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Business Context and Reporting Period

Company: United States Cellular Corporation (USM), an 80.9%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).

Reporting Period: Quarterly period ended March 31, 1999 (Form 10-Q).

Operations: USM owns, operates, and invests in cellular markets across the United States. As of March 31, 1999, the Company held interests in 182 markets (26.5 million population equivalents), with 138 majority-owned consolidated markets (23.7 million pops) and 38 minority interests accounted for via the equity method.

Key Financial Metrics

Liquidity: The Company maintains a $500 million Revolving Credit Facility, which was entirely unused as of March 31, 1999. The Company also holds $400.9 million in marketable equity securities (primarily AirTouch stock).

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 33% ($80.8 million) driven by a 25% increase in the customer base (2.27 million vs. 1.82 million) and a 72% surge in inbound roaming minutes.
• Net Income Decline: Net income decreased 79% ($101.9 million) compared to Q1 1998. This decline is primarily due to the absence of $180.0 million in gains from the sale of cellular interests recorded in Q1 1998. Excluding these one-time gains, underlying net income increased from $19.5 million in 1998 to $27.8 million in 1999.
• Operating Expenses: Total operating expenses rose 29% ($61.9 million). Notable increases include customer usage expenses (up 84% due to expanded service footprints and outbound roaming costs) and general and administrative expenses (up 35% due to staff expansion and start-up costs for new Communications Centers).
• Customer Metrics: Average monthly revenue per customer increased 6% to $47.18, though average revenue per minute of use declined due to competitive pricing pressures.

Guidance, Outlook, and Risks

• Outlook: Management expects service revenues to continue growing in 1999 but anticipates a decrease in average monthly revenue per customer for the full year due to declining per-minute rates. Customer growth is expected to slow as competition increases.
• Capital Requirements: The 1999 construction and system expansion budget is approximately $300 million. The Company plans to fund this primarily through internally generated cash, proceeds from divestitures, and short-term borrowings.
• Year 2000 Issue: The Company is actively addressing Y2K compliance with a total estimated direct cost of $3 million to $5 million. Renovation of mission-critical systems is on schedule for completion in Q3 1999, with implementation expected in Q4 1999. Risks include potential service interruptions if third-party vendors fail to comply.
• Market Risk: The Company holds significant marketable equity securities ($400.9 million). A hypothetical 10% decrease in share prices would result in a $40.1 million decline in market value. The Company has no interest rate derivatives to hedge its fixed-rate debt.
• Divestitures: A pending divestiture of a majority interest in one market (completed in April 1999) is expected to generate $39.4 million in cash with no gain or loss recorded.

Investor Verification Checklist

• One-Time Gains: Verify the exclusion of the $180 million gain on sale of cellular interests from Q1 1998 when comparing year-over-year profitability.
• Roaming Economics: Assess the sustainability of the 72% increase in inbound roaming minutes and the impact of declining per-minute rates on future margins.
• Capital Intensity: Confirm the ability to fund the $300 million 1999 capital budget given the current cash flow and unused credit facility.
• Y2K Contingency: Review the status of third-party vendor compliance and the Company's contingency plans for potential service disruptions.
• Equity Portfolio: Monitor the valuation of the $400.9 million AirTouch equity holding, which represents a significant portion of the Company's investment portfolio.