- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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 June 30, 1999
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------------- ---------------------
Commission File Number 1-9712
- --------------------------------------------------------------------------------
UNITED STATES CELLULAR CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1147325
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631
-------------------------------------------------------
(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
------ -------
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 July 30, 1999
- ------------------------------------ ----------------------------
Common Shares, $1 par value 54,462,836 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
- --------------------------------------------------------------------------------
<PAGE>
UNITED STATES CELLULAR CORPORATION
2ND QUARTER REPORT ON FORM 10-Q
INDEX
Page 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 Six Months Ended June 30, 1999 and 1998 16
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 17
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 18-19
Notes to Consolidated Financial Statements 20-23
Part II. Other Information 24-25
Signatures 26
<PAGE>
PART I. FINANCIAL INFORMATION
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
- -------------------------------------------------------------------------
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 182 markets at June
30, 1999, representing 26,260,000 population equivalents ("pops"). USM included
the operations of 138 majority-owned and managed cellular markets, representing
23.7 million pops, in consolidated operations ("consolidated markets") as of
June 30, 1999. Minority interests in 38 markets, representing 2.5 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,
were accounted for using the cost method. Following is a table of summarized
operating data for USM's consolidated operations.
<TABLE>
<CAPTION>
Six Months Ended or At June 30,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Total market population (in thousands) (1) 24,683 24,136
Customers 2,364,000 1,922,000
Market penetration 9.58% 7.96%
Markets in operation 138 136
Total employees 4,800 4,500
Cell sites in service 2,163 1,864
Average monthly revenue per customer $48.71 $47.50
Churn rate per month 2.0% 1.8%
Marketing cost per gross customer addition $ 335 $ 309
(1) Calculated using Claritas population estimates for 1998 and 1997,
respectively.
</TABLE>
The growth in the Company's operating income in the first six 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 six 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 a 23%
increase in customers served, rose $151.7 million, or 28%, in 1999. Cash
operating expenses rose $97.7 million, or 27%, in 1999. Operating cash flow
(operating income plus depreciation and amortization expense) increased $53.9
million, or 30%, in 1999. Depreciation and amortization expense increased $12.7
million, or 13%, in 1999. Operating income increased $41.3 million, or 50%, in
1999.
-2-
<PAGE>
Investment and other income increased $65.3 million to $273.2 million in 1999,
due primarily to an increase of $70.9 million in gains on sales of cellular and
other investments in the second quarter of 1999, partially offset by a $7.1
million, or 34%, 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 expects to receive approximately
2.0 million VOD American Depositary Receipts ("ADRs") plus $36.9 million in cash
in exchange for its 4.1 million ATI shares, which the Company received as
consideration for certain minority interest divestitures in 1998. 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 to be 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.
Investment income declined in 1999 due to a decrease in the aggregate income
from the markets managed by others in which the Company owned investment
interests in both 1998 and 1999. Also contributing to the decline was a
reduction in the number of investment interests owned as a result of the sale of
minority interests to ATI in 1998.
Net income totaled $222.7 million in 1999, an increase of $60.2 million, or 37%,
from 1998. Diluted earnings per share totaled $2.54 in 1999, an increase of
$.68, or 37%, 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.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
------- ------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net income before after-tax effects of gains $ 66,321 $ 46,456
Add: After-tax effects of gains 156,381 116,081
--------- --------------
Net income as reported $ 222,702 $ 162,537
========= ==============
Earnings per share before after-tax effects
of gains $ .76 $ .53
Add: After-tax effects of gains 1.78 1.33
--------- --------------
Diluted earnings per share as reported $ 2.54 $ 1.86
========= ==============
</TABLE>
Operating Revenues
- ------------------
Operating revenues totaled $686.9 million in 1999, up $151.7 million, or 28%,
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 $663.7 million in
1999, up $146.4 million, or 28%, over 1998. The increase was primarily due to
the growing number of local retail
-3-
<PAGE>
customers and also due to the increase in inbound roaming minutes of use on the
Company's systems.
Average monthly service revenue per customer increased 3% to $48.71 in 1999 from
$47.50 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 roamers. While the increase in inbound
roaming minutes of use was partially offset by a decrease in revenue per minute
of use, monthly roaming revenue per Company customer increased 17%. 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 3% decrease in monthly
local retail revenue per customer.
Monthly local retail minutes of use per customer increased 10% to 112 in 1999
from 102 in 1998, resulting from the Company's focus on stimulating overall
usage. Also, total inbound roaming minutes used on the Company's systems
increased 81% in 1999, 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 inbound roaming minutes. Management anticipates that the increase
in minutes of use will be slower in the second half of 1999 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 trend toward reduced per minute prices for roaming negotiated
between the Company and other wireless operators. 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 $79.7 million, or 22%, 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 23% to 2,364,000 at June 30, 1999
from 1,922,000 at June 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 3% to $32.88 in 1999
from $33.82 in 1998. Monthly local retail minutes of use per customer was 112 in
1999 and 102 in 1998. 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. 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.
