-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KKuJY9c7UXBiyljj+TgGUE7YI9JiQm9ZjqVjbY7jLbZoFPJMKH56PQ7unEPgfiN/ OMug6SygaQcpfSRIICHeOw== 0001047469-98-012111.txt : 19980330 0001047469-98-012111.hdr.sgml : 19980330 ACCESSION NUMBER: 0001047469-98-012111 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED STATES CELLULAR CORP CENTRAL INDEX KEY: 0000821130 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 621147325 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09712 FILM NUMBER: 98576558 BUSINESS ADDRESS: STREET 1: 8410 W BRYN MAWR AVE STREET 2: STE 700 CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 3123998900 MAIL ADDRESS: STREET 1: 301 S. WESTFIELD ROAD STREET 2: P.O. BOX 5158 CITY: MADISON STATE: WI ZIP: 53705-0158 10-K 1 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (IRS Employer Identification incorporation or organization) No.)
8410 WEST BRYN MAWR, SUITE 700, CHICAGO, ILLINOIS 60631 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER: (773) 399-8900 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ----------------------------- ----------------------------- Common Shares, $1 par value American Stock Exchange Liquid Yield Option American Stock Exchange Notes Due 2015
Securities registered pursuant to Section 12(g) of the Act: None ------------------- 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ______ As of February 27, 1998, the aggregate market value of registrant's Common Shares held by nonaffiliates was approximately $487.6 million (based upon the closing price of the Common Shares on February 27, 1998, of $30.13, as reported by the American Stock Exchange). The number of shares outstanding of each of the registrant's classes of common stock, as of February 27, 1998, is 54,232,305 Common Shares, $1 par value, and 33,005,877 Series A Common Shares, $1 par value. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1997 Annual Report to Shareholders and of the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its Annual Meeting of Shareholders to be held May 13, 1998, described in the cross reference sheet and table of contents attached hereto are incorporated by reference into Parts II and III of this report. - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS - --------------------------------------------------------------------------------
PAGE NUMBER OR REFERENCE(1) --------------- Item 1. Business............................................. 3 Item 2. Properties........................................... 23 Item 3. Legal Proceedings.................................... 23 Item 4. Submission of Matters to a Vote of Security Holders............................................ 23 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 24 (2) Item 6. Selected Financial Data.............................. 24 (3) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 24 (4) Item 7a. Quantitative and Qualitative Disclosures About Market Risk............................................... 24 Item 8. Financial Statements and Supplementary Data.......... 24 (5) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 24 Item 10. Directors and Executive Officers of the Registrant... 25 (6) Item 11. Executive Compensation............................... 25 (7) Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 25 (8) Item 13. Certain Relationships and Related Transactions....... 25 (9) Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................ 26
- --------- (1) Parenthetical references are to information incorporated by reference from Exhibit 13, which includes portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1997 ("Annual Report") and from the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its Annual Meeting of Shareholders to be held on May 13, 1998 (the "Proxy Statement"). (2) Annual Report section entitled "United States Cellular Stock and Dividend Information." (3) Annual Report section entitled "Selected Consolidated Financial Data." (4) Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." (5) Annual Report sections entitled "Consolidated Quarterly Income Information (Unaudited)," "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Changes in Common Shareholders' Equity," "Notes to Consolidated Financial Statements" and "Report of Independent Public Accountants." (6) Proxy Statement sections entitled "Election of Directors" and "Executive Officers." (7) Proxy Statement section entitled "Executive Compensation," except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. (8) Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management." (9) Proxy Statement section entitled "Certain Relationships and Related Transactions." - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES CELLULAR CORPORATION 8410 WEST BRYN MAWR - CHICAGO, ILLINOIS 60631 TELEPHONE (773) 399-8900 - -------------------------------------------------------------------------------- PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS THE COMPANY United States Cellular Corporation (the "Company") provides cellular telephone service to 1,710,000 customers through 134 majority-owned and managed ("consolidated") cellular systems serving approximately 16% of the geography and approximately 9% of the population of the United States. Since 1985, when the Company began providing cellular service in Knoxville, Tennessee, the Company has expanded its cellular networks and customer service operations to cover 143 markets in 26 states as of December 31, 1997. In total, the Company now operates eight market clusters, of which four have a total population of more than two million, and each of which has a total population of more than one million. Overall, 86% of the Company's 26.2 million population equivalents are in markets which are consolidated, 2% are in managed but not consolidated markets and 12% are in markets in which the Company holds an investment interest. The Company is the eighth largest cellular telephone company in the United States, based on the aggregate number of population equivalents it owns. The Company's corporate development strategy is to operate controlling interests in cellular market licensees in areas adjacent to or in proximity to its other markets, thereby building clusters of operating markets. Customers benefit from larger service areas such as these, which provide longer uninterrupted service and the ability to make outgoing calls and receive incoming calls within the designated area without special roaming arrangements. In addition, the Company anticipates that clustering will continue to provide the Company certain economies in its capital and operating costs. As the number of opportunities for outright acquisitions has decreased in recent years, and as the Company's clusters have grown, the Company's focus has shifted toward exchanges and divestitures of managed and investment interests which are considered less essential to the Company's clustering strategy. The following table summarizes the status of the Company's interests in cellular markets at December 31, 1997. Owns Majority Interest and Manages.................................... 134 Owns Minority Interest and Manages.................................... 9 --- Total Markets Managed by the Company.................................. 143 Markets Managed by Others (1)......................................... 49 --- Total Markets......................................................... 192 --- ---
- ------------ (1) Represents markets in which the Company owns a minority or other noncontrolling interest and which are managed by third parties; as of December 31, 1997, the Company accounted for its interests in 42 of these markets using the equity method and accounted for the remaining seven markets using the cost method. 3 Cellular systems in the Company's 134 majority-owned and managed markets served 1,710,000 customers at December 31, 1997, and contained 1,748 cell sites. The average penetration rate in the Company's consolidated markets was 7.11% at December 31, 1997, and the churn rate in all consolidated markets averaged 1.9% per month for the twelve months ended December 31, 1997. The Company was incorporated in Delaware in 1983. The Company's executive offices are located at 8410 West Bryn Mawr, Chicago, Illinois 60631. Its telephone number is 773-399-8900. The Common Shares of the Company are listed on the American Stock Exchange under the symbol "USM." The Company's Liquid Yield Option Notes ("LYONs") are also listed on the American Stock Exchange. Unless the context indicates otherwise: (i) references to the "Company" refer to United States Cellular Corporation and its subsidiaries; (ii) references to "TDS" refer to Telephone and Data Systems, Inc. and its subsidiaries; (iii) references to "MSA" or to a particular city refer to the Metropolitan Statistical Area, as designated by the U.S. Office of Management and Budget and used by the Federal Communications Commission ("FCC") in designating metropolitan cellular market areas; (iv) references to "RSA" refer to the Rural Service Area, as used by the FCC in designating non-MSA cellular market areas; (v) references to cellular "markets" or "systems" refer to MSAs, RSAs or both; (vi) references to "population equivalents" mean the population of a market, based on 1997 Claritas estimates, multiplied by the percentage interests that the Company owns or has the right to acquire in an entity licensed, designated to receive a license or expected to receive a construction permit ("licensee") from the FCC to construct or operate a cellular system in such market. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Annual Report on Form 10-K, including exhibits, contains "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 Personal Communications Services ("PCS") operations; and unanticipated changes in growth in cellular customers, penetration rates, churn rates and the mix of products and services offered in the Company's markets. Readers should evaluate any statements in light of these important factors. PROPOSED TDS CORPORATE RESTRUCTURING In December 1997, the Company received a proposal from TDS to acquire all of the issued and outstanding Common Shares of the Company not already owned by TDS (the "Merger"). The offer was made in connection with, and is subject to TDS shareholder approval of and the effectiveness of, TDS's proposed corporate restructuring. The Board of Directors of TDS (the "TDS Board") has adopted a proposal which, if approved by TDS shareholders and implemented by the TDS Board, would authorize the TDS Board to issue three new classes of common stock and change the state of incorporation of TDS from Iowa to Delaware (the "Tracking Stock Proposal"). The three new classes of stock are intended to separately reflect the performance of TDS's cellular telephone, landline telephone and personal communications services businesses ("Tracking Stocks"). Under the Tracking Stock Proposal, one of the three new classes of common stock created by TDS would be designated as United States Cellular Group Common Shares (the "Cellular Group Shares"). The Cellular Group Shares, when issued, are intended to reflect the separate performance of the United States Cellular Group (the "Cellular Group"), which consists of TDS's interest in United States Cellular Corporation. 4 Subject to the approval of the Tracking Stock Proposal by shareholders, TDS intends to, among other things, issue Cellular Group Shares in exchange for all of the Common Shares of the Company which are not currently owned by TDS, subject to approval by the Company's Board of Directors and shareholders. In January 1998, the Company's Board of Directors created a special committee of the Board (the "Special Committee") to review the proposal from TDS. The Special Committee, consisting of one independent director of the Company, has engaged a financial advisor and legal advisor to assist in reviewing the proposal. The Special Committee will consider how the Company should respond to the TDS proposal, take the steps it deems appropriate to respond to the TDS proposal and, at such time as it considers it appropriate, report its recommendations to the Company's Board of Directors. Subsequent to shareholder approval of the Tracking Stock Proposal, TDS intends to terminate certain intercompany agreements between TDS and the Company. Thereafter, some or all of the policies between TDS and the Company would be determined solely by methods that management believes to be reasonable. Many of such policies would continue the arrangements which presently exist between TDS and the Company pursuant to the intercompany agreements, but TDS would have no contractual obligation to continue such policies after the intercompany agreements have been terminated. The TDS Board currently intends to retain future earnings, if any, for the development of the business of the Cellular Group and does not anticipate paying dividends on the Cellular Group Shares in the foreseeable future. On December 29, 1997, an individual who claims to be a holder of the Company's Common Shares filed a putative class action complaint on behalf of common stockholders of the Company in the Court of Chancery of the State of Delaware in New Castle County. The complaint names as defendants TDS, the Company and the directors of the Company. The complaint alleges a breach of fiduciary duties by the defendants and seeks to have the Merger enjoined or, if it is consummated, to have it rescinded and to recover unspecified damages, fees and expenses. A virtually identical complaint has been filed by a second individual. None of the defendants have been served with this complaint. The Company intends to vigorously defend against these lawsuits. CELLULAR TELEPHONE OPERATIONS THE CELLULAR TELEPHONE INDUSTRY. Cellular telephone technology provides high-quality, high-capacity communications services to in-vehicle and hand-held portable cellular telephones. Cellular technology is a major improvement over earlier mobile telephone technologies. Cellular telephone systems are designed for maximum mobility of the customer. Access is provided through system interconnections to local, regional, national and world-wide telecommunications networks. Cellular telephone systems also offer a full range of ancillary services such as conference calling, call-waiting, call-forwarding, voice mail, facsimile and data transmission. Cellular telephone systems divide each service area into smaller geographic areas or "cells." Each cell is served by radio transmitters and receivers operating on discrete radio frequencies licensed by the FCC. All of the cells in a system are connected to a computer-controlled Mobile Telephone Switching Office ("MTSO"). The MTSO is connected to the conventional ("landline") telephone network and potentially other MTSOs. Each conversation on a cellular phone involves a transmission over a specific set of radio frequencies from the cellular phone to a transmitter/receiver at a cell site. The transmission is forwarded from the cell site to the MTSO and from there may be forwarded to the landline telephone network to complete the call. As the cellular telephone moves from one cell to another, the MTSO determines radio signal strength and transfers ("hands off") the call from one cell to the next. This hand-off is not noticeable to either party on the phone call. The FCC currently grants only two licenses to provide cellular telephone service in each market. However, competition for customers includes competing communications technologies such as conventional landline and mobile telephone, Specialized Mobile Radio ("SMR") systems and radio paging. PCS has become available in many areas of the United States, including the Company's markets, and the Company expects PCS operators to complete initial deployment of PCS in portions of all of the Company's clusters by the end of 1998. Additionally, emerging technologies such as Enhanced 5 Specialized Mobile Radio ("ESMR") and mobile satellite communication systems may prove to be competitive with cellular service in the future in some or all of the Company's markets. The services available to cellular customers and the sources of revenue available to cellular system operators are similar to those provided by conventional landline telephone companies. Customers may be charged a separate fee for system access, airtime, long-distance calls and ancillary services. Cellular system operators often provide service to customers of other operators' cellular systems while the customers are temporarily located within the operators' service areas. Customers using service away from their home system are called "roamers." Roaming is available because technical standards require that analog cellular telephones be compatible in all market areas in the United States. The system that provides the service to these roamers will generate usage revenue. Many operators, including the Company, charge premium rates for this roaming service. There are a number of recent technical developments in the cellular industry. Currently, while most of the MTSOs process information digitally, on certain cellular systems the radio transmission is done on an analog basis. During 1992, a new transmission technique was approved for implementation by the cellular industry. Time Division Multiple Access ("TDMA") technology was selected as one industry standard by the cellular industry and has been deployed in several markets, including the Company's operations in portions of several clusters. Another digital technology, Code Division Multiple Access ("CDMA"), is also being deployed by the Company in portions of certain clusters. Digital radio technology offers several advantages, including greater privacy, less transmission noise, greater system capacity and potentially lower incremental costs for additional customers. The conversion from analog to digital radio technology is continuing on an industry-wide basis; however, this process is expected to take a number of years. PCS operators have deployed systems based on versions of TDMA and CDMA technology and a third digital technology, Global Systems for Mobile Communications ("GSM"), in the markets where they have begun operations. The cellular telephone industry is characterized by high initial fixed costs. Accordingly, if and when revenues less variable costs exceed fixed costs, incremental revenues should yield an operating profit. The amount of profit, if any, under such circumstances is dependent on, among other things, prices and variable marketing costs which in turn are affected by the amount and extent of competition. Until technological limitations on total capacity are approached, additional cellular system capacity can normally be added in increments that closely match demand and at less than the proportionate cost of the initial capacity. THE COMPANY'S OPERATIONS. From its inception in 1983 until 1993, the Company was principally in a start-up phase. Until that time, the Company's activities had been concentrated significantly on the acquisition of interests in cellular licensees and on the construction and initial operation of cellular systems. The development of a cellular system is capital-intensive and requires substantial investment prior to and subsequent to initial operation. The Company experienced operating losses and net losses from its inception until 1993. During the past four years, the Company generated operations-driven net income and has significantly increased its operating cash flows during that time. Management anticipates further growth in cellular units in service and revenues as the Company continues to expand through internal growth. Marketing and system operations expenses associated with this expansion may reduce the rate of growth in operating cash flows and operating income during the period of additional growth. In addition, the Company anticipates that the seasonality of revenue streams and operating expenses may cause the Company's operating income to vary from quarter to quarter. While the Company produced operating income and net income during the last four years, changes in any of several factors may reduce the Company's growth in operating income and net income over the next few years. These factors include: (i) the growth rate in the Company's customer base; (ii) the usage and pricing of cellular services; (iii) the churn rate; (iv) the cost of providing cellular services, including the cost of attracting new customers; (v) continued competition from PCS and other emerging technologies; and (vi) continuing technological advances which may provide additional competitive alternatives to cellular service. The Company is building a substantial presence in selected geographic areas throughout the United States where it can efficiently integrate and manage cellular telephone systems. Its cellular interests include regional market clusters in the following areas: Wisconsin/Illinois/Indiana, Iowa/ 6 Missouri, Eastern North Carolina/South Carolina, West Virginia/Maryland/Pennsylvania/Ohio, Virginia, Washington/Oregon/Idaho, Oregon/California, Maine/New Hampshire/Vermont, Florida/Georgia, Oklahoma/Missouri/Kansas, Texas/Oklahoma, Eastern Tennessee/Western North Carolina and Southwestern Texas. See "The Company's Cellular Interests." The Company has acquired its cellular interests through the wireline application process (17%), including settlements and exchanges with other applicants, and through acquisitions (83%), including acquisitions from TDS and third parties. CELLULAR SYSTEMS DEVELOPMENT ACQUISITIONS. During the last five years, the Company has expanded its size, particularly in contiguous or adjacent markets, through acquisitions which have been aimed at strengthening the Company's position in the cellular industry. This growth has resulted primarily from acquisitions of interests in mid-sized and rural markets and has been based on obtaining interests with rights to manage the underlying market. Including acquisitions of cellular interests from TDS, the Company has increased its population equivalents by 17%, from approximately 22.5 million at December 31, 1992, to approximately 26.2 million at December 31, 1997. Markets managed by the Company have increased from 116 markets at December 31, 1992 to 143 markets at December 31, 1997. As of December 31, 1997, 88% of the Company's population equivalents represented interests in markets the Company manages compared to 75% at December 31, 1992. Recently, the pace of acquisitions has slowed as industry-wide consolidation has reduced the number of markets available for acquisition. The Company's population equivalents grew at a compound annual rate of just 3% over the last five years due to the increased number of exchange and divestiture transactions in the past few years. The Company may continue to make opportunistic acquisitions or exchanges in markets that further strengthen its market clusters and in other attractive markets. The Company also seeks to acquire minority interests in markets where it already owns the majority interest. There can be no assurance that the Company, or TDS for the benefit of the Company, will be able to negotiate additional acquisitions or exchanges on terms acceptable to it or that regulatory approvals, where required, will be received. The Company plans to retain minority interests in certain cellular markets which it believes will earn a favorable return on investment. Other minority interests may be exchanged for interests in markets which enhance the Company's market clusters or may be sold for cash or other consideration. The Company also continues to evaluate the disposition of certain managed interests which are not essential to its corporate development strategy. The Company, or TDS for the benefit of the Company, has historically negotiated acquisitions of cellular interests from third parties primarily in consideration for the Company's Common Shares or TDS's equity securities. Cellular interests acquired by TDS in these transactions have been assigned to the Company. At that time, the Company reimbursed TDS for the value of TDS securities issued in such transactions, generally by issuing Common Shares to TDS or by increasing the balance under the Company's Revolving Credit Agreement with TDS in amounts equal to the value of TDS securities delivered at the time the acquisitions were completed. The fair market value of the Company's securities issued to TDS in connection with these transactions was equal to the fair market value of the TDS securities delivered in the transactions and was determined at the time the transactions were completed. In the past four years, the Company has also negotiated substantial divestitures and exchanges of cellular interests with third parties. The consideration received from these divestitures of non-strategic markets has primarily been cash, which has been used to reduce debt or for general corporate purposes. The exchanges have included the divestiture of controlling interests in non-strategic markets in exchange for controlling interests in markets which further enhance the Company's clusters. COMPLETED ACQUISITIONS. During 1997, the Company, or TDS for the benefit of the Company, purchased majority interests in two markets and several additional minority interests, representing approximately 534,000 population equivalents. The total consideration paid for these purchases, primarily in the form of cash (including cash borrowed under the Revolving Credit Agreement with TDS) 7 and the Company's Common Shares issued to TDS to reimburse TDS for the value of TDS Common Shares issued to third parties, totaled $81.4 million. COMPLETED DIVESTITURES AND EXCHANGES. During 1997, the Company sold a majority interest in one market and minority interests in two other markets, representing approximately 358,000 population equivalents, for an aggregate consideration of $54.5 million in cash and receivables. The two minority interests involved interests the Company had previously acquired from TDS pursuant to an agreement between the two companies signed in June 1996. Also during 1997, the Company completed an exchange with BellSouth Corporation ("BellSouth"). Pursuant to the exchange, the Company received majority interests representing approximately 4.0 million population equivalents in exchange for majority interests representing approximately 2.0 million population equivalents, minority interests representing approximately 1.2 million population equivalents and a net amount of $86.7 million in cash. The majority interests the Company received are in 12 markets adjacent to its Iowa/Missouri and Wisconsin/Illinois/Indiana clusters. PENDING ACQUISITIONS. At December 31, 1997, the Company had entered into agreements with third parties to acquire a majority interest in one market and a minority interest in a market in which the Company owns a majority interest, representing approximately 410,000 population equivalents, for $51.3 million in cash. If the majority interest is acquired as expected, the Company will subsequently sell that interest to BellSouth for cash. PENDING DIVESTITURES. At December 31, 1997, the Company had entered into agreements with AirTouch Communications, Inc. ("AirTouch") to divest minority interests in nine markets, representing 759,000 population equivalents. In exchange, the agreements provided that the Company will receive approximately 4.0 million shares of AirTouch stock and cash totaling $54.2 million. In addition, the Company will receive approximately $27.0 million in cash from TDS pursuant to a contract right termination agreement entered into between the Company and TDS. This agreement is related to two interests which are to be sold directly by TDS to AirTouch and which were to be acquired by the Company as part of the June 1996 agreement between the Company and TDS. The contract right termination agreement will enable 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. Additionally, the Company has entered into an agreement to sell its minority interests in two other markets, representing approximately 176,000 population equivalents, for $37.6 million in cash. The Company expects these pending transactions to be completed during the first half of 1998. The Company anticipates that it will record significant book gains on these divestitures when the transactions are completed. The Company maintains shelf registration of its Common Shares and Preferred Stock under the Securities Act of 1933 for issuance specifically in connection with acquisitions. The Company is a majority-owned subsidiary of TDS. TDS owns 81.1% of the combined total of the outstanding Common Shares and Series A Common Shares of the Company and controls 95.6% of the combined voting power of both classes of common stock. The Company benefits from the extensive telecommunications industry experience of TDS, which also operates a telephone business and is developing its PCS business. CELLULAR INTERESTS AND CLUSTERS The Company operates clusters of adjacent cellular systems in nearly all of its markets, enabling its customers to benefit from larger service areas than otherwise possible. Where the Company offers wide-area coverage, its customers enjoy uninterrupted service within the designated area. Customers may also make outgoing calls and receive incoming calls within this area without special roaming arrangements. In addition to benefits to customers, clustering also has provided to the Company certain economies in its capital and operating costs. These economies are made possible through increased sharing of facilities, personnel and other costs and have resulted in a reduction of the Company's per customer cost of service. The extent to which the Company benefits from these revenue enhancements 8 and economies of operation is dependent on market conditions, population size of each cluster and engineering considerations. The Company may continue to make opportunistic acquisitions and exchanges which will complement its established market clusters. From time to time, the Company may also consider exchanging or selling its interests in markets which do not fit well with its long-term strategies. The Company owned interests in cellular telephone systems in 192 markets at December 31, 1997, representing 26.2 million population equivalents. Including the effect of the 11 minority interests to be sold during 1998, the Company owned or had the right to acquire 181 markets, representing 25.3 million pops, at December 31, 1997. The following table summarizes the growth in the Company's population equivalents in recent years and the development status of these population equivalents.
DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (THOUSANDS OF POPULATION EQUIVALENTS)(1) Operational Markets: Majority-Owned and Managed........................................... 22,778 20,389 20,104 18,829 19,086 Minority-Owned and Managed (2)....................................... 401 401 514 1,234 1,263 Markets to be Managed, Net of Markets to be Divested: (3) Majority-Owned....................................................... -- 216 273 2,220 1,035 Minority-Owned (2)................................................... -- -- -- -- 6 --------- --------- --------- --------- --------- Total Markets Managed and to be Managed.............................. 23,179 21,006 20,891 22,283 21,390 Minority Interests in Markets Managed by Others........................ 2,121 4,511 4,026 3,779 3,577 --------- --------- --------- --------- --------- Total................................................................ 25,300 25,517 24,917 26,062 24,967 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- ------------ (1) Based on 1997 Claritas estimates for all years. (2) Includes markets where the Company has the right to acquire an interest but does not currently own an interest. (3) Includes markets which are operational but which are currently managed by third parties. The following section details the Company's cellular interests, including those it owned or had the right to acquire as of December 31, 1997. The table presented therein lists clusters of markets that the Company manages. The Company's market clusters show the areas in which the Company is currently focusing its development efforts. These clusters have been devised with a long-term goal of allowing delivery of cellular service to areas of economic interest and along corridors of economic activity. The number of population equivalents represented by the Company's cellular interests may have no direct relationship to the number of potential cellular customers or the revenues that may be realized from the operation of the related cellular systems. 9 THE COMPANY'S CELLULAR INTERESTS The table below sets forth certain information with respect to the interests in cellular markets which the Company owned or had the right to acquire pursuant to definitive agreements as of December 31, 1997.
PERCENTAGE TOTAL CURRENT CURRENT CHANGE PURSUANT AND ACQUIRABLE PERCENTAGE TO DEFINITIVE POPULATION CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS - ----------------------------------------------------- --------------- ----------- --------------- --------- --------------- MARKETS MANAGED BY THE COMPANY: MIDWEST REGIONAL MARKET CLUSTER: WISCONSIN/ILLINOIS/INDIANA: Milwaukee, Wl...................................... 1,460,000 100.00% 100.00% 1,460,000 Columbia (Wl 9).................................... 386,000 100.00 100.00 386,000 Madison, Wl........................................ 398,000 92.50 92.50 368,000 Peoria, IL......................................... 347,000 100.00 100.00 347,000 Appleton, Wl....................................... 344,000 100.00 100.00 344,000 Jo Daviess (IL 1).................................. 318,000 100.00 100.00 318,000 Rockford, IL....................................... 304,000 100.00 100.00 304,000 Wood (Wl 7)........................................ 290,000 100.00 100.00 290,000 Vernon (Wl 8)...................................... 236,000 100.00 100.00 236,000 Adams (IL 4) * (2)................................. 214,000 100.00 100.00 214,000 Green Bay, Wl...................................... 215,000 99.01 99.01 213,000 Mercer (IL 3)...................................... 202,000 100.00 100.00 202,000 Racine, Wl......................................... 186,000 89.64 89.64 167,000 Kenosha, Wl........................................ 143,000 99.09 99.09 142,000 Janesville-Beloit, Wl.............................. 152,000 80.54 12.00% 92.54 141,000 Door (Wl 10)....................................... 130,000 100.00 100.00 130,000 La Crosse, Wl...................................... 103,000 95.11 95.11 98,000 Sheboygan, Wl...................................... 110,000 86.66 86.66 96,000 Wausau, Wl *....................................... 122,000 71.76 71.76 88,000 Trempealeau (Wl 6) (2)............................. 83,000 100.00 100.00 83,000 Miami (IN 4) *..................................... 179,000 28.57 28.57 51,000 Warren (IN 5) *.................................... 123,000 33.33 33.33 41,000 Alton, IL.......................................... 21,000 100.00 100.00 21,000 Pierce (Wl 5) (2).................................. 14,000 100.00 100.00 14,000 --------------- --------------- 6,080,000 5,754,000 --------------- --------------- IOWA/MISSOURI: Des Moines, IA..................................... 431,000 100.00 100.00 431,000 Davenport, IA-IL................................... 358,000 97.37 97.37 349,000 Humboldt (IA 10)................................... 180,000 100.00 100.00 180,000 Cedar Rapids, IA................................... 181,000 96.00 96.00 174,000 Iowa (IA 6)........................................ 156,000 100.00 100.00 156,000 Muscatine (IA 4)................................... 155,000 100.00 100.00 155,000 Waterloo-Cedar Falls, IA........................... 146,000 93.03 93.03 136,000 Columbia, MO *..................................... 127,000 100.00 100.00 127,000 Stone (MO 15)...................................... 118,000 100.00 100.00 118,000 Hardin (IA 11)..................................... 113,000 100.00 100.00 113,000 Jackson (IA 5)..................................... 109,000 100.00 100.00 109,000 Kossuth (IA 14).................................... 107,000 100.00 100.00 107,000 Lyon (IA 16)....................................... 103,000 100.00 100.00 103,000 Iowa City, IA...................................... 102,000 100.00 100.00 102,000 Laclede (MO 16).................................... 100,000 100.00 100.00 100,000 Washington (MO 13)................................. 94,000 100.00 100.00 94,000 Callaway (MO 6) *.................................. 85,000 100.00 100.00 85,000 Dubuque, IA........................................ 88,000 95.90 95.90 84,000 Mitchell (IA 13)................................... 67,000 100.00 100.00 67,000
10
PERCENTAGE TOTAL CURRENT CURRENT CHANGE PURSUANT AND ACQUIRABLE PERCENTAGE TO DEFINITIVE POPULATION CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS - ----------------------------------------------------- --------------- ----------- --------------- --------- --------------- Mills (IA 1)....................................... 62,000 100.00% 100.00% 62,000 Schuyler (MO 3).................................... 56,000 100.00 100.00 56,000 Shannon (MO 17).................................... 56,000 100.00 100.00 56,000 Audubon (IA 7)..................................... 55,000 100.00 100.00 55,000 Linn (MO 5) (2).................................... 55,000 100.00 100.00 55,000 Union (IA 2)....................................... 50,000 100.00 100.00 50,000 Monroe (IA 3)...................................... 91,000 49.00 49.00 44,000 Winneshiek (IA 12)................................. 116,000 24.50 24.50 28,000 Ida (IA 9) *....................................... 63,000 16.67 16.67 11,000 --------------- --------------- 3,424,000 3,207,000 --------------- --------------- TOTAL MIDWEST REGIONAL MARKET CLUSTER.............. 9,504,000 8,961,000 --------------- --------------- --------------- --------------- MID-ATLANTIC REGIONAL MARKET CLUSTER: EASTERN NORTH CAROLINA/SOUTH CAROLINA: Harnett (NC 10).................................... 294,000 100.00 100.00 294,000 Northampton (NC 8)................................. 292,000 100.00 100.00 292,000 Rockingham (NC 7).................................. 291,000 100.00 100.00 291,000 Greene (NC 13)..................................... 246,000 100.00 100.00 246,000 Greenville (NC 14)................................. 242,000 100.00 100.00 242,000 Hoke (NC 11)....................................... 226,000 100.00 100.00 226,000 Chesterfield (SC 4)................................ 213,000 100.00 100.00 213,000 Ashe (NC 3)........................................ 162,000 100.00 100.00 162,000 Chatham (NC 6)..................................... 162,000 61.16 61.16 132,000 Sampson (NC 12).................................... 132,000 100.00 100.00 132,000 Camden (NC 9)...................................... 119,000 100.00 100.00 119,000 --------------- --------------- 2,379,000 2,349,000 --------------- --------------- WEST VIRGINIA/MARYLAND/PENNSYLVANIA/ OHIO: Monongalia (WV 3) *................................ 269,000 100.00 100.00 269,000 Raleigh (WV 7) *................................... 256,000 100.00 100.00 256,000 Grant (WV 4) *..................................... 174,000 100.00 100.00 174,000 Tucker (WV 5) *.................................... 132,000 100.00 100.00 132,000 Hagerstown, MD *................................... 128,000 100.00 100.00 128,000 Ross (OH 9) *...................................... 249,000 48.00 48.00 122,000 Cumberland, MD *................................... 100,000 100.00 100.00 100,000 Bedford (PA 10) * (2).............................. 49,000 100.00 100.00 49,000 Garrett (MD 1) *................................... 30,000 100.00 100.00 30,000 --------------- --------------- 1,387,000 1,260,000 --------------- --------------- VIRGINIA: Roanoke, VA........................................ 234,000 100.00 100.00 234,000 Giles (VA 3)....................................... 201,000 100.00 100.00 201,000 Bedford (VA 4)..................................... 176,000 100.00 100.00 176,000 Lynchburg, VA...................................... 160,000 100.00 100.00 160,000 Charlottesville, VA................................ 146,000 94.44 94.44 138,000 Buckingham (VA 7).................................. 91,000 100.00 100.00 91,000 Tazewell (VA 2) (2)................................ 83,000 100.00 100.00 83,000 Bath (VA 5)........................................ 61,000 100.00 100.00 61,000 --------------- --------------- 1,152,000 1,144,000 --------------- --------------- TOTAL MID-ATLANTIC REGIONAL MARKET CLUSTER......... 4,918,000 4,753,000 --------------- --------------- --------------- ---------------
11
PERCENTAGE TOTAL CURRENT CURRENT CHANGE PURSUANT AND ACQUIRABLE PERCENTAGE TO DEFINITIVE POPULATION CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS - ----------------------------------------------------- --------------- ----------- --------------- --------- --------------- NORTHWEST REGIONAL MARKET CLUSTER: WASHINGTON/OREGON/IDAHO: Clark (ID 6)....................................... 294,000 100.00% 100.00% 294,000 Pacific (WA 6) *................................... 184,000 100.00 100.00 184,000 Richland-Kennewick-Pasco, WA *..................... 183,000 100.00 100.00 183,000 Butte (ID 5)....................................... 160,000 100.00 100.00 160,000 Yakima, WA *....................................... 219,000 54.55 58.54 128,000 Okanogan (WA 4).................................... 118,000 100.00 100.00 118,000 Umatilla (OR 3) *.................................. 151,000 60.42 60.42 91,000 Kittitas (WA 5) * (2).............................. 71,000 83.50 85.20 61,000 Hood River (OR 2) *................................ 74,000 45.10 45.10 34,000 Skamania (WA 7) *.................................. 28,000 45.10 45.10 13,000 --------------- --------------- 1,482,000 1,266,000 --------------- --------------- OREGON/CALIFORNIA: Coos (OR 5)........................................ 260,000 100.00 100.00 260,000 Del Norte (CA 1)................................... 209,000 100.00 100.00 209,000 Medford, OR *...................................... 171,000 100.00 100.00 171,000 Mendocino (CA 9)................................... 139,000 100.00 100.00 139,000 Crook (OR 6) *..................................... 196,000 62.50 62.50 122,000 Modoc (CA 2)....................................... 63,000 100.00 100.00 63,000 --------------- --------------- 1,038,000 964,000 --------------- --------------- TOTAL NORTHWEST REGIONAL MARKET CLUSTER............ 2,520,000 2,230,000 --------------- --------------- --------------- --------------- MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER: Manchester-Nashua, NH.............................. 357,000 92.49 92.49 330,000 Coos (NH 1) *...................................... 224,000 100.00 100.00 224,000 Kennebec (ME 3).................................... 221,000 100.00 100.00 221,000 Carroll (NH 2)..................................... 216,000 100.00 100.00 216,000 Somerset (ME 2).................................... 148,000 100.00 100.00 148,000 Bangor, ME......................................... 145,000 91.47 91.47 132,000 Addison (VT 2) * (2)............................... 107,000 100.00 100.00 107,000 Washington (ME 4) *................................ 86,000 100.00 100.00 86,000 Lewiston-Auburn, ME................................ 101,000 82.67 82.67 84,000 Oxford (ME 1)...................................... 83,000 100.00 100.00 83,000 --------------- --------------- TOTAL MAINE/NEW HAMPSHIRE/VERMONT MARKET CLUSTER... 1,688,000 1,631,000 --------------- --------------- --------------- --------------- FLORIDA/GEORGIA MARKET CLUSTER: Fort Pierce, FL * (3).............................. 291,000 49.00 51.00% 100.00 291,000 Tallahassee, FL.................................... 280,000 100.00 100.00 280,000 Worth (GA 14)...................................... 253,000 100.00 100.00 253,000 Gainesville, FL.................................... 222,000 100.00 100.00 222,000 Toombs (GA 11)..................................... 155,000 100.00 100.00 155,000 Walton (FL 10)..................................... 119,000 100.00 100.00 119,000 Putnam (FL 5) (2).................................. 70,000 100.00 100.00 70,000 Dixie (FL 6)....................................... 57,000 100.00 100.00 57,000 Jefferson (FL 8) (2)............................... 49,000 100.00 100.00 49,000 Calhoun (FL 9)..................................... 43,000 100.00 100.00 43,000 --------------- --------------- TOTAL FLORIDA/GEORGIA MARKET CLUSTER............... 1,539,000 1,539,000 --------------- --------------- --------------- ---------------
12
PERCENTAGE TOTAL CURRENT CURRENT CHANGE PURSUANT AND ACQUIRABLE PERCENTAGE TO DEFINITIVE POPULATION CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS - ----------------------------------------------------- --------------- ----------- --------------- --------- --------------- TEXAS/OKLAHOMA/MISSOURI/KANSAS REGIONAL MARKET CLUSTER: OKLAHOMA/MISSOURI/KANSAS: Tulsa, OK *........................................ 798,000 55.06% 55.06% 440,000 Joplin, MO *....................................... 147,000 100.00 100.00 147,000 Seminole (OK 6).................................... 219,000 55.06 55.06 120,000 Elk (KS 15) *...................................... 154,000 75.00 75.00 116,000 Nowata (OK 4) * (2)................................ 102,000 55.06 55.06 56,000 --------------- --------------- 1,420,000 879,000 --------------- --------------- TEXAS/OKLAHOMA: Garvin (OK 9)...................................... 203,000 100.00 100.00 203,000 Haskell (OK 10).................................... 83,000 100.00 100.00 83,000 Wichita Falls, TX *................................ 140,000 51.65 51.65 72,000 Lawton, OK *....................................... 111,000 51.65 51.65 57,000 Jackson (OK 8) *................................... 97,000 51.65 51.65 50,000 Hardeman (TX 5) * (2).............................. 38,000 51.65 51.65 19,000 Briscoe (TX 4) * (2)............................... 13,000 51.65 51.65 6,000 Beckham (OK 7) * (2)............................... 10,000 51.65 51.65 5,000 --------------- --------------- 695,000 495,000 --------------- --------------- TOTAL TEXAS/OKLAHOMA/MISSOURI/ KANSAS REGIONAL MARKET CLUSTER.................................. 2,115,000 1,374,000 --------------- --------------- --------------- --------------- EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER: Knoxville, TN *.................................... 556,000 96.03 96.03 534,000 Asheville, NC *.................................... 212,000 100.00 100.00 212,000 Henderson (NC 4) * (2)............................. 194,000 100.00 100.00 194,000 Bledsoe (TN 7) * (2)............................... 151,000 96.03 96.03 145,000 Hamblen (TN 4) * (2)............................... 135,000 100.00 100.00 135,000 Macon (TN 3) *..................................... 344,000 16.67 16.67 57,000 Yancey (NC 2) * (2)................................ 31,000 100.00 100.00 31,000 --------------- --------------- TOTAL EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET CLUSTER.................................. 1,623,000 1,308,000 --------------- --------------- --------------- --------------- SOUTHWESTERN TEXAS MARKET CLUSTER: Corpus Christi, TX................................. 388,000 100.00 100.00 388,000 Atascosa (TX 19)................................... 231,000 100.00 100.00 231,000 Edwards (TX 18).................................... 223,000 100.00 100.00 223,000 Laredo, TX......................................... 182,000 93.74 93.74 171,000 Wilson (TX 20)..................................... 148,000 100.00 100.00 148,000 Victoria, TX....................................... 82,000 100.00 100.00 82,000 --------------- --------------- TOTAL SOUTHWESTERN TEXAS MARKET CLUSTER............ 1,254,000 1,243,000 --------------- --------------- --------------- --------------- OTHER OPERATIONS: Hawaii (Hl 3)...................................... 140,000 100.00 100.00 140,000 --------------- --------------- Total Managed Markets............................ 25,301,000 23,179,000 --------------- --------------- --------------- --------------- MARKETS MANAGED BY OTHERS: Los Angeles/Oxnard, CA *........................... 15,645,000 5.50 5.50 861,000 Oklahoma City, OK *................................ 1,003,000 14.60 14.60 146,000 Portland, ME *..................................... 288,000 49.00 49.00 141,000 McAllen, TX........................................ 509,000 26.20 26.20 133,000
13
PERCENTAGE TOTAL CURRENT CURRENT CHANGE PURSUANT AND ACQUIRABLE PERCENTAGE TO DEFINITIVE POPULATION CLUSTER/MARKET 1997 POPULATION INTEREST AGREEMENTS (1) TOTAL EQUIVALENTS - ----------------------------------------------------- --------------- ----------- --------------- --------- --------------- Portsmouth-Dover-Rochester, NH-ME *.......................................... 280,000 40.00% 40.00% 112,000 Others (Fewer than 100,000 population equivalents each)............................................ 728,000 --------------- Total Population Equivalents of Markets Managed by Others...................................... 2,121,000 --------------- Total Population Equivalents..................... 25,300,000 --------------- ---------------
- ------------ * Designates wireline market. (1) Interests under these agreements are expected to be acquired at the time specified therein, following the satisfaction of customary closing conditions. (2) These markets have been partitioned into more than one licensed area. The 1997 population, percentage ownership and number of population equivalents shown are for the licensed areas within the markets in which the Company owns an interest. (3) The Company owns 80% of the entity which owns and operates this market but has only a 49% interest in the earnings and profits. Pursuant to a definitive agreement, the Company has rights to acquire the remaining 20% of the equity and 51% of the earnings and profits of this entity. SYSTEM DESIGN AND CONSTRUCTION. The Company designs and constructs its systems in a manner it believes will permit it to provide high-quality service to mobile, transportable and portable cellular telephones, generally based on market and engineering studies which relate to specific markets. Engineering studies are performed by Company personnel or independent engineering firms. The Company's switching equipment is digital, which reduces noise and crosstalk and is capable of interconnecting in a manner which reduces costs of operation. While digital microwave interconnections are typically made between the MTSO and cell sites, primarily analog radio transmission is used between cell sites and the cellular telephones themselves. In accordance with its strategy of building and strengthening market clusters, the Company has selected high capacity digital cellular switching systems that are capable of serving multiple markets through a single MTSO. The Company's cellular systems are designed to facilitate the installation of equipment which will permit microwave interconnection between the MTSO and the cell site. The Company has implemented such microwave interconnection in most of the cellular systems it manages. In other systems in which the Company owns a majority interest and where it is believed to be cost-efficient, such microwave technology will also be implemented. Otherwise, such systems will rely upon landline telephone connections or microwave links owned by others to link cell sites with the MTSO. Although the installation of microwave network interconnection equipment requires a greater initial capital investment, a microwave network enables a system operator to avoid the current and future charges associated with leasing telephone lines from the landline telephone company, while generally improving system reliability. In addition, microwave facilities can be used to connect separate cellular systems to allow shared switching, which reduces the aggregate cost of the equipment necessary to operate both systems. The Company expanded its internal network in 1996 to encompass all of its managed markets. This network provides automatic call delivery for the Company's customers and handoff between adjacent markets. The network has also been extended through links with certain systems operated by several other carriers, including GTE, AirTouch/US West, Ameritech, BellSouth, Centennial Cellular Corp., Southwestern Bell, AT&T Wireless Communications, Vanguard Cellular Systems and others. Additionally, the Company has implemented certain Signal Transfer Points which have allowed it to interconnect efficiently with network providers such as Illuminet and the North American Cellular Network. 14 The Company plans to integrate the systems in the markets acquired in the exchange with BellSouth into its internal network as quickly as possible. This may involve changing out certain system equipment and replacing it with new equipment which will allow for more efficient networking. During 1997, the Company extended the network for its customers through interconnection with additional system operators for call delivery and hand-off. This expanded network increases the area in which customers can automatically receive incoming calls, and should further reduce the incidence of "tumbling" electronic serial number fraud due to the pre-call validation feature of networked systems. In addition, the extension of these networks will allow for the termination of wireless-to-wireless traffic without the inherent costs that are otherwise incurred if this traffic is routed through the landline network. Management believes that currently available technologies will allow sufficient capacity on the Company's networks to meet anticipated demand over the next few years. COSTS OF SYSTEM CONSTRUCTION AND FINANCING Construction of cellular systems is capital-intensive, requiring substantial investment for land and improvements, buildings, towers, MTSOs, cell site equipment, microwave equipment, engineering and installation. The Company, consistent with FCC control requirements, uses primarily its own personnel to engineer and oversee construction of each cellular system it owns and operates. In so doing, the Company expects to improve the overall quality of its systems and to reduce the expense and time required to make them operational. The costs (exclusive of license costs) of the systems in which the Company owns an interest have historically been financed through capital contributions or intercompany loans from the Company to the entities owning the systems, and through certain vendor financing. In recent years, these funding requirements have been met with cash generated from operations, proceeds from debt and equity offerings and proceeds from the sales of cellular interests. MARKETING The Company's marketing plan is centered around rapid penetration of its market clusters, increasing customer awareness of cellular service and reducing churn through both the building of brand awareness and the implementation of marketing programs. The marketing plan stresses the value of the Company's service offerings and incorporates combinations of rate plans and cellular telephone equipment which are designed to meet the needs of a variety of customer segments and their usage patterns. The Company's distribution channels include direct sales personnel, agents and retail service centers in the vast majority of its markets. The retail locations are Company-owned and managed and are designed to market cellular service to the consumer segment in a familiar setting. In late 1996, the Company implemented its new site on the WorldWideWeb to support its marketing efforts and to be a future distribution channel. Customers may now order the Company's service through this Website. The Company manages each cluster of markets from an administrative office with a local staff, including sales, customer service, engineering and in some cases installation personnel. Direct sales consultants market cellular service to business customers throughout each cluster. Retail associates work out of the retail locations and market cellular service primarily to the consumer and small business segment. The Company maintains an ongoing training program to improve the effectiveness of sales consultants and retail associates by focusing their efforts on obtaining customers and maximizing the sale of high-user packages. These packages provide for customers to obtain a minimum amount of usage at discounted rates per minute, at fixed prices which are charged even if usage falls below a defined monthly minimum amount. The Company continues to expand its relationships with agents, dealers and non-Company retailers to obtain customers. Agents and dealers are independent business people who obtain customers for the Company on a commission basis. The Company's agents are generally in the business of selling cellular telephones, cellular service packages and other related products. The Company's dealers include car stereo companies and other companies whose customers are also potential cellular customers. The non-Company retailers include car dealers, major appliance dealers, office supply dealers and mass merchants. 15 The Company opened its first retail locations in late 1993, expanding to 260 stand-alone retail stores by the end of 1997. These Company-owned and operated businesses utilize rental facilities in high-traffic areas. The Company has implemented a uniform appearance in these stores, with all having similar displays and layouts. The retail centers' hours of business match those of the retail trade in the local marketplace, often staying open on weekends and later in the evening than a typical business supplier. To fully serve customer needs, these stores sell accessories to complement the phones and services the Company has traditionally provided. During 1996, the Company further expanded its retail presence by opening smaller retail kiosks within other larger merchandisers and grocery stores. At December 31, 1997, the Company had opened over 140 "stores within a store," primarily in Wal-Mart locations. In addition to its own retail centers, the Company actively pursues national retail accounts, as agents of the Company, which yield new customer additions in multiple markets. Agreements have been entered into with such national distributors as Ford Motor Company, General Motors, Radio Shack, Best Buy, Circuit City, Staples, Office Depot and Sears, Roebuck & Co. in certain of the Company's markets. Upon the sale of a cellular telephone by one of these national distributors, the Company receives, often exclusively within the territories served, the resulting cellular customer. The Company uses a variety of direct mail, billboard, radio, television and newspaper advertising to stimulate interest by prospective customers in purchasing the Company's cellular service and to establish familiarity with the Company's name. In 1997, the Company increased its focus on brand advertising, using the tag line "The Way People Talk Around Here"(SM) to promote the United States Cellular-TM- brand. Advertising is directed at gaining customers, improving customers' awareness of the United States Cellular brand, increasing existing customers' usage and increasing the public awareness and understanding of the cellular services offered by the Company. The Company attempts to select the advertising and promotion media that are most appealing to the targeted groups of potential customers in each local market. The Company utilizes local advertising media and public relations activities and establishes programs to enhance public awareness of the Company, such as providing telephones and service for public events and emergency uses. The following table summarizes, by operating cluster, the total population, the Company's customer units and penetration for the Company's majority-owned and managed markets that were operational as of December 31, 1997.
