SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-14157
TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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36-2669023 |
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(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
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incorporation or organization) |
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30 North LaSalle Street, Chicago, Illinois 60602 |
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(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 |
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No o |
Indicate by check 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 |
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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 |
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No x |
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
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Outstanding at August 31, 2006 |
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Common Shares, $.01 par value |
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51,432,410 Shares |
Special Common Shares, $.01 par value |
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57,782,076 Shares |
Series A Common Shares, $.01 par value |
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6,445,404 Shares |
Explanatory Note
Telephone and Data Systems, Inc. (TDS) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006, which was originally filed with the Securities and Exchange Commission (SEC) on October 10, 2006 (Original Form 10-Q), to amend Part I Financial Information Item 1 Financial Statements, Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A), Item 3 Quantitative and Qualitative Disclosures About Market Risk, and Item 4 Controls and Procedures, and Part II Other Information Item 6 Exhibits and Financial Statement Schedules.
As discussed in Note 1 to the Consolidated Financial Statements, TDS and its audit committee concluded on November 6, 2006, that TDS would amend its Annual Report on Form 10-K for the year ended December 31, 2005 to restate its consolidated financial statements and financial information for each of the three years in the period ended December 31, 2005, including quarterly information for 2005 and 2004, and certain selected financial data for 2002. TDS and its audit committee also concluded that TDS would amend its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2006 and June 30, 2006 to restate the consolidated financial statements and financial information included therewith.
The restatement adjustments are described below.
· Forward contracts and related derivative instruments - In reviewing the accounting and disclosure of its prepaid forward contracts, TDS concluded that its continued designation of the embedded collars within the forward contracts as cash flow hedges of marketable equity securities was not appropriate. TDS did not contemporaneously de-designate, re-designate, and assess hedge effectiveness when the embedded collars were contractually modified for differences between the actual and expected dividend rates on the underlying securities in 2004, 2003 and 2002. As a result, the embedded collars no longer qualified for cash flow hedge accounting treatment upon the modification of the terms of the collars for changes in dividend rates and, from that point forward, must be accounted for as derivative instruments that do not qualify for cash flow hedge accounting treatment. Accordingly, all changes in the fair value of the embedded collars from the time of the contractual modification of each collar must be recognized in the statement of operations. The restatement adjustments represent reclassifications of unrealized gains or losses related to changes in the fair value of the embedded collars from other comprehensive income or loss, included in common stockholders equity, to the statement of operations.
· Expense reclassifications - Certain prior period amounts, primarily labor, maintenance, rent and utilities expenses at the competitive local exchange carriers (CLEC), previously reported in selling, general and administrative expense have been corrected to properly reflect the classification of the expenses in cost of service and products in the current period. Certain expenses, primarily universal service costs, at both the incumbent local exchange carriers (ILEC) and the CLEC previously reported in cost of service and products have been adjusted to properly reflect the classification of the expenses in selling, general and administrative expense. These adjustments did not have an effect on operating income or net income.
· Establishment of an Asset Retirement Obligation (ARO) - Upon initial implementation of Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations (SFAS No. 143) in 2003, TDS Telecoms ILEC operations concluded that it was not necessary to record an ARO asset and corresponding regulatory liability of equal amount. TDS Telecom's ILECs have their rates regulated by the respective state public utility commissions and the Federal Communications Commission (FCC), and therefore, reflect the effects of the rate-making actions of these regulatory bodies in their financial statements. In 2002, the FCC notified carriers by Order that it would not be adopting SFAS No. 143 since the FCC concluded that SFAS No. 143 conflicted with the FCC's current accounting rules that require ILECs to accrue for asset retirement obligations through prescribed depreciation rates. Upon adoption of SFAS No. 143, and pursuant to the FCC's order and the provisions of SFAS No. 71 Accounting for the Effects of Certain Types of Regulation, (SFAS No.71) the ILECs reclassified their existing remediation liabilities, previously recorded in accumulated depreciation, to an ARO liability and a separate regulatory liability. Upon further review, TDS has concluded that upon adoption of SFAS No. 143, and in accordance with SFAS No. 71, it should have recognized an ARO asset and a corresponding ARO liability, rather than establish the ARO liability through a reclassification of its existing remediation liabilities. The adjustment did not affect previously reported revenues, operating income or net income (loss).
· Contracts with maintenance and support services U.S. Cellular entered into certain equipment and software contracts that included maintenance and support services. In one case, U.S. Cellular did not properly allocate expenditures between equipment purchases and maintenance and support services. In other cases, U.S. Cellular did not properly record fees for maintenance and support services over the specified term of the agreement. The restatement adjustments properly record property, plant and equipment, related depreciation expense and fees for maintenance and support services in the correct periods.
· Classification of Asset Retirement Obligation on the Statement of Cash Flows The additions to property, plant and equipment and other deferred liabilities representing additional asset retirement obligations (ARO) should be treated as non-cash items in the statement of cash flows. From 2004 through the second quarter of 2006, U.S. Cellular included additional ARO liabilities as a change in other assets and liabilities in cash flows from operating activities and the increase in the ARO asset balance as a capital expenditure in cash flows from investing activities resulting in an overstatement of cash flows from operating activities and an overstatement of cash flows required by investing activities. In the restatement, adjustments were recorded in the statement of cash flows to offset the change in ARO liabilities against the ARO asset.
· Income taxes In the restatement, TDS adjusted its income tax expense, income taxes payable, goodwill, deferred income tax assets and liabilities and related disclosures for the years ended December 31, 2005, 2004, 2003 and 2002 for items identified based on its annual analysis reconciling its 2005 income tax expense and income tax balance sheet accounts as determined in its comparison of the 2005 year-end income tax provision to the 2005 federal and state income tax returns. These adjustments included corrections for certain accounts that had not previously been included in the financial reporting basis used in determining the cumulative temporary differences in computing deferred income tax assets and liabilities, as well as adjustments to certain cumulative temporary differences that had historically been incorrectly associated with operating license assets which, in this restatement, have been correctly classified as investments in partnership assets. Accordingly, the company has adjusted the deferred tax liabilities related to these assets. Goodwill was adjusted to record the income tax effect of the difference between the financial reporting basis and the income tax basis of certain acquisitions made prior to 2004.
TDS determined that the state deferred tax liabilities attributable to marketable equity securities, as presented in prior periods, should have been lower to reflect carryover of a higher stock basis than the federal basis for certain states that have not adopted the federal consolidated return regulations. TDS also identified a valuation allowance related to state net operating loss carry forwards for which deferred tax liabilities related to marketable equity securities provide positive evidence supporting reductions to previously established valuation allowances.
· Cash and interest income In reviewing cash accounts, it was determined that cash and interest income were overstated in the three months ended March 31, 2006 and six months ended June 30, 2006. In the restatement, TDS corrected the overstatement by reducing cash and interest income.
· Property, plant and equipment U.S. Cellular did not properly record certain transfers and disposals of equipment removed from service. Also, U.S. Cellular did not properly record depreciation expense for certain leasehold improvements and other equipment due to the use of incorrect asset lives. The restatement adjustments properly record equipment disposals and depreciation expense in the correct amounts and periods.
· Other items In addition to the adjustments described above, TDS recorded a number of other adjustments to correct and record revenues, expenses and equity in earnings of unconsolidated entities in the periods in which such revenues, expenses and equity in earnings of unconsolidated entities were earned or incurred. Adjustments were also made to correct certain balance sheet amounts, including corrections to purchase price accounting for certain acquisitions prior to 2003. These individual adjustments were not material.
