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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
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FORM 10-K
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(Mark One)
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[x]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the
fiscal year ended December 31, 2016
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 001-09712
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UNITED STATES CELLULAR CORPORATION
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(Exact name
of Registrant as specified in its charter)
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Delaware
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62-1147325
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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8410 West Bryn Mawr, Chicago, Illinois 60631
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(Address of principal
executive offices) (Zip code)
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Registrant's Telephone Number: (773) 399-8900
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common Shares, $1 par value
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New York Stock Exchange
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6.95% Senior Notes Due 2060
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New York Stock Exchange
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7.25% Senior Notes Due 2063
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New York Stock Exchange
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7.25% Senior Notes Due 2064
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes [ ]
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No [x]
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Indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
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Yes [ ]
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No [x]
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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.
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Yes [x]
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No [ ]
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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 registrant's 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.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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[x]
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
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Yes [ ]
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No [x]
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As of June 30, 2016, the aggregate market value of the registrant's Common Shares held by non-affiliates was approximately $545 million, based upon the closing price of the Common Shares on June 30,
2016 of $39.27, as reported by the New York Stock Exchange. For purposes hereof, it was assumed that each director, executive officer and holder of 10% or more of any class of voting equity security of U.S. Cellular is an affiliate.
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The number of
shares outstanding of each of the registrant's classes of common stock, as of January 31, 2017, is 51,843,000 Common Shares, $1 par value, and 33,006,000 Series A Common Shares, $1 par value.
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DOCUMENTS INCORPORATED BY REFERENCE
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Those sections or portions of the registrant's 2016 Annual Report to Shareholders (“Annual Report”), filed as Exhibit 13 hereto, and of the registrant’s Notice of Annual Meeting of Shareholders and Proxy Statement (“Proxy Statement”) to be
filed prior to April 30, 2017 for the 2017 Annual Meeting of Shareholders scheduled to be held May 23, 2017, are herein incorporated by reference into Parts
II and III of this report.
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United States Cellular Corporation
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Annual Report on Form 10-K
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For the Period Ended December 31, 2016
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TAB
LE OF CONTENTS
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PA
RT
I
Item
1.
Busi
ness
General
United States Cellular Corporation (“U.S.
Cellular”) provides wireless telecommunications services to
customers with
approximately
5.0
million
connections
in
23
states
collectively representing a total population of
32
million.
U.S. Cellular oper
ates in one reportable segment
, and all of its wireless
operating markets are in the United States.
-
U.S. Cellular’s strategy is to attract and retain wireless customers through a value proposition comprised of a high-quality network
, outstanding customer service, and
competitive devices, plans, and pricing,
al
l provided
with a local focus.
-
U.S. Cellular Common Shares trade on the New York Stock Exchange (“NYSE”) under the ticker
symbol “USM.”
-
U.S.
Cellular is a majority-owned subsidiary of Telephone and Data Systems,
Inc. (NYSE: TDS).
As of December 31,
2016
,
TDS owns
83%
of U.S. Cellular common stock,
has the voting power to elect all of the directors of U.S. Cellular and controls over 96% of the voting power in matters other than the election of directors of U.S. Cellular.
-
U.S. Cellular was incorporated under the laws of the state of Delaware in 1983.
The map below highlights areas of operation of U.S. Cellular’s consolidated operating markets.
Customers, Services and Products
Customers.
U.S.
Cellular
provides service to postpaid and prepaid customers from a variety of demographic segments. U.S. Cellular focuses on retail consumers, government
s
, and small-to-mid-size business customers in industries such as construction, retail,
agriculture,
profession
al services and real estate.
These customers are served primarily through U.S. Cellular’s retail and direct sales channels. U.S. Cellular builds customer loyalty by offering high-quality network services,
outstanding
customer
-
foc
used support services, co
mpetitive
pricing, and other benefits as discussed further in “Marketing, Customer Service, and Sales and Distribution Channels.”
Services.
U.S.
Cellular’s postpaid customers are able to choose from a variety of national plans with voice, messaging and da
ta usage options and pricing that are designed to fit different customer needs, usage patterns and budgets.
Helping a customer find the right pricing plan is an important element of U.S.
Cellular’s brand positioning.
U.S. Cellular offers Shared
Connect d
ata plans wh
ich
allow
customers
to
share data usage among all users and devices connected to the plan.
Business rate plans are designed to meet the unique needs of the business customer.
U.S. Cellular’s national plans price all domestic calls as local ca
lls, regardless of where they are made or received in the United States, with no long distance or roaming charges
,
made possible by
roaming
agreement
s
with other wireless carriers
.
See “System Usage” section below for further discussion related to roaming
.
U.S. Cellular also offers
monthly
prepaid service
plans, which provide
customers unlimited voice and unlimited messaging with a specified amount of high
-
speed data and unlimited data at lower speeds once the high
-
speed data limit is reached to ensure cu
stomers are never witho
ut data access
.
U.S. Cellular’s portfolio of smartphones, tablets and other connected devices is a key part of its strategy to deliver wireless devices which allow customers to stay productive, entertained and connected on the go
; th
ese devices
are backed by U.S. Cellular’s high-speed networks, including a
fourth generation (“
4G
”) Long-Term Evolution
(“
LTE
”)
network, which
covers 99% of
its postpaid
connections and supports nationwide roaming
.
U.S. C
ellular’s 4G LTE network features
smartphone messaging, data and internet services that allow customers to access the web and social network sites, e-mail, text, picture and video message, utilize turn-by-turn GPS navigation, and browse and download thousands of applications to customize t
heir wireless de
vices to fit their lifestyles.
U.S. Cellular
also offers advanced wireless
solutions to
consumers and
business and government customers, including a growing suite of
connected
machine to machine solutions
and software applications
across the categories of monitor
and
control (e.g.
, sensors and
cameras), business automation/operations (e.g.
,
e-forms), communication (e.g.
,
enterprise messaging,
back-up router for business continuity services) and asset management (e.g.
,
telematics,
fl
eet management). U.S. Cellular
intends to
continue to further enhance
these offerings
for consume
r and business customers in 2017
and beyond.
Devices and Products.
U.S.
Cellular offers a comprehensive range of wireless devices such as handsets,
tablets
,
mobile hotspots, home phone
s
and
routers
for use by its customers.
U.S. Cellular offers wireless devices that are compatible with its 4G LTE and
third generation (“
3G
”)
networks and
are compliant with the
Federal Co
mmunications Commission (“FCC”) enhanced
wireless 911
requiremen
ts.
In addition, U.S. Cellular also offers a wide range of accessories, including wireless basics such as
cases,
screen protectors
, chargers, and memory cards
as well as an ever growing assortment of
consumer electronics such as he
adphones, speakers, and
hands-free devices
.
In addition, U.S. Cellular recently introduced an assortment of home automation products (e.g., cameras, sensors, thermostats).
During 2016, U.S. Cellular offered
c
ustomers the option to purchase devices under t
wo alternatives: (1) through equipment
installment contracts over a spec
ified time
period
, where no annual service contract is signed and a discount is provided on their connection charge or (2) alternative plans that are subject to a service contract. S
tarting in September 2016, however, new postpaid handset sales to retail consumers are made under equipment installment plans only; business and government customers may continue to purchase equipment under either alternative.
For certain inst
allment plan
s, after a specified
period of time, the customer may have the right to upgrade to a new device
prior to reaching the end of the installment term
, thus enabling customers
to access the latest smartphones
and provide a bet
ter overall customer experience.
U.S. Cel
lular continues to offer device service
programs that
provide customers a simple process to replace a damaged or defective
device through a retail store or
via
direct mail.
U.S. Cellular also offers its Device Protection+ program which includes overnight delivery
of a replacement device
for
lost and stolen devices.
In 2016, U.S. Cellular launched Device Protection+ Advanced, which includes 100GB of data backup
, TechSupport+, and AppleCare services for Apple iOS customers.
U.S. Cellular offers a full array of both iconic and value smartphones with options for both Android and iOS customers. U.S. Cellular continues to bolster its expanding smartphone portfolio w
ith the Samsung Galaxy S® 7 and S® 7 Edge, the iPhone® 7 and 7 Plus, the LG V20 and K8, and the Motorola G4 Play. Along with the iconic devices, U.S. Cellular supports the larger ecosystem of Samsung and Apple devices, such as the Samsung Gear VR, the Sam
sung Gear S2 and the Apple Watch. For tablets, U.S. Cellular offer
s
the full complement of iPads, the Samsung Galaxy Tab S2, the LG G Pad F™ 8.0 LTE, and the ZTE ZPad™. U.S. Cellular’s smartphone offerings play a significant role in attracting customers
and driving data service usage and revenues.
U.S. Cellular also offers
additional products and services that utilize the company’s network, including feature phones, mobile hotspots, LTE wireless routers and home phones.
U.S. Cellular purchases wireless
devices and accessory products from a number of original equipment manufacturers, including Samsung, Apple, Motorola, LG, Kyocera, ZTE, and
Tessco
. U.S. Cellular also has relationships with its suppliers to ensure best possible pricing and identifies opp
ortunities for promotional support.
Additionally, in 2016 U.S. Cellular completed multiple auctions to
optimize pricing from
accessories
suppliers
and was able to realize lower costs
as a result
. U.S. Cellular does not own significant product warehousing
and distribution infrastructure; rather, it contracts with third party providers for the majority of its product warehousing, distribution and direct customer fulfillment activities. U.S. Cellular also contracts with third party providers for services re
lated to its device service programs.
U.S. Cellular continuously monitors the financial condition of its wireless device a
nd accessory suppliers.
Since U.S. Cellular has a diversified portfolio of products
from
more than one supplier
, U.S. Cellular does n
ot expect the financial condition of any single supplier to affect its ability to offer a competitive
portfolio
of wireless devices and accessories for sale to customers.
Marketing, Customer Service, and Sales and Distribution Channels
Marketing and Advert
ising.
U.S.
Cellular’s marketing plan is focused on acquiring, retaining and growing customer
relationships by maintaining a
high-quality
wireless network, providing outstanding customer service, and offering
a comprehensive portfolio of
products and serv
ices built aroun
d customer needs at fair prices with a local focus.
U.S. Cellular believes that creating positive relationships with its customers enhances their wireless experience and builds customer loyalty.
U.S. Cellular currently offers several custo
mer-centric programs and services to customers.
The Overage Protection service provides customers peace of mind by sending them text message alerts when they come close to reaching their allowable monthly plan minutes, text messages or data usage in order
to avoid overage charges.
U.S. Cellular also offers a service
to customers on Shared Connect data plans to allow them
to limit data usage on specific lines – or for the entire account – thereby providing controls to manage account overages.
This service
, Data Usage Controls, allows customers an easy way to
divide
their data bucket by line.
U.S.
Cellular’s advertising is directed at increasing the public awareness
of the U.S. Cellular brand
and understanding of the wireless services it offers,
to attract
potential customers, retain existing customers and increase
their
usage of
U.S. Cellular’s
services.
U.S.
Cellular supplements its advertising with a focused public relations program that drives store traffic, supports sales of products and services, and
builds brand awareness and preference.
The approach combines national and local media relations in mainstream and social media channels with market-wide activities, events, and sponsorships.
U.S. Cellular focuses its charitable giving strategy on support
ing initiatives relevant to consumers in its service areas.
These initiatives include support of programs that focus on youth in the communities U.S. Cellular serves, such as the Boys and Girls Clubs and 4H Societies of America.
Customer Service.
U.S.
Ce
llular manages customer retention by focusing on outstanding customer service through the development of processes that are customer-friendly, extensive training of frontline sales and support associates and the implementation of retention programs.
U.S.
C
ellular currently operates four regional customer care centers
in its operating markets
with personnel who are responsible for customer service activities, and a national financial services center with personnel who perform credit and other customer paymen
t activities.
U.S. Cellular also contracts with third parties that provide additional customer care and financial services support.
Sales and Distribution Channels.
U.S.
Cellular supports a multi-faceted distribution program, including retail sales,
direct sales, third-party national retailers, and independent agents, plus a website and telesales.
Company retail store locations are designed to market wireless products and services to the consumer and small business segments in a setting familiar to th
ese types of customers.
As of
December 31, 2016
,
retail sales associates work in
267 U.S. Cellular-operated retail stores and kiosks. Direct
sales consultants market wireless services to mid-size business
and gov
ernment
customers. Additionally, the U.S.
Cellular website enables customers to activate service and purchase wireless devices online.
U.S.
Cellular maintains an ongoing training program to improve the effectiveness of retail sales associates and direct s
ales consultants by focusing their efforts on obtaining customers by facilitating the sale of appropriate packages for the customer’s expected usage and value-added services that meet the individual needs of the customer.
U.S.
Cellular has relationships wi
th exclusive and non-exclusive agents
(collectively “agents”). Those agents
are independent businesses that obtain customers for U.S.
Cellular on a commission basis
.
At
December 31, 2016
, U.S.
Cellular had contracts with these businesses aggregating 523 locations.
U.S.
Cellular provides additional
support and training to its
agents to increase customer satisfaction and to ensure a consistent customer experience.
U.S.
Cellular’s agents a
re generally in the business of selling wireless devices, wireless service packages and other related products.
No single agent accounted for 10% or more of U.S. Cellular’s operating revenues during the past three years.
U.S. Cellular products and service
s are also offered
through third-party national and on-line retailers. Wal-Mart, Sam’s Club, and Dollar General offer U.S. Cellular products and services at select retail locations in U.S. Cellular’s service areas. Further, Amazon offers U.S. Cellular’s
postpaid and prepaid services on-line.
U.S. Cellular continues to explore new relationships with additional third-party retailers as part of its strategy to expand distribution.
Seasonality.
S
easonality
in operating expenses may cause operating income to
vary from quarter to quarter. U.S. Cellular’s operating expenses
tend to
be higher in the fourth quarter
due to increased marketing and promotional activities during t
he holiday season.
Competition
The wireless telecommunication industry is highly
competitive.
U.S.
Cellular competes directly with several wireless service providers in each of its markets. In general, there are between two and four competitors in each wireless market in which U.S. Cellular provides service, excluding resellers and m
obile virtual network operators. In its footprint, U.S. Cellular competes to varying degrees
against each of the national wireless companies: Verizon Wireless, AT&T Mobility, Sprint, and T-Mobile USA, in addition to a few smaller regional carriers in spec
ific
areas
of its footprint.
A
ll of the national competitors have substantially greater
financial and other
resources than U.S.
Cellular. Additionally, U.S. Cellular competes with other companies that use alternative communication technology and services
to provide similar products and services.
Since each of these wireless competitors operates on systems using spectrum licensed by the FCC and has comparable technology and facilities, competition among wireless service providers for customers is principal
ly on the basis of types of products and services, price, size of area covered,
network
quality, network speed and responsiveness of customer service.
U.S. Cellular employs a customer satisfaction strategy that includes maintaining an outstanding wireless
network throughout its markets.
U.S. Cellular owns and operates low-band spectrum (less than 1 GHz) that covers the majority of its footp
rint and enables more efficient
coverage in rural areas (compared to spectrum above 1 GHz), which strengthens its net
work quality positioning.
As discussed below, the FCC is currently completing the auction process for a new tranche of low-band spectrum, the 600 MHz band.
To the extent existing competitors or new entrants acquire such spectrum in U.S. C
ellular markets,
U.S. Cellular c
ould face increased competition
over time
from competitors that hold
such more-efficient
low-band spectrum.
The use of national advertising and promotional programs by the top four wireless service providers
is
a source of additional competitive and pricing pressures in all U.S. Cellular markets, even if those operators do not provide direct service in a particular market.
Over the past year, competition among top carriers has continued to be aggressive, with t
he top four carriers engaging in rich promotional initiatives including contract buyouts and limited-time and permanent price reductions.
In addition, in the current wireless environment, U.S. Cellular’s ability to compete depends on its ability to contin
ue to offer national voice and data plans.
U.S. Cellular provides wireless services comparable to the national competitors, but the national wireless companies operate in a wider geographic area and are able to
provide such services
over a wider area on t
heir own networks than U.S. Cellular can offer on its network.
Although U.S. Cellular offers
similar
coverage area as these competitors, U.S. Cellular incurs roaming charges for data sessions and calls made in portions of the coverage area which are not p
art of its network, thereby increasing its cost of operations. U.S. Cellular depends on roaming agreements with other wireless carriers to provide voice and data roaming capabilities in areas not covered by U.S. Cellular’s network. Similarly, U.S. Cellul
ar provides roaming services on its network to other wireless carriers’ customers who travel within
U.S. Cellular’s coverage areas and receives revenue from other carriers for the provision of these services.
Convergence of connectivity is taking place on
many levels, including wirel
ess devices that can act as wireless or wireline replacement
devices and the incorporation of wireless “hot spot” technology in wireless devices making internet access seamless regardless of location.
Although less directly a s
ubstitute for other wireless services, wireless data services such as Wi-Fi may be adequate for those who do not need mobile wide-area roaming or full two-way voice services.
Technological advances or regulatory changes in the future, such as the rollout
and consumer adoption of Wi-Fi calling and Voice over Long
-
Term Evolution (“VoLTE”) capabilities, may make available other alternatives to
current
wireless service, thereby creating additional sources of competition that shift consumers’ perceptions and pr
eferences of network strength, speed and reliability.
If
the trend toward
convergence
continues
, U.S. Cellular is at a competitive disadvantage to larger competitors, including the national wireless carriers
, traditional cable companies, mobile virtual ne
twork operators (“MVNO”)
and other potential large new entrants
with much greater financial and other resources in adapting to such convergence.
U.S. Cellular’s approach in
2017
and in future years will be to focus on
the unique needs and attitudes of i
ts customers
towards wireless service.
U.S. Cellular will deliver high-
quality products and services at competitive prices and
intends to
continue to differentiate itself by seeking to provide an overall outstanding custom
er experience, founded on a high-
quality network. U.S. Cellular’s ability to compete successfully in the future
will depend upon its ability to anticipate and respond to changes related to new service offerings, consumer preferences, competitors’ pricing strategies
and new product offeri
ngs
, technology, demographic trends, economic conditions and its access to adequate spectrum resources.
System Usage
U.S.
Cellular’s main sources of revenues are from its own customers and from customers of
other wireless operators who roam on its network.
An inter-carrier roaming agreement is negotiated between the wireless operators to enable
customer
s who are
in a wireless service area other than the customer’s home service area to place or receive a call
, SMS
or use data in that service area.
U.S.
Cel
lular has entered into reciprocal roaming agreements with operators of other wireless systems covering virtually all systems with Code Division Multiple Access (“CDMA”) technology in the United States, Canada and Mexico.
In addition, U.S. Cellular has ent
ered into
4G LTE roaming agreement
s with national wireless companies and, as a result, a majority of U.S. Cellular customers currently have access to nationwide 4G LTE service
.
When roaming on another wireless carrier’s network, customers will
automatica
lly pre-register
on the serving carrier’s network allowing customers to make or receive calls, SMS or use data.
The charge for this service is negotiated as part of the roaming agreement between U.S.
Cellular and the roaming customer’s carrier. U.S.
Cell
ular bills this charge to the customer’s home carrier, which then may bill the customer.
In many instances, based on competitive factors, carriers, including U.S.
Cellular,
may or may
not charge their customers
for roaming.
Since 2010, U.S. Cellular has
offered nationwide 3G data roaming services, allowing its customers to access high-speed data across the country.
Access Technology and System Design
Technology.
Wireless telecommunication systems transmit voice, data, graphics and video through the tra
nsmission of signals over networks of radio towers using radio spectrum licensed by the FCC.
Access to local, regional, national and worldwide telecommunications networks is provided through system interconnections.
A high-quality network, supported by c
ontinued investments in that network, will
remain an important factor for U.S. Cellular
to remain competitive.
4G LTE technology enables more network capacity for more data per user as well as faster access to data. U.S. Cellular continues to devote efforts to enhance its network capabilities with the deployment of VoLTE technology and plans a multi-year roll out
with one market in early 2017.
VoLTE will allow
U.S. Cellular’s customers and
customers
of other wireless carriers that have roaming agreements with U.S. Cellular
to utilize U.S. Cellular’s LTE network for voice and data services.
U.S. Cellular continues
to offer
services based on 3G technology and CDMA digital technology across its networks.
Through roaming agreements with other
U.S. based
wireless carriers, U.S. Cellular’s customers may access CDMA
and 4G LTE
service
s
in virtually all areas of the Unite
d States, as well as
CDMA in
parts of Canada and Mexico.
Another digital technology, Global System for Mobile Communication (“GSM”), has a larger installed base of customers worldwide. U.S. Cellular customers now have the ability to roam on GSM carriers
with voice, data and SMS in Canada, Mexico and internationally.
Both CDMA and GSM technologies are being succeeded by 4G LTE technology.
System Design and Construction.
U.S.
Cellular designs and constructs its systems in a manner it believes will permi
t it to provide high-quality service to substantially all types of compatible wireless devices.
Designs are based on engineering studies which relate to specific markets, in support of the larger network.
