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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-9712
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UNITED STATES CELLULAR CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 62-1147325
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
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8410 WEST BRYN MAWR, SUITE 700, CHICAGO, ILLINOIS 60631
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER: (773) 399-8900
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
Title of each class which registered
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Common Shares, $1 par value American Stock Exchange
Liquid Yield Option American Stock Exchange
Notes Due 2015
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Securities registered pursuant to Section 12(g) of the Act: None
-------------------
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 ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
As of February 27, 1998, the aggregate market value of registrant's Common
Shares held by nonaffiliates was approximately $487.6 million (based upon the
closing price of the Common Shares on February 27, 1998, of $30.13, as reported
by the American Stock Exchange).
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 27, 1998, is 54,232,305 Common Shares, $1 par
value, and 33,005,877 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1997 Annual Report to
Shareholders and of the registrant's Notice of Annual Meeting of Shareholders
and Proxy Statement for its Annual Meeting of Shareholders to be held May 13,
1998, described in the cross reference sheet and table of contents attached
hereto are incorporated by reference into Parts II and III of this report.
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<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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PAGE NUMBER
OR REFERENCE(1)
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Item 1. Business............................................. 3
Item 2. Properties........................................... 23
Item 3. Legal Proceedings.................................... 23
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 23
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 24 (2)
Item 6. Selected Financial Data.............................. 24 (3)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 24 (4)
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk............................................... 24
Item 8. Financial Statements and Supplementary Data.......... 24 (5)
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 24
Item 10. Directors and Executive Officers of the Registrant... 25 (6)
Item 11. Executive Compensation............................... 25 (7)
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 25 (8)
Item 13. Certain Relationships and Related Transactions....... 25 (9)
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 26
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(1) Parenthetical references are to information incorporated by reference from
Exhibit 13, which includes portions of the registrant's Annual Report to
Shareholders for the year ended December 31, 1997 ("Annual Report") and from
the registrant's Notice of Annual Meeting of Shareholders and Proxy
Statement for its Annual Meeting of Shareholders to be held on May 13, 1998
(the "Proxy Statement").
(2) Annual Report section entitled "United States Cellular Stock and Dividend
Information."
(3) Annual Report section entitled "Selected Consolidated Financial Data."
(4) Annual Report section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
(5) Annual Report sections entitled "Consolidated Quarterly Income Information
(Unaudited)," "Consolidated Statements of Operations," "Consolidated
Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated
Statements of Changes in Common Shareholders' Equity," "Notes to
Consolidated Financial Statements" and "Report of Independent Public
Accountants."
(6) Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."
(7) Proxy Statement section entitled "Executive Compensation," except for the
information specified in Item 402(a)(8) of Regulation S-K under the
Securities Exchange Act of 1934, as amended.
(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
Owners and Management."
(9) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
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UNITED STATES CELLULAR CORPORATION
8410 WEST BRYN MAWR - CHICAGO, ILLINOIS 60631
TELEPHONE (773) 399-8900
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PART I
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ITEM 1. BUSINESS
THE COMPANY
United States Cellular Corporation (the "Company") provides cellular
telephone service to 1,710,000 customers through 134 majority-owned and managed
("consolidated") cellular systems serving approximately 16% of the geography and
approximately 9% of the population of the United States. Since 1985, when the
Company began providing cellular service in Knoxville, Tennessee, the Company
has expanded its cellular networks and customer service operations to cover 143
markets in 26 states as of December 31, 1997. In total, the Company now operates
eight market clusters, of which four have a total population of more than two
million, and each of which has a total population of more than one million.
Overall, 86% of the Company's 26.2 million population equivalents are in markets
which are consolidated, 2% are in managed but not consolidated markets and 12%
are in markets in which the Company holds an investment interest.
The Company is the eighth largest cellular telephone company in the United
States, based on the aggregate number of population equivalents it owns. The
Company's corporate development strategy is to operate controlling interests in
cellular market licensees in areas adjacent to or in proximity to its other
markets, thereby building clusters of operating markets. Customers benefit from
larger service areas such as these, which provide longer uninterrupted service
and the ability to make outgoing calls and receive incoming calls within the
designated area without special roaming arrangements. In addition, the Company
anticipates that clustering will continue to provide the Company certain
economies in its capital and operating costs. As the number of opportunities for
outright acquisitions has decreased in recent years, and as the Company's
clusters have grown, the Company's focus has shifted toward exchanges and
divestitures of managed and investment interests which are considered less
essential to the Company's clustering strategy.
The following table summarizes the status of the Company's interests in
cellular markets at December 31, 1997.
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Owns Majority Interest and Manages.................................... 134
Owns Minority Interest and Manages.................................... 9
---
Total Markets Managed by the Company.................................. 143
Markets Managed by Others (1)......................................... 49
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Total Markets......................................................... 192
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(1) Represents markets in which the Company owns a minority or other
noncontrolling interest and which are managed by third parties; as of
December 31, 1997, the Company accounted for its interests in 42 of these
markets using the equity method and accounted for the remaining seven
markets using the cost method.
3
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Cellular systems in the Company's 134 majority-owned and managed markets
served 1,710,000 customers at December 31, 1997, and contained 1,748 cell sites.
The average penetration rate in the Company's consolidated markets was 7.11% at
December 31, 1997, and the churn rate in all consolidated markets averaged 1.9%
per month for the twelve months ended December 31, 1997.
The Company was incorporated in Delaware in 1983. The Company's executive
offices are located at 8410 West Bryn Mawr, Chicago, Illinois 60631. Its
telephone number is 773-399-8900. The Common Shares of the Company are listed on
the American Stock Exchange under the symbol "USM." The Company's Liquid Yield
Option Notes ("LYONs") are also listed on the American Stock Exchange.
Unless the context indicates otherwise: (i) references to the "Company"
refer to United States Cellular Corporation and its subsidiaries; (ii)
references to "TDS" refer to Telephone and Data Systems, Inc. and its
subsidiaries; (iii) references to "MSA" or to a particular city refer to the
Metropolitan Statistical Area, as designated by the U.S. Office of Management
and Budget and used by the Federal Communications Commission ("FCC") in
designating metropolitan cellular market areas; (iv) references to "RSA" refer
to the Rural Service Area, as used by the FCC in designating non-MSA cellular
market areas; (v) references to cellular "markets" or "systems" refer to MSAs,
RSAs or both; (vi) references to "population equivalents" mean the population of
a market, based on 1997 Claritas estimates, multiplied by the percentage
interests that the Company owns or has the right to acquire in an entity
licensed, designated to receive a license or expected to receive a construction
permit ("licensee") from the FCC to construct or operate a cellular system in
such market.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Annual Report on Form 10-K, including exhibits, contains
"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 Personal
Communications Services ("PCS") operations; and unanticipated changes in growth
in cellular customers, penetration rates, churn rates and the mix of products
and services offered in the Company's markets. Readers should evaluate any
statements in light of these important factors.
PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, the Company received a proposal from TDS to acquire all of
the issued and outstanding Common Shares of the Company not already owned by TDS
(the "Merger"). The offer was made in connection with, and is subject to TDS
shareholder approval of and the effectiveness of, TDS's proposed corporate
restructuring. The Board of Directors of TDS (the "TDS Board") has adopted a
proposal which, if approved by TDS shareholders and implemented by the TDS
Board, would authorize the TDS Board to issue three new classes of common stock
and change the state of incorporation of TDS from Iowa to Delaware (the
"Tracking Stock Proposal"). The three new classes of stock are intended to
separately reflect the performance of TDS's cellular telephone, landline
telephone and personal communications services businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as United States Cellular Group Common
Shares (the "Cellular Group Shares"). The Cellular Group Shares, when issued,
are intended to reflect the separate performance of the United States Cellular
Group (the "Cellular Group"), which consists of TDS's interest in United States
Cellular Corporation.
4
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Subject to the approval of the Tracking Stock Proposal by shareholders, TDS
intends to, among other things, issue Cellular Group Shares in exchange for all
of the Common Shares of the Company which are not currently owned by TDS,
subject to approval by the Company's Board of Directors and shareholders.
In January 1998, the Company's Board of Directors created a special
committee of the Board (the "Special Committee") to review the proposal from
TDS. The Special Committee, consisting of one independent director of the
Company, has engaged a financial advisor and legal advisor to assist in
reviewing the proposal. The Special Committee will consider how the Company
should respond to the TDS proposal, take the steps it deems appropriate to
respond to the TDS proposal and, at such time as it considers it appropriate,
report its recommendations to the Company's Board of Directors.
Subsequent to shareholder approval of the Tracking Stock Proposal, TDS
intends to terminate certain intercompany agreements between TDS and the
Company. Thereafter, some or all of the policies between TDS and the Company
would be determined solely by methods that management believes to be reasonable.
Many of such policies would continue the arrangements which presently exist
between TDS and the Company pursuant to the intercompany agreements, but TDS
would have no contractual obligation to continue such policies after the
intercompany agreements have been terminated. The TDS Board currently intends to
retain future earnings, if any, for the development of the business of the
Cellular Group and does not anticipate paying dividends on the Cellular Group
Shares in the foreseeable future.
On December 29, 1997, an individual who claims to be a holder of the
Company's Common Shares filed a putative class action complaint on behalf of
common stockholders of the Company in the Court of Chancery of the State of
Delaware in New Castle County. The complaint names as defendants TDS, the
Company and the directors of the Company. The complaint alleges a breach of
fiduciary duties by the defendants and seeks to have the Merger enjoined or, if
it is consummated, to have it rescinded and to recover unspecified damages, fees
and expenses. A virtually identical complaint has been filed by a second
individual. None of the defendants have been served with this complaint. The
Company intends to vigorously defend against these lawsuits.
CELLULAR TELEPHONE OPERATIONS
THE CELLULAR TELEPHONE INDUSTRY. Cellular telephone technology provides
high-quality, high-capacity communications services to in-vehicle and hand-held
portable cellular telephones. Cellular technology is a major improvement over
earlier mobile telephone technologies. Cellular telephone systems are designed
for maximum mobility of the customer. Access is provided through system
interconnections to local, regional, national and world-wide telecommunications
networks. Cellular telephone systems also offer a full range of ancillary
services such as conference calling, call-waiting, call-forwarding, voice mail,
facsimile and data transmission.
Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching
Office ("MTSO"). The MTSO is connected to the conventional ("landline")
telephone network and potentially other MTSOs. Each conversation on a cellular
phone involves a transmission over a specific set of radio frequencies from the
cellular phone to a transmitter/receiver at a cell site. The transmission is
forwarded from the cell site to the MTSO and from there may be forwarded to the
landline telephone network to complete the call. As the cellular telephone moves
from one cell to another, the MTSO determines radio signal strength and
transfers ("hands off") the call from one cell to the next. This hand-off is not
noticeable to either party on the phone call.
The FCC currently grants only two licenses to provide cellular telephone
service in each market. However, competition for customers includes competing
communications technologies such as conventional landline and mobile telephone,
Specialized Mobile Radio ("SMR") systems and radio paging. PCS has become
available in many areas of the United States, including the Company's markets,
and 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. Additionally,
emerging technologies such as Enhanced
5
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Specialized Mobile Radio ("ESMR") and mobile satellite communication systems may
prove to be competitive with cellular service in the future in some or all of
the Company's markets.
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers may be charged a separate
fee for system access, airtime, long-distance calls and ancillary services.
Cellular system operators often provide service to customers of other operators'
cellular systems while the customers are temporarily located within the
operators' service areas. Customers using service away from their home system
are called "roamers." Roaming is available because technical standards require
that analog cellular telephones be compatible in all market areas in the United
States. The system that provides the service to these roamers will generate
usage revenue. Many operators, including the Company, charge premium rates for
this roaming service.
There are a number of recent technical developments in the cellular
industry. Currently, while most of the MTSOs process information digitally, on
certain cellular systems the radio transmission is done on an analog basis.
During 1992, a new transmission technique was approved for implementation by the
cellular industry. Time Division Multiple Access ("TDMA") technology was
selected as one industry standard by the cellular industry and has been deployed
in several markets, including the Company's operations in portions of several
clusters. Another digital technology, Code Division Multiple Access ("CDMA"), is
also being deployed by the Company in portions of certain clusters. Digital
radio technology offers several advantages, including greater privacy, less
transmission noise, greater system capacity and potentially lower incremental
costs for additional customers. The conversion from analog to digital radio
technology is continuing on an industry-wide basis; however, this process is
expected to take a number of years. PCS operators have deployed systems based on
versions of TDMA and CDMA technology and a third digital technology, Global
Systems for Mobile Communications ("GSM"), in the markets where they have begun
operations.
The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of profit, if
any, under such circumstances is dependent on, among other things, prices and
variable marketing costs which in turn are affected by the amount and extent of
competition. Until technological limitations on total capacity are approached,
additional cellular system capacity can normally be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.
THE COMPANY'S OPERATIONS. From its inception in 1983 until 1993, the
Company was principally in a start-up phase. Until that time, the Company's
activities had been concentrated significantly on the acquisition of interests
in cellular licensees and on the construction and initial operation of cellular
systems. The development of a cellular system is capital-intensive and requires
substantial investment prior to and subsequent to initial operation. The Company
experienced operating losses and net losses from its inception until 1993.
During the past four years, the Company generated operations-driven net income
and has significantly increased its operating cash flows during that time.
Management anticipates further growth in cellular units in service and revenues
as the Company continues to expand through internal growth. Marketing and system
operations expenses associated with this expansion may reduce the rate of growth
in operating cash flows and operating income during the period of additional
growth. In addition, the Company anticipates that the seasonality of revenue
streams and operating expenses may cause the Company's operating income to vary
from quarter to quarter.
While the Company produced operating income and net income during the last
four years, changes in any of several factors may reduce the Company's growth in
operating income and net income over the next few years. These factors include:
(i) the growth rate in the Company's customer base; (ii) the usage and pricing
of cellular services; (iii) the churn rate; (iv) the cost of providing cellular
services, including the cost of attracting new customers; (v) continued
competition from PCS and other emerging technologies; and (vi) continuing
technological advances which may provide additional competitive alternatives to
cellular service.
The Company is building a substantial presence in selected geographic areas
throughout the United States where it can efficiently integrate and manage
cellular telephone systems. Its cellular interests include regional market
clusters in the following areas: Wisconsin/Illinois/Indiana, Iowa/
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Missouri, Eastern North Carolina/South Carolina, West
Virginia/Maryland/Pennsylvania/Ohio, Virginia, Washington/Oregon/Idaho,
Oregon/California, Maine/New Hampshire/Vermont, Florida/Georgia,
Oklahoma/Missouri/Kansas, Texas/Oklahoma, Eastern Tennessee/Western North
Carolina and Southwestern Texas. See "The Company's Cellular Interests." The
Company has acquired its cellular interests through the wireline application
process (17%), including settlements and exchanges with other applicants, and
through acquisitions (83%), including acquisitions from TDS and third parties.
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS. During the last five years, the Company has expanded its
size, particularly in contiguous or adjacent markets, through acquisitions which
have been aimed at strengthening the Company's position in the cellular
industry. This growth has resulted primarily from acquisitions of interests in
mid-sized and rural markets and has been based on obtaining interests with
rights to manage the underlying market.
Including acquisitions of cellular interests from TDS, the Company has
increased its population equivalents by 17%, from approximately 22.5 million at
December 31, 1992, to approximately 26.2 million at December 31, 1997. Markets
managed by the Company have increased from 116 markets at December 31, 1992 to
143 markets at December 31, 1997. As of December 31, 1997, 88% of the Company's
population equivalents represented interests in markets the Company manages
compared to 75% at December 31, 1992.
Recently, the pace of acquisitions has slowed as industry-wide consolidation
has reduced the number of markets available for acquisition. The Company's
population equivalents grew at a compound annual rate of just 3% over the last
five years due to the increased number of exchange and divestiture transactions
in the past few years.
The Company may continue to make opportunistic acquisitions or exchanges in
markets that further strengthen its market clusters and in other attractive
markets. The Company also seeks to acquire minority interests in markets where
it already owns the majority interest. There can be no assurance that the
Company, or TDS for the benefit of the Company, will be able to negotiate
additional acquisitions or exchanges on terms acceptable to it or that
regulatory approvals, where required, will be received. The Company plans to
retain minority interests in certain cellular markets which it believes will
earn a favorable return on investment. Other minority interests may be exchanged
for interests in markets which enhance the Company's market clusters or may be
sold for cash or other consideration. The Company also continues to evaluate the
disposition of certain managed interests which are not essential to its
corporate development strategy.
The Company, or TDS for the benefit of the Company, has historically
negotiated acquisitions of cellular interests from third parties primarily in
consideration for the Company's Common Shares or TDS's equity securities.
Cellular interests acquired by TDS in these transactions have been assigned to
the Company. At that time, the Company reimbursed TDS for the value of TDS
securities issued in such transactions, generally by issuing Common Shares to
TDS or by increasing the balance under the Company's Revolving Credit Agreement
with TDS in amounts equal to the value of TDS securities delivered at the time
the acquisitions were completed. The fair market value of the Company's
securities issued to TDS in connection with these transactions was equal to the
fair market value of the TDS securities delivered in the transactions and was
determined at the time the transactions were completed.
In the past four years, the Company has also negotiated substantial
divestitures and exchanges of cellular interests with third parties. The
consideration received from these divestitures of non-strategic markets has
primarily been cash, which has been used to reduce debt or for general corporate
purposes. The exchanges have included the divestiture of controlling interests
in non-strategic markets in exchange for controlling interests in markets which
further enhance the Company's clusters.
COMPLETED ACQUISITIONS. During 1997, the Company, or TDS for the benefit of
the Company, purchased majority interests in two markets and several additional
minority interests, representing approximately 534,000 population equivalents.
The total consideration paid for these purchases, primarily in the form of cash
(including cash borrowed under the Revolving Credit Agreement with TDS)
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and the Company's Common Shares issued to TDS to reimburse TDS for the value of
TDS Common Shares issued to third parties, totaled $81.4 million.
COMPLETED DIVESTITURES AND EXCHANGES. During 1997, the Company sold a
majority interest in one market and minority interests in two other markets,
representing approximately 358,000 population equivalents, for an aggregate
consideration of $54.5 million in cash and receivables. 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.
Also during 1997, the Company completed an exchange with BellSouth
Corporation ("BellSouth"). Pursuant to the exchange, the Company received
majority interests representing approximately 4.0 million population equivalents
in exchange for majority interests representing approximately 2.0 million
population equivalents, minority interests representing approximately 1.2
million population equivalents and a net amount of $86.7 million in cash. The
majority interests the Company received are in 12 markets adjacent to its
Iowa/Missouri and Wisconsin/Illinois/Indiana clusters.
PENDING ACQUISITIONS. At December 31, 1997, the Company had entered into
agreements with third parties to acquire a majority interest in one market and a
minority interest in a market in which the Company owns a majority interest,
representing approximately 410,000 population equivalents, for $51.3 million in
cash. If the majority interest is acquired as expected, the Company will
subsequently sell that interest to BellSouth for cash.
PENDING DIVESTITURES. At December 31, 1997, the Company had entered into
agreements with AirTouch Communications, Inc. ("AirTouch") to divest minority
interests in nine markets, representing 759,000 population equivalents. In
exchange, the agreements provided that the Company will receive approximately
4.0 million shares of AirTouch stock and cash totaling $54.2 million. In
addition, the Company will receive approximately $27.0 million in cash from TDS
pursuant to a contract right termination agreement entered into between the
Company and TDS. This agreement is related to two interests which are to be sold
directly by TDS to AirTouch and which were to be acquired by the Company as part
of the June 1996 agreement between the Company and TDS. The contract right
termination agreement will enable 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.
Additionally, the Company has entered into an agreement to sell its minority
interests in two other markets, representing approximately 176,000 population
equivalents, for $37.6 million in cash. The Company expects these pending
transactions to be completed during the first half of 1998. The Company
anticipates that it will record significant book gains on these divestitures
when the transactions are completed.
The Company maintains shelf registration of its Common Shares and Preferred
Stock under the Securities Act of 1933 for issuance specifically in connection
with acquisitions.
The Company is a majority-owned subsidiary of TDS. TDS owns 81.1% of the
combined total of the outstanding Common Shares and Series A Common Shares of
the Company and controls 95.6% of the combined voting power of both classes of
common stock. The Company benefits from the extensive telecommunications
industry experience of TDS, which also operates a telephone business and is
developing its PCS business.
CELLULAR INTERESTS AND CLUSTERS
The Company operates clusters of adjacent cellular systems in nearly all of
its markets, enabling its customers to benefit from larger service areas than
otherwise possible. Where the Company offers wide-area coverage, its customers
enjoy uninterrupted service within the designated area. Customers may also make
outgoing calls and receive incoming calls within this area without special
roaming arrangements. In addition to benefits to customers, clustering also has
provided to the Company certain economies in its capital and operating costs.
These economies are made possible through increased sharing of facilities,
personnel and other costs and have resulted in a reduction of the Company's per
customer cost of service. The extent to which the Company benefits from these
revenue enhancements
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and economies of operation is dependent on market conditions, population size of
each cluster and engineering considerations.
The Company may continue to make opportunistic acquisitions and exchanges
which will complement its established market clusters. From time to time, the
Company may also consider exchanging or selling its interests in markets which
do not fit well with its long-term strategies.
The Company owned interests in cellular telephone systems in 192 markets at
December 31, 1997, representing 26.2 million population equivalents. Including
the effect of the 11 minority interests to be sold during 1998, the Company
owned or had the right to acquire 181 markets, representing 25.3 million pops,
at December 31, 1997. The following table summarizes the growth in the Company's
population equivalents in recent years and the development status of these
population equivalents.
<TABLE>
<CAPTION>
DECEMBER 31,
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1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(THOUSANDS OF POPULATION EQUIVALENTS)(1)
<S> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed........................................... 22,778 20,389 20,104 18,829 19,086
Minority-Owned and Managed (2)....................................... 401 401 514 1,234 1,263
Markets to be Managed, Net of Markets to be Divested: (3)
Majority-Owned....................................................... -- 216 273 2,220 1,035
Minority-Owned (2)................................................... -- -- -- -- 6
--------- --------- --------- --------- ---------
Total Markets Managed and to be Managed.............................. 23,179 21,006 20,891 22,283 21,390
Minority Interests in Markets Managed by Others........................ 2,121 4,511 4,026 3,779 3,577
--------- --------- --------- --------- ---------
Total................................................................ 25,300 25,517 24,917 26,062 24,967
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(1) Based on 1997 Claritas estimates for all years.
(2) Includes markets where the Company has the right to acquire an interest but
does not currently own an interest.
(3) Includes markets which are operational but which are currently managed by
third parties.
The following section details the Company's cellular interests, including
those it owned or had the right to acquire as of December 31, 1997. The table
presented therein lists clusters of markets that the Company manages. The
Company's market clusters show the areas in which the Company is currently
focusing its development efforts. These clusters have been devised with a
long-term goal of allowing delivery of cellular service to areas of economic
interest and along corridors of economic activity. The number of population
equivalents represented by the Company's cellular interests may have no direct
relationship to the number of potential cellular customers or the revenues that
may be realized from the operation of the related cellular systems.
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THE COMPANY'S CELLULAR INTERESTS
The table below sets forth certain information with respect to the interests
in cellular markets which the Company owned or had the right to acquire pursuant
to definitive agreements as of December 31, 1997.
