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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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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 ____________
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
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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 29, 1994
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Common Shares, $1 par value 44,806,360 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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UNITED STATES CELLULAR CORPORATION
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2ND QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
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Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-14
Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1994 and 1993 15
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1994 and 1993 16
Consolidated Balance Sheets -
June 30, 1994 and December 31, 1993 17-18
Notes to Consolidated Financial Statements 19-22
Part II. Other Information 23-24
Signatures 25
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PART I. FINANCIAL INFORMATION
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS
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Six Months Ended 6/30/94 Compared to Six Months Ended 6/30/93
United States Cellular Corporation (the "Company" or "USM") owns, operates
and invests in cellular markets throughout the United States. USM owns or
has the right to acquire both majority and minority interests in 208
cellular markets at June 30, 1994, representing 24,330,000 population
equivalents ("pops"). USM managed the operations of 141 cellular markets
at June 30, 1994 and expects to manage the operations of five additional
markets in the future. Interests in the 62 remaining markets are managed
by others. All 62 of these markets were served by operational systems at
June 30, 1994. The following table is a summary of the Company's markets
and consolidated operations.
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UNITED STATES CELLULAR CORPORATION
Three Months Ended
June 30, 1994 June 30, 1993
Majority-Owned, Managed and
Consolidated Markets: (1)
Population equivalents (in
thousands) (2) 18,861 17,004
Total population (in
thousands) 20,344 17,553
Customers 331,000 189,100
Market penetration 1.63% 1.08%
Markets in operation 123 107
Cell sites in service 610 393
Average monthly revenue per
customer $82 $88*
Churn rate per month 2.1% 2.0%
Marketing cost per net
customer addition $629 $607
Minority-Owned and Managed
Markets: (3)
Population equivalents (in
thousands) (2) 1,140 1,094
Markets in operation 18 21
Markets to be Managed: (4)
Population equivalents (in
thousands) (2) 922 1,200
Markets 5 10
Total Markets Managed and to
be Managed by USM:
Population equivalents (in
thousands) (2) 20,923 19,298
Markets 146 138
Markets Managed by Others: (5)
Population equivalents (in
thousands) (2) 3,407 3,401
Markets in operation 62 62
Total Markets:
Population equivalents (in
thousands) (2) 24,330 22,699
Markets 208 200
* 1993 average monthly revenue per customer has been restated to conform to
current year presentation.
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(1) Includes two markets managed by third parties in 1994 and one in
1993.
(2) 1993 Donnelley Marketing Service estimates are used for both periods.
Includes population equivalents relating to interests which are
acquirable in the future.
(3) Includes markets where the Company has the right to acquire an
interest but did not own an interest at the respective dates (one
market in 1994 and two markets in 1993).
(4) Represents markets which are not yet operational or which are managed
by third parties until the Company acquires a majority interest in
the markets.
(5) Represents markets in which the Company owns or has the right to
acquire a minority or other noncontrolling interest and which are
managed by others.
The Company's consolidated results of operations include 100% of the
revenues and expenses of the systems serving majority-owned and managed
markets plus its corporate office operations. The June 30, 1994
consolidated results of operations include 123 markets with a total
population of 20.3 million, compared to 107 markets with a total
population of 17.6 million in 1993.
Investment income includes the Company's share of the net income or loss
of each of the minority-owned and managed markets and also includes the
Company's share of the net income or loss of each of those markets managed
by others for which the Company follows the equity method of accounting.
USM follows the cost method of accounting for its remaining interests in
markets managed by others. This information is shown in the table below.
June 30,
__________________________
1994 1993
___________ ___________
Minority-owned and Managed 17 19
Managed by Others - Equity Method 16 16
___________ ___________
Total Markets Included in Investment Income 33 35
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Managed by Others - Cost Method 46 47
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Operating results for the first half of 1994 primarily reflect improvement
in the Company's more established markets (those 107 markets consolidated
at June 30, 1993), the acquisition of majority interests in 13 operational
markets and the start-up expenses associated with initiating operations in
three additional majority-owned and managed markets since June 30, 1993.
Operating revenues, driven primarily by increases in customers served,
rose $54.9 million, or 60%. Operating expenses rose $47.5 million, or
50%. Operating cash flow increased $17.4 million, or 99%. The Company
changed its financial reporting presentation for outbound, or pass-
through, roamer revenue during the first quarter of 1994. Pass-through
roamer revenue is now treated as an offset to the expense charged by other
cellular carriers to the Company's markets for this roaming service, and
the net amount is included in system operations expense. Service revenues
and system operations expense for 1993 have been reclassified for the
effect of this change in presentation. This change in presentation allows
more comparability of the Company's revenues and margins to other
companies in the cellular industry.
Investment and other income increased $3.6 million, or 41%, due primarily
to increases in investment income. Investment income increased $4.8
million mostly due to improved results in markets managed by others.
Interest expense decreased $7.7 million primarily due to a
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reduction in the amount owed under a Revolving Credit Agreement with USM's
parent company, Telephone and Data Systems, Inc. ("TDS"), as a result of
the Company's 1993 rights offering. Net income totaled $4.4 million in
1994 compared to a net loss of $13.4 million in 1993, reflecting improved
operating results, increased investment income and decreased interest
expense.
The Company expects to add 12 markets to consolidated operations by the
end of 1994. The Company currently owns a minority interest in and
manages eight of these markets. The Company expects to acquire a majority
interest in these eight markets and three additional markets and to begin
operations in one market in which it currently owns a majority interest by
the end of 1994.
Management anticipates that operating losses from new markets and the
seasonality of revenue streams and operating expenses may significantly
affect the Company's operating and net results over the next several
quarters.
Operating Revenues
-------------------
Operating revenues totaled $146.9 million in 1994, up $54.9 million, or
60%, over 1993. Market acquisitions and start-ups increased operating
revenues $10.6 million, or 11%, in 1994. This "acquisitions and start-
ups" effect is defined as: (i) the operations of markets added to the
consolidated group in 1994 since their respective dates of acquisition,
plus (ii) for any market added to the consolidated group in 1993, the
portion of 1994 operations which correspond to that portion of 1993 prior
to the market's addition to the consolidated group.
Service revenues primarily consist of: (i) charges for access, airtime and
value-added services provided to the Company's local retail customers who
use the local systems operated by the Company; (ii) charges to customers
of other systems who use the Company's cellular systems when roaming
("inbound roamer"); and (iii) charges for long-distance calls made on the
Company's systems. Service revenues exclude pass-through roamer revenue
as discussed above. Service revenues for 1993 have been reclassified to
conform to current year presentation. Service revenues totaled $140.4
million in 1994, up $53.4 million, or 61%, over 1993. The increase was
primarily due to the growing number of local retail customers and the
growth in inbound roamer revenue. Acquisitions and start-ups increased
service revenues $10.0 million, or 11%, in 1994. Average monthly service
revenue per customer totaled $79 in 1994 compared to $84 in 1993. The 6%
decrease in average monthly service revenue per customer in 1994 was
primarily a result of the decline in average local minutes of use per
retail customer and a decrease in per customer inbound roamer revenue.
Management anticipates that average monthly service revenue per customer
will continue to decrease as local minutes of use per customer decline and
as the growth rate of the Company's customer base exceeds the growth rate
of inbound roamer revenue.
Revenue from local customers' usage of USM's systems increased $32.9
million, or 63%, in 1994. Growth in the number of customers in the
systems serving the Company's consolidated markets was the primary reason
for the increase in local revenue. The number of customers increased 75%
to 331,000 at June 30, 1994 from 189,100 at June 30, 1993. Excluding the
effect of acquisitions and dispositions, the Company's consolidated
markets added 117,200 customers since June 30, 1993. Of these additions,
104,300 were in markets in service and consolidated at June 30, 1993,
representing a 55% increase over the 189,100 customers served at June 30,
1993. While the percentage increase is expected to be lower in future
periods, management
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anticipates that the total number of net customer additions will increase.
Acquisitions and start-ups increased local revenue $5.6 million, or 11%,
in 1994.
