SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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, 1996
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
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631
(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.
X Yes 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 30, 1996
-------------- -----------------------------
Common Shares, $1 par value 53,075,857 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
- -------------------------------------------------------------------------------
UNITED STATES CELLULAR CORPORATION
1ST QUARTER REPORT ON FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-10
Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1995 11
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 12
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 13-14
Notes to Consolidated Financial Statements 15-18
Part II. Other Information 19
Signatures 20
PART I. FINANCIAL INFORMATION
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Three Months Ended 3/31/96 Compared to Three Months Ended 3/31/95
United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. USM owns
or expects to own cellular interests, pursuant to agreements in place as of
March 31, 1996, representing 24,199,000 population equivalents ("pops").
USM included the operations of 134 majority-owned and managed cellular markets,
representing 19.9 million pops, in consolidated operations ("consolidated
markets") at March 31, 1996. The Company has agreements in place to divest its
controlling interests in four of these markets during 1996. Noncontrolling
interests in 29 markets, representing 3.4 million pops, were accounted for
using the equity method and were included in investment income at that date.
Noncontrolling interests held for sale or trade in 41 other markets,
representing 870,000 pops, were accounted for using the cost method. Following
is a table of summarized operating data for USM's consolidated operations.
For the Three Months Ended
or at March 31,
-----------------------------
1996 1995
---- ----
Total market population (in thousands) (1) 22,188 22,061
Customers 785,000 478,000
Market penetration 3.54% 2.17%
Markets in operation 134 135
Cell sites in service 1,139 841
Average monthly revenue per customer $ 64 $ 71
Churn rate per month 2.1% 2.1%
Marketing cost per net customer addition $ 593 $ 646
(1) Calculated using the respective Donnelley Marketing Service estimates for
each year.
The Company's consolidated revenues and expenses include 100% of the revenues
and expenses of the systems serving majority-owned and managed markets plus its
corporate office operations. Investment income includes the Company's share of
the net income or loss of each of the noncontrolling interests for which the
Company follows the equity method of accounting.
Operating results for the first three months of 1996 primarily reflect
improvement in the Company's established markets plus the net effect of the 18
markets acquired and 19 markets divested since March 31, 1995. Operating
revenues, driven primarily by increases in customers served, rose $48.2 million,
or 48%. Operating expenses rose $44.5 million, or 48%. Operating cash flow
increased $9.2 million, or 33%.
-2-
Investment and other income increased $21.2 million to $49.5 million, due
primarily to the increase of $20.2 million on gains on the sales of cellular
interests. Interest expense decreased $1.9 million, or 25%, in 1996,
primarily due to lower effective interest rates, offset by a 14% increase in
average debt balances. Net income totaled $29.4 million in 1996 compared to
$23.6 million in 1995, reflecting increased gains on the sales of cellular and
other investments, improved operating results, decreased interest expense and
increased income taxes. On a comparable basis, excluding the effect of the gains
on sales of cellular and other investments (net of tax), net income increased
34% to $8.5 million in 1996 compared to $6.4 million in 1995.
Management believes there exists a seasonality in both service revenues, which
tend to increase more slowly in the first and fourth quarters, and operating
expenses, which tend to be higher in the fourth quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter.
Operating Revenues
Operating revenues totaled $148.0 million in 1996, up $48.2 million, or 48%,
over 1995. The net effect of acquisitions and divestitures ("net acquisitions")
increased operating revenues $9.0 million, or 9%, in 1996.
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 roaming");
and (iii) charges for long-distance calls made on the Company's systems. Service
revenues totaled $143.7 million in 1996, up $47.3 million, or 49%, over 1995.
The increase was primarily due to the growing number of local retail customers
and the growth in inbound roaming revenue offset by declining monthly average
revenue per customer. Service revenues in 1996 increased 66%, or $63.5 million,
due to customer growth and declined 17%, or $16.2 million, due to decreases in
average monthly service revenue per customer. Net acquisitions increased service
revenues $8.6 million, or 9%, in 1996.
