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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: Second quarter and six months ended June 30, 1999.

Operations: USM operates cellular markets throughout the United States. As of June 30, 1999, it held majority or minority interests in 182 markets (26.26 million population equivalents). Consolidated operations included 138 majority-owned markets (23.7 million pops) with 2.36 million customers and a market penetration of 9.58%.

Key Financial Metrics (Six Months Ended June 30, 1999)

Debt Structure: Includes $250 million in 7.25% unsecured notes (due 2007) and $289.9 million in 6% zero-coupon convertible debentures (LYONs). A $500 million revolving credit facility remains fully unused.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 28% ($151.7 million), driven by a 23% increase in the customer base (2.36 million vs. 1.92 million) and an 81% surge in inbound roaming minutes due to "one-rate" programs by competitors.
• Non-Operating Gains: Investment and other income rose to $273.2 million, primarily due to a $260.7 million gain on the sale of cellular investments resulting from the AirTouch Communications (ATI) merger with Vodafone Group plc (VOD).
• Expense Increases: Operating expenses rose 24% ($110.4 million). System operations costs increased 35% due to higher customer usage and a 16% increase in cell sites. Marketing costs rose 20%, partly due to a rebranding effort (United States Cellular to U.S. Cellular).
• Profitability: Operating income increased 50% ($41.3 million). Net income increased 37% ($60.2 million), heavily influenced by the after-tax gain on the ATI-VOD merger ($156.4 million).

Guidance, Outlook, and Risks

• Revenue Outlook: Management expects service revenues to continue growing but anticipates a decline in average monthly revenue per customer for the full year 1999 due to decreasing revenue per minute for both local retail and inbound roaming.
• Customer Growth: Future customer growth is expected to slow due to increased competition from Personal Communications Services (PCS) operators entering USM markets.
• Capital Requirements: The 1999 construction and system expansion budget is approximately $300 million. Remaining capital spending for the year is estimated at $138 million, to be funded by operating cash flow and divestiture proceeds.
• Year 2000 Compliance: The company is in the validation and implementation phases of its Y2K remediation. Total direct costs are estimated at $3.5 million to $5 million. Management believes material disruption is unlikely but acknowledges risks related to third-party vendors and network interconnectivity.
• Market Risk: The company holds $411.1 million in marketable equity securities (primarily VOD ADRs). A hypothetical 10% price decrease would reduce the portfolio value by $41.1 million.

Investor Verification Checklist

• Quality of Earnings: Verify the sustainability of net income by excluding the $156.4 million after-tax gain from the ATI-VOD merger; core net income was $66.3 million.
• Revenue Per Minute Trends: Monitor the continued decline in average revenue per minute for local retail and roaming, which management expects to persist.
• Competition Impact: Assess the impact of new PCS entrants on customer churn and growth rates in key markets.
• Capital Expenditures: Confirm that the $300 million capital budget is being executed efficiently to support digital conversion and capacity expansion.
• Y2K Contingency: Review the status of third-party vendor compliance and the company's contingency plans for network failures.