Average monthly retail revenue per customer declined to $48 in 1994 from
$50 in 1993. Monthly local minutes of use per customer averaged 96 in
1994 compared to 104 in 1993. This decline in average local minutes of
use follows an industry-wide trend and is believed to be related to the
tendency of the early customers in a market to be the heaviest users. It
also reflects the Company's and the industry's continued penetration of
the consumer market, which tends to include more lower-usage customers.
Inbound roamer revenue increased $15.8 million, or 55%, in 1994. This
increase was attributable to the rise in the number of customers from
other systems using the Company's systems when roaming. Also contributing
were the increased number of Company-managed systems and cell sites within
those systems. Monthly inbound roamer revenue per customer averaged $25
in 1994 and $28 in 1993. Acquisitions and start-ups increased inbound
roamer revenue $3.6 million, or 13%, in 1994.
Long-distance revenue increased $4.6 million, or 90%, in 1994 as the
volume of long-distance calls billed by the Company increased. Monthly
long-distance revenue per customer averaged $6 in 1994 and $5 in 1993.
Acquisitions and start-ups increased long-distance revenue $707,000, or
14%, in 1994.
Equipment sales revenues totaled $6.5 million in 1994, up $1.5 million, or
30%, over 1993. Equipment sales reflect the sale of 63,200 and 24,300
cellular telephone units in 1994 and 1993, respectively, plus installation
and accessories revenue. The average revenue per unit was $102 in 1994
compared to $204 in 1993. The average revenue per unit decline partially
reflects the Company's decision to reduce sales prices on cellular
telephones to increase the number of customers, to maintain its market
position and to meet competitive prices as well as to reflect reduced
manufacturers' prices. Also, during the first half of 1994, the Company
used promotions which were based on increased equipment discounting. The
success of these promotions led to both an increase in units sold and a
decrease in average equipment sales revenue per unit. Acquisitions and
start-ups increased equipment sales revenues $591,000, or 12%, in 1994.
Operating Expenses
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Operating expenses totaled $142.4 million in 1994, up $47.5 million, or
50%, over 1993. Market acquisitions and start-ups increased expenses
$14.8 million, or 16%, in 1994.
System operations expenses increased $6.3 million, or 40%, in 1994 as a
result of increases in customer usage expenses and costs associated with
operating the Company's increased number of cellular systems and with the
growing number of cell sites within those systems. System operations
expense includes pass-through roamer revenue as an offset to the expense
charged by other carriers to the Company's markets for this roaming
service. System operations expense for 1993 has been reclassified to
conform to current year presentation. Costs are expected to continue to
increase as the number of cell sites within the Company's systems grows.
Customer usage expenses represent charges from other telecommunications
service providers for USM's customers' use of their facilities as well as
for the Company's inbound roamer traffic on these facilities, offset
somewhat by pass-through roamer revenue. These expenses also include
local interconnection to the landline network, toll charges and roamer
expenses from the Company's customers' use of systems other than their
local systems. Customer usage expenses were $9.9
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million in 1994 compared to $8.4 million in 1993, and represented 7% of
service revenues in 1994 compared to 10% in 1993. Maintenance, utility
and cell site expenses grew $4.8 million, or 68%, in 1994, primarily
reflecting an increase in the number of cell sites in the systems serving
all majority-owned and managed markets, from 393 in 1993 to 610 in 1994.
Acquisitions and start-ups increased system operations expenses $2.8
million, or 18%, in 1994.
Marketing and selling expenses increased $12.4 million, or 70%, in 1994.
Marketing and selling expenses primarily consist of salaries, commissions
and expenses of field sales and retail personnel and offices; agent
commissions; promotional expenses; local advertising and public relations
expenses. The 1994 increase was primarily due to a 94% rise in the number
of gross customer activations (excluding acquisitions and divestitures),
from 51,500 in the first half of 1993 to 100,000 in 1994. Offsetting the
increase in marketing and selling expenses due to the rise in customer
activations was a 1% decrease in the cost per gross customer addition from
$409 in 1993 to $406 in 1994. Excluding acquisitions and divestitures,
the Company added 61,000 net new customers in 1994 compared to 30,400 in
1993, a 101% increase. The churn rate increased slightly to 2.2% for the
first six months of 1994 from 2.0% for 1993. Acquisitions and start-ups
increased marketing and selling expenses $3.2 million, or 18%, in 1994.
Cost of equipment sold increased $8.6 million, or 103%, in 1994. The
increase reflects the growth in unit sales related to both the rise in
gross customer activations made through the Company's direct and retail
distribution channels and the first half of 1994 promotional sales which
were discussed previously, offset somewhat by falling manufacturer prices
per unit. The average cost to the Company of a telephone unit sold,
including accessories and installation, was $269 in 1994 compared to $345
in 1993. Acquisitions and start-ups increased cost of goods sold $1.7
million, or 20%, in 1994.
General and administrative expenses increased $10.2 million, or 31%, in
1994. These expenses include the costs of operating the Company's local
business offices and its corporate expenses. This increase includes the
effects of an increase in the number of consolidated markets, increases in
expenses required to serve the growing customer base in existing markets
and an expansion of both local office and corporate staff, necessitated by
growth in the Company's business and the start-up of and acquisition of
additional operations. The Company is using an ongoing clustering
strategy to combine local operations wherever feasible in order to gain
operational efficiencies and reduce its administrative expenses. General
and administrative expenses increased approximately $1.6 million in 1994
due to legal expenses incurred to successfully defend the Company against
claims totaling more than $200 million. The receipt of a health and life
insurance premium refund decreased general and administrative expenses
$730,000 in 1994. Acquisitions and start-ups increased direct field-
related general and administrative expenses $3.7 million, or 11%, in 1994.
Depreciation expense increased $6.6 million, or 58%, in 1994, reflecting
an increase in the average fixed asset balance of 55% since June 30, 1993.
Acquisitions and start-ups increased depreciation expense $1.3 million, or
11%, in 1994.
Amortization of intangibles increased $3.4 million, or 39%, in 1994,
primarily due to an increase in license costs as a result of the
acquisition of or the commencement of service in 16 markets since June 30,
1993. License costs related to consolidated markets increased $291.2
million, or 42%, since June 30, 1993. Acquisitions and start-ups
increased amortization of intangibles $2.2 million, or 25%, in 1994.
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Operating Income (Loss) before Minority Share
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Operating income before minority share totaled $4.5 million in 1994
compared to a loss of $2.8 million in 1993. The operating income (loss)
margin (as a percent of service revenues) improved to 3% in 1994 from (3%)
in 1993. The 1994 operating income reflects improved results in the more
established markets and increased revenues resulting from the growth in
the number of customers served by the Company's systems, partially offset
by costs associated with the growth of the Company's operations and
increased losses on equipment sales. Acquisitions and start-ups decreased
operating income before minority share $4.3 million in 1994.
The Company expects service revenues to continue to grow during 1994 as it
adds customers and cell sites to its existing systems, realizes a full
year of revenues from customers and cell sites added in 1993, completes
acquisitions of operational systems and begins operations in new markets.
Additionally, the Company expects expenses to increase significantly in
1994 as it incurs expenses for markets and cell sites added in 1993,
incurs expenses associated with customer and system growth, acquires
existing markets and initiates service in new markets. At least 12
markets are expected to be added to consolidated operations before the end
of 1994. Of these, 11 markets (eight of which are currently minority-
owned and managed by the Company) were operational at June 30, 1994. The
Company expects to acquire a majority interest in these markets, and to
begin operations in one market in which it currently owns a majority
interest, before the end of 1994. Upon the commencement of operations in
the new markets and upon completion of any related acquisitions, the
Company will begin to amortize the related license costs. The Company
expects that the costs related to acquiring, constructing and operating
new markets may exceed their revenues over the next few quarters.
Additionally, management believes there exists a seasonality in both
service revenues and operating expenses, especially marketing expenses.
As a result, decreased operating income, or operating loss, before
minority share could be generated over the next several quarters.
Investment and Other Income
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Investment and other income totaled $12.3 million in 1994 and $8.7 million
in 1993. Investment income was $12.3 million in 1994, a $4.8 million, or
65%, increase over 1993. The Company's share of the income or loss from
the markets managed by others that are accounted for by the equity method
totaled $12.2 million in 1994 compared to $7.6 million in 1993. There
were 16 such markets in 1994 and 1993. The Company's share of income from
minority-owned markets it manages totaled $85,000 in 1994 compared to
losses of $161,000 in 1993. There were 17 such markets in 1994 and 19 in
1993.
