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. USM is an
81.0%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
USM owned either majority or minority cellular interests in 183 markets at
December 31, 1998, representing 26,433,000 population equivalents ("pops"). USM
included the operations of 138 majority-owned and managed cellular markets,
representing 23.6 million pops, in consolidated operations ("consolidated
markets") as of December 31, 1998. Minority interests in 38 markets,
representing 2.5 million pops, were accounted for using the equity method and
were included in investment income at that date. All other interests were
accounted for using the cost method. Following is a table of summarized
operating data for USM's consolidated operations.
Year Ended or At December 31,
1998 1997 1996
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Total market population
(in thousands) (1) 24,683 24,034 21,712
Customers 2,183,000 1,710,000 1,073,000
Market penetration 8.84% 7.11% 4.94%
Markets in operation 138 134 131
Total employees 4,800 4,600 3,800
Cell sites in service 2,065 1,748 1,328
Average monthly
revenue per customer $ 48.61 $ 54.18 $ 63.69
Churn rate per month 1.9% 1.9% 1.9%
Marketing cost per
gross customer
addition $ 317 $ 318(2) $ 332(2)
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(1) CALCULATED USING THE RESPECTIVE POPULATION ESTIMATES FOR EACH YEAR
(CLARITAS FOR 1998 AND 1997, DONNELLEY FOR 1996).
(2) RECOMPUTED TO SHOW THE EFFECT OF CHANGE IN CURRENT YEAR PRESENTATION OF
CERTAIN EXPENSES.
The growth in the Company's operating income in 1998 and 1997, 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 1997 and 1996. The improvements resulted from growth in
the Company's customer base and revenues in each year, coupled with increasing
economies of scale in both years. Operating revenues, driven by increases in
customers served, rose $285.5 million, or 33% in 1998 and $196.9 million, or
29%, in 1997. Cash operating expenses rose $164.6 million, or 27%, in 1998 and
$131.2 million, or 27%, in 1997. Operating cash flow (operating income plus
depreciation and amortization expense) increased $120.9 million, or 46%, in 1998
and $65.7 million, or 33%, in 1997. Depreciation and amortization expense
increased $74.4 million, or 56%, in 1998 and $23.5 million, or 22%, in 1997.
Operating income increased $46.5 million, or 36%, in 1998 and $42.2 million, or
48%, in 1997.
The Company's operating results were also impacted by the effects of
acquisitions and divestitures, primarily those related to the exchange of
markets with BellSouth Corporation ("BellSouth") in the fourth quarter of 1997.
In that transaction, the Company received operating markets serving a total
population of approximately 4.0 million in exchange for operating markets
serving a total population of approximately 2.0 million. The Company also
divested certain minority interests, representing approximately 1.2 million
population equivalents, and paid cash to BellSouth to complete the exchange.
The operating markets acquired in that transaction, net of the operating markets
divested, generated increases in the Company's overall revenues, operating
expenses, operating cash flow and operating income. These increases were
primarily due to the increase in the Company's customer base as a result of the
exchange. However, as a result of the Company's divestiture of several minority
interests in the exchange, investment income was reduced by the exchange, by an
amount that was less than the exchange's impact on operating income. In total,
the BellSouth exchange has had a slightly positive effect on net income and
earnings per share to date.
Investment and other income increased $156.5 million to $251.8 million in 1998,
due primarily to an increase of $184.8 million in gains on the sales of cellular
interests in 1998. The increase in gains was partially offset by a $34.7
million, or 45%, reduction in investment income, which was negatively affected
by the exchange transaction with BellSouth in 1997 and by the sale of minority
interests to AirTouch Communications, Inc. ("AirTouch") in 1998. The BellSouth
and AirTouch transactions reduced the Company's pops in investment markets by
1.9 million or 42%. Investment and other income decreased $82.0 million to $95.3
million in 1997, due primarily to the decrease of $102.4 million in gains
UNITED STATES CELLULAR CORPORATION
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
on the sales of cellular interests in 1997. Interest expense increased $10.4
million, or 35%, in 1998, and $6.3 million, or 27%, in 1997, primarily due to an
increase in average debt balances in both years resulting from the Company's
issuance of 7.25% unsecured notes ("Notes") in August 1997. Income tax expense
increased $87.2 million to $171.2 million in 1998, primarily resulting from
increased gains on the sales of cellular interests. Income tax expense decreased
$27.7 million to $83.9 million in 1997, as improved operating results were more
than offset by decreased gains on the sales of cellular interests.
Net income totaled $216.9 million in 1998, an increase of $105.4 million, or
95%, from 1997, and totaled $111.5 million in 1997, a decrease of $18.4 million,
or 14%, from 1996. Diluted earnings per share totaled $2.48 in 1998, an increase
of $1.19, or 92%, from 1997, and totaled $1.29 in 1997, a decrease of $.22, or
15%, from 1996. In all three years, both net income and earnings per share
included gains on the sales of cellular interests. Excluding the after-tax
effects of gains, net income decreased $6.6 million, or 7%, in 1998 and
increased $32.8 million, or 52%, in 1997. Excluding the after-tax effects of
gains, diluted earnings per share decreased $.08, or 7%, in 1998 and increased
$.37, or 51%, in 1997. The 1998 decreases reflect an increase in operating
income, more than offset by a decrease in investment income and increases in
interest expense and income tax expense. The 1997 increases reflect increases in
operating income and investment income, partially offset by increases in
interest expense and income tax expense.A summary of the after-tax effects of
gains on net income and diluted earnings per share is shown below.
(Dollars in thousands,
except per share amounts) Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net income before
after-tax effects
of gains $ 88,742 $ 95,302 $ 62,504
Add: After-tax
effects of gains 128,205 16,237 67,425
- --------------------------------------------------------------------------------
Net income as reported $216,947 $111,539 $129,929
- --------------------------------------------------------------------------------
Earnings per share
before after-tax
effects of gains $ 1.02 $ 1.10 $ .73
Add: After-tax
effects of gains 1.46 .19 .78
- --------------------------------------------------------------------------------
Diluted earnings
per share $ 2.48 $ 1.29 $ 1.51
- --------------------------------------------------------------------------------
OPERATING REVENUES
OPERATING REVENUES Operating revenues totaled $1.162 billion in 1998, up $285.5
million, or 33%, over 1997. Operating revenues totaled $877.0 million in 1997,
up $196.9 million, or 29%, over 1996. 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
$1.123 billion in 1998, up $270.5 million, or 32%, over 1997. Service revenues
totaled $853.0 million in 1997, up $190.3 million, or 29%, over 1996. The
increases in both years were primarily due to the growing number of local retail
customers.
Average monthly service revenue per customer declined 10% to $48.61 in 1998 from
$54.18 in 1997, and declined 15% in 1997 from $63.69 in 1996. The decreases in
average monthly service revenue per customer in both years resulted from
decreases in average revenue per minute of use from both local retail customers
and inbound roamers. The addition of the markets acquired in the exchange with
BellSouth in the fourth quarter of 1997 contributed to the decline in both local
retail revenue per customer and inbound roaming revenue per customer. The
acquired markets produce a lower amount of local retail revenue per customer,
and the addition of those markets caused the elimination of certain inbound
roaming revenues between the Company's existing markets and the acquired
markets.
UNITED STATES CELLULAR CORPORATION 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Competitive pressures and the Company's increasing use of pricing and other
incentive programs that encourage weekend and off-peak usage at reduced rates,
in order to stimulate overall usage, resulted in decreases in average local
retail revenue per minute of use during both 1998 and 1997. The Company's
average inbound roaming revenue per minute of use also decreased during both
1998 and 1997, in line with the ongoing trend toward reduced per minute prices
for roaming negotiated between the Company and other cellular operators.
Management anticipates that the Company's average revenue per minute of use for
both local retail and inbound roaming revenues will continue to decline in the
future, reflecting the continued effect of the previously mentioned factors.
LOCAL RETAIL REVENUE increased $204.2 million, or 36%, in 1998 and $153.8
million, or 37%, in 1997. Growth in the Company's customer base was the
primary reason for the increases in local retail revenue in both years. The
number of customers increased 28% to 2,183,000 at December 31, 1998, and
increased 59% to 1,710,000 at December 31, 1997. A substantial portion of the
percentage increase in customers in 1997 resulted from the BellSouth
exchange, which occurred during the fourth quarter, diminishing the effect
that transaction had on 1997's revenues. Management anticipates that overall
growth in the Company's customer base will be slower 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 7% to $33.44 in 1998
from $36.11 in 1997, and declined 9% in 1997 from $39.87 in 1996. Monthly local
retail minutes of use per customer was 105 in 1998, 103 in 1997 and 107 in 1996.
Average revenue per minute of use decreased as a result of the pricing and other
incentive programs stated previously, totaling $.32 in 1998 compared to $.35 in
1997 and $.37 in 1996. The decrease in average monthly local retail revenue per
customer primarily reflects the increasing level of competition for wireless
services and the Company's and the industry's continued penetration of the
consumer market.
INBOUND ROAMING REVENUE increased $25.1 million, or 12%, in 1998 and $24.2
million, or 13%, in 1997. The growth in inbound roaming revenue in 1998 is
affected by the exchange of markets with BellSouth. Prior to the BellSouth
exchange, revenue from BellSouth customers from markets included in the exchange
who were roaming in the Company's service areas was recorded as inbound roaming
revenue. Subsequent to the exchange, these roaming transactions are recorded as
outbound roaming revenue, which is reported as an offset to system operations
expense. Also affecting the growth in inbound roaming revenue in 1998 and 1997
was an increase in roaming minutes used on the Company's systems and a decrease
in revenue per minute. Although the number of minutes used by customers from
other wireless systems when roaming in the Company's service areas increased by
48% in 1998 and 27% in 1997, these increases were mostly offset by the decrease
in average revenue per minute due to the downward trend in negotiated rates.
