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, 1995
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8410 West Bryn Mawr, Suite 700, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 399-8900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
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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 31, 1995
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Common Shares, $1 par value 49,925,263 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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UNITED STATES CELLULAR CORPORATION
2ND QUARTER REPORT ON FORM 10-Q
INDEX
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Page No.
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, 1995 and 1994 15
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1995 and 1994 16
Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994 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
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Six Months Ended 6/30/95 Compared to Six Months Ended 6/30/94
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, 1995, representing 24,830,000 population equivalents ("pops"). USM
managed the operations of 148 cellular markets at June 30, 1995. The Company
expects to divest its controlling interests in five of these markets and manage
the operations of four additional markets in the future. In total, USM expects
to manage 147 markets under agreements in place as of June 30, 1995. Interests
in the 61 remaining markets are or will be managed by others. All 61 of these
markets were served by operational systems at June 30, 1995. The following table
is a summary of the Company's markets and consolidated operations.
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UNITED STATES CELLULAR CORPORATION
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At or For the Six Months Ended
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June 30, 1995 June 30, 1994
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Majority-Owned, Managed and
Consolidated Markets: (1)
Population equivalents (in
thousands) (2) 19,826 19,118
Total population (in thousands) 22,430 20,344
Customers 550,000 331,000
Market penetration 2.45% 1.63%
Markets in operation 137 123
Cell sites in service 940 610
Average monthly revenue per customer $73 $79
Churn rate per month 2.0% 2.2%
Marketing cost per net customer addition $589 $665
Minority-Owned and Managed
Markets: (3)
Population equivalents (in
thousands) (2) 700 1,159
Markets in operation 11 18
Markets to be Managed, Net of
Markets to be Divested: (4)
Population equivalents (in thousands) (2) 516 938
Net Markets to be Acquired (Divested) -1 5
Total Markets Managed and to be
Managed by USM:
Population equivalents (in thousands) (2) 21,042 21,215
Markets 147 146
Markets Managed by Others: (5)
Population equivalents (in thousands) (2) 3,788 3,458
Markets in operation 61 62
Total Markets:
Population equivalents (in thousands) (2) 24,830 24,673
Markets 208 208
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(1) Includes two markets managed by third parties in 1994.
(2) 1994 Donnelley Marketing Service estimates are used for both periods.
Includes population equivalents relating to interests which are acquirable
in the future.
(3) Includes two markets in 1995 and one in 1994 where the Company has the
right to acquire an interest but did not own an interest at the respective
dates.
(4) "Markets to be Managed" represents markets which are managed by third
parties until the Company acquires a majority interest in the markets. In
1995, represents the net of four markets which will be added to managed
operations and five markets which are currently majority-owned and managed
and will be divested.
(5) Represents markets in which the Company owns or has the right to acquire a
minority 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, 1995 consolidated results of
operations include 137 markets with a total population of 22.4 million, compared
to 123 markets with a total population of 20.3 million in 1994.
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.
Number of Markets at June 30,
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1995 1994
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Minority-owned and Managed 9 17
Managed by Others - Equity Method 18 16
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Total Markets Included in
Investment Income 27 33
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Managed by Others - Cost Method 43 46
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Operating results for the first six months of 1995 primarily reflect improvement
in the Company's more established markets (those 123 markets consolidated at
June 30, 1994), the acquisition of majority interests in 23 operational markets
and the divestiture of nine markets since June 30, 1994. Operating revenues,
driven primarily by increases in customers served, rose $70.0 million, or 48%.
Operating expenses rose $55.6 million, or 39%. Operating cash flow increased
$24.8 million, or 71%.
Investment and other income increased $41.8 million, due primarily to gains on
the sales of cellular and other investments totaling $35.4 million and an
increase in investment income. Investment income increased $6.1 million in 1995,
mostly due to improved results in markets managed by others. Interest expense
increased $6.2 million as a result of both a 36% increase in average debt
balances and higher interest rates. Net income totaled $47.7 million in 1995
compared to $4.4 million in 1994, reflecting gains on the sale of cellular
interests, improved operating results, increased investment income and increased
interest expense. On a comparable basis, excluding the effect of the 1995 gains
on sales of cellular and other
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investments (net of tax), net income increased to $15.2 million in 1995 compared
to $4.4 million in 1994.
The Company expects to add a net of one market to consolidated operations by the
end of 1995, through the acquisition of majority interests in six operational
markets and the divestiture of five markets currently majority-owned and managed
by the Company. Of the six majority interests to be acquired, all are expected
to be acquired in 1995 and the Company currently owns a minority interest in and
manages two of the markets.
Management anticipates that operating losses from new markets and the
seasonality of revenue streams and operating expenses may affect the Company's
operating and net results over the next several quarters.
Operating Revenues
Operating revenues totaled $216.9 million in 1995, up $70.0 million, or 48%,
over 1994. Market acquisitions and start-ups increased operating revenues $14.4
million, or 10%, in 1995.
Service revenues primarily consist of: (i) charges for access, airtime and
value-added services provided to the Company's local retail customers who use
the local systems operated by the Company; (ii) charges to customers of other
systems who use the Company's cellular systems when roaming ("inbound roaming");
and (iii) charges for long-distance calls made on the Company's systems. Service
revenues totaled $209.9 million in 1995, up $69.5 million, or 49%, over 1994.
The increase was primarily due to the growing number of local retail customers
and the growth in inbound roaming revenue. Acquisitions and start-ups increased
service revenues $13.9 million, or 10%, in 1995. Average monthly service revenue
per customer totaled $73 in 1995 compared to $79 in 1994. The 8% decrease in
average monthly service revenue per customer in 1995 was primarily a result of
the decline in average local minutes of use per retail customer and a decrease
in per customer inbound roaming revenue. Management anticipates that average
monthly service revenue per customer will continue to decrease as local minutes
of use per customer declines and as the growth rate of the Company's customer
base exceeds the growth rate of inbound roaming revenue.
Revenue from local customers' usage of USM's systems increased $43.3 million, or
51%, in 1995. 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 66% to 550,000 at June 30, 1995 from
331,000 at June 30, 1994. Excluding the effect of acquisitions and dispositions,
the Company's consolidated markets added 184,000 customers since June 30, 1994.
