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 June 30, 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
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UNITED STATES CELLULAR CORPORATION
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(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.
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 July 31, 1996
Common Shares, $1 par value 53,083,674 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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UNITED STATES CELLULAR CORPORATION
2ND QUARTER REPORT ON FORM 10-Q
INDEX
Page
No. ----
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Part I. Financial Information:
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-9
Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1996
and 1995 10
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995 11
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 12-13
Notes to Consolidated Financial Statements 14-17
Part II. Other Information 18-19
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
Six Months Ended 6/30/96 Compared to Six Months Ended 6/30/95
United States Cellular Corporation (the "Company" - AMEX: USM) owns, operates
and invests in cellular markets throughout the United States. USM owns or
expects to own, pursuant to agreements in place as of June 30, 1996, cellular
interests representing 24,669,000 population equivalents ("pops"). USM included
the operations of 130 majority-owned and managed cellular markets, representing
19.9 million pops, in consolidated operations ("consolidated markets") at June
30, 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 46 other
markets, representing 1.4 million pops, were accounted for using the cost
method. Following is a table of summarized operating data for USM's consolidated
operations.
Six Months Ended or at June 30,
-------------------------------
1996 1995
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Total market population (in thousands) (1) 21,483 22,430
Customers 860,000 550,000
Market penetration 4.00% 2.45%
Markets in operation 130 137
Cell sites in service 1,185 940
Average monthly revenue per customer $ 67 $ 73
Churn rate per month 1.9% 2.0%
Marketing cost per net customer addition $564 $589
(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 six months of 1996 primarily reflect improvement
in the Company's established markets (those markets included in consolidated
operations at June 30, 1995) plus the net effect of the six markets acquired and
13 markets divested since June 30, 1995. Operating revenues, driven primarily by
increases in customers served, rose $105.8 million, or 49%. Operating expenses
rose $82.9 million, or 42%. Operating cash flow increased $34.0 million, or 57%.
Investment and other income increased $95.6 million to $149.8 million, due
primarily to the increase of $89.6 million on gains on the sales of cellular and
other investments. Interest expense
-1-
decreased $3.3 million, or 22%, in 1996, primarily due to lower effective
interest rates. Income tax expense increased $75.5 million to $82.0 million, due
both to increased gains on the sale of cellular and other investments as well as
improved operating results in 1996. Net income totaled $92.4 million in 1996
compared to $47.7 million in 1995. In both years, net income included
significant gains on sales of cellular and other investments. A summary of the
net-of-tax effect of these gains is shown below.
Six Months Ended June 30,
-------------------------
1996 1995
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(Dollars in thousands,
except per share amounts)
Net income as reported $ 92,442 $ 47,687
Less: Effects of gains (64,201) (32,447)
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As adjusted $ 28,241 $ 15,240
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Earnings per share as reported $ 1.08 $ .57
Less: Effects of gains (.75) (.39)
--------- ---------
As adjusted $ .33 $ .18
========= =========
Operating Revenues
Operating revenues totaled $322.7 million in 1996, up $105.8 million, or 49%,
over 1995. The net effect of acquisitions and divestitures ("net acquisitions")
increased operating revenues $15.9 million, or 7%, 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 ("local retail"); (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 $314.2 million in 1996, up $104.3
million, or 50%, over 1995. The increase was primarily due to the growing number
of local retail customers and the growth in inbound roaming revenue. Average
monthly revenue per customer declined 8% to $67 in 1996 from $73 in 1995. This
decrease was primarily a result of a decrease in average revenue per minute of
use from both inbound roamers and local retail customers. Net acquisitions
increased service revenues $15.3 million, or 7%, in 1996.
Local retail revenue increased $73.2 million, or 57%, in 1996. Growth in the
number of customers was the primary reason for the increase in local revenue.
The number of customers increased 56% to 860,000 at June 30, 1996 from 550,000
at June 30, 1995. The Company's consolidated markets added 152,000 customers
through its marketing channels in 1996 compared to 103,000 in 1995. 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 in the next few years. Net acquisitions increased local
retail revenue $14.8 million, or 12%, in 1996.
