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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-9712
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UNITED STATES CELLULAR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 62-1147325
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 399-8900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 30, 1998
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Common Shares, $1 par value 54,376,700 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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<PAGE>
UNITED STATES CELLULAR CORPORATION
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3RD QUARTER REPORT ON FORM 10-Q
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INDEX
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Page(s)
No. -------
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Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-16
Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 1998 and 1997 17
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 18
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 19-20
Notes to Consolidated Financial Statements 21-23
Part II. Other Information 24
Signatures 25
<PAGE>
PART I. FINANCIAL INFORMATION
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS
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Nine Months Ended 9/30/98 Compared to Nine Months Ended 9/30/97
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United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. USM is an
81.0%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
USM owned either majority or minority cellular interests in 184 markets at
September 30, 1998, representing 26,126,000 population equivalents ("pops"). USM
included the operations of 136 majority-owned and managed cellular markets,
representing 23.0 million pops, in consolidated operations ("consolidated
markets") as of September 30, 1998. Minority interests in 39 markets,
representing 2.6 million pops, were accounted for using the equity method and
were included in investment income at that date. All other interests were
accounted for using the cost method. Following is a table of summarized
operating data for USM's consolidated operations.
<TABLE>
<CAPTION>
For the Nine Months Ended or At September 30,
---------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Total market population (in thousands) (1) 24,136 21,844
Customers 2,018,000 1,357,000
Market penetration 8.36% 6.21%
Markets in operation 136 132
Cell sites in service 1,958 1,556
Average monthly revenue per customer $ 48.87 $ 56.58
Churn rate per month 1.8% 1.9%
Marketing cost per gross customer addition $ 314 $ 328 (2)
<FN>
(1) Calculated using the respective population estimates for each year (Claritas
for 1998, Donnelley for 1997).
(2) Recomputed to show the effect of change in current year presentation of
certain expenses.
</FN>
</TABLE>
The Company's operating income for the first nine months of 1998, which includes
100% of the revenues and expenses of its consolidated markets plus its corporate
office operations, primarily reflects improvement in the Company's overall
operations compared to the first nine months of 1997. The improvement resulted
from growth in the Company's customer base and revenues coupled with increasing
economies of scale. Operating revenues, driven by increases in customers served,
rose $215.1 million, or 34%. Cash operating expenses rose $126.7 million, or
30%. Operating cash flow (operating income before minority share plus
depreciation and amortization expense) increased $88.4 million, or 43%.
Depreciation and amortization expense increased $53.1 million, or 56%. Operating
income before minority share increased $35.3 million, or 32%.
2
<PAGE>
The Company's operating results were also impacted by the effects of
acquisitions and divestitures, primarily those related to the exchange of
markets with BellSouth Corporation ("BellSouth") in the fourth quarter of 1997.
In that transaction, the Company received operating markets serving a total
population of over four million in exchange for operating markets serving a
total population of approximately two million. The Company also divested certain
minority interests and paid cash to BellSouth to complete the exchange. The
operating markets acquired in that transaction, net of the operating markets
divested, generated increases in the Company's overall revenues, operating
expenses, operating cash flow and operating income. These increases were
primarily due to the increase in the Company's customer base as a result of the
exchange.
However, the results of certain of the Company's existing markets which are
adjacent to the markets acquired were negatively impacted by the effects of the
exchange, when viewed on a standalone basis. Specifically, inbound roaming
revenue and, to a lesser extent, operating cash flow suffered the most negative
impact in these markets. This impact was primarily due to the change in the
nature and pricing of transactions in which customers from the acquired markets
use their wireless phones when roaming in the Company's existing markets. Prior
to the exchange, the Company recorded inbound roaming revenue at premium rates;
after the exchange, the Company recorded outbound roaming revenue, which is
reported in the financial statements as an offset to system operations expense,
at less than premium rates.
Overall, the Company's revenues, operating cash flow and operating income were
positively impacted by the effects of the BellSouth exchange. However, as a
result of the Company's divestiture of several minority interests in the
exchange, investment income was reduced by the exchange, by an amount that was
less than the exchange's impact on operating income. In total, the BellSouth
exchange has had a slightly positive effect on net income and earnings per share
to date.
Investment and other income increased $149.2 million to $221.8 million, due
primarily to an increase of $176.3 million in gains on the sales of cellular
interests in 1998. The increase in gains was partially offset by a $29.1
million, or 48%, reduction in investment income, which was negatively affected
by the exchange transaction with BellSouth in 1997 and by the sale of minority
interests to AirTouch Communications, Inc. ("AirTouch") in 1998. Interest
expense increased $9.5 million, or 47%, in 1998, primarily due to an increase in
debt balances resulting from the Company's issuance of 7.25% unsecured notes
("Notes") in August 1997. Income tax expense increased $69.3 million to $135.4
million in 1998, primarily resulting from increased gains on the sales of
cellular interests.
3
<PAGE>
Net income totaled $197.9 million in 1998, an increase of $111.6 million from
1997. Both net income and earnings per share in 1998 reflect an increase in
gains on the sales of cellular interests and improved operating results,
partially offset by reduced investment income and increased interest expense. A
summary of the after-tax effects of these gains on net income and earnings per
share-diluted is shown below.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
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(Dollars in thousands, except per share amounts)
<S> <C> <C>
Net income before after-tax effects of gains $ 81,865 $ 79,263
Add: After-tax effects of gains 116,081 7,119
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Net income as reported $ 197,946 $ 86,382
=========== ==========
Earnings per share before after-tax
effects of gains $ .94 $ .92
Add: After-tax effects of gains 1.33 .08
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Earnings per share-diluted $ 2.27 $ 1.00
=========== ==========
</TABLE>
Operating Revenues
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Operating revenues totaled $849.2 million in 1998, up $215.1 million, or 34%,
over 1997. Service revenues primarily consist of: (I) charges for access,
airtime and value-added services provided to the Company's local retail
customers who use the local systems operated by the Company ("local retail");
(ii) charges to customers of other systems who use the Company's cellular
systems when roaming ("inbound roaming"); and (iii) charges for long-distance
calls made on the Company's systems. Service revenues totaled $821.2 million in
1998, up $203.0 million, or 33%, over 1997. The increase was primarily due to
the growing number of local retail customers.
Average monthly service revenue per customer declined 14% to $48.87 in 1998 from
$56.58 in 1997. The decrease in average monthly service revenue per customer
resulted from a decrease in average revenue per minute of use from both local
retail customers and inbound roamers. The addition of the markets acquired in
the exchange with BellSouth Corporation ("BellSouth") in the fourth quarter of
1997 contributed to the decline in both local retail revenue per customer and
inbound roaming revenue per customer. The acquired markets produce a lower
amount of local retail revenue per customer, and the addition of those markets
caused the elimination of certain inbound roaming revenues between the Company's
existing markets and the acquired markets. Also contributing to the overall
decline in average monthly service revenue per customer was slower growth in
inbound roaming minutes of use when compared to the growth in the Company's
customer base.
