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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, 1998
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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_________________________
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, 1998
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Common Shares, $1 par value 54,353,136 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 2-10
Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and 1997 11
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 12
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 13-14
Notes to Consolidated Financial Statements 15-18
Part II. Other Information 19
Signatures 20
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
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AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS
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Three Months Ended 3/31/98 Compared to Three Months Ended 3/31/97
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United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. USM is an
81.1%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
USM owned either majority or minority cellular interests in 182 markets at March
31, 1998, representing 25,533,000 population equivalents ("pops"). USM included
the operations of 134 majority-owned and managed cellular markets, representing
22.8 million pops, in consolidated operations ("consolidated markets") as of
March 31, 1998. Minority interests in 40 markets, representing 2.6 million pops,
were accounted for using the equity method and were included in investment
income at that date. All other interests, representing less than 100,000 pops in
the aggregate, were accounted for using the cost method. Following is a table of
summarized operating data for USM's consolidated operations.
Three Months Ended
or At March 31,
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1998 1997
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Total market population (in thousands) (1) 24,034 21,712
Customers 1,817,000 1,164,000
Market penetration 7.56% 5.36%
Markets in operation 134 131
Cell sites in service 1,786 1,377
Average monthly revenue per customer $ 44.66 $ 53.50
Churn rate per month 1.7% 2.0%
Marketing cost per net customer addition $ 579 $ 558(2)
<FN>
(1) Calculated using the respective population estimates for each year (Claritas
for 1998, Donnelley for 1997).
(2) Recomputed to show the effect of the change in current year presentation of
certain expenses.
</FN>
The Company's operating income for the first three months of 1998, which
includes 100% of the revenues and expenses of its consolidated markets plus its
corporate office operations, primarily reflects improvement in the Company's
overall operations compared to the first three months of 1997. The improvement
resulted from growth in the Company's customer base and revenues coupled with
increasing economies of scale. Operating revenues, driven by increases in
customers served, rose $60.6 million, or 33%. Operating expenses, excluding
depreciation and amortization, rose $35.8 million, or 27%. Operating cash flow
(operating income before minority share plus depreciation and amortization
expense) increased $24.8 million, or 46%. Depreciation and amortization expense
increased $15.1 million, or 50%. Operating income before minority share
increased $9.7 million, or 41%.
-2-
The Company's operating results were also impacted by the effects of
acquisitions and divestitures, primarily those related to the exchange of
markets with BellSouth Corporation ("BellSouth"). The markets acquired in that
transaction, net of the markets divested, generated increases in the Company's
overall revenues, operating expenses, operating cash flow and operating income.
These increases were primarily due to the increase in the Company's customer
base as a result of the exchange.
However, the results of certain of the Company's existing markets which are
adjacent to the markets acquired were negatively impacted by the effects of the
exchange. Specifically, inbound roaming revenue and, to a lesser extent,
operating cash flow suffered the most negative impact in these markets. This
impact was primarily due to the change in the nature and pricing of transactions
in which customers from the acquired markets use their wireless phones when
roaming in the Company's existing markets. Prior to the exchange, the Company's
existing markets recorded inbound roaming revenue at premium rates; after the
exchange, those markets recorded an intercompany transfer amount which is
eliminated in the Company's consolidated financial statements.
Overall, the Company's revenues, operating cash flow and operating income were
positively impacted by the effects of the BellSouth exchange.
Investment and other income increased $175.0 million to $192.4 million, due
primarily to $180.0 million in gains on the sales of cellular interests realized
in 1998. Interest expense increased $4.5 million, or 81%, in 1998, primarily due
to an increase in debt balances resulting from the Company's issuance of 7.25%
unsecured notes ("Notes") in August 1997. Income tax expense increased $70.5
million to $84.5 million in 1998, resulting from increased gains on the sales of
cellular interests and improved operating results.
Net income totaled $129.8 million in 1998, an increase of $111.3 million from
1997. In 1998, net income included significant gains on sales of cellular
interests. A summary of the after-tax effects of these gains on net income and
earnings per share-diluted is shown below.