Average inbound roaming revenue per minute totaled $.65 in 1998, $.83 in 1997
and $.92 in 1996. Both the increase in minutes of use and the decrease in
revenue per minute of use were significantly affected by certain "one rate"
programs offered by other wireless companies. Monthly inbound roaming revenue
per Company customer averaged $10.50 in 1998, $13.81 in 1997 and $18.58 in 1996.
The decreases in monthly inbound roaming revenue per Company customer in both
years are attributable to a larger increase in the Company's customer base than
in inbound roaming revenue.
LONG-DISTANCE REVENUE increased $39.6 million, or 61%, in 1998 and $12.0
million, or 23%, in 1997 as the volume of long-distance calls billed by the
Company increased. A substantial portion of the 1998 increase is due to the
increase in volume of long-distance calls in both the markets acquired in the
BellSouth exchange and the Company's existing markets adjacent to the acquired
markets. Monthly long-distance revenue per customer averaged $4.51 in 1998,
$4.10 in 1997 and $5.05 in 1996.
EQUIPMENT SALES REVENUES increased $15.0 million, or 63%, in 1998 and $6.6
million, or 38%, in 1997. The increases in equipment sales revenues reflect the
20% and 33% increases, respectively, in the number of gross customer
activations, to 896,000 in 1998 from 746,000 in 1997 and 563,000 in 1996, plus
an increase in the volume of accessories sold. Most of the gross customer
activations were produced by the Company's direct and retail distribution
channels; activations from these channels usually generate sales of cellular
telephone units. The increases in the volume of accessories sold in both years
reflect an increased emphasis on the sale of accessories at retail prices
primarily in the Company's retail locations.
22 UNITED STATES CELLULAR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
OPERATING EXPENSES
OPERATING EXPENSES totaled $986.4 million in 1998, up $239.0 million, or 32%,
over 1997. Operating expenses totaled $747.4 million in 1997, up $154.7
million, or 26%, over 1996. Beginning on January 1, 1998, the Company changed
its income statement presentation of certain corporate marketing department
expenses from general and administrative expenses to marketing and selling
expenses, which the Company believes is the more appropriate classification
for these expenses. Amounts have been reclassified for previous years,
including the 1997 and 1996 information provided throughout this Annual
Report. The effect of such reclassification is not material to either
marketing and selling expenses or general and administrative expenses, and
does not have any effect on operating income or net income.
SYSTEM OPERATIONS EXPENSES increased $40.5 million, or 26%, in 1998 and $35.8
million, or 30%, in 1997. These increases were 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 total, system operations costs are expected to continue to
increase as the number of customers using and the number of cell sites within
the Company's systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for the Company's customers' use of their facilities as well as for
the Company's inbound roaming traffic on these facilities. Also included are
costs related to local interconnection to the landline network, toll charges and
expenses incurred by the Company when its customers use systems other than their
local systems ("outbound roaming"). These expenses are offset some- what by
amounts the Company bills to its customers for outbound roaming.
Customer usage expenses increased $30.3 million, or 30%, in 1998 and $24.3
million, or 32%, in 1997. The increases in 1998 and 1997 are primarily due to
the 59% and 85% increases, respectively, in net outbound roaming expense, which
has resulted from the Company offering its customers increasingly larger service
footprints in which their calls are billed at local rates. In an increasing
number of cases, these service areas include other operators' service areas. The
Company pays roaming rates to the other carriers for calls the Company's
customers make in these areas, while charging those customers a local rate which
is usually lower than the roaming rate. Also contributing to the increases in
customer usage expenses in 1998 and 1997 were 8% and 20% rises, respectively, in
costs related to the increase in minutes used on the Company's systems,
partially offset by 28% and 64% reductions, respectively, in costs related to
fraudulent use of the Company's customers' cellular telephone numbers.The
Company continues to implement procedures in its markets to combat this fraud,
which is primarily related to roaming usage. Customer usage expenses represented
12% of service revenues both in 1998 and 1997 and 11% in 1996.
Maintenance, utility and cell site expenses increased $10.2 million, or 19%, in
1998, and $11.5 million, or 27%, in 1997. The increase primarily reflects an
increase in the number of cell sites in the Company's systems, to 2,065 in 1998
from 1,748 in 1997 and 1,328 in 1996.
MARKETING AND SELLING EXPENSES increased $49.9 million, or 28%, in 1998, and
$48.7 million, or 37%, in 1997. 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 1998 increase was
primarily due to a 20% rise in the number of gross customer activations, to
896,000 in 1998 from 746,000 in 1997. The 1997 increase was primarily due to a
33% rise in the number of gross customer activations, to 746,000 in 1997 from
563,000 in 1996. Marketing cost per gross customer activation, which includes
marketing and selling expenses and losses on equipment sales, decreased less
than 1% to $317 in 1998 from $318 in 1997, and decreased 4% in 1997 from $332 in
1996. The decrease in cost per gross customer activation has been slowed
somewhat by additional advertising expenses incurred to promote the Company's
brand and to distinguish the Company's service offerings from those of other
competitors.
COST OF EQUIPMENT SOLD increased $12.1 million, or 15%, in 1998, and $8.3
million, or 11%, in 1997. The increases in both years reflect the growth in unit
sales related to the 20% and 33% increases, respectively, in gross customer
activations in 1998 and 1997. Also contributing to the increase was a greater
volume of sales of accessories.
GENERAL AND ADMINISTRATIVE EXPENSES increased $62.1 million, or 31%, in 1998 and
$38.5 million, or 24%, in 1997. These expenses include the costs of operating
the Company's local business offices and its corporate expenses other than the
corporate engineering and marketing departments. The increase includes the
effects of increases in expenses required to serve the growing customer base in
existing markets and an expansion of both local administrative office and
corporate staff, necessitated by growth in the Company's business. Also, the
Company incurred start-up costs in 1998 related to its five Communications
Centers, which were created to centralize certain customer service functions.
Employee-related expenses increased $27.3 million, or 29%, in 1998 and $19.4
million, or 26%, in 1997, primarily due to increases in the number of customer
service and administrative employees. The Company is using an ongoing clustering
strategy to combine local and customer service operations wherever feasible in
order to gain operational efficiencies and reduce its per unit administrative
expenses. Monthly general and
UNITED STATES CELLULAR CORPORATION 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
administrative expenses per customer decreased 11% to $11.37 in 1998 from $12.74
in 1997, and decreased 18% in 1997 from $15.59 in 1996. General and
administrative expenses represented 23% of service revenues in 1998 and 24% both
in 1997 and 1996.
Operating cash flow increased $120.9 million, or 46%, to $382.9 million in 1998
and increased $65.7 million, or 33%, to $261.9 million in 1997. The improvements
in both years were primarily due to substantial growth in customers and service
revenues, the effects of improved operational efficiencies on cash operating
expenses and the effect of net acquisitions. Operating cash flow margins (as a
percent of service revenues) were 34.1% in 1998, 30.7% in 1997 and 29.6% in
1996.
DEPRECIATION EXPENSE increased $69.6 million, or 71%, in 1998 and $23.0 million,
or 31%, in 1997. The increases reflect rising average fixed asset balances,
which increased 27% in 1998 and 35% in 1997, plus a reduction in useful lives of
certain assets beginning in 1998 which increased depreciation expense by an
additional $23.2 million in that year. In 1999, the Company expects depreciation
expense to increase by approximately the same percentage as the increase in
average fixed assets during the year. Increased fixed asset balances in both
1998 and 1997 resulted from the addition of new cell sites built to improve
coverage and capacity in the Company's markets, from upgrades to provide digital
service and from the acquisition of markets from BellSouth in 1997.
AMORTIZATION OF INTANGIBLES increased $4.8 million, or 14%, in 1998 and
$580,000, or 2%, in 1997. The increase in 1998 primarily reflects a 9% increase
in investment in licenses, related both to acquisitions completed during the
year and to the BellSouth exchange completed in 1997.
OPERATING INCOME
OPERATING INCOME totaled $176.1 million in 1998, a 36% increase
over 1997. Operating income totaled $129.5 million in 1997, a 48% increase over
1996. The operating income margin was 15.7% in 1998, 15.2% in 1997 and 13.2% in
1996. The improvements in operating income and operating income margins in both
1998 and 1997 reflect increased revenues resulting from growth in the number of
customers served by the Company's systems and the effect of continued
operational efficiencies on total operating expenses.
The Company expects service revenues to continue to grow during 1999; however,
management anticipates that average monthly revenue per customer will continue
to decrease as local retail and inbound roaming revenue per minute of use
decline and as the Company further penetrates the consumer market. Additionally,
the Company expects expenses to increase during 1999 as it incurs costs
associated with both customer growth and cell sites added.
