UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One) |
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
For the fiscal year ended December 31, 2004
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TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE |
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 |
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(IRS Employer Identification No.) |
8410 West Bryn Mawr, Suite 700, 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 |
Common Shares, $1 par value |
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American Stock Exchange |
8.75% Senior Notes Due 2032 |
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New York Stock Exchange |
7.5% Senior Notes Due 2034 |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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 o No ý
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. o
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý No o
As of June 30, 2004, the aggregate market value of registrants Common Shares held by nonaffiliates was approximately $579.4 million (based upon the closing price of the Common Shares on June 30, 2004, of $38.55, as reported by the American Stock Exchange). For purposes hereof, it was assumed that each director, executive officer and holder of 10% or more of the voting power 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, 2005, is 53,347,391 Common Shares, $1 par value, and 33,005,877 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrants 2004 Annual Report to Shareholders and of the registrants Notice of Annual Meeting of Shareholders and Proxy Statement for its 2005 Annual Meeting of Shareholders held on May 3, 2005, described in the cross reference sheet and table of contents attached hereto are incorporated by reference into Parts II and III of this report.
Explanatory Note
United States Cellular Corporation (U.S. Cellular) is filing this Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2004, which was originally filed with the Securities and Exchange Commission (SEC) on March 11, 2005 (Original Form 10-K), to amend Item 1 Business, Item 2 Properties, Item 6 Selected Financial Data, Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A), Item 8 Financial Statements and Supplementary Data, Item 9A Controls and Procedures, and Item 15 Exhibits and Financial Statement Schedules.
As discussed in Note 1 to the Consolidated Financial Statements, on November 9, 2005, U.S. Cellular and its audit committee concluded that U.S. Cellular would amend its Annual Report on Form 10-K for the year ended December 31, 2004 to restate its financial statements and financial information for each of the three years in the period ended December 31, 2004, including quarterly information for 2004 and 2003, and certain selected financial data for the years 2001 and 2000. U.S. Cellular and its audit committee also concluded that U.S. Cellular would amend its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2005 and June 30, 2005 to restate the financial statements and financial information included therein.
The restatement adjustments principally correct items that were recorded in the financial statements previously but not in the proper periods and certain income tax errors. Correction of the errors, with the exception of income taxes discussed below, individually did not have a material impact on income before income taxes and minority interest, net income or earnings per share; however, when aggregated, the items were considered to be material. The restatement adjustments to correct income tax accounting had a material impact individually on net income and earnings per share in prior periods. The restated financial statements are adjusted to record certain obligations in the periods such obligations were incurred and, correct the timing or the reversal of certain tax liabilities and record revenues in the periods such revenues were earned. The adjustments are described below.
Income taxes U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. In the restatement, U.S. Cellular corrected its income tax expense, federal and state taxes payable, liabilities accrued for tax contingencies, deferred income tax assets and liabilities and related disclosures for the years ended December 31, 2004, 2003 and 2002 for items identified based on a reconciliation of income tax accounts. The reconciliation compared amounts used for financial reporting purposes to the amounts used in the preparation of the income tax returns, and took into consideration the results of federal and state income tax audits and the resulting book/tax basis differences which generate deferred tax assets and liabilities. In addition, a review of the state deferred income tax rates used to establish deferred income tax assets and liabilities identified errors in the state income tax rate used which resulted in adjustments to correct the amount of deferred income tax assets and liabilities recorded for temporary differences between the timing of when certain transactions are recognized for financial and income tax reporting.
Federal universal service fund (USF) contributions In 2004 and 2003, Universal Service Administrative Company (USAC) billings to U.S. Cellular for USF contributions were based on estimated revenues reported to USAC by U.S. Cellular in accordance with USACs established procedures. However, U.S. Cellulars actual liability for USF is based upon its actual revenues and USACs established procedures provide a method to adjust U.S. Cellulars estimated liability to its actual liability. In the first six months of 2005 and the full years of 2004 and 2003, U.S. Cellulars actual revenues exceeded estimated revenues reported to USAC on an interim basis. As a result, additional amounts were due to USAC in 2005 and 2004 based on U.S. Cellulars annual report filings. Such additional amounts were incorrectly expensed when the invoices were received from USAC rather than at the time the obligation was incurred. In the third quarter of 2005, U.S. Cellular corrected its accounting for USF contributions to record expense reflecting the estimated obligation incurred based on actual revenues reported during the period. Accordingly, in the restatement, U.S. Cellular has adjusted previously reported USF contributions expense to reflect the estimated liability incurred during the period.
Customer contract termination fees In the fourth quarter of 2003, U.S. Cellular revised its business practices related to the billing of contract termination fees charged when a customer disconnected service prior to the end of the customers contract. This change resulted in an increase in amounts billed to customers and revenues even though a high percentage of the amounts billed were deemed uncollectible. At the time of the change in business practice, U.S. Cellular incorrectly recorded revenues related to such fees at the time of billing, as generally accepted accounting principles (GAAP) would preclude revenue recognition if the receivable is not reasonably assured of collection. In the first quarter of 2005, U.S. Cellular corrected its accounting to record revenues related to such fees only upon collection, in recognition of the fact that the collectibility of the revenues was not reasonably assured at the time of billing. In the restatement, U.S. Cellular made adjustments to properly reflect revenues for such fees upon collection beginning on October 1, 2003.
Leases and contracts U.S. Cellular has entered into certain operating leases (as both lessee and lessor) that provide for specific scheduled increases in payments over the lease term. In the third quarter of 2004, U.S. Cellular made adjustments for the cumulative effect which were not considered to be material to either that quarter or to prior periods to correct its accounting and to recognize revenues and expenses under such agreements on a straight-line basis over the term of the lease in accordance with Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases, as amended, and related pronouncements. In addition, the accounting for certain other long-term contracts, for which a cumulative effect adjustment was made in the first quarter of 2005, was corrected to recognize expenses in the appropriate periods. The restatement adjustments reverse the cumulative amounts previously recorded in the third quarter of 2004 and the first quarter of 2005, and properly record such revenues and expenses on a straight-line basis in the appropriate periods.
Promotion rebates From time to time, U.S. Cellulars sales promotions include rebates on sales of handsets to customers. In such cases, U.S. Cellular reduces revenues and records a liability at the time of sale reflecting an estimate of rebates to be paid under the promotion. Previously, the accrued liability was not adjusted on a timely basis upon expiration of the promotion to reflect the actual amount of rebates paid based upon information available at the date the financial statements were issued. In the restatement, U.S. Cellular has corrected revenues and accrued liabilities to reflect the impacts associated with promotion rebates in the appropriate periods.
Operations of consolidated partnerships managed by a third party Historically, U.S. Cellular recorded the results of operations of certain consolidated partnerships managed by a third party on an estimated basis, and adjusted such estimated results to the actual results upon receipt of financial statements in the following quarter. However, GAAP requires that the actual amounts be used. In the restatement, U.S. Cellular has corrected its financial statements to recognize results of operations in the appropriate period based on the partnerships actual results of operations reported for such periods.
Investment income from entities accounted for by the equity method Historically, U.S. Cellular recorded an estimate each quarter of its proportionate share of net income (loss) from certain entities accounted for by the equity method, and adjusted such estimate to the actual share of net income (loss) upon receipt of financial statements in the following quarter. However, GAAP requires that the actual amounts be used. In the restatement, U.S. Cellular has corrected its financial statements to recognize investment income in the appropriate period based on the entities actual net income (loss) reported for such periods.
Consolidated statements of cash flows In the restatement, the classification of cash distributions received from unconsolidated entities has been corrected to properly reflect cash received, which represents a return on investment in the unconsolidated entities, as cash flows from operating activities; previously, the cash received on such investments was classified as cash flows from investing activities. Also, the classification of certain noncash stock-based compensation expense has been corrected to properly reflect such noncash expense as an adjustment to cash flows from operating activities; previously, such expense was classified as cash flows from financing activities.
Other items In addition to the adjustments described above, U.S. Cellular recorded a number of other adjustments to correct and record revenues and expenses in the periods in which such revenues and expenses were earned or incurred. These adjustments were not significant, either individually or in aggregate.
In connection with the restatement, U.S. Cellular concluded that certain material weaknesses existed in its internal control over financial reporting. See Part II Item 9A Controls and Procedures.
For the convenience of the reader, this Form 10-K/A sets forth the Original Form 10-K, as amended hereby, in its entirety. However, this Form 10-K/A amends and restates only Items 1, 2, 6, 7, 8, 9A and 15 of the Original Form 10-K, in each case solely as a result of and to reflect the adjustments discussed above and more fully in Note 1 of the accompanying financial statements, and no other information in the Original Form 10-K is amended hereby. The foregoing items have not been updated to reflect other events occurring after the filing of the Original Form 10-K, or to modify or update those disclosures affected by other subsequent events. In particular, forward-looking statements included in the Form 10-K/A represented managements views as of the date of filing of the Original Form 10-K for the year ended December 31, 2004 on March 11, 2005. Such forward-looking statements should not be assumed to be accurate 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.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by U.S. Cellulars principal executive officer and principal financial officer are being filed with this Form 10-K/A as Exhibits 31.1, 31.2, 32.1 and 32.2. In addition, Exhibits 23.1 and 23.2 have been amended to contain currently-dated consents of independent registered public accounting firms.
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
(1) Parenthetical references are to information incorporated by reference from Exhibit 13 to this document, which includes portions of the registrants Annual Report to Shareholders for the year ended December 31, 2004 (Annual Report) and from the registrants Notice of Annual Meeting of Shareholders and Proxy Statement for its 2005 Annual Meeting of Shareholders held on May 3, 2005 (Proxy Statement).
(2) Annual Report section entitled United States Cellular Stock and Dividend Information and Consolidated Quarterly Information (Unaudited).
(3) Annual Report section entitled Selected Consolidated Financial Data.
(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 Statements of Operations, Consolidated Statements of Cash Flows, Consolidated Balance Sheets, Consolidated Statements of Common Shareholders 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.
(7) Proxy Statement sections entitled Election of Directors, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance.
(8) Proxy Statement section entitled Executive Compensation, except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
(9) Proxy Statement sections entitled Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters and Securities Authorized for Issuance under Equity Compensation Plans.
(10) Proxy Statement section entitled Certain Relationships and Related Transactions.
(11) Proxy Statement section entitled Fees Paid to Principal Accountants.
United States Cellular Corporation
8410 WEST BRYN MAWR CHICAGO, ILLINOIS 60631
TELEPHONE (773) 399-8900
United States Cellular Corporation (U.S. Cellular) provides wireless telephone service to 4,945,000 customers through the operations of 175 majority-owned (consolidated) wireless licenses throughout the United States. Since 1985, when it began providing wireless service in Knoxville, Tennessee and Tulsa, Oklahoma, U.S. Cellular has expanded its wireless networks and customer service operations to cover six market areas in 27 states as of December 31, 2004. Through a 2003 exchange transaction, U.S. Cellular has rights to wireless licenses covering territories in two additional states and has the rights to commence service in those licensed areas in the future. The wireless licenses that U.S. Cellular currently includes in its consolidated operations cover a total population of more than one million in each market area, including its Midwest/Southwest market area, which covers a total population of more than 31 million, and one other market area which covers a total population of more than five million.
U.S. Cellulars ownership interests in wireless licenses include interests in licenses covering 150 cellular metropolitan statistical areas (as designated by the U.S. Office of Management and Budget and used by the Federal Communications Commission (FCC) in designating metropolitan cellular market areas) or rural service areas (as used by the FCC in designating non-metropolitan statistical area cellular market areas) (cellular licenses) and 49 personal communications service basic trading areas (used by the FCC in dividing the United States into personal communications service market areas for licenses in Blocks C through F). Of those interests, U.S. Cellular owns controlling interests in 126 cellular licenses and each of the 49 personal communications service basic trading areas. U.S. Cellular also owns rights to acquire controlling interests in 20 additional personal communications service licenses, primarily through an acquisition agreement with AT&T Wireless Services, Inc. (AT&T Wireless), now a subsidiary of Cingular Wireless LLC (Cingular). In a separate agreement, U.S. Cellular agreed to purchase a controlling interest in one license from Cingular which will be completed during the first half of 2005.
At December 31, 2004, U.S. Cellular is a limited partner in Carroll Wireless, L.P. (Carroll Wireless). U.S. Cellular consolidates Carroll Wireless for financial reporting purposes because it is deemed to have a controlling financial interest in Carroll Wireless. Carroll Wireless participated in FCC wireless spectrum Auction 58, in which eligible participants bid on designated personal communication service spectrum licenses. Carroll Wireless did not own any interests in wireless licenses or any other significant assets as of December 31, 2004. As a result of Auction 58, which ended on February 15, 2005, Carroll Wireless was a successful bidder for 17 personal communication service licenses in 11 states for a cost of $129.9 million. See Wireless Systems DevelopmentAuction 58 for further discussion of U.S. Cellular and Carroll Wireless obligations pursuant to Auction 58.
U.S. Cellular manages the operations of all but two of the licenses in which it owns a controlling interest; U.S. Cellular has contracted with another wireless operator to manage the operations of the other two licenses. U.S. Cellular includes the operations of each of these two licenses in its consolidated operating revenues and expenses. U.S. Cellular also manages the operations of three additional licenses in which it does not own a controlling interest, through an agreement with the controlling interest holder or holders. U.S. Cellular accounts for its interests in each of these three licenses using the equity method.
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The following table summarizes the status of U.S. Cellulars interests in wireless markets at December 31, 2004. Personal communications service markets are designated as PCS.
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Total |
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Cellular |
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PCS |
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Consolidated markets (1) |
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175 |
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126 |
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49 |
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Consolidated markets to be acquired pursuant to existing agreements (2) |
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21 |
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1 |
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20 |
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Minority interests accounted for using equity method (3) |
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19 |
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19 |
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Minority interests accounted for using cost method (4) |
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5 |
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5 |
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Total markets to be owned after completion of pending transactions |
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220 |
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151 |
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69 |
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(1) U.S. Cellular owns a controlling interest in each of the 126 cellular markets and 49 personal communications service markets it included in its consolidated markets at December 31, 2004.
(2) U.S. Cellular owns rights to acquire controlling interests in 20 additional personal communications service licenses, through an acquisition agreement with AT&T Wireless which was closed in August 2003. U.S. Cellular has up to five years from the transaction closing date to exercise its rights to acquire the licenses. In a separate agreement, U.S. Cellular agreed to purchase a controlling interest in one cellular license from Cingular.
(3) Represents cellular licenses in which U.S. Cellular owns an interest that is not a controlling financial interest and which are accounted for using the equity method. U.S. Cellulars investments in these licenses are included in investment in unconsolidated entities in its Balance Sheet and its proportionate share of the net income of these licenses is included in investment income in its Statement of Operations.
(4) Represents cellular licenses in which U.S. Cellular owns an interest that is not a controlling financial interest and which are accounted for using the cost method. U.S. Cellulars investments in these licenses are included in investment in unconsolidated entities in its Balance Sheet.
Some of the territory covered by the personal communications service licenses U.S. Cellular operates overlaps with territory covered by the cellular licenses it operates. For the purpose 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 non-overlapping, incremental population counts are added to the reported amount of total population in the case of an acquisition of a licensed area that overlaps a previously owned licensed area. The incremental population counts that are added in such event are referred to throughout this Form 10-K/A as incremental population measurements. Amounts reported in this Form 10-K/A as total market population do not duplicate any population counts in the case of any overlapping licensed areas U.S. Cellular owns.
U.S. Cellular owns interests in consolidated wireless licenses which cover a total population of 44.4 million as of December 31, 2004. U.S. Cellular also owns investment interests in wireless licenses which represent 1.7 million population equivalents as of that date. Population equivalents represent the population of a wireless licensed area, based on 2003 Claritas estimates, multiplied by the percentage interest that U.S. Cellular owns in an entity licensed to operate such wireless license.
