SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No.1
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005 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 1-9712
UNITED STATES CELLULAR CORPORATION
(Exact name of registrant as specified in its charter)
|
Delaware |
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62-1147325 |
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(State or other
jurisdiction of |
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(I.R.S. Employer Identification No.) |
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|
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8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631 |
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(Address of principal executive offices) (Zip Code) |
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Registrant’s telephone number, including area code: (773) 399-8900 |
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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 o No ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý No 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 ý
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 March 31, 2005 |
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Common Shares, $1 par value |
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53,604,615 Shares |
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Series A Common Shares, $1 par value |
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33,005,877 Shares |
Explanatory Note
United States Cellular Corporation (“U.S. Cellular”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005, which was originally filed with the Securities and Exchange Commission (“SEC”) on May 4, 2005 (“Original Form 10-Q”), to amend Part I Financial Information – Item 1 “Financial Statements,” Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), and Item 4 “Controls and Procedures,” and Part II Other Information – Item 6 “Exhibits and Financial Statement Schedules.”
As discussed in Note 1 to the Consolidated Financial Statements, on November 9, 2005, U.S. Cellular and its audit committee concluded that U.S. Cellular would amend its Annual Report on Form 10-K for the year ended December 31, 2004 to restate its financial statements and financial information for each of the three years in the period ended December 31, 2004, including quarterly information for 2004 and 2003, and certain selected financial data for the years 2001 and 2000. U.S. Cellular and its audit committee also concluded that U.S. Cellular would amend its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2005 and June 30, 2005 to restate the financial statements and financial information included therein.
The restatement adjustments principally correct items that were recorded in the financial statements previously but not in the proper periods and certain income tax errors. Correction of the errors, with the exception of income taxes discussed below, individually did not have a material impact on income before income taxes and minority interest, net income or earnings per share; however, when aggregated, the items were considered to be material. The restatement adjustments to correct income tax accounting had a material impact individually on net income and earnings per share in prior periods. The restated financial statements are adjusted to record certain obligations in the periods such obligations were incurred and, correct the timing of the reversal of certain tax liabilities and record revenues in the periods such revenues were earned. The adjustments are described below.
• Income taxes – U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. In the restatement, U.S. Cellular corrected its income tax expense, federal and state taxes payable, liabilities accrued for tax contingencies, deferred income tax assets and liabilities and related disclosures for the first quarter of 2005 and the years ended December 31, 2004, 2003 and 2002 for items identified based on a reconciliation of income tax accounts. The reconciliation compared amounts used for financial reporting purposes to the amounts used in the preparation of the income tax returns, and took into consideration the results of federal and state income tax audits and the resulting book/tax basis differences which generate deferred tax assets and liabilities. In addition, a review of the state deferred income tax rates used to establish deferred income tax assets and liabilities identified errors in the state income tax rate used which resulted in adjustments to correct the amount of deferred income tax assets and liabilities recorded for temporary differences between the timing of when certain transactions are recognized for financial and income tax reporting.
• Federal universal service fund (“USF”) contributions – In 2004 and 2003, Universal Service Administrative Company (“USAC”) billings to U.S. Cellular for USF contributions were based on estimated revenues reported to USAC by U.S. Cellular in accordance with USAC’s established procedures. However, U.S. Cellular’s actual liability for USF is based upon its actual revenues and USAC’s established procedures provide a method to adjust U.S. Cellular’s estimated liability to its actual liability. In the first six months of 2005 and the full years of 2004 and 2003, U.S. Cellular’s actual revenues exceeded estimated revenues reported to USAC on an interim basis. As a result, additional amounts were due to USAC in 2005 and 2004 based on U.S. Cellular’s annual report filings. Such additional amounts were incorrectly expensed when the invoices were received from USAC rather than at the time the obligation was incurred. In the third quarter of 2005, U.S. Cellular corrected its accounting for USF contributions to record expense reflecting the estimated obligation incurred based on actual revenues reported during the period. Accordingly, in the restatement, U.S. Cellular has adjusted previously reported USF contributions expense to reflect the estimated liability incurred during the period.
• Customer contract termination fees – In the fourth quarter of 2003, U.S. Cellular revised its business practices related to the billing of contract termination fees charged when a customer disconnected service prior to the end of the customer’s contract. This change resulted in an increase in amounts billed to customers and revenues even though a high percentage of the amounts billed were deemed uncollectible. At the time of the change in business practice, U.S. Cellular incorrectly recorded revenues related to such fees at the time of billing, as generally accepted accounting principles (“GAAP”) would preclude revenue recognition if the receivable is not reasonably assured of collection. In the first quarter of 2005, U.S. Cellular corrected its accounting to record revenues related to such fees only upon collection, in recognition of the fact that the collectibility of the revenues was not reasonably assured at the time of billing. In the restatement, U.S. Cellular made adjustments to properly reflect revenues for such fees upon collection beginning on October 1, 2003.
• Leases and contracts – U.S. Cellular has entered into certain operating leases (as both lessee and lessor) that provide for specific scheduled increases in payments over the lease term. In the third quarter of 2004, U.S. Cellular made adjustments for the cumulative effect which were not considered to be material to either that quarter or to prior periods to correct its accounting and to recognize revenues and expenses under such agreements on a straight-line basis over the term of the lease in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,” as amended, and related pronouncements. In addition, the accounting for certain other long-term contracts, for which a cumulative effect adjustment was made in the first quarter of 2005, was corrected to recognize expenses in the appropriate periods. The restatement adjustments reverse the cumulative amounts previously recorded in the third quarter of 2004 and the first quarter of 2005, and properly record such revenues and expenses on a straight-line basis in the appropriate periods.
• Promotion rebates – From time to time, U.S. Cellular’s sales promotions include rebates on sales of handsets to customers. In such cases, U.S. Cellular reduces revenues and records a liability at the time of sale reflecting an estimate of rebates to be paid under the promotion. Previously, the accrued liability was not adjusted on a timely basis upon expiration of the promotion to reflect the actual amount of rebates paid based upon information available at the date the financial statements were issued. In the restatement, U.S. Cellular has corrected revenues and accrued liabilities to reflect the impacts associated with promotion rebates in the appropriate periods.
• Operations of consolidated partnerships managed by a third party – Historically, U.S. Cellular recorded the results of operations of certain consolidated partnerships managed by a third party on an estimated basis, and adjusted such estimated results to the actual results upon receipt of financial statements in the following quarter. However, GAAP requires that the actual amounts be used. In the restatement, U.S. Cellular has corrected its financial statements to recognize results of operations in the appropriate period based on the partnerships’ actual results of operations reported for such periods.
• Investment income from entities accounted for by the equity method – Historically, U.S. Cellular recorded an estimate each quarter of its proportionate share of net income (loss) from certain entities accounted for by the equity method, and adjusted such estimate to the actual share of net income (loss) upon receipt of financial statements in the following quarter. However, GAAP requires that the actual amounts be used. In the restatement, U.S. Cellular has corrected its financial statements to recognize investment income in the appropriate period based on the entities’ actual net income (loss) reported for such periods.
• Consolidated statements of cash flows – In the restatement, the classification of cash distributions received from unconsolidated entities has been corrected to properly reflect cash received, which represents a return on investment in the unconsolidated entities, as cash flows from operating activities; previously, the cash received on such investments was classified as cash flows from investing activities. Also, the classification of certain noncash stock-based compensation expense has been corrected to properly reflect such noncash expense as an adjustment to cash flows from operating activities; previously, such expense was classified as cash flows from financing activities.
• Other items – In addition to the adjustments described above, U.S. Cellular recorded a number of other adjustments to correct and record revenues and expenses in the periods in which such revenues and expenses were earned or incurred. These adjustments were not significant, either individually or in aggregate.
In connection with the restatement, U.S. Cellular concluded that certain material weaknesses existed in its internal control over financial reporting. See Part I – Item 4 “Controls and Procedures.”
For the convenience of the reader, this Form 10-Q/A sets for the Original Form 10-Q, as amended hereby, in its entirety. However, this Form 10-Q/A amends and restates only Items 1, 2, and 4 of Part I and Item 6 of Part II of the Original From 10-Q, in each case solely as a result of and to reflect the adjustments discussed above and more fully in Note 1 of the accompanying financial statements, and no other information in the Original Form 10-Q is amended hereby. The foregoing items have not been updated to reflect other events occurring after the filing of the Original Form 10-Q, or to modify or update those disclosures affected by other subsequent events. In particular, forward-looking statements included in the Form 10-Q/A represented management’s views as of the date of filing of the Original Form 10-Q for the quarter ended March 31, 2005 on May 4, 2005. Such forward-looking statements should not be assumed to be accurate as of any future date. U.S. Cellular undertakes no duty to update such information whether as a result of new information, future events or otherwise.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by U.S. Cellular’s principal executive officer and principal financial officer are being filed with this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2.