Average monthly local retail revenue per customer decreased to $43 in 1996 from
$45 in 1995. Monthly local retail minutes of use per customer increased 12% to
102 in 1996 from 91 in 1995. While there was an increase in average local retail
minutes of use from 1995 to 1996, the Company's use of incentive programs in
1996 that encourage weekend and off-peak usage, in order to stimulate overall
usage, resulted in a decrease in average revenue per minute of use during the
year. The decrease in average monthly local retail revenue 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
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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. Local retail revenues
increased 64%, or $81.4 million, in 1996 due to customer growth and declined 6%,
or $8.2 million, due to decreases in average monthly local retail revenue per
customer.
Inbound roaming revenue increased $22.8 million, or 35%, 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 cell sites within the Company's systems. This effect was
offset somewhat by the decrease in average revenue per minute, related to the
ongoing trend toward reduced per minute prices for roaming negotiated between
the Company and other cellular operators. Monthly inbound roaming revenue per
customer averaged $19 in 1996 and $23 in 1995. Inbound roaming revenue has been
increasing at a slower rate than the Company's own customer base (35% compared
to 56%), which is growing faster than that of the rest of the industry. Net
acquisitions increased inbound roaming revenue $897,000, or 1%, in 1996.
Long-distance revenue increased $10.0 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. Net acquisitions
increased long-distance revenue $1.3 million, or 9%, in 1996.
Equipment sales revenues totaled $8.5 million in 1996, up $1.5 million, or 21%,
over 1995. Equipment sales reflect the sale of 177,000 and 122,000 cellular
telephone units in 1996 and 1995, respectively, plus installation and
accessories revenue. The average revenue per unit was $48 in 1996 compared to
$57 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 $618,000, or 9%, in 1996.
Operating Expenses
Operating expenses totaled $280.8 million in 1996, up $82.9 million, or 42%,
over 1995. Net acquisitions increased expenses $17.1 million, or 9%, in 1996.
System operations expenses increased $21.9 million, or 72%, in 1996 as a result
of increases in customer usage expenses and costs associated with the growing
number of cell sites within the Company's systems. Also contributing to the
increase was a $5.4 million increase in costs related to fraudulent use of the
Company's customers' cellular telephone numbers. The Company is implementing
procedures in certain markets 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. Net acquisitions increased system operations
expenses $3.2 million, or 11%, in 1996.
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
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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 were $31.3 million in 1996 compared to $13.2 million in
1995, and represented 10% of service revenues in 1996 and 6% in 1995. These
increases primarily resulted from the effect of increased roaming fraud costs in
1996.
Maintenance, utility and cell site expenses totaled $21.0 million in 1996
compared to $17.2 million in 1995. This increase primarily reflects an increase
in the number of cell sites in the systems serving all majority-owned and
managed markets, which totaled 1,185 in 1996 and 940 in 1995.
Marketing and selling expenses increased $19.2 million, or 44%, 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 49% rise in the number of gross customer
activations (excluding acquisitions and divestitures), to 240,000 in 1996 from
161,000 in 1995. Cost per gross customer addition, including losses on equipment
sales, decreased to $357 in 1996 from $377 in 1995. Net acquisitions increased
marketing and selling expenses $5.6 million, or 13%, in 1996.
Cost of equipment sold increased $7.4 million, or 31%, 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
$177 in 1996 compared to $197 in 1995. Net acquisitions increased cost of goods
sold $3.1 million, or 13%, in 1996.
General and administrative expenses increased $23.4 million, or 39%, 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 nonincome taxes levied by state and local taxing authorities. Net
acquisitions increased direct field-related general and administrative expenses
$4.2 million, or 7%, in 1996.
Operating cash flow (operating income before minority share plus depreciation
and amortization expense) increased $34.0 million, or 57%, to $93.6 million in
1996. The improvement was primarily due to substantial growth in service
revenues and the effects of improved operational efficiencies on operating
expenses. Operating cash flow margins were 30% in 1996 and 28% in 1995.
Depreciation expense increased $9.6 million, or 38%, in 1996. The increase
reflects rising average fixed asset balances, which increased 33% 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 $972,000, or 4%, in 1996.
Amortization of intangibles increased $1.4 million, or 9%, in 1996. The increase
is primarily due to increases in deferred information system costs, which are
amortized over the estimated useful life
-4-
of the associated improvements. Net acquisitions increased amortization of
intangibles $131,000, or 1%, in 1996.
