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 March 31, 1997
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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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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: (773) 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 April 30, 1997
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Common Shares, $1 par value 53,167,050 Shares
Series A Common Shares, $1 par value 33,005,877 Shares
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UNITED STATES CELLULAR CORPORATION
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1ST 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 2-10
Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996 11
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 12
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 13-14
Notes to Consolidated Financial Statements 15-17
Part II. Other Information 18
Signatures 19
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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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Three Months Ended 3/31/97 Compared to Three Months Ended 3/31/96
United States Cellular Corporation (the "Company" - AMEX symbol: USM) owns,
operates and invests in cellular markets throughout the United States. USM owned
either majority or minority interests in 204 cellular markets at March 31, 1997,
representing 25,082,000 population equivalents ("pops"). USM included the
operations of 131 majority-owned and managed cellular markets in consolidated
operations ("consolidated markets") at March 31, 1997. Noncontrolling interests
in 63 markets, representing 4.7 million pops, were accounted for using the
equity method and were included in investment income at that date. All other
interests, representing less than 100,000 pops, were accounted for using the
cost method. Following is a table of summarized operating data for USM's
consolidated operations.
For the Three Months
Ended or at March 31,
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1997 1996
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Total market population (1) 21,712,000 22,188,000
Customers 1,164,000 785,000
Market penetration 5.36% 3.54%
Markets in operation 131 134
Cell sites in service 1,377 1,139
Average monthly revenue per customer $ 53.50 $ 62.11 (2)
Churn rate per month 2.0% 2.1%
Marketing cost per net customer addition $ 550 $ 544 (2)
(1) Calculated using the respective Donnelley Marketing Service estimates
for each year.
(2) Recomputed to show the effect of the change in current year presentation
of certain revenues and expenses.
The Company's operating results for the first three months of 1997, which
include 100% of the revenues and expenses of its consolidated markets plus its
corporate office operations, primarily reflect improvement in the Company's
overall operations. This improvement resulted from growth in its customer base
and revenues coupled with increasing economies of scale. Operating revenues,
driven by increases in customers served, rose $40.9 million, or 29%. Operating
expenses rose $29.3 million, or 22%. Operating cash flow (operating income
before minority share plus depreciation and amortization expense) increased
$16.6 million, or 45%.
Beginning on January 1, 1997, the Company changed its income statement
presentation of certain credits given to customers on their monthly bills. The
implementation of incentive programs which result in either new or current
customers receiving free or reduced-price airtime or access are now reported as
a reduction of local retail revenue. Prior to January 1, 1997, the Company
reported the foregone revenues resulting from these incentive programs as
marketing and selling expense (for
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new customers) and general and administrative expense (for current customers).
Amounts in the currently affected revenue and expense categories have been
reclassified for previous years, including the 1996 information provided
throughout this Form 10-Q. Operating income and net income are not affected by
this change.
Investment and other income decreased $32.1 million to $17.4 million, due
primarily to the $38.7 million of gains on the sales of cellular interests
recorded in 1996. No such gains were recorded in 1997. Interest expense remained
relatively flat, decreasing $203,000, or 4%, in 1997. Net income totaled $18.5
million in 1997, a decrease of $10.9 million, or 37%, reflecting improved
operating results and investment income in 1997 but no gains on sales of
cellular interests as were recorded in 1996. A summary of the after-tax effect
of these gains on net income and earnings per share is shown below.
Three Months Ended March 31,
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1997 1996
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(Dollars in thousands,
except per share amounts)
Net income before after-tax effects of gains $ 18,468 $ 8,547
Add: After-tax effects of gains -- 20,840
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Net income as reported $ 18,468 $ 29,387
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Earnings per share before after-tax effects
of gains $ .21 $ .10
Add: After-tax effects of gains -- .24
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Earnings per share as reported $ .21 $ .34
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Operating Revenues
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Operating revenues totaled $184.6 million in the first three months of 1997, up
$40.9 million, or 29%, over 1996. As explained previously, operating revenues
for 1996 have been reclassified to conform to current period presentation of
customer incentive program credits.
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 $179.6 million in 1997, up $40.2 million, or 29%, over 1996.
The increase was primarily due to the growing number of local retail customers
and the growth in inbound roaming revenue. The reclassification of customer bill
credits reduced service revenues by $12.2 million, or 6%, in 1997 and $4.3
million, or 3%, in 1996. Average monthly service revenue per customer declined
14% to $53.50 in 1997 from $62.11 in 1996. The reclassification of customer bill
credits reduced average monthly service revenue per customer by $3.65, or 6%, in
1997 and $1.93, or 3%, in 1996.
