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0001104659-07-080054.txt : 20071106
0001104659-07-080054.hdr.sgml : 20071106
20071106102825
ACCESSION NUMBER: 0001104659-07-080054
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20070930
FILED AS OF DATE: 20071106
DATE AS OF CHANGE: 20071106
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: 071216352
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
a07-26055_110q.htm
10-Q
UNITED STATES
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 September
30, 2007
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 x No o
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 September 30, 2007
|
Common Shares, $.01 par value
|
|
52,992,984 Shares
|
Special Common Shares, $.01 par value
|
|
58,637,510 Shares
|
Series A Common Shares, $.01 par value
|
|
6,444,661 Shares
|
TELEPHONE AND DATA SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2007
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
UNAUDITED
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
1,236,885
|
|
$
|
1,112,070
|
|
$
|
3,586,276
|
|
$
|
3,239,834
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Cost of services and products (exclusive of
depreciation, amortization and accretion expense shown below)
|
|
436,630
|
|
390,182
|
|
1,257,879
|
|
1,136,047
|
|
Selling, general and administrative expense
|
|
474,071
|
|
424,234
|
|
1,323,623
|
|
1,228,221
|
|
Depreciation, amortization and accretion
expense
|
|
191,695
|
|
187,279
|
|
573,533
|
|
550,698
|
|
Total Operating Expenses
|
|
1,102,396
|
|
1,001,695
|
|
3,155,035
|
|
2,914,966
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
134,489
|
|
110,375
|
|
431,241
|
|
324,868
|
|
|
|
|
|
|
|
|
|
|
|
Investment and Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated
entities
|
|
23,823
|
|
24,080
|
|
71,394
|
|
66,376
|
|
Interest and dividend income
|
|
18,687
|
|
16,323
|
|
182,651
|
|
174,351
|
|
Interest expense
|
|
(49,730
|
)
|
(59,365
|
)
|
(162,776
|
)
|
(177,185
|
)
|
Fair value adjustment of derivative
instruments
|
|
(54,824
|
)
|
34,619
|
|
(157,073
|
)
|
22,881
|
|
Gain on sale of investments
|
|
248,860
|
|
|
|
386,780
|
|
91,418
|
|
Other expense
|
|
(865
|
)
|
(4,319
|
)
|
(4,957
|
)
|
(6,187
|
)
|
Total Investment and Other Income (Expense)
|
|
185,951
|
|
11,338
|
|
316,019
|
|
171,654
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes, Minority
Interest and Extraordinary Item
|
|
320,440
|
|
121,713
|
|
747,260
|
|
496,522
|
|
Income tax expense
|
|
115,907
|
|
35,718
|
|
283,845
|
|
185,246
|
|
Income Before Minority Interest and
Extraordinary Item
|
|
204,533
|
|
85,995
|
|
463,415
|
|
311,276
|
|
Minority share of income
|
|
(15,623
|
)
|
(10,756
|
)
|
(63,807
|
)
|
(33,281
|
)
|
Income Before Extraordinary Item
|
|
188,910
|
|
75,239
|
|
399,608
|
|
277,995
|
|
Extraordinary item, net of taxes (Note 8)
|
|
42,827
|
|
|
|
42,827
|
|
|
|
Net Income
|
|
231,737
|
|
75,239
|
|
442,435
|
|
277,995
|
|
Preferred dividend requirement
|
|
(13
|
)
|
(51
|
)
|
(39
|
)
|
(152
|
)
|
Net Income Available To Common
|
|
$
|
231,724
|
|
$
|
75,188
|
|
$
|
442,396
|
|
$
|
277,843
|
|
|
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares Outstanding
(000s)
|
|
118,705
|
|
115,768
|
|
117,526
|
|
115,759
|
|
Income
before extraordinary item
|
|
$
|
1.59
|
|
$
|
0.65
|
|
3.40
|
|
$
|
2.40
|
|
Extraordinary item
|
|
0.36
|
|
|
|
0.36
|
|
|
|
Basic Earnings Per Share (Note 9)
|
|
$
|
1.95
|
|
$
|
0.65
|
|
$
|
3.76
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Weighted Average Shares Outstanding
(000s)
|
|
119,950
|
|
116,862
|
|
119,164
|
|
116,623
|
|
Income
before extraordinary item
|
|
$
|
1.57
|
|
$
|
0.64
|
|
3.33
|
|
$
|
2.38
|
|
Extraordinary item
|
|
0.36
|
|
|
|
0.36
|
|
|
|
Diluted Earnings Per Share (Note 9)
|
|
$
|
1.93
|
|
$
|
0.64
|
|
$
|
3.69
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Per Share
|
|
$
|
0.0975
|
|
$
|
0.0925
|
|
$
|
0.2925
|
|
$
|
0.2775
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
3
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
UNAUDITED
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net income
|
|
$
|
442,435
|
|
$
|
277,995
|
|
Add (Deduct) adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
Extraordinary
item, net of taxes
|
|
(42,827
|
)
|
|
|
Depreciation, amortization and accretion
|
|
573,533
|
|
550,698
|
|
Bad debts expense
|
|
51,131
|
|
49,748
|
|
Stock-based compensation expense
|
|
22,946
|
|
27,650
|
|
Fair value adjustment of derivative
instruments
|
|
157,073
|
|
(22,881
|
)
|
Deferred income taxes
|
|
(195,108
|
)
|
(67,956
|
)
|
Equity in earnings of unconsolidated entities
|
|
(71,394
|
)
|
(66,376
|
)
|
Distributions from unconsolidated entities
|
|
47,871
|
|
39,692
|
|
Minority share of income
|
|
63,807
|
|
33,281
|
|
Gain on sale
of assets
|
|
(5,000
|
)
|
|
|
Gain on investments
|
|
(386,780
|
)
|
(91,418
|
)
|
Noncash interest expense
|
|
15,855
|
|
15,981
|
|
Other noncash expense
|
|
2,520
|
|
5,821
|
|
Other operating activities
|
|
|
|
3,162
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Change in accounts receivable
|
|
(79,571
|
)
|
(67,149
|
)
|
Change in inventory
|
|
4,262
|
|
15,431
|
|
Change in accounts payable
|
|
(2,439
|
)
|
(51,436
|
)
|
Change in customer deposits and deferred
revenues
|
|
24,760
|
|
9,923
|
|
Change in accrued taxes
|
|
180,697
|
|
24,505
|
|
Change in accrued interest
|
|
4,295
|
|
6,971
|
|
Change in other assets and liabilities
|
|
(34,836
|
)
|
(22,642
|
)
|
|
|
773,230
|
|
671,000
|
|
|
|
|
|
|
|
Cash Flows (Used in) Investing Activities
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(464,795
|
)
|
(516,610
|
)
|
Cash paid for acquisitions, net of cash
acquired
|
|
(20,569
|
)
|
(98,353
|
)
|
Cash received from divestitures
|
|
4,277
|
|
722
|
|
Proceeds from sales of investments
|
|
91,740
|
|
102,549
|
|
Proceeds from return of investment
|
|
|
|
36,202
|
|
Other investing activities
|
|
(1,345
|
)
|
(6,168
|
)
|
|
|
(390,692
|
)
|
(481,658
|
)
|
|
|
|
|
|
|
Cash Flows (Used in) Financing Activities
|
|
|
|
|
|
Issuance of notes payable
|
|
25,000
|
|
390,000
|
|
Issuance of long-term debt
|
|
2,857
|
|
560
|
|
Repayment of notes payable
|
|
(60,000
|
)
|
(375,000
|
)
|
Repayment of long-term debt
|
|
(2,460
|
)
|
(202,371
|
)
|
Repayment of medium-term notes
|
|
|
|
(35,000
|
)
|
TDS Common Shares and Special Common Shares
issued for benefit plans
|
|
111,089
|
|
3,047
|
|
Excess tax benefit from exercise of stock
awards
|
|
24,530
|
|
|
|
U.S. Cellular Common Shares issued for
benefit plans
|
|
16,474
|
|
3,856
|
|
Repurchase of TDS Special Common Shares
|
|
(85,584
|
)
|
|
|
Repurchase of U.S. Cellular Common Shares
|
|
(65,202
|
)
|
|
|
Capital distributions to minority partners
|
|
(6,258
|
)
|
(10,085
|
)
|
Dividends paid
|
|
(34,337
|
)
|
(32,247
|
)
|
Other financing activities
|
|
(1,994
|
)
|
1,863
|
|
|
|
(75,885
|
)
|
(255,377
|
)
|
|
|
|
|
|
|
Net Increase/(Decrease) in Cash and Cash
Equivalents
|
|
306,653
|
|
(66,035
|
)
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
|
|
|
Beginning of period
|
|
1,013,325
|
|
1,095,791
|
|
End of period
|
|
$
|
1,319,978
|
|
$
|
1,029,756
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
4
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
UNAUDITED
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
(Dollars in thousands)
|
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,319,978
|
|
$
|
1,013,325
|
|
Accounts receivable
|
|
|
|
|
|
Due from customers, less allowance of
$16,087 and $15,807, respectively
|
|
383,541
|
|
357,279
|
|
Other, principally connecting companies,
less allowance of $6,939 and $9,576, respectively
|
|
161,173
|
|
162,888
|
|
Marketable equity securities
|
|
1,802,076
|
|
1,205,344
|
|
Inventory
|
|
126,333
|
|
128,981
|
|
Prepaid expenses
|
|
58,448
|
|
43,529
|
|
Other current assets
|
|
21,743
|
|
61,738
|
|
|
|
3,873,292
|
|
2,973,084
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
Marketable equity securities
|
|
10
|
|
1,585,286
|
|
Licenses
|
|
1,532,165
|
|
1,520,407
|
|
Goodwill
|
|
673,628
|
|
647,853
|
|
Customer lists, net of accumulated
amortization of $78,743 and $68,110, respectively
|
|
26,939
|
|
26,196
|
|
Investments in unconsolidated entities
|
|
225,268
|
|
197,636
|
|
Other investments, less valuation allowance
of $55,144 in both periods
|
|
10,948
|
|
11,073
|
|
|
|
2,468,958
|
|
3,988,451
|
|
|
|
|
|
|
|
Property, Plant and Equipment
|
|
|
|
|
|
In service and under construction
|
|
8,055,003
|
|
7,700,746
|
|
Less accumulated depreciation
|
|
4,559,975
|
|
4,119,360
|
|
|
|
3,495,028
|
|
3,581,386
|
|
|
|
|
|
|
|
Other Assets and Deferred Charges
|
|
50,630
|
|
56,593
|
|
|
|
$
|
9,887,908
|
|
$
|
10,599,514
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
5
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
UNAUDITED
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
(Dollars in thousands)
|
|
Current Liabilities
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
2,967
|
|
$
|
2,917
|
|
Forward contracts
|
|
1,042,067
|
|
738,408
|
|
Notes payable
|
|
|
|
35,000
|
|
Accounts payable
|
|
296,036
|
|
294,932
|
|
Customer deposits and deferred revenues
|
|
166,226
|
|
141,164
|
|
Accrued interest
|
|
31,024
|
|
26,729
|
|
Accrued taxes
|
|
158,707
|
|
38,324
|
|
Accrued compensation
|
|
76,434
|
|
72,804
|
|
Derivative liability
|
|
561,069
|
|
359,970
|
|
Net deferred income tax liability
|
|
348,749
|
|
236,397
|
|
Other current liabilities
|
|
117,875
|
|
138,086
|
|
|
|
2,801,154
|
|
2,084,731
|
|
|
|
|
|
|
|
Deferred Liabilities and Credits
|
|
|
|
|
|
Net deferred income tax liability
|
|
563,405
|
|
950,348
|
|
Derivative liability
|
|
|
|
393,776
|
|
Asset retirement obligation
|
|
167,754
|
|
232,312
|
|
Other deferred liabilities and credits
|
|
154,148
|
|
136,733
|
|
|
|
885,307
|
|
1,713,169
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
1,634,098
|
|
1,633,308
|
|
Forward contracts
|
|
|
|
987,301
|
|
|
|
1,634,098
|
|
2,620,609
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Minority Interest in Subsidiaries
|
|
652,371
|
|
609,722
|
|
|
|
|
|
|
|
Preferred Shares
|
|
860
|
|
863
|
|
|
|
|
|
|
|
Common Stockholders Equity
|
|
|
|
|
|
Common Shares, par value $.01 per share;
authorized 100,000,000 shares; issued 56,570,000 and 56,558,000 shares,
respectively
|
|
566
|
|
566
|
|
Special Common Shares, par value $.01 per
share; authorized 165,000,000 shares, issued 62,947,000 and 62,941,000
shares, respectively
|
|
629
|
|
629
|
|
Series A Common Shares, par value $.01 per
share; authorized 25,000,000 shares; issued and outstanding 6,445,000 and
6,445,000 shares; respectively
|
|
64
|
|
64
|
|
Capital in excess of par value
|
|
2,040,242
|
|
1,992,597
|
|
Treasury Shares, at cost:
|
|
|
|
|
|
Common Shares, 3,577,000 and 4,676,000
shares, respectively
|
|
(128,701
|
)
|
(187,103
|
)
|
Special Common Shares 4,309,000 and
4,676,000 shares, respectively
|
|
(178,169
|
)
|
(187,016
|
)
|
Accumulated other comprehensive income
|
|
405,841
|
|
522,113
|
|
Retained earnings
|
|
1,773,646
|
|
1,428,570
|
|
|
|
3,914,118
|
|
3,570,420
|
|
|
|
$
|
9,887,908
|
|
$
|
10,599,514
|
|
The accompanying notes are an integral part of these consolidated
financial 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 TDS 80.7%-owned wireless telephone subsidiary, United
States Cellular Corporation (U.S. Cellular), TDS 100%-owned wireline
telephone subsidiary, TDS Telecommunications Corporation (TDS Telecom) and
TDS 80%-owned printing and distribution company, Suttle Straus, Inc. In addition, the consolidated financial
statements include all entities in which TDS has a variable interest that
requires TDS to absorb a majority of the entitys expected gains or
losses. All material intercompany
accounts and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the 2007
presentation.
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 TDS Annual Report on
Form 10-K for the year ended December 31, 2006 (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 September
30, 2007, and the results of operations for the three and nine months ended
September 30, 2007 and 2006 and the cash flows for the nine months ended
September 30, 2007 and 2006. The results
of operations for the three and nine months ended September 30, 2007 are not
necessarily indicative of the results to be expected for the full year.
2. Summary of Significant Accounting Policies
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 $4.1 million and $11.2 million for the three and nine months ended
September 30, 2007, respectively, and $3.6 million and $11.5 million for the
three and nine months ended September 30, 2006, 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.
7
Net periodic benefit costs for the defined benefit postretirement plans
include the following components:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Service Cost
|
|
$
|
609
|
|
$
|
544
|
|
$
|
1,827
|
|
$
|
1,633
|
|
Interest on accumulated benefit obligation
|
|
858
|
|
692
|
|
2,574
|
|
2,075
|
|
Expected return on plan assets
|
|
(821
|
)
|
(648
|
)
|
(2,463
|
)
|
(1,945
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
(207
|
)
|
(208
|
)
|
(622
|
)
|
(623
|
)
|
Net loss
|
|
340
|
|
292
|
|
1,021
|
|
876
|
|
Net postretirement cost
|
|
$
|
779
|
|
$
|
672
|
|
$
|
2,337
|
|
$
|
2,016
|
|
TDS contributed $7.0 million to the postretirement plan during the
second quarter of 2007.
Amounts Collected from Customers and Remitted
to Governmental Authorities
TDS records
amounts collected from customers and remitted to governmental authorities net
within a tax liability account if the tax is assessed upon the customer and TDS
merely acts as an agent in collecting the tax on behalf of the imposing
governmental authority. If the tax is
assessed upon TDS, then amounts collected from customers as recovery of the tax
are recorded in revenues and amounts remitted to governmental authorities are
recorded in Selling, general and administrative expense on the Consolidated
Statements of Operations. The amounts recorded gross in revenues that are
billed to customers and remitted to governmental authorities totaled $39.5
million and $108.4 million for the three and nine months ended September 30,
2007, respectively, and $24.2 million and $68.8 million for the three and nine
months ended September 30, 2006, respectively.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair
value as used in numerous accounting pronouncements, establishes a framework
for measuring fair value in U.S. GAAP, and expands disclosures related to the
use of fair value measures in financial statements. SFAS 157 does not expand the
use of fair value measurements in financial statements, but standardizes its
definition and guidance in U.S. GAAP. SFAS 157 emphasizes that fair value is a
market-based measurement and not an entity-specific measurement, based on an
exchange transaction in which the entity sells an asset or transfers a
liability (exit price). SFAS 157 establishes a fair value hierarchy, from
observable market data as the highest level to an entitys own fair value
assumptions as the lowest level. SFAS 157 is effective for TDS 2008 financial
statements. TDS is currently reviewing the requirements of SFAS 157 and has not
determined the impact, if any, on its financial position or results of
operations.
In September 2006, the FASB ratified Emerging Issues Task Force Issue No. 06-1,
Accounting for Consideration Given by a Service
Provider to Manufacturers or Resellers of Equipment Necessary for an
End-Customer to Receive Service from the Service Provider (EITF
06-1). This guidance requires the application of EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer
(EITF 01-9), when consideration is given to a reseller or manufacturer for
benefit to the service providers end customer. EITF 01-9 requires that the
consideration given be recorded as a liability at the time of the sale of the
equipment and also provides guidance for the classification of the expense.
EITF 06-1 is effective for TDS 2008 financial statements. TDS is currently
reviewing the requirements of EITF 06-1 and has not yet determined the impact,
if any, on its financial position or results of operations.
8
In February
2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities,
Including an Amendment of FASB Statement No. 115 (SFAS 159).
SFAS 159 permits entities to choose to measure many financial instruments and
certain other items at fair value at specified election dates. Unrealized
gains and losses on items for which the fair value option has been elected
shall be reported in earnings at each subsequent reporting date. SFAS 159
also establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is
effective for TDS 2008 financial statements. TDS is currently reviewing the
requirements of SFAS 159 and has not yet determined the impact, if any, on its
financial position or results of operations.
3. Acquisitions, Divestitures and Exchanges
TDS
assesses its existing wireless and wireline 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 interests those markets and interests that
are not strategic to its long-term success.
On
February 1, 2007, U.S. Cellular purchased 100% of the membership interests of
Iowa 15 Wireless, LLC (Iowa 15) and obtained the 25 megahertz Federal
Communications Commission (FCC) cellular license to provide wireless service
in Iowa Rural Service Area (RSA) 15 for approximately $18.2 million in cash.
This acquisition increased investments in licenses, goodwill and customer lists
by $7.9 million, $5.9 million and $1.6 million, respectively. The goodwill of
$5.9 million is deductible for income tax purposes.
In
addition, during the first nine months of 2007, TDS Telecom and Suttle Straus
each acquired a company for cash, which purchases aggregated to $2.3 million.
These acquisitions increased goodwill by $1.8 million of which $1.0 million is
deductible for income tax purposes.
A
wholly-owned subsidiary of U.S. Cellular is a limited partner in Barat
Wireless, L.P. (Barat Wireless), an entity which participated in the auction
of wireless spectrum designated by the FCC as Auction 66. Barat Wireless was
qualified to receive a 25% discount available to very small businesses which
were defined as having annual gross revenues of less than $15 million. At the
conclusion of the auction on September 18, 2006, Barat Wireless was the high
bidder with respect to 17 licenses and had bid $127.1 million, net of its
discount. On April 30, 2007, the FCC granted Barat Wireless applications with
respect to the 17 licenses for which it was the winning bidder.
Barat
Wireless is in the process of developing its long-term business and financing
plans. As of September 30, 2007, U.S. Cellular had made capital contributions
and advances to Barat Wireless and/or its general partner of $127.2 million,
which are included in Licenses in the Consolidated Balance Sheets. Barat
Wireless used the funding to pay the FCC an initial deposit of $79.9 million on
July 14, 2006 to allow it to participate in Auction 66. On October 18, 2006,
Barat Wireless paid the balance due at the conclusion of the auction for the
licenses with respect to which Barat Wireless was the high bidder; such amount
totaled $47.2 million. For financial statement purposes, U.S. Cellular
consolidates Barat Wireless and Barat Wireless, Inc., the general partner of
Barat Wireless, pursuant to the guidelines of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51, (FIN 46(R)), 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 October 2006, Midwest Wireless Communications, L.L.C. (Midwest
Wireless) was sold to ALLTEL Corporation. In connection with the sale, U.S.
Cellular became entitled to receive approximately $106.0 million in cash with
respect to its interest in Midwest Wireless. Of this amount, $95.1 million was
distributed upon closing and $10.9 million was held in escrow to secure certain
true-up, indemnification and other possible adjustments; the funds held in
escrow were to be distributed in installments over a period of four to fifteen
months following the closing. During the
first nine months of 2007, U.S. Cellular received $4.3 million of funds that
were distributed from the aforementioned escrow. At September 30, 2007, the
amount which U.S. Cellular might be entitled to receive from the escrow in
future periods was $6.6 million, excluding accrued interest income.
9
In
April 2006, U.S. Cellular purchased the remaining ownership interest in a Tennessee
wireless market, in which it had previously owned a 16.7% interest, for
approximately $18.8 million in cash. This acquisition increased investments in
licenses, goodwill and customer lists by $5.5 million, $4.0 million and $2.0
million, respectively. The $4.0 million of goodwill is not deductible for
income tax purposes.
A
wholly-owned subsidiary of 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 closed licenses that were available only to companies
included under the FCC definition of entrepreneurs, which are small
businesses that have a limited amount of assets and revenues. In addition, Carroll Wireless bid on open
licenses that were not subject to restriction.
With respect to these licenses, however, Carroll Wireless was qualified
to receive a 25% discount available to very small businesses which were defined
as having average annual gross revenues of less than $15 million. Carroll
Wireless was a successful bidder for 17 license 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 the discounts to which Carroll Wireless was
entitled. These 17 license 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 $0.2 million 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 September 30, 2007, U.S. Cellular had 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. For financial statement purposes, U.S. Cellular
consolidates Carroll Wireless and Carroll PCS, Inc., the general partner of
Carroll Wireless, pursuant to the guidelines of FIN 46(R), as U.S. Cellular
anticipates benefiting from or 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 make
additional capital contributions and advances to Carroll Wireless and/or its
general partner. U.S. Cellular has approved additional funding of $1.4 million
of which $0.1 million was provided to Carroll Wireless as of September 30,
2007.
4. Gain
on Sale of Assets
In December 2006, U.S. Cellular entered into an agreement to sell
$226.0 million face amount of accounts receivable written off in previous
periods; the proceeds from the sale were $5.9 million. The agreement transferred all rights, title,
and interest in the account balances, along with the right to collect all
amounts due, to the buyer. The sale was
subject to a 180-day period in which the buyer was entitled to request a refund
for unenforceable accounts. The
transaction was recognized as a sale during the fourth quarter of 2006 in
accordance with the provisions of FASB Statement of Financial Accounting
Standards No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,
with the gain deferred until expiration of the recourse period. During the second quarter 2007, U.S. Cellular
recognized a gain of $5.0 million, net of refunds for unenforceable accounts.
The gain is included in the Selling, general and administrative expense on the
Consolidated Statements of Operations. All expenses related to the transaction
were recognized in the period incurred.
10
5. Fair
Value Adjustments of Derivative Instruments
Fair value adjustments of derivative instruments resulted
in a loss of $54.8 million and $157.1 million in the three and nine months
ended September 30, 2007, respectively, and a gain of $34.6 million and $22.9
million in the three and nine months ended September 30, 2006, respectively. Fair value adjustments of derivative
instruments reflect the change in the fair value of the bifurcated embedded
collars within the forward contracts related to the Deutsche Telekom and
Vodafone marketable equity securities not designated as a hedge. See Note 13 Marketable Equity Securities
and Forward Contracts and Note 17 Long-Term Debt and Forward Contracts.
The accounting for the embedded collars as derivative instruments not
designated as a hedge results in increased volatility in the results of operations,
as fluctuation in the market price of the underlying Deutsche Telekom and
Vodafone marketable equity securities results in changes in the fair value of
the embedded collars being recorded in the Consolidated Statements of
Operations. Also included in the fair
value adjustment of derivative instruments are the gains and losses related to
the ineffectiveness of the VeriSign fair value hedge.
6. Gain on Sale of Investments
TDS
recorded a gain from the sale of investments of $386.8 million in 2007. The gain consists of a $137.9 million gain on
the settlement of forward contracts and the disposition of remaining VeriSign
Common Shares and U.S. Cellular owned Vodafone ADRs recorded in the second
quarter of 2007 and a $248.9 million gain on the settlement of a portion of the
Deutsche Telekom forward contracts and the disposition of remaining Deutsche
Telekom shares related to such forward contracts recorded in the third quarter
of 2007. As a result of the Deutsche Telekom settlement, TDS now owns 85,969,689
of the Deutsche Telekom ordinary shares (131,461,861 shares owned as of
December 31, 2006). See Note 17 Long-Term Debt and Forward Contracts for
additional information related to forward contracts. In the second quarter of 2006, Gain on
investments totaled $91.4 million primarily resulting from TDS Telecoms
remittance of its Rural Telephone Bank (RTB) shares to the RTB which resulted
in a gain of $90.3 million.
7. Income Taxes
The overall effective tax rate on income before income taxes and minority
interest for the three and nine months ended September 30, 2007 was 36.2% and 38.0%,
respectively, and 29.3% and 37.3% for the three and nine months ended September
30, 2006, respectively. The effective tax rate for the 2007 period is higher
than 2006 primarily due to the favorable resolution of state audits in 2006.
Due to discontinuance of the application of SFAS 71 (see Note 8)
Deferred tax liabilities increased by $27.0 million in the third quarter of
2007.
Effective January 1, 2007, TDS adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN
48). In accordance with FIN 48, TDS recognized a cumulative-effect adjustment
of $4.4 million, decreasing its liability for unrecognized tax benefits,
interest, and penalties and increasing the January 1, 2007 balance of
Common Stockholders Equity. Of this amount, $20.7 million increases
accumulated other comprehensive income and $16.3 million represents the
cumulative reduction of beginning retained earnings.
At January 1, 2007, TDS had $28.4 million in unrecognized tax
benefits which, if recognized, would reduce income tax expense by $14.3
million, net of the federal benefit
from state income taxes. Included in the balance of unrecognized tax
benefits at January 1, 2007, is an immaterial amount related to tax
positions for which it is possible that the total amounts could change during
the next twelve months. At September
30, 2007 TDS had $33.9 million in unrecognized tax benefits, which, if
recognized, would reduce income tax expense by $18.1 million, net of the
federal benefit from state income taxes.
TDS recognizes accrued interest and penalties related to unrecognized
tax benefits in income tax expense. This amount totaled $1.2 million and $3.4
million for the three and nine months ended September 30, 2007, respectively.
Accrued interest and penalties were $1.3 million and $4.7 million as of January
1, 2007 and September 30, 2007, respectively.
11
TDS and its subsidiaries file federal and state income tax returns.
With few exceptions, TDS is no longer subject to federal, state and local
income tax examinations by tax authorities for years prior to 2002. TDS
consolidated federal income tax returns for the years 2002 2005 are currently
under examination by the Internal Revenue Service. TDS and its subsidiaries are also under
examination by various state taxing authorities.
8. Extraordinary Item - Discontinuance of the
Application of Statement of Financial Accounting Standard No. 71, Accounting for the Effects of Certain Types of Regulation
Historically,
TDS Telecoms incumbent local exchange carrier (ILEC) operations followed the
accounting for regulated enterprises prescribed by FASB Statement of Financial
Accounting Standard No. 71, Accounting for the Effects
of Certain Types of Regulation (SFAS 71). This accounting
recognizes the economic effects of rate-making actions of regulatory bodies in
the financial statements of the TDS Telecom ILEC operations.
TDS
Telecom has regularly monitored the appropriateness of the application of
SFAS 71. Recent changes in TDS
Telecoms business environment have caused competitive forces to surpass
regulatory forces such that TDS Telecom has concluded that it is no longer
reasonable to assume that rates set at levels that will recover the enterprises
cost can be charged to its customers.
TDS
Telecom has experienced increasing access line losses due to increasing levels
of competition across all of the ILEC service areas. Competition has intensified in 2007 from
cable and wireless operators who have extended their investment beyond major
markets to enable a broader range of voice and data services that compete
directly with TDS Telecoms service offerings.
These alternative telecommunications providers have transformed a
pricing structure historically based on the recovery of costs to a pricing
structure based on market conditions. Consequently, TDS Telecom has had to
alter its strategy to compete in its markets.
Specifically, in the third quarter of 2007, TDS Telecom initiated an
aggressive program of service bundling and deep discounting and has made the
decision to voluntarily exit certain revenue pools administered by the
FCC-supervised National Exchange Carrier Association in order to achieve
additional pricing flexibility to meet competitive pressures.
