UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9712
UNITED STATES CELLULAR CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware |
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62-1147325 |
(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
8410 West Bryn Mawr, Chicago, Illinois 60631
(Address of principal executive offices) (Zip code)
Registrants Telephone Number: (773) 399-8900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Name of each exchange on which registered |
Common Shares, $1 par value |
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New York Stock Exchange |
6.95% Senior Notes Due 2060 |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of June 30, 2012, the aggregate market value of the registrants Common Shares held by non-affiliates was approximately $534.6 million, based upon the closing price of the Common Shares on June 30, 2012 of $38.62, as reported by the New York Stock Exchange. For purposes hereof, it was assumed that each director, executive officer and holder of 10% or more of any class of voting equity security of U.S. Cellular is an affiliate.
The number of shares outstanding of each of the registrants classes of common stock, as of January 31, 2013, is 50,882,000 Common Shares, $1 par value, and 33,006,000 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrants 2012 Annual Report to Shareholders filed as Exhibit 13 hereto, and of the registrants Notice of Annual Meeting of Shareholders and Proxy Statement for its 2013 Annual Meeting of Shareholders scheduled to be held May 14, 2013, described in the cross reference sheet and table of contents included herein, are incorporated by reference into Parts II and III of this report.
United States Cellular Corporation
Annual Report on Form 10-K for the period ended December 31, 2012
CROSS REFERENCE SHEET AND TABLE OF CONTENTS
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Page Number
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Part I |
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2 |
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Item 1. |
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Business |
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2 |
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Item 1A. |
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Risk Factors |
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16 |
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Item 1B. |
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Unresolved Staff Comments |
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33 |
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Item 2. |
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Properties |
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33 |
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Item 3. |
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Legal Proceedings |
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33 |
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Item 4. |
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Mine Safety Disclosures |
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33 |
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Part II |
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34 |
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Item 5. |
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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34 |
(2) |
Item 6. |
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Selected Financial Data |
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34 |
(3) |
Item 7. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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34 |
(4) |
Item 7A. |
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Quantitative and Qualitative Disclosures About Market Risk |
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35 |
(5) |
Item 8. |
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Financial Statements and Supplementary Data |
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35 |
(6) |
Item 9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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35 |
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Item 9A. |
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Controls and Procedures |
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35 |
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Item 9B. |
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Other Information |
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36 |
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Part III |
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37 |
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Item 10. |
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Directors, Executive Officers and Corporate Governance |
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37 |
(7) |
Item 11. |
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Executive Compensation |
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37 |
(8) |
Item 12. |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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37 |
(9) |
Item 13. |
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Certain Relationships and Related Transactions, and Director Independence |
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37 |
(10) |
Item 14. |
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Principal Accountant Fees and Services |
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37 |
(11) |
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Part IV |
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38 |
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Item 15. |
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Exhibits and Financial Statement Schedules |
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38 |
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(1) Parenthetical references are to information incorporated by reference from Exhibit 13 hereto, which includes portions of the registrants Annual Report to Shareholders for the year ended December 31, 2012 (Annual Report) and from the registrants Notice of Annual Meeting of Shareholders and Proxy Statement for its 2013 Annual Meeting of Shareholders (Proxy Statement) to be filed on or prior to April 30, 2013.
(2) Annual Report sections entitled Shareholder Information and Consolidated Quarterly Information (Unaudited), except that Securities Authorized for Issuance under Equity Compensation Plans is incorporated in Item 12 of this Form 10-K and Issuer Purchases of Equity Securities, is included under Item 5 of this Form 10-K.
(3) Annual Report section entitled Selected Consolidated Financial Data, except that Ratio of Earnings to Fixed Charges is included in Exhibit 12 to this Form 10-K.
(4) Annual Report section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations.
(5) Annual Report section entitled Market Risk.
(6) Annual Report sections entitled Consolidated Statement of Operations, Consolidated Statement of Cash Flows, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Notes to Consolidated Financial Statements, Consolidated Quarterly Information (Unaudited), Managements Report on Internal Control Over Financial Reporting and Report of Independent Registered Public Accounting Firm. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the years ended December 31, 2012, 2011 and 2010 equaled net income.
(7) Proxy Statement sections entitled Election of Directors, Corporate Governance, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance.
(8) Proxy Statement section entitled Executive and Director Compensation.
(9) Proxy Statement sections entitled Security Ownership of Certain Beneficial Owners and Management and Securities Authorized for Issuance under Equity Compensation Plans.
(10) Proxy Statement sections entitled Corporate Governance and Certain Relationships and Related Transactions.
(11) Proxy Statement section entitled Fees Paid to Principal Accountants.
UNITED STATES CELLULAR CORPORATION 8410 WEST BRYN MAWR AVENUE, CHICAGO ILLINOIS 60631 TELEPHONE (773) 399-8900 |
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PART I
Item 1. Business
General
United States Cellular Corporation (U.S. Cellular) was incorporated under the laws of the state of Delaware in 1983. At December 31, 2012, U.S. Cellulars consolidated operating markets cover approximately 5.8 million customers in five geographic market areas in 26 states. U.S. Cellular operates in one reportable segment, wireless operations, and all of its wireless operating markets are in the United States.
U.S. Cellular is a majority-owned subsidiary of Telephone and Data Systems, Inc. (NYSE symbol TDS). As of December 31, 2012, TDS owned 84% of the combined total of the outstanding Common Shares and Series A Common Shares of U.S. Cellular and controlled 96% of the combined voting power of both classes of common stock. The Common Shares of U.S. Cellular are listed on the New York Stock Exchange under the symbol USM. U.S. Cellulars 6.95% Senior Notes are listed on the New York Stock Exchange (NYSE) under the symbol UZA. U.S. Cellulars 6.7% Senior Notes due 2033 are not listed on any stock exchange and trade over the counter.
U.S. Cellular has its principal executive offices at 8410 West Bryn Mawr, Chicago, Illinois 60631 (telephone number 773-399-8900). U.S. Cellulars website address is http://www.uscellular.com . U.S. Cellular files with, or furnishes to, the Securities and Exchange Commission (SEC) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, as well as various other information. Investors may access, free of charge, through the Investor Relations portion of the website, U.S. Cellulars annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practical after such material is filed electronically with the SEC. The public may read and copy any materials U.S. Cellular files with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington D.C. 20549. The public may obtain information on the operation of the Reference Room by calling the SEC at 1-800-732-0330. The public may also view electronic filings of U.S. Cellular by accessing SEC filings at http://www.sec.gov .
U.S. Cellular is a wireless telecommunications service provider. U.S. Cellular groups its individual markets (geographic service areas as defined by the Federal Communications Commission (FCC) in which wireless carriers are licensed, for fixed terms, to provide service) into broader geographic market areas (as discussed below in Total Consolidated Markets and Consolidated Operating Markets) to offer customers large service areas that primarily utilize U.S. Cellulars network. Since 1985, when it began providing wireless telecommunications service in Knoxville, Tennessee and Tulsa, Oklahoma, U.S. Cellular has expanded its consolidated wireless networks and customer service operations to cover five geographic market areas in portions of 26 states, which collectively represent a total population of 47.0 million as of December 31, 2012. U.S. Cellular uses roaming agreements with other wireless carriers to provide service to its customers in areas not covered by U.S. Cellulars network.
U.S. Cellular is subject to regulation by the FCC as a provider of wireless telecommunication services. The FCC regulates the licensing, construction, and operation of providers of wireless telecommunications systems, as well as the provision of services over those systems. See Regulation below for further discussion regarding licenses as well as the regulations promulgated by the FCC.
U.S. Cellulars ownership interests in wireless licenses include both consolidated and investment interests in licenses covering portions of 36 states and a total population of 93.2 million at December 31, 2012.
For purposes of tracking population counts in order to calculate market penetration, when U.S. Cellular acquires a licensed area that overlaps a licensed area it already owns, it does not duplicate the population counts for any overlapping licensed area. Only incremental population counts are added to the reported amount of total market population in the case of an acquisition of a licensed area that overlaps a previously owned licensed area.
Total market population measures are provided to allow comparison of the relative size of each of U.S. Cellulars geographic market areas to its total consolidated markets and consolidated operating markets, as defined below. The total population of U.S. Cellulars consolidated markets may have no direct relationship to the number of wireless customers or the revenues that may be realized from the operation of the related wireless systems. In addition, population equivalents for investment interests have been provided to allow comparison to the relative size of U.S. Cellulars consolidated markets.
Total Consolidated Markets (Including non-operating markets)
The following table summarizes information regarding licensed areas which U.S. Cellular consolidates as of December 31, 2012. The population shown is the total population within each geographic market area, regardless of U.S. Cellulars percentage ownership in the licenses included in such geographic market areas:
Geographic Market Areas |
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Population (1) |
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Customers |
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Penetration |
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States |
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Central Region (2) |
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65,931,000 |
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3,688,000 |
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5.6 |
% |
AL, AR, CO, FL, GA, IA, IL, IN, KS, KY, LA, MI, MN, MO, MS, NE, OH, OK, SD, TX, WI |
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Mid-Atlantic Region |
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20,291,000 |
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1,104,000 |
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5.4 |
% |
MD, NC, PA, SC, TN, VA, WV |
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New England Region |
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2,857,000 |
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422,000 |
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14.8 |
% |
ME, NH, VT |
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Northwest Region |
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3,685,000 |
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369,000 |
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10.0 |
% |
CA, ID, OR, WA |
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New York Region (3) |
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480,000 |
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215,000 |
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44.8 |
% |
NY |
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Total |
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93,244,000 |
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5,798,000 |
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6.2 |
% |
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Consolidated Operating Markets
The following table summarizes information regarding licensed areas which U.S. Cellular consolidates and are in operation as of December 31, 2012. The population shown is the total population within each geographic market area, regardless of U.S. Cellulars percentage ownership in the licenses included in such geographic market areas:
Geographic Market Areas |
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Population (1) |
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Customers |
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Penetration |
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States |
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Central Region (2) |
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33,235,000 |
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3,688,000 |
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11.1 |
% |
IA, IL, IN, KS, MI, MN, MO, NE, OH, OK, TX, WI |
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Mid-Atlantic Region |
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8,006,000 |
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1,104,000 |
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13.8 |
% |
MD, NC, PA, SC, TN, VA, WV |
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New England Region |
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2,857,000 |
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422,000 |
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14.8 |
% |
ME, NH, VT |
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Northwest Region |
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2,388,000 |
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369,000 |
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15.5 |
% |
CA, OR, WA |
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New York Region (3) |
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480,000 |
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215,000 |
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44.8 |
% |
NY |
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Total |
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46,966,000 |
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5,798,000 |
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12.3 |
% |
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(1) Represents 100% of the population of the licensed areas, based on 2011 Claritas® population estimates. Population in this context includes only the areas covering such markets and is used only for the purposes of calculating market penetration and is not related to population equivalents, as defined below. It also includes 100% of the population of two licensed areas where U.S. Cellular owns a controlling interest and has contracted with another wireless operator to manage the operations.
(2) At December 31, 2012, the Divestiture Markets are included in the Central Geographic Market Area.
(3) Markets in the New York Region are operated by Verizon Wireless under the Verizon Wireless brand. U.S. Cellular owns a greater than 50% interest in each of these markets and consolidates the financial results of these markets in accordance with Generally Accepted Accounting Principles (GAAP).
Investment Markets
The following table summarizes the markets in which U.S. Cellular owns an investment interest at December 31, 2012. For licenses in which U.S. Cellular owns an investment interest, the related population equivalents are shown.
Market Area/Market |
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Population (1) |
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Current
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Current
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Los Angeles/Oxnard, CA |
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18,095,000 |
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5.5 |
% |
995,000 |
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Oklahoma City, OK |
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1,209,000 |
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14.6 |
% |
177,000 |
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Others (fewer than 100,000 population equivalents each) |
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4,667,000 |
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Varies |
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290,000 |
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Total population equivalents in investment markets |
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1,462,000 |
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(1) Represents 100% of the total population of the licensed area in which U.S. Cellular owns an interest based on 2011 Claritas® population estimates.
(2) Represents U.S. Cellulars percentage ownership interest in the licensed area as of December 31, 2012.
(3) Current Population Equivalents are derived by multiplying the amount in the Population column by the percentage interest indicated in the Current Percentage Interest column.
Divestiture Transaction
As more fully described in the Divesture Transaction section of Managements Discussion and Analysis of Financial Condition and Results of Operations and in Note 7 Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements, on November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement (the Divestiture Transaction) with subsidiaries of Sprint Nextel Corporation (Sprint).
The Purchase and Sale Agreement provides that U.S. Cellular will transfer to Sprint certain rights and assets (collectively, the Subject Assets), and Sprint will assume certain liabilities (Subject Liabilities), related to U.S. Cellulars Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (the Divestiture Markets), in consideration for $480 million in cash at closing, subject to pro-rations of certain assets and liabilities. U.S. Cellular will retain all other assets (Retained Assets) and liabilities (Retained Liabilities) related to the Divestiture Markets. U.S. Cellular is not transferring and will continue to operate and provide service in Peoria, Rockford and certain other areas in Illinois, and in Columbia, Joplin, Jefferson City and certain other areas in Missouri.
The Subject Assets include customers and most of U.S. Cellulars PCS licenses in the Divestiture Markets. U.S. Cellular will retain its direct and indirect ownership interests in other spectrum in the Divestiture Markets. The transaction does not include spectrum licenses held by U.S. Cellular or variable interest entities consolidated by U.S. Cellular that are not currently used in the operations of the Divestiture Markets. The Subject Liabilities that will be assumed by Sprint include only (i) liabilities as of the closing relating to the Subject Assets and (ii) liabilities arising after the closing relating to the Subject Assets.
The Retained Assets include all assets other than the Subject Assets, including cash, accounts receivable, inventory, naming rights, real estate, cell sites including towers, network equipment, stores, retail equipment, furniture and fixtures, and all other assets, including the corporate and other facilities located in the Divestiture Markets. The Retained Liabilities include all liabilities other than the Subject Liabilities, including accounts payable, accrued expenses, liabilities to employees, taxes, obligations under benefit plans, contracts, leases and asset retirement obligations.
The transaction is subject to FCC approval, compliance with the Hart-Scott-Rodino Act and other conditions. Subject to the satisfaction or (if permitted) waiver of all conditions, the transaction is expected to close in mid-2013.
The table below provides selected information related to the Divestiture Markets as of December 31, 2012:
Market population |
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15,037,000 |
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Market penetration |
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3.7 |
% |
Total customers |
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560,000 |
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Postpaid customers |
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463,000 |
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Prepaid customers |
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81,000 |
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Reseller customers |
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16,000 |
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Postpaid churn rate |
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2.95 |
% |
Products and Services
Wireless Services. U.S. Cellulars postpaid customers are able to choose from a variety of national plans with voice, messaging and data pricing that are designed to fit different customer needs, usage patterns and budgets. The ability to help a customer find the right pricing plan is central to U.S. Cellulars brand positioning. U.S. Cellular offers national consumer plans with both bundled and unbundled options that can be tailored to a customers needs. Many plans enable small work groups or families to share the plan minutes, enabling customers to get more value for their money. U.S. Cellular offers data plans in a variety of tiers to fit customers needs and budgets. Business rate plans are offered to companies to meet their unique needs. U.S. Cellulars popular national plans price all calls, regardless of where they are made or received in the United States, as local calls with no long distance or roaming charges. All incoming calls, texts, and picture messages are free on currently offered plans. Additionally, U.S. Cellular offers prepaid service plans, which include voice minutes, messaging and data in a variety of ways for a monthly fee. In May 2012, U.S. Cellular began offering U Prepaid, a no contract wireless service in select Walmart stores in an effort to expand points of distribution for U.S. Cellular products and services. In October 2012, U.S. Cellular began offering a postpaid option through Walmart as well, and continues to explore new distribution options.
U.S. Cellular recognizes customer loyalty with national bundled rate plans and industry-leading benefits without requiring customers to sign continuous contracts . Customers who subscribe to national plans can earn loyalty reward points that can be used for accelerated phone upgrades just for being a customer. Points can also be used for other rewards such as additional lines, phones, accessories and ringtones . Available postpaid plans include Overage Cap, a free service that prevents voice overage charges from exceeding $50 for a National Single Line Plan or $150 for a Family Plan.
U.S. Cellulars portfolio of Android TM -powered, BlackBerry® and Windows Mobile® smartphones and Android TM -powered tablets are key parts of its strategy to deliver wireless devices which allow customers to stay productive, entertained and connected on the go. Backed by U.S. Cellulars high-speed networks, including a fourth generation Long Term Evolution (4G LTE) network, which, as of December 31, 2012, covers 61% of its postpaid customers and a third generation (3G) network that supports nationwide roaming, U.S. Cellulars smartphone messaging, data and internet services allow customers to access the web and social network sites, e-mail, text, picture and video message, utilize turn-by-turn GPS navigation, and browse and download thousands of applications to customize their wireless devices to fit their lifestyles.
U.S. Cellular offers enhanced multimedia services, including Digital Radio, Mobile TV and 3D Gaming, over its 4G LTE and 3G networks. U.S. Cellulars easy edge SM brand of enhanced data services uses a Binary Runtime Environment for Wireless (BREW) technology which adds limited computer-like functionality to non-smartphone wireless devices, enabling applications to be downloaded over-the-air directly to the customers wireless device. These enhanced data services include news, weather, sports, information, games, ring tones and other services.
U.S. Cellular plans to further enhance its advanced data services in 2013 and beyond.
Wireless Devices. U.S. Cellular offers a comprehensive range of wireless devices such as handsets, modems, mobile hotspots and tablets for use by its customers. U.S. Cellular offers wireless devices that are compatible with some or all of its 4G LTE, 3G and 2G networks and all are compliant with the FCCs enhanced wireless 911 (E-911) requirements. In addition, U.S. Cellular offers a wide range of accessories, such as carrying cases, hands-free devices, batteries, battery chargers, memory cards and other items to customers. U.S. Cellular also sells wireless devices to agents and other third-party distributors for resale. U.S. Cellular frequently discounts wireless devices sold to new and current customers and provides discounts on upgraded wireless devices to current customers, in order to attract new customers or to retain existing customers by reducing the cost of becoming or remaining a wireless customer. With plans offering no contract after the first, customers who are eligible for a wireless device upgrade are able to obtain wireless devices at promotional prices without signing a new contract.
U.S. Cellular has established service facilities in many of its local markets to ensure quality service and repair of the wireless devices it sells. These facilities allow U.S. Cellular to provide convenient and timely repair service to customers who experience device problems. Additionally, U.S. Cellular offers several programs which allow the customer to receive a replacement device through a retail store or through direct mail.
Handset selection and availability are significant areas of competitive differentiation in the industry today. During 2012, U.S. Cellular continued to bolster its expanding smartphone and tablet portfolio with the launch of high-performance Android TM -powered wireless devices, such as the Samsung Galaxy S III TM . U.S. Cellulars smartphone offerings play a significant role in driving data service usage and revenues. The devices offered include a full array of smartphones from the top-tier Android TM -powered Samsung Galaxy S III TM to lower-tier smartphones.
U.S. Cellular purchases wireless devices and accessory products from a number of manufacturers, including Samsung, Motorola, Personal Communications Devices, LG, BlackBerry®, Superior Communications and Xentris Wireless. U.S. Cellular negotiates volume discounts with its suppliers and works with them in promoting specific equipment in its local advertising. U.S. Cellular does not own significant product warehousing and distribution infrastructure. Instead, it contracts with third party providers for substantially all of its product warehousing, distribution and direct customer fulfillment activities. U.S. Cellular also contracts with third party providers for services related to its reward points and phone replacement programs.
U.S. Cellular monitors the financial condition of all of its wireless device and accessory suppliers. Because U.S. Cellular purchases wireless devices and accessories from numerous suppliers, U.S. Cellular does not expect the financial condition of any single supplier to affect U.S. Cellulars ability to offer a competitive variety of wireless devices and accessories for sale to customers.
Marketing
Customer Acquisition and Retention. U.S. Cellulars marketing plan is focused on acquiring, retaining and growing customer relationships by offering high-quality products and services built around customer needs at fair prices, supported by outstanding customer service.
U.S. Cellular believes that creating positive connections with its customers enhances their wireless experience and builds customer loyalty. U.S. Cellular currently offers several innovative, customer-centric programs and services, at no cost to the customer. The Overage Protection service provides customers peace-of-mind by sending them text message alerts when they come close to reaching their allowable monthly plan minutes or text messages in order to avoid overage charges. Although the FCC approved a proposal in 2011 that would require carriers to notify customers before they incur excessive charges, U.S. Cellular believes that it was the first to offer this service to all of its customers. My Contacts Backup offers extra security for customers by allowing them to retrieve their contact numbers if they lose or damage their wireless devices.
U.S. Cellular increases customer awareness using media such as television, radio, newspaper, direct mail advertising, the Internet, social media and sponsorships. U.S. Cellular has achieved its current level of penetration of its markets through a combination of a strong brand position, promotional advertising, broad distribution, maintaining a high-quality wireless network and providing outstanding customer service. U.S. Cellulars advertising is directed at attracting and retaining customers, improving potential customers awareness of the U.S. Cellular brand, increasing existing customers usage of U.S. Cellulars services and increasing the public awareness and understanding of the wireless services it offers. U.S. Cellular attempts to select the advertising and promotional media that are most appealing to the targeted groups of potential customers in each local market. U.S. Cellular supplements its advertising with a focused public relations program that drives store traffic, supports sales of products and services, and builds brand awareness and preference. The approach combines national and local media relations in mainstream and social media channels with market-wide activities, events, and sponsorships. Since 2008, U.S. Cellular has focused its giving strategy on the pressing needs of schools and has invested millions of dollars in its education initiatives, such as Calling All Communities and Calling All Teachers, which support schools and teachers in the communities U.S. Cellular serves.
U.S. Cellular manages customer retention by focusing on outstanding customer service through the development of processes that are customer-friendly, extensive training of frontline sales and support associates and the implementation of retention programs. The marketing plan highlights the value of U.S. Cellulars service offerings and incorporates combinations of rate plans, additional value-added features and services and wireless devices which are designed to meet the needs of customers.
Through 2012, U.S. Cellular operated five regional customer care centers. Effective January 1, 2013, U.S. Cellular transferred its Bolingbrook Customer Care Center operations to an existing third-party vendor. In connection with the Bolingbrook Customer Care Center transaction, the majority of U.S. Cellulars associates at the Bolingbrook, Illinois location became employees of the third party vendor, which will continue to provide services to U.S. Cellular through a transition period. Through the Bolingbrook and other customer care center operations, U.S. Cellular will continue to deliver award-winning customer service. U.S. Cellular will continue to operate four other regional customer care centers with personnel who are responsible for customer service activities, and a national financial services center with personnel who perform credit and other customer payment activities. U.S. Cellular also contracts with third parties that provide additional customer care support.
Distribution Channels. U.S. Cellular supports a multi-faceted distribution program, including retail sales and service centers, direct sales, third-party national retailers, and independent agents, plus the website and telesales for customers who wish to contact U.S. Cellular through the Internet or by phone.
Company retail store locations are designed to market wireless products and services to the consumer and small business segments in a setting familiar to these types of customers. As of December 31, 2012, retail sales associates work in over 400 U.S. Cellular-operated retail stores and kiosks. Direct sales consultants market wireless services to mid-size business customers. Additionally, the U.S. Cellular website enables customers to activate service and purchase wireless devices online.
U.S. Cellular maintains an ongoing training program to improve the effectiveness of retail sales associates and direct sales consultants by focusing their efforts on obtaining customers by facilitating the sale of appropriate packages for the customers expected usage and value-added services that meet customer needs.
In May 2012, U.S. Cellular began offering U Prepaid, a no contract wireless service, in select Walmart stores within its service areas. In October 2012, U.S. Cellular began offering a postpaid option through Walmart, and continues to explore new distribution options.
U.S. Cellular has relationships with exclusive and non-exclusive agents, which are independent businesses that obtain customers for U.S. Cellular on a commission basis. At December 31, 2012, U.S. Cellular had contracts with these businesses aggregating over 1,000 locations. U.S. Cellular provides additional support and training to its exclusive agents to increase customer satisfaction for customers they serve. U.S. Cellulars agents are generally in the business of selling wireless devices, wireless service packages and other related products. No single agent accounted for 10% or more of U.S. Cellulars operating revenues during the past three years.
U.S. Cellular also markets wireless service through resellers. The resale business involves the sale of wholesale access and minutes to independent companies that package and resell wireless services to end-users. These resellers generally provide prepaid and postpaid services to subscribers under their own brand names and also provide their own billing and customer service. U.S. Cellular incurs no direct subscriber acquisition costs related to reseller customers. At December 31, 2012, U.S. Cellular had approximately 241,000 customers of resellers. For the year ended December 31, 2012, revenues from resale business were less than 1% of total service revenues.
Seasonality. There is seasonality in operating expenses, which tend to be higher in the fourth quarter than in the other quarters due to increased marketing activities, which may cause operating income to vary from quarter to quarter.
Customers and System Usage
U.S. Cellular provides service to customers from a variety of demographic segments. U.S. Cellular uses a segmentation model to classify businesses and consumers into logical groupings for developing new products and services, direct marketing campaigns, and retention efforts. U.S. Cellular focuses on both retail consumers and small-to-mid-size business customers in vertical industries such as construction, retail, professional services and real estate. These industries are primarily served through U.S. Cellulars retail and direct sales channels.
U.S. Cellulars main sources of revenues are from its own customers and from customers of competitors who roam on its network. The interoperability of wireless service enables a customer who is in a wireless service area other than the customers home service area to place or receive a call or use data in that service area. U.S. Cellular has entered into reciprocal roaming agreements with operators of other wireless systems covering virtually all systems with Code Division Multiple Access (CDMA) technology in the United States, Canada and Mexico. Roaming agreements offer customers the opportunity to roam on these systems. These reciprocal agreements automatically pre-register the customers of U.S. Cellulars systems in the other carriers systems. In addition, a customer of a participating system roaming in a U.S. Cellular market where this arrangement is in effect is able to make and receive calls or data on U.S. Cellulars system. The charge for this service is negotiated as part of the roaming agreement between U.S. Cellular and the roaming customers carrier. U.S. Cellular bills this charge to the customers home carrier, which then may bill the customer. In many instances, based on competitive factors, carriers, including U.S. Cellular, may not charge their customers, or charge lower amounts to their customers than the amounts actually charged by other wireless carriers for roaming. Since 2010, U.S. Cellular has offered nationwide 3G data roaming services, allowing its customers to access high-speed data across the country. U.S. Cellular is currently exploring 4G roaming agreements with operators of other wireless systems. The FCCs adoption of mandatory 4G roaming rules, which were upheld by the United States Court of Appeals for the District of Columbia, may be of assistance in the negotiation of 4G roaming agreements with other wireless operators in the future. However, technological challenges currently exist which limit the interoperability of 4G wireless devices on other carriers networks. Specifically, wireless devices support certain configurations of 4G spectrum frequencies and as a result 4G wireless devices offered by carriers are not necessarily compatible with the networks of other carriers. U.S. Cellular is working with other carriers and original equipment manufacturers in order to resolve and mitigate interoperability issues; however, there is no assurance that these issues will be fully resolved or mitigated. Accordingly, both the timing of when U.S. Cellular will be able to offer 4G roaming, and in which geographies, are uncertain.
Technology and System Design and Construction
Technology . Wireless telecommunication systems transmit voice, data, graphics and video through the transmission of signals over networks of radio towers using radio spectrum licensed by the FCC. Access to local, regional, national and worldwide telecommunications networks is provided through system interconnections.
U.S. Cellular currently deploys CDMA digital technology throughout its networks. Through roaming agreements with other CDMA-based wireless carriers, U.S. Cellulars customers may access CDMA service in virtually all areas of the United States, as well as parts of Canada and Mexico. U.S. Cellular believes that CDMA technology offers advantages compared to the other second generation digital technologies, including greater spectral efficiency as well as better call quality. Another digital technology, Global System for Mobile Communication (GSM), has a larger installed base of customers worldwide. Since CDMA technology currently is not compatible with GSM technology, U.S. Cellular customers with CDMA-only based wireless devices are currently not able to use their wireless devices when traveling through areas serviced only by GSM-based networks. However, both CDMA and GSM technologies are expected to be succeeded by 4G LTE technology over the next several years. As described above, there are challenges to implementing 4G LTE roaming and interoperability. Carriers may deploy 4G LTE technology on different radio bands, or spectrum, and devices from one carrier may not have the required antennas to operate on another carriers network and, as such, would not be able to roam on that network.
A high-quality network, supported by continued investments in that network, will remain an important factor for wireless companies to remain competitive. U.S. Cellular continually reviews its long-term technology plans. Since 2006, U.S. Cellular has offered services based on 3G technology and, in 2012, U.S. Cellular launched services based on 4G LTE technology in conjunction with King Street Wireless L.P. As of December 31, 2012, U.S. Cellular deployed 4G LTE technology that covered approximately 61% of its postpaid customers and anticipates further expansion of 4G LTE in 2013.
System Design and Construction. U.S. Cellular designs and constructs its systems in a manner it believes will permit it to provide high-quality service to substantially all types of compatible wireless devices. Designs are based on engineering studies which relate to specific markets, in support of the larger network. Such engineering studies are performed by U.S. Cellular personnel or third-party engineering firms. Network reliability is given careful consideration and extensive backup redundancy is employed in many aspects of U.S. Cellulars network design. Route diversity, ring topology and extensive use of emergency standby power are also utilized to enhance network reliability and minimize service disruption from any particular network element failure.
In accordance with its strategy of building and strengthening its operating market areas, U.S. Cellular has selected high-capacity digital wireless switching systems that are capable of serving multiple markets through a single mobile telephone switching office. U.S. Cellulars wireless systems are designed to facilitate the installation of equipment that will permit microwave interconnection between the mobile telephone switching office and the cell sites. U.S. Cellular has implemented such microwave interconnection in many of the wireless systems it operates. In other areas, U.S. Cellulars systems rely upon wireline telephone connections to link cell sites with the mobile telephone switching office. Although the installation of microwave network interconnection equipment requires a greater initial capital investment, a microwave network enables a system operator to reduce the current and future charges associated with leasing backhaul capacity from a wireline telephone company. U.S. Cellular is currently transitioning its existing wireline backhaul capacity to a packet-based Ethernet technology from circuit-switched technology. In addition to allowing for increased data capacity, the packet-based backhaul reduces the costs of data transmission.
U.S. Cellular believes that currently available technologies and appropriate capital additions will allow sufficient capacity on its networks to meet anticipated demand for voice and data services over the next few years. U.S. Cellulars continued investment in new licenses will support future demand for fourth generation broadband services using 4G LTE. Increasing demand for high-speed data and video services may require the acquisition of additional licenses or spectrum to provide sufficient capacity in markets where U.S. Cellular currently offers or may offer these services.
Construction of wireless systems is capital-intensive, requiring substantial investment for land and improvements, buildings, towers, mobile telephone switching offices, cell site equipment, microwave equipment, engineering and installation. U.S. Cellular primarily uses its own personnel to engineer each wireless system it owns and operates, and engages contractors to construct the facilities.
The costs (inclusive of the costs to acquire licenses) to develop the systems which U.S. Cellular operates have historically been financed primarily through proceeds from debt and equity offerings, with cash generated by operations, and proceeds from the sales of wireless interests. U.S. Cellular believes that existing cash and investments balances, expected cash flows from operating and investing activities and funds available under its revolving credit facility provide substantial liquidity and financial flexibility for U.S. Cellular to meet its normal financing needs (including working capital, construction and development expenditures) for the foreseeable future. In addition, U.S. Cellular may access public and private capital markets to help meet its financing needs.
Competition
The wireless telecommunication industry is highly competitive. U.S. Cellular competes directly with several wireless service providers in each of its markets. In general, there are between three and five competitors in each wireless market in which U.S. Cellular provides service, excluding resellers and mobile virtual network operators. U.S. Cellular generally competes against each of the national wireless companies: Verizon Wireless, AT&T Mobility, Sprint Nextel, and T-Mobile USA. These competitors have substantially greater financial, technical, marketing, sales, purchasing and distribution resources than U.S. Cellular. In addition, in certain markets, U.S. Cellular competes against other regional wireless companies, including Leap Wireless International, and resellers of wireless services. Since U.S. Cellulars competitors do not disclose their subscriber counts in specific regional service areas, market share for the competitors in each regional market cannot be precisely determined.
Since each of these competitors operates on systems using spectrum licensed by the FCC and has comparable technology and facilities, competition among wireless service providers for customers is principally on the basis of types of products and services, price, size of area covered, call quality, network speed and responsiveness of customer service. U.S. Cellular employs a customer satisfaction strategy throughout its markets that it believes has contributed to its overall success.
Wireless service providers continue to use wireless device availability and pricing to gain a competitive advantage since the markets for wireless service are nearly fully saturated. The wireless device has become more than just a means for communication. Consumers attitudes have shifted, and continue to shift, and a wireless device becomes more important year after year as it expands to become the primary communication link to the world as well as a personal entertainment center and source of information. U.S. Cellular believes that customer growth will be achieved primarily by capturing customers switching from other wireless carriers, selling additional products and services to its existing customers, and increasing the number of multi-device users among its existing customers.
The use of national advertising and promotional programs by the national wireless service providers may be a source of additional competitive and pricing pressures in all U.S. Cellular markets, even if those operators may not provide direct service in a particular market. In addition, in the current wireless environment, U.S. Cellulars ability to compete depends on its ability to offer family and national calling plans. U.S. Cellular provides wireless services comparable to the national competitors, but the national wireless companies operate in a wider geographic area and are able to offer no- or low-cost roaming and long-distance calling packages over a wider area on their own networks than U.S. Cellular can offer on its network. When U.S. Cellular offers the same calling area as one of these competitors, U.S. Cellular incurs roaming charges for calls made in portions of the calling area which are not part of its network, thereby increasing its cost of operations. U.S. Cellular depends on roaming agreements with other wireless carriers to provide voice and data roaming capabilities in areas not covered by U.S. Cellulars network.
Bundled offerings, in the form of triple plays and quadruple plays (combination of cable or satellite video service, high-speed internet, wireline service, and wireless service), are common among some of U.S. Cellulars competitors. In addition, wireless carriers and others are beginning to roll out new or enhanced technologies to better meet the needs of the anytime, anywhere consumer. Convergence is taking place on many levels, including dual-mode wireless devices that act as wireline or wireless devices depending on location and the incorporation of wireless hot spot technology in wireless devices for improved in-building coverage and for making internet access seamless regardless of location. Although less directly a substitute for other wireless services, wireless data services such as Wi-Fi may be adequate for those who do not need full mobility wide area roaming or full two-way voice services. Technological advances or regulatory changes in the future may make available other alternatives to wireless service, thereby creating additional sources of competition.
U.S. Cellulars approach in 2013 and in future years will be to focus on the unique needs and attitudes towards wireless service of its selected target segments. U.S. Cellular will deliver selected, targeted high quality products and services at fair prices and will continue to differentiate itself through the customer experience and service quality. U.S. Cellulars customer-centric approach, highly reliable network, as evidenced by numerous consumer satisfaction awards based on survey results, and cutting-edge wireless devices all represent examples of how U.S. Cellular believes it is differentiating itself from competitors as it relates to the customer experience. U.S. Cellulars ability to compete successfully in the future, and to meet necessary growth and return on capital, will depend upon its ability to anticipate and respond to changes related to new service offerings, customer preferences, competitors pricing strategies, technology, demographic trends, economic conditions and access to adequate spectrum resources.
Business Development Strategy
U.S. Cellulars business development strategy is to obtain interests in and access to wireless licenses in areas adjacent to or in proximity to its other wireless licenses, thereby building contiguous operating market areas. U.S. Cellular anticipates that grouping its operations into market areas will continue to provide it with certain economies in its capital and operating costs. U.S. Cellular may continue to make opportunistic acquisitions or exchanges of markets that further strengthen its operating market areas and in other attractive markets. U.S. Cellular also believes that the acquisition of additional licenses within its operating territories will enhance its network capacity to meet its customers increased demand for data services. U.S. Cellular seeks to acquire noncontrolling interests in licenses in which it already owns the majority interest and/or operates the license. From time to time, U.S. Cellular has divested outright or included in exchanges for other wireless interests certain consolidated and investment interests that were considered less essential to its operating strategy. As part of this strategy, U.S. Cellular from time to time may be engaged in negotiations relating to the acquisition, exchange or disposition of companies, strategic properties or wireless spectrum. In general, U.S. Cellular may not disclose such transactions until there is a definitive agreement. In addition, U.S. Cellular may participate as a bidder, or member of a bidding group, in auctions for wireless spectrum administered by the FCC. In general, U.S. Cellular may not disclose any such participation unless it or such bidding group is announced as a winning bidder by the FCC.
In addition to the Divestiture Transaction discussed above, U.S. Cellular engaged in the following significant transactions in the last five years.
Spectrum Transactions. The following significant license transactions provided U.S. Cellular with additional spectrum to meet anticipated future capacity and coverage requirements in several of its markets. No cash, customers, network assets, other assets or liabilities were included in these transactions. In addition to the licenses listed below, U.S. Cellular has acquired a number of other licenses as part of less significant transactions in recent years.
2012 700 MHz A-Block . On August 15, 2012, U.S. Cellular completed a license purchase whereby U.S. Cellular received four 700 MHz A-Block spectrum licenses covering portions of Iowa, Kansas, Missouri, Nebraska, and Oklahoma. On November 20, 2012, U.S. Cellular completed a license purchase whereby U.S. Cellular received seven 700 MHz A-Block spectrum licenses covering portions of Illinois, Michigan, Minnesota, Missouri, Nebraska, Oregon, Washington and Wisconsin.
2011 Spectrum Swap. On September 30, 2011, U.S. Cellular completed an exchange whereby U.S. Cellular received eighteen 700 MHz spectrum licenses covering portions of Idaho, Illinois, Indiana, Kansas, Nebraska, Oregon and Washington in exchange for two PCS spectrum licenses covering portions of Illinois and Indiana.
FCC Auctions. As more fully described in the Regulation section below, in 2012, the FCC conducted a single round, sealed bid, reverse auction to award Mobility Fund Phase I support to bidders that commit to provide wireless service in areas designated as unserved by the FCC. U.S. Cellular and several of its subsidiaries were winning bidders in eligible areas within 10 states.
From time to time, the FCC conducts auctions through which additional spectrum is made available for the provision of wireless services. U.S. Cellular has participated in certain prior FCC auctions indirectly through its limited partnership interests. Each entity qualified as a designated entity and thereby was eligible for bidding credits with respect to most licenses purchased in accordance with the rules defined by the FCC for each auction. In most cases, the bidding credits resulted in a 25% discount from the gross winning bid.
The FCCs Auction 73 for spectrum in the 700 MHz band closed on March 20, 2008. U.S. Cellular participated in Auction 73 indirectly through its limited partnership interest in King Street Wireless L.P. (King Street Wireless). King Street Wireless was the successful winning bidder of 152 licenses in Auction 73. These licenses were granted by the FCC in December 2009.
Regulation
Regulatory Environment. U.S. Cellulars operations are subject to FCC and state regulation. The wireless licenses that are held by U.S. Cellular and by the designated entities in which U.S. Cellular owns a non-controlling interest are granted by the FCC for the use of radio frequencies and are an important component of the overall value of U.S. Cellulars consolidated assets. The construction, operation and transfer of wireless systems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act of 1934 (Communications Act). In 1996, Congress enacted the Telecommunications Act of 1996 (Telecommunications Act), which amended the Communications Act. The Telecommunications Act mandated significant changes in telecommunications rules and policies to promote competition, ensure the availability of telecommunications services to all parts of the United States and streamline regulation of the telecommunications industry to remove regulatory burdens, as competition developed. The FCC has promulgated regulations governing construction and operation of wireless systems, licensing (including renewal of licenses) and technical standards for the provision of wireless services under the Communications Act, and has implemented the legislative objectives of the Telecommunications Act, as discussed below.
LicensingWireless Service. Wireless licenses are granted by the FCC based on various geographic areas. The completion of acquisitions, involving the transfer of control of all or a portion of a wireless system, requires prior FCC approval. The FCC determines on a case-by-case basis whether an acquisition of wireless licenses is in the public interest.
The Communications Act also requires the FCC to award new licenses for most commercial wireless services through a competitive bidding process in which spectrum is awarded to bidders in an auction. From time to time, the FCC conducts auctions through which additional spectrum is made available for the provision of wireless services. U.S. Cellular has participated in such auctions in the past and is likely to participate in any other auctions conducted by the FCC in the future as an applicant or as a non-controlling partner in another auction applicant. FCC anti-collusion rules place certain restrictions on business communications and disclosures by participants in an FCC auction.
LicensingFacilities. The FCC must be notified each time an additional cell site for a cellular system is constructed which enlarges the service area of a given cellular system. U.S. Cellular believes that its facilities are in compliance with these requirements.
LicensingCommercial Mobile Radio Service. Pursuant to the 1993 amendments to the Communications Act, cellular, personal communications, advanced wireless, and 700 MHz services are classified as commercial mobile radio service in that they are services offered to the public for a fee and are interconnected to the public switched telephone network. The FCC has determined that it will not require carriers providing such services to comply with a number of statutory provisions otherwise applicable to common carriers, such as the filing of tariffs. All commercial mobile radio service wireless licensees must satisfy specified coverage requirements. Licensees which fail to meet the coverage requirements may be subject to forfeiture of their licenses.
Wireless licenses are generally granted for a ten year term or, in some cases, for fifteen years. The FCC has established standards for conducting comparative renewal proceedings between a wireless licensee seeking renewal of its license and challengers filing competing applications. All of U.S. Cellulars licenses for which it applied for renewal between 1995 and 2012 have been renewed. In 2010, the FCC released a Notice of Proposed Rulemaking (NPRM) regarding wireless services renewal proceedings. Pursuant to the NPRM, the FCC would abolish comparative renewal proceedings, but establish criteria by which it would determine whether a wireless licensee was entitled to license renewal. The proposed changes have been opposed by most wireless carriers, including U.S. Cellular. It is, however, likely that the FCC will take some action to modify the license renewal process. U.S. Cellular expects to meet the current criteria of any license renewal process.
U.S. Cellular conducts and plans to conduct its operations in accordance with all relevant FCC rules and regulations and anticipates being able to qualify for renewal expectancy in its upcoming renewal filings whatever renewal criteria are applied. Accordingly, U.S. Cellular expects to be able to renew its licenses under current regulations. However, changes in the regulation of wireless operators or their activities and of other mobile service providers or changes in the FCCs renewal requirements could have a material adverse effect on U.S. Cellulars operations.
E-911 . The FCC has imposed E-911 regulations on wireless carriers. The rules require wireless carriers to provide different levels of detailed location information about E-911 callers depending on the capabilities of the local emergency call center. U.S. Cellular is in compliance with the FCCs requirements regarding E-911.
Hearing Aid Compatibility. The FCC has imposed Hearing Aid Compatibility requirements on wireless carriers. These rules mandate that carriers offer to customers a certain number or percentage of handsets which are compatible with different types of hearing aids. The rules also require certain types of marketing and labeling practices in relation to such handsets, as well as certain disclosures on wireless carrier websites. There are also annual carrier reporting requirements regarding Hearing Aid Compatibility. U.S. Cellular is in compliance with the FCCs Hearing Aid Compatibility requirements.
Telecommunications ActGeneral. The primary purpose of the Telecommunications Act is to open all telecommunications markets to competition. The Telecommunications Act makes most direct or indirect state and local barriers to competition unlawful. It directs the FCC to preempt all inconsistent state and local laws and regulations, after notice and comment proceedings. It also enables electric and other utilities to engage in telecommunications service through qualifying subsidiaries.
Only narrow powers over wireless carriers are left to state and local authorities. Each state retains the power to impose competitively neutral requirements that are consistent with the Telecommunications Acts universal service provisions and necessary for universal services, public safety and welfare, continued service quality and consumer rights. While a state may not impose requirements that effectively function as barriers to entry, it retains limited authority to regulate certain competitive practices in rural telephone company service areas.
The Telecommunications Act authorizes and directs the FCC to establish an explicit universal service fund, to preserve and advance universal access to telecommunications services in rural and high-cost areas of the country, to ensure that low-income consumers have access, and to promote access for schools, libraries and health care providers. The Telecommunications Act requires all interstate telecommunications providers, including wireless service providers, to make an equitable and non-discriminatory contribution to support the cost of providing universal service, unless their contribution would be de minimis. At present, the provision of wireline and wireless telephone service in high cost areas is subsidized by support from the Universal Service Fund (USF) to which all carriers with interstate and international revenues must contribute. Carriers are free to pass on the cost of such contributions to their customers. In 2012, U.S. Cellular contributed $112 million into the federal USF and passed on the cost of such contributions to its customers.
Wireless carriers may be designated by states, or in some cases by the FCC, as eligible to receive universal service support payments if they provide specified services in high cost areas. In 2012, U.S. Cellular received approximately $140.8 million in high cost support for service to high cost areas in the states of Illinois, Iowa, Kansas, Maine, Missouri, Nebraska, New Hampshire, New York, North Carolina, Oklahoma, Oregon, Tennessee, Virginia, Washington, Wisconsin and West Virginia. This high cost support is undergoing change, as set forth below.
National Broadband Plan. In 2009, Congress directed the FCC to develop a National Broadband Plan (the Plan) to ensure every American has access to broadband capability. In March 2010, the FCC released the Plan which describes the FCCs goals in enhancing broadband availability and the methods for achieving those goals over the next decade. Among the recommendations in the Plan which are significant to wireless providers are a series of proposals to make up to 500 MHz of spectrum newly available for broadband wireless uses by 2020, with a benchmark of making 300 MHz available by 2015, to reserve additional spectrum for unlicensed wireless use and to make more spectrum available for opportunistic and secondary uses. The Plan also made recommendations for transitioning the USF from supporting voice networks to broadband networks over time.
