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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
---------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-9712
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UNITED STATES CELLULAR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 62-1147325
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 399-8900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
------------------------------------- -------------------------------
Common Shares, $1 par value 52,804,774 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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<PAGE>
UNITED STATES CELLULAR CORPORATION
----------------------------------
2ND QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
--------
Part I. Financial Information:
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-12
Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 2000 and 1999 13
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 14
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 15-16
Notes to Consolidated Financial Statements 17-21
Part II. Other Information 22-23
Signatures 24
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
RESULTS OF OPERATIONS
---------------------
Six Months Ended 6/30/00 Compared to Six Months Ended 6/30/99
---------------------------------------------------------------
United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. USM is
an 82.4%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
USM owned either majority or minority cellular interests in 180 markets at June
30, 2000, representing 26,528,000 population equivalents ("pops"). USM included
the operations of 139 majority-owned and managed cellular markets, representing
24.1 million pops, in consolidated operations ("consolidated markets") as of
June 30, 2000. Minority interests in 35 markets, representing 2.4 million pops,
were accounted for using the equity method and were included in investment
income at that date. All other interests were accounted for using the cost
method. Following is a table of summarized operating data for USM's consolidated
operations.
<TABLE>
<CAPTION>
Six Months Ended or At June 30,
---------------------------------------
2000 1999
---- ----
<S> <C> <C>
Total market population (in thousands) (1) 25,044 24,683
Customers 2,807,000 2,364,000
Market penetration 11.21% 9.58%
Markets in operation 139 138
Total employees 4,800 4,800
Cell sites in service 2,392 2,163
Average monthly revenue per customer $44.97 $48.71
Churn rate per month 1.97% 2.00%
Marketing cost per gross customer addition $337 $335
(1) Calculated using Claritas population estimates for 2000 and 1999, respectively.
</TABLE>
The growth in the Company's operating income in the first six months of 2000,
which includes 100% of the revenues and expenses of its consolidated markets
plus its corporate office operations, primarily reflects improvements in the
Company's overall operations compared to the first six months of 1999. The
improvements resulted from growth in the Company's customer base and revenues
coupled with continuing economies of scale. Operating revenues, driven primarily
by a 19% increase in customers served, rose $70.8 million, or 10%, in 2000. Cash
operating expenses rose $16.5 million, or 4%, in 2000. Operating cash flow
(operating income plus depreciation and amortization expense) increased $54.3
million, or 23%, in 2000. Depreciation and amortization expense increased $22.8
million, or 21%, in 2000. Operating income increased $31.5 million, or 25%, in
2000.
Investment and other income decreased $230.2 million to $43.0 million in 2000,
due primarily to a decrease of $242.8 million in gains on sales of cellular and
other investments in 2000.
-2-
<PAGE>
Income tax expense decreased $80.0 million to $76.5 million in 2000, due
primarily to the decrease in taxable income as a result of the reduced gains in
2000. An after-tax extraordinary loss of $6.1 million was recorded in 2000
related to the repurchase of convertible debentures.
Net income totaled $97.8 million in 2000, a decrease of $124.9 million, or 56%,
from 1999. Diluted earnings per share totaled $1.09 in 2000, a decrease of
$1.32, or 55%, from 1999. Net income in 2000 and 1999 was significantly affected
by gains on the sales of cellular and other investments, and net income in 2000
was affected by the extraordinary loss. A summary of the after-tax effects of
gains and the extraordinary loss on net income and diluted earnings per share in
each period is shown below.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Net income before after-tax effects of gains
and extraordinary loss $ 92,643 $ 66,321
Add: After-tax effects of gains and extraordinary loss 5,176 156,381
--------- ---------
Net income as reported $ 97,819 $ 222,702
========= =========
Earnings per share before after-tax effects
of gains and extraordinary loss $ 1.04 $ 0.75
Add: After-tax effects of gains and extraordinary loss 0.05 1.66
--------- ---------
Diluted earnings per share $ 1.09 $ 2.41
========= =========
</TABLE>
Operating Revenues
------------------
Operating revenues totaled $757.7 million in 2000, up $70.8 million, or 10%,
over 1999. 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 $729.3 million in
2000, up $65.6 million, or 10%, over 1999. The increase was primarily due to the
growing number of local retail customers using the Company's systems. Monthly
service revenue per customer declined 8% to $44.97 in 2000 from $48.71 in 1999.
Local retail revenue increased $73.3 million, or 16%, in 2000. Growth in the
Company's customer base was the primary reason for the increase in local retail
revenue. The number of customers increased 19% to 2,807,000 at June 30, 2000
from 2,364,000 at June 30, 1999. Management anticipates that overall growth rate
in the Company's customer base will 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 $32.14 in 2000
from $32.88 in 1999. Monthly local retail minutes of use per customer was 142 in
2000 and 112 in 1999. The increase in monthly local retail minutes of use was
driven by the Company's focus on designing incentive programs and rate plans to
stimulate overall usage. Average revenue per minute of use decreased as a result
of competitive pressures and these pricing and incentive programs. 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.