Operating Income before Minority Share
Operating income before minority share totaled $41.8 million in 1996, an
increase of $22.9 million, or 121%, over 1995. The operating income margin (as a
percent of service revenues) was 13% in 1996 and 9% in 1995. The improvement in
operating income and operating income margin 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
nonincome taxes. Net acquisitions decreased operating income before minority
share $1.2 million, or 6%, 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
growth.
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.
Investment and Other Income
Investment and other income totaled $149.8 million in 1996, an increase of $95.6
million over 1995. Investment income was $22.3 million in 1996 compared to $18.4
million in 1995, a 21% increase. 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
$125.0 million in 1996, an increase of $89.6 million over 1995. The 1996 amount
primarily reflects gains recorded on the sales of the Company's majority
interests in eight markets and a minority interest in another market, on cash
received in an exchange of markets with another cellular operator and on cash
received from the settlement of two separate legal matters. The 1995 amount
reflects gains recorded on the sales of the Company's majority interests in
three markets and minority interests in three markets.
Interest and Income Taxes
Total interest expense decreased $3.3 million, or 22%, in 1996. Interest expense
in 1996 is primarily related to Liquid Yield Option Notes ("LYONs") ($7.1
million) and borrowings under vendor financing agreements ($4.1 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, ($10.3 million) and borrowings under the vendor financing
agreements ($4.7 million).
-5-
The LYONs are zero coupon convertible debentures which do not require current
cash payments of interest. No LYONs were outstanding until mid-June 1995. The
average amount of debt under the vendor financing agreements was $116.8 million
in the first six months of 1996 and $104.4 million in 1995. The average interest
rate on such debt was 8.0% in 1996 and 9.0% in 1995. The average amount of debt
outstanding under the Revolving Credit Agreement was $185.7 million during the
first half of 1995; no borrowings were outstanding during the first half of
1996. The average interest rate on such debt was 11.1% in 1995.
Income tax expense was $82.0 million in 1996 and $6.5 million in 1995. In 1996,
$60.8 million of income tax expense related to the gains on sales of cellular
interests; this amount was only $2.9 million in 1995. An increase in pretax
income generated by improved operating results in 1996 provided the remainder of
the increase in income tax expense. State income tax expense in both years 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 1996.
Net Income
Net income totaled $92.4 million in 1996, an increase of $44.8 million, or 94%,
over 1995. Net income per share was $1.08 in 1996 and $.57 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 $28.2 million in 1996, an increase of $13.0 million, or 85%,
over 1995. On this basis, net income per share was $.33 in 1996 and $.18 in
1995. The improvement in net income per share primarily reflects the improvement
in net income partially 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.
Three Months Ended 6/30/96 Compared to Three Months Ended 6/30/95
Operating revenues totaled $174.7 million in the second quarter of 1996, up
$57.6 million, or 49%, over 1995. Average monthly service revenue per customer
decreased 7% to $70 in the second quarter of 1996 compared to $75 in 1995 for
reasons generally the same as the first half of 1996. Revenues from local
customers' usage of USM's systems increased $38.6 million, or 56%, in 1996
primarily due to the increased number of customers served. Average monthly local
retail minutes of use per customer totaled 107 in the second quarter of 1996
compared to 95 in 1995. However, as the number of customers and amount of
revenue earned continued to grow, average revenue per minute of use continued to
decline. As a result, average monthly local retail revenue per
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customer declined 4% to $44 in the second quarter of 1996 compared to $46 in
1995. Inbound roaming revenue increased $13.5 million, or 38%, in 1996 due to
the increased number of other carriers' customers using the Company's systems
and the growth in the number of cell sites in those systems. Monthly inbound
roaming revenue per customer averaged $20 in 1996 compared to $23 in 1995.
Long-distance revenue increased $5.5 million, or 68%, in 1996 as the volume of
long-distance calls billed by the Company increased. Monthly long-distance
revenue per customer averaged $6 in 1996 and $5 in 1995. Equipment sales revenue
reflects sales of 87,000 cellular telephones in 1996 compared to 68,000 in 1995.
The average revenue per unit sold was $48 in 1996 and $53 in 1995.
Operating expenses totaled $144.7 million in the second quarter of 1996, up
$38.4 million, or 36%, over 1995 for reasons generally the same as the first
half of 1996.
Operating income before minority share totaled $30.0 million in 1996 compared to
$10.9 million in 1995. The operating income margin improved to 18% in 1996 from
10% in 1995. The improvement in operating income and operating income margin was
primarily the result of increased revenues and cost efficiencies, partially
offset by the costs associated with the growth of the Company's operations and
additional costs related to fraud and bad debt.