FCCs USF and ICC Reform Order . Pursuant to the Plan and subsequent notices of proposed rulemaking, on November 18, 2011, the FCC released a Report and Order and Further Notice of Proposed Rulemaking (Reform Order) adopting reforms of its universal service and intercarrier compensation mechanisms, and proposing further rules to advance reform. The Reform Order substantially revises the current USF high cost program and intercarrier compensation regime. The current USF program, which supports voice services, began to be phased out in 2012. As a replacement, the FCC is adopting the Connect America Fund (CAF), a new Mobility Fund, and a Remote Area Fund, which will collectively support broadband-capable networks. Mobile wireless carriers such as U.S. Cellular may be eligible to receive funding under each of these funds under certain circumstances.
The FCC has determined that both wireline and wireless facilities should be supported with one wireline carrier and one mobile carrier receiving support in each area. The Mobility Fund will be implemented in two phases. The Phase I Mobility Fund which was implemented in 2012 is designed to provide one-time funding through a reverse auction to fill in coverage in dead zones that currently lack 3G wireless service. In Phase I, $300 million was allocated throughout the country and an additional $50 million was set aside for tribal lands through the reverse auction described below. The Phase II Mobility Fund will have a budget of up to $500 million per year (up to $100 million of which is reserved for tribal lands), with the method of disbursement to be determined in a further NPRM. Phase II funding will be provided to areas that lack 4G wireless service. The CAF will support service to homes, businesses, and anchor institutions, using any technology that can meet the technical requirements.
On September 27, 2012, the FCC conducted a single round, sealed bid, reverse auction to award up to $300 million in one-time Mobility Fund Phase I support to successful bidders that commit to provide 3G, or better, wireless service in areas designated as unserved by the FCC. This auction was designated by the FCC as Auction 901. U.S. Cellular and several of its wholly-owned subsidiaries participated in Auction 901 and were winning bidders in eligible areas within 10 states and will receive up to $40.1 million in one-time support from the Mobility Fund. As part of the auction rules, winning bidders must complete network build-out projects to provide 3G or 4G service to these areas within two or three years, respectively, and must also make their networks available to other providers for roaming. Winning bidders will receive support funding primarily upon achievement of coverage milestones defined in the auction rules. As a result of the funding awards in the Phase I Mobility Fund, U.S. Cellular will be required to meet certain regulatory conditions in the areas where it will receive funding to provide service. Examples of these regulatory conditions include: allowing other carriers to collocate on U.S. Cellulars towers, allowing voice and data roaming on U.S. Cellulars network, and submitting various reports and certifications to retain eligibility each year. It is possible that additional regulatory requirements will be imposed pursuant to the FCCs Reform Order.
The terms and rules for participating in the CAF as a wireless eligible telecommunications carrier (ETC) have not been developed yet by the FCC. It is uncertain whether U.S. Cellular will obtain support through the CAF or Phase II of the Mobility Fund. If U.S. Cellular is successful in obtaining support, it will be required to meet certain regulatory conditions to obtain and retain the right to receive support including, for example, allowing other carriers to collocate on U.S. Cellulars towers, allowing voice and data roaming on U.S. Cellulars network, and submitting various reports and certifications to retain eligibility each year. It is possible that additional regulatory requirements will be imposed pursuant to the FCCs Reform Order.
U.S. Cellulars current ETC support is scheduled to be phased down. Support for 2012 (excluding certain adjustments) was frozen on January 1, 2012 using support for 2011 as a baseline and was reduced by 20% starting in July 2012. The reduction in USF support that U.S. Cellular otherwise would have received in 2012 was approximately $16 million. Support will be further reduced by 20% in July of each subsequent year; however, if the Phase II Mobility Fund is not operational by July 2014, the phase down will halt at that time and U.S. Cellular will receive 60% of its baseline support until the Phase II Mobility Fund is operational.
With respect to intercarrier compensation, the Reform Order provides for a reduction in the charges that U.S. Cellular pays to wireline phone companies to transport and terminate calls that originate on U.S. Cellulars network, which will reduce U.S. Cellulars operating expenses. The reductions in intercarrier charges are to increase over the next five to ten years, further reducing U.S. Cellulars operating expenses.
The FCCs Reform Order, and any subsequent orders it adopts to reform universal service and intercarrier compensation, are subject to judicial review. Multiple appeals and petitions for reconsideration have been filed with respect to the FCC Reform Order, but it has not been stayed. At this time, U.S. Cellular cannot predict the timing or outcome of any such appeals or petitions, or whether such appeals or petitions would result in a material adverse effect on U.S. Cellulars business, financial condition or results of operations.
U.S. Cellular also cannot predict the net effect of the FCCs changes to the USF high cost support program in the Reform Order or whether reductions in support will be fully offset with additional support from the CAF or the Mobility Fund. Accordingly, U.S. Cellular cannot predict whether such changes will have a material adverse effect on U.S. Cellulars business, financial condition or results of operations.
Incremental Charges. In October 2010, the FCC released an NPRM proposing that wireless carriers be required, among other things, to alert customers when they approach and reach usage limits for voice and data services which, if exceeded, would result in extra charges beyond the customers rate plan. In October 2011, a number of carriers, including U.S. Cellular, entered into voluntary commitments to minimize unexpected incremental charges on customers bills, precluding the need for the FCC to adopt rules proposed in its NPRM. Although U.S. Cellular already offers certain consumer protections, such as its Overage Cap and Overage Protection services, U.S. Cellular will incur additional regulatory obligations as a result of the voluntary commitments; however, such burdens are not expected to have a material effect on U.S. Cellulars operations.
Net Neutrality. In 2009, the FCC initiated a rulemaking proceeding designed to codify its existing Net Neutrality principles and impose new requirements that could have the effect of restricting the ability of wireless internet service providers to manage applications and content that traverse their networks. In December 2010, after a lengthy proceeding which considered different approaches including the reclassification of internet access as common carrier service under Title II of the Communications Act, the FCC adopted a net neutrality rule based on its Title I ancillary authority to enforce different parts of the Communications Act. The rule requires all providers of broadband internet access, including both fixed (that is, telephone and cable) and wireless providers, to publicly disclose accurate information regarding their network management practices, performance and commercial terms sufficient for consumers to make informed choices regarding the use of such services. The rule also prohibits all internet providers from blocking consumers access to lawful websites, subject to reasonable network management, and from blocking applications that compete with the providers voice or video telephony services, also subject to reasonable network management. The rule subjects the providers of fixed but not wireless broadband internet access to a prohibition on unreasonable discrimination in transmitting internet traffic over their networks, also subject to reasonable network management. The exemption of wireless providers from this part of the rule reflects recognition of the capacity constraints and other special conditions under which mobile broadband service is offered and the competitive nature of evolving wireless networks. Thus, the FCC at this time considered it appropriate to take only the measured steps with respect to mobile broadband service reflected in the rule. The Reform Order is generally controversial and has been challenged in the courts. U.S. Cellular cannot predict the outcome of such cases.
Data Roaming. In 2007, the FCC adopted a rule requiring that wireless carriers offer voice roaming agreements to each other on a just, reasonable and non-discriminatory basis. The FCC stated that this was a common carrier obligation under Title II of the Communications Act. In 2011, the FCC broadened this obligation to require carriers to offer wireless data roaming agreements to each other. However, because this obligation involved the use of the Internet, it could not be a common carrier obligation. Thus, the FCC grounded the obligation in Title III of the Communications Act, under which the FCC regulates use of the radio spectrum. This order was challenged in the U.S. Court of Appeals for the District of Columbia Circuit on the grounds that it constituted an unlawful common carrier regulation. However, in December 2012, the court upheld the FCCs ruling. U.S. Cellular was an intervenor in the case in support of the FCC and believes that the FCC and court rulings will be beneficial to it and similarly situated wireless carriers.
CVAA. In 2010, Congress enacted the Twenty-First Century Communications and Video Accessibility Act (CVAA), to ensure that people with disabilities have access to advanced communications services (ACS). The CVAA is currently the subject of two FCC rulemakings. The first deals with access to ACS generally and specifically with access to mobile browsers by persons who are blind or who have visual impairments. The second deals with the closed captioning obligations of wireless manufacturers and wireless providers. There are also recordkeeping and reporting requirements, which come into effect in March and April of 2013, respectively.
As of October 1, 2013, a mobile phone manufacturer that includes a browser in its device or a mobile phone provider such as U.S. Cellular that sells a mobile phone which includes such a browser must ensure that the browser functions are accessible to and usable by individuals who are blind or who have a visual impairment, unless doing so is not achievable.
As of January 1, 2014, wireless carriers will be required to deliver all programming received from a video programming owner or other origination source containing closed captioning with the original closed captioning data intact, unless such programming is recaptioned or the captions are reformatted by the programming distributor.
U.S. Cellular is working with its trade association, with standards setting organizations and with its vendors to comply with these requirements.
Spectrum Holdings. In September 2012, the FCC adopted an NPRM which proposed a review of its policies regarding mobile spectrum holdings in the context of both auctions and secondary market transactions. Comments and reply comments were filed in November 2012 and January 2013. In the proceeding, the FCC sought and received comment on whether it should retain or modify the current case by case analysis used to evaluate mobile spectrum holdings, or adopt bright line limits on the amount of wireless spectrum which may be held by any carrier.
The FCC also is considering updating the spectrum bands included in the evaluation of mobile spectrum holdings and whether to make distinctions between different bands in evaluating spectrum holdings. The FCC also is re-examining its determinations of geographic and product markets in the context of evaluating wireless transactions. It also is reviewing its spectrum attribution rules and remedies if a proposed transaction does not comply with its rules or policies.
U.S. Cellular cannot predict what, if any, changes the FCC will make to the foregoing rules, but intends to comply with all applicable requirements.
State and Local Regulation. U.S. Cellular is subject to state and local regulation in some instances. In 1981, the FCC preempted the states from exercising jurisdiction in the areas of licensing, technical standards and market structure. In 1993, Congress preempted states from regulating the entry of wireless systems into service and the rates charged by wireless systems to customers. The siting and construction of wireless facilities, including transmitter towers, antennas and equipment shelters are still subject to state or local zoning and land use regulations. However, in 1996, Congress amended the Communications Act to provide that states could not discriminate against wireless carriers in tower zoning proceedings and had to decide on zoning requests with reasonable speed. In addition, states may still regulate other terms and conditions of wireless service.
In 2000, the FCC ruled that the preemption provisions of the Communications Act do not preclude the states from acting under state tort, contract, and consumer protection laws to regulate the practices of commercial mobile radio service carriers, even if such activities might have an incidental effect on wireless rates. This ruling has led to more state regulation of commercial mobile radio service carriers, particularly from the standpoint of consumer protection. U.S. Cellular intends to comply with state regulation and to seek reasonable regulation of its activities in this regard.
The FCC is required to forbear from applying any statutory or regulatory provision that is not necessary to keep telecommunications rates and terms reasonable or to protect consumers. A state may not apply a statutory or regulatory provision that the FCC decides to forbear from applying. In addition, the FCC must review its telecommunications regulations every two years and change any that are no longer necessary. Further, the FCC is empowered under certain circumstances to preempt state regulatory authorities if a state is obstructing the Communications Acts basic purposes.
U.S. Cellular and its subsidiaries have been and intend to remain active participants in proceedings before the FCC and state regulatory authorities. Proceedings with respect to the foregoing policy issues before the FCC and state regulatory authorities could have a significant impact on the competitive market structure among wireless providers and the relationships between wireless providers and other carriers. U.S. Cellular is unable to predict the scope, pace or financial impact of policy changes which could be adopted in these proceedings.
Radio Frequency Emissions. The FCC has adopted rules specifying standards and the methods to be used in evaluating radio frequency emissions from radio equipment, including network equipment and wireless devices used in connection with commercial mobile radio service. These rules were upheld on appeal by the U.S. Court of Appeals for the Second Circuit in 2000. The U.S. Supreme Court declined to review the Second Circuits ruling. U.S. Cellulars network facilities and the wireless devices it sells to customers comply with these standards. In August 2012, the Government Accountability Office issued a report which recommended that the FCC reassess its current radio frequency emission limits. In October 2012, in guidance released by the FCC Office of Engineering and Technology, it was stated that that the FCC intends to initiate a rulemaking proceeding dealing, in part, with radio frequency emissions from mobile devices. The FCC could adopt amended radio frequency emission limits and/or testing procedures for mobile devices in such a rulemaking proceeding, following review of comments filed by affected parties and members of the public.
Employees
U.S. Cellular had approximately 8,100 full-time and part-time employees as of December 31, 2012. None of U.S. Cellulars employees are represented by labor organizations. U.S. Cellular considers its relationship with its employees to be good.
Item 1A. Risk Factors
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Annual Report on Form 10-K, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that U.S. Cellular intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words believes, anticipates, estimates, expects, plans, intends, projects and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include those set forth below under Risk Factors in this Form 10-K. Each of the following risks could have a material adverse effect on U.S. Cellular; however, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. You should carefully consider the following risk factors and other information contained in, or incorporated by reference into, this Form 10-K to understand the material risks relating to U.S. Cellulars business.
RISK FACTORS
1) Intense competition in the markets in which U.S. Cellular operates could adversely affect U.S. Cellulars revenues or increase its costs to compete.
Competition in the telecommunications industry is currently intense and could intensify further in the future due to the general effects of the economy, as well as due to multiple wireless industry factors such as increasing market penetration, decreasing customer churn rates, introduction of new products, new competitors and changing prices. There is competition in devices and handsets; network quality, coverage, speed and technologies; distribution; pricing; and other categories. U.S. Cellulars ability to compete effectively will depend, in part, on its ability to anticipate and respond to various competitive factors affecting the telecommunications industry. U.S. Cellular anticipates that, in the future, competition may cause the prices for products and services to continue to decline and the costs to compete to increase. Most of U.S. Cellulars competitors are national or global telecommunications companies that are larger than U.S. Cellular, possess greater resources, possess more extensive coverage areas and more spectrum within their coverage areas, and market other services with their communications services that U.S. Cellular does not offer. In addition, U.S. Cellular may face competition from technologies that may be introduced in the future or from new entrants into the industry. New technologies, services and products that are more commercially effective than the technologies, services and products offered by U.S. Cellular may be developed. Further, new technologies may be proprietary such that U.S. Cellular is not able to adopt such technologies. There can be no assurance that U.S. Cellular will be able to compete successfully in this environment.
Sources of competition to U.S. Cellulars business typically include three to five competing wireless telecommunications service providers in each market, wireline telecommunications service providers, cable companies, resellers (including mobile virtual network operators), and providers of other alternate telecommunications services. Many of U.S. Cellulars wireless competitors and other competitors have substantially greater financial, technical, marketing, sales, purchasing and distribution resources than U.S. Cellular.
U.S. Cellulars competitors offer a wide array of wireless service offerings and wireless devices. There is increasing complexity associated with these wireless product and service offerings and the related pricing. Further, new wireless services and products and pricing structures are frequently introduced. Multiple events related to new service offerings, products and pricing offered by U.S. Cellulars competitors occurring simultaneously or in close proximity, may impact U.S. Cellulars ability to respond to such events and compete effectively.
If U.S. Cellular does not adapt to effectively compete in such a highly competitive environment, such competitive factors could result in product, service, pricing or cost disadvantages and could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
2) A failure by U.S. Cellular to successfully execute its business strategy (including planned acquisitions, divestitures and exchanges) or allocate resources or capital could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
U.S. Cellular is a regional wireless carrier that operates on a customer satisfaction strategy, seeking to meet customer needs by providing a comprehensive range of wireless products and services, excellent customer support, and a high-quality network. U.S. Cellular seeks to operate controlling interests in wireless licenses in areas adjacent to or in proximity to its other wireless licenses, thereby building contiguous operating market areas. U.S. Cellular relies on roaming agreements with other carriers to provide roaming capability to its customers in areas of the U.S. outside its service areas and to improve coverage within selected areas of U.S. Cellulars network footprint. U.S. Cellular pursues a product and technology strategy which requires it to recognize product and technology advances and quickly adopt and execute rollouts of such advances. This strategy requires U.S. Cellular to make timely and effective strategic decisions related to technological advances and related products and services, and which of these technological advances to adopt and roll out to its customers.
In addition, in pursuit of its business strategy U.S. Cellular is engaged in a number of multi-year initiatives including the development of a new billing and operational support system (B/OSS) which will include a new point-of-sale system and consolidate billing on one platform. These multi-year initiatives involve a substantial financial commitment.
Further, U.S. Cellulars strategic decisions related to the adoption of new technologies are ultimately impacted by such factors as consumer preferences for technologies and the related services and products, and original equipment manufacturer (OEM) and standard bodies support of such technologies, including Long-Term Evolution (LTE), among other factors. If U.S. Cellulars competitors adopt new technologies faster than U.S. Cellular, then consumers who are eager to adopt new technologies more quickly may select U.S. Cellulars competitors rather than U.S. Cellular as their service provider. These customers who are early adopters of new technologies are often customers who generate higher average revenue per unit (ARPU), and to the extent that U.S. Cellular does not attract these types of customers, U.S. Cellular could be at a competitive disadvantage and have a customer base that generates lower overall ARPU relative to its competition.
As more fully described in the Divestiture Transaction section of Managements Discussion and Analysis of Financial Condition and Results of Operations, on November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of Sprint Nextel Corporation. The Purchase and Sale Agreement provides that U.S. Cellular will transfer to Sprint certain rights and assets, and Sprint will assume certain liabilities, related to U.S. Cellulars Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets, in consideration for $480 million in cash at closing, subject to pro-rations of certain assets and liabilities. U.S. Cellular will retain all other assets and liabilities related to the subject markets. The transaction is subject to FCC approval, compliance with the Hart-Scott-Rodino Act and other conditions. Subject to the satisfaction or (if permitted) waiver of all conditions, the transaction is expected to close in mid-2013. The anticipated impacts of the Purchase and Sale Agreement with Sprint and related transactions are subject to risks and uncertainties, including, but not limited to, the ability to obtain regulatory approval, successfully complete the transaction and the actual financial impacts of such transactions.
The successful execution of strategy and optimal capital allocation decisions depend on various internal and external factors, many of which are not in U.S. Cellulars control. U.S. Cellulars ability to implement and execute its business strategy and optimally allocate its assets and capital and, as a result, achieve desired financial results, could be affected by such factors. Such factors include pricing practices by competitors, relative scale, purchasing power, roaming and other strategic agreements, wireless device availability, timing of introduction of wireless devices and other factors. In addition, there is no assurance that U.S. Cellulars multi-year initiatives will be successful. Even if U.S. Cellular executes its business strategy as intended, such strategy may not be successful in the long term to profitably sustain growth in revenue or otherwise.
A failure by U.S. Cellular to execute its business strategy successfully or to allocate resources or capital optimally could have an adverse effect on U.S. Cellulars wireless business, financial condition or results of operations.
3) A failure by U.S. Cellulars service offerings to meet customer expectations could limit U.S. Cellulars ability to attract and retain customers and could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
Customer acceptance of the services that U.S. Cellular offers is and will continue to be affected by technology and the range of wireless device and service-based differences from competition and by the operational performance, quality, reliability, and coverage of U.S. Cellulars networks. U.S. Cellular may have difficulty attracting and retaining customers if it is unable to meet customer expectations for a range of services, such as wireless device selection and easy access to a broad variety of applications, or if it is otherwise unable to resolve quality issues relating to its networks, billing systems or customer care. Any of these issues may limit U.S. Cellulars ability to expand its network capacity or customer base or otherwise place U.S. Cellular at a competitive disadvantage to other service providers in its markets. The levels of customer demand for any U.S. Cellular next-generation services and products are uncertain. Customer demand could be impacted by differences in the types of services offered, service content, technology, footprint and service areas, network quality, customer perceptions, customer care levels and rate plans.
4) U.S. Cellulars system infrastructure may not be capable of supporting changes in technologies and services expected by customers, which could result in lost customers and revenues.
The wireless telecommunications industry is experiencing significant changes in technologies and services expected by customers. Future technological changes or advancements may enable other wireless technologies to equal or exceed U.S. Cellulars current levels of service and render its system infrastructure obsolete. New technologies or services often render existing technology products, services or infrastructure obsolete, too costly or otherwise unmarketable. U.S. Cellulars system infrastructure may not be able to accommodate new product features and functionality, new reporting requirements, new capacity requirements or deployment of complex next generation services. If U.S. Cellular is unable to meet future advances in or changes in competing technologies on a timely basis, or at an acceptable cost, it may not be able to compete effectively with other carriers, which could result in lost customers and revenues. This could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
5) An inability to obtain or maintain roaming arrangements with other carriers on terms that are acceptable to U.S. Cellular could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
U.S. Cellulars customers can access another carriers digital system automatically only if the other carrier allows U.S. Cellulars customers to roam on its network. U.S. Cellular relies on roaming agreements with other carriers to provide roaming capability to its customers in areas of the U.S., Mexico and Canada outside of its service areas and to improve coverage within selected areas of U.S. Cellulars network footprint. Such agreements cover traditional voice services as well as data services, which are an area of strong growth for U.S. Cellular and other carriers. Although U.S. Cellular currently has long-term roaming agreements with certain other carriers, these agreements generally are subject to renewal and termination if certain events occur. FCC rules require wireless carriers to offer some roaming arrangements to other carriers on reasonable terms and conditions. However, carriers frequently disagree on what constitutes reasonable terms and conditions. Pursuant to FCC orders issued in 2007 and 2011, commercial mobile service providers are required to provide automatic roaming voice and data services to other providers on just, reasonable and non-discriminatory terms. In December 2012, the data roaming requirement was upheld by the United States Court of Appeals for the District of Columbia Grant against an appeal filed by Verizon Wireless. The FCC will, however, determine what is just and reasonable on a case by case basis, taking into account the totality of circumstances. As yet, the FCC has not issued any rulings concerning these requirements. At this time, there is no assurance that U.S. Cellular will be able to enter into agreements to provide roaming services using 4G LTE or other technologies or that it will be able to do so on reasonable or cost-effective terms.
Some competitors may be able to obtain lower roaming rates than U.S. Cellular is able to obtain because they have larger call volumes or may be able to reduce roaming charges by providing service principally over their own networks. In addition, the quality of service that a wireless carrier delivers during a roaming call may be inferior to the quality of service U.S. Cellular provides, the price of a roaming call may not be competitive with prices of other wireless carriers for such call, and U.S. Cellulars customers may not be able to use some of the advanced features, such as voicemail notification or data applications, that U.S. Cellulars customers enjoy when making calls on U.S. Cellulars network. U.S. Cellulars rate of adoption of new technologies, such as those enabling high-speed data services, could affect its ability to enter into or maintain roaming agreements with other carriers. In addition, U.S. Cellulars wireless technology may not be compatible with technologies used by other carriers, which may limit the ability of U.S. Cellular to enter into voice or data roaming agreements with such other carriers. U.S. Cellulars roaming partners could switch their business to new operators or, over time, to their own networks. Changes in roaming usage patterns, rates for roaming minutes or data usage or relationships with carriers whose customers generate roaming minutes or data use on U.S. Cellulars network could have an adverse effect on U.S. Cellulars revenues and revenue growth.
To the extent that U.S. Cellulars key roaming partners expand their networks in U.S. Cellulars service areas, the roaming arrangements between U.S. Cellular and these key roaming partners could become less strategic to such key roaming partners. That is, these key roaming partners will have fewer or less extensive geographic areas where roaming services are required by their customers and, as a result, the roaming arrangements could become less critical to serving their customer base. This presents a risk to U.S. Cellular in that, to the extent U.S. Cellular is not able to enter into economically viable roaming arrangements with key roaming partners, this could impact U.S. Cellulars ability to service its customers in geographic areas where U.S. Cellular does not have its own network.
If U.S. Cellular is unable to obtain or maintain roaming agreements with other wireless carriers that contain pricing and other terms that are competitive and acceptable to U.S. Cellular, and that satisfy U.S. Cellulars quality and interoperability requirements, its business, financial condition or results of operations could be adversely affected.
6) U.S. Cellular currently receives a significant amount of roaming revenues. Further consolidation within the wireless industry, continued network build-outs by other wireless carriers and/or the inability to negotiate 4G LTE roaming agreements with other operators could cause roaming revenues to decline from current levels, which would have an adverse effect on U.S. Cellulars business, financial condition and results of operations.
U.S. Cellulars service revenues include roaming revenues related to the use of U.S. Cellulars network by other carriers customers who travel within U.S. Cellulars coverage areas. Changes in the network footprints of carriers due to mergers, acquisitions or network expansions could have an adverse effect on U.S. Cellulars roaming revenues. For example, consolidation among other carriers which have network footprints that currently overlap U.S. Cellulars network could decrease the amount of roaming revenues for U.S. Cellular. In 2012 U.S. Cellular launched services based on 4G LTE technology in conjunction with King Street Wireless L.P. As of December 31, 2012, U.S. Cellular deployed 4G LTE technology that covered approximately 61% of its postpaid customers and anticipates further expansion in 2013. Further industry consolidation, network expansions by other wireless carriers or the inability to negotiate 4G roaming agreements with other operators could cause U.S. Cellulars current roaming revenues to decline, which would have an adverse effect on U.S. Cellulars business, financial condition and results of operations.
7) A failure by U.S. Cellular to obtain access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
U.S. Cellulars business depends on the ability to use portions of the radio spectrum licensed by the FCC. U.S. Cellular could fail to obtain access to sufficient spectrum capacity in new or existing critical markets, whether through FCC auctions or other transactions, in order to meet the anticipated spectrum requirements associated with increased demand for existing services, especially increases in customer demand for data services, and to enable deployment of next-generation services. U.S. Cellular believes that this increased demand for data services reflects a trend that will continue for the foreseeable future; as such, U.S. Cellular could fail to accurately forecast its future spectrum requirements considering changes in customer usage patterns, technology requirements and the expanded demands of new services. Such a failure could have an adverse impact on the quality of U.S. Cellulars services or U.S. Cellulars ability to roll out such future services in some markets, or could require that U.S. Cellular curtail existing services in order to make spectrum available for next-generation services. Spectrum constrained providers could be effectively capped in increasing market share. As spectrum constrained providers gain customers, they use up their network capacity. Since they lack spectrum, they can respond to demand only by adding cell sites, which is capital intensive, limited by zoning considerations, and ultimately may not be cost effective. U.S. Cellular may acquire access to spectrum through a number of alternatives, including participation in spectrum auctions, partnering on a non-controlling basis with other auction applicants (Other Applicants) and other acquisitions and exchanges. As required by law, the FCC has conducted auctions for licenses to use some parts of the radio spectrum. The decision to conduct auctions, and the determination of what spectrum frequencies will be made available for auction, are made by the FCC pursuant to laws that they administer. The FCC may not be able to allocate spectrum sufficient to meet the demands of all those wishing to obtain licenses for new market entry or to expand their spectrum holdings to meet the expanding demand for data services or to address other spectrum constraints. U.S. Cellular or Other Applicants may not be successful in FCC auctions in obtaining the spectrum that either believes is necessary to implement its business and technology strategies. In addition, newly auctioned spectrum may not be compatible with existing spectrum, and vendors may not create suitable products to use such spectrum. Further, access to use spectrum won in FCC auctions may not be available on a timely basis. Such access is dependent upon the FCC actually granting licenses won in the various auctions, which can be delayed for various reasons, including the possible need for the FCC to transition current users of spectrum to other portions of the radio spectrum. U.S. Cellular also may seek to acquire radio spectrum through purchases and exchanges with other spectrum licensees. However, U.S. Cellular may not be able to acquire sufficient spectrum through these types of transactions, and U.S. Cellular may not be able to complete any of these transactions on favorable terms.
8) To the extent conducted by the Federal Communications Commission (FCC), U.S. Cellular is likely to participate in FCC auctions of additional spectrum in the future as an applicant or as a noncontrolling partner in another auction applicant and, during certain periods, will be subject to the FCCs anti-collusion rules, which could have an adverse effect on U.S. Cellular.
From time to time, the FCC conducts auctions through which additional spectrum is made available for the provision of wireless services. U.S. Cellular has participated in such auctions in the past and is likely to participate in other auctions conducted by the FCC in the future as an applicant or as a non-controlling partner in another auction applicant. FCC anti-collusion rules place certain restrictions on business communications and disclosures by participants in an FCC auction. These anti-collusion rules may restrict the normal conduct of U.S. Cellulars business and/or disclosures by U.S. Cellular relating to an FCC auction, which could last three to six months or more. The restrictions could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
9) Changes in the regulatory environment or a failure by U.S. Cellular to timely or fully comply with any applicable regulatory requirements could adversely affect U.S. Cellulars business, financial condition or results of operations.
U.S. Cellulars operations are subject to varying degrees of regulation by the FCC, state public utility commissions and other federal, state and local regulatory agencies and legislative bodies. Adverse decisions or increased regulation by these regulatory bodies could negatively impact U.S. Cellulars operations by, among other things, increasing U.S. Cellulars costs of doing business, permitting greater competition or limiting U.S. Cellulars ability to engage in certain sales or marketing activities. New regulatory mandates or enforcement may require unexpected or changed capital investment, lost revenues, changes in operations or other changes.
U.S. Cellulars business requires licenses granted by the FCC to provide wireless telecommunications services. Typically, such licenses are issued for an initial ten-year term and may be renewed for additional ten-year terms, subject to FCC approval of the renewal applications. Failure to comply with FCC requirements in a given service area could result in the revocation of U.S. Cellulars license for that area or in the imposition of fines. Court decisions and rulemakings could have a substantial impact on U.S. Cellulars operations, including rulemakings on intercarrier access compensation and universal service. Litigation and different objectives among federal and state regulators could create uncertainty and delay U.S. Cellulars ability to respond to new regulations. U.S. Cellular is unable to predict the future actions of the various regulatory bodies that govern U.S. Cellular, but such actions could have adverse effects on U.S. Cellulars business.
In March 2010, the FCC released its National Broadband Plan (the Plan) which describes the FCCs goals for enhancing broadband availability and the methods for achieving those goals over the next decade. The FCC notes that about one-half of the Plan will be addressed by the FCC, while the remainder would be addressed by Congress, the Executive Branch and state and local governments working closely with private and non-profit sectors. U.S. Cellular cannot predict the outcome of these deliberations or what effects any final rules, regulations or laws may have on its ability to compete in the provision of wireless broadband services to its customer base. Changes in regulation or the amount or distribution of USF funds to U.S. Cellular and other telecommunications service providers could impact competition in certain of U.S. Cellulars service areas, and could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
In 2009, the FCC initiated a rulemaking proceeding designed to codify its existing Net Neutrality principles and impose new requirements that could have the effect of restricting the ability of wireless internet service providers to manage applications and content that traverse their networks. In December 2010, after a lengthy proceeding, which considered different approaches, including the reclassification of internet access as common carrier service under Title II of the Communications Act, the FCC adopted a net neutrality rule based on its Title I ancillary authority to enforce different parts of the Communications Act, which rule is now in effect. The rule requires all providers of broadband internet access, including both fixed (that is, telephone and cable) and wireless providers, to publicly disclose accurate information regarding their network management practices, performance and commercial terms sufficient for consumers to make informed choices regarding the use of such services. The rule also prohibits all internet providers from blocking consumers access to lawful websites, subject to reasonable network management, and from blocking applications that compete with the providers voice or video telephony services, also subject to reasonable network management. The rule subjects the providers of fixed but not wireless broadband internet access to a prohibition on unreasonable discrimination in transmitting internet traffic over their networks, also subject to reasonable network management. The exemption of wireless providers from this part of the rule reflects a recognition of the capacity constraints and other special conditions under which mobile broadband service is offered and the competitive nature of evolving wireless networks. Thus, the FCC at this time considered it appropriate to take only the measured steps with respect to mobile broadband service reflected in the rule. The order is controversial and has been challenged in the courts. U.S. Cellular cannot predict the outcome of such cases.
In 2010, Congress enacted the Twenty-First Century Communications and Video Accessibility Act (CVAA), to ensure that people with disabilities have access to advanced communications services (ACS). The CVAA is currently the subject of two FCC rulemakings. The first deals with access to ACS generally and specifically with access to mobile browsers by persons who are blind or who have visual impairments. The second deals with the closed captioning obligations of wireless manufacturers and wireless providers. There are also recordkeeping and reporting requirements, which come into effect in March and April of 2013, respectively. As of October 1, 2013, a mobile phone manufacturer that includes a browser in its device or a mobile phone provider such as U.S. Cellular that sells a mobile phone which includes such a browser must ensure that the browser functions are accessible to and usable by individuals who are blind or who have a visual impairment, unless doing so is not achievable. As of January 1, 2014, wireless carriers will be required to deliver all programming received from a video programming owner or other origination source containing closed captioning with the original closed captioning data intact, unless such programming is recaptioned or the captions are reformatted by the programming distributor. U.S. Cellular is working with its trade association, with standards setting organizations and with its vendors to comply with these requirements. However, its ability to comply is uncertain, and a failure to comply would have an adverse effect on its business owing to possible FCC forfeitures.
U.S. Cellulars operations are subject to various federal, state and local environmental and health and safety laws and regulations, including those relating to the generation, storage, handling and disposal of hazardous substances and wastes. U.S. Cellulars operations involve the use of materials such as petroleum fuel for emergency generators, as well as batteries, cleaning solutions and other materials. Unexpected events, equipment malfunctions and human error, among other factors, can lead to violations of environmental laws, regulations or permits. To the extent any hazardous substances or any other substance or material must be cleaned up or removed from U.S. Cellular property or property leased by U.S. Cellular, it may be responsible under applicable laws, regulations or leases for the removal or cleanup of such substances or materials, the cost of which could be substantial.
Fluctuations in the price of power can increase the cost of energy used by U.S. Cellulars businesses. Federal legislative proposals have been considered that would, if adopted, implement various forms of regulation or taxation to reduce or mitigate greenhouse gas emissions. Some states have also considered or adopted laws intended to limit fuel consumption and/or encourage the use of renewable energy for the same purpose. Regulation of greenhouse gas emissions could increase the costs of electricity or petroleum, and these cost increases could consequently increase U.S. Cellulars costs for electricity or emergency generator fuels. U.S. Cellular could be directly subject to taxes, fees or costs, or could indirectly be required to reimburse electricity providers for such costs as a result of such regulation. The impacts of climate change could increase costs of operation due to, for example, higher maintenance and repair costs due to extreme weather events or an increase in energy use in order to maintain the temperature of equipment used in U.S. Cellulars operations.
Regulations regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries may require U.S. Cellular to take various actions. Depending on the nature and extent of actions required to be taken by U.S. Cellular, these regulations may have an adverse effect U.S. Cellulars business, financial condition or results of operations.
In addition, new or amended regulatory requirements could increase U.S. Cellulars costs and divert resources from other initiatives.
U.S. Cellular attempts to timely and fully comply with all regulatory requirements. However, in certain circumstances, U.S. Cellular may not be able to timely or fully comply with all regulatory requirements due to various factors, including changes to regulatory requirements, limitations in or availability of technology, insufficient time provided for compliance, problems encountered in attempting to comply or other factors. Any failure by U.S. Cellular to timely or fully comply with any regulatory requirements could adversely affect U.S. Cellulars financial condition, results of operations or ability to do business.
10) Changes in Universal Service Fund (USF) funding and/or intercarrier compensation could have an adverse impact on U.S. Cellulars business, financial condition or results of operations.
USF and ICC Reform Order . On November 18, 2011, pursuant to the Plan and subsequent notices of proposed rulemaking, the FCC released a Report and Order and Further Notice of Proposed Rulemaking (Reform Order) adopting reforms of its universal service and intercarrier compensation mechanisms, and proposing further rules to advance reform. The Reform Order substantially revises the current USF high cost program and intercarrier compensation regime. The current USF program, which supports voice services, is to be phased out over time and replaced with the Connect America Fund (CAF), a new Mobility Fund, and a Remote Area Fund, which will collectively support broadband-capable networks. Mobile wireless carriers such as U.S. Cellular are eligible to receive funds in both the CAF and the Mobility Fund, although some areas that U.S. Cellular currently serves may be declared ineligible for support if they are already served, or are subject to certain rights of first refusal by incumbent carriers.
The FCC has determined that both wireline and wireless facilities should be supported, with one wireline carrier and one mobile carrier receiving support in each area. The Mobility Fund will be implemented in two phases. The Phase I Mobility Fund is providing one-time funding through a reverse auction to fill in coverage in dead zones that currently lack 3G wireless service. In Phase I, $300 million has been allocated throughout the country and an additional $50 million has been set aside for tribal lands. The Phase II Mobility Fund will have a budget of up to $500 million per year (up to $100 million of which is reserved for tribal lands), with the method of disbursement to be determined in a Further Notice of Proposed Rulemaking (FNPRM). Phase II funding will be provided to areas that lack 4G wireless service. The CAF will support service to homes, businesses, and anchor institutions, using any technology that can meet the technical requirements.
The terms and rules for participating in the CAF for wireless ETCs have not been developed yet by the FCC. It is uncertain whether U.S. Cellular will obtain support through any of these replacement mechanisms to the current USF funding regime. If U.S. Cellular is successful in obtaining support, it will be required to meet certain regulatory conditions to obtain and retain the right to receive support including, for example, allowing other carriers to collocate on U.S. Cellulars towers, allowing voice and data roaming on U.S. Cellulars network, and submitting various reports and certifications to retain eligibility each year. It is possible that additional regulatory requirements will be imposed pursuant to the FCCs Reform Order.
On September 27, 2012, the FCC conducted a single round, sealed bid, reverse auction to award up to $300 million in one-time Mobility Fund Phase I support to successful bidders that commit to provide 3G, or better, wireless service in areas designated as unserved by the FCC. This auction was designated by the FCC as Auction 901. As announced on October 3, 2012, U.S. Cellular and several of its wholly-owned subsidiaries participated in Auction 901. U.S. Cellular and its subsidiaries were winning bidders in eligible areas within 10 states and will receive up to $40.1 million in support from the Mobility Fund. As part of the auction rules, winning bidders must complete network build out projects to provide 3G or 4G service to these areas within two or three years, respectively, and must also make their networks available to other providers for roaming. Winning bidders will receive support funding primarily upon achievement of coverage milestones defined in the auction rules.
U.S. Cellulars current USF support is scheduled to be phased down. Support for 2012 (excluding certain adjustments) was frozen on January 1, 2012 using support for 2011 as a baseline and was reduced by 20% starting in July 2012. The reduction in USF support that U.S. Cellular otherwise would have received in 2012 was approximately $16 million. Support will be further reduced by 20% in July of each subsequent year; however, if the Phase II Mobility Fund is not operational by July 2014, the phase down will halt at that time and U.S. Cellular will receive 60% of its baseline support until the Phase II Mobility Fund is operational.
With respect to intercarrier compensation, the Reform Order provides for a reduction in the charges that U.S. Cellular pays to wireline phone companies to transport and terminate calls that originate on U.S. Cellulars network, which will reduce U.S. Cellulars operating expenses. The reductions in intercarrier charges are to increase over the next five to ten years, further reducing U.S. Cellulars operating expenses.
The FCCs Reform Order, and any subsequent orders it adopts to reform universal service and intercarrier compensation, are subject to judicial review. A number of parties have asked the FCC to reconsider certain aspects of its Reform Order and a number of other parties have sought judicial review. U.S. Cellular cannot predict the timing or outcome of any such requests for reconsiderations or appeals or whether such actions will result in an adverse effect on U.S. Cellulars business, financial condition or results of operations.
At this time, U.S. Cellular cannot predict the net effect of the FCCs changes to the USF high cost support program in the Reform Order or whether reductions in support will be offset with additional support from the CAF or the Mobility Fund. Accordingly, U.S. Cellular cannot predict whether such changes will have a material adverse effect on U.S. Cellulars business, financial condition or results of operations.
11) An inability to attract and/or retain highly competent management, technical, sales and other personnel could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
U.S. Cellulars business is highly technical and competition for skilled talent in the wireless industry is aggressive. Due to competition for qualified management, technical, sales and other personnel and U.S. Cellulars relative size in comparison to much larger competitors, there can be no assurance that U.S. Cellular will be able to continue to attract and/or retain qualified personnel necessary for the development of its business. The loss of the services of existing key personnel as well as the failure to recruit additional qualified personnel in a timely manner could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
12) U.S. Cellulars assets are concentrated in the U.S. wireless telecommunications industry. As a result, its results of operations may fluctuate based on factors related primarily to conditions in this industry.
U.S. Cellulars assets are concentrated in the U.S. wireless telecommunications industry and the United States. The U.S. wireless telecommunications industry is facing significant change and an uncertain operating environment. U.S. Cellular has not diversified its revenue streams beyond wireless telecommunications. U.S. Cellulars focus on the U.S. wireless telecommunications industry, together with its positioning relative to larger competitors with greater resources within the industry, may represent increased risk for investors due to the lack of diversification. This could have an adverse effect on U.S. Cellulars ability to profitably sustain long-term revenue growth and could have an adverse effect on its business, financial condition or results of operations.
13) U.S. Cellulars lower scale relative to larger competitors could adversely affect its business, financial condition or results of operations.
There has been a trend in the telecommunications and related industries in recent years towards consolidation of service providers through acquisitions, reorganizations and joint ventures. U.S. Cellular expects this trend towards consolidation to continue, leading to larger competitors over time. U.S. Cellular has lower scale efficiencies compared to larger competitors. U.S. Cellular may be unable to compete successfully with larger companies that have substantially greater financial, technical, marketing, sales, purchasing and distribution resources or that offer more services than U.S. Cellular, which could adversely affect U.S. Cellulars revenues and costs of doing business. Specifically, U.S. Cellulars smaller scale relative to most of its competitors could have the following impacts:
· Increased operating costs due to lack of leverage with vendors.
· Limited opportunities for strategic partnerships as potential partners are focused on wireless carriers with greater scale.
· Limited access to content.
· Limited access to wireless devices.
· Limited ability to influence industry standards.
· Reduced ability to invest in research and development of new products and services.
· Vendors may deem U.S. Cellular non-strategic and not develop or sell products and services to U.S. Cellular, particularly where technical requirements differ from those of larger companies.
· Limited access to intellectual property.
· Other limited opportunities such as for software development, third party distribution, and amortization of fixed costs.
U.S. Cellulars business increasingly depends on access to content for data, music or video services and its access to new wireless devices and other devices being developed by vendors. U.S. Cellulars ability to obtain such access depends in part on other parties. If U.S. Cellular is unable to obtain timely access to content for data, music or video services or timely access to new wireless devices being developed by vendors, its business, financial condition or results of operations could be adversely affected.
As a result of the foregoing, U.S. Cellulars lower scale relative to larger competitors could adversely affect U.S. Cellulars business, financial condition or results of operations.
14) Changes in various business factors could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
Changes in any of several factors could have an adverse effect on U.S. Cellulars business, financial condition or results of operations. These factors include, but are not limited to:
· Demand for or usage of services, particularly data services;
· Customer preferences, including type of wireless devices;
· Customer perceptions of network quality and performance;
· The pricing of services;
· The overall size and growth rate of U.S. Cellulars customer base;
· Average revenue per customer;
· Penetration rates;
· Churn rates;
· Selling expenses;
· Net customer acquisition and retention costs;
· Customers ability to pay for wireless service and the potential impact on bad debts expense;
· Roaming agreements and rates;
· Third-party vendor support;
· The mix of products and services offered by U.S. Cellular and purchased by customers; and
· The costs of providing products and services.
15) Advances or changes in technology could render certain technologies used by U.S. Cellular obsolete, could put U.S. Cellular at a competitive disadvantage, could reduce U.S. Cellulars revenues or could increase its costs of doing business.
The telecommunications industry is experiencing significant technological change, as evidenced by evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new services, and products, and enhancements and changes in end-user requirements and preferences. Widespread deployment of technologies such as Wi-Fi, which does not rely on exclusively-licensed spectrum, Voice over Internet Protocol (VoIP), advances in High Speed Packet Access (HSPA), and the deployment of fourth-generation technologies (4G) such as LTE or Worldwide Interoperability for Microwave Access (WiMAX), could cause the technology used on U.S. Cellulars wireless networks to become less competitive or obsolete. In addition, wider deployment and use of VoIP could cause a decrease in demand for U.S. Cellulars wireless services. Non-traditional competitors may try to dis-intermediate the wireless carrier and render it less valuable or obsolete. U.S. Cellular may not be able to respond to such changes and implement new technology on a timely or cost-effective basis, which could reduce its revenues or increase its costs of doing business. If U.S. Cellular cannot keep pace with these technological changes or other changes in the telecommunications industry over time, its financial condition, results of operations or ability to do business could be adversely affected.
16) Complexities associated with deploying new technologies present substantial risk.
Complexities associated with deploying new technologies present substantial risk to U.S. Cellulars businesses.
U.S. Cellular has selected 4G LTE technology as its approach to address demand for services enabled by fourth generation wireless technology. The deployment of 4G LTE technology is impacted by a number of technical challenges.
Manufacturers of wireless devices (Original Equipment Manufacturers or OEMs) must design and manufacture equipment that operates on the frequency bands available to U.S. Cellular. This may involve software and hardware support for such bands in wireless device chipsets as well as band-specific designs for components such as filters. OEMs, chipset manufacturers, and component manufacturers will likely prioritize the support of frequency bands that are specified by the largest wireless carriers. Given U.S. Cellulars smaller scale relative to its competitors, certain bands of spectrum licensed to U.S. Cellular in certain cases represent a lower priority for chipset and wireless device manufacturers. As a result, the timing and the availability of wireless devices to support U.S. Cellulars continued 4G LTE roll out could be negatively impacted. In addition, due to U.S. Cellulars relatively smaller scale, the cost of such equipment could be higher for U.S. Cellular than for U.S. Cellulars competitors.
