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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 March 31, 2001
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OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-9712
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UNITED STATES CELLULAR CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 62-1147325
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 399-8900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2001
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Common Shares, $1 par value 53,235,377 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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UNITED STATES CELLULAR CORPORATION
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1ST QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
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Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-12
Consolidated Statements of Operations -
Three Months Ended March 31, 2001 and 2000 13
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 and 2000 14
Consolidated Balance Sheets -
March 31, 2001 and December 31, 2000 15-16
Notes to Consolidated Financial Statements 17-20
Part II. Other Information 21
Signatures 22
PART I. FINANCIAL INFORMATION
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
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FINANCIAL CONDITION
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RESULTS OF OPERATIONS
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Three Months Ended 3/31/01 Compared to Three Months Ended 3/31/00
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United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. The
Company is an 82.2%-owned subsidiary of Telephone and Data Systems, Inc.
("TDS").
The Company owned either majority or minority cellular interests in 176 markets
at March 31, 2001, representing 26,676,000 population equivalents ("pops"). The
Company included the operations of 142 majority-owned cellular markets,
representing 24.6 million pops, in consolidated operations ("consolidated
markets") as of March 31, 2001. Minority interests in 28 markets, representing
2.0 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.
Three Months Ended or At
March 31,
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2001 2000
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Total market population (in thousands) (1) 25,670 25,044
Customers 3,221,000 2,707,000
Market penetration 12.55% 10.81%
Markets in operation 142 139
Total employees 5,250 4,750
Cell sites in service 2,597 2,331
Average monthly revenue per customer $ 44.65 $ 47.77
Postpay churn rate per month 1.7% 1.8%
Marketing cost per gross customer addition $ 308 $ 338
(1) Calculated using Claritas population estimates for 2000 and 1999,
respectively.
The Company's operating income, which includes 100% of the revenues and expenses
of its consolidated markets plus its corporate office operations, decreased
slightly in the first three months of 2001. The decrease reflects increases in
revenues offset by higher increases in operating expenses, primarily general and
administrative expenses, compared to the first three months of 2000. The
improvement in revenues resulted from growth in the Company's customer base, and
the increases in expenses primarily resulted from an increase in the cost to
retain and serve customers. Operating revenues, driven by a 19% increase in
customers served, rose $45.6 million, or 12%. Operating cash flow (operating
income plus depreciation and amortization expense) increased $3.2 million, or
2%, in 2001. Operating income decreased $2.2 million, or 4%, in 2001.
In the first three months of 2001, net income and earnings per share included an
extraordinary loss. In the first three months of 2000, both net income and
earnings per share included gains on cellular and other investments and the
cumulative effect of a change in accounting principle. A summary of the
after-tax effects of the gains, extraordinary loss and cumulative effect of a
change in accounting principle on net income and diluted earnings per share in
each period is shown below.
-3-
Three Months Ended March 31,
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2001 2000
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(Dollars in thousands,
except per share amounts)
Income before after-tax effects of gains,
extraordinary loss and change in accounting
principle $ 34,017 $ 35,557
Add: After-tax effects of gains -- 11,282
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Income before extraordinary loss and cumulative
effect of accounting change 34,017 46,839
Less: Extraordinary loss on extinguishment of debt (3,629) --
Less: Cumulative effect of accounting change -- (4,660)
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Net income as reported $ 30,388 $ 42,179
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Diluted earnings per share before after-tax effects
of gains, extraordinary loss and change in
accounting principle $ .39 $ .40
Add: After-tax effects of gains -- .12
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Diluted earnings per share before extraordinary
loss and cumulative effect of accounting change .39 .52
Less: Extraordinary loss on extinguishment of debt (.04) --
Less: Cumulative effect of accounting change -- (.05)
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Diluted earnings per share as reported $ .35 $ .47
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Operating Revenues
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Three Months Ended March 31,
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2001 2000
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(Dollars in thousands)
Operating Revenues
Retail service $ 326,541 $ 281,610
Inbound roaming 64,026 73,251
Long-distance and other 33,392 25,169
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Service Revenues 423,959 380,030
Equipment sales 15,810 14,127
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Total Operating Revenues $ 439,769 $ 394,157
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Operating revenues increased $45.6 million, or 12%, in the first three months of
2001.
Service revenues primarily consist of: (i) charges for access, airtime and
value-added services provided to the Company's retail customers ("retail
service"); (ii) charges to customers of other systems who use the Company's
cellular systems when roaming ("inbound roaming"); (iii) charges for
long-distance calls made on the Company's systems. Service revenues increased
$43.9 million, or 12%, in 2001. The increase was primarily due to the growing
number of retail customers. Monthly service revenue per customer averaged $44.65
in 2001, a 7% decrease from 2000.