<TABLE>
<CAPTION>
PERCENTAGE TOTAL CURRENT
CURRENT CHANGE PURSUANT AND ACQUIRABLE
PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ----------------------------------------------------- --------------- ----------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
MARKETS MANAGED BY THE COMPANY:
MIDWEST REGIONAL MARKET CLUSTER:
WISCONSIN/ILLINOIS/INDIANA:
Milwaukee, Wl...................................... 1,460,000 100.00% 100.00% 1,460,000
Columbia (Wl 9).................................... 386,000 100.00 100.00 386,000
Madison, Wl........................................ 398,000 92.50 92.50 368,000
Peoria, IL......................................... 347,000 100.00 100.00 347,000
Appleton, Wl....................................... 344,000 100.00 100.00 344,000
Jo Daviess (IL 1).................................. 318,000 100.00 100.00 318,000
Rockford, IL....................................... 304,000 100.00 100.00 304,000
Wood (Wl 7)........................................ 290,000 100.00 100.00 290,000
Vernon (Wl 8)...................................... 236,000 100.00 100.00 236,000
Adams (IL 4) * (2)................................. 214,000 100.00 100.00 214,000
Green Bay, Wl...................................... 215,000 99.01 99.01 213,000
Mercer (IL 3)...................................... 202,000 100.00 100.00 202,000
Racine, Wl......................................... 186,000 89.64 89.64 167,000
Kenosha, Wl........................................ 143,000 99.09 99.09 142,000
Janesville-Beloit, Wl.............................. 152,000 80.54 12.00% 92.54 141,000
Door (Wl 10)....................................... 130,000 100.00 100.00 130,000
La Crosse, Wl...................................... 103,000 95.11 95.11 98,000
Sheboygan, Wl...................................... 110,000 86.66 86.66 96,000
Wausau, Wl *....................................... 122,000 71.76 71.76 88,000
Trempealeau (Wl 6) (2)............................. 83,000 100.00 100.00 83,000
Miami (IN 4) *..................................... 179,000 28.57 28.57 51,000
Warren (IN 5) *.................................... 123,000 33.33 33.33 41,000
Alton, IL.......................................... 21,000 100.00 100.00 21,000
Pierce (Wl 5) (2).................................. 14,000 100.00 100.00 14,000
--------------- ---------------
6,080,000 5,754,000
--------------- ---------------
IOWA/MISSOURI:
Des Moines, IA..................................... 431,000 100.00 100.00 431,000
Davenport, IA-IL................................... 358,000 97.37 97.37 349,000
Humboldt (IA 10)................................... 180,000 100.00 100.00 180,000
Cedar Rapids, IA................................... 181,000 96.00 96.00 174,000
Iowa (IA 6)........................................ 156,000 100.00 100.00 156,000
Muscatine (IA 4)................................... 155,000 100.00 100.00 155,000
Waterloo-Cedar Falls, IA........................... 146,000 93.03 93.03 136,000
Columbia, MO *..................................... 127,000 100.00 100.00 127,000
Stone (MO 15)...................................... 118,000 100.00 100.00 118,000
Hardin (IA 11)..................................... 113,000 100.00 100.00 113,000
Jackson (IA 5)..................................... 109,000 100.00 100.00 109,000
Kossuth (IA 14).................................... 107,000 100.00 100.00 107,000
Lyon (IA 16)....................................... 103,000 100.00 100.00 103,000
Iowa City, IA...................................... 102,000 100.00 100.00 102,000
Laclede (MO 16).................................... 100,000 100.00 100.00 100,000
Washington (MO 13)................................. 94,000 100.00 100.00 94,000
Callaway (MO 6) *.................................. 85,000 100.00 100.00 85,000
Dubuque, IA........................................ 88,000 95.90 95.90 84,000
Mitchell (IA 13)................................... 67,000 100.00 100.00 67,000
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL CURRENT
CURRENT CHANGE PURSUANT AND ACQUIRABLE
PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ----------------------------------------------------- --------------- ----------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Mills (IA 1)....................................... 62,000 100.00% 100.00% 62,000
Schuyler (MO 3).................................... 56,000 100.00 100.00 56,000
Shannon (MO 17).................................... 56,000 100.00 100.00 56,000
Audubon (IA 7)..................................... 55,000 100.00 100.00 55,000
Linn (MO 5) (2).................................... 55,000 100.00 100.00 55,000
Union (IA 2)....................................... 50,000 100.00 100.00 50,000
Monroe (IA 3)...................................... 91,000 49.00 49.00 44,000
Winneshiek (IA 12)................................. 116,000 24.50 24.50 28,000
Ida (IA 9) *....................................... 63,000 16.67 16.67 11,000
--------------- ---------------
3,424,000 3,207,000
--------------- ---------------
TOTAL MIDWEST REGIONAL MARKET CLUSTER.............. 9,504,000 8,961,000
--------------- ---------------
--------------- ---------------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
EASTERN NORTH CAROLINA/SOUTH CAROLINA:
Harnett (NC 10).................................... 294,000 100.00 100.00 294,000
Northampton (NC 8)................................. 292,000 100.00 100.00 292,000
Rockingham (NC 7).................................. 291,000 100.00 100.00 291,000
Greene (NC 13)..................................... 246,000 100.00 100.00 246,000
Greenville (NC 14)................................. 242,000 100.00 100.00 242,000
Hoke (NC 11)....................................... 226,000 100.00 100.00 226,000
Chesterfield (SC 4)................................ 213,000 100.00 100.00 213,000
Ashe (NC 3)........................................ 162,000 100.00 100.00 162,000
Chatham (NC 6)..................................... 162,000 61.16 61.16 132,000
Sampson (NC 12).................................... 132,000 100.00 100.00 132,000
Camden (NC 9)...................................... 119,000 100.00 100.00 119,000
--------------- ---------------
2,379,000 2,349,000
--------------- ---------------
WEST VIRGINIA/MARYLAND/PENNSYLVANIA/ OHIO:
Monongalia (WV 3) *................................ 269,000 100.00 100.00 269,000
Raleigh (WV 7) *................................... 256,000 100.00 100.00 256,000
Grant (WV 4) *..................................... 174,000 100.00 100.00 174,000
Tucker (WV 5) *.................................... 132,000 100.00 100.00 132,000
Hagerstown, MD *................................... 128,000 100.00 100.00 128,000
Ross (OH 9) *...................................... 249,000 48.00 48.00 122,000
Cumberland, MD *................................... 100,000 100.00 100.00 100,000
Bedford (PA 10) * (2).............................. 49,000 100.00 100.00 49,000
Garrett (MD 1) *................................... 30,000 100.00 100.00 30,000
--------------- ---------------
1,387,000 1,260,000
--------------- ---------------
VIRGINIA:
Roanoke, VA........................................ 234,000 100.00 100.00 234,000
Giles (VA 3)....................................... 201,000 100.00 100.00 201,000
Bedford (VA 4)..................................... 176,000 100.00 100.00 176,000
Lynchburg, VA...................................... 160,000 100.00 100.00 160,000
Charlottesville, VA................................ 146,000 94.44 94.44 138,000
Buckingham (VA 7).................................. 91,000 100.00 100.00 91,000
Tazewell (VA 2) (2)................................ 83,000 100.00 100.00 83,000
Bath (VA 5)........................................ 61,000 100.00 100.00 61,000
--------------- ---------------
1,152,000 1,144,000
--------------- ---------------
TOTAL MID-ATLANTIC REGIONAL MARKET CLUSTER......... 4,918,000 4,753,000
--------------- ---------------
--------------- ---------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL CURRENT
CURRENT CHANGE PURSUANT AND ACQUIRABLE
PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ----------------------------------------------------- --------------- ----------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
NORTHWEST REGIONAL MARKET CLUSTER:
WASHINGTON/OREGON/IDAHO:
Clark (ID 6)....................................... 294,000 100.00% 100.00% 294,000
Pacific (WA 6) *................................... 184,000 100.00 100.00 184,000
Richland-Kennewick-Pasco, WA *..................... 183,000 100.00 100.00 183,000
Butte (ID 5)....................................... 160,000 100.00 100.00 160,000
Yakima, WA *....................................... 219,000 54.55 58.54 128,000
Okanogan (WA 4).................................... 118,000 100.00 100.00 118,000
Umatilla (OR 3) *.................................. 151,000 60.42 60.42 91,000
Kittitas (WA 5) * (2).............................. 71,000 83.50 85.20 61,000
Hood River (OR 2) *................................ 74,000 45.10 45.10 34,000
Skamania (WA 7) *.................................. 28,000 45.10 45.10 13,000
--------------- ---------------
1,482,000 1,266,000
--------------- ---------------
OREGON/CALIFORNIA:
Coos (OR 5)........................................ 260,000 100.00 100.00 260,000
Del Norte (CA 1)................................... 209,000 100.00 100.00 209,000
Medford, OR *...................................... 171,000 100.00 100.00 171,000
Mendocino (CA 9)................................... 139,000 100.00 100.00 139,000
Crook (OR 6) *..................................... 196,000 62.50 62.50 122,000
Modoc (CA 2)....................................... 63,000 100.00 100.00 63,000
--------------- ---------------
1,038,000 964,000
--------------- ---------------
TOTAL NORTHWEST REGIONAL MARKET CLUSTER............ 2,520,000 2,230,000
--------------- ---------------
--------------- ---------------
MAINE/NEW HAMPSHIRE/VERMONT
MARKET CLUSTER:
Manchester-Nashua, NH.............................. 357,000 92.49 92.49 330,000
Coos (NH 1) *...................................... 224,000 100.00 100.00 224,000
Kennebec (ME 3).................................... 221,000 100.00 100.00 221,000
Carroll (NH 2)..................................... 216,000 100.00 100.00 216,000
Somerset (ME 2).................................... 148,000 100.00 100.00 148,000
Bangor, ME......................................... 145,000 91.47 91.47 132,000
Addison (VT 2) * (2)............................... 107,000 100.00 100.00 107,000
Washington (ME 4) *................................ 86,000 100.00 100.00 86,000
Lewiston-Auburn, ME................................ 101,000 82.67 82.67 84,000
Oxford (ME 1)...................................... 83,000 100.00 100.00 83,000
--------------- ---------------
TOTAL MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER... 1,688,000 1,631,000
--------------- ---------------
--------------- ---------------
FLORIDA/GEORGIA MARKET CLUSTER:
Fort Pierce, FL * (3).............................. 291,000 49.00 51.00% 100.00 291,000
Tallahassee, FL.................................... 280,000 100.00 100.00 280,000
Worth (GA 14)...................................... 253,000 100.00 100.00 253,000
Gainesville, FL.................................... 222,000 100.00 100.00 222,000
Toombs (GA 11)..................................... 155,000 100.00 100.00 155,000
Walton (FL 10)..................................... 119,000 100.00 100.00 119,000
Putnam (FL 5) (2).................................. 70,000 100.00 100.00 70,000
Dixie (FL 6)....................................... 57,000 100.00 100.00 57,000
Jefferson (FL 8) (2)............................... 49,000 100.00 100.00 49,000
Calhoun (FL 9)..................................... 43,000 100.00 100.00 43,000
--------------- ---------------
TOTAL FLORIDA/GEORGIA MARKET CLUSTER............... 1,539,000 1,539,000
--------------- ---------------
--------------- ---------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL CURRENT
CURRENT CHANGE PURSUANT AND ACQUIRABLE
PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ----------------------------------------------------- --------------- ----------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET
CLUSTER:
OKLAHOMA/MISSOURI/KANSAS:
Tulsa, OK *........................................ 798,000 55.06% 55.06% 440,000
Joplin, MO *....................................... 147,000 100.00 100.00 147,000
Seminole (OK 6).................................... 219,000 55.06 55.06 120,000
Elk (KS 15) *...................................... 154,000 75.00 75.00 116,000
Nowata (OK 4) * (2)................................ 102,000 55.06 55.06 56,000
--------------- ---------------
1,420,000 879,000
--------------- ---------------
TEXAS/OKLAHOMA:
Garvin (OK 9)...................................... 203,000 100.00 100.00 203,000
Haskell (OK 10).................................... 83,000 100.00 100.00 83,000
Wichita Falls, TX *................................ 140,000 51.65 51.65 72,000
Lawton, OK *....................................... 111,000 51.65 51.65 57,000
Jackson (OK 8) *................................... 97,000 51.65 51.65 50,000
Hardeman (TX 5) * (2).............................. 38,000 51.65 51.65 19,000
Briscoe (TX 4) * (2)............................... 13,000 51.65 51.65 6,000
Beckham (OK 7) * (2)............................... 10,000 51.65 51.65 5,000
--------------- ---------------
695,000 495,000
--------------- ---------------
TOTAL TEXAS/OKLAHOMA/MISSOURI/ KANSAS REGIONAL
MARKET CLUSTER.................................. 2,115,000 1,374,000
--------------- ---------------
--------------- ---------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET
CLUSTER:
Knoxville, TN *.................................... 556,000 96.03 96.03 534,000
Asheville, NC *.................................... 212,000 100.00 100.00 212,000
Henderson (NC 4) * (2)............................. 194,000 100.00 100.00 194,000
Bledsoe (TN 7) * (2)............................... 151,000 96.03 96.03 145,000
Hamblen (TN 4) * (2)............................... 135,000 100.00 100.00 135,000
Macon (TN 3) *..................................... 344,000 16.67 16.67 57,000
Yancey (NC 2) * (2)................................ 31,000 100.00 100.00 31,000
--------------- ---------------
TOTAL EASTERN TENNESSEE/WESTERN NORTH CAROLINA
MARKET CLUSTER.................................. 1,623,000 1,308,000
--------------- ---------------
--------------- ---------------
SOUTHWESTERN TEXAS MARKET CLUSTER:
Corpus Christi, TX................................. 388,000 100.00 100.00 388,000
Atascosa (TX 19)................................... 231,000 100.00 100.00 231,000
Edwards (TX 18).................................... 223,000 100.00 100.00 223,000
Laredo, TX......................................... 182,000 93.74 93.74 171,000
Wilson (TX 20)..................................... 148,000 100.00 100.00 148,000
Victoria, TX....................................... 82,000 100.00 100.00 82,000
--------------- ---------------
TOTAL SOUTHWESTERN TEXAS MARKET CLUSTER............ 1,254,000 1,243,000
--------------- ---------------
--------------- ---------------
OTHER OPERATIONS:
Hawaii (Hl 3)...................................... 140,000 100.00 100.00 140,000
--------------- ---------------
Total Managed Markets............................ 25,301,000 23,179,000
--------------- ---------------
--------------- ---------------
MARKETS MANAGED BY OTHERS:
Los Angeles/Oxnard, CA *........................... 15,645,000 5.50 5.50 861,000
Oklahoma City, OK *................................ 1,003,000 14.60 14.60 146,000
Portland, ME *..................................... 288,000 49.00 49.00 141,000
McAllen, TX........................................ 509,000 26.20 26.20 133,000
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE TOTAL CURRENT
CURRENT CHANGE PURSUANT AND ACQUIRABLE
PERCENTAGE TO DEFINITIVE POPULATION
CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
- ----------------------------------------------------- --------------- ----------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Portsmouth-Dover-Rochester,
NH-ME *.......................................... 280,000 40.00% 40.00% 112,000
Others (Fewer than 100,000 population equivalents
each)............................................ 728,000
---------------
Total Population Equivalents of Markets Managed
by Others...................................... 2,121,000
---------------
Total Population Equivalents..................... 25,300,000
---------------
---------------
</TABLE>
- ------------
* Designates wireline market.
(1) Interests under these agreements are expected to be acquired at the time
specified therein, following the satisfaction of customary closing
conditions.
(2) These markets have been partitioned into more than one licensed area. The
1997 population, percentage ownership and number of population equivalents
shown are for the licensed areas within the markets in which the Company
owns an interest.
(3) The Company owns 80% of the entity which owns and operates this market but
has only a 49% interest in the earnings and profits. Pursuant to a
definitive agreement, the Company has rights to acquire the remaining 20% of
the equity and 51% of the earnings and profits of this entity.
SYSTEM DESIGN AND CONSTRUCTION. The Company designs and constructs its
systems in a manner it believes will permit it to provide high-quality service
to mobile, transportable and portable cellular telephones, generally based on
market and engineering studies which relate to specific markets. Engineering
studies are performed by Company personnel or independent engineering firms. The
Company's switching equipment is digital, which reduces noise and crosstalk and
is capable of interconnecting in a manner which reduces costs of operation.
While digital microwave interconnections are typically made between the MTSO and
cell sites, primarily analog radio transmission is used between cell sites and
the cellular telephones themselves.
In accordance with its strategy of building and strengthening market
clusters, the Company has selected high capacity digital cellular switching
systems that are capable of serving multiple markets through a single MTSO. The
Company's cellular systems are designed to facilitate the installation of
equipment which will permit microwave interconnection between the MTSO and the
cell site. The Company has implemented such microwave interconnection in most of
the cellular systems it manages. In other systems in which the Company owns a
majority interest and where it is believed to be cost-efficient, such microwave
technology will also be implemented. Otherwise, such systems will rely upon
landline telephone connections or microwave links owned by others to link cell
sites with the MTSO. Although the installation of microwave network
interconnection equipment requires a greater initial capital investment, a
microwave network enables a system operator to avoid the current and future
charges associated with leasing telephone lines from the landline telephone
company, while generally improving system reliability. In addition, microwave
facilities can be used to connect separate cellular systems to allow shared
switching, which reduces the aggregate cost of the equipment necessary to
operate both systems.
The Company expanded its internal network in 1996 to encompass all of its
managed markets. This network provides automatic call delivery for the Company's
customers and handoff between adjacent markets. The network has also been
extended through links with certain systems operated by several other carriers,
including GTE, AirTouch/US West, Ameritech, BellSouth, Centennial Cellular
Corp., Southwestern Bell, AT&T Wireless Communications, Vanguard Cellular
Systems and others. Additionally, the Company has implemented certain Signal
Transfer Points which have allowed it to interconnect efficiently with network
providers such as Illuminet and the North American Cellular Network.
14
<PAGE>
The Company plans to integrate the systems in the markets acquired in the
exchange with BellSouth into its internal network as quickly as possible. This
may involve changing out certain system equipment and replacing it with new
equipment which will allow for more efficient networking.
During 1997, the Company extended the network for its customers through
interconnection with additional system operators for call delivery and hand-off.
This expanded network increases the area in which customers can automatically
receive incoming calls, and should further reduce the incidence of "tumbling"
electronic serial number fraud due to the pre-call validation feature of
networked systems. In addition, the extension of these networks will allow for
the termination of wireless-to-wireless traffic without the inherent costs that
are otherwise incurred if this traffic is routed through the landline network.
Management believes that currently available technologies will allow
sufficient capacity on the Company's networks to meet anticipated demand over
the next few years.
COSTS OF SYSTEM CONSTRUCTION AND FINANCING
Construction of cellular systems is capital-intensive, requiring substantial
investment for land and improvements, buildings, towers, MTSOs, cell site
equipment, microwave equipment, engineering and installation. The Company,
consistent with FCC control requirements, uses primarily its own personnel to
engineer and oversee construction of each cellular system it owns and operates.
In so doing, the Company expects to improve the overall quality of its systems
and to reduce the expense and time required to make them operational.
The costs (exclusive of license costs) of the systems in which the Company
owns an interest have historically been financed through capital contributions
or intercompany loans from the Company to the entities owning the systems, and
through certain vendor financing. In recent years, these funding requirements
have been met with cash generated from operations, proceeds from debt and equity
offerings and proceeds from the sales of cellular interests.
MARKETING
The Company's marketing plan is centered around rapid penetration of its
market clusters, increasing customer awareness of cellular service and reducing
churn through both the building of brand awareness and the implementation of
marketing programs. The marketing plan stresses the value of the Company's
service offerings and incorporates combinations of rate plans and cellular
telephone equipment which are designed to meet the needs of a variety of
customer segments and their usage patterns. The Company's distribution channels
include direct sales personnel, agents and retail service centers in the vast
majority of its markets. The retail locations are Company-owned and managed and
are designed to market cellular service to the consumer segment in a familiar
setting. In late 1996, the Company implemented its new site on the WorldWideWeb
to support its marketing efforts and to be a future distribution channel.
Customers may now order the Company's service through this Website.
The Company manages each cluster of markets from an administrative office
with a local staff, including sales, customer service, engineering and in some
cases installation personnel. Direct sales consultants market cellular service
to business customers throughout each cluster. Retail associates work out of the
retail locations and market cellular service primarily to the consumer and small
business segment. The Company maintains an ongoing training program to improve
the effectiveness of sales consultants and retail associates by focusing their
efforts on obtaining customers and maximizing the sale of high-user packages.
These packages provide for customers to obtain a minimum amount of usage at
discounted rates per minute, at fixed prices which are charged even if usage
falls below a defined monthly minimum amount.
The Company continues to expand its relationships with agents, dealers and
non-Company retailers to obtain customers. Agents and dealers are independent
business people who obtain customers for the Company on a commission basis. The
Company's agents are generally in the business of selling cellular telephones,
cellular service packages and other related products. The Company's dealers
include car stereo companies and other companies whose customers are also
potential cellular customers. The non-Company retailers include car dealers,
major appliance dealers, office supply dealers and mass merchants.
15
<PAGE>
The Company opened its first retail locations in late 1993, expanding to 260
stand-alone retail stores by the end of 1997. These Company-owned and operated
businesses utilize rental facilities in high-traffic areas. The Company has
implemented a uniform appearance in these stores, with all having similar
displays and layouts. The retail centers' hours of business match those of the
retail trade in the local marketplace, often staying open on weekends and later
in the evening than a typical business supplier. To fully serve customer needs,
these stores sell accessories to complement the phones and services the Company
has traditionally provided. During 1996, the Company further expanded its retail
presence by opening smaller retail kiosks within other larger merchandisers and
grocery stores. At December 31, 1997, the Company had opened over 140 "stores
within a store," primarily in Wal-Mart locations.
In addition to its own retail centers, the Company actively pursues national
retail accounts, as agents of the Company, which yield new customer additions in
multiple markets. Agreements have been entered into with such national
distributors as Ford Motor Company, General Motors, Radio Shack, Best Buy,
Circuit City, Staples, Office Depot and Sears, Roebuck & Co. in certain of the
Company's markets. Upon the sale of a cellular telephone by one of these
national distributors, the Company receives, often exclusively within the
territories served, the resulting cellular customer.
The Company uses a variety of direct mail, billboard, radio, television and
newspaper advertising to stimulate interest by prospective customers in
purchasing the Company's cellular service and to establish familiarity with the
Company's name. In 1997, the Company increased its focus on brand advertising,
using the tag line "The Way People Talk Around Here"(SM) to promote the United
States Cellular-TM- brand. Advertising is directed at gaining customers,
improving customers' awareness of the United States Cellular brand, increasing
existing customers' usage and increasing the public awareness and understanding
of the cellular services offered by the Company. The Company attempts to select
the advertising and promotion media that are most appealing to the targeted
groups of potential customers in each local market. The Company utilizes local
advertising media and public relations activities and establishes programs to
enhance public awareness of the Company, such as providing telephones and
service for public events and emergency uses.
