- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------ --------------------- Commission File Number 1-9712 - -------------------------------------------------------------------------------- UNITED STATES CELLULAR CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 62-1147325 ------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631 ------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (773) 399-8900 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 2000 ------------------------------- ------------------------------------ Common Shares, $1 par value 52,805,277 Shares Series A Common Shares, $1 par value 33,005,877 Shares - --------------------------------------------------------------------------------
UNITED STATES CELLULAR CORPORATION ----------------------------------- 3RD QUARTER REPORT ON FORM 10-Q ------------------------------- INDEX ----- Page(s) ------- No. - --- Part I. Financial Information Management's Discussion and Analysis of Results of Operations and Financial Condition 2-13 Consolidated Statements of Operations - Three Months and Nine Months Ended September 30, 2000 and 1999 14 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 15 Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 16-17 Notes to Consolidated Financial Statements 18-23 Part II. Other Information 24 Signatures 25
PART I. FINANCIAL INFORMATION ----------------------------- UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS ------------------------------------------------------------- AND FINANCIAL CONDITION ------------------------ RESULTS OF OPERATIONS - --------------------- Nine Months Ended 9/30/00 Compared to Nine Months Ended 9/30/99 - --------------------------------------------------------------- United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns, operates and invests in cellular markets throughout the United States. USM is an 82.7%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS"). The Company owned either majority or minority cellular interests in 175 markets at September 30, 2000, representing 26,319,000 population equivalents ("pops"). The Company included the operations of 138 majority-owned and managed cellular markets, representing 24.0 million pops, in consolidated operations ("consolidated markets") as of September 30, 2000. Minority interests in 30 markets, representing 2.2 million pops, were accounted for using the equity method and were included in investment income at that date. All other interests were accounted for using the cost method. Following is a table of summarized operating data for the Company's consolidated operations. <TABLE> <CAPTION> Nine Months Ended or At September 30, --------------------------- 2000 1999 --------- --------- <S> <C> <C> Total market population (in thousands) (1) 24,900 24,861 Customers 2,890,000 2,453,000 Market penetration 11.61% 9.87% Markets in operation 138 139 Total employees 5,000 4,800 Cell sites in service 2,430 2,235 Average monthly revenue per customer $45.53 $49.06 Churn rate per month 2.00% 2.04% Marketing cost per gross customer addition $331 $343 (1) Calculated using Claritas population estimates for 1999 and 1998, respectively. </TABLE> The growth in the Company's operating income in the first nine months of 2000, which includes 100% of the revenues and expenses of its consolidated markets plus its corporate office operations, primarily reflects improvements in the Company's overall operations compared to the first nine months of 1999. The improvements resulted from growth in the Company's customer base and revenues coupled with continuing economies of scale. Operating revenues, driven primarily by a 18% increase in customers served, rose $111.8 million, or 11%, in 2000. Cash operating expenses (total operating expenses less depreciation and amortization expense) rose $49.3 million, or 7%, in 2000. Operating cash flow (operating income plus depreciation and amortization expense) increased $62.5 million, or 16%, in 2000. Depreciation and amortization expense increased $32.0 million, or 19%, in 2000. Operating income increased $30.5 million, or 14%, in 2000. 2
Investment and other income decreased $153.9 million to $134.4 million in 2000, due primarily to a decrease of $170.7 million in gains on cellular and other investments in 2000. Income tax expense decreased $42.7 million to $157.9 million in 2000, due primarily to the decrease in taxable income as a result of the reduced gains in 2000. An after-tax extraordinary loss of $29.5 million was recorded in 2000 related to the repurchase and certain conversions of convertible debentures. Net income totaled $169.6 million in 2000, a decrease of $110.2 million, or 39%, from 1999. Diluted earnings per share totaled $1.92 in 2000, a decrease of $1.11, or 37%, from 1999. Net income in 2000 and 1999 was significantly affected by gains on cellular and other investments, and net income in 2000 was affected by the extraordinary loss. A summary of the after-tax effects of gains and the extraordinary loss on net income and diluted earnings per share in each period is shown below. <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 2000 1999 ---------- ---------- (Dollars in thousands, except per share amounts) <S> <C> <C> Net income before after-tax effects of gains and extraordinary loss $ 148,697 $ 119,586 Add: After-tax effects of gains and extraordinary loss 20,876 160,179 ---------- ---------- Net income as reported $ 169,573 $ 279,765 ========== ========== Earnings per share before after-tax effects of gains and extraordinary loss $ 1.69 $ 1.34 Add: After-tax effects of gains and extraordinary loss 0.23 1.69 ---------- ---------- Diluted earnings per share as reported $ 1.92 $ 3.03 ========== ========== </TABLE> Operating Revenues - ------------------ Operating revenues totaled $1,171.9 million in 2000, up $111.8 million, or 11%, over 1999. Service revenues primarily consist of: (i) charges for access, airtime and value-added services provided to the Company's local retail customers who use the local systems operated by the Company ("local retail"); (ii) charges to customers of other systems who use the Company's cellular systems when roaming ("inbound roaming"); and (iii) charges for long-distance calls made on the Company's systems. Service revenues totaled $1,126.0 million in 2000, up $102.1 million, or 10%, over 1999. The increase was primarily due to the growing number of local retail customers using the Company's systems. Monthly service revenue per customer declined 7% to $45.53 in 2000 from $49.06 in 1999. Local retail revenue increased $111.8 million, or 16%, in 2000. Growth in the Company's customer base was the primary reason for the increase in local retail revenue. The number of customers increased 18% to 2,890,000 at September 30, 2000 from 2,453,000 at September 30, 1999. Management anticipates that overall growth rate in the Company's customer base will slow down in the future, primarily as a result of an increase in the number of competitors in its markets. Average monthly local retail revenue per customer declined 2% to $32.41 in 2000 from $33.04 in 1999. Monthly local retail minutes of use per customer was 151 in 2000 and 115 in 1999. The increase in monthly local retail minutes of use was driven by the Company's focus on designing incentive programs and rate plans to stimulate overall usage. Average revenue per minute of use decreased as a result of competitive pressures and these pricing and incentive programs. 3
