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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended __________March 31, 1994___________________
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to
______________________
Commission File Number 1-9712
__________________________________________________________________________
UNITED STATES CELLULAR CORPORATION
__________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 62-1147325
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 399-8900
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.
Class Outstanding at April 29, 1994
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Common Shares, $1 par value 43,901,378 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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UNITED STATES CELLULAR CORPORATION
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1ST QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
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Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-14
Consolidated Statements of Operations -
Three Months Ended March 31, 1994 and 1993 15
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1994 and 1993 16
Consolidated Balance Sheets -
March 31, 1994 and December 31, 1993 17-18
Notes to Consolidated Financial Statements 19-22
Part II. Other Information 23
Signatures 24
Part 1. FINANCIAL INFORMATION
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS
----------------------
United States Cellular Corporation (the "Company" or "USM") owns, operates
and invests in cellular markets throughout the United States. USM owns or
has the right to acquire both majority and minority interests in 205
cellular markets at March 31, 1994, representing 23,642,000 population
equivalents ("pops"). USM managed the operations of 139 cellular markets
at March 31, 1994 and expects to manage the operations of four additional
markets in the future. Interests in the 62 remaining markets are managed
by others. All 62 of these markets were served by operational systems at
March 31, 1994. The following table is a summary of the Company's markets
and consolidated operations.
-2-
UNITED STATES CELLULAR CORPORATION
Three Months Ended
March 31, 1994 March 31, 1993
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Majority-Owned, Managed and
Consolidated Markets: (1)
Population equivalents (in
thousands) (2) 18,521 16,217
Total population (in thousands) 19,927 17,338
Customers 294,000 173,800
Market penetration 1.48% 1.00%
Markets in operation 120 101
Cell sites in service 566 362
Average monthly revenue per
customer $76 $79*
Churn rate per month 2.3% 2.1%
Marketing cost per net customer
addition $711 $798
Minority-Owned and Managed
Markets: (3)
Population equivalents (in
thousands) (2) 980 1,285
Markets in operation 19 22
Markets to be Managed: (4)
Population equivalents (in
thousands) (2) 734 1,252
Markets 4 11
Total Markets Managed and to be
Managed by USM:
Population equivalents (in
thousands) (2) 20,235 18,754
Markets 143 134
Markets Managed by Others: (5)
Population equivalents (in
thousands) (2) 3,407 3,400
Markets in operation 62 62
Total Markets:
Population equivalents (in
thousands) (2) 23,642 22,154
Markets 205 196
* 1993 average monthly revenue per customer has been restated to conform
to current year presentation.
-3-
(1) Includes one market managed by a third party in 1994 and 1993, and
one wholly owned reseller operation in 1993.
(2) 1993 Donnelley Marketing Service estimates are used for all years.
Includes population equivalents relating to interests which are
acquirable in the future.
(3) Includes markets where the Company has the right to acquire an
interest but did not own an interest at the respective dates (two
markets in 1994 and four in 1993).
(4) Represents markets which are not yet operational or which are managed
by third parties until the Company acquires a majority interest in
the markets.
(5) Represents markets in which the Company owns or has the right to
acquire a minority or other noncontrolling interest and which are
managed by others.
The Company's consolidated results of operations include 100% of the
revenues and expenses of the systems serving majority-owned and managed
markets plus its corporate office operations. The March 31, 1994
consolidated results of operations include 120 markets with a total
population of 19.9 million, compared to 101 markets with a total
population of 17.3 million in 1993.
Investment income includes the Company's share of the net income or loss
of the minority-owned and managed markets and also includes the Company's
share of the net income or loss of those markets managed by others for
which the Company follows the equity method of accounting. USM follows
the cost method of accounting for its remaining interests in markets
managed by others. This information is shown in the table below.
March 31,
1994 1993
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Minority-owned and Managed 17 18
Managed by Others - Equity Method 16 16
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Total Markets Included in Investment 33 34
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Managed by Others - Cost Method 46 47
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Operating results for the first quarter of 1994 primarily reflect
improvement in the Company's more established markets (those 101 markets
consolidated at March 31, 1993), the acquisition of majority interests in
17 operational markets and the start-up expenses associated with
initiating operations in three additional majority-owned and managed
markets since March 31, 1993. Operating revenues, driven primarily by
increases in customers served, rose $24.8 million, or 60%. Operating
expenses rose $22.4 million, or 50%. Operating cash flow (operating loss
before minority share plus depreciation and amortization expense)
increased $7.4 million, or 117%. The Company changed its financial
reporting presentation for outbound, or pass-through, roamer revenue
during the first quarter of 1994. Pass-through roamer revenue is now
treated as an offset to the expense charged by other cellular carriers to
the Company's markets for this roaming service, and the net amount is
included in system operations expense. Service revenues and system
operations expense for 1993 have been reclassified for the effect of this
change in presentation. This change in presentation will allow more
comparability of the Company's revenues and margins to other companies in
the cellular industry.
Investment and other income increased $2.3 million due primarily to
increases in investment income. Investment income increased $2.1 million
mostly due to improved results in markets managed by others. Interest
expense decreased $3.7 million primarily due to a reduction in the
-4-
amount owed under a Revolving Credit Agreement with USM's parent company,
Telephone and Data Systems, Inc. ("TDS"), as a result of the Company's
1993 rights offering. USM used financing from TDS as a major source of
external funding requirements during the first quarter of 1994. Net loss
totaled $1.8 million in 1994 compared to $9.2 million in 1993, primarily
reflecting improved operating results, increased investment income and
decreased interest expense.