-3-
<PAGE>
Inbound roaming revenue decreased $1.6 million, or 1%, in 2000. The decline in
inbound roaming revenue in 2000 was affected by a decrease in revenue per minute
due to the downward trend in negotiated rates and an increase in roaming minutes
used on the Company's systems. Both the decrease in revenue per minute of use
and the increase in minutes of use were significantly affected by certain
pricing programs offered by other wireless companies. 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 growth
rate in inbound roaming minutes of use will be slower throughout the remainder
of 2000 due to these pricing programs being present in both periods of
comparison. Additionally, as new wireless operators begin service in the
Company's markets, the Company's roaming partners could switch their business to
these new operators, further slowing growth in inbound roaming minutes of use.
The Company's inbound roaming revenue per minute of use has decreased as
negotiated rates between the Company and its roaming partners continue to
decline. Management 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. Monthly inbound roaming revenue per Company
customer averaged $9.15 in 2000 and $11.01 in 1999. The decrease in monthly
inbound roaming revenue per Company customer was attributable to a decrease in
inbound roaming revenue compared to an increase in the Company's customer base.
Long-distance revenue decreased $10.9 million, or 17%, in 2000. While 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, long-distance
revenue declined due to 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 $3.26 in 2000 and $4.67 in 1999.
Equipment sales revenues increased $5.2 million, or 22%, in 2000. The increase
in equipment sales revenues reflected the 16% increase in the number of gross
customer activations, to 524,000 in 2000 from 453,000 in 1999, plus an increase
in the number of higher priced dual- mode units and the volume of accessories
sold. Most of the gross customer activations were produced by the Company's
direct and retail distribution channels, which usually generate sales of
cellular telephone units. The increase in sales of dual-mode units was related
to the growth in the number of the Company's systems providing digital coverage,
which enables the Company to offer its customers more features, better clarity
and increased roaming capabilities. As of June 30, 2000, 35% of the company's
customers were on digital rate plans compared to 11% as of June 30, 1999. The
increase in the volume of accessories sold reflected an increased emphasis on
the sale of accessories at retail prices in the Company's retail locations.
Operating Expenses
------------------
Operating expenses totaled $601.6 million in 2000, up $39.3 million, or 7%, over
1999. System operations expenses decreased $22.7 million, or 19%, in 2000,
primarily as a result of decreases in customer usage expense related to the
lower cost per minute of use associated with the change in roaming pricing
discussed previously. Costs associated with serving the Company's increased
number of customers and the growing number of cell sites within the Company's
systems increased in 2000.
-4-
<PAGE>
Customer usage expense represents 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 expense decreased $27.7 million, or 33%, in 2000. The decrease in
2000 was primarily due to the $30.9 million decrease in net outbound roaming
expense. Net outbound roaming expense decreased due to a reduction in cost per
minute of use related to the lower roaming prices in the industry discussed
previously. This decrease was partially offset by the effect of increases in
monthly local minutes of use and inbound roaming minutes of use on the Company's
systems. Customer usage expense represented 8% of service revenues in 2000 and
13% in 1999.
Maintenance, utility and cell site expense increased $5.0 million, or 14%, in
2000. The increase primarily reflected an increase in the number of cell sites
in the Company's systems, to 2,392 in 2000 from 2,163 in 1999.
In total, the decrease in system operations expenses is expected to slow down
during the remainder of 2000, as the effects of these changes become present in
both periods of comparison. System operations expenses are then expected to
increase as the number of customers using and the number of cell sites within
the Company's systems grows.
Marketing and selling expenses increased $18.5 million, or 15%, in 2000.
Marketing and selling expenses primarily consist of salaries, commissions and
expenses of field sales and retail personnel and offices; agent expenses;
corporate marketing department salaries and expenses; local advertising; and
public relations expenses. The increase in 2000 was primarily due to the 16%
rise in the number of gross customer activations, and the associated increases
in commissions and advertising costs. Marketing cost per gross customer
activation, which includes marketing and selling expenses and equipment
subsidies, increased 1% to $337 in 2000 from $335 in 1999.
Cost of equipment sold increased $11.6 million, or 22%, in 2000. The increase
reflected the growth in unit sales related to the 16% increase in gross customer
activations as well as the impact of selling more higher cost dual-mode units in
2000.
General and administrative expenses increased $9.2 million, or 6%, in 2000.
These expenses include the costs of operating the Company's local business
offices and its corporate expenses other than the corporate engineering and
marketing departments. The increase includes the effects of increases in
expenses required to serve the growing customer base in the Company's markets
and other expenses incurred related to the growth in the Company's business. The
Company incurred additional costs in 2000 by providing dual-mode phone units to
customers who migrated from analog to digital rate plans. This increase was
partially offset by decreases in consulting expenses and nonincome taxes.
Employee-related expenses increased $3.1 million, or 4%, in 2000. Monthly
general and administrative expenses per customer decreased 11% to $10.36 in 2000
from $11.66 in 1999. General and administrative expenses represented 23% of
service revenues in 2000 and 24% in 1999.
Operating cash flow increased $54.3 million, or 23%, to $287.2 million in 2000.
The improvement was primarily due to substantial growth in customers and service
revenues and the
-5-
<PAGE>
effects of continued operational efficiencies on cash operating expenses.
Operating cash flow margins (as a percent of service revenues) were 39.4% in
2000 and 35.1% in 1999.