The 14% decrease in average monthly service revenue per customer was primarily a
result of a decrease in average revenue per minute of use from both local retail
customers and inbound roamers. Although average monthly local minutes of use per
retail customer totaled 100 in 1997 compared to 96 in 1996, the Company's
increasing use of incentive programs that encourage weekend and off-peak usage,
in order to stimulate overall usage, resulted in a decrease in average local
retail revenue per minute of use during the year. Also contributing to the
decline in average local retail revenue per minute are increased amounts of bill
credits given to new and current
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customers as incentives to become or remain the Company's customers. The Company
believes that its customer base is growing faster than that of the industry as a
whole, which has a dilutive effect on inbound roaming revenue per customer.
Inbound roaming minutes of use has been growing at a slower rate than the
Company's customer base (24% compared to 48%). Also, the Company's average
inbound roaming revenue per minute of use decreased during 1997, in line with
the ongoing trend toward reduced per minute prices for roaming negotiated
between the Company and other cellular operators.
Revenue from local customers' usage of USM's systems increased $32.1 million, or
36%, in 1997. Growth in the Company's customer base was the primary reason for
the increase in local retail revenue. The number of customers increased 48% to
1,164,000 at March 31, 1997 from 785,000 at March 31, 1996. The Company added
91,000 net new customers in the first quarter of 1997. While the percentage
increase in customer additions is expected to be lower in the future, management
anticipates that the Company will continue to increase its customer base over
the next few years. Local retail revenue in 1997 increased $44.1 million, or
50%, due to customer growth and declined $12.1 million, or 14%, due to decreases
in average monthly local retail revenue per customer. The reclassification of
customer bill credits reduced local retail revenue by $12.2 million, or 9%, in
1997 and $4.3 million, or 5%, in 1996.
Average monthly local retail revenue per customer declined to $36.05 in 1997
from $39.64 in 1996. Monthly local retail minutes of use per customer increased
4% to 100 in 1997 from 96 in 1996. While there was an increase in average local
retail minutes of use from 1996 to 1997, average revenue per minute of use
decreased as a result of the incentive programs stated previously. Average local
retail revenue per minute totaled $.36 in 1997 compared to $.41 in 1996. The
decrease in average monthly local retail revenue is part of an industry-wide
trend and is believed to be related to the tendency of the early customers in a
market to be the heaviest users during peak business hours. It also reflects the
Company's and the industry's continued penetration of the consumer market, which
tends to include fewer peak business hour-usage customers. The reclassification
of customer bill credits reduced average monthly service revenue per customer by
$3.65, or 9%, in 1997 and $1.93, or 5%, in 1996.
Inbound roaming revenue increased $6.4 million, or 16%, in 1997. This increase
was attributable to the 24% increase in the number of minutes used by customers
from other systems when roaming in the Company's service areas. Also
contributing were the increased number of cell sites within the Company's
systems. These effects were offset somewhat by the decrease in average revenue
per minute due to the downward trend in negotiated rates. Average inbound
roaming revenue per minute totaled $.88 in 1997 and $.94 in 1996. Monthly
inbound roaming revenue per Company customer averaged $13.51 in 1997 and $17.36
in 1996. This decrease is related to both the decrease in roaming revenue per
minute and the faster growth of the Company's customer base as compared to the
growth of inbound roaming revenue.
Long-distance revenue increased $1.7 million, or 16%, in 1997 as the volume of
long-distance calls billed by the Company increased. Monthly long-distance
revenue per customer averaged $3.81 in 1997 and $4.93 in 1996.
Equipment sales revenues increased $724,000, or 17%, in 1997. Equipment sales
reflect the sale of 121,000 and 90,000 cellular telephone units in 1997 and
1996, respectively, plus installation and accessories revenue. The average
revenue per unit was $41 in 1997 compared to $47 in 1996. The average revenue
per unit decline partially reflects the Company's decision to reduce sales
prices on cellular telephones to stimulate growth in the number of customers, to
maintain its market position and to meet competitive prices as well as to pass
through reduced manufacturers' prices to customers. Also, the Company uses
promotions which are based on increased equipment
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discounting. The success of these promotions led to both an increase in units
sold and a decrease in average equipment sales revenue per unit.
Operating Expenses
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Operating expenses totaled $161.1 million in 1997, up $29.3 million, or 22%,
over 1996. As explained previously, operating expenses for 1996 have been
reclassified to conform to current period presentation of customer incentive
program credits. The reclassification of customer bill credits reduced operating
expenses by $12.2 million, or 7%, in 1997 and $4.3 million, or 3%, in 1996.
System operations expenses increased $7.7 million, or 32%, in 1997 as a result
of increases in customer usage expenses and costs associated with serving the
Company's increased number of customers (approximately $4.3 million), the
growing number of cell sites within the Company's systems (approximately $2.4
million) and increased expenses related to roaming fraud (approximately $1.0
million). In total, system operations costs are expected to continue to increase
as the number of cell sites within and the number of customers using the
Company's systems grows.
