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0001104659-06-027798.txt : 20060426
0001104659-06-027798.hdr.sgml : 20060426
20060426125328
ACCESSION NUMBER: 0001104659-06-027798
CONFORMED SUBMISSION TYPE: 10-Q/A
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20050630
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/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-14157
FILM NUMBER: 06780414
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/A
1
a06-1473_210qa.htm
AMENDMENT TO QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)
SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM 10-Q/A
Amendment No. 1
ý
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|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period
ended June 30,
2005
|
OR
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|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
|
SECURITIES
EXCHANGE ACT OF 1934
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|
|
For the transition period
from to
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Commission
File Number 001-14157
TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of registrant as
specified in its charter)
Delaware
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36-2669023
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(State or
other jurisdiction of
|
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
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30 North
LaSalle Street, Chicago, Illinois 60602
|
(Address of
principal executive offices) (Zip Code)
|
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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 June 30,
2005
|
Common Shares, $.01 par value
|
|
51,219,733
Shares
|
Special Common Shares, $.01 par value
|
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57,648,379
Shares
|
Series A Common Shares, $.01 par value
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6,428,640
Shares
|
Explanatory
Note
Telephone
and Data Systems, Inc. (TDS) is filing this Amendment No. 1 to its
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2005, which was originally filed with the Securities and Exchange Commission (SEC)
on August 1, 2005 (Original Form 10-Q), to amend Part I
Financial Information Item 1 Financial Statements, Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations (MD&A),
and Item 4 Controls and Procedures, and Part II Other Information Item
6 Exhibits and Financial Statement Schedules.
As discussed in Note 1 to the Consolidated Financial Statements, on November 9,
2005, TDS and its audit committee concluded 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.
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.
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 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.
In connection with the restatement, TDS concluded that certain material
weaknesses existed in its internal control over financial reporting. See Part I
Item 4 Controls and Procedures.
For the convenience of the reader, this Form 10-Q/A sets for the
Original Form 10-Q, as amended hereby, in its entirety. However, this Form 10-Q/A amends and
restates only Items 1, 2, and 4 of Part I and Item 6 of Part II of
the Original Form 10-Q, in each case solely as a result of and to reflect the adjustments
discussed above and more fully in Note 1 of the accompanying financial
statements, and no other information in the Original Form 10-Q is amended
hereby. The foregoing items have not been updated to reflect other events
occurring after the filing of the Original Form 10-Q, or to modify or
update those disclosures affected by other subsequent events. In particular, forward-looking statements
included in the Form 10-Q/A represented managements views as of the date of
filing of the Original Form 10-Q for the quarter ended June 30, 2005 on August
1, 2005. Such forward-looking statements should not be assumed to be accurate
as of any future date. TDS undertakes no duty to update such information
whether as a result of new information, future events or otherwise.
As required by Rule 12b-15 under the Securities Exchange Act of
1934, as amended, new certifications by TDSs principal executive officer and
principal financial officer are being filed with this Form 10-Q/A as
Exhibits 31.1, 31.2, 32.1 and 32.2.
TELEPHONE AND DATA SYSTEMS, INC.
2ND QUARTER
REPORT ON FORM 10-Q/A
AMENDMENT NO. 1
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF OPERATIONS
Unaudited
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
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|
2004
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
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|
(As Restated)
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|
(As Restated)
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|
(As Restated)
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|
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(Dollars in thousands, except
per share amounts)
|
|
|
|
|
|
|
|
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|
|
|
OPERATING REVENUES
|
|
$
|
969,859
|
|
$
|
929,086
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|
$
|
1,905,646
|
|
$
|
1,799,184
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
Cost of
services and products (exclusive of depreciation, amortization and accretion
shown below)
|
|
337,600
|
|
322,481
|
|
676,224
|
|
643,560
|
|
Selling,
general and administrative
|
|
356,357
|
|
337,558
|
|
704,928
|
|
659,611
|
|
Depreciation,
amortization and accretion
|
|
168,575
|
|
165,009
|
|
338,323
|
|
321,206
|
|
(Gain) on
assets held for sale
|
|
|
|
(582
|
)
|
|
|
(725
|
)
|
Total
Operating Expenses
|
|
862,532
|
|
824,466
|
|
1,719,475
|
|
1,623,652
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
107,327
|
|
104,620
|
|
186,171
|
|
175,532
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT AND OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Investment
income
|
|
18,188
|
|
16,468
|
|
32,942
|
|
30,595
|
|
Interest and dividend income
|
|
118,896
|
|
5,286
|
|
127,182
|
|
8,058
|
|
Interest (expense)
|
|
(54,532
|
)
|
(48,422
|
)
|
(106,388
|
)
|
(95,243
|
)
|
Gain (loss) on investments
|
|
|
|
(1,830
|
)
|
500
|
|
(1,830
|
)
|
Other (expense), net
|
|
(6,708
|
)
|
(2,579
|
)
|
(11,029
|
)
|
(2,971
|
)
|
Total Investment and Other Income (Expense)
|
|
75,844
|
|
(31,077
|
)
|
43,207
|
|
(61,391
|
)
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST
|
|
183,171
|
|
73,543
|
|
229,378
|
|
114,141
|
|
Income tax expense
|
|
76,980
|
|
28,010
|
|
94,375
|
|
46,740
|
|
INCOME BEFORE MINORITY INTEREST
|
|
106,191
|
|
45,533
|
|
135,003
|
|
67,401
|
|
Minority share of income
|
|
(9,135
|
)
|
(8,195
|
)
|
(14,898
|
)
|
(11,809
|
)
|
NET INCOME
|
|
97,056
|
|
37,338
|
|
120,105
|
|
55,592
|
|
Preferred dividend requirement
|
|
(52
|
)
|
(51
|
)
|
(102
|
)
|
(101
|
)
|
NET INCOME AVAILABLE TO COMMON
|
|
$
|
97,004
|
|
$
|
37,287
|
|
$
|
120,003
|
|
$
|
55,491
|
|
|
|
|
|
|
|
|
|
|
|
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
(000s)
|
|
115,224
|
|
114,539
|
|
115,112
|
|
114,437
|
|
BASIC EARNINGS PER SHARE (Note 6)
|
|
$
|
0.84
|
|
$
|
0.33
|
|
$
|
1.04
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
(000s)
|
|
115,959
|
|
115,049
|
|
115,926
|
|
114,943
|
|
DILUTED EARNINGS PER SHARE (Note 6)
|
|
$
|
0.83
|
|
$
|
0.32
|
|
$
|
1.03
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER SHARE
|
|
$
|
0.0875
|
|
$
|
0.0825
|
|
$
|
0.175
|
|
$
|
0.165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net income
|
|
$
|
120,105
|
|
$
|
55,592
|
|
Add (Deduct) adjustments to reconcile net income to net cash provided
by operating activities
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
338,323
|
|
321,206
|
|
Bad debts expense
|
|
17,764
|
|
25,864
|
|
Deferred income taxes
|
|
1,082
|
|
37,205
|
|
Investment income
|
|
(32,942
|
)
|
(30,595
|
)
|
Distributions from unconsolidated entities
|
|
28,210
|
|
7,484
|
|
Minority share of income
|
|
14,898
|
|
11,809
|
|
(Gain) on assets held for sale
|
|
|
|
(725
|
)
|
(Gain) loss on investments
|
|
(500
|
)
|
1,830
|
|
Noncash interest expense
|
|
10,129
|
|
14,225
|
|
Other noncash expense
|
|
9,597
|
|
7,271
|
|
Changes in assets and liabilities
|
|
|
|
|
|
Change in accounts receivable
|
|
(29,158
|
)
|
(47,792
|
)
|
Change in materials and supplies
|
|
22,020
|
|
24,942
|
|
Change in accounts payable
|
|
(46,352
|
)
|
(82,296
|
)
|
Change in customer deposits and deferred
revenues
|
|
5,261
|
|
9,047
|
|
Change in accrued taxes
|
|
76,878
|
|
8,053
|
|
Change in other assets and liabilities
|
|
(16,963
|
)
|
(29,333
|
)
|
|
|
518,352
|
|
333,787
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(307,405
|
)
|
(327,292
|
)
|
Cash received from sale of assets
|
|
|
|
96,932
|
|
Acquisitions, net of cash acquired
|
|
(125,533
|
)
|
(40,367
|
)
|
Other investing activities
|
|
(1,271
|
)
|
(3,550
|
)
|
|
|
(434,209
|
)
|
(274,277
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Issuance of
notes payable
|
|
310,000
|
|
270,000
|
|
Issuance of
long-term debt
|
|
112,881
|
|
412,676
|
|
Repayment of
notes payable
|
|
(290,000
|
)
|
(270,000
|
)
|
Repayment of
long-term debt
|
|
(257,952
|
)
|
(10,574
|
)
|
Repurchase
of TDS common shares
|
|
|
|
(20,440
|
)
|
TDS common
shares issued for benefit plans
|
|
12,663
|
|
20,252
|
|
U.S.
Cellular common shares issued for benefit plans
|
|
14,012
|
|
1,739
|
|
Dividends
paid
|
|
(20,259
|
)
|
(19,001
|
)
|
Other
financing activities
|
|
(816
|
)
|
(300
|
)
|
|
|
(119,471
|
)
|
384,352
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
|
|
(35,328
|
)
|
443,862
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS -
|
|
|
|
|
|
Beginning of period
|
|
1,171,105
|
|
940,578
|
|
End of period
|
|
$
|
1,135,777
|
|
$
|
1,384,440
|
|
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
|
|
June 30,
2005
|
|
December 31,
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
CURRENT ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,135,777
|
|
$
|
1,171,105
|
|
Accounts receivable
|
|
|
|
|
|
Due from customers, less allowance of
$12,646 and $14,317, respectively
|
|
312,953
|
|
304,851
|
|
Other, principally connecting companies,
less allowance of $4,236 and $3,170, respectively
|
|
137,750
|
|
134,458
|
|
Deferred income tax asset
|
|
28,427
|
|
43,867
|
|
Materials and supplies, at average cost
|
|
67,184
|
|
91,556
|
|
Other current assets
|
|
58,248
|
|
71,877
|
|
|
|
1,740,339
|
|
1,817,714
|
|
|
|
|
|
|
|
INVESTMENTS
|
|
|
|
|
|
Marketable equity securities
|
|
2,821,208
|
|
3,398,804
|
|
Licenses
|
|
1,362,434
|
|
1,228,801
|
|
Goodwill
|
|
843,527
|
|
843,387
|
|
Customer lists, net of accumulated
amortization of $39,214 and $34,630, respectively
|
|
20,952
|
|
24,915
|
|
Investments in unconsolidated entities
|
|
205,940
|
|
199,518
|
|
Other investments, less valuation allowance
of $55,144 in both periods
|
|
22,710
|
|
23,039
|
|
|
|
5,276,771
|
|
5,718,464
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
|
|
|
|
U.S. Cellular
|
|
2,451,307
|
|
2,440,720
|
|
TDS Telecom
|
|
915,965
|
|
945,762
|
|
Corporate and other
|
|
31,111
|
|
32,962
|
|
|
|
3,398,383
|
|
3,419,444
|
|
|
|
|
|
|
|
OTHER ASSETS AND DEFERRED CHARGES
|
|
57,416
|
|
56,981
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
10,472,909
|
|
$
|
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
|
|
June 30,
2005
|
|
December 31,
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
2,727
|
|
$
|
38,787
|
|
Notes
payable
|
|
50,000
|
|
30,000
|
|
Accounts
payable
|
|
281,146
|
|
327,497
|
|
Customer
deposits and deferred revenues
|
|
124,457
|
|
119,196
|
|
Accrued taxes
|
|
133,753
|
|
63,184
|
|
Accrued compensation
|
|
50,291
|
|
71,707
|
|
Other current liabilities
|
|
80,351
|
|
79,100
|
|
|
|
722,725
|
|
729,471
|
|
|
|
|
|
|
|
DEFERRED LIABILITIES AND CREDITS
|
|
|
|
|
|
Net deferred income tax liability
|
|
1,444,367
|
|
1,488,655
|
|
Derivative liability
|
|
699,348
|
|
1,210,500
|
|
Other deferred liabilities and credits
|
|
234,360
|
|
220,206
|
|
|
|
2,378,075
|
|
2,919,361
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
1,869,928
|
|
1,974,599
|
|
Forward contracts
|
|
1,698,366
|
|
1,689,644
|
|
|
|
3,568,294
|
|
3,664,243
|
|
|
|
|
|
|
|
MINORITY INTEREST IN SUBSIDIARIES
|
|
528,056
|
|
499,468
|
|
|
|
|
|
|
|
PREFERRED SHARES
|
|
3,864
|
|
3,864
|
|
|
|
|
|
|
|
COMMON STOCKHOLDERS EQUITY (Note 2)
|
|
|
|
|
|
Common Shares, par value $.01 per share;
authorized 100,000,000 shares; issued 56,430,000 and 56,377,000 shares,
respectively
|
|
564
|
|
564
|
|
Special Common Shares, par value $.01 per
share; authorized 165,000,000 shares; issued 62,859,000 shares and 0 shares,
respectively
|
|
629
|
|
|
|
Series A Common Shares, par value $.01 per
share; authorized 25,000,000 shares; issued and outstanding 6,429,000 and
6,421,000 shares; respectively
|
|
64
|
|
64
|
|
Additional paid-in capital
|
|
1,819,336
|
|
1,822,541
|
|
Treasury Shares, at cost:
|
|
|
|
|
|
Common Shares, 5,210,000 and 5,362,000
shares, respectively
|
|
(215,385
|
)
|
(449,173
|
)
|
Special Common Shares, 5,210,000 and 0
shares, respectively
|
|
(215,385
|
)
|
|
|
Accumulated other comprehensive income
|
|
331,516
|
|
370,857
|
|
Retained earnings
|
|
1,550,556
|
|
1,451,343
|
|
|
|
3,271,895
|
|
3,196,196
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
10,472,909
|
|
$
|
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 81.5%-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 (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 June 30, 2005, and its results of operations for
the three and six months ended June 30, 2005 and 2004 and its cash flows
for the six months ended June 30, 2005 and 2004. The results of operations for the three and
six months ended June 30, 2005, and the cash flow for the six months ended
June 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 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.
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.
8
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 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.
9
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
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 before income taxes and minority interest.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(Increase (decrease)
dollars in thousands)
|
|
Income
Before Income Taxes and Minority Interest, as previously reported
|
|
$
|
184,273
|
|
$
|
81,850
|
|
$
|
226,216
|
|
$
|
125,195
|
|
Federal universal service fund
contributions
|
|
(1,224
|
)
|
(1,704
|
)
|
(2,655
|
)
|
(113
|
)
|
Customer contract termination fees
|
|
124
|
|
(84
|
)
|
3,592
|
|
(235
|
)
|
Leases and contracts
|
|
(133
|
)
|
(847
|
)
|
2,105
|
|
(1,244
|
)
|
Promotion rebates
|
|
|
|
|
|
(446
|
)
|
|
|
Operations of consolidated partnerships
managed by a third party
|
|
935
|
|
(1,064
|
)
|
481
|
|
(794
|
)
|
Investment income from entities accounted
for by the equity method
|
|
1,667
|
|
(2,064
|
)
|
2,189
|
|
(2,568
|
)
|
Revenue and cost of service accruals
|
|
|
|
(2,536
|
)
|
|
|
(5,702
|
)
|
Interest income
|
|
93
|
|
50
|
|
571
|
|
(66
|
)
|
Other items
|
|
(2,564
|
)
|
(58
|
)
|
(2,675
|
)
|
(332
|
)
|
Total adjustment
|
|
(1,102
|
)
|
(8,307
|
)
|
3,162
|
|
(11,054
|
)
|
Income
Before Income Taxes and Minority Interest, as restated
|
|
$
|
183,171
|
|
$
|
73,543
|
|
$
|
229,378
|
|
$
|
114,141
|
|
The table below summarizes the net income and
earnings per share impacts from the restatement.
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
Net
Income
(loss)
|
|
Diluted
Earnings
Per Share
|
|
Net
Income
(loss)
|
|
Diluted
Earnings
Per Share
|
|
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
|
|
$
|
99,361
|
|
$
|
0.85
|
|
$
|
41,394
|
|
$
|
0.36
|
|
$
|
119,906
|
|
$
|
1.03
|
|
$
|
61,126
|
|
$
|
0.53
|
|
Federal universal
service fund contributions
|
|
(576
|
)
|
(0.01
|
)
|
(816
|
)
|
(0.01
|
)
|
(1,254
|
)
|
(0.01
|
)
|
(54
|
)
|
|
|
Customer contract
termination fees
|
|
56
|
|
|
|
(38
|
)
|
|
|
1,646
|
|
0.01
|
|
(108
|
)
|
|
|
Leases and
contracts
|
|
(61
|
)
|
|
|
(434
|
)
|
|
|
1,049
|
|
0.01
|
|
(590
|
)
|
(0.01
|
)
|
Promotion rebates
|
|
|
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
Operations of
consolidated partnerships managed by a third party
|
|
336
|
|
|
|
(389
|
)
|
|
|
172
|
|
|
|
(291
|
)
|
|
|
Investment income
from entities accounted for by the equity method
|
|
820
|
|
0.01
|
|
(1,025
|
)
|
(0.01
|
)
|
1,078
|
|
0.01
|
|
(1,275
|
)
|
(0.02
|
)
|
Revenue and cost
of service accruals
|
|
|
|
|
|
(1,534
|
)
|
(0.02
|
)
|
|
|
|
|
(3,449
|
)
|
(0.03
|
)
|
Income taxes
|
|
(394
|
)
|
|
|
174
|
|
|
|
(34
|
)
|
|
|
424
|
|
0.01
|
|
Interest income
|
|
56
|
|
|
|
30
|
|
|
|
345
|
|
|
|
(40
|
)
|
|
|
Other items
|
|
(2,542
|
)
|
(0.02
|
)
|
(24
|
)
|
|
|
(2,599
|
)
|
(0.02
|
)
|
(151
|
)
|
|
|
Total adjustment
|
|
(2,305
|
)
|
(0.02
|
)
|
(4,056
|
)
|
(0.04
|
)
|
199
|
|
|
|
(5,534
|
)
|
(0.05
|
)
|
As restated
|
|
$
|
97,056
|
|
$
|
0.83
|
|
$
|
37,338
|
|
$
|
0.32
|
|
$
|
120,105
|
|
$
|
1.03
|
|
$
|
55,592
|
|
$
|
0.48
|
|
10
The table below summarizes the effects of
consolidating Suttle Straus, Inc. and recording certain intercompany
eliminations as previously discussed.