Additionally, the efficiency of LTE networks and the peak speeds they can provide are optimized when the technology is deployed in larger channel bandwidths that, in early releases of LTE, require larger amounts of contiguous spectrum. To the extent that U.S. Cellulars competitors have access to larger contiguous spectrum positions, they may be able to offer faster speeds or provision their networks more efficiently. In order for U.S. Cellular to realize the same LTE data transfer speeds as competitors, it is important that both network infrastructure and device manufacturers support non-contiguous spectrum aggregation features for U.S. Cellular.
Lack of wireless devices available to U.S. Cellular to support its continued 4G LTE roll out, comparatively smaller spectrum positions for initial 4G LTE deployments, or carrier aggregation standards that result in U.S. Cellular delivering slower 4G LTE data transfer speeds relative to its competitors, could have an adverse impact on U.S. Cellulars business, financial condition and results of operations.
In addition, in March of 2012, the FCC adopted a NPRM with respect to promoting LTE device interoperability in 700 MHz commercial spectrum. This NPRM is intended to evaluate whether possible interference concerns to Lower 700 MHz B and C Block licensees can be resolved either by agreement on the part of these licensees to be interoperable with the Lower 700 MHz A Block licensees, or by a regulatory mandate for such interoperability. In the event the FCC finds that these interference concerns are minimal or can be reasonably mitigated, then the FCC, along with the industry, could adopt policies to ensure device interoperability which will enhance the access of U.S. Cellular to an expanded array of advanced 4G LTE devices designed to operate on 700 MHz commercial spectrum.
17) U.S. Cellular is subject to numerous surcharges and fees from federal, state and local governments, and the applicability and the amount of these fees are subject to great uncertainty.
Telecommunications providers pay a variety of surcharges and fees on their gross revenues from interstate and intrastate services, including USF fees and common carrier regulatory fees. The division of services between interstate services and intrastate services, including the divisions associated with the federal USF fees, is a matter of interpretation and may in the future be contested by the FCC or state authorities. The FCC also may change in the future the basis on which federal USF fees are charged. The Federal government and many states also apply transaction-based taxes to sales of U.S. Cellular products and services and to purchases of telecommunications services from various carriers. In addition, state regulators and local governments have imposed and may continue to impose various surcharges, taxes and fees on U.S. Cellular services. The applicability of these surcharges and fees to its services is uncertain in many cases and jurisdictions may contest whether U.S. Cellular has assessed and remitted those monies correctly. Periodically, state and federal regulators may increase or change the surcharges and fees U.S. Cellular currently pays. In some instances U.S. Cellular passes through these charges to its customers. However, Congress, the FCC, state regulatory agencies or state legislatures may limit the ability to pass through transaction-based tax liabilities, regulatory surcharges and regulatory fees imposed on U.S. Cellular to customers. U.S. Cellular may or may not be able to recover some or all of those taxes from its customers and the amount of taxes may deter demand for its services or increase its cost to provide service which could have an adverse effect on its business, financial condition or operating results.
18) Changes in U.S. Cellulars enterprise value, changes in the market supply or demand for wireless licenses, adverse developments in the business or the industry in which U.S. Cellular is involved and/or other factors could require U.S. Cellular to recognize impairments in the carrying value of its license costs, goodwill and/or physical assets.
A large portion of U.S. Cellulars assets consists of indefinite-lived intangible assets in the form of licenses and goodwill. U.S. Cellular also has substantial investments in long-lived assets such as property, plant and equipment. U.S. Cellular reviews its licenses, goodwill and other long-lived assets for impairment annually or whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. An impairment loss may need to be recognized to the extent the carrying value of the assets exceeds the fair value of such assets. The amount of any such impairment loss could be significant and could have an adverse effect on U.S. Cellulars reported financial results for the period in which the loss is recognized. The estimation of fair values requires assumptions by management about factors that are uncertain including future cash flows, the appropriate discount rate and other factors. Different assumptions for these factors could create materially different results.
19) Costs, integration problems or other factors associated with acquisitions/divestitures of properties or licenses and/or expansion of U.S. Cellulars business could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
As part of U.S. Cellulars operating strategy, U.S. Cellular from time to time may be engaged in negotiations relating to the acquisition, divestiture or exchange of companies, strategic properties or wireless spectrum. U.S. Cellular may change the markets in which it operates and the services that it provides through the acquisition of other telecommunications service providers and related service businesses, the acquisition of selected licenses or operating markets from such providers or through direct investment or divestiture of current operations. In general, U.S. Cellular may not disclose such transactions until a definitive agreement has been reached.
The acquisition of additional businesses will depend on U.S. Cellulars ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition and to finance any such acquisitions. U.S. Cellular also will be subject to competition for suitable acquisition candidates. Any acquisitions, if made, could divert the resources and management time of U.S. Cellular and would require integration with U.S. Cellulars existing business operations and services. As a result, there can be no assurance that any such acquisitions will occur or that any such acquisitions, if made, would be made in a timely manner or on terms favorable to U.S. Cellular or would be successfully integrated into U.S. Cellulars operations. These transactions commonly involve a number of risks, including:
· Ability to enter markets in which U.S. Cellular has limited or no direct prior experience and competitors have stronger positions;
· Ability to manage businesses that are engaged in activities other than traditional wireless service;
· Uncertain revenues and expenses, with the result that U.S. Cellular may not realize the growth in revenues, anticipated cost structure, profitability, or return on investment that it expects;
· Difficulty of integrating the technologies, services, products, operations and personnel of the acquired businesses;
· Diversion of managements attention;
· Disruption of ongoing business;
· Impact on U.S. Cellulars cash and available credit lines for use in financing future growth and working capital needs;
· Inability to retain key personnel;
· Inability to successfully incorporate acquired assets and rights into U.S. Cellulars service offerings;
· Inability to maintain uniform standards, controls, procedures and policies;
· Possible conditions to approval by the FCC, the Federal Trade Commission and/or the Department of Justice; and
· Impairment of relationships with employees, customers or vendors.
Failure to overcome these risks or any other problems encountered in these transactions could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
If U.S. Cellular expands into new telecommunications businesses or markets, it may incur significant expenditures, a substantial portion of which must be made before any revenues will be realized. Such expenditures may increase as a result of the accelerated pace of regulatory and technological changes. Such expenditures, together with the associated high initial costs of providing service in new markets, may result in reduced cash flow until an adequate revenue base is established. There can be no assurance that an adequate revenue base will be established in any new technology or market which U.S. Cellular pursues.
If U.S. Cellular expands into new telecommunications businesses or markets, it will incur certain additional risks in connection with such expansion, including increased legal and regulatory risks and possible adverse reaction by some of its current customers. Such telecommunications businesses and markets are highly competitive and, as a new entrant, U.S. Cellular may be disadvantaged. The success of U.S. Cellulars entry into new telecommunications businesses or markets will be dependent upon, among other things, U.S. Cellulars ability to select new equipment and software and to integrate the new equipment and software into its operations, to hire and train qualified personnel and to enhance its existing administrative, financial and information systems to accommodate the new businesses or markets. No assurance can be given that U.S. Cellular will be successful with respect to these efforts.
If U.S. Cellular is not successful with respect to its expansion or divestiture initiatives, its business, financial condition or results of operations could be adversely affected. In particular, the anticipated impacts of the Purchase and Sale Agreement with Sprint and related transactions are subject to risks and uncertainties, including, but not limited to, the ability to obtain regulatory approvals, successfully complete the transaction and the actual financial impacts of such transactions.
20) A significant portion of U.S. Cellulars revenues is derived from customers who buy services through independent agents who market U.S. Cellulars services on a commission basis. If U.S. Cellulars relationships with these agents are seriously harmed, its business, financial condition or results of operations could be adversely affected.
U.S. Cellular has relationships with agents to obtain customers. Agents are independent business people who obtain customers for U.S. Cellular on a commission basis. U.S. Cellulars agents are generally in the business of selling wireless devices, wireless service packages and other related products.
U.S. Cellulars business and growth depends, in part, on the maintenance of satisfactory relationships with its agents. If such relationships are seriously harmed or if such parties experience financial difficulties, including bankruptcy, U.S. Cellulars revenues and, as a result, its business, financial condition or results of operations, could be adversely affected.
21) U.S. Cellulars investments in technologies which are unproven may not produce the benefits that U.S. Cellular expects.
U.S. Cellular is making investments in various new technologies and service and product offerings. These investments include technologies for enhanced data services offerings. U.S. Cellular expects new services, products and solutions based on these new technologies to contribute to future growth in its revenues. However, the markets for some of these services, products and solutions are still emerging and the overall potential for these markets remains uncertain. If customer demand for these new services, products and solutions does not develop as expected, U.S. Cellulars business, financial condition or results of operations could be adversely affected.
22) A failure by U.S. Cellular to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse effect on its operations.
U.S. Cellulars business plan includes significant construction activities and enhancements to its network. As U.S. Cellular deploys, expands and enhances its network, it may need to acquire additional spectrum. Also, as U.S. Cellular continues to build out and enhance its network, U.S. Cellular must, among other things, continue to:
· Lease, acquire or otherwise obtain rights to cell and switch sites;
· Obtain zoning variances or other local governmental or third-party approvals or permits for network construction;
· Complete and update the radio frequency design, including cell site design, frequency planning and network optimization, for each of U.S. Cellulars markets; and
· Improve, expand and maintain customer care, network management, billing and other financial and management systems.
Any difficulties encountered in completing these activities, as well as problems in vendor equipment availability, technical resources, system performance or system adequacy, could delay expansion of operations and product capabilities in new or existing markets or result in increased costs in all markets. Failure to successfully build out and enhance U.S. Cellulars network and necessary support facilities and systems in a cost-effective manner, and in a manner that satisfies customer expectations for quality and coverage, could have an adverse effect on U.S. Cellulars business, business prospects, financial condition or results of operations.
23) Financial difficulties (including bankruptcy proceedings) or other operational difficulties of any of U.S. Cellulars key suppliers, termination or impairment of U.S. Cellulars relationships with such suppliers, or a failure by U.S. Cellular to manage its supply chain effectively could result in delays or termination of U.S. Cellulars receipt of required equipment or services, or could result in excess quantities of required equipment or services, any of which could adversely affect U.S. Cellulars business, financial condition or results of operations.
U.S. Cellular depends upon certain vendors to provide it with equipment, services or content to continue its network construction and upgrade and to operate its business. U.S. Cellular does not have operational or financial control over such key suppliers and has limited influence with respect to the manner in which these key suppliers conduct their businesses. If these key suppliers experience financial difficulties or file for bankruptcy or experience other operational difficulties, they may be unable to provide equipment, services or content to U.S. Cellular on a timely basis or cease to provide such equipment, services or content or otherwise fail to honor their obligations to U.S. Cellular.
Regulations regarding the use of conflict minerals mined from the Democratic Republic of Congo and adjoining countries may affect some of U.S. Cellulars suppliers. These regulations may limit the availability of conflict free minerals and, as a result, U.S. Cellular may not be able to obtain products in sufficient quantities or at competitive prices from its vendors who utilize such minerals in the manufacture of products.
In such cases, U.S. Cellular may be unable to maintain and upgrade its network or provide products and services to its customers in a competitive manner, or could suffer other disruptions to its business. In that event, U.S. Cellulars business, financial condition or results of operations could be adversely affected.
In addition, operation of U.S. Cellulars supply chain and management of its inventory require accurate forecasting of customer growth and demand, which has become increasingly challenging. If overall demand for wireless devices or the mix of demand for wireless devices is significantly different than U.S. Cellulars expectations, U.S. Cellular could face inadequate or excess supplies of particular models of wireless devices. This could result in lost sales opportunities or an excess supply of inventory. Either of these situations could adversely affect U.S. Cellulars revenues, costs of doing business, results of operations or financial condition.
24) U.S. Cellular has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on U.S. Cellulars financial condition or results of operations.
U.S. Cellular has significant investments in entities that it does not control, including a 5.5% ownership interest in the Los Angeles SMSA Limited Partnership (the LA Partnership) which represents a significant portion of U.S. Cellulars net income, and a limited partnership interest in King Street Wireless L.P. U.S. Cellulars interests in such entities do not provide U.S. Cellular with control over the business strategy, financial goals, build-out plans or other operational aspects of these entities. U.S. Cellular cannot provide assurance that these entities will operate in a manner that will increase the value of U.S. Cellulars investments, that U.S. Cellulars proportionate share of income from the LA Partnership will continue at the current level in the future or that U.S. Cellular will not incur losses from the holding of such investments. Losses in the values of such investments or a reduction in income from the LA Partnership could adversely affect U.S. Cellulars financial condition or results of operations.
25) A failure by U.S. Cellular to maintain flexible and capable telecommunication networks or information technology, or a material disruption thereof, including breaches of network or information technology security, could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
U.S. Cellular relies extensively on its telecommunication networks and information technology to operate and manage its business, process transactions and summarize and report results. These networks and technology become obsolete over time and must be upgraded, replaced and/or otherwise enhanced over time. Enhancements must be more flexible and robust than ever before. All of this is capital intensive and challenging. A failure by U.S. Cellular to maintain flexible and capable telecommunication networks or information technology could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
The increased provision of data services has introduced significant new demands on U.S. Cellulars network and has also increased complexities related to network management. Further, the increased provision of data services on U.S. Cellulars networks has created an increased level of risk related to quality of service. This is due to the fact that many customers increasingly rely on data communications to execute and validate transactions. As a result, redundancy and geographical diversity of U.S. Cellulars network facilities are critical to providing uninterrupted service. Also, the speed of repair and maintenance procedures in the event of network interruptions is critical to maintaining customer satisfaction. U.S. Cellulars ability to maintain high quality, uninterrupted service to its customers is critical, particularly given the increasingly competitive environment and customers ability to choose other service providers.
In addition, U.S. Cellulars networks and information technology and the networks and information technology of vendors on which U.S. Cellular relies are subject to damage or interruption due to various events, including power outages, computer, network and telecommunications failures, computer viruses, security breaches, hackers and other cyber security risks, catastrophic events, natural disasters, errors or unauthorized actions by employees and vendors, flawed conversion of systems, disruptive technologies and technology changes. U.S. Cellular experiences cyber attacks of varying degrees on a regular basis. U.S. Cellular maintains administrative, technical and physical controls, as well as other preventative actions, to reduce the risk of security breaches. While to date U.S. Cellular has not experienced a material security breach, these efforts may be insufficient to prevent a security breach stemming from future cyber attacks. If U.S. Cellulars or its vendors networks and information technology are not adequately adapted to changes in technology or are damaged or fail to function properly, and/or if U.S. Cellulars or its vendors security is breached or otherwise compromised, U.S. Cellular could suffer adverse consequences, including theft, destruction or other loss of critical and private data, including customer and/or employee data, interruptions or delays in its operations, inaccurate billings, inaccurate financial reporting, and significant costs to remedy the problems. If U.S. Cellulars or its vendors systems become unavailable or suffer a security breach of customer or other data, U.S. Cellular may be required to expend significant resources and take various actions to address the problems, including notification under data privacy laws and regulations, may be subject to fines, sanctions and litigation, and its reputation and operating results could be adversely affected. Any material disruption in U.S. Cellulars networks or information technology, including security breaches, could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
26) Wars, conflicts, hostilities and/or terrorist attacks or equipment failures, power outages, natural disasters or other events could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
Wars, conflicts, hostilities, terrorist attacks, major equipment failures, power outages, natural disasters, or similar disasters or failures that affect U.S. Cellulars mobile telephone switching offices, information systems, microwave links, third-party owned local and long distance networks on which U.S. Cellular relies, U.S. Cellulars cell sites, data centers or other equipment or the networks of other providers and vendors which U.S. Cellular or its customers use or on which customers roam could have an adverse effect on U.S. Cellulars operations. Although U.S. Cellular has certain back-up and similar arrangements, it has not established a formal, comprehensive business continuity or emergency response plan at this time. As a result, under certain circumstances, U.S. Cellular may not be prepared to continue its operations, respond to emergencies or recover from disasters or other similar events. U.S. Cellulars inability to operate its telecommunications systems or access or operate its information systems even for a limited time period, may result in a loss of customers or impair U.S. Cellulars ability to serve customers or attract new customers, which could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
27) The market price of U.S. Cellulars Common Shares is subject to fluctuations due to a variety of factors.
Factors that may affect the future market price of U.S. Cellulars Common Shares include:
· General economic conditions, including conditions in the credit and financial markets;
· Wireless and telecommunications industry conditions;
· Fluctuations in U.S. Cellulars quarterly customer additions, churn rate, revenues, results of operations or cash flows;
· Variations between U.S. Cellulars actual financial and operating results and those expected by analysts and investors; and
· Announcements by U.S. Cellulars competitors.
Any of these or other factors could adversely affect the future market price of U.S. Cellulars Common Shares, or could cause the future market price of U.S. Cellulars Common Shares to fluctuate from time to time.
28) Identification of errors in financial information or disclosures could require amendments to or restatements of financial information or disclosures included in this or prior filings with the Securities and Exchange Commission (SEC). Such amendments or restatements and related matters, including resulting delays in filing periodic reports with the SEC, could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
U.S. Cellular prepares its consolidated financial statement in accordance with accounting principles generally accepted in the United States of America (GAAP) and files such financial statements with the SEC in accordance with the SECs rules and regulations. The possible identification of any errors in such prior filings with the SEC could require restatements of financial information or amendments to disclosures included in this or prior filings with the SEC.
Restatements and delays in filing reports with the SEC could have adverse consequences, including the following: U.S. Cellulars credit ratings could be downgraded, which would result in an increase in its borrowing costs and could make it more difficult for U.S. Cellular to borrow funds on satisfactory terms. The lenders on U.S. Cellulars revolving credit agreement could refuse to waive a default or extend a waiver of default, impose restrictive covenants or conditions or require increased payments and fees. The holders of debt under U.S. Cellulars indenture could attempt to assert a default and, if successful and U.S. Cellular does not cure the default in a timely manner, accelerate the repayment date of such debt. The New York Stock Exchange could begin delisting proceedings with respect to U.S. Cellular Common Shares and debt that is listed thereon. U.S. Cellular may not be able to use or file shelf registration statements on Form S-3 for an extended period of time, which may limit U.S. Cellulars ability to access the capital markets. U.S. Cellular may not be able to use Form S-8 registration statements relating to its employee benefit plans, which may have an adverse affect on U.S. Cellulars ability to attract and retain employees. U.S. Cellular also could face shareholder litigation or SEC enforcement action. Any of these events could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
29) The existence of material weaknesses in the effectiveness of internal control over financial reporting could result in inaccurate financial statements or other disclosures or failure to prevent fraud, which could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, U.S. Cellular is required to furnish a report of managements assessment of the design and effectiveness of its internal control over financial reporting as part of its Form 10-K filed with the SEC. U.S. Cellular management also is required to report on the effectiveness of U.S. Cellulars disclosure controls and procedures. The independent auditors of U.S. Cellular are required to attest to, and report on, the effectiveness of internal control over financial reporting. Material weaknesses could result in inaccurate financial statements or other disclosures or failure to prevent fraud, which could have an adverse effect on U.S. Cellulars business, financial condition or results of operations. Further, if U.S. Cellular does not successfully remediate any known material weaknesses in a timely manner, it could be subject to sanctions by regulatory authorities such as the SEC, it could fail to timely meet its regulatory reporting obligations, or investor perceptions could be negatively affected; each of these potential consequences could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
30) Changes in facts or circumstances, including new or additional information that affects the calculation of potential liabilities for contingent obligations under guarantees, indemnities, claims, litigation or otherwise, could require U.S. Cellular to record charges in excess of amounts accrued in the financial statements, if any, which could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
The preparation of financial statements requires U.S. Cellular to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. U.S. Cellular bases its estimates on historical experience and on various other assumptions and information that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from estimates under different assumptions or conditions. Changes in facts or circumstances, including new or additional information that affects the calculation of potential liabilities for contingent obligations under guarantees, indemnities, claims, litigation or otherwise, could require U.S. Cellular to record charges in excess of amounts accrued in the financial statements, if any, which could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
31) Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede U.S. Cellulars access to or increase the cost of financing its operating and investment activities and/or result in reduced revenues and lower operating income and cash flows, which would have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
Disruptions in the credit and financial markets, declines in consumer confidence, increases in unemployment, declines in economic growth and uncertainty about corporate earnings could have a significant negative impact on the U.S. and global financial and credit markets and the overall economy. Such events could have an adverse impact on financial institutions resulting in limited access to capital and credit for many companies. Furthermore, economic uncertainties make it very difficult to accurately forecast and plan future business activities. Changes in economic conditions, changes in financial markets, deterioration in the capital markets or other factors could have an adverse effect on U.S. Cellulars business, financial condition, revenues, results of operations and cash flows.
32) Uncertainty of U.S. Cellulars ability to access capital, deterioration in the capital markets, other changes in market conditions, changes in U.S. Cellulars credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development or acquisition programs.
U.S. Cellular and its subsidiaries operate a capital-intensive business. U.S. Cellular has used internally-generated funds and has also obtained substantial funds from external sources to finance the build out and enhancement of markets, to fund acquisitions and for general corporate purposes. U.S. Cellular also may require substantial additional capital for, among other uses, acquisitions of providers of wireless telecommunications services, spectrum license or system acquisitions, system development and network capacity expansion. There can be no assurance that sufficient funds will continue to be available to U.S. Cellular or its subsidiaries on terms or at prices acceptable to U.S. Cellular. Changes in U.S. Cellulars credit rating, uncertainty of access to capital for telecommunications companies, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their ability to borrow, other changes in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development and acquisition programs. Reduction of U.S. Cellulars construction, development and acquisition programs likely would have a negative impact on U.S. Cellulars consolidated revenues, income and cash flows.
33) Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
U.S. Cellular is regularly involved in a number of legal and policy proceedings before the FCC and various state and federal courts. Such legal and policy proceedings can be complex, costly, protracted and highly disruptive to business operations by diverting the attention and energies of management and other key personnel.
The assessment of legal and policy proceedings is a highly subjective process that requires judgments about future events. Additionally, amounts ultimately received or paid upon settlement or resolution of litigation and other contingencies may differ materially from amounts accrued in the financial statements. Depending on a range of factors, these or similar proceedings could impose restraints on U.S. Cellulars current or future manner of doing business. Such potential outcomes could have an adverse effect on U.S. Cellulars financial condition, results of operations or ability to do business.
34) The possible development of adverse precedent in litigation or conclusions in professional studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic medical devices such as pacemakers, could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
Media reports and certain professional studies have suggested that certain radio frequency emissions from wireless devices may be linked to various health problems, including cancer or tumors, and may interfere with various electronic medical devices, including hearing aids and pacemakers. U.S. Cellular is a party to and may in the future be a party to lawsuits against wireless carriers and other parties claiming damages for alleged health effects, including cancer or tumors, arising from wireless phones or radio frequency transmitters. Concerns over radio frequency emissions may discourage use of wireless devices or expose U.S. Cellular to potential litigation. Any resulting decrease in demand for wireless services or costs of litigation and damage awards could have an adverse effect on U. S. Cellulars business, financial condition or results of operations.
In addition, some studies have indicated that some aspects of using wireless devices while driving may impair drivers attention in certain circumstances, making accidents more likely. These concerns could lead to potential litigation relating to accidents, deaths or serious bodily injuries, any of which could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
Numerous state and local legislative bodies have enacted or proposed legislation restricting or prohibiting the use of wireless devices while driving motor vehicles. These enacted or proposed laws or other similar laws, if passed, could have the effect of reducing customer usage and/or increasing costs, which could have an adverse effect on U.S. Cellulars business, financial condition, or results of operations.
35) Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent U.S. Cellular from using necessary technology to provide products or services or subject U.S. Cellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
U.S. Cellular faces possible effects of industry litigation relating to patents, other intellectual property or otherwise, that may restrict U.S. Cellulars access to devices for sale to customers. If technology that U.S. Cellular uses in products or services were determined by a court to infringe a patent or other intellectual property right held by another person, U.S. Cellular could be precluded from using that technology and could be required to pay significant monetary damages. U.S. Cellular also may be required to pay significant royalties to such person to continue to use such technology in the future. The successful enforcement of any intellectual property rights, or U.S. Cellulars inability to negotiate a license for such rights on acceptable terms, could force U.S. Cellular to cease using the relevant technology and offering services incorporating the technology. Any litigation to determine the validity of claims that U.S. Cellulars products or services infringe or may infringe intellectual property rights of another, regardless of their merit or resolution, could be costly and divert the effort and attention of U.S. Cellulars management and technical personnel. Regardless of the merits of any specific claim, U.S. Cellular cannot give assurance that it would prevail in litigation because of the complex technical issues and inherent uncertainties in intellectual property litigation. Although U.S. Cellular generally seeks to obtain indemnification agreements from vendors that provide it with technology, there can be no assurance that any claim of infringement will be covered by an indemnity or that U.S. Cellular will be able to recover all or any of its losses and costs under any available indemnity agreements. Any claims of infringement of intellectual property and proprietary rights of others could prevent U.S. Cellular from using necessary technology to provide its services or subject U.S. Cellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on U.S. Cellulars business, financial condition or results of operations.
36) There are potential conflicts of interests between TDS and U.S. Cellular.
TDS owns over 80% of the combined total of both classes of common stock of U.S. Cellular, including a majority of the outstanding Common Shares and 100% of the Series A Common Shares, and controls approximately 96% of their combined voting power. As a result, TDS is effectively able to elect all of U.S. Cellulars ten directors and otherwise control the management and operations of U.S. Cellular. Four of ten members of the U.S. Cellular board are executive officers of TDS or U.S. Cellular. Three directors of U.S. Cellular are also directors of TDS. Directors and officers of TDS who are also directors or officers of U.S. Cellular, and TDS as U.S. Cellulars controlling shareholder, are in positions involving the possibility of conflicts of interest with respect to certain transactions concerning U.S. Cellular. When the interests of TDS and U.S. Cellular diverge, TDS may exercise its influence in its own best interests.
U.S. Cellular and TDS have entered into contractual arrangements governing certain transactions and relationships between them. These agreements were executed prior to the initial public offering of U.S. Cellulars Common Shares and were not the result of arms-length negotiations. Accordingly, there is no assurance that the terms and conditions of these agreements are as favorable to U.S. Cellular as could have been obtained from unaffiliated third parties. See Certain Relationships and Related Transactions in this Form 10-K.
Conflicts of interest may arise between TDS and U.S. Cellular when faced with decisions that could have different implications for U.S. Cellular and TDS, including technology decisions, financial budgets, the payment of distributions by U.S. Cellular, business activities and other matters. TDS also may take action that favors its other businesses and the interests of its shareholders over U.S. Cellulars wireless business and the interests of U.S. Cellular shareholders and debt holders. Because TDS controls U.S. Cellular, conflicts of interest could be resolved in a manner adverse to U.S. Cellular and its other shareholders or its debt holders.
The U.S. Cellular Restated Certificate of Incorporation provides that, so long as not less than 500,000 Series A Common Shares are outstanding, U.S. Cellular, without the written consent of TDS, shall not, directly or indirectly own, invest or otherwise have an interest in, lease, operate or manage any business other than a business engaged solely in the construction of, the ownership of interests in and/or the management of wireless telephone systems. This limitation on the scope of U.S. Cellulars potential business could hurt the growth of U.S. Cellulars business. This restriction would preclude U.S. Cellular from pursuing attractive related or unrelated business opportunities unless TDS consents in writing. TDS has no obligation to consent to any business opportunities proposed by U.S. Cellular and may withhold its consent in its own best interests.
37) Certain matters, such as control by TDS and provisions in the U.S. Cellular Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of U.S. Cellular.
The control of U.S. Cellular by TDS may tend to deter non-negotiated tender offers or other efforts to obtain control of U.S. Cellular and thereby deprive shareholders of opportunities to sell shares at prices higher than those prevailing in the market.
The U.S. Cellular Restated Certificate of Incorporation also contains provisions which may serve to discourage or make more difficult a change in control of U.S. Cellular without the support of TDS or without meeting various other conditions. In particular, the authorization of multiple classes of capital stock with different voting rights could prevent shareholders from profiting from an increase in the market value of their shares as a result of a change in control of U.S. Cellular by delaying or preventing such change in control.
The U.S. Cellular Restated Certificate of Incorporation also authorizes the U.S. Cellular board of directors to designate and issue Preferred Shares in one or more classes or series from time to time. Generally, no further action or authorization by the shareholders is necessary prior to the designation or issuance of the additional Preferred Shares authorized pursuant to the U.S. Cellular Restated Certificate of Incorporation unless applicable laws or regulations would require such approval in a given instance. Such Preferred Shares could be issued in circumstances that would serve to preserve TDS control of U.S. Cellular.
38) Any of the foregoing events or other events could cause revenues, earnings, capital expenditures and/or any other financial or statistical information to vary from U.S. Cellulars forward-looking estimates by a material amount.
From time to time, U.S. Cellular may disclose forward-looking information, including estimates of future service revenues; income before income taxes; and/or capital expenditures. Any such forward-looking information includes consideration of known or anticipated changes to the extent disclosed, but dynamic market conditions and/or other unknown or unanticipated events, including but not limited to the risks discussed above, could cause such estimates to differ materially from the actual amounts.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The physical properties for mobile telephone switching offices, cell sites, call centers and retail locations are located primarily in U.S. Cellulars operating markets and are either owned or leased under long-term leases by U.S. Cellular, one of its subsidiaries, or the partnership or corporation which holds the license issued by the FCC. U.S. Cellulars cell and transmitter sites are located on private and public property. Locations on private land are by virtue of easements or other arrangements. U.S. Cellular has not experienced major problems with obtaining zoning approval for cell sites or operating facilities and does not anticipate significant problems in this area in future periods.
U.S. Cellular leases space for its corporate offices in Chicago, Bensenville and Wood Dale, Illinois; it also leases space for its network operations center in Schaumburg, Illinois and its four regional offices. As of January 1, 2013, U.S. Cellular operates four customer care centers; one of the facilities used in these operations is owned and three are leased.
As of December 31, 2012, U.S. Cellulars Property, plant and equipment, net of accumulated depreciation, totaled $3,022.6 million.
U.S. Cellular considers the properties owned or leased by it and its subsidiaries to be suitable and adequate for their respective business operations.
Item 3. Legal Proceedings
U.S. Cellular is involved or may be involved from time to time in legal proceedings before the FCC, other regulatory authorities, and/or various state and federal courts. If U.S. Cellular believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement disclosures. The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial statements. See Note 13 Commitments and Contingencies in the Notes to Consolidated Financial Statements for further information.
Item 4. Mine Safety Disclosures.
Not applicable
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market, holder, dividend and performance graph information is incorporated by reference from Exhibit 13 to this Form 10-K, Annual Report sections entitled Shareholder Information and Consolidated Quarterly Information (Unaudited).
Information relating to Issuer Purchases of Equity Securities is set forth below.
On November 17, 2009, the Board of Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis (the 2009 Authorization). These purchases will be made pursuant to open market purchases, block purchases, private purchases, or otherwise, depending on market prices and other conditions. This authorization does not have an expiration date.
The following table provides certain information with respect to all purchases made by or on behalf of U.S. Cellular, and any open market purchases made by any affiliated purchaser (as defined by the SEC) of U.S. Cellular, of U.S. Cellular Common Shares during the fourth quarter of 2012.
U.S. CELLULAR PURCHASES OF COMMON SHARES |
|
|
(a) |
|
(b) |
|
(c) |
|
(d) |
|
|
Period |
|
Total Number
|
|
Average Price
|
|
Total Number of
|
|
Maximum Number of
|
|
|
October 1 31, 2012 |
|
|
|
$ |
|
|
|
|
2,598,522 |
|
November 1 30, 2012 |
|
239,024 |
|
34.61 |
|
239,024 |
|
2,359,498 |
|
|
December 1 31, 2012 |
|
331,955 |
|
35.46 |
|
331,955 |
|
2,027,543 |
|
|
Total as of or for the quarter ended December 31, 2012 |
|
570,979 |
|
$ |
35.11 |
|
570,979 |
|
2,027,543 |
|
The following is additional information with respect to the 2009 Authorization:
i. The date the program was announced was November 20, 2009 by Form 8-K.
ii. The amount approved was up to 1,300,000 U.S. Cellular Common Shares on an annual basis in 2009 and continuing each year thereafter on a cumulative basis.
iii. There is no expiration date for the program.
iv. The authorization did not expire during the fourth quarter of 2012.
v. U.S. Cellular did not determine to terminate the foregoing program prior to expiration, or to cease making further purchases thereunder, during the fourth quarter of 2012.
Item 6. Selected Financial Data
Incorporated by reference from Exhibit 13 to this Form 10-K, Annual Report section entitled Selected Consolidated Financial and Operating Data, except for Ratio of earnings to fixed charges, which is incorporated herein by reference from Exhibit 12 to this Form 10-K.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Incorporated by reference from Exhibit 13 to this Form 10-K, Annual Report section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Incorporated by reference from Exhibit 13 to this Form 10-K, Annual Report section entitled Market Risk.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference from Exhibit 13 to this Form 10-K, Annual Report sections entitled Consolidated Statement of Operations, Consolidated Statement of Cash Flows, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Notes to Consolidated Financial Statements, Managements Report on Internal Control Over Financial Reporting, Report of Independent Registered Public Accounting Firm, and Consolidated Quarterly Information (Unaudited). The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the years ended December 31, 2012, 2011 and 2010 equaled net income.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
U.S. Cellular maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to U.S. Cellulars management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As required by SEC Rule 13a-15(b), U.S. Cellular carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of U.S. Cellulars disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that U.S. Cellulars disclosure controls and procedures were effective as of December 31, 2012, at the reasonable assurance level.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. U.S. Cellulars internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). U.S. Cellulars internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and, where required, the board of directors of the issuer; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuers assets that could have a material effect on the interim or annual consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of U.S. Cellulars management, including its Chief Executive Officer and Chief Financial Officer, U.S. Cellular conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that U.S. Cellular maintained effective internal control over financial reporting as of December 31, 2012 based on criteria established in Internal Control Integrated Framework issued by the COSO.
The effectiveness of U.S. Cellulars internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in the firms report which is incorporated by reference into Item 8 of this Annual Report on Form 10-K from Exhibit 13 filed herewith.
Changes in Internal Control Over Financial Reporting
There were no changes in U.S. Cellulars internal control over financial reporting during the fourth quarter of 2012 that have materially affected, or are reasonably likely to materially affect, U.S. Cellulars internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Incorporated by reference from Proxy Statement sections entitled Election of Directors, Corporate Governance, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance.
Item 11. Executive Compensation
Incorporated by reference from Proxy Statement section entitled Executive and Director Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference from Proxy Statement sections entitled Security Ownership of Certain Beneficial Owners and Management and Securities Authorized for Issuance under Equity Compensation Plans.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference from Proxy Statement sections entitled Corporate Governance and Certain Relationships and Related Transactions.
Item 14. Principal Accountant Fees and Services
Incorporated by reference from Proxy Statement section entitled Fees Paid to Principal Accountants.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as a part of this report:
(1) Financial Statements
Consolidated Statement of Operations |
Annual Report* |
Consolidated Statement of Cash Flows |
Annual Report* |
Consolidated Balance Sheet |
Annual Report* |
Consolidated Statement of Changes in Equity |
Annual Report* |
Notes to Consolidated Financial Statements |
Annual Report* |
Managements Report on Internal Control Over Financial Reporting |
Annual Report* |
Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP |
Annual Report* |
Consolidated Quarterly Information (Unaudited) |
Annual Report* |
* Incorporated by reference from Exhibit 13.
(2) Financial Statement Schedules
|
Location |
Los Angeles SMSA Limited Partnership Financial Statements |
S-1 |
Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP |
S-2 |
Balance Sheets |
S-3 |
Statements of Operations |
S-4 |
Statements of Changes in Partners Capital |
S-5 |
Statements of Cash Flows |
S-6 |
Notes to Financial Statements |
S-7 |
|
|
All other schedules have been omitted because they are not applicable or not required or because the required information is shown in the financial statements or notes thereto. |
||||
|
|
|
|
|
|
(3) |
Exhibits |
The exhibits set forth in the accompanying Index to Exhibits are filed as a part of this Report. Compensatory plans or arrangements are identified in the Index to Exhibits with an asterisk.
LOS ANGELES SMSA LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
U.S. Cellular owns a 5.5% limited partnership interest in the Los Angeles SMSA Limited Partnership and accounts for such interest by the equity method. The partnerships financial statements were obtained by U.S. Cellular as a limited partner.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Los Angeles SMSA Limited Partnership:
Basking Ridge, New Jersey
We have audited the accompanying balance sheets of Los Angeles SMSA Limited Partnership (the Partnership) as of December 31, 2012 and 2011, and the related statements of operations, changes in partners capital, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Partnerships management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnerships internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 26, 2013
Los Angeles SMSA Limited Partnership
Balance Sheets - As of December 31, 2012 and 2011
(Dollars in Thousands)
See notes to financial statements.
Los Angeles SMSA Limited Partnership
Statements of Operations - Years Ended December 31, 2012, 2011 and 2010
(Dollars in Thousands)
|
|
2012 |
|
2011 |
|
2010 |
|
|||
|
|
|
|
|
|
|
|
|||
OPERATING REVENUE: |
|
|
|
|
|
|
|
|||
Service revenue |
|
$ |
3,920,064 |
|
$ |
3,782,027 |
|
$ |
3,533,581 |
|
Equipment and other |
|
677,836 |
|
593,330 |
|
381,790 |
|
|||
|
|
|
|
|
|
|
|
|||
Total operating revenue |
|
4,597,900 |
|
4,375,357 |
|
3,915,371 |
|
|||
|
|
|
|
|
|
|
|
|||
OPERATING COSTS AND EXPENSES: |
|
|
|
|
|
|
|
|||
Cost of service (exclusive of depreciation and amortization) |
|
705,065 |
|
797,797 |
|
674,007 |
|
|||
Depreciation and amortization |
|
343,565 |
|
366,119 |
|
338,700 |
|
|||
Cost of equipment |
|
948,130 |
|
955,002 |
|
625,225 |
|
|||
Selling, general and administrative |
|
1,375,852 |
|
1,263,604 |
|
1,140,518 |
|
|||
|
|
|
|
|
|
|
|
|||
Total operating costs and expenses |
|
3,372,612 |
|
3,382,522 |
|
2,778,450 |
|
|||
|
|
|
|
|
|
|
|
|||
OPERATING INCOME |
|
1,225,288 |
|
992,835 |
|
1,136,921 |
|
|||
|
|
|
|
|
|
|
|
|||
OTHER INCOME: |
|
|
|
|
|
|
|
|||
Interest income, net |
|
1,051 |
|
561 |
|
35,211 |
|
|||
Other |
|
4,941 |
|
6,964 |
|
6,567 |
|
|||
|
|
|
|
|
|
|
|
|||
Total other income |
|
5,992 |
|
7,525 |
|
41,778 |
|
|||
|
|
|
|
|
|
|
|
|||
NET INCOME |
|
$ |
1,231,280 |
|
$ |
1,000,360 |
|
$ |
1,178,699 |
|
|
|
|
|
|
|
|
|
|||
Allocation of Net Income: |
|
|
|
|
|
|
|
|||
Limited Partners |
|
$ |
738,768 |
|
$ |
600,216 |
|
$ |
707,219 |
|
General Partner |
|
$ |
492,512 |
|
$ |
400,144 |
|
$ |
471,480 |
|
See notes to financial statements.
Los Angeles SMSA Limited Partnership
Statements of Changes in Partners Capital - Years Ended December 31, 2012, 2011 and 2010
(Dollars in Thousands)
|
|
General
|
|
Limited Partners |
|
|||||||||||
|
|
AirTouch
|
|
AirTouch
|
|
Cellco
|
|
United States
|
|
Total Partners
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
BALANCEJanuary 1, 2010 |
|
$ |
842,210 |
|
$ |
890,637 |
|
$ |
256,875 |
|
$ |
115,803 |
|
$ |
2,105,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Distributions |
|
(480,000 |
) |
(507,600 |
) |
(146,400 |
) |
(66,000 |
) |
(1,200,000 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net Income |
|
471,480 |
|
498,590 |
|
143,801 |
|
64,828 |
|
1,178,699 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
BALANCEDecember 31, 2010 |
|
833,690 |
|
881,627 |
|
254,276 |
|
114,631 |
|
2,084,224 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Distributions |
|
(480,000 |
) |
(507,600 |
) |
(146,400 |
) |
(66,000 |
) |
(1,200,000 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net Income |
|
400,144 |
|
423,152 |
|
122,044 |
|
55,020 |
|
1,000,360 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
BALANCEDecember 31, 2011 |
|
753,834 |
|
797,179 |
|
229,920 |
|
103,651 |
|
1,884,584 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Distributions |
|
(480,000 |
) |
(507,600 |
) |
(146,400 |
) |
(66,000 |
) |
(1,200,000 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net Income |
|
492,512 |
|
520,832 |
|
150,216 |
|
67,720 |
|
1,231,280 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
BALANCEDecember 31, 2012 |
|
$ |
766,346 |
|
$ |
810,411 |
|
$ |
233,736 |
|
$ |
105,371 |
|
$ |
1,915,864 |
|
See notes to financial statements.
Los Angeles SMSA Limited Partnership
Statements of Cash Flows - Years Ended December 31, 2012, 2011 and 2010
(Dollars in Thousands)
|
|
2012 |
|
2011 |
|
2010 |
|
|||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|||
Net income |
|
$ |
1,231,280 |
|
$ |
1,000,360 |
|
$ |
1,178,699 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|||
Depreciation and amortization |
|
343,565 |
|
366,119 |
|
338,700 |
|
|||
Provision for losses on accounts receivable |
|
37,057 |
|
27,249 |
|
36,005 |
|
|||
Amortization of deferred gain on lease transaction |
|
(4,957 |
) |
(4,949 |
) |
(4,939 |
) |
|||
Changes in certain assets and liabilities: |
|
|
|
|
|
|
|
|||
Accounts receivable |
|
(69,272 |
) |
(47,942 |
) |
(39,750 |
) |
|||
Unbilled revenue |
|
2,761 |
|
(1,014 |
) |
(1,198 |
) |
|||
Prepaid expenses and other current assets |
|
(760 |
) |
(125 |
) |
44 |
|
|||
Other assets |
|
19 |
|
|
|
|
|
|||
Accounts payable and accrued liabilities |
|
18,548 |
|
24,243 |
|
(2,414 |
) |
|||
Advance billings and customer deposits |
|
9,826 |
|
8,518 |
|
21,636 |
|
|||
Other long term liabilities |
|
4,208 |
|
3,124 |
|
4,203 |
|
|||
|
|
|
|
|
|
|
|
|||
Net cash provided by operating activities |
|
1,572,275 |
|
1,375,583 |
|
1,530,986 |
|
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|||
Capital expenditures, net |
|
(272,176 |
) |
(364,956 |
) |
(429,662 |
) |
|||
Change in due from affiliate, net |
|
(100,099 |
) |
189,373 |
|
98,676 |
|
|||
|
|
|
|
|
|
|
|
|||
Net cash used in investing activities |
|
(372,275 |
) |
(175,583 |
) |
(330,986 |
) |
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|||
Distributions to partners |
|
(1,200,000 |
) |
(1,200,000 |
) |
(1,200,000 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net cash used in financing activities |
|
(1,200,000 |
) |
(1,200,000 |
) |
(1,200,000 |
) |
|||
|
|
|
|
|
|
|
|
|||
CHANGE IN CASH |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
CASHBeginning of year |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
CASHEnd of year |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|||
NONCASH TRANSACTIONS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Accruals for Capital Expenditures |
|
$ |
11,403 |
|
$ |
3,372 |
|
$ |
6,796 |
|
See notes to financial statements.
Los Angeles SMSA Limited Partnership
Notes to Financial Statements - Years Ended December 31, 2012, 2011 and 2010
(Dollars in Thousands)
1. ORGANIZATION AND MANAGEMENT
Los Angeles SMSA Limited Partnership Los Angeles SMSA Limited Partnership (the Partnership) was formed in 1984. The principal activity of the Partnership is providing cellular service in the Los Angeles metropolitan service area.
The partners and their respective ownership percentages as of December 31, 2012, 2011 and 2010 are as follows:
General Partner: |
|
|
|
AirTouch Cellular* (General Partner) |
|
40.0 |
% |
|
|
|
|
Limited Partners: |
|
|
|
AirTouch Cellular* |
|
42.3 |
% |
Cellco Partnership |
|
12.2 |
% |
United States Cellular Corporation |
|
5.5 |
% |
*AirTouch Cellular is a wholly-owned subsidiary of Verizon Wireless (VAW) LLC (a wholly-owned subsidiary of Cellco Partnership (Cellco) doing business as Verizon Wireless.
In accordance with the partnership agreement, AirTouch Cellular is responsible for managing the operations of the partnership (See Note 5).
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. Estimates are used for, but are not limited to, the accounting for: allocations, allowance for uncollectible accounts receivable, unbilled revenue, depreciation and amortization, useful lives and impairment of assets, accrued expenses, and contingencies.
Revenue Recognition The Partnership offers products and services to our customers through bundled arrangements. These arrangements involve multiple deliverables which may include products, services, or a combination of products and services.
On January 1, 2011, the Partnership prospectively adopted the accounting standard updates regarding revenue recognition for multiple deliverable arrangements, and arrangements that include software elements. These updates require a vendor to allocate revenue in an arrangement using its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists. The residual method of revenue allocation is no longer permissible. These accounting standard updates do not change our units of accounting for bundled arrangements, nor do they materially change how we allocate arrangement consideration to our various products and services. Accordingly, the adoption of these standard updates did not have a significant impact on the financial statements. Additionally, we do not currently foresee any changes to our products, services or pricing practices that will have a significant effect on the financial statements in periods after the initial adoption, although this could change.
