Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **
| **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

** **

**For the quarterly period ended June 30, 2009**

** **

**OR**

** **
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

** **

**For the transition period from                 to**

** **

**CommissionFile Number 1-9712**

 

**UNITED STATES CELLULAR CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **62-1147325**                       |
|---------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification No.) |
| incorporation  or organization) |       |                                 |

 

**8410 West Bryn Mawr, Suite 700,Chicago, Illinois  60631**

(Address of principalexecutive offices)  (Zip Code)

 

Registrant’stelephone number, including area code: **(773) 399-8900**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o   No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated  filer x                     |   | Accelerated filer o          |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated filer  o                       |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                         |

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o   No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **Class**                                  | ** ** | **Outstanding at June 30, 2009** |
|--------------------------------------------|------------|---------------------------------------|
| Common Shares, $1 par value                |       | 53,865,256 Shares                     |
| Series A Common Shares, $1 par  value |       | 33,005,877 Shares                     |

 

 

 

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**United States CellularCorporation**

** **

**Quarterly Report on Form 10-Q**

**For the Period Ended June 30,2009**

** **

**Index**

 
| ** **    | ** **             | ** **                                                                                    | **Page No.** |
|---------------|------------------------|-----------------------------------------------------------------------------------------------|-------------------|
|          |                   |                                                                                          |
| Part I.  | Financial  Information | 3                                                                                             |
|          |                   |                                                                                          |              |
|          | Item  1.               | Financial  Statements (Unaudited)                                                             | 3                 |
|          |                   |                                                                                          |              |
|          |                   | Consolidated  Statement of Operations Three and Six Months Ended June 30, 2009 and  2008 | 3                 |
|          |                   |                                                                                          |              |
|          |                   | Consolidated  Statement of Cash Flows Six Months Ended June 30, 2009 and 2008            | 4                 |
|          |                   |                                                                                          |              |
|          |                   | Consolidated  Balance Sheet June 30, 2009 and December 31, 2008                     | 5                 |
|          |                   |                                                                                          |              |
|          |                   | Consolidated Statement of Changes in Equity Six Months  Ended June 30, 2009 and 2008     | 7                 |
|          |                   |                                                                                          |              |
|          |                   | Notes to Consolidated Financial Statements                                                    | 9                 |
|          |                   |                                                                                          |              |
|          | Item 2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations   | 21                |
|          |                   |                                                                                          |              |
|          |                   | Overview                                                                                      | 21                |
|          |                   | Results  of Operations                                                                        | 24                |
|          |                   | Recent Accounting Pronouncements                                                              | 33                |
|          |                   | Financial  Resources                                                                          | 34                |
|          |                   | Liquidity and Capital Resources                                                               | 35                |
|          |                   | Application of Critical Accounting Policies and Estimates                                     | 40                |
|          |                   | Safe Harbor Cautionary Statement                                                              | 41                |
|          |                   |                                                                                          |              |
|          | Item 3.                | Quantitative  and Qualitative Disclosures About Market Risk                                   | 45                |
|          |                   |                                                                                          |              |
|          | Item 4.                | Controls and  Procedures                                                                      | 46                |
|          |                   |                                                                                          |              |
| Part II. | Other Information      | 47                                                                                            |
|          |                   |                                                                                          |              |
|          | Item 1.                | Legal Proceedings                                                                             | 47                |
|          |                   |                                                                                          |              |
|          | Item 1A.               | Risk Factors                                                                                  | 47                |
|          |                   |                                                                                          |              |
|          | Item 2.                | Unregistered  Sales of Equity Securities and Use of Proceeds                                  | 49                |
|          |                   |                                                                                          |              |
|          | Item 4.                | Submission of  Matters to a Vote of Security Holders                                          | 50                |
|          |                   |                                                                                          |              |
|          | Item 5.                | Other Information                                                                             | 51                |
|          |                   |                                                                                          |              |
|          | Item  6.               | Exhibits                                                                                      | 52                |
|          |                   |                                                                                          |              |
| Signatures    |                   |                                                                                          |              |

 

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Table ofContents

 

**Part I.  Financial Information**

**Item 1.  Financial Statements**

 

**United States CellularCorporation**

** **

**ConsolidatedStatement of Operations**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                | ** ** | **Three Months Ended**                                           | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                                                                | ** ** | **June 30,**                                                | ** ** | **June 30,**    | ** ** |
| ** **                                                                                                                                                                                                                | ** ** | **2009**                                                         | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                                                                                                                                                      |       | **(Dollars and shares in thousands, except per  share amounts)** |       |
| **Operating  revenues**                                                                                                                                                                                                   |       |                                                             |       |                 |       |   |   |   |   |
| Service                                                                                                                                                                                                                   |       | $                                                                | 974,755    |                 | $          | 987,352 |   | $ | 1,956,629 |   | $ | 1,949,446 |   |
| Equipment sales                                                                                                                                                                                                           |       | 67,795                                                           |       | 73,240               |       | 138,685 |   | 149,002 |   |
| Total operating  revenues                                                                                                                                                                                                 |       | 1,042,550                                                        |       | 1,060,592            |       | 2,095,314 |   | 2,098,448 |   |
|                                                                                                                                                                                                                      |       |                                                             |       |                 |       |   |   |   |   |
| **Operating  expenses**                                                                                                                                                                                                   |       |                                                             |       |                 |       |   |   |   |   |
| System operations  (excluding Depreciation, amortization and accretion reported below)                                                                                                                                    |       | 194,806                                                          |       | 196,652              |       | 394,809 |   | 387,668 |   |
| Cost of equipment  sold                                                                                                                                                                                                   |       | 156,055                                                          |       | 176,145              |       | 341,756 |   | 354,190 |   |
| Selling, general and  administrative  (including charges from affiliates of $26.2 million and $26.4 million, respectively,  for the three months, and $54.9 million and $54.9 million, respectively, for  the six months) |       | 410,070                                                          |       | 418,416              |       | 822,518 |   | 822,042 |   |
| Depreciation,  amortization and accretion                                                                                                                                                                                 |       | 138,614                                                          |       | 145,258              |       | 276,265 |   | 287,788 |   |
| Loss on asset  disposals, net                                                                                                                                                                                             |       | 2,086                                                            |       | 6,219                |       | 4,277 |   | 9,892 |   |
| Total operating  expenses                                                                                                                                                                                                 |       | 901,631                                                          |       | 942,690              |       | 1,839,625 |   | 1,861,580 |   |
|                                                                                                                                                                                                                      |       |                                                             |       |                 |       |   |   |   |   |
| **Operating  income**                                                                                                                                                                                                     |       | 140,919                                                          |       | 117,902              |       | 255,689 |   | 236,868 |   |
|                                                                                                                                                                                                                      |       |                                                             |       |                 |       |   |   |   |   |
| **Investment  and other income (expense)**                                                                                                                                                                                |       |                                                             |       |                 |       |   |   |   |   |
| Equity in earnings  of unconsolidated entities                                                                                                                                                                            |       | 24,794                                                           |       | 22,807               |       | 50,121 |   | 44,042 |   |
| Interest and  dividend income                                                                                                                                                                                             |       | 751                                                              |       | 1,429                |       | 1,228 |   | 3,334 |   |
| Interest expense                                                                                                                                                                                                          |       | (19,387                                                          | )          | (20,774              | )          | (38,409 | ) | (40,889 | ) |
| Other, net                                                                                                                                                                                                                |       | (2                                                               | )          | 600                  |       | 278 |   | 718 |   |
| Total investment and  other income (expense)                                                                                                                                                                              |       | 6,156                                                            |       | 4,062                |       | 13,218 |   | 7,205 |   |
|                                                                                                                                                                                                                      |       |                                                             |       |                 |       |   |   |   |   |
| **Income  before income taxes**                                                                                                                                                                                           |       | 147,075                                                          |       | 121,964              |       | 268,907 |   | 244,073 |   |
| Income tax expense                                                                                                                                                                                                        |       | 57,748                                                           |       | 44,016               |       | 88,980 |   | 91,556 |   |
|                                                                                                                                                                                                                      |       |                                                             |       |                 |       |   |   |   |   |
| **Net  income**                                                                                                                                                                                                           |       | 89,327                                                           |       | 77,948               |       | 179,927 |   | 152,517 |   |
| Less: Net income  attributable to noncontrolling interests, net of tax                                                                                                                                                    |       | (5,969                                                           | )          | (5,346               | )          | (11,977 | ) | (9,358 | ) |
| **Net  income attributable to U.S. Cellular**                                                                                                                                                                             |       | $                                                                | 83,358     |                 | $          | 72,602 |   | $ | 167,950 |   | $ | 143,159 |   |
|                                                                                                                                                                                                                      |       |                                                             |       |                 |       |   |   |   |   |
| **Basic  weighted average shares outstanding**                                                                                                                                                                            |       | 86,992                                                           |       | 87,571               |       | 87,093 |   | 87,571 |   |
| **Basic  earnings per share attributable to U.S. Cellular****shareholders**                                                                                                                                               |       | $                                                                | 0.96       |                 | $          | 0.83 |   | $ | 1.93 |   | $ | 1.63 |   |
|                                                                                                                                                                                                                      |       |                                                             |       |                 |       |   |   |   |   |
| **Diluted  weighted average shares outstanding**                                                                                                                                                                          |       | 87,177                                                           |       | 87,872               |       | 87,308 |   | 87,963 |   |
| **Diluted  earnings per share attributable to U.S. Cellular****shareholders**                                                                                                                                             |       | $                                                                | 0.96       |                 | $          | 0.83 |   | $ | 1.92 |   | $ | 1.63 |   |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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**United States CellularCorporation**

