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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-9712
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UNITED STATES CELLULAR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 62-1147325
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 399-8900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 29, 1999
-------------------------------- --------------------------------
Common Shares, $1 par value 54,531,705 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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<PAGE>
UNITED STATES CELLULAR CORPORATION
----------------------------------
3RD QUARTER REPORT ON FORM 10-Q
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INDEX
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Page(s)
No. -------
- --
Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-15
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1999 and 1998 16
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 17
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 18-19
Notes to Consolidated Financial Statements 20-26
Part II. Other Information 27
Signatures 28
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
RESULTS OF OPERATIONS
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Nine Months Ended 9/30/99 Compared to Nine Months Ended 9/30/98
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United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. USM is an
80.9%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
USM owned either majority or minority cellular interests in 180 markets at
September 30, 1999, representing 26,211,000 population equivalents ("pops"). USM
included the operations of 139 majority-owned and managed cellular markets,
representing 23.9 million pops, in consolidated operations ("consolidated
markets") as of September 30, 1999. Minority interests in 35 markets,
representing 2.3 million pops, were accounted for using the equity method and
were included in investment income at that date. All other interests were
accounted for using the cost method. Following is a table of summarized
operating data for USM's consolidated operations.
<TABLE>
<CAPTION>
Nine Months Ended or At September 30,
-------------------------------------
1999 1998
---- ----
<S> <C> <C>
Total market population (in thousands) (1) 24,861 24,136
Customers 2,453,000 2,018,000
Market penetration 9.87% 8.36%
Markets in operation 139 136
Total employees 4,800 4,600
Cell sites in service 2,235 1,958
Average monthly revenue per customer $ 49.06 $ 48.87
Churn rate per month 2.0% 1.8%
Marketing cost per gross customer addition $ 343 $ 314
</TABLE>
(1) Calculated using Claritas population estimates
for 1998 and 1997, respectively.
The growth in the Company's operating income in the first nine months of 1999,
which includes 100% of the revenues and expenses of its consolidated markets
plus its corporate office operations, primarily reflects improvements in the
Company's overall operations compared to the first nine months of 1998. The
improvements resulted from growth in the Company's customer base and revenues
coupled with continuing economies of scale. Operating revenues, driven by both a
22% increase in customers served and a 38% increase in inbound roaming revenue,
rose $210.9 million, or 25%, in 1999. Cash operating expenses rose $118.5
million, or 21%, in 1999. Operating cash flow (operating income plus
depreciation and amortization expense) increased $92.4 million, or 31%, in 1999.
Depreciation and amortization expense increased $18.1 million, or 12%, in 1999.
Operating income increased $74.3 million, or 51%, in 1999.
2
<PAGE>
Investment and other income increased $70.9 million to $288.3 million in 1999,
due primarily to an increase of $77.0 million in gains on sales of cellular and
other investments in 1999, partially offset by a $6.9 million, or 22%, reduction
in investment income.
Gains on sales of cellular and other investments in 1999 primarily resulted from
the effect of the AirTouch Communications, Inc. ("ATI") merger with Vodafone
Group plc ("VOD") in June 1999. As a result of the merger, the Company received
approximately 2.0 million VOD American Depositary Receipts ("ADRs") plus $36.9
million in cash in exchange for its 4.1 million ATI shares. In 1999, the Company
recognized in earnings a gain of $259.5 million on the difference between its
historical basis in the ATI shares ($181.1 million) and the merger date value of
the VOD ADRs plus the cash received (an aggregate of $440.6 million). Gains on
sales of cellular and other investments in 1998 primarily resulted from the sale
of certain minority interests to ATI.
Net income totaled $279.8 million in 1999, an increase of $81.8 million, or 41%,
from 1998. Diluted earnings per share totaled $3.03 in 1999, an increase of
$.86, or 40%, from 1998. Net income in 1999 and 1998 was significantly affected
by gains on the sales of cellular and other investments. A summary of the
after-tax effects of gains on net income and diluted earnings per share in each
period is shown below. Additionally, the Company restated its 1998 diluted
earnings per share to conform to current period presentations. See Note 2 to the
financial statements for further discussion of this restatement.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1999 1998
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(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net income before after-tax effects of gains $ 119,586 $ 81,865
Add: After-tax effects of gains 160,179 116,081
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Net income as reported $ 279,765 $ 197,946
========== =========
Earnings per share before after-tax effects
of gains $ 1.34 $ 0.94
Add: After-tax effects of gains 1.69 1.23
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Diluted earnings per share $ 3.03 $ 2.17
========== =========
</TABLE>
Operating Revenues
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Operating revenues totaled $1,060.1 million in 1999, up $210.9 million, or 25%,
over 1998. 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 $1,023.9 million
in 1999, up $202.7 million, or 25%, over 1998. The increase was primarily due to
the growing number of local retail customers and also due to the increase in
inbound roaming minutes of use on the Company's systems.
Monthly service revenue per customer averaged $49.06 in 1999, up slightly from
$48.87 in 1998. The increase in average monthly service revenue per customer
resulted from increases in minutes of use on the Company's systems from both
local retail customers and inbound
3
<PAGE>
roamers. Substantial increases in inbound roaming minutes of use were partially
offset by a 24% decrease in revenue per minute of use, resulting in an 11%
increase in monthly roaming revenue per Company customer. The increase in
average monthly local retail minutes of use was more than offset by the decline
in revenue per minute of use, resulting in a 2% decrease in monthly local retail
revenue per customer.
Monthly local retail minutes of use per customer increased 11% in 1999,
resulting from the Company's focus on stimulating overall usage. The increase in
inbound roaming minutes of use was primarily driven by the introduction of
certain "one rate" programs by other wireless companies since the second half of
1998. Wireless customers who sign up for these programs are given price
incentives to roam, and many of those customers travel in the Company's markets,
thus driving an increase in the Company's inbound roaming minutes. Management
anticipates that the increase in inbound roaming minutes of use will be slower
in the fourth quarter of 1999 and in 2000 as the effect of "one rate" programs
becomes present in both periods of comparison.
Competitive pressures and the Company's increasing use of pricing and other
incentive programs to stimulate overall usage resulted in decreases in average
local retail revenue per minute of use during 1999. The Company's average
inbound roaming revenue per minute of use also decreased during 1999, in line
with the ongoing industry trend toward reduced per minute prices for roaming.
Management anticipates that the Company's average revenue per minute of use for
both local retail and inbound roaming revenues will continue to decline in the
future, reflecting the continued effect of the previously mentioned factors.
Local retail revenue increased $120.5 million, or 21%, in 1999. Growth in the
Company's customer base was the primary reason for the increase in local retail
revenue. The number of customers increased 22% to 2,453,000 at September 30,
1999 from 2,018,000 at September 30, 1998. Management anticipates that overall
growth in the Company's customer base will be slower in the future, primarily as
a result of an increase in the number of competitors in its markets.
Average monthly local retail revenue per customer declined 2% to $33.04 in 1999
from $33.87 in 1998. Monthly local retail minutes of use per customer was 115 in
1999 and 104 in 1998. The increase in monthly local retail minutes of use was
driven by the Company's focus on designing incentive programs and rate plans to
stimulate overall usage. Average revenue per minute of use decreased as a result
of the pricing and other incentive programs stated previously, totaling $.29 in
1999 compared to $.33 in 1998.