Depreciation expense increased $13.1 million, or 15%, in 2000. The increase
reflects rising average fixed asset balances, which increased 12% in 2000, and a
reduction in the useful lives of certain assets beginning in 2000. Increased
fixed asset balances in 2000 resulted from the addition of new cell sites built
to improve coverage and capacity in the Company's markets and from upgrades to
provide digital service in more of the Company's service areas.
Amortization of intangibles increased $9.7 million, or 48%, in 2000. Beginning
October 1, 1999, the Company's began amortizing capitalized development costs
related to its new billing and information system. Annual amortization of these
billing-related costs is expected to be approximately $17 million.
Operating Income
----------------
Operating income totaled $156.1 million in 2000, a $31.5 million, or 25%,
increase over 1999. The operating income margin was 21.4% in 2000 and 18.8% in
1999. The improvements in operating income and operating income margin in 2000
reflected increased revenues resulting from growth in the number of customers
served by the Company's systems and the effect of continued operational
efficiencies on total operating expenses.
The Company expects service revenues to continue to grow during the remainder of
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 the remainder of 2000 as it
incurs costs associated with both customer growth and fixed assets added.
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 four years. The Company expects
PCS operators to continue deployment of PCS in portions of all of the Company's
clusters throughout 2000 and 2001. 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
lower in the future, primarily as a result of the increase in the number of
competitors in its markets.
Investment and Other Income
---------------------------
Investment and other income totaled $43.0 million in 2000 and $273.2 million in
1999. Gain on sale of cellular and other investments totaled $17.9 million in
the first half of 2000 and $260.7 in the first half of 1999. The gain in 2000
was from the sale of the Company's minority interest in one market. The Company
recognized a $259.5 million gain in the second quarter of 1999 on the difference
between its historical basis in its investment in AirTouch Communications, Inc.
-6-
<PAGE>
("ATI") common shares and the value of Vodafone Group plc ("VOD") American
Depositary Receipts and cash received in the merger of ATI and VOD.
Investment income was $19.6 million in 2000 compared to $13.8 million in 1999, a
41% increase. Investment income primarily represents the Company's share of net
income from the markets managed by others that are accounted for by the equity
method. The aggregate income from the markets in which the Company had interests
in both 1999 and 2000 increased in 2000.
Interest and Income Taxes
-------------------------
Interest expense increased $130,000 in 2000 as the Company's outstanding debt
balances remained relatively constant in 1999 and 2000.
Income tax expense was $76.5 million in 2000 and $156.4 million in 1999. In
2000, $6.6 million of income tax expense related to gains on sales of cellular
and other investments. In 1999, $104.3 million of income tax expense related to
gains on sales of cellular and other investments. The overall effective tax
rates were 42% in 2000 and 41% in 1999. The change in 2000's effective tax rate
was primarily related to the nature of the gains on sale of cellular and other
investments in 2000 and 1999.
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.
Extraordinary Loss
------------------
Extraordinary item - (loss) on extinguishment of debt, net of tax totaled $6.1
million in 2000, or $.07 per diluted share, resulting from the repurchase of
$25,817,000 face value of LYONs in May 2000 for $16.5 million in cash. The loss
resulted from the difference between the repurchase price, which approximated
market value, and the accreted value of the LYONs repurchased. This loss is not
deductible for tax purposes.
Net Income
----------
Net income totaled $97.8 million in 2000 and $222.7 million in 1999. Diluted
earnings per share was $1.09 in 2000 and $2.41 in 1999. Net income and earnings
per share in 2000 and 1999 included significant after-tax gains on the sales of
cellular and other investments, and an extraordinary loss in 2000, representing
$5.2 million and $0.05 per share in 2000 and $156.4 million and $1.66 per share
in 1999. Excluding the after-tax effect of these gains and an extraordinary loss
in 2000, net income would have been $92.6 million, or $1.04 per share, in 2000
and $66.3 million, or $.75 per share, in 1999.
Three Months Ended 6/30/00 Compared to Three Months Ended 6/30/99
-----------------------------------------------------------------
Operating revenues totaled $397.7 million in the second quarter of 2000, up
$36.7 million, or 10%, over 1999. Average monthly service revenue per customer
decreased to $46.37 in the second quarter of 2000 compared to $50.18 in the same
period of 1999 for reasons generally the same as the first half of 2000.
-7-
<PAGE>
Revenues from local customers' usage of the Company's systems increased $39.2
million, or 17%, in 2000 primarily due to the increased number of customers
served. Average monthly local retail minutes of use per customer totaled 156 in
the second quarter of 2000 compared to 123 in 1999. Also, as the number of
customers and amount of revenue earned continued to grow, average revenue per
minute of use continued to decline. As a result, average monthly local retail
revenue per customer declined 2% to $33.11 in the second quarter of 2000
compared to $33.76 in 1999.
Inbound roaming revenue decreased $3.9 million, or 5%, in 2000 as the increase
in inbound roaming minutes of use was more than offset by a decrease in the
average inbound roaming revenue per minutes of use. Monthly inbound roaming
revenue per customer averaged $9.10 in 2000 compared to $11.39 in 1999.