The Company expects to add 11 markets to consolidated operations by the
end of 1994. The Company currently owns a minority interest in and
manages eight of these markets. The Company expects to acquire a majority
interest in these eight markets and one additional market and begin
operations in two markets in which it currently owns a majority interest
by the end of 1994. Management anticipates that operating losses from and
funding requirements for these markets and for markets which recently
began operations could result in operating losses for the Company over the
next several quarters.
Operating Revenues
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Operating revenues totaled $66.2 million in 1994, up $24.8 million, or
60%, over 1993. The effect of market acquisitions and start-ups increased
operating revenues $7.6 million, or 18%, in 1994. This effect is defined
as: (i) the operations of markets added to the consolidated group in 1994
since their respective dates of acquisition, plus (ii) for any market
added to the consolidated group in 1993, the portion of 1994 operations
which correspond to that portion of 1993 prior to the market's addition to
the consolidated group.
Service revenues primarily consist of: (i) charges for access, airtime and
value-added services provided to the Company's local retail customers who
use the local systems operated by the Company; (ii) charges to customers
of other systems who use the Company's cellular systems when roaming
("inbound roamer"); and (iii) charges for long-distance calls made on the
Company's systems. Service revenues exclude pass-through roamer revenue
as discussed above. Service revenues for 1993 have been reclassified to
conform to current year presentation. Service revenues totaled $63.4
million in 1994, up $24.2 million, or 62%, over 1993. The increase was
primarily due to the growing number of local retail customers and the
growth in inbound roamer revenue. The effects of acquisitions increased
service revenues $7.1 million, or 18%, in 1994. Average monthly service
revenue per customer totaled $76 in 1994 compared to $79 in 1993. The 4%
decrease in average monthly service revenue per customer in 1994 was
primarily a result of the decline in average local minutes of use per
retail customer and a decrease in per customer inbound roamer revenue.
Management anticipates that average monthly service revenue per customer
will continue to decrease as local minutes of use per customer decline and
as the growth rate of the Company's customer base exceeds the growth rate
of inbound roamer revenue.
Revenue from local customers' usage of USM's systems increased $14.9
million, or 63%, in 1994. Growth in the number of customers in the
systems serving the Company's consolidated markets was the primary reason
for the increase in local revenue. The number of customers increased 69%
to 294,000 at March 31, 1994 from 173,800 at March 31, 1993. Excluding
the effects of acquisitions and dispositions, the Company's consolidated
markets added 100,000 customers since March 31, 1993. Of these additions,
86,800 were in markets in service and consolidated at March 31, 1993,
representing a 50% increase over the 173,800 customers served at March 31,
1993. While the percentage increase is expected to be lower in future
periods, management
-5-
anticipates that the total number of net customer additions will increase.
The effects of acquisitions increased local revenue $4.1 million, or 17%,
in 1994.
Average monthly retail revenue per customer declined to $46 in 1994 from
$48 in 1993. Monthly local minutes of use per customer averaged 89 in
1994 compared to 100 in 1993. This decline in average local minutes of
use follows an industry-wide trend and is believed to be related to the
tendency of the early customers in a market to be the heaviest users. It
also reflects the Company's and the industry's continued penetration of
the consumer market, which tends to include more lower-usage customers.
Inbound roamer revenue increased $7.2 million, or 57%, in 1994. This
increase was attributable to the rise in the number of customers from
other systems using the Company's systems when roaming. Also contributing
were the increased number of Company-managed systems and cell sites within
those systems. Monthly inbound roamer revenue per customer averaged $24
in 1994 and $25 in 1993. The effects of acquisitions increased inbound
roamer revenue $2.5 million, or 20%, in 1994.
Long-distance revenue increased $2.1 million, or 95%, in 1994 as the
volume of long-distance calls billed by the Company increased. Monthly
long-distance revenue per customer averaged $5 in 1994 and 1993.
Equipment sales revenues totaled $2.9 million in 1994, up $537,000, or
23%, over 1993. Equipment sales reflect the sale of 28,700 and 11,700
cellular telephone units in 1994 and 1993, respectively, plus installation
and accessories revenue. The average revenue per unit was $100 in 1994
compared to $200 in 1993. The average revenue per unit decline partially
reflects the Company's decision to reduce sales prices on cellular
telephones to increase the number of customers, to maintain its market
position and to meet competitive prices as well as to reflect reduced
manufacturers' prices. Also, during the first quarter of 1994, the
Company used promotions which were based on increased equipment
discounting. The success of these promotions led to both an increase in
units sold and a decrease in average equipment sales revenue per unit.
The effects of acquisitions increased equipment sales revenues $483,000,
or 21%, in 1994.
Operating Expenses
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Operating expenses totaled $67.2 million in 1994, up $22.4 million, or
50%, over 1993. The effect of market acquisitions and start-ups increased
expenses $10.2 million, or 23%, in 1994.
System operations expenses increased $2.9 million, or 42%, in 1994 as a
result of increases in customer usage expenses and costs associated with
operating the Company's increased number of cellular systems and with the
increased number of cell sites within those systems. System operations
expense includes pass-through roamer revenue as an offset to the expense
charged by other carriers to the Company's markets for this roaming
service. System operations expense for 1993 has been reclassified to
conform to current year presentation. Costs are expected to continue to
increase as the number of cell sites within the Company's systems grows.
