OR
Commission file number 1-9712
(Exact name of registrant as specified in its charter)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
UNITED STATES CELLULAR CORPORATION ---------------------------------- 3RD QUARTER REPORT ON FORM 10-Q ------------------------------- INDEX ----- Page No. -------- Part I. Financial Information: Management's Discussion and Analysis of Results of Operations and Financial Condition 2-15 Consolidated Statements of Income - Three Months and Nine Months Ended September 30, 2001 and 2000 16 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000 17 Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 18-19 Notes to Consolidated Financial Statements 20-24 Part II. Other Information 25 Signatures 26
PART I. FINANCIAL INFORMATIONUNITED STATES CELLULAR CORPORATION AND SUBSIDIARIESMANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS ANDFINANCIAL CONDITION
United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns, operates and invests in cellular markets throughout the United States. The Company is an 82.1%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
The Company owned either majority or minority cellular interests in 176 markets at September 30, 2001, representing 26,686,000 population equivalents (“pops”). The Company included the operations of 142 majority-owned cellular markets, representing 24.6 million pops, in consolidated operations (“consolidated markets”) as of September 30, 2001. Minority cellular interests in 28 markets, representing 2.0 million pops, were accounted for using the equity method and were included in investment income at that date. All other cellular interests were accounted for using the cost method.
At September 30, 2001, the Company, on its own behalf and through joint ventures, owned or had the right to acquire interests in 24 personal communication service (“PCS”) Basic Trading Areas (“BTAs” or “markets”). These interests represent a total population of 8.3 million. The Company’s proportionate ownership of these interests represents 7.3 million pops. See “Financial Resources and Liquidity – PCS Acquisitions” for further discussion of these transactions.
Following is a table of summarized operating data for the Company’s consolidated operations. The Company’s interests in PCS licenses are not included in consolidated operations.
Nine Months Ended or At September 30, ---------------------------- 2001 2000 ------------ ------------ Total market population (1) 25,670,000 24,900,000 Customers 3,379,000 2,890,000 Market penetration 13.16% 11.61% Markets in operation 142 138 Total employees 5,150 5,000 Cell sites in service 2,804 2,430 Average monthly revenue per customer $ 46.66 $ 49.84 Postpay churn rate per month 1.73% 1.77% Marketing cost per gross customer addition $ 311 $ 331 (1)Calculated using Claritas population estimates for 2000 and 1999, respectively.
The Company’s operating income, which includes 100% of the revenues and expenses of its consolidated markets plus its corporate office operations, decreased slightly in the first nine months of 2001. The decrease reflects increases in revenues offset by higher increases in operating expenses, primarily system operations expenses and general and administrative expenses, compared to the first nine months of 2000. The improvement in revenues resulted from growth in the Company’s customer base, and the increases in expenses primarily resulted from an increase in the cost to retain and serve customers. Operating revenues, driven by a 17% increase in customers served, rose $137.5 million, or 11%. Operating cash flow (operating income plus
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depreciation and amortization expense) increased $21.4 million, or 5%, in 2001. Operating income decreased $2.4 million, or 1%, in 2001.
In the first nine months of 2001, both net income and earnings per share included an extraordinary loss. In the first nine months of 2000, both net income and earnings per share included gains on cellular and other investments, an extraordinary loss and the cumulative effect of a change in accounting principle. A summary of the after-tax effects of the gains, extraordinary loss and cumulative effect of a change in accounting principle on net income and diluted earnings per share in each period is shown below.
Nine Months Ended September 30, --------------------------- 2001 2000 ------------ ------------ (Dollars in thousands, except per share amounts) Income before after-tax effects of gains, extraordinary loss and change in accounting principle $ 147,818 $ 146,617 Add: After-tax effects of gains -- 50,349 ------------ ------------ Income before extraordinary loss and cumulative effect of accounting change 147,818 196,966 Less: Extraordinary loss on extinguishment of debt (6,934) (29,473) Less: Cumulative effect of accounting change -- (4,661) ------------ ------------ Net income as reported $ 140,884 $ 162,832 ============ ============ Diluted earnings per share before after-tax effects of gains, extraordinary loss and change in accounting principle $ 1.69 $ 1.67 Add: After-tax effects of gains -- .55 ------------ ------------ Diluted earnings per share before extraordinary loss and cumulative effect of accounting change 1.69 2.22 Less: Extraordinary loss on extinguishment of debt (.08) (.32) Less: Cumulative effect of accounting change -- (.05) ------------ ------------ Diluted earnings per share as reported $ 1.61 $ 1.85 ============ ============
Nine Months Ended September 30, ------------------------------- 2001 2000 -------------- -------------- (Dollars in thousands) Operating Revenues Retail service $ 1,044,876 $ 908,162 Inbound roaming 209,144 226,579 Long-distance and other 110,419 97,887 -------------- -------------- Service Revenues 1,364,439 1,232,628 Equipment sales 51,643 45,965 -------------- -------------- Total Operating Revenues $ 1,416,082 $ 1,278,593 ============== ==============
Operating revenuesincreased $137.5 million, or 11%, in the first nine months of 2001.
Service revenuesprimarily consist of: (i) charges for access, airtime and value-added services provided to the Company’s retail customers (“retail service”); (ii) charges to customers of other systems who use the Company’s cellular systems when roaming (“inbound roaming”); (iii) charges for long-distance calls made on the Company’s systems. Service revenues increased $131.8 million, or 11%, in 2001. The increase was primarily due to the 17% increase in retail customers. Monthly service revenue per customer averaged $46.66 in 2001, a 6% decrease from 2000.
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Retail service revenueincreased $136.7 million, or 15%, in 2001. Growth in the Company’s customer base was the primary reason for the increase in retail service revenue. The number of customers increased 17% to 3,379,000 at September 30, 2001 from 2,890,000 at September 30, 2000. Management anticipates that overall growth in the Company’s customer base will continue to slow down in the future, primarily as a result of an increase in the number of competitors in its markets.