Management believes there exists a seasonality in both service revenues, which
tend to increase more slowly in the first and fourth quarters, and operating
expenses, which tend to be higher in the fourth quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter. Additionally, competitors licensed to provide
personal communications services ("PCS") have initiated service in certain of
the Company's markets over the past two and a half years. The Company expects
PCS operators to continue deployment of PCS in portions of all of the Company's
clusters throughout 1999. The Company has increased its advertising,
particularly brand advertising, in 1997 and 1998 to promote the United States
Cellular(R) brand and distinguish the Company's service from other wireless
communications providers. The Company's management continues to monitor other
wireless communications providers' strategies to determine how additional
competition is affecting the Company's results. While the effects of additional
wireless competition have slowed customer growth in certain of the Company's
markets, the overall effect on the Company's total customer growth to date has
not been material. However, management anticipates that customer growth will be
lower in the future, primarily as a result of the increase in the number of
competitors in its markets.
INVESTMENT AND OTHER INCOME
INVESTMENT AND OTHER INCOME totaled $251.8 million in 1998, $95.3 million in
1997 and $177.3 million in 1996. GAIN ON SALE OF CELLULAR AND OTHER
INVESTMENTS totaled $215.2 million in 1998, reflecting gains recorded on the
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. Gains totaling $132.7 million were
24 UNITED STATES CELLULAR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
recorded in 1996 from sales of the Company's majority interests in eight
markets and minority interests in two other markets, on cash received in an
exchange of markets with another cellular operator and on cash received from
the settlement of two separate legal matters. See "Financial Resources and
Liquidity--Acquisitions and Divestitures" for further discussion of these
transactions.
INVESTMENT INCOME was $42.5 million in 1998, $77.1 million in 1997 and $51.5
million in 1996. Investment income primarily represents the Company's share of
net income from the markets managed by others that are accounted for by the
equity method. Investment income in 1998 was negatively impacted by the
completion of the exchange transaction with BellSouth in 1997 and the
divestitures of certain minority interests to AirTouch Communications
("AirTouch") in the first half of 1998. See "Financial Resources and Liquidity
Acquisitions and Divestitures" for further discussion of these transactions.
INTEREST AND INCOME TAXES
INTEREST EXPENSE totaled $39.8 million in 1998, $29.4 million in 1997 and
$23.1 million in 1996. Interest expense in 1998 is primarily related to
Liquid Yield Option Notes ("LYONs") ($16.5 million); the Company's 7.25%
Notes (the "Notes") issued during the third quarter of 1997 ($18.5 million);
and the Company's revolving credit facility with a series of banks
("Revolving Credit Facility") ($1.1 million). Interest expense in 1997 was
primarily related to LYONs ($15.5 million), the Company's 7.25% 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).
Interest expense in 1996 was primarily related to LYONs ($14.4 million) and
borrowings under vendor financing agreements ($8.0 million).
In August 1997, the Company sold $250 million principal amount of 7.25% Notes
under a shelf registration statement, priced to yield 7.33% to maturity. The
Notes are unsecured and become due in August 2007. Interest on the Notes is
payable semi-annually on February 15 and August 15 of each year. The Notes will
be redeemable, in whole or in part, at the option of the Company at any time
after August 2004. All borrowings under the vendor financing agreements and
under the Revolving Credit Agreement with TDS were repaid in August 1997 with a
portion of the proceeds from the Notes offering.
The LYONs are zero coupon convertible debentures which accrete interest at 6%
annually, but do not require current cash payments of interest. All accreted
interest is added to the outstanding principal balance on June 15 and December
15 of each year.
The Revolving Credit Facility is a seven-year facility which was established in
1997 to replace the Company's Revolving Credit Agreement with TDS as its primary
short-term borrowing facility. Borrowings under this facility accrue interest at
the London InterBank Offered Rate ("LIBOR") plus 26.5 basis points (for a rate
of 5.3% at December 31, 1998). 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. 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.
INCOME TAX EXPENSE was $171.2 million in 1998, $83.9 million in 1997 and $111.6
million in 1996. In 1998, 1997 and 1996, $86.9 million, $14.1 million and $65.3
million of income tax expense, respectively, related to the gains on sales of
cellular interests. The effective tax rates were 44% in 1998, 43% in 1997 and
46% in 1996. The fluctuation in effective tax rates in each year is primarily
related to the nature of the gains on sales of cellular interests, which have
varying tax rates.
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 $216.9 million in 1998, $111.5 million in 1997 and $129.9
million in 1996. EARNINGS PER SHARE was $2.48 in 1998, $1.29 in 1997 and $1.51
in 1996. Net income and earnings per share for all three years included
significant after-tax gains on the sales of cellular interests, representing
$128.2 million and $1.46 per share in 1998, $16.2 million and $0.19 per share in
1997 and $67.4 million and $0.78 per share in 1996, respectively.
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 cell sites as it continues
its growth strategy. Operating cash flow may fluctuate from quarter to quarter
depending on the seasonality of each of these growth factors.
UNITED STATES CELLULAR CORPORATION 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
CASH FLOWS FROM OPERATING ACTIVITIES provided $311.1 million in 1998, $222.1
million in 1997 and $137.5 million in 1996. Operating cash flow provided $382.9
million in 1998, $261.9 million in 1997 and $196.2 million in 1996. 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 $71.8 million in 1998, $39.8 million in 1997 and $58.7
million in 1996. Income taxes and interest paid totaled $120.0 million in 1998,
$47.1 million in 1997 and $71.4 million in 1996.
CASH FLOWS FROM FINANCING ACTIVITIES required $2.7 million in 1998, provided
$135.9 million in 1997 and required $11.2 million in 1996. 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 the vendor financing agreements
earlier in 1997 totaled $13.7 million. In 1996, issuances of USM Common Shares,
primarily to TDS, provided $10.5 million while repayments of debt under the
vendor financing agreements required $21.5 million.
CASH FLOWS FROM INVESTING ACTIVITIES required $270.2 million in 1998, $358.5
million in 1997 and $150.3 million in 1996. Cash required for property, plant
and equipment and system development expenditures totaled $320.4 million in
1998, $318.7 million in 1997 and $248.1 million in 1996. In 1998 and 1996, 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 281,331 and
242 cell sites in 1998, 1997 and 1996, respectively, plus other plant additions
and costs related to the development of the Company's office systems. In 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. The Company received net cash proceeds totaling $148.3 million in
1998, $61.1 million in 1997 and $213.0 million in 1996 related to sales of
cellular interests. Cash distributions from cellular entities in which
theCompany has an interest provided $27.7 million in 1998, $52.4 million in 1997
and $23.5 million in 1996. Acquisitions required $117.3 million in 1998, $128.8
million in 1997 and $116.4 million in 1996.
Anticipated capital requirements for 1999 primarily reflect the Company's
construction and system expansion program. The Company's construction and system
expansion budget for 1999 is approximately $300 million, to expand and enhance
the Company's coverage in its service areas, including the addition of digital
service capabilities to its systems, and to enhance the Company's office
systems.
ACQUISITIONS AND DIVESTITURES
The Company assesses its cellular holdings on an ongoing basis in order to
maximize the benefits derived from clustering its markets. As the Company's
clusters have grown, the Company's focus has shifted toward exchanges and
divestitures of managed and investment interests along with the outright
purchases of controlling interests which helped build the Company's clusters
since its inception. Over the past few years, the Company has completed
exchanges of controlling interests in its less strategic markets for controlling
interests in markets which better complement its clusters. The Company has also
completed outright sales of other less strategic markets, and has purchased
controlling interests in markets which enhance its clusters. The proceeds from
any sales have been used to further the Company's growth.
In 1998, the Company acquired majority interests in six markets and other
interests in several markets, representing approximately 1.3 million pops, for a
total consideration of $168.3 million. The consideration primarily consisted of
cash and approximately 46,000 USM Common Shares issued to TDS as reimbursement
for consideration paid by TDS directly to the sellers.
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.
Also in 1997, the Company completed an exchange with BellSouth. Pursuant to the
exchange, USM 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.
26 UNITED STATES CELLULAR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The majority interests USM received are in 12 markets adjacent to its
Iowa/Missouri/Illinois/Indiana and Wisconsin/ Illinois clusters.
In 1996, the Company purchased majority interests in two markets and several
minority interests, representing approximately 1.0 million pops, and received a
majority interest in another market through an exchange with another cellular
operator. 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 $158.9 million. Included
in these acquisitions are minority interests representing approximately 598,000
pops the Company acquired from TDS for $102.8 million in cash, pursuant to an
agreement entered into in June 1996.
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 AirTouch
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 AirTouch and which were to be acquired by the
Company as part of a June 1996 agreement between the Company and TDS. The
contract right termination agreement enabled the Company to receive cash equal
to the value of the gain the Company would have realized had it purchased the
interests from TDS and sold them to AirTouch under terms similar to those in the
agreement between TDS and AirTouch.
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.
In 1996, the Company sold majority interests in eight markets and minority
interests in two other markets, representing approximately 1.2 million pops, and
divested a majority interest in another market through an exchange with another
cellular operator. The Company received cash consideration totaling $187.8
million from these sales and from the exchange. The Company also settled two
separate legal matters during 1996, receiving $30.3 million in cash from those
transactions. In total, sales, exchange and litigation settlements provided the
Company with cash totaling $218.1 million in 1996.
As of December 31, 1998, the Company had agreements pending to acquire minority
interests in two markets in which it already owns majority interests,
representing 74,000 pops, for consideration totaling $8.1 million in cash. Also
at December 31, 1998, the Company had an agreement pending to divest a majority
interest in one market, representing 264,000 pops, for $35.2 million in cash.
The Company will not record a gain or loss on the sale transaction. The Company
expects all of the pending transactions to be completed in the first half of
1999.