Inbound roaming revenue increased $67.0 million, or 38%, in 1999. The growth in
inbound roaming revenue in 1999 is affected by an increase in roaming minutes
used on the Company's systems and a decrease in revenue per minute. The number
of minutes used by customers from other wireless systems when roaming in the
Company's service areas increased substantially in 1999, while average inbound
roaming revenue per minute decreased 24% in 1999, due to the downward trend in
negotiated rates. Both the increase in minutes of use and the decrease in
revenue per minute of use were significantly affected by certain "one rate"
programs offered by other wireless companies beginning in the second half of
1998. Monthly inbound roaming revenue per Company customer averaged $11.58 in
1999 and $10.40 in 1998. The increase in monthly inbound roaming revenue per
Company customer is attributable to a larger increase in inbound roaming revenue
than in the Company's customer base.
4
<PAGE>
Long-distance revenue increased $14.8 million, or 20%, in 1999 as the volume of
long-distance calls billed by the Company increased, primarily from inbound
roamers using the Company's systems to make long-distance calls. Growth in
long-distance revenue was slowed by price reductions primarily related to
long-distance charges on roaming minutes of use. These reductions, similar to
the price reductions on roaming airtime charges, are a continuation of the
industry trend toward reduced per minute prices. The price reductions also
reduced the growth in the outbound roaming expense component of system
operations expense by approximately the same amount, resulting in no material
effect on the Company's operating cash flow or operating income. Monthly
long-distance revenue per customer averaged $4.27 in 1999 and $4.42 in 1998.
Equipment sales revenues increased $8.3 million, or 29%, in 1999. The increase
in equipment sales revenues reflects the 11% increase in the number of gross
customer activations, to 681,000 in 1999 from 614,000 in 1998, plus an increase
in the number of higher priced dual- mode units and the volume of accessories
sold. Most of the gross customer activations were produced by the Company's
direct and retail distribution channels; activations from these channels usually
generate sales of cellular telephone units. The increase in sales of dual-mode
units is related to the Company's ongoing conversion of its systems to digital
coverage, which enables the Company to offer its customers more features, better
clarity and increased roaming capabilities. The increase in the volume of
accessories sold reflects an increased emphasis on the sale of accessories at
retail prices in the Company's retail locations.
Operating Expenses
- ------------------
Operating expenses totaled $840.0 million in 1999, up $136.6 million, or 19%,
over 1998. System operations expenses increased $22.0 million, or 15%, in 1999
as a result of increases in customer usage expenses and costs associated with
serving the Company's increased number of customers and the growing number of
cell sites within the Company's systems. In total, system operations costs are
expected to continue to increase as the number of customers using and the number
of cell sites within the Company's systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for the Company's customers' use of their facilities as well as for
the Company's inbound roaming traffic on these facilities. Also included are
costs related to local interconnection to the landline network, long-distance
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 $12.8 million, or 13%, in 1999. The increase
in 1999 is primarily due to the $11.2 million increase in costs related to the
increase in minutes used on the Company's systems. This increase is related to
the 11% increase in average monthly local minutes of use per customer on the
Company's systems as well as the substantial increase in inbound roaming minutes
of use. Net outbound roaming expense also increased $1.3 million, reflecting
growth in minutes used by the Company's customers on other systems, mostly
offset by lower costs per roaming minute of use. These lower costs are related
to the lower roaming prices in the industry discussed previously. Customer usage
expenses represented 11% of service revenues in 1999 and 12% in 1998.
5
<PAGE>
Maintenance, utility and cell site expenses increased $9.2 million, or 20%, in
1999. The increase primarily reflects an increase in the number of cell sites in
the Company's systems, to 2,235 in 1999 from 1,958 in 1998.
Marketing and selling expenses increased $31.7 million, or 20%, in 1999.
Marketing and selling expenses primarily consist of salaries, commissions and
expenses of field sales and retail personnel and offices; agent expenses;
corporate marketing department salaries and expenses; local advertising; and
public relations expenses. The increase was primarily due to the 11% rise in the
number of gross customer activations and a change in the Company's brand name
and logo. The Company changed its brand name and logo from United States
Cellular to U.S. Cellular during the second quarter of 1999, and incurred
one-time expenses to roll out new marketing materials and signage. Marketing
cost per gross customer activation, which includes marketing and selling
expenses and losses on equipment sales, increased 9% to $343 in 1999 from $314
in 1998. The increase in cost per gross customer activation was primarily driven
by increased commissions and additional advertising expenses incurred to promote
the Company's brand and to distinguish the Company's service offerings from
those of its competitors. Also contributing was an increase in losses on
equipment sales in 1999. The increased equipment losses were primarily driven by
the sale of more dual-mode units, which on average generate greater equipment
losses than the sale of analog units.
Cost of equipment sold increased $17.1 million, or 27%, in 1999. The increase
reflects the growth in unit sales related to the 11% increase in gross customer
activations as well as the impact of selling more higher cost dual-mode units in
1999. Also contributing to the increase was a greater volume of sales of
accessories.
General and administrative expenses increased $47.7 million, or 25%, in 1999.
These expenses include the costs of operating the Company's local business
offices and its corporate expenses other than the corporate engineering and
marketing departments. The increase includes the effects of increases in
expenses required to serve the growing customer base in existing markets and an
expansion of both local administrative office and corporate staff, necessitated
by growth in the Company's business. Also, the Company incurred additional
start-up costs in 1999 related to its Communications Centers, which were created
to centralize certain customer service functions; incurred costs, which were no
longer capitalizable beginning in January 1999, related to its conversion to a
new billing system; and incurred additional costs by providing digital phone
units to customers who migrated from analog to digital rate plans. Employee-
related expenses increased $21.3 million, or 24%, in 1999, primarily due to
increases in the number of customer service and administrative employees.
Monthly general and administrative expenses per customer increased 1% to $11.48
in 1999 from $11.41 in 1998. General and administrative expenses represented 23%
of service revenues in both 1999 and 1998.
Operating cash flow increased $92.4 million, or 31%, to $386.0 million in 1999.
The improvement was primarily due to substantial growth in customers and service
revenues and the effects of continued operational efficiencies on cash operating
expenses. Operating cash flow margins (as a percent of service revenues) were
37.7% in 1999 and 35.7% in 1998.
Depreciation expense increased $17.7 million, or 15%, in 1999. The increase
reflects rising average fixed asset balances, which increased 17% in 1999.
Increased fixed asset balances in 1999 resulted from the addition of new cell
sites built to improve coverage and capacity in the Company's markets and from
upgrades to provide digital service in more of the Company's service areas.
6
<PAGE>
Although amortization of intangibles only increased $348,000, or 1%, in 1999,
the Company expects amortization expense to increase substantially in the
future. Beginning October 1, 1999, capitalized development costs related to the
Company's new billing and information system, totaling approximately $118
million, will be amortized over a period of seven years. Annual amortization of
these costs is expected to be approximately $17 million.