** **

**ConsolidatedStatement of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **Six Months Ended**       | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                     | ** ** | **June 30,**          | ** ** |
| ** **                                                                                     | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| **Cash  flows from operating activities**                                                      |       |                       |       |   |   |
| Net income                                                                                     |       | $                          | 179,927    |   | $ | 152,517 |   |
| Add (deduct)  adjustments to reconcile net income to net cash flows from operating  activities |       |                       |       |   |   |
| Depreciation,  amortization and accretion                                                      |       | 276,265                    |       | 287,788 |   |
| Bad debts expense                                                                              |       | 39,028                     |       | 32,426 |   |
| Stock-based compensation  expense                                                              |       | 7,974                      |       | 6,481 |   |
| Deferred income  taxes, net                                                                    |       | 19,604                     |       | 27,231 |   |
| Equity in earnings  of unconsolidated entities                                                 |       | (50,121                    | )          | (44,042 | ) |
| Distributions from  unconsolidated entities                                                    |       | 12,997                     |       | 45,569 |   |
| Loss on asset  disposals, net                                                                  |       | 4,277                      |       | 9,892 |   |
| Excess tax benefit  from stock awards                                                          |       | (4                         | )          | (896 | ) |
| Noncash interest  expense                                                                      |       | 1,213                      |       | 886 |   |
| Changes in assets  and liabilities from operations                                             |       |                       |       |   |   |
| Accounts receivable                                                                            |       | (63,510                    | )          | (50,059 | ) |
| Inventory                                                                                      |       | (10,391                    | )          | (19,816 | ) |
| Accounts payable -  trade                                                                      |       | (41,378                    | )          | 2,838 |   |
| Accounts payable -  affiliate                                                                  |       | 4,137                      |       | 171 |   |
| Customer deposits  and deferred revenues                                                       |       | (5,372                     | )          | 10,406 |   |
| Accrued taxes                                                                                  |       | 64,851                     |       | 1,471 |   |
| Accrued interest                                                                               |       | 450                        |       | 455 |   |
| Other assets and  liabilities                                                                  |       | (66,824                    | )          | (36,486 | ) |
|                                                                                           |       | 373,123                    |       | 426,832 |   |
|                                                                                           |       |                       |       |   |   |
| **Cash  flows from investing activities**                                                      |       |                       |       |   |   |
| Additions to  property, plant and equipment                                                    |       | (228,902                   | )          | (249,500 | ) |
| Cash received from  divestitures                                                               |       | 50                         |       | 6,838 |   |
| Cash paid for  acquisitions and licenses                                                       |       | (12,327                    | )          | (312,615 | ) |
| Other investing  activities                                                                    |       | 1,107                      |       | (1,215 | ) |
|                                                                                           |       | (240,072                   | )          | (556,492 | ) |
|                                                                                           |       |                       |       |   |   |
| **Cash  flows from financing activities**                                                      |       |                       |       |   |   |
| Issuance of notes  payable                                                                     |       | —                     |       | 100,000 |   |
| Repayment of notes  payable                                                                    |       | —                     |       | (50,000 | ) |
| Common shares  reissued for benefit plans, net of tax payments                                 |       | (405                       | )          | (1,878 | ) |
| Common shares repurchased                                                                      |       | (19,332                    | )          | (14,516 | ) |
| Excess tax benefit  from stock awards                                                          |       | 4                          |       | 896 |   |
| Payment of debt  issuance costs                                                                |       | (4,309                     | )          | — |   |
| Distributions to  noncontrolling interests                                                     |       | (4,060                     | )          | (6,022 | ) |
| Other financing  activities                                                                    |       | (25                        | )          | (2,198 | ) |
|                                                                                           |       | (28,127                    | )          | 26,282 |   |
|                                                                                           |       |                       |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                      |       | 104,924                    |       | (103,378 | ) |
|                                                                                           |       |                       |       |   |   |
| **Cash  and cash equivalents**                                                                 |       |                       |       |   |   |
| Beginning of period                                                                            |       | 170,996                    |       | 204,533 |   |
| End of period                                                                                  |       | $                          | 275,920    |   | $ | 101,155 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

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**United States CellularCorporation**

** **

**ConsolidatedBalance Sheet — Assets**

 
| ** **                                                                            | ** ** | **June 30,**          | ** ** | ** **            | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **2009**                   | ** ** | **December 31,** | ** ** |
| ** **                                                                            | ** ** | **(Unaudited)**            | ** ** | **2008**              | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  assets**                                                                   |       |                       |       |                  |       |
| Cash and cash  equivalents                                                            |       | $                          | 275,920    |                  | $          | 170,996 |   |
| Accounts receivable                                                                   |       |                       |       |                  |       |
| Customers, less  allowances of $8,383 and $8,222, respectively                        |       | 344,812                    |       | 330,390               |       |
| Roaming                                                                               |       | 30,411                     |       | 34,841                |       |
| Affiliated                                                                            |       | 2,545                      |       | 1,579                 |       |
| Other, less  allowances of $313 and $150, respectively                                |       | 69,753                     |       | 52,809                |       |
| Inventory                                                                             |       | 125,578                    |       | 116,564               |       |
| Prepaid income taxes                                                                  |       | —                     |       | 22,515                |       |
| Prepaid expenses                                                                      |       | 49,040                     |       | 51,645                |       |
| Net deferred income  tax asset                                                        |       | 19,481                     |       | 19,481                |       |
| Other current assets                                                                  |       | 54,705                     |       | 14,227                |       |
|                                                                                  |       | 972,245                    |       | 815,047               |       |
| **Investments**                                                                       |       |                       |       |                  |       |
| Licenses                                                                              |       | 1,445,501                  |       | 1,433,415             |       |
| Goodwill                                                                              |       | 494,737                    |       | 494,279               |       |
| Customer lists, net  of accumulated amortization of $90,447 and $87,976, respectively |       | 6,465                      |       | 8,936                 |       |
| Investments in  unconsolidated entities                                               |       | 192,445                    |       | 156,637               |       |
| Notes and interest  receivable – long-term                                       |       | 4,231                      |       | 4,297                 |       |
|                                                                                  |       | 2,143,379                  |       | 2,097,564             |       |
| **Property,  plant and equipment**                                                    |       |                       |       |                  |       |
| In service and under  construction                                                    |       | 5,602,245                  |       | 5,884,383             |       |
| Less: accumulated  depreciation                                                       |       | 3,024,243                  |       | 3,264,007             |       |
|                                                                                  |       | 2,578,002                  |       | 2,620,376             |       |
|                                                                                  |       |                       |       |                  |       |
| **Other  assets and deferred charges**                                                |       | 37,621                     |       | 33,055                |       |
|                                                                                  |       |                       |       |                  |       |
| **Total  assets**                                                                     |       | $                          | 5,731,247  |                  | $          | 5,566,042 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

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**United States CellularCorporation**

** **

**Consolidated Balance Sheet —Liabilities and Shareholders’ Equity**

 
| ** **                                                                                                                    | ** ** | **June 30,**          | ** ** | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                                                                                                    | ** ** | **2009**                   | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                    | ** ** | **(Unaudited)**            | ** ** | **2008**              | ** ** |
| ** **                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  liabilities**                                                                                                      |       |                       |       |                  |       |
| Current portion of  long-term debt                                                                                            |       | $                          | 10,088     |                  | $          | 10,258 |   |
| Accounts payable                                                                                                              |       |                       |       |                  |       |
| Affiliated                                                                                                                    |       | 13,750                     |       | 9,613                 |       |
| Trade                                                                                                                         |       | 210,826                    |       | 248,785               |       |
| Customer deposits  and deferred revenues                                                                                      |       | 145,710                    |       | 151,082               |       |
| Accrued taxes                                                                                                                 |       | 58,433                     |       | 17,643                |       |
| Accrued compensation                                                                                                          |       | 41,976                     |       | 55,969                |       |
| Other current  liabilities                                                                                                    |       | 91,149                     |       | 108,533               |       |
|                                                                                                                          |       | 571,932                    |       | 601,883               |       |
|                                                                                                                          |       |                       |       |                  |       |
| **Deferred  liabilities and credits**                                                                                         |       |                       |       |                  |       |
| Net deferred income  tax liability                                                                                            |       | 498,823                    |       | 478,106               |       |
| Other deferred  liabilities and credits                                                                                       |       | 243,258                    |       | 233,619               |       |
|                                                                                                                          |       | 742,081                    |       | 711,725               |       |
|                                                                                                                          |       |                       |       |                  |       |
| **Long-term  debt**                                                                                                           |       | 997,651                    |       | 996,636               |       |
|                                                                                                                          |       |                       |       |                  |       |
| **Commitments  and contingencies**                                                                                            |       |                       |       |                  |       |
|                                                                                                                          |       |                       |       |                  |       |
| **Noncontrolling  interests with mandatory redemption features**                                                              |       | 640                        |       | 589                   |       |
|                                                                                                                          |       |                       |       |                  |       |
| **Equity**                                                                                                                    |       |                       |       |                  |       |
| U.S. Cellular  shareholders’ equity                                                                                      |       |                       |       |                  |       |
| Common Shares, par  value $1 per share; authorized 140,000,000 shares; issued 55,068,000 shares                               |       | 55,068                     |       | 55,068                |       |
| Series A Common  Shares, par value $1 per share; authorized 50,000,000 shares; issued and  outstanding 33,006,000 shares |       | 33,006                     |       | 33,006                |       |
| Additional paid-in  capital                                                                                                   |       | 1,348,664                  |       | 1,340,146             |       |
| Treasury shares, at  cost, 1,203,000 and 794,000 Common Shares, respectively                                                  |       | (60,104                    | )          | (50,258               | )          |
| Retained earnings                                                                                                             |       | 1,985,876                  |       | 1,828,680             |       |
| Total U.S. Cellular  shareholders’ equity                                                                                |       | 3,362,510                  |       | 3,206,642             |       |
|                                                                                                                          |       |                       |       |                  |       |
| Noncontrolling  interests                                                                                                     |       | 56,433                     |       | 48,567                |       |
|                                                                                                                          |       |                       |       |                  |       |
| Total equity                                                                                                                  |       | 3,418,943                  |       | 3,255,209             |       |
|                                                                                                                          |       |                       |       |                  |       |
| **Total  liabilities and equity**                                                                                             |       | $                          | 5,731,247  |                  | $          | 5,566,042 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

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**United States CellularCorporation**

 

**ConsolidatedStatement of Changes in Equity**

**(Unaudited)**

 
| ** **                                                                                                 | ** ** | **U.S. Cellular Shareholders** | ** ** | ** **                        | ** ** | ** **                       | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| **(Dollars  in thousands)**                                                                                | ** ** | **Common  Shares**             | ** ** | **Series A  Common  Shares** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Treasury  Shares** | ** ** | **Retained  Earnings** | ** ** | **Total   Shareholders’  Equity** | ** ** | **Noncontrolling  Interests** | ** ** | **Total Equity** | ** ** |
| **Balance,  December 31, 2008**                                                                       | ** ** | **$**                          | **55,068** | ** **                        | **$**      | **33,006**                       | ** ** | **$** | **1,340,146** | ** ** | **$** | **(50,258** | **)** | **$** | **1,828,680** | ** ** | **$** | **3,206,642** | ** ** | **$** | **48,567** | ** ** | **$** | **3,255,209** | ** ** |
| ** **                                                                                                 | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Add (Deduct)                                                                                               |       |                           |       |                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                       |       |                           |       |                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net income excluding  portion attributable to noncontrolling interests with mandatory redemption  features |       | —                         |       | —                            |       | —                           |       | — |   | 167,950 |   | 167,950 |   | 11,926 |   | 179,876 |   |
| Repurchase of Common  Shares                                                                               |       | —                         |       | —                            |       | —                           |       | (19,332 | ) | — |   | (19,332 | ) | — |   | (19,332 | ) |
| Incentive and  compensation plans                                                                          |       | —                         |       | —                            |       | 1,444                            |       | 9,486 |   | (10,754 | ) | 176 |   | — |   | 176 |   |
| Stock-based  compensation awards                                                                           |       | —                         |       | —                            |       | 7,974                            |       | — |   | — |   | 7,974 |   | — |   | 7,974 |   |
| Tax windfall  (shortfall) from stock awards                                                                |       | —                         |       | —                            |       | (900                             | )          | — |   | — |   | (900 | ) | — |   | (900 | ) |
| Distributions to  noncontrolling interests                                                                 |       | —                         |       | —                            |       | —                           |       | — |   | — |   | — |   | (4,060 | ) | (4,060 | ) |
| ** **                                                                                                 | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance,  June 30, 2009**                                                                           | ** ** | **$**                          | **55,068** | ** **                        | **$**      | **33,006**                       | ** ** | **$** | **1,348,664** | ** ** | **$** | **(60,104** | **)** | **$** | **1,985,876** | ** ** | **$** | **3,362,510** | ** ** | **$** | **56,433** | ** ** | **$** | **3,418,943** | ** ** |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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**United States CellularCorporation**