Retail service revenue increased $44.9 million, or 16%, in 2001. Growth in the
Company's customer base was the primary reason for the increase in retail
service revenue. The number of customers increased 19% to 3,221,000 at March 31,
2001 from 2,707,000 at March 31, 2000. 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.
-4-
Average monthly retail service revenue per customer declined 3% to $34.39 in
2001 from $35.40 in 2000. Monthly local retail minutes of use per customer
averaged 181 in 2001 and 128 in 2000. 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. This increase was offset by the
decrease in average revenue per minute of use in 2001. Management anticipates
that the Company's average revenue per minute of use will continue to decline in
the future, reflecting the continued effect of the previously mentioned factors.
Inbound roaming revenue decreased $9.2 million, or 13%, in 2001. The decline in
inbound roaming revenue in 2001 primarily resulted from the decrease in revenue
per roaming minute of use on the Company's systems, partially offset by an
increase in roaming minutes used.
The increase in minutes of use was 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. The decline in revenue per minute of use is primarily due to the
general downward trend in negotiated rates, and these negotiated rates are also
affected by the previously mentioned pricing programs offered by other wireless
carriers.
Management anticipates that the increase in inbound roaming minutes of use will
continue to be slower in the remainder of 2001 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 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 $6.74 in
2001 and $9.21 in 2000. The decrease in 2001 is attributable to the decrease in
inbound roaming revenue compared to the increase in the Company's customer base.
Long-distance and other revenue increased $8.2 million, or 33%, in 2001 as the
volume of long-distance calls billed by the Company increased, primarily from
inbound roamers using the Company's systems to make long-distance calls. Monthly
long-distance and other revenue per customer averaged $3.52 in 2001 and $3.16 in
2000.
Equipment sales revenues increased $1.7 million, or 12%, in 2001. The increase
in equipment sales revenues reflects a 9% increase in the number of gross
customer activations, to 290,000 in 2001 from 266,000 in 2000, plus an increase
in the number of higher priced dual-mode units sold. Most of the gross customer
activations were produced by the Company's direct and retail distribution
channels; activations from these channels usually generate sales of cellular
telephone units. The increase in sales of dual-mode units 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.
-5-
Operating Expenses
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Three Months Ended March 31,
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2001 2000
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(Dollars in thousands)
Operating Expenses
System operations $ 95,584 $ 81,758
Marketing and selling 71,305 69,458
Cost of equipment sold 33,812 34,597
General and administrative 109,246 81,687
Depreciation 55,244 51,169
Amortization of intangibles 16,095 14,839
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Total Operating Expenses $ 381,286 $ 333,508
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Operating expenses increased $47.8 million, or 14%, in 2001.
System operations expenses increased $13.8 million, or 17%, in 2001. The
increase was due to the following:
* an increase in the cost of maintaining the Company's network;
* an increase in the cost of minutes used on the Company's systems; and
* an increase in the costs associated with the Company's customers roaming on
other companies' systems ("outbound roaming").
These increases were driven by the following factors:
* an increase in the number of cell sites within the Company's systems;
* increases in minutes of use both on the Company's systems and by the
Company's customers using other systems when roaming;
* partially offset by the ongoing reduction both in the per-minute cost of
usage on the Company's systems and in negotiated roaming rates, as
mentioned previously.
In total, management expects system operations expenses to increase over the
next few years, driven by increases in the number of cell sites within the
Company's systems and increases in minutes of use both on the Company's systems
and by the Company's customers on other systems when roaming. 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
outbound roaming expenses.
Customer usage expenses increased $7.9 million, or 13%, in 2001. The increase
was primarily due to the $4.3 million, or 28%, increase in the cost of minutes
used on the Company's systems and the $3.3 million, or 7%, increase in outbound
roaming costs. Customer usage expenses represented 17% of service revenues in
2001 and 16% in 2000.
Maintenance, utility and cell site expenses increased $5.9 million, or 30%, in
2001. The increase primarily reflects a $2.0 million, or 47%, increase in
employee-related expenses, plus an increase in the number of cell sites in the
Company's systems, to 2,597 in 2001 from 2,331 in 2000.
Marketing and selling expenses increased $1.8 million, or 3%, in 2001. Marketing
and selling expenses primarily consist of salaries, commissions and expenses of
field sales and retail personnel and offices; agent expenses; corporate
marketing department salaries and expenses; local advertising; and public
relations expenses. The increase was primarily due to a 9% increase in the
number of gross customer activations.