Three Months Ended March 31,
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1998 1997
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(Dollars in thousands,
except per share amounts)
Net income before after-tax effects of gains $ 19,513 $ 18,468
Add: After-tax effects of gains 110,239 --
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Net income as reported $ 129,752 $ 18,468
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Earnings per share before after-tax effects
of gains $ .22 $ .21
Add: After-tax effects of gains 1.27 --
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Earnings per share-diluted $ 1.49 $ .21
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Operating Revenues
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Operating revenues totaled $245.2 million in the first three months of 1998, up
$60.6 million, or 33%, over 1997. Service revenues primarily consist of: (i)
charges for access, airtime and value-added services provided to the Company's
local retail customers who use the local systems operated by the Company ("local
retail"); (ii) charges to customers of other systems who use the Company's
cellular systems when roaming ("inbound roaming"); and (iii) charges for
long-distance calls made on the
-3-
Company's systems. Service revenues totaled $236.3 million in 1998, up $56.8
million, or 32%, over 1997. The increase was primarily due to the growing number
of local retail customers.
Average monthly service revenue per customer declined 17% to $44.66 in 1998 from
$53.50 in 1997. The decrease in average monthly service revenue per customer
resulted from a decrease in average revenue per minute of use from both local
retail customers and inbound roamers. The addition of the markets acquired in
the exchange with BellSouth Corporation ("BellSouth") in the fourth quarter of
1997 contributed to the decline in both local retail revenue per customer and
inbound roaming revenue per customer. The acquired markets produce a lower
amount of revenue per customer, and the addition of those markets caused the
elimination of certain inbound roaming revenues between the Company's existing
markets and the acquired markets. Also contributing to the overall decline in
average monthly service revenue per customer was slower growth in inbound
roaming minutes of use when compared to the growth in the Company's customer
base.
Competitive pressures and the Company's increasing use of pricing and other
incentive programs that encourage weekend and off-peak usage at reduced rates,
in order to stimulate overall usage, plus increasing amounts of bill credits
given to new and current customers as incentives to become or remain the
Company's customers, resulted in a decrease in average local retail revenue per
minute of use during 1998. The Company's average inbound roaming revenue per
minute of use also decreased during 1998, in line with the ongoing trend toward
reduced per minute prices for roaming negotiated between the Company and other
cellular operators. Also, the Company believes that its customer base is growing
faster than that of the cellular industry as a whole, which has a dilutive
effect on inbound roaming revenue per customer. Inbound roaming minutes of use
have been growing at a slower rate than the Company's customer base (32% growth
in inbound roaming minutes in 1998 compared to 56% growth in the Company's
customer base).
Local retail revenue increased $49.1 million, or 41%, in 1998. Growth in the
Company's customer base was the primary reason for the increase in local retail
revenue. The number of customers increased 56% to 1,817,000 at March 31, 1998
from 1,164,000 at March 31, 1997. The Company added 107,000 net new customers
from its marketing channels in the first quarter of 1998 compared to 91,000 in
1997. Management anticipates that the growth rate in the Company's customer base
will be lower 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 to $32.14 in 1998
from $36.05 in 1997. Monthly local retail minutes of use per customer decreased
5% to 95 in 1998 from 100 in 1997. Average revenue per minute of use decreased
as a result of the pricing and other incentive programs stated previously.
Average local retail revenue per minute totaled $.34 in 1998 compared to $.36 in
1997. The decrease in average monthly local retail revenue per customer is part
of an industry-wide trend and is believed to be related to the tendency of the
early customers in a market to be the heaviest users during peak business hours.
It also reflects the increasing level of competition for wireless services and
the Company's and the industry's continued penetration of the consumer market,
which tends to include fewer peak business hour-usage customers.
Inbound roaming revenue increased $867,000, or 2%, in 1998. Because all roaming
transactions involving customers of both the Company's previously existing
markets and the markets acquired from BellSouth, and vice versa, are considered
intracompany transactions in 1998, the revenue from those roaming transactions
is recorded as an offset to customer usage expense in the current year. Roaming
traffic involving the same markets would have been recorded as inbound roaming
revenue and customer usage expense in 1997. The total increase in inbound
roaming revenue was attributable to the 32% increase in the number of minutes
used by customers from other wireless systems when roaming in the Company's
service areas, offset by the decrease in average revenue per minute due to the
downward trend in negotiated rates. Average inbound roaming revenue per minute
totaled $.69
-4-
in 1998 and $.88 in 1997. Monthly inbound roaming revenue per Company customer
averaged $8.73 in 1998 and $13.51 in 1997. The decreases in monthly inbound
roaming revenue per Company customer are related to both the decreases in
inbound roaming revenue per minute and the faster increases in the Company's
customer base as compared to the growth in inbound roaming minutes of use.
Long-distance revenue increased $6.3 million, or 49%, in 1998 as the volume of
long-distance calls billed by the Company increased. Monthly long-distance
revenue per customer averaged $3.60 in 1998 and $3.81 in 1997. The decrease in
monthly long-distance revenue per customer is primarily due to the dilution of
the portion of long-distance revenue that comes from inbound roaming customers.