Other income (expense), net was ($800,000) in 1994 and $390,000 in 1993.
In 1994, the Company sold obsolete equipment obtained in certain
acquisitions, recognizing losses of $614,000. In 1993, the Company sold
the customer base in its reseller operation and recognized income related
to the settlement of a dispute concerning one of the Company's markets.
Income related to these 1993 transactions totaled $580,000 and $675,000,
respectively.
Interest and Income Taxes
-------------------------
Interest expense decreased $7.7 million, or 46%, in 1994, on a 47%
decrease in the average amount of debt outstanding. Interest expense is
primarily related to borrowings under the Revolving Credit Agreement with
TDS and borrowings under a vendor financing agreement. Borrowings under
the Revolving Credit Agreement bear interest at a floating rate equal to
prime
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plus 1.5% (for a rate of 8.75% at June 30, 1994) and are used to finance
system construction and working capital requirements, investments in and
advances to entities in which the Company has a minority interest, and
acquisitions of cellular interests. In the fourth quarter of 1993, the
Company completed a rights offering to its common shareholders, the
proceeds of which were used to repay approximately $378 million in debt
outstanding under the Revolving Credit Agreement. Interest expense
relating to the Revolving Credit Agreement was $7.0 million in 1994 and
$14.5 million in 1993. The average amount of debt outstanding under the
Revolving Credit Agreement was $177.6 million in the first half of 1994
and $383.0 million in 1993. The average interest rate on such debt was
7.9% in 1994 and 7.6% in 1993.
Most of the borrowings under the vendor financing agreement bear interest
at a rate of 2.3% over the 90-day Commercial Paper Rate of high-grade,
unsecured notes (for a rate of 7.0% at June 30, 1994). The remainder of
such borrowings bear interest at a rate approximating the prime rate
(7.25% at June 30, 1994). Borrowings under the vendor financing agreement
were used to finance certain of USM's equipment purchases and construction
costs. Interest expense related to the vendor financing agreement was
approximately $1.9 million in 1994 and $2.0 million in 1993. The average
amount of debt under the vendor financing agreement was $59.6 million in
the first half of 1994 and $68.0 million in 1993. The average interest
rate on such debt was 6.2% in 1994 and 6.0% in 1993.
Continued capital expenditures, investments in and advances to entities in
which the Company has a minority interest, and the completion of pending
acquisitions will require additional funding over the next few years.
These funding requirements are anticipated to be at least partially met
through additional debt, which will likely result in increased interest
expense as debt balances increase. Additional borrowings also may be
required to fund additional future acquisitions and their construction and
operations. See "Financial Resources and Liquidity."
Income tax expense was $1.3 million in 1994 and $730,000 in 1993. Income
tax expense includes the federal income taxes of consolidated subsidiaries
not included in the TDS consolidated federal income tax return. State
income tax expense in 1994 was primarily related to subsidiaries
generating taxable income after utilization of state net operating losses.
USM is included in a consolidated federal income tax return with other
members of the TDS consolidated group. TDS and USM are parties to a Tax
Allocation Agreement under which USM is able to carry forward its losses
and credits and use them to offset any current or future income tax
liabilities to TDS. The amount of the federal net operating loss
carryforward available to offset future taxable income aggregated
approximately $148.2 million at December 31, 1993, and expires between
2002 and 2008. The amount of the state net operating loss carryforward
available to offset future taxable income aggregated approximately $197.1
million at December 31, 1993, and expires between 1998 and 2008.
Net Income (Loss)
-----------------
Net income totaled $4.4 million in 1994 compared to a net loss of $13.4
million in 1993. The 1994 improvement resulted from improved operating
results in the established markets, increased investment income and
decreased interest expense, partially offset by the effects of the
addition of new markets. Net income per share was $.06 in 1994 compared
to a net loss per share of $.25 in 1993, primarily reflecting the
improvement in net income and the increase in weighted average Common and
Series A Common Shares outstanding. Weighted average number of Common and
Series A Common Shares outstanding for 1994 increased 45% over the shares
outstanding for 1993 primarily as a result of Common and Series A Common
Shares issued in
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connection with the 1993 rights offering, Common Shares issued in
connection with acquisitions, and the inclusion of dilutive common stock
equivalents in 1994 weighted average common shares outstanding as a result
of the 1994 net income.
TDS owned an aggregate of 63,373,565 shares of common stock of the Company
at June 30, 1994, representing over 81% of the combined total of the
Company's outstanding Common and Series A Common Shares and over 96% of
their combined voting power. Assuming the Company's Common Shares are
issued in all instances in which the Company has the choice to issue its
Common Shares or other consideration and assuming all issuances of the
Company's common stock to TDS and third parties for completed and pending
acquisitions and redemptions of the Company's Preferred Stock and TDS's
Preferred Shares had been completed at June 30, 1994, TDS would have owned
approximately 80% of the total outstanding common stock of the Company and
controlled over 95% of the combined voting power of both classes of its
common stock. In the event TDS's ownership of the Company falls below 80%
of the total value of all of the outstanding shares of the Company's
stock, TDS and the Company would be deconsolidated for federal income tax
purposes. TDS and the Company have the ability to defer or prevent
deconsolidation, if deferring or preventing deconsolidation would be
advantageous, by delivering TDS Common Shares and/or cash in lieu of the
Company's Common Shares in connection with certain acquisitions.
Three Months Ended 6/30/94 Compared to Three Months Ended 6/30/93
Operating revenues totaled $80.7 million in the second quarter of 1994, up
$30.1 million, or 60%, over 1993. As the number of customers and amount
of revenue earned continued to grow, local minutes of use per customer
continued to decline. Average monthly local minutes of use were 103 in
the second quarter of 1994 compared to 110 in 1993. Average monthly
service revenue per customer decreased 6% to $82 in the second quarter of
1994 compared to $88 in 1993 for reasons generally the same as the first
half of 1994. Revenues from local customers' usage of USM's systems
increased $18.0 million, or 64%, in 1994 primarily due to the increased
number of customers served. Average monthly local retail revenue per
customer declined 4% to $49 in the second quarter of 1994 compared to $51
in 1993. Inbound roamer revenue increased $8.6 million, or 53%, in 1994
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 roamer revenue per customer averaged $27 in 1994
and $30 in 1993. Long-distance revenue increased $2.5 million, or 87%, in
1994 as the volume of long-distance calls billed by the Company increased.
Equipment sales revenue reflects sales of 34,500 cellular telephones in
1994 compared to 12,600 in 1993. The average revenue per unit sold was
$104 in 1994 and $208 in 1993.
Operating expenses totaled $75.1 million in the second quarter of 1994, up
$25.1 million, or 50%, over 1993 for reasons generally the same as the
first half of 1994.
Operating income before minority share was $5.5 million in 1994 compared
to $560,000 in 1993. The operating income margin improved to 7% in 1994
from 1% in 1993. The improvement in operating income 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 the
addition of new markets.
Investment income increased $2.7 million, or 61%, in 1994 due to improved
results in markets managed by others accounted for by the equity method.
Other income (expense), net was
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($476,000) in 1994 compared to $936,000 in 1993 due to the 1994 losses on
system equipment dispositions and the 1993 income recognized on the sale
of the customer base in the Company's reseller operation as well as the
income recognized from the settlement of a dispute related to a cellular
market.
Net income was $6.2 million in 1994 compared to net loss of $4.2 million
in 1993. Net income per share was $.08 in 1994 compared to net loss per
share of $.08 in 1993. Weighted average common shares outstanding
increased 45% in 1994.
FINANCIAL RESOURCES AND LIQUIDITY
The Company operates a capital- and marketing-intensive business. Rapid
growth in markets operated by the Company and customers served has caused
financing requirements for acquisitions, construction and operations to
exceed internally generated cash flow. The Company requires capital to
complete acquisitions in process, to fund construction and operating
expenses of the cellular systems it operates, to fund investments in
minority partnership interests in other cellular markets and to pay
principal and interest on its outstanding debt. Management anticipates
that each new cellular market the Company acquires and places in service
will require significant capital expenditures and will incur substantial
losses during its initial operating stage. The Company has experienced
operating losses and net losses in all but a few quarters since its
inception. The Company has obtained substantial funds from external
sources during the past several years.