Network reliability is given careful consideratio
n and extensive backup redundancy is employed in many aspects of U.S. Cellular’s network design.
Route diversity, redundant equipment, ring topology and extensive use of emergency standby power also are used to enhance network reliability and minimize ser
vice disruption from any particular network element failure.
In accordance with its strategy of building and strengthening its operating market areas, U.S. Cellular has selected high-capacity, carrier-class digital wireless switching systems that are capab
le of serving multiple markets through a single mobile telephone switching office.
Centralized equipment, used for network and data management, is located in high-availability facilities supported by multiple levels of power and network redundancy. U.S.
Cellular’s systems are designed to incorporate Internet Protocol (“IP”) packet-based Ethernet technology, which allows for increased data capacity and a more efficient network. Interconnection between the mobile telephone switching office and the cell sit
es utilizes Ethernet technology for nearly all 4G LTE sites, over fiber or microwave links.
U.S. Cellular believes that currently available technologies and appropriate capital additions will allow sufficient capacity on its networks to meet anticipated de
mand for voice and data services over the next few years. However, increasing demand for high-speed
data
may require the acquisition of additional spectrum licenses to provide sufficient capacity and throughput.
Construction of wireless systems is capital
-intensive, requiring substantial investment for land and improvements, buildings, towers, mobile telephone switching offices, cell site equipment, transport equipment, engineering and installation.
U.S. Cellular primarily uses its own personnel to engine
er each wireless system it owns and operates, and engages contractors to construct the facilities.
The costs (inclusive of the costs to acquire licenses) to develop the systems which U.S.
Cellular operates have historically been financed primarily through proceeds from debt and equity
offerings, with cash generated by operations, and proceeds from the sales of wireless interests and other non-strategic assets.
Business Development Strategy
U.S. Cellular groups its individual markets (geographic service areas as defined by the FCC in whi
ch wireless carriers are licensed, for fixed terms, to provide service) into broader geographic market areas to offer customers large service areas that primarily utilize U.S. Cellular’s network.
U.S. Cellular’s ownership interests in wireless licenses in
clude both consolidated and investment interest
s in operating and non-operating licenses covering portions
of
32
states
and a total population
of
50
million
at
December 31, 2016
.
U.S. Cellular’s business development strategy is to obtain interests in and access to wireless licenses in its current operating markets and in areas that are adjacent to or in close proximity to its other wireless licenses, thereby building contiguous ope
rating market areas.
U.S. Cellular believes that the acquisition of additional licenses within its current operating markets will enhance its network capacity
and speed
to meet its customers’
growing
demand for data services.
U.S. Cellular may continue t
o make opportunistic acquisitions or exchanges that further strengthen its
current operating markets
.
From time to time, U.S. Cellular has divested outright or included in exchanges for other wireless interests certain consolidated and investment interest
s that were considered less essential to its current and expected future operations.
As part of its business development strategy, U.S. Cellular may
periodically
be engaged in negotiations relating to the acquisition, exchange or disposition of companies,
strategic properties or wireless spectrum.
See
Note
6
—
Acquisitions, Divestitures and Exchanges
in the Notes to Consolidated Financial Statements for a description of significant acqui
sitions, divestitures
and exchanges in the years
2014
through
2016
.
Occasionally, the FCC conducts auctions through which additional spectrum is made available for the provision of wirele
ss services.
Historically,
U.S. Cellular has participated in certain prior FCC auctions indirectly through its limited partnership interests.
Each entity that qualified as a “designated entity” was eligible for bidding credits with respect to most licens
es purchased in accordance with the rules defined by the FCC for each auction.
In most cases, the bidding credits resulted in a 25% discount from the gross winning bid.
In January 2015, the FCC released the results of Auction 97.
U.S. Cellular participa
ted in Auction 97 indirectly through its limited partnership interest in Advantage Spectrum L.P.
Advantage Spectrum L.P. applied as a “designated entity” and received bid credits resulting in a 25% discount with respect to spectrum purchased in Auction 97
. See Note
13
—
Variable Interest Entities
in the Notes to Consolidated Financial Statements for additional information.
U.S. Cellular may participate as a bidder, or member of a bidding group, in future auctions.
In
July 2016
,
the FCC announced
U.S. Cellular
as a qualified bidder in the FCC’s forward
auction
of
600MHz
spectrum
licenses
,
referred to as Auction 100
2
.
Due to changes in FCC rules, U.S.
Cellular did not apply to participate in Auction 100
2
by investing in a “designated entity” limited partnership which would have qualified for a discount of 25% on any licenses won in the auction. Instead, U.S. Cellular applied to participate in the aucti
on directly and will not qualify for any discount on licenses th
at may be won in the auction.
See Exhibit 13 to this Form 10-K, under “Regulatory Matters – FCC Auction 1002” for a summary of
U.S. Cellular’s participation in
Auction 100
2
.
Regulation
U.S.
Cellular’s operations are subject to federal, state and local regulation. Key regulatory consi
derations are discussed below.
Additional information relating to U.S. Cellular’s regulatory environment is
in Risk Factors and
incorporated by reference from E
xhibit 13 to this Form 10-K, Annual Report section “Regulatory Matters
.
”
U.S. Cellular provides various wireless services, including voice and data services, pursuant t
o licenses granted by the FCC.
The construction, operation and transfer of wireless sys
tems in the United States are regulated to varying degrees by the FCC pursuant to the Communications Act of 1934, as a
mended (“Communications Act”).
The FCC currently does not require wireless carriers to comply with a number of statutory provisions other
wise applicable to common carriers that provide, originate or terminate interstate or international telecommunications.
However, the FCC has enacted regulations governing construction and operation of wireless systems, licensing (including renewal of lice
nses) and technical standards for the provision of wireless services under the Communications Act.
Wireless licenses
segmented by geographic areas
are granted by the FCC.
The completion of acquisitions, involving the transfer of control of all or a portio
n of a wireless system
,
requires prior FCC approval.
The FCC determines on a case-by-case basis whether an acquisition of wireless licenses is in the public interest.
Wireless licenses are granted
generally for a ten year term or, in some cases, for a
fi
fteen year term.
The FCC establishes the
standards for conducting comparative renewal proceedings between a wireless license holder seeking renewal of its license and challengers filing competing applications.
All of U.S. Cellular’s licenses for whic
h it
applied for renewal since 1995
have been renewed.
U.S. Cellular expects to
continue to meet the criteria of the FCC’s
license renewal process.
As part of its data services, U.S. Cellular provides internet access.
Such internet access services may be sub
ject to different regulatory requirements than other wireless services.
Reference is made to
Exhibit 13 to this Form 10-K under “Regulatory Matters
”
for information regarding any significant recent developments and proposals relating to the foregoing regul
atory matters
.
Although the Communications Act generally pre-empts state and local governments from regulating the entry of, or the rates charged by, wireless carriers, certain state and local governments regulate other terms and conditions of wireless ser
vices, including billing, termination of service arrangements, imposition of early termination fees, advertising, network outages, the use of handsets while driving, zoning and land use.
Further, the Federal Aviation Administration also regulates the siti
ng, lighting and construction of transmitter towers and antennae.
Debt Securities
The following securities trade on the NYSE: U.S. Cellular’s 6.95% Senior Notes due 2060 trade und
er the symbol “UZA,
” U.S. Cellular’s 7.25% Senior Notes due 2
063 trade under the symbol “UZB,
”
and
U.S.
Cellular’s 7.25% Senior Notes due 2064 trade under the symbol “UZC
.
”
U.S. Cellular’s 6.7% Senior Notes due 2033 are traded over the counter and are not listed on any stock exchange.
Employees
U.S.
Cellular had
approximately
6,300
full-time
and part-time employees
as of
December 31, 2016
.
None
of U.S.
Cellular’s employees are represented by labor organizations. U.S. Cellular considers its relationship with its employees to be good.
Locat
ion and Company Information
U.S. Cellular executive offices are located at 8410 West Bryn Mawr Avenue, Chicago, Illinois 60631. U.S. Cellular’s telephone number is 773-399-8900
.
U.S.
Cellular’s website address is
www.uscellular.com.
U.S. Cellular files with, or furnishes to, the S
ecurities and
Exchange Commission (“SEC”) annual reports on Form
10-K, quarterly reports on Form
10-Q, current reports on Form
8-K, as well as various other information.
Investors may access, free of charge, through the Investor Relations portion of the w
ebsite, U.S.
Cellular’s annual reports on Form
10-K, quarterly reports on Form
10-Q, current reports on Form
8-K, and amendments to such reports filed or furnished pursuant to Section
13(a)
or 15(d)
of the Exchange Act as soon as reasonably practical after
such material is filed electronically with the SEC. The public may read and copy any materials U.S. Cellular files with the SEC at the SEC’s Public Reference Room
at 100 F Street, NE, Washington D.C. 20549.
The public may obtain information on the opera
tion of the Reference Room
by calling the SEC at 1-800-732-0330.
The public may also view electronic filings of U.S. Cellular by accessing SEC filings at
www.sec.gov.
Item
1A.
R
isk Factors
PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
SAFE HARBOR
CAUTIONARY STATEMENT
This Annual Report on Form
10-K,
including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995
.
All statements, other than statements of historical facts, that address activities, events or developments that U.S. Cellular intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking state
ments.
The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them.
Such forward-lookin
g 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 s
tatements.
Such risks, uncertainties and other factors include those set forth below under “Risk Factors” in this Form
10-K. Each of the following risks could have a material adverse effect on U.S. Cellular’s business, financial condition or results of o
perations; h
owever, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this doc
ument.
Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements.
U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new inf
ormation, future events or otherwise.
You should carefully consider the following risk factors and other information contained in, or incorporated by reference into, this Form
10-K to understand the material risks relating to U.S. Cellular’s business.
Risk Factors
-
Intense competition in the markets in which U.S. Cellular operates could adversely affect U.S. Cellular’s revenues or increase its costs to compete.
Competition in the wireless industry is intense and is expected to intensify in the future due
to multiple wireless industry factors such as increasing market penetration, decreasing customer churn rates, introduction of new products, new competitors and changing prices.
There is competition in pricing; handsets and other devices; network quality,
coverage, speed and technologies; distribution; new entrants; and other categories. In particular, wireless competition includes aggressive promotional pricing to induce customers to switch carriers, which could result in switching activity and churn; da
ta network speed is a competitive differentiator; and there has been a resurgence of new entrants to wireless markets including prepaid brands that have been purchased by national carriers.
U.S. Cellular’s ability to compete effectively will depend, in pa
rt, on its ability to anticipate and respond to various competitive factors affecting the telecommunications industry.
U.S. Cellular anticipates that competition will continue to cause the prices for products and services to decline and the costs to compe
te to increase.
Most of U.S. Cellular’s competitors are national or global telecommunications companies that are larger than U.S. Cellular, possess greater financial and other resources, possess more extensive coverage areas and more spectrum within their
coverage areas, and market other services with their communications services that U.S. Cellular does not offer.
Further, other companies that currently are less competitive may also add more efficient low-band spectrum to become more competitive in U.S.
Cellular’s primary markets. In particular, to the extent that existing competitors or new entrants acquire low-band (600 MHz) spectrum in FCC Auction 1002 in U.S. Cellular markets, U.S. Cellular could face increased competition over time from competitors
which hold more efficient low-band spectrum. In addition, U.S. Cellular may face competition from technologies that may be introduced in the future.
New technologies, services and products that are more commercially effective than the technologies, servi
ces and products offered by U.S. Cellular may be developed.
Further, new technologies may be proprietary such that U.S. Cellular is not able to adopt such technologies.
There can be no assurance that U.S. Cellular will be able to compete successfully in
this environment.
Sources of competition to U.S. Cellular’s business typically include two to four competing wireless telecommunications service providers in each market, wireline telecommunications service providers, cable companies, resellers (including
MVNO), and providers of other alternate telecommunications services.
Many of U.S. Cellular’s wireless competitors and other competitors have substantially greater financial, technical, marketing, sales, purchasing and distribution resources than U.S. Cel
lular.
If U.S. Cellular does not adapt to compete effectively in such a highly competitive environment, such competitive factors could result in product, service, pricing or cost disadvantages and could have an adverse effect on U.S. Cellular’s business, f
inancial condition or results of operations.
-
A failure by U.S. Cellular to successfully execute its business strategy (including planned acquisitions, spectrum acquisitions, divestitures and exchanges) or allocate resources or capital could have an adverse
effect on U.S. Cellular’s business, financial condition or results of operations.
U.S. Cellular is a regional wireless carrier, but competes primarily against much larger national wireless carriers with much greater resources. Its business strategy in a
ttempting to attract and retain wireless customers through a value proposition comprised of a high-quality network, outstanding customer service, and competitive devices, plans and pricing, all provided with a local focus has not resulted in, and in the fu
ture may not result in, performance that achieves returns in line with or above its cost of capital. U.S. Cellular’s current forecast indicates that U.S. Cellular will not achieve a return on capital that exceeds its cost of capital in the foreseeable fut
ure. U.S. Cellular also might be unable to adopt technologies, products and services as fast as its larger competitors. As a result, consumers who are eager to adopt new technologies, products and services more quickly may select U.S. Cellular’s competit
ors rather than U.S. Cellular as their service provider. To the extent that U.S. Cellular does not attract or retain these types of customers, U.S. Cellular could be at a competitive disadvantage and have a customer base that generates lower profit margin
s relative to its competition.
The successful execution of strategy and optimal capital allocation decisions depend on various internal and external factors, many of which are not in U.S. Cellular’s control.
U.S. Cellular’s ability to achieve projected fi
nancial results by implementing and executing its business strategy and optimally allocating its assets and capital could be affected by such factors.
Such factors include but are not limited to pricing practices by competitors, relative scale, purchasing
power, roaming and other strategic agreements, wireless device availability, timing of introduction of wireless devices, access to spectrum, emerging technologies and other factors.
In addition, there is no assurance that U.S. Cellular’s strategy will be
successful.
Even if U.S. Cellular executes its business strategy as intended, such strategy may not be successful in the long term at achieving growth in customers, revenues, net income, or generating a return on capital greater than U.S. Cellular’s cost
of capital. A failure by U.S. Cellular to execute its business strategy successfully or to allocate resources or capital optimally could have an adverse effect on U.S. Cellular’s wireless business, financial condition or results of operations.
-
Uncertaint
y in U.S. Cellular’s future cash flow and liquidity or in the ability to access capital, deterioration in the capital markets, other changes in U.S. Cellular’s performance or market conditions, changes in U.S. Cellular’s credit ratings or other factors cou
ld limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular to reduce its construction, development or acquisition programs, reduce the acquisition of spectrum licenses, and/or reduc
e or cease share repurchases.
U.S. Cellular operates a capital-intensive business. U.S. Cellular has used internally-generated funds and also has obtained substantial funds from external sources for general corporate purposes. In the past, U.S. Cellular’
s existing cash and investment balances, funds available under its revolving credit facilities, funds from other financing sources, including a term loan and other long-term debt, and cash flows from operating, investing and financing activities, including
sales of assets or businesses, provided sufficient liquidity and financial flexibility for U.S. Cellular to meet its normal day-to-day operating needs and debt service requirements, to finance the build-out and enhancement of markets and to fund acquisiti
ons. There is no assurance that this will be the case in the future.
It may be necessary from time to time to increase the size of the existing revolving credit facility, to put in place new credit facilities, or to obtain other forms of financing in ord
er to fund potential expenditures. U.S. Cellular’s liquidity would be adversely affected if, among other things, U.S. Cellular is unable to obtain short or long-term financing on acceptable terms, U.S. Cellular makes spectrum license purchases in FCC auct
ions or from other parties, the LA Partnership discontinues or reduces distributions compared to prior historical levels and/or
Eligible Telecommunications Carrier
(“ETC”) and/or other regulatory support payments decline. In addition, although sales of as
sets or businesses by U.S. Cellular have been an important source of liquidity for U.S. Cellular in recent periods, U.S. Cellular does not expect a similar level of such sales in the future, which will reduce a source of liquidity for U.S. Cellular.
In re
cent years, U.S. Cellular’s credit rating has declined to sub-investment grade. In certain recent periods, U.S. Cellular has incurred negative free cash flow (defined as Cash flows from operating activities less Cash paid for additions to property, plant
and equipment) and this will continue in the future if operating results do not improve or if capital expenditures do not decrease. U.S. Cellular
currently expects to have negative free cash flow in 2017. U.S. Cellular
may require substantial additional
capital for, among other uses, funding day-to-day operating needs, working capital, acquisitions of providers of wireless telecommunications services, spectrum license or system acquisitions, system development and network capacity expansion, debt service
requirements, the repurchase of shares, or making additional investments. There can be no assurance that sufficient funds will continue to be available to U.S. Cellular or its subsidiaries on terms or at prices acceptable to U.S. Cellular. Insufficient c
ash flows from operating activities, changes in its credit ratings, defaults of the terms of debt or credit agreements, uncertainty of access to capital, deterioration in the capital markets, reduced regulatory capital at banks which in turn limits their a
bility to borrow and lend, other changes in the performance of U.S. Cellular or in market conditions or other factors could limit or restrict the availability of financing on terms and prices acceptable to U.S. Cellular, which could require U.S. Cellular t
o reduce its acquisition, capital expenditure and business development programs
, reduce the acquisition of spectrum licenses, and/or reduce or cease share repurchases
. U.S. Cellular cannot provide assurances that circumstances that could have a material a
dverse effect on its liquidity or capital resources will not occur. Any of the foregoing would have an adverse impact on U.S. Cellular’s business, financial condition or results of operations.
-
U.S. Cellular has a significant amount of indebtedness whic
h could adversely affect its financial performance and in turn adversely affect its ability to make payments on its indebtedness, comply with terms of debt covenants and incur additional debt.
U.S. Cellular has a significant amount of indebtedness and may
need to incur additional indebtedness. U.S. Cellular’s level of indebtedness could have important consequences. For example, it (i) may limit U.S. Cellular’s ability to obtain additional financing for working capital, capital expenditures or general corp
orate purposes, particularly if the ratings assigned to its debt securities by rating organizations are revised downward; (ii) will require U.S. Cellular to dedicate a substantial portion of its cash flow from operations to the payment of interest and prin
cipal on its debt, reducing the funds available to U.S. Cellular for other purposes including expansion through acquisitions, capital expenditures, marketing spending and expansion of its business; and (iii) may limit U.S. Cellular’s flexibility to adjust
to changing business and market conditions and make U.S. Cellular more vulnerable to a downturn in general economic conditions as compared to U.S. Cellular’s competitors. U.S. Cellular’s ability to make scheduled payments on its indebtedness or to refinan
ce it will depend on its financial and operating performance, which, in turn, is subject to prevailing economic and competitive conditions and other factors beyond its control. In addition, U.S. Cellular’s leverage may put it at a competitive disadvantage
to some of its competitors that are not as leveraged. U.S. Cellular’s revolving credit facility and the U.S. Cellular term loan facility require U.S. Cellular to comply with certain affirmative and negative covenants, including certain financial covenant
s. Depending on actual financial performance of U.S. Cellular, there is a risk that U.S. Cellular could fail to satisfy the required financial covenants. If U.S. Cellular breaches a financial or other covenant of any of these agreements, it would result
in a default under that agreement, and could involve a cross-default under other debt instruments. This could in turn cause the affected lenders to accelerate the repayment of principal and accrued interest on any outstanding debt under such agreements an
d, if they choose, terminate the facility. If appropriate, U.S. Cellular may request the applicable lender for an amendment of financial covenants in the U.S. Cellular revolving credit facility and the U.S. Cellular term loan facility, in order to provide
additional financial flexibility to U.S. Cellular, and may also seek other changes to such facilities. There is no assurance that the lenders will agree to any amendments. If the lenders agree to amendments, this may result in additional payments or hig
her interest rates payable to the lenders and/or additional restrictions. Restrictions in such debt instruments may limit U.S. Cellular’s operating and financial flexibility.
As a result, U.S. Cellular’s level of indebtedness, restrictions contained in d
ebt instruments and/or possible breaches of covenants, defaults, and acceleration of indebtedness could have an adverse effect on U.S. Cellular’s business, financial condition, revenues, results of operations and cash flows.
-
Changes in roaming practices
or other factors could cause U.S. Cellular's roaming revenues to decline from current levels, roaming expenses to increase from current levels and/or impact U.S. Cellular's ability to service its customers in geographic areas where U.S. Cellular does not h
ave its own network, which could have an adverse effect on U.S. Cellular's business, financial condition or results of operations.
U.S. Cellular’s service revenues include roaming revenues related to the use of U.S. Cellular’s network by other carriers’ cu
stomers who travel within U.S. Cellular’s coverage areas.
Changes in the network footprints of carriers due to mergers, acquisitions or network expansions could have an adverse effect on U.S. Cellular’s roaming revenues.
For example, consolidation among
other carriers which have network footprints that currently overlap U.S. Cellular’s network could decrease the amount of roaming revenues for U.S. Cellular.