 

**Consolidated Statement of Changesin Equity**

**(Unaudited)**

 
| ** **                                                                                                 | ** ** | **U.S. Cellular Shareholders** | ** ** | ** **                        | ** ** | ** **                       | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| **(Dollars  in thousands)**                                                                                | ** ** | **Common  Shares**             | ** ** | **Series A  Common  Shares** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Treasury  Shares** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Retained  Earnings** | ** ** | **Total   Shareholders’   Equity** | ** ** | **Noncontrolling  Interests** | ** ** | **Total Equity** | ** ** |
| **Balance,  December 31, 2007**                                                                       | ** ** | **$**                          | **55,068** | ** **                        | **$**      | **33,006**                       | ** ** | **$** | **1,316,785** | ** ** | **$** | **(41,859** | **)** | **$** | **10,134** | ** ** | **$** | **1,823,022** | ** ** | **$** | **3,196,156** | ** ** | **$** | **46,831** | ** ** | **$** | **3,242,987** | ** ** |
| ** **                                                                                                 | ** ** | ** **                     | ** ** | ** **                        | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Add (Deduct)                                                                                               |       |                           |       |                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                       |       |                           |       |                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income excluding  portion attributable to noncontrolling interests with mandatory redemption  features |       | —                         |       | —                            |       | —                           |       | — |   | — |   | 143,159 |   | 143,159 |   | 10,478 |   | 153,637 |   |
| Net unrealized  losses on securities                                                                       |       | —                         |       | —                            |       | —                           |       | — |   | 99 |   | — |   | 99 |   | — |   | 99 |   |
| Repurchase of Common  Shares                                                                               |       | —                         |       | —                            |       | 4,554                            |       | (19,070 | ) | — |   | — |   | (14,516 | ) | — |   | (14,516 | ) |
| Incentive and  compensation plans                                                                          |       | —                         |       | —                            |       | 548                              |       | 14,750 |   | — |   | (16,369 | ) | (1,071 | ) | — |   | (1,071 | ) |
| Stock-based  compensation awards                                                                           |       | —                         |       | —                            |       | 6,481                            |       | — |   | — |   | — |   | 6,481 |   | — |   | 6,481 |   |
| Tax windfall  (shortfall) from stock awards                                                                |       | —                         |       | —                            |       | 1,587                            |       | — |   | — |   | — |   | 1,587 |   | — |   | 1,587 |   |
| Distributions to  noncontrolling interests                                                                 |       | —                         |       | —                            |       | —                           |       | — |   | — |   | — |   | — |   | (6,022 | ) | (6,022 | ) |
|                                                                                                       |       |                           |       |                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance,  June 30, 2008**                                                                           | ** ** | **$**                          | **55,068** | ** **                        | **$**      | **33,006**                       | ** ** | **$** | **1,329,955** | ** ** | **$** | **(46,179** | **)** | **$** | **10,233** | ** ** | **$** | **1,949,812** | ** ** | **$** | **3,331,895** | ** ** | **$** | **51,287** | ** ** | **$** | **3,383,182** | ** ** |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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**United States CellularCorporation**

 

**Notes to Consolidated FinancialStatements**

 

**1.****    ****Basis of Presentation**

 

United States Cellular Corporation (“U.S.Cellular®”), a Delaware Corporation, is an 81%-owned subsidiary of Telephoneand Data Systems, Inc. (“TDSTM”).

 

Theaccounting policies of U.S. Cellular conform to accounting principles generallyaccepted in the United States of America (“GAAP”). The consolidated financialstatements include the accounts of U.S. Cellular, its majority-ownedsubsidiaries since acquisition, general partnerships in which U.S. Cellular hasa majority partnership interest and any entity in which U.S. Cellular has avariable interest that requires U.S. Cellular to recognize a majority of theentity’s expected gains or losses. All material intercompany accounts andtransactions have been eliminated. Certain prior year amounts have beenreclassified to conform to the 2009 presentation.

 

The consolidated financial statementsincluded herein have been prepared by U.S. Cellular, without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission (“SEC”).Certain information and disclosures normally included in financial statementsprepared in accordance with GAAP have been condensed or omitted pursuant tosuch rules and regulations. However, U.S. Cellular believes that thedisclosures included herein are adequate to make the information presented notmisleading.  It is suggested that theseconsolidated financial statements be read in conjunction with the consolidatedfinancial statements and the notes thereto included in U.S. Cellular’s AnnualReport on Form 10-K for the year ended December 31, 2008.

 

The accompanying unaudited consolidatedfinancial statements contain all adjustments (consisting of only normalrecurring items unless otherwise disclosed) necessary to present fairly thefinancial position as of June 30, 2009 and December 31, 2008, theresults of operations for the three and six months ended June 30, 2009 and2008, and cash flows and changes in equity for the six months ended June 30,2009 and 2008.  The results of operationsfor the three and six months ended June 30, 2009, and cash flows andchanges in equity for the six months ended June 30, 2009 are notnecessarily indicative of the results to be expected for the full year.

 

**2.****    ****Summaryof Significant Accounting Policies**

 

AmountsCollected from Customers and Remitted to Governmental Authorities

 

Ifthe tax is assessed upon the customer and U.S. Cellular merely acts as an agentin collecting the tax on behalf of the governmental authority imposing suchtax, the amounts collected from customers and remitted to governmentalauthorities are recorded net in Accrued taxes in the Consolidated BalanceSheet.  If the tax is assessed upon U.S.Cellular, the amounts collected from customers as recovery of the tax arerecorded in Service revenues and the amounts remitted to governmentalauthorities are recorded in Selling, general and administrative expenses in theConsolidated Statement of Operations. The amounts recorded in Service revenues that are billed to customersand remitted to governmental authorities totaled $27.2 million and $53.1million for the three and six months ended June 30, 2009, respectively,and $36.3 million and $69.5 million for the three and six months ended June 30,2008, respectively.

 

Implementationof SFAS No. 141(R)

 

EffectiveJanuary 1, 2009, U.S. Cellular adopted the provisions of FASB Statement ofFinancial Accounting Standards No. 141 (revised 2007), *Business Combinations — a replacement of FASB Statement No. 141*(“SFAS 141(R)”), which replaces SFAS No. 141, *BusinessCombinations* (“SFAS 141”). Although SFAS 141(R) retains the underlying concept of SFAS 141 inthat all business combinations are still required to be accounted for at fairvalue in accordance with the acquisition method, SFAS 141(R) requires U.S.Cellular to revise its application of the acquisition method in a number ofsignificant aspects, such as requiring the expensing of transaction costs andrequiring the acquirer to recognize 100% of the acquiree’s assets andliabilities, rather than a proportional share, for acquisitions of less than100% of a business.  In addition, SFAS 141(R) eliminatesthe step acquisition model and provides that all business combinations, whetherfull, partial or step acquisitions, will result in all assets and liabilitiesof an acquired business being recorded at their fair values at the acquisitiondate.

 

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InApril 2009, the FASB issued FASB Staff Position FAS 141(R)-1, *Accounting for Assets and Liabilities Assumed in a Business CombinationThat Arise from Contingencies*(“FSP FAS 141(R)-1”), which amends theinitial and subsequent measurement guidance and disclosure requirements in SFAS141(R) for assets and liabilities arising from contingencies in a businesscombination. FSP FAS 141(R)-1 is effective on a prospective basis for allbusiness combinations for which the acquisition date is on or after January 1,2009.  U.S. Cellular did not have anybusiness combinations accounted for under SFAS 141(R) during the sixmonths ended June 30, 2009.

 

Implementationof SFAS No. 160

 

SeeNote 3 — Noncontrolling Interests for information related to U.S. Cellular’sadoption of SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements*—*anamendment of ARB No. 51* (“SFAS 160”)*.*

 

Recent Accounting Pronouncements

 

In June 2009, theFASB issued SFAS No. 167, *Amendments to FASBInterpretation No. 46(R) *(“SFAS 167”).  SFAS 167 changes how U.S. Cellular willdetermine when an entity that is insufficiently capitalized or is notcontrolled through voting (or similar rights) should be consolidated.  U.S. Cellular has several variable interestentities within the scope of SFAS 167 (see Note 6 — Variable InterestEntities).  SFAS 167 is effective forU.S. Cellular on January 1, 2010. U.S. Cellular is currently reviewing the requirements of SFAS 167 andhas not yet determined the impact of adoption, if any, on its financialposition or results of operations.

 

**3.****    ****Noncontrolling Interests**

 

Implementationof SFAS No. 160

 

EffectiveJanuary 1, 2009, U.S. Cellular adopted the provisions of SFAS 160.

 

Pursuantto SFAS 160, the following provisions were applied retrospectively to allperiods presented in the financial statements:

 

·      U.S. Cellular reclassifiednoncontrolling interests, formerly known as “minority interests,” from aseparate caption between liabilities and shareholders’ equity (“mezzaninesection”) to a component of equity, with the exception of noncontrollinginterests with redemption features, which require mezzanine sectionpresentation in accordance with Emerging Issues Task Force Topic No. D-98,*Classification and Measurement of RedeemableSecurities.*  Previously,minority interests generally were reported in the balance sheet in themezzanine section.

 

·      Consolidated net income andcomprehensive income include amounts attributable to both U.S. Cellular and thenoncontrolling interests. Previously, net income attributable to thenoncontrolling interests was reported as a deduction in arriving at consolidatednet income.  This presentation changedoes not impact the calculation of basic or diluted earnings per share, whichcontinue to be calculated based on Net income attributable to U.S. Cellular.

 

·      Shares of U.S. Cellular heldby its subsidiary are reflected as treasury shares in the consolidatedfinancial statements.  Previously, theseshares were not reflected as issued shares and treasury shares in theconsolidated financial statements.  As aresult, 22,534 Common Shares were added to both Common Shares issued andTreasury Shares in the Consolidated Balance Sheets as of June 30, 2009 andDecember 31, 2008.

 

Pursuantto SFAS 160, the following provisions were applied prospectively effective January 1,2009:

 

·      SFAS 160 provides that allearnings and losses of a subsidiary should be attributed to the parent and thenoncontrolling interest, even if the losses attributable to the noncontrollinginterest result in a deficit noncontrolling interest balance.  Previously, any losses exceeding thenoncontrolling interest’s investment in the subsidiary were attributed to theparent.  This change did not have asignificant impact on U.S. Cellular’s financial statements for the six monthsended June 30, 2009.