Inbound roaming revenue increased $47.2 million, or 46%, 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 by 81% in 1999. Average inbound roaming
revenue per minute decreased 17% in 1999, due to the downward trend in
negotiated rates. Both the increase in minutes of use and the decrease in
-4-
<PAGE>
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 $11.01 in
1999 and $9.45 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.
Long-distance revenue increased $19.6 million, or 44%, 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. Monthly
long-distance revenue per customer averaged $4.67 in 1999 and $4.05 in 1998.
Equipment sales revenues increased $5.2 million, or 29%, in 1999. The increase
in equipment sales revenues reflect the 12% increase in the number of gross
customer activations, to 453,000 in 1999 from 403,000 in 1998, plus an increase
in the number of higher priced dual-mode units and in the volume of accessories
sold. Most of the gross customer activations were produced by the Company's
direct and retail distribution channels; activations from these channels usually
generate sales of cellular telephone units. The increase in 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 $562.4 million in 1999, up $110.4 million, or 24%,
over 1998. System operations expenses increased $31.0 million, or 35%, in 1999
as a result of increases in customer usage expenses, costs associated with
serving the Company's increased number of customers and the growing number of
cell sites within the Company's systems. In total, system operations costs are
expected to continue to increase as the number of customers using and the number
of cell sites within the Company's systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for the Company's customers' use of their facilities as well as for
the Company's inbound roaming traffic on these facilities. Also included are
costs related to local interconnection to the landline network, toll charges and
expenses incurred by the Company when its customers use systems other than their
local systems ("outbound roaming"). These expenses are offset somewhat by
amounts the Company bills to its customers for outbound roaming.
Customer usage expenses increased $25.2 million, or 42%, in 1999. The increase
in 1999 is primarily due to the 59% increase in net outbound roaming expense,
which has resulted from the Company offering its customers increasingly larger
service footprints in which their calls are billed at local rates. In an
increasing number of cases, these service areas include other operators' service
areas. The Company pays roaming rates to the other carriers for calls the
Company's customers make in these areas, while charging those customers a local
rate which is usually lower than the roaming rate. Also contributing to the
increase in customer usage expenses in 1999 was a 25% rise in costs related to
the increase in minutes used on the Company's systems. Customer usage expenses
represented 13% of service revenues in 1999 and 11% in 1998.
-5-
<PAGE>
Maintenance, utility and cell site expenses increased $5.8 million, or 19%, in
1999. The increase primarily reflects a 16% increase in the number of cell sites
in the Company's systems to 2,163 in 1999 from 1,864 in 1998.
Marketing and selling expenses increased $20.4 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 12% 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(R) to U.S. CellularSM 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 8% to $335 in 1999 from $309
in 1998. The increase in cost per gross customer activation was primarily driven
by additional advertising expenses incurred to promote the Company's new brand
name and logo and to distinguish the Company's service offerings from those of
other competitors. Also contributing were increased commissions and 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 $12.0 million, or 29%, in 1999. The increase
reflects the growth in unit sales related to the 12% 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 $34.4 million, or 28%, 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 could no
longer be capitalized beginning in January 1999, related to its conversion to a
new billing system; and incurred additional costs by providing dual-mode units
to customers who migrated from analog to digital rate plans. Employee-related
expenses increased $15.2 million, or 27%, in 1999, primarily due to increases in
the number of customer service and administrative employees. Monthly general and
administrative expenses per customer increased 2% to $11.66 in 1999 from $11.43
in 1998. General and administrative expenses represented 24% of service revenues
both in 1999 and 1998.
Operating cash flow increased $53.9 million, or 30%, to $232.9 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
35.1% in 1999 and 34.6% in 1998.
Depreciation expense increased $11.5 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>
Amortization of intangibles increased $1.2 million, or 6%, in 1999. The increase
in 1999 primarily reflects a 5% increase in average investment in licenses,
related to acquisitions completed since the first half of 1998.
Beginning September 1, 1999, the Company will begin amortization of deferred
system development costs related to its new billing and information systems over
a seven-year period. Through June 30, 1999, the Company had capitalized
approximately $118 million of costs related to these systems.