-6-
Marketing cost per gross customer activation, which includes marketing and
selling expenses and equipment subsidies, decreased 9% to $308 in 2001 from $338
in 2000. The decrease in cost per gross customer activation in 2001 was
primarily due to reductions in equipment subsidies and advertising expenses per
gross customer activation.
Cost of equipment sold decreased $785,000, or 2%, in 2001. The effect of an
increased number of units sold was offset by a decrease in the average cost of
units sold, especially dual-mode units.
General and administrative expenses increased $27.6 million, or 34%, in 2001.
These expenses include the costs of operating the Company's five customer care
centers and local business offices, the costs of serving and retaining customers
and corporate expenses other than the corporate engineering and marketing
departments. The increase includes the effect 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 2001 related to its customer care centers, which centralize
certain customer service functions, and incurred additional costs to retain
customers and to provide dual-mode phone units to customers who migrated from
analog to digital rate plans.
Employee-related expenses increased $6.8 million, or 18%, in 2001. Monthly
general and administrative expenses per customer increased 12% to $11.51 in 2001
from $10.27 in 2000. General and administrative expenses represented 26% of
service revenues in 2001 and 21% in 2000.
Operating cash flow increased $3.2 million, or 2%, to $129.8 million in 2001.
The slight improvement was primarily due to substantial growth in customers and
service revenues, offset by an increase in general and administrative expenses.
Operating cash flow margins (as a percent of service revenues) were 30.6% in
2001 and 33.3% in 2000.
Depreciation expense increased $4.1 million, or 8%, in 2001. The increase
reflects rising average fixed asset balances, which increased 17% in 2001.
Increased fixed asset balances in 2001 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.
Operating Income
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Operating income totaled $58.5 million in 2001, a decrease of $2.2 million, or
4%, from 2000. Operating income margins were 13.8% in 2001 and 16.0% in 2000.
The reductions in operating income and operating income margins reflect the
following factors:
* increased revenues, driven by growth in both the number of customers
served by the Company's systems, and the number of minutes used by the
Company's customers and on the Company's systems;
* increased system operations expenses, driven by the increase in minutes of
use by both the Company's customers and inboud roamers using the
Company's systems; and
* increased general and administrative expenses.
The Company expects each of the above factors to continue to have an effect on
operating income and operating margins for the next several quarters. Any
changes in the above factors, as well as the effects of other drivers of the
Company's operating results, may cause operating income and operating margins to
fluctuate over the next several quarters.
-7-
The Company expects service revenues to continue to grow during the remainder of
2001; however, management anticipates that average monthly revenue per customer
will decrease, as retail service 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 2001 as it
incurs costs associated with customer growth, service and retention 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 several years. The Company
expects PCS operators to continue deployment of PCS throughout all of the
Company's clusters during 2001. 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
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Investment and other income totaled $13.8 million in 2001 and $30.0 million in
2000. There were no gains on cellular and other investments in the first three
months of 2001. Gain on cellular and other investments totaled $17.9 million in
the first three months of 2000, from the sale of Company's minority interest in
one market.
Investment income was $7.2 million in 2001 and $8.7 million in 2000. 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 2000 and 2001
decreased in 2001, reducing investment income.
Interest income totaled $5.5 million in 2001 and $4.0 million in 2000. The
increase is primarily due to the increase in short- and long-term notes
receivable in 2001.
Interest and Income Taxes
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Interest expense totaled $8.8 million in 2001 and $9.4 million in 2000. Interest
expense in 2001 is primarily related to Liquid Yield Option Notes ("LYONs")
($2.7 million); the Company's 7.25% Notes (the "Notes") ($4.6 million); and the
Company's revolving credit facility with a series of banks ("Revolving Credit
Facility") ($1.1 million). Interest expense in 2000 is primarily related to
LYONs ($4.5 million) and the Notes ($4.6 million).
Income tax expense was $27.2 million in 2001 and $33.4 million in 2000. In 2000,
$6.6 million of income tax expense related to gains on cellular and other
investments. The overall effective tax rates were 43% in 2001 and 41% in 2000.
Each year's effective tax rate is affected by sales of cellular and other
investments, 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 was filing a separate return as
its own affiliated group and was not included in the TDS group.