The Partnership earns revenue by providing access to its network (access revenue) and usage of its network (usage revenue), which includes voice and data revenue. Customers are associated with the Partnership based upon mobile identification number. In general, access revenue is billed one month in advance and is recognized when earned; the unearned portion is classified in Advance billings in the balance sheet. Usage revenue is recognized when service is rendered and included in unbilled revenue until billed. Equipment sales revenue associated with the sale of wireless devices and related equipment costs are recognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from the sale of wireless services. Customer activation fees charged to customers are considered additional consideration and are recorded in Equipment and other revenue, generally, at the time of customer acceptance. For agreements involving the resale of third-party services in which the Partnership is considered the primary obligor in the arrangements, the Partnership records revenue gross at the time of sale. The roaming rates charged by the Partnership to Cellco do not necessarily reflect current market rates. The Partnership will continue to re-evaluate the rates on a periodic basis (See Note 5).
Wireless bundled service plans primarily consist of wireless voice and data services. The bundling of a voice plan with a text messaging plan (Talk & Text), for example, creates a multiple deliverable arrangement consisting of a voice component and a data component in the form of text messaging. For these arrangements, revenue is allocated to each deliverable using a relative selling price method. Under this method, arrangement consideration is allocated to each separate deliverable based on our standalone selling price for each product or service, up to the amount that is not contingent upon providing additional services. For equipment sales, the Partnership currently subsidizes the cost of wireless devices. The amount of this subsidy is generally contingent on the arrangement and terms selected by the customer. The equipment revenue is recognized up to the amount collected when the wireless device is sold.
The Partnership reports taxes imposed by governmental authorities on revenue-producing transactions between us and our customers on a net basis.
Operating Costs and Expenses Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of selling, general and administrative, and operating costs incurred by Cellco or its affiliates on behalf of the Partnership. Employees of Cellco provide services performed on behalf of the Partnership. These employees are not employees of the Partnership, therefore operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. Cellco believes such allocations, principally based on the Partnerships percentage of total customers, customer gross additions or minutes-of-use, are in accordance with the Partnership Agreement. The roaming rates charged to the Partnership by Cellco do not necessarily reflect current market rates. The Partnership will continue to re-evaluate the rates on a periodic basis (see Note 5).
Retail Stores The daily operations of all retail stores owned by the Partnership are managed by Cellco. All fixed assets, liabilities, income and expenses related to these retail stores are recorded in the financial statements of the Partnership.
Income Taxes The Partnership is not a taxable entity for federal and state income tax purposes. Any taxable income or loss is apportioned to the partners based on their respective partnership interests and is reported by them individually.
Inventory Inventory is owned by Cellco and is not recorded on the Partnerships financial statements. Upon sale, the related cost of the inventory is transferred to the Partnership at Cellcos cost basis and included in the accompanying statements of operations.
Allowance for Doubtful Accounts The Partnership maintains allowances for uncollectible accounts receivable for estimated losses resulting from the inability of customers to make required payments. Estimates are based on the aging of the accounts receivable balances and the historical write-off experience, net of recoveries.
Property, Plant and Equipment Property, plant and equipment primarily represents costs incurred to construct and expand capacity and network coverage on mobile telephone switching offices and cell sites. The cost of property, plant and equipment is depreciated over its estimated useful life using the straight-line method of accounting. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Major improvements to existing plant and equipment are capitalized. Routine maintenance and repairs that do not extend the life of the plant and equipment are charged to expense as incurred .
Upon the sale or retirement of property, plant and equipment, the cost and related accumulated depreciation or amortization are eliminated and any related gain or loss is reflected in the statements of operations. All property, plant and equipment purchases are made through an affiliate of Cellco. Transfers of property, plant and equipment between Cellco and affiliates are recorded at net book value.
Interest expense and network engineering costs incurred during the construction phase of the Partnerships network and real estate properties under development are capitalized as part of property, plant and equipment and recorded as construction in progress until the projects are completed and placed into service.
FCC Licenses The Federal Communications Commission (FCC) issues licenses that authorize cellular carriers to provide service in specific cellular geographic service areas. The FCC grants licenses for terms of up to ten years. In 1993 the FCC adopted specific standards to apply to cellular renewals, concluding it will award a license renewal to a cellular licensee that meets certain standards of past performance. Historically, the FCC has granted license renewals routinely and at nominal costs, which are expensed as incurred. The current terms of the Partnerships FCC licenses expire in October 2014, February 2016 and April 2017. Cellco believes it will be able to meet all requirements necessary to secure renewal of the Partnerships cellular licenses. FCC wireless licenses totaling $79,543 are recorded on the books of the Partnership as of December 31, 2012 and 2011. There are additional wireless licenses issued by the FCC that authorize the Partnership to provide cellular service recorded on the books of Cellco.
Valuation of Assets Long-lived assets, including property, plant and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.
The Partnerships principal intangible assets are licenses, which provide the Partnership with the exclusive right to utilize certain radio frequency spectrum to provide wireless communication services. Cellco and the Partnership re-evaluates the useful life determination for wireless licenses at least annually to determine whether events and circumstances continue to support an indefinite useful life. Moreover, Cellco and the Partnership have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the Partnerships wireless licenses. As a result, the wireless licenses are treated as an indefinite life intangible asset, and are not amortized but rather are tested for impairment.
Cellco and the Partnership test their wireless licenses for potential impairment annually, and more frequently if indications of impairment exist. Cellco and the Partnership evaluate their licenses on an aggregate basis, using a direct value approach. This approach estimates fair value using a discounted cash flow analysis to estimate what a marketplace participant would be willing to pay to purchase the aggregated wireless licenses as of the valuation date. If the fair value of the aggregated wireless licenses is less than the aggregated carrying amount of the wireless licenses, an impairment is recognized. In addition, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for all licenses included in Cellcos national footprint. Cellco does not charge the
Partnership for the use of any FCC license recorded on its books (except for the annual cost of $51,185 related to the spectrum leases). Cellco and the Partnership evaluated their wireless licenses for potential impairment as of December 15, 2012 and December 15, 2011. These evaluations resulted in no impairment of wireless licenses.
Concentrations The Partnership maintains allowances for uncollectible accounts receivable for estimated losses resulting from the inability of customers to make required payments. Estimates are based on historical net write-off experience. No single customer receivable is large enough to present a significant financial risk to the partnership.
Cellco and the Partnership rely on local and long-distance telephone companies, some of which are related parties (See Note 5), and other companies to provide certain communication services. Although management believes alternative telecommunications facilities could be found in a timely manner, any disruption of these services could potentially have a material adverse impact on the Partnerships operating results.
Although Cellco attempts to maintain multiple vendors for its network assets and inventory, which are important components of its operations, they are currently acquired from only a few sources. Certain of these products are in turn utilized by the Partnership and are important components of the Partnerships operations. If the suppliers are unable to meet Cellcos needs as it builds out its network infrastructure and sells service and equipment, delays and increased costs in the expansion of the Partnerships network infrastructure or losses of potential customers could result, which would adversely affect operating results.
Financial Instruments The Partnerships trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value.
Due from affiliate Due from affiliate principally represents the Partnerships cash position with Cellco. Cellco manages, on behalf of the Partnership, all cash, inventory, investing and financing activities of the Partnership. As such, the change in due from affiliate is reflected as an investing activity or a financing activity in the statements of cash flows depending on whether it represents a net asset or net liability for the Partnership.
Additionally, administrative and operating costs incurred by Cellco on behalf of the Partnership, as well as property, plant and equipment transactions with affiliates, are charged to the Partnership through this account. Starting in 2011, interest income is based on the Applicable Federal Rate which was approximately .2% and .4% for the years ended December 31, 2012 and 2011, respectively. Interest expense is calculated by applying Cellcos average cost of borrowing from Verizon Communications, Inc, which was approximately 7.3% and 6.8% for the years ended December 31, 2012 and 2011, respectively. For 2010, interest income or interest expense was based on the average monthly outstanding balance in this account and was calculated by applying Cellcos average cost of borrowing from Verizon Communications, Inc., which was approximately 5.8% for the year ended December 31, 2010. Included in net interest income is interest
income of $1,123, $712 and $35,372 for the years ended December 31, 2012, 2011 and 2010, respectively, related to due from affiliate.
Distributions - The Partnership is required to make distributions to its partners based upon the Partnerships operating results, cash availability and financing needs as determined by the General Partner at the date of the distribution.
Recently Adopted Accounting Standards - During the first quarter of 2012, we adopted the accounting standard update regarding fair value measurement. This update was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. generally accepted accounting principles and International Financial Reporting Standards. This standard update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The adoption of this standard update did not have a significant impact on the financial statements.
During the first quarter of 2012, we adopted the accounting standard update regarding testing of goodwill for impairment. This standard update gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The adoption of this standard did not have a significant impact on the financial statements.
Recent Accounting Standards - In July 2012, the accounting standard update regarding testing of intangible assets for impairment was issued. This standard update allows companies the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not the asset is impaired. We will adopt this standard update during the first quarter of 2013. The adoption of this standard is not expected to have a significant impact on the financial statements.
3. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist of the following as of December 31, 2012 and 2011:
|
|
2012 |
|
2011 |
|
||
Land |
|
$ |
7,742 |
|
$ |
7,742 |
|
Buildings and improvements (15-40 years) |
|
575,456 |
|
537,006 |
|
||
Wireless plant and equipment (3-15 years) |
|
3,265,052 |
|
3,114,653 |
|
||
Furniture, fixtures and equipment (3-10 years) |
|
65,823 |
|
67,210 |
|
||
Leasehold improvements (5 years) |
|
308,050 |
|
291,889 |
|
||
|
|
4,222,123 |
|
4,018,500 |
|
||
Less: accumulated depreciation |
|
2,652,705 |
|
2,385,724 |
|
||
Property, plant and equipment, net |
|
$ |
1,569,418 |
|
$ |
1,632,776 |
|
|
|
|
|
|
|
||
Depreciation expense |
|
$ |
343,565 |
|
$ |
366,119 |
|
Capitalized network engineering costs of $22,253 and $21,152 were recorded during the years ended December 31, 2012 and 2011, respectively. Construction in progress included in certain classifications shown above, principally wireless plant and equipment, amounted to $85,383 and $71,842 as of December 31, 2012 and 2011, respectively.
Tower Transactions Prior to the acquisition of the Partnership interest by Cellco in 2000, Vodafone Group Plc (Vodafone), then parent company of AirTouch Cellular, entered into agreements to sublease all of its unused space on up to 430 of its communications towers (Sublease Agreement) to SpectraSite Holdings, Inc. (SpectraSite) in exchange for $155,000. At various closings in 2001 and 2000, SpectraSite leased 274 communications towers owned and operated by the Partnership for $98,465. At December 31, 2012 and 2011, the Partnership has $38,756 and $43,713, respectively, recorded as deferred gain on lease transaction. The Sublease Agreement requires monthly maintenance fees for the existing physical space used by the Partnerships cellular equipment. The Partnership paid $11,421, $12,150 and $10,950 to SpectraSite pursuant to the Sublease Agreement for the years ended December 31, 2012, 2011 and 2010, respectively, which is included in cost of service in the accompanying Statements of Operations.
4. CURRENT LIABILITIES
Accounts payable and accrued liabilities consist of the following as of December 31, 2012 and 2011:
|
|
2012 |
|
2011 |
|
||
|
|
|
|
|
|
||
Accounts payable |
|
$ |
117,935 |
|
$ |
88,640 |
|
Accrued liabilities |
|
14,623 |
|
17,339 |
|
||
Accounts payable and accrued libilities |
|
$ |
132,558 |
|
$ |
105,979 |
|
Advance billings and customer deposits consist of the following as of December 31, 2012 and 2011:
|
|
2012 |
|
2011 |
|
||
|
|
|
|
|
|
||
Advance billings |
|
$ |
140,617 |
|
$ |
131,201 |
|
Customer deposits |
|
4,232 |
|
3,822 |
|
||
Advance billings and customer deposits |
|
$ |
144,849 |
|
$ |
135,023 |
|
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
In addition to fixed asset purchases (see Note 2), substantially all of service revenues, equipment and other revenues, cost of service, cost of equipment, and selling, general and administrative expenses represent transactions processed by affiliates (Cellco and its related parties) on behalf of the Partnership or represent transactions with affiliates. These transactions consist of revenues and expenses that pertain to the Partnership which are processed by Cellco and directly attributed to or directly charged to the Partnership. They also include certain revenues and expenses that are processed or incurred by Cellco which are allocated to the Partnership based on factors such as the Partnerships percentage of customers, gross customer additions, or minutes of use. These transactions do not necessarily represent arms length transactions and may not represent all revenues and costs if the Partnership operated on a standalone basis.
Service revenues Service revenues include monthly customer billings processed by Cellco on behalf of the Partnership and roaming revenues relating to customers of other affiliated markets that are specifically identified to the Partnership. Service revenue also includes long distance, data, and certain revenue reductions including revenue concessions that are processed by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Equipment and other revenues Equipment revenue includes equipment sales processed by Cellco and specifically identified to the Partnership, as well as certain handset and accessory revenues, contra-revenues including equipment concessions, and coupon
rebates that are processed by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. Other revenues include switch revenue and other fees and surcharges charged to the customer that are specifically identified to the Partnership.
Cost of Service Cost of service includes roaming costs relating to customers roaming in other affiliated markets that are specifically identified to the Partnership. Cost of service also includes cost of telecom, long distance and application content that are incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. The Partnership has also entered into a lease agreement for the right to use additional spectrum owned by Cellco. See Note 6 for further information regarding this arrangement.
Cost of equipment Cost of equipment includes the cost of inventory specifically identified and transferred to the Partnership (see Note 2). Cost of equipment also includes certain costs related to handsets, accessories and other costs incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Selling, general and administrative Selling, general and administrative expenses include commissions, customer billing, office telecom, customer care, salaries, sales and marketing and advertising expenses that are specifically identified to the Partnership as well as incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
6. COMMITMENTS
Cellco, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities, and equipment and spectrum used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancellable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably assured. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancellable lease term. For the years ended December 31, 2012, 2011 and 2010, the Partnership incurred a total of $131,362, $127,469 and $102,968, respectively, as rent expense related to these operating leases, which was included in cost of service and general and administrative expenses in the accompanying statements of operations. Aggregate future minimum rental commitments under noncancellable operating leases, excluding renewal options that are not reasonably assured and remaining tower maintenance fees of $104,608 (See Note 3), for the years shown are as follows:
Years |
|
Amount |
|
|
|
|
|
|
|
2013 |
|
$ |
91,619 |
|
2014 |
|
82,347 |
|
|
2015 |
|
68,331 |
|
|
2016 |
|
56,371 |
|
|
2017 |
|
14,957 |
|
|
2018 and thereafter |
|
28,069 |
|
|
|
|
|
|
|
Total minimum payments |
|
$ |
341,694 |
|
On November 30, 2010, the Partnership entered into a 700 MHz upper band spectrum lease with Cellco. The lease includes an initial term extending through June 13, 2019 and a renewal option through June 13, 2029. The license, held by Cellco, is considered an indefinite-lived intangible as Cellco believes it will be able to meet all requirements necessary to secure renewal of this license. The Partnership accounts for this spectrum lease as an executory contract which is similar to an operating lease.
Based on the terms of the spectrum license lease as of December 31, 2012, future spectrum lease obligations, including the renewal period, are expected to be as follows:
Years |
|
Amount |
|
|
|
|
|
|
|
2013 |
|
$ |
20,843 |
|
2014 |
|
20,843 |
|
|
2015 |
|
20,843 |
|
|
2016 |
|
20,843 |
|
|
2017 |
|
20,843 |
|
|
2018 and thereafter |
|
237,956 |
|
|
|
|
|
|
|
Total minimum payments |
|
$ |
342,171 |
|
The General Partner currently expects that the renewal option in the lease will be exercised.
From time to time Cellco enters into purchase commitments, primarily for network equipment, on behalf of the Partnership. These represent legal obligations of Cellco.
7. CONTINGENCIES
Cellco and the Partnership are subject to lawsuits and other claims including class actions, product liability, patent infringement, intellectual property, antitrust, partnership disputes, and claims involving relations with resellers and agents. Cellco is also currently defending lawsuits filed against it and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco violated certain state consumer protection laws and other statutes and defrauded customers through misleading billing practices or statements. These matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and the outcomes are not currently predictable.
The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. In none of the currently pending matters is the amount of accrual material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued to either Cellco or the Partnership with respect to these matters as of December 31, 2012 cannot be made at this time due to various factors typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. We continuously monitor these proceedings as they develop and adjust any accrual or disclosure as needed. We do not expect that the ultimate resolution of any pending regulatory or legal matter in future periods will have a material effect on the financial condition of the Partnership, but it could have a material effect on our results of operations for a given reporting period.
8. RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
|
Balance at |
|
Additions |
|
Write-offs |
|
Balance at |
|
||||
|
|
Beginning |
|
Charged to |
|
Net of |
|
End |
|
||||
|
|
of the Year |
|
Operations |
|
Recoveries |
|
of the Year |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Accounts Receivable Allowances: |
|
|
|
|
|
|
|
|
|
||||
2012 |
|
$ |
14,076 |
|
$ |
37,057 |
|
$ |
(36,928 |
) |
$ |
14,205 |
|
2011 |
|
15,135 |
|
27,249 |
|
(28,308 |
) |
14,076 |
|
||||
2010 |
|
17,688 |
|
36,005 |
|
(38,558 |
) |
15,135 |
|
||||
******
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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UNITED STATES CELLULAR CORPORATION |
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By: |
/s/ Mary N. Dillon |
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Mary N. Dillon |
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President and Chief Executive Officer |
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|
(principal executive officer) |
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By: |
/s/ Steven T. Campbell |
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|
Steven T. Campbell |
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|
Executive Vice PresidentFinance, Chief |
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Financial Officer and Treasurer |
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|
(principal financial officer) |
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|
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By: |
/s/ Douglas D. Shuma |
|
|
Douglas D. Shuma |
|
|
Chief Accounting Officer |
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|
(principal accounting officer) |
Dated: February 26, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
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Title |
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Date |
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/s/ LeRoy T. Carlson, Jr. |
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Director |
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February 26, 2013 |
LeRoy T. Carlson, Jr. |
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/s/ Mary N. Dillon |
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Director |
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February 26, 2013 |
Mary N. Dillon |
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/s/ James Barr III |
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Director |
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February 26, 2013 |
James Barr III |
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/s/ Walter C.D. Carlson |
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Director |
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February 26, 2013 |
Walter C.D. Carlson |
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/s/ J. Samuel Crowley |
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Director |
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February 26, 2013 |
J. Samuel Crowley |
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/s/ Ronald E. Daly |
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Director |
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February 26, 2013 |
Ronald E. Daly |
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/s/ Paul-Henri Denuit |
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Director |
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February 26, 2013 |
Paul-Henri Denuit |
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/s/ Harry J. Harczak, Jr. |
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Director |
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February 26, 2013 |
Harry J. Harczak, Jr. |
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/s/ Gregory P. Josefowicz |
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Director |
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February 26, 2013 |
Gregory P. Josefowicz |
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/s/ Kenneth R. Meyers |
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Director |
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February 26, 2013 |
Kenneth R. Meyers |
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|
INDEX TO EXHIBITS
Exhibit
|
|
Description of Documents |
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|
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2.1 |
|
Purchase and Sale Agreement dated as of November 6, 2012 by and between United States Cellular Corporation and Sprint Spectrum L.P. and SprintCom, Inc., is hereby incorporated by reference to U.S. Cellulars Current Report on Form 8-K dated November 6, 2012. |
|
|
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3.1(a) |
|
Restated Certificate of Incorporation, as amended, filed as Exhibit 2(a) to U.S. Cellulars Amendment No. 1 on Form 8 dated March 24, 1992 to U.S. Cellulars Report on Form 8-A. |
|
|
|
3.1(b) |
|
Certificate of Amendment to Restated Certificate of Incorporation is hereby incorporated by reference to Exhibit 2(a)(i) to U.S. Cellulars Amendment No. 2 on Form 8 dated December 28, 1992 to U.S. Cellulars Report on Form 8-A. |
|
|
|
3.2 |
|
Restated Bylaws, as amended, are hereby incorporated by reference to Exhibit 3.1 to U.S. Cellulars Current Report on Form 8-K dated April 6, 2012. |
|
|
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4.1(a) |
|
Restated Certificate of Incorporation, as amended, incorporated herein as Exhibit 3.1(a). |
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4.1(b) |
|
Certificate of Amendment to Restated Certificate of Incorporation is incorporated herein as Exhibit 3.1(b). |
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4.2 |
|
Restated Bylaws, as amended, are incorporated herein as Exhibit 3.2. |
|
|
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4.3 |
|
Revolving Credit Agreement dated December 17, 2010 among U.S. Cellular and the lenders named therein, Toronto Dominion (New York) LLC as Administrative Agent and Swing Line Lender, The Toronto Dominion Bank, New York Branch as Letter of Credit Issuer, TD Securities (USA) LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Co-Lead Arrangers and Joint Book Managers, Wells Fargo Bank, N.A. as Syndication Agent, and Bank of America, N.A., SunTrust Bank and CoBank ACB as Co-Documentation Agents, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellulars Current Report on Form 8-K dated December 17, 2010. |
|
|
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4.4(a) |
|
Indenture dated June 1, 2002 between U.S. Cellular and BNY Midwest Trust Company of New York is hereby incorporated by reference to Exhibit 4.1 to Form S-3 (File No. 333-88344). |
|
|
|
4.4(b) |
|
Form of Third Supplemental Indenture dated December 3, 2003 between U.S. Cellular and BNY Midwest Trust Company, relating to $444,000,000 of U.S. Cellulars 6.7% Senior Notes due 2033, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellulars Current Report on Form 8-K dated December 3, 2003. |
|
|
|
4.4(c) |
|
Form of Fifth Supplemental Indenture dated June 21, 2004 between U.S. Cellular and BNY Midwest Trust Company, relating to $100,000,000 of U.S. Cellulars 6.7% Senior Notes due 2033, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellulars Current Report on Form 8-K dated June 21, 2004. |
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|
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4.4(d) |
|
Form of Sixth Supplemental Indenture dated as of May 9, 2011 between U.S. Cellular and BNY Midwest Trust Company, related to $342,000,000 of U.S. Cellulars 6.95% Senior Notes due 2060, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellulars Current Report on Form 8-K dated May 9, 2011. |
|
|
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9.1 |
|
Amendment and Restatement (dated April 22, 2005) of Voting Trust Agreement dated June 30, 1989 is hereby incorporated by reference to the Exhibit filed on Amendment No. 3 to the Schedule 13D dated May 2, 2005 filed by the trustees of such voting trust with respect to TDS Common Shares. |
|
|
|
10.1 |
|
Tax Allocation Agreement between U.S. Cellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellulars Registration Statement on Form S-1 (Registration No. 33-16975). |
|
|
|
10.2 |
|
Cash Management Agreement between U.S. Cellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellulars Registration Statement on Form S-1 (Registration No. 33-16975). |
10.3 |
|
Registration Rights Agreement between U.S. Cellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellulars Registration Statement on Form S-1 (Registration No. 33-16975). |
|
|
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10.4 |
|
Exchange Agreement between U.S. Cellular and TDS, as amended, is hereby incorporated by reference to an exhibit to U.S. Cellulars Registration Statement on Form S-1 (Registration No. 33-16975). |
|
|
|
10.5 |
|
Intercompany Agreement between U.S. Cellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellulars Registration Statement on Form S-1 (Registration No. 33-16975). |
|
|
|
10.6 |
|
Employee Benefit Plans Agreement between U.S. Cellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellulars Registration Statement on Form S-1 (Registration No. 33-16975). |
|
|
|
10.7 |
|
Insurance Cost Sharing Agreement between U.S. Cellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellulars Registration Statement on Form S-1 (Registration No. 33-16975). |
|
|
|
10.8(a)* |
|
TDS Supplemental Executive Retirement Plan, as amended and restated, effective January 1, 2009 is hereby incorporated by reference to Exhibit 10.1 to TDS Current Report on Form 8-K dated August 27, 2008. |
|
|
|
10.8(b)* |
|
Amendment to the TDS Supplemental Executive Retirement Plan, is hereby incorporated by reference to Exhibit 10.2 to TDS Current Report on Form 8-K dated March 15, 2012. |
|
|
|
10.9(a)* |
|
Compensation Plan for Non-Employee Directors, as amended March 17, 2009, is hereby incorporated by reference to Exhibit B to U.S. Cellulars Notice of Annual Meeting of Shareholders and Proxy Statement dated April 15, 2009. |
|
|
|
10.9(b)* |
|
Amendment to the U.S. Cellular Compensation Plan for Non-Employee Directors, is hereby incorporated by reference to Item 5.02 to U.S. Cellulars Current Report on Form 8-K dated March 6, 2012. |
|
|
|
10.10* |
|
U.S. Cellular 2005 Long-Term Incentive Plan, as amended, is hereby incorporated by reference to Exhibit C to U.S. Cellulars Notice of Annual Meeting of Shareholders and Proxy Statement dated April 15, 2009. |
|
|
|
10.11* |
|
Form of U.S. Cellular Executive Deferred Compensation AgreementPhantom Stock Account for Deferred Bonus is hereby incorporated by reference to Exhibit 10.7 to U.S. Cellulars Current Report on Form 8-K dated December 9, 2008. |
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|
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10.12(a)* |
|
U.S. Cellular Executive Deferred Compensation Interest Account Plan is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellulars Current Report on Form 8-K dated December 10, 2007. |
|
|
|
10.12(b)* |
|
First Amendment to U.S. Cellular Executive Deferred Compensation Interest Account Plan is hereby incorporated by reference to Exhibit 10.6 to U.S. Cellulars Current Report on Form 8-K dated December 9, 2008. |
|
|
|
10.12(c)* |
|
Second Amendment to U.S. Cellular Executive Deferred Compensation Interest Account Plan. |
|
|
|
10.12(d)* |
|
Election Form for U.S. Cellular Executive Deferred Compensation Interest Account Plan. |
|
|
|
10.13* |
|
Letter Agreement dated March 23, 2011 between U.S. Cellular and Carter S. Elenz. |
|
|
|
10.14* |
|
Form of Long-Term Incentive Plan Stock Option Award Agreement to be used for grants to executive officers other than the President and CEO is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellulars Current Report on Form 8-K dated March 7, 2011. |
|
|
|
10.15* |
|
Form of Long-Term Incentive Plan Restricted Stock Unit Award Agreement to be used for grants to executive officers other than the President and CEO is hereby incorporated by reference to Exhibit 10.5 to U.S. Cellulars Current Report on Form 8-K dated March 7, 2011. |
|
|
|
10.16* |
|
Form of U.S. Cellular 2005 Long-Term Incentive Plan Stock Option Award Agreement for grants of stock options to the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellulars Current Report on Form 8-K dated March 7, 2011. |
10.17* |
|
Form of U.S. Cellular 2005 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for grants of restricted stock options to the President and Chief Executive Officer of U.S. Cellular, is hereby incorporated by reference to Exhibit 10.2 to U.S. Cellulars Current Report on Form 8-K dated March 7, 2011. |
|
|
|
10.18* |
|
Letter Agreement between U.S. Cellular and Steven T. Campbell dated June 1, 2005 is hereby incorporated by reference to Exhibit 99.2 to U.S. Cellulars Current Report on Form 8-K dated June 1, 2005. |
|
|
|
10.19* |
|
Guidelines for the Determination of Annual Bonus for President and Chief Executive Officer of U.S. Cellular, as amended November 18, 2009, is hereby incorporated by reference to Exhibit 10.2 to U.S. Cellulars Current Report on Form 8-K dated November 18, 2009. |
|
|
|
10.20* |
|
Terms of Letter Agreement dated May 3, 2010 between U.S. Cellular and Mary N. Dillon is hereby incorporated by reference to Exhibit 99.2 to U.S. Cellulars Current Report on Form 8-K dated May 6, 2010. |
|
|
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10.21* |
|
U.S. Cellular 2005 Long-Term Incentive Plan 2010 Stock Option Award Agreement evidencing U.S. Cellular stock options granted to Mary N. Dillon on June 1, 2010 (with accelerated vesting in the event of termination without cause or for good reason), is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellulars Current Report on Form 8-K dated June 1, 2010. |
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10.22* |
|
U.S. Cellular 2005 Long-Term Incentive Plan 2010 Restricted Stock Unit Award Agreement evidencing U.S. Cellular restricted stock units granted to Mary N. Dillon on June 1, 2010 (with accelerated vesting in the event of termination without cause or for good reason), is hereby incorporated by reference to Exhibit 10.2 to U.S. Cellulars Current Report on Form 8-K dated June 1, 2010. |
|
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10.23* |
|
U.S. Cellular 2005 Long-Term Incentive Plan 2010 Stock Option Award Agreement evidencing U.S. Cellular stock options granted to Mary N. Dillon on June 1, 2010 (without accelerated vesting in the event of termination without cause or for good reason), is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellulars Current Report on Form 8-K dated June 1, 2010. |
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10.24* |
|
U.S. Cellular 2005 Long-Term Incentive Plan 2010 Restricted Stock Unit Award Agreement evidencing U.S. Cellular restricted stock units granted to Mary N. Dillon on June 1, 2010 (without accelerated vesting in the event of termination without cause or for good reason), is hereby incorporated by reference to Exhibit 10.4 to U.S. Cellulars Current Report on Form 8-K dated June 1, 2010. |
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10.25* |
|
Form of Retention Bonus Letter to named executive officers other than the President and CEO is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellulars Current Report on Form 8-K dated April 12, 2011. |
|
|
|
10.26* |
|
U.S. Cellular 2012 Executive Officer Annual Incentive Plan Effective January 1, 2012, is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellulars Current Report on Form 8-K dated May 30, 2012. |
|
|
|
10.27* |
|
Confidential Agreement and General Release between U.S. Cellular and Alan D. Ferber dated July 19, 2012, is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellulars Current Report on Form 8-K dated June 21, 2012, as filed on an amendment to such Form 8-K on July 25, 2012. |
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|
|
10.28** |
|
Master Service Agreement entered into by United States Cellular Corporation and Amdocs Software Systems Limited on August 17, 2010 to develop a Billing and Operational Support System (B/OSS) with a new point-of-sale system to consolidate billing on one platform, is hereby incorporated by reference to Exhibit 10.8 to U.S. Cellulars Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010. |
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|
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10.29** |
|
Software License and Maintenance Agreement entered into by United States Cellular Corporation and Amdocs Software Systems Limited on August 17, 2010 to develop a Billing and Operational Support System (B/OSS) with a new point-of-sale system to consolidate billing on one platform, is hereby incorporated by reference to Exhibit 10.9 to U.S. Cellulars Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010. |
|
|
|
11 |
|
Statement regarding computation of earnings per share (included in Note 6 Earnings Per Share in the Notes to Consolidated Financial Statements in Exhibit 13). |
|
|
|
12 |
|
Statement regarding computation of ratio of earnings to fixed charges for the years ended December 31, 2012, 2011, 2010, 2009, and 2008. |
13 |
|
Incorporated portions of 2012 Annual Report to Shareholders. |
|
|
|
21 |
|
Subsidiaries of U.S. Cellular. |
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23.1 |
|
Consent of Independent Registered Public Accounting FirmPricewaterhouseCoopers LLP. |
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|
23.2 |
|
Consent of Independent Registered Public Accounting FirmDeloitte & Touche LLP. |
|
|
|
31.1 |
|
Chief Executive Officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
|
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|
31.2 |
|
Chief Financial Officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |
|
|
|
32.1 |
|
Chief Executive Officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
|
|
|
32.2 |
|
Chief Financial Officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. |
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
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|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
* Indicates a management contract or compensatory plan or arrangement.
** Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Exchange Act of 1934, as amended.
EXHIBIT 10.12(c)
SECOND AMENDMENT
TO THE
UNITED STATES CELLULAR CORPORATION
EXECUTIVE DEFERRED COMPENSATION INTEREST ACCOUNT PLAN
WHEREAS, United States Cellular Corporation (the Corporation) has adopted and maintains the United States Cellular Corporation Executive Deferred Compensation Interest Account Plan (Amended and Restated Effective January 1, 2008), as amended (the Plan), for the benefit of its officers and directors;
WHEREAS, pursuant to Section 8.1 of the Plan, the Senior Vice President of Human Resources of the Corporation (the SVPHR) may amend the Plan at any time and for any reason; and
WHEREAS, the Executive Vice President and Chief Human Resources Officer of the Corporation ( i.e. , the redesignated title of the SVPHR) desires to amend the Plan in certain respects.
NOW, THEREFORE, BE IT RESOLVED, that effective as of January 1, 2013 or as otherwise set forth herein, the Plan hereby is amended as follows:
1. Effective for deferrals under the Plan earned on or after January 1, 2013, Section 5.1 hereby is amended in its entirety to read as follows:
Section 5.1. Normal Distribution . Except as otherwise provided herein, including the six month payment delay described in Section 3.3(b) for a Specified Employee entitled to payment by reason of a Separation from Service, a Participants Deferred Compensation Account shall become payable to the Participant as of the earlier of (i) the Payment Date elected by the Participant and (ii) the Participants Separation from Service. Payment shall be made either in a lump sum or installments, as elected by the Participant on the Election Form, in accordance with the payment schedule described in Section 5.4.
2. The parenthetical in the first sentence of Section 5.2 hereby is replaced with (irrespective of the Payment Date elected by the Participant or whether the Participant has incurred a Separation from Service).
3. The parenthetical in the first sentence of Section 5.4 hereby is replaced with (Separation from Service, the Payment Date or the Participants Disability, as applicable).
4. Article 7 hereby is amended to add thereto the following new Section 7.15:
Section 7.15. Clawback . To the maximum extent permitted under applicable law, a Participants Deferred Compensation Account and any amounts distributed with respect to a Participants Deferred Compensation Account are subject to forfeiture, recovery by the Company or other action pursuant to any clawback or recoupment policy which the Company may adopt from time to time, including without limitation any such policy which the Company may be required to adopt under the Dodd-Frank Wall Street Reform and Consumer Protection Act and implementing rules and regulations thereunder, or as otherwise required by law.
5. The definition of SVPHR hereby is deleted, and SVPHR each time it appears in the Plan hereby is replaced with Executive Vice President and Chief Human Resources Officer of the Company (or any successor thereto).
******
IN WITNESS WHEREOF, the undersigned has executed this Second Amendment as of this 7 th day of December, 2012.
|
/s/ Jeffrey J. Childs |
|
|
Jeffrey J. Childs |
|
|
Executive Vice President and Chief Human Resources Officer |
|
SIGNATURE PAGE TO
SECOND AMENDMENT TO THE
UNITED STATES CELLULAR CORPORATION
EXECUTIVE DEFERRED COMPENSATION INTEREST ACCOUNT PLAN
EXHIBIT 10.12(d)
UNITED STATES CELLULAR CORPORATION
EXECUTIVE DEFERRED COMPENSATION INTEREST ACCOUNT PLAN
2013 Election Form
Name
Election to Participate
I choose to participate in the United States Cellular Corporation Executive Deferred Compensation Interest Account Plan (the Plan) for calendar year 2013.
Election to Defer Base Salary
On each issuance of my payroll check for services to be performed in calendar year 2013, I elect to have USCC deduct an amount equivalent to the percentage indicated from my gross base salary for the pay period, which amount will be credited to my 2013 Deferred Compensation Account under the Plan as of the pay date on which such check is to be issued. The first deduction will occur on my payroll check dated January 18, 2013 .
Base Salary %:
Election to Defer Bonus
On each issuance of a check in full or partial payment of my annual bonus or quarterly sales bonus (or any annual component to my sales bonus), if any, for services to be performed in calendar year 2013, I elect to have USCC deduct an amount equivalent to the percentage indicated of such gross bonus payment, which amount will be credited to my 2013 Deferred Compensation Account under the Plan as of the pay date on which such check is to be issued.
Bonus %:
2013 Interest Account Plan - Time of Payment Election
You must choose when your base salary and/or bonus you defer under the Plan with respect to calendar year 2013 will be paid to you.
Note that if you are a specified employee (as determined under the Section 409A Specified Employee Policy of Telephone and Data Systems, Inc. and its Affiliates), no payment on account of your separation from service shall be made from your 2013 Deferred Compensation Account before the date which is six months after the date of your separation from service (or, if earlier than the end of such six-month period, the date of your death).
Note: If you elect a Specified Date for payment and separate from service prior to such date, payment will accelerate and your 2013 Deferred Compensation Account shall be distributed to you upon such separation from service, subject to the required six-month delay for specified employees.
2013 Interest Account Plan Method of Payment Election
You must choose the method of payment, either lump sum or quarterly installments, of your deferrals under the Plan with respect to calendar year 2013.
Note that if you choose installment payments and die prior to the total distribution of your 2013 Deferred Compensation Account, the unpaid balance of such account will be paid in a lump sum to your designated beneficiary at the time determined by USCC within sixty (60) days following your death.
Lump Sum Distribution |
OR |
Quarterly Installment Method (Up to a maximum of 20 qtrs or 5 yrs) |
|
|
|
Indicate x: |
|
# Quarters : |
Acknowledgement of Executive
I acknowledge and agree that the elections set forth herein to defer my base salary and/or bonus for calendar year 2013 are irrevocable and, except in the event of any withdrawal under the Plan (or under any other non-qualified deferred compensation plan maintained by USCC or its affiliates) due to my unforeseeable emergency, shall be in effect for the entire calendar year.
I understand that my ability to change the elections set forth herein regarding the date and method of payment of my 2013 Deferred Compensation Account is restricted. I generally will not be allowed to elect to accelerate the payment date of my 2013 Deferred Compensation Account. I may elect to delay the payment date of my 2013 Deferred Compensation Account or change the method of payment only if (i) such election is made at least 12 months prior to the date of the scheduled payment (or, in the case of installment payments, 12 months prior to the date the first amount is scheduled to be paid) and (ii) except in the event of my death, disability or unforeseeable emergency, the payment subject to such election is deferred for a period of at least 5 years from the date such payment otherwise would have been made (or, in the case of installment payments, 5 years from the date the first amount is scheduled to be paid).
I acknowledge and agree that my elections set forth herein are subject to the terms and conditions of the Plan, as it may be amended from time to time, including any amendment necessary to satisfy any requirement of Section 409A of the Internal Revenue Code.
|
|
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Signature |
|
Date |
Your completed election form must be received no later than December 17, 2012 to be effective. Please return this completed election form to Patricia Nowak or Lorraine Gardner at the RSO.
Exhibit 10.13
U.S. Cellular
8410 W. Bryn Mawr Avenue
Chicago, IL 60631
773-399-8900p
www.uscellular.com
March 23, 2011
Carter Elenz
00 Hillcrest Road
Burlington, VT 05401
Dear Carter,
We are pleased to extend an offer for you to join U.S. Cellular Corporation as the Executive Vice President, Sales and Customer Service, reporting to Mary Dillon. We hope that you accept this offer and agree to start on April 15, 2011. Upon acceptance, your appointment to the position is subject to the approval of the U.S. Cellular Board of Directors.
This letter contains our complete offer of employment to you. Your starting salary will be $16,077, paid bi-weekly, ($418,000 annualized) and will be subject to all applicable withholdings. Your pay check or direct deposit notification will be mailed to you at your address of record. You will be eligible for an annual performance review and given consideration for a salary increase in March, 2012.
You will be eligible for participation in our annual bonus program and will have a target bonus equal to 60% of your 2011 annual base earnings. Any bonus earned for 2011 is scheduled to be paid in March, 2012, provided you are an employee in good standing at that time.
Assuming you start on April 15, 2011, you will be eligible to participate in the companys Long-Term Incentive Plan (LTIP) with an initial award of $364,198 worth of non-qualified stock options and $169,708 worth of restricted stock units (RSU). The exercise price and the number of options granted will be determined by the closing price of a share of U.S. Cellular stock on the latter of your start date or the date the Long Term Incentive Compensation Committee of the Board of Directors, and the full Board of Directors, approves your grant. The number of RSUs granted will also be determined by the closing price of U.S. Cellular stock on the same date. The options will vest in three installments (33 1/3% each year) over three years and the RSUs will vest three years from the grant date. Participation in this plan also includes an opportunity for you to receive future stock options and restricted stock units (RSUs) awards which historically are granted on the first trading day of April each year.
In subsequent years, assuming U.S. Cellular continues its LTIP in its current form with the same base pay multiples, your target Long-Term Incentive (LTI) value will be 145 % of your base pay. This assumes that the company and you meet certain performance targets. If we maintain the current equity award vehicles and certain performance targets are met, 60 % of your LTI value will be paid as stock options and 40 % will be paid as RSUs. For any LTI awards made in April 2012, your RSU award allocation will be prorated based on your date of hire during 2011. If you start on April 15, 2011, your allocation will be 75% of the target annual RSU award, adjusted for company and personal performance.
U.S. Cellular provides an excellent benefits package, including group insurance, 401(k) plan participation, pension and flexible spending accounts. Also, as a member of senior management, you are eligible to participate in two separate salary and bonus deferral programs. Additional information regarding these programs, as well as U.S. Cellulars complete benefits program will be discussed with you at time of hire.
We understand that making a move to follow your career aspirations isnt always easy. To assist you with the transition to your new home, we would like to offer you relocation benefits. If your employment with U.S. Cellular® terminates within one year of the effective date in your position, you will be required to repay 100% of the total relocation dollars reimbursed and/or advanced including all expenses that were directly billed to U.S. Cellular. Please contact the Senior Director of Staffing, at 773-399-8900 to discuss in detail.
This offer is expressly contingent upon the acceptable results of a pre-employment drug screening. Failure to submit to a drug screen within 48 hours of the acceptance of this offer or a confirmed positive drug test shall result in the withdrawal of the employment offer and denial of employment. This offer is expressly contingent upon the acceptable results of a pre-employment drug screening. Failure to submit to a drug screen within 48 hours of the acceptance of this offer or a confirmed positive drug test shall result in the withdrawal of the employment offer and denial of employment.
This offer is also contingent upon the background check results provided by our third-party administrator, Orange Tree Employment Screening, and upon your ability to prove your identity and eligibility to be employed in compliance with the Immigration Reform and Control Act of 1986. At the time of hire, you will be provided with a comprehensive list of acceptable documents, which may be utilized to comply with the requirements of this federal law, as well as a Federal I-9 form, which you must complete.
In addition, this offer is contingent upon you signing this letter and completing the USCC Payroll Corporation Confidentiality/Non-Solicitation/Non-Competition Agreement. It is important that you understand all terms and conditions stated in the Agreement, and we will be happy to review the details with you directly.
To accept our invitation and as a condition of employment, we ask that you please sign and return this letter. A second copy of this letter is provided for your records.
On behalf of Mary Dillon, I welcome you to join U.S. Cellular®, and we look forward to a successful partnership with you.
Enclosures: |
|
USCC Confidentiality/Non-Solicitation/Non-Competition Agreement |
|
|
USCC Benefits At A Glance |
Exhibit 12
UNITED STATES CELLULAR CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
For the Year Ended December 31,
(Dollars in thousands) |
|
2012 |
|
2011 |
|
2010 |
|
2009 |
|
2008 |
|
|||||
EARNINGS: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income before income taxes (1) |
|
$ |
205,053 |
|
$ |
312,822 |
|
$ |
241,116 |
|
$ |
349,165 |
|
$ |
69,855 |
|
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity in earnings of unconsolidated entities |
|
(90,364 |
) |
(83,566 |
) |
(97,318 |
) |
(96,800 |
) |
(91,981 |
) |
|||||
Distributions from unconsolidated entities |
|
84,417 |
|
91,768 |
|
100,359 |
|
91,105 |
|
91,845 |
|
|||||
Amortization of capitalized interest |
|
855 |
|
613 |
|
492 |
|
320 |
|
|
|
|||||
Income attributable to noncontrolling interests in subsidiaries that do not have fixed charges |
|
(30,122 |
) |
(24,247 |
) |
(23,869 |
) |
(22,663 |
) |
(26,131 |
) |
|||||
|
|
169,839 |
|
297,390 |
|
220,780 |
|
321,127 |
|
43,588 |
|
|||||
Add fixed charges: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Consolidated interest expense (2) |
|
42,393 |
|
65,614 |
|
61,555 |
|
78,199 |
|
78,535 |
|
|||||
Interest portion (1/3) of consolidated rent expense |
|
47,394 |
|
44,130 |
|
42,550 |
|
41,305 |
|
37,254 |
|
|||||
|
|
259,626 |
|
407,134 |
|
324,885 |
|
440,631 |
|
159,377 |
|
|||||
FIXED CHARGES: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Consolidated interest expense (2) |
|
42,393 |
|
65,614 |
|
61,555 |
|
78,199 |
|
78,535 |
|
|||||
Capitalized interest |
|
17,930 |
|
10,064 |
|
2,446 |
|
1,647 |
|
2,805 |
|
|||||
Interest portion (1/3) of consolidated rent expense |
|
47,394 |
|
44,130 |
|
42,550 |
|
41,305 |
|
37,254 |
|
|||||
|
|
$ |
107,717 |
|
$ |
119,808 |
|
$ |
106,551 |
|
$ |
121,151 |
|
$ |
118,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
RATIO OF EARNINGS TO FIXED CHARGES |
|
2.41 |
|
3.40 |
|
3.05 |
|
3.64 |
|
1.34 |
|
(1) Includes non-cash charges related to losses on impairment as follows: 2009: $14.0 million; 2008: $386.7 million.
Includes (Gain) loss on sale of business and other exit costs, net as follows: 2012: $21.0 million.
Includes loss on investment of $3.7 million in 2012 and gain on investment as follows: 2011: $11.4 million; 2008: $16.6 million.
(2) Interest expense on income tax contingencies is not included in fixed charges.