Operating Income
- ----------------
Operating income totaled $124.6 million in 1999, a 50% increase over 1998. The
operating income margin was 18.8% in 1999 and 16.1% 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
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; however, management anticipates that average monthly revenue per customer
will decrease for the full year of 1999 compared to 1998, despite the increase
in the first six months comparison, as local retail and inbound roaming revenue
per minute of use decline, as the growth in inbound roaming minutes of use slows
and as the Company further penetrates the consumer market. Additionally, the
Company expects expenses to increase during the remainder of 1999 as it incurs
costs associated with both customer growth and fixed assets added.
Although service revenues increased 28% and average monthly revenue per customer
increased 3% in the first half of 1999, management does not expect these trends
to continue throughout 1999 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. 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 $273.2 million in 1999 and $207.9 million in
1998. Gain on sale of cellular and other investments totaled $260.7 in the first
half of 1999 primarily due to the ATI-VOD merger. Gain on sale of cellular and
other investments totaled $189.8 million in 1998
-7-
<PAGE>
from sales of the Company's investment interests in ten markets, and also
related to cash received from TDS pursuant to an agreement between the Company
and TDS.
Investment income was $13.8 million in 1999 compared to $20.9 million in 1998, a
34% 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 $18.6 million in 1999 compared to $19.9 million in
1998. Interest expense in 1999 is primarily related to Liquid Yield Option Notes
("LYONs") ($8.6 million); the Company's 7.25% Notes (the "Notes") ($9.2
million); and the Company's revolving credit facility with a series of banks
("Revolving Credit Facility") ($395,000). Interest expense in 1998 was primarily
related to LYONs ($8.1 million), the Company's 7.25% Notes ($9.2 million) and
the Revolving Credit Facility ($760,000).
The Company's $250 million principal amount of 7.25% 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 5.5% at June 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 the first six
months of 1998; no borrowings were made during the first six months of 1999.
Income tax expense was $156.4 million in 1999 and $108.7 million in 1998. In
1999, $104.3 million of income tax expense related to the gains due to the
ATI-VOD merger in the second quarter. 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 41% in 1999 and 40% in 1998. The increase in
1999's effective tax rate is primarily related to the nature of the gains on
sales of cellular interests 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 $222.7 million in 1999 and $162.5 million in 1998. Diluted
earnings per share was $2.54 in 1999 and $1.86 in 1998. Net income and earnings
per share in 1999 and 1998 included significant after-tax gains, representing
$156.4 million and $1.78 and $116.1 million and $1.33 per share, respectively.
Excluding the after-tax effect of these gains, net income would have been $66.3
million, or $.76 per share, in 1999 and $46.5 million, or $.53 per share, in
1998.
Three Months Ended 6/30/99 Compared to Three Months Ended 6/30/98
- -----------------------------------------------------------------
Operating revenues totaled $361.0 million in the second quarter of 1999, up
$70.8 million, or 24%, over 1998. Average monthly service revenue per customer
remained flat at $50.18 in the second quarter of 1999 compared to $50.16 in the
same period of 1998 for reasons generally the same as the first half of 1999.
Revenues from local customers' usage of the Company's systems increased $36.3
million, or 18%, in 1999 primarily due to the increased number of customers
served. Average monthly local retail minutes of use per customer totaled 123 in
the second quarter of 1999 compared to 109 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 5% to $33.76 in the second quarter of 1999
compared to $35.39 in 1998. Inbound roaming revenue increased $22.4 million, or
40%, in 1999. Monthly inbound roaming revenue per customer averaged $11.39 in
1999 compared to $10.12 in 1998.
Long-distance revenue increased $8.6 million, or 34%, in 1999 as the volume of
long-distance calls billed by the Company increased. Monthly long-distance
revenue per customer averaged $4.85 in 1999 and $4.47 in 1998.
Equipment sales revenue reflects a 9% increase in the number of gross customer
activations, to 224,000 in 1999 compared to 205,000 in 1998, plus increases in
the number of dual-mode units sold and in the volume of accessories sold.
Operating expenses totaled $288.5 million in the second quarter of 1999, up
$48.5 million, or 20%, over 1998. System operations expenses increased $9.3
million, or 18%, in 1999 as a result of increased customer usage expenses and
costs associated with maintaining 16% more cell sites than in 1998. Customer
usage expenses increased $6.3 million in 1999, primarily due to a $3.8 million
increase in cost of minutes used; maintenance, utility and cell site expenses
increased $3.0 million in 1999.
Marketing and selling expenses increased $12.1 million, or 23%, in 1999. The
increase was primarily due to a 9% increase in the number of gross customer
activations. Cost per gross customer activation was $351 in 1999 and $305 in
1998.
Cost of equipment sold increased $7.3 million, or 36%, 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.
-9-
<PAGE>
General and administrative expenses increased $13.9 million, or 21%, in 1999,
primarily related to the increase in customers served.