Average monthly retail service revenue per customer declined 3% to $35.73 in 2001 from $36.72 in 2000. Monthly local retail minutes of use per customer averaged 208 in 2001 and 151 in 2000. The increase in monthly local retail minutes of use was driven by the Company’s focus on designing incentive programs and rate plans to stimulate overall usage. This increase was offset by the decrease in average revenue per minute of use in 2001. Management anticipates that the Company’s average revenue per minute of use will continue to decline in the future, reflecting the continued effect of the previously mentioned factors.
Inbound roaming revenue decreased $17.4 million, or 8%, in 2001. The decline in inbound roaming revenue in 2001 primarily resulted from the decrease in revenue per roaming minute of use on the Company’s systems, partially offset by an increase in roaming minutes used.
The increase in minutes of use was affected by certain pricing programs offered by other wireless companies. Wireless customers who sign up for these programs are given price incentives to roam, and many of those customers travel in the Company’s markets, thus driving an increase in the Company’s inbound roaming minutes of use. The decline in revenue per minute of use is primarily due to the general downward trend in negotiated rates, and these negotiated rates are also affected by the previously mentioned pricing programs offered by other wireless carriers.
Management anticipates that the increase in inbound roaming minutes of use will be slower in the remainder of 2001 and in 2002 as the effect of these new pricing programs becomes present in all periods of comparison. Additionally, as new wireless operators begin service in the Company’s markets, the Company’s roaming partners could switch their business to these new operators, further slowing growth in inbound roaming minutes of use. Management also anticipates that average inbound roaming revenue per minute of use will continue to decline in the future, reflecting the continued effect of the previously mentioned factors.
Average monthly inbound roaming revenue per Company customer averaged $7.15 in 2001 and $9.16 in 2000. The decrease in 2001 is attributable to the decrease in inbound roaming revenue compared to the increase in the Company’s customer base.
Long-distance and other revenue increased $12.5 million, or 13%, in 2001 as the volume of long-distance calls billed by the Company increased, primarily from inbound roamers using the Company’s systems to make long-distance calls. Monthly long-distance and other revenue per customer averaged $3.78 in 2001 and $3.96 in 2000.
Equipment sales revenues increased $5.7 million, or 12%, in 2001. The increase in equipment sales revenues primarily reflects the recognition in equipment sales revenues of $5.2 million of previously deferred activation fees. The increase also reflects a 2% increase in the number of gross customer activations, to 823,000 in 2001 from 807,000 in 2000. A majority of the gross customer activations were produced by the Company’s direct and retail distribution channels; activations from these channels usually generate sales of cellular telephone units.
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Nine Months Ended September 30, ------------------------------- 2001 2000 -------------- -------------- (Dollars in thousands) Operating Expenses System operations $ 320,596 $ 262,432 Marketing and selling 213,667 214,174 Cost of equipment sold 93,737 99,081 General and administrative 321,663 257,931 Depreciation 174,437 153,052 Amortization of intangibles 47,196 44,783 -------------- -------------- Total Operating Expenses $ 1,171,296 $ 1,031,453 ============== ==============
Operating expensesincreased $139.8 million, or 14%, in 2001.
System operations expenses increased $58.2 million, or 22%, in 2001. System operations expenses include charges from other telecommunications service providers for the Company’s customers’ use of their facilities, as well as for the Company’s inbound roaming traffic on these facilities. Also included are costs related to local interconnection to the landline network, long-distance charges and outbound roaming expenses. The increase in system operations expenses in 2001 was due to the following factors:
As a result of the above factors, the components of system operations expenses were affected as follows:
In total, management expects system operations expenses to increase over the next few years, driven by increases in the number of cell sites within the Company’s systems and increases in minutes of use both on the Company’s systems and by the Company’s customers on other systems when roaming.
Marketing and selling expenses decreased $507,000, or less than 1%, in 2001. Marketing and selling expenses primarily consist of salaries, commissions and expenses of field sales and retail personnel and offices; agent expenses; corporate marketing department salaries and expenses; local advertising; and public relations expenses.
Marketing cost per gross customer activation, which includes marketing and selling expenses and equipment subsidies, decreased 6% to $311 in 2001 from $331 in 2000. The decrease in cost per gross customer activation in 2001 was primarily due to reductions in equipment subsidies per gross customer activation, part of which was driven by the increase in equipment sales revenues related to activation fees.
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Cost of equipment sold decreased $5.3 million, or 5%, in 2001. The effect of a slight increase in the number of units sold was offset by a decrease in the average cost of units sold, especially dual-mode units.
General and administrative expenses increased $63.7 million, or 25%, in 2001. These expenses include the costs of operating the Company’s customer care centers and local business offices, the costs of serving and retaining customers and corporate expenses other than the corporate engineering and marketing departments. The increase includes the effect of increases in expenses required to serve the growing customer base in the Company’s markets and other expenses incurred related to the growth in the Company’s business.
Driven by additional costs incurred in 2001 related to its customer care centers, which centralize certain customer service functions, administrative employee-related expenses increased $25.6 million, or 23%, in 2001. The Company also incurred additional costs in 2001 to retain customers and to provide dual-mode phone units to customers who migrated from analog to digital rate plans, and as of September 30, 2001, approximately two-thirds of the Company’s customers were using digital rate plans. Customer retention-related costs increased $17.0 million, or 45%, in 2001. Monthly general and administrative expenses per customer increased 5% to $11.00 in 2001 from $10.43 in 2000. General and administrative expenses represented 24% of service revenues in 2001 and 21% in 2000.
Operating cash flow increased $21.4 million, or 5%, to $466.4 million in 2001. The improvement was primarily due to substantial growth in customers and service revenues, partially offset by an increase in cash expenses, primarily system operations expenses and general and administrative expenses. Operating cash flow margins (as a percent of service revenues) were 34.2% in 2001 and 36.1% in 2000.
Depreciation expenseincreased $21.4 million, or 14%, in 2001. The increase reflects rising average fixed asset balances, which increased 20% in 2001. Increased fixed asset balances in 2001 resulted from the addition of new cell sites built to improve coverage and capacity in the Company’s markets and from upgrades to provide digital service in more of the Company’s service areas.