United States Cellular Corporation and Subsidiaries
Financial Reports Contents
United States Cellular Corporation
Management's Discussion and Analysis of Financial Condition and Results of Operations
United States Cellular Corporation ("U.S. Cellular") owns, operates and invests in wireless markets throughout the United States. U.S. Cellular is an 84%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
The following discussion and analysis should be read in conjunction with U.S. Cellular's audited consolidated financial statements and the description of U.S. Cellular's business included in Item 1 of the U.S. Cellular Annual Report on Form 10-K ("Form 10-K") for the year ended December 31, 2012. The discussion and analysis contained herein refers to consolidated data and results of operations, unless otherwise noted.
The following is a summary of certain selected information contained in the comprehensive Management's Discussion and Analysis of Financial Condition and Results of Operations that follows. The overview does not contain all of the information that may be important. You should carefully read the entire Management's Discussion and Analysis of Financial Condition and Results of Operations and not rely solely on the overview.
U.S. Cellular's consolidated operating markets cover approximately 5.8 million customers in five geographic market areas in 26 states. As of December 31, 2012, U.S. Cellular's average penetration rate in its consolidated operating markets was 12.3%. U.S. Cellular operates on a customer satisfaction strategy, striving to meet or exceed customer needs by providing a comprehensive range of wireless products and services, excellent customer support, and a high-quality network. U.S. Cellular's business development strategy is to obtain interests in and access to wireless licenses in certain spectrum bands in areas overlapping, adjacent to or in proximity to its other wireless licenses, thereby building contiguous operating market areas with strong spectrum positions. U.S. Cellular anticipates that grouping its operations into market areas will continue to provide it with certain economies in its capital and operating costs.
Financial and operating highlights in 2012 included the following:
1
U.S. Cellular anticipates that future results will be affected by the following factors:
2
FCC Reform Order
On November 18, 2011, the FCC released a Report and Order and Further Notice of Proposed Rulemaking ("Reform Order") adopting reforms of its universal service and intercarrier compensation mechanisms, establishing a new, broadband-focused support mechanism, and proposing further rules to advance reform.
The Reform Order substantially revises the current USF high cost program and intercarrier compensation regime. The current USF program, which supports voice services, is to be phased out over time and replaced with the Connect America Fund ("CAF"), a new Mobility Fund and a Remote Area Fund, which will collectively support broadband-capable networks. Mobile wireless carriers such as U.S. Cellular are eligible to receive funds in both the CAF and the Mobility Fund, although some areas that U.S. Cellular currently serves may be declared ineligible for support if they are already served, or are subject to certain rights of first refusal by incumbent carriers.
The terms and rules for participating in the CAF for wireless eligible telecommunications carriers ("ETC") have not been developed yet by the FCC. It is uncertain whether U.S. Cellular will obtain support through these replacement mechanisms to the current USF funding regime. If U.S. Cellular is successful in obtaining support, it will be required to meet certain regulatory conditions to obtain and retain the right to receive support including, for example, allowing other carriers to collocate on U.S. Cellular's towers, allowing voice and data roaming on U.S. Cellular's network, and submitting various reports and certifications to retain eligibility each year. It is possible that additional regulatory requirements will be imposed pursuant to the FCC's Further Notice of Proposed Rulemaking.
U.S. Cellular's current USF support is scheduled to be phased down. Support for 2012 (excluding certain adjustments) was frozen on January 1, 2012 using support for 2011 as a baseline and was reduced by 20% starting in July 2012. The reduction in USF support that U.S. Cellular otherwise would have received in 2012 is approximately $16 million. Support will be further reduced by 20% in July of each subsequent year; however, if the Phase II Mobility Fund is not operational by July 2014, the phase down will halt at
3
that time and U.S. Cellular will receive 60% of its baseline support until the Phase II Mobility Fund is operational.
Multiple appeals and petitions for reconsideration have been filed with respect to the FCC Reform Order, but it has not been stayed.
At this time, U.S. Cellular cannot predict the net effect of the FCC's changes to the USF high cost support program in the Reform Order or whether reductions in support will be fully offset with additional support from the CAF or the Mobility Fund. Accordingly, U.S. Cellular cannot predict whether such changes will have a material adverse effect on U.S. Cellular's business, financial condition or results of operations.
On September 27, 2012, the FCC conducted a single round, sealed bid, reverse auction to award up to $300 million in one-time Mobility Fund Phase I support to successful bidders that commit to provide 3G, or better, wireless service in areas designated as unserved by the FCC. This auction was designated by the FCC as Auction 901. As announced on October 3, 2012, U.S. Cellular and several of its wholly-owned subsidiaries participated in Auction 901. U.S. Cellular and its subsidiaries were winning bidders in eligible areas within 10 states and will receive up to $40.1 million in support from the Mobility Fund. As part of the auction rules, winning bidders must complete network build-out projects to provide 3G or 4G service to these areas within two or three years, respectively, and must also make their networks available to other providers for roaming. Winning bidders will receive support funding primarily upon achievement of coverage milestones defined in the auction rules.
Cash Flows and Investments
See "Financial Resources" and "Liquidity and Capital Resources" below for information related to cash flows and investments.
On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of Sprint Nextel Corporation ("Sprint"). The Purchase and Sale Agreement also contemplates certain other agreements, collectively referred to as the "Divestiture Transaction."
As more fully described below, the Purchase and Sale Agreement provides that U.S. Cellular will transfer to Sprint certain rights and assets (collectively, the "Subject Assets"), and Sprint will assume certain liabilities ("Subject Liabilities"), related to U.S. Cellular's Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (the "Divestiture Markets"), in consideration for $480 million in cash at closing ("Purchase Price"), subject to pro-rations of certain assets and liabilities. U.S. Cellular will retain all other assets ("Retained Assets") and liabilities ("Retained Liabilities") related to the Divestiture Markets. U.S. Cellular is not transferring and will continue to operate and provide services in Peoria, Rockford and certain other areas in Illinois, and in Columbia, Joplin, Jefferson City and certain other areas in Missouri.
Management, the U.S. Cellular Board of Directors and the TDS Board of Directors considered various alternatives and approved this transaction as part of a decision to divest low-margin markets and focus U.S. Cellular's efforts and capital on its higher-margin markets. The transaction will better position U.S. Cellular to invest its resources in markets where it is more likely to succeed. U.S. Cellular's strategic priority is to drive growth and profitability in its stronger markets.
The Subject Assets include customers (the "Subject Customers") and most of U.S. Cellular's PCS licenses in the Divestiture Markets. U.S. Cellular will retain its direct and indirect ownership interests in other spectrum in the Divestiture Markets. The transaction does not affect spectrum licenses held by U.S. Cellular or by variable interest entities consolidated by U.S. Cellular, that are not currently used in the operations of the Divestiture Markets. The Subject Liabilities that will be assumed by Sprint include only (i) liabilities as of the closing relating to the Subject Customers and (ii) liabilities arising after the closing relating to the Subject Assets.
4
The Retained Assets include all assets other than the Subject Assets, including cash, accounts receivable, inventory, naming rights, real estate, 561 owned cell sites including towers, network equipment, stores, retail equipment, furniture and fixtures, and all other assets, including corporate and other facilities located in the Divestiture Markets. The Retained Liabilities include all liabilities other than the Subject Liabilities, including accounts payable, accrued expenses, liabilities to employees, taxes, and obligations under benefit plans, contracts, leases and asset retirement obligations.
The transaction is subject to FCC approval, compliance with the Hart-Scott-Rodino Act and other conditions. Subject to the satisfaction or (if permitted) waiver of all conditions, the transaction is expected to close in mid-2013.
Selected pro forma information related to the Divestiture Transaction is as follows:
(Dollars in millions)
|
As Reported |
Divestiture
Markets(1) |
Core
Markets |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
As of or for the year ended December 31, 2012 |
||||||||||
Postpaid customers(2) |
5,134,000 | 463,000 | 4,671,000 | |||||||
Prepaid customers(2) |
423,000 | 81,000 | 342,000 | |||||||
Reseller customers(2) |
241,000 | 16,000 | 225,000 | |||||||
Total customers |
5,798,000 | 560,000 | 5,238,000 | |||||||
Market penetration in consolidated operating markets(2) |
12.3 | % | 3.7 | % | 16.4 | % | ||||
Postpaid churn rate(2) |
1.67 | % | 2.95 | % | 1.53 | % | ||||
U.S. Cellular Service revenues |
$ | 4,099 | $ | 427 | $ | 3,672 | ||||
U.S. Cellular Capital expenditures |
$ | 837 | $ | 68 | $ | 769 | ||||
As of or for the year ended December 31, 2011 |
||||||||||
U.S. Cellular Service revenues |
$ | 4,054 | $ | 468 | $ | 3,586 | ||||
U.S. Cellular Capital expenditures |
$ | 783 | $ | 67 | $ | 716 | ||||
As of or for the year ended December 31, 2010 |
||||||||||
U.S. Cellular Service revenues |
$ | 3,913 | $ | 513 | $ | 3,400 | ||||
U.S. Cellular Capital expenditures |
$ | 583 | $ | 68 | $ | 515 |
The Divestiture Transaction contemplates that five agreements will be entered into as of the closing: a Customer Transition Services Agreement, a Network Transition Services Agreement, a Spectrum Manager Lease Agreement, a Brand License Agreement, and an amendment to the Sprint/U.S. Cellular Intercarrier Roaming Agreement.
At closing, the Subject Customers will cease to be customers of U.S. Cellular and will become customers of Sprint. Pursuant to the Customer Transition Services Agreement, on and after closing, U.S. Cellular will provide customer service and billing to, and collect accounts receivable from, the Subject Customers on behalf of Sprint for a period of up to 24 months following the closing. Sprint will reimburse U.S. Cellular at an amount equal to U.S. Cellular's cost, including applicable overhead allocations, for providing such services and will provide notice to U.S. Cellular when to discontinue them.
Pursuant to the Network Transition Services Agreement, U.S. Cellular will retain and continue to operate the Retained Assets to provide network services to Sprint in the Divestiture Markets for a period of up to 24 months following the closing. Sprint will reimburse U.S. Cellular at an amount equal to U.S. Cellular's cost, including applicable overhead allocations, for providing such services and for actual cell site rent
5
expenses during the transition period. Sprint will provide notice to U.S. Cellular as to how and when to decommission certain network assets.
Sprint will reimburse U.S. Cellular up to $200 million (the "Sprint Cost Reimbursement") for network-related exit costs in the Divestiture Markets that U.S. Cellular expects to incur as a result of the transaction, including: (i) costs to decommission cell sites and mobile telephone switching office ("MTSO") sites in the Divestiture Markets, (ii) costs to terminate real property leases related to cell sites in the Divestiture Markets, (iii) costs to terminate certain network access arrangements, and (iv) costs for employee termination benefits that are paid to specified engineering employees in the Divestiture Markets.
The Spectrum Manager Lease Agreement provides that Sprint, as lessor, would lease the Subject Licenses to U.S. Cellular, as lessee, to provide U.S. Cellular with FCC authority to operate the network during the transition period. U.S. Cellular is not required to make any lease payments to Sprint under this agreement.
The Brand License Agreement provides that Sprint will have the rights to continue to use U.S. Cellular's trade-names, trademarks and service marks in the Divestiture Markets during the transition period. No additional payments are due by Sprint to U.S. Cellular under this agreement.
Sprint will not purchase or assume any of U.S. Cellular's retail locations, distribution points or agent relationships. The transaction ultimately will result in the closure of approximately 100 company-owned stores and the termination of related retail associates, along with the termination of agent and sub-agent relationships related to approximately 150 stores in these markets. U.S. Cellular also will cease to distribute the U Prepaid product in Walmart stores in these markets.
U.S. Cellular expects to incur costs associated with store closures and agent terminations in the Divestiture Markets, including: (i) costs to terminate leases for company-owned retail stores, (ii) costs for employee termination benefits that are paid to retail and support employees, and (iii) costs to terminate certain agent and sub-agent relationships. Sprint will not reimburse U.S. Cellular for costs associated with company-owned store closures and agent terminations.
Upon the completion of the transaction, U.S. Cellular expects to reduce its workforce by approximately 1,000 employees in these markets, primarily store employees, but also including engineering employees and support staff. Most of these employees will continue to work through the closing and some of the employees will continue to be retained through the completion of the transition services period.
Between the date of the Purchase and Sale Agreement and the closing, the operating results of the Divestiture Markets will continue to be presented in continuing operations. The financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of Operations within Operating income. See Note 7Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information regarding (i) the amounts U.S. Cellular expects to recognize in the Consolidated Statement of Operations between the date the Purchase and Sale Agreement was signed and the end of the transition services period and (ii) the actual amounts incurred during the year ended December 31, 2012 as a result of the transaction. The net impacts of the Divestiture Transaction resulted in a $44.5 million reduction in U.S. Cellular's Operating income in the quarter ended December 31, 2012.
As a result of the transaction, U.S. Cellular reviewed the remaining goodwill and intangible assets in these reporting units and units of accounting for impairment in the fourth quarter of 2012 and concluded there was no impairment of Goodwill or Licenses. See Application of Critical Accounting Policies and Estimates, below, for additional information.
As noted above, the Purchase Price is $480 million, net of certain pro-rations, to be received upon the closing of the Purchase and Sale Agreement, and the Sprint Cost Reimbursement is up to $200 million. After the closing, U.S. Cellular intends to invest the Purchase Price in excess of non-reimbursed exit costs and income tax payments in temporary investments and these funds will be available for use for general corporate purposes. This will increase U.S. Cellular's liquidity and capital resources at that time, subject to the below cash expenditures and income taxes.
6
As a result of the transaction, U.S. Cellular expects net cash flows of the following:
(Dollars in thousands)
|
Cash inflow (outflow) | |||
---|---|---|---|---|
Proceeds: |
||||
Purchase price |
$ | 480,000 | ||
Reimbursement of transition and exit costs |
150,000 - 200,000 | |||
Cash expenditures: |
||||
Employee related costs including severance, retention and outplacement |
(15,000) - (25,000 | ) | ||
Contract termination costs |
(125,000) - (175,000 | ) | ||
Costs of decommissioning cell sites and MTSOs |
(40,000) - (50,000 | ) | ||
Transaction costs |
(3,000) - (5,000 | ) | ||
Income taxes |
(130,000) - (150,000 | ) |
Net cash proceeds from the transaction are expected to be $275 million to $350 million. Such net cash proceeds will be realized over the period from the date of the signing of the Purchase and Sale Agreement on November 6, 2012, to the end of the transition services agreements. Net cash outflows related to the Divestiture Transaction for the quarter ended December 31, 2012 totaled $0.3 million.
Following the closing, U.S. Cellular will no longer receive Operating revenues in the Divestiture Markets. However, following the closing, U.S. Cellular will continue to incur System operations, Selling, general and administrative expenses and Depreciation, amortization and accretion in the Divestiture Markets in order for U.S. Cellular to provide transition services to Sprint. Certain of these costs will be reimbursed by Sprint pursuant to the Customer Transition Service Agreement and the Network Transition Services Agreement described above.
U.S. Cellular's estimates of full-year 2013 results are shown below. Such estimates represent U.S. Cellular's views as of the date of filing of U.S. Cellular's Form 10-K for the year ended December 31, 2012. Such forward-looking statements should not be assumed to be current as of any future date. U.S. Cellular undertakes no duty to update such information whether as a result of new information, future events or otherwise. There can be no assurance that final results will not differ materially from such estimated results.
U.S. Cellular has changed the measures which it uses to present estimates of operating results. U.S. Cellular previously presented Adjusted OIBDA, defined as operating income excluding the effects of: depreciation, amortization and accretion (OIBDA); the loss on impairment of assets; and the net gain or loss on asset disposals and exchanges. U.S. Cellular believes Adjusted income before income taxes, as defined below, is a measure which provides a more comprehensive and meaningful view of U.S. Cellular's recurring results of operations.
|
2013 Estimated Results(1) | |||||
---|---|---|---|---|---|---|
(Dollars in millions)
|
Core
Markets(2) |
Divestiture
Markets(2)(3) |
U.S. Cellular
Consolidated(2)(3) |
|||
Service revenues |
$3,600 - $3,700 | $165 - $185 | $3,765 - $3,885 | |||
Adjusted income before income taxes(4) |
$765 - $865 | $15 - $35 | $780 - $900 | |||
Capital expenditures |
Approx. $600 | | Approx. $600 |
7
U.S. Cellular's total consolidated markets excluding the Divestiture Markets. The Core Markets and Divestiture Markets amounts represent non-GAAP financial measures. U.S. Cellular believes that the Core Markets and Divestiture Markets amounts may be useful to investors and other users of its financial information in evaluating the pro forma results for the Core Markets.
|
2013 Estimated Results | |||||
---|---|---|---|---|---|---|
(Dollars in millions)
|
Core
Markets(2) |
Divestiture
Markets(2)(3) |
U.S. Cellular
Consolidated(2)(3) |
|||
Income before income taxes(5) |
$165 - $265 | ($180) - ($160) | ($15) - $105 | |||
Depreciation, amortization and accretion expense(6) |
Approx. $545 | Approx. $195 | Approx. $740 | |||
Interest expense |
Approx. $55 | | Approx. $55 | |||
Adjusted income before income taxes |
$765 - $865 | $15 - $35 | $780 - $900 | |||
|
U.S. Cellular Consolidated Actual Results | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Year Ended December 31,
(Dollars in millions) |
2012 | 2011 | 2010 | |||||||
Income before income taxes |
$ | 205.1 | $ | 312.8 | $ | 241.1 | ||||
Depreciation, amortization and accretion expense(6) |
608.6 | 573.6 | 571.0 | |||||||
(Gain) loss on sale of business and other exit costs, net |
21.0 | | | |||||||
Interest expense |
42.4 | 65.6 | 61.6 | |||||||
Adjusted income before income taxes |
$ | 877.1 | $ | 952.0 | $ | 873.7 | ||||
U.S. Cellular management currently believes that the foregoing estimates represent a reasonable view of what is achievable considering actions that U.S. Cellular has taken and will be taking. However, the current competitive conditions in the markets served by U.S. Cellular have created a challenging environment that could continue to significantly impact actual results. U.S. Cellular expects to continue its focus on customer satisfaction by delivering a high quality network, attractively priced service plans, a broad line of wireless devices and other products, and outstanding customer service. U.S. Cellular believes that future growth in its revenues will result primarily from selling additional products and services, including data products and services, to its existing customers, increasing the number of
8
multi-device users among its existing customers, and attracting wireless users switching from other wireless carriers. U.S. Cellular is focusing on opportunities to increase revenues, pursuing cost reduction initiatives in various areas and implementing a number of initiatives to enable future growth. The initiatives are intended, among other things, to allow U.S. Cellular to accelerate its introduction of new products and services, better segment its customers for new services and retention, sell additional services such as data, expand its distribution channels, enhance its internet sales and customer service capabilities, improve its prepaid products and services and reduce operational expenses over the long term.
Following is a table of summarized operating data for U.S. Cellular's consolidated operations.
As of December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Total population |
||||||||||
Consolidated markets(1) |
93,244,000 | 91,965,000 | 90,468,000 | |||||||
Consolidated operating markets(1) |
46,966,000 | 46,888,000 | 46,546,000 | |||||||
Market penetration at end of period |
||||||||||
Consolidated markets(2) |
6.2 | % | 6.4 | % | 6.7 | % | ||||
Consolidated operating markets(2) |
12.3 | % | 12.6 | % | 13.0 | % | ||||
All Customers |
||||||||||
Total at end of period |
5,798,000 | 5,891,000 | 6,072,000 | |||||||
Gross additions |
1,302,000 | 1,155,000 | 1,372,000 | |||||||
Net additions (losses) |
(88,000 | ) | (186,000 | ) | (69,000 | ) | ||||
Smartphones sold as a percent of total devices sold(3) |
55.8 | % | 44.0 | % | 24.6 | % | ||||
Retail Customers |
||||||||||
Total at end of period |
5,557,000 | 5,608,000 | 5,729,000 | |||||||
Postpaid smartphone penetration(3)(4) |
41.8 | % | 30.5 | % | 16.7 | % | ||||
Gross additions |
1,248,000 | 1,064,000 | 1,205,000 | |||||||
Net retail additions (losses)(5) |
(47,000 | ) | (125,000 | ) | (15,000 | ) | ||||
Net postpaid additions (losses) |
(165,000 | ) | (117,000 | ) | (66,000 | ) | ||||
Net prepaid additions (losses) |
118,000 | (8,000 | ) | 51,000 | ||||||
Service revenue components (000s) |
||||||||||
Retail service |
$ | 3,547,979 | $ | 3,486,522 | $ | 3,459,546 | ||||
Inbound roaming |
348,717 | 348,309 | 253,290 | |||||||
Other |
202,160 | 218,966 | 200,165 | |||||||
Total service revenues (000s) |
$ | 4,098,856 | $ | 4,053,797 | $ | 3,913,001 | ||||
Total ARPU(6) |
$ | 58.70 | $ | 56.54 | $ | 53.27 | ||||
Billed ARPU(7) |
$ | 50.81 | $ | 48.63 | $ | 47.10 | ||||
Postpaid ARPU(8) |
$ | 54.32 | $ | 54.00 | $ | 51.21 | ||||
Postpaid churn rate(9) |
1.7 | % | 1.5 | % | 1.5 | % | ||||
Capital expenditures (000s) |
$ | 836,748 | $ | 782,526 | $ | 583,134 | ||||
Cell sites in service |
8,028 | 7,882 | 7,645 |
9
Components of Operating Income
Year Ended December 31,
|
2012 |
Increase/
(Decrease) |
Percentage
Change |
2011 |
Increase/
(Decrease) |
Percentage
Change |
2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|||||||||||||||
Retail service |
$ | 3,547,979 | $ | 61,457 | 2 | % | $ | 3,486,522 | $ | 26,976 | 1 | % | $ | 3,459,546 | ||||||||
Inbound roaming |
348,717 | 408 | | 348,309 | 95,019 | 38 | % | 253,290 | ||||||||||||||
Other |
202,160 | (16,806 | ) | (8 | )% | 218,966 | 18,801 | 9 | % | 200,165 | ||||||||||||
Service revenues |
4,098,856 | 45,059 | 1 | % | 4,053,797 | 140,796 | 4 | % | 3,913,001 | |||||||||||||
Equipment sales |
353,228 | 63,679 | 22 | % | 289,549 | 24,869 | 9 | % | 264,680 | |||||||||||||
Total operating revenues |
4,452,084 | 108,738 | 3 | % | 4,343,346 | 165,665 | 4 | % | 4,177,681 | |||||||||||||
System operations (excluding Depreciation, amortization and accretion reported below) |
946,805 | 17,426 | 2 | % | 929,379 | 74,448 | 9 | % | 854,931 | |||||||||||||
Cost of equipment sold |
935,947 | 144,145 | 18 | % | 791,802 | 35,512 | 5 | % | 756,290 | |||||||||||||
Selling, general and administrative |
1,764,933 | (4,768 | ) | | 1,769,701 | (13,614 | ) | (1 | )% | 1,783,315 | ||||||||||||
Depreciation, amortization and accretion |
608,633 | 35,076 | 6 | % | 573,557 | 2,602 | | 570,955 | ||||||||||||||
(Gain) loss on asset disposals and exchanges, net |
18,088 | 19,961 | N/M | (1,873 | ) | (12,590 | ) | N/M | 10,717 | |||||||||||||
(Gain) loss on sale of business and other exit costs, net |
21,022 | 21,022 | N/M | | | N/M | | |||||||||||||||
Total operating expenses |
4,295,428 | 232,862 | 6 | % | 4,062,566 | 86,358 | 2 | % | 3,976,208 | |||||||||||||
Operating income |
$ | 156,656 | $ | (124,124 | ) | (44 | )% | $ | 280,780 | $ | 79,307 | 39 | % | $ | 201,473 | |||||||
N/MPercentage change not meaningful
10
Operating Revenues
Service revenues
Service revenues consist primarily of: (i) charges for access, airtime, roaming, recovery of regulatory costs and value-added services, including data products and services, provided to U.S. Cellular's retail customers and to end users through third-party resellers ("retail service"); (ii) charges to other wireless carriers whose customers use U.S. Cellular's wireless systems when roaming, including long-distance roaming ("inbound roaming"); and (iii) amounts received from the Federal USF.
Retail service revenues
Retail service revenues increased by $61.5 million, or 2%, to $3,548.0 million primarily due to the impact of an increase in the average monthly retail service revenue per customer, partially offset by a decrease in U.S. Cellular's average customer base.
The average number of customers decreased to 5,819,000 in 2012 from 5,975,000 in 2011, driven by reductions in postpaid and reseller customers. The average number of customers in 2011 decreased from 6,121,000 in 2010 driven by reductions in postpaid, prepaid and reseller customers.
Average monthly retail service revenue per customer increased to $50.81 in 2012 from $48.63 in 2011, and in 2011 increased from $47.10 in 2010. The increase in 2012 from 2011 reflects the impact of a larger portion of the customer base using smartphones which drives incremental data access revenue. The average monthly retail service revenue increase in both years also includes the impact of a reduction in the number of reseller customers, who typically generate lower average monthly revenues.
U.S. Cellular expects continued pressure on revenues in the foreseeable future due to industry competition for customers and related effects on pricing of service plan offerings offset to some degree by continued adoption of smartphones and data usage.
U.S. Cellular accounts for loyalty reward points under the deferred revenue method. Under this method, U.S. Cellular allocates a portion of the revenue billed to customers with applicable plans to the loyalty reward points. The revenue allocated to these points is initially deferred in the Consolidated Balance Sheet and is recognized in future periods when the loyalty reward points are redeemed or used. Application of the deferred revenue method of accounting related to loyalty reward points resulted in deferring net revenues of $17.7 million in 2012, $31.8 million in 2011, and $7.1 million in 2010. Deferred revenues related to loyalty reward points are included in the Customer deposits and deferred revenues in the Consolidated Balance Sheet at December 31, 2012 and December 31, 2011.
Inbound roaming revenues
Inbound roaming revenues of $348.7 million were flat in 2012 compared to 2011 as higher data revenues, reflecting significantly higher volumes but lower negotiated rates, were offset by lower voice revenues, reflecting both lower volumes and rates. In 2011, inbound roaming revenues increased $95.0 million, or 38% compared to 2010 as an increase in data roaming revenues was partially offset by a decrease in voice roaming revenues. U.S. Cellular expects continued growth in data roaming volume but also expects that the revenue impact of this growth will be offset by the impacts of decreases in negotiated data roaming rates and voice roaming volumes.
Other revenues
As described below, ETC support was phased down to 80% of 2011 levels beginning July 1, 2012. As a result, Other revenues decreased by $16.8 million, or 8%, in 2012 compared to 2011. In 2011, the increase of $18.8 million, or 9%, was driven primarily by increased ETC revenues due to expanded eligibility in certain states and adjustments by the Universal Service Administrative Company ("USAC") that reduced amounts received in prior years. U.S. Cellular was eligible to receive ETC funds in sixteen states in 2012, 2011 and 2010. ETC revenues recorded in 2012, 2011 and 2010 were $140.8 million, $160.5 million and $143.9 million, respectively.
11
Pursuant to the FCC's Reform Order (See "OverviewFCC Reform Order" above), U.S. Cellular's ETC support is currently being phased down. Support for 2012 (excluding certain adjustments) was frozen on January 1, 2012 at 2011 levels and was reduced by 20% starting in July 2012. Support will be reduced by 20% in July of each subsequent year; however, if the Phase II Mobility Fund is not operational by July 2014, the phase down will halt at that time and U.S. Cellular will receive 60% of its baseline support until the Phase II Mobility Fund is operational.
See the "OverviewFCC Reform Order" section above for a discussion of alternative sources of funding. At this time, U.S. Cellular cannot predict the net effect of the FCC's changes to the USF high cost support program in the Reform Order or the extent to which reductions in support will be offset with additional support from the CAF or the Mobility Fund. Accordingly, U.S. Cellular cannot predict whether such changes will have a material adverse effect on U.S. Cellular's business, financial condition or results of operations.
Equipment sales revenues
Equipment sales revenues include revenues from sales of wireless devices and related accessories to both new and existing customers, as well as revenues from sales of wireless devices and accessories to agents. All equipment sales revenues are recorded net of rebates.
U.S. Cellular offers a competitive line of quality wireless devices to both new and existing customers. U.S. Cellular's customer acquisition and retention efforts include offering new wireless devices to customers at discounted prices; in addition, customers on currently offered rate plans receive loyalty reward points that may be used to purchase a new wireless device or accelerate the timing of a customer's eligibility for a wireless device upgrade at promotional pricing. U.S. Cellular also continues to sell wireless devices to agents including national retailers; this practice enables U.S. Cellular to provide better control over the quality of wireless devices sold to its customers, establish roaming preferences and earn quantity discounts from wireless device manufacturers which are passed along to agents and other retailers. U.S. Cellular anticipates that it will continue to sell wireless devices to agents in the future.
The increase in 2012 equipment sales revenues of $63.7 million, or 22%, to $353.2 million was driven primarily by a 17% increase in average revenue per wireless device sold; an increase in equipment activation fees also was a factor. Average revenue per wireless device sold increased due to a shift in customer preference to higher priced smartphones. The increase in 2011 equipment sales revenues of $24.9 million, or 9%, to $289.5 million was driven by a 15% increase in average revenue per wireless device sold offset by a 4% decrease in total wireless devices sold.
Operating Expenses
System operations expenses (excluding Depreciation, amortization and accretion)
System operations expenses (excluding Depreciation, amortization and accretion) include charges from telecommunications service providers for U.S. Cellular's customers' use of their facilities, costs related to local interconnection to the wireline network, charges for cell site rent and maintenance of U.S. Cellular's network, long-distance charges, outbound roaming expenses and payments to third-party data product and platform developers.
System operations expenses increased $17.4 million, or 2%, to $946.8 million in 2012 and $74.4 million, or 9%, to $929.4 million in 2011. Key components of the overall increases in System operations expenses were as follows:
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U.S. Cellular expects system operations expenses to increase in the future to support the continued growth in cell sites and other network facilities as it continues to add capacity, enhance quality and deploy new technologies as well as to support increases in total customer usage, particularly data usage. However, these increases are expected to be offset to some extent by cost savings generated by shifting data traffic to the 4G LTE network from the 3G network, containment of roaming expense via lower negotiated rates and initiatives designed to reduce overall customer usage.
Cost of equipment sold
Cost of equipment sold increased $144.1 million, or 18%, in 2012 and $35.5 million, or 5% in 2011. In 2012, total devices sold increased by 1% due to expanded distribution for U Prepaid compared to a decline in total wireless devices sold in 2011. In both years there was an increase in the average cost per wireless device sold (18% in 2012 and 8% in 2011) due to a shift in the mix of sales to smartphones. In 2012, the introduction of 4G LTE devices also was a significant driver to the increase in Cost of equipment sold as these devices are more costly than similar 3G devices. However, 4G LTE technology results in lower system operations expense during a customer's lifecycle.
U.S. Cellular's loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $582.7 million, $502.3 million and $491.6 million for 2012, 2011 and 2010, respectively. U.S. Cellular expects loss on equipment to continue to be a significant cost in the foreseeable future as wireless carriers continue to use device availability and pricing as a means of competitive differentiation. In addition, U.S. Cellular expects increasing sales of data centric wireless devices such as smartphones and tablets to result in higher equipment subsidies over time; these devices generally have higher purchase costs which cannot be recovered through proportionately higher selling prices to customers. Smartphones sold as a percentage of total devices sold was 56%, 44% and 25% in 2012, 2011 and 2010, respectively.
Selling, general and administrative expenses
Selling, general and administrative expenses include salaries, commissions and expenses of field sales and retail personnel and facilities; telesales department salaries and expenses; agent commissions and related expenses; corporate marketing and merchandise management; and advertising expenses. Selling, general and administrative expenses also include bad debts expense, costs of operating customer care centers and corporate expenses.
Selling, general and administrative expenses decreased by $4.8 million to $1,764.9 million in 2012 and by $13.6 million to $1,769.7 in 2011. Key components of the net changes in Selling, general and administrative expenses were as follows:
2012
13
2011
Depreciation, amortization and accretion
Depreciation, amortization and accretion expense increased $35.1 million in 2012, or 6% primarily due to the acceleration of depreciation in the Divestiture Markets and depreciation and amortization on asset additions.
(Gain) loss on asset disposals and exchanges, net
(Gain) loss on asset disposals and exchanges, net was a loss of $18.1 million in 2012 primarily due to losses resulting from the write-off of certain network assets.
(Gain) loss on sale of business and other exit costs, net
(Gain) loss on sale of business and other exit costs, net was a loss of $21.0 million in 2012. This loss is primarily due to employee severance costs and asset write-offs in the Divestiture Markets, partially offset by a $4.2 million gain resulting from the sale of a wireless market in March 2012.
See "Financial Resources" and "Liquidity and Capital Resources" for a discussion of U.S. Cellular's capital expenditures.
Components of Other Income (Expense)
Year Ended December 31,
|
2012 |
Increase /
(Decrease) |
Percentage
Change |
2011 |
Increase /
(Decrease) |
Percentage
Change |
2010 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
||||||||||||||||||||||
Operating income |
$ | 156,656 | $ | (124,124 | ) | (44 | )% | $ | 280,780 | $ | 79,307 | 39 | % | $ | 201,473 | |||||||
Equity in earnings of unconsolidated entities |
90,364 | 6,798 | 8 | % | 83,566 | (13,752 | ) | (14 | )% | 97,318 | ||||||||||||
Interest and dividend income |
3,644 | 249 | 7 | % | 3,395 | (413 | ) | (11 | )% | 3,808 | ||||||||||||
Gain (loss) on investments |
(3,718 | ) | (15,091 | ) | N/M | 11,373 | 11,373 | N/M | | |||||||||||||
Interest expense |
(42,393 | ) | 23,221 | 35 | % | (65,614 | ) | (4,059 | ) | (7 | )% | (61,555 | ) | |||||||||
Other, net |
500 | 1,178 | N/M | (678 | ) | (750 | ) | N/M | 72 | |||||||||||||
Total investment and other income |
48,397 | 16,355 | 51 | % | 32,042 | (7,601 | ) | (19 | )% | 39,643 | ||||||||||||
Income before income taxes |
205,053 | (107,769 | ) | (34 | )% | 312,822 | 71,706 | 30 | % | 241,116 | ||||||||||||
Income tax expense |
63,977 | 50,101 | 44 | % | 114,078 | (32,120 | ) | (39 | )% | 81,958 | ||||||||||||
Net income |
141,076 | (57,668 | ) | (29 | )% | 198,744 | 39,586 | 25 | % | 159,158 | ||||||||||||
Less: Net income attributable to noncontrolling interests, net of tax |
(30,070 | ) | (6,367 | ) | (27 | )% | (23,703 | ) | (619 | ) | (3 | )% | (23,084 | ) | ||||||||
Net income attributable to U.S. Cellular shareholders |
$ | 111,006 | $ | (64,035 | ) | (37 | )% | $ | 175,041 | $ | 38,967 | 29 | % | $ | 136,074 | |||||||
N/MPercentage change not meaningful
Equity in earnings of unconsolidated entities
Equity in earnings of unconsolidated entities represents U.S. Cellular's share of net income from entities accounted for by the equity method of accounting. U.S. Cellular's investment in the Los Angeles SMSA
14
Limited Partnership ("LA Partnership") contributed $67.2 million, $55.3 million and $64.8 million to Equity in earnings of unconsolidated entities in 2012, 2011 and 2010, respectively. U.S. Cellular received cash distributions from the LA Partnership of $66.0 million in each of 2012, 2011 and 2010.
Gain (loss) on investments
Loss on investment in 2012 includes a provision for loss of $3.7 million related to a note receivable and preferred stock acquired by U.S. Cellular in connection with an acquisition in 1998. In 2011, U.S. Cellular paid $24.6 million in cash to purchase the remaining ownership interest in a wireless business in which it previously held a noncontrolling interest. In connection with this transaction, a $13.4 million gain was recorded. See Note 7Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.
Interest expense
In 2011, U.S. Cellular recorded $8.2 million in interest expense to write-off unamortized debt issuance costs related to its $330 million, 7.5% Senior Notes redeemed on June 20, 2011. The impact of this write-off in 2011, along with lower effective interest rates on long-term debt and an increase in capitalized interest for multi-year projects during 2012, resulted in the year-over-year decrease of $23.2 million from 2011 to 2012. The increase of $4.1 million from 2010 to 2011 also reflects the 2011 write-off, which was partially offset by an increase in capitalized interest during 2011.
Income tax expense
The effective tax rates on Income before income taxes for 2012, 2011 and 2010 were 31.2%, 36.5% and 34.0%, respectively. The following significant discrete and other items impacted income tax expense for these years:
2012Includes tax benefits of $12.1 million resulting from state statute of limitation expirations and $5.3 million resulting from corrections relating to a prior period.
2011Includes a tax benefit of $9.9 million resulting from state statute of limitations expirations and tax expense of $6.1 million resulting from corrections of partnership basis.
2010Includes a tax benefit of $7.9 million resulting from favorable settlements of state income tax audits.
See Note 4Income Taxes in the Notes to Consolidated Financial Statements for a discussion of income tax expense and the overall effective tax rate on Income before income taxes.
Management believes that inflation affects U.S. Cellular's business to no greater or lesser extent than the general economy.
RECENT ACCOUNTING PRONOUNCEMENTS
In general, recent accounting pronouncements did not have and are not expected to have a significant effect on U.S. Cellular's financial condition and results of operations.
See Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.
U.S. Cellular operates a capital- and marketing-intensive business. U.S. Cellular utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and disposition of investments, short-term credit facilities and long-term debt financing to fund its acquisitions (including licenses), construction costs, operating expenses and Common Share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions, capital expenditures and other
15
factors. The table below and the following discussion in this Financial Resources section summarize U.S. Cellular's cash flow activities in 2012, 2011 and 2010.
(Dollars in thousands)
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash flows from (used in) |
||||||||||
Operating activities |
$ | 899,291 | $ | 987,862 | $ | 834,387 | ||||
Investing activities |
(896,611 | ) | (759,603 | ) | (777,297 | ) | ||||
Financing activities |
(48,477 | ) | (81,019 | ) | (83,166 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
$ | (45,797 | ) | $ | 147,240 | $ | (26,076 | ) | ||
The Divestiture Transaction, as described above, resulted in net Cash used in operating activities of $0.3 million during the year ended December 31, 2012. Cash flows from operating and financing activities in future periods will be impacted by the Divestiture Transaction, as described in the Divestiture Transaction section.
Cash Flows from Operating Activities
The following table presents Adjusted OIBDA and is included for purposes of analyzing changes in operating activities. Adjusted OIBDA is defined as operating income excluding the effects of: depreciation, amortization and accretion (OIBDA); the loss on impairment of assets (if any); the net gain or loss on asset disposals and exchanges (if any); and the net gain or loss on sale of business and other exit costs (if any). Adjusted OIBDA excludes the items discussed above in order to show operating results on a more comparable basis from period to period. U.S. Cellular does not intend to imply that any of such amounts that are excluded are non-recurring, infrequent or unusual; such gains or losses may occur in the future.
Adjusted OIBDA may also be commonly referred to by management as operating cash flow. U.S. Cellular believes this measure provides useful information to investors regarding U.S. Cellular's financial condition and results of operations because it highlights certain key cash and non-cash items and their impacts on cash flows from operating activities. This amount should not be confused with Cash flows from operating activities, which is a component of the Consolidated Statement of Cash Flows.
(Dollars in thousands)
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Operating income |
$ | 156,656 | $ | 280,780 | $ | 201,473 | ||||
Add back: |
||||||||||
Depreciation, amortization and accretion |
608,633 | 573,557 | 570,955 | |||||||
Loss on impairment of assets |
| | | |||||||
(Gain) loss on asset disposals and exchanges, net |
18,088 | (1,873 | ) | 10,717 | ||||||
(Gain) loss on sale of business and other exit costs, net |
21,022 | | | |||||||
Adjusted OIBDA |
$ | 804,399 | $ | 852,464 | $ | 783,145 | ||||
Cash flows from operating activities in 2012 were $899.3 million, a decrease of $88.6 million from 2011. Significant changes included the following:
16
Cellular expects federal income tax payments to substantially increase beginning in 2014 and remain at a higher level for several years as the amount of U.S. Cellular's federal tax depreciation deduction substantially decreases as a result of having accelerated depreciation in earlier years. This expectation considers the bonus depreciation provisions enacted in January 2013, which includes 50% federal tax bonus depreciation on qualified capital expenditures in the 2013 tax year and assumes that federal bonus depreciation provisions are not enacted in future periods. To the extent further federal bonus depreciation provisions are enacted, this expectation will change.
Cash flows from operating activities in 2011 were $987.9 million, an increase of $153.5 million from 2010. Significant changes included the following:
17
Cash Flows from Investing Activities
U.S. Cellular makes substantial investments to acquire wireless licenses and properties and to construct and upgrade wireless telecommunications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue-enhancing and cost-reducing upgrades of U.S. Cellular's networks.
The primary purpose of U.S. Cellular's construction and expansion expenditures is to provide for customer and usage growth, to upgrade service and to take advantage of service-enhancing and cost-reducing technological developments.
Capital expenditures (i.e. additions to property, plant and equipment and system development expenditures) totaled $836.7 million in 2012, $782.5 million in 2011 and $583.1 million in 2010. Cash used for additions to property, plant and equipment is reported in the Consolidated Statement of Cash Flows and excludes amounts accrued in Accounts payable for capital expenditures at December 31 of the current year, and includes amounts paid in the current period that were accrued at December 31 of the prior year. Cash used for additions to property, plant and equipment totaled $826.4 million, $771.8 million and 569.3 million in 2012, 2011 and 2010, respectively. These expenditures were made to construct new cell sites, build out 4G LTE networks in certain markets, increase capacity in existing cell sites and switches, develop new and enhance existing office systems such as the new Billing and Operational Support System ("B/OSS") and customer relationship management platforms, and construct new and remodel existing retail stores.
Cash payments for acquisitions in 2012, 2011 and 2010 were as follows:
Cash Payments for Acquisitions(1)
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
||||||||||
Licenses |
$ | 122,690 | $ | 4,406 | $ | 17,101 | ||||
Additional interest in operating market |
| 19,367 | | |||||||
Total |
$ | 122,690 | $ | 23,773 | $ | 17,101 | ||||
In March 2012, U.S. Cellular sold the majority of the assets and liabilities of a wireless market for $49.8 million in cash. See Note 7Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to this sale.
U.S. Cellular invested $120.0 million, $110.0 million, and $250.3 million in 2012, 2011, and 2010, respectively, in U.S. Treasury securities and corporate notes with maturities greater than three months from the acquisition date. U.S. Cellular realized proceeds of $125.0 million, $145.3 million, and $60.3 million in 2012, 2011, and 2010, respectively, related to the maturities of its investments in U.S. Treasury securities and corporate notes and, in addition in 2010, certificates of deposit.
Cash Flows from Financing Activities
Cash flows from financing activities primarily reflect repayment of and proceeds from short-term and long-term debt balances, distributions to noncontrolling interests, cash used to repurchase Common Shares and cash proceeds from reissuance of Common Shares pursuant to stock-based compensation plans.
In May 2011, U.S. Cellular issued $342.0 million of 6.95% Senior Notes due 2060, and paid related debt issuance costs of $11.0 million. The net proceeds from the 6.95% Senior Notes were used primarily to redeem $330.0 million of U.S. Cellular's 7.5% Senior Notes in June 2011. The redemption price of the 7.5% Senior Notes was equal to 100% of the principal amount plus accrued and unpaid interest thereon to the redemption date.
18
U.S. Cellular repurchased Common Shares for $20.0 million, $62.3 million and $52.8 million in 2012, 2011 and 2010, respectively. See Note 14Common Shareholders' Equity in the Notes to Consolidated Financial Statements for additional information related to these transactions.
Free Cash Flow
The following table presents Free cash flow. Free cash flow is defined as Cash flows from operating activities less Cash used for additions to property, plant and equipment. Free cash flow is a non-GAAP financial measure. U.S. Cellular believes that Free cash flow as reported by U.S. Cellular may be useful to investors and other users of its financial information in evaluating the amount of cash generated by business operations, after Cash used for additions to property, plant and equipment.
(Dollars in thousands)
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities |
$ | 899,291 | $ | 987,862 | $ | 834,387 | ||||
Cash used for additions to property, plant and equipment |
(826,400 | ) | (771,798 | ) | (569,323 | ) | ||||
Free cash flow |
$ | 72,891 | $ | 216,064 | $ | 265,064 | ||||
See Cash flows from Operating Activities and Cash flows from Investing Activities for details on the changes to the components of Free cash flow.
LIQUIDITY AND CAPITAL RESOURCES
U.S. Cellular believes that existing cash and investment balances, funds available under its revolving credit facilities and expected cash flows from operating and investing activities provide substantial liquidity and financial flexibility for U.S. Cellular to meet its normal financing needs (including working capital, construction and development expenditures and share repurchases under approved programs) for the foreseeable future. In addition, U.S. Cellular may access public and private capital markets to help meet its financing needs.
U.S. Cellular's profitability historically has been lower in the fourth quarter as a result of significant promotional spending during the holiday season. Changes in these or other economic factors could have a material adverse effect on demand for U.S. Cellular's products and services and on U.S. Cellular's financial condition and results of operations.
U.S. Cellular cannot provide assurances that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur. Economic conditions, changes in financial markets or other factors could restrict U.S. Cellular's liquidity and availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development, acquisition or share repurchase programs. Such reductions could have a material adverse effect on U.S. Cellular's business, financial condition or results of operations.
Cash and Cash Equivalents
At December 31, 2012, U.S. Cellular had $378.4 million in Cash and cash equivalents, which included cash and short-term, highly liquid investments with original maturities of three months or less. The primary objective of U.S. Cellular's Cash and cash equivalents investment activities is to preserve principal. At December 31, 2012, the majority of U.S. Cellular's Cash and cash equivalents was held in money market funds that invest exclusively in U.S. Treasury securities or in repurchase agreements fully collateralized by such obligations. U.S. Cellular monitors the financial viability of the money market funds and direct investments in which it invests and believes that the credit risk associated with these investments is low.