U.S. Cellular believes that it is the seventh largest wireless company in the United States at December 31, 2004, based on internally prepared calculations of the aggregate number of customers in its consolidated markets compared to the number of customers disclosed by other wireless companies in their publicly released information. U.S. Cellulars business development strategy is 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 anticipates that grouping its operations into market areas will continue to provide it with certain economies in its capital and operating costs. In recent years, U.S. Cellulars focus has broadened to include exchanges and divestitures of consolidated and investment interests which are considered less essential to its operating strategy.
Wireless systems in U.S. Cellulars consolidated markets served 4,945,000 customers at December 31, 2004, and contained 4,856 cell sites. The average penetration rate in U.S. Cellulars consolidated markets, as calculated by dividing the number of U.S. Cellular customers by the total population in such markets, was 11.14% at December 31, 2004, and the number of customers who discontinued service (the churn rate) in these markets averaged 1.66% per month for the twelve months ended December 31, 2004.
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U.S. Cellular was incorporated in Delaware in 1983. U.S. Cellulars executive offices are located at 8410 West Bryn Mawr, Chicago, Illinois 60631. Its telephone number is 773-399-8900. The Common Shares of U.S. Cellular are listed on the American Stock Exchange under the symbol USM. U.S. Cellulars 8.75% Senior Notes are listed on the New York Stock Exchange under the symbol UZG. U.S. Cellulars 7.5% Senior Notes are listed on the New York Stock Exchange under the symbol UZV. U.S. Cellular is a majority-owned subsidiary of Telephone and Data Systems, Inc. (AMEX symbol TDS). TDS owns 82.0% of the combined total of the outstanding Common Shares and Series A Common Shares of U.S. Cellular and controls 95.9% of the combined voting power of both classes of common stock.
Available Information
U.S. Cellulars website is http://www.uscellular.com. Investors may access, free of charge, through the About Us / 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 Securities Exchange Act of 1934, as amended, as soon as reasonably practical after such material is electronically filed with the Securities and Exchange Commission (SEC).
Possible U.S. Cellular Transaction
On February 18, 2005, TDS disclosed that the TDS Board of Directors unanimously approved the distribution of TDS Special Common Shares in the form of a stock dividend, subject to TDS shareholder approval of an increase in the authorized number of TDS Special Common Shares and certain other conditions.
TDS also disclosed that, following such action at some time in the future, TDS may possibly offer to issue TDS Special Common Shares in exchange for all of the Common Shares of U.S. Cellular which are not owned by TDS (a Possible U.S. Cellular Transaction). TDS currently owns approximately 82% of the shares of common stock of U.S. Cellular. TDS disclosed that a Possible U.S. Cellular Transaction would cause U.S. Cellular to become a wholly owned subsidiary of TDS. TDS has set no time frame for a Possible U.S. Cellular Transaction and there are no assurances that a transaction will occur.
See the proxy statement of TDS filed with the SEC relating to the Special Common Share proposal for additional information relating to the foregoing.
Wireless Telephone Operations
The Wireless Telephone Industry. Wireless telephone technology provides high-quality, high-capacity communications services to hand-held portable and in-vehicle wireless telephones. Wireless telephone systems are designed for maximum mobility of the customer. Access is provided through system interconnections to local, regional, national and world-wide telecommunications networks. Wireless telephone systems also offer a full range of services, similar to those offered by conventional (landline) telephone services. Data transmission capabilities offered by wireless telephone systems may be at slower speeds than those offered by landline telephone or other data service providers.
Wireless telephone systems divide each service area into smaller geographic areas or cells. Each cell is served by radio transmitters and receivers which operate on discrete radio frequencies licensed by the FCC. All of the cells in a system are connected to a computer-controlled mobile telephone switching office. Each mobile telephone switching office is connected to the landline telephone network and potentially other mobile telephone switching offices. Each conversation on a wireless phone involves a transmission over a specific set of radio frequencies from the wireless phone to a transmitter/receiver at a cell site. The transmission is forwarded from the cell site to the mobile telephone switching office and from there may be forwarded to the landline telephone network or to another wireless phone to complete the call. As the wireless telephone moves from one cell to another, the mobile telephone switching office determines radio signal strength and transfers (hands off) the call from one cell to the next. This hand-off is not noticeable to either party on the phone call.
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The FCC currently grants two licenses to provide cellular telephone service in each cellular licensed area. Multiple licenses have been granted in each personal communications service licensed area, and these licensed areas overlap with cellular licensed areas. As a result, personal communications service license holders can and do compete with cellular license holders for customers. In addition, specialized mobile radio systems operators such as Nextel are providing wireless services similar to those offered by U.S. Cellular. Competition for customers also includes competing communications technologies, such as:
conventional landline telephone,
mobile satellite communications systems,
radio paging,
mobile virtual network operators, and
Voice Over Internet Protocol.
Personal communications service licensees have initiated service in nearly all areas of the United States, including substantially all of U.S. Cellulars licensed areas, and U.S. Cellular expects other wireless operators to continue deployment in all of U.S. Cellulars operating regions in the future. Additionally, technologies such as enhanced specialized mobile radio are competitive with wireless service in substantially all of U.S. Cellulars markets.
The services available to wireless customers and the sources of revenue available to wireless system operators are similar to those provided by landline telephone companies. Customers may be charged a separate fee for system access, airtime, long-distance calls and ancillary services. Wireless system operators also provide service to customers of other operators wireless systems while the customers are temporarily located within the operators service areas.
Customers using service away from their home system are called roamers. Roaming is available because technical standards require that analog wireless telephones be compatible in all market areas in the United States. Additionally, because U.S. Cellular has deployed digital radio technologies in substantially all of its service areas, its customers with digital, dual-mode (both analog and digital capabilities) or tri-mode (analog plus digital capabilities at both the cellular and personal communications service radio frequencies) wireless telephones can roam in other companies service areas which have a compatible digital technology in place. Likewise, U.S. Cellular can provide roaming service to other companies customers who have compatible digital wireless telephones. In all cases, the system that provides the service to roamers will generate usage revenue, at rates that have been negotiated between the serving carrier and the customers carrier.
There have been a number of technical developments in the wireless industry since its inception. Currently, while substantially all companies mobile telephone switching offices process information digitally, on certain cellular systems the radio transmission uses analog technology. All personal communications service systems utilize digital radio transmission. Several years ago, certain digital transmission techniques were approved for implementation by the wireless industry in the United States. Time Division Multiple Access (TDMA) technology was selected as one industry standard by the wireless industry and has been deployed by many wireless operators, including U.S. Cellulars operations in a substantial portion of its markets. Another digital technology, Code Division Multiple Access (CDMA), was also deployed by U.S. Cellular in its remaining markets.
In late 2001, U.S. Cellular announced its plans to migrate to a single digital technology, CDMA, for its customers in all of its markets. U.S. Cellular believes that a single digital technology platform represents the best network strategy to foster its future growth. In 2002, U.S. Cellular began its plans to deploy CDMA 1XRTT technology, which improves capacity and allows for higher speed data transmission than basic CDMA, throughout all of its markets, over a three-year period ending in 2004. As of December 31, 2004, U.S. Cellular had deployed CDMA 1XRTT technology in substantially all of its licensed areas, including areas where it had previously deployed TDMA technology, as part of its technology conversion plans. Migration of U.S. Cellulars customers to CDMA handsets in all of its markets is expected to take a few additional years.
U.S. Cellular believes CDMA technology is the best digital radio technology choice for its operations for the following reasons:
TDMA technology may not be supported by manufacturers of future generations of wireless products due to limitations on the services it enables wireless companies to provide.
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CDMA technology has a lower long-term cost in relation to the spectrum efficiency it provides compared to similar costs of other technologies.
CDMA technology provides improved coverage at most cell sites compared to other technologies.
CDMA technology provides a more efficient evolution to a wireless network with higher data speeds, which will enable U.S. Cellular to provide enhanced data services.
The main disadvantage of U.S. Cellulars conversion to CDMA technology is that it is generally not used outside of the United States. A third digital technology, Global System for Mobile Communication (GSM), is the standard technology in Europe and most other areas outside the United States. GSM technology, which is used by certain wireless companies in the United States, has certain advantages over CDMA in that GSM phones can be used more widely outside of the United States and GSM has a larger installed worldwide customer base. Also, TDMA technology is used in many parts of the United States and in other countries as well. Since CDMA technology is not compatible with GSM or TDMA technology, U.S. Cellular customers with CDMA-based handsets may not be able to use all of their handset features when traveling through GSM- and TDMA-based 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.
U.S. Cellular will continue to retain TDMA technology for the next several years in markets in which such technology is in use today. This will enable U.S. Cellular to provide TDMA-based service to its customers who still choose to use TDMA-based handsets and to roamers from other wireless providers who have TDMA-based networks. Also, since the TDMA equipment has analog capabilities embedded, U.S. Cellular will maintain the TDMA network in order to be able to meet the FCC mandate of retaining analog capability through 2008.
U.S. Cellular continually reviews its long-term technology plans. In 2005, U.S. Cellular expects to introduce a limited trial of EvolutionData Optimized (EV-DO) technology. This technology, which increases the speed of data transmissions on the wireless network, is being deployed by certain other wireless companies. A revision to the current EV-DO standard is expected to be commercially available in 2006. U.S. Cellular will evaluate any planned investment in EV-DO technology in light of the revenue opportunities afforded by the deployment of such technology.
U.S. Cellulars Operations. Management anticipates that U.S. Cellular will experience increases in wireless units in service and revenues in 2005 through internal growth and through the launch of new markets as the licenses acquired in 2001, 2002 and 2003 are developed and become integrated into its operations.
Expenses associated with customer and revenue growth may reduce the amount of cash flows from operating activities and operating income during 2005. In addition, U.S. Cellular anticipates that the seasonality of revenue streams and operating expenses may cause U.S. Cellulars cash flows from operating activities and operating income to vary from quarter to quarter.
Changes in any of several factors may reduce U.S. Cellulars growth in operating income and net income over the next few years. These factors include but are not limited to:
the growth rate in U.S. Cellulars customer base;
the usage and pricing of wireless services;
the cost of providing wireless services, including the cost of attracting and retaining customers;
the cost to begin or integrate operations of newly acquired licensed areas;
the churn rate;
continued capital expenditures, which are necessary to improve the quality of U.S. Cellulars network and to expand its operations into new markets;
continued competition from other wireless licensees and other telecommunication technologies;
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continued consolidation in the wireless industry;
the growth rate in the use of U.S. Cellulars easyedgesm brand of enhanced data services and products;
continued declines in inbound roaming revenue; and
continuing technological advances which may provide wireless products/services and additional competitive alternatives to wireless service.
U.S. Cellular is building a substantial presence in selected geographic areas throughout the United States where it can efficiently integrate and manage wireless telephone systems. Its wireless interests included six market areas as of December 31, 2004. See U.S. Cellulars Wireless Interests.
Wireless Systems Development
Acquisitions, Divestitures and Exchanges. U.S. Cellular assesses its wireless holdings on an ongoing basis in order to maximize the benefits derived from its operating markets. U.S. Cellular also reviews attractive opportunities for the acquisition of additional wireless spectrum. As part of this strategy, U.S. Cellular may from time-to-time be engaged in negotiations relating to the acquisition of companies, strategic properties or wireless spectrum. U.S. Cellular may plan to participate as a bidder, or member of a bidding group, in auctions administered by the FCC. See Auction 58 for a discussion of the auction completed in early 2005. Recently, U.S. Cellular has been disposing of those markets that are not strategic to its long-term success and redeploying capital to more strategically important parts of the business. As part of this strategy, U.S. Cellular may from time-to-time be engaged in negotiations relating to the disposition of other non-strategic properties.
U.S. Cellular may continue to make opportunistic acquisitions or exchanges in markets that further strengthen its operating market areas and in other attractive markets. U.S. Cellular also seeks to acquire minority interests in licenses where it already owns the majority interest and/or operates the license. There can be no assurance that U.S. Cellular will be able to negotiate additional acquisitions or exchanges on terms acceptable to it or that regulatory approvals, where required, will be received. U.S. Cellular plans to retain minority interests in certain wireless licenses which it believes will earn a favorable return on investment. Other minority interests may be exchanged for interests in licenses which enhance U.S. Cellulars operations or may be sold for cash or other consideration. U.S. Cellular also continues to evaluate the disposition of certain controlling interests in wireless licenses which are not essential to its corporate development strategy.
Auction 58. U.S. Cellular is a limited partner in Carroll Wireless, an entity which participated in the auction of wireless spectrum designated by the FCC as Auction 58. Carroll Wireless was qualified to bid on spectrum which was available only to companies that fall under the FCC definition of designated entities, which are small businesses that have a limited amount of assets. Carroll Wireless was a successful bidder for 17 licensed areas in Auction 58 which ended on February 15, 2005. These 17 licensed areas cover portions of 11 states and are in markets which are either adjacent to or overlap current U.S. Cellular licensed areas.
On March 4, 2005, Carroll Wireless increased the amount on deposit with the FCC to approximately $26 million, from $9 million initially deposited, and filed an application with the FCC seeking a grant of the subject licenses. The aggregate amount due to the FCC for the 17 licenses is $129.9 million, net of all bidding credits to which Carroll Wireless is entitled as a designated entity. U.S. Cellular consolidates Carroll Wireless for financial reporting purposes, pursuant to the guidelines of Financial Accounting Standards Board Interpretation No. 46R, as U.S. Cellular anticipates absorbing a majority of Carroll Wireless expected gains or losses.
Carroll Wireless is in the process of developing its long-term business and financing plans. As of March 4, 2005, U.S. Cellular has made capital contributions and advances to Carroll Wireless and/or its general partner of approximately $26 million. Pending finalization of Carroll Wireless permanent financing plan, and upon request by Carroll Wireless, U.S. Cellular may make capital contributions and advances to Carroll Wireless and/or its general partner of up to $130 million to fund the payments to the FCC and additional working capital.
Sales of Wireless Interests. On December 20, 2004, U.S. Cellular completed the sale of its controlling interest in one personal communications service license to MetroPCS California/Florida, Inc. (MetroPCS) for $8.5 million.
7
On November 30, 2004, U.S. Cellular completed the sales of two consolidated markets and five minority interests to ALLTEL Communications Inc. (ALLTEL) for $80.2 million in cash, subject to a working capital adjustment. U.S. Cellular recorded a pretax gain of $38.0 million related to this transaction at the time of its completion, representing the excess of the cash received over the net book value of the assets and liabilities sold, subject to a working capital adjustment. The portion of the gain related to the two consolidated markets included in operations of $10.1 million, was recorded in (gain) loss on assets held for sale in the Statement of Operations. The remaining portion of the gains of $27.9 million was recorded in gain (loss) on investments included within investment and other income (expense) on the Statement of Operations.
On February 18, 2004, U.S. Cellular completed the sale of certain of its wireless properties in southern Texas to AT&T Wireless for $96.5 million in cash, including a working capital adjustment. The U.S. Cellular properties sold included wireless assets and customers in six markets. An aggregate loss of $21.3 million (including a $22.0 million estimate of the loss on assets of operations held for sale in the fourth quarter of 2003 and a $0.7 million reduction of the loss in 2004) was recorded as a loss on assets of operations held for sale (included in operating expenses), representing the difference between the carrying value of the markets sold to AT&T Wireless and the cash received in the transaction.
Pending Acquisition of Market. On November 30, 2004, U.S. Cellular entered into a definitive agreement with Cingular to acquire a controlling interest in one cellular license. U.S. Cellular anticipates that this transaction will be completed during the first half of 2005.
License Rights Related to Exchange of Markets with AT&T Wireless. Pursuant to a transaction with AT&T Wireless which was completed on August 1, 2003, U.S. Cellular acquired rights to 21 licenses that have not yet been assigned to U.S. Cellular. These licenses, with a recorded value of $42.0 million, are accounted for in license rights on the consolidated Balance Sheet. All asset values related to the properties acquired or pending, including license values, were determined by U.S. Cellular.