Average monthly service revenue per customer totaled $64 in 1996 compared to $71
in 1995. The 10% decrease in average monthly service revenue per customer was
primarily a result of a decrease in average revenue per minute of use from both
local retail customers and inbound roamers. Although average monthly local
minutes of use per retail customer totaled 96 in 1996 compared to 86 in 1995,
the Company's use of incentive programs to increase lower-revenue weekend and
off-peak usage in 1996 resulted in a decrease in average revenue per minute of
use during the year. Inbound roaming revenue has been increasing at a slower
rate than the Company's own customer base, which is growing faster than that of
the rest of the industry. Also, the Company's average inbound roaming revenue
per minute of use decreased during 1996, related to the ongoing trend toward
reduced per minute prices for roaming negotiated between the Company and other
cellular operators.
Revenue from local customers' usage of USM's systems increased $34.6 million, or
59%, in 1996. Growth in the number of customers was the primary reason for the
increase in local revenue. The number of customers increased 64% to 785,000 at
March 31, 1996 from 478,000 at March 31, 1995. Excluding net acquisitions, the
Company's consolidated markets added 71,000 customers in the first quarter of
1996. While the percentage increase in customer additions is expected to be
lower in the future, management anticipates that the total number of net
customer additions will continue to increase during the remainder of 1996. Net
acquisitions increased local revenue $7.6 million, or 13%, in 1996.
-3-
Average monthly local retail revenue per customer declined to $42 in 1996 from
$43 in 1995. Monthly local retail minutes of use per customer averaged 96 in
1996 and 86 in 1995. While there was an increase in average local retail minutes
of use from 1995 to 1996, average revenue per minute of use decreased as a
result of the incentive programs stated previously. This decrease is part of 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 during peak business hours. It
also reflects the Company's and the industry's continued penetration of the
consumer market, which tends to include fewer peak business hour-usage
customers.
Inbound roaming revenue increased $9.3 million, or 31%, in 1996. This increase
was attributable to the rise in the number of minutes used by customers from
other systems when roaming in the Company's systems. Also contributing were the
increased number of Company-managed systems and cell sites within those systems.
This effect was offset somewhat by the decrease in average revenue per minute
due to the downward trend in negotiated rates, as stated previously. Monthly
inbound roaming revenue per customer averaged $17 in 1996 and $22 in 1995. The
decrease is related to both the decrease in roaming revenue per minute and the
faster increase in the Company's customer base than in inbound roaming revenue
stated previously. Acquisitions increased inbound roaming revenue $1.3 million,
or 4%, in 1996.
Long-distance revenue increased $4.5 million, or 69%, in 1996 as the volume of
long-distance calls billed by the Company increased. Monthly long-distance
revenue per customer averaged $5 in both 1996 and 1995. Acquisitions increased
long-distance revenue $720,000, or 11%, in 1996.
Equipment sales revenues totaled $4.3 million in 1996, up $926,000, or 28%, over
1995. Equipment sales reflect the sale of 90,000 and 54,000 cellular telephone
units in 1996 and 1995, respectively, plus installation and accessories revenue.
The average revenue per unit was $47 in 1996 compared to $62 in 1995. The
average revenue per unit decline partially reflects the Company's decision to
reduce sales prices on cellular telephones to stimulate growth in the number of
customers, to maintain its market position and to meet competitive prices as
well as to pass through reduced manufacturers' prices to customers. Also, the
Company uses promotions which are 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. Net acquisitions increased
equipment sales revenues $358,000, or 11%, in 1996.
Operating Expenses
Operating expenses totaled $136.1 million in 1996, up $44.5 million, or 48%,
over 1995. Acquisitions increased expenses $10.5 million, or 12%, in 1996.
System operations expenses increased $10.4 million, or 79%, in 1996 as a result
of increases in customer usage expenses and costs associated with operating the
Company's increased number of cellular systems and the growing number of cell
sites within those systems. Also contributing to the increase were $2.0 million
of costs related to fraudulent use of the Company's customers' cellular
telephone numbers. The Company is putting procedures in place to combat this
fraud, which is primarily related to roaming usage. In total, system operations
costs are expected to continue to increase as the number of cell sites within
and the number of customers using 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 roaming traffic on these facilities, offset somewhat by
pass-through roaming revenue. These expenses also include local interconnection
to the landline network, toll charges and roaming expenses from the Company's
customers' use of systems other than their local systems. Customer usage
expenses
-4-
were $13.8 million in 1996 compared to $5.4 million in 1995, and represented 10%
of service revenues in 1996 and 6% in 1995.