Operating Income
- ----------------
Operating income totaled $220.1 million in 1999, a 51% increase over 1998. The
operating income margin was 21.5% in 1999 and 17.8% in 1998. The improvements in
operating income and operating income margins in 1999 reflect increased revenues
resulting from growth in the number of customers served by the Company's
systems, the increased minutes of use on the Company's systems from both local
customers and inbound roamers and the effect of continued operational
efficiencies on total operating expenses.
The Company expects service revenues to continue to grow during the remainder of
1999 and in 2000; however, management anticipates that average monthly revenue
per customer will decrease for the full year of 1999 compared to 1998, despite
the slight increase through nine months of 1999, as local retail and inbound
roaming revenue per minute of use decline and as the Company further penetrates
the consumer market. Additionally, the Company expects expenses to increase
during the remainder of 1999 and in 2000 as it incurs costs associated with both
customer growth and fixed assets added.
Although service revenues increased 25%, the Company's customer base increased
by 22% and average monthly revenue per customer increased less than 1% in the
first nine months of 1999, management does not expect service revenues to
continue to grow faster than the Company's customer base for the remainder of
1999 or in 2000 for the reasons stated previously. Management continues to
believe 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 three years. The Company expects PCS operators
to continue deployment of PCS in portions of all of the Company's clusters
throughout 1999 and 2000. The Company has increased its advertising,
particularly brand advertising, since 1997 to promote its brand and distinguish
the Company's service from other wireless communications providers. The
Company's management continues to monitor other wireless communications
providers' strategies to determine how additional competition is affecting the
Company's results. While the effects of additional wireless competition have
slowed customer growth in certain of the Company's markets, the overall effect
on the Company's total customer growth to date has not been material. However,
management anticipates that customer growth will be lower in the future,
primarily as a result of the increase in the number of competitors in its
markets.
Investment and Other Income
- ---------------------------
Investment and other income totaled $288.3 million in 1999 and $217.4 million in
1998. Gain on sale of cellular and other investments totaled $266.7 million in
the first nine months of 1999, primarily due to the ATI-VOD merger. Gain on sale
of cellular and other investments totaled $189.8 million in 1998 from sales of
the Company's investment interests in ten markets, and
7
<PAGE>
also related to cash received from TDS pursuant to an agreement between the
Company and TDS.
Investment income was $24.5 million in 1999 compared to $31.4 million in 1998, a
22% decrease. Investment income primarily represents the Company's share of net
income from the markets managed by others that are accounted for by the equity
method. The aggregate income from the markets in which the Company had interests
in both 1998 and 1999 decreased in 1999, reducing investment income. Investment
income in 1999 was also negatively impacted by the divestitures of certain
minority interests to ATI in the first half of 1998. See "Financial Resources
and Liquidity - Acquisitions and Divestitures" for further discussion of the ATI
transactions.
Interest and Income Taxes
- -------------------------
Interest expense totaled $28.1 million in 1999 compared to $29.8 million in
1998. Interest expense in 1999 is primarily related to Liquid Yield Option Notes
("LYONs") ($13.0 million); the Company's 7.25% Notes (the "Notes") ($13.9
million); and the Company's revolving credit facility with a series of banks
("Revolving Credit Facility") ($592,000). Interest expense in 1998 was primarily
related to LYONs ($12.3 million), the Notes ($13.9 million) and the Revolving
Credit Facility ($1.0 million).
The Company's $250 million principal amount of Notes are unsecured and become
due in August 2007. Interest on the Notes is payable semi-annually on February
15 and August 15 of each year.
The LYONs are zero coupon convertible debentures which accrete interest at 6%
annually, but do not require current cash payments of interest. All accreted
interest is added to the outstanding principal balance on June 15 and December
15 of each year.
The Revolving Credit Facility is a seven-year facility which was established in
1997. Borrowings under this facility accrue interest at the London InterBank
Offered Rate ("LIBOR") plus 26.5 basis points (for a rate of 5.7% at September
30, 1999). Interest and principal are due the last day of the borrowing period,
as selected by the borrower, of either seven days or one, two, three or six
months; any borrowings made under the facility are short-term in nature and
automatically renew until they are repaid. The Company pays facility and
administrative fees totaling $710,000 per year in addition to interest on any
borrowings; these fees are recorded as interest expense. Any borrowings
outstanding in August 2004, the termination date of the Revolving Credit
Facility, are due and payable at that time along with any accrued interest. The
Company borrowed and repaid amounts totaling $47 million during 1998; no
borrowings were made during 1999.
Income tax expense was $200.6 million in 1999 and $135.4 million in 1998. In
1999, $106.6 million of income tax expense related to gains on sales of cellular
and other investments. In 1998, $73.7 million of income tax expense related to
the gains on sales of cellular and other investments. The overall effective tax
rates were 42% in 1999 and 41% in 1998. The increase in 1999's effective tax
rate is primarily related to the nature of the gains on sales of cellular and
other investments in both years, which have varying tax rates.
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
8
<PAGE>
taxes as if it were filing a separate return as its own affiliated group and was
not included in the TDS group.
Net Income
- ----------
Net income totaled $279.8 million in 1999 and $198.0 million in 1998. Diluted
earnings per share was $3.03 in 1999 and $2.17 in 1998. Net income and earnings
per share in 1999 and 1998 included significant after-tax gains on the sales of
cellular and other investments, representing $160.2 million and $1.69 per share
and $116.1 million and $1.23 per share, respectively. Excluding the after-tax
effect of these gains, net income would have been $119.6 million, or $1.34 per
share, in 1999 and $81.9 million, or $.94 per share, in 1998.
Three Months Ended 9/30/99 Compared to Three Months Ended 9/30/98
- -----------------------------------------------------------------
Operating revenues totaled $373.2 million in the third quarter of 1999, up $59.3
million, or 19%, over 1998. Average monthly service revenue per customer
decreased 3% to $49.73 in 1999 from $51.40 in 1998. The decrease in average
monthly service revenue per customer resulted from the continued decline in
average revenue per minute of use from both local retail customers and inbound
roamers. This effect was partially offset by the increases in minutes of use on
the Company's systems from both local retail customers and inbound roamers.
Revenue from local customers' usage of the Company's system increased $40.8
million, or 20%, in 1999 primarily due to the increased number of customers
served. Average monthly local retail minutes of use per customer increased to
124 in the third quarter of 1999 compared to 112 in 1998. Also, as the number of
customers and amount of revenue earned continued to grow, average revenue per
minute of use continued to decline. As a result, average monthly local retail
revenue per customer declined 2% to $33.37 in the third quarter of 1999 compared
to $33.97 in 1998.
Inbound roaming revenue increased $19.8 million, or 28%, in 1999. Monthly
inbound roaming revenue per Company customer averaged $12.66 in 1999 compared to
$12.16 in 1998.
Long-distance revenue decreased $4.8 million, or 16%, in 1999, reflecting the
lower prices on roaming long-distance minutes of use. Monthly long-distance
revenue per customer averaged $3.51 in 1999 and $5.11 in 1998.
