 |
| UNITED STATES CELLULAR CORPORATION |
| 2ND 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 |
| Results of Operations |
| Six Months Ended June 30, 2002 and 2001 | 4-11 |
| Three Months Ended June 30, 2002 and 2001 | 11-13 |
| Financial Resources and Liquidity | 14-21 |
| Critical Accounting Policies and Estimates | 21-23 |
| Certain Relationships and Related Transactions | 23-24 |
| Safe Harbor Cautionary Statement | 24-25 |
| Consolidated Statements of Operations - |
| Three Months and Six Months Ended June 30, 2002 and 2001 | 26 |
| Consolidated Statements of Cash Flows - |
| Six Months Ended June 30, 2002 and 2001 | 27 |
| Consolidated Balance Sheets - |
| June 30, 2002 and December 31, 2001 | 28-29 |
| Notes to Consolidated Financial Statements | 30-37 |
| Part II. Other Information | 38-39 |
| Signatures | 40 |
| |
Six Months Ended or At
June 30,
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2002 2001
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Total market population (in thousands) (1) 27,548 25,670
Customers 3,547,000 3,294,000
Market penetration - cellular and PCS markets 12.88% 12.83%
Market penetration - cellular markets only 13.34% 12.83%
Markets in operation - cellular and PCS markets 148 142
Markets in operation - cellular markets only 143 142
Total employees 5,175 5,200
Cell sites in service 3,145 2,688
Average monthly service revenue per customer $ 45.82 $ 46.00
Postpay churn rate per month 1.8% 1.7%
Marketing cost per gross customer addition $ 378 $ 325
(1) Represents 100% of the population of the licensed areas in which the Company
has a controlling financial interest for financial reporting purposes.
Calculated using Claritas population estimates for 2001 and 2000, respectively.
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The growth in the Company’s operating income in 2002, which includes 100% of the revenues and expenses of its consolidated markets plus its corporate office operations, primarily reflects improvements in the Company’s overall operations. The improvement primarily resulted from growth in the Company’s customer base and revenues and a reduction in amortization of intangibles. Operating revenues, driven by an 8% increase in customers served, rose $91.1 million, or 10%, in 2002. Operating cash flow (operating income plus depreciation and amortization of intangibles) increased $31.6 million, or 11%, in 2002. Operating income increased $26.8 million, or 18%, in 2002. The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 effective January 1, 2002, and ceased the amortization of license costs and goodwill on that date. The Company determined that no impairment charge was required upon the completion of the initial impairment review required under SFAS No. 142. The aggregate effect of ceasing amortization increased operating income by $18.0 million, or 12%, in 2002. The amounts reported previously for “operating cash flow” do not represent cash flows from operations as defined by generally accepted accounting principles (“GAAP”). The Company believes that this is a useful measure of its performance but it should not be construed as an alternative to measures of performance determined under GAAP. -4- Investment and other income decreased $245.8 million in 2002, primarily due to the $244.7 million other than temporary loss recorded on the writedown of marketable equity securities in June 2002. Net income and diluted earnings per share decreased $133.0 million and $1.54, respectively, in 2002. Excluding the after-tax effects of the other than temporary loss on investments in 2002, net income and diluted earnings per share increased $12.6 million and $.14, respectively, in 2002. A summary of the after-tax effects of the other than temporary loss on investments, license and goodwill amortization and losses on the retirement of debt on net income and diluted earnings per share in both 2002 and 2001 is shown below. |
Six Months Ended
June 30,
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2002 2001
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(Dollars in thousands,
except per share amounts)
Net Income (Loss) from:
Operations $ 100,377 $ 105,599
(Loss) on marketable securities (145,587) --
License and goodwill amortization -- (12,677)
(Loss) on retirement of debt -- (5,165)
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Net income (loss) as reported $ (45,210) $ 87,757
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Diluted Earnings (Loss) Per Share from:
Operations $ 1.15 $ 1.20
(Loss) on marketable securities (1.68) --
License and goodwill amortization -- (.14)
(Loss) on retirement of debt -- (.05)
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Diluted earnings (loss) per share as reported $ (.53) $ 1.01
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Operating Revenues |
Six Months Ended June 30,
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2002 2001
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(Dollars in millions)
Operating Revenues
Retail service $ 774.1 $ 684.2
Inbound roaming 116.7 131.4
Long-distance and other 71.5 69.5
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Service Revenues 962.3 885.1
Equipment sales 43.8 30.0
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Total Operating Revenues $ 1,006.1 $ 915.1
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Operating revenues increased $91.1 million, or 10% in 2002. Service revenues primarily 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”); and (iii) charges for long-distance calls made on the Company’s systems. Service revenues increased $77.1 million, or 9%, in 2002. The increase was primarily due to the growing number of retail customers. Monthly service revenue per customer averaged $45.82 in 2002 and $46.00 in 2001. Retail service revenue increased $89.9 million, or 13%, in 2002. Growth in the Company’s customer base and an increase in average monthly retail service revenue per customer were the primary reasons for the increase in retail service revenue. The number of customers increased 8% to -5- 3,547,000 at June 30, 2002, and average monthly retail service revenue per customer increased 4% to $36.86 in 2002. Management anticipates that overall growth in the Company’s customer base will continue at a slower pace in the future, primarily as a result of an increase in the number of competitors in its markets and continued penetration of the consumer market. Monthly local retail minutes of use per customer averaged 259 in 2002 and 199 in 2001. 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 partially offset by a decrease in average revenue per minute of use in 2002. Management anticipates that the Company’s average revenue per minute of use will continue to decline in the future, reflecting increased competition and continued penetration of the consumer market. Inbound roaming revenue decreased $14.7 million, or 11%, in 2002. The decline in inbound roaming revenue 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. In 2002, the increase in inbound roaming minutes of use was primarily driven by the overall growth in the number of customers throughout the wireless industry. The decline in revenue per minute of use is primarily due to the general downward trend in negotiated rates. Management anticipates that the rate of growth in inbound roaming minutes of use will be reduced due to two factors: |
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| Management also anticipates that average inbound roaming revenue per minute of use will continue to decline, reflecting the continued general downward trend in negotiated rates. Average monthly inbound roaming revenue per Company customer averaged $5.56 in 2002 and $6.83 in 2001. The decrease in monthly inbound roaming revenue per Company customer is attributable to a decrease in inbound roaming revenue compared to an increase in the Company’s customer base. Long-distance and other revenue increased $2.0 million, or 3%, in 2002 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 $3.40 in 2002 and $3.62 in 2001. Equipment sales revenues increased $13.9 million, or 47%, in 2002. The increase in equipment sales revenues reflects a change in the Company’s method of distributing handsets to its agent channel. Beginning in the second quarter of 2002, the Company began selling handsets to its agents at a price approximately equal to the Company’s cost. Previously, the Company’s agents purchased handsets from third parties. Selling handsets to agents enables the Company to provide better control over handset quality, set roaming preferences and pass along quantity discounts. As a result, equipment sales revenue and cost of goods sold increased by approximately $8 million during 2002. Management anticipates that these increases will continue in the future. Additionally, in 2002 the Company shifted its promotional activity from handset-related promotions to those based on increased minutes of use packages. As a result, revenues per handset sale increased in 2002. These increases were partially offset by the effect on handset sales of a 6% decrease in gross customer activations, to 493,000 in 2002 from 527,000 in 2001. -6- Operating Expenses |