Long-distance revenue decreased $4.7 million, or 14%, in 2000. While 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, long-distance
revenue declined due to price reductions primarily related to long-distance
charges on roaming minutes of use. Monthly long- distance revenue per customer
averaged $3.50 in 2000 and $4.85 in 1999.
Equipment sales revenue increased $1.8 million, or 15%, reflecting a 15%
increase in the number of gross customer activations, to 258,000 in 2000
compared to 224,000 in 1999, plus increases in the number of dual-mode units
sold and in the volume of accessories sold.
Operating expenses totaled $302.7 million in the second quarter of 2000, up
$14.2 million, or 5%, over 2000. System operations expenses decreased $11.2
million, or 18%, in 2000 as a result of decreases in cost per minute for
outbound roaming and toll transactions, partially offset by increases in minutes
of use and costs associated with maintaining 11% more cell sites than in 1999.
Marketing and selling expenses increased $7.3 million, or 12%, in 2000. The
increase was primarily due to a 15% increase in the number of gross customer
activations. Cost per gross customer activation was $335 in 2000 and $351 in
1999.
Cost of equipment sold increased $2.4 million, or 9%, in 2000. The increase
reflects a rise in the number of dual-mode units sold in 1999, plus an increase
in the volume of accessories sold. General and administrative expenses increased
$7.0 million, or 9%, in 2000, primarily related to the increase in customers
served.
Operating cash flow increased $31.2 million, or 24%, to $160.1 million in 2000;
operating cash flow margins totaled 41.8% in 2000 and 37.0% in 1999.
Depreciation expense increased $3.5 million, or 8%, in 2000, reflecting an 11%
increase in average fixed asset balances.
Amortization of intangibles increased $5.1 million, or 52%, in 2000, reflecting
the amortization of capitalized development costs beginning October 1, 1999
related to the Company's new billing and information system.
Operating income totaled $95.0 million in 2000 compared to $72.5 million in
1999, a 31% increase. The operating income margin increased to 24.8% in 2000
from 20.8% in 1999. The improvements in operating income and operating income
margin were primarily the result of increased revenues and improved operational
efficiencies.
-8-
<PAGE>
Investment and other income decreased $253.2 million to $14.0 million in 2000
due to the gains on sales of cellular and other investments totaling $260.7
million in 1999. There were no gains in the second quarter of 2000. Investment
income increased $3.6 million, or 50%, in 2000 due to the increase in 2000 in
the aggregate income from the markets in which the Company had interests in both
1999 and 2000.
Total interest expense decreased $14,000 in 2000. Income tax expense totaled
$42.8 million in 2000 and $135.4 million in 1999. In 1999, $104.3 million of
income tax expense related to gains on sales of cellular and other investments.
Extraordinary (loss), net of tax totaled $6.1 million in 2000.
Net income totaled $50.7 million in 2000 compared to $194.9 million in 1999.
Both net income and earnings per share in both years were significantly affected
by gains on the sales of cellular and other investments and by the extraordinary
loss in 2000. A summary of the after-tax effect of gains and the extraordinary
loss on net income and diluted earnings per share is shown below.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
2000 1999
--------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C>
Net income before after-tax effects of gains
and extraordinary loss $ 56,786 $ 38,495
Add: After-tax effects of gains and
extraordinary loss (6,106) 156,381
---------- ---------
Net income as reported $ 50,680 $ 194,876
========== =========
Earnings per share before after-tax effects
of gains and extraordinary loss $ .64 $ .43
Add: After-tax effects of gains and
extraordinary loss (.07) 1.66
---------- ---------
Diluted earnings per share as reported $ .57 $ 2.09
========== =========
</TABLE>
FINANCIAL RESOURCES AND LIQUIDITY
---------------------------------
The Company operates a capital- and marketing-intensive business. In recent
years, the Company has generated operating cash flow and received cash proceeds
from divestitures to fund its construction costs and 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 $258.5 million in 2000 and $165.1
million in 1999. Operating cash flow provided $287.2 million in 2000 and $232.9
million in 1999. 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 $28.7 million in 2000 and
$67.8 million in 1999. Income taxes and interest paid totaled $46.8 million in
2000 and $32.6 million in 1999.
Cash flows from investing activities required $129.8 million in 2000 and $113.5
million in 1999. Cash required for property, plant and equipment and system
development expenditures totaled
-9-
<PAGE>
$129.8 million in 2000 and $161.9 million in 1999. In both periods, these
expenditures were financed with internally generated cash. These expenditures
primarily represent the construction of 92 and 98 cell sites in 2000 and 1999,
respectively, plus other plant additions and costs related to the development of
the Company's office systems. In both periods, other plant additions included
significant amounts related to the replacement of retired assets and the
changeout of analog radio equipment for digital radio equipment. Acquisitions
required $33.6 million in 2000 and $8.1 million in 1999. The Company received
net cash proceeds totaling $22.5 million in 2000 related to sales of cellular
and other investments. Cash distributions from cellular entities in which the
Company has an interest provided $9.7 million in 2000 and $12.7 million in 1999.