LIQUIDITY
The Company anticipates that the aggregate resources required for 1999 will
include approximately $300 million for capital spending and approximately $8
million to complete pending acquisitions. The Company is generating substantial
cash from its operations and anticipates financing its capital spending for 1999
primarily with internally generated cash, proceeds from the sales of cellular
interests and short-term borrowings. The Company had $52 million of cash and
cash equivalents at December 31, 1998 and expects to receive approximately $35
million from a pending divestiture. 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.
UNITED STATES CELLULAR CORPORATION 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
TDS TRACKING STOCK
Proposal On December 18, 1998, TDS announced that it had
with-drawn its offer to acquire all of the issued Common Shares of the Company
which TDS does not own, pursuant to a merger, in exchange for a TDS tracking
stock which follows the performance of the Company. Earlier in 1998, the
Company's Board of Directors had appointed Mr. Paul- Henri Denuit, an
independent Director of the Company, to a special committee (the "Special
Committee") of the Board of Directors to consider this offer. Because the offer
to acquire the Company's Common Shares was withdrawn, the Special Committee was
dissolved.
MARKET RISK
The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. All of the Company's current 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 significant
fluctuations in the fair value of such instruments. The Company does not enter
into financial derivatives to reduce its exposure to interest rate risks.
The Company has $995.0 million of debt repayments which are all due after 2003.
The weighted average interest rate on this debt is 6.59%, and the fair value of
the debt was $562.3 million as of December 31, 1998. The fair value was
estimated using discounted cash flow analysis.
The Company maintains a portfolio of available for sale marketable equity
securities which were acquired as consideration for the divestiture of certain
non-strategic cellular interests. The market value of these investments, in the
form of AirTouch common shares, amounted to approximately $296.9 million at
December 31, 1998. A hypothetical 10% decrease in the price of these shares
would result in a $29.7 million decline in the market value of the shares.
YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications
abbreviate dates using only two digits rather than four digits, e.g., "98"
rather than "1998". Unless corrected, this shortcut may cause problems when the
century date "2000" occurs. On that date, some computer operating systems and
applications and embedded technology may recognize the date as January 1, 1900
instead of January 1, 2000. If the Company fails to correct any critical Year
2000 processing problems prior to January 1, 2000, the affected systems may
either cease to function or produce erroneous data, which could have material
adverse operational and financial consequences.
The Company's management has established a project team to address Year 2000
issues. The Company's plan to address the Year 2000 Issue consists of five
general phases: (i) Awareness (ii) Assessment, (iii) Renovation, (iv) Validation
and (v) Implementation.
The awareness phase consisted of establishing a Year 2000 project team, that
reports periodically to the Company's Audit Committee, and developing an overall
strategy. A Year 2000 Program Office has been established at the TDS corporate
level to coordinate activities of the Year 2000 project team, to monitor the
current status of individual projects, to report periodically to the TDS Audit
Committee and to promote the exchange of information between all TDS business
units to share knowledge and solution techniques. The Year 2000 effort covers
the network and supporting infrastructure for the provision of cellular
services; the operational and financial information technology ("IT") systems
and applications, including computer systems that support key business functions
such as billing, finance, customer service procurement and supply; and a review
of the Year 2000 compliance efforts of the Company's critical vendors.
The assessment phase includes the identification of core business areas and
processes, analysis of systems and hardware supporting the core business areas
and the prioritization of renovation or replacement of the systems and hardware
that are not Year 2000 compliant. Included in the assessment phase is an
analysis of risk management factors such as contingency plans and legal matters.
The assessment phase was largely complete early in the first quarter of 1999.
Certain critical systems and hardware components have been identified and are in
the renovation phase. The renovation phase consists of the conversion or
replacement of selected platforms, applications, databases and utilities. The
renovation of critical hardware, systems and applications is scheduled to be
substantially completed by the third quarter of 1999.
The validation phase includes testing, verifying and validating the renovated or
replaced platforms, applications, databases and utilities. The validation phase
consists of independent verification testing of key hardware, systems and
applications as well as network and system component upgrades received from
suppliers. In addition, selected Year 2000 upgrades are slated to undergo
testing in a controlled environment that replicates the current environment and
is equipped to simulate the turn of the century and leap year dates. The
Cellular Telecommunications Industry Association ("CTIA") has formed a working
group to coordinate efforts of various carriers and manufacturers to facilitate
inter-network Year 2000 testing. Validation of critical hardware, systems and
applications is scheduled to be completed in the third quarter of 1999.
The implementation phase involves switching over to the converted and renovated
systems and applications. This phase is expected to be completed during the
fourth quarter of 1999.
28 UNITED STATES CELLULAR CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Management cannot provide assurance that its plan to achieve Year 2000
compliance will be successful as it is subject to various risks and
uncertainties. The Company's current schedule is subject to change depending on
developments that may arise through unforeseen circumstances in the renovation,
validation and implementation phases of the Company's compliance efforts.The
Company, like most other telecommunications operators, is highly dependent on
the telecommunications network vendors to provide compliant hardware, systems
and applications and on other third parties, including vendors, other
telecommunications service providers, government agencies and financial
institutions, to deliver reliable services. The Company is dependent on the
development of compliant hardware, systems and applications and upgrades by
experts, both internal and external, and the availability of critical resources
with the requisite skill sets. The Company's ability to meet its target dates is
dependent upon the timely provision of necessary upgrades and modifications by
its suppliers and internal resources. In addition, the Company cannot guarantee
that third parties on whom it depends for essential services (such as electric
utilities, financial institutions, interconnected telecommunications operators,
etc.) will convert their critical systems and processes in a timely manner.
Failure or delay by any of these parties could significantly disrupt the
Company's business, including the provision of cellular service to customers,
billing and collection processes and other areas of the business, and cause a
material adverse effect on the Company's results of operations, financial
position and cash flow.
The Company's worst case scenario regarding the Year 2000 Issue may involve
interruption of telecommunications services and data processing service and/or
interruption of customer billing, operating and other information systems. As
part of its Year 2000 initiative, the Company is evaluating a variety of adverse
scenarios and is in the process of developing contingency and business
continuity plans tailored for adverse Year 2000-related occurrences. The
contingency and business continuity plans are expected to assess the potential
for business disruption in various scenarios, and to provide key operational
backup, recovery and restorational alternatives.
The Company's contingency plan initiatives will include the following:
reviewing, assessing and updating existing business recovery plans; identifying
teams who will be on call during the millennium change to monitor the network,
critical systems, operations centers and business processes to react immediately
to facilitate repairs; re-prioritization of mission critical work processes and
associated resources; developing alternate processes to support critical
customer functions in the event information systems or mechanized processes
experience Year 2000 disruptions; establishing replacement/repair parallel paths
to provide for repair and readiness of existing systems and components that are
scheduled for replacement by the Year 2000, in the event the replacement
schedules are not met; developing alternate plans for critical suppliers of
products and services that fail to meet Year 2000 compliance commitment
schedules; developing data retention and recovery procedures to be in place for
customer and critical business data to provide pre-millennium backups with
on-site as well as off-site data copies. The Company anticipates having these
contingency plans in place before December 31, 1999.
The Company estimates that the total direct costs related to the Year 2000
project will be approximately $3 million to $5 million. Through December 31,
1998, the total direct costs associated with the Year 2000 Issue were
approximately $1 million. In recent years, the Company has made capital
expenditures, primarily related to the ongoing upgrade of its network, to
provide digital capabilities, as well as certain financial systems which are by
design Year 2000 compliant but which will be tested. These expenditures are not
considered to be directly related to the Year 2000 project because they are in
conjunction with the Company's overall operating strategies to add digital
capabilities for competitive purposes and to improve financial systems and
customer service. The Company anticipates making further capital expenditures
during 1999 for similar purposes. The timing of the Company's specific Year 2000
project expenditures may vary and is not necessarily indicative of readiness
efforts or progress to date. Though specific Year 2000 project costs will
directly impact the reported level of future net income, the Company intends to
manage its total cost structure, including deferral of non-critical projects, in
an effort to mitigate the impact of Year 2000 project costs.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION AND OTHER SECTIONS OF THIS ANNUAL REPORT TO SHAREHOLDERS CONTAIN
"FORWARD-LOOKING" STATEMENTS AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT THE COMPANY'S BELIEFS AND EXPECTATIONS, ARE FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS CONTAIN POTENTIAL RISKS AND UNCERTAINTIES; THEREFORE, ACTUAL
RESULTS MAY DIFFER MATERIALLY. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE
PUBLICLY ANY FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE, BUT
ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION IN
MARKETS IN WHICH THE COMPANY OPERATES; ADVANCES IN TELECOMMUNICATIONS
TECHNOLOGY; CHANGES IN THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING
AND FUTURE LITIGATION; AVAILABILITY OF FUTURE FINANCING; START-UP OF PCS
OPERATIONS; UNANTICIPATED CHANGES IN GROWTH IN CELLULAR CUSTOMERS, PENETRATION
RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES OFFERED IN THE COMPANY'S
MARKETS; AND UNANTICIPATED PROBLEMS WITH THE YEAR 2000 ISSUE. READERS SHOULD
EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT FACTORS.