-8-
Extraordinary Item
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Extraordinary item - loss on extinguishment of debt, net of tax totaled $3.6
million in the first three months of 2001, or $.04 per diluted share. In 2001,
the Company satisfied $19.8 million face value ($8.5 million carrying value) of
converted LYONs by paying $12.0 million in cash ($1.2 million of which was
included in accounts payable at March 31, 2001) to the holders. The loss
resulted from the difference between the conversion price, which approximated
market value, and the accreted value of the LYONs converted. This loss is not
deductible for tax purposes.
Cumulative Effect of Accounting Change
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Cumulative effect of accounting change, net of tax totaled $(4.7) million in
2000, or $(.05) per diluted share, reflecting the Company's implementation of
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No.
101. The Company now defers certain activation fees charged to its customers
when initiating service through its retail and direct channels and reconnect
fees charged to its customers when resuming service after suspension, and
records the related revenue over periods from six to 48 months. Prior to
implementing SAB No. 101, the Company recorded these fees as operating revenues
in the period they were charged to the customer. The cumulative effect
represents the aggregate impact of this accounting change for periods prior to
2000.
Net Income
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Net income totaled $30.4 million in 2001 and $42.2 million in 2000. Diluted
earnings per share was $0.35 in 2001 and $0.47 in 2000. In 2001, net income and
earnings per share included an extraordinary loss, representing $3.6 million and
$0.04 per share. Net income and earnings per share in 2000 included significant
after-tax gains on cellular and other investments, representing $11.3 million
and $0.12 per share, and the cumulative effect of a change in accounting
principle, representing $(4.7) million and $(0.05) per share. Excluding the
after-tax effect of these gains, extraordinary loss and cumulative effect of a
change in accounting principle, net income would have been $34.0 million, or
$.39 per share, in 2001; and $35.6 million, or $0.40 per share, in 2000.
FINANCIAL RESOURCES AND LIQUIDITY
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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 $137.7 million in 2001 and $121.1
million in 2000. Operating cash flow provided $129.8 million in 2001 and $126.7
million in 2000. 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) provided $7.9 million in 2001 and
required $5.6 million in 2000. Income taxes and interest paid totaled $13.2
million in 2001 and $15.3 million in 2000.
-9-
Cash flows from investing activities required $175.9 million in 2001 and $32.5
million in 2000. Cash required for property, plant and equipment and system
development expenditures totaled $120.4 million in 2001 and $59.8 million in
2000. In both periods, these expenditures were financed primarily with
internally generated cash, and in 2000, they were also financed with the
proceeds from the sales of cellular interests. These expenditures primarily
represent the construction of 49 and 31 cell sites in 2001 and 2000,
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 $56.2 million in 2001. The Company issued notes receivable to third
parties totaling $3.8 million in 2001. 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 $3.3 million in 2001 and $5.5 million in 2000.
Cash flows from financing activities required $20.8 million in 2001 and $52.3
million in 2000. In 2001, the Company paid $10.8 million in cash, and will pay
$1.2 million in cash in April 2001, to satisfy the conversion of $19.8 million
face value ($8.5 million carrying value) of LYONs by the holders. In 2001, the
Company paid $11.0 million for the repurchase of 190,000 of its Common Shares.
These repurchases had been executed in 2000 and the amount was included in
accounts payable at year-end 2000. In 2000, the Company repurchased a total of
817,300 of its Common Shares for a total of $56.7 million, $5.2 million of which
was paid in April 2000 and was included in accounts payable at March 31, 2000.
Anticipated capital requirements for 2001 primarily reflect the Company's plans
for construction and system expansion. The Company's construction and system
expansion budget for 2001 is $425 million to $450 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.
Liquidity
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The Company anticipates that the aggregate resources required for the remainder
of 2001 will include the following:
o $305 million to $330 million for capital spending;
o $78 million to acquire certain 10 megahertz ("MHz") D and E block PCS
licenses covering 4.9 million pops;
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; and
o an as yet undetermined amount that may be needed to finance expenditures
related to the Company's interests in certain wireless licenses acquired
by Black Crow Wireless L.P. ("Black Crow") in the Federal Communications
Commission's ("FCC's") C and F Block auctions in early 2001.
In October 2000, the Company's Board of Directors authorized the repurchase of
an additional 1.4 million USM Common Shares. Through March 31, 2001, the company
had repurchased 65,400 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. The Company may also purchase a limited amount of
LYONs in open-market transactions from time to time. 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.
-10-
The Company assesses its cellular holdings on an ongoing basis in order to
maximize the benefits derived from clustering its markets. The Company also
reviews attractive opportunities for the acquisition of additional wireless
spectrum. 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 April 2001, the Company entered into agreements to acquire certain 10 MHz D
and E block PCS licenses covering 4.9 million pops in the Midwest for $78
million in cash. The Company expects these transactions to be completed during
2001.