 

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·      SFAS 160 alsoestablishes that, once control of a subsidiary is obtained, changes inownership interests in that subsidiary that do not result in a loss of controlshall be accounted for as equity transactions. Previously, decreases in ownership interest in a subsidiary wereaccounted for as equity transactions, while increases in ownership interests ofa subsidiary were accounted for as step acquisitions under the provisions ofSFAS 141.  U.S. Cellular did not enterinto any transactions in the six months ended June 30, 2009 that changedits ownership interest in its consolidated subsidiaries.  During the six months ended June 30,2008, U.S. Cellular purchased noncontrolling interests in a consolidatedsubsidiary.  U.S. Cellular accounted forthis transaction as a step acquisition under the provisions of SFAS 141.  The amounts recorded in this transaction arereflected in the changes in the balances of Licenses, Goodwill and Customerlists.

 

Mandatorily Redeemable Noncontrolling Interests inSubsidiaries

 

Under SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity*, certain noncontrolling interests inconsolidated entities with finite lives may meet the definition of amandatorily redeemable financial instrument. U.S. Cellular’s consolidatedfinancial statements include certain noncontrolling interests that meet thedefinition of mandatorily redeemable financial instruments.  These mandatorily redeemable noncontrollinginterests represent interests held by third parties in consolidatedpartnerships and limited liability companies (“LLCs”), where the terms of theunderlying partnership or LLC agreement provide for a defined termination dateat which time the assets of the subsidiary are to be sold, the liabilities areto be extinguished and the remaining net proceeds are to be distributed to thenoncontrolling interest holders and U.S. Cellular in accordance with therespective partnership and LLC agreements. The termination dates of U.S. Cellular’s mandatorily redeemablenoncontrolling interests range from 2085 to 2094.

 

The settlement value of U.S. Cellular’s mandatorilyredeemable noncontrolling interests was estimated to be $147.4 million at June 30,2009.  This amount represents theestimate of cash that would be due and payable to settle these noncontrollinginterests assuming an orderly liquidation of the finite-lived consolidatedpartnerships and LLCs on June 30, 2009, net of estimated liquidationcosts.  This amount is being disclosedpursuant to the requirements of FSP No. FAS 150-3, *Effective Date, Disclosures, and Transition forMandatorily Redeemable Financial Instruments of Certain Nonpublic Entities andCertain Mandatorily Redeemable Noncontrolling Interests under SFAS 150*.  U.S. Cellular has no current plans orintentions to liquidate any of the related partnerships or LLCs prior to theirscheduled termination dates.  Thecorresponding carrying value of the mandatorily redeemable noncontrollinginterests in finite-lived consolidated partnerships and LLCs at June 30,2009 was $53.1 million, and was included in Noncontrolling interests in theConsolidated Balance Sheet. The excess of the aggregate settlement value overthe aggregate carrying value of the mandatorily redeemable noncontrolling interestsof $94.3 million was due primarily to the unrecognized appreciation of thenoncontrolling interest holders’ share of the underlying net assets in theconsolidated partnerships and LLCs. Neither the noncontrolling interest holders’ share, nor U.S. Cellular’sshare, of the appreciation of the underlying net assets of these subsidiarieswas reflected in the consolidated financial statements. The estimate ofsettlement value was based on certain factors and assumptions which aresubjective in nature.  Changes in thosefactors and assumptions could result in a materially larger or smallersettlement amount.

 

**4.****    ****Fair Value Measurements**

 

SFASNo. 157, *Fair Value Measurements*, (“SFAS157”) defines “fair value”, establishes a framework for measuring fair value inthe application of GAAP, and expands disclosures about fair valuemeasurements.  SFAS 157 does not expandthe use of fair value measurements in financial statements, but standardizesits definition and application in GAAP. SFAS 157 provides that fair value is a market-based measurement. Thispronouncement establishes a fair value hierarchy that distinguishes betweenassumptions developed based on market data obtained from independent externalsources and the reporting entity’s own assumptions. Further, SFAS 157 specifiesthat fair value measurements should consider adjustments for risk, such as therisk inherent in a valuation technique or its input.  For assets and liabilities measured at fairvalue on a recurring basis, SFAS 157 expands the required disclosuresconcerning the inputs used to measure fair value.

 

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Asof June 30, 2009 and December 31, 2008, U.S. Cellular did not haveany financial assets or liabilities that were required to be recorded at fairvalue on a recurring basis in its Consolidated Balance Sheet. However, U.S.Cellular has applied the provisions of SFAS 157 for purposes of computingthe fair value of financial instruments for disclosure purposes.  The fair value of financial instruments wasas follows:

 
| ** **                            | ** ** | **June 30,**          | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                            | ** ** | **Book Value**             | ** ** | **Fair Value**        | ** ** | **Book Value** | ** ** | **Fair Value** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)** | ** ** |
| Cash and cash equivalents             |       | $                          | 275,920    |                  | $          | 275,920 |   | $ | 170,996 |   | $ | 170,996 |   |
| Current portion of  long-term debt(1) |       | 10,000                     |       | 9,825                 |       | 10,000 |   | 9,887 |   |
| Long-term debt(1)                     |       | 992,975                    |       | 856,426               |       | 992,748 |   | 663,432 |   |
|                                       |            |                            |            |                       |            |  |  |  |  |  |  |  |  |

 

----

(1)   Excludes capital lease obligations

 

Thefair value of cash equivalents included in Cash and cash equivalentsapproximates their book value due to the short-term nature of these financialinstruments.  The fair value of U.S.Cellular’s Current portion of long-term debt, excluding capital leaseobligations, was estimated using a discounted cash flow analysis.  The fair value of U.S. Cellular’s Long-termdebt, excluding capital lease obligations, was estimated using market pricesfor the 7.5% and 8.75% senior notes and discounted cash flow analysis for theremaining debt.

 

Asof June 30, 2009, U.S. Cellular did not have any nonfinancial assets orliabilities that required the application of SFAS 157 for purposes of reportingsuch amounts in its Consolidated Balance Sheet.

 

**5.****    ****Income Taxes**

 

U.S.Cellular is included in a consolidated federal income tax return and in certainstate income or franchise tax returns with other members of the TDSconsolidated group.  For financialstatement purposes, U.S. Cellular and its subsidiaries compute their income taxexpense as if they comprised a separate affiliated group and were not includedin the TDS consolidated group.

 

U.S.Cellular’s overall effective tax rate on Income before income taxes for thethree and six months ended June 30, 2009 was 39.3% and 33.1%,respectively, and for the three and six months ended June 30, 2008 was36.1% and 37.5%, respectively.

 

·      The effective tax ratefor the six months ended June 30, 2009 was lower than the rate for thethree months ended June 30, 2009 and the six months ended June 30,2008 primarily due to a state tax benefit resulting from a state tax lawchange.  A tax benefit associated withthe state tax law change was recognized as a discrete item in the three monthsended March 31, 2009.  This benefit,along with other minor discrete benefits in the period, decreased income taxexpense for the three months ended March 31, 2009 and the six months endedJune 30, 2009 by $14.6 million and $12.4 million, respectively; absentthese benefits, the effective tax rate for the three and six months ended June 30,2009 would have been 37.8% and 37.7%, respectively.  The state tax law change is not expected toprovide any incremental benefit in future periods.

 

·      The effective tax ratefor the three months ended June 30, 2009 was higher than the rate for thethree months ended June 30, 2008 primarily due to discrete income taxexpense (benefit) items which aggregated $2.2 million and ($0.2) million in thethree months ended June 30, 2009 and 2008, respectively.

 

In2008, upon completion of the audit of the TDS consolidated group’s federalincome tax returns for the years 2002 through 2005, the Internal RevenueService (“IRS”) issued an assessment of income tax.  TDS protested the assessment and it is underappeal.  Pursuant to a provision of theInternal Revenue Code, TDS made a $38 million deposit with the IRS in order toeliminate any potential interest expense subsequent to the deposit.  U.S. Cellular then paid TDS a $34 milliondeposit in March 2009, which represented its proportionate share of thedeposit that TDS paid to the IRS. This deposit is included in Other currentassets in U.S. Cellular’s Consolidated Balance Sheet at June 30, 2009.

 

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**6.****    ****Variable Interest Entities**

 

From time to time, theFederal Communications Commission (“FCC”) conducts auctions through whichadditional spectrum is made available for the provision of wirelessservices.  U.S. Cellular participated in spectrum auctions indirectlythrough its limited partnership interests in Aquinas Wireless L.P. (“AquinasWireless”), King Street Wireless L.P. (“King Street Wireless”), Barat WirelessL.P. (“Barat Wireless”) and Carroll Wireless L.P. (“Carroll Wireless”),collectively, the “limited partnerships.” Each entity qualified as a “designated entity” and thereby was eligiblefor bid credits with respect to licenses purchased in accordance with the rules definedby the FCC for each auction. In most cases, the bidding credits resulted in a25% discount from the gross winning bid.  Some licenses were “closedlicenses,” for which no credit was received, but bidding was restricted tobidders qualifying as “entrepreneurs,” which are small businesses that have alimited amount of assets and revenues.

 

A summary of the auctionsin which each entity participated and the auction results for each of theseentities are shown in the table below.

 
| ** **           | ** ** | **FCC   Auction** | ** ** | **Auction End Date**    | ** ** | **Date Applications   Granted by FCC** | ** ** | **Number of   Licenses Won** | ** ** |
|----------------------|------------|-------------------|------------|-------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| Aquinas Wireless     |       | 78                |       | August 20, 2008    |       |                                   | (1)        | 5                            | (2)        |
| King Street Wireless |       | 73                |       | March 20, 2008     |       |                                   | (1)        | 152                          | (2)        |
| Barat Wireless       |       | 66                |       | September 18, 2006 |       | April 30, 2007                    |       | 17                           |       |
| Carroll Wireless     |       | 58                |       | February 15, 2005  |       | January 6, 2006                   |       | 16                           |       |

 

----

(1)   As of June 30,2009, the FCC had not granted licenses to Aquinas Wireless and King StreetWireless for Auctions 78 and 73, respectively.

(2)   Provisionallywon.

 

Consolidated Variable Interest Entities

 

As of June 30, 2009, U.S. Cellular consolidates the following variable interest entities (“VIEs”):

 

·      Aquinas Wireless;

·      King Street Wireless and King StreetWireless, Inc., the general partner of King Street Wireless;

·      Barat Wireless and Barat Wireless, Inc.,the general partner of Barat Wireless; and

·      Carroll Wireless and Carroll PCS, Inc.,the general partner of Carroll Wireless.

