<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-9712
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UNITED STATES CELLULAR CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 62-1147325
- -------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
</TABLE>
8410 WEST BRYN MAWR, SUITE 700, CHICAGO, ILLINOIS 60631
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER: (773) 399-8900
Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
Name of each exchange on
Title of each class which registered
- ----------------------------- -----------------------------
Common Shares, $1 par value American Stock Exchange
Liquid Yield Option American Stock Exchange
Notes Due 2015
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
As of February 26, 1999, the aggregate market value of registrant's Common
Shares held by nonaffiliates was approximately $688.1 million (based upon the
closing price of the Common Shares on February 26, 1999, of $42.13, as reported
by the American Stock Exchange).
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 26, 1999, is 54,420,664 Common Shares, $1 par
value, and 33,005,877 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1998 Annual Report to
Shareholders and of the registrant's Notice of Annual Meeting of Shareholders
and Proxy Statement for its Annual Meeting of Shareholders to be held May 11,
1999, described in the cross reference sheet and table of contents attached
hereto are incorporated by reference into Parts II and III of this report.
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<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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<TABLE>
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PAGE NUMBER
OR REFERENCE(1)
---------------
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Item 1. Business............................................. 3
Item 2. Properties........................................... 23
Item 3. Legal Proceedings.................................... 23
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 23
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 24 (2)
Item 6. Selected Financial Data.............................. 24 (3)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 24 (4)
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk............................................... 24 (4)
Item 8. Financial Statements and Supplementary Data.......... 24 (5)
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 24
Item 10. Directors and Executive Officers of the Registrant... 25 (6)
Item 11. Executive Compensation............................... 25 (7)
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 25 (8)
Item 13. Certain Relationships and Related Transactions....... 25 (9)
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 26
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(1) Parenthetical references are to information incorporated by reference from
Exhibit 13, which includes portions of the registrant's Annual Report to
Shareholders for the year ended December 31, 1998 ("Annual Report") and from
the registrant's Notice of Annual Meeting of Shareholders and Proxy
Statement for its Annual Meeting of Shareholders to be held on May 11, 1999
(the "Proxy Statement").
(2) Annual Report section entitled "United States Cellular Stock and Dividend
Information."
(3) Annual Report section entitled "Selected Consolidated Financial Data."
(4) Annual Report section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
(5) Annual Report sections entitled "Consolidated Quarterly Income Information
(Unaudited)," "Consolidated Statements of Income," "Consolidated Statements
of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of
Changes in Common Shareholders' Equity," "Notes to Consolidated Financial
Statements" and "Report of Independent Public Accountants."
(6) Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."
(7) Proxy Statement section entitled "Executive Compensation," except for the
information specified in Item 402(a)(8) of Regulation S-K under the
Securities Exchange Act of 1934, as amended.
(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
Owners and Management."
(9) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
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UNITED STATES CELLULAR CORPORATION
8410 WEST BRYN MAWR - CHICAGO, ILLINOIS 60631
TELEPHONE (773) 399-8900
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PART I
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ITEM 1. BUSINESS
THE COMPANY
United States Cellular Corporation (the "Company") provides cellular
telephone service to 2,183,000 customers through 138 majority-owned and managed
("consolidated") cellular systems serving approximately 17% of the geography and
approximately 9% of the population of the United States. Since 1985, when the
Company began providing cellular service in Knoxville, Tennessee, the Company
has expanded its cellular networks and customer service operations to cover 145
markets in 26 states as of December 31, 1998. In total, the Company now operates
eight market clusters, of which four have a total population of more than two
million, and each of which has a total population of more than one million.
Overall, 90% of the Company's 26.2 million population equivalents are in markets
which are consolidated, 2% are in managed but not consolidated markets and 8%
are in markets in which the Company holds an investment interest.
The Company is the eleventh largest wireless company in the United States,
based on the aggregate number of customers in its consolidated markets. The
Company's corporate development strategy is to operate controlling interests in
cellular market licensees in areas adjacent to or in proximity to its other
markets, thereby building clusters of operating markets. Customers benefit from
larger service areas such as these, which provide longer uninterrupted service
and the ability to make outgoing calls and receive incoming calls within the
designated area without special roaming arrangements. In addition, the Company
anticipates that clustering will continue to provide the Company certain
economies in its capital and operating costs. As the number of opportunities for
outright acquisitions has decreased in recent years, and as the Company's
clusters have grown, the Company's focus has shifted toward exchanges and
divestitures of managed and investment interests which are considered less
essential to the Company's clustering strategy.
3
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The following table summarizes the status of the Company's interests in
cellular markets at December 31, 1998.
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Owns Majority Interest and Manages.................................... 138
Owns Minority Interest and Manages.................................... 7
---
Total Markets Managed by the Company.................................. 145
Markets Managed by Others (1)......................................... 38
---
Total Markets......................................................... 183
---
---
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(1) Represents markets in which the Company owns a minority or other
noncontrolling interest and which are managed by third parties; as of
December 31, 1998, the Company accounted for its interests in 31 of these
markets using the equity method and accounted for the remaining seven
markets using the cost method.
Cellular systems in the Company's 138 majority-owned and managed markets
served 2,183,000 customers at December 31, 1998, and contained 2,065 cell sites.
The average penetration rate in the Company's consolidated markets was 8.84% at
December 31, 1998, and the churn rate in all consolidated markets averaged 1.9%
per month for the twelve months ended December 31, 1998.
The Company was incorporated in Delaware in 1983. The Company's executive
offices are located at 8410 West Bryn Mawr, Chicago, Illinois 60631. Its
telephone number is 773-399-8900. The Common Shares of the Company are listed on
the American Stock Exchange under the symbol "USM." The Company's Liquid Yield
Option Notes ("LYONs") are also listed on the American Stock Exchange.
Unless the context indicates otherwise: (i) references to the "Company"
refer to United States Cellular Corporation and its subsidiaries; (ii)
references to "TDS" refer to Telephone and Data Systems, Inc. and its
subsidiaries; (iii) references to "MSA" or to a particular city refer to the
Metropolitan Statistical Area, as designated by the U.S. Office of Management
and Budget and used by the Federal Communications Commission ("FCC") in
designating metropolitan cellular market areas; (iv) references to "RSA" refer
to the Rural Service Area, as used by the FCC in designating non-MSA cellular
market areas; (v) references to cellular "markets" or "systems" refer to MSAs,
RSAs or both; (vi) references to "population equivalents" mean the population of
a market, based on 1998 Claritas estimates, multiplied by the percentage
interests that the Company owns or has the right to acquire in an entity
licensed, designated to receive a license or expected to receive a construction
permit ("licensee") from the FCC to construct or operate a cellular system in
such market.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Annual Report on Form 10-K, including exhibits, contains
"forward-looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on current expectations, estimates and
projections. Statements that are not historical facts, including statements
about the Company's beliefs and expectations, are forward-looking statements.
These statements contain potential risks and uncertainties; therefore, actual
results may differ materially. The Company undertakes no obligation to update
publicly any forward-looking statements whether as a result of new information,
future events or otherwise.
Important factors that may affect these projections or expectations include,
but are not limited to: changes in the overall economy; changes in competition
in markets in which the Company operates; advances in telecommunications
technology; changes in the telecommunications regulatory environment; pending
and future litigation; availability of future financing; continued start-up of
Personal Communications Services ("PCS" or "broadband PCS") operations in the
Company's service areas; 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.
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TDS TRACKING STOCK PROPOSAL
On December 18, 1998, TDS announced that it had withdrawn its offer to
acquire all of the issued Common Shares of the Company which TDS did not own,
pursuant to a merger, in exchange for a TDS tracking stock which follows the
performance of the Company. Earlier in 1998, the Company's Board of Directors
had appointed Mr. Paul-Henri Denuit, an independent Director of the Company, to
a special committee (the "Special Committee") of the Board of Directors to
consider this offer. Because the offer to acquire the Company's Common Shares
was withdrawn, the Special Committee was dissolved.
CELLULAR TELEPHONE OPERATIONS
THE CELLULAR TELEPHONE INDUSTRY. Cellular telephone technology provides
high-quality, high-capacity communications services to in-vehicle and hand-held
portable cellular telephones. Cellular technology is a major improvement over
earlier mobile telephone technologies. Cellular telephone systems are designed
for maximum mobility of the customer. Access is provided through system
interconnections to local, regional, national and world-wide telecommunications
networks. Cellular telephone systems also offer a full range of ancillary
services such as conference calling, call-waiting, call-forwarding, voice mail,
facsimile and data transmission.
Cellular telephone systems divide each service area into smaller geographic
areas or "cells." Each cell is served by radio transmitters and receivers
operating on discrete radio frequencies licensed by the FCC. All of the cells in
a system are connected to a computer-controlled Mobile Telephone Switching
Office ("MTSO"). The MTSO is connected to the conventional ("landline")
telephone network and potentially other MTSOs. Each conversation on a cellular
phone involves a transmission over a specific set of radio frequencies from the
cellular phone to a transmitter/receiver at a cell site. The transmission is
forwarded from the cell site to the MTSO and from there may be forwarded to the
landline telephone network to complete the call. As the cellular telephone moves
from one cell to another, the MTSO determines radio signal strength and
transfers ("hands off") the call from one cell to the next. This hand-off is not
noticeable to either party on the phone call.
The FCC currently grants only two licenses to provide cellular telephone
service in each market. However, competition for customers includes competing
communications technologies such as conventional landline and mobile telephone,
Specialized Mobile Radio ("SMR") systems, radio paging and PCS. PCS has become
available in many areas of the United States, including the Company's markets,
and the Company expects PCS operators to continue deployment of PCS in portions
of all of the Company's clusters through 1999. Additionally, technologies such
as Enhanced Specialized Mobile Radio ("ESMR") and mobile satellite communication
systems may prove to be competitive with cellular service in the future in some
or all of the Company's markets.
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers may be charged a separate
fee for system access, airtime, long-distance calls and ancillary services.
Cellular system operators often provide service to customers of other operators'
cellular systems while the customers are temporarily located within the
operators' service areas. Customers using service away from their home system
are called "roamers." Roaming is not limited to cellular customers and systems;
PCS customers and systems have this roaming capability as well. In all cases,
the system that provides the service to roamers will generate usage revenue.
Many operators, including the Company, charge premium rates for this roaming
service.
There have been a number of technical developments in the cellular industry
since its inception. Currently, while most companies' MTSOs process information
digitally, on certain cellular systems the radio transmission is done on an
analog basis. During 1992, a new transmission technique was approved for
implementation by the cellular industry. Time Division Multiple Access ("TDMA")
technology was selected as one industry standard by the cellular industry and
has been deployed in several markets, including the Company's operations in
portions of several clusters. Another digital technology, Code Division Multiple
Access ("CDMA"), is also being deployed by the Company in portions of several
clusters. Digital radio technology offers several advantages, including greater
privacy, less transmission noise, greater system capacity and potentially lower
5
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incremental costs to accomodate additional system usage. The conversion from
analog to digital radio technology is continuing on an industry-wide basis;
however, this process is expected to take a number of years. PCS operators have
deployed TDMA, CDMA and a third digital technology, Global System for Mobile
Communication ("GSM"), in the markets where they have begun operations.
The cellular telephone industry is characterized by high initial fixed
costs. Accordingly, if and when revenues less variable costs exceed fixed costs,
incremental revenues should yield an operating profit. The amount of profit, if
any, under such circumstances is dependent on, among other things, prices and
variable marketing costs which in turn are affected by the amount and extent of
competition. Until technological limitations on total capacity are approached,
additional cellular system capacity can normally be added in increments that
closely match demand and at less than the proportionate cost of the initial
capacity.
THE COMPANY'S OPERATIONS. From its inception in 1983 until 1993, the
Company was principally in a start-up phase. Until 1993, the Company's
activities had been concentrated significantly on the acquisition of interests
in cellular licensees and on the construction and initial operation of cellular
systems. The development of a cellular system is capital-intensive and requires
substantial investment prior to and subsequent to initial operation. The Company
experienced operating losses and net losses from its inception until 1993.
During the past five years, the Company generated operations-driven net income
and has significantly increased its operating cash flows during that time.
Management anticipates further growth in cellular units in service and revenues
as the Company continues to expand through internal growth. Marketing and system
operations expenses associated with this expansion may reduce the rate of growth
in operating cash flows and operating income during the period of additional
growth. In addition, the Company anticipates that the seasonality of revenue
streams and operating expenses may cause the Company's operating income to vary
from quarter to quarter.
While the Company produced operating income and net income during the last
five years, changes in any of several factors may reduce the Company's growth in
operating income and net income over the next few years. These factors include:
(i) the growth rate in the Company's customer base; (ii) the usage and pricing
of cellular services; (iii) the churn rate; (iv) the cost of providing cellular
services, including the cost of attracting new customers; (v) continued
competition from PCS and other technologies; and (vi) continuing technological
advances which may provide additional competitive alternatives to cellular
service.
The Company is building a substantial presence in selected geographic areas
throughout the United States where it can efficiently integrate and manage
cellular telephone systems. Its cellular interests include regional market
clusters in the following areas: Wisconsin/Illinois, Iowa/Missouri/
Illinois/Indiana, Eastern North Carolina/South Carolina, West
Virginia/Maryland/Pennsylvania/Ohio, Virginia/North Carolina,
Washington/Oregon/Idaho, Oregon/California, Maine/New Hampshire/ Vermont,
Florida/Georgia, Oklahoma/Missouri/Kansas, Texas/Oklahoma, Eastern
Tennessee/Western North Carolina and Southern Texas. See "The Company's Cellular
Interests." The Company has acquired its cellular interests through the wireline
application process (16%), including settlements and exchanges with other
applicants, and through acquisitions (84%), including acquisitions from TDS and
third parties.
CELLULAR SYSTEMS DEVELOPMENT
ACQUISITIONS, DIVESTITURES AND EXCHANGES. The Company assesses its cellular
holdings on an ongoing basis in order to maximize the benefits derived from
clustering its markets. As the Company's clusters have grown, its focus has
shifted toward exchanges and divestitures of managed and investment interests,
with outright acquisitions becoming a decreasing portion of the Company's
overall acquisition strategy. As a result, the Company has not substantially
increased its population equivalents during the past five years, but has shifted
the balance of its holdings between investment and operating interests so that
currently over 90% of the Company's interests are in markets where it is the
operator. This shift has resulted primarily because of the Company's
6
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recent focus on exchanges and divestitures of investment interests and the
acquisitions of interests in markets where it will become the operator.
The Company has only increased its population equivalents by 5% in the last
five years, from approximately 24.8 million at December 31, 1993, to
approximately 26.1 million at December 31, 1998. However, during that period the
Company has increased the percentage of those population equivalents which are
in markets the Company operates. As of December 31, 1998, 92% of the Company's
population equivalents represented interests in markets the Company operates
compared to 81% at December 31, 1993. Also, the number of markets operated by
the Company have increased to 145 markets at December 31, 1998 from 136 markets
at December 31, 1993.
Recently, the pace of acquisitions, exchanges and divestitures has slowed as
industry-wide consolidation has reduced the number of markets available for
acquisition. The Company may continue to make opportunistic acquisitions or
exchanges in markets that further strengthen its market clusters and in other
attractive markets. The Company also seeks to acquire minority interests in
markets where it already owns the majority interest and/or operates the market.
There can be no assurance that the Company, or TDS for the benefit of the
Company, will be able to negotiate additional acquisitions or exchanges on terms
acceptable to it or that regulatory approvals, where required, will be received.
The Company plans to retain minority interests in certain cellular markets which
it believes will earn a favorable return on investment. Other minority interests
may be exchanged for interests in markets which enhance the Company's market
clusters or may be sold for cash or other consideration. The Company also
continues to evaluate the disposition of certain managed interests which are not
essential to its corporate development strategy.
COMPLETED ACQUISITIONS. During 1998, the Company, or TDS for the benefit of
the Company, purchased majority interests in six markets and several additional
minority interests, representing approximately 1.3 million population
equivalents. The total consideration paid for these purchases, primarily in the
form of cash and USM Common Shares issued to TDS to reimburse TDS for the value
of TDS Common Shares issued to third parties, totaled $168.3 million.
COMPLETED DIVESTITURES. During 1998, the Company sold a majority interest
in one market and several minority interests, representing approximately 1.1
million population equivalents. In exchange, the Company received approximately
4.1 million shares of AirTouch Communications, Inc. ("AirTouch") stock and cash
totaling $148.4 million. Approximately $28.7 million of the total cash received
was pursuant to a contract right termination agreement entered into between the
Company and TDS. This agreement was related to two interests which were sold
directly by TDS to AirTouch and which were to be acquired by the Company as part
of a June 1996 agreement between the Company and TDS. The contract right
termination agreement enabled the Company to receive cash equal to the value of
the gain the Company would have realized had it purchased the interest from TDS
and sold them to AirTouch under terms similar to those in the agreement between
TDS and AirTouch.
PENDING ACQUISITIONS AND DIVESTITURE. As of December 31, 1998, the Company
had agreements pending to acquire minority interests in two markets in which it
currently owns majority interests, representing 74,000 population equivalents,
for $8.1 million in cash. Also at December 31, 1998, the Company had an
agreement pending to divest a majority interest in one market, representing
264,000 population equivalents, for $35.2 million in cash. The Company will not
record a gain or loss on the sale transaction. The Company expects all of the
pending transactions to be completed in the first half of 1999.
The Company maintains shelf registration of its Common Shares and Preferred
Stock under the Securities Act of 1933 for issuance specifically in connection
with acquisitions.
The Company is a majority-owned subsidiary of TDS. TDS owns 81.0% of the
combined total of the outstanding Common Shares and Series A Common Shares of
the Company and controls 95.7% of the combined voting power of both classes of
common stock.
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CELLULAR INTERESTS AND CLUSTERS
The Company operates clusters of adjacent cellular systems in nearly all of
its markets, enabling its customers to benefit from larger service areas than
otherwise possible. Where the Company offers wide-area coverage, its customers
enjoy uninterrupted service within the designated area. Customers may also make
outgoing calls and receive incoming calls within this area without special
roaming arrangements. In addition to benefits to customers, clustering also has
provided to the Company certain economies in its capital and operating costs.
These economies are made possible through increased sharing of facilities,
personnel and other costs and have resulted in a reduction of the Company's per
customer cost of service. The extent to which the Company benefits from these
revenue enhancements and economies of operation is dependent on market
conditions, population size of each cluster and engineering considerations.
The Company may continue to make opportunistic acquisitions and exchanges
which will complement its established market clusters. From time to time, the
Company may also consider exchanging or selling its interests in markets which
do not fit well with its long-term strategies.
The Company owned interests in cellular telephone systems in 183 markets at
December 31, 1998, representing 26.4 million population equivalents. Including
the minority interests to be purchased and the majority interest to be sold
during 1999, the Company owned or had the right to acquire 182 markets,
representing 26.2 million population equivalents, at December 31, 1998. The
following table summarizes the growth in the Company's population equivalents in
recent years and the development status of these population equivalents.
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DECEMBER 31,
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1998 1997 1996 1995 1994
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(THOUSANDS OF POPULATION EQUIVALENTS) (1)
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Operational Markets:
Majority-Owned and Managed........................................... 23,661 22,929 20,539 20,230 18,812
Minority-Owned and Managed (2)....................................... 354 401 401 512 1,213
Majority-Owned Markets to be Managed, Net of Markets to be Divested:
(2)(3)............................................................. -- -- 218 274 2,228
--------- --------- --------- --------- ---------
Total Markets Managed and to be Managed.............................. 24,015 23,330 21,158 21,016 22,253
Minority Interests in Markets Managed by Others........................ 2,150 2,143 4,569 4,070 3,821
--------- --------- --------- --------- ---------
Total................................................................ 26,165 25,473 25,727 25,086 26,074
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(1) Based on 1998 Claritas estimates for all years.
(2) Includes markets where the Company has the right to acquire an interest but
does not currently own an interest.
(3) Includes markets which are operational but which are currently managed by
third parties.
The following section details the Company's cellular interests, including
those it owned or had the right to acquire as of December 31, 1998. The table
presented therein lists clusters of markets that the Company manages. The
Company's market clusters show the areas in which the Company is currently
focusing its development efforts. These clusters have been devised with a
long-term goal of allowing delivery of cellular service to areas of economic
interest and along corridors of economic activity. The number of population
equivalents represented by the Company's cellular interests may have no direct
relationship to the number of potential cellular customers or the revenues that
may be realized from the operation of the related cellular systems.
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THE COMPANY'S CELLULAR INTERESTS
The table below sets forth certain information with respect to the interests
in cellular markets which the Company owned or had the right to acquire pursuant
to definitive agreements as of December 31, 1998.
