MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. The
Company is an 80.7%-owned subsidiary of Telephone and Data Systems, Inc.
("TDS").
The Company owned either majority or minority cellular interests in 180 markets
at December 31, 1999, representing 26,395,000 population equivalents ("pops").
The Company included the operations of 139 majority-owned and managed cellular
markets, representing 24.0 million pops, in consolidated operations
("consolidated markets") as of December 31, 1999. Minority interests in 35
markets, representing 2.3 million pops, were accounted for using the equity
method and were included in investment income at that date. All other interests
were accounted for using the cost method. Following is a table of summarized
operating data for the Company's consolidated operations.
YEAR ENDED OR AT DECEMBER 31,
1999 1998 1997
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Total market population
(in thousands) (1) 25,044 24,683 24,034
Customers 2,602,000 2,183,000 1,710,000
Market penetration 10.39% 8.84% 7.11%
Markets in operation 139 138 134
Total employees 4,800 4,800 4,600
Cell sites in service 2,300 2,065 1,748
Average monthly revenue
per customer $ 48.11 $ 48.61 $ 54.18
Churn rate per month 2.1% 1.9% 1.9%
Marketing cost per gross
customer addition $ 346 $ 317 $ 318
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(1) CALCULATED USING CLARITAS POPULATION ESTIMATES FOR 1999, 1998 AND 1997,
RESPECTIVELY.
The growth in the Company's operating income in 1999 and 1998, which includes
100% of the revenues and expenses of its consolidated markets plus its
corporate office operations, primarily reflects improvements in the Company's
overall operations compared to 1998 and 1997. The improvements resulted from
growth in the Company's customer base and revenues in each year, coupled with
continuing economies of scale in both years. Operating revenues, driven by
19% and 28% increases in customers served and 31% and 12% increases in
inbound roaming revenue in 1999 and 1998, respectively, rose $254.7 million,
or 22%, in 1999 and $285.5 million, or 33%, in 1998. Cash operating expenses
rose $151.8 million, or 19%, in 1999 and $164.6 million, or 27%, in 1998.
Operating cash flow (operating income plus depreciation and amortization
expense) increased $103.0 million, or 27%, in 1999 and $120.9 million, or
46%, in 1998. Depreciation and amortization expense increased $23.2 million,
or 11%, in 1999 and $74.4 million, or 56%, in 1998. Operating income
increased $79.8 million, or 45%, in 1999 and $46.5 million, or 36% in 1998.
The Company's operating results in all three years were impacted by the exchange
of markets with BellSouth Corporation ("BellSouth") in 1997, which had a
slightly positive effect on operating income, net income and earnings per share
in all three years.
Investment and other income increased $46.5 million to $298.3 million in 1999,
due primarily to an increase of $51.6 million in gains on sales of cellular and
other investments, partially offset by a $12.1 million, or 28%, reduction in
investment income. Investment and other income increased $156.5 million, or
164%, in 1998, due primarily to a $184.8 million increase in gains on sales of
cellular and other investments, partially offset by a $34.7 million, or 45%,
decrease in investment income.
Gains on sales of cellular and other investments in 1999 primarily resulted from
the effect of the AirTouch Communications, Inc. ("ATI") merger with Vodafone
Group plc ("VOD") in June 1999. As a result of the merger, the Company received
approximately 2.0 million VOD American Depository Receipts ("ADRs") (now 10.2
million ADRs after a five-for-one stock split) plus $36.9 million in cash in
exchange for its 4.1 million ATI shares. In 1999, the Company recognized in
earnings a gain of $259.5 million on the difference between its historical basis
in the ATI shares ($181.1 million) and the merger date value of the VOD ADRs
plus the cash received (an aggregate of $440.6 million). Gains on sales of
cellular and other investments in 1998 primarily resulted from the sale of
certain minority interests to ATI, from which the Company received consideration
including the 4.1 million ATI shares.
Net income totaled $300.8 million in 1999, an increase of $83.8 million, or 39%,
from 1998, and totaled $216.9 million in 1998, an increase of $105.4 million, or
95%, from 1997. Diluted earnings per share totaled $3.28 in 1999, an increase of
$.89, or 37%, from 1998, and totaled $2.39 in 1998, an increase of $1.10, or
85%, from 1997. Excluding the after-tax effects of gains, net income increased
$51.8 million, or 58%, in 1999 and decreased $6.6 million, or 7%, in 1998.
Excluding the after-tax effects of gains, diluted earnings per share increased
$.57, or 56%, in 1999 and decreased $.08, or 7%, in 1998. The increases in 1999
reflect an increase in operating income, partially offset by a decrease in
investment income and an increase in income tax expense. The decreases in 1998
reflect an increase in operating income, more than offset by a decrease in
investment income and increases in interest expense and income tax expense.
In all three years, both net income and earnings per share included gains on the
sales of cellular and other investments. A summary of the after-tax effects of
gains on net income and diluted earnings per share in each period is shown as
follows.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, YEAR ENDED DECEMBER 31,
except per share amounts) 1999 1998 1997
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Net income before
after-tax effects of gains $ 140,579 $ 88,742 $ 95,302
Add: After-tax effects of gains 160,179 128,205 16,237
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Net income as reported $ 300,758 $ 216,947 $ 111,539
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Diluted Earnings per share
before after-tax effects
of gains $ 1.59 $ 1.02 $ 1.10
Add: After-tax effects of gains 1.69 1.37 .19
Diluted earnings per share $ 3.28 $ 2.39 $ 1.29
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[GRAPHIC]
OPERATING REVENUES
OPERATING REVENUES totaled $1.417 billion in 1999, up $254.7 million, or 22%,
over 1998. Operating revenues totaled $1.162 billion in 1998, up $285.5 million,
or 33%, over 1997.
SERVICE REVENUES primarily consist of: (i) charges for access, airtime and
value-added services provided to the Company's local retail customers who use
the local systems operated by the Company ("local retail"); (ii) charges to
customers of other systems who use the Company's cellular systems when roaming
("inbound roaming"); and (iii) charges for long-distance calls made on the
Company's systems. Service revenues totaled $1.366 billion in 1999, up $243.0
million, or 22%, over 1998. Service revenues totaled $1.123 billion in 1998, up
$270.5 million, or 32%, over 1997. The increases in both years were primarily
due to the growing number of local retail customers and also due to the increase
in inbound roaming minutes of use on the Company's systems. Monthly service
revenue per customer averaged $48.11 in 1999, a 1% decrease from 1998, and
averaged $48.61 in 1998, a 10% decrease from the $54.18 average in 1997.
LOCAL RETAIL REVENUE increased $157.2 million, or 20%, in 1999 and $204.2
million, or 36%, in 1998. Growth in the Company's customer base was the primary
reason for the increase in local retail revenue in both years. The number of
customers increased 19% to 2,602,000 at December 31, 1999, and increased 28% to
2,183,000 at December 31, 1998. Management anticipates that overall growth in
the Company's customer base will continue to slow down in the future, primarily
as a result of an increase in the number of competitors in its markets.
Average monthly local retail revenue per customer declined 2% to $32.74 in 1999
from $33.44 in 1998, and declined 7% in 1998 from $36.11 in 1997. Monthly local
retail minutes of use per customer was 115 in 1999, 105 in 1998 and 103 in 1997.
The increases in monthly local retail minutes of use in both years were driven
by the Company's focus on designing incentive programs and rate plans to
stimulate overall usage. Average revenue per minute of use totaled $.29 in 1999
compared to $.32 in 1998 and $.35 in 1997. The decreases in both 1999 and 1998
are a result of competitive pressures and the Company's increasing use of
pricing and other incentive programs to stimulate overall usage. Management
anticipates that the Company's average local retail revenue per minute of use
will continue to decline in the future, reflecting the continued effect of the
previously mentioned factors.
INBOUND ROAMING REVENUE increased $76.1 million, or 31%, in 1999 and $25.1
million, or 12%, in 1998. The growth in inbound roaming revenue in 1999 and 1998
is affected by an increase in roaming minutes used on the Company's systems and
a decrease in revenue per minute. The number of minutes used by customers from
other wireless systems when roaming in the Company's service areas increased in
both 1999 and 1998, while average inbound roaming revenue per minute of use also
decreased in both years, due to the downward trend in negotiated rates. Both the
increase in minutes of use and the decrease in revenue per minute of use were
significantly affected by certain pricing programs offered by other wireless
companies beginning in the second half of 1998. Wireless customers who sign up
for these programs are given price incentives to roam, and many of those
customers travel in the Company's markets, thus driving an increase in the
Company's inbound roaming minutes of use. Management anticipates that the
increase in inbound roaming minutes of use will be slower in 2000 as the effect
of these new pricing programs becomes present in all periods of comparison.
Additionally, as new wireless operators begin service in the Company's markets,
the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Company's roaming partners could switch their business to these new operators,
further slowing growth in inbound roaming minutes of use. Management also
anticipates that average inbound roaming revenue per minute of use will continue
to decline in the future, reflecting the continued effect of the previously
mentioned factors.
Average monthly inbound roaming revenue per Company customer averaged $11.22 in
1999, $10.50 in 1998 and $13.81 in 1997. The increase in monthly inbound roaming
revenue per Company customer in 1999 is attributable to a larger increase in
inbound roaming revenue than in the Company's customer base; the reverse was
true in 1998, resulting in the decline in monthly inbound roaming revenue per
Company customer.
LONG-DISTANCE REVENUE increased $9.3 million, or 9%, in 1999 and $39.6 million,
or 61%, in 1998 as the volume of long-distance calls billed by the Company
increased, primarily from inbound roamers using the Company's systems to make
long-distance calls. Growth in long-distance revenue in 1999 was slowed by price
reductions primarily related to long-distance charges on roaming minutes of use.
These reductions, similar to the price reductions on roaming airtime charges,
are a continuation of the industry trend toward reduced per minute prices. The
price reductions also reduced the growth in the outbound roaming expense
component of system operations expense by approximately the same amount,
resulting in no material effect on the Company's operating cash flow or
operating income. Monthly long-distance revenue per customer averaged $4.00 in
1999, $4.51 in 1998 and $4.10 in 1997.
EQUIPMENT SALES REVENUES increased $11.8 million, or 30%, in 1999 and $15.0
million, or 63%, in 1998. The increases in equipment sales revenues reflect the
12% and 20% increases, respectively, in the number of gross customer
activations, to 1,000,000 in 1999 from 896,000 in 1998 and 746,000 in 1997, plus
an increase in the number of higher priced dual-mode units and the volume of
accessories sold in both years. Most of the gross customer activations were
produced by the Company's direct and retail distribution channels; activations
from these channels usually generate sales of cellular telephone units. The
increases in sales of dual-mode units in both years are related to the Company's
ongoing conversion of its systems to digital coverage, which enables the Company
to offer its customers more features, better clarity and increased roaming
capabilities. The increases in the volume of accessories sold in both years
reflect an increased emphasis on the sale of accessories at retail prices in the
Company's retail locations.