 

FASB Interpretation No. 46(R),*Consolidation of Variable Interest Entities,an interpretation of ARB No. 51* (“FIN 46(R)”), establishescertain criteria for consolidation when voting control is not present.  Specifically, for a variable interest entity,as such term is defined by FIN 46(R), an entity, referred to as theprimary beneficiary, that absorbs a majority of the variable interest entity’sexpected gains or losses is required to consolidate such a variable interestentity.  U.S. Cellular holds avariable interest in the entities listed above due to capital contributionsand/or advances it has provided to these entities.  Given the significance of these contributionsand/or advances in relation to the equity investment at risk,U.S. Cellular was deemed to be the primary beneficiary of these VIEs.  Accordingly, these VIEs are consolidatedpursuant to FIN 46(R) because U.S. Cellular anticipatesbenefiting from or absorbing a majority of these VIEs’ expected gains orlosses.

 

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Following is a summary ofthe capital contributions and advances made to each entity by U.S. Cellular asof June 30, 2009 (dollars in thousands). The amounts shown in the table below exclude funds provided to theseentities solely from the shareholder of the general partner.

 
| Aquinas Wireless                                                 |   | $       | 2,132         |   |
|------------------------------------------------------------------|--------|---------|---------------|--------|
| King Street Wireless & King Street  Wireless, Inc. |   | 300,604 |          |
| Barat Wireless & Barat Wireless, Inc.              |   | 127,485 |          |
| Carroll Wireless & Carroll  PCS, Inc.              |   | 130,094 |          |
|                                                             |   | $       |  560,315 |   |

 

The following table presents the classification of the consolidatedVIEs’ assets and liabilities in U.S. Cellular’s Consolidated Balance Sheet.

 
| ** **                               | ** ** | **June 30,**          | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2009**                   | ** ** | **2008**              | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                               |       |                       |       |                  |       |
| Cash                                     |       | $                          | 361        |                  | $          | 684 |   |
| Other current assets                     |       | 367                        |       | 63                    |       |
| Licenses                                 |       | 487,962                    |       | 487,962               |       |
| Total assets                             |       | $                          | 488,690    |                  | $          | 488,709 |   |
|                                     |       |                       |       |                  |       |
| **Liabilities**                          |       |                       |       |                  |       |
| Customer deposits  and deferred revenues |       | 110                        |       | 63                    |       |
| Total liabilities                        |       | $                          | 110        |                  | $          | 63 |   |

 

Other Related Matters

 

U.S. Cellular may agree to make additional capital contributions and/oradvances to the VIEs discussed above and/or to their general partners toprovide additional funding for the development of licenses granted in thevarious auctions.  U.S. Cellular may finance such amounts with acombination of cash on hand, borrowings under its revolving credit agreementand/or long-term debt.  There is no assurance that U.S. Cellular will beable to obtain additional financing on commercially reasonable terms or at allto provide such financial support.

 

The general partner of each of these VIEs has the right to manage andoperate the limited partnerships; however, the general partner needs consent ofthe limited partner, a subsidiary of U.S. Cellular, in certain limitedcircumstances, such as to make certain large expenditures, admit otherpartners, or liquidate the limited partnerships.

 

See Note 12 — Commitments and Contingencies for additional informationrelated to the participation of Carroll Wireless, Barat Wireless and KingStreet Wireless in Auction 58, Auction 66 and Auction 73, respectively.

 

These VIEs are in the process of developing long-term business andfinancing plans.  These entities wereformed to participate in FCC auctions of wireless spectrum and to fund,establish and provide wireless service with respect to any FCC licenses won inthe auctions.  As such, these entitieshave risks similar to those described in the “Risk Factors” in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2008.

 

**7.****    ****EarningsPer Share**

 

Basicearnings per share is computed by dividing Net income attributable to U.S.Cellular by the weighted average number of common shares outstanding during theperiod. Diluted earnings per share is computed by dividing Net incomeattributable to U.S. Cellular by the weighted average number of common sharesadjusted to include the effects of potentially dilutive securities. Potentiallydilutive securities include incremental shares issuable upon exercise ofoutstanding stock options and the vesting of restricted stock units.

 

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Theamounts used in computing Earnings per Common and Series A Common Shareand the effects of potentially dilutive securities on the weighted averagenumber of Common and Series A Common Shares are as follows:

 
| ** **                                                             | ** ** | **Three Months Ended**                                           | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **June 30,**                                                | ** ** | **June 30,**    | ** ** |
| ** **                                                             | ** ** | **2009**                                                         | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                             | ** ** | **(Dollars and shares in thousands, except per  share amounts)** | ** ** |
|                                                                   |       |                                                             |       |                 |       |   |   |   |   |
| Net income  attributable to U.S. Cellular                              |       | $                                                                | 83,358     |                 | $          | 72,602 |   | $ | 167,950 |   | $ | 143,159 |   |
|                                                                   |       |                                                             |       |                 |       |   |   |   |   |
| Weighted average  number of shares used in basic earnings per share    |       | 86,992                                                           |       | 87,571               |       | 87,093 |   | 87,571 |   |
| Effect of dilutive  securities:                                        |       |                                                             |       |                 |       |   |   |   |   |
| Stock options(1)                                                       |       | 21                                                               |       | 181                  |       | 32 |   | 227 |   |
| Restricted stock  units(2)                                             |       | 164                                                              |       | 120                  |       | 183 |   | 165 |   |
| Weighted average  number of shares used in diluted earnings per share  |       | 87,177                                                           |       | 87,872               |       | 87,308 |   | 87,963 |   |
|                                                                   |       |                                                             |       |                 |       |   |   |   |   |
| Basic earnings per  share attributable to U.S. Cellular shareholders   |       | $                                                                | 0.96       |                 | $          | 0.83 |   | $ | 1.93 |   | $ | 1.63 |   |
|                                                                   |       |                                                             |       |                 |       |   |   |   |   |
| Diluted earnings per  share attributable to U.S. Cellular shareholders |       | $                                                                | 0.96       |                 | $          | 0.83 |   | $ | 1.92 |   | $ | 1.63 |   |

 

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(1)   Stock optionsexercisable into 2,270,687 and 1,848,256 Common Shares in the three and sixmonths ended June 30, 2009, respectively, and 597,695 and 336,683 CommonShares in the three and six months ended June 30, 2008, respectively, werenot included in computing Diluted Earnings per Share because their effects wereantidilutive.

 

(2)   Restricted stockunits issuable upon vesting into 151,386 and 126,360 Common Shares in the threeand six months ended June 30, 2009, respectively, were not included incomputing Diluted Earnings per Share because their effects wereantidilutive.  There were no antidilutiverestricted stock units for the comparable periods in 2008.

 

**8.**     **Acquisitions,Divestitures and Exchanges**

 

U.S.Cellular assesses its existing wireless interests on an ongoing basis with agoal of improving the competitiveness of its operations and maximizing itslong-term return on investment. As part of this strategy, U.S. Cellular reviewsattractive opportunities to acquire additional operating markets and wirelessspectrum. In addition, U.S. Cellular may seek to divest outright or include inexchanges for other wireless interests those markets and wireless intereststhat are not strategic to its long-term success.

 

Significant transactions pending as of June 30,2009

 

TheFCC auction of spectrum in the PCS and AWS-1 bands, designated by the FCC asAuction 78, closed on August 20, 2008. U.S. Cellular participated inAuction 78 indirectly through its interest in Aquinas Wireless.  Aquinas Wireless paid $2.1 million tothe FCC in 2008 for five licenses for which it was the provisional winningbidder in the auction.

 

U.S.Cellular also participated in the FCC auction of spectrum in the 700 megahertzband, designated as Auction 73, which closed on March 20, 2008. U.S.Cellular participated in Auction 73 indirectly through its interest in KingStreet Wireless.  King Street Wirelesspaid $300.5 million to the FCC in 2008 for 152 licenses for which it wasthe provisional winning bidder in the auction.

 

Thereis no prescribed timeframe for the FCC to review the qualifications of thevarious winning bidders and grant licenses related to Auctions 78 and 73. As ofJune 30, 2009, the FCC had not granted the licenses to Aquinas Wireless orKing Street Wireless. See Note 6—Variable Interest Entities, for furtherdetails on Aquinas Wireless and King Street Wireless and the licensesprovisionally won in Auctions 78 and 73.

 

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**9.****    ****Licenses and Goodwill**

 

Changesin U.S. Cellular’s licenses and goodwill for the six months ended June 30,2009 and 2008 are presented below.

 
| ** **                    | ** ** | **June 30,**          | ** ** | **June 30,** | ** ** |
|-------------------------------|------------|----------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2009**                   | ** ** | **2008**          | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)** | ** ** |
| Licenses                      |       |                       |       |              |       |
| Balance, beginning  of period |       | $                          | 1,433,415  |              | $          | 1,482,446 |   |
| Acquisitions                  |       | 12,250                     |       | 310,282           |       |
| Other                         |       | (164                       | )          | —            |       |
| Balance, end of  period       |       | $                          | 1,445,501  |              | $          | 1,792,728 |   |

 
| ** **                    | ** ** | **June 30,**          | ** ** | **June 30,** | ** ** |
|-------------------------------|------------|----------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **2009**                   | ** ** | **2008**          | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)** | ** ** |
| Goodwill                      |       |                       |       |              |       |
| Balance, beginning  of period |       | $                          | 494,279    |              | $          | 491,316 |   |
| Acquisitions                  |       | —                     |       | 2,602             |       |
| Other                         |       | 458                        |       | —            |       |
| Balance, end of  period       |       | $                          | 494,737    |              | $          | 493,918 |   |

 

Licenses and goodwillmust be reviewed for impairment annually or more frequently if events orchanges in circumstances indicate that the asset might be impaired. U.S.Cellular has historically performed the required annual impairment assessmentof its licenses and goodwill in the second quarter of the year.

 

As a result of thedeterioration in the credit and financial markets and the decline of theoverall economy in the fourth quarter of 2008, U.S. Cellular performed aninterim impairment assessment of licenses and goodwill as of December 31,2008.  The assessment resulted in an impairment loss of $386.7 million onlicenses, which was recognized in December 2008, and no impairment ofgoodwill.  U.S. Cellular assessed whether an interim impairment assessmentwas also required at June 30, 2009, and concluded that such an impairmentassessment was not required.

 

As noted above, since theadoption of SFAS No. 142, *Goodwill and OtherIntangible Assets*(“SFAS 142”), U.S. Cellular’s annual impairmentreview of goodwill and indefinite-lived intangible assets has been completed asof April 1 of each year. Effective April 1, 2009, U.S. Cellularadopted a new accounting policy whereby its annual impairment review ofgoodwill and indefinite-lived intangible assets will be performed as of November 1instead of April 1 of each year.  As indicated above, an impairmentanalysis of goodwill and indefinite-lived intangible assets was last completedas of December 31, 2008.  The change in the annual goodwill andindefinite-lived intangible asset impairment testing date was made to betteralign the annual impairment test with the timing of U.S. Cellular’s annualstrategic planning process, which allows for a better estimate of the futurecash flows used in discounted cash flow models to test for impairment.  This change in accounting policy does notdelay, accelerate or avoid an impairment charge. Accordingly, U.S. Cellularmanagement believes that this accounting change is preferable under thecircumstances.