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PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1998 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
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MARKETS MANAGED BY THE COMPANY:
MIDWEST REGIONAL MARKET CLUSTER:
WISCONSIN/ILLINOIS:
Milwaukee, WI........................................ 1,452,000 100.00% 100.00% 1,452,000
Columbia (WI 9)...................................... 387,000 100.00 100.00 387,000
Madison, WI.......................................... 399,000 92.50 92.50 369,000
Appleton-Oshkosh, WI................................. 345,000 100.00 100.00 345,000
Jo Daviess (IL 1).................................... 320,000 100.00 100.00 320,000
Rockford, IL......................................... 306,000 100.00 100.00 306,000
Wood (WI 7).......................................... 291,000 100.00 100.00 291,000
Vernon (WI 8)........................................ 237,000 100.00 100.00 237,000
Green Bay, WI........................................ 216,000 99.01 99.01 214,000
Racine, WI........................................... 185,000 89.82 89.82 167,000
Kenosha, WI.......................................... 144,000 99.32 99.32 143,000
Janesville-Beloit, WI................................ 152,000 92.43 92.43 141,000
Door (WI 10)......................................... 129,000 100.00 100.00 129,000
La Crosse, WI........................................ 103,000 95.11 95.11 98,000
Sheboygan, WI........................................ 111,000 86.76 86.76 96,000
Trempealeau (WI 6) (2)............................... 83,000 100.00 100.00 83,000
Pierce (WI 5) (2).................................... 14,000 100.00 100.00 14,000
--------------- ---------------
4,874,000 4,792,000
--------------- ---------------
IOWA/MISSOURI/ILLINOIS/INDIANA:
Des Moines, IA....................................... 434,000 100.00 100.00 434,000
Davenport, IA-IL..................................... 357,000 97.37 97.37 348,000
Peoria, IL........................................... 347,000 100.00 100.00 347,000
Adams (IL 4) * (2)................................... 214,000 100.00 100.00 214,000
Mercer (IL 3)........................................ 202,000 100.00 100.00 202,000
Humboldt (IA 10)..................................... 180,000 100.00 100.00 180,000
Cedar Rapids, IA..................................... 181,000 96.00 96.00 174,000
Iowa (IA 6).......................................... 156,000 100.00 100.00 156,000
Muscatine (IA 4)..................................... 154,000 100.00 100.00 154,000
Moniteau (MO 11)..................................... 151,000 100.00 100.00 151,000
Waterloo-Cedar Falls, IA............................. 145,000 93.03 93.03 135,000
Columbia, MO *....................................... 130,000 100.00 100.00 130,000
Stone (MO 15)........................................ 122,000 100.00 100.00 122,000
Hardin (IA 11)....................................... 113,000 100.00 100.00 113,000
Jackson (IA 5)....................................... 108,000 100.00 100.00 108,000
Kossuth (IA 14)...................................... 107,000 100.00 100.00 107,000
Lyon (IA 16)......................................... 103,000 100.00 100.00 103,000
Iowa City, IA........................................ 102,000 100.00 100.00 102,000
Laclede (MO 16)...................................... 102,000 100.00 100.00 102,000
Washington (MO 13)................................... 95,000 100.00 100.00 95,000
Callaway (MO 6) *.................................... 85,000 100.00 100.00 85,000
Dubuque, IA.......................................... 88,000 95.51 95.51 84,000
Mitchell (IA 13)..................................... 66,000 100.00 100.00 66,000
Mills (IA 1)......................................... 62,000 100.00 100.00 62,000
Schuyler (MO 3)...................................... 56,000 100.00 100.00 56,000
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1998 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- ------------------------------------------------------ --------------- ----------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Shannon (MO 17)...................................... 56,000 100.00% 100.00% 56,000
Audubon (IA 7)....................................... 55,000 100.00 100.00 55,000
Linn (MO 5) (2)...................................... 54,000 100.00 100.00 54,000
Miami (IN 4) *....................................... 178,000 28.57 28.57 51,000
Union (IA 2)......................................... 50,000 100.00 100.00 50,000
Monroe (IA 3)........................................ 90,000 49.00 49.00 44,000
Warren (IN 5) *...................................... 124,000 33.33 33.33 41,000
Winneshiek (IA 12)................................... 115,000 24.50 24.50 28,000
Alton, IL *.......................................... 21,000 100.00 100.00 21,000
Ida (IA 9) *......................................... 63,000 16.67 16.67 10,000
--------------- ---------------
4,666,000 4,240,000
--------------- ---------------
TOTAL MIDWEST REGIONAL MARKET CLUSTER................ 9,540,000 9,032,000
--------------- ---------------
--------------- ---------------
MID-ATLANTIC REGIONAL MARKET CLUSTER:
EASTERN NORTH CAROLINA/SOUTH CAROLINA:
Harnett (NC 10)...................................... 299,000 100.00 100.00 299,000
Northampton (NC 8)................................... 294,000 100.00 100.00 294,000
Rockingham (NC 7).................................... 293,000 100.00 100.00 293,000
Greene (NC 13)....................................... 248,000 100.00 100.00 248,000
Greenville (NC 14)................................... 244,000 100.00 100.00 244,000
Hoke (NC 11)......................................... 228,000 100.00 100.00 228,000
Chesterfield (SC 4).................................. 215,000 100.00 100.00 215,000
Wilmington, NC....................................... 217,000 96.51 96.51 209,000
Jacksonville, NC..................................... 145,000 96.48 96.48 139,000
Chatham (NC 6)....................................... 165,000 81.20 81.20 134,000
Sampson (NC 12)...................................... 134,000 100.00 100.00 134,000
Camden (NC 9)........................................ 120,000 100.00 100.00 120,000
--------------- ---------------
2,602,000 2,557,000
--------------- ---------------
WEST VIRGINIA/MARYLAND/PENNSYLVANIA/ OHIO:
Monongalia (WV 3) *.................................. 267,000 100.00 100.00 267,000
Raleigh (WV 7) *..................................... 253,000 100.00 100.00 253,000
Grant (WV 4) *....................................... 172,000 100.00 100.00 172,000
Tucker (WV 5) *...................................... 131,000 100.00 100.00 131,000
Hagerstown, MD *..................................... 128,000 100.00 100.00 128,000
Ross (OH 9) *........................................ 250,000 49.00 49.00 122,000
Cumberland, MD-WV *.................................. 100,000 100.00 100.00 100,000
Bedford (PA 10) * (2)................................ 49,000 100.00 100.00 49,000
Garrett (MD 1) *..................................... 29,000 100.00 100.00 29,000
--------------- ---------------
1,379,000 1,251,000
--------------- ---------------
VIRGINIA/NORTH CAROLINA:
Roanoke, VA.......................................... 234,000 100.00 100.00 234,000
Giles (VA 3)......................................... 202,000 100.00 100.00 202,000
Bedford (VA 4)....................................... 177,000 100.00 100.00 177,000
Ashe (NC 3).......................................... 163,000 100.00 100.00 163,000
Lynchburg, VA........................................ 160,000 100.00 100.00 160,000
Charlottesville, VA.................................. 148,000 95.37 95.37 141,000
Buckingham (VA 7).................................... 92,000 100.00 100.00 92,000
Tazewell (VA 2) (2).................................. 83,000 100.00 100.00 83,000
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1998 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- ------------------------------------------------------ --------------- ----------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Bath (VA 5).......................................... 61,000 100.00% 100.00% 61,000
--------------- ---------------
1,320,000 1,313,000
--------------- ---------------
TOTAL MID-ATLANTIC REGIONAL MARKET CLUSTER........... 5,301,000 5,121,000
--------------- ---------------
--------------- ---------------
NORTHWEST REGIONAL MARKET CLUSTER:
WASHINGTON/OREGON/IDAHO:
Clark (ID 6)......................................... 295,000 100.00 100.00 295,000
Yakima, WA *......................................... 222,000 58.54 29.27% 87.81 195,000
Richland-Kennewick-Pasco, WA *....................... 187,000 100.00 100.00 187,000
Pacific (WA 6) *..................................... 186,000 100.00 100.00 186,000
Butte (ID 5) (3)..................................... 168,000 100.00 100.00 168,000
Okanogan (WA 4)...................................... 120,000 100.00 100.00 120,000
Umatilla (OR 3) *.................................... 152,000 76.39 76.39 116,000
Kittitas (WA 5) * (2)................................ 72,000 85.20 13.02 98.22 71,000
Hood River (OR 2) *.................................. 75,000 65.55 65.55 49,000
Skamania (WA 7) *.................................... 29,000 65.55 65.55 19,000
--------------- ---------------
1,506,000 1,406,000
--------------- ---------------
OREGON/CALIFORNIA:
Coos (OR 5).......................................... 261,000 100.00 100.00 261,000
Del Norte (CA 1)..................................... 209,000 100.00 100.00 209,000
Crook (OR 6) *....................................... 199,000 100.00 100.00 199,000
Medford, OR *........................................ 174,000 100.00 100.00 174,000
Mendocino (CA 9)..................................... 140,000 100.00 100.00 140,000
Modoc (CA 2)......................................... 63,000 100.00 100.00 63,000
--------------- ---------------
1,046,000 1,046,000
--------------- ---------------
TOTAL NORTHWEST REGIONAL MARKET CLUSTER.............. 2,552,000 2,452,000
--------------- ---------------
--------------- ---------------
MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER:
Manchester-Nashua, NH................................ 360,000 92.70 92.70 334,000
Coos (NH 1) *........................................ 225,000 100.00 100.00 225,000
Kennebec (ME 3)...................................... 221,000 100.00 100.00 221,000
Carroll (NH 2)....................................... 218,000 100.00 100.00 218,000
Somerset (ME 2)...................................... 146,000 100.00 100.00 146,000
Bangor, ME........................................... 144,000 91.88 91.88 132,000
Addison (VT 2) * (2)................................. 107,000 100.00 100.00 107,000
Washington (ME 4) *.................................. 86,000 100.00 100.00 86,000
Lewiston-Auburn, ME.................................. 100,000 83.63 83.63 84,000
Oxford (ME 1)........................................ 83,000 100.00 100.00 83,000
--------------- ---------------
TOTAL MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER..... 1,690,000 1,636,000
--------------- ---------------
--------------- ---------------
FLORIDA/GEORGIA MARKET CLUSTER:
Fort Pierce, FL *.................................... 297,000 100.00 100.00 297,000
Tallahassee, FL...................................... 285,000 100.00 100.00 285,000
Worth (GA 14)........................................ 256,000 100.00 100.00 256,000
Gainesville, FL...................................... 225,000 100.00 100.00 225,000
Toombs (GA 11)....................................... 156,000 100.00 100.00 156,000
Walton (FL 10)....................................... 121,000 100.00 100.00 121,000
Putnam (FL 5) (2).................................... 71,000 100.00 100.00 71,000
Dixie (FL 6)......................................... 58,000 100.00 100.00 58,000
Jefferson (FL 8) (2)................................. 50,000 100.00 100.00 50,000
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1998 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- ------------------------------------------------------ --------------- ----------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Calhoun (FL 9)....................................... 43,000 100.00% 100.00% 43,000
--------------- ---------------
TOTAL FLORIDA/GEORGIA MARKET CLUSTER................. 1,562,000 1,562,000
--------------- ---------------
--------------- ---------------
TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET
CLUSTER:
OKLAHOMA/MISSOURI/KANSAS:
Tulsa, OK *.......................................... 804,000 55.06 55.06 442,000
Joplin, MO *......................................... 149,000 100.00 100.00 149,000
Seminole (OK 6)...................................... 219,000 55.06 55.06 120,000
Elk (KS 15) *........................................ 154,000 75.00 75.00 115,000
Nowata (OK 4) * (2).................................. 102,000 55.06 55.06 56,000
--------------- ---------------
1,428,000 882,000
--------------- ---------------
TEXAS/OKLAHOMA:
Garvin (OK 9)........................................ 204,000 100.00 100.00 204,000
Wichita Falls, TX *.................................. 140,000 70.45 70.45 99,000
Haskell (OK 10)...................................... 84,000 100.00 100.00 84,000
Lawton, OK *......................................... 110,000 70.45 70.45 78,000
Jackson (OK 8) *..................................... 97,000 70.45 70.45 68,000
Hardeman (TX 5) * (2)................................ 37,000 70.45 70.45 26,000
Briscoe (TX 4) * (2)................................. 12,000 70.45 70.45 9,000
Beckham (OK 7) * (2)................................. 10,000 70.45 70.45 7,000
--------------- ---------------
694,000 575,000
--------------- ---------------
TOTAL TEXAS/OKLAHOMA/MISSOURI/ KANSAS REGIONAL MARKET
CLUSTER............................................ 2,122,000 1,457,000
--------------- ---------------
--------------- ---------------
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET
CLUSTER:
Knoxville, TN *...................................... 560,000 96.03 96.03 538,000
Asheville, NC *...................................... 214,000 100.00 100.00 214,000
Henderson (NC 4) * (2)............................... 196,000 100.00 100.00 196,000
Bledsoe (TN 7) * (2)................................. 152,000 96.03 96.03 146,000
Hamblen (TN 4) * (2)................................. 136,000 100.00 100.00 136,000
Macon (TN 3) *....................................... 347,000 16.67 16.67 58,000
Yancey (NC 2) * (2).................................. 31,000 100.00 100.00 31,000
--------------- ---------------
TOTAL EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET
CLUSTER............................................. 1,636,000 1,319,000
--------------- ---------------
--------------- ---------------
SOUTHERN TEXAS MARKET CLUSTER:
Corpus Christi, TX................................... 392,000 100.00 100.00 392,000
Atascosa (TX 19) (3)................................. 266,000 100.00 100.00 266,000
Edwards (TX 18)...................................... 227,000 100.00 100.00 227,000
Laredo, TX........................................... 188,000 93.74 93.74 177,000
Wilson (TX 20)....................................... 150,000 100.00 100.00 150,000
Victoria, TX......................................... 83,000 100.00 100.00 83,000
--------------- ---------------
TOTAL SOUTHERN TEXAS MARKET CLUSTER.................. 1,306,000 1,295,000
--------------- ---------------
--------------- ---------------
OTHER OPERATIONS:
Hawaii (HI 3)........................................ 141,000 100.00 100.00 141,000
--------------- ---------------
Total Managed Markets............................. 25,850,000 24,015,000
--------------- ---------------
--------------- ---------------
MARKETS MANAGED BY OTHERS:
Los Angeles/Oxnard, CA *............................. 15,795,000 5.50 5.50 869,000
Jefferson (NY 1) *................................... 255,000 60.00 60.00 153,000
Oklahoma City, OK *.................................. 1,010,000 14.60 14.60 147,000
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1998 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS(1) TOTAL EQUIVALENTS
- ------------------------------------------------------ --------------- ----------- -------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
McAllen, TX.......................................... 526,000 26.20% 26.20% 138,000
Portsmouth-Dover-Rochester, NH-ME *.................. 282,000 40.00 40.00 113,000
Others (Fewer than 100,000 population equivalents
each)............................................... 730,000
---------------
Total Population Equivalents of Markets Managed by
Others.......................................... 2,150,000
---------------
Total Population Equivalents...................... 26,165,000
---------------
---------------
</TABLE>
- ---------
* Designates wireline market.
(1) Interests under these agreements are expected to be acquired at the time
specified in the agreements, following the satisfaction of customary closing
conditions.
(2) These markets have been partitioned into more than one licensed area. The
1998 population, percentage ownership and number of population equivalents
shown are for the licensed areas within the markets in which the Company
owns an interest.
(3) These markets include territory and population equivalents of fill-in areas
which were annexed from adjacent MSAs or RSAs.
13
<PAGE>
SYSTEM DESIGN AND CONSTRUCTION. The Company designs and constructs its
systems in a manner it believes will permit it to provide high-quality service
to mobile, transportable and portable cellular telephones, based on market and
engineering studies which relate to specific markets. Engineering studies are
performed by Company personnel or independent engineering firms. The Company's
switching equipment is digital, which reduces noise and crosstalk and is capable
of interconnecting in a manner which reduces costs of operation. While digital
microwave interconnections are typically made between the MTSO and cell sites,
both analog and digital radio transmissions are made between cell sites and the
cellular telephones themselves. Network reliability is given careful
consideration and extensive redundancy is employed in virtually all aspects of
the Company's network design. Route diversity, ring topology and extensive use
of emergency standby power are also utilized to enhance network reliability and
minimize service disruption from any particular network failure.
In accordance with its strategy of building and strengthening market
clusters, the Company has selected high capacity digital cellular switching
systems that are capable of serving multiple markets through a single MTSO. The
Company's cellular systems are designed to facilitate the installation of
equipment which will permit microwave interconnection between the MTSO and the
cell site. The Company has implemented such microwave interconnection in most of
the cellular systems it manages. In other systems in which the Company owns a
majority interest and where it is believed to be cost-efficient, such microwave
technology will also be implemented. Otherwise, such systems will rely upon
landline telephone connections to link cell sites with the MTSO. Although the
installation of microwave network interconnection equipment requires a greater
initial capital investment, a microwave network enables a system operator to
avoid the current and future charges associated with leasing telephone lines
from the landline telephone company, while generally improving system
reliability. In addition, microwave facilities can be used to connect separate
cellular systems to allow shared switching, which reduces the aggregate cost of
the equipment necessary to operate multiple systems. Microwave facilities can
also be used to carry long-distance calls, which reduces the costs of
interconnecting to the landline network.
The Company has continued to expand its Wide Area Network to accomodate
various business functions, including: automatic call delivery, intersystem
handoff, credit validation, fraud prevention, network management, long-distance
traffic, SS7 signaling and virtually all internal data communications between
various Company office locations and a significant number of the Company's
retail locations.
Management believes that currently available technologies will allow
sufficient capacity on the Company's networks to meet anticipated demand over
the next few years.
COSTS OF SYSTEM CONSTRUCTION AND FINANCING
Construction of cellular systems is capital-intensive, requiring substantial
investment for land and improvements, buildings, towers, MTSOs, cell site
equipment, microwave equipment, engineering and installation. The Company,
consistent with FCC control requirements, uses primarily its own personnel to
engineer and oversee construction of each cellular system it owns and operates.
In so doing, the Company expects to improve the overall quality of its systems
and to reduce the expense and time required to make them operational.
The costs (exclusive of license costs) of the systems in which the Company
owns an interest have historically been financed through capital contributions
or intercompany loans from the Company to the entities owning the systems, and
through certain vendor financing. In recent years, these funding requirements
have been met with cash generated from operations, proceeds from debt and equity
offerings and proceeds from the sales of cellular interests.
MARKETING
The Company's marketing plan is centered around rapid penetration of its
market clusters, increasing customer awareness of cellular service and reducing
churn through both the building of brand awareness and the implementation of
marketing programs. The marketing plan stresses the value of the Company's
service offerings and incorporates combinations of rate plans and cellular
14
<PAGE>
telephone equipment which are designed to meet the needs of a variety of
customer segments and their usage patterns. The Company's distribution channels
include direct sales personnel, agents and retail service centers in the vast
majority of its markets.
Company-owned and managed locations are designed to market cellular service
to the consumer segment in a familiar setting. In late 1997, the Company
expanded its e-commerce site to offer three rate plans across the country aimed
at each of the Company's three major segments. Sales are relatively light at
this time, but the Company anticipates that as customers become more comfortable
with on-line purchasing, the Internet will become more of a robust marketing
channel.
The Company manages each cluster of markets with a local staff, including
sales, customer service, engineering and in some cases installation personnel.
Direct sales consultants market cellular service to business customers
throughout each cluster. Retail associates work out of the retail locations and
market cellular service primarily to the consumer and small business segment.
The Company maintains an ongoing training program to improve the effectiveness
of sales consultants and retail associates by focusing their efforts on
obtaining customers and maximizing the sale of high-user packages. These
packages provide for customers to obtain a minimum amount of usage at discounted
rates per minute, at fixed prices which are charged even if usage falls below a
defined monthly minimum amount.
The Company continues to expand its relationships with agents, dealers and
non-Company retailers to obtain customers. Agents and dealers are independent
business people who obtain customers for the Company on a commission basis. The
Company's agents are generally in the business of selling cellular telephones,
cellular service packages and other related products. The Company's dealers
include car stereo companies and other companies whose customers are also
potential cellular customers. The non-Company retailers include car dealers,
major appliance dealers, office supply dealers and mass merchants.
The Company opened its first retail locations in late 1993, expanding to
over 280 stand-alone retail stores by the end of 1998. These Company-owned and
operated businesses utilize rental facilities in high-traffic areas, primarily
in strip malls. The Company has implemented a uniform appearance in these
stores, with all having similar displays and layouts. The retail centers' hours
of business match those of the retail trade in the local marketplace, often
staying open on weekends and later in the evening than a typical business
supplier. To fully serve customer needs, these stores sell accessories to
complement the phones and services the Company has traditionally provided.
During 1998, the Company further expanded its retail presence by opening smaller
retail kiosks within other larger merchandisers, called "stores within a store,"
and had several of these locations in place at year-end. Additionally, the
Company operates small kiosks within stores such as Wal-Mart and staffs those
kiosks with Company personnel. At December 31, 1998, the Company managed nearly
170 of these kiosks.
The Company actively pursues national retail accounts, as agents of the
Company, which yield new customer additions in multiple markets. Agreements have
been entered into with such national distributors as Ford Motor Company, General
Motors, Radio Shack, Best Buy, Circuit City, Staples, Office Depot, Sears, TDS
Telecom, TSR Wireless and Onstar in certain of the Company's markets. Upon the
sale of a cellular telephone by one of these national distributors, the Company
receives, often exclusively within the territories served, the resulting
cellular customer. The Company created a new class of agent during 1998, the
Value Added Distributor agent channel. This channel's initial focus was on the
sale of the Company's prepaid service product, TalkTracker, to selected market
segments, and complements the Company's own distribution channels.
The Company uses a variety of direct mail, billboard, radio, television and
newspaper advertising to stimulate interest by prospective customers in
purchasing the Company's cellular service and to establish familiarity with the
Company's name. In 1998, the Company increased its focus on brand advertising,
including the addition of several new television commercials, using the tag line
"The Way People Talk Around Here"(SM) to promote the United States
Cellular-Registered Trademark- brand. Additionally, the Company began actively
advertising its digital service offerings through both television and radio
advertising during the year. Advertising is directed at gaining customers,
improving customers' awareness of the United States
Cellular-Registered Trademark- brand, increasing existing
15
<PAGE>
customers' usage and increasing the public awareness and understanding of the
cellular services offered by the Company. The Company attempts to select the
advertising and promotion media that are most appealing to the targeted groups
of potential customers in each local market. The Company utilizes local
advertising media and public relations activities and establishes programs such
as its CommunityCare programs to enhance public awareness of the Company. These
programs are aimed at supporting the communities in which the Company serves.
The programs range from loaning phones to support public service operations in
emergencies to assisting victims of domestic abuse.
The following table summarizes, by operating cluster, the total population,
the Company's customer units and penetration for the Company's majority-owned
and managed markets that were operational as of December 31, 1998.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
- ----------------------------------------------------------------------- ------------- ----------- -------------
<S> <C> <C> <C>
Wisconsin/Illinois..................................................... 4,874,000 498,000 10.22%
Iowa/Missouri/Illinois/Indiana......................................... 4,096,000 426,000 10.40
Eastern North Carolina/South Carolina.................................. 2,602,000 168,000 6.46
West Virginia/Maryland/Pennsylvania/Ohio............................... 1,129,000 90,000 7.97
Virginia/North Carolina................................................ 1,320,000 107,000 8.11
Washington/Oregon/Idaho................................................ 1,506,000 124,000 8.23
Oregon/California...................................................... 1,046,000 86,000 8.22
Maine/New Hampshire/Vermont............................................ 1,690,000 129,000 7.63
Florida/Georgia........................................................ 1,562,000 136,000 8.71
Oklahoma/Missouri/Kansas............................................... 1,428,000 133,000 9.31
Texas/Oklahoma......................................................... 694,000 59,000 8.50
Eastern Tennessee/Western North Carolina............................... 1,289,000 137,000 10.63
Southern Texas......................................................... 1,306,000 70,000 5.36
Other Operations....................................................... 141,000 20,000 14.18
------------- ----------- -----
24,683,000 2,183,000 8.84%
------------- ----------- -----
------------- ----------- -----
</TABLE>
CUSTOMERS AND SYSTEM USAGE
Cellular customers come from a wide range of demographic segments. Business
users typically include a large proportion of individuals who work outside of
their offices such as people in the construction, real estate, wholesale and
retail distribution businesses and professionals. Increasingly, the Company is
providing cellular service to consumers and to customers who use their cellular
telephones for mixed business and personal use as well as for security purposes.
A major portion of the Company's recent customer growth is from these lower
revenue segments. Although some of the Company's customers still use in-vehicle
cellular telephones, most new customers are selecting portable cellular
telephones. These units have become more compact and fully featured as well as
more attractively priced, and they appeal to newer segments of the customer
population.
The Company's cellular systems are used most extensively during normal
business hours between 7:00 AM and 6:00 PM. On average, the local retail
customers in the Company's consolidated markets used their cellular systems
approximately 105 minutes per unit each month and generated retail revenue of
approximately $33 per month during 1998, compared to 103 minutes and $36 per
month in 1997. Revenue generated by roamers using the Company's systems
("inbound roaming"), together with local retail, toll and other revenues,
brought the Company's total average monthly service revenue per customer unit in
consolidated markets to $49 during 1998. Average monthly service revenue per
customer unit decreased approximately 10% during 1998. This decrease resulted
from decreases in average revenue per minute of use from both local retail
customers and inbound roamers. Competitive pressures and the Company's
increasing use of pricing and other incentive programs that encourage weekend
and off-peak usage at reduced rates, in order to stimulate overall usage,
resulted in a decrease in average local retail revenue per minute of use in
1998. Although the introduction of "one rate" pricing plans by other wireless
companies has helped increase inbound roaming minutes of use on the Company's
systems during 1998,
16
<PAGE>
inbound roaming revenue per minute decreased during the year. The decrease is
partially a result of the ongoing trend toward reduced per minute prices for
roaming negotiated between the Company and other cellular operators and also due
to the additional minutes generated by customers with "one rate" pricing plans,
which are at lower than average rates. The Company anticipates that average
monthly service revenue per customer unit will continue to decline in the
future. However, this effect is more than offset by the Company's increasing
number of customers; therefore, the Company expects total revenues to continue
to grow for the next few years.
The Company's main sources of revenue are from its own customers and from
inbound roaming customers. The Company's roaming service allows a customer to
place or receive a call in a cellular service area away from the customer's home
service area. The Company has entered into "roaming agreements" with operators
of other cellular systems covering virtually all systems in the United States,
Canada and Mexico. The Company also has roaming agreements with several PCS
operators. The charge for this service is typically at premium rates and is
billed by the Company to the customer's home system, which then bills the
customer. The Company has entered into agreements with other cellular carriers
to transfer roaming usage at agreed-upon rates. In some instances, based on
competitive factors, the Company may charge a lower amount to its customers than
the amount actually charged to the Company by another cellular carrier for
roaming.
The following table summarizes certain information about customers and
market penetration in the Company's consolidated operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
-----------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation (1).............. 138 134 131 137 130
Total population of markets in service
(000s)....................................... 24,683 24,034 21,712 22,309 21,314
Customer Units: (2)
at beginning of period....................... 1,710,000 1,073,000 710,000 421,000 261,000
additions during period...................... 915,000 941,000 561,000 426,000 250,000
disconnects during period.................... 442,000 304,000 198,000 137,000 90,000
at end of period............................. 2,183,000 1,710,000 1,073,000 710,000 421,000
Market penetration at end of period (3)........ 8.84% 7.11% 4.94% 3.18% 1.98%
</TABLE>
- ---------
(1) Represents the number of markets in which the Company owned at least a 50%
interest and which it managed. The revenues and expenses of these cellular
markets are included in the Company's consolidated revenues and expenses.
(2) Represents the approximate number of revenue-generating cellular telephones
served by the cellular markets referred to in footnote (1). The revenue
generated by such cellular telephones is included in consolidated revenues.
(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Claritas
(1997-1998) or Donnelley Marketing Service (1994-1996) for the respective
years.
PRODUCTS AND SERVICES
CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types
of cellular telephones, all of which are currently compatible with cellular
systems nationwide. The Company offers a full range of vehicle-mounted,
transportable and portable cellular telephones. Features offered in some of the
cellular telephones include hands-free calling, repeat dialing, horn alert and
others. In the systems where the Company offers digital service, additional
features such as caller ID and short messaging services are available on those
cellular telephones.
The Company negotiates volume discounts from its cellular telephone
suppliers. The Company discounts cellular telephones to meet competition or to
stimulate sales by reducing the cost of becoming a cellular customer. In these
instances, where permitted by law, customers are generally required to sign a
service contract with the Company. The Company also cooperates with cellular
equipment manufacturers in local advertising and promotion of cellular
equipment.
17
<PAGE>
The Company has established service and/or installation facilities in many
of its local markets to ensure quality installation and service of the cellular
telephones it sells. These facilities allow the Company to improve its service
by promptly assisting customers who experience equipment problems. Additionally,
the Company maintains a repair facility in Tulsa, Oklahoma, which handles more
complex service and repair issues.
CELLULAR SERVICES. The Company's customers are able to choose from a
variety of packaged pricing plans which are designed to fit different calling
patterns. The ability to help a customer find the right technology and the right
pricing plan is central to the Company's brand positioning. During 1998, the
Company focused its efforts on new products with the continued introduction of
its digital service offering, called Digital PCS, and its prepaid offering,
TalkTracker-Registered Trademark-. Both offerings were very successful, as many
higher revenue customers purchased the Company's digital offering and new market
segments such as individuals with credit difficulties were able to purchase
cellular service through the Company's prepaid offering. The Company's customer
bills typically show separate charges for custom-calling features, airtime in
excess of the packaged amount, and toll calls. Custom-calling features provided
by the Company include wide-area call delivery, call forwarding, call waiting,
three-way calling and no-answer transfer. The Company also offers a voice
message service in many of its markets. This service, which functions like a
sophisticated answering machine, allows customers to receive messages from
callers when they are not available to take calls. Additional services, such as
short messaging service, are available in the Company's markets where digital
service is offered.
REGULATION
REGULATORY ENVIRONMENT. The operations of the Company are subject to FCC
and state regulation. The cellular telephone licenses held by USM are granted by
the FCC for the use of radio frequencies and are an important component of the
overall value of the assets of the Company. The construction, operation and
transfer of cellular systems in the United States are regulated to varying
degrees by the FCC pursuant to the Communications Act of 1934 (the
"Communications Act"). In 1996, Congress enacted the Telecommunications Act of
1996 (the "1996 Act"), which amended the Communications Act. The 1996 Act
mandates significant changes in existing telecommunications rules and policies
to promote competition, ensure the availability of telecommunications services
to all parts of the nation and to streamline regulation of the
telecommunications industry to remove regulatory burdens, as competition
develops. The FCC has promulgated regulations governing construction and
operation of cellular systems, licensing (including renewal of licenses) and
technical standards for the provision of cellular telephone service under the
Communications Act, and is implementing the legislative objectives of the 1996
Act, as discussed below.
LICENSING. For cellular telephone licensing purposes, the FCC has divided
the United States into separate geographic markets (MSAs and RSAs). In each
market, the allocated cellular frequencies are divided into two equal blocks.