In a manner similar to inbound roaming revenue, this revenue is not growing as
fast as the Company's customer base.
Equipment sales revenues increased $3.8 million, or 76%, in 1998. Equipment
sales reflect the sale of 151,000 and 121,000 cellular telephone units in 1998
and 1997, respectively, plus installation and accessories revenue. The average
revenue per unit was $58 in 1998 and $41 in 1997. The average revenue per unit
is significantly less than the Company's cost per unit, which partially reflects
the Company's decision to reduce sales prices on cellular telephones to
stimulate growth in the number of customers, to maintain its market position and
to meet competitive prices as well as to pass through reduced manufacturers'
prices to customers.
Operating Expenses
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Operating expenses totaled $212.0 million in 1998, up $50.9 million, or 32%,
over 1997. Beginning on January 1, 1998, the Company changed its income
statement presentation of certain corporate marketing department expenses from
general and administrative expenses to marketing and selling expenses. Amounts
have been reclassified for previous years, including the 1997 information
provided throughout this Form 10-Q. The effect of such reclassification is not
material to either marketing and selling expenses or general and administrative
expenses, and does not have any effect on operating income or net income.
System operations expenses increased $5.7 million, or 18%, in 1998 as a result
of increases in customer usage expenses and costs associated with serving the
Company's increased number of customers, which include the costs of roaming
fraud, and the growing number of cell sites within the Company's systems. In
1998, the Company reduced its expenses related to roaming fraud by $2.0 million.
In total, system operations costs are expected to continue to increase as the
number of customers using and the number of cell sites within the Company's
systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for the Company's customers' use of their facilities as well as for
the Company's inbound roaming traffic on these facilities. Also included are
costs related to local interconnection to the landline network, toll charges and
expenses incurred by the Company when its customers use systems other than their
local systems ("outbound roaming"). These expenses are offset somewhat by
amounts the Company bills to its customers for outbound roaming.
Customer usage expenses increased $3.7 million, or 19%, in 1998. The increase in
1998 is primarily due to the increase in net outbound roaming expense, which has
resulted from the Company offering its customers increasingly larger service
footprints in which their calls are billed at local rates. In certain cases
these service areas include other operators' service areas. The Company pays
roaming rates to the other carriers for calls the Company's customers make in
these areas, while charging those customers a local rate which is usually lower
than the roaming rate. Also contributing to the increase in 1998 were costs
related to the increase in minutes used on the Company's systems, partially
offset
-5-
by the reduction in costs related to fraudulent use of the Company's customers'
cellular telephone numbers. These fraud-related costs totaled $1.3 million in
1998 and $3.3 million in 1997. The Company continues to implement procedures in
its markets to combat this fraud, which is primarily related to roaming usage.
Customer usage expenses represented 10% of service revenues in 1998 and 11% in
1997.
Maintenance, utility and cell site expenses increased $2.1 million, or 17%, in
1998. The increase primarily reflects a 30% increase in the number of cell sites
in the Company's systems, to 1,786 in 1998 from 1,377 in 1997. Monthly
maintenance, utility and cell site expenses totaled $2,699 and $3,018 per
average cell site in 1998 and 1997, respectively.
Marketing and selling expenses increased $12.2 million, or 32%, in 1998.
Marketing and selling expenses primarily consist of salaries, commissions and
expenses of field sales and retail personnel and offices; agent expenses;
corporate marketing department salaries and expenses; local advertising; and
public relations expenses. The increase was primarily due to a 26% rise in the
number of gross customer activations, to 198,000 in 1998 from 157,000 in 1997,
and also due to an increase in advertising expenses relative to total marketing
and selling expenses. Cost per gross customer activation, which includes
marketing and selling expenses and losses on equipment sales, decreased to $313
in 1998 from $324 in 1997.
Cost of equipment sold increased $2.8 million, or 15%, in 1998. The increase
reflects the growth in unit sales related to the rise in gross customer
activations made through the Company's direct and retail distribution channels,
offset somewhat by falling manufacturer prices per unit. The average cost to the
Company of a telephone unit sold, including accessories and installation, was
$137 in 1998 and $149 in 1997.
General and administrative expenses increased $15.1 million, or 34%, in 1998.
