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0001104659-06-057131.txt : 20060825
0001104659-06-057131.hdr.sgml : 20060825
20060825121057
ACCESSION NUMBER: 0001104659-06-057131
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20060331
FILED AS OF DATE: 20060825
DATE AS OF CHANGE: 20060825
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TELEPHONE & DATA SYSTEMS INC /DE/
CENTRAL INDEX KEY: 0001051512
STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813]
IRS NUMBER: 362669023
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-14157
FILM NUMBER: 061054924
BUSINESS ADDRESS:
STREET 1: 30 NORTH LASALLE STREET
STREET 2: STE 4000
CITY: CHICAGO
STATE: IL
ZIP: 60602
BUSINESS PHONE: 3126301900
MAIL ADDRESS:
STREET 1: 30 NORTH LASALLE STREET
STREET 2: STE 4000
CITY: CHICAGO
STATE: IL
ZIP: 60602
10-Q
1
a06-15128_110q.htm
QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2006 OR
o TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from
to
Commission
File Number 001-14157
TELEPHONE
AND DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
|
|
36-2669023
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
Identification No.)
|
incorporation or
organization)
|
|
|
30 North
LaSalle Street, Chicago, Illinois 60602
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (312) 630-1900
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes o
No x
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
|
|
Accelerated filer o
|
|
Non-accelerated filer 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 x
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, 2006
|
Common Shares,
$.01 par value
|
|
51,431,735
Shares
|
Special Common
Shares, $.01 par value
|
|
57,782,076
Shares
|
Series A Common
Shares, $.01 par value
|
|
6,446,079 Shares
|
Telephone and Data
Systems, Inc. and Subsidiaries
Quarterly
Report on Form 10-Q
For the Period Ended March 31,
2006
Index
Part I.
Financial Information
Item 1.
Financial Statements
Telephone and Data Systems, Inc. and Subsidiaries
Consolidated Statements of
Operations
Unaudited
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands,
except per share amounts)
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
1,060,312
|
|
$
|
935,787
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
Cost of services
and products (exclusive of depreciation, amortization and accretion expense
shown below)
|
|
375,139
|
|
338,624
|
|
Selling, general
and administrative expense
|
|
393,421
|
|
348,571
|
|
Depreciation,
amortization and accretion expense
|
|
182,667
|
|
169,748
|
|
Total Operating
Expenses
|
|
951,227
|
|
856,943
|
|
|
|
|
|
|
|
Operating Income
|
|
109,085
|
|
78,844
|
|
|
|
|
|
|
|
Investment and Other Income
(Expense)
|
|
|
|
|
|
Investment
income
|
|
19,805
|
|
14,754
|
|
Interest and
dividend income
|
|
16,237
|
|
8,286
|
|
Interest expense
|
|
(58,532
|
)
|
(51,856
|
)
|
Gain on
investments
|
|
|
|
500
|
|
Other expense
|
|
(502
|
)
|
(4,321
|
)
|
Total Investment
and Other Income (Expense)
|
|
(22,992
|
)
|
(32,637
|
)
|
|
|
|
|
|
|
Income Before Income Taxes and
Minority Interest
|
|
86,093
|
|
46,207
|
|
Income tax expense
|
|
35,968
|
|
17,395
|
|
Income Before Minority Interest
|
|
50,125
|
|
28,812
|
|
Minority share of
income
|
|
(10,250
|
)
|
(5,763
|
)
|
Net Income
|
|
39,875
|
|
23,049
|
|
Preferred dividend
requirement
|
|
(51
|
)
|
(50
|
)
|
Net Income Available To Common
|
|
$
|
39,824
|
|
$
|
22,999
|
|
|
|
|
|
|
|
Basic Weighted Average Shares
Outstanding (000s)
|
|
115,741
|
|
114,999
|
|
Basic Earnings Per Share (Note
5)
|
|
$
|
0.34
|
|
$
|
0.20
|
|
|
|
|
|
|
|
Diluted Weighted Average Shares
Outstanding (000s)
|
|
116,327
|
|
115,646
|
|
Diluted Earnings Per Share
(Note 5)
|
|
$
|
0.34
|
|
$
|
0.20
|
|
|
|
|
|
|
|
Dividends Per Share
|
|
$
|
0.0925
|
|
$
|
0.0875
|
|
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
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
Net income
|
|
$
|
39,875
|
|
$
|
23,049
|
|
Add (Deduct) adjustments to reconcile net income to
net cash provided by operating activities
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
182,667
|
|
169,748
|
|
Bad debts expense
|
|
9,075
|
|
8,135
|
|
Deferred income taxes
|
|
(11,602
|
)
|
960
|
|
Investment income
|
|
(19,805
|
)
|
(14,754
|
)
|
Distributions from unconsolidated entities
|
|
5,676
|
|
1,520
|
|
Minority share of income
|
|
10,250
|
|
5,763
|
|
Gain on investments
|
|
|
|
(500
|
)
|
Stock based compensation expense
|
|
7,023
|
|
1,171
|
|
Noncash interest expense
|
|
5,480
|
|
5,029
|
|
Other noncash expense
|
|
1,079
|
|
2,514
|
|
Changes in assets and liabilities
|
|
|
|
|
|
Change in accounts receivable
|
|
9,065
|
|
9,620
|
|
Change in materials and supplies
|
|
7,546
|
|
7,482
|
|
Change in accounts payable
|
|
(53,405
|
)
|
(64,793
|
)
|
Change in customer deposits and deferred revenues
|
|
4,349
|
|
3,844
|
|
Change in accrued taxes
|
|
47,703
|
|
21,868
|
|
Change in accrued interest
|
|
4,567
|
|
3,971
|
|
Change in other assets and liabilities
|
|
(28,967
|
)
|
(34,468
|
)
|
|
|
220,576
|
|
150,159
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(146,362
|
)
|
(134,787
|
)
|
Acquisitions, divestitures and exchanges
|
|
|
|
(120,924
|
)
|
Other investing activities
|
|
(1,467
|
)
|
(564
|
)
|
|
|
(147,829
|
)
|
(256,275
|
)
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
Issuance of notes payable
|
|
55,000
|
|
165,000
|
|
Issuance of long-term debt
|
|
560
|
|
112,588
|
|
Repayment of notes payable
|
|
(105,000
|
)
|
(60,000
|
)
|
Repayment of long-term debt
|
|
(748
|
)
|
(110,510
|
)
|
Repayment of medium-term notes
|
|
(35,000
|
)
|
(17,200
|
)
|
TDS common share issued for benefit plans
|
|
3,080
|
|
6,684
|
|
U.S. Cellular common shares issued for benefit plans
|
|
3,858
|
|
6,836
|
|
Capital (distributions) to minority partners
|
|
(4,146
|
)
|
|
|
Dividends paid
|
|
(10,749
|
)
|
(10,122
|
)
|
Other financing activities
|
|
1,207
|
|
131
|
|
|
|
(91,938
|
)
|
93,407
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
(19,191
|
)
|
(12,709
|
)
|
|
|
|
|
|
|
Cash
and Cash Equivalents -
|
|
|
|
|
|
Beginning of period
|
|
1,095,791
|
|
1,171,105
|
|
End of period
|
|
$
|
1,076,600
|
|
$
|
1,158,396
|
|
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
|
|
March 31,
2006
|
|
December 31,
2005
|
|
|
|
(Dollars in thousands)
|
|
Current
Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,076,600
|
|
$
|
1,095,791
|
|
Accounts receivable
|
|
|
|
|
|
Due from customers, less allowance of $11,805 and
$15,200, respectively
|
|
332,811
|
|
336,005
|
|
Other, principally connecting companies, less
allowance of $6,806 and $5,620, respectively
|
|
145,437
|
|
160,577
|
|
Materials and supplies, at average cost
|
|
96,359
|
|
103,211
|
|
Prepaid expenses
|
|
47,889
|
|
40,704
|
|
Deferred income tax asset
|
|
13,434
|
|
13,438
|
|
Other current assets
|
|
31,723
|
|
29,243
|
|
|
|
1,744,253
|
|
1,778,969
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
Marketable equity securities
|
|
2,559,507
|
|
2,531,690
|
|
Licenses
|
|
1,364,836
|
|
1,365,063
|
|
Goodwill
|
|
870,110
|
|
869,792
|
|
Customer lists, net of accumulated amortization of
$45,979 and $42,947, respectively
|
|
46,286
|
|
49,318
|
|
Investments in unconsolidated entities
|
|
231,196
|
|
215,424
|
|
Other investments, less valuation allowance of
$55,144 in both periods
|
|
12,044
|
|
12,274
|
|
|
|
5,083,979
|
|
5,043,561
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
|
|
|
|
|
|
In service and under construction
|
|
7,262,283
|
|
7,140,447
|
|
Less accumulated depreciation
|
|
3,768,618
|
|
3,614,242
|
|
|
|
3,493,665
|
|
3,526,205
|
|
|
|
|
|
|
|
Other
Assets and Deferred Charges
|
|
55,259
|
|
55,830
|
|
|
|
$
|
10,377,156
|
|
$
|
10,404,565
|
|
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
|
|
March 31,
2006
|
|
December 31,
2005
|
|
|
|
(Dollars in thousands)
|
|
Current
Liabilities
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
203,124
|
|
$
|
237,948
|
|
Notes payable
|
|
85,000
|
|
135,000
|
|
Accounts payable
|
|
303,869
|
|
357,273
|
|
Customer deposits and deferred revenues
|
|
125,577
|
|
121,228
|
|
Accrued interest
|
|
33,513
|
|
28,946
|
|
Accrued taxes
|
|
85,875
|
|
47,180
|
|
Accrued compensation
|
|
45,866
|
|
67,443
|
|
Other current liabilities
|
|
71,130
|
|
61,086
|
|
|
|
953,954
|
|
1,056,104
|
|
|
|
|
|
|
|
Deferred
Liabilities and Credits
|
|
|
|
|
|
Net deferred income tax liability
|
|
1,378,914
|
|
1,383,031
|
|
Derivative liability
|
|
454,049
|
|
449,192
|
|
Asset retirement obligation
|
|
167,645
|
|
163,093
|
|
Other deferred liabilities and credits
|
|
112,328
|
|
104,984
|
|
|
|
2,112,936
|
|
2,100,300
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
1,633,268
|
|
1,633,519
|
|
Forward contracts
|
|
1,711,813
|
|
1,707,282
|
|
|
|
3,345,081
|
|
3,340,801
|
|
|
|
|
|
|
|
Commitment
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest in Subsidiaries
|
|
561,711
|
|
552,884
|
|
|
|
|
|
|
|
Preferred
Shares
|
|
3,863
|
|
3,863
|
|
|
|
|
|
|
|
Common
Stockholders Equity
|
|
|
|
|
|
Common Shares, par value $.01 per share; authorized 100,000,000
shares; issued 56,502,000 and 56,481,000 shares, respectively
|
|
565
|
|
565
|
|
Special Common Shares, par value $.01 per share; authorized
165,000,000 shares, issued 62,887,000 and 62,868,000 shares, respectively
|
|
629
|
|
629
|
|
Series A Common Shares, par value $.01 per share;
authorized 25,000,000 shares; issued and outstanding 6,446,000 and 6,440,000
shares; respectively
|
|
64
|
|
64
|
|
Capital in excess of par value
|
|
1,830,780
|
|
1,826,420
|
|
Treasury Shares, at cost:
|
|
|
|
|
|
Common Shares, 5,071,000 and 5,105,000 shares,
respectively
|
|
(207,524
|
)
|
(208,156
|
)
|
Special Common Shares 5,105,000 and 5,128,000
shares, respectively
|
|
(209,421
|
)
|
(210,600
|
)
|
Accumulated other comprehensive income
|
|
322,710
|
|
309,009
|
|
Retained earnings
|
|
1,661,808
|
|
1,632,682
|
|
|
|
3,399,611
|
|
3,350,613
|
|
|
|
$
|
10,377,156
|
|
$
|
10,404,565
|
|
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 81.2%-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, or
both. 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. However, 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 Annual Report on
Form 10-K for the year ended December 31, 2005 (Form 10-K).
The accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring items unless otherwise
disclosed) necessary to present fairly the financial position as of March 31,
2006, and the results of operations for the three months ended March 31, 2006
and 2005 and the cash flows for the three months ended March 31, 2006 and
2005. The results of operations for the
three months ended March 31, 2006, are not necessarily indicative of the
results to be expected for the full year.
2. Summary of Significant
Accounting Policies
Change in Accounting Principle Stock-Based
Compensation
TDS has
established long-term incentive plans, employee stock purchase plans, and
dividend reinvestment plans, which are described more fully in Note 3
Stock-Based Compensation. Prior to January 1, 2006, TDS accounted for those
plans under the recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations, as
permitted by Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Total stock-based employee compensation cost
recognized in the Consolidated Statements of Operations under APB 25 was $1.2
million for the three months ended March 31, 2005, primarily for restricted
stock unit and deferred compensation stock unit awards. No compensation cost
was recognized in the Consolidated Statements of Operations under APB 25 for
stock option awards for the three months ended March 31, 2005, because all
outstanding options granted had an exercise price equal to the market value of
the underlying common stock on the date of grant. The employee stock purchase plans and
dividend reinvestment plans qualified as non-compensatory plans under APB 25;
therefore, no compensation cost was recognized for these plans during the three
months ended March 31, 2005.
Effective January
1, 2006, TDS adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)),
using the modified prospective transition method. In addition, TDS applied the
provisions of Staff Accounting Bulletin No. 107 (SAB 107), issued by the
Securities and Exchange Commission in March 2005 in its adoption of SFAS
123(R). Under the modified prospective
transition method, compensation cost recognized during the three months ended
March 31, 2006 includes: (a) compensation cost for all share-based payments
granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS
123, and (b) compensation cost for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123(R). Results for prior periods have not been
restated.
7
Under SFAS 123(R),
the long-term incentive plans are considered compensatory plans; therefore,
recognition of compensation costs for grants made under these plans is
required.
Under SFAS 123(R),
the employee stock purchase plans are considered compensatory plans; therefore,
recognition of compensation costs for grants made under these plans is
required. However, due to restrictions on activity under these plans that were
in place during the three months ended March 31, 2006, no compensation expense
was recognized during this period.
Under SFAS 123(R),
the dividend reinvestment plans are not considered compensatory plans,
therefore recognition of compensation costs for grants made under these plans
is not required.
Upon adoption of SFAS 123(R), TDS elected to continue to value its
share-based payment transactions using a Black-Scholes valuation model, which
was previously used by TDS for purposes of preparing the pro forma disclosures
under SFAS 123. Under the provisions of SFAS 123(R), stock-based compensation
cost recognized during the period is based on the portion of the share-based
payment awards that is ultimately expected to vest. Accordingly, stock-based
compensation cost recognized in the first quarter of 2006 has been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Pre-vesting forfeitures were estimated
based on historical experience related to similar awards, giving consideration
to the contractual terms of the stock-based awards, vesting schedules and
expectations of future employee behavior. TDS believes that its historical
experience is the best estimate of future expected life. In TDSs pro forma
information required under SFAS 123, TDS also reduced stock-based compensation
cost for estimated forfeitures. The expected life assumption was determined
based on TDSs historical experience. For purposes of both SFAS 123 and SFAS
123(R), the expected volatility assumption was based on the historical
volatility of TDSs common stock. The dividend yield was included in the
assumptions. The risk-free interest rate assumption was determined using the
implied yield currently available for zero-coupon U.S. government issues with a
remaining term equal to the expected life of the stock options.
Compensation cost
for stock option awards granted after January 1, 2006 will be recognized over
the respective requisite service period of the awards, which is generally the
vesting period, on a straight-line basis over the requisite service period for
each separately vesting portion of the awards as if the awards were,
in-substance, multiple awards (graded vesting attribution method), which is the
same attribution method that was used by TDS for purposes of its pro forma
disclosures under SFAS 123.
Certain employees
were eligible for retirement at the time that compensatory stock options were
granted. Under the terms of the TDS
option agreements, options granted to these individuals do not vest upon
retirement. Under the terms of the U.S. Cellular option agreements, options granted
to these individuals will fully vest upon their retirement if they have reached
the age of 65. Similarly, under the terms of TDSs restricted stock unit
agreements, restricted stock units vest upon retirement if the employee has
reached the age of 66. Under the terms of U.S. Cellulars restricted stock unit
agreements, restricted stock units vest upon retirement if the employee has
reached the age of 65. Prior to the adoption of SFAS 123(R), TDS used the nominal
vesting method to recognize the pro forma stock-based compensation cost
related to options and restricted stock units awarded to retirement eligible
employees. This method does not take into account the effect of early vesting
due to the retirement of eligible employees.
Upon adoption of SFAS 123(R), TDS adopted the non-substantive vesting
method, which requires the recognition of the entire expense related to
options granted to retirement-eligible employees. If the non-substantive vesting method had
been applied in prior periods, the effect on previously disclosed pro forma
stock-based compensation cost would not have been material.
On March 7, 2006, the TDS Compensation Committee approved
amendments to stock option award agreements. The amendments modify current and
future options to extend the exercise period until 30 days following (i) the
lifting of a suspension if options otherwise would expire or be forfeited
during the suspension period and (ii) the lifting of a blackout if options
otherwise would expire or be forfeited during a blackout period. TDS temporarily suspended issuances of shares
under the 2004 Long Term Incentive Plan on March 17, 2006, as required by SEC
regulations, because TDS did not file its Form 10-K for the year ended December
31, 2005 in a timely manner. Under SEC regulations, TDS may not issue shares
under its existing registration statement on Form S-8 related to the 2004 Long
Term Incentive Plan until the date that TDS is current with respect to its Form
10-K for the year ended December 31, 2005 and other periodic SEC filings. As required under the provisions of SFAS 123
(R), TDS evaluated the impact of this plan modification to determine if an
adjustment to stock based compensation was required. TDS determined that the impact of such an
adjustment would not be material.
8
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 $3.5 million and $3.4 million for the three months ended March 31, 2006
and March 31, 2005, respectively.
TDS also sponsors an unfunded non-qualified deferred supplemental
executive retirement plan for certain employees which supplements the benefits
under the qualified plan to offset the reduction of benefits caused by the
limitation on annual employer contributions under the tax laws.
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
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Service Cost
|
|
$
|
544
|
|
$
|
553
|
|
Interest on
accumulated benefit obligation
|
|
692
|
|
659
|
|
Expected return
on plan assets
|
|
(648
|
)
|
(558
|
)
|
Amortization of:
|
|
|
|
|
|
Prior service cost
|
|
(208
|
)
|
(279
|
)
|
Net loss
|
|
292
|
|
288
|
|
Net postretirement cost
|
|
$
|
672
|
|
$
|
663
|
|
TDS will contribute $5.3 million to the postretirement plan assets
during the second quarter of 2006.
Recent Accounting
Pronouncements
FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48),
was issued in July 2006. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
accordance with FASB Statement No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition
threshold and measurement attribute for the recognition and measurement of a
tax position taken or expected to be taken in an income tax return. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. TDS is currently reviewing the requirements
of FIN 48 and has not yet determined the impact, if any, on its financial
position or results of operations.
9
3. Stock-Based
Compensation
As a result of
adopting SFAS 123(R) on January 1, 2006, TDSs income before income taxes and
net income for the three months ended March 31, 2006, are $3.5 million and $1.7
million lower, respectively, than if it had continued to account for
share-based compensation under APB 25. Basic and diluted earnings per share for
the three months ended March 31, 2006 are $0.02 and $0.02 lower, respectively,
than if TDS had continued to account for share-based compensation under APB 25.
Stock-Based
Compensation Expense
For comparison,
the following table illustrates the pro forma effect on net income and earnings
per share had TDS applied the fair value recognition provisions of SFAS 123(R)
to its stock-based employee compensation plans for the three months ended March
31, 2005:
(Dollars in thousands, except per share amounts)
|
|
|
|
Net income, as
reported
|
|
$
|
23,049
|
|
Add: Stock-based
compensation expense included in reported net income, net of related tax
effects and minority interest
|
|
647
|
|
Deduct:
Stock-based compensation expense determined under fair value based method for
all awards, net of related tax effects and minority interest
|
|
(2,962
|
)
|
Pro forma net
income
|
|
$
|
20,734
|
|
|
|
|
|
Earnings per
share:
|
|
|
|
Basicas
reported
|
|
$
|
0.20
|
|
Basicpro forma
|
|
$
|
0.18
|
|
Dilutedas
reported
|
|
$
|
0.20
|
|
Dilutedpro forma
|
|
$
|
0.18
|
|
Prior to the
adoption of SFAS 123(R), TDS presented all tax benefits resulting from tax
deductions associated with the exercise of stock options by employees as cash
flows from operating activities in the Consolidated Statements of Cash Flows.
SFAS 123(R) requires that excess tax benefits be classified as cash flows
from financing activities in the Consolidated Statement of Cash Flows. For this purpose, the excess tax benefits are
tax benefits related to the difference between the total tax deduction
associated with the exercise of stock options by employees and the amount of
compensation cost recognized for those options. For the three months ended
March 31, 2006, excess tax benefits of $0.4 million were included within Other
Financing Activities of the Cash Flows from Financing Activities pursuant to
this requirement of SFAS 123(R).
The following table summarizes stock-based compensation expense
recognized during the three months ended March 31, 2006:
(Amounts in thousands)
|
|
|
|
Compensation
expense recognized for stock option awards
|
|
$
|
3,512
|
|
Compensation
expense recognized for restricted stock unit awards
|
|
2,751
|
|
Compensation
expense recognized for deferred compensation matching stock unit awards
|
|
760
|
|
Compensation
expense recognized for awards under employee stock purchase plans
|
|
0
|
|
Total
stock-based compensation, before income taxes
|
|
7,023
|
|
Income tax
benefit
|
|
(2,935
|
)
|
Total stock-based
compensation expense, net of income taxes
|
|
$
|
4,088
|
|
At March 31, 2006, unrecognized compensation cost for all stock-based
compensation awards was $19.7 million. The unrecognized compensation cost for
stock-based compensation awards at March 31, 2006 is expected to be recognized
over a weighted average period of 0.8 years.