Competitive pressures and the Company's increasing use of pricing and other
incentive programs that encourage weekend and off-peak usage at reduced rates,
in order to stimulate overall usage, resulted in a decrease in average local
retail revenue per minute of use during 1998. The Company's average inbound
roaming revenue per minute of use also decreased during 1998, in line with the
ongoing trend toward reduced per minute prices for roaming negotiated between
the Company and other cellular operators. Also, the Company believes that its
customer base is growing faster than that of the cellular industry as a whole,
which contributes to the dilution of inbound roaming revenue per customer.
Inbound roaming minutes
4
<PAGE>
of use have been growing at a slower rate than the Company's customer base (41%
growth in inbound roaming minutes in 1998 compared to 49% growth in the
Company's customer base).
Local retail revenue increased $161.6 million, or 40%, in 1998. Growth in the
Company's customer base was the primary reason for the increase in local retail
revenue. The number of customers increased 49% to 2,018,000 at September 30,
1998 from 1,357,000 at September 30, 1997. Management anticipates that growth in
the Company's customer base will be slower in the future, primarily as a result
of an increase in the number of competitors in its markets.
Average monthly local retail revenue per customer declined 9% to $33.87 in 1998
from $37.30 in 1997. Monthly local retail minutes of use per customer decreased
1% to 104 in 1998 from 105 in 1997. Average revenue per minute of use decreased
as a result of the pricing and other incentive programs stated previously,
totaling $.33 in 1998 compared to $.36 in 1997. The decrease in average monthly
local retail revenue per customer is part of an industry-wide trend and is
believed to be related to the tendency of the early customers in a market to be
the heaviest users during peak business hours. It also reflects the increasing
level of competition for wireless services and the Company's and the industry's
continued penetration of the consumer market, which tends to include fewer peak
business hour-usage customers.
Inbound roaming revenue increased $11.2 million, or 7%, in 1998. The growth in
inbound roaming revenue is affected by the exchange of markets with BellSouth.
Prior to the BellSouth exchange, revenue from BellSouth customers from markets
included in the exchange who were roaming in the Company's service areas was
recorded as inbound roaming revenue. Subsequent to the exchange, these roaming
transactions are recorded as outbound roaming revenue, which is reported as an
offset to system operations expense. Also affecting the growth in inbound
roaming revenue was an increase in roaming minutes used on the Company's systems
and a decrease in revenue per minute. Although the number of minutes used by
customers from other wireless systems when roaming in the Company's service
areas increased by 41%, this was mostly offset by the decrease in average
revenue per minute due to the downward trend in negotiated rates. Average
inbound roaming revenue per minute totaled $.67 in 1998 and $.86 in 1997.
Monthly inbound roaming revenue per Company customer averaged $10.40 in 1998 and
$14.97 in 1997. The decrease in monthly inbound roaming revenue per Company
customer is related to both the decrease in inbound roaming revenue per minute
and the faster increase in the Company's customer base as compared to the growth
in inbound roaming minutes of use.
Long-distance revenue increased $28.5 million, or 62%, in 1998 as the volume of
long-distance calls billed by the Company increased. A substantial portion of
this increase is due to the increase in volume of long-distance calls in both
the markets acquired in the BellSouth exchange and the Company's existing
markets adjacent to the acquired markets. The increased volume was driven by the
larger local service areas being offered to these customers. Monthly
long-distance revenue per customer averaged $4.42 in 1998 and $4.19 in 1997.
Equipment sales revenues increased $12.1 million, or 76%, in 1998. The increase
in equipment sales revenues reflects the 24% increase in the number of gross
customer activations, to 614,000 in 1998 from 494,000 in 1997, plus an increase
in the volume of accessories sold. Most of the gross customer activations were
produced by the Company's direct and retail distribution channels; activations
from these channels usually generate sales of cellular telephone units. The
increase in the volume of accessories sold reflects an increased emphasis on the
sale of accessories at retail prices, primarily in the Company's retail
locations.
5
<PAGE>
Operating Expenses
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Operating expenses totaled $703.4 million in 1998, up $179.8 million, or 34%,
over 1997. Beginning on January 1, 1998, the Company changed its income
statement presentation of certain corporate marketing department expenses from
general and administrative expenses to marketing and selling expenses, which the
Company believes is the more appropriate classification for these expenses.
Amounts have been reclassified for previous years, including the 1997
information provided throughout this Form 10-Q. The effect of such
reclassification is not material to either marketing and selling expenses or
general and administrative expenses, and does not have any effect on operating
income or net income.
System operations expenses increased $33.6 million, or 31%, in 1998 as a result
of increases in customer usage expenses and costs associated with serving the
Company's increased number of customers and the growing number of cell sites
within the Company's systems. In total, system operations costs are expected to
continue to increase as the number of customers using and the number of cell
sites within the Company's systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for the Company's customers' use of their facilities as well as for
the Company's inbound roaming traffic on these facilities. Also included are
costs related to local interconnection to the landline network, toll charges and
expenses incurred by the Company when its customers use systems other than their
local systems ("outbound roaming"). These expenses are offset somewhat by
amounts the Company bills to its customers for outbound roaming.
Customer usage expenses increased $26.8 million, or 38%, in 1998. The increase
in 1998 is primarily due to the 75% increase in net outbound roaming expense,
which has resulted from the Company offering its customers increasingly larger
service footprints in which their calls are billed at local rates. In an
increasing number of cases, these service areas include other operators' service
areas. The Company pays roaming rates to the other carriers for calls the
Company's customers make in these areas, while charging those customers a local
rate which is usually lower than the roaming rate. Also contributing to the
increase in 1998 was a 13% rise in costs related to the increase in minutes used
on the Company's systems, partially offset by a 33% reduction in costs related
to fraudulent use of the Company's customers' cellular telephone numbers. The
Company continues to implement procedures in its markets to combat this fraud,
which is primarily related to roaming usage. Customer usage expenses represented
12% of service revenues in 1998 and 11% in 1997.
Maintenance, utility and cell site expenses increased $6.8 million, or 17%, in
1998. The increase primarily reflects a 26% increase in the number of cell sites
in the Company's systems, to 1,958 in 1998 from 1,556 in 1997. Monthly
maintenance, utility and cell site expenses totaled $2,788 and $3,058 per
average cell site in 1998 and 1997, respectively.
Marketing and selling expenses increased $34.3 million, or 28%, in 1998.
Marketing and selling expenses primarily consist of salaries, commissions and
expenses of field sales and retail personnel and offices; agent expenses;
corporate marketing department salaries and expenses; local advertising; and
public relations expenses. The increase was primarily due to a 24% rise in the
number of gross customer activations, to 614,000 in 1998 from 494,000 in 1997.