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
June 30, 2005
|
|
|
|
Adjustment for
|
|
Intercompany
|
|
Adjustment for
|
|
Intercompany
|
|
|
|
Suttle Straus
|
|
Eliminations
|
|
Suttle Straus
|
|
Eliminations
|
|
|
|
(Increase/(decrease) dollars in
thousands)
|
|
Operating Revenue
|
|
$
|
7,455
|
|
$
|
(3,235
|
)
|
$
|
15,263
|
|
$
|
(6,176
|
)
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Cost of
service and products
|
|
4,938
|
|
309
|
|
10,487
|
|
599
|
|
Selling,
general and administrative
|
|
1,430
|
|
(3,544
|
)
|
2,846
|
|
(6,775
|
)
|
Depreciation,
amortization and accretion
|
|
687
|
|
|
|
1,375
|
|
|
|
Total
Operating Expenses
|
|
7,055
|
|
(3,235
|
)
|
14,708
|
|
(6,176
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
400
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense), net
|
|
(400
|
)
|
|
|
(555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment and Other Income (Expense)
|
|
|
(400
|
)
|
|
|
|
|
(555
|
)
|
|
|
|
Income Before Income Taxes and Minority
Interest
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2004
|
|
June 30, 2004
|
|
|
|
Adjustment for
|
|
Intercompany
|
|
Adjustment for
|
|
Intercompany
|
|
|
|
Suttle Straus
|
|
Eliminations
|
|
Suttle Straus
|
|
Eliminations
|
|
|
|
(Increase/(decrease) dollars in
thousands)
|
|
Operating Revenue
|
|
$
|
6,133
|
|
$
|
(2,558
|
)
|
$
|
12,393
|
|
$
|
(4,839
|
)
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Cost of
service and products
|
|
4,118
|
|
202
|
|
8,334
|
|
423
|
|
Selling,
general and administrative
|
|
1,127
|
|
(2,760
|
)
|
2,323
|
|
(5,262
|
)
|
Depreciation,
amortization and accretion
|
|
619
|
|
|
|
1,240
|
|
|
|
Total
Operating Expenses
|
|
5,864
|
|
(2,558
|
)
|
11,897
|
|
(4,839
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
269
|
|
|
|
|
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense), net
|
|
(269
|
)
|
|
|
(496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment and Other Income (Expense)
|
|
|
(269
|
)
|
|
|
|
|
(496
|
)
|
|
|
|
Income 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
|
|
|
|
June 30, 2005
|
|
June 30, 2004
|
|
|
|
As
Previously
Reported
|
|
As
Restated
|
|
As
Previously
Reported
|
|
As
Restated
|
|
|
|
(Dollars in thousands, except
per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
965,558
|
|
$
|
969,859
|
|
$
|
934,588
|
|
$
|
929,086
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Cost of
service and products
(exclusive of depreciation, amortization and accretion shown separately
below)
|
|
332,854
|
|
337,600
|
|
317,230
|
|
322,481
|
|
Selling,
general and administrative expense
|
|
357,281
|
|
356,357
|
|
343,058
|
|
337,558
|
|
Depreciation,
amortization and accretion expense
|
|
167,571
|
|
168,575
|
|
164,411
|
|
165,009
|
|
(Gain) loss
on assets held for sale
|
|
|
|
|
|
(582
|
)
|
(582
|
)
|
Total
Operating Expenses
|
|
857,706
|
|
862,532
|
|
824,117
|
|
824,466
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
107,852
|
|
107,327
|
|
110,471
|
|
104,620
|
|
|
|
|
|
|
|
|
|
|
|
Investment and Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
Investment
income
|
|
16,520
|
|
18,188
|
|
18,532
|
|
16,468
|
|
Interest and dividend income
|
|
118,814
|
|
118,896
|
|
5,246
|
|
5,286
|
|
Interest expense
|
|
(54,532
|
)
|
(54,532
|
)
|
(48,422
|
)
|
(48,422
|
)
|
Gain (loss) on investments
|
|
|
|
|
|
(1,830
|
)
|
(1,830
|
)
|
Other income (expense), net
|
|
(4,381
|
)
|
(6,708
|
)
|
(2,147
|
)
|
(2,579
|
)
|
Total Investment and Other Income (Expense)
|
|
76,421
|
|
75,844
|
|
(28,621
|
)
|
(31,077
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes and
Minority Interest
|
|
184,273
|
|
183,171
|
|
81,850
|
|
73,543
|
|
Income tax expense (benefit)
|
|
76,005
|
|
76,980
|
|
31,277
|
|
28,010
|
|
Income (Loss) Before Minority Interest
|
|
108,268
|
|
106,191
|
|
50,573
|
|
45,533
|
|
Minority share of income
|
|
(8,907
|
)
|
(9,135
|
)
|
(9,179
|
)
|
(8,195
|
)
|
Net Income (Loss)
|
|
99,361
|
|
97,056
|
|
41,394
|
|
37,338
|
|
Preferred dividend requirement
|
|
(52
|
)
|
(52
|
)
|
(50
|
)
|
(51
|
)
|
Net Income (Loss) Available to Common
|
|
$
|
99,309
|
|
$
|
97,004
|
|
$
|
41,344
|
|
$
|
37,287
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
$
|
0.86
|
|
$
|
0.84
|
|
$
|
0.36
|
|
$
|
0.33
|
|
Diluted Earnings per Share
|
|
$
|
0.85
|
|
$
|
0.83
|
|
$
|
0.36
|
|
$
|
0.32
|
|
12
|
|
Six Months Ended
|
|
|
|
June 30, 2005
|
|
June 30, 2004
|
|
|
|
As
Previously
Reported
|
|
As
Restated
|
|
As
Previously
Reported
|
|
As
Restated
|
|
|
|
(Dollars in thousands, except
per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
1,893,724
|
|
$
|
1,905,646
|
|
$
|
1,805,100
|
|
$
|
1,799,184
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Cost of
service and products
(exclusive of depreciation, amortization and accretion shown separately
below)
|
|
666,718
|
|
676,224
|
|
628,623
|
|
643,560
|
|
Selling,
general and administrative expense
|
|
707,326
|
|
704,928
|
|
673,701
|
|
659,611
|
|
Depreciation,
amortization and accretion expense
|
|
336,388
|
|
338,323
|
|
319,863
|
|
321,206
|
|
(Gain) loss
on assets held for sale
|
|
|
|
|
|
(725
|
)
|
(725
|
)
|
Total
Operating Expenses
|
|
1,710,432
|
|
1,719,475
|
|
1,621,462
|
|
1,623,652
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
183,292
|
|
186,171
|
|
183,638
|
|
175,532
|
|
|
|
|
|
|
|
|
|
|
|
Investment and Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
Investment
income
|
|
30,753
|
|
32,942
|
|
33,162
|
|
30,595
|
|
Interest and dividend income
|
|
126,633
|
|
127,182
|
|
8,142
|
|
8,058
|
|
Interest expense
|
|
(106,388
|
)
|
(106,388
|
)
|
(95,243
|
)
|
(95,243
|
)
|
Gain (loss) on investments
|
|
500
|
|
500
|
|
(1,830
|
)
|
(1,830
|
)
|
Other income (expense), net
|
|
(8,574
|
)
|
(11,029
|
)
|
(2,674
|
)
|
(2,971
|
)
|
Total Investment and Other Income (Expense)
|
|
42,924
|
|
43,207
|
|
(58,443
|
)
|
(61,391
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes and
Minority Interest
|
|
226,216
|
|
229,378
|
|
125,195
|
|
114,141
|
|
Income tax expense (benefit)
|
|
92,153
|
|
94,375
|
|
51,382
|
|
46,740
|
|
Income (Loss) before Minority Interest
|
|
134,063
|
|
135,003
|
|
73,813
|
|
67,401
|
|
Minority share of income
|
|
(14,157
|
)
|
(14,898
|
)
|
(12,687
|
)
|
(11,809
|
)
|
Net Income (Loss)
|
|
119,906
|
|
120,105
|
|
61,126
|
|
55,592
|
|
Preferred dividend requirement
|
|
(102
|
)
|
(102
|
)
|
(101
|
)
|
(101
|
)
|
Net Income (Loss) Available to Common
|
|
$
|
119,804
|
|
$
|
120,003
|
|
$
|
61,025
|
|
$
|
55,491
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
$
|
1.04
|
|
$
|
1.04
|
|
$
|
0.53
|
|
$
|
0.48
|
|
Diluted Earnings per Share
|
|
$
|
1.03
|
|
$
|
1.03
|
|
$
|
0.53
|
|
$
|
0.48
|
|
13
The effect of the restatement on the previously reported Consolidated
Statements of Cash Flows is as follows:
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2005
|
|
2004
|
|
2004
|
|
|
|
As
Previously
Reported
|
|
As
Restated
|
|
As
Previously
Reported
|
|
As
Restated
|
|
|
|
(Dollars in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
119,906
|
|
$
|
120,105
|
|
$
|
61,126
|
|
$
|
55,592
|
|
Add (Deduct) adjustments to reconcile net
income to net cash
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
336,388
|
|
338,323
|
|
319,863
|
|
321,206
|
|
Bad debts expense
|
|
19,418
|
|
17,764
|
|
38,439
|
|
25,864
|
|
Deferred income taxes
|
|
(1,140
|
)
|
1,082
|
|
41,847
|
|
37,205
|
|
Investment income
|
|
(30,753
|
)
|
(32,942
|
)
|
(33,162
|
)
|
(30,595
|
)
|
Distributions from unconsolidated entities
|
|
|
|
28,210
|
|
|
|
7,484
|
|
Minority share of income
|
|
14,157
|
|
14,898
|
|
12,687
|
|
11,809
|
|
(Gain) on assets held for sale
|
|
|
|
|
|
(725
|
)
|
(725
|
)
|
(Gain) loss on investments
|
|
(500
|
)
|
(500
|
)
|
1,830
|
|
1,830
|
|
Noncash interest expense
|
|
10,129
|
|
10,129
|
|
14,225
|
|
14,225
|
|
Other noncash expense
|
|
10,785
|
|
9,597
|
|
8,395
|
|
7,271
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
Change in accounts receivable
|
|
(28,966
|
)
|
(29,158
|
)
|
(65,175
|
)
|
(47,792
|
)
|
Change in materials and supplies
|
|
22,020
|
|
22,020
|
|
24,942
|
|
24,942
|
|
Change in accounts payable
|
|
(48,968
|
)
|
(46,352
|
)
|
(89,580
|
)
|
(82,296
|
)
|
Change in customer deposits and deferred
revenues
|
|
5,000
|
|
5,261
|
|
9,457
|
|
9,047
|
|
Change in accrued taxes
|
|
76,424
|
|
76,878
|
|
8,053
|
|
8,053
|
|
Change in other assets and liabilities
|
|
(15,080
|
)
|
(16,963
|
)
|
(26,724
|
)
|
(29,333
|
)
|
|
|
488,820
|
|
518,352
|
|
325,498
|
|
333,787
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(304,856
|
)
|
(307,405
|
)
|
(325,115
|
)
|
(327,292
|
)
|
Cash received from sale of assets
|
|
|
|
|
|
96,932
|
|
96,932
|
|
Acquisitions, net of cash acquired
|
|
(125,533
|
)
|
(125,533
|
)
|
(40,367
|
)
|
(40,367
|
)
|
Distributions from unconsolidated entities
|
|
28,210
|
|
|
|
7,484
|
|
|
|
Other investing activities
|
|
(3,199
|
)
|
(1,271
|
)
|
(5,106
|
)
|
(3,550
|
)
|
|
|
(405,378
|
)
|
(434,209
|
)
|
(266,172
|
)
|
(274,277
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Issuance of
notes payable
|
|
310,000
|
|
310,000
|
|
270,000
|
|
270,000
|
|
Issuance of
long-term debt
|
|
112,881
|
|
112,881
|
|
412,676
|
|
412,676
|
|
Repayment of
notes payable
|
|
(290,000
|
)
|
(290,000
|
)
|
(270,000
|
)
|
(270,000
|
)
|
Repayment of
long-term debt
|
|
(257,952
|
)
|
(257,952
|
)
|
(10,574
|
)
|
(10,574
|
)
|
Repurchase
of TDS common shares
|
|
|
|
|
|
(20,440
|
)
|
(20,440
|
)
|
TDS common
shares issued for benefit plans
|
|
12,663
|
|
12,663
|
|
20,252
|
|
20,252
|
|
U.S. Cellular
common shares issued for benefit plans
|
|
14,199
|
|
14,012
|
|
1,855
|
|
1,739
|
|
Dividends
paid
|
|
(20,259
|
)
|
(20,259
|
)
|
(19,001
|
)
|
(19,001
|
)
|
Other
financing activities
|
|
(816
|
)
|
(816
|
)
|
(300
|
)
|
(300
|
)
|
|
|
(119,284
|
)
|
(119,471
|
)
|
384,468
|
|
384,352
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
|
|
(35,842
|
)
|
(35,328
|
)
|
443,794
|
|
443,862
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
1,168,581
|
|
1,171,105
|
|
937,651
|
|
940,578
|
|
End of period
|
|
$
|
1,132,739
|
|
$
|
1,135,777
|
|
$
|
1,381,445
|
|
$
|
1,384,440
|
|
14
The effect of the restatement on the previously reported Consolidated
Balance Sheets is as follows:
|
|
June 30,
|
|
December 31,
|
|
|
|
2005
|
|
2005
|
|
2004
|
|
2004
|
|
|
|
As
Previously
Reported
|
|
As
Restated
|
|
As
Previously
Reported
|
|
As
Restated
|
|
|
|
(Dollars in thousands)
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,132,739
|
|
$
|
1,135,777
|
|
$
|
1,168,581
|
|
$
|
1,171,105
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
Due from customers
|
|
312,362
|
|
312,953
|
|
308,410
|
|
304,851
|
|
Other, principally connecting companies
|
|
137,261
|
|
137,750
|
|
131,665
|
|
134,458
|
|
Deferred income tax asset
|
|
20,601
|
|
28,427
|
|
36,040
|
|
43,867
|
|
Materials and supplies, at average cost
|
|
67,184
|
|
67,184
|
|
91,556
|
|
91,556
|
|
Other current assets
|
|
59,660
|
|
58,248
|
|
73,965
|
|
71,877
|
|
|
|
1,729,807
|
|
1,740,339
|
|
1,810,217
|
|
1,817,714
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
2,821,208
|
|
2,821,208
|
|
3,398,804
|
|
3,398,804
|
|
Licenses
|
|
1,362,434
|
|
1,362,434
|
|
1,228,801
|
|
1,228,801
|
|
Goodwill
|
|
823,399
|
|
843,527
|
|
823,259
|
|
843,387
|
|
Customer lists, net of accumulated
amortization
|
|
20,952
|
|
20,952
|
|
24,915
|
|
24,915
|
|
Investments in unconsolidated entities
|
|
211,011
|
|
205,940
|
|
206,763
|
|
199,518
|
|
Other investments
|
|
22,710
|
|
22,710
|
|
23,039
|
|
23,039
|
|
|
|
5,261,714
|
|
5,276,771
|
|
5,705,581
|
|
5,718,464
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
|
U.S. Cellular
|
|
2,450,296
|
|
2,451,307
|
|
2,439,719
|
|
2,440,720
|
|
TDS Telecom
|
|
915,965
|
|
915,965
|
|
945,762
|
|
945,762
|
|
Corporate and other
|
|
|
|
31,111
|
|
|
|
32,962
|
|
|
|
3,366,261
|
|
3,398,383
|
|
3,385,481
|
|
3,419,444
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS AND DEFERRED CHARGES
|
|
90,952
|
|
57,416
|
|
92,562
|
|
56,981
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
10,448,734
|
|
$
|
10,472,909
|
|
$
|
10,993,841
|
|
11,012,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
June 30,
|
|
December 31,
|
|
|
|
2005
|
|
2005
|
|
2004
|
|
2004
|
|
|
|
As
Previously
Reported
|
|
As
Restated
|
|
As
Previously
Reported
|
|
As
Restated
|
|
|
|
(Dollars in thousands)
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
2,727
|
|
$
|
2,727
|
|
$
|
38,787
|
|
$
|
38,787
|
|
Notes
payable
|
|
50,000
|
|
50,000
|
|
30,000
|
|
30,000
|
|
Accounts
payable
|
|
274,288
|
|
281,146
|
|
323,256
|
|
327,497
|
|
Customer
deposits and deferred revenues
|
|
124,380
|
|
124,457
|
|
119,380
|
|
119,196
|
|
Accrued taxes
|
|
148,125
|
|
133,753
|
|
76,266
|
|
63,184
|
|
Accrued compensation
|
|
50,291
|
|
50,291
|
|
71,707
|
|
71,707
|
|
Other current liabilities
|
|
82,407
|
|
80,351
|
|
81,927
|
|
79,100
|
|
|
|
732,218
|
|
722,725
|
|
741,323
|
|
729,471
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED LIABILITIES AND CREDITS
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
1,420,201
|
|
1,444,367
|
|
1,466,649
|
|
1,488,655
|
|
Derivative liability
|
|
699,348
|
|
699,348
|
|
1,210,500
|
|
1,210,500
|
|
Other deferred liabilities and credits
|
|
231,595
|
|
234,360
|
|
217,208
|
|
220,206
|
|
|
|
2,351,144
|
|
2,378,075
|
|
2,894,357
|
|
2,919,361
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
1,869,928
|
|
1,869,928
|
|
1,974,599
|
|
1,974,599
|
|
Prepaid forward contracts
|
|
1,698,366
|
|
1,698,366
|
|
1,689,644
|
|
1,689,644
|
|
|
|
3,568,294
|
|
3,568,294
|
|
3,664,243
|
|
3,664,243
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST IN SUBSIDIARIES
|
|
527,185
|
|
528,056
|
|
499,306
|
|
499,468
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED SHARES
|
|
3,864
|
|
3,864
|
|
3,864
|
|
3,864
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCKHOLDERS EQUITY (Note 2)
|
|
|
|
|
|
|
|
|
|
Common Shares, par value $.01 per share
|
|
564
|
|
564
|
|
564
|
|
564
|
|
Special Common Shares, par value $.01 per
share
|
|
633
|
|
629
|
|
|
|
|
|
Series A Common Shares, par value $.01 per share
|
|
64
|
|
64
|
|
64
|
|
64
|
|
Additional paid-in capital
|
|
1,819,953
|
|
1,819,336
|
|
1,823,161
|
|
1,822,541
|
|
Treasury Shares, at cost
|
|
(215,385
|
)
|
(215,385
|
)
|
(449,173
|
)
|
(449,173
|
)
|
Special Common Shares
|
|
(215,385
|
)
|
(215,385
|
)
|
|
|
|
|
Accumulated other comprehensive income
|
|
333,945
|
|
331,516
|
|
373,505
|
|
370,857
|
|
Retained earnings
|
|
1,541,640
|
|
1,550,556
|
|
1,442,627
|
|
1,451,343
|
|
|
|
3,266,029
|
|
3,271,895
|
|
3,190,748
|
|
3,196,196
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
10,448,734
|
|
$
|
10,472,909
|
|
$
|
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.
