<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, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-9712
- --------------------------------------------------------------------------------
UNITED STATES CELLULAR CORPORATION
(Exact name of Registrant as specified in its charter)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
DELAWARE 62-1147325
- --------------------------------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</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:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which
- ------------------------------------- registered
-------------------------------------
Common Shares, $1 par value American Stock Exchange
Liquid Yield Option Notes Due 2015 American Stock Exchange
</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 29, 2000, the aggregate market value of registrant's Common
Shares held by nonaffiliates was approximately $1.1 billion (based upon the
closing price of the Common Shares on February 29, 2000, of $66.94, 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 29, 2000, is 54,692,996 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 1999 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 17,
2000, described in the cross reference sheet and table of contents attached
hereto are incorporated by reference into Parts II and III of this report.
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE NUMBER
OR REFERENCE(1)
---------------
<C> <S> <C>
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 24
Item 3. Legal Proceedings........................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 24
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 25(2)
Item 6. Selected Financial Data..................................... 25(3)
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25(4)
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 25(4)
Item 8. Financial Statements and Supplementary Data................. 25(5)
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 25
Item 10. Directors and Executive Officers of the Registrant.......... 26(6)
Item 11. Executive Compensation...................................... 26(7)
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 26(8)
Item 13. Certain Relationships and Related Transactions.............. 26(9)
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 27
</TABLE>
- ---------
(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, 1999 ("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 17, 2000
(the "Proxy Statement").
(2) Annual Report section entitled "United States Cellular Stock and Dividend
Information."
(3) Annual Report section entitled "Selected Consolidated Financial Data."
(4) Annual Report section entitled "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
(5) Annual Report sections entitled "Consolidated Quarterly Income Information
(Unaudited)," "Consolidated Statements of Operations," "Consolidated
Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated
Statements of Changes in Common Shareholders' Equity," "Notes to
Consolidated Financial Statements" and "Report of Independent Public
Accountants."
(6) Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."
(7) Proxy Statement section entitled "Executive Compensation," except for the
information specified in Item 402(a)(8) of Regulation S-K under the
Securities Exchange Act of 1934, as amended.
(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
Owners and Management."
(9) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
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<PAGE>
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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 2,602,000 customers through 139 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, 1999. 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, 91% of the Company's 26.4 million population equivalents are in markets
which are consolidated, 1% are in managed but not consolidated markets and 8%
are in markets in which the Company holds an investment interest.
The Company is the eighth 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. 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 following table summarizes the status of the Company's interests in
cellular markets at December 31, 1999.
<TABLE>
<S> <C>
Owns Majority Interest and Manages.......................... 139
Owns Minority Interest and Manages.......................... 6
---
Total Markets Managed by the Company........................ 145
Markets Managed by Others (1)............................... 35
---
Total Markets............................................... 180
===
</TABLE>
- ------------
(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, 1999, the Company accounted for its interests in 29 of these
markets using the equity method and accounted for the remaining six markets
using the cost method.
Cellular systems in the Company's 139 majority-owned and managed markets
served 2,602,000 customers at December 31, 1999, and contained 2,300 cell sites.
The average penetration rate in the Company's consolidated markets was 10.39% at
December 31, 1999, and
3
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the churn rate in all consolidated markets averaged 2.1% per month for the
twelve months ended December 31, 1999.
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 1999 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 statements
that are not based on historical fact, including the words "believes",
"anticipates", "intends", "expects" and similar words. These statements
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
actual results, events or developments to be significantly different from any
future results, events or developments expressed or implied by such
forward-looking statements. Such factors include:
- general economic and business conditions, both nationally and in the
regions in which the Company operates;
- technology changes;
- competition;
- changes in business strategy or development plans;
- changes in governmental regulations;
- our ability and the ability of our third-party suppliers to take
corrective action in a timely manner with respect to the Year 2000 Issue;
- availability of future financing; and
- changes in growth in cellular customers, penetration rates and churn
rates.
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,
Internet access, 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
4
<PAGE>
licensed by the FCC. All of the cells in a system are connected to a
computer-controlled Mobile Telephone Switching Office ("MTSO"). The MTSO is
connected to the conventional "landline" telephone network and potentially other
MTSOs. Each conversation on a cellular phone involves a transmission over a
specific set of radio frequencies from the cellular phone to a
transmitter/receiver at a cell site. The transmission is forwarded from the cell
site to the MTSO and from there may be forwarded to the landline telephone
network to complete the call. As the cellular telephone moves from one cell to
another, the MTSO determines radio signal strength and transfers ("hands off")
the call from one cell to the next. This hand-off is not noticeable to either
party on the phone call.
The FCC currently grants only two licenses to provide cellular telephone
service in each market. However, competition for customers includes competing
communications technologies such as conventional landline and mobile telephone,
Specialized Mobile Radio ("SMR") systems and radio paging. Personal
Communications Service ("PCS") has become available in many areas of the United
States, including the majority of 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 2000. Additionally, technologies such as Enhanced Specialized
Mobile Radio ("ESMR") are proving to be competitive with cellular service in
certain of the Company's markets.
The services available to cellular customers and the sources of revenue
available to cellular system operators are similar to those provided by
conventional landline telephone companies. Customers may be charged a separate
fee for system access, airtime, long-distance calls and ancillary services.
Cellular system operators often provide service to customers of other operators'
cellular systems while the customers are temporarily located within the
operators' service areas. Customers using service away from their home system
are called "roamers." Roaming is available because technical standards require
that analog cellular telephones be compatible in all market areas in the United
States. Additionally, because the Company has deployed digital technologies in
many of its service areas, its customers with digital or dual-mode (both analog
and digital capabilities) wireless telephones can roam in other companies'
service areas which have a compatible digital technology in place. Likewise, in
its service areas with digital technologies in place, the Company can provide
roaming service to other companies' customers who have compatible digital
wireless telephones. This type of 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. Several years ago, certain digital transmission techniques were
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 by many wireless operators, 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 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.
5
<PAGE>
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 were 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. In
the years since 1993, the Company has generated operations-driven net income and
significantly increased its operating cash flows. 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 has produced operating income and net income since 1993,
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:
- the growth rate in the Company's customer base;
- the usage and pricing of cellular services;
- the churn rate;
- the cost of providing cellular services, including the cost of attracting
new customers;
- continued competition from PCS and other technologies; and
- 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:
Midwest Regional Market Cluster
- Western Wisconsin/Northern Illinois
- Eastern Wisconsin
- Missouri/Illinois/Indiana
- Eastern Iowa
- Western Iowa
Mid-Atlantic Regional Market Cluster
- Eastern North Carolina/South Carolina
- Virginia/North Carolina
- West Virginia/Maryland/Pennsylvania/Ohio
Northwest Regional Market Cluster
- Washington/Oregon/Idaho
- Oregon/California
Maine/New Hampshire/Vermont Market Cluster
Florida/Georgia Market Cluster
Texas/Oklahoma/Missouri/Kansas Regional Market Cluster
- Oklahoma/Missouri/Kansas
6
<PAGE>
- Texas/Oklahoma
Eastern Tennessee/Western North Carolina Market Cluster
Southern Texas Market Cluster
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. 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. 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.
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 1999, the Company purchased a majority
interest in one market and several minority interests in markets in which the
Company currently owns a majority interest, representing approximately 245,000
population equivalents, for $31.5 million in cash.
COMPLETED DIVESTITURES. During 1999, the Company sold a majority interest
in one market and minority interests in three markets, representing
approximately 612,000 population equivalents, for cash and receivables totaling
$59.7 million.
PENDING ACQUISITIONS AND DIVESTITURE. As of December 31, 1999, the Company
had agreements pending to acquire a majority interest in one market and a
minority interest in another market in which it currently owns a majority
interest, representing an aggregate of 160,000 population equivalents, in
exchange for $24.0 million in cash and the issuance of approximately 28,000 USM
Common Shares. Also at December 31, 1999, the Company had an agreement pending
to divest a minority interest in one market, representing 114,000 population
equivalents, for $22.5 million in cash. The Company expects all of the pending
transactions to be completed in the first half of 2000.
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 80.7% of the
combined total of the outstanding Common Shares and Series A Common Shares of
the Company and controls 95.6% of the combined voting power of both classes of
common stock.
7
<PAGE>
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 180 markets at
December 31, 1999, representing 26,395,000 population equivalents. Including the
interest to be purchased and the interest to be sold during 2000, the Company
owned or had the right to acquire 180 markets, representing 26,362,000
population equivalents, at December 31, 1999. The following table summarizes the
changes in the Company's population equivalents in recent years.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(THOUSANDS OF POPULATION EQUIVALENTS) (1)
<S> <C> <C> <C> <C> <C>
Operational Markets:
Majority-Owned and Managed...................... 24,079 23,825 23,051 20,625 20,325
Minority-Owned and Managed (2).................. 306 358 405 405 516
Majority-Owned Markets to be Managed, Net of
Markets to be Divested:(2)(3)................... -- -- -- 221 274
------ ------ ------ ------ ------
Total Markets Managed and to be Managed........... 24,385 24,183 23,456 21,251 21,115
Minority Interests in Markets Managed by Others... 1,977 2,166 2,163 4,614 4,115
------ ------ ------ ------ ------
Total........................................... 26,362 26,349 25,619 25,865 25,230
====== ====== ====== ====== ======
</TABLE>
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(1) Based on 1999 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, 1999. 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, 1999.
<TABLE>
<CAPTION>
TOTAL
PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1999 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
-------------- ---------- ---------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C>
MARKETS MANAGED BY THE COMPANY:
MIDWEST REGIONAL MARKET CLUSTER:
WESTERN WISCONSIN/NORTHERN ILLINOIS:
Madison, WI........................ 428,000 92.50% 92.50% 396,000
Appleton, WI....................... 346,000 100.00 100.00 346,000
Jo Daviess (IL 1).................. 318,000 100.00 100.00 318,000
Rockford, IL....................... 308,000 100.00 100.00 308,000
Wood (WI 7)........................ 291,000 100.00 100.00 291,000
Vernon (WI 8)...................... 238,000 100.00 100.00 238,000
Green Bay, WI...................... 217,000 100.00 100.00 217,000
Janesville-Beloit, WI.............. 151,000 95.44 95.44 144,000
Door (WI 10)....................... 129,000 100.00 100.00 129,000
La Crosse, WI...................... 103,000 95.11 95.11 98,000
Trempealeau (WI 6) (2)............. 84,000 100.00 100.00 84,000
Pierce (WI 5) (2).................. 14,000 100.00 100.00 14,000
---------- ----------
2,627,000 2,583,000
---------- ----------
EASTERN WISCONSIN:
Milwaukee, WI...................... 1,458,000 100.00 100.00 1,458,000
Columbia (WI 9).................... 390,000 100.00 100.00 390,000
Racine, WI......................... 187,000 91.88 91.88 171,000
Kenosha, WI........................ 145,000 99.32 99.32 144,000
Sheboygan, WI...................... 111,000 94.62 94.62 105,000
---------- ----------
2,291,000 2,268,000
---------- ----------
MISSOURI/ILLINOIS/INDIANA:
Peoria, IL......................... 345,000 100.00 100.00 345,000
Adams (IL 4) * (2)................. 212,000 100.00 100.00 212,000
Mercer (IL 3)...................... 202,000 100.00 100.00 202,000
Miami (IN 4) *..................... 181,000 85.71 85.71 155,000
Moniteau (MO 11)................... 152,000 100.00 100.00 152,000
Columbia, MO *..................... 131,000 100.00 100.00 131,000
Stone (MO 15)...................... 121,000 100.00 100.00 121,000
Laclede (MO 16).................... 103,000 100.00 100.00 103,000
Washington (MO 13)................. 97,000 100.00 100.00 97,000
Callaway (MO 6) *.................. 86,000 100.00 100.00 86,000
Shannon (MO 17).................... 57,000 100.00 100.00 57,000
Schuyler (MO 3).................... 56,000 100.00 100.00 56,000
Linn (MO 5) (2).................... 54,000 100.00 100.00 54,000
Warren (IN 5) *.................... 125,000 33.33 33.33 42,000
Alton, IL *........................ 21,000 100.00 100.00 21,000
---------- ----------
1,943,000 1,834,000
---------- ----------
EASTERN IOWA:
Davenport, IA-IL................... 358,000 97.37 97.37 349,000
Cedar Rapids, IA................... 184,000 96.43 96.43 177,000
Iowa (IA 6)........................ 157,000 100.00 100.00 157,000
</TABLE>
9
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<TABLE>
<CAPTION>
TOTAL
PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1999 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
-------------- ---------- ---------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C>
Muscatine (IA 4)................... 153,000 100.00% 100.00% 153,000
Waterloo-Cedar Falls, IA........... 144,000 93.03 93.03 134,000
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).................... 106,000 100.00 100.00 106,000
Iowa City, IA...................... 103,000 100.00 100.00 103,000
Dubuque, IA........................ 88,000 95.51 95.51 84,000
Mitchell (IA 13)................... 66,000 100.00 100.00 66,000
Monroe (IA 3)...................... 90,000 49.00 49.00 44,000
Winneshiek (IA 12)................. 115,000 24.50 24.50 28,000
---------- ----------
1,785,000 1,622,000
---------- ----------
WESTERN IOWA:
Des Moines, IA..................... 441,000 100.00 100.00 441,000
Humboldt (IA 10)................... 181,000 100.00 100.00 181,000
Lyon (IA 16)....................... 103,000 100.00 100.00 103,000
Mills (IA 1)....................... 63,000 100.00 100.00 63,000
Audubon (IA 7)..................... 55,000 100.00 100.00 55,000
Union (IA 2)....................... 50,000 100.00 100.00 50,000
Ida (IA 9) *....................... 63,000 16.67 16.67 10,000
---------- ----------
956,000 903,000
---------- ----------
TOTAL MIDWEST REGIONAL MARKET
CLUSTER......................... 9,602,000 9,210,000
========== ==========
MID-ATLANTIC REGIONAL MARKET CLUSTER:
EASTERN NORTH CAROLINA/SOUTH
CAROLINA:
Harnett (NC 10).................... 306,000 100.00 100.00 306,000
Rockingham (NC 7).................. 297,000 100.00 100.00 297,000
Northampton (NC 8)................. 293,000 100.00 100.00 293,000
Greenville (NC 14)................. 252,000 100.00 100.00 252,000
Greene (NC 13)..................... 249,000 100.00 100.00 249,000
Hoke (NC 11)....................... 231,000 100.00 100.00 231,000
Wilmington, NC..................... 223,000 96.79 96.79 216,000
Chesterfield (SC 4)................ 216,000 100.00 100.00 216,000
Chatham (NC 6)..................... 169,000 81.20 18.80% 100.00 169,000
Jacksonville, NC................... 143,000 97.53 97.53 139,000
Sampson (NC 12).................... 137,000 100.00 100.00 137,000
Camden (NC 9)...................... 121,000 100.00 100.00 121,000
---------- ----------
2,637,000 2,626,000
---------- ----------
VIRGINIA/NORTH CAROLINA:
Roanoke, VA........................ 232,000 100.00 100.00 232,000
Giles (VA 3)....................... 202,000 100.00 100.00 202,000
Bedford (VA 4)..................... 179,000 100.00 100.00 179,000
Ashe (NC 3)........................ 165,000 100.00 100.00 165,000
Lynchburg, VA...................... 159,000 100.00 100.00 159,000
Charlottesville, VA................ 151,000 95.37 95.37 144,000
Buckingham (VA 7).................. 91,000 100.00 100.00 91,000
Tazewell (VA 2) (2)................ 82,000 100.00 100.00 82,000
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
TOTAL
PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1999 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
---------- ----------
1,322,000 1,315,000
---------- ----------
WEST VIRGINIA/MARYLAND/
PENNSYLVANIA/OHIO:
Monongalia (WV 3) *................ 266,000 100.00 100.00 266,000
Raleigh (WV 7) *................... 252,000 100.00 100.00 252,000
Grant (WV 4) *..................... 178,000 100.00 100.00 178,000
Tucker (WV 5) *.................... 131,000 100.00 100.00 131,000
Hagerstown, MD *................... 128,000 100.00 100.00 128,000
Ross (OH 9) *...................... 251,000 49.00 49.00 123,000
Cumberland, MD *................... 98,000 100.00 100.00 98,000
Bedford (PA 10) * (2).............. 50,000 100.00 100.00 50,000
Garrett (MD 1) *................... 29,000 100.00 100.00 29,000
---------- ----------
1,383,000 1,255,000
---------- ----------
TOTAL MID-ATLANTIC REGIONAL MARKET
CLUSTER......................... 5,342,000 5,196,000
========== ==========
NORTHWEST REGIONAL MARKET CLUSTER:
WASHINGTON/OREGON/IDAHO:
Clark (ID 6)....................... 298,000 100.00 100.00 298,000
Yakima, WA *....................... 216,000 87.81 87.81 189,000
Pacific (WA 6) *................... 187,000 100.00 100.00 187,000
Richland-Kennewick-Pasco, WA *..... 185,000 100.00 100.00 185,000
Butte (ID 5) (3)................... 168,000 100.00 100.00 168,000
Okanogan (WA 4).................... 118,000 100.00 100.00 118,000
Umatilla (OR 3) *.................. 151,000 76.39 76.39 115,000
Kittitas (WA 5) * (2).............. 73,000 98.24 98.24 72,000
Hood River (OR 2) *................ 75,000 65.29 65.29 49,000
Skamania (WA 7) *.................. 29,000 65.29 65.29 19,000
---------- ----------
1,500,000 1,400,000
---------- ----------
OREGON/CALIFORNIA:
Coos (OR 5)........................ 261,000 100.00 100.00 261,000
Del Norte (CA 1)................... 210,000 100.00 100.00 210,000
Crook (OR 6) *..................... 203,000 100.00 100.00 203,000