Similarly, U.S. Cellular's customers can access another carrier’s digital system automatically only
if the other carrier allows U.S. Cellular's customers to roam on its network.
U.S. Cellular relies on roaming agreements with other carriers to provide roaming capability to its customers in areas of the U.S. and internationally outside of its service ar
eas, including Mexico and Canada, and to improve coverage within
selected areas of U.S. Cellular's network footprint.
Such agreements cover traditional voice services as well as data services.
Although U.S. Cellular currently has long-term roaming agreem
ents with certain other carriers, these agreements generally are subject to renewal and termination if certain events occur.
FCC rules
and orders impose certain requirements on wireless carriers to offer certain roaming arrangements to other carriers.
Ho
wever, carriers frequently disagree on what is required.
Although U.S. Cellular has entered into 4G LTE roaming agreements with national carriers,
there is no assurance that U.S. Cellular will be able to maintain these agreements and/or enter into new agr
eements with other carriers to provide roaming services using 4G LTE or other technologies or that it will be able to do so on reasonable or cost-effective terms.
Some competitors may be able to obtain lower roaming rates than U.S. Cellular is able to obta
in because they have larger call volumes or may be able to reduce roaming charges by providing service principally over their own networks.
In addition, the quality of service that a wireless carrier delivers during a roaming call may be inferior to the q
uality of service U.S. Cellular provides, the price of a roaming call may not be competitive with prices of other wireless carriers for such call, and U.S. Cellular’s customers may not be able to use some of the advanced features, such as voicemail notific
ation or data applications, that U.S. Cellular’s customers enjoy when making calls on U.S. Cellular’s network.
U.S. Cellular’s rate of adoption of new technologies, such as those enabling high-speed data and voice services, could affect its ability to ent
er into or maintain roaming agreements with other carriers.
In addition, U.S. Cellular’s wireless technology may not be compatible with technologies used by other carriers, which may limit the ability of U.S. Cellular to enter into voice or data roaming a
greements with such other carriers.
Carriers whose customers roam on U.S. Cellular’s network could switch their business to new operators or, over time, to their own networks.
Changes in roaming usage patterns, rates for roaming minutes or data usage or
relationships with carriers whose customers generate roaming minutes or data use on U.S. Cellular’s network could have an adverse effect on U.S. Cellular’s revenues and revenue growth. Further, other carriers could negotiate higher roaming rates for acces
sing their networks, resulting in increased roaming expense for U.S. Cellular.
To the extent that other carriers expand their networks in U.S. Cellular’s service areas, the roaming arrangements between U.S. Cellular and these other carriers could become le
ss strategic for them.
That is, these other carriers will have fewer or less extensive geographic areas where roaming services are required by their customers and, as a result, the roaming arrangements could become less critical to serving their customer
base.
This presents a risk to U.S. Cellular in that, to the extent U.S. Cellular is not able to enter into economically viable roaming arrangements with these other carriers, this could impact U.S. Cellular’s ability to service its customers in geographic
areas where U.S. Cellular does not have its own network.
If U.S. Cellular’s roaming revenues decline, roaming expenses increase, or if U.S. Cellular is unable to obtain or maintain roaming agreements with other carriers that contain pricing and other term
s that are competitive and acceptable to U.S. Cellular, and that satisfy U.S. Cellular’s quality and interoperability requirements, its business, financial condition or results of operations could be adversely affected.
-
A failure by U.S. Cellular to obtain
access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
U.S. Cellula
r’s business depends on the ability to use portions of the radio spectrum licensed by the FCC.
U.S. Cellular could fail to obtain access to sufficient spectrum capacity in new or existing critical markets, whether through FCC auctions or other transaction
s, in order to meet the anticipated spectrum requirements associated with increased demand for existing services, especially increases in customer demand for data services, and to enable deployment of next-generation services.
U.S. Cellular believes that
this increased demand for data services reflects a trend that will continue for the foreseeable future. However, U.S. Cellular could fail to accurately forecast its future spectrum requirements considering changes in customer usage patterns, technology re
quirements and the expanded demands of new services. Such a failure could have an adverse impact on the quality of U.S. Cellular’s services or U.S. Cellular’s ability to roll out such future services in some markets, or could require that U.S. Cellular cu
rtail existing services in order to make spectrum available for next-generation services.
Spectrum constrained providers could be effectively capped in increasing market share.
As spectrum constrained providers gain customers, they use up their network c
apacity. Since they lack spectrum, they can respond to demand only by adding cell sites, which is capital intensive, adds fixed operating costs, is limited by zoning considerations, and ultimately may not be cost effective.
U.S. Cellular may acquire acc
ess to spectrum through a number of alternatives, including acquisitions, exchanges and participation in spectrum auctions.
U.S. Cellular may participate in spectrum auctions conducted by the FCC in the future.
As required by law, the FCC has conducted a
uctions for licenses to use some parts of the radio spectrum.
The decision to conduct auctions, and the determination of what spectrum frequencies will be made available for auction and the determination of geographic size of licenses, are made by the FCC
pursuant to laws that it administers.
The FCC may not be able to allocate spectrum sufficient to meet the demands of all those wishing to obtain licenses for new market entry or to expand their spectrum holdings to meet the expanding demand for data serv
ices or to address other spectrum constraints.
Due to factors such as geographic size of licenses and auction bidders that may raise prices beyond acceptable levels, U.S. Cellular may not be successful in FCC auctions in obtaining access to the spectrum t
hat it believes is necessary to implement its business and technology strategies.
In addition, newly auctioned spectrum may not be compatible with existing spectrum, and vendors may not create suitable products to use such spectrum.
Further, access to
spectrum licenses won in FCC auctions may not be available on a timely basis.
Such access is dependent upon the FCC actually granting licenses won, which can be delayed for various reasons.
Furthermore, newly licensed spectrum may not be available for im
mediate use since the radio operations of incumbent users, including in some cases government agencies, may need to be relocated to other portions of the radio spectrum, and/or the newly licensed spectrum may be subject to sharing and coordination obligati
ons for a period of time.
U.S. Cellular also may seek to acquire radio spectrum through purchases and exchanges with other spectrum licensees.
However, U.S. Cellular may not be able to acquire sufficient spectrum through these types of transactions, and
U.S. Cellular may not be able to complete any of these transactions on favorable terms.
-
To the extent conducted by the FCC, U.S. Cellular may participate in FCC auctions of additional spectrum in the future directly or indirectly and, during certain period
s, will be subject to the FCC’s anti-collusion rules, which could have an adverse effect on U.S.
Cellular.
From time to time, the FCC conducts auctions through which additional spectrum is made available for the provision of wireless services.
U.S. Cellul
ar has participated in such auctions in the past and may participate in other auctions conducted by the FCC in the future. FCC anti-collusion rules
place certain restrictions on business communications and disclosures by participants in an FCC auction.
T
hese anti-collusion rules
may restrict the normal conduct of U.S. Cellular’s business, U.S. Cellular’s acquisition, divestiture, exchange and other corporate development activity and/or disclosures by U.S. Cellular relating to an FCC auction
. The restrict
ions could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
As a result of its application to participate in
the FCC’s forward auction of 600 MHz spectrum licenses, referred to as
Auction 1002
, since Februar
y 10, 2016
, U.S. Cellular has been subject to FCC anti-collusion rules that place certain restrictions on public disclosures and business communications with other companies relating to U.S. Cellular’s participation.
As a result of the FCC’s announcement
of U.S. Cellular as a qualified bidder on July 15, 2016, t
hese restrictions will continue until the down payment deadline for Auction 1002, which will be ten business days after release of the FCC’s Channel Reassignment Public Notice, following the end of
the auction. These anti-collusion rules may restrict the conduct of certain U.S. Cellular activities with other auction applicants as well as with nationwide providers of wireless services which are not applicants. The restrictions could have an adverse
effect on U.S. Cellular’s business, financial condition or results of operations.
See Exhibit 13 to this Form 10-K, under “Regulatory Matters – FCC Auction 1002” for
a summary of U.S. Cellular’s participation in
Auction 1002.
-
F
ailure by U.S.
Cellular to t
imely or fully comply with any
existing
applicable
legislative and/or
regulatory requirements
or changes thereto
could adversely affect U.S.
Cellular’s business, financial condition or results of operations.
U.S. Cellular’s operations are subject to varyin
g degrees of regulation by the FCC, state public utility commissions and other federal, state and local regulatory agencies and legislative bodies.
Changes in the administration of the various regulatory agencies and legislative bodies could result in dif
ferent policies with respect to many federal laws and regulations, including but not limited to changes to fiscal and tax policies, which may include comprehensive tax reform. New or amended regulatory requirements could increase U.S. Cellular’s costs and
divert resources from other initiatives.
Adverse decisions, increased regulation, or changes to existing regulation by regulatory bodies could negatively impact U.S. Cellular’s operations by, among other things, changing the amount that can be charged fo
r local, intrastate or interstate access rates, increasing U.S. Cellular’s costs of doing business, permitting greater competition or limiting U.S. Cellular’s ability to engage in certain sales or marketing activities.
New regulatory mandates or enforceme
nt may require unexpected or increased capital expenditures, lost revenues, higher operating expenses or other changes.
Court decisions and rulemakings could have a substantial impact on U.S. Cellular’s operations, including rulemakings on intercarrier ac
cess compensation and state and federal universal service.
Litigation and different objectives among federal and state regulators could create uncertainty and delay U.S. Cellular’s ability to respond to new regulations.
Further, wireless licenses are sub
ject to renewal by the FCC and could be revoked in the event of a violation of applicable laws or regulatory requirements. Also, FCC rules relating to net neutrality, broadband consumer privacy and other rules may result in additional costs for compliance
and may limit opportunities to derive profits from certain business practices or resources, if not amended or rescinded.
U.S. Cellular attempts to timely and fully comply with all regulatory requirements. However, U.S. Cellular is unable to predict the f
uture actions of the various legislative and regulatory bodies that govern U.S. Cellular, but such actions could have adverse effects on U.S. Cellular’s business.
Any failure by U.S. Cellular to timely or fully comply with any regulatory requirements coul
d adversely affect U.S. Cellular’s financial condition, results of operations or ability to do business.
For additional information about U.S. Cellular’s regulatory environment, see Risk Factor Number 15 below and “Regulatory Matters” in Exhibit 13 to this
Form 10-K.
-
An inability to attract people of outstanding potential, to develop their potential through education and assignments, and to retain them by keeping them engaged, challenged and properly rewarded could have an adverse effect on U.S. Cellular's
business, financial condition or results of operations.
U.S. Cellular’s business is highly technical and competition for skilled talent in the wireless industry is aggressive.
Due to competition for qualified management, technical, sales and other personn
el, there can be no assurance that U.S. Cellular will be able to continue to attract and/or retain people of outstanding potential for the development of its business.
The loss of the services of existing key personnel as well as the failure to recruit ad
ditional qualified personnel in a timely manner could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
-
U.S.
Cellular’s assets are concentrated in the U.S.
wireless telecommunications industry. Consequently,
its operating results may fluctuate based on factors related primarily to conditions in this industry.
U.S. Cellular’s assets and revenue streams are concentrated in the U.S. wireless telecommunications industry.
The U.S. wireless telecommunications indu
stry is facing significant change and an uncertain operating environment.
U.S. Cellular’s focus on the U.S. wireless telecommunications industry, together with its positioning relative to larger competitors with greater resources within the industry, may
represent increased risk for investors due to the lack of diversification.
This could have an adverse effect on U.S. Cellular’s ability to attain and sustain long-term, profitable revenue growth and could have an adverse effect on its business, financial
condition or results of operations.
-
U.S. Cellular’s smaller scale relative to larger competitors that may have greater financial and other resources than U.S. Cellular could cause U.S. Cellular to be unable to compete successfully, which could adversely af
fect its business, financial condition or results of operations.
There has been a trend in the telecommunications and related industries in recent years towards consolidation of service providers through acquisitions, reorganizations and joint ventures.
T
his trend could continue, leading to larger competitors over time.
U.S. Cellular has smaller scale efficiencies compared to larger competitors.
U.S. Cellular may be unable to compete successfully with larger companies that have substantially greater fina
ncial, technical, marketing, sales, purchasing and distribution resources or that offer more services than U.S. Cellular, which could adversely affect U.S. Cellular’s revenues and costs of doing business.
Specifically, U.S. Cellular’s smaller scale relati
ve to most of its competitors could have the following impacts, among others:
-
Low profit margins and returns on investment that are below U.S. Cellular’s cost of capital;
-
Increased operating costs due to lack of leverage with vendors;
-
Limited opportunities
for strategic partnerships as potential partners are focused on wireless companies with greater scale
and scope
;
-
Limited access to content;
-
Limited ability to influence industry standards;
-
Reduced ability to invest in research and development of new produ
cts and services;
-
Vendors may deem U.S. Cellular non-strategic and not develop or sell products and services to U.S. Cellular, particularly where technical requirements differ from those of larger companies;
-
Limited access to intellectual property; and
-
Other limited opportunities such as for software development or third party distribution.
U.S. Cellular’s business increasingly depends on access to content for data and access to new wireless devices being developed by vendors.
U.S. Cellular’s ability
to obtain such access depends in part on other parties.
If U.S. Cellular is unable to obtain timely access to new content or wireless devices being developed by vendors, its business, financial condition or results of operations could be adversely affecte
d.
As a result of the foregoing, U.S. Cellular’s smaller scale relative to larger competitors could adversely affect U.S. Cellular’s business, financial condition or results of operations.
-
Changes in various business factors, including changes in demand, c
ustomer preferences and perceptions, price competition, churn from customer switching activity and other factors, could have an adverse effect on U.S.
Cellular’s business, financial condition or results of operations.
Changes in any of several factors
could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
These factors include, but are not limited to:
-
Demand for or usage of services, particularly data services;
-
Customer preferences, including type of wir
eless devices;
-
Customer perceptions of network quality and performance;
-
The pricing of services
, including an increase in price-based competition
;
-
The overall size and growth rate of U.S.
Cellular’s customer base;
-
Penetration rates;
-
Churn rates;
-
Selling ex
penses;
-
Net customer acquisition and retention costs;
-
Customers’ ability to pay for wireless service and the potential impact on bad debts expense;
-
Roaming agreements and rates;
-
Third-party vendor support;
-
The mix of products and services offered by U.S.
C
ellular and purchased by customers; and
-
The costs of providing products and services.
-
Advances or changes in technology could render certain technologies used by U.S.
Cellular obsolete, could put U.S. Cellular at a competitive disadvantage, could reduce
U.S.
Cellular’s revenues or could increase its costs of doing business.
The telecommunications industry is experiencing significant changes in technologies and services expected by customers, as evidenced by evolving industry standards, ongoing improvement
s in the capacity and quality of digital technology, shorter development cycles for new services and products, and enhancements and changes in end-user requirements and preferences.
Widespread deployment of new technologies could cause the technology used
on U.S. Cellular’s wireless networks to become less competitive or obsolete.
Further, fixed-mobile convergence services that combine wireline broadband services with mobile services represent a competitive threat. If the trend toward convergence continu
es, U.S. Cellular is at a competitive disadvantage to larger competitors, including the national wireless carriers and other potential large new entrants with much greater financial and other resources in adapting to such convergence. Future technological
changes or advancements may enable other wireless technologies to equal or exceed U.S. Cellular’s current levels of service and render its system infrastructure obsolete.
For example, the timing, cost, and availability of CDMA enabled devices and other C
DMA ecosystem support needs may inhibit U.S. Cellular’s ability to maintain 3G wireless voice services until it is fully replaced by VoLTE. U.S. Cellular may not be able to respond to such changes and implement new technology on a timely or cost-effective
basis, which could reduce its revenues or increase its costs of doing business.
If U.S. Cellular cannot keep pace with these technological changes or other changes in the telecommunications industry over time, its financial condition, results of operatio
ns or ability to do business could be adversely affected.
-
Complexities associated with deploying new technologies present substantial risk and U.S. Cellular investments in unproven technologies may not produce the benefits that U.S. Cellular expects.
U.S.
Cellular has completed the transition to 4G LTE and has implemented 4G LTE roaming agreements with national carriers. U.S. Cellular will begin commercial deployment of VoLTE in early 2017 and has begun testing 5G technology. Transition to new technologie
s involves significant time and cost. Furthermore, the wireless business experiences rapid technology changes and new services and products. If U.S. Cellular fails to effectively deploy new wireless technologies, services or products on a timely basis, t
his could have an adverse impact on U.S. Cellular’s business, financial condition and results of operations.
Furthermore, it is not certain that U.S. Cellular’s investments in various new, unproven technologies and service and product offerings will be eff
ective. The markets for some of these services, products and solutions may still be emerging and the overall potential for these markets may be uncertain. If customer demand for these new services, products and solutions does not develop as expected, U.
S. Cellular’s business, financial condition or results of operations could be adversely affected.
-
U.S. Cellular receives regulatory support and is subject to numerous surcharges and fees from federal, state and local governments, and the applicability and
the amount of the support and fees are subject to great uncertainty
, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations
.
Telecommunications companies may be designated by states, or in some cases by
the FCC, as an ETC to receive universal service support
payments if they provide specified services in “high cost” areas. U.S. Cellular has been designated as an ETC in certain states and received
$
92
m
illion
in high cost suppo
rt for service to high cost areas in 201
6
.
In 2011, the FCC released an order (“Reform Order”) to: reform its universal service and intercarrier compensation mechanisms; establish a new, broadband-focused support mechanism; and propose further rules to
advance reform. Pursuant to the Reform Order, U.S. Cellular’s ETC support has been phased down by 40% since July 1, 2012. As provided by the Reform Order, the phasedown is currently suspended and U.S. Cellular will continue to receive 60% of its baseline
support until a new fund proposed in the Reform Order is operational. On February 23, 2017, the FCC adopted an order concerning the Mobility Fund II and the resumption of the phase down. The text of the order has not been released but the press release
issued by the FCC following adoption of the order indicates that the order will establish a Mobility Fund II support mechanism of $453 million annually for ten years to be distributed through a market-based, multi-round reverse auction and that the phase d
own of unnecessary legacy support from the Federal USF will commence on the first day of the month following the completion of the auction and will conclude two years later. U.S
.
Cellular cannot predict at this time when the Mobility Fund II auction will
occur, when the phase down period for its existing legacy support from the Federal USF will commence, or whether the Mobility Fund II auction will provide opportunities to the Company to offset any loss in existing support.
However, U.S. Cellular currentl
y expects that its legacy support will continue at the existing level for 2017.
If the foregoing regulatory support is reduced from current levels, this could have an adverse effect on U.S. Cellular’s business, financial condition or operating results. W
ith respect to intercarrier compensation, the Reform Order provides for a reduction in the charges that U.S. Cellular pays to wireline phone companies to transport and terminate calls that originate on their networks, which will reduce U.S. Cellular’s oper
ating expenses. The reductions in intercarrier charges are to increase over the next five to ten years, further reducing U.S. Cellular’s operating expenses.
Telecommunications providers pay a variety of surcharges and fees on their gross revenues from int
erstate and intrastate services, including USF fees and common carrier regulatory fees.
The division of services between interstate services and intrastate services, including the divisions associated with the
F
ederal USF fees, is a matter of interpretati
on and may in the future be contested by the FCC or state authorities. The FCC also may change in the future the basis on which
F
ederal USF fees are charged. The Federal government and many states also apply transaction-based taxes to sales of
telecommun
ications
products and services and to purchases of telecommunications services from various carriers
. In addition, state regulators and local governments have imposed and may continue to impose various surcharges, taxes and fees on telecommunications serv
ices. The applicability of these surcharges and fees to its services is uncertain in many cases and jurisdictions may contest whether U.S. Cellular has assessed and remitted those monies correctly.
Periodically, state and federal regulators may increase
or change the surcharges and fees U.S. Cellular currently pays.
In some instances, U.S. Cellular passes through these charges to its customers.
However, Congress, the FCC, state regulatory agencies or state legislatures may limit the ability to pass thro
ugh transaction-based tax liabilities, regulatory surcharges and regulatory fees imposed on U.S. Cellular to customers.
U.S. Cellular may or may not be able to recover some or all of those taxes from its customers and the amount of taxes may deter demand
for its services or increase its cost to provide service which could have an adverse effect on its business, financial condition or operating results.
-
Performance under device purchase agreements could have a material adverse impact on U.S. Cellular's bus
iness, financial condition or results of operations.
U.S. Cellular has entered into purchase commitments with certain vendors and may enter into similar purchase commitments with other vendors in the future.
If U.S. Cellular is unable to sell all of the
devices that it is required to purchase under such agreements, or if it is unable to sell them at the prices it projects, its business, financial condition or results of operations could be adversely affected.
-
Changes in U.S.
Cellular’s enterprise value, c
hanges in the market supply or demand for wireless licenses, adverse developments in the business or the industry in which U.S.
Cellular is involved and/or other factors could require U.S.
Cellular to recognize impairments in the carrying value of its lice
nses, goodwill and/or physical assets.
