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 September 30, 1996
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 October 31, 1996
Common Shares, $1 par value 53,090,700 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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UNITED STATES CELLULAR CORPORATION
3RD 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 and Nine Months Ended
September 30, 1996 and 1995 11
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 12
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 13-14
Notes to Consolidated Financial Statements 15-19
Part II. Other Information 20
Signatures 21
PART I. FINANCIAL INFORMATION
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
NINE MONTHS ENDED 9/30/96 COMPARED TO NINE MONTHS ENDED 9/30/95
RESULTS OF OPERATIONS
United States Cellular Corporation (the "Company" - AMEX: USM) owns, operates
and invests in cellular markets throughout the United States. USM owns cellular
interests representing 24,722,000 population equivalents ("pops") as of
September 30, 1996. USM included the operations of 130 majority-owned and
managed cellular markets, representing 20.0 million pops, in consolidated
operations ("consolidated markets") as of September 30, 1996. Noncontrolling
interests in 33 markets, representing 3.7 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 40 other markets,
representing 1.0 million pops, were accounted for using the cost method.
Following is a table of summarized operating data for USM's consolidated
operations.
Nine Months Ended or at September 30,
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1996 1995
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Total market population (in thousands) (1) 21,483 22,210
Customers 940,000 618,000
Market penetration 4.38% 2.78%
Markets in operation 130 138
Cell sites in service 1,270 1,041
Average monthly revenue per customer $ 67 $ 75
Churn rate per month 1.9% 2.0%
Marketing cost per net customer addition $ 591 $ 586
(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 nine months of 1996 primarily reflect improvement in
the Company's established markets (those markets included in consolidated
operations at September 30, 1995) plus the net effect of the two markets
acquired and ten markets divested since September 30, 1995. Operating revenues,
driven primarily by increases in customers served, rose $154.8 million, or 44%.
Operating expenses rose $116.8 million, or 37%. Operating cash flow (operating
income before minority share plus depreciation and amortization expense)
increased $53.0 million, or 52%.
Investment and other income increased $67.6 million, or 63%, to $174.9 million,
due primarily to the increase of $55.1 million in gains on the sales of cellular
and other investments. Interest expense decreased $3.7 million, or 17%, in 1996,
primarily due to lower effective interest rates. Income tax expense increased
$67.8 million to $105.2 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 $118.6 million in 1996 compared to $80.0 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 on net income is
shown below.
-2-
Nine Months Ended September 30,
1996 1995
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(Dollars in thousands,
except per share amounts)
Net income as reported $ 118,582 $ 79,950
Less: Effects of gains, net of tax (66,442) (49,180)
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As adjusted $ 52,140 $ 30,770
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Earnings per share as reported $ 1.38 $ .95
Less: Effects of gains, net of tax (.77) (.58)
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As adjusted $ .61 $ .37
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OPERATING REVENUES
Operating revenues totaled $510.3 million in 1996, up $154.8 million, or 44%,
over 1995. The net effect of acquisitions and divestitures ("net acquisitions")
increased operating revenues $12.7 million, or 4%, 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 $497.5 million in 1996, up $153.0
million, or 44%, 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 10% to $67 in 1996. Net acquisitions
increased service revenues $12.2 million, or 4%, in 1996.
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 106 in 1996 compared to 93 in 1995, 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. Inbound roaming revenue has been increasing at a slower
rate than the Company's own customer base (28% compared to 52%). The Company
believes that its customer base is growing faster than the rest of the industry,
which has a dilutive effect on inbound roaming revenue per customer. Also, the
Company's average inbound roaming revenue per minute of use decreased during
1996, in line with the ongoing trend toward reduced per minute prices for
roaming negotiated between the Company and other cellular operators.
Local retail revenue increased $109.3 million, or 53%, in 1995. Growth in the
number of customers was the primary reason for the increase in local revenue.
The number of customers increased 52% to 940,000 at September 30, 1996 from
618,000 at September 30, 1995. The Company's consolidated markets added 232,000
customers internally in 1996 compared to 165,000 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
$13.9 million, or 7%, 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 14% to
106 in 1996. 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. 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 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 61%, or $125.6
million, in 1996 due to customer growth and declined 8%, or $16.3 million, due
to decreases in average monthly local retail revenue per customer.