The following table summarizes, by operating cluster, the total population,
the Company's customer units and penetration for the Company's majority-owned
and managed markets that were operational as of December 31, 1997.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- ----------------------------------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
Wisconsin/Illinois/Indiana....................................... 5,778,000 452,000 7.82%
Iowa/Missouri.................................................... 3,154,000 257,000 8.15
Eastern North Carolina/South Carolina............................ 2,379,000 124,000 5.21
West Virginia/Maryland/Pennsylvania/Ohio......................... 1,138,000 69,000 6.06
Virginia......................................................... 1,152,000 70,000 6.08
Washington/Oregon/Idaho.......................................... 1,380,000 102,000 7.39
Oregon/California................................................ 1,038,000 71,000 6.84
Maine/New Hampshire/Vermont...................................... 1,688,000 103,000 6.10
Florida/Georgia.................................................. 1,539,000 115,000 7.47
Oklahoma/Missouri/Kansas......................................... 1,420,000 111,000 7.82
Texas/Oklahoma................................................... 695,000 46,000 6.62
Eastern Tennessee/Western North Carolina......................... 1,279,000 117,000 9.15
Southwestern Texas............................................... 1,254,000 56,000 4.47
Other Operations................................................. 140,000 17,000 12.14
---------- ---------- -----
24,034,000 1,710,000 7.11%
---------- ---------- -----
---------- ---------- -----
</TABLE>
CUSTOMERS AND SYSTEM USAGE
Cellular customers come from a wide range of occupations. They typically
include a large proportion of individuals who work outside of their offices such
as people in the construction, real estate, wholesale and retail distribution
businesses and professionals. Increasingly, the Company is providing cellular
service to consumers and to customers who use their cellular telephones for
security purposes. Although some of the Company's customers still use in-vehicle
cellular telephones, most new customers
16
<PAGE>
are selecting portable cellular telephones. These units have become more compact
and fully featured as well as more attractively priced, and they appeal to newer
segments of the customer population.
The Company's cellular systems are used most extensively during normal
business hours between 7:00 am and 6:00 pm. On average, the local retail
customers in the Company's consolidated markets used their cellular systems
approximately 103 minutes per unit each month and generated retail revenue of
approximately $36 per month during 1997, compared to 107 minutes and $40 per
month in 1996. Revenue generated by roamers, together with local retail, toll
and other revenues, brought the Company's total average monthly service revenue
per customer unit in consolidated markets to $54 during 1997. Average monthly
service revenue per customer unit decreased approximately 15% during 1997. This
decrease is related to the industry-wide trend of newer customers tending to use
fewer minutes during peak business hours, which has reduced the average local
retail revenue per minute, and to the declining contribution of inbound roaming
revenue per customer. The Company believes that its customer base is growing
faster than that of the cellular industry as a whole, which has a dilutive
effect on inbound roaming revenue per customer. The Company anticipates that
average monthly service revenue per customer unit will continue to decline as
its distribution channels provide additional customers who generate lower
revenue per local minute of use and as roaming revenues grow more slowly.
However, this effect is more than offset by the Company's increasing number of
customers; therefore, the Company expects total revenues to continue to grow for
the next few years.
In addition to revenue from local retail customers, the Company generates
revenue from roaming customers and other services. The Company's roaming service
allows a customer to place or receive a call in a cellular service area away
from the customer's home service area. The Company has entered into "roaming
agreements" with operators of other cellular systems covering virtually all
systems in the United States and Canada. These agreements offer customers the
opportunity to roam in these systems. These reciprocal agreements automatically
pre-register the customers of the Company's systems in the other carriers'
systems. Also, a customer of a participating system roaming (i.e., travelling)
in a Company market where this arrangement is in effect is able to make and
receive calls on the Company's system. The charge for this service is typically
at premium rates and is billed by the Company to the customer's home system,
which then bills the customer. The Company has entered into agreements with
other cellular carriers to transfer roaming usage at agreed-upon rates. In some
instances, based on competitive factors, the Company may charge a lower amount
to its customers than the amount actually charged to the Company by another
cellular carrier for roaming.
The following table summarizes certain information about customers and
market penetration in the Company's managed operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1)....................... 134 131 137 130 116
Total population of markets in service (000s)........... 24,034 21,712 22,309 21,314 19,383
Customer Units:
at beginning of period (2)............................ 1,073,000 710,000 421,000 261,000 150,800
additions during period (2)........................... 941,000 561,000 426,000 250,000 165,300
disconnects during period (2)......................... 304,000 198,000 137,000 90,000 55,100
at end of period (2).................................. 1,710,000 1,073,000 710,000 421,000 261,000
Market penetration at end of period (3)................. 7.11% 4.94% 3.18% 1.98% 1.35%
</TABLE>
- ------------
(1) Represents the number of markets in which the Company owned at least a 50%
interest and which it managed. The revenues and expenses of these cellular
markets are included in the Company's consolidated revenues and expenses.
(2) Represents the approximate number of revenue-generating cellular telephones
served by the cellular markets referred to in footnote (1). The revenue
generated by such cellular telephones is included in consolidated revenues.
(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Donnelley
Marketing Service for the respective years (Claritas in 1997).
17
<PAGE>
PRODUCTS AND SERVICES
CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types
of cellular telephones, all of which are currently compatible with cellular
systems nationwide. The Company offers a full range of vehicle-mounted,
transportable and hand-held portable cellular telephones. Features offered in
some of the cellular telephones include hands-free calling, repeat dialing, horn
alert and others.
The Company negotiates volume discounts from its cellular telephone
suppliers. The Company discounts cellular telephones to meet competition or to
stimulate sales by reducing the cost of becoming a cellular customer. In these
instances, where permitted by law, customers are generally required to sign a
service contract with the Company. The Company also cooperates with cellular
equipment manufacturers in local advertising and promotion of cellular
equipment.
The Company has established service and/or installation facilities in many
of its local markets to ensure quality installation and service of the cellular
telephones it sells. These facilities allow the Company to improve its service
by promptly assisting customers who experience equipment problems. Additionally,
the Company maintains a repair facility in Tulsa, Oklahoma, which handles more
complex service and repair issues.
CELLULAR SERVICES. The Company's customers are able to choose from a
variety of packaged pricing plans which are designed to fit different calling
patterns. The Company has developed and introduced its new consumer line of
products under the CarryPhone brand. These products include a) Express, a
pre-packaged phone plus price plan aimed at the convenience buyer; b)
TalkTracker, a cellular phone with usage prepaid; and c) Home and Away, a
combination cordless and cellular phone in a single package. The Company's
customer bills typically show separate charges for custom-calling features,
airtime in excess of the packaged amount, and toll calls. Custom-calling
features provided by the Company include wide-area call delivery, call
forwarding, call waiting, three-way calling and no-answer transfer. The Company
also offers a voice message service in many of its markets. This service, which
functions like a sophisticated answering machine, allows customers to receive
messages from callers when they are not available to take calls.
REGULATION
REGULATORY ENVIRONMENT. The operations of the Company are subject to FCC
and state regulation. The cellular telephone licenses held by USM are granted by
the FCC for the use of radio frequencies and are an important component of the
overall value of the assets of the Company. The construction, operation and
transfer of cellular systems in the United States are regulated to varying
degrees by the FCC pursuant to the Communications Act of 1934 (the
"Communications Act"). In 1996, Congress enacted the Telecommunications Act of
1996 (the "1996 Act"), which amended the Communications Act. The 1996 Act
mandates significant changes in existing telecommunications rules and policies
to promote competition, ensure the availability of telecommunications services
to all parts of the nation and to streamline regulation of the
telecommunications industry to remove regulatory burdens as competition
develops. The FCC has promulgated regulations governing construction and
operation of cellular systems, licensing (including renewal of licenses) and
technical standards for the provision of cellular telephone service under the
Communications Act, and is implementing the legislative objectives of the 1996
Act, as discussed below.
LICENSING. For cellular telephone licensing purposes, the FCC has divided
the United States into separate geographic markets (MSAs and RSAs). In each
market, the allocated cellular frequencies are divided into two equal blocks.
During the application process, the FCC reserved one block of frequencies for
nonwireline applicants and another block for wireline applicants. Subject to FCC
approval, a cellular system may be sold to either a wireline or nonwireline
entity, but no entity which controls a cellular system may own an interest in
another cellular system in the same MSA or RSA.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval. Acquisitions of minority interests
generally do not require FCC approval. Whenever FCC approval is required, any
interested party may file a petition to dismiss or deny the application for
approval of the proposed transfer.
18
<PAGE>
The FCC must be notified each time an additional cell is constructed which
enlarges the service area of a given market. The FCC's rules also generally
require persons or entities holding cellular construction permits or licenses to
coordinate their proposed frequency usage with neighboring cellular licensees in
order to avoid electrical interference between adjacent systems. The height and
power of base stations in the cellular system are regulated by FCC rules, as are
the types of signals emitted by these stations. In addition to regulation by the
FCC, cellular systems are subject to certain Federal Aviation Administration
("FAA") regulations with respect to the siting and construction of cellular
transmitter towers and antennas as well as local zoning requirements.
Beginning in 1996, the FCC has also imposed a requirement that all licensees
register and obtain FCC registration numbers for all of their antenna towers
which require prior FAA clearance. The Company is currently engaged in this
registration process. All new towers must be registered at the time of
construction and existing towers are being registered on a staggered
state-by-state basis, to be concluded in May 1998.
Beginning in October 1997, cellular systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" (RF) radiation requirements,
were made subject to those requirements (cellular towers of less than 10 meters
in height, building-mounted antennae and cellular telephones). After October
1997, all new cellular facilities must be in compliance when they are brought
into service. Existing facilities must be brought into compliance with the
requirements when their licenses are renewed. The Company believes that the
great majority of its existing facilities already comply with the requirements,
that the remainder will be brought into compliance as required and that the
cellular telephones it sells comply with the standards.
Initial cellular telephone licenses were granted tor ten-year periods. The
FCC has established standards for conducting comparative renewal proceedings
between a cellular licensee seeking renewal of its license and challengers
filing competing applications. The FCC has: (i) established criteria for
comparing the renewal applicant to challengers, including the standards under
which a renewal expectancy will be granted to the applicant seeking license
renewal; (ii) established basic qualifications standards for challengers; and
(iii) provided procedures for preventing possible abuses in the comparative
renewal process. The FCC has concluded that it will award a renewal expectancy
if the licensee has (i) provided "substantial" performance, which is defined as
"sound, favorable and substantially above a level of mediocre service just
minimally justifying renewal," and (ii) complied with FCC rules, policies and
the Communications Act. If a renewal expectancy is awarded to an existing
licensee, its license is renewed and competing applications are not considered.
The Company's Tulsa and Knoxville licenses were renewed in 1995, and the
Company's Des Moines, Iowa; Peoria, Illinois; and Roanoke, Virginia licenses
were renewed in 1996. In September 1997, the Company filed license renewal
applications for its Davenport, Iowa; Tallahassee, Florida; Asheville, North
Carolina; Manchester, New Hampshire; Columbia, Missouri; Wichita Falls, Texas;
Gainesville, Florida; Lewiston, Maine; Joplin, Missouri; Cedar Rapids, Iowa; La
Crosse, Wisconsin; Bangor, Maine; Fort Pierce, Florida; Victoria, Texas;
Evansville, Indiana; and Owensboro, Kentucky licenses. Those applications were
unopposed. On October 30, 1997, the Company assigned its Evansville and
Owensboro licenses to a subsidiary of BellSouth as part of the exchange
transaction between the two companies. As part of the same transaction,
BellSouth assigned its Appleton, Wisconsin; Rockford, Illinois; Green Bay,
Wisconsin; and Janesville, Wisconsin licenses to the Company. All of those
licenses were renewed in January 1998.
The Company conducts and plans to conduct its operations in accordance with
all relevant FCC rules and regulations and anticipates being able to qualify for
a renewal expectancy in its upcoming renewal filings. Accordingly, the Company
believes that current regulations will have no significant effect on its
operations and financial condition. However, changes in the regulation of
cellular operators or their activities and of other mobile service providers
could have a material adverse effect on the Company's operations.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and non-wireline entities and by third parties.
Accordingly, many unserved area applications have been filed by the Company and
others. The Company's strategy with respect to system construction in its
markets has been and will be to build cells covering areas within such markets
that the Company considers economically feasible to
19
<PAGE>
serve or might conceivably wish to serve and to do so within the five-year
period following issuance of the license. In cases where applications for
unserved areas are filed which are mutually exclusive and would result in
overlapping service areas, the FCC decides between the competing applicants by
an auction process.
Pursuant to 1993 amendments to the Communications Act, cellular service is
classified as a Commercial Mobile Radio Service ("CMRS"), in that it is service
offered to the public, for a fee, which is interconnected to the public switched
telephone network. The FCC has determined that it will forebear from requiring
CMRS carriers to comply with a number of statutory provisions otherwise
applicable to common carriers, such as the filing of tariffs.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the cellular industry. In
one proceeding, the FCC has imposed new "enhanced 911" regulations on cellular
carriers. Enhanced 911 capabilities would enable cellular systems to determine
the precise location of persons making emergency calls. The new rules will
require cellular carriers to work with local public safety officials to process
911 calls, including those made from mobile telephones not registered with the
cellular system, will require carriers by April 1998 to be able to identify the
cell from which the call has been made, and will require cellular systems to
improve their ability to locate wireless 911 callers over a five-year period.
The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the roaming subscribers of broadband PCS providers, among
others, even though the subscribers involved have no pre-existing service
relationship with that carrier. Under these new policies, broadband PCS
providers may offer their subscribers handsets which are capable of operating
over broadband PCS and cellular networks so that when their subscribers are out
of range of broadband PCS networks, they will be able to obtain non-automatic
access to cellular networks. The FCC expects that implementation of these
roaming capabilities will promote competition between broadband PCS and cellular
service providers.
The FCC has adopted requirements which will make it possible for subscribers
to retain, at the same location, their existing telephone numbers when they
switch from one service provider to another. This numbering portability will
include switching between Local Exchange Carriers ("LECs") and other wireline
providers, between wireless service providers and between LEC/wireline and
wireless providers. LECs have implementation deadlines by the end of 1998.
Broadband PCS, cellular and certain other wireless providers have phased
implementation deadlines in 1998 and 1999.
In another proceeding, the FCC in 1996 adopted rules regarding the method by
which cellular carriers and LECs shall compensate each other for interconnecting
cellular and local exchange facilities. The FCC rules provided for symmetrical
and reciprocal compensation between LECs and cellular carriers, and also
prescribed interim interconnection proxy rates, which are much lower than the
rates formerly paid by cellular carriers to LECs. Symmetrical and reciprocal
compensation means they must pay each other at the same rate. The U.S. Court of
Appeals for the Eighth Circuit has vacated the FCC's rules. However, the FCC's
rules requiring reciprocal and symmetrical compensation remain in effect as
applied to the cellular industry. Interconnection rate issues will be decided by
the states. Whether the issue is decided by the states or the federal
government, cellular carriers in the future can be expected to pay lower rates
to LECs than they previously paid. This result is expected to be favorable to
the wireless industry and somewhat unfavorable to LECs.
The FCC is also proceeding to implement other parts of the 1996 Act. The
1996 Act provides that implementing its legislative objectives will be the task
of the FCC, the state public utilities commissions and a Federal-state Joint
Board. Much of this implementation is proceeding in numerous, concurrent
proceedings with aggressive deadlines. The Company cannot predict the full
extent of, nature of and interrelationships among state and federal
implementation and other responses to the 1996 Act.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition. The 1996 Act makes most direct or
indirect state and local barriers to competition unlawful. It directs the FCC to
preempt all inconsistent state and local laws and regulations, after notice and
comment proceedings. It also enables electric and other utilities to engage in
telecommunications service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal
20
<PAGE>
service provision and necessary for universal services, public safety and
welfare, continued service quality and consumer rights. While a state may not
impose requirements that effectively function as barriers to entry, it retains
limited authority to regulate certain competitive practices in rural telephone
company service areas.
The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. The FCC has implemented the mandate of the 1996
Act to create a new universal service support mechanism "to ensure that all
Americans have access to telecommunications services." The 1996 Act requires all
interstate telecommunications providers, including wireless service providers,
to "make an equitable and non-discriminatory contribution," to support the cost
of providing universal service, unless their contribution would be de minimis.
At present, the provision of landline telephone service in high-cost areas is
subsidized by access charges and other payments by interexchange carriers to
LECs. The obligation to make payments to support universal service has been
expanded to include other telecommunications service providers, including
cellular carriers. Such payments, which are to be based on a percentage of the
total "billed revenue" of carriers for a given previous half year, began in the
first quarter of 1998. Carriers are free to pass such charges on to their
customers. Cellular carriers are also eligible to receive universal service
support payments in certain circumstances under the new systems if they provide
specified services in "high-cost" areas. The Company has sought designation as
an "eligible telecommunications carrier" qualified to receive universal service
support in certain states.
Under a 1994 federal law, the Communications Assistance to Law Enforcement
Act, all telecommunications carriers, including the Company and other wireless
licensees, must, by October 1998, implement certain equipment changes necessary
to assist law enforcement authorities in achieving an enhanced ability to
conduct electronic surveillance of those suspected of criminal activity.
However, owing to disputes between the Federal Bureau of Investigation and the
relevant industry groups about the law's requirements, the FCC has not yet
adopted the necessary technical standards to enable carriers to meet those
requirements. Questions also exist regarding reimbursement by a federal fund of
certain of the costs involved. The Company has supported the efforts of industry
groups to obtain from the FCC a postponement of the October 1998 deadline on the
grounds that compliance with the originally proposed schedule is impossible. The
FCC is considering these requests for postponement, and legislation mandating a
two-year postponement is also pending in Congress.
The FCC has also allocated a total of 140 megahertz ("MHz") to broadband
PCS, 20 MHz to unlicensed operations and 120 MHz to licensed operations,
consisting of two 30 MHz blocks in each of the 51 Major Trading Areas ("MTAs")
and one 30 MHz block and three 10 MHz blocks in each of 493 Basic Trading Areas
("BTAs"). Cellular operators and those entities under common ownership with them
are permitted to participate in the ownership of PCS licenses, except for those
PCS licenses reserved for small businesses, and licenses for PCS service areas
in which the cellular operator owns a 20% or greater interest in a cellular
licensee, the service area of which covers 10% or more of the population of the
PCS service area. In the latter case, the cellular license is limited to two 10
MHz PCS channel blocks.
PCS technology is currently under development and is similar in some
respects to cellular technology. Where it has become commercially available,
this technology is capable of offering increased capacity for wireless two-way
and one-way voice, data and multimedia communications services and will result
in increased competition with the Company's operations. The ability of these
future PCS licensees to complement or compete with existing cellular licensees
will be affected by future FCC rule-makings. These and other future
technological and regulatory developments in the wireless telecommunications
industry and the enhancement of current technologies will likely create new
products and services that are competitive with the services currently offered
by the Company. There can be no assurance that the Company will not be adversely
affected by such technological and regulatory developments.
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones might be linked to cancer. The Company has
reviewed relevant scientific information and, based on such information, is not
aware of any credible evidence linking the usage of portable cellular telephones
with cancer.
21
<PAGE>
STATE AND LOCAL REGULATION. The Company is also subject to state and local
regulation in some instances. In 1981, the FCC preempted the states from
exercising jurisdiction in the areas of licensing, technical standards and
market structure. In 1993, Congress preempted states from regulating the entry
of cellular systems into service and the rates charged by cellular systems to
customers. The siting and construction of the cellular facilities, including
transmitter towers, antennas and equipment shelters are still subject to state
or local zoning and land use regulations. However, in 1996, Congress amended the
Communications Act to provide that states could not discriminate against
wireless carriers in tower zoning proceedings and had to decide on zoning
requests with reasonable speed. In addition, states may still regulate other
terms and conditions of cellular service. The FCC is currently considering
whether to take action to preempt moratoria imposed by certain localities on the
construction of wireless towers. The Company has supported such FCC action.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary. Further, the FCC is empowered under
certain circumstances to preempt state regulatory authorities if a state is
obstructing the Communications Act's basic purposes.
The Company and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and, through its membership in state
associations of wireless providers, before state regulatory authorities.
Proceedings with respect to the foregoing policy issues before the FCC and state
regulatory authorities could have a significant impact on the competitive market
structure among wireless providers and the relationships between wireless
providers and other carriers. The Company is unable to predict the scope, pace
or financial impact of policy changes which could be adopted in these
proceedings.
COMPETITION
The Company's principal competitor for cellular telephone service in each
market is the licensee of the second cellular system in that market. Since each
competitor operates its cellular system on a 25 MHz frequency block licensed by
the FCC using comparable technology and facilities, competition for customers
between the two systems in each market is principally on the basis of quality of
service, price, size of area covered, services offered, and responsiveness of
customer service. The competing entities in many of the markets in which the
Company has an interest have financial resources which are substantially greater
than those of the Company and its partners in such markets.
The FCC's rules require all operational cellular systems to provide, on a
nondiscriminatory basis, cellular service to resellers which purchase blocks of
mobile telephone numbers from an operational system and then resell them to the
public.
In addition to competition from the other cellular licensee in each market,
there is also competition from, among other technologies, SMR systems, which are
able to connect with the landline telephone network. The Company believes that
conventional SMR systems are competitively disadvantaged because of
technological limitations on the capacity of such systems. The FCC has recently
given approval, through waivers of its rules, to ESMR, an enhanced SMR system.
ESMR systems may have cells and frequency reuse like cellular, thereby
potentially eliminating any current technological limitation. The first ESMR
systems were implemented in 1993 in Los Angeles and are beginning to be
constructed in several other cities across the United States. In 1995, an ESMR
provider initiated service in Tulsa, Oklahoma, where the Company operates a
cellular system. ESMR service is also being provided in certain other of the
Company's markets. Although less directly a substitute for cellular service,
wireless data services and one-way paging service (and in the future, two-way
paging services) may be adequate for those who do not need full two-way voice
service.
PCS providers have initiated service in many markets across the United
States, including markets where the Company has operations. PCS providers offer
digital, wireless communications services to their customers. Similar
technological advances or regulatory changes in the future may make available
other alternatives to cellular service, thereby creating additional sources of
competition. 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.
22
<PAGE>
Continuing technological advances in the communications field make it
difficult to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to a mobile satellite
system in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and several consortia to provide such
service have been formed. Such a system is designed primarily to serve the
communications needs of remote locations and a mobile satellite system could
provide viable competition for land-based cellular systems in such areas. It is
also possible that the FCC may in the future assign additional frequencies to
cellular telephone service to provide for more than two cellular telephone
systems per market.
EMPLOYEES
The Company had 4,600 employees as of December 31, 1997. None of the
Company's employees is represented by a labor organization. The Company
considers its relationship with its employees to be good.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
The property for mobile telephone switching offices and cell sites are
either owned or leased under long-term leases by the Company, one of its
subsidiaries or the partnership or corporation which holds the license. The
Company has not experienced major problems with obtaining zoning approval for
cell sites or operating facilities and does not anticipate any such problems in
the future which are or will be material to the Company and its subsidiaries as
a whole. The Company's investment in property is small compared to its
investment in licenses and cellular system equipment.
The Company leases approximately 95,000 square feet of office space for its
headquarters in Chicago, Illinois.
The Company considers the properties owned or leased by it and its
subsidiaries to be suitable and adequate for their respective business
operations.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
In addition to the legal proceedings discussed previously in "Proposed TDS
Corporate Restructuring," the Company is involved in legal proceedings related
to its business from time to time. The Company does not believe that any such
proceeding should have a material adverse impact on the Company.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of securities holders during the fourth
quarter of 1997.
23
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Exhibit 13, Annual Report section entitled
"United States Cellular Stock and Dividend Information."
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Selected Consolidated Financial Data," except for ratios of earnings to fixed
charges, which are incorporated herein by reference from Exhibit 12 to this
Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
- --------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from Exhibit 13, Annual Report sections entitled
"Consolidated Quarterly Income Information (Unaudited)," "Consolidated
Statements of Operations," "Consolidated Statements of Cash Flows,"
"Consolidated Balance Sheets," "Consolidated Statements of Changes in Common
Shareholders' Equity," "Notes to Consolidated Financial Statements," and "Report
of Independent Public Accountants."
