Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the quarterly period ended  September 30, 2008

 

 

 

OR

 

 

 

 

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

 

 

For the transition period from                      to                     

 

Commission File Number 001-14157

 

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-2669023

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

30 North LaSalle Street, Chicago, Illinois  60602

(Address of principal executive offices)  (Zip Code)

 

Registrant’s telephone number, including area code: (312) 630-1900

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

 

Accelerated filer  o

Non-accelerated filer   o
(Do not check if a smaller reporting company)

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at September 30, 2008

Common Shares, $.01 par value

 

53,197,083 Shares

Special Common Shares, $.01 par value

 

55,457,401 Shares

Series A Common Shares, $.01 par value

 

6,457,683 Shares

 

 

 



Table of Contents

 

Telephone and Data Systems, Inc.

 

Quarterly Report on Form 10-Q

For the Period Ended September 30, 2008

 

Index

 

 

 

 

Page No.

 

 

 

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

 

 

 

 

 

Consolidated Statements of Operations Three and Nine Months Ended September 30, 2008 and 2007

3

 

 

 

 

 

 

Consolidated Statements of Cash Flows Nine Months Ended September 30, 2008 and 2007

4

 

 

 

 

 

 

Consolidated Balance Sheets September 30, 2008 and December 31, 2007

5

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

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

31

 

 

 

 

 

 

Overview

31

 

 

 

 

 

 

Nine Months Ended September 30, 2008 and 2007

 

 

 

Results of Operations – Consolidated

36

 

 

Results of Operations – Wireless

39

 

 

Results of Operations – Wireline

45

 

 

Three Months Ended September 30, 2008 and 2007

 

 

 

Results of Operations – Consolidated

50

 

 

Results of Operations – Wireless

53

 

 

Results of Operations – Wireline

55

 

 

Recent Accounting Pronouncements

58

 

 

Financial Resources

60

 

 

Liquidity and Capital Resources

62

 

 

Application of Critical Accounting Policies and Estimates

67

 

 

Safe Harbor Cautionary Statement

68

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

72

 

 

 

 

 

Item 4.

Controls and Procedures

73

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

75

 

 

 

 

 

Item 1A.

Risk Factors

75

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

77

 

 

 

 

 

Item 5.

Other Information

77

 

 

 

 

 

Item 6.

Exhibits

78

 

 

 

 

Signatures

 

 

 



Table of Contents

 

Part I. Financial Information

Item 1. Financial Statements

 

Telephone and Data Systems, Inc.

Consolidated Statements of Operations

Unaudited

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(Dollars and shares in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

$

1,304,598

 

$

1,236,885

 

$

3,828,050

 

$

3,586,276

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Cost of services and products (excluding Depreciation, amortization and accretion expense reported below)

 

461,302

 

433,396

 

1,356,530

 

1,247,936

 

Selling, general and administrative expense

 

496,082

 

477,305

 

1,436,680

 

1,333,566

 

Depreciation, amortization and accretion expense

 

187,975

 

189,933

 

562,159

 

565,634

 

Loss on asset disposals, net

 

7,100

 

1,762

 

17,190

 

7,899

 

Total Operating Expenses

 

1,152,459

 

1,102,396

 

3,372,559

 

3,155,035

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

152,139

 

134,489

 

455,491

 

431,241

 

 

 

 

 

 

 

 

 

 

 

Investment and Other Income (Expense)

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated entities

 

22,566

 

23,823

 

66,945

 

71,394

 

Interest and dividend income

 

8,617

 

18,687

 

35,818

 

182,651

 

Interest expense

 

(31,684

)

(49,730

)

(108,634

)

(162,776

)

Gain (loss) on investments and financial instruments

 

31,997

 

194,036

 

31,595

 

229,707

 

Other, net

 

383

 

(865

)

2,086

 

(4,957

)

Total Investment and Other Income (Expense)

 

31,879

 

185,951

 

27,810

 

316,019

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes, Minority Interest and Extraordinary Item

 

184,018

 

320,440

 

483,301

 

747,260

 

Income tax expense

 

61,024

 

115,907

 

163,536

 

283,845

 

Income Before Minority Interest and Extraordinary Item

 

122,994

 

204,533

 

319,765

 

463,415

 

Minority share of income, net of tax

 

(21,771

)

(15,623

)

(57,298

)

(63,807

)

Income Before Extraordinary Item

 

101,223

 

188,910

 

262,467

 

399,608

 

Extraordinary Item, net of taxes (Note 7)

 

 

42,827

 

 

42,827

 

Net Income

 

101,223

 

231,737

 

262,467

 

442,435

 

Preferred dividend requirement

 

(13

)

(13

)

(39

)

(39

)

Net Income Available To Common

 

$

101,210

 

$

231,724

 

$

262,428

 

$

442,396

 

 

 

 

 

 

 

 

 

 

 

Basic Weighted Average Shares Outstanding

 

115,700

 

118,705

 

116,510

 

117,526

 

Basic Earnings Per Share (Note 8)

 

 

 

 

 

 

 

 

 

Income before extraordinary item

 

$

0.87

 

$

1.59

 

$

2.25

 

$

3.40

 

Extraordinary item

 

 

0.36

 

 

0.36

 

Net income available to common

 

$

0.87

 

$

1.95

 

$

2.25

 

$

3.76

 

 

 

 

 

 

 

 

 

 

 

Diluted Weighted Average Shares Outstanding

 

116,193

 

119,950

 

117,065

 

119,164

 

Diluted Earnings Per Share (Note 8)

 

 

 

 

 

 

 

 

 

Income before extraordinary item

 

$

0.87

 

$

1.57

 

$

2.24

 

$

3.33

 

Extraordinary item

 

 

0.36

 

 

0.36

 

Net income available to common

 

$

0.87

 

$

1.93

 

$

2.24

 

$

3.69

 

 

 

 

 

 

 

 

 

 

 

Dividends Per Share

 

$

0.1025

 

$

0.0975

 

$

0.3075

 

$

0.2925

 

 

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

 

3



Table of Contents

 

Telephone and Data Systems, Inc.