Operating incometotaled $244.8 million in 2001, a decrease of $2.4 million, or 1%, from 2000. Operating income margins were 17.9% in 2001 and 20.0% in 2000. The reductions in operating income and operating income margins reflect the following factors:
The Company expects each of the above factors to continue to have an effect on operating income and operating margins for the next several quarters. Any changes in the above factors, as well as the effects of other drivers of the Company’s operating results, may cause operating income and operating margins to fluctuate over the next several quarters.
The Company expects service revenues to continue to grow during the remainder of 2001 and in 2002; however, management anticipates that average monthly revenue per customer will decrease,
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as retail service and inbound roaming revenue per minute of use continue to decline. Additionally, the Company expects expenses to increase during the remainder of 2001 and in 2002 as it incurs costs associated with customer growth, service and retention and fixed assets added.
Management continues to believe there exists a seasonality in both service revenues, which tend to increase more slowly in the first and fourth quarters, and operating expenses, which tend to be higher in the fourth quarter due to increased marketing activities and customer growth, which may cause operating income to vary from quarter to quarter. Additionally, competitors licensed to provide PCS have initiated service in certain of the Company’s markets over the past several years. The Company expects PCS operators to continue deployment of PCS throughout all of the Company’s clusters during 2001 and in 2002. Management continues to monitor other wireless communications providers’ strategies to determine how additional competition is affecting the Company’s results. The effects of additional wireless competition have significantly slowed customer growth in certain of the Company’s markets. Coupled with the recent downturn in the nation’s economy, the effect of increased competition has caused the Company’s customer growth in these markets to be slower than expected in 2001. Management anticipates that overall customer growth will continue to be slower in the future, primarily as a result of the increase in the number of competitors in its markets.
Investment and other income totaled $17.5 million in 2001 and $113.1 million in 2000. There were no gains on cellular and other investments in the first nine months of 2001.Gain on cellular and other investments totaled $96.1 million in the first nine months of 2000, from the sales of Company’s majority interest in one market and minority interests in two markets, and from cash received from the settlement of a legal matter.
Investment incomewas $31.3 million in 2001 and $30.7 million in 2000. 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.
Interest incometotaled $9.5 million in 2001 and $13.5 million in 2000. The decrease is primarily due to the decrease in average cash balances in 2001.
Interest expensetotaled $26.2 million in 2001 and $28.1 million in 2000. Interest expense in 2001 is primarily related to Liquid Yield Option Notes (“LYONs”) ($7.6 million); the Company’s 7.25% Notes (the “Notes”) ($13.9 million); and the Company’s revolving credit facility with a series of banks (“Revolving Credit Facility”) ($3.5 million). Interest expense in 2000 is primarily related to LYONs ($13.1 million) and the Notes ($13.9 million).
Income tax expensewas $107.4 million in 2001 and $156.5 million in 2000. In 2000, $45.7 million of income tax expense related to gains on cellular and other investments. The overall effective tax rates were 41% in 2001 and 43% in 2000. In 2001, income tax expense was reduced by $4.5 million to reflect one-time tax adjustments. In 2000, the effective tax rate was affected by sales of cellular and other investments, which were taxed at varying rates.
TDS and the Company are parties to a Tax Allocation Agreement, pursuant to which the Company is included in a consolidated federal income tax return with other members of the TDS consolidated group. For financial reporting purposes, the Company computes federal income taxes as if it was filing a separate return as its own affiliated group and was not included in the TDS group.
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Extraordinary item - loss on extinguishment of debt, net of tax totaled $6.9 million in the first nine months of 2001, or $.08 per diluted share, and $29.5 million in 2000, or $.32 per diluted share. In 2001, the Company satisfied $55.5 million face value ($24.2 million carrying value) of converted LYONs by paying $30.8 million in cash ($612,000 of which was included in accounts payable at September 30, 2001) to the holders. In 2000, the Company repurchased $41.0 million face value ($16.9 million carrying value) of LYONs and satisfied $72.5 million face value ($30.3 million carrying value) of converted LYONs for an aggregate of $75.8 million in cash ($10.9 million of which was included in accounts payable at September 30, 2001) paid to the holders. In each year, the loss resulted from the difference between the conversion price, which approximated market value, and the accreted value of the LYONs repurchased or converted. These losses are not deductible for tax purposes.
Cumulative effect of accounting change, net of tax totaled $(4.7) million in 2000, or $(.05) per diluted share, reflecting the Company’s implementation of SAB No. 101. The Company now defers certain activation fees charged to its customers when initiating service through its retail and direct channels and reconnect fees charged to its customers when resuming service after suspension, and records the related revenue over periods from six to 48 months. Prior to implementing SAB No. 101, the Company recorded these fees as operating revenues in the period they were charged to the customer. The cumulative effect represents the aggregate impact of this accounting change for periods prior to 2000.
Net income totaled $140.9 million in 2001 and $162.8 million in 2000. Diluted earnings per sharewas $1.61 in 2001 and $1.85 in 2000. In 2001, net income and earnings per share included an extraordinary loss, representing $(6.9) million and $(.08) per share. Net income and earnings per share in 2000 included significant after-tax gains on cellular and other investments, representing $50.3 million and $.55 per share; an extraordinary loss, representing $(29.5) million and $(.32) per share; and the cumulative effect of a change in accounting principle, representing $(4.7) million and $(.05) per share. Excluding the after-tax effect of these gains, extraordinary losses and cumulative effect of a change in accounting principle, net income would have been $147.8 million, or $1.69 per share, in 2001; and $146.6 million, or $1.67 per share, in 2000.
Operating revenues totaled $501.0 million in the third quarter of 2001, up $49.6 million, or 11%, over 2000. Average monthly service revenue per customer decreased to $47.92 in the third quarter of 2001 compared to $50.91 in the same period of 2000 for reasons generally the same as the first nine months of 2001.