16
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 Restated)
|
|
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
Restated)
|
|
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 Restated)
|
|
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.
17
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
Service Cost
|
|
$
|
553
|
|
$
|
591
|
|
$
|
1,106
|
|
$
|
1,181
|
|
Interest on accumulated benefit obligation
|
|
659
|
|
665
|
|
1,318
|
|
1,330
|
|
Expected return on plan assets
|
|
(558
|
)
|
(337
|
)
|
(1,116
|
)
|
(674
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
(280
|
)
|
(179
|
)
|
(559
|
)
|
(357
|
)
|
Net loss
|
|
289
|
|
237
|
|
577
|
|
475
|
|
Net postretirement cost
|
|
$
|
663
|
|
$
|
977
|
|
$
|
1,326
|
|
$
|
1,955
|
|
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. These options include supplementing the
government program on a secondary payor basis or accepting a direct subsidy
from the government to support a portion of the cost of the employers
program. TDS continues to evaluate the
Act to determine which option would provide it with the most benefit.
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 $6.8
million for the three and six months ended June 30, 2005, respectively,
and $3.0 million and $6.0 million for the three and six months ended June 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.
18
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 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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Net Income Available to Common
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
97,004
|
|
$
|
37,287
|
|
$
|
120,003
|
|
$
|
55,491
|
|
Pro forma expense
|
|
(6,283
|
)
|
(6,054
|
)
|
(8,519
|
)
|
(8,602
|
)
|
Pro forma net income available to common
|
|
$
|
90,721
|
|
$
|
31,233
|
|
$
|
111,484
|
|
$
|
46,889
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.84
|
|
$
|
0.33
|
|
$
|
1.04
|
|
$
|
0.48
|
|
Pro forma expense per share
|
|
(0.05
|
)
|
(0.05
|
)
|
(0.07
|
)
|
(0.08
|
)
|
Pro forma basic earnings per share
|
|
$
|
0.79
|
|
$
|
0.28
|
|
$
|
0.97
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.83
|
|
$
|
0.32
|
|
$
|
1.03
|
|
$
|
0.48
|
|
Pro forma expense per share
|
|
(0.05
|
)
|
(0.06
|
)
|
(0.07
|
)
|
(0.08
|
)
|
Pro forma diluted earnings per share
|
|
$
|
0.78
|
|
$
|
0.26
|
|
$
|
0.96
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
Share-Based Payment
Statement of Financial Accounting Standard (SFAS)
No. 123 (revised 2004), Share-Based Payment, was issued in December 2004.
In April 2005, the SEC postponed the effective date of SFAS 123R until the
issuers first fiscal year beginning after June 15, 2005. As a result, TDS
will be required to adopt SFAS 123R 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 123R 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 123R 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 123R. See the Stock-Based
Compensation disclosure above for a pro forma impact on net income and
earnings per share under current accounting requirements.
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 in circumstances that would previously have been effected in the
period of the change under APB No. 20.
19
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 requirement of this Interpretation and has not yet determined the impact,
if any, on TDSs financial position or results of operations.
4. Income
Taxes
The following table summarizes the effective
income tax expense (benefit) rates in each of the periods:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Effective Income Tax (Benefit) Rate From:
|
|
|
|
|
|
|
|
|
|
Operations excluding gain (loss) on
investments
and gain on assets held for sale
|
|
42.0
|
%
|
38.1
|
%
|
41.2
|
%
|
38.8
|
%
|
Gain (loss) on investments and gain on
assets
held for sale (1)
|
|
|
|
(41.5
|
)%
|
35.7
|
%
|
N/M
|
|
Income before income taxes and minority
interest
|
|
42.0
|
%
|
38.1
|
%
|
41.1
|
%
|
41.0
|
%
|
N/M Not Meaningful
(1) The
effective tax rate in the six months ended June 30, 2004 related to the
provision for gain on assets held for sale is not meaningful. Because of the
impact on the income tax provision of the completion of the sale of assets to
AT&T Wireless Services, Inc. (AT&T Wireless), now Cingular
Wireless LLC, in February 2004, it was necessary for TDS to record a tax
provision of $2.8 million at the time of this sale. However, book pretax income
in the first six months of 2004 reflected a $725,000 increase attributable to a
working capital adjustment on assets held for sale, which was an adjustment of
the $22.0 million loss on assets held for sale recorded in the fourth quarter
of 2003 when the sale transaction was announced.
5. Gain
(Loss) on Investments
TDS reported a loss on investments of $1.8
million in the second quarter of 2004.
The loss was recorded 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.
6. 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.
20
Net income used in computing earnings per
share and the effect on income and the weighted average number of shares and
earnings per share of potentially dilutive securities are as follows:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars and shares in thousands, except earnings per share)
|
|
Basic
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
97,056
|
|
$
|
37,338
|
|
$
|
120,105
|
|
$
|
55,592
|
|
Preferred dividend requirement
|
|
(52
|
)
|
(51
|
)
|
(102
|
)
|
(101
|
)
|
Net income available to common used in
basic earnings per share
|
|
$
|
97,004
|
|
$
|
37,287
|
|
$
|
120,003
|
|
$
|
55,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
Net income available to common used in
basic earnings per share
|
|
$
|
97,004
|
|
$
|
37,287
|
|
$
|
120,003
|
|
$
|
55,491
|
|
Reduction in Preferred Dividends if
Preferred Shares Converted into Common Shares
|
|
50
|
|
12
|
|
100
|
|
|
|
Minority income adjustment (1)
|
|
(229
|
)
|
(147
|
)
|
(365
|
)
|
(211
|
)
|
Net income available to common used in
diluted earnings per share
|
|
$
|
96,825
|
|
$
|
37,152
|
|
$
|
119,738
|
|
$
|
55,280
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
of Common Stock used in basic
earnings per share (2)
|
|
115,224
|
|
114,539
|
|
115,112
|
|
114,437
|
|
Effects of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
Effects of stock options (2)(3)
|
|
582
|
|
471
|
|
661
|
|
506
|
|
Conversion of preferred shares (2)(4)
|
|
153
|
|
39
|
|
153
|
|
|
|
Weighted average number of shares
of Common Stock used in diluted
earnings per share
|
|
115,959
|
|
115,049
|
|
115,926
|
|
114,943
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share
|
|
$
|
0.84
|
|
$
|
0.33
|
|
$
|
1.04
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share
|
|
$
|
0.83
|
|
$
|
0.32
|
|
$
|
1.03
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 1,091,147 and 861,112 common shares and special common
shares were not included in computing diluted earnings per share in the three
and six months ended June 30, 2005, respectively, because their effects
were antidilutive. Stock options
convertible into 1,366,562 common shares and special common shares in the three
and six months ended June 30, 2004 were not included in computing diluted
earnings per share because their effects were antidilutive.
(4) Preferred
shares convertible into 109,080 and 148,031 common shares and special common
shares were not included in computing diluted earnings per share in the three
and six months ended June 30, 2004, respectively, because their effects
were antidilutive.
7. 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.
21
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 (See
Note 11-Revolving Credit Facilities and Forward Contracts).
Information regarding the fair value of TDSs
marketable equity securities is summarized as follows:
|
|
June 30,
2005
|
|
December 31,
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Marketable
Equity Securities
|
|
|
|
|
|
Deutsche
Telekom AG - 131,461,861 Ordinary Shares
|
|
$
|
2,434,674
|
|
$
|
2,960,521
|
|
Vodafone Group Plc 12,945,915 American
Depositary Receipts
|
|
314,845
|
|
354,459
|
|
VeriSign, Inc. - 2,361,333 Common
Shares
|
|
67,912
|
|
79,341
|
|
Rural Cellular Corporation - 719,396
equivalent Common Shares
|
|
3,776
|
|
4,482
|
|
Other
|
|
1
|
|
1
|
|
Aggregate
fair value
|
|
2,821,208
|
|
3,398,804
|
|
Accounting
cost basis, as adjusted
|
|
1,543,677
|
|
1,543,677
|
|
Gross
unrealized holding gains
|
|
1,277,531
|
|
1,855,127
|
|
Equity
method unrealized gains
|
|
543
|
|
261
|
|
Deferred income tax (expense)
|
|
(503,953
|
)
|
(732,179
|
)
|
Minority
share of unrealized holding gains
|
|
(10,630
|
)
|
(13,987
|
)
|
Unrealized
holding gains, net of tax and minority share
|
|
763,491
|
|
1,109,222
|
|
Derivative
instruments, net of tax and minority share
|
|
(431,975
|
)
|
(738,365
|
)
|
Accumulated
other comprehensive income
|
|
$
|
331,516
|
|
$
|
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.
8. Goodwill
TDS has substantial amounts of goodwill as a
result of the acquisition of wireless markets, and the acquisition of operating
telephone companies. The changes in goodwill for the six months ended June 30,
2005 and 2004, are detailed in the table below. TDS Telecoms incumbent local
exchange carriers are designated as ILEC and its competitive local exchange
carrier is designated as CLEC.
|
|
U.S.
|
|
TDS Telecom
|
|
|
|
|
|
(Dollars in thousands)
|
|
Cellular
|
|
ILEC
|
|
CLEC (1)
|
|
Other (2)
|
|
Total
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
Balance December 31, 2004
|
|
$
|
445,212
|
|
$
|
395,894
|
|
$
|
|
|
$
|
2,281
|
|
$
|
843,387
|
|
Acquisitions
|
|
150
|
|
|
|
|
|
|
|
150
|
|
Other Adjustments
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
Balance June 30, 2005
|
|
$
|
445,352
|
|
$
|
395,894
|
|
$
|
|
|
$
|
2,281
|
|
$
|
843,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003
|
|
$
|
449,550
|
|
$
|
395,894
|
|
$
|
29,440
|
|
$
|
33,181
|
|
$
|
908,065
|
|
Acquisitions
|
|
3,649
|
|
|
|
|
|
|
|
3,649
|
|
Other
|
|
(651
|
)
|
|
|
|
|
|
|
(651
|
)
|
Balance June 30, 2004
|
|
$
|
452,548
|
|
$
|
395,894
|
|
$
|
29,440
|
|
$
|
33,181
|
|
$
|
911,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) 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.
(2) 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.
22
9. 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.
TDSs significant investments in unconsolidated
entities include the following:
|
|
June 30,
2005
|
|
June 30,
2004
|
|
Los Angeles
SMSA Limited Partnership
|
|
5.5
|
%
|
5.5
|
%
|
Raleigh-Durham
MSA Limited Partnership (1)
|
|
|
|
8.0
|
%
|
Midwest
Wireless Communications, LLC
|
|
15.2
|
%
|
15.2
|
%
|
North
Carolina RSA 1 Partnership
|
|
50.0
|
%
|
50.0
|
%
|
Oklahoma
City SMSA Limited Partnership
|
|
14.6
|
%
|
14.6
|
%
|
(1) As a result of an agreement with ALLTEL, U.S.
Cellulars investment in this partnership was sold to ALLTEL on November 30,
2004.
Based primarily on data furnished to TDS by
third parties, the following summarizes the combined results of operations of
all wireless and wireline entities in which TDSs investments are accounted for
by the equity method:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(as restated)
|
|
(as restated)
|
|
(as restated)
|
|
(as restated)
|
|
|
|
(Dollars in thousands)
|
|
Results of
operations
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
831,000
|
|
$
|
807,000
|
|
$
|
1,615,000
|
|
$
|
1,512,000
|
|
Operating expenses
|
|
579,000
|
|
561,000
|
|
1,123,000
|
|
1,059,000
|
|
Operating income
|
|
252,000
|
|
246,000
|
|
492,000
|
|
453,000
|
|
Other income (expense), net
|
|
7,000
|
|
(9,000
|
)
|
14,000
|
|
(8,000
|
)
|
Net Income
|
|
$
|
259,000
|
|
$
|
237,000
|
|
$
|
506,000
|
|
$
|
445,000
|
|
10. Customer
Lists
Customer lists, 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 six months ended June 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 $2.3
million and $4.6 million for the three and six months ended June 30, 2005,
respectively, and $3.7 and $6.7 million for the three and six months ended June 30,
2004, respectively. Amortization expense
for the remainder of 2005 and for the years 2006-2009 is expected to be $3.7
million, $5.5 million, $3.6 million, $2.4 million and $1.7 million,
respectively.
11. Revolving
Credit Facilities and Forward Contracts
TDS has a $600 million revolving credit
facility available for general corporate purposes. At June 30, 2005, this credit facility
had $596.6 million available for use, net of $3.4 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 TDSs credit rating. At June 30, 2005, the contractual spread
was 30 basis points (the one-month LIBOR rate was 3.34% at June 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 6.25% at June 30, 2005).
TDS also has $75 million of direct bank lines
of credit at June 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 (the prime rate was 6.25% at June 30, 2005).
23
U.S. Cellular has a $700 million revolving
credit facility available for general corporate purposes. At June 30, 2005, this credit facility
had $649.8 million available for use, net of borrowings of $50.0 million and
outstanding letters of credit of $0.2 million. 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 June 30, 2005, the
contractual spread was 30 basis points (the one-month LIBOR rate was 3.34% at June 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 6.25% at June 30, 2005).
On July 11, 2005, Moodys Investor 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 has increased to 45 basis points from 30 basis
points. In addition, the facility fee
has increased to 15 basis points from 10 basis points.
As disclosed
in Note 1, 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. The
restatement 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.
12. 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 June 30, 2005 was $78.1
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 June 30, 2005 was $34.8 million. The regulatory liability in excess of
the amounts required to be recorded in accordance with SFAS No. 143 at June 30,
2005 was $32.6 million.
TDS Telecoms competitive local exchange
carrier does not have a material legal obligation to remove long-lived assets
as described by SFAS No. 143. TDS
Telecom is reviewing FASB Interpretation No. 47 to determine the impact,
if any, on the competitive local exchange carrier operations.
24
The table below summarizes the changes in asset retirement obligations
during the six months ended June 30, 2005.
|
|
U.S.
Cellular
|
|
TDS
Telecom
|
|
TDS
Consolidated
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Beginning
Balance December 31, 2004
|
|
$
|
72,575
|
|
$
|
65,000
|
|
$
|
137,575
|
|
Additional liabilities accrued
|
|
3,223
|
|
2,851
|
|
6,074
|
|
Accretion expense
|
|
2,282
|
|
|
|
2,282
|
|
Costs of removal incurred in 2005
|
|
|
|
(431
|
)
|
(431
|
)
|
Ending
Balance June 30, 2005
|
|
$
|
78,080
|
|
$
|
67,420
|
|
$
|
145,500
|
|
13. 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 paid prepayment penalties 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 ILEC companies, had a weighted
average interest rate of 5.5%.
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 prepayment penalties 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 ILEC companies, had a
weighted average interest rate of 6.2%.
TDS redeemed $17.2 million of medium-term notes in January and February of
2005 which carried interest rates of 9.25 9.35%.
14. 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.
25
The settlement value of TDSs mandatorily
redeemable minority interests is estimated to be $121.2 million at June 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 June 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 June 30, 2005 is
$31.5 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 $89.7 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.
15. 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 a Special Common Share repurchase program.
No TDS Common Shares were repurchased in the
first six months of 2005. As of June 30,
2005, shares remaining available for repurchase under this authorization
totaled 824,300. In the six months ended
June 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 $69.16, 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. No U.S.
Cellular Common Shares were repurchased in the first six months of 2005 or
2004.
16. 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 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.
In March 2005, Carroll Wireless filed an
application with the FCC seeking a grant of the subject licenses. TDS expects
that the FCC will grant the licenses in the third quarter of 2005. The $129.9 million deposited with the FCC is
included in licenses in the Consolidated Balance Sheet as of June 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.
Carroll Wireless is in the process of
developing its long-term business and financing plans. As of June 30,
2005, U.S. Cellular has made capital contributions and advances to Carroll
Wireless and/or its general partner of approximately $130 million. 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;
however, U.S. Cellular has not entered into any commitments to provide Carroll
Wireless with any financing beyond the $130 million it has provided to date.
26
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 non-controlling investment
interest.
2004 Activity
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 six 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 acquisitions increased investment in licenses, goodwill and customer
lists by $2.7 million, $3.6 million and $12.9 million, respectively.
17. 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.