Equipment sales revenue increased $3.0 million, or 30%, in 1999. The increase
reflects an 8% increase in the number of gross customer activations, to 228,000
in 1999 compared to 211,000 in 1998, plus increases in the number of dual-mode
units sold and in the volume of accessories sold.
Operating expenses totaled $277.6 million in the third quarter of 1999, up $26.2
million, or 10%, over 1998. System operations expenses decreased $9.0 million,
or 17%, in 1999, driven by lower costs for minutes used by the Company's
customers when roaming. The cost related to minutes used on the Company's
systems increased $5.3 million, or 45%, in the third quarter of 1999. Overall,
customer usage expenses decreased $12.4 million in 1999 and maintenance, utility
and cell site expense increased $3.4 million.
9
<PAGE>
Marketing and selling expenses increased $11.3 million, or 20%, in 1999. The
increase was primarily due to the 8% rise in the number of gross customer
activations. Cost per gross customer activation increased 10% to $358 in 1999
from $324 in 1998.
Cost of equipment sold increased $5.1 million, or 23%, in 1999. The increase
reflects a rise in the number of dual-mode units sold in 1999, plus an increase
in the volume of accessories sold.
General and administrative expenses increased $13.4 million, or 20%, in 1999,
primarily related to the increase in customers served.
Operating cash flow increased $38.5 million, or 34%, to $153.0 million in 1999;
operating cash flow margins were 42.5% in 1999 and 37.7% in 1998.
Depreciation expense increased $6.2 million, or 15%, in 1999 reflecting an 18%
increase in average fixed asset balances.
Operating income totaled $95.6 million in 1999 compared to $62.5 million in
1998, a 53% increase. The operating income margin was 26.5% in 1999 and 20.6% in
1998.
Investment income increased $176,000, or 2%, in 1999 as the aggregate income
from the markets in which the Company had interests in both 1998 and 1999 was
relatively flat. Gain on sale of cellular and other investments totaled $6.0
million in 1999. There were no gains recorded in 1998. Total interest expense
decreased $440,000, or 4%, in 1999. Income tax expense totaled $44.1 million in
1999 and $26.7 million in 1998. In 1999, $2.2 million of income tax expense
related to gains on sales of cellular and other investments.
Net income totaled $57.1 million in 1999, an increase of $21.7 million, or 61%,
from 1998. Both net income and earnings per share in 1999 were significantly
affected by gains on the sales of cellular interests. A summary of the after-tax
effects of gains on net income and diluted earnings per share in each period is
shown below. Additionally, the Company restated its 1998 diluted earnings per
share to conform to current period presentation. See Note 2 to the financial
statements for further discussion of this restatement.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
---- ----
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net income before after-tax effects of gains $ 53,265 $ 35,409
Add: After-tax effects of gains 3,798 --
---------- ----------
Net income as reported $ 57,063 $ 35,409
========== ==========
Earnings per share before after-tax effects
of gains $ .59 $ .40
Add: After-tax effects of gains .04 --
--------- -----------
Diluted earnings per share $ .63 $ .40
========== ==========
</TABLE>
10
<PAGE>
FINANCIAL RESOURCES AND LIQUIDITY
- ---------------------------------
The Company operates a capital and marketing-intensive business. In recent
years, the Company has generated operating cash flow and received cash proceeds
from divestitures to fund most of its construction costs and substantially all
of its operating expenses. The Company anticipates further increases in cellular
units in service, revenues, operating cash flow and fixed asset additions 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 $287.1 million in 1999 and $197.3
million in 1998. Operating cash flow provided $386.0 million in 1999 and $293.5
million in 1998. Cash flows from other operating activities (investment and
other income, interest expense, income taxes, changes in working capital and
changes in other assets and liabilities) required $98.9 million in 1999 and
$96.2 million in 1998. Income taxes and interest paid totaled $74.1 million in
1999 and $103.0 million in 1998.
Cash flows from financing activities required $554,000 in 1999 and $1.7 million
in 1998. In 1998, the Company borrowed and repaid $47 million under the
Revolving Credit Facility.
Cash flows from investing activities required $154.6 million in 1999 and $182.4
million in 1998. Cash required for property, plant and equipment and system
development expenditures totaled $242.7 million in 1999 and $231.0 million in
1998. In both periods, these expenditures were financed primarily with
internally generated cash. These expenditures primarily represent the
construction of 160 and 196 cell sites in 1999 and 1998, respectively, plus
other plant additions and costs related to the development of the Company's
office systems. In both periods, other plant additions included significant
amounts related to the replacement of retired assets and the changeout of analog
radio equipment for digital radio equipment. Acquisitions required $27.0 million
in 1999 and $86.2 million in 1998. The Company received net cash proceeds
totaling $96.0 million in 1999 and $120.2 million in 1998 related to sales of
cellular and other investments. Cash distributions from cellular entities in
which the Company has an interest provided $17.9 million in 1999 and $19.1
million in 1998.
Anticipated capital requirements for 1999 primarily reflect the Company's
construction and system expansion program. The Company's construction and system
expansion budget for 1999 is approximately $300 million, to expand and enhance
the Company's coverage in its service areas, including the addition of digital
service capabilities to its systems, and to enhance the Company's office
systems.
Acquisitions and Divestitures
- -----------------------------
The Company assesses its cellular holdings on an ongoing basis in order to
maximize the benefits derived from clustering its markets. As the Company's
clusters have grown, the Company's focus has shifted toward exchanges and
divestitures of managed and investment interests along with the outright
purchases of controlling interests which helped build the Company's clusters
since its inception. 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, and has purchased
controlling interests in markets which enhance its clusters. The proceeds from
any sales have been used to further the Company's growth.
11
<PAGE>
In the first nine months of 1999, the Company acquired a majority interest in
one market and minority interests in several markets in which the Company
currently owns a majority interest, representing 243,000 pops, for a total of
$30.1 million, consisting primarily of cash.
In the first nine months of 1998, the Company acquired majority interests in
three markets and minority interests in several markets, representing 866,000
pops, for a total consideration of $106.5 million, consisting of cash and
approximately 46,000 USM Common Shares. The minority interests were in markets
in which the Company currently owns both majority and minority interests.
In the first nine months of 1999, the Company divested a majority interest in
one market and minority interests in three markets, representing 606,000 pops,
for a total consideration of $59.7 million. The majority interest was sold to
BellSouth Corporation as part of a transaction which was substantially completed
in November 1997; therefore, no gain or loss was recorded on this sale.
In the first nine months of 1998, the Company divested minority interests in 12
markets, representing approximately 936,000 pops. In exchange, the Company
received approximately 4.1 million shares of ATI stock and cash totaling $120.5
million. Approximately $28.7 million of the total cash received was pursuant to
a contract right termination agreement entered into between the Company and TDS.
This agreement was related to two interests which were sold directly by TDS to
ATI and which were to be acquired by the Company as part of a June 1996
agreement between the Company and TDS. The contract right termination agreement
enabled the Company to receive cash equal to the value of the gain the Company
would have realized had it purchased the interests from TDS and sold them to ATI
under terms similar to those in the agreement between TDS and ATI.
As of September 30, 1999, the Company had an agreement pending to acquire a
majority interest in one market, representing 128,000 pops, for $23.0 million in
cash.