Cash flows from financing activities required $154.3 million in 2000 and
$538,000 in 1999. In 2000, the Company repurchased a total of 2,063,000 of its
Common Shares for a total of $135.8 million. These stock repurchases were made
under separate programs authorized by the Company's Board of Directors. In March
2000, the Board of Directors authorized the repurchase of up to 1.4 million USM
Common Shares. A total of 1.4 million common shares were repurchased under this
program as of June 30, 2000. A total of 335,400 common shares were repurchased
under a separate program of 1.4 million USM Common Shares authorized by the
Board of Directors in May 2000. An additional 327,600 USM Common Shares were
purchased pursuant to a previously authorized program to repurchase a limited
amount of shares on a quarterly basis, primarily for use in employee benefit
plans. Retirement of debt required $16.5 million in 2000 as the Company
repurchased $25,817,000 face value of LYONs.
Anticipated capital requirements for 2000 primarily reflect the Company's
construction and system expansion program. 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 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.
In the first six months of 2000, the Company acquired a majority interest in one
market and several minority interests in other markets, representing 242,000
pops, for consideration totaling $59.5 million. The consideration consisted of
$33.6 million in cash, approximately 28,000 USM Common Shares, forgiveness of
notes receivable totaling $10.0 million and payables totaling $14.2 million.
In the first six months of 1999, the Company acquired minority interests in
several markets representing 93,000 pops for a total of $9.1 million in cash.
In the first six months of 2000, the Company divested a minority interest in one
market representing 114,000 pops for a total consideration of $22.5 million in
cash.
-10-
<PAGE>
In the first half of 1999, the Company divested a majority interest in one
market and a minority interest in another market, representing 406,000 pops, for
cash totaling $43.3 million. The majority interest was sold to BellSouth
Corporation as part of the exchange which was substantially completed in
November 1997; therefore, no gain or loss was recorded on this sale.
As of June 30, 2000, the Company had agreements pending to divest a majority
interest in one market and minority interests in four markets, representing
approximately 305,000 pops, for consideration totaling $104.9 million. The
consideration will consist of $51.7 million in cash and $53.2 million in
receivables. These transactions will be completed during the third quarter of
2000 and the Company will record substantial book gains related to these
transactions.
Liquidity
---------
The Company anticipates that the aggregate resources required for the remainder
of 2000 will include the following:
o approximately $200 million for capital spending; and
o an as yet undetermined amount that may be needed to repurchase USM Common
Shares or LYONs under programs authorized by the Company's Board of
Directors.
In May 2000, the Company's Board of Directors authorized the repurchase of an
additional 1.4 million USM Common Shares. Through June 30, 2000, the Company had
repurchased 335,400 shares under this program. Additionally, the Company may
repurchase a limited amount of additional shares on a quarterly basis, primarily
for use in employee benefit plans.
The Board of Directors has authorized management to opportunistically repurchase
LYONs in private transactions. U.S. Cellular may also purchase a limited amount
of LYONs in open- market transactions from time to time.
The Company is generating substantial cash from its operations and anticipates
financing these expenditures primarily with internally generated cash, the $52
million it expects from the completion of a divestiture and short-term
borrowings. The Company had $172.1 million of cash and cash equivalents at June
30, 2000. 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.
Revenue Recognition
-------------------
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements ("SAB 101")." SAB 101 provides guidance on
the recognition, presentation and disclosure of revenue in financial statements.
On June 26, 2000, the SEC issued Staff Accounting Bulletin No. 101B "Amendment:
Revenue Recognition in Financial Statements". SAB 101B allows companies to defer
the reporting of a change in accounting principle, as required by SAB 101, until
the fourth quarter of the current fiscal year. Management continues to analyze
this bulletin and anticipates the impact to be immaterial.
-11-
<PAGE>
Market Risk
-----------
The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. All of the Company' existing debt is in the form of
long-term fixed-rate notes with original maturities ranging from five to 20
years. Accordingly, fluctuations in interest rates can lead to fluctuations in
the fair value of such instruments. The Company has not entered into financial
derivatives to reduce its exposure to interest rate risks. There have been no
material changes to the Company's outstanding debt instruments since December
31, 1999.
The Company maintains a portfolio of available for sale marketable equity
securities which resulted from acquisitions and the sale of non-strategic
assets. The market value of these investments, principally Vodafone AirTouch plc
American Depositary Receipts ("VOD ADRs"), amounted to $459.8 million at June
30, 2000. A hypothetical 10% decrease in the share prices of these investments
would result in a $46.0 million decline in the market value of the investments.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Quarterly Report on Form 10-Q contain
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:
o general economic and business conditions, both nationally and in the
regions in which the Company operates;
o technology changes;
o competition;
o changes in business strategy or development plans;
o changes in governmental regulations;
o availability of future financing; and
o changes in growth in cellular customers, penetration rates, churn rates
and roaming rates.
The Company undertakes no obligation to update publicly any forward-looking
statements whether as a result of new information, future events or otherwise.
Readers should evaluate any statements in light of these important factors.