Customer usage expenses represent charges from other telecommunications service
providers for USM's customers' use of their facilities as well as for the
Company's inbound roaming traffic on these facilities. Also included are costs
related to local interconnection to the landline network, toll charges and
expenses incurred by the Company when its customers use systems other than their
local systems ("outbound roaming"). These expenses are offset somewhat by
amounts the Company bills to its customers for outbound roaming. Customer usage
expenses were $19.0 million in 1997 compared to $13.8 million in 1996.
Contributing to the increase in 1997 were costs related to the increase in
minutes used on the Company's systems and for outbound roaming, plus additional
costs related to fraudulent use of the Company's customers' cellular telephone
numbers. These fraud-related costs totaled $3.3 million in 1997 and $2.3 million
in 1996. The Company continues to implement procedures in its markets to combat
this fraud, which is primarily related to roaming usage. Customer usage expenses
represented 11% of service revenues in 1997 and 10% in 1996. The percentage
increase in 1997 is primarily due to the increase in minutes of use on the
Company's systems and for outbound roaming.
Maintenance, utility and cell site expenses totaled $12.2 million in 1997
compared to $9.8 million in 1996, primarily reflecting an increase in the number
of cell sites in the Company's systems to 1,377 in 1997 from 1,139 in 1996.
Marketing and selling expenses increased $9.6 million, or 35%, in 1997.
Marketing and selling expenses primarily consist of salaries, commissions and
expenses of field sales and retail personnel and offices; agent expenses; local
advertising and public relations expenses. The increase was primarily due to a
34% rise in the number of gross customer activations, to 157,000 in 1997 from
117,000 in 1996. Cost per gross customer addition, including losses on equipment
sales, decreased to $319 in 1997 from $330 in 1996. The reclassification of
customer bill credits reduced cost per gross customer addition by $61, or 16%,
in 1997 and $30, or 8%, in 1996; in total, the reclassification reduced
marketing and selling expenses by $9.7 million, or 21%, in 1997 and $3.5
million, or 11%, in 1996.
Cost of equipment sold increased $2.5 million, or 16%, in 1997. The increases
reflect the growth in unit sales related to the rise in gross customer
activations made through the Company's direct and retail distribution channels,
offset somewhat by falling manufacturer prices per unit. The
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average cost to the Company of a telephone unit sold, including accessories and
installation, was $149 in 1997 compared to $172 in 1996.
General and administrative expenses increased $4.5 million, or 11%, in 1997.
These expenses include the costs of operating the Company's local business
offices and its corporate expenses. The increase includes the effects of
increases in expenses required to serve the growing customer base in existing
markets and an expansion of both local administrative office and corporate
staff, necessitated by growth in the Company's business. The Company is using an
ongoing clustering strategy to combine local operations wherever feasible in
order to gain operational efficiencies and reduce its administrative expenses.
The reclassification of customer bill credits reduced general and administrative
expenses by $2.5 million, or 5%, in 1997 and $829,000, or 2%, in 1996.
Operating cash flow increased $16.6 million, or 45%, to $53.6 million in 1997.
The improvement was primarily due to substantial growth in customers and service
revenues and the effects of improved operational efficiencies on cash operating
expenses. Operating cash flow margins were 30% in 1997 and 27% in 1996.
Depreciation expense increased $4.6 million, or 27%, in 1997. The increase
reflects rising average fixed asset balances, which increased 26% in 1997.
Increased fixed asset balances primarily result from the increase in cell sites
built to improve coverage and capacity in the Company's markets.
Amortization of intangibles increased $450,000, or 5%, in 1997. The increase is
primarily due to increases in deferred information system development costs,
which are amortized over the useful life of the related systems.
Operating Income before Minority Share
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Operating income before minority share totaled $23.4 million in 1997, an
increase of $11.6 million, or 98%, over 1996. The operating income margin (as a
percent of service revenues) was 13.1% in 1997 and 8.5% in 1996. The
improvements in operating income and operating income margin reflect increased
revenues resulting from growth in the number of customers served by the
Company's systems and the effect of improved operational efficiencies on total
operating expenses.
The Company expects service revenues to continue to grow significantly during
the remainder of 1997 as it adds customers to its existing systems and realizes
a full year of revenues from customers added in 1996. However, management
anticipates that average monthly revenue per customer will continue to decrease
as local retail and inbound roaming revenue per minute of use decline and as the
growth rate of the Company's customer base exceeds the growth rate of inbound
roaming revenue, diluting the roaming contribution per customer. Additionally,
the Company expects expenses to increase significantly during the remainder of
1997 as it incurs costs for cell sites added in 1996 and 1997 and incurs costs
associated with customer growth.
Management believes there exists a seasonality in both service revenues, which
tend to increase more slowly in the first and fourth quarters, and operating
expenses, which tend to be higher in the fourth quarter due to increased
marketing activities and customer growth, which may cause operating income to
vary from quarter to quarter. Additionally, competitors licensed to provide
personal communications services ("PCS") have initiated service in certain of
the Company's markets in recent months. The Company anticipates that PCS
operators will initiate service in several other of the Company's markets in
1997 and 1998. The Company's management is monitoring these and other wireless
communications providers' strategies to determine what effect this additional
competition will have on the Company's future strategies and results.
