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

 

 

 

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)

 

Registrant’s 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 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 issuer’s classes of common stock, as of the latest practicable date.

Class

 

Outstanding at August 31, 2006

Common Shares, $.01 par value

 

 

51,432,410 Shares

Special Common Shares, $.01 par value

 

 

57,782,076 Shares

Series A Common Shares, $.01 par value

 

 

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 “Management’s 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 Telecom’s 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 management’s 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 TDS’s 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

 

 

 

Page No.

Part I.

Financial Information

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited) – As Restated

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations – As Restated

 

 

 

 

Three and Six Months Ended June 30, 2006 and 2005

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows – As Restated

 

 

 

 

Six Months Ended June 30, 2006 and 2005

 

7

 

 

 

 

 

 

 

Consolidated Balance Sheets – As Restated

 

 

 

 

June 30, 2006 and December 31, 2005

 

8

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

10

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

48

 

 

 

 

 

 

 

Six Months Ended June 30, 2006 and 2005

 

 

 

 

U.S. Cellular Operations

 

55

 

 

TDS Telecom Operations

 

64

 

 

Three Months Ended June 30, 2006 and 2005

 

67

 

 

Recent Accounting Pronouncements

 

73

 

 

Financial Resources

 

74

 

 

Liquidity and Capital Resources

 

76

 

 

Application of Critical Accounting Policies and Estimates

 

82

 

 

Certain Relationships and Related Transactions

 

89

 

 

Other Matters

 

89

 

 

Safe Harbor Cautionary Statement

 

90

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

93

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

95

 

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

99

 

 

 

 

 

 

Item 1A.

Risk Factors

 

99

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

99

 

 

 

 

 

 

Item 5.

Other Information

 

99

 

 

 

 

 

 

Item 6.

Exhibits

 

100

 

 

 

 

 

Signatures

 

 

 

 




PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(As Restated)

 

(As Restated)

 

(As Restated)

 

(As Restated)

 

 

 

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

$

1,068,687

 

$

967,948

 

$

2,127,764

 

$

1,901,910

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Cost of services and products (exclusive of depreciation, amortization and accretion expense shown below)

 

369,559

 

341,993

 

745,865

 

685,810

 

Selling, general and administrative expense

 

411,366

 

352,707

 

803,987

 

697,779

 

Depreciation, amortization and accretion expense

 

180,453

 

167,911

 

363,419

 

338,052

 

Total Operating Expenses

 

961,378

 

862,611

 

1,913,271

 

1,721,641

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

107,309

 

105,337

 

214,493

 

180,269

 

 

 

 

 

 

 

 

 

 

 

Investment and Other Income (Expense)

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

22,491

 

17,741

 

42,296

 

32,492

 

Interest and dividend income

 

146,545

 

119,192

 

158,028

 

127,310

 

Interest expense

 

(59,288

)

(54,532

)

(117,820

)

(106,388

)

Fair value adjustment of derivative instruments

 

(11,768

)

164,323

 

(11,738

)

499,723

 

Gain on investments

 

91,418

 

 

91,418

 

500

 

Other expense

 

(941

)

(6,802

)

(1,868

)

(11,076

)

Total Investment and Other Income

 

188,457

 

239,922

 

160,316

 

542,561

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes and Minority Interest

 

295,766

 

345,259

 

374,809

 

722,830

 

Income tax expense

 

117,186

 

140,090

 

149,528

 

288,490

 

Income Before Minority Interest

 

178,580

 

205,169

 

225,281

 

434,340

 

Minority share of income

 

(11,821

)

(11,190

)

(22,525

)

(16,800

)

Net Income

 

166,759

 

193,979

 

202,756

 

417,540

 

Preferred dividend requirement

 

(50

)

(52

)

(101

)

(102

)

Net Income Available To Common

 

$

166,709

 

$

193,927

 

$

202,655

 

$

417,438

 

 

 

 

 

 

 

 

 

 

 

Basic Weighted Average Shares Outstanding (000s)

 

115,768

 

115,224

 

115,754

 

115,112

 

Basic Earnings Per Share (Note 7)

 

$

1.44

 

$

1.68

 

$

1.75

 

$

3.63

 

