UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES |
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For the quarterly period ended June 30, 2008 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES |
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For the transition period from to |
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Commission File Number 001-14157
TELEPHONE AND DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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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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30 North LaSalle Street, Chicago, Illinois |
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60602 |
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(Address of principal executive offices) |
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(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 mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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.
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Class |
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Outstanding at June 30, 2008 |
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Common Shares, $.01 par value |
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53,193,983 Shares |
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Special Common Shares, $.01 par value |
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56,249,536 Shares |
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Series A Common Shares, $.01 par value |
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6,451,896 Shares |
Telephone and Data Systems, Inc.
Quarterly Report on Form 10-Q
For the Period Ended June 30, 2008
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Page No. |
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Consolidated Statements of Operations |
3 |
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Consolidated Statements of Cash Flows |
4 |
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Consolidated Balance Sheets |
5 |
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7 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
28 |
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28 |
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32 |
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34 |
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39 |
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44 |
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46 |
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49 |
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53 |
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55 |
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57 |
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61 |
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62 |
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66 |
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67 |
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69 |
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69 |
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70 |
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71 |
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72 |
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72 |
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Telephone and Data Systems, Inc.
Consolidated Statements of Operations
Unaudited
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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(Dollars and shares in thousands, except per share amounts) |
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Operating Revenues |
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$ |
1,274,351 |
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$ |
1,192,834 |
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$ |
2,523,452 |
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$ |
2,349,391 |
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Operating Expenses |
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Cost of services and products (excluding Depreciation, amortization and accretion expense reported below) |
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452,845 |
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412,507 |
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895,228 |
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814,540 |
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Selling, general and administrative expense |
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477,299 |
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435,843 |
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940,598 |
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856,261 |
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Depreciation, amortization and accretion expense |
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188,026 |
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187,697 |
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374,184 |
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375,701 |
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Loss on asset disposals, net |
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6,438 |
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2,832 |
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10,090 |
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6,137 |
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Total Operating Expenses |
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1,124,608 |
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1,038,879 |
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2,220,100 |
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2,052,639 |
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Operating Income |
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149,743 |
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153,955 |
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303,352 |
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296,752 |
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Investment and Other Income (Expense) |
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Equity in earnings of unconsolidated entities |
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22,909 |
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23,875 |
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44,379 |
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47,571 |
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Interest and dividend income |
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17,455 |
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147,768 |
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27,201 |
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163,964 |
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Interest expense |
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(35,570 |
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(55,245 |
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(76,950 |
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(113,046 |
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Gain (loss) on investments and financial instruments |
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3,088 |
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(220,199 |
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(402 |
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35,671 |
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Other, net |
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1,902 |
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(1,868 |
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1,703 |
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(4,092 |
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Total Investment and Other Income (Expense) |
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9,784 |
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(105,669 |
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(4,069 |
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130,068 |
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Income Before Income Taxes and Minority Interest |
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159,527 |
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48,286 |
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299,283 |
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426,820 |
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Income tax expense |
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53,261 |
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26,700 |
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102,512 |
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167,938 |
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Income Before Minority Interest |
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106,266 |
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21,586 |
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196,771 |
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258,882 |
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Minority share of income, net of tax |
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(18,509 |
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(30,213 |
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(35,527 |
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(48,184 |
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Net Income (Loss) |
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87,757 |
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(8,627 |
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161,244 |
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210,698 |
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Preferred dividend requirement |
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(13 |
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(13 |
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(26 |
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(26 |
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Net Income (Loss) Available To Common |
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$ |
87,744 |
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$ |
(8,640 |
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$ |
161,218 |
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$ |
210,672 |
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Basic Weighted Average Shares Outstanding |
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116,267 |
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117,031 |
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116,919 |
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116,935 |
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Basic Earnings (Loss) Per Share (Note 7) |
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$ |
0.75 |
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$ |
(0.07 |
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$ |
1.38 |
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$ |
1.80 |
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Diluted Weighted Average Shares Outstanding |
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116,814 |
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117,031 |
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117,500 |
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118,432 |
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Diluted Earnings (Loss) Per Share (Note 7) |
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$ |
0.75 |
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$ |
(0.08 |
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$ |
1.37 |
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$ |
1.76 |
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Dividends Per Share |
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$ |
0.1025 |
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$ |
0.0975 |
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$ |
0.2050 |
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$ |
0.195 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
Telephone and Data Systems, Inc.
Consolidated Statements of Cash Flows
Unaudited
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Six Months Ended |
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June 30, |
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2008 |
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2007 |
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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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$ |
161,244 |
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$ |
210,698 |
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Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities |
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Depreciation, amortization and accretion |
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374,184 |
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375,701 |
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Bad debts expense |
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36,806 |
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26,991 |
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Stock-based compensation expense |
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9,022 |
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10,879 |
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Deferred income taxes |
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(316,269 |
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(61,814 |
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(Gain) loss on investments and financial instruments |
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402 |
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(35,671 |
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Equity in earnings of unconsolidated entities |
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(44,379 |
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(47,571 |
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Distributions from unconsolidated entities |
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45,810 |
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43,435 |
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Minority share of income |
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35,527 |
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48,184 |
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Loss on asset disposals, net |
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10,090 |
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6,137 |
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Noncash interest expense |
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7,930 |
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10,635 |
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Other noncash expense |
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247 |
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1,788 |
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Excess tax benefit from stock awards |
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(1,706 |
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(17,598 |
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Other operating activities |
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(2,350 |
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(5,000 |
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Changes in assets and liabilities |
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Change in accounts receivable |
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(59,440 |
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(43,884 |
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Change in inventory |
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(20,830 |
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(1,213 |
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Change in accounts payable |
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(4,171 |
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(5,792 |
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Change in customer deposits and deferred revenues |
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10,303 |
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19,469 |
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Change in accrued taxes |
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304,231 |
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128,672 |
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Change in accrued interest |
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(3,780 |
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(712 |
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Change in other assets and liabilities |
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(47,432 |
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(44,784 |
) |
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495,439 |
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618,550 |
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Cash Flows from Investing Activities |
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Additions to property, plant and equipment |
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(299,061 |
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(304,559 |
) |
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Cash paid for acquisitions |
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(334,350 |
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(20,569 |
) |
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Cash received from divestitures |
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6,838 |
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4,277 |
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Proceeds from sale of investments |
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226,644 |
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10,547 |
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Cash paid to settle derivative liabilities |
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(17,404 |
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— |
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Other investing activities |
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(934 |
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(242 |
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(418,267 |
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(310,546 |
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Cash Flows from Financing Activities |
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Issuance of notes payable |
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100,000 |
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25,000 |
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Issuance of long-term debt |
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— |
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2,857 |
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Repayment of notes payable |
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(50,000 |
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(60,000 |
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Repayment of variable prepaid forward contracts |
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(47,357 |
) |
— |
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Repayment of long-term debt |
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(6,442 |
) |
(1,679 |
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TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments |
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1,494 |
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74,339 |
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U.S. Cellular Common Shares reissued for benefit plans, net of tax payments |
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(1,878 |
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9,223 |
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Excess tax benefit from stock awards |
|
1,706 |
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17,598 |
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Repurchase of TDS Special Common Shares |
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(83,013 |
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(7,036 |
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Repurchase of U.S. Cellular Common Shares |
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(14,516 |
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(49,057 |
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Dividends paid |
|
(23,922 |
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(22,798 |
) |
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Distributions to minority partners |
|
(4,594 |
) |
(4,676 |
) |
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Other financing activities |
|
2,067 |
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(1,869 |
) |
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(126,455 |
) |
(18,098 |
) |
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Net Increase (Decrease) in Cash and Cash Equivalents |
|
(49,283 |
) |
289,906 |
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Cash and Cash Equivalents - |
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Beginning of period |
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1,174,446 |
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1,013,325 |
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End of period |
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$ |
1,125,163 |
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$ |
1,303,231 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
Telephone and Data Systems, Inc.
Assets
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June 30, |
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2008 |
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December 31, |
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(Unaudited) |
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2007 |
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(Dollars in thousands) |
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Current Assets |
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Cash and cash equivalents |
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$ |
1,125,163 |
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$ |
1,174,446 |
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Accounts receivable |
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Due from customers, less allowances of $13,015 and $16,326, respectively |
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386,661 |
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379,558 |
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Other, principally connecting companies, less allowances of $5,297 and $5,297, respectively |
|
156,003 |
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150,863 |
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Marketable equity securities |
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32,020 |
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1,917,893 |
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Inventory |
|
126,083 |
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115,818 |
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Net deferred income tax asset |
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22,502 |
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— |
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Prepaid expenses |
|
89,455 |
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77,155 |
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Other current assets |
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32,612 |
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59,855 |
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1,970,499 |
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3,875,588 |
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Investments |
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Licenses |
|
1,829,014 |
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1,516,629 |
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Goodwill |
|
695,696 |
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679,129 |
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Customer lists, net of accumulated amortization of $91,180 and $84,190, respectively |
|
29,069 |
|
25,851 |
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Investments in unconsolidated entities |
|
209,053 |
|
206,418 |
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Other investments |
|
11,032 |
|
11,509 |
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|
|
2,773,864 |
|
2,439,536 |
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Property, Plant and Equipment |
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In service and under construction |
|
8,348,380 |
|
8,064,229 |
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Less accumulated depreciation |
|
4,863,167 |
|
4,539,127 |
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||
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|
|
3,485,213 |
|
3,525,102 |
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Other Assets and Deferred Charges |
|
51,910 |
|
53,917 |
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Total Assets |
|
$ |
8,281,486 |
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$ |
9,894,143 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
Telephone and Data Systems, Inc.