Based
on these material factors impacting its operations, management determined in
the third quarter of 2007 that it is no longer appropriate to continue the
application of SFAS 71 for reporting its financial results. Accordingly, TDS Telecom recorded a non-cash
extraordinary gain of $42.8 million, net of taxes of $27.0 million, upon
discontinuance of the provisions of SFAS 71, as required by the provisions of FASB
Statement of Financial Accounting Standard No. 101, Regulated
Enterprises Accounting for the Discontinuation of the Application of FASB
Statement No. 71. The
components of the non-cash extraordinary gain are as follows:
|
|
Before Tax Effects
|
|
After Tax Effects
|
|
|
|
(in thousands)
|
|
Write off of regulatory cost of removal
|
|
$
|
70,107
|
|
$
|
43,018
|
|
Write off of other net regulatory assets
|
|
(259
|
)
|
(191
|
)
|
Total
|
|
$
|
69,848
|
|
$
|
42,827
|
|
In
conjunction with the discontinuance of SFAS 71, TDS Telecom has assessed the
useful lives of fixed assets and determined that the impacts of any changes
were not material.
12
9. Earnings Per Share
Basic earnings per share is computed by dividing net income (loss)
available to common by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed using net income
(loss) available to common and weighted average common shares adjusted to
include the effect of potentially dilutive securities.
The amounts used in computing earnings per share and the effect of
potentially dilutive securities on income and the weighted average number of
Common, Special Common and Series A Common Shares are as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Dollars and shares in thousands, except earnings per share)
|
|
Basic Earnings per Share:
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item
|
|
$
|
188,910
|
|
$
|
75,239
|
|
$
|
399,608
|
|
$
|
277,995
|
|
Preferred dividend requirement
|
|
(13
|
)
|
(51
|
)
|
(39
|
)
|
(152
|
)
|
Income before extraordinary item available
to common
|
|
188,897
|
|
75,188
|
|
399,569
|
|
277,843
|
|
Extraordinary item, net of taxes
|
|
42,827
|
|
|
|
42,827
|
|
|
|
Net Income available to common used in
basic earnings per share
|
|
$
|
231,724
|
|
$
|
75,188
|
|
$
|
442,396
|
|
$
|
277,843
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item available
to common
|
|
$
|
188,897
|
|
$
|
75,188
|
|
$
|
399,569
|
|
$
|
277,843
|
|
Minority income adjustment (1)
|
|
(479
|
)
|
(270
|
)
|
(2,424
|
)
|
(945
|
)
|
Preferred dividend adjustment (2)
|
|
12
|
|
50
|
|
37
|
|
150
|
|
Income before extraordinary item available
to common
|
|
188,430
|
|
74,968
|
|
397,182
|
|
277,048
|
|
Extraordinary item, net of taxes
|
|
42,827
|
|
|
|
42,827
|
|
|
|
Net Income available to common used in diluted
earnings per share
|
|
$
|
231,257
|
|
$
|
74,968
|
|
$
|
440,009
|
|
$
|
277,048
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common
stock used in basic earnings per share:
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
52,953
|
|
51,486
|
|
52,323
|
|
51,480
|
|
Special Common Shares
|
|
59,309
|
|
57,836
|
|
58,758
|
|
57,832
|
|
Series A Common Shares
|
|
6,443
|
|
6,446
|
|
6,445
|
|
6,447
|
|
Weighted average number of shares of common
stock used in basic earnings per share
|
|
118,705
|
|
115,768
|
|
117,526
|
|
115,759
|
|
Effects of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
Effects of stock options (3)
|
|
1,011
|
|
908
|
|
1,413
|
|
705
|
|
Effects of Restricted Stock Units(4)
|
|
181
|
|
27
|
|
173
|
|
|
|
Conversion of preferred shares
|
|
53
|
|
159
|
|
52
|
|
159
|
|
Weighted average number of shares of common
stock used in diluted earnings per share
|
|
119,950
|
|
116,862
|
|
119,164
|
|
116,623
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item
|
|
$
|
1.59
|
|
$
|
0.65
|
|
$
|
3.40
|
|
$
|
2.40
|
|
Extraordinary item, net of taxes
|
|
0.36
|
|
|
|
0.36
|
|
|
|
|
|
$
|
1.95
|
|
$
|
0.65
|
|
$
|
3.76
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item
|
|
$
|
1.57
|
|
$
|
0.64
|
|
$
|
3.33
|
|
$
|
2.38
|
|
Extraordinary item, net of taxes
|
|
0.36
|
|
|
|
0.36
|
|
|
|
|
|
$
|
1.93
|
|
$
|
0.64
|
|
$
|
3.69
|
|
$
|
2.38
|
|
(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.
13
(3) Stock options convertible into 863,000 Special
Common Shares were not included in computing Diluted Earnings per Share in the
three months ended September 30, 2007, because their effects were
antidilutive. Stock options convertible
into 112,000 Common Shares and 403,000 Special Common Shares were not included
in computing Diluted Earnings per Share in the nine months ended September 30,
2007 because their effects were antidilutive. Stock options convertible into
670,000 Common Shares and 670,000 Special Common Shares were not included in
computing Diluted Earnings per Share in the three months ended September 30,
2006, because their effects were antidilutive.
Stock options convertible into 1,293,000 Common Shares and 2,398,000
Special Common Shares were not included in computing Diluted Earnings per Share
in the nine months ended September 30, 2006 because their effects were
antidilutive.
(4) Restricted stock units convertible into 31,000
Special Common Shares were not included in computing Diluted Earnings per Share
in the nine months ended September 30, 2007, because their effects were
antidilutive.
10. Supplemental
Cash Flow Disclosures Non-Cash Financing Activities
TDS delivered 2,123,310 VeriSign common shares, and 41,008,930 Deutsche
Telekom ordinary shares related to forward contracts that matured in May 2007
and July through September 2007, respectively, with an aggregate fair market
value of $798.4 million to settle the $537.7 million principal amount of
prepaid forward contracts (which included $4.6 million of accreted interest)
and $260.7 million of the related derivative liability.
Upon settlement of these prepaid forward contracts and related
derivative liability, TDS disposed of its remaining 238,023 VeriSign common
shares and 4,483,242 Deutsche Telekom ordinary shares related to these forward
contracts. TDS recorded a gain of $255.1 million in the nine months ended
September 30, 2007 (of which $248.9 million was recorded in the third quarter)
on the settlement of the prepaid forward contracts and the related derivative
liability and the disposition of the remaining VeriSign and Deutsche Telekom
shares.
In May 2007, U.S. Cellular delivered 8,815,475 American Depositary
Receipts (ADRs) of Vodafone Group, Plc (Vodafone) with a fair market value of $254.1 million to
settle the $159.9 million principal amount of prepaid forward contracts and
$94.2 million of related derivative liabilities.
Upon settlement of the prepaid forward contracts and related derivative
liability, U.S. Cellular disposed of its remaining 149,223 Vodafone ADRs. U.S.
Cellular recorded a gain of $131.7 million in the nine months ended September
30, 2007 (all in the second quarter) on the settlement of the prepaid forward
contracts and the related derivative liability and the disposition of remaining
Vodafone ADRs.
In the nine months ended September 30, 2007, U.S. Cellular withheld
544,000 Common Shares aggregating $43.5 million for the payment of the exercise
price and income taxes from employees who exercised stock options or who
received vested stock awards.
See Note 13 Marketable Equity Securities and Forward Contracts and
Note 17 Long-Term Debt and Forward Contracts for additional information.
14
11. Licenses and
Goodwill
Changes in TDS licenses and goodwill are primarily the result of
acquisitions, divestitures and impairment of its licenses, wireless markets and
telephone companies.
TDS Telecoms incumbent local exchange carriers are designated as ILEC
in the following tables and its competitive local exchange carriers are
designated as CLEC.
|
|
U.S.
|
|
TDS Telecom
|
|
|
|
Licenses
|
|
Cellular (1)
|
|
CLEC
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance December 31, 2006
|
|
$
|
1,517,607
|
|
$
|
2,800
|
|
$
|
1,520,407
|
|
Acquisitions
|
|
7,900
|
|
|
|
7,900
|
|
Impairment
|
|
(2,136
|
)
|
|
|
(2,136
|
)
|
Step acquisition allocation adjustment (2)
|
|
5,994
|
|
|
|
5,994
|
|
Balance September 30, 2007
|
|
$
|
1,529,365
|
|
$
|
2,800
|
|
$
|
1,532,165
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
$
|
1,385,543
|
|
$
|
2,800
|
|
$
|
1,388,343
|
|
Acquisitions
|
|
5,534
|
|
|
|
5,534
|
|
Other (3)
|
|
79,772
|
|
|
|
79,772
|
|
Balance September 30, 2006
|
|
$
|
1,470,849
|
|
$
|
2,800
|
|
$
|
1,473,649
|
|
(1) U.S. Cellulars beginning and ending balances
include $23.3 million of licenses allocated from TDS.
(2) The step acquisition allocation adjustment is
the allocation of value related to U.S. Cellulars share buyback program.
See Note 20 - Common Share Repurchase Programs below for a discussion of U.S.
Cellulars purchase of 838,000 of its Common Shares from an investment banking
firm in a private transaction pursuant to the accelerated share repurchase (ASR)
agreements.
(3) Includes $79.9 million
representing deposits made to the FCC for Barat Wireless licenses with respect
to which Barat Wireless was the high bidder in Auction 66.
|
|
U.S.
|
|
TDS Telecom
|
|
|
|
|
|
Goodwill
|
|
Cellular (1)
|
|
ILEC
|
|
Other (2)
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance December 31, 2006
|
|
$
|
246,920
|
|
$
|
398,652
|
|
$
|
2,281
|
|
$
|
647,853
|
|
Acquisitions
|
|
5,864
|
|
259
|
|
1,521
|
|
7,644
|
|
Step acquisition allocation adjustment (3)
|
|
18,131
|
|
|
|
|
|
18,131
|
|
Balance September 30, 2007
|
|
$
|
270,915
|
|
$
|
398,911
|
|
$
|
3,802
|
|
$
|
673,628
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
$
|
242,703
|
|
$
|
398,652
|
|
$
|
2,281
|
|
$
|
643,636
|
|
Acquisitions
|
|
3,932
|
|
|
|
|
|
3,932
|
|
Other
|
|
318
|
|
|
|
|
|
318
|
|
Balance September 30, 2006
|
|
$
|
246,953
|
|
$
|
398,652
|
|
$
|
2,281
|
|
$
|
647,886
|
|
(1) U.S. Cellulars balances in each period were
reduced by $(238.5) million of goodwill previously impaired at TDS.
(2) Consists of goodwill related to Suttle Straus.
(3) The step acquisition allocation adjustment is
the allocation of value related to U.S. Cellulars share buyback program.
See Note 20 - Common Share Repurchase Programs below for a discussion of U.S.
Cellulars purchase of 838,000 of its Common Shares from an investment banking
firm in a private transaction pursuant to the ASR agreements.
See Note 3 Acquisitions, Divestitures and Exchanges for information
regarding purchase and sale transactions which affected licenses and goodwill
during the period.
Licenses and goodwill, which are indefinite-lived assets, 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. Accordingly, the annual impairment tests for licenses and
goodwill for 2007 and 2006 were performed in the second quarter of 2007 and
2006. Such impairment tests indicated that there was an impairment of licenses
at U.S. Cellular totaling $2.1 million in 2007; the loss is included in
Depreciation, amortization and accretion expense on the Consolidated Statements
of Operations. There was no impairment of licenses in 2006, and no impairment
of goodwill in either 2007 or 2006.
15
U.S. Cellulars license impairments in 2007 were related to two of its
six units of accounting in which operations have not yet begun. The carrying
values of licenses associated with these six units of accounting are tested
separately from those associated with U.S. Cellulars operating licenses. Fair
values for such units of accounting were determined by reference to values
established by auctions and other market transactions involving licenses
comparable to those included in each specific unit of accounting.
12. Customer
Lists
Customer lists, which are intangible assets resulting from acquisitions
of wireless markets or step acquisition allocation of value related to U.S.
Cellulars share buyback programs, are amortized based on average customer
retention periods using the double declining balance method in the first year,
switching to straight-line over the remaining estimated life. The changes in
the customer lists for the nine months ended September 30, 2007 and 2006 were
as follows:
Customer Lists
|
|
September 30,
2007
|
|
September 30,
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
26,196
|
|
$
|
47,649
|
|
Acquisitions
|
|
1,560
|
|
2,042
|
|
Impairment
|
|
(1,947
|
)
|
|
|
Amortization
|
|
(10,633
|
)
|
(17,643
|
)
|
Step acquisition allocation adjustment (1)
|
|
11,763
|
|
|
|
Balance, end of period
|
|
$
|
26,939
|
|
$
|
32,048
|
|
(1) The step
acquisition allocation adjustment is the allocation of value related to U.S.
Cellulars share buyback programs. See Note 20 - Common Share Repurchase
Programs below for a discussion of U.S. Cellulars purchase of 838,000 of its
Common Shares from an investment banking firm in private transactions pursuant
to the ASR agreements.
U.S. Cellular performs an annual impairment test of customer list
balances in the third quarter of its fiscal year. During the third quarter of
2007, such test indicated that the carrying value of certain customer list
balances exceeded their estimated fair values and an impairment loss of $1.9
million was recorded; the loss is included in Depreciation, amortization and
accretion on the Consolidated Statements of Operations. Fair values were
determined based upon a present value analysis of expected future cash flows.
There was no impairment of customer lists in 2006.
Based on the customer list balance as of September 30, 2007, amortization
expense for the fourth quarter of 2007 and for the years 2008 - 2012 is
expected to be $3.3 million, $9.9 million, $6.6 million, $5.0 million, $2.0
million and $0.1 million, respectively.
16
13. 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. Any increase or
decrease in the fair value of the underlying marketable equity securities is
reflected in Accumulated other comprehensive income rather than as a
non-operating gain or loss in the Consolidated Statements of Operations. 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.
Information regarding TDS marketable equity securities is summarized
as follows:
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
(Dollars in thousands)
|
|
Marketable Equity Securities included in
Current Assets
|
|
|
|
|
|
Deutsche Telekom AG 85,969,689 and
45,492,172 Ordinary Shares, respectively
|
|
$
|
1,685,006
|
|
$
|
833,872
|
|
Vodafone Group Plc 2,362,976 and
11,327,674 American Depositary Receipts, respectively
|
|
85,776
|
|
314,683
|
|
Rural Cellular Corporation 719,396
equivalent Common Shares in 2007
|
|
31,294
|
|
|
|
VeriSign, Inc. 2,361,333 Common Shares in
2006
|
|
|
|
56,789
|
|
Aggregate fair value included in Current
Assets
|
|
1,802,076
|
|
1,205,344
|
|
|
|
|
|
|
|
Marketable Equity Securities included in
Investments
|
|
|
|
|
|
Deutsche Telekom AG 85,969,689 Ordinary
Shares in 2006
|
|
|
|
1,575,824
|
|
Rural Cellular Corporation - 719,396
equivalent Common Shares in 2006
|
|
|
|
9,453
|
|
Other
|
|
10
|
|
9
|
|
Aggregate fair value included in
Investments
|
|
10
|
|
1,585,286
|
|
Total aggregate fair value
|
|
1,802,086
|
|
2,790,630
|
|
Accounting cost basis
|
|
898,276
|
|
1,507,477
|
|
Gross holding gains
|
|
903,810
|
|
1,283,153
|
|
Gross realized holding gains
|
|
|
|
(29,729
|
)
|
Gross unrealized holding gains
|
|
903,810
|
|
1,253,424
|
|
Equity method unrealized gains
|
|
387
|
|
352
|
|
Income tax expense
|
|
(331,653
|
)
|
(488,817
|
)
|
Minority share of unrealized holding gains
|
|
(1,932
|
)
|
(14,981
|
)
|
Unrealized holding gains, net of tax and
minority share
|
|
570,612
|
|
749,978
|
|
Derivative instruments, net of tax and
minority share
|
|
(152,273
|
)
|
(215,122
|
)
|
Retirement plans, net of tax
|
|
(12,498
|
)
|
(12,743
|
)
|
Amount included in Accumulated other
comprehensive income
|
|
$
|
405,841
|
|
$
|
522,113
|
|
The investment in Deutsche Telekom
AG (Deutsche Telekom) resulted from TDS 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 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) resulted from 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)
resulted from 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 entered into a number of forward contracts related to the
marketable equity securities it holds.
The economic hedge 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 of the securities.
17
TDS
delivered a substantial majority of the 45,492,172 Deutsche Telekom ordinary
shares reflected in current assets as of December 31, 2006, in settlement of
the forward contracts relating to such Deutsche Telekom ordinary shares, which
matured in July through September 2007, and disposed of the remaining Deutsche
Telekom ordinary shares related to such forward contracts. After these forward
contracts were settled in July through September 2007, TDS now owns 85,969,689
Deutsche Telekom ordinary shares. TDS recorded a pre-tax gain of $248.9 million
in the third quarter of 2007 on the settlement of such forward contracts and
the disposition of such remaining shares.
The forward contracts related to TDS 2,361,333 VeriSign Common Shares
and the forward contracts related to U.S. Cellulars 8,964,698 Vodafone ADRs
matured in May 2007. TDS elected to deliver a substantial majority of the
2,361,333 VeriSign Common Shares in settlement of the forward contracts, and to
dispose of all remaining VeriSign Common Shares in connection therewith. U.S.
Cellular elected to deliver a substantial majority of its 8,964,698 Vodafone
ADRs in settlement of the forward contracts, and to dispose of all of its
remaining Vodafone ADRs in connection therewith. As a result of the settlement
of these forward contracts in May 2007, TDS no longer owns any VeriSign Common
Shares, U.S. Cellular no longer owns any Vodafone ADRs and TDS and U.S.
Cellular no longer have any liability or other obligations under the related
forward contracts. TDS recorded a pre-tax gain of $137.9 million in the second
quarter of 2007 on the settlement of such forward contracts and the disposition
of such remaining VeriSign Common Shares and such remaining U.S. Cellular-owned
Vodafone ADRs.
See Note 17 Long-term Debt and Forward Contracts for additional
information related to forward contracts.
TDS and its
subsidiaries own 719,396 shares of Rural Cellular Corporation (RCCC).
On July 30, 2007, RCCC announced
that Verizon Wireless has agreed to purchase the outstanding shares of RCCC for
$45 per share in cash. The acquisition
is expected to close in the first half of 2008. If the transaction
closes, TDS will receive approximately $32.4 million in cash, recognize a $31.7
million pre-tax gain and cease to own any interest in RCCC.
14. Investments
in Unconsolidated Entities
Investments
in unconsolidated entities consist of amounts invested in wireless and wireline
entities in which TDS and its subsidiaries hold a minority interest. These
investments are accounted for using either the equity or cost method.
TDS
and its subsidiaries significant investments in unconsolidated entities
include the following:
|
|
September 30,
2007
|
|
September 30,
2006
|
|
|
|
|
|
|
|
Los Angeles SMSA Limited Partnership
|
|
5.5
|
%
|
5.5
|
%
|
Midwest Wireless Communications, L.L.C. (1)
|
|
|
|
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 owned an interest of approximately 2.9% of Midwest Wireless
Holdings, L.L.C., the parent company of Midwest Wireless Communications L.L.C.
The entitys investment in Midwest Wireless Holdings, L.L.C. was disposed of in
the fourth quarter of 2006.
18
Based primarily on data furnished to TDS by third parties, the
following table summarizes the combined results of operations of all wireless
and wireline entities in which TDS investments are accounted for under the
equity method:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Results of operations
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,152,000
|
|
$
|
1,082,000
|
|
$
|
3,358,000
|
|
$
|
3,100,000
|
|
Operating expenses
|
|
793,000
|
|
744,000
|
|
2,260,000
|
|
2,135,000
|
|
Operating income
|
|
359,000
|
|
338,000
|
|
1,098,000
|
|
965,000
|
|
Other income (expense), net
|
|
7,000
|
|
10,000
|
|
22,000
|
|
32,000
|
|
Net Income
|
|
$
|
366,000
|
|
$
|
348,000
|
|
$
|
1,120,000
|
|
$
|
997,000
|
|
15. Revolving Credit Facilities
TDS has a $600 million revolving credit facility available for general
corporate purposes. At September 30, 2007, TDS had no outstanding notes payable
and $3.4 million letters of credit were outstanding, 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 TDS credit rating. At September 30, 2007, the contractual spread was 75
basis points. TDS may select borrowing periods of either seven days or one,
two, three or six months (the one-month LIBOR was 5.12% at September 30, 2007).
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 September 30, 2007). This credit facility expires in December 2009.
TDS also has $75 million of direct bank lines of credit at September
30, 2007, 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 September 30, 2007).
U.S. Cellular has a $700 million revolving credit facility available
for general corporate purposes. At September 30, 2007, U.S. Cellular had no
outstanding notes payable and $0.2 million letters of credit were outstanding,
leaving $699.8 million available for use. Borrowings under the revolving credit
facility bear interest at LIBOR plus a contractual spread based on U.S.
Cellulars credit rating. At September 30, 2007, the contractual spread was 75
basis points. U.S. Cellular may select borrowing periods of either seven days
or one, two, three or six months (the one-month LIBOR was 5.12% at September
30, 2007). 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 September 30, 2007). This credit facility expires in
December 2009.
TDS and U.S. Cellulars interest cost on their revolving credit
facilities would increase if their current credit ratings from Moodys Investor
Service (Moodys) were lowered. However, the credit facilities would not
cease to be available or accelerate solely as a result of a decline in TDS or
U.S. Cellulars credit rating. A downgrade in TDS or U.S. Cellulars credit
rating could adversely affect their ability to renew existing, or obtain access
to new credit facilities in the future. TDS and U.S. Cellulars credit ratings
are as follows:
Moodys
(Issued September 20, 2007)
|
Baa3
|
stable
outlook
|
Standard
& Poors (Issued June 21, 2007)
|
BB+
|
with
developing outlook
|
Fitch
(Issued August 16, 2007)
|
BBB+
|
stable
outlook
|
On September 20, 2007, Moodys changed its outlook on TDS and U.S.
Cellulars credit rating to stable from under review for possible further
downgrade.
On August 16, 2007, Fitch changed its outlook on TDS and U.S. Cellulars
credit rating to stable from ratings watch negative.
19
On February 13, 2007, Standard & Poors
lowered its credit ratings on TDS and U.S. Cellular to BBB- from BBB. The
ratings remained on credit watch with negative implications. On April 23, 2007,
Standard & Poors lowered its credit rating on TDS and U.S. Cellular to BB+
from BBB-. The ratings remained on credit watch with negative implications. On
June 21, 2007, Standard & Poors affirmed the BB+ rating, and removed TDS
and U.S. Cellular from Credit Watch. The outlook is developing.
The maturity dates of borrowings under TDS 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 6, 2006, TDS and U.S. Cellular
announced that they would restate certain financial statements which caused TDS
and U.S. Cellular to be late with certain filings. In addition, on April 23,
2007, TDS announced another restatement that caused a further delay in TDS SEC
filings. Before TDS and U.S. Cellular filed the foregoing restatements and
became current in their SEC filings on or prior to June 19, 2007, the
restatements and late filings resulted in defaults under the revolving credit
agreements and one line of credit agreement. TDS and U.S. Cellular were not in
violation of any covenants that require TDS and U.S. Cellular to maintain
certain financial ratios, and TDS and U.S. Cellular did not fail to make any
scheduled payments under such credit agreements. TDS and U.S. Cellular received
waivers from the lenders associated with the credit agreements, under which the
lenders agreed to waive any defaults that may have occurred as a result of the
restatements and late filings. TDS and U.S. Cellular believe they were in
compliance as of September 30, 2007 with all covenants and other requirements
set forth in the revolving credit facilities.
16. Asset Retirement Obligations
TDS accounts for
its asset retirement obligations in accordance with FASB Statement of Financial
Accounting Standard 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 Statement
of Operations as a gain or loss.
TDS Telecoms incumbent local exchange carriers have recorded an asset
retirement obligation in accordance with the requirements of SFAS 143 and FIN
47, and prior to the discontinuance of SFAS 71, a regulatory liability for the
costs of removal that state public utility commissions required to be recorded
for regulatory accounting purposes. The amounts recorded for regulatory
accounting purposes were in addition to the amounts required to be recorded in
accordance with SFAS 143 and FIN 47. As a result of the discontinuance of SFAS
71, the asset retirement obligation for incumbent local exchange carriers was
reduced by $70.1 million in the third quarter of 2007. See Note 8
Extraordinary Item - Discontinuance of the Application of Statement of
Financial Accounting Standard No. 71, Accounting for the Effects
of Certain Types of Regulation for additional details.
During the
third quarter of 2007, U.S. Cellular performed its annual review of the
assumptions and estimated costs related
to its asset retirement obligations. As a result of the review, the liabilities were revised to reflect lower
estimated cash flows as a result of lower estimates of removal and restoration
costs, primarily related to cell sites, as determined through quoted market
prices obtained from independent contractors. These changes are
reflected in Revisions in estimated cash flows below.
20
The table below also summarizes other changes in asset retirement
obligations during the nine months ended September 30, 2007. 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, 2006
|
|
$
|
127,639
|
|
$
|
101,647
|
|
$
|
3,026
|
|
$
|
232,312
|
|
Additional liabilities incurred
|
|
4,194
|
|
9,888
|
|
|
|
14,082
|
|
Revision in estimated cash flows
|
|
(15,331
|
)
|
|
|
|
|
(15,331
|
)
|
Acquisition of assets
|
|
348
|
|
|
|
|
|
348
|
|
Disposition of assets
|
|
(493
|
)
|
(352
|
)
|
|
|
(845
|
)
|
Accretion expense
|
|
7,109
|
|
28
|
|
158
|
|
7,295
|
|
Discontinuance of SFAS 71
|
|
|
|
(70,107
|
)
|
|
|
(70,107
|
)
|
Ending Balance September 30, 2007
|
|
$
|
123,466
|
|
$
|
41,104
|
|
$
|
3,184
|
|
$
|
167,754
|
|
17. Long-Term
Debt and Forward Contracts
TDS long-term debt does not contain any provisions resulting in
acceleration of the maturities of outstanding debt in the event of a change in
TDS credit rating. However, a downgrade in TDS credit rating could adversely
affect TDS ability to obtain long-term debt financing in the future. TDS
believes it was in compliance as of September 30, 2007 with all covenants and
other requirements set forth in its long-term debt indenture.
TDS redeemed
$35.0 million of medium-term notes in January and February of 2006 which
carried an interest rate of 10.0%.
TDS
repaid $200.0 million plus accrued interest on its 7% unsecured senior notes on
August 1, 2006, using cash on-hand.
Forward
Contracts
TDS and its subsidiaries
maintain 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 prepaid forward contracts with counterparties in
connection with its Deutsche Telekom and Vodafone marketable equity securities
and until May 2007 TDS had such contracts in connection with its VeriSign
marketable equity securities and U.S. Cellular had such contracts in connection
with its Vodafone marketable equity securities. The principal amount of the
prepaid forward contracts was accounted for as a loan. The collar portions of
the forward contracts are accounted for as derivative instruments. The prepaid
forward contracts contain embedded collars that are bifurcated and receive
separate accounting treatment in accordance with FASB Statement of
Financial Accounting Standards
No. 133, Accounting for Derivatives and Hedging Activities.
A portion of the Deutsche
Telekom forward contracts matured in the third quarter of 2007. The remaining
Deutsche Telekom forward contracts mature from October 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
5.23% at September 30, 2007). 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.
U.S. Cellulars Vodafone
forward contracts matured in May 2007 and TDS Telecoms Vodafone contracts
mature in October 2007. The Vodafone forward contracts require quarterly
interest payments at the LIBOR rate plus 50 basis points (the three-month LIBOR
rate was 5.23% at September 30, 2007).
The VeriSign forward
contract matured in May 2007 and was structured as a zero coupon
obligation with an effective interest rate of 5.00% per year. TDS was not
required to make interest payments during the contract period.
21
The economic hedge 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 of the
securities.
Under the terms of the remaining
forward contracts related to Deutsche Telekom and Vodafone marketable equity
securities, subsidiaries of TDS will continue to own the contracted shares and
will receive dividends paid on such contracted shares, if any. The forward
contracts, at TDS 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 contractually adjusted for any changes in
dividends on the underlying 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 elects to settle in shares, it
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 would incur a current tax liability at the time of
delivery. If TDS elects to settle in cash, it 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 provides and U.S. Cellular provided guarantees to
the counterparties which provide assurance that all principal and interest
amounts will be paid by its consolidated subsidiaries upon settlement of the
contracts.
A
portion of the forward contracts related to the Deutsche Telekom ordinary
shares held by TDS matured in July through September 2007. The loan amounts
associated with the forward contracts were $516.9 million. TDS elected to
deliver a substantial majority of the 45,492,172 Deutsche Telekom ordinary
shares in settlement of the forward contracts maturing in July through September
2007, and to dispose of the remaining Deutsche Telekom ordinary shares related
to such forward contracts. TDS recognized a pre-tax gain of $248.9 million at
the time of the delivery of the Deutsche Telekom ordinary shares. Since shares
were delivered in the settlement of the forward contract, TDS incurred a
current tax liability in the amount of $176.5 million at the time of the
delivery. After these forward contracts were settled in July through September
2007, TDS owns 85,969,689 of the Deutsche Telekom ordinary shares and has a
derivative liability of $516.6 million under the related forward contract. TDS
will determine whether to settle the remaining forward contracts in shares or
in cash at a time closer to the maturity dates.