A large portion of U.S. Cellular’s assets consists of indefinite-lived intangible assets in the form of licenses and goodwill.
U.S. Cellular also has substantial investments in long-lived assets such as property, pla
nt and equipment.
U.S. Cellular reviews its licenses, goodwill and other long-lived assets for impairment annually or whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable.
An impairment loss may n
eed to be recognized to the extent the carrying value of the assets exceeds the fair value of such assets.
The amount of any such impairment loss could be significant and could have an adverse effect on U.S. Cellular’s reported financial results for the p
eriod in which the loss is recognized.
The estimation of fair values requires assumptions by management about factors that are uncertain including such things as future cash flows and the appropriate discount rate.
Different assumptions for these factors
could create materially different results.
-
Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or licenses and/or expansion of U.S.
Cellular’s business could have an adverse effect on U.S.
Cel
lular’s business, financial condition or results of operations.
As part of U.S. Cellular’s operating strategy, U.S. Cellular from time to time may be engaged in the acquisition, divestiture or exchange of companies, businesses, strategic properties, wirele
ss spectrum or other assets.
U.S. Cellular may change the markets in which it operates and the services that it provides through such acquisitions, divestitures and/or exchanges. In general, U.S. Cellular may not disclose the negotiation of such transact
ions until a definitive agreement has been reached.
These transactions commonly involve a number of risks, including:
-
Identification of attractive companies, businesses, properties, spectrum or other assets for acquisition or exchange, and/or the selection
of U.S. Cellular’s businesses or assets for divestiture or exchange;
-
Competition for acquisition targets and the ability to acquire or exchange businesses at reasonable prices;
-
Inability to make acquisitions that would achieve sufficient scale to be compe
titive with competitors with greater scale;
-
Possible lack of buyers for businesses or assets that U.S. Cellular desires to divest and the ability to divest or exchange such businesses or assets at reasonable prices;
-
Ability to negotiate favorable terms and
conditions for acquisitions, divestitures and exchanges;
-
Significant expenditures associated with acquisitions, divestitures and exchanges;
-
Legal and regulatory risks associated with new businesses or markets;
-
Ability to enter markets in which U.S. Cellul
ar has limited or no direct prior experience and competitors have stronger positions;
-
Ability to
integrate and
manage businesses that are engaged in activities other than traditional wireless service;
-
Uncertain revenues and expenses associated with acquis
itions, with the result that U.S. Cellular may not realize the growth in revenues, anticipated cost structure, profitability, or return on investment that it expects;
-
Difficulty of integrating the technologies, services, products, operations and personnel
of the acquired businesses, or of separating such matters for divested businesses or assets;
-
Diversion of management’s attention;
-
Disruption of ongoing business;
-
Impact on U.S. Cellular’s cash and available credit lines for use in financing future growth a
nd working capital needs;
-
Inability to retain key personnel;
-
Inability to successfully incorporate acquired assets and rights into U.S. Cellular’s service offerings;
-
Inability to maintain uniform standards, controls, procedures and policies;
-
Possible
conditions to approval by the FCC, the Federal Trade Commission and/or the Department of Justice; and
-
Impairment of relationships with employees, customers or vendors.
No assurance can be given that U.S. Cellular will be successful with respect to its acq
uisition, divestiture or exchange strategies or initiatives.
If U.S. Cellular is not successful with respect to its acquisitions, divestitures or exchanges, its business, financial condition or results of operations could be adversely affected.
-
U.S.
Cellular offers customers the option to purchase certain devices under installment contracts which, compared to fixed-term service contracts, includes risks that U.S. Cellular may possibly incur greater churn, lower cash flows, increased costs and/or incre
ased bad debts expense due to differences in contract terms, which could have an adverse impact on U.S. Cellular’s financial condition or results of operations.
U.S. Cellular sells devices to customers under installment contracts over a specified period of
time. Customers with installment contracts are not required to sign a fixed-term service contract to obtain postpaid service; rather, their service is provided on a month to month basis with no early termination fee. These device installment contract pl
ans may not meet U.S. Cellular’s customers’ or potential customers’ needs, expectations or demands. In addition, customers on these device installment contract plans can discontinue their service at any time without penalty, other than the obligation of a
ny residual commitment they may have for unpaid service or for amounts due under the installment contract for the device. U.S. Cellular could experience a higher churn rate than it expects due to the ability of customers to more easily change service prov
iders, which could adversely affect its results of operations. U.S. Cellular’s operational and financial performance may be adversely affected if it is unable to grow its customer base and achieve the customer penetration levels that it anticipates with t
his business model.
Customers who have financed their devices through these device installment contracts pay for their devices in installments over a specified period of time. Compared to fixed-term service contracts, such plans result in lower cash flows
from operating activities in the near term and could have an adverse effect on U.S. Cellular’s liquidity or capital resources. In addition, such
device installment contracts subject U.S. Cellular to increased risks relating to consumer credit issues, whi
ch could result in increased costs, including increases to its bad debts expense. These device installment contracts may be particularly sensitive to changes in general economic conditions, and any declines in the credit quality of U.S. Cellular’s custome
r base could have a material adverse effect on U.S. Cellular’s financial condition or results of operations.
-
A failure by U.S.
Cellular to complete significant network construction and systems implementation activities as part of its plans to improve the
quality, coverage, capabilities and capacity of its network, support and other systems and infrastructure could have an adverse effect on its operations.
U.S. Cellular’s business plan includes significant construction activities and enhancements to its net
work, support and other systems and infrastructure.
As U.S. Cellular deploys, expands and enhances its network, it may need to acquire additional spectrum.
Also, as U.S. Cellular continues to build out and enhance its network, U.S. Cellular must, among o
ther things, continue to:
-
Lease, acquire or otherwise obtain rights to cell and switch sites;
-
Obtain zoning variances or other local governmental or third-party approvals or permits for network construction;
-
Complete and update the radio frequency design,
including cell site design, frequency planning and network optimization, for each of U.S. Cellular’s markets; and
-
Improve, expand and maintain customer care, network management, billing and other financial and management systems.
Any difficulties encount
ered in completing these activities, as well as problems in vendor equipment availability, technical resources, system performance or system adequacy, could delay expansion of operations and product capabilities in new or existing markets or result in incr
eased costs.
Failure to successfully build-out and enhance U.S. Cellular’s network and necessary support facilities and systems in a cost-effective manner, and in a manner that satisfies customer expectations for quality and coverage, could have an advers
e effect on U.S. Cellular’s business, business prospects, financial condition or results of operations.
-
Difficulties involving third parties with which U.S. Cellular does business, including changes in U.S. Cellular's relationships with or financial or ope
rational difficulties of key suppliers or independent agents and third party national retailers who market U.S. Cellular’s services, could adversely affect U.S.
Cellular’s business, financial condition or results of operations.
U.S. Cellular has relationsh
ips with independent agents and third party national retailers who market U.S. Cellular services.
If such relationships are seriously harmed or if such parties experience financial difficulties, including bankruptcy, U.S. Cellular’s business, financial co
ndition or results of operations could be adversely affected.
U.S. Cellular depends upon certain vendors to provide it with equipment (including wireless devices), services or content to continue its network construction and upgrades and to operate its bus
iness.
U.S. Cellular does not have operational or financial control over such key suppliers and has limited influence with respect to the manner in which these key suppliers conduct their businesses.
If these key suppliers experience financial difficulti
es or file for bankruptcy or experience other operational difficulties, they may be unable to provide equipment,
services or content to U.S. Cellular on a timely basis, or at all, or they may otherwise fail to honor their obligations to U.S. Cellular.
Reg
ulations regarding the use of “conflict minerals” mined from the Democratic Republic of Congo and adjoining countries may affect some of U.S. Cellular’s suppliers.
These regulations may limit the availability of conflict free minerals and, as a result, U.
S. Cellular may not be able to obtain products in sufficient quantities or at competitive prices from its vendors who utilize such minerals in the manufacture of products.
In such cases, U.S. Cellular may be unable to maintain and upgrade its network or p
rovide products and services to its customers in a competitive manner, or could suffer other disruptions to its business.
In that event, U.S. Cellular’s business, financial condition or results of operations could be adversely affected.
In addition, oper
ation of U.S. Cellular’s supply chain and management of its inventory require accurate forecasting of customer growth and demand, which has become increasingly challenging.
If overall demand for wireless devices or the mix of demand for wireless devices i
s significantly different than U.S. Cellular’s expectations, U.S. Cellular could face inadequate or excess supplies of particular models of wireless devices.
This could result in lost sales opportunities or an excess supply of inventory.
Either of these
situations could adversely affect U.S. Cellular’s revenues, costs of doing business, results of operations or financial condition.
Also, U.S. Cellular has other arrangements with third parties, including arrangements pursuant to which U.S. Cellular now out
sources certain support functions to third party vendors. Operational problems associated with such functions, including any failure by the vendor to provide the required level of service under the outsourcing arrangements, could have adverse effects on U
.S. Cellular’s business, financial condition or results of operations.
-
U.S.
Cellular has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on U.S.
Cellular’s financial condit
ion or results of operations.
U.S. Cellular has significant investments in entities that it does not control, including equity investments and interests in certain variable interest entities.
U.S. Cellular’s interests in such entities do not provide U.S.
Cellular with control over the business strategy, financial goals, network build-out plans or other operational aspects of these entities.
U.S. Cellular cannot provide assurance that these entities will operate in a manner that will increase or maintain t
he value of U.S. Cellular’s investments, that U.S. Cellular’s proportionate share of income from these investments will continue at the current level in the future or that U.S. Cellular will not incur losses from the holding of such investments.
Losses in
the values of such investments or a reduction in income from these investments could adversely affect U.S. Cellular’s financial condition or results of operations. In addition, certain investments have historically contributed significant cash flows to U
.S. Cellular and a reduction or suspension of such cash flows could adversely affect U.S. Cellular’s financial condition.
-
A failure by U.S. Cellular to maintain flexible and capable telecommunication networks or information technology, or a material disrup
tion thereof, could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
U.S. Cellular relies extensively on its telecommunication networks and information technology to operate and manage its business, process
transactions and summarize and report results.
These networks and technology become obsolete over time and must be upgraded, replaced and/or otherwise enhanced over time.
Enhancements must be more flexible and dependable than ever before.
All of this is
capital intensive and challenging.
A failure by U.S. Cellular to maintain flexible and capable telecommunication networks or information technology could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Th
e increased provision of data services has introduced significant new demands on U.S. Cellular’s network and also has increased complexities related to network management.
Further, the increased provision of data services on U.S. Cellular’s networks has c
reated an increased level of risk related to quality of service.
This is due to the fact that many customers increasingly rely on data communications to execute and validate transactions.
As a result, redundancy and geographical diversity of U.S. Cellula
r’s network facilities are critical to providing uninterrupted service.
Also, the speed of repair and maintenance procedures in the event of network interruptions is critical to maintaining customer satisfaction.
U.S. Cellular’s ability to maintain high-
quality, uninterrupted service to its customers is critical, particularly given the increasingly competitive environment and customers’ ability to choose other service providers.
In addition, U.S. Cellular’s networks and information technology and the net
works and information technology of vendors on which U.S. Cellular relies are subject to damage or interruption due to various events, including power outages, computer, network and telecommunications failures, computer viruses, security breaches, hackers
and other cyber security risks, catastrophic events, natural disasters, errors or unauthorized actions by employees and vendors, flawed conversion of systems, disruptive technologies and technology changes.
-
U.S. Cellular has experienced and, in the future
, expects to experience cyber-attacks or other breaches of network or information technology security of varying degrees on a regular basis, which could have an adverse effect on U.S. Cellular's business, financial condition or results of operations.
U.S.
Cellular experiences cyber-attacks of varying degrees on a regular basis. U.S. Cellular maintains administrative, technical and physical controls, as well as other preventative actions, to reduce the risk of security breaches.
Although to date U.S. Cellu
lar has not experienced a material security breach, these efforts may be insufficient to prevent a security breach stemming from future cyber-attacks.
If U.S. Cellular’s or its vendors’ networks and information technology are not adequately adapted to cha
nges in technology or are damaged or fail to function properly, and/or if U.S. Cellular’s or its vendors’ security is breached or otherwise compromised, U.S. Cellular could suffer adverse consequences, including theft, destruction or other loss of critical
and private data, including customer and/or employee data, interruptions or delays in its operations, inaccurate billings, inaccurate financial reporting, and significant costs to remedy the problems.
If U.S. Cellular’s or its vendors’ systems become una
vailable or suffer a security breach of customer or other data, U.S. Cellular may be required to expend significant resources and take various actions to address the problems, including notification under data privacy laws and regulations, may be subject t
o fines, sanctions and litigation, and its reputation and operating results could be adversely affected.
Any material disruption in U.S. Cellular’s networks or information technology, including security breaches, could have an adverse effect on U.S. Cellu
lar’s business, financial condition or results of operations.
-
The market price of U.S.
Cellular’s Common Shares is subject to fluctuations due to a variety of factors.
Factors that may affect the future market price of U.S. Cellular’s Common Shares include
:
-
General economic conditions, including conditions in the credit and financial markets;
-
Industry conditions;
-
Fluctuations in U.S. Cellular’s quarterly customer additions, churn rate, revenues, results of operations or cash flows;
-
Variations between U.S.
Cellular’s actual financial and operating results and those expected by analysts and investors; and
-
Announcements by U.S. Cellular’s competitors.
Any of these or other factors could adversely affect the future market price of U.S. Cellular’s Common
Shares, or could cause the future market price of U.S. Cellular’s Common Shares to fluctuate from time to time.
-
Changes in facts or circumstances, including new or additional information, could require U.S.
Cellular to record charges in excess of amounts a
ccrued in the financial statements, which could have an adverse effect on U.S.
Cellular’s business, financial condition or results of operations.
The preparation of financial statements requires U.S. Cellular to make estimates and assumptions that affect t
he reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
U.S. Cellular bases its estimates on historical experience and on various other assumption
s and information that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from estimates under different assumption
s or conditions.
Changes in facts or circumstances, including new or additional information, could require U.S. Cellular to record charges in excess of amounts accrued in the financial statements, if any, which could have an adverse effect on U.S. Cellula
r’s business, financial condition or results of operations.
-
Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede U.S. Cellular’s access to or increase the
cost of financing its operating and investment activities and/or result in reduced revenues and lower operating income and cash flows, which would have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Disruption
s in the credit and financial markets, declines in consumer confidence, increases in unemployment, declines in economic growth and uncertainty about corporate earnings could have a significant negative impact on the U.S. and global financial and credit mar
kets and the overall economy.
Such events could have an adverse impact on financial institutions resulting in limited access to capital and credit for many companies.
Furthermore, economic uncertainties make it very difficult to accurately forecast and p
lan future business activities.
Changes in economic conditions, changes in financial markets, deterioration in the capital markets or other factors could have an adverse effect on U.S. Cellular’s business, financial condition, revenues, results of operati
ons and cash flows.
-
Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on U.S.
Cellular’s business, financial condition or result
s of operations.
U.S. Cellular is regularly involved in a number of legal and policy proceedings before the FCC and various state and federal courts.
Such legal and policy proceedings can be complex, costly, protracted and highly disruptive to business op
erations by diverting the attention and energies of management and other key personnel.
The assessment of legal and policy proceedings is a highly subjective process that requires judgments about future events.
Additionally, amounts ultimately received or
paid upon settlement or resolution of litigation and other contingencies may differ materially from amounts accrued in the financial statements.
Depending on a range of factors, these or similar proceedings could impose restraints on U.S. Cellular’s curr
ent or future manner of doing business.
Such potential outcomes could have an adverse effect on U.S. Cellular’s financial condition, results of operations or ability to do business.
-
The possible development of adverse precedent in litigation or conclusion
s in professional studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic medical devices such as pacemakers, could
have an adverse effect on U.S.
Cellular’s business, financial condition or results of operations.
Media reports and certain professional studies have suggested that certain radio frequency emissions from wireless devices may be linked to various health pr
oblems, including cancer or tumors, and may interfere with various electronic medical devices, including hearing aids and pacemakers.
U.S. Cellular is a party to and may in the future be a party to lawsuits against wireless carriers and other parties clai
ming damages for alleged health effects, including cancer or tumors, arising from wireless phones or radio frequency transmitters.
Concerns over radio frequency emissions may discourage use of wireless devices or expose U.S. Cellular to potential litigati
on.
In addition, the FCC or other regulatory authorities may adopt regulations in response to concerns about radio frequency emissions.
Any resulting decrease in demand for wireless services, costs of litigation and damage awards or regulation could have
an adverse effect on U. S. Cellular’s business, financial condition or results of operations.
In addition, some studies have indicated that some aspects of using wireless devices while driving may impair drivers’ attention in certain circumstances, making
accidents more likely.
These concerns could lead to potential litigation relating to accidents, deaths or serious bodily injuries, any of which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
Numero
us state and local legislative bodies have enacted or proposed legislation restricting or prohibiting the use of wireless devices while driving motor vehicles.
These enacted or proposed laws or other similar laws, if passed, could have the effect of reduc
ing customer usage and/or increasing costs, which could have an adverse effect on U.S. Cellular’s business, financial condition, or results of operations.
-
Claims of infringement of intellectual property and proprietary rights of others, primarily involving
patent infringement claims, could prevent U.S. Cellular from using necessary technology to provide products or services or subject U.S. Cellular to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on U.S
. Cellular’s business, financial condition or results of operations.
U.S. Cellular faces possible effects of industry litigation relating to patents, other intellectual property or otherwise, that may restrict U.S. Cellular’s access to devices for sale to
customers.
If technology that U.S. Cellular uses in products or services were determined by a court to infringe a patent or other intellectual property right held by another person, U.S. Cellular could be precluded from using that technology and could be
required to pay significant monetary damages.
U.S. Cellular also may be required to pay significant royalties to such person to continue to use such technology in the future.
The successful enforcement of any intellectual property rights, or U.S. Cellula
r’s inability to negotiate a license for such rights on acceptable terms, could force U.S. Cellular to cease using the relevant technology and offering services incorporating the technology.
Any litigation to determine the validity of claims that U.S. Cel
lular’s products or services infringe or may infringe intellectual property rights of another, regardless of their merit or resolution, could be costly and divert the effort and attention of U.S. Cellular’s management and technical personnel.
Regardless o
f the merits of any specific claim, U.S. Cellular cannot give assurance that it would prevail in litigation because of the complex technical issues and
inherent uncertainties in intellectual property litigation.
Although U.S. Cellular generally seeks to o
btain indemnification agreements from vendors that provide it with technology, there can be no assurance that any claim of infringement will be covered by an indemnity or that U.S. Cellular will be able to recover all or any of its losses and costs under a
ny available indemnity agreements.
Any claims of infringement of intellectual property and proprietary rights of others could prevent U.S. Cellular from using necessary technology to provide its services or subject U.S. Cellular to expensive intellectual
property litigation or monetary penalties, which could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.
-
There are potential conflicts of interests between TDS and U.S.
Cellular.
TDS owns over 80% of the comb
ined total of both classes of common stock of U.S. Cellular, including a majority of the outstanding Common Shares and 100% of the Series
A Common Shares, and controls over 96% of their combined voting power.
As a result, TDS is effectively able to elect
all of U.S. Cellular’s fourteen directors and otherwise control the management and operations of U.S. Cellular.
Seven of the fourteen directors of U.S. Cellular are also directors of TDS and/or executive officers of TDS and/or U.S. Cellular.
Directors an
d officers of TDS who are also directors or officers of U.S. Cellular, and TDS as U.S. Cellular’s controlling shareholder, are in positions involving the possibility of conflicts of interest with respect to certain transactions concerning U.S. Cellular.
W
hen the interests of TDS and U.S. Cellular diverge, TDS may exercise its influence in its own best interests.
U.S. Cellular and TDS have entered into contractual arrangements governing certain transactions and relationships between them.
These agreements
were executed prior to the initial public offering of U.S. Cellular’s Common Shares and were not the result of arm’s-length negotiations.
Accordingly, there is no assurance that the terms and conditions of these agreements are as favorable to U.S. Cellula
r as could have been obtained from unaffiliated third parties.
See “Certain Relationships and Related Transactions” in this Form
10-K.
Conflicts of interest may arise between TDS and U.S. Cellular when faced with decisions that could have different implic
ations for U.S. Cellular and TDS, including technology decisions, financial budgets, the payment of distributions by U.S. Cellular, agreements or transactions between TDS and U.S. Cellular, business activities and other matters.
TDS also may take action t
hat favors its other businesses and the interests of its shareholders over U.S. Cellular’s wireless business and the interests of U.S. Cellular shareholders and debt holders.
Because TDS controls U.S. Cellular, conflicts of interest could be resolved in a
manner adverse to U.S. Cellular and its other shareholders or its debt holders.
The U.S. Cellular Restated Certificate of Incorporation provides that, so long as not less than 500,000 Series
A Common Shares are outstanding, U.S. Cellular, without the writ
ten consent of TDS, shall not, directly or indirectly own, invest or otherwise have an interest in, lease, operate or manage any business other than a business engaged solely in the construction of, the ownership of interests in and/or the management of wi
reless telephone systems.