UNITED STATES CELLULAR CORPORATION
AMENDMENT NO.1
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
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Three Months Ended |
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2005 |
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2004 |
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(As Restated) |
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(As Restated) |
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(Dollars in thousands, except per share amounts) |
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OPERATING REVENUES |
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Service |
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$ |
671,639 |
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$ |
614,951 |
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Equipment sales |
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39,432 |
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38,224 |
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Total Operating Revenues |
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711,071 |
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653,175 |
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OPERATING EXPENSES |
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System operations (excluding depreciation, amortization and accretion expense shown separately below) |
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138,471 |
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139,608 |
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Cost of equipment sold |
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127,248 |
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119,818 |
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Selling, general and administrative expense |
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278,330 |
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250,793 |
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Depreciation, amortization and accretion expense |
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127,493 |
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114,018 |
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Gain on assets held for sale |
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— |
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(143 |
) |
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Total Operating Expenses |
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671,542 |
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624,094 |
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|
|
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|
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OPERATING INCOME |
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39,529 |
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29,081 |
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INVESTMENT AND OTHER INCOME (EXPENSE) |
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Investment income |
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14,440 |
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13,784 |
|
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Interest and dividend income |
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2,025 |
|
370 |
|
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Interest (expense) |
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(20,738 |
) |
(20,315 |
) |
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Gain on investments |
|
551 |
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— |
|
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Other income, net |
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226 |
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324 |
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Total Investment and Other Income (Expense) |
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(3,496 |
) |
(5,837 |
) |
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|
|
|
|
|
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INCOME BEFORE INCOME TAXES AND MINORITY INTEREST |
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36,033 |
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23,244 |
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Income tax expense |
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13,934 |
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11,653 |
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INCOME BEFORE MINORITY INTEREST |
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22,099 |
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11,591 |
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Minority share of income |
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(2,534 |
) |
(2,187 |
) |
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NET INCOME |
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$ |
19,565 |
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$ |
9,404 |
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BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (000s) |
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86,405 |
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86,153 |
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BASIC EARNINGS PER SHARE (Note 4) |
|
$ |
0.23 |
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$ |
0.11 |
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|
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DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (000s) |
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87,125 |
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86,704 |
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DILUTED EARNINGS PER SHARE (Note 4) |
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$ |
0.22 |
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$ |
0.11 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
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|
Three
Months Ended |
|
||||
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|
2005 |
|
2004 |
|
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(As Restated) |
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(As Restated) |
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(Dollars in thousands) |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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|
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Net income |
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$ |
19,565 |
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$ |
9,404 |
|
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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 |
|
127,493 |
|
114,018 |
|
||
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Deferred income taxes |
|
11,506 |
|
9,984 |
|
||
|
Investment income |
|
(14,440 |
) |
(13,784 |
) |
||
|
Distributions from unconsolidated entities |
|
1,394 |
|
3,541 |
|
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|
Minority share of income |
|
2,534 |
|
2,187 |
|
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Gain on assets held for sale |
|
— |
|
(143 |
) |
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Gain on investments |
|
(551 |
) |
— |
|
||
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Bad debts expense |
|
6,445 |
|
9,683 |
|
||
|
Other noncash expense |
|
1,616 |
|
4,826 |
|
||
|
Changes in assets and liabilities |
|
|
|
|
|
||
|
Change in accounts receivable |
|
4,713 |
|
4,060 |
|
||
|
Change in inventory |
|
7,167 |
|
15,120 |
|
||
|
Change in accounts payable |
|
(55,387 |
) |
(68,648 |
) |
||
|
Change in accrued interest |
|
8,678 |
|
2,919 |
|
||
|
Change in accrued taxes |
|
8,725 |
|
5,632 |
|
||
|
Change in customer deposits and deferred revenues |
|
3,603 |
|
6,437 |
|
||
|
Change in other assets and liabilities |
|
(20,188 |
) |
(14,291 |
) |
||
|
|
|
112,873 |
|
90,945 |
|
||
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
||
|
Additions to property, plant and equipment |
|
(112,775 |
) |
(101,459 |
) |
||
|
Cash received from sale of assets |
|
— |
|
96,932 |
|
||
|
Acquisitions, excluding cash acquired |
|
(120,924 |
) |
(40,367 |
) |
||
|
Other investing activities |
|
(1,042 |
) |
(481 |
) |
||
|
|
|
(234,741 |
) |
(45,375 |
) |
||
|
|
|
|
|
|
|
||
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
||
|
Issuance of notes payable |
|
165,000 |
|
230,000 |
|
||
|
Repayment of notes payable |
|
(60,000 |
) |
(145,000 |
) |
||
|
Repayment of long-term debt – affiliated |
|
— |
|
(105,000 |
) |
||
|
Common shares reissued |
|
6,836 |
|
388 |
|
||
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Other financing activities |
|
(61 |
) |
(620 |
) |
||
|
|
|
111,775 |
|
(20,232 |
) |
||
|
|
|
|
|
|
|
||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
(10,093 |
) |
25,338 |
|
||
|
|
|
|
|
|
|
||
|
CASH AND CASH EQUIVALENTS- |
|
|
|
|
|
||
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Beginning of period |
|
41,062 |
|
10,029 |
|
||
|
End of period |
|
$ |
30,969 |
|
$ |
35,367 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
4
ASSETS
Unaudited
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
(As Restated) |
|
(As Restated) |
|
||
|
|
|
(Dollars in thousands) |
|
||||
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CURRENT ASSETS |
|
|
|
|
|
||
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Cash and cash equivalents |
|
$ |
30,969 |
|
$ |
41,062 |
|
|
Accounts Receivable |
|
|
|
|
|
||
|
Customers, less allowance of $9,720 and $10,820, respectively |
|
245,838 |
|
248,383 |
|
||
|
Roaming |
|
23,039 |
|
26,421 |
|
||
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Other |
|
40,600 |
|
41,632 |
|
||
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Inventory |
|
69,751 |
|
76,918 |
|
||
|
Prepaid expenses |
|
33,273 |
|
31,764 |
|
||
|
Deferred tax asset |
|
62,142 |
|
73,216 |
|
||
|
Other current assets |
|
13,639 |
|
24,951 |
|
||
|
|
|
519,251 |
|
564,347 |
|
||
|
INVESTMENTS |
|
|
|
|
|
||
|
Licenses |
|
1,358,725 |
|
1,228,801 |
|
||
|
Goodwill |
|
445,202 |
|
445,212 |
|
||
|
Customer lists, net of accumulated amortization of $36,930 and $34,630, respectively |
|
22,615 |
|
24,915 |
|
||
|
Marketable equity securities |
|
274,079 |
|
282,829 |
|
||
|
Investments in unconsolidated entities |
|
169,634 |
|
155,519 |
|
||
|
Notes and interest receivable – long-term |
|
4,778 |
|
4,885 |
|
||
|
|
|
2,275,033 |
|
2,142,161 |
|
||
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
||
|
In service and under construction |
|
4,219,311 |
|
4,133,471 |
|
||
|
Less accumulated depreciation |
|
1,789,552 |
|
1,692,751 |
|
||
|
|
|
2,429,759 |
|
2,440,720 |
|
||
|
|
|
|
|
|
|
||
|
OTHER DEFERRED CHARGES |
|
31,627 |
|
32,807 |
|
||
|
|
|
|
|
|
|
||
|
TOTAL ASSETS |
|
$ |
5,255,670 |
|
$ |
5,180,035 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Unaudited
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
(As Restated) |
|
(As Restated) |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
CURRENT LIABILITIES |
|
|
|
|
|
||
|
Notes payable |
|
$ |
135,000 |
|
$ |
30,000 |
|
|
Accounts payable |
|
|
|
|
|
||
|
Affiliated |
|
5,412 |
|
5,314 |
|
||
|
Trade |
|
203,682 |
|
259,167 |
|
||
|
Customer deposits and deferred revenues |
|
107,997 |
|
104,394 |
|
||
|
Accrued taxes |
|
88,972 |
|
80,512 |
|
||
|
Accrued compensation |
|
25,921 |
|
49,116 |
|
||
|
Other current liabilities |
|
32,011 |
|
20,829 |
|
||
|
|
|
598,995 |
|
549,332 |
|
||
|
|
|
|
|
|
|
||
|
DEFERRED LIABILITIES AND CREDITS |
|
|
|
|
|
||
|
Net deferred income tax liability |
|
668,006 |
|
670,250 |
|
||
|
Derivative liability |
|
66,800 |
|
70,796 |
|
||
|
Other deferred liabilities and credits |
|
104,302 |
|
99,222 |
|
||
|
|
|
839,108 |
|
840,268 |
|
||
|
|
|
|
|
|
|
||
|
LONG-TERM DEBT |
|
1,160,900 |
|
1,160,786 |
|
||
|
|
|
|
|
|
|
||
|
MINORITY INTEREST IN SUBSIDIARIES |
|
42,504 |
|
40,052 |
|
||
|
|
|
|
|
|
|
||
|
COMMON SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
|
Common Shares, par value $1 per share; authorized 140,000,000 shares; issued 55,045,684 shares |
|
55,046 |
|
55,046 |
|
||
|
Series A Common Shares, par value $1 per share; authorized 50,000,000 shares; issued and outstanding 33,005,877 shares |
|
33,006 |
|
33,006 |
|
||
|
Additional paid-in capital |
|
1,292,859 |
|
1,305,249 |
|
||
|
Treasury Shares, at cost, 1,441,069 and 1,716,658 Common Shares, respectively |
|
(79,229 |
) |
(99,627 |
) |
||
|
Accumulated other comprehensive income |
|
29,796 |
|
32,803 |
|
||
|
Retained earnings |
|
1,282,685 |
|
1,263,120 |
|
||
|
|
|
2,614,163 |
|
2,589,597 |
|
||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
$ |
5,255,670 |
|
$ |
5,180,035 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
6
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accounting policies of United States Cellular Corporation (“U.S. Cellular”) conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of U.S. Cellular, its majority-owned subsidiaries since acquisition, general partnerships in which U.S. Cellular has a majority partnership interest and any entity where U.S. Cellular has a variable interest that will absorb a majority of the entity’s expected gains or losses, or both. All material intercompany accounts and transactions have been eliminated.