Management anticipates that the Company's average local retail revenue per minute of use will continue to decline in the future, reflecting the continued effect of the previously mentioned factors. Inbound roaming revenue decreased $15.2 million, or 6%, in 2000. The decline in inbound roaming revenue in 2000 was affected by a decrease in revenue per minute due to the downward trend in negotiated rates and an increase in roaming minutes used on the Company's systems. Both the decrease in revenue per minute of use and the increase in minutes of use were significantly affected by certain pricing programs offered by other wireless companies. Wireless customers who sign up for these programs are given price incentives to roam, and many of those customers travel in the Company's markets, thus driving an increase in the Company's inbound roaming minutes of use. Management anticipates that the growth rate in inbound roaming minutes of use will be slower throughout the remainder of 2000 and in 2001 due to these pricing programs being present in both periods of comparison. Additionally, as new wireless operators begin service in the Company's markets, the Company's roaming partners could switch their business to these new operators, further slowing growth in inbound roaming minutes of use. The Company's inbound roaming revenue per minute of use has decreased as negotiated rates between the Company and its roaming partners continue to decline. Management anticipates that average inbound roaming revenue per minute of use will continue to decline in the future, reflecting the continued effect of the previously mentioned factors. Monthly inbound roaming revenue per Company customer averaged $9.16 in 2000 and $11.58 in 1999. The decrease in monthly inbound roaming revenue per Company customer was attributable to a decrease in inbound roaming revenue compared to an increase in the Company's customer base. Long-distance revenue decreased $3.6 million, or 4%, in 2000. While the volume of long-distance calls billed by the Company increased, primarily from inbound roamers using the Company's systems to make long-distance calls, long-distance revenue declined due to price reductions primarily related to long-distance charges on roaming minutes of use. These reductions, similar to the price reductions on roaming airtime charges, are a continuation of the industry trend toward reduced per minute prices. The price reductions also reduced the growth in the outbound roaming expense component of system operations expense by approximately the same amount, resulting in no material effect on the Company's operating cash flow or operating income. Monthly long-distance revenue per customer averaged $3.46 in 2000 and $4.27 in 1999. Equipment sales revenues increased $9.7 million, or 27%, in 2000. The increase in equipment sales revenues reflected the 19% increase in the number of gross customer activations, to 807,000 in 2000 from 681,000 in 1999, plus an increase in the number of higher priced dual-mode units and the volume of accessories sold. Most of the gross customer activations were produced by the Company's direct and retail distribution channels, which usually generate sales of cellular telephone units. The increase in sales of dual-mode units was related to the growth in the number of the Company's systems providing digital coverage, which enables the Company to offer its customers more features, better clarity and increased roaming capabilities. As of September 30, 2000, 42% of the Company's customers were on digital rate plans compared to 15% as of September 30, 1999. The increase in the volume of accessories sold reflected an increased emphasis on the sale of accessories at retail prices in the Company's retail locations. 4
Operating Expenses - ------------------ Operating expenses totaled $921.3 million in 2000, up $81.3 million, or 10%, over 1999. System operations expenses include customer usage expense and maintenance, utility and cell site expense. Customer usage expense represents charges from other telecommunications service providers for the Company's customers' use of their facilities as well as for the Company's inbound roaming traffic on these facilities. Also included are costs related to local interconnection to the landline network, long-distance charges and expenses incurred by the Company when its customers use systems other than their local systems ("outbound roaming"). These expenses are offset somewhat by amounts the Company bills to its customers for outbound roaming. System operations expenses decreased $12.9 million, or 8%, in 2000, primarily as a result of decreases in customer usage expense related to the lower cost per minute of use associated with the change in roaming pricing discussed previously. Costs associated with serving the Company's increased number of customers and the growing number of cell sites within the Company's systems increased in 2000. Customer usage expense decreased $20.3 million, or 19%, in 2000. The decrease in 2000 was primarily due to the $25.5 million decrease in net outbound roaming expense. Net outbound roaming expense decreased due to a reduction in cost per minute of use related to the lower roaming prices in the industry discussed previously. This decrease was partially offset by the effect of increases in monthly local minutes of use and inbound roaming minutes of use on the Company's systems. Customer usage expense represented 8% of service revenues in 2000 and 11% in 1999. Maintenance, utility and cell site expense increased $7.5 million, or 13%, in 2000. The increase primarily reflected an increase in the number of cell sites in the Company's systems, to 2,430 in 2000 from 2,235 in 1999. In total, the decrease in system operations expenses is expected to continue to slow down during the remainder of 2000, as the effects of these changes become present in both periods of comparison. System operations expenses are then expected to increase as the number of customers using and the number of cell sites within the Company's systems grows. Marketing and selling expenses increased $25.6 million, or 14%, in 2000. Marketing and selling expenses primarily consist of salaries, commissions and expenses of field sales and retail personnel and offices; agent expenses; corporate marketing department salaries and expenses; local advertising; and public relations expenses. The increase in 2000 was primarily due to the 19% rise in the number of gross customer activations, and the associated increases in commissions and advertising costs. Marketing cost per gross customer activation, which includes marketing and selling expenses and equipment subsidies, decreased 3% to $331 in 2000 from $343 in 1999. Cost of equipment sold increased $18.1 million, or 22%, in 2000. The increase reflected the growth in unit sales related to the 19% increase in gross customer activations as well as the impact of selling more higher cost dual-mode units in 2000. General and administrative expenses increased $18.4 million, or 8%, in 2000. These expenses include the costs of operating the Company's local business offices and its corporate expenses other than the corporate engineering and marketing departments. The increase includes the 5