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Marketable
Equity Securities
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,109,222
|
|
$
|
732,904
|
|
Add
(deduct):
|
|
|
|
|
|
Unrealized loss on marketable equity
securities
|
|
(577,596
|
)
|
(120,300
|
)
|
Income tax benefit
|
|
228,226
|
|
46,677
|
|
|
|
(349,370
|
)
|
(73,623
|
)
|
Unrealized gain (loss) of equity method
companies
|
|
282
|
|
135
|
|
Minority share of unrealized loss
|
|
3,357
|
|
3,412
|
|
Net change in unrealized loss on marketable
equity securities in comprehensive income
|
|
(345,731
|
)
|
(70,076
|
)
|
Balance, end
of period
|
|
$
|
763,491
|
|
$
|
662,828
|
|
|
|
|
|
|
|
Derivative
Instruments
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
(738,365
|
)
|
$
|
(438,086
|
)
|
Add
(deduct):
|
|
|
|
|
|
Unrealized loss on derivative instruments
|
|
511,105
|
|
124,206
|
|
Income tax benefit
|
|
(202,091
|
)
|
(48,475
|
)
|
|
|
309,014
|
|
75,731
|
|
Minority
share of unrealized loss
|
|
(2,624
|
)
|
(2,671
|
)
|
Net change in unrealized loss on derivative
instruments included in comprehensive income
|
|
306,390
|
|
73,060
|
|
Balance, end
of period
|
|
$
|
(431,975
|
)
|
$
|
(365,026
|
)
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
370,857
|
|
$
|
294,818
|
|
Net change in marketable equity securities
|
|
(345,731
|
)
|
(70,076
|
)
|
Net change in derivative instruments
|
|
306,390
|
|
73,060
|
|
Net change in unrealized gain (loss)
included in comprehensive income
|
|
(39,341
|
)
|
2,984
|
|
Balance, end
of period
|
|
$
|
331,516
|
|
$
|
297,802
|
|
27
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
97,056
|
|
$
|
37,338
|
|
$
|
120,105
|
|
$
|
55,592
|
|
Net change in unrealized gain (loss) included
in comprehensive income
|
|
(33,771
|
)
|
(25,673
|
)
|
(39,341
|
)
|
2,984
|
|
|
|
$
|
63,285
|
|
$
|
11,665
|
|
$
|
80,764
|
|
$
|
58,576
|
|
18. Business
Segment Information
Financial data for TDSs business segments
for each of the three and six month periods ended or at June 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.
|
|
U.S.
Cellular
|
|
|
|
|
|
Other (3)
|
|
Other
Reconciling
Items (1)
|
|
Total
|
|
Three Months Ended or At
|
TDS Telecom
|
June 30, 2005 (As Restated)
|
ILEC
|
|
CLEC
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
741,965
|
|
$
|
164,379
|
|
$
|
60,772
|
|
$
|
7,455
|
|
$
|
(4,712
|
)
|
$
|
969,859
|
|
Cost of services and products
|
|
264,049
|
|
42,894
|
|
26,392
|
|
4,938
|
|
(673
|
)
|
337,600
|
|
Selling, general and administrative expense
|
|
284,209
|
|
44,764
|
|
29,993
|
|
1,430
|
|
(4,039
|
)
|
356,357
|
|
Operating income before depreciation,
amortization and accretion (2)
|
|
193,707
|
|
76,721
|
|
4,387
|
|
1,087
|
|
|
|
275,902
|
|
Depreciation, amortization and accretion
expense
|
|
126,784
|
|
33,582
|
|
7,522
|
|
687
|
|
|
|
168,575
|
|
Operating income (loss)
|
|
66,923
|
|
43,139
|
|
(3,135
|
)
|
400
|
|
|
|
107,327
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
17,825
|
|
175
|
|
|
|
|
|
188
|
|
18,188
|
|
Marketable equity securities
|
|
251,115
|
|
|
|
|
|
|
|
2,570,093
|
|
2,821,208
|
|
Investment in unconsolidated entities
|
|
161,239
|
|
20,071
|
|
|
|
|
|
24,630
|
|
205,940
|
|
Total assets
|
|
5,206,919
|
|
1,691,557
|
|
148,290
|
|
26,442
|
|
3,399,701
|
|
10,472,909
|
|
Capital expenditures
|
|
$
|
143,782
|
|
$
|
18,718
|
|
$
|
7,322
|
|
$
|
1,063
|
|
$
|
1,733
|
|
$
|
172,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Cellular
|
|
|
|
|
|
Other (3)
|
|
Other
Reconciling
Items (1)
|
|
Total
|
|
Three Months Ended or At
|
TDS Telecom
|
June 30, 2004 (As Restated)
|
ILEC
|
|
CLEC
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
705,590
|
|
$
|
163,611
|
|
$
|
57,245
|
|
$
|
6,133
|
|
$
|
(3,493
|
)
|
$
|
929,086
|
|
Cost of services and products
|
|
255,942
|
|
39,242
|
|
23,514
|
|
4,118
|
|
(335
|
)
|
322,481
|
|
Selling, general and administrative expense
|
|
265,623
|
|
43,111
|
|
30,855
|
|
1,127
|
|
(3,158
|
)
|
337,558
|
|
Operating income before depreciation,
amortization, accretion and gain on assets held for sale(2)
|
|
184,025
|
|
81,258
|
|
2,876
|
|
888
|
|
|
|
269,047
|
|
Depreciation, amortization and accretion
expense
|
|
122,228
|
|
32,425
|
|
9,737
|
|
619
|
|
|
|
165,009
|
|
(Gain) on assets held for sale
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
(582
|
)
|
Operating income (loss)
|
|
62,379
|
|
48,833
|
|
(6,861
|
)
|
269
|
|
|
|
104,620
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
16,297
|
|
175
|
|
|
|
|
|
(4
|
)
|
16,468
|
|
(Loss) on investments
|
|
(1,830
|
)
|
|
|
|
|
|
|
|
|
(1,830
|
)
|
Marketable equity securities
|
|
229,712
|
|
|
|
|
|
|
|
2,422,401
|
|
2,652,113
|
|
Investment in unconsolidated entities
|
|
183,020
|
|
19,955
|
|
|
|
|
|
24,749
|
|
227,724
|
|
Total assets
|
|
5,238,098
|
|
1,840,015
|
|
235,824
|
|
23,120
|
|
3,162,091
|
|
10,499,148
|
|
Capital expenditures
|
|
$
|
162,444
|
|
$
|
26,961
|
|
$
|
8,596
|
|
$
|
795
|
|
$
|
1,353
|
|
$
|
200,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
U.S.
Cellular
|
|
|
|
|
|
Other (3)
|
|
Other
Reconciling
Items (1)
|
|
Total
|
|
Six Months Ended or At
|
TDS Telecom
|
June 30, 2005 (As Restated)
|
ILEC
|
|
CLEC
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,453,036
|
|
$
|
326,222
|
|
$
|
120,039
|
|
$
|
15,263
|
|
$
|
(8,914
|
)
|
$
|
1,905,646
|
|
Cost of services and products
|
|
529,768
|
|
86,633
|
|
50,516
|
|
10,487
|
|
(1,180
|
)
|
676,224
|
|
Selling, general and administrative expense
|
|
562,539
|
|
88,022
|
|
59,255
|
|
2,846
|
|
(7,734
|
)
|
704,928
|
|
Operating income before depreciation,
amortization and accretion (2)
|
|
360,729
|
|
151,567
|
|
10,268
|
|
1,930
|
|
|
|
524,494
|
|
Depreciation, amortization and accretion
expense
|
|
254,277
|
|
67,846
|
|
14,825
|
|
1,375
|
|
|
|
338,323
|
|
Operating income (loss)
|
|
106,452
|
|
83,721
|
|
(4,557
|
)
|
555
|
|
|
|
186,171
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
32,265
|
|
350
|
|
|
|
|
|
327
|
|
32,942
|
|
Gain (loss) on investments
|
|
551
|
|
(51
|
)
|
|
|
|
|
|
|
500
|
|
Marketable equity securities
|
|
251,115
|
|
|
|
|
|
|
|
2,570,093
|
|
2,821,208
|
|
Investment in unconsolidated entities
|
|
161,239
|
|
20,071
|
|
|
|
|
|
24,630
|
|
205,940
|
|
Total assets
|
|
5,206,919
|
|
1,691,557
|
|
148,290
|
|
26,442
|
|
3,399,701
|
|
10,472,909
|
|
Capital expenditures
|
|
$
|
256,557
|
|
$
|
34,860
|
|
$
|
11,536
|
|
$
|
1,978
|
|
$
|
2,474
|
|
$
|
307,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Cellular
|
|
|
|
|
|
Other (3)
|
|
Other
Reconciling
Items (1)
|
|
Total
|
|
Six Months Ended or At
|
TDS Telecom
|
June 30, 2004 (As Restated)
|
ILEC
|
|
CLEC
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,358,765
|
|
$
|
322,812
|
|
$
|
111,981
|
|
$
|
12,393
|
|
$
|
(6,767
|
)
|
$
|
1,799,184
|
|
Cost of services and products
|
|
515,368
|
|
76,993
|
|
43,561
|
|
8,334
|
|
(696
|
)
|
643,560
|
|
Selling, general and administrative expense
|
|
516,416
|
|
86,598
|
|
60,345
|
|
2,323
|
|
(6,071
|
)
|
659,611
|
|
Operating income before depreciation,
amortization, accretion and gain on assets held for sale (2)
|
|
326,981
|
|
159,221
|
|
8,075
|
|
1,736
|
|
|
|
496,013
|
|
Depreciation, amortization and accretion
expense
|
|
236,246
|
|
64,972
|
|
18,748
|
|
1,240
|
|
|
|
321,206
|
|
(Gain) on assets held for sale
|
|
(725
|
)
|
|
|
|
|
|
|
|
|
(725
|
)
|
Operating income (loss)
|
|
91,460
|
|
94,249
|
|
(10,673
|
)
|
496
|
|
|
|
175,532
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
30,081
|
|
350
|
|
|
|
|
|
164
|
|
30,595
|
|
(Loss) on investments
|
|
(1,830
|
)
|
|
|
|
|
|
|
|
|
(1,830
|
)
|
Marketable equity securities
|
|
229,712
|
|
|
|
|
|
|
|
2,422,401
|
|
2,652,113
|
|
Investment in unconsolidated entities
|
|
183,020
|
|
19,955
|
|
|
|
|
|
24,749
|
|
227,724
|
|
Total assets
|
|
5,238,098
|
|
1,840,015
|
|
235,824
|
|
23,120
|
|
3,162,091
|
|
10,499,148
|
|
Capital expenditures
|
|
$
|
263,903
|
|
$
|
44,577
|
|
$
|
15,052
|
|
$
|
1,388
|
|
$
|
2,372
|
|
$
|
327,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
29
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Total operating income from
reportable and other segments
|
|
$
|
107,327
|
|
$
|
104,620
|
|
$
|
186,171
|
|
$
|
175,532
|
|
Total Investment and other income
(expense)
|
|
75,844
|
|
(31,077
|
)
|
43,207
|
|
(61,391
|
)
|
Income before income taxes and
minority interest
|
|
$
|
183,171
|
|
$
|
73,543
|
|
$
|
229,378
|
|
$
|
114,141
|
|
19. 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. As of June 30, 2005, TDS has recorded
liabilities of $9.1 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.
30
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 6.4 million wireless telephone
customers and wireline telephone equivalent access lines. TDS conducts substantially all of its
wireless telephone operations through its 81.5%-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 through its
80%-owned 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 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
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.
31
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 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 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.
32
· 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
before income taxes and minority interest.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(Increase (decrease)
dollars in thousands)
|
|
Income
Before Income Taxes and Minority Interest, as previously reported
|
|
$
|
184,273
|
|
$
|
81,850
|
|
$
|
226,216
|
|
$
|
125,195
|
|
Federal universal service fund
contributions
|
|
(1,224
|
)
|
(1,704
|
)
|
(2,655
|
)
|
(113
|
)
|
Customer contract termination fees
|
|
124
|
|
(84
|
)
|
3,592
|
|
(235
|
)
|
Leases and contracts
|
|
(133
|
)
|
(847
|
)
|
2,105
|
|
(1,244
|
)
|
Promotion rebates
|
|
|
|
|
|
(446
|
)
|
|
|
Operations of consolidated partnerships
managed by a third party
|
|
935
|
|
(1,064
|
)
|
481
|
|
(794
|
)
|
Investment income from entities accounted
for by the equity method
|
|
1,667
|
|
(2,064
|
)
|
2,189
|
|
(2,568
|
)
|
Revenue and cost of service accruals
|
|
|
|
(2,536
|
)
|
|
|
(5,702
|
)
|
Interest income
|
|
93
|
|
50
|
|
571
|
|
(66
|
)
|
Other items
|
|
(2,564
|
)
|
(58
|
)
|
(2,675
|
)
|
(332
|
)
|
Total adjustment
|
|
(1,102
|
)
|
(8,307
|
)
|
3,162
|
|
(11,054
|
)
|
Income
Before Income Taxes and Minority Interest, as restated
|
|
$
|
183,171
|
|
$
|
73,543
|
|
$
|
229,378
|
|
$
|
114,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
The table
below summarizes the net income and earnings per share impacts from the
restatement.
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
Net Income
(loss)
|
|
Diluted
Earnings
Per Share
|
|
Net Income
(loss)
|
|
Diluted
Earnings
Per Share
|
|
Net Income
(loss)
|
|
Diluted
Earnings
Per Share
|
|
Net Income
(loss)
|
|
Diluted
Earnings
Per Share
|
|
As previously
reported
|
|
$
|
99,361
|
|
$
|
0.85
|
|
$
|
41,394
|
|
$
|
0.36
|
|
$
|
119,906
|
|
$
|
1.03
|
|
$
|
61,126
|
|
$
|
0.53
|
|
Federal universal
service fund contributions
|
|
(576
|
)
|
(0.01
|
)
|
(816
|
)
|
(0.01
|
)
|
(1,254
|
)
|
(0.01
|
)
|
(54
|
)
|
|
|
Customer contract
termination fees
|
|
56
|
|
|
|
(38
|
)
|
|
|
1,646
|
|
0.01
|
|
(108
|
)
|
|
|
Leases and
contracts
|
|
(61
|
)
|
|
|
(434
|
)
|
|
|
1,049
|
|
0.01
|
|
(590
|
)
|
(0.01
|
)
|
Promotion rebates
|
|
|
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
Operations of
consolidated partnerships managed by a third party
|
|
336
|
|
|
|
(389
|
)
|
|
|
172
|
|
|
|
(291
|
)
|
|
|
Investment income
from entities accounted for by the equity method
|
|
820
|
|
0.01
|
|
(1,025
|
)
|
(0.01
|
)
|
1,078
|
|
0.01
|
|
(1,275
|
)
|
(0.02
|
)
|
Revenue and cost
of service accruals
|
|
|
|
|
|
(1,534
|
)
|
(0.02
|
)
|
|
|
|
|
(3,449
|
)
|
(0.03
|
)
|
Income taxes
|
|
(394
|
)
|
|
|
174
|
|
|
|
(34
|
)
|
|
|
424
|
|
0.01
|
|
Interest income
|
|
56
|
|
|
|
30
|
|
|
|
345
|
|
|
|
(40
|
)
|
|
|
Other items
|
|
(2,542
|
)
|
(0.02
|
)
|
(24
|
)
|
|
|
(2,599
|
)
|
(0.02
|
)
|
(151
|
)
|
|
|
Total adjustment
|
|
(2,305
|
)
|
(0.02
|
)
|
(4,056
|
)
|
(0.04
|
)
|
199
|
|
|
|
(5,534
|
)
|
(0.05
|
)
|
As restated
|
|
$
|
97,056
|
|
$
|
0.83
|
|
$
|
37,338
|
|
$
|
0.32
|
|
$
|
120,105
|
|
$
|
1.03
|
|
$
|
55,592
|
|
$
|
0.48
|
|
The table below summarizes the effects of consolidating Suttle Straus, Inc.
and recording certain intercompany eliminations as previously discussed.
|
|
Three Months Ended
June 30, 2005
|
|
Six Months Ended
June 30, 2005
|
|
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
|
|
(Increase/(decrease) dollars in thousands)
|
|
Operating
Revenue
|
|
$
|
7,455
|
|
$
|
(3,235
|
)
|
$
|
15,263
|
|
$
|
(6,176
|
)
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
Cost of service and products
|
|
4,938
|
|
309
|
|
10,487
|
|
599
|
|
Selling, general and administrative
|
|
1,430
|
|
(3,544
|
)
|
2,846
|
|
(6,775
|
)
|
Depreciation, amortization and accretion
|
|
687
|
|
|
|
1,375
|
|
|
|
Total Operating Expenses
|
|
7,055
|
|
(3,235
|
)
|
14,708
|
|
(6,176
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
400
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
(400
|
)
|
|
|
(555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment and Other Income (Expense)
|
|
|
(400
|
)
|
|
|
|
|
(555
|
)
|
|
|
|
Income Before Income Taxes and Minority
Interest
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
34
|
|
Three Months Ended
June 30, 2004
|
|
Six Months Ended
June 30, 2004
|
|
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
Adjustment for
Suttle Straus
|
|
Intercompany
Eliminations
|
|
|
|
(Increase/(decrease) dollars in thousands)
|
|
Operating Revenue
|
|
$
|
6,133
|
|
$
|
(2,558
|
)
|
$
|
12,393
|
|
$
|
(4,839
|
)
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Cost of service and products
|
|
4,118
|
|
202
|
|
8,334
|
|
423
|
|
Selling, general and administrative
|
|
1,127
|
|
(2,760
|
)
|
2,323
|
|
(5,262
|
)
|
Depreciation, amortization and accretion
|
|
619
|
|
|
|
1,240
|
|
|
|
Total Operating Expenses
|
|
5,864
|
|
(2,558
|
)
|
11,897
|
|
(4,839
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
269
|
|
|
|
|
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
(269
|
)
|
|
|
(496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment and Other Income (Expense)
|
|
|
(269
|
)
|
|
|
|
|
(496
|
)
|
|
|
|
Income Before Income Taxes and Minority
Interest
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
35
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.