Medford, OR *...................... 175,000 100.00 100.00 175,000
Mendocino (CA 9)................... 140,000 100.00 100.00 140,000
Modoc (CA 2)....................... 64,000 100.00 100.00 64,000
---------- ----------
1,053,000 1,053,000
---------- ----------
TOTAL NORTHWEST REGIONAL MARKET
CLUSTER......................... 2,553,000 2,453,000
========== ==========
MAINE/NEW HAMPSHIRE/VERMONT MARKET
CLUSTER:
Manchester-Nashua, NH.............. 366,000 93.07 93.07 341,000
Coos (NH 1) *...................... 223,000 100.00 100.00 223,000
Kennebec (ME 3).................... 222,000 100.00 100.00 222,000
Carroll (NH 2)..................... 221,000 100.00 100.00 221,000
Somerset (ME 2).................... 146,000 100.00 100.00 146,000
Bangor, ME......................... 142,000 91.88 91.88 130,000
Addison (VT 2) * (2)............... 107,000 100.00 100.00 107,000
Washington (ME 4) *................ 86,000 100.00 100.00 86,000
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
TOTAL
PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1999 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
-------------- ---------- ---------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C>
Lewiston-Auburn, ME................ 101,000 83.63% 83.63% 84,000
Oxford (ME 1)...................... 83,000 100.00 100.00 83,000
---------- ----------
TOTAL MAINE/NEW HAMPSHIRE/VERMONT
MARKET CLUSTER.................. 1,697,000 1,643,000
========== ==========
FLORIDA/GEORGIA MARKET CLUSTER:
Fort Pierce, FL *.................. 302,000 100.00 100.00 302,000
Tallahassee, FL.................... 294,000 100.00 100.00 294,000
Worth (GA 14)...................... 257,000 100.00 100.00 257,000
Gainesville, FL.................... 232,000 100.00 100.00 232,000
Toombs (GA 11)..................... 157,000 100.00 100.00 157,000
Walton (FL 10)..................... 126,000 100.00 100.00 126,000
Putnam (FL 5) (2).................. 72,000 100.00 100.00 72,000
Dixie (FL 6)....................... 60,000 100.00 100.00 60,000
Jefferson (FL 8) (2)............... 52,000 100.00 100.00 52,000
Calhoun (FL 9)..................... 45,000 100.00 100.00 45,000
---------- ----------
TOTAL FLORIDA/GEORGIA MARKET
CLUSTER......................... 1,597,000 1,597,000
========== ==========
TEXAS/OKLAHOMA/MISSOURI/KANSAS
REGIONAL MARKET CLUSTER:
OKLAHOMA/MISSOURI/KANSAS:
Tulsa, OK *........................ 822,000 55.06 55.06 452,000
Joplin, MO *....................... 150,000 100.00 100.00 150,000
Seminole (OK 6).................... 222,000 55.06 55.06 122,000
Elk (KS 15) *...................... 154,000 75.00 75.00 115,000
Nowata (OK 4) * (2)................ 103,000 55.06 55.06 57,000
---------- ----------
1,451,000 896,000
---------- ----------
TEXAS/OKLAHOMA:
Garvin (OK 9)...................... 204,000 100.00 100.00 204,000
Wichita Falls, TX *................ 137,000 78.46 78.46 107,000
Lawton, OK *....................... 113,000 78.46 78.46 89,000
Haskell (OK 10).................... 83,000 100.00 100.00 83,000
Jackson (OK 8) *................... 95,000 78.46 78.46 74,000
Hardeman (TX 5) * (2).............. 37,000 78.46 78.46 29,000
Briscoe (TX 4) * (2)............... 12,000 78.46 78.46 10,000
Beckham (OK 7) * (2)............... 10,000 78.46 78.46 8,000
---------- ----------
691,000 604,000
---------- ----------
TOTAL TEXAS/OKLAHOMA/MISSOURI/
KANSAS REGIONAL MARKET CLUSTER.. 2,142,000 1,500,000
========== ==========
EASTERN TENNESSEE/WESTERN NORTH
CAROLINA MARKET CLUSTER:
Knoxville, TN *.................... 558,000 96.03 96.03 536,000
Asheville, NC *.................... 215,000 100.00 100.00 215,000
Henderson (NC 4) * (2)............. 199,000 100.00 100.00 199,000
Bledsoe (TN 7) * (2)............... 156,000 96.03 96.03 150,000
Hamblen (TN 4) * (2)............... 140,000 100.00 100.00 140,000
Macon (TN 3) *..................... 353,000 16.67 16.67 59,000
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
TOTAL
PERCENTAGE CURRENT
CHANGE AND
CURRENT PURSUANT TO ACQUIRABLE
1999 PERCENTAGE DEFINITIVE POPULATION
CLUSTER/MARKET POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS
-------------- ---------- ---------- -------------- -------- -----------
<S> <C> <C> <C> <C> <C>
Yancey (NC 2) * (2)................ 32,000 100.00% 100.00% 32,000
---------- ----------
TOTAL EASTERN TENNESSEE/WESTERN NORTH
CAROLINA MARKET CLUSTER............ 1,653,000 1,331,000
========== ==========
SOUTHERN TEXAS MARKET CLUSTER:
Corpus Christi, TX................. 390,000 100.00 100.00 390,000
Atascosa (TX 19) (3)............... 266,000 100.00 100.00 266,000
Edwards (TX 18).................... 228,000 100.00 100.00 228,000
Laredo, TX......................... 193,000 100.00 100.00 193,000
Wilson (TX 20)..................... 151,000 100.00 100.00 151,000
Victoria, TX....................... 83,000 100.00 100.00 83,000
---------- ----------
TOTAL SOUTHERN TEXAS MARKET
CLUSTER......................... 1,311,000 1,311,000
========== ==========
OTHER OPERATIONS:
Hawaii (HI 3)...................... 144,000 100.00 100.00 144,000
---------- ----------
Total Managed Markets............ 26,041,000 24,385,000
========== ==========
MARKETS MANAGED BY OTHERS:
Los Angeles/Oxnard, CA *........... 15,955,000 5.50 5.50 877,000
Jefferson (NY 1) *................. 251,000 60.00 60.00 151,000
Oklahoma City, OK *................ 1,015,000 14.60 14.60 148,000
Franklin (NY 2) *.................. 223,000 57.14% 57.14 128,000
Others (Fewer than 100,000
population equivalents each)..... 673,000
----------
Total Population Equivalents of
Markets Managed by Others...... 1,977,000
----------
Total Population Equivalents..... 26,362,000
==========
</TABLE>
- ------------
* Designates wireline market.
(1) Interests under these agreements are expected to be acquired at the time
specified therein, following the satisfaction of customary closing
conditions.
(2) These markets have been partitioned into more than one licensed area. The
1999 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 analog and certain types of digital
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. 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 ("WAN") to
accomodate various business functions, including:
- automatic call delivery
- intersystem handoff
- credit validation
- fraud prevention
- network management and
- interconnectivity of all of the Company's MTSOs and cell sites.
In addition, the WAN accomodates virtually all internal data communications
between various Company office locations and a significant number of the
Company's retail locations to process customer activations. The WAN is deployed
in the Company's five regional customer service centers ("Communications
Centers") for all customer service functions using the Company's new billing and
information system.
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.
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
14
<PAGE>
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 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. The Company achieves these results through the building of brand
awareness and the implementation of loyalty programs which give customer service
priority to the Company's most valuable customers. The marketing plan stresses
the value of the Company's service offerings and incorporates combinations of
rate plans and cellular telephone equipment which are designed to meet the needs
of defined customer segments and their usage patterns. The Company supports a
multi-faceted distribution program, including direct sales, agents and retail
service centers in the vast majority of its markets, and the Internet for those
customers who wish to contact the Company through that medium.
Company-owned and managed locations are designed to market cellular service
to the consumer segment in a familiar setting. In late 1999, the Company
expanded its e-commerce site to make additional accessories available online.
The Company anticipates that as customers become more comfortable with
e-commerce, the Internet will become more of a robust marketing channel for both
sales of rate plans as well as accessories.
The Company manages each cluster of markets with a local staff, including
sales, engineering and in some cases installation personnel. The Company
operates five regional Communications Centers whose personnel are responsible
for customer service and certain other functions. Direct sales consultants
market cellular service to business customers throughout each cluster. Retail
sales associates work out of the Company's nearly 500 Company-owned retail
stores and kiosks 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-use
packages. These packages enable customers to buy substantial amounts of minutes
for fixed monthly rates.
The Company continues to expand its relationships with agents, dealers and
non-Company retailers to obtain customers, and at year-end 1999 had contracts
with more than 2,000 of these businesses. 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, major appliance dealers, office supply dealers and
mass merchants including national companies such as Best Buy and Circuit City.
The Company created a new class of agent during 1999, the Value Added
Distributor agent channel. This channel's initial focus was on the sale of the
Company's prepaid service product, TalkTracker-Registered Trademark-, to
selected market segments, and complements the Company's own distribution
channels. Additionally, in support of its overall Internet initiatives, the
Company has actively recruited agents who provide services exclusively through
the Internet. Such agents include Sundial, Telstreet, StartSmart and
Buyphone.com.
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 1999, the Company began operating under a unified brand name
and logo, U.S. Cellular(SM), across all its markets. All markets were converted
to the new brand name in the second quarter of 1999. The new logo is simpler and
bolder than the old logo. The Company retained its tag line "The way people talk
around here(SM)," which is still used to promote the U.S. Cellular brand.
The Company continues to advertise its digital service offerings through
both television and radio advertising, which contributed to a significant
increase in the number of customers using the Company's digital services during
1999. Advertising is directed at gaining customers, improving customers'
awareness of the U.S. Cellular brand, increasing existing customers' usage of
the
15
<PAGE>
Company's services 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 community
relations 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 public service operations in emergencies
to assisting victims of domestic abuse through the Company's Stop Abuse From
Existing(SM) programs.
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, 1999.
<TABLE>
<CAPTION>
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION
------------------ ---------- --------- -----------
<S> <C> <C> <C>
Midwest Regional Market Cluster.......................... 9,209,000 1,140,000 12.38%
Mid-Atlantic Regional Market Cluster..................... 5,091,000 415,000 8.15
Northwest Regional Market Cluster........................ 2,553,000 254,000 9.95
Maine/New Hampshire/Vermont Market Cluster............... 1,697,000 165,000 9.72
Florida/Georgia Market Cluster........................... 1,597,000 151,000 9.46
Texas/Oklahoma/Missouri/Kansas Regional Market Cluster... 2,142,000 226,000 10.55
Eastern Tennessee/Western North Carolina Market
Cluster................................................ 1,300,000 152,000 11.69
Southern Texas Market Cluster............................ 1,311,000 77,000 5.87
Other Operations......................................... 144,000 22,000 15.28
---------- --------- -----
25,044,000 2,602,000 10.39%
========== ========= =====
</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, the vast majority of new customers are selecting portable
cellular telephones. These units are 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 115 minutes per unit each month and generated retail revenue of
approximately $33 per month during 1999, compared to 105 minutes and $33 per
month in 1998. 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 $48 during 1999. Average monthly service revenue per
customer unit decreased approximately 1% during 1999. This decrease was not as
significant as in recent years, due to the proliferation of certain national
pricing plans used by other wireless companies which significantly increased
inbound roaming minutes of use on the Company's systems during 1999. This effect
was offset by 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 to stimulate overall
usage resulted in a decrease in average local retail revenue per minute of use
in 1999. Inbound roaming revenue per minute also decreased during the year,
partially due to 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 national 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,
16
<PAGE>
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. Roaming agreements offer customers the opportunity to roam in these
systems. These reciprocal agreements automatically pre-register the customers of
the Company's systems in the other carriers' systems. Also, a customer of a
participating system roaming (i.e., traveling) in a Company market where this
arrangement is in effect is able to make and receive calls on the Company's
system. The charge for this service is typically at premium rates and is billed
by the Company to the customer's home system, which then bills the customer. The
Company has entered into agreements with other cellular carriers to transfer
roaming usage at agreed-upon rates. In some instances, based on competitive
factors, the Company may charge a lower amount to its customers than the amount
actually charged to the Company by another cellular carrier for roaming.
The following table summarizes certain information about customers and
market penetration in the Company's managed operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Majority-owned and managed markets:
Cellular markets in operation
(1).............................. 139 138 134 131 137
Total population of markets in
service (000s)................... 25,044 24,683 24,034 21,712 22,309
Customer Units:
at beginning of period (2)....... 2,183,000 1,710,000 1,073,000 710,000 421,000
additions during period (2)...... 1,015,000 915,000 941,000 561,000 426,000
disconnects during period (2).... 596,000 442,000 304,000 198,000 137,000
at end of period (2)............. 2,602,000 2,183,000 1,710,000 1,073,000 710,000
Market penetration at end of period
(3)................................ 10.39% 8.84% 7.11% 4.94% 3.18%
</TABLE>
- ---------
(1) Represents the number of markets in which the Company owned at least a 50%
interest and which it managed. The revenues and expenses of these cellular
markets are included in the Company's consolidated revenues and expenses.
(2) Represents the approximate number of revenue-generating cellular telephones
served by the cellular markets referred to in footnote (1). The revenue
generated by such cellular telephones is included in consolidated revenues.
(3) Computed by dividing the number of customer units at the end of the period
by the total population of markets in service as estimated by Donnelley
Marketing Service (1995-1996) or Claritas (1997-1999) 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 analog
cellular systems nationwide. The Company offers a full range of cellular
telephones for use by its customers. Features offered in some of the cellular
telephones include hands-free calling, repeat dialing, voice mail 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 1999, the
Company focused its efforts on new products with the continued promotion of its
digital service offering, called Digital PCS, and its prepaid offering,
TalkTracker-Registered Trademark-. Both offerings continued their success during
the year, 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 services, 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 the Company holds are
granted by the FCC for the use of radio frequencies and are an important
component of the overall value of the Company's assets. 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. In 1996,
Congress enacted the Telecommunications Act of 1996, which amended the
Communications Act. The Telecommunications 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 and makes regulation unnecessary. 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 Telecommunications 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 a significant
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 by May 1998
on a staggered state-by-state basis. The Company believes that it is in
compliance with the FCC's tower registration requirements.
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 radiation requirements, were made
subject to those requirements. As a result, cellular towers of less than 10
meters in height, building-mounted antennae and cellular telephones must comply
with radio frequency radiation guidelines. After October 1997, all new cellular
facilities must be in compliance when they are brought into service. As of
September 1, 2000, all existing facilities must be brought into compliance. The
Company believes that the majority of its existing facilities already comply
with the requirements and will seek to ensure that the remainder are brought
into compliance as required.
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 the Company's licenses which it applied to have renewed between 1995 and
1999 were renewed.
The Company conducts and plans to conduct its operations in accordance with
all relevant FCC rules and regulations and anticipates being able to qualify for
a renewal expectancy in its upcoming renewal filings. Accordingly, the Company
believes that current regulations will have no significant effect on its
operations and financial condition. However, changes in the regulation of
cellular operators or their activities and of other mobile service providers
could have a material adverse effect on the Company's operations.
The FCC has also provided that five years after the initial licenses are
granted, unserved areas within markets previously granted to licensees may be
applied for by both wireline and non-wireline entities and by third parties.
Accordingly, the Company and others have filed many unserved area applications
and these applications have generally been routinely granted. The Company's
strategy with respect to system construction in its markets has been and will be
to build cells covering areas within such markets that the Company considers
economically feasible to 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, 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 forbear from requiring
such 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
19
<PAGE>
new "enhanced 911" regulations on cellular carriers. Enhanced 911 capabilities
will enable cellular systems to determine the precise location of persons making
emergency calls. The new rules will require cellular carriers to work with local
public safety officials to process 911 calls, including those made from mobile
telephones not registered with the cellular system. 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 during 2001 and 2002.
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
relationships with such cellular carriers. Under these 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 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 had
implementation deadlines by the end of 1998 at those switches which received
specific requests for numbering portability. The FCC has extended the compliance
date for cellular, broadband PCS and certain other wireless providers until
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 that were 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
Telecommunications Act. The Telecommunications 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 of and
interrelationships among state and federal implementation and other responses to
Telecommunications Act.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition. The Telecommunications 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 Telecommunications Act's universal
service provisions and necessary for universal services, public safety and
welfare, continued service quality and consumer rights. While a state may not
impose requirements that effectively function as barriers to entry, it retains
limited authority to regulate certain competitive practices in rural telephone
company service areas.
The Telecommunications 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 Telecommunications Act also requires universal service to
schools, libraries and rural health facilities at discounted rates. Cellular
carriers must provide such discounted rates
20
<PAGE>
to such organizations in accordance with federal regulations. The FCC has
implemented the mandate of the Telecommunications Act to create a new universal
service support mechanism "to ensure that all Americans have access to
telecommunications services." The Telecommunications 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, based on a percentage of the total "billed revenue" of carriers
for a given previous half year, began in the first quarter of 1998. Carriers are
free to pass such charges on to their customers. Cellular carriers are also
eligible to receive universal service support payments in certain circumstances
under the new systems if they provide specified services in "high-cost" areas.