All stock-based compensation expense recognized during the three months
ended March 31, 2006 was recorded in Selling, general and administrative
expense.
TDS
The information in this section relates to stock-based compensation
plans utilizing the equity instruments of TDS.
Participants in these plans are generally employees of TDS Corporate and
TDS Telecom, although U.S. Cellular employees are eligible to participate in
the TDS Employee Stock Purchase Plan.
Information related to plans utilizing the equity instruments of U.S.
Cellular are shown in the U.S. Cellular section following the TDS section.
10
Under the TDS 2004 Long-Term Incentive Plan (and a predecessor plan),
TDS may grant fixed and performance-based incentive and non-qualified stock
options, restricted stock, restricted stock units, and deferred compensation stock
unit awards to key employees. TDS had
reserved 4,006,000 Common Shares and 11,893,000 Special Common Shares at March
31, 2006, for equity awards granted and to be granted under this plan. At March
31, 2006, the only types of awards outstanding are fixed non-qualified stock
option awards, restricted stock unit awards, and deferred compensation stock
unit awards. At March 31, 2006, TDS also had reserved 174,000 Common Shares and
323,000 Special Common Shares for issuance under the Automatic Dividend Reinvestment
and Stock Purchase Plan and 49,000 Series A common shares for issuance under
the Series A common share Automatic Dividend Reinvestment Plan, and 185,000
Common Shares and 320,000 Special Common Shares under an employee stock
purchase plan. The maximum number of TDS Common Shares, TDS Special Common
Shares and TDS Series A Common Shares that may be issued to employees under all
stock-based compensation plans in effect at March 31, 2006 was 4,365,000,
12,536,000 and 49,000 shares, respectively. TDS currently utilizes treasury
stock to satisfy stock option exercises, issuances under its employee stock
purchase plan, restricted stock unit awards and deferred compensation stock
unit awards.
Stock OptionsStock options granted to key employees are exercisable
over a specified period not in excess of ten years. Stock options generally vest over periods up
to four years from the date of grant.
Stock options outstanding at March 31, 2006 expire between 2006 and
2015. However, vested stock options
typically expire 30 days after the effective date of an employees termination
of employment for reasons other than retirement. Employees who leave at the age of retirement
have 90 days (or one year if they satisfy certain requirements) within which to
exercise their vested stock options. The exercise price of the option generally
equals the market value of TDS common stock on the date of grant.
TDS estimates the fair value of stock options granted using the
Black-Scholes valuation model. The fair value is then recognized as
compensation cost on a straight-line basis over the requisite service period,
which is generally the vesting period, for each separately vesting portion of
the awards as if the awards were, in-substance, multiple awards, which is the
same attribution method that was used by TDS for purposes of its pro forma
disclosures under SFAS 123. TDS did not
grant stock options during the three months ended March 31, 2006 and March 31,
2005.
A summary of TDS stock options (vested and nonvested) at March 31, 2006
and changes during the three months then ended is presented in the table and
narrative below:
All TDS options outstanding at March 31, 2006 were granted prior to the
distribution of the TDS Special Common Share Dividend in 2005, more fully described
in TDSs 2005 Annual Report on Form 10-K. As a result of the Special Common Share
Dividend, an employee will receive one Common Share and one Special Common
Share per tandem option exercised. Each tandem option is exercisable at its
original exercise price.
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Number
|
|
Average
|
|
Remaining
|
|
|
|
|
|
of Tandem
|
|
Exercise
|
|
Contractual
|
|
Aggregate
|
|
|
|
Options(1)
|
|
Prices
|
|
Term
|
|
Intrinsic Value
|
|
Outstanding at December 31, 2005
(2,461,000 exercisable)
|
|
2,701,000
|
|
$
|
73.86
|
|
6.5 years
|
|
$
|
30,119,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
23,000
|
|
$
|
52.28
|
|
|
|
466,000
|
|
Forfeited
|
|
12,000
|
|
$
|
56.70
|
|
|
|
273,000
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
(2,438,000 exercisable)
|
|
2,666,000
|
|
$
|
74.12
|
|
6.3 years
|
|
$
|
29,285,000
|
|
(1) Upon exercise,
each tandem option is converted into one TDS Common Share and one TDS Special
Common Share.
The aggregate intrinsic value in the table above represents the total
pretax intrinsic value (the difference between TDSs closing stock price on the
last trading day of the period and the exercise price, multiplied by the number
of in-the-money options) that would have been received by the option holders
had all option holders exercised their options on March 31, 2006. This amount
will change in future periods based on the market price of TDSs stock. TDS
received $1.2 million in cash from the exercise of stock options during the
three months ended March 31, 2006.
11
A summary of TDSs nonvested stock options at March 31, 2006 and
changes during the three months then ended is presented in the table below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
Fair Values of
|
|
|
|
Stock Options(1)
|
|
Stock Options
|
|
Nonvested at
December 31, 2005
|
|
240,000
|
|
$
|
21.67
|
|
Granted
|
|
|
|
|
|
Vested
|
|
|
|
|
|
Forfeited
|
|
12,000
|
|
21.99
|
|
Nonvested at March 31,
2006
|
|
228,000
|
|
$
|
21.66
|
|
(1) Upon exercise,
each restricted stock option outstanding at March 31, 2006 is converted into
one TDS Common Share and one TDS Special Common Share.
Restricted Stock UnitsBeginning in April 2005, TDS granted restricted
stock unit awards to key employees.
These awards generally vest after three years. All TDS restricted stock
units outstanding at March 31, 2006 were granted prior to the distribution of
the TDS Special Common Share Dividend in 2005. As a result of the Special
Common Share Dividend, an employee will receive one Common Share and one
Special Common Share upon the vesting of such restricted stock units. The
restricted stock unit awards outstanding at March 31, 2006 will vest in
December 2007. When vested, employees will receive an equal number of TDS
Common Shares and TDS Special Common Shares with respect to such restricted
stock units.
TDS estimates the fair value of restricted stock units based on the
closing market price of TDS shares on the date of grant. The fair value is then
recognized as compensation cost on a straight-line basis over the requisite
service periods of the awards, which is generally the vesting period.
A summary of TDS nonvested restricted stock units at March 31, 2006 and
changes during the three months then ended is presented in the table below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
Fair Values of
|
|
|
|
of Restricted
|
|
Restricted
|
|
|
|
Stock Units(1)
|
|
Stock Units
|
|
Nonvested at
December 31, 2005
|
|
90,286
|
|
$
|
77.55
|
|
Granted
|
|
|
|
|
|
Vested
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
Nonvested at March 31,
2006
|
|
90,286
|
|
$
|
77.55
|
|
(1) Upon exercise,
each restricted stock unit outstanding at March 31, 2006 is converted into one
TDS Common Share and one TDS Special Common Share.
Deferred Compensation Stock UnitsCertain TDS employees may elect to
defer receipt of all or a portion of their annual bonuses and to receive stock
unit matches on the amount deferred up to $400,000. Deferred compensation,
which is immediately vested, is deemed to be invested in TDS Common Share units
or, at the election of the committee that administers the plan after the TDS
Special Common Share Dividend in 2005, TDS Special Common Share units. TDS
match amounts depend on the amount of annual bonus that is deferred into stock
units. Participants receive a 25% stock unit match for amounts deferred up to
50% of their total annual bonus and a 33% match for amounts that exceed 50% of
their total annual bonus. The matched stock units vest ratably at a rate of
one-third per year over three years. When fully vested and upon distribution,
employees will receive the vested TDS Common Shares and/or TDS Special Common
Shares, as applicable.
TDS estimates the fair value of deferred compensation matching stock
units based on the closing market price of TDS shares on the date of grant. The
fair value of the matched stock units is then recognized as compensation cost
on a straight-line basis over the requisite service periods of the awards,
which is generally the vesting period.
12
A summary of TDS nonvested deferred compensation stock unit plans at
March 31, 2006 and changes during the three months then ended is presented in
the table that follows:
|
|
|
|
Weighted
Average
|
|
|
|
Number of
|
|
Fair Values
|
|
|
|
Stock Units(1)
|
|
of Stock Units
|
|
Nonvested at
December 31, 2005
|
|
1,025
|
|
$
|
72.50
|
|
Granted
|
|
|
|
|
|
Vested
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
Nonvested at March 31,
2006
|
|
1,025
|
|
$
|
72.50
|
|
(1) Upon exercise,
each deferred compensation stock unit outstanding at March 31, 2006 is
converted into one TDS Common Share and one TDS Special Common Share.
Employee Stock Purchase PlanUnder the 2003 Employee Stock Purchase
Plan, eligible employees of TDS and its subsidiaries may purchase a limited
number of shares of TDS common stock on a quarterly basis. Prior to 2006, such common
stock consisted of TDS Common Shares. Beginning in 2006, such common stock consisted
of TDS Special Common Shares. TDS had reserved 185,000 Common Shares and
320,000 Special Common Shares at March 31, 2006 for issuance under this
plan. The plan became effective on April
1, 2003 and will terminate on December 31, 2008. The per share cost to each
participant is 85% of the market value of the Common Shares or Special Common
Shares as of the issuance date. Under SFAS 123(R), the employee stock purchase
plan is considered a compensatory plan; therefore recognition of compensation
costs for stock issued under this plan is required. Compensation cost is
measured as the difference between the cost of the shares to the plan
participants and the fair market value of the shares on the date of issuance.
However, due to restrictions on activity under these plans in place during the
three months ended March 31, 2006, no compensation expense was recognized
during this period.
Dividend Reinvestment PlansTDS had reserved 174,000 Common Shares and
323,000 Special Common Shares at March 31, 2006, for issuance under Automatic
Dividend Reinvestment and Stock Purchase Plans and 49,000 Series A Common
Shares for issuance under the Series A Common Share Automatic Dividend
Reinvestment Plan. These plans enable holders of TDSs Common Shares, Special
Common Shares and Preferred Shares to reinvest cash dividends in Common Shares and
Special Common Shares and holders of Series A Common Shares to reinvest cash
dividends in Series A Common Shares. The purchase price of the shares is 95% of
the market value, based on the average of the daily high and low sales prices
for TDSs Common Shares and Special Common Shares on the American Stock
Exchange for the ten trading days preceding the date on which the purchase is
made. Under SFAS 123(R) and SFAS 123,
these plans are considered non-compensatory plans, therefore no compensation
expense is recognized for stock issued under these plans.
U.S. Cellular
The information in this section relates to stock-based compensation
plans utilizing the equity instruments of U.S. Cellular. Participants in these plans are employees of
U.S. Cellular. U.S. Cellular employees
are also eligible to participate in the TDS Employee Stock Purchase Plan. Information related to plans utilizing the
equity instruments of TDS are shown in the previous section.
Under the U.S. Cellular 2005 Long-Term Incentive Plan, U.S. Cellular
may grant fixed and performance-based incentive and non-qualified stock
options, restricted stock, restricted stock units, and deferred compensation
stock unit awards to key employees. U.S. Cellular had reserved 5,403,000 Common
Shares at March 31, 2006, for equity awards granted and to be granted under
this plan. At March 31, 2006, the only types of awards outstanding are fixed
non-qualified stock option awards, restricted stock unit awards, and deferred
compensation stock unit awards. At March 31, 2006, U.S. Cellular also had
reserved 110,000 Common Shares for issuance to employees under an employee
stock purchase plan. The maximum number of U.S. Cellular Common Shares that may
be issued to employees under all stock-based compensation plans in effect at
March 31, 2006 was 5,513,000 shares.
U.S. Cellular currently utilizes treasury stock to satisfy stock option
exercises, issuances under its employee stock purchase plan, restricted stock
unit awards and deferred compensation stock unit awards. U.S. Cellular
employees are also eligible to participate in the TDS Employee Stock Purchase
Plan, which was described previously.
13
On March 7, 2006, the U.S. Cellular Compensation Committee,
approved amendments to stock option award agreements. The amendments modify
current and future options to extend the exercise period until 30 days
following (i) the lifting of a suspension if options otherwise would expire
or be forfeited during the suspension period and (ii) the lifting of a blackout
if options otherwise would expire or be forfeited during a blackout
period. U.S. Cellular temporarily
suspended issuances of shares under the 2005 Long Term Incentive Plan on March
17, 2006, as required by SEC regulations, because U.S. Cellular did not file
its Form 10-K for the year ended December 31, 2005 in a timely manner. Under
SEC regulations, U.S. Cellular may not issue shares under its existing
registration statement on Form S-8 related to the 2005 Long Term Incentive Plan
until the date that U.S. Cellular is current in this and its other SEC
filings. As required under the
provisions of SFAS 123 (R), U.S. Cellular evaluated the impact of this plan
modification to determine if an adjustment to stock based compensation was
required. U.S. Cellular determined that
the impact of a change would not be material.
Stock Options Stock options granted to key employees are exercisable
over a specified period not in excess of ten years. Stock options generally vest over periods up
to four years from the date of grant.
Stock options outstanding at March 31, 2006 expire between 2006 and
2015. However, vested stock options
typically expire 30 days after the effective date of an employees termination
of employment for reasons other than retirement. Employees who leave at the age of retirement
have 90 days (or one year if they satisfy certain requirements) within which to
exercise their vested stock options. The exercise price of the option generally
equals the market value of U.S. Cellular Common Shares on the date of grant.
U.S. Cellular estimates the fair value of stock options granted using
the Black-Scholes option-pricing model. The fair value is then recognized as
compensation cost on a straight-line basis over the requisite service period,
which is generally the vesting period, for each separately vesting portion of
the awards as if the awards were, in-substance, multiple awards, which is the
same attribution method that was used by U.S. Cellular for purposes of its pro
forma disclosures under SFAS 123. U.S. Cellular did not grant stock options
during the three months ended March 31, 2006.
A summary of U.S. Cellular stock options outstanding (vested and
nonvested) at March 31, 2006 and changes during the three months then ended is
presented in the table that follows:
|
|
|
|
Weighted
|
|
Weighted
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Aggregate
|
|
|
|
Options
|
|
Prices
|
|
Term
|
|
Intrinsic Value
|
|
Outstanding at December 31, 2005
(877,000 exercisable)
|
|
2,701,000
|
|
$
|
38.80
|
|
7.5 years
|
|
$
|
55,522,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
107,000
|
|
$
|
34.51
|
|
|
|
2,259,000
|
|
Forfeited
|
|
29,000
|
|
$
|
39.70
|
|
|
|
564,000
|
|
Expired
|
|
1,000
|
|
$
|
29.80
|
|
|
|
18,000
|
|
Outstanding at March 31, 2006
(1,514,000 exercisable)
|
|
2,564,000
|
|
$
|
38.98
|
|
7.4 years
|
|
$
|
52,252,000
|
|
The aggregate intrinsic value in the table above represents the total
pretax intrinsic value (the difference between U.S. Cellulars closing stock
price on the last trading day of the period and the exercise price, multiplied
by the number of in-the-money options) that would have been received by the
option holders had all option holders exercised their options on March 31,
2006. This amount will change in future periods based on the market price of
U.S. Cellulars stock. U.S. Cellular received $3.7 million in cash from the
exercise of stock options during the three months ended March 31, 2006.
14
A summary of U.S. Cellular nonvested stock options at March 31, 2006
and changes during the three months then ended is presented in the table that
follows:
|
|
|
|
Weighted
Average
|
|
|
|
Number of
|
|
Fair Values of
|
|
|
|
Stock Options
|
|
Stock Options
|
|
Nonvested at December
31, 2005
|
|
1,824,000
|
|
$
|
14.19
|
|
Granted
|
|
|
|
|
|
Vested
|
|
748,000
|
|
17.23
|
|
Forfeited
|
|
26,000
|
|
14.22
|
|
Nonvested at March 31, 2006
|
|
1,050,000
|
|
14.00
|
|
|
|
|
|
|
|
|
Restricted Stock UnitsU.S. Cellular grants restricted stock unit
awards to key employees, which generally vest after three years.
U.S. Cellular estimates the fair value of restricted stock units based
on the closing market price of U.S. Cellular shares on the date of grant, which
is not adjusted for any dividends foregone during the vesting period because
U.S. Cellular has never paid a dividend and has expressed the intention of
retaining all future earnings in the business. The fair value is then
recognized as compensation cost on a straight-line basis over the requisite
service periods of the awards, which is generally the vesting period. Awards
granted under this plan prior to 2005 were classified as liability awards due
to a plan provision which allowed participants to elect tax withholding in
excess of minimum statutory tax rates.
In 2005, this provision was removed from the plan and awards after 2005
have been classified as equity awards.
A summary of U.S. Cellular nonvested restricted stock units at March
31, 2006 and changes during the three months then ended is presented in the tables
that follow:
Liability Classified Awards
|
|
|
|
Weighted
Average
|
|
|
|
|
|
Grant-Date
|
|
|
|
Number of
|
|
Fair Values of
|
|
|
|
Restricted
|
|
Restricted
|
|
|
|
Stock Units
|
|
Stock Units
|
|
Nonvested at December
31, 2005
|
|
181,000
|
|
$
|
29.79
|
|
Granted
|
|
|
|
|
|
Vested
|
|
(108,000
|
)
|
$
|
23.73
|
|
Forfeited
|
|
(1,000
|
)
|
$
|
38.65
|
|
Nonvested at March 31, 2006
|
|
72,000
|
|
$
|
38.65
|
|
Equity Classified Awards
|
|
|
|
Weighted
Average
|
|
|
|
|
|
Grant-Date
|
|
|
|
Number of
|
|
Fair Values of
|
|
|
|
Restricted
|
|
Restricted
|
|
|
|
Stock Units
|
|
Stock Units
|
|
Nonvested at December
31, 2005
|
|
201,000
|
|
$
|
45.63
|
|
Granted
|
|
|
|
|
|
Vested
|
|
|
|
|
|
Forfeited
|
|
(5,000
|
)
|
$
|
45.63
|
|
Nonvested at March 31, 2006
|
|
196,000
|
|
$
|
45.63
|
|
15
Deferred Compensation Stock UnitsCertain U.S. Cellular employees may
elect to defer receipt of all or a portion of their annual bonuses and to
receive a company matching contribution on the amount deferred. All bonus
compensation that is deferred by employees, which is immediately vested, is
deemed to be invested in U.S. Cellular Common Share stock units. Upon vesting
and distribution of such stock units, employees will receive U.S. Cellular
Common Shares. The amount of U.S. Cellulars matching contribution depends on
the portion of the annual bonus that is deferred. Participants receive a 25%
match for amounts deferred up to 50% of their total annual bonus and a 33%
match for amounts that exceed 50% of their total annual bonus; such matching
contributions also are deemed to be invested in U.S. Cellular Common Share
stock units. The matching contribution stock units vest ratably at a rate of
one-third per year over three years.
U.S. Cellular estimates the fair value of deferred compensation
matching contribution stock units based on the closing market price of U.S.
Cellular Common Shares on the date of match. The fair value of such matching
contribution stock units is then recognized as compensation cost on a
straight-line basis over the requisite service periods of the awards, which is
generally the vesting period
A summary of U.S. Cellular nonvested deferred compensation stock units
at March 31, 2006 and changes during the three months ended is presented in the
table below:
|
|
|
|
Weighted
Average
|
|
|
|
|
|
Fair Values
|
|
|
|
Number of
|
|
of Stock
|
|
|
|
Stock Units
|
|
Units
|
|
Nonvested at December
31, 2005
|
|
7,700
|
|
$
|
41.08
|
|
Granted
|
|
|
|
|
|
Vested
|
|
3,700
|
|
37.31
|
|
Forfeited
|
|
|
|
|
|
Nonvested at March 31, 2006
|
|
4,000
|
|
$
|
44.62
|
|
Employee Stock Purchase PlanUnder the 2003 Employee Stock Purchase
Plan, eligible employees of U.S. Cellular and its subsidiaries may purchase a
limited number of U.S. Cellular Common Shares on a quarterly basis. U.S.
Cellular had reserved 110,000 Common Shares at March 31, 2006 for issuance
under this plan. The plan became
effective on April 1, 2003 and will terminate on December 31, 2008. U.S.
Cellular employees are also eligible to participate in the TDS Employee Stock
Purchase Plan, which was described previously. The per share cost to each participant
in these plans is 85% of the market value of the Common Shares or Special
Common Shares as of the issuance date. Under SFAS 123(R), the employee stock
purchase plans are considered compensatory plans; therefore recognition of
compensation costs for stock issued under these plans is required. Compensation
cost is measured as the difference between the cost of the shares to plan
participants and the fair market value of the shares on the date of issuance.
However, due to restrictions on activity under these plans in place during the
three months ended March 31, 2006, no compensation expense was recognized
during this period for either plan.
Prior to the adoption of SFAS 123(R), U.S. Cellular presented all tax
benefits resulting from tax deductions associated with the exercise of stock
options by employees as cash flows from operating activities in the
Consolidated Statements of Cash Flows. SFAS 123(R) requires that excess tax
benefits be classified as cash flows from financing activities in the
Consolidated Statement of Cash Flows.
For this purpose, the excess tax benefits are tax benefits related to
the difference between the total tax deduction associated with the exercise of
stock options by employees and the amount of compensation cost recognized for
those options. For the three months
ended March 31, 2006, excess tax benefits of $0.3 million were included within
Other Financing Activities of the Cash Flows from Financing Activities pursuant
to this requirement of SFAS 123(R).
16
4. Income Taxes
The overall effective tax rate on income before income
taxes and minority interest for the three months ended March 31, 2006 and 2005
was 41.8% and 37.7%, respectively. The effective tax rate for the 2006 period
is higher than 2005 primarily due to the estimated foreign tax expense on the
Deutsche Telekom dividend included in the annual operations effective tax rate
for 2006. In 2005 the estimated foreign
tax expense on the Deutsche Telekom dividend was not included in the annual
operations effective tax rate until the second quarter (the first time in three
years that a dividend was declared).
In June of 2006, the Internal Revenue Service
commenced its audit of the 2002 2004 consolidated federal tax returns of TDS
and subsidiaries. The audit is in its preliminary stages.
5. Earnings per Share
Basic earnings per share is computed by dividing net income available
to common by the weighted average common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by weighted
average common shares adjusted to include the effect of potentially dilutive
securities. Potentially dilutive securities include incremental shares issuable
upon exercise of outstanding stock options.