Consolidated Statements of Cash Flows

Unaudited

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2008

 

2007

 

 

 

(Dollars in thousands)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

262,467

 

$

442,435

 

Add (Deduct) adjustments to reconcile net income to net cash flows from operating activities

 

 

 

 

 

Depreciation, amortization and accretion

 

562,159

 

565,634

 

Bad debts expense

 

59,452

 

51,131

 

Stock-based compensation expense

 

15,961

 

22,946

 

Deferred income taxes, net

 

(298,200

)

(195,108

)

Gain on investments and financial instruments, net

 

(31,595

)

(229,707

)

Equity in earnings of unconsolidated entities

 

(66,945

)

(71,394

)

Distributions from unconsolidated entities

 

51,224

 

47,871

 

Minority share of income

 

57,298

 

63,807

 

Loss on asset disposals, net

 

17,190

 

7,899

 

Extraordinary item, net of tax

 

 

(42,827

)

Noncash interest expense

 

8,573

 

15,855

 

Excess tax benefit from stock awards

 

(1,832

)

(24,530

)

Other operating activities

 

(1,955

)

(3,306

)

Changes in assets and liabilities

 

 

 

 

 

Change in accounts receivable

 

(82,857

)

(79,571

)

Change in inventory

 

(12,929

)

3,312

 

Change in accounts payable

 

7,140

 

(2,439

)

Change in customer deposits and deferred revenues

 

9,827

 

24,760

 

Change in accrued taxes

 

109,269

 

205,227

 

Change in accrued interest

 

5,528

 

4,295

 

Change in other assets and liabilities

 

(37,951

)

(30,543

)

 

 

631,824

 

775,747

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Additions to property, plant and equipment

 

(485,028

)

(463,019

)

Cash paid for acquisitions and licenses

 

(336,259

)

(20,569

)

Cash received from divestitures

 

6,838

 

4,277

 

Proceeds from disposition of investments

 

259,017

 

91,740

 

Cash paid to settle derivative liabilities

 

(17,404

)

 

Other investing activities

 

(832

)

(1,345

)

 

 

(573,668

)

(388,916

)

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Issuance of notes payable

 

100,000

 

25,000

 

Issuance of long-term debt

 

 

2,857

 

Repayment of notes payable

 

(100,000

)

(60,000

)

Settlement of variable prepaid forward contracts

 

(47,357

)

 

Repayment of long-term debt

 

(8,296

)

(2,460

)

TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments

 

1,916

 

109,842

 

U.S. Cellular Common Shares reissued for benefit plans, net of tax payments

 

(1,286

)

12,181

 

Excess tax benefit from stock awards

 

1,832

 

24,530

 

Repurchase of TDS Special Common Shares

 

(111,769

)

(85,584

)

Repurchase of U.S. Cellular Common Shares

 

(23,146

)

(65,202

)

Dividends paid

 

(35,783

)

(34,337

)

Distributions to minority partners

 

(6,539

)

(6,258

)

Other financing activities

 

3,909

 

(747

)

 

 

(226,519

)

(80,178

)

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

(168,363

)

306,653

 

 

 

 

 

 

 

Cash and Cash Equivalents -

 

 

 

 

 

Beginning of period

 

1,174,446

 

1,013,325

 

End of period

 

$

1,006,083

 

$

1,319,978

 

 

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

 

4



Table of Contents

 

Telephone and Data Systems, Inc.

Consolidated Balance Sheets

Assets

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

 

 

 

 

(Dollars in thousands)

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,006,083

 

$

1,174,446

 

Accounts receivable

 

 

 

 

 

Due from customers, less allowances of $12,501 and $16,326, respectively

 

382,749

 

379,558

 

Other, principally connecting companies, less allowances of $4,521 and $5,297, respectively

 

160,422

 

150,863

 

Marketable equity securities

 

 

1,917,893

 

Inventory

 

118,183

 

115,818

 

Net deferred income tax asset

 

27,784

 

 

Prepaid expenses

 

100,050

 

77,155

 

Other current assets

 

22,054

 

59,855

 

 

 

1,817,325

 

3,875,588

 

Investments

 

 

 

 

 

Licenses

 

1,831,526

 

1,516,629

 

Goodwill

 

695,870

 

679,129

 

Customer lists, net of accumulated amortization of $94,687 and $84,190, respectively

 

27,736

 

25,851

 

Investments in unconsolidated entities

 

227,425

 

206,418

 

Other investments

 

10,791

 

11,509

 

 

 

2,793,348

 

2,439,536

 

Property, Plant and Equipment

 

 

 

 

 

In service and under construction

 

8,497,768

 

8,064,229

 

Less accumulated depreciation

 

5,003,653

 

4,539,127

 

 

 

3,494,115

 

3,525,102

 

Other Assets and Deferred Charges

 

53,558

 

53,917

 

Total Assets

 

$

8,158,346

 

$

9,894,143

 

 

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

 

5



Table of Contents

 

Telephone and Data Systems, Inc.

Consolidated Balance Sheets

Liabilities and Stockholders’ Equity

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

 

 

 

 

(Dollars in thousands)

 

Current Liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

6,171

 

$

3,860

 

Forward contracts

 

 

1,005,512

 

Accounts payable

 

320,763

 

308,882

 

Customer deposits and deferred revenues

 

176,098

 

166,191

 

Accrued interest

 

23,984

 

18,456

 

Accrued taxes

 

107,200

 

40,439

 

Accrued compensation

 

85,792

 

91,703

 

Derivative liability

 

 

711,692

 

Net deferred income tax liability

 

 

327,162

 

Other current liabilities

 

116,567

 

125,622

 

 

 

836,575

 

2,799,519

 

 

 

 

 

 

 

Deferred Liabilities and Credits

 

 

 

 

 

Net deferred income tax liability

 

614,022

 

555,593

 

Asset retirement obligation

 

194,810

 

173,468

 

Other deferred liabilities and credits

 

148,814

 

154,602

 

 

 

957,646

 

883,663

 

 

 

 

 

 

 

Long-Term Debt

 

1,631,627

 

1,632,226

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Minority Interest

 