Of these additions, 143,000 were in markets in service and consolidated at June
30, 1994, representing a 43% increase over the 331,000 customers served at that
date. While the percentage increase is expected to be lower in future periods,
management anticipates that the total number of net customer additions will
increase. Acquisitions and start-ups increased local revenue $7.4 million, or
9%, in 1995.
Average monthly retail revenue per customer declined to $45 in 1995 from $48 in
1994. Monthly local minutes of use per customer averaged 91 in 1995 compared to
96 in 1994. 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.
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Inbound roaming revenue increased $19.9 million, or 44%, in 1995. 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
roaming revenue per customer averaged $23 in 1995 and $25 in 1994. Acquisitions
and start-ups increased inbound roaming revenue $5.4 million, or 12%, in 1995.
Long-distance revenue increased $4.8 million, or 49%, in 1995 as the volume of
long-distance calls billed by the Company increased. Monthly long-distance
revenue per customer averaged $5 in 1995 compared to $6 in 1994. Acquisitions
and start-ups increased long-distance revenue $1.0 million, or 11%, in 1995.
Equipment sales revenues totaled $7.0 million in 1995, up $508,000, or 8%, over
1994. Equipment sales reflect the sale of 121,700 and 63,200 cellular telephone
units in 1995 and 1994, respectively, plus installation and accessories revenue.
The average revenue per unit was $57 in 1995 compared to $102 in 1994. 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. Acquisitions and start-ups increased
equipment sales revenues $468,000, or 7%, in 1995.
Operating Expenses
Operating expenses totaled $198.0 million in 1995, up $55.6 million, or 39%,
over 1994. Market acquisitions and start-ups increased expenses $12.2 million,
or 9%, in 1995.
System operations expenses increased $8.6 million, or 40%, in 1995 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. 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
roaming traffic on these facilities, offset somewhat by pass-through roaming
revenue. These expenses also include local interconnection to the landline
network, toll charges and roaming expenses from the Company's customers' use of
systems other than their local systems. Customer usage expenses were $13.2
million in 1995 compared to $9.9 million in 1994; these expenses represented 6%
of service revenues in 1995 and 7% in 1994. Maintenance, utility and cell site
expenses grew $5.3 million, or 44%, in 1995, primarily reflecting an increase in
the number of cell sites in the systems serving all majority-owned and managed
markets, from 610 in 1994 to 940 in 1995. Acquisitions and start-ups increased
system operations expenses $2.0 million, or 9%, in 1995.
Marketing and selling expenses increased $13.6 million, or 45%, in 1995.
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 1995
increase was primarily due to a 61% rise in the number of gross customer
activations (excluding acquisitions and divestitures), to 161,000 in the first
half of 1995 from 100,000 in 1994. Cost per gross customer addition decreased 7%
to $377 in 1995 from $406 in 1994. Excluding acquisitions and divestitures, the
Company added 103,000 net new customers in 1995 compared to 61,000 in 1994, a
69% increase. The churn rate decreased to
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2.0% for the first six months of 1995 from 2.2% in 1994. Acquisitions and
start-ups increased marketing and selling expenses $2.4 million, or 8%, in 1995.
Cost of equipment sold increased $7.0 million, or 41%, in 1995. 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,
offset somewhat by falling manufacturer prices per unit. The average cost to the
Company of a telephone unit sold, including accessories and installation, was
$197 in 1995 compared to $269 in 1994. Acquisitions and start-ups increased cost
of goods sold $1.6 million, or 9%, in 1995.
General and administrative expenses increased $15.9 million, or 37%, in 1995.
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, an increase 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 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. Acquisitions and start-ups increased direct
field-related general and administrative expenses $3.4 million, or 8%, in 1995.
Depreciation expense increased $7.3 million, or 40%, in 1995, reflecting an
increase in the average fixed asset balance of 55% since the second quarter of
1994. Acquisitions and start-ups increased depreciation expense $1.5 million, or
8%, in 1995.
Amortization of intangibles increased $3.1 million, or 25%, in 1995, primarily
due to an increase in license costs as a result of the acquisition of or the
commencement of service in 23 markets since June 30, 1994. License costs related
to consolidated markets increased $80.6 million, or 8%, since June 30, 1994.
Acquisitions and start-ups increased amortization of intangibles $1.4 million,
or 11%, in 1995.
Operating Income before Minority Share
Operating income before minority share totaled $18.9 million in 1995 compared to
$4.5 million in 1994. The operating margin (as a percent of service revenues)
improved to 9% in 1995 from 3% in 1994. The increase in operating income
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, partially offset by costs associated with the growth of the Company's
operations and increased losses on equipment sales. Acquisitions and start-ups
increased operating income before minority share $2.2 million, or 48%, in 1995.
The Company expects service revenues to continue to grow during the remainder of
1995 as it adds customers and cell sites to its existing systems, realizes a
full year of revenues from customers and cell sites added in 1994 and completes
acquisitions of operational systems. Additionally, the Company expects expenses
to increase significantly during the remainder of 1995 as it incurs costs for
markets and cell sites added in 1994 and 1995, incurs costs associated with
customer and system growth and acquires additional markets. At least one market
is expected to be added to consolidated operations before the end of 1995,
through the acquisition of majority interests in six operational markets and the
divestiture of five majority-owned and managed markets. The Company expects that
the costs related to acquiring and operating new markets may exceed their
revenues over the next few quarters. As a result, the rate of growth
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in operating income could be reduced over the next several quarters.
Additionally, management believes there exists a seasonality in both service
revenues, which tend to increase more slowly in the first quarter, and operating
expenses, which tend to be higher in the fourth quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter.
Investment and Other Income
Investment and other income totaled $54.1 million in 1995 and $12.3 million in
1994. Investment income was $18.4 million in 1995, a $6.1 million, or 50%,
increase over 1994, due to improved results in markets managed by others
accounted for by the equity method. The Company's share of the income or loss
from these markets totaled $18.3 million in 1995 compared to $12.2 million in
1994. There were 18 such markets in 1995 and 16 in 1994. The Company's share of
income from minority-owned markets it manages totaled $141,000 in 1995 compared
to $85,000 in 1994. There were nine such markets in 1995 and 17 in 1994.