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Inbound roaming revenue increased $30.9 million, or 28%, 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 due to the
downward trend in negotiated rates. Monthly inbound roaming revenue per customer
averaged $19 in 1996 and $24 in 1995. This 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. Net acquisitions decreased
inbound roaming revenue $1.3 million, or 1%, in 1996.
Long-distance revenue increased $14.5 million, or 58%, 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 $1.1 million, or 5%, in 1996.
Equipment sales revenues totaled $12.8 million in 1996, up $1.8 million, or 16%,
over 1995. Equipment sales reflect the sale of 288,000 and 192,000 cellular
telephone units in 1996 and 1995, respectively, plus installation and
accessories revenue. The average revenue per unit was $44 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 $534,000, or 5%, in 1996.
OPERATING EXPENSES
Operating expenses totaled $435.3 million in 1996, up $116.8 million, or 37%,
over 1995. Acquisitions increased expenses $13.4 million, or 4%, in 1996.
System operations expenses increased $27.3 million, or 52%, 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 in 1996 were $9.3 million of additional costs related to fraudulent use
of the Company's customers' cellular telephone numbers. The Company continues to
implement procedures in its 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 $1.8 million, or 3%, 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. 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, offset somewhat by pass-through roaming revenue. Customer usage
expenses were $47.7 million in 1996 compared to $25.5 million in 1995, and
represented 10% of service revenues in 1996 and 7% in 1995. These increases
primarily resulted from the effect of increased roaming fraud costs in 1996.
Maintenance, utility and cell site expenses totaled $32.0 million in 1996
compared to $26.9 million in 1995, primarily reflecting an increase in the
number of cell sites in the systems serving all majority-owned and managed
markets, to 1,270 in 1996 from 1,041 in 1995.
Marketing and selling expenses increased $31.1 million, or 45%, 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 44% rise in the number of gross customer
activations (excluding acquisitions and divestitures), to 373,000 in 1996 from
259,000 in 1995. Cost per gross customer activation, including losses on
equipment
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sales, decreased to $368 in 1996 from $373 in 1995. Net acquisitions increased
marketing and selling expenses $5.5 million, or 8%, in 1996.
Cost of equipment sold increased $11.2 million, or 29%, 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
$172 in 1996 compared to $200 in 1995. Net acquisitions increased cost of
equipment sold $2.8 million, or 7%, in 1996.
General and administrative expenses increased $32.2 million, or 34%, 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
$3.1 million, or 3%, in 1996.
Operating cash flow increased $53.0 million, or 52%, to $154.2 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 31% in 1996 and 29% in 1995. Net acquisitions
decreased operating cash flow $904,000, or 1%, in 1996.
Depreciation expense increased $13.1 million, or 32%, in 1996. The increase
reflects rising average fixed asset balances, which increased 34% 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 $453,000, or 1%, in 1996.
Amortization of intangibles increased $1.8 million, or 8%, 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 decreased amortization of intangibles $254,000, or 1%, in 1996.
OPERATING INCOME BEFORE MINORITY SHARE
Operating income before minority share totaled $74.9 million in 1996, an
increase of $38.1 million, or 103%, over 1995. The operating income margin (as a
percent of service revenues) was 15% in 1996 and 11% 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 $705,000, or 2%, in 1996.
The Company expects service revenues to continue to grow during the remainder of
1996 and in 1997 as it adds customers to its existing systems and realizes a
full year of revenues from customers added in 1995 and 1996. 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. Additionally, competitors licensed to provide
personal communications services ("PCS") have
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initiated service in certain of the Company's markets in recent months. The
Company anticipates that PCS operators will intiate service in several other of
the Company's markets later in 1996 and in 1997. The Company's management is
monitoring these and other PCS providers' strategies, but cannot at this time
anticipate what effect, if any, this additional competition will have on the
Company's future strategies and results.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $174.9 million in 1996, an increase of $67.6
million, or 63%, over 1995. Investment income was $36.4 million in 1996 compared
to $28.6 million in 1995, a 27% 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
$132.8 million in 1996, an increase of $55.1 million, or 71%, over 1995. The
1996 amount primarily reflects gains recorded on the sales of the Company's
majority interests in eight markets and minority interests in two other markets,
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 five
markets and minority interests in three markets.