UNITED STATES CELLULAR CORPORATION 29
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
(Dollars in thousands, except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Operating Revenues
Service $ 1,123,454 $ 852,991 $ 662,681
Equipment sales 39,013 23,974 17,387
----------- ---------- -----------
Total Operating Revenues 1,162,467 876,965 680,068
----------- ---------- -----------
Operating Expenses
System operations 193,625 153,137 117,368
Marketing and selling 228,844 178,984 130,310
Cost of equipment sold 94,378 82,302 74,023
General and administrative 262,766 200,620 162,162
Depreciation 167,150 97,591 74,631
Amortization of intangibles 39,629 34,788 34,208
----------- ---------- -----------
Total Operating Expenses 986,392 747,422 592,702
----------- ---------- -----------
----------- ---------- -----------
Operating Income 176,075 129,543 87,366
----------- ---------- -----------
Investment and Other Income
Investment income 42,451 77,121 51,518
Amortization of licenses related to investments (1,039) (2,084) (1,391)
Interest income 5,695 5,863 10,093
Other (expense), net (4,413) (3,614) (1,881)
Minority share of income (6,039) (12,298) (13,743)
Gain on sale of cellular and other investments 215,154 30,318 132,718
----------- ---------- -----------
Total Investment and Other Income 251,809 95,306 177,314
----------- ---------- -----------
Income Before Interest and Income Taxes 427,884 224,849 264,680
----------- ---------- -----------
Interest Expense
Interest expense - other 39,772 27,414 23,111
Interest expense - affiliate -- 1,948 --
----------- ---------- -----------
Total Interest Expense 39,772 29,362 23,111
----------- ---------- -----------
Income Before Income Taxes 388,112 195,487 241,569
Income tax expense 171,165 83,948 111,640
----------- ---------- -----------
Net Income $ 216,947 $ 111,539 $ 129,929
----------- ---------- -----------
Weighted Average Common and Series A Common Shares (000s) 87,323 86,346 85,797
Basic Earnings Per Common and Series A Common Share $ 2.48 $ 1.29 $ 1.51
----------- ---------- -----------
DILUTED EARNINGS PER COMMON AND SERIES A COMMON SHARE $ 2.48 $ 1.29 $ 1.51
----------- ---------- -----------
- ------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
30 UNITED STATES CELLULAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 216,947 $ 111,539 $ 129,929
Add (Deduct) adjustments to reconcile net
income to net cash provided by operating activities
Depreciation and amortization 206,779 132,379 108,839
Deferred income tax provision 107,201 24,077 63,137
Investment income (42,451) (77,121) (51,518)
Minority share of income 6,039 12,298 13,743
Gain on sale of cellular and other investments (215,154) (30,318) (132,718)
Other noncash expense 24,660 18,786 19,260
Change in accounts receivable (26,998) (10,038) (16,706)
Change in accounts payable 61,977 (1,646) 12,709
Change in accrued interest 532 6,413 204
Change in accrued taxes (26,246) 26,297 (10,185)
Change in customer deposits and deferred revenues 6,523 5,083 5,254
Change in other assets and liabilities (8,710) 4,388 (4,439)
----------- ---------- -----------
311,099 222,137 137,509
----------- ---------- -----------
Cash Flows from Financing Activities
Issuance of 7.25% unsecured notes -- 243,053 --
Vendor financing borrowings -- -- 3,922
Repayment of vendor financing -- (103,827) (21,519)
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 2,567 2,503 10,483
Capital distributions to minority partners (3,991) (5,849) (4,099)
----------- ---------- -----------
(2,726) 135,880 (11,213)
Cash Flows from Investing Activities
Additions to property, plant and equipment (274,375) (277,799) (219,370)
System development costs (46,042) (40,949) (28,753)
Investments in and advances to minority interests in cellular entities (2,823) (20,084) (22,256)
Distributions from minority interests in cellular entities 27,740 52,365 23,464
Proceeds from sale of cellular and other investments 148,329 61,145 212,979
Acquisitions, excluding cash acquired (117,319) (128,828) (116,387)
Change in temporary investments and
marketable non-equity securities 468 (1,088) --
Other investing activities (6,227) (3,305) --
----------- ---------- -----------
(270,249) (358,543) (150,323)
----------- ---------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents 38,124 (526) (24,027)
Cash and Cash Equivalents -
Beginning of period 13,851 14,377 38,404
----------- ---------- -----------
End of period $ 51,975 $ 13,851 $ 14,377
----------- ---------- -----------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
UNITED STATES CELLULAR CORPORATION 31
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - ASSETS
December 31,
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents
General funds $ 15,576 $ 13,851
Affiliated cash equivalents 36,399 --
------------ ------------
51,975 13,851
Temporary investments 284 218
Accounts receivable
Customers, less allowance of
$6,054 and $5,259, respectively 99,931 81,387
Roaming 46,634 30,689
Affiliates 26 170
Other 13,671 17,536
Inventory 16,673 11,836
Prepaid expenses 10,506 15,714
Other current assets 3,105 3,963
------------ ------------
242,805 175,364
------------ ------------
Investments
Licenses, net of accumulated amortization of
$158,480 and $127,783, respectively 1,248,053 1,150,924
Minority interests in cellular entities 92,886 128,810
Notes and interest receivable 11,530 10,673
Marketable equity securities 296,860 --
Marketable non-equity securities 336 870
------------ ------------
1,649,665 1,291,277
------------ ------------
Property, Plant and Equipment
In service and under construction 1,400,597 1,212,575
Less accumulated depreciation 389,754 272,322
------------ ------------
1,010,843 940,253
------------ ------------
Deferred Charges
System development costs, net of accumulated amortization
of $6,483 and $18,117, respectively 127,742 78,306
Other, net of accumulated amortization
of $8,502 and $4,639, respectively 16,581 23,716
------------ ------------
144,323 102,022
Total Assets $ 3,047,636 $ 2,508,916
------------ ------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
32 UNITED STATES CELLULAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $ -- $ 1,302
Accounts payable
Affiliates 11,508 2,466
Other 172,568 101,263
Customer deposits and deferred revenues 27,575 21,019
Accrued interest 7,069 6,534
Accrued taxes 13,928 41,606
Accrued compensation 13,263 9,112
Other current liabilities 12,362 20,934
------------ --------------
258,273 204,236
------------ --------------
Long-term Debt
6% zero coupon convertible debentures 281,487 265,330
7.25% unsecured notes 250,000 250,000
------------ --------------
531,487 515,330
------------ --------------
Deferred Liabilities and Credits
Net deferred income tax liability 258,123 100,725
Other 5,914 5,397
------------ --------------
264,037 106,122
------------ --------------
Minority Interest 43,609 53,908
------------ --------------
Common Shareholders' Equity
Common Shares, par value $1 per share;
authorized 140,000,000 shares; issued and outstanding
54,364,729 and 54,232,486 shares, respectively 54,365 54,232
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 1,319,895 1,285,530
Accumulated other comprehensive income 69,465 --
Retained earnings 473,499 256,552
------------ --------------
1,950,230 1,629,320
Total Liabilities and Shareholders' Equity $ 3,047,636 $ 2,508,916
------------ --------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
UNITED STATES CELLULAR CORPORATION 33
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Accumulated
Other
Series A Additional Common Compre- Compre-
Common Common Paid-In Shares hensive hensive Retained
(Dollars in thousands) Shares Shares Capital Issuable Income Income Earnings
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 49,966 $33,006 $ 1,206,614 $ 24,784 $ -- $ -- $ 15,084
Add (Deduct)
Acquisition of
cellular interests 2,194 -- 65,089 -- -- -- --
Employee benefit plans 62 -- 1,575 -- -- -- --
Redemption of USM and
TDS Preferred Stock 895 -- 17,555 -- -- -- --
Transfer of interests
from TDS -- -- (45,761) -- -- -- --
Capital stock expense -- -- (6) -- -- -- --
Shares issued pursuant to
acquisition agreements -- -- -- (24,784) -- -- --
Net income and
comprehensive income -- -- -- -- 129,929 -- 129,929
--------- ------- ------------ --------- -------- ------- ----------
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 (Deduct)
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
--------- ------- ------------ --------- ------- ----------
34 UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, United States Cellular Corporation (the "Company" or "USM")
received a proposal from Telephone and Data Systems, Inc.("TDS"), which was part
of a plan which had been adopted by the TDS Board of Directors and then approved
by the shareholders of TDS in April 1998, to authorize three new classes of
common stock. The three new classes of stock were intended to separately reflect
the performance of TDS's cellular telephone, telephone and personal
communications services businesses ("Tracking Stocks").
TDS proposed to issue Cellular Group Shares in exchange for all of the Common
Shares of USM which are not owned by TDS, subject to approval by the Board of
Directors and the shareholders of USM, and distribute one Cellular Group Share
in the form of a stock dividend with respect to each outstanding Series A Common
Share and Common Share of the Company.
On December 18, 1998, TDS announced that it had withdrawn its offer to acquire
all of the issued Common Shares of the Company which TDS does not own, pursuant
to a merger, in exchange for a TDS tracking stock which follows the performance
of the Company. Earlier in 1998, the Company's Board of Directors had appointed
Mr. Paul-Henri Denuit, an independent Director of the Company, to a special
committee (the "Special Committee") of the Board of Directors to consider this
offer. Because the offer to acquire the Company's Common Shares was withdrawn,
the Special Committee was dissolved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY, A DELAWARE
Corporation, is currently an 81.0%-owned subsidiary of Telephone and Data
Systems, Inc.