Marketing cost per gross customer activation, which includes marketing and
selling expenses and losses on equipment sales, decreased 4% to $314 in 1998
from $328 in 1997. The decrease in cost per gross customer activation has been
slowed somewhat by additional advertising expenses
6
<PAGE>
incurred to promote the Company's brand and to distinguish the Company's service
offerings from those of other competitors.
Cost of equipment sold increased $8.4 million, or 15%, in 1998. The increase
reflects the growth in unit sales related to the 24% increase in gross customer
activations. Also contributing to the increase was a greater volume of sales of
accessories.
General and administrative expenses increased $50.4 million, or 36%, in 1998.
These expenses include the costs of operating the Company's local business
offices and its corporate expenses other than the corporate engineering and
marketing departments. The increase includes the effects of increases in
expenses required to serve the growing customer base in existing markets and an
expansion of both local administrative office and corporate staff, necessitated
by growth in the Company's business. Employee-related expenses increased $19.3
million, or 28%, in 1998, primarily due to increases in the number of customer
service and administrative employees. The Company is using an ongoing clustering
strategy to combine local and customer service operations wherever feasible in
order to gain operational efficiencies and reduce its per unit administrative
expenses. Monthly general and administrative expenses per customer decreased 12%
to $11.41 in 1998 from $12.94 in 1997.
Operating cash flow increased $88.4 million, or 43%, to $293.5 million in 1998.
The improvement was primarily due to substantial growth in customers and service
revenues, the effects of improved operational efficiencies on cash operating
expenses and the effect of net acquisitions. Operating cash flow margins (as a
percent of service revenues) were 35.7% in 1998 and 33.2% in 1997.
Depreciation expense increased $48.9 million, or 71%, in 1998. The increase
reflects rising average fixed asset balances, which increased 34% in 1998, plus
a reduction in useful lives of certain assets beginning in 1998 which increased
depreciation expense by $13.6 million. Increased fixed asset balances resulted
from the increase in cell sites built to improve coverage and capacity in the
Company's markets and from the acquisition of markets from BellSouth in 1997.
Amortization of intangibles increased $4.2 million, or 16%, in 1998. The
increase primarily reflects a 17% increase in investment in licenses, primarily
related to the BellSouth transaction.
Operating Income before Minority Share
- --------------------------------------
Operating income before minority share totaled $145.8 million in 1998, a 32%
increase over the $110.5 million generated in 1997. The operating income margin
was 17.8% in 1998 and 17.9% in 1997. The improvement in operating income
reflects increased revenues resulting from growth in the number of customers
served by the Company's systems and the effect of continued operational
efficiencies on total operating expenses. The slight decline in operating income
margins reflects an increase in depreciation expense in 1998.
The Company expects service revenues to continue to grow during the remainder of
1998 and in 1999; however, management anticipates that average monthly revenue
per customer will continue to decrease as local retail and inbound roaming
revenue per minute of use decline and as the Company further penetrates the
consumer market. Additionally, the Company expects expenses to increase during
the remainder of 1998 and in 1999 as it incurs costs associated with both
customer growth and cell sites added.
7
<PAGE>
Management believes there exists a seasonality in both service revenues, which
tend to increase more slowly in the first and fourth quarters, and operating
expenses, which tend to be higher in the fourth quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter. Additionally, competitors licensed to provide
personal communications services ("PCS") have initiated service in many of the
Company's markets over the past two years. The Company expects PCS operators to
complete initial deployment of PCS in portions of all of the Company's clusters
by the end of 1998. The Company has increased its advertising, particularly
brand advertising, in 1997 and 1998 to promote the United States Cellular(C)
brand and distinguish the Company's service from other wireless communications
providers. The Company's management continues to monitor other wireless
communications providers' strategies to determine how additional competition is
affecting the Company's results. While the effects of additional wireless
competition have slowed customer growth in certain of the Company's markets, the
overall effect on the Company's total customer growth to date has not been
material. However, management anticipates that customer growth will be lower in
the future, primarily as a result of the increase in the number of competitors
in its markets.
Investment and Other Income
- ---------------------------
Investment and other income totaled $221.8 million in 1998 and $72.6 million in
1997. Gain on sale of cellular interests totaled $189.8 million in 1998,
reflecting gains recorded on the sales of the Company's investment interests in
twelve markets, and also related to cash received from TDS pursuant to an
agreement between the Company and TDS. Gains totaling $13.4 million were
recorded in 1997 from sales of the Company's majority interest in one market
partition and two other minority interests. See "Financial Resources and
Liquidity - Acquisitions and Divestitures" for further discussion of these
transactions.
Investment income was $31.4 million in 1998 compared to $60.5 million in 1997, a
48% decrease. Investment income primarily represents the Company's share of net
income from the markets managed by others that are accounted for by the equity
method. Investment income in 1998 was negatively impacted by the completion of
the exchange transaction with BellSouth in 1997 and the divestitures of certain
minority interests to AirTouch Communications ("AirTouch") in the first half of
1998. See "Financial Resources and Liquidity - Acquisitions and Divestitures"
for further discussion of these transactions.
Interest and Income Taxes
- -------------------------
Interest expense totaled $29.8 million in 1998 compared to $20.3 million in
1997, a 47% increase. Interest expense in 1998 is primarily related to Liquid
Yield Option Notes ("LYONs") ($12.3 million); the Company's 7.25% Notes (the
"Notes") issued during the third quarter of 1997 ($13.9 million); and the
Company's revolving credit facility with a series of banks ("Revolving Credit
Facility") ($1.0 million). Interest expense in 1997 was primarily related to
LYONs ($11.5 million); borrowings under vendor financing agreements ($4.7
million); borrowings under the Revolving Credit Agreement with TDS ($1.9
million); and the Notes ($1.8 million).
In August 1997, the Company sold $250 million principal amount of 7.25% Notes
under a shelf registration statement, priced to yield 7.33% to maturity. The
Notes are unsecured and become due in August 2007. Interest on the Notes is
payable semi-annually on February 15 and August 15 of each year, commencing
February 15, 1998. The Notes will be redeemable, in whole or in part, at the
option of the Company at any time after August 2004. All borrowings under the
8
<PAGE>
vendor financing agreements and under the Revolving Credit Agreement with TDS
were repaid in August 1997 with a portion of the proceeds from the Notes
offering.
The LYONs are zero coupon convertible debentures which accrete interest at 6%
annually, but do not require current cash payments of interest. All accreted
interest is added to the outstanding principal balance on June 15 and December
15 of each year.
The Revolving Credit Facility is a seven-year facility which was established in
1997 to replace the Company's Revolving Credit Agreement with TDS as its primary
short-term borrowing facility. Borrowings under this facility accrue interest at
the London InterBank Offered Rate ("LIBOR") plus 26.5 basis points (for a rate
of 5.6% at September 30, 1998). Interest payments are due quarterly; any
borrowings made under the facility are short-term in nature and automatically
renew until they are repaid. Any borrowings outstanding in August 2004, the
termination date of the Revolving Credit Facility, are due and payable at that
time along with any accrued interest. The Company borrowed and repaid amounts
totaling $47 million during 1998.