Operating cash flow increased $28.3 million, or 28%, to $128.9 million in 1999;
operating cash flow margins totaled 37.0% in 1999 and 35.8% in 1998.
Depreciation expense increased $5.8 million, or 14%, in 1999, reflecting an 11%
increase in average fixed asset balances.
Operating income totaled $72.5 million in 1999 compared to $50.1 million in
1998, a 45% increase. The operating income margin increased to 20.8% in 1999
from 17.8% in 1998. The improvements in operating income and operating income
margin were primarily the result of increased revenues and improved operational
efficiencies.
Investment income decreased $886,000, or 11%, in 1999 due to the decrease in
1999 in the aggregate income from the markets in which the Company had interests
in both 1998 and 1999. Gain on sale of cellular and other investments totaled
$260.7 million in 1999 and $9.8 million in 1998. Total interest expense
decreased $369,000, or 4%, in 1999. Income tax expense totaled $135.4 million in
1999 and $24.2 million in 1998. In 1999 and 1998, $104.3 million and $3.9
million of income tax expense, respectively, related to gains on sales of
cellular and other investments.
Net income totaled $194.9 million in 1999 compared to $32.8 million in 1998.
Both net income and earnings per share in both years were significantly affected
by gains on the sales of cellular and other investments. A summary of the
after-tax effect of gains on net income and diluted earnings per share is shown
below.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
----------- ------------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
Net income before after-tax effects of gain $ 38,495 $ 26,943
Add: After-tax effects of gains 156,381 5,842
-------------- --------------
Net income as reported $ 194,876 $ 32,785
============== ==============
Earnings per share before after-tax effects
of gains $ .44 $ .31
Add: After-tax effects of gains 1.78 .07
-------------- --------------
Diluted earnings per share as reported $ 2.22 $ .38
============== ==============
</TABLE>
FINANCIAL RESOURCES AND LIQUIDITY
- ---------------------------------
The Company operates a capital and marketing-intensive business. In recent
years, the Company has generated operating cash flow and received cash proceeds
from divestitures to fund most of its construction costs and substantially all
of its operating expenses. The Company anticipates further increases in cellular
units in service, revenues, operating cash flow and 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.
-10-
<PAGE>
Cash flows from operating activities provided $165.1 million in 1999 and $100.9
million in 1998. Operating cash flow provided $232.9 million in 1999 and $179.0
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 $67.8 million in 1999 and
$78.1 million in 1998. Income taxes and interest paid totaled $32.6 million in
1999 and $70.6 million in 1998.
Cash flows from financing activities required $538,000 in 1999 and $1.2 million
in 1998. In 1998, the Company borrowed and repaid $47 million under the
Revolving Credit Facility.
Cash flows from investing activities required $113.5 million in 1999 and $50.9
million in 1998. Cash required for property, plant and equipment and system
development expenditures totaled $161.9 million in 1999 and $137.0 million in
1998. In both periods, these expenditures were financed primarily with
internally generated cash. These expenditures primarily represent the
construction of 98 and 102 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 $8.1 million in
1999 and $43.6 million in 1998. The Company received net cash proceeds totaling
$43.3 million in 1999 and $120.2 million in 1998 related to sales of cellular
interests. Cash distributions from cellular entities in which the Company has an
interest provided $12.7 million in 1999 and $11.9 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 to add capacity to meet the growing usage
demand from both the Company's customers and roamers, 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.
In the first six months of 1999, there were no completed acquisitions or
divestitures of interests in consolidated markets. In the first six months of
1999, the Company acquired minority interests in several markets, representing
93,000 pops, for a total of $9.1 million in cash.
In the first six months of 1998, the Company acquired majority interests in two
markets and minority interests in several markets, representing 432,000 pops,
for a total consideration of $57.6 million, consisting of cash and approximately
46,000 USM Common Shares.
-11-
<PAGE>
In the first half of 1999, the Company divested a majority interest in one
market and a minority interest in another market, representing 406,000 pops, for
cash totaling $43.3 million. The majority interest was sold to BellSouth
Corporation as part of the exchange which was substantially completed in
November 1997; therefore, no gain or loss was recorded on this sale.
In the first half 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 and receivables
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 June 30, 1999, the Company had agreements pending to acquire majority
interests in two markets plus minority interests in several markets in which the
Company currently has majority interests, representing 263,000 pops, for cash
consideration totaling $42.0 million. The Company expects these acquisitions to
be completed during the last half of 1999.
Liquidity
- ---------
The Company anticipates that the aggregate resources required for the remainder
of 1999 will include approximately $138 million for capital spending. The
Company is generating substantial cash from its operations and anticipates
financing its capital spending for 1999 primarily with internally generated
cash, proceeds from the sales of cellular interests and short-term borrowings.