Investment income increased $3.3 million, or 38%, in 1996 due to improved
results in markets managed by others accounted for by the equity method. Gain on
sale of cellular and other investments totaled $86.3 million in 1996, resulting
from the sale of the Company's majority interests in four markets, its
investment interest in one other market and cash received from the settlement of
two separate legal matters during the quarter. Gain on the sale of cellular and
other investments totaled $16.8 million in 1995.
Net income totaled $63.1 million in 1996 compared to $24.1 million in 1995. In
both years, net income included significant gains on sales of cellular and other
investments. A summary of the net-of-tax effect of these gains is shown below.
Three Months Ended June 30,
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1996 1995
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(Dollars in thousands,
except per share amounts)
Net income as reported $ 63,055 $ 24,089
Less: Effects of gains (43,361) (15,236)
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As adjusted $ 19,694 $ 8,853
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Earnings per share as reported $ .73 $ .29
Less: Effects of gains (.50) (.18)
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As adjusted $ .23 $ .11
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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 anticipates further substantial increases in cellular units in service,
revenues and cell
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sites as it continues its rapid growth strategy. As the Company's customer and
revenue base grows, the rate of increase in operating cash flow and operating
income may be reduced over the next several quarters.
Cash flows from operating activities provided $44.4 million in 1996 and $53.0
million in 1995. Operating cash flow provided cash totaling $93.6 million in
1996 and $59.6 million in 1995. 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
$49.2 million in 1996 and $6.6 million in 1995. The increase in cash required
for other activities in 1996 is primarily due to the effects of the Company's
conversion to a new accounting system software and associated changes in
accounts payable procedures.
Cash flows from financing activities provided $1.2 million in 1996 and $18.1
million in 1995. In 1996, issuance of USM Common Shares, primarily to TDS,
provided $9.6 million while repayments of debt under the vendor financing
agreements required $10.0 million. In 1995, the sale of LYONs provided cash
totaling $221.5 million and vendor financing transactions provided $58.7
million. Repayments of amounts owed under the Revolving Credit Agreement with
TDS and amounts owed under the vendor financing agreement totaled $249.9 million
and $7.6 million, respectively, in 1995.
Cash flows from investing activities provided $73.6 million in 1996 and required
$50.1 million in 1995. The Company received net cash proceeds totaling $178.0
million in 1996 and $82.5 million in 1995 related to the sales and exchanges of
cellular and other investments. Cash required for property, plant and equipment
expenditures totaled $103.0 million in 1996, for the construction of 72 cell
sites and other plant additions; these cash requirements totaled $95.6 million
in 1995, for the construction of 119 cell sites and other plant additions.
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 half of
1996, the Company purchased a controlling interest in one market and several
minority interests, representing 308,000 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 $43.6 million. In the first half of 1995, the
Company purchased controlling interests in ten markets and several minority
interests, representing 1.4 million pops. The total consideration paid for these
purchases, primarily in the form of USM Common Shares issued to
-8-
TDS to reimburse TDS for the value of TDS Common Shares issued to third parties,
totaled $135.9 million. Some of 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 six months of 1996, the Company sold controlling interests in eight
markets and one market partition, plus a minority interest in another market,
representing 1.1 million pops, and divested a controlling interest in another
market through an exchange. The Company received consideration totaling $181.0
million both from these sales and from the exchange. The company also settled
two separate legal matters during the first six months of 1996, receiving $30.3
million from those transactions. In total, sales, exchanges and litigation
settlements provided the Company with cash and receivables totaling $211.3
million in the first half of 1996. In the first six months of 1995, the Company
sold controlling interests in three markets and minority interests in three
markets, representing 599,000 pops. The Company received consideration of cash
and receivables totaling $64.5 million from these sales.
The Company and TDS have reached an agreement, pursuant to which TDS will
transfer its minority ownership interests in certain cellular markets acquired
in conjunction with prior acquisitions of telephone companies to the Company.
The minority interests subject to the proposal represent approximately 614,000
population equivalents. The purchase price is approximately $110 million in
cash. At June 30, 1996, the Company had an agreement pending to divest a
minority interest in one market, representing 61,000 pops, for $7 million in
cash. The pending acquisition and divestiture agreements discussed above are
expected to be completed during 1996.