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Investment and Other Income
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Investment and other income totaled $17.4 million in 1997, a decrease of $32.1
million, or 65%, from 1996. Investment income was $18.4 million in 1997 compared
to $10.3 million in 1996. Investment income primarily represents the Company's
share of net income from the markets managed by others that are accounted for by
the equity method. Although investment income increased significantly in the
first three months of 1997, future investment income will be negatively impacted
by the completion of the pending exchange transaction with BellSouth Corporation
("BellSouth"). See "Financial Resources and Liquidity" for further discussion of
this transaction.
Gain on sale of cellular interests totaled $38.7 million in
1996, reflecting gains recorded on the sales of the Company's majority interests
in four markets and on cash received in an exchange of markets with another
cellular operator. There were no gains in the first quarter of 1997.
Interest and Income Taxes
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Total interest expense decreased $203,000, or 4%, in 1997. Interest expense in
1997 is primarily related to Liquid Yield Option Notes ("LYONs") ($3.7 million)
and borrowings under vendor financing agreements ($1.8 million).
The LYONs are zero coupon convertible debentures which accrete interest at 6%
annually, but do not require current cash payments of interest. The average
amount of LYONs outstanding was $252.6 million in the first three months of 1997
and $237.5 million in the same period of 1996. The average amount of debt under
the vendor financing agreements was $100.8 million in the first three months of
1997 and $118.6 million in the same period of 1996. The average interest rate on
such debt was 7.4% in 1997 and 7.7% in 1996.
Income tax expense was $13.9 million in 1997 and $24.0 million in 1996. In 1996,
approximately $17.9 million of income tax expense related to the gains on sales
of cellular interests. The effective tax rates were 43.0% in 1997 and 45.0% in
1996. In 1997, state income taxes increased the effective rate above the
statutory rate. In 1996, state income taxes and gains on sales increased the
effective rate above the statutory rate.
The Company is included in a consolidated federal income tax return with other
members of the Telephone and Data Systems, Inc. ("TDS"), its parent
organization, consolidated group. TDS and the Company 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 state net operating loss carryforward available to offset
future taxable income aggregated approximately $203 million at December 31,
1996, and expires between 1997 and 2011.
Net Income
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Net income totaled $18.5 million in 1997, a decrease of $10.9 million, or 37%,
from 1996. Earnings per share was $.21 in 1997 and $.34 in 1996. Both net income
and earnings per share in 1997 reflect improved operating results and investment
income but no gains on the sales of cellular interests as were recorded in 1996.
See "Results of Operations" for a summary of the after-tax effect of these gains
on net income and earnings per share.
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FINANCIAL RESOURCES AND LIQUIDITY
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The Company operates a capital- and marketing-intensive business. In recent
years, the Company has generated operating cash flow and received cash proceeds
from divestitures to fund most of its construction costs and substantially all
of its operating expenses. The Company anticipates further substantial increases
in cellular units in service, revenues and cell sites as it continues its growth
strategy. As the Company's customer and revenue bases grow, the percentage
increases in operating cash flow and operating income may be reduced.
Cash flows from operating activities provided $53.5 million in 1997 and $2.5
million in 1996. Operating cash flow provided cash totaling $53.6 million in
1997 and $37.0 million in 1996. Cash flows from other operating activities
(investment and other income, interest expense, changes in working capital and
changes in other assets and liabilities) required cash investments totaling
$104,000 in 1997 and $34.5 million in 1996. The increase in cash required for
other activities in 1996 reflects cash used to reduce accounts payable balances
prior to the Company's conversion to a new accounting system software.
Cash flows from financing activities required $5.8 million in 1997 and provided
$5.1 million in 1996. In 1997, the Company primarily used available cash to
repay amounts owed under the vendor financing agreements totaling $5.8 million.
In 1996, issuances of USM Common Shares, primarily to TDS, provided $9.4 million
and repayments of amounts owed under the vendor financing agreements required
cash totaling $3.6 million.
Cash flows from investing activities required $51.5 million in 1997 and provided
$16.1 million in 1996. Cash required for property, plant and equipment
expenditures totaled $45.8 million in 1997 and $43.3 million in 1996,
representing the construction of 49 and 27 cell sites, respectively, plus other
plant additions. The Company received net cash proceeds totaling $65.9 million
in 1996 related to the sales and exchanges of cellular interests.
Anticipated capital requirements for 1996 primarily reflect the Company's
construction and system expansion program. The Company's construction and system
expansion budget for 1997 is approximately $300 million, primarily for new cell
sites to expand and enhance the Company's coverage in its service areas and for
the enhancement of the Company's office systems.