Short-term and Long-term Investments
At December 31, 2012, U.S. Cellular had $100.7 million in Short-term investments and $50.3 million in Long-term investments. Short-term and Long-term investments consist primarily of U.S. Treasury securities which are designated as held-to-maturity investments and recorded at amortized cost in the
19
Consolidated Balance Sheet. For these investments, U.S. Cellular's objective is to earn a higher rate of return on funds that are not anticipated to be required to meet liquidity needs in the near term, while maintaining a low level of investment risk. See Note 3Fair Value Measurements in the Notes to Consolidated Financial Statements for additional details on Short-term and Long-term investments.
Revolving Credit Facility
U.S. Cellular has a revolving credit facility available for general corporate purposes.
In connection with U.S. Cellular's revolving credit facility, TDS and U.S. Cellular entered into a subordination agreement dated December 17, 2010 together with the administrative agent for the lenders under U.S. Cellular's revolving credit facility. At December 31, 2012, no U.S. Cellular debt was subordinated pursuant to this subordination agreement.
U.S. Cellular's interest cost on its revolving credit facility is subject to increase if its current credit rating from nationally recognized credit rating agencies is lowered, and is subject to decrease if the rating is raised. The credit facility would not cease to be available nor would the maturity date accelerate solely as a result of a downgrade in U.S. Cellular's credit rating. However, a downgrade in U.S. Cellular's credit rating could adversely affect its ability to renew the credit facility or obtain access to other credit facilities in the future.
As of December 31, 2012, U.S. Cellular's credit ratings from the nationally recognized credit rating agencies remained at investment grade.
The following table summarizes the terms of U.S. Cellular's revolving credit facility as of December 31, 2012:
(Dollars in millions) |
||||
Maximum borrowing capacity |
$ | 300.0 | ||
Letter of credit outstanding |
$ | 0.2 | ||
Amount borrowed |
$ | | ||
Amount available for use |
$ | 299.8 | ||
Agreement date |
December 2010 | |||
Maturity date |
December 2017 |
U.S. Cellular may seek to extend the maturity date from time to time. In 2012, the U.S. Cellular revolving credit facility was amended to extend the maturity date from December 2015 to December 2017.
The continued availability of the revolving credit facility requires U.S. Cellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and make representations regarding certain matters at the time of each borrowing. The covenants also prescribe certain terms associated with intercompany loans from TDS or TDS subsidiaries to U.S. Cellular or U.S. Cellular subsidiaries. There were no intercompany loans at December 31, 2012 or 2011. U.S. Cellular believes it was in compliance as of December 31, 2012 with all of the covenants and requirements set forth in its revolving credit facility.
Long-Term Financing
U.S. Cellular had the following debt outstanding as of December 31, 2012:
(Dollars in thousands)
|
Issuance Date | Maturity Date | Call Date(1) |
Aggregate
Principal Amount |
||||||
---|---|---|---|---|---|---|---|---|---|---|
Unsecured Senior Notes |
||||||||||
6.7% |
December 2003 and June 2004 | December 2033 | December 2003 | $ | 544,000 | |||||
6.95% |
May 2011 | May 2060 | May 2016 | 342,000 |
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accrued and unpaid interest, or (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the Treasury Rate plus 30 basis points. U.S. Cellular may redeem the 6.95% Senior Notes, in whole or in part at any time after the call date, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest.
U.S. Cellular's long-term debt indenture does not contain any provisions resulting in acceleration of the maturities of outstanding debt in the event of a change in U.S. Cellular's credit rating. However, a downgrade in U.S. Cellular's credit rating could adversely affect its ability to obtain long-term debt financing in the future. U.S. Cellular believes it was in compliance as of December 31, 2012 with all covenants and other requirements set forth in its long-term debt indenture. U.S. Cellular has not failed to make nor does it expect to fail to make any scheduled payment of principal or interest under such indenture.
The long-term debt principal payments due for the next five years represent less than 1% of the total long-term debt obligation at December 31, 2012. Refer to Market RiskLong-Term Debt for additional information regarding required principal payments and the weighted average interest rates related to U.S. Cellular's long-term debt.
U.S. Cellular, at its discretion, may from time to time seek to retire or purchase its outstanding debt through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
U.S. Cellular has an effective shelf registration statement on Form S-3 that it may use to issue senior debt securities. The proceeds from any such issuance may be used for general corporate purposes, including to finance the redemption of any of the above existing debt. The U.S. Cellular shelf registration statement permits U.S. Cellular to issue at any time and from time to time senior debt securities in one or more offerings up to an aggregate principal amount of $500 million. The ability of U.S. Cellular to complete an offering pursuant to such shelf registration statement is subject to market conditions and other factors at the time.
Capital Expenditures
U.S. Cellular's capital expenditures for 2013 are expected to be approximately $600 million. These expenditures are expected to be for the following general purposes:
U.S. Cellular plans to finance its capital expenditures program for 2013 using primarily cash flows from operating activities and, as necessary, existing cash balances and short-term investments.
Acquisitions, Divestitures and Exchanges
U.S. Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment. As part of this strategy, U.S. Cellular reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum. In addition, U.S. Cellular may seek to divest outright or include in exchanges for other wireless interests those interests that are not strategic to its long-term success. As a result, U.S. Cellular may be engaged from time to time in negotiations relating to the acquisition, divestiture or
21
exchange of companies, strategic properties or wireless spectrum. In general, U.S. Cellular may not disclose such transactions until there is a definitive agreement. See "Divestiture Transaction" above in this Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 7Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for details on significant transactions in 2012 and 2011.
Variable Interest Entities
U.S. Cellular consolidates certain entities because they are "variable interest entities" under accounting principles generally accepted in the United States of America ("GAAP"). See Note 5Variable Interest Entities in the Notes to Consolidated Financial Statements for the details of these variable interest entities. U.S. Cellular may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations.
Common Share Repurchase Program
U.S. Cellular has repurchased and expects to continue to repurchase its Common Shares subject to the repurchase program. For additional information related to the current repurchase authorization and repurchases made during 2012, 2011 and 2010, see Note 14Common Shareholders' Equity in the Notes to Consolidated Financial Statements.
Contractual and Other Obligations
At December 31, 2012, the resources required for contractual obligations were as follows:
|
|
Payments Due by Period | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions)
|
Total |
Less Than
1 Year |
1 - 3
Years |
3 - 5
Years |
More Than
5 Years |
|||||||||||
Long-term debt obligations(1) |
$ | 886.0 | $ | | $ | | $ | | $ | 886.0 | ||||||
Interest payments on long-term debt obligations |
1,906.2 | 60.2 | 120.4 | 120.4 | 1,605.2 | |||||||||||
Operating leases(2) |
1,361.7 | 151.6 | 235.9 | 164.9 | 809.3 | |||||||||||
Capital leases |
9.4 | 0.6 | 1.2 | 1.2 | 6.4 | |||||||||||
Purchase obligations(3) |
846.5 | 434.1 | 246.9 | 106.8 | 58.7 | |||||||||||
|
$ | 5,009.8 | $ | 646.5 | $ | 604.4 | $ | 393.3 | $ | 3,365.6 | ||||||
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The table above excludes liabilities related to "unrecognized tax benefits" as defined by GAAP because U.S. Cellular is unable to predict the period of settlement of such liabilities. Such unrecognized tax benefits were $26.5 million at December 31, 2012. See Note 4Income Taxes in the Notes to Consolidated Financial Statements for additional information on unrecognized tax benefits.
Agreements
See Agreements in Note 13Commitments and Contingencies in the Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
U.S. Cellular had no transactions, agreements or other contractual arrangements with unconsolidated entities involving "off-balance sheet arrangements," as defined by Securities and Exchange Commission ("SEC") rules, that had or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
U.S. Cellular prepares its consolidated financial statements in accordance with GAAP. U.S. Cellular's significant accounting policies are discussed in detail in Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements.
Management believes the application of the following critical accounting policies and the estimates required by such application reflect its most significant judgments and estimates used in the preparation of U.S. Cellular's consolidated financial statements. Management has discussed the development and selection of each of the following accounting policies and related estimates and disclosures with the Audit Committee of U.S. Cellular's Board of Directors.
Goodwill and Licenses
See the Goodwill and Licenses Impairment Assessment section of Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for information on Goodwill and Licenses impairment testing policies and methods.
See Note 8Intangible Assets in the Notes to Consolidated Financial Statements for additional information related to Goodwill and Licenses activity in 2012 and 2011.
During the second quarter of 2012, a sustained decrease in U.S. Cellular's stock price resulted in a triggering event, as defined by GAAP, requiring an interim impairment test of Licenses and Goodwill as of June 30, 2012. Based on this test, U.S. Cellular concluded that there was no impairment of Licenses or Goodwill.
Goodwill
U.S. Cellular tests Goodwill for impairment at the level of reporting referred to as a "reporting unit." For purposes of impairment testing of Goodwill in 2012, U.S. Cellular identified five reporting units based on geographic service areas. There were no changes to U.S. Cellular's reporting units or to U.S. Cellular's overall Goodwill impairment testing methodology between November 1, 2012 and November 1, 2011.
A discounted cash flow approach was used to value each reporting unit, using value drivers and risks specific to the industry and current economic factors. The cash flow estimates incorporated assumptions that market participants would use in their estimates of fair value and may not be indicative of U.S. Cellular specific assumptions. The most significant assumptions made in this process were the revenue growth rate, the long-term and terminal revenue growth rate, discount rate and projected capital expenditures. Also, discounted cash flows related to the Central Region exclude projected cash flows associated with the Divestiture Markets, as the assets associated with such markets, including Goodwill, were excluded from the carrying value of the Central Region reporting unit for purposes of conducting
23
the Goodwill impairment test as of November 1, 2012. These assumptions were as follows for November 1, 2012 and 2011:
Key Assumptions
|
November 1,
2012 |
November 1,
2011 |
|||||
---|---|---|---|---|---|---|---|
Weighted-average expected revenue growth rate (next five years) |
2.4 | % | 3.6 | % | |||
Weighted-average long-term and terminal revenue growth rate (after year five) |
2.0 | % | 2.0 | % | |||
Discount rate |
11.0 | % | 10.5 | % | |||
Average annual capital expenditures (millions) |
$ | 559 | $ | 609 |
The decrease in the weighted-average expected revenue growth rate for the next five years was due to a decrease in projected customer penetration growth rate of market participants. In spite of lower overall market interest rates, the discount rate used to estimate cash flows increased from 10.5% in November 2011 to 11.0% in November 2012 due to a shift toward more equity in the representative capital structure of market participants.
The carrying value of each U.S. Cellular reporting unit as of November 1, 2012, as impacted for the Divestiture Transaction, was as follows:
Reporting Unit
|
Carrying Value | |||
---|---|---|---|---|
(Dollars in millions) |
||||
Central Region(1) |
$ | 351 | ||
Mid-Atlantic Region |
763 | |||
New England Region |
255 | |||
Northwest Region |
334 | |||
New York Region(2) |
167 | |||
Total |
$ | 1,870 | ||
As of November 1, 2012, the fair values of the reporting units exceeded their respective carrying values by amounts ranging from 23% to 63% of the respective carrying values. Therefore, no impairment of Goodwill existed. Given that the fair values of the respective reporting units exceed their respective carrying values, provided all other assumptions remained the same, the discount rate would have to increase to a range of 11.8% to 14.6% to yield estimated fair values of reporting units that equal their respective carrying values at November 1, 2012. Further, assuming all other assumptions remained the same, the terminal growth rate assumptions would need to decrease to amounts ranging from negative 11.2% to positive 0.2%, to yield estimates of fair value equal to the carrying values of the respective reporting units at November 1, 2012.
Licenses
U.S. Cellular tests licenses for impairment at the level of reporting referred to as a "unit of accounting." For purposes of its impairment testing of licenses as of November 1, 2012, U.S. Cellular separated its FCC licenses into thirteen units of accounting based on geographic service areas. As of November 1, 2011, U.S. Cellular separated its FCC licenses into twelve units of accounting based on geographic service areas. In both 2012 and 2011 testing, seven of the units of accounting represented geographic groupings of licenses which, because they were not being utilized and, therefore, were not expected to generate cash flows from operating activities in the foreseeable future, were considered separate units of accounting for purposes of impairment testing.
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Developed operating market licenses ("built licenses")
U.S. Cellular applies the build-out method to estimate the fair values of built licenses. The most significant assumptions applied for purposes of the November 1, 2012 and 2011 licenses impairment assessments were as follows:
Key Assumptions
|
November 1,
2012 |
November 1,
2011 |
||
---|---|---|---|---|
Build-out period |
7 years | 7 years | ||
Discount rate |
8.5% | 9.0% | ||
Long-term EBITDA margin |
33.9% | 32.2% | ||
Long-term capital expenditure requirement (as a % of service revenue) |
14.5% | 13.0% | ||
Long-term service revenue growth rate |
2.0% | 2.0% | ||
Customer penetration rates |
13-17% | 11-16% |
The discount rate used to estimate the fair value of built licenses was based on market participant capital structures, participant risk profiles, market conditions and risk premium assumptions. The decline from 9.0% in November 2011 to 8.5% in November 2012 primarily reflects the general decline in market interest rates during that period as well as revised cash flow assumptions based on forecasts of market participants.
The discount rate used in the valuation of licenses is less than the discount rate used in the valuation of reporting units for purposes of goodwill impairment testing. That is primarily because the discount rate used for licenses does not include a company-specific risk premium as a wireless license would not be subject to such risk.
The discount rate is the most significant assumption used in the build-out method. The discount rate is estimated based on the overall risk-free interest rate adjusted for industry participant information, such as a typical capital structure (i.e., debt-equity ratio), the after-tax cost of debt and the cost of equity. The cost of equity takes into consideration the average risk specific to individual market participants.
The results of the licenses impairment test at November 1, 2012 did not result in the recognition of a loss on impairment. Given that the fair values of the licenses exceed their respective carrying values, the discount rate would have to increase to a range of 8.6% to 9.1% to yield estimated fair values of licenses in the respective units of accounting that equal their respective carrying values at November 1, 2012. An increase of 10 basis points to the assumed discount rate would cause less than a $6 million impairment whereas an increase of 50 basis points would cause an impairment of approximately $36 million.
Non-operating market licenses ("unbuilt licenses")
For purposes of performing impairment testing of unbuilt licenses, U.S. Cellular prepares estimates of fair value by reference to prices paid in recent auctions and market transactions where available. If such information is not available, the fair value of the unbuilt licenses is assumed to have changed by the same percentage, and in the same direction, that the fair value of built licenses measured using the build-out method changed during the period. There was no impairment loss recognized related to unbuilt licenses as a result of the November 1, 2012 licenses impairment test.
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Carrying Value of Licenses
The carrying value of licenses at November 1, 2012 was as follows:
Unit of Accounting(1)
|
Carrying Value | |||
---|---|---|---|---|
(Dollars in millions) |
||||
Developed Operating markets (6 units of accounting) |
||||
Central Region |
$ | 693 | ||
Licenses to be transferred as a result of the Divestiture Transaction |
141 | |||
Mid-Atlantic Region |
228 | |||
New England Region |
103 | |||
Northwest Region |
67 | |||
New York Region(2) |
| |||
Non-operating markets (7 units of accounting) |
||||
North Northwest (2 states) |
3 | |||
South Northwest (2 states) |
2 | |||
North Central (5 states) |
51 | |||
South Central (5 states) |
24 | |||
East Central (5 states) |
127 | |||
Mid-Atlantic (8 states) |
50 | |||
Mississippi Valley (13 states) |
43 | |||
Total(3) |
$ | 1,532 | ||
Licenses with an aggregate carrying value of $70.2 million were in units of accounting where the fair value exceeded the carrying value by amounts less than 10% of the carrying value. Any further declines in the fair value of such licenses in future periods could result in the recognition of impairment losses on such licenses and any such impairment losses would have a negative impact on future results of operations. The impairment losses on licenses are not expected to have a future impact on liquidity. U.S. Cellular is unable to predict the amount, if any, of future impairment losses attributable to licenses. Further, historical operating results, particularly amounts related to impairment losses, are not indicative of future operating results.
Income Taxes
U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. TDS and U.S. Cellular are parties to a Tax Allocation Agreement which provides that U.S. Cellular and its subsidiaries be included with the TDS affiliated group in a consolidated federal income tax return and in state income or franchise tax returns in certain situations. For financial statement purposes, U.S. Cellular and its subsidiaries calculate their income, income tax and credits as if they comprised a separate affiliated group. Under the Tax Allocation Agreement, U.S. Cellular remits its applicable income tax payments to TDS.
26
The amounts of income tax assets and liabilities, the related income tax provision and the amount of unrecognized tax benefits are critical accounting estimates because such amounts are significant to U.S. Cellular's financial condition and results of operations.
The preparation of the consolidated financial statements requires U.S. Cellular to calculate a provision for income taxes. This process involves estimating the actual current income tax liability together with assessing temporary differences resulting from the different treatment of items for tax purposes. These temporary differences result in deferred income tax assets and liabilities, which are included in U.S. Cellular's Consolidated Balance Sheet. U.S. Cellular must then assess the likelihood that deferred income tax assets will be realized based on future taxable income and, to the extent management believes that realization is not likely, establish a valuation allowance. Management's judgment is required in determining the provision for income taxes, deferred income tax assets and liabilities and any valuation allowance that is established for deferred income tax assets.
U.S. Cellular recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
See Note 4Income Taxes in the Notes to Consolidated Financial Statements for details regarding U.S. Cellular's income tax provision, deferred income taxes and liabilities, valuation allowances and unrecognized tax benefits, including information regarding estimates that impact income taxes.
Loyalty Reward Program
See the Revenue Recognition section of Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements for a description of this program and the related accounting.
U.S. Cellular follows the deferred revenue method of accounting for its loyalty reward program. Under this method, revenue allocated to loyalty reward points is fully deferred as U.S. Cellular does not yet have sufficient historical data in which to estimate any portion of loyalty reward points that will not be redeemed. Revenue is recognized at the time of customer redemption or when such points have been depleted via a maintenance charge. U.S. Cellular periodically reviews and will revise the redemption and depletion rates as appropriate based on history and related future expectations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 17Related Parties and Note 18Certain Relationships and Related Transactions in the Notes to Consolidated Financial Statements.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain statements that are not based on historical facts, including the words "believes," "anticipates," "intends," "expects" and similar words. These statements constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following risks:
27
28
29
availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development or acquisition programs.
See "Risk Factors" in U.S. Cellular's Annual Report on Form 10-K for the year ended December 31, 2012 for a further discussion of these risks. U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers should evaluate any statements in light of these important factors.
30
Long-Term Debt
As of December 31, 2012, the majority of U.S. Cellular's debt was in the form of fixed-rate notes with original maturities ranging up to 49 years. Fluctuations in market interest rates can lead to significant fluctuations in the fair value of these fixed-rate notes.
The following table presents the scheduled principal payments on long-term debt and capital lease obligations, and the related weighted average interest rates by maturity dates at December 31, 2012:
|
Principal Payments Due by Period | ||||||
---|---|---|---|---|---|---|---|
(Dollars in millions)
|
Long-Term Debt
Obligations(1) |
Weighted-Avg. Interest
Rates on Long-Term Debt Obligations(2) |
|||||
2013 |
$ | 0.1 | 9.7 | % | |||
2014 |
0.1 | 9.7 | % | ||||
2015 |
0.1 | 9.7 | % | ||||
2016 |
0.2 | 9.7 | % | ||||
2017 |
0.2 | 9.7 | % | ||||
After 5 years |
890.0 | 6.8 | % | ||||
Total |
$ | 890.7 | 6.8 | % | |||
Fair Value of Long-Term Debt
At December 31, 2012 and 2011, the estimated fair value of long-term debt obligations, excluding capital lease obligations and the current portion of such long-term debt, was $959.4 million and $899.0 million, respectively. The fair value of long-term debt, excluding capital lease obligations and the current portion of such long-term debt, was estimated using market prices for the 6.95% Senior Notes at December 31, 2012 and 2011 and discounted cash flow analysis for the 6.7% Senior Notes at December 31, 2012 and 2011.
Other Market Risk Sensitive Instruments
The substantial majority of U.S. Cellular's other market risk sensitive instruments (as defined in item 305 of SEC Regulation S-K) are short-term, including Cash and cash equivalents and Short-term investments. The fair value of such instruments is less sensitive to market fluctuations than longer term instruments. Accordingly, U.S. Cellular believes that a significant change in interest rates would not have a material effect on such other market risk sensitive instruments.
31
United States Cellular Corporation
Consolidated Statement of Operations
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars and shares in thousands, except per share amounts)
|
|
|
|
|||||||
Operating revenues |
||||||||||
Service |
$ | 4,098,856 | $ | 4,053,797 | $ | 3,913,001 | ||||
Equipment sales |
353,228 | 289,549 | 264,680 | |||||||
Total operating revenues |
4,452,084 | 4,343,346 | 4,177,681 | |||||||
Operating expenses |
||||||||||
System operations (excluding Depreciation, amortization and accretion reported below) |
946,805 | 929,379 | 854,931 | |||||||
Cost of equipment sold |
935,947 | 791,802 | 756,290 | |||||||
Selling, general and administrative (including charges from affiliates of $104.3 million, $104.1 million and $107.5 million in 2012, 2011 and 2010) |
1,764,933 | 1,769,701 | 1,783,315 | |||||||
Depreciation, amortization and accretion |
608,633 | 573,557 | 570,955 | |||||||
(Gain) loss on asset disposals and exchanges, net |
18,088 | (1,873 | ) | 10,717 | ||||||
(Gain) loss on sale of business and other exit costs, net |
21,022 | | | |||||||
Total operating expenses |
4,295,428 | 4,062,566 | 3,976,208 | |||||||
Operating income |
156,656 |
280,780 |
201,473 |
|||||||
Investment and other income (expense) |
||||||||||
Equity in earnings of unconsolidated entities |
90,364 | 83,566 | 97,318 | |||||||
Interest and dividend income |
3,644 | 3,395 | 3,808 | |||||||
Gain (loss) on investment |
(3,718 | ) | 11,373 | | ||||||
Interest expense |
(42,393 | ) | (65,614 | ) | (61,555 | ) | ||||
Other, net |
500 | (678 | ) | 72 | ||||||
Total investment and other income (expense) |
48,397 | 32,042 | 39,643 | |||||||
Income before income taxes |
205,053 |
312,822 |
241,116 |
|||||||
Income tax expense |
63,977 | 114,078 | 81,958 | |||||||
Net income |
141,076 |
198,744 |
159,158 |
|||||||
Less: Net income attributable to noncontrolling interests, net of tax |
(30,070 | ) | (23,703 | ) | (23,084 | ) | ||||
Net income attributable to U.S. Cellular shareholders |
$ |
111,006 |
$ |
175,041 |
$ |
136,074 |
||||
Basic weighted average shares outstanding |
84,645 |
84,877 |
86,128 |
|||||||
Basic earnings per share attributable to U.S. Cellular shareholders |
$ | 1.31 | $ | 2.06 | $ | 1.58 | ||||
Diluted weighted average shares outstanding |
85,067 |
85,335 |
86,518 |
|||||||
Diluted earnings per share attributable to U.S. Cellular shareholders |
$ | 1.30 | $ | 2.05 | $ | 1.57 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
32
United States Cellular Corporation
Consolidated Statement of Cash Flows
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|
|||||||
Cash flows from operating activities |
||||||||||
Net income |
$ | 141,076 | $ | 198,744 | $ | 159,158 | ||||
Add (deduct) adjustments to reconcile net income to net cash flows from operating activities |
||||||||||
Depreciation, amortization and accretion |
608,633 | 573,557 | 570,955 | |||||||
Bad debts expense |
67,372 | 62,157 | 76,292 | |||||||
Stock-based compensation expense |
21,466 | 20,183 | 18,044 | |||||||
Deferred income taxes, net |
49,244 | 203,264 | 73,727 | |||||||
Equity in earnings of unconsolidated entities |
(90,364 | ) | (83,566 | ) | (97,318 | ) | ||||
Distributions from unconsolidated entities |
84,417 | 91,768 | 100,359 | |||||||
(Gain) loss on asset disposals and exchanges, net |
18,088 | (1,873 | ) | 10,717 | ||||||
(Gain) loss on sale of business and other exit costs, net |
21,022 | | | |||||||
(Gain) loss on investment |
3,718 | (11,373 | ) | | ||||||
Noncash interest expense |
(1,822 | ) | 10,040 | 2,540 | ||||||
Other operating activities |
546 | 102 | (2,483 | ) | ||||||
Changes in assets and liabilities from operations |
||||||||||
Accounts receivable |
(64,816 | ) | (82,175 | ) | (75,252 | ) | ||||
Inventory |
(28,786 | ) | (14,640 | ) | 40,277 | |||||
Accounts payabletrade |
(4,977 | ) | 28,410 | (52,568 | ) | |||||
Accounts payableaffiliate |
(1,458 | ) | 1,392 | (3,940 | ) | |||||
Customer deposits and deferred revenues |
30,353 | 34,927 | 6,180 | |||||||
Accrued taxes |
73,064 | (39,984 | ) | (70,057 | ) | |||||
Accrued interest |
167 | 225 | 204 | |||||||
Other assets and liabilities |
(27,652 | ) | (3,296 | ) | 77,552 | |||||
|
899,291 | 987,862 | 834,387 | |||||||
Cash flows from investing activities |
||||||||||
Cash used for additions to property, plant and equipment |
(826,400 | ) | (771,798 | ) | (569,323 | ) | ||||
Cash paid for acquisitions and licenses |
(122,690 | ) | (23,773 | ) | (17,101 | ) | ||||
Cash paid for investments |
(120,000 | ) | (110,000 | ) | (250,250 | ) | ||||
Cash received for divestitures |
49,932 | | | |||||||
Cash received for investments |
125,000 | 145,250 | 60,330 | |||||||
Other investing activities |
(2,453 | ) | 718 | (953 | ) | |||||
|
(896,611 | ) | (759,603 | ) | (777,297 | ) | ||||
Cash flows from financing activities |
||||||||||
Repayment of long-term debt |
(145 | ) | (330,338 | ) | (316 | ) | ||||
Issuance of long-term debt |
| 342,000 | | |||||||
Common shares reissued for benefit plans, net of tax payments |
(2,205 | ) | 1,935 | 509 | ||||||
Common shares repurchased |
(20,045 | ) | (62,294 | ) | (52,827 | ) | ||||
Payment of debt issuance costs |
(514 | ) | (11,400 | ) | (2,229 | ) | ||||
Distributions to noncontrolling interests |
(22,970 | ) | (21,094 | ) | (19,631 | ) | ||||
Payments to acquire additional interest in subsidiaries |
(3,167 | ) | | (8,786 | ) | |||||
Other financing activities |
569 | 172 | 114 | |||||||
|
(48,477 | ) | (81,019 | ) | (83,166 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
(45,797 |
) |
147,240 |
(26,076 |
) |
|||||
Cash and cash equivalents |
||||||||||
Beginning of period |
424,155 | 276,915 | 302,991 | |||||||
End of period |
$ | 378,358 | $ | 424,155 | $ | 276,915 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
33
United States Cellular Corporation
Consolidated Balance SheetAssets
December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|||||
Current assets |
|||||||
Cash and cash equivalents |
$ | 378,358 | $ | 424,155 | |||
Short-term investments |
100,676 | 127,039 | |||||
Accounts receivable |
|||||||
Customers and agents, less allowances of $24,290 and $21,337, respectively |
349,424 | 341,439 | |||||
Roaming |
31,782 | 36,557 | |||||
Affiliated |
375 | 621 | |||||
Other, less allowances of $2,612 and $2,200, respectively |
63,639 | 63,204 | |||||
Inventory |
155,886 | 127,056 | |||||
Income taxes receivable |
1,612 | 74,791 | |||||
Prepaid expenses |
62,560 | 55,980 | |||||
Net deferred income tax asset |
35,419 | 31,905 | |||||
Other current assets |
16,745 | 10,096 | |||||
|
1,196,476 | 1,292,843 | |||||
Assets held for sale |
216,763 |
49,647 |
|||||
Investments |
|||||||
Licenses |
1,456,794 | 1,470,769 | |||||
Goodwill |
421,743 | 494,737 | |||||
Customer lists, net of accumulated amortization of $96,809 and $96,597, respectively |
102 | 314 | |||||
Investments in unconsolidated entities |
144,531 | 138,096 | |||||
Notes and interest receivablelong-term |
| 1,921 | |||||
Long-term investments |
50,305 | 30,057 | |||||
|
2,073,475 | 2,135,894 | |||||
Property, plant and equipment |
|||||||
In service and under construction |
7,478,428 | 7,008,449 | |||||
Less: Accumulated depreciation |
4,455,840 | 4,218,147 | |||||
|
3,022,588 | 2,790,302 | |||||
Other assets and deferred charges |
78,148 |
59,290 |
|||||
Total assets |
$ |
6,587,450 |
$ |
6,327,976 |
|||
The accompanying notes are an integral part of these consolidated financial statements.
34
United States Cellular Corporation
Consolidated Balance SheetLiabilities and Equity
December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars and shares in thousands)
|
|
|
|||||
Current liabilities |
|||||||
Current portion of long-term debt |
$ | 92 | $ | 127 | |||
Accounts payable |
|||||||
Affiliated |
10,725 | 12,183 | |||||
Trade |
310,936 | 303,779 | |||||
Customer deposits and deferred revenues |
192,113 | 181,355 | |||||
Accrued taxes |
35,834 | 34,095 | |||||
Accrued compensation |
90,418 | 69,551 | |||||
Other current liabilities |
114,881 | 121,190 | |||||
|
754,999 | 722,280 | |||||
Liabilities held for sale |
19,594 |
1,051 |
|||||
Deferred liabilities and credits |
|||||||
Net deferred income tax liability |
849,818 | 799,190 | |||||
Other deferred liabilities and credits |
288,441 | 248,213 | |||||
Long-term debt |
878,858 |
880,320 |
|||||
Commitments and contingencies |
|||||||
Noncontrolling interests with redemption features |
493 |
1,005 |
|||||
Equity |
|||||||
U.S. Cellular shareholders' equity |
|||||||
Series A Common and Common Shares |
|||||||
Authorized 190,000 shares (50,000 Series A Common and 140,000 Common Shares) |
|||||||
Issued 88,074 shares (33,006 Series A Common and 55,068 Common Shares) |
|||||||
Outstanding 84,168 shares (33,006 Series A Common and 51,162 Common Shares) and 84,557 shares (33,006 Series A Common and 51,551 Common Shares), respectively |
|||||||
Par Value ($1 per share) ($33,006 Series A Common and $55,068 Common Shares) |
88,074 | 88,074 | |||||
Additional paid-in capital |
1,412,453 | 1,387,341 | |||||
Treasury Shares, at cost, 3,906 and 3,517 Common Shares, respectively |
(165,724 | ) | (152,817 | ) | |||
Retained earnings |
2,399,052 | 2,297,363 | |||||
Total U.S. Cellular shareholders' equity |
3,733,855 | 3,619,961 | |||||
Noncontrolling interests |
61,392 | 55,956 | |||||
Total equity |
3,795,247 | 3,675,917 | |||||
Total liabilities and equity |
$ |
6,587,450 |
$ |
6,327,976 |
|||
The accompanying notes are an integral part of these consolidated financial statements.
35
United States Cellular Corporation
Consolidated Statement of Changes in Equity
|
U.S. Cellular Shareholders |
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
Series A
Common and Common Shares |
Additional
Paid-In Capital |
Treasury
Shares |
Retained
Earnings |
Total
U.S. Cellular Shareholders' Equity |
Noncontrolling
Interests |
Total
Equity |
|||||||||||||||
Balance, December 31, 2011 |
$ | 88,074 | $ | 1,387,341 | $ | (152,817 | ) | $ | 2,297,363 | $ | 3,619,961 | $ | 55,956 | $ | 3,675,917 | |||||||
Add (Deduct) |
||||||||||||||||||||||
Net income attributable to U.S. Cellular shareholders |
| | | 111,006 | 111,006 | | 111,006 | |||||||||||||||
Net income attributable to noncontrolling interests classified as equity |
| | | | | 30,019 | 30,019 | |||||||||||||||
Repurchase of Common Shares |
| | (20,045 | ) | | (20,045 | ) | | (20,045 | ) | ||||||||||||
Incentive and compensation plans |
| 137 | 7,138 | (9,317 | ) | (2,042 | ) | | (2,042 | ) | ||||||||||||
Stock-based compensation awards |
| 21,249 | | | 21,249 | | 21,249 | |||||||||||||||
Tax windfall (shortfall) from stock awards |
| (1,518 | ) | | | (1,518 | ) | | (1,518 | ) | ||||||||||||
Distributions to noncontrolling interests |
| | | | | (22,970 | ) | (22,970 | ) | |||||||||||||
Adjust investment in subsidiaries for noncontrolling interest purchases |
| 5,244 | | | 5,244 | (1,586 | ) | 3,658 | ||||||||||||||
Other |
| | | | | (27 | ) | (27 | ) | |||||||||||||
Balance, December 31, 2012 |
$ | 88,074 | $ | 1,412,453 | $ | (165,724 | ) | $ | 2,399,052 | $ | 3,733,855 | $ | 61,392 | $ | 3,795,247 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
36
United States Cellular Corporation
Consolidated Statement of Changes in Equity
|
U.S. Cellular Shareholders |
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
Series A
Common and Common Shares |
Additional
Paid-In Capital |
Treasury
Shares |
Retained
Earnings |
Total
U.S. Cellular Shareholders' Equity |
Noncontrolling
Interests |
Total
Equity |
|||||||||||||||
Balance, December 31, 2010 |
$ | 88,074 | $ | 1,368,487 | $ | (105,616 | ) | $ | 2,135,507 | $ | 3,486,452 | $ | 53,518 | $ | 3,539,970 | |||||||
Add (Deduct) |
||||||||||||||||||||||
Net income attributable to U.S. Cellular shareholders |
| | | 175,041 | 175,041 | | 175,041 | |||||||||||||||
Net income attributable to noncontrolling interests classified as equity |
| | | | | 23,532 | 23,532 | |||||||||||||||
Repurchase of Common Shares |
| | (62,294 | ) | | (62,294 | ) | | (62,294 | ) | ||||||||||||
Incentive and compensation plans |
| 57 | 15,093 | (13,185 | ) | 1,965 | | 1,965 | ||||||||||||||
Stock-based compensation awards |
| 20,183 | | | 20,183 | | 20,183 | |||||||||||||||
Tax windfall (shortfall) from stock awards |
| (1,386 | ) | | | (1,386 | ) | | (1,386 | ) | ||||||||||||
Distributions to noncontrolling interests |
| | | | | (21,094 | ) | (21,094 | ) | |||||||||||||
Balance, December 31, 2011 |
$ | 88,074 | $ | 1,387,341 | $ | (152,817 | ) | $ | 2,297,363 | $ | 3,619,961 | $ | 55,956 | $ | 3,675,917 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
37
United States Cellular Corporation
Consolidated Statement of Changes in Equity
|
U.S. Cellular Shareholders |
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
Series A
Common and Common Shares |
Additional
Paid-In Capital |
Treasury
Shares |
Retained
Earnings |
Total
U.S. Cellular Shareholders' Equity |
Noncontrolling
Interests |
Total
Equity |
|||||||||||||||
Balance, December 31, 2009 |
$ | 88,074 | $ | 1,356,322 | $ | (69,616 | ) | $ | 2,015,752 | $ | 3,390,532 | $ | 51,701 | $ | 3,442,233 | |||||||
Add (Deduct) |
||||||||||||||||||||||
Net income attributable to U.S. Cellular shareholders |
| | | 136,074 | 136,074 | | 136,074 | |||||||||||||||
Net income attributable to noncontrolling interests classified as equity |
| | | | | 22,992 | 22,992 | |||||||||||||||
Repurchase of Common Shares |
| | (52,827 | ) | | (52,827 | ) | | (52,827 | ) | ||||||||||||
Incentive and compensation plans |
| 606 | 16,827 | (16,319 | ) | 1,114 | | 1,114 | ||||||||||||||
Stock-based compensation awards |
| 18,044 | | | 18,044 | | 18,044 | |||||||||||||||
Tax windfall (shortfall) from stock awards |
| (2,217 | ) | | | (2,217 | ) | | (2,217 | ) | ||||||||||||
Distributions to noncontrolling interests |
| | | | | (19,631 | ) | (19,631 | ) | |||||||||||||
Adjust investment in subsidiaries for noncontrolling interest purchase |
| (4,268 | ) | | | (4,268 | ) | (1,544 | ) | (5,812 | ) | |||||||||||
Balance, December 31, 2010 |
$ | 88,074 | $ | 1,368,487 | $ | (105,616 | ) | $ | 2,135,507 | $ | 3,486,452 | $ | 53,518 | $ | 3,539,970 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
38
United States Cellular Corporation
Notes to the Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
United States Cellular Corporation ("U.S. Cellular"), a Delaware Corporation, is an 84%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS").
Nature of Operations
U.S. Cellular owns, operates and invests in wireless systems throughout the United States. As of December 31, 2012, U.S. Cellular served 5.8 million customers. U.S. Cellular operates as one reportable segment.
Principles of Consolidation
The accounting policies of U.S. Cellular conform to accounting principles generally accepted in the United States of America ("GAAP") as set forth in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). Unless otherwise specified, references to accounting provisions and GAAP in these notes refer to the requirements of the FASB ASC. The consolidated financial statements include the accounts of U.S. Cellular, its majority-owned subsidiaries, general partnerships in which U.S. Cellular has a majority partnership interest and variable interest entities ("VIEs") in which U.S. Cellular is the primary beneficiary. Both VIE and primary beneficiary represent terms defined by GAAP.
Intercompany accounts and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2012 financial statement presentation. These reclassifications did not affect consolidated net income attributable to U.S. Cellular shareholders, cash flows, assets, liabilities or equity for the years presented.
Business Combinations
U.S. Cellular accounts for business combinations at fair value in accordance with the acquisition method. This method requires that the acquirer recognize 100% of the acquiree's assets and liabilities at their fair values on the acquisition date for all acquisitions, whether full or partial. In addition, transaction costs related to acquisitions are expensed.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (a) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and (b) the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates are involved in accounting for goodwill and indefinite-lived intangible assets, depreciation, amortization and accretion, allowance for doubtful accounts, loyalty reward points, and income taxes.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term, highly liquid investments with original maturities of three months or less.
Short-Term and Long-Term Investments
At December 31, 2012 and 2011, U.S. Cellular had $100.7 million and $127.0 million in Short-term investments and $50.3 million and $30.1 million in Long-term investments, respectively. Short-term and
39
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Long-term investments consist primarily of U.S. treasuries which are designated as held-to-maturity investments and are recorded at amortized cost in the Consolidated Balance Sheet. For these investments, U.S. Cellular's objective is to earn a higher rate of return on funds that are not anticipated to be required to meet liquidity needs in the near term, while maintaining a low level of investment risk. See Note 3Fair Value Measurements for additional details on Short-term and Long-term investments.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts owed by customers for wireless services and equipment sales, by agents for sales of equipment to them and by other wireless carriers whose customers have used U.S. Cellular's wireless systems.
The allowance for doubtful accounts is the best estimate of the amount of probable credit losses related to existing accounts receivable. The allowance is estimated based on historical experience and other factors that could affect collectability. Accounts receivable balances are reviewed on either an aggregate or individual basis for collectability depending on the type of receivable. When it is probable that an account balance will not be collected, the account balance is charged against the allowance for doubtful accounts. U.S. Cellular does not have any off-balance sheet credit exposure related to its customers.
The changes in the allowance for doubtful accounts during the years ended December 31, 2012, 2011 and 2010 were as follows:
(Dollars in thousands)
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Beginning balance |
$ | 23,537 | $ | 25,816 | $ | 26,624 | ||||
Additions, net of recoveries |
67,372 | 62,157 | 76,292 | |||||||
Deductions |
(64,007 | ) | (64,436 | ) | (77,100 | ) | ||||
Ending balance |
$ | 26,902 | $ | 23,537 | $ | 25,816 | ||||
Inventory
Inventory consists primarily of wireless devices stated at the lower of cost or market, with cost determined using the first-in, first-out method and market determined by replacement costs or estimated net realizable value.
Fair Value Measurements
Under the provisions of GAAP, fair value is a market-based measurement and not an entity-specific measurement, based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). The provisions also establish a fair value hierarchy that contains three levels for inputs used in fair value measurements. Level 1 inputs include quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets. Level 3 inputs are unobservable. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. A financial instrument's level within the fair value hierarchy is not representative of its expected performance or its overall risk profile and, therefore, Level 3 assets are not necessarily higher risk than Level 2 assets or Level 1 assets.
Licenses
Licenses consist of direct and incremental costs incurred in acquiring Federal Communications Commission ("FCC") licenses to provide wireless service.
40
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
U.S. Cellular has determined that wireless licenses are indefinite-lived intangible assets and, therefore, not subject to amortization based on the following factors:
Goodwill
U.S. Cellular has Goodwill as a result of its acquisitions of wireless businesses. Such Goodwill represents the excess of the total purchase price over the fair value of net assets acquired in these transactions.
Goodwill and Licenses Impairment Assessment
Goodwill and Licenses must be assessed for impairment annually or more frequently if events or changes in circumstances indicate that such assets might be impaired. U.S. Cellular performs its annual impairment assessment of Goodwill and Licenses as of November 1 of each year.
The impairment test for Goodwill is a two-step process. The first step compares the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the second step of the test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit Goodwill with the carrying amount of that Goodwill. To calculate the implied fair value of Goodwill in this second step, an enterprise allocates the fair value of the reporting unit to all of the assets and liabilities of that reporting unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amount assigned to the assets and liabilities of the reporting unit is the implied fair value of Goodwill. If the carrying amount of Goodwill exceeds the implied fair value of Goodwill, an impairment loss is recognized for that difference.
The impairment test for an indefinite-lived intangible asset other than Goodwill consists of comparing the fair value of the intangible asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized for the difference.
Quoted market prices in active markets are the best evidence of fair value of an intangible asset or reporting unit and are used when available. If quoted market prices are not available, the estimate of fair value is based on the best information available, including prices for similar assets and the use of other valuation techniques. Other valuation techniques include present value analysis, multiples of earnings or revenues, or similar performance measures. The use of these techniques involve assumptions by
41
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
management about factors that are uncertain including future cash flows, the appropriate discount rate, and other inputs. Different assumptions for these inputs could create materially different results.
U.S. Cellular tests Goodwill for impairment at the level of reporting referred to as a reporting unit. For purposes of its impairment testing of Goodwill in 2012 and 2011, U.S. Cellular identified five reporting units. The five reporting units represent five geographic groupings of FCC licenses, representing five geographic service areas.
A discounted cash flow approach was used to value each reporting unit for purposes of the Goodwill impairment review by using value drivers and risks specific to the current industry and economic markets. The cash flow estimates incorporated assumptions that market participants would use in their estimates of fair value. Key assumptions made in this process were the discount rate, estimated expected revenue growth rate, projected capital expenditures and the terminal growth rate.
U.S. Cellular tests Licenses for impairment at the level of reporting referred to as a unit of accounting. For purposes of its 2012 impairment testing of Licenses, U.S. Cellular separated its FCC licenses into thirteen units of accounting based on geographic service areas. One unit of accounting includes the licenses to be transferred as a result of the Divestiture Transaction more fully described in Note 7Acquisitions, Divestitures and Exchanges. For purposes of its 2011 impairment testing of Licenses, U.S. Cellular separated its FCC licenses into twelve units of accounting based on geographic service areas. In both 2012 and 2011 testing, seven of the units of accounting represented geographic groupings of licenses which, because they were not being utilized and, therefore, were not expected to generate cash flows from operating activities in the foreseeable future, were considered separate units of accounting for purposes of impairment testing.
U.S. Cellular estimates the fair value of built licenses for purposes of impairment testing using the build-out method. The build-out method estimates the fair value of Licenses by calculating future cash flows from a hypothetical start-up wireless company and assuming that the only assets available upon formation are the underlying Licenses. To apply this method, a hypothetical build-out of the company's wireless network, infrastructure, and related costs are projected based on market participant information. Calculated cash flows, along with a terminal value, are discounted to the present and summed to determine the estimated fair value.
For units of accounting which consist of unbuilt licenses, U.S. Cellular prepares estimates of fair value by reference to prices paid in recent auctions and market transactions where available. If such information is not available, the fair value of the unbuilt licenses is assumed to change by the same percentage, and in the same direction, that the fair value of built licenses measured using the build-out method changed during the period.
Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a noncontrolling interest. U.S. Cellular follows the equity method of accounting for such investments in which its ownership interest equals or exceeds 20% for corporations and equals or exceeds 3% for partnerships and limited liability companies. The cost method of accounting is followed for such investments in which U.S. Cellular's ownership interest is less than 20% for corporations and is less than 3% for partnerships and limited liability companies and for investments for which U.S. Cellular does not have the ability to exercise significant influence.
For its equity method investments for which financial information is readily available, U.S. Cellular records its equity in the earnings of the entity in the current period. For its equity method investments for which
42
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
financial information is not readily available, U.S. Cellular records its equity in the earnings of the entity on a one quarter lag basis.
Property, Plant and Equipment
U.S. Cellular's Property, plant and equipment is stated at the original cost of construction or purchase including capitalized costs of certain taxes, payroll-related expenses, interest and estimated costs to remove the assets.
Expenditures that enhance the productive capacity of assets in service or extend their useful lives are capitalized and depreciated. Expenditures for maintenance and repairs of assets in service are charged to System operations expense or Selling, general and administrative expense, as applicable. Retirements and disposals of assets are recorded by removing the original cost of the asset (along with the related accumulated depreciation) from plant in service and charging it, together with removal cost less any salvage realized, to (Gain) loss on asset disposals and exchanges, net.