The Company has sought designation as an "eligible telecommunications carrier"
qualified to receive universal service support in certain states, and has been
designated as such a carrier in Washington State. It has also sought FCC
clarification of the standards under which wireless eligible telecommunications
carriers will be designated.
Under a 1994 federal law, the Communications Assistance to Law Enforcement
Act, all telecommunications carriers, including the Company and other wireless
licensees, must implement by June 30, 2000, certain equipment changes necessary
to assist law enforcement authorities in achieving an enhanced ability to
conduct electronic surveillance of those suspected of criminal activity. In
August 1999, the FCC added certain additional capabilities necessary to meet the
requirements of such act, which are to become applicable by September 2001.
Also, issues remain as to when carriers may obtain reimbursement from the
federal government for upgrades related to such requirements. The Company will
work diligently to comply with all applicable requirements of the Communications
Assistance to Law Enforcement Act in cooperation with industry groups and
standard setting bodies.
The FCC has recently taken action in proceedings: (1) to ensure that the
customers of wireless providers, among other carriers, will receive complete,
accurate, and understandable bills; (2) to establish safeguards to protect
against unauthorized access to customer information, though these rules have
been overturned, at least temporarily, by court order; (3) to increase to
55 megahertz ("MHz") in rural areas its 45 MHz "cap" on the amount of spectrum
which entities under common ownership and control may hold in a single wireless
market and to relax its related cellular cross ownership restrictions; and
(4) to require improved access to telecommunications facilities by persons with
disabilities.
The FCC also has pending proceedings: (1) to implement a wireless billing
option under which wireline customers who call wireless customers could be
charged for wireless "airtime" as opposed to the wireless customer receiving the
call, as is the case at present ("calling party pays"); (2) 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; and (3) to set national policy for the allocation by state public
utilities commissions of telephone numbers to wireline and wireless carriers.
The Company will monitor such proceedings and comply with new federal
requirements as they become applicable.
The FCC has also allocated a total of 140 MHz to broadband PCS (a portion of
radio spectrum from 1850 MHz to 1990 MHz), 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
licensee is limited to 20 MHz of PCS channels in urban areas. In rural areas,
such a cellular operator may now own 30 MHz of PCS channels.
21
<PAGE>
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 the
Company'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 the Company
currently offers. The Company could be adversely affected by such technological
and regulatory developments.
In January 2000, the FCC took an action which may have an impact on both
cellular and PCS licensees. Pursuant to a congressional directive, the FCC
adopted service rules for licensing the commercial use of 30 MHz of spectrum in
the 746-764 MHz and 776-794 MHz spectrum bands. That spectrum is to be
auctioned, beginning in June 2000. The licenses are divided into six regional
service areas, with 20 and 10 MHz blocks, and are designed to allow for a wide
range of wireless services. There will be no eligibility restrictions on
participation in the auctions for this spectrum. Cellular and PCS carriers and
other entities will be eligible to bid in the auction. Use of the spectrum by
licensees selected in the auction may be affected by the presence of incumbent
broadcast licensees on some of the auctioned frequencies through at least
December 31, 2006.
STATE AND LOCAL REGULATION. The Company is also subject to state and local
regulation in some instances. In 1981, the FCC preempted the states from
exercising jurisdiction in the areas of licensing, technical standards and
market structure. In 1993, Congress preempted states from regulating the entry
of cellular systems into service and the rates charged by cellular systems to
customers. The siting and construction of 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.
The Company 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. The Company is unable to predict the scope, pace
or financial impact of policy changes which could be adopted in these
proceedings.
COMPETITION
The Company's principal competitor for cellular telephone service in each
market is the licensee of the second cellular system in that market. Since each
competitor operates its cellular system on a 25 MHz frequency block licensed by
the FCC using comparable technology and facilities, competition for customers
between the two systems in each market is principally on the basis of quality of
service, price, size of area covered, services offered and responsiveness of
customer service. The competing entities in many of the markets in which the
Company has an interest have financial resources which are substantially greater
than those of the Company and its partners in such markets.
22
<PAGE>
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 SMR/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 many
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 2000. 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 mobile satellite
systems 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 systems are designed primarily to serve the
communications needs of remote locations and mobile satellite systems could
provide viable competition for cellular systems in such areas. It is also
possible that the FCC may in the future assign additional frequencies to
cellular telephone service to provide for more than two cellular telephone
systems per market.
EMPLOYEES
The Company had 4,800 employees as of December 31, 1999. None of the
Company's employees is represented by a labor organization. The Company
considers its relationship with its employees to be good.
23
<PAGE>
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
The property for mobile telephone switching offices and cell sites are
either owned or leased under long-term leases by the Company, one of its
subsidiaries or the partnership or corporation which holds the 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's investment in property is small
compared to its investment in licenses and cellular system equipment.
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 1999.
24
<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.
25
<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."
26
<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 29
II. Valuation and Qualifying Accounts for Each of the Three
Years in the Period Ended December 31, 1999................. page 30
</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 1999 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>
27
<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 reference to Exhibit 99.4 to
the Company's Registration Statement on Form S-8
(Registration No. 333-57063).
10.26 United States Cellular Corporation 1999 Employee Stock
Purchase Plan is hereby incorporated by reference to Exhibit
99.1 to the Company's Registration Statement on Form S-8
(Registration No. 333-76455).
10.27 Retention Agreement for Kenneth R. Meyers dated
September 13, 1999 is included as Exhibit 10.27 to this Form
10-K filing.
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
28
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Board of Directors of United States Cellular
Corporation:
We have audited, in accordance with auditing standards generally accepted in the
United States, 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 26, 2000. Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The financial
statement schedules listed in Item 14(a)(2) are the responsibility of the
Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. These financial statement schedules have been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly state 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 26, 2000
29
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C-1 COLUMN C-2 COLUMN D COLUMN E
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND CHARGED TO END OF
DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------- ------------ ----------- -------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31,
1999
Deducted from deferred state tax
asset:
For unrealized net operating
losses $ (13,448) $ 2,778 $ (1,026) $ -- $ (11,696)
Deducted from accounts receivable:
For doubtful accounts (6,054) (25,343) -- 21,368 (10,029)
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)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
UNITED STATES CELLULAR CORPORATION
By: /S/ H. DONALD NELSON
------------------------------------------
H. Donald Nelson
PRESIDENT (CHIEF EXECUTIVE OFFICER)
By: /S/ KENNETH R. MEYERS
------------------------------------------
Kenneth R. Meyers
EXECUTIVE VICE PRESIDENT--FINANCE AND
TREASURER (CHIEF FINANCIAL OFFICER)
By: /S/ JOHN T. QUILLE
------------------------------------------
John T. Quille
VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Dated March 29, 2000
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 29, 2000
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H. Donald Nelson
/S/ KENNETH R. MEYERS DIRECTOR March 29, 2000
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Kenneth R. Meyers
/S/ LEROY T. CARLSON, DIRECTOR March 29, 2000
JR.
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LeRoy T. Carlson, Jr.
/S/ LEROY T. CARLSON DIRECTOR March 29, 2000
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LeRoy T. Carlson
/S/ WALTER C.D. CARLSON DIRECTOR March 29, 2000
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Walter C. D. Carlson
/S/ SANDRA L. HELTON DIRECTOR March 29, 2000
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Sandra L. Helton
/S/ PAUL-HENRI DENUIT DIRECTOR March 29, 2000
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Paul-Henri Denuit
/S/ J. SAMUEL CROWLEY DIRECTOR March 29, 2000
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J. Samuel Crowley
</TABLE>
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INDEX TO EXHIBITS
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<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
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<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 4.4).
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
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<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 1999 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>
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<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
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<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 United States Cellular Corporation 1999 Employee Stock
Purchase Plan is hereby incorporated by reference to Exhibit
99.1 to the Company's Registration Statement on Form S-8
(Registration No. 333-76455).
10.27 Retention Agreement for Kenneth R. Meyers dated September
13, 1999 is included as Exhibit 10.27 to this Form 10-K
filing.
11 Statement regarding computation of per share earnings
(included in Note 3 to Consolidated Financial Statements
which are included in Exhibit 13).
12 Statement regarding computation of ratios.
13 Incorporated portions of 1999 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>
EXHIBIT 3.2
UNITED STATES CELLULAR CORPORATION
AMENDED AND RESTATED BYLAWS (DECEMBER 17, 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
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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
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<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
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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.
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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.
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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 salary as director. No such payments shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor. Members of
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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 a chairman, a president, one or more vice presidents, a
general counsel, a secretary, a treasurer, and a controller, and such assistant
secretaries, assistant treasurers or other officers or agents as may be elected
or appointed by the board of directors. 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 general counsel, a secretary, a treasurer and one
or more assistant secretary(ies) and assistant treasurer(s).
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.
SECTION 4. SALARIES. The salaries of all officers and agents of the
corporation shall be fixed by the board of directors.
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<PAGE>
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 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.
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<PAGE>
THE GENERAL COUNSEL
SECTION 9 THE GENERAL COUNSEL. The general counsel shall be the
principal legal officer of the Corporation and shall be responsible for and have
charge of all legal matters affecting the Corporation, its subsidiaries, and
those affiliated entities which it controls. The general counsel shall perform
or supervise the performance of all duties incident to such legal matters,
together with such other duties as from time to time may be assigned to him by
the chairman, the president or the board of directors. The duties and powers of
the general counsel shall extend to all subsidiaries of the corporation and,
insofar as the chairman or president may deem appropriate and practicable, to
all affiliated entities.
THE SECRETARY AND ASSISTANT SECRETARY
SECTION 10. 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 11. 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 12. 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
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<PAGE>
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.
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 13. 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.
THE CONTROLLER
SECTION 14 THE CONTROLLER. The controller shall be the chief
accounting officer of the Corporation. The duties of the controller shall be to
maintain adequate records of all assets, liabilities and transactions of the
Corporation; to see that adequate audits are currently and regularly performed;
and, in conjunction with other officers and department heads, to initiate and
enforce measures and procedures whereby the business of the Corporation shall be
conducted with the maximum safety, efficiency and economy. The controller shall
establish and administer an adequate plan for the control of operations,
including systems and procedures required to properly maintain internal controls
on all financial transactions of the Corporation. The controller shall perform
all duties as from time to time may be assigned to him or her by the chief
financial officer or the Board of Directors. The duties and powers of the
controller shall extend to all subsidiaries of the Corporation and, insofar as
the chief financial officer may deem appropriate and practicable, to all
affiliated entities.
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
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<PAGE>
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 ss.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 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
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<PAGE>
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 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.
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<PAGE>
EXHIBIT 10.11
SUMMARY OF 1999 BONUS PROGRAM FOR
EXECUTIVE VICE PRESIDENTS OF
UNITED STATES CELLULAR CORPORATION
The objectives of the 1999 Bonus Program for Senior Corporate Staff
(the "1999 Bonus Plan") of United States Cellular Corporation ("USM") are: (i)
to provide incentives for the Executive Vice Presidents of USM to extend their
best efforts to achieve superior results in relation to key performance targets,
(ii) to reward USM's Executive Vice Presidents 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 1999 Bonus Plan.
For target performance on the team and individual categories, the 1999
Bonus Plan was designed to generate a targeted 1999 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 1999 Bonus Plan, the size
of the target bonus pool is increased or decreased depending on USM's 1999
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 team performance
categories include (i) new customer additions (8% of the targeted award) (ii)
cash flow growth (8% of the targeted award), (iii) service revenue growth (8% of
the targeted award), (iv) return on capital (8% of the targeted award) and (v)
churn (4% of the targeted award).
<PAGE>
EXHIBIT 10.27
RETENTION AGREEMENT
This Retention Agreement (the "Agreement") is made and entered into as
of the 13th day of September, 1999 by and between United States Cellular
Corporation, a Delaware corporation (the "Company"), and Kenneth R. Meyers (the
"Executive").
W I T N E S S E T H
WHEREAS, the Executive currently serves as an officer, a director and a
key employee of the Company; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its stockholders
to reinforce and encourage the continued attention and dedication of the
Executive to his assigned duties without distraction in the face of potentially
disturbing circumstances arising from any possibility of the Executive's
termination of employment.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and for other good and valuable
consideration, the adequacy and sufficiency of which hereby are acknowledged,
the Company and the Executive hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall
have the respective meanings set forth below:
(a) "Cause" shall mean (i) a material breach by the Executive of his
employment duties and responsibilities (other than as a result of incapacity due
to physical or mental illness) (A) which is the result of the Executive's
negligence or (B) which is demonstrably willful and deliberate on the
Executive's part and which is committed in bad faith or without reasonable
belief that such breach is in the best interests of the Company; (ii) the
commission by the Executive of a felony involving moral turpitude; or (iii)
competition by the Executive with the Company or any of its affiliates or
misappropriation of confidential information of the Company or any of its
affiliates (as defined in the Executive's 1998 Stock Option Award Agreement
evidencing a stock option grant under the United States Cellular Corporation
1998 Long-Term Incentive Program (the "Program")).
(b) "Good Reason" shall mean the occurrence of any of the following
events without the Executive's written consent and which is not remedied by the
Company within a reasonable period of time after receipt of written notice from
the Executive specifying such event:
(i) any of (A) a material and adverse change in the Executive's
duties with the Company at the time this Agreement is executed,
(B) a material and adverse change in the Executive's reporting
responsibilities, titles or offices with the Company as in effect
at the time this Agreement is executed or (C) any failure to
<PAGE>
re-elect the Executive to any position with the Company held by
the Executive at the time this Agreement is executed; or
(ii) a reduction by the Company in the Executive's rate of annual
base salary as in effect at the time this Agreement is executed or
as the same may be increased from time to time thereafter.
(c) "Qualifying Termination" shall mean termination of the Executive's
employment with the Company by the Company without Cause or by the Executive for
Good Reason.
2. PAYMENTS UPON QUALIFYING TERMINATION. The Company agrees, under
the conditions described herein, to pay the Executive the payments described in
this Section 2 if the Executive's employment with the Company is terminated in a
Qualifying Termination.
(a) STOCK OPTIONS. The Company and the Executive hereby acknowledge
that options to purchase shares of common stock of the Company ("Common Stock")
have heretofore been granted to the Executive pursuant to the United States
Cellular Corporation 1994 Long-Term Incentive Plan (the "Plan") and the Program.
Under the terms of the award agreements with respect to such options, in certain
circumstances any such options that are unexercisable upon the Executive's
termination of employment shall be canceled. In recognition of the possibility
of such cancellation, the Company hereby agrees that if the Executive's
employment with the Company is terminated in a Qualifying Termination, and if as
a result of such termination any of the options identified in Exhibit A to this
Agreement are canceled (the "Canceled Options"), as soon as administratively
practicable after such Qualifying Termination the Company shall pay the
Executive a lump sum cash payment equal to the difference between (i) the Fair
Market Value (as defined in the Program) on the date of the Qualifying
Termination of the Common Stock subject to the Canceled Options and (ii) the
exercise price with respect to such Canceled Options provided in the award
agreement or agreements evidencing the option grant. Notwithstanding any other
provision herein, the calculation of any lump sum payable to the Executive
pursuant to this Section 2(a) shall be adjusted by the Company in good faith to
reflect any capital adjustment applicable to all holders of Common Stock that
occurs prior to the date of the Qualifying Termination.
(b) RESTRICTED STOCK. The Company and the Executive hereby acknowledge
that shares of Common Stock of the Company subject to a restriction period
("Restricted Stock") have heretofore been granted to the Executive pursuant to
the Program and other long-term incentive arrangements. Under the terms of the
award agreements with respect to such Restricted Stock, in certain circumstances
any such Restricted Stock that is unvested upon the Executive's termination of
employment shall be forfeited. In recognition of the possibility of such
forfeiture, the Company hereby agrees that if the Executive's employment with
the Company is terminated in a Qualifying Termination, and if as a result of
such termination any of the Restricted Stock identified in Exhibit B to this
Agreement is forfeited (the "Forfeited Restricted Stock"), as soon as
administratively practicable after each date any such Forfeited Restricted Stock
would have become vested had the Executive remained continuously in the employ
of the Company until such date (the "Vesting Date"), the Company shall pay the
Executive a lump sum cash payment equal to the Fair Market Value (as defined in
the Program) on the Vesting Date of the Common
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<PAGE>
Stock that would have become vested on such date had the Restricted Stock not
been forfeited. Notwithstanding any other provision herein, (i) the calculation
of any lump sum payable to the Executive pursuant to this Section 2(b) shall be
adjusted by the Company in good faith to reflect any capital adjustment
applicable to all holders of Common Stock that occurs prior to the Vesting Date
and (ii) any lump sum payable to the Executive pursuant to this Section 2(b)
shall be increased by the value of any dividends that would have been paid with
respect to the Restricted Stock during the restriction period had the Executive
remained continuously in the employ of the Company until the Vesting Date.
3. WITHHOLDING TAXES. The Company may withhold from all payments due
to the Executive (or his beneficiary or estate) hereunder all taxes which, by
applicable federal, state, local or other law, the Company is required to
withhold therefrom.