effects of increases in expenses required to serve the growing customer base in the Company's markets and other expenses incurred related to the growth in the Company's business. The Company incurred additional costs in 2000 by providing dual-mode phone units to customers who migrated from analog to digital rate plans. Employee-related expenses increased $4.7 million, or 4%, in 2000. Monthly general and administrative expenses per customer decreased 9% to $10.43 in 2000 from $11.48 in 1999. General and administrative expenses represented 22.9% of service revenues in 2000 and 23.4% in 1999. Operating cash flow increased $62.5 million, or 16%, to $448.5 million in 2000. The improvement was primarily due to substantial growth in customers and service revenues and the effects of continued operational efficiencies on cash operating expenses. Operating cash flow margins (as a percent of service revenues) were 39.8% in 2000 and 37.7% in 1999. Depreciation expense increased $17.7 million, or 13%, in 2000. The increase reflects rising average fixed asset balances, which increased 12% in 2000, and a reduction in the useful lives of certain assets beginning in 2000. Increased fixed asset balances in 2000 resulted from the addition of new cell sites built to improve coverage and capacity in the Company's markets and from upgrades to provide digital service in more of the Company's service areas. Amortization of intangibles increased $14.3 million, or 47%, in 2000. Beginning October 1, 1999, the Company began amortizing capitalized development costs related to its new billing and information system. Annual amortization of these billing-related costs is expected to be approximately $17 million. Operating Income - ---------------- Operating income totaled $250.6 million in 2000, a $30.5 million, or 14%, increase over 1999. The operating income margin was 22.3% in 2000 and 21.5% in 1999. The improvements in operating income and operating income margin in 2000 reflected increased revenues resulting from growth in the number of customers served by the Company's systems and the effect of continued operational efficiencies on total operating expenses. The Company expects service revenues to continue to grow during the remainder of 2000 and in 2001; however, management anticipates that average monthly revenue per customer will decrease as local retail and inbound roaming revenue per minute of use decline and as the Company further penetrates the consumer market. Additionally, the Company expects expenses to increase during the remainder of 2000 and in 2001 as it incurs costs associated with both customer growth and fixed assets added. Management continues to believe there exists a seasonality in both service revenues, which tend to increase more slowly in the first and fourth quarters, and operating expenses, which tend to be higher in the fourth quarter due to increased marketing activities and customer growth, which may cause operating income to vary from quarter to quarter. Additionally, competitors licensed to provide personal communications services ("PCS") have initiated service in certain of the Company's markets over the past four years. The Company expects PCS operators to continue deployment of PCS in portions of all of the Company's clusters throughout 2000 and 2001. The Company has increased its advertising to promote its brand and distinguish the Company's service from other wireless communications providers. The Company's management continues to monitor other wireless communications providers' strategies to determine how additional competition is affecting the Company's results. While the effects of additional wireless competition have slowed customer growth in certain of the Company's markets, the overall effect on the Company's total customer growth to date has not been material. However, management 6
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 $134.4 million in 2000 and $288.3 million in 1999. Gain on cellular and other investments totaled $96.1 million in the first nine months of 2000 and $266.7 in the first nine months of 1999. The gains in 2000 were from the sales of the Company's majority interest in one market and minority interests in two markets, and from cash received from the settlement of a legal matter. The Company recognized a $259.5 million gain in the second quarter of 1999 on the difference between its historical basis in its investment in AirTouch Communications, Inc. ("ATI") common shares and the value of Vodafone Group plc ("VOD") American Depositary Receipts and cash received in the merger of ATI and VOD. Investment income was $30.7 million in 2000 compared to $24.5 million in 1999, a 25% increase. Investment income primarily represents the Company's share of net income from the markets managed by others that are accounted for by the equity method. The aggregate income from the markets in which the Company had interests in both 1999 and 2000 increased in 2000. Interest and Income Taxes - ------------------------- Interest expense decreased $20,000 in 2000 as the Company's outstanding debt balances remained relatively constant in 1999 and 2000. Income tax expense was $157.9 million in 2000 and $200.6 million in 1999. Income tax expense related to gains on cellular and other investments totaled $45.7 million in 2000 and $106.6 million in 1999. The overall effective tax rates were 44% in 2000 and 42% in 1999. The change in 2000's effective tax rate was primarily related to the nature of the gains on cellular and other investments in 2000 and 1999. TDS and the Company are parties to a Tax Allocation Agreement, pursuant to which the Company is included in a consolidated federal income tax return with other members of the TDS consolidated group. For financial reporting purposes, the Company computes federal income taxes as if it were filing a separate return as its own affiliated group and was not included in the TDS group. Extraordinary Loss - ------------------ Extraordinary item - (loss) on extinguishment of debt, net of tax totaled $29.5 million in 2000, or $(.32) per diluted share. In 2000, the Company repurchased $40,817,000 face value of its Liquid Yield Option Notes ("LYONs") and satisfied $72,664,000 face value of converted LYONs by paying cash to the holders. In total, the Company paid $64.9 million in cash and recorded accounts payable of $10.9 million related to amounts paid in October 2000. The loss resulted from the difference between the repurchase or conversion price, which approximated market value, and the accreted value of the LYONs repurchased or converted. This loss is not deductible for tax purposes. Net Income - ---------- Net income totaled $169.6 million in 2000 and $279.8 million in 1999. Diluted earnings per share was $1.92 in 2000 and $3.03 in 1999. Net income and earnings per share in 2000 and 1999 included significant after-tax gains on cellular and other investments, and an extraordinary loss 7