Liquidity
The Company anticipates that the aggregate resources required for the remainder
of 1996 will include approximately $137 million for capital spending, $110
million for the purchase of cellular interests from TDS and $11 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. While it is not known what effect these potential
acquisitions may have on the Company's liquidity during the second half of 1996,
the funding needs for potential acquisitions may be substantial.
The Company had $158 million of cash and cash equivalents at June 30, 1996 and
anticipates generating over $100 million of operating cash flow during the
remainder of 1996. The Company also has $100 million available under the
Revolving Credit Agreement with TDS.
Management believes that the Company has sufficient financial resources to help
meet its short-term financing needs. Additionally, the Company has access to
public and private capital markets to help meet its long-term financing needs
and anticipates issuing debt and equity securities when capital requirements
(including acquisitions), financial market conditions and other factors warrant.
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
(dollars in thousands, except per share amounts)
OPERATING REVENUES
Service $ 170,529 $ 113,500 $ 314,221 $ 209,900
Equipment sales 4,191 3,624 8,465 6,972
--------- ---------- --------- ----------
Total Operating Revenues 174,720 117,124 322,686 216,872
--------- ---------- --------- ----------
OPERATING EXPENSES
System operations 28,811 17,239 52,389 30,441
Marketing and selling 31,918 23,711 62,821 43,633
Cost of equipment sold 15,917 12,838 31,390 24,037
General and administrative 41,439 31,473 82,492 59,140
Depreciation 18,125 13,188 35,060 25,452
Amortization of intangibles 8,489 7,823 16,691 15,253
--------- --------- --------- ----------
Total Operating Expenses 144,699 106,272 280,843 197,956
--------- --------- --------- ----------
OPERATING INCOME BEFORE
MINORITY SHARE 30,021 10,852 41,843 18,916
Minority share of operating
income (3,309) (1,875) (5,421) (3,763)
--------- --------- --------- ----------
OPERATING INCOME 26,712 8,977 36,422 15,153
--------- --------- --------- ----------
INVESTMENT AND OTHER INCOME
Investment income 12,025 8,728 22,328 18,445
Amortization of licenses
and deferred costs
related to investments (288) (261) (574) (493)
Interest income 3,118 1,060 4,270 2,052
Other (expense), net (934) (560) (1,267) (1,230)
Gain on sale of cellular
interests 86,305 16,842 124,996 35,359
--------- --------- --------- ----------
Total Investment and
Other Income 100,226 25,809 149,753 54,133
--------- --------- --------- ----------
INCOME BEFORE INTEREST
AND INCOME TAXES 126,938 34,786 186,175 69,286
Interest expense - affiliate -- 4,237 -- 10,327
Interest expense - other 5,949 3,154 11,755 4,769
--------- --------- --------- ----------
INCOME BEFORE INCOME TAXES 120,989 27,395 174,420 54,190
Income tax expense 57,934 3,306 81,978 6,503
--------- --------- --------- ----------
NET INCOME $ 63,055 $ 24,089 $ 92,442 $ 47,687
========= ========= ========= ==========
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON SHARES
(000s) 86,166 83,937 85,926 82,979
EARNINGS PER COMMON AND
SERIES A COMMON SHARE $ .73 $ .29 $ 1.08 $ .57
========= ========= ========= ==========
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES
ASSUMING FULL DILUTION
(000s) 93,225 85,115 92,987 83,570
EARNINGS PER COMMON AND
SERIES A COMMON SHARE
ASSUMING FULL DILUTION $ .70 $ .29 $ 1.03 $ .57
========= ========= ========= ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-10-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended
June 30,
--------------------------
1996 1995
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 92,442 $ 47,687
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 52,325 41,198
Investment income (22,328) (18,445)
Gain on sale of cellular and other investments (124,996) (35,359)
Minority share of operating income 5,421 3,763
Other noncash expense 8,535 6,660
Change in accounts receivable (18,647) (12,981)
Change in accounts payable (21,269) (146)
Change in accrued interest 113 10,235
Change in accrued taxes 37,014 3,168
Change in deferred taxes 31,812 1,051
Change in other assets and liabilities 4,000 6,126
---------- -----------
44,422 52,957
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 3,922 58,698