 

**10.**** ****Investment in Unconsolidated Entities**

 

Investmentsin unconsolidated entities consist of amounts invested in wireless entities inwhich U.S. Cellular holds a noncontrolling interest. These investments areaccounted for using either the equity or cost method.

 

Equityin earnings of unconsolidated entities totaled $24.8 million and $22.8 millionin the three months ended June 30, 2009 and 2008, respectively, and $50.1million and $44.0 million in the six month periods then ended,respectively.  Of those amounts, U.S.Cellular’s investment in the Los Angeles SMSA Partnership (“LA Partnership”)contributed $17.1 million and $18.2 million in the three months ended June 30,2009 and 2008, respectively, and $34.0 million and $34.0 million in the sixmonths ended June 30, 2009 and 2008, respectively.  U.S. Cellular held a 5.5% ownership interestin the LA Partnership during these periods.

 

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The following table summarizes the combined results ofoperations of U.S. Cellular’s equity method investments:

 
| ** **              | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------|------------|----------------------|------------|
| ** **              | ** ** | **June 30,**          | ** ** | **June 30,**    | ** ** |
| ** **              | ** ** | **2009**                   | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
|                    |       | **(Dollars in thousands)** |       |
|                    |       |                       |       |                 |       |   |   |   |   |
| Revenues                |       | $                          | 1,197,000  |                 | $          | 1,169,000 |   | $ | 2,369,000 |   | $ | 2,346,000 |   |
|                    |       |                       |       |                 |       |   |   |   |   |
| Operating expenses      |       | 834,000                    |       | 812,000              |       | 1,648,000 |   | 1,630,000 |   |
| Operating income        |       | 363,000                    |       | 357,000              |       | 721,000 |   | 716,000 |   |
| Other income  (expense) |       | 12,000                     |       | 6,000                |       | 21,000 |   | 11,000 |   |
| Net Income              |       | $                          | 375,000    |                 | $          | 363,000 |   | $ | 742,000 |   | $ | 727,000 |   |

 

**11.****  NotesPayable**

 

Prior to June 30, 2009, U.S.Cellular had a $700 million revolving credit facility available for generalcorporate purposes.  On June 30,2009, U.S. Cellular entered into a new $300 million revolving credit agreementwith certain lenders and other parties. As a result, U.S. Cellular’s $700 million revolving credit agreement,which was due to expire in December 2009, was terminated on June 30,2009 as a condition of entering into the new agreement.  The new revolving credit agreement providesU.S. Cellular with a $300 million senior revolving credit facility for workingcapital, non-hostile acquisitions and other corporate purposes and to refinanceany existing debt of U.S. Cellular. Amounts under the new revolving credit facility may be borrowed, repaidand reborrowed from time to time from and after June 30, 2009 untilmaturity in June 2012.

 

At June 30, 2009, there were no outstandingborrowings and $0.3 million of outstanding letters of credit, leaving $299.7million available for use.  Borrowingsunder the new revolving credit facility bear interest at the London InterBankOffered Rate (“LIBOR”) (or, at U.S. Cellular’s option, an alternate “Base Rate”as defined in the new revolving credit agreement) plus a contractual spreadbased on U.S. Cellular’s credit rating. U.S. Cellular may select borrowing periods of either one, two, three orsix months (or other period of twelve months or less requested by U.S. Cellularif approved by the lenders).  At June 30,2009, the one-month LIBOR was 0.31% and the contractual spread was 300 basispoints.  If U.S. Cellular provides lessthan three business days notice of intent to borrow, interest on borrowings isthe Base Rate plus the contractual spread (the Base Rate was 3.25% at June 30,2009).

 

U.S.Cellular’s interest cost on its new revolving credit facility is subject toincrease if its current credit rating from Standard & Poor’s RatingService, Moody’s Investors Service and/or Fitch Ratings is lowered, and issubject to decrease if the rating is raised. The new credit facility would notcease to be available nor would the maturity date accelerate solely as a resultof a downgrade in U.S. Cellular’s credit rating. However, a downgrade in U.S.Cellular’s credit rating could adversely affect its ability to renew the newcredit facility or obtain access to other credit facilities in the future.

 

Thenew revolving credit facility has a commitment fee based on the senior unsecured debtrating assigned to U.S. Cellular by certain rating agencies. The range of thecommitment fee is 0.25% to 0.75% of the unused portion of the new revolvingcredit facility.

 

U.S.Cellular incurred debt issuance costs of $4.3 million in conjunction withobtaining the new credit facility, and such costs will be amortized on astraight line basis over the three year term of the facility.

 

The maturity date of any borrowings under U.S. Cellular’s new revolvingcredit facility would accelerate in the event of a change in control.

 

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The continued availability of the new revolving credit facilityrequires U.S. Cellular to comply with certain negative and affirmativecovenants, maintain certain financial ratios and make representations regardingcertain matters at the time of each borrowing. U.S. Cellular believes it was in compliance as of June 30, 2009with all covenants and other requirements set forth in its new revolving creditfacility.

 

In connection with U.S. Cellular’s newrevolving credit facility, TDS and U.S. Cellular entered into a subordinationagreement dated June 30, 2009 together with the administrative agent forthe lenders under U.S. Cellular’s new revolving credit agreement.  Pursuant to this subordination agreement, (a) anyconsolidated funded indebtedness from U.S. Cellular to TDS will be unsecuredand (b) any (i) consolidated funded indebtedness (other than “refinancingindebtedness” as defined in the subordination agreement) in excess of$105,000,000, and (ii) refinancing indebtedness in excess of $250,000,000,will be subordinated and made junior in right of payment to the prior paymentin full of obligations to the lenders under U.S. Cellular’s new revolvingcredit agreement.  The aggregateoutstanding principal amount of consolidated funded indebtedness of U.S.Cellular that was subordinated pursuant to this subordination agreement waszero as of June 30, 2009.

 

**12.**** ****Commitments and Contingencies**

 

Indemnifications

 

U.S. Cellular enters into agreements in the normal course of businessthat provide for indemnification of counterparties.  These agreements include certain asset salesand financings with other parties.  Theterms of the indemnification vary by agreement. The events or circumstances that would require U.S. Cellular to performunder these indemnities are transaction specific; however, these agreements mayrequire U.S. Cellular to indemnify the counterparty for costs and lossesincurred from any litigation or claims arising from the underlyingtransaction.  U.S. Cellular is unable toestimate the maximum potential liability for these types of indemnifications asthe amounts are dependent on the outcome of future events, the nature andlikelihood of which cannot be determined at this time.  Historically, U.S. Cellular has not made anysignificant indemnification payments under such agreements.

 

Legal Proceedings

 

The United States Department of Justice (“DOJ”) has notifiedU.S. Cellular and its parent, TDS, that each is a named defendant in acivil action brought by a private party in the U.S. District Court for theDistrict of Columbia under the “qui tam” provisions of the federal False ClaimsAct.  TDS and U.S. Cellular wereadvised that the complaint seeks return of approximately $165 million ofbid credits from certain FCC auctions and requests treble damages.  The complaint remains under seal pending theDOJ’s consideration as to whether to intervene in the proceeding.  The DOJ has not yet made any decision as towhether it will intervene.  However, as aresult of the complaint, the DOJ is investigating TDS’ and U.S. Cellular’sparticipation in certain spectrum auctions conducted by the FCC between 2005and 2008, through Carroll Wireless, L.P., Barat Wireless, L.P., andKing Street Wireless, L.P.  Theselimited partnerships were winning bidders in Auction 58, Auction 66and Auction 73, respectively, and received a 25% bid credit in theapplicable auction price under FCC rules. The DOJ is investigating whether these limited partnerships qualifiedfor the 25% bid credit in auction price considering their arrangements with TDSand U.S. Cellular. TDS and U.S. Cellular are cooperating with the DOJ’sreview.  TDS and U.S. Cellularbelieve that U.S. Cellular’s arrangements with these limited partnershipsand the limited partnerships’ participation in the FCC auctions complied withapplicable law and FCC rules and each of TDS and U.S. Cellularintends to vigorously defend itself against any claim that it violatedapplicable law or FCC rules.  At thistime, U.S. Cellular cannot predict the outcome of this review or anyproceeding.  The FCC sent a letter toKing Street Wireless, L.P. requesting that it submit to the FCC a writtenresponse to the allegations in the complaint. King Street Wireless, L.P. made this submission as requested by the FCC.

 

U.S. Cellular is involved or may be involved from time to time in legalproceedings before the FCC, other regulatory authorities, and/or various stateand federal courts.  If U.S. Cellularbelieves that a loss arising from such legal proceedings is probable and can bereasonably estimated, an amount is accrued in the financial statements for theestimated loss.  If only a range of loss can be determined, the bestestimate within that range is accrued; if none of the estimates within thatrange is better than another, the low end of the range is accrued.  The assessment of the expected outcomes oflegal proceedings is a highly subjective process that requires judgments aboutfuture events.  The legal proceedings arereviewed at least quarterly to determine the adequacy of accruals and relatedfinancial statement disclosures.  Theultimate outcomes of legal proceedings could differ materially from amountsaccrued in the financial statements.

 

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**13.****  CommonShare Repurchases**

 

Prior to November 18, 2008, the Board of Directors of U.S.Cellular had authorized the repurchase of up to 1% of the outstanding U.S.Cellular Common Shares held by non-affiliates in each three-month period,primarily for use in employee benefit plans (the “Limited Authorization”).  On November 18, 2008, the Board ofDirectors of U.S. Cellular amended the Limited Authorization to permit therepurchase of up to 5% of the outstanding U.S. Cellular Common Shares held bypersons other than TDS affiliates in each twelve-month period.  This authorization does not have anexpiration date.

 

During the six months ended June 30,2009, U.S. Cellular repurchased 507,000 Common Shares for $19.3 million, or anaverage of $38.13 per Common Share. During the six months ended June 30, 2008, U.S. Cellularrepurchased 300,000 Common Shares for $19.1 million, or an average of $63.57per Common Share.  In addition, U.S.Cellular received $4.6 million in cash during the six months ended June 30,2008 as a final settlement payment of 2007 Common Share repurchases executedthrough accelerated share repurchase agreements with an investment bankingfirm.  As of June 30, 2009, U.S.Cellular had repurchased the maximum number of Common Shares permitted to berepurchased for the twelve months then ended under the Limited Authorization.

 

**14.Accumulated Other Comprehensive Income**

 

The cumulativebalance of unrealized gains on securities and related income tax effectsincluded in Accumulated other comprehensive income was zero at June 30,2009 and December 31, 2008.  Changesin such cumulative balance during the six months ended June 30, 2009 and June 30,2008 were $0 and $99,000, respectively.