4. REIMBURSEMENT OF EXPENSES. If any contest or dispute shall arise
with respect to this Agreement involving termination of the Executive's
employment with the Company or involving the failure or refusal of the Company
to perform fully in accordance with the terms hereof, the Company shall
reimburse the Executive, on a current basis, for all legal fees and expenses, if
any, incurred by the Executive in connection with such contest or dispute;
PROVIDED, HOWEVER, that in the event the resolution of any such contest or
dispute includes a finding denying, in total, the Executive's claims in such
contest or dispute, the Executive shall be required to reimburse the Company, no
later than 12 months from the date of such resolution, for all sums paid to the
Executive pursuant to this Section 4.
5. OPERATIVE EVENT. Notwithstanding any provision herein to the
contrary, no amounts shall be payable hereunder unless the Executive's
employment with the Company is terminated in a Qualifying Termination.
6. EFFECTIVE DATE. This Agreement shall be effective as of the day
and year first above written.
7. SCOPE OF AGREEMENT. Nothing in this Agreement shall be deemed to
entitle the Executive to continued employment with the Company or its
affiliates. The Company reserves all rights to terminate the Executive's
employment with or without Cause.
8. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall not be
terminated by any merger or consolidation of the Company or as a result of any
transfer of all or substantially all of the assets of the Company.
(b) The Company agrees that concurrently with any merger,
consolidation or transfer of assets referred to in Section 8(a), it will cause
any successor or transferee unconditionally to assume, by written instrument
delivered to the Executive (or his beneficiary or estate), all of the
obligations of the Company hereunder. Failure of the Company to obtain such
assumption prior to the effectiveness of any such merger, consolidation or
transfer of assets shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled hereunder if the Executive's employment
was terminated in a Qualifying Termination. For purposes of
<PAGE>
implementing the foregoing, the date on which any such merger, consolidation or
transfer becomes effective shall be deemed the date of the Executive's
Qualifying Termination.
(c) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amounts would be payable to the Executive hereunder had the
Executive continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to such person or
persons appointed in writing by the Executive to receive such amounts or, if no
person is so appointed, to the Executive's estate.
9. NOTICES. (a) For purposes of this Agreement, all notices and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered or five days after deposit in the
United States mail, certified and return receipt requested, postage prepaid,
addressed (i) if to the Executive, to Kenneth R. Meyers, 1308 Camelot Court,
Arlington Heights, Illinois 60004, and if to the Company, to United States
Cellular Corporation, 8410 West Bryn Mawr, Suite 700, Chicago, Illinois
60631-3486, attention Vice President - Human Resources, with a copy to the
Secretary of the Company, Stephen P. Fitzell, Esq., Sidley & Austin, One First
National Plaza, Chicago, Illinois 60603 or (ii) to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notices of change of address shall be effective only upon receipt.
(b) A written notice of the Executive's termination of employment by
the Company or by the Executive, as the case may be, shall be provided to the
other party and such notice shall specify the termination date (which date shall
be not less than 15 days after the giving of such notice). Any notice by the
Company to the Executive of termination for Cause, or notice by the Executive to
the Company of termination for Good Reason, additionally shall specify the
particular termination provision in this Agreement relied upon and set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
such termination under the provision so indicated; PROVIDED, HOWEVER, that the
failure by the Company or the Executive to set forth in such notice any fact or
circumstance which contributes to a showing of Cause or Good Reason, as the case
may be, shall not waive any right of the Company or the Executive hereunder or
preclude the Company or the Executive from asserting such fact or circumstance
in enforcing the Company's or Executive's rights hereunder.
10. FULL SETTLEMENT; RESOLUTION OF DISPUTES. (a) The Company's
obligation to make any payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which the
Company may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement and such amounts shall not be reduced whether or
not the Executive obtains other employment.
(b) If there shall be any dispute between the Company and the
Executive in the event of any termination of the Executive's employment, then,
unless and until there is a final, nonappealable judgment by a court of
competent jurisdiction declaring that such
4
<PAGE>
termination was not a Qualifying Termination or that the Company is not
otherwise obligated to pay any amount pursuant to this Agreement to the
Executive or his dependents or other beneficiaries, as the case may be, the
Company shall pay all such amounts to the Executive or his dependents or other
beneficiaries, as the case may be, as though such termination was a Qualifying
Termination; PROVIDED, HOWEVER, that the Company shall not be required to pay
any disputed amounts pursuant to this Section 10(b) except upon receipt of an
undertaking by or on behalf of the Executive, his dependents or other
beneficiaries to repay all such amounts to which the Executive, his dependents
or other beneficiaries are ultimately adjudged by such court not to be entitled.
11. GOVERNING LAW; VALIDITY. The interpretation, construction and
performance of this Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of Illinois without regard to the
principles of conflicts of laws. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which other provisions shall remain in
full force and effect.
12. MISCELLANEOUS. No provision of this Agreement may be modified or
waived unless such modification or waiver is agreed to in writing and signed by
the Executive and by a duly authorized officer of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. Failure by the
Executive or the Company to insist upon strict compliance with any provision of
this Agreement or to assert any right the Executive or the Company may have
hereunder shall not be deemed to be a waiver of such provision or right or any
other provision or right of this Agreement. The rights of, and amounts payable
to, the Executive, his estate or his beneficiaries pursuant to this Agreement
are in addition to any rights of, or amounts payable to, the Executive, his
estate or his beneficiaries under any other employee benefit plan or
compensation program of the Company.
13. COUNTERPARTS. This Agreement may be executed in two counterparts,
each of which shall be deemed to be an original and both of which together shall
constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Executive has executed this
Agreement as of the day and year first above written.
UNITED STATES CELLULAR CORPORATION
By: /S/ LEROY T. CARLSON, JR.
-------------------------------
LeRoy T. Carlson, Jr., Chairman
EXECUTIVE:
/S/ KENNETH R. MEYERS
------------------------------------
Kenneth R. Meyers
6
<PAGE>
EXHIBIT A: STOCK OPTIONS COVERED BY THE AGREEMENT
<TABLE>
<CAPTION>
PLAN, PROGRAM OR NUMBER OF DATE OF
GRANT DATE ARRANGEMENT OPTIONS EXERCISABILITY
- ---------- ----------- ------- --------------
<S> <C> <C> <C>
May 14, 1997 1994 Long-Term 9,600 (5,760 of which 1,920 become exercisable on each of the
Incentive Plan are unexercisable) following dates: March 31, 2000, March
31, 2001 and March 31, 2002
March 31, 1998 1998 Long-Term 9,600 (7,680 of which 1,920 become exercisable on each of the
Incentive Program are unexercisable) following dates: March 31, 2000, March
31, 2001, March 31, 2002 and March 31,
2003
March 31, 1999 1998 Long-Term 9,600 (9,600 of which 1,920 become exercisable on each of the
Incentive Program are unexercisable) following dates: March 31, 2000,
March 31, 2001, March 31, 2002, March
31, 2003 and March 31, 2004
</TABLE>
7
<PAGE>
EXHIBIT B: RESTRICTED STOCK COVERED BY THE AGREEMENT
<TABLE>
<CAPTION>
PLAN, PROGRAM NUMBER OF SHARES OF
GRANT DATE OR ARRANGEMENT RESTRICTED STOCK DATE OF VESTING
- ---------- -------------- ---------------- ---------------
<S> <C> <C> <C>
February 28, 1997 Special Retention 5,000 (2,500 of which remaining 2,500 vest on January
Restricted Stock Award are unvested) 15, 2000
Agreement
March 31, 1998 1998 Long-Term Incentive 1,872 (1,872 of which all become vested on March 31,
Program are unvested) 2001
November 5, 1998 1998 Long-Term Incentive 10,696 (10,696 of which 5,329 become vested on December
Program are unvested) 15, 1999, 2,683 become vested
on December 15, 2000 and 2,684
become vested on December 15,
2001
March 15, 1999 (Special Award) 7,500 (7,500 of which 3,750 become vested on
are unvested) September 15, 2000 and 3,750
become vested on March 15, 2001
March 31, 1999 1998 Long-Term Incentive 2,938 (2,938 of which all become vested on March 31,
Program are unvested) 2002
</TABLE>
8
<PAGE>
EXHIBIT 12
UNITED STATES CELLULAR CORPORATION
RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars In Thousands)
<TABLE>
<CAPTION>
12 Months
ended
12/31/99
----------------------
(Dollars In Thousands)
<S> <C>
EARNINGS:
Income from Continuing Operations Before Income Taxes...................... $516,010
Add (Deduct):
Minority Share of Cellular Losses....................................... (46)
Earnings on Equity Method............................................... (30,374)
Distributions from Minority Subsidiaries................................ 24,427
--------
$510,017
Add Fixed Charges:
Consolidated Interest Expense........................................... 37,282
Deferred Debt Expense................................................... 817
Interest Portion (1/3) of Consolidated Rent Expense..................... 9,276
--------
$557,392
FIXED CHARGES:
Consolidated Interest Expense.............................................. $ 37,282
Deferred Debt Expense...................................................... 817
Interest Portion (1/3) of Consolidated Rent Expense........................ 9,276
--------
$ 47,375
RATIO OF EARNINGS TO FIXED CHARGES............................................ 11.77
========
Tax-Effected Preferred Dividends........................................... $ 120
Fixed Charges.............................................................. 47,375
--------
Fixed Charges and Preferred Dividends................................... $ 47,495
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS.................... 11.74
========
</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. The
Company is an 80.7%-owned subsidiary of Telephone and Data Systems, Inc.
("TDS").
The Company owned either majority or minority cellular interests in 180 markets
at December 31, 1999, representing 26,395,000 population equivalents ("pops").
The Company included the operations of 139 majority-owned and managed cellular
markets, representing 24.0 million pops, in consolidated operations
("consolidated markets") as of December 31, 1999. Minority interests in 35
markets, representing 2.3 million pops, were accounted for using the equity
method and were included in investment income at that date. All other interests
were accounted for using the cost method. Following is a table of summarized
operating data for the Company's consolidated operations.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total market population
(in thousands) (1) 25,044 24,683 24,034
Customers 2,602,000 2,183,000 1,710,000
Market penetration 10.39% 8.84% 7.11%
Markets in operation 139 138 134
Total employees 4,800 4,800 4,600
Cell sites in service 2,300 2,065 1,748
Average monthly revenue
per customer $ 48.11 $ 48.61 $ 54.18
Churn rate per month 2.1% 1.9% 1.9%
Marketing cost per gross
customer addition $ 346 $ 317 $ 318
================================================================================
</TABLE>
(1) CALCULATED USING CLARITAS POPULATION ESTIMATES FOR 1999, 1998 AND 1997,
RESPECTIVELY.
The growth in the Company's operating income in 1999 and 1998, 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 1998 and 1997. The improvements resulted from
growth in the Company's customer base and revenues in each year, coupled with
continuing economies of scale in both years. Operating revenues, driven by
19% and 28% increases in customers served and 31% and 12% increases in
inbound roaming revenue in 1999 and 1998, respectively, rose $254.7 million,
or 22%, in 1999 and $285.5 million, or 33%, in 1998. Cash operating expenses
rose $151.8 million, or 19%, in 1999 and $164.6 million, or 27%, in 1998.
Operating cash flow (operating income plus depreciation and amortization
expense) increased $103.0 million, or 27%, in 1999 and $120.9 million, or
46%, in 1998. Depreciation and amortization expense increased $23.2 million,
or 11%, in 1999 and $74.4 million, or 56%, in 1998. Operating income
increased $79.8 million, or 45%, in 1999 and $46.5 million, or 36% in 1998.
The Company's operating results in all three years were impacted by the exchange
of markets with BellSouth Corporation ("BellSouth") in 1997, which had a
slightly positive effect on operating income, net income and earnings per share
in all three years.
Investment and other income increased $46.5 million to $298.3 million in 1999,
due primarily to an increase of $51.6 million in gains on sales of cellular and
other investments, partially offset by a $12.1 million, or 28%, reduction in
investment income. Investment and other income increased $156.5 million, or
164%, in 1998, due primarily to a $184.8 million increase in gains on sales of
cellular and other investments, partially offset by a $34.7 million, or 45%,
decrease in investment income.
Gains on sales of cellular and other investments in 1999 primarily resulted from
the effect of the AirTouch Communications, Inc. ("ATI") merger with Vodafone
Group plc ("VOD") in June 1999. As a result of the merger, the Company received
approximately 2.0 million VOD American Depository Receipts ("ADRs") (now 10.2
million ADRs after a five-for-one stock split) plus $36.9 million in cash in
exchange for its 4.1 million ATI shares. In 1999, the Company recognized in
earnings a gain of $259.5 million on the difference between its historical basis
in the ATI shares ($181.1 million) and the merger date value of the VOD ADRs
plus the cash received (an aggregate of $440.6 million). Gains on sales of
cellular and other investments in 1998 primarily resulted from the sale of
certain minority interests to ATI, from which the Company received consideration
including the 4.1 million ATI shares.
Net income totaled $300.8 million in 1999, an increase of $83.8 million, or 39%,
from 1998, and totaled $216.9 million in 1998, an increase of $105.4 million, or
95%, from 1997. Diluted earnings per share totaled $3.28 in 1999, an increase of
$.89, or 37%, from 1998, and totaled $2.39 in 1998, an increase of $1.10, or
85%, from 1997. Excluding the after-tax effects of gains, net income increased
$51.8 million, or 58%, in 1999 and decreased $6.6 million, or 7%, in 1998.
Excluding the after-tax effects of gains, diluted earnings per share increased
$.57, or 56%, in 1999 and decreased $.08, or 7%, in 1998. The increases in 1999
reflect an increase in operating income, partially offset by a decrease in
investment income and an increase in income tax expense. The decreases in 1998
reflect an increase in operating income, more than offset by a decrease in
investment income and increases in interest expense and income tax expense.
In all three years, both net income and earnings per share included gains on the
sales of cellular and other investments. A summary of the after-tax effects of
gains on net income and diluted earnings per share in each period is shown as
follows.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Dollars in thousands, YEAR ENDED DECEMBER 31,
except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income before
after-tax effects of gains $ 140,579 $ 88,742 $ 95,302
Add: After-tax effects of gains 160,179 128,205 16,237
-------------------------------------------
Net income as reported $ 300,758 $ 216,947 $ 111,539
-------------------------------------------
-------------------------------------------
Diluted Earnings per share
before after-tax effects
of gains $ 1.59 $ 1.02 $ 1.10
Add: After-tax effects of gains 1.69 1.37 .19
Diluted earnings per share $ 3.28 $ 2.39 $ 1.29
- --------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
OPERATING REVENUES
OPERATING REVENUES totaled $1.417 billion in 1999, up $254.7 million, or 22%,
over 1998. Operating revenues totaled $1.162 billion in 1998, up $285.5 million,
or 33%, over 1997.
SERVICE REVENUES primarily consist of: (i) charges for access, airtime and
value-added services provided to the Company's local retail customers who use
the local systems operated by the Company ("local retail"); (ii) charges to
customers of other systems who use the Company's cellular systems when roaming
("inbound roaming"); and (iii) charges for long-distance calls made on the
Company's systems. Service revenues totaled $1.366 billion in 1999, up $243.0
million, or 22%, over 1998. Service revenues totaled $1.123 billion in 1998, up
$270.5 million, or 32%, over 1997. The increases in both years were primarily
due to the growing number of local retail customers and also due to the increase
in inbound roaming minutes of use on the Company's systems. Monthly service
revenue per customer averaged $48.11 in 1999, a 1% decrease from 1998, and
averaged $48.61 in 1998, a 10% decrease from the $54.18 average in 1997.
LOCAL RETAIL REVENUE increased $157.2 million, or 20%, in 1999 and $204.2
million, or 36%, in 1998. Growth in the Company's customer base was the primary
reason for the increase in local retail revenue in both years. The number of
customers increased 19% to 2,602,000 at December 31, 1999, and increased 28% to
2,183,000 at December 31, 1998. Management anticipates that overall growth in
the Company's customer base will continue to slow down in the future, primarily
as a result of an increase in the number of competitors in its markets.
Average monthly local retail revenue per customer declined 2% to $32.74 in 1999
from $33.44 in 1998, and declined 7% in 1998 from $36.11 in 1997. Monthly local
retail minutes of use per customer was 115 in 1999, 105 in 1998 and 103 in 1997.
The increases in monthly local retail minutes of use in both years were driven
by the Company's focus on designing incentive programs and rate plans to
stimulate overall usage. Average revenue per minute of use totaled $.29 in 1999
compared to $.32 in 1998 and $.35 in 1997. The decreases in both 1999 and 1998
are a result of competitive pressures and the Company's increasing use of
pricing and other incentive programs to stimulate overall usage. Management
anticipates that the Company's average local retail revenue per minute of use
will continue to decline in the future, reflecting the continued effect of the
previously mentioned factors.
INBOUND ROAMING REVENUE increased $76.1 million, or 31%, in 1999 and $25.1
million, or 12%, in 1998. The growth in inbound roaming revenue in 1999 and 1998
is affected by an increase in roaming minutes used on the Company's systems and
a decrease in revenue per minute. The number of minutes used by customers from
other wireless systems when roaming in the Company's service areas increased in
both 1999 and 1998, while average inbound roaming revenue per minute of use also
decreased in both years, due to the downward trend in negotiated rates. Both the
increase in minutes of use and the decrease in revenue per minute of use were
significantly affected by certain pricing programs offered by other wireless
companies beginning in the second half of 1998. Wireless customers who sign up
for these programs are given price incentives to roam, and many of those
customers travel in the Company's markets, thus driving an increase in the
Company's inbound roaming minutes of use. Management anticipates that the
increase in inbound roaming minutes of use will be slower in 2000 as the effect
of these new pricing programs becomes present in all periods of comparison.