Six Months Ended June 30,
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2002 2001
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(Dollars in millions)
Operating Expenses
System operations $ 226.0 $ 201.4
Marketing and selling 163.2 139.3
Cost of equipment sold 67.0 62.0
General and administrative 221.9 215.9
Depreciation 134.9 112.9
Amortization of intangibles 14.2 31.4
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Total Operating Expenses $ 827.2 $ 762.9
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| Operating expenses increased $64.3 million, or 8%, in 2002. System operations expenses increased $24.6 million, or 12%, in 2002. System operations expenses include charges from other telecommunications service providers for the Company’s customers’ use of their facilities, costs related to local interconnection to the landline network, long-distance charges and outbound roaming expenses. The increase in system operations expenses in 2002 was due to the following factors: |
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| The ongoing reduction both in the per-minute cost of usage on the Company’s systems and in negotiated roaming rates partially offset the above factors. As a result of the above factors, the components of system operations expenses were affected as follows: |
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| 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 increased $23.9 million, or 17%, in 2002. Marketing and selling expenses primarily consist of salaries, commissions and expenses of field sales and retail personnel and offices; agent expenses; corporate marketing, merchandise management and telesales department salaries and expenses; local advertising; and public relations expenses. The increase in 2002 was primarily due to the following factors: |
-7-
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Marketing cost per gross customer activation, which includes marketing and selling expenses and equipment subsidies, increased 16% to $378 in 2002 from $325 in 2001. The increase in cost per gross customer activation in 2002 was primarily due to the increase in marketing and selling costs spread over a reduced number of customer activations. These costs included those related to the development of the Company’s data services strategies, which increased cost per gross activation by $12 in 2002. Also, during the second half of 2001, the Company changed certain agent compensation plans to reduce the base commission payment and include future residual payments to agents. Such residual payments recognize the agent’s role in providing ongoing customer support, promote agent loyalty and encourage agent sales to customers who are more likely to have greater usage and remain customers for a longer period of time. As a greater percentage of the Company’s customer base becomes activated by agents receiving residual payments, it is possible that the Company’s aggregate residual payments to agents may grow by a larger percentage than its customers . During the first six months of 2002, the combination of lower customer activations and the increased residual payments to certain agents increased cost per gross customer activation by $12. Cost of equipment sold increased $4.9 million, or 8%, in 2002. The increase is primarily due to the approximately $8 million in handset costs related to the sale of handsets to agents beginning in the second quarter of 2002. Excluding these costs, cost of equipment sold decreased by approximately $3 million, or 5%, in 2002 related to the 6% decrease in gross customer activations. General and administrative expenses increased $6.1 million, or 3%, in 2002. 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 the majority of the Company’s corporate expenses. The increase in 2002 reflects the following factors: |
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| A $3.4 million reduction in customer retention expenses, due to the slowing of the migration of customers from analog to digital service, partially offset the above factors. The Company anticipates that customer retention expenses will increase in the future as it changes to a single digital technology platform and certain customers will require new handsets. Monthly general and administrative expenses per customer decreased 6% to $10.57 in 2002 from $11.22 in 2001. General and administrative expenses represented 23% of service revenues in 2002 and 24% in 2001. Operating cash flow increased $31.6 million, or 11%, to $328.1 million in 2002. The improvement in 2002 was primarily due to substantial growth in customers and service revenues. Operating cash flow margins (as a percent of service revenues) were 34.1% in 2002 and 33.5% in 2001. Depreciation expense increased $22.0 million, or 19%, in 2002. The increases reflect rising average fixed asset balances, which increased 23% in 2002. Increased fixed asset balances in 2002 -8- resulted from the following factors: |
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| Amortization of intangibles decreased $17.2 million, or 55%, in 2002. In accordance with SFAS No. 142, effective January 1, 2002, the Company no longer amortizes previously recorded goodwill and intangible assets with indefinite lives. These assets will be subject to periodic impairment tests. No impairment charge was required to be recorded upon the completion of the initial impairment review. In the first six months of 2001, amortization of intangibles totaled $18.0 million. Operating Income Operating income totaled $178.9 million in 2002, an increase of $26.8 million, or 18%, from 2001. The operating income margins (as a percent of service revenues) were 18.6% in 2002 and 17.2% in 2001. The improvement in operating income in 2002 reflects the following: |
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| These improvements were partially offset by the following factors: |
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Three Months Ended
June 30,
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2002 2001
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(Dollars in thousands,
except per share amounts)
Net Income (Loss) from:
Operations $ 56,485 $ 65,135
(Loss) on marketable securities (145,587) --
License and goodwill amortization -- (6,230)
(Loss) on retirement of debt -- (1,536)
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Net income (loss) as reported $ (89,102) $ 57,369
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Diluted Earnings Per Share from:
Operations $ .65 $ .74
(Loss) on marketable securities (1.69) --
License and goodwill amortization -- (.07)
(Loss) on retirement of debt -- (.02)
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Diluted earnings per share as reported $ (1.04) $ .65
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| -13- |
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The Company expects its conversion to a single digital equipment platform to be completed during 2004, at an approximate cost of $400 million to $450 million, spread over the next three years. The estimated capital expenditures in 2002 include $80 million to $95 million related to this conversion. The Company has contracted with an infrastructure vendor to provide a substantial portion of the equipment related to the conversion. See Item 6. – Exhibit 10.1. The Company may continue the repurchase of its common shares, as market conditions warrant, on the open market or at negotiated prices in private transactions. The Company’s repurchase program is intended to create value for the shareholders. The repurchases of common shares will be funded by internal cash flow, supplemented by short-term borrowings and other sources. The Company’s 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 may redeem the LYONs for cash at the issue price plus accrued original issue discount through the date of redemption. The Company is generating substantial cash from its operations and anticipates financing all of the 2002 obligations listed above with internally generated cash and with borrowings under the Company’s 1997 Revolving Credit Facility as the timing of such expenditures warrants. The Company had $18.2 