This limitation on the scope of U.S. Cellular’s potential business could hurt the growth of U.S. Cellular’s business.
This restriction would preclude U.S. Cellular from pursuing attractive related or unrelated business opportuni
ties unless TDS consents in writing.
TDS has no obligation to consent to any business opportunities proposed by U.S. Cellular and may withhold its consent in its own best interests.
-
Certain matters, such as control by TDS and provisions in the
U.S.
Cellular Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of U.S.
Cellular.
The control of U.S. Cellular by TDS may tend to deter non-negotiated tender offers or other efforts to obtain control
of U.S. Cellular and thereby deprive shareholders of opportunities to sell shares at prices higher than those prevailing in the market.
The U.S. Cellular Restated Certificate of Incorporation also contains provisions which may serve to discourage or make m
ore difficult a change in control of U.S. Cellular without the support of TDS or without meeting various other conditions.
In particular, the authorization of multiple classes of capital stock with different voting rights could prevent shareholders from p
rofiting from an increase in the market value of their shares as a result of a change in control of U.S. Cellular by delaying or preventing such change in control.
The U.S. Cellular Restated Certificate of Incorporation also authorizes the U.S. Cellular Bo
ard of Directors to designate and issue Preferred Shares in one or more classes or series from time to time.
Generally, no further action or authorization by the shareholders is necessary prior to the designation or issuance of the additional Preferred Sh
ares authorized pursuant to the U.S. Cellular Restated Certificate of Incorporation unless applicable laws or regulations would require such approval in a given instance.
Such Preferred Shares could be issued in circumstances that would serve to preserve
TDS’ control of U.S. Cellular.
-
Any of the foregoing events or other events could cause revenues, earnings, capital expenditures and/or any other financial or statistical information to vary from U.S.
Cellular’s forward-looking estimates by a material amoun
t.
From time to time, U.S.
Cellular may disclose forward-looking information, including estimates of future operating revenues; various measures of income before income taxes; and/or capital expenditures.
Any such forward-looking information includes consideration
of known or antic
ipated changes to the extent disclosed, but dynamic market conditions and/or other unknown or unanticipated events, including but not limited to the risks discussed above, could cause such estimates to differ materially from the actual amounts.
Item
1B.
U
nre
solved Staff Comments
None.
Item
2.
Pr
operties
U.S. Cellular has properties located throughout the United States. U.S. Cellular’s mobile telephone switching offices, cell sites, call centers and retail stores are located primarily in U.S. Cellular’s operating markets and are either
owned or leased by U.S. Cellular, one of its subsidiaries, or the partnership, limited liability company or corporation which holds the license issued by the FCC.
As of
December 31, 2016
, U.S. Cellular’s Property,
plant and equipment, net of accumulated depreciation, totaled $
2,470
million.
U.S. Cellular considers the properties owned or leased by it and its subsidiaries to be maintained in good operating condition and suitable and adequate for its business operations
.
Item
3.
Leg
al Proceedings
U.S.
Cellular is involved or may be involved from time to time in legal proceedings before the FCC, other regulatory authorities, and/or various state and federal courts. If U.S.
Cellular believes that a loss arising from such legal proceedings is probabl
e and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better tha
n another, the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine th
e adequacy of accruals and related financial statement disclosures. The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial statements.
See Note
12
—
Commitments and Contingencies
in the Notes to Consolidated Financial Statements for further information.
Item
4.
Mine S
afety Disclosures
Not applicable.
PA
RT
II
Item
5.
Mar
ket for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market, holder, dividend and performance graph information is incorporated by reference from Exhibit
13 to this Form 10-K, Annual Report sections
entitled
“Shareholder Information” and “Consolidated Quarterly Information (Una
udited).”
U.S. Cellular has not paid any cash dividends
in recent periods and currently intends to retain all earnings for use in U.S. Cellular’s business.
Information
relating to Issuer Purchases of Equity Securities is set forth below.
In November 2009,
U.S. Cellular announced by Form 8-K that the Board of Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis.
In December 2016,
the U.S. Cellular Board amended this authorization to provide that such amount will be any amount from zero to 1,300,000 beginning on January 1, 2017, as determined by the Pricing Committee, and that if the Pricing Committee did not specify an amount for a
ny year, such amount would be zero for such year.
The Pricing Committee did not specify any increase as of January 1, 2017.
The Pricing Committee was also authorized to decrease the cumulative amount of the authorization at any time, but has not taken an
y action to do so at this time.
As a result, there was no change to the cumulative amount of the share repurchase authorization as of January 1, 2017.
The authorization provides that share repurchases will be made pursuant to open market purchases, block
purchases, private purchases, or otherwise, depending on market prices and other conditions.
This authorization does not have an expiration date.
U.S. Cellular did not determine to terminate the foregoing Common Share repurchase program, as amended, or
cease making further purchases thereunder, during the fourth quarter of
2016
.
The following table provides certain information with respect to all purchases made by or on behalf of U.S.
Cellular, and any open market
purchases
made by any “affiliated purchaser” (as defined by the SEC) of U.S.
Cellular, of U.S.
Cellular Common Shares
during the fourth quarter of 2016.
Period
|
|
Total Number of Common Shares Purchased
|
|
Average Price Paid per Common Share
|
|
Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs
|
|
Maximum Number of Common Shares that May Yet B
e Purchased Under the Plans or Programs
|
October 1 – 31, 2016
|
|
4,135
|
|
$
|
35.01
|
|
4,135
|
|
6,004,302
|
November 1 – 30, 2016
|
|
103,453
|
|
|
34.43
|
|
103,453
|
|
5,900,849
|
December 1 – 31, 2016
|
|
–
|
|
|
–
|
|
–
|
|
5,900,849
|
Total as of or for the quarter ended December 31, 2016
|
|
107,588
|
|
$
|
34.45
|
|
107,588
|
|
5,900,849
|
Item
6.
Sele
cted Financial Data
Incorporated by reference from Exhibit
13 to this Form
10-K, Annual Repor
t section entitled “Selected Consolidated Financial Data,” except for Ratio of earnings to fixed charges, which is incorporated herein by reference from Exhibit
12 to this Form
10-K.
Item
7.
Manag
ement’s Discussion and Analysis of Financial Condition and
Results of Operations
Incorporated by reference from Exhibit
13 to this Form
10-K, Annual Report section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item
7A.
Quan
titative and Qualitative Disclosures About Market Risk
Incorporated by reference from
Exhibit
13 to this Form
10-K, Annual Report section entitled “Market Risk.”
Item
8.
Finan
cial Statements and Supplementary Data
Incorporated by reference from Exhibit
13 to this Form
10-K, Annual Report
sections entitled “Consolidated Statement of Operations,” “Consolidated Statement of Cash Flows,” “Consolidated Balance Sheet,” “Consolidated Statement of Changes in Equity,” “Notes to Consolidated Financial Statements,” “Management’s Report on Internal C
ontrol Over Financial Reporting,”
“Report of Independent Registered Public Accounting Firm,” and “Consolidated Quarterly Information (Unaudited).”
The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the ye
ars ended
December 31, 2016
,
2015
and
2014
equaled net income.
Item
9.
Cha
nges in and
Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Con
trols 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 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 SEC’s rules
and forms, and that suc
h information is accumulated and communicated to U.S. Cellular’s management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluatin
g 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 principal executive officer and principal financial officer, of the effectiveness of the design and operation of U.S. Cellular’s disclo
sure controls and procedures as of the end of the period covered by this Annual Report.
Based on this evaluation, the principal executive officer and principal financial officer have concluded that U.S. Cellular’s disclosure controls and procedures were e
ffective as of
December 31, 2016
, at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate inter
nal control over financial reporting, as such term is defined in Rules
13a-15(f)
and 15d-15(f)
under the Exchange Act.
U.S. Cellular’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabilit
y of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
U.S. Cellular’s internal control over financial reporting incl
udes 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 a
re recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and, where required, the board of directors
of the issuer; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the issuer’s assets that could have a material effect on the interim or annual consolidated financial statem
ents.
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 inadequat
e because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of U.S. Cellular’s management, including its principal executive officer and principal fi
nancial officer, U.S. Cellular conducted an evaluation of the effectiveness of its internal control over financial reporting as of
December 31, 2016
, based on the criteria established in the 2013 version of
Interna
l Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Management has concluded that U.S. Cellular maintained effective internal control over financial reporting as of
December 31, 2016
based on criteria established in the 2013 version of
Internal Control — Integrated Framework
issued by the COSO.
The effectiveness of U.S. Cellular’s internal control over financial reporting as of
December 31, 2016
has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in the firm’s report which is incorporated by reference into Item 8 of this Annual Report on Form
10-K fro
m Exhibit
13 filed herewith.
Changes in Internal Control over Financial Reporting
There were no changes in U.S. Cellular’s internal control over financial reporting during the fourth quarter of
2016
that have materially affected, or are reasonably likely to materially affect, U.S. Cellular’s internal control over financial reporting.
Item
9B.
Oth
er Information
None.
PAR
T
III
Item
10.
Dire
ctors, Executive Officers and Corporate Governance
Incorporated by reference from Proxy
Statement sections entitled “Election of Directors,” “Corporate Governance,” “Executive Officers” and “Section
16(a)
Beneficial Ownership Reporting Compliance.”
Item
11.
Execu
tive Compensation
Incorporated by reference from Proxy Statement section entitle
d “Executive and Director Compensation.”
Item
12.
Sec
urity Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference from Proxy Statement sections entitled “Security Ownership of Certain Beneficial Own
ers and Management” and “Securities Authorized for Issuance under Equity Compensation Plans.”
Item
13.
Ce
rtain Relationships and Related Transactions, and Director Independence
Incorporated by reference from Proxy Statement sections entitled “Corporate Go
vernance” and “Certain Relationships and Related Transactions.”
Item
14.
Prin
cipal Accountant Fees and Services
Incorporated by reference from Proxy Statement section entitled “Fees Paid to Principal Accountants.”
PA
RT IV
Item 15. Exh
ibits and Financial Statement Schedules
(a)
|
The
following documents are filed as part of this report:
|
|
|
|
|
|
|
(1)
|
Financial Statements
|
|
|
|
|
|
|
|
Consolidated Statement of Operations
|
Annual Report*
|
|
|
Consolidated Statement of Cash Flows
|
Annual Report*
|
|
|
Consolidated Balance Sheet
|
Annual Report*
|
|
|
Consolidated Statement of Changes in Equity
|
Annual Report*
|
|
|
Notes to Consolidated Financial Statements
|
Annual Report*
|
|
|
Management's Report on Internal Control Over Financial Reporting
|
Annual Report*
|
|
|
Report of Independent Registered Public Accounting
Firm — PricewaterhouseCoopers LLP
|
Annual Report*
|
|
|
Consolidated Quarterly Information (Unaudited)
|
Annual Report*
|
|
|
|
|
|
|
|
|
*Incorporated by reference from Exhibit 13.
|
|
|
|
|
|
|
(2)
|
Financial Statement Schedules
|
|
|
|
|
Location
|
|
|
Los Angeles SMSA Limited
Partnership and Subsidiary Financial Statements
|
S-1
|
|
|
|
Report of Independent Registered Public Accounting Firm — Ernst & Young LLP
|
S-2
|
|
|
|
Consolidated Balance Sheets
|
S-3
|
|
|
|
Consolidated Statements of Income and Comprehensive Income
|
S-4
|
|
|
|
Consolidated
Statements of Changes in Partners’ Capital
|
S-5
|
|
|
|
Consolidated Statements of Cash Flows
|
S-6
|
|
|
|
Notes to Consolidated Financial Statements
|
S-7
|
|
|
|
|
|
|
|
All other schedules have been omitted because they are not applicable or not required or because the
required information is shown in the financial statements or notes thereto.
|
|
|
|
|
|
|
(3)
|
Exhibits
|
|
|
|
|
|
|
|
The exhibits set forth in the accompanying Index to Exhibits are filed as a part of this Report. Compensatory plans or arrangements are identified in
the Index to Exhibits with an asterisk.
|
Item
16. Form 10-K Summary
None.
LOS ANGELES SMSA LIMITED PARTNERSHIP
AND SUBSIDIARY
FINANCIAL STATEMENTS
U.S.
Cellular
owns a 5.5% limited partnership interest in the Los Angeles SMSA Limited Partnership and accounts for such interest by the equity method. The partnership’s
consolidated
financial statements were obtained by U.S.
Cellular as a limited partner.
Report of In
dependent Registered Public Accounting Firm
The Partners of Los Angeles SMSA Limited Partnership
We have audited the accompanying consolidated balance sheets of Los Angeles SMSA Limited
Partnership and Subsidiary (the Partnership) as of December 31, 2016
and 2015, and the related
consolidated statements of income and comprehensive income, changes in partners’ capital and
cash flows for each of the three years in the period ended December 31, 2016. These financial
statements are the responsibility of the Pa
rtnership’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our December 31, 2016 audit in accordance with the standards of the Public Company Accounting Oversight Board (United State
s) and in accordance with auditing standards generally accepted in the United States of America. We conducted our December 31, 2015 and 2014 audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those sta
ndards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis fo
r our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Partnership at December 31, 2016 and 2015, and the consolidated results of their operations and t
heir cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Certified Public Accountants
Orlando, Florida
February 22, 2017
Los Angeles SMSA Partnership and Subsidiary
|
|
|
|
|
|
Consolidated Balance Sheets - As of December 31, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
2016
|
|
|
2015
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Due from affiliate
|
$
|
281,846
|
|
$
|
–
|
|
Accounts receivable, net of allowances of $31,093 and $37,090
|
|
489,043
|
|
|
407,622
|
|
Unbilled revenue
|
|
23,190
|
|
|
22,883
|
|
Prepaid expenses
|
|
18,716
|
|
|
11,785
|
|
|
Total current
assets
|
|
812,795
|
|
|
442,290
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT - NET
|
|
1,862,892
|
|
|
1,804,877
|
|
|
|
|
|
|
|
|
|
WIRELESS LICENSES
|
|
2,075,448
|
|
|
2,073,751
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
228,770
|
|
|
252,751
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
4,979,905
|
|
$
|
4,573,669
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS' CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
202,284
|
|
$
|
190,807
|
|
Advance billings and other
|
|
160,434
|
|
|
166,533
|
|
Financing obligation
|
|
12,744
|
|
|
12,494
|
|
Deferred rent
|
|
8,382
|
|
|
8,382
|
|
Due to affiliate
|
|
–
|
|
|
348,724
|
|
|
Total current liabilities
|
|
383,844
|
|
|
726,940
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
Financing obligation
|
|
112,552
|
|
|
113,016
|
|
Deferred rent
|
|
146,547
|
|
|
150,557
|
|
Other liabilities
|
|
158
|
|
|
117
|
|
|
Total long term
liabilities
|
|
259,257
|
|
|
263,690
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
643,101
|
|
|
990,630
|
|
|
|
|
|
|
|
|
|
PARTNERS' CAPITAL
|
|
|
|
|
|
|
General Partner's interest
|
|
1,734,722
|
|
|
1,433,215
|
|
Limited Partners' interest
|
|
2,602,082
|
|
|
2,149,824
|
|
|
Total partners' capital
|
|
4,336,804
|
|
|
3,583,039
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND PARTNERS' CAPITAL
|
$
|
4,979,905
|
|
$
|
4,573,669
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
Los Angeles SMSA Limited Partnership and Subsidiary
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income and Comprehensive Income - For the Years Ended December 31, 2016, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
|
Service revenues
|
$
|
3,996,989
|
|
$
|
4,181,377
|
|
$
|
4,317,377
|
|
Equipment revenues
|
|
930,690
|
|
|
943,419
|
|
|
650,130
|
|
Other
|
|
256,917
|
|
|
221,918
|
|
|
201,427
|
|
|
Total operating revenues
|
|
5,184,596
|
|
|
5,346,714
|
|
|
5,168,934
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
Cost
of service (exclusive of depreciation and amortization)
|
|
1,070,302
|
|
|
968,132
|
|
|
863,031
|
|
Cost of equipment
|
|
1,193,924
|
|
|
1,267,801
|
|
|
1,195,874
|
|
Depreciation and amortization
|
|
356,848
|
|
|
360,463
|
|
|
344,887
|
|
Selling, general and administrative
|
|
1,278,205
|
|
|
1,397,856
|
|
|
1,470,669
|
|
|
Total operating expenses
|
|
3,899,279
|
|
|
3,994,252
|
|
|
3,874,461
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
1,285,317
|
|
|
1,352,462
|
|
|
1,294,473
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST (EXPENSE) INCOME, NET
|
|
(6,552)
|
|
|
(3,197)
|
|
|
4,199
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME AND COMPREHENSIVE INCOME
|
$
|
1,278,765
|
|
$
|
1,349,265
|
|
$
|
1,298,672
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of Net Income:
|
|
|
|
|
|
|
|
|
|
General Partner
|
$
|
511,507
|
|
$
|
539,706
|
|
$
|
519,468
|
|
Limited Partners
|
$
|
767,258
|
|
$
|
809,559
|
|
$
|
779,204
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial
statements.
|
|
|
|
|
|
|
|
|
Los Angeles SMSA Limited Partnership and Subsidiary
|
|
|
|
|
|
|
Consolidated Statements of Changes in Partners' Capital - For the Years
Ended December 31, 2016, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Partner
|
|
Limited Partners
|
|
|
|
|
|
|
AirTouch
Cellular Inc.
|
|
AirTouch
Cellular Inc.
|
|
Cellco
Partnership
|
|
United States
Cellular
Investment
Corporation of
Los Angeles
|
|
Total Partners'
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE - January 1, 2014
|
$
|
814,041
|
|
$
|
860,848
|
|
$
|
248,282
|
|
$
|
111,931
|
|
$
|
2,035,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
(440,000)
|
|
|
(465,300)
|
|
|
(134,200)
|
|
|
(60,500)
|
|
|
(1,100,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
519,468
|
|
|
549,338
|
|
|
158,438
|
|
|
71,428
|
|
|
1,298,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE - December 31, 2014
|
$
|
893,509
|
|
$
|
944,886
|
|
$
|
272,520
|
|
$
|
122,859
|
|
$
|
2,233,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
539,706
|
|
|
570,740
|
|
|
164,611
|
|
|
74,208
|
|
|
1,349,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE - December 31, 2015
|
$
|
1,433,215
|
|
$
|
1,515,626
|
|
$
|
437,131
|
|
$
|
197,067
|
|
$
|
3,583,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
(210,000)
|
|
|
(222,075)
|
|
|
(64,050)
|
|
|
(28,875)
|
|
|
(525,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
511,507
|
|
|
540,917
|
|
|
156,009
|
|
|
70,332
|
|
|
1,278,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE - December 31, 2016
|
$
|
1,734,722
|
|
$
|
1,834,468
|
|
$
|
529,090
|
|
$
|
238,524
|
|
$
|
4,336,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
Los Angeles SMSA Limited Partnership and Subsidiary
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows - For the Years Ended December 31, 2016, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,278,765
|
|
$
|
1,349,265
|
|
$
|
1,298,672
|
|
Adjustments to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
356,848
|
|
|
360,463
|
|
|
344,887
|
|
|
Imputed interest on financing obligation
|
|
|
12,284
|
|
|
9,135
|
|
|
–
|
|
|
Provision for losses on accounts receivable
|
|
|
71,925
|
|
|
79,063
|
|
|
34,370
|
|
|
Gain on device
installment plan receivables sold
|
|
|
–
|
|
|
(7,632)
|
|
|
–
|
|
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(153,704)
|
|
|
42,964
|
|
|
(200,950)
|
|
|
|
Unbilled revenue
|
|
|
(307)
|
|
|
1,628
|
|
|
(4,441)
|
|
|
|
Prepaid expenses
|
|
|
(6,931)
|
|
|
1,403
|
|
|
(8,831)
|
|
|
|
Other assets
|
|
|
20,037
|
|
|
(151,954)
|
|
|
(91,809)
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
24,685
|
|
|
24,105
|
|
|
32,591
|
|
|
|
Advance billings and other
|
|
|
(6,099)
|
|
|
(31,182)
|
|
|
45,017
|
|
|
|
Deferred rent
|
|
|
(4,010)
|
|
|
88,115
|
|
|
(4,942)
|
|
|
|
Other
liabilities
|
|
|
41
|
|
|
4,046
|
|
|
3,610
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,593,534
|
|
|
1,769,419
|
|
|
1,448,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(449,005)
|
|
|
(470,954)
|
|
|
(487,511)
|
|
Fixed asset transfers out
|
|
|
23,453
|
|
|
25,371
|
|
|
27,816
|
|
Acquisition of wireless licenses (including capitalized interest)
|
|
|
(1,697)
|
|
|
(1,994,208)
|
|
|
–
|
|
Collections on deferred purchase price
|
|
|
1,783
|
|
|
–
|
|
|
–
|
|
Change in due from affiliate
|
|
|
(281,846)
|
|
|
(583,060)
|
|
|
111,521
|
|
|
|
|
Net cash used in investing activities
|
|
|
(707,312)
|
|
|
(3,022,851)
|
|
|
(348,174)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Change in due to affiliate
|
|
|
(348,724)
|
|
|
1,137,057
|
|
|
–
|
|
Proceeds from financing obligation
|
|
|
–
|
|
|
126,635
|
|
|
–
|
|
Repayments of financing obligation
|
|
|
(12,498)
|
|
|
(10,260)
|
|
|
–
|
|
Distributions
|
|
|
(525,000)
|
|
|
–
|
|
|
(1,100,000)
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(886,222)
|
|
|
1,253,432
|
|
|
(1,100,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN CASH
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH - B
eginning of year
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH - E
nd of year
|
|
$
|
–
|
|
$
|
–
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PAID FOR INTEREST
|
|
$
|
2,576
|
|
$
|
24,269
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH
TRANSACTIONS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Accruals for capital expenditures
|
|
$
|
15,621
|
|
$
|
28,829
|
|
$
|
31,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
Los Angeles SMSA Limited Partnership
and Subsidiary
Notes to
Consolidated
Financial Statements –
For the Years E
nded
December 31, 2016
,
2015
and
2014
.