The consolidated financial statements included herein have been prepared by U.S. Cellular, 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, although U.S. Cellular believes that the disclosures 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 U.S. Cellular’s latest annual report on Form 10-K/A. (See discussion of Restatement below).
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 March 31, 2005, the results of operations for the three months ended March 31, 2005 and 2004, and the cash flows for the three months ended March 31, 2005 and 2004. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year.
Certain amounts reported in the prior year have been reclassified to conform to current period presentation. The reclassifications had no impact on previously reported net income.
Restatement
U.S. Cellular and its audit committee concluded on November 9, 2005, that U.S. Cellular would amend its Annual Report on Form 10-K for the year ended December 31, 2004 to restate its financial statements and financial information for each of the three years in the period ended December 31, 2004, including quarterly information for 2004 and 2003, and certain selected financial data for the years 2001 and 2000. U.S. Cellular and its audit committee also concluded that U.S. Cellular would amend its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2005 and June 30, 2005 to restate the financial statements and financial information included therewith.
On November 11, 2005, U.S. Cellular announced that the staff of the Midwest Regional Office of the Securities and Exchange Commission (“SEC”) had advised U.S. Cellular that it was conducting an investigation into the restatement of financial statements announced by U.S. Cellular on November 10, 2005. U.S. Cellular intends to cooperate fully with the SEC staff in this investigation.
7
The restatement adjustments principally correct items that were recorded in the financial statements previously but not in the proper periods and certain income tax errors. Correction of the errors, with the exception of income taxes discussed below, individually did not have a material impact on income before income taxes and minority interest, net income or earnings per share; however, when aggregated, the items were considered to be material. The restatement adjustments to correct income tax accounting had a material impact individually on net income and earnings per share in prior periods. The restated financial statements are adjusted to record certain obligations in the periods such obligations were incurred and, correct the timing of the reversal of certain tax liabilities and record revenues in the periods such revenues were earned. The adjustments are described below.
• Income taxes – U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. In the restatement, U.S. Cellular corrected its income tax expense, federal and state taxes payable, liabilities accrued for tax contingencies, deferred income tax assets and liabilities and related disclosures for the first quarter of 2005 and the years ended December 31, 2004, 2003 and 2002 for items identified based on a reconciliation of income tax accounts. The reconciliation compared amounts used for financial reporting purposes to the amounts used in the preparation of the income tax returns, and took into consideration the results of federal and state income tax audits and the resulting book/tax basis differences which generate deferred tax assets and liabilities. In addition, a review of the state deferred income tax rates used to establish deferred income tax assets and liabilities identified errors in the state income tax rate used which resulted in adjustments to correct the amount of deferred income tax assets and liabilities recorded for temporary differences between the timing of when certain transactions are recognized for financial and income tax reporting.
• Federal universal service fund (“USF”) contributions – In 2004 and 2003, Universal Service Administrative Company (“USAC”) billings to U.S. Cellular for USF contributions were based on estimated revenues reported to USAC by U.S. Cellular in accordance with USAC’s established procedures. However, U.S. Cellular’s actual liability for USF is based upon its actual revenues and USAC’s established procedures provide a method to adjust U.S. Cellular’s estimated liability to its actual liability. In the first six months of 2005 and the full years of 2004 and 2003, U.S. Cellular’s actual revenues exceeded estimated revenues reported to USAC on an interim basis. As a result, additional amounts were due to USAC in 2005 and 2004 based on U.S. Cellular’s annual report filings. Such additional amounts were incorrectly expensed when the invoices were received from USAC rather than at the time the obligation was incurred. In the third quarter of 2005, U.S. Cellular corrected its accounting for USF contributions to record expense reflecting the estimated obligation incurred based on actual revenues reported during the period. Accordingly, in the restatement, U.S. Cellular has adjusted previously reported USF contributions expense to reflect the estimated liability incurred during the period.
• Customer contract termination fees – In the fourth quarter of 2003, U.S. Cellular revised its business practices related to the billing of contract termination fees charged when a customer disconnected service prior to the end of the customer’s contract. This change resulted in an increase in amounts billed to customers and revenues even though a high percentage of the amounts billed were deemed uncollectible. At the time of the change in business practice, U.S. Cellular incorrectly recorded revenues related to such fees at the time of billing, as generally accepted accounting principles (“GAAP”) would preclude revenue recognition if the receivable is not reasonably assured of collection. In the first quarter of 2005, U.S. Cellular corrected its accounting to record revenues related to such fees only upon collection, in recognition of the fact that the collectibility of the revenues was not reasonably assured at the time of billing. In the restatement, U.S. Cellular made adjustments to properly reflect revenues for such fees upon collection beginning on October 1, 2003.
8
• Leases and contracts – U.S. Cellular has entered into certain operating leases (as both lessee and lessor) that provide for specific scheduled increases in payments over the lease term. In the third quarter of 2004, U.S. Cellular made adjustments for the cumulative effect which were not considered to be material to either that quarter or to prior periods to correct its accounting and to recognize revenues and expenses under such agreements on a straight-line basis over the term of the lease in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,” as amended, and related pronouncements. In addition, the accounting for certain other long-term contracts, for which a cumulative effect adjustment was made in the first quarter of 2005, was corrected to recognize expenses in the appropriate periods. The restatement adjustments reverse the cumulative amounts previously recorded in the third quarter of 2004 and the first quarter of 2005, and properly record such revenues and expenses on a straight-line basis in the appropriate periods.
• Promotion rebates – From time to time, U.S. Cellular’s sales promotions include rebates on sales of handsets to customers. In such cases, U.S. Cellular reduces revenues and records a liability at the time of sale reflecting an estimate of rebates to be paid under the promotion. Previously, the accrued liability was not adjusted on a timely basis upon expiration of the promotion to reflect the actual amount of rebates paid based upon information available at the date the financial statements were issued. In the restatement, U.S. Cellular has corrected revenues and accrued liabilities to reflect the impacts associated with promotion rebates in the appropriate periods.
• Operations of consolidated partnerships managed by a third party – Historically, U.S. Cellular recorded the results of operations of certain consolidated partnerships managed by a third party on an estimated basis, and adjusted such estimated results to the actual results upon receipt of financial statements in the following quarter. However, GAAP requires that the actual amounts be used. In the restatement, U.S. Cellular has corrected its financial statements to recognize results of operations in the appropriate period based on the partnerships’ actual results of operations reported for such periods.
• Investment income from entities accounted for by the equity method – Historically, U.S. Cellular recorded an estimate each quarter of its proportionate share of net income (loss) from certain entities accounted for by the equity method, and adjusted such estimate to the actual share of net income (loss) upon receipt of financial statements in the following quarter. However, GAAP requires that the actual amounts be used. In the restatement, U.S. Cellular has corrected its financial statements to recognize investment income in the appropriate period based on the entities’ actual net income (loss) reported for such periods.
• Consolidated statements of cash flows – In the restatement, the classification of cash distributions received from unconsolidated entities has been corrected to properly reflect cash received, which represents a return on investment in the unconsolidated entities, as cash flows from operating activities; previously, the cash received on such investments was classified as cash flows from investing activities. Also, the classification of certain noncash stock-based compensation expense has been corrected to properly reflect such noncash expense as an adjustment to cash flows from operating activities; previously, such expense was classified as cash flows from financing activities.
• Other items – In addition to the adjustments described above, U.S. Cellular recorded a number of other adjustments to correct and record revenues and expenses in the periods in which such revenues and expenses were earned or incurred. These adjustments were not significant, either individually or in aggregate.
9
The table below summarizes the impact on income before income taxes and minority interest as a result of the restatement.
|
|
|
Three Months Ended |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(Increase (decrease) |
|
||||
|
Income Before Income Taxes and Minority Interest, as previously reported |
|
$ |
32,205 |
|
$ |
23,005 |
|
|
Federal universal service fund contributions |
|
(1,431 |
) |
1,591 |
|
||
|
Customer contract termination fees |
|
3,468 |
|
(151 |
) |
||
|
Leases and contracts |
|
2,238 |
|
(686 |
) |
||
|
Promotion rebates |
|
(446 |
) |
— |
|
||
|
Operations of consolidated partnerships managed by a third party |
|
(454 |
) |
270 |
|
||
|
Investment income from entities accounted for by the equity method |
|
522 |
|
(504 |
) |
||
|
Other items |
|
(69 |
) |
(281 |
) |
||
|
Total adjustment |
|
3,828 |
|
239 |
|
||
|
Income Before Income Taxes and Minority Interest, as restated |
|
$ |
36,033 |
|
$ |
23,244 |
|
The table below summarizes the impact on net income and earnings per share as a result of the restatement.