694,561

 

651,537

 

 

 

 

 

 

 

Preferred Shares

 

854

 

860

 

 

 

 

 

 

 

Common Stockholders’ Equity

 

 

 

 

 

Common Shares, par value $.01 per share; authorized 100,000,000 shares; issued 56,593,000 and 56,581,000 shares, respectively

 

566

 

566

 

Special Common Shares, par value $.01 per share; authorized 165,000,000 shares; issued 62,954,000 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 6,458,000 and 6,442,000 shares, respectively

 

65

 

64

 

Capital in excess of par value

 

2,062,218

 

2,048,110

 

Treasury Shares at cost:

 

 

 

 

 

Common Shares, 3,396,000 and 3,433,000 shares, respectively

 

(118,390

)

(120,544

)

Special Common Shares, 7,497,000 and 4,712,000 shares, respectively

 

(313,472

)

(204,914

)

Accumulated other comprehensive income

 

(8,338

)

511,776

 

Retained earnings

 

2,413,804

 

1,690,651

 

 

 

4,037,083

 

3,926,338

 

Total Liabilities and Stockholders’ Equity

 

$

8,158,346

 

$

9,894,143

 

 

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

 

6



Table of Contents

 

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’ 81%-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 recognize a majority of the entity’s expected gains or losses. All material intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 2008 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 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 September 30, 2008 and December 31, 2007, the results of operations for the three and nine months ended September 30, 2008 and 2007, and the cash flows for the nine months ended September 30, 2008 and 2007. The results of operations for the three and nine months ended September 30, 2008 and cash flows for the nine months ended September 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 $4.6 million and $13.2 million for the three and nine months ended September 30, 2008, respectively; and $4.1 million and $11.2 million for the three months and nine months ended September 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



Table of Contents

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(Dollars in thousands)

 

Service Cost

 

$

498

 

$

609

 

$

1,496

 

$

1,827

 

Interest on accumulated benefit obligation

 

863

 

858

 

2,589

 

2,574

 

Expected return on plan assets

 

(948

)

(821

)

(2,844

)

(2,463

)

Amortization of:

 

 

 

 

 

 

 

 

 

Prior service cost

 

(207

)

(207

)

(622

)

(622

)

Net loss

 

242

 

340

 

726

 

1,021

 

Net postretirement cost

 

$

448

 

$

779

 

$

1,345

 

$

2,337

 

 

TDS contributed $3.8 million to the postretirement plans during 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 governmental authority imposing such tax. 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 $42.4 million and $119.7 million for the three and nine months ended September 30, 2008, respectively; and $39.5 million and $108.4 million for the three and nine months ended September 30, 2007, respectively.

 

Recent Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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, 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. In October 2008, the FASB issued FSP FAS 157-3 to clarify and demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive. As of September 30, 2008, TDS did not have any financial assets or liabilities that required the application of SFAS 157 for purposes of reporting such amounts in its Consolidated Balance Sheet. TDS is currently reviewing the requirements of SFAS 157 related to its nonfinancial assets and liabilities which become effective January 1, 2009, and has not yet determined the impact of adoption, if any, on its financial position or results of operations.

 

8



Table of Contents

 

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 SFAS 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 has determined that any transaction costs incurred and capitalized in 2008 for a business combination that will not close until on or after January 1, 2009 will be expensed upon TDS’ adoption of SFAS 141(R) on January 1, 2009. TDS does not anticipate that this treatment will have a significant impact on its financial position or results of operations. TDS is currently reviewing the remaining requirements of SFAS 141(R) and has not yet determined the impact of adoption, 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 SFAS 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 of adoption, 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 September 30, 2008, TDS did not hold any derivative instruments and, therefore, does not expect any impact as a result of this pronouncement.

 

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.

 

9



Table of Contents

 

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. The SEC approved the amendments on September 15, 2008. Therefore, SFAS 162 is effective as of November 15, 2008. 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 wireless operating markets, telecommunications companies and wireless spectrum. In addition, TDS may seek to divest outright or include in exchanges for other interests those wireless and wireline interests that are not strategic to its long-term success.

 

Transactions Pending as of September 30, 2008:

 

On August 1, 2008, TDS’ subsidiary, U.S. Cellular, executed an agreement to acquire 12 megahertz Block C licenses in the Lower 700 megahertz band of the wireless spectrum in three market areas in the state of Missouri for $11.6 million in cash, including acquisition costs. The transaction is expected to close in the fourth quarter of 2008.

 

On July 30, 2008, U.S. Cellular signed an agreement to purchase four 700 megahertz licenses in the state of Missouri for $8.0 million in cash. This transaction is expected to close in the fourth quarter of 2008.

 

A Federal Communications Commission (“FCC”) auction of spectrum in the PCS and AWS-1 bands, designated by the FCC as Auction 78, began on August 13, 2008 and closed August 20, 2008.  U.S. Cellular participated in Auction 78 indirectly through its interest in Aquinas Wireless, L.P. (“Aquinas Wireless”).  Aquinas Wireless paid $2.1 million to the FCC for the licenses for which it was the provisional winning bidder in the auction.

 

U.S. Cellular also participated in the 2008 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”).  King Street Wireless paid $300.5 million to the FCC for the licenses for which it was the provisional winning bidder in the auction.

 

See Note 4 – Variable Interest Entities, for further details on Aquinas Wireless and King Street Wireless and the licenses acquired in Auctions 78 and 73.

 

Transactions Completed as of September 30, 2008:

 

On May 31, 2008, TDS Telecom acquired 100% of the outstanding shares of Mosinee Telephone Company, LLC for $17.4 million in cash, including acquisition costs.  Mosinee Telephone Company, LLC is a telephone company serving 5,800 equivalent access lines in Wisconsin.

 

10



Table of Contents

 

On May 30, 2008, U.S. Cellular acquired 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 March 28, 2008, U.S. Cellular acquired six 12 megahertz Block C licenses in the Lower 700 megahertz band of the wireless spectrum in Maine for $5.0 million in cash.