These expenses include the costs of operating the Company's local business
offices and its corporate expenses other than the corporate engineering and
marketing departments. The increase includes the effects of increases in
expenses required to serve the growing customer base in existing markets and an
expansion of both local administrative office and corporate staff, necessitated
by growth in the Company's business. Employee-related expenses increased $6.5
million, or 31%, in 1998, primarily due to increases in the number of customer
service and administrative employees. The Company is using an ongoing clustering
strategy to combine local and customer service operations wherever feasible in
order to gain operational efficiencies and reduce its per unit administrative
expenses. Monthly general and administrative expenses per customer decreased to
$11.16 in 1998 from $13.09 in 1997.
Operating cash flow increased $24.8 million, or 46%, to $78.4 million in 1998.
The improvement was primarily due to substantial growth in customers and service
revenues, the effects of improved operational efficiencies on cash operating
expenses and the effect of net acquisitions. Operating cash flow margins (as a
percent of service revenues) were 33.2% in 1998 and 29.9% in 1997.
Depreciation expense increased $14.4 million, or 67%, in 1998. The increase
reflects rising average fixed asset balances, which increased 42% in 1998, plus
a reduction in useful lives of certain assets beginning in 1998 which increased
depreciation expense by $3.5 million. Increased fixed asset balances resulted
from the increase in cell sites built to improve coverage and capacity in the
Company's markets and also from the acquisition of markets from BellSouth in
1997.
Operating Income before Minority Share
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-6-
Operating income before minority share totaled $33.2 million in 1998 and $23.4
million in 1997. The operating income margin was 14.0% in 1998 and 13.1% in
1997. The improvement in operating income and operating income margin reflects
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
1998; however, management anticipates that average monthly revenue per customer
will continue to decrease as local retail and inbound roaming revenue per minute
of use decline and as the Company further penetrates the consumer market.
Additionally, the Company expects expenses to increase during the remainder of
1998 as it incurs costs associated with both customer growth and cell sites
added.
Management believes there exists a seasonality in both service revenues, which
tend to increase more slowly in the first and fourth quarters, and operating
expenses, which tend to be higher in the fourth quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter. Additionally, competitors licensed to provide
personal communications services ("PCS") have initiated service in certain of
the Company's markets over the past two years. The Company expects PCS operators
to complete initial deployment of PCS in portions of all of the Company's
clusters by the end of 1998. The Company has increased its advertising,
particularly brand advertising, in 1997 and 1998 to promote the United States
Cellular(R) brand and distinguish the Company's service from other wireless
communications providers. The Company's management continues to monitor other
wireless communications providers' strategies to determine what effects
additional competition will have on the Company's future strategies and 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.
Investment and Other Income
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Investment and other income totaled $192.4 million in 1998 and $17.4 million in
1997. Gain on sale of cellular interests totaled $180.0 million in 1998,
reflecting gains recorded on the sales of the Company's investment interests in
ten markets, and also related to amounts received from Telephone and Data
Systems, Inc. ("TDS"), the Company's parent organization, pursuant to an
agreement between the Company and TDS. There were no gains in the first quarter
of 1997.
Investment income was $12.8 million in 1998 compared to $18.4 million in 1997.
Investment income primarily represents the Company's share of net income from
the markets managed by others that are accounted for by the equity method.
Investment income in 1998 was negatively impacted by the completion of the
exchange transaction with BellSouth in 1997 and the divestitures of certain
minority interests to AirTouch Communications ("AirTouch") in the first quarter
of 1998. See "Financial Resources and Liquidity - Acquisitions, Divestitures and
Exchanges" for further discussions of these transactions.
Interest and Income Taxes
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Interest expense totaled $10.1 million in 1998 compared to $5.6 million in 1997.
Interest expense in 1998 is primarily related to Liquid Yield Option Notes
("LYONs") ($4.0 million); the Company's 7.25% Notes issued during the third
quarter of 1997 ($5.7 million); and borrowings under the Company's revolving
credit facility with a series of banks ("Revolving Credit Facility") ($369,000).
Interest expense in 1997 was primarily related to LYONs ($3.7 million) and
borrowings under vendor financing agreements ($1.8 million).
-7-
In August 1997, the Company sold $250 million principal amount of 7.25% Notes
under a shelf registration statement, priced to yield 7.33% to maturity. The
Notes are unsecured and become due on August 15, 2007. Interest on the Notes is
payable semi-annually on February 15 and August 15 of each year. The
Notes will be redeemable, in whole or in part, at the option of the
Company at any time on or after August 15, 2004. All borrowings under
the vendor financing agreements were repaid in August 1997 with a portion
of the proceeds from the Notes offering.