During the application process, the FCC reserved one block of frequencies for
non-wireline applicants and another block for wireline applicants. Subject to
FCC approval, a cellular system may be sold to either a wireline or non-wireline
entity, but no entity which controls a cellular system may own an interest in
another cellular system in the same MSA or RSA.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval. Acquisitions of minority interests
generally do not require FCC approval. Whenever FCC approval is required, any
interested party may file a petition to dismiss or deny the application for
approval of the proposed transfer.
The FCC must be notified each time an additional cell is constructed which
enlarges the service area of a given market. The FCC's rules also generally
require persons or entities holding cellular construction permits or licenses to
coordinate their proposed frequency usage with neighboring cellular licensees in
order to avoid electrical interference between adjacent systems. The height and
power of base stations in the cellular system are regulated by FCC rules, as are
the types of signals emitted by these stations. In addition to regulation by the
FCC, cellular systems are
18
<PAGE>
subject to certain Federal Aviation Administration ("FAA") regulations with
respect to the siting and construction of cellular transmitter towers and
antennas as well as local zoning requirements.
Beginning in 1996, the FCC has also imposed a requirement that all licensees
register and obtain FCC registration numbers for all of their antenna towers
which require prior FAA clearance. All new towers must be registered at the time
of construction and existing towers were required to be registered on a
staggered state-by-state basis by May 1998. USM has completed the registration
of its existing towers.
Beginning in October 1997, cellular systems, which previously were
"categorically excluded" from having to evaluate their facilities to ensure
their compliance with federal "radio frequency" (RF) radiation requirements,
were made subject to those requirements (all cellular towers of less than 10
meters in height, building-mounted antennae and cellular telephones must comply
with RF radiation guidelines). After October 1997, all new cellular facilities
must be in compliance when they are brought into service. Existing facilities
must be brought into compliance with the requirements when their licenses are
renewed. USM believes that the great majority of its existing facilities already
comply with the requirements, that the remainder will be brought into compliance
as required and that the cellular telephones it sells comply with the standards.
Initial cellular telephone licenses were granted tor ten-year periods. The
FCC has established standards for conducting comparative renewal proceedings
between a cellular licensee seeking renewal of its license and challengers
filing competing applications. The FCC has: (i) established criteria for
comparing the renewal applicant to challengers, including the standards under
which a renewal expectancy will be granted to the applicant seeking license
renewal; (ii) established basic qualifications standards for challengers; and
(iii) provided procedures for preventing possible abuses in the comparative
renewal process. The FCC has concluded that it will award a renewal expectancy
if the licensee has (i) provided "substantial" performance, which is defined as
"sound, favorable and substantially above a level of mediocre service just
minimally justifying renewal," and (ii) complied with FCC rules, policies and
the Communications Act. If a renewal expectancy is awarded to an existing
licensee, its license is renewed and competing applications are not considered.
All of USM's licenses which it applied to have renewed in 1995, 1996, 1997 and
1998 were renewed.
USM conducts and plans to conduct its operations in accordance with all
relevant FCC rules and regulations and anticipates being able to qualify for a
renewal expectancy in its upcoming renewal filings. Accordingly, USM believes
that current regulations will have no significant effect on its operations and
financial condition. However, changes in the regulation of cellular operators or
their activities and of other mobile service providers could have a material
adverse effect on USM's operations.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and non-wireline entities and by third parties.
Accordingly, many unserved area applications have been filed by USM and others
and have generally been routinely granted. USM's strategy with respect to system
construction in its markets has been to build cells covering areas within such
markets that USM considers economically feasible to serve or might conceivably
wish to serve and to do so within the five-year period following issuance of the
license. In cases where applications for unserved areas are filed which are
mutually exclusive and would result in overlapping service areas, the FCC
decides between the competing applicants by an auction process.
Pursuant to 1993 amendments to the Communications Act, cellular service is
classified as a Commercial Mobile Radio Service ("CMRS"), in that it is service
offered to the public, for a fee, which is interconnected to the public switched
telephone network. The FCC has determined that it will forebear from requiring
CMRS carriers to comply with a number of statutory provisions otherwise
applicable to common carriers, such as the filing of tariffs.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC which are of particular importance to the cellular industry. In
one proceeding, the FCC has imposed new "enhanced 911" regulations on cellular
carriers. Enhanced 911 capabilities would enable
19
<PAGE>
cellular systems to determine the precise location of persons making emergency
calls. The new rules will require cellular carriers to work with local public
safety officials to process 911 calls, including those made from mobile
telephones not registered with the cellular system. Since April 1998, cellular
carriers have had to be able to identify the cell from which the call has been
made. The rules will require cellular systems to improve their ability to locate
wireless 911 callers by 2001.
The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the roaming subscribers of broadband PCS providers, among
others, even though the subscribers involved have no pre-existing service
relationship with that carrier. Under these new policies, broadband PCS
providers may offer their subscribers handsets which are capable of operating
over broadband PCS and cellular networks so that when their subscribers are out
of range of broadband PCS networks, they will be able to obtain non-automatic
access to cellular networks. The FCC expects that implementation of these
roaming capabilities will promote competition between broadband PCS and cellular
service providers.
The FCC has adopted requirements which will make it possible for subscribers
to retain, subject to certain geographic and other limitations, their existing
telephone numbers when they switch from one service provider to another. This
numbering portability will include switching between Local Exchange Carriers
("LECs") and other wireline providers, between wireless service providers and
between LEC/wireline and wireless providers. LECs, in the 100 largest MSAs, have
implementation deadlines by the end of 1998 at those switches which received
specific requests for numbering portability. The FCC recently extended the
compliance date for cellular, broadband PCS and certain other wireless providers
to November 2002.
In another proceeding, the FCC in 1996 adopted rules regarding the method by
which cellular carriers and LECs shall compensate each other for interconnecting
cellular and local exchange facilities. The FCC rules provided for symmetrical
and reciprocal compensation between LECs and cellular carriers, and also
prescribed interim interconnection proxy rates, which are much lower than the
rates formerly paid by cellular carriers to LECs. Symmetrical and reciprocal
compensation means they must pay each other at the same rate. Interconnection
rate issues will be decided by the states. Cellular carriers are now paying and
in the future can be expected to pay lower rates to LECs than they previously
paid. This result is expected to be favorable to the wireless industry and
somewhat unfavorable to LECs.
The FCC is also proceeding to implement other parts of the 1996 Act. The
1996 Act provides that implementing its legislative objectives will be the task
of the FCC, the state public utilities commissions and a Federal-state Joint
Board. Much of this implementation is proceeding in numerous, concurrent
proceedings with aggressive deadlines. The Company cannot predict the full
extent, nature and interrelationships among state and federal implementation and
other responses to the 1996 Act.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition. The 1996 Act makes most direct or
indirect state and local barriers to competition unlawful. It directs the FCC to
preempt all inconsistent state and local laws and regulations, after notice and
comment proceedings. It also enables electric and other utilities to engage in
telecommunications service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights.
The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. Cellular carriers must provide such discounted
rates in accordance with federal regulations. The FCC has implemented the
mandate of the 1996 Act to create a new universal service support mechanism "to
ensure that all Americans have access to
20
<PAGE>
telecommunications services." The 1996 Act requires all interstate
telecommunications providers, including wireless service providers, to "make an
equitable and non-discriminatory contribution" to support the cost of providing
universal service, unless their contribution would be DE MINIMIS. At present,
the provision of landline telephone service in high-cost areas is subsidized by
access charges and other payments by interexchange carriers to LECs. The
obligation to make payments to support universal service has been expanded to
include other telecommunications service providers, including cellular carriers.
Such payments are based on a percentage of the total "billed revenue" of
carriers for a given previous half year and began in the first quarter of 1998.
Carriers are free to pass such charges on to their customers. Cellular carriers
are also eligible to receive universal service support payments in certain
circumstances under the new systems if they provide specified services in
"high-cost" areas. USM has sought designation as an "eligible telecommunications
carrier" qualified to receive universal service support in certain states.
Under a 1994 federal law, the Communications Assistance to Law Enforcement
Act, all telecommunications carriers, including USM and other wireless
licensees, were to have implemented by October 1998 certain equipment changes
necessary to assist law enforcement authorities in achieving an enhanced ability
to conduct electronic surveillance of those suspected of criminal activity.
However, owing to disputes between the Federal Bureau of Investigation and the
relevant industry groups about the law's requirements, the FCC has not yet
adopted the necessary technical standards to enable carriers to meet those
requirements. Questions also exist regarding reimbursement by a federal fund of
certain of the costs involved. USM supported the efforts of industry groups to
obtain from the FCC a postponement of the October 1998 deadline on the grounds
that compliance with the originally proposed schedule was impossible. In
September 1998, the FCC postponed the compliance deadline until June 2000.
The FCC also has pending proceedings: (1) to ensure that the customers of
wireless providers, among others, receive complete, accurate and understandable
bills; (2) to establish safeguards to protect against unauthorized access to
customer information; (3) to retain, relax or repeal its 45 megahertz ("MHz")
cap on the amount of spectrum which entities under common ownership and control
may hold in a single market and its related cellular cross-interest
restrictions; and (4) to implement requirements for wireless providers to set
interstate interexchange rates in each state at levels no higher than the rates
charged to subscribers in any other state.
The FCC has also allocated a total of 140 MHz to broadband PCS, 20 MHz to
unlicensed operations and 120 MHz to licensed operations, consisting of two 30
MHz blocks in each of the 51 Major Trading Areas ("MTAs") and one 30 MHz block
and three 10 MHz blocks in each of 493 Basic Trading Areas ("BTAs"). Cellular
operators and those entities under common ownership with them are permitted to
participate in the ownership of PCS licenses, except for those PCS licenses
reserved for small businesses, and licenses for PCS service areas in which the
cellular operator owns a 20% or greater interest in a cellular licensee, the
service area of which covers 10% or more of the population of the PCS service
area. In the latter case, the cellular license is limited to two 10 MHz PCS
channel blocks. As noted previously, the FCC is now reconsidering these
ownership limits.
PCS technology is similar in some respects to cellular technology. Where it
has become commercially available, this technology is capable of offering
increased capacity for wireless two-way and one-way voice, data and multimedia
communications services and has resulted in increased competition with USM's
operations in the markets where PCS systems have begun operations. The ability
of these PCS licensees to complement or compete with existing cellular licensees
will be affected by future FCC rule-makings. These and other future
technological and regulatory developments in the wireless telecommunications
industry and the enhancement of current technologies will likely create new
products and services that are competitive with the services currently offered
by USM. There can be no assurance that USM will not be adversely affected by
such technological and regulatory developments.
STATE AND LOCAL REGULATION. USM is also subject to state and local
regulation in some instances. In 1981, the FCC preempted the states from
exercising jurisdiction in the areas of licensing, technical standards and
market structure. In 1993, Congress preempted states from
21
<PAGE>
regulating the entry of cellular systems into service and the rates charged by
cellular systems to customers. The siting and construction of the cellular
facilities, including transmitter towers, antennas and equipment shelters are
still subject to state or local zoning and land use regulations. However, in
1996, Congress amended the Communications Act to provide that states could not
discriminate against wireless carriers in tower zoning proceedings and had to
decide on zoning requests with reasonable speed. In addition, states may still
regulate other terms and conditions of cellular service.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary. Further, the FCC is empowered under
certain circumstances to preempt state regulatory authorities if a state is
obstructing the Communications Act's basic purposes.
USM and its subsidiaries have been and intend to remain active participants
in proceedings before the FCC and state regulatory authorities. Proceedings with
respect to the foregoing policy issues before the FCC and state regulatory
authorities could have a significant impact on the competitive market structure
among wireless providers and the relationships between wireless providers and
other carriers. USM is unable to predict the scope, pace or financial impact of
policy changes which could be adopted in these proceedings.
COMPETITION
The Company's principal competitor for cellular telephone service in each
market is the licensee of the second cellular system in that market. Since each
competitor operates its cellular system on a 25 MHz frequency block licensed by
the FCC using comparable technology and facilities, competition for customers
between the two systems in each market is principally on the basis of quality of
service, price, size of area covered, services offered, and responsiveness of
customer service. The competing entities in many of the markets in which the
Company has an interest have financial resources which are substantially greater
than those of the Company and its partners in such markets.
The FCC's rules require all operational cellular systems to provide, on a
nondiscriminatory basis, cellular service to resellers which purchase blocks of
mobile telephone numbers from an operational system and then resell them to the
public.
In addition to competition from the other cellular licensee in each market,
there is also competition from PCS providers and ESMR system providers, both of
which are able to connect with the landline telephone network. PCS providers
have initiated service in many markets across the United States, including
markets where the Company has operations. PCS providers offer digital, wireless
communications services to their customers. The Company expects PCS operators to
continue deployment of PCS in portions of all of the Company's clusters
throughout 1999. ESMR, an enhanced SMR system, has cells and frequency reuse
like other wireless services, thereby eliminating any technological limitation.
In recent years, ESMR providers have initiated service in several of the
Company's markets. Although less directly a substitute for cellular service,
wireless data services and paging services may be adequate for those who do not
need full two-way voice service. Similar technological advances or regulatory
changes in the future may make available other alternatives to cellular service,
thereby creating additional sources of competition.
Continuing technological advances in the communications field make it
difficult to predict the extent of additional future competition for cellular
systems. For example, the FCC has allocated radio channels to a mobile satellite
system in which transmissions from mobile units to satellites would augment or
replace transmissions to cell sites, and several consortia to provide such
service have been formed. Such a system is designed primarily to serve the
communications needs of remote locations and a mobile satellite system could
provide viable competition for land-based cellular systems in such areas. It is
also possible that the FCC may in the future assign additional
22
<PAGE>
frequencies to cellular telephone service to provide for more than two cellular
telephone systems per market.
EMPLOYEES
The Company had 4,800 employees as of December 31, 1998. None of the
Company's employees is represented by a labor organization. The Company
considers its relationship with its employees to be good.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
With the exception of certain parcels of land which are leased under
long-term leases, all of the property and equipment used for mobile telephone
switching offices and cell sites is owned by the Company, one of its
subsidiaries or the partnership or corporation which holds the construction
permit or license. The Company has not experienced major problems with obtaining
zoning approval for cell sites or operating facilities and does not anticipate
any such problems in the future which are or will be material to the Company and
its subsidiaries as a whole.
The Company leases approximately 93,000 square feet of office space for its
headquarters in Chicago, Illinois.
The Company considers the properties owned or leased by it and its
subsidiaries to be suitable and adequate for their respective business
operations.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal proceedings before the FCC and
various state and federal courts. In some cases, the litigation involves
disputes regarding rights to certain cellular telephone systems and other
interests. The Company does not believe that any such proceeding should have a
material adverse impact on the Company.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of securities holders during the fourth
quarter of 1998.
23
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Exhibit 13, Annual Report section entitled
"United States Cellular Stock and Dividend Information."
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Selected Consolidated Financial Data," except for ratios of earnings to fixed
charges, which are incorporated herein by reference from Exhibit 12 to this
Annual Report on Form 10-K.
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
- --------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference from Exhibit 13, Annual Report section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" under the caption "Market Risk."
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from Exhibit 13, Annual Report sections entitled
"Consolidated Quarterly Income Information (Unaudited)," "Consolidated
Statements of Income," "Consolidated Statements of Cash Flows," "Consolidated
Balance Sheets," "Consolidated Statements of Changes in Common Shareholders'
Equity," "Notes to Consolidated Financial Statements" and "Report of Independent
Public Accountants."
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from Proxy Statement sections entitled "Election
of Directors" and "Executive Officers."
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from Proxy Statement section entitled "Executive
Compensation," except for the information specified in Item 402(a)(8) of
Regulation S-K under the Securities Exchange Act of 1934, as amended.
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from Proxy Statement section entitled "Security
Ownership of Certain Beneficial Owners and Management."
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Proxy Statement section entitled "Certain
Relationships and Related Transactions."
25
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) (1) Financial Statements
<TABLE>
<S> <C>
Consolidated Quarterly Income Information (Unaudited)...... Annual Report*
Consolidated Statements of Income.......................... Annual Report*
Consolidated Statements of Cash Flows...................... Annual Report*
Consolidated Balance Sheets................................ Annual Report*
Consolidated Statements of Changes in Common Shareholders'
Equity................................................... Annual Report*
Notes to Consolidated Financial Statements................. Annual Report*
Report of Independent Public Accountants................... Annual Report*
</TABLE>
- ---------
* Incorporated by reference from Exhibit 13.
(2) Schedules
<TABLE>
<CAPTION>
LOCATION
----------
<S> <C> <C>
Report of Independent Public Accountants on Financial Statement Schedule.......................... page 28
II. Valuation and Qualifying Accounts for Each of the Three Years in the Period Ended
December 31, 1998...................................................................... page 29
</TABLE>
All other schedules have been omitted because they are not applicable or not
required or because the required information is shown in the financial
statements or notes thereto.
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a
part of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------------------
<S> <C>
10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by
reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No.
33-16975).
10.10 Stock Option and Stock Appreciation Rights Plan is hereby incorporated by reference to Exhibit B to
the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed
with the Commission on April 16, 1991.
10.11 Summary of 1998 Bonus Program for Senior Corporate Staff of the Company.
10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference
to exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference
to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------------------
<S> <C>
10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by
reference to Exhibit 99.4 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
10.18 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996, is hereby incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996.
10.19 Deferred Compensation Agreement for Richard Goehring dated July 15, 1996, is hereby incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996.
10.20 Cellular Interest Transfer Agreement by and between TDS and the Company dated June 20, 1996 is hereby
incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1996.
10.21 United States Cellular Corporation Compensation Plan for Non-Employee Directors is hereby
incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8
(Registration No. 333-19403).
10.22 United States Cellular Corporation 1996 Senior Executive Stock Bonus and Restricted Stock Award Plan
is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form
S-8 (Registration No. 333-19405).
10.23 United States Cellular Corporation Special Retention Restricted Stock Award Plan is hereby
incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8
(Registration No. 333-23861).
10.24 Form of 1997 Special Retention Restricted Stock Awards is hereby incorporated by reference to Exhibit
99.2 to the Company's Registration Statement on Form S-8 (Registration No. 333-57063).
10.25 United States Cellular Corporation 1998 Long-Term Incentive Plan is hereby incorporated by
referenceto Exhibit 99.4 to the Company's Registration Statement on Form S-8 (Registration No.
333-57063).
10.26 Deferred Compensation Agreement for Joyce Gab Kneeland dated December 31, 1997.
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1998.
The Company filed a Current Report on Form 8-K on December 23, 1998 dated
December 18, 1998, which included a press release that announced that TDS was
withdrawing its offer to acquire all of the issued and outstanding Common Shares
of USM not already owned by TDS (the "Offer"). The original offer was made in
December 1997 and called for TDS to issue a new class of common stock, commonly
known as "Tracking Stock" and which would reflect the performance of the
Company, in exchange for the Common Shares of USM it proposed to acquire.
Because the Offer was withdrawn, a special committee of the Company's Board of
Directors that had been appointed to review the Offer was dissolved.
27
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of United States Cellular
Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in United States Cellular Corporation
and Subsidiaries Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 27, 1999. Our audits
were made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The financial statement schedule listed
in Item 14(a)(2) is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This financial statement schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1999
28
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A
DESCRIPTION COLUMN B COLUMN C-1 COLUMN E
- ---------------------------------------- BALANCE AT CHARGED TO COLUMN C-2 BALANCE AT
BEGINNING OF COSTS AND CHARGED TO COLUMN D END OF
(DOLLARS IN THOUSANDS) PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
------------- ------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
Deducted from deferred state tax asset:
For unrealized net operating losses $ (10,233) $ (705) $ (2,510) $ -- $ (13,448)
Deducted from accounts receivable:
For doubtful accounts (5,259) (20,197) -- 19,402 (6,054)
FOR THE YEAR ENDED DECEMBER 31, 1997
Deducted from deferred federal tax
asset:
For unrealized net operating losses $ (2,147) $ -- $ 2,147 $ -- $ --
Deducted from deferred state tax asset:
For unrealized net operating losses (11,003) 877 (107) -- (10,233)
Deducted from accounts receivable:
For doubtful accounts (4,199) (25,578) -- 24,518 (5,259)
FOR THE YEAR ENDED DECEMBER 31, 1996
Deducted from deferred federal tax
asset:
For unrealized net operating losses $ (8,141) $ 5,795 $ 199 $ -- $ (2,147)
Deducted from deferred state tax asset:
For unrealized net operating losses (11,969) 2,305 (1,339) -- (11,003)
Deducted from accounts receivable:
For doubtful accounts (3,820) (17,534) -- 17,155 (4,199)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
UNITED STATES CELLULAR CORPORATION
By: /S/ H. DONALD NELSON
------------------------------------------
H. Donald Nelson
PRESIDENT (CHIEF EXECUTIVE OFFICER)
By: /S/ KENNETH R. MEYERS
------------------------------------------
Kenneth R. Meyers
EXECUTIVE VICE PRESIDENT--FINANCE AND
TREASURER (CHIEF FINANCIAL OFFICER)
By: /S/ JOHN T. QUILLE
------------------------------------------
John T. Quille
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Dated March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------------------------- ----------- ---------------------
<S> <C> <C>
/S/ H. DONALD NELSON DIRECTOR March 30, 1999
-----------------------------------------------
H. Donald Nelson
/S/ LEROY T. CARLSON, JR. DIRECTOR March 30, 1999
-----------------------------------------------
LeRoy T. Carlson, Jr.
/S/ LEROY T. CARLSON DIRECTOR March 30, 1999
-----------------------------------------------
LeRoy T. Carlson
/S/ WALTER C.D. CARLSON DIRECTOR March 30, 1999
-----------------------------------------------
Walter C. D. Carlson
/S/ SANDRA L. HELTON DIRECTOR March 30, 1999
-----------------------------------------------
Sandra L. Helton
/S/ PAUL-HENRI DENUIT DIRECTOR March 30, 1999
-----------------------------------------------
Paul-Henri Denuit
/S/ J. SAMUEL CROWLEY DIRECTOR March 30, 1999
-----------------------------------------------
J. Samuel Crowley
/S/ KENNETH R. MEYERS DIRECTOR March 30, 1999
-----------------------------------------------
Kenneth R. Meyers
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ---------- ----------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit
to the Company's Amendment No. 2 on Form 8 dated December 28, 1992, to the Company's Report on Form
8-A.
3.2 Restated Bylaws, as amended.
4.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit
to the Company's Amendment No. 2 on Form 8 dated December 28, 1992 to the Company's Report on Form
8-A.
4.2 Restated Bylaws, as amended, are included as Exhibit 3.2 to this Form 10-K filing.
4.3 Indenture dated June 1, 1995 between registrant and Harris Trust and Savings Bank, as Trustee,
relating to the LYONs is hereby incorporated by reference to the Company's Form 8-K dated June 16,
1995.
4.4 Form of Certificate for Liquid Yield Option Note (included in Exhibit 4.3).
9.1 Voting Trust Agreement, dated as of June 30, 1989, with respect to Series A Common Shares of TDS, is
hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-38644).
9.2 Amendment dated as of May 9, 1991, to the Voting Trust Agreement dated as of June 30, 1989, is
hereby incorporated by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991.
9.3 Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as
amended is hereby incorporated by reference to Exhibit 9.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.
9.4 Amendment dated as of May 22, 1998, to the Voting Trust Agreement dated as of June 30, 1989, as
amended is hereby incorporated by reference to Exhibit 99.3 to Telephone and Data Systems, Inc.'s
Current Report on Form 8-K filed on June 5, 1998.
10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by
reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No.
33-16975).
10.3 Tax Allocation Agreement, between the Company and TDS, is hereby incorporated by reference to an
exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.4 Cash Management Agreement, between the Company and TDS, is hereby incorporated by reference to an
exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.5 Registration Rights Agreement, between the Company and TDS, is hereby incorporated by reference to
an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.6 Exchange Agreement, between the Company and TDS, as amended, is hereby incorporated by reference to
an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ---------- ----------------------------------------------------------------------------------------------------
<S> <C>
10.7 Intercompany Agreement, between the Company and TDS, is hereby incorporated by reference to an
exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.8 Employee Benefit Plans Agreement, between the Company and TDS, is hereby incorporated by reference
to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.9 Insurance Cost Sharing Agreement, between the Company and TDS, is hereby incorporated by reference
to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
10.10 Stock Option and Stock Appreciation Rights Plan, is hereby incorporated by reference to Exhibit B to
the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed
with the Commission on April 16, 1991.
10.11 Summary of 1998 Bonus Program for the Senior Corporate Staff of the Company.
10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference
to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by
reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by
reference to Exhibit 99.4 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by
reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No.
33-57255).
10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13
to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
10.14 Securities Loan Agreement, dated June 31, 1995, between TDS and Merrill Lynch & Co. is hereby
incorporated by reference to Exhibit 99.1 to the Company's Form 8-K dated June 16, 1995.
10.15 Registration Rights Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation
is hereby incorporated by reference to Exhibit 99.2 to the Company's Form 8-K dated June 16, 1995.
10.16 Common Share Delivery Arrangement Agreement among TDS, Merrill Lynch & Co. and United States
Cellular Corporation is hereby incorporated by reference to Exhibit 99.3 to the Company's Form 8-K
dated June 16, 1995.
10.17 LYONs Offering Agreement between TDS and United States Cellular Corporation is hereby incorporated
by reference to Exhibit 99.4 to the Company's Form 8-K dated June 16, 1995.
10.18 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996 is hereby incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ---------- ----------------------------------------------------------------------------------------------------
<S> <C>
10.19 Deferred Compensation Agreement for Richard Goehring dated July 15, 1996 is hereby incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996.
10.20 Cellular Interest Transfer Agreement by and between TDS and the Company dated June 20, 1996 is
hereby incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
10.21 United States Cellular Corporation Compensation Plan for Non-Employee Directors is hereby
incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8
(Registration No. 333-19403).
10.22 United States Cellular Corporation 1996 Senior Executive Stock Bonus and Restricted Stock Award Plan
is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form
S-8 (Registration No. 333-19405).