Liquidity
- ---------
The Company anticipates that the aggregate resources required for the remainder
of 1999 will include approximately $57 million for capital spending and $23
million for an acquisition. The Company is generating substantial cash from its
operations and anticipates financing these expenditures primarily with
internally generated cash and short-term borrowings. The Company had $184
million of cash and cash equivalents at September 30, 1999. Additionally, the
entire balance of $500 million under the Company's Revolving Credit Facility is
unused and remains available to meet any short-term borrowing requirements.
Management believes that the Company's operating cash flows and sources of
external financing, including the above-referenced Revolving Credit Facility,
provide substantial financial flexibility for the Company to meet both its
short- and long-term needs. The Company also currently has access to public and
private capital markets to help meet its long-term financing needs. The Company
anticipates issuing debt and equity securities only when capital requirements
(including acquisitions), financial market conditions and other factors warrant.
12
<PAGE>
Market Risk
- -----------
The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. All of the Company' existing debt is in the form of
long-term fixed-rate notes with original maturities ranging from seven to 20
years. Accordingly, fluctuations in interest rates can lead to fluctuations in
the fair value of such instruments. The Company has not entered into financial
derivatives to reduce its exposure to interest rate risks. There have been no
material changes to the Company's outstanding debt instruments since December
31, 1998.
The Company maintains a portfolio of available for sale marketable equity
securities which resulted from acquisitions and the sale of non-strategic
investments. The market value of these investments, principally VOD ADRs,
amounted to $504.2 million at September 30, 1999. A hypothetical 10% decrease in
the share prices of these investments would result in a $50.4 million decline in
the market value of the investments.
Year 2000 Issue
- ---------------
The Year 2000 Issue exists because many computer systems and applications
abbreviate dates using only two digits rather than four digits, e.g., "98"
rather than "1998". Unless corrected, this shortcut may cause problems when the
century date "2000" occurs. On that date, some computer operating systems and
applications and embedded technology may recognize the date as January 1, 1900
instead of January 1, 2000. If the Company fails to correct any critical Year
2000 processing problems prior to January 1, 2000, the affected systems may
either cease to function or produce erroneous data, which could have material
adverse operational and financial consequences.
The Company's management established a project team to address Year 2000 issues.
The Company's plan to address the Year 2000 Issue consists of five general
phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv) Validation and
(v) Implementation.
The awareness phase consisted of establishing a Year 2000 project team, that
reports periodically to the Company's Audit Committee, and developing an overall
strategy. TDS management established a Year 2000 Program Office at the corporate
level to coordinate activities of the Year 2000 project team, to monitor the
current status of individual projects, to report periodically to the TDS Audit
Committee and to promote the exchange of information between all TDS business
units to share knowledge and solution techniques. On an ongoing basis, the
project teams continue to provide Year 2000 information and updates to
customers, employees and business partners. Management has made the Year 2000
Issue a top priority. The Year 2000 effort covers the network and supporting
infrastructure for the provision of cellular services; the operational and
financial information technology ("IT") systems and applications, including
computer systems that support key business functions such as billing, finance,
customer service, procurement and supply; and a review of the Year 2000
readiness efforts of the Company's critical vendors.
The assessment phase included the identification of core business areas and
processes, analysis of systems and hardware supporting the core business areas
and the prioritization of renovation or replacement of the systems and hardware
that were determined not to be Year 2000 ready. Included in the assessment phase
was an analysis of risk management factors such as contingency plans and legal
matters. Except for the contingency plans as discussed herein, the assessment
phase was completed in the first quarter of 1999.
13
<PAGE>
The Year 2000 project team has identified those mission critical hardware,
systems and applications that were not Year 2000 ready. These critical hardware,
systems and applications that were not Year 2000 ready have undergone
renovation. The renovation phase consisted of the remediation or replacement of
mission critical systems, applications and hardware. The renovation of these
mission critical hardware, systems and applications has been completed.
The renovated mission critical hardware, systems and applications have undergone
Year 2000 validation testing. The validation phase included testing, verifying
and validating the renovated or replaced platforms, applications, databases and
utilities. The validation phase consisted of independent verification testing of
mission critical systems, applications and hardware as well as network and
system component upgrades received from suppliers. In addition, selected Year
2000 upgrades were tested in a controlled environment that replicated the
current environment and was equipped to simulate the turn of the century and
leap year dates. The Company will rely on the Cellular Telecommunications
Industry Association ("CTIA"), Alliance for Telecommunications Industry
Solutions ("ATIS") and TELCO Forum, which formed working groups to coordinate
efforts of various carriers and manufacturers to facilitate inter-network Year
2000 testing. These programs have concluded and, generally, the findings
indicate that there are no known network inter-operability defects related to
Year 2000 associated with the available Year 2000 ready upgrades for the
networks. The Company has analyzed the findings and has installed upgrades
appropriate to its network. Validation of mission critical hardware, systems and
applications was substantially completed as of October 31, 1999.
The implementation phase involves migrating the converted, renovated and
validated mission critical systems, applications and hardware into production.
This phase is expected to be completed during the fourth quarter of 1999.
As with other telecommunications services providers, there exists a worst case
scenario possibility that a failure to correct a Year 2000 problem in one or
more of the mission critical network elements or IT applications could cause a
significant disruption of, or interruption in, certain normal business
functions. Management believes it has assembled the proper staffing and tools
and put in place procedures to identify and prepare all mission critical systems
for the Year 2000 and believes the necessary programs are in place for a smooth
Year 2000 transition. Based on the assessments and work performed to date by the
project teams, management believes that any such material disruption to the
operations due to failure of an internal system is unlikely. However, management
cannot provide assurance that its plan to address Year 2000 readiness will be
successful as the Company is subject to various risks and uncertainties. Like
most other telecommunications operators, the Company is highly dependent on the
telecommunications network vendors to develop and provide Year 2000 ready
hardware, systems and applications and on other third parties, including
vendors, other telecommunications service providers, government agencies and
financial institutions, to deliver reliable services and timely upgrades. The
Company has contacted critical vendors, requesting information about their Year
2000 readiness. The responses have been used to make its renovations and are
being used in developing the Company's overall contingency plans.
The Company cannot assess with certainty the magnitude of any such potential
adverse impact. However, based upon risk assessment work conducted thus far,
management believes that the most reasonably likely worst case scenario of the
failure by the Company, its suppliers or other telecommunications carriers with
which the Company interconnects to resolve Year 2000 issues would be an
inability by the Company to (i) provide telecommunications services to the
Company's customers, (ii) route and deliver telephone calls originating from or
terminating with
14
<PAGE>
other telecommunications carriers, (iii) timely and accurately process service
requests and (iv) timely and accurately bill its customers. In addition to lost
earnings, these failures could also result in loss of customers due to service
interruptions and billing errors, substantial claims by customers and increased
expenses associated with stabilizing operations and executing contingency plans.