Acquisitions and Divestitures
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The Company is continuing to assess its cellular holdings in order to maximize
the benefits derived from clustering its markets. As the number of opportunities
for outright acquisitions has decreased in recent years, and as the Company's
clusters have grown, the Company's focus has shifted toward exchanges and
divestitures of managed and investment interests. Recently, the Company has
completed exchanges of controlling interests in its less strategic markets for
controlling interests in markets which better complement its clusters. The
Company has also completed outright sales of other less strategic markets. The
proceeds from these sales have been used to further the Company's growth. The
Company is currently negotiating acquisitions, exchanges and divestitures of
cellular interests to further capitalize on the benefits of its clustering
strategy.
In the first three months of 1997, there were no completed acquisitions or
divestitures of majority interests. In the same period of 1996, the Company
purchased a controlling interest in one market and several minority interests,
representing 304,000 pops, and received a controlling interest in another market
through an exchange with another cellular operator. The total consideration paid
in these transactions, primarily in the form of USM Common Shares issued to TDS
to reimburse TDS for the value of TDS Common Shares issued to third parties,
totaled $43.8 million.
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Also in the first quarter of 1996, the Company sold controlling interests in
four markets and one market partition, representing 433,000 pops, and divested a
controlling interest in another market through the exchange mentioned
previously. The Company received cash consideration totaling $65.9 million both
from these sales and from the exchange.
During the first quarter of 1997, the Company announced that it had entered into
an exchange agreement with BellSouth, pursuant to which the Company will receive
majority interests in twelve contiguous markets adjacent to its Iowa and
Wisconsin/Illinois clusters. In exchange, the Company will divest its majority
interests in ten markets and minority interests in 13 markets, pay cash and
incur certain income tax costs, the
amounts of which are dependent upon certain factors. The Company will receive
majority interests representing approximately 3.9 million pops in the
transaction, and will divest majority interests representing approximately 1.9
million pops and minority interests representing approximately 1.4 million pops.
The transaction is subject to various regulatory and other approvals.
The Company expects that the completion of this transaction will have a positive
effect on its operating cash flow after the transition of operators is complete.
As it includes the divestiture of significant investment interests in exchange
for majority interests, the transaction is also expected to significantly reduce
investment income immediately after it is completed. Because of the regulatory
approval process, the Company is uncertain as to when the transaction will be
completed.
Also, at March 31, 1997, the Company had agreements pending to acquire a
majority interest in one market and minority interests in two markets,
representing 317,000 pops, for a total of $48.4 million in cash. A
portion of this cash may be borrowed from TDS under the Revolving Credit
Agreement. The agreement to acquire the majority interest is with a third party,
and the agreement to acquire the minority interests is with TDS, as part of a
larger transaction which was partially completed in 1996. Also at March 31,
1997, the Company had agreements pending to divest a controlling interest in one
market partition and one other minority interest, together representing 121,000
pops, in exchange for 23.8 million in cash and other consideration. Subsequent
to March 31, 1997, the Company entered into an agreement to divest one
additional minority interest, representing 62,000 pops, for cash consideration
totaling $10.8 million. Both pending minority interest divestitures involve
interests that were acquired from TDS as part of the larger transaction
discussed earlier. All pending acquisition and divestiture agreements discussed
above are expected to be completed during 1997. All of the divestiture
transactions are expected to generate gains for book and tax purposes.
LIQUIDITY
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The Company anticipates that the aggregate resources required for the remainder
of 1997 will include approximately: (i) $249 million for capital spending, (ii)
$49 million for the purchase of cellular interests from TDS and third parties
and (iii) $17 million of scheduled debt repayments. The Company may have
additional funding obligations in 1997 related to the exchange transaction with
BellSouth if the transaction is completed during the year. The Company had $11
million of cash and cash equivalents at March 31, 1997, expects to
receive approximately $35 million from pending divestitures and anticipates
generating an increasing amount of cash flows from operating activities during
the remainder of 1997. The Company also has $100 million available under the
Revolving Credit Agreement with TDS.
Management believes that the Company's operating cash flows and sources of
external financing provide substantial financial flexibility. The Company has a
line of credit with TDS to help meet its short-term financing needs. The Company
also has access to public and private capital markets
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to help meet its long-term financing needs, although there are currently no
material agreements or commitments pending to issue additional debt or equity
securities. The Company anticipates issuing debt and equity securities only when
capital requirements (including acquisitions), financial market conditions and
other factors warrant.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Quarterly Report on Form 10-Q contain
"forward-looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on current expectations, estimates and
projections. Statements that are not historical facts, including statements
about the Company's beliefs and expectations, are forward-looking statements.
These statements contain potential risks and uncertainties, and therefore actual
results may differ materially. The Company undertakes no obligation to update
publicly any forward-looking statements whether as a result of new information,
future events or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
our markets; new telecommunications technology advances; changes in the
telecommunications regulatory environment; pending and future litigation;
availability of future financing; and unanticipated changes in growth in
cellular customers, penetration rates, churn rates and the mix of products and
services offered in our markets. Readers should evaluate any statements in light
of these important factors.