Maintenance, utility and cell site expenses totaled $9.8 million in 1996
compared to $7.8 million in 1995, primarily reflecting an increase in the number
of cell sites in the systems serving all majority-owned and managed markets, to
1,139 in 1996 from 841 in 1995. Net acquisitions increased system operations
expenses $2.2 million, or 16%, in 1996.
Marketing and selling expenses increased $11.0 million, or 55%, in 1996.
Marketing and selling expenses primarily consist of salaries, commissions and
expenses of field sales and retail personnel and offices; agent expenses;
promotional expenses; local advertising and public relations expenses. The
increase was primarily due to a 63% rise in the number of gross customer
activations (excluding acquisitions and divestitures), to 117,000 in 1996 from
72,000 in 1995. Cost per gross customer addition, including losses on equipment
sales, decreased to $360 in 1996 from $386 in 1995. Net acquisitions increased
marketing and selling expenses $3.3 million, or 17%, in 1996.
Cost of equipment sold increased $4.3 million, or 38%, in 1996. The increases
reflect the growth in unit sales related to the rise in gross customer
activations made through the Company's direct and retail distribution channels,
offset somewhat by falling manufacturer prices per unit. The average cost to the
Company of a telephone unit sold, including accessories and installation, was
$171 in 1996 compared to $206 in 1995. Net acquisitions increased cost of goods
sold $1.5 million, or 14%, in 1996.
General and administrative expenses increased $13.4 million, or 48%, in 1996.
These expenses include the costs of operating the Company's local business
offices and its corporate expenses. The increase includes the effects of
increases in expenses required to serve the growing customer base in existing
markets and an expansion of both local administrative office and corporate
staff, necessitated by growth in the Company's business. 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 increase also includes the effect of a higher amount of bad debt, primarily
related to the Company's increased rate of customer growth, and the effect of
increased non-income taxes levied by state and local taxing authorities. Net
acquisitions increased direct field-related general and administrative expenses
$2.8 million, or 10%, in 1996.
Operating cash flow (operating income before minority share plus
depreciation and amortization expense) increased $9.2 million, or 33%, to $37.0
million in 1996. The improvement was primarily due to growth in service revenues
and slightly lesser growth in operating expenses resulting from improved
operational efficiencies. Operating cash flow margins were 26% in 1996 and 29%
in 1995. The decreased margin in 1996 primarily reflects the effect of expenses
related to the increased customer growth, roaming fraud, bad debt and non-income
taxes stated previously.
Depreciation expense increased $4.7 million, or 38%, in 1996. The increase
reflects rising average fixed asset balances, which increased 41% in 1996.
Increased fixed asset balances primarily result from the increase in cell sites
built to improve coverage in the Company's markets. Net acquisitions increased
depreciation expense $608,000, or 5%, in 1996.
Amortization of intangibles increased $772,000, or 10%, in 1996. The increase is
primarily due to increases in deferred information system costs, which are
amortized over the estimated useful life of the associated improvements. Net
acquisitions increased amortization of intangibles $117,000, or 2%, in 1996.
-5-
Operating Income before Minority Share
Operating income before minority share totaled $11.8 million in 1996, an
increase of $3.8 million, or 47%, over 1995. The operating income margin (as a
percent of service revenues) was 8% in both 1996 and 1995. The improvement in
operating income dollars reflects improved results in the more established
markets and increased revenues resulting from growth in the number of customers
served by the Company's systems. This was partially offset by costs associated
with the growth of the Company's operations, increased losses on equipment sales
and the effect of roaming fraud, bad debt and non-income taxes stated
previously. Net acquisitions decreased operating income before minority share
$1.6 million, or 20%, in 1996.
The Company expects service revenues to continue to grow significantly during
the remainder of 1996 as it adds customers to its existing systems and realizes
a full year of revenues from customers added in 1995. However, management
anticipates that average monthly revenue per customer will continue to decrease
as local retail and inbound roaming revenue per minute of use declines and as
the growth rate of the Company's customer base exceeds the growth rate of
inbound roaming revenue, diluting the roaming contribution per customer. The
Company also expects expenses to increase significantly during 1996 as it incurs
costs for cell sites added in 1995 and incurs costs associated with customer and
system growth.