Costs of developing new information systems are capitalized and amortized over their expected economic useful lives.
Depreciation
Depreciation is provided using the straight-line method over the estimated useful life of the assets.
U.S. Cellular depreciates leasehold improvement assets associated with leased properties over periods ranging from one to thirty years; such periods approximate the shorter of the assets' economic lives or the specific lease terms.
Useful lives of specific assets are reviewed throughout the year to determine if changes in technology or other business changes would warrant accelerating the depreciation of those specific assets. Due to the Divestiture Transaction more fully described in Note 7Acquisitions, Divestitures and Exchanges, U.S. Cellular changed the useful lives of certain assets in 2012. There were no material changes to useful lives of property, plant and equipment in 2011 or 2010.
Impairment of Long-lived Assets
U.S. Cellular reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired. The impairment test for tangible long-lived assets is a two-step process. The first step compares the carrying value of the asset (or asset group) with the estimated undiscounted cash flows over the remaining asset (or asset group) life. If the carrying value of the asset (or asset group) is greater than the undiscounted cash flows, the second step of the test is performed to measure the amount of impairment loss. The second step compares the carrying value of the asset to its estimated fair value. If the carrying value exceeds the estimated fair value (less cost to sell), an impairment loss is recognized for the difference.
Quoted market prices in active markets are the best evidence of fair value of a tangible long-lived asset and are used when available. If quoted market prices are not available, the estimate of fair value is based on the best information available, including prices for similar assets and the use of other valuation techniques. A present value analysis of cash flow scenarios is often the best available valuation technique. The use of this technique involves assumptions by management about factors that are uncertain including future cash flows, the appropriate discount rate and other inputs. Different assumptions for these inputs could create materially different results.
43
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Agent Liabilities
U.S. Cellular has relationships with agents, which are independent businesses that obtain customers for U.S. Cellular. At December 31, 2012 and 2011, U.S. Cellular had accrued $88.2 million and $75.3 million, respectively, for amounts due to agents. This amount is included in Other current liabilities in the Consolidated Balance Sheet.
Other Assets and Deferred Charges
Other assets and deferred charges include legal fees and other charges related to U.S. Cellular's various borrowing instruments, and are amortized over the respective term of each instrument. The amounts for deferred charges included in the Consolidated Balance Sheet at December 31, 2012 and 2011, are shown net of accumulated amortization of $12.7 million and $9.6 million, respectively.
Asset Retirement Obligations
U.S. Cellular operates cell sites, retail stores and office spaces in its operating markets. A majority of these sites, stores and office spaces are leased. Most of these leases contain terms which require or may require U.S. Cellular to return the leased property to its original condition at the lease expiration date.
U.S. Cellular accounts for asset retirement obligations by recording the fair value of a liability for legal obligations associated with an asset retirement in the period in which the obligations are incurred. At the time the liability is incurred, U.S. Cellular records a liability equal to the net present value of the estimated cost of the asset retirement obligation and increases the carrying amount of the related long-lived asset by an equal amount. The liability is accreted to its present value over a period ending with the estimated settlement date of the respective asset retirement obligation. The carrying amount of the long-lived asset is depreciated over the useful life of the asset. Upon settlement of the obligation, any difference between the cost to retire the asset and the recorded liability (including accretion of discount) is recognized in the Consolidated Statement of Operations.
Treasury Shares
Common Shares repurchased by U.S. Cellular are recorded at cost as treasury shares and result in a reduction of equity. Treasury shares are reissued as part of U.S. Cellular's stock-based compensation programs. When treasury shares are reissued, U.S. Cellular determines the cost using the first-in, first-out cost method. The difference between the cost of the treasury shares and reissuance price is included in Additional paid-in capital or Retained earnings.
Revenue Recognition
Revenues from wireless operations consist primarily of:
44
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Revenues related to wireless services and other value added services are recognized as services are rendered. Revenues billed in advance or in arrears of the services being provided are estimated and deferred or accrued, as appropriate.
Revenues from sales of equipment and accessories are recognized when title and risk of loss passes to the agent or end-user customer.
U.S. Cellular allocates revenue to each element of multiple element service offerings using the relative selling price method. Under this method, arrangement consideration, which consists of the amounts billed to the customer net of any cash-based discounts, is allocated to each element on the basis of its relative selling price on a stand-alone basis. Such stand-alone selling price is determined in accordance with the following hierarchy:
U.S. Cellular estimates stand-alone selling prices of the elements of its service offerings as follows:
U.S. Cellular follows the deferred revenue method of accounting for its loyalty reward program. Under this method, revenue allocated to loyalty reward points is fully deferred as U.S. Cellular does not have sufficient historical data in which to estimate any portion of loyalty reward points that will not be redeemed. Revenue is recognized at the time of customer redemption or when such points have been depleted via a maintenance charge. U.S. Cellular periodically reviews and will revise the redemption and depletion rates as appropriate based on history and related future expectations. As of December 31, 2012 and 2011, U.S. Cellular had deferred revenue related to loyalty reward points outstanding of $56.6 million and $38.9 million, respectively. These amounts are recorded in Customer deposits and deferred revenues (a current liability account) in the Consolidated Balance Sheet, as customers may redeem their reward points within the current period.
Cash-based discounts and incentives, including discounts to customers who pay their bills through the use of on-line bill payment methods, are recognized as a reduction of Operating revenues concurrently with the associated revenue, and are allocated to the various products and services in the bundled offering based on their respective relative selling price.
In order to provide better control over wireless device quality, U.S. Cellular sells wireless devices to agents. U.S. Cellular pays rebates to agents at the time an agent activates a new customer or retains an existing customer in a transaction involving a wireless device. U.S. Cellular accounts for these rebates by
45
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
reducing revenues at the time of the wireless device sale to the agent rather than at the time the agent activates a new customer or retains a current customer. Similarly, U.S. Cellular offers certain wireless device sales rebates and incentives to its retail customers and records the revenue net of the corresponding rebate or incentive. The total potential rebates and incentives are reduced by U.S. Cellular's estimate of rebates that will not be redeemed by customers based on historical experience of such redemptions.
Prior to July 1, 2012, U.S. Cellular charged a service activation fee to customers. Activation fees charged at agent locations with the sale of service only, where U.S. Cellular did not sell a wireless device to the customer, were deferred and recognized over the average customer life. On July 1, 2012, U.S. Cellular discontinued the service activation fee and began charging a device activation fee. Device activation fees charged at agent locations, where U.S. Cellular does not also sell a wireless device to the customer, are deferred and recognized over the average device life. Device activation fees charged as a result of handset sales at Company-owned retail stores are recognized at the time the handset is delivered to the customer. GAAP requires that activation fees charged with the sale of equipment and service be allocated to the equipment and service based upon the relative selling prices of each item. This generally results in the recognition of the activation fee as additional wireless device revenue at the time of sale.
ETC revenues recognized in the reporting period represent the amounts which U.S. Cellular is entitled to receive for such period, as determined and approved in connection with U.S. Cellular's designation as an ETC in various states.
Amounts Collected from Customers and Remitted to Governmental Authorities
U.S. Cellular records amounts collected from customers and remitted to governmental authorities net within a tax liability account if the tax is assessed upon the customer and U.S. Cellular merely acts as an agent in collecting the tax on behalf of the imposing governmental authority. If the tax is assessed upon U.S. Cellular, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $135.7 million, $125.2 million and $137.6 million for 2012, 2011 and 2010, respectively.
Advertising Costs
U.S. Cellular expenses advertising costs as incurred. Advertising costs totaled $227.0 million, $257.8 million and $265.2 million in 2012, 2011 and 2010, respectively.
Income Taxes
U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. TDS and U.S. Cellular are parties to a Tax Allocation Agreement which provides that U.S. Cellular and its subsidiaries be included with the TDS affiliated group in a consolidated federal income tax return and in state income or franchise tax returns in certain situations. For financial statement purposes, U.S. Cellular and its subsidiaries calculate their income, income taxes and credits as if they comprised a separate affiliated group. Under the Tax Allocation Agreement, U.S. Cellular remits its applicable income tax payments to TDS. U.S. Cellular had a tax payable balance with TDS of $1.1 million and a tax receivable balance of $73.7 million as of December 31, 2012 and 2011, respectively.
Deferred taxes are computed using the liability method, whereby deferred tax assets are recognized for future deductible temporary differences and operating loss carryforwards, and deferred tax liabilities are recognized for future taxable temporary differences. Both deferred tax assets and liabilities are measured
46
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
using the tax rates anticipated to be in effect when the temporary differences reverse. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. U.S. Cellular evaluates income tax uncertainties, assesses the probability of the ultimate settlement with the applicable taxing authority and records an amount based on that assessment.
Stock-Based Compensation
U.S. Cellular has established a long-term incentive plan and a Non-Employee Director compensation plan, and previously had an employee stock purchase plan before this was terminated in the fourth quarter of 2011. Also, U.S. Cellular employees were eligible to participate in the TDS employee stock purchase plan before this was terminated in the fourth quarter of 2011. These plans are described more fully in Note 15Stock-based Compensation. These plans are considered compensatory plans and, therefore, recognition of compensation cost for grants made under these plans is required.
U.S. Cellular values its share-based payment transactions using a Black-Scholes valuation model. Stock-based compensation cost recognized during the period is based on the portion of the share-based payment awards that is ultimately expected to vest. Accordingly, stock-based compensation cost recognized has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures and expected life are estimated based on historical experience related to similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. U.S. Cellular believes that its historical experience provides the best estimates of future pre-vesting forfeitures and future expected life. The expected volatility assumption is based on the historical volatility of U.S. Cellular's common stock over a period commensurate with the expected life. The dividend yield assumption is zero because U.S. Cellular has never paid a dividend and has expressed its intention to retain all future earnings in the business. The risk-free interest rate assumption is determined using the U.S. Treasury Yield Curve Rate with a term length that approximates the expected life of the stock options.
Compensation cost for stock option awards is recognized over the respective requisite service period of the awards, which is generally the vesting period, on a straight-line basis for each separate vesting portion of the awards as if the awards were, in-substance, multiple awards (graded vesting attribution method).
Defined Contribution Plans
U.S. Cellular participates in a qualified noncontributory defined contribution pension plan sponsored by TDS; such plan provides pension benefits for the employees of U.S. Cellular and its subsidiaries. Under this plan, pension benefits and costs are calculated separately for each participant and are funded currently. Pension costs were $12.4 million, $11.6 million and $11.6 million in 2012, 2011 and 2010, respectively.
U.S. Cellular also participates in a defined contribution retirement savings plan ("401(k) plan") sponsored by TDS. Total costs incurred from U.S. Cellular's contributions to the 401(k) plan were $17.1 million, $15.5 million and $15.3 million in 2012, 2011 and 2010, respectively.
47
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Operating Leases
U.S. Cellular is a party to various lease agreements for office space, retail stores, cell sites and equipment that are accounted for as operating leases. Certain leases have renewal options and/or fixed rental increases. Renewal options that are reasonably assured of exercise are included in determining the lease term. U.S. Cellular accounts for certain operating leases that contain rent abatements, lease incentives and/or fixed rental increases by recognizing lease revenue and expense on a straight-line basis over the lease term.
Recent Accounting Pronouncements
On July 27, 2012, the FASB issued Accounting Standards Update 2012-02, IntangiblesGoodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). ASU 2012-02 is intended to reduce the cost and complexity of the annual indefinite-lived intangible assets impairment testing by providing entities an option to perform a "qualitative" assessment to determine whether further impairment testing is necessary. As such, there is the possibility that quantitative assessments would not need to be performed if it is more likely than not that no impairment exists. U.S. Cellular is required to adopt the provisions of ASU 2012-02 as of January 1, 2013. Early adoption is permitted. The adoption of ASU 2012-02 is not expected to have a significant impact on U.S. Cellular's financial position or results of operations.
NOTE 2 NONCONTROLLING INTERESTS
U.S. Cellular's consolidated financial statements include certain noncontrolling interests that meet the GAAP definition of mandatorily redeemable financial instruments. These mandatorily redeemable noncontrolling interests represent interests held by third parties in consolidated partnerships and limited liability companies ("LLCs"), where the terms of the underlying partnership or LLC agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are to be distributed to the noncontrolling interest holders and U.S. Cellular in accordance with the respective partnership and LLC agreements. The termination dates of these mandatorily redeemable noncontrolling interests range from 2085 to 2107.
The settlement value or estimate of cash that would be due and payable to settle these noncontrolling interests assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on December 31, 2012, net of estimated liquidation costs, is $159.2 million. This amount excludes redemption amounts recorded in Noncontrolling interests with redemption features in the Consolidated Balance Sheet. The estimate of settlement value was based on certain factors and assumptions which are subjective in nature. Changes in those factors and assumptions could result in a materially larger or smaller settlement amount. U.S. Cellular currently has no plans or intentions relating to the liquidation of any of the related partnerships or LLCs prior to their scheduled termination dates. The corresponding carrying value of the mandatorily redeemable noncontrolling interests in finite-lived consolidated partnerships and LLCs at December 31, 2012 was $57.5 million, and is included in Noncontrolling interests in the Consolidated Balance Sheet. The excess of the aggregate settlement value over the aggregate carrying value of these mandatorily redeemable noncontrolling interests is primarily due to the unrecognized appreciation of the noncontrolling interest holders' share of the underlying net assets in the consolidated partnerships and LLCs. Neither the noncontrolling interest holders' share, nor U.S. Cellular's share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements.
48
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 3 FAIR VALUE MEASUREMENTS
As of December 31, 2012 and 2011, U.S. Cellular did not have any financial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP. However, U.S. Cellular has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.
|
|
December 31, 2012 | December 31, 2011 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Level within the
Fair Value Hierarchy |
|||||||||||||||
(Dollars in thousands)
|
Book Value | Fair Value | Book Value | Fair Value | ||||||||||||
Cash and cash equivalents |
1 | $ | 378,358 | $ | 378,358 | $ | 424,155 | $ | 424,155 | |||||||
Short-term investments(1)(2) |
||||||||||||||||
Government-backed securities(3) |
1 | 100,676 | 100,676 | 127,039 | 127,039 | |||||||||||
Long-term investments(1)(4) |
||||||||||||||||
Government-backed securities(3) |
1 | 50,305 | 50,339 | 30,057 | 30,140 | |||||||||||
Long-term debt(5) |
||||||||||||||||
6.95% Senior Notes |
1 | 342,000 | 376,610 | 342,000 | 364,162 | |||||||||||
6.7% Senior Notes |
2 | 532,194 | 582,744 | 534,111 | 534,860 |
The fair values of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. The fair values of Long-term investments were estimated using quoted market prices for the individual issuances. The fair value of Long-term debt, excluding capital lease obligations and the current portion of such Long-term debt, was estimated using market prices for the 6.95% Senior Notes, and discounted cash flow analysis using an estimated yield to maturity of 6.09% and 6.85% for the 6.7% Senior Notes at December 31, 2012 and 2011, respectively.
NOTE 4 INCOME TAXES
U.S. Cellular's income taxes balances at December 31, 2012 and 2011 were as follows:
December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|||||||
Federal income taxes receivable (payable) |
$ | (1,614 | ) | $ | 73,525 | ||
State income taxes receivable |
1,612 | 1,266 |
49
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 4 INCOME TAXES (Continued)
Income tax expense (benefit) is summarized as follows:
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) |
||||||||||
Current |
||||||||||
Federal |
$ | 10,547 | $ | (90,235 | ) | $ | 19,290 | |||
State |
4,186 | 1,049 | (11,059 | ) | ||||||
Deferred |
||||||||||
Federal |
54,490 | 187,581 | 57,759 | |||||||
State |
(5,246 | ) | 15,683 | 15,968 | ||||||
|
$ | 63,977 | $ | 114,078 | $ | 81,958 | ||||
A reconciliation of U.S. Cellular's income tax expense computed at the statutory rate to the reported income tax expense, and the statutory federal income tax expense rate to U.S. Cellular's effective income tax expense rate is as follows:
|
2012 | 2011 | 2010 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year Ended December 31,
|
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||
(Dollars in millions)
|
|
|
|
|
|
|
|||||||||||||
Statutory federal income tax expense and rate |
$ | 71.8 | 35.0 | % | $ | 109.5 | 35.0 | % | $ | 84.4 | 35.0 | % | |||||||
State income taxes, net of federal benefit(1) |
3.7 | 1.8 | 4.5 | 1.4 | 5.0 | 2.1 | |||||||||||||
Effect of noncontrolling interests |
(6.3 | ) | (3.1 | ) | (4.9 | ) | (1.6 | ) | (4.6 | ) | (1.9 | ) | |||||||
Correction of deferred taxes(2) |
(5.3 | ) | (2.6 | ) | 6.1 | 2.0 | | | |||||||||||
Other differences, net |
0.1 | 0.1 | (1.1 | ) | (0.3 | ) | (2.8 | ) | (1.2 | ) | |||||||||
Total income tax expense and rate |
$ | 64.0 | 31.2 | % | $ | 114.1 | 36.5 | % | $ | 82.0 | 34.0 | % | |||||||
U.S. Cellular's current Net deferred income tax asset totaled $35.4 million and $31.9 million at December 31, 2012 and 2011, respectively, and primarily represents the deferred tax effects of accrued liabilities and the allowance for doubtful accounts on customer receivables.
50
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 4 INCOME TAXES (Continued)
U.S. Cellular's noncurrent deferred income tax assets and liabilities at December 31, 2012 and 2011 and the temporary differences that gave rise to them were as follows:
December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|||||||
Noncurrent deferred tax assets |
|||||||
Net operating loss ("NOL") carryforwards |
$ | 63,240 | $ | 48,565 | |||
Stock-based compensation |
22,411 | 19,079 | |||||
Compensation and benefitsother |
13,673 | 2,985 | |||||
Deferred rent |
15,822 | 12,656 | |||||
Other |
25,432 | 20,554 | |||||
|
140,578 | 103,839 | |||||
Less valuation allowance |
(40,208 | ) | (29,262 | ) | |||
Total noncurrent deferred tax assets |
100,370 | 74,577 | |||||
Noncurrent deferred tax liabilities |
|||||||
Property, plant and equipment |
527,547 | 482,433 | |||||
Licenses/intangibles |
294,738 | 267,344 | |||||
Partnership investments |
124,221 | 120,941 | |||||
Other |
3,682 | 3,049 | |||||
Total noncurrent deferred tax liabilities |
950,188 | 873,767 | |||||
Net noncurrent deferred income tax liability |
$ | 849,818 | $ | 799,190 | |||
At December 31, 2012, U.S. Cellular and certain subsidiaries had $1,152.0 million of state NOL carryforwards (generating a $54.4 million deferred tax asset) available to offset future taxable income. The state NOL carryforwards expire between 2013 and 2032. Certain subsidiaries had federal NOL carryforwards (generating a $8.8 million deferred tax asset) available to offset their future taxable income. The federal NOL carryforwards expire between 2013 and 2032. A valuation allowance was established for certain state NOL carryforwards and federal NOL carryforwards since it is more likely than not that a portion of such carryforwards will expire before they can be utilized.
A summary of U.S. Cellular's deferred tax asset valuation allowance is as follows:
(Dollars in thousands)
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1, |
$ | 30,261 | $ | 29,891 | $ | 19,234 | ||||
Charged to income tax expense |
3,033 | (1,450 | ) | (832 | ) | |||||
Charged to other accounts |
8,001 | 1,820 | 11,489 | |||||||
Balance at December 31, |
$ | 41,295 | $ | 30,261 | $ | 29,891 | ||||
As of December 31, 2012, the valuation allowance reduced current deferred tax assets by $1.1 million and noncurrent deferred tax assets by $40.2 million.
51
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 4 INCOME TAXES (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(Dollars in thousands)
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Unrecognized tax benefits balance at January 1, |
$ | 28,745 | $ | 32,547 | $ | 34,442 | ||||
Additions for tax positions of current year |
6,656 | 4,487 | 5,119 | |||||||
Additions for tax positions of prior years |
854 | 332 | 550 | |||||||
Reductions for tax positions of prior years |
(115 | ) | (1,104 | ) | (1,560 | ) | ||||
Reductions for settlements of tax positions |
| (244 | ) | (5,938 | ) | |||||
Reductions for lapses in statutes of limitations |
(9,680 | ) | (7,273 | ) | (66 | ) | ||||
Unrecognized tax benefits balance at December 31, |
$ | 26,460 | $ | 28,745 | $ | 32,547 | ||||
Unrecognized tax benefits are included in Accrued taxes and Other deferred liabilities and credits in the Consolidated Balance Sheet. If these benefits were recognized, they would have reduced income tax expense in 2012, 2011 and 2010 by $17.2 million, $18.7 million and $21.1 million, respectively, net of the federal benefit from state income taxes.
As of December 31, 2012, U.S. Cellular believes it is reasonably possible that unrecognized tax benefits could decrease by approximately $4.9 million in the next twelve months. The nature of the uncertainty primarily relates to state income tax positions and their resolution or the expiration of statutes of limitation.
U.S. Cellular recognizes accrued interest and penalties related to unrecognized tax benefits in Income tax expense. The amounts charged to Income tax expense related to interest and penalties resulted in a benefit in 2012 of $2.2 million, a benefit of $2.6 million in 2011 and expense of $3.0 million in 2010, respectively. Net accrued interest and penalties were $12.8 million and $15.6 million at December 31, 2012 and 2011, respectively.
U.S. Cellular is included in TDS' consolidated federal income tax return. U.S. Cellular also files various state and local income tax returns. The TDS consolidated group remains subject to federal income tax audits for the tax years after 2009. With only a few exceptions, TDS is no longer subject to state income tax audits for years prior to 2008.
NOTE 5 VARIABLE INTEREST ENTITIES (VIEs)
Consolidated VIEs
As of December 31, 2012, U.S. Cellular holds a variable interest in and consolidates the following VIEs under GAAP:
From time to time, the FCC conducts auctions through which additional spectrum is made available for the provision of wireless services. U.S. Cellular participated in spectrum auctions indirectly through interests that it held at the time in Aquinas Wireless, King Street Wireless, Barat Wireless L.P. ("Barat Wireless") and Carroll Wireless L.P. ("Carroll Wireless"), collectively, the "limited partnerships." Each limited partnership participated in and was awarded spectrum licenses in one of four separate spectrum auctions (FCC Auctions 78, 73, 66 and 58). Each limited partnership qualified as a "designated entity" and thereby was eligible for bidding credits with respect to licenses purchased in accordance with the rules defined by the FCC for each auction. In most cases, the bidding credits resulted in a 25% discount from the gross winning bid.
52
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 5 VARIABLE INTEREST ENTITIES (VIEs) (Continued)
On September 7, 2012, U.S. Cellular acquired 100% of the ownership interest in Barat Wireless, Inc., the general partner of Barat Wireless, for an immaterial amount. On December 5, 2012, U.S. Cellular acquired 100% of the ownership interest in Carroll PCS, Inc., the general partner of Carroll Wireless, for an immaterial amount. Prior to these acquisitions, U.S. Cellular consolidated Barat Wireless, Barat Wireless, Inc., Carroll Wireless, and Carroll PCS, Inc. as VIEs. Subsequent to the acquisition dates these entities ceased to be VIEs but continue to be consolidated based on U.S. Cellular's controlling financial interest in the entities.
The power to direct the activities that most significantly impact the economic performance of Aquinas Wireless and King Street Wireless is shared. Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control the limited partnerships and make all decisions to carry on the business of the partnerships; however, the general partner of each partnership needs consent of the limited partner, a U.S. Cellular subsidiary, to sell or lease certain licenses, to make certain large expenditures, admit other partners or liquidate the limited partnerships. Although the power to direct the activities of the VIEs is shared, U.S. Cellular has a disproportionate level of exposure to the variability associated with the economic performance of the VIEs, indicating that U.S. Cellular is the primary beneficiary of the VIEs in accordance with GAAP. Accordingly, these VIEs are consolidated.
U.S. Cellular's capital contributions and advances made to VIEs totaled $10.0 million and $15.8 million in the years ended December 31, 2012 and 2011, respectively.
The following table presents the classification of the consolidated VIEs' assets and liabilities in U.S. Cellular's Consolidated Balance Sheet.
December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands) |
|||||||
Assets |
|||||||
Cash and cash equivalents |
$ | 5,849 | $ | 12,086 | |||
Other current assets |
120 | 47 | |||||
Licenses |
308,091 | 483,059 | |||||
Property, plant and equipment, net |
16,443 | 9,450 | |||||
Other assets and deferred charges |
887 | 153 | |||||
Total assets |
$ | 331,390 | $ | 504,795 | |||
Liabilities |
|||||||
Current liabilities |
$ | 1,013 | $ | 957 | |||
Deferred liabilities and credits |
3,024 | | |||||
Total liabilities |
$ | 4,037 | $ | 957 | |||
Other Related Matters
U.S. Cellular may agree to make additional capital contributions and/or advances to Aquinas Wireless and King Street Wireless and/or to their general partners to provide additional funding for the development of licenses granted in the various auctions. U.S. Cellular may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or long-term debt. There is no assurance that U.S. Cellular will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.
The limited partnership agreements of Aquinas Wireless and King Street Wireless also provide the general partner with a put option whereby the general partner may require the limited partner, a subsidiary of U.S. Cellular, to purchase its interest in the limited partnership. The general partner's put
53
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 5 VARIABLE INTEREST ENTITIES (VIEs) (Continued)
options related to its interests in King Street Wireless and Aquinas Wireless will become exercisable in 2019 and 2020, respectively. The put option price is determined pursuant to a formula that takes into consideration fixed interest rates and the market value of U.S. Cellular's Common Shares. Upon exercise of the put option, the general partner is required to repay borrowings due to U.S. Cellular. If the general partner does not elect to exercise its put option, the general partner may trigger an appraisal process in which the limited partner (a subsidiary of U.S. Cellular) may have the right, but not the obligation, to purchase the general partner's interest in the limited partnership at a price and on other terms and conditions specified in the limited partnership agreement. In accordance with requirements under GAAP, U.S. Cellular is required to calculate a theoretical redemption value for all of the put options assuming they are exercisable at the end of each reporting period, even though such exercise is not contractually permitted. Pursuant to GAAP, this theoretical redemption value, net of amounts payable to U.S. Cellular for loans and accrued interest thereon made by U.S. Cellular to the general partners the ("net put value"), was $0.5 million at December 31, 2012. At December 31, 2011, the net put value was $1.0 million and also included the theoretical redemption value of the put options held by the general partners of Barat Wireless and Carroll Wireless, which were consolidated as VIEs on that date. The net put value is recorded as Noncontrolling interests with redemption features in U.S. Cellular's Consolidated Balance Sheet. Also in accordance with GAAP, changes in the redemption value of the put options, net of interest accrued on the loans, are recorded as a component of Net income attributable to noncontrolling interests, net of tax, in U.S. Cellular's Consolidated Statements of Operations.
Aquinas Wireless and King Street Wireless were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions. As such, these entities have risks similar to those described in the "Risk Factors" in U.S. Cellular's Annual Report on Form 10-K.
U.S. Cellular began offering fourth generation Long-term Evolution ("4G LTE") service in certain cities within its service areas during the first quarter of 2012 and has plans to continue the deployment of 4G LTE. U.S. Cellular currently provides 4G LTE service in conjunction with King Street Wireless. Aquinas Wireless is still in the process of developing long-term business plans.
NOTE 6 EARNINGS PER SHARE
Basic earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share attributable to U.S. Cellular shareholders is computed by dividing Net income attributable to U.S. Cellular shareholders by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.
54
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 6 EARNINGS PER SHARE (Continued)
The amounts used in computing Earnings per Common and Series A Common Share and the effects of potentially dilutive securities on the weighted average number of Common and Series A Common Shares are as follows:
Year ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars and shares in thousands, except earnings per share) |
||||||||||
Net income attributable to U.S. Cellular shareholders |
$ |
111,006 |
$ |
175,041 |
$ |
136,074 |
||||
Weighted average number of shares used in basic earnings per share |
84,645 |
84,877 |
86,128 |
|||||||
Effect of dilutive securities: |
||||||||||
Stock options |
58 | 114 | 89 | |||||||
Restricted stock units |
364 | 344 | 301 | |||||||
Weighted average number of shares used in diluted earnings per share |
85,067 | 85,335 | 86,518 | |||||||
Basic earnings per share attributable to U.S. Cellular shareholders |
$ | 1.31 | $ | 2.06 | $ | 1.58 | ||||
Diluted earnings per share attributable to U.S. Cellular shareholders |
$ | 1.30 | $ | 2.05 | $ | 1.57 | ||||
Certain Common Shares issuable upon the exercise of stock options or vesting of restricted stock units were not included in average diluted shares outstanding for the calculation of Diluted earnings per share because their effects were antidilutive. The number of such Common Shares excluded is shown in the table below.
(Shares in thousands)
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Stock options |
2,452 | 1,399 | 1,771 | |||||||
Restricted stock units |
318 | 215 | 224 |
NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES
U.S. Cellular assesses its existing wireless interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on capital. As part of this strategy, U.S. Cellular reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum. In addition, U.S. Cellular may seek to divest outright or include in exchanges for other wireless interests those interests that are not strategic to its long-term success.
Divestiture Transaction
On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of Sprint Nextel Corporation ("Sprint"). The Purchase and Sale Agreement provides that U.S. Cellular will transfer customers and certain PCS license spectrum to Sprint in U.S. Cellular's Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets ("Divestiture Markets") in consideration for $480 million in cash at closing, subject to pro-rations of certain assets and liabilities. The Purchase and Sale Agreement also contemplates certain other agreements, collectively referred to as the "Divestiture Transaction."
U.S. Cellular will retain other assets and liabilities related to the Divestiture Markets, including network assets, retail stores and related equipment, and other buildings and facilities. The transaction does not affect spectrum licenses held by U.S. Cellular or VIEs that are not currently used in the operations of the Divestiture Markets. The Purchase and Sale Agreement also contemplates certain other agreements, including customer and network transition services agreements, which will require that U.S. Cellular provide customer, billing and network services to Sprint for a period of up to 24 months after the closing
55
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
date. Sprint will reimburse U.S. Cellular for providing such services at an amount equal to U.S. Cellular's cost, including applicable overhead allocations. In addition, these agreements will require Sprint to reimburse U.S. Cellular up to $200 million for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees.
Financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of Operations within Operating income. The table below describes the amounts U.S. Cellular expects to recognize in the Consolidated Statement of Operations between the date the Purchase and Sale Agreement was signed and the end of the transition services period, and the actual amounts incurred during the year ended December 31, 2012, as a result of the transaction.
(Dollars in thousands)
|
Expected
Period of Realization / Incurrence(1) |
Projected Range |
Actual
Amount Incurred Year Ended December 31, 2012 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Gain) loss on sale of business and other exit costs, net |
|||||||||||||
Proceeds from Sprint |
|||||||||||||
Purchase price |
2013 | $ | (480,000 | ) | $ | (480,000 | ) | $ | | ||||
Reimbursement of transition and exit costs |
2013-2014 | (150,000 | ) | (200,000 | ) | | |||||||
Net assets transferred |
2013 | 210,000 | 230,000 | | |||||||||
Non-cash charges for the write-off and write-down of property under construction and related assets |
2012-2013 | 5,000 | 15,000 | 10,672 | |||||||||
Employee related costs including severance, retention and outplacement |
2012-2014 | 15,000 | 25,000 | 12,609 | |||||||||
Contract termination costs |
2012-2014 | 125,000 | 175,000 | 59 | |||||||||
Transaction costs |
2012-2013 | 3,000 | 5,000 | 1,137 | |||||||||
Total (Gain) loss on sale of business and other exit costs, net |
$ | (272,000 | ) | $ | (230,000 | ) | $ | 24,477 | |||||
Depreciation, amortization and accretion expense |
|||||||||||||
Incremental depreciation, amortization and accretion, net of salvage values(2) |
2012-2014 | 150,000 | 210,000 | 20,058 | |||||||||
Other Operating expenses |
|||||||||||||
Non-cash charges for the write-off and write-down of various operating assets and liabilities |
2013 | | 10,000 | | |||||||||
(Increase) decrease in Operating income |
$ | (122,000 | ) | $ | (10,000 | ) | $ | 44,535 | |||||
56
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
As a result of the transaction, U.S. Cellular recognized the following amounts in the Consolidated Balance Sheet between the date the Purchase and Sale Agreement was signed and December 31, 2012:
(Dollars in thousands)
|
Balance
November 6, 2012 |
Costs
Incurred |
Cash
Settlements |
Non-cash
Settlements |
Adjustments |
Balance
December 31, 2012 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Accrued compensation |
|||||||||||||||||||
Employee related costs including severance, retention, outplacement |
$ | | $ | 12,609 | $ | (304 | ) | $ | | $ | | $ | 12,305 | ||||||
Other current liabilities |
|||||||||||||||||||
Contract termination costs |
$ | | $ | 59 | $ | (29 | ) | $ | | $ | | $ | 30 |
The transaction is subject to FCC approval, compliance with the Hart-Scott-Rodino Act and other conditions. Subject to the satisfaction or (if permitted) waiver of all conditions, the transaction is expected to close in mid-2013.
Other Acquisitions, Divestitures and Exchanges
On November 20, 2012, U.S. Cellular acquired seven 700 MHz licenses covering portions of Illinois, Michigan, Minnesota, Missouri, Nebraska, Oregon, Washington and Wisconsin for $57.7 million.
On August 15, 2012, U.S. Cellular acquired four 700 MHz licenses covering portions of Iowa, Kansas, Missouri, Nebraska and Oklahoma for $34.0 million.
On March 14, 2012, U.S. Cellular sold the majority of the assets and liabilities of a wireless market for $49.8 million in cash, net of working capital adjustments. At the time of the sale, a $4.2 million gain was recorded in (Gain) loss on sale of business and other exit costs, net in the Consolidated Statement of Operations. On May 9, 2011, pursuant to certain required terms of the partnership agreement, U.S. Cellular paid $24.6 million in cash to purchase the remaining ownership interest in this wireless market in which it previously held a 49% noncontrolling interest. In connection with the acquisition of the remaining interest, a $13.4 million gain was recorded to adjust the carrying value of this 49% investment to its fair value of $25.7 million based on an income approach valuation method. The gain was recorded in Gain (loss) on investment in the Consolidated Statement of Operations in 2011.
On September 30, 2011, U.S. Cellular completed an exchange whereby U.S. Cellular received eighteen 700 MHz spectrum licenses covering portions of Idaho, Illinois, Indiana, Kansas, Nebraska, Oregon and Washington in exchange for two PCS spectrum licenses covering portions of Illinois and Indiana. The exchange of licenses will provide U.S. Cellular with additional spectrum to meet anticipated future capacity and coverage requirements in several of its markets. No cash, customers, network assets, other assets or liabilities were included in the exchange. As a result of this transaction, U.S. Cellular recognized a gain of $11.8 million, representing the difference between the fair value of the licenses received, calculated using a market approach valuation method, and the carrying value of the licenses surrendered. This gain was recorded in (Gain) loss on asset disposals and exchanges, net in the Consolidated Statement of Operations for the year ended December 31, 2011. The Indiana PCS spectrum included in the exchange was originally awarded to Carroll Wireless in FCC Auction 58 and was purchased by U.S. Cellular prior to the exchange. Carroll Wireless was a VIE which U.S. Cellular consolidated at the time of the exchange; see Note 5Variable Interest Entities for additional information.
Acquisitions and exchanges completed as of December 31, 2012 did not have a material impact on U.S. Cellular's consolidated financial statements for the periods presented and pro forma results, assuming acquisitions and exchanges had occurred at the beginning of each period presented, would not be materially different from the results reported.
57
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued)
U.S. Cellular acquisitions in 2012 and 2011 and the allocation of the purchase price for these acquisitions were as follows:
|
|
Allocation of Purchase Price | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
Purchase
Price(1) |
Goodwill | Licenses |
Intangible Assets
Subject to Amortization(2) |
Net Tangible
Assets (Liabilities) |
|||||||||||
2012 |
||||||||||||||||
Licenses |
$ | 122,690 | $ | | $ | 122,690 | $ | | $ | | ||||||
2011 |
||||||||||||||||
Licenses |
$ | 4,406 | $ | | $ | 4,406 | $ | | $ | | ||||||
Business(3)(4) |
24,572 | | 15,592 | 2,252 | 6,728 | |||||||||||
Total |
$ | 28,978 | $ | | $ | 19,998 | $ | 2,252 | $ | 6,728 | ||||||
At December 31, 2012 and 2011, the following assets and liabilities were classified in the Consolidated Balance Sheet as "Assets held for sale" and "Liabilities held for sale":
(Dollars in thousands)
|
Current
Assets |
Licenses | Goodwill |
Other
Intangible Assets |
Property,
Plant and Equipment |
Total
Assets Held for Sale |
Liabilities
Held for Sale(1) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2012 |
||||||||||||||||||||||
Divestiture Transaction |
$ | | $ | 140,599 | $ | 72,994 | $ | | $ | | $ | 213,593 | $ | 19,594 | ||||||||
Bolingbrook Customer Care Center(2) |
| | | | 3,170 | 3,170 | | |||||||||||||||
Total |
$ | | $ | 140,599 | $ | 72,994 | $ | | $ | 3,170 | $ | 216,763 | $ | 19,594 | ||||||||
2011 |
||||||||||||||||||||||
U.S. Cellular wireless market |
$ | 4,179 | $ | 31,920 | $ | | $ | 4,611 | $ | 8,937 | $ | 49,647 | $ | 1,051 | ||||||||
58
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 8 INTANGIBLE ASSETS
Changes in U.S. Cellular's Licenses and Goodwill are presented below. See Note 7Acquisitions, Divestitures and Exchanges for information regarding transactions which affected Licenses and Goodwill during the periods.
Licenses
Year Ended December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|||||
Balance, beginning of year |
$ |
1,470,769 |
$ |
1,452,101 |
|||
Acquisitions(1) |
122,690 | 4,406 | |||||
Exchanges |
| 11,842 | |||||
Transferred to Assets held for sale |
(140,599 | ) | | ||||
Other |
3,934 | 2,420 | |||||
Balance, end of year |
$ | 1,456,794 | $ | 1,470,769 | |||
Goodwill
Year Ended December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|||||
Assigned value at time of acquisition |
$ |
494,737 |
$ |
494,737 |
|||
Accumulated impairment losses in prior periods |
| | |||||
Balance, beginning of year |
494,737 | 494,737 | |||||
Acquisitions |
| | |||||
Transferred to Assets held for sale |
(72,994 | ) | | ||||
Balance, end of year |
$ | 421,743 | $ | 494,737 | |||
See Note 1Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a description of accounting policies related to Licenses and Goodwill.
NOTE 9 INVESTMENTS IN UNCONSOLIDATED ENTITIES
Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a noncontrolling interest. These investments are accounted for using either the equity or cost method as shown in the following table:
December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|||||
Equity method investments: |
|||||||
Capital contributions, loans and advances |
$ | 10,323 | $ | 13,787 | |||
Cumulative share of income |
1,017,449 | 928,019 | |||||
Cumulative share of distributions |
(884,852 | ) | (805,321 | ) | |||
|
142,920 | 136,485 | |||||
Cost method investments |
1,611 | 1,611 | |||||
Total investments in unconsolidated entities |
$ | 144,531 | $ | 138,096 | |||
59
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 9 INVESTMENTS IN UNCONSOLIDATED ENTITIES (Continued)
Equity in earnings of unconsolidated entities totaled $90.4 million, $83.6 million and $97.3 million in 2012, 2011 and 2010, respectively; of those amounts, U.S. Cellular's investment in the Los Angeles SMSA Limited Partnership ("LA Partnership") contributed $67.2 million, $55.3 million and $64.8 million in 2012, 2011 and 2010, respectively. U.S. Cellular held a 5.5% ownership interest in the LA Partnership throughout and at the end of each of these years.
The following tables, which are based on information provided in part by third parties, summarize the combined assets, liabilities and equity, and the combined results of operations of U.S. Cellular's equity method investments:
December 31,
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|||||
Assets |
|||||||
Current |
$ | 444,100 | $ | 404,751 | |||
Due from affiliates |
298,707 | 199,167 | |||||
Property and other |
1,896,784 | 1,935,125 | |||||
|
$ | 2,639,591 | $ | 2,539,043 | |||
Liabilities and Equity |
|||||||
Current liabilities |
$ | 350,067 | $ | 300,780 | |||
Deferred credits |
80,660 | 79,787 | |||||
Long-term liabilities |
21,328 | 22,943 | |||||
Long-term capital lease obligations |
405 | 234 | |||||
Partners' capital and shareholders' equity |
2,187,131 | 2,135,299 | |||||
|
$ | 2,639,591 | $ | 2,539,043 | |||
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|
|||||||
Results of Operations |
||||||||||
Revenues |
$ | 5,804,466 | $ | 5,519,024 | $ | 4,950,306 | ||||
Operating expenses |
4,363,399 | 4,282,277 | 3,549,098 | |||||||
Operating income |
1,441,067 | 1,236,747 | 1,401,208 | |||||||
Other income, net |
4,003 | 4,976 | 37,701 | |||||||
Net income |
$ | 1,445,070 | $ | 1,241,723 | $ | 1,438,909 | ||||
60
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 10 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment in service and under construction, and related accumulated depreciation and amortization, as of December 31, 2012 and 2011 were as follows:
December 31,
|
Useful Lives
(Years) |
2012 | 2011 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|
|||||||
Land |
N/A |
$ |
33,947 |
$ |
30,807 |
|||||
Buildings |
20 | 341,852 | 330,925 | |||||||
Leasehold and land improvements |
1-30 | 1,188,720 | 1,129,818 | |||||||
Cell site equipment |
6-25 | 3,100,916 | 2,874,397 | |||||||
Switching equipment |
1-8 | 1,155,114 | 1,113,780 | |||||||
Office furniture and equipment |
3-5 | 535,656 | 570,776 | |||||||
Other operating assets and equipment |
5-25 | 128,290 | 127,253 | |||||||
System development |
3-7 | 631,184 | 545,193 | |||||||
Work in process |
N/A | 362,749 | 285,500 | |||||||
|
7,478,428 | 7,008,449 | ||||||||
Accumulated depreciation and amortization |
(4,455,840 | ) | (4,218,147 | ) | ||||||
|
$ | 3,022,588 | $ | 2,790,302 | ||||||
Depreciation and amortization expense totaled $597.7 million, $565.1 million and $559.0 million in 2012, 2011 and 2010, respectively. As a result of the Divestiture Transaction, U.S. Cellular recognized incremental depreciation and amortization in 2012. See Note 7Acquisitions, Divestitures and Exchanges for additional information.
In 2012, 2011 and 2010, (Gain) loss on asset disposals and exchanges, net included charges of $18.1 million, $9.9 million and $10.7 million, respectively, related to disposals of assets, trade-ins of older assets for replacement assets and other retirements of assets from service in the normal course of business. The 2011 (Gain) loss on asset disposals and exchanges, net also included a gain on the exchange of licenses, as described in Note 7Acquisitions, Divestitures and Exchanges
NOTE 11 ASSET RETIREMENT OBLIGATIONS
U.S. Cellular is subject to asset retirement obligations associated with its leased cell sites, switching office sites, retail store sites and office locations in its operating markets. Asset retirement obligations generally include obligations to restore leased land and retail store and office premises to their pre-lease conditions. These obligations are included in Other deferred liabilities and credits in the Consolidated Balance Sheet.
61
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 11 ASSET RETIREMENT OBLIGATIONS (Continued)
In 2012 and 2011, U.S. Cellular performed a review of the assumptions and estimated costs related to its asset retirement obligations. The results of the reviews (identified as "Revisions in estimated cash outflows") and other changes in asset retirement obligations during 2012 and 2011, including the Divestiture Transaction, were as follows:
(Dollars in thousands)
|
2012 | 2011 | |||||
---|---|---|---|---|---|---|---|
Balance, beginning of period |
$ | 143,402 | $ | 128,709 | |||
Additional liabilities accrued |
5,578 | 2,105 | |||||
Revisions in estimated cash outflows(1) |
22,588 | 5,888 | |||||
Disposition of assets |
(2,674 | ) | (1,323 | ) | |||
Accretion expense(2) |
10,713 | 8,023 | |||||
Balance, end of period |
$ | 179,607 | $ | 143,402 | |||
NOTE 12 DEBT
Revolving Credit Facility
At December 31, 2012, U.S. Cellular had a revolving credit facility available for general corporate purposes. Amounts under the revolving credit facility may be borrowed, repaid and reborrowed from time to time until maturity. U.S. Cellular did not borrow under its current or previous revolving credit facilities in 2012, 2011 or 2010 except for letters of credit.
U.S. Cellular's interest cost on its revolving credit facility is subject to increase if its current credit ratings from nationally recognized credit rating agencies is lowered, and is subject to decrease if the ratings are raised. The credit facility would not cease to be available nor would the maturity date accelerate solely as a result of a downgrade in U.S. Cellular's credit rating. However, a downgrade in U.S. Cellular's credit rating could adversely affect its ability to renew the credit facilities or obtain access to other credit facilities in the future.
The maturity date of any borrowings under the U.S. Cellular revolving credit facility would accelerate in the event of a change in control.
In 2012, the U.S. Cellular revolving credit facility was amended to extend the maturity date from December 2015 to December 2017.