In connection with the restatement, TDS concluded that certain material weaknesses existed in its internal control over financial reporting. See Part I Item 4 Controls and Procedures.
For the convenience of the reader, this Form 10-Q/A sets forth the Original Form 10-Q, as amended hereby, in its entirety. However, this Form 10-Q/A amends and restates only Items 1, 2, 3, and 4 of Part I and Item 6 of Part II of the Original Form 10-Q, in each case solely as a result of and to reflect the adjustments discussed above and more fully in Note 1 of the accompanying consolidated financial statements, and no other information in the Original Form 10-Q is amended hereby. The foregoing items have not been updated to reflect other events occurring after the filing of the Original Form 10-Q, or to modify or update those disclosures affected by other subsequent events. In particular, forward-looking statements included in the Form 10-Q/A represented managements views as of the date of filing of the Original Form 10-Q for the quarterly period ended June 30, 2006 on October 10, 2006. Such forward-looking statements should not be assumed to be accurate as of any future date. TDS undertakes no duty to update such information whether as a result of new information, future events or otherwise.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by TDSs principal executive officer and principal financial officer are being filed with this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
TELEPHONE AND DATA SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q/A
FOR THE PERIOD ENDED JUNE 30, 2006
INDEX
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Page No. |
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6 |
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7 |
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8 |
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10 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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48 |
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Six Months Ended June 30, 2006 and 2005 |
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55 |
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64 |
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67 |
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73 |
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74 |
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76 |
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82 |
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89 |
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89 |
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90 |
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93 |
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95 |
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99 |
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99 |
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99 |
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99 |
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100 |
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TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
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Three Months Ended |
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Six Months Ended |
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2006 |
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2005 |
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2006 |
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2005 |
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(As Restated) |
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(As Restated) |
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(As Restated) |
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(As Restated) |
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(Dollars in thousands, except per share amounts) |
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Operating Revenues |
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$ |
1,068,687 |
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$ |
967,948 |
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$ |
2,127,764 |
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$ |
1,901,910 |
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Operating Expenses |
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Cost of services and products (exclusive of depreciation, amortization and accretion expense shown below) |
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369,559 |
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341,993 |
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745,865 |
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685,810 |
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Selling, general and administrative expense |
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411,366 |
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352,707 |
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803,987 |
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697,779 |
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Depreciation, amortization and accretion expense |
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180,453 |
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167,911 |
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363,419 |
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338,052 |
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Total Operating Expenses |
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961,378 |
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862,611 |
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1,913,271 |
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1,721,641 |
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Operating Income |
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107,309 |
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105,337 |
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214,493 |
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180,269 |
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Investment and Other Income (Expense) |
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Equity in earnings of unconsolidated entities |
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22,491 |
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17,741 |
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42,296 |
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32,492 |
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Interest and dividend income |
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146,545 |
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119,192 |
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158,028 |
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127,310 |
|
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Interest expense |
|
(59,288 |
) |
(54,532 |
) |
(117,820 |
) |
(106,388 |
) |
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Fair value adjustment of derivative instruments |
|
(11,768 |
) |
164,323 |
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(11,738 |
) |
499,723 |
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Gain on investments |
|
91,418 |
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91,418 |
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500 |
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Other expense |
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(941 |
) |
(6,802 |
) |
(1,868 |
) |
(11,076 |
) |
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Total Investment and Other Income |
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188,457 |
|
239,922 |
|
160,316 |
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542,561 |
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Income Before Income Taxes and Minority Interest |
|
295,766 |
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345,259 |
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374,809 |
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722,830 |
|
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Income tax expense |
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117,186 |
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140,090 |
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149,528 |
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288,490 |
|
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Income Before Minority Interest |
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178,580 |
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205,169 |
|
225,281 |
|
434,340 |
|
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Minority share of income |
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(11,821 |
) |
(11,190 |
) |
(22,525 |
) |
(16,800 |
) |
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Net Income |
|
166,759 |
|
193,979 |
|
202,756 |
|
417,540 |
|
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Preferred dividend requirement |
|
(50 |
) |
(52 |
) |
(101 |
) |
(102 |
) |
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Net Income Available To Common |
|
$ |
166,709 |
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$ |
193,927 |
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$ |
202,655 |
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$ |
417,438 |
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|
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|
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Basic Weighted Average Shares Outstanding (000s) |
|
115,768 |
|
115,224 |
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115,754 |
|
115,112 |
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Basic Earnings Per Share (Note 7) |
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$ |
1.44 |
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$ |
1.68 |
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$ |
1.75 |
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$ |
3.63 |
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Diluted Weighted Average Shares Outstanding (000s) |
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116,640 |
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115,959 |
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116,576 |
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115,926 |
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Diluted Earnings Per Share (Note 7) |
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$ |
1.43 |
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$ |
1.67 |
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$ |
1.73 |
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$ |
3.60 |
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Dividends Per Share |
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$ |
0.0925 |