The Company's contingency plan initiatives include business recovery planning
and establishing command centers and critical support teams. Project teams are
developing alternate processes to support critical customer functions in the
event information systems or mechanized processes experience Year 2000
disruptions; as well as for repair or replacement of any affected systems or
processes. The teams are also developing alternate plans for critical suppliers
of products/services that fail to meet established service levels due to Year
2000 disruptions. Retention and backup procedures for customer and critical
business data are being developed to provide the Company with pre-rollover
recovery capabilities. The Company anticipates completing the balance of its
contingency planning in the fourth quarter of 1999.
The Company estimates that the total direct costs related to the Year 2000
project will be approximately $4 million to $5 million. Through September 30,
1999, the total direct costs associated with the Year 2000 Issue were
approximately $3.5 million. In recent years, the Company has made capital
expenditures, primarily related to the ongoing upgrade of its network to provide
digital capabilities as well as certain financial and customer information
systems, which are by design thought to be Year 2000 ready. These expenditures
are not considered to be directly related to the Year 2000 project because they
are in conjunction with the Company's overall operating strategies to add
digital capabilities for competitive purposes and to improve financial systems
and customer service. Though Year 2000 project costs will directly impact the
reported level of net income, the Company intends to manage its total cost
structure, including deferral of non-critical projects, in an effort to mitigate
the impact of Year 2000 project costs.
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 Quarterly Report on Form 10-Q
contain "forward-looking" statements as defined in the Private Securities
Litigation Reform Act of 1995, that are based on current expectations, estimates
and projections. Statements that are not historical facts, including statements
about the Company's beliefs and expectations, are forward-looking statements.
These statements contain potential risks and uncertainties; therefore, actual
results may differ materially. The Company undertakes no obligation to update
publicly any forward-looking statements whether as a result of new information,
future events or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
markets in which the Company operates; advances in telecommunications
technology; changes in the telecommunications regulatory environment; pending
and future litigation; availability of future financing; start-up of PCS
operations; unanticipated changes in growth in cellular customers, penetration
rates, churn rates and the mix of products and services offered in the Company's
markets; and unanticipated problems with the Year 2000 Issue. Readers should
evaluate any statements in light of these important factors.
15
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Unaudited
---------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ------------------------------
1999 1998 1999 1998
------ ------ ------ ------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Service $ 360,140 $ 303,921 $ 1,023,857 $ 821,196
Equipment sales 13,061 10,026 36,281 28,016
------------- ------------- ------------- ------------
Total Operating Revenues 373,201 313,947 1,060,138 849,212
------------- ------------- ------------- ------------
OPERATING EXPENSES
System operations 44,807 53,817 165,139 143,127
Marketing and selling 66,848 55,546 188,533 156,875
Cost of equipment sold 27,915 22,776 81,015 63,881
General and administrative 80,627 67,265 239,500 191,785
Depreciation 47,031 40,795 135,332 117,593
Amortization of intangibles 10,413 11,233 30,493 30,144
------------- ------------- ------------- ------------
Total Operating Expenses 277,641 251,432 840,012 703,405
------------- ------------- ------------- ------------
OPERATING INCOME 95,560 62,515 220,126 145,807
------------- ------------- ------------- ------------
INVESTMENT AND OTHER INCOME
Investment income 10,696 10,520 24,530 31,410
Amortization of licenses related to investments (363) (256) (933) (815)
Interest income 1,833 1,294 4,590 4,561
Other income (expense), net 19 (303) (452) (3,109)
Minority share of income (3,077) (1,707) (6,156) (4,402)
Gain on sale of cellular and other investments 6,046 -- 266,744 189,759
------------- ------------- ------------- ------------
Total Investment and Other Income 15,154 9,548 288,323 217,404
------------- ------------- ------------- ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 110,714 72,063 508,449 363,211
Interest expense 9,508 9,948 28,116 29,836
------------- ------------- ------------- ------------
INCOME BEFORE INCOME TAXES 101,206 62,115 480,333 333,375
Income tax expense 44,143 26,706 200,568 135,429
------------- ------------- ------------- ------------
NET INCOME $ 57,063 $ 35,409 $ 279,765 $ 197,946
============= ============= ============= ============
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000s) 87,484 87,353 87,445 87,311
BASIC EARNINGS PER COMMON AND
SERIES A COMMON SHARE $ .65 $ .41 $ 3.20 $ 2.27
============= ============= ============= ============
DILUTED EARNINGS PER COMMON AND
SERIES A COMMON SHARE $ .63 $ .40 $ 3.03 $ 2.17
============= ============= ============= ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
----------
Nine Months Ended
September 30,
---------------------------------------
1999 1998
------------- ---------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 279,765 $ 197,946
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 165,825 147,737
Deferred income tax provision 119,354 76,170
Investment income (24,530) (31,410)
Minority share of income 6,156 4,402
Gain on sale of cellular and other investments (266,744) (189,759)
Other noncash expense 20,266 18,074
Change in accounts receivable (42,082) (30,704)
Change in accounts payable 1,466 20,027
Change in accrued interest (4,533) (4,221)
Change in accrued taxes 30,838 (13,526)
Change in customer deposits and deferred revenues 3,875 3,549
Change in other assets and liabilities (2,536) (1,030)
------------- ---------------
287,120 197,255
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (267) --
Borrowings from Revolving Credit Facility -- 47,000
Repayment of Revolving Credit Facility -- (47,000)
Change in notes payable -- (1,302)
Common Shares issued 3,507 2,131
Capital distributions to minority partners (3,794) (2,546)
------------- ---------------
(554) (1,717)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (217,485) (199,754)
System development costs (25,260) (31,214)
Investments in and advances to minority interests
in cellular entities 724 (6,356)
Distributions from minority interests in cellular entities 17,891 19,073
Proceeds from sale of cellular and other investments 95,987 120,244
Acquisitions, excluding cash acquired (26,967) (86,190)
Other investing activities 491 773
Change in temporary cash and marketable
non-equity securities 57 1,037
------------- ---------------
(154,562) (182,387)
------------- ---------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 132,004 13,151
CASH AND CASH EQUIVALENTS-
Beginning of period 51,975 13,851
------------- ---------------
End of period $ 183,979 $ 27,002
============= ===============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
September 30, December 31,
1999 1998
------------ -----------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds $ 53,215 $ 15,576
Affiliated cash equivalents 130,764 36,399
---------- ----------
183,979 51,975
Temporary investments 233 284
Accounts receivable
Customers, net of allowance 118,795 99,931
Roaming 69,499 46,634
Affiliates 171 26
Other 11,358 13,671
Inventory 24,568 16,673
Prepaid expenses 9,542 10,506
Other current assets 3,805 3,105
---------- ----------
421,950 242,805
---------- ----------
INVESTMENTS
Licenses, net of accumulated amortization 1,161,538 1,200,653
Minority interests in cellular entities 127,577 140,286
Notes and interest receivable 10,940 11,530
Marketable equity securities 504,182 296,860
Marketable non-equity securities 309 336
---------- ----------
1,804,546 1,649,665
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 1,556,863 1,400,597
Less accumulated depreciation 477,409 389,754
---------- ----------
1,079,454 1,010,843
---------- ----------
DEFERRED CHARGES
System development costs,
net of accumulated amortization 138,164 127,742
Other, net of accumulated amortization 12,807 16,581
---------- ----------
150,971 144,323
---------- ----------
Total Assets $ 3,456,921 $ 3,047,636
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
18
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------ -----------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable
Affiliates $ 1,605 $ 11,508
Other 156,585 172,568
Customer deposits and deferred revenues 31,690 27,575
Accrued interest 2,536 7,069
Accrued taxes 44,899 13,928
Accrued compensation 16,048 13,263
Other current liabilities 13,983 12,362
---------- ----------
267,346 258,273
---------- ----------
LONG-TERM DEBT
6% zero coupon convertible debentures 293,949 281,487
7.25% notes 250,000 250,000
---------- ----------
543,949 531,487
---------- ----------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 370,626 258,123
Other 9,162 5,914
---------- ----------
379,788 264,037
---------- ----------
MINORITY INTEREST 42,305 43,609
---------- ----------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 54,511 54,365
Series A Common Shares, par value $1 per share 33,006 33,006
Additional paid-in capital 1,323,279 1,319,895
Accumulated other comprehensive income 59,472 69,465
Retained earnings 753,265 473,499
---------- ----------
2,223,533 1,950,230
---------- ----------
Total Liabilities and Shareholders' Equity $ 3,456,921 $ 3,047,636
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
19
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's
latest annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring items) necessary to
present fairly the financial position as of September 30, 1999 and
December 31, 1998, and the results of operations and cash flows for the
nine months ended September 30, 1999 and 1998. The results of operations
for the nine months ended September 30, 1999 and 1998, are not necessarily
indicative of the results to be expected for the full year.