Cash flows from operating activities provided $35.5 million in 1994 and
$7.4 million in 1993. Operating cash flow provided cash totaling $34.8
million in 1994 and $17.5 million in 1993. The 1994 increase in operating
cash flow primarily reflects improvement in the more mature markets.
Acquisitions and start-ups decreased operating cash flow $807,000, or 5%,
in 1994. Cash flows from other operating activities (investment and other
income, interest expense, changes in working capital and changes in other
assets and liabilities) provided cash totaling $656,000 in 1994 and
required cash investments totaling $10.1 million in 1993.
Cash flows from financing activities provided $49.2 million in 1994 and
$35.4 million in 1993. Cash flows from financing activities include cash
flows from borrowings under the Revolving Credit Agreement with TDS,
vendor financing transactions and sales of Common Shares. Borrowings
under the Revolving Credit Agreement with TDS totaling $56.7 million and
$44.9 million provided a majority of the Company's external financing
requirements in 1994 and 1993, respectively.
Cash flows from investing activities required cash totaling $84.0 million
in 1994 and $45.0 million in 1993. Such cash requirements primarily
consisted of cash additions to property, plant, and equipment and cash
requirements for acquisitions and for investments in cellular markets.
Cash expenditures for property, plant and equipment totaled $69.5 million
in 1994 (of which $9.7 million relates to 1993 additions), representing
the construction of 65 cell sites and other plant additions. Cash
expenditures for property, plant and equipment totaled $34.7 million in
1993 (of which $5.0 million relates to 1992 additions), representing the
construction of 39 cell sites and other plant additions.
Anticipated capital requirements for 1994 reflect the Company's
construction and system expansion program, funding of working capital
needs, investments in entities in which the Company has a minority
interest, scheduled debt repayments and pending acquisitions. The
-11-
<PAGE>
Company's consolidated construction budget for 1994 is approximately $140
million, including anticipated expenditures for both enhancements to
existing systems and construction of new systems. Of this amount, planned
expenditures for enhancements of existing majority-owned cellular systems,
including additional radio channel capacity as well as new cell sites,
will total about $120 million; anticipated expenditures for construction
of switching offices and digital expansion will total $7 million.
The Company is expanding its operations through acquisitions. During the
first half of 1994, the Company completed the acquisition of controlling
interests in eight markets and several additional minority interests.
During the first half of 1993, the Company completed the acquisition of
controlling interests in 17 markets and several additional minority
interests. Some of the markets acquired during 1994 and 1993 were subject
to acquisition agreements which were entered into prior to the year in
which the acquisitions were completed. The following table summarizes the
consideration issued for these acquisitions.
COMPLETED ACQUISITIONS Six Months Ended June 30,
----------------------------------
1994 1993
-------------- ----------------
(in millions)
Pops Acquired 1.1 2.8
Total Consideration $ 123.4 $ 200.0
Details of Total Consideration:
USM Common Shares
Shares Issued 3.8 3.3
Recorded Cost $ 117.0 $ 77.4
USM Series A Common Shares
Shares Issued -- .1
Recorded Cost $ -- $ .1
USM Common Shares to be issued
in the future (mostly in 1994)
Shares Issuable -- .1
Recorded Cost $ -- $ 3.0
Revolving Credit Agreement - TDS .3 100.8
Subsidiary Preferred Stock -- 2.9
Cancellation of Notes Receivable 1.4 --
Equity contribution from TDS -- 8.1
Cash $ 4.7 $ 7.7
Of the total 1994 and 1993 consideration, the debt under the Revolving
Credit Agreement and the USM Common Shares were issued to TDS to reimburse
TDS for TDS Common Shares issued and issuable and cash paid to third
parties in connection with 1994 and 1993 acquisitions. Additionally, the
Company had commitments at June 30, 1994, to issue 1.0 million Common
Shares in 1994 through 1996 related to certain completed acquisitions.
The Company and TDS
-12-
<PAGE>
have the option to deliver TDS Common Shares and/or cash in lieu of the
Company's Common Shares in connection with certain of these acquisitions.
The Company has an ongoing acquisition program, the funding requirements
of which may be substantial. The Company maintains an ongoing acquisition
program to seek to maximize its future potential, including seeking
opportunities to combine operations and achieve increased economies of
scale. These economies of scale include the sharing of market personnel,
equipment and office resources. The Company plans to continue its
acquisition program as long as it is feasible to acquire cellular
interests that fit into its business objectives.
At June 30, 1994, the Company, or TDS for the benefit of the Company, had
agreements pending to acquire controlling interests in four markets and
one minority interest. The following table summarizes the consideration to
be issued by USM for these acquisitions if they are completed as planned.
PENDING ACQUISITIONS June 30, 1994
-------------
(in millions)
Pops to be Acquired .9
Estimated Consideration to be Paid $ 53.3
Details of Consideration:
USM Common Shares
Shares to be Issued 1.8
Estimated Cost at Agreement Date $ 52.6
Equity Contribution from TDS $ .7
Cellular interests acquired by TDS in these transactions are expected to
be assigned to the Company and at the time this occurs the Company will
reimburse TDS for TDS's consideration delivered and costs incurred in such
acquisitions. Of the consideration for these pending acquisitions, the
USM Common Shares are to be issued to TDS to reimburse TDS for TDS Common
Shares to be issued and cash to be paid to third parties in connection
with these pending acquisitions.
TDS and USM are parties to a legal proceeding before the Federal
Communications Commission ("FCC") involving a cellular license in a
Wisconsin Rural Service Area. Pending the resolution of the issues in the
Wisconsin proceeding, further FCC grants to TDS and its subsidiaries will
be conditioned on the outcome of that proceeding. TDS's and USM's ability
to sell or exchange properties with third parties while such proceeding is
pending may be affected. See Note 15 of Notes to Consolidated Financial
Statements, Legal Proceedings (La Star Application), in the Company's 1993
Annual Report to Shareholders for a discussion of the proceeding involving
the Wisconsin Rural Service Area and the La Star proceeding. As discussed
in a Current Report on Form 8-K dated March 30, 1994, the FCC's decision
in the La Star proceeding was vacated and remanded to the FCC for further
proceedings by a federal court of appeals. The Company is evaluating what
impact the court's decision in the La Star matter may have on the
Wisconsin proceeding.
-13-
<PAGE>
Liquidity
---------
The Company anticipates that the aggregate resources required for the
remainder of 1994 will include approximately: (i) $80 million for capital
spending; and (ii) $6 million of scheduled debt repayments. Additionally,
the Company anticipates it will reimburse TDS, as each acquisition is
completed, for TDS Common Shares valued at approximately $51.8 million to
be issued and $800,000 in cash to be paid by TDS to third parties in
connection with acquisitions anticipated to be primarily completed by the
end of 1994. The reimbursement to TDS is expected to be in the form of
1.8 million Common Shares of the Company. Not included in the above
amounts are acquisitions that may be signed during the remainder of 1994.
These potential acquisitions may require substantial funding for both
their acquisition and operation during the remainder of 1994.
At June 30, 1994, the Company had $7 million of cash and cash equivalents,
$45 million remaining under the $250 million Revolving Credit Agreement
with TDS as amended effective November 15, 1993, $9 million of anticipated
minority partner cash distributions, and $6 million of anticipated
minority partner capital contributions. Additionally, the Company
anticipates generating positive cash flows from operating activities
during the remainder of 1994.
Pursuant to the Revolving Credit Agreement, the Company may borrow up to
an aggregate of $250 million from TDS, at an interest rate equal to 1.5%
above the prime rate. The advances made by TDS under the Revolving Credit
Agreement are unsecured. Interest on the balance due under the Revolving
Credit Agreement is payable quarterly and no principal is payable until
March 31, 1996, subject to acceleration under certain circumstances, at
which time the entire principal balance then outstanding is scheduled to
become due and payable. The Company may prepay the balance due under the
Revolving Credit Agreement at any time, in whole or in part, without
premium.