[GRAPHIC]
OPERATING EXPENSES
OPERATING EXPENSES totaled $1.161 billion in 1999, up $174.9 million, or 18%,
over 1998. Operating expenses totaled $986.4 million in 1998, up $239.0
million, or 32%, over 1997.
SYSTEM OPERATIONS expenses increased $15.2 million, or 8%, in 1999, and $40.5
million, or 26%, in 1998. The increases in both years are primarily a result
of increases in customer usage expenses and costs associated with serving the
Company's increased number of customers and the growing number of cell sites
within the Company's systems. In 1999, the increase in customer usage
expenses was reduced by lower costs per minute of use related to the changes
in roaming pricing discussed previously. In total, system operations costs
are expected to continue to increase as the number of customers using and the
number of cell sites within the Company's systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for the Company's customers' use of their facilities as well as for
the Company's inbound roaming traffic on these facilities. Also included are
costs related to local interconnection to the landline network, long-distance
charges and expenses incurred by the Company when its customers use systems
other than their local systems ("outbound roaming"). These expenses are offset
somewhat by amounts the Company bills to its customers for outbound roaming.
Customer usage expenses increased $3.3 million, or 3%, in 1999 and $30.3
million, or 30%, in 1998. In 1999, the increase is pri-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
marily due to the $13.6 million increase in costs related to the 10% increase in
average monthly local minutes of use per customer on the Company's systems as
well as the substantial increase in inbound roaming minutes of use. Net outbound
roaming expense decreased $10.7 million in 1999, reflecting growth in minutes
used by the Company's customers on other systems which was more than offset by
lower costs per roaming minute of use. These lower costs are related to the
lower roaming prices in the industry discussed previously. In 1998, the increase
in customer usage expenses was primarily due to the $28.8 million increase in
net roaming expense. This increase was driven by the substantial increase in
outbound roaming charges incurred when the Company's customers use other
operators' service areas which were included in the customer's "home" territory.
These calls were billed at the customer's local rate, but the Company was
charged a roaming rate by the other operators which was usually higher than that
local rate. Customer usage expenses represented 10% of service revenues in 1999
and 12% in 1998 and 1997.
Maintenance, utility and cell site expenses increased $11.8 million, or 19%, in
1999, and $10.2 million, or 19%, in 1998. The increase primarily reflects an
increase in the number of cell sites in the Company's systems, to 2,300 in 1999
from 2,065 in 1998 and 1,748 in 1997.
MARKETING AND SELLING EXPENSES increased $43.9 million, or 19%, in 1999, and
$49.9 million, or 28%, in 1998. Marketing and selling expenses primarily consist
of salaries, commissions and expenses of field sales and retail personnel and
offices; agent expenses; corporate marketing department salaries and expenses;
local advertising; and public relations expenses. The increases in both years
were primarily due to the respective 12% and 20% rises in the number of gross
customer activations. In 1999, the Company changed to a new U.S. CellularSM
brand name and logo, and incurred additional expenses to roll out new marketing
materials and signage.
Marketing cost per gross customer activation, which includes marketing and
selling expenses and losses on equipment sales, increased 9% to $346 in 1999
from $317 in 1998, and decreased less than 1% in 1998 from $318 in 1997. The
increase in cost per gross customer activation in 1999 was primarily driven by
additional advertising expenses incurred to promote the Company's new brand and
to distinguish the Company's service offerings from those of its competitors; an
increase in commissions paid to agents resulting from increase in the percent of
gross activations which were produced by agents; and an increase in losses on
equipment sales, resulting from the sale of more dual-mode units, which on
average generate greater equipment losses than the sale of analog units.
COST OF EQUIPMENT SOLD increased $29.7 million, or 31%, in 1999, and $12.1
million, or 15%, in 1998. The increases in both years reflect the growth in unit
sales related to the respective 12% and 20% increase in gross customer
activations as well as the impact of selling more higher cost dual-mode units in
1999. Also contributing to the increases in both years were greater volumes of
sales of accessories.
GENERAL AND ADMINISTRATIVE EXPENSES increased $63.0 million, or 24%, in 1999 and
$62.1 million, or 31%, in 1998. These expenses include the costs of operating
the Company's local business offices and its corporate expenses other than the
corporate engineering and marketing departments. The increases in both years
include the effects of increases in expenses required to serve the growing
customer base in the Company's markets and other expenses incurred related to
the growth in the Company's business. The Company incurred additional costs in
1999 and 1998 related to its Communications Centers, which were created to
centralize certain customer service functions, and incurred additional costs by
providing digital phone units to customers who migrated from analog to digital
rate plans. In 1999, the Company incurred costs, which could no longer be
capitalized beginning in January 1999, related to its conversion to a new
billing system. Employee-related expenses increased $27.6 million, or 23%, in
1999 and $27.3 million, or 29%, in 1998. The increase in employee-related
expenses in 1999 was primarily due to an increase in deferred compensation
expense resulting from the Company's higher stock price. In 1998, the increase
was primarily due to an increase in the number of customer service and
administrative employees. Monthly general and administrative expenses per
customer increased 1% to $11.47 in 1999 from $11.37 in 1998, and decreased 11%
in 1998 from $12.74 in 1997. General and administrative expenses represented 24%
of service revenues in 1999, 23% in 1998 and 24% in 1997.
Operating cash flow increased $103.0 million, or 27%, to $485.8 million in 1999
and increased $120.9 million, or 46%, to $382.9 million in 1998. Including
noncash stock-based compensation expense, operating cash flow would have been
$494.4 million in 1999, $386.0 million in 1998 and $264.5 million in 1997. The
improvements in 1999 and 1998 were primarily due to substantial growth in
customers and service revenues and the effects of continued operational
efficiencies on cash operating expenses. Operating cash flow margins (as a
percent of service revenues) were 35.6% in 1999, 34.1% in 1998 and 30.7% in
1997.
DEPRECIATION EXPENSE increased $17.7 million, or 11%, in 1999 and $69.6 million,
or 71%, in 1998. The increases reflect rising average fixed asset balances,
which increased 14% in 1999 and 27% in 1998. Increased fixed asset balances in
both 1999 and 1998 resulted from the addition of new cell sites built to improve
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
coverage and capacity in the Company's markets and from upgrades to provide
digital service in more of the Company's service areas. In 1998, the Company
reduced the useful lives of certain assets which increased depreciation by
approximately $23.2 million.
AMORTIZATION OF INTANGIBLES increased $5.5 million, or 14%, in 1999 and $4.8
million, or 14%, in 1998. Beginning October 1, 1999, capitalized development
costs related to the Company's new billing and information system, totaling
approximately $118 million, are being amortized over a period of seven years.
Annual amortization of these costs is expected to be approximately $17 million.
In 1998, the increase in amortization of intangibles primarily reflects an
increase in investment in licenses related to acquisitions made during the year
and to the BellSouth exchange completed in 1997.
[GRAPHIC]
OPERATING INCOME
Operating income totaled $255.8 million in 1999, a 45% increase over 1998.
Operating income totaled $176.1 million in 1998, a 36% increase over 1997. The
operating income margins were 18.7% in 1999, 15.7% in 1998 and 15.2% in 1997.
The improvements in operating income and operating income margins in 1999 and
1998 reflect increased revenues resulting from growth in the number of customers
served by the Company's systems, the increased minutes of use on the Company's
systems from both local customers and inbound roamers and the effect of
continued operational efficiencies on total operating expenses.
The Company expects service revenues to continue to grow during 2000; however,
management anticipates that average monthly revenue per customer will decrease,
as local retail and inbound roaming revenue per minute of use decline and as the
Company further penetrates the consumer market. Additionally, the Company
expects expenses to increase during 2000 as it incurs costs associated with both
customer growth and fixed assets added.
Although service revenues increased 22%, the Company's customer base
increased by 19% and average monthly revenue per customer decreased less than
1% in 1999, management does not expect service revenues to continue to grow
faster than the Company's customer base in 2000 for the reasons stated
previously. Management continues to believe there exists a seasonality in
both service revenues, which tend to increase more slowly in the first and
fourth quarters, and operating expenses, which tend to be higher in the
fourth quarter due to increased marketing activities and customer growth,
which may cause operating income to vary from quarter to quarter.
Additionally, competitors licensed to provide personal communications
services ("PCS") have initiated service in certain of the Company's markets
over the past three-and-a-half years. The Company expects PCS operators to
continue deployment of PCS in portions of all of the Company's clusters
throughout 2000. The Company has increased its advertising since 1997 to
promote its brand and distinguish the Company's service from other wireless
communications providers. The Company's management continues to monitor other
wireless communications providers' strategies to determine how additional
competition is affecting the Company's results. While the effects of
additional wireless competition have slowed customer growth in certain of the
Company's markets, the overall effect on the Company's total customer growth
to date has not been material. However, management anticipates that customer
growth will be slower in the future, primarily as a result of the increase in
the number of competitors in its markets.
INVESTMENT AND OTHER INCOME
INVESTMENT AND OTHER INCOME totaled $298.3 million in 1999, $251.8 million in
1998 and $95.3 million in 1997. Gain on sale of cellular and other investments
totaled $266.7 million in 1999, primarily due to the ATI-VOD merger. Gain on
sale of cellular and other investments totaled $215.2 million in 1998 from sales
of the Company's majority interest in one market and minority interests in
several markets, and also related to cash received from TDS pursuant to an
agreement between the Company and TDS. Gains totaling $30.3 million were
recorded in 1997 from sales of the Company's majority interest in one market
and minority interests in two other markets, and on cash received from the
settlement of a legal matter.
INVESTMENT INCOME was $30.4 million in 1999, $42.5 million in 1998, and $77.1
million in 1997. Investment income primarily represents the Company's share of
net income from the markets
managed by others that are accounted for by the equity method. The
aggregate income from the markets in which the Company had interests in both
1998 and 1999 decreased in 1999, reducing investment income. Investment
income in 1999 and 1998 was negatively impacted by the completion of the
exchange transaction with BellSouth in 1997, by the divestitures of certain
minority interests to ATI in the first half of 1998 and by sales of other
minority interests during 1999, 1998 and 1997. See "Financial Resources and
Liquidity - Acquisitions and Divestitures" for further discussion of the ATI
transactions.