-12-
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Unaudited
---------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
----- ------ ------ ------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Service $ 383,389 $ 348,523 $ 729,349 $ 663,717
Equipment sales 14,268 12,429 28,395 23,220
------------- ------------- ------------ ------------
Total Operating Revenues 397,657 360,952 757,744 686,937
------------- ------------- ------------ -------------
OPERATING EXPENSES
System operations 50,443 61,641 97,627 120,332
Marketing and selling 70,728 63,380 140,186 121,685
Cost of equipment sold 30,054 27,659 64,651 53,100
General and administrative 86,352 79,354 168,039 158,873
Depreciation 50,218 46,685 101,387 88,301
Amortization of intangibles 14,907 9,781 29,746 20,080
------------ ------------- ------------ ------------
Total Operating Expenses 302,702 288,500 601,636 562,371
------------ ------------- ------------ ------------
OPERATING INCOME 94,955 72,452 156,108 124,566
------------ ------------- ------------ ------------
INVESTMENT AND OTHER INCOME
Investment income 10,832 7,216 19,557 13,834
Amortization of licenses related to investments (206) (263) (553) (570)
Interest income 4,753 1,558 8,751 2,757
Other income (expense), net 1,964 (363) 1,717 (471)
Minority share of income (3,295) (1,596) (4,310) (3,079)
Gain on sale of cellular and other investments -- 260,698 17,851 260,698
------------ ------------- ----------- ----------
Total Investment and Other Income 14,048 267,250 43,013 273,169
------------ ------------- ----------- ----------
INCOME BEFORE INTEREST
AND INCOME TAXES 109,003 339,702 199,121 397,735
Interest expense 9,378 9,392 18,738 18,608
------------ ------------- ----------- ----------
INCOME BEFORE INCOME TAXES 99,625 330,310 180,383 379,127
Income tax expense 42,839 135,434 76,458 156,425
------------ ------------- ----------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 56,786 194,876 103,925 222,702
------------ ------------- ------------- ------------
Extraordinary item-(loss) on extinguishment
of debt, net of tax (6,106) -- (6,106) --
------------- ------------- -------------- ------------
NET INCOME $ 50,680 $ 194,876 $ 97,819 $ 222,702
============= ============= ============= ============
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON SHARES (000s) 86,277 87,461 86,938 87,426
BASIC EARNINGS PER SHARE COMMON AND
SERIES A COMMON SHARES (Note 2)
Income Before Extraordinary Item $ .66 $ 2.23 $ 1.20 $ 2.55
Extraordinary Item (.07) -- (.07) --
-------------- ------------- ------------- ------------
Net Income $ .59 $ 2.23 $ 1.13 $ 2.55
============= ============= ============= ============
DILUTED EARNINGS PER COMMON AND
SERIES A COMMON SHARES (Note 2)
Income Before Extraordinary Item $ .64 $ 2.09 $ 1.16 $ 2.41
Extraordinary Item (.07) -- (.07) --
------------- ------------- ------------- ------------
Net Income $ .57 $ 2.09 $ 1.09 $ 2.41
============= ============= ============= ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Six Months Ended
June 30,
--------------------------------
2000 1999
------- --------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 97,819 $ 222,702
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 131,133 108,381
Deferred income tax provision 20,179 107,369
Investment income (19,557) (13,834)
Minority share of income 4,310 3,079
Extraordinary Item 6,106 --
Gain on sale of cellular and other investments (17,851) (260,698)
Other noncash expense 14,952 13,928
Change in inventory 10,309 (6,156)
Change in accounts receivable (7,887) (24,031)
Change in accounts payable (11,230) (18,175)
Change in accrued taxes 24,185 29,836
Change in customer deposits and deferred revenues 4,415 681
Change in other assets and liabilities 1,643 2,063
------------- -----------
258,526 165,145
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (125,426) (149,826)
System development costs (4,373) (12,026)
Investments in and advances (to)/from
unconsolidated entities (959) 413
Distributions from unconsolidated entities 9,698 12,684
Proceeds from sale of cellular and other investments 22,500 43,324
Acquisitions, excluding cash acquired (33,635) (8,131)
Other investing activities 2,406 31
------------- -----------
(129,789) (113,531)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment on debt retirement (16,539) --
Repurchase of Common Shares (135,793) --
Common Shares issued 1,768 2,000
Capital (distributions) to minority partners (3,756) (2,538)
------------- -----------
(154,320) (538)
------------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (25,583) 51,076
CASH AND CASH EQUIVALENTS-
Beginning of period 197,675 51,975
------------- -----------
End of period $ 172,092 $ 103,051
============= ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
June 30, 2000 December 31, 1999
---------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents
General funds $ 10,727 $ 29,169
Affiliated cash equivalents 161,365 168,506
---------- ----------
172,092 197,675
Temporary investments 180 148
Accounts receivable
Customers, net of allowance 125,252 124,145
Roaming 68,577 61,915
Affiliates 46 15
Other 7,187 9,584
Inventory 19,691 29,999
Note receivable -- 10,000
Prepaid expenses 8,898 10,081
Other current assets 6,293 5,221
---------- ----------
408,216 448,783
---------- ----------
INVESTMENTS
Licenses, net of accumulated amortization 1,145,502 1,156,175
Marketable equity securities 459,764 540,711
Investment in unconsolidated entities,
net of accumulated amortization 185,461 124,573
Notes and interest receivable - long-term 8,278 10,736
Marketable non-equity securities 269 216
---------- ----------
1,799,274 1,832,411
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 1,673,382 1,579,278