Revenues from retail customers increased $43.2 million, or 14%, in 2001 primarily due to the increased number of customers served. Average monthly local retail minutes of use per customer totaled 230 in the third quarter of 2001 compared to 170 in 2000. Also, as the number of customers and amount of revenue earned continued to grow, average revenue per minute of use continued to decline. As a result, average monthly retail service revenue per customer decreased 3% to $36.06 in the third quarter of 2001 compared to $37.25 in 2000.
Inbound roaming revenue decreased $334,000, or less than 1%, in 2001 as the increase in inbound roaming minutes of use was more than offset by a decrease in the average inbound roaming revenue per minute of use. Monthly inbound roaming revenue per customer averaged $7.78 in 2001 compared to $9.17 in 2000.
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Long-distance and other revenue increased $2.6 million, or 7%, in 2001. The effect of an increase in the volume of long-distance calls billed by the Company, primarily from inbound roamers using the Company’s systems to make long-distance calls, was partially offset by price reductions primarily related to long-distance charges on roaming minutes of use. Monthly long-distance and other revenue per customer averaged $4.08 in 2001 and $4.49 in 2000.
Equipment sales revenue increased $4.1 million, or 24%, primarily reflecting the recognition of previously deferred revenues, which increased revenue by $5.2 million in 2001. Although gross customer activations increased 5% to 296,000 in 2001 from 283,000 in 2000, the revenue per unit sold declined due to an overall decline in the price of units sold, particularly dual-mode units provided to customers who initiated digital service.
Operating expenses totaled $408.3 million in the third quarter of 2001, up $49.5 million, or 14%, over 2000. System operations expenses increased $25.3 million, or 27%, in 2001 as a result of increases in minutes of use and costs associated with maintaining 15% more cell sites than in 2000, partially offset by decreases in cost per minute for outbound roaming and toll transactions.
Marketing and selling expenses increased $375,000, or 1%, in 2001. The increase was primarily due to a 5% increase in the number of gross customer activations. Cost per gross customer activation was $285 in 2001 and $321 in 2000.
Cost of equipment sold decreased $2.7 million, or 8%, in 2001. The decrease primarily reflects the decline in the per unit cost of dual-mode units, partially offset by the 5% increase in gross customer activations.
General and administrative expenses increased $15.9 million, or 18%, in 2001, for reasons generally the same as the first nine months of 2001.
Operating cash flow increased $10.7 million, or 7%, to $170.0 million in 2001; operating cash flow margins totaled 35.5% in 2001 and 36.7% in 2000.
Depreciation expense increased $9.9 million, or 19%, in 2001, reflecting a 25% increase in average fixed asset balances.
Operating income totaled $92.7 million in 2001 compared to $92.5 million in 2000, a less than 1% increase. The operating income margin decreased to 19.3% in 2001 from 21.3% in 2000. The decline in operating income margin was primarily the result of increased system operations and general and adminstrative expenses, slightly offset by increased revenues.
Investment and other income decreased $77.3 million to $7.2 million in 2001. There were no gains on cellular and other investments in 2001; these gains totaled $78.2 million in 2000, resulting from the sale of the Company’s majority interest in one market and minority interest in another market, and from cash received from the settlement of a legal matter. Investment income increased $3.2 million, or 29%, in 2001, as the aggregate net income from the markets in which the company had interests in both periods increased in 2001. Total interest expense decreased $690,000, or 7%, in 2001.
Income tax expense totaled $43.0 million in 2001 and $80.6 million in 2000. In 2000, $39.2 million of income tax expense related to gains on cellular and other investments. Extraordinary (loss), net of tax totaled ($1.8) million in 2001 and ($23.4) million in 2000.
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Net income totaled $53.1 million in 2001 compared to $70.6 million in 2000. Both net income and earnings per share in both years were affected by extraordinary losses and gains on cellular and other investments. A summary of the after-tax effect of the extraordinary losses on net income and diluted earnings per share is shown below.
Three Months Ended September 30, --------------------------- 2001 2000 ------------ ------------ (Dollars in thousands, except per share amounts) Income before after-tax effects of gains, extraordinary loss $ 54,896 $ 54,874 Add: After-tax effects of gains -- 39,067 Less: Extraordinary loss on extinguishment of debt (1,768) (23,367) ------------ ------------ Net income as reported $ 53,128 $ 70,574 ============ ============ Diluted earnings per share before after-tax effects of gains, extraordinary loss $ 0.62 $ 0.63 Add: After-tax effects of gains -- 0.43 Less: Extraordinary loss on extinguishment of debt (0.02) (0.26) ------------ ------------ Diluted earnings per share as reported $ 0.60 $ 0.80 ============ ============
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations” and 142 “Goodwill and Other Intangible Assets” in July 2001. Among other provisions of SFAS 141 and 142, the Financial Accounting Standards Board requires that all future business combinations be accounted for using the purchase method of accounting and prohibits the use of the pooling-of-interest method. For acquisitions completed after June 30, 2001, goodwill will not be amortized. In addition, effective January 1, 2002, previously recorded goodwill and other intangible assets with indefinite lives will no longer be amortized but will be subject to impairment tests at least annually. Intangible assets with finite lives are required to be amortized over their estimated useful lives. Management is currently reviewing the final release of these statements to evaluate the impact on results of operations and financial position.
SFAS No. 143 “Accounting for Asset Retirement Obligations” was issued in June 2001 and will become effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. Management is currently reviewing the final release of this statement to evaluate the impact on results of operations and financial position.
SFAS 144 “Accounting for the Impairment of Disposal of Long-Lived Assets” was issued in October 2001. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This SFAS replaces SFAS 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” but retains many of the fundamental provisions. The provisions of this statement are effective for fiscal years beginning after December 15, 2001. Management is currently reviewing the final release of this statement to evaluate the impact on results of operations and financial position.
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 its construction costs and operating expenses. The Company anticipates further increases in cellular units in service, revenues, operating cash flow and fixed asset additions in the future. Operating
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cash flow may fluctuate from quarter to quarter depending on the seasonality of each of these growth factors.