Wireless Interests and Operating Market Areas
U.S. Cellular operates its adjacent wireless systems under an organization structure in which it groups its markets into geographic market areas to offer customers large local service areas which primarily utilize U.S. Cellulars network. Customers may make outgoing calls and receive incoming calls within each market area without special roaming arrangements. In addition to benefits to customers, its operating strategy also has provided to U.S. Cellular certain economies in its capital and operating costs. These economies are made possible through the reduction of outbound roaming costs and increased sharing of facilities, personnel and other costs, enabling U.S. Cellular to minimize its per customer cost of service. The extent to which U.S. Cellular benefits from these revenue enhancements and economies of operation is dependent on market conditions, population size of each market area and network engineering considerations.
The following section details U.S. Cellulars wireless interests, including those it owned or had the right to acquire as of December 31, 2004. The table presented therein lists the markets that U.S. Cellular manages or has the right to manage, grouped according to operating market area. The operating market areas represent areas in which U.S. Cellular is currently focusing its development efforts. These market areas have been devised with a long-term goal of allowing delivery of wireless service to areas of economic interest and areas of economic activity.
The table aggregates the total population of the consolidated licenses within each operating market area, regardless of U.S. Cellulars percentage ownership in the licenses included in such operating market areas. Those markets in which U.S. Cellular owns less than 100% of the license show U.S. Cellulars ownership percentage; in all others, U.S. Cellular owns 100% of the license. For licenses in which U.S. Cellular owns an investment interest, the related population equivalents are shown, defined as the total population of each licensed area multiplied by U.S. Cellulars ownership interest in each such license.
The total population and population equivalents measures are provided to enable comparison of the relative size of each operating market area to U.S. Cellulars consolidated operations and to enable comparison of the relative size of U.S. Cellulars consolidated markets to its investment interests, respectively. 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.
8
U.S. CELLULARS WIRELESS INTERESTS
The table below sets forth certain information with respect to the interests in wireless markets which U.S. Cellular owned or had the right to acquire pursuant to definitive agreements as of December 31, 2004.
Some of the territory covered by the personal communications service licenses U.S. Cellular owns overlaps with territory covered by the cellular licenses it owns. For the purpose of tracking amounts in the 2003 Total Population column in the table below, when U.S. Cellular acquires or agrees to acquire a licensed area that overlaps a licensed area it already owns, it does not duplicate the total population for any overlapping licensed area. Only non-overlapping, incremental population amounts are added to the amounts in the 2003 Total Population column in the table below, in the case of an acquisition of a licensed area that overlaps a previously owned licensed area.
Market Area/Market |
|
Current or Future |
|
2003 Total |
|
Markets Currently Consolidated or Which Are Expected To Be Consolidated |
|
|
|
|
|
MIDWEST MARKET AREA: |
|
|
|
|
|
Chicago Major Trading Area/Michigan |
|
|
|
|
|
Chicago, IL-IN-MI-OH 20MHz B Block MTA # (3) (4) |
|
|
|
|
|
Kalamazoo, MI 20MHz A Block # (5) |
|
|
|
|
|
Battle Creek, MI 20MHz A Block # (5) |
|
|
|
|
|
Jackson, MI 10MHz A Block # (5) |
|
|
|
|
|
Total Chicago Major Trading Area/Michigan |
|
|
|
13,012,000 |
|
|
|
|
|
|
|
Illinois/Indiana |
|
|
|
|
|
Indianapolis, IN 10MHz F Block # (5) |
|
|
|
|
|
Peoria, IL |
|
|
|
|
|
Jo Daviess (IL 1) |
|
|
|
|
|
Rockford, IL |
|
|
|
|
|
Bloomington-Bedford, IN 10MHz B Block # (5) |
|
|
|
|
|
Terre Haute, IN-IL 20MHz B Block # |
|
|
|
|
|
Adams (IL 4) * |
|
|
|
|
|
Carbondale-Marion, IL 10MHz A Block/10MHz D Block # (5) |
|
|
|
|
|
Mercer (IL 3) |
|
|
|
|
|
Miami (IN 4) * |
|
85.71 |
% |
|
|
Anderson, IN 10MHz B Block # (5) |
|
|
|
|
|
Muncie, IN 10MHz B Block # (5) |
|
|
|
|
|
Lafayette, IN 10MHz B Block # |
|
|
|
|
|
Columbus, IN 10MHz B Block # (5) |
|
|
|
|
|
Warren (IN 5) * |
|
33.33 |
% |
|
|
Mount Vernon-Centralia, IL 10MHz A Block # |
|
|
|
|
|
Kokomo-Logansport, IN 10MHz B Block # |
|
|
|
|
|
Richmond, IN 10MHz B Block # (5) |
|
|
|
|
|
Vincennes-Washington, IN-IL 10MHz B Block # (5) |
|
|
|
|
|
Marion, IN 10MHz B Block # |
|
|
|
|
|
Alton, IL * |
|
|
|
|
|
Rockford, IL 10MHz E Block # |
|
|
|
|
|
Peoria, IL 10MHz C Block # |
|
|
|
|
|
Peoria, IL 10MHz E Block # |
|
|
|
|
|
Springfield, IL 10MHz E Block/10MHz F Block # |
|
|
|
|
|
Decatur-Effingham, IL 10MHz E Block/10MHz F Block # |
|
|
|
|
|
Bloomington, IL 10MHz E Block/10MHz F Block # |
|
|
|
|
|
Champaign-Urbana, IL 10MHz E Block/F Block # |
|
|
|
|
|
LaSalle-Peru-Ottawa-Streator, IL 10MHz C Block # |
|
|
|
|
|
LaSalle-Peru-Ottawa-Streator, IL 10MHz F Block # |
|
|
|
|
|
Danville, IL-IN 15MHz C Block # |
|
|
|
|
|
Galesburg, IL 30MHz C Block # |
|
|
|
|
|
Jacksonville, IL 10MHz F Block # |
|
|
|
|
|
Mattoon, IL 10MHz E Block/10MHz F Block # |
|
|
|
|
|
Total Illinois/Indiana |
|
|
|
5,224,000 |
|
9
Market Area/Market |
|
Current or Future |
|
2003 Total |
|
Markets Currently Consolidated or Which Are Expected To Be Consolidated |
|
|
|
|
|
MIDWEST MARKET AREA (continued): |
|
|
|
|
|
Wisconsin/Minnesota |
|
|
|
|
|
Milwaukee, WI |
|
|
|
|
|
Madison, WI |
|
92.50 |
% |
|
|
Columbia (WI 9) |
|
|
|
|
|
Appleton, WI |
|
|
|
|
|
Wood (WI 7) |
|
|
|
|
|
Rochester, MN 10MHz F Block # |
|
|
|
|
|
Vernon (WI 8) |
|
|
|
|
|
Green Bay, WI |
|
|
|
|
|
Racine, WI |
|
95.82 |
% |
|
|
Kenosha, WI |
|
99.32 |
% |
|
|
Janesville-Beloit, WI |
|
|
|
|
|
Door (WI 10) |
|
|
|
|
|
Sheboygan, WI |
|
|
|
|
|
La Crosse, WI |
|
96.51 |
% |
|
|
Trempealeau (WI 6) (3) |
|
|
|
|
|
Pierce (WI 5) (3) |
|
|
|
|
|
Milwaukee, WI 10MHz D Block # |
|
|
|
|
|
Madison, WI 10MHz F Block # |
|
|
|
|
|
Total Wisconsin/Minnesota |
|
|
|
4,738,000 |
|
|
|
|
|
|
|
Nebraska/Iowa/Missouri/South Dakota: |
|
|
|
|
|
Des Moines, IA |
|
|
|
|
|
Davenport, IA-IL |
|
97.37 |
% |
|
|
Sioux City, IA-NE-SD 10MHz F Block # (5) |
|
|
|
|
|
Cedar Rapids, IA |
|
96.43 |
% |
|
|
Humboldt (IA 10) |
|
|
|
|
|
Iowa (IA 6) |
|
|
|
|
|
Muscatine (IA 4) |
|
|
|
|
|
Waterloo-Cedar Falls, IA |
|
93.03 |
% |
|
|
Iowa City, IA |
|
|
|
|
|
Hardin (IA 11) |
|
|
|
|
|
Jackson (IA 5) |
|
|
|
|
|
Kossuth (IA 14) |
|
|
|
|
|
Lyon (IA 16) |
|
|
|
|
|
Dubuque, IA |
|
97.55 |
% |
|
|
Mitchell (IA 13) |
|
|
|
|
|
Audubon (IA 7) |
|
|
|
|
|
Union (IA 2) |
|
|
|
|
|
Fort Dodge, IA 10MHz D Block # (5) |
|
|
|
|
|
Des Moines, IA 10MHz D Block # |
|
|
|
|
|
Davenport, IA-IL 10MHz E Block # |
|
|
|
|
|
Clinton, IA-IL 10MHz E Block # |
|
|
|
|
|
Burlington, IA-IL-MO 10MHz E Block # |
|
|
|
|
|
Iowa City, IA 10MHz E Block # |
|
|
|
|
|
Ottumwa, IA 10MHz E Block # |
|
|
|
|
|
Total Nebraska/Iowa/Missouri/South Dakota |
|
|
|
2,737,000 |
|
|
|
|
|
|
|
Nebraska/Iowa/Missouri/Kansas |
|
|
|
|
|
Omaha, NE-IA 10 MHz A Block/10MHz E Block # |
|
|
|
|
|
Lincoln, NE 10MHz F Block # |
|
|
|
|
|
Mills (IA 1) |
|
|
|
|
|
Total Nebraska/Iowa/Missouri/Kansas |
|
|
|
1,375,000 |
|
TOTAL MIDWEST MARKET AREA |
|
|
|
27,086,000 |
|
|
|
|
|
|
|
MID-ATLANTIC MARKET AREA: |
|
|
|
|
|
Eastern North Carolina/South Carolina |
|
|
|
|
|
Harnett (NC 10) |
|
|
|
|
|
Rockingham (NC 7) |
|
|
|
|
|
Northampton (NC 8) |
|
|
|
|
|
10
Market Area/Market |
|
Current or Future |
|
2003 Total |
|
Greenville (NC 14) |
|
|
|
|
|
Greene (NC 13) |
|
|
|
|
|
Hoke (NC 11) |
|
|
|
|
|
Wilmington, NC |
|
98.82 |
% |
|
|
Chesterfield (SC 4) |
|
|
|
|
|
Chatham (NC 6) |
|
|
|
|
|
Sampson (NC 12) |
|
|
|
|
|
Jacksonville, NC |
|
97.57 |
% |
|
|
Camden (NC 9) |
|
|
|
|
|
Total Eastern North Carolina/South Carolina |
|
|
|
2,831,000 |
|
|
|
|
|
|
|
Markets Currently Consolidated or Which Are Expected To Be Consolidated |
|
|
|
|
|
MID-ATLANTIC MARKET AREA (continued): |
|
|
|
|
|
Virginia/North Carolina |
|
|
|
|
|
Roanoke, VA |
|
|
|
|
|
Giles (VA 3) |
|
|
|
|
|
Bedford (VA 4) |
|
|
|
|
|
Ashe (NC 3) |
|
|
|
|
|
Charlottesville, VA |
|
95.37 |
% |
|
|
Lynchburg, VA |
|
|
|
|
|
Buckingham (VA 7) |
|
|
|
|
|
Tazewell (VA 2) (3) |
|
|
|
|
|
Bath (VA 5) |
|
|
|
|
|
Total Virginia/North Carolina |
|
|
|
1,414,000 |
|
West Virginia/Maryland/Pennsylvania |
|
|
|
|
|
Monongalia (WV 3) * |
|
|
|
|
|
Raleigh (WV 7) * |
|
|
|
|
|
Grant (WV 4) * |
|
|
|
|
|
Hagerstown, MD * |
|
|
|
|
|
Tucker (WV 5) * |
|
|
|
|
|
Cumberland, MD * |
|
|
|
|
|
Bedford (PA 10) * (3) |
|
|
|
|
|
Garrett (MD 1) * |
|
|
|
|
|
Total West Virginia/Maryland/Pennsylvania |
|
|
|
1,161,000 |
|
TOTAL MID-ATLANTIC MARKET AREA |
|
|
|
5,406,000 |
|
|
|
|
|
|
|
SOUTHWEST MARKET AREA: |
|
|
|
|
|
|
|
|
|
|
|
Texas/Oklahoma/Missouri/Kansas/Arkansas |
|
|
|
|
|
Oklahoma City, OK 10MHz F Block # |
|
|
|
|
|
Tulsa, OK * |
|
|
|
|
|
Wichita, KS 10MHz A Block # (5) |
|
|
|
|
|
Fayetteville-Springdale, AR 10MHz A Block # (5) |
|
|
|
|
|
Fort Smith, AR-OK 10MHz A Block # (5) |
|
|
|
|
|
Seminole (OK 6) |
|
|
|
|
|
Garvin (OK 9) |
|
|
|
|
|
Joplin, MO * |
|
|
|
|
|
Elk (KS 15) * |
|
75.00 |
% |
|
|
Wichita Falls, TX * |
|
78.45 |
% |
|
|
Lawton, OK * |
|
78.45 |
% |
|
|
Nowata (OK 4) * (3) |
|
|
|
|
|
Lawrence, KS 10MHz E Block # (5) |
|
|
|
|
|
Jackson (OK 8) * |
|
78.45 |
% |
|
|
Enid, OK 10MHz C Block # |
|
|
|
|
|
Haskell (OK 10) |
|
|
|
|
|
Stillwater, OK 10MHz F Block # |
|
|
|
|
|
Ponca City, OK 30MHz C Block # |
|
|
|
|
|
Hardeman (TX 5) * (3) |
|
78.45 |
% |
|
|
Briscoe (TX 4) * (3) |
|
78.45 |
% |
|
|
Beckham (OK 7) * (3) |
|
78.45 |
% |
|
|
|
|
|
|
|
|
Total Texas/Oklahoma/Missouri/Kansas/Arkansas |
|
|
|
5,221,000 |
|
|
|
|
|
|
|
Missouri/Illinois/Kansas/Arkansas |
|
|
|
|
|
11
Market Area/Market |
|
Current or Future |
|
2003 Total |
|
St. Louis, MO/IL 10MHz A Block # |
|
|
|
|
|
Springfield, MO 20MHz A Block # |
|
|
|
|
|
St. Joseph, MO-KS 10MHz E Block # |
|
|
|
|
|
Cape Girardeau-Sikeston, MO/IL 10MHz A Block/10MHz D Block # (5) |
|
|
|
|
|
Moniteau (MO 11) |
|
|
|
|
|
Columbia, MO * |
|
|
|
|
|
Poplar Bluff, MO/AR 10MHz A Block # (5) |
|
|
|
|
|
Stone (MO 15) |
|
|
|
|
|
Jefferson City, MO 10MHz A Block # |
|
|
|
|
|
Barton (MO 14) (6) |
|
|
|
|
|
Rolla, MO 10MHz A Block # |
|
|
|
|
|
Laclede (MO 16) |
|
|
|
|
|
Washington (MO 13) |
|
|
|
|
|
Callaway (MO 6) * |
|
|
|
|
|
|
|
|
|
|
|
Markets Currently Consolidated or Which Are Expected To Be Consolidated |
|
|
|
|
|
SOUTHWEST MARKET AREA (continued): |
|
|
|
|
|
Missouri/Illinois/Kansas/Arkansas (continued) |
|
|
|
|
|
Sedalia, MO 10MHz C Block # |
|
|
|
|
|
Schuyler (MO 3) |
|
|
|
|
|
Shannon (MO 17) |
|
|
|
|
|
Linn (MO 5) (3) |
|
|
|
|
|
Columbia, MO 10MHz A Block # |
|
|
|
|
|
Harrison (MO 2) (3) |
|
|
|
|
|
Total Missouri/Illinois/Kansas/Arkansas |
|
|
|
4,914,000 |
|
SOUTHWEST MARKET AREA |
|
|
|
10,135,000 |
|
|
|
|
|
|
|
MAINE/NEW HAMPSHIRE/VERMONT MARKET AREA: |
|
|
|
|
|
Portland-Brunswick, ME 10MHz A Block # |
|
|
|
|
|
Burlington, VT 10MHz D Block # |
|
|
|
|
|
Manchester-Nashua, NH |
|
96.66 |
% |
|
|
Carroll (NH 2) |
|
|
|
|
|
Coos (NH 1) * |
|
|
|
|
|
Kennebec (ME 3) |
|
|
|
|
|
Bangor, ME |
|
97.16 |
% |
|
|
Somerset (ME 2) |
|
|
|
|
|
Addison (VT 2) * (3) |
|
|
|
|
|
Lewiston-Auburn, ME |
|
88.45 |
% |
|
|
Washington (ME 4) * |
|
|
|
|
|
Oxford (ME 1) |
|
|
|
|
|
Rutland-Bennington, VT 10MHz D Block # |
|
|
|
|
|
Lebanon-Claremont, NH-VT 10MHz A Block # (5) |
|
|
|
|
|
Burlington, VT 10MHz E Block # (5) |
|
|
|
|
|
TOTAL MAINE/NEW HAMPSHIRE/VERMONT MARKET AREA |
|
|
|
2,800,000 |
|
|
|
|
|
|
|
NORTHWEST MARKET AREA: |
|
|
|
|
|
Oregon/California/Idaho |
|
|
|
|
|
Clark (ID 6) |
|
|
|
|
|
Coos (OR 5) |
|
|
|
|
|
Crook (OR 6) * |
|
|
|
|
|
Del Norte (CA 1) |
|
|
|
|
|
Medford, OR * |
|
|
|
|
|
Butte (ID 5) (7) |
|
|
|
|
|
Mendocino (CA 9) |
|
|
|
|
|
Modoc (CA 2) |
|
|
|
|
|
Total Oregon/California/Idaho |
|
|
|
1,603,000 |
|
Washington/Oregon |
|
|
|
|
|
Yakima, WA * |
|
87.81 |
% |
|
|
Richland-Kennewick-Pasco, WA * |
|
|
|
|
|
Pacific (WA 6) * |
|
|
|
|
|
Umatilla (OR 3) * |
|
|
|
|
|
Okanogan (WA 4) |
|
|
|
|
|
12
Market Area/Market |
|
Current or Future |
|
2003 Total |
|
Kittitas (WA 5) * (3) |
|
98.24 |
% |
|
|
Hood River (OR 2) * |
|
|
|
|
|
Skamania (WA 7) * |
|
|
|
|
|
Total Washington/Oregon |
|
|
|
1,101,000 |
|
TOTAL NORTHWEST MARKET AREA |
|
|
|
2,704,000 |
|
EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET AREA: |
|
|
|
|
|
Knoxville, TN * |
|
|
|
|
|
Asheville, NC * |
|
|
|
|
|
Henderson (NC 4) * (3) |
|
|
|
|
|
Bledsoe (TN 7) * (3) |
|
|
|
|
|
Hamblen (TN 4) * (3) |
|
|
|
|
|
Cleveland, TN 10MHz C Block # |
|
|
|
|
|
Yancey (NC 2) * (3) |
|
|
|
|
|
TOTAL EASTERN TENNESSEE/WESTERN NORTH CAROLINA MARKET AREA |
|
|
|
1,532,000 |
|
|
|
|
|
|
|
Other Markets: |
|
|
|
|
|
Jefferson (NY 1) * |
|
60.00 |
% |
|
|
Franklin (NY 2) * |
|
57.14 |
% |
|
|
Total Other Markets |
|
|
|
482,000 |
|
Total Markets Currently Consolidated or Which are Expected to Be Consolidated |
|
|
|
50,145,000 |
|
Market Area/Market |
|
2003 Total |
|
Current |
|
Current and |
|
Investment Markets: |
|
|
|
|
|
|
|
Los Angeles/Oxnard, CA * |
|
17,182,000 |
|
5.50 |
% |
945,000 |
|
Oklahoma City, OK * |
|
1,074,000 |
|
14.60 |
% |
157,000 |
|
Rochester, MN/Chippewa (MN 7)/Lac Qui Parle (MN 8)/ Pipestone (MN 9)/Le Sueur (MN 10)/ Goodhue (MN 11) * |
|
971,000 |
|
15.22 |
% |
147,000 |
|
Cherokee (NC 1) * |
|
209,000 |
|
50.00 |
% |
105,000 |
|
Others (Fewer than 100,000 population equivalents each) |
|
|
|
|
|
360,000 |
|
Total Population Equivalents in Investment Markets |
|
|
|
|
|
1,714,000 |
|
* Designates wireline cellular licensed area.
# Designates personal communications service licensed area.
(1) Represents U.S. Cellulars ownership percentage in these licensed areas as of December 31, 2004 or as of the completion of any related transactions pending as of December 31, 2004. U.S. Cellular owns 100% of any licensed areas which do not indicate a percentage.