The LYONs are zero coupon convertible debentures which accrete interest at 6%
annually, but do not require current cash payments of interest. All accreted
interest is added to the outstanding principal balance on June 15 and December
15 of each year.
The Revolving Credit Facility is a seven-year facility which was established in
1997 to replace the Company's Revolving Credit Agreement with TDS as its primary
short-term borrowing facility. Borrowings under this facility accrue interest at
the London InterBank Offered Rate ("LIBOR") plus 26.5 basis points (for a rate
of 6.0% at March 31, 1998). Interest payments are due quarterly; no principal
under the facility is due until August 29, 2004, on which date the Revolving
Credit Facility terminates. The Company borrowed and repaid amounts totaling $47
million during the first quarter of 1998.
Income tax expense was $84.5 million in 1998 and $13.9 million in 1997. In 1998,
$69.7 million of income tax expense related to the gains on sales of cellular
interests. The effective tax rates were 39% in 1998 and 43% in 1997.
The decrease in 1998's effective tax rate is primarily due to the gains on sales
of cellular interests; these gains are taxed at a lower rate than income from
operations. In 1998 and 1997, state income taxes and gains on sales of
cellular interests increased the effective rate above the statutory federal
income tax rate.
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. Subject to the
completion of the proposed USM Merger, as defined below, TDS intends to
terminate certain intercompany agreements between TDS and the Company, including
the Tax Allocation Agreement, and replace those agreements with policies on
substantially the same terms. See "Recent Developments" for further discussion
of the USM Merger.
Net Income
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Net income totaled $129.8 million in 1998 and $18.5 million in 1997. Earnings
per share was $1.49 in 1998 and $.21 in 1997. Net income and earnings per share
for 1998 included significant gains on the sales of cellular interests,
representing $110.2 million and $1.27 per share, respectively.
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 most of its construction costs and substantially all
of its operating expenses. The Company anticipates further increases in cellular
units in service, revenues and cell sites as it continues its growth strategy.
Operating cash flow may fluctuate from quarter to quarter depending on the
seasonality of each of these factors.
Cash flows from operating activities provided $48.3 million in 1998 and $53.5
million in 1997. Operating cash flow provided $78.4 million in 1998 and $53.6
million in 1997. Cash flows from other operating
-8-
activities (investment and other income, interest expense, changes in working
capital and changes in other assets and liabilities) required $30.1 million in
1998 and $104,000 in 1997.
Cash flows from financing activities provided $93,000 in 1998 and, in 1997,
required $5.8 million primarily for the repayment of borrowings under vendor
financing agreements.
Cash flows from investing activities provided $460,000 in 1998 and required
$51.5 million in 1997. The company received net cash proceeds totaling $118.9
million in 1998 related to sales of cellular interests. Cash distributions from
cellular entities in which the Company has an interest provided $4.5 million in
1998 and $9.3 million in 1997. Cash required for property, plant and equipment
and system development expenditures totaled $69.1 million in 1998, financed
primarily with internally generated cash and the proceeds from the sales of
cellular interests; and $53.1 million in 1997, financed primarily with
internally generated funds. These expenditures primarily represent the
construction of 38 and 49 cell sites in 1998 and 1997, respectively, plus other
plant additions and costs related to the development of the Company's office
systems. Acquisitions required $48.9 million in 1998.
Anticipated capital requirements for 1998 primarily reflect the Company's
construction and system expansion program. The Company's construction and system
expansion budget for 1998 is approximately $330 million, primarily for new cell
sites to expand and enhance the Company's coverage in its service areas and for
the enhancement of the Company's office systems.
Acquisitions, Divestitures and Exchanges
- ----------------------------------------
The Company assesses its cellular holdings on an ongoing basis in order to
maximize the benefits derived from clustering its markets. As the Company's
clusters have grown, the Company's focus has shifted toward exchanges and
divestitures of managed and investment interests. 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. The proceeds from these sales have been used to further the Company's
growth.
In the first three months of both 1998 and 1997, there were no completed
acquisitions or divestitures of majority interests. In the first three months of
1998, the Company acquired minority interests in several markets, representing
225,000 pops, for a total of $42.0 million in cash, most of which was borrowed
under the Company's Revolving Credit Facility.