 

In October 2006, U.S. Cellular’s interest in Midwest Wireless Communications, LLC was sold to ALLTEL Corporation. In connection with the sale, U.S. Cellular became entitled to receive approximately $106.0 million in cash. Of this amount, $95.1 million was distributed upon closing and $10.9 million was held in escrow to secure certain true-up, indemnification and other possible adjustments; the funds held in escrow were to be distributed in installments over a period of four to fifteen months following the closing. U.S. Cellular received $6.6 million and $4.3 million of funds from the escrow, plus interest of $0.2 million and $0.3 million, in the nine months ended September 30, 2008 and 2007, respectively.

 

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 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 February 13, 2008, TDS Telecom acquired 100% of the outstanding shares of West Point Telephone Company, a telephone company in Indiana serving 1,100 equivalent access lines, for $6.8 million in cash, including acquisition costs.

 

TDS’ acquisitions for the nine months ended September 30, 2008 and the allocation of the purchase price for each respective acquisition were as follows:

 

 

 

 

 

Allocation of Purchase Price

 

 

 

Purchase
price (1)

 

Goodwill(2)

 

Licenses

 

Customer
lists

 

Net tangible
assets/(liabilities)

 

 

 

(Dollars in thousands)

 

U.S. Cellular Acquisitions

 

 

 

 

 

 

 

 

 

 

 

Auction 73 Licenses

 

$

300,479

 

$

 

$

300,479

 

$

 

$

 

North Carolina RSA 1 Partnership

 

6,900

 

1,632

 

4,180

 

81

 

1,007

 

Maine Licenses

 

5,000

 

 

5,000

 

 

 

Auction 78 Licenses

 

2,115

 

 

2,115

 

 

 

Other

 

1,891

 

970

 

623

 

964

 

(666

)

 

 

 

 

 

 

 

 

 

 

 

 

TDS Telecom Acquisitions

 

 

 

 

 

 

 

 

 

 

 

Mosinee Telephone Company

 

17,385

 

9,331

 

 

4,300

 

3,754

 

West Point Telephone Company

 

6,757

 

1,956

 

 

499

 

4,302

 

Other

 

151

 

151

 

 

 

 

Total

 

$

340,678

 

$

14,040

 

$

312,397

 

$

5,844

 

$

8,397

 

 


(1)

 

$2.7 million in cash was received from acquired companies and an aggregate of $1.7 million is recorded as a component of Other current liabilities in TDS’ September 30, 2008 Consolidated Balance Sheet.

 

 

 

 

 

(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 the financial statement impact of these acquisitions, individually and in the aggregate, was not material to TDS’ consolidated results of operations for the nine months ended September 30, 2008.

 

11



Table of Contents

 

4.              Variable Interest Entities

 

From time to time, the FCC conducts auctions through which additional spectrum is made available for the provision of wireless services. U.S. Cellular, TDS’ subsidiary, participated in spectrum auctions indirectly through its interests in Aquinas Wireless, King Street Wireless, Barat Wireless L.P. (“Barat Wireless”) and Carroll Wireless L.P. (“Carroll Wireless”). Each entity qualified as a “designated entity” and thereby was eligible for bid credits with respect to licenses purchased in accordance with the rules defined by the FCC for each auction. In most cases, the bidding credits resulted in a 25% discount from the gross winning bid.  Some licenses were “closed licenses”, for which no credit was received, but bidding was restricted to bidders qualifying as “entrepreneurs”, which are small businesses that have a limited amount of assets and revenues.

 

A summary of the auctions in which each entity participated and the auction results for each of these entities are shown in the table below.

 

 

 

FCC
Auction

 

Auction End Date

 

Date
Applications
Granted by FCC

 

Number
of
Licenses
Won

 

Amount Paid to
FCC, Net of Bid
Credits

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Aquinas Wireless

 

78

 

August 20, 2008

 

 

(1)

5

(2)

$

2.1

 

King Street Wireless

 

73

 

March 20, 2008

 

 

(1)

152

(2)

300.5

 

Barat Wireless

 

66

 

September 18, 2006

 

April 30, 2007

 

17

 

127.1

 

Carroll Wireless

 

58

 

February 15, 2005

 

January 6, 2006

 

16

 

129.7

 

 


(1)          Licenses have not yet been granted by the FCC for Auctions 78 and 73.

 

(2)          Provisionally won.

 

Although the bidding in Auction 73 and Auction 78 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.

 

As of September 30, 2008, TDS consolidates the following variable interest entities:

 

                  Aquinas Wireless (1)

 

                  King Street Wireless and King Street Wireless, Inc., the general partner of King Street Wireless

 

                  Barat Wireless and Barat Wireless, Inc., the general partner of Barat Wireless

 

                  Carroll Wireless and Carroll PCS, Inc., the general partner of Carroll Wireless

 


(1)          Aquinas Wireless, Inc., the general partner of Aquinas Wireless is a variable interest entity, but was not consolidated by TDS as of September 30, 2008 because TDS does not currently benefit from or absorb a majority of Aquinas Wireless, Inc.’s expected gains and losses.

 

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)”), because TDS 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, TDS may agree to make additional capital contributions and/or advances to the variable interest entities.

 

12



Table of Contents

 

Following are a summary of the capital contributions and advances made to each entity and the classification of these amounts in TDS’ Consolidated Balance Sheet as of September 30, 2008:

 

 

 

Capital contributions
and advances to date

 

Amount of capital
contributions and advances
included in Licenses in the
Consolidated Balance
Sheets

 

 

 

(in millions)

 

Aquinas Wireless

 

$

2.1

 

$

2.1

 

King Street Wireless & King Street Wireless, Inc.

 

300.5

 

300.5

 

Barat Wireless & Barat Wireless, Inc.

 

127.3

 

127.1

 

Carroll Wireless & Carroll PCS, Inc.

 

130.1

 

129.7

 

 

U.S. Cellular may agree to make additional capital contributions to the variable interest entities discussed above and/or their general partners to provide additional funding for the development of licenses awarded in the various auctions.  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.

 

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.

 

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. As of September 30, 2008, TDS did not have any financial assets or liabilities that required the application of SFAS 157 for purposes of valuing and reporting such amounts in its Consolidated Balance Sheet.