62
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 12 DEBT (Continued)
The following table summarizes the terms of the revolving credit facility as of December 31, 2012:
(Dollars in millions)
|
|
|||
---|---|---|---|---|
Maximum borrowing capacity |
$ | 300.0 | ||
Letters of credit outstanding |
$ | 0.2 | ||
Amount borrowed |
$ | | ||
Amount available for use |
$ | 299.8 | ||
Borrowing rate: One-month London Interbank Offered Rate ("LIBOR") plus contractual spread(1) |
1.46 | % | ||
LIBOR |
0.21 | % | ||
Contractual spread |
1.25 | % | ||
Range of commitment fees on amount available for use(2) |
||||
Low |
0.13 | % | ||
High |
0.30 | % | ||
Agreement date |
December 2010 | |||
Maturity date |
December 2017 | |||
Fees incurred attributable to the Revolving Credit Facility are as follows: |
||||
Fees incurred as a percent of Maximum borrowing capacity for 2012 |
0.38 | % | ||
Fees incurred, amount |
||||
2012 |
$ | 1.1 | ||
2011 |
$ | 1.2 | ||
2010 |
$ | 3.8 |
The continued availability of the revolving credit facility requires U.S. Cellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and make representations regarding certain matters at the time of each borrowing. U.S. Cellular believes it was in compliance as of December 31, 2012 with all covenants and other requirements set forth in the revolving credit facility.
In connection with U.S. Cellular's revolving credit facility, TDS and U.S. Cellular entered into a subordination agreement dated December 17, 2010 together with the administrative agent for the lenders under U.S. Cellular's revolving credit agreement. Pursuant to this subordination agreement, (a) any consolidated funded indebtedness from U.S. Cellular to TDS will be unsecured and (b) any (i) consolidated funded indebtedness from U.S. Cellular to TDS (other than "refinancing indebtedness" as defined in the subordination agreement) in excess of $105,000,000, and (ii) refinancing indebtedness in excess of $250,000,000, will be subordinated and made junior in right of payment to the prior payment in full of obligations to the lenders under U.S. Cellular's revolving credit agreement. As of December 31,
63
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 12 DEBT (Continued)
2012, U.S. Cellular had no outstanding consolidated funded indebtedness or refinancing indebtedness that was subordinated to the revolving credit agreement pursuant to the subordination agreement.
At December 31, 2012, U.S. Cellular had recorded $3.4 million of issuance costs related to the revolving credit facility which is included in Other assets and deferred charges in the Consolidated Balance Sheet.
Long-Term Debt
Long-term debt as of December 31, 2012 and 2011 was as follows:
December 31,
|
Issuance date | Maturity date | Call date | 2012 | 2011 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|
|
|
||||||||
Unsecured Senior Notes |
|||||||||||||
6.7% |
December 2003
and June 2004 |
December 2033 | December 2003 | $ | 544,000 | $ | 544,000 | ||||||
Less: 6.7% Unamortized discount |
(11,806 | ) | (9,889 | ) | |||||||||
|
532,194 | 534,111 | |||||||||||
6.95% |
May 2011 | May 2060 | May 2016 | 342,000 | 342,000 | ||||||||
Obligation on capital leases |
4,756 | 4,336 | |||||||||||
Total long-term debt |
878,950 | 880,447 | |||||||||||
Long-term debt, current |
92 | 127 | |||||||||||
Long-term debt, noncurrent |
$ | 878,858 | $ | 880,320 |
U.S. Cellular may redeem the 6.7% Senior Notes, in whole or in part, at any time prior to maturity at a redemption price equal to the greater of (a) 100% of the principal amount of such notes, plus accrued and unpaid interest, or (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date on a semi-annual basis at the Treasury Rate plus 30 basis points. U.S. Cellular may redeem the 6.95% Senior Notes, in whole or in part at any time after the call date, at a redemption price equal to 100% of the principal amount redeemed plus accrued and unpaid interest.
Interest on the 6.7% Senior Notes is payable semi-annually, and on the 6.95% Senior Notes is payable quarterly.
Capitalized debt issuance costs for Unsecured Senior Notes totaled $16.3 million and are included in Other assets and deferred charges (a long-term asset account). These costs are amortized over the life of the notes using the effective interest method.
U.S. Cellular does not have any annual requirements for principal payments on long-term debt over the next five years (excluding capital lease obligations).
The covenants associated with U.S. Cellular's long-term debt obligations, among other things, restrict U.S. Cellular's ability, subject to certain exclusions, to incur additional liens, enter into sale and leaseback transactions, and sell, consolidate or merge assets.
U.S. Cellular's long-term debt indenture does not contain any provisions resulting in acceleration of the maturities of outstanding debt in the event of a change in U.S. Cellular's credit rating. However, a downgrade in U.S. Cellular's credit rating could adversely affect its ability to obtain long-term debt financing in the future.
64
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 13 COMMITMENTS AND CONTINGENCIES
Agreements
As previously disclosed, on August 17, 2010, U.S. Cellular and Amdocs Software Systems Limited ("Amdocs") entered into a Software License and Maintenance Agreement ("SLMA") and a Master Service Agreement ("MSA") (collectively, the "Amdocs Agreements") to develop a Billing and Operational Support System ("B/OSS"). Pursuant to an updated Statement of Work dated June 29, 2012, the implementation of B/OSS is expected to take until the end of 2013 to complete and total payments to Amdocs are estimated to be approximately $162.2 million (subject to certain potential adjustments) over the period from commencement of the SLMA in 2010 through the second half of 2013. As of December 31, 2012, $83.9 million had been paid to Amdocs.
Lease Commitments
U.S. Cellular is a party to various lease agreements, both as lessee and lessor, for office space, retail store sites, cell sites and equipment which are accounted for as operating leases. Certain leases have renewal options and/or fixed rental increases. Renewal options that are reasonably assured of exercise are included in determining the lease term. Any rent abatements or lease incentives, in addition to fixed rental increases, are included in the calculation of rent expense and calculated on a straight-line basis over the defined lease term.
As of December 31, 2012, future minimum rental payments required under operating leases and rental receipts expected under operating leases that have noncancellable lease terms in excess of one year were as follows:
(Dollars in thousands)
|
Operating Leases
Future Minimum Rental Payments |
Operating Leases
Future Minimum Rental Receipts |
|||||
---|---|---|---|---|---|---|---|
2013 |
$ | 151,630 | $ | 41,184 | |||
2014 |
127,081 | 35,613 | |||||
2015 |
108,779 | 26,088 | |||||
2016 |
90,919 | 15,358 | |||||
2017 |
73,969 | 6,505 | |||||
Thereafter |
809,344 | 398 | |||||
Total |
$ | 1,361,722 | $ | 125,146 | |||
Rent expense totaled $183.9 million, $171.6 million and $163.1 million in 2012, 2011 and 2010, respectively.
Rent revenue totaled $41.7 million, $39.2 million and $35.4 million in 2012, 2011 and 2010, respectively.
Indemnifications
U.S. Cellular enters into agreements in the normal course of business that provide for indemnification of counterparties. The terms of the indemnifications vary by agreement. The events or circumstances that would require U.S. Cellular to perform under these indemnities are transaction specific; however, these agreements may require U.S. Cellular to indemnify the counterparty for costs and losses incurred from litigation or claims arising from the underlying transaction. U.S. Cellular is unable to estimate the maximum potential liability for these types of indemnifications as the amounts are dependent on the outcome of future events, the nature and likelihood of which cannot be determined at this time. Historically, U.S. Cellular has not made any significant indemnification payments under such agreements.
65
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 13 COMMITMENTS AND CONTINGENCIES (Continued)
Legal Proceedings
U.S. Cellular is involved or may be involved from time to time in legal proceedings before the FCC, other regulatory authorities, and/or various state and federal courts. If U.S. Cellular believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement disclosures. The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial statements.
U.S. Cellular has accrued $1.7 million with respect to legal proceedings and unasserted claims as of December 31, 2012 and 2011. U.S. Cellular has not accrued any amount for legal proceedings if it cannot estimate the amount of the possible loss or range of loss. U.S. Cellular does not believe that the amount of any contingent loss in excess of the amounts accrued would be material.
NOTE 14 COMMON SHAREHOLDERS' EQUITY
Tax-Deferred Savings Plan
U.S. Cellular has reserved 67,215 Common Shares for issuance under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. Participating employees have the option of investing their contributions in a U.S. Cellular Common Share fund, a TDS Common Share fund or certain unaffiliated funds.
Series A Common Shares
Series A Common Shares are convertible on a share-for-share basis into Common Shares. In matters other than the election of directors, each Series A Common Share is entitled to ten votes per share, compared to one vote for each Common Share. The Series A Common Shares are entitled to elect 75% of the directors (rounded down), and the Common Shares elect 25% of the directors (rounded up). As of December 31, 2012, a majority of U.S. Cellular's outstanding Common Shares and all of U.S. Cellular's outstanding Series A Common Shares were held by TDS.
Common Share Repurchase Program
On November 17, 2009, the Board of Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. These purchases will be made pursuant to open market purchases, block purchases, private purchases, or otherwise, depending on market prices and other conditions. This authorization does not have an expiration date.
66
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 14 COMMON SHAREHOLDERS' EQUITY (Continued)
Share repurchases made under this authorization and prior authorizations, were as follows:
Year Ended December 31,
|
Number of Shares | Average Cost Per Share | Amount | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars and share amounts in thousands)
|
|
|
|
|||||||
2012 |
||||||||||
U.S. Cellular Common Shares |
571 | $ | 35.11 | $ | 20,045 | |||||
2011 |
||||||||||
U.S. Cellular Common Shares |
1,276 | $ | 48.82 | $ | 62,294 | |||||
2010 |
||||||||||
U.S. Cellular Common Shares |
1,235 | $ | 42.76 | $ | 52,827 |
Pursuant to certain employee and non-employee benefit plans, U.S. Cellular reissued 182,195, 286,211, and 241,954 Treasury Shares in 2012, 2011 and 2010, respectively.
NOTE 15 STOCK-BASED COMPENSATION
U.S. Cellular has established the following stock-based compensation plans: a long-term incentive plan and a Non-Employee Director compensation plan, and had an employee stock purchase plan that was terminated in the fourth quarter of 2011. In addition, U.S. Cellular employees were eligible to participate in the TDS employee stock purchase plan before that plan also was terminated in the fourth quarter of 2011.
Under the U.S. Cellular 2005 Long-Term Incentive Plan, U.S. Cellular may grant fixed and performance based incentive and non-qualified stock options, restricted stock, restricted stock units, and deferred compensation stock unit awards to key employees. At December 31, 2012, the only types of awards outstanding are fixed non-qualified stock option awards, restricted stock unit awards, and deferred compensation stock unit awards.
At December 31, 2012, U.S. Cellular had reserved 5,662,000 Common Shares for equity awards granted and to be granted under the 2005 Long-Term Incentive Plan. No Common Shares were reserved for issuance to employees under any employee stock purchase plan since this plan was terminated in the fourth quarter of 2011.
U.S. Cellular also has established a Non-Employee Director compensation plan under which it has reserved 25,000 Common Shares at December 31, 2012 for issuance as compensation to members of the Board of Directors who are not employees of U.S. Cellular or TDS.
U.S. Cellular uses treasury stock to satisfy requirements for Common Shares issued pursuant to its various stock-based compensation plans.
Long-Term Incentive PlanStock Options Stock options granted to key employees are exercisable over a specified period not in excess of ten years. Stock options generally vest over a period of three years from the date of grant. Stock options outstanding at December 31, 2012 expire between 2013 and 2022. However, vested stock options typically expire 30 days after the effective date of an employee's termination of employment for reasons other than retirement. Employees who leave at the age of retirement have 90 days (or one year if they satisfy certain requirements) within which to exercise their vested stock options. The exercise price of options equals the market value of U.S. Cellular Common Shares on the date of grant.
67
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 15 STOCK-BASED COMPENSATION (Continued)
U.S. Cellular estimated the fair value of stock options granted during 2012, 2011, and 2010 using the Black-Scholes valuation model and the assumptions shown in the table below.
|
2012 | 2011 | 2010 | |||
---|---|---|---|---|---|---|
Expected life |
4.5 years | 4.3 years | 0.9 - 8.0 years | |||
Expected volatility |
40.7% - 42.6% | 43.4% - 44.8% | 26.9% - 43.9% | |||
Dividend yield |
0% | 0% | 0% | |||
Risk-free interest rate |
0.5% - 0.9% | 0.7% - 2.0% | 0.4% - 3.1% | |||
Estimated annual forfeiture rate |
0.0% - 9.1% | 0.0% - 7.8% | 0.0% - 8.4% |
The fair value of options is recognized as compensation cost using an accelerated attribution method over the requisite service periods of the awards, which is generally the vesting period.
A summary of U.S. Cellular stock options outstanding (total and portion exercisable) and changes during the three years ended December 31, 2012, is presented in the table below:
|
Number of
Options |
Weighted
Average Exercise Price |
Weighted
Average Grant Date Fair Value |
Aggregate
Intrinsic Value |
Weighted
Average Remaining Contractual Life (in years) |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2009 |
2,029,000 | $ | 51.37 | |||||||||||||
(1,046,000 exercisable) |
54.40 | |||||||||||||||
Granted |
831,000 | 41.98 | $ | 13.75 | ||||||||||||
Exercised |
(317,000 | ) | 38.60 | $ | 1,555,000 | |||||||||||
Forfeited |
(88,000 | ) | 44.28 | |||||||||||||
Expired |
(193,000 | ) | 61.50 | |||||||||||||
Outstanding at December 31, 2010 |
2,262,000 | $ | 49.12 | |||||||||||||
(1,151,000 exercisable) |
54.64 | |||||||||||||||
Granted |
595,000 | 51.70 | $ | 19.42 | ||||||||||||
Exercised |
(173,000 | ) | 37.50 | $ | 2,099,000 | |||||||||||
Forfeited |
(72,000 | ) | 45.97 | |||||||||||||
Expired |
(175,000 | ) | 57.05 | |||||||||||||
Outstanding at December 31, 2011 |
2,437,000 | $ | 50.10 | |||||||||||||
(1,321,000 exercisable) |
$ | 53.68 | ||||||||||||||
Granted |
580,000 | 40.70 | $ | 14.71 | ||||||||||||
Exercised |
(41,000 | ) | 34.27 | $ | 205,000 | |||||||||||
Forfeited |
(97,000 | ) | 44.81 | |||||||||||||
Expired |
(116,000 | ) | 52.92 | |||||||||||||
Outstanding at December 31, 2012 |
2,763,000 | $ | 48.43 | $ | 513,000 | 6.60 | ||||||||||
(1,657,000 exercisable) |
$ | 51.20 | $ | 513,000 | 5.30 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between U.S. Cellular's closing stock price and the exercise price multiplied by the number of in-the-money options) that was received by the option holders upon exercise or that would have been received by option holders had all options been exercised on December 31, 2012.
Long-Term Incentive PlanRestricted Stock Units U.S. Cellular grants restricted stock unit awards, which generally vest after three years, to key employees.
68
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 15 STOCK-BASED COMPENSATION (Continued)
U.S. Cellular estimates the fair value of restricted stock units based on the closing market price of U.S. Cellular shares on the date of grant. The fair value is then recognized as compensation cost on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
A summary of U.S. Cellular nonvested restricted stock units at December 31, 2012 and changes during the year then ended is presented in the table below:
|
Number |
Weighted
Average Grant Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
Nonvested at December 31, 2011 |
845,000 | $ | 42.48 | ||||
Granted |
468,000 | 39.75 | |||||
Vested |
(225,000 | ) | 32.96 | ||||
Forfeited |
(75,000 | ) | 43.74 | ||||
Nonvested at December 31, 2012 |
1,013,000 | $ | 43.24 | ||||
The total fair value of restricted stock units that vested during 2012, 2011 and 2010 was $8.9 million, $9.5 million and $4.7 million, respectively, as of the respective vesting dates. The weighted average grant date fair value of restricted stock units granted in 2012, 2011 and 2010 was $39.75, $49.35 and $42.21, respectively.
Long-Term Incentive PlanDeferred Compensation Stock Units Certain U.S. Cellular employees may elect to defer receipt of all or a portion of their annual bonuses and to receive a company matching contribution on the amount deferred. All bonus compensation that is deferred by employees electing to participate is immediately vested and is deemed to be invested in U.S. Cellular Common Share stock units. The amount of U.S. Cellular's matching contribution depends on the portion of the annual bonus that is deferred. Participants receive a 25% match for amounts deferred up to 50% of their total annual bonus and a 33% match for amounts that exceed 50% of their total annual bonus; such matching contributions also are deemed to be invested in U.S. Cellular Common Share stock units.
The total fair value of deferred compensation stock units that vested was less than $0.1 million during 2012 and 2011. The fair value of units vested during 2010 was $0.4 million. The weighted average grant date fair value of deferred compensation stock units granted in 2012, 2011 and 2010 was $42.37, $48.72 and $40.76, respectively. As of December 31, 2012, there were 7,000 vested but unissued deferred compensation stock units valued at $0.2 million.
Employee Stock Purchase Plan The U.S. Cellular 2009 Employee Stock Purchase Plan was terminated in the fourth quarter of 2011.
Compensation of Non-Employee Directors U.S. Cellular issued 7,600, 6,600 and 9,000 Common Shares in 2012, 2011 and 2010, respectively, under its Non-Employee Director compensation plan.
69
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 15 STOCK-BASED COMPENSATION (Continued)
Stock-Based Compensation Expense
The following table summarizes stock-based compensation expense recognized during 2012, 2011 and 2010:
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|
|||||||
Stock option awards |
$ | 8,471 | $ | 9,549 | $ | 7,179 | ||||
Restricted stock unit awards |
12,300 | 10,037 | 10,056 | |||||||
Deferred compensation bonus and matching stock unit awards |
240 | 12 | 165 | |||||||
Awards under employee stock purchase plan |
| 255 | 314 | |||||||
Awards under Non-Employee Director compensation plan |
455 | 330 | 330 | |||||||
Total stock-based compensation, before income taxes |
21,466 | 20,183 | 18,044 | |||||||
Income tax benefit |
(8,121 | ) | (7,581 | ) | (6,812 | ) | ||||
Total stock-based compensation expense, net of income taxes |
$ | 13,345 | $ | 12,602 | $ | 11,232 | ||||
The following table provides a summary of the stock-based compensation expense included in the Consolidated Statement of Operations for the years ended:
December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|
|||||||
Selling, general and administrative expense |
$ | 18,437 | $ | 17,538 | $ | 16,009 | ||||
System operations |
3,029 | 2,645 | 2,035 | |||||||
Total stock-based compensation expense |
$ | 21,466 | $ | 20,183 | $ | 18,044 | ||||
At December 31, 2012, unrecognized compensation cost for all U.S. Cellular stock-based compensation awards was $24.6 million and is expected to be recognized over a weighted average period of 1.8 years.
U.S. Cellular's tax benefits realized from the exercise of stock options and other awards totaled $3.6 million in 2012.
NOTE 16 SUPPLEMENTAL CASH FLOW DISCLOSURES
Following are supplemental cash flow disclosures regarding interest paid and income taxes paid.
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|
|||||||
Interest paid |
$ | 44,048 | $ | 55,580 | $ | 59,049 | ||||
Income taxes paid (refunded) |
$ | (58,609 | ) | $ | (54,469 | ) | $ | 53,050 |
70
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 16 SUPPLEMENTAL CASH FLOW DISCLOSURES (Continued)
Following are supplemental cash flow disclosures regarding transactions related to stock-based compensation awards:
Year Ended December 31,
|
2012 | 2011 | 2010 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands)
|
|
|
|
|||||||
Common Shares withheld(1) |
92,846 | 120,250 | 310,388 | |||||||
Aggregate value of Common Shares withheld |
$ | 3,604 | $ | 5,952 | $ | 13,527 | ||||
Cash receipts upon exercise of stock options |
900 | 5,447 | 3,574 | |||||||
Cash disbursements for payment of taxes(2) |
(3,105 | ) | (3,512 | ) | (3,065 | ) | ||||
Net cash receipts (disbursements) from exercise of stock options and vesting of other stock awards |
$ | (2,205 | ) | $ | 1,935 | $ | 509 | |||
NOTE 17 RELATED PARTIES
U.S. Cellular is billed for all services it receives from TDS, pursuant to the terms of various agreements between it and TDS. These billings are included in U.S. Cellular's Selling, general and administrative expenses. Some of these agreements were established at a time prior to U.S. Cellular's initial public offering when TDS owned more than 90% of U.S. Cellular's outstanding capital stock and may not reflect terms that would be obtainable from an unrelated third party through arms-length negotiations. Billings from TDS to U.S. Cellular are based on expenses specifically identified to U.S. Cellular and on allocations of common expenses. Such allocations are based on the relationship of U.S. Cellular's assets, employees, investment in property, plant and equipment and expenses relative to all subsidiaries in the TDS consolidated group. Management believes the method TDS uses to allocate common expenses is reasonable and that all expenses and costs applicable to U.S. Cellular are reflected in its financial statements. Billings to U.S. Cellular from TDS totaled $104.3 million, $104.1 million and $107.5 million in 2012, 2011 and 2010, respectively.
In the second quarter of 2012, certain subsidiaries of U.S. Cellular agreed to lease wireless spectrum from Airadigm Communications, Inc. ("Airadigm") to enhance wireless services in existing markets. Both U.S. Cellular and Airadigm are consolidated subsidiaries of TDS. The lease agreements require U.S. Cellular to make payments of approximately $0.5 million to Airadigm annually for a period of five years after which U.S. Cellular will have an option to renew the lease for a fixed period of time. U.S. Cellular accounts for these leases as operating leases and includes the lease payments as System operations expense in the Consolidated Statement of Operations.
The Audit committee of the Board of Directors of U.S. Cellular is responsible for the review and evaluation of all related party transactions as such term is defined by the rules of the New York Stock Exchange ("NYSE").
71
United States Cellular Corporation
Notes to the Consolidated Financial Statements (Continued)
NOTE 18 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following persons are partners of Sidley Austin LLP, the principal law firm of U.S. Cellular and its subsidiaries: Walter C.D. Carlson, a director of U.S. Cellular, a director and non-executive Chairman of the Board of Directors of TDS and a trustee and beneficiary of a voting trust that controls TDS; William S. DeCarlo, the General Counsel of TDS and an Assistant Secretary of TDS and certain subsidiaries of TDS; and Stephen P. Fitzell, the General Counsel of U.S. Cellular and TDS Telecommunications Corporation and an Assistant Secretary of U.S. Cellular and certain other subsidiaries of TDS. Walter C.D. Carlson does not provide legal services to TDS, U.S. Cellular or their subsidiaries. U.S. Cellular and its subsidiaries incurred legal costs from Sidley Austin LLP of $10.7 million in 2012, $9.2 million in 2011 and $9.8 million in 2010.
The Audit Committee of the Board of Directors is responsible for the review and evaluation of all related-party transactions as such term is defined by the rules of the New York Stock Exchange.
72
Management's Responsibility for Financial Statements
Management of United States Cellular Corporation has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and, in management's opinion, were fairly presented. The financial statements included amounts that were based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and has expressed herein its unqualified opinion on these financial statements.
/s/ Mary N. Dillon
|
/s/ Steven T. Campbell
|
|
Mary N. Dillon
President and Chief Executive Officer (principal executive officer) |
Steven T. Campbell
Executive Vice PresidentFinance, Chief Financial Officer and Treasurer (principal financial officer) |
|
/s/ Douglas D. Shuma Douglas D. Shuma Chief Accounting Officer (principal accounting officer) |
|
|
73
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. U.S. Cellular's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("GAAP"). U.S. Cellular's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and, where required, the Board of Directors of the issuer; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuer's assets that could have a material effect on the interim or annual consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of U.S. Cellular's management, including its Chief Executive Officer and Chief Financial Officer, U.S. Cellular conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that U.S. Cellular maintained effective internal control over financial reporting as of December 31, 2012 based on criteria established in Internal ControlIntegrated Framework issued by the COSO.
The effectiveness of U.S. Cellular's internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in the firm's report included herein.
/s/ Mary N. Dillon
|
/s/ Steven T. Campbell
|
|
Mary N. Dillon
President and Chief Executive Officer (principal executive officer) |
Steven T. Campbell
Executive Vice PresidentFinance, Chief Financial Officer and Treasurer (principal financial officer) |
|
/s/ Douglas D. Shuma |
|
|
Douglas D. Shuma
Chief Accounting Officer (principal accounting officer) |
74
United States Cellular Corporation
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of United States Cellular Corporation:
In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in equity, and cash flows present fairly, in all material respects, the financial position of United States Cellular Corporation and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, based on our audits, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We did not audit the financial statements of Los Angeles SMSA Limited Partnership, a 5.5% owned entity accounted for by the equity method of accounting. The consolidated financial statements of United States Cellular Corporation reflect an investment in this partnership of $105,300,000 and $104,100,000 as of December 31, 2012 and 2011, and equity earnings of $67,200,000, $55,300,000 and $64,800,000 for each of the three years in the period ended December 31, 2012. The financial statements of Los Angeles SMSA Limited Partnership were audited by other auditors whose report thereon has been furnished to us, and our opinion on the financial statements expressed herein, insofar as it relates to the amounts included for Los Angeles SMSA Limited Partnership, is based solely on the report of the other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits and the report of other auditors provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Chicago,
Illinois
February 26, 2013
75
United States Cellular Corporation
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended or at December 31,
|
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
||||||||||||
Statement of Operations data |
||||||||||||||||
Service revenues |
$ | 4,098,856 | $ | 4,053,797 | $ | 3,913,001 | $ | 3,927,128 | $ | 3,939,695 | ||||||
Equipment sales |
353,228 | 289,549 | 264,680 | 286,752 | 302,859 | |||||||||||
Operating revenues |
4,452,084 | 4,343,346 | 4,177,681 | 4,213,880 | 4,242,554 | |||||||||||
Loss on impairment of assets(1) |
| | | 14,000 | 386,653 | |||||||||||
(Gain) loss on sale of business and other exit costs, net |
21,022 | | | | | |||||||||||
Operating income |
156,656 | 280,780 | 201,473 | 325,525 | 32,782 | |||||||||||
Equity in earnings of unconsolidated entities |
90,364 | 83,566 | 97,318 | 96,800 | 91,981 | |||||||||||
Gain (loss) on investment |
(3,718 | ) | 11,373 | | | 16,628 | ||||||||||
Income before income taxes |
205,053 | 312,822 | 241,116 | 349,165 | 69,855 | |||||||||||
Net income |
141,076 | 198,744 | 159,158 | 231,315 | 60,788 | |||||||||||
Net income attributable to noncontrolling interests, net of tax |
30,070 | 23,703 | 23,084 | 21,768 | 25,083 | |||||||||||
Net income attributable to U.S. Cellular shareholders |
$ | 111,006 | $ | 175,041 | $ | 136,074 | $ | 209,547 | $ | 35,705 | ||||||
Basic weighted average shares outstanding (000s) |
84,645 | 84,877 | 86,128 | 86,946 | 87,457 | |||||||||||
Basic earnings per share attributable to U.S. Cellular shareholders |
$ | 1.31 | $ | 2.06 | $ | 1.58 | $ | 2.41 | $ | 0.41 | ||||||
Diluted weighted average shares outstanding (000s) |
85,067 | 85,335 | 86,518 | 87,168 | 87,754 | |||||||||||
Diluted earnings per share attributable to U.S. Cellular shareholders |
$ | 1.30 | $ | 2.05 | $ | 1.57 | $ | 2.40 | $ | 0.41 | ||||||
Balance Sheet data |
||||||||||||||||
Total assets |
6,587,450 | 6,327,976 | 5,875,549 | 5,716,848 | 5,553,672 | |||||||||||
Long-term debt (excluding current portion) |
878,858 | 880,320 | 867,941 | 867,522 | 996,636 | |||||||||||
Total U.S. Cellular shareholders' equity |
$ | 3,795,247 | $ | 3,619,961 | $ | 3,486,452 | $ | 3,390,532 | $ | 3,199,339 |
U.S. Cellular has not paid any cash dividends and currently intends to retain all earnings for use in U.S. Cellular's business.
76
United States Cellular Corporation
CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
|
Quarter Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Amounts in thousands, except per share amounts)
|
March 31 | June 30 | September 30 | December 31 | |||||||||
2012 |
|||||||||||||
Operating revenues |
$ | 1,092,121 | $ | 1,104,400 | $ | 1,140,357 | $ | 1,115,206 | |||||
(Gain) loss on sale of business and other exit costs, net(1) |
(4,213 | ) | | 65 | 25,170 | ||||||||
Operating income (loss)(1)(2) |
85,202 | 84,163 | 48,079 | (60,788 | ) | ||||||||
Gain (loss) on investment(1) |
| (3,728 | ) | | 10 | ||||||||
Net income (loss)(1)(2)(3) |
69,012 | 59,248 | 42,140 | (29,324 | ) | ||||||||
Net income (loss) attributable to U.S. Cellular shareholders |
$ | 62,492 | $ | 52,685 | $ | 35,451 | $ | (39,622 | ) | ||||
Basic weighted average shares outstanding |
84,570 | 84,707 | 84,737 | 84,568 | |||||||||
Diluted weighted average shares outstanding |
85,133 | 85,061 | 85,152 | 84,568 | |||||||||
Basic earnings per share attributable to U.S. Cellular shareholders |
$ | 0.74 | $ | 0.62 | $ | 0.42 | $ | (0.47 | ) | ||||
Diluted earnings per share attributable to U.S. Cellular shareholders |
$ | 0.73 | $ | 0.62 | $ | 0.42 | $ | (0.47 | ) | ||||
Stock price(4) |
|||||||||||||
U.S. Cellular Common Shares |
|||||||||||||
High |
$ | 48.30 | $ | 41.15 | $ | 41.54 | $ | 40.40 | |||||
Low |
39.97 | 36.55 | 36.30 | 33.16 | |||||||||
Close |
$ | 40.93 | $ | 38.62 | $ | 39.13 | $ | 35.24 |
|
Quarter Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Amounts in thousands, except per share amounts)
|
March 31 | June 30 | September 30 | December 31 | |||||||||
2011 |
|||||||||||||
Operating revenues |
$ | 1,057,092 | $ | 1,076,182 | $ | 1,110,439 | $ | 1,099,633 | |||||
Operating income(2)(5) |
58,748 | 104,096 | 101,620 | 16,316 | |||||||||
Gain (loss) on investment |
| 13,373 | | (2,000 | ) | ||||||||
Net income(5) |
40,430 | 80,932 | 69,507 | 7,875 | |||||||||
Net income attributable to U.S. Cellular shareholders |
$ | 35,161 | $ | 74,939 | $ | 62,140 | $ | 2,801 | |||||
Basic weighted average shares outstanding |
85,484 | 84,930 | 84,547 | 84,559 | |||||||||
Diluted weighted average shares outstanding |
86,101 | 85,397 | 84,940 | 85,005 | |||||||||
Basic earnings per share attributable to U.S. Cellular shareholders |
$ | 0.41 | $ | 0.88 | $ | 0.73 | $ | 0.03 | |||||
Diluted earnings per share attributable to U.S. Cellular shareholders |
$ | 0.41 | $ | 0.88 | $ | 0.73 | $ | 0.03 | |||||
Stock price(4) |
|||||||||||||
U.S. Cellular Common Shares |
|||||||||||||
High |
$ | 52.10 | $ | 52.41 | $ | 49.75 | $ | 44.09 | |||||
Low |
44.21 | 46.25 | 35.58 | 36.84 | |||||||||
Close |
$ | 51.49 | $ | 48.42 | $ | 39.65 | $ | 43.63 |
U.S. Cellular has not paid any cash dividends and currently intends to retain all earnings for use in U.S. Cellular's business.
77
United States Cellular Corporation
SHAREHOLDER INFORMATION
Stock and dividend information
U.S. Cellular's Common Shares are listed on the New York Stock Exchange under the symbol "USM" and in the newspapers as "US Cellu." As of January 31, 2013, the last trading day of the month, U.S. Cellular's Common Shares were held by approximately 300 record owners. All of the Series A Common Shares were held by TDS. No public trading market exists for the Series A Common Shares. The Series A Common Shares are convertible on a share-for-share basis into Common Shares.
U.S. Cellular has not paid any cash dividends and currently intends to retain all earnings for use in U.S. Cellular's business.
See "Consolidated Quarterly Information (Unaudited)" for information on the high and low trading prices of the USM Common Shares for 2012 and 2011.
Stock performance graph
The following chart provides a comparison of U.S. Cellular's cumulative total return to shareholders (stock price appreciation plus dividends) during the previous five years to the returns of the Standard & Poor's 500 Composite Stock Price Index and the Dow Jones U.S. Telecommunications Index. As of December 31, 2012, the Dow Jones U.S. Telecommunications Index was composed of the following companies: AT&T Inc., CenturyLink Inc., Cincinnati Bell Inc., Crown Castle International Corp., Frontier Communications Corp., Leucadia National Corp., Level 3 Communications Inc., MetroPCS Communications Inc., NII Holdings Inc., SBA Communications Corp., Sprint Nextel Corp., Telephone and Data Systems, Inc. (TDS), TW Telecom, Inc., Verizon Communications Inc., and Windstream Corp.
COMPARISON OF CUMULATIVE TOTAL RETURN*
|
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
U.S. Cellular (NYSE: USM) |
$ | 100 | $ | 51.41 | $ | 50.43 | $ | 59.38 | $ | 51.88 | $ | 41.90 | |||||||
S&P 500 Index |
100 | 63.00 | 79.67 | 91.68 | 93.61 | 108.59 | |||||||||||||
Dow Jones U.S. Telecommunications Index |
100 | 67.07 | 73.68 | 86.75 | 90.19 | 107.14 |
Assumes $100.00 invested at the close of trading on the last trading day preceding the first day of 2007 in U.S. Cellular Common Shares, S&P 500 Index and the Dow Jones U.S. Telecommunications Index.
78
Investor relations
U.S. Cellular's annual report, SEC filings and news releases are available to investors, securities analysts and other members of the investment community. These reports are provided, without charge, upon request to our Corporate Office. Investors may also access these and other reports through the Investor Relations portion of the U.S. Cellular website ( http://www.uscc.com ).
Questions regarding lost, stolen or destroyed certificates, consolidation of accounts, transferring of shares and name or address changes should be directed to:
Julie
Mathews, ManagerInvestor Relations
Telephone and Data Systems, Inc.
30 North LaSalle Street, Suite 4000
Chicago, IL 60602
312.592.5341
312.630.9299 (fax)
julie.mathews@teldta.com
General inquiries by investors, securities analysts and other members of the investment community should be directed to:
Jane
W. McCahon, Vice PresidentCorporate Relations and Corporate Secretary
Telephone and Data Systems, Inc.
30 North LaSalle Street, Suite 4000
Chicago, IL 60602
312.592.5379
312.630.9299 (fax)
jane.mccahon@teldta.com
Directors and executive officers
See "Election of Directors" and "Executive Officers" sections of the Proxy Statement issued in 2013 for the 2013 Annual Meeting.
Principal counsel
Sidley Austin LLP, Chicago, Illinois
Transfer agent
Computershare
Trust Company, N.A.
250 Royall St.
Canton, MA 02021
312.360.5326
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Visit U.S. Cellular's website at www.uscc.com
79
Exhibit 21
UNITED STATES CELLULAR CORPORATION
SUBSIDIARY COMPANIES
December 31, 2012
|
|
STATE OF |
SUBSIDIARY COMPANIES |
|
ORGANIZATION |
|
|
|
BANGOR CELLULAR TELEPHONE, L.P. |
|
DELAWARE |
BARAT WIRELESS, INC. |
|
DELAWARE |
BARAT WIRELESS, L.P. |
|
DELAWARE |
CALIFORNIA RURAL SERVICE AREA #1, INC. |
|
CALIFORNIA |
CARROLL PCS, INC. |
|
DELAWARE |
CARROLL WIRELESS, L.P. |
|
DELAWARE |
CEDAR RAPIDS CELLULAR TELEPHONE, L.P. |
|
DELAWARE |
CELLVEST, INC. |
|
DELAWARE |
CENTRAL CELLULAR TELEPHONES, LTD. |
|
ILLINOIS |
CHAMPLAIN CELLULAR, INC. |
|
NEW YORK |
COMMUNITY CELLULAR TELEPHONE COMPANY |
|
TEXAS |
CROWN POINT CELLULAR, INC. |
|
NEW YORK |
DUBUQUE CELLULAR TELEPHONE, L.P. |
|
DELAWARE |
EASTERN NORTH CAROLINA CELLULAR JOINT VENTURE |
|
DELAWARE |
HARDY CELLULAR TELEPHONE COMPANY |
|
DELAWARE |
HUMPHREYS COUNTY CELLULAR, INC. |
|
DELAWARE |
INDIANA RSA # 5, INC. |
|
INDIANA |
INDIANA RSA NO. 4 LIMITED PARTNERSHIP |
|
INDIANA |
INDIANA RSA NO. 5 LIMITED PARTNERSHIP |
|
INDIANA |
IOWA RSA # 3, INC. |
|
DELAWARE |
IOWA RSA # 9, INC. |
|
DELAWARE |
IOWA RSA # 12, INC. |
|
DELAWARE |
JACKSONVILLE CELLULAR PARTNERSHIP |
|
NORTH CAROLINA |
JACKSONVILLE CELLULAR TELEPHONE COMPANY |
|
NORTH CAROLINA |
KANSAS #15 LIMITED PARTNERSHIP |
|
DELAWARE |
KENOSHA CELLULAR TELEPHONE, L.P. |
|
DELAWARE |
MADISON CELLULAR TELEPHONE COMPANY |
|
WISCONSIN |
MAINE RSA # 1, INC. |
|
MAINE |
MAINE RSA # 4, INC. |
|
MAINE |
MANCHESTER-NASHUA CELLULAR TELEPHONE, L.P. |
|
DELAWARE |
MCDANIEL CELLULAR TELEPHONE COMPANY |
|
DELAWARE |
MINNESOTA INVCO OF RSA # 7, INC. |
|
DELAWARE |
NEW YORK RSA 2 CELLULAR PARTNERSHIP |
|
NEW YORK |
NEWPORT CELLULAR, INC. |
|
NEW YORK |
NH #1 RURAL CELLULAR, INC. |
|
NEW HAMPSHIRE |
NORTH CAROLINA RSA 1 PARTNERSHIP |
|
DELAWARE |
OREGON RSA #2, INC. |
|
OREGON |
PCS WISCONSIN, LLC |
|
WISCONSIN |
RACINE CELLULAR TELEPHONE COMPANY |
|
WISCONSIN |
SOUTH CANAAN CELLULAR COMMUNICATIONS COMPANY, L.P. |
|
DELAWARE |
ST. LAWRENCE SEAWAY RSA CELLULAR PARTNERSHIP |
|
NEW YORK |
TENNESSEE NO. 3, LIMITED PARTNERSHIP |
|
TENNESSEE |
TEXAHOMA CELLULAR LIMITED PARTNERSHIP |
|
TEXAS |
TEXAS INVCO OF RSA # 6, INC. |
|
DELAWARE |
TOWNSHIP CELLULAR TELEPHONE, INC. |
|
DELAWARE |
UNITED STATES CELLULAR INVESTMENT CO. OF OKLAHOMA CITY, INC. |
|
OKLAHOMA |
UNITED STATES CELLULAR INVESTMENT COMPANY, LLC |
|
DELAWARE |
UNITED STATES CELLULAR INVESTMENT CORPORATION OF LOS ANGELES |
|
INDIANA |
UNITED STATES CELLULAR OPERATING COMPANY LLC |
|
DELAWARE |
UNITED STATES CELLULAR OPERATING COMPANY OF BANGOR |
|
MAINE |
UNITED STATES CELLULAR OPERATING COMPANY OF CEDAR RAPIDS |
|
DELAWARE |
UNITED STATES CELLULAR OPERATING COMPANY OF CHICAGO, LLC |
|
DELAWARE |
UNITED STATES CELLULAR OPERATING COMPANY OF DUBUQUE |
|
IOWA |
UNITED STATES CELLULAR OPERATING COMPANY OF KNOXVILLE |
|
TENNESSEE |
UNITED STATES CELLULAR OPERATING COMPANY OF MANCHESTER-NASHUA, INC. |
|
NEW HAMPSHIRE |
UNITED STATES CELLULAR OPERATING COMPANY OF MEDFORD |
|
OREGON |
UNITED STATES CELLULAR OPERATING COMPANY OF YAKIMA |
|
WASHINGTON |
UNITED STATES CELLULAR TELEPHONE COMPANY (GREATER KNOXVILLE), L.P. |
|
TENNESSEE |
USCC AUCTION 92, LLC |
|
DELAWARE |
USCC DISTRIBUTION CO., LLC |
|
DELAWARE |
USCC FINANCIAL L.L.C. |
|
ILLINOIS |
USCC PAYROLL CORPORATION |
|
DELAWARE |
USCC PURCHASE, LLC |
|
DELAWARE |
USCC REAL ESTATE CORPORATION |
|
DELAWARE |
USCC WIRELESS INVESTMENT, INC. |
|
DELAWARE |
USCCI CORPORATION |
|
DELAWARE |
USCIC OF FRESNO |
|
CALIFORNIA |
USCIC OF NORTH CAROLINA RSA # 1, INC. |
|
DELAWARE |
USCIC OF PENNSYLVANIA 5, INC. |
|
DELAWARE |
USCOC NEBRASKA/KANSAS, INC. |
|
DELAWARE |
USCOC NEBRASKA/KANSAS, LLC |
|
DELAWARE |
USCOC OF CENTRAL ILLINOIS, LLC |
|
ILLINOIS |
USCOC OF CHICAGO REAL ESTATE HOLDINGS, LLC |
|
DELAWARE |
USCOC OF CUMBERLAND, LLC |
|
DELAWARE |
USCOC OF GREATER IOWA, LLC |
|
DELAWARE |
USCOC OF GREATER MISSOURI, LLC |
|
DELAWARE |
USCOC OF GREATER NORTH CAROLINA, LLC |
|
DELAWARE |
USCOC OF GREATER OKLAHOMA, LLC |
|
OKLAHOMA |
USCOC OF JACK/WIL, INC. |
|
DELAWARE |
USCOC OF JACKSONVILLE, LLC |
|
DELAWARE |
USCOC OF LACROSSE, LLC |
|
WISCONSIN |
USCOC OF OREGON RSA # 5, INC. |
|
DELAWARE |
USCOC OF PENNSYLVANIA RSA NO. 10-B2, INC. |
|
DELAWARE |
USCOC OF RICHLAND, INC. |
|
WASHINGTON |
USCOC OF ROCHESTER, INC. |
|
DELAWARE |
USCOC OF SOUTH CAROLINA RSA # 4, INC. |
|
SOUTH CAROLINA |
USCOC OF TEXAHOMA, INC. |
|
TEXAS |
USCOC OF VIRGINIA RSA # 3, INC. |
|
VIRGINIA |
USCOC OF WASHINGTON-4, INC. |
|
DELAWARE |
USCOC OF WILMINGTON, LLC |
|
DELAWARE |
VERMONT RSA NO. 2-B2, INC. |
|
DELAWARE |
WASHINGTON RSA # 5, INC. |
|
WASHINGTON |
WESTELCOM CELLULAR, INC. |
|
NEW YORK |
WESTERN SUB-RSA LIMITED PARTNERSHIP |
|
DELAWARE |
WILMINGTON CELLULAR PARTNERSHIP |
|
NORTH CAROLINA |
WILMINGTON CELLULAR TELEPHONE COMPANY |
|
NORTH CAROLINA |
YAKIMA MSA LIMITED PARTNERSHIP |
|
DELAWARE |
|
|
|
OTHER ENTITIES CONSOLIDATED IN ACCORDANCE WITH GAAP |
|
|
AQUINAS WIRELESS, L.P. |
|
DELAWARE |
KING STREET WIRELESS, L.P. |
|
DELAWARE |
KING STREET WIRELESS, INC. |
|
DELAWARE |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-176833), Form S-4 (No. 33-41826) and Form S-8 (Nos. 333-42366, 333-105675, 333-152841 and 333-161119) of United States Cellular Corporation of our report dated February 26, 2013, relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP |
|
Chicago, Illinois |
|
February 26, 2013 |
|
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-176833), Form S-4 (No. 33-41826), and in the Registration Statements on Form S-8 (Nos. 333-42366, 333-105675, 333-152841 and 333-161119) of United States Cellular Corporation of our report dated February 25, 2013, relating to the financial statements of Los Angeles SMSA Limited Partnership as of December 31, 2012 and 2011, and for each of the three years in the period ended December 31, 2012, appearing in the Annual Report on Form 10-K of United States Cellular Corporation for the year ended December 31, 2012.
/s/ Deloitte & Touche LLP |
|
Atlanta, Georgia |
|
February 26, 2013 |
|
Exhibit 31.1
Certification of Chief Executive Officer
I, Mary N. Dillon, certify that:
1. I have reviewed this annual report on Form 10-K of United States Cellular Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 26, 2013 |
|
|
/s/ Mary N. Dillon |
|
Mary N. Dillon |
|
President and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
I, Steven T. Campbell, certify that:
1. I have reviewed this annual report on Form 10-K of United States Cellular Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 26, 2013 |
|
|
/s/ Steven T. Campbell |
|
Steven T. Campbell |
|
Executive Vice President-Finance, |
|
Chief Financial Officer and Treasurer |
Exhibit 32.1
Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, Mary N. Dillon, the chief executive officer of United States Cellular Corporation, certify that (i) the annual report on Form 10-K for the year ended December 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of United States Cellular Corporation.
|
/s/ Mary N. Dillon |
|
Mary N. Dillon |
|
February 26, 2013 |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to United States Cellular Corporation and will be retained by United States Cellular Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification Pursuant to Section 1350 of Chapter 63
of Title 18 of the United States Code
I, Steven T. Campbell, the chief financial officer of United States Cellular Corporation, certify that (i) the annual report on Form 10-K for the year ended December 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of United States Cellular Corporation.
|
/s/ Steven T. Campbell |
|
Steven T. Campbell |
|
February 26, 2013 |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to United States Cellular Corporation and will be retained by United States Cellular Corporation and furnished to the Securities and Exchange Commission or its staff upon request.