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UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
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Unaudited
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Three Months Ended
March 31,
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1997 1996
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(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Service $ 179,585 $ 139,368
Equipment sales 4,999 4,274
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Total Operating Revenues 184,584 143,642
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OPERATING EXPENSES
System operations 31,229 23,578
Marketing and selling 37,040 27,408
Cost of equipment sold 17,994 15,473
General and administrative 44,715 40,224
Depreciation 21,509 16,935
Amortization of intangibles 8,652 8,202
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Total Operating Expenses 161,139 131,820
------------ ------------
OPERATING INCOME BEFORE MINORITY SHARE 23,445 11,822
Minority share of operating income (2,865) (2,112)
------------ ------------
OPERATING INCOME 20,580 9,710
------------ ------------
INVESTMENT AND OTHER INCOME
Investment income 18,383 10,303
Amortization of licenses related to
investments (532) (286)
Interest income 625 1,152
Other (expense), net (1,053) (333)
Gain on sale of cellular and other
investments -- 38,691
------------ ------------
Total Investment and Other Income 17,423 49,527
------------ ------------
INCOME BEFORE INTEREST AND INCOME TAXES 38,003 59,237
Interest expense - other 5,603 5,806
------------ ------------
INCOME BEFORE INCOME TAXES 32,400 53,431
Income tax expense 13,932 24,044
------------ ------------
NET INCOME $ 18,468 $ 29,387
============ ============
WEIGHTED AVERAGE COMMON
AND SERIES A COMMON SHARES (000s) 86,198 85,686
EARNINGS PER COMMON AND
SERIES A COMMON SHARE $ .21 $ .34
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-11-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Unaudited
---------
Three Months Ended
March 31,
---------------------------
1997 1996
------------ ------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,468 $ 29,387
Add (Deduct) adjustments to reconcile
net income to net cash provided by
operating activities
Depreciation and amortization 30,161 25,137
Investment income (18,383) (10,303)
Gain on sale of cellular interests -- (38,691)
Minority share of operating income 2,865 2,112
Other noncash expense 4,070 5,201
Change in accounts receivable 1,508 2,068
Change in accounts payable 2,003 (20,925)
Change in accrued taxes 6,198 7,392
Change in deferred taxes 4,897 236
Change in unearned revenue 1,476 829
Change in other assets and liabilities 239 (81)
------------ ------------
53,502 2,524
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of vendor financing (5,830) (3,561)
Common Shares issued 1,168 9,401
Capital (distributions) to minority partners (1,110) (751)
------------ ------------
(5,772) 5,089
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (45,828) (43,252)
System development costs (7,234) (2,359)
Investments in and advances to nonconsolidated
entities (6,547) (6,434)
Distributions from nonconsolidated entities 9,294 2,566
Proceeds from sale of cellular and other
investments -- 65,922
Acquisitions, excluding cash acquired -- (367)
Other investments (522) --
Change in temporary cash and marketable
non-equitable securities (634) --
------------ ------------
(51,471) 16,076
------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS (3,741) 23,689
CASH AND CASH EQUIVALENTS-
Beginning of period 14,377 38,404
------------ ------------
End of period $ 10,636 $ 62,093
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-12-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(Unaudited)
March 31, 1997 December 31, 1996
---------------- -----------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents
General funds $ 6,977 $ 802
Affiliated cash equivalents 3,659 13,575
--------------- ---------------
10,636 14,377
Temporary cash investments 162 --
Accounts Receivable
Customers 56,581 58,034
Roaming 30,802 29,742
Affiliates 43 607
Other 5,355 7,568
Inventory 10,101 11,893
Prepaid and other current assets 7,296 6,398
--------------- ---------------
120,976 128,619
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT
In service and under construction 897,415 846,005
Less accumulated depreciation 216,477 195,251
--------------- ---------------
680,938 650,754
--------------- ---------------
INVESTMENTS
Licenses, net of accumulated
amortization 1,038,994 1,044,141
Cellular entities 202,501 186,791
Notes and interest receivable 14,536 14,943
Marketable non-equity securities 471 --
--------------- ---------------
1,256,502 1,245,875
--------------- ---------------
DEFERRED CHARGES
System development costs,
net of accumulated amortization 49,829 44,319
Other, net of accumulated amortization 16,348 16,332
--------------- ---------------
66,177 60,651
--------------- ---------------
Total Assets $ 2,124,593 $ 2,085,899
=============== ===============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-13-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(Unaudited)
March 31, 1997 December 31, 1996
-------------- -----------------
(Dollars in thousands)
CURRENT LIABILITIES
Current portion of long-term debt $ 23,532 $ 23,065
Notes payable 1,375 1,375
Accounts payable
Affiliates 2,657 2,729
Other 71,619 66,638
Accrued taxes 25,074 18,781
Customer deposits and deferred revenues 17,886 16,410
Other current liabilities 19,182 17,456
----------- ------------
161,325 146,454
----------- ------------
LONG-TERM DEBT
6% zero coupon convertible debentures 253,849 250,107
Vendor financing, excluding current
portion 74,365 80,589
----------- ------------
328,214 330,696
----------- ------------
DEFERRED LIABILITIES AND CREDITS
Net deferred income tax liability 83,695 78,833
Other 2,409 2,444
----------- ------------
86,104 81,277
----------- ------------
MINORITY INTEREST 53,112 51,270
----------- ------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 53,167 53,117
Series A Common Shares,
par value $1 per share 33,006 33,006
Additional paid-in capital 1,246,184 1,245,066
Retained earnings 163,481 145,013
----------- ------------
1,495,838 1,476,202
----------- ------------
Total Liabilities
and Shareholders' Equity $ 2,124,593 $ 2,085,899
=========== ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
-14-
<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 March 31, 1997 and December
31, 1996, and the results of operations and cash flows for the three
months ended March 31, 1997 and 1996. The results of operations for the
three months ended March 31, 1997 and 1996, are not necessarily indicative
of the results to be expected for the full year.