Gain on sale of cellular and other investments of $35.4 million in 1995 reflects
the sales of the Company's majority interests in three markets, which generated
gains totaling $23.9 million, its investment interests in four other markets,
which produced aggregate gains of $9.0 million and its investment in equity
securities, which produced a gain of $2.5 million.
Interest and Income Taxes
Interest expense increased $6.2 million, or 69%, in 1995, on a 36% increase in
the average amount of debt outstanding plus increased interest rates. Interest
expense is primarily related to borrowings under the Revolving Credit Agreement
with TDS and borrowings under a vendor financing agreement. The interest rate
for borrowings under the Revolving Credit Agreement for both periods was equal
to prime plus 1.5%. Borrowings under the Revolving Credit Agreement have been
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. Interest expense relating to
the Revolving Credit Agreement was $10.3 million in 1995 and $7.0 million in
1994. The average amount of debt outstanding under the Revolving Credit
Agreement was $185.7 million in the first half of 1995 and $177.6 million in the
first half of 1994. The average interest rate on such debt was 11.1% in 1995 and
7.9% in 1994.
The Company sold $745 million principal amount at maturity of zero coupon
convertible debt in June 1995. This 20-year fixed rate debt is in the form of
Liquid Yield OptionTM Notes ("LYONs"TM) (TM Trademark of Merrill Lynch & Co.,
Inc.) and is subordinated to all senior indebtedness of the Company. See
"Financial Resources and Liquidity -- Liquidity."
Most of the net proceeds to the Company of approximately $221 million from the
sale of the LYONs were used to completely repay debt to TDS under the Revolving
Credit Agreement, and the excess proceeds were used for general corporate
purposes. In connection with the sale of the LYONs, the Company and TDS amended
the Revolving Credit Agreement to reduce the available line of credit thereunder
to $100 million and to reduce the interest rate for borrowings to prime plus
0.75%. No borrowings were outstanding under the Revolving Credit Agreement at
June 30, 1995.
The Company has borrowings outstanding under a financing agreement with an
equipment vendor entered into in 1994. This agreement is an amendment and
restatement of a similar 1991
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agreement with the same equipment vendor under which the Company had previous
borrowings outstanding. In addition to the amounts previously borrowed under the
1991 agreement, the Company has new borrowings outstanding as of June 30, 1995
under the 1994 agreement. Borrowings under the 1991 agreement bear interest at a
rate of 2.307% over the 90-day Commercial Paper Rate of high-grade, unsecured
notes (for a rate of 8.3% at June 30, 1995). Borrowings under the 1994 agreement
bear interest at a rate of 2.25% over the 90-day Commercial Paper Rate of
high-grade, unsecured notes (for a rate of 8.3% at June 30, 1995). All
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 $4.7 million in 1995 and $1.9 million in
1994. The average amount of debt outstanding under the vendor financing
agreement was $104.4 million in the first half of 1995 and $59.6 million in
1994. The average interest rate on such debt was 9.0% in 1995 and 6.2% in 1994.
Continued capital expenditures and investments in and advances to entities in
which the Company has a minority interest will require additional funding over
the next few years. These funding requirements are anticipated to be at least
partially met through additional debt, which will likely result in increased
interest expense as debt balances increase. Additional borrowings also may be
required to fund any future acquisitions and their construction and operations.
See "Financial Resources and Liquidity."
Income tax expense was $6.5 million in 1995 and $1.3 million in 1994. Income tax
expense includes the federal income taxes of majority-owned and managed
subsidiaries not included in the TDS consolidated federal income tax return.
State income tax expense in 1995 and 1994 was primarily related to subsidiaries
generating taxable income after utilization of state net operating losses. Also
in 1995, $2.9 million of income tax expense was generated by the gains on sales
of cellular interests. 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 $165 million
at December 31, 1994, and expires between 2002 and 2009. The amount of the state
net operating loss carryforward available to offset future taxable income
aggregated approximately $227 million at December 31, 1994, and expires between
1998 and 2009.
Net Income (Loss)
Net income totaled $47.7 million in 1995 compared to $4.4 million in 1994. The
1995 improvement resulted from gains on the sales of cellular interests,
improved operating results in the established markets and increased investment
income, partially offset by increased interest expense. Earnings per share was
$.57 in 1995 compared to $.06 in 1994, reflecting both 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 the first half of 1995 increased 5% over the shares outstanding
for 1994 primarily as a result of Common Shares issued in connection with
acquisitions. On a comparable basis, excluding the effect of the 1995 gains on
sales of cellular and other investments (net of tax), net income increased to
$15.2 million in 1995 from $4.4 million in 1994 and earnings per share increased
to $.18 in 1995 from $.06 in 1994.
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TDS owned an aggregate of 67,052,931 shares of common stock of the Company at
June 30, 1995, representing 80.9% of the combined total of the Company's
outstanding Common and Series A Common Shares and 95.8% 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, 1995,
TDS would have owned 79.9% of the total outstanding common stock of the Company
and controlled 95.6% of the combined voting power of both classes of its common
stock.
Three Months Ended 6/30/95 Compared to Three Months Ended 6/30/94
Operating revenues totaled $117.1 million in the second quarter of 1995, up
$36.5 million, or 45%, over 1994. 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 totaled 95 in the second quarter
of 1995 compared to 103 in 1994. Average monthly service revenue per customer
decreased 9% to $75 in the second quarter of 1995 compared to $82 in 1994 for
reasons generally the same as the first half of 1995. Revenues from local
customers' usage of USM's systems increased $23.3 million, or 51%, in 1995
primarily due to the increased number of customers served. Average monthly local
retail revenue per customer declined 7% to $46 in the second quarter of 1995
compared to $49 in 1994. Inbound roaming revenue increased $10.1 million, or
40%, in 1995 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 $23 in 1995 and $27 in
1994. Long-distance revenue increased $2.6 million, or 48%, in 1995 as the
volume of long-distance calls billed by the Company increased. Equipment sales
revenue reflects sales of 67,300 cellular telephones in 1995 compared to 34,500
in 1994. The average revenue per unit sold was $54 in 1995 and $104 in 1994.
Operating expenses totaled $106.3 million in the second quarter of 1995, up
$31.1 million, or 41%, over 1994 for reasons generally the same as the first
half of 1995.