Income tax expense was $135.4 million in 1998 and $66.1 million in 1997. In 1998
and 1997, $73.7 million and $6.3 million of income tax expense, respectively,
related to the gains on sales of cellular interests. The effective tax rates
were 41% in 1998 and 43% in 1997. The decrease in 1998's effective tax rate is
primarily related to lower tax rates applied to gains on sales of cellular
interests in 1998 compared to 1997.
TDS and the Company are parties to a Tax Allocation Agreement, pursuant to which
the Company is included in a consolidated federal income tax return with other
members of the TDS consolidated group. For financial reporting purposes, the
Company computes federal income taxes as if it were filing a separate return as
its own affiliated group and was not included in the TDS group.
Net Income
- ----------
Net income totaled $197.9 million in 1998 and $86.4 million in 1997. Earnings
per share-diluted was $2.27 in 1998 and $1.00 in 1997. Net income and earnings
per share for 1998 and 1997 included significant after-tax gains on the sales of
cellular interests, representing $116.1 million and $1.33 per share in 1998 and
$7.1 million and $0.08 per share in 1997, respectively.
Three Months Ended 9/30/98 Compared to Three Months Ended 9/30/97
- -----------------------------------------------------------------
Operating revenues totaled $313.9 million in the third quarter of 1998, up $82.0
million, or 35%, over 1997. Average monthly service revenue per customer
decreased 11% to $51.40 in the third quarter of 1998 compared to $57.56 in the
same period of 1997 for reasons generally the same as in the first nine months
of 1998.
Revenues from local customers' usage of the Company's systems increased $53.6
million, or 36%, in 1998 primarily due to the increased number of customers
served. Average monthly local retail minutes of use per customer totaled 112 in
the third quarter of 1998 compared to 105 in 1997. Also, as the number of
customers and amount of revenue earned continued to grow, average revenue per
minute of use continued to decline. As a result, average monthly local retail
revenue per customer declined 9% to $33.97 in the third quarter of 1998 compared
to $37.48 in 1997.
9
<PAGE>
Inbound roaming revenue increased $10.9 million, or 18%, in 1998. Monthly
inbound roaming revenue per customer averaged $12.16 in 1998 compared to $15.52
in 1997.
Long-distance revenue increased $12.7 million, or 72%, in 1998 as the volume of
long-distance calls billed by the Company increased. Monthly long-distance
revenue per customer averaged $5.11 in 1998 and $4.47 in 1997.
Equipment sales revenue increased $4.3 million, or 75%, in 1998, primarily due
to a 22% increase in gross customer activations and an increase in the volume of
accessories sold.
Operating expenses totaled $251.4 million in the third quarter of 1998, up $64.4
million, or 34%, over 1997.
System operations expenses increased $13.5 million, or 34%, in 1998 as a result
of increased customer usage expenses and costs associated with maintaining 26%
more cell sites than in 1997. Customer usage expenses were $37.2 million in 1998
compared to $26.6 million in 1997, primarily due to an $8.2 million increase in
net outbound roaming expenses; maintenance, utility and cell site expenses were
$16.6 million in 1998 compared to $13.7 million in 1997.
Marketing and selling expenses increased $11.8 million, or 27%, in 1998. The
increase was primarily due to a 22% increase in the number of gross customer
activations (excluding acquisitions and divestitures) to 211,000 in 1998 from
173,000 in 1997. Cost per gross customer activation was $324 in 1998 and $334 in
1997.
Cost of equipment sold increased $3.1 million, or 16%, in 1998. The increase
reflects a rise in the number of cellular telephones sold in 1998.
General and administrative expenses increased $17.0 million, or 34%, in 1998,
primarily related to the increase in customers served.
Operating cash flow increased $36.6 million, or 47%, to $114.5 million in 1998,
and operating cash flow margins totaled 37.7% in 1998 and 34.5% in 1997.
Depreciation expense increased $16.3 million, or 66%, in 1998, reflecting a 28%
increase in average fixed asset balances and a reduction in the useful lives of
certain assets.
Amortization of intangibles increased $2.7 million, or 31%, reflecting a 17%
increase in investment in licenses.
Operating income before minority share totaled $62.5 million in 1998 compared to
$44.9 million in 1997, a 39% increase. The operating income margin increased to
20.6% in 1998 from 19.9% in 1997. The improvement in operating income and
operating income margin was primarily the result of increased revenues and
improved operational efficiencies, partially offset by an increase in
depreciation expense.
Investment income decreased $13.6 million, or 56%, in 1998 due to the effects of
the sales of certain minority interests to AirTouch in 1998 and the exchange
transaction with BellSouth in 1997. There were no gains on sales of cellular and
other investments in 1998 compared to $5.2 million of such gains in 1997. Total
interest expense increased $1.8 million, or 23%, in 1998. Interest expense in
1998 is primarily related to LYONs ($4.2 million) and the Notes ($4.6
10
<PAGE>
million). Interest expense in 1997 is primarily related to LYONs ($4.0 million);
borrowings under vendor financing agreements ($1.2 million); borrowings under
the Revolving Credit Agreement with TDS ($935,000); and the Notes ($1.8
million). Income tax expense totaled $26.7 million both in 1998 and 1997. In
1997, $1.0 million of income tax expense related to gains on sales of cellular
interests.
Net income totaled $35.4 million in 1998 compared to $36.2 million in 1997. Both
net income and earnings per share in 1998 reflect improved operating results and
an increase in gains on the sales of cellular interests, partially offset by
reduced investment income and increased interest expense. A summary of the
after-tax effect of gains on net income and earnings per share is shown below.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Net income before after-tax effects of gains $ 35,409 $ 32,014
Add: After-tax effects of gains -- 4,208
---------- ----------
Net income as reported $ 35,409 $ 36,222
========== ==========
Earnings per share before after-tax
effects of gains $ .41 $ .37
Add: After-tax effects of gains -- .05
---------- ----------
Earnings per share-diluted $ .41 $ .42
========== ==========
</TABLE>
FINANCIAL RESOURCES AND LIQUIDITY
- ---------------------------------
The Company operates a capital- and marketing-intensive business. In recent
years, the Company has generated operating cash flow and received cash proceeds
from divestitures to fund most of its construction costs and substantially all
of its operating expenses. The Company anticipates further increases in cellular
units in service, revenues, operating cash flow and cell sites as it continues
its growth strategy. Operating cash flow may fluctuate from quarter to quarter
depending on the seasonality of each of these growth factors.
Cash flows from operating activities provided $197.3 million in 1998 and $183.6
million in 1997. Operating cash flow provided $293.5 million in 1998 and $205.2
million in 1997. Cash flows from other operating activities (investment and
other income, interest expense, changes in working capital and changes in other
assets and liabilities) required $96.2 million in 1998 and $21.6 million in
1997, primarily reflecting increases in income taxes and interest paid in 1998.