|
|
|
Three Months Ended |
|
||||||||||
|
|
|
2005 |
|
2004 |
|
||||||||
|
|
|
Net Income |
|
Diluted |
|
Net Income |
|
Diluted |
|
||||
|
|
|
(Increase (decrease) dollars in thousands, except per share amounts) |
|
||||||||||
|
As previously reported |
|
$ |
16,898 |
|
$ |
0.19 |
|
$ |
9,232 |
|
$ |
0.11 |
|
|
Federal universal service fund contributions |
|
(829 |
) |
(0.01 |
) |
928 |
|
0.01 |
|
||||
|
Customer contract termination fees |
|
1,942 |
|
0.02 |
|
(85 |
) |
— |
|
||||
|
Leases and contracts |
|
1,356 |
|
0.02 |
|
(403 |
) |
(0.01 |
) |
||||
|
Promotion rebates |
|
(250 |
) |
— |
|
— |
|
— |
|
||||
|
Operations of consolidated partnerships managed by a third party |
|
(200 |
) |
— |
|
120 |
|
— |
|
||||
|
Investment income from entities accounted for by the equity method |
|
316 |
|
— |
|
(305 |
) |
— |
|
||||
|
Income taxes |
|
370 |
|
— |
|
76 |
|
— |
|
||||
|
Other items |
|
(38 |
) |
— |
|
(159 |
) |
— |
|
||||
|
Total adjustment |
|
2,667 |
|
0.03 |
|
172 |
|
— |
|
||||
|
As restated |
|
$ |
19,565 |
|
$ |
0.22 |
|
$ |
9,404 |
|
$ |
0.11 |
|
10
The effect of the restatement on the previously reported Consolidated Statements of Operations is as follows:
|
|
|
Three Months Ended |
|
||||||||||
|
|
|
2005 |
|
2004 |
|
||||||||
|
|
|
As |
|
As |
|
As |
|
As |
|
||||
|
|
|
(Dollars in thousands, except per share amounts ) |
|
||||||||||
|
OPERATING REVENUES |
|
|
|
|
|
|
|
|
|
||||
|
Service |
|
$ |
668,792 |
|
$ |
671,639 |
|
$ |
619,382 |
|
$ |
614,951 |
|
|
Equipment Sales |
|
39,643 |
|
39,432 |
|
38,268 |
|
38,224 |
|
||||
|
Total Operating Revenues |
|
708,435 |
|
711,071 |
|
657,650 |
|
653,175 |
|
||||
|
OERATING EXPENSES |
|
|
|
|
|
|
|
|
|
||||
|
System Operations |
|
|
|
|
|
|
|
|
|
||||
|
(exclusive of depreciation, amortization and accretion shown separately below) |
|
140,066 |
|
138,471 |
|
137,523 |
|
139,608 |
|
||||
|
Cost of equipment sold |
|
126,893 |
|
127,248 |
|
119,888 |
|
119,818 |
|
||||
|
Selling, general and administrative expense |
|
277,989 |
|
278,330 |
|
258,206 |
|
250,793 |
|
||||
|
Depreciation, amortization and accretion expense |
|
127,250 |
|
127,493 |
|
113,894 |
|
114,018 |
|
||||
|
Gain on assets held for sale |
|
— |
|
— |
|
(143 |
) |
(143 |
) |
||||
|
Total Operating Expenses |
|
672,198 |
|
671,542 |
|
629,368 |
|
624,094 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating Income |
|
36,237 |
|
39,529 |
|
28,282 |
|
29,081 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Investment and Other Income (Expense) |
|
|
|
|
|
|
|
|
|
||||
|
Investment income |
|
13,919 |
|
14,440 |
|
14,287 |
|
13,784 |
|
||||
|
Interest and dividend income |
|
2,036 |
|
2,025 |
|
378 |
|
370 |
|
||||
|
Interest expense |
|
(20,738 |
) |
(20,738 |
) |
(20,315 |
) |
(20,315 |
) |
||||
|
Gain on investments |
|
551 |
|
551 |
|
— |
|
— |
|
||||
|
Other income, net |
|
200 |
|
226 |
|
373 |
|
324 |
|
||||
|
Total Investment and Other Income (Expense) |
|
(4,032 |
) |
(3,496 |
) |
(5,277 |
) |
(5,837 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income (Loss) From Continuing Operations before Income Taxes and Minority Interest |
|
32,205 |
|
36,033 |
|
23,005 |
|
23,244 |
|
||||
|
Income tax expense (benefit) |
|
12,803 |
|
13,934 |
|
11,661 |
|
11,653 |
|
||||
|
Income (Loss) From Continuing Operations Before Minority Interest |
|
19,402 |
|
22,099 |
|
11,344 |
|
11,591 |
|
||||
|
Minority share of income |
|
(2,504 |
) |
(2,534 |
) |
(2,112 |
) |
(2,187 |
) |
||||
|
Net Income (Loss) |
|
$ |
16,898 |
|
$ |
19,565 |
|
$ |
9,232 |
|
$ |
9,404 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic Earnings per Share: |
|
$ |
0.20 |
|
$ |
0.23 |
|
$ |
0.11 |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted Earnings per Share: |
|
$ |
0.19 |
|
$ |
0.22 |
|
$ |
0.11 |
|
$ |
0.11 |
|
11
The effect of the restatement on the previously reported Consolidated Statements of Cash Flows is as follows:
|
|
|
Three Months Ended |
|
||||||||||
|
|
|
2005 |
|
2005 |
|
2004 |
|
2004 |
|
||||
|
|
|
As |
|
As |
|
As Previously |
|
As |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
||||
|
Net income |
|
$ |
16,898 |
|
$ |
19,565 |
|
$ |
9,232 |
|
$ |
9,404 |
|
|
Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
||||
|
Depreciation, amortization and accretion |
|
127,250 |
|
127,493 |
|
113,894 |
|
114,018 |
|
||||
|
Deferred income taxes |
|
10,374 |
|
11,506 |
|
9,991 |
|
9,984 |
|
||||
|
Investment income |
|
(13,919 |
) |
(14,440 |
) |
(14,287 |
) |
(13,784 |
) |
||||
|
Distributions from unconsolidated entities |
|
— |
|
1,394 |
|
— |
|
3,541 |
|
||||
|
Minority share of income |
|
2,504 |
|
2,534 |
|
2,112 |
|
2,187 |
|
||||
|
Gain on assets held for sale |
|
— |
|
— |
|
(143 |
) |
(143 |
) |
||||
|
Gain on investments |
|
(551 |
) |
(551 |
) |
— |
|
— |
|
||||
|
Bad debts expense |
|
— |
|
6,445 |
|
— |
|
9,683 |
|
||||
|
Other noncash expense |
|
1,561 |
|
1,616 |
|
4,766 |
|
4,826 |
|
||||
|
Changes in assets and liabilities |
|
|
|
|
|
|
|
|
|
||||
|
Change in accounts receivable |
|
12,700 |
|
4,713 |
|
11,796 |
|
4,060 |
|
||||
|
Change in inventory |
|
7,167 |
|
7,167 |
|
15,120 |
|
15,120 |
|
||||
|
Change in accounts payable |
|
(57,062 |
) |
(55,387 |
) |
(68,343 |
) |
(68,648 |
) |
||||
|
Change in accrued interest |
|
8,678 |
|
8,678 |
|
2,919 |
|
2,919 |
|
||||
|
Change in accrued taxes |
|
8,475 |
|
8,725 |
|
5,632 |
|
5,632 |
|
||||
|
Change in customer deposits and deferred revenues |
|
3,331 |
|
3,603 |
|
6,730 |
|
6,437 |
|
||||
|
Change in other assets and liabilities |
|
(16,468 |
) |
(20,188 |
) |
(12,981 |
) |
(14,291 |
) |
||||
|
|
|
110,938 |
|
112,873 |
|
86,438 |
|
90,945 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
||||
|
Additions to property, plant and equipment |
|
(112,243 |
) |
(112,775 |
) |
(100,535 |
) |
(101,459 |
) |
||||
|
Cash received from sale of assets |
|
— |
|
— |
|
96,932 |
|
96,932 |
|
||||
|
Acquisitions, excluding cash acquired |
|
(120,924 |
) |
(120,924 |
) |
(40,367 |
) |
(40,367 |
) |
||||
|
Distributions from unconsolidated entities |
|
1,394 |
|
— |
|
3,541 |
|
— |
|
||||
|
Other investing activities |
|
(1,052 |
) |
(1,042 |
) |
(651 |
) |
(481 |
) |
||||
|
|
|
(232,825 |
) |
(234,741 |
) |
(41,080 |
) |
(45,375 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
||||
|
Issuance of notes payable |
|
165,000 |
|
165,000 |
|
230,000 |
|
230,000 |
|
||||
|
Repayment of notes payable |
|
(60,000 |
) |
(60,000 |
) |
(145,000 |
) |
(145,000 |
) |
||||
|
Repayment of long-term debt – affiliated |
|
— |
|
— |
|
(105,000 |
) |
(105,000 |
) |
||||
|
Common shares reissued |
|
6,892 |
|
6,836 |
|
449 |
|
388 |
|
||||
|
Other financing activities |
|
(61 |
) |
(61 |
) |
(620 |
) |
(620 |
) |
||||
|
|
|
111,831 |
|
111,775 |
|
(20,171 |
) |
(20,232 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
NET INCREASE (DECREASE) IN CASH AND CASH |
|
(10,056 |
) |
(10,093 |
) |
25,187 |
|
25,338 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
CASH AND CASH EQUIVALENTS- |
|
|
|
|
|
|
|
|
|
||||
|
Beginning of period |
|
40,922 |
|
41,062 |
|
9,848 |
|
10,029 |
|
||||
|
End of period |
|
$ |
30,866 |
|
$ |
30,969 |
|
$ |
35,035 |
|
$ |
35,367 |
|
12
The effect of the restatement on the previously reported Consolidated Balance Sheets is as follows:
|
|
|
March 31, |
|
December 31, |
|
||||||||
|
|
|
2005 |
|
2005 |
|
2004 |
|
2004 |
|
||||
|
|
|
As |
|
As |
|
As |
|
As |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
||||
|
Cash and cash equivalents |
|
$ |
30,866 |
|
$ |
30,969 |
|
$ |
40,922 |
|
$ |
41,062 |
|
|
Accounts Receivable |
|
|
|
|
|
|
|
|
|
||||
|
Customers |
|
245,840 |
|
245,838 |
|
251,943 |
|
248,383 |
|
||||
|
Roaming |
|
23,039 |
|
23,039 |
|
26,421 |
|
26,421 |
|
||||
|
Other |
|
40,269 |