INTEREST AND INCOME TAXES
INTEREST EXPENSE totaled $38.1 million in 1999, $39.8 million in 1998 and $29.4
million in 1997. Interest expense in 1999 is primarily related to Liquid Yield
Option Notes ("LYONs") ($17.6 million); the Company's 7.25% Notes (the "Notes")
($18.5 million); and the Company's revolving credit facility with a series of
banks ("Revolving Credit Facility") ($782,000). Interest expense in 1998 was
primarily related to LYONs ($16.5 million), the Notes ($18.5 million) and the
Revolving Credit Facility ($1.1 million). Interest expense in 1997 was primarily
related to LYONs ($15.5 million), the Notes ($6.4 million), borrowings under
vendor financing agreements ($4.7 million) and borrowings under the Revolving
Credit Agreement with Telephone and Data Systems, Inc, ("TDS"), the Company's
parent organization ($1.9 million).
The LYONs are zero coupon convertible debentures which accrete interest at 6%
annually, but do not require current cash payments of interest. All accreted
interest is added to the outstanding principal balance on June 15 and December
15 of each year.
The Company's $250 million principal amount of Notes are unsecured and become
due in August 2007. Interest on the Notes is payable semi-annually on February
15 and August 15 of each year.
The Revolving Credit Facility is a seven-year facility which was established in
1997. Borrowings under this facility accrue interest at the London InterBank
Offered Rate ("LIBOR") plus 26.5 basis points (for a rate of 6.1% at December
31, 1999). Interest and principal are due the last day of the borrowing period,
as selected by the borrower, of either seven days or one, two, three or six
months; any borrowings made under the facility are short-term in nature and
automatically renew until they are repaid. The Company pays facility and
administrative fees totaling $710,000 per year in addition to interest on any
borrowings; these fees are recorded as interest expense. Any borrowings
outstanding in August 2004, the termination date of the Revolving Credit
Facility, are due and payable at that time along with any accrued interest. The
Company borrowed and repaid amounts totaling $57 million during 1998; no
borrowings were made during 1999 or 1997.
INCOME TAX EXPENSE was $215.3 million in 1999, $171.2 million in 1998 and $83.9
million in 1997. In 1999, 1998 and 1997, $106.6 million, $86.9 million and $14.1
million of income tax expense, respectively, related to gains on sales of
cellular and other investments. The overall effective tax rates were 42% in
1999, 44% in 1998 and 43% in 1997. The variances in each year's effective tax
rate is primarily related to gains on sales of cellular and other investments in
all years, which have varying tax implications depending upon the structure of
the transactions involved.
TDS and the Company are parties to a Tax Allocation Agreement, pursuant to which
the Company is included in a consolidated federal income tax return with other
members of the TDS consolidated group. For financial reporting purposes, the
Company computes federal income taxes as if it were filing a separate return as
its own affiliated group and was not included in the TDS group.
NET INCOME
NET INCOME totaled $300.8 million in 1999, $216.9 million in 1998 and $111.5
million in 1997. Diluted earnings per share was $3.28 in 1999, $2.39 in 1998 and
$1.29 in 1997. Net income and earnings per share for all three years included
significant after-tax gains on the sales of cellular and other investments,
representing $160.2 million and $1.69 per share in 1999, $128.2 million and
$1.35 per share in 1998 and $16.2 million and $0.19 per share in 1997. Excluding
the after-tax effect of these gains, net income would have been $140.6 million,
or $1.59 per share, in 1999, $88.7 million, or $1.02 per share in 1998 and $95.3
million, or $1.10 per share, in 1997.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Management
believes that this statement will not have a material effect on results of
operations and financial position of the Company.
REVENUE RECOGNITION
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is effective
beginning in the first quarter of 2000. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
Management believes that this bulletin will not have a material effect on
results of operations or the financial position of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL RESOURCES AND LIQUIDITY
The Company operates a capital- and marketing-intensive business. In recent
years, the Company has generated operating cash flow and received cash proceeds
from divestitures to fund most of its construction costs and substantially all
of its operating expenses. The Company anticipates further increases in cellular
units in service, revenues, operating cash flow and fixed asset additions in the
future. Operating cash flow may fluctuate from quarter to quarter depending on
the seasonality of each of these growth factors.
CASH FLOWS FROM OPERATING ACTIVITIES provided $333.2 million in 1999, $311.1
million in 1998 and $222.1 million in 1997. Operating cash flow provided $485.8
million in 1999, $382.9 million in 1998 and $261.9 million in 1997. Cash flows
from other operating activities (investment and other income, interest expense,
income taxes, changes in working capital and changes in other assets and
liabilities) required $152.6 million in 1999, $71.8 million in 1998 and $39.8
million in 1997. Income taxes and interest paid totaled $110.5 million in 1999,
$120.0 million in 1998 and $47.1 million in 1997.
[GRAPHIC]
CASH FLOWS FROM INVESTING ACTIVITIES required $190.4 million in 1999, $270.2
million in 1998 and $358.5 million in 1997. Cash required for property, plant
and equipment and system development expenditures totaled $277.4 million in
1999, $320.4 million in 1998 and $318.7 million in 1997. In 1999 and 1998, these
expenditures were financed primarily with internally generated cash and the
proceeds from the sales of cellular interests. In 1997, these expenditures were
financed primarily with internally generated cash and the proceeds of the Notes
offering. These expenditures primarily represent the construction of 225, 281
and 331 cell sites in 1999, 1998 and 1997, respectively, plus other plant
additions and costs related to the development of the Company's office systems.
In 1999 and 1998, other plant additions included significant amounts related to
the replacement of retired assets and the changeout of analog radio equipment
for digital radio equipment. Acquisitions required $29.8 million in 1999, $120.0
million in 1998 and $138.4 million in 1997. The Company received net cash
proceeds totaling $96.0 million in 1999, $148.3 million in 1998 and $61.1
million in 1997 related to sales of cellular and other investments. Cash
distributions from cellular entities in which the Company has an interest
provided $24.4 million in 1999, $27.7 million in 1998 and $52.4 million in 1997.
CASH FLOWS FROM FINANCING ACTIVITIES provided $2.9 million in 1999, required
$2.7 million in 1998 and provided $135.9 million in 1997. In 1998, the Company
borrowed and repaid $57 million under the Revolving Credit Facility. In 1997,
the Notes offering provided $243.1 million of cash. A portion of the proceeds
from the Notes offering was used to repay all outstanding borrowings under the
Revolving Credit Agreement with TDS and under vendor financing agreements,
aggregating $160.5 million. Repayments of borrowings under vendor financing
agreements earlier in 1997 totaled $13.7 million.
Anticipated capital requirements for 2000 primarily reflect the Company's plans
for construction and system expansion. The Company's construction and system
expansion budget for 2000 is approximately $330 million, to expand and enhance
the Company's coverage in its service areas, including the addition of digital
service capabilities to its systems, and to enhance the Company's office
systems.
ACQUISITIONS, EXCHANGES AND DIVESTITURES
The Company assesses its cellular holdings on an ongoing basis in order to
maximize the benefits derived from clustering its markets. Over the past few
years, the Company has completed exchanges of controlling interests in its less
strategic markets for controlling interests in markets which better complement
its clusters. The Company has also completed outright sales of other less
strategic markets, and has purchased controlling interests in markets which
enhance its clusters. The proceeds from any sales have been used to further the
Company's growth.
ACQUISITIONS
In 1999, the Company acquired a majority interest in one market and minority
interests in several markets in which the Company currently owns a majority
interest, representing approximately 245,000 pops, for a total of $31.5 million.
In 1998, the Company acquired majority interests in six markets and minority
interests in several markets, representing approximately 1.3 million pops, for a
total consideration of $168.3 million,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
consisting of cash and approximately 46,000 USM Common Shares. The minority
interests acquired were in markets in which the Company currently owns both
majority and minority interests.
In 1997, the Company purchased majority interests in two markets and several
minority interests, representing approximately 534,000 pops. The total
consideration paid for these purchases, primarily in the form of cash and USM
Common Shares issued to TDS to reimburse TDS for the value of TDS Common Shares
issued to third parties, totaled $81.4 million.
EXCHANGES
In 1997, the Company completed an exchange of properties with BellSouth.
Pursuant to the exchange, the Company received majority interests representing
approximately 4.0 million pops in exchange for majority interests representing
approximately 2.0 million pops, minority interests representing approximately
1.2 million pops, and a net amount of $86.7 million in cash. The majority
interests the Company received are in 12 markets adjacent to its clusters in
Illinois, Iowa and Wisconsin.
DIVESTITURES
In 1999, the Company divested a majority interest in one market and minority
interests in three markets, representing approximately 612,000 pops, for $59.7
million in cash and receivables. The majority interest was divested to BellSouth
as part of the exchange transaction, which was substantially completed in
November 1997; therefore, no gain or loss was recorded on this transaction.
In 1998, the Company divested a majority interest in one market and minority
interests in several markets, representing approximately 1.1 million pops. In
exchange, the Company received approximately 4.1 million shares of ATI stock and
cash totaling $148.4 million. Approximately $28.7 million of the total cash
received was pursuant to a contract right termination agreement entered into
between the Company and TDS. This agreement was related to two interests which
were sold directly by TDS to ATI and which were to be acquired by the Company as
part of a June 1996 agreement between the Company and TDS. The contract right
termination agreement enabled the Company to receive cash equal to the value of
the gain the Company would have realized had it purchased the interests from TDS
and sold them to ATI under terms similar to those in the agreement between TDS
and ATI.
In 1997, the Company sold a majority interest in one market and minority
interests in two other markets, representing approximately 358,000 pops, for an
aggregate consideration of $54.5 million in cash and receivables.
PENDING TRANSACTIONS
As of December 31, 1999, the Company had agreements pending to acquire a
majority interest in one market and a minority interest in another market in
which it currently owns a majority interest, representing an aggregate of
160,000 pops, in exchange for $24.0 million in cash and approximately 28,000 USM
Common Shares.
The Company has an agreement pending to divest a minority interest in one
market, representing approximately 114,000 pops, for $22.5 million in cash. The
Company expects all of the pending transactions to be completed in the first
half of 2000.
[GRAPHIC]
LIQUIDITY
The Company anticipates that the aggregate resources required for 2000 will
include approximately $330 million for capital spending and $24 million for
acquisitions.