INTEREST AND INCOME TAXES
Total interest expense decreased $3.7 million, or 17%, in 1996. Interest expense
in 1996 is primarily related to Liquid Yield Option Notes ("LYONs") ($10.7
million) and borrowings under vendor financing agreements ($6.1 million).
Interest expense in 1995 is primarily related to borrowings under the Revolving
Credit Agreement with Telephone and Data Systems, Inc. (AMEX: TDS), the
Company's parent organization, ($10.4 million), borrowings under the vendor
financing agreements ($6.8 million) and the LYONs financing ($4.0 million).
The LYONs are zero coupon convertible debentures which do not require current
cash payments of interest. No LYONs were outstanding until June 1995, at which
time LYONs were issued in the amount of $228.3 million. The average amount of
debt under the vendor financing agreements was $115.1 million in the first nine
months of 1996 and $109.6 million in 1995. The average interest rate on such
debt was 7.9% in 1996 and 8.9% in 1995. The average amount of debt outstanding
under the Revolving Credit Agreement was $130.0 million during the first nine
months of 1995; no borrowings were outstanding during the first nine months of
1996. The average interest rate on such debt was 10.6% in 1995.
Income tax expense was $105.2 million in 1996 and $37.4 million in 1995. In
1996, $66.4 million of income tax expense related to the gains on sales of
cellular and other investments compared to $28.5 million in 1995. An increase in
pretax income generated by improved operating results in 1996 caused the
remainder of the increase in income tax expense.
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 $118.6 million in 1996, an increase of $38.6 million, or 48%,
over 1995. Net income per share was $1.38 in 1996 and $.95 in 1995. The
improvement resulted from gains on the sales of cellular and other investments
and improved operating results in the established markets, partially offset by
increased income tax expense. 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 on net income is shown below.
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Nine Months Ended September 30,
1996 1995
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(Dollars in thousands,
except per share amounts)
Net income as reported $ 118,582 $ 79,950
Less: Effects of gains, net of tax (66,442) (49,180)
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As adjusted $ 52,140 $ 30,770
============ ============
Earnings per share as reported $ 1.38 $ .95
Less: Effects of gains, net of tax (.77) (.58)
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As adjusted $ 61 $ .37
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THREE MONTHS ENDED 9/30/96 COMPARED TO THREE MONTHS ENDED 9/30/95
Operating revenues totaled $187.6 million in the third quarter of 1996, up $49.0
million, or 35%, over 1995. Average monthly service revenue per customer
decreased 12% to $68 in the third quarter of 1996 compared to $77 in 1995 for
reasons generally the same as the first nine months of 1996. Revenues from local
customers' usage of USM's systems increased $36.1 million, or 45%, in 1996
primarily due to the increased number of customers served. Average monthly local
retail minutes of use per customer totaled 112 in the third quarter of 1996
compared to 97 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 customer declined
6% to $43 in the third quarter of 1996 compared to $46 in 1995. Inbound roaming
revenue increased $8.1 million, or 18%, 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 $19 in 1996 compared to $25 in 1995. Long-distance revenue
increased $4.4 million, or 43%, in 1996 as the volume of long-distance calls
billed by the Company increased. Monthly long-distance revenue per customer
averaged $5 in 1996 and $6 in 1995. Equipment sales revenue reflects sales of
111,000 cellular telephones in 1996 compared to 73,000 in 1995.
The average revenue per unit sold was $39 in 1996 and $55 in 1995.
Operating expenses totaled $154.5 million in the third quarter of 1996, up $33.9
million, or 28%, over 1995. System operations expenses increased $5.4 million,
or 24%, in 1996 as a result of increased customer usage expenses and costs
associated with maintaining 22% more cell sites than in 1995. Also contributing
were $4.0 million of additional costs incurred in 1996 related to roaming fraud.