Additionally, as new wireless operators begin service in the Company's markets,
the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Company's roaming partners could switch their business to these new operators,
further slowing growth in inbound roaming minutes of use. Management also
anticipates that average inbound roaming revenue per minute of use will continue
to decline in the future, reflecting the continued effect of the previously
mentioned factors.
Average monthly inbound roaming revenue per Company customer averaged $11.22 in
1999, $10.50 in 1998 and $13.81 in 1997. The increase in monthly inbound roaming
revenue per Company customer in 1999 is attributable to a larger increase in
inbound roaming revenue than in the Company's customer base; the reverse was
true in 1998, resulting in the decline in monthly inbound roaming revenue per
Company customer.
LONG-DISTANCE REVENUE increased $9.3 million, or 9%, in 1999 and $39.6 million,
or 61%, in 1998 as the volume of long-distance calls billed by the Company
increased, primarily from inbound roamers using the Company's systems to make
long-distance calls. Growth in long-distance revenue in 1999 was slowed by price
reductions primarily related to long-distance charges on roaming minutes of use.
These reductions, similar to the price reductions on roaming airtime charges,
are a continuation of the industry trend toward reduced per minute prices. The
price reductions also reduced the growth in the outbound roaming expense
component of system operations expense by approximately the same amount,
resulting in no material effect on the Company's operating cash flow or
operating income. Monthly long-distance revenue per customer averaged $4.00 in
1999, $4.51 in 1998 and $4.10 in 1997.
EQUIPMENT SALES REVENUES increased $11.8 million, or 30%, in 1999 and $15.0
million, or 63%, in 1998. The increases in equipment sales revenues reflect the
12% and 20% increases, respectively, in the number of gross customer
activations, to 1,000,000 in 1999 from 896,000 in 1998 and 746,000 in 1997, plus
an increase in the number of higher priced dual-mode units and the volume of
accessories sold in both years. 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 sales of dual-mode units in both years are related to the Company's
ongoing conversion of its systems to digital coverage, which enables the Company
to offer its customers more features, better clarity and increased roaming
capabilities. The increases in the volume of accessories sold in both years
reflect an increased emphasis on the sale of accessories at retail prices in the
Company's retail locations.
[GRAPHIC]
OPERATING EXPENSES
OPERATING EXPENSES totaled $1.161 billion in 1999, up $174.9 million, or 18%,
over 1998. Operating expenses totaled $986.4 million in 1998, up $239.0
million, or 32%, over 1997.
SYSTEM OPERATIONS expenses increased $15.2 million, or 8%, in 1999, and $40.5
million, or 26%, in 1998. The increases in both years are 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 1999, the increase in customer usage
expenses was reduced by lower costs per minute of use related to the changes
in roaming pricing discussed previously. In total, system operations costs
are expected to continue to increase as the number of customers using and the
number of cell sites within the Company's systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for the Company's customers' use of their facilities as well as for
the Company's inbound roaming traffic on these facilities. Also included are
costs related to local interconnection to the landline network, long-distance
charges and expenses incurred by the Company when its customers use systems
other than their local systems ("outbound roaming"). These expenses are offset
somewhat by amounts the Company bills to its customers for outbound roaming.
Customer usage expenses increased $3.3 million, or 3%, in 1999 and $30.3
million, or 30%, in 1998. In 1999, the increase is pri-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
marily due to the $13.6 million increase in costs related to the 10% increase in
average monthly local minutes of use per customer on the Company's systems as
well as the substantial increase in inbound roaming minutes of use. Net outbound
roaming expense decreased $10.7 million in 1999, reflecting growth in minutes
used by the Company's customers on other systems which was more than offset by
lower costs per roaming minute of use. These lower costs are related to the
lower roaming prices in the industry discussed previously. In 1998, the increase
in customer usage expenses was primarily due to the $28.8 million increase in
net roaming expense. This increase was driven by the substantial increase in
outbound roaming charges incurred when the Company's customers use other
operators' service areas which were included in the customer's "home" territory.
These calls were billed at the customer's local rate, but the Company was
charged a roaming rate by the other operators which was usually higher than that
local rate. Customer usage expenses represented 10% of service revenues in 1999
and 12% in 1998 and 1997.
Maintenance, utility and cell site expenses increased $11.8 million, or 19%, in
1999, and $10.2 million, or 19%, in 1998. The increase primarily reflects an
increase in the number of cell sites in the Company's systems, to 2,300 in 1999
from 2,065 in 1998 and 1,748 in 1997.
MARKETING AND SELLING EXPENSES increased $43.9 million, or 19%, in 1999, and
$49.9 million, or 28%, in 1998. Marketing and selling expenses primarily consist
of salaries, commissions and expenses of field sales and retail personnel and
offices; agent expenses; corporate marketing department salaries and expenses;
local advertising; and public relations expenses. The increases in both years
were primarily due to the respective 12% and 20% rises in the number of gross
customer activations. In 1999, the Company changed to a new U.S. CellularSM
brand name and logo, and incurred additional expenses to roll out new marketing
materials and signage.
Marketing cost per gross customer activation, which includes marketing and
selling expenses and losses on equipment sales, increased 9% to $346 in 1999
from $317 in 1998, and decreased less than 1% in 1998 from $318 in 1997. The
increase in cost per gross customer activation in 1999 was primarily driven by
additional advertising expenses incurred to promote the Company's new brand and
to distinguish the Company's service offerings from those of its competitors; an
increase in commissions paid to agents resulting from increase in the percent of
gross activations which were produced by agents; and an increase in losses on
equipment sales, resulting from the sale of more dual-mode units, which on
average generate greater equipment losses than the sale of analog units.
COST OF EQUIPMENT SOLD increased $29.7 million, or 31%, in 1999, and $12.1
million, or 15%, in 1998. The increases in both years reflect the growth in unit
sales related to the respective 12% and 20% increase in gross customer
activations as well as the impact of selling more higher cost dual-mode units in
1999. Also contributing to the increases in both years were greater volumes of
sales of accessories.
GENERAL AND ADMINISTRATIVE EXPENSES increased $63.0 million, or 24%, in 1999 and
$62.1 million, or 31%, in 1998. These expenses include the costs of operating
the Company's local business offices and its corporate expenses other than the
corporate engineering and marketing departments. The increases in both years
include the effects of increases in expenses required to serve the growing
customer base in the Company's markets and other expenses incurred related to
the growth in the Company's business. The Company incurred additional costs in
1999 and 1998 related to its Communications Centers, which were created to
centralize certain customer service functions, and incurred additional costs by
providing digital phone units to customers who migrated from analog to digital
rate plans. In 1999, the Company incurred costs, which could no longer be
capitalized beginning in January 1999, related to its conversion to a new
billing system. Employee-related expenses increased $27.6 million, or 23%, in
1999 and $27.3 million, or 29%, in 1998. The increase in employee-related
expenses in 1999 was primarily due to an increase in deferred compensation
expense resulting from the Company's higher stock price. In 1998, the increase
was primarily due to an increase in the number of customer service and
administrative employees. Monthly general and administrative expenses per
customer increased 1% to $11.47 in 1999 from $11.37 in 1998, and decreased 11%
in 1998 from $12.74 in 1997. General and administrative expenses represented 24%
of service revenues in 1999, 23% in 1998 and 24% in 1997.
Operating cash flow increased $103.0 million, or 27%, to $485.8 million in 1999
and increased $120.9 million, or 46%, to $382.9 million in 1998. Including
noncash stock-based compensation expense, operating cash flow would have been
$494.4 million in 1999, $386.0 million in 1998 and $264.5 million in 1997. The
improvements in 1999 and 1998 were primarily due to substantial growth in
customers and service revenues and the effects of continued operational
efficiencies on cash operating expenses. Operating cash flow margins (as a
percent of service revenues) were 35.6% in 1999, 34.1% in 1998 and 30.7% in
1997.
DEPRECIATION EXPENSE increased $17.7 million, or 11%, in 1999 and $69.6 million,
or 71%, in 1998. The increases reflect rising average fixed asset balances,
which increased 14% in 1999 and 27% in 1998. Increased fixed asset balances in
both 1999 and 1998 resulted from the addition of new cell sites built to improve
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
coverage and capacity in the Company's markets and from upgrades to provide
digital service in more of the Company's service areas. In 1998, the Company
reduced the useful lives of certain assets which increased depreciation by
approximately $23.2 million.
AMORTIZATION OF INTANGIBLES increased $5.5 million, or 14%, in 1999 and $4.8
million, or 14%, in 1998. Beginning October 1, 1999, capitalized development
costs related to the Company's new billing and information system, totaling
approximately $118 million, are being amortized over a period of seven years.
Annual amortization of these costs is expected to be approximately $17 million.
In 1998, the increase in amortization of intangibles primarily reflects an
increase in investment in licenses related to acquisitions made during the year
and to the BellSouth exchange completed in 1997.
[GRAPHIC]
OPERATING INCOME
Operating income totaled $255.8 million in 1999, a 45% increase over 1998.
Operating income totaled $176.1 million in 1998, a 36% increase over 1997. The
operating income margins were 18.7% in 1999, 15.7% in 1998 and 15.2% in 1997.
The improvements in operating income and operating income margins in 1999 and
1998 reflect increased revenues resulting from growth in the number of customers
served by the Company's systems, the increased minutes of use on the Company's
systems from both local customers and inbound roamers and the effect of
continued operational efficiencies on total operating expenses.
The Company expects service revenues to continue to grow during 2000; however,
management anticipates that average monthly revenue per customer will 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 2000 as it incurs costs associated with both
customer growth and fixed assets added.
Although service revenues increased 22%, the Company's customer base
increased by 19% and average monthly revenue per customer decreased less than
1% in 1999, management does not expect service revenues to continue to grow
faster than the Company's customer base in 2000 for the reasons stated
previously. Management continues to believe there exists a seasonality in
both service revenues, which tend to increase more slowly in the first and
fourth quarters, and operating expenses, which tend to be higher in the
fourth quarter due to increased marketing activities and customer growth,
which may cause operating income to vary from quarter to quarter.
Additionally, competitors licensed to provide personal communications
services ("PCS") have initiated service in certain of the Company's markets
over the past three-and-a-half years. The Company expects PCS operators to
continue deployment of PCS in portions of all of the Company's clusters
throughout 2000. The Company has increased its advertising since 1997 to
promote its brand and distinguish the Company's service from other wireless
communications providers. The Company's management continues to monitor other
wireless communications providers' strategies to determine how additional
competition is affecting the Company's results. While the effects of
additional wireless competition have slowed customer growth in certain of the
Company's markets, the overall effect on the Company's total customer growth
to date has not been material. However, management anticipates that customer
growth will be slower 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 $298.3 million in 1999, $251.8 million in
1998 and $95.3 million in 1997. Gain on sale of cellular and other investments
totaled $266.7 million in 1999, primarily due to the ATI-VOD merger. Gain on
sale of cellular and other investments totaled $215.2 million in 1998 from 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.
INVESTMENT INCOME was $30.4 million in 1999, $42.5 million in 1998, and $77.1
million in 1997. Investment income primarily represents the Company's share of
net income from the markets
<PAGE>
managed by others that are accounted for by the equity method. The
aggregate income from the markets in which the Company had interests in both
1998 and 1999 decreased in 1999, reducing investment income. Investment
income in 1999 and 1998 was negatively impacted by the completion of the
exchange transaction with BellSouth in 1997, by the divestitures of certain
minority interests to ATI in the first half of 1998 and by sales of other
minority interests during 1999, 1998 and 1997. See "Financial Resources and
Liquidity - Acquisitions and Divestitures" for further discussion of the ATI
transactions.
INTEREST AND INCOME TAXES
INTEREST EXPENSE totaled $38.1 million in 1999, $39.8 million in 1998 and $29.4
million in 1997. Interest expense in 1999 is primarily related to Liquid Yield
Option Notes ("LYONs") ($17.6 million); the Company's 7.25% Notes (the "Notes")
($18.5 million); and the Company's revolving credit facility with a series of
banks ("Revolving Credit Facility") ($782,000). Interest expense in 1998 was
primarily related to LYONs ($16.5 million), the Notes ($18.5 million) and the
Revolving Credit Facility ($1.1 million). Interest expense in 1997 was primarily
related to LYONs ($15.5 million), the 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).
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 Company's $250 million principal amount of Notes are unsecured and become
due in August 2007. Interest on the Notes is payable semi-annually on February
15 and August 15 of each year.
The Revolving Credit Facility is a seven-year facility which was established in
1997. Borrowings under this facility accrue interest at the London InterBank
Offered Rate ("LIBOR") plus 26.5 basis points (for a rate of 6.1% at December
31, 1999). Interest and principal are due the last day of the borrowing period,
as selected by the borrower, of either seven days or one, two, three or six
months; any borrowings made under the facility are short-term in nature and
automatically renew until they are repaid. The Company pays facility and
administrative fees totaling $710,000 per year in addition to interest on any
borrowings; these fees are recorded as interest expense. Any borrowings
outstanding in August 2004, the termination date of the Revolving Credit
Facility, are due and payable at that time along with any accrued interest. The
Company borrowed and repaid amounts totaling $57 million during 1998; no
borrowings were made during 1999 or 1997.
INCOME TAX EXPENSE was $215.3 million in 1999, $171.2 million in 1998 and $83.9
million in 1997. In 1999, 1998 and 1997, $106.6 million, $86.9 million and $14.1
million of income tax expense, respectively, related to gains on sales of
cellular and other investments. The overall effective tax rates were 42% in
1999, 44% in 1998 and 43% in 1997. The variances in each year's effective tax
rate is primarily related to gains on sales of cellular and other investments in
all years, which have varying tax implications depending upon the structure of
the transactions involved.
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 $300.8 million in 1999, $216.9 million in 1998 and $111.5
million in 1997. Diluted earnings per share was $3.28 in 1999, $2.39 in 1998 and
$1.29 in 1997. Net income and earnings per share for all three years included
significant after-tax gains on the sales of cellular and other investments,
representing $160.2 million and $1.69 per share in 1999, $128.2 million and
$1.35 per share in 1998 and $16.2 million and $0.19 per share in 1997. Excluding
the after-tax effect of these gains, net income would have been $140.6 million,
or $1.59 per share, in 1999, $88.7 million, or $1.02 per share in 1998 and $95.3
million, or $1.10 per share, in 1997.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Management
believes that this statement will not have a material effect on results of
operations and financial position of the Company.
REVENUE RECOGNITION
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is effective
beginning in the first quarter of 2000. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
Management believes that this bulletin will not have a material effect on
results of operations or the financial position of the Company.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL RESOURCES AND LIQUIDITY
The Company operates a capital- and marketing-intensive business. In recent
years, the Company has generated operating cash flow and received cash proceeds
from divestitures to fund most of its construction costs and substantially all
of its operating expenses. The Company anticipates further increases in cellular
units in service, revenues, operating cash flow and fixed asset additions in the
future. Operating cash flow may fluctuate from quarter to quarter depending on
the seasonality of each of these growth factors.
CASH FLOWS FROM OPERATING ACTIVITIES provided $333.2 million in 1999, $311.1
million in 1998 and $222.1 million in 1997. Operating cash flow provided $485.8
million in 1999, $382.9 million in 1998 and $261.9 million in 1997. 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 $152.6 million in 1999, $71.8 million in 1998 and $39.8
million in 1997. Income taxes and interest paid totaled $110.5 million in 1999,
$120.0 million in 1998 and $47.1 million in 1997.
[GRAPHIC]
CASH FLOWS FROM INVESTING ACTIVITIES required $190.4 million in 1999, $270.2
million in 1998 and $358.5 million in 1997. Cash required for property, plant
and equipment and system development expenditures totaled $277.4 million in
1999, $320.4 million in 1998 and $318.7 million in 1997. In 1999 and 1998, these
expenditures were financed primarily with internally generated cash and the
proceeds from the sales of cellular interests. In 1997, these expenditures were
financed primarily with internally generated cash and the proceeds of the Notes
offering. These expenditures primarily represent the construction of 225, 281
and 331 cell sites in 1999, 1998 and 1997, respectively, plus other plant
additions and costs related to the development of the Company's office systems.
In 1999 and 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. Acquisitions required $29.8 million in 1999, $120.0
million in 1998 and $138.4 million in 1997. The Company received net cash
proceeds totaling $96.0 million in 1999, $148.3 million in 1998 and $61.1
million in 1997 related to sales of cellular and other investments. Cash
distributions from cellular entities in which the Company has an interest
provided $24.4 million in 1999, $27.7 million in 1998 and $52.4 million in 1997.
CASH FLOWS FROM FINANCING ACTIVITIES provided $2.9 million in 1999, required
$2.7 million in 1998 and provided $135.9 million in 1997. In 1998, the Company
borrowed and repaid $57 million under the Revolving Credit Facility. 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 vendor financing
agreements earlier in 1997 totaled $13.7 million.
Anticipated capital requirements for 2000 primarily reflect the Company's plans
for construction and system expansion. The Company's construction and system
expansion budget for 2000 is approximately $330 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, EXCHANGES AND DIVESTITURES
The Company assesses its cellular holdings on an ongoing basis in order to
maximize the benefits derived from clustering its markets. 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.
ACQUISITIONS
In 1999, the Company acquired a majority interest in one market and minority
interests in several markets in which the Company currently owns a majority
interest, representing approximately 245,000 pops, for a total of $31.5 million.