Consolidated Balance Sheets
Liabilities and Stockholders’ Equity
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June 30, |
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2008 |
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December 31, |
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(Unaudited) |
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2007 |
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(Dollars in thousands) |
|
||||
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Current Liabilities |
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Current portion of long-term debt |
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$ |
4,390 |
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$ |
3,860 |
|
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Forward contracts |
|
— |
|
1,005,512 |
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Notes payable |
|
50,000 |
|
— |
|
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Accounts payable |
|
307,572 |
|
308,882 |
|
||
|
Customer deposits and deferred revenues |
|
176,574 |
|
166,191 |
|
||
|
Accrued interest |
|
14,676 |
|
18,456 |
|
||
|
Accrued taxes |
|
310,861 |
|
40,439 |
|
||
|
Accrued compensation |
|
61,840 |
|
91,703 |
|
||
|
Derivative liability |
|
— |
|
711,692 |
|
||
|
Deferred income tax liability |
|
— |
|
327,162 |
|
||
|
Other current liabilities |
|
122,877 |
|
125,622 |
|
||
|
|
|
1,048,790 |
|
2,799,519 |
|
||
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|
|
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Deferred Liabilities and Credits |
|
|
|
|
|
||
|
Net deferred income tax liability |
|
595,420 |
|
555,593 |
|
||
|
Asset retirement obligation |
|
182,495 |
|
173,468 |
|
||
|
Other deferred liabilities and credits |
|
149,726 |
|
154,602 |
|
||
|
|
|
927,641 |
|
883,663 |
|
||
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|
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|
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Long-Term Debt |
|
1,635,147 |
|
1,632,226 |
|
||
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|
|
|
|
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Commitments and Contingencies |
|
|
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||
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|
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|
||
|
Minority Interest |
|
679,938 |
|
651,537 |
|
||
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|
|
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|
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|
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Preferred Shares |
|
860 |
|
860 |
|
||
|
|
|
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|
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Common Stockholders’ Equity |
|
|
|
|
|
||
|
Common Shares, par value $.01 per share; authorized 100,000,000 shares; issued 56,592,000 and 56,581,000 shares, respectively |
|
566 |
|
566 |
|
||
|
Special Common Shares, par value $.01 per share; authorized 165,000,000 shares; issued 62,951,000 and 62,946,000 shares, respectively |
|
630 |
|
629 |
|
||
|
Series A Common Shares, par value $.01 per share; authorized 25,000,000 shares; issued and outstanding 6,452,000 and 6,442,000 shares, respectively |
|
65 |
|
64 |
|
||
|
Capital in excess of par value |
|
2,055,677 |
|
2,048,110 |
|
||
|
Treasury Shares at cost: |
|
|
|
|
|
||
|
Common Shares, 3,398,000 and 3,433,000 shares, respectively |
|
(118,506 |
) |
(120,544 |
) |
||
|
Special Common Shares, 6,702,000 and 4,712,000 shares, respectively |
|
(283,682 |
) |
(204,914 |
) |
||
|
Accumulated other comprehensive income |
|
9,546 |
|
511,776 |
|
||
|
Retained earnings |
|
2,324,814 |
|
1,690,651 |
|
||
|
|
|
3,989,110 |
|
3,926,338 |
|
||
|
Total Liabilities and Stockholders’ Equity |
|
$ |
8,281,486 |
|
$ |
9,894,143 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Telephone and Data Systems, Inc.
Notes To Consolidated Financial Statements
1. Basis of Presentation
The accounting policies of Telephone and Data Systems, Inc. (“TDS”) conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of TDS and its majority-owned subsidiaries, including TDS’ 80.9%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”), TDS’ 100%-owned wireline telephone subsidiary, TDS Telecommunications Corporation (“TDS Telecom”) and TDS’ 80%-owned printing and distribution company, Suttle Straus, Inc. In addition, the consolidated financial statements include all entities in which TDS has a variable interest that requires TDS to absorb a majority of the entity’s expected gains or losses, or both. All material intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 2008 financial statement presentation.
The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K for the year ended December 31, 2007 (“Form 10-K”).
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items unless otherwise disclosed) necessary to present fairly the financial position as of June 30, 2008 and December 31, 2007, the results of operations for the three and six months ended June 30, 2008 and 2007, and the cash flows for the six months ended June 30, 2008 and 2007. The results of operations for the three and six months ended June 30, 2008 and cash flows for the six months ended June 30, 2008 are not necessarily indicative of the results to be expected for the full year.
2. Summary of Significant Accounting Policies
Pension Plan
TDS sponsors a qualified noncontributory defined contribution pension plan. The plan provides benefits for the employees of TDS Corporate, TDS Telecom and U.S. Cellular. Under this plan, pension benefits and costs are calculated separately for each participant and are funded annually. Pension costs were $3.9 million and $8.6 million for the three and six months ended June 30, 2008, respectively; and $3.6 million and $7.1 million for the three months and six months ended June 30, 2007, respectively.
TDS also sponsors an unfunded non-qualified deferred supplemental executive retirement plan for certain employees which supplements the benefits under the qualified plan to offset the reduction of benefits caused by the limitation on annual employer contributions under the tax laws.
Other Postretirement Benefits
TDS sponsors two contributory defined benefit postretirement plans that cover most employees of TDS Corporate, TDS Telecom and the subsidiaries of TDS Telecom. One plan provides medical benefits and the other plan provides life insurance benefits.
7
Net periodic benefit costs for the defined benefit postretirement plans include the following components:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
Service Cost |
|
$ |
499 |
|
$ |
609 |
|
$ |
998 |
|
$ |
1,218 |
|
|
Interest on accumulated benefit obligation |
|
863 |
|
858 |
|
1,726 |
|
1,716 |
|
||||
|
Expected return on plan assets |
|
(948 |
) |
(821 |
) |
(1,896 |
) |
(1,642 |
) |
||||
|
Amortization of: |
|
|
|
|
|
|
|
|
|
||||
|
Prior service cost |
|
(207 |
) |
(207 |
) |
(414 |
) |
(415 |
) |
||||
|
Net loss |
|
242 |
|
340 |
|
484 |
|
681 |
|
||||
|
Net postretirement cost |
|
$ |
449 |
|
$ |
779 |
|
$ |
898 |
|
$ |
1,558 |
|
TDS did not make any contributions to the post-retirement plans in the six months ended June 30, 2008. TDS expects to make a contribution of $3.8 million in the third quarter of 2008.
Amounts Collected from Customers and Remitted to Governmental Authorities
TDS records amounts collected from customers and remitted to governmental authorities net within a tax liability account if the tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority. If the tax is assessed upon TDS, the amounts collected from customers as recovery of the tax are recorded in Operating revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statements of Operations. The amounts recorded gross in Operating revenues that are billed to customers and remitted to governmental authorities totaled $40.4 million and $77.2 million for the three and six months ended June 30, 2008, respectively; and $38.0 million and $68.9 million for the three and six months ended June 30, 2007, respectively.
Accounting for the Effects of Certain Types of Regulation
For the six months ended June 30, 2007, TDS Telecom’s incumbent local exchange carrier (“ILEC”) operations followed the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 71, Accounting for the Effects of Certain Types of Regulation (“SFAS 71”). This accounting recognized the economic effects of rate-making actions of regulatory bodies in the financial statements of TDS Telecom’s ILEC operations. In the third quarter of 2007, TDS Telecom discontinued the application of SFAS 71 for its ILEC operations. Therefore, TDS Telecom’s ILEC operations follow the provisions of SFAS 71 for the three and six months ended June 30, 2007, and do not follow such provisions for the three and six months ended June 30, 2008. This accounting change did not have a material impact on the comparability of TDS’ consolidated financial statements for these periods.