Operating income before minority share totaled $10.9 million in 1995 compared to
$5.5 million in 1994. The operating income margin improved to 10% in 1995 from
7% in 1994. 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 $1.6 million, or 22%, in 1995 due to improved
results in markets managed by others accounted for by the equity method. Gain on
sale of cellular and other investments totaled $16.8 million in 1995, resulting
from the sale of the Company's 100% interests in two markets and its investment
interest in two other markets plus the Company's sale of equity securities
during the quarter.
Net income totaled $24.1 million in 1995 compared to $6.2 million in 1994.
Earnings per share was $.29 in 1995 and $.08 in 1994. Weighted average common
shares outstanding increased 5% in 1995.
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FINANCIAL RESOURCES AND LIQUIDITY
The Company operates a capital- and marketing-intensive business. Rapid growth
in markets operated by the Company 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 only
recently achieved profitability and has previously incurred significant start-up
costs and operating losses. The Company anticipates increasing growth in
cellular units in service and revenues as it continues its expansion and
development programs. Marketing and system operations expenses associated with
this expansion will most likely reduce the rate of growth in operating cash flow
and operating income over the next several quarters. The Company has obtained
substantial funds from external sources during the past several years.
Cash flows from operating activities provided $53.0 million in 1995 and $35.5
million in 1994. Operating cash flow (operating income before minority share
plus depreciation and amortization) provided cash totaling $59.6 million in 1995
and $34.8 million in 1994. The 1995 increase in operating cash flow primarily
reflects improvement in the more established markets. Acquisitions and start-ups
increased operating cash flow $5.0 million, or 14%, 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 $6.6 million in 1995 and provided cash totaling
$656,000 in 1994.
Cash flows from financing activities provided $18.1 million in 1995 and $49.2
million in 1994. Cash flows from financing activities include cash flows from
the sale of LYONs, borrowings under the Revolving Credit Agreement with TDS and
vendor financing transactions. In 1995, the sale of LYONs provided cash totaling
$221.5 million and vendor financing transactions provided $58.7 million. These
were offset by repayments of amounts owed under the Revolving Credit Agreement
with TDS totaling $249.9 million and amounts owed under the vendor financing
agreement totaling $7.6 million. Borrowings under the Revolving Credit Agreement
with TDS totaling $56.7 million provided a majority of the Company's external
financing requirements in 1994.
Cash flows from investing activities required cash investments totaling $50.1
million in 1995 and $84.0 million in 1994. Such cash requirements primarily
consisted of cash additions to property, plant, and equipment and cash
requirements for acquisitions and for investments in cellular markets. In 1995,
the Company received cash proceeds totaling $82.5 million relating to the sales
of cellular interests in seven markets and the sale of equity securities. Cash
expenditures for property, plant and equipment totaled $95.6 million in 1995
(excluding noncash expenditures of $3.6 million), representing the construction
of 119 cell sites and other plant additions. 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.
Anticipated capital requirements for 1995 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 1995 is approximately $180
million, consisting primarily of new cell sites to expand and enhance the
Company's coverage in its service areas.
The Company continued to expand its operations through acquisitions during the
first half of 1995, completing the acquisition of controlling interests in ten
markets and several additional minority interests. During the first six months
of 1994, the Company completed the acquisition of controlling interests in eight
markets and several additional minority interests. Some of the markets acquired
during 1995 and 1994 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,
1995 1994
---------- --------
(in millions)
Pops Acquired 1.4 1.1
Total Consideration $135.9 $123.4
Details of Total Consideration:
USM Common Shares
Shares Issued 3.1 3.8
Recorded Cost $ 98.4 $117.0
Revolving Credit Agreement - TDS 14.6 .3
Cancellation of Notes Receivable -- 1.4
Cash $ 22.9 $ 4.7
Of the total 1995 and 1994 consideration, the debt under the Revolving Credit
Agreement and the USM Common Shares (except 415,000 shares issued to third
parties in 1995) were issued to TDS to reimburse TDS for TDS Common Shares
issued and issuable and cash paid to third parties in connection with 1995 and
1994 acquisitions. Additionally, the Company had commitments at June 30, 1995,
to issue 472,000 Common Shares in 1995 and 1996 related to certain completed
acquisitions. The Company and TDS have the option to deliver TDS Common Shares
and/or cash in lieu of the Company's Common Shares in connection with certain of
these acquisitions.
The Company is continuing to rationalize its holdings. As the number of
opportunities for outright acquisitions has decreased over the last one or two
years, and as the Company's clusters have grown to realize greater economies of
scale, 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 divestitures of other less strategic markets. The proceeds from these
divestitures have been used to further the Company's growth.
At June 30, 1995, the Company had agreements pending to exchange controlling
interests in three markets, representing 625,000 population equivalents, for
controlling interests in six markets, representing 759,000 population
equivalents. In addition, the Company had agreements
-12-
<PAGE>
pending to divest controlling interests in three other markets, representing
475,000 population equivalents, and to settle litigation related to an
investment interest which was divested earlier in 1995. If these divestitures
and the litigation settlement are completed as planned, the Company will receive
cash consideration totaling approximately $81.5 million.
Management believes the rationalization of its holdings will enhance the
Company's clustering strategy, by exchanging markets which are less strategic
for markets which add to its current clusters and by divesting other less
strategic markets for cash. All of the pending exchange, divestiture and
litigation settlement agreements discussed above are expected to be completed
during 1995. Certain of the divestitures and the litigation settlement are
expected to generate substantial gains for book and tax purposes.
The Company and TDS are parties to a legal proceeding before the FCC involving a
cellular license in a Wisconsin Rural Service Area. The Company and TDS have
entered into definitive settlement agreements with all of the private parties
to that proceeding. The proposed settlements followed extensive discovery by
the FCC and other parties. On July 31, 1995, the Company, TDS and the Wireless
Telecommunications Bureau of the FCC jointly proposed that the judge presiding
in the FCC proceeding issue a decision finding that TDS and its affiliates
(including the company) are fully qualified to be FCC licensees. The
settlements and the proposed decision are subject to the final action of the
presiding judge. See Note 15 of Notes to Consolidated Financial Statements,
Legal Proceedings (La Star and Wisconsin RSA 8 Applications), in the Company's
Annual Report to Shareholders for the year ended December 31, 1994 for further
discussion of the proceeding involving the Wisconsin RSA.