Cash flows from financing activities required $1.7 million in 1998 and provided
$140.8 million in 1997. In 1997, the Notes offering provided $247.0 million of
cash. A portion of the proceeds from the Notes offering was used to repay all
outstanding borrowings under the Revolving Credit Agreement with TDS and under
vendor financing agreements, aggregating $160.5 million. Repayments of
borrowings under the vendor financing agreements earlier in 1997 totaled $13.7
million.
Cash flows from investing activities required $182.4 million in 1998 and $218.3
million in 1997. Cash required for property, plant and equipment and system
development expenditures totaled
11
<PAGE>
$231.0 million in 1998 and $248.0 million in 1997. In 1998, these expenditures
were financed primarily with internally generated cash and the proceeds from the
sales of cellular interests. In 1997, these expenditures were financed primarily
with internally generated cash and the proceeds of the Notes offering. These
expenditures primarily represent the construction of 196 and 234 cell sites in
1998 and 1997, respectively, plus other plant additions and costs related to the
development of the Company's office systems. The Company received net cash
proceeds totaling $120.2 million in 1998 and $32.9 million in 1997 related to
sales of cellular interests. Cash distributions from cellular entities in which
the Company has an interest provided $19.1 million in 1998 and $40.0 million in
1997. Acquisitions required $86.2 million in 1998 and $39.2 million in 1997.
Anticipated capital requirements for 1998 primarily reflect the Company's
construction and system expansion program. The Company's construction and system
expansion budget for 1998 is approximately $310 million, primarily for new cell
sites to expand and enhance the Company's coverage in its service areas and for
the enhancement of the Company's office systems.
Acquisitions and Divestitures
- -----------------------------
The Company assesses its cellular holdings on an ongoing basis in order to
maximize the benefits derived from clustering its markets. As the Company's
clusters have grown, the Company's focus has shifted toward exchanges and
divestitures of managed and investment interests. Over the past few years, the
Company has completed exchanges of controlling interests in its less strategic
markets for controlling interests in markets which better complement its
clusters. The Company has also completed outright sales of other less strategic
markets. The proceeds from these sales have been used to further the Company's
growth.
In the first nine months of 1998, the Company acquired majority interests in
three markets and minority interests in several markets, primarily where the
Company already owns a majority interest, representing 866,000 pops, for a total
consideration of $106.5 million. The consideration primarily consisted of cash
and approximately 46,000 USM Common Shares issued to TDS as reimbursement for
consideration paid by TDS directly to the sellers.
In the first nine months of 1997, the Company purchased a majority interest in
one market and several minority interests, representing 327,000 pops. The total
consideration paid in these transactions was $48.7 million in cash.
In the first nine months of 1998, the Company divested minority interests in 12
markets, representing approximately 936,000 pops. In exchange, the Company
received approximately 4.1 million shares of AirTouch stock and cash totaling
$120.5 million. Approximately $28.7 million of the total cash received was
pursuant to a contract right termination agreement entered into between the
Company and TDS. This agreement was related to two interests which were sold
directly by TDS to AirTouch and which were to be acquired by the Company as part
of a June 1996 agreement between the Company and TDS. The contract right
termination agreement enabled the Company to receive cash equal to the value of
the gain the Company would have realized had it purchased the interests from TDS
and sold them to AirTouch under terms similar to those in the agreement between
TDS and AirTouch.
In the first nine months of 1997, the Company sold a majority interest in one
market partition and minority interests in two other markets, representing
183,000 pops. The Company received
12
<PAGE>
consideration consisting of cash and receivables totaling $34.5 million from
these sales. The two minority interests involved interests the Company had
previously acquired from TDS pursuant to an agreement between the two companies
signed in June 1996. In the aggregate, the Company recorded a substantial book
gain on the divestitures of the interests acquired from TDS.
As of September 30, 1998, the Company had agreements pending to acquire majority
interests in three markets, representing 319,000 pops, for consideration
totaling $51.2 million in cash. Also at September 30, 1998, the Company had an
agreement pending to divest majority interests in two markets and a minority
interest in one market, representing 386,000 pops, for a total consideration of
$62.7 million. The Company expects these transactions to be completed by the end
of 1998.
Liquidity
- ---------
The Company anticipates that the aggregate resources required for the remainder
of 1998 will include approximately $79 million for capital spending and
approximately $51 million to complete pending acquisitions. The Company is
generating substantial cash from its operations and anticipates financing its
capital spending for the remainder of 1998 primarily with internally generated
cash, proceeds from the sales of cellular interests and short-term borrowings.
The Company had $27 million of cash and cash equivalents at September 30, 1998
and expects to receive approximately $63 million from pending divestitures.
Additionally, the entire balance of $500 million under the Company's Revolving
Credit Facility is unused and remains available to meet any short-term borrowing
requirements.
Management believes that the Company's operating cash flows and sources of
external financing, including the above-referenced Revolving Credit Facility,
provide substantial financial flexibility for the Company to meet both its
short- and long-term needs. The Company also currently has access to public and
private capital markets to help meet its long-term financing needs. The Company
anticipates issuing debt and equity securities only when capital requirements
(including acquisitions), financial market conditions and other factors warrant.
Year 2000 Issue
- ---------------
The Year 2000 issue exists because many computer systems and applications
abbreviate dates using only two digits rather than four digits, e.g., "98"
rather than "1998". Unless corrected, this shortcut may cause problems when the
century date "2000" occurs. On that date, some computer operating systems and
applications and embedded technology may recognize the date as January 1, 1900
instead of January 1, 2000. If the Company fails to correct any critical Year
2000 processing problems prior to January 1, 2000, the affected systems may
either cease to function or produce erroneous data, which could have material
adverse operational and financial consequences. Currently, the Company believes
that a disruption in the operation of its networks, and financial and accounting
systems and/or an inability to access interconnections with other
telecommunications carriers, are the major risks associated with the inability
of its systems and software to process Year 2000 data correctly. The Company's
results of operations, financial position and cash flows could be materially and
adversely affected by such failures.
The Company's management has established a project team to address Year 2000
issues. The Company's plan to address the Year 2000 Issue consists of five
general phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv)
Validation and (v) Implementation.
13
<PAGE>
The awareness phase consisted of establishing a Year 2000 project team and
developing an overall strategy. A Year 2000 Program Office has been established
at the TDS corporate level to coordinate activities of the Year 2000 project
team, to monitor the current status of individual projects, to report
periodically to the Audit Committee and to promote the exchange of information
between all business units to share knowledge and solution techniques. The Year
2000 effort covers the network and supporting infrastructure for the provision
of cellular services; the operational and financial information technology
("IT") systems and applications, such as computer systems that support key
business functions such as billing, finance, customer service procurement and
supply; and a review of the Year 2000 compliance efforts of the Company's key
suppliers.