U.S. Cellulars operating income in the six months ended June 30,
2005 increased $15.0 million, or 16%, to $106.5 million from $91.5 million in
2004. The operating income margins (as a
percent of service revenues) were 7.8% in 2005 and 7.2% in 2004. Although operating income and margins
improved in 2005, TDS expects that there will be continued 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;
reduced
inbound roaming revenues; and
continued
enhancements to its wireless networks.
The effects of these factors are expected to be mitigated to some
extent by the following factors:
reduced
per minute costs for usage on U.S. Cellulars network and for outbound roaming
usage;
expansion
of revenues from additional customers, data-related products and services and
newly launched markets; and
reduced
amortization expense as the customer list asset balances decline.
See U.S. Cellular Operations.
TDS TelecomTDS 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.
TDS Telecoms operating income in the six months ended June 30,
2005 decreased $4.4 million, or 5%, to $79.2 million from $83.6 million in
2004. The operating income margins were 17.9% in 2005 and 19.3% 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 contributed to the net decrease in the operating income
margin.
See TDS Telecom Operations.
36
Financing Initiatives
TDS and its subsidiaries had cash and cash equivalents totaling $1,135.8
million, $1,246.4 million of revolving credit facilities available for use and
an additional $75 million of bank lines of credit as of June 30, 2005. TDS
and its subsidiaries are also generating substantial cash flows from
operations. Cash flows from operating activities totaled $518.4 million in the
six months ended June 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.
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.
U.S. Cellular
has recently received or will receive licenses that will be in a development
phase 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).
Carroll Wireless is in the process of developing its long-term business
and financing plans. As of June 30, 2005, U.S. Cellular has made capital
contributions and advances to Carroll Wireless and/or its general partner of
approximately $130 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; however, U.S. Cellular has not entered
into any commitments to provide Carroll Wireless with any financing beyond the
$130 million it has provided to date.
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
paid prepayment penalties 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 ILEC companies, had a weighted average interest rate
of 5.5%.
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 prepayment penalties 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 ILEC
companies, had a weighted average interest rate of 6.2%. 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.
See Financial Resources and Liquidity and Capital Resources.
37
RESULTS OF OPERATIONS
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30,
2004
Operating Revenues increased
$106.4 million, or 6%, to $1,905.6 million during the six months ended June 30,
2005 from $1,799.2 million during the six months ended June 30, 2004,
primarily as a result of a 10% increase in customers and equivalent access
lines served. U.S. Cellulars operating
revenues increased $94.2 million, or 7%, to $1,453.0 million in 2005 from
$1,358.8 million in 2004 as customers served increased by 543,000, or 12%,
since June 30, 2004, to 5,227,000.
Of the 12% increase in customers since June 30, 2004, 570,000 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 $10.6 million, or 3%, to $443.5 million in 2005
from $432.9 million in 2004 as equivalent access lines increased by 55,900 or
5%, since June 30, 2004, to 1,177,100.
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 $95.8 million, or 6%, to $1,719.5 million in 2005 from $1,623.7
million in 2004 primarily reflecting growth in operations. U.S. Cellulars
operating expenses increased $79.3 million, or 6%, to $1,346.6 million in 2005
from $1,267.3 million in 2004 primarily reflecting costs associated with
acquiring customers and serving and retaining its expanding customer base.
TDS Telecoms expenses increased $15.1 million, or 4%, to $364.4 million in
2005 from $349.3 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 $10.7 million, or 6%, to $186.2 million in 2005 from $175.5 million
in 2004. The operating margin was 9.8%
in both 2005 and 2004 on a consolidated basis. U.S. Cellulars operating income increased
$15.0 million, or 16%, to $106.5 million from $91.5 million in 2004 and its
operating margin, as a percentage of service revenues, increased to 7.8% in
2005 from 7.2% in 2004. TDS Telecoms
operating income decreased $4.4 million, or 5%, to $79.2 million in 2005 from
$83.6 million in 2004 and its operating margin decreased to 17.8% in 2005 from
19.3% 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 $43.2 million in 2005 and $(61.4) million in 2004.
Investment income increased
$2.3 million, or 8%, to $32.9 million in 2005 from $30.6 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 $119.1 million to $127.2 million in 2005 from $8.1 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 share in April 2005. TDS recorded dividend income of $105.7
million, before taxes, in the second quarter of 2005. Deutsche Telekom did not pay a dividend in
2004.
Interest expense
increased $11.2 million, or 12%, to $106.4 million in 2005 from $95.2 million
in 2004 primarily due to interest expense on forward contracts being $11.0
million higher in the six months ended June 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 six months ended June 30, 2005 increased by $14.8 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 largely offset by a $4.9 million and $9.2 million
reduction 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 $1.8 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. The net loss of $1.8 million in 2004
represents an impairment in the carrying value of a U.S. Cellular investment in
a non-operational market in Florida.
38
Other income (expense), net
totaled $(11.0) million in 2005 and $(3.0) 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 incurred $2.9 million of
expenses from the Special Common Share proposal and stock dividend described in
Note 2 to the financial statements of this Form 10-Q/A.
Income Tax Expense
increased $47.7 million, or 102%, to $94.4 million in 2005 from $46.7 million
in 2004 primarily due to higher pretax income in 2005, partially offset by a
$2.8 million provision in 2004 recorded upon the completion of the sale of
assets by U.S. Cellular to AT&T Wireless in February 2004. The
effective tax rate was 41.1% in 2005 and was 41.0% 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.
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Minority Share of (Income) Loss
|
|
|
|
|
|
Minority Public Shareholders
|
|
$
|
(10,562
|
)
|
$
|
(7,846
|
)
|
Minority Shareholders or Partners
|
|
(4,219
|
)
|
(3,939
|
)
|
|
|
(14,781
|
)
|
(11,785
|
)
|
Other
|
|
(117
|
)
|
(24
|
)
|
|
|
$
|
(14,898
|
)
|
$
|
(11,809
|
)
|
Net Income Available to Common
totaled $120.0 million, or $1.03 per diluted share, in 2005 and $55.5 million,
or $0.48 per diluted share, in 2004, as adjusted for the effects of the Special
Common Share stock dividend. See Note 2
Stock Dividend for adjustment discussion.
39
U.S. CELLULAR OPERATIONS
TDS provides wireless telephone service through United States Cellular
Corporation (U.S. Cellular), an 81.5%-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 12%
since June 30, 2004, to 5,227,000 from 4,684,000, 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, either majority or minority interests in 229 wireless markets as of
June 30, 2005. A summary of the number of markets U.S. Cellular owns or has rights
to acquire as of June 30, 2005 follows:
|
|
Number of
Markets
|
|
Consolidated
markets (1)
|
|
176
|
|
Consolidated
markets to be acquired pursuant to existing agreements (2)
|
|
29
|
|
Minority
interests accounted for using equity method (3)
|
|
19
|
|
Minority interests
accounted for using cost method (4)
|
|
5
|
|
Total markets to
be owned after completion of pending transactions
|
|
229
|
|
(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
owns rights to acquire controlling interests in 29 additional wireless licenses.
Of the 29 licenses, 20 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.
(3) 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.
(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 cost method.
RESULTS
OF OPERATIONS
Following is a
table of summarized operating data for U.S. Cellulars consolidated operations.
|
|
Six Months Ended or At
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
As of June 30,
(1a)
|
|
|
|
|
|
Total market
population (2)
|
|
44,690,000
|
|
45,581,000
|
|
Customers (3)
|
|
5,227,000
|
|
4,684,000
|
|
Market
penetration (4)
|
|
11.70
|
%
|
10.28
|
%
|
Total full-time
equivalent employees
|
|
7,000
|
|
6,350
|
|
Cell sites in
service
|
|
5,034
|
|
4,420
|
|
For the Six
Months Ended June 30, (1b)
|
|
|
|
|
|
Net customer
additions (5)
|
|
276,000
|
|
333,000
|
|
Net retail
customer additions (5)
|
|
204,000
|
|
248,000
|
|
Average monthly
service revenue per customer (6)
|
|
$
|
44.52
|
|
$
|
46.55
|
|
Postpay churn
rate per month (7)
|
|
1.5
|
%
|
1.4
|
%
|
Sales and
marketing cost per gross customer addition (8)
|
|
$
|
425
|
|
$
|
382
|
|
(1a) Amounts in 2005 include
the market acquired from Cingular in April 2005, and do not include (i) the six
markets sold to AT&T Wireless in February 2004, or (ii) the two markets
sold to ALLTEL in November 2004. 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.
(1b) Amounts in 2005 include
the results of the market acquired from Cingular in April 2005 from April 1,
2005 through June 30, 2005 and do not include (i) the results of the six
markets sold to AT&T Wireless in February 2004 for the entire period or
(ii) the results of the two markets sold to ALLTEL in November 2004 for the
entire period. Amounts in 2004 include
(i) the results of the six markets sold to AT&T Wireless in February 2004 from
January 1, 2004 through February 17, 2004, and (ii) the results of the two
markets sold to ALLTEL in November 2004 for the entire period.
40
(2) Represents 100% of the
population of the markets in which U.S. Cellular has a controlling financial
interest for financial reporting purposes. As of June 30, 2005, such population includes the
total market population of the market acquired from Cingular in April 2005. As of June 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 June 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 June 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 June 30, 2005, but such total market
population and customer are included as of June 30, 2004. The population of markets in which U.S.
Cellular has deferred the transfer of licenses from AT&T Wireless are not
included in the total population for any period, nor are 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:
|
|
June 30,
|
|
|
|
2005
|
|
2004
|
|
Customers on
postpay service plans in which the end user is a customer of U.S. Cellular
(postpay customers)
|
|
4,426,000
|
|
4,128,000
|
|
End user
customers acquired through U.S. Cellulars agreement with a third party
(reseller customers) *
|
|
539,000
|
|
400,000
|
|
Total postpay
customer base
|
|
4,965,000
|
|
4,528,000
|
|
Customers on
prepaid service plans in which the end user is a customer of U.S. Cellular
(prepaid customers)
|
|
262,000
|
|
156,000
|
|
Total customers
|
|
5,227,000
|
|
4,684,000
|
|
* 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:
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
Service Revenues
per Consolidated Statements of Operations
|
|
$
|
1,363,385
|
|
$
|
1,270,733
|
|
Divided by
average customers during period (000s) *
|
|
5,104
|
|
4,550
|
|
Divided by
number of months in each period
|
|
6
|
|
6
|
|
Average monthly
service revenue per customer
|
|
$
|
44.52
|
|
$
|
46.55
|
|
* 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.
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.
41
Operating
revenues increased $94.2 million, or 7%, to $1,453.0 million
in 2005 from $1,358.8 million in 2004.
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Retail service
|
|
$
|
1,204,326
|
|
$
|
1,104,478
|
|
Inbound roaming
|
|
65,188
|
|
87,216
|
|
Long-distance
and other service revenues
|
|
93,871
|
|
79,039
|
|
Service Revenues
|
|
1,363,385
|
|
1,270,733
|
|
Equipment sales
|
|
89,651
|
|
88,032
|
|
|
|
$
|
1,453,036
|
|
$
|
1,358,765
|
|
Service
revenues increased $92.7 million, or 7%, to $1,363.4 million
in 2005 from $1,270.7 million in 2004. Service revenues primarily consist of:
(i) charges for access, airtime, roaming 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 $44.52 in the first six months of 2005, and $46.55 in the
first six months of 2004. See footnote 6
to the table above for the calculation of average monthly service revenue per
customer.
Retail
service revenues increased $99.8 million, or 9%, to $1,204.3
million in 2005 from $1,104.5 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 12% to 5,227,000 at June 30, 2005,
from 4,684,000 at June 30, 2004. Of the
12% increase in customers since June 30, 2004, 570,000 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.
Revenues from data
products and services increased to $59.7 million in 2005 from $25.2 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 USF and costs related to other federal
mandates such as E-911 capability and wireless number portability increased
$21.1 million in the first half of 2005.
Monthly retail
minutes of use per customer increased to 606 in 2005 from 517 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.
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. 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 June 30, 2004 to 15% at June 30, 2005.
As a result of the above factors,
average monthly retail service revenue per customer decreased 3% to $39.32 in
2005 from $40.46 in 2004. 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.
Inbound
roaming revenues decreased $22.0 million, or 25%, to $65.2 million
in 2005 from $87.2 million in 2004. The
decrease in revenue primarily related to the decrease 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 negotiated rates. The increase
in inbound roaming minutes of use was primarily driven by the overall growth in
the number of customers throughout the wireless industry.
42
U.S. Cellular
anticipates that the rate of growth in inbound roaming minutes of use will
continue to slow down due to these factors:
U.S. Cellulars roaming
partners may switch their business from U.S. Cellular to other operators or to
their own systems;
as certain wireless
operators convert their networks to Global System for Mobile Communication (GSM)
digital technology, which U.S. Cellular only supports through its analog
service and in some cases through its Time Division Multiple Access (TDMA)
service, those operators may switch their business to other operators which
offer GSM service; and
newer customers may roam
less than existing customers, reflecting further penetration of the consumer
market.
U.S. Cellular also
anticipates that average inbound roaming revenue per minute of use will continue
to decline, reflecting the continued general downward trend in negotiated
rates.
Long-distance
and other service revenues increased $14.9 million, or 19%, to
$93.9 million in 2005 from $79.0 million in 2004. The increase primarily reflected a $14.6
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 reimbursement paid to U.S. Cellular related to filings for prior
periods; this effect was mostly offset by a $4.4 million one-time reduction in
reimbursements which U.S. Cellular had previously received but related to a
time period before it had become eligible to receive such reimbursements. In the first half of 2005, U.S. Cellular was
eligible to receive such funds in five states compared to three states in the
first half of 2004.
Equipment
sales revenues increased $1.7 million, or 2%, to $89.7 million
in 2005 from $88.0 million in 2004. U.S.
Cellulars 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. U.S. Cellular sells handsets to its agents at
a price approximately equal to U.S. Cellulars cost, before applying any
rebates. Selling handsets to agents 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.
The total cost of
equipment sold increased $13.7 million, or 6%,
to $244.1 million in 2005 from $230.4 million in 2004. Equipment sales revenues have grown
less significantly than the total cost of equipment sold due to the continued
substantial discounting of handsets for new customers as well as those
customers who renew service with U.S. Cellular.
This trend is occurring throughout the wireless industry.
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 rebate from U.S. Cellular at the time these
agents provide handsets to sign up new customers or renew current customers.
Customers added to
U.S. Cellulars customer base through its marketing distribution channels
(gross customer activations), one of the primary drivers of equipment sales
revenues, increased less than 1% in 2005. The revenues from handsets provided
to current customers for retention purposes declined slightly, despite a slight
increase in the volume of such transactions, partially reducing the growth in
equipment sales revenues. The retention
transaction revenue decline was primarily due to the increase in discounting of
handsets for competitive reasons. 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.
43
Operating
expenses increased $79.3 million, or 6%, to $1,346.6 million
in 2005 from $1,267.3 million in 2004.
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
System
operations (exclusive of depreciation,
|
|
|
|
|
|
amortization and
accretion included below)
|
|
$
|
285,709
|
|
$
|
284,945
|
|
Cost of
equipment sold
|
|
244,059
|
|
230,423
|
|
Selling, general
and administrative
|
|
562,539
|
|
516,416
|
|
Depreciation,
amortization and accretion
|
|
254,277
|
|
236,246
|
|
Gain on assets
held for sale
|
|
|
|
(725
|
)
|
|
|
$
|
1,346,584
|
|
$
|
1,267,305
|
|
System
operations expenses (excluding depreciation, amortization and
accretion) increased $0.8 million, or less than 1%, to $285.7 million
in 2005 from $284.9 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 $13.4 million, or 15%, primarily driven by a 14% increase
in the number of cell sites within U.S. Cellulars network, to 5,034 in 2005
from 4,420 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 on U.S. Cellulars systems
increased $13.6 million, or 14%, 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 on U.S. Cellulars network; and
expenses incurred when U.S. Cellulars customers used
other carriers networks while roaming decreased $26.2 million, or 26%. 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 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
years, 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 new
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. As
the recently launched markets have historically been among U.S. Cellulars
customers most popular roaming destinations, U.S. Cellular anticipates that
the continued integration of these markets into its operations will result in a
further increase in minutes of use by U.S. Cellulars customers on its network
and a corresponding decrease in minutes of use by its customers on other carriers
networks, resulting in a lower overall increase in minutes of use by U.S.
Cellulars customers on other carriers networks. Such a shift in minutes of
use should reduce U.S. Cellulars per-minute cost of usage in the future.
Cost of equipment sold increased $13.7 million, or 6%, to $244.1 million in 2005 from $230.4
million in 2004. The change was primarily due to an increase in the total cost
of handsets provided to customers for retention purposes, as the number of
retention transactions increased only slightly in 2005 and the number of gross
customer activations from marketing channels increased less than 1%. In addition, the overall cost per handset
increased slightly in the first six months of 2005 as more customers purchased
higher priced, 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.
44
Selling, general and administrative expenses
increased $46.1 million, or 9%, to $562.5 million in 2005 from $516.4 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 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 12% increase in U.S.
Cellulars customer base and a 10% increase in full-time equivalent employees.
Selling, general and administrative expenses were also affected by the
following factors:
a $10.3 million increase in
expenses related to USF contributions,
driven by increases in retail service
revenues, upon which payments into the fund are based, and specified
contribution rates. Most of these payments are offset by increases in retail
service revenues for amounts passed through to customers;
a $10.1 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 $7.2 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;
an $8.0 million decrease in bad
debt expense, primarily attributable to the improvement in U.S. Cellulars
collections of outstanding accounts receivable in 2005; and
a $4.3 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.
Sales and marketing cost per gross customer activation increased 11% to
$425 in 2005 from $382 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.