OPERATING CLUSTERS POPULATION CUSTOMERS PENETRATION - ----------------------------------------------------------------- ---------- ---------- ------------ Wisconsin/Illinois/Indiana....................................... 5,778,000 452,000 7.82% Iowa/Missouri.................................................... 3,154,000 257,000 8.15 Eastern North Carolina/South Carolina............................ 2,379,000 124,000 5.21 West Virginia/Maryland/Pennsylvania/Ohio......................... 1,138,000 69,000 6.06 Virginia......................................................... 1,152,000 70,000 6.08 Washington/Oregon/Idaho.......................................... 1,380,000 102,000 7.39 Oregon/California................................................ 1,038,000 71,000 6.84 Maine/New Hampshire/Vermont...................................... 1,688,000 103,000 6.10 Florida/Georgia.................................................. 1,539,000 115,000 7.47 Oklahoma/Missouri/Kansas......................................... 1,420,000 111,000 7.82 Texas/Oklahoma................................................... 695,000 46,000 6.62 Eastern Tennessee/Western North Carolina......................... 1,279,000 117,000 9.15 Southwestern Texas............................................... 1,254,000 56,000 4.47 Other Operations................................................. 140,000 17,000 12.14 ---------- ---------- ----- 24,034,000 1,710,000 7.11% ---------- ---------- ----- ---------- ---------- -----
CUSTOMERS AND SYSTEM USAGE Cellular customers come from a wide range of occupations. They typically include a large proportion of individuals who work outside of their offices such as people in the construction, real estate, wholesale and retail distribution businesses and professionals. Increasingly, the Company is providing cellular service to consumers and to customers who use their cellular telephones for security purposes. Although some of the Company's customers still use in-vehicle cellular telephones, most new customers 16 are selecting portable cellular telephones. These units have become more compact and fully featured as well as more attractively priced, and they appeal to newer segments of the customer population. The Company's cellular systems are used most extensively during normal business hours between 7:00 am and 6:00 pm. On average, the local retail customers in the Company's consolidated markets used their cellular systems approximately 103 minutes per unit each month and generated retail revenue of approximately $36 per month during 1997, compared to 107 minutes and $40 per month in 1996. Revenue generated by roamers, together with local retail, toll and other revenues, brought the Company's total average monthly service revenue per customer unit in consolidated markets to $54 during 1997. Average monthly service revenue per customer unit decreased approximately 15% during 1997. This decrease is related to the industry-wide trend of newer customers tending to use fewer minutes during peak business hours, which has reduced the average local retail revenue per minute, and to the declining contribution of inbound roaming revenue per customer. The Company believes that its customer base is growing faster than that of the cellular industry as a whole, which has a dilutive effect on inbound roaming revenue per customer. The Company anticipates that average monthly service revenue per customer unit will continue to decline as its distribution channels provide additional customers who generate lower revenue per local minute of use and as roaming revenues grow more slowly. However, this effect is more than offset by the Company's increasing number of customers; therefore, the Company expects total revenues to continue to grow for the next few years. In addition to revenue from local retail customers, the Company generates revenue from roaming customers and other services. The Company's roaming service allows a customer to place or receive a call in a cellular service area away from the customer's home service area. The Company has entered into "roaming agreements" with operators of other cellular systems covering virtually all systems in the United States and Canada. These agreements offer customers the opportunity to roam in these systems. These reciprocal agreements automatically pre-register the customers of the Company's systems in the other carriers' systems. Also, a customer of a participating system roaming (i.e., travelling) in a Company market where this arrangement is in effect is able to make and receive calls on the Company's system. The charge for this service is typically at premium rates and is billed by the Company to the customer's home system, which then bills the customer. The Company has entered into agreements with other cellular carriers to transfer roaming usage at agreed-upon rates. In some instances, based on competitive factors, the Company may charge a lower amount to its customers than the amount actually charged to the Company by another cellular carrier for roaming. The following table summarizes certain information about customers and market penetration in the Company's managed operations.
YEAR ENDED OR AT DECEMBER 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ----------- ----------- ----------- Majority-owned and managed markets: Cellular markets in operation (1)....................... 134 131 137 130 116 Total population of markets in service (000s)........... 24,034 21,712 22,309 21,314 19,383 Customer Units: at beginning of period (2)............................ 1,073,000 710,000 421,000 261,000 150,800 additions during period (2)........................... 941,000 561,000 426,000 250,000 165,300 disconnects during period (2)......................... 304,000 198,000 137,000 90,000 55,100 at end of period (2).................................. 1,710,000 1,073,000 710,000 421,000 261,000 Market penetration at end of period (3)................. 7.11% 4.94% 3.18% 1.98% 1.35%
- ------------ (1) Represents the number of markets in which the Company owned at least a 50% interest and which it managed. The revenues and expenses of these cellular markets are included in the Company's consolidated revenues and expenses. (2) Represents the approximate number of revenue-generating cellular telephones served by the cellular markets referred to in footnote (1). The revenue generated by such cellular telephones is included in consolidated revenues. (3) Computed by dividing the number of customer units at the end of the period by the total population of markets in service as estimated by Donnelley Marketing Service for the respective years (Claritas in 1997). 17 PRODUCTS AND SERVICES CELLULAR TELEPHONES AND INSTALLATION. There are a number of different types of cellular telephones, all of which are currently compatible with cellular systems nationwide. The Company offers a full range of vehicle-mounted, transportable and hand-held portable cellular telephones. Features offered in some of the cellular telephones include hands-free calling, repeat dialing, horn alert and others. The Company negotiates volume discounts from its cellular telephone suppliers. The Company discounts cellular telephones to meet competition or to stimulate sales by reducing the cost of becoming a cellular customer. In these instances, where permitted by law, customers are generally required to sign a service contract with the Company. The Company also cooperates with cellular equipment manufacturers in local advertising and promotion of cellular equipment. The Company has established service and/or installation facilities in many of its local markets to ensure quality installation and service of the cellular telephones it sells. These facilities allow the Company to improve its service by promptly assisting customers who experience equipment problems. Additionally, the Company maintains a repair facility in Tulsa, Oklahoma, which handles more complex service and repair issues. CELLULAR SERVICES. The Company's customers are able to choose from a variety of packaged pricing plans which are designed to fit different calling patterns. The Company has developed and introduced its new consumer line of products under the CarryPhone brand. These products include a) Express, a pre-packaged phone plus price plan aimed at the convenience buyer; b) TalkTracker, a cellular phone with usage prepaid; and c) Home and Away, a combination cordless and cellular phone in a single package. The Company's customer bills typically show separate charges for custom-calling features, airtime in excess of the packaged amount, and toll calls. Custom-calling features provided by the Company include wide-area call delivery, call forwarding, call waiting, three-way calling and no-answer transfer. The Company also offers a voice message service in many of its markets. This service, which functions like a sophisticated answering machine, allows customers to receive messages from callers when they are not available to take calls. REGULATION REGULATORY ENVIRONMENT. The operations of the Company are subject to FCC and state regulation. The cellular telephone licenses held by USM are granted by the FCC for the use of radio frequencies and are an important component of the overall value of the assets of the Company. The construction, operation and transfer of cellular systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act of 1934 (the "Communications Act"). In 1996, Congress enacted the Telecommunications Act of 1996 (the "1996 Act"), which amended the Communications Act. The 1996 Act mandates significant changes in existing telecommunications rules and policies to promote competition, ensure the availability of telecommunications services to all parts of the nation and to streamline regulation of the telecommunications industry to remove regulatory burdens as competition develops. The FCC has promulgated regulations governing construction and operation of cellular systems, licensing (including renewal of licenses) and technical standards for the provision of cellular telephone service under the Communications Act, and is implementing the legislative objectives of the 1996 Act, as discussed below. LICENSING. For cellular telephone licensing purposes, the FCC has divided the United States into separate geographic markets (MSAs and RSAs). In each market, the allocated cellular frequencies are divided into two equal blocks. During the application process, the FCC reserved one block of frequencies for nonwireline applicants and another block for wireline applicants. Subject to FCC approval, a cellular system may be sold to either a wireline or nonwireline entity, but no entity which controls a cellular system may own an interest in another cellular system in the same MSA or RSA. The completion of acquisitions involving the transfer of control of a cellular system requires prior FCC approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the application for approval of the proposed transfer. 18 The FCC must be notified each time an additional cell is constructed which enlarges the service area of a given market. The FCC's rules also generally require persons or entities holding cellular construction permits or licenses to coordinate their proposed frequency usage with neighboring cellular licensees in order to avoid electrical interference between adjacent systems. The height and power of base stations in the cellular system are regulated by FCC rules, as are the types of signals emitted by these stations. In addition to regulation by the FCC, cellular systems are subject to certain Federal Aviation Administration ("FAA") regulations with respect to the siting and construction of cellular transmitter towers and antennas as well as local zoning requirements. Beginning in 1996, the FCC has also imposed a requirement that all licensees register and obtain FCC registration numbers for all of their antenna towers which require prior FAA clearance. The Company is currently engaged in this registration process. All new towers must be registered at the time of construction and existing towers are being registered on a staggered state-by-state basis, to be concluded in May 1998. Beginning in October 1997, cellular systems, which previously were "categorically excluded" from having to evaluate their facilities to ensure their compliance with federal "radio frequency" (RF) radiation requirements, were made subject to those requirements (cellular towers of less than 10 meters in height, building-mounted antennae and cellular telephones). After October 1997, all new cellular facilities must be in compliance when they are brought into service. Existing facilities must be brought into compliance with the requirements when their licenses are renewed. The Company believes that the great majority of its existing facilities already comply with the requirements, that the remainder will be brought into compliance as required and that the cellular telephones it sells comply with the standards. Initial cellular telephone licenses were granted tor ten-year periods. The FCC has established standards for conducting comparative renewal proceedings between a cellular licensee seeking renewal of its license and challengers filing competing applications. The FCC has: (i) established criteria for comparing the renewal applicant to challengers, including the standards under which a renewal expectancy will be granted to the applicant seeking license renewal; (ii) established basic qualifications standards for challengers; and (iii) provided procedures for preventing possible abuses in the comparative renewal process. The FCC has concluded that it will award a renewal expectancy if the licensee has (i) provided "substantial" performance, which is defined as "sound, favorable and substantially above a level of mediocre service just minimally justifying renewal," and (ii) complied with FCC rules, policies and the Communications Act. If a renewal expectancy is awarded to an existing licensee, its license is renewed and competing applications are not considered. The Company's Tulsa and Knoxville licenses were renewed in 1995, and the Company's Des Moines, Iowa; Peoria, Illinois; and Roanoke, Virginia licenses were renewed in 1996. In September 1997, the Company filed license renewal applications for its Davenport, Iowa; Tallahassee, Florida; Asheville, North Carolina; Manchester, New Hampshire; Columbia, Missouri; Wichita Falls, Texas; Gainesville, Florida; Lewiston, Maine; Joplin, Missouri; Cedar Rapids, Iowa; La Crosse, Wisconsin; Bangor, Maine; Fort Pierce, Florida; Victoria, Texas; Evansville, Indiana; and Owensboro, Kentucky licenses. Those applications were unopposed. On October 30, 1997, the Company assigned its Evansville and Owensboro licenses to a subsidiary of BellSouth as part of the exchange transaction between the two companies. As part of the same transaction, BellSouth assigned its Appleton, Wisconsin; Rockford, Illinois; Green Bay, Wisconsin; and Janesville, Wisconsin licenses to the Company. All of those licenses were renewed in January 1998. The Company conducts and plans to conduct its operations in accordance with all relevant FCC rules and regulations and anticipates being able to qualify for a renewal expectancy in its upcoming renewal filings. Accordingly, the Company believes that current regulations will have no significant effect on its operations and financial condition. However, changes in the regulation of cellular operators or their activities and of other mobile service providers could have a material adverse effect on the Company's operations. The FCC has also provided that five years after the initial licenses are granted, unserved areas within markets previously granted to licensees may be applied for by both wireline and non-wireline entities and by third parties. Accordingly, many unserved area applications have been filed by the Company and others. The Company's strategy with respect to system construction in its markets has been and will be to build cells covering areas within such markets that the Company considers economically feasible to 19 serve or might conceivably wish to serve and to do so within the five-year period following issuance of the license. In cases where applications for unserved areas are filed which are mutually exclusive and would result in overlapping service areas, the FCC decides between the competing applicants by an auction process. Pursuant to 1993 amendments to the Communications Act, cellular service is classified as a Commercial Mobile Radio Service ("CMRS"), in that it is service offered to the public, for a fee, which is interconnected to the public switched telephone network. The FCC has determined that it will forebear from requiring CMRS carriers to comply with a number of statutory provisions otherwise applicable to common carriers, such as the filing of tariffs. RECENT EVENTS. There are certain regulatory proceedings currently pending before the FCC which are of particular importance to the cellular industry. In one proceeding, the FCC has imposed new "enhanced 911" regulations on cellular carriers. Enhanced 911 capabilities would enable cellular systems to determine the precise location of persons making emergency calls. The new rules will require cellular carriers to work with local public safety officials to process 911 calls, including those made from mobile telephones not registered with the cellular system, will require carriers by April 1998 to be able to identify the cell from which the call has been made, and will require cellular systems to improve their ability to locate wireless 911 callers over a five-year period. The FCC has adopted a limited expansion of the obligation of cellular carriers to serve the roaming subscribers of broadband PCS providers, among others, even though the subscribers involved have no pre-existing service relationship with that carrier. Under these new policies, broadband PCS providers may offer their subscribers handsets which are capable of operating over broadband PCS and cellular networks so that when their subscribers are out of range of broadband PCS networks, they will be able to obtain non-automatic access to cellular networks. The FCC expects that implementation of these roaming capabilities will promote competition between broadband PCS and cellular service providers. The FCC has adopted requirements which will make it possible for subscribers to retain, at the same location, their existing telephone numbers when they switch from one service provider to another. This numbering portability will include switching between Local Exchange Carriers ("LECs") and other wireline providers, between wireless service providers and between LEC/wireline and wireless providers. LECs have implementation deadlines by the end of 1998. Broadband PCS, cellular and certain other wireless providers have phased implementation deadlines in 1998 and 1999. In another proceeding, the FCC in 1996 adopted rules regarding the method by which cellular carriers and LECs shall compensate each other for interconnecting cellular and local exchange facilities. The FCC rules provided for symmetrical and reciprocal compensation between LECs and cellular carriers, and also prescribed interim interconnection proxy rates, which are much lower than the rates formerly paid by cellular carriers to LECs. Symmetrical and reciprocal compensation means they must pay each other at the same rate. The U.S. Court of Appeals for the Eighth Circuit has vacated the FCC's rules. However, the FCC's rules requiring reciprocal and symmetrical compensation remain in effect as applied to the cellular industry. Interconnection rate issues will be decided by the states. Whether the issue is decided by the states or the federal government, cellular carriers in the future can be expected to pay lower rates to LECs than they previously paid. This result is expected to be favorable to the wireless industry and somewhat unfavorable to LECs. The FCC is also proceeding to implement other parts of the 1996 Act. The 1996 Act provides that implementing its legislative objectives will be the task of the FCC, the state public utilities commissions and a Federal-state Joint Board. Much of this implementation is proceeding in numerous, concurrent proceedings with aggressive deadlines. The Company cannot predict the full extent of, nature of and interrelationships among state and federal implementation and other responses to the 1996 Act. The primary purpose and effect of the new law is to open all telecommunications markets to competition. The 1996 Act makes most direct or indirect state and local barriers to competition unlawful. It directs the FCC to preempt all inconsistent state and local laws and regulations, after notice and comment proceedings. It also enables electric and other utilities to engage in telecommunications service through qualifying subsidiaries. Only narrow powers over competitive entry are left to state and local authorities. Each state retains the power to impose competitively neutral requirements that are consistent with the 1996 Act's universal 20 service provision and necessary for universal services, public safety and welfare, continued service quality and consumer rights. While a state may not impose requirements that effectively function as barriers to entry, it retains limited authority to regulate certain competitive practices in rural telephone company service areas. The 1996 Act establishes principles and a process for implementing a modified "universal service" policy. This policy seeks nationwide, affordable service and access to advanced telecommunications and information services. It calls for reasonably comparable urban and rural rates and services. The 1996 Act also requires universal service to schools, libraries and rural health facilities at discounted rates. The FCC has implemented the mandate of the 1996 Act to create a new universal service support mechanism "to ensure that all Americans have access to telecommunications services." The 1996 Act requires all interstate telecommunications providers, including wireless service providers, to "make an equitable and non-discriminatory contribution," to support the cost of providing universal service, unless their contribution would be de minimis. At present, the provision of landline telephone service in high-cost areas is subsidized by access charges and other payments by interexchange carriers to LECs. The obligation to make payments to support universal service has been expanded to include other telecommunications service providers, including cellular carriers. Such payments, which are to be based on a percentage of the total "billed revenue" of carriers for a given previous half year, began in the first quarter of 1998. Carriers are free to pass such charges on to their customers. Cellular carriers are also eligible to receive universal service support payments in certain circumstances under the new systems if they provide specified services in "high-cost" areas. The Company has sought designation as an "eligible telecommunications carrier" qualified to receive universal service support in certain states. Under a 1994 federal law, the Communications Assistance to Law Enforcement Act, all telecommunications carriers, including the Company and other wireless licensees, must, by October 1998, implement certain equipment changes necessary to assist law enforcement authorities in achieving an enhanced ability to conduct electronic surveillance of those suspected of criminal activity. However, owing to disputes between the Federal Bureau of Investigation and the relevant industry groups about the law's requirements, the FCC has not yet adopted the necessary technical standards to enable carriers to meet those requirements. Questions also exist regarding reimbursement by a federal fund of certain of the costs involved. The Company has supported the efforts of industry groups to obtain from the FCC a postponement of the October 1998 deadline on the grounds that compliance with the originally proposed schedule is impossible. The FCC is considering these requests for postponement, and legislation mandating a two-year postponement is also pending in Congress. The FCC has also allocated a total of 140 megahertz ("MHz") to broadband PCS, 20 MHz to unlicensed operations and 120 MHz to licensed operations, consisting of two 30 MHz blocks in each of the 51 Major Trading Areas ("MTAs") and one 30 MHz block and three 10 MHz blocks in each of 493 Basic Trading Areas ("BTAs"). Cellular operators and those entities under common ownership with them are permitted to participate in the ownership of PCS licenses, except for those PCS licenses reserved for small businesses, and licenses for PCS service areas in which the cellular operator owns a 20% or greater interest in a cellular licensee, the service area of which covers 10% or more of the population of the PCS service area. In the latter case, the cellular license is limited to two 10 MHz PCS channel blocks. PCS technology is currently under development and is similar in some respects to cellular technology. Where it has become commercially available, this technology is capable of offering increased capacity for wireless two-way and one-way voice, data and multimedia communications services and will result in increased competition with the Company's operations. The ability of these future PCS licensees to complement or compete with existing cellular licensees will be affected by future FCC rule-makings. These and other future technological and regulatory developments in the wireless telecommunications industry and the enhancement of current technologies will likely create new products and services that are competitive with the services currently offered by the Company. There can be no assurance that the Company will not be adversely affected by such technological and regulatory developments. Media reports have suggested that certain radio frequency ("RF") emissions from portable cellular telephones might be linked to cancer. The Company has reviewed relevant scientific information and, based on such information, is not aware of any credible evidence linking the usage of portable cellular telephones with cancer. 21 STATE AND LOCAL REGULATION. The Company is also subject to state and local regulation in some instances. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure. In 1993, Congress preempted states from regulating the entry of cellular systems into service and the rates charged by cellular systems to customers. The siting and construction of the cellular facilities, including transmitter towers, antennas and equipment shelters are still subject to state or local zoning and land use regulations. However, in 1996, Congress amended the Communications Act to provide that states could not discriminate against wireless carriers in tower zoning proceedings and had to decide on zoning requests with reasonable speed. In addition, states may still regulate other terms and conditions of cellular service. The FCC is currently considering whether to take action to preempt moratoria imposed by certain localities on the construction of wireless towers. The Company has supported such FCC action. The FCC is required to forbear from applying any statutory or regulatory provision that is not necessary to keep telecommunications rates and terms reasonable or to protect consumers. A state may not apply a statutory or regulatory provision that the FCC decides to forbear from applying. In addition, the FCC must review its telecommunications regulations every two years and change any that are no longer necessary. Further, the FCC is empowered under certain circumstances to preempt state regulatory authorities if a state is obstructing the Communications Act's basic purposes. The Company and its subsidiaries have been and intend to remain active participants in proceedings before the FCC and, through its membership in state associations of wireless providers, before state regulatory authorities. Proceedings with respect to the foregoing policy issues before the FCC and state regulatory authorities could have a significant impact on the competitive market structure among wireless providers and the relationships between wireless providers and other carriers. The Company is unable to predict the scope, pace or financial impact of policy changes which could be adopted in these proceedings. COMPETITION The Company's principal competitor for cellular telephone service in each market is the licensee of the second cellular system in that market. Since each competitor operates its cellular system on a 25 MHz frequency block licensed by the FCC using comparable technology and facilities, competition for customers between the two systems in each market is principally on the basis of quality of service, price, size of area covered, services offered, and responsiveness of customer service. The competing entities in many of the markets in which the Company has an interest have financial resources which are substantially greater than those of the Company and its partners in such markets. The FCC's rules require all operational cellular systems to provide, on a nondiscriminatory basis, cellular service to resellers which purchase blocks of mobile telephone numbers from an operational system and then resell them to the public. In addition to competition from the other cellular licensee in each market, there is also competition from, among other technologies, SMR systems, which are able to connect with the landline telephone network. The Company believes that conventional SMR systems are competitively disadvantaged because of technological limitations on the capacity of such systems. The FCC has recently given approval, through waivers of its rules, to ESMR, an enhanced SMR system. ESMR systems may have cells and frequency reuse like cellular, thereby potentially eliminating any current technological limitation. The first ESMR systems were implemented in 1993 in Los Angeles and are beginning to be constructed in several other cities across the United States. In 1995, an ESMR provider initiated service in Tulsa, Oklahoma, where the Company operates a cellular system. ESMR service is also being provided in certain other of the Company's markets. Although less directly a substitute for cellular service, wireless data services and one-way paging service (and in the future, two-way paging services) may be adequate for those who do not need full two-way voice service. PCS providers have initiated service in many markets across the United States, including markets where the Company has operations. PCS providers offer digital, wireless communications services to their customers. Similar technological advances or regulatory changes in the future may make available other alternatives to cellular service, thereby creating additional sources of competition. The Company expects PCS operators to complete initial deployment of PCS in portions of all of the Company's clusters by the end of 1998. 22 Continuing technological advances in the communications field make it difficult to predict the extent of additional future competition for cellular systems. For example, the FCC has allocated radio channels to a mobile satellite system in which transmissions from mobile units to satellites would augment or replace transmissions to cell sites, and several consortia to provide such service have been formed. Such a system is designed primarily to serve the communications needs of remote locations and a mobile satellite system could provide viable competition for land-based cellular systems in such areas. It is also possible that the FCC may in the future assign additional frequencies to cellular telephone service to provide for more than two cellular telephone systems per market. EMPLOYEES The Company had 4,600 employees as of December 31, 1997. None of the Company's employees is represented by a labor organization. The Company considers its relationship with its employees to be good. - -------------------------------------------------------------------------------- ITEM 2. PROPERTIES The property for mobile telephone switching offices and cell sites are either owned or leased under long-term leases by the Company, one of its subsidiaries or the partnership or corporation which holds the license. The Company has not experienced major problems with obtaining zoning approval for cell sites or operating facilities and does not anticipate any such problems in the future which are or will be material to the Company and its subsidiaries as a whole. The Company's investment in property is small compared to its investment in licenses and cellular system equipment. The Company leases approximately 95,000 square feet of office space for its headquarters in Chicago, Illinois. The Company considers the properties owned or leased by it and its subsidiaries to be suitable and adequate for their respective business operations. - -------------------------------------------------------------------------------- ITEM 3. LEGAL PROCEEDINGS In addition to the legal proceedings discussed previously in "Proposed TDS Corporate Restructuring," the Company is involved in legal proceedings related to its business from time to time. The Company does not believe that any such proceeding should have a material adverse impact on the Company. - -------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of securities holders during the fourth quarter of 1997. 23 - -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Exhibit 13, Annual Report section entitled "United States Cellular Stock and Dividend Information." - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from Exhibit 13, Annual Report section entitled "Selected Consolidated Financial Data," except for ratios of earnings to fixed charges, which are incorporated herein by reference from Exhibit 12 to this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from Exhibit 13, Annual Report section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition." - -------------------------------------------------------------------------------- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. - -------------------------------------------------------------------------------- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from Exhibit 13, Annual Report sections entitled "Consolidated Quarterly Income Information (Unaudited)," "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Changes in Common Shareholders' Equity," "Notes to Consolidated Financial Statements," and "Report of Independent Public Accountants." - -------------------------------------------------------------------------------- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 - -------------------------------------------------------------------------------- PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from Proxy Statement sections entitled "Election of Directors" and "Executive Officers." - -------------------------------------------------------------------------------- ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from Proxy Statement section entitled "Executive Compensation," except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. - -------------------------------------------------------------------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management." - -------------------------------------------------------------------------------- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from Proxy Statement section entitled "Certain Relationships and Related Transactions." 25 - -------------------------------------------------------------------------------- PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as a part of this report: (a)(1) Financial Statements Consolidated Quarterly Income Information (Unaudited).............. Annual Report* Consolidated Statements of Operations.............................. Annual Report* Consolidated Statements of Cash Flows.............................. Annual Report* Consolidated Balance Sheets........................................ Annual Report* Consolidated Statements of Changes in Common Shareholders' Equity............................................................. Annual Report* Notes to Consolidated Financial Statements......................... Annual Report* Report of Independent Public Accountants........................... Annual Report*
- --------- * Incorporated by reference from Exhibit 13. (2) Schedules
LOCATION -------- Report of Independent Public Accountants on Financial Statement Schedule.......... page 29 II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31, 1997.................................................... page 30 All other schedules have been omitted because they are not applicable or not required or because the required information is shown in the financial statements or notes thereto.