10.23 United States Cellular Corporation Special Retention Restricted Stock Award Plan is hereby
incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8
(Registration No. 333-23861).
10.24 Form of 1997 Special Retention Restricted Stock Awards is hereby incorporated by reference to
Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No. 333-57063).
10.25 United States Cellular Corporation 1998 Long-Term Incentive Plan is hereby incorporated by reference
to Exhibit 99.4 to the Company's Registration Statement on Form S-8 (Registration No. 333-57063).
10.26 Deferred Compensation Agreement for Joyce Gab Kneeland dated December 31, 1997.
11 Statement regarding computation of per share earnings (included in Note 4 to Consolidated Financial
Statements which are included in Exhibit 13).
12 Statement regarding computation of ratios.
13 Incorporated portions of 1998 Annual Report to Security Holders.
21 Subsidiaries of the Registrant.
23.1 Consent of independent public accountants.
27 Financial Data Schedules.
</TABLE>
<PAGE>
[LOGO]
8410 West Bryn Mawr
Suite 700
Chicago, Illinois 60631
(773) 399-8900
<PAGE>
UNITED STATES CELLULAR CORPORATION
RESTATED BYLAWS
(AS AMENDED AS OF MARCH 19, 1999)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be
in the City of Dover, County of Kent, State of Delaware.
SECTION 2. OTHER OFFICES. The corporation may also have
offices at such other places both within and without the State of Delaware as
the board of directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the stockholders
for the election of directors shall be held at such place either within or
without the State of Delaware as shall be designated from time to time by the
board of directors and stated in the notice of the meeting. Meetings of
stockholders for any other purpose may be held at such time and place, within or
without the State of Delaware, as shall be stated in the notice of the meeting
or in a duly executed waiver of notice thereof.
SECTION 2. TIME OF ANNUAL MEETING AND VOTE REQUIRED TO ELECT
DIRECTORS. Annual meetings of stockholders shall be held on the first Friday in
May if not a legal holiday, and if a legal holiday, then on the next secular day
following, at 10:00 A.M., or at such other date and time as shall be designated
from time to time by the board of directors and stated in the notice of the
meeting, at which they shall elect by a plurality vote directors to succeed
those whose terms expire, and transact such other business as may properly be
brought before the meeting.
SECTION 3. NOTICE OF ANNUAL MEETING. Written notice of the
annual meeting stating the place, date and hour of the meeting shall be given to
each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the date of the meeting.
<PAGE>
SECTION 4. VOTING LIST. The officer who has charge of the
stock ledger of the corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
SECTION 5. SPECIAL MEETINGS. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the certificate of incorporation, may be called by the president
and shall be called by the president or secretary at the request in writing of a
majority of the board of directors, or at the request in writing of holders of a
majority of the votes of the stock issued and outstanding and entitled to vote.
Such request shall state the purpose or purposes of the proposed meeting.
SECTION 6. NOTICE OF SPECIAL MEETINGS. Written notice of a
special meeting, stating the place, date and hour of the meeting and the
purposes or purposes for which the meeting is called, shall be given not less
than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at such meeting.
SECTION 7. BUSINESS TO BE TRANSACTED AT SPECIAL MEETINGS.
Business transacted at any special meeting of stockholders shall be limited
to the purposes stated in the notice.
SECTION 8. QUORUM AND ADJOURNMENTS. The holders of a majority
of the votes of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business except as otherwise
provided by statute or by the certificate of incorporation, and except where a
separate vote by a class or classes is required, in which case the holders of a
majority of the votes of the stock of such class or classes, present in person
or represented by a proxy, shall constitute a quorum entitled to take action
with respect to that vote on that matter. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a
-2-
<PAGE>
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
SECTION 9. VOTE REQUIRED. When a quorum is present at any
meeting, the vote of the holders of a majority of the votes of the stock having
voting power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of statute, of the certificate of incorporation, or the bylaws, a
different vote is required, in which case such express provision shall govern
and control the decision or such question.
SECTION 10. VOTING. Each stockholder shall at every meeting of
stockholders be entitled to vote in person or by proxy the shares of capital
stock having voting power held by such stockholder, but no proxy shall be voted
after three years from its date, unless the proxy provides for a longer period.
SECTION 11. INFORMAL ACTION. Any action required to be taken
at any annual or special meeting of stockholders of the corporation, or any
action which may be taken at any annual or special meeting of such stockholders,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
SECTION 12. INTRODUCTION OF BUSINESS AT A MEETING OF
STOCKHOLDERS. At an annual or special meeting of stockholders, only such
business shall be conducted, and only such proposals shall be acted upon, as
shall have been properly brought before an annual or special meeting of
stockholders. To be properly brought before an annual or special meeting of
stockholders, business must be (1) in the case of a special meeting, specified
in the notice of the special meeting (or any supplement thereto) given by or at
the direction of the board of directors, or (2) in the case of an annual
meeting, properly brought before the meeting by or at the direction of the board
of directors, or otherwise properly brought before an annual meeting by a
stockholder. For business to be properly brought before an annual meeting of
stockholders by a stockholder, the stockholder must have given timely notice
thereof in writing to the President or Secretary of the corporation. To be
timely, a stockholder's notice must be received at the principal executive
offices of the corporation not earlier than 120 calendar days nor later than 90
calendar days in advance of the anniversary date of the date of the
corporation's proxy statement to stockholders in connection with the most recent
preceding annual meeting of stockholders, except that if the date of the current
year's annual meeting has been changed by more than 30 calendar days from the
anniversary date of the most recent preceding annual meeting, a stockholder
proposal
-3-
<PAGE>
shall be received by the corporation not later than the close of business on the
tenth day following the date of public notice of the date of the current year's
annual meeting.
A stockholder's notice shall set forth as to each matter the
stockholder proposes to bring before an annual meeting of stockholders (1) a
brief description of the business desired to be brought before the annual
meeting and the reason for conducting such business at the annual meeting, (2)
the name and address, as they appear on the corporation's books, of the
stockholder proposing such business and any other stockholders known by such
stockholder to be supporting such proposal, (3) the class and number of shares
of the corporation which are beneficially owned by such stockholder on the date
of such stockholder's notice and by any other stockholders known by such
stockholder to be supporting such proposal on the date of such stockholder's
notice and (4) any material interest of the stockholder in such proposal.
Notwithstanding anything in the bylaws to the contrary, no
business shall be conducted at a meeting of stockholders except in accordance
with the procedure set forth in this Section 12. The chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that the
business was not properly brought before the meeting in accordance with the
procedures described by the bylaws, and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be considered.
SECTION 13. NOMINATION OF DIRECTORS. Only persons nominated in
accordance with the procedures set forth in this section shall be eligible for
election as directors. Nominations of persons for election to the board may be
made at a meeting of stockholders (1) by or at the direction of the board of
directors, or (2) by any stockholder of the corporation entitled to vote for the
election of directors at such meeting who complies with the notice procedures
set forth in this Section 13. Such nominations, other than those made by or at
the direction of the board of directors, shall be made pursuant to timely notice
in writing to the President or Secretary of the corporation. To be timely, a
stockholder's notice must be received at the principal executive offices of the
corporation not earlier than 120 calendar days nor later than 90 calendar days
in advance of the anniversary date of the date of the corporation's proxy
statement to stockholders in connection with the preceding year's annual meeting
of stockholders, except that if the date of the current year's annual meeting
has been changed by more than 30 calendar days from the anniversary date of the
most recent preceding annual meeting, a nomination shall be received by the
corporation not later than the close of business on the tenth day following the
date of public notice of the date of the current year's annual meeting.
A stockholder's notice shall set forth (1) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the corporation which are beneficially owned by such
person on the date of such stockholder's notice and (d) any other information
relating to such person that is
-4-
<PAGE>
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including without limitation such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); and (2) as to the stockholder giving the
notice (a) the name and address, as they appear on the corporation's books, of
such stockholder and any other stockholders known by such stockholder to be
supporting such nominees and (b) the class and number of shares of the
corporation which are beneficially owned by such stockholder on the date of such
stockholder's notice and by any other stockholders known by such stockholder to
be supporting such nominees on the date of such stockholder's notice.
No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth in this
section. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by the bylaws, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be disregarded.
This Section 13 shall not apply to the election of a director
to a directorship which may be filled by the board of directors under the
Delaware General Corporation Law.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER, CLASSIFICATION AND TERM OF OFFICE. The
number of directors which shall constitute the whole board shall not be less
than three nor more than eleven. Upon the adoption of this bylaw, the board
shall consist of eight directors. Thereafter, within the limits above specified,
the number of directors shall be determined by resolution of the board of
directors or by the stockholders at the annual meeting. The directors shall be
divided into three classes: Class I, Class II and Class III. Such classes shall
be as nearly equal in number as possible. The term of office of the initial
Class I directors shall expire at the annual meeting of stockholders in 1988;
the term of office of the initial Class II directors shall expire at the annual
meeting of stockholders in 1989; and the term of office of the initial Class III
directors shall expire at the annual meeting of stockholders in 1990, or
thereafter when their respective successors in each case are elected and
qualified. At each annual election held after the adoption of this bylaw the
directors chosen to succeed those whose terms then expire shall be identified as
being of the same class as the directors they succeed and shall be elected for a
term expiring at the third succeeding annual meeting or thereafter when their
respective successors in each case are elected and qualified. Any director
elected to a particular class by the stockholders or directors shall be
eligible, upon resignation, to be elected to a different class.
-5-
<PAGE>
SECTION 2. GENERAL POWERS. The business of the corporation
shall be managed by its board of directors, which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by the bylaws directed or required to
be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 3. PLACE OF MEETINGS. The board of directors of the
corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
SECTION 4. REGULAR MEETINGS. A regular meeting of the board of
directors shall be held without other notice than this bylaw, immediately after,
and at the same place as, the annual meeting of stockholders. The board of
directors may provide, by resolution, the time and place, either within or
without the State of Delaware, for the holding of additional regular meetings
without other notice than such resolution.
SECTION 5. SPECIAL MEETINGS. Special meetings of the board of
directors may be called by the president on two days notice to each director,
either personally or by mail or by telegram; special meetings shall be called by
the president or secretary in like manner and on like notice on the written
request of two directors.
SECTION 6. QUORUM. At all meetings of the board of directors,
a majority of directors then in office shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise specifically provided by statute or by the
certificate of incorporation. If a quorum shall not be present at any meeting of
the board of directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
SECTION 7. INFORMAL ACTION. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required to be taken at
any meeting of the board of directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
SECTION 8. RESIGNATIONS. Any director of the corporation may
resign at any time by giving written notice to the board of directors, the
president, or the secretary of the corporation. Such resignation shall take
effect at the time specified therein; and, unless tendered to take effect upon
acceptance thereof, the acceptance of such resignation shall not be necessary to
make it effective.
-6-
<PAGE>
SECTION 9. PRESUMPTION OF ASSENT. A director of the
corporation who is present at a meeting of the board of directors at which
action on any corporate matter is taken shall be conclusively presumed to have
assented to the action taken unless his dissent shall be entered in the minutes
of the meeting or unless he shall file his written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
COMMITTEE OF DIRECTORS
SECTION 10. APPOINTMENT AND POWERS. The board of directors
may, by resolution passed by a majority of the whole board, designate one or
more committees, each committee to consist of one or more directors of the
corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether the member or members constitute a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the board of directors,
shall have and may exercise all the powers and authority of the board of
directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the certificate of incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the bylaws of the corporation; and, unless the
resolution so provides, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the board of directors.
SECTION 11. MINUTES. Each committee shall keep regular minutes
of its meetings and report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
SECTION 12. COMPENSATION. The board of directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the board of directors
and may be paid a fixed sum for attendance at each meeting of the board of
directors or a stated
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<PAGE>
salary as director. No such payments shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
ARTICLE IV
NOTICES
SECTION 1. NOTICE. Whenever, under the provisions of statute
or of the certificate of incorporation or of these bylaws, notice is required to
be given to any director or stockholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed to
such director or stockholder, at the stockholder's address as it appears on the
records of the corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Notice to directors may also be given by telegram, telex or similar
device.
SECTION 2. WAIVER. Whenever any notice is required to be given
under the provisions of statute or of the certificate of incorporation or of
these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE V
OFFICERS
SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the
corporation shall be chosen by the board of directors and shall be a chairman,
president, one or more vice-presidents, a secretary and a treasurer. The board
of directors may also choose one or more assistant secretaries and assistant
treasurers. Any number of offices may be held by the same person, unless the
certificate of incorporation or these bylaws otherwise provide.
SECTION 2. ELECTION. The board of directors at its first
meeting after each annual meeting of stockholders shall choose a chairman,
president, one or more vice-presidents, a secretary and a treasurer.
SECTION 3. OTHER OFFICERS AND AGENTS. The board of directors
may appoint such other officers and agents as it shall deem necessary who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the board.
-8-
<PAGE>
SECTION 4. SALARIES. The salaries of all officers and
agents of the corporation shall be fixed by the board of directors.
SECTION 5. TERM OF OFFICE. The officers of the corporation
shall hold office until their successors are chosen and qualify. Any officer
elected or appointed by the board of directors may be removed at any time by the
affirmative vote of a majority of the board of directors. Any vacancy occurring
in any office of the corporation shall be filled by the board of directors.
THE CHAIRMAN
SECTION 6. CHAIRMAN. The chairman shall preside at all
meetings of the shareholders and of the board of directors and shall see that
orders and resolutions of the board of directors are carried into effect. He may
sign bonds, mortgages, certificates for shares and all other contracts and
documents whether or not under the seal of the corporation except in cases where
the signing and execution thereof shall be expressly delegated by law, by the
board of directors or by these bylaws to some other officer or agent of the
corporation. In the absence of the president (including a vacancy in such
office) or in the event of his inability or refusal to act, which inability
shall be determined by the chairman, the chairman shall perform the duties of
the principal executive officer and, when so acting, shall have all the powers
of the President.
THE PRESIDENT
SECTION 7. THE PRESIDENT. The president shall be the principal
executive officer of the corporation and shall in general supervise and control
all of the business and affairs of the corporation, subject to the general
powers of the board of directors. In the absence of the chairman, he shall
preside at all meetings of the shareholders and of the board of directors. He
may sign bonds, mortgages, certificates for shares and all other contracts and
documents whether or not under seal of the corporation except in cases where the
signing and execution thereof shall be expressly delegated by the board of
directors or by these bylaws to some other office or agent of the corporation.
In general, he shall perform all duties incident to the office of president and
such other duties as may by prescribed by the board of directors from time to
time. He shall have general powers of supervision and shall be the final arbiter
of all differences between officers of the corporation and his decision as to
any matter affecting the corporation shall be final and binding as between the
officers of the corporation subject only to the chairman and the board of
directors.
THE VICE-PRESIDENT
SECTION 8. THE VICE-PRESIDENT. In the absence of the
chairman or the president or in the event of the chairman's or the
president's inability or refusal to
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<PAGE>
act, the vice-president (or in the event there be more than one vice-president,
the vice-presidents in the order designated, or in the absence of any
designation then in the order of their election) shall perform the duties of the
president, and when so acting shall have all the powers of and be subject to all
the restrictions upon the president. The vice-president shall perform such other
duties and have such other powers as the board of directors may from time to
time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
SECTION 9. THE SECRETARY. The secretary shall attend all
meetings of the board of directors and all meetings of the stockholders and
record all the proceedings of the meetings of the corporation and of the board
of directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and special meetings of the board of
directors, and shall perform such other duties as may be prescribed by the board
of directors or president, under whose supervision the secretary shall be. The
secretary shall have custody of the corporate seal of the corporation and the
secretary, or an assistant secretary, shall have authority to affix the same to
any instrument requiring it and, when so affixed, it may be attested by the
secretary's signature or by the signature of such assistant secretary. The board
of directors may give general authority to any other officer to affix the seal
of the corporation and to attest the affixing by the secretary's signature.
SECTION 10. THE ASSISTANT SECRETARY. The assistant secretary
or, if there be more than one, the assistant secretaries in the order determined
by the board of directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the secretary or in the event
of the secretary's inability or refusal to act, perform the duties and exercise
the powers of the secretary and shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURER
SECTION 11. THE TREASURER. The treasurer shall have custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the board of
directors.
The treasurer shall disburse the funds of the corporation as
may be ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all transactions as treasurer and of the financial condition of the corporation.
-10-
<PAGE>
If required by the board of directors, the treasurer shall
give the corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the board of
directors for the faithful performance of the duties of the office and for the
restoration to the corporation, in case of the treasurer's death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in the treasurer's possession or under the
treasurer's control belonging to the corporation.
SECTION 12. THE ASSISTANT TREASURER. The assistant treasurer
or, if there shall be more than one, the assistant treasurers in the order
determined by the board of directors (of if there be no such determination, then
in the order of their election), shall, in the absence of the treasurer or in
the event of the treasurer's inability or refusal to act, perform the duties and
exercise the powers of the treasurer and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
ARTICLE VI
CERTIFICATES OF STOCK
SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the
corporation shall be entitled to have a certificate, signed by, or in the name
of the corporation by, the chairman, president or a vice-president and the
treasurer or an assistant treasurer or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by the stockholder in
the corporation. If the corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
references and relative, participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of Title 8 of the Delaware Code, in lieu of
the foregoing requirements, there may be set forth on the face or back of the
certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
SECTION 2. FACSIMILE SIGNATURES. Where a certificate is
countersigned (1) by a transfer agent other than the corporation or its
employee, or (2) by a registrar other than the corporation or its employee, any
other signature on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it
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<PAGE>
may be issued by the corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.
SECTION 3. LOST CERTIFICATES. The board of directors may
direct that a new certificate or certificates be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen or destroyed upon the making of an affidavit of that fact
by the person claiming the certificate of stock to be lost, stolen or destroyed.
When authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
SECTION 4. TRANSFER OF STOCK. Upon surrender to the
corporation or the transfer agent of the corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the corporation, within a
reasonable period of time, to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
SECTION 5. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation.
Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time
-12-
<PAGE>
to time, in their absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the corporation, or for such other purpose as the directors
shall think conducive to the interest of the corporation, and the directors may
modify or abolish any such reserve in the manner in which it was created.
SECTION 2. CHECKS. All checks or demands for money and notes
of the corporation shall be signed by such officer or officers or such other
person or persons as the board of directors may from time to time designate.
SECTION 3. FISCAL YEAR. The fiscal year of the corporation
shall be fixed by resolution of the board of directors.
SECTION 4. SEAL. The corporate seal shall have inscribed
thereon the name of the corporation and the words "Corporate Seal, Delaware."
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
These bylaws may be altered, amended or repealed or new bylaws
may be adopted by the stockholders or by the board of directors at any regular
meeting of the board of directors or of the stockholders or at any special
meeting of the board of directors or of the stockholders, if notice of such
alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting of the stockholders.
-13-
<PAGE>
EXHIBIT 10.11
SUMMARY OF 1998 BONUS PROGRAM FOR
SENIOR CORPORATE STAFF OF UNITED STATES
CELLULAR CORPORATION
The objectives of the 1998 Bonus Program for Senior Corporate Staff (the
"1998 Bonus Plan") of United States Cellular Corporation ("USM") are: (i) to
provide suitable incentives for the senior corporate management of USM to extend
their best efforts to achieve superior results in relation to key performance
targets, (ii) to suitably reward USM's senior corporate management team in
relation to their success in meeting and exceeding these performance targets,
and (iii) to help USM attract and retain talented management personnel in
positions of critical importance to the success of USM. A team performance award
and an individual performance award are available under the 1998 Bonus Plan.
For target performance on the team and individual categories, the 1998 Bonus
Plan was designed to generate a targeted 1998 bonus pool equal to the total of
40% of the aggregate of the base salaries of the Company's senior executive
officers other than the President. Under the 1998 Bonus Plan, the size of the
target bonus pool is increased or decreased depending on USM's 1998 achievements
with respect to the performance categories. No bonus pool is paid under such
plan if minimum performance levels are not achieved in these categories. The
maximum bonus pool that could be generated, which would require exceptional
performance in all areas, would equal the total of 80% of the aggregate base
salaries of the Company's executive officers other than the president. At target
performance, the bonus pool would be equal to 40% of the aggregate salaries of
the Company's executive officers other than the President. Of this percentage,
4% represents a targeted individual performance award and a total of 36%
represents a targeted team bonus award. The targeted team award includes a
discretionary team award of 4% and an objective award of 32% for a total
targeted team bonus award of 36%. The objective performance categories include
(i) penetration (10% of the targeted award) (ii) cash flow (10% of the targeted
award), (iii) service revenue (8% of the targeted award) and (iv) churn (4% of
the targeted award).
<PAGE>
Exhibit 10.26
UNITED STATES CELLULAR CORPORATION
EXECUTIVE DEFERRED COMPENSATION
AGREEMENT
THIS AGREEMENT, entered into this 31(st) day of December, 1997, by and
between Joyce Gab Kneeland, (hereinafter referred to as "Executive") and United
States Cellular Corporation, (hereinafter referred to as "Company"), a Delaware
corporation, located at 8410 West Bryn Mawr Avenue, Suite 700, Chicago, IL,
60631-3486.
W I T N E S S E T H:
WHEREAS, the Executive is now and will in the future be rendering valuable
services to the Company, and the Company desires to ensure the continued
loyalty, service and counsel of the Executive; and
WHEREAS, the Executive desires to defer a portion of his or her salary and
bonus until retirement, resignation, disability or death, or to a specific date
greater than one year from the date of this agreement.
NOW, THEREFORE, in consideration of the covenants and agreements herein set
forth, and for other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto covenant and agree as follows:
1. Deferred Compensation Agreement. The Company agrees to establish and
maintain a book reserve (the "Deferred Compensation Account") for the
purpose of measuring the amount of deferred compensation payable under this
Agreement. Credits shall be made to the Deferred Compensation Account as
follows:
(a) On each issuance of the Executive's semi-monthly payroll check,
(scheduled for the 15th and the last day of each month), during the
Executive's continued active employment with the Company, there shall be
deducted an amount equivalent to 3 percent of the Executive's gross
compensation for the pay period which will be credited to the Deferred
Compensation Account. The first deduction will occur on the Executive's
semi-monthly payroll check dated January 31. The deferral percentage
selected by the Executive will also be applied to all normal bonus
payments.
(b) Commencing on February 28, 1998, and on the last day of each month
thereafter during the Executive's continued employment with the Company,
there shall be credited to the Deferred Compensation Account (before any
amount is credited for the month then ending pursuant to paragraph 1(a)),
interest compounded monthly computed at a rate equal to one-twelfth
( 1/12) of the sum of (a) the average thirty (30) year Treasury Bond rate
of interest (as published in the Wall Street Journal for the last day of
the preceding month) plus (b) 1.25 percentage points. Quarterly reports
which specify the amount credited to the Executive's Deferred
Compensation Account during the previous period (amount deferred plus
interest) and the then current balance, shall be provided to the
Executive.
(c) The Deferred Compensation percentage elected in section 1(a) shall be
deducted and credited to the Deferred Compensation Account for all
compensation paid to the Executive, including bonus and retroactive pay
increases.
(d) The Executive may terminate participation in the Agreement with respect
to the deferral of future compensation at any time. In the event the
Executive elects to make such a discontinuance, he or she shall remain
eligible to receive the benefits under Section 2 with respect to amounts
already deferred. Previously deferred amounts are not payable until
retirement, resignation, disability, death or the date specified by the
Executive in paragraph 2 (g) (ii). After a discontinuance, Executive may
not again elect to participate with respect to future deferrals until a
subsequent calendar year.
2
<PAGE>
(e) The Deferred Compensation percentage selected in 1(a) shall be in effect
for the entire plan year unless participation is terminated. The
Executive may not elect to change the percentage until a new plan year
commences.
2. Payment of Deferred Compensation.
(a) In the event the Executive terminates his/her employment for whatever
reason, the Company must compute the "Ending Balance" in the Deferred
Compensation Account. This Ending Balance shall include all deferrals and
interest as of the last day of the preceding month, and any deferrals
made in the current month. In the event that the Executive becomes
disabled, his/her employment shall for these purposes be deemed to
terminate on the first day of the month in which he/she begins to receive
long term disability payments provided by the Company's insurance carrier
(thus, the Ending Balance shall be computed as of the preceding month).
Payment of deferred compensation under these events will be in accordance
with the Executive's payment method election in paragraph 2(e).
(b) The Executive must elect the payment method for receiving his/her Ending
Balance either in a lump sum or in an indicated number of installments.
This determination must be made at the time of execution of the agreement
in Section 2(e) and will apply to all deferrals. Any amendment changing
the method of payment must be made at least two (2) years prior to the
selected payment date or (2) years prior to termination of employment,
whichever occurs first, to be considered effective.
(c) In the event the Executive chooses the installment option, the Executive
must inform the Company of the number of installments he or she wishes to
receive. The installments will be paid quarterly (not to exceed 20
quarters) commencing with the fifteenth day of the quarter following the
quarter in which the date specified in 2(g) occurs. Installments will
then be paid on the fifteenth day of each succeeding calendar quarter
until the Ending Balance and all accrued interest, which includes
interest earned during the installment period, has been paid. If the
Executive chooses the lump sum option, such sum must be paid within
forty-five (45) days after the date specified in 2(g).
(d) If the Executive dies prior to the total distribution of the Ending
Balance, the Company shall pay an amount equal to the then current
balance including accrued interest in the Deferred Compensation Account,
in a lump sum within forty-five (45) days following the Executive's death
to the Executive's Designated Beneficiary (as hereinafter defined).
However, if the Executive is married at the time of death, the Executive
may designate (at the time of entering this Agreement or upon a
subsequent marriage) that the payments specified in 2(c) shall continue
to the spouse. If such spouse dies before all payments are made, the
procedures in 3(a) and 3(b) shall apply.
(e) Payment of Deferred Compensation Election (choose one option):
i) / / Lump sum distribution; or
ii) /X/ Installment method. The amount of each installment shall be equal
to one-twelfth (cannot be less than one-twentieth) of the Ending
Balance plus accrued interest compounded monthly for the
preceding calendar quarter.