The Company had $103 million of cash and cash equivalents at June 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 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.
Market Risk
- -----------
The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. All of the Company's current 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 significant
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
interests. The market value of these
-12-
<PAGE>
investments, principally VOD ADRs, amounted to $411.1 million at June 30, 1999.
A hypothetical 10% decrease in the price of these shares would result in a $41.1
million decline in the market value of the shares.
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 has established a project team to address Year 2000
issues. The Company's plan to address the Year 2000 Issue consists of five
general phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv)
Validation and (v) Implementation.
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. A Year 2000 Program Office has been established at the TDS corporate
level to coordinate activities of the Year 2000 project team, to monitor the
current status of individual projects, to report periodically to the TDS Audit
Committee and to promote the exchange of information among 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. The Company's 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 compliance efforts of the Company's critical vendors.
The assessment phase includes the identification of core business areas and
processes, analysis of systems and hardware supporting the core business areas
and the prioritization of renovation or replacement of the systems and hardware
that are not Year 2000 compliant. Included in the assessment phase is an
analysis of risk management factors such as contingency plans and legal matters.
Except for the contingency plans as discussed below, the assessment phase was
completed in the first quarter of 1999.
The Year 2000 project teams identified those mission critical hardware, systems
and applications that were not Year 2000 compliant. These noncompliant critical
hardware, systems and applications have undergone renovation. The renovation
phase consisted of the remediation or replacement of mission critical hardware,
systems and applications. The renovation of these mission critical hardware,
systems and applications was substantially completed in July 1999.
The mission critical hardware, systems and applications that have been renovated
are undergoing Year 2000 validation testing. The validation phase includes
testing, verifying and validating the renovated or replaced platforms,
applications, databases and utilities. The
-13-
<PAGE>
validation phase consists 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 are slated to undergo testing in a controlled environment that
replicates the current environment and is equipped to simulate the turn of the
century and leap year dates. 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
compliant upgrades for the networks. The Company has analyzed the findings and
plans to install upgrades appropriate to its network. Validation of mission
critical hardware, systems and applications is scheduled to be completed in the
third quarter of 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 compliance 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 compliant hardware,
systems and applications and on other third parties, including vendors, other
telecommunications service providers, government agencies and financial
institutions, to deliver reliable services and timely upgrades. The Company has
contacted critical vendors, requesting information about their Year 2000
readiness. The responses are being 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 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 will include the following:
reviewing, assessing and updating existing business recovery plans; identifying
teams who will be on call during the
-14-
<PAGE>
millennium change to monitor the network, critical systems, operations centers
and business processes to react immediately to facilitate repairs;
re-prioritization of mission critical work processes and associated resources;
developing alternate processes to support critical customer functions in the
event information systems or mechanized processes experience Year 2000
disruptions; establishing replacement/repair parallel paths to provide for
repair and readiness of existing systems and components that are scheduled for
replacement by the Year 2000, in the event the replacement schedules are not
met; developing alternate plans for critical suppliers of products and services
that fail to meet Year 2000 compliance commitment schedules; and developing data
retention and recovery procedures to be in place for customer and critical
business data to provide pre-millennium backups with on-site as well as off-site
data copies. The Company anticipates substantially completing the balance of its
contingency planning early in the fourth quarter of 1999.
The Company estimates that the total direct costs related to the Year 2000
project will be approximately $3.5 million to $5 million. Through June 30, 1999,
the total direct costs associated with the Year 2000 Issue were approximately $2
million. The timing of expenditures may vary and is not necessarily indicative
of readiness efforts or progress to date. 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 systems, billing
systems and customer information systems which are by design thought to be Year
2000 compliant. These expenditures are not considered to be directly related to
the Year 2000 project because they were incurred as part of the Company's
overall operating strategies to add digital capabilities for competitive
purposes and to improve financial systems and customer service. However, these
upgrades and financial systems will be tested for Year 2000 compliance. Though
Year 2000 project costs will directly impact the reported level of future net
income, the Company intends to manage its total cost structure, including
deferral of non-critical projects, in an effort to mitigate the impact of Year
2000 project costs.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR
- ------------------------------------------------------------
CAUTIONARY STATEMENT
--------------------
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Annual Report to Shareholders contain
"forward-looking" statements as defined in the Private Securities Litigation
Reform Act of 1995, that are based on current expectations, estimates and
projections. Statements that are not historical facts, including statements
about the Company's beliefs and expectations, are forward-looking statements.