NATURE OF OPERATIONS
USM owns, manages and invests in cellular systems throughout the United States
and is the nation's eleventh largest cellular telephone company in terms of
customers. The Company owned interests in 183 cellular markets, representing
approximately 26.4 million population equivalents ("pops"), as of December 31,
1998. USM's 138 majority-owned and managed markets, primarily mid-sized and
rural markets, served 2,183,000 customers in 24 states as of December 31, 1998.
USM's Midwest Regional Market Cluster, which includes markets in Iowa,
Wisconsin, Illinois and Missouri, served 924,000 customers at December 31, 1998,
representing approximately 42% of USM's total customers served as of that date.
PRINCIPLES OF CONSOLIDATION
The accounting policies of USM conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of USM,
its majority-owned subsidiaries, and partnerships in which USM has a majority
partnership interest. All material intercompany accounts and transactions have
been eliminated.
USM includes as investments in subsidiaries 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 the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and 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 securities and are stated at amortized cost.
As part of its cash management program, the Company utilizes controlled
disbursement banking arrangements. Outstanding checks in excess of cash
balances totaled $21.2 million at December 31, 1998 and are classified as
Accounts payable in the Consolidated Balance Sheets. Sufficient funds were
available to fund these outstanding checks when presented for payment.
The carrying amounts of Cash and cash equivalents and Temporary investments
approximate their fair value due to the short-term nature of these investments.
UNITED STATES CELLULAR CORPORATION 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 USM's cellular systems, by affiliated entities and by other partners for
capital contributions and distributions.
DEFERRED CHARGES
Deferred system development costs represent costs incurred
for the development of new information systems. Capitalized costs of information
systems development are or will be 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).
REVENUES
Revenues from operations primarily consist of charges to customers for monthly
access, cellular airtime, data usage, vertical services, roaming charges,
long-distance charges and equipment sales. 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 USM's cellular systems for the last half of each
month, are estimated and recorded. Equipment sales are recognized upon delivery
to the customer and reflect charges to customers for cellular telephone user
equipment purchased.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs totaled
$52.4 million, $41.4 million and $24.4 million for the years ended December
31, 1998, 1997 and 1996, 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 USM and its subsidiaries. Under this plan, pension benefits
and costs are calculated separately for each participant and are funded
currently. Pension costs were $3.3 million, $1.0 million and $1.5 million in
1998, 1997 and 1996, respectively.
ACCOUNTING FOR COMPUTER SOFTWARE
DEVELOPED FOR OR OBTAINED FOR INTERNAL USE
The American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 98-1 "Accounting for Computer Software Developed
for or Obtained for Internal Use" which became effective January 1999. To
eliminate the diversity in practice in accounting and improve financial
reporting, SOP 98-1 provides guidance for accounting for software developed for
internal use. Management is currently analyzing the impact of this statement,
but does not anticipate that the effect on results of operations and financial
position will be material.
3. INCOME TAXES
USM is included in a consolidated federal income tax return with other members
of the TDS consolidated group.
TDS and USM are parties to a Tax Allocation Agreement
(the "Agreement"). The Agreement provides that USM 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. USM
and its subsidiaries calculate their losses and credits as if they comprised a
separate affiliated group. Under the Agreement, USM 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) 1998 1997 1996
- --------------------------------------------------------------------------------
Federal income taxes
Current $ 52,613 $ 46,357 $ 35,613
Deferred 91,671 22,109 54,509
State income taxes
Current 11,351 13,514 12,890
Deferred 15,530 1,968 8,628
--------- -------- ----------
Total income
tax expense $ 171,165 $83,948 $ 111,640
--------- -------- ----------
36 UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate below:
Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.4 5.1 5.7
Amortization of license
acquisition costs .6 1.7 1.1
Corporations not included
in consolidated federal
income tax return .4 .4 .8
Changes in tax basis 1.7 -- --
Valuation allowance on
deferred tax asset -- -- (1.2)
Sale of cellular interests .7 .8 4.8
Resolution of prior
period tax issues .8 -- --
Other .5 (.1) --
---- ----- -----
Effective income tax rate 44.1% 42.9% 46.2%
---- ----- -----
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.
USM had current deferred tax assets totaling $1.5 million and $2.5 million at
December 31, 1998 and 1997, 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:
December 31,
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred Tax Asset
Net operating loss carryforward $ 14,719 $ 14,725
Taxes on acquisitions 28,190 56,384
Alternative minimum
tax credit carryforward -- 7,121
Partnership investments 7,492 --
Other -- 619
--------- ----------
50,401 78,849
Less valuation allowance 13,448 10,233
--------- ----------
Total Deferred Tax Asset 36,953 68,616
Deferred Tax Liability
Marketable equity securities 106,194 --
Property, plant and equipment 67,803 52,668
Equity investments 63,650 65,956
Licenses 46,459 40,624
Partnership investments -- 10,093
Other 10,970 --
--------- ----------
Total Deferred Tax Liability 295,076 169,341
Net Deferred Tax Liability $258,123 $100,725
--------- ----------
The amount of state net operating loss ("NOL") carryforward (generating a $11.6
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 $175.2 million at December 31, 1998 and expires
between 1999 and 2013. 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.
USM 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 $8.2 million
at December 31, 1998 which expires between 2004 and 2013.
The financial reporting basis of the marketable equity securities was greater
than the tax basis at the date of acquisition, generating $59.9 million of
deferred taxes. Additionally, the value of the marketable equity securities has
appreciated since acquisition, generating $46.3 million of deferred taxes.
4. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," effective December 31, 1997. Earnings per Share
amounts for 1996 have been restated to conform to current year presentation.
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) 1998 1997 1996
- --------------------------------------------------------------------------------
Net Income used in
Basic and Diluted
Earnings Per Share $216,947 $111,539 $129,929
-------- -------- --------
Weighted Average
Number of Common
Shares used in Basic
Earnings Per Share 87,323 86,346 85,797
Effect of
Dilutive Securities:
Convertible
Preferred Stock -- -- 51
Stock Options
and Stock
Appreciation Rights 48 52 78
Common Shares
Issuable -- -- 115
-------- -------- --------
Weighted Average
Number of Common
Shares used in Diluted
Earnings Per Share 87,371 86,398 86,041
-------- -------- --------
UNITED STATES CELLULAR CORPORATION 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Common and Series A Common Share for the years ended December
31, 1998, 1997 and 1996 contain significant income amounts related to gains
on the sale of cellular and other investments. Excluding the after-tax effect
of these gains, both basic and diluted earnings per share were $1.02, $1.10
and $.73 for the years ended December 31, 1998, 1997 and 1996, respectively.
5. INVESTMENT IN LICENSES
Investment in licenses consists of the costs incurred in acquiring Federal
Communications Commission ("FCC") 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 $33.7 million, $29.2 million and $27.3
million in 1998, 1997 and 1996, respectively. Costs applicable to
unsuccessful license applications are charged to expense. Investment in
licenses at December 31, 1998 and 1997 include approximately $242 million and
$281 million, respectively, of goodwill related to various acquisitions
structured to be tax-free. No deferred taxes have been provided on this
goodwill.
6. MINORITY INTERESTS IN CELLULAR ENTITIES
Minority interests in cellular entities consist of amounts invested in cellular
entities in which USM 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) 1998 1997
- --------------------------------------------------------------------------------
Equity method investments:
Capital contributions,
loans and advances $ 32,444 $ 66,182
Cumulative share of income 187,279 177,798
Cumulative share of distributions (130,295) (117,174)
---------- ----------
89,428 126,806
Cost method investments:
Capital contributions,
net of partnership distributions 3,458 2,004
---------- ----------
Total minority interests
in cellular entities $ 92,886 $ 128,810
---------- ----------
As of December 31, 1998, USM followed the equity method of accounting for
minority interests in 38 markets where the Company's ownership interest is 3% or
greater. This method recognizes, on a current basis, USM's proportionate share
of the income and losses accruing to it under the terms of the respective
partnership and shareholder agreements. As of December 31, 1998, USM followed
the cost method of accounting for its investments in seven markets where the
Company's ownership interest is less than 3%.
The following summarizes the unaudited balance sheets and results of operations
of the cellular system entities in which the USM's investments are accounted for
by the equity method:
December 31,
- --------------------------------------------------------------------------------
(Unaudited, dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Assets
Current $ 598,071 $ 361,561
Due from affiliates 6,721 2,724
Property and other 1,089,172 1,050,755
---------- ------------
$1,693,964 $ 1,415,040
---------- ------------
Liabilities and Partners` capital
Current liabilities $ 389,294 $ 249,587
Due to affiliates 26,022 38,429
Deferred credits 783 6,604
Long-term debt 321,026 27,195
Partners` capital
and shareholders' equity 956,839 1,093,225
---------- ------------
$1,693,964 $1,415,040
---------- ------------
---------- ------------
Year Ended December 31,
- --------------------------------------------------------------------------------
(Unaudited, dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Results of Operations
Revenues $1,548,884 $1,652,683 $1,269,835
Costs and expenses 1,055,214 1,178,970 859,026
---------- ---------- ----------
Operating income 493,670 473,713 410,809
Other (expense)
income (19,639) (7,292) 832
---------- ---------- ----------
Net income $ 474,031 $ 466,421 $ 411,641
---------- ---------- ----------
7. MARKETABLE EQUITY SECURITIES
On January 30, 1998 and April 6, 1998, USM completed sales in which the
Company received 4.1 million AirTouch Communications, Inc. ("AirTouch")
common shares as consideration. These shares are classified as
available-for-sale (see Note 10 - Acquisitions, Exchanges and Divestitures).