|
40,600 |
|
39,285 |
|
41,632 |
|
||||
|
Inventory |
|
69,751 |
|
69,751 |
|
76,918 |
|
76,918 |
|
||||
|
Prepaid expenses |
|
32,938 |
|
33,273 |
|
31,507 |
|
31,764 |
|
||||
|
Deferred tax asset |
|
72,667 |
|
62,142 |
|
83,741 |
|
73,216 |
|
||||
|
Other current assets |
|
14,998 |
|
13,639 |
|
28,214 |
|
24,951 |
|
||||
|
|
|
530,368 |
|
519,251 |
|
578,951 |
|
564,347 |
|
||||
|
INVESTMENTS |
|
|
|
|
|
|
|
|
|
||||
|
Licenses |
|
1,358,725 |
|
1,358,725 |
|
1,228,801 |
|
1,228,801 |
|
||||
|
Goodwill |
|
425,908 |
|
445,202 |
|
425,918 |
|
445,212 |
|
||||
|
Customer lists, net of accumulated amortization |
|
22,615 |
|
22,615 |
|
24,915 |
|
24,915 |
|
||||
|
Marketable equity securities |
|
274,079 |
|
274,079 |
|
282,829 |
|
282,829 |
|
||||
|
Investments in unconsolidated entities |
|
176,367 |
|
169,634 |
|
162,764 |
|
155,519 |
|
||||
|
Notes and interest receivable – long-term |
|
4,778 |
|
4,778 |
|
4,885 |
|
4,885 |
|
||||
|
|
|
2,262,472 |
|
2,275,033 |
|
2,130,112 |
|
2,142,161 |
|
||||
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
|
||||
|
In service and under construction |
|
4,216,083 |
|
4,219,311 |
|
4,130,551 |
|
4,133,471 |
|
||||
|
Less accumulated depreciation |
|
1,787,613 |
|
1,789,552 |
|
1,690,832 |
|
1,692,751 |
|
||||
|
|
|
2,428,470 |
|
2,429,759 |
|
2,439,719 |
|
2,440,720 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
OTHER DEFERRED CHARGES |
|
31,954 |
|
31,627 |
|
33,145 |
|
32,807 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
TOTAL ASSETS |
|
$ |
5,253,264 |
|
$ |
5,255,670 |
|
$ |
5,181,927 |
|
$ |
5,180,035 |
|
13
|
|
|
March 31, |
|
December 31, |
|
||||||||
|
|
|
2005 |
|
2005 |
|
2004 |
|
2004 |
|
||||
|
|
|
As |
|
As |
|
As |
|
As |
|
||||
|
|
|
(Dollars in thousands) |
|
||||||||||
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
||||
|
Notes payable |
|
$ |
135,000 |
|
$ |
135,000 |
|
$ |
30,000 |
|
$ |
30,000 |
|
|
Accounts payable |
|
|
|
|
|
|
|
|
|
||||
|
Affiliated |
|
5,412 |
|
5,412 |
|
5,314 |
|
5,314 |
|
||||
|
Trade |
|
197,766 |
|
203,682 |
|
254,926 |
|
259,167 |
|
||||
|
Customer deposits and deferred revenues |
|
107,909 |
|
107,997 |
|
104,578 |
|
104,394 |
|
||||
|
Accrued taxes |
|
86,833 |
|
88,972 |
|
78,624 |
|
80,512 |
|
||||
|
Accrued compensation |
|
25,921 |
|
25,921 |
|
49,116 |
|
49,116 |
|
||||
|
Other current liabilities |
|
35,045 |
|
32,011 |
|
24,308 |
|
20,829 |
|
||||
|
|
|
593,886 |
|
598,995 |
|
546,866 |
|
549,332 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
DEFERRED LIABILITIES AND CREDITS |
|
|
|
|
|
|
|
|
|
||||
|
Net deferred income tax liability |
|
676,773 |
|
668,006 |
|
680,278 |
|
670,250 |
|
||||
|
Derivative liability |
|
66,800 |
|
66,800 |
|
70,796 |
|
70,796 |
|
||||
|
Other deferred liabilities and credits |
|
101,991 |
|
104,302 |
|
94,738 |
|
99,222 |
|
||||
|
|
|
845,564 |
|
839,108 |
|
845,812 |
|
840,268 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
LONG-TERM DEBT |
|
1,160,900 |
|
1,160,900 |
|
1,160,786 |
|
1,160,786 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
MINORITY INTEREST IN SUBSIDIARIES |
|
42,796 |
|
42,504 |
|
40,373 |
|
40,052 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
COMMON SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
||||
|
Common Shares, par value $1 per share; authorized 140,000,000 shares; issued 55,045,684 shares |
|
55,046 |
|
55,046 |
|
55,046 |
|
55,046 |
|
||||
|
Series A Common Shares, par value $1 per share; authorized 50,000,000 shares; issued and outstanding 33,005,877 shares |
|
33,006 |
|
33,006 |
|
33,006 |
|
33,006 |
|
||||
|
Additional paid-in capital |
|
1,290,104 |
|
1,292,859 |
|
1,302,496 |
|
1,305,249 |
|
||||
|
Treasury Shares, at cost, 1,441,069 and 1,716,658 Common Shares, respectively |
|
(79,229 |
) |
(79,229 |
) |
(99,627 |
) |
(99,627 |
) |
||||
|
Accumulated other comprehensive income |
|
28,516 |
|
29,796 |
|
31,393 |
|
32,803 |
|
||||
|
Retained earnings |
|
1,282,675 |
|
1,282,685 |
|
1,265,776 |
|
1,263,120 |
|
||||
|
|
|
2,610,118 |
|
2,614,163 |
|
2,588,090 |
|
2,589,597 |
|
||||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
$ |
5,253,264 |
|
$ |
5,255,670 |
|
$ |
5,181,927 |
|
$ |
5,180,035 |
|
2. Summary of Significant Accounting Policies
Pension Plan
U.S. Cellular participates in a qualified noncontributory defined contribution pension plan sponsored by Telephone and Data Systems, Inc. (“TDS”), U.S. Cellular’s parent organization. The plan provides pension benefits for the employees of U.S. Cellular and its subsidiaries. Under this plan, pension benefits and costs are calculated separately for each participant and are funded currently. Pension costs were $1.8 million and $1.6 million for the three months ended March 31, 2005 and 2004, respectively.
Stock-Based Compensation
U.S. Cellular accounts for stock options, stock appreciation rights and employee stock purchase plans under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” as allowed by SFAS No. 123, “Accounting for Stock-Based Compensation.”
No compensation costs have been recognized for stock options because, under U.S. Cellular’s stock option plans, the option exercise price for each grant is equal to the quoted stock price at the grant date. No compensation costs have been recognized for employee stock purchase plans because the stock purchase price is not less than 85 percent of the fair market value of the stock at the purchase date.
14
Had compensation cost for all plans been determined consistent with SFAS No. 123, U.S. Cellular’s net income and earnings per share would have been reduced to the following pro forma amounts.
|
|
|
Three Months Ended |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(As Restated) |
|
(As Restated) |
|
||
|
|
|
(Dollars in thousands, except per share amounts) |
|
||||
|
Net Income |
|
|
|
|
|
||
|
As reported |
|
$ |
19,565 |
|
$ |
9,404 |
|
|
Pro forma expense |
|
(1,914 |
) |
(1,971 |
) |
||
|
Pro forma net income |
|
$ |
17,651 |
|
$ |
7,433 |
|
|
|
|
|
|
|
|
||
|
Basic Earnings per Share |
|
|
|
|
|
||
|
As reported |
|
$ |
0.23 |
|
$ |
0.11 |
|
|
Pro forma expense per share |
|
(0.02 |
) |
(0.02 |
) |
||
|
Pro forma basic earnings per share |
|
$ |
0.21 |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
||
|
Diluted Earnings per Share |
|
|
|
|
|
||
|
As reported |
|
$ |
0.22 |
|
$ |
0.11 |
|
|
Pro forma expense per share |
|
(0.02 |
) |
(0.02 |
) |
||
|
Pro forma diluted earnings per share |
|
$ |
0.20 |
|
$ |
0.09 |
|
Recent Accounting Pronouncements
Share-Based Payments
SFAS No. 123 (revised 2004), “Share-Based Payment,” was issued in December 2004 and becomes effective for U.S. Cellular in the first quarter of 2006. The statement requires that compensation cost resulting from all share-based payment transactions be recognized in the financial statements. U.S. Cellular has reviewed the provisions of this statement and expects to record compensation expense for certain share-based payment transactions, primarily related to stock options, in the Statement of Operations upon adoption of this standard. See the “Stock-Based Compensation” disclosure above for a pro forma impact on net income and earnings per share.
Conditional Asset Retirement Obligation
FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” was issued in March 2005. It is effective no later than December 31, 2005. This Interpretation clarifies that the term “conditional asset retirement obligation” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. Interpretation 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. U.S. Cellular is currently reviewing the requirement of this Interpretation and has not yet determined the impact, if any, on U.S. Cellular’s financial position or results of operations.