Customer usage expenses represent charges from other telecommunications
service providers for USM's customers' use of their facilities as well as
for the Company's inbound roamer traffic on these facilities, offset
somewhat by pass-through roamer revenue. These expenses include local
interconnection to the landline network, toll charges and roamer expenses
from the Company's customers' use of systems other than their local
systems. Customer usage expenses were $4.1
-6-
million in 1994 compared to $3.7 million in 1993, and represented 7% of
service revenues in 1994 and 9% in 1993. Maintenance, utility and cell
site expenses grew $2.4 million, or 76%, in 1994, primarily reflecting
increases in the number of cell sites in the systems serving all majority-
owned and managed markets, from 362 in 1993 to 566 in 1994. The effects
of acquisitions increased system operations expenses $2.0 million, or 29%,
in 1994.
Marketing and selling expenses increased $4.7 million, or 51%, in 1994.
Marketing and selling expenses primarily consist of salaries, commissions
and expenses of field sales and retail personnel and offices; agent
commissions; promotional expenses; local advertising; and public relations
expenses. The 1994 increase was primarily due to a 91% rise in the number
of gross customer activations, from 24,000 in the first quarter of 1993 to
46,000 in 1994. Excluding acquisitions, the Company added 27,000 net new
customers in 1994 compared to 13,600 in 1993, a 99% increase. The effects
of acquisitions increased marketing and selling expenses $2.3 million, or
25%, in 1994.
Cost of equipment sold increased $4.1 million, or 107%, in 1994. The
increase reflects the growth in unit sales related to both the rise in
gross customer activations made through the Company's direct and retail
distribution channels and the first quarter 1994 promotional sales which
were discussed previously, offset somewhat by falling manufacturer prices
per unit. The average cost to the Company of a telephone unit sold,
including accessories and installation, was $279 in 1994 compared to $331
in 1993. The effects of acquisitions increased cost of goods sold $1.1
million, or 29%, in 1994.
General and administrative expenses increased $5.6 million, or 37%, in
1994. These expenses include the cost of operating the Company's local
business offices and its corporate expenses. This increase includes the
effects of an increase in the number of consolidated markets, increases in
expenses required to serve the growing customer base in existing markets
and an expansion of both local office and corporate staff, necessitated by
growth in the Company's business and the start-up and acquisition of
additional operations. The Company is using an ongoing clustering
strategy to combine local operations wherever feasible in order to gain
operational efficiencies and reduce its administrative expenses. The
effects of acquisitions increased direct field-related general and
administrative expenses $2.7 million, or 18%, in 1994.
Depreciation expense increased $3.1 million, or 55%, in 1994, reflecting
an increase in the average fixed asset balance of 54% since March 31,
1993. The effects of acquisitions increased depreciation expense
$859,000, or 16%, in 1994.
Amortization of intangibles increased $2.0 million, or 47%, in 1994,
primarily due to an increase in license costs as a result of the
acquisitions of or the commencement of service in 20 markets since March
31, 1993. License costs related to consolidated markets increased $259
million, or 41%, since March 31, 1993. The effects of acquisitions
increased amortization of intangibles $1.3 million, or 32%, in 1994.
Operating Loss before Minority Share
------------------------------------
Operating loss before minority share totaled $1.0 million in 1994 compared
to $3.4 million in 1993. The operating loss margin (as a percent of
service revenues) improved to (2%) in 1994 from (9%) in 1993. The
decrease in the 1994 operating loss reflects improved results in the more
established markets and increased revenues resulting from the growth in
the number of customers served by the Company's systems, partially offset
by costs associated with the growth
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of the Company's operations and increased losses on equipment sales. The
effects of acquisitions contributed $2.6 million to the operating loss
before minority share in 1994.
The Company expects service revenues to continue to grow during 1994 as it
adds customers and cell sites to its existing systems, realizes a full
year of revenues from customers and cell sites added in 1993, completes
acquisitions of operational systems and begins operations in new markets.
Additionally, the Company expects expenses to increase significantly in
1994 as it incurs expenses for markets and cell sites added in 1993,
incurs expenses associated with customer and system growth, acquires
existing markets and initiates service in new markets. At least 11
markets are expected to be added to consolidated operations before the end
of 1994. Of these, nine markets (eight of which are currently minority-
owned and managed by the Company) were operational at March 31, 1994. The
Company expects to acquire a majority interest in these markets, and begin
operations in two markets in which it currently owns a majority interest,
before the end of 1994. Upon the commencement of operations in the new
markets and upon completion of any related acquisitions, the Company will
begin to amortize the related license costs. The Company expects that the
costs related to acquiring, constructing and operating its markets may
exceed revenues over the next few quarters. As a result, operating losses
before minority share could be generated over the next several quarters.
Investment and Other Income
----------------------------
Investment and other income totaled $5.3 million in 1994 and $3.0 million
in 1993. Investment income was $5.2 million in 1994, a $2.1 million, or
69%, increase over 1993. The Company's share of the income or loss from
the markets managed by others that are accounted for by the equity method
totaled $5.1 million in 1994 compared to $3.3 million in 1993. There were
16 such markets in 1994 and 1993. The Company's share of income from
minority-owned markets it manages totaled $71,000 in 1994 compared to
losses of $239,000 in 1993. There were 17 such markets in 1994 and 18 in
1993.