in 2000, representing $20.9 million and $0.23 per share in 2000 and $160.2 million and $1.69 per share in 1999. Excluding the after-tax effect of these gains and an extraordinary loss in 2000, net income would have been $148.7 million, or $1.69 per share, in 2000 and $119.6 million, or $1.34 per share, in 1999. Three Months Ended 9/30/00 Compared to Three Months Ended 9/30/99 - ----------------------------------------------------------------- Operating revenues totaled $414.2 million in the third quarter of 2000, up $41.0 million, or 11%, over 1999. Average monthly service revenue per customer decreased to $46.54 in the third quarter of 2000 compared to $49.73 in the same period of 1999 for reasons generally the same as the first nine months of 2000. Revenues from local customers' usage of the Company's systems increased $38.6 million, or 16%, in 2000 primarily due to the increased number of customers served. Average monthly local retail minutes of use per customer totaled 170 in the third quarter of 2000 compared to 124 in 1999. Also, as the number of customers and amount of revenue earned continued to grow, average revenue per minute of use continued to decline. As a result, average monthly local retail revenue per customer declined 1% to $32.88 in the third quarter of 2000 compared to $33.37 in 1999. Inbound roaming revenue decreased $13.6 million, or 15%, in 2000 as the increase in inbound roaming minutes of use was more than offset by a decrease in the average inbound roaming revenue per minute of use. Monthly inbound roaming revenue per customer averaged $9.17 in 2000 compared to $12.66 in 1999. Long-distance revenue increased $7.2 million, or 28%, in 2000. The increase was primarily driven by the increased volume of long-distance calls billed by the Company, primarily from inbound roamers using the Company's systems to make long-distance calls, partially offset by per minute price reductions primarily related to long-distance charges on roaming minutes of use. Monthly long-distance revenue per customer averaged $3.83 in 2000 and $3.51 in 1999. Equipment sales revenue increased $4.5 million, or 35%, reflecting a 24% increase in the number of gross customer activations, to 283,000 in 2000 compared to 228,000 in 1999, plus increases in the number of dual-mode units sold and in the volume of accessories sold. Operating expenses totaled $319.7 million in the third quarter of 2000, up $42.0 million, or 15%, over 2000. System operations expenses increased $9.9 million, or 22%, in 2000 as a result of increases in minutes of use and costs associated with maintaining 9% more cell sites than in 1999, partially offset by decreases in cost per minute for outbound roaming and toll transactions. Marketing and selling expenses increased $7.1 million, or 11%, in 2000. The increase was primarily due to a 24% increase in the number of gross customer activations. Cost per gross customer activation was $321 in 2000 and $358 in 1999. Cost of equipment sold increased $6.5 million, or 23%, in 2000. The increase reflects a rise in the number of dual-mode units sold in 2000, plus an increase in the volume of accessories sold. General and administrative expenses increased $9.3 million, or 12%, in 2000, primarily related to the increase in customers served. 8
Operating cash flow increased $8.2 million, or 5%, to $161.2 million in 2000; operating cash flow margins totaled 40.7% in 2000 and 42.5% in 1999. The decrease in operating cash flow margin was primarily the result of increased costs associated with continued customer growth. Depreciation expense increased $4.6 million, or 10%, in 2000, reflecting an 11% increase in average fixed asset balances. Amortization of intangibles increased $4.6 million, or 44%, in 2000, reflecting the amortization of capitalized development costs beginning October 1, 1999 related to the Company's new billing and information system. Operating income totaled $94.5 million in 2000 compared to $95.6 million in 1999, a 1% decrease. The operating income margin decreased to 23.8% in 2000 from 26.5% in 1999. The decreases in operating income and operating income margin were primarily the result of increased costs associated with continued customer growth and higher amortization expense. Investment and other income increased $76.2 million to $91.4 million in 2000. Gains on cellular and other investments totaled $78.2 million in the third quarter of 2000, resulting from the sale of the Company's majority interest in one market and minority interest in another market, and from cash received from the settlement of a legal matter. Investment income increased $418,000, or 4%, in 2000 due to the increase in 2000 in the aggregate income from the markets in which the Company had interests in both 1999 and 2000. Total interest expense decreased $150,000, or 2%, in 2000, due to a slight decrease in average debt balances. Income tax expense totaled $81.4 million in 2000 and $44.1 million in 1999. Income tax expense related to gains on cellular and other investments totaled $39.1 million in 2000 and $2.2 million in 1999. Extraordinary (loss), net of tax totaled $23.4 million in 2000. Net income totaled $71.8 million in 2000 compared to $57.1 million in 1999. Both net income and earnings per share in both years were significantly affected by gains on cellular and other investments and by the extraordinary loss in 2000. A summary of the after-tax effect of gains and the extraordinary loss on net income and diluted earnings per share is shown below. <TABLE> <CAPTION> Three Months Ended September 30, -------------------------------- 2000 1999 ---------- ----------- (Dollars in thousands, except per share amounts) <S> <C> <C> Net income before after-tax effects of gains and extraordinary loss $ 56,054 $ 53,265 Add: After-tax effects of gains and extraordinary loss 15,700 3,798 ---------- ----------- Net income as reported $ 71,754 $ 57,063 ========== =========== Earnings per share before after-tax effects of gains and extraordinary loss $ 0.64 $ 0.59 Add: After-tax effects of gains and extraordinary loss 0.17 0.04 ---------- ----------- Diluted earnings per share as reported $ 0.81 $ 0.63 ========== =========== </TABLE> FINANCIAL RESOURCES AND LIQUIDITY - --------------------------------- The Company operates a capital- and marketing-intensive business. In recent years, the Company has generated operating cash flow and received cash proceeds from divestitures to 9
fund its construction costs and operating expenses. The Company anticipates further increases in cellular units in service, revenues, operating cash flow and fixed asset additions in the future. Operating cash flow may fluctuate from quarter to quarter depending on the seasonality of each of these growth factors. Cash flows from operating activities provided $425.0 million in 2000 and $287.1 million in 1999. Operating cash flow provided $448.5 million in 2000 and $386.0 million in 1999. Cash flows from other operating activities (investment and other income, interest expense, income taxes, changes in working capital and changes in other assets and liabilities) required $23.5 million in 2000 and $98.9 million in 1999. Income taxes and interest paid totaled $82.3 million in 2000 and $74.1 million in 1999. Cash flows from investing activities required $156.7 million in 2000 and $154.6 million in 1999. Cash required for property, plant and equipment and system development expenditures totaled $206.6 million in 2000 and $242.7 million in 1999. In both periods, these expenditures were financed with internally generated cash. These expenditures primarily represent the construction of 153 and 160 cell sites in 2000 and 1999, respectively, plus other plant additions and costs related to the development of the Company's office systems. In both periods, other plant additions included significant amounts related to the replacement of retired assets and the changeout of analog radio equipment for digital radio equipment. Acquisitions