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from Proxy Statement sections entitled "Election
of Directors" and "Executive Officers."
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from Proxy Statement section entitled "Executive
Compensation," except for the information specified in Item 402(a)(8) of
Regulation S-K under the Securities Exchange Act of 1934, as amended.
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from Proxy Statement section entitled "Security
Ownership of Certain Beneficial Owners and Management."
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Proxy Statement section entitled "Certain
Relationships and Related Transactions."
25
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a)(1) Financial Statements
<TABLE>
<S> <C>
Consolidated Quarterly Income Information (Unaudited).............. Annual Report*
Consolidated Statements of Operations.............................. Annual Report*
Consolidated Statements of Cash Flows.............................. Annual Report*
Consolidated Balance Sheets........................................ Annual Report*
Consolidated Statements of Changes in Common Shareholders'
Equity............................................................. Annual Report*
Notes to Consolidated Financial Statements......................... Annual Report*
Report of Independent Public Accountants........................... Annual Report*
</TABLE>
- ---------
* Incorporated by reference from Exhibit 13.
(2) Schedules
<TABLE>
<CAPTION>
LOCATION
--------
<S> <C> <C>
Report of Independent Public Accountants on Financial Statement Schedule.......... page 29
II. Valuation and Qualifying Accounts for each of the Three Years in the Period
Ended December 31, 1997.................................................... page 30
All other schedules have been omitted because they are not applicable or not
required or because the required information is shown in the financial
statements or notes thereto.
</TABLE>
26
<PAGE>
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a part
of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------------------------------------------------------------------------------------------
<C> <S>
10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by
reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No.
33-16975).
10.10 Stock Option and Stock Appreciation Rights Plan is hereby incorporated by reference to Exhibit B to
the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed
with the Commission on April 16, 1991.
10.11 Summary of 1997 Bonus Program for Senior Corporate Staff of the Company.
10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference
to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by
reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by
reference to Exhibit 99.4 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
10.18 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996, is hereby incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996.
10.19 Deferred Compensation Agreement for Richard Goehring dated July 15, 1996, is hereby incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996.
10.20 Cellular Interest Transfer Agreement by and between TDS and the Company dated June 20, 1996 is
hereby incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.21 United States Cellular Corporation Compensation Plan for Non-Employee Directors is hereby
incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8
(Registration No. 333-19403).
10.22 United States Cellular Corporation 1996 Senior Executive Stock Bonus and Restricted Stock Award Plan
is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form
S-8 (Registration No. 333-19405).
10.23 United States Cellular Corporation Special Retention Restricted Stock Award Plan is hereby
incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8
(Registration No. 333-23861).
</TABLE>
27
<PAGE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997.
The Company filed a Current Report on Form 8-K on December 8, 1997 dated
December 1, 1997, which included a press release that announced that AirTouch
Communications, Inc. ("AirTouch") will acquire interests owned by the Company in
cellular systems serving Seattle and Olympia, Washington; Tucson, Arizona;
Duluth, Minnesota; and rural areas in Colorado and Idaho in exchange for
approximately 4,000,000 shares of AirTouch's common stock and approximately $50
million in cash.
The Company filed a Current Report on Form 8-K on December 29, 1997 dated
December 18, 1997, which included a press release that announced that the
Company had received an offer from TDS to acquire all of the issued and
outstanding Common Shares of the Company not already owned by TDS. The offer was
made in connection with, and is subject to TDS shareholder approval of and the
effectiveness of, TDS's announced corporate restructuring. The restructuring
plan calls for TDS to issue three new classes of common stock, commonly known as
"Tracking Stocks," each of which is intended to separately reflect one of TDS's
primary business groups.
28
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of United States Cellular
Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in United States Cellular Corporation
and Subsidiaries Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 28, 1998. Our audits
were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The financial statement schedule listed
in Item 14(a)(2) is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This financial statement schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 28, 1998
29
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A
DESCRIPTION COLUMN B COLUMN C-1 COLUMN C-2 COLUMN E
- ---------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER COLUMN D END OF
(DOLLARS IN THOUSANDS) PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997
Deducted from deferred federal tax asset:
For unrealized net operating losses $ (2,147) $ -- $ 2,147 $ -- $ --
Deducted from deferred state tax asset:
For unrealized net operating losses (11,003) 877 (107) -- (10,233)
Deducted from accounts receivable:
For doubtful accounts (4,199) (25,578) -- 24,518 (5,259)
FOR THE YEAR ENDED DECEMBER 31, 1996
Deducted from deferred federal tax asset:
For unrealized net operating losses $ (8,141) $ 5,795 $ 199 $ -- $ (2,147)
Deducted from deferred state tax asset:
For unrealized net operating losses (11,969) 2,305 (1,339) -- (11,003)
Deducted from accounts receivable:
For doubtful accounts (3,820) (17,534) -- 17,155 (4,199)
FOR THE YEAR ENDED DECEMBER 31, 1995
Deducted from deferred federal tax asset:
For unrealized net operating losses $ (23,761) $ 16,730 $ (1,110) $ -- $ (8,141)
Deducted from deferred state tax asset:
For unrealized net operating losses (14,203) 8,257 (6,023) -- (11,969)
Deducted from accounts receivable:
For doubtful accounts (2,073) (12,532) -- 10,785 (3,820)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
UNITED STATES CELLULAR CORPORATION
By: /S/ H. DONALD NELSON
------------------------------------------
H. Donald Nelson
PRESIDENT (CHIEF EXECUTIVE OFFICER)
By: /S/ KENNETH R. MEYERS
------------------------------------------
Kenneth R. Meyers
SENIOR VICE PRESIDENT--FINANCE AND
TREASURER
(CHIEF FINANCIAL OFFICER)
By: /S/ PHILLIP A. LORENZINI
------------------------------------------
Phillip A. Lorenzini
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Dated March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------------------------- ----------- ---------------------
<S> <C> <C>
/S/ H. DONALD NELSON DIRECTOR March 26, 1998
-----------------------------------------------
H. Donald Nelson
/S/ LEROY T. CARLSON, JR. DIRECTOR March 26, 1998
-----------------------------------------------
LeRoy T. Carlson, Jr.
/S/ LEROY T. CARLSON DIRECTOR March 26, 1998
-----------------------------------------------
LeRoy T. Carlson
/S/ WALTER C.D. CARLSON DIRECTOR March 26, 1998
-----------------------------------------------
Walter C. D. Carlson
/S/ MURRAY L. SWANSON DIRECTOR March 26, 1998
-----------------------------------------------
Murray L. Swanson
/S/ PAUL-HENRI DENUIT DIRECTOR March 26, 1998
-----------------------------------------------
Paul-Henri Denuit
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit to the
Company's Amendment No. 2 on Form 8 dated December 28, 1992, to the Company's Report on Form 8-A.
3.2 Restated Bylaws, as amended, are hereby incorporated by reference to Exhibit 3 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1997.
4.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit to the
Company's Amendment No. 2 on Form 8 dated December 28, 1992 to the Company's Report on Form 8-A.
4.2 Restated Bylaws, as amended, are hereby incorporated by reference to Exhibit 3 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1997.
4.3(a) Amended and restated Term Loan Agreement between NTFC Capital Corporation and the Company dated December 22, 1994
is hereby incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
4.3(b) First Amendment to Amended and Restated Term Loan Agreement between NTFC Capital Corporation and the Company dated
September 29, 1995 is hereby incorporated by reference to Exhibit 4.3(b) to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
4.4 Indenture dated June 1, 1995 between registrant and Harris Trust and Savings Bank, as Trustee, relating to the
LYONs is hereby incorporated by reference to the Company's Form 8-K dated June 16, 1995.
4.5 Form of Certificate for Liquid Yield Option Note (included in Exhibit 4.4).
4.6 Indenture dated July 31, 1997 between registrant and the First National Bank of Chicago, as Trustee, relating to
the Company's shelf registration of debt securities is hereby incorporated by reference to Exhibit 4 to the
Company's Form 8-K dated August 26, 1997.
4.7 Revolving Credit Agreement dated August 19, 1997, among registrant and BankBoston N.A. and Toronto Dominion
(Texas), Inc., as agents, is hereby incorporated by reference to Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1997.
9.1 Voting Trust Agreement, dated as of June 30, 1989, with respect to Series A Common Shares of TDS, is hereby
incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No.
33-38644).
9.2 Amendment dated as of May 9, 1991, to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated
by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991.
9.3 Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended is
hereby incorporated by reference to Exhibit 9.3 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992.
10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by reference to an
exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------------------------------------------------------------
<C> <S>
10.2(a) Revolving Credit Agreement, between the Company and TDS, as amended, is hereby incorporated by reference to an
exhibit to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-1 (Registration No.
33-23492).
10.2(b) Amendment dated as of March 31, 1997, to Revolving Credit Agreement between the Company and TDS is hereby
incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1997.
10.3 Tax Allocation Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.4 Cash Management Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.5 Registration Rights Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to
the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.6 Exchange Agreement, between the Company and TDS, as amended, is hereby incorporated by reference to an exhibit to
the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.7 Intercompany Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the
Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.8 Employee Benefit Plans Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit
to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.9 Insurance Cost Sharing Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit
to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.10 Stock Option and Stock Appreciation Rights Plan, is hereby incorporated by reference to Exhibit B to the Company's
definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed with the Commission on
April 16, 1991.
10.11 Summary of 1997 Bonus Program for the Senior Corporate Staff of the Company.
10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit
99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit
99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to
Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit
99.4 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to
Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------------ ------------------------------------------------------------------------------------------------------------------
<C> <S>
10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
10.14 Securities Loan Agreement, dated June 31, 1995, between TDS and Merrill Lynch & Co. is hereby incorporated by
reference to Exhibit 99.1 to the Company's Form 8-K dated June 16, 1995.
10.15 Registration Rights Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby
incorporated by reference to Exhibit 99.2 to the Company's Form 8-K dated June 16, 1995.
10.16 Common Share Delivery Arrangement Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation
is hereby incorporated by reference to Exhibit 99.3 to the Company's Form 8-K dated June 16, 1995.
10.17 LYONs Offering Agreement between TDS and United States Cellular Corporation is hereby incorporated by reference to
Exhibit 99.4 to the Company's Form 8-K dated June 16, 1995.
10.18 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996 is hereby incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996.
10.19 Deferred Compensation Agreement for Richard Goehring dated July 15, 1996 is hereby incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996.
10.20 Cellular Interest Transfer Agreement by and between TDS and the Company dated June 20, 1996 is hereby incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
10.21 United States Cellular Corporation Compensation Plan for Non-Employee Directors is hereby incorporated by
reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-19403).
10.22 United States Cellular Corporation 1996 Senior Executive Stock Bonus and Restricted Stock Award Plan is hereby
incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No.
333-19405).
10.23 United States Cellular Corporation Special Retention Restricted Stock Award Plan is hereby incorporated by
reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-23861).
11 Statement regarding computation of per share earnings.
12 Statement regarding computation of ratios.
13 Incorporated portions of 1997 Annual Report to Security Holders.
21 Subsidiaries of the Registrant.
23.1 Consent of independent public accountants.
27.1 Financial Data Schedule for December 31, 1997 and for the period then ended.
27.2 Financial Data Schedule for December 31, 1995 and for the period then ended.
27.3 Financial Data Schedule for March 31, 1996; June 30, 1996; September 30, 1996; and December 31, 1996; and for the
periods then ended.
27.4 Financial Data Schedule for September 30, 1997 and for the period then ended.
</TABLE>
<PAGE>
EXHIBIT 10.11
SUMMARY OF 1997 BONUS PROGRAM FOR
SENIOR CORPORATE STAFF OF
UNITED STATES CELLULAR CORPORATION
The objectives of the 1997 Bonus Program for Senior Corporate Staff (the
"1997 Bonus Plan") of United States Cellular Corporation ("USM") are: (i) to
provide suitable incentives for the senior corporate management of USM to
extend their best efforts to achieve superior results in relation to key
performance targets, (ii) to suitably reward USM's senior corporate
management team in relation to their success in meeting and exceeding these
performance targets, and (iii) to help USM attract and retain talented
management personnel in positions of critical importance to the success of
USM. A team performance award and an individual performance award are
available under the 1997 Bonus Plan.
For target performance on the team and individual categories, the 1997
Bonus Plan was designed to generate a targeted 1997 bonus pool equal to the
total of 35% of the aggregate of the base salaries of the Company's senior
executive officers other than the President. Under the 1997 Bonus Plan, the
size of the target bonus pool is increased or decreased depending on USM's
1997 achievements with respect to the performance categories. No bonus pool
is paid under such plan if minimum performance levels are not achieved in
these categories. The maximum bonus pool that could be generated, which
would require exceptional performance in all areas, would equal the total of
70% of the aggregate base salaries of the Company's executive officers other
than the President. At target performance, the bonus pool would be equal to
35% of the aggregate salaries of the Company's executive officers other than
the President. Of this percentage, 7% represents a targeted individual
performance award and a total of 28% represents a targeted team bonus award.
The targeted team award includes a discretionary team award of 4.2% and an
objective award of 23.8% for a total targeted team bonus award of 28%. The
objective performance categories include (i) penetration (5.6% of the
targeted award) (ii) cash flow (8.4% of the targeted award), (iii) service
revenue (5.6% of the targeted award) and (iv) quality improvement (4.2% of
the targeted award).
<PAGE>
EXHIBIT 11
UNITED STATES CELLULAR CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
BASIC EARNINGS
Net Income Available to Common................................................. $ 111,539
---------
---------
BASIC SHARES
Weighted average number of Common and Series A Common Shares Outstanding....... 86,346
---------
---------
BASIC EARNINGS PER COMMON SHARE
Net Income..................................................................... $ 1.29
---------
---------
DILUTED EARNINGS
Net Income Available to Common................................................. $ 111,539
---------
---------
DILUTED SHARES
Weighted average number of Common and Series A Common Shares Outstanding....... 86,346
Additional shares assuming issuance of:
Options and Stock Appreciation Rights........................................ 52
---------
Diluted Shares................................................................. 86,398
---------
---------
DILUTED EARNINGS PER COMMON SHARE
Net Income..................................................................... $ 1.29
---------
---------
</TABLE>
- ---------
<PAGE>
EXHIBIT 12
UNITED STATES CELLULAR CORPORATION
RATIOS OF EARNINGS TO FIXED CHARGES
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT RATIO AMOUNTS)
<TABLE>
<S> <C>
EARNINGS:
Income from Continuing Operations before income taxes.......................... $ 195,487
Add (Deduct):
Minority Share of Cellular Losses from Majority-owned Subsidiaries......... (371)
Earnings on Equity Method.................................................. (77,121)
Distributions from Minority Subsidiaries................................... 52,362
---------
$ 170,357
Add fixed charges:
Consolidated Interest Expense.............................................. 28,760
Deferred Debt Amortization Expense......................................... 602
Interest Portion (1/3) of Consolidated Rent Expense........................ 5,724
---------
$ 205,443
FIXED CHARGES:
Consolidated Interest Expense.................................................. $ 28,760
Deferred Debt Amortization Expense............................................. 602
Interest Portion (1/3) of Consolidated Rent Expense............................ 5,724
---------
$ 35,086
RATIO OF EARNINGS TO FIXED CHARGES............................................... 5.86
---------
---------
FIXED CHARGES AND PREFERRED DIVIDENDS:
Tax-effected Preferred Dividends............................................... $ 122
Fixed Charges.................................................................. 35,086
---------
$ 35,208
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS....................... 5.84
---------
---------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
United States Cellular Corporation (the "Company"--AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. USM is an
81.1%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS"). See
"Proposed TDS Corporate Restructuring" for further information on TDS's
ownership of USM.
USM owned either majority or minority cellular interests in 192 markets at
December 31, 1997, representing 26,179,000 population equivalents ("pops"). USM
included the operations of 134 majority-owned and managed cellular markets,
representing 22.6 million pops, in consolidated operations ("consolidated
markets") as of December 31, 1997. Minority interests in 51 markets,
representing 3.5 million pops, were accounted for using the equity method and
were included in investment income at that date. All other interests,
representing less than 100,000 pops in the aggregate, were accounted for using
the cost method. Following is a table of summarized operating data for USM's
consolidated operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Total market population (in thousands)(1).... 24,034 21,712 22,309
Customers.................................... 1,710,000 1,073,000 710,000
Market penetration........................... 7.11% 4.94% 3.18%
Markets in operation......................... 134 131 137
Cell sites in service........................ 1,748 1,328 1,116
Average monthly revenue per customer......... $ 54.18 $ 63.69(2) $ 70.64(2)
Churn rate per month......................... 1.9% 1.9% 2.1%
Marketing cost per net customer addition..... $ 528 $ 505(2) $ 515(2)
---------- ---------- --------
</TABLE>
- ------------------------
(1) Calculated using the respective Donnelley Marketing Service estimates for
each year (Claritas for 1997).
(2) Recomputed to show the effect of change in current year presentation of
certain revenues and expenses.
The Company's operating income for 1997 and 1996, 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 1996 and 1995. The improvements resulted from growth in the
Company's customer base and revenues in each year, coupled with increasing
economies of scale in both years. Operating revenues, driven by increases in
customers served, rose $196.9 million, or 29%, in 1997 and $199.8 million, or
42%, in 1996. Operating expenses rose $154.7 million, or 26%, in 1997 and $155.1
million, or 35%, in 1996. Operating cash flow (operating income before minority
share plus depreciation and amortization expense) increased $65.7 million, or
33%, in 1997 and $64.0 million, or 48%, in 1996.
Beginning on January 1, 1997, the Company changed its income statement
presentation of certain credits given to customers on their monthly bills.
Customer incentive programs which result in either new or current customers
receiving free or reduced-price airtime or access are now reported as a
reduction of local retail revenue. Prior to January 1, 1997, the Company
reported the foregone revenues resulting from these incentive programs as
marketing and selling expense (for new customers) and general and administrative
expense (for current customers). Amounts in the currently affected revenue and
expense categories have been reclassified for previous years, including the 1996
and 1995 information provided throughout this Annual Report. Operating income
and net income are not affected by this change.
1
<PAGE>
Investment and other income decreased $83.5 million, or 44%, to $107.6
million in 1997, due primarily to the decrease of $102.4 million in gains on the
sales of cellular interests. Investment and other income increased $66.4
million, or 53%, in 1996, due primarily to the increase of $49.2 million in
gains on the sales of cellular and other investments. Interest expense increased
$6.3 million, or 27%, in 1997 and decreased $4.2 million, or 15%, in 1996.
Income tax expense decreased $27.7 million to $83.9 million in 1997, as improved
operating results were more than offset by decreased gains on the sales of
cellular and other investments. Income tax expense increased $79.1 million in
1996, primarily due to the increase in gains on the sales of cellular and other
investments.
Net income totaled $111.5 million in 1997, a decrease of $18.4 million, or
14%, from 1996, and totaled $129.9 million in 1996, an increase of $30.2
million, or 30%, over 1995. In all three years, net income included gains on
sales of cellular and other investments. A summary of the after-tax effects of
these gains on net income and earnings per share-diluted is shown on the next
page.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net income before after-tax effects of gains................................... $ 95,302 $ 62,504 $ 43,918
Add: After-tax effects of gains................................................ 16,237 67,425 55,824
---------- ---------- ---------
Net income as reported......................................................... $ 111,539 $ 129,929 $ 99,742
---------- ---------- ---------
---------- ---------- ---------
Earnings per share before after-tax effects of gains........................... $ 1.10 $ .73 $ .52
Add: After-tax effects of gains................................................ .19 .78 .67
---------- ---------- ---------
Earnings per share--diluted.................................................... $ 1.29 $ 1.51 $ 1.19
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
OPERATING REVENUES
OPERATING REVENUES totaled $877.0 million in 1997, up $196.9 million, or
29%, over 1996. Operating revenues totaled $680.1 million in 1996, up $199.8
million, or 42%, over 1995. As explained previously, operating revenues for 1996
and 1995 have been reclassified to conform to current period presentation of
customer incentive program credits.
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 $853.0 million in 1997, up $190.3
million, or 29%, over 1996. Service revenues totaled $662.7 million in 1996, up
$198.1 million, or 43%, over 1995. The increases in both years were primarily
due to the growing number of local retail customers and the growth in inbound
roaming revenue. The reclassification of customer bill credits reduced service
revenues from what would have been reported by $49.0 million, or 5%, in 1997,
and from what was reported by $27.8 million, or 4%, in 1996 and $12.1 million,
or 3%, in 1995.
Average monthly service revenue per customer totaled $54.18 in 1997, $63.69
in 1996 and $70.64 in 1995, representing declines of 15% in 1997 and 10% in
1996. The decrease in average monthly service revenue per customer in both years
resulted from a decrease in average revenue per minute of use from both local
retail customers and inbound roamers. Also contributing was slower growth in
inbound roaming minutes of use when compared to the growth in the Company's
customer base. The reclassification of customer bill credits reduced average
monthly service revenue per customer from what would have been reported by
$3.11, or 5%, in 1997, and from what was reported by $2.67, or 4%, in 1996 and
$1.84, or 3%, in 1995.
2
<PAGE>
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, plus increasing amounts of bill credits
given to new and current customers as incentives to become or remain the
Company's customers, resulted in decreases in average local retail revenue per
minute of use during both 1997 and 1996. The Company's average inbound roaming
revenue per minute of use also decreased during both 1997 and 1996, 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 has a dilutive effect on inbound roaming revenue per customer.
Inbound roaming minutes of use have been growing at a slower rate than the
Company's customer base (27% and 38% growth in inbound roaming minutes in 1997
and 1996, respectively, compared to 59% and 51% growth in the Company's customer
base).
LOCAL RETAIL REVENUE increased $153.8 million, or 37%, in 1997 and $137.4
million, or 50%, in 1996. Growth in the Company's customer base was the primary
reason for the increases in local retail revenue in both years. The number of
customers increased 59% to 1,710,000 at December 31, 1997, and increased 51% to
1,073,000 at December 31, 1996. The Company added 442,000 net new customers from
its marketing channels in 1997 compared to 365,000 in 1996. Management
anticipates that the growth rate in the Company's customer base will be lower in
the future, primarily as a result of an increase in the number of competitors in
its markets. The reclassification of customer bill credits reduced local retail
revenue from what would have been reported by $49.0 million, or 8%, in 1997, and
from what was reported by $27.8 million, or 6%, in 1996 and $12.1 million, or
4%, in 1995.
Average monthly local retail revenue per customer declined to $36.11 in 1997
from $39.87 in 1996 and $42.19 in 1995. Monthly local retail minutes of use per
customer decreased 4% to 103 in 1997, and increased 13% to 107 in 1996. Average
revenue per minute of use decreased in both years as a result of the pricing and
other incentive programs stated previously. Average local retail revenue per
minute totaled $.35 in 1997 compared to $.37 in 1996 and $.44 in 1995. 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. The reclassification
of customer bill credits reduced average monthly local retail revenue per
customer from what would have been reported by $3.11, or 8%, in 1997, and from
what was reported by $2.67, or 6%, in 1996 and $1.84, or 4%, in 1995.