Interest and Income Taxes
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Interest expense decreased $3.7 million, or 48%, in 1994, on a 52%
decrease in the average amount of debt outstanding. Interest expense is
primarily related to borrowings under the Revolving Credit Agreement with
TDS and borrowings under a vendor financing agreement. Borrowings under
the Revolving Credit Agreement bear interest at a floating rate equal to
prime plus 1.5% (for a rate of 7.75% at March 31, 1994) and are used to
finance the acquisitions of cellular interests, system construction and
working capital requirements, and investments in and advances to entities
in which the Company has a minority interest. In the fourth quarter of
1993, the Company completed a rights offering to its common shareholders
the proceeds of which were used to repay approximately $378 million in
debt outstanding under the Revolving Credit Agreement. Interest expense
relating to the Revolving Credit Agreement was $3.0 million in 1994 and
$6.6 million in 1993. The average amount of debt outstanding under the
Revolving Credit Agreement was $164.3 million in the first quarter of 1994
and $345.6 million in 1993. The average interest rate on such debt was
7.4% in 1994 and 7.6% in 1993.
Most of the borrowings under the vendor financing agreement bear interest
at a rate of 2.3% over the 90-day Commercial Paper Rate of high-grade,
unsecured notes (for a rate of 6.2% at March 31, 1994). The remainder of
such borrowings bear interest at a rate approximating the prime rate
(6.25% at March 31, 1994). Borrowings under the vendor financing
agreement were used to finance certain of USM's equipment purchases and
construction costs. Interest expense related
-8-
to the vendor financing agreement was approximately $902,000 in 1994 and
$1.1 million in 1993. The average amount of debt under the vendor
financing agreement was $61.0 million in the first quarter of 1994 and
$68.3 million in 1993. The average interest rate on such debt was 6.0% in
1994 and 5.7% in 1993.
The completion of pending acquisitions, continued capital expenditures and
investments in and advances to entities in which the Company has a
minority interest will require additional funding over the next few years.
These funding requirements are anticipated to be at least partially met
through additional debt, which will likely result in increased interest
expense as debt balances increase. Additional borrowings also may be
required to fund additional future acquisitions and their construction and
operations. See "Financial Resources and Liquidity."
Income tax expense was $980,000 in 1994 and $329,000 in 1993. Income tax
expense includes the federal income taxes of a consolidated subsidiary not
included in the TDS consolidated federal income tax return. State income
tax expense in 1994 was primarily related to subsidiaries generating
taxable income after utilization of state net operating losses. USM is
included in a consolidated federal income tax return with other members of
the TDS consolidated group. TDS and USM are parties to a Tax Allocation
Agreement under which USM is able to carry forward its losses and credits
and use them to offset any current or future income tax liabilities to
TDS. The amount of the federal net operating loss carryforward available
to offset future taxable income aggregated approximately $148.2 million at
December 31, 1993, and expires between 2002 and 2008. The amount of the
state net operating loss carryforward available to offset future taxable
income aggregated approximately $197.1 million at December 31, 1993, and
expires between 1998 and 2008.
Net (Loss)
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Net (loss) totaled ($1.8 million) in 1994 compared to ($9.2 million) in
1993. The 1994 improvement resulted from improved operating results in
the established markets, increased investment income and decreased
interest expense, offset by the effects of the addition of new markets.
Net (loss) per share was ($.02) in 1994 compared to ($.17) in 1993,
primarily reflecting the decrease in net loss and the increase in weighted
average Common and Series A Common Shares outstanding. The weighted
average number of Common and Series A Common Shares outstanding for 1994
increased 39% over the shares outstanding for 1993 primarily as a result
of Common Shares issued in connection with acquisitions and Common and
Series A Common Shares issued in connection with the 1993 rights offering.
TDS owned an aggregate of 62,487,904 shares of common stock of the Company
at March 31, 1994, representing over 81% of the combined total of the
Company's outstanding Common and Series A Common Shares and over 96% of
their combined voting power. Assuming the Company's Common Shares are
issued in all instances in which the Company has the choice to issue its
Common Shares or other consideration and assuming all issuances of the
Company's common stock to TDS and third parties for completed and pending
acquisitions and redemptions of the Company's Preferred Stock and TDS's
Preferred Shares had been completed at March 31, 1994, TDS would have
owned approximately 79.6% of the total outstanding common stock of the
Company and controlled over 95% of the combined voting power of both
classes of its common stock. In the event TDS's ownership of the Company
falls below 80% of the total value of all of the outstanding shares of the
Company's stock, TDS and the Company would be deconsolidated for federal
income tax purposes. TDS and the Company have the ability to defer or
prevent deconsolidation, if deferring or preventing deconsolidation would
be advantageous, by delivering
-10-
TDS Common Shares and/or cash in lieu of the Company's Common Shares in
connection with certain acquisitions.
Accounting for Postemployment Benefits
--------------------------------------
The Company adopted Statement of Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits" effective January 1,
1994. SFAS No. 112 requires employers to recognize the obligation to
provide benefits to former or inactive employees after employment but
before retirement. The adoption of SFAS No. 112 in 1994 had an immaterial
effect on net loss and loss per share.
Accounting for Certain Investments in Debt and Equity Securities
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The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective January 1, 1994. SFAS No. 115
addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. The Company has recorded an unrealized
loss on its Marketable Equity Securities (classified as available-for-sale
securities) of $1.8 million for the first quarter of 1994. This
unrealized loss is excluded from earnings and reported in shareholders'
equity.
FINANCIAL RESOURCES AND LIQUIDITY
The Company operates a capital- and marketing-intensive business. Rapid
growth in markets operated by the Company and customers served has caused
financing requirements for acquisitions, construction and operations to
exceed internally generated cash flow. The Company requires capital to
complete acquisitions in process, to fund construction and operating
expenses of the cellular systems it operates, to fund investments in
minority partnership interests in other cellular markets and to pay
principal and interest on its outstanding debt. Management anticipates
that each new cellular market the Company acquires and places in service
will require significant capital expenditures and will incur substantial
losses during its initial operating stage. The Company has experienced
operating losses and net losses in all but a few quarters since its
inception. The Company has obtained substantial funds from external
sources during the past several years.