Investment and Other Income
Investment and other income totaled $49.5 million in 1996, an increase of $21.2
million, or 75%, over 1995. Investment income was $10.3 million in 1996 compared
to $9.7 million in 1995. Investment income primarily represents the Company's
share of net income from the markets managed by others that are accounted for by
the equity method. Gain on sale of cellular interests totaled $38.7 million in
1996, an increase of $20.2 million over 1995. The 1996 amount primarily reflects
gains recorded on the sales of the Company's majority interests in four markets
and on cash received in an exchange of markets with another cellular operator.
The 1995 amount reflects gains recorded on the sale of the Company's majority
interest in one market and on the sales of the Company's minority interests in
two markets.
Interest and Income Taxes
Total interest expense decreased $1.9 million, or 25%, in 1996. Interest expense
in 1996 is primarily related to Liquid Yield Option Notes ("LYONs") ($3.5
million) and borrowings under vendor financing agreements ($2.1 million).
Interest expense in 1995 is primarily related to borrowings under the Revolving
Credit Agreement with Telephone and Data Systems, Inc. ("TDS"), the Company's
parent organization, ($6.1 million) and borrowings under the vendor financing
agreements ($1.6 million).
The LYONs are zero coupon convertible debentures which do not require current
cash payments of interest. No LYONs were outstanding during the first quarter of
1995. The average amount of debt under the vendor financing agreements was
$118.6 million in the first three months of 1996 and $91.2 million in 1995. The
average interest rate on such debt was 7.7% in 1996 and 7.0% in 1995. The
average amount of debt outstanding under the Revolving Credit Agreement was
$222.0 million during the first quarter of 1995; no borrowings were outstanding
during the first quarter of 1996. The average interest rate on such debt was
11.0% in 1995.
Income tax expense was $24.0 million in 1996 and $3.2 million in 1995. In 1996,
$17.9 million of income tax expense related to the gains on sales of cellular
interests. Income tax expense for 1995 primarily includes the federal income
taxes of consolidated subsidiaries not included in the TDS consolidated federal
income tax return plus $1.3 million of taxes related to the gains on sales
-6-
of cellular interests. State income tax expense 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 $74 million at December 31, 1995, and
expires between 2002 and 2010. The amount of the state net operating loss
carryforward available to offset future taxable income aggregated approximately
$212 million at December 31, 1995, and expires between 1996 and 2010. Both the
federal and state loss carryforwards have been significantly reduced by the
gains on the sales of cellular and other investments during 1995 and 1996, and
more reductions are anticipated from gains which may be recognized on sales of
cellular interests for which the Company has agreements as of March 31, 1996.
Net Income
Net income totaled $29.4 million in 1996, an increase of $5.8 million, or 25%,
over 1995. Earnings per share was $.34 in 1996 and $.29 in 1995. The improvement
resulted from gains on the sales of cellular and other investments, improved
operating results in the established markets and reduced interest expense,
partially offset by increased income tax expense. On a comparable basis (net of
tax), excluding gains on the sales of cellular and other investments, net income
totaled $8.5 million in 1996, an increase of $2.1 million, or 34%, over 1995.
The improvement primarily reflects the improvement in net income offset by 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
1996 increased 4%, primarily due to the issuance of Common Shares in connection
with acquisitions.
FINANCIAL RESOURCES AND LIQUIDITY
The Company operates a capital- and marketing-intensive business. Rapid growth
in markets operated by the Company, capital expenditures and customers served
has caused financing requirements for acquisitions, construction and operations
to exceed internally generated cash flow until recent years. In recent years,
the Company has generated operating cash flow and received cash proceeds from
divestitures to fund most of its construction and operating expenses. The
Company has been profitable for the last eight quarters, but had previously
incurred significant start-up costs and operating losses. The Company
anticipates further substantial growth in cellular units in service and revenues
as it continues its expansion and development programs. Marketing and system
operations expenses associated with this expansion may reduce the rate of growth
in operating cash flow and operating income over the next several quarters.
Cash flows from operating activities provided $2.5 million in 1996 and $22.6
million in 1995. Operating cash flow (operating income or loss before minority
share plus depreciation and amortization expense) provided cash totaling $37.0
million in 1996 and $27.8 million in 1995. The increase in operating cash flow
primarily reflects improvement in the Company's established markets. Net
acquisitions decreased operating cash flow $848,000, or 3%, in 1996. 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 $34.5 million in 1996 and $5.2 million in 1995. The
increase in cash required for other activities in 1996 reflects cash used to
reduce accounts payable balances prior to the Company's conversion to a new
accounting system software.