The assessment phase includes the identification of core business areas and
processes, analysis of systems and hardware supporting the core business areas
and the prioritization of renovation or replacement of the systems and hardware
that are not Year 2000 compliant. Included in the assessment phase is an
analysis of risk management factors such as contingency plans and legal matters.
The assessment phase is scheduled to be completed in the first quarter of 1999.
Certain critical systems and hardware components have been identified and are in
the renovation phase. The renovation phase consists of the conversion or
replacement of selected platforms, applications, databases and utilities. The
renovation of critical hardware, systems and applications is scheduled to be
substantially completed by the third quarter of 1999.
The validation phase includes testing, verifying and validating the renovated or
replaced platforms, applications, databases and utilities. A goal of the
validation phase is to conduct independent verification testing of key hardware,
systems and applications as well as network and system component upgrades
received from suppliers. In addition, selected Year 2000 upgrades are slated to
undergo testing in a controlled environment that replicates the current
environment and is equipped to simulate the turn of the century and leap year
dates. Validation is scheduled to be completed in the third quarter of 1999.
The implementation phase involves switching over to the converted and renovated
systems and applications. This phase is expected to be completed by the end of
1999.
The Company's current schedule is subject to change depending on developments
that may arise through unforeseen circumstances, and through finalization of the
assessment phase and the renovation and validation phases of the Company's
compliance efforts. The Company, like most other telecommunications operators,
is highly dependent on the telecommunications network vendors to provide
compliant hardware, systems and applications and on other third parties,
including vendors, other telecommunications service providers, government
agencies and financial institutions, to deliver reliable services. The Company
is dependent on the development of compliant hardware, systems and applications
and upgrades by experts, both internal and external, and the availability of
critical resources with the requisite skill sets. The Company's ability to meet
its target dates is dependent upon the timely provision of necessary upgrades
and modifications by its suppliers and internal resources. In addition, the
Company cannot guarantee that third parties on whom it depends for essential
services (such as electric utilities and other interconnected telecommunications
operators) will convert their critical systems and processes in a timely manner.
Failure or delay by any of these parties could significantly disrupt the
Company's business, including the provision of cellular service to customers,
billing and collection processes and other areas of the business.
14
<PAGE>
The Company has begun implementing additional initiatives to assess the degree
to which third parties with whom it has business relationships are addressing
Year 2000 Issues. These initiatives include analysis of the Year 2000 compliance
programs of the Company's critical vendors. In the near future, the initiative
will be extended to other telecommunications service providers with which the
Company interconnects. The Company's contingency plans will address mechanisms
for preventing or mitigating interruption caused by such third parties.
The Company is currently in the assessment phase, analyzing all systems and
hardware to determine which systems and hardware are not Year 2000 compliant.
The Company has not yet completed the cost estimate of this project. The Company
expects to complete this phase and develop total cost estimates in early 1999.
Through the third quarter of 1998, the total incremental costs associated with
the Year 2000 Issue were less than $1 million. The timing of expenditures may
vary and is not necessarily indicative of readiness efforts or progress to date.
Though Year 2000 project costs will directly impact the reported level of future
net income, the Company intends to manage its total cost structure, including
deferral of non-critical projects, in an effort to mitigate the impact of Year
2000 project costs.
Based on the Company's current schedule for completion of Year 2000 tasks, the
Company believes that its planning is adequate to secure Year 2000 readiness of
its critical systems. Nevertheless, management cannot provide assurance that its
plan to achieve Year 2000 compliance will be successful, as it is subject to
various risks and uncertainties, many of which are described above. Accordingly,
the Company's goal is to develop business continuity and contingency plans in
1999 to address high risk areas as they are identified. These plans are expected
to assess the potential for business disruption in various scenarios, and to
provide for key operational back-up, recovery and restoration alternatives.
However, if the Company, or third parties with whom it has significant business
relationships, fails to achieve Year 2000 readiness with respect to critical
systems, there could be a material adverse effect on the Company's results of
operations, financial position and cash flows.
The above information, which contains statements that are "forward-looking"
within the meaning of the Private Securities Litigation Reform Act of 1995, is
based on the Company's current best estimates, which were derived using numerous
assumptions of future events, including the availability and future costs of
certain technological and other resources, third party modification actions and
other factors. Given the complexity of these issues and the possibility of
unidentified risks, actual results may vary materially from those anticipated
and discussed above. Specific factors that might cause such differences include,
among others, the availability and cost of personnel trained in this area, the
ability to locate and correct all affected computer code, the timing and success
of remedial efforts of third party suppliers and similar uncertainties.
TDS Tracking Stock Proposal
- ---------------------------
On December 17, 1997, the Company received an offer from TDS to acquire all of
the issued Common Shares of the Company which TDS does not own pursuant to a
merger (the "USM Merger"), in exchange for a TDS tracking stock which tracks the
performance of the Company. The Company's Board of Directors appointed Mr.
Paul-Henri Denuit, an independent director of the Company, to a special
committee (the "Special Committee") of the Board to consider this offer. The
Special Committee retained the firm of Lazard Freres & Co. LLC as financial
advisor and Squire, Sanders & Dempsey L.L.P. as legal advisor to the Special
Committee. The Special Committee and its representatives have conducted a due
diligence review and have held meetings with representatives of TDS relating to
the TDS offer. TDS has attempted to seek an
15
<PAGE>
agreement to acquire the Company's Common Shares that it does not own on
mutually acceptable terms. TDS has stated that it is actively engaged in
ascertaining whether the Tracking Stock Proposal or another alternative is the
best vehicle to unlock and build shareholder value, and that it is working
towards a resolution. There can be no assurance that an agreement will be
reached with respect to the USM Merger.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Annual Report to Shareholders contain
"forward-looking" statements as defined in the Private Securities Litigation
Reform Act of 1995, that are based on current expectations, estimates and
projections. Statements that are not historical facts, including statements
about the Company's beliefs and expectations, are forward-looking statements.
These statements contain potential risks and uncertainties; therefore, actual
results may differ materially. The Company undertakes no obligation to update
publicly any forward-looking statements whether as a result of new information,
future events or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
markets in which the Company operates; advances in telecommunications
technology; changes in the telecommunications regulatory environment; pending
and future litigation; availability of future financing; start-up of PCS
operations; unanticipated changes in growth in cellular customers, penetration
rates, churn rates and the mix of products and services offered in the Company's
markets; and unanticipated problems with the Year 2000 issue. Readers should
evaluate any statements in light of these important factors.