required $36.0 million in 2000 and $27.0 million in 1999. The Company received net cash proceeds totaling $73.0 million in 2000 and $96.0 million in 1999 related to cellular and other investments. Cash distributions from cellular entities in which the Company has an interest provided $13.6 million in 2000 and $17.9 million in 1999. Cash flows from financing activities required $273.2 million in 2000 and $554,000 in 1999. In 2000, the Company repurchased a total of 3,140,900 of its Common Shares for a total of $206.8 million in cash, plus $4.7 million of accounts payable recorded for payments made in October 2000. These stock repurchases were made under separate programs authorized by the Company's Board of Directors. In March 2000, the Board of Directors authorized the repurchase of up to 1.4 million USM Common Shares, all of which were repurchased as of September 30, 2000. A total of 1,263,300 Common Shares were repurchased under a separate program of 1.4 million USM Common Shares authorized by the Board of Directors in May 2000. An additional 477,600 USM Common Shares were purchased pursuant to a previously authorized program to repurchase a limited amount of shares on a quarterly basis, primarily for use in employee benefit plans. Retirement of debt required $64.9 million of cash in 2000, plus $10.9 million of accounts payable recorded for payments made in October 2000, as the Company repurchased $40,817,000 face value of LYONs and paid cash to satisfy the conversion of $72,664,000 face value of LYONs by the holders. Additionally, the Company satisfied the conversion of $82,781,000 face value of LYONs by issuing approximately 105,000 new USM Common Shares and by reissuing approximately 680,000 treasury shares valued at $47.4 million. In 2000, the Company borrowed and repaid $6.0 million under its revolving credit facility with a group of banks. Anticipated capital requirements for 2000 primarily reflect the Company's construction and system expansion program. The Company's construction and system expansion budget for 2000 is approximately $310 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. 10
Acquisitions and Divestitures - ----------------------------- The Company assesses its cellular holdings on an ongoing basis in order to maximize the benefits derived from clustering its markets. The Company also reviews attractive opportunities for the acquisition of additional wireless spectrum. Over the past few years, the Company has completed exchanges of controlling interests in its less strategic markets for controlling interests in markets which better complement its clusters. The Company has also completed outright sales of other less strategic markets, and has purchased controlling interests in markets which enhance its clusters. The proceeds from any sales have been used to further the Company's growth. In the first nine months of 2000, the Company acquired majority interests in two markets and several minority interests in other markets, representing 328,000 pops, for consideration totaling $76.0 million. The consideration consisted of $49.7 million in cash, approximately 28,000 USM Common Shares, forgiveness of notes receivable totaling $10.4 million and payables totaling $14.2 million. In the first nine months of 1999, the Company acquired a majority interest in one market and minority interests in several markets, representing 243,000 pops, for a total of $30.1 million, consisting primarily of cash. In the first nine months of 2000, the Company divested a majority interest in one market and minority interests in two markets representing 382,000 pops for a total consideration of $114.8 million. The consideration consisted of $74.2 million in cash and $40.6 million in receivables. In the first nine months of 1999, the Company divested a majority interest in one market and minority interests in three markets, representing 606,000 pops, for a total consideration of $59.7 million. The majority interest was sold to BellSouth Corporation as part of a transaction which was substantially completed in November 1997; therefore, no gain or loss was recorded on this sale. As of September 30, 2000, the Company had agreements pending to acquire a majority interest in one market, representing 122,000 pops, for cash totaling $56.0 million, and to divest minority interests in three markets, representing 37,000 pops, for consideration totaling $12.6 million. The Company expects these transactions to be completed in early 2001. Liquidity - --------- The Company anticipates that the aggregate resources required for the remainder of 2000 will include the following: - approximately $103 million for capital spending; and - an as yet undetermined amount that may be needed to repurchase USM Common Shares or LYONs under programs authorized by the Company's Board of Directors. In May 2000, the Company's Board of Directors authorized the repurchase of an additional 1.4 million USM Common Shares. Through September 30, 2000, the Company had repurchased 1,263,300 shares under this program. Additionally, the Company may repurchase a limited amount of additional shares on a quarterly basis, primarily for use in employee benefit plans. In October 2000, the Company's Board of Directors authorized the repurchase of a third 1.4 million USM Common Shares. The Company completed the second 1.4 million authorization and began repurchases under the third 1.4 million authorization in October 2000. 11
The Board of Directors has authorized management to opportunistically repurchase LYONs in private transactions. The Company may also purchase a limited amount of LYONs in open-market transactions from time to time. The Company's LYONs are convertible, at the option of their holders, at any time prior to maturity, redemption or purchase, into USM Common Shares at a conversion rate of 9.475 USM Common Shares per LYON. Upon conversion, the Company has the option to deliver to holders either USM Common Shares or cash equal to the market value of the USM Common Shares into which the LYONs are convertible. The Company is generating substantial cash from its operations and anticipates financing these expenditures primarily with internally generated cash. The Company had $192.8 million of cash and cash equivalents at September 30, 2000. Additionally, the entire balance of $500 million under the Company's Revolving Credit Facility is unused and remains available to meet any short-term borrowing requirements. Management believes that the Company's operating cash flows and sources of external financing, including the above-referenced Revolving Credit Facility, provide substantial financial flexibility for the Company to meet both its short- and long-term needs. The Company also currently has access to public and private capital markets to help meet its long-term financing needs. The Company anticipates issuing debt and equity securities only when capital requirements (including acquisitions), financial market conditions and other factors warrant. Revenue Recognition - ------------------- In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements ("SAB 101")." SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. On June 26, 2000, the SEC issued Staff Accounting Bulletin No. 101B "Amendment: Revenue Recognition in Financial Statements". SAB 101B allows companies to defer the reporting of a change in accounting principle, as required by SAB 101, until