At December 31, 1998, these noncurrent marketable equity securities are
carried at market value ($296.9 million), which is greater than amounts
recorded at historical cost ($181.1 million) resulting in an unrealized gain
of $69.5 million, net of taxes ($46.3 million). The market value for the
marketable equity securities is based on quoted market prices. The Company's
net unrealized holding gain is included as an increase to Common
Shareholders' Equity.
38 UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. 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 13.6%, 10.3% and 10.4% in 1998, 1997 and 1996, respectively.
Composite 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
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) 1998 1997
- --------------------------------------------------------------------------------
Cell site-related equipment $ 790,292 $ 725,544
Switching-related equipment 116,198 105,955
Office furniture and equipment 127,397 89,987
Land, buildings and
leasehold improvements 237,361 199,108
Work in process 70,197 44,000
Other operating equipment 59,152 47,981
---------- -----------
$1,400,597 $1,212,575
---------- -----------
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
USM acquired certain cellular licenses and other cellular interests during 1998,
1997 and 1996. In conjunction with these acquisitions, the following assets were
acquired, liabilities assumed and Common Shares issued:
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Property, plant
and equipment, net $ 18,417 $112,696 $ 7,069
Cellular licenses 94,590 130,336 90,341
(Decrease) increase in
equity-method minority
investments in entities (2,317) (90,332) 13,971
Accounts receivable 4,551 26,032 1,332
Accounts payable (370) (31,117) (1,081)
Other assets and liabilities,
excluding cash acquired 3,751 13,699 1,493
Common Shares issued
and issuable (1,303) (32,486) 3,262
--------- --------- ---------
Decrease in cash due
to acquisitions $117,319 $128,828 $116,387
--------- --------- ---------
Following are supplemental cash flow disclosures regarding interest and income
taxes paid and certain noncash transactions:
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest paid $ 18,966 $6,816 $ 7,001
Income taxes paid 101,041 40,316 64,402
Noncash interest expense 16,157 15,379 16,110
Additions to Property,
Plant and Equipment
and System Development
financed through
Accounts Payable 21,528 8,514 2,737
Common Shares issued
by USM for redemption
of USM Preferred
Stock and TDS
Preferred Shares $ -- $ 36 $18,450
-------- ------ -------
10. ACQUISITIONS, EXCHANGES AND DIVESTITURES
USM has acquired cellular interests for cash, promissory notes and USM and TDS
Common Shares. USM 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 1998, USM 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.
During 1997, USM completed the acquisition of majority interests in two markets
and several minority interests, representing approximately 534,000 pops, for a
total consideration of $81.4 million as shown in the following table:
(Dollars in millions) Consideration
- ---------------------------------------------------------------------------------
1.0 million Common Shares to TDS(1) $ 32.5
Increase in Revolving Credit Agreement with TDS 39.0
Cash 9.9
------
Total $ 81.4
- ---------------------------------------------------------------------------------
(1) ISSUED TO REIMBURSE TDS FOR TDS SECURITIES ISSUED AND CASH PAID TO THIRD
PARTIES IN CONNECTION WITH THE ACQUISITIONS.
UNITED STATES CELLULAR CORPORATION 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assuming that the 1998 and 1997 acquisitions discussed above, which were
accounted for as purchases, had taken place on January 1, 1997, unaudited pro
forma results of operations would have been as follows:
Year Ended December 31,
(Dollars in thousands,
except per share amounts 1998 1997
- --------------------------------------------------------------------------------
Service Revenues $1,144,991 $883,126
Equipment Sales 39,706 24,895
Interest Expense
(including cost to
finance acquisitions) 40,248 33,641
Net Income 218,151 109,119
Basic Earnings per
Common Share 2.50 1.25
Diluted Earnings per
Common Share $ 2.50 $ 1.25
- --------------------------------------------------------------------------------
EXCHANGE OF MARKETS WITH BELLSOUTH
In October 1997, USM completed an exchange with BellSouth Corporation. Pursuant
to the exchange, USM received majority interests representing approximately 4.0
million pops in exchange for majority interests representing 2.0 million pops,
minority interests representing 1.2 million pops and a net amount of $86.7
million in cash. The majority interests USM received are in 12 markets adjacent
to its Iowa/Missouri/ Illinois/Indiana and Wisconsin/Illinois clusters.
COMPLETED DIVESTITURES
The gains recorded in 1998, 1997 and 1996 primarily reflect the sales of
non-strategic cellular and certain other investments. In 1998, USM 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, USM
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 1996, USM
sold its majority interests in eight markets and minority interests in two
other markets, received cash from the settlement of two separate legal
matters and received cash in an exchange of markets with another cellular
operator. In addition to the AirTouch Common Shares received in 1998, these
transactions generated net cash proceeds of $148.3 million, $61.1 million and
$213.0 million in 1998, 1997 and 1996, respectively.
PENDING ACQUISITIONS
At December 31, 1998, USM had entered into agreements with third parties to
acquire minority interests in two markets in which the Company already owns a
majority interest, representing 74,000 pops, for $8.1 million in cash. These
transactions are expected to be completed during the first half of 1999.
PENDING DIVESTITURE OF MAJORITY INTEREST
USM had entered into an agreement to sell its majority interest in one market at
December 31, 1998, representing 264,000 pops, for $35.2 million in cash. The
Company will not record a gain or loss on this transaction, which it expects to
complete during the first half of 1999.
11. REVOLVING CREDIT FACILITY
In 1997, USM established a seven-year $500 million revolving credit facility
with a group of banks ("Revolving Credit Facility"). This facility replaces the
Company's Revolving Credit Agreement with TDS as its primary short-term
borrowing facility. As of December 31, 1998, 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 5.3% at December 31, 1998). 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. USM pays facility and
administration fees at an aggregate annual rate of 0.142% of the total $500
million facility. These payments totaled $710,000 in 1998 and $237,000 in
1997. The Revolving Credit Facility expires in August, 2004.
12. 6% ZERO COUPON CONVERTIBLE DEBENTURES
During 1995, the Company sold $745 million principal amount at maturity of zero
coupon 6% yield to maturity convertible debt with proceeds to the Company of
$221.5 million. 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
both December 31, 1998 and 1997, USM's senior indebtedness totaled $260.0
million.
Each LYON is convertible at the option of the holder at any time at a
conversion rate of 9.475 USM Common Shares per $1,000 of Notes. Upon
conversion, USM may elect to deliver its Common Shares or cash equal to the
market value of the Common Shares. Beginning June 15, 2000, the LYONs may be
redeemed at any time for cash at the option of USM at the issue price plus
accrued original issue discount
40 UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
through the date of redemption. USM will purchase LYONs, at the option of the
holder, as of June 15, 2000, at the issue price plus accrued original issue
discount through that date. USM will have the option of purchasing such LYONs
with cash, USM Common Shares or TDS common equity securities, or any combination
thereof. During 1997, 25 LYONs were converted for approximately $7,600 in cash.
The carrying values at December 31, 1998 and 1997 of USM's 6% zero coupon
convertible debentures, $281.5 million and $265.3 million, respectively, are
less than and greater than their fair values, estimated to be $298.7 million and
$255.6 million, respectively. The fair values were estimated using discounted
cash flow analysis.
13. 7.25% UNSECURED NOTES
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 values at both December 31, 1998 and 1997 of the Company's 7.25%
unsecured notes, $250.0 million is less than their fair values, estimated to be
$263.6 million and $252.9 million, respectively. The fair values were estimated
using discounted cash flow analysis.
14. COMMON SHAREHOLDERS' EQUITY
COMMON STOCK
Employee Benefit Plans. The following table summarizes Common Shares issued for
the employee benefit plans described below:
Year Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
Tax-Deferred Savings Plan 33,532 42,400 23,302
Employee stock options,
stock appreciation rights
and awards 58,523 65,029 16,380
Employee Stock
Purchase Plan 16,739 10,134 22,366
------- ------- ------
108,794 117,563 62,048
------- ------- ------
TAX-DEFERRED SAVINGS PLAN
USM has reserved 88,123 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 USM Common Shares, TDS Common Shares, Common
Shares of Aerial Communications, Inc. (an 82.3%-owned subsidiary of TDS) or five
nonaffiliated funds.
EMPLOYEE STOCK OPTIONS,
STOCK APPRECIATION RIGHTS AND AWARDS
USM 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 $440,000, $285,000 and ($224,000) in 1998, 1997 and 1996,
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, Year Ended December 31,
except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
Net Income:
As Reported $216,947 $111,539 $129,929
Pro Forma 214,810 110,317 129,166
Basic Earnings
Per Common Share:
As Reported 2.48 1.29 1.51
Pro Forma 2.46 1.28 1.51
Diluted Earnings
Per Common Share:
As Reported 2.48 1.29 1.51
Pro Forma $ 2.46 $ 1.28 $ 1.50
-------- -------- ---------
41 UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plans at December 31,
1998, 1997 and 1996 and changes during the years then ended is presented in the
table and narrative below:
Weighted Weighted
Number Average Average
of Shares Option Prices Fair Values
- --------------------------------------------------------------------------------
Stock Options
Outstanding
December 31, 1995
(177,675 exercisable) 319,952 $28.07
Granted 103,326 $25.12 $16.59
Exercised (16,380) $16.98
Canceled (15,851) $30.05
------- -------
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
------- -------
USM has reserved 1,634,130 Common Shares for options granted and to be granted
to key employees. USM has established a Stock Option plan as of November 9, 1994
(as amended on May 14, 1997) that provides for the grant of stock options to
officers and employees. The options under the 1998 plan (formerly known as the
1994 plan) are exercisable from the date of vesting through November 9, 2004 to
March 31, 2008, or thirty days following the date of the employee's termination
of employment, if earlier. Under the 1998 Stock Option Plan, 317,611 stock
options were exercisable at December 31, 1998, with exercise prices between
$24.48 and $35.84 with a weighted average exercise price of $30.61 per share,
and a weighted average remaining contractual life of 6.6 years. The remaining
465,041 options, which are not exercisable, have exercise prices between $0 and
$33.94 with a weighted average exercise price of $16.72, and a weighted average
remaining contractual life of 7.0 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 1998 and 1997,
respectively: risk-free interest rates of 4.7% and 6.3%; expected dividend
yields of zero for both years; expected lives of 4.5 years and 4.0 years; and
expected volatility of 22.5% and 20.8%.
