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2010 Annual Report
uscellular.com

Table of contents

  • Page 1
    2010 Annual Report uscellular.com

  • Page 2
    ... $500 $400 $580 $565 $586 $547 $583 $3.2 $2.0 $300 $200 $1.0 $100 0 06 07 08 09 10 0 06 07 08 09 10 Cash Flows from Operating Activities (in millions) $1,000 $50 Average Retail Service Revenue Per Unit $923 $800 $600 $400 $200 0 06 07 08 $863 $701 $882 $874 $40 $45.22 $42.35 $46.45...

  • Page 3
    ... a high-qualitg network. 2010 Performance Highlights For U.S. Cellular, 2010 was a gear of innovation and exciting transition, tempered bg challenging economic conditions and intense competition in our markets. We had strong growth in smartphone sales, which led to greater use of data services and...

  • Page 4
    ... services into national Belief Plans at a range of price points. Calling The Belief Project a "paradigm shift", industrg expert Frost & Sullivan gave U.S. Cellular its 2010 Customer Value Enhancement of the Year Award. Reinforcing our customer focus, U.S. Cellular was one of Smartphone Customers...

  • Page 5
    ...supporting the Federal Communications Commission's efforts to make additional sources of spectrum available and attainable. 10% 0% 12/09 3/10 6/10 9/10 12/10 Highest Call Quality Performance Among Wireless Cell Phone Users In North Central Region, Eleven Times in a Row - J.D. Power and Associates...

  • Page 6
    ...outstanding service and value, and we're making sure that our marketing, media and sales strategies effectivelg communicate our value to potential customers. We're also leveraging our most important asset-our logal customers- to promote word-of-mouth advocacg that attracts new customers. Smartphones...

  • Page 7
    ... financial statements and certain other financial information for the year ended December 31, 2010, represent U.S. Cellular's annual report to shareholders as required by the rules and regulations of the Securities and Exchange Commission (''SEC''). The following information was filed with the SEC...

  • Page 8
    ... Accounting Policies and Estimates ...Certain Relationships and Related Transactions ...Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Statement ...Market Risk ...Consolidated Statement of Operations ...Consolidated Statement of Cash Flows ...Consolidated Balance Sheet...

  • Page 9
    ... rate plans; a loyalty rewards program; overage protection, caps and forgiveness; a phone replacement program; and discounts for paperless billing and automatic payment. As of December 31, 2010, nearly 1.2 million new and existing customers had adopted the new Belief Plans. • Retail customer...

  • Page 10
    ... technology (''3G'') to additional markets, outfit new and remodel existing retail stores, develop new billing and other customer management related systems and platforms, and enhance existing office systems. Total cell sites in service increased 5% year-over-year to 7,645. • U.S. Cellular...

  • Page 11
    ... a strong balance sheet and an investment grade credit rating. See ''Financial Resources'' and ''Liquidity and Capital Resources'' below for additional information related to cash flows and investments, including information related to U.S. Cellular's new revolving credit agreement. 2011 Estimates...

  • Page 12
    ... on customer satisfaction by delivering a high quality network, attractively priced service plans, a broad line of wireless devices and other products, and outstanding customer service in its company-owned and agent retail stores and customer care centers. U.S. Cellular believes that future growth...

  • Page 13
    ... the average postpaid churn rate for the twelve months of the respective year. (9) Smartphones represent wireless devices which run on a Blackberryá"¼, Windows Mobile, or Android operating system. (10) Smartphone penetration is calculated by dividing postpaid customers on smartphone service plans by...

  • Page 14
    ...charges for access, airtime, roaming, recovery of regulatory costs and value-added services, including data products and services, provided to U.S. Cellular's retail customers and to end users through third-party resellers (''retail service''); (ii) charges to other wireless carriers whose customers...