8
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures related to the use of fair value measures in financial statements. SFAS 157 does not expand the use of fair value measurements in financial statements, but standardizes its definition and guidance in U.S. GAAP. SFAS 157 emphasizes that fair value is a market-based measurement and not an entity-specific measurement, based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS 157 establishes a fair value hierarchy from observable market data as the highest level to an entity’s own fair value assumptions about market participant assumptions as the lowest level. In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2 to defer the effective date of SFAS 157 for all nonfinancial assets and liabilities, except those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until years beginning after November 15, 2008. TDS adopted SFAS 157 for its financial assets and liabilities effective January 1, 2008 (See Note 5 - Fair Value Measurements for more information related to TDS’ adoption of SFAS 157 for its financial assets and liabilities). TDS is currently reviewing the adoption requirements related to its nonfinancial assets and liabilities and has not yet determined the impact, if any, on its financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations—a replacement of FASB Statement No. 141 (“SFAS 141(R)”). SFAS 141(R) replaces FASB Statement No. 141, Business Combinations (“SFAS 141”). SFAS 141(R) retains the underlying concept of SFAS 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method, a method that requires the acquirer to measure and recognize the acquiree on an entire entity basis and recognize the assets acquired and liabilities assumed at their fair values as of the date of acquisition. However, SFAS 141(R) changes the method of applying the acquisition method in a number of significant aspects, such as requiring the expensing of transaction costs previously capitalized and requiring the accrual at fair value of certain contractual and noncontractual contingencies. SFAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes, such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) also would be determined in accordance with the provisions of SFAS 141(R). TDS is currently reviewing the requirements of SFAS 141(R) and has not yet determined the impact, if any, on its financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries—a replacement of ARB No. 51 (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, as amended by FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to establish new standards that will govern the accounting and reporting of (1) noncontrolling interests (commonly referred to as minority interests) in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. SFAS 160 also establishes that once control of a subsidiary is obtained, changes in ownership interests in that subsidiary that do not result in a loss of control shall be accounted for as equity transactions, not as step acquisitions under SFAS 141. SFAS 160 is effective for TDS on a prospective basis beginning January 1, 2009, except for the presentation and disclosure requirements, which will be applied retrospectively. TDS is currently reviewing the requirements of SFAS 160 and has not yet determined the impact, if any, on its financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 expands the disclosure requirements for derivative instruments and hedging activities. The Statement specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for TDS beginning January 1, 2009. As of June 30, 2008, TDS did not hold any derivative instruments.
9
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for TDS beginning January 1, 2009. TDS does not anticipate that the adoption of FSP FAS 142-3 will have an impact on its financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for non-governmental entities. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Presenting Fairly in Conformity with Generally Accepted Accounting Principles. TDS does not anticipate that the adoption of SFAS 162 will have an impact on either its financial statements or disclosures.
3. Acquisitions, Divestitures and Exchanges
TDS assesses its existing wireless and wireline interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment. As part of this strategy, TDS reviews attractive opportunities to acquire additional operating markets, telecommunications companies and wireless spectrum. In addition, TDS may seek to divest outright or include in exchanges for other wireless interests those markets and wireless interests that are not strategic to its long-term success.
Transactions Pending as of June 30, 2008:
TDS’ subsidiary, U.S. Cellular, participated in the Federal Communications Commission (“FCC”) auction of spectrum in the 700 megahertz band, known as Auction 73, indirectly through its interest in King Street Wireless, L.P. (“King Street Wireless”). U.S. Cellular is a limited partner in King Street Wireless. King Street Wireless qualified as a “designated entity” and is eligible to receive a 25% bid credit available to “very small businesses,” defined as businesses having annual gross revenues of less than $15 million. As discussed in Note 4 – Variable Interest Entities, TDS consolidates King Street Wireless.
The FCC released the results of Auction 73 on March 20, 2008. King Street Wireless was the provisional winning bidder for 152 licenses for an aggregate bid of $300.5 million, net of its designated entity discount of 25%. This amount is recorded as a component of Licenses in TDS’ June 30, 2008 Consolidated Balance Sheet. During the six months ended June 30, 2008, U.S. Cellular made capital contributions and advances to King Street Wireless and its general partner of $300.5 million. King Street Wireless paid this amount to the FCC for the licenses for which it was the provisional winning bidder in the auction. U.S. Cellular may agree to make additional capital contributions and/or advances to King Street Wireless and/or its general partner to provide additional funding for the development of such licenses. U.S. Cellular may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or long-term debt. There is no assurance that U.S. Cellular will be able to obtain additional financing on commercially reasonable terms or at all. While the bidding in Auction 73 has ended, the FCC has awarded only a few of the licenses to winning bidders. There is no prescribed timeframe for the FCC to review the qualifications of the various winning bidders and award licenses. The licenses expected to be awarded to King Street Wireless cover areas that overlap or are proximate or contiguous to areas covered by licenses that U.S. Cellular currently owns, operates and/or consolidates.
Transactions Completed as of June 30, 2008:
On May 31, 2008, TDS Telecom acquired 100% of the outstanding shares of Mosinee Telephone Company, LLC for $17.3 million in cash, including acquisition costs. Mosinee Telephone Company, LLC is a rural incumbent local exchange carrier serving 4,900 physical access lines in Wisconsin.
10
On March 21, 2008, U.S. Cellular entered into an agreement to acquire the remaining 50% ownership interest of North Carolina RSA 1 Partnership, a wireless market operator in which U.S. Cellular had previously owned a 50% non-operating, unconsolidated interest, for $6.9 million in cash. On May 30, 2008, U.S. Cellular completed this transaction.
In October 2006, U.S. Cellular’s interest in Midwest Wireless Communications, LLC (“Midwest Wireless”) was sold to ALLTEL Corporation. In connection with the sale, U.S. Cellular became entitled to receive approximately $106.0 million in cash with respect to its interest in Midwest Wireless. On January 8, 2008, U.S. Cellular received a final distribution from the escrow of $6.3 million, plus interest of $0.5 million. A gain and interest income of $6.3 million and $0.5 million, respectively, were recognized in the fourth quarter of 2007 related to this distribution.
On December 3, 2007, U.S. Cellular entered into an agreement to acquire six 12 megahertz lower C block 700 megahertz licenses in Maine for $5.0 million in cash. On March 28, 2008, U.S. Cellular completed this transaction.
On November 30, 2007, U.S. Cellular entered into an exchange agreement with Sprint Nextel Corporation which provided for U.S. Cellular to receive personal communication service (“PCS”) spectrum in eight licenses covering portions of four states (Oklahoma, West Virginia, Maryland and Iowa), in exchange for U.S. Cellular delivering PCS spectrum in eight licenses covering portions of Illinois. In connection with the exchange, TDS recognized a pre-tax loss of $20.8 million during the fourth quarter of 2007. This transaction closed on March 19, 2008.
On November 30, 2007, TDS Telecom entered into an agreement to acquire West Point Telephone Company, a telephone company in Indiana serving 750 physical access lines, for $6.8 million in cash, including acquisition costs. On February 13, 2008, TDS Telecom completed this transaction.
TDS’ acquisitions for the six months ended June 30, 2008 and the allocation of the purchase price for each respective acquisition were as follows:
|
|
|
|
|
Allocation of Purchase Price |
|
|||||||||||
|
(Dollars in thousands) |
|
Purchase |
|
Goodwill(2) |
|
Licenses |
|
Customer |
|
Net tangible |
|
|||||
|
U.S. Cellular Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Auction 73 Licenses |
|
$ |
300,479 |
|
$ |
— |
|
$ |
300,479 |
|
$ |
— |
|
$ |
— |
|
|
Maine Licenses |
|
5,000 |
|
— |
|
5,000 |
|
— |
|
— |
|
|||||
|
North Carolina RSA 1 Partnership |
|
6,900 |
|
1,632 |
|
4,180 |
|
81 |
|
1,007 |
|
|||||
|
Other |
|
1,891 |
|
970 |
|
623 |
|
964 |
|
(666 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
TDS Telecom Acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Mosinee Telephone Company |
|
17,264 |
|
9,210 |
|
— |
|
4,300 |
|
3,754 |
|
|||||
|
West Point Telephone Company |
|
6,757 |
|
1,956 |
|
— |
|
499 |
|
4,302 |
|
|||||
|
Other |
|
151 |
|
151 |
|
— |
|
— |
|
— |
|
|||||
|
Total |
|
$ |
338,442 |
|
$ |
13,919 |
|
$ |
310,282 |
|
$ |
5,844 |
|
$ |
8,397 |
|
(1) $2.7 million in cash was received from acquired companies and an aggregate of $1.4 million is recorded as a component of Other current liabilities.
(2) $1.6 million of the goodwill is deductible for tax purposes.
Unaudited pro-forma financial information related to TDS’ 2008 acquisitions has not been presented because these acquisitions, individually and in the aggregate, were not material to TDS’ consolidated results of operations for the six months ended June 30, 2008.
11
4. Variable Interest Entities
As of June 30, 2008, TDS consolidates the following variable interest entities:
· King Street Wireless and King Street Wireless, Inc., the general partner of King Street Wireless
· Barat Wireless L.P. (“Barat Wireless”) and Barat Wireless, Inc., the general partner of Barat Wireless
· Carroll Wireless L.P. (“Carroll Wireless”) and Carroll PCS, Inc., the general partner of Carroll Wireless
These variable interest entities are consolidated pursuant to the guidelines of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (“FIN 46(R)”), as U.S. Cellular anticipates benefiting from or absorbing a majority of the variable interest entities’ expected gains or losses. Pending finalization of the variable interest entities’ permanent financing plans, and upon request by the variable interest entities, U.S. Cellular may agree to make additional capital contributions and advances to the variable interest entities.