15
3. Income Taxes
The following table summarizes the effective income tax rates in each of the periods.
|
|
|
Three Months Ended |
|
||
|
|
|
2005 |
|
2004 |
|
|
|
|
(As Restated) |
|
(As Restated) |
|
|
Effective Tax Rate From |
|
|
|
|
|
|
Operations excluding gain on assets held for sale |
|
38.7 |
% |
39.1 |
% |
|
Gain on assets held for sale (1) |
|
37.5 |
% |
N/M |
|
|
Income before income taxes and minority interest |
|
38.7 |
% |
50.1 |
% |
(1) The effective tax rate in the first quarter of 2004 related to the provision for gain on assets held for sale is not meaningful. Because of the impact on the income tax provision of the completion of the sale of assets to AT&T Wireless Services, Inc. (“AT&T Wireless”) in February 2004, it was necessary for U.S. Cellular to record a tax provision of $2.6 million at the time of this sale. However, book pretax income in the first quarter of 2004 reflected a $143,000 gain on assets held for sale, which was an adjustment of the $22.0 million loss on assets held for sale recorded in the fourth quarter of 2003 when the sale transaction was announced.
4. Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average number of Common Shares outstanding during the period. Diluted earnings per share is computed using net income and weighted average Common Shares adjusted to include the effect of potentially dilutive securities. Potentially dilutive securities included in diluted earnings per share represent incremental shares issuable upon exercise of outstanding stock options.
The amounts used in computing earnings per shares and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows:
|
|
|
Three Months Ended |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(As Restated) |
|
(As Restated) |
|
||
|
|
|
(Dollars and shares in thousands, |
|
||||
|
|
|
|
|
|
|
||
|
Net income used in basic and diluted earnings per share |
|
$ |
19,565 |
|
$ |
9,404 |
|
|
|
|
|
|
|
|
||
|
Weighted average number of Common Shares used in basic earnings per share |
|
86,405 |
|
86,153 |
|
||
|
Effect of Dilutive Securities: |
|
|
|
|
|
||
|
Stock options (1) |
|
720 |
|
551 |
|
||
|
Conversion of convertible debentures (2) |
|
— |
|
— |
|
||
|
Weighted average number of Common Shares used in diluted earnings per share |
|
87,125 |
|
86,704 |
|
||
|
|
|
|
|
|
|
||
|
Basic Earnings per Share |
|
$ |
0.23 |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
||
|
Diluted Earnings per Share |
|
$ |
0.22 |
|
$ |
0.11 |
|
(1) Stock options convertible into 242,322 Common Shares were not included in computing Diluted Earnings per share in 2005 because their effects were antidilutive. Stock options convertible into 999,665 Common Shares were not included in computing Diluted Earnings per Share in 2004 because their effects were antidilutive.
(2) All outstanding convertible debentures were redeemed on July 26, 2004. Convertible debentures convertible into 2,944,347 Common Shares were not included in computing Diluted Earnings per Share in 2004 because their effects were antidilutive.
16
5. Marketable Equity Securities
U.S. Cellular and its subsidiaries hold a substantial amount of marketable equity securities that are publicly traded and can have volatile movements in share prices. U.S. Cellular and its subsidiaries do not make direct investments in publicly traded companies and all of these interests were acquired as a result of sales, trades or reorganizations of other assets. The investment in Vodafone Group Plc (“Vodafone”) resulted from certain dispositions of non-strategic cellular investments to or settlements with AirTouch Communications, Inc. (“AirTouch”), in exchange for stock of AirTouch, which was then acquired by Vodafone whereby U.S. Cellular received American Depositary Receipts representing Vodafone stock. The investment in Rural Cellular Corporation (“Rural Cellular”) is the result of a consolidation of several cellular partnerships in which U.S. Cellular subsidiaries held interests in Rural Cellular and the distribution of Rural Cellular stock in exchange for these interests.
U.S. Cellular and its subsidiaries have entered into a number of forward contracts related to the marketable equity securities that they hold. The risk management objective of the forward contracts is to hedge the value of the marketable equity securities from losses due to decreases in the market prices of the securities while retaining a share of gains from increases in the market prices of such securities. The downside risk is hedged at or above the accounting cost basis thereby eliminating the risk of an other-than-temporary loss being recorded on these contracted securities (See Note 10 – Revolving Credit Facility and Forward Contracts).
Information regarding U.S. Cellular’s marketable equity securities is summarized below.
|
|
|
March 31, |
|
December 31, 2004 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Marketable Equity Securities |
|
|
|
|
|
||
|
Vodafone Group Plc |
|
|
|
|
|
||
|
10,245,370 American Depositary Receipts |
|
$ |
272,117 |
|
$ |
280,518 |
|
|
Rural Cellular Corporation |
|
|
|
|
|
||
|
370,882 Common Shares |
|
1,962 |
|
2,311 |
|
||
|
Aggregate fair value |
|
274,079 |
|
282,829 |
|
||
|
Accounting cost, as adjusted |
|
160,161 |
|
160,161 |
|
||
|
Gross unrealized holding gains |
|
113,918 |
|
122,668 |
|
||
|
Deferred income tax (expense) |
|
(41,878 |
) |
(45,095 |
) |
||
|
Net unrealized holding gains |
|
72,040 |
|
77,573 |
|
||
|
Derivative instruments, net of tax |
|
(42,244 |
) |
(44,770 |
) |
||
|
Accumulated other comprehensive income |
|
$ |
29,796 |
|
$ |
32,803 |
|
6. Goodwill
U.S. Cellular has substantial amounts of goodwill as a result of the acquisition of wireless markets. The changes in goodwill for the three months ended March 31, 2005 and 2004 were as follows:
|
|
|
March 31, |
|
March 31, |
|
||
|
|
|
(As Restated) |
|
(As Restated) |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Balance, beginning of period |
|
$ |
445,212 |
|
$ |
449,550 |
|
|
Acquisitions |
|
— |
|
3,649 |
|
||
|
Other adjustments |
|
(10 |
) |
(655 |
) |
||
|
Balance, end of period |
|
$ |
445,202 |
|
$ |
452,544 |
|
17
7. Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a minority interest. These investments are accounted for using either the equity or cost method.
Significant investments in U.S. Cellular’s unconsolidated entities include the following:
|
|
|
March 31, |
|
March 31, |
|
|
|
|
|
|
|
|
|
Los Angeles SMSA Limited Partnership |
|
5.5 |
% |
5.5 |
% |
|
Raleigh-Durham MSA Limited Partnership (1) |
|
— |
|
8.0 |
% |
|
Midwest Wireless Communications, LLC |
|
15.2 |
% |
15.2 |
% |
|
North Carolina RSA 1 Partnership |
|
50.0 |
% |
50.0 |
% |
|
Oklahoma City SMSA Limited Partnership |
|
14.6 |
% |
14.6 |
% |
(1) As a result of an agreement with ALLTEL, U.S. Cellular’s investment in this partnership was sold to ALLTEL on November 30, 2004.
Based primarily on data furnished to U.S. Cellular by third parties, the following summarizes the combined results of operations of the wireless entities in which U.S. Cellular’s investments are accounted for by the equity method:
|
|
|
Three Months Ended |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(as restated) |
|
(as restated) |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Results of Operations |
|
|
|
|
|
||
|
Revenues |
|
$ |
780,000 |
|
$ |
699,000 |
|
|
Operating expenses |
|
542,000 |
|
493,000 |
|
||
|
Operating income |
|
238,000 |
|
206,000 |
|
||
|
Other income (expense), net |
|
8,000 |
|
1,000 |
|
||
|
Net Income |
|
$ |
246,000 |
|
$ |
207,000 |
|
8. Customer Lists
Customer lists, intangible assets from the acquisition of wireless properties, are being amortized based on average customer retention periods using the declining balance method. The acquisition of certain minority interests in the first quarter of 2004 added $12.9 million to the gross balance of customer lists. Amortization expense was $2.3 million and $3.1 million for the first quarter of 2005 and 2004, respectively. Amortization expense for the remainder of 2005 and for the years 2006-2009 is expected to be $5.9 million, $5.4 million, $3.6 million, $2.4 million and $1.6 million, respectively.
9. Property, Plant and Equipment
The capitalized costs of developing information systems, “system development costs,” and the related accumulated amortization has been reclassified from Deferred Charges to Property, Plant and Equipment on the Balance Sheet.
U.S. Cellular reviews the useful lives of its property, plant and equipment, including leasehold improvements, annually during the first quarter. The useful lives of all leasehold improvements range from three to ten years; for leasehold improvements related to cell site leases entered into in 2005, the useful life was changed to four years, compared to ten years on leasehold improvements related to cell site leases entered into prior to 2005. This change better approximates the shorter of the assets’ economic lives or the specific lease terms.
18
10. Revolving Credit Facilities and Forward Contracts
U.S. Cellular has a $700 million revolving credit facility available for general corporate purposes. At March 31, 2005, this credit facility had $564.8 million available for use, net of borrowings of $135.0 million and outstanding letters of credit of $0.2 million. This credit facility expires in December 2009. Borrowings bear interest at the London InterBank Offered Rate (“LIBOR”) plus a contractual spread based on U.S. Cellular’s credit rating. At March 31, 2005, the contractual spread was 30 basis points (the one-month LIBOR was 2.87% at March 31, 2005). Under certain circumstances, with less than two days’ notice of intent to borrow, interest on borrowings are at the prime rate less 50 basis points (the prime rate was 5.75% at March 31, 2005).
As disclosed in Note 1, U.S. Cellular and its audit committee concluded on November 9, 2005 to restate U.S. Cellular’s Consolidated Financial Statements as of and for the three years ended December 31, 2004 and for the first and second quarters of 2005. The restatement resulted in defaults under the revolving credit agreement and certain of the forward contracts. U.S. Cellular was not in violation of any covenants that require U.S. Cellular to maintain certain financial ratios. U.S. Cellular did not fail to make any scheduled payments under such credit agreement or forward contracts. U.S. Cellular received waivers from the lenders associated with the credit agreement and from the counterparty to such forward contracts, under which the lenders and the counterparty agreed to waive any defaults that may have occurred as a result of the restatement.