TDS distributed
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 on May 13, 2005 to
shareholders of record on April 29, 2005. As a result of the Special Common Share
Dividend, each option outstanding on May 13, 2005 was converted into a tandem
option for one Common Share and one Special Common Share at the same exercise
price per tandem option exercised.
17
The net income
amounts used in computing earnings per share and the effects on the weighted
average number of common and Series A Common Shares and earnings per share of
potentially dilutive stock options are as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars and shares in thousands,
except earnings per share)
|
|
Basic Earnings per
Share:
|
|
|
|
|
|
Net income
|
|
$
|
39,875
|
|
$
|
23,049
|
|
Preferred
dividend requirement
|
|
(51
|
)
|
(50
|
)
|
Net income
available to common used in basic earnings per share
|
|
$
|
39,824
|
|
$
|
22,999
|
|
|
|
|
|
|
|
Diluted Earnings per
Share:
|
|
|
|
|
|
Net income available
to common used in basic earnings per share
|
|
$
|
39,824
|
|
$
|
22,999
|
|
Minority income
adjustment (1)
|
|
(206
|
)
|
(132
|
)
|
Preferred
dividend adjustment (2)
|
|
12
|
|
|
|
Net income
available to common used in diluted earnings per share
|
|
$
|
39,630
|
|
$
|
22,867
|
|
|
|
|
|
|
|
Weighted average
number of shares of common stock used in basic earnings per share:
|
|
|
|
|
|
Common Shares
|
|
51,471
|
|
51,074
|
|
Special Common
Shares
|
|
57,823
|
|
57,500
|
|
Series A Common
Shares
|
|
6,447
|
|
6,425
|
|
Weighted average
number of shares of common stock used in basic earnings per share
|
|
115,741
|
|
114,999
|
|
Effects of
Dilutive Securities:
|
|
|
|
|
|
Effects of stock
options (3)
|
|
532
|
|
647
|
|
Conversion of
preferred shares (4)
|
|
54
|
|
|
|
Weighted average
number of shares of common stock used in diluted earnings per share
|
|
116,327
|
|
115,646
|
|
|
|
|
|
|
|
Basic Earnings per
Share
|
|
$
|
0.34
|
|
$
|
0.20
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
$
|
0.34
|
|
$
|
0.20
|
|
(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 preferred dividend
adjustment reflects the dividend reduction in the event any preferred series
were dilutive, and therefore converted for shares.
(3) Stock options
convertible into 1,294,004 Common Shares and 1,294,004 Special Common Shares
were not included in computing Diluted Earnings per Share in the three months
ended March 31, 2006, because their effects were antidilutive. Stock options convertible into 680,683 Common
Shares and 680,683 Special Common Shares were not included in computing Diluted
Earnings per Share in the three months ended March 31, 2005 because their
effects were antidilutive.
(4) Preferred shares
convertible into 54,540 Common Shares and 54,540 Special Common Shares were not
included in computing Diluted Earnings per Share in the three months ended
March 31, 2006, because their effects were antidilutive. Preferred shares convertible into 94,792 Common
Shares and 54,540 Special Common Shares were not included in computing Diluted
Earnings per Share in the three months ended March 31, 2005 because their
effects were antidilutive.
6. 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.
18
Information regarding TDSs marketable equity
securities is summarized as follows:
|
|
March 31,
2006
|
|
December 31,
2005
|
|
|
|
(Dollars in thousands)
|
|
Marketable Equity
Securities
|
|
|
|
|
|
Deutsche Telekom AG - 131,461,861 Ordinary Shares
|
|
$
|
2,221,706
|
|
$
|
2,191,469
|
|
Vodafone Group
Plc 12,945,915 American Depositary Receipts(1)
|
|
270,570
|
|
277,949
|
|
VeriSign, Inc. -
2,361,333 Common Shares
|
|
56,648
|
|
51,760
|
|
Rural Cellular
Corporation - 719,396 equivalent Common Shares
|
|
10,582
|
|
10,511
|
|
Other
|
|
1
|
|
1
|
|
Aggregate fair value
|
|
2,559,507
|
|
2,531,690
|
|
Accounting cost basis
|
|
1,543,677
|
|
1,543,677
|
|
Gross unrealized
holding gains
|
|
1,015,830
|
|
988,013
|
|
Equity method
unrealized gains
|
|
543
|
|
543
|
|
Income tax (expense)
|
|
(398,740
|
)
|
(387,599
|
)
|
Minority share of
unrealized holding gains
|
|
(7,088
|
)
|
(7,738
|
)
|
Unrealized holding
gains, net of tax and minority share
|
|
610,545
|
|
593,219
|
|
Derivative instruments,
net of tax and minority share
|
|
(287,835
|
)
|
(284,210
|
)
|
Accumulated other comprehensive income
|
|
$
|
322,710
|
|
$
|
309,009
|
|
(1) See Note 20 Subsequent
Events for a discussion of the Share Consolidation and Special Distribution
related to the Vodafone ADRs that was effected on July 25, 2006. As a
result of the Share Consolidation, the aggregate number of shares underlying
ADRs was reduced from 12,945,915 to 11,327,674.
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 VeriSign, Inc. (VeriSign) is the result of the acquisition
by VeriSign of Illuminet, Inc., a telecommunication entity in which several TDS
subsidiaries held interests. 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.
TDS has entered into a number of forward contracts related to the
marketable equity securities it holds.
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 13
Long-term Debt and Forward Contracts for additional information related to
forward contracts.
See Note 20 Subsequent Events for
additional information related to the investment in Vodafone ADRs.
19
7. 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 three months ended March 31, 2006 and 2005 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
|
|
Other (1)
|
|
Total
|
|
Balance December 31,
2005
|
|
$
|
471,617
|
|
$
|
395,894
|
|
$
|
|
|
$
|
2,281
|
|
$
|
869,792
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
Other Adjustments
|
|
318
|
|
|
|
|
|
|
|
318
|
|
Balance March 31, 2006
|
|
$
|
471,935
|
|
$
|
395,894
|
|
$
|
|
|
$
|
2,281
|
|
$
|
870,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31,
2004
|
|
$
|
445,212
|
|
$
|
395,894
|
|
$
|
|
|
$
|
2,281
|
|
$
|
843,387
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
Balance March 31, 2005
|
|
$
|
445,202
|
|
$
|
395,894
|
|
$
|
|
|
$
|
2,281
|
|
$
|
843,377
|
|
(1) Other consists of goodwill related to
Suttle Straus.
8. 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 investment in
unconsolidated entities include the following:
|
|
March 31,
2006
|
|
March 31,
2005
|
|
|
|
|
|
|
|
Los Angeles SMSA
Limited Partnership
|
|
5.5
|
%
|
5.5
|
%
|
Midwest Wireless
Communications, L.L.C. (1)
|
|
14.2
|
%
|
14.2
|
%
|
North Carolina RSA 1
Partnership
|
|
50.0
|
%
|
50.0
|
%
|
Oklahoma City SMSA Limited Partnership
|
|
14.6
|
%
|
14.6
|
%
|
(1) In addition, U.S. Cellular owns a 49%
interest in an entity, which owns approximately 2.9% of Midwest Wireless
Holdings, L.L.C., the parent company of Midwest Wireless Communications, L.L.C.
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
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Results of operations
|
|
|
|
|
|
Revenues
|
|
$
|
993,000
|
|
$
|
784,000
|
|
Operating
expenses
|
|
688,000
|
|
544,000
|
|
Operating income
|
|
305,000
|
|
240,000
|
|
Other income
(expense), net
|
|
8,000
|
|
7,000
|
|
Net Income
|
|
$
|
313,000
|
|
$
|
247,000
|
|
See Note 20 Subsequent
Events for additional information related to TDSs investment in Midwest
Wireless Communications, LLC.
20
9. Customer
Lists
Customer lists, which are intangible
assets resulting from the acquisition of wireless markets, are amortized based
on average customer retention periods using the declining balance method. Amortization expense was $3.0 million and
$2.3 million for the first quarter of 2006 and 2005, respectively. Amortization expense for the remainder of
2006 and for the years 2007-2010 is expected to be $8.8 million, $8.6 million,
$6.5 million, $4.9 million and $3.3 million, respectively.
10. Property,
Plant and Equipment
U.S. Cellular reviews the estimated
useful lives of its property, plant and equipment, including leasehold
improvements, annually and adjusts such estimated useful lives as appropriate.
U.S. Cellular did not change the useful lives of its property, plant and
equipment, including leasehold improvements, in 2006 or 2005.
TDS Telecom reviews the useful lives of
its property, plant and equipment annually.
There were no changes made to the useful lives of TDS Telecom assets in
the first quarter of 2006 or 2005.
11. Revolving Credit
Facilities
TDS has a $600 million revolving credit facility available for general
corporate purposes. At March 31, 2006,
letters of credit were $3.4 million, leaving $596.6 million available for use.
Borrowings under the revolving credit facility bear interest at the London
InterBank Offered Rate (LIBOR) plus a contractual spread based on TDSs
credit rating (the one-month LIBOR was 4.83% at March 31, 2006). At March 31, 2006, the contractual spread was
60 basis points. TDS may select borrowing periods of either seven days or one, two,
three or six months. If TDS provides less than two days notice of intent to
borrow, interest on borrowings is at the prime rate less 50 basis points (the
prime rate was 7.75% at March 31, 2006). This credit facility expires in
December 2009.
TDS also has $75 million of direct bank lines of credit at March 31,
2006, all of which were unused. The terms of the direct lines of credit bear
negotiated interest rates up to the prime rate (the prime rate was 7.75% at
March 31, 2006).
U.S. Cellular has a $700 million revolving credit facility available
for general corporate purposes. At March
31, 2006, outstanding notes payable and letters of credit were $85.0 million
and $0.5 million, respectively, leaving $614.5 million available for use.
Borrowings under the revolving credit facility bear interest at the London
InterBank Offered Rate (LIBOR) plus a contractual spread based on U.S.
Cellulars credit rating (the one-month LIBOR was 4.83% at March 31,
2006). At March 31, 2006, the
contractual spread was 60 basis points.
U.S. Cellular may select borrowing periods of either seven days or one,
two, three or six months. If U.S. Cellular provides less than two days notice
of intent to borrow, interest on borrowings is the prime rate less 50 basis
points (the prime rate was 7.75% at March 31, 2006). This credit facility expires in December
2009.
TDSs and U.S. Cellulars interest cost
on their revolving credit facilities would increase if their current credit
ratings from either Standard & Poors or Moodys were lowered. However, the
credit facilities would not cease to be available or accelerate solely as a
result of a decline in TDSs or U.S. Cellulars credit rating. A downgrade in
TDSs or U.S. Cellulars credit rating could adversely affect their ability to
renew existing, or obtain access to new, credit facilities in the future. At
March 31, 2006, TDSs and U.S. Cellulars credit ratings are as follows:
Moodys Investor Service
|
Baa3
|
under review for possible further downgrade
|
Standard & Poors
|
A-
|
on credit watch with negative implications
|
Fitch
|
BBB+
|
on rating watch negative
|
21
The maturity dates of certain of TDSs and U.S.
Cellulars revolving 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 negative and affirmative covenants, maintain certain
financial ratios and represent certain matters at the time of each borrowing.
On November 10, 2005 TDS and U.S. Cellular announced that they would restate
certain financial statements which caused TDS and U.S. Cellular to be late in
certain SEC filings. The restatements and late filings resulted in defaults
under the revolving credit facilities and one line of credit facility. However,
TDS and U.S. Cellular were not in violation of any covenants that require TDS
and U.S. Cellular to maintain certain financial ratios and did not fail to make
any scheduled payments. TDS and U.S. Cellular
received waivers from the lenders associated with the revolving credit
facilities, under which the lenders agreed to waive any defaults that may have
occurred as a result of the restatements and late filings. The waivers require
the Form 10-K for the year ended December 31, 2005 to be filed by August 31,
2006, the Form 10-Q for the quarter ended March 31, 2006 to be filed within 30
days after the filing of the Form 10-K for the year ended December 31, 2005 and
the Form 10-Q for the quarter ended June 30, 2006 to be filed within 45 days
after the filing of the Form 10-Q for the quarter ended March 31, 2006. The
Form 10-K for the year ended December 31, 2005 was filed on July 28, 2006.
12. Asset Retirement
Obligations
TDS accounts for asset retirement obligations under SFAS
No. 143, Accounting for Asset Retirement Obligations (SFAS 143), and FASB
Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, (FIN 47) which require
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. At the time the liability is incurred, TDS records a liability equal
to the net present value of the estimated cost of the asset retirement
obligation and increases the carrying amount of the related long-lived asset by
an equal amount. 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 obligations, any differences between the
cost to retire an asset and the recorded liability (including accretion of
discount) is recognized in the Consolidated Statements of Operations as a gain
or loss.
U.S. Cellular is subject
to asset retirement obligations associated primarily with its cell sites,
retail sites and office locations. Asset retirement obligations generally
include obligations to remediate leased land on which U.S. Cellulars cell
sites and switching offices are located.
U.S. Cellular is also generally required to return leased retail store
premises and office space to their pre-existing conditions.
TDS Telecoms incumbent
local exchange carriers have recorded an asset retirement obligation in
accordance with the requirements of SFAS No. 143 and FIN 47, and a regulatory
liability for the costs of removal that state public utility commissions have
required to be recorded for regulatory accounting purposes. The amounts
recorded for regulatory accounting purposes exceed, in most cases, the amount
required to be recorded in accordance with SFAS No. 143 and FIN 47. These
amounts combined make up the asset retirement obligation for the incumbent
local exchange carriers. The asset
retirement obligation calculated in accordance with the provisions of SFAS No.
143 and FIN 47 at March 31, 2006 was $37.0 million. The regulatory liability in
excess of the amounts required to be recorded in accordance with SFAS No. 143
and FIN 47 at March 31, 2006 was $34.4 million.
In accordance with the requirements of SFAS No. 143
and FIN 47, TDS Telecoms competitive local exchange carrier has recorded an
asset retirement obligation of $2.7 million at March 31, 2006.
The table below
summarizes the changes in asset retirement obligations during the three months
ended March 31, 2006.
|
|
U.S.
|
|
TDS Telecom
|
|
TDS
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Consolidated
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
December 31, 2005
|
|
$
|
90,224
|
|
$
|
70,220
|
|
$
|
2,649
|
|
$
|
163,093
|
|
Additional
liabilities accrued
|
|
1,529
|
|
1,429
|
|
|
|
2,958
|
|
Accretion
expense
|
|
1,737
|
|
8
|
|
46
|
|
1,791
|
|
Costs of removal
incurred in 2006
|
|
|
|
(197
|
)
|
|
|
(197
|
)
|
Ending Balance March 31, 2006
|
|
$
|
93,490
|
|
$
|
71,460
|
|
$
|
2,695
|
|
$
|
167,645
|
|
22
13. Long-Term Debt and
Forward Contracts
The late filing of TDSs
and U.S. Cellulars Forms 10-K for the year ended December 31, 2005 and Forms
10-Q for the quarterly periods ended March 31, 2006 and June 30, 2006 and the
failure to deliver such Forms 10-K and 10-Q to the trustees of the TDS and U.S.
Cellular debt indentures on a timely basis, resulted in non-compliance under
such debt indentures. However, this non-compliance did not result in an event
of default or a default. TDS and U.S. Cellular believe that non-compliance was
cured upon the filing of their Forms 10-K for the year ended December 31, 2005
and Forms 10-Q for the quarterly period ended March 31, 2006, but that
non-compliance continues to exist with respect to their Forms 10-Q for the
quarterly period ended June 30, 2006. TDS and U.S. Cellular have not failed to
make nor do they expect to fail to make any scheduled payment of principal or
interest under such indentures.
Except as noted above, TDS believes that it and its subsidiaries were
in compliance as of March 31, 2006 with all 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.
TDS redeemed $35.0
million of medium-term notes in January and February of 2006 which carried
interest rates of 10.00%.
TDS repaid $200.0 million
plus accrued interest of unsecured 7% senior notes on August 1, 2006, using
cash on-hand.
Forward Contracts
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.
Subsidiaries of TDS have forward contracts with counterparties in connection
with its Deutsche Telekom, Vodafone and VeriSign marketable equity securities.
The principal amount of the forward contracts was accounted for as a loan. The
collar portions of the forward contracts are accounted for as derivative
instruments.
The
Deutsche Telekom forward contracts mature from July 2007 to
September 2008. A majority of the contracts require quarterly interest
payments at the LIBOR rate plus 50 basis points (the three-month LIBOR rate was
5.00% at March 31, 2006). The remaining contracts are structured as zero
coupon obligations with a weighted average effective interest rate of 4.4% per
year. No interest payments are required for the zero coupon obligations during
the contract period.
The
Vodafone forward contracts mature in May and October 2007. The
Vodafone forward contracts require quarterly interest payments at the LIBOR
rate plus 50 basis points (the three-month LIBOR rate was 5.00% at March 31,
2006). See Note 20
Subsequent Events for additional information related to the investment
in Vodafone ADRs.
The
VeriSign forward contract matures in May 2007 and is structured as a zero
coupon obligation with an effective interest rate of 5.00% per year. TDS is not
required to make interest payments during the contract period.
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 accounting cost basis thereby
eliminating the risk of an other-than-temporary loss being recorded on these
contracted securities.
23
Under
the terms of the forward contracts, subsidiaries of TDS and U.S. Cellular will
continue to own the contracted shares and will receive dividends paid on such
contracted shares, if any. The forward contracts, 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 reduce 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
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. TDS and U.S. Cellular have
provided guarantees to the counterparties which provide assurance that all
principal and interest amounts are paid by its consolidated subsidiaries upon
settlement of the contracts.
TDS and U.S. Cellular are required to comply
with certain covenants under the forward contracts. On November 10, 2005,
TDS and U.S. Cellular announced that they would restate certain financial
statements which caused TDS and U.S. Cellular to be late in certain SEC
filings. The restatements and late filings resulted in defaults under the
forward contracts. However, 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 counterparties associated with the forward
contracts, under which the counterparties agreed to waive any defaults that may
have occurred as a result of the restatements and late filings. The waivers
require the Form 10-K for the year ended December 31, 2005 to be
filed by August 31, 2006, the Form 10-Q for the quarter ended
March 31, 2006 to be filed within 30 days after the filing of the
Form 10-K for the year ended December 31, 2005 and the Form 10-Q
for the quarter ended June 30, 2006 to be filed within 45 days after
the filing of the Form 10-Q for the quarter ended March 31,
2006. The Form 10-K for the year ended
December 31, 2005 was filed on July 28, 2006.
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.
The settlement value of TDSs mandatorily redeemable minority interests
is estimated to be $144.6 million at March 31, 2006. 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 March 31, 2006, net of estimated liquidation costs.
This amount is being disclosed pursuant to the requirements of FASB Staff
Position (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 March 31, 2006 is $32.5
million, and is included in the Balance Sheet caption Minority interest in
subsidiaries. The excess of the aggregate settlement value over the aggregate
carrying value of the mandatorily redeemable minority interests of $112.1
million is primarily due to the unrecognized appreciation of the minority
interest holders share of the underlying net assets in the consolidated
partnerships and LLCs. Neither the minority interest holders share, nor TDSs
share, of the appreciation of the underlying net assets of these subsidiaries
is reflected in the consolidated financial statements. The estimate of
settlement value was based on certain factors and assumptions. Changes in those
factors and assumptions could result in a materially larger or smaller
settlement amount.
24
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, but this authorization expired in February
2006 and a new authorization has not yet been put in place. No TDS Common
Shares were repurchased in the first quarter of 2006 or 2005.
The Board of Directors of
U.S. Cellular has authorized the repurchase of 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
quarter of 2006 or 2005.
16. Acquisitions,
Divestitures and Exchanges
TDS assesses its existing wireless interests on an ongoing basis with a
goal of improving the competitiveness of its operations and maximizing its
long-term return on investment. As part
of this strategy, TDS reviews attractive opportunities to acquire additional
operating markets, telecommunications companies and wireless spectrum. In addition, TDS may seek to divest outright or include in exchanges for other
wireless interests those markets and wireless interests that are not strategic
to its long-term success.
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.
On January 6, 2006, the FCC granted
Carroll Wireless applications with respect to 16 of the 17 licenses for which
it had been the successful bidder and dismissed one application, relating to
Walla Walla, Washington. Following the completion of Auction 58, the FCC
determined that a portion of the Walla Walla license was already licensed to
another party and should not have been included in Auction 58. Accordingly, in
2006, Carroll Wireless received a full refund of the $228,000 previously paid
to the FCC with respect to the Walla Walla license.
Carroll Wireless
is in the process of developing its long-term business and financing plans. As
of March 31, 2006, U.S. Cellular made capital contributions and advances to
Carroll Wireless and/or its general partner of approximately $129.9 million;
$129.7 million of this amount is included in Licenses in the Consolidated
Balance Sheets. 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 FASB Interpretation No. 46R (FIN 46R),
as U.S. Cellular anticipates benefiting from or absorbing a majority of Carroll
Wireless expected respective gains or losses. Pending finalization of Carroll
Wireless permanent financing plan, and upon request by Carroll Wireless, U.S.
Cellular may make additional capital contributions and advances to Carroll
Wireless and/or its general partner. In November 2005, U.S. Cellular approved
additional funding of $1.4 million of which $0.1 million was provided to
Carroll Wireless through March 31, 2006.
In the first quarter of
2005, TDS adjusted the gain on investments related to its sale to ALLTEL of
certain wireless properties on November 30, 2004. The adjustment of the gain, which resulted
from a working capital adjustment that was finalized in the first quarter of
2005, increased the total gain on the sale by $0.5 million to $51.4 million.
In addition, in 2005,
U.S. Cellular purchased one new wireless market and certain minority interests
in other wireless markets in which it already owned a controlling interest for
$6.9 million in cash.
25
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.