2. Net Income used in computing Earnings per Common Share and the effect on
income and the weighted average number of Common and Series A Common
Shares of dilutive potential common stock are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income used in Basic Earnings Per
Share 57,063 35,409 279,765 197,946
Interest expense eliminated as a result of the pro
forma conversion of Convertible Debentures 2,419 2,330 7,415 7,155
-------- ------- ------- -------
Net Income used in Diluted Earnings per
Share $ 59,482 $ 37,739 $ 287,180 $ 205,101
========= ======= ======== =========
Weighted average number of Common
Shares used in Basic Earnings Per Share 87,484 87,353 87,445 87,311
Effect of Dilutive Securities:
Stock Options and Stock Appreciation Rights 483 34 241 42
Conversion of Convertible Debentures 7,054 7,059 7,057 7,059
--------- ------- ------- -------
Weighted Average Number of Common
Shares used in Diluted Earnings Per Share 95,021 94,446 94,743 94,412
========= ======= ======= =======
</TABLE>
20
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Earnings per Common and Series A Common Share for the nine months ended
September 30, 1999 and 1998, contain significant income amounts related
to gains on the sale of cellular and other investments. Excluding the
after-tax effect of these gains, basic and diluted earnings per share
were $1.37 and $1.34, respectively, for the nine months ended September
30, 1999 and $.94 for the nine months ended September 30, 1998.
Pro forma earnings per Common Share for the three months ended and nine
months ended September 30, 1998 are reported in this Form 10-Q to
reflect current period presentation. Current period presentation
includes the conversion of LYONs into USM Common Shares as dilutive
potential common stock and also includes the effect of adding after-tax
interest accreted on the LYONs to net income for each period. The
amounts used in computing pro forma earnings per Common Share for all
periods which were not originally reported in a format comparable to
current period presentation are as follows:
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999
------------- --------------
3 Months 6 Months 3 Months
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Net Income used in Basic Earnings Per
Share $ 194,876 $ 222,702 $ 27,826
Interest expense eliminated as a result of the pro
forma conversion of Convertible Debentures 2,497 4,960 2,400
------------ ----------- -----------
Net Income used in Diluted Earnings Per
Share $ 197,373 $ 227,662 $ 30,226
============ =========== ===========
Weighted average number of Common
Shares used in Basic Earnings Per Share 87,461 87,426 87,390
Effect of Dilutive Securities:
Stock Options and Stock Appreciation Rights 133 120 107
Conversion of Convertible Debentures 7,059 7,059 7,059
------------ ----------- -----------
Weighted Average Number of Common
Shares used in Diluted Earnings Per Share 94,653 94,605 94,556
============ =========== ===========
Diluted Earnings per Common Share as restated $ 2.09 $ 2.41 $ 0.32
============ =========== ===========
Diluted Earnings per Common Share as
previously reported $ 2.22 $ 2.54 $ 0.32
============ =========== ===========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1998 September 30, 1998
----------------- ------------------
3 Months 12 Months 3 Months 9 Months
-------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income used in Basic Earnings Per Share $ 19,001 $ 216,947 $ 35,409 $ 197,946
Interest expense eliminated as a result of the pro
forma conversion of Convertible Debentures 1,426 9,032 2,331 7,155
------------ ----------- ----------- ------------
Net Income used in Diluted Earnings Per Share $ 20,428 $ 225,979 $ 37,740 $ 205,101
============ =========== =========== ============
Weighted average number of Common
Shares used in Basic Earnings Per Share 87,358 87,323 87,353 87,311
Effect of Dilutive Securities:
Stock Options and Stock Appreciation Rights 65 48 33 42
Conversion of Convertible Debentures 7,059 7,059 7,059 7,059
------------ ----------- ----------- ------------
Weighted Average Number of Common
Shares used in Diluted Earnings Per Share 94,482 94,430 94,445 94,412
============ =========== =========== ============
Diluted Earnings per Common Share as restated $ 0.22 $ 2.39 $ 0.40 $ 2.17
============ =========== =========== ============
Diluted Earnings per Common Share as
previously reported $ 0.22 $ 2.48 $ 0.41 $ 2.27
============ =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
March 31,
June 30, 1998 1998
------------- ----
3 Months 6 Months 3 Months
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Net Income used in Basic Earnings Per Share $ 32,785 $ 162,537 $ 129,752
Interest expense eliminated as a result of the pro
forma conversion of Convertible Debentures 2,294 4,770 2,404
------------- ------------- -------------
Net Income used in Diluted Earnings Per Share $ 35,079 $ 167,307 $ 132,156
============= ============= =============
Weighted average number of Common
Shares used in Basic Earnings Per Share 87,342 87,290 87,239
Effect of Dilutive Securities:
Stock Options and Stock Appreciation Rights 40 39 38
Conversion of Convertible Debentures 7,059 7,059 7,059
------------- ------------- -------------
Weighted Average Number of Common
Shares used in Diluted Earnings Per Share 94,441 94,388 94,336
============= ============= =============
Diluted Earnings per Common Share as restated $ 0.37 $ 1.77 $ 1.40
============= ============= =============
Diluted Earnings per Common Share as
previously reported $ 0.38 $ 1.86 $ 1.49
============= ============= =============
</TABLE>
22
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
December 31,
1997
----
3 Months 12 Months
-------- ---------
(Dollars in thousands)
<S> <C> <C>
Net Income used in Basic Earnings Per Share $ 25,157 $ 111,539
Interest expense eliminated as a result of the pro
forma conversion of Convertible Debentures 2,267 8,691
-------- --------
Net Income used in Diluted Earnings Per Share $ 27,424 $ 120,230
======== ========
Weighted average number of Common
Shares used in Basic Earnings Per Share 86,858 86,346
Effect of Dilutive Securities:
Stock Options and Stock Appreciation Rights 52 52
Conversion of Convertible Debentures 7,059 7,059
-------- --------
Weighted Average Number of Common
Shares used in Diluted Earnings Per Share 93,969 93,457
======== ========
Diluted Earnings per Common Share as restated $ 0.29 $ 1.29
======== ========
Diluted Earnings per Common Share as
previously reported $ 0.29 $ 1.29
======== ========
</TABLE>
3. Assuming that acquisitions accounted for as purchases during the period
January 1, 1998, to September 30, 1999, had taken place on January 1,
1998, pro forma results of operations would have been as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1999 1998
---- ----
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Service Revenues $ 1,030,867 $ 839,157
Equipment Sales 36,346 28,448
Interest Expense (including cost to finance acquisitions) 28,116 29,836
Net Income 281,333 200,537
Earnings per Common and Series A Common Share-Basic 3.22 2.30
Earnings per Common and Series A Common Share-Diluted 3.05 2.20
</TABLE>
23
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first nine months of 1999 and 1998. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed and
Common Shares issued.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Property, plant and equipment $ 3,444 $ 5,447
Cellular licenses 19,879 68,695
Decrease in equity-method investment
in cellular interests (748) (2,317)
Decrease in minority investments 3,682 13,168
Other assets and liabilities,
excluding cash acquired 710 2,500
Common Shares issued -- (1,303)
-------- --------
Decrease in cash due to acquisitions $ 26,967 $ 86,190
======== ========
</TABLE>
The following summarizes certain noncash transactions
and interest and income taxes paid.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Interest paid $ 19,254 $ 18,688
Income taxes paid 54,837 84,263
Noncash interest expense 12,781 12,048
</TABLE>
5. Gain on sale of cellular and other investments in 1999 primarily related
to the merger between AirTouch Communications, Inc. and Vodafone Group
plc. In accordance with current accounting rules, the Company was
required to recognize in earnings as a gain the difference between its
historical basis in the ATI shares and the June 30, 1999 value of the
Vodafone ADRs plus the cash to be received as a result of this merger.