-7-
Cash flows from financing activities provided $5.1 million in 1996 and required
$3.7 million in 1995. In 1996, issuances of USM Common Shares, primarily to TDS,
provided $9.4 million while repayments of debt under the vendor financing
agreements required $3.6 million. In 1995, repayments of amounts owed under the
Revolving Credit Agreement with TDS totaled $52.8 million, and repayments of
amounts owed under the vendor financing agreement totaled $4.9 million.
Additional vendor financing transactions provided cash totaling $54.2 million in
1995.
Cash flows from investing activities provided $16.1 million in 1996 and required
$10.8 million in 1995. The Company received net cash proceeds totaling $65.9
million in 1996 and $30.3 million in 1995 related to the sales and exchanges of
cellular interests. Cash required for property, plant and equipment expenditures
totaled $51.4 million in 1996, representing the construction of 27 cell sites
and other plant additions; these cash requirements totaled $37.4 million in
1995, representing the construction of 38 cell sites and other plant additions.
Cash totaling $4.1 million was also required in 1995 to fund investments in and
advances to minority partnerships.
Anticipated capital requirements for 1996 primarily reflect the Company's
construction and system expansion program. The Company's construction and system
expansion budget for 1996 is approximately $240 million, primarily for new cell
sites to expand and enhance the Company's coverage in its service areas and for
the enhancement of the Company's office systems.
Acquisitions and Divestitures
The Company is continuing to assess its cellular holdings in order to maximize
the benefits derived from clustering its markets. As the number of opportunities
for outright acquisitions has decreased in recent years, and as the Company's
clusters have grown, the Company's focus has shifted toward exchanges and
divestitures of managed and investment interests. Recently, the Company has
completed exchanges of controlling interests in its less strategic markets for
controlling interests in markets which better complement its clusters. The
Company has also completed outright sales of other less strategic markets. The
proceeds from these sales have been used to further the Company's growth.
The Company has gradually slowed its pace of acquisitions. In the first three
months of 1996, the Company purchased a controlling interest in one market and
several minority interests, representing 304,000 pops, and received a
controlling interest in another market through an exchange with another cellular
operator. The total consideration paid in these transactions, primarily in the
form of USM Common Shares issued to TDS to reimburse TDS for the value of TDS
Common Shares issued to third parties, totaled $43.8 million. In the first three
months of 1995, the Company purchased controlling interests in six markets and
several minority interests, representing 1.0 million pops. The total
consideration paid for these purchases, primarily in the form of USM Common
Shares issued to TDS to reimburse TDS for the value of TDS Common Shares issued
to third parties, totaled $80.4 million. The controlling interests acquired in
these transactions were subject to acquisition or exchange agreements which were
entered into prior to the year in which the acquisitions were completed.
In the first quarter of 1996, the Company sold controlling interests in four
markets and one market partition, representing 433,000 pops, and divested a
controlling interest in another market through the exchange mentioned
previously. The Company received cash consideration totaling $67.4 million both
from these sales and from the exchange. In the first quarter of 1995, the
Company sold a controlling interest in one market and minority interests in two
markets, representing 338,000 pops. The Company received cash consideration
totaling $30.8 million from these sales.
At March 31, 1996, the Company had agreements pending to divest controlling
interests in four markets and a minority interest, representing 654,000
population equivalents, and to settle
-8-
litigation related to an investment interest which was divested in 1995. If the
divestitures and litigation settlement are completed as planned, the Company
will receive cash and notes receivable totaling approximately $135 million. All
of the pending exchange, acquisition, divestiture and litigation settlement
agreements discussed above are expected to be completed during 1996. Certain of
these transactions are expected to generate substantial gains for book and tax
purposes.
TDS has proposed the transfer of its minority ownership interests in certain
cellular markets acquired in conjunction with prior acquisitions of telephone
companies to the Company. As currently contemplated, the minority interests
subject to the proposal represent approximately 614,000 population equivalents.
The current proposed purchase price is approximately $110 million in cash.
The TDS proposal is subject to negotiation and has been referred to a previously
established independent committee of the Company's Board of Directors. The
independent committee has retained Lazard Freres LLC as its financial advisor.
The proposed transaction will be subject to approval by the independent
committee of the USM Board of Directors, to the completion of definitive
documentation and to compliance with regulatory requirements.