  • Page 15
    ... future due to industry competition for customers and related effects on pricing of service plan offerings. As discussed in the Overview section above, on October 1, 2010, U.S. Cellular introduced The Belief Project, which allows customers selecting Belief Plans to earn loyalty reward points...

  • Page 16
    ... discounted prices; in addition, customers on the new Belief Plans receive loyalty reward points that may be used to purchase a new wireless device or accelerate the timing of a customer's eligibility for a wireless device upgrade at promotional pricing. U.S. Cellular also continues to sell wireless...

  • Page 17
    ... in 2008 included expenditures related to the launch in June 2008 of a new branding campaign, Believe in Something BetterSM. • Other selling and marketing expenses increased by $9.4 million, or 2%, reflecting higher commissions due to a greater number of retail sales and renewals. U.S. Cellular...

  • Page 18
    ...and financial markets and the accelerated decline in the overall economy in the fourth quarter of 2008. These factors impacted U.S. Cellular's calculation of the estimated fair value of licenses in the fourth quarter of 2008 through the use of a higher discount rate when projecting future cash flows...

  • Page 19
    Components of Other Income (Expense) Year Ended December 31, (Dollars in thousands) 2010 Increase/ Percentage (Decrease) Change 2009 Increase/ Percentage (Decrease) Change 2008 Operating income ...Equity in earnings of unconsolidated entities ...Interest and dividend income Gain on disposition of ...

  • Page 20
    ... Financial Statements for information on recent accounting pronouncements. FINANCIAL RESOURCES U.S. Cellular operates a capital- and marketing-intensive business. U.S. Cellular utilizes cash from its operating activities, cash proceeds from divestitures, short-term credit facilities and long...

  • Page 21
    ... actual versus expected sales in the respective periods. • Changes in accounts payable required $18.6 million in 2010 and provided $52.6 million in 2009 causing a year-over-year decrease in cash flows of $71.2 million. Changes in accounts payable were driven primarily by payment timing differences...

  • Page 22
    ... 2009 and $585.6 million in 2008. These expenditures were made to construct new cell sites, increase capacity in existing cell sites and switches, upgrade technology including the overlay of 3G technology, develop new and enhance existing office systems, and construct new and remodel existing retail...

  • Page 23
    ... from the sale of non-strategic wireless and other investments, from time to time, have been used to reduce short-term debt. There were no short-term borrowings or repayments during 2010 or 2009. Cash received from short-term borrowings under U.S. Cellular's revolving credit facility provided...

  • Page 24
    ... Free cash flow. U.S. Cellular believes that Free cash flow as reported by U.S. Cellular may be useful to investors and other users of its financial information in evaluating the amount of cash generated by business operations, after capital expenditures. 2010 (Dollars in thousands) 2009 2008 Cash...

  • Page 25
    ....8 million available for use. In connection with U.S. Cellular's new revolving credit facility, TDS and U.S. Cellular entered into a subordination agreement dated December 17, 2010 together with the administrative agent for the lenders under U.S. Cellular's new revolving credit facility. At December...

  • Page 26
    ... LTE technology in certain markets; • Enhance U.S. Cellular's retail store network; • Develop and enhance office systems; and • Develop new billing and other customer management related systems and platforms. U.S. Cellular plans to finance its capital expenditures program for 2011 using cash...

  • Page 27
    ... in the Consolidated Balance Sheet due to the $10.3 million unamortized discount related to U.S. Cellular's 6.7% senior notes and capital leases. See Note 12-Debt in the Notes to Consolidated Financial Statements. (2) Includes future lease costs related to office space, retail sites, cell sites and...

  • Page 28
    ...after year four) ...Discount rate ...Average annual capital expenditures (millions) ... ... 2.18% 2.00% 10.5% $ 540 2.13% 2.00% 11.5% $ 520 The decrease in the discount rate between November 1, 2009 and 2010 was a result of the decrease in several of the market-participant inputs used to calculate...