million of cash and cash equivalents at June 30, 2002. At June 30, 2002, $485 million of the $500 million under the Company’s 1997 Revolving Credit Facility was unused and remained available to meet any short-term borrowing requirements. This line of credit provides for borrowing at LIBOR plus a contractual spread, based on the Company’s credit rating, which was 19.5 basis points as of June 30, 2002. The Company’s interest costs related to this line of credit would increase if its credit rating goes down, which would increase its cost of financing, but such line of credit would not cease to be available solely as a result of a decline in its credit rating. However, the continued availability of this revolving line of credit requires the Company to comply with certain negative and affirmative covenants, maintain certain financial ratios and to represent certain matters at the time of each borrowing. At June 30, 2002, the Company was in compliance with all covenants and other requirements set forth in the 1997 Revolving Credit Facility. -17- See also "Financing of Chicago 20MHz Acquisition." The Company holds various investments in publicly traded companies valued at $140.2 million as of June 30, 2002. These assets are classified for financial reporting purposes as available-for-sale securities. In May 2002, the Company entered into variable prepaid forward contracts related to all of its VOD securities. The Company received $160.0 million related to the contracts, which expire in five years and may be settled in cash or delivery of the underlying securities. Management continues to believe there exists a seasonality in both service revenues and operating expenses, which may cause cash flows from operations to vary from quarter to quarter. However, these fluctuations are not considered to be large enough to cause the Company to look beyond its short-term financing sources to meet its cash needs during 2002. Subject to the discussion under “Financing of Chicago 20 MHz Acquisition” below, management believes that the Company’s cash flows from operations and sources of external financing, including the above-referenced 1997 Revolving Credit Facility, provide substantial financial flexibility for the Company to meet both its short- and long-term needs. The Company also may have 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. However, the availability of financial resources is dependent on economic events, business developments, technological changes, financial conditions or other factors, some of which may not be in the Company’s control. If at any time financing is not available on terms acceptable to the Company, it might be required to reduce its business development and capital expenditure plans, which could have a materially adverse effect on its business and financial condition. The Company does not believe that any circumstances that could materially adversely affect its liquidity or its capital resources are currently reasonably likely to occur, but it cannot provide assurances that such circumstances will not occur or that they will not occur rapidly. Economic downturns, changes in financial markets or other factors could rapidly change the availability of the Company’s liquidity and capital resources. Continued uncertainty of access to capital for telecommunications companies, further deterioration in the capital markets, other changes in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to the Company, which could require the Company to reduce its construction, development and acquisition programs. At June 30, 2002, the Company is in compliance with all covenants and other requirements set forth in long-term debt indentures. The Company does not have any rating downgrade triggers that would accelerate the maturity dates of its debt. However, a downgrade in the Company’s credit rating could adversely affect its ability to renew existing, or obtain access to new, credit facilities in the future. Financing of Chicago 20MHz AcquisitionThe PrimeCo acquisition price of approximately $610 million was financed using the Company’s revolving lines of credit, proceeds of $175 million from the Series A Notes and proceeds from a $105 million loan from TDS. In May 2002, the Company raised approximately $160 million in cash when it entered into variable prepaid forward contracts related to its VOD ADRs; the proceeds from these contracts were initially used to pay down balances outstanding under the Company’s 1997 Revolving Credit Facility. The Company has obtained a five-year credit facility, amended in July 2002 to provide up to $325 million in financing (the “2002 Revolving Credit Facility”), which may be used to finance the purchase of PrimeCo and for other purposes. -18- The Company’s 2002 Revolving Credit Facility permits revolving loans on terms and conditions substantially similar to the Company’s 1997 Revolving Credit Facility, except for the interest rate and certain additional provisions. The terms of the 2002 Revolving Credit Facility provide for borrowings with interest at LIBOR plus a margin percentage based on the Company’s credit rating. Based on its current credit rating, the margin percentage is 55 basis points (for a rate of 2.39% as of June 30, 2002). Also, the Company needs to comply with certain financial covenants. The covenants include limitations on the ratios of funded debt to capitalization; earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest expense; and funded debt to EBITDA. The 2002 Revolving Credit Facility places other requirements on the Company, including the sale or placement of at least $175 million of debt securities on terms reasonably satisfactory to the lenders. The Series A Notes were issued to PrimeCo in a private placement. The notes are callable by the Company at the principal amount after five years. In connection with the purchase of Chicago 20MHz from PrimeCo, the Company entered into an agreement pursuant to which it provided PrimeCo and transferees of PrimeCo rights to have such notes registered with the SEC for resale. At the time of the completion of the acquisition of Chicago 20MHz, PrimeCo delivered a notice to the Company to request that the Company cause all of the $175 million principal amount of such notes to be registered for resale in a shelf registration statement. The Company has agreed to use commercially reasonable efforts to cause such registration statement to be filed within 10 days after the receipt of such request. The request for registration was provided by PrimeCo on August 7, 2002. The $105 million loan from TDS bears interest at an annual rate of 8.1%, payable quarterly, and becomes due in August 2008, with no penalty for prepayment. This loan is subordinated to the 2002 Revolving Credit Facility. The Company filed with the SEC a shelf registration statement on Form S-3 to register the issuance from time to time of up to $500 million of senior debt securities. This registration statement was declared effective by the SEC in May 2002. Subsequent to its acquisition of Chicago 20MHz, the Company began reevaluating its capital spending plans for the remainder of 2002. The Company expects to incur approximately $90 million in capital expenditures during the first year following the Chicago 20MHz acquisition, to improve coverage in the Chicago 20MHz network, including an upgrade of the current CDMA system to 1XRTT, and to enhance its marketing distribution in the Chicago market. The Company is currently evaluating what portion of the $90 million will be invested during 2002. Additionally, as a result of the completion of the Chicago 20MHz acquisition, the Company is reevaluating the timing of certain portions of its planned migration to a single digital equipment platform. Any changes that result from this reevaluation could accelerate capital expenditures previously planned for 2003 into 2002, in order to migrate some service areas to the new platform sooner and minimize the Company’s investment in infrastructure and handsets which would be used on the old platform. -19- RECENT ACCOUNTING PRONOUNCEMENTSSFAS No. 143 “Accounting for Asset Retirement Obligations” was issued in June 2001, and will become effective for the Company beginning January 1, 2003. SFAS No. 143 requires entities to record the fair value of a liability for legal obligations associated with an asset retirement in the period in which the obligation is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related long-lived asset. Throughout the useful life of the asset, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the asset’s useful life. The Company is currently reviewing the requirements of this new standard and has not yet determined the