Liquidity
The Company anticipates that the aggregate resources required for the remainder
of 1995 will include approximately: (i) $84 million for capital spending and
(ii) $4 million of scheduled debt repayments. Not included in the above amounts
are resources that may be required for acquisitions signed during the second
half of 1995. These potential acquisitions may require funding for both their
acquisition and operation during the remainder of 1995.
At June 30, 1995, the Company had $27 million of cash and cash equivalents and
affiliated cash investments and $100 million available under the Revolving
Credit Agreement with TDS as amended effective June 29, 1995. Additionally, the
Company anticipates generating additional amounts of positive cash flows from
operating activities during the remainder of 1995.
The Company sold $745 million principal amount at maturity of zero coupon
convertible debt in June 1995. This 20-year fixed rate debt, in the form of
LYONs, is subordinated to all senior indebtedness of the Company. The issue
price of each LYON was $306.46 for each $1,000 principal amount at maturity,
which represents a yield to maturity of 6%. Each LYON is convertible at the
option of the holder at any time on or prior to maturity at a conversion rate of
9.475 Common Shares per LYON. Upon conversion, USM may elect the delivery of its
Common Shares or cash equal to the market value of the Common Shares into which
the LYONs are convertible. Beginning five years after the date of issue, the
LYONs may be redeemed at any time for cash at the option of the Company at
redemption prices equal to the issue price plus accrued original issue discount
through the date of redemption. On the fifth anniversary of the issue date, USM
will purchase LYONs at the option of the holder at the issue price plus accrued
original issue discount through that date. At that time, USM will have the
option of purchasing
-13-
<PAGE>
such LYONs with cash, USM Common Shares or TDS common equity securities, or any
combination thereof.
Most of the net proceeds to the Company of approximately $221 million from the
sale of the LYONs were used to completely repay debt to TDS under the Revolving
Credit Agreement, and the excess proceeds were used for general corporate
purposes. In connection with the sale of the LYONs, the Company and TDS amended
the Revolving Credit Agreement to reduce the available line of credit thereunder
to $100 million and to reduce the interest rate for borrowings to prime plus
0.75%.
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 January 2, 1998, 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 funding to acquire cellular markets
and build and operate cellular systems in the future. The timing and amount of
such funding requirements will depend on the timing of the completion of any
future 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 may need to raise additional capital to meet
these requirements. These additional requirements may be met through internally
generated funds, additional borrowings from TDS, the issuance of additional
equity or debt securities, vendor financing, bank financing, the sale of assets
or a combination of the above. 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 may have to reduce its
construction, development and acquisition programs. In the long term, reduction
of these programs may have a negative impact on the ability of the Company to
increase its consolidated revenues and cash flows.
-14-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1995 1994 1995 1994
--------------------- ---------------------
(dollars in thousands, except per share amounts)
OPERATING REVENUES
Service $ 113,500 $ 77,065 $ 209,900 $ 140,426
Equipment sales 3,624 3,592 6,972 6,464
--------- -------- --------- ---------
Total Operating Revenues 117,124 80,657 216,872 146,890
--------- -------- --------- ---------
OPERATING EXPENSES
System operations 17,239 12,074 30,441 21,804
Marketing and selling 23,711 15,977 43,633 30,031
Cost of equipment sold 12,838 9,012 24,037 17,021
General and administrative 31,473 22,480 59,140 43,206
Depreciation 13,188 9,520 25,452 18,142
Amortization of intangibles 7,823 6,071 15,253 12,167
--------- -------- --------- ---------
Total Operating Expenses 106,272 75,134 197,956 142,371
--------- -------- --------- ---------
OPERATING INCOME BEFORE
MINORITY SHARE 10,852 5,523 18,916 4,519
Minority share of operating
income (1,875) (1,196) (3,763) (2,314)
--------- -------- --------- ---------
OPERATING INCOME 8,977 4,327 15,153 2,205
--------- -------- --------- ---------
INVESTMENT AND OTHER INCOME
Investment income 8,728 7,138 18,445 12,329
Amortization of licenses and
deferred costs related
to investments (261) (243) (493) (487)
Interest income 1,060 667 2,052 1,306
Other (expense), net (560) (476) (1,230) (800)
Gain on sale of cellular and
other investments 16,842 -- 35,359 --
--------- -------- --------- ---------
Total Investment and
Other Income 25,809 7,086 54,133 12,348
--------- -------- --------- ---------
INCOME BEFORE INTEREST
AND INCOME TAXES 34,786 11,413 69,286 14,553
Interest expense - affiliate 4,237 3,942 10,327 6,974
Interest expense - other 3,154 974 4,769 1,933
--------- -------- --------- ---------
INCOME BEFORE INCOME TAXES 27,395 6,497 54,190 5,646
Income tax expense 3,306 312 6,503 1,291
--------- -------- --------- ---------
NET INCOME $ 24,089 $ 6,185 $ 47,687 $ 4,355
========= ======== ======== =========
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON
SHARES (000s) 83,937 79,587 82,979 79,092
EARNINGS PER COMMON AND SERIES A
COMMON SHARE $ .29 $ .08 $ .57 $ .06
======== ======== ======== ========
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
-15-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended
June 30,
1995 1994
--------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 47,687 $ 4,355
Add (Deduct) adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 41,198 30,796
Investment income (18,445) (12,329)
Gain on sale of cellular and other investments (35,359) --
Minority share of operating income 3,763 2,314
Other noncash expense 6,660 1,371
Change in accounts receivable (12,981) (11,931)
Change in accounts payable (146) 7,644
Change in accrued interest 10,235 6,902
Change in accrued taxes 3,168 3,523
Change in other assets and liabilities 7,177 2,839
-------- --------
52,957 35,484
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt borrowings 58,698 --
Change in Convertible Debentures 221,466 --
Repayment of long-term debt (7,642) (6,040)