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Marketable Equity Securities
|
|
|
|
|
|
Balance, beginning of
period
|
|
$
|
593,219
|
|
$
|
1,109,222
|
|
Add (deduct):
|
|
|
|
|
|
Unrealized gains
(losses) on marketable equity securities
|
|
27,817
|
|
(356,776
|
)
|
Income tax
(expense) benefit
|
|
(11,142
|
)
|
141,384
|
|
|
|
16,675
|
|
(215,392
|
)
|
Minority share
of unrealized losses
|
|
651
|
|
862
|
|
Net change in
unrealized gains (losses) on marketable equity securities in comprehensive
income
|
|
17,326
|
|
(214,530
|
)
|
Balance, end of period
|
|
$
|
610,545
|
|
$
|
894,692
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
|
|
|
|
Balance, beginning of
period
|
|
$
|
(284,210
|
)
|
$
|
(738,365
|
)
|
Add (deduct):
|
|
|
|
|
|
Unrealized gains
(losses) on derivative instruments
|
|
(5,283
|
)
|
347,018
|
|
Income tax
(expense) benefit
|
|
2,217
|
|
(137,683
|
)
|
|
|
(3,066
|
)
|
209,335
|
|
Minority share of
unrealized losses
|
|
(559
|
)
|
(375
|
)
|
Net change in
unrealized gains (losses) on derivative instruments included in comprehensive
income
|
|
(3,625
|
)
|
208,960
|
|
Balance, end of period
|
|
$
|
(287,835
|
)
|
$
|
(529,405
|
)
|
|
|
|
|
|
|
Accumulated Other Comprehensive
Income
|
|
|
|
|
|
Balance, beginning of
period
|
|
$
|
309,009
|
|
$
|
370,857
|
|
Net change in
marketable equity securities
|
|
17,326
|
|
(214,530
|
)
|
Net change in
derivative instruments
|
|
(3,625
|
)
|
208,960
|
|
Net change in
unrealized gains (losses) included in comprehensive income
|
|
13,701
|
|
(5,570
|
)
|
Balance, end of period
|
|
$
|
322,710
|
|
$
|
365,287
|
|
26
18. Business Segment
Information
Financial data for
TDSs business segments for the three month period ended or at March 31, 2006
and 2005 are as follows. TDS Telecoms
incumbent local exchange carriers are designated as ILEC in the table and its
competitive local exchange carrier is designated as CLEC.
Three Months Ended or at
March 31, 2006
|
|
U.S.
|
|
TDS Telecom
|
|
|
|
Other
Reconciling
|
|
|
|
(Dollars in thousands)
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Other (1)
|
|
Items(2)
|
|
Total
|
|
Operating revenues
|
|
$
|
837,236
|
|
$
|
161,026
|
|
$
|
59,870
|
|
$
|
7,583
|
|
$
|
(5,403
|
)
|
$
|
1,060,312
|
|
Cost of services and
products
|
|
298,171
|
|
48,832
|
|
23,617
|
|
5,272
|
|
(753
|
)
|
375,139
|
|
Selling, general and
administrative expense
|
|
325,618
|
|
41,200
|
|
28,449
|
|
1,907
|
|
(3,753
|
)
|
393,421
|
|
Operating income before
depreciation, amortization and accretion (3)
|
|
213,447
|
|
70,994
|
|
7,804
|
|
404
|
|
(897
|
)
|
291,752
|
|
Depreciation,
amortization and accretion expense
|
|
141,726
|
|
33,576
|
|
6,654
|
|
711
|
|
|
|
182,667
|
|
Operating income (loss)
|
|
71,721
|
|
37,418
|
|
1,150
|
|
(307
|
)
|
(897
|
)
|
109,085
|
|
Significant noncash
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income
|
|
19,483
|
|
|
|
|
|
|
|
322
|
|
19,805
|
|
Marketable equity
securities
|
|
219,584
|
|
|
|
|
|
|
|
2,339,923
|
|
2,559,507
|
|
Investment in
unconsolidated entities
|
|
185,915
|
|
3,623
|
|
|
|
|
|
41,658
|
|
231,196
|
|
Total assets
|
|
5,412,286
|
|
1,668,956
|
|
151,830
|
|
27,664
|
|
3,116,420
|
|
10,377,156
|
|
Capital expenditures
|
|
$
|
119,795
|
|
$
|
17,109
|
|
$
|
2,673
|
|
$
|
1,873
|
|
$
|
4,912
|
|
$
|
146,362
|
|
Three Months Ended or at
March 31, 2005
|
|
U.S.
|
|
TDS Telecom
|
|
|
|
Other
Reconciling
|
|
|
|
(Dollars in thousands)
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Other (1)
|
|
Items(2)
|
|
Total
|
|
Operating revenues
|
|
$
|
711,071
|
|
$
|
161,843
|
|
$
|
59,267
|
|
$
|
7,808
|
|
$
|
(4,202
|
)
|
$
|
935,787
|
|
Cost of services and
products
|
|
265,719
|
|
43,739
|
|
24,124
|
|
5,549
|
|
(507
|
)
|
338,624
|
|
Selling, general and
administrative expense
|
|
278,330
|
|
43,258
|
|
29,262
|
|
1,416
|
|
(3,695
|
)
|
348,571
|
|
Operating income before
depreciation, amortization and accretion (3)
|
|
167,022
|
|
74,846
|
|
5,881
|
|
843
|
|
|
|
248,592
|
|
Depreciation,
amortization and accretion expense
|
|
127,493
|
|
34,264
|
|
7,303
|
|
688
|
|
|
|
169,748
|
|
Operating income (loss)
|
|
39,529
|
|
40,582
|
|
(1,422
|
)
|
155
|
|
|
|
78,844
|
|
Significant noncash
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income
|
|
14,440
|
|
175
|
|
|
|
|
|
139
|
|
14,754
|
|
Gain (loss) on
investments
|
|
551
|
|
(51
|
)
|
|
|
|
|
|
|
500
|
|
Marketable equity
securities
|
|
274,079
|
|
|
|
|
|
|
|
2,767,949
|
|
3,042,028
|
|
Investment in
unconsolidated entities
|
|
169,634
|
|
19,896
|
|
|
|
|
|
24,290
|
|
213,820
|
|
Total assets
|
|
5,255,595
|
|
1,728,560
|
|
147,760
|
|
25,623
|
|
3,557,551
|
|
10,715,089
|
|
Capital expenditures
|
|
$
|
112,775
|
|
$
|
16,142
|
|
$
|
4,214
|
|
$
|
915
|
|
$
|
741
|
|
$
|
134,787
|
|
(1) Represents Suttle Straus.
(2) 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 or TDS Telecom segments.
(3) The amount of operating income before depreciation, amortization and
accretion 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.
27
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Total operating income
from reportable and other segments
|
|
$
|
109,085
|
|
$
|
78,844
|
|
Total Investment and
other income (expense)
|
|
(22,992
|
)
|
(32,637
|
)
|
Income before income taxes and minority interest
|
|
$
|
86,093
|
|
$
|
46,207
|
|
19. Commitments and
Contingencies
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 outcome of contingencies could materially
impact the Consolidated Statements of Operations, Consolidated Balance Sheets
and Consolidated Statements of Cash Flows.
Indemnifications
TDS enters into agreements in the normal course of business that
provide for indemnification of counterparties. These agreements 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 USA Inc., (T-Mobile)
regarding certain contingent liabilities at Aerial Communications, Inc. (Aerial)
for the period prior to Aerials merger into VoiceStream Wireless. As of March 31, 2006, TDS has recorded
liabilities of $1.5 million relating to this indemnity, which represents its
best estimate of its probable liability.
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 outcome of legal proceedings could 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 TDS Telecoms financial condition, results of operations and
cash flows.
28
20. Subsequent Events
U.S.
Cellular owns approximately 14% of Midwest Wireless Communications, LLC, which
interest is convertible into approximately an 11% interest in Midwest Wireless
Holdings, LLC, a privately-held wireless telecommunications company that
controls Midwest Wireless Communications.
Midwest Wireless Holdings, through subsidiaries, holds FCC licenses and
operates certain wireless markets in southern Minnesota, northern and eastern
Iowa and western Wisconsin. On November
18, 2005, ALLTEL announced that it had entered into a definitive agreement to
acquire Midwest Wireless Holdings for $1.075 billion in cash, subject to
certain conditions, including approval by the FCC, other governmental
authorities and the members of Midwest Wireless Holdings. On January 31, 2006, U.S. Cellular filed a
petition to deny the FCC license transfer of control applications filed by
ALLTEL and Midwest Wireless Holdings seeking FCC consent to their transaction. That petition is pending. Subject to the outcome of such petition, the
satisfaction of certain conditions and the closing of the foregoing agreement,
U.S. Cellular will be entitled to receive approximately $102.7 million in cash
in consideration with respect to its interest in Midwest Wireless Communications
upon the closing of the acquisition of Midwest Wireless Holdings by
ALLTEL. In addition, U.S. Cellular owns
49% of an entity, accounted for under the equity method, which owns
approximately 2.9% of Midwest Wireless Holdings. If the transaction with ALLTEL occurs, this
entity will receive cash in consideration for its interest in Midwest Wireless
Holdings. Following that, this entity
will be dissolved and U.S. Cellular will be entitled to receive approximately $11.4
million in cash. The net aggregate
carrying value of U.S. Cellulars investments in Midwest Wireless
Communications and Midwest Wireless Holdings was approximately $21.7 million at
March 31, 2006.
U.S.
Cellular is a limited partner in Barat Wireless, L.P. (Barat Wireless), an
entity which is participating in the auction of wireless spectrum designated by
the FCC as Auction 66, which began in August 2006. Barat Wireless intends to qualify as a designated
entity and be eligible for discounts with respect to spectrum purchased in
Auction 66.
Barat Wireless is in the process of
developing its long-term business and financing plans. As of August 25, 2006, U.S. Cellular
has made capital contributions and advances to Barat Wireless and/or its
general partner of $79.9 million to provide initial funding of Barat Wireless
participation in Auction 66. U.S.
Cellular will consolidate Barat Wireless and Barat Wireless, Inc., the general
partner of Barat Wireless, for financial reporting purposes, pursuant to the
guidelines of FIN 46R, as U.S. Cellular anticipates benefiting from or
absorbing a majority of Barat Wireless expected gains or losses. Pending
finalization of Barat Wireless permanent financing plan, and upon request by
Barat Wireless, U.S. Cellular may agree to make additional capital contributions
and advances to Barat Wireless and/or its general partner.
In April 2006, an
interexchange carrier for which TDS Telecom provides both originating and
terminating access asserted a claim for refund, net of counterclaims, of up to
$10 million for past billed amounts for certain types of traffic. TDS Telecom believes its billing methods and
procedures were appropriate under the terms of its state and federal tariffs
and will contest this claim.
TDS Telecom has in the past obtained financing from the RTB. In
connection with such financings, TDS Telecom purchased stock in the RTB. TDS
Telecom has repaid all of its debt to the RTB, but continued to own the RTB
stock. In August 2005, the board of directors of the RTB approved resolutions
to liquidate and dissolve the RTB. In order to effect the dissolution and
liquidation, shareholders were asked to remit their shares to receive cash
compensation for those shares. TDS
Telecom remitted its shares and received $101.7 million from the RTB in the
second quarter of 2006. TDS Telecoms book basis in the RTB stock was
approximately $9.1 million.
At an Extraordinary General Meeting held on July 25, 2006, shareholders
of Vodafone approved a Return of Capital (Special Distribution) of £0.15 per
share (£1.50 per American Depositary Receipt (ADR)) and a Share Consolidation
under which every 8 ADRs were consolidated into 7 ADRs.
The Share Consolidation was effective July 28, 2006 and the Special
Distribution was paid on August 18, 2006. As a result of the Share
Consolidation, U.S. Cellulars previous 10,245,370 ADRs were consolidated into
8,964,698 ADRs and TDS Telecoms previous 2,700,545 ADRs were consolidated into
2,362,976 ADRs. Also, U.S. Cellular received approximately $28.6 million and
TDS Telecom received approximately $7.6 million from the Special
Distribution and will record dividend income, before taxes, of this amount in
the third quarter of 2006.
29
Pursuant to terms of the forward contracts, the contract collars were
adjusted as a result of the Special Dividend and the Share Consolidation. After
adjustment, the collars had downside limits (floor) ranging from $17.22 to $18.37
and upside potential (ceiling) ranging from $17.22 to $19.11. In the case of
two forward contracts, subsidiaries of TDS made a dividend substitution payment
in the amount of $3.2 million to the counterparties in lieu of further
adjustments to the collars for such forward contracts.
TDS repaid $200.0
million plus accrued interest of unsecured 7% senior notes on August 1, 2006,
using cash on-hand.
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 and TDS.S) is a diversified
telecommunications company providing high-quality telecommunications services
to approximately 6.8 million wireless telephone customers and wireline
telephone equivalent access lines. TDS
conducts substantially all of its wireless telephone operations through its
81.2%-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 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 included herein, and with its audited
consolidated financial statements and Managements Discussion and Analysis of
Financial Condition and Results of Operations included in its Annual Report on
Form 10-K (Form 10-K) for the year ended December 31, 2005.
OVERVIEW
The following is a
summary of certain selected information from the complete management discussion
that follows the overview and does not contain all of the information that may
be important. You should carefully read the entire Managements Discussion and
Analysis of Financial Condition and Results of Operations and not rely solely
on this 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.
U.S. Cellulars operating
income in the three months ended March 31, 2006 increased $32.2 million, or 81%,
to $71.7 million from $39.5 million in 2005.
The operating income margin (as a percent of service revenues) was 9.3%
in 2006 and 5.9% in 2005. Operating
income and operating income margin are expected to improve slightly over the
next few years, primarily due to anticipated increases in revenues generated by
additional customers, data-related services and recently launched markets.
Offsetting these increases are the anticipated effects of the following
factors:
· costs of
customer acquisition and retention;
· effects of
competition;
· costs related to
increased customer use of its services;
· costs of
developing recently acquired and launched markets; and
· costs of additional enhancements to
U.S. Cellulars wireless networks.
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.
31
TDS Telecoms operating
income in the three months ended March 31, 2006 decreased $0.6 million, or 2%
to $38.6 million from $39.2 million in 2005. The operating income margins were
17.6% in 2006 and 17.8% in 2005. Despite the challenges faced in the industry,
TDS Telecom was able to increase equivalent access lines in 2006 primarily
through the increase in penetration of existing markets by its competitive
local exchange operations.
See TDS Telecom
Operations.
Cash Flows and Investments
At March 31, 2006, TDS
and its subsidiaries had cash and cash equivalents totaling $1,076.6 million,
available borrowing capacity of $1,211.1 million under its revolving credit
facilities and an additional $75 million of bank lines of credit. Also, during
the quarter ended March 31, 2006, TDS generated cash flows from operating
activities of $220.6 million. Management believes that cash on hand, expected
future cash flows from operating activities 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. TDS continues to
seek to maintain a strong balance sheet and an investment grade credit rating.
U.S.
Cellular is a limited partner in Barat Wireless, L.P. (Barat Wireless), an
entity which is participating in the auction of wireless spectrum designated by
the FCC as Auction 66, which began in August 2006. Barat Wireless intends to qualify as a designated
entity and be eligible for discounts with respect to spectrum purchased in
Auction 66.
Barat Wireless is in the process of developing its long-term
business and financing plans. As
of August 25, 2006, U.S. Cellular has made capital contributions and advances
of $79.9 million to Barat Wireless and/or its general partner to provide
initial funding of Barat Wireless participation in Auction 66. U.S. Cellular will consolidate Barat Wireless
and Barat Wireless, Inc., the general partner of Barat 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 Barat Wireless expected gains or losses.
Pending finalization of Barat Wireless permanent financing plan, and upon
request by Barat Wireless, U.S. Cellular may agree to make additional capital
contributions and advances to Barat Wireless and/or its general partner.
See Financial
Resources and Liquidity and Capital Resources.
32
RESULTS
OF OPERATIONS
Three
Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
Operating
Revenues increased $124.5 million, or 13%, to $1,060.3
million during the three months ended March 31, 2006 from $935.8 million during
the three months ended March 31, 2005, primarily as a result of an 8% increase
in customers and equivalent access lines served. U.S. Cellulars operating revenues increased
$126.1 million, or 18%, to $837.2 million in 2006 from $711.1 million in 2005
as customers served increased by 506,000, or 10%, since March 31, 2005, to
5,633,000. TDS Telecoms operating revenues decreased $0.4 million, or less
than 1%, to $219.4 million in 2006 from $219.8 million in 2005. A decrease in
revenues generated from network access was partially offset by the growth in
equivalent access lines. Equivalent access lines grew 19,500 or 2%, since March
31, 2005, to 1,191,400. An equivalent
access line is derived by converting a high-capacity data line to an estimated
equivalent number, in terms of capacity, of switched access lines.
Operating
Expenses increased $94.3 million, or 11%, to $951.2 million
in 2006 from $856.9 million in 2005 primarily reflecting growth in operations.
Operating expenses include a $5.9 million increase in stock-based compensation
expense primarily due to the implementation of FASB Statement of Financial
Accounting Standards (SFAS) No. 123 (revised) (SFAS 123(R)), Share-Based
Payment, as of January 1, 2006. U.S. Cellulars operating expenses increased
$94.0 million, or 14%, to $765.5 million in 2006 from $671.5 million in 2005
primarily reflecting costs associated with acquiring customers and serving and
retaining its expanding customer base.
TDS Telecoms expenses increased $0.1 million, or less than 1%, to
$180.8 million in 2006 from $180.7 million in 2005 primarily reflecting
increased cost of goods sold for digital subscriber lines and long distance
services, along with costs related to providing services to additional
competitive local exchange carrier customers.
Operating
Income increased $30.3 million, or 38%, to $109.1 million in
2006 from $78.8 million in 2005. The
operating margin was 10.3% in 2006 and 8.4% in 2005 on a consolidated
basis. U.S. Cellulars operating income
increased $32.2 million, or 81%, to $71.7 million from $39.5 million in 2005
and its operating margin, as a percentage of service revenues, increased to
9.3% in 2006 from 5.9% in 2005. TDS
Telecoms operating income decreased $0.6 million, or 2%, to $38.6 million in
2006 from $39.2 million in 2005 and its operating margin decreased to 17.6% in
2006 from 17.8% in 2005.
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 $(23.0) million in 2006
and $(32.6) million in 2005.
Investment
income increased $5.0 million, or 34%, to $19.8 million in
2006 from $14.8 million in 2005.
Investment income represents TDSs share of net income from markets in
which it has a minority interest and that are accounted for by the equity
method. TDSs investment in the Los
Angeles SMSA Limited Partnership meets certain significance tests, pursuant
to Rule 3-09 of SEC Regulation S-X, this investment contributed $14.6 million
and $12.0 million to investment income for the three months ended March 31,
2006 and 2005, respectively.
Interest
and dividend income increased $7.9 million to $16.2 million
in 2006 from $8.3 million in 2005 primarily due to higher average rates of
interest earned on investments in 2006 than 2005.
Interest
expense increased $6.6 million, or 13%, to $58.5 million in
2006 from $51.9 million in 2005. The increase in interest expense in the three
months ended March 31, 2006 was primarily due to an increase in interest paid
on forward contracts related to interest rate increases ($6.7 million), the new
debt issuance of 6.625% senior notes in March 2005 of $116.25 million ($1.9
million) and the increase in interest rates on the revolving credit facilities
($1.6 million). The increase in interest
expense was partially offset by the repayment of TDS Telecom subsidiary debt in
March and June of 2005 ($3.4 million).
Gain on
investments totaled a net gain of $0.5 million in 2005. The
net gain reflects the working capital adjustment recorded in 2005 on the
investment interests sold by U.S. Cellular and TDS Telecom to ALLTEL in
November 2004. There were no gains or losses on investments recorded in 2006.
33
Other income (expense)
totaled $(0.5) million in 2006 and $(4.3) million in 2005. Borrowing costs on
the prepaid forward contracts decreased $0.6 million in 2006 compared to
2005. The VeriSign derivative resulted
in a gain of $0.4 million in 2006 compared to a loss of $0.1 million in 2005. In addition, in 2005 TDS Telecom recorded a
$0.6 million expense prepayment penalty on the repayment of debt as well as a
$0.1 million write off of unamortized debt issuance costs.
Income
Tax Expense increased $18.6 million to $36.0 million in 2006
from $17.4 million in 2005 primarily due to the increase in pre-tax income. The
overall effective tax rates on income before income taxes and minority interest
for the three months ended March 31, 2006 and 2005 were 41.8% and 37.7%,
respectively. The effective tax rate for the 2006 period is higher than for
2005 primarily due to the estimated foreign tax expense on the Deutsche Telekom
dividend included in the annual operations effective tax rate for 2006. In 2005
the estimated foreign tax expense on the Deutsche Telekom dividend was not
included in the annual operations effective tax rate until the second quarter (the
first time in three years that a dividend was declared). For further analysis
and discussion of TDSs effective tax rates in 2006 and 2005, 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.
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Minority Share of
Income
|
|
|
|
|
|
U.S. Cellular
|
|
|
|
|
|
Minority Public
Shareholders
|
|
$
|
(7,050
|
)
|
$
|
(2,159
|
)
|
Minority
Shareholders or Partners
|
|
(3,100
|
)
|
(3,578
|
)
|
|
|
(10,150
|
)
|
(5,737
|
)
|
Other
|
|
(100
|
)
|
(26
|
)
|
|
|
$
|
(10,250
|
)
|
$
|
(5,763
|
)
|
Net
Income Available to Common totaled $39.8 million, or $0.34
per diluted share, in 2006 and $23.0 million, or $0.20 per diluted share, in
2005.
34
U.S.
CELLULAR OPERATIONS
TDS provides
wireless telephone service through United States Cellular Corporation (U.S.
Cellular), an 81.2%-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 change in U.S. Cellulars results
of operations in 2006 and 2005. The number of customers increased 10% to
5,633,000 at March 31, 2006, from 5,127,000 at March 31, 2005, due to customer
additions from its marketing channels and acquisition, divestitures and
exchange activities.