26 (3) Exhibits The exhibits set forth in the accompanying Index to Exhibits are filed as a part of this Report. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this Report.
EXHIBIT NUMBER DESCRIPTION - ------------------------------------------------------------------------------------------------------------ 10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.10 Stock Option and Stock Appreciation Rights Plan is hereby incorporated by reference to Exhibit B to the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed with the Commission on April 16, 1991. 10.11 Summary of 1997 Bonus Program for Senior Corporate Staff of the Company. 10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.4 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.18 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996, is hereby incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. 10.19 Deferred Compensation Agreement for Richard Goehring dated July 15, 1996, is hereby incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. 10.20 Cellular Interest Transfer Agreement by and between TDS and the Company dated June 20, 1996 is hereby incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.21 United States Cellular Corporation Compensation Plan for Non-Employee Directors is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-19403). 10.22 United States Cellular Corporation 1996 Senior Executive Stock Bonus and Restricted Stock Award Plan is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-19405). 10.23 United States Cellular Corporation Special Retention Restricted Stock Award Plan is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-23861).
27 (b) Reports on Form 8-K filed during the quarter ended December 31, 1997. The Company filed a Current Report on Form 8-K on December 8, 1997 dated December 1, 1997, which included a press release that announced that AirTouch Communications, Inc. ("AirTouch") will acquire interests owned by the Company in cellular systems serving Seattle and Olympia, Washington; Tucson, Arizona; Duluth, Minnesota; and rural areas in Colorado and Idaho in exchange for approximately 4,000,000 shares of AirTouch's common stock and approximately $50 million in cash. The Company filed a Current Report on Form 8-K on December 29, 1997 dated December 18, 1997, which included a press release that announced that the Company had received an offer from TDS to acquire all of the issued and outstanding Common Shares of the Company not already owned by TDS. The offer was made in connection with, and is subject to TDS shareholder approval of and the effectiveness of, TDS's announced corporate restructuring. The restructuring plan calls for TDS to issue three new classes of common stock, commonly known as "Tracking Stocks," each of which is intended to separately reflect one of TDS's primary business groups. 28 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders and Board of Directors of United States Cellular Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in United States Cellular Corporation and Subsidiaries Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 28, 1998. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The financial statement schedule listed in Item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois January 28, 1998 29 UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS - --------------------------------------------------------------------------------
COLUMN A DESCRIPTION COLUMN B COLUMN C-1 COLUMN C-2 COLUMN E - ---------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER COLUMN D END OF (DOLLARS IN THOUSANDS) PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ------------ ------------ ------------ ----------- ------------ FOR THE YEAR ENDED DECEMBER 31, 1997 Deducted from deferred federal tax asset: For unrealized net operating losses $ (2,147) $ -- $ 2,147 $ -- $ -- Deducted from deferred state tax asset: For unrealized net operating losses (11,003) 877 (107) -- (10,233) Deducted from accounts receivable: For doubtful accounts (4,199) (25,578) -- 24,518 (5,259) FOR THE YEAR ENDED DECEMBER 31, 1996 Deducted from deferred federal tax asset: For unrealized net operating losses $ (8,141) $ 5,795 $ 199 $ -- $ (2,147) Deducted from deferred state tax asset: For unrealized net operating losses (11,969) 2,305 (1,339) -- (11,003) Deducted from accounts receivable: For doubtful accounts (3,820) (17,534) -- 17,155 (4,199) FOR THE YEAR ENDED DECEMBER 31, 1995 Deducted from deferred federal tax asset: For unrealized net operating losses $ (23,761) $ 16,730 $ (1,110) $ -- $ (8,141) Deducted from deferred state tax asset: For unrealized net operating losses (14,203) 8,257 (6,023) -- (11,969) Deducted from accounts receivable: For doubtful accounts (2,073) (12,532) -- 10,785 (3,820) - -------------------------------------------------------------------------------------------------------------------------------
30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By: /S/ H. DONALD NELSON ------------------------------------------ H. Donald Nelson PRESIDENT (CHIEF EXECUTIVE OFFICER) By: /S/ KENNETH R. MEYERS ------------------------------------------ Kenneth R. Meyers SENIOR VICE PRESIDENT--FINANCE AND TREASURER (CHIEF FINANCIAL OFFICER) By: /S/ PHILLIP A. LORENZINI ------------------------------------------ Phillip A. Lorenzini CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
Dated March 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - -------------------------------------------------------------------- ----------- --------------------- /S/ H. DONALD NELSON DIRECTOR March 26, 1998 ----------------------------------------------- H. Donald Nelson /S/ LEROY T. CARLSON, JR. DIRECTOR March 26, 1998 ----------------------------------------------- LeRoy T. Carlson, Jr. /S/ LEROY T. CARLSON DIRECTOR March 26, 1998 ----------------------------------------------- LeRoy T. Carlson /S/ WALTER C.D. CARLSON DIRECTOR March 26, 1998 ----------------------------------------------- Walter C. D. Carlson /S/ MURRAY L. SWANSON DIRECTOR March 26, 1998 ----------------------------------------------- Murray L. Swanson /S/ PAUL-HENRI DENUIT DIRECTOR March 26, 1998 ----------------------------------------------- Paul-Henri Denuit
- -------------------------------------------------------------------------------- INDEX TO EXHIBITS - --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------------------------------------------------------------ 3.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit to the Company's Amendment No. 2 on Form 8 dated December 28, 1992, to the Company's Report on Form 8-A. 3.2 Restated Bylaws, as amended, are hereby incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997. 4.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to an exhibit to the Company's Amendment No. 2 on Form 8 dated December 28, 1992 to the Company's Report on Form 8-A. 4.2 Restated Bylaws, as amended, are hereby incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997. 4.3(a) Amended and restated Term Loan Agreement between NTFC Capital Corporation and the Company dated December 22, 1994 is hereby incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 4.3(b) First Amendment to Amended and Restated Term Loan Agreement between NTFC Capital Corporation and the Company dated September 29, 1995 is hereby incorporated by reference to Exhibit 4.3(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. 4.4 Indenture dated June 1, 1995 between registrant and Harris Trust and Savings Bank, as Trustee, relating to the LYONs is hereby incorporated by reference to the Company's Form 8-K dated June 16, 1995. 4.5 Form of Certificate for Liquid Yield Option Note (included in Exhibit 4.4). 4.6 Indenture dated July 31, 1997 between registrant and the First National Bank of Chicago, as Trustee, relating to the Company's shelf registration of debt securities is hereby incorporated by reference to Exhibit 4 to the Company's Form 8-K dated August 26, 1997. 4.7 Revolving Credit Agreement dated August 19, 1997, among registrant and BankBoston N.A. and Toronto Dominion (Texas), Inc., as agents, is hereby incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997. 9.1 Voting Trust Agreement, dated as of June 30, 1989, with respect to Series A Common Shares of TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-38644). 9.2 Amendment dated as of May 9, 1991, to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated by reference to Exhibit 9.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 9.3 Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended is hereby incorporated by reference to Exhibit 9.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. 10.1 Supplemental Benefit Agreement between the Company and H. Donald Nelson is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975).
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------------------------------------------------------------ 10.2(a) Revolving Credit Agreement, between the Company and TDS, as amended, is hereby incorporated by reference to an exhibit to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-1 (Registration No. 33-23492). 10.2(b) Amendment dated as of March 31, 1997, to Revolving Credit Agreement between the Company and TDS is hereby incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. 10.3 Tax Allocation Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.4 Cash Management Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.5 Registration Rights Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.6 Exchange Agreement, between the Company and TDS, as amended, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.7 Intercompany Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.8 Employee Benefit Plans Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.9 Insurance Cost Sharing Agreement, between the Company and TDS, is hereby incorporated by reference to an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-16975). 10.10 Stock Option and Stock Appreciation Rights Plan, is hereby incorporated by reference to Exhibit B to the Company's definitive Notice of Annual Meeting and Proxy Statement dated April 15, 1991, as filed with the Commission on April 16, 1991. 10.11 Summary of 1997 Bonus Program for the Senior Corporate Staff of the Company. 10.12(a) United States Cellular Corporation 1994 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(b) Form of 1994 Long-Term Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(c) Form of 1994 Long-Term Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(d) Form of 1995 Performance Stock Option Agreement (Transferable Form) is hereby incorporated by reference to Exhibit 99.4 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255). 10.12(e) Form of 1995 Performance Stock Option Agreement (Nontransferable Form) is hereby incorporated by reference to Exhibit 99.5 to the Company's Registration Statement on Form S-8 (Registration No. 33-57255).
EXHIBIT NO. DESCRIPTION OF DOCUMENT - ------------ ------------------------------------------------------------------------------------------------------------------ 10.13 Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 10.14 Securities Loan Agreement, dated June 31, 1995, between TDS and Merrill Lynch & Co. is hereby incorporated by reference to Exhibit 99.1 to the Company's Form 8-K dated June 16, 1995. 10.15 Registration Rights Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.2 to the Company's Form 8-K dated June 16, 1995. 10.16 Common Share Delivery Arrangement Agreement among TDS, Merrill Lynch & Co. and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.3 to the Company's Form 8-K dated June 16, 1995. 10.17 LYONs Offering Agreement between TDS and United States Cellular Corporation is hereby incorporated by reference to Exhibit 99.4 to the Company's Form 8-K dated June 16, 1995. 10.18 Deferred Compensation Agreement for H. Donald Nelson dated July 15, 1996 is hereby incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. 10.19 Deferred Compensation Agreement for Richard Goehring dated July 15, 1996 is hereby incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. 10.20 Cellular Interest Transfer Agreement by and between TDS and the Company dated June 20, 1996 is hereby incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.21 United States Cellular Corporation Compensation Plan for Non-Employee Directors is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-19403). 10.22 United States Cellular Corporation 1996 Senior Executive Stock Bonus and Restricted Stock Award Plan is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-19405). 10.23 United States Cellular Corporation Special Retention Restricted Stock Award Plan is hereby incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-23861). 11 Statement regarding computation of per share earnings. 12 Statement regarding computation of ratios. 13 Incorporated portions of 1997 Annual Report to Security Holders. 21 Subsidiaries of the Registrant. 23.1 Consent of independent public accountants. 27.1 Financial Data Schedule for December 31, 1997 and for the period then ended. 27.2 Financial Data Schedule for December 31, 1995 and for the period then ended. 27.3 Financial Data Schedule for March 31, 1996; June 30, 1996; September 30, 1996; and December 31, 1996; and for the periods then ended. 27.4 Financial Data Schedule for September 30, 1997 and for the period then ended.
EX-10.11 2 EXHIBIT 10.11 EXHIBIT 10.11 SUMMARY OF 1997 BONUS PROGRAM FOR SENIOR CORPORATE STAFF OF UNITED STATES CELLULAR CORPORATION The objectives of the 1997 Bonus Program for Senior Corporate Staff (the "1997 Bonus Plan") of United States Cellular Corporation ("USM") are: (i) to provide suitable incentives for the senior corporate management of USM to extend their best efforts to achieve superior results in relation to key performance targets, (ii) to suitably reward USM's senior corporate management team in relation to their success in meeting and exceeding these performance targets, and (iii) to help USM attract and retain talented management personnel in positions of critical importance to the success of USM. A team performance award and an individual performance award are available under the 1997 Bonus Plan. For target performance on the team and individual categories, the 1997 Bonus Plan was designed to generate a targeted 1997 bonus pool equal to the total of 35% of the aggregate of the base salaries of the Company's senior executive officers other than the President. Under the 1997 Bonus Plan, the size of the target bonus pool is increased or decreased depending on USM's 1997 achievements with respect to the performance categories. No bonus pool is paid under such plan if minimum performance levels are not achieved in these categories. The maximum bonus pool that could be generated, which would require exceptional performance in all areas, would equal the total of 70% of the aggregate base salaries of the Company's executive officers other than the President. At target performance, the bonus pool would be equal to 35% of the aggregate salaries of the Company's executive officers other than the President. Of this percentage, 7% represents a targeted individual performance award and a total of 28% represents a targeted team bonus award. The targeted team award includes a discretionary team award of 4.2% and an objective award of 23.8% for a total targeted team bonus award of 28%. The objective performance categories include (i) penetration (5.6% of the targeted award) (ii) cash flow (8.4% of the targeted award), (iii) service revenue (5.6% of the targeted award) and (iv) quality improvement (4.2% of the targeted award). EX-11 3 EXHIBIT 11 EXHIBIT 11 UNITED STATES CELLULAR CORPORATION COMPUTATION OF EARNINGS PER COMMON SHARE FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BASIC EARNINGS Net Income Available to Common................................................. $ 111,539 --------- --------- BASIC SHARES Weighted average number of Common and Series A Common Shares Outstanding....... 86,346 --------- --------- BASIC EARNINGS PER COMMON SHARE Net Income..................................................................... $ 1.29 --------- --------- DILUTED EARNINGS Net Income Available to Common................................................. $ 111,539 --------- --------- DILUTED SHARES Weighted average number of Common and Series A Common Shares Outstanding....... 86,346 Additional shares assuming issuance of: Options and Stock Appreciation Rights........................................ 52 --------- Diluted Shares................................................................. 86,398 --------- --------- DILUTED EARNINGS PER COMMON SHARE Net Income..................................................................... $ 1.29 --------- ---------
- --------- EX-12 4 EXHIBIT 12 EXHIBIT 12 UNITED STATES CELLULAR CORPORATION RATIOS OF EARNINGS TO FIXED CHARGES FOR THE YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT RATIO AMOUNTS) EARNINGS: Income from Continuing Operations before income taxes.......................... $ 195,487 Add (Deduct): Minority Share of Cellular Losses from Majority-owned Subsidiaries......... (371) Earnings on Equity Method.................................................. (77,121) Distributions from Minority Subsidiaries................................... 52,362 --------- $ 170,357 Add fixed charges: Consolidated Interest Expense.............................................. 28,760 Deferred Debt Amortization Expense......................................... 602 Interest Portion (1/3) of Consolidated Rent Expense........................ 5,724 --------- $ 205,443 FIXED CHARGES: Consolidated Interest Expense.................................................. $ 28,760 Deferred Debt Amortization Expense............................................. 602 Interest Portion (1/3) of Consolidated Rent Expense............................ 5,724 --------- $ 35,086 RATIO OF EARNINGS TO FIXED CHARGES............................................... 5.86 --------- --------- FIXED CHARGES AND PREFERRED DIVIDENDS: Tax-effected Preferred Dividends............................................... $ 122 Fixed Charges.................................................................. 35,086 --------- $ 35,208 RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS....................... 5.84 --------- ---------
EX-13 5 EXHIBIT 13 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 81.1%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS"). See "Proposed TDS Corporate Restructuring" for further information on TDS's ownership of USM. USM owned either majority or minority cellular interests in 192 markets at December 31, 1997, representing 26,179,000 population equivalents ("pops"). USM included the operations of 134 majority-owned and managed cellular markets, representing 22.6 million pops, in consolidated operations ("consolidated markets") as of December 31, 1997. Minority interests in 51 markets, representing 3.5 million pops, were accounted for using the equity method and were included in investment income at that date. All other interests, representing less than 100,000 pops in the aggregate, were accounted for using the cost method. Following is a table of summarized operating data for USM's consolidated operations.