The
forward contracts related to the VeriSign common shares held by TDS and the Vodafone ADRs held by
U.S. Cellular matured in May 2007. The loan amounts associated with the forward
contracts related to the VeriSign common shares held by TDS and the Vodafone ADRs held by U.S. Cellular were $20.8
million and $159.9 million, respectively. TDS elected to deliver a substantial
majority of the 2,361,333 VeriSign common shares in settlement of the forward contracts, and to dispose of all of its
remaining VeriSign common shares
in connection therewith. U.S. Cellular elected to deliver a substantial
majority of its 8,964,698 Vodafone ADRs in settlement of the forward contracts,
and to dispose of all of its remaining Vodafone ADRs in connection therewith.
TDS recognized a pre-tax gain of $137.9 million at the time of the delivery of
the VeriSign common shares and
Vodafone ADRs. Since shares were delivered in the settlement of the forward
contracts, TDS incurred a current tax liability in the amount of $43.4 million
at the time of the delivery. After these forward contracts were settled in May
2007, TDS no longer owns any VeriSign common shares, U.S. Cellular no longer owns any Vodafone
ADRs and TDS and U.S. Cellular no longer have any liability or other
obligations under these forward contracts.
22
The
following table details the outstanding forward contracts, related marketable
equity securities, and maturity dates of the contracts as of September 30,
2007, all of which relate to TDS:
Marketable Equity Security
|
|
Shares
|
|
Loan Amounts
|
|
Maturity Date
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Vodafone Group Plc
|
|
2,362,976
|
|
$
|
41,183
|
|
Fourth Quarter 2007
|
|
Deutsche Telekom AG
|
|
30,000,000
|
|
340,963
|
|
First Quarter 2008
|
|
|
|
|
|
|
|
|
|
Deutsche Telekom AG
|
|
38,000,000
|
|
452,104
|
|
Second Quarter 2008
|
|
Unamortized Discount
|
|
|
|
(6,094
|
)
|
|
|
|
|
|
|
446,010
|
|
|
|
|
|
|
|
|
|
|
|
Deutsche Telekom AG
|
|
17,969,689
|
|
222,298
|
|
Third Quarter 2008
|
|
Unamortized Discount
|
|
|
|
(8,387
|
)
|
|
|
|
|
|
|
213,911
|
|
|
|
|
|
|
|
$
|
1,042,067
|
|
|
|
TDS is, and until May 2007 (when U.S. Cellular settled its forward
contracts as discussed above) U.S. Cellular was, required to comply with
certain covenants under the forward contracts. On November 6, 2005, TDS and
U.S. Cellular announced that they would restate certain financial statements
which caused TDS and U.S. Cellular to be late with certain SEC filings. In
addition, on April 23, 2007, TDS announced another restatement that caused a
further delay in TDS SEC filings. Before TDS and U.S. Cellular filed the
foregoing restatements and became current in their SEC filings on or prior to
June 19, 2007, the restatements and late filings resulted in defaults under the
forward contracts. TDS and U.S.
Cellular were not in violation of any covenants that require TDS and U.S.
Cellular to maintain certain financial ratios, and TDS and U.S. Cellular did
not fail to make any scheduled payments under such forward contracts. TDS and
U.S. Cellular received waivers from the counterparty associated with the forward
contracts, under which the lenders agreed to waive any defaults that may have
occurred as a result of the restatements and late filings. TDS believes that it
was in compliance as of September 30, 2007 with all covenants and other
requirements set forth in its forward contracts.
18. Commitments
and Contingencies
Indemnity Agreements
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 any
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 September
30, 2007, TDS has recorded liabilities of $0.9 million relating to this
indemnity, which represents its best estimate of its probable liability.
23
Legal Proceedings
TDS
is involved or may be involved from time to time in legal proceedings before
the FCC, other regulatory authorities, and various state and federal courts. In
accordance with FASB Statement of Financial Accounting Standards No. 5, Accounting for
Contingencies, 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 the expected outcomes 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 accruals and related
financial statement disclosures. The ultimate outcomes 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.
19. Minority
Interest in Subsidiaries
Under
FASB Statement of Financial Accounting Standards 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). TDS consolidated financial statements include certain
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 (L.L.C.s), where the terms of
the underlying partnership or L.L.C. 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 L.L.C. agreements. The termination dates of TDS
mandatorily redeemable minority interests range from 2042 to 2105.
The
settlement value of TDS mandatorily redeemable minority interests is estimated
to be $214.5 million at September 30, 2007. 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 L.L.C.s on September 30, 2007, 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 L.L.C.s prior to their scheduled termination dates. The
corresponding carrying value of the minority interests in finite-lived
consolidated partnerships and L.L.C.s at September 30, 2007 is $37.5 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 $177.0 million is primarily
due to the unrecognized appreciation of the minority interest holders share of
the underlying net assets in the consolidated partnerships and L.L.C.s. Neither
the minority interest holders share, nor TDS 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 which are subjective in nature. Changes in
those factors and assumptions could result in a materially larger or smaller
settlement amount.
24
20. Common Share
Repurchase Programs
On
March 2, 2007, the Board of Directors of TDS authorized the repurchase of up to
$250 million of TDS Special Common Shares from time to time through open market
purchases, block transactions, private purchases or otherwise. The
authorization will expire March 2, 2010. As of September 30, 2007, TDS
repurchased 1,483,193 Special Common Shares for $89.1 million, or an average of
$60.03 per share pursuant to this authorization. TDS did not repurchase any common
shares in 2006.
The Board of Directors of
U.S. Cellular has authorized the repurchase of up to 1% of the outstanding U.S.
Cellular Common Shares held by non-affiliates on a quarterly basis, primarily for use in
employee benefit plans (the Limited Authorization). This authorization does
not have an expiration date.
On March 6,
2007, the Board of Directors of U.S. Cellular authorized the repurchase of up
to 500,000 Common Shares of U.S. Cellular (the Additional Authorization) from
time to time through open market purchases, block transactions, private
transactions or other methods. This authorization was in addition to U.S.
Cellulars existing Limited Authorization discussed above, and was scheduled to
expire on March 6, 2010. However, as discussed below, because this
authorization was fully utilized, no further purchases are available under this
authorization.
U.S. Cellular
has entered into accelerated share repurchase (ASR) agreements to purchase
its shares through an investment banking firm in private transactions. The
repurchased shares are being held as treasury shares. In connection with each
ASR, the investment banking firm will purchase an equivalent number of shares
in the open-market over time. Each program must be completed within two years
of the trade date of the respective ASR. At the end of each program, U.S.
Cellular will receive or pay a price adjustment based on the average price of
shares acquired by the investment banking firm pursuant to the ASR during the
purchase period, less a negotiated discount. The purchase price adjustment can
be settled, at U.S. Cellulars option, in cash or in U.S. Cellular Common
Shares. The subsequent purchase price adjustment will change the cost basis of
the U.S. Cellular treasury shares.
Activity related to U.S. Cellulars repurchases of shares through ASR
transactions on April 4 and July 10, 2007 and its obligations and potential
obligations to the investment banking firm, are detailed in the table below.
(dollars in thousands, except per share amounts)
|
|
April 4,
2007
|
|
July 10,
2007
|
|
Totals
|
|
Number of Shares Repurchased by U.S.
Cellular (1)
|
|
670,000
|
|
168,000
|
|
838,000
|
|
Weighted average price (2)
|
|
$
|
73.22
|
|
$
|
96.10
|
|
|
|
Initial purchase price to investment
banking firm
|
|
$
|
49,057
|
|
$
|
16,145
|
|
$
|
65,202
|
|
|
|
|
|
|
|
|
|
Number of Shares Purchased by Investment
Banking Firm (As
of September 30, 2007)
|
|
181,970
|
|
|
|
181,970
|
|
Average price of shares, net of discount,
purchased by Investment banking firm
|
|
$
|
78.51
|
|
|
|
|
|
Additional amount due to investment banking
firm for shares purchased through September 30, 2007 (3)
|
|
$
|
967
|
|
|
|
$
|
967
|
|
Equivalent number of shares based on
September 30, 2007 closing price (4)
|
|
9,847
|
|
|
|
9,847
|
|
|
|
|
|
|
|
|
|
Remaining Shares to be Purchased by
Investment Banking Firm under ASR
|
|
488,030
|
|
168,000
|
|
656,030
|
|
Potential additional cost of remaining
shares to be purchased(5)
|
|
$
|
11,898
|
|
$
|
202
|
|
$
|
12,100
|
|
Potential additional shares to settle ASR
based on September 30, 2007 closing price (6)
|
|
121,163
|
|
2,053
|
|
123,216
|
|
|
|
|
|
|
|
|
|
Total Potential Additional Cost to Settle
ASR, Based on September 30, 2007 Closing Price
|
|
|
|
|
|
|
|
If settled in cash
|
|
$
|
12,865
|
|
$
|
202
|
|
$
|
13,067
|
|
If settled in shares
|
|
131,010
|
|
2,053
|
|
133,063
|
|
(1) The repurchased shares are being held as
treasury shares.
(2) Weighted average price includes any per share
discount and commission paid to the investment banking firm.
25
(3) Represents the purchase price adjustment owed
by U.S. Cellular to the investment banking firm as of September 30, 2007 for
the shares purchased through such date, based on the difference between the
price paid per share by U.S. Cellular in connection with the ASR, and the
average price paid per share by the investment banking firm.
(4) Represents the number of additional U.S.
Cellular Common Shares that would need to be delivered to the investment
banking firm based on the closing price of $98.20 on September 30, 2007, if
U.S. Cellular settled the additional amount due described in footnote (3) with
shares.
(5) Represents the additional purchase price
adjustment that would be potentially owed by U.S. Cellular to the investment
banking firm as of September 30, 2007 based on the difference between the
initial price paid per share by U.S. Cellular in connection with the ASR, and
the closing price of U.S. Cellular Common Shares on September 30, 2007.
(6) Represents the number of additional U.S.
Cellular Common Shares that would need to be delivered to the investment banking
firm based on the closing price of $98.20 on September 30, 2007, if U.S.
Cellular settled the potential additional amount due described in footnote (5)
with shares.
At September 30, 2007, there were 656,030 shares remaining to be
purchased by the investment banking firm pursuant to the ASRs. Thus, the
amounts owed and potentially owed by U.S. Cellular to the investment banking
firm as shown in the table above would increase or decrease by $656,030 for
each $1 increase or decrease in the U.S. Cellular stock price of $98.20 as of
September 30, 2007. Any amount owed will be settled at the conclusion of each
program.
TDS
ownership percentage of U.S. Cellular increases upon such U.S. Cellular share
repurchases. Therefore, TDS accounts for U.S. Cellulars purchases of U.S.
Cellular Common Shares as step acquisitions using purchase accounting. In
addition, the subsequent ASR purchase price adjustment may result in additional
amounts being allocated to licenses, goodwill and customer lists at TDS.
26
21. Accumulated
Other Comprehensive Income
The
cumulative balances of unrealized gains (losses) on marketable equity
securities, derivative instruments and retirement plans and related income tax
effects included in Accumulated other comprehensive income are as follows.
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Marketable Equity Securities
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
749,978
|
|
$
|
578,273
|
|
Add (deduct):
|
|
|
|
|
|
Unrealized gains (losses) on marketable
equity securities
|
|
150,512
|
|
(87,605
|
)
|
Income tax (expense) benefit
|
|
(56,091
|
)
|
34,923
|
|
|
|
94,421
|
|
(52,682
|
)
|
Unrealized gain (loss) of equity method
companies
|
|
35
|
|
(190
|
)
|
Minority share of unrealized (gains) losses
|
|
(2,536
|
)
|
(1,445
|
)
|
Net change in unrealized gains (losses) on
marketable equity securities
|
|
91,920
|
|
(54,317
|
)
|
|
|
|
|
|
|
Recognized gain on sale of marketable
equity securities
|
|
(500,126
|
)
|
|
|
Income tax expense
|
|
182,948
|
|
|
|
|
|
(317,178
|
)
|
|
|
Minority share of income
|
|
15,586
|
|
|
|
Net recognized gain on sale of marketable
equity securities
|
|
(301,592
|
)
|
|
|
Net change in marketable equity securities
|
|
(209,672
|
)
|
(54,317
|
)
|
Application of FIN 48
|
|
30,306
|
|
|
|
Balance, end of period
|
|
$
|
570,612
|
|
$
|
523,956
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(215,122
|
)
|
$
|
(214,632
|
)
|
Add (deduct):
|
|
|
|
|
|
Minority share of unrealized gains
|
|
|
|
(3
|
)
|
Net change in unrealized losses on
derivative instruments
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
Recognized gain on settlement of derivative
instruments
|
|
113,346
|
|
|
|
Income tax expense
|
|
(41,463
|
)
|
|
|
|
|
71,883
|
|
|
|
Minority share of income
|
|
549
|
|
|
|
Net recognized gain on settlement of
derivatives
|
|
72,432
|
|
|
|
Net change in derivative instruments
|
|
72,432
|
|
(3
|
)
|
Application of FIN 48
|
|
(9,583
|
)
|
|
|
Balance, end of period
|
|
$
|
(152,273
|
)
|
$
|
(214,635
|
)
|
|
|
|
|
|
|
Retirement Plans
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
(12,743
|
)
|
$
|
|
|
Add (deduct):
|
|
|
|
|
|
Amounts included in net periodic benefit
cost for the period
|
|
|
|
|
|
Amortization of prior service cost, net of
taxes
|
|
(381
|
)
|
|
|
Amortization of unrecognized net loss, net
of taxes
|
|
626
|
|
|
|
Net change in retirement plans included in
comprehensive income
|
|
245
|
|
|
|
Balance, end of year
|
|
$
|
(12,498
|
)
|
$
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
522,113
|
|
$
|
363,641
|
|
Net change in marketable equity securities
|
|
(209,672
|
)
|
(54,317
|
)
|
Net change in derivative instruments
|
|
72,432
|
|
(3
|
)
|
Net change in retirement plans
|
|
245
|
|
|
|
Net change included in comprehensive income
|
|
(136,995
|
)
|
(54,320
|
)
|
Application of FIN 48
|
|
20,723
|
|
|
|
Balance, end of period
|
|
$
|
405,841
|
|
$
|
309,321
|
|
27
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Comprehensive Income
|
|
|
|
|
|
Net income
|
|
$
|
442,435
|
|
$
|
277,995
|
|
Net change in unrealized losses included in
comprehensive income
|
|
(136,995
|
)
|
(54,320
|
)
|
|
|
$
|
305,440
|
|
$
|
223,675
|
|
22. Stock-Based Compensation
Stock-based
compensation expense recorded for the three and nine months ended September 30,
2007, was $12.1 million and $22.9 million, respectively. Stock-based
compensation expense recorded for the three and nine months ended September 30,
2006, was $13.0 million and $27.7 million, respectively. Stock-based
compensation expense is primarily recorded in Selling, general and
administrative expense.
At
September 30, 2007, TDS unrecognized compensation cost for all stock-based
compensation awards was $29.4 million. The unrecognized compensation cost for
stock-based compensation awards at September 30, 2007 is expected to be
recognized over a weighted average period of 0.8 years.
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 following U.S. Cellular section.
Effective
January 1, 2006, TDS adopted the fair value recognition provisions of FASB Statement
of Financial Accounting Standards
No. 123(R), Share-Based Payment (SFAS 123(R)), using the modified
prospective transition method. Upon adoption of SFAS 123(R), TDS elected to
continue to value its share-based payment transactions using the Black-Scholes
valuation model, which was previously used by TDS for purposes of preparing the
pro forma disclosures under SFAS 123.
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 has reserved 2,150,000 Common Shares and 9,584,000
Special Common Shares at September 30, 2007, for equity awards granted and to
be granted under this plan. At September 30, 2007, the only types of awards
outstanding are fixed non-qualified stock option awards, restricted stock unit
awards, and deferred compensation stock unit awards. As of September 30, 2007
TDS has also reserved 308,000 Special Common Shares under an employee stock purchase
plan. The maximum number of TDS Common Shares and TDS Special Common Shares
that may be issued to employees under all stock-based compensation plans in
effect at September 30, 2007 was 2,150,000 and 9,892,000 shares, respectively. TDS
has also created a Non-Employee Directors Plan under which it has reserved
66,000 Special Common Shares of TDS stock for issuance as compensation to
members of the board of directors who are not employees of TDS. 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.
28
Stock
OptionsNon qualified 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 September 30, 2007 expire between 2007 and 2017. TDS estimates
the fair value of stock options granted using the Black-Scholes valuation
model. TDS granted 873,000 stock options during the three and nine months ended
September 30, 2007. TDS granted 1,105,000 stock options during the three and
nine months ended September 30, 2006. TDS used the assumptions shown in the
table below in valuing the options granted in 2007.
Expected Life
|
|
4.0 years
|
|
Expected Annual Volatility Rate
|
|
19.5
|
%
|
Dividend Yield
|
|
0.7
|
%
|
Risk Free Interest Rate
|
|
4.7
|
%
|
Estimated Annual Forfeiture Rate
|
|
1.0
|
%
|
A summary of TDS stock options outstanding and exercisable as of
September 30, 2007 and changes during the nine months ended September 30, 2007
is presented below:
Tandem Options (1)
|
|
Number of
Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2006
|
|
2,254,000
|
|
$
|
76.59
|
|
5.4
|
|
$
|
118,075,000
|
|
(2,193,000 exercisable)
|
|
|
|
76.89
|
|
5.3
|
|
114,208,000
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
1,101,000
|
|
75.85
|
|
|
|
51,021,000
|
|
Forfeited
|
|
1,000
|
|
65.96
|
|
|
|
47,000
|
|
Expired
|
|
11,000
|
|
77.85
|
|
|
|
577,000
|
|
Outstanding at September 30, 2007
|
|
1,141,000
|
|
77.20
|
|
4.7
|
|
58,815,000
|
|
(1,141,000 exercisable)
|
|
|
|
$
|
77.20
|
|
4.7
|
|
$
|
58,815,000
|
|
Special Common Options
|
|
Number of
Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2006
|
|
1,402,000
|
|
$
|
40.15
|
|
9.6
|
|
$
|
30,635,000
|
|
(1,400,000 exercisable)
|
|
|
|
40.15
|
|
9.6
|
|
30,578,000
|
|
Granted
|
|
873,000
|
|
59.45
|
|
|
|
2,226,000
|
|
Exercised
|
|
773,000
|
|
38.63
|
|
|
|
15,407,000
|
|
Forfeited
|
|
1,000
|
|
59.45
|
|
|
|
2,000
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007
|
|
1,501,000
|
|
52.14
|
|
9.4
|
|
14,795,000
|
|
(628,000 exercisable)
|
|
|
|
$
|
42.01
|
|
8.9
|
|
$
|
12,556,000
|
|
(1) Upon exercise, each tandem option is converted
into one TDS Common Share and one TDS Special Common Share. All TDS tandem
stock options outstanding were granted prior to the distribution of the TDS
Special Common Share Dividend in 2005.
The
aggregate intrinsic value represents the total pretax intrinsic value (the
difference between TDS 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 September 30, 2007. This amount will change
in future periods based on the market price of TDS stock.
Restricted
Stock UnitsBeginning in April 2005, TDS granted restricted stock unit awards
to key employees. These awards generally vest in 30-32 months. TDS estimates
the fair value of restricted stock units based on the closing market price of TDS
shares on the date of grant.
29
A
summary of TDS nonvested restricted stock units at September 30, 2007 and
changes during the nine months then ended is presented in the tables that
follow:
Tandem
Restricted Stock Units
|
|
Number of
Restricted Stock Units
|
|
Weighted Average
Grant-Date
Fair Values of
Restricted Stock Units
|
|
Nonvested at December 31, 2006
|
|
80,000
|
|
$
|
77.57
|
|
Granted
|
|
|
|
|
|
Vested
|
|
8,000
|
|
77.36
|
|
Forfeited
|
|
2,000
|
|
77.49
|
|
Nonvested at September 30, 2007
|
|
70,000
|
|
$
|
77.59
|
|
Special
Common Restricted Stock Units
|
|
Number of
Restricted Stock Units
|
|
Weighted Average
Grant-Date
Fair Values of
Restricted Stock Units
|
|
Nonvested at December 31, 2006
|
|
125,000
|
|
$
|
40.04
|
|
Granted
|
|
93,000
|
|
59.45
|
|
Vested
|
|
19,000
|
|
38.12
|
|
Forfeited
|
|
4,000
|
|
39.45
|
|
Nonvested at September 30, 2007
|
|
195,000
|
|
$
|
49.56
|
|
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 per bonus. TDS match amounts depend on the
amount of annual bonus that is deferred into stock units. The matched stock
units vest ratably at a rate of one-third per year over three years. 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. A summary of TDS
deferred compensation stock units at September 30, 2007 and changes during the
year is presented in the tables that follow:
Tandem
Deferred Compensation Stock Units
|
|
Number of
Tandem Stock Units(1)
|
|
Weighted Average
Grant-Date
Fair Values of
Stock Units
|
|
Nonvested at December 31, 2006
|
|
295
|
|
$
|
81.53
|
|
Granted
|
|
|
|
|
|
Vested
|
|
60
|
|
76.84
|
|
Forfeited
|
|
|
|
|
|
Nonvested at September 30, 2007
|
|
235
|
|
$
|
82.71
|
|
(1) Upon exercise, each tandem deferred
compensation stock unit outstanding at September 30, 2007 is converted into one
TDS Common Share and one TDS Special Common Share.
Special
Common Deferred Compensation Stock Units
|
|
Number of Special
Common Stock Units(2)
|
|
Weighted Average
Grant-Date
Fair Values of
Stock Units
|
|
Nonvested at December 31, 2006
|
|
1,400
|
|
$
|
41.37
|
|
Granted
|
|
1,700
|
|
52.58
|
|
Vested
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
Nonvested at September 30, 2007
|
|
3,100
|
|
$
|
47.52
|
|
(2) Upon exercise, each Special Common deferred
compensation stock unit is converted into one TDS Special Common Share.
30
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 Special Common Shares on a quarterly basis. The per share cost to each
participant is 85% of the market value of the Special Common Shares as of the
issuance date. TDS issued 5,400 and 0 shares during the nine months ended
September 30, 2007 and 2006, respectively.
U.S. Cellular
Effective
January 1, 2006, U.S. Cellular adopted the fair value recognition provisions of
FASB Statement of Financial Accounting Standard No. 123(R), Share-Based
Payment (SFAS 123(R)),
using the modified prospective transition method. Upon adoption of SFAS 123(R),
U.S. Cellular elected to continue to value its share-based payment transactions
using the Black-Scholes valuation model, which was previously used by U.S.
Cellular for purposes of preparing the pro forma disclosures under SFAS 123.
U.S.
Cellular has established the following stock-based compensation plans: a
long-term incentive plan, an employee stock purchase plan and a non-employee
director compensation plan.
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. At September 30, 2007, the only types of awards outstanding are
fixed non-qualified stock option awards, restricted stock unit awards and
deferred compensation stock unit awards.
At
September 30, 2007, U.S. Cellular had reserved 4,067,000 Common Shares for
equity awards granted and to be granted under the long-term incentive plan, and
also had reserved 101,000 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 September 30, 2007 was 4,168,000 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.
Long-Term Incentive Plan Stock OptionsNon-qualified 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 September 30, 2007 expire between 2007 and 2017. U.S.
Cellular granted 6,000 and 476,000 stock options during the three and nine
months ended September 30, 2007 and 551,000 stock options during the nine
months ended September 30, 2006. No stock options were granted during the three
months ended September 30, 2006. U.S. Cellular used the assumptions shown in
the table below in valuing options granted in 2007.
Expected Life
|
|
3.1 years
|
|
Expected Annual Volatility Rate
|
|
22.5%-25.7%
|
|
Dividend Yield
|
|
|
|
Risk Free Interest Rate
|
|
4.0%-4.8%
|
|
Estimated Annual Forfeiture Rate
|
|
9.6%
|
|
A summary of U.S. Cellular stock options outstanding and exercisable as
of September 30, 2007 and changes during the nine months ended September 30,
2007 is presented below.
|
|
Number of
Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2006
|
|
2,571,000
|
|
$
|
44.07
|
|
7.2
|
|
$
|
139,206,000
|
|
(1,430,000 exercisable)
|
|
|
|
|
|
|
|
80,178,000
|
|
Granted
|
|
476,000
|
|
74.24
|
|
|
|
11,399,000
|
|
Exercised
|
|
1,316,000
|
|
42.38
|
|
|
|
49,537,000
|
|
Forfeited
|
|
94,000
|
|
55.18
|
|
|
|
4,065,000
|
|
Expired
|
|
4,000
|
|
34.09
|
|
|
|
225,000
|
|
Outstanding at September 30, 2007
|
|
1,633,000
|
|
53.60
|
|
7.7
|
|
72,818,000
|
|
(627,000 exercisable)
|
|
|
|
40.32
|
|
6.3
|
|
$
|
36,310,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
The aggregate intrinsic value 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 September 30, 2007. This amount
will change in future periods based on the market price of U.S. Cellulars
stock.
Long-Term Incentive Plan Restricted
Stock UnitsU.S. Cellular grants restricted stock unit awards, which generally
vest after three years, to key employees. 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. U.S. Cellular granted 137,000 and 128,000
restricted stock units during the nine months ended September 30, 2007 and
2006, respectively.
A summary of U.S. Cellular nonvested restricted stock units at
September 30, 2007 and changes during the nine months then ended is presented
in the tables that follow:
Liability
Classified Awards
|
|
Number of
Restricted Stock Units
|
|
Weighted Average
Grant-Date
Fair Values of
Restricted Stock Units
|
|
Nonvested at December 31, 2006
|
|
57,000
|
|
$
|
38.65
|
|
Granted
|
|
|
|
|
|
Vested
|
|
57,000
|
|
38.65
|
|
Forfeited
|
|
|
|
|
|
Nonvested at September 30, 2007
|
|
|
|
$
|
|
|
Equity
Classified Awards
|
|
Number of
Restricted Stock Units
|
|
Weighted Average
Grant-Date
Fair Values of
Restricted Stock Units
|
|
Nonvested at December 31, 2006
|
|
288,000
|
|
$
|
51.40
|
|
Granted
|
|
137,000
|
|
74.09
|
|
Vested
|
|
|
|
|
|
Forfeited
|
|
35,000
|
|
54.96
|
|
Nonvested at September 30, 2007
|
|
390,000
|
|
$
|
59.09
|
|
Long-Term Incentive Plan 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 electing to participate is immediately vested and is
deemed to be invested in U.S. Cellular Common Share stock units. The matching
contributions also are deemed to be invested in U.S. Cellular Common Share
stock units, with the number of such units determined based on the dollar
amount of the matching contribution and the closing market price of U.S.
Cellular Common Shares on the date of match.
A summary of U.S. Cellular nonvested deferred compensation stock units
at September 30, 2007 and changes during the nine months then ended is
presented in the table below:
|
|
Number of
Stock Units
|
|
Weighted Average
Grant-Date
Fair Values
of Stock Options
|
|
Nonvested at December 31, 2006
|
|
2,400
|
|
$
|
51.39
|
|
Granted
|
|
2,600
|
|
70.55
|
|
Vested
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
Nonvested at September 30, 2007
|
|
5,000
|
|
$
|
61.35
|
|
32
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. The per share cost to each participant is 85% of the
market value of the Common Shares as of the issuance date. U.S. Cellular
employees are also eligible to participate in the TDS employee stock purchase
plan. The per share costs in the TDS plan are the same as those for the U.S.
Cellular plan. U.S. Cellular issued 5,400 shares during the nine months ended
September 30, 2007. No shares were issued during the nine months ended
September 30, 2006.
Non-Employee Director Compensation Plan
- - Under the Non-Employee Director Compensation Plan, U.S. Cellular has reserved
3,100 Common Shares of U.S. Cellular for issuance as compensation to members of
the board of directors who are not employees of U.S. Cellular or TDS. U.S.
Cellular issued 700 shares during the nine months ended September 30, 2007 and
40 shares during the nine months ended September 30, 2006.
During the three and nine months ended September 30, 2007 and 2006,
U.S. Cellular recognized stock-based compensation costs of $3.2 million and
$11.4 million and $5.7 million and $16.1 million, respectively. At September
30, 2007, unrecognized compensation cost for all U.S. Cellular stock-based
compensation awards was $17.0 million. The unrecognized compensation cost for
stock-based compensation awards at September 30, 2007 is expected to be
recognized over a weighted average period of one year.
33
23. Business
Segment Information
Financial
data for TDS business segments for the three and nine month periods ended or
at September 30, 2007 and 2006 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.