SUMMARY
OF HOLDINGS
U.S. Cellular owned, or
had the right to acquire pursuant to certain agreements, either majority or
minority interests in 241 wireless markets as of March 31, 2006. A summary of
the number of markets U.S. Cellular owns or has rights to acquire as of March
31, 2006 follows:
|
|
Number of
Markets
|
|
Consolidated
markets (1)
|
|
200
|
|
Consolidated
markets acquirable pursuant to existing agreements (2)
|
|
17
|
|
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
|
|
241
|
|
(1) U.S. Cellular owns a controlling interest in
each of these markets. These markets
include controlling interests acquired in 11 licenses through 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 for 17 wireless licenses in
the auction of wireless spectrum designated by the Federal Communications
Commission (FCC) as Auction 58. On
January 6, 2006, the FCC granted Carroll Wireless applications with respect to
16 of the 17 licenses for which it was the winning bidder and dismissed one
application relating to Walla Walla, Washington. Following the completion of Auction 58, the
FCC determined that a portion of the Walla Walla license was already licensed
to another party and should not have been included in Auction 58. In March 2006, Carroll Wireless received a
full refund of the amount paid to the FCC with respect to the Walla Walla
license. Of the 16 licenses which were granted to Carroll Wireless, five are in
markets in which U.S. Cellular currently owns spectrum. Only license
acquisitions which add incremental territory to U.S. Cellulars consolidated
operating markets are included in the number of consolidated markets to be
acquired to avoid duplicate reporting of overlapping markets. The other 11
licenses represent markets which are incremental to U.S. Cellulars currently
owned or acquirable markets.
U.S. Cellulars
consolidated markets also include controlling interests acquired in 15 licenses
and exclude controlling interests transferred in two licenses pursuant to the
exchange transaction with ALLTEL Corporation (ALLTEL) that was completed on
December 19, 2005.
(2) U.S. Cellular owns rights to acquire
controlling interests in 17 wireless licenses resulting from an exchange
transaction with AT&T Wireless Services, Inc. (AT&T Wireless), now
Cingular Wireless LLC (Cingular), which closed in August 2003. Pursuant to such exchange transaction, U.S.
Cellular acquired rights to 21 licenses as of the closing date. U.S. Cellular
has up to five years from the transaction closing date to exercise its rights
to acquire the licenses. Pursuant to such exchange transaction, U.S. Cellular
also has rights to acquire four additional licenses. However, those four
licenses are in markets where U.S. Cellular currently owns spectrum. Therefore,
the four licenses for which U.S. Cellular owns rights to acquire controlling
interests are not included in the number of consolidated markets to be
acquired.
(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.
35
RESULTS
OF OPERATIONS
Following
is a table of summarized operating data for U.S. Cellulars consolidated
operations.
|
|
Three Months Ended or At
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
As of March 31, (1a)
|
|
|
|
|
|
Total market
population (2)
|
|
55,164,000
|
|
44,576,000
|
|
Customers (3)
|
|
5,633,000
|
|
5,127,000
|
|
Market
penetration (4)
|
|
10.21
|
%
|
11.50
|
%
|
Total full-time
equivalent employees
|
|
7,350
|
|
7,000
|
|
Cell sites in
service
|
|
5,438
|
|
4,899
|
|
For the Three Months
Ended March 31, (1b)
|
|
|
|
|
|
Net customer additions
(5)
|
|
151,000
|
|
182,000
|
|
Net retail
customer additions (5)
|
|
122,000
|
|
123,000
|
|
Average monthly
service revenue per customer (6)
|
|
$
|
46.22
|
|
$
|
44.46
|
|
Postpay churn
rate per month (7)
|
|
1.5
|
%
|
1.5
|
%
|
Sales and marketing
cost per gross customer addition (8)
|
|
$
|
412
|
|
$
|
396
|
|
(1a) Amounts in 2006 included information related to all markets included in
U.S. Cellulars consolidated operations as of March 31, 2006. Such markets
include, (i) the market acquired from Cingular in April 2005, (ii) the 15
markets acquired from ALLTEL in the exchange transaction completed in December
2005 and (iii) the 11 markets granted to Carroll Wireless by the FCC in January
2006 which are incremental to U.S. Cellulars currently owned or acquirable
markets; such markets exclude the two markets transferred to ALLTEL in the
exchange transaction completed in December 2005. Amounts in 2005 include
information related to all markets included in U.S. Cellulars consolidated
operations as of March 31, 2005. For further information on acquisitions,
divestitures and exchanges, see Summary of Holdings above.
(1b) Amounts in 2006 included results from all markets included in U.S.
Cellulars consolidated operations for the period January 1, 2006 through March
31, 2006. Such amounts include results from (i) the market acquired from
Cingular in April 2005 from January 1 through March 31, 2006, (ii) the 15
markets acquired from ALLTEL in the exchange transaction completed in December
2005 from January 1 through March 31, 2006 and (iii) the 11 markets granted to
Carroll Wireless by the FCC in January 2006 for the period January 6 through
March 31, 2006; such amounts exclude results from the two markets transferred
to ALLTEL in the exchange transaction completed in December 2005. Amounts in 2005
include results from all markets included in U.S. Cellulars consolidated
operations for the period January 1, 2005 through March 31, 2005. For further
information on acquisitions, divestitures and exchanges, see Summary of
Holdings above.
(2) Represents 100% of the population of the
markets in which U.S. Cellular had a controlling financial interest for
financial reporting purposes as of March 31 of each respective year.
(3) U.S. Cellulars
customer base consists of the following types of customers:
|
|
March 31,
|
|
|
|
2006
|
|
2005
|
|
Customers on
postpay service plans in which the end user is a customer of U.S. Cellular
(postpay customers)
|
|
4,707,000
|
|
4,378,000
|
|
End user
customers acquired through U.S. Cellulars agreement with a third party
(reseller customers) *
|
|
604,000
|
|
526,000
|
|
Total postpay
customer base
|
|
5,311,000
|
|
4,904,000
|
|
Customers on
prepaid service plans in which the end user is a customer of U.S. Cellular
(prepaid customers)
|
|
322,000
|
|
223,000
|
|
Total customers
|
|
5,633,000
|
|
5,127,000
|
|
* 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
2005 and 2004 Claritas population estimates for 2006 and 2005, 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 acquisitions, divestitures or
exchanges. 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
acquisitions, divestitures or exchanges. See Operating Income below for
information related to U.S. Cellulars estimate of net retail customer
additions for the full year 2006.
36
(6) Management 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:
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Service Revenues
per Statement of Operations
|
|
$
|
770,082
|
|
$
|
671,639
|
|
Divided by
average customers during period (000s) *
|
|
5,554
|
|
5,035
|
|
Divided by
number of months in each period
|
|
3
|
|
3
|
|
Average monthly
service revenue per customer
|
|
$
|
46.22
|
|
$
|
44.46
|
|
* Average customers during
period is calculated by adding the number of total customers, including reseller
customers, at the beginning of the first month of the 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 included 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
customers. 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 is performed by first dividing the total number of
postpay and reseller customers who disconnect service during the period by the
number of months in such period, and then dividing 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 expenses, below.
37
Operating
revenues increased $126.1 million, or 18%, to $837.2 million
in 2006 from $711.1 million in 2005.
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Retail service
|
|
$
|
678,970
|
|
$
|
592,167
|
|
Inbound roaming
|
|
35,344
|
|
29,875
|
|
Long-distance
and other service revenues
|
|
55,768
|
|
49,597
|
|
Service Revenues
|
|
770,082
|
|
671,639
|
|
Equipment sales
|
|
67,154
|
|
39,432
|
|
|
|
$
|
837,236
|
|
$
|
711,071
|
|
Service
revenues increased $98.5 million, or 15%, to $770.1 million
in 2006 from $671.6 million in 2005. Service revenues primarily consist of: (i)
charges for access, airtime, roaming, recovery of regulatory costs and
value-added services, including data products and services, provided to U.S.
Cellulars retail customers and to end users through third party resellers (retail
service); (ii) charges to other wireless carriers whose customers use U.S.
Cellulars wireless systems when roaming (inbound roaming); and (iii) charges
for long-distance calls made on U.S. Cellulars systems. The increase in service revenues in 2006 was
primarily due to the growth in the number of retail customers, which increased
10% since March 31, 2005, and a 4% increase in monthly service revenue per
customer, which averaged $46.22 in the first three months of 2006 and $44.46 in
the first three months of 2005. See
footnote 6 to the table of summarized operating data in Results of Operations
above for the calculation of average monthly service revenue per customer.
Retail
service revenues increased $86.8 million, or 15%, to $679.0
million in 2006 from $592.2 million in 2005. Growth in U.S. Cellulars average
customer base and an increase in average monthly retail revenue per customer,
driven by growth in revenues from data services, were the primary reasons for
the increase in retail service revenue. Average monthly retail service revenue
per customer increased 4% to $40.75 in 2006 from $39.20 in 2005.
The
increase in the average number of customers was primarily driven by the 446,000
net new customer additions that U.S. Cellular generated from its marketing
(including reseller) distribution channels over the past twelve months. The
average number of customers was also affected by the timing of acquisitions, divestitures
and exchanges, including the acquisition of a market in April 2005 and the
exchange of markets in December 2005.
U.S.
Cellular anticipates that growth in its customer base will be lower in the
future, primarily as a result of increased competition and higher penetration
in its markets. 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.
Monthly retail
minutes of use per customer increased to 658 in 2006 from 584 in 2005,
primarily driven by U.S. Cellulars focus on designing sales incentive programs
and customer billing rate plans to stimulate overall usage. The impact on
retail service revenue of the increases in average monthly minutes of use was
offset by decreases in average revenue per minute of use in both years. The
decreases in average revenue per minute of use reflect the impact of increasing
competition, which has led to the inclusion of an increasing number of minutes
in package pricing plans and the inclusion of features such as unlimited night
and weekend minutes and unlimited incoming call minutes in certain pricing
plans. Additionally, the percentage of U.S. Cellulars customer base
represented by prepaid and reseller customers, which generate lower average
revenue per customer than postpay customers, increased from 14.6% at March 31,
2005 to over 16.4% at March 31, 2006. U.S. Cellular anticipates that its
average revenue per minute of use will continue to decline in the future,
reflecting increased competition and continued penetration of the consumer
market.
Revenues from data
products and services increased to $44.3 million in 2006 from $28.8 million in
2005, as U.S. Cellular continued to enhance its easyedgeSM products and introduce new offerings such as
SpeedTalkSM, a
push-to-talk service, and BlackBerry® handsets and service.
38
Inbound
roaming revenues increased $5.4 million, or 18%, to $35.3
million in 2006 from $29.9 million in 2005.
The increase in revenues was related primarily to an increase in roaming
minutes of use, partially offset by a decrease in revenue per roaming minute of
use. The increase in inbound roaming
minutes of use was driven primarily by the overall growth in the number of
customers throughout the wireless industry. The decline in revenue per minute
of use is primarily due to the general downward trend in negotiated rates.
U.S. Cellular
anticipates that inbound roaming minutes of use will continue to grow over the
next few years, reflecting continuing industry-wide growth in customers but
that the rate of growth will decline due to higher penetration of the consumer
wireless markets. In addition, U.S. Cellular anticipates that the rate of
decline in average inbound roaming revenue per minute of use will be lower over
the next few years, reflecting the wireless industry trend toward longer term
negotiated rates.
Long-distance
and other service revenues increased $6.2 million, or 12%, to
$55.8 million in 2006 from $49.6 million in 2005. The increase primarily
reflected a $4.1 million increase in long-distance revenues and a $2.1 million
increase in rental revenues from other wireless carriers who lease space on
U.S. Cellulars towers. The increase in long-distance revenues was driven by an
increase in the volume of long-distance calls billed both to U.S. Cellulars
customers and to other wireless carriers whose customers used U.S. Cellulars
systems to make long-distance calls. The increase in tower rental revenues was
driven by the increase in tower space lease agreements in effect.
Equipment
sales revenues increased $27.8 million, or 70%, to $67.2
million in 2006 from $39.4 million in 2005. Equipment sales revenues include
revenues from sales of handsets and related accessories to both new and
existing customers, as well as revenues from sales of handsets to agents. All
equipment sales revenues are recorded net of anticipated rebates.
U.S. Cellular
continues to offer a competitive line of quality handsets to both new and
existing customers. U.S. Cellulars customer retention efforts include offering
new handsets at discounted prices to existing customers as the expiration date
of the customers service contract approaches. U.S. Cellular also continues to
sell handsets to agents; this practice enables U.S. Cellular to provide better
control over the quality of handsets sold to its customers, establish roaming
preferences and earn quantity discounts from handset manufacturers which are
passed along to agents. U.S. Cellular anticipates that it will continue to sell
handsets to agents in the future.
The increase in equipment sales revenues in 2006 was driven by increases in
both average revenue per handset sold and in the number of handsets sold.
Average revenue per handset sold increased in 2006, primarily due to changes in
the mix of handsets sold and promotional discounts. The number of handsets sold
increased 23% in 2006, partly due to sales of handsets to existing customers to
replace non-GPS enabled handsets and increased sales of handsets to agents. The
number of customers added to U.S. Cellulars customer base through its
marketing distribution channels (gross customer additions), one of the
primary drivers of equipment sales revenues, increased 2% in 2006.
Operating
expenses increased $94.0 million, or 14%, to $765.5 million
in 2006 from $671.5 million in 2005. The major components of operating expenses
are shown in the table below.
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
System operations
(exclusive of depreciation, amortization and accretion included below)
|
|
$
|
154,855
|
|
$
|
138,471
|
|
Cost of equipment sold
|
|
143,316
|
|
127,248
|
|
Selling, general and
administrative
|
|
325,618
|
|
278,330
|
|
Depreciation,
amortization and accretion
|
|
141,726
|
|
127,493
|
|
|
|
$
|
765,515
|
|
$
|
671,542
|
|
System operations expenses
(excluding depreciation, amortization and
accretion) increased $16.4 million, or 12%, to $154.9 million in
2006 from $138.5 million in 2005. 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.
39
Key
components of the increase in total system operations expenses were as follows:
· Maintenance,
utility and cell site expenses increased $11.8 million, or 24%, in 2006,
primarily driven by increases in the number of cell sites within U.S. Cellulars
network. The number of cell sites totaled 5,438 and 4,899 as of March 31, 2006
and 2005, respectively, as U.S. Cellular continued to grow by expanding and
enhancing coverage in its existing markets and also through acquisitions of
existing wireless operations.
· The
cost of network usage for U.S. Cellulars systems increased $5.9 million, or
11%, as total minutes used on U.S. Cellulars systems increased 33% in 2006,
mostly offset by the ongoing reduction in the per-minute cost of usage for U.S.
Cellulars network; such network usage costs represent the costs U.S. Cellular
incurs to deliver minutes of use on its network to interconnecting wireline
networks.
· Expenses
incurred when U.S. Cellulars customers used other systems while roaming
decreased $1.3 million, or 4%, primarily due to the reduction in cost per
minute which resulted from the reduction in negotiated roaming rates.
In
total, management 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 systems 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 systems and by U.S. Cellulars
customers on other systems 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 systems and on other carriers
networks.
Cost of equipment sold increased $16.1
million, or 13%, to $143.3 million in 2006 from $127.2 million in 2005. The
increase was due primarily to an increase in the number of handsets sold (23%),
as discussed above. The effect of the increase in the number of handsets sold
was partially offset by a decrease in the average cost per handset sold (8%),
which reflected changes in both the mix of handsets sold and promotional
discounts.
Selling, general and administrative expenses
increased $47.3 million, or 17%, to $325.6 million in 2006 from $278.3 million
in 2005. 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 and
the majority of U.S. Cellulars corporate expenses.
The increase in selling, general and administrative expenses in 2006
reflects higher employee-related and other expenses associated with acquiring,
serving and retaining customers, primarily as a result of a 10% increase in
U.S. Cellulars customer base and a 5% increase in full-time equivalent
employees. Key components of the increase in selling, general and
administrative expenses were as follows:
· a $12.1 million
increase in advertising expenses primarily due to the increase in marketing of
the U.S. Cellular brand in newly acquired and recently launched markets as well
as increases in specific sponsorships and direct and segment marketing
programs;
· a $17.0 million
increase primarily related to agent-related and sales employee-related expenses
driven by the increase in full-time sales employee equivalents and the increase
in retention-related activities. New employees
were added primarily in newly acquired and recently launched markets since
March 31, 2005. The increase in retention-related agent activities was
primarily driven by the 29% increase in retention handsets sold and the
spending on retention activities that were focused on providing wireless
911-capable handsets to customers who did not previously have such handsets;
· a $7.0 million
increase in expenses related to the operations of U.S Cellulars corporate
office and customer care centers, primarily due to the 10% increase in the
customer base;
· a $4.6 million
increase in stock-based compensation expense primarily due to the
implementation of FASB Statement of Financial Accounting Standards (SFAS) No.
123 (revised) (SFAS 123(R)), Share-Based Payment, as of January 1, 2006.
· a $4.9 million
increase in expenses related to federal universal service fund contributions
and other regulatory fees and taxes.
Most of the expenses related to universal service fund contributions are
offset by increases in retail service revenues for amounts passed through to
customers; and
· a $1.7 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.
40
Sales and marketing cost per gross customer
addition increased 4% to $412 in 2006 from $396 in 2005, primarily due to
increased agent-related expenses, employee-related expenses and advertising
expenses, partially offset by reduced losses on sales of handsets.
Management uses the sales and marketing costs
per gross customer addition measurement to assess both the cost of acquiring
customers on a per gross customer addition basis and the efficiency of its
marketing efforts. Sales and marketing cost per gross customer addition
is not calculable using financial information derived directly from the
Consolidated Statements of Operations.
The definition of sales and marketing cost per gross customer addition
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 addition for each period:
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands,
except per customer amounts)
|
|
Components of
cost:
|
|
|
|
|
|
Selling, general and administrative expenses related
to the acquisition of new customers (1)
|
|
$
|
144,990
|
|
$
|
120,552
|
|
Cost of equipment sold to new customers (2)
|
|
104,372
|
|
95,597
|
|
Less equipment sales revenue from new customers (3)
|
|
(70,437
|
)
|
(47,582
|
)
|
Total costs
|
|
$
|
178,925
|
|
$
|
168,567
|
|
Gross customer
additions (000s) (4)
|
|
434
|
|
426
|
|
Sales and marketing cost
per gross customer addition
|
|
$
|
412
|
|
$
|
396
|
|
(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
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses, as reported
|
|
$
|
325,618
|
|
$
|
278,330
|
|
Less expenses related
to serving and retaining customers
|
|
(180,628
|
)
|
(157,778
|
)
|
Selling, general and administrative expenses related to the
acquisition of new customers
|
|
$
|
144,990
|
|
$
|
120,552
|
|
(2) Cost of equipment sold
to new customers is reconciled to cost of equipment sold as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Cost of equipment sold
as reported
|
|
$
|
143,316
|
|
$
|
127,248
|
|
Less cost of equipment
sold related to the retention of existing customers
|
|
(38,944
|
)
|
(31,651
|
)
|
Cost of equipment sold to new customers
|
|
$
|
104,372
|
|
$
|
95,597
|
|
(3) Equipment sales revenue
from new customers is reconciled to equipment sales revenues as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Equipment sales revenue
as reported
|
|
$
|
67,154
|
|
$
|
39,432
|
|
Less equipment sales
revenues related to the retention of existing customers, excluding agent
rebates
|
|
(14,045
|
)
|
(5,437
|
)
|
Add agent rebate
reductions of equipment sales revenues related to the retention of existing
customers
|
|
17,328
|
|
13,587
|
|
Equipment sales revenues from new customers
|
|
$
|
70,437
|
|
$
|
47,582
|
|
(4) Gross customer additions
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.
41
Monthly general and administrative expenses per customer, including the net
costs related to the renewal or upgrade of service contracts of existing U.S.
Cellular customers (net customer retention costs), increased 2% to $13.38 in
2006 from $13.08 in 2005, primarily due to the increase in employee-related
expenses associated with acquiring, serving and retaining customers. Also, in
2006, U.S. Cellular increased spending on retention activities that were focused
on providing wireless 911-capable handsets to customers who did not previously
have such handsets.
Management uses the monthly general and administrative expenses per
customer 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:
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands,
except per customer amounts)
|
|
Components of cost (1)
|
|
|
|
|
|
Selling, general and administrative expenses as
reported
|
|
$
|
325,618
|
|
$
|
278,330
|
|
Less selling, general and administrative
expenses related to the acquisition of new customers
|
|
(144,990
|
)
|
(120,552
|
)
|
Add cost of equipment sold related to the
retention
of existing customers
|
|
38,944
|
|
31,651
|
|
Less equipment sales revenues related to the
retention
of existing customers, excluding agent rebates
|
|
(14,045
|
)
|
(5,437
|
)
|
Add agent rebate reductions of equipment
sales revenues related to the retention of existing customers
|
|
17,328
|
|
13,587
|
|
Net cost of serving and retaining customers
|
|
$
|
222,855
|
|
$
|
197,579
|
|
Divided by average customers during period
(000s) (2)
|
|
5,554
|
|
5,035
|
|
Divided by three months in each period
|
|
3
|
|
3
|
|
|
|
|
|
|
|
Average
monthly general and administrative expenses per customer
|
|
$
|
13.38
|
|
$
|
13.08
|
|
(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 previously defined in footnote 6 to the table of summarized operating data
in Results of Operations above.
Depreciation, amortization and
accretion expense increased $14.2 million, or 11%, to $141.7
million in 2006 from $127.5 million in 2005.
Depreciation expense
increased $12.5 million, or 11%, to $129.1 million in 2006 from $116.6 million
in 2005. The majority of the increase reflects a higher average fixed assets
balance, which increased 13% for the period from January 1 through March 31,
2006 as compared to the same period in the prior year. The increase in fixed assets in 2006 resulted
from the following factors:
· the
addition of 539 cell sites to U.S. Cellulars network since March 31, 2005,
including those built to improve coverage and capacity in U.S. Cellulars
markets, both in existing service areas as well as in areas where U.S. Cellular
has recently launched service; and
· the
addition of radio channels and switching capacity to U.S. Cellulars network to
accommodate increased usage.