(f) The Executive must elect the deferral date for receiving his/her Ending
Balance. This date is to be either retirement, or a specific date greater
than one year from the date of this agreement. This determination must be
made at the time of execution of the agreement in Section 2(g) and will
apply to all deferrals.
(g) Election of Deferral Date (choose one option):
i) / / Retirement; or
ii) /X/ Specific Date: 2010 (must be greater than one year from the date
of this agreement)
3
<PAGE>
(h) In the event of an unforeseeable emergency, the Executive may make
withdrawals from the Deferred Compensation Account in an amount equal to
that which is reasonably necessary to satisfy the emergency. An
unforeseeable emergency means a severe financial hardship to the
Executive resulting from a sudden and unexpected illness or accident of
the Executive or of a dependent (as defined in Internal Revenue Code
Section 152(a)) of the Executive, loss of the Executive's property due to
casualty, or other similar extraordinary and unforeseeable circumstances
arising as a result of events beyond the control of the Executive. The
circumstances that will constitute an emergency will depend upon the
facts of each case, but, in any case, payment may not be made to the
extent that such hardship is or may be relieved (a) through reimbursement
or compensation by insurance or otherwise; (b) by liquidation of the
Executive's assets, to the extent the liquidation of such assets would
not itself cause severe financial hardship; or (c) by cessation of
deferrals under this Agreement. Examples of what are not considered to be
unforeseeable emergencies include the need to send an Executive's child
to college or the desire to purchase a home.
In the event the Company approves the payment of a withdrawal due to an
unforeseeable emergency, such payment shall be made by the Company to the
Executive in a lump sum within forty-five (45) days after approval of
such request.
3. Designation of Beneficiaries.
(a) The Executive may designate a beneficiary to receive any amount payable
pursuant to paragraph 2(c) (the "Designated Beneficiary") by executing or
filing with the Company during his/her lifetime, a Beneficiary
Designation in the form attached hereto. The Executive may change or
revoke any such designation by executing and filing with the Company
during his/her lifetime a new Beneficiary Designation. If the Executive
is married and names someone other than his/her spouse (e.g., child) as
beneficiary, the spouse must consent by signing the designated area of
the Beneficiary Designation form in the presence of a Notary Public.
(b) If any Designated Beneficiary predeceases the Executive, or if any
corporation, partnership, trust or other entity which is a Designated
Beneficiary is terminated, dissolved, becomes insolvent, is adjudicated
bankrupt prior to the date of the Executive's death, or if the Executive
fails to designate a beneficiary, then the following persons in the order
set forth below shall receive the entire amount specified in paragraph
2(c) above, which the previous Designated Beneficiary would have been
entitled to receive:
i) Executive's spouse, if living; otherwise
ii) Executive's then living descendants, per stirpes; and otherwise;
iii) Executive's estate
4. Miscellaneous.
(a) The right of the Executive or any other person to any payment of
benefits under this Agreement may not be assigned, transferred, pledged
or encumbered.
(b) If the Company finds that any person to whom any amount is payable under
this Agreement is unable to care for his/her affairs because of illness
or accident, or is under any legal disability which prevents the
Executive from caring for his or her affairs, any payment due (unless a
prior claim therefor shall have been made by a duly appointed guardian,
committee or other legal representative) may be made to the spouse, a
child, a parent, or a brother or sister of such person, or to any party
deemed by the Company to have incurred expenses for such person otherwise
entitled to payment, in such manner and proportions as the Company may
determine. Any such lump sum payment, as discussed in 2(d), shall be a
complete discharge of the liability of the Company under this Agreement
for such payment.
4
<PAGE>
(c) This Agreement shall be construed in accordance with and governed by the
laws of the State of Illinois.
(d) The Executive is considered to be a general unsecured creditor of the
Company with regard to the deferred compensation amounts to which this
Agreement pertains.
(e) The deferred amounts under this Agreement are unfunded for tax and ERISA
purposes.
(f) The Company must deduct from all payments made hereunder all applicable
federal or state taxes required to be withheld from such payments.
(g) This Agreement contains the entire understanding of the Company and the
Executive with respect to the subject matter hereof.
(h) In the event any provision of this Agreement is held illegal or invalid
for any reason, the illegality or invalidity shall not affect the
remaining parts of the Agreement, and the Agreement must be construed and
enforced as if the illegal or invalid provision had not been included.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
UNITED STATES CELLULAR CORPORATION
("COMPANY"):
BY: /S/ DOUGLAS S. ARNOLD
-----------------------------------
Douglas S. Arnold
EXECUTIVE:
BY: /S/ JOYCE GAB KNEELAND
-----------------------------------
Joyce Gab Kneeland
5
<PAGE>
EXHIBIT 12
UNITED STATES CELLULAR CORPORATION
RATIOS OF EARNINGS TO FIXED CHARGES
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT RATIO AMOUNTS)
<TABLE>
<S> <C>
EARNINGS:
Income from Continuing Operations before income taxes.......................... $ 388,112
Add (Deduct):
Minority Share of Losses from Majority-owned Subsidiaries.................. (406)
Earnings on Equity Method.................................................. (42,451)
Distributions from Minority Subsidiaries................................... 27,083
---------
$ 372,338
Add fixed charges:
Consolidated Interest Expense.............................................. 35,705
Deferred Debt Amortization Expense......................................... 4,067
Interest Portion ( 1/3) of Consolidated Rent Expense....................... 8,076
---------
$ 420,186
FIXED CHARGES:
Consolidated Interest Expense.................................................. $ 35,705
Deferred Debt Amortization Expense............................................. 4,067
Interest Portion ( 1/3) of Consolidated Rent Expense........................... 8,076
---------
$ 47,848
---------
---------
RATIO OF EARNINGS TO FIXED CHARGES............................................... 8.78
---------
---------
FIXED CHARGES AND PREFERRED DIVIDENDS:
Tax-effected Preferred Dividends............................................... $ 59
Fixed Charges.................................................................. 47,848
---------
$ 47,907
---------
---------
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS....................... 8.77
---------
---------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. USM is an
81.0%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
USM owned either majority or minority cellular interests in 183 markets at
December 31, 1998, representing 26,433,000 population equivalents ("pops"). USM
included the operations of 138 majority-owned and managed cellular markets,
representing 23.6 million pops, in consolidated operations ("consolidated
markets") as of December 31, 1998. 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 were
accounted for using the cost method. Following is a table of summarized
operating data for USM's consolidated operations.
<TABLE>
<CAPTION>
Year Ended or At December 31,
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Total market population
(in thousands) (1) 24,683 24,034 21,712
Customers 2,183,000 1,710,000 1,073,000
Market penetration 8.84% 7.11% 4.94%
Markets in operation 138 134 131
Total employees 4,800 4,600 3,800
Cell sites in service 2,065 1,748 1,328
Average monthly
revenue per customer $ 48.61 $ 54.18 $ 63.69
Churn rate per month 1.9% 1.9% 1.9%
Marketing cost per
gross customer
addition $ 317 $ 318(2) $ 332(2)
</TABLE>
- --------------
(1) CALCULATED USING THE RESPECTIVE POPULATION ESTIMATES FOR EACH YEAR
(CLARITAS FOR 1998 AND 1997, DONNELLEY FOR 1996).
(2) RECOMPUTED TO SHOW THE EFFECT OF CHANGE IN CURRENT YEAR PRESENTATION OF
CERTAIN EXPENSES.
The growth in the Company's operating income in 1998 and 1997, 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 1997 and 1996. The improvements resulted from growth in
the Company's customer base and revenues in each year, coupled with increasing
economies of scale in both years. Operating revenues, driven by increases in
customers served, rose $285.5 million, or 33% in 1998 and $196.9 million, or
29%, in 1997. Cash operating expenses rose $164.6 million, or 27%, in 1998 and
$131.2 million, or 27%, in 1997. Operating cash flow (operating income plus
depreciation and amortization expense) increased $120.9 million, or 46%, in 1998
and $65.7 million, or 33%, in 1997. Depreciation and amortization expense
increased $74.4 million, or 56%, in 1998 and $23.5 million, or 22%, in 1997.
Operating income increased $46.5 million, or 36%, in 1998 and $42.2 million, or
48%, in 1997.
The Company's operating results were also impacted by the effects of
acquisitions and divestitures, primarily those related to the exchange of
markets with BellSouth Corporation ("BellSouth") in the fourth quarter of 1997.
In that transaction, the Company received operating markets serving a total
population of approximately 4.0 million in exchange for operating markets
serving a total population of approximately 2.0 million. The Company also
divested certain minority interests, representing approximately 1.2 million
population equivalents, and paid cash to BellSouth to complete the exchange.
The operating markets acquired in that transaction, net of the operating markets
divested, generated increases in the Company's overall revenues, operating
expenses, operating cash flow and operating income. These increases were
primarily due to the increase in the Company's customer base as a result of the
exchange. However, as a result of the Company's divestiture of several minority
interests in the exchange, investment income was reduced by the exchange, by an
amount that was less than the exchange's impact on operating income. In total,
the BellSouth exchange has had a slightly positive effect on net income and
earnings per share to date.
Investment and other income increased $156.5 million to $251.8 million in 1998,
due primarily to an increase of $184.8 million in gains on the sales of cellular
interests in 1998. The increase in gains was partially offset by a $34.7
million, or 45%, reduction in investment income, which was negatively affected
by the exchange transaction with BellSouth in 1997 and by the sale of minority
interests to AirTouch Communications, Inc. ("AirTouch") in 1998. The BellSouth
and AirTouch transactions reduced the Company's pops in investment markets by
1.9 million or 42%. Investment and other income decreased $82.0 million to $95.3
million in 1997, due primarily to the decrease of $102.4 million in gains
UNITED STATES CELLULAR CORPORATION
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
on the sales of cellular interests in 1997. Interest expense increased $10.4
million, or 35%, in 1998, and $6.3 million, or 27%, in 1997, primarily due to an
increase in average debt balances in both years resulting from the Company's
issuance of 7.25% unsecured notes ("Notes") in August 1997. Income tax expense
increased $87.2 million to $171.2 million in 1998, primarily resulting from
increased gains on the sales of cellular interests. Income tax expense decreased
$27.7 million to $83.9 million in 1997, as improved operating results were more
than offset by decreased gains on the sales of cellular interests.
Net income totaled $216.9 million in 1998, an increase of $105.4 million, or
95%, from 1997, and totaled $111.5 million in 1997, a decrease of $18.4 million,
or 14%, from 1996. Diluted earnings per share totaled $2.48 in 1998, an increase
of $1.19, or 92%, from 1997, and totaled $1.29 in 1997, a decrease of $.22, or
15%, from 1996. In all three years, both net income and earnings per share
included gains on the sales of cellular interests. Excluding the after-tax
effects of gains, net income decreased $6.6 million, or 7%, in 1998 and
increased $32.8 million, or 52%, in 1997. Excluding the after-tax effects of
gains, diluted earnings per share decreased $.08, or 7%, in 1998 and increased
$.37, or 51%, in 1997. The 1998 decreases reflect an increase in operating
income, more than offset by a decrease in investment income and increases in
interest expense and income tax expense. The 1997 increases reflect increases in
operating income and investment income, partially offset by increases in
interest expense and income tax expense.A summary of the after-tax effects of
gains on net income and diluted earnings per share is shown below.
<TABLE>
<CAPTION>
(Dollars in thousands,
except per share amounts) Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income before
after-tax effects
of gains $ 88,742 $ 95,302 $ 62,504
Add: After-tax
effects of gains 128,205 16,237 67,425
- --------------------------------------------------------------------------------
Net income as reported $216,947 $111,539 $129,929
- --------------------------------------------------------------------------------
Earnings per share
before after-tax
effects of gains $ 1.02 $ 1.10 $ .73
Add: After-tax
effects of gains 1.46 .19 .78
- --------------------------------------------------------------------------------
Diluted earnings
per share $ 2.48 $ 1.29 $ 1.51
- --------------------------------------------------------------------------------
</TABLE>
OPERATING REVENUES
OPERATING REVENUES Operating revenues totaled $1.162 billion in 1998, up $285.5
million, or 33%, over 1997. Operating revenues totaled $877.0 million in 1997,
up $196.9 million, or 29%, over 1996. 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
$1.123 billion in 1998, up $270.5 million, or 32%, over 1997. Service revenues
totaled $853.0 million in 1997, up $190.3 million, or 29%, over 1996. The
increases in both years were primarily due to the growing number of local retail
customers.
Average monthly service revenue per customer declined 10% to $48.61 in 1998 from
$54.18 in 1997, and declined 15% in 1997 from $63.69 in 1996. The decreases in
average monthly service revenue per customer in both years resulted from
decreases in average revenue per minute of use from both local retail customers
and inbound roamers. The addition of the markets acquired in the exchange with
BellSouth in the fourth quarter of 1997 contributed to the decline in both local
retail revenue per customer and inbound roaming revenue per customer. The
acquired markets produce a lower amount of local retail revenue per customer,
and the addition of those markets caused the elimination of certain inbound
roaming revenues between the Company's existing markets and the acquired
markets.
UNITED STATES CELLULAR CORPORATION 21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Competitive pressures and the Company's increasing use of pricing and other
incentive programs that encourage weekend and off-peak usage at reduced rates,
in order to stimulate overall usage, resulted in decreases in average local
retail revenue per minute of use during both 1998 and 1997. The Company's
average inbound roaming revenue per minute of use also decreased during both
1998 and 1997, in line with the ongoing trend toward reduced per minute prices
for roaming negotiated between the Company and other cellular 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 $204.2 million, or 36%, in 1998 and $153.8
million, or 37%, in 1997. Growth in the Company's customer base was the
primary reason for the increases in local retail revenue in both years. The
number of customers increased 28% to 2,183,000 at December 31, 1998, and
increased 59% to 1,710,000 at December 31, 1997. A substantial portion of the
percentage increase in customers in 1997 resulted from the BellSouth
exchange, which occurred during the fourth quarter, diminishing the effect
that transaction had on 1997's revenues. 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 7% to $33.44 in 1998
from $36.11 in 1997, and declined 9% in 1997 from $39.87 in 1996. Monthly local
retail minutes of use per customer was 105 in 1998, 103 in 1997 and 107 in 1996.
Average revenue per minute of use decreased as a result of the pricing and other
incentive programs stated previously, totaling $.32 in 1998 compared to $.35 in
1997 and $.37 in 1996. The decrease in average monthly local retail revenue per
customer primarily reflects the increasing level of competition for wireless
services and the Company's and the industry's continued penetration of the
consumer market.
INBOUND ROAMING REVENUE increased $25.1 million, or 12%, in 1998 and $24.2
million, or 13%, in 1997. The growth in inbound roaming revenue in 1998 is
affected by the exchange of markets with BellSouth. Prior to the BellSouth
exchange, revenue from BellSouth customers from markets included in the exchange
who were roaming in the Company's service areas was recorded as inbound roaming
revenue. Subsequent to the exchange, these roaming transactions are recorded as
outbound roaming revenue, which is reported as an offset to system operations
expense. Also affecting the growth in inbound roaming revenue in 1998 and 1997
was an increase in roaming minutes used on the Company's systems and a decrease
in revenue per minute. Although the number of minutes used by customers from
other wireless systems when roaming in the Company's service areas increased by
48% in 1998 and 27% in 1997, these increases were mostly offset by the decrease
in average revenue per minute due to the downward trend in negotiated rates.
Average inbound roaming revenue per minute totaled $.65 in 1998, $.83 in 1997
and $.92 in 1996. 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. Monthly inbound roaming revenue
per Company customer averaged $10.50 in 1998, $13.81 in 1997 and $18.58 in 1996.
The decreases in monthly inbound roaming revenue per Company customer in both
years are attributable to a larger increase in the Company's customer base than
in inbound roaming revenue.
LONG-DISTANCE REVENUE increased $39.6 million, or 61%, in 1998 and $12.0
million, or 23%, in 1997 as the volume of long-distance calls billed by the
Company increased. A substantial portion of the 1998 increase is due to the
increase in volume of long-distance calls in both the markets acquired in the
BellSouth exchange and the Company's existing markets adjacent to the acquired
markets. Monthly long-distance revenue per customer averaged $4.51 in 1998,
$4.10 in 1997 and $5.05 in 1996.
EQUIPMENT SALES REVENUES increased $15.0 million, or 63%, in 1998 and $6.6
million, or 38%, in 1997. The increases in equipment sales revenues reflect the
20% and 33% increases, respectively, in the number of gross customer
activations, to 896,000 in 1998 from 746,000 in 1997 and 563,000 in 1996, plus
an increase in the volume of accessories sold. Most of the gross customer
activations were produced by the Company's direct and retail distribution
channels; activations from these channels usually generate sales of cellular
telephone units. The increases in the volume of accessories sold in both years
reflect an increased emphasis on the sale of accessories at retail prices
primarily in the Company's retail locations.
22 UNITED STATES CELLULAR CORPORATION
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
OPERATING EXPENSES
OPERATING EXPENSES totaled $986.4 million in 1998, up $239.0 million, or 32%,
over 1997. Operating expenses totaled $747.4 million in 1997, up $154.7
million, or 26%, over 1996. Beginning on January 1, 1998, the Company changed
its income statement presentation of certain corporate marketing department
expenses from general and administrative expenses to marketing and selling
expenses, which the Company believes is the more appropriate classification
for these expenses. Amounts have been reclassified for previous years,
including the 1997 and 1996 information provided throughout this Annual
Report. The effect of such reclassification is not material to either
marketing and selling expenses or general and administrative expenses, and
does not have any effect on operating income or net income.
SYSTEM OPERATIONS EXPENSES increased $40.5 million, or 26%, in 1998 and $35.8
million, or 30%, in 1997. These increases were primarily a result of increases
in customer usage expenses and costs associated with serving the Company's
increased number of customers and the growing number of cell sites within the
Company's systems. In total, system operations costs are expected to continue to
increase as the number of customers using and the number of cell sites within
the Company's systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for the Company's customers' use of their facilities as well as for
the Company's inbound roaming traffic on these facilities. Also included are
costs related to local interconnection to the landline network, toll charges and
expenses incurred by the Company when its customers use systems other than their
local systems ("outbound roaming"). These expenses are offset some- what by
amounts the Company bills to its customers for outbound roaming.
Customer usage expenses increased $30.3 million, or 30%, in 1998 and $24.3
million, or 32%, in 1997. The increases in 1998 and 1997 are primarily due to
the 59% and 85% increases, respectively, 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 increases in
customer usage expenses in 1998 and 1997 were 8% and 20% rises, respectively, in
costs related to the increase in minutes used on the Company's systems,
partially offset by 28% and 64% reductions, respectively, in costs related to
fraudulent use of the Company's customers' cellular telephone numbers.The
Company continues to implement procedures in its markets to combat this fraud,
which is primarily related to roaming usage. Customer usage expenses represented
12% of service revenues both in 1998 and 1997 and 11% in 1996.
Maintenance, utility and cell site expenses increased $10.2 million, or 19%, in
1998, and $11.5 million, or 27%, in 1997. The increase primarily reflects an
increase in the number of cell sites in the Company's systems, to 2,065 in 1998
from 1,748 in 1997 and 1,328 in 1996.
MARKETING AND SELLING EXPENSES increased $49.9 million, or 28%, in 1998, and
$48.7 million, or 37%, in 1997. 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 1998 increase was
primarily due to a 20% rise in the number of gross customer activations, to
896,000 in 1998 from 746,000 in 1997. The 1997 increase was primarily due to a
33% rise in the number of gross customer activations, to 746,000 in 1997 from
563,000 in 1996. Marketing cost per gross customer activation, which includes
marketing and selling expenses and losses on equipment sales, decreased less
than 1% to $317 in 1998 from $318 in 1997, and decreased 4% in 1997 from $332 in
1996. The decrease in cost per gross customer activation has been slowed
somewhat by additional advertising expenses incurred to promote the Company's
brand and to distinguish the Company's service offerings from those of other
competitors.
COST OF EQUIPMENT SOLD increased $12.1 million, or 15%, in 1998, and $8.3
million, or 11%, in 1997. The increases in both years reflect the growth in unit
sales related to the 20% and 33% increases, respectively, in gross customer
activations in 1998 and 1997. Also contributing to the increase was a greater
volume of sales of accessories.
GENERAL AND ADMINISTRATIVE EXPENSES increased $62.1 million, or 31%, in 1998 and
$38.5 million, or 24%, in 1997. 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 start-up costs in 1998 related to its five Communications
Centers, which were created to centralize certain customer service functions.
Employee-related expenses increased $27.3 million, or 29%, in 1998 and $19.4
million, or 26%, in 1997, primarily due to increases in the number of customer
service and administrative employees. The Company is using an ongoing clustering
strategy to combine local and customer service operations wherever feasible in
order to gain operational efficiencies and reduce its per unit administrative
expenses. Monthly general and
UNITED STATES CELLULAR CORPORATION 23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
administrative expenses per customer decreased 11% to $11.37 in 1998 from $12.74
in 1997, and decreased 18% in 1997 from $15.59 in 1996. General and
administrative expenses represented 23% of service revenues in 1998 and 24% both
in 1997 and 1996.
Operating cash flow increased $120.9 million, or 46%, to $382.9 million in 1998
and increased $65.7 million, or 33%, to $261.9 million in 1997. The improvements
in both years were primarily due to substantial growth in customers and service
revenues, the effects of improved operational efficiencies on cash operating
expenses and the effect of net acquisitions. Operating cash flow margins (as a
percent of service revenues) were 34.1% in 1998, 30.7% in 1997 and 29.6% in
1996.
DEPRECIATION EXPENSE increased $69.6 million, or 71%, in 1998 and $23.0 million,
or 31%, in 1997. The increases reflect rising average fixed asset balances,
which increased 27% in 1998 and 35% in 1997, plus a reduction in useful lives of
certain assets beginning in 1998 which increased depreciation expense by an
additional $23.2 million in that year. In 1999, the Company expects depreciation
expense to increase by approximately the same percentage as the increase in
average fixed assets during the year. Increased fixed asset balances in both
1998 and 1997 resulted from the addition of new cell sites built to improve
coverage and capacity in the Company's markets, from upgrades to provide digital
service and from the acquisition of markets from BellSouth in 1997.
AMORTIZATION OF INTANGIBLES increased $4.8 million, or 14%, in 1998 and
$580,000, or 2%, in 1997. The increase in 1998 primarily reflects a 9% increase
in investment in licenses, related both to acquisitions completed during the
year and to the BellSouth exchange completed in 1997.
OPERATING INCOME
OPERATING INCOME totaled $176.1 million in 1998, a 36% increase
over 1997. Operating income totaled $129.5 million in 1997, a 48% increase over
1996. The operating income margin was 15.7% in 1998, 15.2% in 1997 and 13.2% in
1996. The improvements in operating income and operating income margins in both
1998 and 1997 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 1999; however,
management anticipates that average monthly revenue per customer will continue
to decrease as local retail and inbound roaming revenue per minute of use
decline and as the Company further penetrates the consumer market. Additionally,
the Company expects expenses to increase during 1999 as it incurs costs
associated with both customer growth and cell sites added.
Management believes there exists a seasonality in both service revenues, which
tend to increase more slowly in the first and fourth quarters, and operating
expenses, which tend to be higher in the fourth quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter. Additionally, competitors licensed to provide
personal communications services ("PCS") have initiated service in certain of
the Company's markets over the past two and a half 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, in 1997 and 1998 to promote the United States
Cellular(R) 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 $251.8 million in 1998, $95.3 million in
1997 and $177.3 million in 1996. GAIN ON SALE OF CELLULAR AND OTHER
INVESTMENTS totaled $215.2 million in 1998, reflecting gains recorded on the
sales of the Company's majority interest in one market and minority interests
in several markets, and also related to cash received from TDS pursuant to an
agreement between the Company and TDS. Gains totaling $30.3 million were
recorded in 1997 from sales of the Company's majority interest in one market
and minority interests in two other markets, and on cash received from the
settlement of a legal matter. Gains totaling $132.7 million were
24 UNITED STATES CELLULAR CORPORATION
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
recorded in 1996 from sales of the Company's majority interests in eight
markets and minority interests in two other markets, on cash received in an
exchange of markets with another cellular operator and on cash received from
the settlement of two separate legal matters. See "Financial Resources and
Liquidity--Acquisitions and Divestitures" for further discussion of these
transactions.
INVESTMENT INCOME was $42.5 million in 1998, $77.1 million in 1997 and $51.5
million in 1996. Investment income primarily represents the Company's share of
net income from the markets managed by others that are accounted for by the
equity method. Investment income in 1998 was negatively impacted by the
completion of the exchange transaction with BellSouth in 1997 and the
divestitures of certain minority interests to AirTouch Communications
("AirTouch") in the first half of 1998. See "Financial Resources and Liquidity
Acquisitions and Divestitures" for further discussion of these transactions.
INTEREST AND INCOME TAXES
INTEREST EXPENSE totaled $39.8 million in 1998, $29.4 million in 1997 and
$23.1 million in 1996. Interest expense in 1998 is primarily related to
Liquid Yield Option Notes ("LYONs") ($16.5 million); the Company's 7.25%
Notes (the "Notes") issued during the third quarter of 1997 ($18.5 million);
and the Company's revolving credit facility with a series of banks
("Revolving Credit Facility") ($1.1 million). Interest expense in 1997 was
primarily related to LYONs ($15.5 million), the Company's 7.25% Notes ($6.4
million), borrowings under vendor financing agreements ($4.7 million) and
borrowings under the Revolving Credit Agreement with Telephone and Data
Systems, Inc. ("TDS"), the Company's parent organization ($1.9 million).
Interest expense in 1996 was primarily related to LYONs ($14.4 million) and
borrowings under vendor financing agreements ($8.0 million).
In August 1997, the Company sold $250 million principal amount of 7.25% Notes
under a shelf registration statement, priced to yield 7.33% to maturity. The
Notes are unsecured and become due in August 2007. Interest on the Notes is
payable semi-annually on February 15 and August 15 of each year. The Notes will
be redeemable, in whole or in part, at the option of the Company at any time
after August 2004. All borrowings under the vendor financing agreements and
under the Revolving Credit Agreement with TDS were repaid in August 1997 with a
portion of the proceeds from the Notes offering.