impact, if any, on the Company’s financial position or results of operations. SFAS No. 145 “Rescission of SFAS No. 4, 44, and 64 and Technical Corrections” was issued in April 2002 and is effective for fiscal years beginning after May 15, 2002 with early application encouraged. The provisions of SFAS No. 145 preclude gains and losses on the extinguishment of debt from being classified as extraordinary unless the criteria outlined in APB No. 30 “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. The Company has elected to adopt SFAS No. 145 early and as a result will no longer report the retirement of LYONs debt as extraordinary. Prior year after-tax losses related to LYONs debt retirements of $5.2 million for the six months ended June 30, 2001 and $1.5 million for the three months ended June 30, 2001, previously recorded as extraordinary items, have been reclassified as Other Income (Expense), Net in the Company’s statement of operations to conform with SFAS No. 145. SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” was issued in June 2002 and will become effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and states that an entity’s commitment to an exit plan, by itself, does not create a present obligation that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The Company is currently reviewing the requirements of this new standard and has not yet determined the impact, if any, on the Company’s financial position or results of operations. MARKET RISKThe Company is subject to market rate risks due to fluctuations in interest rates and equity markets. The majority of the Company’s existing long-term debt is in the form of fixed-rate notes with original maturities ranging from five to 20 years. Accordingly, fluctuations in interest rates can lead to significant fluctuations in the fair value of such instruments. As of June 30, 2002, 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 VOD ADRs, amounted to $140.2 million at June 30, 2002 and $272.4 million at December 31, 2001. As of June 30, 2002, the net unrealized holding loss, net of tax, included in accumulated other comprehensive loss totaled $12.0 million following the recognition in the statement of operations of a loss related to the Company’s investments in marketable securities of $145.6 million, net of tax, as a result of management’s determination that unrealized losses with respect to the investments were “other than temporary.” Management continues to review the valuation of the investments on a periodic basis. If management determines in the future that any -20- additional loss is other than temporary, the loss will be recognized and recorded in the statement of operations. In May 2002, the Company entered into contracts with third parties relating to its investment in 10.2 million VOD ADRs. Each contract, known as a variable prepaid forward, provides a collar to the stock price for five years and, taken together, the contracts allowed the Company to borrow an aggregate of $160 million against the stock. The collars limit the Company’s exposure to movement in the VOD ADR price through the use of floors and caps. The collars limit the Company’s downside risk to an average of $15.60 per share and limit the upside potential to an average of $23.68 per share. These contracts are accounted for as cash flow hedges in accordance with SFAS No. 133. At the expiration of each contract, the Company may settle the contract by delivering cash or VOD ADRs. These transactions are discussed in detail in Note 9 to the consolidated interim financial statements included herein. The following analysis presents the hypothetical change in the fair value of the Company’s marketable equity securities and derivative instruments at June 30, 2002, assuming the same hypothetical price fluctuations of plus and minus 10%, 20% and 30%. |
Valuation of investments June 30, Valuation of investments
($ in thousands) assuming indicated decrease 2002 assuming indicated increase
-30% -20% -10% Fair Value +10% +20% +30%
Marketable Equity
Securities $98,165 $112,188 $126,212 $140,235 $154,259 $168,282 $182,306
Derivative
Securities $47,436 $ 36,269 $ 24,999 $ 17,000 $ 2,254 $ (9,323) $(21,105)
CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe Company prepares its consolidated financial statements in accordance with GAAP. The Company’s significant accounting policies are discussed in detail in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from estimates under different assumptions or conditions. Management believes the following critical accounting policies reflect the most significant judgments and estimates used in the preparation of its consolidated financial statements. The Company makes estimates and assumptions in the determination of revenue. Unbilled revenues, resulting from wireless service provided from the billing cycle date to the end of each month and from other wireless carriers’ customers using the Company’s wireless systems for the last half of each month, are estimated and recorded. Certain activation and reconnection fees are recognized over average customer service periods. Although the Company does not expect any significant changes to average customer service periods, a material increase in churn rates associated with the customer base could affect future operating results. -21- In evaluating the collectibility of its trade receivables, the Company assesses a number of factors, including a specific customer’s ability to meet its financial obligations to the Company, as well as general factors, such as the length of time the receivables are past due and historical collection experience. Based on these assessments, the Company records both specific and general reserves for bad debt to reduce the related receivables to the amount the Company ultimately expects to collect from customers. If circumstances related to specific customers change or economic conditions worsen such that the Company’s past collection experience is no longer relevant, the Company’s estimate of the recoverability of its trade receivables could be further reduced from the levels provided for in the consolidated financial statements. The Company has notes receivable aggregating $45.8 million from Kington Management Corporation (“Kington”) that are due in June 2005. These notes relate to the purchase by Kington of certain of the Company’s minority interests in 2000. The value of the notes cannot increase, but may decrease, and is directly related to the to the future fair market value of the related interests. There may be substantial variability in the future market values of these interests and risk of decline in the value of the notes. Management continues to review the valuation on a periodic basis. The calculation of depreciation and amortization expense is based on the estimated economic useful lives of the underlying property, plant and equipment and intangible assets. The Company is currently updating its fixed asset accounting systems. This process, completion of which is expected by year-end 2002, will include taking an inventory of major fixed asset categories, which may result in book-to-physical adjustments. Although the Company believes it is unlikely that any significant changes to the useful lives of its tangible or definite-lived intangible assets will occur in the near term, rapid changes in technology or changes in market conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and the Company’s future consolidated operating results. The Company holds a substantial amount of marketable securities that are publicly traded and can have volatile share prices. The Company recently entered into a series of variable prepaid forward contracts to minimize the impact of such volatility on the value of its VOD ADRs, which comprise the majority of its investment in marketable securities. The marketable securities are adjusted to market value each period with the change in value of the securities reported as Other Comprehensive Income, net of income taxes, which is included in the stockholders’ equity section of the balance sheet. If management determined that any decline in value of any of the Company’s marketable securities other than the VOD ADRs was “other than temporary”, the unrealized loss included in other comprehensive income would be recognized and recorded as a loss in the statement of operations. Factors that management reviews in determining an other than temporary decline include the following: |
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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 OPERATIONS
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
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2002 2001 2002 2001