  • Page 29
    ... a company-specific risk premium as a wireless license would not be subject to such risk. The discount rate is the most significant assumption used in the build-out method. The discount rate is estimated based on the overall risk-free interest rate adjusted for industry participant information, such...

  • Page 30
    ... discount rate would have to increase to a range of 9.9% to 11.1% in order to yield estimated fair values of licenses in the respective units of accounting that equal their respective carrying values at November 1, 2010. Non-operating market licenses (''unbuilt licenses'') For purposes of performing...

  • Page 31
    ... tax returns in certain situations. For financial statement purposes, U.S. Cellular and its subsidiaries calculate their income, income tax and credits as if they comprised a separate affiliated group. Under the Tax Allocation Agreement, U.S. Cellular remits its applicable income tax payments to TDS...

  • Page 32
    ... value of the loyalty reward points is deferred until redeemed. U.S. Cellular will periodically review and revise the redemption rate as appropriate based on history and related future expectations. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS U.S. Cellular is billed for all services it receives...

  • Page 33
    ... in the future prevent or delay its access to new products including wireless devices, new technology and/or new content and applications which could adversely affect U.S. Cellular's ability to attract and retain customers and, as a result, could adversely affect its business, financial condition or...

  • Page 34
    ... (''VoIP''), High-Speed Packet Access (''HSPA''), WiMAX or Long-Term Evolution (''LTE''), 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...

  • Page 35
    ... of these risks as set forth under ''Risk Factors'' in U.S. Cellular's Annual Report on Form 10-K for the year ended December 31, 2010. U.S. Cellular undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Readers...

  • Page 36
    ... on the Consolidated Balance Sheet due to the $10.3 million unamortized discount related to the 6.7% senior notes. See Note 12-Debt in the Notes to Consolidated Financial Statements for additional information. (2) Represents the weighted average interest rates at December 31, 2010 for debt maturing...

  • Page 37
    United States Cellular Corporation Consolidated Statement of Operations Year Ended December 31, (Dollars and shares in thousands, except per share amounts) 2010 2009 2008 Operating revenues Service ...Equipment sales ...Total operating revenues ...Operating expenses System operations (excluding ...

  • Page 38
    ... Statement of Cash Flows Year Ended December 31, (Dollars in thousands) 2010 2009 2008 Cash flows from operating activities Net income ...Add (deduct) adjustments to reconcile net income to net operating activities Depreciation, amortization and accretion ...Bad debts expense ...Stock-based...

  • Page 39
    ... States Cellular Corporation Consolidated Balance Sheet-Assets December 31, (Dollars in thousands) 2010 2009 Current assets Cash and cash equivalents ...Short-term investments ...Accounts receivable Customers and agents, less allowances of $24,455 and $26,260, respectively ...Roaming ...Affiliated...

  • Page 40
    United States Cellular Corporation Consolidated Balance Sheet-Liabilities and Equity December 31, (Dollars and shares in thousands) 2010 2009 Current liabilities Current portion of long-term debt ...Accounts payable Affiliated ...Trade ...Customer deposits and deferred revenues Accrued taxes ......

  • Page 41
    ... Balance, December 31, 2007 ...Add (Deduct) Net income attributable to U.S. Cellular shareholders ...Net income attributable to noncontrolling interests classified as equity ...Net change in marketable equity securities Repurchase of Common Shares ...Incentive and compensation plans ...Stock-based...

  • Page 42
    ...18,426) $3,440,114 34 Balance, December 31, 2008 ...Add (Deduct) Net income attributable to U.S. Cellular shareholders ...Net income attributable to noncontrolling interests classified as equity ...Repurchase of Common Shares ...Incentive and compensation plans ...Adjust investment in subsidiaries...

  • Page 43
    ...19,631) $3,534,101 35 Balance, December 31, 2009 ...Add (Deduct) Net income attributable to U.S. Cellular shareholders ...Net income attributable to noncontrolling interests classified as equity ...Repurchase of Common Shares ...Incentive and compensation plans ...Adjust investment in subsidiaries...