See Note 3 - Acquisitions, Divestitures and Exchanges for further details on King Street Wireless.
U.S. Cellular is a limited partner in Barat Wireless, an entity which participated in the auction of wireless spectrum designated by the FCC as Auction 66. Barat Wireless was qualified to receive a 25% bid credit available to “very small businesses”, defined as businesses having annual gross revenues of less than $15 million. At the conclusion of the auction on September 18, 2006, Barat Wireless was the successful bidder with respect to 17 licenses for which it had bid $127.1 million, net of its bid credit. On April 30, 2007, the FCC granted Barat Wireless’ applications with respect to the 17 licenses for which it was the successful bidder. These 17 license areas cover portions of 20 states and are in markets which are either adjacent to or overlap current U.S. Cellular licensed areas.
As of June 30, 2008, U.S. Cellular has made capital contributions and advances to Barat Wireless and/or its general partner of $127.3 million; of this amount, $127.1 million is included in Licenses in the Consolidated Balance Sheets.
U.S. Cellular is a limited partner in Carroll Wireless, an entity which participated in the auction of wireless spectrum designated by the FCC as Auction 58. Carroll Wireless was qualified to bid on “closed licenses” that were available only to companies included under the FCC definition of “entrepreneurs,” which are small businesses that have a limited amount of assets and revenues. In addition, Carroll Wireless bid on “open licenses” that were not subject to restriction. With respect to these open licenses, however, Carroll Wireless was qualified to receive a 25% bid credit available to “very small businesses” which were defined as having average annual gross revenues of less than $15 million. Carroll Wireless was a successful bidder for 16 licenses in Auction 58, which ended on February 15, 2005. The aggregate amount paid to the FCC for the licenses was $129.7 million, net of the bid credit to which Carroll Wireless was entitled. On January 6, 2006, the FCC granted Carroll Wireless’ applications with respect to the 16 licenses for which it was the successful bidder. These licenses cover portions of 10 states and are in markets which are either adjacent to or overlap current U.S. Cellular licensed areas.
As of June 30, 2008, U.S. Cellular has made capital contributions and advances to Carroll Wireless and/or its general partner of approximately $130.1 million; of this amount, $129.7 million is included in Licenses in the Consolidated Balance Sheets.
5. Fair Value Measurements
Effective January 1, 2008, TDS adopted the provisions of SFAS 157 for its financial assets and liabilities. Also on January 1, 2008, TDS elected to adopt the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 (“SFAS 159”), for certain assets and liabilities.
12
SFAS 157 Adoption
SFAS 157 defines “fair value”, establishes a framework for measuring fair value in the application of U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 does not expand the use of fair value measurements in financial statements, but standardizes its definition and application in U.S. GAAP. SFAS 157 provides that fair value is a market-based measurement and not an entity-specific measurement, based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). This pronouncement establishes a fair value hierarchy that contains three levels for inputs used in fair value measurements. Level 1 inputs include quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets. Level 2 inputs must be observable either directly or indirectly for substantially the full term of the financial instrument. Level 3 inputs are unobservable.
Marketable equity securities were the only financial assets on TDS and its subsidiaries’ Balance Sheet at June 30, 2008, which required the application of SFAS 157. TDS and its subsidiaries did not have any financial liabilities at June 30, 2008, which required the application of SFAS 157 for valuation purposes. TDS and its subsidiaries’ marketable equity securities had a balance of $32.0 million at June 30, 2008, and consisted entirely of an investment in the common stock of Rural Cellular Corporation (“RCCC”). This security is publicly traded. Fair value for this security is based upon quoted market prices for identical assets in active markets. Therefore, these inputs are considered Level 1 inputs in accordance with the guidance set forth in SFAS 157. TDS and its subsidiaries’ investment in RCCC is accounted for as an “available for sale” security under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Therefore, unrealized gains and losses on this investment are recorded as a component of Accumulated other comprehensive income.
SFAS 159 Adoption
SFAS 159 permits companies to choose to measure various financial instruments and certain other items at fair value. Pursuant to the provisions of SFAS 159, at the date the option is elected, entities are required to record a cumulative-effect adjustment to beginning retained earnings. In subsequent periods, for those instruments in which the fair value option is elected, unrealized gains and losses are recorded in the Statement of Operations. On January 1, 2008, TDS adopted SFAS 159 for its investment in Deutsche Telekom Ordinary Shares, and also for the “collar” portions of the variable prepaid forward contracts (“forward contracts”) related to such Deutsche Telekom stock.
TDS adopted SFAS 159 for these items in order to better align the financial statement presentation of the unrealized gains and losses attributable to these items with their underlying economics. Specifically, prior to the adoption of SFAS 159 for these items, the Deutsche Telekom stock was subject to the recognition provisions of SFAS 115, which required that the unrealized gains and losses on such stock be recorded in Accumulated other comprehensive income, a balance sheet account. Since the related collars did not qualify as cash flow hedges after June 2003, the changes in the fair value of the collars were reported in the Consolidated Statements of Operations in accordance with the requirements of SFAS 133 after this date. As a result of adopting SFAS 159 for both the Deutsche Telekom stock and the related collars, unrealized gains and losses on both of these items will be recorded in the Consolidated Statements of Operations as a (Gain) loss on investments and financial instruments. Such gains and losses are expected to substantially offset each other, and thus better reflect the economics of the collars, which were established in order to hedge the variability in the fluctuations of the fair value of the underlying Deutsche Telekom stock.
As a result of the election of SFAS 159 for its Deutsche Telekom stock and related collars, TDS recorded an adjustment to increase the January 1, 2008 beginning retained earnings by $502.7 million, net of $291.2 million of income taxes. This amount reflects an unrealized gain attributable to the Deutsche Telekom stock of $647.3 million, net of income taxes of $374.9 million, offset by an unrealized loss on the related collars of $144.6 million, net of income taxes of $83.7 million. The unrealized loss on the collars was attributable to the periods from inception to June 2003. During such periods the collars qualified as cash flow hedges and the changes in the fair value were recorded as a component of Accumulated other comprehensive income.
13
There were no tax accounting implications to the Consolidated Balance Sheet or Statement of Operations upon TDS’ election of the fair value option for its Deutsche Telekom marketable equity securities and related collars other than to reclassify the related tax effects from Accumulated other comprehensive income to beginning retained earnings, as mentioned above.
The following table summarizes the impact of the adoption of SFAS 159 as of January 1, 2008:
|
|
|
Balance Sheet prior |
|
|
|
Balance Sheet |
|
|||
|
|
|
to the adoption |
|
Net unrealized |
|
after adoption |
|
|||
|
|
|
of SFAS 159 |
|
gain reclassified |
|
of SFAS 159 |
|
|||
|
|
|
on January 1, 2008 |
|
upon adoption |
|
on January 1, 2008 |
|
|||
|
Marketable equity securities |
|
$ |
1,917,893 |
|
$ |
— |
|
$ |
1,917,893 |
|
|
Derivative liabilities |
|
711,692 |
|
— |
|
711,692 |
|
|||
|
Accumulated other comprehensive income |
|
511,776 |
|
(502,677 |
) |
9,099 |
|
|||
|
Retained earnings |
|
1,690,651 |
|
502,677 |
|
2,193,328 |
|
|||
During the six months ended June 30, 2008, TDS disposed of all 85,969,689 Deutsche Telekom Ordinary Shares and settled all outstanding forward contracts related to such shares – see Note 10 - Marketable Equity Securities and Variable Prepaid Forward Contracts, for more information on these settlements. As a result, at June 30, 2008, TDS and its subsidiaries’ investment in marketable equity securities consisted solely of $32.0 million investment in RCCC common stock. TDS and its subsidiaries did not elect to adopt the provisions of SFAS 159 for this investment since TDS and its subsidiaries do not have any collars or other derivative instruments that hedge the impact of changes in the market value of this RCCC stock.