(2) 2003 Total Population represents the total population of the licensed area in which U.S. Cellular owns or has rights to own an interest, based on 2003 Claritas estimates (without duplication of the population counts of any overlapping licensed areas). In personal communications service licensed areas, this amount represents the portion of the personal communications service licensed areas owned that is not already served by a cellular licensed area in which U.S. Cellular owns a controlling interest. The 2003 Total Population of Total Markets Currently Consolidated or which are expected to be consolidated includes rights to acquire licensed areas with a total population of 5,754,000. Excluding the population of these licensed areas to be acquired, U.S. Cellulars total population was 44,391,000 at December 31, 2004.
(3) These markets have been partitioned into more than one licensed area. The 2003 population, percentage ownership and number of population equivalents shown are for the licensed areas within the markets in which U.S. Cellular owns an interest.
(4) This personal communications service licensed area is made up of 18 basic trading areas, as follows: Benton Harbor, MI; Bloomington, IL; Champaign-Urbana, IL; Chicago, IL (excluding Kenosha County, WI); Danville, IL-IN; Decatur-Effingham, IL; Elkhart, IN-MI; Fort Wayne, IN-OH; Galesburg, IL; Jacksonville, IL; Kankakee, IL; LaSalle-Peru-Ottawa-Streator, IL; Mattoon, IL; Michigan City, IN; Peoria, IL; Rockford, IL; South Bend-Mishawaka, IN; and Springfield, IL.
13
(5) U.S. Cellular acquired the rights to these licensed areas during 2003. Pursuant to an agreement with the seller of these licensed areas, U.S. Cellular has deferred the assignment and development of these licensed areas until up to five years from the closing date of the original transaction.
(6) Pursuant to an agreement entered into during 2004 with Cingular, U.S. Cellular has rights to acquire a controlling interest in this license. The licensed area also includes 10 megahertz of personal communications service spectrum that overlaps a portion of the area covered by the cellular license to be acquired, for a total of 35 megahertz of spectrum in the overlapping area. U.S. Cellular anticipates that the transaction will be completed during the first half of 2005.
(7) This licensed area includes territory and population equivalents of a fill-in area which was annexed from a nearby cellular licensed area.
(8) Current and Acquirable Population Equivalents are derived by multiplying the amount in the 2003 Total Population column by the percentage interest indicated in the Current Percentage Interest column.
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 wireless telephones which are compatible with its network technology, based on market and engineering studies which relate to specific markets. Such engineering studies are performed by U.S. Cellular personnel or third party engineering firms. U.S. Cellulars switching equipment is digital, which provides high-quality transmissions and is capable of interconnecting in a manner which minimizes costs of operation. Both analog and digital radio transmissions are made between cell sites and the wireless telephones. During 2004, over 95% of this traffic utilized digital radio transmissions. Network reliability is given careful consideration and extensive 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 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 which will permit microwave interconnection between the mobile telephone switching office and the cell site. 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 landline 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 avoid the current and future charges associated with leasing telephone lines from the landline telephone company.
U.S. Cellular has continued to expand its wide area network to accommodate various business functions, including:
order processing,
over the air provisioning,
automatic call delivery,
intersystem handoff,
credit validation,
fraud prevention,
call data record collection,
network management,
long-distance traffic, and
interconnectivity of all of U.S. Cellulars mobile telephone switching offices and cell sites.
14
In addition, the wide area network accommodates virtually all internal data communications between various U.S. Cellular office and retail locations to process customer activations. The wide area network is deployed in U.S. Cellulars six customer service centers (Customer Care Centers) for all customer service functions using U.S. Cellulars billing and information system. The wide area network will also be deployed in U.S. Cellulars newest Customer Care Center, in Bolingbrook, IL, when it opens in 2005.
Management believes that currently available technologies will allow sufficient capacity on U.S. Cellulars networks to meet anticipated demand for voice services over the next few years. High-speed data and video services may require the acquisition of additional licenses to provide sufficient capacity in markets where U.S. Cellular offers these services.
Costs of System Construction and Financing
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, consistent with FCC control requirements, uses primarily its own personnel to engineer each wireless system it owns and operates, and engages contractors to construct the facilities.
The costs (exclusive of the costs to acquire licenses) to develop the systems in which U.S. Cellular owns a controlling interest have historically been financed primarily through proceeds from debt and equity offerings and, in recent years, with cash generated by operations and proceeds from the sales of wireless interests. U.S. Cellular expects to meet its future funding requirements with cash generated by operations and borrowings under its revolving credit facilities. U.S. Cellular also may have access to public and private capital markets to help meet its long-term financing needs. In 2005, U.S. Cellular estimates its capital expenditures will total between $570 million and $610 million.
Marketing
U.S. Cellulars marketing plan is focused on acquiring, retaining and growing customer relationships by offering high-quality products and servicesbuilt around customer needsat fair prices, supported by outstanding customer service. U.S. Cellular increases customer awareness through the use of traditional media such as TV, radio, newspaper and direct mail advertising. U.S. Cellular has achieved its current level of penetration of its markets through a combination of promotional advertising and broad distribution, and has been able to sustain a high customer retention rate based on its high-quality wireless network and outstanding customer service. U.S. Cellular supports a multi-faceted distribution program, including direct sales, agents and retail sales and service centers in the vast majority of its markets, plus the Internet and telesales for customers who wish to contact U.S. Cellular through those channels. U.S. Cellular maintains a low customer churn rate (relative to other wireless carriers) by focusing on customer satisfaction, development of processes that are more customer-friendly, extensive training of frontline sales and support associates and the implementation of retention programs. The marketing plan stresses the value of U.S. Cellulars service offerings and incorporates combinations of rate plans, additional value-added features and services and wireless telephone equipment which are designed to meet the needs of defined customer segments and their usage patterns.
Company-owned and managed locations are designed to market wireless service to the consumer and small business segments in a setting familiar to these types of customers. U.S. Cellular has expanded its e-commerce site to enable customers to purchase a broad range of accessories online, and this site is continually evolving to address customers current needs. U.S. Cellular anticipates that as customers become increasingly comfortable with e-commerce, the Internet will become a more robust marketing channel for sales of rate plans as well as accessories. Traffic on U.S. Cellulars Web site is continually increasing as customers use the site for gathering information, purchasing handsets and accessories, signing up for service and finding the locations of its stores and agents.
U.S. Cellular believes that, while strategy is set at the corporate level, day-to-day tactical operating decisions should be made close to the customer, and accordingly, it manages its operating market areas with a decentralized staff, including sales, marketing, network operations, engineering and finance personnel. U.S. Cellular operates six regional Customer Care Centers whose personnel are responsible for customer service and certain other functions. In 2005, U.S. Cellular plans to open a seventh Customer Care Center in Bolingbrook, IL to meet the needs of its expanding customer base. Direct sales consultants market wireless service to business customers. Retail sales associates work out of over 400 U.S. Cellular-owned retail stores and kiosks and market wireless service primarily to the consumer and small business segments. U.S. Cellular maintains an ongoing training program to improve the effectiveness of sales consultants and retail associates by focusing their efforts on obtaining customers and maximizing the sale of high-use packages. These packages enable customers to buy packages of minutes for a fixed monthly rate.
15
U.S. Cellular continues to expand its relationships with agents, dealers and non-Company retailers to obtain customers, and at year-end 2004 had contracts with over 800 of these businesses aggregating over 1,800 locations. Agents and dealers are independent business people who obtain customers for U.S. Cellular on a commission basis. U.S. Cellular has provided 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 telephones, wireless service packages and other related products. U.S. Cellulars dealers include major appliance dealers, car stereo companies and mass merchants including regional and national companies such as Wal-Mart, Radio Shack, Best Buy and American TV. Additionally, in support of its overall Internet initiatives, U.S. Cellular has recruited agents who provide services exclusively through the Internet. No single agent, dealer or other non-Company retailer accounted for 10% or more of U.S. Cellulars operating revenues during the past three years.
U.S. Cellular uses a variety of direct mail, billboard, radio, television and newspaper advertising to stimulate interest by prospective customers in purchasing U.S. Cellulars wireless service and to establish familiarity with U.S. Cellulars name. U.S. Cellular operates under a unified brand name and logo, U.S. Cellular®, across all its markets, and uses the tag line, We Connect With You®.
U.S. Cellulars advertising is directed at gaining customers, improving 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 promotion 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. This program combines nationally supported activities and unique local activities, events, and sponsorships to enhance public awareness of U.S. Cellular and its brand. These programs are aimed at supporting the communities U.S. Cellular serves. The programs range from loaning phones to public service operations in emergencies, to assisting victims of domestic abuse through U.S. Cellulars Stop Abuse From Existing programs, to supporting safe driving programs.
In 2003, U.S. Cellular secured the naming rights to the home of the Chicago White Sox American League baseball team, which is now called U.S. Cellular Field. Concurrent with the naming rights agreement, U.S. Cellular purchased a media package with rights to place various forms of advertising in and around the facility. These agreements have increased the visibility of U.S. Cellulars brand not only in Chicago but throughout the United States.
U.S. Cellular continues to migrate customers in its cellular licensed areas from analog to digital service plans, and as of year-end 2004 over 95% of the minutes used were on U.S. Cellulars digital network. Additionally, during the second half of 2003, U.S. Cellular began offering its easyedgesm brand of enhanced data services in its operating market areas where it has implemented CDMA 1XRTT digital radio technology, supporting that effort using a wide variety of media. As of year-end 2004, easyedgesm services were available in all of U.S. Cellulars market areas. The initial results of the easyedgesm rollout have been encouraging, as many new customers and existing customers have signed up for data service plans. These enhanced data services include downloading news/weather/sports information/games, ringtones and other consumer services as well as wireless modem capabilities to use with personal computers in some markets. In early 2004, U.S. Cellular began offering camera phone-capable handsets and the related services to its customers as part of its easyedgesm suite of products and services, and as of year-end 2004 those services were available in all market areas. U.S. Cellular plans on further expansion of its easyedgesm services in 2005 and beyond.
In October 2003, Edge Wireless, LLC (Edge Wireless) filed a complaint against U.S. Cellular in U.S. District Court for the District of Oregon alleging that the easyedgesm mark infringes certain of Edge Wirelesss marks. In July 2004, the court found that U.S. Cellulars easyedgesm mark would not create a likelihood of confusion between the parties marks with respect to all types of advertising except for print advertising. The court ordered that in print materials U.S. Cellular must display the easyedgesm mark with a separate and dominant U.S. Cellular house mark and star logo which is featured more prominently than the easyedgesm mark. This order applies in areas in which U.S. Cellular competes with Edge Wireless, which include portions of U.S. Cellulars service areas in California, Oregon and Idaho. An appeal of this order by Edge Wireless was settled for nominal consideration and will be dismissed.