In 2006,
depreciation expense included charges of $3.5 million related to disposals of
assets, trade-ins of older assets for replacement assets and write-offs of TDMA
equipment upon disposal or consignment for future sale. In 2005, depreciation expense included
charges of $6.6 million related to such disposals, trade-ins and write-offs.
See Financial
Resources and Liquidity and Capital Resources for further discussions of
U.S. Cellulars capital expenditures.
42
Operating
Income
Operating
income increased $32.2 million, or 81%, to $71.7 million in
2006 from $39.5 million in 2005. The operating income margin (as a percent of
service revenues) was 9.3% in 2006 and 5.9% in 2005.
The increases in
operating income and operating income margin were due to the fact that
operating revenues increased more, in both dollar and percentage terms, than
operating expenses as a result of factors which are described in detail in
Operating Revenues and Operating Expenses above.
U.S.
Cellular expects the above factors to continue to have an effect on operating
income and operating income 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 income margin to
fluctuate over the next several quarters.
The
following are estimates of full-year 2006 service revenues; depreciation,
amortization and accretion expenses; operating income; and net retail customer
additions. Except for disclosed changes, such estimates are based on U.S.
Cellulars currently owned and operated 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 28, 2006 and continue to represent U.S. Cellulars views as of the date of
filing this 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. U.S. Cellular undertakes no duty to update such information
whether as a result of new information, future events or otherwise. There can
be no assurance that final results will not differ materially from these
estimated results.
|
|
2006 Estimated Results
|
|
2005 Actual Results
|
|
Service revenues
|
|
Approx. $3.2 billion
|
|
$
|
2.83 billion
|
|
Depreciation,
amortization and accretion expenses
|
|
$
|
585 million
|
|
$
|
509.1 million
|
|
Operating income (1)(2)
|
|
$
|
250-300 million
|
|
$
|
244.3 million
|
|
Net retail customer additions
|
|
370,000 - 400,000
|
|
411,000
|
|
(1) Includes
gain of $44.7 million resulting from sale of assets in 2005 Actual Results.
(2) Reflects
estimates of stock-based compensation expense to be recorded pursuant to U.S.
Cellulars implementation of SFAS 123(R) effective January 1, 2006.
43
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 19,500
or 2%, since March 31, 2005 to 1,191,400.
An equivalent access line is derived by converting a high-capacity data
line to an estimated equivalent number, in terms of capacity, of switched
access lines.
TDS Telecoms incumbent
local exchange carrier subsidiaries served 742,300 equivalent access lines at
March 31, 2006, a 1% (8,300 equivalent access lines) increase from 734,000
equivalent access lines at March 31, 2005.
TDS Telecoms
competitive local exchange carrier subsidiary served 449,200 equivalent access
lines at March 31, 2006, a 3% (11,200 equivalent access lines) increase from
438,000 equivalent access lines served at March 31, 2005.
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Incumbent Local Exchange Carrier Operations
|
|
|
|
|
|
Operating Revenues
|
|
$
|
161,026
|
|
$
|
161,843
|
|
Operating Expenses
|
|
123,608
|
|
121,261
|
|
Operating Income
|
|
37,418
|
|
40,582
|
|
|
|
|
|
|
|
Competitive Local Exchange Carrier Operations
|
|
|
|
|
|
Operating Revenues
|
|
59,869
|
|
59,267
|
|
Operating Expenses
|
|
58,719
|
|
60,689
|
|
Operating Income (Loss)
|
|
1,150
|
|
(1,422
|
)
|
|
|
|
|
|
|
Intercompany revenue elimination
|
|
(1,512
|
)
|
(1,261
|
)
|
Intercompany expense elimination
|
|
(1,512
|
)
|
(1,261
|
)
|
|
|
|
|
|
|
TDS Telecom Operating Income
|
|
$
|
38,568
|
|
$
|
39,160
|
|
TDS Telecom
operating expenses include a $0.7 million increase in stock-based compensation
expense primarily due to the implementation of FASB Statement of Financial
Accounting Standards (SFAS) No. 123 (revised) (SFAS 123(R)), Share Based
Payment, as of January 1, 2006.
Operating
income decreased $0.6 million, or 2%, to $38.6 million in the
three months ended March 31, 2006 from $39.2 million in 2005.
The following
estimates were updated by TDS Telecom on July 28, 2006 and continue to
represent TDS Telecoms views as of the date of filing this 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 Telecom undertakes no legal duty
to update such information whether as a result of new information, future
events or otherwise.
|
|
2006 Estimated
Results
|
|
2005 Actual
Results
|
|
Incumbent Local Exchange Operations:
|
|
|
|
|
|
Revenues
|
|
$
|
645-655 million
|
|
$
|
669.7 million
|
|
Depreciation and amortization expenses
|
|
$
|
135 million
|
|
$
|
135.2 million
|
|
Operating income (1)
|
|
$
|
145-155 million
|
|
$
|
168.9 million
|
|
|
|
|
|
|
|
Competitive Local Exchange Operations:
|
|
|
|
|
|
Revenues
|
|
$
|
230-240 million
|
|
$
|
241.3 million
|
|
Depreciation and amortization expenses
|
|
$
|
25 million
|
|
$
|
30.4 million
|
|
Operating
income (loss) (1)
|
|
$
|
approx. (5) million
|
|
$
|
(6.2) million
|
|
(1) Reflects
estimates of stock-based compensation expense to be recorded pursuant to TDS
Telecoms implementation of SFAS 123(R) effective January 1, 2006.
44
Incumbent
Local Exchange Carrier Operations
Operating
revenues decreased $0.8 million, or 0.5%, to $161.0 million
in the three months ended March 31, 2006 from $161.8 million in 2005.
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Local service
|
|
$
|
50,552
|
|
$
|
49,627
|
|
Network access and long
distance
|
|
89,257
|
|
90,096
|
|
Miscellaneous
|
|
21,217
|
|
22,120
|
|
|
|
$
|
161,026
|
|
$
|
161,843
|
|
Local service revenues increased
$0.9 million, or 2%, to $50.5 million in 2006 from $49.6 million in 2005. Revenue increases from advanced calling
services and interconnection more than offset the revenue decrease from access
line losses. Physical access lines
decreased 3%, of which 34% was due to the loss of second lines significantly
affected by digital subscriber line substitution.
Network
access and long distance revenues decreased $0.8 million, or
1%, to $89.3 million in 2006 from $90.1 million in 2005. Revenues from long distance service increased
$1.7 million in 2006 reflecting an increased number of long distance customers
as well as an increase in monthly average revenue per customer. As of March 31,
2006, TDS Telecom incumbent local exchange carrier operations were providing
long-distance service to 327,100 customers compared to 302,400 customers at
March 31, 2005. Revenues generated from
network usage, including compensation from state and national revenue pools,
decreased $2.5 million, reflecting a 2.9% decrease in access minutes of use in
2006.
Miscellaneous
revenues decreased $0.9 million or 4%, to $21.2 million in
2006 from $22.1 million in 2005.
Revenues from digital subscriber lines increased 44.6%, but were offset
by decreases in dial-up Internet, digital broadcast service, bundled services
and other non-regulated services revenues.
Additionally, bundled service discounts increased in the first quarter
of 2006 as compared to 2005. As of March
31, 2006, TDS Telecom incumbent local exchange carrier operations were
providing dial-up Internet service and digital subscriber line service to
90,800 and 75,300 customers, respectively, as compared to 98,200 dial-up
Internet service customers and 49,300 digital subscriber line service customers
as of March 31, 2005.
Operating
expenses increased by $2.3 million, or 2%, to $123.6 million
in 2006 from $121.3 million in 2005, primarily reflecting increased cost of
services and products.
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Cost of services and
products (exclusive of depreciation and amortization included below)
|
|
$
|
48,832
|
|
$
|
43,739
|
|
Selling, general and
administrative expense
|
|
41,200
|
|
43,258
|
|
Depreciation and
amortization
|
|
33,576
|
|
34,264
|
|
|
|
$
|
123,608
|
|
$
|
121,261
|
|
Cost of services and products
increased $5.1 million or 12%, to $48.8 million in 2006 from $43.7 million in
2005. Increases in line charges and circuit expense and other related cost of
goods sold associated with growth in digital subscriber line customers resulted
in $1.9 million of expense increases. Growth in long distance customers
combined with increased usage stimulated by call plans increased expense $1.1
million. The remainder of the increase was driven by increased labor and
contractor charges.
Selling, general and administrative expenses
decreased by $2.1 million or 5%, to $41.2 million from $43.3 million in 2005.
Depreciation and amortization expenses
decreased $0.7 million, or 2%, to $33.6 million in 2006 from $34.3 million in
2005 primarily due to certain asset categories becoming fully depreciated.
Operating
income decreased $3.2 million, or 8%, to $37.4 million in
2006 from $40.6 million in 2005 primarily as a result of the increase in cost
of services and products discussed above.
45
Competitive
Local Exchange Carrier Operations
Operating revenues (revenue from
the provision of local and long distance telephone service and data services)
increased $0.6 million, or 1.0%, to $59.9 million in the three months ended
March 31, 2006 from $59.3 million in 2005.
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Operating Revenues
|
|
$
|
59,869
|
|
$
|
59,267
|
|
|
|
|
|
|
|
|
|
Retail revenues increased $0.8
million, or 1% to $53.8 million in 2006 from $53.0 million in 2005, primarily
due to customer growth partially offset by lower average revenue per customer
due to competitive pressures on voice and data product pricing.
Wholesale revenues, which
represent charges to other carriers, decreased $0.2 million, or 3% to $6.1
million in 2006 from $6.3 million in 2005 primarily due to access rate
decreases.
Operating
expenses decreased $2.0
million, or 3%, to $58.7 million in 2006 from $60.7 million in 2005.
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Cost of services and
products (exclusive of depreciation and amortization included below)
|
|
$
|
23,617
|
|
$
|
24,124
|
|
Selling, general and
administrative expense
|
|
28,449
|
|
29,262
|
|
Depreciation and
amortization
|
|
6,654
|
|
7,303
|
|
|
|
$
|
58,720
|
|
$
|
60,689
|
|
Cost of
services and products decreased $0.5 million, or 2%, to $23.6
million in 2006 from $24.1 million in 2005.
In the first quarter of 2006, the CLEC recognized a $2.9 million
settlement with Qwest Communications related to pricing of certain services
offered by Qwest. The settlement reduced
the cost of services for the first quarter of 2006. This was partially offset by a $0.9 million
increase in expense due to access line growth and a $1.5 million increase in
other related expenses.
Selling,
general and administrative expenses decreased $0.8 million,
or 3%, to $28.4 million in 2006 from $29.3 million in 2005 primarily due to a
decline in administrative expenses related to securing continued access to the
unbundled network elements of incumbent carriers.
Depreciation
and amortization expenses decreased $0.6 million, or 9%, to
$6.7 million in 2006 from $7.3 million in 2005 as a result of decreases in
certain assets as they become fully depreciated.
Operating income increased $2.6
million to $1.2 million in 2006 from a $1.4 million operating loss in 2005,
reflecting the increase in operating revenues and decrease in operating
expenses discussed above.
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 increased equivalent access line levels while
maintaining excellent customer satisfaction.
46
RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48)
was issued in July 2006. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in
accordance with SFAS 109, Accounting for Income Taxes. The interpretation prescribes a recognition
threshold and measurement attribute for the recognition and measurement of a
tax position taken or expected to be taken in an income tax return. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. TDS is currently reviewing the requirements
of FIN 48 and has not yet determined the impact, if any, on its financial
position or results of operations.
FINANCIAL RESOURCES
TDS operates a
capital- and sales and marketing-intensive business. In recent years, TDS has generated cash from
its operating activities, received cash proceeds from divestitures, used its
short-term credit facilities and used long-term debt financing to fund its
construction costs and operating expenses.
TDS anticipates further increases in wireless customers, revenues,
operating expenses, cash flows from operating activities and fixed asset
additions in the future. 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 for the periods shown:
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Cash flows from (used
in)
|
|
|
|
|
|
Operating
activities
|
|
$
|
220,576
|
|
$
|
150,159
|
|
Investing
activities
|
|
(147,829
|
)
|
(256,275
|
)
|
Financing
activities
|
|
(91,938
|
)
|
93,407
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(19,191
|
)
|
$
|
(12,709
|
)
|
Cash
Flows from Operating Activities
TDS generated
substantial cash flows from operating activities during the first quarters of
2006 and 2005. Such cash flows were $220.6 million and $150.2 million,
respectively. Excluding changes in
assets and liabilities from operations, cash flows from operating activities
totaled $229.7 million in 2006 and $202.6 million in 2005. Changes in assets
and liabilities from operations required $9.1 million in 2006 and $52.4 million
in 2005, reflecting higher net working capital balances required to support
higher levels of business activity as well as differences in the timing of
collections and payments.
The following
table is a summary of the components of cash flows from operating activities:
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Net income
|
|
$
|
39,875
|
|
$
|
23,049
|
|
Adjustments to
reconcile net income to net cash provided by operating activities
|
|
189,843
|
|
179,586
|
|
|
|
229,718
|
|
202,635
|
|
Changes in assets and
liabilities
|
|
(9,142
|
)
|
(52,476
|
)
|
|
|
$
|
220,576
|
|
$
|
150,159
|
|
47
Cash Flows from Investing Activities
TDS makes substantial
investments each year to acquire wireless licenses and properties and to
construct, operate and upgrade modern high-quality communications networks and
facilities as a basis for creating long-term value for shareholders. 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 $147.8 million in the
first three months of 2006 compared to $256.3 million 2005.
Cash
used for property, plant and equipment and system development totaled $146.4
million in 2006 and $134.8 million in 2005. 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 $119.8 million in 2006 and $112.8 million
in 2005 representing expenditures to construct cell sites, increase capacity in
existing cell sites and switches, remodel new and existing retail stores and
continue the development of U.S. Cellulars office systems. TDS Telecoms
capital expenditures for its incumbent local exchange carrier operations
totaled $17.1 million in 2006 and $16.1 million in 2005 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 $2.7 million in 2006 and
$4.2 million in 2005 for switching and other network facilities. Corporate and
other capital expenditures totaled $6.8 million in 2006 and $1.7 million in
2005. The increase of $5 million represents construction and plant additions at
both Corporate and Suttle Straus.
In 2005, U.S.
Cellulars consolidated subsidiary, Carroll Wireless, paid $120.9 million to
the FCC to complete the payment for the licenses in which it was the winning
bidder in the FCCs Auction 58. See
Acquisitions, Exchanges and Divestitures in the Liquidity and Capital Resources
section below for more information on this transaction.
Cash Flows from Financing
Activities
Cash flows from financing
activities primarily reflect issuances and repayments of short-term debt,
proceeds from issuance of long-term debt and from entering into forward
contracts, repayments of long-term debt and repurchases of common shares. TDS has used short-term debt to finance
acquisitions, to repurchase common shares and for other general corporate
purposes. Cash flows from operating activities, proceeds from forward contracts
and, from time to time, the sale of non-strategic cellular and other
investments have been used to reduce short-term debt. In addition, from time to
time, TDS has used proceeds from the issuance of long-term debt to reduce
short-term debt.
Cash flows from financing
activities required $91.9 million in the three months ended March 31, 2006, and
provided $93.4 million in the same period of 2005. Redemptions of medium-term notes required
$35.0 million in 2006 and $17.2 million in 2005. Cash received from short term
borrowings on revolving lines of credit provided $55.0 million in 2006 while
repayments required $105.0 million in 2006. In 2005, short-term borrowings
provided $165.0 million while repayments required $60.0 million. Issuances of
long-term debt, consisting of $116.25 million of 6.625% notes by TDS provided
proceeds of $112.8 million in 2005 after underwriting discounts. Repayments of
long-term debt, including RUS debt, required $110.5 million in 2005. Proceeds
from re-issuances of treasury shares in connection with employee benefit plans
provided $6.9 million in 2006 and $13.5 million in 2005. Dividends paid on TDS common shares and
Preferred Shares, required $10.7 million in 2006 and $10.1 million in 2005.
LIQUIDITY AND CAPITAL RESOURCES
As indicated above, TDS
generated cash flows from operating activities of $220.6 million and $150.2
million during the first quarters of 2006 and 2005, respectively. At March 31, 2006, TDS had cash and cash
equivalents of $1,076.6 million. TDS
believes that cash flows from operating activities, existing cash and cash
equivalents and funds available from the revolving credit facilities provide
substantial financial flexibility for TDS to meet both its short- and long-term
needs for the foreseeable future. In addition, TDS and its subsidiaries may
have access to public and private capital markets to help meet their long-term
financing needs.
48
However, the availability
of external financial resources is dependent on economic events, business
developments, technological changes, financial conditions or other factors,
some 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 cannot
provide assurances that circumstances that could materially adversely affect
TDSs liquidity or capital resources will not occur. Economic downturns,
changes in financial markets or other factors could affect TDSs liquidity and
availability of 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 and acquisition programs.
Deutsche Telekom
paid a dividend of EUR 0.72 per share in May 2006. Using a weighted-average
exchange rate of $1.27 per EUR, TDS will record dividend income of $120.3
million, before taxes, in the second quarter of 2006.
At an Extraordinary
General Meeting held on July 25, 2006, shareholders of Vodafone approved a
Return of Capital (Special Distribution) of £0.15 per share (£1.50 per
American Depositary Receipt (ADR)) and a Share Consolidation under which
every 8 ADRs were consolidated into 7 ADRs.
The Share Consolidation
was effective July 28, 2006 and the Special Distribution was paid on August 18,
2006. As a result of the Share Consolidation, U.S. Cellulars previous
10,245,370 ADRs were consolidated into 8,964,698 ADRs and TDS Telecoms
previous 2,700,545 ADRs were consolidated into 2,362,976 ADRs. Also, U.S.
Cellular received approximately $28.6 million and TDS Telecom received approximately
$7.6 million from the Special Distribution and will record dividend
income, before taxes, of this amount in the third quarter of 2006.
Pursuant to terms of the forward
contracts, the contract collars were adjusted as a result of the Special
Dividend and the Share Consolidation. After adjustment, the collars had
downside limits (floor) ranging from $17.22 to $18.37 and upside potential
(ceiling) ranging from $17.22 to $19.11. In the case of two forward contracts, subsidiaries
of TDS made a dividend substitution payment in the amount of $3.2 million to
the counterparties in lieu of further adjustments to the collars for such
forward contracts.
Revolving
Credit Facilities
TDS has a $600 million
revolving credit facility available for general corporate purposes. At March 31, 2006, letters of credit were
$3.4 million, leaving $596.6 million available for use. Borrowings under the
revolving credit facility bear interest at the London InterBank Offered Rate (LIBOR)
plus a contractual spread based on TDSs credit rating (the one-month LIBOR was
4.83% at March 31, 2006). At March 31,
2006, the contractual spread was 60 basis points. TDS may select borrowing
periods of either seven days or one, two, three or six months. If TDS provides
less than two days notice of intent to borrow, interest on borrowings is at
the prime rate less 50 basis points (the prime rate was 7.75% at March 31,
2006). This credit facility expires in December 2009.
TDS also has $75 million
of direct bank lines of credit at March 31, 2006, 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 7.75% at March 31, 2006).
U.S. Cellular has a $700
million revolving credit facility available for general corporate
purposes. At March 31, 2006, outstanding
notes payable and letters of credit were $85.0 million and $0.5 million,
respectively, leaving $614.5 million available for use. Borrowings under the
revolving credit facility bear interest at the London InterBank Offered Rate (LIBOR)
rate plus a contractual spread based on U.S. Cellulars credit rating the (one-month
LIBOR was 4.83% at March 31, 2006). At
March 31, 2006, the contractual spread was 60 basis points. U.S. Cellular may select borrowing periods of
either seven days or one, two, three or six months. If U.S. Cellular provides
less than two days notice of intent to borrow, interest on borrowings is the
prime rate less 50 basis points. This
credit facility expires in December 2009.
49
TDSs and U.S. Cellulars interest costs on their
revolving credit facilities would 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. 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. At March 31, 2006, TDSs and U.S. Cellulars credit
ratings are as follows:
Moodys Investor Service
|
|
Baa3
under review for possible further downgrade
|
Standard &
Poors
|
|
A- on credit watch with negative implications
|
Fitch
|
|
BBB+ on
rating watch negative
|
The maturity dates of
certain of TDSs and U.S. Cellulars revolving 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 negative and affirmative covenants, maintain certain financial ratios
and represent certain matters at the time of each borrowing. On November 10,
2005 TDS and U.S. Cellular announced that they would restate certain financial
statements which caused TDS and U.S. Cellular to be late in certain SEC
filings. The restatements and the late filings resulted in defaults under the
revolving credit facilities and one line of credit facility. However, TDS and
U.S. Cellular were not in violation of any covenants that require TDS and U.S.
Cellular to maintain certain financial ratios and TDS and U.S. Cellular did not
fail to make any scheduled payments. TDS
and U.S. Cellular received waivers from the lenders associated with the
revolving credit facilities, under which the lenders agreed to waive any
defaults that may have occurred as a result of the restatements and late
filings. The waivers require the Form 10-K for the year ended December 31, 2005
to be filed by August 31, 2006, the Form 10-Q for the quarter ended March 31,
2006 to be filed within 30 days after the filing of the Form 10-K for the year
ended December 31, 2005 and the Form 10-Q for the quarter ended June 30, 2006
to be filed within 45 days after the filing of the Form 10-Q for the quarter
ended March 31, 2006. The Form 10-K for the year ended December 31, 2005 was
filed on July 28, 2006.
Long-term
Financing
The late filing of TDSs and U.S. Cellulars Forms
10-K for the year ended December 31, 2005 and Forms 10-Q for the quarterly
periods ended March 31, 2006 and June 30, 2006 and the failure to deliver such
Forms 10-K and 10-Q to the trustees of the TDS and U.S. Cellular debt
indentures on a timely basis, resulted in non-compliance under such debt
indentures. However, this non-compliance did not result in an event of default
or a default. TDS and U.S. Cellular believe that non-compliance was cured upon
the filing of their Forms 10-K for the year ended December 31, 2005 and Forms
10-Q for the quarterly period ended March 31, 2006, but that non-compliance
continues to exist with respect to their Forms 10-Q for the quarterly period
ended June 30, 2006. TDS and U.S. Cellular have not failed to make nor do they
expect to fail to make any scheduled payment of principal or interest under
such indentures.