Customer usage expenses were $16.4 million in 1996 compared to $12.3 million in
1995; maintenance, utility and cell site expenses were $10.9 million in 1996
compared to $9.7 million in 1995. Marketing and selling expenses increased $11.9
million, or 47%, in 1996. The increase was primarily due to a 36% increase in
the number of gross customer activations (excluding acquisitions and
divestitures) to 133,000 in 1996 from 98,000 in 1995, and also due to an
increase in cost per gross customer activation to $386 in 1996 from $366 in
1995. Cost of equipment sold increased $3.9 million, or 27%, in 1996. The
increase reflects a rise in the number of cellular telephones sold, to 111,000
in 1996 compared to 73,000 in 1995, partially offset by a decrease in average
cost per telephone sold, to $164 in 1996 from $197 in 1995. General and
administrative expenses increased $8.8 million, or 25%, in 1996, primarily
related to the increase in customers served and an increase in bad debt expense.
Operating cash flow increased $19.0 million, or 46%, to $60.6 million in 1996,
and operating cash flow margins increased to 33% in 1996 from 31% in 1995.
Depreciation expense increased $3.5 million, or 23%, in 1996, reflecting a 30%
increase in average fixed asset balances. Amortization of intangibles increased
$407,000, or 5%, in 1996, primarily reflecting increased system development
costs.
Operating income before minority share totaled $33.1 million in 1996 compared to
$18.0 million in 1995, an 84% increase. The operating income margin improved to
18% in 1996 from 13% in 1995. The improvement in operating income and operating
income margin was primarily the result of increased revenues and cost
-7-
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 $3.9 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 $7.8 million in 1996 and $42.3
million in 1995.
Net income totaled $26.1 million in 1996 compared to $32.3 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 September 30,
1996 1995
---- ----
(Dollars in thousands,
except per share amounts)
Net income as reported $ 26,140 $ 32,263
Less: Effects of gains (2,241) (16,732)
------------ ------------
As adjusted $ 23,899 $ 15,531
============ ============
Earnings per share as reported $ .30 $ .38
Less: Effects of gains (.02) (.20)
------------ ------------
As adjusted $ .28 $ .18
============ ============
FINANCIAL RESOURCES AND LIQUIDITY
The Company operates a capital and marketing-intensive business. 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 sites as it continues its growth strategy. As the Company's
customer and revenue base grows, the rate of year-over-year increases in
operating cash flow and operating income may be reduced over the next several
quarters.
Cash flows from operating activities provided $126.3 million in 1996 and $80.9
million in 1995. Operating cash flow provided $154.2 million in 1996 and $101.2
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 $27.9 million in 1996
and $20.3 million in 1995. The increase in cash required for other activities in
1996 is primarily due to the effects of the Company's growth and resulting
working capital requirements.
Cash flows from financing activities required $6.3 million in 1996 and provided
$20.9 million in 1995. In 1996, issuance of USM Common Shares, primarily to TDS,
provided $9.8 million while repayments of debt under the vendor financing
agreements required $15.8 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 $10.5 million, respectively, in 1995.
Cash flows from investing activities required $93.1 million in 1996 and $48.6
million in 1995. The Company received net cash proceeds totaling $193.6 million
in 1996 and $141.4 million in 1995 related to the sales and exchanges of
cellular and other investments. Cash required for property, plant and equipment
and system development expenditures totaled $172.9 million in 1996, representing
the construction of 184 cell sites and other system additions; these cash
requirements totaled $163.7 million in 1995, representing the construction of
211 cell sites and other system additions. Acquisitions required $112.0 million
in 1996, primarily for the purchase of minority interests from TDS.
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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 nine months of
1996, the Company purchased a controlling interest in one market and several
minority interests, representing 971,000 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
cash and USM Common Shares issued to TDS to reimburse TDS for the value of TDS
Common Shares issued to third parties, totaled $153.9 million. Included in these
acquisitions are minority interests representing 584,000 pops USM acquired from
TDS for $102.8 million in cash, pursuant to an agreement entered into in June
1996.
In the first nine months of 1995, the Company purchased controlling interests in
ten markets and several minority interests, representing 1.5 million pops. The
total consideration paid for these purchases, primarily in the form of cash and
USM Common Shares issued or issuable to TDS to reimburse TDS for the value of
TDS Common Shares issued and issuable and cash paid to third parties, totaled
$150.6 million.