The Company is a limited partner in Black Crow, which was a successful bidder
for 17 licenses in 13 markets in the most recent FCC spectrum auction, ended in
January 2001. The license cost for the 17 licenses amounted to $283.9 million.
As a result of its 85% economic interest in Black Crow, the Company, as of March
31, 2001, has contributed a total of $9.7 million in capital and loaned $45.5
million to Black Crow, and loaned $563,000 to the general partner of Black Crow.
The exact nature of the Company's financial commitment going forward will be
developed as Black Crow develops its long-term business and financing plans. The
Company is committed to contributing capital along the lines of its partnership
interest, and has committed to loan the general partner up to $20 million. The
Company has no other loan commitments, but it is possible that the Company will
provide guarantees or other financial undertakings to support Black Crow's
efforts at raising debt financing.
Thirteen of the 17 licenses for which Black Crow was the successful bidder were
auctioned by the FCC subject to the final outcome of certain judicial
proceedings initiated by parties claiming to have continuing interests in such
licenses. These 13 licenses, along with various other licenses, were originally
awarded by the FCC in prior auctions. The licenses were subsequently cancelled
and reauctioned by the FCC after the winning bidders of the prior auctions were
unable to make their required payments to the FCC on a timely basis. The winning
bidders in the prior auctions are contesting the FCC's decision to revoke and
reauction the licenses. In the event the parties are successful in their
challenge against the FCC, the winning bidders in the January 2001 auctions,
including Black Crow, may be required to surrender these licenses. In such
event, Black Crow would receive a refund of payments made to the FCC for such
licenses and only acquire four licenses in three markets for a total cost of
$3.8 million, which would significantly reduce U.S. Cellular's current and
potential future financial commitments.
The Company is generating substantial cash from its operations and anticipates
financing all of the above expenditures with internally generated cash and with
borrowings under the Company's Revolving Credit Facility as the timing of such
expenditures warrants. The Company had $65.4 million of cash and cash
equivalents at March 31, 2001. Additionally, $445 million of the $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.
-11-
Market Risk
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The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. All of the Company's existing long-term debt is in the
form of 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 maintains a portfolio of available for sale marketable equity
securities which resulted from acquisitions and the sale of non-strategic
investments. The market value of these investments, principally VOD ADRs,
amounted to $288.6 million at March 31, 2001. A hypothetical 10% decrease in the
share prices of these investments would result in a $28.9 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 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, but are not limited to:
* 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;
* acquisitions/divestitures of properties and/or licenses;
* changes in governmental regulations;
* availability of future financing; and
* 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-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Unaudited
---------
Three Months Ended
March 31,
---------------------------------
2001 2000
------------- -------------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Service $ 423,959 $ 380,030
Equipment sales 15,810 14,127
------------- -------------
Total Operating Revenues 439,769 394,157
------------- -------------
OPERATING EXPENSES
System operations 95,584 81,758
Marketing and selling 71,305 69,458
Cost of equipment sold 33,812 34,597
General and administrative 109,246 81,687
Depreciation 55,244 51,169
Amortization of intangibles 16,095 14,839
------------- -------------
Total Operating Expenses 381,286 333,508
------------- -------------
OPERATING INCOME 58,483 60,649
------------- -------------
INVESTMENT AND OTHER INCOME
Investment income 7,167 8,725
Amortization of licenses related to investments (176) (347)
Interest income 5,522 3,998
Other income (expense), net 1,309 (247)
Gain on cellular and other investments -- 17,851
------------- -------------
Total Investment and Other Income 13,822 29,980
------------- -------------
INCOME BEFORE INTEREST, INCOME TAXES,
AND MINORITY INTEREST 72,305 90,629
Interest expense 8,821 9,360
------------- -------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 63,484 81,269
Income tax expense 27,188 33,414
------------- -------------
INCOME BEFORE MINORITY INTEREST 32,296 47,855
Minority share of income (2,279) (1,015)
------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 34,017 46,840
Extraordinary item - loss on extinguishment
of debt, net of tax (3,629) --