 

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.

 

13



Table of Contents

 

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, Accounting for Certain Investments in Debt and Equity Securities, 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, Accounting for Derivative Instruments and Hedging Activities, 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 were recorded in the Consolidated Statements of Operations as (Gain) loss on investments and financial instruments. Such gains and losses were expected to substantially offset each other, and thus better reflect the economics of the collars, which were established 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 balance 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.

 

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

 

 

In the first half of 2008, TDS disposed of all 85,969,689 Deutsche Telekom Ordinary Shares and settled all outstanding forward contracts related to such shares. See Note 11 - Marketable Equity Securities and Variable Prepaid Forward Contracts, for more information on these settlements.

 

14



Table of Contents

 

The following table details the (Gain) loss on investments and financial instruments included in the Statements of Operations:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(Dollars in thousands)

 

Gains (losses) on marketable equity securities and derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deutsche Telekom:

 

 

 

 

 

 

 

 

 

Gain on disposition of securities(1)

 

$

 

$

366,684

 

$

 

$

366,684

 

Loss on the settlement of variable prepaid forward contracts(1)

 

 

(117,825

)

 

(117,825

)

(Decrease) in the fair value of securities (asset)

 

 

 

(294,827

)

 

(Increase)/decrease in the fair value of the embedded collars in the variable prepaid forward contracts (liability)

 

 

(48,915

)

295,389

 

(132,121

)

 

 

 

199,944

 

562

 

116,738

 

Vodafone Group Plc:

 

 

 

 

 

 

 

 

 

Gain on disposition of securities(1)

 

 

 

 

127,207

 

Gain on the settlement of variable prepaid forward contracts(1)

 

 

 

 

4,478

 

(Increase) in the fair value of the embedded collars in the variable prepaid forward contracts (liability)

 

 

(5,908

)

 

(25,450

)

 

 

 

(5,908

)

 

106,235

 

VeriSign:

 

 

 

 

 

 

 

 

 

Gain on disposition of securities(1)

 

 

 

 

6,234

 

Increase in the fair value of securities (asset)

 

 

 

 

5,171

 

(Increase) in the fair value of the embedded collars in the variable prepaid forward contracts (liability)

 

 

 

 

(4,671

)

 

 

 

 

 

6,734

 

Rural Cellular Corporation:(2)

 

 

 

 

 

 

 

 

 

Gain on disposition of securities

 

31,725

 

 

31,725

 

 

 

 

 

 

 

 

 

 

 

 

Other gains (losses)

 

272

 

 

(692

)

 

 

 

$

31,997

 

$

194,036

 

$

31,595

 

$

229,707

 

 


(1)          TDS and its subsidiaries held Vodafone American Depository Receipts (“ADRs”), VeriSign Common Shares and Deutsche Telekom Ordinary 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, VeriSign and Deutsche Telekom securities that it held.  During 2007 and the first six months of 2008, all forward contracts related to the Vodafone ADRs, VeriSign shares, and Deutsche Telekom shares were settled, and all remaining shares of these securities were sold.  As a result, at September 30, 2008, TDS no longer owned Vodafone ADRs, VeriSign Common Shares and Deutsche Telekom Ordinary Shares, and no longer had any liability or other obligations under the related forward contracts.

 

(2)          See Note 11 - Marketable Equity Securities and Variable Prepaid Forward Contracts, for additional information on this transaction.

 

15



Table of Contents

 

6.              Income Taxes

 

The overall effective tax rate on income before income taxes and minority interest for the three and nine months ended September 30, 2008 was 33.2% and 33.8%, respectively, and for the three and nine months ended September 30, 2007 was 36.2% and 38.0%, respectively. The effective tax rate for the three months ended September 30, 2008 is lower than the rate for the three months ended September 30, 2007, primarily due to lower state income tax expense resulting from a change in the filing method in one state. The effective tax rate for the nine months ended September 30, 2008 is lower than the rate for the nine months ended September 30, 2007 primarily due to the change in the state income tax filing method described above and the recognition of state tax benefits related to the disposition of Deutsche Telekom Ordinary Shares and the settlement of the related variable prepaid forward contracts in 2008.

 

7.              Extraordinary Item

 

Prior to the third quarter of 2007, TDS Telecom’s incumbent local exchange carrier (“ILEC”) operations followed the accounting for regulated enterprises prescribed by 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 the TDS Telecom ILEC operations.

 

TDS Telecom regularly monitored the appropriateness of the application of SFAS 71.  Changes in TDS Telecom’s business environment had caused competitive forces to surpass regulatory forces such that TDS Telecom concluded that it was no longer reasonable to assume that rates set at levels that would recover the enterprise’s cost could be charged to its customers.

 

TDS Telecom has experienced increasing access line losses due to increasing levels of competition across all of the ILEC service areas.  Competition intensified in 2007 from cable and wireless operators who have been extending their investment beyond major markets to enable a broader range of voice and data services that compete directly with TDS Telecom’s service offerings.  These alternative telecommunications providers have transformed a pricing structure historically based on the recovery of costs to a pricing structure based on market conditions. Consequently, TDS Telecom had to alter its strategy to compete in its markets.  Specifically, in the third quarter of 2007, TDS Telecom initiated an aggressive program of service bundling and deep discounting and made the decision to voluntarily exit certain revenue pools administered by the FCC-supervised National Exchange Carrier Association in order to achieve additional pricing flexibility to meet competitive pressures.

 

Based on these material factors impacting its operations, management determined in the third quarter of 2007 that it was no longer appropriate to continue the application of SFAS 71 for reporting its financial results.  Accordingly, TDS Telecom recorded a non-cash extraordinary gain of $42.8 million, net of taxes of $27.0 million, upon discontinuance of the provisions of SFAS 71, as required by the provisions of SFAS No. 101, Regulated Enterprises – Accounting for the Discontinuation of the Application of FASB Statement No. 71.  The components of the non-cash extraordinary gain are as follows:

 

 

 

Before Tax Effects

 

After Tax Effects

 

 

 

(Dollars in thousands)

 

Write-off of regulatory cost of removal

 

$

70,107

 

$

43,018

 

Write-off of other net regulatory assets

 

(259

)

(191

)

Total

 

$

69,848

 

$

42,827

 

 

In conjunction with the discontinuance of SFAS 71, TDS Telecom assessed the useful lives of fixed assets and determined that the impacts of any changes were not material.