The Company's LYONs are convertible, at the option of their holders, at any time
prior to maturity, redemption or purchase, into USM Common Shares at a
conversion rate of 9.475 USM Common Shares per LYON. Upon conversion, the
Company has the option to deliver to holders either USM Common Shares or cash
equal to the market value of the USM Common Shares into which the LYONs are
convertible.
Under the terms of the LYONs, on June 15, 2000, the Company will be required, at
the option of each holder of LYONs, to purchase LYONs for a purchase price of
$411.99 for each LYON (the "Put Value"). Each LYON has a face value of $1,000.00
at maturity. The Company may elect to pay this purchase price either in (a)
cash, (b) USM Common Shares, (c) shares of publicly traded
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
common equity securities of TDS or (d) any combination thereof. Based on current
market prices for USM Common Shares, the conversion value of the LYONs is
greater than the Put Value. Accordingly, the Company's management believes it is
unlikely that holders of LYONs will exercise their put rights on June 15, 2000.
However, there can be no assurance that the conversion value of the LYONs will
exceed the Put Value on or shortly prior to that date. If the conversion value
declines so that it is near or below the Put Value, it is possible that some or
all holders of LYONs may exercise their option to require the Company to
purchase the LYONs. In such event, the Company will determine, based upon market
conditions and other factors, which option it will exercise to satisfy such
requirement.
In addition, the Company may, at any time on or after June 15, 2000, redeem
LYONs for cash at a price equal to the issue price plus accrued original issue
discount through the date of redemption. However, holders of LYONs must be
notified of such redemption between 30 and 60 days prior to the date of the
redemption. During the period between the date of notice and the redemption
date, as at any other time, any holder of LYONs may exercise his conversion
rights.
The Company is generating substantial cash from its operations and anticipates
financing these expenditures primarily with internally generated cash and
short-term borrowings. The Company had $198 million of cash and cash equivalents
at December 31, 1999. Additionally, the entire balance of $500 million under the
Company's Revolving Credit Facility is unused and remains available to meet any
short-term borrowing requirements.
Management believes that the Company's operating cash flows and sources of
external financing, including the above-referenced Revolving Credit Facility,
provide substantial financial flexibility for the Company to meet both its
short- and long-term needs. The Company also currently has access to public and
private capital markets to help meet its long-term financing needs. The Company
anticipates issuing debt and equity securities only when capital requirements
(including acquisitions), financial market conditions and other factors warrant.
[GRAPHIC]
MARKET RISK
The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. All of the Company's existing debt is in the form of
long-term fixed-rate notes with original maturities ranging from seven to 20
years. Accordingly, fluctuations in interest rates can lead to fluctuations in
the fair value of such instruments. The Company has not entered into financial
derivatives to reduce its exposure to interest rate risks.
The Company had total debt repayments as of December 31, 1999 and 1998 of $989.2
million and $995.0 million, respectively, which are all due after 2004. The
weighted average interest rate on this debt during 1999 and 1998 were 6.35% and
6.59%, respectively, and the fair value of the debt at year-end was $950.2
million and $562.3 million, respectively.
The Company maintains a portfolio of available for sale marketable equity
securities which resulted from acquisitions and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
the sale of non-strategic investments. The market value of these investments,
principally VOD ADRs, amounted to $540.7 million at December 31, 1999. A
hypothetical 10% decrease in the share prices of these investments would result
in a $54.1 million decline in the market value of the investments.
YEAR 2000 ISSUE
The Year 2000 Issue existed because certain computer systems and applications
abbreviate dates using only two digits rather than four digits, e.g., "98"
rather than "1998." Unless corrected, this shortcut could have caused problems
when the century date "2000" occurs. On that date, some computer operating
systems and applications and embedded technology may have recognized the date as
January 1, 1900 instead of January 1, 2000.
The Company's management established Year 2000 project teams in 1998 to address
Year 2000 issues. The project teams identified those mission critical hardware,
systems and applications that were not Year 2000 ready. These mission critical
hardware, systems and applications were then renovated, validated and
implemented prior to December 31, 1999. No significant problems have been
encountered in 2000. The total costs associated with the Year 2000 Issue
incurred through December 31, 1999 were approximately $4 million; no further
substantial expenditures are expected.
The Company expects to incur minimal expenditures for final project wrap-up
activities. While the Company believes its mission critical hardware, systems
and applications are Year 2000 ready, it will continue to monitor information
systems, facilities, equipment and relationships with third parties. Contingency
plans have been developed to address any interruptions in essential services.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION AND OTHER SECTIONS OF THIS ANNUAL REPORT TO SHAREHOLDERS CONTAINS
STATEMENTS THAT ARE NOT BASED ON HISTORICAL FACT, INCLUDING THE WORDS
"BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS" AND SIMILAR WORDS. THESE
STATEMENTS CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT
MAY CAUSE ACTUAL RESULTS, EVENTS OR DEVELOPMENTS TO BE SIGNIFICANTLY DIFFERENT
FROM ANY FUTURE RESULTS, EVENTS OR DEVELOPMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE:
- - GENERAL ECONOMIC AND BUSINESS CONDITIONS, BOTH NATIONALLY AND IN THE REGIONS
IN WHICH THE COMPANY OPERATES,
- - TECHNOLOGY CHANGES,
- - COMPETITION,
- - CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS,
- - CHANGES IN GOVERNMENTAL REGULATIONS,
- -OUR ABILITY AND THE ABILITY OF OUR THIRD-PARTY SUPPLIERS TO TAKE CORRECTIVE
ACTION IN A TIMELY MANNER WITH RESPECT TO THE YEAR 2000 ISSUE,
- - AVAILABILITY OF FUTURE FINANCING, AND
- - CHANGES IN GROWTH IN CELLULAR CUSTOMERS, PENETRATION RATES AND CHURN RATES.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
(Dollars in thousands, except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES
Service $1,366,412 $1,123,454 $852,991
Equipment sales 50,769 39,013 23,974
------------------------------------------
Total Operating Revenues 1,417,181 1,162,467 876,965
------------------------------------------
OPERATING EXPENSES
System operations 208,822 193,625 153,137
Marketing and selling 272,729 228,844 178,984
Cost of equipment sold 124,058 94,378 82,302
General and administrative 325,758 262,766 200,620
Depreciation 184,830 167,150 97,591
Amortization of intangibles 45,142 39,629 34,788
------------------------------------------
Total Operating Expenses 1,161,339 986,392 747,422
------------------------------------------
OPERATING INCOME 255,842 176,075 129,543
------------------------------------------
INVESTMENT AND OTHER INCOME
Investment income 30,374 42,451 77,121
Amortization of licenses related to investments (1,186) (1,039) (2,084)
Interest income 8,893 5,695 5,863
Other income (expense), net 590 (4,413) (3,614)
Minority share of income (7,148) (6,039) (12,298)
Gain on sale of cellular and other investments 266,744 215,154 30,318
------------------------------------------
Total Investment and Other Income 298,267 251,809 95,306
------------------------------------------
INCOME BEFORE INTEREST AND INCOME TAXES 554,109 427,884 224,849
------------------------------------------
INTEREST EXPENSE
Interest expense - other 38,099 39,772 27,414
Interest expense - affiliate -- -- 1,948
------------------------------------------
Total Interest Expense 38,099 39,772 29,362
------------------------------------------
INCOME BEFORE INCOME TAXES 516,010 388,112 195,487
Income tax expense 215,252 171,165 83,948
------------------------------------------
NET INCOME $ 300,758 $ 216,947 $111,539
------------------------------------------
WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES (000S) 87,478 87,323 86,346
BASIC EARNINGS PER COMMON AND SERIES A COMMON SHARE $ 3.44 $ 2.48 $ 1.29
------------------------------------------
DILUTED EARNINGS PER COMMON AND SERIES A COMMON SHARE $ 3.28 $ 2.39 $ 1.29
------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $300,758 $216,947 $ 111,539
Add (Deduct) adjustments to reconcile net
income to net cash provided by operating activities
Depreciation and amortization 229,972 206,779 132,379
Deferred income tax provision 134,130 107,201 24,077
Investment income (30,374) (42,451) (77,121)
Minority share of income 7,148 6,039 12,298
Gain on sale of cellular and other investments (266,744) (215,154) (30,318)
Other noncash expense 18,017 24,660 18,786
Change in accounts receivable (38,970) (26,998) (10,038)
Change in accounts payable (14,711) 61,977 (1,646)
Change in accrued interest (6) 532 6,413
Change in accrued taxes (5,896) (26,246) 26,297
Change in customer deposits and deferred revenues 9,067 6,523 5,083
Change in other assets and liabilities (9,214) (8,710) 4,388
--------------------------------------
333,177 311,099 222,137
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (248,722) (274,375) (277,799)
System development costs (28,728) (46,042) (40,949)
Acquisitions, excluding cash acquired (29,841) (119,957) (138,377)
Proceeds from sale of cellular and other investments 95,988 148,329 61,145
Distributions from unconsolidated entities 24,427 27,740 52,365
Investments in and advances from/(to) unconsolidated entities 5,497 (185) (10,535)
Change in notes receivable (10,000) -- --
Change in temporary investments and
marketable non-equity securities 236 468 (1,088)
Other investing activities 738 (6,227) (3,305)
--------------------------------------
(190,405) (270,249) (358,543)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of 7.25% unsecured notes -- -- 243,053
Repayment of long-term debt (267) -- --
Repayment of vendor financing -- -- (103,827)
Borrowings from Revolving Credit Facility -- 57,000 --
Repayment of Revolving Credit Facility -- (57,000) --
Borrowings from Revolving Credit Agreement - TDS -- -- 70,444
Repayment of Revolving Credit Agreement - TDS -- -- (70,444)
Repayment of notes payable -- (1,302) --
Common Shares issued 9,290 2,567 2,503
Capital distributions to minority partners (6,095) (3,991) (5,849)
--------------------------------------
2,928 (2,726) 135,880
--------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 145,700 38,124 (526)
CASH AND CASH EQUIVALENTS -
Beginning of period 51,975 13,851 14,377
--------------------------------------
End of period $197,675 $ 51,975 $ 13,851
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - ASSETS
DECEMBER 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents
General funds $ 29,169 $ 15,576
Affiliated cash equivalents 168,506 36,399
---------------------------
197,675 51,975
Temporary investments 148 284
Accounts receivable
Customers, less allowance of
$10,029 and $6,054, respectively 124,145 99,931
Roaming 61,915 46,634
Affiliates 15 26
Other 9,584 13,671
Inventory 29,999 16,673
Note receivable 10,000 --
Prepaid expenses 10,081 10,506
Other current assets 5,221 3,105
---------------------------
448,783 242,805
---------------------------
INVESTMENTS
Licenses, net of accumulated amortization of
$188,076 and $153,934, respectively 1,156,175 1,200,653