The LYONs are zero coupon convertible debentures which accrete interest at 6%
annually, but do not require current cash payments of interest. All accreted
interest is added to the outstanding principal balance on June 15 and December
15 of each year.
The Revolving Credit Facility is a seven-year facility which was established in
1997 to replace the Company's Revolving Credit Agreement with TDS as its primary
short-term borrowing facility. Borrowings under this facility accrue interest at
the London InterBank Offered Rate ("LIBOR") plus 26.5 basis points (for a rate
of 5.3% at December 31, 1998). 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. 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 $57 million during 1998.
INCOME TAX EXPENSE was $171.2 million in 1998, $83.9 million in 1997 and $111.6
million in 1996. In 1998, 1997 and 1996, $86.9 million, $14.1 million and $65.3
million of income tax expense, respectively, related to the gains on sales of
cellular interests. The effective tax rates were 44% in 1998, 43% in 1997 and
46% in 1996. The fluctuation in effective tax rates in each year is primarily
related to the nature of the gains on sales of cellular interests, 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 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 $216.9 million in 1998, $111.5 million in 1997 and $129.9
million in 1996. EARNINGS PER SHARE was $2.48 in 1998, $1.29 in 1997 and $1.51
in 1996. Net income and earnings per share for all three years included
significant after-tax gains on the sales of cellular interests, representing
$128.2 million and $1.46 per share in 1998, $16.2 million and $0.19 per share in
1997 and $67.4 million and $0.78 per share in 1996, respectively.
FINANCIAL RESOURCES AND LIQUIDITY
The Company operates a capital- and marketing-intensive business. In recent
years, the Company has generated operating cash flow and received cash proceeds
from divestitures to fund most of its construction costs and substantially all
of its operating expenses. The Company anticipates further increases in cellular
units in service, revenues, operating cash flow and cell sites as it continues
its growth strategy. Operating cash flow may fluctuate from quarter to quarter
depending on the seasonality of each of these growth factors.
UNITED STATES CELLULAR CORPORATION 25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
CASH FLOWS FROM OPERATING ACTIVITIES provided $311.1 million in 1998, $222.1
million in 1997 and $137.5 million in 1996. Operating cash flow provided $382.9
million in 1998, $261.9 million in 1997 and $196.2 million in 1996. 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 $71.8 million in 1998, $39.8 million in 1997 and $58.7
million in 1996. Income taxes and interest paid totaled $120.0 million in 1998,
$47.1 million in 1997 and $71.4 million in 1996.
CASH FLOWS FROM FINANCING ACTIVITIES required $2.7 million in 1998, provided
$135.9 million in 1997 and required $11.2 million in 1996. In 1997, the Notes
offering provided $243.1 million of cash. A portion of the proceeds from the
Notes offering was used to repay all outstanding borrowings under the Revolving
Credit Agreement with TDS and under vendor financing agreements, aggregating
$160.5 million. Repayments of borrowings under the vendor financing agreements
earlier in 1997 totaled $13.7 million. In 1996, issuances of USM Common Shares,
primarily to TDS, provided $10.5 million while repayments of debt under the
vendor financing agreements required $21.5 million.
CASH FLOWS FROM INVESTING ACTIVITIES required $270.2 million in 1998, $358.5
million in 1997 and $150.3 million in 1996. Cash required for property, plant
and equipment and system development expenditures totaled $320.4 million in
1998, $318.7 million in 1997 and $248.1 million in 1996. In 1998 and 1996, these
expenditures were financed primarily with internally generated cash and the
proceeds from the sales of cellular interests. In 1997, these expenditures were
financed primarily with internally generated cash and the proceeds of the Notes
offering. These expenditures primarily represent the construction of 281,331 and
242 cell sites in 1998, 1997 and 1996, respectively, plus other plant additions
and costs related to the development of the Company's office systems. In 1998,
other plant additions included significant amounts related to the replacement of
retired assets and the changeout of analog radio equipment for digital radio
equipment. The Company received net cash proceeds totaling $148.3 million in
1998, $61.1 million in 1997 and $213.0 million in 1996 related to sales of
cellular interests. Cash distributions from cellular entities in which
theCompany has an interest provided $27.7 million in 1998, $52.4 million in 1997
and $23.5 million in 1996. Acquisitions required $117.3 million in 1998, $128.8
million in 1997 and $116.4 million in 1996.
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.
In 1998, the Company acquired majority interests in six markets and other
interests in several markets, representing approximately 1.3 million pops, for a
total consideration of $168.3 million. The consideration primarily consisted of
cash and approximately 46,000 USM Common Shares issued to TDS as reimbursement
for consideration paid by TDS directly to the sellers.
In 1997, the Company purchased majority interests in two markets and several
minority interests, representing approximately 534,000 pops. The total
consideration paid for these purchases, primarily in the form of cash and USM
Common Shares issued to TDS to reimburse TDS for the value of TDS Common Shares
issued to third parties, totaled $81.4 million.
Also in 1997, the Company completed an exchange with BellSouth. Pursuant to the
exchange, USM received majority interests representing approximately 4.0 million
pops in exchange for majority interests representing approximately 2.0 million
pops, minority interests representing approximately 1.2 million pops, and a net
amount of $86.7 million in cash.
26 UNITED STATES CELLULAR CORPORATION
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The majority interests USM received are in 12 markets adjacent to its
Iowa/Missouri/Illinois/Indiana and Wisconsin/ Illinois clusters.
In 1996, the Company purchased majority interests in two markets and several
minority interests, representing approximately 1.0 million pops, and received a
majority interest in another market through an exchange with another cellular
operator. The total consideration paid for these purchases, primarily in the
form of cash and USM Common Shares issued to TDS to reimburse TDS for the value
of TDS Common Shares issued to third parties, totaled $158.9 million. Included
in these acquisitions are minority interests representing approximately 598,000
pops the Company acquired from TDS for $102.8 million in cash, pursuant to an
agreement entered into in June 1996.
In 1998, the Company divested a majority interest in one market and minority
interests in several markets, representing approximately 1.1 million pops. In
exchange, the Company received approximately 4.1 million shares of AirTouch
stock and cash totaling $148.4 million. Approximately $28.7 million of the total
cash received was pursuant to a contract right termination agreement entered
into between the Company and TDS. This agreement was related to two interests
which were sold directly by TDS to AirTouch and which were to be acquired by the
Company as part of a June 1996 agreement between the Company and TDS. The
contract right termination agreement enabled the Company to receive cash equal
to the value of the gain the Company would have realized had it purchased the
interests from TDS and sold them to AirTouch under terms similar to those in the
agreement between TDS and AirTouch.
In 1997, the Company sold a majority interest in one market and minority
interests in two other markets, representing approximately 358,000 pops, for an
aggregate consideration of $54.5 million in cash and receivables.
In 1996, the Company sold majority interests in eight markets and minority
interests in two other markets, representing approximately 1.2 million pops, and
divested a majority interest in another market through an exchange with another
cellular operator. The Company received cash consideration totaling $187.8
million from these sales and from the exchange. The Company also settled two
separate legal matters during 1996, receiving $30.3 million in cash from those
transactions. In total, sales, exchange and litigation settlements provided the
Company with cash totaling $218.1 million in 1996.
As of December 31, 1998, the Company had agreements pending to acquire minority
interests in two markets in which it already owns majority interests,
representing 74,000 pops, for consideration totaling $8.1 million in cash. Also
at December 31, 1998, the Company had an agreement pending to divest a majority
interest in one market, representing 264,000 pops, for $35.2 million in cash.
The Company will not record a gain or loss on the sale transaction. The Company
expects all of the pending transactions to be completed in the first half of
1999.
LIQUIDITY
The Company anticipates that the aggregate resources required for 1999 will
include approximately $300 million for capital spending and approximately $8
million to complete pending acquisitions. 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 $52 million of cash and
cash equivalents at December 31, 1998 and expects to receive approximately $35
million from a pending divestiture. 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.
UNITED STATES CELLULAR CORPORATION 27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
TDS TRACKING STOCK
Proposal On December 18, 1998, TDS announced that it had
with-drawn its offer to acquire all of the issued Common Shares of the Company
which TDS does not own, pursuant to a merger, in exchange for a TDS tracking
stock which follows the performance of the Company. Earlier in 1998, the
Company's Board of Directors had appointed Mr. Paul- Henri Denuit, an
independent Director of the Company, to a special committee (the "Special
Committee") of the Board of Directors to consider this offer. Because the offer
to acquire the Company's Common Shares was withdrawn, the Special Committee was
dissolved.
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 does not enter
into financial derivatives to reduce its exposure to interest rate risks.
The Company has $995.0 million of debt repayments which are all due after 2003.
The weighted average interest rate on this debt is 6.59%, and the fair value of
the debt was $562.3 million as of December 31, 1998. The fair value was
estimated using discounted cash flow analysis.
The Company maintains a portfolio of available for sale marketable equity
securities which were acquired as consideration for the divestiture of certain
non-strategic cellular interests. The market value of these investments, in the
form of AirTouch common shares, amounted to approximately $296.9 million at
December 31, 1998. A hypothetical 10% decrease in the price of these shares
would result in a $29.7 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 between all TDS business
units to share knowledge and solution techniques. The Year 2000 effort covers
the network and supporting infrastructure for the provision of cellular
services; the operational and financial information technology ("IT") systems
and applications, 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.
The assessment phase was largely complete early in the first quarter of 1999.
Certain critical systems and hardware components have been identified and are in
the renovation phase. The renovation phase consists of the conversion or
replacement of selected platforms, applications, databases and utilities. The
renovation of critical hardware, systems and applications is scheduled to be
substantially completed by the third quarter of 1999.
The validation phase includes testing, verifying and validating the renovated or
replaced platforms, applications, databases and utilities. The validation phase
consists of independent verification testing of key hardware, systems and
applications as well as network and system component upgrades received from
suppliers. In addition, selected Year 2000 upgrades are slated to undergo
testing in a controlled environment that replicates the current environment and
is equipped to simulate the turn of the century and leap year dates. The
Cellular Telecommunications Industry Association ("CTIA") has formed a working
group to coordinate efforts of various carriers and manufacturers to facilitate
inter-network Year 2000 testing. Validation of critical hardware, systems and
applications is scheduled to be completed in the third quarter of 1999.
The implementation phase involves switching over to the converted and renovated
systems and applications. This phase is expected to be completed during the
fourth quarter of 1999.
28 UNITED STATES CELLULAR CORPORATION
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Management cannot provide assurance that its plan to achieve Year 2000
compliance will be successful as it is subject to various risks and
uncertainties. The Company's current schedule is subject to change depending on
developments that may arise through unforeseen circumstances in the renovation,
validation and implementation phases of the Company's compliance efforts.The
Company, like most other telecommunications operators, is highly dependent on
the telecommunications network vendors to provide compliant hardware, systems
and applications and on other third parties, including vendors, other
telecommunications service providers, government agencies and financial
institutions, to deliver reliable services. The Company is dependent on the
development of compliant hardware, systems and applications and upgrades by
experts, both internal and external, and the availability of critical resources
with the requisite skill sets. The Company's ability to meet its target dates is
dependent upon the timely provision of necessary upgrades and modifications by
its suppliers and internal resources. In addition, the Company cannot guarantee
that third parties on whom it depends for essential services (such as electric
utilities, financial institutions, interconnected telecommunications operators,
etc.) will convert their critical systems and processes in a timely manner.
Failure or delay by any of these parties could significantly disrupt the
Company's business, including the provision of cellular service to customers,
billing and collection processes and other areas of the business, and cause a
material adverse effect on the Company's results of operations, financial
position and cash flow.
The Company's worst case scenario regarding the Year 2000 Issue may involve
interruption of telecommunications services and data processing service and/or
interruption of customer billing, operating and other information systems. As
part of its Year 2000 initiative, the Company is evaluating a variety of adverse
scenarios and is in the process of developing contingency and business
continuity plans tailored for adverse Year 2000-related occurrences. The
contingency and business continuity plans are expected to assess the potential
for business disruption in various scenarios, and to provide key operational
backup, recovery and restorational alternatives.
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 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; 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 having these
contingency plans in place before December 31, 1999.
The Company estimates that the total direct costs related to the Year 2000
project will be approximately $3 million to $5 million. Through December 31,
1998, the total direct costs associated with the Year 2000 Issue were
approximately $1 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 systems which are by
design Year 2000 compliant but which will be tested. 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. The Company anticipates making further capital expenditures
during 1999 for similar purposes. The timing of the Company's specific Year 2000
project expenditures may vary and is not necessarily indicative of readiness
efforts or progress to date. Though specific 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.
UNITED STATES CELLULAR CORPORATION 29
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands, except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Service $ 1,123,454 $ 852,991 $ 662,681
Equipment sales 39,013 23,974 17,387
----------- ---------- -----------
Total Operating Revenues 1,162,467 876,965 680,068
----------- ---------- -----------
Operating Expenses
System operations 193,625 153,137 117,368
Marketing and selling 228,844 178,984 130,310
Cost of equipment sold 94,378 82,302 74,023
General and administrative 262,766 200,620 162,162
Depreciation 167,150 97,591 74,631
Amortization of intangibles 39,629 34,788 34,208
----------- ---------- -----------
Total Operating Expenses 986,392 747,422 592,702
----------- ---------- -----------
----------- ---------- -----------
Operating Income 176,075 129,543 87,366
----------- ---------- -----------
Investment and Other Income
Investment income 42,451 77,121 51,518
Amortization of licenses related to investments (1,039) (2,084) (1,391)
Interest income 5,695 5,863 10,093
Other (expense), net (4,413) (3,614) (1,881)
Minority share of income (6,039) (12,298) (13,743)
Gain on sale of cellular and other investments 215,154 30,318 132,718
----------- ---------- -----------
Total Investment and Other Income 251,809 95,306 177,314
----------- ---------- -----------
Income Before Interest and Income Taxes 427,884 224,849 264,680
----------- ---------- -----------
Interest Expense
Interest expense - other 39,772 27,414 23,111
Interest expense - affiliate -- 1,948 --
----------- ---------- -----------
Total Interest Expense 39,772 29,362 23,111
----------- ---------- -----------
Income Before Income Taxes 388,112 195,487 241,569
Income tax expense 171,165 83,948 111,640
----------- ---------- -----------
Net Income $ 216,947 $ 111,539 $ 129,929
----------- ---------- -----------
Weighted Average Common and Series A Common Shares (000s) 87,323 86,346 85,797
Basic Earnings Per Common and Series A Common Share $ 2.48 $ 1.29 $ 1.51
----------- ---------- -----------
DILUTED EARNINGS PER COMMON AND SERIES A COMMON SHARE $ 2.48 $ 1.29 $ 1.51
----------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
30 UNITED STATES CELLULAR CORPORATION
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 216,947 $ 111,539 $ 129,929
Add (Deduct) adjustments to reconcile net
income to net cash provided by operating activities
Depreciation and amortization 206,779 132,379 108,839
Deferred income tax provision 107,201 24,077 63,137
Investment income (42,451) (77,121) (51,518)
Minority share of income 6,039 12,298 13,743
Gain on sale of cellular and other investments (215,154) (30,318) (132,718)
Other noncash expense 24,660 18,786 19,260
Change in accounts receivable (26,998) (10,038) (16,706)
Change in accounts payable 61,977 (1,646) 12,709
Change in accrued interest 532 6,413 204
Change in accrued taxes (26,246) 26,297 (10,185)
Change in customer deposits and deferred revenues 6,523 5,083 5,254
Change in other assets and liabilities (8,710) 4,388 (4,439)
----------- ---------- -----------
311,099 222,137 137,509
----------- ---------- -----------
Cash Flows from Financing Activities
Issuance of 7.25% unsecured notes -- 243,053 --
Vendor financing borrowings -- -- 3,922
Repayment of vendor financing -- (103,827) (21,519)
Borrowings from Revolving Credit Facility 57,000 -- --
Repayment of Revolving Credit Facility (57,000) -- --
Borrowings from Revolving Credit Agreement - TDS -- 70,444 --
Repayment of Revolving Credit Agreement - TDS -- (70,444) --
Repayment of notes payable (1,302) -- --
Common Shares issued 2,567 2,503 10,483
Capital distributions to minority partners (3,991) (5,849) (4,099)
----------- ---------- -----------
(2,726) 135,880 (11,213)
Cash Flows from Investing Activities
Additions to property, plant and equipment (274,375) (277,799) (219,370)
System development costs (46,042) (40,949) (28,753)
Investments in and advances to minority interests in cellular entities (2,823) (20,084) (22,256)
Distributions from minority interests in cellular entities 27,740 52,365 23,464
Proceeds from sale of cellular and other investments 148,329 61,145 212,979
Acquisitions, excluding cash acquired (117,319) (128,828) (116,387)
Change in temporary investments and
marketable non-equity securities 468 (1,088) --
Other investing activities (6,227) (3,305) --
----------- ---------- -----------
(270,249) (358,543) (150,323)
----------- ---------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 38,124 (526) (24,027)
Cash and Cash Equivalents -
Beginning of period 13,851 14,377 38,404
----------- ---------- -----------
End of period $ 51,975 $ 13,851 $ 14,377
----------- ---------- -----------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
UNITED STATES CELLULAR CORPORATION 31
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - ASSETS
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents
General funds $ 15,576 $ 13,851
Affiliated cash equivalents 36,399 --
------------ ------------
51,975 13,851
Temporary investments 284 218
Accounts receivable
Customers, less allowance of
$6,054 and $5,259, respectively 99,931 81,387
Roaming 46,634 30,689
Affiliates 26 170
Other 13,671 17,536
Inventory 16,673 11,836
Prepaid expenses 10,506 15,714
Other current assets 3,105 3,963
------------ ------------
242,805 175,364
------------ ------------
Investments
Licenses, net of accumulated amortization of
$158,480 and $127,783, respectively 1,248,053 1,150,924
Minority interests in cellular entities 92,886 128,810
Notes and interest receivable 11,530 10,673
Marketable equity securities 296,860 --
Marketable non-equity securities 336 870
------------ ------------
1,649,665 1,291,277
------------ ------------
Property, Plant and Equipment
In service and under construction 1,400,597 1,212,575
Less accumulated depreciation 389,754 272,322
------------ ------------
1,010,843 940,253
------------ ------------
Deferred Charges
System development costs, net of accumulated amortization
of $6,483 and $18,117, respectively 127,742 78,306
Other, net of accumulated amortization
of $8,502 and $4,639, respectively 16,581 23,716
------------ ------------
144,323 102,022
Total Assets $ 3,047,636 $ 2,508,916
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
32 UNITED STATES CELLULAR CORPORATION
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Notes payable $ -- $ 1,302
Accounts payable
Affiliates 11,508 2,466
Other 172,568 101,263
Customer deposits and deferred revenues 27,575 21,019
Accrued interest 7,069 6,534
Accrued taxes 13,928 41,606
Accrued compensation 13,263 9,112
Other current liabilities 12,362 20,934
------------ --------------
258,273 204,236
------------ --------------
Long-term Debt
6% zero coupon convertible debentures 281,487 265,330
7.25% unsecured notes 250,000 250,000
------------ --------------
531,487 515,330
------------ --------------
Deferred Liabilities and Credits
Net deferred income tax liability 258,123 100,725
Other 5,914 5,397
------------ --------------
264,037 106,122
------------ --------------
Minority Interest 43,609 53,908
------------ --------------
Common Shareholders' Equity
Common Shares, par value $1 per share;
authorized 140,000,000 shares; issued and outstanding
54,364,729 and 54,232,486 shares, respectively 54,365 54,232
Series A Common Shares, par value $1 per share;
authorized 50,000,000 shares;
issued and outstanding 33,005,877 shares 33,006 33,006
Additional paid-in capital 1,319,895 1,285,530
Accumulated other comprehensive income 69,465 --
Retained earnings 473,499 256,552
------------ --------------
1,950,230 1,629,320
Total Liabilities and Shareholders' Equity $ 3,047,636 $ 2,508,916
------------ --------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
UNITED STATES CELLULAR CORPORATION 33
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Series A Additional Common Compre- Compre-
Common Common Paid-In Shares hensive hensive Retained
(Dollars in thousands) Shares Shares Capital Issuable Income Income Earnings
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 49,966 $33,006 $ 1,206,614 $ 24,784 $ -- $ -- $ 15,084
Add (Deduct)
Acquisition of
cellular interests 2,194 -- 65,089 -- -- -- --
Employee benefit plans 62 -- 1,575 -- -- -- --
Redemption of USM and
TDS Preferred Stock 895 -- 17,555 -- -- -- --
Transfer of interests
from TDS -- -- (45,761) -- -- -- --
Capital stock expense -- -- (6) -- -- -- --
Shares issued pursuant to
acquisition agreements -- -- -- (24,784) -- -- --
Net income and
comprehensive income -- -- -- -- 129,929 -- 129,929
--------- ------- ------------ --------- -------- ------- ----------
Balance, December 31, 1996 53,117 33,006 1,245,066 -- -- 145,013
Add (Deduct)
Acquisition of
cellular interests 996 -- 31,489 -- -- -- --
Employee benefit plans 118 -- 2,376 -- -- -- --
Redemption of USM and
TDS Preferred Stock 1 -- 35 -- -- -- --
Sale of interests transferred
from TDS -- -- 6,591 -- -- -- --
Capital stock expense -- -- (27) -- -- -- --
Net income and
comprehensive income -- -- -- -- 111,539 -- 111,539
--------- ------- ------------ --------- -------- ------- ----------
Balance, December 31, 1997 54,232 33,006 1,285,530 -- -- 256,552
Add (Deduct)
Acquisition of
cellular interests 46 -- 1,257 -- -- -- --
Employee benefit plans 87 -- 2,480 -- -- -- --
Sale of interests transferred
from TDS -- -- 30,628 -- -- -- --
Net income -- -- -- -- 216,947 -- 216,947
Other Comprehensive Income:
Unrealized gain on
marketable equity
securities -- -- -- -- 69,465 69,465 --
---------
Comprehensive income -- -- -- -- $ 286,412 -- --
--------- ------- ------------ --------- --------- ------- ----------
Balance, December 31, 1998 $ 54,365 $33,006 $1,319,895 $ -- $69,465 $ 473,499
--------- ------- ------------ --------- ------- ----------
</TABLE>
34 UNITED STATES CELLULAR CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, United States Cellular Corporation (the "Company" or "USM")
received a proposal from Telephone and Data Systems, Inc.("TDS"), which was part
of a plan which had been adopted by the TDS Board of Directors and then approved
by the shareholders of TDS in April 1998, to authorize three new classes of
common stock. The three new classes of stock were intended to separately reflect
the performance of TDS's cellular telephone, telephone and personal
communications services businesses ("Tracking Stocks").
TDS proposed to issue Cellular Group Shares in exchange for all of the Common
Shares of USM which are not owned by TDS, subject to approval by the Board of
Directors and the shareholders of USM, and distribute one Cellular Group Share
in the form of a stock dividend with respect to each outstanding Series A Common
Share and Common Share of the Company.
On December 18, 1998, TDS announced that it had withdrawn its offer to acquire
all of the issued Common Shares of the Company which TDS does not own, pursuant
to a merger, in exchange for a TDS tracking stock which follows the performance
of the Company. Earlier in 1998, the Company's Board of Directors had appointed
Mr. Paul-Henri Denuit, an independent Director of the Company, to a special
committee (the "Special Committee") of the Board of Directors to consider this
offer. Because the offer to acquire the Company's Common Shares was withdrawn,
the Special Committee was dissolved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY, A DELAWARE
Corporation, is currently an 81.0%-owned subsidiary of Telephone and Data
Systems, Inc.
NATURE OF OPERATIONS
USM owns, manages and invests in cellular systems throughout the United States
and is the nation's eleventh largest cellular telephone company in terms of
customers. The Company owned interests in 183 cellular markets, representing
approximately 26.4 million population equivalents ("pops"), as of December 31,
1998. USM's 138 majority-owned and managed markets, primarily mid-sized and
rural markets, served 2,183,000 customers in 24 states as of December 31, 1998.
USM's Midwest Regional Market Cluster, which includes markets in Iowa,
Wisconsin, Illinois and Missouri, served 924,000 customers at December 31, 1998,
representing approximately 42% of USM's total customers served as of that date.
PRINCIPLES OF CONSOLIDATION
The accounting policies of USM conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of USM,
its majority-owned subsidiaries, and partnerships in which USM has a majority
partnership interest. All material intercompany accounts and transactions have
been eliminated.
USM includes as investments in subsidiaries the value of the consideration given
and all direct and incremental costs relating to acquisitions accounted for as
purchases. All costs relating to unsuccessful negotiations for acquisitions are
expensed.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates, but management
believes any differences will not be material.
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
CASH AND CASH EQUIVALENTS
AND TEMPORARY INVESTMENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to 12 months are classified
as Temporary investments. Temporary investments are stated at cost. Those
investments with original maturities of more than 12 months are classified as
Marketable securities and are stated at amortized cost.
As part of its cash management program, the Company utilizes controlled
disbursement banking arrangements. Outstanding checks in excess of cash
balances totaled $21.2 million at December 31, 1998 and are classified as
Accounts payable in the Consolidated Balance Sheets. Sufficient funds were
available to fund these outstanding checks when presented for payment.
The carrying amounts of Cash and cash equivalents and Temporary investments
approximate their fair value due to the short-term nature of these investments.
UNITED STATES CELLULAR CORPORATION 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTS RECEIVABLE
Accounts receivable consists of amounts owed by customers for both service
provided and equipment sales, by other cellular carriers whose customers have
used USM's cellular systems, by affiliated entities and by other partners for
capital contributions and distributions.
DEFERRED CHARGES
Deferred system development costs represent costs incurred
for the development of new information systems. Capitalized costs of information
systems development are or will be amortized over a five- or seven-year period,
starting when each new system is placed in service.