11. Asset Retirement Obligation
U.S. Cellular is subject to asset retirement obligations associated primarily with its cell sites, retail sites and office locations. Legal obligations include obligations to remediate leased land on which U.S. Cellular’s cell sites and switching offices are located. U.S. Cellular is also required to return leased retail store premises and office space to their pre-existing conditions. U.S. Cellular determined that it had an obligation to remove long-lived assets in its cell sites, retail sites and office locations as described by SFAS No. 143, “Accounting for Asset Retirement Obligations,” and has recorded a liability, which is included in Other deferred liabilities and credits in the Balance Sheet, and related asset retirement obligation accretion expense, which is reflected in Depreciation, amortization and accretion expense in the Statement of Operations.
The table below summarizes the change in asset retirement obligation during the three months ended March 31, 2005 and 2004.
|
|
|
March 31, |
|
March 31, |
|
||
|
|
|
(As Restated) |
|
(As Restated) |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Balance, beginning of period |
|
$ |
72,575 |
|
$ |
64,540 |
|
|
Additional liabilities accrued |
|
678 |
|
200 |
|
||
|
Accretion expense |
|
1,792 |
|
1,232 |
|
||
|
Disposition of assets (1) |
|
— |
|
(1,635 |
) |
||
|
Balance, end of period |
|
$ |
75,045 |
|
$ |
64,337 |
|
(1) This change in the asset retirement obligation relates to those obligations which were associated with the properties sold to AT&T Wireless in February 2004 and are no longer obligations of U.S. Cellular.
12. Intercompany Note Repayment
In August 2002, U.S. Cellular entered into a loan agreement with TDS (the “Intercompany Note”) under which it borrowed $105 million, which was used for the Chicago market purchase. The loan bore interest at an annual rate of 8.1%, payable quarterly, and was due in August 2008, with prepayments optional. The terms of the loan did not contain covenants that were more restrictive than those included in U.S. Cellular’s senior debt, except that, until December 19, 2003, the loan agreement provided that U.S. Cellular could not incur senior debt in an aggregate principal amount in excess of $325 million unless it obtained the consent of TDS as lender. U.S. Cellular’s Board of Directors, including independent directors, approved the terms of this loan and determined that such terms were fair to U.S. Cellular and all of its shareholders. On February 9, 2004, U.S. Cellular repaid this note in full, including $921,000 of accrued interest.
19
13. 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”). U.S. Cellular’s consolidated financial statements include such 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 U.S. Cellular in accordance with the respective partnership and LLC agreements. The termination dates of U.S. Cellular’s mandatorily redeemable minority interests range from 2042 to 2103.
The settlement value of U.S. Cellular’s mandatorily redeemable minority interests was estimated to be $136.1 million at March 31, 2005. 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 March 31, 2005, net of estimated liquidation costs. This amount is being disclosed pursuant to the requirements of FSP No. FAS 150-3; U.S. Cellular 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 March 31, 2005 was $38.7 million and is included in the Balance Sheet caption Minority interest in subsidiaries. The excess of the aggregate settlement value over the aggregate carrying value of the mandatorily redeemable minority interests of $97.4 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 U.S. Cellular’s 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. Changes in those factors and assumptions could result in a materially larger or smaller settlement amount.
14. Common Share Repurchase Program
U.S. Cellular’s primary repurchase program expired in December 2003. However, U.S. Cellular has an ongoing authorization to repurchase a limited amount of U.S. Cellular Common Shares on a quarterly basis, primarily for use in employee benefit plans. No U.S. Cellular Common Shares were repurchased in the first quarter of 2005 or 2004.
15. Acquisitions, Divestitures and Exchanges
First Quarter 2005 Activity
U.S. Cellular is a limited partner in Carroll Wireless, L.P. (“Carroll Wireless”), an entity which participated in the auction of wireless spectrum designated by the FCC as Auction 58. Carroll Wireless was qualified to bid on spectrum which was available only to companies that fall under the FCC definition of “designated entities,” which are small businesses that have a limited amount of assets. Carroll Wireless was a successful bidder for 17 licensed areas in Auction 58, which ended on February 15, 2005. The aggregate amount due to the FCC for the 17 licenses is $129.9 million, net of all bidding credits to which Carroll Wireless is entitled as a designated entity. These 17 licensed areas cover portions of 11 states and are in markets which are either adjacent to or overlap current U.S. Cellular licensed areas.
In March 2005, Carroll Wireless increased the amount on deposit with the FCC to $129.9 million, from $9 million initially deposited in 2004, and filed an application with the FCC seeking a grant of the subject licenses. U.S. Cellular expects that the FCC will grant the licenses in the second quarter of 2005. The $129.9 million deposited with the FCC is included in licenses on the Balance Sheet. U.S. Cellular consolidates Carroll Wireless and Carroll PCS, Inc., the general partner of Carroll Wireless, for financial reporting purposes, pursuant to the guidelines of Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”), as U.S. Cellular anticipates absorbing a majority of Carroll Wireless’ expected gains or losses.
20
Carroll Wireless is in the process of developing its long-term business and financing plans. As of March 31, 2005, U.S. Cellular has made capital contributions and advances to Carroll Wireless and/or its general partner of approximately $130 million. Pending finalization of Carroll Wireless’ permanent financing plan, and upon request by Carroll Wireless, U.S. Cellular may agree to make additional capital contributions and advances to Carroll Wireless and/or its general partner; however, U.S. Cellular has not entered into any commitments to provide Carroll Wireless with any financing beyond the $130 million it has provided to date.
In the first quarter of 2005, U.S. Cellular adjusted the gain on investments related to its sale to ALLTEL of certain wireless properties on November 30, 2004. The adjustment increased the total gain on investment from this transaction by $0.6 million due to a working capital adjustment which was finalized in the first quarter of 2005 related to the entities sold in which U.S. Cellular previously owned a noncontrolling investment interest.
First Quarter 2004 Activity
On February 18, 2004, U.S. Cellular completed the sale of certain of its wireless properties in southern Texas to AT&T Wireless for $96.9 million in cash, subject to a working capital adjustment. The U.S. Cellular markets sold to AT&T Wireless included wireless assets and customers in six cellular markets. An aggregate loss of $21.3 million (including a $22.0 million estimate of the loss on assets held for sale in the fourth quarter of 2003 and subsequent $0.1 million and $0.6 million reductions of the loss in the first and second quarters of 2004, respectively) was recorded as a loss on assets held for sale (included in operating expenses), representing the difference between the carrying value of the markets sold to AT&T Wireless and the cash received in the transaction. The results of operations of the markets sold to AT&T Wireless were included in results of operations through February 17, 2004.
In the first quarter of 2004, U.S. Cellular purchased certain minority interests in several wireless markets in which it already owned a controlling interest for $40.4 million in cash. These acquisitions increased investment in licenses, goodwill and customer lists by $2.7 million, $3.6 million and $12.9 million, respectively in the first quarter of 2004.
16. Accumulated Other Comprehensive Income
The cumulative balances of unrealized gains and (losses) on securities and derivative instruments and related income tax effects included in Accumulated other comprehensive income are as follows:
|
|
|
Three Months Ended |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Marketable Equity Securities |
|
|
|
|
|
||
|
Balance, beginning of period |
|
$ |
77,573 |
|
$ |
63,307 |
|
|
Add (deduct): |
|
|
|
|
|
||
|
Unrealized gains (losses) on marketable equity securities |
|
(8,750 |
) |
(11,786 |
) |
||
|
Income tax (expense) benefit |
|
3,217 |
|
4,327 |
|
||
|
Net change in unrealized gains (losses) on marketable equity securities in comprehensive income |
|
(5,533 |
) |
(7,459 |
) |
||
|
Balance, end of period |
|
$ |
72,040 |
|
$ |
55,848 |
|
|
|
|
|
|
|
|
||
|
Derivative Instruments |
|
|
|
|
|
||
|
Balance, beginning of period |
|
$ |
(44,770 |
) |
$ |
(35,275 |
) |
|
Add (deduct): |
|
|
|
|
|
||
|
Unrealized gain on derivative instruments |
|
3,996 |
|
12,294 |
|
||
|
Income tax (expense) |
|
(1,470 |
) |
(4,513 |
) |
||
|
Net change in unrealized gains (losses) on derivative instruments included in comprehensive income |
|
2,526 |
|
7,781 |
|
||
|
Balance, end of period |
|
$ |
(42,244 |
) |
$ |
(27,494 |
) |
|
|
|
|
|
|
|
||
|
Accumulated Other Comprehensive Income |
|
|
|
|
|
||
|
Balance, beginning of period |
|
$ |
32,803 |
|
$ |
28,032 |
|
|
Net change in marketable equity securities |
|
(5,533 |
) |
(7,459 |
) |
||
|
Net change in derivative instruments |
|
2,526 |
|
7,781 |
|
||
|
Net change in unrealized gains (losses) included in comprehensive income |
|
(3,007 |
) |
322 |
|
||
|
Balance, end of period |
|
$ |
29,796 |
|
$ |
28,354 |
|
21
|
|
|
Three Months Ended |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(As Restated) |
|
(As Restated) |
|
||
|
|
|
(Dollars in thousands) |
|
||||
|
Comprehensive Income |
|
|
|
|
|
||
|
Net Income |
|
$ |
19,565 |
|
$ |
9,404 |
|
|
Net change in unrealized gains (losses) on marketable equity securities and derivative instruments |
|
(3,007 |
) |
322 |
|
||
|
|
|
$ |
16,558 |
|
$ |
9,726 |
|
17. Commitments and Contingencies
Indemnifications
U.S. Cellular enters into agreements in the normal course of business that provide for indemnification of counterparties. These include certain asset sales and financings with other parties. The terms of the indemnifications vary by agreement. The events or circumstances that would require U.S. Cellular to perform under these indemnities are transaction specific; however, these agreements may require U.S. Cellular to indemnify the counterparty for costs and losses incurred from litigation or claims arising from the underlying transaction. U.S. Cellular 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, U.S. Cellular has not made any significant indemnification payments under such agreements.