As of and for the Three Months Ended September 30, 2007
|
|
U.S.
|
|
TDS Telecom
|
|
Non-
Reportable
|
|
Other
Reconciling
|
|
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Segment(1)
|
|
Items(2)
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Operating revenues
|
|
$
|
1,015,834
|
|
$
|
157,240
|
|
$
|
58,972
|
|
$
|
11,281
|
|
$
|
(6,442
|
)
|
$
|
1,236,885
|
|
Cost of services and products
|
|
350,141
|
|
49,069
|
|
29,252
|
|
9,783
|
|
(1,615
|
)
|
436,630
|
|
Selling, general and administrative expense
|
|
414,978
|
|
43,703
|
|
19,679
|
|
176
|
|
(4,465
|
)
|
474,071
|
|
Operating income before depreciation,
amortization and accretion (3)
|
|
250,715
|
|
64,468
|
|
10,041
|
|
1,322
|
|
(362
|
)
|
326,184
|
|
Depreciation, amortization and accretion
expense
|
|
149,776
|
|
32,641
|
|
5,833
|
|
703
|
|
2,742
|
|
191,695
|
|
Operating income (loss)
|
|
100,939
|
|
31,827
|
|
4,208
|
|
619
|
|
(3,104
|
)
|
134,489
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated
entities
|
|
23,782
|
|
|
|
|
|
|
|
41
|
|
23,823
|
|
Fair value adjustment of derivative
instruments
|
|
|
|
|
|
|
|
|
|
(54,824
|
)
|
(54,824
|
)
|
Gain on sale of investments
|
|
|
|
|
|
|
|
|
|
248,860
|
|
248,860
|
|
Marketable equity securities
|
|
16,133
|
|
|
|
|
|
|
|
1,785,953
|
|
1,802,086
|
|
Investment in unconsolidated entities
|
|
176,557
|
|
3,673
|
|
|
|
|
|
45,038
|
|
225,268
|
|
Total assets
|
|
5,589,454
|
|
1,717,315
|
|
145,377
|
|
29,156
|
|
2,406,606
|
|
9,887,908
|
|
Capital expenditures
|
|
$
|
130,609
|
|
$
|
23,457
|
|
$
|
3,426
|
|
$
|
1,139
|
|
$
|
735
|
|
$
|
159,366
|
|
As of and for the Three Months Ended September 30, 2006
|
|
U.S.
|
|
TDS Telecom
|
|
Non-
Reportable
|
|
Other
Reconciling
|
|
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Segment(1)
|
|
Items(2)
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Operating revenues
|
|
$
|
888,523
|
|
$
|
162,242
|
|
$
|
59,370
|
|
$
|
7,434
|
|
$
|
(5,499
|
)
|
$
|
1,112,070
|
|
Cost of services and products
|
|
305,864
|
|
48,275
|
|
31,662
|
|
5,463
|
|
(1,082
|
)
|
390,182
|
|
Selling, general and administrative expense
|
|
358,392
|
|
46,251
|
|
21,855
|
|
1,321
|
|
(3,585
|
)
|
424,234
|
|
Operating income before depreciation,
amortization and accretion (3)
|
|
224,267
|
|
67,716
|
|
5,853
|
|
650
|
|
(832
|
)
|
297,654
|
|
Depreciation, amortization and accretion
expense
|
|
146,940
|
|
33,757
|
|
5,871
|
|
711
|
|
|
|
187,279
|
|
Operating income (loss)
|
|
77,327
|
|
33,959
|
|
(18
|
)
|
(61
|
)
|
(832
|
)
|
110,375
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated
entities
|
|
23,483
|
|
|
|
|
|
|
|
597
|
|
24,080
|
|
Fair value adjustment of derivative
instruments
|
|
(21,285
|
)
|
|
|
|
|
|
|
55,904
|
|
34,619
|
|
Marketable equity securities
|
|
208,505
|
|
|
|
|
|
|
|
2,195,316
|
|
2,403,821
|
|
Investment in unconsolidated entities
|
|
197,817
|
|
3,623
|
|
|
|
|
|
42,409
|
|
243,849
|
|
Total assets
|
|
5,573,507
|
|
1,692,675
|
|
144,684
|
|
23,834
|
|
2,895,749
|
|
10,330,449
|
|
Capital expenditures
|
|
$
|
152,771
|
|
$
|
26,986
|
|
$
|
4,552
|
|
$
|
838
|
|
$
|
1,169
|
|
$
|
186,316
|
|
34
As of and for the Nine Months Ended September 30, 2007
|
|
U.S.
|
|
TDS Telecom
|
|
Non-
Reportable
|
|
Other
Reconciling
|
|
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Segment(1)
|
|
Items(2)
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Operating revenues
|
|
$
|
2,922,154
|
|
$
|
473,935
|
|
$
|
179,089
|
|
$
|
32,544
|
|
$
|
(21,446
|
)
|
$
|
3,586,276
|
|
Cost of services and products
|
|
999,528
|
|
148,883
|
|
88,402
|
|
26,244
|
|
(5,178
|
)
|
1,257,879
|
|
Selling, general and administrative expense
|
|
1,141,803
|
|
129,622
|
|
62,687
|
|
3,474
|
|
(13,963
|
)
|
1,323,623
|
|
Operating income before depreciation,
amortization and accretion (3)
|
|
780,823
|
|
195,430
|
|
28,000
|
|
2,826
|
|
(2,305
|
)
|
1,004,774
|
|
Depreciation, amortization and accretion
expense
|
|
447,889
|
|
98,912
|
|
17,911
|
|
1,991
|
|
6,830
|
|
573,533
|
|
Operating income (loss)
|
|
332,934
|
|
96,518
|
|
10,089
|
|
835
|
|
(9,135
|
)
|
431,241
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated
entities
|
|
69,860
|
|
|
|
|
|
|
|
1,534
|
|
71,394
|
|
Fair value adjustment of derivative
instruments
|
|
(5,388
|
)
|
|
|
|
|
|
|
(151,685
|
)
|
(157,073
|
)
|
Gain on sale of investments
|
|
131,686
|
|
|
|
|
|
|
|
255,094
|
|
386,780
|
|
Marketable equity securities
|
|
16,133
|
|
|
|
|
|
|
|
1,785,953
|
|
1,802,086
|
|
Investment in unconsolidated entities
|
|
176,557
|
|
3,673
|
|
|
|
|
|
45,038
|
|
225,268
|
|
Total assets
|
|
5,589,454
|
|
1,717,315
|
|
145,377
|
|
29,156
|
|
2,406,606
|
|
9,887,908
|
|
Capital expenditures
|
|
$
|
377,399
|
|
$
|
70,375
|
|
$
|
10,766
|
|
$
|
3,093
|
|
$
|
3,162
|
|
$
|
464,795
|
|
As of and for the Nine Months Ended September 30, 2006
|
|
U.S.
|
|
TDS Telecom
|
|
Non-
Reportable
|
|
Other
Reconciling
|
|
|
|
|
|
Cellular
|
|
ILEC
|
|
CLEC
|
|
Segment(1)
|
|
Items(2)
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Operating revenues
|
|
$
|
2,571,036
|
|
$
|
485,228
|
|
$
|
176,599
|
|
$
|
23,372
|
|
$
|
(16,401
|
)
|
$
|
3,239,834
|
|
Cost of services and products
|
|
886,469
|
|
141,833
|
|
93,481
|
|
16,717
|
|
(2,453
|
)
|
1,136,047
|
|
Selling, general and administrative expense
|
|
1,028,865
|
|
137,436
|
|
67,005
|
|
4,570
|
|
(9,655
|
)
|
1,228,221
|
|
Operating income before depreciation,
amortization and accretion (3)
|
|
655,702
|
|
205,959
|
|
16,113
|
|
2,085
|
|
(4,293
|
)
|
875,566
|
|
Depreciation, amortization and accretion
expense
|
|
429,451
|
|
100,585
|
|
18,530
|
|
2,132
|
|
|
|
550,698
|
|
Operating income (loss)
|
|
226,251
|
|
105,374
|
|
(2,417
|
)
|
(47
|
)
|
(4,293
|
)
|
324,868
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated
entities
|
|
64,923
|
|
|
|
|
|
|
|
1,453
|
|
66,376
|
|
Fair value adjustment of derivative
instruments
|
|
(17,392
|
)
|
|
|
|
|
|
|
40,273
|
|
22,881
|
|
Gain on sale of investments
|
|
|
|
91,418
|
|
|
|
|
|
|
|
91,418
|
|
Marketable equity securities
|
|
208,505
|
|
|
|
|
|
|
|
2,195,316
|
|
2,403,821
|
|
Investment in unconsolidated entities
|
|
197,817
|
|
3,623
|
|
|
|
|
|
42,409
|
|
243,849
|
|
Total assets
|
|
5,573,507
|
|
1,692,675
|
|
144,684
|
|
23,834
|
|
2,895,749
|
|
10,330,449
|
|
Capital expenditures
|
|
$
|
421,378
|
|
$
|
73,808
|
|
$
|
11,576
|
|
$
|
2,955
|
|
$
|
6,893
|
|
$
|
516,610
|
|
(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, TDS Telecom or the Non-Reportable 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 telecommunications industry may define operating cash flow in
a different manner or present other varying financial measures, and,
accordingly, TDS presentation may not be comparable to other similarly titled
measures of other companies.
35
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 TDS 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
telecommunications industry, TDS believes that operating cash flow provides
some commonality of measurement in analyzing operating performance of companies
in the telecommunications industry.
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Total operating income from reportable and
other segments
|
|
$
|
134,489
|
|
$
|
110,375
|
|
$
|
431,241
|
|
$
|
324,868
|
|
Total investment and other income
|
|
185,951
|
|
11,338
|
|
316,019
|
|
171,654
|
|
Income before income taxes, minority
interest and extraordinary item
|
|
$
|
320,440
|
|
$
|
121,713
|
|
$
|
747,260
|
|
$
|
496,522
|
|
24. Subsequent
Events
On October 25,
2007, U.S. Cellular entered into a third ASR to purchase 168,000 of its Common
Shares from an investment banking firm in a private transaction under the
Limited Authorization. Including a commission payable to the investment banking
firm, the shares were repurchased for $16.2 million or $96.52 per share. TDS
ownership percentage of U.S. Cellular increases upon such U.S. Cellular share
repurchases. Therefore, TDS accounts for U.S. Cellulars purchases of U.S.
Cellular Common Shares as step acquisitions using purchase accounting. In
addition, the subsequent ASR purchase price adjustment may result in additional
amounts being allocated to licenses, goodwill and customer lists at TDS. See
Note 20 Common Share Repurchase Program for additional information.
On October 19, 2007, TDS
elected to deliver a substantial majority of the 2,362,976 Vodafone ADRs in
settlement of the forward contracts relating to such Vodafone ADRs, with a loan
value of $41.2 million, and to dispose of the remaining Vodafone ADRs in
connection with such forward contracts. TDS will recognize an estimated pre-tax
gain of $39.9 million in the fourth quarter reflecting the delivery of the
Vodafone ADRs. Since ADRs were delivered in the settlement of the forward
contract, TDS will incur an estimated current tax liability in the amount of
$10.9 million in the fourth quarter at the time of the delivery. As a result,
following such settlement and disposition, TDS no longer owns any Vodafone ADRs.
36
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
Telephone
and Data Systems, Inc. (TDS- AMEX symbol: TDS and TDS.S) is a diversified
telecommunications company providing high-quality telecommunications services
to an aggregate of approximately 7.3 million wireless telephone customers and
wireline telephone equivalent access lines. TDS conducts substantially all of
its wireless telephone operations through its 80.7%-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 TDS
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, 2006.
OVERVIEW
The
following is a summary of certain selected information contained in the
comprehensive Managements Discussion and Analysis of Financial Condition and
Results of Operations that follows. The overview does not contain all of the
information that may be important. You should carefully read 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.
Cellular U.S. Cellular
differentiates itself from its competitors through a customer satisfaction
strategy, reflecting a customer service focus, a high-quality wireless network
and broad product distribution. U.S. Cellulars business development strategy
is to acquire, develop and 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. Cellular offers wireless telephone service to approximately 6
million customers covering six market areas in 26 states as of September 30,
2007. U.S. Cellular owned, or had the right to acquire pursuant to certain
agreements, interests in 253 wireless markets at September 30, 2007.
Operating highlights for U.S. Cellular in the first nine months of 2007
include the following:
Total customers
increased 6% year-over-year to 6,067,000; net retail customer additions were
269,000, up 35% from the prior year;
The retail postpay
churn rate was 1.4% per month. The total postpay churn rate per month, including
reseller customers, was 1.7%;
Average monthly
service revenue per customer increased 8% year-over-year to $50.66;
Cash flows from
operating activities were $617.4 million, an increase of 24% year-over-year.
During the period, U.S. Cellular paid off all outstanding balances under its
revolving credit facility and, at September 30, 2007, had cash and cash
equivalents totaling $182.0 million; and
Additions to property,
plant and equipment totaled $377.4 million, including expenditures to construct
cell sites, increase capacity in existing cell sites and switches, outfit new
and remodel existing retail stores and continue the development and
enhancements of U.S. Cellulars office systems. Total cell sites in service
increased 9% year-over-year to 6,255.
37
Service Revenues increased $338.6 million, or 14%, to $2,721.3 million
in the nine months ended September 30, 2007 from $2,382.7 million in 2006. Revenues
from data products and services increased 71% to $260.1 million in the nine
months ended September 30, 2007 from $152.0 million in 2006 as customers
continue to increase usage of U.S. Cellulars easyedgeSM
products and offerings such as Short Messaging Service (SMS) and BlackBerry®
handsets and service.
Operating Income increased $106.6 million, or 47%, to $332.9 million in
the nine months ended September 30, 2007 from $226.3 million in 2006. The
increase in Operating Income reflected both higher operating revenues and a
higher operating income margin (as a percent of service revenues), which was
12.2% in the nine months ended September 30, 2007 compared to 9.5% in 2006.
Although operating income margin improved in 2007 on a year-over-year
basis, U.S. Cellular anticipates that there will be continued pressure on its
operating income and operating income margin in the next few years related to
the following factors:
costs of
customer acquisition and retention;
effects of
competition;
providing
service in recently launched areas;
potential
increases in prepaid and reseller customers as a percentage of U.S. Cellulars
customer base;
costs of
developing and introducing new products and services;
continued
enhancements to its wireless networks; and
uncertainty in
future eligible telecommunications carrier (ETC) funding.
See
U.S. Cellular Operations.
TDS
Telecom TDS Telecom
provides high-quality telecommunication services, including full-service local
exchange service, long distance telephone service and Internet access, to
rural, suburban and selected small urban area communities. TDS Telecoms
business plan is designed for a full-service telecommunications company,
including competitive local exchange carrier operations, by leveraging TDS
Telecoms strength as an incumbent local exchange carrier. TDS Telecom is
focused on achieving three central strategic objectives: growth, market
leadership, and profitability. TDS Telecoms strategy includes gaining
additional market share and deepening penetration of vertical services within
established markets.
TDS
Telecom increased its total equivalent access lines served by 1,700, or less
than 1%, since September 30, 2006, ending the quarter with 1,206,700 equivalent
access lines served. 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
revenues decreased $9.0 million, or 1%, to $648.6 million in the nine months
ended September 30, 2007 from $657.6 million in 2006, reflecting lower
incumbent local exchange carriers (ILEC) revenues partially offset by higher
competitive local exchange carriers (CLEC) revenues.
Operating
income increased $3.6 million, or 4%, to $106.6 million in the nine months
ended September 30, 2007 from $103.0 million in the same period of 2006,
primarily as a result of a decrease in CLEC expenses.
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 in the first nine months of 2007 while
maintaining excellent customer satisfaction.
See
TDS Telecom Operations.
38
Cash
Flows and Investments
At
September 30, 2007, TDS and its subsidiaries had cash and cash equivalents
totaling $1,320.0 million, available borrowing capacity of $1,296.4 million
under its revolving credit facilities and an additional $75.0 million of bank
lines of credit. Also, during the nine months ended September 30, 2007, TDS
generated cash flows from operating activities of $773.2 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.
See
Financial Resources and Liquidity and Capital Resources.
39
RESULTS
OF OPERATIONS
Nine Months Ended September 30, 2007 Compared to Nine Months Ended
September 30, 2006
Operating
Revenues increased
$346.5 million, or 11%, to $3,586.3 million during the nine months ended
September 30, 2007 from $3,239.8 million during the nine months ended September
30, 2006. U.S. Cellulars operating revenues increased $351.2 million, or 14%,
to $2,922.2 million in 2007 from $2,571.0 million in 2006 as customers served
increased by 338,000, or 6%, since September 30, 2006, to 6,067,000. TDS
Telecoms operating revenues decreased $9.0 million, or 1%, to $648.6 million
in 2007 from $657.6 million in 2006 reflecting lower ILEC revenues partially
offset by higher CLEC revenues Equivalent access lines increased by 1,700 or
less than 1%, since September 30, 2006, to 1,206,700.
Operating
Expenses increased
$240.0 million, or 8%, to $3,155.0 million in 2007 from $2,915.0 million in
2006 primarily reflecting growth in operations. U.S. Cellulars operating
expenses increased $244.4 million, or 10%, to $2,589.2 million in 2007 from
$2,344.8 million in 2006 primarily reflecting costs associated with acquiring
customers and serving and retaining its expanding customer base. TDS
Telecoms expenses decreased $12.8 million, or 2%, to $541.9 million in 2007
and from $554.7 million in 2006.
Operating
Income increased
$106.3 million, or 33%, to $431.2 million in 2007 from $324.9 million in 2006. The
operating margin was 12.0% in 2007 and 10.0% in 2006 on a consolidated basis. U.S.
Cellulars operating income increased $106.6 million, or 47%, to $332.9 million
from $226.3 million in 2006 and its operating margin, as a percentage of
service revenues, increased to 12.2% in 2007 from 9.5% in 2006. TDS Telecoms
operating income increased $3.6 million, or 4%, to $106.6 million from $103.0
million in 2006 and its operating margin increased to 16.4% from 15.7% in 2006.
Investment
and Other Income (Expense) primarily includes interest and dividend income,
investment income, gains and losses on investments, fair value adjustment of
derivative instruments and interest expense. Investment and other income
(expense) totaled $316.0 million in 2007 and $171.7 million in 2006.
Equity
in earnings of unconsolidated entities increased $5.0 million, or 8%, to $71.4 million
in 2007 from $66.4 million in 2006. Equity in earnings of unconsolidated
entities represents TDS share of net income from markets in which TDS or U.S.
Cellular has minority interests that are accounted for by the equity method. U.S.
Cellulars investment in the Los Angeles SMSA Limited Partnership contributed
$54.3 million and $46.5 million to equity in earnings of unconsolidated
entities for the nine months ended September 30, 2007 and 2006, respectively.
Interest
and dividend income
increased $8.3 million to $182.7 million in 2007 from $174.4 million in 2006
primarily due to an $8.2 million increase in dividend income from Deutsche
Telekom.
Interest
expense decreased
$14.4 million, or 8%, to $162.8 million in 2007 from $177.2 million in 2006.
The decrease in interest expense in the nine months ended September 30, 2007
was primarily due to a decrease in interest related to TDS 7.0% senior notes
that were paid off in the third quarter of 2006 ($8.2 million), a decrease in
interest paid on forward contracts related to the settlement of various prepaid
forward contracts ($3.0 million) and a decrease in interest related to U.S.
Cellulars revolving credit facility ($2.6 million).
Fair
value adjustments of derivative instruments totaled a loss of $157.1 million in 2007 and
a gain of $22.9 million in 2006. Fair value adjustments of derivative
instruments reflect the change in the fair value of the bifurcated embedded
collars within the forward contracts related to the Deutsche Telekom and
Vodafone marketable equity securities not designated as a hedge. Accounting for
the embedded collars as derivative instruments not designated as a hedge
results in increased volatility in the results of operations, as fluctuation in
the market price of the underlying Deutsche Telekom and Vodafone marketable
equity securities results in changes in the fair value of the embedded collars
being recorded in the Consolidated Statement of Operations. Also included in
the fair value adjustments of derivative instruments are the gains and losses
related to the ineffectiveness of the VeriSign fair value hedge, which totaled
an immaterial amount for the comparable periods in 2007 and 2006.
40
Gain on
sale of investments totaled
a gain of $386.8 million in 2007 and $91.4 million in 2006. The gain in 2007
consists of the $386.8 million gain recorded on the delivery of the Vodafone
ADRs, VeriSign Common Shares and
a portion of the Deutsche Telekom ordinary shares to settle the related prepaid
forward contracts and the sale of the remaining Vodafone ADRs, VeriSign Common
Shares and Deutsche Telekom ordinary
shares related to the settled forward contracts. The gain in 2006 was primarily
due to the $90.3 million gain at TDS Telecom from its remittance of Rural
Telephone Bank (RTB) shares. See Note 6 Gain on Sale of Investments.
Income
Tax Expense increased
$98.6 million to $283.8 million in 2007 from $185.2 million in 2006 primarily
due to the increase in pre-tax income. The overall effective tax rates on
income before income taxes and minority interest for the nine months ended
September 30, 2007 and 2006 were 38.0% and 37.3%, respectively. For further
analysis and discussion of TDS effective tax rates in 2007 and 2006, see Note
7 Income Taxes.
Minority
Share of Income
includes the minority public shareholders share of U.S. Cellulars net income,
the minority shareholders or partners share of U.S. Cellulars subsidiaries
net income or loss and other minority interests.
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Minority Share of Income
|
|
|
|
|
|
U.S. Cellular
|
|
|
|
|
|
Minority Public Shareholders
|
|
$
|
(55,001
|
)
|
$
|
(23,602
|
)
|
Minority Shareholders or Partners
|
|
(8,731
|
)
|
(9,552
|
)
|
|
|
(63,732
|
)
|
(33,154
|
)
|
Other
|
|
(75
|
)
|
(127
|
)
|
|
|
$
|
(63,807
|
)
|
$
|
(33,281
|
)
|
Extraordinary
item, representing a
gain of $42.8 million, net of tax, was recorded in the third quarter of 2007. Historically,
TDS Telecoms ILEC operations followed the accounting for regulated enterprises
prescribed by FASB Statements of Financial Accounting Standard No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS 71).
This accounting recognizes the economic effects of rate-making actions of
regulatory bodies in the financial statements of the TDS incumbent local
exchange carriers.
TDS
Telecom has regularly monitored the appropriateness of the application of
SFAS 71. Recent changes in TDS Telecoms business environment have caused
competitive forces to surpass regulatory forces such that TDS Telecom has
concluded that it is no longer reasonable to assume that rates set at levels
that will recover the enterprises cost can be charged to its customers.
TDS
Telecom has experienced increasing access line losses due to increasing levels
of competition across all of the ILEC service areas. Competition has
intensified in 2007 from cable and wireless operators who have extended their
investment beyond major markets to enable a broader range of voice and data
services that compete directly with TDS Telecoms service offerings. These
alternative telecommunications providers have transformed a pricing structure
historically based on the recovery of costs to a pricing structure based on
market conditions. Consequently, TDS Telecom has had to alter its strategy to
compete in its markets. Specifically, in the third quarter of 2007, TDS Telecom
initiated an aggressive program of service bundling and deep discounting and
has made the decision to voluntarily exit certain revenue pools administered by
the FCC-supervised National Exchange Carrier Association in order to achieve
additional pricing flexibility to meet competitive pressures.
Based
on these material factors impacting its operations, management determined in
the third quarter of 2007 that it is no longer appropriate to continue the
application of SFAS 71 for reporting its financial results. Accordingly,
TDS Telecom recorded a non-cash extraordinary gain of $42.8 million, net of
taxes of $27.0 million, upon discontinuance of the provisions of SFAS 71, as
required by the provisions of FASB Statements of Financial Accounting Standard
No. 101, Regulated Enterprises Accounting for the
Discontinuation of the Application of Financial Accounting Standards Board (FASB)
Statement No. 71 (SFAS 101). TDS Telecom does not expect
operating results in the future to be materially impacted by the decision to
discontinue the application of SFAS 71.
In
conjunction with the discontinuance of SFAS 71, TDS Telecom has assessed the
useful lives of fixed assets and determined that the impact of any changes were
not material.
41
Net
Income Available to Common totaled $442.4 million, or $3.69 per diluted share, in 2007 and $277.8
million, or $2.38 per diluted share, in 2006.
42
U.S. CELLULAR OPERATIONS
TDS provides wireless telephone service through United States Cellular
Corporation (U.S. Cellular), an 80.7%-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 2007 compared with 2006. The number of customers
increased 6% to 6,067,000 at September 30, 2007, from 5,729,000 at September
30, 2006, due to customer additions from its marketing channels and
acquisition, divestiture and exchange activities.
RESULTS OF OPERATIONS
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2006
Following is a table of summarized operating
data for U.S. Cellulars consolidated operations.
|
|
2007
|
|
2006
|
|
As of September 30, (1a)
|
|
|
|
|
|
Total market population (2)
|
|
81,841,000
|
|
55,543,000
|
|
Customers (3)
|
|
6,067,000
|
|
5,729,000
|
|
Market penetration (4)
|
|
7.41
|
%
|
10.3
|
%
|
Total full-time equivalent employees
|
|
7,634
|
|
7,571
|
|
Cell sites in service
|
|
6,255
|
|
5,726
|
|
For the Nine Months Ended September 30, (1b)
|
|
|
|
|
|
Net customer additions (5)
|
|
246,000
|
|
224,000
|
|
Net retail customer additions (5)
|
|
269,000
|
|
200,000
|
|
Average monthly service revenue per
customer (6)
|
|
$
|
50.66
|
|
$
|
46.92
|
|
Retail postpay churn rate per month (7)
|
|
1.4
|
%
|
1.6
|
%
|
Total postpay churn rate per month (7)
|
|
1.7
|
%
|
1.5
|
%
|
Sales and marketing cost per gross customer
addition (8)
|
|
$
|
468
|
|
$
|
467
|
|
(1a) Amounts in 2007 include information related to all markets included in
U.S. Cellulars consolidated operations as of September 30, 2007. Such markets
include; (i) the market acquired during February 2007 from February 1 through
September 30, 2007; and (ii) the markets related to the 17 licenses granted to
Barat Wireless by the FCC in April 2007 which are incremental to U.S. Cellulars
currently owned or acquirable markets from April 30, 2007 through September 30,
2007. Amounts in 2006 include information related to all markets included in
U.S. Cellulars consolidated operations as of September 30, 2006. Such markets
include: (i) the 11 markets granted to Carroll Wireless by the FCC in January
2006 for the period January 6 through September 30, 2006; and (ii) the
additional market interest acquired during April 2006 for the period April 1,
2006 through September 30, 2006.
(1b) Amounts in 2007 include results from all markets included in U.S.
Cellulars consolidated operations for the period January 1, 2007 through
September 30, 2007. The market acquired in February 2007 is included for the
period February 1, 2007 through September 30, 2007. Amounts in 2006 include
results from all markets included in U.S. Cellulars consolidated operations
for the period January 1, 2006 through September 30, 2006. The 11 markets
granted to Carroll Wireless by the FCC in January 2006 are included for the
period January 6 through September 30, 2006. The additional market interest
acquired during April 2006 is included for the period April 1, 2006 through
September 30, 2006.
(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 September 30 of each
respective year.
(3) U.S. Cellulars customer base consists of the
following types of customers:
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
Customers on postpay service plans in which
the end user is a customer of U.S. Cellular (postpay customers)
|
|
5,199,000
|
|
4,818,000
|
|
End user customers acquired through U.S.
Cellulars agreement with a third party (reseller customers) *
|
|
567,000
|
|
602,000
|
|
Total postpay customers
|
|
5,766,000
|
|
5,420,000
|
|
Customers on prepaid service plans in which
the end user is a customer of U.S. Cellular (prepaid customers)
|
|
301,000
|
|
309,000
|
|
Total customers
|
|
6,067,000
|
|
5,729,000
|
|
* 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 2006 and 2005 Claritas population
estimates for 2007 and 2006, 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, including unbuilt licenses
(without duplication of population in overlapping markets).
43
(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 2007.
(6) Management
uses this measurement to assess the amount of service revenue that U.S. Cellular
generates each month on a per customer basis. Variances in this measurement are
monitored and compared to variances in expenses on a per customer basis. Average
monthly service revenue per customer is calculated as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Service Revenues per Consolidated
Statements of Operations
|
|
$
|
2,721,341
|
|
$
|
2,382,747
|
|
|
|
|
|
|
|
Divided by average customers during period
(000s) *
|
|
5,969
|
|
5,642
|
|
|
|
|
|
|
|
Divided by number of months in each period
|
|
9
|
|
9
|
|
|
|
|
|
|
|
Average monthly service revenue per
customer
|
|
$
|
50.66
|
|
$
|
46.92
|
|
* 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. Total postpay churn rate includes both retail
postpay customers and reseller customers. Retail postpay churn rate includes
only retail postpay customers. Effective for 2007, consistent with a
change in U.S. Cellulars operating practices with its reseller, U.S. Cellular
reports reseller customer disconnects as postpay disconnects in the period in
which the reseller customers are disconnected by the reseller. Previously, only
those reseller customer numbers that were disconnected from U.S. Cellulars
network were counted in the number of postpay disconnects; this previous
practice reflected the fact that reseller customers could disconnect service
without the associated account numbers being disconnected from U.S. Cellulars
network if the reseller elected to reuse the customer telephone numbers.