Except as noted above,
TDS believes that it and its subsidiaries were in compliance as of March 31,
2006 with all 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.
50
TDSs 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
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. See Note 20Subsequent Events for additional information
related to the investment in Vodafone ADRs. 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 cellular partnerships in which TDS subsidiaries held
interests into Rural Cellular, and the distribution of Rural Cellular stock in
exchange for these interests.
Subsidiaries of TDS and
U.S. Cellular have 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 by its subsidiary when due. If
shares are delivered in the settlement of the forward contract, TDS and U.S.
Cellular would incur a current tax liability at the time of delivery based on
the difference between the tax basis of the marketable equity securities
delivered and the net amount realized 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 March 31, 2006,
such deferred tax liabilities totaled $913.7 million.
TDS and U.S. Cellular are
required to comply with certain covenants under the forward contracts. On
November 10, 2005 TDS and U.S. Cellular announced that they would restate
certain financial statements which caused them to be late in certain SEC
filings. The restatements and late filings resulted in defaults under certain
of the forward contracts. However, TDS and U.S. Cellular were not in violation
of any covenants that require TDS and U.S. Cellular to maintain certain
financial ratios and TDS and U.S. Cellular did not fail to make any scheduled
payments. TDS and U.S. Cellular received
waivers from the counterparties associated with such forward contracts, under
which the counterparties agreed to waive any defaults that may have occurred as
a result of the restatements and late filings. The waivers require the
Form 10-K for the year ended December 31, 2005 to be filed by August 31, 2006,
the Form 10-Q for the quarter ended March 31, 2006 to be filed within 30 days
after the filing of the Form 10-K for the year ended December 31, 2005 and the
Form 10-Q for the quarter ended June 30, 2006 to be filed within 45 days after
the filing of the Form 10-Q for the quarter ended March 31, 2006. The Form 10-K
for the year ended December 31, 2005 was filed on July 28, 2006.
51
Capital
Expenditures
U.S. Cellulars
anticipated capital expenditures for 2006 primarily reflect plans for
construction, system expansion and the buildout of certain of its licensed
areas. U.S. Cellular plans to finance its construction program using cash flows
from operating activities and short-term financing. U.S. Cellulars estimated
capital spending for 2006 is currently expected to range from $580 million to
$610 million. These expenditures 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 spending for 2006 is currently expected to range from $125 to $140
million. The incumbent local exchange
carriers are expected to spend approximately $105 to $120 million to provide to
upgrades to plant and equipment and to provide enhanced services. The competitive local exchange carrier is
expected to spend approximately $20 million to build switching and other
network facilities to meet the needs of a growing customer base. TDS Telecom
plans to finance its construction program using primarily internally generated
cash.
Acquisitions,
Exchanges and Divestitures
TDS assesses its existing
wireless interests on an ongoing basis with a goal of improving competitiveness
of its operations and maximizing its long-term return on investment. As part of this strategy, TDS reviews
attractive opportunities to acquire additional operating markets, telecommunications
companies and wireless spectrum. In
addition, TDS may seek to divest outright or
include in exchanges for other wireless interests those markets and wireless
interests that are not strategic to its long-term success. TDS may from
time-to-time be engaged in negotiations relating to the acquisition,
divestiture or exchange of companies, strategic properties or wireless
spectrum. In addition, TDS may participate as a bidder, or member of a bidding
group, in auctions administered by the FCC.
U.S. Cellular owns approximately 14% of Midwest
Wireless Communications, LLC, which interest is convertible into approximately
an 11% interest in Midwest Wireless Holdings, LLC, a privately-held wireless
telecommunications company that controls Midwest Wireless Communications. Midwest Wireless Holdings, through
subsidiaries, holds FCC licenses and operates certain wireless markets in
southern Minnesota, northern and eastern Iowa and western Wisconsin. On November 18, 2005, ALLTEL announced that
it had entered into a definitive agreement to acquire Midwest Wireless Holdings
for $1.075 billion in cash, subject to certain conditions, including approval
by the FCC, other governmental authorities and the members of Midwest Wireless
Holdings. On January 31, 2006, U.S. Cellular filed a petition to deny the FCC
license transfer of control applications filed by ALLTEL and Midwest Wireless
Holdings seeking FCC consent to their transaction. That petition is pending. Subject to the outcome of such petition, the
satisfaction of certain conditions and the closing of the foregoing agreement,
U.S. Cellular will be entitled to receive approximately $102.7 million in cash
in consideration with respect to its interest in Midwest Wireless
Communications upon the closing of the acquisition of Midwest Wireless Holdings
by ALLTEL. In addition, U.S. Cellular
owns 49% of an entity, accounted for under the equity method, which owns
approximately 2.9% of Midwest Wireless Holdings. If the transaction with ALLTEL occurs, this
entity will receive cash in consideration for its interest in Midwest Wireless
Holdings. Following that, this entity
will be dissolved and U.S. Cellular will be entitled to receive approximately
$11.4 million in cash. The
net aggregate carrying value of U.S. Cellulars investments in Midwest Wireless
Communications and Midwest Wireless Holdings was approximately $21.7 million at
March 31, 2006.
U.S.
Cellular is a limited partner in Barat Wireless, L.P. (Barat Wireless), an
entity which is participating in the auction of wireless spectrum designated by
the FCC as Auction 66, which began in August 2006. Barat Wireless intends to qualify as a designated
entity and be eligible for discounts with respect to spectrum purchased in
Auction 66.
Barat Wireless is in the process of developing its long-term
business and financing plans. As
of August 25, 2006, U.S. Cellular has made capital contributions and advances
to Barat Wireless and/or its general partner of $79.9 million to provide
initial funding of Barat Wireless participation in Auction 66. U.S. Cellular will consolidate Barat Wireless
and Barat Wireless, Inc., the general partner of Barat Wireless, for financial
reporting purposes, pursuant to the guidelines of FASB Interpretation No. 46R (FIN
46R), as U.S. Cellular anticipates absorbing a majority of Barat Wireless
expected gains or losses. Pending finalization of Barat Wireless permanent
financing plan, and upon request by Barat Wireless, U.S. Cellular may agree to
make additional capital contributions and advances to Barat Wireless and/or its
general partner.
52
U.S.
Cellular is a limited partner in 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.
On
January 6, 2006, the FCC granted Carroll Wireless applications with respect to
16 of the 17 licenses for which it had been the successful bidder and dismissed
one application, relating to Walla Walla, Washington. Following the completion
of Auction 58, the FCC determined that a portion of the Walla Walla license was
already licensed to another party and should not have been included in Auction
58. Accordingly, in 2006, Carroll Wireless received a full refund of the
$228,000 previously paid to the FCC with respect to the Walla Walla license.
Carroll Wireless is in
the process of developing its long-term business and financing plans. As of
March 31, 2006, U.S. Cellular made capital contributions and advances to
Carroll Wireless and/or its general partner of approximately $129.9 million;
$129.7 of this amount is included in Licenses in the Consolidated Balance
Sheets. 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 FIN 46R, as U.S. Cellular anticipates absorbing a majority
of Carroll Wireless expected gains or losses. Pending finalization of Carroll
Wireless permanent financing plan, and upon request by Carroll Wireless, U.S.
Cellular may agree to make additional capital contributions and advances to
Carroll Wireless and/or its general partner. In November 2005, U.S. Cellular
approved additional funding of $1.4 million of which $0.1 million was provided
to Carroll Wireless through March 31, 2006.
In the first quarter of 2005, TDS adjusted the gain on
investments related to its sale to ALLTEL of certain wireless properties on
November 30, 2004. The adjustment of the
gain, which resulted from a working capital adjustment that was finalized in
the first quarter of 2005, increased the total gain on the sale by $0.5 million
to $51.4 million.
In addition, in 2005, U.S. Cellular purchased one new
wireless market and certain minority interests in other wireless markets in
which it already owned a controlling interest for $6.9 million in cash.
Repurchase
of Securities and Dividends
TDS does not have a share
repurchase program as of March 31, 2006. No TDS Common Shares were repurchased
in the three months ended March 31, 2006 or 2005.
U.S. Cellular has an
ongoing authorization from its Board of Directors 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 quarter of 2006 or 2005.
TDS
paid total dividends on its Common Shares and preferred shares of $10.7 million
in the first three months of 2006 and $10.1 million in 2005. TDS paid quarterly
dividends per share of $0.0925 in 2006 and $0.0875 in 2005.
Contractual and Other Obligations
There has been no
material change to Contractual and Other Obligations included in the Managements
Discussion and Analysis of Results of Operations and Financial Condition
included in TDSs Form 10-K for the year ended December 31, 2005.
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.
53
Investments in
Unconsolidated Entities. TDS has certain variable interests
in investments in which TDS holds a minority interest. Such investments totaled $231.2 million as of
March 31, 2006 and are accounted for using either the equity or cost method.
TDSs maximum loss exposure for these variable interests is limited to the
aggregate carrying amount of the investments.
Indemnity Agreements. TDS enters into agreements in the normal
course of business that provide for indemnification of counterparties. These
include certain asset sales and financings with other parties. The terms of the
indemnifications vary by agreement. The events or circumstances that would
require TDS to perform under these indemnities are transaction specific;
however these agreements may require TDS to indemnify the counterparty for
costs and losses incurred from litigation or claims arising from the underlying
transaction. TDS is unable to estimate the maximum potential liability for
these types of indemnifications as the amounts are dependent on the outcome of
future events, the nature and likelihood of which cannot be determined at this
time. Historically, TDS has not made any significant indemnification payments
under such agreements. TDS is party to
an indemnity agreement with T-Mobile regarding certain contingent liabilities
at Aerial Communications for the period prior to Aerials merger into
VoiceStream Wireless in 2000. As of
March 31, 2006, TDS has recorded liabilities of $1.5 million relating to this
indemnity.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
TDS prepares its
consolidated financial statements 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 Summary of Significant Accounting Policies of
the Notes to the Consolidated Financial Statements included in TDSs Form 10-K
for the year ended December 31, 2005.
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.
Management 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
As of March 31, 2006, TDS
reported $1,364.8 million of licenses and $870.1 million of goodwill, as a
result of the acquisitions of interests in wireless licenses and businesses,
and the acquisition of operating telephone companies. Licenses include those won by Carroll
Wireless in the FCC auction completed in February 2005 and license rights
related to licenses that will be received when the 2003 AT&T Wireless
exchange transaction is fully completed.
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 of
its fiscal year. There can be no assurance that upon review at a later date
material impairment charges will not be required.
54
The intangible asset
impairment test consists of comparing the fair value of the intangible asset to
the carrying amount of the intangible asset. If the carrying amount exceeds the
fair value, an impairment loss is recognized for the difference. The goodwill
impairment test is a two-step process. The first step compares the fair value
of the reporting unit as identified in accordance with SFAS No. 142, Goodwill
and Other Intangible Asset (SFAS 142) to its carrying value. If the carrying
amount exceeds the fair value, the second step of the test is performed to
measure the amount of impairment loss, if any. The second step compares the
implied fair value of reporting unit goodwill with the carrying amount of that
goodwill. To calculate the implied fair value of goodwill, an enterprise
allocates the fair value of the reporting unit to all of the assets and
liabilities of that reporting unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and
the fair value was the price paid to acquire the reporting unit. The excess of
the fair value of the reporting unit over the amounts assigned to the assets
and liabilities of the reporting unit is the implied fair value of goodwill. If
the carrying amount of goodwill exceeds the implied fair value of goodwill, an
impairment loss of goodwill is recognized for that difference.
The fair value of an
asset or reporting unit 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 similar performance measures. The use of
these techniques 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.
U.S. Cellular tests
goodwill for impairment at the level of reporting referred to as a reporting
unit. For purposes of impairment testing of goodwill in 2005, U.S. Cellular has
identified five reporting units pursuant to paragraph 30 of SFAS 142. The five
reporting units represent five geographic groupings of FCC licenses,
constituting five geographic service areas. For purposes of impairment testing
of licenses. U.S. Cellular combined its FCC licenses into five units of
accounting pursuant to Emerging Issues Task Force Issue 02-7, Units of
Accounting for Testing Impairment of Indefinite-Lived Intangible Assets (EITF
02-7), and SFAS 142, using the same geographic groupings as its reporting
units.
U.S. Cellular prepares
valuations of each of the five reporting units for purposes of impairment
testing of goodwill. 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. Similarly, U.S. Cellular also prepares valuations (of each of five
units of accounting determined pursuant to EITF 02-7) using an excess earnings
methodology, for purposes of impairment testing of licenses. 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 is valued using a multiple of cash flow
valuation technique for purposes of goodwill impairment testing.
There was no impairment
of licenses or goodwill at U.S. Cellular or TDS Telecom in 2005.
Property, Plant and Equipment
U.S. Cellular and TDS
Telecom 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. U.S.
Cellular and TDS Telecom did not change the useful lives of their property,
plant and equipment in the three months ended March 31, 2006 or 2005.
55
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 flows, 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
a 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 different 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, cash flow
and earnings, are developed based upon the comparable companies. The valuation
multiples are applied to the appropriate financial measures of the asset group
to indicate its value. The income approach uses a discounted cash flow analysis
based on value drivers and risks specific to its asset group. The cash flow
estimates incorporate assumptions that market participants would use in their
estimates of fair value. Key assumptions made in this process are the selection
of a discount rate, estimated future cash flow levels, projected capital
expenditures, and determination of terminal value.
Asset Retirement Obligations
TDS accounts for its
asset retirement obligations in accordance with FASB SFAS No. 143, Accounting
for Asset Retirement Obligations, (SFAS 143) and FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations (FIN 47), which
require 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. At the time the liability is incurred, TDS records a liability equal
to the net present value of the estimated cost of the asset retirement
obligation and increases the carrying amount of the related long-lived asset by
an equal amount. 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 obligations, any difference between the
cost to retire an asset and the recorded liability (including accretion of
discount) is recognized in the Consolidated Statements of Operations as a gain
or loss.
The calculation of the
asset retirement obligation is a critical accounting estimate for TDS 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 generally
include costs to remediate leased land on which U.S. Cellulars cell sites and
switching offices are located. Also, U.S. Cellular is also generally is
required to return leased retail store premises and office space to their
pre-existing conditions.
TDS Telecoms incumbent local exchange carriers have
recorded an asset retirement obligation in accordance with the requirements of
SFAS No. 143 and FIN 47, and a regulatory liability for the costs of removal that
state public utility commissions have required to be recorded for regulatory
accounting purposes. The amounts
recorded for regulatory accounting purposes exceed, in most cases, the amount
required to be recorded in accordance with SFAS No 143 and FIN 47. These amounts combined make up the asset
retirement obligation for the incumbent local exchange carriers. The asset retirement obligation calculated in
accordance with the provisions of SFAS No. 143 and FIN 47 at March 31, 2006 was
$37.0 million. The regulatory liability in excess of the amounts required to be
recorded in accordance with SFAS No. 143 and FIN 47 at March 31, 2006 was $34.4
million.
56
In accordance with
the requirements of SFAS No. 143 and FIN 47, TDS Telecoms competitive local
exchange carrier has recorded an asset retirement obligation of $2.7 million at
March 31, 2006.
The table below summarizes the changes in asset
retirement obligations during the first three months of 2006. 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.
|
|
TDS Telecom
|
|
TDS
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance December 31, 2005
|
|
$
|
90,224
|
|
$
|
70,220
|
|
$
|
2,649
|
|
$
|
163,093
|
|
Additional liabilities accrued
|
|
1,529
|
|
1,429
|
|
|
|
2,958
|
|
Accretion expense
|
|
1,737
|
|
8
|
|
46
|
|
1,791
|
|
Costs of removal incurred in 2006
|
|
|
|
(197
|
)
|
|
|
(197
|
)
|
Ending Balance March
31, 2006
|
|
$
|
93,490
|
|
$
|
71,460
|
|
$
|
2,695
|
|
$
|
167,645
|
|
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 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 for tax and accounting purposes, such as
depreciation expense, as well as estimating the impact of potential adjustments
to filed tax returns. 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
realized based on future taxable income and to the extent TDS believes that
realization is not likely, establish a valuation allowance. Managements
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 $13.4 million, at March 31, 2006 and $13.4 million
at December 31, 2005. The net current deferred tax asset primarily represents
the deferred tax effects of the allowance for doubtful accounts on customer
receivables.
TDSs noncurrent deferred
tax assets and liabilities as of March 31, 2006 and December 31, 2005 and the
underlying temporary differences are as follows:
|
|
March 31,
2006
|
|
December 31,
2005
|
|
|
|
(Dollars in thousands)
|
|
Deferred Tax
Asset noncurrent
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
74,390
|
|
$
|
71,981
|
|
Derivative instruments
|
|
187,924
|
|
185,707
|
|
Other
|
|
40,302
|
|
37,127
|
|
|
|
302,616
|
|
294,815
|
|
Less valuation
allowance
|
|
(67,487
|
)
|
(64,374
|
)
|
Total Deferred
Tax Asset
|
|
235,129
|
|
230,441
|
|
|
|
|
|
|
|
Deferred Tax Liability
noncurrent
|
|
|
|
|
|
Marketable equity securities
|
|
913,691
|
|
910,723
|
|
Property, plant and equipment
|
|
359,369
|
|
367,785
|
|
Partnership investments
|
|
61,567
|
|
61,589
|
|
Licenses
|
|
279,416
|
|
273,375
|
|
Total Deferred
Tax Liability
|
|
1,614,043
|
|
1,613,472
|
|
Net Deferred
Income Tax Liability
|
|
$
|
1,378,914
|
|
$
|
1,383,031
|
|
57
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 $913.7 million, and
$910.7 million, as of March 31, 2006 and December 31, 2005, respectively. These amounts represent deferred income taxes
calculated on the difference between the fair value 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. Managements judgment is required in assessing the eventual outcome
of these examinations. Changes to such
assessments affect the calculation of TDSs income tax expense.
In June of 2006, the
Internal Revenue Service commenced its audit of the 2002 2004 consolidated
federal tax returns of TDS and subsidiaries. The audit is in its preliminary
stages.
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.
Stock-based Compensation
As a result of the
adoption of a new accounting pronouncement, the accounting policy related to
stock-based compensation has changed as described below and is now a critical
accounting policy due to the significant assumptions and estimates involved.
As described in more
detail in Notes 2 and 3 of the accompanying Notes to the Condensed Consolidated
Financial Statements, TDS has established long-term incentive plans, employee
stock purchase plans and dividend reinvestment plans, all of which are
stock-based compensation plans. Prior to the first quarter of 2006, TDS
accounted for share-based payments in accordance with Accounting Principles
Board (APB), Accounting for Stock Issued to Employees (APB 25) and
related interpretations as allowed by Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock Based Compensation, (SFAS
123). Prior to the first quarter of 2006, compensation cost for share-based
payments was measured using the intrinsic value method APB 25. Under the
intrinsic value method, compensation cost is measured as the amount by which
the market value of the underlying equity instrument on the grant date exceeds
the exercise price. Effective January 1, 2006, TDS adopted the fair value
recognition provisions of FASB SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), using the modified
prospective transition method. In addition, TDS applied the provisions of Staff
Accounting Bulletin No. 107 (SAB 107), issued by the Securities and Exchange
Commission in March 2005, in its adoption of SFAS 123(R). Under the modified prospective transition
method, compensation cost recognized during the three months ended March 31,
2006 includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R).
Upon adoption of SFAS
123(R), TDS elected to continue to value its share-based payment transactions
using a Black-Scholes valuation model, which was previously used by TDS for
purposes of preparing the pro forma disclosures under SFAS 123. This model
requires assumptions regarding a number of complex and subjective variables.
These variables include, but are not limited to, TDS and U.S. Cellulars
expected stock price volatility over the term of the awards, expected
forfeitures, time of exercise, risk-free interest rate and expected dividends.
Different assumptions could create materially different results. Under the
provisions of SFAS 123(R), stock-based compensation cost recognized during the
period is based on the portion of the share-based payment awards that are
ultimately expected to vest.
58
Contingencies, Indemnities and
Commitments
Contingent
obligations, including indemnities, litigation and other possible commitments
are accounted for in accordance with FASB 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 outcome of contingencies could materially impact the Consolidated
Statement of Operations, Consolidated Balance Sheets and Consolidated Cash
Flows.
In
April 2006, an interexchange carrier for which TDS Telecom provides both
originating and terminating access asserted a claim for refund, net of
counterclaims, of up to $10 million for the past billed amounts for certain
types of traffic. TDS Telecom believes its billing methods and procedures were
appropriate under terms of its state and federal tariffs and will contest this
claim.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The
following persons are partners of Sidley Austin LLP, the principal law firm of
TDS and its subsidiaries: Walter C.D.
Carlson, a trustee and beneficiary of a voting trust that controls TDS, the
non-executive chairman of the board and member of the board of directors of TDS
and a director of U.S. Cellular, a subsidiary of TDS; William S. DeCarlo, the
General Counsel of TDS and an Assistant Secretary of TDS and certain
subsidiaries of TDS; and Stephen P. Fitzell, the General Counsel of U.S.
Cellular and TDS Telecommunications Corporation and an Assistant Secretary of
certain subsidiaries of TDS. Walter C.D. Carlson does not provide legal
services to TDS or its subsidiaries.
59
PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Form 10-Q (Form 10-Q), including exhibits, contains
statements that are not based on historical fact and represent forward-looking
statements, as this term is defined in the Private Securities Litigation Reform
Act of 1995. All statements, other than statements of historical facts,
that address activities, events or developments that TDS intends, expects,
projects, believes or anticipates will or may occur in the future are
forward-looking statements. The words believes, anticipates, estimates,
expects, plans, intends and similar expressions are intended to identify
these forward-looking statements, but are not the exclusive means of
identifying them. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause 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 risks, uncertainties and other factors include those set
forth below, as more fully discussed under Risk Factors in TDSs Form 10-K
for the year ended December 31, 2005. However, such factors are not
necessarily all of the important factors that could cause actual results,
performance or achievements to differ materially from those expressed in, or
implied by, the forward-looking statements contained in this document.