YEAR ENDED OR AT DECEMBER 31, ------------------------------------ 1997 1996 1995 ---------- ---------- -------- Total market population (in thousands)(1).... 24,034 21,712 22,309 Customers.................................... 1,710,000 1,073,000 710,000 Market penetration........................... 7.11% 4.94% 3.18% Markets in operation......................... 134 131 137 Cell sites in service........................ 1,748 1,328 1,116 Average monthly revenue per customer......... $ 54.18 $ 63.69(2) $ 70.64(2) Churn rate per month......................... 1.9% 1.9% 2.1% Marketing cost per net customer addition..... $ 528 $ 505(2) $ 515(2) ---------- ---------- --------
- ------------------------ (1) Calculated using the respective Donnelley Marketing Service estimates for each year (Claritas for 1997). (2) Recomputed to show the effect of change in current year presentation of certain revenues and expenses. The Company's operating income for 1997 and 1996, which includes 100% of the revenues and expenses of its consolidated markets plus its corporate office operations, primarily reflects improvement in the Company's overall operations compared to 1996 and 1995. 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 $196.9 million, or 29%, in 1997 and $199.8 million, or 42%, in 1996. Operating expenses rose $154.7 million, or 26%, in 1997 and $155.1 million, or 35%, in 1996. Operating cash flow (operating income before minority share plus depreciation and amortization expense) increased $65.7 million, or 33%, in 1997 and $64.0 million, or 48%, in 1996. Beginning on January 1, 1997, the Company changed its income statement presentation of certain credits given to customers on their monthly bills. Customer incentive programs which result in either new or current customers receiving free or reduced-price airtime or access are now reported as a reduction of local retail revenue. Prior to January 1, 1997, the Company reported the foregone revenues resulting from these incentive programs as marketing and selling expense (for new customers) and general and administrative expense (for current customers). Amounts in the currently affected revenue and expense categories have been reclassified for previous years, including the 1996 and 1995 information provided throughout this Annual Report. Operating income and net income are not affected by this change. 1 Investment and other income decreased $83.5 million, or 44%, to $107.6 million in 1997, due primarily to the decrease of $102.4 million in gains on the sales of cellular interests. Investment and other income increased $66.4 million, or 53%, in 1996, due primarily to the increase of $49.2 million in gains on the sales of cellular and other investments. Interest expense increased $6.3 million, or 27%, in 1997 and decreased $4.2 million, or 15%, in 1996. 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 and other investments. Income tax expense increased $79.1 million in 1996, primarily due to the increase in gains on the sales of cellular and other investments. Net income totaled $111.5 million in 1997, a decrease of $18.4 million, or 14%, from 1996, and totaled $129.9 million in 1996, an increase of $30.2 million, or 30%, over 1995. In all three years, net income included gains on sales of cellular and other investments. A summary of the after-tax effects of these gains on net income and earnings per share-diluted is shown on the next page.
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ---------- ---------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income before after-tax effects of gains................................... $ 95,302 $ 62,504 $ 43,918 Add: After-tax effects of gains................................................ 16,237 67,425 55,824 ---------- ---------- --------- Net income as reported......................................................... $ 111,539 $ 129,929 $ 99,742 ---------- ---------- --------- ---------- ---------- --------- Earnings per share before after-tax effects of gains........................... $ 1.10 $ .73 $ .52 Add: After-tax effects of gains................................................ .19 .78 .67 ---------- ---------- --------- Earnings per share--diluted.................................................... $ 1.29 $ 1.51 $ 1.19 ---------- ---------- --------- ---------- ---------- ---------
OPERATING REVENUES OPERATING REVENUES totaled $877.0 million in 1997, up $196.9 million, or 29%, over 1996. Operating revenues totaled $680.1 million in 1996, up $199.8 million, or 42%, over 1995. As explained previously, operating revenues for 1996 and 1995 have been reclassified to conform to current period presentation of customer incentive program credits. 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 $853.0 million in 1997, up $190.3 million, or 29%, over 1996. Service revenues totaled $662.7 million in 1996, up $198.1 million, or 43%, over 1995. The increases in both years were primarily due to the growing number of local retail customers and the growth in inbound roaming revenue. The reclassification of customer bill credits reduced service revenues from what would have been reported by $49.0 million, or 5%, in 1997, and from what was reported by $27.8 million, or 4%, in 1996 and $12.1 million, or 3%, in 1995. Average monthly service revenue per customer totaled $54.18 in 1997, $63.69 in 1996 and $70.64 in 1995, representing declines of 15% in 1997 and 10% in 1996. The decrease in average monthly service revenue per customer in both years resulted from a decrease in average revenue per minute of use from both local retail customers and inbound roamers. Also contributing was slower growth in inbound roaming minutes of use when compared to the growth in the Company's customer base. The reclassification of customer bill credits reduced average monthly service revenue per customer from what would have been reported by $3.11, or 5%, in 1997, and from what was reported by $2.67, or 4%, in 1996 and $1.84, or 3%, in 1995. 2 Competitive pressures and the Company's increasing use of pricing and other incentive programs that encourage weekend and off-peak usage at reduced rates, in order to stimulate overall usage, plus increasing amounts of bill credits given to new and current customers as incentives to become or remain the Company's customers, resulted in decreases in average local retail revenue per minute of use during both 1997 and 1996. The Company's average inbound roaming revenue per minute of use also decreased during both 1997 and 1996, in line with the ongoing trend toward reduced per minute prices for roaming negotiated between the Company and other cellular operators. Also, the Company believes that its customer base is growing faster than that of the cellular industry as a whole, which has a dilutive effect on inbound roaming revenue per customer. Inbound roaming minutes of use have been growing at a slower rate than the Company's customer base (27% and 38% growth in inbound roaming minutes in 1997 and 1996, respectively, compared to 59% and 51% growth in the Company's customer base). LOCAL RETAIL REVENUE increased $153.8 million, or 37%, in 1997 and $137.4 million, or 50%, in 1996. 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 59% to 1,710,000 at December 31, 1997, and increased 51% to 1,073,000 at December 31, 1996. The Company added 442,000 net new customers from its marketing channels in 1997 compared to 365,000 in 1996. Management anticipates that the growth rate in the Company's customer base will be lower in the future, primarily as a result of an increase in the number of competitors in its markets. The reclassification of customer bill credits reduced local retail revenue from what would have been reported by $49.0 million, or 8%, in 1997, and from what was reported by $27.8 million, or 6%, in 1996 and $12.1 million, or 4%, in 1995. Average monthly local retail revenue per customer declined to $36.11 in 1997 from $39.87 in 1996 and $42.19 in 1995. Monthly local retail minutes of use per customer decreased 4% to 103 in 1997, and increased 13% to 107 in 1996. Average revenue per minute of use decreased in both years as a result of the pricing and other incentive programs stated previously. Average local retail revenue per minute totaled $.35 in 1997 compared to $.37 in 1996 and $.44 in 1995. The decrease in average monthly local retail revenue per customer is part of an industry-wide trend and is believed to be related to the tendency of the early customers in a market to be the heaviest users during peak business hours. It also reflects the increasing level of competition for wireless services and the Company's and the industry's continued penetration of the consumer market, which tends to include fewer peak business hour-usage customers. The reclassification of customer bill credits reduced average monthly local retail revenue per customer from what would have been reported by $3.11, or 8%, in 1997, and from what was reported by $2.67, or 6%, in 1996 and $1.84, or 4%, in 1995. INBOUND ROAMING REVENUE increased $24.2 million, or 13%, in 1997 and $45.3 million, or 31%, in 1996. Both the 1997 and 1996 increases were attributable to the respective 27% and 38% increases in the number of minutes used by customers from other wireless systems when roaming in the Company's service areas. Also contributing were the increased number of cell sites within the Company's service areas. These effects were offset somewhat by the decrease in average revenue per minute due to the downward trend in negotiated rates. Average inbound roaming revenue per minute totaled $.83 in 1997, $.92 in 1996 and $.99 in 1995. Monthly inbound roaming revenue per Company customer averaged $13.81 in 1997, $18.58 in 1996 and $22.51 in 1995. The decreases in monthly inbound roaming revenue per Company customer are related to both the decreases in inbound roaming revenue per minute and the faster increases in the Company's customer base as compared to the growth in inbound roaming minutes of use. LONG-DISTANCE REVENUE increased $12.0 million, or 23%, in 1997 and $17.3 million, or 49%, in 1996 as the volume of long-distance calls billed by the Company increased. Monthly long-distance revenue per customer averaged $4.10 in 1997, $5.05 in 1996 and $5.36 in 1995. The decrease in monthly long-distance revenue per customer is primarily due to the dilution of the portion of long-distance revenue that comes from inbound roaming customers. In a manner similar to inbound roaming revenue, this revenue is not growing as fast as the Company's customer base. 3 EQUIPMENT SALES REVENUES increased $6.6 million, or 38%, in 1997 and $1.6 million, or 10%, in 1996. Equipment sales reflect the sale of 587,000, 449,000 and 296,000 cellular telephone units in 1997, 1996 and 1995, respectively, plus installation and accessories revenue. The average revenue per unit was $41 in 1997, $39 in 1996 and $53 in 1995. The average revenue per unit in all years is significantly less than the Company's cost per unit, which partially reflects the Company's decision to reduce sales prices on cellular telephones to stimulate growth in the number of customers, to maintain its market position and to meet competitive prices as well as to pass through reduced manufacturers' prices to customers. Also, the Company uses promotions which are based on increased equipment discounting. The success of these promotions has led to both an increase in units sold and a general decline in average equipment sales revenue per unit over the last several years. OPERATING EXPENSES OPERATING EXPENSES totaled $747.4 million in 1997, up $154.7 million, or 26%, over 1996. Operating expenses totaled $592.7 million in 1996, up $155.1 million, or 35%, over 1995. As explained previously, operating expenses for 1996 and 1995 have been reclassified to conform to current period presentation of customer incentive program credits. The reclassification of customer bill credits reduced operating expenses from what would have been reported by $49.0 million, or 6%, in 1997, and from what was reported by $27.8 million, or 4%, in 1996 and $12.1 million, or 3%, in 1995. SYSTEM OPERATIONS EXPENSES increased $35.8 million, or 30%, in 1997 and $46.9 million, or 67%, in 1996. These increases were primarily due to increases in customer usage expenses and costs associated with serving the Company's increased number of customers, which include the costs of roaming fraud, and the growing number of cell sites within the Company's systems. In 1997, the Company significantly reduced its expenses related to roaming fraud, resulting in a decline in the percentage increase in total system operations expenses during the year. In total, system operations costs are expected to continue to increase as the number of customers using and the number of cell sites within the Company's systems grows. Customer usage expenses represent charges from other telecommunications service providers for the Company's customers' use of their facilities as well as for the Company's inbound roaming traffic on these facilities. Also included are costs related to local interconnection to the landline network, toll charges and expenses incurred by the Company when its customers use systems other than their local systems ("outbound roaming"). These expenses are offset somewhat by amounts the Company bills to its customers for outbound roaming. Customer usage expenses increased $24.3 million, or 32%, in 1997 and $40.4 million, or 116%, in 1996. The increase in 1997 is primarily due to the increase in net outbound roaming expense, which has resulted from the Company offering its customers increasingly larger service footprints in which their calls are billed at local rates. In certain cases these service areas include other operators' service areas. The Company pays roaming rates to the other carriers for calls the Company's customers make in these areas, while charging those customers a local rate which is usually lower than the roaming rate. Also contributing to the increase in 1997 were costs related to the increase in minutes used on the Company's systems, partially offset by the reduction in costs related to fraudulent use of the Company's customers' cellular telephone numbers. The increase in 1996 is due to both an increase in net outbound roaming expense and an increase in fraud-related costs. These fraud-related costs totaled $6.5 million in 1997, $18.0 million in 1996 and $4.1 million in 1995. 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 in 1997, 11% in 1996 and 7% in 1995. Maintenance, utility and cell site expenses increased $11.5 million, or 27%, in 1997, and $6.5 million, or 18%, in 1996. The increases primarily reflect an increase in the number of cell sites in the Company's systems each year, to 1,748 in 1997 from 1,328 in 1996 and 1,116 in 1995. Monthly maintenance, utility and 4 cell site expenses totaled $2,900, $2,866 and $3,107 per average cell site in 1997, 1996 and 1995, respectively. MARKETING AND SELLING EXPENSES increased $47.4 million, or 37%, in 1997 and $35.5 million, or 39%, in 1996. Marketing and selling expenses primarily consist of salaries, commissions and expenses of field sales and retail personnel and offices; agent expenses; local advertising and public relations expenses. The 1997 increase was primarily due to a 33% rise in the number of gross customer activations (excluding acquisitions and divestitures), to 746,000 in 1997 from 563,000 in 1996. Also in 1997, the Company increased its advertising expenses, particularly brand advertising, to promote the United States Cellular-Registered Trademark-brand. The 1996 increase was primarily due to a 44% rise in the number of gross customer activations (excluding acquisitions and divestitures), to 563,000 in 1996 from 392,000 in 1995. Cost per gross customer activation, including losses on equipment sales, decreased to $313 in 1997 from $327 in 1996 and $335 in 1995. While cost per gross customer activation in total decreased in 1997 and 1996, the percentage of cost per gross customer activation attributable to marketing and selling expenses increased to 75% in 1997 from 69% in 1996 and 70% in 1995. The percentage increase from 1996 to 1997 is primarily due to the additional advertising expenses coupled with decreased losses on equipment sales due to lower per unit manufacturer equipment prices. The reclassification of customer bill credits reduced cost per gross addition from what would have been reported by $52, or 14%, in 1997, and from what was reported by $40, or 11%, in 1996 and $26, or 7%, in 1995; in total, the reclassification reduced marketing and selling expenses from what would have been reported by $38.6 million, or 18%, in 1997, and from what was reported by $22.3 million, or 15%, in 1996 and $10.2 million, or 10%, in 1995. COST OF EQUIPMENT SOLD increased $8.3 million, or 11%, in 1997 and $19.1 million, or 35%, in 1996. The increase reflects the growth in unit sales related to the rise in gross customer activations made through the Company's direct and retail distribution channels, offset somewhat by falling manufacturer prices per unit. The average cost to the Company of a telephone unit sold, including accessories and installation, was $140 in 1997, $165 in 1996 and $186 in 1995. GENERAL AND ADMINISTRATIVE EXPENSES increased $39.7 million, or 24%, in 1997 and $34.2 million, or 26%, in 1996. These expenses include the costs of operating the Company's local business offices and its corporate expenses. The increases in both years include the effects of increases in expenses required to serve the growing customer base in existing markets and an expansion of both local administrative office and corporate staff, necessitated by growth in the Company's business. Employee-related expenses increased $19.4 million, or 26%, in 1997 and $15.6 million, or 27%, in 1996, primarily due to increases in the number of administrative employees in each year. Also, bad debt expense increased $8.0 million, or 46%, in 1997 and $5.0 million, or 40%, in 1996, primarily due to the Company's increased penetration of the consumer market. The Company is using an ongoing clustering strategy to combine local and customer service operations wherever feasible in order to gain operational efficiencies and reduce its per unit administrative expenses. Monthly general and administrative expenses per customer decreased to $12.99 in 1997 from $15.84 in 1996 and $19.85 in 1995. The reclassification of customer bill credits reduced general and administrative expenses from what would have been reported by $10.4 million, or 5%, in 1997, and from what was reported by $5.5 million, or 3%, in 1996 and $1.9 million, or 1%, in 1995. Operating cash flow increased $65.7 million, or 33%, to $261.9 million in 1997 and increased $64.0 million, or 48%, to $196.2 million in 1996. The improvements in both years were primarily due to substantial growth in customers and service revenues and the effects of improved operational efficiencies on cash operating expenses. Operating cash flow margins (as a percent of service revenues) were 30.7% in 1997, 29.6% in 1996 and 28.5% in 1995; had the reclassification of customer bill credits not been made, operating cash flow margins would have been 29.0% in 1997, 28.4% in 1996 and 27.7% in 1995. DEPRECIATION EXPENSE increased $23.0 million, or 31%, in 1997 and $17.3 million, or 30%, in 1996. The increase reflects rising average fixed asset balances, which increased 35% in 1997 and 34% in 1996. 5 Increased fixed asset balances primarily result from the increase in cell sites built to improve coverage and capacity in the Company's markets. OPERATING INCOME BEFORE MINORITY SHARE OPERATING INCOME BEFORE MINORITY SHARE totaled $129.5 million in 1997, $87.4 million in 1996 and $42.8 million in 1995. The operating income margin was 15.2% in 1997, 13.2% in 1996 and 9.2% in 1995; had the reclassification of customer bill credits not been made, operating income margins would have been 14.4% in 1997, 12.7% in 1996 and 9.0% in 1995. The improvement in operating income and operating income margin reflects increased revenues resulting from growth in the number of customers served by the Company's systems and the effect of improved operational efficiencies on total operating expenses. The Company expects service revenues to continue to grow during 1998; however, management anticipates that average monthly revenue per customer will continue to decrease as local retail and inbound roaming revenue per minute of use decline and as the Company further penetrates the consumer market. Additionally, the Company expects expenses to increase during 1998 as it incurs costs associated with both customer growth and cell sites added. Management believes there exists a seasonality in both service revenues, which tend to increase more slowly in the first and fourth quarters, and operating expenses, which tend to be higher in the fourth quarter due to increased marketing activities and customer growth, which may cause operating income to vary from quarter to quarter. Additionally, competitors licensed to provide personal communications services ("PCS") have initiated service in certain of the Company's markets over the past eighteen months. The Company expects PCS operators to complete initial deployment of PCS in portions of all of the Company's clusters by the end of 1998. The Company has increased its advertising, particularly brand advertising, in 1997 to promote the United States Cellular-Registered Trademark- brand and distinguish the Company's service from other wireless communications providers. The Company's management continues to monitor other wireless communications providers' strategies to determine what effects additional competition will have on the Company's future strategies and results. While the effects of additional wireless competition have slowed customer growth in certain of the Company's markets, the overall effect on the Company's total customer growth to date has not been material. INVESTMENT AND OTHER INCOME INVESTMENT AND OTHER INCOME totaled $107.6 million in 1997, $191.1 million in 1996 and $124.7 million in 1995. Gain on sale of cellular and other investments totaled $30.3 million in 1997, reflecting gains recorded on the 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. Gain on sale of cellular and other investments totaled $132.7 million in 1996, reflecting gains recorded on the 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. Gain on sale of cellular and other investments totaled $83.5 million in 1995, reflecting gains recorded on the sales of majority interests in six markets and minority interests in six markets, on cash received in an exchange of markets with another cellular operator and on the sale of certain marketable equity securities. INVESTMENT INCOME was $77.1 million in 1997 compared to $51.5 million in 1996 and $39.8 million in 1995. 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. Although investment income increased significantly in 1996 and 1997, future investment income will be negatively impacted by the completion of the exchange transaction with BellSouth Corporation ("BellSouth") and the divestitures of certain minority interests to AirTouch Communications ("AirTouch"). See "Financial Resources and Liquidity-- Acquisitions, Divestitures and Exchanges" for further discussions of these transactions. 6 INTEREST AND INCOME TAXES INTEREST EXPENSE totaled $29.4 million in 1997 compared to $23.1 million in 1996 and $27.3 million in 1995. Interest expense in 1997 is primarily related to Liquid Yield Option Notes ("LYONs") ($15.2 million); the Company's 7.25% notes (the "Notes") issued during the third quarter of 1997 ($6.3 million); borrowings under vendor financing agreements ($4.5 million); and borrowings under the Revolving Credit Agreement with TDS ($1.9 million). Interest expense in 1996 is primarily related to LYONs ($14.4 million) and borrowings under vendor financing agreements ($8.0 million). Interest expense in 1995 is primarily related to borrowings under the Revolving Credit Agreement with TDS ($10.4 million), borrowings under vendor financing agreements ($9.2 million) and LYONs ($7.4 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 on August 15, 2007. Interest on the Notes is payable semi-annually on February 15 and August 15 of each year, commencing February 15, 1998. 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. 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. All borrowings under the vendor financing agreements were repaid in August 1997 with a portion of the proceeds from the Notes offering. Borrowings under the Revolving Credit Agreement with TDS were outstanding from April 1997 through August 1997, at which time all outstanding amounts were repaid with a portion of the proceeds from the Notes offering. Borrowings under the Revolving Credit Agreement with TDS were also outstanding from January 1995 through June 1995, at which time all outstanding amounts were repaid with a portion of the proceeds from the LYONs offering. INCOME TAX EXPENSE was $83.9 million in 1997, $111.6 million in 1996 and $32.5 million in 1995. In 1997, $14.1 million of income tax expense related to the gains on sales of cellular and other investments compared to $65.3 million in 1996 and $27.7 million in 1995. The effective tax rates were 43% in 1997, 46% in 1996 and 25% in 1995. The fluctuation in each year's effective tax rate is primarily due to the different amounts of gains on sales of cellular interests in each year; these gains are generally taxed at a higher rate than income from operations, due to the lower tax basis of certain interests sold which were originally acquired in tax-free transactions. In 1997, 1996 and 1995, state income taxes and gains on sales of cellular and other investments increased the effective rate above the statutory federal income tax rate. In 1995, this effect was offset by the effect of the valuation allowance on the deferred tax asset, which decreased the effective rate below the statutory rate. TDS and the Company are parties to a Tax Allocation Agreement, pursuant to which the Company is included in a consolidated federal income tax return with other members of the TDS consolidated group. For financial reporting purposes, the Company computes federal income taxes as if it were filing a separate return as its own affiliated group and was not included in the TDS group. Subject to the completion of the proposed TDS corporate restructuring, TDS intends to terminate certain intercompany agreements between TDS and the Company. See "Proposed TDS Corporate Restructuring" for further information on these intercompany agreements. NET INCOME NET INCOME totaled $111.5 million in 1997, $129.9 million in 1996 and $99.7 million in 1995. EARNINGS PER SHARE-DILUTED was $1.29 in 1997, $1.51 in 1996 and $1.19 in 1995. Net income and earnings per share in all three years included gains on the sales of cellular and other investments. See Page 21 for a summary of the after-tax effects of gains on net income and earnings per share. 