the fourth quarter of the current fiscal year. Management continues to analyze this bulletin and anticipates the impact to be immaterial. Market Risk - ----------- The Company is subject to market rate risks due to fluctuations in interest rates and equity markets. All of the Company' existing debt is in the form of long-term fixed-rate notes with original maturities ranging from five to 20 years. Accordingly, fluctuations in interest rates can lead to fluctuations in the fair value of such instruments. The Company has not entered into financial derivatives to reduce its exposure to interest rate risks. There have been no material changes to the Company's outstanding debt instruments since December 31, 1999. The Company maintains a portfolio of available for sale marketable equity securities which resulted from acquisitions and the sale of non-strategic assets. The market value of these investments, principally Vodafone AirTouch plc American Depositary Receipts ("VOD ADRs"), amounted to $410.1 million at September 30, 2000. A hypothetical 10% decrease in the share prices of these investments would result in a $41.0 million decline in the market value of the investments. 12
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Management's Discussion and Analysis of Results of Operations and Financial Condition and other sections of this Quarterly Report on Form 10-Q contain statements that are not based on historical fact, including the words "believes", "anticipates", "intends", "expects", and similar words. These statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, but are not limited to: - - general economic and business conditions, both nationally and in the regions in which the Company operates; - - technology changes; - - competition; - - changes in business strategy or development plans; - - acquisitions/divestitures of properties and/or licenses; - - changes in governmental regulations; - - availability of future financing; and - - changes in growth in cellular customers, penetration rates, churn rates and roaming rates. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors. 13
<TABLE> <CAPTION> UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- Unaudited --------- Three Months Nine Months Ended September 30, September 30, --------------------------------- -------------------------------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- (Dollars in thousands, except per share amounts) <S> <C> <C> <C> <C> OPERATING REVENUES Service $ 396,629 $ 360,140 $ 1,125,978 $ 1,023,857 Equipment sales 17,570 13,061 45,965 36,281 ------------- ------------- ------------- ------------- Total Operating Revenues 414,199 373,201 1,171,943 1,060,138 ------------- ------------- ------------- ------------- OPERATING EXPENSES System operations 54,659 44,807 152,286 165,139 Marketing and selling 73,988 66,848 214,174 188,533 Cost of equipment sold 34,430 27,915 99,081 81,015 General and administrative 89,892 80,627 257,931 239,500 Depreciation 51,665 47,031 153,052 135,332 Amortization of intangibles 15,037 10,413 44,783 30,493 ------------- ------------- ------------ ------------- Total Operating Expenses 319,671 277,641 921,307 840,012 ------------- ------------- ------------ ------------- OPERATING INCOME 94,528 95,560 250,636 220,126 ------------- ------------- ------------ ------------- INVESTMENT AND OTHER INCOME Investment income 11,114 10,696 30,671 24,530 Amortization of licenses related to investments (412) (363) (965) (933) Interest income 4,726 1,833 13,477 4,590 Other income (expense), net 233 19 1,950 (452) Minority share of income (2,491) (3,077) (6,801) (6,156) Gain on cellular and other investments 78,224 6,046 96,075 266,744 ------------- ------------- ------------- ------------- Total Investment and Other Income 91,394 15,154 134,407 288,323 ------------- ------------- ------------- ------------- INCOME BEFORE INTEREST AND INCOME TAXES 185,922 110,714 385,043 508,449 Interest expense 9,358 9,508 28,096 28,116 ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 176,564 101,206 356,947 480,333 Income tax expense 81,443 44,143 157,901 200,568 ------------- ------------- ------------- ------------- INCOME BEFORE EXTRAORDINARY ITEM 95,121 57,063 199,046 279,765 ------------- ------------- ------------- ------------- Extraordinary item-(loss) on extinguishment of debt, net of tax (23,367) -- (29,473) -- ------------- ------------- ------------- ------------- NET INCOME $ 71,754 $ 57,063 $ 169,573 $ 279,765 ============= ============= ============== ============= BASIC WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES (000s) 85,685 87,484 86,520 87,445 BASIC EARNINGS PER COMMON AND SERIES A COMMON SHARES (Note 2) Income Before Extraordinary Item $ 1.11 $ 0.65 $ 2.30 $ 3.20 Extraordinary Item (0.27) -- (0.34) -- ------------- ------------- ------------- ------------- Net Income $ 0.84 $ 0.65 $ 1.96 $ 3.20 ============= ============= ============= ============= DILUTED EARNINGS PER COMMON AND SERIES A COMMON SHARES (Note 2) Income Before Extraordinary Item $ 1.07 $ 0.63 $ 2.24 $ 3.03 Extraordinary Item (0.26) -- (0.32) -- ------------- ------------- ------------- ------------- Net Income $ 0.81 $ 0.63 $ 1.92 $ 3.03 ============= ============= ============= ============= The accompanying notes to consolidated financial statements are an integral part of these statements. </TABLE> 14
<TABLE> <CAPTION> UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited --------- Nine Months Ended September 30, ------------------------------------- 2000 1999 ------------- ------------- (Dollars in thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 169,573 $ 279,765 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 197,835 165,825 Deferred income tax provision 38,119 119,354 Investment income (30,671) (24,530) Minority share of income 6,801 6,156 Extraordinary Item 29,473 -- Gain on cellular and other investments (96,075) (266,744) Other noncash expense 23,251 20,266 Proceeds from litigation settlement 42,457 -- Change in inventory (3,659) (7,871) Change in accounts receivable (22,208) (42,082) Change in accounts payable (6,176) 1,466 Change in accrued interest (4,148) (4,533) Change in accrued taxes 65,908 30,838 Change in customer deposits and deferred revenues 9,247 3,875 Change in other assets and liabilities 5,297 5,335 ------------- ------------- 425,024 287,120 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (199,821) (217,485) System development costs (6,812) (25,260) Investments in and advances (to)/from unconsolidated entities (3,681) 724 Distributions from unconsolidated entities 13,607 17,891 Proceeds from cellular and other investments 72,973 95,987 Acquisitions, excluding cash acquired (35,979) (26,967) Other investing activities 3,049 548 ------------- ------------- (156,664) (154,562) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of debt (64,891) (267) Borrowings from revolving credit facility 6,000 -- Repayment of revolving credit facility (6,000) -- Repurchase of Common Shares (206,782) -- Common Shares issued 4,450 3,507 Capital (distributions) to minority partners (5,971) (3,794) ------------- ------------- (273,194) (554) ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,834) 132,004 CASH AND CASH EQUIVALENTS- Beginning of period 197,675 51,975 ------------- ------------- End of period $ 192,841 $ 183,979 ============= ============= The accompanying notes to consolidated financial statements are an integral part of these statements. </TABLE> 15