 

16



Table of Contents

 

8.              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, vesting of restricted stock units and redemption of preferred shares.

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(Dollars and shares in thousands, except earnings per share)

 

Basic Earnings per Share:

 

 

 

 

 

 

 

 

 

Income before extraordinary item available to common

 

$

101,223

 

$

188,910

 

$

262,467

 

$

399,608

 

Preferred dividend requirement

 

(13

)

(13

)

(39

)

(39

)

Income before extraordinary item available to common

 

101,210

 

188,897

 

262,428

 

399,569

 

Extraordinary item, net of taxes

 

 

42,827

 

 

42,827

 

Net income available to common used in basic earnings per share

 

$

101,210

 

$

231,724

 

$

262,428

 

$

442,396

 

Diluted Earnings per Share:

 

 

 

 

 

 

 

 

 

Income before extraordinary item available to common

 

$

101,210

 

$

188,897

 

$

262,428

 

$

399,569

 

Minority income adjustment (1)

 

(314

)

(479

)

(817

)

(2,424

)

Preferred dividend adjustment (2)

 

12

 

12

 

37

 

37

 

Income before extraordinary item available to common

 

100,908

 

188,430

 

261,648

 

397,182

 

Extraordinary item, net of taxes

 

 

42,827

 

 

42,827

 

Net Income available to common used in diluted earnings per share

 

$

100,908

 

$

231,257

 

$

261,648

 

$

440,009

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares used in basic earnings per share

 

 

 

 

 

 

 

 

 

Common Shares

 

53,242

 

52,953

 

53,223

 

52,323

 

Special Common Shares

 

56,006

 

59,309

 

56,840

 

58,758

 

Series A Common Shares

 

6,452

 

6,443

 

6,447

 

6,445

 

Weighted average number of shares used in basic earnings per share

 

115,700

 

118,705

 

116,510

 

117,526

 

Effects of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options (3)

 

323

 

1,011

 

404

 

1,413

 

Restricted stock units (4)

 

123

 

181

 

104

 

173

 

Preferred shares (5)

 

47

 

53

 

47

 

52

 

Weighted average number of shares used in diluted earnings per share

 

116,193

 

119,950

 

117,065

 

119,164

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings per Share

 

 

 

 

 

 

 

 

 

Income before extraordinary item

 

$

0.87

 

$

1.59

 

$

2.25

 

$

3.40

 

Extraordinary item, net of taxes

 

 

0.36

 

 

0.36

 

 

 

$

0.87

 

$

1.95

 

$

2.25

 

$

3.76

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

 

 

 

 

 

 

 

 

Income before extraordinary item

 

$

0.87

 

$

1.57

 

$

2.24

 

$

3.33

 

Extraordinary item, net of taxes

 

 

0.36

 

 

0.36

 

 

 

$

0.87

 

$

1.93

 

$

2.24

 

$

3.69

 

 

17



Table of Contents

 


(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 related to preferred securities that were dilutive, and therefore converted for shares.

 

(3)          Stock options exercisable into 336,000 Common Shares and 1,876,000 Special Common Shares for the three months ended September 30, 2008, and 863,000 Special Common Shares for the three months ended September 30, 2007, were not included in computing Diluted Earnings per Share because their effects were antidilutive.  Stock options exercisable into 337,000 Common Shares and 1,566,000 Special Common Shares for the nine months ended September 30, 2008, and 112,000 Common Shares and 403,000 Special Common Shares for the nine months ended September 30, 2007, were not included in computing Diluted Earnings per Share because their effects were antidilutive.

 

(4)          Restricted stock units issuable upon vesting into 57,000 Special Common Shares for the three months ended September 30, 2008 were not included in computing Diluted Earnings per Share because their effects were antidilutive.  Restricted stock units issuable upon vesting into 20,000 and 31,000 Special Common Shares for the nine months ended September 30, 2008 and 2007 were not included in Diluted Earnings per Share because their effects were antidilutive. There were no antidilutive restricted stock units for the three-month period ended September 30, 2007.

 

(5)          For the class of preferred shares that is redeemable for Common Shares, there were no antidilutive preferred shares for the three- or nine-month periods ended September 30, 2008 or September 30, 2007.

 

9.              Licenses and Goodwill

 

Changes in TDS’ licenses and goodwill are primarily the result of acquisitions (or step acquisition allocation of value related to U.S. Cellular’s share buyback programs), divestitures and exchanges 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.

 

 

 

 

 

 

 

Cellular(1)

 

TDS Telecom

 

Total

 

 

 

(Dollars in thousands)

 

Licenses

 

 

 

 

 

 

 

Balance December 31, 2007

 

$

1,513,829

 

$

2,800

 

$

1,516,629

 

Acquisitions

 

312,397

 

 

312,397

 

U.S. Cellular Common Share repurchases (3)

 

2,500

 

 

2,500

 

Balance September 30, 2008

 

$

1,828,726

 

$

2,800

 

$

1,831,526

 

 

 

 

 

 

 

 

 

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 (3)

 

5,994

 

 

5,994

 

Balance September 30, 2007

 

$

1,529,365

 

$

2,800

 

$

1,532,165

 

 

18



Table of Contents

 

 

 

U.S.

 

 

 

 

 

 

 

 

 

Cellular(1)

 

TDS Telecom

 

Other(2)

 

Total

 

 

 

(Dollars in thousands)

 

Goodwill

 

 

 

 

 

 

 

 

 

Balance December 31, 2007

 

$

276,416

 

$

398,911

 

$

3,802

 

$

679,129

 

Acquisitions

 

2,602

 

11,438

 

 

14,040

 

U.S. Cellular Common Share repurchases(3)

 

3,485

 

 

 

3,485

 

Other

 

 

(784

)

 

(784

)

Balance September 30, 2008

 

$

282,503

 

$

409,565

 

$

3,802

 

$

695,870

 

 

 

 

 

 

 

 

 

 

 

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)

 

18,131

 

 

 

18,131

 

Balance September 30, 2007

 

$

270,915

 

$

398,911

 

$

3,802

 

$

673,628

 

 


(1)          U.S. Cellular’s balances include licenses and goodwill allocated from TDS.