Cash flows from operating activities provided $356.2 million in 2001 and $425.0 million in 2000. Operating cash flow provided $466.4 million in 2001 and $445.0 million in 2000. Cash flows from other operating activities (investment and other income, interest expense, income taxes, changes in working capital and changes in other assets and liabilities) required $110.2 million in 2001 and $20.0 million in 2000. Income taxes and interest paid totaled $84.9 million in 2001 and $82.3 million in 2000. Proceeds from a litigation settlement provided $42.5 million in 2000.
Cash flows from investing activities required $510.1 million in 2001 and $156.7 million in 2000. Cash required for property, plant and equipment and system development expenditures totaled $377.7 million in 2001 and $206.6 million in 2000. In both periods, these expenditures were financed primarily with internally generated cash, and in 2000, they were also financed with the proceeds from the sales of cellular interests. These expenditures primarily represent the construction of 256 and 153 cell sites in 2001 and 2000, respectively, plus other plant additions and costs related to the development of the Company’s office systems. In both periods, other plant additions included significant amounts related to the replacement of retired assets and the changeout of analog radio equipment for digital radio equipment. Acquisitions required $134.6 million in 2001 and $36.0 million in 2000. The Company issued notes receivable totaling $13.1 million in 2001 related to the acquisition and/or potential acquisition of certain PCS licenses. The Company received net cash proceeds totaling $73.0 million in 2000 related to sales of cellular and other investments. Cash distributions from cellular entities in which the Company has an interest provided $10.6 million in 2001 and $13.6 million in 2000.
Cash flows from financing activities provided $39.4 million in 2001 and required $273.2 million in 2000. In 2001, the Company paid $30.1 million in cash, recorded $612,000 of accounts payable for payments made in October 2001 and issued 550,000 USM Common Shares to satisfy the conversion of $113.5 million face value ($49.4 million carrying value) of LYONs by the holders. In 2000, the Company paid $16.5 million in cash, and recorded $9.7 million of accounts payable for payments made in October 2000, to repurchase $41.0 million face value ($16.9 million carrying value) of LYONs; paid $48.4 million in cash, recorded $1.2 million of accounts payable for amounts paid in October 2000 and issued 784,000 USM Common Shares to satisfy the conversion of $155.3 million face value ($64.7 million carrying value) of LYONs by the holders. In 2001, the Company paid $25.8 million for the repurchase of 322,600 of its Common Shares. The cash paid includes $11.0 million paid in 2001 for repurchases executed in December 2000, and excludes $1.0 million of accounts payable recorded for payments made in October 2001. In 2000, the Company repurchased a total of 3,140,900 of its Common Shares for a total of $206.8 million in cash, plus $4.7 million of accounts payable recorded for payments made in October 2000. In 2001, the Company borrowed $118.5 million and repaid $22.5 million under the Revolving Credit Facility. In 2000, the Company borrowed and repaid $6.0 million under the Revolving Credit Facility.
As of September 30, 2001, the Company had entered into agreements, on its own behalf and through joint ventures, to acquire interests in PCS licenses in 24 markets. These interests, primarily in 10 megahertz licenses, represent a total population of 8.3 million and will be acquired in exchange for $131.8 million in cash. The Company’s proportionate share of pops to be acquired is 7.3 million and its share of cash to be paid is $119.2 million. Of these PCS interests, 4.0 million pops are in markets adjacent to those in which the Company already provides cellular service, and the remaining pops are in markets in which the Company already provides cellular service.
As of September 30, 2001, the Company, on its own behalf, had completed the acquisition of interests in licenses in sixteen of the markets, representing 5.0 million pops, for $80.4 million. The interests the Company expects to acquire in the future are all through joint ventures. These interests will be 100% owned by the joint ventures, in each of which the Company owns a majority economic interest. In total, these joint ventures have agreements to acquire markets representing 2.4 million
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pops for $38.8 million. The Company expects each of the pending transactions to be completed by the first quarter of 2002.
The Company anticipates that the aggregate resources required for the remainder of 2001 will include the following:
Anticipated capital requirements for 2001 primarily reflect the Company’s plans for construction and system expansion. The Company’s construction and system expansion budget for 2001 is $470 million to $480 million, to expand and enhance the Company’s coverage in its service areas, including the addition of digital service capabilities to its systems, and to enhance the Company’s office systems. Through September 30, 2001, the Company’s capital expenditures totaled $378 million, with $92 million to $102 million of capital expenditures expected during the remainder of 2001.
In October 2000, the Company’s Board of Directors authorized the repurchase of an additional 1.4 million USM Common Shares. Through September 30, 2001, the company had repurchased 230,300 shares under this program. Additionally, the Company may repurchase a limited amount of additional shares on a quarterly basis, primarily for use in employee benefit plans.
The Board of Directors has authorized management to opportunistically repurchase LYONs in private transactions. The Company may also purchase a limited amount of LYONs in open-market transactions from time to time. The Company’s LYONs are convertible, at the option of their holders, at any time prior to maturity, redemption or purchase, into USM Common Shares at a conversion rate of 9.475 USM Common Shares per LYON. Upon conversion, the Company has the option to deliver to holders either USM Common Shares or cash equal to the market value of the USM Common Shares into which the LYONs are convertible.
The Company assesses its cellular holdings on an ongoing basis in order to maximize the benefits derived from clustering its markets. The Company also reviews attractive opportunities for the acquisition of additional wireless spectrum. Over the past few years, the Company has completed exchanges of controlling interests in its less strategic markets for controlling interests in markets which better complement its clusters. The Company has purchased controlling interests in cellular markets and has recently participated in joint ventures to purchase interests in PCS licenses which enhance its clusters. The Company has also completed outright sales of other less strategic markets. The proceeds from any sales have been used to further the Company’s growth.