Legal Proceedings
U.S. Cellular is involved in a number of legal proceedings before the FCC and various state and federal courts. If U.S. Cellular believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. The assessment of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of the accruals and related financial statement disclosure. The ultimate settlement of proceedings may differ materially from amounts accrued in the financial statements.
22
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
United States Cellular Corporation (“U.S. Cellular” - AMEX symbol: USM) owns, operates and invests in wireless markets throughout the United States. U.S. Cellular is an 81.7%-owned subsidiary of Telephone and Data Systems, Inc. (“TDS”).
The following discussion and analysis should be read in conjunction with U.S. Cellular’s interim consolidated financial statements and footnotes included herein, and with its audited consolidated financial statements and footnotes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K/A for the year ended December 31, 2004.
Restatement
U.S. Cellular and its audit committee concluded on November 9, 2005, that U.S. Cellular would amend its Annual Report on Form 10-K for the year ended December 31, 2004 to restate its financial statements and financial information for each of the three years in the period ended December 31, 2004, including quarterly information for 2004 and 2003, and certain selected financial data for the years 2001 and 2000. U.S. Cellular and its audit committee also concluded that U.S. Cellular would amend its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2005 and June 30, 2005 to restate the financial statements and financial information included therewith.
On November 11, 2005, U.S. Cellular announced that the staff of the Midwest Regional Office of the Securities and Exchange Commission (“SEC”) had advised U.S. Cellular that it was conducting an investigation into the restatement of financial statements announced by U.S. Cellular on November 10, 2005. U.S. Cellular intends to cooperate fully with the SEC staff in this investigation.
The restatement adjustments principally correct items that were recorded in the financial statements previously but not in the proper periods and certain income tax errors. Correction of the errors, with the exception of income taxes discussed below, individually did not have a material impact on income before income taxes and minority interest, net income or earnings per share; however, when aggregated, the items were considered to be material. The restatement adjustments to correct income tax accounting had a material impact individually on net income and earnings per share in prior periods. The restated financial statements are adjusted to record certain obligations in the periods such obligations were incurred and, correct the timing of the reversal of certain tax liabilities and record revenues in the periods such revenues were earned. The adjustments are described below.
• Income taxes – U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. In the restatement, U.S. Cellular corrected its income tax expense, federal and state taxes payable, liabilities accrued for tax contingencies, deferred income tax assets and liabilities and related disclosures for the first quarter of 2005 and the years ended December 31, 2004, 2003 and 2002 for items identified based on a reconciliation of income tax accounts. The reconciliation compared amounts used for financial reporting purposes to the amounts used in the preparation of the income tax returns, and took into consideration the results of federal and state income tax audits and the resulting book/tax basis differences which generate deferred tax assets and liabilities. In addition, a review of the state deferred income tax rates used to establish deferred income tax assets and liabilities identified errors in the state income tax rate used which resulted in adjustments to correct the amount of deferred income tax assets and liabilities recorded for temporary differences between the timing of when certain transactions are recognized for financial and income tax reporting.
23
• Federal universal service fund (“USF”) contributions – In 2004 and 2003, Universal Service Administrative Company (“USAC”) billings to U.S. Cellular for USF contributions were based on estimated revenues reported to USAC by U.S. Cellular in accordance with USAC’s established procedures. However, U.S. Cellular’s actual liability for USF is based upon its actual revenues and USAC’s established procedures provide a method to adjust U.S. Cellular’s estimated liability to its actual liability. In the first six months of 2005 and the full years of 2004 and 2003, U.S. Cellular’s actual revenues exceeded estimated revenues reported to USAC on an interim basis. As a result, additional amounts were due to USAC in 2005 and 2004 based on U.S. Cellular’s annual report filings. Such additional amounts were incorrectly expensed when the invoices were received from USAC rather than at the time the obligation was incurred. In the third quarter of 2005, U.S. Cellular corrected its accounting for USF contributions to record expense reflecting the estimated obligation incurred based on actual revenues reported during the period. Accordingly, in the restatement, U.S. Cellular has adjusted previously reported USF contributions expense to reflect the estimated liability incurred during the period.
• Customer contract termination fees – In the fourth quarter of 2003, U.S. Cellular revised its business practices related to the billing of contract termination fees charged when a customer disconnected service prior to the end of the customer’s contract. This change resulted in an increase in amounts billed to customers and revenues even though a high percentage of the amounts billed were deemed uncollectible. At the time of the change in business practice, U.S. Cellular incorrectly recorded revenues related to such fees at the time of billing, as generally accepted accounting principles (“GAAP”) would preclude revenue recognition if the receivable is not reasonably assured of collection. In the first quarter of 2005, U.S. Cellular corrected its accounting to record revenues related to such fees only upon collection, in recognition of the fact that the collectibility of the revenues was not reasonably assured at the time of billing. In the restatement, U.S. Cellular made adjustments to properly reflect revenues for such fees upon collection beginning on October 1, 2003.
• Leases and contracts – U.S. Cellular has entered into certain operating leases (as both lessee and lessor) that provide for specific scheduled increases in payments over the lease term. In the third quarter of 2004, U.S. Cellular made adjustments for the cumulative effect which were not considered to be material to either that quarter or to prior periods to correct its accounting and to recognize revenues and expenses under such agreements on a straight-line basis over the term of the lease in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,” as amended, and related pronouncements. In addition, the accounting for certain other long-term contracts, for which a cumulative effect adjustment was made in the first quarter of 2005, was corrected to recognize expenses in the appropriate periods. The restatement adjustments reverse the cumulative amounts previously recorded in the third quarter of 2004 and the first quarter of 2005, and properly record such revenues and expenses on a straight-line basis in the appropriate periods.
• Promotion rebates – From time to time, U.S. Cellular’s sales promotions include rebates on sales of handsets to customers. In such cases, U.S. Cellular reduces revenues and records a liability at the time of sale reflecting an estimate of rebates to be paid under the promotion. Previously, the accrued liability was not adjusted on a timely basis upon expiration of the promotion to reflect the actual amount of rebates paid based upon information available at the date the financial statements were issued. In the restatement, U.S. Cellular has corrected revenues and accrued liabilities to reflect the impacts associated with promotion rebates in the appropriate periods.
• Operations of consolidated partnerships managed by a third party – Historically, U.S. Cellular recorded the results of operations of certain consolidated partnerships managed by a third party on an estimated basis, and adjusted such estimated results to the actual results upon receipt of financial statements in the following quarter. However, GAAP requires that the actual amounts be used. In the restatement, U.S. Cellular has corrected its financial statements to recognize results of operations in the appropriate period based on the partnerships’ actual results of operations reported for such periods.
24
• Investment income from entities accounted for by the equity method – Historically, U.S. Cellular recorded an estimate each quarter of its proportionate share of net income (loss) from certain entities accounted for by the equity method, and adjusted such estimate to the actual share of net income (loss) upon receipt of financial statements in the following quarter. However, GAAP requires that the actual amounts be used. In the restatement, U.S. Cellular has corrected its financial statements to recognize investment income in the appropriate period based on the entities’ actual net income (loss) reported for such periods.
• Consolidated statements of cash flows – In the restatement, the classification of cash distributions received from unconsolidated entities has been corrected to properly reflect cash received, which represents a return on investment in the unconsolidated entities, as cash flows from operating activities; previously, the cash received on such investments was classified as cash flows from investing activities. Also, the classification of certain noncash stock-based compensation expense has been corrected to properly reflect such noncash expense as an adjustment to cash flows from operating activities; previously, such expense was classified as cash flows from financing activities.
• Other items – In addition to the adjustments described above, U.S. Cellular recorded a number of other adjustments to correct and record revenues and expenses in the periods in which such revenues and expenses were earned or incurred. These adjustments were not significant, either individually or in aggregate.
The table below summarizes the impact on income before income taxes and minority interest as a result of the restatement.
|
|
|
Three Months Ended |
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
(Increase (decrease) |
|
||||
|
Income Before Income Taxes and Minority Interest, as previously reported |
|
$ |
32,205 |
|
$ |
23,005 |
|
|
Federal universal service fund contributions |
|
(1,431 |
) |
1,591 |
|
||
|
Customer contract termination fees |
|
3,468 |
|
(151 |
) |
||
|
Leases and contracts |
|
2,238 |
|
(686 |
) |
||
|
Promotion rebates |
|
(446 |
) |
— |
|
||
|
Operations of consolidated partnerships managed by a third party |
|
(454 |
) |
270 |
|
||
|
Investment income from entities accounted for by the equity method |
|
522 |
|
(504 |
) |
||
|
Other items |
|
(69 |
) |
(281 |
) |
||
|
Total adjustment |
|
3,828 |
|
239 |
|
||
|
Income Before Income Taxes and Minority Interest, as restated |
|
$ |
36,033 |
|
$ |
23,244 |
|
The table below summarizes the impact on net income and earnings per share as a result of the restatement.
|
|
|
Three Months Ended |
|
||||||||||
|
|
|
2005 |
|
2004 |
|
||||||||
|
|
|
Net Income |
|
| |||||||||