These statements contain potential risks and uncertainties; therefore, actual
results may differ materially. The Company undertakes no obligation to update
publicly any forward-looking statements whether as a result of new information,
future events or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
markets in which the Company operates; advances in telecommunications
technology; changes in the telecommunications regulatory environment; pending
and future litigation; availability of future financing; start-up of PCS
operations; unanticipated changes in growth in cellular customers, penetration
rates, churn rates and the mix of products and services offered in the Company's
markets; and unanticipated problems with the Year 2000 issue. Readers should
evaluate any statements in light of these important factors.
-15-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------
1999 1998 1999 1998
-------------- ------------- ------------ -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Service $ 348,523 $ 280,931 $ 663,717 $ 517,275
Equipment sales 12,429 9,177 23,220 17,990
------------- ------------- ------------- ------------
Total Operating Revenues 360,952 290,108 686,937 535,265
------------- ------------- ------------- ------------
OPERATING EXPENSES
System operations 61,641 52,367 120,332 89,310
Marketing and selling 63,380 51,328 121,685 101,329
Cost of equipment sold 27,659 20,357 53,100 41,105
General and administrative 79,354 65,477 158,873 124,520
Depreciation 46,685 40,878 88,301 76,798
Amortization of intangibles 9,781 9,564 20,080 18,911
------------- ------------- ------------- ------------
Total Operating Expenses 288,500 239,971 562,371 451,973
------------- ------------- ------------- ------------
OPERATING INCOME 72,452 50,137 124,566 83,292
------------- ------------- ------------- ------------
INVESTMENT AND OTHER INCOME
Investment income 7,216 8,102 13,834 20,890
Amortization of licenses related to investments (263) (226) (570) (559)
Interest income 1,558 1,607 2,757 3,267
Other (expense), net (363) (1,079) (471) (2,806)
Minority share of income (1,596) (1,513) (3,079) (2,695)
Gain on sale of cellular and other investments 260,698 9,767 260,698 189,759
------------- ------------- ------------- ------------
Total Investment and Other Income 267,250 16,658 273,169 207,856
------------- ------------- ------------- ------------
INCOME BEFORE INTEREST
AND INCOME TAXES 339,702 66,795 397,735 291,148
Interest expense 9,392 9,760 18,608 19,888
------------- ------------- ------------- ------------
INCOME BEFORE INCOME TAXES 330,310 57,035 379,127 271,260
Income tax expense 135,434 24,250 156,425 108,723
------------- ------------- ------------- ------------
NET INCOME $ 194,876 $ 32,785 $ 222,702 $ 162,537
============= ============= ============= ============
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON SHARES (000s) 87,461 87,342 87,426 87,290
BASIC EARNINGS PER COMMON AND
SERIES A COMMON SHARE $ 2.23 $ .38 $ 2.55 $ 1.86
============= ============= ============= ============
DILUTED EARNINGS PER COMMON AND
SERIES A COMMON SHARE $ 2.22 $ .38 $ 2.54 $ 1.86
============= ============= ============= ============
</TABLE>
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
-16-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 222,702 $ 162,537
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 108,381 95,709
Deferred income tax provision 107,369 66,057
Investment income (13,834) (20,890)
Minority share of income 3,079 2,695
Gain on sale of cellular and other investments (260,698) (189,759)
Other noncash expense 13,928 11,555
Change in accounts receivable (24,031) (14,663)
Change in accounts payable (18,175) 19
Change in accrued interest -- 310
Change in accrued taxes 29,836 (11,942)
Change in customer deposits and deferred revenues 681 1,994
Change in other assets and liabilities (4,093) (2,724)
--------- ---------
165,145 100,898
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from Revolving Credit Facility -- 47,000
Repayment of Revolving Credit Facility -- (47,000)
Change in notes payable -- (1,302)
Common Shares issued 2,000 1,877
Capital (distributions) to minority partners (2,538) (1,753)
--------- ---------
(538) (1,178)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (149,826) (115,967)
System development costs (12,026) (21,025)
Investments in and advances to minority interests in
cellular entities 413 (3,561)
Distributions from minority interests in cellular entities 12,684 11,890
Proceeds from sale of cellular and other investments 43,324 120,244
Acquisitions, excluding cash acquired (8,131) (43,643)
Other investing activities 147 409
Change in temporary cash and marketable
non-equity securities (116) 795
--------- ---------
(113,531) (50,858)