In the first nine months of 1996, the Company sold controlling interests in
eight markets and one market partition, plus minority interests in two other
markets, representing 1.1 million pops, and divested a controlling interest in
another market through an exchange. The Company received consideration totaling
$187.8 million both from these sales and from the exchange. The Company also
settled two separate legal matters during the first nine 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
$218.1 million in the first nine months of 1996.
In the first nine months of 1995, the Company sold controlling interests in five
markets and minority interests in three markets, representing 983,000 pops. The
Company received consideration of cash and receivables totaling $122.7 million
from these sales.
Pursuant to the agreement to acquire minority interests from TDS, USM will
acquire additional interests, representing an additional 101,000 pops, for $17.2
million in cash. Additionally, at September 30, 1996, the Company had an
agreement pending to acquire a controlling interest in one market and a minority
interest in another market, representing 241,000 pops, for $34.8 million in
cash. The pending acquisition agreements discussed above are expected to be
completed during 1996. The Company is currently negotiating agreements for the
acquisition of additional cellular interests which fit its strategic plans.
LIQUIDITY
The Company anticipates that the aggregate resources required for the remainder
of 1996 will include approximately $67 million for capital spending, $65 million
for income tax payments, $52 million for acquisitions and $6 million of
scheduled debt repayments. The Company had $65 million of cash and cash
equivalents at September 30, 1996 and anticipates generating over $40 million of
operating cash flow during the remainder of 1996. The Company also has $100
million available under the Revolving Credit Agreement with TDS.
-9-
Management believes that the Company's operating cash flows provide substantial
financial flexibility. The Company also has a line of credit to help meet its
short-term financing needs, and there are currently no material agreements or
commitments pending to issue additional debt or equity securities. 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 only 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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
----------- ------------ ---------- -----------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Service $ 183,269 $ 134,554 $ 497,490 $ 344,454
Equipment sales 4,325 4,013 12,790 10,985
----------- ------------ ---------- -----------
Total Operating Revenues 187,594 138,567 510,280 355,439
----------- ------------ ---------- -----------
OPERATING EXPENSES
System operations 27,339 21,972 79,728 52,413
Marketing and selling 37,486 25,571 100,307 69,204
Cost of equipment sold 18,241 14,356 49,631 38,393
General and administrative 43,969 35,131 126,461 94,271
Depreciation 18,631 15,143 53,691 40,595
Amortization of intangibles 8,834 8,427 25,525 23,680
---------- ------------ ---------- -----------
Total Operating Expenses 154,500 120,600 435,343 318,556
----------- ------------ ---------- -----------
OPERATING INCOME BEFORE
MINORITY SHARE 33,094 17,967 74,937 36,883
Minority share of
operating income (3,195) (1,950) (8,616) (5,713)
----------- ------------ ---------- -----------
OPERATING INCOME 29,899 16,017 66,321 31,170
----------- ------------ ---------- -----------
INVESTMENT AND OTHER INCOME
Investment income 14,073 10,196 36,401 28,641
Amortization of licenses
and deferred costs
related to investments (280) (299) (854) (792)
Interest income 3,374 1,266 7,644 3,318
Other income (expense), net 198 (238) (1,069) (1,468)
Gain on sale of cellular
interests and
other investments 7,797 42,301 132,793 77,660
----------- ------------ ----------- ----------
Total Investment and
Other Income 25,162 53,226 174,915 107,359
----------- ------------ ----------- ----------
INCOME BEFORE INTEREST
AND INCOME TAXES 55,061 69,243 241,236 138,529
Interest expense-affiliate -- 39 -- 10,366
Interest expense-other 5,741 6,045 17,496 10,814
----------- ------------ ----------- ----------
INCOME BEFORE INCOME TAXES 49,320 63,159 223,740 117,349
Income tax expense 23,180 30,896 105,158 37,399
----------- ------------ ----------- ----------
NET INCOME $ 26,140 $ 32,263 $ 118,582 $ 79,950
=========== ============ =========== ==========
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON
SHARES (000s) 86,158 84,561 86,002 83,846
EARNINGS PER COMMON AND
SERIES A COMMON SHARE $ .30 $ .38 $ 1.38 $ .95
=========== ============ =========== ==========
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
Nine Months Ended
September 30,
-----------------------