14
The following table details the (Gain) loss on investments and financial instruments included in the Statements of Operations:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
Gains (losses) on marketable equity securities and derivative instruments |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Deutsche Telekom: |
|
|
|
|
|
|
|
|
|
||||
|
Increase/(decrease) in the fair value of securities (asset) |
|
$ |
62,333 |
|
$ |
— |
|
$ |
(294,827 |
) |
$ |
— |
|
|
(Increase)/decrease in the fair value of the embedded collars in the variable prepaid forward contracts (liability) |
|
(58,281 |
) |
(322,952 |
) |
295,389 |
|
(83,206 |
) |
||||
|
|
|
4,052 |
|
(322,952 |
) |
562 |
|
(83,206 |
) |
||||
|
Vodafone Group Plc: |
|
|
|
|
|
|
|
|
|
||||
|
Gain on disposition of securities(1) |
|
— |
|
4,478 |
|
— |
|
4,478 |
|
||||
|
Gain on the settlement of variable prepaid forward contracts(1) |
|
— |
|
127,207 |
|
— |
|
127,207 |
|
||||
|
(Increase) in the fair value of the embedded collars in the variable prepaid forward contracts (liability) |
|
— |
|
(35,311 |
) |
— |
|
(19,542 |
) |
||||
|
|
|
— |
|
96,374 |
|
— |
|
112,143 |
|
||||
|
VeriSign: |
|
|
|
|
|
|
|
|
|
||||
|
Gain on disposition of securities(1) |
|
— |
|
6,234 |
|
— |
|
6,234 |
|
||||
|
Increase in the fair value of securities (asset) |
|
— |
|
2,644 |
|
— |
|
5,171 |
|
||||
|
(Increase) in the fair value of the embedded collars in the variable prepaid forward contracts (liability) |
|
— |
|
(2,499 |
) |
— |
|
(4,671 |
) |
||||
|
|
|
— |
|
6,379 |
|
— |
|
6,734 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Other gains (losses) |
|
(964 |
) |
— |
|
(964 |
) |
— |
|
||||
|
|
|
$ |
3,088 |
|
$ |
(220,199 |
) |
$ |
(402 |
) |
$ |
35,671 |
|
(1) TDS and its subsidiaries held Vodafone American Depository Receipts (“ADRs”) and VeriSign Common Shares which were obtained in connection with the sale of non-strategic investments. TDS entered into a number of variable prepaid forward contracts (“forward contracts”) related to the Vodafone ADRs and VeriSign securities that it held. A portion of these forward contracts matured in the second quarter of 2007. TDS recorded a gain of $137.9 million in the second quarter of 2007 on the settlement of forward contracts and the disposition of remaining VeriSign Common Shares and U.S. Cellular-owned Vodafone ADRs. As a result, after these settlements in the second quarter of 2007, TDS no longer owned VeriSign Common Shares and no longer had any liability or other obligations under the related forward contracts. The remaining Vodafone ADRs and related forward contracts were disposed of and settled in the second half of 2007.
6. Income Taxes
The overall effective tax rate on income before income taxes and minority interest for the three and six months ended June 30, 2008 was 33.4% and 34.3%, respectively, and for the three and six months ended June 30, 2007 was 55.3% and 39.3%, respectively. The effective tax rate for the three and six months ended June 30, 2008 is lower than for the three and six months ended June 30, 2007 primarily due to the recognition of state tax benefits related to the settlement of the Deutsche Telekom variable prepaid forward contracts in 2008. Also, the effective tax rate for the three months ended June 30, 2007 reflects the income tax effects of derivative losses incurred during the period.
15
7. Earnings per Share
Basic earnings per share is computed by dividing Net income available to common by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing Net income available to common by the weighted average number of common shares adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.
The amounts used in computing earnings per share and the effects of potentially dilutive securities on income and the weighted average number of Common, Special Common and Series A Common Shares are as follows:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
||||
|
|
|
(Dollars and shares in thousands, except earnings per share) |
|
||||||||||
|
Basic Earnings per Share: |
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) |
|
$ |
87,757 |
|
$ |
(8,627 |
) |
$ |
161,244 |
|
$ |
210,698 |
|
|
Preferred dividend requirement |
|
(13 |
) |
(13 |
) |
(26 |
) |
(26 |
) |
||||
|
Net income (loss) available to common used in basic earnings per share |
|
$ |
87,744 |
|
$ |
(8,640 |
) |
$ |
161,218 |
|
$ |
210,672 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted Earnings per Share: |
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) available to common used in basic earnings per share |
|
$ |
87,744 |
|
$ |
(8,640 |
) |
$ |
161,218 |
|
$ |
210,672 |
|
|
Minority income adjustment (1) |
|
(200 |
) |
(1,095 |
) |
(516 |
) |
(1,767 |
) |
||||
|
Preferred dividend adjustment (2) |
|
12 |
|
— |
|
25 |
|
25 |
|
||||
|
Net income (loss) available to common used in diluted earnings per share |
|
$ |
87,556 |
|
$ |
(9,735 |
) |
$ |
160,727 |
|
$ |
208,930 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Weighted average number of shares used in basic earnings per share: |
|
|
|
|
|
|
|
|
|
||||
|
Common Shares |
|
53,219 |
|
52,048 |
|
53,213 |
|
52,011 |
|
||||
|
Special Common Shares |
|
56,601 |
|
58,539 |
|
57,261 |
|
58,479 |
|
||||
|
Series A Common Shares |
|
6,447 |
|
6,444 |
|
6,445 |
|
6,445 |
|
||||
|
Weighted average number of shares used in basic earnings per share |
|
116,267 |
|
117,031 |
|
116,919 |
|
116,935 |
|
||||
|
Effects of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
||||
|
Effects of stock options (3) |
|
43 |
|
— |
|
43 |
|
1,360 |
|
||||
|
Effects of restricted stock units (4) |
|
400 |
|
— |
|
442 |
|
86 |
|
||||
|
Effects of preferred shares(5) |
|
104 |
|
— |
|
96 |
|
51 |
|
||||
|
Weighted average number of shares used in diluted earnings per share |
|
116,814 |
|
117,031 |
|
117,500 |
|
118,432 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic Earnings (Loss) per Share |
|
$ |
0.75 |
|
$ |
(0.07 |
) |
$ |
1.38 |
|
$ |
1.80 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted Earnings (Loss) per Share |
|
$ |
0.75 |
|
$ |
(0.08 |
) |
$ |
1.37 |
|
$ |
1.76 |
|
|
|
(1) |
The minority income adjustment reflects the additional minority share of U.S. Cellular’s income computed as if all of U.S. Cellular’s issuable securities were outstanding. |
|
|
(2) |
The preferred dividend adjustment reflects the dividend reduction in the event any preferred series were dilutive, and therefore converted for shares. |
|
|
(3) |
Stock options exercisable into 337,000 Common Shares and 1,411,000 Special Common Shares for the three months ended June 30, 2008, and 1,522,000 Common Shares and 2,359,000 Special Common Shares for the three months ended June 30, 2007, were not included in computing Diluted Earnings per Share because their effects were antidilutive. Stock options exercisable into 336,000 Common Shares and 1,412,000 Special Common Shares for the six months ended June 30, 2008, and 214,000 Common Shares and 214,000 Special Common Shares for the six months ended June 30, 2007, were not included in computing Diluted Earnings per Share because their effects were antidilutive. |
16
(4) There were no antidilutive restricted stock units for the three months ended June 30, 2008. Restricted stock units issuable upon vesting into 80,000 Common Shares and 203,000 Special Common Shares for the three months ended June 30, 2007 were not included in computing diluted earnings per share because their effects were antidilutive. There were no antidilutive restricted stock units for the comparable six-month periods ended June 30, 2008 and 2007.
(5) There were no antidilutive preferred shares for the three months ended June 30, 2008. Preferred shares redeemable for 51,000 Common Shares were not included in computing Diluted Earnings per Share in the three months ended June 30, 2007 because their effects were antidilutive. There were no antidilutive preferred shares for the six month periods ended June 30, 2008 and 2007.
8. Licenses and Goodwill
Changes in TDS’ licenses and goodwill are primarily the result of acquisitions, divestitures and impairment of licenses, wireless markets and telephone companies. See Note 3 – Acquisitions, Divestitures and Exchanges for information regarding transactions which affected licenses and goodwill during the period.
|
|
|
U.S. |
|
|
|
|
|
|||
|
(Dollars in thousands) |
|
Cellular(1) |
|
TDS Telecom |
|
Total |
|
|||
|
Licenses |
|
|
|
|
|
|
|
|||
|
Balance December 31, 2007 |
|
$ |
1,513,829 |
|
$ |
2,800 |
|
$ |
1,516,629 |
|
|
Acquisitions |
|
310,282 |
|
— |
|
310,282 |
|
|||
|
U.S. Cellular Common Share repurchases (2) |
|
2,103 |
|
— |
|
2,103 |
|
|||
|
Balance June 30, 2008 |
|
$ |
1,826,214 |
|
$ |
2,800 |
|
$ |
1,829,014 |
|
|
|
|
|
|
|
|
|
|
|||
|
Balance December 31, 2006 |
|
$ |
1,517,607 |
|
$ |
2,800 |
|
$ |
1,520,407 |
|
|
Acquisitions |
|
7,900 |
|
— |
|
7,900 |
|
|||
|
Impairment |
|
(2,136 |
) |
— |
|
(2,136 |
) |
|||
|
U.S. Cellular Common Share repurchases (2) |
|
4,464 |
|
— |
|
4,464 |
|
|||
|
Balance June 30, 2007 |
|
$ |
1,527,835 |
|
$ |
2,800 |
|
$ |
1,530,635 |
|
(1) U.S. Cellular’s balances include licenses allocated from TDS.