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(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Service $ 501,153 $ 461,162 $ 962,266 $ 885,121
Equipment sales 26,557 14,127 43,864 29,937
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Total Operating Revenues 527,710 475,289 1,006,130 915,058
------------ ------------ ------------ ------------
OPERATING EXPENSES
System operations 118,138 105,852 226,059 201,436
Marketing and selling 83,099 67,999 163,155 139,304
Cost of equipment sold 36,588 28,204 66,955 62,016
General and administrative 113,427 106,600 221,905 215,846
Depreciation 68,957 57,673 134,934 112,917
Amortization of intangibles 7,452 15,335 14,227 31,430
------------ ------------ ------------ ------------
Total Operating Expenses 427,661 381,663 827,235 762,949
------------ ------------ ------------ ------------
OPERATING INCOME 100,049 93,626 178,895 152,109
------------ ------------ ------------ ------------
INVESTMENT AND OTHER INCOME
Investment income 7,287 9,828 17,748 16,995
Amortization of licenses related
to investments -- (178) -- (354)
Interest income 1,375 2,294 2,413 7,816
Other income (expense), net 1,269 609 1,626 (1,711)
Interest (expense) (8,658) (8,702) (17,687) (17,523)
(Loss) on cellular and other investments (244,699) -- (244,699) --
------------ ------------ ------------ ------------
Total Investment and Other Income (243,426) 3,851 (240,599) 5,223
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST (143,377) 97,477 (61,704) 157,332
Income tax expense (benefit) (55,496) 37,238 (20,148) 64,426
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST (87,881) 60,239 (41,556) 92,906
Minority share of income (1,221) (2,870) (3,654) (5,149)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (89,102) $ 57,369 $ (45,210) $ 87,757
============ ============ ============ ============
BASIC WEIGHTED AVERAGE COMMON
AND SERIES A COMMON SHARES (000s) 86,083 86,311 86,068 86,150
BASIC EARNINGS PER COMMON AND
SERIES A COMMON SHARES $ (1.04) $ 0.66 $ (0.53) $ 1.02
============ ============ ============ ============
DILUTED EARNINGS PER COMMON AND
SERIES A COMMON SHARES $ (1.04) $ 0.65 $ (0.53) $ 1.01
============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
| -26- |
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended
June 30,
----------------------
2002 2001
---------- ----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (45,210) $ 87,757
Add (Deduct) adjustments to reconcile net income
(loss) to net cash provided by operating activities
Depreciation and amortization 149,161 144,347
Deferred income tax provision (57,519) 7,245
Investment income (17,748) (16,995)
Minority share of income 3,654 5,149
Loss on cellular and other investments 244,699 --
Other noncash expense 5,702 13,793
Change in assets and liabilities from operations
Change in accounts receivable (20,506) (9,166)
Change in inventory 26,785 14,127
Change in accounts payable (19,462) (38,264)
Change in accrued interest 504 690
Change in accrued taxes 31,652 3,461
Change in customer deposits and deferred revenues 9,798 (1,001)
Change in other assets and liabilities (4,719) 3,083
---------- ----------
306,791 214,226
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (236,061) (247,773)
System development costs (20,713) (4,359)
Refund of deposit from FCC 47,565 --
Acquisitions, excluding cash acquired (18,010) (98,450)
Distributions from unconsolidated entities 5,773 6,960
Other investing activities (2,097) (1,049)
---------- ----------
(223,543) (344,671)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from contracts payable 159,918 --
Borrowings from 1997 Revolving Credit Facility 57,444 41,000
Repayment of 1997 Revolving Credit Facility (306,444) --
Repurchase and conversion of LYONs (70) (17,221)
Repurchase of common shares -- (10,992)
Proceeds from Common Shares issued 644 3,108
Capital distributions to minority partners (3,616) (2,955)
Other financing activities (1,821) --
---------- ----------
(93,945) 12,940
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,697) (117,505)
CASH AND CASH EQUIVALENTS
Beginning of period 28,941 124,281
---------- ----------
End of period $ 18,244 $ 6,776
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
| -27- |
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents
General funds $ 9,135 $ 28,941
Affiliated cash equivalents 9,109 --
------------ ------------
18,244 28,941
Accounts Receivable
Customers, net of allowance 175,204 149,920
Roaming 69,958 78,572
Other 20,355 18,883
Inventory 29,217 55,996
Prepaid expenses 10,415 9,442
Deposit receivable from Federal
Communications Commission 8,494 56,060
Other current assets 7,526 6,141
------------ ------------
339,413 403,955
------------ ------------
INVESTMENTS
Licenses, net of accumulated amortization 877,195 858,791
Goodwill, net of accumulated amortization 473,975 473,975
Marketable equity securities 140,235 272,390
Other Investments
Investment in unconsolidated entities,
net of accumulated amortization 170,929 159,454
Notes and interest receivable - long-term 53,017 49,220
------------ ------------
1,715,351 1,813,830
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 2,495,210 2,253,016
Less accumulated depreciation 972,876 833,675
------------ ------------
1,522,334 1,419,341
------------ ------------
OTHER ASSETS AND DEFERRED CHARGES
System development costs,
net of accumulated amortization 115,406 108,464
Other, net of accumulated amortization 32,859 13,567
------------ ------------
148,265 122,031
------------ ------------
Total Assets $ 3,725,363 $ 3,759,157
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
| -28- |
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
(Dollars in thousands)
CURRENT LIABILITIES
1997 Revolving Credit Facility $ 15,000 $ 264,000
Accounts payable
Affiliates 2,274 4,018
Other 175,471 192,742
Customer deposits and deferred revenues 67,879 58,000
Accrued interest 8,361 7,857
Accrued taxes 40,089 8,362
Accrued compensation 18,465 22,185
Other current liabilities 18,954 19,974
------------ ------------
346,493 577,138
------------ ------------
LONG-TERM DEBT
6% zero coupon convertible debentures 144,274 140,156
7.25% unsecured notes 250,000 250,000
Contracts payable 159,962 --
Other 13,000 13,000
------------ ------------
567,236 403,156
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 384,114 388,296
Other 9,014 8,466
------------ ------------
393,128 396,762
------------ ------------
MINORITY INTEREST 48,167 46,432
------------ ------------
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 1,307,313 1,307,584
Treasury Shares, at cost (1,987,419
and 2,001,560 shares) (118,999) (122,010)
Accumulated other comprehensive loss (1,859) (78,997)
Retained earnings 1,095,832 1,141,040
------------ ------------
2,370,339 2,335,669
------------ ------------
Total Liabilities and Shareholders' Equity $ 3,725,363 $ 3,759,157
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
| -29- |
| UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| 1. | Basis of Presentation |
| The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K. |
| The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of June 30, 2002 and December 31, 2001, and the results of operations and cash flows for the six months ended June 30, 2002 and 2001. The results of operations for the six months ended June 30, 2002 and 2001, are not necessarily indicative of the results to be expected for the full year. |
| Certain amounts reported in prior years have been reclassified to conform to current period presentation. These reclassifications had no impact on previously reported operating revenue, net income and shareholders’ equity. |
| 2. | Significant Accounting Policy - Derivative Instruments |
| The Company utilizes derivative financial instruments to reduce market rate risks. The Company does not hold or issue derivative financial instruments for trading purposes. In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for Derivative Instruments and Hedging Activities,” which was amended in June 2000 by SFAS No. 138. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Changes in fair value of those instruments will be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in the fair value of the derivative and the effect on the consolidated financial statements will depend on its hedge designations and whether the hedge is anticipated to be effective in achieving offsetting changes in the fair value of the hedged item or cash flows of the asset or liability hedged. |
| 3. | Recent Accounting Pronouncements |
|
SFAS
No. 143 “Accounting for Asset Retirement Obligations” was issued in
June 2001, and will become effective for the Company beginning January 1, 2003.