7 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 substantial increases in cellular units in service, revenues and cell sites as it continues its growth strategy. Operating cash flow may fluctuate from quarter to quarter depending on the seasonality of each of these growth factors. CASH FLOWS FROM OPERATING ACTIVITIES provided $222.1 million in 1997, $137.5 million in 1996 and $115.9 million in 1995. Operating cash flow provided $261.9 million in 1997, $196.2 million in 1996 and $132.2 million in 1995. Cash flows from other operating activities (investment and other income, interest expense, changes in working capital and changes in other assets and liabilities) required cash investments totaling $39.8 million in 1997, $58.7 million in 1996 and $16.3 million in 1995. CASH FLOWS FROM FINANCING ACTIVITIES provided $135.9 million in 1997, required $11.2 million in 1996 and provided $19.3 million in 1995. In August 1997, the Notes offering provided $243.1 million in 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. In 1995, the sale of LYONs provided cash totaling $221.5 million and borrowings under the vendor financing agreements provided cash totaling $59.5 million. This cash was used to repay amounts owed under the Revolving Credit Agreement with TDS totaling $251.2 million and amounts owed under the vendor financing agreements totaling $13.4 million. CASH FLOWS FROM INVESTING ACTIVITIES required $358.5 million in 1997, $150.3 million in 1996 and $102.6 million in 1995. The company received net cash proceeds totaling $61.1 million in 1997, $213.0 million in 1996 and $151.1 million in 1995 related to the sales and exchanges of cellular interests. Cash distributions from cellular entities in which the Company has an interest provided $52.4 million in 1997, $23.5 million in 1996 and $8.7 million in 1995. Cash required for property, plant and equipment and system development expenditures totaled $318.7 million in 1997, financed primarily with internally generated cash and the proceeds from the Notes offering; $248.1 million in 1996, financed primarily with internally generated funds and proceeds from the sales of cellular interests; and $206.2 million in 1995, financed primarily with internally generated funds and proceeds from the LYONs offering. These expenditures primarily represent the construction of 331, 242 and 292 cell sites in 1997, 1996 and 1995, respectively, plus other plant additions and costs related to the development of the Company's office systems. Acquisitions required $128.8 million in 1997, $116.4 million in 1996 and $29.3 million in 1995. Anticipated capital requirements for 1998 primarily reflect the Company's construction and system expansion program. The Company's construction and system expansion budget for 1998 is approximately $330 million, primarily for new cell sites to expand and enhance the Company's coverage in its service areas and for the enhancement of the Company's office systems. ACQUISITIONS, DIVESTITURES AND EXCHANGES The Company assesses its cellular holdings on an ongoing basis in order to maximize the benefits derived from clustering its markets. As the Company's clusters have grown, the Company's focus has shifted toward exchanges and divestitures of managed and investment interests. Over the past few years, the Company has completed exchanges of controlling interests in its less strategic markets for controlling interests in markets which better complement its clusters. The Company has also completed outright sales of other less strategic markets. The proceeds from these sales have been used to further the Company's growth. 8 In 1997, the Company, or TDS for the benefit of 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 (including cash borrowed under the Revolving Credit Agreement with TDS) 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. The majority interests USM received are in 12 markets adjacent to its Iowa/Missouri and Wisconsin/Illinois/Indiana 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 1995, the Company purchased majority interests in 11 markets and several minority interests, representing approximately 1.7 million pops. The total consideration paid for these purchases, primarily in the form of cash and USM Common Shares issued or issuable to TDS to reimburse TDS for the value of TDS Common Shares issued and issuable and cash paid to third parties, totaled $151.0 million. The Company also acquired majority interests in 12 markets, representing approximately 2.0 million pops, as a result of six separate exchange transactions completed during 1995. 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. The two minority interests involved interests the Company had previously acquired from TDS pursuant to the June 1996 agreement between the two companies. In the aggregate, the Company recorded a substantial book gain on the divestitures of the interests acquired from TDS. 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, exchanges and litigation settlements provided the Company with cash totaling $218.1 million in 1996. In 1995, the Company sold majority interests in six markets and minority interests in six markets, representing approximately 1.1 million pops. The Company received consideration consisting of cash and receivables totaling $128.2 million from these sales. The Company also divested majority interests in 10 markets, representing approximately 2.1 million pops, as a result of the exchange transactions completed during 1995. At December 31, 1997, the Company had entered into agreements to acquire a majority interest in one market and a minority interest in a market in which the Company owns a majority interest, representing approximately 410,000 pops, for $51.3 million in cash. If the majority interest is acquired as expected, the Company will subsequently sell that interest to BellSouth for cash. Also at December 31, 1997, the Company had entered into agreements with AirTouch to divest minority interests in nine markets, representing approximately 759,000 pops. In exchange, the agreements provided that the Company will receive approximately 4.0 million shares of AirTouch stock and cash totaling $54.2 million. In addition, the Company will receive approximately $27.0 million in cash from TDS 9 pursuant to a contract right termination agreement entered into between the Company and TDS. This agreement is related to two interests which are to be sold directly by TDS to AirTouch and which were to be acquired by the Company as part of the June 1996 agreement between the Company and TDS. The contract right termination agreement will enable 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. Additionally, the Company has entered into an agreement to sell its minority interests in two other markets, representing approximately 176,000 pops, for $37.6 million in cash. The Company expects these pending transactions to be completed during the first half of 1998. The Company anticipates that it will record significant book gains on these divestitures when the transactions are completed. LIQUIDITY The Company anticipates that the aggregate resources required for 1998 will include approximately $330 million for capital spending and approximately $51 million to complete pending acquisitions. The Company is generating substantial cash from its operations and anticipates financing its capital spending for 1998 primarily with internally generated cash. The Company had $14 million of cash and cash equivalents at December 31, 1997 and expects to receive approximately $119 million from pending divestitures and the contract right termination agreement during 1998. Additionally, in August 1997 the Company established a $500 million revolving credit facility with a group of banks. This seven-year facility replaces the Company's Revolving Credit Agreement with TDS as the Company's primary short-term borrowing facility. No borrowings have been made under the new credit facility through December 31, 1997. The Company filed a shelf registration statement in July 1997 covering $400 million of debt securities, and in August 1997 sold $250 million of Notes under such shelf registration statement. The remaining $150 million is available for future transactions. Management believes that the nature of the interest rate bases related to the Company's current and potential future debt financing sources do not subject the Company to material market risk exposures. Management believes that the Company's operating cash flows and sources of external financing, including the above-referenced revolving credit facility and shelf registration, 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. The Company has assessed and continues to assess the impact of the Year 2000 on its reporting systems and operations (the "Year 2000 Issue"), and is taking steps to make its systems Year 2000 compliant. The Year 2000 Issue exists because many computer systems and applications abbreviate dates by eliminating the first two digits of the year, assuming that these two digits will always be "19." Unless corrected, this shortcut is expected to cause problems beginning on January 1, 2000. On that date, some computer programs may recognize the date as January 1, 1900. This may cause systems to incorrectly process critical financial and operational information, or stop processing altogether. Additionally, computer applications may be affected before January 1, 2000, if calculations into the year 2000 are involved. The costs to date of addressing the Year 2000 Issue have not been material to the Company's results of operations or financial condition, and management believes that the costs to be incurred in the future will not be material to future results or financial condition. If management's steps are not successful in making the systems Year 2000 compliant, it could have a material adverse effect on results of operations. 10 PROPOSED TDS CORPORATE RESTRUCTURING In December 1997, the Company received a proposal from TDS to acquire all of the issued and outstanding Common Shares of USM not already owned by TDS. The offer was made in connection with, and is subject to TDS shareholder approval of and the effectiveness of, TDS's proposed corporate restructuring. The Board of Directors of TDS (the "TDS Board") has adopted a proposal which, if approved by TDS shareholders and implemented by the TDS Board, would authorize the TDS Board to issue three new classes of common stock and change the state of incorporation of TDS from Iowa to Delaware (the "Tracking Stock Proposal"). The three new classes of stock are intended to separately reflect the performance of TDS's cellular telephone, landline telephone and personal communications services businesses ("Tracking Stocks"). Under the Tracking Stock Proposal, one of the three new classes of common stock created by TDS would be designated as United States Cellular Group Common Shares (the "Cellular Group Shares"). The Cellular Group Shares, when issued, are intended to reflect the separate performance of the United States Cellular Group (the "Cellular Group"), which consists of TDS's interest in United States Cellular Corporation. Subject to the approval of the Tracking Stock Proposal by TDS shareholders, TDS intends to, among other things, issue Cellular Group Shares in exchange for all of the Common Shares of the Company which are not currently owned by TDS, subject to approval by the Company's board of directors and shareholders. In January 1998, the Company's Board of Directors created a special committee of the Board (the "Special Committee") to review the proposal from TDS. The Special Committee, consisting of one independent director of the Company, has engaged a financial advisor and legal advisor to assist in reviewing the proposal. The Special Committee will consider how the Company should respond to the TDS proposal, take the steps it deems appropriate to respond to the TDS proposal and, at such time as it considers it appropriate, report its recommendations to the Company's Board of Directors. Subsequent to TDS shareholder approval of the Tracking Stock Proposal, TDS intends to terminate certain inter-company agreements between TDS and the Company. Thereafter, all of the policies between TDS and the Company would be determined solely by methods that TDS management believes to be reasonable. Many of such policies would continue the arrangements which presently exist between TDS and the Company pursuant to the intercompany agreements, but TDS would have no contractual obligation to continue such policies after the intercompany agreements have been terminated. The TDS Board currently intends to retain future earnings, if any, for the development of the business of the Cellular Group and does not anticipate paying dividends on the Cellular Group Shares in the foreseeable future. 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; 11 pending and future litigation; availability of future financing; start-up of PCS operations; and unanticipated changes in growth in cellular customers, penetration rates, churn rates and the mix of products and services offered in the Company's markets. Readers should evaluate any statements in light of these important factors. CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
QUARTER ENDED ---------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 Revenues......................................................... $ 184,584 $ 217,579 $ 231,959 $ 242,843 Operating Income Before Minority Share........................... 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 Earnings Per Common and Series A Common Share-Basic.................................................... $ .21 $ .37 $ .42 $ .29 Earnings Per Common and Series A Common Share-Diluted Total...... .21 .37 .42 .29 From Operations................................................ .21 .33 .37 .18 From Gains..................................................... $ -- $ .04 $ .05 $ .11 1996 Revenues......................................................... $ 143,642 $ 169,470 $ 180,219 $ 186,737 Operating Income Before Minority Share........................... 11,822 30,021 33,094 12,429 Gain on Sale of Cellular and Other Investments................... 38,691 86,305 7,797 (75) Net Income....................................................... 29,387 63,055 26,140 11,347 From Operations................................................ 8,547 19,694 23,899 10,364 From Gains..................................................... $ 20,840 $ 43,361 $ 2,241 $ 983 Weighted Average Common and Series A Common Shares (000s)........ 84,910 86,085 86,092 86,098 Earnings Per Common and Series A Common Share-Basic.................................................... $ .35 $ .73 $ .30 $ .13 Earnings Per Common and Series A Common Share-Diluted Total...... .34 .73 .30 .13 From Operations................................................ .10 .23 .28 .12 From Gains..................................................... $ .24 $ .50 $ .02 $ .01
- ------------------------ Note: Certain 1996 amounts were reclassified for current year presentation. Net Income for 1997 and 1996 included significant gains from the sales of cellular and other investments. The table above summarizes the effect of the gains on Net Income and Earnings per Common and Series A Common Share-Diluted. Management believes there exists a seasonality at the Company 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. 12 UNITED STATES CELLULAR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING REVENUES Service.................................................................... $ 852,991 $ 662,681 $ 464,555 Equipment sales............................................................ 23,974 17,387 15,761 ---------- ---------- ---------- Total Operating Revenues................................................. 876,965 680,068 480,316 ---------- ---------- ---------- OPERATING EXPENSES System operations.......................................................... 153,137 117,368 70,442 Marketing and selling...................................................... 175,117 127,689 92,180 Cost of equipment sold..................................................... 82,302 74,023 54,948 General and administrative................................................. 204,487 164,783 130,533 Depreciation............................................................... 97,591 74,631 57,302 Amortization of intangibles................................................ 34,788 34,208 32,156 ---------- ---------- ---------- Total Operating Expenses................................................. 747,422 592,702 437,561 ---------- ---------- ---------- OPERATING INCOME BEFORE MINORITY SHARE....................................... 129,543 87,366 42,755 Minority share of operating income........................................... (12,298) (13,743) (7,902) ---------- ---------- ---------- OPERATING INCOME............................................................. 117,245 73,623 34,853 ---------- ---------- ---------- INVESTMENT AND OTHER INCOME Investment income.......................................................... 77,121 51,518 39,833 Amortization of licenses related to investments............................ (2,084) (1,391) (1,089) Interest income............................................................ 5,863 10,093 5,008 Other (expense), net....................................................... (3,614) (1,881) (2,578) Gain on sale of cellular and other investments............................. 30,318 132,718 83,494 ---------- ---------- ---------- Total Investment and Other Income........................................ 107,604 191,057 124,668 ---------- ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES...................................... 224,849 264,680 159,521 ---------- ---------- ---------- INTEREST EXPENSE Interest expense--other.................................................... 27,414 23,111 16,881 Interest expense--affiliate................................................ 1,948 -- 10,406 ---------- ---------- ---------- Total Interest Expense................................................... 29,362 23,111 27,287 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES................................................... 195,487 241,569 132,234 Income tax expense......................................................... 83,948 111,640 32,492 ---------- ---------- ---------- Net Income................................................................... $ 111,539 $ 129,929 $ 99,742 ---------- ---------- ---------- ---------- ---------- ---------- WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES (000s).................... 86,346 85,797 82,320 EARNINGS PER COMMON AND SERIES A COMMON SHARE--BASIC......................... $ 1.29 $ 1.51 $ 1.21 ---------- ---------- ---------- ---------- ---------- ---------- EARNINGS PER COMMON AND SERIES A COMMON SHARE--DILUTED....................... $ 1.29 $ 1.51 $ 1.19 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these statements. 13 UNITED STATES CELLULAR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................................ $ 111,539 $ 129,929 $ 99,742 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities.................................................... Depreciation and amortization........................................... 132,379 108,839 89,458 Investment income....................................................... (77,121) (51,518) (39,833) Gain on sale of cellular and other investments.......................... (30,318) (132,718) (83,494) Minority share of operating income...................................... 12,298 13,743 7,902 Other noncash expense................................................... 18,786 19,260 30,597 Change in accounts receivable........................................... (10,038) (16,706) (27,878) Change in accounts payable.............................................. (1,646) 12,709 (1,819) Change in accrued taxes................................................. 26,297 (10,185) 27,127 Change in deferred taxes................................................ 24,077 63,137 8,660 Change in accrued interest.............................................. 6,413 204 (4,309) Change in unearned revenue.............................................. 5,083 5,254 5,265 Change in other assets and liabilities.................................. 4,388 (4,439) 4,516 ---------- ---------- ---------- 222,137 137,509 115,934 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of 7.25% unsecured notes......................................... 243,053 -- -- Vendor financing borrowings............................................... -- 3,922 59,460 Repayment of vendor financing............................................. (103,827) (21,519) (13,353) Issuance of convertible debentures........................................ -- -- 221,466 Borrowings from Revolving Credit Agreement--TDS........................... 70,444 -- -- Repayment of Revolving Credit Agreement--TDS.............................. (70,444) -- (251,230) Common Shares issued...................................................... 2,503 10,483 1,563 Capital (distributions) contributions (to)/from minority partners......... (5,849) (4,099) 1,411 ---------- ---------- ---------- 135,880 (11,213) 19,317 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures...................................................... (277,799) (219,370) (200,554) System development costs.................................................. (40,949) (28,753) (5,628) Investments in and advances to investment entities........................ (20,084) (22,256) (26,966) Distributions from investment entities.................................... 52,365 23,464 8,679 Proceeds from sales of cellular and other investments..................... 61,145 212,979 151,137 Acquisitions, excluding cash acquired..................................... (128,828) (116,387) (29,315) Other investments......................................................... (3,305) -- -- Change in temporary investments and marketable non-equity securities...... (1,088) -- -- ---------- ---------- ---------- (358,543) (150,323) (102,647) ---------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................ (526) (24,027) 32,604 CASH AND CASH EQUIVALENTS-- Beginning of period....................................................... 14,377 38,404 5,800 ---------- ---------- ---------- End of period............................................................. $ 13,851 $ 14,377 $ 38,404 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes to consolidated financial statements are an integral part of these statements. 14 UNITED STATES CELLULAR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ (DOLLARS IN THOUSANDS) CURRENT ASSETS Cash and cash equivalents General funds..................................................................... $ 13,851 $ 802 Affiliated cash equivalents....................................................... -- 13,575 ------------ ------------ 13,851 14,377 Temporary investments............................................................... 218 -- Accounts receivable Customers, less allowance of $5,259 and $4,199, respectively...................... 81,387 58,034 Roaming........................................................................... 30,689 29,742 Affiliates........................................................................ 170 607 Other............................................................................. 17,536 7,568 Inventory........................................................................... 11,836 11,893 Prepaid expenses.................................................................... 15,714 2,622 Other current assets................................................................ 3,963 3,776 ------------ ------------ 175,364 128,619 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT In service and under construction................................................... 1,212,575 846,005 Less accumulated depreciation....................................................... 272,322 195,251 ------------ ------------ 940,253 650,754 ------------ ------------ INVESTMENTS Licenses, net of accumulated amortization of $127,783 and $110,727, respectively.... 1,150,924 1,044,141 Cellular entities................................................................... 128,810 186,791 Notes and interest receivable....................................................... 10,673 14,943 Marketable non-equity securities.................................................... 870 -- ------------ ------------ 1,291,277 1,245,875 ------------ ------------ DEFERRED CHARGES System development costs, net of accumulated amortization of $18,117 and $11,089, respectively...................................................................... 78,306 44,319 Other, net of accumulated amortization of $4,639 and $5,276, respectively........... 23,716 16,332 ------------ ------------ 102,022 60,651 ------------ ------------ TOTAL ASSETS...................................................................... $ 2,508,916 $ 2,085,899 ------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 15 UNITED STATES CELLULAR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ (DOLLARS IN THOUSANDS) CURRENT LIABILITIES Current portion of long-term debt................................................... $ -- $ 23,065 Notes payable....................................................................... 1,302 1,375 Accounts payable Affiliates........................................................................ 2,466 2,729 Other............................................................................. 101,263 66,638 Accrued taxes....................................................................... 41,606 18,781 Accrued interest.................................................................... 6,534 204 Accrued compensation................................................................ 9,112 3,231 Customer deposits and deferred revenues............................................. 21,019 16,410 Other current liabilities........................................................... 20,934 14,021 ------------ ------------ 204,236 146,454 ------------ ------------ LONG-TERM DEBT 6% zero coupon convertible debentures............................................... 265,330 250,107 7.25% unsecured notes............................................................... 250,000 -- Vendor financing, excluding current portion......................................... -- 80,589 ------------ ------------ 515,330 330,696 ------------ ------------ DEFERRED LIABILITIES AND CREDITS Net deferred income tax liability................................................... 100,725 78,833 Other............................................................................... 