(2) This adjustment is the allocation of value related to U.S. Cellular’s share buyback programs. See Note 14 - TDS Special Common and U.S. Cellular Common Share Repurchases for a discussion of U.S. Cellular’s purchase of its Common Shares.
|
|
|
U.S. |
|
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
Cellular(1) |
|
TDS Telecom |
|
Other(2) |
|
Total |
|
||||
|
Goodwill |
|
|
|
|
|
|
|
|
|
||||
|
Balance December 31, 2007 |
|
$ |
276,416 |
|
$ |
398,911 |
|
$ |
3,802 |
|
$ |
679,129 |
|
|
Acquisitions |
|
2,602 |
|
11,317 |
|
— |
|
13,919 |
|
||||
|
U.S. Cellular Common Share repurchases(3) |
|
2,648 |
|
— |
|
— |
|
2,648 |
|
||||
|
Balance June 30, 2008 |
|
$ |
281,666 |
|
$ |
410,228 |
|
$ |
3,802 |
|
$ |
695,696 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Balance December 31, 2006 |
|
$ |
246,920 |
|
$ |
398,652 |
|
$ |
2,281 |
|
$ |
647,853 |
|
|
Acquisitions |
|
5,864 |
|
259 |
|
1,521 |
|
7,644 |
|
||||
|
U.S. Cellular Common Share repurchases(3) |
|
12,325 |
|
— |
|
— |
|
12,325 |
|
||||
|
Balance June 30, 2007 |
|
$ |
265,109 |
|
$ |
398,911 |
|
$ |
3,802 |
|
$ |
667,822 |
|
(1) U.S. Cellular’s balances include goodwill allocated from TDS.
(2) Other consists of goodwill related to Suttle Straus.
(3) This adjustment is the allocation of value related to U.S. Cellular’s share buyback programs. See Note 14 - TDS Special Common and U.S. Cellular Common Share Repurchases for a discussion of U.S. Cellular’s purchase of its Common Shares.
Licenses and goodwill must be reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. TDS performs the annual impairment review on licenses and goodwill during the second quarter of its fiscal year. Accordingly, the annual impairment reviews for licenses and goodwill for 2008 and 2007 were performed in the second quarter of those years. Such impairment reviews indicated that there was no impairment in 2008 and an impairment of licenses of $2.1 million in 2007. The impairment in 2007 is included in Depreciation, amortization and accretion expense in the Consolidated Statements of Operations.
17
9. Customer Lists
Customer lists, which are intangible assets resulting from acquisitions (or step acquisition allocation of value related to U.S. Cellular’s share buyback programs), are amortized using a combination of accelerated and straight-line methods over the remaining estimated life. The changes in the customer lists for the six months ended June 30, 2008 and 2007 were as follows:
|
|
|
U.S. |
|
TDS |
|
|
|
|||
|
(Dollars in thousands) |
|
Cellular(1) |
|
Telecom |
|
Total |
|
|||
|
Customer lists |
|
|
|
|
|
|
|
|||
|
Balance December 31, 2007 |
|
$ |
25,851 |
|
$ |
— |
|
$ |
25,851 |
|
|
Acquisitions |
|
1,045 |
|
4,799 |
|
5,844 |
|
|||
|
Amortization |
|
(6,990 |
) |
— |
|
(6,990 |
) |
|||
|
U.S. Cellular Common Share repurchases(2) |
|
4,364 |
|
— |
|
4,364 |
|
|||
|
Balance June 30, 2008 |
|
$ |
24,270 |
|
$ |
4,799 |
|
$ |
29,069 |
|
|
|
|
|
|
|
|
|
|
|||
|
Balance December 31, 2006 |
|
$ |
26,196 |
|
$ |
— |
|
$ |
26,196 |
|
|
Acquisitions |
|
1,560 |
|
— |
|
1,560 |
|
|||
|
Amortization |
|
(7,381 |
) |
— |
|
(7,381 |
) |
|||
|
U.S. Cellular Common Share repurchases(2) |
|
9,384 |
|
— |
|
9,384 |
|
|||
|
Balance June 30, 2007 |
|
$ |
29,759 |
|
$ |
— |
|
$ |
29,759 |
|
(1) U.S. Cellular’s balance includes customer lists allocated from TDS.
(2) This adjustment is the allocation of value related to U.S. Cellular’s share buyback programs. See Note 14 - TDS Special Common and U.S. Cellular Common Share Repurchases for a discussion of U.S. Cellular’s purchase of its Common Shares.
Based on the Customer lists balance as of June 30, 2008 amortization expense for the remainder of 2008 and for the years 2009-2013 is expected to be $6.1 million, $8.6 million, $6.7 million, $3.7 million, $1.1 million, $0.6 million, respectively, and is expected to be an aggregate of $2.3 million for the years 2014-2019.
18
10. Marketable Equity Securities and Variable Prepaid Forward Contracts
At June 30, 2008, TDS and its subsidiaries held marketable equity securities of Rural Cellular Corporation (“RCCC”), which were obtained in connection with a sale of non-strategic investments. Information regarding TDS’ marketable equity securities is summarized as follows:
|
|
|
June 30, |
|
December 31, |
|
||
|
|
|
2008 |
|
2007 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Marketable Equity Securities – Current Assets |
|
|
|
|
|
||
|
Rural Cellular Corporation - 719,396 Common Shares |
|
$ |
32,020 |
|
$ |
31,718 |
|
|
Deutsche Telekom AG - 0 and 85,969,689 Ordinary Shares, respectively |
|
— |
|
1,886,175 |
|
||
|
|
|
|
|
|
|
||
|
Aggregate fair value included in Current Assets |
|
32,020 |
|
1,917,893 |
|
||
|
Accounting cost basis |
|
649 |
|
864,643 |
|
||
|
Gross unrealized holding gains (1) |
|
31,371 |
|
1,053,250 |
|
||
|
Equity method unrealized gains |
|
608 |
|
387 |
|
||
|
Income tax expense |
|
(11,512 |
) |
(386,315 |
) |
||
|
Minority share of unrealized holding gains |
|
(1,951 |
) |
(1,945 |
) |
||
|
Unrealized holding gains, net of tax and minority share (1) |
|
18,516 |
|
665,377 |
|
||
|
Derivative instruments, net of tax and minority share(1) |
|
— |
|
(144,583 |
) |
||
|
Retirement plans, net of tax |
|
(8,970 |
) |
(9,018 |
) |
||
|
Accumulated other comprehensive income |
|
$ |
9,546 |
|
$ |
511,776 |
|
(1) Upon the adoption of SFAS 159 on January 1, 2008, unrealized holding gains and losses related to the Deutsche Telekom Ordinary Shares and the collar portions of the variable prepaid forward contracts related to such shares (derivatives) were reclassified to retained earnings. See Note 5 - Fair Value Measurements, for further details on the adoption of SFAS 159.
TDS entered into variable prepaid forward contracts (“forward contracts”) related to the Deutsche Telekom Ordinary Shares it held. The economic hedge risk management objective of the forward contracts was to hedge the value of the marketable equity securities from losses due to decreases in the market prices of the securities while retaining a share of gains from increases in the market prices of such securities. The downside risk was hedged at or above the accounting cost basis of the securities. The principal amount of the forward contracts was accounted for as a loan. The forward contracts contained embedded collars that were bifurcated and accounted for as derivatives in accordance with SFAS 133. As of December 31, 2007, such forward contracts were scheduled to mature during the period January 2008 to September 2008.
During the six months ended June 30, 2008, the forward contracts related to 39,000,000 Deutsche Telekom Ordinary Shares were settled at their scheduled maturity dates, while the forward contracts related to 46,969,689 Deutsche Telekom Ordinary Shares were settled prior to their scheduled maturity dates. TDS settled these forward contracts through a combination of delivery of 73,462,167 Deutsche Telekom Ordinary Shares relating to the forward contracts and cash payments. TDS sold the remaining 12,507,522 Deutsche Telekom Ordinary Shares. TDS realized cash proceeds of $226.6 million from the sale of Deutsche Telekom Ordinary Shares that were not delivered to the counterparty to settle forward contracts. This amount was offset by $17.4 million and $47.4 million of cash payments paid to settle the collar (derivative liability) and debt portions of certain variable prepaid forward contracts, respectively, for which cash was delivered upon settlement. The settlement of the forward contracts and disposition of Deutsche Telekom Ordinary Shares resulted in a current tax liability of $344.2 million.
As a result of TDS adopting SFAS 159 as of January 1, 2008, no gain or loss was recognized upon the settlement of forward contracts and disposition of Deutsche Telekom Ordinary Shares in the six months ended June 30, 2008. Rather changes in the fair value of the Deutsche Telekom Ordinary Shares and the collar portion of the forward contracts related to such shares were recorded in Gain (loss) on investments and financial instruments from January 1, 2008 through the respective settlement dates. See Note 5 - Fair Value Measurements for details on TDS’ adoption of SFAS 159 and the impact on TDS’ financial statements.
19
As a result of these transactions, at June 30, 2008 TDS does not own any shares of Deutsche Telekom and no longer holds any forward contracts related to such shares.
On July 30, 2007, RCCC announced that Verizon Wireless agreed to purchase the outstanding shares of RCCC for $45 per share in cash. The acquisition is expected to close in 2008 and, therefore, the investment is classified as a Current Asset in TDS’ Consolidated Balance Sheet as of June 30, 2008. If the transaction closes, TDS will receive approximately $32.4 million in cash, recognize a $31.7 million pre-tax gain and cease to own any interest in RCCC.
11. Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in wireless and wireline entities in which TDS holds a minority interest. These investments are accounted for using either the equity or cost method.
TDS held a 5.5% ownership interest in the Los Angeles SMSA Limited Partnership (“LA Partnership”) as of June 30, 2008 and June 30, 2007, and recorded related income of $18.2 million and $18.4 million, respectively, for the three month periods then ended and $34.0 million and $36.4 million, respectively, for the six month periods then ended. Such amounts are included in Equity in earnings of unconsolidated entities in the Consolidated Statements of Operations.
The following table summarizes the operating results of the LA Partnership as furnished to TDS by the managing partner:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
Revenues |
|
$ |
968,000 |
|
$ |
909,000 |
|
$ |
1,905,000 |
|
$ |
1,783,000 |
|
|
Operating expenses |
|
661,000 |
|
582,000 |
|
1,300,000 |
|
1,133,000 |
|
||||
|
Operating income |
|
307,000 |
|
327,000 |
|
605,000 |
|
650,000 |
|
||||
|
Other income |
|
9,000 |
|
11,000 |
|
15,000 |
|
18,000 |
|
||||
|
Net income |
|
$ |
316,000 |
|
$ |
338,000 |
|
$ |
620,000 |
|
$ |
668,000 |
|
12. Notes Payable
TDS has a $600 million revolving credit facility available for general corporate purposes. At June 30, 2008, there were no outstanding borrowings. Outstanding letters of credit were $3.4 million, leaving $596.6 million available for use. Borrowings under the revolving credit facility bear interest at the London InterBank Offered Rate (“LIBOR”) plus a contractual spread based on TDS’ credit rating. At June 30, 2008, the contractual spread was 75 basis points. TDS may select borrowing periods of either seven days or one, two, three or six months (the one-month LIBOR was 2.46% at June 30, 2008). If TDS provides less than two days’ notice of intent to borrow, interest on borrowings is at the prime rate less 50 basis points (the prime rate was 5.00% at June 30, 2008). This credit facility expires in December 2009.
TDS also has $25 million of direct bank lines of credit at June 30, 2008, all of which were unused. The terms of the direct lines of credit bear negotiated interest rates up to the prime rate.
U.S. Cellular has a $700 million revolving credit facility available for general corporate purposes. At June 30, 2008, outstanding notes payable and letters of credit were $50.0 million and $0.3 million, respectively, leaving $649.7 million available for use. Borrowings under the revolving credit facility bear interest at LIBOR plus a contractual spread based on U.S. Cellular’s credit rating. At June 30, 2008, the contractual spread was 75 basis points. U.S. Cellular may select borrowing periods of either seven days or one, two, three or six months (the one-month LIBOR was 2.46% at June 30, 2008). If U.S. Cellular provides less than two days’ notice of intent to borrow, interest on borrowings is the prime rate less 50 basis points (the prime rate was 5.00% at June 30, 2008). This credit facility expires in December 2009.
20
TDS’ and U.S. Cellular’s interest cost on their revolving credit facilities would increase if their current credit ratings from either Standard & Poor’s Rating Services (“Standard & Poor’s”) or Moody’s Investor Service (“Moody’s”) were lowered and would decrease if the ratings were raised. The credit facilities would not cease to be available or accelerate solely as a result of a downgrade in TDS’ or U.S. Cellular’s credit rating. However, a downgrade in TDS’ or U.S. Cellular’s credit rating could adversely affect their ability to renew existing, or obtain access to new credit facilities in the future.
The maturity date of any borrowings under the TDS and U.S. Cellular revolving credit facilities would accelerate in the event of a change in control.
The continued availability of the revolving credit facilities requires TDS and U.S. Cellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and make representations regarding certain matters at the time of each borrowing. TDS and U.S. Cellular believe they were in compliance as of June 30, 2008 with all covenants and other requirements set forth in the revolving credit facilities and lines of credit.
13. Commitments and Contingencies
Indemnifications
TDS enters into agreements in the normal course of business that provide for indemnification of counterparties. These agreements include certain asset sales and financings with other parties. The terms of the indemnifications vary by agreement. The events or circumstances that would require TDS to perform under these indemnities are transaction specific; however, these agreements may require TDS to indemnify the counterparty for costs and losses incurred from litigation or claims arising from the underlying transaction. TDS is unable to estimate the maximum potential liability for these types of indemnifications as the amounts are dependent on the outcome of future events, the nature and likelihood of which cannot be determined at this time. Historically, TDS has not made any significant indemnification payments under such agreements.
Legal Proceedings
TDS is involved or may be involved from time to time in legal proceedings before the FCC, other regulatory authorities, and/or various state and federal courts. If TDS believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement disclosures. The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial statements.
Minority Interest in Subsidiaries
Under SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, certain minority interests in consolidated entities with finite lives may meet the standard’s definition of a mandatorily redeemable financial instrument and thus require reclassification as liabilities and remeasurement at the estimated amount of cash that would be due and payable to settle such minority interests under the applicable entity’s organization agreement assuming an orderly liquidation of the finite-lived entity, net of estimated liquidation costs (the “settlement value”). TDS’ consolidated financial statements include certain minority interests that meet the standard’s definition of mandatorily redeemable financial instruments. These mandatorily redeemable minority interests represent interests held by third parties in consolidated partnerships and limited liability companies (“LLCs”), where the terms of the underlying partnership or LLC agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are to be distributed to the minority interest holders and TDS in accordance with the respective partnership and LLC agreements. The termination dates of TDS’ mandatorily redeemable minority interests range from 2042 to 2106.
The settlement value of TDS’ mandatorily redeemable minority interests is estimated to be $127.1 million at June 30, 2008. This represents the estimated amount of cash that would be due and payable to settle minority interests assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on June 30, 2008, net of estimated liquidation costs. This amount is being
21
disclosed pursuant to the requirements of FASB Staff Position (“FSP”) No. FAS 150-3; TDS has no current plans or intentions to liquidate any of the related partnerships or LLCs prior to their scheduled termination dates. The corresponding carrying value of the minority interests in finite-lived consolidated partnerships and LLCs at June 30, 2008 is $41.9 million, and is included in the Balance Sheet caption Minority interest. The excess of the aggregate settlement value over the aggregate carrying value of the mandatorily redeemable minority interests of $85.2 million is primarily due to the unrecognized appreciation of the minority interest holders’ share of the underlying net assets in the consolidated partnerships and LLCs. Neither the minority interest holders’ share, nor TDS’ share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements. The estimate of settlement value was based on certain factors and assumptions which are subjective in nature. Changes in those factors and assumptions could result in a materially larger or smaller settlement amount.
14. TDS Special Common and U.S. Cellular Common Share Repurchases
On March 2, 2007, the TDS Board of Directors authorized the repurchase of up to $250 million of TDS Special Common Shares from time to time through open market purchases, block transactions, private purchases or otherwise. This authorization will expire on March 2, 2010. During the six months ended June 30, 2008, TDS repurchased 2,056,666 Special Common Shares for $84.7 million, or an average of $41.17 per share pursuant to this authorization. Of this amount, $83.0 million was paid during the six months ended June 30, 2008, and $1.7 million was paid in July of 2008. During the six months ended June 30, 2007, TDS repurchased 217,280 Special Common Shares for $12.6 million, or $57.80 per share. Of this amount, $7.0 million was paid during the six months ended June 30, 2007, and $5.6 million was paid in July of 2007. As of June 30, 2008, TDS has purchased a total of $211.3 million of Special Common Shares under this authorization, and therefore may purchase up to $38.7 million in future periods.
The Board of Directors of U.S. Cellular has authorized the repurchase of up to 1% of the outstanding U.S. Cellular Common Shares held by non-affiliates in each three-month period, primarily for use in employee benefit plans (the “Limited Authorization”). This authorization does not have an expiration date. During the six months ended June 30, 2008, U.S. Cellular repurchased 300,000 Common Shares for $19.1 million, or an average of $63.57 per share, pursuant to this authorization.
In addition to U.S. Cellular’s Limited Authorization discussed above, on March 6, 2007, the Board of Directors of U.S. Cellular authorized the repurchase of up to 500,000 Common Shares of U.S. Cellular from time to time through open market purchases, block transactions, private transactions or other methods (the “Additional Authorization”). During the six months ended June 30, 2007, U.S. Cellular purchased 670,000 Common Shares from an investment banking firm in a private transaction in connection with an accelerated share repurchase (“ASR”). This purchase of 670,000 shares represents 170,000 shares under the Limited Authorization and 500,000 shares under the Additional Authorization. The initial price paid to the investment banking firm was approximately $49.1 million or $73.22 per share. The ASR was settled for an additional $6.5 million in cash on December 18, 2007. The subsequent price adjustment resulted in the final weighted average price per share of $82.90. U.S. Cellular also received $4.6 million in cash in January, 2008 as a final settlement payment for Common Share repurchases executed in July and October, 2007 through ASRs with an investment banking firm.