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$ |
0.0875 |
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$ |
0.185 |
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$ |
0.175 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
|
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Six Months Ended |
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2006 |
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2005 |
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(As Restated) |
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(As Restated) |
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(Dollars in thousands) |
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Cash Flows from Operating Activities |
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Net income |
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$ |
202,756 |
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$ |
417,540 |
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Add (Deduct) adjustments to reconcile net income to net cash |
|
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provided by operating activities |
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|
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Depreciation, amortization and accretion |
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363,419 |
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338,052 |
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Bad debts expense |
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26,465 |
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17,764 |
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Stock-based compensation expense |
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14,653 |
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4,086 |
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Deferred income taxes |
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(41,091 |
) |
195,198 |
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Equity in earnings of unconsolidated entities |
|
(42,296 |
) |
(32,492 |
) |
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Distributions from unconsolidated entities |
|
37,399 |
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27,914 |
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Minority share of income |
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22,525 |
|
16,800 |
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Fair value adjustment of derivative instruments |
|
11,738 |
|
(499,723 |
) |
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(Gain) loss on investments |
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(91,418 |
) |
(500 |
) |
||
Noncash interest expense |
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10,705 |
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10,129 |
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Other noncash expense |
|
3,631 |
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5,558 |
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Changes in assets and liabilities |
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|
|
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Change in accounts receivable |
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(41,637 |
) |
(28,171 |
) |
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Change in materials and supplies |
|
10,503 |
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22,020 |
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Change in accounts payable |
|
(47,956 |
) |
(46,303 |
) |
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Change in customer deposits and deferred revenues |
|
5,346 |
|
8,339 |
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Change in accrued taxes |
|
67,233 |
|
76,878 |
|
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Change in other assets and liabilities |
|
(32,485 |
) |
(17,759 |
) |
||
|
|
479,490 |
|
515,330 |
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||
|
|
|
|
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|
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Cash Flows from Investing Activities |
|
|
|
|
|
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Additions to property, plant and equipment |
|
(330,294 |
) |
(304,383 |
) |
||
Cash received from divestitures |
|
722 |
|
500 |
|
||
Cash paid for acquisitions |
|
(18,546 |
) |
(126,033 |
) |
||
Sales of investments |
|
102,549 |
|
|
|
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Other investing activities |
|
(2,887 |
) |
(1,271 |
) |
||
|
|
(248,456 |
) |
(431,187 |
) |
||
|
|
|
|
|
|
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Cash Flows from Financing Activities |
|
|
|
|
|
||
Issuance of notes payable |
|
195,000 |
|
310,000 |
|
||
Issuance of long-term debt |
|
560 |
|
112,881 |
|
||
Repayment of notes payable |
|
(225,000 |
) |
(290,000 |
) |
||
Repayment of long-term debt |
|
(1,586 |
) |
(240,752 |
) |
||
Repayment of medium-term notes |
|
(35,000 |
) |
(17,200 |
) |
||
TDS Common Shares and Special Common Shares issued for benefit plans |
|
3,047 |
|
12,663 |
|
||
U.S. Cellular Common Shares issued for benefit plans |
|
3,856 |
|
14,012 |
|
||
Capital (distributions) to minority partners |
|
(7,613 |
) |
(810 |
) |
||
Dividends paid |
|
(21,498 |
) |
(20,259 |
) |
||
Other financing activities |
|
750 |
|
(6 |
) |
||
|
|
(87,484 |
) |
(119,471 |
) |
||
|
|
|
|
|
|
||
Net Increase (Decrease) in Cash and Cash Equivalents |
|
143,550 |
|
(35,328 |
) |
||
|
|
|
|
|
|
||
Cash and Cash Equivalents |
|
|
|
|
|
||
Beginning of period |
|
1,095,791 |
|
1,171,105 |
|
||
End of period |
|
$ |
1,239,341 |
|
$ |
1,135,777 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
7
ASSETS
Unaudited
|
|
June 30, |
|
December 31, |
|
||
|
|
(As Restated) |
|
(As Restated) |
|
||
|
|
(Dollars in thousands) |
|
||||
Current Assets |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
1,239,341 |
|
$ |
1,095,791 |
|
Accounts receivable |
|
|
|
|
|
||
Due from customers, less allowance of $14,033 and $15,200, respectively |
|
339,627 |
|
332,278 |
|
||
Other, principally connecting companies, less allowance of $7,831 and $5,620, respectively |
|
165,553 |
|
157,182 |
|
||
Marketable equity securities |
|
272,938 |
|
|
|
||
Materials and supplies |
|
93,922 |
|
103,211 |
|
||
Prepaid expenses |
|
53,688 |
|
41,746 |
|
||
Deferred income tax asset |
|
|
|
13,438 |
|
||
Other current assets |
|
24,458 |
|
34,774 |
|
||
|
|
2,189,527 |
|
1,778,420 |
|
||
|
|
|
|
|
|
||
Investments |
|
|
|
|
|
||
Marketable equity securities |
|
2,176,706 |
|
2,531,690 |
|
||
Licenses |
|
1,370,369 |
|
1,365,063 |
|
||
Goodwill |
|
886,476 |
|
882,168 |
|
||
Customer lists, net of accumulated amortization of $56,323 and $44,616, respectively |
|
37,998 |
|
47,649 |
|
||
Investments in unconsolidated entities |
|
222,187 |
|
217,180 |
|
||
Other investments, less valuation allowance of $55,144 in both periods |
|
11,760 |
|
12,274 |
|
||
|
|
4,705,496 |
|
5,056,024 |
|
||
|
|
|
|
|
|
||
Property, Plant and Equipment |
|
|
|
|
|
||
In service and under construction |
|
7,431,878 |
|
7,131,977 |
|
||
Less accumulated depreciation |
|
3,907,694 |
|
3,602,217 |
|
||
|
|
3,524,184 |
|
3,529,760 |
|
||
|
|
|
|
|
|
||
Other Assets and Deferred Charges |
|
56,231 |
|
55,830 |
|
||
|
|
$ |
10,475,438 |
|
$ |
10,420,034 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
8
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS EQUITY
Unaudited
|
|
June 30, |
|
December 31, |
|
||
|
|
(As Restated) |
|
(As Restated) |
|
||
|
|
(Dollars in thousands) |
|
||||
Current Liabilities |
|
|
|
|
|
||
Current portion of long-term debt |
|
$ |
203,091 |
|
$ |
237,948 |
|
Forward contracts |
|
179,832 |
|
|
|
||
Notes payable |
|
105,000 |
|
135,000 |
|
||
Accounts payable |
|
312,512 |
|
359,934 |
|
||
Customer deposits and deferred revenues |
|
132,362 |
|
126,454 |
|
||
Accrued interest |
|
29,212 |
|
28,946 |
|
||
Accrued taxes |
|
112,663 |
|
46,061 |
|
||
Accrued compensation |
|
54,495 |
|
67,443 |
|
||
Derivative liability |
|
50,828 |
|
|
|
||
Deferred income tax liability |
|
44,669 |
|
|
|
||
Other current liabilities |
|
74,497 |
|
63,539 |
|
||
|
|
1,299,161 |
|
1,065,325 |
|
||
|
|
|
|
|
|
||
Deferred Liabilities and Credits |
|
|
|
|
|
||
Net deferred income tax liability |
|
1,195,527 |
|
1,337,716 |
|
||
Derivative liability |
|
413,054 |
|
449,192 |
|
||
Asset retirement obligation |
|
200,529 |
|
190,382 |
|
||
Other deferred liabilities and credits |
|
108,873 |
|
107,924 |
|
||
|
|
1,917,983 |
|
2,085,214 |
|
||
|
|
|
|
|
|
||
Long-Term Debt |
|
|
|
|
|
||
Long-term debt, excluding current portion |
|
1,632,577 |
|
1,633,519 |
|
||
Forward contracts |
|
1,536,563 |
|
1,707,282 |
|
||
|
|
3,169,140 |
|
3,340,801 |
|
||
|
|
|
|
|
|
||
Commitments and Contingencies (See Note 21) |
|
|
|
|
|
||
|
|
|
|
|
|
||
Minority Interest in Subsidiaries |
|
566,881 |
|
546,833 |
|
||
|
|
|
|
|
|
||
Preferred Shares |
|
3,863 |
|
3,863 |
|
||
|
|
|
|
|
|
||
Common Stockholders Equity |
|
|
|
|
|
||
Common Shares, par value $.01 per share; authorized 100,000,000 shares; issued 56,503,000 and 56,481,000 shares, respectively |
|
565 |
|
565 |
|
||
Special Common Shares, par value $.01 per share; authorized 165,000,000 shares, issued 62,887,000 and 62,868,000 shares, respectively |
|
629 |
|
629 |
|
||
Series A Common Shares, par value $.01 per share; authorized 25,000,000 shares; issued and outstanding 6,446,000 and 6,440,000 shares; respectively |
|
64 |
|
64 |
|
||
Capital in excess of par value |
|
1,837,354 |
|
1,828,634 |
|
||
Treasury Shares, at cost: |
|
|
|
|
|
||
Common Shares, 5,071,000 and 5,105,000 shares, respectively |
|
(207,524 |
) |
(208,156 |
) |
||
Special Common Shares 5,105,000 and 5,128,000 shares, respectively |
|
(209,421 |
) |
(210,600 |
) |
||
Accumulated other comprehensive income |
|
312,264 |
|
363,641 |
|
||
Retained earnings |
|
1,784,479 |
|
1,603,221 |
|
||
|
|
3,518,410 |
|
3,377,998 |
|
||
|
|
$ |
10,475,438 |
|
$ |
10,420,034 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
9
TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accounting policies of Telephone and Data Systems, Inc. (TDS) conform to accounting principles generally accepted in the United States of America (U.S. GAAP). The consolidated financial statements include the accounts of TDS and its majority-owned subsidiaries, including TDSs 81.2%-owned wireless telephone subsidiary, United States Cellular Corporation (U.S. Cellular), TDSs 100%-owned wireline telephone subsidiary, TDS Telecommunications Corporation (TDS Telecom) and TDSs 80%-owned printing and distribution company, Suttle Straus, Inc. In addition, the consolidated financial statements include all entities in which TDS has a variable interest that requires TDS to absorb a majority of the entitys expected gains or losses, or both. All material intercompany accounts and transactions have been eliminated.