In the first quarter of 1998, the Company divested minority interests in ten
markets, representing approximately 872,000 pops. In exchange, the Company
received approximately 3.9 million shares of AirTouch stock and cash and
receivables totaling $120.4 million. Approximately $28.7 million of the total
cash and receivables was pursuant to a contract right termination agreement
entered into between the Company and TDS. This agreement was related to two
interests which were sold directly by TDS to AirTouch and which were to be
acquired by the Company as part of a June 1996 agreement between the Company and
TDS. The contract right termination agreement enabled the Company to receive
cash equal to the value of the gain the Company would have realized had it
purchased the interests from TDS and sold them to AirTouch under terms similar
to those in the agreement between TDS and AirTouch.
As of March 31, 1998, the Company had agreements pending to acquire a majority
interest in one market and minority interests in six markets, representing
559,000 pops, for a total of $57.6 million in cash. Also at March 31, 1998, the
Company had an agreement pending to divest a minority interest in one market,
representing 63,000 pops, for approximately 236,000 shares of AirTouch stock.
-9-
Liquidity
- ---------
The Company anticipates that the aggregate resources required for the remainder
of 1998 will include approximately $261 million for capital spending and
approximately $58 million to complete pending acquisitions. The Company is
generating substantial cash from its operations and anticipates financing its
capital spending for 1998 primarily with internally generated cash, proceeds
from the sale of cellular interests and short-term borrowings. The Company had
$63 million of cash and cash equivalents at March 31, 1998. Additionally, the
Company has the entire $500 million remaining under its Revolving Credit
Facility.
Management believes that the nature of the interest rate bases related to the
Company's current and potential future debt financing sources do not subject the
Company to material market risk exposures.
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.
Recent Developments
- -------------------
On December 17, 1997, the Company received an offer from TDS to acquire all of
the issued Common Shares of the Company which TDS does not own pursuant to a
merger (the "USM Merger"), in exchange for a TDS tracking stock which tracks the
performance of the Company. The Company's Board of Directors appointed Mr.
Paul-Henri Denuit, an independent director of the Company, to a special
committee (the "Special Committee") of the Board to consider this offer. The
Special Committee retained the firm of Lazard Freres & Co. LLC as financial
advisor and Squire, Sanders & Dempsey L.L.P. as legal advisor to the Special
Committee. The Special Committee and its representatives have been conducting a
due diligence review and have met with representatives of TDS relating to the
TDS offer. The review by the Special Committee and its representatives is
continuing. However, the Special Committee has expressed significant
reservations about the TDS offer. At this time, there is no agreement between
the Company and TDS relating to the TDS offer and there can be no assurance that
an agreement will be reached or that, if an agreement is reached, it will be on
the terms proposed by TDS.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT This Management's Discussion and Analysis of Results of Operations and
Financial Condition and other sections of this Annual Report to Shareholders
contain "forward-looking" statements as defined in the Private Securities
Litigation Reform Act of 1995, that are based on current expectations, estimates
and projections. Statements that are not historical facts, including statements
about the Company's beliefs and expectations, are forward-looking statements.
These statements contain potential risks and uncertainties; therefore, actual
results may differ materially. The Company undertakes no obligation to update
publicly any forward-looking statements whether as a result of new information,
future events or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
markets in which the Company operates; advances in telecommunications
technology; changes in the telecommunications regulatory environment; pending
and future litigation; availability of future financing; start-up of PCS
operations; and unanticipated changes in growth in cellular customers,
penetration rates, churn rates and the mix of products and services offered in
the Company's markets. Readers should evaluate any statements in light of these
important factors.