Below is a summary of sales and marketing cost per gross customer
activation for each period:
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(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)
|
|
$
|
244,661
|
|
$
|
226,010
|
|
Cost of
equipment sold to new customers (2)
|
|
183,959
|
|
162,326
|
|
Less equipment
sales revenue from new customers (3)
|
|
(103,149
|
)
|
(97,383
|
)
|
Total costs
|
|
$
|
325,471
|
|
$
|
290,953
|
|
Gross customer
activations (000s) (4)
|
|
766
|
|
762
|
|
Sales and
marketing cost per gross customer activation
|
|
$
|
425
|
|
$
|
382
|
|
(1) Selling,
general and administrative expenses related to the acquisition of new customers
is reconciled to total selling, general
and administrative expenses as follows:
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Selling, general
and administrative expenses, as reported
|
|
$
|
562,539
|
|
$
|
516,416
|
|
Less expenses
related to serving and retaining customers
|
|
(317,878
|
)
|
(290,406
|
)
|
Selling, general
and administrative expenses related to the acquisition of new customers
|
|
$
|
244,661
|
|
$
|
226,010
|
|
45
(2) Cost
of equipment sold to new customers is reconciled to cost of equipment sold as
follows:
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Cost of
equipment sold as reported
|
|
$
|
244,059
|
|
$
|
230,423
|
|
Less cost of
equipment sold related to the retention of current customers
|
|
(60,100
|
)
|
(68,097
|
)
|
Cost of
equipment sold to new customers
|
|
$
|
183,959
|
|
$
|
162,326
|
|
(3) Equipment
sales revenue from new customers is reconciled to equipment sales revenues as
follows:
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Equipment sales
revenue as reported
|
|
$
|
89,651
|
|
$
|
88,032
|
|
Less equipment
sales revenues related to the retention of current customers, excluding agent
rebates
|
|
(12,103
|
)
|
(12,927
|
)
|
Add agent rebate
reductions of equipment sales revenues related to the retention of current
customers
|
|
25,601
|
|
22,278
|
|
Equipment sales
revenues from new customers
|
|
$
|
103,149
|
|
$
|
97,383
|
|
|
|
|
|
|
|
|
|
|
(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
$12.78 in 2005 from $13.47 in 2004. U.S. Cellular uses this measurement to
assess the cost of serving and retaining its customers on a per unit basis.
This measurement is reconciled to total selling,
general and administrative expenses as follows:
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands,
except per customer amounts)
|
|
Components of cost (1)
|
|
|
|
|
|
Selling, general and
administrative expenses as reported
|
|
$
|
562,539
|
|
$
|
516,416
|
|
Less selling, general
and administrative expenses related to the acquisition of new customers
|
|
(244,661
|
)
|
(226,010
|
)
|
Add cost of equipment
sold related to the retention of current customers
|
|
60,100
|
|
68,097
|
|
Less equipment sales
revenues related to the retention of current customers, excluding agent
rebates
|
|
(12,103
|
)
|
(12,927
|
)
|
Add agent rebate
reductions of equipment sales revenues related to the retention of current
customers
|
|
25,601
|
|
22,278
|
|
|
|
|
|
|
|
Net cost of serving and
retaining customers
|
|
$
|
391,476
|
|
$
|
367,854
|
|
Divided by average
customers during period (000s) (2)
|
|
5,104
|
|
4,550
|
|
Divided by six months
in each period
|
|
6
|
|
6
|
|
|
|
|
|
|
|
Average monthly general
and administrative expenses per customer
|
|
$
|
12.78
|
|
$
|
13.47
|
|
|
|
|
|
|
|
|
|
|
(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 six month periods were previously defined in
footnote 6 to the table of summarized operating data.
46
Depreciation, amortization and accretion expense
increased $18.1 million, or 8%, to $254.3 million in 2005 from $236.2 million
in 2004. The majority of the increase reflects a $20.3 million, or 10%,
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 614 cell
sites to U.S. Cellulars network since June 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:
$6.3 million of writeoffs of
fixed assets related to the disposal of assets or trade-in of older assets for
replacement assets; and
$3.6 million of writeoffs of
certain Time Division Multiple Access (TDMA) digital radio equipment related
to its disposal or consignment for future sale. This writedown 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
$9.9 million. Additionally, certain TDMA
digital radio equipment consigned to a third party for future sale was written
down by $6.3 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. Based on the results of the review
through June 30, 2004, U.S. Cellular estimated that the review, when completed,
would result in a write-off 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-off in the second quarter of 2004.
Amortization expense
decreased $2.7 million, or 12%, to $19.2 million in 2005 from $22.0 million in
2004, primarily representing a $2.4 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 six months of 2004
includes a gain of $725,000, which primarily represents a $582,000 reduction of
loss on assets held for sale recorded originally in the fourth quarter of 2003 on
the sale of wireless properties in southern Texas to AT&T Wireless which
was completed in February 2004.
Operating
Income
Operating
income increased $15.0 million, or 16%, to $106.5 million in
2005 from $91.5 million in 2004. The operating income margins (as a percent of
service revenues) were 7.8% in 2005 and 7.2% 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
expense, primarily driven by an increase in average fixed assets related to
ongoing improvements to U.S. Cellulars wireless network;
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; and
increased minutes of use and
cell sites in service.
47
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. Additionally, U.S.
Cellular plans to build out its network into other as yet unserved portions of
its licensed areas, and began sales and marketing operations in the St. Louis
area in the third quarter of 2005. U.S.
Cellular launched its brand of data-related wireless services in many of its
markets in the second half of 2003, and 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
include the impact of commercially launching service in the St. Louis market
during the third quarter of 2005. Except for disclosed changes, such estimates
are based on U.S. Cellulars currently owned markets because the effect of any
possible future acquisition or disposition activity cannot be predicted with
accuracy or certainty. The following
estimates were updated by U.S. Cellular on July 27, 2005 and continue to
represent U.S. Cellulars views as of the date of filing the original Form
10-Q based on current facts and circumstances. Such forward-looking statements
should not be assumed to be accurate as of any future date. TDS and U.S.
Cellular undertake 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
|
|
$
|
+/- 2.8 billion
|
|
$
|
2.62 billion
|
|
Depreciation,
amortization and accretion expenses
|
|
$
|
530 million
|
|
$
|
498.2 million
|
|
Operating income
|
|
$
|
180-220 million
|
|
$
|
183.3 million
|
|
Net retail customer
activations
|
|
475,000 - 525,000
|
|
464,000
|
|
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.
U.S. Cellular
believes there exists 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.
48
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 55,900 or
5%, since June 30, 2004 to 1,177,100. 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.
TDS Telecoms
incumbent local exchange carrier subsidiaries served 734,200 equivalent access
lines at June 30, 2005, a 1% (8,600 equivalent access lines) increase from 725,600
equivalent access lines at June 30, 2004.
TDS Telecoms
competitive local exchange carrier subsidiaries served 442,900 equivalent
access lines at June 30, 2005, a 12% (47,300 equivalent access lines) increase
from 395,600 equivalent access lines served at June 30, 2004.
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Dollars in thousands)
(As Restated)
|
|
Incumbent Local
Exchange Carrier Operations
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
326,222
|
|
$
|
322,812
|
|
Operating
Expenses
|
|
242,501
|
|
228,563
|
|
Operating Income
|
|
83,721
|
|
94,249
|
|
|
|
|
|
|
|
Competitive
Local Exchange Carrier Operations
|
|
|
|
|
|
Operating
Revenues
|
|
120,039
|
|
111,981
|
|
Operating Expenses
|
|
124,596
|
|
122,654
|
|
Operating (Loss)
|
|
(4,557
|
)
|
(10,673
|
)
|
|
|
|
|
|
|
Intercompany
revenue elimination
|
|
(2,738
|
)
|
(1,928
|
)
|
Intercompany
expense elimination
|
|
(2,738
|
)
|
(1,928
|
)
|
|
|
|
|
|
|
TDS Telecom
Operating Income
|
|
$
|
79,164
|
|
$
|
83,576
|
|
Operating
income decreased $4.4 million, or 5%, to $79.2 million in the
six months ended June 30, 2005 from $83.6 million in 2004.
The following forward-looking
information with respect to anticipated operating revenues, operating income
and operating losses was updated by TDS Telecom on July 27, 2005 and continues
to represent TDSs views as of the date of filing of the original Form 10-Q.
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
|
|
$
|
655-665 million
|
|
$
|
658.3 million
|
|
Depreciation,
amortization and accretion expenses
|
|
$
|
135 million
|
|
$
|
131.7 million
|
|
Operating income
|
|
$
|
170-180 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)
|
|
$
|
(15)-(10) million
|
|
$
|
(146.1) million
|
|
49
Incumbent
Local Exchange Carrier Operations
Operating
revenues increased $3.4 million, or 1%, to $326.2 million in
the six months ended June 30, 2005 from $322.8 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.
|
|
Six Months Ended
June 30,
|
|
|
|
(Dollars in thousands)
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
Local service
|
|
$
|
99,723
|
|
$
|
101,776
|
|
Network access
and long distance
|
|
181,313
|
|
177,729
|
|
Miscellaneous
|
|
45,186
|
|
43,307
|
|
|
|
$
|
326,222
|
|
$
|
322,812
|
|
Local service revenues decreased $2.1
million, or 2%, to $99.7 million in 2005 from $101.8 million in 2004 primarily due to a 2% decrease
in physical access lines, 49% of which was due to loss of second lines that was
affected by digital subscriber lines substitution. Lower access lines reduced revenues by
approximately $2.0 million. This
decrease is impacted by an increase in advanced calling services revenues, driven by higher
penetration.
Network
access and long distance revenues increased $3.6 million, or 2%,
to $181.3 million in 2005 from $177.7 million in 2004. Revenues from long distance service increased
$1.4 million in 2005 reflecting increased long distance customers. As of June 30, 2005, TDS Telecom incumbent local
exchange carrier operations were providing long-distance service to 310,000 access
lines compared to 280,900 access lines at June 30, 2004. Compensation from state and national revenue
pools for recovery of expenses of providing network access increased $2.5 million
as compared to 2004.
Miscellaneous
revenues from Internet, digital subscriber line and other
non-regulated lines of business increased $1.9 million or 4%, to $45.2 million
in 2005 from $43.3 million in 2004. As
of June 30, 2005, TDS Telecom incumbent local exchange carrier operations were
providing dial-up Internet service to 94,500 customers compared to 112,100
customers in 2004 and were providing digital subscriber line service to 54,200 customers
compared to 31,500 customers in 2004. The net increase in digital subscriber lines
in service was the primary cause of the revenue increase.
Operating
expenses increased by $13.9 million, or 6%, to $242.5 million
in 2005 from $228.6 million in 2004, primarily reflecting increased cost of services
and products.
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Dollars in thousands)
(As Restated)
|
|
Cost of services
and products (exclusive of depreciation and amortization included below)
|
|
$
|
86,633
|
|
$
|
76,993
|
|
Selling, general
and administrative expense
|
|
88,022
|
|
86,598
|
|
Depreciation and
amortization
|
|
67,846
|
|
64,972
|
|
|
|
$
|
242,501
|
|
$
|
228,563
|
|
Cost of services and products increased
$9.6 million, or 13%, to $86.6 million in 2005 from $77.0 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 $4.2 million
of expense increases. Growth in long distance customers combined with increased
usage stimulated by call plans increased expense $2.1 million. The remainder of the increase is driven by
increased labor and contractor charges.
Selling, general and administrative expenses
increased $1.4 million, or 2%, to $88.0 million from $86.6 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.
50
Depreciation
and amortization expenses increased $2.8 million, or 4%, to $67.8
million in 2005 from $65.0 million in 2004 primarily due to additions to plant
in service.
Operating
income decreased $10.5 million, or 11%, to $83.7 million in
2005 from $94.2 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 $8.0 million,
or 7%, to $120.0 million in 2005 from $112.0 million in 2004, primarily due to
the increase in access lines.
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Operating Revenues
|
|
$
|
120,039
|
|
$
|
111,981
|
|
|
|
|
|
|
|
|
|
Retail revenues increased $11.0 million
to $107.4 million in 2005 from $96.4 million in 2004, primarily due to access
line growth of 12% or 47,300. Increased access lines added approximately $13.3
million to retail revenues.
Wholesale revenues, which represent
charges to incumbent carriers, decreased $3.0 million to $12.6 million in 2005
from $15.6 million in 2004 primarily due to federal and state mandated
decreases in access rates, including approximately $4.1 million due to
interstate switched access rate decreases.
Operating
expenses increased $1.9 million,
or 2%, to $124.6 million in 2005 from $122.7 million in 2004.
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Cost of services
and products (exclusive of depreciation and amortization included below)
|
|
$
|
50,516
|
|
$
|
43,561
|
|
Selling, general
and administrative expense
|
|
59,255
|
|
60,345
|
|
Depreciation and
amortization
|
|
14,825
|
|
18,748
|
|
|
|
$
|
124,596
|
|
$
|
122,654
|
|
Cost of services and products
increased $6.9 million, or 16%, to $50.5 million in 2005 from $43.6 million in
2004, primarily due to the costs related to providing service to customers
added during the period. Access line growth added $4.4 million to cost
of goods sold and rate increases added another $4.4 million. These increases were impacted by rate
decreases in other costs of goods sold.
Selling,
general and administrative expenses decreased $1.0 million,
or 2%, to $59.3 million in 2005 from $60.3 million in 2004. Sales and marketing expenses have decreased as
a result of changes in strategy on the mix of targeted customers, but have been
offset by increased administrative costs including consulting and auditing
costs.
Depreciation
and amortization expenses decreased $3.9 million, or 21%, to $14.8
million in 2005 from $18.7 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.
Operating loss decreased $6.1 million,
or 57%, to $(4.6) million in 2005 from $(10.7) million in 2004.
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.
51
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 June 30, 2005
Compared to Three Months Ended June 30, 2004
Operating
Revenues increased $40.8 million, or 4%, to $969.9 million
during the second quarter of 2005 from $929.1 million in 2004 for reasons
generally the same as the first six months.
U.S.
Cellular Operating Revenues
|
|
Three Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Retail service
|
|
$
|
612,159
|
|
$
|
569,187
|
|
Inbound roaming
|
|
35,313
|
|
44,723
|
|
Long distance
and other service revenues
|
|
44,274
|
|
41,872
|
|
Service Revenues
|
|
691,746
|
|
655,782
|
|
Equipment sales
|
|
50,219
|
|
49,808
|
|
|
|
$
|
741,965
|
|
$
|
705,590
|
|
U.S. Cellular
operating revenues increased $36.4 million, or 5%, to $742.0 million in 2005
from $705.6 million in 2004. Retail service revenues increased $43.0 million, or
8%, to $612.2 million in 2005 from $569.2 million in 2004, primarily due to a
12% increase in U.S. Cellulars customer base. The effect of a 16% increase in monthly retail
minutes of use per customer, to 627 in 2005 from 542 in 2004, was more than
offset by a decrease in average revenue per minute of use in 2005, resulting in
a 4% decrease in average monthly retail service revenue per customer.
Inbound roaming
revenues decreased $9.4 million, or 21%, to $35.3 million in 2005 from $44.7
million in 2004, for reasons generally the same as for the first six 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 $2.4 million, or 6%, to $44.3 million in 2005
from $41.9 million in 2004. The increase
primarily reflected an increase in competitive eligible telecommunications
carrier funds received for the states in which U.S. Cellular is eligible to
receive such funds, partially offset by a one-time reduction in
reimbursements which U.S. Cellular had previously received but related to a
time period before it had become eligible to receive such reimbursements. In
the second quarter of 2005, U.S. Cellular was eligible to receive such funds in
five states compared to three states in the same period of 2004.
Equipment sales
revenue increased $0.4 million, or 1%, to $50.2 million in 2005 from $49.8
million in 2004. The primary driver for the increase was an increase in handsets
sold to current customers for retention purposes, while gross customer
activations decreased 7% and overall revenue per handset decreased as
well. The decrease in overall revenue
per handset was primarily due to an increase
in discounting of handsets for competitive reasons.
52
TDS
Telecom Operating Revenues
|
|
Three Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Incumbent Local
Exchange Carrier Operations
|
|
|
|
|
|
Local service
|
|
$
|
50,096
|
|
$
|
51,290
|
|
Network access
and long distance
|
|
91,217
|
|
89,519
|
|
Miscellaneous
|
|
23,066
|
|
22,802
|
|
|
|
164,379
|
|
163,611
|
|
Competitive
Local Exchange Carrier Operations
|
|
60,772
|
|
57,245
|
|
Intercompany
revenue elimination
|
|
(1,477
|
)
|
(935
|
)
|
TDS Telecom
Operating Revenues
|
|
$
|
223,674
|
|
$
|
219,921
|
|
TDS Telecom
operating revenues increased $3.8 million, or 2%, to $223.7 million during the
second quarter of 2005 from $219.9 million in 2004, due in part to a 5% growth
in competitive local exchange carrier revenues. Competitive local exchange carrier access
line equivalents increased 12% since June 30, 2004, while competitive local
exchange carrier digital subscriber line customers increased 34%. Incumbent local exchange carrier revenues
decreased due to the loss of physical access lines, but the loss was offset by
the digital subscriber line customers increase of 72% since June 30, 2004. In addition, the incumbent local exchange
carrier received $1.6 million from the national revenue pool in the second
quarter of 2005 for recovery of expenses of providing network access in 2004.
Operating
Expenses increased $38.0 million, or 5%, to $862.5 million
during the second quarter of 2005 from $824.5 million in 2004 for reasons
generally the same as the first six months.
U.S.
Cellular Operating Expenses
|
|
Three Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
System
operations (exclusive of depreciation, amortization and accretion included
below)
|
|
$
|
147,238
|
|
$
|
145,337
|
|
Cost of
equipment sold
|
|
116,811
|
|
110,605
|
|
Selling, general
and administrative
|
|
284,209
|
|
265,623
|
|
Depreciation,
amortization and accretion
|
|
126,784
|
|
122,228
|
|
Gain on assets
of operations held for sale
|
|
|
|
(582
|
)
|
|
|
$
|
675,042
|
|
$
|
643,211
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Cellular
operating expenses increased $31.8 million, or 5%, to $675.0 million in 2005
from $643.2 million in 2004.