The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and 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 information and disclosures included herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in TDSs Annual Report on Form 10-K/A for the year ended December 31, 2005 (Form 10-K/A).
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 June 30, 2006 and December 31, 2005, and the results of operations for the three and six months ended June 30, 2006 and 2005 and the cash flows for the six months ended June 30, 2006 and 2005. The results of operations for the three and six months ended June 30, 2006, are not necessarily indicative of the results to be expected for the full year.
Restatement
TDS and its audit committee concluded on November 6, 2006, that TDS would amend its Annual Report on Form 10-K for the year ended December 31, 2005 to restate its consolidated financial statements and financial information for each of the three years in the period ended December 31, 2005, including quarterly information for 2005 and 2004, and certain selected financial data for 2002. TDS and its audit committee also concluded that TDS would amend its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2006 and June 30, 2006 to restate the consolidated financial statements and financial information included therewith.
The restatement adjustments are described below.
· Forward contracts and related derivative instruments - In reviewing the accounting and disclosure of its prepaid forward contracts, TDS concluded that its continued designation of the embedded collars within the forward contracts as cash flow hedges of marketable equity securities was not appropriate. TDS did not contemporaneously de-designate, re-designate, and assess hedge effectiveness when the embedded collars were contractually modified for differences between the actual and expected dividend rates on the underlying securities in 2004, 2003 and 2002. As a result, the embedded collars no longer qualified for cash flow hedge accounting treatment upon the modification of the terms of the collars for changes in dividend rates and, from that point forward, must be accounted for as derivative instruments that do not qualify for cash flow hedge accounting treatment. Accordingly, all changes in the fair value of the embedded collars from the time of the contractual modification of each collar must be recognized in the statement of operations. The restatement adjustments represent reclassifications of unrealized gains or losses related to changes in the fair value of the embedded collars from other comprehensive income or loss, included in common stockholders equity, to the statement of operations.
10
· Expense reclassifications - Certain prior period amounts, primarily labor, maintenance, rent and utilities expenses at the competitive local exchange carriers (CLEC), previously reported in selling, general and administrative expense have been corrected to properly reflect the classification of the expenses in cost of service and products in the current period. Certain expenses, primarily universal service costs, at both the incumbent local exchange carriers (ILEC) and the CLEC previously reported in cost of service and products have been adjusted to properly reflect the classification of the expenses in selling, general and administrative expense. For the ILEC, cost of services and products decreased by $1.7 million and $3.3 million with a corresponding increase in selling, general and administrative expenses in the three and six months ended June 30, 2005, respectively. For the CLEC, cost of services and products increased by $5.9 million and $11.7 million with a corresponding decrease in selling, general and administrative expenses in the three and six months ended June 30, 2005, respectively. On a TDS consolidated basis, cost of services and products increased by $4.2 million and $8.4 million with a corresponding decrease in selling, general and administrative expenses in the three and six months ended June 30, 2005, respectively. The adjustments did not affect previously reported revenues, operating income or net income.
· Establishment of an Asset Retirement Obligation (ARO) - Upon initial implementation of Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations (SFAS No. 143) in 2003, TDS Telecoms ILEC operations concluded that it was not necessary to record an ARO asset and corresponding regulatory liability of equal amount. TDS Telecom's ILECs have their rates regulated by the respective state public utility commissions and the Federal Communications Commission (FCC), and therefore, reflect the effects of the rate-making actions of these regulatory bodies in their financial statements. In 2002, the FCC notified carriers by Order that it would not be adopting SFAS No. 143 since the FCC concluded that SFAS No. 143 conflicted with the FCC's current accounting rules that require ILECs to accrue for asset retirement obligations through prescribed depreciation rates. Upon adoption of SFAS No. 143, and pursuant to the FCC's order and the provisions of SFAS No. 71 Accounting for the Effects of Certain Types of Regulation, (SFAS No.71) the ILECs reclassified their existing remediation liabilities, previously recorded in accumulated depreciation, to an ARO liability and a separate regulatory liability. Upon further review, TDS has concluded that upon adoption of SFAS No. 143, and in accordance with SFAS No. 71, it should have recognized an ARO asset and a corresponding ARO liability, rather than establish the ARO liability through a reclassification of its existing remediation liabilities. The impact of establishing the ARO asset increased Property, Plant and Equipment and the corresponding ARO liability by $26.8 million and $27.3 million as of June 30, 2006 and December 31, 2005, respectively. The adjustment did not affect previously reported revenues, operating income or net income (loss).
· Contracts with maintenance and support services U.S. Cellular entered into certain equipment and software contracts that included maintenance and support services. In one case, U.S. Cellular did not properly allocate expenditures between equipment purchases and maintenance and support services. In other cases, U.S. Cellular did not properly record fees for maintenance and support services over the specified term of the agreement. The restatement adjustments properly record property, plant and equipment, related depreciation expense and fees for maintenance and support services in the correct periods.
· Classification of Asset Retirement Obligation on the Statement of Cash Flows The additions to property, plant and equipment and other deferred liabilities representing additional asset retirement obligations (ARO) should be treated as non-cash items in the statement of cash flows. From 2004 through the second quarter of 2006, U.S. Cellular included additional ARO liabilities as a change in other assets and liabilities in cash flows from operating activities and the increase in the ARO asset balance as a capital expenditure in cash flows from investing activities resulting in an overstatement of cash flows from operating activities and an overstatement of cash flows required by investing activities. In the restatement, adjustments were recorded in the statement of cash flows to offset the change in ARO liabilities against the ARO asset. The reduction in the change in other assets and liabilities in cash flows from operating activities and the reduction in additions to property, plant and equipment in cash flows from investing activities totaled $3.4 million and $2.3 million in the six months ended June 30, 2006 and 2005, respectively.
11
· Income taxes In the restatement, TDS adjusted its income tax expense, income taxes payable, goodwill, deferred income tax assets and liabilities and related disclosures for the years ended December 31, 2005, 2004, 2003 and 2002 for items identified based on its annual analysis reconciling its 2005 income tax expense and income tax balance sheet accounts as determined in its comparison of the 2005 year-end income tax provision to the 2005 federal and state income tax returns. These adjustments included corrections for certain accounts that had not previously been included in the financial reporting basis used in determining the cumulative temporary differences in computing deferred income tax assets and liabilities, as well as adjustments to certain cumulative temporary differences that had historically been incorrectly associated with operating license assets which, in this restatement, have been correctly classified as investments in partnership assets. Accordingly, the company has adjusted the deferred tax liabilities related to these assets. Goodwill was adjusted by $10.2 million to record the income tax effect of the difference between the financial reporting basis and the income tax basis of certain acquisitions made prior to 2004.
TDS determined that the state deferred tax liabilities attributable to marketable equity securities, as presented in prior periods, should have been lower to reflect carryover of a higher stock basis than the federal basis for certain states that have not adopted the federal consolidated return regulations. TDS also identified a valuation allowance related to state net operating loss carry forwards for which deferred tax liabilities related to marketable equity securities provide positive evidence supporting reductions to previously established valuation allowances.