 

Comprehensiveincome for the six months ended June 30, 2009 and 2008 was as follows:

 
| ** **                                                               | ** ** | **Six Months Ended**       | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                               | ** ** | **June 30,**          | ** ** |
| ** **                                                               | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| **Comprehensive Income**                                                 |       |                       |       |   |   |
| Net income                                                               |       | $                          | 179,927    |   | $ | 152,517 |   |
| Net change in accumulated other comprehensive  income                    |       | —                     |       | 99 |   |
| Comprehensive income                                                     |       | 179,927                    |       | 152,616 |   |
| Less: Comprehensive income attributable to the  noncontrolling interests |       | (11,977                    | )          | (9,358 | ) |
| Comprehensive income attributable to U.S.  Cellular                      |       | $                          | 167,950    |   | $ | 143,258 |   |

 

**15.**** ****Supplemental Cash Flow Disclosures**

 

Thefollowing represents cash flow information related to the issuance of CommonShares pursuant to stock-based compensation awards:

 
| ** **                                                                                           | ** ** | **Six Months Ended**       | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                           | ** ** | **June 30,**          | ** ** |
| ** **                                                                                           | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| ** **                                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Common Shares  withheld(1)                                                                           |       | 33,565                     |       | 217,535 |   |
|                                                                                                 |       |                       |       |   |   |
| Aggregate value of  Common Shares withheld                                                           |       | $                          | 1,213      |   | $ | 12,841 |   |
|                                                                                                 |       |                       |       |   |   |
| Cash receipts upon  exercise of stock options                                                        |       | $                          | 808        |   | $ | 1,920 |   |
| Cash disbursements  for payment of taxes(2)                                                          |       | (1,213                     | )          | (3,798 | ) |
| Net cash receipts  (disbursements) from exercise of stock options and vesting of other stock  awards |       | $                          | (405       | ) | $ | (1,878 | ) |

 

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(1)   Such shares werewithheld to cover the exercise price of stock options, if applicable, andrequired tax withholdings.

(2)   In certainsituations, U.S. Cellular withholds shares that are issuable upon the exerciseof stock options or the vesting of restricted shares to cover, and with a valueequivalent to, the exercise price and/or the amount of taxes required to bewithheld from the stock award holder at the time of the exercise or vesting.  U.S. Cellular then pays the amount of therequired tax withholdings to the taxing authorities in cash.

 

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**16.**** ****Subsequent Events**

 

U.S.Cellular evaluated subsequent events from June 30, 2009 through theissuance date (August 6, 2009) of these financial statements.  No significant subsequent events haveoccurred during this period that require adjustment to the June 30, 2009financial statements or disclosure.

 

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

UnitedStates Cellular Corporation (“U.S. Cellular®”) owns, operates and invests inwireless markets throughout the United States. U.S. Cellular is an 81%-ownedsubsidiary of Telephone and Data Systems, Inc. (“TDSTM”) as of June 30,2009.

 

Thefollowing discussion and analysis should be read in conjunction with U.S.Cellular’s interim consolidated financial statements included in Item 1 above,and with its audited consolidated financial statements and Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in its Annual Report on Form 10-K (“Form 10-K”) for the yearended December 31, 2008.

 

**OVERVIEW**

 

Thefollowing is a summary of certain selected information contained in thecomprehensive Management’s Discussion and Analysis of Financial Condition andResults of Operations that follows. The overview does not contain all of theinformation that may be important. You should carefully read the entireManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and not rely solely on the overview.

 

U.S.Cellular provides wireless telecommunications services to approximately6.2 million customers in five geographic market areas in 26 states. As of June 30,2009, U.S. Cellular’s average penetration rate in its consolidated operatingmarkets, calculated by dividing U.S. Cellular’s total customers by the totalpopulation of 46.3 million in such markets, was 13.3%. U.S. Cellular operateson a customer satisfaction strategy, meeting customer needs by providing acomprehensive range of wireless products and services, excellent customersupport, and a high-quality network. U.S. Cellular’s business developmentstrategy is to operate controlling interests in wireless licenses in areasadjacent to or in proximity to its other wireless licenses, thereby buildingcontiguous operating market areas. U.S. Cellular believes that operating incontiguous market areas will continue to provide it with certain economies inits capital and operating costs. Financial and operating highlights in thefirst six months of 2009 included the following:

 

·      Totalcustomers were 6,155,000 at June 30, 2009, including 5,711,000 retailcustomers.

 

·      Retailcustomer net additions were 4,000 in the first six months of 2009 (comprised of63,000 net additions in the first quarter and 59,000 net defections in the secondquarter) compared to 119,000 in 2008. The decrease year-over-year reflectedboth lower gross additions and higher churn rates, due to the weak economy andvery competitive industry conditions including the increased impacts ofunlimited prepay service providers in certain of U.S. Cellular’s markets.

 

·      Postpaycustomers comprised approximately 95% of U.S. Cellular’s retail customer baseas of June 30, 2009. Postpay net additions were 28,000 in the first sixmonths of 2009 (comprised of 60,000 net additions in the first quarter and32,000 net defections in the second quarter) compared to 105,000 in 2008. Thepostpay churn rate was 1.6% in 2009.

 

·      Servicerevenues of $1,956.6 million increased $7.2 million year-over-year, despite a$34.7 million (22%) decrease in inbound roaming revenues.  Retail service revenues grew by $32.4 million(2%) due to increases in the average number of customers and the averagemonthly retail service revenue per customer.

 

·      Cashflows from operating activities were $373.1 million. At June 30, 2009,Cash and cash equivalents totaled $275.9 million and there were no outstandingborrowings under the revolving credit facility.

 

·      OnJune 30, 2009, U.S. Cellular entered into a new $300 million revolvingcredit agreement with certain lenders and other parties.  As a result, U.S. Cellular’s $700 millionrevolving credit agreement, which was due to expire in December 2009, wasterminated on June 30, 2009 as a condition of entering into the newagreement.  The new revolving creditagreement provides U.S. Cellular with a $300 million senior revolving creditfacility for working capital, non-hostile acquisitions and other corporatepurposes and to refinance any existing debt of U.S. Cellular.

 

·      Additionsto property, plant and equipment totaled $228.9 million, including expendituresto construct cell sites, increase capacity in existing cell sites and switches,expand mobile broadband services based on third generation Evolution DataOptimized technology (“3G”) to additional markets, outfit new and remodelexisting retail stores and continue the development and enhancement of U.S.Cellular’s office systems. Total cell sites in service increased 7%year-over-year to 7,043.

 

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·      Asa further proof point of its customer satisfaction strategy and Believe inSomething BetterTM brand message, U.S. Cellular launched its newBattery Swap program. Under this program, a customer can go to any store andexchange a battery that is dead or dying for one that is fully charged, at nocost to the customer. U.S. Cellular is the first wireless company to offer thisservice in the United States.

 

·      U.S.Cellular began efforts on a number of multi-year initiatives including thedevelopment of: a new point-of-sale system to consolidate billing on oneplatform; an Electronic Data Warehouse/Customer Relationship Management Systemto collect and analyze information more efficiently to build and improvecustomer relationships; and a new Internet/Web platform to enable customers tocomplete a wide range of transactions and, eventually, to manage their accountsonline.

 

·      Operatingincome increased $18.8 million, or 8%, to $255.7 million in 2009 from $236.9million in 2008.

 

U.S.Cellular anticipates that future growth in its operating income will beaffected by the following factors:

 

·      Uncertainty related tocurrent economic conditions and their impact on demand for U.S. Cellular’sproducts and services;

 

·      Increasing penetrationin the wireless industry;

 

·      Increased competition incertain markets, including competition from carriers offering low-priced,unlimited prepay service;

 

·      Costs of customeracquisition and retention, such as equipment subsidies and advertising;

 

·      Industry consolidationand the resultant effects on roaming revenues, service and equipment pricingand other effects of competition;

 

·      Providing service inrecently launched areas or potential new market areas;

 

·      Potential increases ordecreases in prepay and reseller customers as a percentage of U.S. Cellular’scustomer base;

 

·      Costs of developing andintroducing new products and services;

 

·      Costs of developing andenhancing office and customer support systems, including costs and risksassociated with the completion of important multi-year initiatives such asthose described above;

 

·      Continued enhancementsto its wireless networks, including expansion of 3G services and potentialdeployments of new technology;

 

·      Increasing costs ofregulatory compliance; and

 

·      Uncertainty in futureeligible telecommunication carrier (“ETC”) funding.

 

·      Netincome attributable to U.S. Cellular increased $24.8 million, or 17%, to $168.0million in 2009 compared to $143.2 million in 2008, due primarily to higheroperating income and a lower effective income tax rate.  Basic earnings per share was $1.93 in 2009,which was $0.30 higher than in 2008, and Diluted earnings per share was $1.92,which was $0.29 higher than in 2008.

 

**Cash Flows and Investments**

 

U.S.Cellular believes that cash on hand, expected future cash flows from operatingactivities and sources of external financing provide financial flexibility andare sufficient to permit U.S. Cellular to finance its contractual obligationsand anticipated capital expenditures for the foreseeable future. U.S. Cellularcontinues to seek to maintain a strong balance sheet and an investment gradecredit rating.

 

See“Financial Resources” and “Liquidity and Capital Resources” below foradditional information related to cash flows and investments, includinginformation related to U.S. Cellular’s new revolving agreement and the impactsof recent economic events.

 

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**Recent Developments**

 

Congress recently enacted the American Recovery andReinvestment Act of 2009, or the Recovery Act, which provides, among otherthings, for an aggregate appropriation of $7.2 billion to fund grants and loansto provide broadband infrastructure, access and equipment to consumers residingin rural, unserved or underserved areas of the United States. A significantportion of these funds is expected to be made available in 2009 and 2010. Theapplication deadline for the first portion of the grants and loans is August 14,2009. U.S. Cellular is currently assessing the eligibility requirements for thegrants and loans and potential qualifying broadband projects, and may apply forthe Recovery Act funds.  There is noassurance that U.S. Cellular, if it applies, will receive the Recovery Actfunds.The distribution of these grants and loans to other telecommunicationsservice providers could impact competition in certain of U.S. Cellular’sservice areas.

 

**2009 Estimates**

 

U.S.Cellular expects the factors described above to impact revenues and operatingincome for the next several quarters. Any changes in the above factors, as wellas the effects of other drivers of U.S. Cellular’s operating results, may causerevenues and operating income to fluctuate over the next several quarters.