SFAS No. 143 requires entities to record the fair value of a liability for legal
obligations associated with an asset retirement in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related
-30- UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. The Company is currently reviewing the requirements of this new standard and has not yet determined the impact, if any, on the Company’s financial position or results of operations. |
| Statement of Financial Accounting Standards No. 145 (“SFAS No. 145”) “Rescission of SFAS No. 4, 44, and 64 and Technical Corrections” was issued in April 2002 and is effective for fiscal years beginning after May 15, 2002 with early application encouraged. The provisions of SFAS No. 145 preclude gains and losses on the extinguishment of debt from being classified as extraordinary unless the criteria outlined in APB No. 30 “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met. The Company has elected to adopt SFAS No. 145 early and as a result will no longer report the retirement of LYONs debt as extraordinary. Prior year after-tax losses on LYONs debt retirements of $5.2 million for the six months ended June 30, 2001 and $1.5 million for the three months ended June 30, 2001, previously recorded as extraordinary items, have been reclassified as Other Income (Expense), Net in the Company’s statement of operations to conform with SFAS No. 145. |
| SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” was issued in June 2002 and will become effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and states that an entity’s commitment to an exit plan, by itself, does not create a present obligation that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The Company is currently reviewing the requirements of this new standard and has not yet determined the impact, if any, on the Company’s financial position or results of operations. |
| 4. | Earnings (Loss) Per Share |
| Net Income (Loss) used in computing Earnings per Common Share and the effect on income and the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows: |
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Dollars in thousands,
except per share amounts)
Net Income (Loss) Available to Common
used in Basic Earnings per Share $(89,102) $ 57,369 $(45,210) $ 87,757
======== ======== ======== ========
Weighted average number of Common Shares
used in Basic Earnings per Share (000's) 86,083 86,311 86,068 86,150
======== ======== ======== ========
Basic Earnings per Share $ (1.04) $ 0.66 $ (0.53) $ 1.02
======== ======== ======== ========
| -31- UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Dollars in thousands,
except per share amounts)
Net Income (Loss) used in Basic Earnings per Share $(89,102) $ 57,369 $(45,210) $ 87,757
Interest expense eliminated as a result of
the pro forma conversion of Convertible
Debentures, net of tax -- 1,411 -- 2,938
-------- -------- -------- --------
Net Income (Loss) Available to Common used in
Diluted Earnings per Share $(89,102) $ 58,780 $(45,210) $ 90,695
======== ======== ======== ========
Weighted average number of Common
Shares used in Basic Earnings per Share (000's) 86,083 86,311 86,068 86,150
Effect of Dilutive Securities:
Stock Options and Stock Appreciation Rights -- 237 -- 257
Conversion of Convertible Debentures -- 3,808 -- 3,808
-------- -------- -------- --------
Weighted Average Number of Common Shares
used in Diluted Earnings per Share 86,083 90,356 86,068 90,215
======== ======== ======== ========
Diluted Earnings Per Share $ (1.04) $ 0.65 $ (0.53) $ 1.01
======== ======== ======== ========
| 5. | Supplemental Cash Flow Information |
| The Company acquired three PCS licenses during the first six months of 2002 and one cellular market and six PCS licenses during the first six months of 2001. In conjunction with these acquisitions, the following assets were acquired. |
Six Months Ended
June 30,
----------------------
2002 2001
---------- ----------
(Dollars in thousands)
Cellular licenses $ 18,010 95,880
Property, plant, and equipment, net -- 2,570
---------- ----------
Decrease in cash due to acquisitions $ 18,010 $ 98,450
========== ==========
| The following summarizes certain noncash transactions and interest and income taxes paid. |
Six Months Ended
June 30,
----------------------------
2002 2001
---------- ----------
(Dollars in thousands)
Interest paid $ 12,178 $ 11,331
Income taxes paid 10,503 59,633
Noncash interest expense $ 4,596 $ 5,484
| -32- UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| 6. | Other Comprehensive (Loss) |
| The Company’s Comprehensive (Loss) includes Net Income, Unrealized (Losses) from Marketable Equity Securities that are classified as “available-for-sale” and derivatives. The following table summarizes the Company’s Comprehensive (Loss): |
Six Months Ended
June 30,
-----------------------
2002 2001
---------- ----------
(Dollars in thousands)
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period $ (78,997) $ (16,296)
---------- ----------
Add (Deduct):
Unrealized (losses) gains on marketable
equity securities (132,155) (131,291)
Unrealized gain on derivative instruments 17,000 --
Income tax effect 46,706 53,175
---------- ----------
Net unrealized (losses) (68,449) (78,116)
---------- ----------
Deduct (Add):
Recognized (loss) (244,699) --
Income tax effect 99,112 --
---------- ----------
(145,587) --
---------- ----------
Net change in unrealized (losses) gains
included in Comprehensive Income (Loss) 77,138 (78,116)
---------- ----------
Balance, end of period $ (1,859) $ (94,412)
========== ==========
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(Dollars in thousands)
Comprehensive Income (Loss)
Net Income (Loss) $ (89,102) $ 57,369 $ (45,210) $ 87,757
Net change in unrealized gains
(losses) on marketable equity
securities and
derivative instruments 125,618 (24,544) 77,138 (78,116)
--------- --------- --------- ---------
$ 36,516 $ 32,825 $ 31,928 $ 9,641
========= ========= ========= =========
| 7. | Marketable Equity Securities |
| Marketable equity securities include the Company’s investments in equity securities, primarily Vodafone AirTouch plc American Depository Receipts (“VOD ADRs”) and Rural Cellular Corporation common shares. These securities are classified as available-for-sale and stated at fair market value. |
| In May 2002, the Company entered into contracts with third parties relating to its investment in 10.2 million VOD ADRs. Each contract, known as a variable prepaid forward, provides a collar to the stock price for five years and, taken together, the contracts allowed the |