The Company anticipates that it may require substantial funding to acquire
cellular markets and build and operate cellular systems during the
remainder of 1994. The timing and amount of such funding requirements
will depend on the timing of the completion of pending acquisitions, the
number of additional licenses acquired by the Company, the construction
and operational plans for the individual cellular projects, and other
relevant factors. The Company will need to raise additional capital to
meet these requirements. These additional requirements may be met through
additional borrowings from TDS, the issuance of equity or debt securities
or a combination thereof, vendor financing, bank financing, or the sale of
assets. There can be no assurance that sufficient funds will be made
available to the Company on terms or at prices acceptable to the Company.
If sufficient funding is not made available to the Company on terms and
prices acceptable to the Company, the Company would have to reduce its
construction, development and acquisition programs. In the long term,
reduction of the Company's construction, development and acquisition
programs would have a negative impact on the ability of the Company to
increase its consolidated revenues and cash flows.
-14-
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------
Unaudited
---------
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------------------
1994 1993 1994 1993
---------- ---------- --------- -----------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Service $ 77,065 $ 47,918 $ 140,426 $ 87,050
Equipment sales 3,592 2,634 6,464 4,970
---------- ---------- ---------- -----------
Total Operating Revenues 80,657 50,552 146,890 92,020
---------- ---------- ---------- -----------
OPERATING EXPENSES
System operations 12,074 8,686 21,804 15,536
Marketing and selling 15,977 8,323 30,031 17,634
Cost of equipment sold 9,012 4,510 17,021 8,381
General and administrative 22,480 17,885 43,206 33,010
Depreciation 9,520 5,969 18,142 11,518
Amortization of intangibles 6,071 4,619 12,167 8,761
---------- ---------- ---------- -----------
Total Operating Expenses 75,134 49,992 142,371 94,840
---------- ---------- ---------- -----------
OPERATING INCOME (LOSS) BEFORE
MINORITY SHARE 5,523 560 4,519 (2,820)
Minority share of operating (income) (1,196) (1,220) (2,314) (1,987)
---------- ---------- ---------- -----------
OPERATING INCOME (LOSS) 4,327 (660) 2,205 (4,807)
---------- ---------- ---------- -----------
INVESTMENT AND OTHER INCOME
Investment income 7,138 4,424 12,329 7,489
Amortization of license and deferred
costs related to investments (243) (205) (487) (439)
Interest income 667 627 1,306 1,297
Other (expense) income, net (476) 936 (800) 390
---------- ---------- ---------- -----------
Total Investment and Other Income 7,086 5,782 12,348 8,737
---------- ---------- ---------- -----------
INCOME BEFORE INTEREST
AND INCOME TAXES 11,413 5,122 14,553 3,930
Interest expense - affiliate 3,942 7,926 6,974 14,498
Interest expense - other 974 990 1,933 2,105
---------- ---------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 6,497 (3,794) 5,646 (12,673)
Income tax expense 312 401 1,291 730
---------- ---------- ---------- -----------
NET INCOME (LOSS) $ 6,185 $ (4,195) $ 4,355 $ (13,403)
---------- ---------- ---------- -----------
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON SHARES (000s) 79,587 54,836 79,092 54,414
NET INCOME (LOSS) PER COMMON SHARE $ .08 $ (.08) $ .06 $ (.25)
========== ========== ========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
-15-
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
----------
<CAPTION>
Six Months Ended
June 30,
---------------------------
1994 1993
------------ -----------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 4,355 $ (13,403)
Add (Deduct) adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Depreciation and amortization 30,796 20,718
Investment income (12,329) (7,489)
Minority share of operating income 2,314 1,987
Other noncash expense 1,371 1,203
Change in accounts receivable (11,931) (5,365)
Change in accounts payable 7,644 (2,699)
Change in accrued interest 6,902 14,405
Change in accrued taxes 3,523 (323)
Change in other assets and liabilities 2,839 (1,646)
--------- ---------
35,484 7,388
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings --- 64
Repayment of long-term debt (6,040) (9,610)
Change in Revolving Credit Agreement 56,714 44,945
Common Shares issued 452 230
Minority partner capital distributions (1,923) (226)
--------- ---------
49,203 35,403
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (69,550) (34,716)
Investments in and advances to minority partnerships (13,615) (9,637)
Distributions from partnerships 8,450 5,767
Acquisitions, excluding cash acquired (3,875) (6,366)
Other investments (5,377)
--------- ---------
(83,967) (44,952)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 720 (2,161)
CASH AND CASH EQUIVALENTS-
Beginning of period 6,274 4,130
--------- ---------
End of period $ 6,994 $ 1,969
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
-16-
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
<CAPTION>
(Unaudited)
June 30, 1994 December 31, 1993
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,213 $ 5,971
Affiliated cash investments 781 303
Accounts receivable
Customers 20,895 14,555
Roaming 18,760 13,484
Affiliates 3,257 2,880
Other 4,828 3,714
Inventory 2,255 2,529
Prepaid and other current assets 4,077 2,597
------------ ------------
61,066 46,033
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
In service 370,261 306,118
Less accumulated depreciation 77,958 59,704
------------ ------------
292,303 246,414
------------ ------------
INVESTMENTS
Cellular partnerships - equity 81,852 77,178
Cellular partnerships - cost 13,695 12,926
Licenses, net of amortization 935,012 824,491
Marketable equity securities 17,669 17,584
Notes and interest receivable 11,324 7,701
------------ ------------
1,059,552 939,880
------------ ------------
DEFERRED CHARGES
Deferred start-up costs 4,443 5,000
Other deferred charges 12,925 8,069
------------ ------------
17,368 13,069
------------ ------------
Total Assets $ 1,430,289 $ 1,245,396
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
-17-
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<CAPTION>
(Unaudited)
June 30, 1994 December 31, 1993
--------------- -----------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and
preferred stock $ 21,057 $ 12,663
Accounts payable
Affiliates 4,602 4,454
Other 38,243 39,126
Accrued interest, primarily to affiliates 3,930 5,785
Accrued taxes 4,356 829
Customer deposits and deferred revenues 4,908 3,909
Other current liabilities 9,456 7,653
------------ ------------
86,552 74,419
------------ ------------
REVOLVING CREDIT AGREEMENT - TDS 205,470 141,524
------------ ------------
LONG-TERM DEBT, excluding current portion 45,078 51,130
------------ ------------
DEFERRED LIABILITIES AND CREDITS
Income taxes 2,696 2,390
Other 980 1,378
------------ ------------
3,676 3,768
------------ ------------
REDEEMABLE PREFERRED STOCK, excluding
current portion 9,597 18,828
------------ ------------
MINORITY INTEREST 15,347 15,599
------------ ------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 44,804 36,960
Series A Common Shares, par value $1 per share 33,006 33,006
Additional paid in capital 1,063,715 867,947
Common Shares issuable, 1,038,552 shares and
4,966,719 shares, respectively 19,739 103,266
Retained (deficit) (96,695) (101,051)
------------ ------------
1,064,569 940,128
------------ ------------
Total Liabilities and Shareholders' Equity $ 1,430,289 $ 1,245,396
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
-18-
<PAGE>
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,
and with respect to certain investments in equity securities, Note 2
of Notes to Consolidated Financial Statements included in the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1994.
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, 1994 and
December 31, 1993, and the results of operations and cash flows for
the six months ended June 30, 1994 and 1993. The results of
operations for the six months ended June 30, 1994 and 1993, are not
necessarily indicative of the results to be expected for the full
year.
2. Net Income per Common and Series A Common Share for the six months
ended June 30, 1994, 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, 1994, consist primarily
of dilutive Common Shares issuable and Redeemable Preferred Stock.
Net (Loss) per Common and Series A Common Share for the six months
ended June 30, 1993, was computed by dividing Net (Loss) by the
weighted average number of Common Shares and Series A Common Shares
outstanding during the period.
3. Certain of the cellular acquisitions closed during 1993, 1992, 1991
and 1990 require the Company to deliver Common Shares in the future.