(Dollars in Thousands)
1.
ORGANIZATION AND MANAGEMENT
The Consolidated Financial Statements include the accounts of the Los Angeles SMSA Limited Partnership (“Los Angeles SMSA”) and Los Angeles Edge LLC, a wholly owned su
bsidiary of Los Angeles SMSA (collectively, the “Partnership”). The principal activity of Los Angeles SMSA, formed in 1984, is to provide cellular service in the Los Angeles metropolitan service area. Los Angeles Edge LLC was formed during 2015 and is a ba
nkruptcy remote special purpose entity, created for the purpose of selling wireless device payment plan receivables to third parties (see Note 3).
In accordance with the partnership agreement,
AirTouch Cellular Inc. an indirect wholly owned subsidiary of
Cellco Partnership (“Cellco”), doing business as Verizon Wireless,
and general partner of the Partnership
is responsible for managing the operations of the Partnership (see Note 8).
The partners and their respective ownership percentages of the Partnershi
p as of December 31, 2016
, 2015 and 2014
are as follows:
General Partner:
|
|
|
AirTouch Cellular Inc.
|
40.0%
|
|
|
|
Limited Partners:
|
|
|
AirTouch Cellular Inc.
|
42.3%
|
|
Cellco Partnership
|
12.2%
|
|
United States Cellular Investment Corporation of Los Angeles
|
5.5%
|
2.
SIGNIFICANT ACCOUNTING POLICIES
Consolidation
–
The method of accounting applied to consolidated investments involves an evaluation of all
significant terms of the investments that explicitly grant or suggest evidence of control or influence over the operations of the investee. The consolidated financial statements include our subsidiary which is a variable interest entity (VIE) where Los An
geles SMSA is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated (see Note 3).
Use of e
stimates
–
The financial statements are prepared using U.S. generally accepted accounting principles (GAA
P), which requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates.
Examples of significant estimates include: the allowance for doubtful accounts, the recoverabili
ty of property, plant and equipment, the recoverability of intangible assets and other long-lived assets, unbilled revenues, fair v
alues of financial instruments, deferred purchase price, beneficial interest,
accrued expenses and contingencies.
Revenue r
ec
ognition
–
The Partnership offers products and services to customers through bundled arrangements. These arrangements involve multiple deliverables which may include products, services, or a combination of products and services.
The Partnership earns
revenue primarily by providing access to and usage of its network as well as the sale of equipment. In general, access revenue is billed one month in advance and recognized when earned. Usage revenue is generally billed in arrears and recognized when servi
ce is rendered. Equipment revenue associated with the sale of wireless devices and accessories is generally recognized when the products are delivered to and accepted by the customer, as equipment sales is considered to be a separate earnings process from
providing wireless services. For agreements involving the resale of third-party services in which the Partnership is considered the primary obligor in the arrangements, the revenue is recorded gross at the time of sale.
Under the Verizon device payment pr
ogram, eligible wireless customers purchase wireless devices under a device payment plan agreement. On select devices, certain marketing promotions have been revocably offered to customers to upgrade to a new device after paying down a certain specified po
rtion of the required device payment plan agreement amount as well as trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device, the Partnership accounts for this tr
ade-in right as a guarantee obligation. The full amount of the trade-in right’s fair value (not an allocated value) is recognized as a guarantee liability and the remaining allocable consideration is allocated to the device. The value of the guarantee liab
ility effectively results in a reduction to the revenue recognized for the sale of the device. The Partnership may offer customers certain promotions where a customer can trade-in his or her owned device in connection with the purchase of a new device. Und
er these types of promotions, the customer will receive trade-in credits that are applied to the customer’s monthly bill. As a result, the Partnership recognizes a trade-in obligation measured at fair value using weighted-average selling prices obtained i
n recent resales of devices eligible for trade-in.
In multiple element arrangements that bundle devices and monthly wireless service, revenue is allocated to each unit of accounting using a relative selling price method. At the inception of the arrangeme
nt, the amount allocable to the delivered units of accounting is limited to the amount that is not contingent upon the delivery of the monthly wireless service (the noncontingent amount). The Partnership effectively recognizes revenue on the delivered devi
ce at the lesser of the amount allocated based on the relative selling price of the device or the noncontingent amount owed when the device is sold.
Roaming revenue reflects service revenue earned by the Partnership when customers not associated with the P
artnership operate in the service area of the Partnership and use the Partnership’s network. The roaming rates with third party carriers associated with those customers are based on agreements with such carriers. The roaming rates charged by the Partnershi
p to Cellco are established by Cellco on a periodic basis and may not reflect current market rates (see Note 8).
Other revenues primarily consist of certain fees billed to customers for
surcharges and elected services as well as non-customer related revenu
es. The
Partnership reports taxes imposed by governmental authorities on revenue
producing
transactions between the Partnership and its customers which is
passed through to the customers on a net basis. Other revenues also include
switch revenue. This reve
nue represents revenue earned by the Partnership for
switch services provided to other Cellco owned entities by the Partnership. The
switch revenue rates charged by the Partnership to Cellco are established by
Cellco on a periodic basis and may not reflect
current market rates (see Note 8).
Operating e
xpenses
–
Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of selling, general and administrative, and operating costs incurred by Cellco or its affiliates on behalf of the Partnership. Employees of Cellco provide se
rvices on behalf of the Partnership. These employees are not employees of the Partnership, therefore operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. Cellco believes
such allocations, principally based on the Partnership’s percentage of certain revenue streams, total customers, customer gross additions or minutes-of-use, are calculated in accordance with the Partnership agreement and are a reasonable
method of allocati
ng such costs
(see Note 8).
Cost of roaming reflects costs incurred by the Partnership when customers associated with the Partnership operate in a service area not associated with the Partnership and use a network not associated with the Partnership. The r
oaming rates with third party carriers are based on agreements with such carriers. The roaming rates charged to the Partnership by Cellco are established by Cellco on a periodic basis and may not reflect current market rates (see Note 8).
Cost of equipment
is recorded upon sale of the related equipment at Cellco’s cost basis. Inventory is wholly owned by Cellco and is not recorded in the financial statements of the Partnership.
Maintenance and r
epairs
–
The cost of maintenance and repairs, including the cos
t of replacing minor items not constituting substantial betterments, is charged principally to Cost of service as these costs are incurred.
Advertising
c
osts
–
Costs for advertising products and services as well as other promotional and sponsorship costs a
re charged to Selling, general and administrative expense in the periods in which they are incurred.
Comprehensive i
ncome
–
Comprehensive income is the same as net income as presented in the accompanying statements of income and comprehensive income.
Incom
e t
axes
–
The Partnership is treated as a pass through entity for income tax purposes and, therefore, is not subject to federal, state or local income taxes. Accordingly, no provision has been recorded for income taxes in the Partnership’s financial statem
ents. The results of operations, including taxable income, gains, losses, deductions and credits, are allocated to and reflected on the income tax returns of the respective partners.
The Partnership files federal and state tax returns. The 2013 through 201
6 tax years for the Partnership remain subject to examination by the Internal Revenue Service and state tax jurisdiction. Because the application of tax laws and regulations to many types of transactions is susceptible to varying interpretations, amounts r
eported in the financial statements could be changed at a later date upon final determination by taxing authorities.
Due to/from affiliate
–
Due to/from affiliate principally represents the Partnership’s cash position with Cellco. Cellco manages, on behal
f of the Partnership, all cash, investing and financing activities
, including all transactions associated with the sales of wireless device payment plan agreement receivables,
of the Partnership. As such, the change in due to/from affiliate is reflected as
an investing activity or a financing activity in the statements of cash flows depending on whether it represents a net asset or net liability for the Partnership.
Additionally, cost of equipment, administrative and operating costs incurred by Cellco on be
half of the Partnership, as well as property, plant and equipment and wireless license transactions with affiliates, are charged to the Partnership through this account. Interest income on due from affiliate is based on the Applicable Federal Rate which wa
s approximately 0.7%, 0.5% and 0.3% for the years ended December 31, 2016, 2015 and 2014, respectively. Interest expense on due to affiliate is calculated by applying Cellco’s average cost of borrowing from Verizon Communications Inc., which was approximat
ely 4.8%, 4.8% and 5.0% for the years ended
December 31, 2016, 2015 and 2014
, respectively to the outstanding due to/from affiliate balance. Included in Interest (expense) income,
net is interest income of $1,390
, $0 and $1,706 for the years ended December
31, 2016, 2015 and 2014, respectively, related to due to/from affiliate. Interest expense of $2,683
and $23,878
was incurred during the year
s
ended December 31, 2016
and 2015 respectively
, of which all was capitalized.
Accounts receivable and allowance
for doubtful a
ccounts
–
Accounts receivable are recorded in the financial statements at cost net of allowance for credit losses, with the exception of device payment plan agreement receivables which are initially recorded at fair value. The Partnership mai
ntains allowances for uncollectible accounts receivable, including device payment plan
agreement
receivables, for estimated losses resulting from the failure or inability of customers to make required payments. The allowance for uncollectible accounts rece
ivable is based on Cellco’s assessment of the collectability of
each Partnership’s
specific customer accounts and includes consideration of the credit worthiness and financial condition of those customers. The Partnership records an allowance to reduce the
receivables to the amount that is reasonably believed to be collectible. The Partnership also records an allowance for all other receivables based on multiple factors including historical experience with bad debts, the general economic environment, and th
e aging of such receivables. Similar to traditional service revenue accounting treatment,
bad debt expense related to
device payment plan
agreement receivables
is recorded based on an estimate of the percentage of
device payment plan agreement receivables
that will not be collected. This estimate is based on a number of factors including historical write-off experience, credit quality of the customer base and other factors such as macro-economic conditions. Due to the device payment plan
agreement receivabl
es
being incorporated in the standard Verizon Wireless bill, the collection and risk strategies continue to follow historical practices. The Partnership monitors the aging of accounts
receivable, including
device payment plan
agreement
receivables
,
and wri
tes off account balances if collection efforts are unsuccessful and future collection is unlikely.
Property, plant and e
quipment
–
Property, plant and equipment is recorded at cost. Property, plant and equipment are generally depreciated on a straight-line
basis.
Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.
When the depreciable assets are retired or otherwis
e disposed of, the related cost and accumulated depreciation are deducted from the property, plant and equipment accounts and any gains or losses on disposition are recognized in income. Transfers of property, plant and equipment between Cellco and affilia
tes are recorded at net book value on the date of the transfer with an offsetting entry included in due to/from affiliate.
Interest associated with the acquisition or construction of network-related assets is capitalized. Capitalized interest is reported a
s a reduction in interest expense and depreciated as part of the cost of the network-related assets.
In connection with the ongoing review of estimated useful lives of property, plant and equipment during 2016, Cellco determined that the average useful liv
es of certain leasehold improvements would be increased from 5 to 7 years. This change was immaterial in 2016. While the timing and extent of current deployment plans are subject to ongoing analysis and modification, Cellco and the Partnership believes the
current estimates of useful lives are reasonable.
Other assets –
Other assets primarily include long term device payment plan agreement receivables, net of allowances of $16,545 and $8,661 at December 31, 2016 and 2015, respectively.
Impairment
–
All long
-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indications were to become present, the Partnership would test for recoverability by compari
ng the carrying amount of the asset group to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount, the next step would be to determine the fair value of the as
set and record an impairment, if any. The Partnership reevaluates the useful life determinations for these long-lived assets each year to determine whether events and circumstances warrant a revision to their remaining useful lives.
Wireless
l
icenses
–
I
ntangible assets are wireless licenses that provide the Partnership wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide wireless communications services. In addition, Cellco maintains wireless licenses tha
t provide the Partnership’s operations with the exclusive right to utilize designated radio frequency spectrum to provide wireless communications services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to r
enewal by the Federal Communications Commission (FCC). License renewals, which are managed by Cellco, have historically occurred routinely and at nominal cost. Moreover, the Partnership determined that there are currently no legal, regulatory, contractual,
competitive, economic or other factors that limit the useful life of wireless licenses. As a result, wireless licenses are treated as an indefinite-lived intangible asset. The useful life determination for wireless licenses is reevaluated each year to det
ermine whether events and circumstances continue to support an indefinite useful life. The Partnership aggregates wireless licenses into one single unit of accounting, as they are utilized on an integrated basis.
Cellco and the Partnership test the
wireless licenses balance for potential impairment annually or more frequently if impairment indicators are present. In 2016
and 2015
, the Partnership performed a qualitative assessment to determine whether it is more likely than not that the fair value of
wireless licenses was less than the carrying amount. As part of the assessment, several qualitative factors were considered including market transactions, the business enterprise value, macroeconomic conditions (including changes in interest rates and dis
count rates), industry and market considerations (including industry revenue and EBITDA (Earnings before interest, taxes, depreciation and amortization) margin projections), the projected financial performance, as well as other factors.
In 2016, Cellco als
o performed a qualitative assessment similar to that described for the Partnership.
In 2015, Cellco
performed a
quantitative assessment
which
consisted of comparing the estimated fair value of
its
aggregate wireless licenses to the aggregated carrying amo
unt as of the test date.
Interest expense incurred while qualifying activities are performed to ready wireless licenses for their intended use is capitalized as part of wireless licenses (see Note 4). The capitalization period ends when the development i
s discontinued or substantially complete and the license is ready for its intended use.
In addition, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Ce
llco for licenses included in Cellco’s national footprint. Cellco and the Partnership evaluated their wireless licenses for potential impairment as of December 15, 2016 and 2015. These evaluations resulted in no impairment of wireless licenses.
Financial
i
nstruments
–
The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value as well as the carrying value of the deferred purchase price and beneficial interest approximates fair value. The Partnership rec
eives a beneficial i
nterest, which is the residual
amount on the device payment plan agre
ement receivables in excess of
proceeds from the sale o
f these receivables to Cellco.
The Partnership records a deferred purchase price, which is the residual amount o
n the device payment plan agreement receivables in excess of proceeds from the sale of these receivables to a third party. The deferred purchase price and the beneficial interest is recorded at fair value based on the remaining device payment amounts expe
cted to be collected, adjusted, as applicable, for the time value of money and by the timing and estimated value of the device trade-in in connection with upgrades. The collection of the deferred purchase
price and the beneficial
interest is contingent on
collections from customers.
Fair value m
easurements
–
Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderl
y transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1 - Quoted prices i
n active markets for identical assets or liabilities
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 - No observable pricing inputs in the market
Financial assets and financial liabilitie
s are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuatio
n of the assets and liabilities being measured and their categorization within the fair value hierarchy.
Distributions
–
The Partnership is required to make distributions to its partners based upon the Partnership’s operating results, due to/from affiliat
e status, and financing needs as determined by the General Partner at the date of the distribution.
Variable interest e
ntities
(VIEs)
–
VIEs are entities which lack sufficient equity to permit the entity to finance its activities without additional subordi
nated financial support from other parties, have equity investors which do not have the ability to make significant decisions relating to the entity’s operations through voting rights, do not have the obligation to absorb the expected losses, or do not hav
e the right to receive the residual returns of the entity. The assets and liabilities of the VIEs are consolidated when the Partnership is deemed to be the primary beneficiary. The primary beneficiary is the party which has the power to make the decisions
that most significantly affect the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
Recent accounting s
tandards
–
In August 2016, the accounting standard
update related to the classification of certain cash receipts and cash payments was issued. This standard update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for these issues. Among the updates
, this standard update requires cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables to be classified as cash inflows from investing activities. This standard update is effective as of the first quarter of 201
8; however, early adoption is permitted. The Partnership is currently evaluating the impact that this standard update will have on the consolidated financial statements. The Partnership expects the amendment relating to beneficial interests in securitizati
on transactions will have an impact on the presentation of collections of the deferred purchase price from sales of wireless device payment plan agreement receivables in the consolidated statements of cash flows.
In June 2016, the standard update related t
o the measurement of credit losses on financial instruments was issued. This standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the ass
ets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the amounts. This standard update is effective as o
f the first quarter of 2020; however early adoption is permitted. The Partnership is currently evaluating the impact that this standard update will have on the consolidated financial statements.
In February 2016, the accounting standard update related to
leases was issued. This standard update intends to increase transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. In addition, through improved discl
osure requirements, the standard update will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. This standard update is effective as of the first quarter of 2019; however early
adoption is permitted. The Partnership’s current operating lease portfolio is primarily comprised of
spectrum,
network, real estate, and equipment leases. Upon adoption of the standard, the balance sheet is expected to include a right of use asset and liab
ility related to substantially all operating lease arrangements. A
t Cellco, a
cross-functional coordinated implementation team has been established to implement the standard update related to leases. The Partnership is in the process of assessing the impa
ct to its systems, processes and internal controls to meet the standard update’s reporting and disclosure requirements.
In May 2014, the accounting standard update related to the recognition of revenue from contracts with customers was issued. This standar
d update along with related subsequently
issued
updates clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP. The standard update also amends current guidance for the recognition of costs to obtain and fulfi
ll contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers will be deferred and amortized consistent with the transfer of the related good or service. The standard update intends to provide
a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and provide more useful information to users of financial statements through impr
oved disclosure requirements. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the stan
dard would be recognized at the earliest period shown, or the modified retrospective method, in which case the standard is applied only to the most current period presented and the cumulative effect of applying the standard would be recognized at the date
of initial application. In August 2015, an accounting standard update was issued that delays the effective date of this standard update until the first quarter of 2018, at which time the Partnership plans to adopt the standard.
The Partnership is in the pr
ocess of evaluating the impact of the standard update. The ultimate impact on revenue resulting from the application of the new standard will be subject to assessments that are dependent on many variables, including, but not limited to, the terms of contra
ctual arrangements and the mix of business. Upon adoption, the Partnership expects that the allocation of revenue between equipment and service for wireless fixed-term service plans will result in more revenue allocated to equipment and recognized earlier
as compared with current GAAP. The timing of recognition of sales commission expenses is also expected to be impacted, as a substantial portion of these costs (which are currently expensed) will be capitalized and amortized as described above. The availabl
e transition methods will continue to be evaluated. The Partnership’s considerations include, but are not limited to, the comparability of financial statements and the comparability within the industry from application of the new standard to contractual ar
rangements. The Partnership plans to select a transition method by the second half of 2017.
A
t Cellco, a
cross-functional coordinated implementation team has been established to implement the standard update related to the recognition of revenue from con
tracts with customers. The Partnership has identified and is in the process of implementing changes to its systems, processes and internal controls to meet the standard update’s reporting and disclosure requirements.
Reclassifications
–
The Partnership rec
lassified certain prior year amounts to conform to the current year presentation.
Subsequent e
vents
–
Events subsequent to December 31, 2016 have been evaluated through February 22, 2017, the date the financial statements were issued.
3. WIRELESS DEVICE
PAYMENT
PLANS
Under the Verizon device payment program, eligible wireless customers purchase wireless devices under a device payment plan agreement. Customers that activate service on devices purchased under the device payment program pay lower service fees as compared
to those under fixed-term service plans, and their device payment plan charge is included in their standard wireless monthly bill.