Other deferred charges primarily represent legal and other charges incurred
relating to the preparation of the agreements related to the Company's various
borrowing instruments, and are amortized over the respective financing periods
of each instrument (seven to 20 years).
REVENUES
Revenues from operations primarily consist of charges to customers for monthly
access, cellular airtime, data usage, vertical services, roaming charges,
long-distance charges and equipment sales. Revenues are recognized as services
are rendered. Unbilled revenues, resulting from cellular service provided from
the billing cycle date to the end of each month and from other cellular
carriers' customers using USM's cellular systems for the last half of each
month, are estimated and recorded. Equipment sales are recognized upon delivery
to the customer and reflect charges to customers for cellular telephone user
equipment purchased.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs totaled
$52.4 million, $41.4 million and $24.4 million for the years ended December
31, 1998, 1997 and 1996, respectively.
PENSION PLAN
Telephone and Data Systems, Inc. Wireless Companies' Pension Plan (the
"Pension Plan"), a qualified noncontributory defined contribution pension
plan, was adopted effective January 1, 1994. It provides pension benefits for
the employees of USM and its subsidiaries. Under this plan, pension benefits
and costs are calculated separately for each participant and are funded
currently. Pension costs were $3.3 million, $1.0 million and $1.5 million in
1998, 1997 and 1996, respectively.
ACCOUNTING FOR COMPUTER SOFTWARE
DEVELOPED FOR OR OBTAINED FOR INTERNAL USE
The American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 98-1 "Accounting for Computer Software Developed
for or Obtained for Internal Use" which became effective January 1999. To
eliminate the diversity in practice in accounting and improve financial
reporting, SOP 98-1 provides guidance for accounting for software developed for
internal use. Management is currently analyzing the impact of this statement,
but does not anticipate that the effect on results of operations and financial
position will be material.
3. INCOME TAXES
USM is included in a consolidated federal income tax return with other members
of the TDS consolidated group.
TDS and USM are parties to a Tax Allocation Agreement
(the "Agreement"). The Agreement provides that USM and its subsidiaries be
included with the TDS affiliated group in a consolidated federal income tax
return and in state income or franchise tax returns in certain situations. USM
and its subsidiaries calculate their losses and credits as if they comprised a
separate affiliated group. Under the Agreement, USM is able to carry forward its
losses and credits and use them to offset any future income tax liabilities to
TDS.
Income tax provisions charged to net income are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes
Current $ 52,613 $ 46,357 $ 35,613
Deferred 91,671 22,109 54,509
State income taxes
Current 11,351 13,514 12,890
Deferred 15,530 1,968 8,628
--------- -------- ----------
Total income
tax expense $ 171,165 $83,948 $ 111,640
--------- -------- ----------
</TABLE>
36 UNITED STATES CELLULAR CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate below:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.4 5.1 5.7
Amortization of license
acquisition costs .6 1.7 1.1
Corporations not included
in consolidated federal
income tax return .4 .4 .8
Changes in tax basis 1.7 -- --
Valuation allowance on
deferred tax asset -- -- (1.2)
Sale of cellular interests .7 .8 4.8
Resolution of prior
period tax issues .8 -- --
Other .5 (.1) --
---- ----- -----
Effective income tax rate 44.1% 42.9% 46.2%
---- ----- -----
</TABLE>
Deferred income taxes are provided for the temporary differences between the
amount of the Company's assets and liabilities for financial reporting purposes
and their tax basis.
USM had current deferred tax assets totaling $1.5 million and $2.5 million at
December 31, 1998 and 1997, respectively, resulting primarily from the allowance
for customer receivables.
The temporary differences that gave rise to the noncurrent deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Asset
Net operating loss carryforward $ 14,719 $ 14,725
Taxes on acquisitions 28,190 56,384
Alternative minimum
tax credit carryforward -- 7,121
Partnership investments 7,492 --
Other -- 619
--------- ----------
50,401 78,849
Less valuation allowance 13,448 10,233
--------- ----------
Total Deferred Tax Asset 36,953 68,616
Deferred Tax Liability
Marketable equity securities 106,194 --
Property, plant and equipment 67,803 52,668
Equity investments 63,650 65,956
Licenses 46,459 40,624
Partnership investments -- 10,093
Other 10,970 --
--------- ----------
Total Deferred Tax Liability 295,076 169,341
Net Deferred Tax Liability $258,123 $100,725
--------- ----------
</TABLE>
The amount of state net operating loss ("NOL") carryforward (generating a $11.6
million deferred tax asset) available to offset future taxable income is
primarily from the individual subsidiaries which generated the loss. The
aggregate NOL is approximately $175.2 million at December 31, 1998 and expires
between 1999 and 2013. A valuation allowance has been provided when it is more
likely than not that some portion of the deferred tax asset will not be
realized.
USM has certain subsidiaries which are not included in the federal consolidated
income tax return, but file separate tax returns. These subsidiaries had a
federal NOL carryforward (generating a $3.1 million deferred tax asset)
available to offset future taxable income aggregating approximately $8.2 million
at December 31, 1998 which expires between 2004 and 2013.
The financial reporting basis of the marketable equity securities was greater
than the tax basis at the date of acquisition, generating $59.9 million of
deferred taxes. Additionally, the value of the marketable equity securities has
appreciated since acquisition, generating $46.3 million of deferred taxes.
4. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," effective December 31, 1997. Earnings per Share
amounts for 1996 have been restated to conform to current year presentation.
The amounts used in computing Earnings per Common Share and the effect on income
and the weighted average number of Common and Series A Common Shares of dilutive
potential common stock are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
(Dollars and shares in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income used in
Basic and Diluted
Earnings Per Share $216,947 $111,539 $129,929
-------- -------- --------
Weighted Average
Number of Common
Shares used in Basic
Earnings Per Share 87,323 86,346 85,797
Effect of
Dilutive Securities:
Convertible
Preferred Stock -- -- 51
Stock Options
and Stock
Appreciation Rights 48 52 78
Common Shares
Issuable -- -- 115
-------- -------- --------
Weighted Average
Number of Common
Shares used in Diluted
Earnings Per Share 87,371 86,398 86,041
-------- -------- --------
</TABLE>
UNITED STATES CELLULAR CORPORATION 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Common and Series A Common Share for the years ended December
31, 1998, 1997 and 1996 contain significant income amounts related to gains
on the sale of cellular and other investments. Excluding the after-tax effect
of these gains, both basic and diluted earnings per share were $1.02, $1.10
and $.73 for the years ended December 31, 1998, 1997 and 1996, respectively.
5. INVESTMENT IN LICENSES
Investment in licenses consists of the costs incurred in acquiring Federal
Communications Commission ("FCC") licenses to provide cellular service. These
costs include amounts paid to license applicants and owners of interests in
cellular entities awarded licenses and all direct and incremental costs
relating to acquiring the licenses. These costs are capitalized and amortized
through charges to expense over 40 years, upon commencement of operations.
Amortization expense amounted to $33.7 million, $29.2 million and $27.3
million in 1998, 1997 and 1996, respectively. Costs applicable to
unsuccessful license applications are charged to expense. Investment in
licenses at December 31, 1998 and 1997 include approximately $242 million and
$281 million, respectively, of goodwill related to various acquisitions
structured to be tax-free. No deferred taxes have been provided on this
goodwill.
6. MINORITY INTERESTS IN CELLULAR ENTITIES
Minority interests in cellular entities consist of amounts invested in cellular
entities in which USM holds a minority interest. These investments are accounted
for using either the equity or cost method, as shown in the following table:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Equity method investments:
Capital contributions,
loans and advances $ 32,444 $ 66,182
Cumulative share of income 187,279 177,798
Cumulative share of distributions (130,295) (117,174)
---------- ----------
89,428 126,806
Cost method investments:
Capital contributions,
net of partnership distributions 3,458 2,004
---------- ----------
Total minority interests
in cellular entities $ 92,886 $ 128,810
---------- ----------
</TABLE>
As of December 31, 1998, USM followed the equity method of accounting for
minority interests in 38 markets where the Company's ownership interest is 3% or
greater. This method recognizes, on a current basis, USM's proportionate share
of the income and losses accruing to it under the terms of the respective
partnership and shareholder agreements. As of December 31, 1998, USM followed
the cost method of accounting for its investments in seven markets where the
Company's ownership interest is less than 3%.
The following summarizes the unaudited balance sheets and results of operations
of the cellular system entities in which the USM's investments are accounted for
by the equity method:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------
(Unaudited, dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current $ 598,071 $ 361,561
Due from affiliates 6,721 2,724
Property and other 1,089,172 1,050,755
---------- ------------
$1,693,964 $ 1,415,040
---------- ------------
Liabilities and Partners` capital
Current liabilities $ 389,294 $ 249,587
Due to affiliates 26,022 38,429
Deferred credits 783 6,604
Long-term debt 321,026 27,195
Partners` capital
and shareholders' equity 956,839 1,093,225
---------- ------------
$1,693,964 $1,415,040
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
(Unaudited, dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Results of Operations
Revenues $1,548,884 $1,652,683 $1,269,835
Costs and expenses 1,055,214 1,178,970 859,026
---------- ---------- ----------
Operating income 493,670 473,713 410,809
Other (expense)
income (19,639) (7,292) 832
---------- ---------- ----------
Net income $ 474,031 $ 466,421 $ 411,641
---------- ---------- ----------
</TABLE>
7. MARKETABLE EQUITY SECURITIES
On January 30, 1998 and April 6, 1998, USM completed sales in which the
Company received 4.1 million AirTouch Communications, Inc. ("AirTouch")
common shares as consideration. These shares are classified as
available-for-sale (see Note 10 - Acquisitions, Exchanges and Divestitures).
At December 31, 1998, these noncurrent marketable equity securities are
carried at market value ($296.9 million), which is greater than amounts
recorded at historical cost ($181.1 million) resulting in an unrealized gain
of $69.5 million, net of taxes ($46.3 million). The market value for the
marketable equity securities is based on quoted market prices. The Company's
net unrealized holding gain is included as an increase to Common
Shareholders' Equity.
38 UNITED STATES CELLULAR CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
provision for depreciation as a percentage of depreciable property, plant and
equipment was 13.6%, 10.3% and 10.4% in 1998, 1997 and 1996, respectively.
Composite depreciation as a percentage of depreciable property increased in 1998
due to the reduction in useful lives of certain assets in 1998, increasing the
provision for depreciation.
The Company records renewals and betterments of units of property as
additions to plant in service. The original cost of depreciable property
retired is removed from plant in service and, together with removal cost less
any salvage realized, is charged to depreciation expense. Repairs and
renewals of minor units of property are charged to system operations expense.
Property, plant and equipment in service and under construction consists of:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Cell site-related equipment $ 790,292 $ 725,544
Switching-related equipment 116,198 105,955
Office furniture and equipment 127,397 89,987
Land, buildings and
leasehold improvements 237,361 199,108
Work in process 70,197 44,000
Other operating equipment 59,152 47,981
---------- -----------
$1,400,597 $1,212,575
---------- -----------
</TABLE>
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
USM acquired certain cellular licenses and other cellular interests during 1998,
1997 and 1996. In conjunction with these acquisitions, the following assets were
acquired, liabilities assumed and Common Shares issued:
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Property, plant
and equipment, net $ 18,417 $112,696 $ 7,069
Cellular licenses 94,590 130,336 90,341
(Decrease) increase in
equity-method minority
investments in entities (2,317) (90,332) 13,971
Accounts receivable 4,551 26,032 1,332
Accounts payable (370) (31,117) (1,081)
Other assets and liabilities,
excluding cash acquired 3,751 13,699 1,493
Common Shares issued
and issuable (1,303) (32,486) 3,262
--------- --------- ---------
Decrease in cash due
to acquisitions $117,319 $128,828 $116,387
--------- --------- ---------
</TABLE>
Following are supplemental cash flow disclosures regarding interest and income
taxes paid and certain noncash transactions:
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 18,966 $6,816 $ 7,001
Income taxes paid 101,041 40,316 64,402
Noncash interest expense 16,157 15,379 16,110
Additions to Property,
Plant and Equipment
and System Development
financed through
Accounts Payable 21,528 8,514 2,737
Common Shares issued
by USM for redemption
of USM Preferred
Stock and TDS
Preferred Shares $ -- $ 36 $18,450
-------- ------ -------
</TABLE>
10. ACQUISITIONS, EXCHANGES AND DIVESTITURES
USM has acquired cellular interests for cash, promissory notes and USM and TDS
Common Shares. USM has also divested cellular interests for cash, notes
receivable and marketable equity securities and has completed exchanges of
cellular interests with other cellular companies.
COMPLETED ACQUISITIONS
During 1998, USM completed the acquisition of majority interests in six markets
and several minority interests, representing approximately 1.3 million pops, for
a total consideration of $168.3 million as shown in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) Consideration
- --------------------------------------------------------------------------------
<S> <C>
46,000 Common Shares to TDS(1) $ 1.3
Increase in Revolving Credit Facility 34.8
Repayment of Note Receivable 3.4
Cash 128.8
-------
Total $ 168.3
-------
</TABLE>
(1) ISSUED TO REIMBURSE TDS FOR TDS SECURITIES ISSUED TO THIRD PARTIES IN
CONNECTION WITH THE ACQUISITIONS.
During 1997, USM completed the acquisition of majority interests in two markets
and several minority interests, representing approximately 534,000 pops, for a
total consideration of $81.4 million as shown in the following table:
<TABLE>
<CAPTION>
(Dollars in millions) Consideration
- ---------------------------------------------------------------------------------
<S> <C>
1.0 million Common Shares to TDS(1) $ 32.5
Increase in Revolving Credit Agreement with TDS 39.0
Cash 9.9
------
Total $ 81.4
- ---------------------------------------------------------------------------------
</TABLE>
(1) ISSUED TO REIMBURSE TDS FOR TDS SECURITIES ISSUED AND CASH PAID TO THIRD
PARTIES IN CONNECTION WITH THE ACQUISITIONS.
UNITED STATES CELLULAR CORPORATION 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assuming that the 1998 and 1997 acquisitions discussed above, which were
accounted for as purchases, had taken place on January 1, 1997, unaudited pro
forma results of operations would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands,
except per share amounts 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Service Revenues $1,144,991 $883,126
Equipment Sales 39,706 24,895
Interest Expense
(including cost to
finance acquisitions) 40,248 33,641
Net Income 218,151 109,119
Basic Earnings per
Common Share 2.50 1.25
Diluted Earnings per
Common Share $ 2.50 $ 1.25
- --------------------------------------------------------------------------------
</TABLE>
EXCHANGE OF MARKETS WITH BELLSOUTH
In October 1997, USM completed an exchange with BellSouth Corporation. Pursuant
to the exchange, USM received majority interests representing approximately 4.0
million pops in exchange for majority interests representing 2.0 million pops,
minority interests representing 1.2 million pops and a net amount of $86.7
million in cash. The majority interests USM received are in 12 markets adjacent
to its Iowa/Missouri/ Illinois/Indiana and Wisconsin/Illinois clusters.
COMPLETED DIVESTITURES
The gains recorded in 1998, 1997 and 1996 primarily reflect the sales of
non-strategic cellular and certain other investments. In 1998, USM sold its
majority interest in one market, and minority interests in several markets in
exchange for 4.1 million AirTouch Common Shares and cash and received cash
from TDS pursuant to an agreement between TDS and the Company. In 1997, USM
sold its majority interest in one market and minority interests in two other
markets and received cash from the settlement of a legal matter. In 1996, USM
sold its majority interests in eight markets and minority interests in two
other markets, received cash from the settlement of two separate legal
matters and received cash in an exchange of markets with another cellular
operator. In addition to the AirTouch Common Shares received in 1998, these
transactions generated net cash proceeds of $148.3 million, $61.1 million and
$213.0 million in 1998, 1997 and 1996, respectively.
PENDING ACQUISITIONS
At December 31, 1998, USM had entered into agreements with third parties to
acquire minority interests in two markets in which the Company already owns a
majority interest, representing 74,000 pops, for $8.1 million in cash. These
transactions are expected to be completed during the first half of 1999.
PENDING DIVESTITURE OF MAJORITY INTEREST
USM had entered into an agreement to sell its majority interest in one market at
December 31, 1998, representing 264,000 pops, for $35.2 million in cash. The
Company will not record a gain or loss on this transaction, which it expects to
complete during the first half of 1999.
11. REVOLVING CREDIT FACILITY
In 1997, USM established a seven-year $500 million revolving credit facility
with a group of banks ("Revolving Credit Facility"). This facility replaces the
Company's Revolving Credit Agreement with TDS as its primary short-term
borrowing facility. As of December 31, 1998, no borrowings were outstanding
under the Revolving Credit Facility.
The terms of the Revolving Credit Facility provide for borrowings with
interest, at the London InterBank Offered Rate ("LIBOR") plus 26.5 basis
points (for a rate of 5.3% at December 31, 1998). 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. USM pays facility and
administration fees at an aggregate annual rate of 0.142% of the total $500
million facility. These payments totaled $710,000 in 1998 and $237,000 in
1997. The Revolving Credit Facility expires in August, 2004.
12. 6% ZERO COUPON CONVERTIBLE DEBENTURES
During 1995, the Company sold $745 million principal amount at maturity of zero
coupon 6% yield to maturity convertible debt with proceeds to the Company of
$221.5 million. This 20-year fixed rate debt, in the form of Liquid Yield Option
Notes ("LYONs"), is subordinated to all senior indebtedness of the Company. At
both December 31, 1998 and 1997, USM's senior indebtedness totaled $260.0
million.
Each LYON is convertible at the option of the holder at any time at a
conversion rate of 9.475 USM Common Shares per $1,000 of Notes. Upon
conversion, USM may elect to deliver its Common Shares or cash equal to the
market value of the Common Shares. Beginning June 15, 2000, the LYONs may be
redeemed at any time for cash at the option of USM at the issue price plus
accrued original issue discount
40 UNITED STATES CELLULAR CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
through the date of redemption. USM will purchase LYONs, at the option of the
holder, as of June 15, 2000, at the issue price plus accrued original issue
discount through that date. USM will have the option of purchasing such LYONs
with cash, USM Common Shares or TDS common equity securities, or any combination
thereof. During 1997, 25 LYONs were converted for approximately $7,600 in cash.
The carrying values at December 31, 1998 and 1997 of USM's 6% zero coupon
convertible debentures, $281.5 million and $265.3 million, respectively, are
less than and greater than their fair values, estimated to be $298.7 million and
$255.6 million, respectively. The fair values were estimated using discounted
cash flow analysis.
13. 7.25% UNSECURED NOTES
During 1997, the Company sold $250 million principal amount of 7.25% notes
("Notes"), priced to yield 7.33% to maturity. The Notes were sold under the
Company's $400 million shelf registration. The Notes are unsecured and become
due on August 15, 2007. Interest on the Notes is payable on February 15 and
August 15 of each year. The Notes will be redeemable, in whole or in part, at
the option of the Company at any time on or after August 15, 2004, at a
redemption price equal to 100% of the principal amount of the Notes to be
redeemed, plus accrued interest thereon, if any, to the date of redemption.
The carrying values at both December 31, 1998 and 1997 of the Company's 7.25%
unsecured notes, $250.0 million is less than their fair values, estimated to be
$263.6 million and $252.9 million, respectively. The fair values were estimated
using discounted cash flow analysis.
14. COMMON SHAREHOLDERS' EQUITY
COMMON STOCK
Employee Benefit Plans. The following table summarizes Common Shares issued for
the employee benefit plans described below:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Deferred Savings Plan 33,532 42,400 23,302
Employee stock options,
stock appreciation rights
and awards 58,523 65,029 16,380
Employee Stock
Purchase Plan 16,739 10,134 22,366
------- ------- ------
108,794 117,563 62,048
------- ------- ------
</TABLE>
TAX-DEFERRED SAVINGS PLAN
USM has reserved 88,123 Common Shares for issuance under the TDS Tax-Deferred
Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and
401(k) of the Internal Revenue Code. Participating employees have the option of
investing their contributions in USM Common Shares, TDS Common Shares, Common
Shares of Aerial Communications, Inc. (an 82.3%-owned subsidiary of TDS) or five
nonaffiliated funds.
EMPLOYEE STOCK OPTIONS,
STOCK APPRECIATION RIGHTS AND AWARDS
USM accounts for stock options, stock appreciation rights ("SARs") and employee
stock purchase plans under Accounting Principles Board ("APB") Opinion No. 25.
No compensation costs have been recognized for the stock option and employee
stock purchase plans. Compensation expense for SARs, measured on the difference
between the SAR prices and the year-end market price of the Common Shares,
aggregated $440,000, $285,000 and ($224,000) in 1998, 1997 and 1996,
respectively. Had compensation cost for all plans been determined consistent
with SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's net
income and earnings per Common Share would have been reduced to the following
pro forma amounts:
<TABLE>
<CAPTION>
(Dollars in thousands, Year Ended December 31,
except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As Reported $216,947 $111,539 $129,929
Pro Forma 214,810 110,317 129,166
Basic Earnings
Per Common Share:
As Reported 2.48 1.29 1.51
Pro Forma 2.46 1.28 1.51
Diluted Earnings
Per Common Share:
As Reported 2.48 1.29 1.51
Pro Forma $ 2.46 $ 1.28 $ 1.50
-------- -------- ---------
</TABLE>
41 UNITED STATES CELLULAR CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plans at December 31,
1998, 1997 and 1996 and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average
of Shares Option Prices Fair Values
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock Options
Outstanding
December 31, 1995
(177,675 exercisable) 319,952 $28.07
Granted 103,326 $25.12 $16.59
Exercised (16,380) $16.98
Canceled (15,851) $30.05
------- -------
Outstanding
December 31, 1996
(271,866 exercisable) 391,047 $29.47
Granted 250,393 $13.41 $18.77
Exercised (68,563) $17.56
Canceled (18,594) $26.85
------- -------
Outstanding
December 31, 1997
(293,418 exercisable) 554,283 $24.23
Granted 325,492 $17.89 $21.93
Exercised (83,515) $ 8.92
Canceled (13,608) $29.16
------- -------
Outstanding
December 31, 1998
(317,611 exercisable) 782,652 $22.21
------- -------
</TABLE>
USM has reserved 1,634,130 Common Shares for options granted and to be granted
to key employees. USM has established a Stock Option plan as of November 9, 1994
(as amended on May 14, 1997) that provides for the grant of stock options to
officers and employees. The options under the 1998 plan (formerly known as the
1994 plan) are exercisable from the date of vesting through November 9, 2004 to
March 31, 2008, or thirty days following the date of the employee's termination
of employment, if earlier. Under the 1998 Stock Option Plan, 317,611 stock
options were exercisable at December 31, 1998, with exercise prices between
$24.48 and $35.84 with a weighted average exercise price of $30.61 per share,
and a weighted average remaining contractual life of 6.6 years. The remaining
465,041 options, which are not exercisable, have exercise prices between $0 and
$33.94 with a weighted average exercise price of $16.72, and a weighted average
remaining contractual life of 7.0 years. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in 1998 and 1997,
respectively: risk-free interest rates of 4.7% and 6.3%; expected dividend
yields of zero for both years; expected lives of 4.5 years and 4.0 years; and
expected volatility of 22.5% and 20.8%.
Stock Appreciation Rights allow the grantee to receive an amount in Common
Shares or cash, or a combination thereof, equivalent to the difference
between the exercise price and the fair market value of the Common Shares on
the exercise date. At December 31, 1998, 3,800 Common Share SARs and 36,000
Series A Common Share SARs were outstanding at $15 per share. These rights
expire from 1999 to 2004 or the date of the person's termination of
employment, if earlier. During 1998, 1997 and 1996 31,250, 3,950 and 300
Common Share SARs were exercised, respectively. There were no SARs granted in
1998 or 1997.
EMPLOYEE STOCK PURCHASE PLAN
USM had 98,759 Common Shares reserved under the 1997 Employee Stock Purchase
Plan ("1997 ESPP"). During 1996, the 1997 ESPP was approved, which became
effective January 1, 1997. The fair value of the employees' purchase rights was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants of rights in 1998 and
1997, respectively: risk-free interest rate of 4.6% and 5.7%; expected dividend
yield of zero for both years; expected life of .7 years for both years; and
expected volatility of 25.9% and 17.6%.
SERIES A COMMON SHARES
Series A Common Shares are convertible on a share-for-share basis into Common
Shares and each share is entitled to ten votes per share, compared to one vote
for each Common Share. As of December 31, 1998, all of USM's outstanding Series
A Common Shares were held by TDS.
OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company implemented the provisions of SFAS No.
130, "Reporting Comprehensive Income." Under SFAS No. 130, the Company is
required to report all changes in equity during a period, except those resulting
from investments and distributions by owners, in a financial statement for the
period in which they are recognized. The Company has chosen to disclose
Comprehensive Income, which encompasses Net Income and Unrealized Gains on
Securities, in the Consolidated Statement of Changes in Shareholders' Equity.
The income tax effects allocated to and the cumulative balance of unrealized
gains on securities are as follows:
<TABLE>
<CAPTION>
Year Ended
(Dollars in thousands) December 31, 1998
- --------------------------------------------------------------------------------
<S> <C>
Balance, beginning of period $ --
Unrealized gains on securities 115,773
Income Tax Effect (46,308)
Net unrealized gains on securities 69,465
---------
Balance, end of period $ 69,465
---------
</TABLE>
42 UNITED STATES CELLULAR CORPORATION
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTIES
USM is billed for all services it receives from TDS, consisting primarily of
information processing and general management services. Such billings are based
on expenses specifically identified to USM and on allocations of common
expenses. Such allocations are based on the relationship of USM's assets,
employees, investment in plant and expenses to the total assets, employees,
investment in plant and expenses of TDS. Management believes the method used to
allocate common expenses is reasonable and that all expenses and costs
applicable to USM are reflected in the accompanying financial statements on a
basis which is representative of what they would have been if USM operated on a
stand-alone basis. Billings to USM from TDS totaled $44.8 million, $36.2 million
and $28.1 million in 1998, 1997 and 1996, respectively. In 1998, TDS developed a
new payroll system for all of its subsidiaries, including the Company. The
Company recorded $12.7 million related to this system in system development
costs.