  • Page 44
    United States Cellular Corporation Consolidated Statement of Comprehensive Income Year Ended December 31, (Dollars in thousands) 2010 2009 2008 Net income ...Net change in accumulated other comprehensive income Net change in marketable equity securities and equity method investments ......

  • Page 45
    ...the 2010 financial statement presentation. These reclassifications did not affect consolidated net income attributable to U.S. Cellular shareholders, cash flows, assets, liabilities or equity for the years presented. Business Combinations Effective January 1, 2009, U.S. Cellular adopted new required...

  • Page 46
    ...cash and short-term, highly liquid investments with original maturities of three months or less. Outstanding checks totaled $17.5 million and $21.0 million at December 31, 2010 and 2009, respectively, and are classified as Accounts payable-Trade in the Consolidated Balance Sheet. Short-Term and Long...

  • Page 47
    ...the account balance is charged against the allowance for doubtful accounts. U.S. Cellular does not have any off-balance sheet credit exposure related to its customers. The changes in the allowance for doubtful accounts during the years ended December 31, 2010, 2009 and 2008 were as follows: (Dollars...

  • Page 48
    ... impairment testing date was made to better align the annual impairment test with the timing of U.S. Cellular's annual strategic planning process, which allows for a better estimate of the future cash flows used in discounted cash flow models to test for impairment. This change in accounting policy...

  • Page 49
    ...markets. The cash flow estimates incorporated assumptions that market participants would use in their estimates of fair value. Key assumptions made in this process were the discount rate, estimated future cash flows, projected capital expenditures and the terminal growth rate. In 2009, U.S. Cellular...

  • Page 50
    ... reviewed throughout the year to determine if changes in technology or other business changes would warrant accelerating the depreciation of those specific assets. U.S. Cellular did not materially change the useful lives of its property, plant and equipment in 2010, 2009 or 2008. Impairment of Long...

  • Page 51
    ..., roaming, long distance, data and other value added services provided to U.S. Cellular's retail customers and to end users through third-party resellers; • Charges to carriers whose customers use U.S. Cellular's systems when roaming; • Sales of equipment and accessories; • Amounts received...

  • Page 52
    ...• Phone Replacement-Based on U.S. Cellular's estimate of the price of this service if it were sold on a stand-alone basis, which was calculated by estimating the cost of this program plus a reasonable margin. • Loyalty reward points-By estimating the retail price of the products and services for...

  • Page 53
    ... various products and services in the bundled offering based on their respective relative selling price. In order to provide better control over wireless device quality, U.S. Cellular sells wireless devices to agents. U.S. Cellular pays rebates to agents at the time an agent activates a new customer...

  • Page 54
    ... in the TDS employee stock purchase plan. These plans are described more fully in Note 15-Stock-based Compensation. These plans are considered compensatory plans; therefore, recognition of compensation cost for grants made under these plans is required. U.S. Cellular values its share-based payment...

  • Page 55
    ... million in 2010, 2009 and 2008, respectively. Operating Leases U.S. Cellular is a party to various lease agreements for office space, retail sites, cell sites and equipment that are accounted for as operating leases. Certain leases have renewal options and/or fixed rental increases. Renewal options...

  • Page 56
    ... 31, 2010, net of estimated liquidation costs. This amount excludes redemption amounts recorded in Noncontrolling interests with redemption features in the Consolidated Balance Sheet. U.S. Cellular currently has no plans or intentions relating to the liquidation of any of the related partnerships or...

  • Page 57
    ...and the current portion of such long-term debt, was estimated using market prices for the 7.5% senior notes and discounted cash flow analysis for the 6.7% senior notes. As of December 31, 2009, U.S. Cellular had certain Licenses recorded at fair value in its Consolidated Balance Sheet as a result of...