The FCC mandated that all wireless carriers had to be capable of facilitating wireless number portability in all areas of the United States beginning on May 24, 2004. See Regulation. In conjunction with this mandate, U.S. Cellular began tailoring certain of its advertising to those customers who may be interested in switching wireless carriers and keeping their current wireless telephone number. To date, U.S. Cellular has been successful in accommodating those customers in all of its market areas who switch to U.S. Cellular service from other carriers and wish to keep their wireless telephone numbers. U.S. Cellular has also been successful in accommodating those customers in all of its market areas who wish to change from U.S. Cellular to another carrier and keep their wireless telephone numbers.
16
The following table summarizes, by operating market area, the total population, U.S. Cellulars customers and penetration for U.S. Cellulars consolidated markets as of December 31, 2004.
Operating Market Areas |
|
Population (1) |
|
Customers |
|
Penetration |
|
Midwest Market Area |
|
23,242,000 |
|
2,476,000 |
|
10.65 |
% |
Mid-Atlantic Market Area |
|
5,406,000 |
|
772,000 |
|
14.28 |
% |
Southwest Market Area |
|
8,254,000 |
|
527,000 |
|
6.38 |
% |
Maine/New Hampshire/Vermont Market Area |
|
2,771,000 |
|
411,000 |
|
14.83 |
% |
Northwest Market Area |
|
2,704,000 |
|
464,000 |
|
17.16 |
% |
Eastern Tennessee/Western North Carolina Market Area |
|
1,532,000 |
|
196,000 |
|
12.79 |
% |
Other Markets |
|
482,000 |
|
99,000 |
|
20.54 |
% |
|
|
44,391,000 |
|
4,945,000 |
|
11.14 |
% |
(1) Represents 100% of the population of the licensed areas in which U.S. Cellular has a controlling interest, based on 2003 Claritas population estimates. Population in this context includes only the areas covering such markets and is only used for the purposes of calculating market penetration and is not related to population equivalents, as previously defined.
Customers and System Usage
U.S. Cellular provides service to a broad range of customers from a wide spectrum 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. Business users typically include a large proportion of individuals who work outside of their offices such as people in the construction, real estate, wholesale and retail distribution businesses as well as various professionals. Increasingly, U.S. Cellular is providing wireless service to consumers and to customers who use their wireless telephones for mixed business and personal use as well as for security purposes. A major portion of U.S. Cellulars recent customer and revenue growth is from these users.
On average, the retail customers in U.S. Cellulars consolidated markets used their wireless systems approximately 539 minutes per unit each month and generated retail service revenue of approximately $40 per month during 2004, compared to 422 minutes and $40 per month in 2003. Revenue generated by roamers using U.S. Cellulars systems (inbound roaming), together with local retail, toll and other revenues, brought U.S. Cellulars total average monthly service revenue per customer unit to $47 during 2004. Average monthly service revenue per customer unit decreased 1% during 2004. This result was primarily due to decreases in the average revenue per minute of use from both retail customers and roamers, almost fully offset by an increase in the number of minutes used by both retail customers and roamers. Competitive pressures, continued penetration of the consumer market and U.S. Cellulars increasing use of pricing and other incentive programs to stimulate overall usage resulted in a decrease in average retail service revenue per minute of use in 2004. The decrease in inbound roaming revenue per minute was primarily due to the general downward trend in per minute prices for roaming negotiated between U.S. Cellular and other wireless operators. U.S. Cellular anticipates that average monthly retail service revenue per customer unit will not change significantly in the near future, while total monthly service revenue per customer is expected to decline slightly in the future, primarily due to the decline in inbound roaming revenues. However, this effect is anticipated to be more than offset by increases in U.S. Cellulars customer base; therefore, U.S. Cellular anticipates that total revenues will continue to grow for the next few years.
U.S. Cellulars main sources of revenue are from its own customers and from inbound roaming customers. The interconnectivity of wireless service enables a customer to place or receive a call in a wireless service area away from the customers home service area. U.S. Cellular has entered into roaming agreements with operators of other wireless systems covering virtually all systems 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. Also, a customer of a participating system roaming (i.e., traveling) in a U.S. Cellular market where this arrangement is in effect is able to make and receive calls 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 bills the customer. In some instances, based on competitive factors, many carriers, including U.S. Cellular, may charge lower amounts to their customers than the amounts actually charged to the carriers by other wireless carriers for roaming.
17
Currently, U.S. Cellulars roaming agreements with other carriers only cover voice-related services; however, U.S. Cellular has begun entering into roaming agreements which will cover data-related services such as those offered through its easyedgesm suite of products and services, and anticipates expanding these roaming agreements to more carriers in the future. U.S. Cellular anticipates that entering into such agreements will provide additional flexibility for its customers and could enhance its inbound roaming revenue in the future.
The following table summarizes certain information about customers and market penetration in U.S. Cellulars consolidated operations.
|
|
Year Ended or At December 31, |
|
||||||||
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
Majority-owned and managed markets: |
|
|
|
|
|
|
|
|
|
|
|
Wireless markets included in consolidated operations (1) |
|
175 |
|
182 |
|
178 |
|
168 |
|
139 |
|
Total population of markets in service (000s) (2) |
|
44,391 |
|
46,267 |
|
41,048 |
|
28,632 |
|
24,912 |
|
Customer Units: |
|
|
|
|
|
|
|
|
|
|
|
at beginning of period (3) |
|
4,409,000 |
|
4,103,000 |
|
3,461,000 |
|
3,061,000 |
|
2,602,000 |
|
acquired (divested) during period (4) |
|
(91,000 |
) |
(141,000 |
) |
332,000 |
|
46,000 |
|
(24,000 |
) |
additions during period (3) |
|
1,557,000 |
|
1,357,000 |
|
1,244,000 |
|
1,095,000 |
|
1,154,000 |
|
disconnects during period (3) |
|
(930,000 |
) |
(910,000 |
) |
(934,000 |
) |
(741,000 |
) |
(671,000 |
) |
at end of period (3) |
|
4,945,000 |
|
4,409,000 |
|
4,103,000 |
|
3,461,000 |
|
3,061,000 |
|
Market penetration at end of period (5) |
|
11.14 |
% |
9.53 |
% |
10.00 |
% |
12.09 |
% |
12.29 |
% |
(1) Represents the number of licensed areas in which U.S. Cellular owned a controlling financial interest at the end of each respective period. The revenues and expenses of these licensed areas are included in U.S. Cellulars consolidated revenues and expenses for each period.
(2) The decline in Total Population in 2004 reflects the divestitures of markets to AT&T Wireless and ALLTEL.
(3) Represents the number of revenue-generating wireless telephones served by U.S. Cellular in the licensed areas referred to in footnote (1). The revenue generated by such wireless telephones is included in consolidated revenues.
(4) Represents the net number of revenue-generating wireless telephones added to or subtracted from U.S. Cellulars customer base during the period due to acquisitions and divestitures of wireless licenses.
(5) Computed by dividing the number of customer units at the end of the period by the total population of consolidated markets in service as estimated by Claritas (1999-2003) for the years 2000-2004, respectively.
Products and Services
Wireless Telephones and Installation. U.S. Cellular offers a full range of wireless telephones for use by its customers, including both analog and digital handsets. U.S. Cellulars digital service offerings include additional features such as caller ID, short messaging services and data transmission, including camera features, downloading and wireless modem capabilities. A majority of new customers are selecting dual-mode or tri-mode wireless telephones, which can be used on analog and digital networks, to fully utilize these features. These types of wireless telephones and associated features appeal to newer segments of the customer population, especially a younger demographic group which has become a fast-growing portion of the wireless user population. Dual-mode and tri-mode wireless telephones also enable customers to enjoy virtually seamless roaming regardless of their travel patterns. U.S. Cellular emphasizes these types of wireless telephones in its marketing efforts.
U.S. Cellular negotiates volume discounts with its wireless telephone suppliers. U.S. Cellular significantly increased its purchasing power in 2002 by implementing a distribution system that enables it to efficiently sell and distribute handsets to its agents, and has expanded its sales of handsets to agents throughout 2003 and 2004. U.S. Cellular discounts wireless telephones sold to new and current customers and provides upgraded handsets to current customers to meet competition, stimulate sales or retain customers by reducing the cost of becoming or remaining a wireless customer. In most instances, where permitted by law, customers are generally required to sign a new service contract or extend their current service contract with U.S. Cellular at the time the handset sale takes place. U.S. Cellular also works with wireless equipment manufacturers in promoting specific equipment in its local advertising.
18
U.S. Cellular has established service facilities in many of its local markets to ensure quality service of the wireless telephones it sells. These facilities allow U.S. Cellular to improve its service by promptly assisting customers who experience equipment problems. Additionally, U.S. Cellular employs a repair facility in Tulsa, Oklahoma, to handle more complex service and repair issues.
Wireless Services. U.S. Cellulars customers are able to choose from a variety of packaged voice and data pricing plans which are designed to fit different usage patterns and customer needs. The ability to help a customer find the right technology and the right pricing plan is central to U.S. Cellulars brand positioning. U.S. Cellular generally offers local, regional and national consumer plans that can be tailored to a customers needs by the addition of features or feature packages. Many consumer plans enable small work groups or families to share the plan minutes, enabling the customer to get more value for their money. Business rate plans are offered to companies to meet their unique needs. U.S. Cellulars national rate plan, SpanAmericasm, prices all calls, regardless of where they are made or received, as local calls with no long distance or roaming charges. Additionally, U.S. Cellular is continually reviewing its prepaid TalkTracker® offering to streamline it and make it more compatible with the lifestyles of the customers who want to buy this product. U.S. Cellular also has a reseller customer who purchases blocks of minutes and resells them to its customers. U.S. Cellular includes all of these reseller phone lines, which numbered 467,000 at December 31, 2004, in its reported customer base.
U.S. Cellulars customer bills typically show separate charges for custom usage features, airtime in excess of the packaged amount (such packages may include roaming and toll usage), roaming and toll calls and data usage. Custom usage features provided by U.S. Cellular include wide-area call delivery, call forwarding, voice mail, call waiting, three-way calling and no-answer transfer.
Regulation
Regulatory Environment. U.S. Cellulars operations are subject to FCC and state regulation. The wireless telephone licenses U.S. Cellular holds are granted by the FCC for the use of radio frequencies in the 800 megahertz band (cellular licenses), and in the 1900 megahertz band (personal communications service licenses), and are an important component of the overall value of U.S. Cellulars 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 develops. 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 telephone service under the Communications Act, and is implementing the legislative objectives of the Telecommunications Act, as discussed below.
LicensingWireless Service. For cellular telephone licensing purposes, the FCC has divided the United States into separate geographic markets (metropolitan statistical areas and rural service areas). In each market, the allocated cellular frequencies are divided into two equal blocks.
Since January 1, 2002, an entity which controls one cellular system in a metropolitan statistical area has been able to control the competing cellular system in that metropolitan statistical area. The FCC determined that wireless competition in metropolitan statistical areas among cellular, personal communications service and certain specialized mobile radio carriers, such as Nextel, which interconnect with the public switched telephone network, was sufficient to permit relaxation of the former prohibition on metropolitan statistical area cross-ownership.
In September 2004, the FCC also repealed the rule which prohibited any entity which controlled a cellular system in a rural service area from owning an interest in another cellular system in the same rural service area. Acquisition of both cellular licenses in the same rural service area will now be evaluated on a case by case basis. That rule took effect on February 14, 2005.
The FCC has also allocated a total of 140 megahertz for broadband personal communications service, 20 megahertz to unlicensed operations and 120 megahertz to licensed operations, originally consisting of two 30 megahertz blocks in each of 51 major trading areas and one 30 megahertz block and three 10 megahertz blocks in each of 493 basic trading areas. Certain of the 30 megahertz basic trading area frequency blocks were split into 10 and 15 megahertz segments when the original licensees, unable to pay their installment payments in full to the FCC, returned part of their assigned spectrum to the FCC and it was subsequently reauctioned. Subject to some conditions, the FCC also permits licensees to split their licenses and assign a portion, on either a geographic or frequency basis, or both, to a third party.
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Prior to January 1, 2003, no entity was allowed to have a controlling interest in more than 55 megahertz of cellular, personal communications service, or covered specialized mobile radio spectrum in a given major trading area or basic trading area. Cellular systems have 25 megahertz of spectrum, and personal communications service systems typically may have 10, 15, or 30 megahertz of spectrum. As of January 1, 2003, this spectrum cap has been eliminated, and the FCC now determines whether acquisition of wireless licenses is in the public interest on a case-by-case basis under criteria which are being developed on a case-by-case basis.
The completion of acquisitions involving the transfer of control of a wireless system requires prior FCC approval. Acquisitions of minority interests generally do not require FCC approval. Whenever FCC approval is required, any interested party may file a petition to dismiss or deny the application for approval of the proposed transfer.
LicensingFacilities. The FCC must be notified each time an additional cell site is constructed which enlarges the service area of a given cellular market. The FCCs rules also generally require persons or entities holding wireless construction permits or licenses to coordinate their proposed frequency usage with neighboring wireless licensees in order to avoid electrical interference between adjacent systems. The coordination process has become more complex as neighboring systems have begun to employ differing digital technologies. The height and power of base stations in wireless systems are regulated by FCC rules, as are the types of signals emitted by these stations. The FCC also regulates tower construction in accordance with its regulations, which carry out its responsibilities under the National Environmental Policy Act and Historic Preservation Act. In October, 2004, the FCC adopted a Nationwide Programmatic Agreement which exempts certain new towers from historic preservation review, but imposes additional notification and approval requirements on carriers with respect to state historic preservation officers and Indian tribes with an interest in the towers location. In addition to regulation by the FCC, wireless systems are subject to certain Federal Aviation Administration (FAA) regulations with respect to the siting, construction, painting and lighting of wireless transmitter towers and antennas as well as local zoning requirements.
Beginning in 1996, the FCC also imposed a requirement that all wireless licensees register and obtain FCC registration numbers for all of their antenna towers which require prior FAA clearance. All new towers must be registered at the time of construction and existing towers were required to be registered by May 1998 on a staggered state-by-state basis. U.S. Cellular believes that it is in compliance with the FCCs tower registration requirements.
Beginning in October 1997, wireless systems, which previously were excluded from having to evaluate their facilities to ensure their compliance with federal radio frequency radiation requirements, were made subject to those requirements. As a result, all wireless towers of less than 10 meters in height, building-mounted antennas and wireless telephones must comply with radio frequency radiation guidelines. Since October 1997, all new wireless facilities have had to be in compliance when they are brought into service. Since September 1, 2000, all existing facilities have had to be brought into compliance. U.S. Cellular believes that its facilities are in compliance with these requirements. The FCC is currently considering changes to its rules to subject more proposed towers to environmental evaluation.
LicensingCommercial Mobile Radio Service. Pursuant to 1993 amendments to the Communications Act, cellular and personal communications 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 forebear from requiring such carriers 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. Cellular licensees were required, during the five years following the initial grant of the respective license, to construct their systems to provide service (at a specified signal strength) to the territory encompassed by their service area. Failure to provide such coverage resulted in reduction of the relevant license area by the FCC. All 30 megahertz block personal communications service licensees must construct facilities that provide coverage to one-third of the population of the service area within five years of the initial license grants and to two-thirds of the population within ten years. All other licensees and certain 10 and 15 megahertz block licensees must construct facilities that provide coverage to one-fourth of the population of the licensed area or make a showing of substantial service in their license area within five years of the original license grants. Licensees that fail to meet the coverage requirements may be subject to forfeiture of the license.
In a rulemaking proceeding concluded in July of 2004, the FCC amended its rules to add a substantial service option for 30 megahertz block personal communications service licensees alternative to the service specific construction benchmarks already available to these licensees. These rules, which took effect on February 14, 2005, will give carriers greater flexibility to provide service based on the needs of individual customers and their own unique business plans.