LIQUIDITY
The Company anticipates that the aggregate resources required for the remainder
of 1996 will include approximately $189 million for capital spending, $110
million for the purchase of cellular interests from TDS and $17 million of
scheduled debt repayments. Not included in the above amounts are those related
to any acquisition agreements that the Company may enter into during the
remainder of 1996. These potential acquisitions may require substantial funding
for both their acquisition and operation during the remainder of 1996.
The Company had $62 million of cash and cash equivalents and affiliated cash
investments at March 31, 1996, anticipates generating an increasing amount of
cash flows from operating activities and is scheduled to receive approximately
$115 million in cash proceeds from pending divestitures and a litigation
settlement during 1996. The Company also has $100 million available under the
Revolving Credit Agreement with TDS and $4 million available under its vendor
financing agreements.
The Company sold $745 million principal amount at maturity of zero coupon
convertible debt in June 1995. Most of the net proceeds to the Company of
approximately $221 million from the sale of the LYONs were used to completely
repay debt to TDS under the Revolving Credit Agreement. In connection with the
sale of the LYONs, on June 29, 1995, the Company and TDS amended the Revolving
Credit Agreement to reduce the available line of credit thereunder to $100
million andto reduce the interest rate for borrowings to prime plus 0.75%. No
borrowings were outstanding under the Revolving Credit Agreement at March 31,
1996.
The Company has two arrangements for the financing of cellular system equipment
and construction costs with an equipment vendor. Terms of borrowings under the
first agreement are for seven years at interest rates of 2.25% or 2.31% over the
90-day Commercial Paper Rate of high-grade, unsecured notes (for rates of 7.6%
or 7.7%, respectively, at March 31, 1996). The Company also has an agreement
with the same equipment vendor which was assumed pursuant to a 1993 acquisition
which is arranged through the individual entity acquired. The interest rate for
these borrowings is 2.25% over the 90-day Commercial Paper Rate of high-grade,
unsecured notes (for a rate of 7.6% at March 31, 1996). In the aggregate,
borrowings totaling $117.5 million were outstanding under these vendor financing
agreements at March 31, 1996, and approximately $4 million remained available
under these agreements at that date.
-9-
Management believes that the Company's operating cash flows and cash proceeds
from scheduled market divestitures provide substantial financial flexibility.
The Company also has a line of credit and longer term financing commitments to
help meet its short- and long-term financing needs. Additionally, the Company
has access to public and private capital markets and anticipates issuing debt
and equity securities when capital requirements (including acquisitions),
financial market conditions and other factors warrant.
-10-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended
March 31,
--------------------------
1996 1995
------ ------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Service $ 143,692 $ 96,400
Equipment sales 4,274 3,348
------------ ----------
Total Operating Revenues 147,966 99,748
------------ ----------
OPERATING EXPENSES
System operations 23,578 13,202
Marketing and selling 30,903 19,922
Cost of equipment sold 15,473 11,199
General and administrative 41,053 27,667
Depreciation 16,935 12,264
Amortization of intangibles 8,202 7,430
------------ ----------
Total Operating Expenses 136,144 91,684
------------ ----------
OPERATING INCOME BEFORE MINORITY SHARE 11,822 8,064
Minority share of operating income (2,112) (1,888)
------------ ----------
OPERATING INCOME 9,710 6,176
INVESTMENT AND OTHER INCOME
Investment income 10,303 9,717
Amortization of licenses related
to investments (286) (232)
Interest income 1,152 992
Other (expense), net (333) (670)
Gain on sale of cellular interests 38,691 18,517
------------ ----------
Total Investment and Other Income 49,527 28,324
------------ ----------
INCOME BEFORE INTEREST AND INCOME TAXES 59,237 34,500
------------ ----------
Interest expense - affiliate -- 6,090
Interest expense - other 5,806 1,615
------------ ----------
Total Interest Expense 5,806 7,705
------------ ----------
INCOME BEFORE INCOME TAXES 53,431 26,795
Income tax expense 24,044 3,197
------------ ----------
NET INCOME $ 29,387 $ 23,598
============ ==========
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON SHARES (000s) 85,686 82,131
EARNINGS PER COMMON AND
SERIES A COMMON SHARE $ .34 $ .29