USM has a Cash Management Agreement with TDS under which USM may from time to
time deposit its excess cash with TDS for investment under TDS's cash management
program. Deposits made under the agreement are available to USM on demand and
bear interest each month at the 30-day Commercial Paper Rate as reported in THE
WALL STREET JOURNAL, plus 1/4%, or such higher rate as TDS may at its discretion
offer on such deposits. Interest income from such deposits was $2.1 million,
$1.3 million and $4.8 million in 1998, 1997 and 1996, respectively.
All markets managed by USM are billed for services they receive from USM. Such
billings are based on expenses specifically identified to each market and on
allocations of common expenses. Such allocations are primarily based on the
relationships of each market's assets and revenues to the total assets and
revenues of all the markets managed by USM. Management believes that all
expenses and costs applicable to each market are representative of what they
would have been if each managed market operated on a stand-alone basis.
16. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The partnerships and corporations in which USM is a partner or shareholder
are in various stages of development. USM expects to spend approximately $300
million during 1999, 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. Under the terms of
certain partnership and shareholder agreements, USM may be committed to
funding other partners' or shareholders' portions of construction and other
costs, if sufficient financing is not available to the individual entities.
USM does not expect such individual financing shortfalls to be material.
From time to time USM may acquire attractive markets to maximize its clustering
strategy. See Note 10 Acquisitions, Exchanges and Divestitures for a discussion
of pending acquisitions and divestitures.
LEASE COMMITMENTS
USM and certain of its majority-owned partnerships and subsidiaries lease
certain office and cell site locations under operating leases. Future minimum
rental payments required under operating leases that have noncancelable lease
terms in excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Minimum
(Dollars in thousands) Future Rentals
- --------------------------------------------------------------------------------
<S> <C>
1999 $18,684
2000 15,176
2001 11,741
2002 8,094
2003 6,550
Thereafter $44,290
- -------------------------------------------------------------------------------
</TABLE>
Rent expense totaled $24.2 million, $17.2 million and $12.4 million in 1998,
1997 and 1996, respectively.
LEGAL PROCEEDINGS
The Company is involved in legal proceedings before the FCC and various state
and federal courts from time to time. Management does not believe that any of
such proceedings should have a material adverse impact on the financial
position, results of operations or cash flows of the Company.
UNITED STATES CELLULAR CORPORATION 43
<PAGE>
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF UNITED STATES CELLULAR CORPORATION:
We have audited the accompanying consolidated balance sheets of United States
Cellular Corporation (a Delaware corporation and an 81.0%-owned subsidiary of
Telephone and Data Systems, Inc.) and Subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in common shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
States Cellular Corporation and Subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1999
44
<PAGE>
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Revenues $ 245,157 $ 290,108 $ 313,947 $ 313,255
Operating Income 33,155 50,137 62,515 30,268
Gain on Sale of Cellular and Other Investments 179,992 9,767 -- 25,395
Net Income 129,752 32,785 35,409 19,001
From Operations 19,513 26,943 35,409 6,877
From Gains $ 110,239 $ 5,842 $ -- $ 12,124
Weighted Average Common and
Series A Common Shares (000s) 87,239 87,342 87,353 87,358
Basic Earnings Per Common and Series A
Common Share $ 1.49 $ .38 $ .41 $ .22
Diluted Earnings Per Common and Series A
Common Share Total 1.49 .38 .41 .22
From Operations .22 .31 .41 .08
From Gains $ 1.27 $ .07 $ -- $ .14
1997
Revenues $ 184,584 $ 217,579 $ 231,959 $ 242,843
Operating Income 23,445 42,154 44,912 19,032
Gain on Sale of Cellular and Other Investments -- 8,237 5,208 16,873
Net Income 18,468 31,692 36,222 25,157
From Operations 18,468 28,781 32,014 16,039
From Gains $ -- $ 2,911 $ 4,208 $ 9,118
Weighted Average Common and
Series A Common Shares (000s) 86,148 86,177 86,203 86,858
Basic Earnings Per Common and Series A
Common Share $ .21 $ .37 $ .42 $ .29
Diluted Earnings Per Common and Series A
Common Share Total .21 .37 .42 .29
From Operations .21 .33 .37 .18
From Gains $ -- $ .04 $ .05 $ .11
</TABLE>
NET INCOME FOR 1998 AND 1997 INCLUDED SIGNIFICANT GAINS FROM THE SALE OF
CELLULAR AND OTHER INVESTMENTS. THE TABLE ABOVE SUMMARIZES THE EFFECT OF THE
GAINS ON NET INCOME AND DILUTED EARNINGS PER COMMON AND SERIES A COMMON SHARE.
THE COMPANY'S MANAGEMENT BELIEVES USM'S OPERATING RESULTS REFLECT 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. THIS
SEASONALITY MAY CAUSE OPERATING INCOME TO VARY FROM QUARTER TO QUARTER.>>
UNITED STATES CELLULAR CORPORATION 45
<PAGE>
CONSOLIDATED FINANCIAL STATEMENT
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended or at December 31,
(Dollars in thousands, except per share amounts) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data
Service Revenues $ 1,123,454 $ 852,991 $ 662,681 $ 464,555 $ 313,875
Equipment Sales 39,013 23,974 17,387 15,761 13,755
Operating Income 176,075 129,543 87,366 42,755 17,385
Minority share of operating income (6,039) (12,298) (13,743) (7,902) (5,152)
Investment income, net of related
amortization expense 41,412 75,037 50,127 38,744 25,627
Gain on sale of cellular and
other investments 215,154 30,318 132,718 83,494 3,321
Income Before Income Taxes 388,112 195,487 241,569 132,234 21,310
Net Income $ 216,947 $ 111,539 $ 129,929 $ 99,742 $ 16,393
Weighted Average Common and
Series A Common Shares (000s) 87,323 86,346 85,797 82,320 77,321
Basic Earnings Per Common and
Series A Common Share $ 2.48 $ 1.29 $ 1.51 $ 1.21 $ .23
Diluted Earnings Per Common and
Series A Common Share $ 2.48 $ 1.29 $ 1.51 $ 1.19 $ .23
Pretax Profit on Service Revenues 34.5% 22.9% 36.5% 28.5% 6.8%
Operating Cash Flow Interest Coverage 16.2x 18.5x 22.4x 6.7x 3.8x
Pretax Interest Coverage Before Gains 5.3x 6.6x 5.7x 2.8x 1.8x
Effective Income Tax Rate 44.1% 42.9% 46.2% 24.6% 23.1%
Balance Sheet Data
Working Capital $ (15,468) $ (28,872) $ (17,835) $ (25,323) $ (33,813)
Property, Plant and Equipment, net 1,010,843 940,253 650,754 530,027 368,181
Investments -
Cellular entities 92,886 128,810 186,791 134,421 99,495
Licenses, net of accumulated
amortization 1,248,053 1,150,924 1,044,141 1,035,846 947,399
Total Assets 3,047,636 2,508,916 2,085,899 1,880,144 1,534,787
Vendor Financing,
excluding current portion -- -- 80,589 98,656 57,691
6% Zero Coupon Convertible Debentures 281,487 265,330 250,107 235,750 --
7.25% Unsecured Notes 250,000 250,000 -- -- --
Revolving Credit Agreement - TDS -- -- -- -- 232,954
Redeemable Preferred Stock,
excluding current portion -- -- -- -- 9,597
Common Shareholders' Equity $ 1,950,230 $ 1,629,320 $ 1,476,202 $ 1,329,454 $ 1,093,967
Current Ratio .94 .86 .88 .84 .66
Return on Equity 12.1% 7.2% 9.3% 8.2% 1.6%
</TABLE>
48 UNITED STATES CELLULAR CORPORATION
<PAGE>
SHAREHOLDERS' INFORMATION
UNITED STATES CELLULAR STOCK AND
DIVIDEND INFORMATION
The Company's Common Shares are listed on the American Stock Exchange under the
symbol "USM" and in the newspapers as "US Cellu." As of February 26, 1999, the
Company's Common Shares were held by 652 record owners. All of the Series A
Common Shares were held by TDS. No public trading market exists for the Series A
Common Shares. The Series A Common Shares are convertible on a share-for-share
basis into Common Shares.
The high and low sales prices of the Common Shares as reported by the American
Stock Exchange were as follows:
<TABLE>
<CAPTION>
Common Shares
Calendar Period High Low
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998
First Quarter $34.75 $ 28.06
Second Quarter 34.25 28.44
Third Quarter 34.94 27.69
Fourth Quarter 41.00 28.63
1997
First Quarter $28.75 $ 24.88
Second Quarter 29.63 23.13
Third Quarter 36.88 29.19
Fourth Quarter 36.81 29.38
</TABLE>
The Company has not paid any cash dividends and currently intends to retain all
earnings for use in the Company's business.
INVESTOR RELATIONS
Our Annual Report, Form 10-K, Prospectuses and News Releases are available to
our investors, security analysts and other members of the investment community.
These reports are provided, without charge, upon request to our Corporate
Office. Our Corporate Office can also help with questions regarding lost, stolen
or destroyed certificates, consolidation of accounts, transferring of shares and
name or address changes. All inquiries should be directed to:
United States Cellular Corporation
Gerry Mundt
Accounting Manager - External Reporting
8410 West Bryn Mawr, Suite 700
Chicago, Illinois 60631
773/399-8900
773/399-8936 (fax)
General inquiries by our investors, securities analysts and other members of the
investment community should be directed to:
United States Cellular Corporation
Kenneth R. Meyers
Senior Vice President - Finance and Chief Financial Officer
8410 West Bryn Mawr, Suite 700
Chicago, Illinois 60631
773/399-8900
773/399-8936 (fax)
ANNUAL MEETING
USM's Annual Meeting of Shareholders will be held on
May 11, 1999 at 10:00 a.m. in Chicago, Illinois.
VISIT USM'S HOME PAGE ON THE INTERNET AT HTTP://WWW.USCC.COM
UNITED STATES CELLULAR CORPORATION 49
<PAGE>
UNITED STATES CELLULAR CORP.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1998
EXHIBIT 21
<TABLE>
<CAPTION>
<S> <C>
UNITED STATES CELLULAR CORPORATION DELAWARE
BANGOR CELLULAR TELEPHONE CO., L.P. DELAWARE
CALIFORNIA RURAL SERVICE AREA #1, INC. CALIFORNIA
CAMDEN CELLULAR TELEPHONE COMPANY, INC. DELAWARE
CAROLINA CELLULAR, INC. NORTH CAROLINA
CARRYPHONE, INC. DELAWARE
CEDAR RAPIDS CELLULAR TELEPHONE, L.P. Partnership
CELLVEST, INC. DELAWARE
CENTRAL CELLULAR TELEPHONES, LTD. ILLINOIS
CENTRAL FLORIDA CELLULAR TELEPHONE COMPANY, INC. FLORIDA
CHARLOTTESVILLE MSA CELLULAR PARTNERSHIP Partnership
COMMUNITY CELLULAR TELEPHONE COMPANY TEXAS
CROOK COUNTY RSA LIMITED PARTNERSHIP Partnership
DAVENPORT CELLULAR TELEPHONE COMPANY, GP Partnership
DAVENPORT CELLULAR TELEPHONE COMPANY, INC. DELAWARE
DUBUQUE CELLULAR TELEPHONE, L.P. DELAWARE
EAU CLAIRE MSA, INC. WISCONSIN
EVANSVILLE CELLULAR TELEPHONE COMPANY, L.P. Partnership
FARMERS CELLULAR TELEPHONE COMPANY, INC. DELAWARE
FARMERS MUTUAL CELLULAR TELEPHONE COMPANY, INC. DELAWARE
FLORIDA RSA # 8, INC. DELAWARE
GEORGIA RSA # 11, INC. (f.k.a. USCOC of Georgia RSA #14, Inc) GEORGIA
GRAY BUTTE JOINT VENTURE Partnership
GREEN BAY CELLTELCO PARTNERSHIP Partnership
HARDY CELLULAR TELEPHONE COMPANY DELAWARE
HBM, INC. DELAWARE
ILLINOIS RSA # 3, INC. ILLINOIS
INDIANA RSA # 4, INC. DELAWARE
INDIANA RSA # 5, INC. INDIANA
INDIANA RSA NO. 5 LIMITED PARTNERSHIP Partnership
IOWA # 13, INC. DELAWARE
IOWA RSA # 12, INC. DELAWARE
IOWA RSA # 3, INC. DELAWARE
IOWA RSA # 9, INC. DELAWARE
IOWA RSA NO. 12 LIMITED PARTNERSHIP DELAWARE
JACKSONVILLE CELLULAR PARTNERSHIP Partnership
JACKSONVILLE CELLULAR TELEPHONE CO. (f.k.a. GTE Mobilnet of Jacksonville II, Inc.) DELAWARE
JANESVILLE CELLULAR TELEPHONE COMPANY, INC. DELAWARE
JEFFERSON CELLULAR TELEPHONE COMPANY, INC. IOWA
JOPLIN CELLULAR TELEPHONE COMPANY, INC. DELAWARE
JOPLIN CELLULAR TELEPHONE COMPANY, L.P. Partnership
KANSAS RSA # 15, INC. (f.k.a. Ohio RSA # 1, Inc.) OHIO
KENOSHA CELLULAR TELEPHONE, L.P. (f.k.a. Owensboro Cellular Telephone, L.P.) Partnership
LACROSSE CELLULAR TELEPHONE COMPANY, INC. DELAWARE
LAR-TEX CELLULAR TELEPHONE COMPANY, INC. DELAWARE
LEAF RIVER VALLEY CELLULAR TELEPHONE COMPANY ILLINOIS
LEWISTON CELLTELLCO PARTNERSHIP Partnership
MADISON CELLULAR TELEPHONE COMPANY Partnership
MAINE RSA # 1, INC. MAINE
</TABLE>
Page 1
<PAGE>
UNITED STATES CELLULAR CORP.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
MAINE RSA # 4, INC. MAINE
MAINE RSA NO. 4 LIMITED PARTNERSHIP Partnership
MANCHESTER-NASHUA CELLULAR TELEPHONE, L.P. Partnership
MARGARETVILLE CELLULAR TELEPHONE COMPANY NEW YORK
MCDANIEL CELLULAR TELEPHONE COMPANY DELAWARE
MIDWEST PAYROLL CORPORATION DELAWARE
MINFORD CELLULAR TELEPHONE COMPANY DELAWARE
MINNESOTA INVCO OF RSA # 10, INC. DELAWARE
MINNESOTA INVCO OF RSA # 11, INC. DELAWARE
MINNESOTA INVCO OF RSA # 5, INC. DELAWARE
MINNESOTA INVCO OF RSA # 7, INC. DELAWARE
MINNESOTA INVCO OF RSA # 8, INC. DELAWARE
MINNESOTA INVCO OF RSA # 9, INC. DELAWARE
MISSOURI # 15 RURAL CELLULAR, INC. MISSOURI
MISSOURI RSA 11, INC. DELAWARE
NH #1 RURAL CELLULAR, INC. NEW HAMPSHIRE
NORTH CAROLINA RSA # 4, INC. DELAWARE
NORTH CAROLINA RSA # 6, INC. CALIFORNIA
NORTH CAROLINA RSA # 9, INC. NORTH CAROLINA
NORTH CAROLINA RSA 1 PARTNERSHIP Partnership
OHIO STATE CELLULAR PHONE COMPANY, INC. FLORIDA
OREGON RSA # 2, INC. OREGON
OREGON RSA # 3, INC. OREGON
OREGON RSA # 6, INC. OREGON
OREGON RSA NO. 2 LIMITED PARTNERSHIP Partnership
OREGON RSA NO. 3 LIMITED PARTNERSHIP Partnership
PEACE VALLEY CELLULAR TELEPHONE COMPANY DELAWARE
PINE ISLAND CELLULAR TELEPHONE COMPANY DELAWARE
RACINE CELLULAR TELEPHONE COMPANY Partnership
ROCHESTER CELLULAR TELEPHONE COMPANY, L.P. Partnership
SCOTT COUNTY CELLULAR TELEPHONE COMPANY DELAWARE
SHEBOYGAN CELLULAR TELEPHONE CO. DELAWARE
SOUTH CANAAN CELLULAR TELEPHONE CO. (DELAWARE) DELAWARE
ST. LAWRENCE SEAWAY RSA CELLULAR, LP Partnership
TENNESSEE # 4 SUB 2, INC. TENNESSEE
TENNESSEE RSA # 3, INC. DELAWARE
TEXAHOMA CELLULAR TELEPHONE COMPANY TEXAS
TEXAHOMA CELLULAR, L.P. Partnership
TEXAS # 20 RURAL CELLULAR, INC. TEXAS
TEXAS INVCO OF RSA # 6, INC. DELAWARE
TOWNSHIP CELLULAR TELEPHONE CO. DELAWARE
TRI-STATES CELLULAR COMMUNICATIONS, INC. MISSOURI
TULSA GENERAL PARTNERS, INC. DELAWARE
UNITED STATES CELLUALAR OPERATING COMPANY OF CUMBERLAND, INC. MARYLAND
UNITED STATES CELLULAR INVESTMENT CO. OF ALLENTOWN PENNSYLVANIA
UNITED STATES CELLULAR INVESTMENT CO. OF OKLAHOMA CITY, INC. OKLAHOMA
UNITED STATES CELLULAR INVESTMENT COMPANY DELAWARE
UNITED STATES CELLULAR INVESTMENT COMPANY OF EAU CLAIRE, INC. WISCONSIN
UNITED STATES CELLULAR INVESTMENT COMPANY OF GREEN BAY, INC. WISCONSIN
UNITED STATES CELLULAR INVESTMENT COMPANY OF PORTSMOUTH, INC. NEW HAMPSHIRE
UNITED STATES CELLULAR INVESTMENT COMPANY OF ROCKFORD (f.k.a. ACC of Rockford) DELAWARE
UNITED STATES CELLULAR INVESTMENT CORPORATION OF LOS ANGELES INDIANA
UNITED STATES CELLULAR OPERATING COMPANY DELAWARE
</TABLE>
Page 2
<PAGE>
UNITED STATES CELLULAR CORP.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
UNITED STATES CELLULAR OPERATING COMPANY OF BANGOR MAINE
UNITED STATES CELLULAR OPERATING COMPANY OF CEDAR RAPIDS DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF COLUMBIA MISSOURI
UNITED STATES CELLULAR OPERATING COMPANY OF DES MOINES IOWA
UNITED STATES CELLULAR OPERATING COMPANY OF DUBUQUE IOWA
UNITED STATES CELLULAR OPERATING COMPANY OF EVANSVILLE INDIANA
UNITED STATES CELLULAR OPERATING COMPANY OF FT. PIERCE FLORIDA
UNITED STATES CELLULAR OPERATING COMPANY OF JOPLIN MISSOURI
UNITED STATES CELLULAR OPERATING COMPANY OF KENOSHA (f.k.a. USCOC of Owensboro) DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF KNOXVILLE TENNESSEE
UNITED STATES CELLULAR OPERATING COMPANY OF LACROSSE WISCONSIN
UNITED STATES CELLULAR OPERATING COMPANY OF LEWISTON-AUBURN MAINE
UNITED STATES CELLULAR OPERATING COMPANY OF MANCHESTER-NASHUA, INC. NEW HAMPSHIRE
UNITED STATES CELLULAR OPERATING COMPANY OF MEDFORD OREGON
UNITED STATES CELLULAR OPERATING COMPANY OF RICHLAND WASHINGTON
UNITED STATES CELLULAR OPERATING COMPANY OF ROCHESTER MINNESOTA
UNITED STATES CELLULAR OPERATING COMPANY OF TEXAHOMA TEXAS
UNITED STATES CELLULAR OPERATING COMPANY OF TULSA, INC. OKLAHOMA
UNITED STATES CELLULAR OPERATING COMPANY OF WATERLOO IOWA
UNITED STATES CELLULAR OPERATING COMPANY OF WAUSAU, INC. WISCONSIN
UNITED STATES CELLULAR OPERATING COMPANY OF YAKIMA WASHINGTON
UNITED STATES CELLULAR TELEPHONE COMPANY (GREATER KNOXVILLE), L.P. Partnership
UNITED STATES CELLULAR TELEPHONE OF GREATER TULSA, L.L.C. OKLAHOMA
UNIVERSAL CELLULAR FOR EAU CLAIRE MSA, INC. WISCONSIN
USCC PAYROLL CORPORATION DELAWARE
USCC REAL ESTATE CORPORATION DELAWARE
USCIC OF AMARILLO, INC. DELAWARE
USCIC OF BROWNSVILLE, INC. DELAWARE
USCIC OF FRESNO, INC. CALIFORNIA
USCIC OF JACKSON, INC. DELAWARE
USCIC OF MCALLEN, INC. DELAWARE
USCIC OF NORTH CAROLINA RSA # 1, INC. DELAWARE
USCOC OF CHARLOTTESVILLE, INC. VIRGINIA
USCOC OF CORPUS CHRISTI, INC. TEXAS
USCOC OF GREATER IOWA, INC. (f.k.a. Canton Cellular Telephone Company) PENNSYLVANIA
USCOC OF HAWAII 3, INC. DELAWARE
USCOC OF IDAHO RSA # 5, INC. DELAWARE
USCOC OF ILLINOIS RSA # 1, INC. VIRGINIA
USCOC OF ILLINOIS RSA # 4, INC. ILLINOIS
USCOC OF IOWA RSA # 1, INC. IOWA
USCOC OF IOWA RSA # 16, INC. DELAWARE
USCOC OF JACKSONVILLE, INC. (f.k.a. GTE Mobilnet of Jacksonville, Inc.) NORTH CAROLINA
USCOC OF JACK-WIL, INC. DELAWARE
USCOC OF MISSOURI RSA # 13, INC. DELAWARE
USCOC OF MISSOURI RSA # 5, INC. ILLINOIS
USCOC OF NEW HAMPSHIRE RSA # 2, INC. DELAWARE
USCOC OF NORTH CAROLINA RSA # 7, INC. NORTH CAROLINA
USCOC OF OKLAHOMA RSA # 10, INC. OKLAHOMA
USCOC OF OREGON RSA # 5, INC. DELAWARE
USCOC OF PENNSYLVANIA RSA NO. 10-B2, INC. DELAWARE
</TABLE>
Page 3
<PAGE>
UNITED STATES CELLULAR CORP.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
USCOC OF PORTLAND, INC. MAINE
USCOC OF ROCKFORD, INC. (f.k.a. ACC of Rockford, Inc.) ILLINOIS
USCOC OF SOUTH CAROLINA RSA # 4, INC. SOUTH CAROLINA
USCOC OF TALLAHASSEE FLORIDA
USCOC OF VICTORIA, INC. TEXAS
USCOC OF VIRGINIA RSA # 2, INC. VIRGINIA
USCOC OF VIRGINIA RSA # 3, INC. VIRGINIA
USCOC OF WASHINGTON 4, INC. DELAWARE
USCOC OF WILMINGTON, INC. (f.k.a. GTE Mobilnet of Wilmington, Inc.) NORTH CAROLINA
VENUS CELLULAR TELEPHONE COMPANY, INC. DELAWARE
VERMONT RSA NO. 2-B2, INC. DELAWARE
VICTORIA CELLULAR CORPORATION TEXAS
VICTORIA CELLULAR PARTNERSHIP Partnership
VIRGINIA RSA # 4, INC. VIRGINIA
VIRGINIA RSA # 7, INC. VIRGINIA
WARD BUTTE JOINT VENTURE Partnership
WASHINGTON RSA # 5, INC. WASHINGTON
WATERLOO / CEDAR FALLS CELLTELCO PARTNERSHIP Partnership
WESTERN SUB-RSA LIMITED PARTNERSHIP Partnership
WILMINGTON CELLULAR PARTNERSHIP Partnership
WILMINGTON CELLULAR TELEPHONE CO. (f.k.a. GTE Mobilnet of Wilmington II, Inc.) NORTH CAROLINA
USCOC OF WISCONSIN RSA #7, INC. (f.k.a. Wisconsin RSA #7, Inc.) DELAWARE
YAKIMA MSA LIMITED PARTNERSHIP Partnership
YAKIMA VALLEY PAGING LIMITED PARTNERSHIP Partnership
</TABLE>
Page 4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of United States Cellular Corporation of our report
dated January 27, 1999, on the consolidated financial statements of United
States Cellular Corporation and Subsidiaries (the "Company") included in the
Company's 1998 Annual Report to Shareholders, to the inclusion in this Form 10-K
of our report dated January 27, 1999, on the financial statement schedule of the
Company, and to the incorporation of such reports into the Company's previously
filed S-3 Registration Statements, File No. 33-58911 and File No. 333-32521,
into the Company's previously filed S-4 Registration Statement, File No.
33-41826, and into the Company's previously filed S-8 Registration Statements,
File No. 33-42558, File No. 33-57255, File No. 33-59777, File No. 33-61291, File
No. 333-16925, File No. 333-19403, File No. 333-19405, File No. 333-23861 and
File No. 333-57063.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION AS OF
DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 51,975
<SECURITIES> 297,196
<RECEIVABLES> 105,985
<ALLOWANCES> 6,054
<INVENTORY> 16,673
<CURRENT-ASSETS> 242,805
<PP&E> 1,400,597
<DEPRECIATION> 389,754
<TOTAL-ASSETS> 3,047,636
<CURRENT-LIABILITIES> 258,273
<BONDS> 531,487
0
0
<COMMON> 87,371
<OTHER-SE> 1,862,859
<TOTAL-LIABILITY-AND-EQUITY> 3,047,636
<SALES> 39,013
<TOTAL-REVENUES> 1,162,467
<CGS> 94,378
<TOTAL-COSTS> 986,392
<OTHER-EXPENSES> (251,809)
<LOSS-PROVISION> 20,197
<INTEREST-EXPENSE> 39,772
<INCOME-PRETAX> 388,112
<INCOME-TAX> 171,165
<INCOME-CONTINUING> 216,947
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 216,947
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.48
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