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Cellular and personal communications service licenses are granted for ten-year periods. The FCC has established standards for conducting comparative renewal proceedings between a cellular licensee seeking renewal of its license and challengers filing competing applications. The FCC has: (i) established criteria for comparing the renewal applicant to challengers, including the standards under which a renewal expectancy will be granted to the applicant seeking license renewal; (ii) established basic qualifications standards for challengers; and (iii) provided procedures for preventing possible abuses in the comparative renewal process. The FCC has concluded that it will award a renewal expectancy if the licensee has (i) provided substantial performance, which is defined as sound, favorable and substantially above a level of mediocre service just minimally justifying renewal, and (ii) complied with FCC rules, policies and the Communications Act. A majority of geographically licensed services, including personal communications services licensees are also afforded a similar renewal expectancy. If renewal expectancy is awarded to an existing licensee, its license is renewed and competing applications are not considered. All of U.S. Cellulars licenses which it applied to have renewed between 1994 and 2004 have been renewed.
All of U.S. Cellulars approximately 1,100 FCC licenses for the microwave radio stations it used to link its cell sites with each other and with its mobile telephone switching offices were required to be renewed in 2001. All of those licenses were renewed for ten-year terms. All newly obtained microwave licenses receive ten-year terms as well. Over the next few years, due to the licensing of new satellite services in the relevant frequency bands, it is likely that certain of U.S. Cellulars remaining microwave facilities will have to be shifted to other frequencies. It is anticipated that those changes will be made without affecting service to customers and the cost of such changes will not be significant.
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. Accordingly, U.S. Cellular believes that current regulations will have no significant effect on the renewal of its licenses. However, changes in the regulation of wireless operators or their activities and of other mobile service providers could have a material adverse effect on U.S. Cellulars operations.
Recent EventsE-911. There are certain regulatory proceedings currently pending before the FCC which are of particular importance to the wireless industry. In one proceeding, the FCC has imposed new enhanced 911 regulations on wireless carriers. The rules require wireless carriers to provide increasingly detailed information about the location of wireless 911 callers in two phases. The obligation of a wireless carrier to provide this information is triggered by a qualifying request from state or local agencies that handle 911 calls in the markets served by the wireless carrier. In phase one, which has been required since April 1998, wireless carriers are required to identify the location of the cell site from which a wireless call has been made and the wireless 911 callers phone number. U.S. Cellular has timely provided this information in compliance with the FCCs rules in most but not all of its markets.
In 2001, U.S. Cellular filed a request for a waiver of phase two of the FCCs E-911 rules that required wireless carriers to provide more precise latitude and longitude location information about wireless 911 callers by October 1, 2001. In July 2002, the FCC released an order that delayed until March 1, 2003, the deadline by which certain medium-sized wireless carriers, including U.S. Cellular, were required to provide more precise phase two location information in response to qualifying requests from state or local 911 agencies. U.S. Cellular is in compliance with the revised phase two enhanced 911 requirements in most of its markets. However, there is no guarantee that U.S. Cellular will not be subject to sanctions, including monetary forfeitures, for failure to comply with the FCCs phase one or phase two requirements in all its markets.
Recent EventsWireless Number Portability. The FCC has adopted wireless number portability rules requiring wireless carriers to allow a customer to retain, subject to certain geographical limitations, their existing telephone number when switching from one telecommunications carrier to another. These rules have become effective for all U.S. Cellular markets on or before May 24, 2004. Now that wireless number portability has been implemented, FCC rules require that wireless providers and local exchange carriers, subject to certain exceptions, provide number portability in compliance with FCC performance criteria, upon request from another carrier.
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U.S. Cellular has been successful in facilitating number portability requests in a timely manner. The implementation of wireless number portability has not had a material effect on U.S. Cellulars results of operations to date. However, U.S. Cellular is unable to predict the impact that the implementation of number portability will have in the future. The implementation of wireless number portability may increase churn rates or customer retention costs for U.S. Cellular and other wireless companies, as the ability of customers to retain their wireless telephone numbers removes a significant barrier for customers who wish to change wireless carriers. However, to the extent U.S. Cellular loses customers, the effect may be offset to the extent it is able to obtain additional new customers who wish to change their service from other wireless carriers as a result of wireless number portability. The future volume of any porting requests, and the processing costs related thereto, may increase U.S. Cellulars operating costs in the future. Any of the above factors could have an adverse effect on U.S. Cellulars competitive position, costs of obtaining new subscribers, liquidity, financial position and results of operations.
Recent EventsNumber Pooling. Cellular and broadband personal communications service providers also had to be capable, by November 2002, of receiving from the numbering authorities telephone numbers in blocks of 1,000, rather than 10,000, as has been the case previously. This action was intended to conserve telephone numbers and extend the life of the current numbering system.
U.S. Cellular is now in compliance with the FCCs thousand block number pooling requirements and the FCCs current number portability requirements. Both requirements are complex and have required extensive capital investment. U.S. Cellular has completed the investments needed to meet these requirements as of December 31, 2004.
Recent EventsReciprocal Compensation. In another proceeding, the FCC in 1996 adopted rules regarding the method by which wireless carriers and local exchange carriers shall compensate each other for interconnecting wireless and local exchange facilities. The FCC rules provided for symmetrical and reciprocal compensation between local exchange carriers and wireless carriers, and also prescribed interim interconnection proxy rates, which are much lower than the rates formerly paid by wireless carriers to local exchange carriers. Symmetrical and reciprocal compensation means wireless carriers and local exchange carriers must pay each other at the same rate. Interconnection rate issues will be decided by the states. Wireless carriers are now paying and in the future can be expected to pay lower rates to local exchange carriers than they previously paid. This result was favorable to the wireless industry and somewhat unfavorable to local exchange carriers.
The FCC is currently considering a proposal to eliminate reciprocal compensation between wireless carriers and local exchange carriers and to move toward a so-called bill and keep system. If adopted, this change in the rules would also be favorable to wireless carriers, as wireless customers currently make more calls to wireline customers than vice versa.
In recent months, a controversy has arisen over the attempt by certain rural wireless carriers to impose state wireless termination tariffs in the absence of interconnection agreements. The legality of such tariffs is an issue before the FCC, and any changes are anticipated to be applied prospectively.
Recent EventsOutage Reporting. The FCC has adopted rules, which took effect in January 2005, which require wireless carriers to report system outages affecting more than 30,000 customers for more than 30 minutes. Previously wireless carriers had not been subject to such requirements. U.S. Cellular is in compliance with the new requirements.
Telecommunications ActGeneral. The primary purpose and effect 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.
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Telecommunications ActUniversal Service. The Telecommunications Act establishes principles and a process for implementing a modified universal service policy. This policy seeks nationwide, affordable service and access to advanced telecommunications and information services. It calls for reasonably comparable urban and rural rates and services. The Telecommunications Act also requires universal service to schools, libraries and rural health facilities at discounted rates. Wireless carriers must provide such discounted rates to such organizations in accordance with federal regulations. The FCC has implemented the mandate of the Telecommunications Act to create a universal service support mechanism to ensure that all Americans have access to telecommunications services. 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 landline telephone service in high cost areas is subsidized by support from the universal service fund, to which, as noted above, all carriers with interstate and international revenues must contribute. Such payments which were based on a percentage of the total billed revenue of carriers for a given previous period of time, began in 1998.
Since February 2003, such payments have been based on estimates of future revenues. Previously, these payments were based on historical revenues. Carriers are free to pass such charges on to their customers. Wireless carriers are also eligible to receive universal service support payments in certain circumstances if they provide specified services in high cost areas. U.S. Cellular has sought designation as an eligible telecommunications carrier qualified to receive universal service support in certain states, has been designated as such a carrier in the states of Washington, Iowa, and Wisconsin and has received payments for services provided to high cost areas within those states. Recently U.S. Cellular was also designated an eligible telecommunications carrier in Oregon and Oklahoma.
Communications Assistance to Law Enforcement Act. Under a 1994 federal law, the Communications Assistance to Law Enforcement Act, all telecommunications carriers, including U.S. Cellular and other wireless licensees, have been required to implement certain equipment changes necessary to assist law enforcement authorities in achieving an enhanced ability to conduct electronic surveillance of those suspected of criminal activity. U.S. Cellular is now substantially in compliance with the requirements of such act. However, issues exist as to the applicability of such act to transmissions of packet data and other information services. U.S. Cellular will attempt to comply with the acts information service requirements as they are clarified and become applicable. In August 2004, the FCC released a Notice of Proposed Rulemaking which proposed new requirements with respect to packet data under this statute. It is expected that the FCC will adopt new regulations in 2005.
Other Recent FCC Actions. The FCC has also taken action in proceedings: (1) to ensure that the customers of wireless providers, among other carriers, will receive complete, accurate, and understandable bills; (2) to establish safeguards to protect against unauthorized access to customer information; (3) to require improved access to telecommunications facilities by persons with disabilities; and (4) to set national policy for the allocation by state public utilities commissions of telephone numbers to wireline and wireless carriers.
The FCC adopted an order in January 2003, pursuant to which the mobile satellite service will permit its licensees to offer terrestrial wireless service in competition with commercial mobile radio service carriers, provided the mobile satellite service licensees also offer satellite telephone service, which will involve building their proposed satellite networks. Assuming the mobile satellite service licensees do build their satellite networks and thus obtain ancillary terrestrial authority, the increased competition could be unfavorable to existing commercial mobile radio service carriers. In November of 2004 the FCC granted, for the first time, authority for a Mobile Satellite System licensee to operate Ancillary Terrestrial Component facilities providing voice and data communication for users. This grant is significant because it confers nationwide blanket authority for the deployment of a new competitive terrestrial advanced wireless network. The timetable for its deployment is not yet known.
In January 2000, the FCC took an action which may have an impact on both cellular and personal communications service licensees. Pursuant to a congressional directive, the FCC adopted service rules for licensing the commercial use of 30 megahertz of spectrum in the 747-762 megahertz and 777-792 megahertz spectrum bands. Subsequently, the FCC adopted service rules for the 688-746 megahertz band, a portion of which was auctioned in 2002. The majority of the spectrum in these bands is being auctioned in large regional service areas, although there is a portion available which covers individual metropolitan statistical area and rural service area markets. The FCC has conducted two auctions for the metropolitan statistical area and rural service area licensed spectrum and certain other portions of the 688-746 megahertz spectrum which ended in September 2002 and June 2003, respectively. Additional auctions to license the 688-792 megahertz spectrum could commence as early as late 2006.
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The FCC adopted service rules in October 2003 to provide for use of 90 megahertz of spectrum, 1710-1755 and 2110-2155 megahertz, for Advanced Wireless Services. This spectrum is intended to enable high-speed data services as well as full-motion video and other services. This spectrum could be auctioned starting late in the second quarter of 2006. The FCC also designated 30 megahertz of spectrum in the 1910-1920, 1990-2000, 2020-2025, and 2175-2180 megahertz bands for Advanced Wireless. The 1910-1915 and 1990-1995 megahertz bands, commonly referred to as the G Block will be licensed to Nextel on a nationwide basis in exchange for relinquishing spectrum holdings in other bands. The balance of this spectrum (commonly known as the H and J blocks) could be auctioned as early as the fourth quarter of 2005, subject to the resolution of industry concerns about interference with existing services in the PCS band.
In June 2002, the FCC created a Spectrum Policy Task Force and commenced proceedings to review and make recommendations on broad categories of possible spectrum policy change. The allocation of additional spectrum for unlicensed services, which has been strongly promoted by various manufacturers of 802.11b devices and Wi-Fi service providers, has emerged from that review process as a potentially significant shift in FCC spectrum policy affecting wireless competition between carriers who paid for spectrum and those who plan to implement networks using unlicensed free spectrum. The FCC commenced proceedings in December 2002 to allocate additional spectrum in the television broadcast bands as well as the 3650-3700 megahertz band for unlicensed services which remain pending. In November 2003 the FCC approved a significant expansion of the spectrum available for unlicensed uses by permitting 802.11b and Wi-Fi operations in the 5.4-5.7 gigahertz band.
The FCC adopted in May 2003 new spectrum leasing policies which permit licensees of cellular, personal communications service, and specialized mobile radio spectrum, among other bands, to lease to third parties any amount of spectrum in any geographic area encompassed by their licenses, and for any period of time not extending beyond the current term of the license. The FCC has also adopted streamlined processing rules for applications for assignment and transfer of control of telecommunications carrier licenses. These new rules and policies were expanded and clarified by the FCC in July of 2004 to permit spectrum leasing in additional wireless services, to streamline processing of spectrum leasing applications as well as traditional license transfers and assignments and to establish new categories of spectrum leasing arrangements.
The FCC also adopted in June 2004 new service rules for multipoint distribution service, microwave multipoint distribution service and instructional television fixed service spectrum in the 2150-2162 megahertz and 2495-2690 megahertz bands which will foster uses of this spectrum for advanced wireless services, including commercial mobile services. This spectrum could create opportunities for new or expanded competition with existing commercial mobile radio service operators.
State and Local Regulation. U.S. Cellular is also 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. Although U.S. Cellular intends to vigorously defend its activities, there can be no assurance that potential state regulatory proceedings and/or consumer lawsuits will not have a material adverse effect on its financial condition, results of operations, cash flows, business or prospects.
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.
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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 handsets 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. The U.S. Supreme Court declined to review the Second Circuits ruling. U.S. Cellulars network facilities and the handsets it sells to customers comply with these standards.
On December 7, 2004, the United States Court of Appeals for the District of Columbia upheld in EMR Network v. FCC, the FCCs current requirements regarding radio frequency emissions and held that the FCC was not obliged to commence inquiry into the non-thermal effects of radio frequency emissions. The court also evaluated the studies relied upon by the plaintiffs and concluded they were insufficient. The FCC is however considering changes in its rules regarding human exposure to radio frequency magnetic fields in a separate proceeding.
Media reports have suggested that radio frequency emissions from handsets, wireless data devices and cell sites may raise various health concerns, including cancer or tumors, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Although some studies have suggested that radio frequency emissions may cause certain biological effects, most of the expert reviews conducted to date have concluded that the evidence does not support a finding of adverse health effects but that further research is appropriate. Research and studies are ongoing. These concerns over radio frequency emissions may discourage the use of handsets and wireless data devices and may result in significant restrictions on the location and operation of cell sites, all of which could have a material adverse effect on U.S. Cellulars results of operations. Several class action and single-plaintiff lawsuits have been filed against several other wireless service operators and several wireless phone manufacturers, asserting product liability, breach of warranty and other claims relating to radio frequency transmissions to and from handsets and wireless data devices. The lawsuits seek substantial monetary damages as well as injunctive relief. One important case in which the plaintiff alleged that his brain tumor had been caused by his wireless telephone use, Newman v. Verizon et al, was dismissed in the U.S. District Court in Maryland in October 2002. The U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal in October 2003. In addition, several other cases are pending or on appeal or have been dismissed and may be appealed. There can be no assurance that the outcome of these or other lawsuits will not have a material adverse effect on the wireless industry, including U.S. Cellular. Currently, U.S. Cellular carries insurance with respect to such matters, but there is no assurance that such insurance would be sufficient, will continue to be available or will not be cost-prohibitive in the future.
Competition
U.S. Cellular competes directly with several wireless communication service providers, including enhanced specialized mobile radio service providers, in each of its markets. In general, there are between five and seven competitors in each wireless market. U.S. Cellular generally competes against each of the near-nationwide wireless companies: Verizon Wireless, Sprint (and affiliates) (Sprint), Cingular (which recently acquired AT&T Wireless), T-Mobile USA Inc. and Nextel Communications (Nextel). However, not all of these competitors operate in each market where U.S. Cellular does business. These competitors have substantially greater financial, technical, marketing, sales, purchasing and distribution resources than U.S. Cellular. In addition, Sprint recently proposed to acquire Nextel which would likely increase this competitors access to such resources.
The use of national advertising and promotional programs by the near-national wireless operators may be a source of additional competitive and pricing pressures in all U.S. Cellular markets, even if those operators may not provide service in a particular market. U.S. Cellular provides wireless services comparable to the national competitors, but the other 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. If U.S. Cellular offers the same calling area as one of these competitors, U.S. Cellular will incur roaming charges for calls made in portions of the calling area which are not part of its network.