In 1998, the Company acquired majority interests in six markets and minority
interests in several markets, representing approximately 1.3 million pops, for a
total consideration of $168.3 million,
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
consisting of cash and approximately 46,000 USM Common Shares. The minority
interests acquired were in markets in which the Company currently owns both
majority and minority interests.
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.
EXCHANGES
In 1997, the Company completed an exchange of properties with BellSouth.
Pursuant to the exchange, the Company received majority interests representing
approximately 4.0 million pops in exchange for majority interests representing
approximately 2.0 million pops, minority interests representing approximately
1.2 million pops, and a net amount of $86.7 million in cash. The majority
interests the Company received are in 12 markets adjacent to its clusters in
Illinois, Iowa and Wisconsin.
DIVESTITURES
In 1999, the Company divested a majority interest in one market and minority
interests in three markets, representing approximately 612,000 pops, for $59.7
million in cash and receivables. The majority interest was divested to BellSouth
as part of the exchange transaction, which was substantially completed in
November 1997; therefore, no gain or loss was recorded on this transaction.
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 ATI 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 ATI and which were to be acquired by the Company as
part of a June 1996 agreement between the Company and TDS. The contract right
termination agreement enabled the Company to receive cash equal to the value of
the gain the Company would have realized had it purchased the interests from TDS
and sold them to ATI under terms similar to those in the agreement between TDS
and ATI.
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.
PENDING TRANSACTIONS
As of December 31, 1999, the Company had agreements pending to acquire a
majority interest in one market and a minority interest in another market in
which it currently owns a majority interest, representing an aggregate of
160,000 pops, in exchange for $24.0 million in cash and approximately 28,000 USM
Common Shares.
The Company has an agreement pending to divest a minority interest in one
market, representing approximately 114,000 pops, for $22.5 million in cash. The
Company expects all of the pending transactions to be completed in the first
half of 2000.
[GRAPHIC]
LIQUIDITY
The Company anticipates that the aggregate resources required for 2000 will
include approximately $330 million for capital spending and $24 million for
acquisitions.
The Company's LYONs are convertible, at the option of their holders, at any time
prior to maturity, redemption or purchase, into USM Common Shares at a
conversion rate of 9.475 USM Common Shares per LYON. Upon conversion, the
Company has the option to deliver to holders either USM Common Shares or cash
equal to the market value of the USM Common Shares into which the LYONs are
convertible.
Under the terms of the LYONs, on June 15, 2000, the Company will be required, at
the option of each holder of LYONs, to purchase LYONs for a purchase price of
$411.99 for each LYON (the "Put Value"). Each LYON has a face value of $1,000.00
at maturity. The Company may elect to pay this purchase price either in (a)
cash, (b) USM Common Shares, (c) shares of publicly traded
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
common equity securities of TDS or (d) any combination thereof. Based on current
market prices for USM Common Shares, the conversion value of the LYONs is
greater than the Put Value. Accordingly, the Company's management believes it is
unlikely that holders of LYONs will exercise their put rights on June 15, 2000.
However, there can be no assurance that the conversion value of the LYONs will
exceed the Put Value on or shortly prior to that date. If the conversion value
declines so that it is near or below the Put Value, it is possible that some or
all holders of LYONs may exercise their option to require the Company to
purchase the LYONs. In such event, the Company will determine, based upon market
conditions and other factors, which option it will exercise to satisfy such
requirement.
In addition, the Company may, at any time on or after June 15, 2000, redeem
LYONs for cash at a price equal to the issue price plus accrued original issue
discount through the date of redemption. However, holders of LYONs must be
notified of such redemption between 30 and 60 days prior to the date of the
redemption. During the period between the date of notice and the redemption
date, as at any other time, any holder of LYONs may exercise his conversion
rights.
The Company is generating substantial cash from its operations and anticipates
financing these expenditures primarily with internally generated cash and
short-term borrowings. The Company had $198 million of cash and cash equivalents
at December 31, 1999. Additionally, the entire balance of $500 million under the
Company's Revolving Credit Facility is unused and remains available to meet any
short-term borrowing requirements.
Management believes that the Company's operating cash flows and sources of
external financing, including the above-referenced Revolving Credit Facility,
provide substantial financial flexibility for the Company to meet both its
short- and long-term needs. The Company also currently has access to public and
private capital markets to help meet its long-term financing needs. The Company
anticipates issuing debt and equity securities only when capital requirements
(including acquisitions), financial market conditions and other factors warrant.
[GRAPHIC]
MARKET RISK
The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. All of the Company's existing debt is in the form of
long-term fixed-rate notes with original maturities ranging from seven to 20
years. Accordingly, fluctuations in interest rates can lead to fluctuations in
the fair value of such instruments. The Company has not entered into financial
derivatives to reduce its exposure to interest rate risks.
The Company had total debt repayments as of December 31, 1999 and 1998 of $989.2
million and $995.0 million, respectively, which are all due after 2004. The
weighted average interest rate on this debt during 1999 and 1998 were 6.35% and
6.59%, respectively, and the fair value of the debt at year-end was $950.2
million and $562.3 million, respectively.
The Company maintains a portfolio of available for sale marketable equity
securities which resulted from acquisitions and
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
the sale of non-strategic investments. The market value of these investments,
principally VOD ADRs, amounted to $540.7 million at December 31, 1999. A
hypothetical 10% decrease in the share prices of these investments would result
in a $54.1 million decline in the market value of the investments.
YEAR 2000 ISSUE
The Year 2000 Issue existed because certain computer systems and applications
abbreviate dates using only two digits rather than four digits, e.g., "98"
rather than "1998." Unless corrected, this shortcut could have caused problems
when the century date "2000" occurs. On that date, some computer operating
systems and applications and embedded technology may have recognized the date as
January 1, 1900 instead of January 1, 2000.
The Company's management established Year 2000 project teams in 1998 to address
Year 2000 issues. The project teams identified those mission critical hardware,
systems and applications that were not Year 2000 ready. These mission critical
hardware, systems and applications were then renovated, validated and
implemented prior to December 31, 1999. No significant problems have been
encountered in 2000. The total costs associated with the Year 2000 Issue
incurred through December 31, 1999 were approximately $4 million; no further
substantial expenditures are expected.
The Company expects to incur minimal expenditures for final project wrap-up
activities. While the Company believes its mission critical hardware, systems
and applications are Year 2000 ready, it will continue to monitor information
systems, facilities, equipment and relationships with third parties. Contingency
plans have been developed to address any interruptions in essential services.
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 CONTAINS
STATEMENTS THAT ARE NOT BASED ON HISTORICAL FACT, INCLUDING THE WORDS
"BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS" AND SIMILAR WORDS. THESE
STATEMENTS CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
MAY CAUSE ACTUAL RESULTS, EVENTS OR DEVELOPMENTS TO BE SIGNIFICANTLY DIFFERENT
FROM ANY FUTURE RESULTS, EVENTS OR DEVELOPMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE:
- - GENERAL ECONOMIC AND BUSINESS CONDITIONS, BOTH NATIONALLY AND IN THE REGIONS
IN WHICH THE COMPANY OPERATES,
- - TECHNOLOGY CHANGES,
- - COMPETITION,
- - CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS,
- - CHANGES IN GOVERNMENTAL REGULATIONS,
- -OUR ABILITY AND THE ABILITY OF OUR THIRD-PARTY SUPPLIERS TO TAKE CORRECTIVE
ACTION IN A TIMELY MANNER WITH RESPECT TO THE YEAR 2000 ISSUE,
- - AVAILABILITY OF FUTURE FINANCING, AND
- - CHANGES IN GROWTH IN CELLULAR CUSTOMERS, PENETRATION RATES AND CHURN RATES.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(Dollars in thousands, except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Service $1,366,412 $1,123,454 $852,991
Equipment sales 50,769 39,013 23,974
------------------------------------------
Total Operating Revenues 1,417,181 1,162,467 876,965
------------------------------------------
OPERATING EXPENSES
System operations 208,822 193,625 153,137
Marketing and selling 272,729 228,844 178,984
Cost of equipment sold 124,058 94,378 82,302
General and administrative 325,758 262,766 200,620
Depreciation 184,830 167,150 97,591
Amortization of intangibles 45,142 39,629 34,788
------------------------------------------
Total Operating Expenses 1,161,339 986,392 747,422
------------------------------------------
OPERATING INCOME 255,842 176,075 129,543
------------------------------------------
INVESTMENT AND OTHER INCOME
Investment income 30,374 42,451 77,121
Amortization of licenses related to investments (1,186) (1,039) (2,084)
Interest income 8,893 5,695 5,863
Other income (expense), net 590 (4,413) (3,614)
Minority share of income (7,148) (6,039) (12,298)
Gain on sale of cellular and other investments 266,744 215,154 30,318
------------------------------------------
Total Investment and Other Income 298,267 251,809 95,306
------------------------------------------
INCOME BEFORE INTEREST AND INCOME TAXES 554,109 427,884 224,849
------------------------------------------
INTEREST EXPENSE
Interest expense - other 38,099 39,772 27,414
Interest expense - affiliate -- -- 1,948
------------------------------------------
Total Interest Expense 38,099 39,772 29,362
------------------------------------------
INCOME BEFORE INCOME TAXES 516,010 388,112 195,487
Income tax expense 215,252 171,165 83,948
------------------------------------------
NET INCOME $ 300,758 $ 216,947 $111,539
------------------------------------------
WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES (000S) 87,478 87,323 86,346
BASIC EARNINGS PER COMMON AND SERIES A COMMON SHARE $ 3.44 $ 2.48 $ 1.29
------------------------------------------
DILUTED EARNINGS PER COMMON AND SERIES A COMMON SHARE $ 3.28 $ 2.39 $ 1.29
------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $300,758 $216,947 $ 111,539
Add (Deduct) adjustments to reconcile net
income to net cash provided by operating activities
Depreciation and amortization 229,972 206,779 132,379
Deferred income tax provision 134,130 107,201 24,077
Investment income (30,374) (42,451) (77,121)
Minority share of income 7,148 6,039 12,298
Gain on sale of cellular and other investments (266,744) (215,154) (30,318)
Other noncash expense 18,017 24,660 18,786
Change in accounts receivable (38,970) (26,998) (10,038)
Change in accounts payable (14,711) 61,977 (1,646)
Change in accrued interest (6) 532 6,413
Change in accrued taxes (5,896) (26,246) 26,297
Change in customer deposits and deferred revenues 9,067 6,523 5,083
Change in other assets and liabilities (9,214) (8,710) 4,388
--------------------------------------
333,177 311,099 222,137
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (248,722) (274,375) (277,799)
System development costs (28,728) (46,042) (40,949)
Acquisitions, excluding cash acquired (29,841) (119,957) (138,377)
Proceeds from sale of cellular and other investments 95,988 148,329 61,145
Distributions from unconsolidated entities 24,427 27,740 52,365
Investments in and advances from/(to) unconsolidated entities 5,497 (185) (10,535)
Change in notes receivable (10,000) -- --
Change in temporary investments and
marketable non-equity securities 236 468 (1,088)
Other investing activities 738 (6,227) (3,305)
--------------------------------------
(190,405) (270,249) (358,543)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of 7.25% unsecured notes -- -- 243,053
Repayment of long-term debt (267) -- --
Repayment of vendor financing -- -- (103,827)
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 9,290 2,567 2,503
Capital distributions to minority partners (6,095) (3,991) (5,849)
--------------------------------------
2,928 (2,726) 135,880
--------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 145,700 38,124 (526)
CASH AND CASH EQUIVALENTS -
Beginning of period 51,975 13,851 14,377
--------------------------------------
End of period $197,675 $ 51,975 $ 13,851
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds $ 29,169 $ 15,576
Affiliated cash equivalents 168,506 36,399
---------------------------
197,675 51,975
Temporary investments 148 284
Accounts receivable
Customers, less allowance of
$10,029 and $6,054, respectively 124,145 99,931
Roaming 61,915 46,634
Affiliates 15 26
Other 9,584 13,671
Inventory 29,999 16,673
Note receivable 10,000 --
Prepaid expenses 10,081 10,506
Other current assets 5,221 3,105
---------------------------
448,783 242,805
---------------------------
INVESTMENTS
Licenses, net of accumulated amortization of
$188,076 and $153,934, respectively 1,156,175 1,200,653
Marketable equity securities 540,711 300,754
Investments in unconsolidated entities, net of accumulated
amortization of $3,934 and $4,546, respectively 124,573 136,391
Notes and interest receivable - long-term 10,736 11,530
Marketable non-equity securities 216 337
---------------------------
1,832,411 1,649,665
---------------------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 1,579,278 1,400,597
Less accumulated depreciation 508,273 389,754
---------------------------
1,071,005 1,010,843
---------------------------
DEFERRED CHARGES
System development costs, net of accumulated amortization
of $17,580 and $6,502, respectively 135,462 127,742
Other, net of accumulated amortization
of $8,662 and $8,502, respectively 12,434 16,581
---------------------------
147,896 144,323
---------------------------
TOTAL ASSETS $3,500,095 $3,047,636
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable
Affiliates $ 3,127 $ 11,508
Other 143,967 172,568
Customer deposits and deferred revenues 36,882 27,575
Accrued interest 7,064 7,069
Accrued taxes 7,517 13,928
Accrued compensation 16,555 13,263
Other current liabilities 11,867 12,362
-----------------------------------
226,979 258,273
-----------------------------------
LONG-TERM DEBT
6% zero coupon convertible debentures 296,322 281,487
7.25% unsecured notes 250,000 250,000
-----------------------------------
546,322 531,487
-----------------------------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 401,983 258,123
Other 9,199 5,914
-----------------------------------
411,182 264,037
-----------------------------------
MINORITY INTEREST 40,971 43,609
-----------------------------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share;
authorized 140,000,000 shares; issued and outstanding
54,713,101 and 54,364,729 shares, respectively 54,713 54,365
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 1,331,274 1,319,895
Accumulated other comprehensive income 81,391 69,465
Retained earnings 774,257 473,499
-----------------------------------
2,274,641 1,950,230
-----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,500,095 $3,047,636
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Series A Additional Comprehensive Comprehensive Retained
(Dollars in thousands) Common Shares Common Shares Paid-In Capital Income Income Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
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
Add (Deduct)
Employee benefit plans 298 -- 9,337 -- -- --
Conversion of 6% zero coupon
convertible debentures 50 -- 2,046 -- -- --
Capital stock expense -- -- (4) -- -- --
Net income -- -- -- $ 300,758 -- 300,758
Other Comprehensive Income:
Net unrealized gain on
marketable equity
securities -- -- -- 11,926 11,926
------------
Comprehensive income -- -- -- $ 312,684 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 54,713 $ 33,006 $ 1,331,274 $ 81,391 $ 774,257
=============================================================================== ============================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United States Cellular Corporation (the "Company" or "U.S. Cellular"), a
Delaware Corporation, is currently an 80.7%-owned subsidiary of Telephone and
Data Systems, Inc. ("TDS").
NATURE OF OPERATIONS
U.S. Cellular owns, manages and invests in cellular systems throughout the
United States and is the nation's eighth largest cellular telephone company in
terms of customers. The Company owned interests in 180 cellular markets,
representing approximately 26.4 million population equivalents ("pops"), as of
December 31, 1999. U.S. Cellular's 139 majority-owned and managed markets,
primarily mid-sized and rural markets, served 2,602,000 customers in 25 states
as of December 31, 1999. U.S. Cellular's Midwest Regional Market Cluster, which
includes markets in Iowa, Wisconsin, Illinois, Indiana, and Missouri, served
1,140,000 customers at December 31, 1999, representing approximately 44% of U.S.
Cellular's total customers served as of that date.
PRINCIPLES OF CONSOLIDATION
The accounting policies of U.S. Cellular conform to generally accepted
accounting principles. The consolidated financial statements include the
accounts of U.S. Cellular, its majority-owned subsidiaries, and partnerships in
which U.S. Cellular has a majority partnership interest. All material
intercompany accounts and transactions have been eliminated.
U.S. Cellular includes as investments 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 (a) the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and (b) 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 non-equity securities and are stated at amortized cost.
The carrying amounts of Cash and cash equivalents and Temporary investments
approximate their fair value due to the short-term nature of these investments.
Outstanding checks in excess of cash balances totaled $26.3 and $21.2 million at
December 31, 1999 and 1998, respectively, and are classified as Accounts payable
in the Consolidated Balance Sheets. Sufficient funds were available to fund
these outstanding checks when presented for payment.
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 U.S. Cellular's cellular systems, by affiliated entities and by other
partners for capital distributions.
DEFERRED CHARGES
Deferred system development costs represent costs incurred for the development
of new information systems. Capitalized costs of information systems development
are amortized over a five- 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).
REVENUE RECOGNITION
Revenues from operations primarily consist of charges for access, airtime, and
value added services provided for the Company's local retail customers; charges
to customers of other systems who use the Company's cellular systems when
roaming; charges for long-distance calls made on the Company's systems; end user
equipment sales; and sales of accessories. 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 U.S. Cellular's cellular systems for the last half of
each month, are estimated and recorded. Equipment and accessory sales are
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognized upon delivery to the customer and reflect charges to customers for
equipment purchased.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs totaled
$64.4 million, $52.4 million and $41.4 million for the years ended December 31,
1999, 1998 and 1997, 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 U.S. Cellular and its subsidiaries. Under this plan, pension
benefits and costs are calculated separately for each participant and are funded
currently. Pension costs were $3.6 million, $3.3 million and $1.0 million in
1999, 1998 and 1997, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities by
requiring that entities recognize all derivatives as either assets or
liabilities at fair market value on the balance sheet. Management believes that
this statement will not have a material effect on results of operations and
financial position of the Company.