System operations
expenses (excluding depreciation, amortization and accretion) increased $1.9 million,
or 1%, to $147.2 million in 2005 from $145.3 million in 2004. The effects of
several offsetting factors, which were generally the same factors that affected
system operations expense in the first six months of 2005, resulted in a slight
net increase in expense during the second quarter of 2005.
Cost of equipment sold
increased $6.2 million, or 6%, to $116.8 million in 2005 from $110.6 million in
2004. The primary driver for the
increase was an increase in handsets sold to current customers for retention
purposes, while gross customer activations decreased 7% and overall cost per
handset decreased slightly as well. The
decrease in overall cost per handset was due to the slight decrease in the cost
of data-enabled handsets since the second quarter of 2004.
53
Selling, general and
administrative expenses increased $18.6 million, or 7%, to $284.2 million in
2005 from $265.6 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 $5.1 million
increase in expenses related to USF contributions, driven by increases in
retail service revenues, upon which payments into the fund are based, and
specified contribution rates. Most of
these payments are offset by increases in retail service revenues for amounts
passed through to customers;
a $5.2 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;
a $4.9 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; and
a $4.8 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 addition increased to $461 in the second
quarter of 2005 from $394 in 2004, primarily due to increased handset subsidies
and advertising expenses. Below is a
summary of sales and marketing cost per gross customer activation for each
period.
|
|
Three Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(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)
|
|
$
|
124,109
|
|
$
|
115,842
|
|
Cost of
equipment sold to new customers (2)
|
|
88,362
|
|
78,938
|
|
Less equipment
sales revenue from new customers (3)
|
|
(55,567
|
)
|
(50,964
|
)
|
Total costs
|
|
$
|
156,904
|
|
$
|
143,816
|
|
Gross customer
activations (000s) (4)
|
|
340
|
|
365
|
|
Sales and
marketing cost per gross customer activation
|
|
$
|
461
|
|
$
|
394
|
|
(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
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Selling, general
and administrative expenses, as reported
|
|
$
|
284,209
|
|
$
|
265,623
|
|
Less expenses
related to serving and retaining customers
|
|
(160,100
|
)
|
(149,781
|
)
|
Selling, general
and administrative expenses related to the acquisition of new customers
|
|
$
|
124,109
|
|
$
|
115,842
|
|
|
|
|
|
|
|
|
|
|
(2) Cost of equipment sold to new customers is
reconciled to cost of equipment sold as follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Cost of
equipment sold as reported
|
|
$
|
116,811
|
|
$
|
110,605
|
|
Less cost of
equipment sold related to the retention of current customers
|
|
(28,449
|
)
|
(31,667
|
)
|
Cost of
equipment sold to new customers
|
|
$
|
88,362
|
|
$
|
78,938
|
|
|
|
|
|
|
|
|
|
|
|
54
(3) Equipment
sales revenue from new customers is reconciled to equipment sales revenues as
follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Equipment sales
revenue as reported
|
|
$
|
50,219
|
|
$
|
49,808
|
|
Less equipment
sales revenues related to the retention of current customers, excluding agent
rebates
|
|
(6,666
|
)
|
(6,879
|
)
|
Add agent rebate
reductions of equipment sales revenues related to the retention of current customers
|
|
12,014
|
|
8,035
|
|
Equipment sales
revenues from new customers
|
|
$
|
55,567
|
|
$
|
50,964
|
|
|
|
|
|
|
|
|
|
|
(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 $12.48
in 2005 from $13.17 in 2004. This
measurement is reconciled to total selling, general and administrative expenses
as follows:
|
|
Three Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands,
except per customer amounts)
|
|
Components of cost (1)
|
|
|
|
|
|
Selling, general and
administrative expenses as reported
|
|
$
|
284,209
|
|
$
|
265,623
|
|
Less selling, general
and administrative expenses related to the acquisition of new customers
|
|
(124,109
|
)
|
(115,842
|
)
|
Add cost of equipment
sold related to the retention of current customers
|
|
28,449
|
|
31,667
|
|
Less equipment sales
revenues related to the retention of current customers, excluding agent
rebates
|
|
(6,666
|
)
|
(6,879
|
)
|
Add agent rebate
reductions of equipment sales revenues related to the retention of current
customers
|
|
12,014
|
|
8,035
|
|
|
|
|
|
|
|
Net cost of serving and
retaining customers
|
|
$
|
193,897
|
|
$
|
182,604
|
|
Divided by average
customers during period (000s) (2)
|
|
5,179
|
|
4,622
|
|
Divided by three months
in each period
|
|
3
|
|
3
|
|
|
|
|
|
|
|
Average monthly general
and administrative expenses per customer
|
|
$
|
12.48
|
|
$
|
13.17
|
|
(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 increased $4.6
million, or 4%, to $126.8 million in 2005 from $122.2 million in 2004. The
majority of the increase reflects rising average fixed asset balances, which
increased 12% in the second quarter of 2005.
Such increased fixed asset balances resulted from the following factors:
the addition of 614 cell
sites to U.S. Cellulars network since June 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.
55
In the second quarter of 2005, additional depreciation expense was
recorded related to the following:
$2.0 million of write-offs
of fixed assets related to the disposal of assets or trade-in of older assets
for replacement assets; and
$1.3 million of write-offs
of certain TDMA digital radio equipment related to its disposal or consignment
for future sale.
In the second
quarter of 2004, a change in the useful lives of certain asset categories
increased depreciation expense $2.5 million.
Additionally, certain TDMA digital radio equipment consigned to a third
party for future sale was written down by $6.3 million prior to its
consignment, increasing depreciation expense by that amount.
Also in 2004, U.S.
Cellular estimated that the ongoing physical inventory review of its fixed
assets, when completed, would result in a write-off 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-off in the second quarter of 2004.
U.S. Cellular
operating expenses also included a $582,000 reduction of loss on assets held
for sale previously recorded on the sale of wireless properties in southern
Texas to AT&T Wireless in February 2004.
TDS
Telecom Operating Expenses
|
|
Three Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Incumbent Local
Exchange Carrier Operations
|
|
|
|
|
|
Cost of services
and products (exclusive of depreciation and amortization included below)
|
|
$
|
42,894
|
|
$
|
39,242
|
|
Selling, general
and administrative expense
|
|
44,764
|
|
43,111
|
|
Depreciation and
amortization
|
|
33,582
|
|
32,425
|
|
|
|
121,240
|
|
114,778
|
|
Competitive
Local Exchange Carrier Operations
|
|
|
|
|
|
Cost of services
and products (exclusive of depreciation and amortization included below)
|
|
26,392
|
|
23,514
|
|
Selling, general
and administrative expense
|
|
29,993
|
|
30,855
|
|
Depreciation and
amortization
|
|
7,522
|
|
9,737
|
|
|
|
63,907
|
|
64,106
|
|
Intercompany
expense elimination
|
|
(1,477
|
)
|
(935
|
)
|
TDS Telecom
Operating Expenses
|
|
$
|
183,670
|
|
$
|
177,949
|
|
|
|
|
|
|
|
|
|
|
|
TDS Telecom
operating expenses increased $5.8 million, or 3%, to $183.7 million in 2005
from $177.9 million in 2004. Incumbent
local exchange carrier operating expenses increased $6.5 million, primarily due
to $2.0 million of increased cost of providing service to new digital
subscriber line customers and $1.2 million of increased depreciation due to
increased fixed assets (see Liquidity and Capital Resources Capital
Expenditures). Expenses from competitive local exchange carrier operations decreased
$0.2 million in 2005 primarily reflecting the decrease in depreciation
resulting from the reduction in the value of fixed assets recorded in the
fourth quarter of 2004.
TDS
Operating Income increased $2.7 million, or 3%, to $107.3 million
in the three months ended June 30, 2005 from $104.6 million in 2004. U.S. Cellulars operating income increased $4.5
million while TDS Telecoms operating income decreased $2.0 million. The decrease at TDS Telecom primarily
reflects costs associated with new customers and provision of additional
services.
Investment and Other Income (Expense) totaled $75.8 million in 2005 and $(31.1) million in 2004.
Investment
income increased $1.7 million, or 10%, to $18.2 million in
2005 from $16.5 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.
56
Interest
and dividend income increased $113.6 million to $118.9 million
in 2005 from $5.3 million in 2004 primarily due to a dividend from Deutsche
Telekom and higher average rates of interest earned on investments in 2005
than 2004. Deutsche Telekom paid a
dividend of EUR 0.62 per share in April 2005. TDS recorded dividend income of
$105.7 million, before taxes, in the second quarter of 2005. Deutsche Telekom did not pay a dividend in
2004.
Gain (loss)
on investments totaled a loss of $1.8 million in 2004
reflecting an impairment in the carrying value of a U.S. Cellular investment in
a non-operational market in Florida. There was no gain (loss) on investment in
the second quarter of 2005.
Interest
(expense) increased $6.1 million, or 13%, to $54.5 million in
2005 from $48.4 million in 2004 for reasons generally the same as for the first
six months.
Other income (expense), net
totaled $(6.7) million in 2005 and $(2.6) million in 2004. In June 2005, TDS Telecom recorded prepayment
penalties of $1.2 million on the repayment of long-term debt as well as a $0.3
million write off of unamortized debt issuance costs. In the second quarter of 2005, TDS incurred $2.9
million of expenses from the Special Common Share proposal and stock dividend
described in Note 2 to the financial statements of this Form 10-Q/A.
Income
Tax Expense increased $49.0 million to $77.0 million in 2005
from $28.0 million in 2004 primarily due to higher pretax income. The effective tax rate was 42.0% in 2005 and 38.1%
in 2004. For further analysis and
discussion of TDSs effective income tax rates in the second quarters of 2005
and 2004, see Note 4 - Income Taxes.
Minority Share of (Income) totaled
$(9.1) million in 2005 compared to $(8.2) million in the second quarter of 2004.
|
|
Three Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Minority Share
of Income
|
|
|
|
|
|
U.S. Cellular
|
|
|
|
|
|
Minority Public
Shareholders
|
|
$
|
(7,010
|
)
|
$
|
(6,165
|
)
|
Minority
Shareholders or Partners
|
|
(2,034
|
)
|
(2,002
|
)
|
|
|
(9,044
|
)
|
(8,167
|
)
|
Other
|
|
(91
|
)
|
(28
|
)
|
|
|
$
|
(9,135
|
)
|
$
|
(8,195
|
)
|
Net Income Available to Common
totaled $97.0 million, or $0.83 per diluted share, in 2005, compared to $37.3
million, or $0.32 per diluted share, in 2004, as adjusted for the effects of
the Special Common Share stock dividend. See Note 2 Stock Dividend for adjustment
discussion.
RECENT ACCOUNTING PRONOUNCEMENTS
Share-Based Payment
Statement of Financial Accounting Standard (SFAS) No. 123 (revised
2004), Share-Based Payment, was issued in December 2004. In April 2005, the
SEC postponed the effective date of SFAS 123R until the issuers first fiscal
year beginning after June 15, 2005. As a result, TDS will be required to adopt
SFAS 123R 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 123R also requires that the benefits of
tax deductions in excess of recognized compensation cost to 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 123R and the valuation of share-based payments for public
companies. TDS has reviewed the
provisions of these statements and expects to record compensation expense for
certain share-based payment transactions, primarily related to stock options,
in the Consolidated Statements of Operations upon adoption of SFAS 123R. See the Stock-Based Compensation disclosure
above for a pro forma impact on net income and earnings per share under current
accounting requirements.
57
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 in
circumstances that would previously 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
requirement of this Interpretation and has not yet determined the impact, if
any, on TDSs financial position or results of operations.
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 six months ended June
30, 2005 and 2004:
|
|
Six months ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Cash flows from
(used in)
|
|
|
|
|
|
Operating activities
|
|
$
|
518,352
|
|
$
|
333,787
|
|
Investing
activities
|
|
(434,209
|
)
|
(274,277
|
)
|
Financing
activities
|
|
(119,471
|
)
|
384,352
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
$
|
(35,328
|
)
|
$
|
443,862
|
|
|
|
|
|
|
|
|
|
|
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 $518.4 million in the six
months ended June 30, 2005 compared to $333.8 million in 2004. Excluding
changes in assets and liabilities, cash provided by operating activities
totaled $506.7 million in 2005 and $451.2 million in 2004. Changes in assets
and liabilities from operations provided $11.7 million in 2005 and required
$117.4 million in 2004, primarily reflecting timing differences in the payment
of accounts payable, payment of accrued taxes, receipt of accounts receivable
and changes in inventory. 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 $28.2 million in 2005 and $7.5 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.
58
The following
table is a summary of the components of cash flows from operating activities:
|
|
Six months ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Net income
|
|
$
|
120,105
|
|
$
|
55,592
|
|
Adjustments to
reconcile net income to net cash provided by operating activities
|
|
386,561
|
|
395,574
|
|
|
|
506,666
|
|
451,166
|
|
Changes in
assets and liabilities
|
|
11,686
|
|
(117,379
|
)
|
|
|
$
|
518,352
|
|
$
|
333,787
|
|
|
|
|
|
|
|
|
|
|
|
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 revenue enhancing upgrades to TDSs networks. Cash flows used for investing activities
required $434.2 million in the first six months of 2005 compared to $274.3
million in 2004.
Cash required for capital additions totaled $307.4 million
in the six months ended June 30, 2005 and $327.3 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 $256.6 million in 2005 and $263.9 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 $34.9 million in 2005
and $44.6 million in 2004 representing expenditures for switch modernization
and outside plant facilities to maintain and enhance the quality of service and
to offer new revenue opportunities. TDS
Telecoms capital expenditures for its competitive local exchange carrier operations
totaled $11.5 million in 2005 and $15.1 million in 2004 for switching and other
network facilities. Corporate and other capital expenditures totaled $4.4 million
in 2005 and $3.7 million in 2004.
U.S. Cellular has made capital contributions and advances to Carroll
Wireless and/or its general partner of approximately $120.9 million in
2005. The amount, plus the initial
deposit of $9.0 million made in the fourth quarter of 2004, was paid to the FCC
for the amounts owed for Carroll Wireless winning bids on 17 licenses in the
FCC wireless license auction completed in February 2005.
In 2004, net cash received from the sale of wireless properties in
southern Texas to AT&T Wireless totaled $96.9 million, subject to a working
capital adjustment. Cash paid for the
acquisition of certain minority wireless interests in several markets in which
U.S. Cellular already owned a controlling interest totaled $40.4 million in
2004.
Cash Flows from Financing Activities
Cash flows from financing activities required $119.5 million in the six
months ended June 30, 2005, and provided $384.4 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 $112.6 million in 2005. Repayments of long-term debt, including RUS debt,
required $258.0 million in 2005. Cash received from short term borrowings on
revolving lines of credit provided $310 million in 2005 while repayments
required $290.0 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 net proceeds from the two offerings,
after deduction of underwriting discounts, of $412.5 million was temporarily
used to reduce short-term debt prior to the redemption of long-term debt in the
third quarter of 2004. In 2004, short-term borrowings provided $270.0 million
while repayments required $270.0 million.
TDS treasury shares reissued for stock options exercised and other
benefit plans in 2005 provided $12.7 million and $20.3 million in 2004. U.S. Cellular treasury shares reissued for
stock options exercised and other benefit plans in 2005 provided $14.0 million
and $1.7 million in 2004. Dividends paid on TDS Common Shares, Special Common
Shares and Preferred Shares, required $20.3 million in 2005 and $19.0 million
in 2004.
59
There were no TDS
Common Share or Special Common Share repurchases in the six months ended June
30, 2005. During the six months ended June 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.
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 $518.4 million in the first six months of 2005 compared to $333.8
million in 2004. TDS and its subsidiaries had cash and cash equivalents
totaling $1,135.8 million at June 30, 2005.
TDS believes that internal cash flow, 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 terms acceptable to TDS, TDS might be required to reduce its
business development and capital expenditure plans, which could have a
materially adverse effect on its business and financial condition. TDS does not believe that any circumstances
that could materially adversely affect TDSs liquidity or capital resources are
currently reasonably likely to occur, but it cannot provide assurances that
such circumstances will not occur.
Economic downturns, changes in financial markets or other factors could
change the availability of TDSs 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 June 30, 2005,
this credit facility had $596.6 million available for use, net of $3.4 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 TDSs credit rating. At June 30, 2005, the contractual spread was 30
basis points (the one-month LIBOR rate was 3.34% at June 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 6.25% at June 30, 2005).
TDS also has $75 million of direct bank lines of credit at June 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 (the prime rate was 6.25%
at June 30, 2005).
U.S. Cellular has a $700 million revolving credit facility available
for general corporate purposes. At June
30, 2005, this credit facility had $649.8 million available for use, net of
borrowings of $50.0 million and outstanding letters of credit of $0.2 million. 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 June
30, 2005, the contractual spread was 30 basis points (the one-month LIBOR rate
was 3.34% at June 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 6.25% at June 30, 2005).
60
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. On
July 11, 2005, Moodys Investor 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 has
increased to 45 basis points from 30 basis points. In addition, the facility fee charged on the
revolving credit agreements has increased to 15 basis points from 10 basis
points.
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/A, 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.
As disclosed in Note 1, TDS and its audit
committee concluded on November 9, 2005 to restate the Consolidated Financial
Statements for each of the three years ended December 31, 2004 and for the
first and second quarters of 2005. The restatement 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.
Long-term Financing
In January 2005, the TDS Board of Directors authorized
the issuance of up to $350 million of debt securities as a drawdown on a TDS
shelf registration statement. Also in January 2005, the TDS Board of Directors
authorized a committee of the TDS Board of Directors to approve the repayment
of some or all of TDS Telecoms notes issued under certain loan agreements with
the Rural Utilities Service, Rural Electrification Administration, Rural
Telephone Bank, Federal Financing Bank, Rural Telephone Finance Cooperative
and/or other federal government or government-sponsored entities.