· Cash and interest income In reviewing cash accounts, it was determined that cash and interest income were overstated in the three months ended March 31, 2006 and six months ended June 30, 2006. In the restatement, TDS corrected the overstatement by reducing cash and interest income.
· Property, plant and equipment U.S. Cellular did not properly record certain transfers and disposals of equipment removed from service. Also, U.S. Cellular did not properly record depreciation expense for certain leasehold improvements and other equipment due to the use of incorrect asset lives. The restatement adjustments properly record equipment disposals and depreciation expense in the correct amounts and periods.
· Other items In addition to the adjustments described above, TDS recorded a number of other adjustments to correct and record revenues, expenses and equity in earnings of unconsolidated entities in the periods in which such revenues, expenses and equity in earnings of unconsolidated entities were earned or incurred. Adjustments were also made to correct certain balance sheet amounts, including $2.1 million corrections to purchase price accounting for certain acquisitions prior to 2003. These individual adjustments were not material.
The table below summarizes the impacts of the restatement on income before income taxes and minority interest.
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
(Increase (decrease) dollars in thousands) |
|
||||||||||
Income Before Income Taxes and Minority Interest, as previously reported |
|
$ |
306,524 |
|
$ |
183,171 |
|
$ |
392,617 |
|
$ |
229,378 |
|
Forward contracts and related derivative instruments |
|
(12,169 |
) |
164,229 |
|
(12,564 |
) |
499,676 |
|
||||
Contracts with maintenance and support services |
|
198 |
|
(138 |
) |
339 |
|
(335 |
) |
||||
Interest income |
|
|
|
|
|
(4,754 |
) |
|
|
||||
Property, plant and equipment |
|
1,511 |
|
317 |
|
3,111 |
|
77 |
|
||||
Other items |
|
(298 |
) |
(2,320 |
) |
(3,940 |
) |
(5,966 |
) |
||||
Total adjustment |
|
(10,758 |
) |
162,088 |
|
(17,808 |
) |
493,452 |
|
||||
Income Before Income Taxes and Minority Interest, as restated |
|
$ |
295,766 |
|
$ |
345,259 |
|
$ |
374,809 |
|
$ |
722,830 |
|
12
The table below summarizes the net income and diluted earnings per share impacts from the restatement.
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||||||||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||||||||||||||
|
|
Net Income |
|
Diluted |
|
Net Income |
|
Diluted |
|
Net Income |
|
Diluted |
|
Net Income |
|
Diluted |
|
||||||||
|
|
(Increase (decrease) dollars in thousands, |
|
||||||||||||||||||||||
As previously reported |
|
$ |
172,467 |
|
$ |
1.48 |
|
$ |
97,056 |
|
$ |
0.83 |
|
$ |
212,342 |
|
$ |
1.82 |
|
$ |
120,105 |
|
$ |
1.03 |
|
Forward contracts and related derivative instruments |
|
(7,274 |
) |
(0.07 |
) |
97,405 |
|
0.85 |
|
(7,946 |
) |
(0.07 |
) |
299,325 |
|
2.58 |
|
||||||||
Contracts with maintenance and support services |
|
101 |
|
|
|
(56 |
) |
|
|
176 |
|
|
|
(140 |
) |
|
|
||||||||
Income taxes |
|
679 |
|
0.01 |
|
549 |
|
|
|
1,358 |
|
0.01 |
|
1,098 |
|
0.01 |
|
||||||||
Interest income |
|
|
|
|
|
|
|
|
|
(2,876 |
) |
(0.02 |
) |
|
|
|
|
||||||||
Property, plant and equipment |
|
710 |
|
0.01 |
|
151 |
|
|
|
1,464 |
|
0.01 |
|
42 |
|
|
|
||||||||
Other items |
|
76 |
|
|
|
(1,126 |
) |
(0.01 |
) |
(1,762 |
) |
(0.02 |
) |
(2,890 |
) |
(0.02 |
) |
||||||||
Total adjustment |
|
(5,708 |
) |
(0.05 |
) |
96,923 |
|
0.84 |
|
(9,586 |
) |
(0.09 |
) |
297,435 |
|
2.57 |
|
||||||||
As restated |
|
$ |
166,759 |
|
$ |
1.43 |
|
$ |
193,979 |
|
$ |
1.67 |
|
$ |
202,756 |
|
$ |
1.73 |
|
$ |
417,540 |
|
$ |
3.60 |
|
13
The effect of the restatement on the previously reported Consolidated Statements of Operations is as follows:
|
|
Three Months Ended |
|
||||||||||
|
|
June 30, 2006 |
|
June 30, 2005 |
|
||||||||
|
|
As Previously |
|
As |
|
As |
|
As |
|
||||
|
|
(Dollars in thousands, except per share amounts) |
|
||||||||||
Operating Revenues |
|
$ |
1,065,910 |
|
$ |
1,068,687 |
|
$ |
969,859 |
|
$ |
967,948 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
||||
Cost of service and products (exclusive of depreciation, amortization and accretion shown separately below) |
|
369,559 |
|
369,559 |
|
341,830 |
|
341,993 |
|
||||
Selling, general and administrative expense |
|
410,468 |
|
411,366 |
|
352,127 |
|
352,707 |
|
||||
Depreciation, amortization and accretion expense |
|
179,985 |
|
180,453 |
|
168,575 |
|
167,911 |
|
||||
Total Operating Expenses |
|
960,012 |
|
961,378 |
|
862,532 |
|
862,611 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating Income |
|
105,898 |
|
107,309 |
|
107,327 |
|
105,337 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Investment and Other Income (Expense) |
|
|
|
|
|
|
|
|
|
||||
Equity in earnings of unconsolidated entities |
|
22,491 |
|
22,491 |
|
18,188 |
|
17,741 |
|
||||
Interest and dividend income |
|
146,545 |
|
146,545 |
|
118,896 |
|
119,192 |
|
||||
Interest expense |
|
(59,288 |
) |
(59,288 |
) |
(54,532 |
) |
(54,532 |
) |
||||
Fair value adjustment of derivative instruments |
|
401 |
|
(11,768 |
) |
94 |
|
164,323 |
|
||||
Gain on investments |
|
91,418 |
|
91,418 |
|
|
|
|
|
||||
Other income (expense), net |
|
(941 |
) |
(941 |
) |
(6,802 |
) |
(6,802 |
) |
||||
Total Investment and Other Income (Expense) |
|
200,626 |
|
188,457 |
|
75,844 |
|
239,922 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income before Income Taxes and Minority Interest |
|
306,524 |
|
295,766 |
|
183,171 |
|
345,259 |
|
||||
Income tax expense |
|
122,118 |
|
117,186 |
|
76,980 |
|
140,090 |
|
||||
Income Before Minority Interest |
|
184,406 |
|
178,580 |
|
106,191 |
|
205,169 |
|
||||
Minority share of income |
|
(11,939 |
) |
(11,821 |
) |
(9,135 |
) |
(11,190 |
) |
||||
Net Income (Loss) |
|
172,467 |
|
166,759 |
|
97,056 |
|
193,979 |
|
||||
Preferred dividend requirement |
|
(50 |
) |
(50 |
) |
(52 |
) |
(52 |
) |
||||
Net Income Available to Common |
|
$ |
172,417 |
|
$ |
166,709 |
|
$ |
97,004 |
|
$ |
193,927 |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic Earnings per Share |
|
$ |
1.49 |
|
$ |
1.44 |
|
$ |
0.84 |
|
$ |
1.68 |
|
Diluted Earnings per Share |
|
$ |
1.48 |
|
$ |
1.43 |
|
$ |
0.83 |
|
$ |
1.67 |
|
14
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, 2006 |
|
June 30, 2005 |
|
||||||||
|
|
As Previously |
|
As |
|
As Previously |
|
As |
|
||||
|
|
(Dollars in thousands, except per share amounts) |
|
||||||||||
Operating Revenues |
|
$ |
2,126,222 |
|
$ |
2,127,764 |
|
$ |
1,905,646 |
|
$ |