5,397 2,444 ------------ ------------ 106,122 81,277 ------------ ------------ MINORITY INTEREST..................................................................... 53,908 51,270 ------------ ------------ COMMON SHAREHOLDERS' EQUITY Common Shares, par value $1 per share; authorized 140,000,000 shares; issued and outstanding 54,232,486 and 53,117,313 shares, respectively........................ 54,232 53,117 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.......................................................... 1,285,530 1,245,066 Retained earnings................................................................... 256,552 145,013 ------------ ------------ 1,629,320 1,476,202 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................ $ 2,508,916 $ 2,085,899 ------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 16 UNITED STATES CELLULAR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) COMMON SHARES Balance at beginning of period........................................ $ 53,117 $ 49,966 $ 45,584 Add Acquisitions of cellular interests.................................. 996 2,194 3,455 Employee benefit plans.............................................. 118 62 62 Redemption of USM and TDS Preferred Stock........................... 1 895 865 ------------ ------------ ------------ Balance at end of period.............................................. $ 54,232 $ 53,117 $ 49,966 ------------ ------------ ------------ ------------ ------------ ------------ SERIES A COMMON SHARES Balance at beginning of period........................................ $ 33,006 $ 33,006 $ 33,006 Issued during year.................................................... -- -- -- ------------ ------------ ------------ Balance at end of period.............................................. $ 33,006 $ 33,006 $ 33,006 ------------ ------------ ------------ ------------ ------------ ------------ ADDITIONAL PAID-IN CAPITAL Balance at beginning of period........................................ $ 1,245,066 $ 1,206,614 $ 1,083,698 Add (Deduct) Acquisitions of cellular interests.................................. 31,489 65,089 101,302 Transfer of interests from TDS...................................... -- (45,761) -- Sale of interests transferred from TDS.............................. 6,591 -- -- Employee benefit plans.............................................. 2,376 1,575 1,614 Redemption of USM and TDS Preferred Stock........................... 35 17,555 21,371 Net unrealized (loss) on available-for-sale marketable equity securities........................................................ -- -- (1,258) Capital stock expense............................................... (27) (6) (113) ------------ ------------ ------------ Balance at end of period.............................................. $ 1,285,530 $ 1,245,066 $ 1,206,614 ------------ ------------ ------------ ------------ ------------ ------------ COMMON SHARES ISSUABLE Balance at beginning of period........................................ $ -- $ 24,784 $ 16,337 Add (Deduct) Acquisitions of cellular interests.................................. -- -- 14,530 Shares issued pursuant to acquisition agreements.................... -- (24,784) (6,083) ------------ ------------ ------------ Balance at end of period.............................................. $ -- $ -- $ 24,784 ------------ ------------ ------------ ------------ ------------ ------------ RETAINED EARNINGS (DEFICIT) Balance at beginning of period........................................ $ 145,013 $ 15,084 $ (84,658) Add net income........................................................ 111,539 129,929 99,742 ------------ ------------ ------------ Balance at end of period.............................................. $ 256,552 $ 145,013 $ 15,084 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 17 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") to acquire all of the issued and outstanding Common Shares of USM not already owned by TDS. The offer was made in connection with, and is subject to, TDS shareholder approval of and the effectiveness of, TDS's proposed corporate restructuring. The Board of Directors of TDS (the "TDS Board") has adopted a proposal which, if approved by TDS shareholders and implemented by the TDS Board, would authorize the TDS Board to issue three new classes of common stock and change the state of incorporation of TDS from Iowa to Delaware (the "Tracking Stock Proposal"). The three new classes of stock are intended to separately reflect the performance of TDS's cellular telephone, landline telephone and personal communications services businesses ("Tracking Stocks"). Under the Tracking Stock Proposal, one of the three new classes of common stock created by TDS would be designated as United States Cellular Group Common Shares (the "Cellular Group Shares"). The Cellular Group Shares, when issued, are intended to reflect the separate performance of the United States Cellular Group (the "Cellular Group"), which consists of TDS's interest in United States Cellular Corporation. Subject to the approval of the Tracking Stock Proposal by TDS shareholders, TDS intends to, among other things, issue Cellular Group Shares in exchange for all of the Common Shares of the Company which are not currently owned by TDS, subject to approval by the Company's board of directors and shareholders (the "Merger"). In January 1998, the Company's Board of Directors created a special committee of the Board (the "Special Committee") to review the proposal from TDS. The Special Committee, consisting of one independent director of the Company, has engaged a financial advisor and legal advisor to assist in reviewing the proposal. The Special Committee will consider how the Company should respond to the TDS proposal, take the steps it deems appropriate to respond to the TDS proposal and, at such time as it considers it appropriate, report its recommendations to the Company's Board of Directors. Subsequent to TDS shareholder approval of the Tracking Stock Proposal, TDS intends to terminate certain intercompany agreements between TDS and the Company. Thereafter, some or all of the policies between TDS and the Company would be determined solely by methods that TDS management believes to be reasonable. Many of such policies would continue the arrangements which presently exist between TDS and the Company pursuant to the intercompany agreements, but TDS would have no contractual obligation to continue such policies after the intercompany agreements have been terminated. The TDS Board currently intends to retain future earnings, if any, for the development of the business of the Cellular Group and does not anticipate paying dividends on the Cellular Group Shares in the foreseeable future. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company, a Delaware corporation, is currently an 81.1%-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 eighth largest cellular telephone company in terms of population equivalents ("pops"). The Company 18 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) owns interests in 192 cellular markets, representing approximately 26.2 million pops, as of December 31, 1997. USM's 134 majority-owned and managed markets, primarily mid-sized and rural markets, covered 24 states and served 1,710,000 customers as of December 31, 1997. USM's Midwest Regional Market Cluster, which includes markets in Iowa, Wisconsin, Illinois and Missouri, served 709,000 customers at December 31, 1997, which represents approximately 41% of USM's total customers served as of that date. PRINCIPLES OF CONSOLIDATION 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. Investments in entities in which the Company does not have a majority interest are generally accounted for using the equity method. 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. The carrying amounts of Cash and Cash Equivalents and Temporary Investments approximate their fair value due to the short-term nature of these investments. 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. NOTES AND INTEREST RECEIVABLE Notes and interest receivable primarily consist of loans to other partners for capital calls paid on their behalf. The interest charged on these loans is at varying annual rates. USM also has an outstanding loan to the operators of another cellular company in which USM has no equity. The interest charged on this loan is at an annual rate of prime plus 1 1/2%. The carrying amount reported in the balance sheet for notes and interest receivable approximates their fair value. 19 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED CHARGES Deferred system development costs represent costs incurred for the development of new information systems. Capitalized costs of information systems development are amortized over a five-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). IMPAIRMENT OF LONG-LIVED ASSETS Effective January 1, 1996, the Company implemented the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under SFAS No. 121, the Company is required to review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the book value of a long-lived asset is not recoverable. An impairment loss would be recognized whenever the review demonstrates that the book value of a long-lived asset is not recoverable. The implementation of SFAS No. 121 did not have an impact on the Company's financial position or results of operations. 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 $41.4 million, $24.4 million and $14.1 million for the years ended December 31, 1997, 1996 and 1995, 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 $1.0 million, $1.5 million and $1.2 million in 1997, 1996 and 1995, respectively. EARNINGS PER SHARE The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," effective December 31, 1997. Earnings per Common Share for 1996 and 1995 have been 20 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) restated to conform to current period presentation. The accounting change had no effect on 1996 and increased Earnings per Common Share-Basic by $.02 in 1995. The adoption of SFAS No. 128 had no effect on Earnings per Common Share-Diluted. The amounts used in computing Earnings per Common Share and the effect on income and the weighted average number of Common Series A Common Shares of dilutive potential common stock are as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ---------- ---------- --------- (DOLLARS AND COMMON SHARES IN THOUSANDS) Net Income used in Earnings Per Share--Basic and Diluted... $ 111,539 $ 129,929 $ 99,742 ---------- ---------- --------- Weighted average number of Common Shares used in Earnings Per Share--Basic......................................... 86,346 85,797 82,320 Effect of Dilutive Securities: Convertible Preferred Stock.............................. -- 51 661 Stock Options and Stock Appreciation Rights.............. 52 78 73 Common Shares Issuable................................... -- 115 976 ---------- ---------- --------- Weighted Average Number of Common Shares used in Earnings Per Share--Diluted....................................... 86,398 86,041 84,030 ---------- ---------- --------- ---------- ---------- ---------
Earnings per Common and Series A Common Share for the years ended December 31, 1997, 1996 and 1995 contain significant income amounts related to gains on the sale of cellular and other investments. Excluding the after-tax effect of these gains, basic earnings per share was $1.10, $.73 and $.53 and diluted earnings per share was $1.10, $.73 and $.52 for the years ended December 31, 1997, 1996 and 1995, respectively. 21 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SUPPLEMENTAL CASH FLOW DISCLOSURES USM acquired certain cellular licenses and other cellular interests during 1997, 1996 and 1995. In conjunction with these acquisitions, the following assets were acquired, liabilities assumed and Common Shares issued:
YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ---------- ---------- ----------- (DOLLARS IN THOUSANDS) Property, plant and equipment, net...................... $ 112,696 $ 7,069 $ 29,622 Cellular licenses....................................... 130,336 90,341 138,600 (Decrease) increase in equity-method investments in cellular interests.................................... (90,332) 13,971 (5,921) Accounts receivable..................................... 26,032 1,332 1,760 Revolving Credit Agreement--TDS......................... -- -- (15,493) Accounts payable........................................ (31,117) (1,081) (5,051) Other assets and liabilities, excluding cash acquired... 13,699 1,493 (998) Common Shares issued and issuable....................... (32,486) 3,262 (113,204) ---------- ---------- ----------- Decrease in cash due to acquisitions.................... $ 128,828 $ 116,387 $ 29,315 ---------- ---------- ----------- ---------- ---------- -----------
Following are supplemental cash flow disclosures regarding interest and income taxes paid and certain noncash transactions:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Interest paid................................................ $ 6,816 $ 7,001 $ 4,112 Income taxes paid............................................ 40,316 64,402 3,035 Noncash interest expense..................................... 15,379 16,110 23,175 Accrued interest converted into debt under the Revolving Credit Agreement........................................... -- -- 14,432 Additions to Property, Plant and Equipment financed through Accounts Payable--Other.................................... 5,778 (4,679) 1,929 Common Shares issued by USM for redemption of USM Preferred Stock and TDS Preferred Shares............................. $ 36 $ 18,450 $ 22,236 --------- --------- --------- --------- --------- ---------
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 22 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INCOME TAXES (CONTINUED) 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. Subject to the completion of the Merger, TDS intends to terminate certain intercompany agreements between TDS and USM. See Note 1--Proposed TDS Corporate Restructuring for a discussion of the proposed merger. Income tax provisions charged to net income are summarized below:
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 --------- ---------- --------- (DOLLARS IN THOUSANDS) Federal income taxes Current................................................... $ 46,357 $ 35,613 $ 14,882 Deferred.................................................. 22,109 54,509 8,468 State income taxes Current................................................... 13,514 12,890 8,306 Deferred.................................................. 1,968 8,628 836 --------- ---------- --------- Total income tax expense.................................... $ 83,948 $ 111,640 $ 32,492 --------- ---------- --------- --------- ---------- ---------
The statutory federal income tax rate is reconciled to the Company's effective income tax rate below:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Statutory federal income tax rate............................ 35.0% 35.0% 35.0% State income taxes, net of federal benefit................... 5.1 5.7 4.4 Amortization of license costs................................ 1.7 1.1 2.2 Effects of corporations not included in consolidated federal income tax return.......................................... .4 .8 1.1 Effects of valuation allowance on deferred tax asset......... (.1) (1.2) (18.1) Gains on sales............................................... .8 4.8 -- --- --- ----- Effective income tax rate.................................... 42.9% 46.2% 24.6% --- --- ----- --- --- -----
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 $2.5 million and $2.4 million at December 31, 1997 and 1996, respectively, resulting primarily from the allowance for customer receivables. 23 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INCOME TAXES (CONTINUED) The temporary differences that gave rise to the non-current deferred tax assets and liabilities as of December 31, 1997 and 1996, are as follows:
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS) Deferred Tax Asset Net operating loss carryforward..................................... $ 14,725 $ 14,121 Taxes on acquisitions............................................... 56,384 -- Alternative minimum tax credit carryforward......................... 7,121 24,545 Stock appreciation rights........................................... 386 299 Other............................................................... 233 -- ---------- ---------- 78,849 38,965 Less valuation allowance.............................................. 10,233 13,150 ---------- ---------- Total Deferred Tax Asset.............................................. 68,616 25,815 ---------- ---------- ---------- ---------- Deferred Tax Liability Equity investments.................................................. 65,956 41,482 Property, plant and equipment....................................... 52,668 23,402 Licenses............................................................ 40,624 24,759 Partnership investments............................................. 10,093 15,005 ---------- ---------- Total Deferred Tax Liability........................................ 169,341 104,648 ---------- ---------- Net Deferred Tax Liability........................................ $ 100,725 $ 78,833 ---------- ---------- ---------- ----------
The amount of state net operating loss carryforward (generating a $12.2 million deferred tax asset) available to offset future taxable income, primarily of the individual subsidiaries which generated the loss, aggregated approximately $221 million at December 31, 1997 and expires between 1998 and 2012. 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. At December 31, 1997, USM had $7.1 million of federal alternative minimum tax credit carryforward available to offset regular income tax payable in future years. 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 net operating loss carryforward (generating a $2.5 million deferred tax asset) available to offset future taxable income aggregating approximately $7.2 million at December 31, 1997 which expires between 2004 and 2012. 4. 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 10.3%, 10.4% and 10.0% in 1997, 1996 and 1995, respectively. 24 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Property, plant and equipment in service and under construction consists of:
DECEMBER 31, ------------------------ 1997 1996 ------------ ---------- (DOLLARS IN THOUSANDS) Operating plant and equipment....................................... $ 923,480 $ 641,600 Buildings and leasehold improvements................................ 136,023 86,533 Office furniture, equipment and vehicles............................ 89,987 71,674 Land................................................................ 63,085 46,198 ------------ ---------- $ 1,212,575 $ 846,005 ------------ ---------- ------------ ----------
5. 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 and notes receivable and has completed exchanges of cellular interests with other cellular companies. COMPLETED 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:
CONSIDERATION --------------- (MILLIONS) 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 to third parties in connection with the acquisitions. During 1996, USM completed the acquisition of majority interests in two markets and several minority interests, representing approximately 1.0 million pops, for a total consideration of $158.9 million as shown in the following table:
CONSIDERATION ------------- (MILLIONS) 1.3 million Common Shares to TDS (1)........................................... $ 42.4 Common Shares issued to third parties.......................................... .1 Cash........................................................................... 116.4 ------ Total........................................................................ $ 158.9 ------ ------
- ------------------------ (1) Issued to reimburse TDS for TDS securities issued and cash paid to third parties in connection with the acquisitions. 25 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED) 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 and Wisconsin/Illinois/Indiana clusters. PURCHASE OF MINORITY INTERESTS BY THE COMPANY FROM TDS Included in the interests USM acquired in 1996 were minority interests in 13 markets, representing 598,000 pops, for $102.8 million in cash paid to TDS. These interests were acquired pursuant to an agreement entered into in June 1996 between USM and TDS. Due to the intercompany nature of the transactions, these acquisitions were recorded at TDS's book value of the interests. Assuming that the 1997 and 1996 acquisitions discussed above, which were accounted for as purchases, had taken place on January 1, 1996, unaudited pro forma results of operations would have been as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Service Revenues................................................... $ 947,520 $ 742,913 Equipment Sales.................................................... 31,262 24,612 Interest Expense (including cost to finance acquisitions).......... 30,412 26,623 Net Income......................................................... 139,107 147,413 Earnings per Common Share--Basic................................... 1.60 1.70 Earnings per Common Share--Diluted................................. $ 1.59 $ 1.69 ---------- ---------- ---------- ----------
DIVESTITURES OF CELLULAR AND OTHER INVESTMENTS Gain on sale of cellular and other investments in 1997 primarily reflects gains recorded on the sales of the Company's majority interest in one market and minority interests in two markets and on cash received from the settlement of a legal matter. Gain on sale of cellular and other investments in 1996 primarily reflects gains recorded on the sales of the Company's majority interests in eight markets and minority interests in two 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. Gain on sale of cellular and other investments in 1995 primarily reflects gains recorded on the sales of the Company's majority interests in six markets and minority interests in six markets, on cash proceeds received in an exchange of cellular markets and on the sale of marketable equity securities for cash. 26 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. ACQUISITIONS, EXCHANGES AND DIVESTITURES (CONTINUED) PENDING ACQUISITIONS At December 31, 1997, USM had entered into agreements with third parties to acquire a majority interest in one market and a minority interest in a market in which the Company owns a majority interest, representing approximately 410,000 pops, for $51.3 million in cash. These transactions are expected to be completed during 1998. PENDING SALES OF MINORITY INTERESTS In December 1997, the Company entered into agreements with AirTouch Communications, Inc. ("AirTouch") to divest minority interests in nine markets, representing approximately 759,000 pops. In exchange, the agreements provided that the Company will receive approximately 4.0 million shares of AirTouch stock and cash totaling $54.2 million. In addition, the Company will receive approximately $27.0 million in cash from TDS pursuant to a contract right termination agreement entered into between the Company and TDS. This agreement is related to two interests which are to be sold directly by TDS to AirTouch and which were to be acquired by the Company as part of the June 1996 agreement between the Company and TDS. The contract right termination agreement will enable 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. Additionally, the Company has entered into an agreement to sell its minority interests in two other markets, representing approximately 176,000 pops, for $37.6 million in cash. The Company expects these pending sales transactions to be completed during the first half of 1998. The Company anticipates that it will record significant book gains on these divestitures when the transactions are completed. 6. INVESTMENT IN LICENSES Investment in licenses consists of the costs incurred in acquiring Federal Communications Commission ("FCC") licenses or interests in entities which have filed for or have been awarded 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. Costs applicable to unsuccessful license applications and acquisitions are charged to expense. Investment in licenses at December 31, 1997 and 1996, include approximately $281 million and $322 million, respectively, of goodwill related to various acquisitions structured to be tax-free. 7. REVOLVING CREDIT FACILITY In August 1997, USM established a $500 million revolving credit facility with a group of banks ("Revolving Credit Facility"). This seven-year facility replaces the Company's Revolving Credit Agreement with TDS as its primary short-term borrowing facility. As of December 31, 1997, 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 plus 26.5 basis points (for a rate of 6.2% at December 31, 1997), due quarterly. No principal under the Revolving Credit Facility is due until August 29, 2004, on which date the Revolving Credit Facility terminates and all unpaid principal and accrued interest thereon are due and payable. 27 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. 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 December 31, 1997 and 1996, the Company's senior indebtedness totaled $260.0 million and $113.7 million, respectively. Each LYON is convertible at the option of the holder at any time at a conversion rate of 9.475 Common Shares per LYON. 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 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, 1997 and 1996 of USM's 6% Zero Coupon Convertible Debentures, $265.3 million and $250.1 million, respectively, are greater than their fair values, estimated to be $255.6 million and $248.4 million, respectively. The fair values were estimated using discounted cash flow analysis. The increase in estimated fair value in 1997 was due to a change in the incremental borrowing rate. 9. 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 value at December 31, 1997 of the Company's 7.25% unsecured notes, $250 million, is less than its fair value, estimated to be $252.9 million. The fair value was estimated using discounted cash flow analysis. 10. VENDOR FINANCING USM repaid approximately $90.1 million principal amount of borrowings, representing all amounts outstanding under its long-term vendor financing agreements, with the proceeds of its 7.25% unsecured notes offering in August 1997. See Note 9--7.25% Unsecured Notes for a discussion of the notes offering. Scheduled repayments of borrowings under the vendor financing agreements in 1997, all made prior to the final repayment, totaled $13.7 million. The carrying value at December 31, 1996 of USM's current and long-term vendor financing, $103.7 million, was approximately equal to its estimated fair value. Vendor financing at December 31, 1996 included $101.1 million (including deferred interest) under a 1994 agreement and $2.6 million assumed pursuant to a 1993 acquisition. The current portion of outstanding vendor financing borrowings was $23.1 million at December 31, 1996. 28 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. COMMON STOCK EMPLOYEE BENEFIT PLANS The following table summarizes Common Shares issued for the employee benefit plans described below:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Tax-Deferred Savings Plan....................................... 42,400 23,302 26,357 Employee stock options, stock appreciation rights and awards.... 65,029 16,380 10,713 Employee Stock Purchase Plan.................................... 10,134 22,366 25,000 --------- --------- --------- 117,563 62,048 62,070 --------- --------- --------- --------- --------- ---------