Change in Revolving Credit Agreement (249,916) 56,714
Common Shares issued 513 452
Minority partner capital distributions (5,035) (1,923)
-------- --------
18,084 49,203
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (95,612) (69,550)
Investments in and advances to minority partnerships (10,929) (13,615)
Distributions from partnerships 4,552 8,450
Proceeds from sale of investments 82,478 --
Acquisitions, excluding cash acquired (26,841) (3,875)
Other investments (3,738) (5,377)
-------- --------
(50,090) (83,967)
-------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 20,951 720
CASH AND CASH EQUIVALENTS-
Beginning of period 5,800 6,274
-------- --------
End of period $ 26,751 $ 6,994
======== ========
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
-16-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
June 30, 1995 December 31, 1994
------------- ---------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 24,239 $ 4,143
Affiliated cash investments 2,512 1,657
Accounts receivable
Customers 36,590 23,609
Roaming 24,524 18,881
Affiliates 1,639 3,549
Other 2,282 3,150
Inventory 5,485 5,435
Prepaid and other current assets 5,370 4,136
---------- --------
102,641 64,560
---------- --------
PROPERTY, PLANT AND EQUIPMENT
In service 582,218 464,132
Less accumulated depreciation 121,417 95,951
---------- --------
460,801 368,181
---------- --------
INVESTMENTS
Cellu1ar partnerships - equity 105,907 86,215
Cellu1ar partnerships - cost 11,499 13,280
Licenses, net of amortization 1,024,887 947,399
Marketable equity securities -- 20,145
Notes and interest receivable 16,569 14,535
---------- ---------
1,158,862 1,081,574
---------- ---------
DEFERRED CHARGES
Deferred start-up costs, net of amortization 2,978 3,685
Other deferred charges, net of amortization 27,065 16,787
---------- ---------
30,043 20,472
---------- ---------
Total Assets $1,752,347 $1,534,787
========== ==========
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
-17-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
June 30, 1995 December 31, 1994
-------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt and
preferred stock $ 18,826 $ 20,804
Notes payable 613 637
Accounts payable
Affiliates 4,547 3,662
Other 55,668 49,114
Accrued interest, primarily to affiliates 1 5,880
Accrued Taxes 5,740 2,430
Customer deposits and deferred revenues 7,262 5,933
Other current liabilities 15,640 9,913
----------- ----------
108,297 98,373
----------- ----------
REVOLVING CREDIT AGREEMENT - TDS -- 232,954
----------- ----------
LONG-TERM DE3T, excluding current portion 113,113 57,691
----------- ----------
6% ZERO COUPON CONVERTIBLE DEBENTURES 228,912 --
----------- ----------
DEFERRED LIABILITIES AND CREDITS
Income taxes 5,310 5,017
Other 1,333 3,636
----------- ----------
6,643 8,653
----------- ----------
REDEEMABLE PREFERRED STOCK, excluding
current portion -- 9,597
----------- ----------
MINORITY INTEREST 33,794 33,552
----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 49,922 45,584
Series A Common Shares, par value $1 per share 33,006 33,006
Additional paid-in capital 1,205,377 1,083,698
Common Shares issuable, 471,789 shares and
802,802 shares, respectively 10,254 16,337
Retained (deficit) (36,971) (84,658)
----------- ---------
1,261,588 1,093,967
----------- ---------
Total Liabilities and Shareholders' Equity $ 1,752,347 $ 1,534,787
=========== ===========
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
-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.
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, 1995 and December 31,
1994, and the results of operations and cash flows for the six months
ended June 30, 1995 and 1994. The results of operations for the six months
ended June 30, 1995 and 1994, are not necessarily indicative of the
results to be expected for the full year.
2. Earnings per Common and Series A Common Share for the six months ended
June 30, 1995 and 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, 1995 and 1994, consist primarily of
dilutive Common Shares issuable and Redeemable Preferred Stock.
3. Certain of the cellular acquisitions closed during 1992 and 1991 require
USM to deliver Common Shares in the future. USM is required to issue
Common Shares to TDS and third parties as follows:
Common Shares
Issuable
--------------
1995 292,966
1996 178,823
--------------
471,789
==============
The Company and TDS have the option to deliver TDS Common Shares and/or
cash in lieu of the Company's Common Shares in connection with certain of
these acquisitions
-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, 1994, to June 30, 1995, had taken place on January 1, 1994, pro
forma results of operations would have been as follows:
Six Months Ended
June 30,
----------------
1995 1994
----- -----
(Dollars in thousands,
except per share amounts)
Service Revenues $ 224,414 $ 164,411
Equipment Sales 8,211 7,927
Interest Expense (including cost to finance acquisitions) 15,276 9,548
Net Income (Loss) 34,444 (7,495)
Earnings per Common and Series A Common Share $ .41 $ (.09)
5. The following summarized unaudited income statements are the combined
summarized income statements of the cellular system partnerships listed
below which are accounted for by the Company following the equity method.
The combined summarized income statements were compiled from financial
statements and other information obtained by the Company as a limited
partner of the cellular limited partnerships as set forth below. The
cellular system partnerships included in the combined summarized income
statements and the Company's ownership percentage of each cellular system
partnership at June 30, 1995, 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
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
----------- ----------- ---------- ----------
(Dollars in thousands)
REVENUES $ 197,943 $ 154,273 $ 382,768 $ 298,449
EXPENSES
Selling, general and
administrative 103,983 78,335 191,647 154,283
Depreciation and
amortization 16,611 16,397 31,833 31,361
--------- --------- -------- --------
120,594 94,732 223,480 185,644
--------- --------- -------- --------
OPERATING INCOME 77,349 59,541 159,288 112,805
OTHER INCOME, NET 1,380 1,643 3,121 2,809
--------- --------- -------- --------
NET INCOME $ 78,729 $ 61,184 $ 162,409 $ 115,614
========= ========= ======== ========
6. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first six months of 1995 and 1994. In conjunction with these acquisitions,
the following assets were acquired, liabilities assumed and Common Shares
issued.