|
-33- UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Company to borrow an aggregate of $160 million against the stock. The collars limit the Company’s exposure to movement in the VOD ADR price through the use of floors and caps. The collars limit the Company’s downside risk to an average of $15.60 per share and limit the upside potential to an average of $23.68 per share. These contracts are accounted for as cash flow hedges in accordance with SFAS No. 133. At the expiration of each contract, the Company may settle the contract by delivering cash or VOD ADRs. |
| Information regarding the Company's marketable equity securities is summarized below. |
June 30, December 31,
2002 2001
---------- ----------
(Dollars in thousands)
Available-for-sale Marketable Equity Securities
Aggregate Fair Value $ 140,235 $ 272,390
Accounting Cost Basis* 160,362 405,061
---------- ----------
Gross Holding (Losses) (20,127) (132,671)
Tax Effect (8,153) (53,674)
---------- ----------
Holding (Losses), net of tax $ (11,974) $ (78,997)
========== ==========
* The accounting cost basis of the marketable equity securities was reduced,
recognizing the other than temporary loss of $244,699 in the first six months of
2002
| 8. | Investment in Goodwill |
| The Company has substantial amounts of goodwill as a result of the acquisition of wireless licenses and markets. U.S. Cellular’s goodwill is related to various acquisitions structured to be tax-free. No deferred taxes have been provided on this goodwill. The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets” on January 1, 2002, and no longer amortizes licenses and goodwill. Prior periods have been revised to conform to current period presentation. Pursuant to SFAS No. 142, the Company assessed its recorded balances of investments in licenses and goodwill for potential impairment in the first quarter of 2002. No impairment charge was required as of January 1, 2002. The changes in the carrying amount of goodwill for the three and six months ended June 30, 2002 and 2001, were as follows. |
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Dollars in thousands)
Balance, beginning of period $ 473,975 $ 450,553 $ 473,975 $ 400,967
Net additions -- 33,854 -- 86,209
Amortization -- (3,493) -- (6,262)
---------- ---------- ---------- ----------
Balance, end of period $ 473,975 $ 480,914 $ 473,975 $ 480,914
========== ========== ========== ==========
| Investments in unconsolidated entities, accounted for under the equity method, also included goodwill of $24.6 million at June 30, 2002 and December 31, 2001. |
| -34- UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Net income and income adjusted to exclude license and goodwill amortization expense, net of tax, recorded in the three and six months ended June 30, 2002 and 2001 is summarized below. |
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Dollars in thousands,
except for share amounts)
Net Income (Loss) $(89,102) $ 57,369 $(45,210) $ 87,757
Amortization adjustment net
to tax and minority interest
effect of:
License Costs -- 3,680 -- 8,111
Goodwill -- 2,424 -- 4,320
Equity method goodwill -- 126 -- 246
-------- -------- -------- --------
Adjusted Income (Loss) $(89,102) $ 63,599 $(45,210) $100,434
======== ======== ======== ========
Basic earnings per share:
Net Income (Loss) $ (1.04) $ 0.66 $ (0.53) $ 1.02
Amortization of license costs -- 0.04 -- 0.09
Amortization of goodwill -- 0.03 -- 0.05
-------- -------- -------- --------
Adjusted Net Income (Loss) $ (1.04) $ 0.73 $ (0.53) $ 1.16
======== ======== ======== ========
Diluted earnings per share:
Net Income (Loss) $ (1.04) $ 0.65 $ (0.53) $ 1.01
Amortization of license costs -- 0.04 -- 0.09
Amortization of goodwill -- 0.03 -- 0.05
-------- -------- -------- --------
Adjusted Net Income (Loss) $ (1.04) $ 0.72 $ (0.53) $ 1.15
======== ======== ======== ========
| 9. | Treasury Shares |
| In 2000, the Company authorized the repurchase of up to 4.2 million of its Common Shares through three separate 1.4 million share programs. The Company may use repurchased shares to fund acquisitions and for other corporate purposes. |
| As of June 30, 2002, the Company had repurchased 4,139,000 Common Shares under these and other authorized programs. No shares were repurchased in the first six months of 2002 or 2001. |
| -35- UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| 10. | Variable Prepaid Forward |
| Forward contracts for forecasted transactions are designated as cash flow hedges and recorded as assets or liabilities on the balance sheet at their fair value. The fair value of the financial instruments is generally determined by using the Black-Scholes model. For contracts designated as cash flow hedges, changes in the contract’s fair value are recognized in accumulated other comprehensive income until they are recognized in earnings at the time the forecasted transaction occurs. If the forecasted transaction does not occur, or it becomes probable that it will not occur, the gain or loss on the related cash flow hedge is recognized in earnings at that time. No components of the contracts are excluded in the measurement of hedge effectiveness for cash flow hedges. The critical terms of the variable prepaid forward contracts are the same as the underlying forecasted transactions; therefore, changes in the fair value of the variable prepaid forward contracts are anticipated to be effective in offsetting changes in the expected cash flows from the forecasted transactions. No gains or losses related to ineffectiveness of cash flow hedges were recognized in earnings for the six months ended June 30, 2002. |
| The Company entered into prepaid forward contracts with four financial institutions to sell, collectively, its 10,245,370 VOD ADRs for aggregate proceeds of $159.9 million. The contracts mature in May 2007 and, at the Company’s option, may be settled in stock or cash. There was no net premium received on these contracts because they were zero cost collars. The contracts payable bear interest (payable quarterly) at LIBOR plus 0.5%. The contracts “collar” or limit the Company’s exposure to movements in the price of VOD ADRs. U.S. Cellular will account for these collars as cash flow hedges. |