TAX-DEFERRED SAVINGS PLAN USM had reserved 134,011 Common Shares for issue 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, American Paging, Inc. (an 81.9%-owned subsidiary of TDS) Common Shares, Aerial Communications, Inc. (an 82.5%-owned subsidiary of TDS) Common Shares or five other nonaffiliated funds. STOCK-BASED COMPENSATION PLANS 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 $285,000, ($224,000) and $168,000 in 1997, 1996 and 1995, respectively. Had compensation cost for all plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts as shown on the next page:
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Income: As Reported.......................................... $ 111,539 $ 129,929 $ 99,742 Pro Forma............................................ 110,317 129,166 98,960 Earnings per Common Share--Basic: As Reported.......................................... 1.29 1.51 1.21 Pro Forma............................................ 1.28 1.51 1.20 Earnings per Common Share--Diluted: As Reported.......................................... 1.29 1.51 1.19 Pro Forma............................................ $ 1.28 $ 1.50 $ 1.18
29 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. COMMON STOCK (CONTINUED) Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. A summary of the status of the Company's stock option plans at December 31, 1997, 1996 and 1995 and changes during the years then ended is presented in the table and narrative below:
WEIGHTED WEIGHTED NUMBER OF AVERAGE AVERAGE SHARES OPTION PRICES FAIR VALUES ----------- ------------- ----------- Stock Options: Outstanding January 1, 1995 (80,164 exercisable)................. 224,259 $ 27.63 Granted.............................................. 106,406 $ 27.76 $ 14.02 Exercised............................................ (10,713) $ 15.67 Outstanding December 31, 1995 (177,675 exercisable).............. 319,952 $ 28.07 Granted.............................................. 103,326 $ 25.12 $ 16.59 Exercised............................................ (16,380) $ 16.98 Cancelled............................................ (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 Cancelled............................................ (18,594) $ 26.85 Outstanding December 31, 1997 (293,418 exercisable).............. 554,283 $ 24.23
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN USM had reserved 748,596 Common Shares for options granted and to be granted to key employees. USM has established a Stock Option plan as of November 9, 1994 that provides for the grant of stock options to officers and employees. The options under the 1994 plan are exercisable from the date of vesting through November 9, 2004, or thirty days following the date of the employee's termination of employment, if earlier. Under the 1994 Stock Option Plan, 293,418 stock options were outstanding at December 31, 1997, at a weighted average price of $30.76 per share. 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 1997 and 1996, respectively: risk-free interest rates of 6.3% and 5.9%; expected dividend yields of zero for both years; expected lives of 4.8 years and 4.0 years; and expected volatility of 20.8% and 22.7%. Stock Appreciation Rights (as amended on February 1, 1991) 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, 1997, 38,050 Common Share SARs and 36,000 Series A Common Share SARs were outstanding at $15 per share. These rights expire from 1998 to 2003 or the date of the person's termination of employment, if earlier. During 30 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. COMMON STOCK (CONTINUED) 1997 and 1996, 3,950 and 300 Common Share SARs were exercised, respectively. No SARs were exercised in 1995. There were no SARs granted in 1997 or 1996. EMPLOYEE STOCK PURCHASE PLAN USM had 115,498 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 rights in 1997: risk-free interest rate of 5.7%; expected dividend yield of zero; expected life of .7 years; and expected volatility of 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, 1997, all of USM's outstanding Series A Common Shares were held by TDS. 12. 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 $36.2 million, $28.1 million and $26.1 million in 1997, 1996 and 1995, respectively. 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 $1.3 million, $4.8 million and $701,000 in 1997, 1996 and 1995, respectively. Subject to the completion of the Merger, TDS intends to terminate certain intercompany agreements between TDS and USM. See Note 1--Proposed TDS Corporate Restructuring for a discussion of the proposed merger. 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. 31 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. RELATED PARTIES (CONTINUED) See Note 5--Acquisitions, Exchanges and Divestitures, Purchase of Minority Interests by the Company from TDS for a discussion of a purchase of minority interests by the Company from TDS. 13. 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 $330 million during 1998, including about $240 million for new cell sites to expand and enhance the Company's coverage in its service areas and about $90 million for the enhancement of 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 5--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, 1997 are as follows:
MINIMUM FUTURE RENTALS ------------------- (DOLLARS IN THOUSANDS) 1998..................................................................... $ 14,436 1999..................................................................... 11,127 2000..................................................................... 8,099 2001..................................................................... 7,515 2002..................................................................... 4,864 Thereafter............................................................... $ 36,475 ------- -------
Rent expense totaled $17.2 million, $12.4 million and $9.8 million in 1997, 1996 and 1995, respectively. LEGAL PROCEEDINGS The Company is involved in a number of 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 or results of operations of the Company. On December 29, 1997, a party, which claims to be a holder of the USM Common Shares, filed a putative class action complaint on behalf of common stockholders of USM in the Court of Chancery of the State of Delaware in New Castle County. The complaint names as defendants TDS, USM and the directors of USM. The complaint alleges a breach of fiduciary duties by the defendants and seeks to have the Merger enjoined or, if it is consummated, to have it rescinded and to recover unspecified damages, fees 32 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) and expenses. A virtually identical complaint has been filed by an individual. None of the defendants have been served with this complaint. The Company intends to vigorously defend against these lawsuits. 14. INVESTMENTS IN CELLULAR ENTITIES Investments 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, ----------------------- 1997 1996 ----------- ---------- (DOLLARS IN THOUSANDS) Equity method investments: Capital contributions, loans and advances.......................... $ 66,182 $ 93,209 Cumulative share of income......................................... 177,798 172,974 Cumulative share of distributions.................................. (117,174) (88,862) ----------- ---------- 126,806 177,321 Cost method investments: Capital contributions, net of partnership distributions............ 2,004 9,470 ----------- ---------- Total investment in cellular entities................................ $ 128,810 $ 186,791 ----------- ---------- ----------- ----------
As of December 31, 1997, USM followed the equity method of accounting for minority interests in 51 markets where the Company's ownership interest is 3% or greater. This method recognizes, on a current basis, USM's proportionate share of the incomes and losses accruing to it under the terms of the respective partnership and shareholder agreements. As of December 31, 1997, USM follows the cost method of accounting for its investments in seven markets where the Company's ownership interest is less than 3%. It is not practicable to estimate the fair value of USM's investments accounted for using the cost method due to the lack of quoted market prices and the inability to estimate fair values without incurring excessive costs. The $2.0 million and $9.5 million carrying amounts at December 31, 1997, and 1996, respectively, represent primarily the original amounts invested, which management believes are not impaired. 33 UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. INVESTMENTS IN CELLULAR ENTITIES (CONTINUED) The following summarizes the unaudited balance sheets and results of operations of the cellular system entities in which USM's investments are accounted for by the equity method:
DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ (DOLLARS IN THOUSANDS) Assets Current......................................................... $ 361,561 $ 249,077 Due from affiliates............................................. 2,724 6,165 Property and other.............................................. 1,050,755 1,000,537 ------------ ------------ $ 1,415,040 $ 1,255,779 ------------ ------------ ------------ ------------ Liabilities and Partners' Capital Current liabilities............................................. $ 249,587 $ 226,606 Due to affiliates............................................... 38,429 20,614 Deferred credits................................................ 6,604 791 Long-term debt.................................................. 27,195 16,144 Partners' capital............................................... 1,093,225 991,624 ------------ ------------ $ 1,415,040 $ 1,255,779 ------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) Results of Operations Revenues.......................................... $ 1,652,683 $ 1,269,835 $ 1,078,413 Costs and expenses................................ 1,178,970 859,026 730,873 Other (expense) income............................ (7,292) 832 1,418 ------------ ------------ ------------ Net income........................................ $ 466,421 $ 411,641 $ 348,958 ------------ ------------ ------------ ------------ ------------ ------------
34 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF UNITED STATES CELLULAR CORPORATION: We have audited the accompanying consolidated balance sheets of United States Cellular Corporation (a Delaware corporation and an 81.1%-owned subsidiary of Telephone and Data Systems, Inc.) and Subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. [SIGNATURE] Chicago, Illinois January 28, 1998 35 SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED OR AT DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA Service Revenues...................................... $ 852,991 $ 662,681 $ 464,555 $ 313,875 $ 199,834 Equipment Sales....................................... 23,974 17,387 15,761 13,755 10,510 Operating Income (Loss) Before Minority Share......... 129,543 87,366 42,755 17,385 (8,656) Minority share of operating income.................... (12,298) (13,743) (7,902) (5,152) (3,496) Operating Income (Loss)............................... 117,245 73,623 34,853 12,233 (12,152) Investment income, net of related amortization expense............................................. 75,037 50,127 38,744 25,627 16,005 Gain on sale of cellular and other investments........ 30,318 132,718 83,494 3,321 4,851 Income (Loss) Before Income Taxes..................... 195,487 241,569 132,234 21,310 (22,749) Net Income (Loss)..................................... $ 111,539 $ 129,929 $ 99,742 $ 16,393 $ (25,441) Weighted Average Common and Series A Common Shares (000s).............................................. 86,346 85,797 82,320 77,321 57,152 Earnings Per Common and Series A Common Share--Basic........................................ $ 1.29 $ 1.51 $ 1.21 $ .23 $ (.45) Earnings Per Common and Series A Common Share--Diluted...................................... $ 1.29 $ 1.51 $ 1.19 $ .23 $ (.45) Pretax Profit (Loss) on Service Revenues.............. 22.9% 36.5% 28.5% 6.8% (11.4%) Operating Cash Flow Interest Coverage................. 18.5x 22.4x 6.7x 3.8x 1.1x Pretax Interest Coverage Before Gains................. 6.6x 5.7x 2.8x 1.8x .2x Effective Income Tax Rate............................. 42.9% 46.2% 24.6% 23.1% (11.8%) BALANCE SHEET DATA Working Capital....................................... $ (28,872) $ (17,835) $ (25,323) $ (33,813) $ (28,386) Property, Plant and Equipment, net.................... 940,253 650,754 530,027 368,181 246,414 Investments-- Cellular entities................................... 128,810 186,791 134,421 99,495 90,104 Licenses, net of accumulated amortization........... 1,150,924 1,044,141 1,035,846 947,399 824,491 Total Assets.......................................... 2,508,916 2,085,899 1,880,144 1,534,787 1,245,396 Vendor Financing, excluding current portion........... -- 80,589 98,656 57,691 51,130 6% Zero Coupon Convertible Debentures................. 265,330 250,107 235,750 -- -- 7.25% Unsecured Notes................................. 250,000 -- -- -- -- Revolving Credit Agreement--TDS....................... -- -- -- 232,954 141,524 Redeemable Preferred Stock, excluding current portion............................................. -- -- -- 9,597 18,828 Common Shareholders' Equity........................... $1,629,320 $1,476,202 $1,329,454 $1,093,967 $ 940,128 Current Ratio......................................... .86 .88 .84 .66 .62 Return on Equity...................................... 7.2% 9.3% 8.2% 1.6% (3.7%)
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 27, 1998, the Company's Common Shares were held by 602 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. 36 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 - --------------------------------------------------------------------------- --------- --------- 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 1996 First Quarter.............................................................. $ 37.38 $ 31.63 Second Quarter............................................................. 35.63 30.75 Third Quarter.............................................................. 31.63 28.13 Fourth Quarter............................................................. 30.38 26.88
The Company has not paid any cash dividends and currently intends to retain all earnings for use in the Company's business. 37 EX-21 6 EXHIBIT 21 EXHIBIT 21 UNITED STATES CELLULAR CORPORATION SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31,1997
STATE OF USM COMPANIES INCORPORATION ------------- ------------- UNITED STATES CELLULAR CORPORATION DELAWARE CANTON CELLULAR TELEPHONE COMPANY PENNSYLVANIA CARRY PHONE, INC. DELAWARE CELLVEST, INC. DELAWARE LAR-TEX CELLULAR TELEPHONE COMPANY, INC. DELAWARE MEDFORD PAGING, INC. OREGON NATIONAL CELLULAR COMMUNICATIONS, INC. LOUISIANA USCOC OF CORPUS CHRISTI, INC. TEXAS TRI-CITIES PAGING, INC. WASHINGTON UNITED STATES CELLULAR OPERATING COMPANY OF COLUMBIA MISSOURI USCOC OF CUMBERLAND, INC. MARYLAND UNITED STATES CELLULAR OPERATING COMPANY - DES MOINES IOWA UNITED STATES CELLULAR OPERATING COMPANY OF MEDFORD OREGON UNITED STATES CELLULAR OPERATING COMPANY OF RICHLAND WASHINGTON USCC REAL ESTATE CORPORATION DELAWARE USCC PAYROLL CORPORATION DELAWARE MIDWEST PAYROLL CORPORATION DELAWARE USCOC OF TALLAHASSEE, INC. FLORIDA CALIFORNIA RURAL SERVICE AREA #1, INC. CALIFORNIA FLORIDA RSA #8, INC. DELAWARE
Page 1 EXHIBIT 21 UNITED STATES CELLULAR CORPORATION SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31,1997
STATE OF USM COMPANIES INCORPORATION ------------- ------------- GEORGIA RSA # 11, INC. GEORGIA GEORGIA RSA # 13, INC. GEORGIA HARDY CELLULAR TELEPHONE COMPANY DELAWARE ILLINOIS RSA # 3, INC. ILLINOIS IOWA 13, INC. DELAWARE MAINE RSA # 1, INC. MAINE MCDANIEL CELLULAR TELEPHONE COMPANY DELAWARE MICHIGAN RSA # 4, INC. MICHIGAN MISSOURI # 15 RURAL CELLULAR, INC. MISSOURI NH # 1 RURAL CELLULAR, INC. NEW HAMPSHIRE NORTH CAROLINA RSA # 4, INC. DELAWARE NORTH CAROLINA RSA NO. 6, INC. CALIFORNIA NORTH CAROLINA RSA # 9, INC. NORTH CAROLINA OHIO STATE CELLULAR PHONE COMPANY, INC. FLORIDA PEACE VALLEY CELLULAR TELEPHONE COMPANY DELAWARE TENNESSEE RSA # 4 SUB 2, INC. TENNESSEE TEXAS # 20 RURAL CELLULAR, INC. TEXAS USCOC OF HAWAII 3, INC. DELAWARE USCOC OF IDAHO RSA # 5, INC. DELAWARE USCOC OF ILLINOIS RSA # 1, INC. VIRGINIA USCOC OF ILLINOIS RSA # 4, INC. ILLINOIS USCOC OF IOWA RSA # 1, INC. IOWA USCOC OF IOWA RSA # 16, INC. DELAWARE USCOC OF MISSOURI RSA # 5, INC. ILLINOIS USCOC OF MISSOURI RSA # 13, INC. DELAWARE USCOC OF NEW HAMPSHIRE RSA # 2, INC. DELAWARE USCOC OF NORTH CAROLINA RSA # 7, INC. NORTH CAROLINA USCOC OF OKLAHOMA RSA # 10, INC. OKLAHOMA USCOC OF OREGON RSA # 5, INC. DELAWARE USCOC OF PENNSYLVANIA RSA NO. 10-B2, INC. DELAWARE USCOC OF SOUTH CAROLINA RSA # 4, INC. SOUTH CAROLINA USCOC OF VIRGINIA RSA # 2, INC. VIRGINIA USCOC OF VIRGINIA RSA # 3, INC. VIRGINIA USCOC OF WASHINGTON-4, INC. DELAWARE VIRGINIA RSA # 4, INC. VIRGINIA VIRGINIA RSA # 7, INC. VIRGINIA WISCONSIN RSA # 7, INC. DELAWARE ACC OF ROCKFORD, INC. ILLINOIS DAVENPORT CELLULAR TELEPHONE COMPANY, INC. DELAWARE JOPLIN CELLULAR TELEPHONE COMPANY, INC. DELAWARE TRI-STATES CELLULAR COMMUNICATIONS, INC. MISSOURI UNITED STATES CELLULAR OPERATING COMPANY DELAWARE UNITED STATES CELLULAR OPERATING COMPANY OF BANGOR MAINE UNITED STATES CELLULAR OPERATING COMPANY OF CEDAR RAPIDS DELAWARE UNITED STATES CELLULAR OPERATING COMPANY OF DUBUQUE IOWA UNITED STATES CELLULAR OPERATING COMPANY OF EVANSVILLE, INC. INDIANA UNITED STATES CELLULAR OPERATING COMPANY OF FT. PIERCE FLORIDA UNITED STATES CELLULAR OPERATING COMPANY OF JOPLIN MISSOURI UNITED STATES CELLULAR OPERATING COMPANY OF KNOXVILLE TENNESSEE UNITED STATES CELLULAR OPERATING COMPANY OF LACROSSE, INC. WISCONSIN UNITED STATES CELLULAR OPERATING COMPANY OF LEWISTON-AUBURN MAINE UNITED STATES CELLULAR OPERATING COMPANY OF MANCHESTER-NASHUA, INC. NEW HAMPSHIRE UNITED STATES CELLULAR OPERATING COMPANY OF OWENSBORO DELAWARE UNITED STATES CELLULAR OPERATING COMPANY OF ROCHESTER MINNESOTA USCOC OF TEXAHOMA, INC. TEXAS UNITED STATES CELLULAR OPERATING COMPANY OF TULSA, INC. OKLAHOMA UNITED STATES CELLULAR OPERATING COMPANY OF WATERLOO IOWA
Page 2 EXHIBIT 21 UNITED STATES CELLULAR CORPORATION SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31,1997
STATE OF USM COMPANIES INCORPORATION ------------- ------------- UNITED STATES CELLULAR OPERATING COMPANY OF WAUSAU, INC. WISCONSIN UNITED STATES CELLULAR OPERATING COMPANY OF WILLIAMSPORT PENNSYLVANIA UNITED STATES CELLULAR OPERATING COMPANY OF YAKIMA WASHINGTON USCOC OF CHARLOTTESVILLE, INC. VIRGINIA USCOC OF PORTLAND, INC. MAINE USCOC OF VICTORIA, INC. TEXAS INDIANA RSA # 4, INC. DELAWARE INDIANA RSA # 5, INC. INDIANA IOWA RSA # 12, INC. DELAWARE IOWA RSA # 3, INC. DELAWARE IOWA RSA # 9, INC. DELAWARE I-5 CELLULAR, INC. WASHINGTON MAINE RSA # 4, INC. MAINE OHIO RSA # 1, INC. OHIO OREGON RSA # 2, INC. OREGON OREGON RSA # 3, INC. OREGON OREGON RSA # 6, INC. OREGON TENNESSEE RSA # 3, INC. DELAWARE USCOC OF VIRGINIA RSA # 4, INC. ILLINOIS WASHINGTON RSA # 5, INC. WASHINGTON WESTERN COLORADO CELLULAR, INC. COLORADO CAMDEN CELLULAR TELEPHONE COMPANY, INC. DELAWARE CAROLINA CELLULAR, INC. NORTH CAROLINA EAU CLAIRE MSA, INC. WISCONSIN FOUR D, LTD. MISSISSIPPI UNITED STATES CELLULAR INVESTMENT COMPANY DELAWARE UNITED STATES CELLULAR INVESTMENT COMPANY OF EAU CLAIRE, INC. WISCONSIN UNITED STATES CELLULAR INVESTMENT COMPANY OF PORTSMOUTH, INC. NEW HAMPSHIRE UNITED STATES CELLULAR INVESTMENT COMPANY OF RALEIGH-DURHAM DELAWARE UNITED STATES CELLULAR INVESTMENT COMPANY OF SANTA CRUZ, INC. CALIFORNIA UNITED STATES CELLULAR INVESTMENT COMPANY OF SARASOTA FLORIDA UNITED STATES CELLULAR INVESTMENT COMPANY OF ST. CLOUD, INC. MINNESOTA UNITED STATES CELLULAR INVESTMENT COMPANY OF WHEELING WEST VIRGINIA UNITED STATES CELLULAR INVESTMENT CORPORATION OF LOS ANGELES INDIANA UNITED STATES CELLULAR INVESTMENT CO. OF ALLENTOWN PENNSYLVANIA UNITED STATES CELLULAR INVESTMENT CO. OF OKLAHOMA CITY, INC. OKLAHOMA UNIVERSAL CELLULAR FOR EAU CLAIRE MSA, INC. WISCONSIN USCIC OF AMARILLO, INC. DELAWARE USCIC OF BROWNSVILLE, INC. DELAWARE USCIC OF FRESNO, INC. CALIFORNIA USCIC OF JACKSON, INC. DELAWARE USCIC OF MCALLEN, INC. DELAWARE USCIC OF SEATTLE, INC. DELAWARE IDAHO INVCO OF RSA # 1, INC. DELAWARE ILP, INC. DELAWARE MINNESOTA INVCO OF RSA # 5, INC. DELAWARE MINNESOTA INVCO OF RSA # 7, INC. DELAWARE MINNESOTA INVCO OF RSA # 8, INC. DELAWARE MINNESOTA INVCO OF RSA # 9, INC. DELAWARE MINNESOTA INVCO OF RSA # 10, INC. DELAWARE MINNESOTA INVCO OF RSA # 11, INC. DELAWARE VERMONT RSA NO. 2-B2, INC. DELAWARE TEXAS INVCO OF RSA # 6, INC. DELAWARE
Page 3 EXHIBIT 21 UNITED STATES CELLULAR CORPORATION SUBSIDIARY AND AFFILIATED COMPANIES DECEMBER 31,1997
STATE OF USM COMPANIES INCORPORATION ------------- ------------- USCIC OF COLORADO RSA # 3, INC. DELAWARE USCIC OF NORTH CAROLINA RSA # 1, INC. DELAWARE CENTRAL FLORIDA CELLULAR TELEPHONE COMPANY, INC. FLORIDA LACROSSE CELLULAR TELEPHONE COMPANY, INC. DELAWARE TULSA GENERAL PARTNER, INC. DELAWARE COMMUNITY CELLULAR TELEPHONE COMPANY TEXAS TEXAHOMA CELLULAR TELEPHONE CORPORATION TEXAS VICTORIA CELLULAR CORPORATION TEXAS BANGOR CELLULAR TELEPHONE, L.P. DELAWARE CEDAR RAPIDS CELLULAR TELEPHONE, L.P. DELAWARE CHARLOTTESVILLE CELLULAR PARTNERSHIP WASHINGTON D.C. CROOK COUNTY RSA LIMITED PARTNERSHIP OREGON DAVENPORT CELLULAR TELEPHONE COMPANY IOWA DUBUQUE CELLULAR TELEPHONE, L.P. DELAWARE EAU CLAIRE CELLULAR TELEPHONE LIMITED PARTNERSHIP WISCONSIN EVANSVILLE CELLULAR TELEPHONE COMPANY INDIANA GREEN BAY CELLTELCO WASHINGTON D.C. I-5 WN MOBILNET LIMITED PARTNERSHIP WASHINGTON JANESVILLE CELLULAR TELEPHONE COMPANY, INC. DELAWARE JOPLIN CELLULAR TELEPHONE COMPANY, L.P. DELAWARE KANSAS RSA #15 LIMITED PARTNERSHIP KANSAS LEWISTON CELLTELL CO PARTNERSHIP WASHINGTON D.C. MADISON CELLULAR TELEPHONE COMPANY WISCONSIN MAINE RSA NO. 4 LIMITED PARTNERSHIP MAINE MANCHESTER-NASHUA CELLULAR TELEPHONE, L.P. DELAWARE NORTH CAROLINA RSA 1 PARTNERSHIP DELAWARE OHIO RSA #1 LIMITED PARTNERSHIP OHIO OREGON RSA NO. 3 LIMITED PARTNERSHIP OREGON OWENSBORO CELLULAR TELEPHONE, L.P. DELAWARE PA RURAL SERVICE AREA NO. 9 LIMITED PARTNERSHIP PENNSYLVANIA RACINE CELLULAR TELEPHONE COMPANY WISCONSIN ROCHESTER CELLULAR TELEPHONE COMPANY, L.P. DELAWARE SHEBOYGAN CELLULAR TELEPHONE COMPANY, INC. DELAWARE TEXAHOMA CELLULAR LIMITED PARTNERSHIP TEXAS UNITED STATES CELLULAR TELEPHONE COMPANY (GREATER KNOXVILLE), L.P. TENNESSEE UNITED STATES CELLULAR TELEPHONE COMPANY (GREATER TULSA), L.L.C. OKLAHOMA VICTORIA CELLULAR PARTNERSHIP WASHINGTON D.C. WESTERN COLORADO CELLULAR OF COLORADO LIMITED PARTNERSHIP COLORADO WESTERN SUB-RSA LIMITED PARTNERSHIP DELAWARE WATERLOO/CEDAR FALLS CELLTEL CO PARTNERSHIP WASHINGTON D.C. WAUSAU CELLULAR TELEPHONE COMPANY LIMITED PARTNERSHIP WISCONSIN YAKIMA MSA LIMITED PARTNERSHIP DELAWARE YAKIMA VALLEY PAGING LIMITED PARTNERSHIP DELAWARE
Page 4 EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of United States Cellular Corporation of our report dated January 28, 1998, on the consolidated financial statements of United States Cellular Corporation and Subsidiaries (the "Company") included in the Company's 1997 Annual Report to Shareholders, to the inclusion in this Form 10-K of our report dated January 28, 1998, on the financial statement schedule of the Company, and to the incorporation of such reports into the Company's previously filed S-3 Registration Statements, File No. 33-58911 and File No. 333-32521, into the Company's previously filed S-4 Registration Statement, File No. 33-41826, and into the Company's previously filed S-8 Registration Statements, File No. 33-42558, File No. 33-57255, File No. 33-59777, File No. 33-61291, File No. 333-16925, File No. 333-19403, File No. 333-19405 and File No. 333-23861. ARTHUR ANDERSEN LLP Chicago, Illinois March 26, 1998 EX-27.1 8 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION AS OF DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 13,851 0 86,646 5,259 11,836 175,364 1,212,575 272,322 2,508,916 204,236 515,330 0 0 87,238 1,542,082 2,508,916 23,974 876,965 82,302 747,422 (107,604) 25,578 29,362 195,487 83,948 111,539 0 0 0 111,539 1.29 1.29
EX-27.2 9 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION AS OF DECEMBER 31, 1995, AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 38,404 0 46,754 3,820 9,198 129,786 674,450 144,423 1,880,144 155,109 334,406 0 0 82,972 1,246,482 1,880,144 15,761 480,316 54,948 437,561 (124,668) 12,532 27,287 132,234 32,492 99,742 0 0 0 99,742 1.21 1.20
EX-27.3 10 EXHIBIT 27.3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION AS OF MARCH 31, 1996, JUNE 30, 1996, SEPTEMBER 30, 1996 AND DECEMBER 31, 1996, AND FOR THE PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 62,093 157,616 65,222 14,377 0 0 0 0 47,428 60,900 61,343 62,233 3,417 3,766 4,789 4,199 6,290 4,676 6,805 11,893 150,188 273,760 174,370 128,619 708,069 749,306 794,599 846,005 159,949 169,994 179,818 195,251 1,941,054 2,079,780 2,089,255 2,085,899 122,141 157,061 185,236 146,454 336,006 337,040 332,741 330,696 0 0 0 0 0 0 0 0 85,789 86,090 86,097 86,123 1,334,512 1,397,520 1,378,059 1,390,079 1,941,054 2,079,780 2,089,255 2,085,899 4,274 8,465 12,790 17,386 143,642 313,112 493,331 680,068 15,473 31,390 49,631 74,023 131,820 271,269 418,394 592,702 (49,527) (149,753) (174,915) (191,057) 3,668 7,509 5,055 17,534 5,806 11,755 17,496 23,111 53,431 174,420 223,740 241,569 24,044 81,978 105,158 111,640 29,387 92,442 118,582 129,929 0 0 0 0 0 0 0 0 0 0 0 0 29,387 92,442 118,582 129,929 .35 1.08 1.38 1.51 .34 1.03 1.34 1.48
EX-27.4 11 EXHIBIT 27.4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF UNITED STATES CELLULAR CORPORATION AS OF SEPTEMBER 30, 1997, AND FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 120,558 0 75,382 4,077 8,648 256,653 1,044,988 252,709 2,412,205 169,118 511,465 0 0 86,224 1,484,922 2,412,205 15,913 634,122 55,473 523,611 (72,559) 19,458 18,347 152,504 66,122 86,382 0 0 0 86,382 1.00 1.00
-----END PRIVACY-ENHANCED MESSAGE-----