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is effective
beginning in the first quarter of 2000. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
Management believes that this bulletin will not have a material effect on
results of operations and financial position of the Company.
2 INCOME TAXES
U.S. Cellular is included in a consolidated federal income tax return with other
members of the TDS consolidated group. TDS and U.S. Cellular are parties to a
Tax Allocation Agreement (the "Agreement"). The Agreement provides that U.S.
Cellular 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. U.S. Cellular and its subsidiaries calculate
their losses and credits as if they comprised a separate affiliated group. Under
the Agreement, U.S. Cellular 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) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes
Current $ 67,116 $ 52,613 $ 46,357
Deferred 112,463 91,671 22,109
State income taxes
Current 14,006 11,351 13,514
Deferred 21,667 15,530 1,968
-----------------------------------------------------
Total income
tax expense $215,252 $171,165 $ 83,948
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.5 4.4 5.1
Amortization of license
acquisition costs .6 .6 1.7
Corporations not included
in consolidated federal
income tax return .1 .4 .4
Changes in tax basis -- 1.7 --
Sale of cellular interests -- .7 .8
Resolution of prior
period tax issues 1.0 .8 --
Other .5 .5 (.1)
-----------------------------------------------
Effective income tax rate 41.7% 44.1% 42.9%
================================================================================
</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.
U.S. Cellular had current deferred tax assets totaling $2.7 million and $1.5
million at December 31, 1999 and 1998, 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:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Asset
Taxes on acquisitions $ 34,143 $ 28,190
Partnership investments 17,541 7,492
Net operating loss carryforward 13,593 14,719
------------------------------------------
65,277 50,401
Less valuation allowance 11,696 13,448
------------------------------------------
Total Deferred Tax Asset 53,581 36,953
------------------------------------------
Deferred Tax Liability
Marketable equity securities 201,882 106,194
Property, plant and equipment 94,430 67,803
Licenses 88,706 46,459
Equity investments 63,650 63,650
Other 6,896 10,970
------------------------------------------
Total Deferred Tax Liability 455,564 295,076
------------------------------------------
Net Deferred Income Tax Liability $401,983 $258,123
================================================================================
</TABLE>
The amount of state net operating loss ("NOL") carryforward (generating a $10.5
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 $168.2 million at December 31, 1999 and expires
between 2000 and 2014. 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.
U.S. Cellular 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
$8.0 million at December 31, 1999 which expires between 2005 and 2014.
Included in Cellular license costs and Investment in unconsolidated entities is
goodwill related to various acquisitions structured to be tax-free of $232
million and $1 million, respectively, at December 31, 1999 and $240 million and
$3 million, respectively, at December 31, 1998. No deferred taxes have been
provided on this goodwill.
The financial reporting basis of the marketable equity securities was greater
than the tax basis at the date of acquisition, generating $147.6 million of
deferred taxes. Additionally, the value of the marketable equity securities has
appreciated since acquisition, generating $54.3 million of deferred taxes.
3 EARNINGS PER SHARE
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) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income used in Basic
Earnings Per Share $300,758 $216,947 $111,539
Interest expense
eliminated as a
result of the pro
forma conversion
of Convertible
Debentures, net of tax 10,053 9,032 8,691
-------------------------------------
Net Income used in
Diluted Earnings
per Share $310,811 $225,979 $120,230
=====================================
Weighted Average
Number of Common
Shares used in Basic
Earnings Per Share 87,478 87,323 86,346
Effect of Dilutive Securities:
Stock Options
and Stock
Appreciation Rights 347 48 52
Conversion of Convertible
Debentures 7,054 7,059 7,059
-------------------------------------
Weighted Average
Number of Common
Shares used in Diluted
Earnings Per Share 94,879 94,430 93,457
================================================================================
</TABLE>
Earnings per Common and Series A Common Share for the years ended December 31,
1999, 1998 and 1997 contain significant income amounts related to gains on the
sale of cellular and other investments. Excluding the after-tax effect of these
gains, basic earnings per share were $1.61, $1.02 and $1.10 for the years ended
December 31, 1999, 1998 and 1997, respectively, and diluted earnings per share
were $1.59, $1.02 and $1.10 for the years ended December 31, 1999, 1998 and
1997, respectively.
4 INVESTMENT IN LICENSES
Investment in licenses consists of the costs incurred in acquiring Federal
Communications Commission 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 $33.8 million, $32.7 million and $27.1 million in 1999, 1998
and 1997, respectively. Costs applicable to unsuccessful license applications
are charged to expense.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 MARKETABLE EQUITY SECURITIES
Marketable equity securities are classified as available-for-sale, are stated at
fair market value and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Vodafone AirTouch plc
ADRs 10,245,375 --
Value $ 507,146 $--
Rural Cellular Corporation
Common Shares 370,882 370,882
Value $ 33,565 $ 3,894
AirTouch Communications, Inc.
Common Shares -- 4,098,150
Value $ -- $ 296,860
================================================================================
</TABLE>
In 1999, the Company received 10.2 million (adjusted for a five-for-one stock
split) Vodafone AirTouch plc American Depository Receipts ("ADRs") and $36.9
million in cash in exchange for its 4.1 million AirTouch Communications, Inc.
("AirTouch") common shares as a result of the AirTouch merger with Vodafone
Group plc. The Company received the AirTouch common shares in 1998 as a result
of the sale of certain minority cellular interests to AirTouch.
Information regarding the Company's marketable equity securities is summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Available-for-sale Equity Securities
Aggregate Fair Value $540,711 $300,754
Historical Cost 405,061 184,980
-----------------------------------------
Gross Unrealized Holding Gains 135,650 115,774
Tax Effect 54,259 46,309
-----------------------------------------
Net Unrealized Holding Gains $ 81,391 $ 69,465
================================================================================
</TABLE>
The Company's net unrealized holding gains are included as an increase to
Accumulated other comprehensive income. Realized gains and losses are determined
on the basis of specific identification. During 1999, cash proceeds from the
exchange of available-for-sale securities totaled $36.9 million and gross
realized gains totaled $259.5 million.
6 INVESTMENTS IN UNCONSOLIDATED ENTITIES
Investments in unconsolidated entities consist of amounts invested in cellular
entities in which U.S. Cellular 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) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Equity method investments:
Capital contributions,
loans and advances $ 24,381 $ 32,444
Licenses, net of amortization 34,495 42,756
Cumulative share of income 211,112 187,279
Cumulative share of distributions (148,014) (130,295)
---------------------------
121,974 132,184
Cost method investments:
Capital contributions,
net of partnership distributions 1,239 3,458
Licenses, net of amortization 1,360 749
---------------------------
2,599 4,207
---------------------------
Total investments in
unconsolidated entities $124,573 $136,391
================================================================================
</TABLE>
As of December 31, 1999, U.S. Cellular followed the equity method of accounting
for minority interests in 35 markets where the Company's ownership interest is
3% or greater. This method recognizes, on a current basis, U.S. Cellular's
proportionate share of the income and losses accruing to it under the terms of
the respective partnership and shareholder agreements. Income and losses from
the entities are reflected in the Consolidated Statements of Income on a pretax
basis as investment income. Investment income totaled $30.4 million, $42.5
million and $77.1 million in 1999, 1998, and 1997, respectively. As of December
31, 1999, U.S. Cellular followed the cost method of accounting for its
investments in six markets where the Company's ownership interest is less than
3%.
Investments in unconsolidated entities include cellular license costs. These
costs are being amortized over 40 years. Amortization amounted to $1.2 million,
$1.0 million and $2.1 million in 1999, 1998, and 1997, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the unaudited combined assets, liabilities and equity,
and the unaudited combined results of operations of the cellular system entities
in which U.S. Cellular's investments are accounted for by the equity method:
<TABLE>
<CAPTION>
DECEMBER 31,
(Unaudited, dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current $ 236,231 $ 241,991
Due from affiliates 2,755 6,721
Property and other 984,738 969,419
---------------------------
$1,223,724 $1,218,131
================================================================================
Liabilities and Equity
Current liabilities $ 226,322 $ 238,055
Due to affiliates 15,649 26,022
Deferred credits 4,062 783
Long-term debt 30,800 22,152
Partners` capital
and shareholders' equity 946,891 931,119
---------------------------
$1,223,724 $1,218,131
================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(Unaudited, dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Results of Operations
Revenues $ 1,557,943 $ 1,460,318 $ 1,652,683
Operating expenses 961,073 820,326 1,012,685
--------------------------------------------
Operating cash flow 596,870 639,992 639,998
Depreciation and
amortization 261,418 153,980 166,285
--------------------------------------------
Operating income 335,452 486,012 473,713
Other (expense) income (6,589) 337 (7,292)
--------------------------------------------
Net income $ 328,863 $ 486,349 $ 466,421
================================================================================
</TABLE>
7 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at the original cost of construction
including capitalized costs of certain taxes and payroll-related expenses.
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 12.9%, 13.6% and 10.3% in 1999,
1998, and 1997, respectively. 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 (and related
accumulated depreciation) 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) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Cell site-related equipment $ 939,797 $ 790,292
Land, buildings and
leasehold improvements 280,306 237,361
Switching-related equipment 153,984 116,198
Office furniture and equipment 104,901 127,397
Other operating equipment 67,021 59,152
Work in process 33,269 70,197
------------------------------------------------
$1,579,278 $1,400,597
================================================================================
</TABLE>
8 SUPPLEMENTAL CASH FLOW DISCLOSURES
U.S. Cellular acquired certain cellular licenses and other cellular interests
during 1999, 1998 and 1997. 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) 1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Property, plant
and equipment, net $ 3,444 $ 18,417 $ 112,696
Cellular licenses 22,567 97,228 139,885
(Decrease) in
investment in
unconsolidated entities (546) (2,317) (90,33)
Accounts receivable 1,762 4,551 26,032
Accounts payable (637) (370) (31,117)
Other assets and liabilities,
excluding cash acquired 3,251 3,751 13,699
Common Shares issued
and issuable -- (1,303) (32,486)
------------------------------------------
Decrease in cash due
to acquisitions $ 29,841 $ 119,957 $ 138,377
================================================================================
</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) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $ 20,150 $ 18,966 $ 6,816
Income taxes paid 90,307 101,041 40,316
Noncash interest expense 17,132 16,157 15,379
Additions to Property,
Plant and Equipment
and System Development
financed through
Accounts Payable $ 15,616 $ 21,528 $ 8,514
================================================================================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 ACQUISITIONS AND DIVESTITURES
As part of its development strategy U.S. Cellular has acquired cellular
interests for cash, promissory notes and U.S. Cellular and TDS Common Shares.
U.S. Cellular 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 1999, U.S. Cellular completed the acquisition of a majority interest in
one market and several minority interests, representing approximately 245,000
pops, for a total consideration of $31.5 million in cash.
During 1998, U.S. Cellular 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.
Assuming that the 1999 and 1998 acquisitions discussed above, which were
accounted for as purchases, had taken place on January 1, 1998, unaudited pro
forma results of operations would have been as follows:
<TABLE>
<CAPTION>
(Unaudited, dollars in thousands, YEAR ENDED DECEMBER 31,
except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Service Revenues $1,373,422 $1,145,117
Equipment Sales 50,835 39,504
Net Income 302,387 220,205
Basic Earnings per
Common Share 3.46 2.52
Diluted Earnings per
Common Share $ 3.27 $ 2.41
================================================================================
</TABLE>
COMPLETED DIVESTITURES
The gains recorded in 1999, 1998, and 1997 reflect the sales of non-strategic
cellular and certain other investments. In 1999, U.S. Cellular recognized a
$259.5 million gain as a result of the AirTouch Communications Inc. merger with
Vodafone Group plc and from the divestiture of minority interests in three
markets. U.S. Cellular recognized a gain on the difference between the
historical basis of its investment in AirTouch common shares and the value of
the Vodafone AirTouch plc ADRs plus cash received from the merger. In 1998, U.S.
Cellular 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, U.S. Cellular 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 addition to the VOD ADRs received in 1999 and the AirTouch Common
Shares received in 1998, these transactions generated net cash proceeds of $96.0
million, $148.3 million and $61.1 million in 1999, 1998 and 1997, respectively.
PENDING ACQUISITIONS
At December 31, 1999, U.S. Cellular had entered into agreements with third
parties to acquire a majority interest in one market and a minority interest in
one market in which the Company already owns a majority interest, representing
160,000 pops, for $24.0 million in cash and approximately 28,000 Common Shares.
These transactions are expected to be completed during the first half of 2000.
PENDING DIVESTITURE
U.S. Cellular had entered into an agreement to sell its minority interest in one
market at December 31, 1999, representing 114,000 pops, for $22.5 million in
cash. The Company expects to complete this transaction during the first half of
2000.
10 REVOLVING CREDIT FACILITY
U.S. Cellular has a seven-year $500 million revolving credit facility with a
group of banks ("Revolving Credit Facility"). This facility replaced the
Company's Revolving Credit Agreement with TDS as its primary short-term
borrowing facility. As of December 31, 1999, 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 6.1% at December 31, 1999). Interest and principal are due the last day
of the borrowing period, as selected by the borrower, of either seven days or
one, two, three or six months. U.S. Cellular pays facility and administration
fees at an aggregate annual rate of 0.142% of the total $500 million facility.
These payments totaled $710,000, $710,000 and $237,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. The Revolving Credit Facility
expires in August, 2004.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 6% ZERO COUPON COVERTIBLE DEBENTURES
The Company sold $745 million principal amount at maturity of zero coupon 6%
yield to maturity convertible debt. This 20-year fixed rate debt, in the form of
Liquid Yield Option Notes ("LYONs"), is subordinated to all senior indebtedness
of the Company. At December 31, 1999 and 1998, U.S. Cellular's senior
indebtedness totaled $250.0 million and $260.0 million, respectively.
Each LYON is convertible at the option of the holder at any time at a conversion
rate of 9.475 U.S. Cellular Common Shares per $1,000 of LYONs. Upon conversion,
U.S. Cellular may elect to deliver its Common Shares or cash equal to the market
value of the Common Shares. During 1999, 5,760 LYONs were converted for
approximately $267,000 in cash and 50,000 Common Shares. Beginning June 15,
2000, U.S. Cellular may redeem the LYONs for cash at the issue price plus
accrued original issue discount through the date of redemption. Holders have the
right to exercise their conversion option prior to the redemption date. On June
15, 2000, the holders may require U.S. Cellular to purchase LYONs at the issue
price plus accrued original issue discount through that date. U.S. Cellular will
have the option of purchasing such LYONs with cash, U.S. Cellular Common Shares,
TDS common equity securities, or any combination thereof.
The carrying value and estimated fair value of U.S. Cellular's 6% zero coupon
convertible debentures were $296.3 million and $706.9 million at December 31,
1999 and $281.5 million and $298.7 million at December 31, 1998, respectively.
The fair values were estimated using discounted cash flow analysis.
12 7.25% UNSECURED NOTE
During 1997, the Company sold $250 million principal amount of 7.25% notes
("Notes"), priced to yield 7.33% to maturity. The Notes were sold under the
Company's $400 million shelf registration. The Notes are unsecured and become
due on August 15, 2007. Interest on the Notes is payable on February 15 and
August 15 of each year. The Notes will be redeemable, in whole or in part, at
the option of the Company at any time on or after August 15, 2004, at a
redemption price equal to 100% of the principal amount of the Notes to be
redeemed, plus accrued interest thereon, if any, to the date of redemption.
The carrying value and estimated fair value of the Company's 7.25% unsecured
notes were $250.0 million and $243.3 million at December 31, 1999 and $250.0
million and $263.6 million at December 31, 1998, respectively. The fair values
were estimated using discounted cash flow analysis.
13 COMMON SHAREHOLDERS" EQUITY
COMMON STOCK
EMPLOYEE BENEFIT PLANS. The following table summarizes
Common Shares issued for the employee benefit plans described as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Deferred Savings Plan 49,770 33,532 42,400
Employee stock options,
stock appreciation rights
and awards 241,693 58,523 65,029
Employee Stock
Purchase Plan 6,997 16,739 10,134
---------------------------
298,460 108,794 117,563
================================================================================
</TABLE>
TAX-DEFERRED SAVINGS PLAN
U.S. Cellular has reserved 38,353 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 U.S.Cellular Common Shares, TDS
Common Shares, or five nonaffiliated funds.