Cash flows from operating activities provided $13.2 million in 1994 and
required $1.9 million in 1993. Operating cash flow (operating loss before
minority share plus depreciation and amortization expense) provided cash
totaling $13.7 million in 1994 and $6.3 million in 1993. The 1994
increase in operating cash flow primarily reflects improvement in the more
mature markets. The effects of acquisitions decreased operating cash flow
$445,000, or 7%, in 1994. Cash flows from other operating activities
(investment and other income, interest expense, changes in working capital
and changes in other assets and liabilities) required cash investments
totaling $522,000 in 1994 and $8.2 million in 1993.
Cash flows from financing activities provided $27.9 million in 1994 and
$24.7 million in 1993. Cash flows from financing activities include cash
flows from borrowings under the Revolving Credit Agreement with TDS,
vendor financing transactions and sales of Common Shares. Borrowings
under the Revolving Credit Agreement with TDS totaling $31.4 million and
$31.2 million provided a majority of the Company's external financing
requirements in 1994 and 1993, respectively.
-10-
Cash flows from investing activities required cash totaling $38.3 million
in 1994 and $23.9 million in 1993. Such cash requirements primarily
consisted of cash additions to property, plant, and equipment and cash
requirements for acquisitions and for investments in cellular markets.
Cash expenditures for property, plant and equipment totaled $31.2 million
in 1994 (of which $12.7 million relates to 1993 additions), representing
the construction of 29 cell sites and other plant additions. Cash
expenditures for property, plant and equipment totaled $18.2 million in
1993 (of which $5.4 million relates to 1992 additions), representing the
construction of 17 cell sites and other plant additions.
Anticipated capital requirements for 1994 reflect the Company's
construction and system expansion program, funding of working capital
needs, investments in entities in which the Company has a minority
interest, scheduled debt repayments and pending acquisitions. The
Company's consolidated construction budget for 1994 is approximately $140
million, including anticipated expenditures for both enhancements to
existing systems and construction of new systems. Planned expenditures
for enhancements of existing majority-owned cellular systems, including
additional radio channel capacity as well as new cell sites, total about
$120 million. Anticipated expenditures for construction of switching
offices and digital expansion total $7 million. Investments in
partnerships, primarily in minority-owned and managed markets, are
expected to total $5 million in 1994.
The Company is expanding its operations through acquisitions. During the
first quarter of 1994, the Company completed the acquisition of
controlling interests in six markets and several additional minority
interests. During the first quarter of 1993, the Company completed the
acquisition of controlling interests in ten markets and several additional
minority interests. Some of the markets acquired during 1994 and 1993
were subject to acquisition agreements which were entered into prior to
the year in which the acquisitions were completed. The following table
summarizes the consideration issued for these acquisitions.
COMPLETED ACQUISITIONS Three Months Ended March 31,
-----------------------------
1994 1993
------------- -------------
(in millions)
Pops Acquired .8 2.0
Total Consideration $ 98.7 $ 136.2
Details of Total Consideration:
USM Common Shares
Shares Issued 2.9 1.7
Recorded Cost $ 92.5 $ 36.1
USM Common Shares to be issued
in the future (mostly in 1994)
Shares Issuable -- .1
Recorded Cost $ -- $ 3.0
Revolving Credit Agreement - TDS .2 91.8
Cancellation of Notes Receivable 1.4 --
Cash $ 4.6 $ 5.3
-11-
Of the total 1994 and 1993 consideration, the debt under the Revolving
Credit Agreement and the USM Common Shares were issued to TDS to reimburse
TDS for TDS Common Shares issued and issuable and cash paid to third
parties in connection with 1994 and 1993 acquisitions. Additionally, the
Company had commitments at March 31, 1994, to issue 1.0 million Common
Shares in 1994 through 1996 related to certain completed acquisitions.
The Company and TDS have the option to deliver TDS Common Shares and/or
cash in lieu of the Company's Common Shares in connection with certain of
these acquisitions.
The Company has an ongoing acquisition program, the funding requirements
of which may be substantial. The Company maintains an ongoing acquisition
program to seek to maximize its future potential, including seeking
opportunities to combine operations and achieve increased economies of
scale. These economies of scale include the sharing of market personnel,
equipment and office resources. The Company plans to continue its
acquisition program as long as it is feasible to acquire cellular
interests that fit into its business objectives.
At March 31, 1994, the Company, or TDS for the benefit of the Company, had
agreements pending to acquire controlling interests in three markets and
several minority interests. The following table summarizes the
consideration to be issued by USM for these acquisitions if they are
completed as planned.
PENDING ACQUISITIONS March 31, 1994
-------------------- --------------
(in millions)
Pops to be Acquired .5
Estimated Consideration to be Paid $ 34.9
Details of Consideration:
USM Common Shares
Shares to be Issued 1.1
Estimated Cost at Agreement Date $ 33.9
Revolving Credit Agreement - TDS .3
Equity Contribution from TDS $ .7
Cellular interests acquired by TDS in these transactions are expected to
be assigned to the Company and at the time this occurs the Company will
reimburse TDS for TDS's consideration delivered and costs incurred in such
acquisitions. Of the consideration for these pending acquisitions, the
debt under the Revolving Credit Agreement and 1.0 million of the USM
Common Shares are to be issued to TDS to reimburse TDS for TDS Common
Shares to be issued and cash to be paid to third parties in connection
with these pending acquisitions. A majority of the 1.1 million Common
Shares to be issued in connection with pending acquisitions are expected
to be issued in 1994.