-10-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Unaudited
---------
Three Months Ended
March 31,
-------------------------
1998 1997
----------- -----------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Service $ 236,344 $ 179,585
Equipment sales 8,813 4,999
----------- -----------
Total Operating Revenues 245,157 184,584
----------- -----------
OPERATING EXPENSES
System operations 36,943 31,229
Marketing and selling 50,001 37,802
Cost of equipment sold 20,748 17,994
General and administrative 59,043 43,953
Depreciation 35,920 21,509
Amortization of intangibles 9,347 8,652
----------- -----------
Total Operating Expenses 212,002 161,139
----------- -----------
OPERATING INCOME BEFORE MINORITY SHARE 33,155 23,445
Minority share of operating income (1,182) (2,865)
----------- -----------
OPERATING INCOME 31,973 20,580
----------- -----------
INVESTMENT AND OTHER INCOME
Investment income 12,788 18,383
Amortization of licenses related to investments (333) (532)
Interest income 1,660 625
Other (expense), net (1,727) (1,053)
Gain on sale of cellular and other investments 179,992 --
----------- -----------
Total Investment and Other Income 192,380 17,423
----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES 224,353 38,003
Interest expense - other 10,128 5,603
----------- -----------
INCOME BEFORE INCOME TAXES 214,225 32,400
Income tax expense 84,473 13,932
---------- -----------
NET INCOME $ 129,752 $ 18,468
=========== ===========
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON SHARES (000s) 87,239 86,148
EARNINGS PER COMMON AND
SERIES A COMMON SHARE - BASIC $ 1.49 $ .21
=========== ===========
EARNINGS PER COMMON AND
SERIES A COMMON SHARE - DILUTED $ 1.49 $ .21
=========== ===========
<FN>
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
</FN>
-11-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Three Months Ended
March 31,
-------------------------
1998 1997
------------ -----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 129,752 $ 18,468
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 45,267 30,161
Investment income (12,788) (18,383)
Gain on sale of cellular and other investments (179,992) --
Minority share of operating income 1,182 2,865
Other noncash expense 5,824 4,070
Change in accounts receivable 2,621 1,508
Change in accounts payable 3,461 2,003
Change in accrued taxes 3,431 6,198
Change in deferred taxes 54,289 4,897
Change in accrued interest (4,168) 33
Change in unearned revenue 1,350 1,476
Change in other assets and liabilities (1,916) 206
------------ -----------
48,313 53,502
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of vendor financing -- (5,830)
Common Shares issued 1,050 1,168
Capital (distributions) to minority partners (957) (1,110)
------------ -----------
93 (5,772)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (56,479) (45,828)
System development costs (12,614) (7,234)
Investments in and advances to investment entities (5,430) (6,547)
Distributions from investment entities 4,454 9,294
Proceeds from sale of cellular and other investments 118,892 --
Acquisitions, excluding cash acquired (48,900) --
Other investments 306 (522)
Change in temporary investments and marketable
non-equitable securities 232 (634)
------------ ----------
461 (51,471)
------------ ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 48,867 (3,741)
CASH AND CASH EQUIVALENTS-
Beginning of period 13,851 14,377
------------ ----------
End of period $ 62,718 $ 10,636
============ ==========
<FN>
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
</FN>
-12-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
March 31, 1998 December 31, 1997
---------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents
General funds $ 2,521 $ 13,851
Affiliated cash equivalents 60,197 --
------------- -------------
62,718 13,851
Temporary cash investments 427 218
Accounts Receivable
Customers 77,291 81,387
Roaming 31,313 30,689
Affiliates 1,269 170
Other 18,534 17,536
Inventory 9,777 11,836
Prepaid expenses 12,925 15,714
Other current assets 3,484 3,963
------------- -------------
217,738 175,364
------------- -------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 1,261,937 1,212,575
Less accumulated depreciation 306,387 272,322
------------- -------------
955,550 940,253
------------- -------------
INVESTMENTS
Licenses, net of accumulated amortization 1,142,450 1,150,924
Cellular entities 97,737 128,810
Notes and interest receivable 15,300 10,673
Marketable equity securities 189,026 --
Marketable non-equity securities 429 870
------------- -------------
1,444,942 1,291,277
------------- -------------
DEFERRED CHARGES
System development costs,
net of accumulated amortization 89,140 78,306
Other, net of accumulated amortization 33,991 23,716
------------- -------------
123,131 102,022
------------- -------------
Total Assets $ 2,741,361 $ 2,508,916
============= =============
<FN>
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
</FN>
-13-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(Unaudited)
March 31, 1998 December 31, 1997
-------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Notes payable $ -- $ 1,302
Accounts payable
Affiliates 2,504 2,466
Other 102,609 101,263
Accrued taxes 45,067 41,606
Accrued interest 2,366 6,534
Accrued compensation 12,020 9,112
Customer deposits and deferred revenues 22,369 21,019
Other current liabilities 19,534 20,934
-------------- --------------
206,469 204,236
-------------- --------------
LONG-TERM DEBT
6% zero coupon convertible debentures 269,300 265,330
7.25% unsecured notes 250,000 250,000
-------------- --------------
519,300 515,330
-------------- --------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 161,385 100,725
Other 4,433 5,397
-------------- --------------
165,818 106,122
-------------- --------------
MINORITY INTEREST 46,313 53,908
-------------- --------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 54,266 54,232
Series A Common Shares, par value $1
per share 33,006 33,006
Additional paid-in capital 1,317,175 1,285,530
Net unrealized gain on marketable equity
securities 12,710 --
Retained earnings 386,304 256,552
-------------- -------------
1,803,461 1,629,320
-------------- -------------
Total Liabilities and Shareholders' Equity $ 2,741,361 $ 2,508,916
============== =============
<FN>
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
</FN>
-14-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's
latest annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring items) necessary to
present fairly the financial position as of March 31, 1998 and December
31, 1997, and the results of operations and cash flows for the three
months ended March 31, 1998 and 1997. The results of operations for the
three months ended March 31, 1998 and 1997, are not necessarily indicative
of the results to be expected for the full year.