============ ==========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
-11-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended
March 31,
---------------------------
1996 1995
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,387 $ 23,598
Add (Deduct) adjustments to reconcile net
income to net cash provided by operating
activities
Depreciation and amortization 25,423 19,926
Investment income (10,303) (9,717)
Gain on sale of cellular interests (38,691) (18,517)
Minority share of operating income 2,112 1,888
Other noncash expense 4,916 976
Change in accounts receivable 2,068 1,172
Change in accounts payable (20,925) (6,462)
Change in accrued interest 113 6,037
Change in accrued taxes 7,392 1,102
Change in other assets and liabilities 1,032 2,562
----------- ----------
2,524 22,565
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings -- 54,218
Repayment of long-term debt (3,561) (4,863)
Change in Revolving Credit Agreement -- (52,781)
Common Shares issued 9,401 373
Capital contributions (distributions)
from/to minority partners (751) (656)
----------- ----------
5,089 (3,709)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (51,353) (37,375)
Investments in and advances to nonconsolidated
partnerships 1,667 (4,063)
Distributions from partnerships 2,566 1,790
Proceeds from sale of investments 65,922 30,300
Acquisitions, excluding cash acquired (367) (271)
Other investments (2,359) (1,158)
----------- ----------
16,076 (10,777)
----------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 23,689 8,079
CASH AND CASH EQUIVALENTS-
Beginning of period 38,404 5,800
----------- ----------
End of period $ 62,093 $ 13,879
=========== ==========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
-12-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
March 31, 1996 December 31, 1995
---------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents
General funds $ 27,583 $ 8,462
Affiliated cash investments 34,510 29,942
------------ ------------
62,093 38,404
Accounts receivable
Customers 44,011 42,934
Roaming 27,249 26,316
Affiliates -- 2,166
Other 6,705 5,761
Inventory 6,290 9,198
Prepaid and other current assets 3,840 5,007
------------ ------------
150,188 129,786
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
In service 708,069 674,450
Less accumulated depreciation 159,949 144,423
------------ ------------
548,120 530,027
------------ ------------
INVESTMENTS
Cellular partnerships 141,038 134,421
Licenses, net of amortization 1,050,878 1,035,846
Notes and interest receivable 16,566 16,376
------------ ------------
1,208,482 1,186,643
------------ ------------
DEFERRED CHARGES
Deferred start-up costs,
net of amortization 1,253 1,728
Other deferred charges,
net of amortization 33,011 31,960
------------ ------------
34,264 33,688
------------ ------------
Total Assets $ 1,941,054 $ 1,880,144
============ ============
The accompanying notes to consolidated financial
statements are an integral part of these statements.
-13-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
March 31, 1996 December 31, 1995
---------------- -------------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term
debt and preferred stock $ 20,722 $ 30,939
Notes payable 1,375 1,375
Accounts payable
Affiliates 1,404 11,636
Other 42,495 62,046
Accrued taxes 28,106 20,753
Customer deposits and deferred
revenues 12,224 11,332
Other current liabilities 15,815 17,028
------------ ------------
122,141 155,109
------------ ------------
LONG-TERM DEBT,
excluding current portion 96,729 98,656
------------ ------------
6% ZERO COUPON CONVERTIBLE
DEBENTURES 239,277 235,750
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 13,897 14,331
Other 1,602 1,541
------------ ------------
15,499 15,872
------------ ------------
MINORITY INTEREST 47,107 45,303
------------ ------------
COMMON SHAREHOLDERS' EQUITY
Common Shares,
par value $1 per share 52,783 49,966
Series A Common Shares,
par value $1 per share 33,006 33,006
Additional paid-in capital 1,283,302 1,206,614
Common Shares issuable, 292,966
shares and 928,009 shares,
respectively 6,739 24,784
Retained earnings 44,471 15,084
------------ ------------
1,420,301 1,329,454
------------ ------------
Total Liabilities and
Shareholders' Equity $ 1,941,054 $ 1,880,144
============ ============
The accompanying notes to consolidated financial
statements are an integral part of these statements.
-14-
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, 1996 and December
31, 1995, and the results of operations and cash flows for the three
months ended March 31, 1996 and 1995. The results of operations for the
three months ended March 31, 1996 and 1995, are not necessarily indicative
of the results to be expected for the full year.