 

(2)          Other consists of licenses and goodwill related to Suttle-Straus.

 

(3)          This adjustment is the allocation of value related to U.S. Cellular’s share buyback programs.  See Note 15 - 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 of licenses and goodwill during the second quarter of the 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.

 

As stated above, TDS performs its annual impairment assessment of goodwill and licenses in the second quarter of the year.  Given recent economic events including significant decreases in investment security values, the tightening of credit markets and other factors, TDS considered whether the decline in its market capitalization in the third quarter of 2008 required an updated impairment assessment of its goodwill and licenses at September 30, 2008.  Given that the market capitalization of U.S. Cellular at September 30, 2008 was greater than its book value, and U.S. Cellular’s operating results and key performance indicators for the three months ended September 30, 2008 provided no evidence of significant deterioration, TDS concluded that an updated impairment analysis was not required for U.S. Cellular’s goodwill or licenses at September 30, 2008.  Given the implied market capitalization of TDS Telecom at September 30, 2008, TDS performed an updated impairment assessment of TDS Telecom’s goodwill at September 30, 2008.  All of TDS Telecom’s goodwill is recorded in its ILEC reporting unit.  As a result of performing this impairment testing, TDS concluded that the fair value of the TDS Telecom ILEC reporting unit exceeded its carrying value at September 30, 2008, and therefore no impairment was recorded.

 

19



Table of Contents

 

10.       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 balance for the nine months ended September 30, 2008 and 2007 were as follows:

 

 

 

U.S.

 

TDS

 

 

 

 

 

Cellular(1)

 

Telecom

 

Total

 

 

 

(Dollars in thousands)

 

Customer lists

 

 

 

 

 

 

 

Balance December 31, 2007

 

$

25,851

 

$

 

$

25,851

 

Acquisitions

 

1,045

 

4,799

 

5,844

 

Amortization

 

(10,325

)

(172

)

(10,497

)

U.S. Cellular Common Share repurchases(2)

 

6,538

 

 

6,538

 

Balance September 30, 2008

 

$

23,109

 

$

4,627

 

$

27,736

 

 

 

 

 

 

 

 

 

Balance December 31, 2006

 

$

26,196

 

$

 

$

26,196

 

Acquisitions

 

1,560

 

 

1,560

 

Amortization

 

(10,633

)

 

(10,633

)

Impairments

 

(1,947

)

 

(1,947

)

U.S. Cellular Common Share repurchases(2)

 

11,763

 

 

11,763

 

Balance September 30, 2007

 

$

26,939

 

$

 

$

26,939

 

 


(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 15 - TDS Special Common and U.S. Cellular Common Share Repurchases for a discussion of U.S. Cellular’s purchase of its Common Shares.

 

TDS reviews its customer lists periodically throughout the year to ensure that they are being amortized over the proper period.  No significant adjustments to the amortization periods used for customer lists were made in the nine months ended September 30, 2008.

 

During the third quarter 2007, it was determined that the carrying values of certain customer list balances exceeded their estimated fair values and an impairment loss of $1.9 million was recorded. The loss was included in Depreciation, amortization and accretion in the Consolidated Statements of Operations. Fair values were determined based upon a present value analysis of expected future cash flows and customer churn rates.

 

Based on the Customer lists balance as of September 30, 2008 amortization expense for the remainder of 2008 and for the years 2009-2013 is expected to be $3.1 million, $9.3 million, $7.1 million, $4.1 million, $1.4 million, $0.6 million, respectively, and is expected to be an aggregate of $2.1 million for the years 2014-2019.

 

20



Table of Contents

 

11.       Marketable Equity Securities and Variable Prepaid Forward Contracts

 

Information regarding TDS’ marketable equity securities and the reconciliation of unrealized gains on marketable equity securities to total accumulated other comprehensive income are summarized below:

 

 

 

September 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(Dollars in thousands)

 

Marketable Equity Securities – Current Assets

 

 

 

 

 

Rural Cellular Corporation - 0 and 719,396 Common Shares, respectively

 

$

 

$

31,718

 

Deutsche Telekom AG - 0 and 85,969,689 Ordinary Shares, respectively

 

 

1,886,175

 

Aggregate fair value included in Current Assets

 

 

1,917,893

 

Accounting cost basis

 

 

864,643

 

Gross unrealized holding gains (1)

 

 

1,053,250

 

Equity method unrealized gains

 

608

 

387

 

Income tax expense

 

 

(386,315

)

Minority share of unrealized holding gains

 

 

(1,945

)

Unrealized holding gains, net of tax and minority share

 

608

 

665,377

 

Derivative instruments, net of tax and minority share

 

 

(144,583

)

Retirement plans, net of tax

 

(8,946

)

(9,018

)

Accumulated other comprehensive income

 

$

(8,338

)

$

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.

 

Prior to August 7, 2008, TDS and its subsidiaries held 719,396 common shares of Rural Cellular Corporation (“RCC”).  On August 7, 2008, RCC was acquired by Verizon Wireless, with shareholders of RCC receiving cash of $45 per share in exchange for each RCC share owned.  Accordingly, in August 2008, TDS received total cash proceeds of $32.4 million, recognized a pre-tax gain of $31.7 million and recorded a current tax liability of $11.1 million related to the exchange. As a result of this transaction, TDS and its subsidiaries no longer had any interest in RCC as of September 30, 2008.

 

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.

 

In the first half of 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 12,507,522 Deutsche Telekom Ordinary Shares remaining after settlement of the forward contracts and realized cash proceeds of $226.6 million from the sale.  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; approximately 75% of this amount was paid as part of estimated tax payments as of September 30, 2008.

 

21



Table of Contents

 

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 first half of 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.