Gain on sale of cellular and other investments in 1998 primarily
reflects gains recorded on the sale of the Company's minority interests
in twelve markets and on cash received from TDS pursuant to an agreement
between the Company and TDS.
24
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Other Comprehensive Income
The Company's Comprehensive Income includes Net Income and Unrealized
Gains from Marketable Equity Securities that are classified as
"available-for-sale". The following table summarizes the Company's
Comprehensive Income:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Accumulated Other Comprehensive Income
Balance, beginning of period $ 69,465 $ --
Add:
Unrealized gains on securities 242,811 52,507
Income tax effect (97,126) (18,377)
--------- ---------
Net unrealized gains 145,685 34,130
--------- ---------
Deduct:
Gain on reclassification of securities 259,464 --
Income tax effect (103,786) --
--------- ---------
Net unrealized gains reclassified to
Net Income 155,678 --
--------- ---------
Net unrealized gains included in
comprehensive income (9,993) --
--------- ---------
Balance, end of period $ 59,472 $ 34,130
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Comprehensive Income
Net Income $ 57,063 $ 35,409 $ 279,765 $ 197,946
Net unrealized gains
on securities 55,857 (3,756) 59,472 34,130
--------- --------- --------- ---------
$ 112,920 $ 31,653 $ 339,237 $ 232,076
========= ========= ========= =========
</TABLE>
25
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Marketable Equity Securities
Marketable equity securities include the Company's investments in equity
securities, primarily Vodafone AirTouch plc American Depository Receipts
("VOD ADRs"). These securities are classified as available-for-sale and
stated at fair market value.
Information regarding the Company's marketable equity securities is
summarized below.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------------------------
(Dollars in thousands)
<S> <C> <C>
Available-for-sale Equity Securities
Aggregate Fair Value $ 504,182 $ 296,860
Adjusted Basis 405,061 181,087
--------- ---------
Gross Unrealized Holding Gains 99,121 115,773
Tax Effect (39,649) (46,308)
--------- ---------
Net Unrealized Holding Gains, net of tax $ 59,472 $ 69,465
========= =========
</TABLE>
26
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits:
Exhibit 11 - Statement regarding computation of per share earnings
is included herein as footnote 2 to the financial statements.
Exhibit 12 - Statement regarding computation of ratios.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1999:
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
27
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
UNITED STATES CELLULAR CORPORATION
----------------------------------
(Registrant)
Date November 12, 1999 H. DONALD NELSON
----------------------------------------------
H. Donald Nelson
President
(Chief Executive Officer)
Date November 12, 1999 KENNETH R. MEYERS
----------------------------------------------
Kenneth R. Meyers
Executive Vice President-Finance and Treasurer
(Chief Financial Officer)
Date November 12, 1999 JOHN T. QUILLE
----------------------------------------------
John T. Quille
Vice President and Controller
(Principal Accounting Officer)
28
Exhibit 12
UNITED STATES CELLULAR CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, 1999
------------------
(Dollars in thousands)
<S> <C>
EARNINGS
Income from Continuing Operations before
income taxes $ 480,333
Add (Deduct):
Minority Share of Cellular Losses (31)
Earnings on Equity Method (24,530)
Distributions from Minority Subsidiaries 18,475
---------
$ 474,247
Add fixed charges:
Consolidated interest expense 27,503
Deferred debt expense 613
Interest Portion (1/3) of Consolidated
Rent Expense 6,057
---------
$ 508,420
=========
FIXED CHARGES
Consolidated interest expense 27,503
Deferred debt expense 613
Interest Portion (1/3) of Consolidated
Rent Expense 6,057
---------
$ 34,173
=========
RATIO OF EARNINGS TO FIXED CHARGES 14.88
=========
Tax-Effected Preferred Dividends $ 120
Fixed Charges 34,173
---------
Fixed Charges and Preferred Dividends $ 34,293
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 14.83
=========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANICAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION AS
OF SEPTEMBER 30, 1999, AND FOR THE NINE MONTHS THEN ENDED, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 183,979
<SECURITIES> 504,182
<RECEIVABLES> 127,551
<ALLOWANCES> 8,756
<INVENTORY> 24,568
<CURRENT-ASSETS> 421,950
<PP&E> 1,556,863
<DEPRECIATION> 477,409
<TOTAL-ASSETS> 3,456,921
<CURRENT-LIABILITIES> 267,346
<BONDS> 543,949
0
0
<COMMON> 87,517
<OTHER-SE> 2,136,016
<TOTAL-LIABILITY-AND-EQUITY> 3,456,921
<SALES> 36,281
<TOTAL-REVENUES> 1,060,138
<CGS> 81,015
<TOTAL-COSTS> 840,012
<OTHER-EXPENSES> (288,323)
<LOSS-PROVISION> 17,910
<INTEREST-EXPENSE> 28,116
<INCOME-PRETAX> 480,333
<INCOME-TAX> 200,568
<INCOME-CONTINUING> 279,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 279,765
<EPS-BASIC> 3.20
<EPS-DILUTED> 3.03
</TABLE>