--------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 51,076 48,862
CASH AND CASH EQUIVALENTS-
Beginning of period 51,975 13,851
--------- ---------
End of period $ 103,051 $ 62,713
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-17-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds $ 43,404 $ 15,576
Affiliated cash equivalents 59,647 36,399
---------- ----------
103,051 51,975
Temporary investments 268 284
Accounts receivable
Customers 106,569 99,931
Roaming 64,080 46,634
Affiliates 117 26
Other 44,466 13,671
Inventory 22,828 16,673
Prepaid expenses 11,057 10,506
Other current assets 3,481 3,105
---------- ----------
355,917 242,805
---------- ----------
INVESTMENTS
Licenses, net of accumulated amortization 1,150,052 1,200,653
Minority interests in cellular entities 137,086 140,286
Notes and interest receivable 11,545 11,530
Marketable equity securities 411,085 296,860
Marketable non-equity securities 448 336
---------- ----------
1,710,216 1,649,665
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 1,511,338 1,400,597
Less accumulated depreciation 448,159 389,754
---------- ----------
1,063,179 1,010,843
---------- ----------
DEFERRED CHARGES
System development costs,
net of accumulated amortization 136,873 127,742
Other, net of accumulated amortization 12,985 16,581
---------- ----------
149,858 144,323
---------- ----------
Total Assets $3,279,170 $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)
June 30, 1999 December 31, 1998
---------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable
Affiliates $ 12,565 $ 11,508
Other 138,296 172,568
Customer deposits and deferred revenues 28,236 13,263
Accrued interest 7,069 7,069
Accrued taxes 43,764 27,575
Accrued compensation 13,449 13,928
Other current liabilities 15,322 12,362
---------- ----------
258,701 258,273
LONG-TERM DEBT
6% zero coupon convertible debentures 289,925 281,487
7.25% unsecured notes 250,000 250,000
---------- ----------
539,925 531,487
---------- ----------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 321,535 258,123
Other 8,405 5,914
---------- ----------
329,940 264,037
---------- ----------
MINORITY INTEREST 41,499 43,609
---------- ----------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 54,460 54,365
Series A Common Shares, par value $1 per share 33,006 33,006
Additional paid-in capital 1,321,823 1,319,895
Accumulated other comprehensive income 3,615 69,465
Retained earnings 696,201 473,499
---------- ----------
2,109,105 1,950,230
---------- ----------
Total Liabilities and Shareholders' Equity $3,279,170 $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
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 June 30, 1999 and December 31,
1998, and the results of operations and cash flows for the six months
ended June 30, 1999 and 1998. The results of operations for the six months
ended June 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 Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net Income used in Earnings Per
Share-Basic and Diluted $194,876 $ 32,785 $222,702 $162,537
======== ======== ======== ========
Basic Weighted average number of Common
Shares used in Earnings Per Share 87,461 87,342 87,426 87,290
Effect of Dilutive Securities:
Stock Options and Stock Appreciation Rights 133 40 120 40
-------- -------- -------- --------
Diluted Weighted Average Number of Common
Shares used in Earnings Per Share 87,594 87,382 87,546 87,330
======== ======== ======== ========
</TABLE>
Earnings per Common and Series A Common Share for the three and six
months ended June 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 was $.44 and $.31 for the three months ended June 30,
1999 and 1998, respectively, and basic and diluted earnings per share
was $.76 and $.53 for the six months ended June 30, 1999 and 1998,
respectively.
-20-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first six months of 1999 and 1998. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed
and Common Shares issued.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Property, plant and equipment $ -- $ 5,447
Cellular licenses 5,464 27,563
Decrease in equity-method investment
in cellular interests -- (4,222)
Decrease in minority investments 2,667 13,168
Other assets and liabilities,
excluding cash acquired -- 2,990
Common Shares issued -- (1,303)
-------- --------
Decrease in cash due to acquisitions $ 8,131 $ 43,643
======== ========
</TABLE>
The following summarizes certain noncash transactions and interest and
income taxes paid.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1999 1998
--------------- -------------
(Dollars in thousands)
<S> <C> <C>
Interest paid $ 9,755 $ 9,313
Income taxes paid 22,886 61,302
Noncash interest expense $ 8,444 $ 7,960
</TABLE>
4. 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.