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, 1998, 3,800 Common Share SARs and 36,000
Series A Common Share SARs were outstanding at $15 per share. These rights
expire from 1999 to 2004 or the date of the person's termination of
employment, if earlier. During 1998, 1997 and 1996 31,250, 3,950 and 300
Common Share SARs were exercised, respectively. There were no SARs granted in
1998 or 1997.
EMPLOYEE STOCK PURCHASE PLAN
USM had 98,759 Common Shares reserved under the 1997 Employee Stock Purchase
Plan ("1997 ESPP"). During 1996, the 1997 ESPP was approved, which became
effective January 1, 1997. The fair value of the employees' purchase rights was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants of rights in 1998 and
1997, respectively: risk-free interest rate of 4.6% and 5.7%; expected dividend
yield of zero for both years; expected life of .7 years for both years; and
expected volatility of 25.9% and 17.6%.
SERIES A COMMON SHARES
Series A Common Shares are convertible on a share-for-share basis into Common
Shares and each share is entitled to ten votes per share, compared to one vote
for each Common Share. As of December 31, 1998, all of USM's outstanding Series
A Common Shares were held by TDS.
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 Unrealized Gains on
Securities, in the Consolidated Statement of Changes in Shareholders' Equity.
The income tax effects allocated to and the cumulative balance of unrealized
gains on securities are as follows:
Year Ended
(Dollars in thousands) December 31, 1998
- --------------------------------------------------------------------------------
Balance, beginning of period $ --
Unrealized gains on securities 115,773
Income Tax Effect (46,308)
Net unrealized gains on securities 69,465
---------
Balance, end of period $ 69,465
---------
42 UNITED STATES CELLULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTIES
USM 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 USM and on allocations of common
expenses. Such allocations are based on the relationship of USM'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 USM are reflected in the accompanying financial statements on a
basis which is representative of what they would have been if USM operated on a
stand-alone basis. Billings to USM from TDS totaled $44.8 million, $36.2 million
and $28.1 million in 1998, 1997 and 1996, respectively. In 1998, TDS developed a
new payroll system for all of its subsidiaries, including the Company. The
Company recorded $12.7 million related to this system in system development
costs.
USM has a Cash Management Agreement with TDS under which USM 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 USM 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 $2.1 million,
$1.3 million and $4.8 million in 1998, 1997 and 1996, respectively.
All markets managed by USM are billed for services they receive from USM. 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 USM. 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.
16. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION AND EXPANSION
The partnerships and corporations in which USM is a partner or shareholder
are in various stages of development. USM expects to spend approximately $300
million during 1999, 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. Under the terms of
certain partnership and shareholder agreements, USM may be committed to
funding other partners' or shareholders' portions of construction and other
costs, if sufficient financing is not available to the individual entities.
USM does not expect such individual financing shortfalls to be material.
From time to time USM may acquire attractive markets to maximize its clustering
strategy. See Note 10 Acquisitions, Exchanges and Divestitures for a discussion
of pending acquisitions and divestitures.
LEASE COMMITMENTS
USM 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, 1998 are as follows:
Minimum
(Dollars in thousands) Future Rentals
- --------------------------------------------------------------------------------
1999 $18,684
2000 15,176
2001 11,741
2002 8,094
2003 6,550
Thereafter $44,290
- -------------------------------------------------------------------------------
Rent expense totaled $24.2 million, $17.2 million and $12.4 million in 1998,
1997 and 1996, respectively.
LEGAL PROCEEDINGS
The Company is involved in legal proceedings before the FCC 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.
UNITED STATES CELLULAR CORPORATION 43
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 81.0%-owned subsidiary of
Telephone and Data Systems, Inc.) and Subsidiaries (the "Company") as of
December 31, 1998 and 1997, 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, 1998. 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 generally accepted auditing
standards. 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, 1998 and
1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1999
44
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
Quarter Ended
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------------------------
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 Total 1.49 .38 .41 .22
From Operations .22 .31 .41 .08
From Gains $ 1.27 $ .07 $ -- $ .14
1997
Revenues $ 184,584 $ 217,579 $ 231,959 $ 242,843
Operating Income 23,445 42,154 44,912 19,032
Gain on Sale of Cellular and Other Investments -- 8,237 5,208 16,873
Net Income 18,468 31,692 36,222 25,157
From Operations 18,468 28,781 32,014 16,039
From Gains $ -- $ 2,911 $ 4,208 $ 9,118
Weighted Average Common and
Series A Common Shares (000s) 86,148 86,177 86,203 86,858
Basic Earnings Per Common and Series A
Common Share $ .21 $ .37 $ .42 $ .29
Diluted Earnings Per Common and Series A
Common Share Total .21 .37 .42 .29
From Operations .21 .33 .37 .18
From Gains $ -- $ .04 $ .05 $ .11
NET INCOME FOR 1998 AND 1997 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 USM'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.>>
UNITED STATES CELLULAR CORPORATION 45
CONSOLIDATED FINANCIAL STATEMENT
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended or at December 31,
(Dollars in thousands, except per share amounts) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Data
Service Revenues $ 1,123,454 $ 852,991 $ 662,681 $ 464,555 $ 313,875
Equipment Sales 39,013 23,974 17,387 15,761 13,755
Operating Income 176,075 129,543 87,366 42,755 17,385
Minority share of operating income (6,039) (12,298) (13,743) (7,902) (5,152)
Investment income, net of related
amortization expense 41,412 75,037 50,127 38,744 25,627
Gain on sale of cellular and
other investments 215,154 30,318 132,718 83,494 3,321
Income Before Income Taxes 388,112 195,487 241,569 132,234 21,310
Net Income $ 216,947 $ 111,539 $ 129,929 $ 99,742 $ 16,393
Weighted Average Common and
Series A Common Shares (000s) 87,323 86,346 85,797 82,320 77,321
Basic Earnings Per Common and
Series A Common Share $ 2.48 $ 1.29 $ 1.51 $ 1.21 $ .23
Diluted Earnings Per Common and
Series A Common Share $ 2.48 $ 1.29 $ 1.51 $ 1.19 $ .23
Pretax Profit on Service Revenues 34.5% 22.9% 36.5% 28.5% 6.8%
Operating Cash Flow Interest Coverage 16.2x 18.5x 22.4x 6.7x 3.8x
Pretax Interest Coverage Before Gains 5.3x 6.6x 5.7x 2.8x 1.8x
Effective Income Tax Rate 44.1% 42.9% 46.2% 24.6% 23.1%
Balance Sheet Data
Working Capital $ (15,468) $ (28,872) $ (17,835) $ (25,323) $ (33,813)
Property, Plant and Equipment, net 1,010,843 940,253 650,754 530,027 368,181
Investments -
Cellular entities 92,886 128,810 186,791 134,421 99,495
Licenses, net of accumulated
amortization 1,248,053 1,150,924 1,044,141 1,035,846 947,399
Total Assets 3,047,636 2,508,916 2,085,899 1,880,144 1,534,787
Vendor Financing,
excluding current portion -- -- 80,589 98,656 57,691
6% Zero Coupon Convertible Debentures 281,487 265,330 250,107 235,750 --
7.25% Unsecured Notes 250,000 250,000 -- -- --
Revolving Credit Agreement - TDS -- -- -- -- 232,954
Redeemable Preferred Stock,
excluding current portion -- -- -- -- 9,597
Common Shareholders' Equity $ 1,950,230 $ 1,629,320 $ 1,476,202 $ 1,329,454 $ 1,093,967
Current Ratio .94 .86 .88 .84 .66
Return on Equity 12.1% 7.2% 9.3% 8.2% 1.6%
48 UNITED STATES CELLULAR CORPORATION
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 26, 1999, the
Company's Common Shares were held by 652 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 as reported by the American
Stock Exchange were as follows:
Common Shares
Calendar Period High Low
- -------------------------------------------------------------------------------------------------------------------
1998
First Quarter $34.75 $ 28.06
Second Quarter 34.25 28.44
Third Quarter 34.94 27.69
Fourth Quarter 41.00 28.63
1997
First Quarter $28.75 $ 24.88
Second Quarter 29.63 23.13
Third Quarter 36.88 29.19
Fourth Quarter 36.81 29.38
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 11, 1999 at 10:00 a.m. in Chicago, Illinois.
VISIT USM'S HOME PAGE ON THE INTERNET AT HTTP://WWW.USCC.COM
UNITED STATES CELLULAR CORPORATION 49