2. The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," effective December 31, 1997. Earnings per
Common Share for 1997 have been restated to conform to current period
presentation. The adoption of SFAS No. 128 had no effect on Earnings per
Common Share - Basic or Diluted for 1997.
The amounts 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,
-------------------------
1998 1997
----------- -----------
(Dollars and Common Shares
in thousands)
Net Income used in Earnings Per
Share-Basic and Diluted $ 129,752 $ 18,468
=========== ==========
Weighted average number of Common
Shares used in Earnings Per Share-Basic 87,239 86,148
Effect of Dilutive Securities:
Stock Options and Stock Appreciation
Rights 39 50
----------- ----------
Weighted Average Number of Common
Shares used in Earnings Per Share-Diluted 87,278 86,198
=========== ==========
-15-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Common and Series A Common Share for the three months ended
March 31, 1998, contain significant income amounts related to gains on the
sale of cellular and other investments. Excluding the after-tax effect of
these gains, basic earnings per share was $.22 and diluted earnings per
share was $.22 for the three months ended March 31, 1998.
3. Assuming that acquisitions accounted for as purchases during the period
January 1, 1997, to March 31, 1998, had taken place on January 1, 1997,
pro forma results of operations would have been as follows (there were no
majority acquisitions with a material effect on earnings from January 1,
1998 to March 31, 1998):
Three Months Ended
March 31, 1997
--------------------
(Dollars in thousands,
except per share amounts)
Service Revenues $ 199,307
Equipment Sales 6,912
Interest Expense (including cost to finance acquisitions) 6,493
Net Income 20,918
Earnings per Common and Series A Common Share - Basic .24
Earnings per Common and Series A Common Share - Diluted $ .24
4. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first three months of 1998. There were no cellular licenses acquired
during the first three months of 1997. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed and
Common Shares issued.
Three Months Ended
March 31, 1998
--------------------
(Dollars in thousands)
Cellular licenses $ 34,080
Other investments 7,000
Minority interest 7,820
-----------------
Decrease in cash due to acquisitions $ 48,900
=================
-16-
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,
-----------------------
1998 1997
---------- ---------
(Dollars in thousands)
Interest paid $ 9,091 $ 1,755
Income taxes paid 28,751 2,473
Noncash interest expense 4,987 3,847
Common Shares issued by USM
for conversion of USM Preferred Stock
and TDS Preferred Shares $ -- $ 1,121
5. Gain on sale of cellular and other investments in 1998 primarily reflects
gains recorded on the sale of the Company's minority interests in ten
markets and on cash received from TDS pursuant to an agreement between
the Company and TDS.
6. Other Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"), which
requires companies to report all of the changes in shareholder's equity,
except those resulting from investment by owners or distribution to
owners ("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.
Three Months Ended
March 31,
1998 1997
------------ -----------
(Dollars in thousands)
Net Income $ 129,752 $ 18,468
Other Comprehensive Income -
Unrealized gains on securities, net of
tax of $6,844 12,710 --
----------- -----------
Comprehensive Income $ 142,462 $ 18,468
=========== ===========
-17-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. On January 30, 1998, the Company completed a sale in which the Company
received certain marketable equity securities (see note 5). At March 31,
1998, these noncurrent marketable equity securities are carried at the
lower of cost ($169.5 million) or market value ($189.0 million) resulting
in an unrealized gain of $12.7 million net of taxes ($6.8 million). The
market value for the marketable equity securities is based on quoted
market prices.
-18-
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibit 11 - Statement regarding computation of per share earnings is
included herein as footnote 2 to the financial statements.
(b) Exhibit 12 - Statement regarding computation of ratios.
(c) Exhibit 27 - Financial Data Schedule.
(d) No reports on Form 8-K were filed during the quarter ended March 31,
1998.
-19-
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 13, 1998
------------------ -----------------------------------
H. Donald Nelson
President
(Chief Executive Officer)
Date May 13, 1998
------------------ -----------------------------------
Kenneth R. Meyers
Senior Vice President-Finance and Treasurer
(Chief Financial Officer)
Date May 13, 1998
------------------ -----------------------------------
Phillip A. Lorenzini
Controller
(Principal Accounting Officer)
-20-