 

 

 

 

 

 

 

 

 

 

Diluted Weighted Average Shares Outstanding (000s)

 

116,640

 

115,959

 

116,576

 

115,926

 

Diluted Earnings Per Share (Note 7)

 

$

1.43

 

$

1.67

 

$

1.73

 

$

3.60

 

 

 

 

 

 

 

 

 

 

 

Dividends Per Share

 

$

0.0925

 

$

0.0875

 

$

0.185

 

$

0.175

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

6

 

 




 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

 

 

(As Restated)

 

(As Restated)

 

 

 

(Dollars in thousands)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

202,756

 

$

417,540

 

Add (Deduct) adjustments to reconcile net income to net cash

 

 

 

 

 

provided by operating activities

 

 

 

 

 

Depreciation, amortization and accretion

 

363,419

 

338,052

 

Bad debts expense

 

26,465

 

17,764

 

Stock-based compensation expense

 

14,653

 

4,086

 

Deferred income taxes

 

(41,091

)

195,198

 

Equity in earnings of unconsolidated entities

 

(42,296

)

(32,492

)

Distributions from unconsolidated entities

 

37,399

 

27,914

 

Minority share of income

 

22,525

 

16,800

 

Fair value adjustment of derivative instruments

 

11,738

 

(499,723

)

(Gain) loss on investments

 

(91,418

)

(500

)

Noncash interest expense

 

10,705

 

10,129

 

Other noncash expense

 

3,631

 

5,558

 

Changes in assets and liabilities

 

 

 

 

 

Change in accounts receivable

 

(41,637

)

(28,171

)

Change in materials and supplies

 

10,503

 

22,020

 

Change in accounts payable

 

(47,956

)

(46,303

)

Change in customer deposits and deferred revenues

 

5,346

 

8,339

 

Change in accrued taxes

 

67,233

 

76,878

 

Change in other assets and liabilities

 

(32,485

)

(17,759

)

 

 

479,490

 

515,330

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

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

 

 

Other investing activities

 

(2,887

)

(1,271

)

 

 

(248,456

)

(431,187

)

 

 

 

 

 

 

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

 

 




 

 

CONSOLIDATED BALANCE SHEETS

ASSETS

Unaudited

 

 

June 30,
2006

 

December 31,
2005

 

 

 

(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,
2006

 

December 31,
2005

 

 

 

(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 TDS’s 81.2%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”), TDS’s 100%-owned wireline telephone subsidiary, TDS Telecommunications Corporation (“TDS Telecom”) and TDS’s 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 entity’s 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 TDS’s 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 Telecom’s 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
June 30,

 

Six Months Ended
June 30,

 

 

 

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

Net Income

 

Diluted
Earnings
Per Share

 

Net Income

 

Diluted
Earnings
Per Share

 

Net Income

 

Diluted
Earnings
Per Share

 

Net Income

 

Diluted
Earnings
Per Share

 

 

 

(Increase (decrease) dollars in thousands,
except per share amounts)

 

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
Reported

 

As
Restated

 

As
Previously
Reported

 

As
Restated

 

 

 

(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
Reported

 

As
Restated

 

As Previously
Reported

 

As
Restated

 

 

 

(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
June 30,

 

 

 

2006

 

2006

 

2005

 

2005

 

 

 

As
Previously
Reported

 


As
Restated

 

As
Previously
Reported

 


As
Restated

 

 

 

(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
Reported

 

As
Restated

 

As Previously
Reported

 

As
Restated

 

 

 

(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
Previously
Reported

 


As
Restated

 

As
Previously
Reported

 


As
Restated

 

 

 

(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 TDS’s 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 TDS’s historical experience. For purposes of both SFAS 123 and SFAS 123(R), the expected volatility assumption was based on the historical volatility of TDS’s 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.

19




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 TDS’s 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. Cellular’s 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.

20




Other Postretirement Benefits

TDS sponsors two contributory defined benefit postretirement plans that cover most employees of TDS Corporate, TDS Telecom and the subsidiaries of TDS Telecom.  One plan provides medical benefits and the other plan provides life insurance benefits.

Net periodic benefit costs for the defined benefit postretirement plans include the following components:

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006