Total reseller disconnects totaled 229,000
for the nine months ended September 30, 2007. On a comparable basis, total
reseller disconnects for the nine months ended September 30, 2006 were
estimated to be 305,000, versus the previously reported total of 57,000. The
total postpay churn rate per month for the nine months ended September 30, 2007
was 1.7%. On a comparable basis, the total postpay churn rate per month for the
nine months ended September 30, 2006 was estimated to be 2.0%, versus the
previously reported figure of 1.5%.
(8) Sales and
marketing cost per gross customer addition for 2007 and for 2006 is not
comparable as a result of the change in U.S. Cellulars operating practices
with the reseller as discussed in footnote (7) above. For a discussion
of the components of this calculation, see Operating expenses Selling, general
and administrative expenses, below. Excluding the impact of reseller gross
customer additions, sales and marketing cost per gross customer addition in
2007 was $554 compared to $503 in 2006.
Operating Revenues increased $351.2 million,
or 14%, to $2,922.2 million in 2007 from $2,571.0 million in 2006.
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Retail service
|
|
$
|
2,357,998
|
|
$
|
2,091,231
|
|
Inbound roaming
|
|
150,195
|
|
117,895
|
|
Long-distance and other service revenues
|
|
213,148
|
|
173,621
|
|
Service Revenues
|
|
2,721,341
|
|
2,382,747
|
|
Equipment sales
|
|
200,813
|
|
188,289
|
|
|
|
$
|
2,922,154
|
|
$
|
2,571,036
|
|
44
Service revenues increased $338.6 million, or
14%, to $2,721.3 million in 2007 from $2,382.7 million in 2006. 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); (iii) charges for long-distance calls made on U.S.
Cellulars systems; and (iv) amounts received from the Federal Universal
Service Fund (USF). The increase in service revenues in 2007 was primarily
due to the following factors:
a 6% growth in
the average customer base; and
an 8% increase
in monthly service revenue per customer, which averaged $50.66 in the first
nine months of 2007 and $46.92 in the first nine months of 2006.
Retail service revenues
increased $266.8 million, or 13%, to $2,358.0 million in 2007 from $2,091.2
million in 2006. 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 and higher regulatory fees such as universal
service fund contributions which are billed to customers, were the primary
reasons for the increase in retail service revenue. Average monthly retail
service revenue per customer increased 7% to $43.89 in 2007 from $41.18 in
2006.
U.S. Cellulars average customer base
increased 6% in 2007, primarily driven by the 332,000 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 also was affected by the timing of acquisitions, divestitures and
exchanges.
U.S. Cellular anticipates that its customer
base will increase during 2007 as a result of its continuing focus on customer
satisfaction, attractively priced service plans, a broader line of handsets and
other products, improvements in distribution and growth in customers in newer
markets. However, the level of growth in the customer base for 2007 will depend
upon U.S. Cellulars ability to attract new customers and retain existing
customers in a highly, and increasingly, competitive marketplace. See Operating
Income, below, for U.S. Cellulars estimate of net retail customer additions
for the full year.
Monthly retail minutes of use per customer increased to 843 in 2007
from 691 in 2006, 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 revenues of the increase in average monthly
minutes of use was offset by a decrease in average revenue per minute of use.
The decrease in average revenue per minute of use reflects 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 in certain pricing plans. U.S. Cellular
anticipates that its average revenue per minute of use may continue to decline
in the future, reflecting increased competition and continued penetration of
the consumer market.
Revenues from data products and services grew significantly year-over-year,
totaling $260.1 million in 2007 compared to $152.0 million in 2006 and
representing 10% of total service revenues, compared to 6% of total service
revenues in the prior year. Such growth, which positively impacted average
monthly retail service revenues per customer, reflected customers continued
increasing acceptance and usage of U.S. Cellulars easyedgeSM
products and offerings such as Short Messaging Services (SMS) and BlackBerry®
handsets and service.
Inbound roaming revenues increased $32.3
million, or 27%, to $150.2 million in 2007 from $117.9 million in 2006. 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 and retail minutes of use per customer
throughout the wireless industry and an increase in inbound traffic from other
wireless carriers. The decline in revenue per minute of use is primarily due to
the general downward trend in negotiated rates, and the changing mix of traffic
from various carriers with different negotiated rates.
45
U.S. Cellular anticipates that inbound roaming minutes of use might
continue to grow over the next few years, reflecting continuing industry-wide
growth in customers and retail minutes of use per customer and increased usage
of data services while roaming, but that the rate of growth will decline due to
higher penetration and slower overall growth in the consumer wireless market.
In addition, U.S. Cellular anticipates that the rate of decline in average
inbound roaming revenue per roaming minute of use may be lower over the next
few years, reflecting the wireless industry trend toward longer term negotiated
rates.
Long-distance and other service revenues
increased $39.5 million, or 23%, to $213.1 million in 2007 from $173.6 million
in 2006. The increase reflected a $15.9 million increase in long-distance
revenues and a $23.6 million increase in other revenues. 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
growth in other revenues was due primarily to an increase in ETC funds that
were received from the USF. At September 30, 2007 and 2006, U.S. Cellular was
eligible to receive ETC funds in nine and seven states, respectively.
Equipment sales revenues
increased $12.5 million, or 7%, to $200.8 million in 2007 from $188.3 million
in 2006. 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 2007 was driven by increases in both the number of handsets sold
and the average revenue per handset sold. The number of handsets sold increased
4% year-over-year, and the average revenue per handset sold increased 3% in
2007 primarily reflecting a continued shift to the sale of more expensive
handsets with expanded capabilities.
Operating Expenses increased $244.4 million,
or 10%, to $2,589.2 million in 2007 from $2,344.8 million in 2006. The major
components of operating expenses are shown in the table below.
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
System operations (excluding depreciation, amortization
and accretion included below)
|
|
$
|
529,172
|
|
$
|
468,980
|
|
Cost of equipment sold
|
|
470,356
|
|
417,489
|
|
Selling, general and administrative
|
|
1,141,803
|
|
1,028,865
|
|
Depreciation, amortization and accretion
|
|
447,889
|
|
429,451
|
|
|
|
$
|
2,589,220
|
|
$
|
2,344,785
|
|
System operations expenses (excluding depreciation,
amortization and accretion) increased
$60.2 million, or 13%, to $529.2 million in 2007 from $469.0 million in 2006.
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.
46
Key components of the increase in total
system operations expenses were as follows:
maintenance,
utility and cell site expenses increased $22.5 million, or 12%, in 2007,
primarily driven by increases in the number of cell sites within U.S. Cellulars
network. The number of cell sites totaled 6,255 and 5,726 as of September 30,
2007 and 2006, 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;
expenses
incurred when U.S. Cellulars customers used other carriers networks while
roaming increased $21.5 million, or 21%, due to an increase in roaming minutes
of use partially offset by a reduction in cost per minute which resulted from a
reduction in negotiated roaming rates; and
the cost of
network usage for U.S. Cellulars systems increased $16.2 million, or 9%, as
total minutes used on U.S. Cellulars systems increased 28% in 2007 primarily
driven by migration to pricing plans with a larger number of packaged minutes,
mostly offset by the ongoing reduction in the per-minute cost of usage for U.S.
Cellulars network. In addition, data network and developer costs increased
driven by the increase in data usage.
Management
expects total 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 most markets and continues development
activities in recently launched markets; and
increases in
minutes of use, both on U.S. Cellulars network and by U.S. Cellulars
customers on other carriers networks when roaming.
These
factors are expected to be partially offset by anticipated decreases in the
per-minute cost of usage both on U.S. Cellulars network and on other carriers
networks.
Cost of
equipment sold increased $52.9 million, or 13%, to $470.4
million in 2007 from $417.5 million in 2006. The increase was driven by an
increase in the number of handsets sold and the change in mix of handsets being
sold, as discussed above.
Selling,
general and administrative expenses increased $112.9
million, or 11%, to $1,141.8 million in 2007 from $1,028.9 million in 2006.
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 2007 is primarily due to higher expenses
associated with acquiring, serving and retaining customers, driven in part by
an increase in U.S. Cellulars customer base. Key components of the increase in
selling, general and administrative expenses were as follows:
a $42.2 million,
or 70%, 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) due to both an
increase in the contribution rate and an increase in service revenues;
a $36.5 million,
or 12%, increase in expenses related to compensation of agents and sales
employees to support growth in customers and revenues in recently acquired and
existing markets;
an $11.3
million, or 27%, increase in consulting and outsourcing costs as U.S. Cellular
increased its use of third parties to perform certain functions and participate
in certain projects;
a $9.3 million,
or 2%, increase in expenses primarily related to the operations of U.S.
Cellulars regional support offices;
47
a $6.9 million,
or 27%, increase in non-income tax expenses primarily due to both an increase
in property taxes due to the increase in the number of cell sites and an
increase in an accrual related to settling disputes with various municipalities
and St. Louis County in Missouri over business license taxes imposed on telephone
service. U.S. Cellular settled this matter in October 2007; and
a $3.9 million,
or 3%, increase in advertising expenses primarily due to an increase in media
purchases.
The above
increases were partially offset by a gain on sale of assets of
$5.0 million in 2007, related to an agreement entered into during December 2006
to sell accounts receivable written off during previous years. See Liquidity
and Capital Resources for additional information regarding the sale.
Management
uses the sales and marketing cost 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 similar measures
that are reported by other companies.
Sales and marketing cost per gross customer addition was $468 in 2007
compared to $467 in 2006. As discussed in footnotes (4) and (5) in the table
below, there was a change in the reporting of reseller gross customer additions
during 2007. Excluding the impact of reseller gross customer additions, sales
and marketing cost per gross customer addition in 2007 was $554 compared to
$503 in 2006. The increase was primarily due to increased sales employee and
agent expenses as discussed above as well as higher losses on sales of
handsets.
Below is a summary of sales and marketing cost per gross customer
addition for each period:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands,
except per customer amounts)
|
|
Components of cost:
|
|
|
|
|
|
Selling, general and administrative expenses
related to the acquisition of new customers (1)
|
|
$
|
487,769
|
|
$
|
448,315
|
|
Cost of equipment sold to new customers (2)
|
|
351,451
|
|
297,533
|
|
Less equipment sales revenue from new
customers (3)
|
|
(219,551
|
)
|
(211,167
|
)
|
Total costs
|
|
619,669
|
|
534,681
|
|
Gross customer additions (000s) (4)
|
|
1,324
|
|
1,146
|
|
Sales and marketing cost per gross customer
addition (5)
|
|
$
|
468
|
|
$
|
467
|
|
(1) Selling, general and administrative expenses related
to the acquisition of new customers is reconciled to total selling, general and
administrative expenses as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses, as reported
|
|
$
|
1,141,803
|
|
$
|
1,028,865
|
|
Less expenses related to serving and
retaining customers
|
|
(654,034
|
)
|
(580,550
|
)
|
Selling, general and administrative
expenses related to the acquisition of new customers
|
|
$
|
487,769
|
|
$
|
448,315
|
|
(2) Cost of equipment sold to new customers is
reconciled to cost of equipment sold as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Cost of equipment sold as reported
|
|
$
|
470,356
|
|
$
|
417,489
|
|
Less cost of equipment sold related to the
retention of current customers
|
|
(118,905
|
)
|
(119,956
|
)
|
Cost of equipment sold to new customers
|
|
$
|
351,451
|
|
$
|
297,533
|
|
48
(3) Equipment sales revenue from new customers is
reconciled to equipment sales revenues as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Equipment sales revenue as reported
|
|
$
|
200,813
|
|
$
|
188,289
|
|
Less equipment sales revenues related to
the retention of current customers, excluding agent rebates
|
|
(31,897
|
)
|
(40,398
|
)
|
Add agent rebate reductions of equipment
sales revenues related to the retention of current customers
|
|
50,635
|
|
63,276
|
|
Equipment sales revenues from new customers
|
|
$
|
219,551
|
|
$
|
211,167
|
|
(4) Gross customer additions represent customers added
to U.S. Cellulars customer base through its marketing distribution channels
during the respective periods presented, including customers added through a
third party reseller. Effective for 2007, consistent with a change in U.S.
Cellulars operating practices with its reseller, U.S. Cellular reports all
reseller customer activations as gross additions in the period in which such
reseller customer activations occur. Previously, only net customer activations
as reported by the reseller were counted in the number of gross additions; this
previous practice reflected the fact that certain reseller customer activations
involved the resellers reuse of telephone numbers that had not been
disconnected from U.S. Cellulars network at the time of an earlier reseller
customer disconnect. Reseller gross customer additions for the nine months
ended September 30, 2007 totaled 206,000. On a comparable basis, reseller gross
customer additions for the nine months ended September 30, 2006 were estimated
to be 329,000, versus the previously reported total of 82,000.
(5) Sales and
marketing cost per gross customer addition for 2007 and for 2006 is not
comparable as a result of the change in operating practices with the reseller (see
footnote (4) above). Excluding the impact of reseller gross customer additions,
sales and marketing costs per gross customer addition for 2007 was $554
compared to $503 for 2006.
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 to $14.74 in 2007 from $14.25 in 2006, primarily
due to the increase in employee-related expenses associated with serving and
retaining customers and an increase in expense related to the federal universal
service fund contributions and other regulatory fees and taxes.
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:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands,
except per customer amounts)
|
|
Components
of cost (1)
|
|
|
|
|
|
Selling,
general and administrative expenses, as reported
|
|
$
|
1,141,803
|
|
$
|
1,028,865
|
|
Less
selling, general and administrative expenses related to the
acquisition of new customers
|
|
(487,769
|
)
|
(448,315
|
)
|
Add
cost of equipment sold related to the retention of
current customers
|
|
118,905
|
|
119,956
|
|
Less
equipment sales revenues related to the retention of
current customers, excluding agent rebates
|
|
(31,897
|
)
|
(40,398
|
)
|
Add
agent rebate reductions of equipment sales revenues
related to the retention of current customers
|
|
50,635
|
|
63,276
|
|
Net
cost of serving and retaining customers
|
|
$
|
791,677
|
|
$
|
723,384
|
|
Divided
by average customers during period (000s) (2)
|
|
5,969
|
|
5,642
|
|
Divided
by nine months in each period
|
|
9
|
|
9
|
|
Average
monthly general and administrative expenses per customer
|
|
$
|
14.74
|
|
$
|
14.25
|
|
(1) These components were previously identified in
the summary of sales and marketing cost per customer addition and related
footnotes above.
(2) The calculation of Average customers during
the period is set forth in footnote 6 of the table of summarized operating
data above.
Depreciation, amortization and accretion expense
increased $18.4 million, or 4%, to $447.9 million in 2007 from $429.5 million
in 2006.
49
Depreciation expense increased $34.2 million, or 9%, to $416.7 million
in 2007 from $382.5 million in 2006. The majority of the increase reflects a
higher average fixed assets balance, which increased 10% for the period from
January 1 through September 30, 2007 as compared to the same period in the
prior year. The increase in fixed assets in 2007 resulted from the following
factors:
the addition of 529 cell
sites to U.S. Cellulars network since September 30, 2006; and
the addition of radio
channels and switching capacity to U.S. Cellulars network to accommodate
increased usage.
See Financial Resources and Liquidity and Capital Resources for
further information regarding capital expenditures.
In 2007, depreciation expense included charges of $7.8 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
2006, depreciation expense included charges of $12.2 million related to such
disposals, trade-ins and write-offs.
Amortization and accretion expense decreased $19.9 million in 2007
primarily due to the billing system becoming fully amortized in 2006 and a
decrease in customer list amortization.
Loss on impairment of intangible assets totaled $4.0 million in 2007. In
accordance with FASB Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), U.S.
Cellular performed the annual impairment test for its investment in licenses in
the second quarter of 2007. In accordance with SFAS 142, the Company performs
the annual impairment tests of licenses at the unit of accounting level. U.S.
Cellulars license impairments in 2007 were $2.1 million and related to two of
its six units of accounting in which operations have not yet begun. Fair values
for such units of accounting were determined by reference to values established
by auctions and other market transactions involving licenses comparable to
those included in each specific unit of accounting. The 2006 annual testing
resulted in no impairments.
U.S. Cellular performed an impairment test for its customer lists in
the third quarter of 2007. Certain customer lists were identified as impaired,
resulting in a $1.9 million charge. No customer lists were impaired in 2006.
Operating Income
Operating income increased $106.6 million, or
47%, to $332.9 million in 2007 from $226.3 million in 2006. Operating income
margin (as a percent of service revenues) was 12.2% in 2007 and 9.5% in 2006.
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 the 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 margin 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 U.S. Cellulars estimates of full-year 2007 service revenues;
depreciation, amortization and accretion expenses; operating income; and net
retail customer additions. The following estimates were updated by U.S.
Cellular on November 6, 2007, and continue to represent U.S. Cellulars
estimates as of the date of the filing of this Form 10-Q . Such forward-looking
information 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.
|
|
2007 Estimated Results
|
|
2006 Actual Results
|
|
Service
revenues
|
|
$3.6 - $3.7 billion
|
|
$
|
3.2 billion
|
|
Depreciation,
amortization and accretion expenses
|
|
Approx. $600 million
|
|
$
|
575.1 million
|
|
Operating
income
|
|
$410 - $460 million
|
|
$
|
289.9 million
|
|
Net
retail customer additions
|
|
375,000 425,000
|
|
297,000
|
|
|
|
|
|
|
|
|
|
50
TDS TELECOM OPERATIONS
TDS operates its wireline telephone operations through TDS Telecom, a
wholly owned subsidiary. Total equivalent access lines served by TDS Telecom
increased by 1,700 or less than 1%, since September 30, 2006 to 1,206,700. 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
763,000 equivalent access lines at September 30, 2007, a 1% (10,900 equivalent
access lines) increase from 752,100 equivalent access lines at September 30,
2006.
TDS Telecoms competitive local exchange carrier subsidiary served
443,700 equivalent access lines at September 30, 2007, a 2% (9,200 equivalent
access lines) decrease from 452,900 equivalent access lines served at September
30, 2006.
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Incumbent Local Exchange Carrier Operations
|
|
|
|
|
|
Operating revenues
|
|
$
|
473,935
|
|
$
|
485,228
|
|
Operating expenses
|
|
377,417
|
|
379,854
|
|
Operating income
|
|
96,518
|
|
105,374
|
|
|
|
|
|
|
|
Competitive Local Exchange Carrier
Operations
|
|
|
|
|
|
Operating revenues
|
|
179,089
|
|
176,599
|
|
Operating expenses
|
|
169,000
|
|
179,016
|
|
Operating income (Loss)
|
|
10,089
|
|
(2,417
|
)
|
|
|
|
|
|
|
Intercompany revenue elimination
|
|
(4,469
|
)
|
(4,186
|
)
|
Intercompany expense elimination
|
|
(4,469
|
)
|
(4,186
|
)
|
|
|
|
|
|
|
TDS Telecom Operating income
|
|
$
|
106,607
|
|
$
|
102,957
|
|
Operating Income increased $3.6 million, or
4%, to $106.6 million in 2007 from $103.0 million in 2006.
The
following are estimates of full-year 2007 service revenues; depreciation,
amortization and accretion expenses and operating income. The following
estimates were updated by TDS Telecom on November 6, 2007 and continue to
represent TDS Telecoms views as of the filing of this Form 10-Q. Such
forward-looking statements should not be assumed to be accurate as of any
future date. TDS Telecom 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.
|
|
2007 Estimated Results
|
|
2006 Actual Results
|
|
Incumbent
Local Exchange Carrier and Competitive Local Exchange Carrier Operations:
|
|
|
|
|
|
Operating
revenues
|
|
$850 - $880 million
|
|
$875.9 million
|
|
Operating
income
|
|
$130 - $150 million
|
|
$128.9 million
|
|
Depreciation,
amortization and accretion expenses
|
|
Approx. $155 million
|
|
$159.6 million
|
|
51
Incumbent
Local Exchange Carrier Operations
In
the third quarter of 2007 TDS Telecom determined that it is no longer
appropriate to continue the application of SFAS 71 for reporting its financial results.
See Footnote 8 Extraordinary Item Discontinuance of the Application of
Statement of Financial Accounting Standard No. 71, Accounting
for the Effects of Certain Types of Regulation. TDS Telecom does not
expect operating results in the future to be materially impacted by the
decision to discontinue the application of SFAS 71.
Operating Revenues decreased $11.3 million, or
2%, to $473.9 million in the nine months ended September 30, 2007 from $485.2
million in 2006.
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Local service
|
|
$
|
147,259
|
|
$
|
151,058
|
|
Network access and long distance
|
|
250,280
|
|
266,994
|
|
Miscellaneous
|
|
76,396
|
|
67,176
|
|
|
|
$
|
473,935
|
|
$
|
485,228
|
|
Local
service revenues decreased $3.8 million, or 3%, to
$147.3 million in 2007 from $151.1 million in 2006. Voice service revenue
decreases from access line losses outpaced increases in advanced calling
services and interconnection revenues. Physical access lines decreased 4.4%, of
which 21.0% was due to the loss of second lines, significantly affected by
digital subscriber line (DSL) substitution.
Network access and long distance revenues
decreased $16.7 million, or 6%, to $250.3 million in 2007 from $267.0 million
in 2006. Revenues generated from network usage, including compensation from
state and national revenue pools, decreased $17.3 million, primarily due to
exiting the national revenue pool for DSL, a 13.3% decrease in access minutes
of use from the first nine months of last year and a lower rate of return from
the national revenue pools. Revenues from long distance service increased $0.6
million in 2007 primarily due to an increased number of long distance
customers. As of September 30, 2007, TDS Telecom incumbent local exchange
carrier operations were providing long-distance service to 346,400 customers
compared to 335,100 customers at September 30, 2006.
Miscellaneous revenues increased $9.2 million,
or 14%, to $76.4 million in 2007 from $67.2 million in 2006. Revenues from
digital subscriber lines increased $10.2 million, but were offset by decreases
in dial-up Internet and other non-regulated services revenues. As of September
30, 2007, TDS Telecom incumbent local exchange carrier operations were
providing digital subscriber line service and dial-up Internet service to
135,500 and 61,300 customers, respectively, as compared to 94,100 digital
subscriber line service customers and 82,200 dial-up Internet service customers
as of September 30, 2006.
Operating Expenses decreased by $2.5 million,
or less than 1%, to $377.4 million in 2007 from $379.9 million in 2006,
reflecting declines in selling, general and administrative expenses as well as
lower depreciation, amortization and accretion expenses. These decreases were
partially offset by an increase in cost of services and products.
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Cost of services and products (excluding
depreciation, amortization and accretion included below)
|
|
$
|
148,883
|
|
$
|
141,833
|
|
Selling, general and administrative expense
|
|
129,622
|
|
137,436
|
|
Depreciation, amortization and accretion
|
|
98,912
|
|
100,585
|
|
|
|
$
|
377,417
|
|
$
|
379,854
|
|
Cost of
services and products increased $7.1 million or 5%, to
$148.9 million in 2007 from $141.8 million in 2006. The increase was driven in
part by increased labor and benefit charges.
52
Selling,
general and administrative expenses decreased $7.8
million, or 6%, to $129.6 million in 2007 from $137.4 million in 2006 primarily
due to cost savings associated with a corporate realignment.
Depreciation,
amortization and accretion expenses decreased $1.7
million, or 2%, to $98.9 million in 2007 from $100.6 million in 2006.
Operating Income decreased $8.9 million, or
8%, to $96.5 million in 2007 from $105.4 million in 2006 primarily as a result
of the decrease in revenues which were partially offset by decreased expenses
from cost containment initiatives.
Competitive Local Exchange Carrier Operations
Operating
Revenues increased $2.5 million, or 1%, to $179.1
million in the nine months ended September 30, 2007 from $176.6 million in
2006.
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Operating revenues
|
|
$
|
179,089
|
|
$
|
176,599
|
|
|
|
|
|
|
|
|
|
Retail
revenues increased $1.2 million, or 1% to $162.3
million in 2007 from $161.1 million in 2006, primarily due to commercial
customer growth partially offset by a declining residential customer base. Average
revenue per customer has increased relative to last year due to the changing
mix of commercial and residential customers and also due to less discounting on
residential products and growth in higher value commercial products.
Wholesale
revenues, which represent charges to other carriers,
increased $1.3 million, or 8% to $16.8 million in 2007 from $15.5 million in
2006 primarily due to a decrease in revenue disputes with interexchange
carriers in 2007.
Operating Expenses decreased
$10.0 million, or 6%, to $169.0 million in 2007 from $179.0 million in 2006.
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Cost of services and products (excluding
depreciation, amortization and accretion included below)
|
|
$
|
88,402
|
|
$
|
93,481
|
|
Selling, general and administrative expense
|
|
62,687
|
|
67,005
|
|
Depreciation, amortization and accretion
|
|
17,911
|
|
18,530
|
|
|
|
$
|
169,000
|
|
$
|
179,016
|
|
Cost of services and products decreased $5.1
million, or 5%, to $88.4 million in 2007 from $93.5 million in 2006 primarily
due to change in mix of customers and products and more favorable pricing
received on certain services purchased. These declines were partially offset by
a settlement with an interexchange carrier, which reduced costs by $2.9 million
in the first quarter of 2006.
Selling, general and administrative expenses
decreased $4.3 million, or 6%, to $62.7 million in 2007 from $67.0 million in
2006 primarily due to a 10% decrease in number of employees, partially offset
by wage increases. Expenses were also impacted by a decrease in advertising expense
related to reduced marketing costs to residential customers and a decrease in
retail and carrier bad debt expense.
Depreciation, amortization and accretion expenses
decreased $0.6 million, or 3%, to $17.9 million in 2007 from $18.5 million in
2006 as a result of decreases in depreciation on certain assets that have
become fully depreciated.
Operating
Income increased $12.5 million to an operating income
of $10.1 million in 2007 from an operating loss of $2.4 million in 2006,
reflecting the increase in operating revenues and the decrease in operating
expenses.
53
Three Months Ended September 30, 2007
Compared to Three Months Ended September 30, 2006
Operating
Revenues increased $124.8 million, or 11%, to $1,236.9
million during the third quarter of 2007 from $1,112.1 million in 2006.
U.S. Cellular Operating Revenues
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Retail service
|
|
$
|
814,948
|
|
$
|
715,896
|
|
Inbound roaming
|
|
60,843
|
|
43,806
|
|
Long-distance and other service revenues
|
|
78,749
|
|
62,118
|
|
Service Revenues
|
|
954,540
|
|
821,820
|
|
Equipment sales
|
|
61,294
|
|
66,703
|
|
|
|
$
|
1,015,834
|
|
$
|
888,523
|
|
Service revenues increased $132.7 million, or
16%, to $954.5 million in 2007 from $821.8 million in 2006. The increase in
service revenues in 2007 was primarily due to the following factors:
a 6% growth in
the average customer base; and
a 10% increase
in monthly service revenue per customer, which averaged $52.71 in the third
quarter of 2007 and $47.93 in the third quarter of 2006.
Retail service revenues increased $99.0
million, or 14%, to $814.9 million in the third quarter of 2007 from $715.9
million in the third quarter of 2006, primarily due to growth in U.S. Cellulars
customer base (6%) and average monthly retail service revenues per customer
(8%). Average monthly retail service revenue per customer increased to $45.00
in 2007 from $41.75 in 2006, reflecting an increase in monthly retail minutes
of use per customer, to 887 in 2007 from 725 in 2006, partially offset by a
decrease in average revenue per minute of use. Other factors in the increase
included higher revenues from data services and higher regulatory fees such as
universal service fund contributions which are billed to customers.
Inbound roaming revenues increased $17.0
million, or 39%, to $60.8 million in the third quarter of 2007 from $43.8
million in the third quarter of 2006. The increase in revenues was related
primarily to an increase in inbound roaming minutes of use.
Long-distance and other service revenues
increased $16.6 million, or 27%, to $78.7 million in the third quarter of 2007
from $62.1 million in the third quarter of 2006. The increase primarily
reflected a $5.3 million increase in long-distance revenues and a $10.8 million
increase in the amount of ETC funds received from the USF.
Equipment sales revenues decreased $5.4
million, or 8%, to $61.3 million in the third quarter of 2007 from $66.7
million in the third quarter of 2006. The decrease in equipment sales revenues
in 2007 was driven primarily by a decrease in average revenue per handset sold.
Average revenue per handset sold decreased 16% in 2007 while the number of
handsets sold increased 9% year-over-year.