16
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Unaudited
---------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- --------------- ---------------- ------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Service $ 303,921 $ 226,230 $ 821,196 $ 618,209
Equipment sales 10,026 5,729 28,016 15,913
------------- ------------- ------------- ------------
Total Operating Revenues 313,947 231,959 849,212 634,122
------------- ------------- ------------- ------------
OPERATING EXPENSES
System operations 53,817 40,268 143,127 109,545
Marketing and selling 55,546 43,712 156,875 122,602
Cost of equipment sold 22,776 19,716 63,881 55,473
General and administrative 67,265 50,303 191,785 141,350
Depreciation 40,795 24,504 117,593 68,735
Amortization of intangibles 11,233 8,544 30,144 25,906
------------- ------------- ------------- ------------
Total Operating Expenses 251,432 187,047 703,405 523,611
------------- ------------- ------------- ------------
OPERATING INCOME BEFORE
MINORITY SHARE 62,515 44,912 145,807 110,511
Minority share of operating income (1,707) (3,023) (4,402) (10,271)
------------- ------------- ------------- ------------
OPERATING INCOME 60,808 41,889 141,405 100,240
------------- ------------- ------------- ------------
INVESTMENT AND OTHER INCOME
Investment income 10,520 24,114 31,410 60,537
Amortization of licenses related to investments (256) (535) (815) (1,603)
Interest income 1,294 1,629 4,561 3,212
Other (expense), net (303) (1,250) (3,109) (3,032)
Gain on sale of cellular and other investments -- 5,208 189,759 13,445
------------- ------------- ------------- ------------
Total Investment and Other Income 11,255 29,166 221,806 72,559
------------- ------------- ------------- ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 72,063 71,055 363,211 172,799
Interest expense - other 9,948 7,180 29,836 18,347
Interest expense - affiliate -- 934 -- 1,948
------------- ------------- ------------- ------------
Total Interest Expense 9,948 8,114 29,836 20,295
------------- ------------- ------------- ------------
INCOME BEFORE INCOME TAXES 62,115 62,941 333,375 152,504
Income tax expense 26,706 26,719 135,429 66,122
------------- ------------- ------------- ------------
NET INCOME $ 35,409 $ 36,222 $ 197,946 $ 86,382
============= ============= ============= ============
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000s) 87,353 86,203 87,311 86,176
EARNINGS PER COMMON AND
SERIES A COMMON SHARE - BASIC $ .41 $ .42 $ 2.27 $ 1.00
============= ============= ============= ============
EARNINGS PER COMMON AND
SERIES A COMMON SHARE - DILUTED $ .41 $ .42 $ 2.27 $ 1.00
============= ============= ============= ============
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</FN>
</TABLE>
17
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
--------- ----------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 197,946 $ 86,382
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 147,737 94,641
Deferred taxes 76,170 21,053
Investment income (31,410) (60,537)
Gain on sale of cellular and other investments (189,759) (13,445)
Minority share of operating income 4,402 10,271
Other noncash expense 18,074 18,123
Change in accounts receivable (30,704) (21,510)
Change in accounts payable 20,027 16,008
Change in accrued taxes (13,526) 25,384
Change in accrued interest (4,221) 1,971
Change in unearned revenue 3,549 3,646
Change in other assets and liabilities (1,030) 1,649
--------- ----------
197,255 183,636
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in 7.25% notes -- 246,985
Repayment of vendor financing -- (103,802)
Borrowings from Revolving Credit Facility 47,000 --
Repayment of Revolving Credit Facility (47,000) --
Borrowings from Revolving Credit Agreement - TDS -- 70,444
Repayment of Revolving Credit Agreement - TDS -- (70,444)
Change in notes payable (1,302) --
Common Shares issued 2,131 1,971
Capital (distributions) to minority partners (2,546) (4,310)
--------- ---------
(1,717) 140,844
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (199,754) (219,311)
System development costs (31,214) (28,646)
Investments in and advances to investment entities (6,356) (497)
Distributions from investment entities 19,073 40,029
Proceeds from sale of cellular and other investments 120,244 32,866
Acquisitions, excluding cash acquired (86,190) (39,169)
Other investments 773 (1,896)
Change in temporary cash and marketable
non-equity securities 1,037 (1,675)
--------- ---------
(182,387) (218,299)
--------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 13,151 106,181
CASH AND CASH EQUIVALENTS-
Beginning of period 13,851 14,377
--------- ---------
End of period $ 27,002 $ 120,558
========= =========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</FN>
</TABLE>
18
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
<CAPTION>
(Unaudited)
September 30, 1998 December 31, 1997
---------------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds $ 18,380 $ 13,851
Affiliated cash equivalents 8,622 --
---------- ----------
27,002 13,851
Temporary cash investments 51 218
Accounts receivable
Customers, net of allowance 102,070 81,387
Roaming 47,304 30,689
Affiliates 41 170
Other 11,065 17,536
Inventory 13,059 11,836
Prepaid expenses 10,034 15,714
Other current assets 1,582 3,963
---------- ----------
212,208 175,364
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 1,317,301 1,212,575
Less accumulated depreciation 356,294 272,322
---------- ----------
961,007 940,253
---------- ----------
INVESTMENTS
Licenses, net of accumulated amortization 1,236,346 1,150,924
Cellular entities 92,830 128,810
Notes and interest receivable 11,422 10,673
Marketable equity securities 233,595 --
Marketable non-equity securities -- 870
---------- ----------
1,574,193 1,291,277
---------- ----------
DEFERRED CHARGES
System development costs,
net of accumulated amortization 104,047 78,306
Other, net of accumulated amortization 33,379 23,716
---------- ----------
137,426 102,022
---------- ----------
Total Assets $2,884,834 $2,508,916
========== ==========
<FN>
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<CAPTION>
(Unaudited) December 31,
September 30, 1998 1997
--------------------- ------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ -- $ 1,302
Accounts payable
Affiliates 1,213 2,466
Other 135,223 101,263
Accrued taxes 28,391 41,606
Accrued interest 2,535 6,534
Accrued compensation 13,742 9,112
Customer deposits and deferred revenues 24,653 21,019
Other current liabilities 15,938 20,934
---------- ----------
221,695 204,236
---------- ----------
LONG-TERM DEBT
6% zero coupon convertible debentures 277,378 265,330
7.25% notes 250,000 250,000
---------- ----------
527,378 515,330
---------- ----------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 192,478 100,725
Other 5,228 5,397
---------- ----------
197,706 106,122
---------- ----------
MINORITY INTEREST 42,596 53,908
---------- ----------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 54,348 54,232
Series A Common Shares, par value $1 per share 33,006 33,006
Additional paid-in capital 1,319,477 1,285,530
Net unrealized gain on marketable equity securities 34,130 --
Retained earnings 454,498 256,552
---------- ----------
1,895,459 1,629,320
---------- ----------
Total Liabilities and Shareholders' Equity $2,884,834 $2,508,916
========== ==========
<FN>
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
</FN>
</TABLE>
20
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company 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 the Company's
latest annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring items) necessary to
present fairly the financial position as of September 30, 1998 and
December 31, 1997, and the results of operations and cash flows for the
nine months ended September 30, 1998 and 1997. The results of operations
for the nine months ended September 30, 1998 and 1997, are not necessarily
indicative of the results to be expected for the full year.
2. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," effective December 31, 1997. Earnings per
Common Share for 1997 have been restated to conform to current period
presentation. The adoption of SFAS No. 128 had no effect on Earnings per
Common Share - Basic or Earnings per Common Share-Diluted for 1997.
The amounts used in computing Earnings per Common Share 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1998 1997 1998 1997
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income used in Earnings Per
Share-Basic and Diluted $ 35,409 $ 36,222 $197,941 $ 86,382
======== ======== ======== ========
Weighted average number of Common
Shares used in Earnings Per Share-Basic 87,353 86,203 87,311 86,176
Effect of Dilutive Securities:
Stock Options and Stock Appreciation Rights 34 57 42 51
-------- -------- -------- --------
Weighted Average Number of Common
Shares used in Earnings Per Share-Diluted 87,387 86,260 87,353 86,227
======== ======== ======== ========
</TABLE>
Earnings per Common and Series A Common Share for the nine months ended
September 30, 1998, contain significant income amounts related to gains
on the sale of cellular and other investments. Excluding the after-tax
effect of these gains, basic and diluted earnings per share was $.94 for
the nine months ended September 30, 1998.
21
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Assuming that acquisitions accounted for as purchases during the period
January 1, 1997, to September 30, 1998, had taken place on January 1,
1997, pro forma results of operations would have been as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1998 1997
--------- ----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Service Revenues $ 822,130 $ 667,196
Equipment Sales 28,040 21,697
Interest Expense (including cost to finance acquisitions) 29,836 21,356
Net Income 197,980 92,843
Earnings per Common and Series A Common Share-Basic 2.27 1.06
Earnings per Common and Series A Common Share-Diluted 2.27 1.06
</TABLE>
4. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first nine months of 1998 and 1997. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed and
Common Shares issued.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
--------- --------
(Dollars in thousands)
<S> <C> <C>
Property, plant and equipment $ 5,447 $ --
Cellular licenses 68,695 37,258
Decrease in equity-method investment
in cellular interests (2,317) --
Decrease in minority investments 13,168 --
Other assets and liabilities,
excluding cash acquired 2,500 1,911
Common Shares issued (1,303) --
--------- --------
Decrease in cash due to acquisitions $ 86,190 $ 39,169
========= ========
</TABLE>
22
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following summarizes certain noncash transactions and interest and
income taxes paid.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1998 1997
---------- -----------
(Dollars in thousands)
<S> <C> <C>
Interest paid $ 18,688 $ 6,431
Income taxes paid 84,263 24,840
Noncash interest expense $ 12,048 $ 11,506
</TABLE>
5. Gain on sale of cellular and other investment in 1998 primarily reflects
gains recorded on the sale of the Company's minority interests in twelve
markets and on cash received from TDS pursuant to an agreement between
the Company and TDS.
6. In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"), which
requires companies to report all of the changes in shareholder's equity,
except those resulting from investment by owners or distribution to
owners ("Comprehensive Income"). The Company's Comprehensive Income
includes Net Income and Unrealized Gains from Marketable Equity
Securities that are classified as "available-for-sale". The following
table summarizes the Company's Comprehensive Income.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income $ 35,409 $ 36,222 $197,946 $ 86,380
Other Comprehensive Income-
Unrealized gains on securities, net of
tax of $18,378 34,130 -- 34,130 --
-------- -------- -------- --------
Comprehensive Income $ 69,539 $ 36,222 $232,076 $ 86,380
======== ======== ======== ========
</TABLE>
7. On January 30, 1998 and April 6, 1998, the Company completed sales in
which the Company received certain marketable equity securities (see
note 5). At September 30, 1998, these noncurrent marketable equity
securities are carried at market value ($233.6 million) resulting in an
unrealized gain of $34.1 million net of taxes ($18.4 million). The
market value for the marketable equity securities is based on quoted
market prices.
23
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits:
Exhibit 11 - Statement regarding computation of per share earnings
is included herein as footnote 2 to the financial statements.
Exhibit 12 - Statement regarding computation of ratios.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1998:
No reports on Form 8-K were filed during the quarter ended September 30,
1998.
24
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
UNITED STATES CELLULAR CORPORATION
----------------------------------
(Registrant)
Date November 13, 1998 H. DONALD NELSON
---------------------- -------------------------------------------
H. Donald Nelson
President
(Chief Executive Officer)
Date November 13, 1998 KENNETH R. MEYERS
---------------------- -------------------------------------------
Kenneth R. Meyers
Senior Vice President-Finance and Treasurer
(Chief Financial Officer)
Date November 13, 1998 JOHN T. QUILLE
---------------------- -------------------------------------------
John T. Quille
Controller
(Principal Accounting Officer)
25
<PAGE>
Exhibit 12
<TABLE>
UNITED STATES CELLULAR CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Nine Months
Ended
September 30, 1998
----------------------
(Dollars in thousands)
<S> <C>
EARNINGS
Income from Continuing Operations before
income taxes $ 333,375
Add (Deduct):
Minority Share of Cellular Losses (348)
Earnings on Equity Method (31,410)
Distributions from Minority Subsidiaries 16,320
---------------
$ 317,937
Add fixed charges:
Consolidated interest expense 26,786
Deferred debt expense 3,050
Interest Portion (1/3) of Consolidated
Rent Expense 4,293
---------------
$ 352,066
===============
FIXED CHARGES
Consolidated interest expense 26,786
Deferred debt expense 3,050
Interest Portion (1/3) of Consolidated
Rent Expense 4,293
---------------
$ 34,129
===============
RATIO OF EARNINGS TO FIXED CHARGES 10.32
===============
Tax-Effected Preferred Dividends $ 59
Fixed Charges 34,129
---------------
Fixed Charges and Preferred Dividends $ 34,188
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 10.30
===============
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION AS OF
SEPTEMBER 30, 1998, AND FOR THE NINE MONTHS THEN ENDED, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 27,002
<SECURITIES> 233,595
<RECEIVABLES> 107,805
<ALLOWANCES> 5,735
<INVENTORY> 13,059
<CURRENT-ASSETS> 212,208
<PP&E> 1,317,301
<DEPRECIATION> 356,294
<TOTAL-ASSETS> 2,884,834
<CURRENT-LIABILITIES> 221,695
<BONDS> 527,378
0
0
<COMMON> 87,354
<OTHER-SE> 1,808,105
<TOTAL-LIABILITY-AND-EQUITY> 2,884,834
<SALES> 28,016
<TOTAL-REVENUES> 849,212
<CGS> 63,881
<TOTAL-COSTS> 703,405
<OTHER-EXPENSES> (221,806)
<LOSS-PROVISION> 14,938
<INTEREST-EXPENSE> 29,836
<INCOME-PRETAX> 333,375
<INCOME-TAX> 135,429
<INCOME-CONTINUING> 197,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197,946
<EPS-PRIMARY> 2.27
<EPS-DILUTED> 2.27
</TABLE>