The Company is required to issue Common Shares to third parties as
follows:
Common Shares
Issuable
--------------
1994 596,716
1995 263,013
1996 178,823
---------
1,038,552
=========
-19-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Assuming that acquisitions accounted for as purchases during the
period January 1, 1993, to June 30, 1994, had taken place on January
1, 1993, pro forma results of operations would have been as follows:
Six Months Ended
June 30,
------------------------
1994 1993
---------- -----------
(Dollars in thousands,
except per share amounts)
Service Revenues $141,466 $ 96,958
Equipment Sales 6,472 5,676
Interest Expense (including cost to
finance acquisitions) 8,914 17,404
Net Income (Loss) 3,708 (21,490)
Income (Loss) per Common Share $ .05 $ (.35)
5. The following summarized unaudited income statements are the combined
summarized income statements of the cellular system partnerships
listed below which are among those partnerships 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, 1994, are set forth in the following table.
The
Company's
Limited
Partnership
Cellular System Partnership Interest
-------------------------------------------- -------------
Los Angeles SMSA Limited Partnership 5.5%
Nashville/Clarksville MSA Limited Partnership 49.0%
Baton Rouge MSA Limited Partnership 52.0%
-20-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
1994 1993 1994 1993
---------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
REVENUES $ 154,273 $ 124,943 $ 298,449 $ 242,861
EXPENSES
Selling, general and
administrative 78,335 71,384 154,283 146,614
Depreciation and
amortization 16,397 13,687 31,361 26,255
------- ------- ------- --------
94,732 85,071 185,644 172,869
------- ------- ------- --------
OPERATING INCOME 59,541 39,872 112,805 69,992
OTHER INCOME, NET 1,643 574 2,809 1,838
------- ------- ------- --------
NET INCOME $ 61,184 $ 40,446 $ 115,614 $ 71,830
======= ======= ======= ========
</TABLE>
6. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during
the first six months of 1994 and 1993. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed
and Common Shares issued.
Six Months Ended
June 30,
------------------------
1994 1993
---------- -----------
(Dollars in thousands,
except per share amounts)
Property, plant and equipment $ 6,390 $ 16,503
Cellular licenses 120,114 200,134
Decrease in equity-method investment
in cellular interests (4,816) (8,283)
Accounts receivable 793 1,774
Revolving Credit Agreement - TDS (309) (99,821)
Long-term debt --- (10,876)
Accounts payable (727) (2,177)
Other assets and liabilities,
excluding cash acquired (567) 661
Common Shares issued and issuable (117,003) (80,522)
Subsidiary preferred stock issued --- (2,909)
Equity contribution from TDS --- (8,118)
---------- ----------
Decrease in cash due to acquisitions $ 3,875 $ 6,366
========== ==========
-21-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes certain noncash transactions, and interest
and income taxes paid.
Six Months Ended
June 30,
------------------------
1994 1993
---------- -----------
(Dollars in thousands,
Interest paid $ 1,961 $ 1,339
Income taxes paid 1,011 1,074
Accrued interest converted into debt
under the Revolving Credit Agreement 8,757 11,392
Common Shares issued by USM for conversion
of USM Preferred Stock and TDS
Preferred Shares $ 1,497 $ ---
7. Subsequent Events
The Company has entered into a standby letter of credit agreement
effective July 20, 1994, with a financial institution. This standby
letter of credit, which will not exceed $9.9 million, provides
supplemental security in support of a bank loan to an entity minority-
owned by the Company. The bank loan, which is secured primarily by a
first mortgage on the tangible and intangible assets of a cellular
operating system to be constructed by the minority-owned entity, was
arranged to finance the construction of this cellular system, the
acquisition of customers and the initial operation of the system.
The cellular license for this system was originally awarded to a third
party which constructed its own cellular system. The third party's
license application was subsequently found to be flawed by the Federal
Communications Commission ("FCC"), and the license was then awarded to
the entity minority-owned by the Company. The third party is
appealing the FCC's decision. If the appeal is successful, the
license will be removed from the entity minority-owned by the Company.
The third party will then resume providing cellular service and will
not be obligated to purchase the minority-owned entity's cellular
system. Such removal of the license from the minority-owned entity
constitutes an event of default under its bank loan agreement, and the
bank may call upon the Company's standby letter of credit to satisfy
any amounts still due under this loan agreement.
-22-
<PAGE>
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 5, 1994, the
following numbers of votes were cast for the matters indicated:
1. Election of two Class I Directors of the Company by the holder of
Series A Common Shares and shares of Preferred Stock.
Broker
Nominee For Withhold Non-Vote
---------------------------------------------------------------------
LeRoy T. Carlson 330,247,054 -0- -0-
H. Donald Nelson 330,247,054 -0- -0-
2. Proposal to Ratify the Selection of Arthur Andersen & Co. as
Independent Public Accountants for 1994.
Broker
For Withhold Abstain Non-Vote
----------------------------------------------------------------------
372,455,581 3,504 13,925 -0-
-23-
<PAGE>
PART II. OTHER INFORMATION
------------------------------
Item 6. Exhibits and Reports on Form 8-K.
------------------------------------------
(a) Exhibit 11 - Computation of earnings per common share.
(b) Exhibit 12 - Statement regarding computation of ratios.
(c) Exhibit 99.1 - Unaudited Consolidation Statements of Operations
for the Twelve Months Ended June 30, 1994 and 1993.
Exhibit 99.2 - ProForma Financial Statements.
(d) No reports on Form 8-K were filed during the quarter ended June
30, 1994.
-24-
<PAGE>
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 12, 1994 /s/ H. DONALD NELSON
------------------ ---------------------------------------
H. Donald Nelson
President
(Principal Executive Officer)
Date August 12, 1994 /s/ KENNETH R. MEYERS
------------------ ---------------------------------------
Kenneth R. Meyers
Vice President-Finance and Treasurer
(Principal Financial Officer)
Date August 12, 1994 /s/ PHILLIP A. LORENZINI
------------------ ---------------------------------------
Phillip A. Lorenzini
Controller
(Principal Accounting Officer)
-25-
<PAGE>
Exhibit 11
<TABLE>
United States Cellular Corporation
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended June 30, 1994 1993
----------------------------------------------------------------------------------
<S> <C> <C>
Primary Earnings
Net Income (Loss) Available to Common $ 6,185 $ (4,195)
======== =======
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding 77,417 54,836
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 60 ---
Convertible Preferred Shares 1,071 ---
Common Shares Issuable 1,039 ---
-------- -------
Primary Shares 79,587 54,836
======== =======
Primary Earnings per Common Share
Net Income (Loss) $ .08 $ (.08)
======== =======
Fully Diluted Earnings*
Net Income (Loss) Available to Common $ 6,185 $ (4,195)
======== =======
Fully Diluted Shares
Weighted average number of Common and Series A
Common Shares Outstanding 77,417 54,836
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 60 ---
Convertible Preferred Shares 1,071 ---
Common Shares Issuable 1,039 ---
-------- -------
Fully Diluted Shares 79,587 54,836
======== =======
Fully Diluted Earnings per Common Share
Net Income (Loss) $ .08 $ (.08)
======== =======
* This calculation is submitted in accordance with Securities Act
of 1934 Release No. 9083 although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution
of less than 3%.
</TABLE>
<PAGE>
Exhibit 11
<TABLE>
United States Cellular Corporation
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
<CAPTION>
Six Months Ended June 30, 1994 1993
--------------------------------------------------------------------------------------
<S> <C> <C>
Primary Earnings
Net Income (Loss) Available to Common $ 4,355 $(13,403)
======== =======
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding 76,279 54,414
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 66 ---
Convertible Preferred Shares 1,102 ---
Common Shares Issuable 1,645 ---
-------- -------
Primary Shares 79,092 54,414
======== =======
Primary Earnings per Common Share
Net Income (Loss) $ .06 $ (.25)
======== =======
Fully Diluted Earnings*
Net Income (Loss) Available to Common $ 4,355 $(13,403)
======== =======
Fully Diluted Shares
Weighted average number of Common and Series A
Common Shares Outstanding 76,279 54,414
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 66 ---
Convertible Preferred Shares 1,102 ---
Common Shares Issuable 1,645 ---
-------- -------
Fully Diluted Shares 79,092 54,414
======== =======
Fully Diluted Earnings per Common Share
Net Income (Loss) $ .06 $ (.25)
======== =======
* This calculation is submitted in accordance with Securities Act
of 1934 Release No. 9083 although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution
of less than 3%.