Cumulative effect of accounting change,
net of tax -- (4,661)
------------- -------------
NET INCOME $ 30,388 $ 42,179
============= =============
BASIC WEIGHTED AVERAGE COMMON AND SERIES A
COMMON SHARES (000s) 85,989 87,599
BASIC EARNINGS PER COMMON AND SERIES A
COMMON SHARE $ 0.35 $ 0.48
============= =============
DILUTED EARNINGS PER COMMON AND SERIES A
COMMON SHARE $ 0.35 $ 0.47
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-13-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Three Months Ended
March 31,
---------------------------------
2001 2000
------------- -------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30,388 $ 42,179
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 71,339 66,008
Deferred income tax provision 4,835 7,431
Investment income (7,167) (8,725)
Minority share of income 2,279 1,015
Extraordinary item 3,629 --
Cumulative effect of accounting change -- 4,661
Gain on cellular and other investments -- (17,851)
Other noncash expense 4,174 7,978
Change in accounts receivable 27,336 22,916
Change in inventory 10,707 206
Change in accounts payable (31,884) (19,929)
Change in accrued interest (4,189) (4,535)
Change in accrued taxes 24,146 20,104
Change in customer deposits and
deferred revenue 2,498 3,873
Change in other assets and liabilities (352) (4,261)
------------- -------------
137,739 121,070
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (119,469) (57,401)
System development costs (941) (2,430)
Investments in and advances (to)/from
unconsolidated entities (1,761) (730)
Distributions from unconsolidated entities 3,320 5,527
Acquisitions, excluding cash acquired (56,180) --
Proceeds from cellular and other investments -- 22,500
Change in notes receivable (3,822) --
Other investing activities 3,000 73
------------- -------------
(175,853) (32,461)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt (10,778) --
Repurchase of common shares (10,992) (51,523)
Common Shares issued 2,831 474
Capital (distributions) to minority partners (1,839) (1,289)
------------- -------------
(20,778) (52,338)
------------- -------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (58,892) 36,271
CASH AND CASH EQUIVALENTS-
Beginning of period 124,281 197,675
------------- -------------
End of period $ 65,389 $ 233,946
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-14-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited) December 31,
March 31, 2001 2000
------------- -------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 15,960 $ 69,956
General funds 49,429 54,325
------------- -------------
Affiliated cash equivalents 65,389 124,281
Temporary investments 7 7
Accounts Receivable
Customers, net of allowance 124,999 142,783
Roaming 58,462 62,928
Affiliates 92 60
Other 14,630 13,312
Inventory 38,091 48,798
Note receivable 45,502 --
Prepaid expenses 10,613 10,796
Other current assets 8,559 6,398
------------- -------------
366,344 409,363
------------- -------------
INVESTMENTS
Licenses, net of accumulated amortization 1,210,955 1,130,802
Marketable equity securities 288,616 377,900
Investment in unconsolidated entities,
net of accumulated amortization 146,734 188,859
Notes and interest receivable - long-term 45,223 84,566
------------- -------------
1,691,528 1,782,127
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 1,947,938 1,801,377
Less accumulated depreciation 724,748 655,754
------------- -------------
1,223,190 1,145,623
------------- -------------
DEFERRED CHARGES
System development costs,
net of accumulated amortization 113,825 119,724
Other, net of accumulated amortization 9,734 10,197
------------- -------------
123,559 129,921
------------- -------------
Total Assets $ 3,404,621 $ 3,467,034
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-15-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(Unaudited) December 31,
March 31, 2001 2000
------------- -------------
(Dollars in thousands)
CURRENT LIABILITIES
Revolving Credit Facility $ 55,000 $ 55,000
Accounts payable
Affiliates 2,022 9,124
Other 177,057 203,223
Customer deposits and deferred revenues 61,991 53,855
Accrued interest 3,260 7,449
Accrued taxes 56,674 32,529
Accrued compensation 16,484 19,550
Other current liabilities 20,495 17,597
------------- -------------
392,983 398,327
------------- -------------
LONG-TERM DEBT
6% zero coupon convertible debentures 172,664 185,817
7.25% unsecured notes 250,000 250,000
Other 13,000 13,000
------------- -------------
435,664 448,817
------------- -------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 326,497 357,775
Other 7,120 12,611
------------- -------------
333,617 370,386
------------- -------------
MINORITY INTEREST 39,062 34,933
------------- -------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 55,046 55,046
Series A Common Shares, par value $1 per share 33,006 33,006
Additional paid-in capital 1,317,486 1,321,193
Treasury Shares, at cost (1,926,085 and
2,176,294 shares) (129,929) (145,542)
Accumulated other comprehensive (loss) (69,867) (16,296)
Retained earnings 997,553 967,164
------------- -------------