Wireless device payment plan agreement receivables
–
The following table displays device payment plan
agreement
receivables,
net, recognized in the accompanying balance sheets:
|
|
2016
|
|
2015
|
Device payment plan agreement receivables, gross
|
|
$
|
272,174
|
|
$
|
159,527
|
Unamortized imputed interest
|
|
|
(11,544)
|
|
|
(6,534)
|
Device payment plan agreement receivables, net of unamortized
imputed interest
|
|
|
260,630
|
|
|
152,993
|
Allowance for credit losses
|
|
|
(36,026)
|
|
|
(25,873)
|
Device payment plan agreement receivables, net
|
|
$
|
224,604
|
|
$
|
127,120
|
|
|
|
|
|
|
|
Classified on the consolidated balance sheets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
120,747
|
|
$
|
68,785
|
Other assets
|
|
$
|
103,857
|
|
$
|
58,335
|
Device payment plan agreement receivables, net
|
|
$
|
224,604
|
|
$
|
127,120
|
The Partnership may offer customers certain promotions where a customer can trade-in his or her owned device in connection with the purchase of a new device. Under these types of promotions, the customer will receive trade-in credits that are
applied to the customer’s monthly bill. As a result, the Partnership recognizes a trade-in obligation measured at fair value using weighted-average selling prices obtained in recent resales of devices eligible for trade-in. Device payment plan agreement re
ceivables, net does not reflect this trade-in obligation. At December 31, 2016 and 2015, the amount of trade-in obligations was not
material
.
At the time of sale, the Partnership imputes risk adjusted interest on the device payment plan agreement receivabl
es. Imputed interest is recorded as a reduction to the related accounts receivable. Interest income, which is included within
Other revenues
on
the statements of income and comprehensive income, is recognized over the financed payment term.
When originating device payment plan agreements, the Partnership uses internal and external data sources to create a credit risk score to measure the credit quality of a customer and to determine eligibility for the device payment program. If a customer i
s either
new
to the Partnership or has less than 210 days of customer tenure (a new customer), the credit decision process relies more heavily on external data sources.
For a small portion of new customer applications, a traditional credit report is not av
ailable from one of the national credit reporting agencies because the potential customer does not have sufficient credit history. In those instances, alternate credit data is used for the risk
assessment.
If the customer has 210 days or more of customer t
enure (an existing customer), the credit decision process relies on internal data sources. The experience has been that the payment attributes of longer tenured customers are highly predictive when considering their ability to pay in the future. External d
ata sources include obtaining a credit report from a national consumer credit reporting agency, if available. Internal data and/or credit data obtained from the credit reporting agencies is used to create a custom credit risk score. The custom credit risk
score is generated automatically (except with respect to a small number of applications where the information needs manual intervention) from the applicant’s credit data using Verizon’s proprietary custom credit models
, which are empirically derived and
de
monstrably and statistically sound. The credit risk score measures the likelihood that the potential customer will become severely delinquent and be disconnected for non-payment.
Based on the custom credit risk score, each customer is assigned to a credit
class, each of which has a specified required down payment
percentage
and specified credit limits. Device payment plan agreement receivables originated from customers assigned to credit classes requiring no down payment represent the lowest risk. Device p
ayment plan agreement receivables originated from customers assigned to credit classes requiring a down payment represent a higher risk.
Subsequent to origination, the Partnership monitors delinquency and write-off experience as key credit quality indicato
rs for its portfolio of device payment plan agreements and fixed-term service plans. The extent of collection efforts with respect to a particular customer are based on the results of proprietary custom empirically derived internal behavioral scoring model
s which analyze the customer’s past performance to predict the likelihood of the customer falling further delinquent. These customer scoring
models
assess a number of variables, including origination characteristics, customer account history and payment pa
tterns. Based on the score derived from these models, accounts are grouped by risk category to determine the collection strategy to be applied to such accounts. The Partnership continuously monitors collection performance results and the credit quality of
device payment plan agreement receivables based on a variety of metrics, including aging. The Partnership considers an account to be delinquent and in default status if there are unpaid charges remaining on the account on the day after the bill’s due date.
As
of
December 31, 2016, the balance and aging of the device payment plan agreement receivables on a gross basis was as follows:
|
|
|
|
|
Unbilled
|
|
$
|
264,724
|
Billed:
|
|
|
|
Current
|
|
|
5,885
|
Past Due
|
|
|
1,565
|
Device payment plan agreement receivables, gross
|
|
|
272,174
|
Activity
in the allowance for credit losses for the device payment plan agreement receivables was as follows:
|
|
|
2016
|
|
|
2015
|
Balance at January 1
|
$
|
25,873
|
|
$
|
3,205
|
|
Bad debt expenses
|
|
48,965
|
|
|
43,794
|
|
Write-offs
|
|
(24,482)
|
|
|
(14,319)
|
|
Allowance related to receivables sold
|
|
(16,829)
|
|
|
(8,758)
|
|
Other
|
|
2,499
|
|
|
1,951
|
Balance at December 31
|
$
|
36,026
|
|
$
|
25,873
|
Customers entering into device payment
plan
agreements prior to May 31, 2015, have the right to upgrade their device, subject to
certain conditions, including making a stated portion of the required device payment plan agreement payments and trading in their device in good working condition. Generally, customers entering into device payment agreements on or after June 1, 2015 are re
quired to repay all amounts due under their device payment agreement before being eligible to upgrade their device. However, on select devices, certain marketing promotions have been revocably offered to customers to upgrade to a new device after paying do
wn a certain specified portion of the device payment plan agreement amount as well as trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device or for a device that
is subject to an upgrade promotion, the Partnership records a guarantee liability in accordance with the Partnership’s accounting policy. The guarantee liability related to this program, which was $
2,840
at December 31, 2016 and $
11,526
at December 31, 201
5, was included in Advance billings and other on the accompanying consolidated balance sheets.
Sales of wireless device payment plan agreement r
eceivables
–
During 2015 and 2016, Cellco established programs pursuant to a Re
ceivables Purchase Agreement
(RPA)
to sell from time to time, on an uncommitted basis, eligible device payment plan receivables to a group of primarily relationship banks (Purchasers) on both a revolving (Revolving Program) and non-revolving (Non-Revolving Program) basis.
Additionally
, during September of 2016, Cellco entered into a device payment plan agreement receivables financing facility (the “ABS Financing Facility”) with a number of financial institutions.
The receivables sold under the RPA
and ABS
are no longer considered asset
s of the Partnership.
Cellco continues to bill and collect on the receivables on behalf of the Partnership. Eligible receivables under the RPA exclude device payment plan agreements where a new customer was required to provide a down payment. The sales of
receivables under the RPA did not have a material impact on the consolidated statements of income and comprehensive income. The proceeds received from the Purchasers are recorded within cash flows provided by operating activities on the consolidated statem
ents of cash flows.
Receivables Purchase Agreement –
Under the Non-Revolving Program, Los Angeles SMSA transfers the eligible receivables to Los Angeles Edge LLC (Seller or SPE). The Seller then sells the receivables to the Purchasers for upfront proceeds
and additional consideration upon settlement of the receivables (the deferred purchase price). Under the Revolving Program, Los Angeles SMSA transfers the eligible device payment plan agreement receivables to the Seller. The Seller then sells the eligible
receivables on a revolving basis, subject to a maximum funding limit, to the Purchasers. Sales of eligible receivables by the Sellers, once initiated, generally occur and are settled on a monthly basis. Customer payments made towards receivables sold under
the Revolving Program will be available to purchase additional eligible device payment plan agreement receivables originated during the revolving period. Cellco elected to end the revolving period in July 2016.
During 2016, the Partnership sold $178,981 o
f receivables, net of allowances and imputed interest
under the Revolving Program
. The Partnership received proceeds from new transfers of $132,483 and proceeds from reinvested collections of $36,855, and recorded
a deferred purchase price of $23,873
.
Duri
ng 2015, the Partnership sold $418,615 of receivables, net of allowances and imputed interest, under the Non-Revolving Program. In connection with this sale, proceeds from new transfers of $308,659 were received and a deferred purchase price of $117,587 wa
s recorded. During 2015, the Partnership also sold $201,283 of receivables, net of allowances and imputed interest, under the Revolving Program. In connection with this sale, proceeds from new transfers of $168,854 were received and a deferred purchase pri
ce of $32,429 was recorded.
Deferred purchase price
–
Under the RPA, the deferred purchase price was initially recorded at fair value, based on the remaining device payment amounts expected to be collected, adjusted, as applicable, for the time value of
money and by the timing and estimated value of the device trade-in in connection with upgrades. The estimated value of the device trade-in considers prices expected to be offered to us by independent third parties. This estimate contemplates changes in val
ue after the launch of a device. The initial fair value measurements are considered to be Level 3 measurements within the fair value hierarchy. The collection of the deferred purchase price is contingent on collections from customers. At December 31, 2016
and 2015, the Partnership’s deferred purchase price receivable was $95,827 and $148,941, respectively, which is held by the SPE and is included within Other assets on the consolidated balance sheets.
Variable interest entities (VIEs)
–
Under the RPA, the S
PE’s sole business consists of the acquisition of the receivables from Los Angeles SMSA and the resale of the receivables to the Purchasers. The assets of the SPE are not available to be used to satisfy obligations of any Partnership entities other than th
e SPE’s. It was determined that the SPE is a VIE as
it
lack
s
sufficient equity to finance
its
activities. Given that Los Angeles SMSA has the power to direct the activities of the SPE that most significantly impact the SPE’s economic performance, Los Angel
es SMSA is deemed to be the primary beneficiary of the SPE. As a result, the Los Angeles SMSA consolidates the assets and liabilities of the SPE into the consolidated financial statements (see Note 2).
Under ABS, there is a Trust entity (the “Trust”) whose
sole business consists of holding collected receivables which were previously sold by the Partnership to Cellco affiliates under the terms of the ABS Financing Facility. The activity of servicing the receivables and distribution of the cash collected is t
he activity that has the most significant impact on the Trust. Cellco is the master and special servicer for the receivables but does not have a direct variable interest in the Trust. The Partnership holds a beneficial interest in the Trust which represent
s the residual interest in the Trust and as such are variable interests. Since Cellco maintains decision making rights as servicer and has an obli
gation to absorb losses, it is
the primary beneficiary in the Trust.
ABS Financing Facility –
Under the terms
of the ABS Financing Facility,
the
counterparties
to the facility
made advances under asset-backed loans backed by device payment plan agreement receivables for proceeds. There is a two year revolving period, which may be extended, during which Cellco may
transfer additional receivables
to an
ABS Entity. Subject to certain conditions, Cellco may also remove receivables from the ABS Entity. Cellco may prepay the outstanding amounts of the loans without penalty, but in certain cases, with breakage costs.
Duri
ng
2016, the Partnership sold $389,800 of device payment plan agreement receivables, net of allowances and imputed interest to Cellco and received proceeds of $
331,454 and
recorded a beneficial interest of $
58,346
, which is included within Other assets on
the consolidated balance sheets.
Beneficial interest –
Under the ABS Financing Facility, the beneficial interest was initially recorded at fair value, based on the remaining device payment amounts expected to be collected, adjusted, as applicable, for the
time value of money. This estimate contemplates changes in value after the launch of a device. The initial fair value measurements are considered to be Level 3 measurements within the fair value hierarchy. The collection of the beneficial interest is conti
ngent on collections from customers.
At December 31, 2016, the Partnership’s beneficial interest was $56,359.
Continuing
involvement
– The Partnership has continuing involvement related to the sold receivables as they may be responsible for absorbing addit
ional credit losses pursuant to the RPA. The Partnership’s maximum exposure to loss related to the sold receivables is limited to the amount of the deferred purchase price, which was $95,827 and $148,941 as of December 31, 2016 and 2015, respectively. The
maximum exposure to loss represents an estimated loss that would be incurred under severe, hypothetical circumstances whereby the Partnership would not receive the total portion of the proceeds withheld by the Purchasers. As the Partnership believes the pr
obability of these circumstances occurring is remote, the maximum exposure to loss is not an indication of the Partnership’s expected loss. Additionally, Cellco has continuing involvement with the sold receivables as it services the receivables on behalf o
f the Partnership under the RPA and ABS Financing Facility. Cellco continues to service the customer and their related receivables, including facilitating customer payment collection. The Partnership has no continuing involvement related to the sold receiv
ables and is not responsible for absorbing additional credit losses pursuant to the ABS Financing Facility. While servicing the receivables, the same policies and procedures are applied to the sold receivables that apply to owned receivables, and Cellco co
ntinues to maintain normal relationships with the customers. The credit quality of the customers served was consistent throughout the periods presented.
The outstanding device payment plan agreement receivables derecognized from the Partnership’s consolida
ted balance sheets, but which Cellco continues to service, was $609,990 and $527,002 (1) at December 31, 2016 and 2015, respectively.
(1) The Partnership corrected the 2015 information in the preceding Paragraph, which was identified during the preparati
on of the 2016 consolidated financial statements. Management believes such amounts are immaterial to the previously issued consolidated financial statements.
4. WIRELESS LICENSES
Changes in the carrying amount of wireless licenses are as follows:
|
|
|
|
|
Balance at January 1, 2015
|
|
$
|
79,543
|
|
Acquisitions
|
|
|
1,972,824
|
|
Capitalized interest on wireless licenses
|
|
|
21,075
|
|
Reclassifications, adjustments and other
|
|
|
309
|
Balance at December 31, 2015
|
|
$
|
2,073,751
|
|
Acquisitions
|
|
|
–
|
|
Capitalized interest on wireless licenses
|
|
|
1,697
|
|
Reclassifications, adjustments and other
|
|
|
–
|
Balance at December 31, 2016
|
|
$
|
2,075,448
|
At December 31, 2016, $1,972,824 of wireless licenses were under development for commercial service for which the Partnership was capitalizing interest costs
.
The average remaining renewal period of the Partnership’s wireless license portfolio was 7.0 yea
rs as of December 31, 2016.
Spectrum license transaction
–
On January 29, 2015, the FCC completed an auction of 65 MHz of spectrum, which it identified as
the AWS-3 band. Cellco participated in that auction and was the high bidder on the licenses covering the Partnership service area. The licenses were deemed to be right to use assets and were allocated and recorded by the Partnership as wireless licenses. T
he cash payment made by the Partnership of $1,972,824 is classified within Acquisition of wireless licenses on the statement of cash flows for the year ended December 31, 2015.
5.
PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consist
of the following as of December 31, 2016 and 2015:
|
2016
|
|
2015
|
Land
|
$
|
7,716
|
|
$
|
7,716
|
Buildings and improvements (15-45 years)
|
|
940,411
|
|
|
836,428
|
Wireless plant and equipment (3-50 years)
|
|
4,165,458
|
|
|
3,973,684
|
Furniture, fixtures and equipment (3-10
years)
|
|
63,565
|
|
|
64,269
|
Leasehold improvements (5-7 years)
|
|
428,995
|
|
|
400,313
|
|
|
|
|
|
|
|
|
5,606,145
|
|
|
5,282,410
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
(3,743,253)
|
|
|
(3,477,533)
|
|
|
|
|
|
|
Property, plant and equipment, net
|
$
|
1,862,892
|
|
$
|
1,804,877
|
Capitalized interest cost of $772 and $2,803, and capitalized network engineering costs of $24,656 and $26,754, were recorded during the years ended December 31, 2016 and 2015, respectively. Construction in progress included in certain classifications show
n above, principally consists of wireless plant and equipment, amounted to $
127,758
and $106,935, as of December 31, 2016 and 2015, respectively. Depreciation expense of $354,329, $353,975, and $343,883 was incurred during the years ended December 31, 2016
, 2015 and 2014.
6. TOWER MONETIZATION TRANSACTION
Prior to the acquisition of the Partnership interest by Cellco in 2000, Vodafone Group PLC (“Vodafone”), then parent company of AirTouch Cellular, entered into agreements to sublease all of its unused space on up to 430 of its communications towers (“Suble
ase Agreement”) to SpectraSite Holdings, Inc. (“SpectraSite”) in exchange for $155,000. At various closings in 2001 and 2000, SpectraSite leased 274 communications towers owned and operated by the Partnership for $98,465. At December 31, 2016 and 2015, the
Partnership has $18,967 and $23,932, respectively, recorded as deferred rent. The Sublease Agreement requires monthly maintenance fees for the existing physical space used by the Partnership’s cellular equipment. The Partnership paid $1,528, $2,152 and $3
,944 to SpectraSite pursuant to the Sublease Agreement for the years ended December 31, 2016, 2015 and 2014, respectively, which is included in cost of service in the accompanying statements of income and comprehensive income.
During March 2015, Verizon C
ommunications, the parent co
mpany of Cellco, entered into an
agreement with American Tower Corporation (ATC) giving ATC exclusive rights to lease and operate approximately 11,300 wireless towers owned and operated by Cellco and its subsidiaries for an upfr
ont payment of $5.0 billion (not in thousands). Verizon Communications also sold 162 towers to ATC for an upfront payment of $0.1 billion (not in thousands). Under the terms of the lease agreements, ATC has exclusive rights to lease and operate the towers
over an average term of approximately 28 years. As the leases expire, ATC has fixed-price purchase options to acquire these towers based on their anticipated fair market values at the end of the lease terms. The Partnership has subleased capacity on the to
wers from ATC for a minimum of 10 years at current market rates, with options to renew. The Partnership participated in this arrangement and has leased 538 towers to ATC for an upfront payment of $221,653 and has sold 1 tower to ATC for an upfront payment
of $616. The upfront payment, including the towers sold was $222,269 and
was
accounted for as deferred rent and as a financing obligation. The $95,634 accounted for as deferred rent
was
included in cash flows provided by operating activities and relates to
the portion of the towers for which the right-of-use has passed to ATC. The deferred rent is being recognized on a straight-line basis over the Partnership’s average lease term of 30 years.
At December 31, 2015,
a financing obligation
in the amount of $12
6,635 was
included in cash flows p
rovided by financing activities, which
relates to the portion of the towers that continue
to be
occupied and used for the Partnership’s network operations. The Partnership makes a sublease payment to ATC for $1.9 per month
per site, with annual increases of 2 percent. During 2016 and 2015, the Partnership made $12,498 and $10,260, respectively, of sublease payments to ATC, which is recorded as Repayments of financing obligation.
At December 31, 2016 and 2015, the balance of deferred rent was $
89,605
and $93,057, respectively. At December 31, 2016 and 2015, the balance of the financing obligation was $125,296 and $125,510, re
spectively.
7. CURRENT LIABILITIES
Accounts payable and accrued liabilities consist of the following as of December 31, 2016 and 2015:
|
2016
|
|
2015
|
|
|
|
|
|
|
Accounts payable
|
$
|
189,081
|
|
$
|
174,883
|
Accrued liabilities
|
|
13,203
|
|
|
15,924
|
Accounts payable and
accrued liabilities
|
$
|
202,284
|
|
$
|
190,807
|
Advance billings and other consist of the following as of December 31, 2016 and 2015:
|
2016
|
|
2015
|
|
|
|
|
|
|
Advance billings
|
$
|
139,714
|
|
$
|
142,652
|
Customer deposits
|
|
17,880
|
|
|
12,355
|
Guarantee liability
|
|
2,840
|
|
|
11,526
|
Advance billings and other
|
$
|
160,434
|
|
$
|
166,533
|
8.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
In addition to fixed asset purchases
and right to use licenses substantially all of service revenues, equipment revenues, other revenues, cost of service, cost of equipment, and selling, general and administrative expenses represent transactions processed by affiliates (Cellco and its related
parties) on behalf of the Partnership or represent transactions with affiliates. These transactions consist of (1) revenues and expenses that pertain to the Partnership which are processed by Cellco and directly attributed to or directly charged to the Pa
rtnership; (2) roaming revenue by customers of other Cellco affiliated markets within the Partnership market or Partnership customers’ cost when roaming in other Cellco affiliated markets; and (3) certain revenues and expenses that are processed or incurre
d by Cellco which are allocated to the Partnership based on factors such as the Partnership’s percentage of revenue streams, customers, gross customer additions, or minutes of use. These transactions do not necessarily represent arm’s length transactions a
nd may not represent all revenues and costs that would be present if the Partnership operated on a standalone basis. Cellco periodically reviews the methodology and allocation bases for allocating certain revenues, operating costs, selling, general and adm
inistrative expenses to the Partnership. Resulting changes, if any, in the allocated amounts have historically not been significant.
Service revenues
–
Service revenues include monthly customer billings processed by Cellco on behalf of the Partnership and
roaming revenues relating to customers of other affiliated markets that are specifically identified to the Partnership. For the years ended December 31, 2016, 2015, and 2014 roaming revenues were $486,262, $438,105 and $369,731, respectively. Service reven
ue
s also include
long distance, data, and certain revenue reductions including revenue concessions that are processed by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Equipment
revenues
–
Equipment revenue
s
include
equipment sales processed by Cellco and specifically identified to the Partnership, as well as certain handset and accessory revenues, contra-revenues including equipment concessions, and coupon rebates that are processed by Cellco and allocated to
the Partnership based on certain factors deemed appropriate by Cellco.
Other revenues
–
Other revenues include switch revenue and other fees and surcharges charged to the customer that are specifically identified to the Partnership. For the years ended De
cember 31, 2016, 2015, and 2014 switch revenues were $8,570, $9,234, and $6,614, respectively.
Cost of s
ervice
–
Cost of service includes roaming costs relating to the Partnership’s customers roaming in other affiliated markets. For the years ended Decembe
r 31, 2016, 2015 and 2014 roaming costs were $619,985, $547,672, and $477,949, respectively. Cost of service also includes cost of telecom, long distance and application content that are incurred by Cellco and allocated to the Partnership based on certain
factors deemed appropriate by Cellco. The Partnership has lease agreement
s
for the right to use additional spectrum owned by Cellco. See Note 2 for further information regarding this arrangement.