</TABLE>
<PAGE>
Exhibit 12
<TABLE>
UNITED STATES CELLULAR CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
For the Six Months Ended June 30, 1994
<CAPTION>
Six Months
Ended
June 30, 1994
-------------------
(Dollars in thousands)
<S> <C>
EARNINGS
Income from Continuing Operations before
income taxes $ 5,646
Add (Deduct):
Minority Share of Cellular Losses (75)
Earnings on Equity Method (12,329)
Distributions from Minority Subsidiaries 8,450
Amortization of Capitalized Interest 10
Minority interest in income of majority-owned
subsidiaries that have fixed charges 1,584
------------
$ 3,286
Add fixed charges:
Consolidated interest expense 8,907
Interest Portion (1/3) of Consolidated
Rent Expense 815
------------
$ 13,008
FIXED CHARGES
Consolidated interest expense 8,907
Interest Portion (1/3) of Consolidated
Rent Expense 815
------------
$ 9,722
RATIO OF EARNINGS TO FIXED CHARGES 1.34
============
Tax-Effected Preferred Dividends $ ---
Fixed Charges 9,722
------------
Fixed Charges and Preferred Dividends $ 9,722
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 1.34
============
</TABLE>
<PAGE>
<TABLE>
Exhibit 99.1
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
---------
<CAPTION>
Twelve Months Ended
June 30,
--------------------------
1994 1993
------------ ----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C>
OPERATING REVENUES
Service $ 257,176 $ 160,615
Equipment sales 12,004 10,310
----------- ----------
Total Operating Revenues 269,180 170,925
----------- ----------
OPERATING EXPENSES
System operations 40,569 29,094
Marketing and selling 55,875 36,538
Cost of equipment sold 34,328 19,182
General and administrative 84,668 61,621
Depreciation 32,289 20,656
Amortization of intangibles 22,768 15,948
----------- ----------
Total Operating Expenses 270,497 183,039
----------- ----------
OPERATING (LOSS) BEFORE MINORITY SHARE (1,317) (12,114)
Minority share of operating (income) (3,823) (2,918)
----------- ----------
OPERATING (LOSS) (5,140) (15,032)
----------- ----------
INVESTMENT AND OTHER INCOME
Investment income 21,762 13,708
Amortization of license and deferred costs
related to investments (965) (797)
Interest income 2,661 2,860
Other (expense), net (2,105) (564)
Gain on sale of cellular interests 4,851 16,521
----------- ----------
Total Investment and Other Income 26,204 31,728
----------- ----------
INCOME BEFORE INTEREST AND
INCOME TAXES 21,064 16,696
Interest expense - affiliate 21,544 23,184
Interest expense - other 3,950 4,048
----------- ----------
(LOSS) BEFORE INCOME TAXES (4,430) (10,536)
Income tax expense 3,253 931
----------- ----------
NET (LOSS) $ (7,683) $ (11,467)
=========== ==========
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000s) 72,579 52,867
NET (LOSS) PER COMMON SHARE $ (.11) $ (.22)
=========== ==========
</TABLE>
<PAGE>
Exhibit 99.2
UNITED STATES CELLULAR CORPORATION
PRO FORMA FINANCIAL INFORMATION
United States Cellular Corporation (AMEX symbol "USM") is
referred to in this exhibit as the "Company." The Company is an 81.4%-
owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
From January 1 through June 30, 1994, the Company acquired
controlling interests in eight cellular markets and several additional
minority cellular interests representing a total of approximately 1.1
million population equivalents. The total consideration paid for these
acquisitions was approximately $123.4 million, consisting of 3.8 million
Common Shares, an increase in the Company's revolving credit agreement
with TDS (the "Revolving Credit Agreement") of $309,000, the cancellation
of a $1.4 million note receivable and $4.7 million in cash paid by the
Company. Of this consideration, the debt under the Revolving Credit
Agreement and the Common Shares were issued to TDS to reimburse TDS for
TDS Common Shares issued and issuable and cash paid to third parties.
As of June 30, 1994, the Company had pending agreements to
acquire controlling interests in four cellular markets and one minority
interest representing a total of approximately 919,000 population
equivalents. The total consideration to be paid for the acquisitions
described in this paragraph, valued at the time such agreements were
entered into, is approximately $53.3 million. If these acquisitions are
completed as planned, the Company will issue approximately 1.8 million
Common Shares and TDS will pay $700,000 in cash (to be treated as an
equity contribution to the Company).
Pursuant to Rule 3-05 and Rule 11-01 of Regulation S-X, the
completed and pending acquisitions of businesses described in the
foregoing paragraphs are not individually significant. The following pro
forma financial information is included pursuant to Article 11 of
Regulation S-X:
United States Cellular Corporation Unaudited Condensed Pro Forma
Consolidated Financial Statements
Unaudited Condensed Pro Forma Consolidated Balance Sheet
as of June 30, 1994
Unaudited Condensed Pro Forma Consolidated Statement of
Operations for the Six Months Ended June 30, 1994
Unaudited Condensed Pro Forma Consolidated Statement of
Operations for the Year Ended December 31, 1993
Notes to Unaudited Condensed Pro Forma Consolidated
Financial Statements
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
Condensed Pro Forma Consolidated Balance Sheet
June 30, 1994
Unaudited
---------
(In Thousands)
ASSETS
<CAPTION>
Combined Pro Forma
Completed Adjustments Pro Forma
USM and Pending Increase USM
Consolidated (a) Acquisitions (Decrease) Consolidated
---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
CURRENT ASSETS $ 61,066 $ 1,502 $ (9)(1) $ 62,559
---------- ------- ------- ----------
PROPERTY, PLANT AND EQUIPMENT
In service 370,261 9,882 --- 380,143
Less accumulated depreciation 77,958 2,423 --- 80,381
---------- ------- ------- ----------
292,303 7,459 --- 299,762
---------- ------- ------- ----------
INVESTMENTS
Cellular partnerships 95,547 --- (2,208)(1) 93,339
Licenses, net of amortization 935,012 1,767 56,751 (1) 993,530
Marketable equity securities 17,669 --- --- 17,669
Other 11,324 --- --- 11,324
---------- ------- ------- ----------
1,059,552 1,767 54,543 1,115,862
---------- ------- ------- ----------
OTHER ASSETS AND DEFERRED CHARGES 17,368 867 --- 18,235
---------- ------- ------- ----------
$1,430,289 $ 11,595 $ 54,534 $ 1,496,418
========== ======= ======= ==========
The accompanying notes to condensed pro forma consolidated financial statements
are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
Condensed Pro Forma Consolidated Balance Sheet
June 30, 1994
Unaudited
---------
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
Combined Pro Forma
Completed Adjustments Pro Forma
USM and Pending Increase USM
Consolidated (a) Acquisitions (Decrease) Consolidated
---------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES $ 86,552 $ 4,255 $ (2,330)(1) $ 88,477
--------- ------- ------- ---------
NOTES PAYABLE --- 326 --- 326
--------- ------- ------- ---------
REVOLVING CREDIT AGREEMENT-TDS 205,470 --- --- 205,470
--------- ------- ------- ---------
LONG-TERM DEBT, excluding
current portion 45,078 10,537 --- 55,615
--------- ------- ------- ---------
DEFERRED LIABILITIES AND CREDITS 3,676 --- --- 3,676
--------- ------- ------- ---------
REDEEMABLE PREFERRED STOCK,
excluding current portion 9,597 --- --- 9,597
--------- ------- ------- ---------
MINORITY INTEREST 15,347 --- 2 (1) 15,349
--------- ------- ------- ---------
COMMON STOCKHOLDERS' EQUITY
Common Shares, par value
$1 per share 44,804 --- 1,845 (1) 46,649
Series A Common Shares,
par value $1 per share 33,006 --- --- 33,006
Additional paid in capital 1,063,715 5 51,489 (1) 1,115,209
Common Shares issuable,
1,038,552 shares 19,739 --- --- 19,739
Retained (deficit) (96,695) (3,528) 3,528 (1) (96,695)
--------- ------- ------- ---------
Total common stockholders'
equity 1,064,569 (3,523) 56,862 1,117,908
--------- ------- ------- ---------
$1,430,289 $ 11,595 $ 54,534 $1,496,418
========= ======= ======= =========
The accompanying notes to condensed pro forma consolidated financial statements