2,203,295 2,214,571
------------- -------------
Total Liabilities and Shareholders' Equity $ 3,404,621 $ 3,467,034
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-16-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note
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 March 31, 2001 and December 31,
2000, and the results of operations and cash flows for the three months
ended March 31, 2001 and 2000. The results of operations for the three
months ended March 31, 2001 and 2000, 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 Series A Common Shares of
dilutive potential common stock are as follows:
Three Months Ended
March 31,
---------------------------------
2001 2000
------------- -------------
(Dollars in thousands,
except per share amounts)
Income used in Basic Earnings per Share $ 34,017 $ 46,840
Extraordinary item (3,629) --
Cumulative effect of accounting change -- (4,661)
------------- -------------
Net Income Available to Common used in
Basic Earnings per Share $ 30,388 $ 42,179
============= =============
Weighted average number of Common
Shares used in Basic Earnings
per Share (000's) 85,989 87,599
============= =============
Basic Earnings per Share
Continuing Operations
Excluding Gains $ 0.40 $ 0.41
Gains -- 0.12
------------- -------------
0.40 0.53
Extraordinary item (0.05) --
Cumulative effect of accounting change -- (0.05)
------------- -------------
$ 0.35 $ 0.48
============= =============
-17-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Three Months Ended
March 31,
---------------------------------
2001 2000
------------- -------------
(Dollars in thousands,
except per share amounts)
Income used in Basic Earnings per Share $ 34,017 $ 46,840
Interest expense eliminated as a result of the
pro forma conversion of Convertible Debentures,
net of tax -- 2,571
------------- -------------
Income used in Diluted Earnings per Share 34,017 49,411
Extraordinary item (3,629) --
Cumulative effect of accounting change -- (4,661)
------------- -------------
Net Income Available to Common used in
Diluted Earnings per Share $ 30,388 $ 44,750
============= =============
Weighted average number of Common
Shares used in Basic Earnings
per Share (000's) 85,989 87,599
Effect of Dilutive Securities:
Stock options and Stock Appreciation Rights 278 447
Conversion of convertible debentures -- 6,920
------------- -------------
Weighted Average Number of Common
Shares used in Diluted Earnings per Share 86,267 94,966
============= =============
Diluted Earnings Per Share
Continuing Operations
Excluding Gains $ 0.39 $ 0.40
Gains -- 0.12
------------- -------------
0.39 0.52
Extraordinary item (0.04) --
Cumulative effect of accounting change -- (0.05)
------------- -------------
$ 0.35 $ 0.47
============= =============
3. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first three months of 2001. In conjunction with these acquisitions, the
following assets were acquired, liabilities assumed and Common Shares
issued.
Three Months Ended
March 31,
----------------------
2001
----------------------
(Dollars in thousands)
Cellular licenses $ 55,055
Property, plant, and equipment, net 1,125
----------------------
Decrease in cash due to acquisitions $ 56,180
======================
-18-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The following summarizes certain noncash transactions, and interest and
income taxes paid.
Three Months Ended
March 31,
---------------------------------
2001 2000
------------- -------------
(Dollars in thousands)
Interest paid $ 10,159 $ 9,301
Income taxes paid 3,048 3,693
Noncash interest expense 2,843 4,590
4. Gain on Cellular and Other Investments
Gain on cellular and other investments in 2000 primarily reflects gains
recorded on the sale of the Company's minority interest in one market.
5. Other Comprehensive Income (Loss)
The Company's Comprehensive Income (Loss) 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 (Loss).
Three Months Ended
March 31,
---------------------------------
2001 2000
------------- -------------
(Dollars in thousands)
Accumulated Other Comprehensive Income
(Loss)
Balance, beginning of period $ (16,296) $ 81,391
Other Comprehensive Income (Loss) -
Unrealized (losses) gains on securities (89,284) 56,555
Income Tax effect 35,713 (22,623)
------------- -------------
Net unrealized (losses) gains included in
Comprehensive Income (Loss) (53,571) 33,932
------------- -------------
Balance, end of period $ (69,867) $ 115,323
============= =============
Comprehensive Income (Loss)
Net Income $ 30,388 $ 42,179
Net unrealized (losses) gains on securities (53,571) 33,932
------------- -------------
$ (23,183) $ 76,111
============= =============
6. Marketable Equity Securities
Marketable equity securities include the Company's investments in equity
securities, primarily AirTouch Communications, Inc. ("AirTouch") common
shares. These securities are classified as available-for-sale and stated at
fair market value.
-19-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Information regarding the Company's marketable equity securities is
summarized below.