Marketable equity securities 540,711 300,754
Investments in unconsolidated entities, net of accumulated
amortization of $3,934 and $4,546, respectively 124,573 136,391
Notes and interest receivable - long-term 10,736 11,530
Marketable non-equity securities 216 337
---------------------------
1,832,411 1,649,665
---------------------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 1,579,278 1,400,597
Less accumulated depreciation 508,273 389,754
---------------------------
1,071,005 1,010,843
---------------------------
DEFERRED CHARGES
System development costs, net of accumulated amortization
of $17,580 and $6,502, respectively 135,462 127,742
Other, net of accumulated amortization
of $8,662 and $8,502, respectively 12,434 16,581
---------------------------
147,896 144,323
---------------------------
TOTAL ASSETS $3,500,095 $3,047,636
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable
Affiliates $ 3,127 $ 11,508
Other 143,967 172,568
Customer deposits and deferred revenues 36,882 27,575
Accrued interest 7,064 7,069
Accrued taxes 7,517 13,928
Accrued compensation 16,555 13,263
Other current liabilities 11,867 12,362
-----------------------------------
226,979 258,273
-----------------------------------
LONG-TERM DEBT
6% zero coupon convertible debentures 296,322 281,487
7.25% unsecured notes 250,000 250,000
-----------------------------------
546,322 531,487
-----------------------------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 401,983 258,123
Other 9,199 5,914
-----------------------------------
411,182 264,037
-----------------------------------
MINORITY INTEREST 40,971 43,609
-----------------------------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share;
authorized 140,000,000 shares; issued and outstanding
54,713,101 and 54,364,729 shares, respectively 54,713 54,365
Series A Common Shares, par value $1 per share;
authorized 50,000,000 shares;
issued and outstanding 33,005,877 shares 33,006 33,006
Additional paid-in capital 1,331,274 1,319,895
Accumulated other comprehensive income 81,391 69,465
Retained earnings 774,257 473,499
-----------------------------------
2,274,641 1,950,230
-----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,500,095 $3,047,636
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Accumulated
Other
Series A Additional Comprehensive Comprehensive Retained
(Dollars in thousands) Common Shares Common Shares Paid-In Capital Income Income Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 53,117 $ 33,006 $ 1,245,066 $ -- $ -- $ 145,013
Add (Deduct)
Acquisition of
cellular interests 996 -- 31,489 -- -- --
Employee benefit plans 118 -- 2,376 -- -- --
Redemption of USM and
TDS Preferred Stock 1 -- 35 -- -- --
Sale of interests transferred
from TDS -- -- 6,591 -- -- --
Capital stock expense -- -- (27) -- -- --
Net income and
comprehensive income -- -- -- $ 111,539 -- 111,539
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 54,232 33,006 1,285,530 -- 256,552
Add
Acquisition of
cellular interests 46 -- 1,257 -- -- --
Employee benefit plans 87 -- 2,480 -- -- --
Sale of interests transferred
from TDS -- -- 30,628 -- -- --
Net income -- -- -- $ 216,947 -- 216,947
Other Comprehensive Income:
Unrealized gain on
marketable equity
securities -- -- -- 69,465 69,465 --
-----------
Comprehensive income -- -- -- $ 286,412 -- --
-----------
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 54,365 33,006 1,319,895 69,465 473,499
Add (Deduct)
Employee benefit plans 298 -- 9,337 -- -- --
Conversion of 6% zero coupon
convertible debentures 50 -- 2,046 -- -- --
Capital stock expense -- -- (4) -- -- --
Net income -- -- -- $ 300,758 -- 300,758
Other Comprehensive Income:
Net unrealized gain on
marketable equity
securities -- -- -- 11,926 11,926
------------
Comprehensive income -- -- -- $ 312,684 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 54,713 $ 33,006 $ 1,331,274 $ 81,391 $ 774,257
=============================================================================== ============================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United States Cellular Corporation (the "Company" or "U.S. Cellular"), a
Delaware Corporation, is currently an 80.7%-owned subsidiary of Telephone and
Data Systems, Inc. ("TDS").
NATURE OF OPERATIONS
U.S. Cellular owns, manages and invests in cellular systems throughout the
United States and is the nation's eighth largest cellular telephone company in
terms of customers. The Company owned interests in 180 cellular markets,
representing approximately 26.4 million population equivalents ("pops"), as of
December 31, 1999. U.S. Cellular's 139 majority-owned and managed markets,
primarily mid-sized and rural markets, served 2,602,000 customers in 25 states
as of December 31, 1999. U.S. Cellular's Midwest Regional Market Cluster, which
includes markets in Iowa, Wisconsin, Illinois, Indiana, and Missouri, served
1,140,000 customers at December 31, 1999, representing approximately 44% of U.S.
Cellular's total customers served as of that date.
PRINCIPLES OF CONSOLIDATION
The accounting policies of U.S. Cellular conform to generally accepted
accounting principles. The consolidated financial statements include the
accounts of U.S. Cellular, its majority-owned subsidiaries, and partnerships in
which U.S. Cellular has a majority partnership interest. All material
intercompany accounts and transactions have been eliminated.
U.S. Cellular includes as investments the value of the consideration given and
all direct and incremental costs relating to acquisitions accounted for as
purchases. All costs relating to unsuccessful negotiations for acquisitions are
expensed.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect (a) the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and (b) the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates, but
management believes any differences will not be material.
Certain amounts reported in prior years have been reclassified to conform to
current period presentation.
CASH AND CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
Cash and cash equivalents include cash and those short-term, highly-liquid
investments with original maturities of three months or less. Those investments
with original maturities of more than three months to 12 months are classified
as Temporary investments. Temporary investments are stated at cost. Those
investments with original maturities of more than 12 months are classified as
Marketable non-equity securities and are stated at amortized cost.
The carrying amounts of Cash and cash equivalents and Temporary investments
approximate their fair value due to the short-term nature of these investments.
Outstanding checks in excess of cash balances totaled $26.3 and $21.2 million at
December 31, 1999 and 1998, respectively, and are classified as Accounts payable
in the Consolidated Balance Sheets. Sufficient funds were available to fund
these outstanding checks when presented for payment.
ACCOUNTS RECEIVABLE
Accounts receivable consists of amounts owed by customers for both service
provided and equipment sales, by other cellular carriers whose customers have
used U.S. Cellular's cellular systems, by affiliated entities and by other
partners for capital distributions.
DEFERRED CHARGES
Deferred system development costs represent costs incurred for the development
of new information systems. Capitalized costs of information systems development
are amortized over a five- or seven-year period, starting when each new system
is placed in service.
Other deferred charges primarily represent legal and other charges incurred
relating to the preparation of the agreements related to the Company's various
borrowing instruments, and are amortized over the respective financing periods
of each instrument (seven to 20 years).
REVENUE RECOGNITION
Revenues from operations primarily consist of charges for access, airtime, and
value added services provided for the Company's local retail customers; charges
to customers of other systems who use the Company's cellular systems when
roaming; charges for long-distance calls made on the Company's systems; end user
equipment sales; and sales of accessories. Revenues are recognized as services
are rendered. Unbilled revenues, resulting from cellular service provided from
the billing cycle date to the end of each month and from other cellular
carriers' customers using U.S. Cellular's cellular systems for the last half of
each month, are estimated and recorded. Equipment and accessory sales are
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognized upon delivery to the customer and reflect charges to customers for
equipment purchased.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs totaled
$64.4 million, $52.4 million and $41.4 million for the years ended December 31,
1999, 1998 and 1997, respectively.
PENSION PLAN
Telephone and Data Systems, Inc. Wireless Companies' Pension Plan (the "Pension
Plan"), a qualified noncontributory defined contribution pension plan, was
adopted effective January 1, 1994. It provides pension benefits for the
employees of U.S. Cellular and its subsidiaries. Under this plan, pension
benefits and costs are calculated separately for each participant and are funded
currently. Pension costs were $3.6 million, $3.3 million and $1.0 million in
1999, 1998 and 1997, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, is effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and hedging activities by
requiring that entities recognize all derivatives as either assets or
liabilities at fair market value on the balance sheet. Management believes that
this statement will not have a material effect on results of operations and
financial position of the Company.
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition" is effective
beginning in the first quarter of 2000. SAB No. 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
Management believes that this bulletin will not have a material effect on
results of operations and financial position of the Company.
2 INCOME TAXES
U.S. Cellular is included in a consolidated federal income tax return with other
members of the TDS consolidated group. TDS and U.S. Cellular are parties to a
Tax Allocation Agreement (the "Agreement"). The Agreement provides that U.S.
Cellular and its subsidiaries be included with the TDS affiliated group in a
consolidated federal income tax return and in state income or franchise tax
returns in certain situations. U.S. Cellular and its subsidiaries calculate
their losses and credits as if they comprised a separate affiliated group. Under
the Agreement, U.S. Cellular is able to carry forward its losses and credits and
use them to offset any future income tax liabilities to TDS.
Income tax provisions charged to net income are summarized below:
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Federal income taxes
Current $ 67,116 $ 52,613 $ 46,357
Deferred 112,463 91,671 22,109
State income taxes
Current 14,006 11,351 13,514
Deferred 21,667 15,530 1,968
-----------------------------------------------------
Total income
tax expense $215,252 $171,165 $ 83,948
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate below:
YEAR ENDED DECEMBER 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.5 4.4 5.1
Amortization of license
acquisition costs .6 .6 1.7
Corporations not included
in consolidated federal
income tax return .1 .4 .4
Changes in tax basis -- 1.7 --
Sale of cellular interests -- .7 .8
Resolution of prior
period tax issues 1.0 .8 --
Other .5 .5 (.1)
-----------------------------------------------
Effective income tax rate 41.7% 44.1% 42.9%
================================================================================
Deferred income taxes are provided for the temporary differences between the
amount of the Company's assets and liabilities for financial reporting purposes
and their tax basis.
U.S. Cellular had current deferred tax assets totaling $2.7 million and $1.5
million at December 31, 1999 and 1998, respectively, resulting primarily from
the allowance for customer receivables.