are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
Condensed Pro Forma Consolidated Statement of Operations
For the Six Months Ended June 30, 1994
Unaudited
---------
(In Thousands, except per share amounts)
<CAPTION>
Combined Pro Forma
Completed Adjustments Pro Forma
USM and Pending Increase USM
Consolidated Acquisitions(b) (Decrease) Consolidated
---------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Service $140,426 $ 2,973 $ --- $143,399
Equipment sales 6,464 220 --- 6,684
--------- ------- ------- ---------
Total Operating Revenues 146,890 3,193 --- 150,083
--------- ------- ------- ---------
OPERATING EXPENSES
System operations 21,804 1,052 --- 22,856
Marketing and selling 30,031 583 --- 30,614
Cost of equipment sold 17,021 504 --- 17,525
General and administrative 43,206 1,232 --- 44,438
Depreciation and amortization 30,309 971 995(3) 32,275
--------- ------- ------- ---------
Total Operating Expenses 142,371 4,342 995 147,708
--------- ------- ------- ---------
OPERATING INCOME (LOSS) BEFORE
MINORITY SHARE 4,519 (1,149) (995) 2,375
--------- ------- ------- ---------
Minority share of
operating (income) loss (2,314) --- 70 (2) (2,244)
--------- ------- ------- ---------
OPERATING INCOME (LOSS) 2,205 (1,149) (925) 131
--------- ------- ------- ---------
INVESTMENT AND OTHER INCOME
Investment income 12,329 --- 39 (4) 12,368
Amortization of license and
deferred costs related to
investments (487) --- --- (487)
Interest income 1,306 3 (103)(5) 1,206
Other (expense), net (800) --- --- (800)
--------- ------- ------- ---------
Total Investment and
Other Income 12,348 3 (64) 12,287
--------- ------- ------- ---------
INCOME (LOSS) BEFORE INTEREST AND
INCOME TAXES 14,553 (1,146) (989) 12,418
Interest expense 8,907 555 (103)(5) 9,431
72 (6)
--------- ------- ------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 5,646 (1,701) (958) 2,987
Income tax expense 1,291 --- --- (7) 1,291
--------- ------- ------- ---------
NET INCOME (LOSS) $ 4,355 $ (1,701) $ (958) $ 1,696
========= ======= ======= =========
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES 79,092 2,739 81,831
========= ======= =========
INCOME PER COMMON AND SERIES A
COMMON SHARE $ .06 $ .02
========= =========
The accompanying notes to condensed pro forma consolidated financial statements
are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
Condensed Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1993
Unaudited
-----------
(In Thousands, except per share amounts)
<CAPTION>
Combined Pro Forma
Completed Adjustments Pro Forma
USM and Pending Increase USM
Consolidated (c) Acquisitions (Decrease) Consolidated
---------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Service $ 203,800 $ 11,848 $ --- $215,648
Equipment sales 10,510 300 --- 10,810
--------- ------- ------- ---------
Total Operating Revenues 214,310 12,148 --- 226,458
--------- ------- ------- ---------
OPERATING EXPENSES
System operations 34,301 5,211 --- 39,512
Marketing and selling 43,478 1,572 --- 45,050
Cost of equipment sold 25,688 1,144 --- 26,832
General and administrative 74,472 4,602 --- 79,074
Depreciation and amortization 45,027 2,407 2,673 (3) 50,107
--------- ------- ------- ---------
Total Operating Expenses 222,966 14,936 2,673 240,575
--------- ------- ------- ---------
OPERATING (LOSS) BEFORE
MINORITY SHARE (8,656) (2,788) (2,673) (14,117)
Minority share of operating
(income) loss (3,496) --- 45 (2) (3,451)
--------- ------- ------- ---------
OPERATING (LOSS) (12,152) (2,788) (2,628) (17,568)
--------- ------- ------- ---------
INVESTMENT AND OTHER INCOME
Investment income 16,922 --- (68)(4) 16,854
Amortization of license and
deferred costs related to
investments (917) --- --- (917)
Interest income 2,652 229 (188)(5) 2,693
Other (expense), net (915) (8) --- (923)
Gain on sale of cellular
interests 4,851 --- --- 4,851
--------- ------- ------- ---------
Total Investment and
Other Income 22,593 221 (256) 22,558
--------- ------- ------- ---------
INCOME (LOSS) BEFORE INTEREST AND
INCOME TAXES 10,441 (2,567) (2,884) 4,990
Interest expense 33,190 1,602 (188)(5) 34,977
373 (6)
--------- ------- ------- ---------
(LOSS) BEFORE INCOME TAXES (22,749) (4,169) (3,069) (29,987)
Income tax expense 2,692 --- --- (7) 2,692
--------- ------- ------- ---------
NET (LOSS) $ (25,441) $ (4,169) $ (3,069) $(32,679)
========= ======= ======= =========
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES 57,152 5,633 62,785
========= ======= =========
(LOSS) PER COMMON AND SERIES A
COMMON SHARE $ (.45) $ (.52)
========= =========
The accompanying notes to condensed pro forma consolidated financial statements
are an integral part of this statement.
</TABLE>
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(a) Includes the balance sheets of the entities discussed in the
second paragraph of this exhibit.
(b) Includes the income statements of the entities discussed in
the second paragraph of this exhibit prior to the date of acquisition by
the Company, as well as each of the income statements of the entities for
which acquisition by the Company is pending as of the date of this Form
10-Q.
(c) Service revenues and system operations expenses for 1993 have
been reclassified to conform to 1994 presentation.
(d) The pro forma adjustments are described in the following
paragraphs:
(1) Reflects the Company's acquisition of the cellular interests
described in the third paragraph of this exhibit. Also reflects the
elimination of the equity of these interests in purchase transactions and
the allocation of the purchase price to cellular license acquisition costs
(in thousands).
Purchase price (aggregate) $ 53,339
Plus: acquired companies' negative equity at
June 30, 1994 3,412
-----------
Purchase price to be allocated $ 56,751
===========
Purchase price in excess of book value--
Cellular operations--consolidated $ 56,751
Cellular operations--equity method ---
-----------
$ 56,751
===========
The pro forma allocations of the purchase prices to the acquired
entities' assets as set forth above are based upon preliminary estimates
of the values of those assets.
(2) Reflects the minority shareholders' portion of acquired
companies' net income and the elimination of the minority shareholders'
portion of net income of companies in which the Company acquired
additional minority interests.
(3) Reflects the amortization of assumed costs in excess of book
value. All excess cost amounts are assumed to be amortized over 40 years.
(4) Reflects the elimination of the equity-method losses of
acquired entities which are consolidated in the Pro Forma Consolidated
Statements of Operations.
(5) Reflects the elimination of intercompany interest income and
interest expense between the Company and several acquired entities. The
acquired entities were previously accounted for by the equity method of
accounting (see Note 4).
(6) Reflects the estimated interest expense incurred as a result
of increases in the Revolving Credit Agreement in connection with the
acquisitions included in the Condensed Pro Forma Consolidated Statements
of Operations.
(7) The Company is included in a consolidated federal income tax
return with other members of the TDS consolidated group. TDS and the
Company entered into a Tax Allocation
<PAGE>
UNITED STATES CELLULAR CORPORATION
NOTES TO CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Agreement (the "Agreement") effective July 1, 1987. The Agreement
provides, among other things, that the Company and its subsidiaries be
included in a consolidated federal income tax return with the TDS
affiliated group unless TDS requests otherwise. The Company and its
subsidiaries calculate their losses and credits as if they comprised a
separate affiliated group. Under the Agreement, the Company is able to
carry forward its losses and credits and use them to offset any future
income tax liabilities to TDS. Accordingly, no pro forma income tax
benefits arising from the pro forma effects of acquisitions have been
recorded in the Condensed Pro Forma Consolidated Statements of Operations.
<PAGE>