Less accumulated depreciation 578,932 508,273
---------- ----------
1,094,450 1,071,005
DEFERRED CHARGES ---------- ----------
System development costs,
net of accumulated amortization 127,086 135,462
Other, net of accumulated amortization 11,634 12,434
---------- ----------
138,720 147,896
---------- ----------
Total Assets $3,440,660 $3,500,095
========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(Unaudited)
June 30, 2000 December 31, 1999
----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable
Affiliates $ 2,584 $ 3,127
Other 134,981 143,967
Customer deposits and deferred revenues 41,297 36,882
Accrued interest 7,058 7,064
Accrued taxes 31,702 7,517
Accrued compensation 16,151 16,555
Other current liabilities 12,966 11,867
---------- ----------
246,739 226,979
---------- ----------
LONG-TERM DEBT
7.25% unsecured notes 289,933 296,322
6% zero coupon convertible debentures 250,000 250,000
Other 13,000 --
---------- ----------
552,933 546,322
---------- ----------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 390,274 401,983
Other 10,903 9,199
---------- ----------
401,177 411,182
---------- ----------
MINORITY INTEREST 40,891 40,971
---------- ----------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 54,945 54,713
Series A Common Shares, par value $1 per share 33,006 33,006
Additional paid-in capital 1,341,862 1,331,274
Treasury Shares, at cost (2,063,000 shares) (135,793) --
Accumulated other comprehensive income 32,822 81,391
Retained earnings 872,078 774,257
---------- ----------
2,198,920 2,274,641
---------- ----------
Total Liabilities and Shareholders' Equity $3,440,660 $3,500,095
========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
-16-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's
latest annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring items) necessary to
present fairly the financial position as of June 30, 2000 and December 31,
1999, and the results of operations and cash flows for the six months
ended June 30, 2000 and 1999. The results of operations for the six months
ended June 30, 2000 and 1999, are not necessarily indicative of the
results to be expected for the full year.
2. Net Income used in computing Earnings per Common Share and the effect on
income and the weighted average number of Common and Series A Common
Shares of dilutive potential common stock are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------
2000 1999 2000 1999
----- ----- ------ ------
(Dollars in thousands, except per share amount)
<S> <C> <C> <C> <C>
Net Income Before Extraordinary Item
used in Basic Earnings Per Share $ 56,786 $ 194,876 $ 103,925 $ 222,702
Extraordinary Item (6,106) -- (6,106) --
----------- ------------ ------------ ------------
Net Income Available to Common used in
Basic Earnings Per Share $ 50,680 $ 194,876 $ 97,819 $ 222,702
========== =========== ============ ============
Basic Weighted average number of Common
Shares used in Earnings Per Share (000's) 86,277 87,461 86,938 87,426
========== ============ ============ ============
Basic Earnings Per Share
Continuing Operations $ 0.66 $ 2.23 $ 1.20 $ 2.55
Extraordinary Item (0.07) -- (0.07) --
----------- ----------- ------------ ------------
$ 0.59 $ 2.23 $ 1.13 $ 2.55
=========== =========== ============ ============
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net Income Available to Common used in
Basic Earnings Per Share $ 50,680 $ 194,876 $ 97,819 $ 222,702
Interest expense eliminated as a result of
the pro forma conversion of
Convertible Debentures 2,485 2,497 5,026 4,960
----------- ------------ ------------ ------------
Net Income Available to Common from
Continued Operations used in Diluted
Earnings Per Share $ 53,165 $ 197,373 $ 102,845 $ 227,662
=========== ============ ============ ============
Basic Weighted average number of Common
Shares used in Earnings Per Share (000's) 86,277 87,461 86,938 87,426
Effect of Dilutive Securities:
Stock Options and Stock Appreciation Rights 381 133 414 119
Conversion of Convertible Debentures 6,654 7,059 6,654 7,059
----------- ------------ ------------ ------------
Diluted Weighted Average Number of Common
Shares used in Earnings Per Share 93,312 94,653 94,006 94,604
=========== ============ ============ ============
Diluted Earnings Per Share
Continuing Operations $ 0.64 $ 2.09 $ 1.16 $ 2.41
Extraordinary Item (0.07) -- (0.07) --
----------- ------------ ------------ ------------
$ 0.57 $ 2.09 $ 1.09 $ 2.41
=========== ============ ============ ============
</TABLE>
-18-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
3. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first six months of 2000 and 1999. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed
and Common Shares issued.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Investment in unconsolidated entities $ 54,727 $ --
Cellular licenses 4,741 5,464
Decrease in notes receivable - other (10,000) --
Decrease in minority investments -- 2,667
Long-term debt (13,000) --
Other current liabilities (1,165) --
Common Shares issued (1,668) --
----------- ----------
Decrease in cash due to acquisitions $ 33,635 $ 8,131
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
The following summarizes certain noncash transactions and interest and income taxes paid.
Six Months Ended
June 30,
------------------------
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Interest paid $ 9,540 $ 9,755
Income taxes paid 37,245 22,886
Noncash interest expense $ 9,083 $ 8,444
</TABLE>
4. Gain on sale of cellular and other investments in 2000 primarily
reflects gains recorded on the sale of the Company's minority interest
in one market. Gain on sale of cellular and other investments in 1999
primarily related to the merger between AirTouch Communications, Inc.