INBOUND ROAMING REVENUE increased $24.2 million, or 13%, in 1997 and $45.3
million, or 31%, in 1996. Both the 1997 and 1996 increases were attributable to
the respective 27% and 38% increases in the number of minutes used by customers
from other wireless systems when roaming in the Company's service areas. Also
contributing were the increased number of cell sites within the Company's
service areas. These effects were offset somewhat by the decrease in average
revenue per minute due to the downward trend in negotiated rates. Average
inbound roaming revenue per minute totaled $.83 in 1997, $.92 in 1996 and $.99
in 1995. Monthly inbound roaming revenue per Company customer averaged $13.81 in
1997, $18.58 in 1996 and $22.51 in 1995. The decreases in monthly inbound
roaming revenue per Company customer are related to both the decreases in
inbound roaming revenue per minute and the faster increases in the Company's
customer base as compared to the growth in inbound roaming minutes of use.
LONG-DISTANCE REVENUE increased $12.0 million, or 23%, in 1997 and $17.3
million, or 49%, in 1996 as the volume of long-distance calls billed by the
Company increased. Monthly long-distance revenue per customer averaged $4.10 in
1997, $5.05 in 1996 and $5.36 in 1995. The decrease in monthly long-distance
revenue per customer is primarily due to the dilution of the portion of
long-distance revenue that comes from inbound roaming customers. In a manner
similar to inbound roaming revenue, this revenue is not growing as fast as the
Company's customer base.
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EQUIPMENT SALES REVENUES increased $6.6 million, or 38%, in 1997 and $1.6
million, or 10%, in 1996. Equipment sales reflect the sale of 587,000, 449,000
and 296,000 cellular telephone units in 1997, 1996 and 1995, respectively, plus
installation and accessories revenue. The average revenue per unit was $41 in
1997, $39 in 1996 and $53 in 1995. The average revenue per unit in all years is
significantly less than the Company's cost per unit, which partially reflects
the Company's decision to reduce sales prices on cellular telephones to
stimulate growth in the number of customers, to maintain its market position and
to meet competitive prices as well as to pass through reduced manufacturers'
prices to customers. Also, the Company uses promotions which are based on
increased equipment discounting. The success of these promotions has led to both
an increase in units sold and a general decline in average equipment sales
revenue per unit over the last several years.
OPERATING EXPENSES
OPERATING EXPENSES totaled $747.4 million in 1997, up $154.7 million, or
26%, over 1996. Operating expenses totaled $592.7 million in 1996, up $155.1
million, or 35%, over 1995. As explained previously, operating expenses for 1996
and 1995 have been reclassified to conform to current period presentation of
customer incentive program credits. The reclassification of customer bill
credits reduced operating expenses from what would have been reported by $49.0
million, or 6%, in 1997, and from what was reported by $27.8 million, or 4%, in
1996 and $12.1 million, or 3%, in 1995.
SYSTEM OPERATIONS EXPENSES increased $35.8 million, or 30%, in 1997 and
$46.9 million, or 67%, in 1996. These increases were primarily due to increases
in customer usage expenses and costs associated with serving the Company's
increased number of customers, which include the costs of roaming fraud, and the
growing number of cell sites within the Company's systems. In 1997, the Company
significantly reduced its expenses related to roaming fraud, resulting in a
decline in the percentage increase in total system operations expenses during
the year. 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 $24.3 million, or 32%, in 1997 and $40.4
million, or 116%, in 1996. The increase in 1997 is primarily due to the 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 certain 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 1997 were costs related to the increase in
minutes used on the Company's systems, partially offset by the reduction in
costs related to fraudulent use of the Company's customers' cellular telephone
numbers. The increase in 1996 is due to both an increase in net outbound roaming
expense and an increase in fraud-related costs. These fraud-related costs
totaled $6.5 million in 1997, $18.0 million in 1996 and $4.1 million in 1995.
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 1997, 11% in 1996 and 7% in 1995.
Maintenance, utility and cell site expenses increased $11.5 million, or 27%,
in 1997, and $6.5 million, or 18%, in 1996. The increases primarily reflect an
increase in the number of cell sites in the Company's systems each year, to
1,748 in 1997 from 1,328 in 1996 and 1,116 in 1995. Monthly maintenance, utility
and
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cell site expenses totaled $2,900, $2,866 and $3,107 per average cell site in
1997, 1996 and 1995, respectively.
MARKETING AND SELLING EXPENSES increased $47.4 million, or 37%, in 1997 and
$35.5 million, or 39%, in 1996. Marketing and selling expenses primarily consist
of salaries, commissions and expenses of field sales and retail personnel and
offices; agent expenses; local advertising and public relations expenses. The
1997 increase was primarily due to a 33% rise in the number of gross customer
activations (excluding acquisitions and divestitures), to 746,000 in 1997 from
563,000 in 1996. Also in 1997, the Company increased its advertising expenses,
particularly brand advertising, to promote the United States Cellular-Registered
Trademark-brand. The 1996 increase was primarily due to a 44% rise in the number
of gross customer activations (excluding acquisitions and divestitures), to
563,000 in 1996 from 392,000 in 1995. Cost per gross customer activation,
including losses on equipment sales, decreased to $313 in 1997 from $327 in 1996
and $335 in 1995. While cost per gross customer activation in total decreased in
1997 and 1996, the percentage of cost per gross customer activation attributable
to marketing and selling expenses increased to 75% in 1997 from 69% in 1996 and
70% in 1995. The percentage increase from 1996 to 1997 is primarily due to the
additional advertising expenses coupled with decreased losses on equipment sales
due to lower per unit manufacturer equipment prices. The reclassification of
customer bill credits reduced cost per gross addition from what would have been
reported by $52, or 14%, in 1997, and from what was reported by $40, or 11%, in
1996 and $26, or 7%, in 1995; in total, the reclassification reduced marketing
and selling expenses from what would have been reported by $38.6 million, or
18%, in 1997, and from what was reported by $22.3 million, or 15%, in 1996 and
$10.2 million, or 10%, in 1995.
COST OF EQUIPMENT SOLD increased $8.3 million, or 11%, in 1997 and $19.1
million, or 35%, in 1996. The increase reflects the growth in unit sales related
to the rise in gross customer activations made through the Company's direct and
retail distribution channels, offset somewhat by falling manufacturer prices per
unit. The average cost to the Company of a telephone unit sold, including
accessories and installation, was $140 in 1997, $165 in 1996 and $186 in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES increased $39.7 million, or 24%, in 1997
and $34.2 million, or 26%, in 1996. These expenses include the costs of
operating the Company's local business offices and its corporate expenses. The
increases in both years include 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 $19.4 million, or 26%,
in 1997 and $15.6 million, or 27%, in 1996, primarily due to increases in the
number of administrative employees in each year. Also, bad debt expense
increased $8.0 million, or 46%, in 1997 and $5.0 million, or 40%, in 1996,
primarily due to the Company's increased penetration of the consumer market. 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 to $12.99 in 1997 from $15.84 in
1996 and $19.85 in 1995. The reclassification of customer bill credits reduced
general and administrative expenses from what would have been reported by $10.4
million, or 5%, in 1997, and from what was reported by $5.5 million, or 3%, in
1996 and $1.9 million, or 1%, in 1995.
Operating cash flow increased $65.7 million, or 33%, to $261.9 million in
1997 and increased $64.0 million, or 48%, to $196.2 million in 1996. The
improvements in both years were primarily due to substantial growth in customers
and service revenues and the effects of improved operational efficiencies on
cash operating expenses. Operating cash flow margins (as a percent of service
revenues) were 30.7% in 1997, 29.6% in 1996 and 28.5% in 1995; had the
reclassification of customer bill credits not been made, operating cash flow
margins would have been 29.0% in 1997, 28.4% in 1996 and 27.7% in 1995.
DEPRECIATION EXPENSE increased $23.0 million, or 31%, in 1997 and $17.3
million, or 30%, in 1996. The increase reflects rising average fixed asset
balances, which increased 35% in 1997 and 34% in 1996.
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Increased fixed asset balances primarily result from the increase in cell sites
built to improve coverage and capacity in the Company's markets.
OPERATING INCOME BEFORE MINORITY SHARE
OPERATING INCOME BEFORE MINORITY SHARE totaled $129.5 million in 1997, $87.4
million in 1996 and $42.8 million in 1995. The operating income margin was 15.2%
in 1997, 13.2% in 1996 and 9.2% in 1995; had the reclassification of customer
bill credits not been made, operating income margins would have been 14.4% in
1997, 12.7% in 1996 and 9.0% in 1995. The improvement in operating income and
operating income margin reflects increased revenues resulting from growth in the
number of customers served by the Company's systems and the effect of improved
operational efficiencies on total operating expenses.
The Company expects service revenues to continue to grow during 1998;
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 1998 as it incurs
costs associated with both customer growth and cell sites added.
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
certain of the Company's markets over the past eighteen months. 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 to promote the United
States Cellular-Registered Trademark- 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 what effects additional competition will have on the Company's future
strategies and 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.
INVESTMENT AND OTHER INCOME
INVESTMENT AND OTHER INCOME totaled $107.6 million in 1997, $191.1 million
in 1996 and $124.7 million in 1995. Gain on sale of cellular and other
investments totaled $30.3 million in 1997, reflecting gains recorded on the
sales of the Company's majority interest in one market and minority interests in
two other markets, and on cash received from the settlement of a legal matter.
Gain on sale of cellular and other investments totaled $132.7 million in 1996,
reflecting gains recorded on the sales of the Company's majority interests in
eight markets and minority interests in two other markets, on cash received in
an exchange of markets with another cellular operator and on cash received from
the settlement of two separate legal matters. Gain on sale of cellular and other
investments totaled $83.5 million in 1995, reflecting gains recorded on the
sales of majority interests in six markets and minority interests in six
markets, on cash received in an exchange of markets with another cellular
operator and on the sale of certain marketable equity securities.
INVESTMENT INCOME was $77.1 million in 1997 compared to $51.5 million in
1996 and $39.8 million in 1995. 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. Although investment income increased
significantly in 1996 and 1997, future investment income will be negatively
impacted by the completion of the exchange transaction with BellSouth
Corporation ("BellSouth") and the divestitures of certain minority interests to
AirTouch Communications ("AirTouch"). See "Financial Resources and Liquidity--
Acquisitions, Divestitures and Exchanges" for further discussions of these
transactions.
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INTEREST AND INCOME TAXES
INTEREST EXPENSE totaled $29.4 million in 1997 compared to $23.1 million in
1996 and $27.3 million in 1995. Interest expense in 1997 is primarily related to
Liquid Yield Option Notes ("LYONs") ($15.2 million); the Company's 7.25% notes
(the "Notes") issued during the third quarter of 1997 ($6.3 million); borrowings
under vendor financing agreements ($4.5 million); and borrowings under the
Revolving Credit Agreement with TDS ($1.9 million). Interest expense in 1996 is
primarily related to LYONs ($14.4 million) and borrowings under vendor financing
agreements ($8.0 million). Interest expense in 1995 is primarily related to
borrowings under the Revolving Credit Agreement with TDS ($10.4 million),
borrowings under vendor financing agreements ($9.2 million) and LYONs ($7.4
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 on August 15, 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 on or after August 15, 2004.
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.
All borrowings under the vendor financing agreements were repaid in August
1997 with a portion of the proceeds from the Notes offering. Borrowings under
the Revolving Credit Agreement with TDS were outstanding from April 1997 through
August 1997, at which time all outstanding amounts were repaid with a portion of
the proceeds from the Notes offering. Borrowings under the Revolving Credit
Agreement with TDS were also outstanding from January 1995 through June 1995, at
which time all outstanding amounts were repaid with a portion of the proceeds
from the LYONs offering.
INCOME TAX EXPENSE was $83.9 million in 1997, $111.6 million in 1996 and
$32.5 million in 1995. In 1997, $14.1 million of income tax expense related to
the gains on sales of cellular and other investments compared to $65.3 million
in 1996 and $27.7 million in 1995. The effective tax rates were 43% in 1997, 46%
in 1996 and 25% in 1995. The fluctuation in each year's effective tax rate is
primarily due to the different amounts of gains on sales of cellular interests
in each year; these gains are generally taxed at a higher rate than income from
operations, due to the lower tax basis of certain interests sold which were
originally acquired in tax-free transactions. In 1997, 1996 and 1995, state
income taxes and gains on sales of cellular and other investments increased the
effective rate above the statutory federal income tax rate. In 1995, this effect
was offset by the effect of the valuation allowance on the deferred tax asset,
which decreased the effective rate below the statutory rate.
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.
Subject to the completion of the proposed TDS corporate restructuring, TDS
intends to terminate certain intercompany agreements between TDS and the
Company. See "Proposed TDS Corporate Restructuring" for further information on
these intercompany agreements.
NET INCOME
NET INCOME totaled $111.5 million in 1997, $129.9 million in 1996 and $99.7
million in 1995. EARNINGS PER SHARE-DILUTED was $1.29 in 1997, $1.51 in 1996 and
$1.19 in 1995. Net income and earnings per share in all three years included
gains on the sales of cellular and other investments. See Page 21 for a summary
of the after-tax effects of gains on net income and earnings per share.
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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 substantial increases
in cellular units in service, revenues 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 $222.1 million in 1997, $137.5
million in 1996 and $115.9 million in 1995. Operating cash flow provided $261.9
million in 1997, $196.2 million in 1996 and $132.2 million in 1995. Cash flows
from other operating activities (investment and other income, interest expense,
changes in working capital and changes in other assets and liabilities) required
cash investments totaling $39.8 million in 1997, $58.7 million in 1996 and $16.3
million in 1995.
CASH FLOWS FROM FINANCING ACTIVITIES provided $135.9 million in 1997,
required $11.2 million in 1996 and provided $19.3 million in 1995. In August
1997, the Notes offering provided $243.1 million in 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. In 1996,
issuances of USM Common Shares, primarily to TDS, provided $10.5 million while
repayments of debt under the vendor financing agreements required $21.5 million.
In 1995, the sale of LYONs provided cash totaling $221.5 million and borrowings
under the vendor financing agreements provided cash totaling $59.5 million. This
cash was used to repay amounts owed under the Revolving Credit Agreement with
TDS totaling $251.2 million and amounts owed under the vendor financing
agreements totaling $13.4 million.
CASH FLOWS FROM INVESTING ACTIVITIES required $358.5 million in 1997, $150.3
million in 1996 and $102.6 million in 1995. The company received net cash
proceeds totaling $61.1 million in 1997, $213.0 million in 1996 and $151.1
million in 1995 related to the sales and exchanges of cellular interests. Cash
distributions from cellular entities in which the Company has an interest
provided $52.4 million in 1997, $23.5 million in 1996 and $8.7 million in 1995.
Cash required for property, plant and equipment and system development
expenditures totaled $318.7 million in 1997, financed primarily with internally
generated cash and the proceeds from the Notes offering; $248.1 million in 1996,
financed primarily with internally generated funds and proceeds from the sales
of cellular interests; and $206.2 million in 1995, financed primarily with
internally generated funds and proceeds from the LYONs offering. These
expenditures primarily represent the construction of 331, 242 and 292 cell sites
in 1997, 1996 and 1995, respectively, plus other plant additions and costs
related to the development of the Company's office systems. Acquisitions
required $128.8 million in 1997, $116.4 million in 1996 and $29.3 million in
1995.
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 $330 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, DIVESTITURES AND EXCHANGES
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.
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In 1997, the Company, or TDS for the benefit of the Company, purchased
majority interests in two markets and several minority interests, representing
approximately 534,000 pops. The total consideration paid for these purchases,
primarily in the form of cash (including cash borrowed under the Revolving
Credit Agreement with TDS) and USM Common Shares issued to TDS to reimburse TDS
for the value of TDS Common Shares issued to third parties, totaled $81.4
million.
Also in 1997, the Company completed an exchange with BellSouth. Pursuant to
the exchange, USM received majority interests representing approximately 4.0
million pops in exchange for majority interests representing approximately 2.0
million pops, minority interests representing approximately 1.2 million pops and
a net amount of $86.7 million in cash. The majority interests USM received are
in 12 markets adjacent to its Iowa/Missouri and Wisconsin/Illinois/Indiana
clusters.
In 1996, the Company purchased majority interests in two markets and several
minority interests, representing approximately 1.0 million pops, and received a
majority interest in another market through an exchange with another cellular
operator. The total consideration paid for these purchases, primarily in the
form of cash and USM Common Shares issued to TDS to reimburse TDS for the value
of TDS Common Shares issued to third parties, totaled $158.9 million. Included
in these acquisitions are minority interests representing approximately 598,000
pops the Company acquired from TDS for $102.8 million in cash, pursuant to an
agreement entered into in June 1996.
In 1995, the Company purchased majority interests in 11 markets and several
minority interests, representing approximately 1.7 million pops. The total
consideration paid for these purchases, primarily in the form of cash and USM
Common Shares issued or issuable to TDS to reimburse TDS for the value of TDS
Common Shares issued and issuable and cash paid to third parties, totaled $151.0
million. The Company also acquired majority interests in 12 markets,
representing approximately 2.0 million pops, as a result of six separate
exchange transactions completed during 1995.
In 1997, the Company sold a majority interest in one market and minority
interests in two other markets, representing approximately 358,000 pops, for an
aggregate consideration of $54.5 million in cash and receivables. The two
minority interests involved interests the Company had previously acquired from
TDS pursuant to the June 1996 agreement between the two companies. In the
aggregate, the Company recorded a substantial book gain on the divestitures of
the interests acquired from TDS.
In 1996, the Company sold majority interests in eight markets and minority
interests in two other markets, representing approximately 1.2 million pops, and
divested a majority interest in another market through an exchange with another
cellular operator. The Company received cash consideration totaling $187.8
million from these sales and from the exchange. The Company also settled two
separate legal matters during 1996, receiving $30.3 million in cash from those
transactions. In total, sales, exchanges and litigation settlements provided the
Company with cash totaling $218.1 million in 1996.
In 1995, the Company sold majority interests in six markets and minority
interests in six markets, representing approximately 1.1 million pops. The
Company received consideration consisting of cash and receivables totaling
$128.2 million from these sales. The Company also divested majority interests in
10 markets, representing approximately 2.1 million pops, as a result of the
exchange transactions completed during 1995.
At December 31, 1997, the Company had entered into agreements to acquire a
majority interest in one market and a minority interest in a market in which the
Company owns a majority interest, representing approximately 410,000 pops, for
$51.3 million in cash. If the majority interest is acquired as expected, the
Company will subsequently sell that interest to BellSouth for cash.
Also at December 31, 1997, the Company had entered into agreements with
AirTouch to divest minority interests in nine markets, representing
approximately 759,000 pops. In exchange, the agreements provided that the
Company will receive approximately 4.0 million shares of AirTouch stock and cash
totaling $54.2 million. In addition, the Company will receive approximately
$27.0 million in cash from TDS
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pursuant to a contract right termination agreement entered into between the
Company and TDS. This agreement is related to two interests which are to be sold
directly by TDS to AirTouch and which were to be acquired by the Company as part
of the June 1996 agreement between the Company and TDS. The contract right
termination agreement will enable 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.
Additionally, the Company has entered into an agreement to sell its minority
interests in two other markets, representing approximately 176,000 pops, for
$37.6 million in cash. The Company expects these pending transactions to be
completed during the first half of 1998. The Company anticipates that it will
record significant book gains on these divestitures when the transactions are
completed.
LIQUIDITY
The Company anticipates that the aggregate resources required for 1998 will
include approximately $330 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 1998
primarily with internally generated cash. The Company had $14 million of cash
and cash equivalents at December 31, 1997 and expects to receive approximately
$119 million from pending divestitures and the contract right termination
agreement during 1998.
Additionally, in August 1997 the Company established a $500 million
revolving credit facility with a group of banks. This seven-year facility
replaces the Company's Revolving Credit Agreement with TDS as the Company's
primary short-term borrowing facility. No borrowings have been made under the
new credit facility through December 31, 1997.
The Company filed a shelf registration statement in July 1997 covering $400
million of debt securities, and in August 1997 sold $250 million of Notes under
such shelf registration statement. The remaining $150 million is available for
future transactions.
Management believes that the nature of the interest rate bases related to
the Company's current and potential future debt financing sources do not subject
the Company to material market risk exposures.
Management believes that the Company's operating cash flows and sources of
external financing, including the above-referenced revolving credit facility and
shelf registration, 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.
The Company has assessed and continues to assess the impact of the Year 2000
on its reporting systems and operations (the "Year 2000 Issue"), and is taking
steps to make its systems Year 2000 compliant. The Year 2000 Issue exists
because many computer systems and applications abbreviate dates by eliminating
the first two digits of the year, assuming that these two digits will always be
"19." Unless corrected, this shortcut is expected to cause problems beginning on
January 1, 2000. On that date, some computer programs may recognize the date as
January 1, 1900. This may cause systems to incorrectly process critical
financial and operational information, or stop processing altogether.
Additionally, computer applications may be affected before January 1, 2000, if
calculations into the year 2000 are involved. The costs to date of addressing
the Year 2000 Issue have not been material to the Company's results of
operations or financial condition, and management believes that the costs to be
incurred in the future will not be material to future results or financial
condition. If management's steps are not successful in making the systems Year
2000 compliant, it could have a material adverse effect on results of
operations.
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PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, the Company received a proposal from TDS to acquire all of
the issued and outstanding Common Shares of USM not already owned by TDS. The
offer was made in connection with, and is subject to TDS shareholder approval of
and the effectiveness of, TDS's proposed corporate restructuring. The Board of
Directors of TDS (the "TDS Board") has adopted a proposal which, if approved by
TDS shareholders and implemented by the TDS Board, would authorize the TDS Board
to issue three new classes of common stock and change the state of incorporation
of TDS from Iowa to Delaware (the "Tracking Stock Proposal"). The three new
classes of stock are intended to separately reflect the performance of TDS's
cellular telephone, landline telephone and personal communications services
businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as United States Cellular Group Common
Shares (the "Cellular Group Shares"). The Cellular Group Shares, when issued,
are intended to reflect the separate performance of the United States Cellular
Group (the "Cellular Group"), which consists of TDS's interest in United States
Cellular Corporation.
Subject to the approval of the Tracking Stock Proposal by TDS shareholders,
TDS intends to, among other things, issue Cellular Group Shares in exchange for
all of the Common Shares of the Company which are not currently owned by TDS,
subject to approval by the Company's board of directors and shareholders.
In January 1998, the Company's Board of Directors created a special
committee of the Board (the "Special Committee") to review the proposal from
TDS. The Special Committee, consisting of one independent director of the
Company, has engaged a financial advisor and legal advisor to assist in
reviewing the proposal. The Special Committee will consider how the Company
should respond to the TDS proposal, take the steps it deems appropriate to
respond to the TDS proposal and, at such time as it considers it appropriate,
report its recommendations to the Company's Board of Directors.
Subsequent to TDS shareholder approval of the Tracking Stock Proposal, TDS
intends to terminate certain inter-company agreements between TDS and the
Company. Thereafter, all of the policies between TDS and the Company would be
determined solely by methods that TDS management believes to be reasonable. Many
of such policies would continue the arrangements which presently exist between
TDS and the Company pursuant to the intercompany agreements, but TDS would have
no contractual obligation to continue such policies after the intercompany
agreements have been terminated. The TDS Board currently intends to retain
future earnings, if any, for the development of the business of the Cellular
Group and does not anticipate paying dividends on the Cellular Group Shares in
the foreseeable future.
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;
11
<PAGE>
pending and future litigation; availability of future financing; start-up of PCS
operations; and unanticipated changes in growth in cellular customers,
penetration rates, churn rates and the mix of products and services offered in
the Company's markets. Readers should evaluate any statements in light of these
important factors.