2. Earnings per Common and Series A Common Share for the three months ended
March 31, 1997 and 1996, was computed by dividing Net Income by the
weighted average number of Common Shares, Series A Common Shares and
dilutive common equivalent shares outstanding during the period. Dilutive
common stock equivalents at March 31, 1997 and 1996, consist primarily of
dilutive Common Shares issuable, Redeemable Preferred Stock, and Common
Share options and stock appreciation rights.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" in March 1997
which will become effective in December 1997. Earnings per share would
not change if the SFAS No. 128 was in effect as of January 1, 1996.
-15-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Assuming that acquisitions accounted for as purchases during the period
January 1, 1996, to March 31, 1997, had taken place on January 1, 1996,
pro forma results of operations would have been as follows (there were no
acquisitions from January 1, 1997 to March 31, 1997):
Three Months Ended
March 31, 1996
------------------------
(Dollars in thousands,
except per share amounts)
Service Revenues $ 139,972
Equipment Sales 4,281
Interest Expense (including cost to finance
acquisitions) 5,806
Net Income 30,269
Earnings per Common and Series A Common Share $ .35
4. Supplemental Cash Flow Information
The Company acquired certain cellular licenses and interests during the
first three months of 1996. There were no cellular licenses or interests
acquired during the first three months of 1997. In conjunction with these
acquisitions, the following assets were acquired, liabilities assumed and
Common Shares issued.
Three Months Ended
March 31, 1996
-----------------------
(Dollars in thousands)
Property, plant and equipment, net $ 7,069
Cellular licenses 37,503
Decrease in equity-method investment
in cellular interests (2,734)
Accounts receivable 2,350
Accounts payable (938)
Other assets and liabilities,
excluding cash acquired (422)
Common Shares issued and issuable (42,461)
----------------
Decrease in cash due to acquisitions $ 367
================
-16-
<PAGE>
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes certain noncash transactions, and interest and
income taxes paid.
Three Months Ended
March 31,
--------------------------
1997 1996
----------- -----------
(Dollars in thousands)
Interest paid $ 1,755 $ 1,152
Income taxes paid 2,473 16,545
Noncash interest expense 3,847 4,653
Common Shares issued by USM
for conversion of USM Preferred Stock
and TDS Preferred Shares $ 1,121 $ 18,450
5. Contingencies
The Company owns a 5.5% interest in the Los Angeles SMSA Limited
Partnership (the "Partnership"). In November 1993, a class action
complaint was filed on behalf of cellular customers in Orange County
Superior Court naming, among others, the Partnership. These complaints
allege certain facts, including a similarity in the pricing structures of
the two defendant cellular carriers, which plaintiffs contend are
circumstantial evidence that the Partnership and Los Angeles Telephone
Company conspired to fix the prices of retail and wholesale cellular radio
services in the Los Angeles market. The complaint seeks damages for the
class "in a sum in excess of $100 million." A similar agent case was
settled for an immaterial amount. Trial has been set for July 7, 1997. The
Partnership does not believe that this proceeding will have a material
adverse effect on the Partnership's financial position or results of
operations. For further discussion of this contingency, see Note 14 of
Notes to Consolidated Financial Statements included in the Company's
Report on Form 10-K for the year ended December 31, 1996.
-17-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibit 10 - Amendment dated as of March 31, 1997 to Revolving
Credit Agreement between the Company and TDS.
(b) Exhibit 11 - Statement regarding computation of per share earnings.
(c) Exhibit 12 - Statement regarding computation of ratios.
(d) Exhibit 27 - Financial Data Schedule.