1,901,910 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
||||
Cost of service and products (exclusive of depreciation, amortization and accretion shown separately below) |
|
747,402 |
|
745,865 |
|
684,576 |
|
685,810 |
|
||||
Selling, general and administrative expense |
|
801,185 |
|
803,987 |
|
696,576 |
|
697,779 |
|
||||
Depreciation, amortization and accretion expense |
|
362,652 |
|
363,419 |
|
338,323 |
|
338,052 |
|
||||
Total Operating Expenses |
|
1,911,239 |
|
1,913,271 |
|
1,719,475 |
|
1,721,641 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Operating Income |
|
214,983 |
|
214,493 |
|
186,171 |
|
180,269 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Investment and Other Income (Expense) |
|
|
|
|
|
|
|
|
|
||||
Equity in earnings of unconsolidated entities |
|
42,296 |
|
42,296 |
|
32,942 |
|
32,492 |
|
||||
Interest and dividend income |
|
162,782 |
|
158,028 |
|
127,182 |
|
127,310 |
|
||||
Interest expense |
|
(117,820 |
) |
(117,820 |
) |
(106,388 |
) |
(106,388 |
) |
||||
Fair value adjustment of derivative instruments |
|
826 |
|
(11,738 |
) |
47 |
|
499,723 |
|
||||
Gain on investments |
|
91,418 |
|
91,418 |
|
500 |
|
500 |
|
||||
Other income (expense), net |
|
(1,868 |
) |
(1,868 |
) |
(11,076 |
) |
(11,076 |
) |
||||
Total Investment and Other Income (Expense) |
|
177,634 |
|
160,316 |
|
43,207 |
|
542,561 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income before Income Taxes and Minority Interest |
|
392,617 |
|
374,809 |
|
229,378 |
|
722,830 |
|
||||
Income tax expense |
|
158,086 |
|
149,528 |
|
94,375 |
|
288,490 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Income before Minority Interest |
|
234,531 |
|
225,281 |
|
135,003 |
|
434,340 |
|
||||
Minority share of income |
|
(22,189 |
) |
(22,525 |
) |
(14,898 |
) |
(16,800 |
) |
||||
Net Income |
|
212,342 |
|
202,756 |
|
120,105 |
|
417,540 |
|
||||
Preferred dividend requirement |
|
(101 |
) |
(101 |
) |
(102 |
) |
(102 |
) |
||||
Net Income Available to Common |
|
$ |
212,241 |
|
$ |
202,655 |
|
$ |
120,003 |
|
$ |
417,438 |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic Earnings per Share |
|
$ |
1.83 |
|
$ |
1.75 |
|
$ |
1.04 |
|
$ |
3.63 |
|
Diluted Earnings per Share |
|
$ |
1.82 |
|
$ |
1.73 |
|
$ |
1.03 |
|
$ |
3.60 |
|
15
The effect of the restatement on the previously reported Consolidated Statements of Cash Flows is as follows:
|
|
Six Months Ended |
|
||||||||||
|
|
2006 |
|
2006 |
|
2005 |
|
2005 |
|
||||
|
|
As |
|
|
|
As |
|
|
|
||||
|
|
(Dollars in thousands) |
|
||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
212,342 |
|
$ |
202,756 |
|
$ |
120,105 |
|
$ |
417,540 |
|
Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
||||
Depreciation, amortization and accretion |
|
362,652 |
|
363,419 |
|
338,323 |
|
338,052 |
|
||||
Bad debts expense |
|
26,465 |
|
26,465 |
|
17,764 |
|
17,764 |
|
||||
Stock-based compensation expense |
|
13,022 |
|
14,653 |
|
4,086 |
|
4,086 |
|
||||
Deferred income taxes |
|
(32,531 |
) |
(41,091 |
) |
1,082 |
|
195,198 |
|
||||
Equity in earnings of unconsolidated entities |
|
(42,296 |
) |
(42,296 |
) |
(32,942 |
) |
(32,492 |
) |
||||
Distributions from unconsolidated entities |
|
37,399 |
|
37,399 |
|
28,210 |
|
27,914 |
|
||||
Minority share of income |
|
22,189 |
|
22,525 |
|
14,898 |
|
16,800 |
|
||||
Fair value adjustment of derivative instruments |
|
(826 |
) |
11,738 |
|
(47 |
) |
(499,723 |
) |
||||
(Gain) loss on investments |
|
(91,418 |
) |
(91,418 |
) |
(500 |
) |
(500 |
) |
||||
Noncash interest expense |
|
10,705 |
|
10,705 |
|
10,129 |
|
10,129 |
|
||||
Other noncash expense |
|
3,631 |
|
3,631 |
|
5,558 |
|
5,558 |
|
||||
Changes in assets and liabilities |
|
|
|
|
|
|
|
|
|
||||
Change in accounts receivable |
|
(39,668 |
) |
(41,637 |
) |
(29,158 |
) |
(28,171 |
) |
||||
Change in materials and supplies |
|
10,503 |
|
10,503 |
|
22,020 |
|
22,020 |
|
||||
Change in accounts payable |
|
(47,956 |
) |
(47,956 |
) |
(46,352 |
) |
(46,303 |
) |
||||
Change in customer deposits and deferred revenues |
|
4,919 |
|
5,346 |
|
5,261 |
|
8,339 |
|
||||
Change in accrued taxes |
|
67,233 |
|
67,233 |
|
76,878 |
|
76,878 |
|
||||
Change in other assets and liabilities |
|
(27,572 |
) |
(32,485 |
) |
(16,963 |
) |
(17,759 |
) |
||||
|
|
488,793 |
|
479,490 |
|
518,352 |
|
515,330 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
||||
Additions to property, plant and equipment |
|
(334,843 |
) |
(330,294 |
) |
(307,405 |
) |
(304,383 |
) |
||||
Cash received from divestitures |
|
722 |
|
722 |
|
500 |
|
500 |
|
||||
Cash paid for acquisitions |
|
(18,546 |
) |
(18,546 |
) |
(126,033 |
) |
(126,033 |
) |
||||
Sales of investments |
|
102,549 |
|
102,549 |
|
|
|
|
|
||||
Other investing activities |
|
(2,887 |
) |
(2,887 |
) |
(1,271 |
) |
(1,271 |
) |
||||
|
|
(253,005 |
) |
(248,456 |
) |
(434,209 |
) |
(431,187 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
||||
Issuance of notes payable |
|
195,000 |
|
195,000 |
|
310,000 |
|
310,000 |
|
||||
Issuance of long-term debt |
|
560 |
|
560 |
|
112,881 |
|
112,881 |
|
||||
Repayment of notes payable |
|
(225,000 |
) |
(225,000 |
) |
(290,000 |
) |
(290,000 |
) |
||||
Repayment of long-term debt |
|
(1,586 |
) |
(1,586 |
) |
(240,752 |
) |
(240,752 |
) |
||||
Repayment of medium-term notes |
|
(35,000 |
) |
(35,000 |
) |
(17,200 |
) |
(17,200 |
) |
||||
TDS Common Shares and Special Common Shares issued for benefit plans |
|
3,047 |
|
3,047 |
|
12,663 |
|
12,663 |
|
||||
U.S. Cellular Common Shares issued for benefit plans |
|
3,856 |
|
3,856 |
|
14,012 |
|
14,012 |
|
||||
Capital (distributions) to minority partners |
|
(7,613 |
) |
(7,613 |
) |
(810 |
) |
(810 |
) |
||||
Dividends paid |
|
(21,498 |
) |
(21,498 |
) |
(20,259 |
) |
(20,259 |
) |
||||
Other financing activities |
|
750 |
|
750 |
|
(6 |
) |
(6 |
) |
||||
|
|
(87,484 |
) |
(87,484 |
) |
(119,471 |
) |
(119,471 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
148,304 |
|
143,550 |
|
(35,328 |
) |
(35,328 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
|
|
|
||||
Beginning of period |
|
1,095,791 |
|
1,095,791 |
|
1,171,105 |
|
1,171,105 |
|
||||
End of period |
|
$ |
1,244,095 |
|
$ |
1,239,341 |
|
$ |
1,135,777 |
|
$ |
1,135,777 |
|
16
The effect of the restatement on the previously reported Consolidated Balance Sheets is as follows:
|
|
June 30, |
|
December 31, |
|
||||||||
|
|
2006 |
|
2006 |
|
2005 |
|
2005 |
|
||||
|
|
As Previously |
|
As |
|
As Previously |
|
As |
|
||||
|
|
(Dollars in thousands) |
|
||||||||||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
1,244,095 |
|
$ |
1,239,341 |
|
$ |
1,095,791 |
|
$ |
1,095,791 |