1996 1995
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 118,582 $ 79,950
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 80,070 65,067
Investment income (36,401) (28,641)
Gain on sale of cellular and other investments (132,793) (77,660)
Minority share of operating income 8,616 5,713
Other noncash expense 14,518 10,236
Change in accounts receivable (17,080) (26,720)
Change in accounts payable (9,365) 1,991
Change in accrued interest 113 10,120
Change in accrued taxes 47,206 10,235
Change in deferred taxes 42,604 21,876
Change in other assets and liabilities 10,244 8,693
----------- ------------
126,314 80,860
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 3,922 58,698
Change in Convertible Debentures -- 221,466
Repayment of long-term debt (15,752) (10,480)
Change in Revolving Credit Agreement -- (249,916)
Proceeds from the issuance of Common Shares 9,784 746
Minority partner capital distributions (4,302) 372
----------- ------------
(6,348) 20,886
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (156,387) (158,088)
System development costs (16,528) (5,628)
Investments in and advances to nonconsolidated
partnerships (16,709) (7,153)
Distributions from nonconsolidated partnerships 14,922 7,231
Proceeds from sale of cellular and other investments 193,625 141,387
Acquisitions, excluding cash acquired (112,071) (26,326)
----------- ------------
(93,148) (48,577)
----------- ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 26,818 53,169
CASH AND CASH EQUIVALENTS-
Beginning of period 38,404 5,800
----------- ------------
End of period $ 65,222 $ 58,969
=========== ============
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)
September 30, 1996 December 31, 1995
--------------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents
General funds $ 10,904 $ 8,462
Affiliated cash investments 54,318 29,942
------------ ------------
65,222 38,404
Accounts receivable
Customers, net of allowance 56,554 42,934
Roaming 34,120 26,316
Affiliates 48 2,166
Other 6,144 5,761
Inventory 6,805 9,198
Prepaid and other current assets 5,477 5,007
------------ ------------
174,370 129,786
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
In service 794,599 674,450
Less accumulated depreciation 179,818 144,423
------------ ------------
614,781 530,027
------------ ------------
INVESTMENTS
Cellular partnerships 172,430 134,421
Licenses, net of amortization 1,048,318 1,035,846
Notes and interest receivable 35,005 16,376
------------ ------------
1,255,753 1,186,643
------------ ------------
DEFERRED CHARGES
Deferred start-up costs,
net of amortization 585 1,728
Other deferred charges,
net of amortization 43,766 31,960
------------ ------------
44,351 33,688
------------ ------------
Total Assets $ 2,089,255 $ 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)
September 30, 1996 December 31, 1995
---------------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of
long-term debt and
preferred stock $ 23,065 $ 30,939
Notes payable 1,375 1,375
Accounts payable
Affiliates 7,357 11,636
Other 40,464 53,155
Accrued taxes 76,111 29,644
Customer deposits and
and deferred revenues 14,733 11,332
Other current liabilities 22,131 17,028
-------------- ---------------
185,236 155,109
-------------- ---------------
LONG-TERM DEBT, excluding
current portion 86,285 98,656
-------------- ---------------
6% ZERO COUPON CONVERTIBLE
DEBENTURES 246,456 235,750
-------------- ---------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income
tax liability 57,013 14,331
Other 2,187 1,541
-------------- ---------------
59,200 15,872
-------------- ---------------
MINORITY INTEREST 47,922 45,303
-------------- ---------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value
$1 per share 53,091 49,966
Series A Common Shares,
par value $1 per share 33,006 33,006
Additional paid-in capital 1,244,392 1,206,614
Common Shares issuable,
928,009 shares in 1995 -- 24,784
Retained earnings 133,667 15,084
-------------- ---------------
1,464,156 1,329,454
-------------- ---------------
Total Liabilities
and Shareholders' Equity $ 2,089,255 $ 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 September 30, 1996 and
December 31, 1995, and the results of operations and cash flows for the
nine months ended September 30, 1996 and 1995. The results of operations
for the nine months ended September 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 nine months ended
September 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 September 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 nine months ended September 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 September 30, 1996 and 1995, consist primarily
of dilutive Convertible Debentures (assuming conversion into Common
Shares), Common Shares issuable and Redeemable Preferred Stock.