(e) Reports on Form 8-K filed during the quarter ended March 31, 1997:
On February 4, 1997, the Company announced that it had signed
definitive agreements with BellSouth Corporation ("BellSouth") to
acquire controlling interest in a 12-market cluster that provides
cellular service to most of Wisconsin and parts of northern
Illinois in exchange for a nine-market cluster in southern Indiana
and Kentucky, a controlling interest in one market in central
Tennessee, investment interests in 13 other markets, and cash.
No other reports on Form 8-K were filed during the quarter ended
March 31, 1997.
-18-
<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 May 13, 1997 H. DONALD NELSON
---------------- --------------------------------
H. Donald Nelson
President
(Chief Executive Officer)
Date May 13, 1997 KENNETH R. MEYERS
---------------- --------------------------------
Kenneth R. Meyers
Vice President-Finance and Treasurer
(Chief Financial Officer)
Date May 13, 1997 PHILLIP A. LORENZINI
---------------- --------------------------------
Phillip A. Lorenzini
Controller
(Principal Accounting Officer)
-19-
<PAGE>
Exhibit 10
TELEPHONE AND DATA SYSTEMS, INC.
30 North LaSalle Street, Suite 4000
Chicago IL 60602
March 31, 1997
United States Cellular Corporation
8410 W Bryn Mawr Ave, Suite 700
Chicago IL 60631-3415
Re: Revolving Credit Agreement, dated as of July 1, 1987, last amended as
of June 29, 1995, (the "Revolving Credit Agreement"), between United
States Cellular Corporation ("USCC") and Telephone and Data Systems,
Inc. ("TDS").
Dear Gentlemen:
This letter will constitute TDS's agreement to amend the Revolving
Credit Agreement, as defined in Section 5 therein, by extending it to January 2,
1999 (the "Termination Date").
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
Senior 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 March 31, 1997 1996
- --------------------------------------------------------------------------------
Primary Earnings
Net Income Available to Common $ 18,468 $ 29,387
=========== ===========
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding 86,148 84,910
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 50 109
Convertible Preferred Shares -- 205
Common Shares Issuable -- 462
----------- -----------
Primary Shares 86,198 85,686
=========== ===========
Primary Earnings per Common Share
Net Income $ .21 $ .34
=========== ===========
Fully Diluted Earnings*
Net Income Available to Common, as reported $ 18,468 $ 29,387
Interest expense eliminated as a result of
the pro forma conversion of Convertible
Debentures -- 1,940
----------- -----------
Net Income Available to Common, as adjusted $ 18,468 $ 31,327
=========== ===========
Fully Diluted Shares
Weighted average number of Common and Series A
Common Shares Outstanding 86,148 84,910
Additional shares assuming issuance of:
Options and Stock Appreciation Rights 50 109
Convertible Preferred Shares -- 205
Common Shares Issuable -- 462
Conversion of Convertible Debentures -- 7,059
------------ -----------
Fully Diluted Shares 86,198 92,745
============ ===========
Fully Diluted Earnings per Common Share
Net Income $ .21 $ .34
=========== ===========
* 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
Three Months Ended
March 31, 1997
----------------------
(Dollars in thousands)
EARNINGS
Income from Continuing Operations before
income taxes $ 32,400
Add (Deduct):
Minority Share of Cellular Losses (76)
Earnings on Equity Method (18,383)
Distributions from Minority Subsidiaries 4,873
-----------------
$ 18,814
Add fixed charges:
Consolidated interest expense 5,603
Interest Portion (1/3) of Consolidated
Rent Expense 1,031
-----------------
$ 25,448
=================
FIXED CHARGES
Consolidated interest expense $ 5,603
Interest Portion (1/3) of Consolidated
Rent Expense 1,031
-----------------
$ 6,634
=================
RATIO OF EARNINGS TO FIXED CHARGES 3.84
=================
Tax-Effected Preferred Dividends $ --
Fixed Charges 6,634
-----------------
Fixed Charges and Preferred Dividends $ 6,634
=================
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS 3.84
=================
<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
March 31, 1997, and for the three months then ended, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,636
<SECURITIES> 0
<RECEIVABLES> 60,347
<ALLOWANCES> 3,766
<INVENTORY> 10,101
<CURRENT-ASSETS> 120,976
<PP&E> 897,415
<DEPRECIATION> 216,477
<TOTAL-ASSETS> 2,124,593
<CURRENT-LIABILITIES> 161,325
<BONDS> 328,214
<COMMON> 86,173
0
0
<OTHER-SE> 1,409,665
<TOTAL-LIABILITY-AND-EQUITY> 2,124,593
<SALES> 4,999
<TOTAL-REVENUES> 184,584
<CGS> 17,994
<TOTAL-COSTS> 161,139
<OTHER-EXPENSES> (17,423)
<LOSS-PROVISION> 5,920
<INTEREST-EXPENSE> 5,603
<INCOME-PRETAX> 32,400
<INCOME-TAX> 13,932
<INCOME-CONTINUING> 18,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,468
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