21
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. 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>
Six Months Ended
June 30,
1999 1998
--------- ----------
(Dollars in thousands)
<S> <C> <C>
Accumulated Other Comprehensive Income
Balance, beginning of period $ 69,465 $ --
Add:
Unrealized gains on securities 149,715 58,329
Income tax effect (59,887) (20,443)
--------- ---------
Net unrealized gains 89,828 37,886
--------- ---------
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 (65,850) --
--------- ---------
Balance, end of period $ 3,615 $ 37,886
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Comprehensive Income
Net Income $194,876 $ 32,785 $222,702 $162,537
Net unrealized gains on
securities 1,490 37,886 3,615 37,886
-------- -------- -------- --------
$196,366 $ 70,671 $226,317 $200,423
======== ======== ======== ========
</TABLE>
-22-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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>
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Available-for-sale Equity Securities
Aggregate Fair Value $ 411,085 $ 296,860
Adjusted Basis 405,061 181,087
--------- ---------
Gross Unrealized Holding Gains 6,024 115,773
Tax Effect (2,409) (46,308)
--------- ---------
Net Unrealized Holding Gains, net of tax $ 3,615 $ 69,465
========= =========
</TABLE>
-23-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
At the Annual Meeting of Shareholders of USM, held on May 11, 1999, the
following number of votes were cast for the matters indicated:
1.a. For the election of one Class III Director of the Company by the holders
of Common Shares:
<TABLE>
<CAPTION>
Broker
Nominee For Withhold Non-Vote
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J. Samuel Crowley 53,623,869 93,593 -0-
</TABLE>
1.b. Election of two Class III Directors of the Company by the holders of
Series A Common Shares:
<TABLE>
<CAPTION>
Broker
Nominee For Withhold Non-Vote
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LeRoy T. Carlson, Jr. 330,058,770 -0- -0-
Walter C.D. Carlson 330,058,770 -0- -0-
</TABLE>
2. Proposal to approve the Company's 1999 Employee Stock Purchase Plan:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Series A Common Shares 330,058,770 -0- -0- -0-
Common Shares 53,701,632 111,544 6,082 -0-
---------- ------- ----- ---
Total 383,760,402 111,544 6,082 -0-
=========== ======= ===== ===
</TABLE>
3. Proposal to Ratify the Selection of Arthur Andersen LLP as Independent
Public Accountants for 1999:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Series A Common Shares 330,058,770 -0- -0- -0-
Common Shares 53,717,462 9,364 6,466 -0-
---------- ----- ----- ---
Total 383,776,232 9,364 6,466 -0-
=========== ===== ===== ===
</TABLE>
-24-
<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 June 30, 1999:
No reports on Form 8-K were filed during the quarter ended June 30, 1999.
-25-
<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 August 13, 1999 /s/ H. DONALD NELSON
--------------------- ------------------------------------------------
H. Donald Nelson
President
(Chief Executive Officer)
Date August 13, 1999 /s/ KENNETH R. MEYERS
--------------------- ------------------------------------------------
Kenneth R. Meyers
Executive Vice President-Finance and Treasurer
(Chief Financial Officer)
Date August 13, 1999 /s/ JOHN T. QUILLE
--------------------- -----------------------------------------------
John T. Quille
Vice President and Controller
(Principal Accounting Officer)
-26-
<PAGE>
Exhibit 12
UNITED STATES CELLULAR CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 1999
---------------------
(Dollars in thousands)
<S> <C>
EARNINGS
Income from Continuing Operations before
income taxes $ 379,127
Add (Deduct):
Minority Share of Cellular Losses (50)
Earnings on Equity Method (13,834)
Distributions from Minority Subsidiaries 12,684
---------
$ 377,927
Add fixed charges:
Consolidated interest expense 18,200
Deferred debt expense 408
Interest Portion (1/3) of Consolidated
Rent Expense 4,038
---------
$ 400,573
=========
FIXED CHARGES
Consolidated interest expense 18,200
Deferred debt expense 408
Interest Portion (1/3) of Consolidated
Rent Expense 4,038
---------
$ 22,646
=========
RATIO OF EARNINGS TO FIXED CHARGES 17.69
=========
Tax-Effected Preferred Dividends $ 61
Fixed Charges 22,646
---------
Fixed Charges and Preferred Dividends $ 22,707
=========
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS
17.64
=========
</TABLE>
<PAGE>
<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 JUNE 30, 1999, AND FOR THE SIX MONTHS THEN ENDED, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 103,051
<SECURITIES> 411,085
<RECEIVABLES> 113,691
<ALLOWANCES> 7,122
<INVENTORY> 22,828
<CURRENT-ASSETS> 355,917
<PP&E> 1,511,338
<DEPRECIATION> 448,159
<TOTAL-ASSETS> 3,279,170
<CURRENT-LIABILITIES> 258,701
<BONDS> 539,925
0
0
<COMMON> 87,466
<OTHER-SE> 2,021,639
<TOTAL-LIABILITY-AND-EQUITY> 3,279,170
<SALES> 23,220
<TOTAL-REVENUES> 686,937
<CGS> 53,100
<TOTAL-COSTS> 562,371
<OTHER-EXPENSES> (273,169)
<LOSS-PROVISION> 11,175
<INTEREST-EXPENSE> 18,608
<INCOME-PRETAX> 379,127
<INCOME-TAX> 156,425
<INCOME-CONTINUING> 222,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 222,702
<EPS-BASIC> 2.55
<EPS-DILUTED> 2.54
</TABLE>