The temporary differences that gave rise to the noncurrent deferred tax assets
and liabilities are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Deferred Tax Asset
Taxes on acquisitions $ 34,143 $ 28,190
Partnership investments 17,541 7,492
Net operating loss carryforward 13,593 14,719
------------------------------------------
65,277 50,401
Less valuation allowance 11,696 13,448
------------------------------------------
Total Deferred Tax Asset 53,581 36,953
------------------------------------------
Deferred Tax Liability
Marketable equity securities 201,882 106,194
Property, plant and equipment 94,430 67,803
Licenses 88,706 46,459
Equity investments 63,650 63,650
Other 6,896 10,970
------------------------------------------
Total Deferred Tax Liability 455,564 295,076
------------------------------------------
Net Deferred Income Tax Liability $401,983 $258,123
================================================================================
The amount of state net operating loss ("NOL") carryforward (generating a $10.5
million deferred tax asset) available to offset future taxable income is
primarily from the individual subsidiaries which generated the loss. The
aggregate NOL is approximately $168.2 million at December 31, 1999 and expires
between 2000 and 2014. A valuation allowance has been provided when it is more
likely than not that some portion of the deferred tax asset will not be
realized.
U.S. Cellular has certain subsidiaries which are not included in the federal
consolidated income tax return, but file separate tax returns. These
subsidiaries had a federal NOL carryforward (generating a $3.1 million deferred
tax asset) available to offset future taxable income aggregating approximately
$8.0 million at December 31, 1999 which expires between 2005 and 2014.
Included in Cellular license costs and Investment in unconsolidated entities is
goodwill related to various acquisitions structured to be tax-free of $232
million and $1 million, respectively, at December 31, 1999 and $240 million and
$3 million, respectively, at December 31, 1998. No deferred taxes have been
provided on this goodwill.
The financial reporting basis of the marketable equity securities was greater
than the tax basis at the date of acquisition, generating $147.6 million of
deferred taxes. Additionally, the value of the marketable equity securities has
appreciated since acquisition, generating $54.3 million of deferred taxes.
3 EARNINGS PER SHARE
The amounts used in computing Earnings per Common Share and the effect on income
and the weighted average number of Common and Series A Common Shares of dilutive
potential common stock are as follows:
YEAR ENDED DECEMBER 31,
(Dollars and shares in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Net Income used in Basic
Earnings Per Share $300,758 $216,947 $111,539
Interest expense
eliminated as a
result of the pro
forma conversion
of Convertible
Debentures, net of tax 10,053 9,032 8,691
-------------------------------------
Net Income used in
Diluted Earnings
per Share $310,811 $225,979 $120,230
=====================================
Weighted Average
Number of Common
Shares used in Basic
Earnings Per Share 87,478 87,323 86,346
Effect of Dilutive Securities:
Stock Options
and Stock
Appreciation Rights 347 48 52
Conversion of Convertible
Debentures 7,054 7,059 7,059
-------------------------------------
Weighted Average
Number of Common
Shares used in Diluted
Earnings Per Share 94,879 94,430 93,457
================================================================================
Earnings per Common and Series A Common Share for the years ended December 31,
1999, 1998 and 1997 contain significant income amounts related to gains on the
sale of cellular and other investments. Excluding the after-tax effect of these
gains, basic earnings per share were $1.61, $1.02 and $1.10 for the years ended
December 31, 1999, 1998 and 1997, respectively, and diluted earnings per share
were $1.59, $1.02 and $1.10 for the years ended December 31, 1999, 1998 and
1997, respectively.
4 INVESTMENT IN LICENSES
Investment in licenses consists of the costs incurred in acquiring Federal
Communications Commission licenses to provide cellular service. These costs
include amounts paid to license applicants and owners of interests in cellular
entities awarded licenses and all direct and incremental costs relating to
acquiring the licenses. These costs are capitalized and amortized through
charges to expense over 40 years upon commencement of operations. Amortization
expense amounted to $33.8 million, $32.7 million and $27.1 million in 1999, 1998
and 1997, respectively. Costs applicable to unsuccessful license applications
are charged to expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 MARKETABLE EQUITY SECURITIES
Marketable equity securities are classified as available-for-sale, are stated at
fair market value and consist of the following:
DECEMBER 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Vodafone AirTouch plc
ADRs 10,245,375 --
Value $ 507,146 $--
Rural Cellular Corporation
Common Shares 370,882 370,882
Value $ 33,565 $ 3,894
AirTouch Communications, Inc.
Common Shares -- 4,098,150
Value $ -- $ 296,860
================================================================================
In 1999, the Company received 10.2 million (adjusted for a five-for-one stock
split) Vodafone AirTouch plc American Depository Receipts ("ADRs") and $36.9
million in cash in exchange for its 4.1 million AirTouch Communications, Inc.
("AirTouch") common shares as a result of the AirTouch merger with Vodafone
Group plc. The Company received the AirTouch common shares in 1998 as a result
of the sale of certain minority cellular interests to AirTouch.
Information regarding the Company's marketable equity securities is summarized
as follows:
DECEMBER 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Available-for-sale Equity Securities
Aggregate Fair Value $540,711 $300,754
Historical Cost 405,061 184,980
-----------------------------------------
Gross Unrealized Holding Gains 135,650 115,774
Tax Effect 54,259 46,309
-----------------------------------------
Net Unrealized Holding Gains $ 81,391 $ 69,465
================================================================================
The Company's net unrealized holding gains are included as an increase to
Accumulated other comprehensive income. Realized gains and losses are determined
on the basis of specific identification. During 1999, cash proceeds from the
exchange of available-for-sale securities totaled $36.9 million and gross
realized gains totaled $259.5 million.
6 INVESTMENTS IN UNCONSOLIDATED ENTITIES
Investments in unconsolidated entities consist of amounts invested in cellular
entities in which U.S. Cellular holds a minority interest. These investments are
accounted for using either the equity or cost method, as shown in the
following table:
DECEMBER 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Equity method investments:
Capital contributions,
loans and advances $ 24,381 $ 32,444
Licenses, net of amortization 34,495 42,756
Cumulative share of income 211,112 187,279
Cumulative share of distributions (148,014) (130,295)
---------------------------
121,974 132,184
Cost method investments:
Capital contributions,
net of partnership distributions 1,239 3,458
Licenses, net of amortization 1,360 749
---------------------------
2,599 4,207
---------------------------
Total investments in
unconsolidated entities $124,573 $136,391
================================================================================
As of December 31, 1999, U.S. Cellular followed the equity method of accounting
for minority interests in 35 markets where the Company's ownership interest is
3% or greater. This method recognizes, on a current basis, U.S. Cellular's
proportionate share of the income and losses accruing to it under the terms of
the respective partnership and shareholder agreements. Income and losses from
the entities are reflected in the Consolidated Statements of Income on a pretax
basis as investment income. Investment income totaled $30.4 million, $42.5
million and $77.1 million in 1999, 1998, and 1997, respectively. As of December
31, 1999, U.S. Cellular followed the cost method of accounting for its
investments in six markets where the Company's ownership interest is less than
3%.
Investments in unconsolidated entities include cellular license costs. These
costs are being amortized over 40 years. Amortization amounted to $1.2 million,
$1.0 million and $2.1 million in 1999, 1998, and 1997, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the unaudited combined assets, liabilities and equity,
and the unaudited combined results of operations of the cellular system entities
in which U.S. Cellular's investments are accounted for by the equity method:
DECEMBER 31,
(Unaudited, dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Assets
Current $ 236,231 $ 241,991
Due from affiliates 2,755 6,721
Property and other 984,738 969,419
---------------------------
$1,223,724 $1,218,131
================================================================================
Liabilities and Equity
Current liabilities $ 226,322 $ 238,055
Due to affiliates 15,649 26,022
Deferred credits 4,062 783
Long-term debt 30,800 22,152
Partners` capital
and shareholders' equity 946,891 931,119
---------------------------
$1,223,724 $1,218,131
================================================================================
YEAR ENDED DECEMBER 31,
(Unaudited, dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Results of Operations
Revenues $ 1,557,943 $ 1,460,318 $ 1,652,683
Operating expenses 961,073 820,326 1,012,685
--------------------------------------------
Operating cash flow 596,870 639,992 639,998
Depreciation and
amortization 261,418 153,980 166,285
--------------------------------------------
Operating income 335,452 486,012 473,713
Other (expense) income (6,589) 337 (7,292)
--------------------------------------------
Net income $ 328,863 $ 486,349 $ 466,421
================================================================================
7 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at the original cost of construction
including capitalized costs of certain taxes and payroll-related expenses.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. The provision for depreciation as a percentage of
depreciable property, plant and equipment was 12.9%, 13.6% and 10.3% in 1999,
1998, and 1997, respectively. Depreciation as a percentage of depreciable
property increased in 1998 due to the reduction in useful lives of certain
assets in 1998, increasing the provision for depreciation.
The Company records renewals and betterments of units of property as additions
to plant in service. The original cost of depreciable property (and related
accumulated depreciation) retired is removed from plant in service and, together
with removal cost less any salvage realized, is charged to depreciation expense.
Repairs and renewals of minor units of property are charged to system operations
expense.
Property, plant and equipment in service and under construction consists of:
DECEMBER 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Cell site-related equipment $ 939,797 $ 790,292
Land, buildings and
leasehold improvements 280,306 237,361
Switching-related equipment 153,984 116,198
Office furniture and equipment 104,901 127,397
Other operating equipment 67,021 59,152
Work in process 33,269 70,197
------------------------------------------------
$1,579,278 $1,400,597
================================================================================
8 SUPPLEMENTAL CASH FLOW DISCLOSURES
U.S. Cellular acquired certain cellular licenses and other cellular interests
during 1999, 1998 and 1997. In conjunction with these acquisitions, the
following assets were acquired, liabilities assumed and Common Shares issued:
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998 1997
-----------------------------------
Property, plant
and equipment, net $ 3,444 $ 18,417 $ 112,696
Cellular licenses 22,567 97,228 139,885
(Decrease) in
investment in
unconsolidated entities (546) (2,317) (90,33)
Accounts receivable 1,762 4,551 26,032
Accounts payable (637) (370) (31,117)
Other assets and liabilities,
excluding cash acquired 3,251 3,751 13,699
Common Shares issued
and issuable -- (1,303) (32,486)
------------------------------------------
Decrease in cash due
to acquisitions $ 29,841 $ 119,957 $ 138,377
================================================================================
Following are supplemental cash flow disclosures regarding interest and income
taxes paid and certain noncash transactions:
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Interest paid $ 20,150 $ 18,966 $ 6,816
Income taxes paid 90,307 101,041 40,316
Noncash interest expense 17,132 16,157 15,379
Additions to Property,
Plant and Equipment
and System Development
financed through
Accounts Payable $ 15,616 $ 21,528 $ 8,514
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 ACQUISITIONS AND DIVESTITURES
As part of its development strategy U.S. Cellular has acquired cellular
interests for cash, promissory notes and U.S. Cellular and TDS Common Shares.