("ATI") and Vodafone Group plc. The Company recognized a gain on the
difference between its historical basis in the ATI shares and the June
30, 1999 value of the Vodafone AirTouch plc American Depository Receipts
("VOD ADRs") plus the cash received as a result of this merger.
-19-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
5. Other Comprehensive Income
The Company's Comprehensive Income includes Net Income and Unrealized
Gains from Marketable Equity Securities that are classified as
"available-for-sale". The following table summarizes the Company's
Comprehensive Income:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
2000 1999
------- -------
(Dollars in thousands)
<S> <C> <C>
Accumulated Other Comprehensive Income
Balance, beginning of period $ 81,391 $ 69,465
Add:
Unrealized gains (losses) on securities (80,947) 149,715
Income tax effect 32,378 (59,887)
---------- ----------
Net unrealized gains (losses) (48,569) 89,828
---------- ----------
Deduct:
Gain on reclassification of securities -- 259,464
Income tax effect -- (103,786)
---------- ----------
Net unrealized gains reclassified to
Net Income -- 155,678
---------- ----------
Net unrealized gains included in
comprehensive income -- (65,850)
---------- ----------
Balance, end of period $ 32,822 $ 3,615
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Comprehensive Income
Net Income $ 50,680 $ 194,876 $ 97,819 $ 222,702
Net unrealized gains (losses)
on securities (82,501) (127,448) (48,569) (65,850)
------------- ------------ ------------- ------------
$ (31,821) $ 67,428 $ 49,250 $ 156,852
============= ============ ============= ============
</TABLE>
-20-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
6. Marketable Equity Securities
Marketable equity securities include the Company's investments in equity
securities, primarily Vodafone ADRs. These securities are classified as
available-for-sale and stated at fair market value.
Information regarding the Company's marketable equity securities is
summarized below.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Available-for-sale Equity Securities
Aggregate Fair Value $ 459,764 $ 540,711
Original Cost 405,061 405,061
---------- ----------
Gross Unrealized Holding Gains 54,703 135,650
Tax Effect 21,881 54,259
---------- ----------
Net Unrealized Holding Gains, net of tax $ 32,822 $ 81,391
========== ==========
</TABLE>
7. Treasury Shares
As of June 30, 2000, the Company had repurchased a total of 2,063,426 of its
Common Shares, at an aggregate cost of $135.8 million. Of the total shares
repurchased, 327,600 were under a previously approved program; 1.4 million
were under the program announced in the first quarter which authorized U.S.
Cellular to repurchase up to 1.4 million shares; and 335,400 were under the
program announced during the second quarter which authorized U.S. Cellular
to repurchase up to an additional 1.4 million shares.
8. Extraordinary Item - Loss on Extinguishment of Debt
U.S. Cellular purchased $25.8 million face value of its Liquid Yield Option
Notes (LYONs) for $16.5 million in a private transaction. A net $6.1
million loss, or $(.07) diluted earnings per share, was recorded to account
for the difference between the purchase price and the carrying value. This
loss is not dedectible for tax purposes.
9. Subsequent Events
In July 2000, the Company received a $42.5 million cash settlement of a
legal matter. The entire amount will be recorded as a pretax gain in the
third quarter.
-21-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Security-Holders.
-------------------------------------------------------------
At the Annual Meeting of Shareholders of USM, held on May 17, 2000, the
following number of votes were cast for the matters indicated:
1. For the election of two Class I Directors of the Company by the holders
of Series A Common Shares:
Broker
Nominee For Withhold Non-Vote
------------------------------------------------------------------------
LeRoy T. Carlson 330,058,770 -0- -0-
John E. Rooney 330,058,770 -0- -0-
2. Proposal to Ratify the Selection of Arthur Andersen LLP as Independent
Public Accountants for 2000:
Broker
For Against Abstain Non-Vote
------------------------------------------------------------------------
Series A
Common Shares 330,058,770 -0- -0- -0-
Common Shares 52,738,051 4,134 68,408 -0-
---------- ----- ------ ---
Total 382,796,821 4,134 68,408 -0-
=========== ===== ====== ===
-22-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
------------------------------------------
(a) Exhibits:
Exhibit 10 - Retirement agreement between U.S. Cellular and
H. Donald Nelson.
Exhibit 11 - Statement regarding computation of per share earnings
is included herein as footnote 2 to the financial statements.
Exhibit 12 - Statement regarding computation of ratios.
Exhibit 27 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended June 30,
2000.
-23-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED STATES CELLULAR CORPORATION
----------------------------------
(Registrant)
Date August 11, 2000 /s/ JOHN E. ROONEY
------------------- --------------------------------
John E. Rooney
President
(Chief Executive Officer)
Date August 11, 2000 /s/ KENNETH R. MEYERS
------------------- -----------------------------------
Kenneth R. Meyers
Executive Vice President-Finance and Treasurer
(Chief Financial Officer)
Date August 11, 2000 /s/ JOHN T. QUILLE
-------------------- ------------------------------
John T. Quille
Vice President and Controller
(Principal Accounting Officer)
-24-