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
1997
Revenues......................................................... $ 184,584 $ 217,579 $ 231,959 $ 242,843
Operating Income Before Minority Share........................... 23,445 42,154 44,912 19,032
Gain on Sale of Cellular and Other Investments................... -- 8,237 5,208 16,873
Net Income....................................................... 18,468 31,692 36,222 25,157
From Operations................................................ 18,468 28,781 32,014 16,039
From Gains..................................................... $ -- $ 2,911 $ 4,208 $ 9,118
Weighted Average Common and Series A Common Shares (000s)........ 86,148 86,177 86,203 86,858
Earnings Per Common and Series A Common
Share-Basic.................................................... $ .21 $ .37 $ .42 $ .29
Earnings Per Common and Series A Common Share-Diluted Total...... .21 .37 .42 .29
From Operations................................................ .21 .33 .37 .18
From Gains..................................................... $ -- $ .04 $ .05 $ .11
1996
Revenues......................................................... $ 143,642 $ 169,470 $ 180,219 $ 186,737
Operating Income Before Minority Share........................... 11,822 30,021 33,094 12,429
Gain on Sale of Cellular and Other Investments................... 38,691 86,305 7,797 (75)
Net Income....................................................... 29,387 63,055 26,140 11,347
From Operations................................................ 8,547 19,694 23,899 10,364
From Gains..................................................... $ 20,840 $ 43,361 $ 2,241 $ 983
Weighted Average Common and Series A Common Shares (000s)........ 84,910 86,085 86,092 86,098
Earnings Per Common and Series A Common
Share-Basic.................................................... $ .35 $ .73 $ .30 $ .13
Earnings Per Common and Series A Common Share-Diluted Total...... .34 .73 .30 .13
From Operations................................................ .10 .23 .28 .12
From Gains..................................................... $ .24 $ .50 $ .02 $ .01
</TABLE>
- ------------------------
Note: Certain 1996 amounts were reclassified for current year presentation.
Net Income for 1997 and 1996 included significant gains from the sales of
cellular and other investments. The table above summarizes the effect of the
gains on Net Income and Earnings per Common and Series A Common Share-Diluted.
Management believes there exists a seasonality at the Company 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. This seasonality may
cause operating income to vary from quarter to quarter.
12
<PAGE>
UNITED STATES CELLULAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING REVENUES
Service.................................................................... $ 852,991 $ 662,681 $ 464,555
Equipment sales............................................................ 23,974 17,387 15,761
---------- ---------- ----------
Total Operating Revenues................................................. 876,965 680,068 480,316
---------- ---------- ----------
OPERATING EXPENSES
System operations.......................................................... 153,137 117,368 70,442
Marketing and selling...................................................... 175,117 127,689 92,180
Cost of equipment sold..................................................... 82,302 74,023 54,948
General and administrative................................................. 204,487 164,783 130,533
Depreciation............................................................... 97,591 74,631 57,302
Amortization of intangibles................................................ 34,788 34,208 32,156
---------- ---------- ----------
Total Operating Expenses................................................. 747,422 592,702 437,561
---------- ---------- ----------
OPERATING INCOME BEFORE MINORITY SHARE....................................... 129,543 87,366 42,755
Minority share of operating income........................................... (12,298) (13,743) (7,902)
---------- ---------- ----------
OPERATING INCOME............................................................. 117,245 73,623 34,853
---------- ---------- ----------
INVESTMENT AND OTHER INCOME
Investment income.......................................................... 77,121 51,518 39,833
Amortization of licenses related to investments............................ (2,084) (1,391) (1,089)
Interest income............................................................ 5,863 10,093 5,008
Other (expense), net....................................................... (3,614) (1,881) (2,578)
Gain on sale of cellular and other investments............................. 30,318 132,718 83,494
---------- ---------- ----------
Total Investment and Other Income........................................ 107,604 191,057 124,668
---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES...................................... 224,849 264,680 159,521
---------- ---------- ----------
INTEREST EXPENSE
Interest expense--other.................................................... 27,414 23,111 16,881
Interest expense--affiliate................................................ 1,948 -- 10,406
---------- ---------- ----------
Total Interest Expense................................................... 29,362 23,111 27,287
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................................... 195,487 241,569 132,234
Income tax expense......................................................... 83,948 111,640 32,492
---------- ---------- ----------
Net Income................................................................... $ 111,539 $ 129,929 $ 99,742
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES (000s).................... 86,346 85,797 82,320
EARNINGS PER COMMON AND SERIES A COMMON SHARE--BASIC......................... $ 1.29 $ 1.51 $ 1.21
---------- ---------- ----------
---------- ---------- ----------
EARNINGS PER COMMON AND SERIES A COMMON SHARE--DILUTED....................... $ 1.29 $ 1.51 $ 1.19
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
13
<PAGE>
UNITED STATES CELLULAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................ $ 111,539 $ 129,929 $ 99,742
Add (Deduct) adjustments to reconcile net income to net cash provided by
operating activities....................................................
Depreciation and amortization........................................... 132,379 108,839 89,458
Investment income....................................................... (77,121) (51,518) (39,833)
Gain on sale of cellular and other investments.......................... (30,318) (132,718) (83,494)
Minority share of operating income...................................... 12,298 13,743 7,902
Other noncash expense................................................... 18,786 19,260 30,597
Change in accounts receivable........................................... (10,038) (16,706) (27,878)
Change in accounts payable.............................................. (1,646) 12,709 (1,819)
Change in accrued taxes................................................. 26,297 (10,185) 27,127
Change in deferred taxes................................................ 24,077 63,137 8,660
Change in accrued interest.............................................. 6,413 204 (4,309)
Change in unearned revenue.............................................. 5,083 5,254 5,265
Change in other assets and liabilities.................................. 4,388 (4,439) 4,516
---------- ---------- ----------
222,137 137,509 115,934
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of 7.25% unsecured notes......................................... 243,053 -- --
Vendor financing borrowings............................................... -- 3,922 59,460
Repayment of vendor financing............................................. (103,827) (21,519) (13,353)
Issuance of convertible debentures........................................ -- -- 221,466
Borrowings from Revolving Credit Agreement--TDS........................... 70,444 -- --
Repayment of Revolving Credit Agreement--TDS.............................. (70,444) -- (251,230)
Common Shares issued...................................................... 2,503 10,483 1,563
Capital (distributions) contributions (to)/from minority partners......... (5,849) (4,099) 1,411
---------- ---------- ----------
135,880 (11,213) 19,317
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................................... (277,799) (219,370) (200,554)
System development costs.................................................. (40,949) (28,753) (5,628)
Investments in and advances to investment entities........................ (20,084) (22,256) (26,966)
Distributions from investment entities.................................... 52,365 23,464 8,679
Proceeds from sales of cellular and other investments..................... 61,145 212,979 151,137
Acquisitions, excluding cash acquired..................................... (128,828) (116,387) (29,315)
Other investments......................................................... (3,305) -- --
Change in temporary investments and marketable non-equity securities...... (1,088) -- --
---------- ---------- ----------
(358,543) (150,323) (102,647)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................ (526) (24,027) 32,604
CASH AND CASH EQUIVALENTS--
Beginning of period....................................................... 14,377 38,404 5,800
---------- ---------- ----------
End of period............................................................. $ 13,851 $ 14,377 $ 38,404
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
14
<PAGE>
UNITED STATES CELLULAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds..................................................................... $ 13,851 $ 802
Affiliated cash equivalents....................................................... -- 13,575
------------ ------------
13,851 14,377
Temporary investments............................................................... 218 --
Accounts receivable
Customers, less allowance of $5,259 and $4,199, respectively...................... 81,387 58,034
Roaming........................................................................... 30,689 29,742
Affiliates........................................................................ 170 607
Other............................................................................. 17,536 7,568
Inventory........................................................................... 11,836 11,893
Prepaid expenses.................................................................... 15,714 2,622
Other current assets................................................................ 3,963 3,776
------------ ------------
175,364 128,619
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction................................................... 1,212,575 846,005
Less accumulated depreciation....................................................... 272,322 195,251
------------ ------------
940,253 650,754
------------ ------------
INVESTMENTS
Licenses, net of accumulated amortization of $127,783 and $110,727, respectively.... 1,150,924 1,044,141
Cellular entities................................................................... 128,810 186,791
Notes and interest receivable....................................................... 10,673 14,943
Marketable non-equity securities.................................................... 870 --
------------ ------------
1,291,277 1,245,875
------------ ------------
DEFERRED CHARGES
System development costs, net of accumulated amortization of $18,117 and $11,089,
respectively...................................................................... 78,306 44,319
Other, net of accumulated amortization of $4,639 and $5,276, respectively........... 23,716 16,332
------------ ------------
102,022 60,651
------------ ------------
TOTAL ASSETS...................................................................... $ 2,508,916 $ 2,085,899
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
15
<PAGE>
UNITED STATES CELLULAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt................................................... $ -- $ 23,065
Notes payable....................................................................... 1,302 1,375
Accounts payable
Affiliates........................................................................ 2,466 2,729
Other............................................................................. 101,263 66,638
Accrued taxes....................................................................... 41,606 18,781
Accrued interest.................................................................... 6,534 204
Accrued compensation................................................................ 9,112 3,231
Customer deposits and deferred revenues............................................. 21,019 16,410
Other current liabilities........................................................... 20,934 14,021
------------ ------------
204,236 146,454
------------ ------------
LONG-TERM DEBT
6% zero coupon convertible debentures............................................... 265,330 250,107
7.25% unsecured notes............................................................... 250,000 --
Vendor financing, excluding current portion......................................... -- 80,589
------------ ------------
515,330 330,696
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability................................................... 100,725 78,833
Other............................................................................... 5,397 2,444
------------ ------------
106,122 81,277
------------ ------------
MINORITY INTEREST..................................................................... 53,908 51,270
------------ ------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share; authorized 140,000,000 shares; issued and
outstanding 54,232,486 and 53,117,313 shares, respectively........................ 54,232 53,117
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.......................................................... 1,285,530 1,245,066
Retained earnings................................................................... 256,552 145,013
------------ ------------
1,629,320 1,476,202
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................ $ 2,508,916 $ 2,085,899
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
16
<PAGE>
UNITED STATES CELLULAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
COMMON SHARES
Balance at beginning of period........................................ $ 53,117 $ 49,966 $ 45,584
Add
Acquisitions of cellular interests.................................. 996 2,194 3,455
Employee benefit plans.............................................. 118 62 62
Redemption of USM and TDS Preferred Stock........................... 1 895 865
------------ ------------ ------------
Balance at end of period.............................................. $ 54,232 $ 53,117 $ 49,966
------------ ------------ ------------
------------ ------------ ------------
SERIES A COMMON SHARES
Balance at beginning of period........................................ $ 33,006 $ 33,006 $ 33,006
Issued during year.................................................... -- -- --
------------ ------------ ------------
Balance at end of period.............................................. $ 33,006 $ 33,006 $ 33,006
------------ ------------ ------------
------------ ------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period........................................ $ 1,245,066 $ 1,206,614 $ 1,083,698
Add (Deduct)
Acquisitions of cellular interests.................................. 31,489 65,089 101,302
Transfer of interests from TDS...................................... -- (45,761) --
Sale of interests transferred from TDS.............................. 6,591 -- --
Employee benefit plans.............................................. 2,376 1,575 1,614
Redemption of USM and TDS Preferred Stock........................... 35 17,555 21,371
Net unrealized (loss) on available-for-sale marketable equity
securities........................................................ -- -- (1,258)
Capital stock expense............................................... (27) (6) (113)
------------ ------------ ------------
Balance at end of period.............................................. $ 1,285,530 $ 1,245,066 $ 1,206,614
------------ ------------ ------------
------------ ------------ ------------
COMMON SHARES ISSUABLE
Balance at beginning of period........................................ $ -- $ 24,784 $ 16,337
Add (Deduct)
Acquisitions of cellular interests.................................. -- -- 14,530
Shares issued pursuant to acquisition agreements.................... -- (24,784) (6,083)
------------ ------------ ------------
Balance at end of period.............................................. $ -- $ -- $ 24,784
------------ ------------ ------------
------------ ------------ ------------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of period........................................ $ 145,013 $ 15,084 $ (84,658)
Add net income........................................................ 111,539 129,929 99,742
------------ ------------ ------------
Balance at end of period.............................................. $ 256,552 $ 145,013 $ 15,084
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
17
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, United States Cellular Corporation (the "Company" or
"USM") received a proposal from Telephone and Data Systems, Inc. ("TDS") to
acquire all of the issued and outstanding Common Shares of USM not already owned
by TDS. The offer was made in connection with, and is subject to, TDS
shareholder approval of and the effectiveness of, TDS's proposed corporate
restructuring. The Board of Directors of TDS (the "TDS Board") has adopted a
proposal which, if approved by TDS shareholders and implemented by the TDS
Board, would authorize the TDS Board to issue three new classes of common stock
and change the state of incorporation of TDS from Iowa to Delaware (the
"Tracking Stock Proposal"). The three new classes of stock are intended to
separately reflect the performance of TDS's cellular telephone, landline
telephone and personal communications services businesses ("Tracking Stocks").
Under the Tracking Stock Proposal, one of the three new classes of common
stock created by TDS would be designated as United States Cellular Group Common
Shares (the "Cellular Group Shares"). The Cellular Group Shares, when issued,
are intended to reflect the separate performance of the United States Cellular
Group (the "Cellular Group"), which consists of TDS's interest in United States
Cellular Corporation.
Subject to the approval of the Tracking Stock Proposal by TDS shareholders,
TDS intends to, among other things, issue Cellular Group Shares in exchange for
all of the Common Shares of the Company which are not currently owned by TDS,
subject to approval by the Company's board of directors and shareholders (the
"Merger").
In January 1998, the Company's Board of Directors created a special
committee of the Board (the "Special Committee") to review the proposal from
TDS. The Special Committee, consisting of one independent director of the
Company, has engaged a financial advisor and legal advisor to assist in
reviewing the proposal. The Special Committee will consider how the Company
should respond to the TDS proposal, take the steps it deems appropriate to
respond to the TDS proposal and, at such time as it considers it appropriate,
report its recommendations to the Company's Board of Directors.
Subsequent to TDS shareholder approval of the Tracking Stock Proposal, TDS
intends to terminate certain intercompany agreements between TDS and the
Company. Thereafter, some or all of the policies between TDS and the Company
would be determined solely by methods that TDS management believes to be
reasonable. Many of such policies would continue the arrangements which
presently exist between TDS and the Company pursuant to the intercompany
agreements, but TDS would have no contractual obligation to continue such
policies after the intercompany agreements have been terminated. The TDS Board
currently intends to retain future earnings, if any, for the development of the
business of the Cellular Group and does not anticipate paying dividends on the
Cellular Group Shares in the foreseeable future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company, a Delaware corporation, is currently an 81.1%-owned subsidiary
of Telephone and Data Systems, Inc.
NATURE OF OPERATIONS
USM owns, manages and invests in cellular systems throughout the United
States and is the nation's eighth largest cellular telephone company in terms of
population equivalents ("pops"). The Company
18
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
owns interests in 192 cellular markets, representing approximately 26.2 million
pops, as of December 31, 1997. USM's 134 majority-owned and managed markets,
primarily mid-sized and rural markets, covered 24 states and served 1,710,000
customers as of December 31, 1997. USM's Midwest Regional Market Cluster, which
includes markets in Iowa, Wisconsin, Illinois and Missouri, served 709,000
customers at December 31, 1997, which represents approximately 41% of USM's
total customers served as of that date.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of USM, its
majority-owned subsidiaries and partnerships in which USM has a majority
partnership interest. All material intercompany accounts and transactions have
been eliminated. Investments in entities in which the Company does not have a
majority interest are generally accounted for using the equity method.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates, but management
believes any differences will not be material.
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to 12 months are classified
as temporary investments. Temporary investments are stated at cost. Those
investments with original maturities of more than 12 months are classified as
marketable securities and are stated at amortized cost.
The carrying amounts of Cash and Cash Equivalents and Temporary Investments
approximate their fair value due to the short-term nature of these investments.
ACCOUNTS RECEIVABLE
Accounts receivable consists of amounts owed by customers for both service
provided and equipment sales, by other cellular carriers whose customers have
used USM's cellular systems, by affiliated entities and by other partners for
capital contributions and distributions.
NOTES AND INTEREST RECEIVABLE
Notes and interest receivable primarily consist of loans to other partners
for capital calls paid on their behalf. The interest charged on these loans is
at varying annual rates. USM also has an outstanding loan to the operators of
another cellular company in which USM has no equity. The interest charged on
this loan is at an annual rate of prime plus 1 1/2%. The carrying amount
reported in the balance sheet for notes and interest receivable approximates
their fair value.
19
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED CHARGES
Deferred system development costs represent costs incurred for the
development of new information systems. Capitalized costs of information systems
development are amortized over a five-year period, starting when each new system
is placed in service.
Other deferred charges primarily represent legal and other charges incurred
relating to the preparation of the agreements related to the Company's various
borrowing instruments, and are amortized over the respective financing periods
of each instrument (seven to 20 years).
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company implemented the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Under SFAS No. 121, the Company is required to review long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the book value of a long-lived asset is not
recoverable. An impairment loss would be recognized whenever the review
demonstrates that the book value of a long-lived asset is not recoverable. The
implementation of SFAS No. 121 did not have an impact on the Company's financial
position or results of operations.
REVENUES
Revenues from operations primarily consist of charges to customers for
monthly access, cellular airtime, data usage, vertical services, roaming
charges, long-distance charges and equipment sales. Revenues are recognized as
services are rendered. Unbilled revenues, resulting from cellular service
provided from the billing cycle date to the end of each month and from other
cellular carriers' customers using USM's cellular systems for the last half of
each month, are estimated and recorded. Equipment sales are recognized upon
delivery to the customer and reflect charges to customers for cellular telephone
user equipment purchased.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs
totaled $41.4 million, $24.4 million and $14.1 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
PENSION PLAN
Telephone and Data Systems, Inc. Wireless Companies' Pension Plan (the
"Pension Plan"), a qualified noncontributory defined contribution pension plan,
was adopted effective January 1, 1994. It provides pension benefits for the
employees of USM and its subsidiaries. Under this plan, pension benefits and
costs are calculated separately for each participant and are funded currently.
Pension costs were $1.0 million, $1.5 million and $1.2 million in 1997, 1996 and
1995, respectively.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," effective December 31, 1997. Earnings per Common
Share for 1996 and 1995 have been
20
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
restated to conform to current period presentation. The accounting change had no
effect on 1996 and increased Earnings per Common Share-Basic by $.02 in 1995.
The adoption of SFAS No. 128 had no effect on Earnings per Common Share-Diluted.
The amounts used in computing Earnings per Common Share and the effect on
income and the weighted average number of Common Series A Common Shares of
dilutive potential common stock are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
(DOLLARS AND COMMON SHARES IN
THOUSANDS)
<S> <C> <C> <C>
Net Income used in Earnings Per Share--Basic and Diluted... $ 111,539 $ 129,929 $ 99,742
---------- ---------- ---------
Weighted average number of Common Shares used in Earnings
Per Share--Basic......................................... 86,346 85,797 82,320
Effect of Dilutive Securities:
Convertible Preferred Stock.............................. -- 51 661
Stock Options and Stock Appreciation Rights.............. 52 78 73
Common Shares Issuable................................... -- 115 976
---------- ---------- ---------
Weighted Average Number of Common Shares used in Earnings
Per Share--Diluted....................................... 86,398 86,041 84,030
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
Earnings per Common and Series A Common Share for the years ended December
31, 1997, 1996 and 1995 contain significant income amounts related to gains on
the sale of cellular and other investments. Excluding the after-tax effect of
these gains, basic earnings per share was $1.10, $.73 and $.53 and diluted
earnings per share was $1.10, $.73 and $.52 for the years ended December 31,
1997, 1996 and 1995, respectively.
21
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES
USM acquired certain cellular licenses and other cellular interests during
1997, 1996 and 1995. In conjunction with these acquisitions, the following
assets were acquired, liabilities assumed and Common Shares issued:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Property, plant and equipment, net...................... $ 112,696 $ 7,069 $ 29,622
Cellular licenses....................................... 130,336 90,341 138,600
(Decrease) increase in equity-method investments in
cellular interests.................................... (90,332) 13,971 (5,921)
Accounts receivable..................................... 26,032 1,332 1,760
Revolving Credit Agreement--TDS......................... -- -- (15,493)
Accounts payable........................................ (31,117) (1,081) (5,051)
Other assets and liabilities, excluding cash acquired... 13,699 1,493 (998)
Common Shares issued and issuable....................... (32,486) 3,262 (113,204)
---------- ---------- -----------
Decrease in cash due to acquisitions.................... $ 128,828 $ 116,387 $ 29,315
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Following are supplemental cash flow disclosures regarding interest and
income taxes paid and certain noncash transactions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest paid................................................ $ 6,816 $ 7,001 $ 4,112
Income taxes paid............................................ 40,316 64,402 3,035
Noncash interest expense..................................... 15,379 16,110 23,175
Accrued interest converted into debt under the Revolving
Credit Agreement........................................... -- -- 14,432
Additions to Property, Plant and Equipment financed through
Accounts Payable--Other.................................... 5,778 (4,679) 1,929
Common Shares issued by USM for redemption of USM Preferred
Stock and TDS Preferred Shares............................. $ 36 $ 18,450 $ 22,236
--------- --------- ---------
--------- --------- ---------
</TABLE>
3. INCOME TAXES
USM is included in a consolidated federal income tax return with other
members of the TDS consolidated group.
TDS and USM are parties to a Tax Allocation Agreement (the "Agreement"). The
Agreement provides that USM and its subsidiaries be included with the TDS
affiliated group in a consolidated federal income tax return and in state income
or franchise tax returns in certain situations. USM and its
22
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
subsidiaries calculate their losses and credits as if they comprised a separate
affiliated group. Under the Agreement, USM is able to carry forward its losses
and credits and use them to offset any future income tax liabilities to TDS.
Subject to the completion of the Merger, TDS intends to terminate certain
intercompany agreements between TDS and USM. See Note 1--Proposed TDS Corporate
Restructuring for a discussion of the proposed merger.
Income tax provisions charged to net income are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes
Current................................................... $ 46,357 $ 35,613 $ 14,882
Deferred.................................................. 22,109 54,509 8,468
State income taxes
Current................................................... 13,514 12,890 8,306
Deferred.................................................. 1,968 8,628 836
--------- ---------- ---------
Total income tax expense.................................... $ 83,948 $ 111,640 $ 32,492
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The statutory federal income tax rate is reconciled to the Company's
effective income tax rate below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Statutory federal income tax rate............................ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit................... 5.1 5.7 4.4
Amortization of license costs................................ 1.7 1.1 2.2
Effects of corporations not included in consolidated federal
income tax return.......................................... .4 .8 1.1
Effects of valuation allowance on deferred tax asset......... (.1) (1.2) (18.1)
Gains on sales............................................... .8 4.8 --
--- --- -----
Effective income tax rate.................................... 42.9% 46.2% 24.6%
--- --- -----
--- --- -----
</TABLE>
Deferred income taxes are provided for the temporary differences between the
amount of the Company's assets and liabilities for financial reporting purposes
and their tax basis.
USM had current deferred tax assets totaling $2.5 million and $2.4 million
at December 31, 1997 and 1996, respectively, resulting primarily from the
allowance for customer receivables.