U.S. Cellular is a limited partner in Black Crow Wireless L.P., which was a successful bidder for 17 PCS licenses in 13 markets for $283.9 million in the January 2001 FCC spectrum auction. As a result of its 85% economic interest in Black Crow, U.S. Cellular, as of September 30, 2001, had contributed a total of $9.7 million in capital and loaned $45.5 million to Black Crow, and loaned $563,000 to the general partner of Black Crow. The exact nature of U.S. Cellular’s financial commitment going forward will be determined as Black Crow develops its long-term business and
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financing plans. U.S. Cellular is committed to contributing capital along the lines of its partnershipinterest, and has committed to loan the general partner up to $20 million. U.S. Cellular has no other loan commitments but it is possible that U.S. Cellular will provide guarantees or other financial undertakings to support Black Crow’s effort at raising debt financing.
Thirteen of the 17 licenses for which Black Crow was the successful bidder were auctioned by the FCC subject to the final outcome of certain judicial and administrative proceedings initiated by parties claiming to have continuing interests in such licenses. These 13 licenses, along with various other licenses, were originally awarded by the FCC in prior auctions. The licenses were subsequently cancelled and reauctioned by the FCC after the winning bidders in these prior auctions were unable to make their required payments to the FCC on a timely basis. One of the original winning bidders in the prior auctions which contested the FCC’s decision to revoke and reauction certain licenses recently obtained a ruling from the United States Court of Appeals for the District of Columbia Circuit in favor of that original winning bidder which held that the FCC’s cancellation of such licenses was illegal. On behalf of the FCC, the U.S. Department of Justice recently filed a Petition for Writ of Certiorari requesting review by the U.S. Supreme Court of this matter. The FCC also requested stay of the ruling of the United States Court of Appeals for the District of Columbia Circuit pending the outcome of that Supreme Court review. In the event the original bidders are ultimately successful in reclaiming the cancelled licenses, Black Crow would receive a refund of payments made to the FCC for such licenses and only acquire four licenses in three markets for a total cost of $3.8 million, which would significantly reduce U.S. Cellular’s current and potential future financial commitments. Settlement discussions have recently been held between the FCC and certain successful bidders for other licenses in the same auction with respect to which Black Crow was the successful bidder. Black Crow has not been a direct participant in such discussions, and it is uncertain at this time whether such discussions will result in Black Crow obtaining any of such licenses.
The Company is generating substantial cash from its operations and anticipates financing all of the above expenditures with internally generated cash and with borrowings under the Company’s Revolving Credit Facility as the timing of such expenditures warrants. The Company had $9.8 million of cash and cash equivalents at September 30, 2001. Additionally, $349 million of the $500 million under the Company’s Revolving Credit Facility is unused and remains available to meet any short-term borrowing requirements.
Management believes that the Company’s operating cash flows and sources of external financing, including the above-referenced Revolving Credit Facility, provide substantial financial flexibility for the Company to meet both its short- and long-term needs. The Company also currently has access to public and private capital markets to help meet its long-term financing needs. The Company anticipates issuing debt and equity securities only when capital requirements (including acquisitions), financial market conditions and other factors warrant.
The Company is subject to market rate risks due to fluctuations in interest rates and equity markets. All of the Company’s existing long-term debt is in the form of fixed-rate notes with original maturities ranging from seven to 20 years. Accordingly, fluctuations in interest rates can lead to fluctuations in the fair value of such instruments. The Company has not entered into financial derivatives to reduce its exposure to interest rate risks.
The Company maintains a portfolio of available for sale marketable equity securities, which resulted from acquisitions and the sale of non-strategic investments. The market value of these investments, principally Vodafone AirTouch plc American Depositary Receipts, amounted to $234.0 million at September 30, 2001. A hypothetical 10% decrease in the share prices of these investments would result in a $23.4 million decline in the market value of the investments.
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PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENTThis Management’s Discussion and Analysis of Results of Operations and Financial Condition and other sections of this Quarterly Report on Form 10-Q contains statements that are not based on historical fact, including the words “believes”, “anticipates”, “intends”, “expects”, and similar words. These statements constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, but are not limited to:
The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors.
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Unaudited --------- Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ (Dollars in thousands, except per share amounts) OPERATING REVENUES Service $ 479,318 $ 433,872 $ 1,364,439 $ 1,232,628 Equipment sales 21,706 17,569 51,643 45,965 ------------ ------------ ------------ ------------ Total Operating Revenues 501,024 451,441 1,416,082 1,278,593 ------------ ------------ ------------ ------------ OPERATING EXPENSES System operations 119,160 93,884 320,596 262,432 Marketing and selling 74,363 73,988 213,667 214,174 Cost of equipment sold 31,721 34,430 93,737 99,081 General and administrative 105,817 89,891 321,663 257,931 Depreciation 61,520 51,665 174,437 153,052 Amortization of intangibles 15,766 15,037 47,196 44,783 ------------ ------------ ------------ ------------ Total Operating Expenses 408,347 358,895 1,171,296 1,031,453 ------------ ------------ ------------ ------------ OPERATING INCOME 92,677 92,546 244,786 247,140 ------------ ------------ ------------ ------------ INVESTMENT AND OTHER INCOME (EXPENSE) Investment income 14,294 11,114 31,289 30,671 Amortization of licenses related to investments (178) (412) (532) (965) Interest income 1,697 4,726 9,513 13,477 Other income (expense), net 61 