Six Months Ended
June 30,
-----------------------
1995 1994
---------- ---------
(Dollars in thousands)
Property, plant and equipment $ 25,837 $ 6,390
Cellular licenses 113,316 120,114
Decrease in equity-method investment
in cellular interests (1,233) (4,816)
Accounts receivable 3,922 793
Revolving Credit Agreement - TDS (15,493) (309)
Accounts payable (1,879) (727)
Other assets and liabilities,
excluding cash acquired 814 (567)
Common Shares issued and issuable (98,443) (117,003)
--------- ---------
Decrease in cash due to acquisitions $ 26,841 $ 3,875
========= =========
-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,
-----------------
1995 1994
------- -----
(Dollars in thousands)
Interest paid $ 2,144 $ 1,961
Income taxes paid 1,998 1,011
Accrued interest converted into debt
under the Revolving Credit Agreement 14,432 8,757
Common Shares issued by USM for conversion
of USM Preferred Stock and TDS Preferred Shares $22,236 $ 1,497
7. Convertible Debentures
The Company sold $745 million principal amount at maturity of zero
coupon convertible debt in June 1995. The net proceeds to the Company of
approximately $221 million from the sale of the 20-year fixed rate
securities were used to repay variable-rate borrowings from TDS. This
convertible debt, in the form of Liquid Yield OptionTM Notes ("LYONs"TM)
(TM Trademark of Merrill Lynch & Co., Inc.), is subordinated to all
senior indebtedness of the Company. The issue price of each LYON was
$306.46 for each $1,000 principal amount at maturity, which represents a
yield to maturity of 6%. Each LYON is convertible at the option of the
holder at any time on or prior to maturity at a conversion rate of 9.475
shares per LYON. Upon conversion, USM may elect the delivery of its
Common Shares or cash equal to the market value of the Common Shares
into which the LYONs are convertible. Beginning five years after the
date of issue, the LYONs may be redeemed at any time for cash at the
option of the Company at redemption prices equal to the issue price plus
accrued original issue discount through the date of redemption. On the
fifth anniversary of the issue date, the Company will purchase LYONs at
the option of the holder at the issue price plus accrued original issue
discount through that date. The Company will have the option of
purchasing such LYONs with cash, USM Common Shares or TDS common equity
securities, or any combination thereof.
8. Contingencies
The Company's material contingencies as of June 30, 1995, include the
collectibility of a $5.4 million note receivable under a long-term
financing agreement with a cellular company and a $9.9 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 1994 Report on Form 10-K for the year ended December 31, 1994.
-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 17, 1995, the
following numbers of votes were cast for the matters indicated:
1.a. Election of one Class II Director of the Company by the holder of Series
A Common Shares and shares of Preferred Stock:
Broker
Nominee For Withhold Non-Vote
----------------------------------------------------------------------
Murray L. Swanson 330,154,742 -0- -0-
1.b. Election of one Class II Director of the Company by the holders of
Common Shares:
Broker
Nominee For Withhold Non-Vote
----------------------------------------------------------------------
Paul-Henri Denuit 47,547,736 304,091 -0-
2. Proposal to Approve the 1994 Employee Stock Purchase Plan:
Broker
For Against Abstain Non-Vote
----------------------------------------------------------------------
377,911,368 44,455 50,746 -0-
3. Proposal to Approve the 1994 Long-Term Incentive Plan:
Broker
For Against Abstain Non-Vote
----------------------------------------------------------------------
377,779,295 168,099 58,175 -0-
4. Proposal to Ratify the Selection of Arthur Andersen LLP as Independent
Public Accountants for 1995:
Broker
For Against Abstain Non-Vote
----------------------------------------------------------------------
377,946,489 3,080 57,000 -0-
-23-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 10 - Amendment to the Revolving Credit Agreement between
the Company and TDS dated June 29, 1995.
(b) Exhibit 11 - Computation of earnings per common share.
(c) Exhibit 12 - Statement regarding computation of ratios.
(d) Exhibit 27 - Financial Data Schedule.
(e) Exhibit 99.1 - Unaudited Consolidation Statements of Operations for
the Twelve Months Ended June 30, 1995 and 1994.
(f) Reports on Form 8-K filed during the quarter ended June 30, 1995:
The Company filed a Report on Form 8-K dated April 27, 1995, which
included a press release which announced the Company's earnings for
the first quarter of 1995.
The Company filed a Report on Form 8-K dated June 8, 1995, which
included a press release which announced the sale of approximately
$650 million principal amount at maturity of zero coupon
convertible debt in the form of LYONs.
The Company filed a Report on Form 8-K dated June 16, 1995, which
updated agreements filed regarding the LYONs offering.
No other reports on Form 8-K were filed during the quarter ended
June 30, 1995.
-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 11, 1995 H. DONALD NELSON
-------------- ----------------------------------
H. Donald Nelson
President
(Chief Executive Officer)
Date August 11, 1995 KENNETH R. MEYERS
-------------- ----------------------------------
Kenneth R. Meyers
Vice President-Finance and Treasurer
(Chief Financial Officer)
Date August 11, 1995 PHILLIP A. LORENZINI
-------------- ----------------------------------
Phillip A. Lorenzini
Controller
(Principal Accounting Officer)
-25
Exhibit 10
June 29, 1995
United States Cellular Corporation
8410 West Bryn Mawr Avenue, Suite 700
Chicago, Illinois 60631-3415
Re: Revolving Credit Agreement, dated as of July 1, 1987,
last amended as of March 29, 1995, (the "Revolving
Credit Agreement"), between United States Cellular
Corporation ("USCC") and Telephone and Data Systems,
Inc. ("TDS")
Gentlemen:
This letter will constitute TDS's agreement to amend the
Revolving Credit Agreement, as follows:
(i) all references to "$300,000,000" in the Revolving
Credit Agreement shall be changed to "$100,000,000".
(ii) Section 3 of the Revolving Credit Agreement is
amended to provide for interest on the unpaid
principal at a rate per annum equal to 3/4% above the
Prime Lending Rate in effect from time to time, and
interest on any overdue amount of principal or
interest at a rate per annum equal to 2 3/4% above
the Prime Lending Rate in effect from time to time.
(iii) Section 5 of the Revolving Credit Agreement is
amended to establish a new Termination Date of
January 2, 1998.
All of the other terms and conditions of the Revolving Credit
Agreement shall remain in full force and effect.
Please acknowledge your agreement to this amendment by
executing the copy of this letter and returning it to the
undersigned.
Very truly yours,
TELEPHONE AND DATA SYSTEMS, INC.
By: /s/ Murray L. Swanson
-------------------------
Murray L. Swanson
Executive Vice President/Finance
Accepted and agreed to as of the date set forth above.