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In the Midwest, U.S. Cellulars largest contiguous service area, it can offer larger regional service packages without incurring significant roaming charges than it is able to offer in other parts of its network. U.S. Cellular also employs a customer satisfaction strategy throughout its markets it believes has contributed to a relatively low churn rate and has had a positive impact on its cost to acquire and serve customers.
Some of U.S. Cellulars competitors bundle other services, such as landline telephone service and internet access, with their wireless communications services, which U.S. Cellular either does not have the ability to offer or has chosen not to offer.
In addition, U.S. Cellular competes against both larger and smaller regional wireless companies in certain areas, including ALLTEL, Western Wireless Corporation and Rural Cellular Corporation, and against resellers of wireless services. Since each of these competitors operates on systems using spectrum licensed by the FCC and has comparable technology and facilities, competition for customers among these systems in each market is principally on the basis of quality of service, price, size of area covered, services offered and responsiveness of customer service. ALLTEL has recently agreed to acquire Western Wireless Corporation, which would likely increase this competitors access to financial, technical, marketing, sales, purchasing and distribution resources, although the two companies do not generally have overlapping territories.
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.
The FCCs rules require all operational wireless systems to provide, on a nondiscriminatory basis, wireless service to resellers which purchase blocks of mobile telephone numbers from an operational system and then resell them to the public. Certain of these resellers (also referred to as mobile virtual network operators), such as Virgin Mobile, Boost Wireless and Qwest Corporation, have grown substantial customer bases through the leveraging of existing brand names and have proven to be competitive with U.S. Cellular in certain of its operating markets. Others, such as Disney Corporations ESPN brand, plan to use their brand recognition and access to content to compete in the wireless arena in the future.
In recent years, enhanced specialized mobile radio providers have initiated that type of service and also offer conventional wireless service in substantially all of U.S. Cellulars markets. Although less directly a substitute for other wireless services, wireless data services and paging services may be adequate for those who do not need full two-way voice service. Technological advances or regulatory changes in the future may make available other alternatives to wireless service, thereby creating additional sources of competition.
Continuing technological advances in the communications field make it difficult to predict the extent of additional future competition for wireless systems. For example, the FCC has allocated radio channels to mobile satellite systems in which transmissions from mobile units to satellites would augment or replace transmissions to cell sites. Such systems are designed primarily to serve the communications needs of remote locations and mobile satellite systems could provide viable competition for land-based wireless systems in such areas. Some initial deployments have been made and service is now being provided in certain areas. It is also possible that the FCC may in the future assign additional frequencies to wireless telephone service or enhanced specialized mobile radio service to provide for more competitors in each market.
Investments
U.S. Cellular and its subsidiaries hold a substantial amount of marketable equity securities that are publicly traded and can have volatile share prices. U.S. Cellular and its subsidiaries do not make direct investments in publicly traded companies and all of these interests were acquired as a result of sales, trades or reorganizations of other assets. The investment in Vodafone Group Plc (Vodafone) resulted from certain dispositions of non-strategic cellular investments to or settlements with AirTouch Communications, Inc. (AirTouch), in exchange for stock of AirTouch, which was then acquired by Vodafone whereby U.S. Cellular received American Depositary Receipts representing Vodafone stock. The investment in Rural Cellular Corporation (Rural Cellular) is the result of a consolidation of several cellular partnerships in which U.S. Cellular subsidiaries held interests in Rural Cellular, and the distribution of Rural Cellular stock in exchange for these interests. A contributing factor in U.S. Cellulars decision not to dispose of the investments is that their tax basis is significantly lower than current stock prices, and therefore would trigger a substantial taxable gain upon disposition.
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These assets are classified for financial reporting purposes as available-for-sale securities. The market value of these investments aggregated $282.8 million at December 31, 2004 and $260.2 million at December 31, 2003. As of December 31, 2004, U.S. Cellular recorded a net unrealized holding gain, net of tax and minority interest, included in accumulated other comprehensive income totaling $77.6 million. This amount was $63.3 million at December 31, 2003. In 2002, U.S. Cellular recognized, in the Statement of Operations, losses of $244.7 million ($146.5 million net of tax of $98.2 million), related to investments in marketable equity securities as a result of managements determination that unrealized losses with respect to the investments were other than temporary.
A subsidiary of U.S. Cellular has entered into a number of forward contracts with counterparties related to the Vodafone marketable equity securities that it holds. U.S. Cellular has provided guarantees to the counterparties which provide assurance that all principal and interest amounts are paid upon settlement of the contracts by such subsidiary. The risk management objective of the forward contracts is to hedge the value of the marketable equity securities from losses due to decreases in the market prices of the securities (downside limit) while retaining a share of gains from increases in the market prices of such securities (upside potential). The downside limit of the Vodafone securities is hedged at a range of $15.07 to $16.07 per share, which is at or above the cost basis, thereby eliminating the other than temporary risk on these contracted securities. The upside potential is a range of $21.05 to $22.60 per share.
Under the terms of the forward contracts, U.S. Cellular continues to own the contracted shares and will receive dividends paid on such contracted shares, if any. The forward contracts mature in May 2007 and, at U.S. Cellulars option, may be settled in shares of the security or in cash, pursuant to formulas that collar the price of the shares. The collars effectively limit U.S. Cellulars downside risk and upside potential on the contracted shares. The collars are typically adjusted for any changes in dividends on the contracted shares. If the dividend increases, the collars upside potential is typically reduced. If the dividend decreases, the collars upside potential is typically increased. If U.S. Cellular elects to settle in shares, it will be required to deliver the number of shares of the contracted security determined pursuant to the formula. If shares are delivered in the settlement of the forward contract, U.S. Cellular would incur a current tax liability at the time of delivery based on the difference between the tax basis of the marketable equity securities delivered and the net amount realized though maturity. If U.S. Cellular elects to settle in cash, it will be required to pay an amount in cash equal to the fair market value of the number of shares determined pursuant to the formula.
Deferred taxes have been provided for the difference between the financial reporting basis and the income tax basis of the marketable equity securities and are included in deferred tax liabilities on the Balance Sheet. Such deferred tax liabilities totaled $85.6 million at December 31, 2004 and $78.3 million at December 31, 2003.
The following table summarizes certain facts surrounding the contracted securities as of December 31, 2004.
|
|
|
|
Collar (1) |
|
|
|
|||
Security |
|
Shares |
|
Downside |
|
Upside |
|
Loan |
|
|
Vodafone Group Plc |
|
10,245,370 |
|
$15.07-$16.07 |
|
$21.05-$22.60 |
|
$ |
159,856 |
|
(1) The per share amounts represent the range of floor and ceiling prices of all the securities monetized.
Employees
U.S. Cellular had approximately 7,400 full-time and part-time employees as of January 31, 2005. None of U.S. Cellulars employees is represented by a labor organization. U.S. Cellular considers its relationship with its employees to be good.
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PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This Annual Report on Form 10-K/A, including exhibits, contains statements that are not based on historical fact, 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:
Increases in the level of competition in the markets in which U.S. Cellular operates could adversely affect its revenues or increase its costs to compete.
Consolidation in the wireless industry may create stronger competitors both operationally and financially which could adversely affect U.S. Cellulars revenues and increase its costs to compete.
Advances or changes in telecommunications technology could render certain technologies used by U.S. Cellular obsolete, could reduce its revenues or could increase its cost of doing business.
Changes in the telecommunications regulatory environment, or a failure to timely or fully comply with any regulatory requirements, such as wireless number portability and E-911 services, could adversely affect U.S. Cellulars financial condition or results of operations or ability to do business.
Changes in U.S. Cellulars enterprise value, changes in the supply or demand of the market for wireless licenses, adverse developments in U.S. Cellulars business or the wireless industry and/or other factors could require U.S. Cellular to recognize impairments in the carrying value of U.S. Cellulars investment in licenses, goodwill and/or physical assets.
Early redemptions of debt or repurchases of debt, changes in prepaid forward contracts, operating leases, purchase obligations or other factors or developments could cause the amounts reported under Contractual Obligations in U.S. Cellulars Managements Discussion and Analysis incorporated herein by reference, to be different from the amounts actually incurred.
Changes in accounting standards or U.S. Cellulars accounting policies, estimates and/or the assumptions underlying the accounting estimates, including those described under Application of Critical Accounting Policies and Estimates in U.S. Cellulars Managements Discussion and Analysis incorporated herein by reference, could have an adverse effect on its financial condition and results of operations.
Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending or future litigation could have an adverse effect on U.S. Cellulars financial condition, results of operations or ability to do business.
Costs, integration problems or other factors associated with acquisitions/divestitures of properties and or licenses could have an adverse effect on U.S. Cellulars financial condition or results of operations.
Changes in prices, the number of wireless customers, average revenue per unit, penetration rates, churn rates, selling expenses and net customer retention costs associated with wireless number portability, roaming rates and the mix of products and services offered in wireless markets could have an adverse effect on U.S. Cellulars operations.
Changes in roaming partners rates for voice services and the lack of standards and roaming agreements for wireless data products could place U.S. Cellulars service offerings at a disadvantage to those offered by other wireless carriers with more nationwide service territories and could have an adverse effect on U.S. Cellulars operations.
28
Changes in competitive factors with national and global wireless carriers could result in product and cost disadvantages and could have an adverse effect on U.S. Cellulars operations.
Changes in guidance or interpretations of accounting requirements, changes in industry practice or changes in management assumptions could require amendments to or restatements of disclosures or financial information included in this or prior filings with the SEC.
Uncertainty of access to capital for telecommunications companies, 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 it, which could require it to reduce its construction, development and acquisition programs.
Changes in income tax rates, tax laws, regulations or rulings, or federal or state tax assessments could have an adverse effect on U.S. Cellulars financial condition and results of operations.
War, conflicts, hostilities and/or terrorist attacks could have an adverse effect on U.S. Cellulars business.
Changes in general economic and business conditions, both nationally and in the markets in which U.S. Cellular operates, could have an adverse effect on U.S. Cellulars business.
Changes in fact or circumstances, including new or additional information that affects the calculation of accrued liabilities for contingent obligations under guarantees, indemnities or otherwise could require U.S. Cellular to record charges in excess of amounts accrued on the financial statements, if any, which could have an adverse effect on U.S. Cellulars financial condition and results of operations.
A material weakness in the effectiveness of internal control over financial reporting could result in inaccurate financial statements or other disclosures or permit fraud, which could have an adverse effect on U.S. Cellulars business, results of operations and financial condition. Assurances cannot be provided as to when such material weaknesses disclosed herein will be remediated.
The possible development of adverse precedent in litigation or conclusions in professional studies to the effect that radio frequency emissions from handsets, wireless data 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 a material adverse effect on U.S. Cellulars business operations, financial condition and results of operations.
Any of the foregoing events or other events could cause revenues, customer additions, operating income, capital expenditures and or any other financial or statistical information to vary from managements forward estimates included in this report by a material amount.
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.
29
The properties for mobile telephone switching offices, cell sites and retail locations 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 construction permit or license. U.S. Cellular has not experienced major problems with obtaining zoning approval for cell sites or operating facilities and does not anticipate any such problems in the future which are or will be material to U.S. Cellular and its subsidiaries as a whole. U.S. Cellulars investment in property is small compared to its investment in licenses, goodwill and wireless system equipment. As of December 31, 2004, U.S. Cellulars property, plant and equipment, net of accumulated depreciation, totaled $2,366.4 million.
U.S. Cellular leases an aggregate of approximately 212,000 square feet of office space for its headquarters buildings in Chicago, Illinois and Bensenville, Illinois.
U.S. Cellular considers the properties owned or leased by it and its subsidiaries to be suitable and adequate for their respective business operations.
U.S. Cellular is involved in a number of legal proceedings before the FCC and various state and federal courts. In some cases, the litigation involves disputes regarding rights to certain wireless telephone systems and other interests. U.S. Cellular does not believe that any of these proceedings, individually or in the aggregate, should have a material adverse impact on the financial position, results of operations or cash flows of U.S. Cellular.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of securities holders during the fourth quarter of 2004.
30
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Incorporated by reference from Exhibit 13 to this document, Annual Report section entitled U.S. Cellular Stock and Dividend Information and Consolidated Quarterly Information.
The following table provides certain information with respect to all purchases made by or on behalf of U.S. Cellular, and any open market purchase 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 2004.
U.S. CELLULAR PURCHASES OF COMMON SHARES(1)
|
|
(a) |
|
(b) |
|
(c) |
|
(d) |
|
|
Period |
|
Total Number of |
|
Average Price |
|
Total Number of |
|
Maximum Number of |
|
|
October 1 - 31, 2004 |
|
14,400 |
|
$ |
41.61 |
|
14,400 |
|
141,552 |
|
November 1 - 30, 2004 |
|
50,900 |
|
42.19 |
|
50,900 |
|
90,215 |
|
|
December 1 - 31, 2004 |
|
21,300 |
|
44.96 |
|
21,300 |
|
69,087 |
|
|
Total for or as of end of the quarter ended 12/31/04 |
|
86,600 |
|
$ |
42.77 |
|
86,600 |
|
69,087 |
|
(1) All of the above Common Shares were purchased under U.S. Cellulars publicly announced Common Share repurchase program.
(2) Represents the aggregate number of Common Shares that could have been purchased under U.S. Cellulars publicly announced Common Share repurchase program at the end of the applicable period, considering the amount of Common Shares repurchased during the three months preceding the end of such period.
The following is additional information with respect to U.S. Cellulars publicly announced Common Share repurchase program:
i. The date the program was announced was May 15, 2000 by Form 10-Q.
ii. The share amount originally approved was up to 1% of the number of outstanding Common Shares of U.S. Cellular not held by TDS or any affiliate thereof in any three-month period. As of December 31, 2004, this would permit U.S. Cellular to acquire up to 155,687 Common Shares in a three-month period based on the number of unaffiliated Common Shares outstanding on such date, less the number of shares purchased within three months prior to any specific purchase.
iii. There is no expiration date for the program.
iv. No Common Share repurchase program has expired during the fourth quarter of 2004.
v. U.S. Cellular has not determined to terminate the foregoing Common Share repurchase program prior to expiration, or to cease making further purchases thereunder, during the fourth quarter of 2004.
31
Item 6. Selected Financial Data
Incorporated by reference from Exhibit 13 to this document, Annual Report section entitled Selected Consolidated Financial Data, except for ratios of earnings to fixed charges, which are incorporated herein by reference from Exhibit 12 to this Annual Report on Form 10-K/A.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Incorporated by reference from Exhibit 13 to this document, Annual Report section entitled Managements Discussion and Analysis of Financial Condition of Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Incorporated by reference from Exhibit 13 to this document, Annual Report section entitled Market Risk.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference from Exhibit 13 to this document, Annual Report sections entitled Consolidated Statements of Operations, Consolidated Statements of Cash Flows, Consolidated Balance Sheets, Consolidated Statements of Changes in Common Shareholders 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.
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, management concluded that U.S. Cellulars disclosure controls and procedures were not effective as of December 31, 2004, at the reasonable assurance level, because of the material weaknesses described below. Notwithstanding the material weaknesses that existed as of December 31, 2004, management has concluded that the restated consolidated financial statements included in this Annual Report on Form 10-K/A present fairly, in all material respects, the financial position, results of operation and cash flows of U.S. Cellular and its subsidiaries in conformity with accounting principles generally accepted in the United States of America.
32
Managements Report on Internal Control Over Financial Reporting (Restated).