EMPLOYEE STOCK OPTIONS, STOCK
APPRECIATION RIGHTS AND AWARDS
U.S. Cellular 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 $1.0 million, $440,000 and $285,000 in 1999, 1998 and 1997,
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, except YEAR ENDED DECEMBER 31,
per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As Reported $ 300,758 $ 216,947 $ 111,539
Pro Forma 298,941 214,810 110,317
Basic Earnings
Per Common Share:
As Reported 3.44 2.48 1.29
Pro Forma 3.42 2.46 1.28
Diluted Earnings
Per Common Share:
As Reported 3.28 2.39 1.29
Pro Forma $ 3.26 $ 2.37$ 1.27
================================================================================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plans at December 31,
1999, 1998 and 1997 and changes during the years then ended is presented in the
table and narrative as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Number Average Average
of Shares Option Prices Fair Values
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Stock Options
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
Granted 291,004 $ 32.64 $23.45
Exercised (378,871) $ 21.87
Canceled (22,171) $ 25.23
----------
Outstanding
December 31, 1999
(106,104 exercisable) 672,614 $ 24.79
================================================================================
</TABLE>
U.S. Cellular has established Stock Option plans that provide for the grant of
stock options to officers and employees and has reserved 1,472,498 Common Shares
for options granted and to be granted to key employees. The options under the
1998 plan are exercisable from the date of vesting through November 9, 2004 to
March 31, 2009, or 30 days following the date of the employee's termination of
employment, if earlier. Under the 1998 Stock Option Plan, 106,104 stock options
were exercisable at December 31, 1999, have exercise prices between $24.48 and
$35.84 with a weighted average exercise price of $30.77 per share, and a
weighted average remaining contractual life of 6.7 years. The remaining 566,510
options, which are not exercisable, have exercise prices between $0 and $55.50
with a weighted average exercise price of $23.67, and a weighted average
remaining contractual life of 5.9 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 1999 and 1998,
respectively: risk-free interest rates of 6.7% and 4.7%; expected dividend
yields of zero for both years; expected lives of 5.0 years and 4.5 years; and
expected volatility of 24.2% and 22.5%.
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, 1999, 9,600 Series A Common Share SARs were
outstanding at $15 per share. These rights expire from 2000 to 2004 or the date
of the person's termination of employment, if earlier. During 1999, 1998 and
1997, 3,800, 31,250 and 3,950 Common Share SARs were exercised, respectively.
During 1999, 26,400 Series A Common Share SARs were exercised. There were no
SARs granted in 1999, 1998 or 1997.
EMPLOYEE STOCK PURCHASE PLAN
U.S. Cellular had 102,855 Common Shares reserved under the 1999 Employee Stock
Purchase Plan ("1999 ESSP"). During 1999, the 1999 ESPP was approved, which
became effective July 1, 1999.
SERIES A COMMON SHARES
Series A Common Shares are convertible on a share-for-share basis into Common
Shares. In matters other than the election of directors, each Series A Common
Share is entitled to ten votes per share, compared to one vote for each Common
Share. The Series A Common Shares are entitled to elect 75% of the directors,
and the Common Shares elect 25% of the directors. As of December 31, 1999, all
of U.S. Cellular's outstanding Series A Common Shares were held by TDS.
ACCUMULATED 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 Net Unrealized Gains on
Securities, in the Consolidated Statement of Changes in Common Shareholders'
Equity.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax effects allocated to and the cumulative balance of unrealized
gains on securities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $ 69,465 $ --
Add:
Unrealized gains on securities 279,341 115,773
Income tax effect (111,736) (46,308)
--------------------------------------
Net unrealized gains on securities 167,605 69,465
--------------------------------------
Deduct:
Recognized gains on sales
of securities 259,464 --
Income tax expense (103,785) --
--------------------------------------
Net recognized gains included
in Net Income 155,679 --
--------------------------------------
Net change in unrealized gains
included in Comprehensive Income 11,926 69,465
--------------------------------------
Balance, end of period $ 81,391 $ 69,465
================================================================================
</TABLE>
14 RELATED PARTIES
U.S. Cellular 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 U.S. Cellular and on
allocations of common expenses. Such allocations are based on the relationship
of U.S. Cellular'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 U.S. Cellular are reflected in the accompanying
financial statements on a basis which is representative of what they would have
been if U.S. Cellular operated on a stand-alone basis. Billings to U.S. Cellular
from TDS totaled $47.5 million, $44.8 million and $36.2 million in 1999, 1998
and 1997, respectively. In 1998, TDS developed a new payroll system for all of
its subsidiaries, including the Company. The Company capitalized $12.7 million
related to this system in system development costs.
U.S. Cellular has a Cash Management Agreement with TDS under which U.S. Cellular
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 U.S. Cellular 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 $5.6 million, $2.1 million and $1.3 million in 1999, 1998 and
1997, respectively.
All markets managed by U.S. Cellular are billed for services they receive from
U.S. Cellular. 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 U.S. Cellular.
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.
15 COMMITMEMTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The partnerships and corporations in which U.S. Cellular is a partner or
shareholder are in various stages of development. U.S. Cellular expects to spend
approximately $330 million during 2000, primarily to add additional cell sites
to expand and enhance coverage, including adding digital service capabilities to
its systems.
From time to time U.S. Cellular may acquire attractive markets to maximize its
clustering strategy. See Note 9 Acquisitions and Divestitures for a discussion
of pending acquisitions and divestitures.
LEASE COMMITMENTS
U.S. Cellular 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, 1999 are as follows:
<TABLE>
<CAPTION>
Minimum
(Dollars in thousands) Future Rentals
- --------------------------------------------------------------------------------
<S> <C>
2000 $17,633
2001 14,167
2002 10,813
2003 8,243
2004 6,370
Thereafter $43,099
- --------------------------------------------------------------------------------
</TABLE>
Rent expense totaled $27.8 million, $24.2 million and $17.2 million in 1999,
1998 and 1997, respectively.
LEGAL PROCEEDINGS
The Company is involved in legal proceedings before the Federal Communications
Commission 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.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of United States Cellular Corporation:
We have audited the accompanying consolidated balance sheets of United States
Cellular Corporation (a Delaware corporation and an 80.7%-owned subsidiary of
Telephone and Data Systems, Inc.) and Subsidiaries (the "Company") as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
- -------------------------
Arthur Andersen LLP
Chicago, Illinois
January 26, 2000
<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>
1999
Revenues $325,985 $360,952 $373,201 $357,043
Operating Income 52,114 72,452 95,560 35,716
Gain on Sale of Cellular and Other Investments -- 260,698 6,046 --
Net Income 27,826 194,876 57,063 20,993
From Operations 27,826 38,495 53,265 20,993
From Gains $ -- $156,381 $ 3,798 $ --
Weighted Average Common and
Series A Common Shares (000s) 87,390 87,461 87,484 87,576
Basic Earnings Per Common and Series A
Common Share $ .32 $ 2.23 $ .65 $ .24
Diluted Earnings Per Common and Series A
Common Share .32 2.09 .63 .24
From Operations .32 .43 .59 .24
From Gains $ -- $ 1.66 $ .04 $ --
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 1.40 .37 .40 .22
From Operations .23 .31 .40 .08
From Gains $ 1.17 $ .06 $ -- $ .14
- --------------------------------------------------------------------------------------------
</TABLE>
NET INCOME FOR 1999 AND 1998 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 U.S. CELLULAR'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.
<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 29,
2000, the Company's Common Shares were held by 565 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 are reported by the
American Stock Exchange were as follows:
<TABLE>
<CAPTION>
1999 Common Shares 1998 Common Shares
Calendar Period High Low High Low
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $ 45.63 $37.00 $34.75 $28.06
Second Quarter 53.50 43.25 34.25 28.44
Third Quarter 68.00 52.56 34.94 27.69
Fourth Quarter 125.75 66.32 41.00 28.63
</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 17, 2000 at 10:00
a.m. in Chicago, Illinois.
<PAGE>
Exhibit 21
UNITED STATES CELLULAR CORPORATION
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------
<S> <C>
U.S. CELLULAR CORPORATION DELAWARE
APPLETON CELLULAR TELEPHONE COMPANY Partnership
BANGOR CELLULAR TELEPHONE CO., L.P. Partnership
CALIFORNIA RURAL SERVICE AREA #1, INC. CALIFORNIA
CAROLINA CELLULAR, INC. NORTH CAROLINA
CEDAR RAPIDS CELLULAR TELEPHONE, L.P. Partnership
CELLULAR AMERICA, INC. PENNSYLVANIA
CELLVEST, INC. DELAWARE
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, Partnership
DAVENPORT CELLULAR TELEPHONE COMPANY, INC. DELAWARE
DUBUQUE CELLULAR TELEPHONE, L.P. Partnership
EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE (GP) Partnership
EAU CLAIRE MSA, INC. WISCONSIN
FLORIDA RSA # 8, INC. DELAWARE
GEORGIA RSA # 11, INC. GEORGIA
GRAY BUTTE JOINT VENTURE Partnership
GREEN BAY CELLTELCO PARTNERSHIP Partnership
HARDY CELLULAR TELEPHONE COMPANY DELAWARE
HBM, INC. DELAWARE
HUMPHREY COUNTY CELLULAR, INC. DELAWARE
ILLINOIS RSA # 3, INC. ILLINOIS
INDIANA 8 SERVICE COMPANY DELAWARE
INDIANA RSA # 4, INC. DELAWARE
INDIANA RSA # 5, INC. INDIANA
INDIANA RSA NO. 4 L.P. Partnership
INDIANA RSA NO. 5 L.P. Partnership
IOWA # 13, INC. DELAWARE
IOWA RSA # 3, INC. DELAWARE
IOWA RSA # 9, INC. DELAWARE
IOWA RSA # 12, INC. DELAWARE
JACKSONVILLE CELLULAR PARTNERSHIP Partnership
JACKSONVILLE CELLULAR TELEPHONE CO. DELAWARE
JANESVILLE CELLULAR TELEPHONE COMPANY, INC. DELAWARE
JOPLIN CELLULAR TELEPHONE COMPANY, INC DELAWARE
JOPLIN CELLULAR TELEPHONE COMPANY, L.P. Partnership
KANSAS # 15 LP Partnership
KANSAS RSA # 15, INC. OHIO
KENOSHA CELLULAR TELEPHONE, L.P. Partnership
LACROSSE CELLULAR TELEPHONE COMPANY, INC. DELAWARE
LEWISTON CELLTELLCO PARTNERSHIP Partnership
MADISON CELLULAR TELEPHONE COMPANY Partnership
MAINE RSA # 1, INC. MAINE
MAINE RSA # 4, INC. MAINE
MAINE RSA NO. 4 LIMITED PARTNERSHIP Partnership
MANCHESTER-NASHUA CELLULAR TELEPHONE, L.P. Partnership
MCDANIEL CELLULAR TELEPHONE COMPANY DELAWARE
MEDFORD PAGING, INC. OREGON
MINNESOTA INVCO OF RSA # 5, INC. DELAWARE
MINNESOTA INVCO OF RSA # 7, INC. DELAWARE
MINNESOTA INVCO OF RSA # 8, INC. DELAWARE
MINNESOTA INVCO OF RSA # 9, INC. DELAWARE
MINNESOTA INVCO OF RSA # 10, INC. DELAWARE
MINNESOTA INVCO OF RSA # 11, INC. DELAWARE
MISSOURI # 15 RURAL CELLULAR, INC. MISSOURI
</TABLE>
<PAGE>
UNITED STATES CELLULAR CORPORATION
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------
<S> <C>
MISSOURI RSA 11, INC. DELAWARE
N.H. #1 RURAL CELLULAR, INC. NEW HAMPSHIRE
NELSON-BALL GROUND CELLULAR TELEPHONE & SERVICES, INC. GEORGIA
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
RACINE CELLULAR TELEPHONE COMPANY Partnership
SHEBOYGAN CELLULAR TELEPHONE COMPANY, INC. DELAWARE
SOUTH CANAAN CELLULAR TELEPHONE COMPANY PENNSYLVANIA
ST. LAWRENCE SEAWAY RSA CELLULAR, LP Partnership
TENNESSEE RSA # 3, INC. DELAWARE
TENNESSEE RSA # 4 SUB 2, INC. TENNESSEE
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-CITIES PAGING, INC. WASHINGTON
TRI-STATES CELLULAR COMMUNICATIONS, INC. MISSOURI
TULSA GENERAL PARTNER, INC. DELAWARE
UNITED STATES CELLULAR INVESTMENT COMPANY, INC. DELAWARE
UNITED STATES CELLULAR INVESTMENT CO. OF ALLENTOWN PENNSYLVANIA
UNITED STATES CELLULAR INVESTMENT COMPANY OF EAU CLAIRE WISCONSIN
UNITED STATES CELLULAR INVESTMENT COMPANY OF FRESNO, INC. CALIFORNIA
UNITED STATES CELLULAR INVESTMENT COMPANY OF GREEN BAY, INC. WISCONSIN
UNITED STATES CELLULAR INVESTMENT COMPANY OF OKLAHOMA CITY OKLAHOMA
UNITED STATES CELLULAR INVESTMENT COMPANY OF PORTSMOUTH, INC. NEW HAMPSHIRE
UNITED STATES CELLULAR INVESTMENT COMPANY OF ROCKFORD DELAWARE
UNITED STATES CELLULAR INVESTMENT COMPANY OF SANTA CRUZ, INC. CALIFORNIA
UNITED STATES CELLULAR INVESTMENT COMPANY OF ST. CLOUD MINNESOTA
UNITED STATES CELLULAR INVESTMENT CORPORATION OF LOS ANGELES INDIANA
UNITED STATES CELLULAR OPERATING COMPANY, INC. DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF APPLETON, INC. INDIANA
UNITED STATES CELLULAR OPERATING COMPANY OF BANGOR MAINE
UNITED STATES CELLULAR OPERATING COMPANY OF BILOXI MISSISSIPPI
UNITED STATES CELLULAR OPERATING COMPANY OF CEDAR RAPIDS DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF COLUMBIA MISSOURI
UNITED STATES CELLULAR OPERATING COMPANY -- DES MOINES IOWA
UNITED STATES CELLULAR OPERATING COMPANY OF DUBUQUE IOWA
UNITED STATES CELLULAR OPERATING COMPANY OF FT. PIERCE FLORIDA
UNITED STATES CELLULAR OPERATING COMPANY OF JOPLIN MISSOURI
UNITED STATES CELLULAR OPERATING COMPANY OF KENOSHA DELAWARE
UNITED STATES CELLULAR OPERATING COMPANY OF KNOXVILLE TENNESSEE
UNITED STATES CELLULAR OPERATING COMPANY OF LACROSSE, INC. WISCONSIN
UNITED STATES CELLULAR OPERATING COMPANY OF LEWISTON-AUBURN MAINE
UNITED STATES CELLULAR OPERATING COMPANY OF MANCHESTER-NASHUA, INC. NEW HAMPSHIRE
UNITED STATES CELLULAR OPERATING COMPANY OF MEDFORD OREGON
UNITED STATES CELLULAR OPERATING COMPANY OF RICHLAND WASHINGTON
UNITED STATES CELLULAR OPERATING COMPANY OF TULSA, INC. OKLAHOMA
</TABLE>
<PAGE>
UNITED STATES CELLULAR CORPORATION
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
-------------
<S> <C>
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 COMPANY 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 JACKSON, INC. DELAWARE
USCIC OF MCALLEN, INC. DELAWARE
USCIC OF NORTH CAROLINA RSA # 1, INC. DELAWARE
USCIC OF OHIO RSA #9, INC. (f.k.a. Carry Phone, Inc.) DELAWARE
USCOC OF CHARLOTTESVILLE, INC. VIRGINIA
USCOC OF CORPUS CHRISTI, INC. TEXAS
USCOC OF CUMBERLAND, INC. MARYLAND
USCOC OF GREATER IOWA, INC 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. 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 OHIO RSA #7, INC. COLORADO
USCOC OF OKLAHOMA RSA # 10, INC. OKLAHOMA
USCOC OF OREGON RSA # 5, INC. DELAWARE
USCOC OF PENNSYLVANIA RSA #10-B2, INC. DELAWARE
USCOC OF PORTLAND, INC. MAINE
USCOC OF ROCKFORD, INC. ILLINOIS
USCOC OF SOUTH CAROLINA RSA # 4, INC. SOUTH CAROLINA
USCOC OF TALLAHASSEE FLORIDA
USCOC OF TEXAHOMA TEXAS
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. NORTH CAROLINA
USCOC OF WISCONSIN RSA #7, 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. NORTH CAROLINA
YAKIMA MSA LIMITED PARTNERSHIP Partnership
YAKIMA VALLEY PAGING LIMITED PARTNERSHIP Partnership
</TABLE>
<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 26, 2000, on the consolidated financial
statements of United States Cellular Corporation and Subsidiaries (the
"Company"), included in the Company's 1999 Annual Report to Shareholders, to the
inclusion in this Form 10-K of our report dated January 26, 2000, on the
financial statement schedules 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, File No. 333-57063 and File No. 333-76455.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 29, 2000
<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 31,1999, AND FOR THE YEAR THEN ENDED.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 197,675
<SECURITIES> 540,927
<RECEIVABLES> 134,174
<ALLOWANCES> 10,029
<INVENTORY> 29,999
<CURRENT-ASSETS> 448,783
<PP&E> 1,579,278
<DEPRECIATION> 508,273
<TOTAL-ASSETS> 3,500,095
<CURRENT-LIABILITIES> 226,979
<BONDS> 546,322
0
0
<COMMON> 87,719
<OTHER-SE> 2,186,922
<TOTAL-LIABILITY-AND-EQUITY> 3,500,095
<SALES> 50,769
<TOTAL-REVENUES> 1,417,181
<CGS> 124,058
<TOTAL-COSTS> 1,161,339
<OTHER-EXPENSES> (298,267)
<LOSS-PROVISION> 25,344
<INTEREST-EXPENSE> 38,099
<INCOME-PRETAX> 516,010
<INCOME-TAX> 215,252
<INCOME-CONTINUING> 300,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 300,758
<EPS-BASIC> 3.44
<EPS-DILUTED> 3.28
</TABLE>