  • Page 58
    ... and the statutory federal income tax expense rate to U.S. Cellular's effective income tax expense rate is as follows: Year Ended December 31, (Dollars in millions) 2010 Amount Rate 2009 Amount Rate 2008 Amount Rate Statutory federal income tax expense and rate ...State income taxes, net of federal...

  • Page 59
    ... liabilities and credits in the Consolidated Balance Sheet. As of December 31, 2010, U.S. Cellular believes it is reasonably possible that unrecognized tax benefits could decrease by approximately $7.0 million in the next twelve months. The nature of the uncertainty primarily relates to state...

  • Page 60
    ...STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 5 VARIABLE INTEREST ENTITIES (VIEs) (Continued) Consolidated VIEs As of December 31, 2010, U.S. Cellular consolidates the following VIEs under GAAP: • Aquinas Wireless; • King Street Wireless and King Street...

  • Page 61
    ...of U.S. Cellular, to purchase its interest in the limited partnership. The general partner's put options related to its interests in Carroll Wireless, Barat Wireless, King Street Wireless and Aquinas Wireless will become exercisable in 2013, 2017, 2019 and 2020, respectively. The put option price is...

  • Page 62
    ... as follows: Year ended December 31, (Dollars and shares in thousands, except earnings per share) 2010 2009 2008 Net income attributable to U.S. Cellular shareholders ...Weighted average number of shares used in basic earnings per share . Effect of dilutive securities: Stock options ...Restricted...

  • Page 63
    ... CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7 ACQUISITIONS, DIVESTITURES AND EXCHANGES (Continued) U.S. Cellular acquisitions in 2010, 2009 and 2008 and the allocation of the purchase price for these acquisitions were as follows: Allocation of Purchase Price Purchase price(1) Customer lists...

  • Page 64
    UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8 LICENSES AND GOODWILL (Continued) Goodwill Year Ended December 31, (Dollars in thousands) 2010 2009 Assigned value at time of acquisition ...Accumulated impairment losses in prior periods ...Balance, ...

  • Page 65
    ....8 million, $64.7 million and $66.1 million in 2010, 2009 and 2008, respectively. U.S. Cellular held a 5.5% ownership interest in the LA Partnership throughout and at the end of each of these years. The following tables, which are based on information provided in part by third parties, summarize the...

  • Page 66
    ..., trade-ins of older assets for replacement assets and other retirements of assets from service. NOTE 11 ASSET RETIREMENT OBLIGATIONS U.S. Cellular is subject to asset retirement obligations associated with its leased cell sites, switching office sites, retail store sites and office locations. Asset...

  • Page 67
    ... in 2010, 2009 and 2008, respectively. U.S. Cellular did not borrow against the revolving credit facilities in 2010 or 2009. U.S. Cellular's interest cost on its new revolving credit facility is subject to increase if its current credit rating from Standard & Poor's Rating Service, Moody's Investors...

  • Page 68
    ...CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 12 DEBT (Continued) At December 31, 2010, U.S. Cellular has recorded $4.3 million of issuance costs related to the new and previous revolving credit facilities which is included in Other assets and deferred charges in the Consolidated Balance Sheet...

  • Page 69
    ... annual requirements for principal payments on long-term debt over the next five years (excluding capital lease obligations). NOTE 13 COMMITMENTS AND CONTINGENCIES Lease Commitments U.S. Cellular is a party to various lease agreements, both as lessee and lessor, for office space, retail store sites...

  • Page 70
    ... 2009 and 2008, respectively. Agreements On August 17, 2010, U.S. Cellular and Amdocs Software Systems Limited (''Amdocs'') entered into agreements to develop a Billing and Operational Support System (''B/OSS''). Amdocs will license to U.S. Cellular certain customer order and relationship management...

  • Page 71
    ..., the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement...