54
TDS Telecom Operating Revenues
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Incumbent Local Exchange Carrier Operations
|
|
|
|
|
|
Local service
|
|
$
|
48,876
|
|
$
|
50,327
|
|
Network access and long distance
|
|
79,522
|
|
89,016
|
|
Miscellaneous
|
|
28,842
|
|
22,899
|
|
|
|
$
|
157,240
|
|
$
|
162,242
|
|
Competitive Local Exchange Carrier
Operations
|
|
58,972
|
|
59,370
|
|
Intercompany revenue elimination
|
|
(1,580
|
)
|
(1,264
|
)
|
TDS Telecom Operating revenues
|
|
$
|
214,632
|
|
$
|
220,348
|
|
TDS
Telecom operating revenues decreased $5.7 million, or 3%, to $214.6 million
during the third quarter of 2007 from $220.3 million in 2006. Incumbent local
exchange carrier revenues decreased $5.0 million, or 3%, primarily due to lower
average network access rates and a decline in dial-up Internet customers,
partially offset by an increase in digital subscriber lines and long distance
customers. Competitive local exchange carrier revenues decreased $0.4 million,
or less than 1%, due to a decline in residential revenues related to a
declining residential customer base, partially offset by growth in wholesale
revenues related to a decrease in billing disputes with interexchange carriers
and growth in commercial revenue per customer.
Operating
Expenses increased
$100.7 million, or 10%, to $1,102.4 million during the third quarter of 2007
from $1,001.7 million in 2006 for reasons generally the same as the first nine
months.
U.S. Cellular Operating Expenses
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
System operations (excluding depreciation, amortization
and accretion included below)
|
|
$
|
185,479
|
|
$
|
165,107
|
|
Cost of equipment sold
|
|
164,662
|
|
140,757
|
|
Selling, general and administrative
|
|
414,978
|
|
358,392
|
|
Depreciation, amortization and accretion
|
|
149,776
|
|
146,940
|
|
|
|
$
|
914,895
|
|
$
|
811,196
|
|
System operations expenses (excluding depreciation, amortization and
accretion) increased $20.4 million, or 12%, to $185.5
million in the third quarter of 2007 from $165.1 million in the third quarter
of 2006.
Key components of the increase in total
system operations expenses were as follows:
expenses
incurred when U.S. Cellulars customers used other carriers networks while
roaming increased $9.3 million, or 25%, due to an increase in outbound roaming
minutes of use;
maintenance,
utility and cell site expenses increased $7.9 million, or 12%, in 2007,
primarily driven by increases in the number of cell sites within U.S. Cellulars
network. The number of cell sites totaled 6,255 and 5,726 as of September 30,
2007 and 2006, 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; and
the cost of
network usage for U.S. Cellulars systems increased $3.2 million, or 5%, as
total minutes used on U.S. Cellulars systems increased 30% in 2007 primarily
driven by migration to pricing plans with a larger number of packaged minutes,
largely offset by the ongoing reduction in the per-minute cost of usage for
U.S. Cellulars network. In addition, data network and developer costs
increased driven by the increase in data usage.
Cost of equipment sold increased $23.9
million, or 17%, to $164.7 million in the third quarter of 2007 from $140.8
million in the third quarter of 2006. The increase was due to increases in the
number of handsets sold (9%) and in the cost per handset sold (8%), reflecting
a change in mix.
55
Selling, general and administrative expenses
increased $56.6 million, or 16%, to $415.0 million in the third quarter of 2007
from $358.4 million in the third quarter of 2006. The increase reflects higher
expenses associated with acquiring, serving and retaining customers, driven in
part by the increase in U.S. Cellulars customer base. Key components of the
increase in selling, general and administrative expenses were as follows:
a $16.7 million,
or 81%, 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) due to both an
increase in the contribution rate and an increase in service revenues;
a $13.3 million,
or 13%, increase in expenses related to agents and sales employees to support
growth in customers and revenues in recently acquired and existing markets;
a $7.4 million,
or 5%, increase in expenses primarily related to the operations of U.S.
Cellulars regional support offices;
a $7.8 million,
or 14%, increase in advertising expenses due to an increase in media purchases;
a $4.9 million,
or 35%, increase in consulting and outsourcing costs as U.S. Cellular increased
its use of third parties to perform certain functions and participate in
certain projects; and
a $4.7 million,
or 56%, increase in non-income tax expenses primarily due to an increase in an
accrual related to settling disputes with various municipalities and St. Louis
County in Missouri over business license taxes imposed on telephone service.
U.S. Cellular settled this matter in October 2007.
Sales and marketing cost per gross customer addition was $502 in the
third quarter of 2007 compared to $496 in 2006. As discussed in footnotes (4)
and (5) in the table below, there was a change in the reporting of reseller
gross customer additions during 2007. Excluding the impact of reseller gross
customer additions, sales and marketing cost per gross customer addition in
2007 was $601 compared to $514 in 2006. The increase was primarily due to
increased sales employee and agent expenses as discussed above as well as
higher losses on sales of handsets. Below is a summary of sales and marketing
cost per gross customer addition for each period.
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands, except per
customer amounts)
|
|
Components of cost:
|
|
|
|
|
|
Selling, general and administrative
expenses related to the acquisition of new customers (1)
|
|
$
|
174,871
|
|
$
|
154,079
|
|
Cost of equipment sold to new customers (2)
|
|
121,375
|
|
101,409
|
|
Less equipment sales revenue from new
customers (3)
|
|
(71,912
|
)
|
(74,442
|
)
|
Total costs
|
|
$
|
224,334
|
|
$
|
181,046
|
|
Gross customer additions (000s) (4)
|
|
447
|
|
365
|
|
Sales and marketing cost per gross customer
addition (5)
|
|
$
|
502
|
|
$
|
496
|
|
(1) Selling, general and administrative expenses
related to the acquisition of new customers is reconciled to total selling,
general and administrative expenses as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses, as reported
|
|
$
|
414,978
|
|
$
|
358,392
|
|
Less expenses related to serving and
retaining customers
|
|
(240,107
|
)
|
(204,313
|
)
|
Selling, general and administrative
expenses related to the acquisition of new customers
|
|
$
|
174,871
|
|
$
|
154,079
|
|
56
(2) Cost of equipment sold to new customers is
reconciled to cost of equipment sold as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Cost of equipment sold as reported
|
|
$
|
164,662
|
|
$
|
140,757
|
|
Less cost of equipment sold related to the
retention of current customers
|
|
(43,287
|
)
|
(39,348
|
)
|
Cost of equipment sold to new customers
|
|
$
|
121,375
|
|
$
|
101,409
|
|
(3) Equipment sales revenue from new customers is
reconciled to equipment sales revenues as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Equipment sales revenue as reported
|
|
$
|
61,294
|
|
$
|
66,703
|
|
Less equipment sales revenues related to
the retention of current customers, excluding agent rebates
|
|
(10,518
|
)
|
(13,530
|
)
|
Add agent rebate reductions of equipment
sales revenues related to the retention of current customers
|
|
21,136
|
|
21,269
|
|
Equipment sales revenues from new customers
|
|
$
|
71,912
|
|
$
|
74,442
|
|
(4) Gross
customer additions represent customers added to U.S. Cellulars customer base
through its marketing distribution channels during the respective periods
presented, including customers added through a third party reseller. Effective
for 2007, consistent with a change in U.S. Cellulars operating practices with
its reseller, U.S. Cellular reports all reseller customer activations as gross
additions in the period in which such reseller customer activations occur.
Previously, only net customer activations as reported by the reseller were
counted in the number of gross additions; this previous practice reflected the
fact that certain reseller customer activations involved the resellers reuse
of telephone numbers that had not been disconnected from U.S. Cellulars
network at the time of an earlier reseller customer disconnect. Reseller gross
customer additions for the three months ended September 30, 2007 totaled 73,000.
On a comparable basis, reseller gross customer additions for the three months
ended September 30, 2006 were estimated to be 92,000, versus the previously
reported total of 12,000.
(5) Sales and marketing cost per gross customer
addition for the third quarter of 2007 and for the third quarter of 2006 is not
comparable as a result of the change in operating practices with the reseller
(see footnote (4) above). Excluding the impact of reseller gross customer
additions, sales and marketing costs per gross customer addition for the third
quarter of 2007 was $601 compared to $514 for the third quarter of 2006.
57
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 11% to
$16.24 in the third quarter of 2007 from $14.66 primarily due to the increase
in expenses related to the federal universal service fund contributions and
other regulatory fees and taxes, an increase in consulting and outsourcing
expenses, an increase in non-income taxes and the increase in employee-related
expenses associated with serving and retaining customers. This measurement is
reconciled to total selling, general and administrative expenses as follows:
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands,
except per customer amounts)
|
|
Components of cost (1)
|
|
|
|
|
|
Selling, general and administrative
expenses as reported
|
|
$
|
414,978
|
|
$
|
358,392
|
|
Less selling, general and administrative
expenses related to the acquisition of new customers
|
|
(174,871
|
)
|
(154,079
|
)
|
Add cost of equipment sold related to the retention
of current customers
|
|
43,287
|
|
39,348
|
|
Less equipment sales revenues related to
the retention of current customers, excluding agent rebates
|
|
(10,518
|
)
|
(13,530
|
)
|
Add agent rebate reductions of equipment
sales revenues related to the retention of current customers
|
|
21,136
|
|
21,269
|
|
|
|
|
|
|
|
Net cost of serving and retaining customers
|
|
$
|
294,012
|
|
$
|
251,400
|
|
Divided by average customers during period
(000s) (2)
|
|
6,036
|
|
5,716
|
|
Divided by three months in each period
|
|
3
|
|
3
|
|
|
|
|
|
|
|
Average monthly general and administrative
expenses per customer
|
|
$
|
16.24
|
|
$
|
14.66
|
|
(1) These components were previously identified in
the summary of sales and marketing cost per customer addition and related
footnotes.
(2) The calculation of Average customers during
the period is set forth in footnote 6 to the table of summarized operating
data above.
Depreciation, amortization and accretion expense
increased $2.9 million, or 2%, to $149.8 million in the third quarter of 2007
from $146.9 million in the third quarter of 2006.
Depreciation expense increased $8.0 million, or 6%, on a year-over-year
basis. The majority of the increase reflects higher fixed assets; average fixed
asset balances for the third quarter of 2007 increased 9% compared to the same
period in the prior year. Such increased fixed assets balances resulted, to a
large degree, from the addition of 529 cell sites to U.S. Cellulars network
since September 30, 2006.
In 2007, amortization and accretion expense decreased $7.1 million
primarily due to the billing system becoming fully amortized in 2006 and a
decrease in customer list amortization.
In addition, U.S. Cellular performed an impairment test of its customer
lists balances in the third quarter of 2007. Certain customer lists were
identified as impaired, resulting in a $1.9 million charge. No customer lists
were impaired in 2006.
58
TDS
Telecom Operating Expenses
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Incumbent Local Exchange Carrier Operations
(ILEC)
|
|
|
|
|
|
Cost of services and products (excluding
depreciation, amortization, and accretion included below)
|
|
$
|
49,069
|
|
$
|
48,275
|
|
Selling, general and administrative expense
|
|
43,703
|
|
46,251
|
|
Depreciation, amortization and accretion
|
|
32,641
|
|
33,757
|
|
|
|
125,413
|
|
128,283
|
|
Competitive Local Exchange Carrier
Operations (CLEC)
|
|
|
|
|
|
Cost of services and products (excluding
depreciation, amortization and accretion included below)
|
|
29,252
|
|
31,662
|
|
Selling, general and administrative expense
|
|
19,679
|
|
21,855
|
|
Depreciation, amortization and accretion
|
|
5,833
|
|
5,871
|
|
|
|
54,764
|
|
59,388
|
|
Intercompany expense elimination
|
|
(1,580
|
)
|
(1,264
|
)
|
TDS Telecom Operating expenses
|
|
$
|
178,597
|
|
$
|
186,407
|
|
TDS Telecom operating expenses decreased $7.8 million, or 4%, to $178.6
million in 2007 from $186.4 million in 2006. ILEC operating expenses decreased
$2.9 million primarily due to savings realized in selling, general and
administrative expenses associated with a corporate realignment. Expenses from
CLEC operations decreased $4.6 million in 2007 primarily as a result of changes
in the mix of targeted customers, decreases in number of employees and reduced
advertising expense. Additionally, lower depreciation due to certain assets
becoming fully depreciated contributed to the lower CLEC operating expenses.
TDS Operating Income
increased $24.1 million, or 22%, to $134.5 million in the three months ended
September 30, 2007 from $110.4 million in 2006. U.S. Cellulars operating
income increased $23.6 million and TDS Telecoms operating income increased
$2.1 million.
Investment and Other Income (Expense) totaled $186.0 million in 2007 and $11.3
million in 2006.
Equity in earnings of unconsolidated entities
decreased $0.3 million, or 1%, to $23.8 million in 2007 from $24.1 million in
2006. Equity in earnings of unconsolidated entities represents TDS share of
income from markets in which it has a minority interest and that are accounted
for by the equity method. TDS investment in the Los Angeles SMSA Limited
Partnership contributed $17.9 million and $16.0 million to equity in earnings
of unconsolidated entities for the three months ended September 30, 2007 and
2006, respectively.
Interest and dividend income
increased $2.4 million, or 14%, to $18.7 million in 2007 from $16.3 million in
2006.
Interest expense
decreased $9.7 million, or 16%, to $49.7 million in 2007 from $59.4 million in
2006 for reasons generally the same as for the first nine months.
Fair value adjustments of derivative
instruments totaled a loss of $54.8 million in 2007
and a gain of $34.6 million in 2006. Fair value adjustments of derivative
instruments reflect the change in the fair value of the bifurcated embedded
collars within the forward contracts related to the Deutsche Telekom and
Vodafone marketable equity securities not designated as a
hedge. Accounting for the embedded collars as derivative instruments not
designated as a hedge results in increased volatility in the results of
operations, as fluctuation in the market price of the underlying Deutsche
Telekom and Vodafone marketable equity securities will result in changes in the
fair value of the embedded collars being recorded in the Consolidated Statement
of Operations. Also included in the fair value adjustments of derivative
instruments are the gains and losses related to the ineffectiveness of the
VeriSign fair value hedge.
Gain on sale of investments totaled a gain of
$248.9 million in 2007. The gain in 2007 consists of the $248.9 million gain
recorded on the delivery of a portion of the Deutsche Telekom ordinary shares
to settle the related prepaid forward contracts and the sale of the remaining
Deutsche Telekom ordinary shares related to the forward contracts that settled.
See Note 6 Gain on Sale of Investment.
59
Income Tax Expense increased
$80.2 million to $115.9 million in 2007 from $35.7 million in 2006. The
effective tax rate was 36.2% in 2007 and 29.3% in 2006. For further analysis and
discussion of TDS effective income tax rates in the third quarters of 2007 and
2006, see Note 7 Income Taxes of Notes of Consolidated Financial Statements
included in Item 1 above.
Minority Share of (Income) totaled
$(15.6) million in 2007 compared to $(10.8) million in the third quarter of
2006.
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Minority Share of Income
|
|
|
|
|
|
U.S. Cellular
|
|
|
|
|
|
Minority Public Shareholders
|
|
$
|
(12,244
|
)
|
$
|
(6,742
|
)
|
Minority Shareholders or Partners
|
|
(3,329
|
)
|
(4,006
|
)
|
|
|
(15,573
|
)
|
(10,748
|
)
|
Other
|
|
(50
|
)
|
(8
|
)
|
|
|
$
|
(15,623
|
)
|
$
|
(10,756
|
)
|
Extraordinary
item, representing a
gain of $42.8 million, net of tax, was recorded in the third quarter of 2007. Historically,
TDS Telecoms ILEC operations followed the accounting for regulated enterprises
prescribed by SFAS 71, Accounting for the Effects
of Certain Types of Regulation. This accounting recognizes the
economic effects of rate-making actions of regulatory bodies in the financial
statements of the TDS incumbent local exchange carriers.
TDS
Telecom has regularly monitored the appropriateness of the application of
SFAS 71. Recent changes in TDS Telecoms business environment have caused
competitive forces to surpass regulatory forces such that TDS Telecom has
concluded that it is no longer reasonable to assume that rates set at levels
that will recover the enterprises cost can be charged to its customers.
TDS
Telecom has experienced increasing access line losses due to increasing levels
of competition across all of the ILEC service areas. Competition has
intensified in 2007 from cable and wireless operators who have extended their
investment beyond major markets to enable a broader range of voice and data
services that compete directly with TDS Telecoms service offerings. These
alternative telecommunications providers have transformed a pricing structure
historically based on the recovery of costs to a pricing structure based on
market conditions. Consequently, TDS Telecom has had to alter its strategy to
compete in its markets. Specifically, in the third quarter of 2007, TDS Telecom
initiated an aggressive program of service bundling and deep discounting and
has made the decision to voluntarily exit certain revenue pools administered by
the FCC-supervised National Exchange Carrier Association in order to achieve
additional pricing flexibility to meet competitive pressures.
Based
on these material factors impacting its operations, management determined in
the third quarter of 2007 that it is no longer appropriate to continue the
application of SFAS 71 for reporting its financial results. Accordingly, TDS
Telecom recorded a non-cash extraordinary gain of $42.8 million, net of taxes
of $27.0 million, upon discontinuance of the provisions of SFAS 71, as required
by the provisions of SFAS 101, Regulated Enterprises
Accounting for the Discontinuation of the Application of FASB Statement
No. 71.
In
conjunction with the discontinuance of SFAS 71, TDS Telecom has assessed the
useful lives of fixed assets and determined that the impact of any changes were
not material.
Net Income (Loss) Available to Common totaled
$231.7 million, or $1.93 per diluted share, in 2007, compared to $75.2 million,
or $0.64 per diluted share, in 2006.
60
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value in U.S. GAAP, and expands
disclosures related to the use of fair value measures in financial statements.
SFAS 157 does not expand the use of fair value measurements in financial
statements, but standardizes its definition and guidance in U.S. GAAP. SFAS 157
emphasizes that fair value is a market-based measurement and not an
entity-specific measurement, based on an exchange transaction in which the
entity sells an asset or transfers a liability (exit price). SFAS 157
establishes a fair value hierarchy, from observable market data as the highest
level to an entitys own fair value assumptions as the lowest level. SFAS 157
is effective for TDS 2008 financial statements. TDS is currently reviewing the
requirements of SFAS 157 and has not determined the impact, if any, on its
financial position or results of operations.
In September 2006, the FASB ratified Emerging Issues Task Force Issue
No. 06-1, Accounting for Consideration Given by a
Service Provider to Manufacturers or Resellers of Equipment Necessary for an
End-Customer to Receive Service from the Service Provider (EITF
06-1). This guidance requires the application of EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer
(EITF 01-9), when consideration is given to a reseller or manufacturer for
benefit to the service providers end customer. EITF 01-9 requires that the
consideration given be recorded as a liability at the time of the sale of the
equipment and also provides guidance for the classification of the expense.
EITF 06-1 is effective for TDS 2008 financial statements. TDS is currently
reviewing the requirements of EITF 06-1 and has not yet determined the impact,
if any, on its financial position or results of operations.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115 (SFAS 159). SFAS 159 permits entities to choose
to measure many financial instruments and certain other items at fair value at
specified election dates. Unrealized gains and losses on items for which the
fair value option has been elected shall be reported in earnings at each
subsequent reporting date. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 is effective for TDS 2008 financial statements. TDS is
currently reviewing the requirements of SFAS 159 and has not yet determined the
impact, if any, on its financial position or results of operations.
FINANCIAL RESOURCES
TDS
operates in a capital- 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 TDS cash flow activities for the periods shown:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Cash flows from (used in)
|
|
|
|
|
|
Operating activities
|
|
$
|
773,230
|
|
$
|
671,000
|
|
Investing activities
|
|
(390,692
|
)
|
(481,658
|
)
|
Financing activities
|
|
(75,885
|
)
|
(255,377
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
306,653
|
|
$
|
(66,035
|
)
|
61
Cash
Flows from Operating Activities
TDS generated substantial cash flows from operating activities during
the nine months ended September 30, 2007 and 2006. Such cash flows were $773.2
million and $671.0 million, respectively. Excluding changes in assets and
liabilities from operations, cash flows from operating activities totaled
$676.1 million in 2007 and $755.4 million in 2006. Changes in assets and
liabilities from operations generated $97.1 million in 2007 and required $84.4
million in 2006, reflecting higher net working capital balances required to
support higher levels of business activity as well as higher taxes payable in
2007 related to the settlement of the forward contracts and differences in the
timing of collections and payments.
The
following table is a summary of the components of cash flows from operating
activities:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Net income
|
|
$
|
442,435
|
|
$
|
277,995
|
|
Adjustments to reconcile net income to net
cash provided by operating activities
|
|
233,627
|
|
477,402
|
|
|
|
$
|
676,062
|
|
$
|
755,397
|
|
Changes in assets and liabilities
|
|
97,168
|
|
(84,397
|
)
|
|
|
$
|
773,230
|
|
$
|
671,000
|
|
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 TDS networks. Cash
flows used for investing activities required $390.7 million in the first nine
months of 2007 compared to $481.7 million 2006.
Cash used for property, plant and equipment
and system development totaled $464.8 million in 2007 and $516.6 million in
2006. The primary purpose of TDS 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 $377.4 million in 2007 and $421.4 million in 2006
representing expenditures to construct cell sites, increase capacity in
existing cell sites and switches, remodel new and existing retail stores and
continue the development and enhancement of U.S. Cellulars office systems. TDS
Telecoms capital expenditures for its incumbent local exchange carrier
operations totaled $70.4 million in 2007 and $73.8 million in 2006 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 $10.7 million in 2007 and $11.6 million in 2006 for
switching and other network facilities. Corporate and other capital
expenditures totaled $6.3 million in 2007 and $9.8 million in 2006.
In connection with the settlement of the forward
contracts related to TDS VeriSign Inc. Common Shares, a portion of TDS Deutsche Telekom ordinary
shares, and U.S. Cellulars Vodafone ADRs, the remaining shares were sold with
proceeds totaling $91.7 million. See Marketable Equity Securities and Forward
Contracts section in Liquidity and Capital resources for further details.
TDS
Telecom in the past obtained financing from the Rural Telephone Bank (RTB).
In connection with such financings, TDS Telecom purchased stock in the RTB. TDS
Telecom had 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.
62
At an
Extraordinary General Meeting held on July 25, 2006, shareholders of Vodafone
approved a Special Distribution of £0.15 per share (£1.50 per ADR) and a Share
Consolidation under which every 8 ADRs of Vodafone were consolidated into 7
ADRs. As a result of the Special Distribution, which was paid on August 18,
2006, U.S. Cellular and TDS Telecom received approximately $28.6 million and
$7.6 million, respectively, in cash; this amount, representing a return of
capital for financial statement purposes, was recorded as a reduction in the
accounting basis of the marketable equity securities. Also, as a result of the
Share Consolidation which was effective on July 28, 2006, U.S. Cellulars
previous 10,245,370 Vodafone ADRs were consolidated into 8,964,698 Vodafone
ADRs and TDS Telecoms previous 2,700,545 Vodafone ADRs were consolidated into
2,362,976 ADRs.
Acquisitions required $20.6 million in 2007 and $98.4 million in 2006
and divestitures provided $4.3 million in 2007 and $0.7 million in 2006. On
February 1, 2007, U.S. Cellular purchased 100% of the membership interests of
Iowa 15 Wireless, LLC (Iowa 15) and obtained the 25 megahertz Federal
Communications Commission cellular license to provide wireless service in Iowa
RSA 15, for $18.2 million in cash. In April 2006, U.S. Cellular purchased the remaining
ownership interest in a Tennessee wireless market, in which it had previously
owned a 16.7% interest, for approximately $18.8 million in cash. Also in 2006, U.S. Cellular made capital
contributions and advances to Barat Wireless, which is consolidated with U.S.
Cellular for financial reporting purposes, and/or its general partner, of $79.9
million to provide initial funding of Barat Wirelesss participation in the FCCs
Auction 66.
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 $75.9 million in the nine
months ended September 30, 2007 and required $255.4 million in the same period
of 2006. Cash received from short term borrowings on revolving lines of credit
provided $25.0 million in 2007 and $390.0 million in 2006 while repayments
required $60.0 million in 2007 and $375.0 million in 2006. Redemptions of
medium-term notes required $35.0 million and repayments of long-term
debt, including $200.0 million of 7% unsecured senior notes plus accrued
interest, required $202.4 million in 2006. Proceeds received from the re-issuances of
treasury shares in connection with employee benefit plans at TDS provided
$111.1 million in 2007 and $3.0 million in 2006. Proceeds received from the
re-issuances of treasury shares in connection with employee benefit plans at
U.S. Cellular provided $16.5 million in 2007 and $3.9 million in 2006. Dividends
paid on TDS Common Shares and
Preferred Shares, required $34.3 million in 2007 and $32.2 million in
2006.
During the nine months ended September 30, 2007, TDS repurchased
1,483,193 Special Common Shares for $89.1 million, or $60.45 per share. A total
of $85.6 million was paid in cash before September 30, 2007 and $3.5 million
was paid in October. TDS did not repurchase any common shares in 2006. During
the nine months ended September 30, 2007, U.S. Cellular paid $65.2 million, to
an investment bank in connection with accelerated share repurchase programs
with respect to 838,000 U.S. Cellular Common Shares. See Repurchase of
Securities and Dividends section in Liquidity and Capital Resources for further
details. U.S. Cellular did not repurchase any of its Common Shares in 2006.
LIQUIDITY AND CAPITAL RESOURCES
As
indicated above, TDS generated cash flows from operating activities of $773.2
million and $671.0 million during the first nine months of 2007 and 2006,
respectively. At September 30, 2007, TDS had cash and cash equivalents of
$1,320.0 million. TDS believes that cash flows from operating activities,
existing cash balances 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.
63
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 TDS 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
TDS liquidity or capital resources will not occur. Economic downturns, changes
in financial markets or other factors could affect TDS 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.
Revolving
Credit Facilities
TDS has a $600 million revolving credit facility available for general
corporate purposes. At September 30, 2007, TDS had no outstanding notes payable
and $3.4 million letters of credit were outstanding, 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 TDS credit rating. At September 30, 2007, the contractual spread was 75
basis points. TDS may select borrowing periods of either seven days or one,
two, three or six months (the one-month LIBOR was 5.12% at September 30, 2007).
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 September 30, 2007). This credit facility expires in December 2009.
TDS also has $75 million of direct bank lines of credit at September
30, 2007, 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 September 30, 2007).
U.S. Cellular has a $700 million revolving credit facility available
for general corporate purposes. At September 30, 2007, U.S. Cellular had no
outstanding notes payable and $0.2 million letters of credit were outstanding,
leaving $699.8 million available for use. Borrowings under the revolving credit
facility bear interest at LIBOR plus a contractual spread based on U.S.
Cellulars credit rating. At September 30, 2007, the contractual spread was 75
basis points. U.S. Cellular may select borrowing periods of either seven days
or one, two, three or six months (the one-month LIBOR was 5.12% at September
30, 2007). 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 September 30, 2007). This credit facility expires in
December 2009.
TDS and U.S. Cellulars
interest costs on their revolving credit facilities would increase if their
credit ratings from 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 TDS or U.S. Cellulars credit ratings could adversely
affect their ability to renew existing, or obtain access to new, credit
facilities in the future. TDS and U.S. Cellulars credit ratings are as
follows:
Moodys (Issued September
20, 2007)
|
Baa3
|
stable outlook
|
Standard & Poors
(Issued June 21, 2007)
|
BB+
|
with developing outlook
|
Fitch (Issued August 16,
2007)
|
BBB+
|
stable outlook
|
On September 20, 2007, Moodys changed its
outlook on TDS and U.S. Cellulars credit rating to stable from under review
for possible further downgrade.
On August 16, 2007, Fitch changed its outlook on TDS
and U.S. Cellulars credit rating to stable from ratings watch negative.
On February 13, 2007, Standard & Poors lowered
its credit ratings on TDS and U.S. Cellular to BBB- from BBB. The ratings
remained on credit watch with negative implications. On April 23, 2007,
Standard & Poors lowered its credit rating on TDS and U.S. Cellular to BB+
from BBB-. The ratings remained
on credit watch with negative implications. On June 21, 2007, Standard &
Poors affirmed the BB+ rating, and removed the company from Credit Watch. The
outlook is developing.
The
maturity dates of certain of TDS and U.S. Cellulars revolving credit
facilities would accelerate in the event of a change in control.
64
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. As noted in Note 15, TDS and U.S. Cellular were in default of the
revolving credit facilities due to restatements and late SEC filings. TDS and
U.S. Cellular received waivers of such defaults and subsequently made all
required filings and ceased to be in default. TDS and U.S. Cellular believe
they were in compliance as of September 30, 2007 with all covenants and other
requirements set forth in the revolving credit facilities.
Long-term
Debt
TDS
long-term debt indentures do not contain any provisions resulting in
acceleration of the maturities of outstanding debt in the event of a change in
TDS credit rating. However, a downgrade in TDS credit rating could adversely
affect its ability to obtain long-term debt financing in the future. TDS
believes it was in compliance as of September 30, 2007 with all covenants and
other requirements set forth in its long-term debt indenture.
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.