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. Our 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 generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and 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, 2004 based on the criteria in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management identified the following material weaknesses in internal control over financial reporting as of December 31, 2004:
1. U.S. Cellular did not have a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with its financial reporting requirements and the complexity of its operations and transactions. This control deficiency contributed to the material weakness discussed in item 2 below and the restatement of U.S. Cellulars annual consolidated financial statements for 2004, 2003 and 2002, the interim financial statements for all quarters in 2004 and 2003, the first and second quarter financial statements for 2005, as well as adjustments, including audit adjustments, to the third quarter of 2005 and the 2005 consolidated financial statements. Additionally, this control deficiency could result in a misstatement of substantially all accounts and disclosures that would result in a material misstatement to U.S. Cellulars interim or annual consolidated financial statements that would not be prevented or detected.
2. U.S. Cellular did not maintain effective controls over the completeness, accuracy, presentation and disclosure of its accounting for income taxes, including the determination of income tax expense, income taxes payable, liabilities accrued for tax contingencies and deferred income tax assets and liabilities. Specifically, U.S. Cellular did not have effective controls designed and in place to accurately calculate income tax expense and income tax payable, monitor the difference between the income tax basis and the financial reporting basis of assets and liabilities and reconcile the resulting basis difference to its deferred income tax asset and liability balances. This control deficiency resulted in the restatement of U.S. Cellulars annual consolidated financial statements for 2004, 2003 and 2002, the interim financial statements for all quarters in 2004 and 2003, the first and second quarter financial statements for 2005, as well as adjustments, including audit adjustments, to the third quarter of 2005 and the 2005 annual consolidated financial statements. Additionally, this control deficiency could result in a misstatement of the aforementioned accounts that would result in a material misstatement to U.S. Cellulars interim or annual consolidated financial statements that would not be prevented or detected.
33
In U.S. Cellulars original Annual Report on Form 10-K, management concluded that U.S. Cellular maintained effective internal control over financial reporting as of December 31, 2004. However, in connection with the restatement discussed under the heading Restatement in Note 1 to the consolidated financial statements, management has determined that the material weaknesses described above existed as of December 31, 2004. As a result of these material weaknesses, management has determined that U.S. Cellular did not maintain effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control Integrated Framework issued by the COSO. Accordingly, management has restated this report on internal control over financial reporting.
Managements assessment of the effectiveness of U.S. Cellulars internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is incorporated by reference into Item 8 of this Annual Report on Form 10-K/A.
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
Prior to the identification of the material weaknesses described above, U.S. Cellular had begun the following processes to enhance its internal control over financial reporting:
Controller Review Committee
The Controller Review Committee was formed in the fourth quarter of 2004 and consists of TDSs Corporate Controller and Assistant Corporate Controller, U.S. Cellulars Controller and TDS Telecoms Chief Financial Officer. The Committee meets regularly to discuss accounting treatment for current, unusual or nonrecurring matters. In addition, the Committee engaged external consultants to provide technical accounting training related to current accounting developments on a quarterly basis. TDS provides shared services to U.S. Cellular including assistance on technical accounting issues and external financial reporting.
Enhancements and additions to technical accounting personnel
TDS a Vice President and Assistant Corporate Controller was hired in the second quarter of 2005; a Manager, Accounting and Reporting was added in the second quarter of 2005 and a Manager, External Reporting was added in the third quarter of 2005. TDS provides shared services to U.S. Cellular including assistance on technical accounting issues and external financial reporting.
U.S. Cellular a Vice President and Controller was hired in the second quarter of 2005 and was designated as U.S. Cellulars principal accounting officer in the third quarter of 2005; a Director, Operations Accounting was hired in the second quarter of 2005 and a Manager, Accounting Policy was added in the first quarter of 2005.
U.S. Cellular believes the above changes have improved its internal control over financial reporting.
Management is currently addressing each of the material weaknesses in internal control over financial reporting and is committed to remediating them as expeditiously as possible. Management will devote significant time and resources to the remediation effort. Managements remediation plans include the following:
Review of Existing Internal Control Over Financial Reporting U.S. Cellular has engaged external consultants to assist in reviewing its existing internal control over financial reporting with the intent of improving the design and operating effectiveness of controls and processes. In addition, management has currently enhanced controls related to restatement items.
Training Management has engaged external consultants to assist U.S. Cellular in developing and implementing a training program specific to the needs of accounting personnel.
Recruiting U.S. Cellular has made several key additions to its technical accounting personnel in 2005, as discussed above. Management is currently assessing the need for additional personnel with skill sets to enhance the overall level of technical expertise and enable improvements in controls and processes.
34
Finance Leadership Team In late 2005, the Finance Leadership Team, consisting of key finance leaders from each of TDSs business units and Corporate headquarters, formed a Financial Infrastructure Committee. The Committee is planning for longer-term improvements in key business processes and support systems with an emphasis on preventive controls versus detective controls, and system-based controls versus manual controls.
Income Tax Accounting TDS provides shared services to U.S. Cellular including assistance with accounting for income taxes. TDS has engaged external tax advisors to assist in enhancing controls with respect to monitoring the difference between the income tax basis and financial reporting basis of assets and liabilities and reconciling the difference to the deferred income tax asset and liability balances. The scope of this project encompasses controls over income taxes on a TDS enterprise-wide basis, including U.S. Cellular. In addition, TDS is in the process of implementing a tax provisioning software which it believes will enhance its internal controls related to income taxes on a TDS enterprise-wide basis, including U.S. Cellular.
Changes in Internal Control Over Financial Reporting
Except for the Controller Review Committee discussed above, there were no changes in U.S. Cellulars internal control over financial reporting during the quarter ended December 31, 2004, that have materially affected, or are reasonably likely to materially affect U.S. Cellulars internal control over financial reporting. Also, as discussed herein, U.S. Cellular has made or intends to make material changes to internal control over financial reporting in order to remediate the material weaknesses discussed above.
None.
35
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from Proxy Statement sections entitled Election of Directors, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance.
Item 11. Executive Compensation
Incorporated by reference from Proxy Statement section entitled Executive Compensation, except for the information specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference from Proxy Statement section entitled Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters and Securities Authorized for Issuance under Equity Compensation Plans.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from Proxy Statement section entitled 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.
36
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as a part of this report:
(a) (1) Financial Statements
Consolidated Statements of Operations |
|
Annual Report* |
Consolidated Statements of Cash Flows |
|
Annual Report* |
Consolidated Balance Sheets |
|
Annual Report* |
Consolidated Statements of Changes in Common Shareholders Equity |
|
Annual Report* |
Notes to Consolidated Financial Statements |
|
Annual Report* |
Consolidated Quarterly Information (Unaudited) |
|
Annual Report* |
Managements Report on Internal Control Over Financial Reporting |
|
Annual Report* |
Report of Independent Registered Public Accounting FirmPricewaterhouseCoopers LLP |
|
Annual Report* |
* Incorporated by reference from Exhibit 13.
(2) Financial Statement Schedules
|
|
Location |
|
|
|||
Valuation and Qualifying Accounts for Each of the Three Years in the Period Ended December 31, 2004 |
|
||
|
|||
Report of Independent Registered Public Accounting FirmDeloitte & Touche LLP |
|
||
|
|||
|
|||
|
|||
|
|||
|
|||
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
37
The exhibits set forth in the accompanying Index to Exhibits are filed as a part of this Report. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 15(c) of this Report.
Exhibit |
|
Description of Document |
10.8 |
|
U.S. Cellular Corporation Regional Support Organization (Corporate) Executive Officer Annual Bonus Plan Effective January 1, 2004, as amended, is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellulars Current Report on Form 8-K dated March 4, 2005. |
|
|
|
10.9 |
|
Supplemental Executive Retirement Plan of TDS is hereby incorporated by reference to Exhibit 10.13 to U.S. Cellulars Annual Report on Form 10-K for the year ended December 31, 1994. |
|
|
|
10.10 |
|
United States Cellular Corporation Compensation Plan for Non-Employee Directors is hereby incorporated by reference to Exhibit 10.11 to U.S. Cellulars Annual Report on Form 10-K for the year ended December 31, 2002. |
|
|
|
10.11 |
|
United States Cellular Corporation 2003 Long-Term Incentive Plan, as amended, is hereby incorporated by reference to Exhibit B to United States Cellular Corporations Notice of Annual Meeting to Shareholders and Proxy Statement dated April 17, 2003. |
|
|
|
10.12 |
|
Retention Agreement for Kenneth R. Meyers dated September 13, 1999 is hereby incorporated by reference to Exhibit 10.27 to U.S. Cellulars Annual Report on Form 10-K for the year ended December 31, 1999. |
|
|
|
10.13 |
|
Executive Deferred Compensation AgreementPhantom Stock Account for 2005 between John E. Rooney and U.S. Cellular dated December 17, 2004 is hereby incorporated by reference to Exhibit 10.1 to United States Cellular Corporations Current Report on Form 8-K dated December 17, 2004. |
|
|
|
10.14 |
|
Executive Deferred Compensation AgreementPhantom Stock Account for 2006 between John E. Rooney and U.S. Cellular dated December 17, 2004 is hereby incorporated by reference to Exhibit 10.2 to United States Cellular Corporations Current Report on Form 8-K dated December 17, 2004. |
|
|
|
10.15 |
|
Executive Deferred Compensation AgreementInterest Account for 2005 between John E. Rooney and U.S. Cellular dated December 17, 2004 is hereby incorporated by reference to Exhibit 10.3 to United States Cellular Corporations Current Report on Form 8-K dated December 17, 2004. |
|
|
|
10.21 |
|
United States Cellular Corporation 2003 Employee Stock Purchase Plan is hereby incorporated by reference to Exhibit 99.1 to U.S. Cellulars Registration Statement on Form S-8 (Registration No. 333-103543). |
|
|
|
10.22 |
|
Form of 2005 Long-Term Incentive Plan Stock Option Award Agreement is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellulars Current Report on Form 8-K dated March 4, 2005. |
|
|
|
10.23 |
|
Form of 2005 Long-Term Incentive Plan Restricted Stock Unit Award Agreement is hereby incorporated by reference to Exhibit 10.2 to U.S. Cellulars Current Report on Form 8-K dated March 4, 2005. |
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of United States Cellular Corporation:
Our audits of the consolidated financial statements, of managements assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated March 11, 2005, except for the restatement discussed under the heading Restatement in Note 1 to the consolidated financial statements and the matter discussed in the penultimate paragraph of Managements Report on Internal Control Over Financial Reporting, as to which the date is April 26, 2006, incorporated by reference in Item 8 of this Form 10-K/A also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K/A. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As discussed in Note 1 to the financial statement schedule, the Company restated its financial statement schedule for each of the three years in the period ended December 31, 2004.
/s/ PricewaterhouseCoopers LLP |
|
|
|
Chicago, Illinois |
|
March 11, 2005, except for Note 1 as to which the date is April 26, 2006 |
S-1
UNITED STATES CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
Additions |
|
|
|
|
|
|||||||
Description |
|
Balance at |
|
Charged to |
|
Charged to |
|
Deductions |
|
Balance at |
|
|||||
Column A |
|
Column B |
|
Column C-1 |
|
Column C-2 |
|
Column D |
|
Column E |
|
|||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
For The Year Ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Deducted from deferred tax asset: |
|
|
|
|
|
|
|
|
|
|
|
|||||
For unrealized net operating losses |
|
$ |
(7,288 |
) |
$ |
(3,464 |
) |
$ |
(1,595 |
) |
$ |
|
|
$ |
(12,347 |
) |
Deducted from accounts receivable: |
|
|
|
|
|
|
|
|
|
|
|
|||||
For doubtful accounts (as restated) |
|
(12,514 |
) |
(47,546 |
) |
|
|
49,240 |
|
(10,820 |
) |
|||||
For The Year Ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Deducted from deferred tax asset: |
|
|
|
|
|
|
|
|
|
|
|
|||||
For unrealized net operating losses |
|
(8,726 |
) |
1,313 |
|
125 |
|
|
|
(7,288 |
) |
|||||
Deducted from accounts receivable: |
|
|
|
|
|
|
|
|
|
|
|
|||||
For doubtful accounts (as restated) |
|
(17,704 |
) |
(57,533 |
) |
|
|
62,723 |
|
(12,514 |
) |
|||||
For The Year Ended December 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Deducted from deferred tax asset: |
|
|
|
|
|
|
|
|
|
|
|
|||||
For unrealized net operating losses |
|
(12,875 |
) |
1,631 |
|
2,518 |
|
|
|
(8,726 |
) |
|||||
Deducted from accounts receivable: |
|
|
|
|
|
|
|
|
|
|
|
|||||
For doubtful accounts (as restated) |
|
$ |
(9,601 |
) |
$ |
(63,536 |
) |
$ |
|
|
$ |
55,433 |
|
$ |
(17,704 |
) |
Note 1:
As discussed in under the heading Restatement Note 1 of the Consolidated Financial Statements, U.S. Cellular and its audit committee concluded on November 9, 2005, that U.S. Cellular would amend its Annual Report on Form 10-K for the year ended December 31, 2004 to restate its financial statements and financial information for each of the three years in the period ended December 31, 2004 including quarterly information for 2004 and 2003, and certain selected financial data for the years 2001 and 2000. U.S. Cellular and its audit committee also concluded that U.S. Cellular would amend its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2005 and June 30, 2005 to restate the financial statements and financial information included therewith.
S-2
The restatement included correction of errors in accounting for contract termination fees billed to customers, operations of consolidated partnerships managed by a third party and income taxes. U.S. Cellular corrected its accounting to record revenues related to contract termination fees only upon collection, in recognition of the fact that the collectibility of the revenues was not reasonably assured at the time of billing. U.S. Cellular also corrected its accounting for operations of consolidated partnerships managed by a third party to recognize results of operations in the appropriate period based on the partnerships actual results of operations reported for such periods. The allowance for doubtful accounts was affected by these corrections. A reconciliation of deferred tax assets and liabilities resulted in a correction of deferred tax assets related to state net operating losses and the corresponding valuation allowances on the deferred tax assets. As a result, the categories noted below for the financial statement schedule information relating to the allowance for doubtful accounts and valuation allowances for deferred tax assets for each of the three years in the period ended December 31, 2004 have been restated. The impact of the restatement for the years ended December 31, 2002, 2003 and 2004 is as follows:
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Additions |
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Description |
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Balance at |
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Charged to |
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Charged to |
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Deductions |
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Balance at |
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Column A |
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Column B |
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Column C-1 |
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Column C-2 |
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Column D |
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Column E |
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(Dollars in thousands) |
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For the Year Ended December 31, 2004 |
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Deducted from deferred tax asset: |
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For unrealized net operating losses |
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As Previously Reported |
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$ |
(10,480 |
) |
$ |
(4,459 |
) |
$ |
(5,304 |
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$ |
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$ |
(20,243 |
) |
Adjustment |
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3,192 |
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995 |
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3,709 |
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7,896 |
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As Restated |
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(7,288 |
) |
(3,464 |
) |
(1,595 |
) |
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(12,347 |
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Deducted from accounts receivable: |
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For doubtful accounts |
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As Previously Reported |
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(13,786 |
) |
(78,112 |
) |
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73,621 |
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(18,277 |
) |
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Adjustment |
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1,272 |
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30,566 |
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(24,381 |
) |
7,457 |
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As Restated |
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(12,514 |
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(47,546 |
) |
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49,240 |
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(10,820 |
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For the Year Ended December 31, 2003 |
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Deducted from deferred tax asset: |
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For unrealized net operating losses |
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As Previously Reported |
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(13,224 |
) |
3,391 |
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(647 |
) |
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(10,480 |
) |
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Adjustment |
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4,498 |
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(2,078 |
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772 |
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3,192 |
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As Restated |
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(8,726 |
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1,313 |
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125 |
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(7,288 |
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Deducted from accounts receivable: |
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For doubtful accounts |
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As Previously Reported |
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(17,866 |
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(61,051 |
) |
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65,131 |
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(13,786 |
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Adjustment |
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162 |
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3,518 |
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(2,408 |
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1,272 |
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As Restated |
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(17,704 |
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(57,533 |
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62,723 |
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(12,514 |
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For the Year Ended December 31, 2002 |
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Deducted from deferred tax asset: |
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For unrealized net operating losses |
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