-15-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Assuming that acquisitions accounted for as purchases during the period
January 1, 1995, to September 30, 1996, had taken place on January 1,
1995, pro forma results of operations would have been as follows:
Nine Months Ended
September 30,
--------------------------
1996 1995
------ ------
(Dollars in thousands,
except per share amounts)
Service Revenues $ 498,094 $ 357,093
Equipment Sales 12,797 11,975
Interest Expense (including cost
to finance acquisitions) 17,496 21,356
Net Income 122,066 74,401
Earnings per Common and
Series A Common Share $ 1.42 $ .87
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 September 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%
-16-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Dollars in thousands)
REVENUES $ 232,132 $ 191,808 $ 663,029 $ 574,576
EXPENSES
Selling, general and
administrative 120,586 100,643 349,108 292,290
Depreciation and
amortization 26,750 17,584 73,296 49,417
---------- ---------- ---------- ----------
147,336 118,227 422,404 341,707
---------- ---------- ---------- ----------
OPERATING INCOME 84,796 73,581 240,625 232,869
OTHER INCOME, NET 1,880 1,436 5,315 4,557
---------- ---------- ---------- ----------
NET INCOME $ 86,676 $ 75,017 $ 245,940 $ 237,426
========== ========== ========== ==========
-17-
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 nine months of 1996 and 1995. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed and
Common Shares issued.
Nine Months Ended
September 30,
----------------------
1996 1995
-------- ---------
(Dollars in thousands)
Property, plant and equipment $ 7,069 $ 30,852
Cellular licenses 88,006 130,454
Increase (Decrease) in equity-method
investment in cellular interests 13,971 (5,921)
Accounts receivable 1,332 4,336
Revolving Credit Agreement - TDS -- (15,493)
Accounts payable (1,106) (3,882)
Other assets and liabilities,
excluding cash acquired (463) (969)
Common Shares issued and issuable 3,262 (113,051)
-------- ---------
Decrease in cash due to acquisitions $ 112,071 $ 26,326
======== =========
The following summarizes certain noncash transactions, and interest and income
taxes paid.
Nine Months Ended
------------------
September 30,
1996 1995
-------- --------
(Dollars in thousands)
Interest paid $ 5,142 $ 2,842
Income taxes paid 21,409 2,547
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
-18-
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Contingencies
The Company's material contingencies as of September 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 September 30, 1996, the Company's senior
indebtedness totaled $119.4 million.
8. Transfer of Minority Interests to the Company from TDS
Pursuant to an agreement entered into in June, 1996, the Company
completed the acquisition of minority interests in 13 markets,
representing 584,000 population equivalents, from TDS in September, 1996
for $102.8 million in cash. Also pursuant to the agreement, the Company
is scheduled to acquire minority interests in two additional markets,
representing 101,000 population equivalents, for $17.2 million in cash.
The pending transfer is awaiting regulatory approvals.
-19-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 10.1 - Deferred Compensation Agreement for H. Donald Nelson
dated July 15, 1996.
Exhibit 10.2 - Deferred Compensation Agreement for Richard Goehring
dated July 15, 1996.
Exhibit 10.3 - Deferred Compensation Agreement for Michael Mutz dated
August 30, 1996.
Exhibit 11 - Computation of earnings per common share.
Exhibit 12 - Statement regarding computation of ratios.
Exhibit 27 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended September
30, 1996.
-20-
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 November 13, 1996 /s/ H. DONALD NELSON
-------------------------- ------------------------------
H. Donald Nelson
President
(Chief Executive Officer)
Date November 13, 1996 /s/ KENNETH R. MEYERS
-------------------------- -------------------------------
Kenneth R. Meyers
Vice President-Finance and Treasurer
(Chief Financial Officer)
Date November 13, 1996 /s/ PHILLIP A. LORENZINI
------------------------- --------------------------------
Phillip A. Lorenzini
Controller
(Principal Accounting Officer)
-21-