Change in Convertible Debentures -- 221,466
Repayment of long-term debt (9,986) (7,642)
Change in Revolving Credit Agreement -- (249,916)
Common Shares issued 9,618 513
Minority partner capital distributions (2,317) (5,035)
---------- -----------
1,237 18,084
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (103,025) (95,612)
Investments in and advances to minority
partnerships (7,764) (10,929)
Distributions from partnerships 10,004 4,552
Proceeds from sale of investments 77,954 82,478
Acquisitions, excluding cash acquired (872) (26,841)
Other investments (2,744) (3,738)
---------- -----------
73,553 (50,090)
---------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 119,212 20,951
CASH AND CASH EQUIVALENTS-
Beginning of period 38,404 5,800
---------- -----------
End of period $ 157,616 $ 26,751
========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-11-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, 1996 December 31, 1995
------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents
General funds $ 1,643 $ 8,462
Affiliated cash investments 155,973 29,942
------------ ------------
157,616 38,404
------------ ------------
Accounts receivable
Customers 57,134 42,934
Roaming 31,296 26,316
Affiliates 14 2,166
Other 16,367 5,761
Inventory 4,676 9,198
Prepaid and other current assets 6,657 5,007
------------ ------------
273,760 129,786
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
In service 749,306 674,450
Less accumulated depreciation 169,994 144,423
------------ ------------
579,312 530,027
------------ ------------
INVESTMENTS
Cellular partnerships 149,095 134,421
Licenses, net of amortization 1,006,165 1,035,846
Notes and interest receivable 36,232 16,376
------------ ------------
1,191,492 1,186,643
------------ ------------
DEFERRED CHARGES
Deferred start-up costs,
net of amortization 875 1,728
Other deferred charges,
net of amortization 34,341 31,960
------------ ------------
35,216 33,688
------------ ------------
Total Assets $ 2,079,780 $ 1,880,144
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-12-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
June 30, 1996 December 31, 1995
--------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt and
preferred stock $ 20,827 $ 30,939
Notes payable 1,375 1,375
Accounts payable
Affiliates 2,366 11,636
Other 43,367 62,046
Accrued taxes 57,253 20,753
Customer deposits and deferred revenues 12,981 11,332
Other current liabilities 18,892 17,028
------------- -------------
157,061 155,109
------------- -------------
LONG-TERM DEBT, excluding current portion 94,218 98,656
------------- -------------
6% ZERO COUPON CONVERTIBLE DEBENTURES 242,822 235,750
------------- -------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 53,839 14,331
Other 1,930 1,541
------------- -------------
55,769 15,872
------------- -------------
MINORITY INTEREST 46,300 45,303
------------- -------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 53,084 49,966
Series A Common Shares, par value $1
per share 33,006 33,006
Additional paid-in capital 1,289,993 1,206,614
Common Shares issuable,
928,009 shares in 1995 -- 24,784
Retained earnings 107,527 15,084
------------- -------------
1,483,610 1,329,454
------------- -------------
Total Liabilities
and Shareholders' Equity $ 2,079,780 $ 1,880,144
============= =============
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
-13-
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 June 30, 1996 and December 31,
1995, and the results of operations and cash flows for the six months
ended June 30, 1996 and 1995. The results of operations for the six months
ended June 30, 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 six months ended
June 30, 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 June 30, 1996 and 1995, consist primarily of
dilutive Common Shares issuable and Redeemable Preferred Stock.
Earnings per Common and Series A Common Share Assuming Full Dilution for
the six months ended June 30, 1996 and 1995, was computed by dividing Net
Income, as adjusted for the interest expense eliminated as a result of the
pro forma conversion of Convertible Debentures, 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 June 30, 1996 and 1995, consist primarily of dilutive
Convertible Debentures (assuming conversion into Common Shares), Common
Shares issuable and Redeemable Preferred Stock.