TDS
investment in Deutsche Telekom AG (Deutsche
Telekom) resulted from TDS
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 (ADRs)
representing Vodafone stock. The investment in VeriSign, Inc. (VeriSign)
resulted from 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) resulted from 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 have a number of forward contracts with counterparties related to the
marketable equity securities that they hold. The forward contracts mature from
July 2007 to September 2008 and, at TDS option, may be settled in shares of
the respective securities or cash. TDS has and until May 2007 U.S. Cellular had
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 would incur
a current tax liability at the time of delivery. Deferred taxes have been
provided for the difference between the book basis and the tax basis of the
marketable equity securities and are included in deferred tax liabilities on
the Consolidated Balance Sheets. As of September 30, 2007, such deferred tax
liabilities totaled $582.8 million.
TDS
is and until May 2007 U.S. Cellular was required to comply with certain covenants
under the forward contracts. As noted in Note 17, TDS and U.S. Cellular were in
default of certain forward contracts due to restatements and late SEC filings.
TDS and U.S. Cellular received waivers of such defaults and subsequently made
all required filings and ceased to be in default. TDS believes that
it was in compliance as of September 30, 2007 with all covenants and other
requirements set forth in its forward contracts. U.S. Cellular did not have any
forward contracts as of September 30, 2007.
A
portion of the forward contracts related to the Deutsche Telekom ordinary
shares held by TDS matured in
July through September 2007. The loan amounts associated with the forward
contracts were $516.9 million. TDS elected to deliver a substantial majority of
the 45,492,172 Deutsche Telekom ordinary shares in settlement of the forward contracts, and to dispose of all of its
remaining Deutsche Telekom ordinary shares related to such forward contracts. TDS recognized a pre-tax gain of
$248.9 million at the time of the delivery of the Deutsche Telekom ordinary
shares. Since shares were delivered in
the settlement of the forward contract, TDS incurred a current tax liability in
the amount of $176.5 million at the time of the delivery. After these forward
contracts were settled in July through September 2007, TDS owns 85,969,689 of
the Deutsche Telekom ordinary shares and has a derivative liability of $516.6
million under the related forward contract. TDS will determine whether to
settle the remaining forward contracts in shares or in cash at a time closer to
the maturity dates.
65
Forward
contracts related to the VeriSign Common Shares held by TDS and the Vodafone ADRs held by
U.S. Cellular matured in May 2007. The loan amounts associated with the forward
contracts related to the VeriSign Common Shares held by TDS and the Vodafone ADRs held by U.S. Cellular were $20.8
million and $159.9 million, respectively. TDS elected to deliver a substantial
majority of the 2,361,333 VeriSign Common Shares in settlement of the forward contracts, and to dispose of all
remaining VeriSign Common Shares
in connection therewith. U.S. Cellular elected to deliver a substantial
majority of its 8,964,698 Vodafone ADRs in settlement of the forward contracts,
and to dispose of all of its remaining Vodafone ADRs in connection therewith.
After these forward contracts were settled in May 2007, TDS no longer owns any
VeriSign Common Shares, U.S.
Cellular no longer owns any Vodafone ADRs and TDS and U.S. Cellular no longer
have any liability or other obligations under such forward contracts. TDS
recognized a pre-tax gain of $137.9 million at the time of the delivery of the
VeriSign Common Shares and
Vodafone ADRs. Since shares were delivered in the settlement of the forward
contracts, TDS incurred a current tax liability in the amount of $43.4 million
at the time of the delivery.
The
following table details the outstanding forward contracts, related marketable
equity securities, and maturity dates of the contracts as of September 30,
2007, all of which relate to TDS.
Marketable Equity Security
|
|
Shares
|
|
Loan Amounts
|
|
Maturity Date
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Vodafone Group Plc
|
|
2,362,976
|
|
$
|
41,183
|
|
Fourth
Quarter 2007
|
|
Deutsche Telekom AG
|
|
30,000,000
|
|
340,963
|
|
First
Quarter 2008
|
|
|
|
|
|
|
|
|
|
Deutsche Telekom AG
|
|
38,000,000
|
|
452,104
|
|
Second
Quarter 2008
|
|
Unamortized Discount
|
|
|
|
(6,094
|
)
|
|
|
|
|
|
|
446,010
|
|
|
|
|
|
|
|
|
|
|
|
Deutsche Telekom AG
|
|
17,969,689
|
|
222,298
|
|
Third Quarter
2008
|
|
Unamortized Discount
|
|
|
|
(8,387
|
)
|
|
|
|
|
|
|
213,911
|
|
|
|
|
|
|
|
$
|
1,042,067
|
|
|
|
On
October 19, 2007, TDS elected to deliver a substantial majority of the
2,362,976 Vodafone ADRs in settlement of the forward contracts relating to such
Vodafone ADRs, with a loan value of $41.2 million, and to dispose of the
remaining Vodafone ADRs in connection with such forward contracts. TDS will
recognize a pre-tax gain of $39.9 million in the fourth quarter reflecting the
delivery of the Vodafone ADRs. Since ADRs were delivered in the settlement of
the forward contract, TDS will incur a current tax liability in the amount of
$10.9 million in the fourth quarter at the time of the delivery. As a result,
following such settlement and disposition, TDS no longer owns any Vodafone
ADRs.
Based
on the delivery of VeriSign Common Shares, a portion of the Deutsche Telekom shares, and Vodafone ADRs in 2007
and assuming the delivery of shares upon settlement of all of the other forward
contracts and based on the fair market value of the marketable equity
securities and the related derivative liabilities as of September 30, 2007, TDS
would be required to pay federal and state income taxes of approximately $581.9
million; $219.9 million related to settlements in the second and third quarter
of 2007; $10.9 million related to settlements in the fourth quarter of 2007;
and $351.1 million related to settlements in 2008. These cash outflows will be
offset somewhat by the net after-tax proceeds from the sale of the remaining
shares for cash. The amount of income taxes payable will change upon settlement
of the forward contracts as the marketable equity securities and the related
derivative liabilities will be valued as of the settlement date, not September
30, 2007.
Deutsche
Telekom paid a dividend of EUR 0.72 per share in May 2007. Using a
weighted-average exchange rate of $1.36 per EUR, TDS recorded dividend income
of $128.5 million, before taxes, in the second quarter of 2007.
TDS and its
subsidiaries own 719,396 shares of Rural Cellular Corporation
(RCCC). On July 30, 2007, RCCC
announced that Verizon Wireless has agreed to purchase the outstanding shares
of RCCC for $45 per share in cash. The acquisition is expected to close in the first half of 2008. If
the transaction closes, TDS will receive approximately $32.4 million in cash,
recognize a $31.7 million pre-tax gain and cease to own any interest in RCCC.
66
Capital
Expenditures
U.S.
Cellulars anticipated capital expenditures for 2007 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 capital
spending for 2007 is currently expected to be approximately $600 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; and
Enhance U.S. Cellulars retail store network
and office systems.
TDS
Telecoms anticipated capital spending for 2007 is currently expected to range
from $120 to $140 million to provide for normal growth and to upgrade plant and
equipment to provide enhanced services.
Acquisitions,
Divestitures and Exchanges
TDS
assesses its existing wireless and wireline 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 interests those markets
and 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.
From time to time, the FCC conducts auctions through
which additional spectrum is made available for the provision of wireless
services. The FCC has scheduled an auction of spectrum in the 700 MHz band,
designated by the FCC as Auction 73, to begin on January 24, 2008. Although its
participation is more likely than not, TDS has not made a final determination
as to whether it will participate in the auction. TDS has participated in
certain prior FCC auctions, as discussed below.
On
February 1, 2007, U.S. Cellular purchased 100% of the membership interests of
Iowa 15 Wireless, LLC (Iowa 15) and obtained the 25 megahertz FCC cellular
license to provide wireless service in Iowa RSA 15, for $18.2 million in cash.
This acquisition increased investments in licenses, goodwill and customer lists
by $7.9 million, $5.9 million and $1.6 million, respectively.
In addition, during the first nine months of 2007,
TDS Telecom and Suttle Straus each acquired a company for cash, which purchases
aggregated $2.3 million. These acquisitions increased goodwill by $1.8 million
of which $1.0 million is deductible for income tax purposes.
A
wholly-owned subsidiary of U.S. Cellular is a limited partner in Barat
Wireless, L.P. (Barat Wireless), an entity which participated in the auction
of wireless spectrum designated by the FCC as Auction 66. Barat Wireless was
qualified to receive a 25% discount available to very small businesses which
are defined as having annual gross revenues of less than $15 million. At the
conclusion of the auction on September 18, 2006, Barat Wireless was the high
bidder with respect to 17 licenses and had bid $127.1 million, net of its
discount. On April 30, 2007, the FCC granted Barat Wireless applications with
respect to the 17 licenses for which it was the winning bidder.
Barat
Wireless is in the process of developing its long-term business and financing
plans. As of September 30, 2007, U.S. Cellular had made capital contributions
and advances to Barat Wireless and/or its general partner of $127.2 million.
Barat Wireless used the funding to pay the FCC an initial deposit of $79.9
million on July 14, 2006 to allow it to participate in Auction 66. On October
18, 2006, Barat Wireless paid the balance due at the conclusion of the auction
for the licenses with respect to which Barat Wireless was the high bidder; such
amount totaled $47.2 million. For financial statement purposes, U.S. Cellular
consolidates Barat Wireless and Barat Wireless, Inc., the general partner of
Barat Wireless, pursuant to the guidelines of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and interpretation of ARB No. 51, (FIN 46(R)), 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.
67
In October 2006, Midwest Wireless Communications, L.L.C. (Midwest
Wireless) was sold to ALLTEL Corporation. In connection with the sale, U.S.
Cellular became entitled to receive approximately $106.0 million in cash with
respect to its interest in Midwest Wireless. Of this amount, $95.1 million was
distributed upon closing and $10.9 million was held in escrow to secure certain
true-up, indemnification and other possible adjustments; the funds held in
escrow were to be distributed in installments over a period of four to fifteen
months following the closing. During the first nine months of 2007, U.S.
Cellular received $4.3 million of funds that were distributed from the
aforementioned escrow. At September 30, 2007, the amount which U.S. Cellular
might be entitled to receive from the escrow in future periods was $6.6
million, excluding accrued interest income.
In April 2006, U.S. Cellular purchased the remaining
ownership interest in a Tennessee wireless market, in which it had previously
owned a 16.7% interest, for approximately $18.8 million in cash. This
acquisition increased investments in licenses, goodwill and customer lists by
$5.5 million, $4.0 million and $2.0 million, respectively.
A
wholly-owned subsidiary of 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 closed
licenses that were available only to companies included under the FCC
definition of entrepreneurs, which are small businesses that have a limited
amount of assets and revenues. In addition, Carroll Wireless bid on open
licenses that were not subject to restriction. With respect to these licenses,
however, Carroll Wireless was qualified to receive a 25% discount available to very
small businesses which were defined as having average annual gross revenues of
less than $15 million. Carroll Wireless was a successful bidder for 17 license
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 the discounts to
which Carroll Wireless was entitled. These 17 license 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 $0.2
million 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 September 30, 2007, U.S. Cellular had 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. For financial statement purposes, U.S. Cellular
consolidates Carroll Wireless and Carroll PCS, Inc., the general partner of
Carroll Wireless, pursuant to the guidelines of FIN 46(R), as U.S. Cellular
anticipates benefiting from or 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 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
September 30, 2007.
Repurchase
of Securities and Dividends
On
March 2, 2007, the TDS Board of Directors authorized the repurchase of up to
$250 million of TDS Special Common Shares from time to time through open market
purchases, block transactions, private purchases or otherwise. This
authorization will expire on March 2, 2010. As of September 30, 2007, TDS
repurchased 1,483,193 Special Common Shares for $89.1 million, or $60.03 per
share pursuant to this authorization. TDS did not repurchase any common shares
in 2006.
The Board of Directors of
U.S. Cellular has authorized the repurchase of up to 1% of the outstanding U.S. Cellular Common Shares held by
non-affiliates on a quarterly basis,
primarily for use in employee benefit plans (Limited Authorization). This
authorization does not have an expiration date.
68
On
March 6, 2007, the Board of Directors of U.S. Cellular authorized the
repurchase of up to 500,000 Common Shares of U.S. Cellular (the Additional
Authorization) from time to time through open market purchases, block
transactions, private transactions or other methods. This authorization was
in addition to U.S. Cellulars existing Limited Authorization discussed above,
and was scheduled to expire on
March 6, 2010. However, as discussed below, because this authorization
was fully utilized, no further purchases are available under this
authorization.
U.S. Cellular
has entered into accelerated share repurchase (ASR) agreements to purchase
its shares through an investment banking firm in private transactions. The
repurchased shares are being held as treasury shares. In connection with each
ASR, the investment banking firm will purchase an equivalent number of shares
in the open-market over time. Each program must be completed within two years
of the trade date of the respective ASR. At the end of each program, U.S.
Cellular will receive or pay a price adjustment based on the average price of
shares acquired by the investment banking firm pursuant to the ASR during the purchase
period, less a negotiated discount. The purchase price adjustment can be
settled, at U.S. Cellulars option, in cash or in U.S. Cellular Common Shares.
The subsequent purchase price adjustment will change the cost basis of the U.S.
Cellular treasury shares.
Activity related to U.S. Cellulars repurchases of shares through ASR
transactions on April 4 and July 10, 2007 and its obligations and potential
obligations to the investment banking firm, are detailed in the table below.
(dollars in thousands, except per share amounts)
|
|
April 4,
2007
|
|
July 10,
2007
|
|
Totals
|
|
Number of Shares Repurchased by U.S.
Cellular (1)
|
|
670,000
|
|
168,000
|
|
838,000
|
|
Weighted average price (2)
|
|
$
|
73.22
|
|
$
|
96.10
|
|
|
|
Initial purchase price to investment
banking firm
|
|
$
|
49,057
|
|
$
|
16,145
|
|
$
|
65,202
|
|
|
|
|
|
|
|
|
|
Number of Shares Purchased by Investment
Banking Firm (As
of September 30, 2007)
|
|
181,970
|
|
|
|
181,970
|
|
Average price of shares, net of discount,
purchased by Investment banking firm
|
|
$
|
78.51
|
|
|
|
|
|
Additional amount due to investment banking
firm for shares purchased through September 30, 2007 (3)
|
|
$
|
967
|
|
|
|
$
|
967
|
|
Equivalent number of shares based on
September 30, 2007 closing price (4)
|
|
9,847
|
|
|
|
9,847
|
|
|
|
|
|
|
|
|
|
Remaining Shares to be Purchased by
Investment Banking Firm under ASR
|
|
488,030
|
|
168,000
|
|
656,030
|
|
Potential additional cost of remaining
shares to be purchased(5)
|
|
$
|
11,898
|
|
$
|
202
|
|
$
|
12,100
|
|
Potential additional shares to settle ASR
based on September 30, 2007 closing price (6)
|
|
121,163
|
|
2,053
|
|
123,216
|
|
|
|
|
|
|
|
|
|
Total Potential Additional Cost to Settle
ASR, Based on September 30, 2007 Closing Price
|
|
|
|
|
|
|
|
If settled in cash
|
|
$
|
12,865
|
|
$
|
202
|
|
$
|
13,067
|
|
If settled in shares
|
|
131,010
|
|
2,053
|
|
133,063
|
|
(1) The repurchased shares are being held as
treasury shares.
(2) Weighted average price includes any per share
discount and commission paid to the investment banking firm.
(3) Represents the purchase price adjustment owed
by U.S. Cellular to the investment banking firm as of September 30, 2007 for
the shares purchased through such date, based on the difference between the
price paid per share by U.S. Cellular in connection with the ASR, and the
average price paid per share by the investment banking firm.
(4) Represents the number of additional U.S.
Cellular Common Shares that would need to be delivered to the investment
banking firm based on the closing price of $98.20 on September 30, 2007, if
U.S. Cellular settled the additional amount due described in footnote (3) with
shares.
(5) Represents the additional purchase price
adjustment that would be potentially owed by U.S. Cellular to the investment
banking firm as of September 30, 2007 based on the difference between the
initial price paid per share by U.S. Cellular in connection with the ASR, and
the closing price of U.S. Cellular Common Shares on September 30, 2007.
(6) Represents the number of additional U.S.
Cellular Common Shares that would need to be delivered to the investment
banking firm based on the closing price of $98.20 on September 30, 2007, if
U.S. Cellular settled the potential additional amount due described in footnote
(5) with shares.
At September 30, 2007, there were 656,030 shares remaining to be
purchased by the investment banking firm pursuant to the ASRs. Thus, the
amounts owed and potentially owed by U.S. Cellular to the investment banking
firm as shown in the table above would increase or decrease by $656,030 for
each $1 increase or decrease in the U.S. Cellular stock price of $98.20 as of
September 30, 2007. Any amount owed will be settled at the conclusion of each
program.
69
In addition,
on October 25, 2007, U.S. Cellular entered into another ASR to purchase 168,000
of its Common Shares from an investment banking firm in a private transaction
under the Limited Authorization. Including a commission payable to the
investment banking firm, the shares were repurchased for $16.2 million or
$96.52 per share.
TDS
ownership percentage of U.S. Cellular increases upon such U.S. Cellular share
repurchases. Therefore, TDS accounts for U.S. Cellulars purchases of U.S.
Cellular Common Shares as step acquisitions using purchase accounting. In
addition, subsequent ASR purchase price adjustment may result in additional
amounts being allocated to licenses, goodwill and customer lists at TDS. See
Note 20 Common Share Repurchase Program for more details on the amounts
allocated to licenses, goodwill and customers lists at TDS as a result of the
ASR transactions.
TDS paid total dividends on its Common Shares and
preferred shares of $34.3 million in the first nine months of 2007 and $32.2
million in 2006. TDS paid quarterly dividends per share of $0.0975 in 2007 and
$0.0925 in 2006.
Contractual and Other Obligations
The
Contractual and Other Obligations disclosed in Managements Discussion and
Analysis of Financial Condition and Results of Operations included in TDS Form
10-K for the year ended December 31, 2006, did not include any liabilities
related to unrecognized tax benefits under FIN 48. Because TDS is unable to
reasonably predict the ultimate amount or timing of settlement of such FIN 48
liabilities, the Contractual and Other Obligations table has not been updated
to include such liabilities. As of September 30, 2007, there has been no material change to
Contractual and Other Obligations or FIN 48 liabilities included in TDS
Form 10-K for the year-ended December 31, 2006.
Sale of Certain Accounts Receivable
In
December 2006, U.S. Cellular entered into an agreement to sell $226.0 million
face amount of accounts receivable written off in previous periods; the
proceeds from the sale were $5.9
million. The agreement transferred all rights, title, and interest in the
account balances, along with the right to collect all amounts due, to the buyer.
The sale was subject to a 180-day period in which the buyer could request a
refund for any unenforceable accounts. The transaction was recognized as a sale
during the fourth quarter of 2006 in accordance with the provisions of FASB Statement
of Financial Accounting Standards No.
140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities,
with the gain deferred until expiration of the recourse period. During the second quarter 2007, U.S.
Cellular recognized a gain of $5.0 million, net of refunds for
unenforceable accounts. The gain is
included in Selling, general and administrative expense on the Consolidated
Statements of Operations. All expenses related to the transaction were recognized in the period incurred.
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,
cash flows from operating activities, liquidity, capital resources or financial
flexibility.
Investments
in Unconsolidated Entities. TDS has certain variable interests in investments in which TDS holds a
minority interest. Such investments totaled $225.3 million as of September 30,
2007 and are accounted for using either the equity or cost method. TDS maximum
loss exposure for these variable interests is limited to the aggregate carrying
amount of the investments.
70
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 September 30, 2007, TDS has recorded
liabilities of $0.9 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). TDS
significant accounting policies are discussed in detail in Note 1 Summary of
Significant Accounting Policies of the Notes to the Consolidated Financial
Statements and TDS Application of Critical Accounting Policies and Estimates
is discussed in detail in the Management Discussion and Analysis of Financial
Condition and Results of Operations, both included in TDS Form 10-K for the
year ended December 31, 2006. Except for the change in accounting for uncertain
tax positions resulting from the adoption of a new accounting standard as
discussed below, there were no material changes to TDS significant accounting
policies or application of critical accounting policies during the first nine
months of 2007.
Accounting
for the Effects of Certain Types of Regulation
Historically,
TDS Telecoms incumbent local exchange carrier (ILEC) operations followed the
accounting for regulated enterprises prescribed by FASB Statement of Financial
Accounting Standard No. 71, Accounting for the Effects
of Certain Types of Regulation (SFAS 71). This accounting
recognizes the economic effects of rate-making actions of regulatory bodies in
the financial statements of the TDS Telecom ILEC operations.
TDS
Telecom has regularly monitored the appropriateness of the application of
SFAS 71. Recent changes in TDS Telecoms business environment have caused
competitive forces to surpass regulatory forces such that TDS Telecom has
concluded that it is no longer reasonable to assume that rates set at levels
that will recover the enterprises cost can be charged to its customers. TDS
Telecom has experienced increasing access line losses due to increasing levels
of competition across all of the ILEC service areas. Competition has
intensified in 2007 from cable and wireless operators who have extended their
investment beyond major markets to enable a broader range of voice and data
services that compete directly with TDS Telecoms service offerings. These
alternative telecommunications providers have transformed a pricing structure
historically based on the recovery of costs to a pricing structure based on
market conditions. Consequently, TDS Telecom has had to alter its strategy to
compete in its markets. Specifically, in the third quarter of 2007, TDS Telecom
initiated an aggressive program of service bundling and deep discounting and
has made the decision to voluntarily exit certain revenue pools administered by
the FCC-supervised National Exchange Carrier Association in order to achieve
additional pricing flexibility to meet competitive pressures.
Based
on these material factors impacting its operations, management determined in
the third quarter of 2007 that it is no longer appropriate to continue the
application of SFAS 71 for reporting its financial results. Accordingly,
TDS Telecom recorded a non-cash extraordinary gain of $42.8 million, net of
taxes of $27.0 million, upon discontinuance of the provisions of SFAS 71, as
required by the provisions of FASB Statement of Financial Accounting Standard
No. 101, Regulated Enterprises Accounting for the
Discontinuation of the Application of FASB Statement No. 71. The
components of the non-cash extraordinary gain are as follows:
|
|
Before Tax Effects
|
|
After Tax Effects
|
|
|
|
(in thousands)
|
|
Write off of regulatory cost of removal
|
|
$
|
70,107
|
|
$
|
43,018
|
|
Write off of other net regulatory assets
|
|
(259
|
)
|
(191
|
)
|
Total
|
|
$
|
69,848
|
|
$
|
42,827
|
|
In
conjunction with the discontinuance of SFAS 71, TDS Telecom has assessed the
useful lives of fixed assets and determined that the impact of any changes were
not material.
71
Income
Taxes
Effective January 1, 2007, TDS adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN
48). In accordance with FIN 48, TDS recognized a cumulative-effect adjustment
of $4.4 million, decreasing its liability for unrecognized tax benefits,
interest, and penalties and increasing the January 1, 2007 balance of
Common Stockholders Equity. Of this amount, $20.7 million increases
accumulated other comprehensive income and $16.3 million represents the
cumulative reduction of beginning retained earnings.
At January 1, 2007, TDS had $28.4 million in unrecognized tax
benefits which, if recognized, would reduce income tax expense by $14.3
million, net of the federal benefit
from state income taxes. Included in the balance of unrecognized tax
benefits at January 1, 2007, is an immaterial amount related to tax
positions for which it is possible that the total amounts could change during
the next twelve months. At September
30, 2007 TDS had $33.9 million in unrecognized tax benefits, which, if
recognized, would reduce income tax expense by $18.1 million, net of the
federal benefit from state income taxes.
TDS recognizes accrued interest and penalties related to unrecognized
tax benefits in income tax expense. This amount totaled $1.2 million and $3.4
million for the three and nine months ended September 30, 2007, respectively.
Accrued interest and penalties were $1.3 million and $4.7 million as of January
1, 2007 and September 30, 2007, respectively.
TDS and its
subsidiaries file federal and state income tax returns. With few exceptions,
TDS is no longer subject to federal, state and local income tax examinations by
tax authorities for years prior to 2002. TDS consolidated federal income tax
returns for the years 2002 2005 are currently under examination by the
Internal Revenue Service. TDS and its subsidiaries are also under examination
by various state taxing authorities.
72
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. TDS,
U.S. Cellular and their subsidiaries had legal costs from Sidley Austin of $2.7
million and $8.9 million in the three and nine months ended September 30, 2007,
respectively, and $2.7 million and $9.1 million in the three and nine months
ended September 30, 2006, respectively.
The Audit Committee of the Board of Directors
is responsible for the review and oversight of all related party transactions
as such term is defined by the rules of the American Stock Exchange.
73
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,
estimates, plans or anticipates will or may occur in the future are forward-looking
statements. The words believes, anticipates, estimates, expects, plans,
intends, projects 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 TDS Form 10-K for the year ended
December 31, 2006. 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 TDS Form 10-K for the year ended December 31, 2006, the following
factors and other information contained in, or incorporated by reference into,
this Form 10-Q to understand the material risks relating to TDS business.
Intense competition in the
markets in which TDS operates could adversely affect TDS revenues or increase
its costs to compete.
A failure by TDS service
offerings to meet customer expectations could limit TDS ability to attract and
retain customers and could have an adverse effect on TDS operations.
TDS system infrastructure
may not be capable of supporting changes in technologies and services expected
by customers, which could result in lost customers and revenues.
An inability to obtain or
maintain roaming arrangements with other carriers on terms that are acceptable
to TDS could have an adverse effect on TDS business, financial condition or
results of operations.
Changes in access to content for data or video services or 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 TDS business,
financial condition or results of operations.
A failure by TDS to acquire
adequate radio spectrum could have an adverse effect on TDS business and
operations.
TDS is likely to participate in
FCC auctions of additional spectrum in the future and, during certain periods,
will be subject to the FCCs anti-collusion rules, which could have an adverse
effect on TDS.
An inability to attract
and/or retain management, technical, sales and other personnel could have an
adverse effect on TDS business, financial condition or results of operations.
TDS 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.
Consolidation in the
telecommunications industry could adversely affect TDS revenues and increase
its costs of doing business.
Changes in general economic
and business conditions, both nationally and in the markets in which TDS
operates, could have an adverse effect on TDS business, financial condition or
results of operations.
Changes in various business
factors could have an adverse effect on TDS business, financial condition or
results of operations. These business factors may include but are not limited
to demand, usage, pricing, growth, penetration, churn, expenses, customer
acquisition and retention, roaming rates, minutes of use, mix of products and
services and costs.
Advances or changes in
telecommunications technology, such as Voice over Internet Protocol, WiMAX or
LTE (Long-Term Evolution), could render certain technologies used by TDS
obsolete, could reduce TDS revenues or could increase its costs of doing
business.
74
Changes in TDS 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 TDS license costs, goodwill
and/or physical assets.
Costs, integration problems
or other factors associated with acquisitions/divestitures of properties or
licenses and/or expansion of TDS business could have an adverse effect on TDS
business, financial condition or results of operations.
A significant portion of TDS
revenues is derived from customers who buy services through independent agents
and dealers who market TDS services on a commission basis. If TDS
relationships with these agents and dealers are seriously harmed, its wireless
revenues could be adversely affected.
TDS investments in
technologies which are unproven or for which success has not yet been
demonstrated may not produce the benefits that TDS expects.
A failure by TDS to complete
significant network build-out and system implementation as part of its plans to
improve the quality, coverage, capabilities and capacity of its network could
have an adverse effect on its operations.
Financial difficulties of
TDS key suppliers or vendors, or termination or impairment of TDS
relationships with such suppliers or vendors or interruption of or interference
in the delivery of equipment from such suppliers or vendors, due to
intellectual property disputes or other matters, could result in a delay or
termination of TDS receipt of equipment, content or services which could
adversely affect TDS business and 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 TDS results of operations or
financial condition.
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 TDS business, financial condition or results of operations.
The market prices of TDS
Common Shares and Special Common Shares are subject to fluctuations due to a
variety of factors.
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.
Restatements of financial statements by TDS and related matters,
including resulting delays in filing periodic reports with the SEC, could have
an adverse effect on TDS credit rating, liquidity, financing arrangements,
capital resources and ability to access the capital markets, including pursuant
to shelf registration statements; could adversely affect TDS listing arrangements
on the American Stock Exchange and/or New York Stock Exchange; and/or could
have other negative consequences, any of which could have an adverse effect on
the trading prices of TDS publicly traded equity and/or debt and/or on TDS
business, financial condition or results of operations.
The pending SEC investigation regarding the restatement of TDS
financial statements could result in substantial expenses, and could result in
monetary or other penalties.
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 TDS financial condition or results of operations.
A failure to successfully
remediate existing material weaknesses in internal control over financial
reporting in a timely manner or the identification of additional 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 TDS business, financial
condition or results of operations.
Early redemptions of debt or
repurchases of debt, issuances of debt, changes in prepaid forward contracts,
changes in operating leases, changes in purchase obligations or other factors
or developments could cause the amounts reported under Contractual Obligations
in TDS Managements Discussion and Analysis of Financial Condition and Results
of Operations to be different from the amounts actually incurred.
An increase of TDS debt in
the future could subject TDS to various restrictions and higher interest costs
and decrease its cash flows and earnings.
Uncertainty of access to
capital for telecommunications companies, deterioration in the capital markets,
other changes in market conditions, changes in TDS 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.