TDS’ ownership percentage of U.S. Cellular increases upon such U.S. Cellular share repurchases. Therefore, TDS accounts for U.S. Cellular’s purchases of U.S. Cellular Common Shares as step acquisitions using purchase accounting. See Note 8 - Licenses and Goodwill, and Note 9 - Customer Lists, for details on the amounts allocated to Licenses, Goodwill and Customer Lists related to the repurchase of U.S. Cellular Common Shares for the six months ended June 30, 2008 and 2007.
22
15. Accumulated Other Comprehensive Income
The cumulative balances of gains and (losses) on marketable equity securities, derivative instruments and retirement plans and related income tax effects included in Accumulated other comprehensive income are as follows.
|
|
|
Six Months Ended |
|
||||
|
|
|
2008 |
|
2007 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Marketable Equity Securities |
|
|
|
|
|
||
|
Balance, beginning of period (prior to adoption of SFAS 159) |
|
$ |
665,377 |
|
$ |
749,978 |
|
|
Cumulative effect adjustment upon the adoption of SFAS 159(1) |
|
(647,260 |
) |
— |
|
||
|
Balance, beginning of period (after adoption of SFAS 159) |
|
18,117 |
|
749,978 |
|
||
|
Add (deduct): |
|
|
|
|
|
||
|
Unrealized gains |
|
302 |
|
63,639 |
|
||
|
Deferred tax expense |
|
(116 |
) |
(24,117 |
) |
||
|
|
|
186 |
|
39,522 |
|
||
|
Unrealized gains of equity method companies |
|
221 |
|
35 |
|
||
|
Minority share of unrealized gains |
|
(8 |
) |
(2,554 |
) |
||
|
Net increase in unrealized gains |
|
399 |
|
37,003 |
|
||
|
|
|
|
|
|
|
||
|
Recognized gain on sale of marketable equity securities |
|
— |
|
(133,442 |
) |
||
|
Income tax expense |
|
— |
|
48,814 |
|
||
|
|
|
— |
|
(84,628 |
) |
||
|
Minority share of income |
|
— |
|
15,586 |
|
||
|
Net recognized gain on sale of marketable equity securities |
|
— |
|
(69,042 |
) |
||
|
Net change in marketable equity securities |
|
399 |
|
(32,039 |
) |
||
|
Initial application of FIN 48(2) |
|
— |
|
30,306 |
|
||
|
Balance, end of period |
|
$ |
18,516 |
|
$ |
748,245 |
|
|
|
|
|
|
|
|
||
|
Derivative Instruments |
|
|
|
|
|
||
|
Balance, beginning of period (prior to adoption of SFAS 159) |
|
$ |
(144,583 |
) |
$ |
(215,122 |
) |
|
Cumulative effect adjustment upon the adoption of SFAS 159(1) |
|
144,583 |
|
— |
|
||
|
Balance, beginning of period (after adoption of SFAS 159) |
|
— |
|
(215,122 |
) |
||
|
Add (deduct): |
|
|
|
|
|
||
|
Recognized gain on settlement |
|
— |
|
(4,480 |
) |
||
|
Income tax expense |
|
— |
|
1,639 |
|
||
|
|
|
— |
|
(2,841 |
) |
||
|
Minority share of income |
|
— |
|
549 |
|
||
|
Net change in derivative instruments |
|
— |
|
(2,292 |
) |
||
|
Initial application of FIN 48(2) |
|
— |
|
(9,583 |
) |
||
|
Balance, end of period |
|
$ |
— |
|
$ |
(226,997 |
) |
|
|
|
|
|
|
|
||
|
Retirement Plans |
|
|
|
|
|
||
|
Balance, beginning of period |
|
$ |
(9,018 |
) |
$ |
(12,743 |
) |
|
Add (deduct): |
|
|
|
|
|
||
|
Amounts included in net periodic benefit cost for the period |
|
|
|
|
|
||
|
Amortization of prior service cost |
|
(414 |
) |
(415 |
) |
||
|
Amortization of unrecognized net loss |
|
484 |
|
681 |
|
||
|
|
|
70 |
|
266 |
|
||
|
Deferred income tax expense |
|
(22 |
) |
(103 |
) |
||
|
Net change in retirement plans |
|
48 |
|
163 |
|
||
|
Balance, end of period |
|
$ |
(8,970 |
) |
$ |
(12,580 |
) |
|
|
|
|
|
|
|
||
|
Accumulated Other Comprehensive Income |
|
|
|
|
|
||
|
Balance, beginning of period (prior to adoption of SFAS 159) |
|
$ |
511,776 |
|
$ |
522,113 |
|
|
Cumulative effect adjustment upon the adoption of SFAS 159(1) |
|
(502,677 |
) |
— |
|
||
|
Balance, beginning of period (after adoption of SFAS 159) |
|
9,099 |
|
522,113 |
|
||
|
Add (deduct): |
|
|
|
|
|
||
|
Net change in marketable equity securities |
|
399 |
|
(32,039 |
) |
||
|
Net change in derivative instruments |
|
— |
|
(2,292 |
) |
||
|
Net change in retirement plans |
|
48 |
|
163 |
|
||
|
Net change included in comprehensive income |
|
447 |
|
(34,168 |
) |
||
|
Initial application of FIN 48(2) |
|
— |
|
20,723 |
|
||
|
Balance, end of period |
|
$ |
9,546 |
|
$ |
508,668 |
|
23
(1) See Note 5 - Fair Value Measurements for additional details related to the cumulative effect adjustment related to the adoption of SFAS 159.
(2) FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”).
|
|
|
Six Months Ended |
|
||||
|
|
|
June 30, |
|
||||
|
|
|
2008 |
|
2007 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Comprehensive Income |
|
|
|
|
|
||
|
Net income |
|
$ |
161,244 |
|
$ |
210,698 |
|
|
Net change included in comprehensive income |
|
447 |
|
(34,168 |
) |
||
|
|
|
$ |
161,691 |
|
$ |
176,530 |
|
24
16. Business Segment Information
Financial data for TDS’ business segments for the three- and six-month periods ended, or as of June 30, 2008 and 2007, is as follows. TDS Telecom’s incumbent local exchange carriers are designated as “ILEC” in the table and its competitive local exchange carrier is designated as “CLEC”.
Three Months Ended or as of June 30, 2008
|
|
|
|
|
|
|
|
|
Non- |
|
Other |
|
|
|
||||||
|
|
|
U.S. |
|
TDS Telecom |
|
Reportable |
|
Reconciling |
|
|
|
||||||||
|
(Dollars in thousands) |
|
Cellular |
|
ILEC |
|
CLEC |
|
Segment(1) |
|
Items(2) |
|
Total |
|
||||||
|
Operating revenues |
|
$ |
1,060,592 |
|
$ |
153,199 |
|
$ |
55,888 |
|
$ |
12,990 |
|
$ |
(8,318 |
) |
$ |
1,274,351 |
|
|
Cost of services and products |
|
368,846 |
|
46,873 |
|
28,828 |
|
10,278 |
|
(1,980 |
) |
452,845 |
|
||||||
|
Selling, general and administrative expense |
|
422,367 |
|
41,416 |
|
17,457 |
|
2,365 |
|
(6,306 |
) |
477,299 |
|
||||||
|
Operating income before depreciation, amortization and accretion, (gain) loss on asset disposals(3) |
|
269,379 |
|
64,910 |
|
9,603 |
|
347 |
|
(32 |
) |
344,207 |
|
||||||
|
Depreciation, amortization and accretion expense |
|
145,258 |
|
33,502 |
|
5,569 |
|
733 |
|
2,964 |
|
188,026 |
|
||||||
|
(Gain) loss on asset disposals |
|
6,219 |
|
(25 |
) |
244 |
|
— |
|
— |
|
6,438 |
|
||||||
|
Operating income (loss) |
|
117,902 |
|
31,433 |
|
3,790 |
|
(386 |
) |
(2,996 |
) |
149,743 |
|
||||||
|
Significant non-operating items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Equity in earnings of unconsolidated entities |
|
22,807 |
|
(4 |
) |
— |
|
— |
|
106 |
|
22,909 |
|
||||||
|
Gain (loss) on investments and financial instruments |
|
— |
|
2,390 |
|
— |
|
— |
|
698 |
|
3,088 |
|
||||||
|
Marketable equity securities |
|
16,508 |
|
— |
|
— |
|
— |
|
15,512 |
|
32,020 |
|
||||||
|
Investments in unconsolidated entities |
|
157,162 |
|
6,512 |
|
— |
|
— |
|
45,379 |
|
209,053 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Total assets |
|
5,832,552 |
|
1,291,432 |
|
142,944 |
|
26,049 |
|
988,509 |
|
8,281,486 |
|
||||||
|
Capital expenditures |
|
137,810 |
|
22,800 |
|
4,711 |
|
102 |
|
1,173 |
|
166,596 |
|
||||||
Three Months Ended or as of June 30, 2007
|
|
|
|
|
|
|
|
|
Non- |
|
Other |
|
|
|
||||||
|
|
|
||||||||||||||||||