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 paid prepayment penalties 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 ILEC companies, had a weighted average interest rate of 5.5%.
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 prepayment
penalties 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 ILEC companies,
had a weighted average interest rate of 6.2%.
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.
61
As of the date of filing this Form 10-Q/A, 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. A
contributing factor in TDSs decision not to dispose of the investments is that
their tax basis is significantly lower when compared to current stock prices,
and therefore would trigger a substantial taxable gain upon disposition.
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
upon settlement of the contracts by their subsidiaries. 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 June 30, 2005, such
deferred tax liabilities totaled $1,044.8 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/A, TDS and U.S. Cellular believe that they
are in compliance with all material covenants and other requirements set forth
in the forward contracts.
As disclosed in Note 1, TDS and its audit
committee concluded on November 9, 2005 to restate the Consolidated Financial
Statements for each of the three years ended December 31, 2004 and for the
first and second quarters of 2005. The
restatement 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.
62
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 and additional expenditures
related to its plans to migrate to a single digital equipment platform. 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 $575 million to $595
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 six months ended June 30, 2005 totaled $256.6
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 $135 to $150 million.
The incumbent local exchange carriers are expected to spend
approximately $110 to $120 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 Telecom incumbent local exchange carriers capital expenditures
totaled $34.9 million and the competitive local exchange carriers capital
expenditures totaled $11.5 million for the six months ended June 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. As part of this strategy, TDS may from time-to-time be
engaged 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 the recently
completed 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.
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 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.
In March 2005, Carroll
Wireless filed an application with the FCC seeking a grant of the subject
licenses. TDS expects that the FCC will grant the licenses in the third quarter
of 2005. The $129.9 million deposited
with the FCC is included in licenses in the Consolidated Balance Sheet as of June 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.
63
Carroll Wireless is in the process of developing its long-term business
and financing plans. As of June 30, 2005, U.S. Cellular has made capital
contributions and advances to Carroll Wireless and/or its general partner of
approximately $130 million. 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; however, U.S. Cellular has not entered into any
commitments to provide Carroll Wireless with any financing beyond the $130
million it has provided to date.
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.
2004 Activity
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 six 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 acquisitions
increased investment in licenses, goodwill and customer lists by $2.7 million,
$3.6 million and $12.9 million, respectively.
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.
No TDS Common Shares were repurchased in the six months ended June 30,
2005. As of June 30, 2005, shares
remaining available for repurchase under this authorization totaled 824,300. In the six months ended June 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
$69.16, including commissions. An
additional $5.5 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. No U.S.
Cellular Common Shares were repurchased in the first six months of 2005 or
2004.
TDS paid total dividends on its
Common Shares, Special Common Shares and Preferred Shares of $20.3 million in
the first six months of 2005 and $19.0 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.
64
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 (a Possible U.S.
Cellular Transaction). TDS currently
owns 81.5% 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.
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
|
|
$
|
|
|
6.625
|
%
|
$
|
(29.2
|
)
|
7.9
|
%
|
2 3 years
|
|
|
|
6.625
|
%
|
(39.5
|
)
|
5.9
|
%
|
4 5 years
|
|
|
|
6.625
|
%
|
(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
|
%
|
65
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 $205.9 million as of June 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 term of the
indemnification varies 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 2000. As of June 30,
2005, TDS has recorded liabilities of $9.1 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.
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 June 30, 2005, TDS reported $1,362.4 million
of licenses and $843.5 million of goodwill, as a result of the acquisitions of
wireless licenses and markets, and the acquisition of operating telephone
companies. Licenses include those
expected to be received from the FCC in the third quarter of 2005 that were won
by Carroll Wireless in the FCC wireless license 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.
66
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 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.
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 recorded a loss on impairment of intangible assets of $29.4 million.
67
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 $78.1
million liability, included in other deferred liabilities and credits in the
Consolidated Balance Sheet, at June 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.
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 June 30, 2005 was
$34.8 million. The regulatory liability in excess of the amounts required to be
recorded in accordance with SFAS No. 143 at June 30, 2005 was $32.6
million.
TDS Telecoms competitive local exchange carrier does not have a
material legal obligation to remove long-lived assets as described by SFAS No. 143. TDS Telecom is reviewing FASB Interpretation No. 47
to determine the impact, if any, on the competitive local exchange carrier
operations.
The table
below summarizes the changes in asset retirement obligations during the first
six months of 2005.
|
|
U.S.
Cellular
|
|
TDS
Telecom
|
|
TDS
Consolidated
|
|
|
|
(As Restated)
|
|
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Beginning Balance December 31, 2004
|
|
$
|
72,575
|
|
$
|
65,000
|
|
$
|
137,575
|
|
Additional
liabilities accrued
|
|
3,223
|
|
2,851
|
|
6,074
|
|
Accretion
expense
|
|
2,282
|
|
|
|
2,282
|
|
Costs of
removal incurred in 2005
|
|
|
|
(431
|
)
|
(431
|
)
|
Ending Balance June 30, 2005
|
|
$
|
78,080
|
|
$
|
67,420
|
|
$
|
145,500
|
|
68
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 tax and accounting 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 $28.4 million, and $43.9
million, as of June 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.
The temporary differences that gave rise to the noncurrent deferred tax
assets and liabilities as of June 30, 2005 and December 31, 2004 are
as follows:
|
|
June 30,
2005
|
|
December 31,
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
Deferred Tax Asset noncurrent
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
61,347
|
|
$
|
61,977
|
|
Derivative instruments
|
|
285,124
|
|
487,216
|
|
Other
|
|
22,855
|
|
38,815
|
|
|
|
369,326
|
|
588,008
|
|
Less valuation allowance
|
|
(55,478
|
)
|
(55,305
|
)
|
Total Deferred Tax Asset
|
|
313,848
|
|
532,703
|
|
|
|
|
|
|
|
Deferred Tax Liability noncurrent
|
|
|
|
|
|
Property, plant and equipment
|
|
415,384
|
|
428,355
|
|
Licenses
|
|
221,341
|
|
241,699
|
|
Marketable equity securities
|
|
1,044,769
|
|
1,284,872
|
|
Partnership investments
|
|
76,721
|
|
66,432
|
|
Total Deferred Tax Liability
|
|
1,758,215
|
|
2,021,358
|
|
Net Deferred Income Tax Liability
|
|
$
|
1,444,367
|
|
$
|
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 $1,044.8 million and $1,284.9 million, as of June 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.
69
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.
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 its digital radio
network fully migrated to CDMA 1XRTT or some future generation of CDMA
technology by that time. 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 were the selection of a discount rate,
estimated future cash flow levels, projected capital expenditures, and
determination of terminal value.
70
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following persons are
partners of Sidley Austin Brown & Wood 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
71
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, issuances of debt, changes in prepaid 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/A for the year
ended December 31, 2004, or this Quarterly Report on Form 10-Q/A to
be different from the amounts actually incurred.
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
associated with wireless number portability and 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 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 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.
72
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 and/or terrorist attacks 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. 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.
73
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 June 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
repaid notes with the Rural Utilities Service (RUS) and the Rural Telephone
Bank (RTB) totaling $105.6 million on March 31, 2005. TDS also paid
accrued interest of $0.6 million and prepayment penalties 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 prepayment penalties were
$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 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
|
|
$
|
|
|
6.625
|
%
|
$
|
(29.2
|
)
|
7.9
|
%
|
2006
|
|
|
|
6.625
|
%
|
(19.5
|
)
|
5.9
|
%
|
2007
|
|
|
|
6.625
|
%
|
(20.0
|
)
|
5.9
|
%
|
2008
|
|
|
|
6.625
|
%
|
(19.5
|
)
|
5.9
|
%
|
2009
|
|
|
|
6.625
|
%
|
(17.7
|
)
|
5.9
|
%
|
After 5 Years
|
|
116.25
|
|
6.625
|
%
|
(143.9
|
)
|
5.8
|
%
|
Total
|
|
$
|
116.25
|
|
6.625
|
%
|
$
|
(249.8
|
)
|
6.1
|
%
|
74
Marketable
Equity Securities and Derivatives
TDS maintains
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 $2,821.2 million at June 30, 2005. As of June 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 $763.5 million.
Subsidiaries
of TDS and U.S. Cellular have entered into forward contracts related to the
marketable equity securities that they hold.
TDS and U.S. Cellular have provided guarantees to the counterparties
which provide assurance to the counterparties that all principal and interest
amounts are paid upon settlement of the contracts by such subsidiaries. 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, 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, 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 Net deferred
income tax liability on the Consolidated Balance Sheets. Such deferred tax liabilities totaled $1,044.8
million at June 30, 2005.
The following
table summarizes certain details surrounding the contracted securities as of June 30,
2005.
|
|
|
|
Collar (1)
|
|
|
|
|
|
|
|
Downside
|
|
Upside
|
|
Loan
|
|
Security
|
|
Shares
|
|
Limit
|
|
Potential
|
|
Amount
|
|
|
|
|
|
(Floor)
|
|
(Ceiling)
|
|
(000s)
|
|
|
|
|
|
|
|
|
|
|
|
VeriSign
|
|
2,361,333
|
|
$
|
8.82
|
|
$
|
11.46
|
|
$
|
20,819
|
|
Vodafone (2)
|
|
12,945,915
|
|
$15.07 -
$16.07
|
|
$18.89 -
$21.58
|
|
201,038
|
|
Deutsche Telekom
|
|
131,461,861
|
|
$10.74 -
$12.41
|
|
$13.68 -
$16.37
|
|
1,532,257
|
|
|
|
|
|
|
|
|
|
1,754,114
|
|
Unamortized debt discount
|
|
|
|
|
|
|
|
55,748
|
|
|
|
|
|
|
|
|
|
$
|
1,698,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
75
The following
analysis presents the hypothetical change in the fair value of marketable
equity securities and derivative instruments at June 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. Such information should not be inferred to suggest that TDS has any
intention of selling any marketable equity securities or canceling any
derivative instruments.
|
|
Valuation of investments
assuming
indicated decrease
|
|
June 30,
2005
|
|
Valuation of investments assuming
indicated increase
|
|
(Dollars in millions)
|
|
-30%
|
|
-20%
|
|
-10%
|
|
Fair Value
|
|
+10%
|
|
+20%
|
|
+30%
|
|
Marketable Equity Securities
|
|
$
|
1,974.8
|
|
$
|
2,257.0
|
|
$
|
2,539.1
|
|
$
|
2,821.2
|
|
$
|
3,103.3
|
|
$
|
3,385.4
|
|
$
|
3,667.6
|
|
Derivative Instruments (1)
|
|
$
|
(30.6
|
)
|
$
|
(189.2
|
)
|
$
|
(461.4
|
)
|
$
|
(699.3
|
)
|
$
|
(964.6
|
)
|
$
|
(1,232.9
|
)
|
$
|
(1,506.2
|
)
|
(1) Represents the fair
value of the derivative instruments assuming the indicated increase or decrease
in the underlying securities.
76
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 June 30, 2005, at the reasonable assurance level, because of the
material weaknesses described below.
Notwithstanding the material weaknesses that existed as of June 30,
2005, management has concluded that the consolidated financial statements
included in this Quarterly Report on Form 10-Q/A 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/A, the following material weaknesses were
identified in TDSs internal control over financial reporting as of December 31,
2004 which continued to exist at June 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.
77
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.
78
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 June 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.
79
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/A.
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
|
|
April 1 30, 2005
|
|
|
|
$
|
|
|
|
|
824,300
|
|
May 1 31, 2005
|
|
|
|
|
|
|
|
824,300
|
|
June 1 30, 2005
|
|
|
|
|
|
|
|
824,300
|
|
Total for or
as of end of the quarter ended 6/30/05
|
|
|
|
$
|
|
|
|
|
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
date the program was announced was February 28, 2003 by press release.
ii. The
share amount originally approved 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/A.
v. TDS
has not determined 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/A.
80
Item 4. Submission of Matters to
a Vote of Security-Holders.
A. At
the Special Meeting of Shareholders of TDS, held on April 11, 2005, the
following number of votes were cast for the matters indicated:
1. Proposal
to approve an amendment to TDSs Restated Certificate of Incorporation to
increase the authorized number of Special Common Shares:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
104,106,871
|
|
2,659,654
|
|
52,600
|
|
0
|
|
2. Proposal
to approve amendments to TDSs 2004 Long-Term Incentive Plan:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
91,708,498
|
|
15,002,807
|
|
107,820
|
|
0
|
|
3. Proposal
to approve amendments to TDSs 2003 Employee Stock Purchase Plan:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
105,097,392
|
|
1,636,461
|
|
85,272
|
|
0
|
|
4. Proposal
to approve TDSs Non-Employee Director Compensation Plan:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
103,516,064
|
|
3,174,157
|
|
128,904
|
|
0
|
|
B. At the Annual Meeting of Shareholders of
TDS, held on May 5, 2005, the following number of votes were cast for the
matters indicated:
1. Election
of Directors:
a. For
the election of eight Directors of the Company by the holders of Series A
Common Shares and Preferred Shares:
Nominee
|
|
For
|
|
Withhold
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
James Barr III
|
|
62,175,316
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
LeRoy T. Carlson
|
|
62,175,316
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
LeRoy T. Carlson, Jr.
|
|
62,175,316
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
Dr. Letitia
G.C. Carlson
|
|
62,175,316
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
Walter C.D. Carlson
|
|
62,175,316
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
Sandra L. Helton
|
|
62,168,676
|
|
6,640
|
|
0
|
|
|
|
|
|
|
|
|
|
Donald C. Nebergall
|
|
62,175,316
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
George W. Off
|
|
62,175,316
|
|
0
|
|
0
|
|
81
b. For
the election of four Directors of the Company by the holders of Common Shares:
Nominee
|
|
For
|
|
Withhold
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
Kevin A. Mundt
|
|
45,970,382
|
|
1,349,826
|
|
0
|
|
|
|
|
|
|
|
|
|
Mitchell H. Saranow
|
|
45,988,448
|
|
1,331,760
|
|
0
|
|
|
|
|
|
|
|
|
|
Martin L. Solomon
|
|
45,990,782
|
|
1,329,426
|
|
0
|
|
|
|
|
|
|
|
|
|
Herbert S. Wander
|
|
45,628,653
|
|
1,691,555
|
|
0
|
|
2. Proposal
to Ratify the Selection of PricewaterhouseCoopers LLP as Independent Public
Accountants for 2005:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
109,371,957
|
|
90,492
|
|
33,075
|
|
0
|
|
Item 5. Other Information.
In lieu of filing a Form 8-K, under Item 2.03 Creation of a Direct
Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of
a Registrant, TDS is providing the following disclosure.
U.S. Cellular has borrowed $50.0 million against its Revolving Credit
Facility as of June 30, 2005. The borrowings occurred throughout
2005. U.S. Cellular anticipates repaying
the amounts with future operating cash flows from operations or long-term debt
financing. As of June 30, 2005, the
notes range in maturity dates from two days to 30 days at rates ranging from
3.63% to 5.50%. The notes can be renewed
when they come due based on the London InterBank Offered Rate (LIBOR) plus a
contractual spread 30 basis points at June 30, 2005. On July 11, 2005, Moodys Investor
Service downgraded TDSs and U.S. Cellulars credit rating 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
borrowings under the revolving credit facilities has increased to 45 basis
points from 30 basis points.
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 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 6 to the financial statements.
82
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/A 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.
83
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 Second Quarter Form 10-Q/A
84
EX-12
2
a06-1473_2ex12.htm
STATEMENTS REGARDING COMPUTATION OF RATIOS
Exhibit 12
TELEPHONE AND DATA SYSTEMS,
INC.
RATIOS OF EARNINGS TO FIXED
CHARGES
|
|
Six Months Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(As Restated)
|
|
(As Restated)
|
|
|
|
(Dollars in thousands)
|
|
EARNINGS:
|
|
|
|
|
|
Income before income taxes and minority
interest
|
|
$
|
229,378
|
|
$
|
114,141
|
|
Add (deduct):
|
|
|
|
|
|
Earnings on equity method investments
|
|
(32,942
|
)
|
(30,595
|
)
|
Distributions from unconsolidated entities
|
|
28,210
|
|
7,484
|
|
Minority interests in pre-tax income of
subsidiaries that do not have fixed charges
|
|
(4,161
|
)
|
(4,683
|
)
|
|
|
220,485
|
|
86,347
|
|
Add fixed charges:
|
|
|
|
|
|
Consolidated interest expense
|
|
106,388
|
|
95,243
|
|
Interest portion (1/3) of consolidated rent
expense
|
|
16,899
|
|
14,810
|
|
|
|
$
|
343,772
|
|
$
|
196,400
|
|
|
|
|
|
|
|
FIXED
CHARGES:
|
|
|
|
|
|
Consolidated
interest expense
|
|
$
|
106,388
|
|
$
|
95,243
|
|
Interest
portion (1/3) of consolidated rent expense
|
|
16,899
|
|
14,810
|
|
|
|
$
|
123,287
|
|
$
|
110,053
|
|
|
|
|
|
|
|
RATIO OF
EARNINGS TO FIXED CHARGES
|
|
2.79
|
|
1.78
|
|
|
|
|
|
|
|
Tax-effected
preferred dividends
|
|
$
|
171
|
|
$
|
166
|
|
Fixed
charges
|
|
123,287
|
|
110,053
|
|
Fixed
charges and preferred dividends
|
|
$
|
123,458
|
|
$
|
110,219
|
|
|
|
|
|
|
|
RATIO OF
EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
|
|
2.78
|
|
1.78
|
|
EX-31.1
3
a06-1473_2ex31d1.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/A 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_2ex31d2.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/A 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_2ex32d1.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/A for the second 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/A
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_2ex32d2.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/A for the second 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/A
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.
GRAPHIC
8
g14732bci001.gif
GRAPHIC
begin 644 g14732bci001.gif
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end
-----END PRIVACY-ENHANCED MESSAGE-----