March 31, December 31,
2001 2000
------------- -------------
(Dollars in thousands)
Available-for-sale Equity Securities
Aggregate Fair Value $ 288,616 $ 377,900
Original Cost 405,061 405,061
------------- -------------
Gross Unrealized Holding (Losses) (116,445) (27,161)
Tax Effect (46,578) (10,865)
------------- -------------
Net Unrealized Holding (Losses),
net of tax $ (69,867) $ (16,296)
============= =============
7. Treasury Shares
In 2000, the Company authorized the repurchase of up to 4.2 million USM
Common Shares through three separate 1.4 million share programs. The
Company may use repurchased shares to fund acquisitions and for other
corporate purposes.
The Company repurchased 3.5 million Common Shares in 2000 for $234.8
million. The Company had reissued 1.6 million Common Shares as of March 31,
2001, primarily to satisfy conversions of convertible debt securities.
In 2001, the Company paid $11.0 million for the repurchase of 190,000 of
its Common Shares. These repurchases had been executed in 2000 and were
included in Accounts Payable at year-end 2000.
8. Extraordinary Item - Loss on Extinguishment of Debt
During 2001, the Company retired a total of $19.8 million face value ($8.5
million carrying value) of its Liquid Yield Option Notes ("LYONs") for
$12.0 million in cash. The retirements resulted in an extraordinary loss of
$3.6 million, $.05 per basic and $.04 per diluted share. There were no
income tax benefits due to the conversion feature associated with these
LYONs.
-20-
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings.
- ---------------------------
On April 11, 2000, two affiliates of U.S. Cellular, along with two
unrelated wireless carriers, filed a declaratory judgment action in the United
States District Court for the Northern District of Iowa against the Iowa
Attorney General. This action was in response to the Attorney General's ongoing
investigation of certain wireless industry practices involving wireless service
agreements and related matters. The suit by U.S. Cellular and the other wireless
carriers seeks to have certain state laws declared inapplicable to wireless
service agreements and such practices. In response, the Iowa Attorney General
filed suit in the Iowa State District Court for Polk County against U.S.
Cellular, alleging violations of various state consumer credit and other
consumer protection laws. The Attorney General is seeking injunctive relief,
barring the enforcement of contracts in excess of four months, and related
relief. The Attorney General is also seeking unspecified reimbursements for
customers, statutory fines ($40,000 for certain violations and $5,000 for
others, per violation) as well as fees and costs. This case was removed to the
U. S. District Court for the Southern District of Iowa. On August 7, 2000, the
U.S. District Court in the Southern District granted the Attorney General's
motion to remand the case to state court. On September 15, 2000, the U.S.
District Court in the Northern District dismissed U.S. Cellular's Complaint in
its entirety. U.S. Cellular has filed an appeal of the grant of the motion to
dismiss the Northern District case. U.S. Cellular vigorously denies the
allegations of the Iowa Attorney General in the case now remanded to state court
and intends to vigorously contest this case.
In addition to the legal proceedings referenced in the previous paragraph,
U.S. Cellular is involved in a number of other 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. U.S. Cellular does not believe that any of these proceedings should
have a material adverse impact.
Item 5. Other Information.
- --------------------------
On May 3, 2001, the Company announced that it had entered into a definitive
agreement with McLeodUSA Incorporated ("McLeod") to acquire certain 10 megahertz
D and E block personal communications service ("PCS") licenses covering 4.7
million population equivalents in Iowa, Illinois and Nebraska. A copy of the
news release is attached as Exhibit 99.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a)Exhibits:
Exhibit 11 - Statement regarding computation of per share earnings is
included herein as footnote 2 to the financial statements.
Exhibit 12 - Statement regarding computation of ratios.
Exhibit 99 - News release announcing the purchase of PCS licenses from
McLeod.
(b)Reports on Form 8-K filed during the quarter ended March 31, 2001:
The Company filed a current report on Form 8-K on February 2, 2001
announcing that Black Crow Wireless L.P. was the high bidder for 17 licenses
in 13 markets in the recent Federal Communications Commission C and F block
broadband PCS spectrum auctions that concluded on January 26, 2001.
-21-
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 May 11, 2001 /s/ John E. Rooney
------------------ -----------------------------------------
John E. Rooney
President
(Chief Executive Officer)
Date May 11, 2001 /s/ Kenneth R. Meyers
------------------ ------------------------------------------
Kenneth R. Meyers
Executive Vice President-Finance
and Treasurer
(Chief Financial Officer)
Date May 11, 2001 /s/ John T. Quille
------------------ -------------------------------------------
John T. Quille
Vice President and Controller
(Principal Accounting Officer)
-22-