75
Changes in the regulatory
environment or a failure by TDS to timely or fully comply with any regulatory
requirements could adversely affect TDS financial condition, results of
operations or ability to do business. For example, if adopted, the
Federal-State Joint Board on Universal Service recommendation to impose an
interim cap on high-cost support received by competitive eligible
telecommunications carriers from the Universal Service Fund could impair TDS
ability to offer service in many rural areas and could adversely affect its
business, financial condition or results of operations.
Changes in income tax rates,
laws, regulations or rulings, or federal or state tax assessments could have an
adverse effect on TDS 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
TDS financial condition, results of operations or ability to do business.
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 TDS wireless business, financial
condition or results of operations.
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.
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 TDS forward looking estimates by a material amount.
76
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET
RISK
Long-term
Debt
TDS
is subject to risks due to fluctuations in interest rates. As of
September 30, 2007, the majority
of TDS debt, excluding long-term debt related to the forward contracts, is in
the form of long-term, fixed-rate notes with original maturities ranging up to
40 years. Accordingly, fluctuations in interest rates can lead to significant
fluctuations in the fair value of such instruments. The long-term debt related
to the forward contracts consists of both variable-rate debt and fixed-rate
zero coupon debt. The variable-rate forward contracts require quarterly
interest payments that are dependent on market interest rates. Increases in
interest rates will result in increased interest expense. As of September 30,
2007, TDS had not entered into any significant financial derivatives to reduce
its exposure to interest rate risks.
Refer
to the disclosure under Market Risk Long-Term Debt in TDS Form 10-K for the
year ended December 31, 2006, for additional information about the annual
requirements of principal payments, the average interest rates, and the
estimated fair values of long-term debt.
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 $1,802.1 million at September 30, 2007
and $2,790.6 million as of December 31, 2006, respectively. TDS cumulative net
unrealized holding gain, net of tax and minority interest, included in
Accumulated other comprehensive income in the Consolidated Balance Sheets
totaled $570.6 million at September 30, 2007.
TDS and its
subsidiaries own 719,396 shares of Rural Cellular Corporation
(RCCC). On July 30, 2007, RCCC
announced that Verizon Wireless has agreed to purchase the outstanding shares
of RCCC for $45 per share in cash. The acquisition is expected to close in the first half of 2008. If
the transaction closes, TDS will receive approximately $32.4 million in cash,
recognize a $31.7 million pre-tax gain and cease to own any interest in RCCC.
As
noted in LIQUIDITY AND CAPITAL RESOURCES - Marketable Equity Securities and
Forward Contracts above, the forward contracts related to the VeriSign Common
Shares and a portion of the
Deutsche Telekom shares held by TDS, and the Vodafone ADRs held by U.S.
Cellular matured in the first nine months of 2007. TDS elected to deliver the
VeriSign Common Shares and a
portion of the Deutsche Telekom ordinary shares, and to dispose of all
remaining VeriSign Common Shares
and Deutsche Telekom ordinary shares in connection therewith. TDS continues to
hold 85,969,689 Deutsch Telekom ordinary shares and is subject to related
forward contracts that mature in the fourth quarter of 2007 and the first three
quarters of 2008. U.S. Cellular elected to deliver Vodafone ADRs in settlement
of the related forward contracts and to dispose of all remaining Vodafone ADRs
held by U.S. Cellular in connection therewith. TDS settled the forward
contracts related to the 2,362,976 Vodafone ADRs that matured in October 2007.
Subsidiaries of TDS have a
number of forward contracts with counterparties related to the marketable
equity securities that they hold. TDS has 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 economic hedge
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 of the securities.
77
Under the terms of the
forward contracts, TDS will continue to own the contracted shares and will
receive dividends paid on such contracted shares, if any. The forward contracts
mature from October 2007 through September 2008 and, at TDS 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
contractually adjusted for any changes in dividends on the underlying 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 elects to settle in shares, it 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 would incur a
current tax liability at the time of delivery. If TDS elects to settle in cash
it 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. See Note 17
Long-Term Debt and Forward Contracts for additional information on the
settlement of forward contracts.
The
following table summarizes certain details related to the contracted securities
as of September 30, 2007.
|
|
|
|
Collar (1)
|
|
|
|
|
|
|
|
Downside
|
|
Upside
|
|
Loan
|
|
|
|
|
|
Limit
|
|
Potential
|
|
Amount
|
|
Security
|
|
Shares
|
|
(Floor)
|
|
(Ceiling)
|
|
(000s)(2)
|
|
|
|
|
|
|
|
|
|
|
|
Vodafone
|
|
2,362,976
|
|
$
|
17.43
|
|
$
|
17.54
|
|
$
|
41,183
|
|
Deutsche Telekom
|
|
85,969,689
|
|
$
|
10.89-$12.41
|
|
$
|
12.40-$14.99
|
|
1,015,364
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt discount
|
|
|
|
|
|
|
|
(14,480
|
)
|
|
|
|
|
|
|
|
|
$
|
1,042,067
|
|
(1) The per share amounts represent the range of
floor and ceiling prices of all securities monetized.
(2) Total amount is included in current
liabilities in the caption Forward Contracts.
The following
analysis presents the hypothetical change in the fair value of marketable
equity securities and derivative instruments at September 30, 2007, using the
Black-Scholes model, assuming hypothetical price fluctuations of plus and minus
10%, 20% and 30%.
(Dollars in millions)
|
|
Valuation of investments assuming
indicated decrease
|
|
September 30,
2007
|
|
Valuation of investments assuming
indicated increase
|
|
|
|
-30%
|
|
-20%
|
|
-10%
|
|
Fair Value
|
|
+10%
|
|
+20%
|
|
+30%
|
|
Marketable Equity Securities
|
|
1,261.5
|
|
1,441.7
|
|
1,621.9
|
|
1,802.1
|
|
1,982.3
|
|
2,165.5
|
|
2,342.7
|
|
Derivative Instruments (1)
|
|
(63.6
|
)
|
(211.1
|
)
|
(372.8
|
)
|
(561.1
|
)
|
(717.6
|
)
|
(893.9
|
)
|
(1,071.0
|
)
|
(1) Represents the fair value of the derivative
instruments assuming the indicated increase or decrease in the underlying
securities.
Accelerated Share Repurchases
U.S. Cellular
has entered into accelerated share repurchase (ASR) agreements to purchase
its shares through an investment banking firm in private transactions. The
repurchased shares are being held as treasury shares. In connection with each
ASR, the investment banking firm will purchase an equivalent number of shares
in the open-market over time. Each program must be completed within two years
of the trade date of the respective ASR. At the end of each program, U.S.
Cellular will receive or pay a price adjustment based on the average price of
shares acquired by the investment banking firm pursuant to the ASR during the
purchase period, less a negotiated discount. The purchase price adjustment can
be settled, at U.S. Cellulars option, in cash or in U.S. Cellular Common
Shares. The subsequent purchase price adjustment will change the cost basis of
the U.S. Cellular treasury shares.
78
Activity related to U.S. Cellulars repurchases of shares through ASR
transactions on April 4 and July 10, 2007 and its obligations and potential
obligations to the investment banking firm, are detailed in the table below.
(dollars in thousands, except per share amounts)
|
|
April 4,
2007
|
|
July 10,
2007
|
|
Totals
|
|
Number of Shares Repurchased by U.S.
Cellular (1)
|
|
670,000
|
|
168,000
|
|
838,000
|
|
Weighted average price (2)
|
|
$
|
73.22
|
|
$
|
96.10
|
|
|
|
Initial purchase price to investment
banking firm
|
|
$
|
49,057
|
|
$
|
16,145
|
|
$
|
65,202
|
|
|
|
|
|
|
|
|
|
Number of Shares Purchased by Investment
Banking Firm (As
of September 30, 2007)
|
|
181,970
|
|
|
|
181,970
|
|
Average price of shares, net of discount,
purchased by Investment banking firm
|
|
$
|
78.51
|
|
|
|
|
|
Additional amount due to investment banking
firm for shares purchased through September 30, 2007 (3)
|
|
$
|
967
|
|
|
|
$
|
967
|
|
Equivalent number of shares based on
September 30, 2007 closing price (4)
|
|
9,847
|
|
|
|
9,847
|
|
|
|
|
|
|
|
|
|
Remaining Shares to be Purchased by
Investment Banking Firm under ASR
|
|
488,030
|
|
168,000
|
|
656,030
|
|
Potential additional cost of remaining
shares to be purchased(5)
|
|
$
|
11,898
|
|
$
|
202
|
|
$
|
12,100
|
|
Potential additional shares to settle ASR
based on September 30, 2007 closing price (6)
|
|
121,163
|
|
2,053
|
|
123,216
|
|
|
|
|
|
|
|
|
|
Total Potential Additional Cost to Settle
ASR, Based on September 30, 2007 Closing Price
|
|
|
|
|
|
|
|
If settled in cash
|
|
$
|
12,865
|
|
$
|
202
|
|
$
|
13,067
|
|
If settled in shares
|
|
131,010
|
|
2,053
|
|
133,063
|
|
(1) The repurchased shares are being held as
treasury shares.
(2) Weighted average price includes any per share
discount and commission paid to the investment banking firm.
(3) Represents the purchase price adjustment owed
by U.S. Cellular to the investment banking firm as of September 30, 2007 for
the shares purchased through such date, based on the difference between the
price paid per share by U.S. Cellular in connection with the ASR, and the
average price paid per share by the investment banking firm.
(4) Represents the number of additional U.S.
Cellular Common Shares that would need to be delivered to the investment
banking firm based on the closing price of $98.20 on September 30, 2007, if
U.S. Cellular settled the additional amount due described in footnote (3) with
shares.
(5) Represents the additional purchase price
adjustment that would be potentially owed by U.S. Cellular to the investment
banking firm as of September 30, 2007 based on the difference between the
initial price paid per share by U.S. Cellular in connection with the ASR, and
the closing price of U.S. Cellular Common Shares on September 30, 2007.
(6) Represents the number of additional U.S.
Cellular Common Shares that would need to be delivered to the investment
banking firm based on the closing price of $98.20 on September 30, 2007, if
U.S. Cellular settled the potential additional amount due described in footnote
(5) with shares.
At September 30, 2007, there were 656,030 shares remaining to be
purchased by the investment banking firm pursuant to the ASRs. Thus, the
amounts owed and potentially owed by U.S. Cellular to the investment banking
firm as shown in the table above would increase or decrease by $656,030 for
each $1 increase or decrease in the U.S. Cellular stock price of $98.20 as of
September 30, 2007. Any amount owed will be settled at the conclusion of each
program.
In addition,
on October 25, 2007, U.S. Cellular entered into another ASR to purchase 168,000
of its Common Shares from an investment banking firm in a private transaction
under the Limited Authorization. Including a commission payable to the
investment banking firm, the shares were repurchased for $16.2 million or
$96.52 per share. The repurchased shares are being held as treasury shares.
79
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 TDS
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 TDS disclosure controls and procedures as of the end
of the period covered by this Quarterly Report. Based on this evaluation,
management concluded that TDS disclosure controls and procedures were not
effective as of September 30, 2007, at the reasonable assurance level, because
of the material weaknesses described below. Notwithstanding the material
weaknesses that existed as of September 30, 2007, 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 (GAAP).
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 interim or annual consolidated financial statements will
not be prevented or detected. Management identified the following material
weaknesses in internal control over financial reporting as of December 31,
2006, which continued to exist at September 30, 2007:
1. TDS did not maintain a sufficient complement
of personnel with an appropriate level of accounting knowledge, experience and
training in the application of GAAP commensurate with the financial reporting
requirements and the complexity of TDS 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
GAAP. This control deficiency contributed to the material weaknesses discussed
in items 2 and 3 below and the
restatement of TDS annual consolidated financial statements for 2005, 2004,
2003 and 2002, the interim consolidated financial statements for all quarters
in 2005, 2004 and 2003, the interim consolidated financial statements for the
first and second quarters of 2006, as well as adjustments, including
audit adjustments, to the 2006 third
quarter interim consolidated financial statements and the 2006 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 TDS interim or annual consolidated
financial statements that would not be prevented or detected.
2. 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 TDS annual consolidated financial statements
for 2005, 2004, 2003 and 2002, the interim consolidated financial statements
for all quarters in 2005, 2004 and 2003, the interim consolidated financial
statements for the first and second quarters of 2006, as well as adjustments,
including audit adjustments, to the 2006 third quarter interim consolidated
financial statements and the 2006 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 TDS interim or annual
consolidated financial statements that would not be prevented or detected.
80
3. TDS did not maintain effective controls over
its accounting for property, plant and equipment. Specifically, effective
controls were not designed and in place to ensure accurate recording of
transfers and disposals of equipment. This control deficiency affected
depreciation expense, property, plant and equipment and accumulated
depreciation. This control deficiency resulted in the restatement of TDS
annual consolidated financial statements for 2005, 2004 and 2003, the interim
consolidated financial statements for all quarters in 2005 and 2004, the
interim consolidated financial statements for the first and second quarters of
2006, as well as adjustments, including audit adjustments, to the 2006 third
quarter interim consolidated financial statements and the 2006 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 TDS interim or annual consolidated financial
statements that would not be prevented or detected.
Remediation
of Material Weaknesses in Internal Control Over Financial Reporting
Management
has been and 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 its technical accounting expertise, documentation from
policies through detailed procedures and automation of accounting and financial
reporting. Management is devoting significant time and resources to the
remediation effort. Managements remediation activities include the following:
Controller Review Committee The Controller
Review Committee was formed in the fourth quarter of 2004 and currently
consists of TDS Corporate Controller, U.S. Cellulars Controller and TDS
Telecoms Chief Financial Officer. The Committee oversees the accounting
treatment for current, unusual or nonrecurring matters. The Committee has
retained external financial accounting experts to advise the Committee on
technical accounting matters and, in addition, to provide technical accounting
training related to current accounting developments on a quarterly basis.
Accounting Policies and Processes TDS has
engaged external consultants to assist an internal team with a comprehensive
review of key accounting policies and processes with the intent of eliminating
the identified material weaknesses in internal control over financial reporting
and improving the design and operating effectiveness of controls and processes.
Such improvements will include the development and enhancement of written
accounting policies and procedures, including policies and procedures for new
accounting pronouncements, as well as communication and training related to the
policies and procedures. Upon remediation of the material weaknesses, a similar
team will be focused on longer-term improvements in key financial processes and
support systems, with an emphasis on simplification of the financial reporting
structure, automation, and the implementation of preventive and system-based
controls.
Training Management has engaged external
consultants to assist TDS in developing and implementing a training program
specific to the needs of accounting personnel. Training sessions were conducted
in the fourth quarter of 2006 and the first and third quarters of 2007, and
additional classes will be conducted in the future. In connection with these
training efforts, management plans to develop greater expertise within each
organization with respect to selected areas of accounting and to expand
staffing in the accounting policy area to include training responsibilities.
81
Recruiting TDS has added, and is
actively recruiting to fill, several new director, manager and staff level
positions which will enhance the overall level of technical expertise and
enable improvements in controls and processes.
TDS a Manager, Accounting and Reporting was
added in the second quarter of 2005; a Manager, External Reporting was added in
the third quarter of 2005; a Director of Accounting Policy and a Director,
Internal Controls and SOX Compliance were added in the third quarter of 2006; a
Manager of Accounting Policy was added in the first quarter of 2007; a Director
of Tax Accounting was added in July 2007; and a Vice President and Controller
of TDS Telecom was added in the fourth quarter of 2007. A new Senior
Vice President and Corporate Controller was added in the third quarter of 2007
as a result of the retirement of the previous Senior Vice President and
Corporate Controller.
U.S. Cellular a Vice President and
Controller was added in the second quarter of 2005 and promoted to Executive
Vice President Finance and Chief Financial Officer in the first quarter of
2007; a Director, Accounting Policy and Reporting was added in the second
quarter of 2006; a Manager, Accounting Policy was added in the fourth quarter
of 2006; a new Vice President and Controller was added in the first quarter of
2007; and a Manager, Accounting Policy and Research, Director
Operations Accounting and a
Director Remediation Projects were
added in the second quarter of 2007.
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 provisioning
software which TDS believes will enhance its internal controls related to
income taxes on a TDS enterprise-wide basis. As noted above, TDS added a
Director of Tax Accounting in July 2007.
Property,
Plant and Equipment TDS has engaged external consultants to assist in
enhancing controls related to accounting and reporting for property, plant and
equipment, including controls related to transfers and disposals of assets. The
scope of this project includes improvements to the fixed assets management
system and supporting processes and procedures, including a cycle count program
covering cell sites and switches and improved financial system integration,
which management believes will enhance its internal controls related to
property, plant and equipment.
Changes
in Internal Control Over Financial Reporting
There
were no changes in TDS internal control over financial reporting during the
quarter ended September 30, 2007, that have materially affected, or are
reasonably likely to materially affect TDS internal control over financial reporting.
There
was a change in the person holding the title of Senior Vice President and
Corporate Controller of TDS during the third quarter of 2007. However, this has
not been reported as a material change because this position previously
existed.
82
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, 2006, which could
materially affect TDS 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 TDS 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 TDS Annual Report on Form 10-K for the year ended
December 31, 2006, except for the following:
TDS is
likely to participate in FCC auctions of additional spectrum in the future and,
during certain periods, will be subject to the FCCs anti-collusion rules,
which could have an adverse effect on TDS.
From
time to time, the FCC conducts auctions through which additional spectrum is
made available for the provision of wireless services. TDS has participated in
such auctions in the past and is likely to participate in such auctions in the
future. FCC anti-collusion rules place certain restrictions on business
communications and disclosures by participants in an FCC auction. The FCC has scheduled an auction, referred to as Auction
73, to begin on January 24, 2008. If certain reserve prices are not met,
the FCC will follow Auction 73 with a contingent auction, referred to as
Auction 76. For purposes of applying its anti-collusion rules the FCC has
determined that both auctions will be treated as a single auction, which means
that, in the event that the contingent auction is needed, the anti-collusion
rules would apply commencing on the application deadline for Auction 73, which
is December 3, 2007, until the down payment deadline for Auction 76. If
TDS or one of its affiliates submits an application to participate in Auction 73, applicable FCC
rules will place certain restrictions on business communications with other
companies and on public disclosures relating to TDS participation. These
anti-collusion rules may restrict the normal conduct of TDS business and/or
disclosures by TDS relating to the auctions, which could last 3 to 6 months or
more. The restrictions could have an adverse effect on TDS business, financial
condition or results of operations.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
The
table required by this item is not included with respect to TDS Common Shares
because TDS does not have a share repurchase authorization with respect to its
Common Shares and there have been no purchases made by or on behalf of TDS, or
any open market purchases made by any affiliated purchaser (as defined by the
SEC) of any TDS Common Shares during the quarter ended September 30, 2007.
83
On
March 2, 2007, the TDS Board of Directors authorized the repurchase of up to
$250 million in aggregate purchase price of TDS Special Common Shares from time
to time pursuant to open market purchases and/or block purchases in compliance
with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (Exchange
Act), pursuant to Rule 10b5-1 under the Exchange Act, or pursuant to
accelerated share repurchase arrangements, prepaid share repurchases, private
transactions or as otherwise. This authorization will expire on March 2, 2010.
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 Special Common Shares during
the quarter covered by this Form 10-Q.
TDS PURCHASES OF SPECIAL COMMON SHARES
Period
|
|
(a)
Total Number of
Special Common
Shares Purchased
|
|
(b)
Average Price Paid
per Special Common
Share
|
|
(c)
Total Number of
Special Common
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
|
|
(d)
Maximum Dollar
Value of Special
Common Shares that
may yet be
Purchased Under the
Plans or Programs
|
|
July 1 31,
2007
|
|
120,692
|
|
$
|
64.67
|
|
120,692
|
|
$
|
229,635,177
|
|
August 1
31, 2007
|
|
708,546
|
|
58.82
|
|
708,546
|
|
187,958,759
|
|
September 1
30, 2007
|
|
436,675
|
|
61.93
|
|
436,675
|
|
160,917,604
|
|
Total for or
as of end of the quarter ended September 30, 2007
|
|
1,265,913
|
|
$
|
60.45
|
|
1,265,913
|
|
$
|
160,917,604
|
|
The
following is additional information with respect to the Special Common Shares
authorization:
I. The date the program was announced was March
5, 2007 by Form 8-K.
II. The
amount originally approved was up to $250 million in aggregate purchase price
of TDS Special Common Shares.
III. The
original expiration date for the program is March 2, 2010.
IV. The
Special Common Shares authorization did not expire during the third quarter of
2007.
V. TDS has not determined to terminate the
foregoing Special Common Shares repurchase program prior to expiration, or to
cease making further purchases thereunder, during the third quarter of 2007.
84
Item 4. Submission of Matter to a Vote of Security-Holders.
At the Annual Meeting of Shareholders of TDS, held on
July 26, 2007, the following number of votes were cast for the matters
indicated:
1. Election of Directors:
a. For the election of eight Directors of the
Company by the holders of Series A Common Shares and Preferred Shares:
Nominee
|
|
For
|
|
Withhold
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
James Barr III
|
|
61,223,731
|
|
9,459
|
|
0
|
|
|
|
|
|
|
|
|
|
LeRoy T. Carlson
|
|
61,232,191
|
|
1,000
|
|
0
|
|
|
|
|
|
|
|
|
|
LeRoy T. Carlson, Jr.
|
|
61,232,191
|
|
1,000
|
|
0
|
|
|
|
|
|
|
|
|
|
Dr. Letitia G.C. Carlson
|
|
61,232,191
|
|
1,000
|
|
0
|
|
|
|
|
|
|
|
|
|
Walter C.D. Carlson
|
|
61,232,191
|
|
1,000
|
|
0
|
|
|
|
|
|
|
|
|
|
Kenneth R. Meyers
|
|
61,232,191
|
|
1,000
|
|
0
|
|
|
|
|
|
|
|
|
|
Donald C. Nebergall
|
|
61,233,001
|
|
190
|
|
0
|
|
|
|
|
|
|
|
|
|
George W. Off
|
|
61,233,001
|
|
190
|
|
0
|
|
b. For the election of four Directors of the
Company by the holders of Common Shares and Special Common Shares:
Nominee
|
|
For
|
|
Withhold
|
|
Broker
Non-vote
|
|
|
|
|
|
|
|
|
|
Gregory P. Josefowicz
|
|
99,655,081
|
|
2,099,603
|
|
0
|
|
|
|
|
|
|
|
|
|
Christopher D. OLeary
|
|
99,700,311
|
|
2,054,373
|
|
0
|
|
|
|
|
|
|
|
|
|
Mitchell H. Saranow
|
|
96,785,005
|
|
4,969,680
|
|
0
|
|
|
|
|
|
|
|
|
|
Herbert S. Wander
|
|
96,409,790
|
|
5,344,894
|
|
0
|
|
2. Proposal to Approve an Amended Non-Employee
Director Compensation Plan by the holders of Series A Common Shares, Preferred
Shares and Common Shares:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-vote
|
|
104,564,308
|
|
719,722
|
|
63,316
|
|
3,063,474
|
|
3. Proposal to Ratify the Selection of
PricewaterhouseCoopers LLP as Independent Public Accountants for 2007 by the
holders of Series A Common Shares, Preferred Shares and Common Shares:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-vote
|
|
107,664,042
|
|
714,907
|
|
31,872
|
|
0
|
|
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 no borrowings under its Revolving Credit Facility as
of September 30, 2007.
85
The
foregoing description is qualified by reference to the description of the
Revolving Credit Facility under Item 1.01 in U.S. Cellulars Current Report on
Form 8-K dated December 9, 2004, and a copy of the Revolving Credit Facility,
which is included as Exhibit 4.1 of U.S. Cellulars Current Report on such Form
8-K dated December 9, 2004 and is incorporated by reference herein.
Item 6. Exhibits
Exhibit 10.1 Guidelines and Procedures for TDS
Officer Bonuses for 2007 Performance Year, is hereby incorporated by reference
from Exhibit 10.1 in TDS Quarterly Report on Form 10-Q for the period ended
March 31, 2007.
Exhibit 10.2 Employment Offer Letter Agreement
from TDS dated August 16, 2007 and accepted on August 17, 2007 by Douglas D.
Shuma Effective September 1, 2007, is hereby incorporated from Exhibit 10.1 of
TDS Current Report on Form 8-K dated August 31, 2007.
Exhibit 10.3 Deferred Compensation Agreement
between TDS and Kenneth R. Meyers effective January 1, 2007, is hereby
incorporated from Exhibit 99.1 of TDS Current Report on Form 8-K dated January
1, 2007.
Exhibit 11 Computation of Earnings per share is
included herein as Note 9 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 TDS Form 10-K for the
year ended December 31, 2006. Reference is made to TDS Form 10-K for the year
ended December 31, 2006 for a complete list of exhibits, which are incorporated
herein except to the extent supplemented or superseded above.
86
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: November
6, 2007
|
/s/
LeRoy T. Carlson, Jr.
|
|
|
LeRoy
T. Carlson, Jr.,
|
|
President
and Chief Executive Officer
|
|
(Principal Executive Officer)
|
|
|
|
|
Date: November
6, 2007
|
/s/
Kenneth R. Meyers
|
|
|
Kenneth
R. Meyers,
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
|
(Principal Financial Officer)
|
|
|
|
|
Date: November
6, 2007
|
/s/
Douglas D. Shuma
|
|
|
Douglas
D. Shuma,
|
|
Senior
Vice President and
|
|
Corporate
Controller
|
|
(Principal
Accounting Officer)
|
Signature page for the TDS 2007 Third Quarter Form 10-Q
EX-12
2
a07-26055_1ex12.htm
EX-12
Exhibit 12
TELEPHONE AND DATA SYSTEMS, INC.
RATIOS OF EARNINGS TO FIXED CHARGES
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
EARNINGS:
|
|
|
|
|
|
Income before income taxes and minority
interest
|
|
$
|
747,260
|
|
$
|
496,522
|
|
Add (deduct):
|
|
|
|
|
|
Equity in earnings of unconsolidated
entities
|
|
(71,394
|
)
|
(66,376
|
)
|
Distributions from unconsolidated entities
|
|
47,871
|
|
39,692
|
|
Minority interests in pre-tax income of
subsidiaries that do not have fixed charges
|
|
(12,024
|
)
|
(10,130
|
)
|
|
|
$
|
711,713
|
|
$
|
459,708
|
|
Add fixed charges:
|
|
|
|
|
|
Consolidated interest expense (1)
|
|
162,776
|
|
177,185
|
|
Interest portion (1/3) of consolidated rent
expense
|
|
34,473
|
|
30,840
|
|
|
|
$
|
908,962
|
|
$
|
667,733
|
|
|
|
|
|
|
|
FIXED CHARGES:
|
|
|
|
|
|
Consolidated interest expense (1)
|
|
$
|
162,776
|
|
$
|
177,185
|
|
Capitalized interest
|
|
582
|
|
|
|
Interest portion (1/3) of consolidated rent
expense
|
|
34,473
|
|
30,840
|
|
|
|
$
|
197,831
|
|
$
|
208,025
|
|
|
|
|
|
|
|
RATIO OF EARNINGS TO FIXED CHARGES
|
|
4.59
|
|
3.21
|
|
|
|
|
|
|
|
Tax-effected preferred dividends
|
|
$
|
65
|
|
$
|
245
|
|
Fixed charges
|
|
197,831
|
|
208,025
|
|
Fixed charges and preferred dividends
|
|
$
|
197,896
|
|
$
|
208,270
|
|
|
|
|
|
|
|
RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED DIVIDENDS
|
|
4.59
|
|
3.21
|
|
(1) Interest expense on income tax contingencies
is not included in fixed charges.
EX-31.1
3
a07-26055_1ex31d1.htm
EX-31.1
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: November 6, 2007
|
|
|
|
|
/s/
LeRoy T. Carlson, Jr.
|
|
|
LeRoy
T. Carlson, Jr.
|
|
President
and Chief Executive Officer
|
EX-31.2
4
a07-26055_1ex31d2.htm
EX-31.2
Exhibit 31.2
Certification
of Chief Financial Officer
I,
Kenneth R. Meyers, 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: November 6, 2007
|
|
|
/s/
Kenneth R. Meyers
|
|
Kenneth
R. Meyers
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
EX-32.1
5
a07-26055_1ex32d1.htm
EX-32.1
Exhibit 32.1
Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States
Code
I,
LeRoy T. Carlson, Jr., the chief executive officer of Telephone and Data
Systems, Inc., certify that (i) the quarterly report on Form 10-Q for the third
quarter of 2007 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.
|
|
November
6, 2007
|
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
a07-26055_1ex32d2.htm
EX-32.2
Exhibit 32.2
Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States
Code
I,
Kenneth R. Meyers, the chief financial officer of Telephone and Data Systems,
Inc., certify that (i) the quarterly report on Form 10-Q for the third quarter
of 2007 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/
Kenneth R. Meyers
|
|
|
Kenneth
R. Meyers
|
|
November
6, 2007
|
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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8
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`
end
-----END PRIVACY-ENHANCED MESSAGE-----