23
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
The temporary differences that gave rise to the non-current deferred tax
assets and liabilities as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Asset
Net operating loss carryforward..................................... $ 14,725 $ 14,121
Taxes on acquisitions............................................... 56,384 --
Alternative minimum tax credit carryforward......................... 7,121 24,545
Stock appreciation rights........................................... 386 299
Other............................................................... 233 --
---------- ----------
78,849 38,965
Less valuation allowance.............................................. 10,233 13,150
---------- ----------
Total Deferred Tax Asset.............................................. 68,616 25,815
---------- ----------
---------- ----------
Deferred Tax Liability
Equity investments.................................................. 65,956 41,482
Property, plant and equipment....................................... 52,668 23,402
Licenses............................................................ 40,624 24,759
Partnership investments............................................. 10,093 15,005
---------- ----------
Total Deferred Tax Liability........................................ 169,341 104,648
---------- ----------
Net Deferred Tax Liability........................................ $ 100,725 $ 78,833
---------- ----------
---------- ----------
</TABLE>
The amount of state net operating loss carryforward (generating a $12.2
million deferred tax asset) available to offset future taxable income, primarily
of the individual subsidiaries which generated the loss, aggregated
approximately $221 million at December 31, 1997 and expires between 1998 and
2012. A valuation allowance has been provided when it is more likely than not
that some portion of the deferred tax asset will not be realized. At December
31, 1997, USM had $7.1 million of federal alternative minimum tax credit
carryforward available to offset regular income tax payable in future years.
USM has certain subsidiaries which are not included in the federal
consolidated income tax return, but file separate tax returns. These
subsidiaries had a federal net operating loss carryforward (generating a $2.5
million deferred tax asset) available to offset future taxable income
aggregating approximately $7.2 million at December 31, 1997 which expires
between 2004 and 2012.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The provision for depreciation as a percentage of depreciable property, plant
and equipment was 10.3%, 10.4% and 10.0% in 1997, 1996 and 1995, respectively.
24
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Property, plant and equipment in service and under construction consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating plant and equipment....................................... $ 923,480 $ 641,600
Buildings and leasehold improvements................................ 136,023 86,533
Office furniture, equipment and vehicles............................ 89,987 71,674
Land................................................................ 63,085 46,198
------------ ----------
$ 1,212,575 $ 846,005
------------ ----------
------------ ----------
</TABLE>
5. ACQUISITIONS, EXCHANGES AND DIVESTITURES
USM has acquired cellular interests for cash, promissory notes and USM and
TDS Common Shares. USM has also divested cellular interests for cash and notes
receivable and has completed exchanges of cellular interests with other cellular
companies.
COMPLETED ACQUISITIONS
During 1997, USM completed the acquisition of majority interests in two
markets and several minority interests, representing approximately 534,000 pops,
for a total consideration of $81.4 million as shown in the following table:
<TABLE>
<CAPTION>
CONSIDERATION
---------------
(MILLIONS)
<S> <C>
1.0 million Common Shares to TDS (1)........................................... $ 32.5
Increase in Revolving Credit Agreement with TDS................................ 39.0
Cash........................................................................... 9.9
-----
Total........................................................................ $ 81.4
-----
-----
</TABLE>
- ------------------------
(1) Issued to reimburse TDS for TDS securities issued to third parties in
connection with the acquisitions.
During 1996, USM completed the acquisition of majority interests in two
markets and several minority interests, representing approximately 1.0 million
pops, for a total consideration of $158.9 million as shown in the following
table:
<TABLE>
<CAPTION>
CONSIDERATION
-------------
(MILLIONS)
<S> <C>
1.3 million Common Shares to TDS (1)........................................... $ 42.4
Common Shares issued to third parties.......................................... .1
Cash........................................................................... 116.4
------
Total........................................................................ $ 158.9
------
------
</TABLE>
- ------------------------
(1) Issued to reimburse TDS for TDS securities issued and cash paid to third
parties in connection with the acquisitions.
25
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED)
EXCHANGE OF MARKETS WITH BELLSOUTH
In October 1997, USM completed an exchange with BellSouth Corporation.
Pursuant to the exchange, USM received majority interests representing
approximately 4.0 million pops in exchange for majority interests representing
2.0 million pops, minority interests representing 1.2 million pops and a net
amount of $86.7 million in cash. The majority interests USM received are in 12
markets adjacent to its Iowa/Missouri and Wisconsin/Illinois/Indiana clusters.
PURCHASE OF MINORITY INTERESTS BY THE COMPANY FROM TDS
Included in the interests USM acquired in 1996 were minority interests in 13
markets, representing 598,000 pops, for $102.8 million in cash paid to TDS.
These interests were acquired pursuant to an agreement entered into in June 1996
between USM and TDS. Due to the intercompany nature of the transactions, these
acquisitions were recorded at TDS's book value of the interests.
Assuming that the 1997 and 1996 acquisitions discussed above, which were
accounted for as purchases, had taken place on January 1, 1996, unaudited pro
forma results of operations would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Service Revenues................................................... $ 947,520 $ 742,913
Equipment Sales.................................................... 31,262 24,612
Interest Expense (including cost to finance acquisitions).......... 30,412 26,623
Net Income......................................................... 139,107 147,413
Earnings per Common Share--Basic................................... 1.60 1.70
Earnings per Common Share--Diluted................................. $ 1.59 $ 1.69
---------- ----------
---------- ----------
</TABLE>
DIVESTITURES OF CELLULAR AND OTHER INVESTMENTS
Gain on sale of cellular and other investments in 1997 primarily reflects
gains recorded on the sales of the Company's majority interest in one market and
minority interests in two markets and on cash received from the settlement of a
legal matter.
Gain on sale of cellular and other investments in 1996 primarily reflects
gains recorded on the sales of the Company's majority interests in eight markets
and minority interests in two markets, on cash received in an exchange of
markets with another cellular operator and on cash received from the settlement
of two separate legal matters.
Gain on sale of cellular and other investments in 1995 primarily reflects
gains recorded on the sales of the Company's majority interests in six markets
and minority interests in six markets, on cash proceeds received in an exchange
of cellular markets and on the sale of marketable equity securities for cash.
26
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED)
PENDING ACQUISITIONS
At December 31, 1997, USM had entered into agreements with third parties to
acquire a majority interest in one market and a minority interest in a market in
which the Company owns a majority interest, representing approximately 410,000
pops, for $51.3 million in cash. These transactions are expected to be completed
during 1998.
PENDING SALES OF MINORITY INTERESTS
In December 1997, the Company entered into agreements with AirTouch
Communications, Inc. ("AirTouch") to divest minority interests in nine markets,
representing approximately 759,000 pops. In exchange, the agreements provided
that the Company will receive approximately 4.0 million shares of AirTouch stock
and cash totaling $54.2 million. In addition, the Company will receive
approximately $27.0 million in cash from TDS pursuant to a contract right
termination agreement entered into between the Company and TDS. This agreement
is related to two interests which are to be sold directly by TDS to AirTouch and
which were to be acquired by the Company as part of the June 1996 agreement
between the Company and TDS. The contract right termination agreement will
enable 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.
Additionally, the Company has entered into an agreement to sell its minority
interests in two other markets, representing approximately 176,000 pops, for
$37.6 million in cash. The Company expects these pending sales transactions to
be completed during the first half of 1998. The Company anticipates that it will
record significant book gains on these divestitures when the transactions are
completed.
6. INVESTMENT IN LICENSES
Investment in licenses consists of the costs incurred in acquiring Federal
Communications Commission ("FCC") licenses or interests in entities which have
filed for or have been awarded FCC licenses to provide cellular service. These
costs include amounts paid to license applicants and owners of interests in
cellular entities awarded licenses and all direct and incremental costs relating
to acquiring the licenses. These costs are capitalized and amortized through
charges to expense over 40 years, upon commencement of operations. Costs
applicable to unsuccessful license applications and acquisitions are charged to
expense. Investment in licenses at December 31, 1997 and 1996, include
approximately $281 million and $322 million, respectively, of goodwill related
to various acquisitions structured to be tax-free.
7. REVOLVING CREDIT FACILITY
In August 1997, USM established a $500 million revolving credit facility
with a group of banks ("Revolving Credit Facility"). This seven-year facility
replaces the Company's Revolving Credit Agreement with TDS as its primary
short-term borrowing facility. As of December 31, 1997, no borrowings were
outstanding under the Revolving Credit Facility.
The terms of the Revolving Credit Facility provide for borrowings with
interest, at the London InterBank Offered Rate plus 26.5 basis points (for a
rate of 6.2% at December 31, 1997), due quarterly. No principal under the
Revolving Credit Facility is due until August 29, 2004, on which date the
Revolving Credit Facility terminates and all unpaid principal and accrued
interest thereon are due and payable.
27
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 6% ZERO COUPON CONVERTIBLE DEBENTURES
During 1995, the Company sold $745 million principal amount at maturity of
zero coupon 6% yield to maturity convertible debt with proceeds to the Company
of $221.5 million. This 20-year fixed rate debt, in the form of Liquid Yield
Option Notes ("LYONs"), is subordinated to all senior indebtedness of the
Company. At December 31, 1997 and 1996, the Company's senior indebtedness
totaled $260.0 million and $113.7 million, respectively. Each LYON is
convertible at the option of the holder at any time at a conversion rate of
9.475 Common Shares per LYON. Upon conversion, USM may elect to deliver its
Common Shares or cash equal to the market value of the Common Shares. Beginning
June 15, 2000, the LYONs may be redeemed at any time for cash at the option of
USM at the issue price plus accrued original issue discount through the date of
redemption. USM will purchase LYONs, at the option of the holder, as of June 15,
2000, at the issue price plus accrued original issue discount through that date.
USM will have the option of purchasing such LYONs with cash, USM Common Shares
or TDS common equity securities, or any combination thereof. During 1997, 25
LYONs were converted for approximately $7,600 in cash.
The carrying values at December 31, 1997 and 1996 of USM's 6% Zero Coupon
Convertible Debentures, $265.3 million and $250.1 million, respectively, are
greater than their fair values, estimated to be $255.6 million and $248.4
million, respectively. The fair values were estimated using discounted cash flow
analysis. The increase in estimated fair value in 1997 was due to a change in
the incremental borrowing rate.
9. 7.25% UNSECURED NOTES
During 1997, the Company sold $250 million principal amount of 7.25% notes
("Notes"), priced to yield 7.33% to maturity. The Notes were sold under the
Company's $400 million shelf registration. The Notes are unsecured and become
due on August 15, 2007. Interest on the Notes is payable on February 15 and
August 15 of each year. The Notes will be redeemable, in whole or in part, at
the option of the Company at any time on or after August 15, 2004, at a
redemption price equal to 100% of the principal amount of the Notes to be
redeemed, plus accrued interest thereon, if any, to the date of redemption.
The carrying value at December 31, 1997 of the Company's 7.25% unsecured
notes, $250 million, is less than its fair value, estimated to be $252.9
million. The fair value was estimated using discounted cash flow analysis.
10. VENDOR FINANCING
USM repaid approximately $90.1 million principal amount of borrowings,
representing all amounts outstanding under its long-term vendor financing
agreements, with the proceeds of its 7.25% unsecured notes offering in August
1997. See Note 9--7.25% Unsecured Notes for a discussion of the notes offering.
Scheduled repayments of borrowings under the vendor financing agreements in
1997, all made prior to the final repayment, totaled $13.7 million.
The carrying value at December 31, 1996 of USM's current and long-term
vendor financing, $103.7 million, was approximately equal to its estimated fair
value.
Vendor financing at December 31, 1996 included $101.1 million (including
deferred interest) under a 1994 agreement and $2.6 million assumed pursuant to a
1993 acquisition. The current portion of outstanding vendor financing borrowings
was $23.1 million at December 31, 1996.
28
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK
EMPLOYEE BENEFIT PLANS
The following table summarizes Common Shares issued for the employee benefit
plans described below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax-Deferred Savings Plan....................................... 42,400 23,302 26,357
Employee stock options, stock appreciation rights and awards.... 65,029 16,380 10,713
Employee Stock Purchase Plan.................................... 10,134 22,366 25,000
--------- --------- ---------
117,563 62,048 62,070
--------- --------- ---------
--------- --------- ---------
</TABLE>
TAX-DEFERRED SAVINGS PLAN
USM had reserved 134,011 Common Shares for issue under the TDS Tax-Deferred
Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and
401(k) of the Internal Revenue Code. Participating employees have the option of
investing their contributions in USM Common Shares, TDS Common Shares, American
Paging, Inc. (an 81.9%-owned subsidiary of TDS) Common Shares, Aerial
Communications, Inc. (an 82.5%-owned subsidiary of TDS) Common Shares or five
other nonaffiliated funds.
STOCK-BASED COMPENSATION PLANS
USM accounts for stock options, stock appreciation rights ("SARs") and
employee stock purchase plans under Accounting Principles Board ("APB") Opinion
No. 25. No compensation costs have been recognized for the stock option and
employee stock purchase plans. Compensation expense for SARs, measured on the
difference between the SAR prices and the year-end market price of the Common
Shares, aggregated $285,000, ($224,000) and $168,000 in 1997, 1996 and 1995,
respectively. Had compensation cost for all plans been determined consistent
with SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts as shown on the next page:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net Income:
As Reported.......................................... $ 111,539 $ 129,929 $ 99,742
Pro Forma............................................ 110,317 129,166 98,960
Earnings per Common Share--Basic:
As Reported.......................................... 1.29 1.51 1.21
Pro Forma............................................ 1.28 1.51 1.20
Earnings per Common Share--Diluted:
As Reported.......................................... 1.29 1.51 1.19
Pro Forma............................................ $ 1.28 $ 1.50 $ 1.18
</TABLE>
29
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK (CONTINUED)
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
A summary of the status of the Company's stock option plans at December 31,
1997, 1996 and 1995 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE
SHARES OPTION PRICES FAIR VALUES
----------- ------------- -----------
<S> <C> <C> <C>
Stock Options:
Outstanding
January 1, 1995 (80,164 exercisable)................. 224,259 $ 27.63
Granted.............................................. 106,406 $ 27.76 $ 14.02
Exercised............................................ (10,713) $ 15.67
Outstanding
December 31, 1995 (177,675 exercisable).............. 319,952 $ 28.07
Granted.............................................. 103,326 $ 25.12 $ 16.59
Exercised............................................ (16,380) $ 16.98
Cancelled............................................ (15,851) $ 30.05
Outstanding
December 31, 1996 (271,866 exercisable).............. 391,047 $ 29.47
Granted.............................................. 250,393 $ 13.41 $ 18.77
Exercised............................................ (68,563) $ 17.56
Cancelled............................................ (18,594) $ 26.85
Outstanding
December 31, 1997 (293,418 exercisable).............. 554,283 $ 24.23
</TABLE>
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
USM had reserved 748,596 Common Shares for options granted and to be granted
to key employees. USM has established a Stock Option plan as of November 9, 1994
that provides for the grant of stock options to officers and employees. The
options under the 1994 plan are exercisable from the date of vesting through
November 9, 2004, or thirty days following the date of the employee's
termination of employment, if earlier. Under the 1994 Stock Option Plan, 293,418
stock options were outstanding at December 31, 1997, at a weighted average price
of $30.76 per share. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996, respectively:
risk-free interest rates of 6.3% and 5.9%; expected dividend yields of zero for
both years; expected lives of 4.8 years and 4.0 years; and expected volatility
of 20.8% and 22.7%.
Stock Appreciation Rights (as amended on February 1, 1991) allow the grantee
to receive an amount in Common Shares or cash, or a combination thereof,
equivalent to the difference between the exercise price and the fair market
value of the Common Shares on the exercise date. At December 31, 1997, 38,050
Common Share SARs and 36,000 Series A Common Share SARs were outstanding at $15
per share. These rights expire from 1998 to 2003 or the date of the person's
termination of employment, if earlier. During
30
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK (CONTINUED)
1997 and 1996, 3,950 and 300 Common Share SARs were exercised, respectively. No
SARs were exercised in 1995. There were no SARs granted in 1997 or 1996.
EMPLOYEE STOCK PURCHASE PLAN
USM had 115,498 Common Shares reserved under the 1997 Employee Stock
Purchase Plan ("1997 ESPP"). During 1996, the 1997 ESPP was approved, which
became effective January 1, 1997. The fair value of the employees' purchase
rights was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants rights in
1997: risk-free interest rate of 5.7%; expected dividend yield of zero; expected
life of .7 years; and expected volatility of 17.6%.
SERIES A COMMON SHARES
Series A Common Shares are convertible on a share-for-share basis into
Common Shares and each share is entitled to ten votes per share, compared to one
vote for each Common Share. As of December 31, 1997, all of USM's outstanding
Series A Common Shares were held by TDS.
12. RELATED PARTIES
USM is billed for all services it receives from TDS, consisting primarily of
information processing and general management services. Such billings are based
on expenses specifically identified to USM and on allocations of common
expenses. Such allocations are based on the relationship of USM's assets,
employees, investment in plant and expenses to the total assets, employees,
investment in plant and expenses of TDS. Management believes the method used to
allocate common expenses is reasonable and that all expenses and costs
applicable to USM are reflected in the accompanying financial statements on a
basis which is representative of what they would have been if USM operated on a
stand-alone basis. Billings to USM from TDS totaled $36.2 million, $28.1 million
and $26.1 million in 1997, 1996 and 1995, respectively.
USM has a Cash Management Agreement with TDS under which USM may from time
to time deposit its excess cash with TDS for investment under TDS's cash
management program. Deposits made under the agreement are available to USM on
demand and bear interest each month at the 30-day Commercial Paper Rate as
reported in The Wall Street Journal, plus 1/4%, or such higher rate as TDS may
at its discretion offer on such deposits. Interest income from such deposits was
$1.3 million, $4.8 million and $701,000 in 1997, 1996 and 1995, respectively.
Subject to the completion of the Merger, TDS intends to terminate certain
intercompany agreements between TDS and USM. See Note 1--Proposed TDS Corporate
Restructuring for a discussion of the proposed merger.
All markets managed by USM are billed for services they receive from USM.
Such billings are based on expenses specifically identified to each market and
on allocations of common expenses. Such allocations are primarily based on the
relationships of each market's assets and revenues to the total assets and
revenues of all the markets managed by USM. Management believes that all
expenses and costs applicable to each market are representative of what they
would have been if each managed market operated on a stand-alone basis.
31
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTIES (CONTINUED)
See Note 5--Acquisitions, Exchanges and Divestitures, Purchase of Minority
Interests by the Company from TDS for a discussion of a purchase of minority
interests by the Company from TDS.
13. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The partnerships and corporations in which USM is a partner or shareholder
are in various stages of development. USM expects to spend approximately $330
million during 1998, including about $240 million for new cell sites to expand
and enhance the Company's coverage in its service areas and about $90 million
for the enhancement of the Company's office systems. Under the terms of certain
partnership and shareholder agreements, USM may be committed to funding other
partners' or shareholders' portions of construction and other costs, if
sufficient financing is not available to the individual entities. USM does not
expect such individual financing shortfalls to be material.
From time to time USM may acquire attractive markets to maximize its
clustering strategy. See Note 5--Acquisitions, Exchanges and Divestitures for a
discussion of pending acquisitions and divestitures.
LEASE COMMITMENTS
USM and certain of its majority-owned partnerships and subsidiaries lease
certain office and cell site locations under operating leases. Future minimum
rental payments required under operating leases that have noncancelable lease
terms in excess of one year as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
MINIMUM FUTURE
RENTALS
-------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
1998..................................................................... $ 14,436
1999..................................................................... 11,127
2000..................................................................... 8,099
2001..................................................................... 7,515
2002..................................................................... 4,864
Thereafter............................................................... $ 36,475
-------
-------
</TABLE>
Rent expense totaled $17.2 million, $12.4 million and $9.8 million in 1997,
1996 and 1995, respectively.
LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts from time to time. Management does not believe
that any of such proceedings should have a material adverse impact on the
financial position or results of operations of the Company.
On December 29, 1997, a party, which claims to be a holder of the USM Common
Shares, filed a putative class action complaint on behalf of common stockholders
of USM in the Court of Chancery of the State of Delaware in New Castle County.
The complaint names as defendants TDS, USM and the directors of USM. The
complaint alleges a breach of fiduciary duties by the defendants and seeks to
have the Merger enjoined or, if it is consummated, to have it rescinded and to
recover unspecified damages, fees
32
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
and expenses. A virtually identical complaint has been filed by an individual.
None of the defendants have been served with this complaint. The Company intends
to vigorously defend against these lawsuits.
14. INVESTMENTS IN CELLULAR ENTITIES
Investments in cellular entities consist of amounts invested in cellular
entities in which USM holds a minority interest. These investments are accounted
for using either the equity or cost method, as shown in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Equity method investments:
Capital contributions, loans and advances.......................... $ 66,182 $ 93,209
Cumulative share of income......................................... 177,798 172,974
Cumulative share of distributions.................................. (117,174) (88,862)
----------- ----------
126,806 177,321
Cost method investments:
Capital contributions, net of partnership distributions............ 2,004 9,470
----------- ----------
Total investment in cellular entities................................ $ 128,810 $ 186,791
----------- ----------
----------- ----------
</TABLE>
As of December 31, 1997, USM followed the equity method of accounting for
minority interests in 51 markets where the Company's ownership interest is 3% or
greater. This method recognizes, on a current basis, USM's proportionate share
of the incomes and losses accruing to it under the terms of the respective
partnership and shareholder agreements.
As of December 31, 1997, USM follows the cost method of accounting for its
investments in seven markets where the Company's ownership interest is less than
3%. It is not practicable to estimate the fair value of USM's investments
accounted for using the cost method due to the lack of quoted market prices and
the inability to estimate fair values without incurring excessive costs. The
$2.0 million and $9.5 million carrying amounts at December 31, 1997, and 1996,
respectively, represent primarily the original amounts invested, which
management believes are not impaired.