|
Accounts receivable |
|
|
|
|
|
|
|
|
|
||||
Due from customers |
|
343,353 |
|
339,627 |
|
336,005 |
|
332,278 |
|
||||
Other, principally connecting companies |
|
166,979 |
|
165,553 |
|
160,577 |
|
157,182 |
|
||||
Marketable equity securities |
|
272,938 |
|
272,938 |
|
|
|
|
|
||||
Materials and supplies, at average cost |
|
93,922 |
|
93,922 |
|
103,211 |
|
103,211 |
|
||||
Prepaid expenses |
|
52,747 |
|
53,688 |
|
40,704 |
|
41,746 |
|
||||
Deferred income tax asset |
|
|
|
|
|
13,438 |
|
13,438 |
|
||||
Other current assets |
|
24,458 |
|
24,458 |
|
29,243 |
|
34,774 |
|
||||
|
|
2,198,492 |
|
2,189,527 |
|
1,778,969 |
|
1,778,420 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
INVESTMENTS |
|
|
|
|
|
|
|
|
|
||||
Marketable equity securities |
|
2,176,706 |
|
2,176,706 |
|
2,531,690 |
|
2,531,690 |
|
||||
Licenses |
|
1,370,369 |
|
1,370,369 |
|
1,365,063 |
|
1,365,063 |
|
||||
Goodwill |
|
874,100 |
|
886,476 |
|
869,792 |
|
882,168 |
|
||||
Customer lists, net of accumulated amortization |
|
45,117 |
|
37,998 |
|
49,318 |
|
47,649 |
|
||||
Investments in unconsolidated entities |
|
220,430 |
|
222,187 |
|
215,424 |
|
217,180 |
|
||||
Other investments |
|
11,760 |
|
11,760 |
|
12,274 |
|
12,274 |
|
||||
|
|
4,698,482 |
|
4,705,496 |
|
5,043,561 |
|
5,056,024 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
PROPERTY, PLANT AND EQUIPMENT, NET |
|
|
|
|
|
|
|
|
|
||||
In service and under construction |
|
7,441,768 |
|
7,431,878 |
|
7,140,447 |
|
7,131,977 |
|
||||
Less accumulated depreciation |
|
3,924,149 |
|
3,907,694 |
|
3,614,242 |
|
3,602,217 |
|
||||
|
|
3,517,619 |
|
3,524,184 |
|
3,526,205 |
|
3,529,760 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
OTHER ASSETS AND DEFERRED CHARGES |
|
56,231 |
|
56,231 |
|
55,830 |
|
55,830 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
TOTAL ASSETS |
|
$ |
10,470,824 |
|
$ |
10,475,438 |
|
$ |
10,404,565 |
|
$ |
10,420,034 |
|
17
|
|
June 30, |
|
December 31, |
|
||||||||
|
|
2006 |
|
2006 |
|
2005 |
|
2005 |
|
||||
|
|
As |
|
|
|
As |
|
|
|
||||
|
|
(Dollars in thousands) |
|
||||||||||
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
||||
Current portion of long-term debt |
|
$ |
203,091 |
|
$ |
203,091 |
|
$ |
237,948 |
|
$ |
237,948 |
|
Forward contracts |
|
179,832 |
|
179,832 |
|
|
|
|
|
||||
Notes payable |
|
105,000 |
|
105,000 |
|
135,000 |
|
135,000 |
|
||||
Accounts payable |
|
309,851 |
|
312,512 |
|
357,273 |
|
359,934 |
|
||||
Customer deposits and deferred revenues |
|
126,709 |
|
132,362 |
|
121,228 |
|
126,454 |
|
||||
Accrued interest |
|
29,212 |
|
29,212 |
|
28,946 |
|
28,946 |
|
||||
Accrued taxes |
|
119,310 |
|
112,663 |
|
47,180 |
|
46,061 |
|
||||
Accrued compensation |
|
54,495 |
|
54,495 |
|
67,443 |
|
67,443 |
|
||||
Derivative liability |
|
50,828 |
|
50,828 |
|
|
|
|
|
||||
Deferred income tax liability |
|
44,669 |
|
44,669 |
|
|
|
|
|
||||
Other current liabilities |
|
71,936 |
|
74,497 |
|
61,086 |
|
63,539 |
|
||||
|
|
1,294,933 |
|
1,299,161 |
|
1,056,104 |
|
1,065,325 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
DEFERRED LIABILITIES AND CREDITS |
|
|
|
|
|
|
|
|
|
||||
Net deferred income tax liability |
|
1,244,331 |
|
1,195,527 |
|
1,383,031 |
|
1,337,716 |
|
||||
Derivative liability |
|
413,054 |
|
413,054 |
|
449,192 |
|
449,192 |
|
||||
Asset retirement obligation |
|
173,779 |
|
200,529 |
|
163,093 |
|
190,382 |
|
||||
Other deferred liabilities and credits |
|
107,532 |
|
108,873 |
|
104,984 |
|
107,924 |
|
||||
|
|
1,938,696 |
|
1,917,983 |
|
2,100,300 |
|
2,085,214 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
LONG-TERM DEBT |
|
|
|
|
|
|
|
|
|
||||
Long-term debt, excluding current portion |
|
1,632,577 |
|
1,632,577 |
|
1,633,519 |
|
1,633,519 |
|
||||
Forward contracts |
|
1,536,563 |
|
1,536,563 |
|
1,707,282 |
|
1,707,282 |
|
||||
|
|
3,169,140 |
|
3,169,140 |
|
3,340,801 |
|
3,340,801 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
MINORITY INTEREST IN SUBSIDIARIES |
|
573,041 |
|
566,881 |
|
552,884 |
|
546,833 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
PREFERRED SHARES |
|
3,863 |
|
3,863 |
|
3,863 |
|
3,863 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
COMMON STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
||||
Common Shares, par value $.01 per share |
|
565 |
|
565 |
|
565 |
|
565 |
|
||||
Special Common Shares, par value $.01 per share |
|
629 |
|
629 |
|
629 |
|
629 |
|
||||
Series A Common Shares, par value $.01 per share |
|
64 |
|
64 |
|
64 |
|
64 |
|
||||
Additional paid-in capital |
|
1,833,617 |
|
1,837,354 |
|
1,826,420 |
|
1,828,634 |
|
||||
Common Shares |
|
(207,524 |
) |
(207,524 |
) |
(208,156 |
) |
(208,156 |
) |
||||
Special Common Shares |
|
(209,421 |
) |
(209,421 |
) |
(210,600 |
) |
(210,600 |
) |
||||
Accumulated other comprehensive income |
|
249,694 |
|
312,264 |
|
309,009 |
|
363,641 |
|
||||
Retained earnings |
|
1,823,527 |
|
1,784,479 |
|
1,632,682 |
|
1,603,221 |
|
||||
|
|
3,491,151 |
|
3,518,410 |
|
3,350,613 |
|
3,377,998 |
|
||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
10,470,824 |
|
$ |
10,475,438 |
|
$ |
10,404,565 |
|
$ |
10,420,034 |
|
18
2. Summary of Significant Accounting Policies
Change in Accounting Principle Stock-Based Compensation
TDS has established long-term incentive plans, employee stock purchase plans, dividend reinvestment plans, and a non-employee director compensation plan which are described more fully in Note 3 Stock-Based Compensation. Prior to January 1, 2006, TDS accounted for these plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, as permitted by Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Total stock-based employee compensation cost recognized in the Consolidated Statements of Operations under APB 25 was $2.9 million and $4.1 million for the three and six months ended June 30, 2005, primarily for restricted stock unit and deferred compensation stock unit awards. No compensation cost was recognized in the Consolidated Statements of Operations under APB 25 for stock option awards for the three and six months ended June 30, 2005, because all outstanding options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The employee stock purchase plans and dividend reinvestment plans qualified as non-compensatory plans under APB 25; therefore, no compensation cost was recognized for these plans during the three and six months ended June 30, 2005.