  • Page 72
    ... and prior authorizations, were as follows: Year Ended December 31, (Dollars and share amounts in thousands) Number of Shares Average Cost Per Share Amount 2010 U.S. Cellular Common Shares ...2009 U.S. Cellular Common Shares ...2008 U.S. Cellular Common Shares ... 1,235 887 600 $42.76 $37...

  • Page 73
    UNITED STATES CELLULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 15 STOCK-BASED COMPENSATION (Continued) U.S. Cellular estimated the fair value of stock options granted during 2010, 2009, and 2008 using the Black-Scholes valuation model and the assumptions shown in the...

  • Page 74
    ... average grant date fair value of restricted stock units granted in 2010, 2009 and 2008 was $42.21, $33.00 and $56.12, respectively. Long-Term Incentive Plan-Deferred Compensation Stock Units-Certain U.S. Cellular employees may elect to defer receipt of all or a portion of their annual bonuses...

  • Page 75
    ... and the market value of the shares on the date of issuance. Compensation of Non-Employee Directors-U.S. Cellular issued 9,000 and 5,200 Common Shares in 2010 and 2009, respectively, under its Non-Employee Director Compensation Plan. No Common Shares were issued under this plan in 2008. Stock-Based...

  • Page 76
    ... regarding transactions related to stock-based compensation awards: Year Ended December 31, (Dollars in thousands) 2010 2009 2008 Common Shares withheld(1) ...Aggregate value of Common Shares withheld . Cash receipts upon exercise of stock options . Cash disbursements for payment of taxes...

  • Page 77
    ...legal costs from Sidley Austin LLP of $9.8 million in 2010, $8.6 million in 2009 and $6.9 million in 2008. The Audit Committee of the Board of Directors is responsible for the review and evaluation of all related party transactions, as such term is defined by the rules of the New York Stock Exchange...

  • Page 78
    ... that were based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements. PricewaterhouseCoopers LLP , an independent registered public accounting firm, has...

  • Page 79
    ..., including its Chief Executive Officer and Chief Financial Officer, U.S. Cellular conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee...

  • Page 80
    ... of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of United States Cellular Corporation In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of operations...

  • Page 81
    Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the ...

  • Page 82
    ... U.S. Cellular's business. (a) Includes Loss on impairment of intangible assets of $14.0 million in 2009, $386.7 million in 2008 and $24.9 million in 2007. (b) Calculated by dividing Service Revenues by average customers and number of months in the year. (c) Represents the percentage of the postpaid...

  • Page 83
    ... closing sales prices as reported by the New York Stock Exchange (''NYSE''). During the fourth quarter of 2009, U.S. Cellular recognized a Loss on impairment of intangible assets related to licenses of $14.0 million. See Note 8-Licenses and Goodwill in the Notes to Consolidated Financial Statements...

  • Page 84
    ... not paid any cash dividends and currently intends to retain all earnings for use in U.S. Cellular's business. See ''Consolidated Quarterly Information (Unaudited)'' for information on the high and low trading prices of the USM Common Shares for 2010 and 2009. Stock performance graph The following...

  • Page 85
    ...our Corporate Office. Investors may also access these and other reports through the Investor Relations portion of the U.S. Cellular website (http://www.uscc.com). Questions regarding lost, stolen or destroyed certificates, consolidation of accounts, transferring of shares and name or address changes...

  • Page 86
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  • Page 87
    ... the best customer experience in wireless to generate profitable growth. • One-and-done contracts • Guaranteed phone upgrades at promotional prices every 18 months • Belief Reward points just for being a customer • National Single Line and Family Belief Plans backed by our high...

  • Page 88
    ... Public Accounting Firm PricewaterhouseCoopers LLP Chicago, Ill. Highest Call Quality Performance Among Wireless Cell Phone Users In North Central Region, Eleven Times in a Row, J.D. Power and Associates 2011 Customer Service Champion, J.D. Power and Associates A 2010 Most Trustworthy Company...