 

As a result of these transactions, TDS does not own any shares of Deutsche Telekom and no longer holds any forward contracts related to such shares.

 

12.       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 September 30, 2008 and 2007, and recorded related income of $15.3 million and $17.9 million, respectively, for the three-month periods then ended and $49.2 million and $54.3 million, respectively, for the nine-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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(Dollars in thousands)

 

Revenues

 

$

1,025,000

 

$

953,000

 

$

2,930,000

 

$

2,776,000

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

728,000

 

642,000

 

2,028,000

 

1,815,000

 

Operating income

 

297,000

 

311,000

 

902,000

 

961,000

 

Other income

 

4,000

 

9,000

 

19,000

 

27,000

 

Net income

 

$

301,000

 

$

320,000

 

$

921,000

 

$

988,000

 

 

13.       Notes Payable

 

TDS has a $600 million revolving credit facility available for general corporate purposes.  At September 30, 2008, there were no outstanding borrowings and $3.4 million of outstanding letters of credit, 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.  TDS may select borrowing periods of either seven days or one, two, three or six months. At September 30, 2008, the one-month LIBOR was 3.93% and the contractual spread was 60 basis points. 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 September 30, 2008).  This credit facility expires in December 2009.

 

TDS also has $25 million of direct bank lines of credit at September 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 September 30, 2008, there were no outstanding borrowings and $0.3 million of outstanding letters of credit, leaving $699.7 million available for use. Borrowings under the revolving credit facility bear interest at the LIBOR plus a contractual spread based on U.S. Cellular’s credit rating. U.S. Cellular may select borrowing periods of either seven days or one, two, three or six months. At September 30, 2008, the one-month LIBOR was 3.93% and the contractual spread was 60 basis points. 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 September 30, 2008). This credit facility expires in December 2009.

 

22



Table of Contents

 

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 or Moody’s Investors Service were lowered and would decrease if the ratings from both agencies 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 the existing credit facilities 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 September 30, 2008 with all covenants and other requirements set forth in the revolving credit facilities and lines of credit.

 

14.       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 2107.

 

23



Table of Contents

 

The settlement value of TDS’ mandatorily redeemable minority interests is estimated to be $134.6 million at September 30, 2008. This represents the estimated amount of cash that would be due and payable to settle these minority interests assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on September 30, 2008, net of estimated liquidation costs. This amount is being disclosed pursuant to the requirements of FSP No. FAS 150-3, Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under SFAS 150. 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 September 30, 2008 is $44.6 million, and is included in Minority interest in the Consolidated Balance Sheet. The excess of the aggregate settlement value over the aggregate carrying value of the mandatorily redeemable minority interests of $90.0 million is due primarily 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.

 

15.       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 nine months ended September 30, 2008, TDS repurchased 2,863,566 Special Common Shares for $115.0 million, or an average of $40.16 per share pursuant to this authorization. During the nine months ended September 30, 2007, TDS repurchased 1,483,193 Special Common Shares for $89.1 million, or $60.06 per share. As of September 30, 2008, TDS has purchased a total of $241.7 million of Special Common Shares under this authorization, and therefore could purchase up to $8.3 million in future periods. TDS substantially completed the repurchase of TDS Special Common Shares under this authorization in October 2008.

 

On November 3, 2008, the TDS Board of Directors authorized the repurchase of up to $250 million in aggregate purchase price of TDS Common and/or TDS Special Common Shares from time to time through open market purchases, block transactions, private purchases or otherwise. This authorization will expire on November 3, 2011.

 

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 nine months ended September 30, 2008, U.S. Cellular repurchased 450,000 Common Shares for $27.7 million, or an average of $61.56 per share, pursuant to this authorization.

 

24



Table of Contents

 

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 nine months ended September 30, 2007, U.S. Cellular purchased 838,000 Common Shares from an investment banking firm in private accelerated share repurchase (“ASR”) transactions dated April 4, 2007 and July 10, 2007. These purchases consisted of 338,000 shares under the Limited Authorization and 500,000 shares under the Additional Authorization.  Activity related to these purchases is detailed in the table below.

 

 

 

April 4,

 

July 10,

 

 

 

 

 

2007

 

2007

 

Total

 

 

 

(Dollars in thousands, except per share amounts)

 

Number of shares purchased

 

670,000

 

168,000

 

838,000

 

ASR Transactions

 

 

 

 

 

 

 

Initial purchase price paid to investment banking firm

 

$

49,057

 

$

16,145

 

$

65,202

 

Weighted average price per share

 

$

73.22

 

$

96.10

 

$

77.81

 

ASR Settlements

 

 

 

 

 

 

 

Additional amount paid to (refunded by) investment banking firm (1)

 

$

6,485

 

$

(2,080

)

$

4,405

 

Final total cost of shares, including discount and commission

 

$

55,542

 

$

14,065

 

$

69,607

 

Final weighted average price per share

 

$

82.90

 

$

83.72

 

$

83.06

 

 


(1)          The cash settlements with the investment banking firm for the April 4, 2007 and July 10, 2007 ASRs occurred in December 2007 and January 2008, respectively.

 

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 9 - Licenses and Goodwill, and Note 10 - 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 nine months ended September 30, 2008 and 2007.

 

25



Table of Contents

 

16.       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 were as follows.

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

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

 

654

 

150,512

 

Income tax expense

 

(251

)

(56,091

)

 

 

403

 

94,421

 

Unrealized gains of equity method companies

 

221

 

35

 

Minority share of unrealized gains

 

(17

)

(2,536

)

Net increase in unrealized gains

 

607

 

91,920

 

 

 

 

 

 

 

Recognized gain on disposition of marketable equity securities(2)

 

(31,725

)

(500,126

)

Income tax expense

 

11,647

 

182,948

 

 

 

(20,078

)

(317,178

)

Minority share of income

 

1,962

 

15,586

 

Net recognized gain on disposition of marketable equity securities

 

(18,116

)

(301,592

)

Net change in marketable equity securities

 

(17,509

)

(209,672

)

Initial application of FIN 48(3)

 

 

30,306

 

</