Other unknown or unpredictable factors also could have material adverse effects
on future results, performance or achievements. TDS undertakes no
obligation to update publicly any forward-looking statements whether as a
result of new information, future events or otherwise. You should
carefully consider the Risk Factors in TDSs Form 10-K for the year ended
December 31, 2005, the following factors and other information contained in, or
incorporated by reference into, this Form 10-Q to understand the material risks
relating to TDSs business.
· Intense competition in the
markets in which TDS operates could adversely affect TDSs revenues or increase
its costs to compete.
· Consolidation in the
telecommunications industry could adversely affect TDSs revenues and increase
its costs of doing business.
· Advances or changes in
telecommunications technology, such as Voice over Internet Protocol or WiMAX,
could render certain technologies used by TDS obsolete, could reduce TDSs
revenues or increase its costs of doing business.
· Changes in the regulatory
environment or a failure by TDS to timely or fully comply with any regulatory
requirements could adversely affect TDSs financial condition, results of
operations or ability to do business.
· Changes in TDSs
enterprise value, changes in the supply or demand of the market for wireless
licenses or telephone company franchises, adverse developments in the business
or the industry 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 or Other Obligations in TDSs Managements Discussion and Analysis
of Financial Condition and Results of Operations 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 TDSs
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 and/or expansion of TDSs business could have an
adverse effect on TDSs business, financial condition or results of operations.
· A significant portion of
TDSs wireless revenues is derived from customers who buy services through
independent agents and dealers who market TDSs services on a commission
basis. If TDSs relationships with these
agents and dealers are seriously harmed, its wireless revenues could be
adversely affected.
60
· TDSs investments in
technologies which are unproven or for which success has not yet been
demonstrated may not produce the benefits that TDS expects.
· An inability to obtain or
maintain roaming arrangements with other carriers on terms that are acceptable
to TDS, and/or changes in roaming rates and the lack of standards and roaming
agreements for wireless data products, could have an adverse effect on TDSs
business, financial condition or results of operations.
· Changes in access to
content for data or video services and access to new handsets being developed
by vendors, or an inability to manage its supply chain or inventory
successfully, could have an adverse effect on TDSs business, financial
condition or results of operations.
· A failure by TDSs service
offerings to meet customer expectations could limit TDSs ability to attract
and retain customers and have an adverse effect on TDSs operations.
· A failure by TDS to
complete significant network build-out and system implementation as part of its
plans to build out new markets and improve the quality and capacity of its
network could have an adverse effect on its operations.
· A failure by TDSs
wireless business to acquire adequate radio spectrum could have an adverse
effect on TDSs business and operations.
· Financial difficulties of
TDSs key suppliers or vendors, or termination or impairment of TDSs
relationship with such suppliers or vendors, could result in a delay or
termination of TDSs receipt of equipment or services, which could adversely
affect TDSs business and results of operations.
· An increase of TDSs debt
in the future could subject TDS to various restrictions and higher interest
costs and decrease its cash flows and earnings.
· An inability to attract
and/or retain management, technical, sales and other personnel could have an
adverse effect on TDSs business, financial condition or results of operations.
· TDS has significant
investments in entities that it does not control. Losses in the value of such investments could
have an adverse effect on TDSs results of operations or financial condition.
· Changes in guidance or
interpretations of accounting requirements, changes in industry practice,
identification of errors or changes in management assumptions could require
amendments to or restatements of financial information or disclosures included
in this or prior filings with the SEC.
· Uncertainty of access to
capital for telecommunications companies, deterioration in the capital markets,
other changes in market conditions, changes in TDSs credit ratings or other
factors could limit or restrict the availability of financing on terms and
prices acceptable to TDS, which could require TDS to reduce its construction,
development and acquisition programs.
· Changes in income tax
rates, laws, regulations or rulings, or federal or state tax assessments could
have an adverse effect on TDSs financial condition or results of operations.
· War, conflicts,
hostilities and/or terrorist attacks or equipment failure, power outages,
natural disasters or breaches of network or information technology security
could have an adverse effect on TDSs business, financial condition or results
of operations.
· Changes in general
economic and business conditions, both nationally and in the markets in which
TDS operates could have an adverse effect on TDSs business, financial
condition or results of operations.
· Changes in facts or
circumstances, including new or additional information that affects the
calculation of potential liabilities for contingent obligations under
guarantees, indemnities or otherwise, could require TDS to record charges in
excess of amounts accrued in the financial statements, if any, which could have
an adverse effect on TDSs financial condition or results of operations.
· Material weaknesses in the
effectiveness of internal control over financial reporting could result in
inaccurate financial statements or other disclosures or fail to prevent fraud,
which could have an adverse effect on TDSs business, financial condition or
results of operations.
61
· The pending SEC
investigation regarding the restatement of TDSs financial statements could
result in substantial expenses, and could result in monetary or other
penalties.
· 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, financial condition or
results of operations.
· TDSs assets are
concentrated in the U.S. telecommunications industry. As a result, its results of operations may
fluctuate based on factors related entirely to conditions in this industry.
· As TDS continues to
implement its strategies, there are internal and external factors that could
impact its ability to successfully meet its objectives.
· 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 by a material amount.
· The market price of TDSs
Common Shares and Special Common Shares is subject to fluctuations due to a
variety of factors.
· Certain matters, such as
control by the TDS Voting Trust and provisions in the TDS Restated Certificate
of Incorporation, may serve to discourage or make more difficult a change in
control of TDS.
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.
62
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 March 31, 2006,
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 Form 10-K for the year
ended December 31, 2005, for additional information about the annual
requirements of principal payments, the average interest rates, and the
estimated fair values of long-term debt.
TDS redeemed $35.0 million of medium-term notes in
January and February of 2006 which carried an interest rate of 10%.
TDS repaid $200.0 million plus accrued interest of
unsecured 7% senior notes on August 1, 2006, using cash on-hand.
Marketable Equity Securities and Derivatives
TDS maintains a portfolio of available-for-sale
marketable equity securities, the majority of which were obtained in connection
with the sale of non-strategic investments.
The market value of these investments aggregated $2,559.5 million at
March 31, 2006 and $2,531.7 million as of December 31, 2005, respectively. TDSs cumulative net unrealized holding gain,
net of tax and minority interest, included in Accumulated other comprehensive
income in the Consolidated Balance Sheets totaled $610.5 million at March 31,
2006.
Subsidiaries of TDS and U.S. Cellular have a number of
forward contracts with counterparties 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 by its
subsidiaries when due. The risk
management objective of the forward contracts is to hedge the value of the
marketable equity securities from losses due to decreases in the market prices
of the securities (downside limit) while retaining a share of gains from
increases in the market prices of such securities (upside potential). The downside limit is hedged at or above the
cost basis thereby eliminating the risk of an other than temporary loss being
recorded on these contracted securities.
Under the terms of the forward contracts, TDSs and
U.S. Cellulars subsidiaries 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.
Deferred taxes have been provided for the difference
between the fair value and the income tax basis of the marketable equity
securities and derivatives and are included in Net deferred tax liabilities in
the Consolidated Balance Sheets. Such
deferred tax liabilities related to marketable equity securities totaled $913.7
million at March 31, 2006 and $910.7 million as of December 31, 2005,
respectively. Such deferred tax assets related to derivatives totaled $187.9
million at March 31, 2006 and $185.7 million at December 31, 2005,
respectively.
63
The following table summarizes certain details
surrounding the contracted securities as of March 31, 2006.
|
|
|
|
Collar (1)
|
|
|
|
|
|
|
|
Downside
|
|
Upside
|
|
Loan
|
|
|
|
|
|
Limit
|
|
Potential
|
|
Amount
|
|
Security
|
|
Shares
|
|
(Floor)
|
|
(Ceiling)
|
|
(000s)
|
|
|
|
|
|
|
|
|
|
|
|
VeriSign
|
|
2,361,333
|
|
$
|
8.82
|
|
$
|
11.46
|
|
$
|
20,819
|
|
Vodafone (2)
|
|
12,945,915
|
|
$
|
15.07 - $16.07
|
|
$
|
18.72 - $21.39
|
|
201,038
|
|
Deutsche Telekom
|
|
131,461,861
|
|
$
|
10.74 - $12.41
|
|
$
|
13.68 - $16.37
|
|
1,532,257
|
|
|
|
|
|
|
|
|
|
1,754,114
|
|
Unamortized debt
discount
|
|
|
|
|
|
|
|
42,301
|
|
|
|
|
|
|
|
|
|
$
|
1,711,813
|
|
(1) The per share amounts
represent the range of floor and ceiling prices of all securities monetized.
(2) U.S. Cellular owned 10.2
million and TDS Telecom owns 2.7 million Vodafone American Depositary Receipts
as of March 31, 2006. See LIQUIDITY AND CAPITAL RESOURCES above for a
discussion of the Share Consolidation and Special Distribution related to the
Vodafone ADRs that was effected on July 25, 2006. As a result of the Share
Consolidation, the aggregate number of shares underlying ADRs was reduced from
12,945,915 to 11,327,674.
The following analysis presents the hypothetical
change in the fair value of marketable equity securities and derivative
instruments at March 31, 2006, 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
|
|
March
31,
2006
|
|
Valuation of investments assuming
indicated increase
|
|
(Dollars in millions)
|
|
-30%
|
|
-20%
|
|
-10%
|
|
Fair
Value
|
|
+10%
|
|
+20%
|
|
+30%
|
|
Marketable Equity
Securities
|
|
$
|
1,791.7
|
|
$
|
2,047.6
|
|
$
|
2,303.6
|
|
$
|
2,559.5
|
|
$
|
2,815.5
|
|
$
|
3,071.4
|
|
$
|
3,327.4
|
|
Derivative Instruments
(1)
|
|
$
|
97.9
|
|
$
|
(68.3
|
)
|
$
|
(247.0
|
)
|
$
|
(454.0
|
)
|
$
|
(672.6
|
)
|
$
|
(908.2
|
)
|
$
|
(1,149.4
|
)
|
(1) Represents
the fair value of the derivative instruments assuming the indicated increase or
decrease in the underlying securities.
64
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, the Chief Executive Officer and Chief Financial Officer concluded
that TDSs disclosure controls and procedures were not effective as of March
31, 2006, at the reasonable assurance level, because of the material weaknesses
described below. Notwithstanding the
material weaknesses that existed as of March 31, 2006, management has concluded
that the consolidated financial statements included in this Quarterly Report on
Form 10-Q present fairly, in all material respects, the financial position,
results of operation and cash flows of TDS and its subsidiaries in conformity
with accounting principles generally accepted in the United States of America.
A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. Management identified
the following material weaknesses in internal control over financial reporting
as of December 31, 2005, which continued to exist as of March 31, 2006:
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 the financial reporting requirements and the
complexity of TDSs operations and transactions. Further, TDS did not have a
sufficient number of qualified personnel to create, communicate and apply
accounting policies and procedures in compliance with accounting principles
generally accepted in the United States of America (GAAP). This control deficiency contributed to the
material weaknesses discussed in items 2, 3 and 4 below and the restatement of TDSs annual consolidated financial statements for
2004, 2003 and 2002, the interim consolidated financial statements for all
quarters in 2004 and 2003, the interim consolidated financial statements for
the first and second quarters of 2005, as well as adjustments, including
audit adjustments, to the 2005 third
quarter interim consolidated financial statements 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
consolidated financial statements for all quarters in 2004 and 2003, the
interim consolidated financial statements for the first and second quarters of
2005, as well as adjustments, including audit adjustments, to the 2005 third quarter interim consolidated
financial statements 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.
65
3. TDS did not
maintain effective controls over the completeness, accuracy, presentation and
disclosure of its accounting for income taxes, including the 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
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 consolidated financial
statements for all quarters in 2004 and 2003, the interim consolidated
financial statements for the first and second quarters of 2005, as well
as adjustments, including audit adjustments, to the 2005 third quarter interim consolidated financial statements 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.
4. TDS did not
maintain effective controls over the complete and accurate recording of leases.
Specifically, effective controls were not designed and in place to ensure the
accuracy of lease information, the use of appropriate lease terms including
renewal option periods, calculation of rent expense on a straight-line basis
for leases with escalation clauses and the complete and accurate accumulation
of future lease commitments in conformity with GAAP. This control deficiency affected rent
expense, deferred liabilities and related lease disclosures and resulted in an
audit adjustment to the disclosure of future minimum rental payments reflected
in 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.
66
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.
Further, management is undertaking a multi-year program to improve and increase
automation of financial reporting and other finance functions. 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. Such improvements will include the development and
enhancement of written accounting policies and procedures as well as
communication thereof. In addition, management has currently enhanced controls
related to certain of the items that resulted in the restatement of TDSs
interim and annual consolidated financial statements as discussed above.
· 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. Management is assessing
both skill and resource levels in the finance organizations and is adding
staffing as well as additional key director level positions to strengthen the
organizations.
· 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 tax provision 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.
· Leases In 2005, TDS began implementation of a new real
estate management system. Implementation of additional system functionality and
related supporting processes and procedures in 2006 will enhance controls
related to the administration, accounting and reporting for leases, including
controls related to the accuracy, completeness and disclosure of future minimum
rental payments and the calculation of straight-line rent expense.
Changes in Internal
Control Over Financial Reporting
There were no changes in
TDSs internal control over financial reporting during the quarter ended March
31, 2006, that have materially affected, or are reasonably likely to materially
affect TDSs internal control over financial reporting. 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.
67
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 and could have a
material effect on the results of operations, financial condition or cash
flows.
Item 1A. Risk Factors.
In addition to the
information set forth in this Form 10-Q, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2005, which could materially affect
TDSs business, financial condition or future results. The risks described in
this Form 10-Q and in our Annual Report on Form 10-K may not be the only risks
facing TDS. Additional unidentified or
unrecognized risks and uncertainties may materially adversely affect TDSs
business, financial condition and/or operating results. Subject to the
foregoing, TDS has not identified for disclosure any material changes to the
risk factors as previously disclosed in TDSs Annual Report on Form 10-K for
the year ended December 31, 2005.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds.
The following table
provides certain information with respect to all purchases made by or on behalf
of TDS, and any open market purchases made by any affiliated purchaser (as
defined by the SEC) of TDS, of TDS Common Shares during the quarter covered by
this Form 10-Q.
TDS PURCHASES OF
COMMON SHARES (1)
Period
|
|
(a)
Total Number of
Common Shares
Purchased
|
|
(b)
Average
Price Paid per
Common Share
|
|
(c)
Total Number of
Common Shares
Purchased as Part of
Publicly Announced
Plans or Programs
|
|
(d)
Maximum Number of
Common Shares that
May Yet Be Purchased
Under the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
January 1 31,
2006
|
|
|
|
$
|
|
|
|
|
824,300
|
|
February 1 28,
2006
|
|
|
|
|
|
|
|
|
|
March 1 31,
2006
|
|
|
|
|
|
|
|
|
|
Total for or as of end
of the quarter ended 3/31/06
|
|
|
|
$
|
|
|
|
|
|
|
(1) All of the above Common Shares relate to TDSs publicly announced Common
Share repurchase program.
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 was February 28, 2006.
iv. The stock repurchase
program has expired during the quarter covered by this Form 10-Q.
v. TDS did not
terminate the foregoing stock repurchase program prior to expiration, or cease
making further purchases thereunder, during the quarter covered by this Form
10-Q.
68
Item
5. Other Information.
The following information
is being provided to update prior disclosures made pursuant to the requirements
of Form 8-K, Item 2.03 - Creation of a Direct Financial Obligation or an
Obligation Under an Off-Balance Sheet Arrangement of a Registrant.
U.S. Cellular has
borrowed $85.0 million under its Revolving Credit Facility as of March 31,
2006. The borrowings occurred throughout
the first quarter of 2006. U.S. Cellular
anticipates repaying the amounts with future operating cash flows from operating
activities or long-term debt financing.
As of March 31, 2006, the notes range in maturity dates from two days to
30 days and bear interest at rates ranging from 5.40% to 5.46%. The notes can be renewed when they come due
based on the London InterBank Offered Rate (LIBOR) plus a contractual spread
60 basis points at March 31, 2006. The
notes were used primarily to fund the general obligations of U.S. Cellular.
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 11
Computation of earnings per Common Share is included herein as Note 5 to the
financial statements.
Exhibit 12
Statement regarding computation of ratios.
Exhibit 31.1
Chief Executive Officer certification pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934.
Exhibit 31.2
Chief Financial Officer certification pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934.
Exhibit 32.1
Chief Executive Officer certification pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.
Exhibit 32.2
Chief Financial Officer certification pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.
The foregoing
exhibits include only the exhibits that relate specifically to this Form 10-Q
or that supplement the exhibits identified in TDSs Form 10-K for the year
ended December 31, 2005. Reference is
made to TDSs Form 10-K for the year ended December 31, 2005 for a complete
list of exhibits, which are incorporated herein except to the extent
supplemented or superseded above.
69
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:
|
|
August 25, 2006
|
|
/s/ LeRoy T. Carlson, Jr.
|
|
|
|
|
LeRoy T. Carlson, Jr.,
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
Date:
|
|
August 25, 2006
|
|
/s/ Sandra L. Helton
|
|
|
|
|
Sandra L. Helton,
|
|
|
|
|
Executive Vice President and
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
Date:
|
|
August 25, 2006
|
|
/s/ D. Michael Jack
|
|
|
|
|
D. Michael Jack,
|
|
|
|
|
Senior Vice President and
|
|
|
|
|
Corporate Controller
|
|
|
|
|
(Principal Accounting Officer)
|
Signature page for the TDS 2006 First Quarter Form
10-Q
EX-12
2
a06-15128_1ex12.htm
EX-12
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
|
|
Three Months Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars in Thousands)
|
|
EARNINGS:
|
|
|
|
|
|
Income before
income taxes and minority interest
|
|
$
|
86,093
|
|
$
|
46,207
|
|
Add (deduct):
|
|
|
|
|
|
Earnings on
equity method investments
|
|
(19,805
|
)
|
(14,754
|
)
|
Distributions
from unconsolidated entities
|
|
5,676
|
|
1,520
|
|
Minority
interests in pre-tax income of subsidiaries that do not have fixed charges
|
|
(3,242
|
)
|
(2,164
|
)
|
|
|
68,722
|
|
30,809
|
|
Add fixed
charges:
|
|
|
|
|
|
Consolidated
interest expense
|
|
58,532
|
|
51,856
|
|
Interest portion
(1/3) of consolidated rent expense
|
|
10,037
|
|
8,449
|
|
|
|
$
|
137,291
|
|
$
|
91,114
|
|
|
|
|
|
|
|
FIXED CHARGES:
|
|
|
|
|
|
Consolidated
interest expense
|
|
$
|
58,532
|
|
$
|
51,856
|
|
Interest portion
(1/3) of consolidated rent expense
|
|
10,037
|
|
8,449
|
|
|
|
$
|
68,569
|
|
$
|
60,305
|
|
|
|
|
|
|
|
RATIO OF EARNINGS TO
FIXED CHARGES
|
|
2.00
|
|
1.51
|
|
|
|
|
|
|
|
Tax-effected
preferred dividends
|
|
$
|
87
|
|
$
|
82
|
|
Fixed charges
|
|
68,569
|
|
60,305
|
|
Fixed charges
and preferred dividends
|
|
$
|
68,656
|
|
$
|
60,387
|
|
|
|
|
|
|
|
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
|
|
2.00
|
|
1.51
|
|
EX-31.1
3
a06-15128_1ex31d1.htm
EX-31
Exhibit 31.1
Certification
of Chief Executive Officer
I, LeRoy T. Carlson, Jr.,
certify that:
1. I have reviewed
this quarterly report on Form 10-Q of Telephone and Data Systems, Inc.;
2. Based on my
knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my
knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrants
other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c) evaluated
the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this
report any change in the registrants internal control over financial reporting
that occurred during the registrants most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
5. The
registrants other certifying officer(s) and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
a) all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and
report financial information; and
b) any fraud, whether or
not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date: August 25, 2006
|
|
|
|
|
/s/ LeRoy T. Carlson, Jr.
|
|
|
LeRoy T.
Carlson, Jr.
|
|
President and
Chief Executive Officer
|
EX-31.2
4
a06-15128_1ex31d2.htm
EX-31
Exhibit 31.2
Certification of Chief Financial
Officer
I,
Sandra L. Helton, certify that:
1. I have reviewed
this quarterly report on Form 10-Q of Telephone and Data Systems, Inc.;
2. Based on my
knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my
knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrants
other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed
such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) evaluated
the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this
report any change in the registrants internal control over financial reporting
that occurred during the registrants most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting; and
5. The
registrants other certifying officer(s) and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
a) all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and
report financial information; and
b) any fraud, whether or
not material, that involves management or other employees who have a significant
role in the registrants internal control over financial reporting.
Date: August 25, 2006
|
|
|
/s/ Sandra L.
Helton
|
|
|
Sandra L. Helton
|
|
Executive Vice
President and
|
|
Chief Financial
Officer
|
EX-32.1
5
a06-15128_1ex32d1.htm
EX-32
Exhibit 32.1
Certification
Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, LeRoy T. Carlson, Jr., the chief executive officer
of Telephone and Data Systems, Inc., certify that (i) the quarterly report on
Form 10-Q for the first quarter of 2006 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the
information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of Telephone and
Data Systems, Inc.
|
/s/ LeRoy T.
Carlson, Jr.
|
|
LeRoy T. Carlson,
Jr.
|
|
August 25, 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
a06-15128_1ex32d2.htm
EX-32
Exhibit 32.2
Certification
Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, Sandra L. Helton, the chief financial officer of
Telephone and Data Systems, Inc., certify that (i) the quarterly report on Form
10-Q for the first quarter of 2006 fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the
information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of Telephone and
Data Systems, Inc.
|
/s/ Sandra
L. Helton
|
|
Sandra L.
Helton
|
|
August 25,
2006
|
A signed original
of this written statement required by Section 906 of the Sarbanes-Oxley Act of
2002 has been provided to Telephone and Data Systems, Inc. and will be retained
by Telephone and Data Systems, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.
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`
end
-----END PRIVACY-ENHANCED MESSAGE-----