<TABLE> <CAPTION> UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ (Unaudited) September 30, December 31, 2000 1999 ------------- ------------- (Dollars in thousands) <S> <C> <C> CURRENT ASSETS Cash and cash equivalents General funds $ 58,937 $ 29,169 Affiliated cash equivalents 133,904 168,506 ------------- ------------- 192,841 197,675 Temporary investments 7 148 Accounts receivable Customers, net of allowance 136,092 124,145 Roaming 71,268 61,915 Affiliates -- 15 Other 9,111 9,584 Inventory 33,404 29,999 Note receivable -- 10,000 Prepaid expenses 10,027 10,081 Other current assets 6,665 5,221 ------------- ------------- 459,415 448,783 ------------- ------------- INVESTMENTS Licenses, net of accumulated amortization 1,140,775 1,156,175 Marketable equity securities 410,140 540,711 Investment in unconsolidated entities, net of accumulated amortization 170,484 124,573 Notes and interest receivable - long-term 43,323 10,736 Marketable non-equity securities -- 216 ------------- ------------- 1,764,722 1,832,411 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT In service and under construction 1,720,516 1,579,278 Less accumulated depreciation 615,975 508,273 ------------- ------------- 1,104,541 1,071,005 ------------- ------------- DEFERRED CHARGES System development costs, net of accumulated amortization 123,022 135,462 Other, net of accumulated amortization 10,730 12,434 ------------- ------------- 133,752 147,896 ------------- ------------- Total Assets $ 3,462,430 $ 3,500,095 ============= ============= The accompanying notes to consolidated financial statements are an integral part of these statements. </TABLE> 16
<TABLE> <CAPTION> UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ (Unaudited) September 30, December 31, 2000 1999 ------------- ------------- (Dollars in thousands) <S> <C> <C> CURRENT LIABILITIES Accounts payable Affiliates $ 1,710 $ 3,127 Other 172,921 143,967 Customer deposits and deferred revenues 46,129 36,882 Accrued interest 3,477 7,064 Accrued taxes 73,425 7,517 Accrued compensation 17,704 16,555 Other current liabilities 16,094 11,867 ------------- ------------- 331,460 226,979 ------------- ------------- LONG-TERM DEBT 6% zero coupon convertible debentures 227,456 296,322 7.25% unsecured notes 250,000 250,000 Other 13,000 -- ------------- ------------- 490,456 546,322 ------------- ------------- DEFERRED LIABILITIES AND CREDITS Net deferred income tax liability 388,593 401,983 Other 13,178 9,199 ------------- ------------- 401,771 411,182 ------------- ------------- MINORITY INTEREST 39,446 40,971 ------------- ------------- COMMON SHAREHOLDERS' EQUITY Common Shares, par value $1 per share 55,043 54,713 Series A Common Shares, par value $1 per share 33,006 33,006 Additional paid-in capital 1,328,464 1,331,274 Treasury Shares, at cost (2,461,686 shares) (164,095) -- Accumulated other comprehensive income 3,048 81,391 Retained earnings 943,831 774,257 ------------- ------------- 2,199,297 2,274,641 ------------- ------------- Total Liabilities and Shareholders' Equity $ 3,462,430 $ 3,500,095 ============= ============= The accompanying notes to consolidated financial statements are an integral part of these statements. </TABLE> 17
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited) 1. The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of September 30, 2000 and December 31, 1999, and the results of operations and cash flows for the nine months ended September 30, 2000 and 1999. The results of operations for the nine months ended September 30, 2000 and 1999, are not necessarily indicative of the results to be expected for the full year. 2. Net Income used in computing Earnings per Common Share and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Dollars in thousands) <S> <C> <C> <C> <C> Net Income Before Extraordinary Item used in Basic Earnings Per Share $ 95,121 $ 57,063 $ 199,046 $ 279,765 Extraordinary Item (23,367) -- (29,473) -- --------- --------- --------- --------- Net Income Available to Common used in Basic Earnings Per Share $ 71,754 $ 57,063 $ 169,573 $ 279,765 ========= ========= ========= ========= Basic Weighted average number of Common Shares used in Earnings Per Share (000's) 85,685 87,484 86,520 87,445 ========= ========= ========= ========= Basic Earnings Per Share Continuing Operations $ 1.11 $ 0.65 $ 2.30 $ 3.20 Extraordinary Item (0.27) -- (0.34) -- --------- --------- --------- --------- $ 0.84 $ 0.65 $ 1.96 $ 3.20 ========= ========= ========= ========= </TABLE> 18
<TABLE> <CAPTION> UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Dollars in thousands, except per share amounts) <S> <C> <C> <C> <C> Net Income Before Extraordinary Item used in Basic Earnings Per Share $ 95,121 $ 57,063 $ 199,046 $ 279,765 Interest expense eliminated as a result of the pro forma conversion of Convertible Debentures 2,276 2,511 7,136 7,425 ----------- ----------- ----------- ----------- Net Income Before Extraordinary Item used in Diluted Earnings Per Share 97,397 59,574 206,182 287,190 Extraordinary Item (23,367) -- (29,473) -- ----------- ----------- ----------- ----------- Net Income Available to Common used in Diluted Earnings Per Share $ 74,030 $ 59,574 $ 176,709 $ 287,190 =========== =========== =========== =========== Basic Weighted average number of Common Shares used in Earnings Per Share (000's) 85,685 87,484 86,520 87,445 Effect of Dilutive Securities: Stock Options and Stock Appreciation Rights 390 483 407 241 Conversion of Convertible Debentures 5,052 7,054 5,052 7,054 ----------- ----------- ----------- ----------- Diluted Weighted Average Number of Common Shares used in Earnings Per Share 91,127 95,021 91,979 94,740 =========== =========== =========== =========== Diluted Earnings Per Share Continuing Operations $ 1.07 $ 0.63 $ 2.24 $ 3.03 Extraordinary Item (0.26) -- (0.32) -- ------------ ----------- ------------ ----------- $ 0.81 $ 0.63 $ 1.92 $ 3.03 =========== =========== =========== =========== </TABLE> 19
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited) 3. Supplemental Cash Flow Information The Company acquired certain cellular licenses and interests during the first nine months of 2000 and 1999. In conjunction with these acquisitions, the following assets were acquired, liabilities assumed and Common Shares issued. <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------ 2000 1999 ------------ ------------ (Dollars in thousands) <S> <C> <C> Property, plant and equipment $ -- $ 3,444 Cellular licenses 18,761 19,879 Investment in unconsolidated entities 56,034 (748) Decrease in note receivable (10,000) -- Decrease in minority investments 1,721 3,682 Long-term debt (13,000) -- Accounts payable - other (13,744) -- Other assets and liabilities, excluding cash acquired (961) 710 Common Shares issued (2,833) -- ------------- ------------ Decrease in cash due to acquisitions $ 35,978 $ 26,967 ============= ============ </TABLE> The following summarizes certain noncash transactions and interest and income taxes paid. <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------ 2000 1999 --------- --------- (Dollars in thousands) <S> <C> <C> Interest paid $ 18,852 $ 19,254 Income taxes paid 63,400 54,837 Noncash interest expense 13,358 12,781 Common and treasury shares issued for conversion of LYONs $ 34,466 $ -- </TABLE> 4. Gain on Cellular and Other Investments Gain on cellular and other investments in 2000 reflects gains recorded on the sale of the Company's majority interest in one market and minority interests in two markets and from the settlement of a legal matter. Gain on cellular and other investments in 1999 primarily related to the merger between AirTouch Communications, Inc. ("ATI") and Vodafone Group plc. The Company recognized a gain on the difference between its historical basis in the ATI shares and the June 30, 1999 value of the Vodafone AirTouch plc American Depository Receipts ("VOD ADRs") plus the cash received as a result of this merger. 20