232 3,515 1,949 Gain on cellular and other investments -- 78,224 -- 96,075 Interest (expense) (8,668) (9,358) (26,191) (28,096) ------------ ------------ ------------ ------------ Total Investment and Other Income 7,206 84,526 17,594 113,111 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 99,883 177,072 262,380 360,251 Income tax expense 42,950 80,640 107,376 156,484 ------------ ------------ ------------ ------------ 56,933 96,432 155,004 203,767 INCOME BEFORE MINORITY INTEREST Minority share of income (2,037) (2,491) (7,186) (6,801) ------------ ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 54,896 93,941 147,818 196,966 Extraordinary item-loss on extinguishment of debt, net of tax (1,769) (23,367) (6,934) (29,473) Cumulative effect of accounting change, net of tax -- -- -- (4,661) ------------ ------------ ------------ ------------ NET INCOME $ 53,127 $ 70,574 $ 140,884 $ 162,832 ============ ============ ============ ============ BASIC WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES (000s) 86,394 85,685 86,231 86,520 BASIC EARNINGS PER COMMON AND SERIES A COMMON SHARES $ 0.61 $ 0.82 $ 1.63 $ 1.88 ============ ============ ============ ============ DILUTED EARNINGS PER COMMON AND SERIES A COMMON SHARES $ 0.60 $ 0.80 $ 1.61 $ 1.85 ============ ============ ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Unaudited --------- Nine Months Ended September 30, ----------------------- 2001 2000 ---------- ---------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 140,884 $ 162,832 Add (Deduct) adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 221,633 197,835 Deferred income tax provision 15,316 36,703 Investment income (31,289) (30,671) Minority share of income 7,186 6,801 Extraordinary Item 6,934 29,473 Cumulative effect on accounting change -- 4,661 Gain on cellular and other investments -- (96,075) Other noncash expense 11,649 23,251 Proceeds from litigation settlement -- 42,457 Change in inventory 23,680 (3,659) Change in accounts receivable (42,925) (22,208) Change in accounts payable (29,012) (6,176) Change in accrued interest (3,526) (4,148) Change in accrued taxes 35,207 65,908 Change in customer deposits and deferred revenues (2,689) 12,743 Change in other assets and liabilities 3,163 5,297 ---------- ---------- 356,211 425,024 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (368,849) (199,821) System development costs (8,872) (6,812) Investments in and advances to/from unconsolidated entities 1,711 (3,681) Distributions from unconsolidated entities 10,577 13,607 Proceeds from cellular and other investments -- 72,973 Acquisitions, excluding cash acquired (134,580) (35,979) Other investing activities (10,097) 3,049 ---------- ---------- (510,110) (156,664) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of debt (30,149) (64,891) Borrowings from Revolving Credit Facility 118,500 6,000 Repayment of Revolving Credit Facility (22,500) (6,000) Repurchase of common shares (25,795) (206,782) Common Shares issued 3,626 4,450 Capital (distributions) to minority partners (4,285) (5,971) ---------- ---------- 39,397 (273,194) ---------- ---------- NET (DECREASE) IN CASH AND CASH EQUIVALENTS (114,502) (4,834) CASH AND CASH EQUIVALENTS- Beginning of period 124,281 197,675 ---------- ---------- End of period $ 9,779 $ 192,841 ========== ========== The accompanying notes to consolidated financial statements are an integral part of these statements.
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ (Unaudited) September 30, December 31, 2001 2000 ------------ ------------ (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents General funds $ 9,023 $ 69,956 Affiliated cash equivalents 756 54,325 ------------ ------------ 9,779 124,281 Temporary investments 7 7 Accounts receivable Customers, net of allowance 155,542 142,783 Roaming 81,494 62,928 Affiliates 925 60 Other 23,871 13,312 Inventory 25,117 48,798 Note receivable 45,502 -- Prepaid expenses 11,106 10,796 Other current assets 11,318 6,398 ------------ ------------ 364,661 409,363 ------------ ------------ INVESTMENTS Licenses, net of accumulated amortization 1,271,287 1,130,802 Marketable equity securities 234,001 377,900 Investment in unconsolidated entities, net of accumulated amortization 159,944 188,859 Notes and interest receivable - long-term 57,257 84,566 ------------ ------------ 1,722,489 1,782,127 ------------ ------------ PROPERTY, PLANT AND EQUIPMENT In service and under construction 2,174,162 1,801,377 Less accumulated depreciation 819,411 655,754 ------------ ------------ 1,354,751 1,145,623 ------------ ------------ DEFERRED CHARGES System development costs, net of accumulated amortization 108,689 119,724 Other, net of accumulated amortization 12,769 10,197 ------------ ------------ 121,458 129,921 ------------ ------------ Total Assets $ 3,563,359 $ 3,467,034 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES --------------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ (Unaudited) September 30, December 31, 2001 2000 ------------ ------------ (Dollars in thousands) CURRENT LIABILITIES Revolving Credit Facility $ 151,000 $ 55,000 Accounts payable Affiliates 2,126 9,124 Other 180,123 203,223 Customer deposits and deferred revenues 54,724 53,855 Accrued interest 3,923 7,449 Accrued taxes 68,046 32,529 Accrued compensation 19,310 19,550 Other current liabilities 25,500 17,597 ------------ ------------ 504,752 398,327 ------------ ------------ LONG-TERM DEBT 6% zero coupon convertible debentures 143,756 185,817 7.25% unsecured notes 250,000 250,000 Other 13,000 13,000 ------------ ------------ 406,756 448,817 ------------ ------------ DEFERRED LIABILITIES AND CREDITS Net deferred income tax liability 314,255 357,775 Other 10,461 12,611 ------------ ------------ 324,716 370,386 ------------ ------------ MINORITY INTEREST 41,044 34,933 ------------ ------------ COMMON SHAREHOLDERS' EQUITY Common Shares, par value $1 per share 55,046 55,046 Series A Common Shares, par value $1 per share 33,006 33,006 Additional paid-in capital 1,309,082 1,321,193 Treasury Shares, at cost (1,819,979 and 2,176,294 shares, respectively) (117,247) (145,542) Accumulated other comprehensive (loss) (101,846) (16,296) Retained earnings 1,108,050 967,164 ------------ ------------ 2,286,091 2,214,571 ------------ ------------ Total Liabilities and Shareholders' Equity $ 3,563,359 $ 3,467,034 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnaudited
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (Dollars in thousands, except per share amounts) Income used in Basic Earnings per Share $ 54,896 $ 93,941 $ 147,818 $ 196,966 Extraordinary item (1,769) (23,367) (6,934) (29,473) Cumulative effect of accounting change -- -- -- (4,661) --------- --------- --------- --------- Net Income Available to Common used in Basic Earnings per Share $ 53,127 $ 70,574 $ 140,884 $ 162,832 ========= ========= ========= ========= Weighted average number of Common Shares used in Basic Earnings per Share (000's) 86,394 85,685 86,231 86,520 ========= ========= ========= ========= Basic Earnings per Share Continuing Operations Excluding Gains $ 0.63 $ 0.64 $ 1.71 $ 1.69 Gains -- 0.45 -- 0.58 --------- --------- --------- --------- 0.63 1.09 1.71 2.27 Extraordinary item (0.02) (0.27) (0.08) (0.34) Cumulative effect of accounting change -- -- -- (0.05) --------- --------- --------- --------- $ 0.61 $ 0.82 $ 1.63 $ 1.88 ========= ========= ========= =========
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Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (Dollars in thousands, except per share amounts) Income used in Basic Earnings per Share $ 54,896 $ 93,941 $ 147,818 $ 196,966 Interest expense eliminated as a result of the pro forma conversion of Convertible Debentures, net of tax 1,328 2,276 4,340 7,136 ---------- ---------- ---------- ---------- Income used in Diluted Earnings per Share 56,224 96,217 152,158 204,102 Extraordinary item (1,769) (23,367) (6,934) (29,473) Cumulative effect of accounting change -- -- -- (4,661) ---------- ---------- ---------- ---------- Net Income Available to Common used in Diluted Earnings per Share $ 54,455 $ 72,850 $ 145,224 $ 169,968 ========== ========== ========== ========== Weighted average number of Common Shares used in Basic Earnings per Share (000's) 86,394 85,685 86,231 86,520 Effect of Dilutive Securities: Stock Options and Stock Appreciation Rights 209 390 241 407 Conversion of Convertible Debentures 3,604 5,052 3,604 5,052 ---------- ---------- ---------- ---------- Weighted Average Number of Common Shares used in Diluted Earnings per Share 90,207 91,127 90,076 91,979 ========== ========== ========== ========== Diluted Earnings Per Share Continuing Operations Excluding Gains $ 0.62 $ 0.63 $ 1.69 $ 1.67 Gains -- 0.43 -- 0.55 ---------- ---------- ---------- ---------- 0.62 1.06 1.69 2.22 Extraordinary item (0.02) (0.26) (0.08) (0.32) Cumulative effect of accounting change -- -- -- (0.05) ---------- ---------- ---------- ---------- $ 0.60 $ 0.80 $ 1.61 $ 1.85 ========== ========== ========== ==========
Nine Months Ended September 30, -------------------------- 2001 2000 ------------ ------------ (Dollars in thousands) Property, plant and equipment $ 2,570 $ -- Cellular licenses 132,010 18,761 Investment in unconsolidated entities -- 56,034 Decrease in note receivable -- (10,000) Decrease in minority investments -- 1,721 Long-term debt -- (13,000) Accounts payable - other -- (13,744) Other assets and liabilities, cash acquired -- (960) Common Shares issued -- (2,833) ------------ ------------ Decrease in cash due to acquisitions $ 134,580 $ 35,979 ============ ============
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Nine Months Ended September 30, --------------------------- 2001 2000 ------------ ------------ (Dollars in thousands) Interest paid $ 21,761 $ 18,852 Income taxes paid 63,104 63,400 Noncash interest expense 7,933 13,358 Net change to equity for conversion of LYONs $ 25,191 $ 34,466
Nine Months Ended September 30, ------------------------ 2001 2000 ---------- ---------- (Dollars in thousands) Accumulated Other Comprehensive Income (Loss) Balance, beginning of period $ (16,296) $ 81,391 Other Comprehensive (Loss)- Unrealized (losses) gains on securities (143,899) (130,571) Income tax effect 58,349 52,228 ---------- ---------- Net unrealized (losses) included in Comprehensive (Loss) (85,550) (78,343) ---------- ---------- Balance, end of period $ (101,846) $ 3,048 ========== ========== Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (Dollars in thousands) Comprehensive Income Net Income $ 53,127 $ 70,574 $ 140,884 $ 162,832 Unrealized (losses) on securities (7,434) (29,774) (85,550) (78,343) ---------- ---------- ---------- ---------- $ 45,693 $ 40,800 $ 55,334 $ 84,489 ========== ========== ========== ==========
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September 30, December 31, 2001 2000 ------------ ------------ (Dollars in thousands) Available-for-sale Equity Securities Aggregate Fair Value $ 234,001 $ 377,900 Historical Cost 405,061 405,061 ------------ ------------ Gross Unrealized Holding (Losses) (171,060) (27,161) Tax Effect (69,214) (10,865) ------------ ------------ Net Unrealized Holding (Losses), net of tax $ (101,846) $ (16,296) ============ ============
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PART II. OTHER INFORMATION
On April 11, 2000, two affiliates of U.S. Cellular, along with two unrelated wireless carriers, filed a declaratory judgment action in the United States District Court for the Northern District of Iowa against the Iowa Attorney General. This action was in response to the Attorney General's ongoing investigation of certain wireless industry practices involving wireless service agreements and related matters. The suit by U.S. Cellular and the other wireless carriers seeks to have certain state laws declared inapplicable to wireless service agreements and such practices. In response, the Iowa Attorney General filed suit in the Iowa State District Court for Polk County against U.S. Cellular, alleging violations of various state consumer credit and other consumer protection laws. The Attorney General is seeking injunctive relief, barring the enforcement of contracts in excess of four months, and related relief. The Attorney General is also seeking unspecified reimbursements for customers, statutory fines ($40,000 for certain violations and $5,000 for others, per violation) as well as fees and costs. This case was removed to the U. S. District Court for the Southern District of Iowa. On August 7, 2000, the U.S. District Court in the Southern District granted the Attorney General's motion to remand the case to state court. On September 15, 2000, the U.S. District Court in the Northern District dismissed U.S. Cellular's Complaint in its entirety. U.S. Cellular has filed an appeal of the grant of the motion to dismiss the Northern District case. U.S. Cellular vigorously denies the allegations of the Iowa Attorney General in the case now remanded to state court and intends to vigorously contest this case.
In addition to the legal proceedings referenced in the previous paragraph, U.S. Cellular is involved in a number of other legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain cellular telephone systems and other interests. U.S. Cellular does not believe that any of these proceedings should have a material adverse impact.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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