| At June 30, 2002, the Company had recorded $17.0 million of derivative assets because the share price was below the floor for all the contracts. The derivative assets are reported in the Company’s balance sheet in Other Assets and Deferred Charges at June 30, 2002. The risk associated with these transactions is the cost of replacing the agreements, at current market rates, in the event of default by the counterparties. Management believes the risk of incurring such losses is remote. |
| 11. | 2002 Revolving Credit Facility |
| The Company has obtained a five-year credit facility, amended in July 2002 to provide up to $325 million in financing (the “2002 Revolving Credit Facility”), which may be used to finance the purchase of PrimeCo and for other purposes. The 2002 Revolving Credit Facility permits revolving loans on terms and conditions substantially similar to the Company’s 1997 Revolving Credit Facility, except for the interest rate and certain additional provisions. The terms of the 2002 Revolving Credit Facility provide for borrowings with interest at LIBOR plus a margin percentage based on the Company’s credit rating. Based on its current credit rating, the margin percentage is 55 basis points (for a rate of 2.39% as of June 30, 2002). Also, the Company needs to comply with certain financial covenants. The covenants include limitations on the ratios of funded debt to capitalization; earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest expense; and funded debt to EBITDA. The 2002 Revolving Credit Facility places other requirements on the Company, including the sale or placement of at least $175 million of debt securities on terms reasonably satisfactory to the lenders. |
|
-36- UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| 12. | Acquisition of Chicago 20 MHz |
| On August 7, 2002, the Company completed the acquisition of all of the equity interests in Chicago 20MHz, LLC (“Chicago 20MHz”), including the assets and certain liabilities of Chicago 20MHz, from PrimeCo Wireless Communications LLC (“PrimeCo”). Chicago 20MHz operates the PrimeCo wireless system in the Chicago Major Trading Area (“MTA”). Chicago 20MHz is the holder of certain FCC licenses, including a 20 megahertz PCS license in the Chicago MTA (excluding Kenosha County, Wisconsin) covering a total population of 13.2 million. The purchase price was approximately $610 million, subject to certain working capital and other adjustments. The Company financed the purchase using its revolving lines of credit, proceeds from $175 million in 30-year notes initially purchased by the sellers and proceeds from a $105 million loan from TDS. In May 2002, the Company raised approximately $160 million in cash when it entered into variable prepaid forward contracts related to its VOD ADRs; the proceeds from these contracts were initially used to pay down balances outstanding under the Company’s 1997 Revolving Credit Facility. |
| -37- |
PART II. OTHER INFORMATIONItem 1. Legal Proceedings. The Company is involved in a number of legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain wireless telephone systems and other interests. The Company does not believe that any of these proceedings should have a material adverse impact on the Company. Item 4. Submission of Matters to a Vote of Security-Holders. At the Annual Meeting of Shareholders of USM, held on May 16, 2002, the following number of votes were cast for the matters indicated: |
| 1. | a. | For the election of two Class III Directors of the Company by the holder of Series A Common Shares: |
| Nominee | For | Withold | Broker Non-vote |
| LeRoy T. Carlson, Jr. | 330,058,770 | -0- | -0- |
| Walter C.D. Carlson | 330,058,770 | -0- | -0- |
| b. | For the election of one Class III Director of the Company by the holders of Common Shares: |
| Nominee | For | Withhold | Broker Non-vote |
| J. Samuel Crowley | 51,201,567 | 321,529 | -0- |
| -38- |
|
Item 6. Exhibits and Reports on Form 8-K. |
| (a) | Exhibits: |
| Exhibit 4.2 – Notice of Increase in Total Commitment under the Revolving Credit Agreement dated as of June 26, 2002. |
| Exhibit 4.3 – First Supplemental Indenture of United States Cellular Corporation dated August 7, 2002 relating to its 9% Series A Notes due 2032. |
| Exhibit 4.4 – Note Purchase Agreement between United States Cellular Corporation and PrimeCo Wireless Communications LLC. |
| Exhibit 4.5 – Registration Rights Agreement between United States Cellular Corporation and PrimeCo Wireless Communications LLC. |
| Exhibit 4.6 – Note Purchase Agreement between United States Cellular Corporation and Telephone and Data Systems, Inc. |
| Exhibit 4.7 – Subordination Agreement dated as of June 26, 2002 among Telephone and Data Systems, Inc., United States Cellular Corporation and Toronto Dominion (Texas), Inc. |
| Exhibit 10.1 – Amended and Restated CDMA Master Supply Agreement between United States Cellular Corporation and Nortel Networks Inc. |
| Exhibit 11 - Statement regarding computation of per share earnings is included herein as footnote 4 to the financial statements. |
| Exhibit 12 - Statement regarding computation of ratios. |
| Exhibit 99.1 – Chief Executive Officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| Exhibit 99.2 – Chief Financial Officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
| Exhibit 99.3 – Press release dated August 7, 2002, announcing the completion of the purchase of all of the equity interests in Chicago 20MHz from PrimeCo. |
| (b) | Reports on Form 8-K filed during the quarter ended June 30, 2002: |
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The Company filed a Current Report on Form 8-K, dated May 23, 2002, for the purpose of announcing a change in independent auditors. U.S. Cellular dismissed Arthur Andersen LLP and engaged PricewaterhouseCoopers LLP. The change in auditors became effective May 24, 2002. The Company filed a Current Report on Form 8-K, dated June 12, 2002, for the purpose of filing a news release. The news release, dated June 12, 2002, announced that United States Cellular Corporation recognized an investment loss on its marketable equity securities. |
| -39- |
| SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
| UNITED STATES CELLULAR CORPORATION |
| (Registrant) |
| Date August 12, 2002 | /s/ Kenneth R. Meyers |
| Kenneth R. Meyers Executive Vice President-Finance and Treasurer (Chief Financial Officer) |
| Date August 12, 2002 | /s/ John T. Quille |
| John T. Quille Vice President and Controller (Principal Accounting Officer) |
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