Cost of equipment
–
Cost of equipment is recorded at Cellco’
s cost basis (see Note 2). Cost of equipment also includes certain costs related to handsets, accessories and other costs incurred by Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco.
Selling, general and admini
strative
–
Selling, general and administrative expenses include commissions, customer billing, office telecom, customer care, salaries, sales and marketing and advertising expenses that are specifically identified to the Partnership as well as incurred by
Cellco and allocated to the Partnership based on certain factors deemed appropriate by Cellco. The Partnership
recorded $113,300,
$117,409 and $118,342 in advertising costs for the years ended December 31, 2016, 2015 and 2014, respectively.
Property, plant
and equipment
–
Property, plant and equipment includes assets purchased by Cellco and directly charged to the Partnership as well as assets transferred between Cellco and the Partnership (see Note 2).
Wireless licenses
–
Wireless licenses include the right to use assets that were allocated by Cellco and recorded by the Partnership in exchange for a $1,972,824 payment (see Note 4).
9.
COMMITMENTS
Cellco
, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities and equipment used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Ind
ex as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancellable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, in
cluding any optional renewal terms that are reasonably assured of occurring. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancellable lease term. For the years ended Decem
ber 31, 2016, 2015 and 2014, the Partnership incurred a total of $117,771, $
104,515
and $97,285 respectively, as rent expense related to these operating leases, which was included in Cost of service and Selling, general and administrative expenses in the accompanying statements of income and comprehensive income. Aggregate future minimum
rental commitments under noncancellable operating leases, excluding renewal options that are not reasonably assured of occurring and remaining tower maintenance fees of $
10,182
(see Note 6), for the years shown are as follows:
Years
|
|
Amount
|
|
|
|
|
2017
|
|
$
|
95,290
|
2018
|
|
|
84,812
|
2019
|
|
|
73,290
|
2020
|
|
|
49,838
|
2021
|
|
|
27,042
|
2022 and thereafter
|
|
|
131,324
|
|
|
|
|
Total minimum payments
|
|
$
|
461,596
|
The Partnership has also entered into certain agreements with Cellco, whereas the Partnership leases certain
spectrum from Cellco that overlaps the Los Angeles metropolitan service area. Total rent expense under these spectrum leases amounted to $124,943 in 2016, $124,722 in 2015 and $110,044 in 2014, respectively, which is included in Cost of service in the acco
mpanying consolidated statements of income and comprehensive income.
Based on the terms of these leases as of December 31, 2016, future spectrum lease obligations are expected to be as follows:
Years
|
|
Amount
|
|
|
|
|
2017
|
|
$
|
103,919
|
2018
|
|
|
93,249
|
2019
|
|
|
82,781
|
2020
|
|
|
72,312
|
2021
|
|
|
72,312
|
2022 and thereafter
|
|
|
882,177
|
|
|
|
|
Total minimum payments
|
|
$
|
1,306,750
|
The General Partner currently expects that
any renewal option in the leases will be exercised.
10.
CONTINGENCIES
Cellco and the Partnership are subject to lawsuits and other claims including class actions, product liability, patent infringement, intellectual property, antitrust, partnership
disputes, and claims involving relations with resellers and agents. Cellco is also currently defending lawsuits filed against it and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various c
onsumer class action lawsuits allege that Cellco violated certain state consumer protection laws and other statutes and defrauded customers through misleading billing practices or statements. These matters may involve indemnification obligations by third p
arties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and the outcomes are not currently predictable.
The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. In
none of the currently pending matters is the amount of accrual material to the Partnership. An estimate of the reasonably possible loss or range of loss with respect to these matters as of December 31, 2016 cannot be made at this time due to various factor
s typical in contested proceedings, including (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of th
e opposing party and its demands. The Partnership continuously monitors these proceedings as they develop and will adjust any accrual or disclosure as needed. It is not expected that the ultimate resolution of any pending regulatory or legal matter in futu
re periods will have a material effect on the financial condition of the Partnership, but it could have a material effect on the results of operations for a given reporting period.
11. RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
|
Balance at
Beginning
of the Year
|
|
Additions
Charged to
Operations
|
|
Write-offs
Net of
Recoveries
|
|
Balance at
End
of the Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable Allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
$
|
45,751
|
|
$
|
71,925
|
|
$
|
(70,038)
|
|
$
|
47,638
|
|
2015
|
|
24,136
|
|
|
79,063
|
|
|
(57,448)
|
|
|
45,751
|
|
2014
|
|
21,600
|
|
|
34,370
|
|
|
(31,834)
|
|
|
24,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
******
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
UNITED STATES CELLULAR CORPORATION
|
|
|
|
|
|
|
|
|
By:
|
/s/ Kenneth R. Meyers
|
|
|
|
Kenneth R. Meyers
President and Chief
Executive Officer
(principal executive officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/ Steven T. Campbell
|
|
|
|
Steven T. Campbell
Executive Vice President-Finance,
Chief Financial Officer and Treasurer
(principal financial officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/ Douglas D. Shuma
|
|
|
|
Douglas
D. Shuma
Chief Accounting Officer
(principal accounting officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/ Kristin A. MacCarthy
|
|
|
|
Kristin A. MacCarthy
Vice President and Controller
|
|
Dated: February 24, 2017
Power of Attorney
Each person whose signature appears below constitutes and appoints LeRoy T. Carlson, Jr. as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him or her and in his or her name, place, and stead, i
n any and all capacities to sign any and all amendments to this Annual Report on Form 10-K under the
Securities Exchange Act of 1934
, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securiti
es and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do so and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he or
she might or could do in person, hereby ratifying and confirming all the said attorney-in fact and agent or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the S
ecurities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/s/ LeRoy T. Carlson, Jr.
|
|
Director
|
|
February 24,
2017
|
LeRoy T. Carlson, Jr.
|
|
|
|
|
|
|
|
|
|
/s/ Kenneth R. Meyers
|
|
Director
|
|
February 24, 2017
|
Kenneth R. Meyers
|
|
|
|
|
|
|
|
|
|
/s/ James Barr III
|
|
Director
|
|
February 24, 2017
|
James Barr III
|
|
|
|
|
|
|
|
|
|
/s/ Steven T. Campbell
|
|
Director
|
|
February 24, 2017
|
Steven
T. Campbell
|
|
|
|
|
|
|
|
|
|
/s/ Walter C. D. Carlson
|
|
Director
|
|
February 24, 2017
|
Walter C. D. Carlson
|
|
|
|
|
|
|
|
|
|
/s/ J. Samuel Crowley
|
|
Director
|
|
February 24, 2017
|
J. Samuel Crowley
|
|
|
|
|
|
|
|
|
|
/s/ Ronald E. Daly
|
|
Director
|
|
February 24, 2017
|
Ronald E. Daly
|
|
|
|
|
|
|
|
|
|
/s/ Paul-Henri Denuit
|
|
Director
|
|
February 24, 2017
|
Paul-Henri Denuit
|
|
|
|
|
|
|
|
|
|
/s/ Harry J. Harczak, Jr.
|
|
Director
|
|
February 24, 2017
|
Harry J. Harczak, Jr.
|
|
|
|
|
|
|
|
|
|
/s/ Gregory P. Josefowicz
|
|
Director
|
|
February 24, 2017
|
Gregory P.
Josefowicz
|
|
|
|
|
|
|
|
|
|
/s/ Peter L. Sereda
|
|
Director
|
|
February 24, 2017
|
Peter L. Sereda
|
|
|
|
|
|
|
|
|
|
/s/ Douglas D. Shuma
|
|
Director
|
|
February 24, 2017
|
Douglas D. Shuma
|
|
|
|
|
|
|
|
|
|
/s/ Cecelia D. Stewart
|
|
Director
|
|
February 24, 2017
|
Cecelia D. Stewart
|
|
|
|
|
|
|
|
|
|
/s/ Kurt B. Thaus
|
|
Director
|
|
February 24, 2017
|
Kurt B. Thaus
|
|
|
|
|
Index to
E
xhibits
Exhibit
|
Description of Documents
|
Number
|
|
|
|
3.1
|
Restated Certificate of Incorporation, is hereby incorporated by reference to Exhibit 3.1 to U.S. Cellular’s Current Report on Form 8-K dated November 10, 2014.
|
|
|
|
3.2
|
Restated Bylaws are hereby incorporated by reference to Exhibit
3.1 to U.S. Cellular’s Current Report on Form
8-K dated August 19, 2014.
|
|
|
|
4.1
|
Restated Certificate of Incorporation incorporated herein as Exhibit 3.1.
|
|
|
|
4.2
|
Restated Bylaws are
incorporated herein as Exhibit
3.2.
|
|
|
|
4.3
|
Revolving Credit Agreement, among U.S. Cellular, Toronto Dominion (Texas) LLC, as administrative agent, and the other lenders thereto, dated as of June 15, 2016, including Schedules and Exhibits, including the
form of the subsidiary Guaranty and Subordination Agreement, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular's Form 8-K dated June 15, 2016.
|
|
|
|
4.4(a)
|
Indenture for Senior Debt Securities dated June
1, 2002 between U.S.
Cellular and
The Bank of New York Mellon Trust Company, N.A., formerly known as BNY Midwest Trust Company of New York (“BNY”) is hereby incorporated by reference to Exhibit
4.1 to Form
S-3 dated May 31, 2013 (File No.
333-188971).
|
|
|
|
4.4(b)
|
Form
of Third Supplemental
Indenture dated December
3, 2003 between U.S.
Cellular and BNY Midwest Trust Company, relating to $444,000,000 of U.S. Cellular’s 6.7% Senior Notes due 2033, is hereby incorporated by reference to Exhibit
4.1 to U.S.
Cellular’s Current Report on Form
8-K
dated December
3, 2003.
|
|
|
|
4.4(c)
|
Form
of Fifth Supplemental Indenture dated June
21, 2004 between U.S. Cellular and BNY Midwest Trust Company, relating to $100,000,000 of U.S. Cellular’s 6.7% Senior Notes due 2033, is hereby incorporated by reference to
Exhibit
4.1 to U.S.
Cellular’s Current Report on Form
8-K dated June
21, 2004.
|
|
|
|
4.4(d)
|
Form of Sixth Supplemental Indenture dated as of May 9, 2011 between U.S. Cellular and BNY Midwest Trust Company, related to $342,000,000 of U.S. Cellular’s 6.95%
Senior Notes due 2060, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular’s Current Report on Form 8-K dated May 9, 2011.
|
|
|
|
4.4(e)
|
Form of Seventh Supplemental Indenture dated as of December 8, 2014 between U.S. Cellular and BNY Midwest
Trust Company, related to $275,000,000 of U.S. Cellular’s 7.25% Senior Notes due 2063, is hereby incorporated by reference to Exhibit 2 to U.S. Cellular’s Registration Statement on Form 8-A dated December 2, 2014.
|
|
|
|
4.4(f)
|
Form of Eighth Supplemental
Indenture dated as of November 23, 2015 between U.S. Cellular and BNY Midwest Trust Company, related to $300,000,000 of U.S. Cellular’s 7.25% Senior Notes due 2064, is hereby incorporated by reference to Exhibit 2 to U.S. Cellular’s Registration Statement
on Form 8-A dated November 17, 2015.
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4.5
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Indenture for Subordinated Debt Securities between U.S. Cellular and BNY is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular’s Current Report on Form 8-K dated September 16, 2013.
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4.6
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Amended and Restated Term Loan Credit Agreement, among U.S. Cellular and CoBank, ACB, as administrative agent, and the other lenders thereto, dated as of June 15, 2016, including Schedules and Exhibits, including the forms of the subsidiary Guaranty and Su
bordination Agreement, is hereby incorporated by reference to Exhibit 4.1 to U.S. Cellular's Form 8-K dated June 15, 2016.
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9.1
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Amendment and Restatement (dated April
22, 2005) of Voting Trust Agreement dated June
30, 1989 is hereby incorporated by
reference to the Exhibit
filed on Amendment No.
3 to the Schedule 13D dated May
2, 2005 filed by the trustees of such voting trust with respect to TDS Common Shares.
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10.1
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Tax Allocation Agreement between U.S.
Cellular and TDS is hereby incorporated by
reference to an exhibit to U.S.
Cellular’s Registration Statement on Form
S-1 (Registration No.
33-16975).
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10.2
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Cash Management Agreement between U.S.
Cellular and TDS is hereby incorporated by reference to an exhibit to U.S.
Cellular’s Registration
Statement on Form
S-1 (Registration No.
33-16975).
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10.3
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Registration Rights Agreement between U.S.
Cellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’s Registration Statement on Form
S-1 (Registration No.
33-16975).
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10.4
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Exchange Agreement between U.S.
Cellular and TDS, as amended, is hereby incorporated by reference to an exhibit to U.S. Cellular’s Registration Statement on Form
S-1 (Registration No.
33-16975).
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10.5
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Intercompany Agreement between
U.S.
Cellular and TDS is hereby incorporated by reference to an exhibit to U.S.
Cellular’s Registration Statement on Form
S-1 (Registration No.
33-16975).
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10.6
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Employee Benefit Plans Agreement between U.S.
Cellular and TDS is hereby incorporated by
reference to an exhibit to U.S. Cellular’s Registration Statement on Form
S-1 (Registration No.
33-16975).
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10.7
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Insurance Cost Sharing Agreement between U.S.
Cellular and TDS is hereby incorporated by reference to an exhibit to U.S. Cellular’s
Registration Statement on Form
S-1 (Registration No.
33-16975).
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10.8(a)*
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TDS Supplemental Executive Retirement Plan, as amended and restated, effective January
1, 2009 is hereby incorporated by reference to Exhibit
10.1 to TDS’ Current Report on
Form
8-K dated August 27, 2008.
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10.8(b)*
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Amendment Number One to the TDS Supplemental Executive Retirement Plan, is hereby incorporated by reference to Exhibit 10.2 to TDS’ Current Report on Form 8-K dated March 15, 2012.
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10.8(c)*
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Amendment
Number Two to the TDS Supplemental Executive Retirement Plan, is hereby incorporated by reference to Exhibit 10.3 to TDS’ Current Report on Form 8-K dated November 3, 2014.
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10.9*
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U.S. Cellular Restated Compensation Plan for Non-Employee Directors is
hereby incorporated by reference to Exhibit B to the U.S. Cellular’s Notice of Annual Meeting of Shareholders and Proxy Statement dated April 15, 2013, which was filed with the SEC on Schedule 14A on April 15, 2013.
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10.10*
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U.S. Cellular 2005 Long-Term
Incentive Plan is hereby incorporated by reference to Exhibit C to the U.S. Cellular Notice of Annual Meeting of Shareholders and Proxy Statement dated April 15, 2009, which was filed with the SEC on Schedule 14A on April 15, 2009.
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10.11(a)*
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U.S.
Cellular 2013 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit B to the U.S. Cellular Notice of Annual Meeting of Shareholders and Proxy Statement dated April 12, 2016, which was filed with the SEC on Schedule 14A on April 12, 2016.
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10.11(b)*
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Amendment No. 1 to U.S. Cellular 2013 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit A to the U.S. Cellular Notice of Annual Meeting of Shareholders and Proxy Statement dated April 12, 2016, which was filed with the
SEC on Schedule 14A on April 12, 2016.
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10.12*
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U.S. Cellular Form of Long-Term Incentive Plan Executive Deferred Compensation Agreement —Phantom Stock Account for officers is hereby incorporated by reference to Exhibit 10.5 to U.S. Cellular’s Current
Report on Form 8-K dated May 14, 2013.
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10.13(a)*
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U.S. Cellular Executive Deferred Compensation Interest Account Plan is hereby incorporated by reference to Exhibit
10.1 to U.S. Cellular’s Current Report on Form
8-K dated December
10, 2007.
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10.13(b)*
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First Amendment to U.S. Cellular Executive Deferred Compensation Interest Account Plan is hereby incorporated by reference to Exhibit
10.6 to U.S. Cellular’s Current Report on Form
8-K dated December
9, 2008.
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10.13(c)*
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Second Amendment to
U.S. Cellular Executive Deferred Compensation Interest Account Plan is hereby incorporated by reference to Exhibit 10.12(c) to U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2012.
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10.13(d)*
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Election Form
for U.S. Cellular Exec
utive Deferred Compensation Interest Account Plan is hereby incorporated by reference to Exhibit 10.12(d) to U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2012.
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10.14*
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U.S. Cellular Form of Long-Term Incentive Plan
Restricted Stock Unit Award Agreement for the President and CEO, is hereby incorporated by reference to Exhibit 10.4 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016.
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10.15*
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U.S. Cellular Form of Long-Term Incentive Plan Stock Option
Award Agreement for the President and CEO, is hereby incorporated by reference to Exhibit 10.3 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016.
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10.16*
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Letter Agreement dated October 28, 2013 between U.S. Cellular and Jay Ellison,
is hereby incorporated by reference to Exhibit 10.13 to U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2013.
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10.17*
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U.S. Cellular Form of Long-Term Incentive Plan Stock Option Award Agreement for Officers other than the
President and CEO, is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016.
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10.18*
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U.S. Cellular Form of Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Officers other
than the President and CEO, is hereby incorporated by reference to Exhibit 10.2 to U.S. Cellular’s Current Report on Form 8-K dated March 14, 2016.
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10.19*
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Letter Agreement between U.S. Cellular and Steven T. Campbell dated June 1, 2005 is hereby
incorporated by reference to Exhibit 99.2 to U.S. Cellular’s Current Report on Form 8-K dated June 1, 2005.
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10.20*
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Form of Retention Bonus Letter to “named executive officers” other than the President and CEO is hereby incorporated by reference to
Exhibit 10.1 to U.S. Cellular’s Current Report on Form 8-K dated April 12, 2011.
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10.21*
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U.S. Cellular 2016 Officer Annual Incentive Plan effective January 1, 2016 is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellular’s Current Report on
Form 8-K dated June 7, 2016.
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10.22*
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Guidelines for the Determination of Annual Bonus for President and Chief Executive Officer of U.S. Cellular, are hereby incorporated by reference to Exhibit 10.2 to U.S. Cellular’s Current Report on Form 8-K dated
August 19, 2014.
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10.23*
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Letter Agreement dated July 25, 2013 between U.S. Cellular and Kenneth R. Meyers is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellular’s Current Report on Form 8-K dated July 25, 2013.
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10.24**
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Master Service
Agreement entered into by United States Cellular Corporation and Amdocs Software Systems Limited on August 17, 2010 to develop a Billing and Operational Support System (“B/OSS”) with a new point-of-sale system to consolidate billing on one platform, is he
reby incorporated by reference to Exhibit 10.8 to U.S. Cellular’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010.
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10.25**
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Software License and Maintenance Agreement entered into by United States Cellular Corporation
and Amdocs Software Systems Limited on August 17, 2010 to develop a Billing and Operational Support System (“B/OSS”) with a new point-of-sale system to consolidate billing on one platform, is hereby incorporated by reference to Exhibit 10.9 to U.S. Cellula
r’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010.
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10.26**
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Master Statement of Work, dated as of November 25, 2014, between U.S. Cellular and Amdocs Software Systems, Ltd., is hereby incorporated by reference from
Exhibit 10.26 to U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31, 2014.
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10.27*
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Letter Agreement dated March 14, 2014 between U.S. Cellular and Deirdre Drake, is hereby incorporated by reference from Exhibit 10.27 to U.S.
Cellular’s Annual Report on Form 10-K for the year ended December 31, 2014.
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11
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Statement regarding computation of earnings per share (included in Note 5 — Earnings Per Share in the Notes to Consolidated Financial Statements in Exhibit
13).
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12
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Statement regarding computation of ratio of earnings to fixed charges for the years ended December
31, 2016, 2015, 2014, 2013, and 2012.
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13
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Incorporated portions of 2016 Annual Report to Shareholders.
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21
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Subsidiaries of U.S. Cellular.
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23.1
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Consent of Independent Registered Public Accounting Firm—PricewaterhouseCoopers LLP.
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23.2
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Consent of Independent Registered Public Accounting Firm—Ernst & Young LLP.
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31.1
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Principal executive officer certification pursuant to Rule
13a-14 of the
Securities Exchange Act of 1934.
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31.2
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Principal financial officer certification pursuant to Rule
13a-14 of the Securities Exchange Act of 1934.
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32.1
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Principal executive officer certification pursuant to Section
1350 of Chapter
63 of Title
18 of
the United States Code.
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32.2
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Principal financial officer certification pursuant to Section
1350 of Chapter
63 of Title
18 of the United States Code.
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
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101.DEF
|
XBRL Taxonomy Extension Definition
Linkbase Document
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*
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Indicates a management contract or compensatory plan or arrangement.
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**
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|
Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential
treatment pursuant to the Securities Exchange Act of 1934, as amended.
The application for confidential treatment has been granted.
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