U.S. Cellular has also divested cellular interests for cash, notes receivable
and marketable equity securities and has completed exchanges of cellular
interests with other cellular companies.
COMPLETED ACQUISITIONS
During 1999, U.S. Cellular completed the acquisition of a majority interest in
one market and several minority interests, representing approximately 245,000
pops, for a total consideration of $31.5 million in cash.
During 1998, U.S. Cellular completed the acquisition of majority interests in
six markets and several minority interests, representing approximately 1.3
million pops, for a total consideration of $168.3 million as shown in the
following table:
(Dollars in millions) Consideration
- --------------------------------------------------------------------------------
46,000 Common Shares to TDS(1) $ 1.3
Increase in Revolving Credit Facility 34.8
Repayment of Note Receivable 3.4
Cash 128.8
----------------------------------------
Total $ 168.3
================================================================================
(1) ISSUED TO REIMBURSE TDS FOR TDS SECURITIES ISSUED TO THIRD PARTIES IN
CONNECTION WITH THE ACQUISITIONS.
Assuming that the 1999 and 1998 acquisitions discussed above, which were
accounted for as purchases, had taken place on January 1, 1998, unaudited pro
forma results of operations would have been as follows:
(Unaudited, dollars in thousands, YEAR ENDED DECEMBER 31,
except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
Service Revenues $1,373,422 $1,145,117
Equipment Sales 50,835 39,504
Net Income 302,387 220,205
Basic Earnings per
Common Share 3.46 2.52
Diluted Earnings per
Common Share $ 3.27 $ 2.41
================================================================================
COMPLETED DIVESTITURES
The gains recorded in 1999, 1998, and 1997 reflect the sales of non-strategic
cellular and certain other investments. In 1999, U.S. Cellular recognized a
$259.5 million gain as a result of the AirTouch Communications Inc. merger with
Vodafone Group plc and from the divestiture of minority interests in three
markets. U.S. Cellular recognized a gain on the difference between the
historical basis of its investment in AirTouch common shares and the value of
the Vodafone AirTouch plc ADRs plus cash received from the merger. In 1998, U.S.
Cellular sold its majority interest in one market, and minority interests in
several markets in exchange for 4.1 million AirTouch Common Shares and cash, and
received cash from TDS pursuant to an agreement between TDS and the Company. In
1997, U.S. Cellular sold its majority interest in one market and minority
interests in two other markets and received cash from the settlement of a legal
matter. In addition to the VOD ADRs received in 1999 and the AirTouch Common
Shares received in 1998, these transactions generated net cash proceeds of $96.0
million, $148.3 million and $61.1 million in 1999, 1998 and 1997, respectively.
PENDING ACQUISITIONS
At December 31, 1999, U.S. Cellular had entered into agreements with third
parties to acquire a majority interest in one market and a minority interest in
one market in which the Company already owns a majority interest, representing
160,000 pops, for $24.0 million in cash and approximately 28,000 Common Shares.
These transactions are expected to be completed during the first half of 2000.
PENDING DIVESTITURE
U.S. Cellular had entered into an agreement to sell its minority interest in one
market at December 31, 1999, representing 114,000 pops, for $22.5 million in
cash. The Company expects to complete this transaction during the first half of
2000.
10 REVOLVING CREDIT FACILITY
U.S. Cellular has a seven-year $500 million revolving credit facility with a
group of banks ("Revolving Credit Facility"). This facility replaced the
Company's Revolving Credit Agreement with TDS as its primary short-term
borrowing facility. As of December 31, 1999, no borrowings were outstanding
under the Revolving Credit Facility.
The terms of the Revolving Credit Facility provide for borrowings with interest
at the London InterBank Offered Rate ("LIBOR") plus 26.5 basis points (for a
rate of 6.1% at December 31, 1999). Interest and principal are due the last day
of the borrowing period, as selected by the borrower, of either seven days or
one, two, three or six months. U.S. Cellular pays facility and administration
fees at an aggregate annual rate of 0.142% of the total $500 million facility.
These payments totaled $710,000, $710,000 and $237,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. The Revolving Credit Facility
expires in August, 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 6% ZERO COUPON COVERTIBLE DEBENTURES
The Company sold $745 million principal amount at maturity of zero coupon 6%
yield to maturity convertible debt. This 20-year fixed rate debt, in the form of
Liquid Yield Option Notes ("LYONs"), is subordinated to all senior indebtedness
of the Company. At December 31, 1999 and 1998, U.S. Cellular's senior
indebtedness totaled $250.0 million and $260.0 million, respectively.
Each LYON is convertible at the option of the holder at any time at a conversion
rate of 9.475 U.S. Cellular Common Shares per $1,000 of LYONs. Upon conversion,
U.S. Cellular may elect to deliver its Common Shares or cash equal to the market
value of the Common Shares. During 1999, 5,760 LYONs were converted for
approximately $267,000 in cash and 50,000 Common Shares. Beginning June 15,
2000, U.S. Cellular may redeem the LYONs for cash at the issue price plus
accrued original issue discount through the date of redemption. Holders have the
right to exercise their conversion option prior to the redemption date. On June
15, 2000, the holders may require U.S. Cellular to purchase LYONs at the issue
price plus accrued original issue discount through that date. U.S. Cellular will
have the option of purchasing such LYONs with cash, U.S. Cellular Common Shares,
TDS common equity securities, or any combination thereof.
The carrying value and estimated fair value of U.S. Cellular's 6% zero coupon
convertible debentures were $296.3 million and $706.9 million at December 31,
1999 and $281.5 million and $298.7 million at December 31, 1998, respectively.
The fair values were estimated using discounted cash flow analysis.
12 7.25% UNSECURED NOTE
During 1997, the Company sold $250 million principal amount of 7.25% notes
("Notes"), priced to yield 7.33% to maturity. The Notes were sold under the
Company's $400 million shelf registration. The Notes are unsecured and become
due on August 15, 2007. Interest on the Notes is payable on February 15 and
August 15 of each year. The Notes will be redeemable, in whole or in part, at
the option of the Company at any time on or after August 15, 2004, at a
redemption price equal to 100% of the principal amount of the Notes to be
redeemed, plus accrued interest thereon, if any, to the date of redemption.
The carrying value and estimated fair value of the Company's 7.25% unsecured
notes were $250.0 million and $243.3 million at December 31, 1999 and $250.0
million and $263.6 million at December 31, 1998, respectively. The fair values
were estimated using discounted cash flow analysis.
13 COMMON SHAREHOLDERS" EQUITY
COMMON STOCK
EMPLOYEE BENEFIT PLANS. The following table summarizes
Common Shares issued for the employee benefit plans described as follows:
YEAR ENDED DECEMBER 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Tax-Deferred Savings Plan 49,770 33,532 42,400
Employee stock options,
stock appreciation rights
and awards 241,693 58,523 65,029
Employee Stock
Purchase Plan 6,997 16,739 10,134
---------------------------
298,460 108,794 117,563
================================================================================
TAX-DEFERRED SAVINGS PLAN
U.S. Cellular has reserved 38,353 Common Shares for issuance under the TDS
Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections
401(a) and 401(k) of the Internal Revenue Code. Participating employees have the
option of investing their contributions in U.S.Cellular Common Shares, TDS
Common Shares, or five nonaffiliated funds.
EMPLOYEE STOCK OPTIONS, STOCK
APPRECIATION RIGHTS AND AWARDS
U.S. Cellular accounts for stock options, stock appreciation rights ("SARs") and
employee stock purchase plans under Accounting Principles Board ("APB") Opinion
No. 25. No compensation costs have been recognized for the stock option and
employee stock purchase plans. Compensation expense for SARs, measured on the
difference between the SAR prices and the year-end market price of the Common
Shares, aggregated $1.0 million, $440,000 and $285,000 in 1999, 1998 and 1997,
respectively. Had compensation cost for all plans been determined consistent
with SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's net
income and earnings per Common Share would have been reduced to the following
pro forma amounts:
(Dollars in thousands, except YEAR ENDED DECEMBER 31,
per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
Net Income:
As Reported $ 300,758 $ 216,947 $ 111,539
Pro Forma 298,941 214,810 110,317
Basic Earnings
Per Common Share:
As Reported 3.44 2.48 1.29
Pro Forma 3.42 2.46 1.28
Diluted Earnings
Per Common Share:
As Reported 3.28 2.39 1.29
Pro Forma $ 3.26 $ 2.37$ 1.27
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plans at December 31,
1999, 1998 and 1997 and changes during the years then ended is presented in the
table and narrative as follows:
Weighted Weighted
Number Average Average
of Shares Option Prices Fair Values
- --------------------------------------------------------------------------------
Stock Options
Outstanding
December 31, 1996
(271,866 exercisable) 391,047 $ 29.47
Granted 250,393 $ 13.41 $18.77
Exercised (68,563) $ 17.56
Canceled (18,594) $ 26.85
----------
Outstanding
December 31, 1997
(293,418 exercisable) 554,283 $ 24.23
Granted 325,492 $ 17.89 $21.93
Exercised (83,515) $ 8.92
Canceled (13,608) $ 29.16
----------
Outstanding
December 31, 1998
(317,611 exercisable) 782,652 $ 22.21
Granted 291,004 $ 32.64 $23.45
Exercised (378,871) $ 21.87
Canceled (22,171) $ 25.23
----------
Outstanding
December 31, 1999
(106,104 exercisable) 672,614 $ 24.79
================================================================================
U.S. Cellular has established Stock Option plans that provide for the grant of
stock options to officers and employees and has reserved 1,472,498 Common Shares
for options granted and to be granted to key employees. The options under the
1998 plan are exercisable from the date of vesting through November 9, 2004 to
March 31, 2009, or 30 days following the date of the employee's termination of
employment, if earlier. Under the 1998 Stock Option Plan, 106,104 stock options
were exercisable at December 31, 1999, have exercise prices between $24.48 and
$35.84 with a weighted average exercise price of $30.77 per share, and a
weighted average remaining contractual life of 6.7 years. The remaining 566,510
options, which are not exercisable, have exercise prices between $0 and $55.50
with a weighted average exercise price of $23.67, and a weighted average
remaining contractual life of 5.9 years. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in 1999 and 1998,
respectively: risk-free interest rates of 6.7% and 4.7%; expected dividend
yields of zero for both years; expected lives of 5.0 years and 4.5 years; and
expected volatility of 24.2% and 22.5%.