33
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INVESTMENTS IN CELLULAR ENTITIES (CONTINUED)
The following summarizes the unaudited balance sheets and results of
operations of the cellular system entities in which USM's investments are
accounted for by the equity method:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Current......................................................... $ 361,561 $ 249,077
Due from affiliates............................................. 2,724 6,165
Property and other.............................................. 1,050,755 1,000,537
------------ ------------
$ 1,415,040 $ 1,255,779
------------ ------------
------------ ------------
Liabilities and Partners' Capital
Current liabilities............................................. $ 249,587 $ 226,606
Due to affiliates............................................... 38,429 20,614
Deferred credits................................................ 6,604 791
Long-term debt.................................................. 27,195 16,144
Partners' capital............................................... 1,093,225 991,624
------------ ------------
$ 1,415,040 $ 1,255,779
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Results of Operations
Revenues.......................................... $ 1,652,683 $ 1,269,835 $ 1,078,413
Costs and expenses................................ 1,178,970 859,026 730,873
Other (expense) income............................ (7,292) 832 1,418
------------ ------------ ------------
Net income........................................ $ 466,421 $ 411,641 $ 348,958
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF UNITED STATES CELLULAR CORPORATION:
We have audited the accompanying consolidated balance sheets of United
States Cellular Corporation (a Delaware corporation and an 81.1%-owned
subsidiary of Telephone and Data Systems, Inc.) and Subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
changes in common shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
States Cellular Corporation and Subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
[SIGNATURE]
Chicago, Illinois
January 28, 1998
35
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Service Revenues...................................... $ 852,991 $ 662,681 $ 464,555 $ 313,875 $ 199,834
Equipment Sales....................................... 23,974 17,387 15,761 13,755 10,510
Operating Income (Loss) Before Minority Share......... 129,543 87,366 42,755 17,385 (8,656)
Minority share of operating income.................... (12,298) (13,743) (7,902) (5,152) (3,496)
Operating Income (Loss)............................... 117,245 73,623 34,853 12,233 (12,152)
Investment income, net of related amortization
expense............................................. 75,037 50,127 38,744 25,627 16,005
Gain on sale of cellular and other investments........ 30,318 132,718 83,494 3,321 4,851
Income (Loss) Before Income Taxes..................... 195,487 241,569 132,234 21,310 (22,749)
Net Income (Loss)..................................... $ 111,539 $ 129,929 $ 99,742 $ 16,393 $ (25,441)
Weighted Average Common and Series A Common Shares
(000s).............................................. 86,346 85,797 82,320 77,321 57,152
Earnings Per Common and Series A Common
Share--Basic........................................ $ 1.29 $ 1.51 $ 1.21 $ .23 $ (.45)
Earnings Per Common and Series A Common
Share--Diluted...................................... $ 1.29 $ 1.51 $ 1.19 $ .23 $ (.45)
Pretax Profit (Loss) on Service Revenues.............. 22.9% 36.5% 28.5% 6.8% (11.4%)
Operating Cash Flow Interest Coverage................. 18.5x 22.4x 6.7x 3.8x 1.1x
Pretax Interest Coverage Before Gains................. 6.6x 5.7x 2.8x 1.8x .2x
Effective Income Tax Rate............................. 42.9% 46.2% 24.6% 23.1% (11.8%)
BALANCE SHEET DATA
Working Capital....................................... $ (28,872) $ (17,835) $ (25,323) $ (33,813) $ (28,386)
Property, Plant and Equipment, net.................... 940,253 650,754 530,027 368,181 246,414
Investments--
Cellular entities................................... 128,810 186,791 134,421 99,495 90,104
Licenses, net of accumulated amortization........... 1,150,924 1,044,141 1,035,846 947,399 824,491
Total Assets.......................................... 2,508,916 2,085,899 1,880,144 1,534,787 1,245,396
Vendor Financing, excluding current portion........... -- 80,589 98,656 57,691 51,130
6% Zero Coupon Convertible Debentures................. 265,330 250,107 235,750 -- --
7.25% Unsecured Notes................................. 250,000 -- -- -- --
Revolving Credit Agreement--TDS....................... -- -- -- 232,954 141,524
Redeemable Preferred Stock, excluding current
portion............................................. -- -- -- 9,597 18,828
Common Shareholders' Equity........................... $1,629,320 $1,476,202 $1,329,454 $1,093,967 $ 940,128
Current Ratio......................................... .86 .88 .84 .66 .62
Return on Equity...................................... 7.2% 9.3% 8.2% 1.6% (3.7%)
</TABLE>
SHAREHOLDERS' INFORMATION
UNITED STATES CELLULAR STOCK AND DIVIDEND INFORMATION
The Company's Common Shares are listed on the American Stock Exchange under
the symbol "USM" and in the newspapers as "US Cellu." As of February 27, 1998,
the Company's Common Shares were held by 602 record owners. All of the Series A
Common Shares were held by TDS. No public trading market exists for the Series A
Common Shares. The Series A Common Shares are convertible on a share-for-share
basis into Common Shares.
36
<PAGE>
The high and low sales prices of the Common Shares as reported by the
American Stock Exchange were as follows:
<TABLE>
<CAPTION>
COMMON SHARES
CALENDAR PERIOD HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1997
First Quarter.............................................................. $ 28.75 $ 24.88
Second Quarter............................................................. 29.63 23.13
Third Quarter.............................................................. 36.88 29.19
Fourth Quarter............................................................. 36.81 29.38
1996
First Quarter.............................................................. $ 37.38 $ 31.63
Second Quarter............................................................. 35.63 30.75
Third Quarter.............................................................. 31.63 28.13
Fourth Quarter............................................................. 30.38 26.88
</TABLE>
The Company has not paid any cash dividends and currently intends to retain
all earnings for use in the Company's business.
37
<PAGE>
EXHIBIT 21 UNITED STATES CELLULAR CORPORATION
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31,1997
<TABLE>
<CAPTION>
STATE OF
USM COMPANIES INCORPORATION
------------- -------------
<S> <C>
UNITED STATES CELLULAR CORPORATION DELAWARE
CANTON CELLULAR TELEPHONE COMPANY PENNSYLVANIA
CARRY PHONE, INC. DELAWARE
CELLVEST, INC. DELAWARE
LAR-TEX CELLULAR TELEPHONE COMPANY, INC. DELAWARE
MEDFORD PAGING, INC. OREGON
NATIONAL CELLULAR COMMUNICATIONS, INC. LOUISIANA
USCOC OF CORPUS CHRISTI, INC. TEXAS
TRI-CITIES PAGING, INC. WASHINGTON
UNITED STATES CELLULAR OPERATING COMPANY OF COLUMBIA MISSOURI
USCOC OF CUMBERLAND, INC. MARYLAND
UNITED STATES CELLULAR OPERATING COMPANY - DES MOINES IOWA
UNITED STATES CELLULAR OPERATING COMPANY OF MEDFORD OREGON
UNITED STATES CELLULAR OPERATING COMPANY OF RICHLAND WASHINGTON
USCC REAL ESTATE CORPORATION DELAWARE
USCC PAYROLL CORPORATION DELAWARE
MIDWEST PAYROLL CORPORATION DELAWARE
USCOC OF TALLAHASSEE, INC. FLORIDA
CALIFORNIA RURAL SERVICE AREA #1, INC. CALIFORNIA
FLORIDA RSA #8, INC. DELAWARE
</TABLE>
Page 1
<PAGE>
EXHIBIT 21 UNITED STATES CELLULAR CORPORATION
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31,1997
<TABLE>
<CAPTION>
STATE OF
USM COMPANIES INCORPORATION
------------- -------------
<S> <C>
GEORGIA RSA # 11, INC. GEORGIA
GEORGIA RSA # 13, INC. GEORGIA
HARDY CELLULAR TELEPHONE COMPANY DELAWARE
ILLINOIS RSA # 3, INC. ILLINOIS
IOWA 13, INC. DELAWARE
MAINE RSA # 1, INC. MAINE
MCDANIEL CELLULAR TELEPHONE COMPANY DELAWARE
MICHIGAN RSA # 4, INC. MICHIGAN
MISSOURI # 15 RURAL CELLULAR, INC. MISSOURI
NH # 1 RURAL CELLULAR, INC. NEW HAMPSHIRE
NORTH CAROLINA RSA # 4, INC. DELAWARE
NORTH CAROLINA RSA NO. 6, INC. CALIFORNIA
NORTH CAROLINA RSA # 9, INC. NORTH CAROLINA
OHIO STATE CELLULAR PHONE COMPANY, INC. FLORIDA
PEACE VALLEY CELLULAR TELEPHONE COMPANY DELAWARE
TENNESSEE RSA # 4 SUB 2, INC. TENNESSEE
TEXAS # 20 RURAL CELLULAR, INC. TEXAS
USCOC OF HAWAII 3, INC. DELAWARE
USCOC OF IDAHO RSA # 5, INC. DELAWARE
USCOC OF ILLINOIS RSA # 1, INC. VIRGINIA
USCOC OF ILLINOIS RSA # 4, INC. ILLINOIS
USCOC OF IOWA RSA # 1, INC. IOWA
USCOC OF IOWA RSA # 16, INC. DELAWARE
USCOC OF MISSOURI RSA # 5, INC. ILLINOIS
USCOC OF MISSOURI RSA # 13, INC. DELAWARE
USCOC OF NEW HAMPSHIRE RSA # 2, INC. DELAWARE
USCOC OF NORTH CAROLINA RSA # 7, INC. NORTH CAROLINA
USCOC OF OKLAHOMA RSA # 10, INC. OKLAHOMA
USCOC OF OREGON RSA # 5, INC. DELAWARE
USCOC OF PENNSYLVANIA RSA NO. 10-B2, INC. DELAWARE
USCOC OF SOUTH CAROLINA RSA # 4, INC. SOUTH CAROLINA
USCOC OF VIRGINIA RSA # 2, INC. VIRGINIA
USCOC OF VIRGINIA RSA # 3, INC. VIRGINIA
USCOC OF WASHINGTON-4, INC. DELAWARE
VIRGINIA RSA # 4, INC. VIRGINIA
VIRGINIA RSA # 7, INC. VIRGINIA
WISCONSIN RSA # 7, INC. DELAWARE
ACC OF ROCKFORD, INC. ILLINOIS
DAVENPORT CELLULAR TELEPHONE COMPANY, INC. DELAWARE
JOPLIN CELLULAR TELEPHONE COMPANY, INC. DELAWARE
TRI-STATES CELLULAR COMMUNICATIONS, INC. MISSOURI
UNITED STATES CELLULAR OPERATING COMPANY DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF BANGOR MAINE
UNITED STATES CELLULAR OPERATING COMPANY OF CEDAR RAPIDS DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF DUBUQUE IOWA
UNITED STATES CELLULAR OPERATING COMPANY
OF EVANSVILLE, INC. INDIANA
UNITED STATES CELLULAR OPERATING COMPANY OF FT. PIERCE FLORIDA
UNITED STATES CELLULAR OPERATING COMPANY OF JOPLIN MISSOURI
UNITED STATES CELLULAR OPERATING COMPANY OF KNOXVILLE TENNESSEE
UNITED STATES CELLULAR OPERATING COMPANY OF LACROSSE, INC. WISCONSIN
UNITED STATES CELLULAR OPERATING COMPANY OF
LEWISTON-AUBURN MAINE
UNITED STATES CELLULAR OPERATING COMPANY OF
MANCHESTER-NASHUA, INC. NEW HAMPSHIRE
UNITED STATES CELLULAR OPERATING COMPANY OF OWENSBORO DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF ROCHESTER MINNESOTA
USCOC OF TEXAHOMA, INC. TEXAS
UNITED STATES CELLULAR OPERATING COMPANY OF TULSA, INC. OKLAHOMA
UNITED STATES CELLULAR OPERATING COMPANY OF WATERLOO IOWA
</TABLE>
Page 2
<PAGE>
EXHIBIT 21 UNITED STATES CELLULAR CORPORATION
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31,1997
<TABLE>
<CAPTION>
STATE OF
USM COMPANIES INCORPORATION
------------- -------------
<S> <C>
UNITED STATES CELLULAR OPERATING COMPANY OF WAUSAU, INC. WISCONSIN
UNITED STATES CELLULAR OPERATING COMPANY OF WILLIAMSPORT PENNSYLVANIA
UNITED STATES CELLULAR OPERATING COMPANY OF YAKIMA WASHINGTON
USCOC OF CHARLOTTESVILLE, INC. VIRGINIA
USCOC OF PORTLAND, INC. MAINE
USCOC OF VICTORIA, INC. TEXAS
INDIANA RSA # 4, INC. DELAWARE
INDIANA RSA # 5, INC. INDIANA
IOWA RSA # 12, INC. DELAWARE
IOWA RSA # 3, INC. DELAWARE
IOWA RSA # 9, INC. DELAWARE
I-5 CELLULAR, INC. WASHINGTON
MAINE RSA # 4, INC. MAINE
OHIO RSA # 1, INC. OHIO
OREGON RSA # 2, INC. OREGON
OREGON RSA # 3, INC. OREGON
OREGON RSA # 6, INC. OREGON
TENNESSEE RSA # 3, INC. DELAWARE
USCOC OF VIRGINIA RSA # 4, INC. ILLINOIS
WASHINGTON RSA # 5, INC. WASHINGTON
WESTERN COLORADO CELLULAR, INC. COLORADO
CAMDEN CELLULAR TELEPHONE COMPANY, INC. DELAWARE
CAROLINA CELLULAR, INC. NORTH CAROLINA
EAU CLAIRE MSA, INC. WISCONSIN
FOUR D, LTD. MISSISSIPPI
UNITED STATES CELLULAR INVESTMENT COMPANY DELAWARE
UNITED STATES CELLULAR INVESTMENT COMPANY OF
EAU CLAIRE, INC. WISCONSIN
UNITED STATES CELLULAR INVESTMENT COMPANY OF
PORTSMOUTH, INC. NEW HAMPSHIRE
UNITED STATES CELLULAR INVESTMENT COMPANY OF
RALEIGH-DURHAM DELAWARE
UNITED STATES CELLULAR INVESTMENT COMPANY OF
SANTA CRUZ, INC. CALIFORNIA
UNITED STATES CELLULAR INVESTMENT COMPANY OF SARASOTA FLORIDA
UNITED STATES CELLULAR INVESTMENT COMPANY OF
ST. CLOUD, INC. MINNESOTA
UNITED STATES CELLULAR INVESTMENT COMPANY OF WHEELING WEST VIRGINIA
UNITED STATES CELLULAR INVESTMENT CORPORATION OF
LOS ANGELES INDIANA
UNITED STATES CELLULAR INVESTMENT CO. OF ALLENTOWN PENNSYLVANIA
UNITED STATES CELLULAR INVESTMENT CO. OF
OKLAHOMA CITY, INC. OKLAHOMA
UNIVERSAL CELLULAR FOR EAU CLAIRE MSA, INC. WISCONSIN
USCIC OF AMARILLO, INC. DELAWARE
USCIC OF BROWNSVILLE, INC. DELAWARE
USCIC OF FRESNO, INC. CALIFORNIA
USCIC OF JACKSON, INC. DELAWARE
USCIC OF MCALLEN, INC. DELAWARE
USCIC OF SEATTLE, INC. DELAWARE
IDAHO INVCO OF RSA # 1, INC. DELAWARE
ILP, INC. DELAWARE
MINNESOTA INVCO OF RSA # 5, INC. DELAWARE
MINNESOTA INVCO OF RSA # 7, INC. DELAWARE
MINNESOTA INVCO OF RSA # 8, INC. DELAWARE
MINNESOTA INVCO OF RSA # 9, INC. DELAWARE
MINNESOTA INVCO OF RSA # 10, INC. DELAWARE
MINNESOTA INVCO OF RSA # 11, INC. DELAWARE
VERMONT RSA NO. 2-B2, INC. DELAWARE
TEXAS INVCO OF RSA # 6, INC. DELAWARE
</TABLE>
Page 3
<PAGE>
EXHIBIT 21 UNITED STATES CELLULAR CORPORATION
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31,1997
<TABLE>
<CAPTION>
STATE OF
USM COMPANIES INCORPORATION
------------- -------------
<S> <C>
USCIC OF COLORADO RSA # 3, INC. DELAWARE
USCIC OF NORTH CAROLINA RSA # 1, INC. DELAWARE
CENTRAL FLORIDA CELLULAR TELEPHONE COMPANY, INC. FLORIDA
LACROSSE CELLULAR TELEPHONE COMPANY, INC. DELAWARE
TULSA GENERAL PARTNER, INC. DELAWARE
COMMUNITY CELLULAR TELEPHONE COMPANY TEXAS
TEXAHOMA CELLULAR TELEPHONE CORPORATION TEXAS
VICTORIA CELLULAR CORPORATION TEXAS
BANGOR CELLULAR TELEPHONE, L.P. DELAWARE
CEDAR RAPIDS CELLULAR TELEPHONE, L.P. DELAWARE
CHARLOTTESVILLE CELLULAR PARTNERSHIP WASHINGTON D.C.
CROOK COUNTY RSA LIMITED PARTNERSHIP OREGON
DAVENPORT CELLULAR TELEPHONE COMPANY IOWA
DUBUQUE CELLULAR TELEPHONE, L.P. DELAWARE
EAU CLAIRE CELLULAR TELEPHONE LIMITED PARTNERSHIP WISCONSIN
EVANSVILLE CELLULAR TELEPHONE COMPANY INDIANA
GREEN BAY CELLTELCO WASHINGTON D.C.
I-5 WN MOBILNET LIMITED PARTNERSHIP WASHINGTON
JANESVILLE CELLULAR TELEPHONE COMPANY, INC. DELAWARE
JOPLIN CELLULAR TELEPHONE COMPANY, L.P. DELAWARE
KANSAS RSA #15 LIMITED PARTNERSHIP KANSAS
LEWISTON CELLTELL CO PARTNERSHIP WASHINGTON D.C.
MADISON CELLULAR TELEPHONE COMPANY WISCONSIN
MAINE RSA NO. 4 LIMITED PARTNERSHIP MAINE
MANCHESTER-NASHUA CELLULAR TELEPHONE, L.P. DELAWARE
NORTH CAROLINA RSA 1 PARTNERSHIP DELAWARE
OHIO RSA #1 LIMITED PARTNERSHIP OHIO
OREGON RSA NO. 3 LIMITED PARTNERSHIP OREGON
OWENSBORO CELLULAR TELEPHONE, L.P. DELAWARE
PA RURAL SERVICE AREA NO. 9 LIMITED PARTNERSHIP PENNSYLVANIA
RACINE CELLULAR TELEPHONE COMPANY WISCONSIN
ROCHESTER CELLULAR TELEPHONE COMPANY, L.P. DELAWARE
SHEBOYGAN CELLULAR TELEPHONE COMPANY, INC. DELAWARE
TEXAHOMA CELLULAR LIMITED PARTNERSHIP TEXAS
UNITED STATES CELLULAR TELEPHONE COMPANY
(GREATER KNOXVILLE), L.P. TENNESSEE
UNITED STATES CELLULAR TELEPHONE COMPANY
(GREATER TULSA), L.L.C. OKLAHOMA
VICTORIA CELLULAR PARTNERSHIP WASHINGTON D.C.
WESTERN COLORADO CELLULAR OF COLORADO LIMITED PARTNERSHIP COLORADO
WESTERN SUB-RSA LIMITED PARTNERSHIP DELAWARE
WATERLOO/CEDAR FALLS CELLTEL CO PARTNERSHIP WASHINGTON D.C.
WAUSAU CELLULAR TELEPHONE COMPANY LIMITED PARTNERSHIP WISCONSIN
YAKIMA MSA LIMITED PARTNERSHIP DELAWARE
YAKIMA VALLEY PAGING LIMITED PARTNERSHIP DELAWARE
</TABLE>
Page 4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of United States Cellular Corporation of our report
dated January 28, 1998, on the consolidated financial statements of United
States Cellular Corporation and Subsidiaries (the "Company") included in the
Company's 1997 Annual Report to Shareholders, to the inclusion in this Form 10-K
of our report dated January 28, 1998, on the financial statement schedule of the
Company, and to the incorporation of such reports into the Company's previously
filed S-3 Registration Statements, File No. 33-58911 and File No. 333-32521,
into the Company's previously filed S-4 Registration Statement, File No.
33-41826, and into the Company's previously filed S-8 Registration Statements,
File No. 33-42558, File No. 33-57255, File No. 33-59777, File No. 33-61291, File
No. 333-16925, File No. 333-19403, File No. 333-19405 and File No. 333-23861.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION AS
OF DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,851
<SECURITIES> 0
<RECEIVABLES> 86,646
<ALLOWANCES> 5,259
<INVENTORY> 11,836
<CURRENT-ASSETS> 175,364
<PP&E> 1,212,575
<DEPRECIATION> 272,322
<TOTAL-ASSETS> 2,508,916
<CURRENT-LIABILITIES> 204,236
<BONDS> 515,330
0
0
<COMMON> 87,238
<OTHER-SE> 1,542,082
<TOTAL-LIABILITY-AND-EQUITY> 2,508,916
<SALES> 23,974
<TOTAL-REVENUES> 876,965
<CGS> 82,302
<TOTAL-COSTS> 747,422
<OTHER-EXPENSES> (107,604)
<LOSS-PROVISION> 25,578
<INTEREST-EXPENSE> 29,362
<INCOME-PRETAX> 195,487
<INCOME-TAX> 83,948
<INCOME-CONTINUING> 111,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111,539
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.29
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION
AS OF DECEMBER 31, 1995, AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 38,404
<SECURITIES> 0
<RECEIVABLES> 46,754
<ALLOWANCES> 3,820
<INVENTORY> 9,198
<CURRENT-ASSETS> 129,786
<PP&E> 674,450
<DEPRECIATION> 144,423
<TOTAL-ASSETS> 1,880,144
<CURRENT-LIABILITIES> 155,109
<BONDS> 334,406
0
0
<COMMON> 82,972
<OTHER-SE> 1,246,482
<TOTAL-LIABILITY-AND-EQUITY> 1,880,144
<SALES> 15,761
<TOTAL-REVENUES> 480,316
<CGS> 54,948
<TOTAL-COSTS> 437,561
<OTHER-EXPENSES> (124,668)
<LOSS-PROVISION> 12,532
<INTEREST-EXPENSE> 27,287
<INCOME-PRETAX> 132,234
<INCOME-TAX> 32,492
<INCOME-CONTINUING> 99,742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,742
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.20
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION
AS OF MARCH 31, 1996, JUNE 30, 1996, SEPTEMBER 30, 1996 AND DECEMBER 31,
1996, AND FOR THE PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 62,093 157,616 65,222 14,377
<SECURITIES> 0 0 0 0
<RECEIVABLES> 47,428 60,900 61,343 62,233
<ALLOWANCES> 3,417 3,766 4,789 4,199
<INVENTORY> 6,290 4,676 6,805 11,893
<CURRENT-ASSETS> 150,188 273,760 174,370 128,619
<PP&E> 708,069 749,306 794,599 846,005
<DEPRECIATION> 159,949 169,994 179,818 195,251
<TOTAL-ASSETS> 1,941,054 2,079,780 2,089,255 2,085,899
<CURRENT-LIABILITIES> 122,141 157,061 185,236 146,454
<BONDS> 336,006 337,040 332,741 330,696
0 0 0 0
0 0 0 0
<COMMON> 85,789 86,090 86,097 86,123
<OTHER-SE> 1,334,512 1,397,520 1,378,059 1,390,079
<TOTAL-LIABILITY-AND-EQUITY> 1,941,054 2,079,780 2,089,255 2,085,899
<SALES> 4,274 8,465 12,790 17,386
<TOTAL-REVENUES> 143,642 313,112 493,331 680,068
<CGS> 15,473 31,390 49,631 74,023
<TOTAL-COSTS> 131,820 271,269 418,394 592,702
<OTHER-EXPENSES> (49,527) (149,753) (174,915) (191,057)
<LOSS-PROVISION> 3,668 7,509 5,055 17,534
<INTEREST-EXPENSE> 5,806 11,755 17,496 23,111
<INCOME-PRETAX> 53,431 174,420 223,740 241,569
<INCOME-TAX> 24,044 81,978 105,158 111,640
<INCOME-CONTINUING> 29,387 92,442 118,582 129,929
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 29,387 92,442 118,582 129,929
<EPS-PRIMARY> .35 1.08 1.38 1.51
<EPS-DILUTED> .34 1.03 1.34 1.48
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION
AS OF SEPTEMBER 30, 1997, AND FOR THE NINE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 120,558
<SECURITIES> 0
<RECEIVABLES> 75,382
<ALLOWANCES> 4,077
<INVENTORY> 8,648
<CURRENT-ASSETS> 256,653
<PP&E> 1,044,988
<DEPRECIATION> 252,709
<TOTAL-ASSETS> 2,412,205
<CURRENT-LIABILITIES> 169,118
<BONDS> 511,465
0
0
<COMMON> 86,224
<OTHER-SE> 1,484,922
<TOTAL-LIABILITY-AND-EQUITY> 2,412,205
<SALES> 15,913
<TOTAL-REVENUES> 634,122
<CGS> 55,473
<TOTAL-COSTS> 523,611
<OTHER-EXPENSES> (72,559)
<LOSS-PROVISION> 19,458
<INTEREST-EXPENSE> 18,347
<INCOME-PRETAX> 152,504
<INCOME-TAX> 66,122
<INCOME-CONTINUING> 86,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,382
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