2. Earnings per Common and Series A Common Share for the three months ended
March 31, 1996 and 1995, was computed by dividing Net Income by the
weighted average number of Common Shares, Series A Common Shares and
dilutive common equivalent shares outstanding during the period. Dilutive
common stock equivalents at March 31, 1996 and 1995, consist primarily of
dilutive Common Shares issuable and Redeemable Preferred Stock.
3. A cellular acquisition closed during 1992 requires USM to deliver Common
Shares in the future. USM is required to issue 292,966 Common Shares to
third parties in 1996.
-15-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Assuming that acquisitions accounted for as purchases during the period
January 1, 1995, to March 31, 1996, had taken place on January 1, 1995,
pro forma results of operations would have been as follows:
Three Months Ended
March 31,
----------------------
1996 1995
------ ------
(Dollars in thousands,
except per share amounts)
Service Revenues $ 144,422 $ 100,937
Equipment Sales 4,331 3,772
Interest Expense
(including cost to finance acquisitions) 5,806 7,539
Net Income 29,134 20,073
Earnings per Common and
Series A Common Share $ .34 .24
5. 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, 1996, 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%
-16-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended
March 31,
-------------------------
1996 1995
------ ------
(Dollars in thousands)
REVENUES $ 206,341 $ 184,825
EXPENSES
Selling, general and administrative 110,164 87,664
Depreciation and amortization 22,964 15,222
------------- -------------
133,128 102,886
------------- -------------
OPERATING INCOME 73,213 81,939
OTHER INCOME, NET 2,418 1,741
------------- -------------
NET INCOME $ 75,631 $ 83,680
============= =============
6. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first three months of 1996 and 1995. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed and
Common Shares issued.
Three Months Ended
March 31,
-----------------------
1996 1995
------ ------
(Dollars in thousands)
Property, plant and equipment, net $ 7,069 $ 12,829
Cellular licenses 37,503 80,222
Decrease in equity-method investment
in cellular interests (2,734) (1,943)
Accounts receivable 2,350 2,241
Revolving Credit Agreement - TDS -- (12,103)
Long-term debt -- (9,936)
Accounts payable (938) (2,222)
Other assets and liabilities,
excluding cash acquired (422) (2,216)
Common Shares issued and issuable (42,461) (66,601)
------------ ------------
Decrease in cash due to acquisitions $ 367 $ 271
============ ============
-17-
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,
--------------------
1996 1995
----- ------
(Dollars in thousands)
Interest paid $ 1,152 $ 1,128
Income taxes paid 16,545 318
Accrued interest converted into debt
under the Revolving Credit Agreement -- 5,864
Common Shares issued by USM
for conversion of USM Preferred Stock
and TDS Preferred Shares $ 18,450 $ 22,236
7. Contingencies
The Company's material contingencies as of March 31, 1996, include the
collectibility of a $5.5 million note receivable under a long-term
financing agreement with a cellular company and a $10.0 million standby
letter of credit in support of a bank loan to an entity minority- owned by
the Company. For further discussion of these contingencies, see Note 14 of
Notes to Consolidated Financial Statements included in the Company's 1995
Report on Form 10-K for the year ended December 31, 1995.
8. Gain on Sale of Cellular Interests
USM sold its majority interest in four markets and one market partition,
and traded one wholly-owned market for another market during the first
three months of 1996. USM recognized $38.7 million on the sales and
exchange of these non-strategic cellular interests.
-18-
PART II. OTHER INFORMATION
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 27 - Financial Data Schedule.
(d) Reports on Form 8-K filed during the quarter ended March 31, 1996:
The Company filed a report on Form 8-K dated January 10, 1996,
which included a press release which announced that the Company had
received a proposal from Telephone and Data Systems, Inc. ("TDS")
for the transfer to the Company of TDS's minority ownership
interest in certain cellular markets.
No other reports on Form 8-K were filed during the quarter ended
March 31, 1996.
-19-
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 14, 1996
------------- /s/ H. DONALD NELSON
------------------------------------
H. Donald Nelson
President
(Chief Executive Officer)
Date May 14, 1996
------------- /s/ KENNETH R. MEYERS
------------------------------------
Kenneth R. Meyers
Vice President-Finance and Treasurer
(Chief Financial Officer)
Date May 14, 1996
------------- /s/ PHILLIP A. LORENZINI
------------------------------------
Phillip A. Lorenzini
Controller
(Principal Accounting Officer)
-20-