Stock Appreciation Rights allow the grantee to receive an amount in Common
Shares or cash, or a combination thereof, equivalent to the difference between
the exercise price and the fair market value of the Common Shares on the
exercise date. At December 31, 1999, 9,600 Series A Common Share SARs were
outstanding at $15 per share. These rights expire from 2000 to 2004 or the date
of the person's termination of employment, if earlier. During 1999, 1998 and
1997, 3,800, 31,250 and 3,950 Common Share SARs were exercised, respectively.
During 1999, 26,400 Series A Common Share SARs were exercised. There were no
SARs granted in 1999, 1998 or 1997.
EMPLOYEE STOCK PURCHASE PLAN
U.S. Cellular had 102,855 Common Shares reserved under the 1999 Employee Stock
Purchase Plan ("1999 ESSP"). During 1999, the 1999 ESPP was approved, which
became effective July 1, 1999.
SERIES A COMMON SHARES
Series A Common Shares are convertible on a share-for-share basis into Common
Shares. In matters other than the election of directors, each Series A Common
Share is entitled to ten votes per share, compared to one vote for each Common
Share. The Series A Common Shares are entitled to elect 75% of the directors,
and the Common Shares elect 25% of the directors. As of December 31, 1999, all
of U.S. Cellular's outstanding Series A Common Shares were held by TDS.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company implemented the provisions of SFAS No.
130, "Reporting Comprehensive Income." Under SFAS No. 130, the Company is
required to report all changes in equity during a period, except those resulting
from investments and distributions by owners, in a financial statement for the
period in which they are recognized. The Company has chosen to disclose
Comprehensive Income, which encompasses Net Income and Net Unrealized Gains on
Securities, in the Consolidated Statement of Changes in Common Shareholders'
Equity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax effects allocated to and the cumulative balance of unrealized
gains on securities are as follows:
YEAR ENDED DECEMBER 31,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------
Balance, beginning of period $ 69,465 $ --
Add:
Unrealized gains on securities 279,341 115,773
Income tax effect (111,736) (46,308)
--------------------------------------
Net unrealized gains on securities 167,605 69,465
--------------------------------------
Deduct:
Recognized gains on sales
of securities 259,464 --
Income tax expense (103,785) --
--------------------------------------
Net recognized gains included
in Net Income 155,679 --
--------------------------------------
Net change in unrealized gains
included in Comprehensive Income 11,926 69,465
--------------------------------------
Balance, end of period $ 81,391 $ 69,465
================================================================================
14 RELATED PARTIES
U.S. Cellular is billed for all services it receives from TDS, consisting
primarily of information processing and general management services. Such
billings are based on expenses specifically identified to U.S. Cellular and on
allocations of common expenses. Such allocations are based on the relationship
of U.S. Cellular's assets, employees, investment in plant and expenses to the
total assets, employees, investment in plant and expenses of TDS. Management
believes the method used to allocate common expenses is reasonable and that all
expenses and costs applicable to U.S. Cellular are reflected in the accompanying
financial statements on a basis which is representative of what they would have
been if U.S. Cellular operated on a stand-alone basis. Billings to U.S. Cellular
from TDS totaled $47.5 million, $44.8 million and $36.2 million in 1999, 1998
and 1997, respectively. In 1998, TDS developed a new payroll system for all of
its subsidiaries, including the Company. The Company capitalized $12.7 million
related to this system in system development costs.
U.S. Cellular has a Cash Management Agreement with TDS under which U.S. Cellular
may from time to time deposit its excess cash with TDS for investment under
TDS's cash management program. Deposits made under the agreement are available
to U.S. Cellular on demand and bear interest each month at the 30-day Commercial
Paper Rate as reported in The Wall Street Journal, plus 1/4%, or such higher
rate as TDS may at its discretion offer on such deposits. Interest income from
such deposits was $5.6 million, $2.1 million and $1.3 million in 1999, 1998 and
1997, respectively.
All markets managed by U.S. Cellular are billed for services they receive from
U.S. Cellular. Such billings are based on expenses specifically identified to
each market and on allocations of common expenses. Such allocations are
primarily based on the relationships of each market's assets and revenues to the
total assets and revenues of all the markets managed by U.S. Cellular.
Management believes that all expenses and costs applicable to each market are
representative of what they would have been if each managed market operated on a
stand-alone basis.
15 COMMITMEMTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The partnerships and corporations in which U.S. Cellular is a partner or
shareholder are in various stages of development. U.S. Cellular expects to spend
approximately $330 million during 2000, primarily to add additional cell sites
to expand and enhance coverage, including adding digital service capabilities to
its systems.
From time to time U.S. Cellular may acquire attractive markets to maximize its
clustering strategy. See Note 9 Acquisitions and Divestitures for a discussion
of pending acquisitions and divestitures.
LEASE COMMITMENTS
U.S. Cellular and certain of its majority-owned partnerships and subsidiaries
lease certain office and cell site locations under operating leases. Future
minimum rental payments required under operating leases that have noncancelable
lease terms in excess of one year as of December 31, 1999 are as follows:
Minimum
(Dollars in thousands) Future Rentals
- --------------------------------------------------------------------------------
2000 $17,633
2001 14,167
2002 10,813
2003 8,243
2004 6,370
Thereafter $43,099
- --------------------------------------------------------------------------------
Rent expense totaled $27.8 million, $24.2 million and $17.2 million in 1999,
1998 and 1997, respectively.
LEGAL PROCEEDINGS
The Company is involved in legal proceedings before the Federal Communications
Commission and various state and federal courts from time to time. Management
does not believe that any of such proceedings should have a material adverse
impact on the financial position, results of operations or cash flows of the
Company.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of United States Cellular Corporation:
We have audited the accompanying consolidated balance sheets of United States
Cellular Corporation (a Delaware corporation and an 80.7%-owned subsidiary of
Telephone and Data Systems, Inc.) and Subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in common shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United States
Cellular Corporation and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
- -------------------------
Arthur Andersen LLP
Chicago, Illinois
January 26, 2000
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
QUARTER ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------------------------------------------
1999
Revenues $325,985 $360,952 $373,201 $357,043
Operating Income 52,114 72,452 95,560 35,716
Gain on Sale of Cellular and Other Investments -- 260,698 6,046 --
Net Income 27,826 194,876 57,063 20,993
From Operations 27,826 38,495 53,265 20,993
From Gains $ -- $156,381 $ 3,798 $ --
Weighted Average Common and
Series A Common Shares (000s) 87,390 87,461 87,484 87,576
Basic Earnings Per Common and Series A
Common Share $ .32 $ 2.23 $ .65 $ .24
Diluted Earnings Per Common and Series A
Common Share .32 2.09 .63 .24
From Operations .32 .43 .59 .24
From Gains $ -- $ 1.66 $ .04 $ --
1998
Revenues $245,157 $290,108 $313,947 $313,255
Operating Income 33,155 50,137 62,515 30,268
Gain on Sale of Cellular and Other Investments 179,992 9,767 -- 25,395
Net Income 129,752 32,785 35,409 19,001
From Operations 19,513 26,943 35,409 6,877
From Gains $110,239 $ 5,842 $-- $ 12,124
Weighted Average Common and
Series A Common Shares (000s) 87,239 87,342 87,353 87,358
Basic Earnings Per Common and Series A
Common Share $ 1.49 $ .38 $ .41 $ .22
Diluted Earnings Per Common and Series A
Common Share 1.40 .37 .40 .22
From Operations .23 .31 .40 .08
From Gains $ 1.17 $ .06 $ -- $ .14
- --------------------------------------------------------------------------------------------
NET INCOME FOR 1999 AND 1998 INCLUDED SIGNIFICANT GAINS FROM THE SALE OF
CELLULAR AND OTHER INVESTMENTS. THE TABLE ABOVE SUMMARIZES THE EFFECT OF THE
GAINS ON NET INCOME AND DILUTED EARNINGS PER COMMON AND SERIES A COMMON SHARE.
THE COMPANY'S MANAGEMENT BELIEVES U.S. CELLULAR'S OPERATING RESULTS REFLECT
SEASONALITY IN BOTH SERVICE REVENUES, WHICH TEND TO INCREASE MORE SLOWLY IN THE
FIRST AND FOURTH QUARTERS, AND OPERATING EXPENSES, WHICH TEND TO BE HIGHER IN
THE FOURTH QUARTER DUE TO INCREASED MARKETING ACTIVITIES AND CUSTOMER GROWTH.
THIS SEASONALITY MAY CAUSE OPERATING INCOME TO VARY FROM QUARTER TO QUARTER.
SHAREHOLDERS' INFORMATION
- -------------------------------------------------------------------------------
UNITED STATES CELLULAR STOCK
AND DIVIDEND INFORMATION
The Company's Common Shares are listed on the American Stock Exchange under
the symbol "USM" and in the newspapers as "US Cellu." As of February 29,
2000, the Company's Common Shares were held by 565 record owners. All of the
Series A Common Shares were held by TDS. No public trading market exists for
the Series A Common Shares. The Series A Common Shares are convertible on a
share-for-share basis into Common Shares.
The high and low sales prices of the Common Shares are reported by the
American Stock Exchange were as follows:
1999 Common Shares 1998 Common Shares
Calendar Period High Low High Low
- ------------------------------------------------------------------
First Quarter $ 45.63 $37.00 $34.75 $28.06
Second Quarter 53.50 43.25 34.25 28.44
Third Quarter 68.00 52.56 34.94 27.69
Fourth Quarter 125.75 66.32 41.00 28.63
The Company has not paid any cash dividends and currently intends to retain
all earnings for use in the Company's business.
INVESTOR RELATIONS
Our Annual Report, Form 10-K, Prospectuses and News Releases are available to
our investors, security analysts and other members of the investment
community. These reports are provided, without charge, upon request to our
Corporate Office. Our Corporate Office can also help with questions regarding
lost, stolen or destroyed certificates, consolidation of accounts,
transferring of shares and name or address changes. All inquiries should be
directed to:
United States Cellular Corporation
Gerry Mundt, Accounting Manager -- External Reporting
8410 West Bryn Mawr, Suite 700
Chicago, Illinois 60631
773-399-8900 773-399-8936 (fax)
General inquiries by our investors, securities analysts and other members of
the investment community should be directed to:
United States Cellular Corporation
Kenneth R. Meyers, Senior Vice President -- Finance and
Chief Financial Officer
8410 West Bryn Mawr, Suite 700
Chicago, Illinois 60631
773-399-8900 773/399-8936 (fax)
ANNUAL MEETING
USM's Annual Meeting of Shareholders will be held on May 17, 2000 at 10:00
a.m. in Chicago, Illinois.