In addition to the agreements above, the Company has agreements to acquire
interests representing 150,000 population equivalents in one market. The
consideration for this acquisition will be determined based on a future
appraisal of the fair market value of the interest to be acquired.
-12-
TDS and USM are parties to a legal proceeding before the Federal
Communications Commission ("FCC") involving its cellular license in a
Wisconsin Rural Service Area. Pending the resolution of the issues in the
Wisconsin proceeding, further FCC grants to TDS and its subsidiaries will
be conditioned on the outcome of that proceeding. TDS's and USM's ability
to sell or exchange properties with third parties while such proceeding is
pending may be affected. See Note 15 of Notes to Consolidated Financial
Statements, Legal Proceedings (La Star Application), in the Company's 1993
Annual Report to Shareholders for a discussion of the proceeding involving
the Wisconsin Rural Service Area and the La Star proceeding. As discussed
in a Form 8-K dated March 30, 1994, the FCC's decision in the La Star
proceeding was vacated and remanded to the FCC for further proceedings by
a federal court of appeals. The Company is evaluating what impact the
court's decision in the La Star matter may have on the Wisconsin
proceeding.
Liquidity
---------
The Company anticipates that the aggregate resources required for the
remainder of 1994 will include approximately: (i) $122 million for
capital spending; and (ii) $9 million of scheduled debt repayments.
Additionally, the Company anticipates it will reimburse TDS, as each
acquisition is completed, for TDS Common Shares valued at approximately
$32.4 million to be issued and $800,000 in cash to be paid by TDS to third
parties in connection with acquisitions anticipated to be primarily
completed by the end of 1994. The reimbursement to TDS is expected to be
in the form of 1.0 million Common Shares of the Company. Not included in
the above amounts are acquisitions that may be signed during the remainder
of 1994. These potential acquisitions may require substantial funding for
both their acquisition and operation during the remainder of 1994.
At March 31, 1994, the Company had $9.0 million of cash and cash
equivalents, $73 million remaining under the $250 million Revolving Credit
Agreement with TDS as amended effective November 15, 1993, and $6 million
of anticipated minority partner capital contributions. Additionally, the
Company anticipates generating positive cash flows from operating
activities during the remainder of 1994.
Pursuant to the Revolving Credit Agreement, the Company may borrow up to
an aggregate of $250 million from TDS, at an interest rate equal to 1.5%
above the prime rate. The advances made by TDS under the Revolving Credit
Agreement are unsecured. Interest on the balance due under the Revolving
Credit Agreement is payable quarterly and no principal is payable until
March 31, 1996, subject to acceleration under certain circumstances, at
which time the entire principal balance then outstanding is scheduled to
become due and payable. The Company may prepay the balance due under the
Revolving Credit Agreement at any time, in whole or in part, without
premium.
The Company anticipates requiring substantial funding to acquire cellular
markets and build and operate cellular systems during the remainder of
1994. The timing and amount of such funding requirements will depend on
the timing of the completion of pending acquisitions, the number of
additional licenses acquired by the Company, the construction and
operational plans for the individual cellular projects, and other relevant
factors. The Company will need to raise additional capital to meet these
requirements. These additional requirements may be met through additional
borrowings from TDS, the issuance of equity or debt securities or a
combination thereof, vendor financing, bank financing, or the sale of
assets. There can be no assurance that sufficient funds will be made
available to the Company on terms or at prices acceptable to the Company.
If sufficient funding is not made available to the Company on terms and
prices acceptable to the Company, the Company would have to reduce its
construction, development and acquisition
-13-
programs. In the long term, reduction of the Company's construction,
development and acquisition programs would have a negative impact on the
ability of the Company to increase its consolidated revenues and cash
flows.