3. Assuming that acquisitions accounted for as purchases during the period
January 1, 1995, to June 30, 1996, had taken place on January 1, 1995, pro
forma results of operations would have been as follows:
Six Months Ended
June 30,
-------------------------
1996 1995
---- ----
(Dollars in thousands,
except per share amounts)
Service Revenues $ 314,825 $ 218,152
Equipment Sales 8,472 7,763
Interest Expense (including cost to
finance acquisitions) 11,756 14,916
Net Income 92,223 39,760
Earnings per Common and Series A Common Share $ 1.07 $ .45
-14-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. 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 June 30, 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 49.99%
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands)
REVENUES $ 224,556 $ 197,943 $ 430,897 $ 382,768
EXPENSES
Selling, general and
administrative 118,358 103,983 228,522 191,647
Depreciation and
amortization 23,582 16,611 46,546 31,833
---------- ---------- ---------- ----------
141,940 120,594 275,068 223,480
---------- ---------- ---------- ----------
OPERATING INCOME 82,616 77,349 155,829 159,288
OTHER INCOME, NET 1,017 1,380 3,435 3,121
---------- ---------- ---------- ----------
NET INCOME $ 83,633 $ 78,729 $ 159,264 $ 162,409
========== ========== ========== ==========
-15-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first six months of 1996 and 1995. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed and
Common Shares issued.
Six Months Ended
June 30,
------------------------
1996 1995
---- ----
(Dollars in thousands)
Property, plant and equipment $ 7,069 $ 25,837
Cellular licenses 39,063 113,316
Decrease in equity-method investment
in cellular interests (2,733) (1,233)
Accounts receivable 1,332 3,922
Revolving Credit Agreement - TDS -- (15,493)
Accounts payable (938) (1,879)
Other assets and liabilities,
excluding cash acquired (422) 814
Common Shares issued and issuable (42,499) (98,443)
----------- ----------
Decrease in cash due to acquisitions $ 872 $ 26,841
=========== ==========
The following summarizes certain noncash transactions, and interest and
income taxes paid.
Six Months Ended
June 30,
-------------------------
1996 1995
---- ----
(Dollars in thousands)
Interest paid $ 3,145 $ 2,144
Income taxes paid 17,310 1,998
Accrued interest converted into debt
under the Revolving Credit Agreement -- 14,432
Common Shares issued by USM for conversion
of USM Preferred Stock and TDS Preferred
Shares $ 18,450 $ 22,236
-16-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Contingencies
The Company's material contingencies as of June 30, 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
13 of Notes to Consolidated Financial Statements included in the
Company's 1995 Report on Form 10-K for the year ended December 31, 1995.
7. Convertible Debentures
The Company sold $745 million principal amount at maturity of zero
coupon convertible debt in June 1995. This convertible debt, in the form
of Liquid Yield Option Notes ("LYONS"), is subordinated to all senior
indebtedness of the Company. At June 30, 1996, the Company's senior
indebtedness totaled $124.0 million.
-17-
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
At the Annual Meeting of Shareholders of USM, held on May 15, 1996, the
following numbers of votes were cast for the matters indicated:
1.a. Election of two Class III Directors of the Company by the holder of
Series A Common Shares:
Broker
Nominee For Withhold Non-Vote
------- ----- -------- --------
LeRoy T. Carlson, Jr. 330,058,770 -- --
Walter C.D. Carlson 330,058,770 -- --
1.b. Election of one Class III Director of the Company by the holders of
Common Shares:
Broker
Nominee For Withhold Non-Vote
------- ----- -------- --------
Allan Z. Loren 50,665,716 343,550 --
2. Proposal to Ratify the Selection of Arthur Andersen LLP as Independent
Public Accountants for 1996:
Broker
For Against Abstain Non-Vote
---- ------- ------- --------
381,060,390 6,302 1,344 --
-18-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 10 - Cellular Interest Transfer Agreement by and
between TDS and USM.
Exhibit 11 - Computation of earnings per common share.
Exhibit 12 - Statement regarding computation of ratios.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1996:
The Company filed a report on Form 8-K dated June 21, 1996, which
included a press release which announced that Telephone and Data
Systems, Inc. ("TDS") agreed to transfer its minority ownership
interests in certain cellular markets to the Company for
approximately $110.2 million in cash. The minority interests
subject to be transferred represent approximately 614,000
population equivalents.
No other reports on Form 8-K were filed during the quarter ended
June 30, 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 August 13, 1996 /s/ H. DONALD NELSON
--------------------------
H. Donald Nelson
President
(Chief Executive Officer)
Date August 13, 1996 /s/ KENNETH R. MEYERS
--------------------------
Kenneth R. Meyers
Vice President-Finance and Treasurer
(Chief Financial Officer)
Date August 13, 1996 /s/ PHILLIP A. LORENZINI
--------------------------
Phillip A. Lorenzini
Controller
(Principal Accounting Officer)
-20-