UNITED STATES CELLULAR CORPORATION
By: /s/ Kenneth R. Meyers
--------------------------
Kenneth R. Meyers
Vice President/Finance
<PAGE>
Exhibit 11
United States Cellular Corporation
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
Three Months Ended June 30, 1995 1994
-----------------------------------------------------------------
Primary Earnings
Net Income Available to Common $ 24,089 $ 6,185
========= ========
Primary Shares
Weighted average number of Common
and Series A Common Shares
Outstanding 82,722 77,417
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 61 60
Convertible Preferred Shares 622 1,071
Common Shares Issuable 532 1,039
--------- --------
Primary Shares 83,937 79,587
========= ========
Primary Earnings per Common Share
Net Income $ .29 $ .08
========= ========
Fully Diluted Earnings*
Net Income Available to Common,
as reported $ 24,089 $ 6,185
Interest expense eliminated as a
result of the pro forma conversion
of Convertible Debentures 390
--------- --------
Net Income Available to Common,
as adjusted 24,479 6,185
========= ========
Fully Diluted Shares
Weighted average number of Common
and Series A Common Shares
Outstanding 82,722 77,417
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 63 60
Convertible Preferred Shares 622 1,071
Common Shares Issuable 532 1,039
Conversion of Convertible Debentures 1,176
--------- --------
Fully Diluted Shares 85,115 79,587
========= ========
Fully Diluted Earnings per Common Share
Net Income $ .29 $ .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%.
<PAGE>
Exhibit 11
United States Cellular Corporation
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
Six Months Ended June 30, 1995 1994
-----------------------------------------------------------------
Primary Earnings
Net Income Available to Common $ 47,687 $ 4,355
========= ========
Primary Shares
Weighted average number of Common and
Series A Common Shares Outstanding 81,701 76,279
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 64 66
Convertible Preferred Shares 700 1,102
Common Shares Issuable 514 1,645
--------- --------
Primary Shares 82,979 79,092
========= ========
Primary Earnings per Common Share
Net Income $ .57 $ .06
========= ========
Fully Diluted Earnings*
Net Income Available to Common,
as reported $ 47,687 $ 4,355
Interest expense eliminated as a
result of the pro forma conversion
of Convertible Debentures 390
--------- --------
Net Income Available to Common,
as adjusted 48,077 4,355
========= ========
Fully Diluted Shares
Weighted average number of Common
and Series A Common Shares
Outstanding 83,570 76,279
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 67 66
Convertible Preferred Shares 700 1,102
Common Shares Issuable 514 1,645
Conversion of Convertible Debentures 588
--------- -------
Fully Diluted Shares 83,570 79,092
========= =======
Fully Diluted Earnings per Common Share
Net Income $ .57 $ .06
========= ========
==========
* 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%.
<PAGE>
Exhibit 12
UNITED STATES CELLULAR CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
Six Months
Ended
June 30, 1995
--------------------
(Dollars in thousands)
EARNINGS
Income from Continuing Operations before
income taxes $ 54,190
Add (Deduct):
Minority Share of Cellular Losses (66)
Earnings on Equity Method (18,445)
Distributions from Minority Subsidiaries 3,746
Amortization of Capitalized Interest 2
Minority interest in income of majority-owned
subsidiaries that have fixed charges 953
---------------
$ 40,380
Add fixed charges:
Consolidated interest expense 15,096
Interest Portion (1/3) of Consolidated
Rent Expense 1,066
---------------
$ 56,542
FIXED CHARGES
Consolidated interest expense 15,096
Interest Portion (1/3) of Consolidated
Rent Expense 1,066
---------------
$ 16,162
RATIO OF EARNINGS TO FIXED CHARGES 3.50
===============
Tax-Effected Preferred Dividends $ ---
Fixed Charges 16,162
---------------
Fixed Charges and Preferred Dividends $ 16,162
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 3.50
===============
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
consolidated financial statements of United States Cellular Corporation as of
June 30, 1995, and for the six months then ended, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 26,751
<SECURITIES> 0
<RECEIVABLES> 38,889
<ALLOWANCES> 2,299
<INVENTORY> 5,485
<CURRENT-ASSETS> 102,641
<PP&E> 582,218
<DEPRECIATION> 121,417
<TOTAL-ASSETS> 1,752,347
<CURRENT-LIABILITIES> 108,297
<BONDS> 342,025
<COMMON> 82,928
0
0
<OTHER-SE> 1,178,660
<TOTAL-LIABILITY-AND-EQUITY> 1,752,347
<SALES> 6,972
<TOTAL-REVENUES> 216,872
<CGS> 24,037
<TOTAL-COSTS> 197,956
<OTHER-EXPENSES> (54,133)
<LOSS-PROVISION> 4,336
<INTEREST-EXPENSE> 15,096
<INCOME-PRETAX> 54,190
<INCOME-TAX> 6,503
<INCOME-CONTINUING> 47,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,687
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
</TABLE>
Exhibit 99.1
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
---------
Twelve Months Ended
June 30,
--------------------------
1995 1994
---------- ------------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Service $ 388,123 $ 257,176
Equipment sales 14,263 12,004
---------- -----------
Total Operating Revenues 402,386 269,180
---------- -----------
OPERATING EXPENSES
System operations 55,506 40,569
Marketing and selling 82,674 55,875
Cost of equipment sold 46,447 34,328
General and administrative 110,127 84,668
Depreciation 46,830 32,289
Amortization of intangibles 29,020 22,768
---------- -----------
Total Operating Expenses 370,604 270,497
---------- -----------
OPERATING INCOME (LOSS) BEFORE
MINORITY SHARE 31,782 (1,317)
Minority share of operating income (6,601) (3,823)
---------- -----------
OPERATING INCOME (LOSS) 25,181 (5,140)
---------- -----------
INVESTMENT AND OTHER INCOME
Investment income 32,656 21,762
Amortization of licenses and deferred
costs related to investments (919) (965)
Interest income 4,126 2,661
Other (expense), net (1,798) (2,105)
Gain on sale of cellular and
other investments 38,680 4,851
---------- -----------
Total Investment and
Other Income 72,745 26,204
---------- -----------
INCOME BEFORE INTEREST AND
INCOME TAXES 97,926 21,064
Interest expense - affiliate 21,165 21,544
Interest expense - other 6,907 3,950
---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 69,854 (4,430)
Income tax expense 10,129 3,253
---------- -----------
NET INCOME (LOSS) $ 59,725 $ (7,683)
========== ===========
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000s) 81,672 72,579
EARNINGS PER COMMON AND SERIES A
COMMON SHARE $ .73 $ (.11)
========== ===========
<PAGE>