-14-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Unaudited
---------
Three Months Ended
March 31,
-----------------------------
1994 1993
----------- -------------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Service $ 63,361 $ 39,132
Equipment sales 2,872 2,336
---------- ----------
Total Operating Revenues 66,233 41,468
---------- ----------
OPERATING EXPENSES
System operations 9,730 6,850
Marketing and selling 14,054 9,311
Cost of equipment sold 8,009 3,871
General and administrative 20,726 15,125
Depreciation 8,622 5,549
Amortization of intangibles 6,096 4,142
---------- ----------
Total Operating Expenses 67,237 44,848
---------- ----------
OPERATING (LOSS) BEFORE MINORITY SHARE (1,004) (3,380)
Minority share of operating (income) (1,118) (767)
---------- ----------
OPERATING (LOSS) (2,122) (4,147)
---------- ----------
INVESTMENT AND OTHER INCOME
Investment income 5,191 3,065
Amortization of license and deferred costs
related to investments (244) (234)
Interest income 639 670
Other (expense), net (324) (546)
---------- ----------
Total Investment and Other Income 5,262 2,955
---------- ----------
INCOME (LOSS) BEFORE INTEREST AND INCOME TAXES 3,140 (1,192)
Interest expense - affiliated 3,032 6,572
Interest expense - other 959 1,115
---------- ----------
(LOSS) BEFORE INCOME TAXES (851) (8,879)
Income tax expense 979 329
---------- ----------
NET (LOSS) $ (1,830) $ (9,208)
========== ==========
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON SHARES (000s) 75,140 53,991
NET (LOSS) PER COMMON AND
SERIES A COMMON SHARE $ (.02) $ (.17)
========== ==========
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-15-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
Unaudited
---------
Three Months Ended
March 31,
-----------------------------
1994 1993
----------- -------------
(Dollars in thousands,
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (1,830) $ (9,208)
Add (Deduct) adjustments to reconcile net
(loss) to net cash provided (required) by
operating activities
Depreciation and amortization 14,962 9,925
Investment income (5,191) (3,065)
Minority share of operating income 1,118 767
Other noncash (income) expense 846 (16)
Change in accounts receivable (2,837) (293)
Change in accounts payable (642) (5,097)
Change in accrued interest 2,975 6,513
Change in accrued taxes 1,931 154
Change in other assets and liabilities 1,861 (1,581)
---------- ----------
13,193 (1,901)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings -- 64
Repayment of long-term debt (3,095) (7,390)
Change in Revolving Credit Agreement 31,384 31,235
Common Shares issued 223 58
Minority partner capital contributions (657) 733
---------- ----------
27,855 24,700
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (31,153) (18,163)
Investments in and advances to minority
partnerships (5,103) (5,450)
Distributions from partnerships 4,659 4,485
Acquisitions, excluding cash acquired (3,943) (4,749)
Other investments (2,761) --
---------- ----------
(38,301) (23,877)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,747 (1,078)
CASH AND CASH EQUIVALENTS-
Beginning of period 6,274 4,130
---------- ----------
End of period $ 9,021 $ 3,052
========== ==========
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-16-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
-------
(Unaudited)
March 31, 1994 December 31, 1993
-------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 8,249 $ 5,971
Affiliated cash investments 772 303
Accounts receivable
Customers 17,054 14,555
Roaming 14,060 13,484
Affiliates 3,412 2,880
Other 2,893 3,714
Inventory 2,476 2,529
Prepaid and other current assets 2,783 2,597
----------- ------------
51,699 46,033
----------- ------------
PROPERTY, PLANT AND EQUIPMENT
In service 328,902 306,118
Less accumulated depreciation 70,355 59,704
----------- ------------
258,547 246,414
----------- ------------
INVESTMENTS
Cellular partnerships - equity 77,978 77,178
Cellular partnerships - cost 12,719 12,926
Licenses, net of amortization 917,044 824,491
Marketable equity securities 15,792 17,584
Notes and interest receivable 6,963 7,701
----------- ------------
1,030,496 939,880
----------- ------------
DEFERRED CHARGES
Deferred start-up costs 4,689 5,000
Other deferred charges 10,630 8,069
----------- ------------
15,319 13,069
----------- ------------
Total Assets $ 1,356,061 $ 1,245,396
=========== ============
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-17-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(Unaudited)
March 31, 1994 December 31, 1993
-------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt and
preferred stock $ 21,082 $ 12,663
Accounts payable
Affiliates 5,913 4,454
Other 24,361 39,126
Accrued interest, primarily to affiliates 3,023 5,785
Customer deposits and deferred revenues 4,678 3,909
Other current liabilities 11,497 8,482
----------- ------------
70,554 74,419
----------- ------------
REVOLVING CREDIT AGREEMENT - TDS 177,023 141,524
----------- ------------
LONG-TERM DEBT, excluding current portion 47,993 51,130
----------- ------------
DEFERRED LIABILITIES AND CREDITS
Income taxes 2,702 2,390
Other 1,002 1,378
----------- ------------
3,704 3,768
----------- ------------
REDEEMABLE PREFERRED STOCK, excluding
current portion 9,597 18,828
----------- ------------
MINORITY INTEREST 15,406 15,599
----------- ------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 43,857 36,960
Series A Common Shares, par value $1 per share 33,006 33,006
Additional paid in capital 1,038,062 867,947
Common Shares issuable, 1,038,552 shares and
4,966,719 shares, respectively 19,739 103,266
Retained (deficit) (102,880) (101,051)
----------- ------------
1,031,784 940,128
----------- ------------
Total Liabilities and Shareholders' Equity $ 1,356,061 $ 1,245,396
=========== ============
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-18-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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 March 31, 1994 and
December 31, 1993, and the results of operations and cash flows for
the three months ended March 31, 1994 and 1993. The results of
operations for the three months ended March 31, 1994 and 1993, are not
necessarily indicative of the results to be expected for the full
year.
2. The Company implemented SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective January 1, 1994.
SFAS No. 115 addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for
all investments in debt securities. Those investments are to be
classified in one of three categories: a) held-to-maturity
securities, reported at amortized cost; b) trading securities,
reported at fair value; and c) available-for-sale securities, reported
at fair value with unrealized gains and losses excluded from earnings
and reported in a separate component of shareholders' equity.
Information regarding the Company's securities is summarized below.
Aggregate Gross Unrealized Gross Unrealized Amortized
Fair Value Holding Gains Holding Losses Cost Basis
------------- -------------- ---------------- -----------
(Dollars in thousands)
Available-for-sale
Equity securities $ 15,792 $ --- $ 2,418 $ 18,210
The Company's net unrealized holding loss on available-for-sale
securities, $1.8 million in the first quarter of 1994, has been
included as a reduction of common stockholders' equity. No sales of
these securities have occurred during the quarter.
3. Net (Loss) per Common Share for the three months ended March 31, 1994
and 1993 was computed by dividing Net (Loss) by the weighted average
number of Common Shares and Series A Common Shares outstanding during
the period.