Effective January 1, 2006, TDS adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), using the modified prospective transition method. In addition, TDS applied the provisions of Staff Accounting Bulletin No. 107 (SAB 107), issued by the SEC in March 2005 in its adoption of SFAS 123(R). Under the modified prospective transition method, compensation cost recognized during the three and six months ended June 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.
Under SFAS 123(R), the long-term incentive plans are considered compensatory plans; therefore, recognition of compensation costs for grants made under these plans is required.
Under SFAS 123(R), the employee stock purchase plans are considered compensatory plans; therefore, recognition of compensation costs for grants made under these plans is required. However, due to restrictions on activity under these plans that were in place during the six months ended June 30, 2006, no compensation expense was recognized during this period.
Under SFAS 123(R), the dividend reinvestment plans are not considered compensatory plans, therefore recognition of compensation costs for grants made under these plans is not required.
Upon adoption of SFAS 123(R), TDS elected to continue to value its share-based payment transactions using a Black-Scholes valuation model, which was previously used by TDS for purposes of preparing the pro forma disclosures under SFAS 123. Under the provisions of SFAS 123(R), stock-based compensation cost recognized during the period is based on the portion of the share-based payment awards that is ultimately expected to vest. Accordingly, stock-based compensation cost recognized in 2006 has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated based on historical experience related to similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. TDS believes that its historical experience is the best estimate of future expected life. In TDSs pro forma information required under SFAS 123, TDS also reduced stock-based compensation cost for estimated forfeitures. The expected life assumption was determined based on TDSs historical experience. For purposes of both SFAS 123 and SFAS 123(R), the expected volatility assumption was based on the historical volatility of TDSs common stock. The dividend yield was included in the assumptions. The risk-free interest rate assumption was determined using the implied yield currently available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the stock options.
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Compensation cost for stock option awards granted after January 1, 2006 will be recognized over the respective requisite service period of the awards, which is generally the vesting period, on a straight-line basis over the requisite service period for each separately vesting portion of the awards as if the awards were, in-substance, multiple awards (graded vesting attribution method), which is the same attribution method that was used by TDS for purposes of its pro forma disclosures under SFAS 123.
Certain employees were eligible for retirement at the time that compensatory stock options were granted. Under the terms of the TDS option agreements, options granted to these individuals do not vest upon retirement. Under the terms of the U.S. Cellular option agreements, options granted to these individuals will fully vest upon their retirement if they have reached the age of 65. Similarly, under the terms of TDSs restricted stock unit agreements, restricted stock units vest upon retirement if the employee has reached the age of 66. Under the terms of U.S. Cellulars restricted stock unit agreements, restricted stock units vest upon retirement if the employee has reached the age of 65. Prior to the adoption of SFAS 123(R), TDS used the nominal vesting method to recognize the pro forma stock-based compensation cost related to options and restricted stock units awarded to retirement-eligible employees. This method does not take into account the effect of early vesting due to the retirement of eligible employees. Upon adoption of SFAS 123(R), TDS adopted the non-substantive vesting method, which requires accelerated recognition of the entire cost of options granted to retirement-eligible employees over the period of time from the date of grant to the date such employees reach age 65. If the non-substantive vesting method had been applied in prior periods, the effect on previously disclosed pro forma stock-based compensation cost would not have been material.
On March 7, 2006, the TDS Compensation Committee approved amendments to stock option award agreements. The amendments modify current and future options to extend the exercise period until 30 days following (i) the lifting of a suspension if options otherwise would expire or be forfeited during the suspension period and (ii) the lifting of a blackout if options otherwise would expire or be forfeited during a blackout period. TDS temporarily suspended issuances of shares under the 2004 Long Term Incentive Plan between March 17, 2006 and October 10, 2006 as a consequence of late SEC filings. As required under the provisions of SFAS 123(R), TDS evaluated the impact of this plan modification and originally determined that the adjustment to stock based compensation was not material. However, in connection with the restatement discussed above, TDS further reviewed the accounting for the plan modification. Upon such further review, TDS determined that it should have recognized stock-based compensation expense of $1.6 million in the three months ended March 31, 2006 as a result of this modification. TDS recognized $0.0 million and $1.6 million in stock-based compensation expense in the three and six months ended June 30, 2006, respectively, as a result of this modification.
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 $4.4 million and $7.9 million for the three and six months ended June 30, 2006, respectively, and $3.3 million and $6.8 million for the three and six months ended June 30, 2005, respectively.
TDS also sponsors an unfunded non-qualified deferred supplemental executive retirement plan for certain employees which supplements the benefits under the qualified plan to offset the reduction of benefits caused by the limitation on annual employer contributions under the tax laws.
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Other Postretirement Benefits
TDS sponsors two contributory defined benefit postretirement plans that cover most employees of TDS Corporate, TDS Telecom and the subsidiaries of TDS Telecom. One plan provides medical benefits and the other plan provides life insurance benefits.
Net periodic benefit costs for the defined benefit postretirement plans include the following components:
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