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited) 5. Other Comprehensive Income The Company's Comprehensive Income includes Net Income and Unrealized Gains from Marketable Equity Securities that are classified as "available-for-sale". The following table summarizes the Company's Comprehensive Income: <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 2000 1999 ----------- ----------- (Dollars in thousands) <S> <C> <C> Accumulated Other Comprehensive Income Balance, beginning of period $ 81,391 $ 69,465 Add: Unrealized gains (losses) on securities (130,571) 242,811 Income tax effect 52,228 (97,126) ----------- ----------- Net unrealized gains (losses) (78,343) 145,685 ----------- ----------- Deduct: Gain on reclassification of securities -- 259,464 Income tax effect -- (103,786) ----------- ----------- Net unrealized gains reclassified to Net Income -- 155,678 Net change in unrealized gains included in comprehensive income (78,343) (9,993) ----------- ----------- Balance, end of period $ 3,048 $ 59,472 =========== =========== </TABLE> <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ----------- (Dollars in thousands) <S> <C> <C> <C> <C> Comprehensive Income Net Income $ 71,754 $ 57,063 $ 169,573 $ 279,765 Net change in unrealized gains (losses) on securities (29,774) 55,857 (78,343) (9,993) ------------- ------------ ------------- ----------- $ 41,980 $ 112,920 $ 91,230 $ 269,772 ============ ============ ============ =========== </TABLE> 21
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited) 6. Marketable Equity Securities Marketable equity securities include the Company's investments in equity securities, primarily VOD ADRs. These securities are classified as available-for-sale and stated at fair market value. Information regarding the Company's marketable equity securities is summarized below. <TABLE> <CAPTION> September 30, December 31, 2000 1999 ------------- ------------- (Dollars in thousands) <S> <C> <C> Available-for-sale Equity Securities Aggregate Fair Value $ 410,140 $ 540,711 Original Cost 405,061 405,061 ------------- ------------- Gross Unrealized Holding Gains 5,079 135,650 Tax Effect 2,031 54,259 ------------- ------------- Net Unrealized Holding Gains, net of tax $ 3,048 $ 81,391 ============= ============= </TABLE> 7. Treasury Shares As of September 30, 2000, the Company had repurchased a total of 3,140,900 of its Common Shares, at an aggregate cost of $211.5 million. Of the total shares repurchased, 477,600 were under a previously approved program; 1.4 million were under the program announced in the first quarter which authorized U.S. Cellular to repurchase up to 1.4 million shares; and 1.3 million were under the program announced during the second quarter which authorized U.S. Cellular to repurchase up to an additional 1.4 million shares. As of September 30, 2000, the Company had reissued 679,640 treasury shares to satisfy conversions of $71.7 million face value ($30.0 million carrying value) of LYONs. The book value of these treasury shares was calculated using the first-in, first-out method and totaled $47.4 million. In October 2000, the Board of Directors authorized the repurchase of up to an additional 1.4 million USM Common Shares. 8. Extraordinary Item - Loss on Extinguishment of Debt The Company repurchased $40.8 million face value ($16.9 million carrying value) of its Liquid Yield Option Notes ("LYONs") in private transactions. Additionally, the Company satisfied $72.7 million face value ($30.3 million carrying value) of LYONs conversions by paying cash to the holders. In total, the Company paid $64.9 million in cash and recorded $10.9 millin of accounts payable (for payments made in October 2000) in connectin with these repurchases and conversions of LYONs. For the three and nine month periods ended September 30, 2000, net losses totaling $23.4 million and $29.5 million, respectively, or $(.26) and $(.32) per diluted share, 22
respectively, were recorded to account for the difference between the repurchase or conversion price and the carrying value. This loss is not deductible for tax purposes. 23
PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings On April 11, 2000, two affiliates of U.S. Cellular, along with two unrelated wireless carriers, filed a declaratory judgment action in the United States District Court for the Northern District of Iowa against the Iowa Attorney General. This action was in response to the Attorney General's ongoing investigation of certain wireless industry practices involving wireless service agreements and related matters. The suit by U.S. Cellular and the other wireless carriers seeks to have certain state laws declared inapplicable to wireless service agreements and such practices. In response, the Iowa Attorney General filed suit in the Iowa State District Court for Polk County against U.S. Cellular, alleging violations of various state consumer credit and other consumer protection laws. The Attorney General is seeking injunctive relief, barring the enforcement of contracts in excess of four months, and related relief. The Attorney General is also seeking unspecified reimbursements for customers, statutory fines ($40,000 for certain violations and $5,000 for others, per violation) as well as fees and costs. This case was removed to the U.S. District Court for the Southern District of Iowa. On August 7, 2000, the U.S. District Court in the Southern District granted the Attorney General's motion to remand the case to the state court. On September 15, 2000, the U.S. District Court in the Northern District dismissed U.S. Cellular's Complaint in its entirety. U.S. Cellular vigorously denies the allegations of the Iowa Attorney General in the case now remanded to state court and intends to vigorously contest this case. U.S. Cellular also intends to appeal the grant of the motion to dismiss the Northern District case. Item 6. Exhibits and Reports on Form 8-K. - ------------------------------------------ (a) Exhibits: Exhibit 11 - Statement regarding computation of per share earnings is included herein as footnote 2 to the financial statements. Exhibit 12 - Statement regarding computation of ratios. Exhibit 27 - Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter ended September 30, 2000. 24
SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED STATES CELLULAR CORPORATION ---------------------------------- (Registrant) Date November 13, 2000 /s/ KENNETH R. MEYERS ----------------------- ---------------------------------- Kenneth R. Meyers Executive Vice President-Finance and Treasurer (Chief Financial Officer) Date November 13, 2000 /s/ JOHN T. QUILLE ----------------------- ---------------------------------- John T. Quille Vice President and Controller (Principal Accounting Officer) 25