-19-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Certain of the cellular acquisitions closed during 1993, 1992, 1991
and 1990 require USM to deliver Common Shares in the future. USM is
required to issue Common Shares to third parties as follows:
Common Shares
Issuable
-----------------------
1994 596,716
1995 263,013
1996 178,823
---------
1,038,552
=========
5. Assuming that acquisitions accounted for as purchases during the
period January 1, 1993, to March 31, 1994, had taken place on January
1, 1993, pro forma results of operations would have been as follows:
Three Months Ended
March 31
------------------------
1994 1993
---------- ----------
(Dollars in thousands,
except per share amounts)
Service Revenues $ 63,498 $ 44,415
Equipment Sales 2,881 2,693
Interest Expense (including cost to finance acquisitions) 3,992 8,405
Net (Loss) (2,008) (14,157)
(Loss) per Common and Series A Common Share $ (.03) $ (.23)
6. The following summarized unaudited income statements are the combined
summarized income statements of the cellular system partnerships
listed below which are accounted for by the Company following the
equity method. The combined summarized income statements were
compiled from financial statements and other information obtained by
the Company as a limited partner of the cellular limited partnerships
as set forth below. The cellular system partnerships included in the
combined summarized income statements and the Company's ownership
percentage of each cellular system partnership at March 31, 1994, are
set forth in the following table.
The Company's
Limited
Partnership
Cellular System Partnership Interest
------------------------------------------- ------------
Los Angeles SMSA Limited Partnership 5.5%
Nashville/Clarksville MSA Limited Partnership 49.0%
Baton Rouge MSA Limited Partnership 52.0%
-20-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended
March 31,
----------------------------
1994 1993
---------- -----------
(Dollars in thousands)
REVENUES $144,176 $ 117,918
EXPENSES
Selling, general and administrative 75,948 75,230
Depreciation and amortization 14,964 12,568
--------- ---------
90,912 87,798
--------- ---------
OPERATING INCOME 53,264 30,120
OTHER INCOME, NET 1,166 1,264
--------- ---------
NET INCOME $ 54,430 $ 31,384
========= =========
7. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during
the first three months of 1994 and 1993. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed
and Common Shares issued.
Three Months Ended
March 31,
----------------------------
1994 1993
---------- -----------
(Dollars in thousands)
Property, plant and equipment, net $ 3,523 $ 9,720
Cellular licenses 97,883 138,096
Decrease in equity-method investment
in cellular interests (4,154) (1,342)
Accounts receivable 565 653
Revolving Credit Agreement - TDS (138) (91,762)
Long-term debt -- (10,795)
Accounts payable (560) (1,147)
Other assets and liabilities,
excluding cash acquired (654) 450
Common Shares issued and issuable (92,522) (39,124)
--------- ---------
Decrease in cash due to acquisitions $ 3,943 $ 4,749
========= =========
-21-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes certain noncash transactions, and interest
and income taxes paid.
Three Months Ended
March 31,
----------------------------
1994 1993
---------- -----------
(Dollars in thousands)
Interest paid $ 966 $ 558
Income taxes paid 255 326
Accrued interest converted into debt
under the Revolving Credit Agreement 5,737 4,836
Common Shares issued by USM
for conversion of USM Preferred Stock
and TDS Preferred Shares $ 1,497 $ --
-22-
PART II. OTHER INFORMATION
------------------------------
Item 1. Legal Proceedings
--------------------------
Townes Telecommunications, Inc., et. al. v. TDS et. al. On May 6, 1994,
TDS and USM announced that a Hendersen, Texas jury rejected all claims
made against TDS and USM in connection with this litigation. A copy of
the news release is attached as an exhibit hereto and incorporated herein
by reference.
Item 6. Exhibits and Reports on Form 8-K.
------------------------------------------
(a) Exhibit 11 - Statement regarding computation of per share earnings.
(b) Exhibit 12 - Statement regarding computation of ratios.
(c) Exhibit 99.1 - Unaudited Consolidated Statements of Operations for
the Twelve Months Ended March 31, 1994 and 1993.
Exhibit 99.2 - Pro Forma Financial Statements.
Exhibit 99.3 - News release regarding the successful outcome of the
legal proceeding - Townes Telecommunications, Inc.,
et. al. v. TDS et. al.
(d) Reports on Form 8-K filed during the quarter ended March 31, 1994:
The Company filed a Report on Form 8-K dated February 7, 1994, which
included a press release describing the FCC's order of a hearing to
determine whether the Company had misrepresented facts to, lacked candor
in its dealings with or attempted to mislead the FCC in a proceeding
involving the application of LaStar Cellular Telephone Company for a
certaiin initial cellular license. The hearing will also determine
whether TDS possesses the requisite character qualifications to retain
its cellular license in another market.
The Company filed a Report on Form 8-K dated March 30, 1994, which
included a press release announcing that the U.S. Court of Appeals for
the Distric of Columbia Circuit vacated an FCC decision holding that the
Company had been in control of LaStar Cellular Telephone Company. The
Court remanded the matter to the FCC for further proceedings.
No other reports on Form 8-K were filed during the quarter ended March
31, 1994.
-23-
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 May 12, 1994 /s/ H. DONALD NELSON
------------ -------------------------------------
H. Donald Nelson
President
(Principal Executive Officer)
Date May 12, 1994 /s/ KENNETH R. MEYERS
------------ -------------------------------------
Kenneth R. Meyers
Vice President-Finance and Treasurer
(Principal Financial Officer)
Date May 12, 1994 /s/ PHILLIP A. LORENZINI
------------ -------------------------------------
Phillip A. Lorenzini
Controller
(Principal Accounting Officer)
-24-