 

U.S.Cellular’s estimates of full-year 2009 results for: service revenues; operatingincome; depreciation, amortization and accretion expenses; and capitalexpenditures, are shown below. Such estimates represent U.S. Cellular’s viewsas of the date of filing of U.S. Cellular’s Form 10-Q for the six monthsended June 30, 2009. Such forward-looking statements should not be assumedto be accurate as of any future date. U.S. Cellular undertakes no duty toupdate such information whether as a result of new information, future eventsor otherwise. There can be no assurance that final results will not differmaterially from such estimated results.

 
| ** **                                                     | ** ** | **2009**                   | ** ** | **2008**                | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | **Estimated Results** | ** ** | **Actual Results** | ** ** |
| Net retail customer  additions (1)                             |       | —                     |       | 149,000                 |       |
| Service revenues                                               |       | $3,900 - $3,950 million    |       | $3,940.3 million        |       |
| Operating  income(2) (3)                                  |       | $300 - $375 million        |       | $27.7 million           |       |
| Depreciation,  amortization and accretion expenses(2) (3) |       | Approx. $600 million       |       | $987.0 million          |       |
| Capital expenditures                                           |       | Approx. $575 million       |       | $585.6 million          |       |

 

----

(1)   U.S.Cellular has withdrawn its net retail customer additions guidance for theremainder of 2009 due to uncertainty related to the weak economy and consumerpurchasing intentions.

 

(2)   2008Actual Results include losses on disposals of $23.4 million and impairment ofassets of $386.7 million. The 2009 Estimated Results include only the estimatefor Depreciation, amortization and accretion expenses and losses on disposalsof assets, and do not include any estimate for losses on impairment of assetssince these cannot be predicted.

 

(3)   The2008 loss on impairment of assets of $386.7 million is not expected to have animpact on future operating results and liquidity.  In addition, historical operating results,including the 2008 impairment, are not necessarily indicative of future operatingresults.

 

U.S.Cellular management currently believes that the foregoing estimates represent areasonable view of what is achievable considering actions that U.S. Cellularhas taken and will be taking. However, the current general economic conditionshave created a challenging business environment that could significantly impactactual results. U.S. Cellular expects to continue its focus on customer satisfactionby delivering a high quality network, attractively priced service plans, abroad line of handsets and other products, and outstanding customer service inits company-owned and agent retail stores and customer care centers. U.S.Cellular believes that future growth in its revenues will result primarily fromselling additional products and services to its existing customers, increasingthe number of multi-device users among its existing customers, and attractingwireless users switching from other wireless carriers, rather than by addingusers that are new to wireless service. U.S. Cellular is focusing onopportunities to increase revenues, pursuing cost reduction initiatives invarious areas and implementing a number of initiatives to enable future growth.The initiatives are intended, among other things, to allow U.S. Cellular toaccelerate its introduction of new products and services, better segment itscustomers for new services and retention, sell additional services such asdata, expand its Internet sales and customer service capabilities, and improveits prepay products and services.

 

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**RESULTS OF OPERATIONS**

 

**Six Months Ended June 30, 2009 Compared toSix Months Ended June 30, 2008**

 

Followingis a table of summarized operating data for U.S. Cellular’s consolidatedoperations.

 
| **As  of June 30,(1)**                                   | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| Total market  population of consolidated operating markets(2) |       | 46,306,000 |       | 45,493,000 |       |
| Customers(3)                                                  |       | 6,155,000  |       | 6,194,000  |       |
| Market  penetration(2)                                        |       | 13.3       | %          | 13.6       | %          |
| Total full-time  equivalent employees                         |       | 8,673      |       | 8,386      |       |
| Cell sites in  service                                        |       | 7,043      |       | 6,596      |       |

 
| **For  the Six Months Ended June 30,(4)**   | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Net retail customer  additions(5)                |       | 4,000    |       | 119,000  |       |
| Net customer  additions (losses)(5)              |       | (41,000  | )          | 90,000   |       |
| Average monthly  service revenue per customer(6) |       | $        | 52.51      |     | $          | 52.78 |   |
| Postpay churn rate  (7)                          |       | 1.6      | %          | 1.4      | %          |
|                                                  |            |          |            |          |            |  |  |

 

----

(1)   Amounts include results for U.S. Cellular’sconsolidated operating markets as of June 30.

 

(2)   Calculated using 2008 and 2007 Claritaspopulation estimates for 2009 and 2008, respectively. “Total market populationof consolidated operating markets” is used only for the purposes of calculatingmarket penetration of consolidated operating markets, which is calculated bydividing customers by the total market population (without duplication ofpopulation in overlapping markets).

 

The total market population and penetration measures for consolidatedoperating markets apply to markets in which U.S. Cellular provides wirelessservice to customers. For comparison purposes, total market population andpenetration related to all consolidated markets in which U.S. Cellular owns aninterest were 83,726,000 and 7.4%, and 82,875,000 and 7.5%, as of June 30,2009 and 2008, respectively.

 

(3)   U.S. Cellular’s customer base consists of thefollowing types of customers:

 
| ** **                                                                                                                | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Customers on postpay  service plans in which the end user is a customer of U.S. Cellular (“postpay  customers”) |       | 5,448,000         |       | 5,367,000 |   |
| Customers on prepay  service plans in which the end user is a customer of U.S. Cellular (“prepay  customers”)   |       | 263,000           |       | 310,000 |   |
| Total retail  customers                                                                                                   |       | 5,711,000         |       | 5,677,000 |   |
|                                                                                                                      |       |              |       |   |   |
| End user customers  acquired through U.S. Cellular’s agreements with third parties (“reseller  customers”) |       | 444,000           |       | 517,000 |   |
| Total customers                                                                                                           |       | 6,155,000         |       | 6,194,000 |   |

 

(4)   Amounts include results for U.S. Cellular’sconsolidated operating markets for the period January 1 through June 30;operating markets acquired during a particular period are included as of theacquisition date.

 

(5)   “Net retail customer additions” represents thenumber of net customers added to U.S. Cellular’s retail customer base throughits marketing distribution channels; this measure excludes activity related toreseller customers and customers transferred through acquisitions, divestituresor exchanges.  “Net customer additions(losses)” represents the number of net customers added to (or deducted from)U.S. Cellular’s overall customer base through its marketing distributionchannels; this measure includes activity related to reseller customers butexcludes activity related to customers transferred through acquisitions,divestitures or exchanges.

 

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(6)   Management uses this measurement to assess theamount of service revenue that U.S. Cellular generates each month on a percustomer basis. Variances in this measurement are monitored and compared tovariances in expenses on a per customer basis. Average monthly service revenueper customer is calculated as follows:

 
| ** **                                                         | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                         | ** ** | **June 30,**    | ** ** |
| ** **                                                         | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Service revenues per  Consolidated Statements of Operations (000s) |       | $                    | 1,956,629  |   | $ | 1,949,446 |   |
| Divided by average  customers during period (000s)*                |       | 6,210                |       | 6,156 |   |
| Divided by number of  months in each period                        |       | 6                    |       | 6 |   |
| Average monthly  service revenue per customer                      |       | $                    | 52.51      |   | $ | 52.78 |   |

 

----

* “Average customers during period” iscalculated by adding the number of total customers, including resellercustomers, at the beginning of the first month of the period and at the end ofeach month in the period and dividing by the number of months in the periodplus one. Acquired and divested customers are included in the calculation on aprorated basis for the amount of time U.S. Cellular included such customersduring each period.

 

(7)   Postpay churn rate represents the percentageof the postpay customer base that disconnects service each month.

 

**Components of Operating Income**

** **
| **Six  Months Ended June 30,**                                                    | ** ** | **2009**                   | ** ** | **2008**  | ** ** | **Increase/   (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|----------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Retail service                                                                         |       | $                          | 1,745,307  |      | $          | 1,712,862                  |       | $                      | 32,445     |   | 2 | % |
| Inbound roaming                                                                        |       | 122,280                    |       | 156,956   |       | (34,676                    | )          | (22                    | )%         |
| Other                                                                                  |       | 89,042                     |       | 79,628    |       | 9,414                      |       | 12                     | %          |
| Service revenues                                                                       |       | 1,956,629                  |       | 1,949,446 |       | 7,183                      |       | —                 |       |
| Equipment sales                                                                        |       | 138,685                    |       | 149,002   |       | (10,317                    | )          | (7                     | )%         |
| Total operating revenues                                                               |       | 2,095,314                  |       | 2,098,448 |       | (3,134                     | )          | —                 |       |
|                                                                                   |       |                       |       |      |       |                       |       |                   |       |
| System operations (excluding Depreciation, amortization and accretion  reported below) |       | 394,809                    |       | 387,668   |       | 7,141                      |       | 2                      | %          |
| Cost of equipment sold                                                                 |       | 341,756                    |       | 354,190   |       | (12,434                    | )          | (4                     | )%         |
| Selling, general and administrative                                                    |       | 822,518                    |       | 822,042   |       | 476                        |       | —                 |       |
| Depreciation, amortization and accretion                                               |       | 276,265                    |       | 287,788   |       | (11,523                    | )          | (4                     | )%         |
| Loss on asset disposals, net                                                           |       | 4,277                      |       | 9,892     |       | (5,615                     | )          | (57                    | )%         |
| Total operating expenses                                                               |       | 1,839,625                  |       | 1,861,580 |       | (21,955                    | )          | (1                     | )%         |
| Operating income                                                                       |       | $                          | 255,689    |      | $          | 236,868                    |       | $                      | 18,821     |   | 8 | % |

 

**Operating Revenues**

 

***Service revenues***

 

Service revenues consist primarily of: (i) chargesfor access, airtime, roaming, recovery of regulatory costs and value-addedservices, including data products and services and long distance, provided toU.S. Cellular’s retail customers and to end users through third-party resellers(“retail service”); (ii) charges to other wireless carriers whosecustomers use U.S. Cellular’s wireless systems when roaming, includinglong-distance roaming (“inbound roaming”); and (iii) amounts received fromthe Federal Universal Service Fund (“USF”).

 

***Retail service revenues***

 

The increase in Retail service revenues in 2009 was due to increases inboth the average number of customers and the average monthly retail servicerevenue per customer.  The average numberof customers increased to 6,210,000 in 2009 from 6,156,000 in 2008.  Average monthly retail service revenue percustomer increased 1% to $46.84 in 2009 from $46.37 in 2008, as a significantincrease in revenues from data products and services more than offset a declinein revenues from voice services.

 

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Revenues from data products and services totaled $318.9 million in2009 and $239.4 million in 2008, and represented 16% of total service revenuesin 2009 compared to 12% of total service revenues in 2008. Such growth, whichpositively impacted average monthly retail service revenue per customer,reflected customers’ continued and increasing usage of U.S. Cellular’s text,picture, and video messaging services, **easy**edgeSM service and applications,premium mobile Internet services, and smart phone handsets and services.  During the six months ended June 30,2009, U.S. Cellular introduced unlimited messaging plans and unlimitedmessaging and mobile Internet plans that further drove data usage andrevenues.  U.S. Cellular expects that thegrowth in revenues from data products and services will continue as customersmigrate to the new unlimited plans and as U.S. Cellular’s 3G network expands tocover 70% of its customers by the end of 2009.

 

Revenues from voice servicesdeclined year-over-year primarily due to a reduction in average voice revenueper customer.  The reduction in averagevoice revenue per customer reflects industry competition which has resulted inlower pricing overall as well as growth in family plans and service plans withenhanced coverage areas and value (such as free incoming calls and unlimitedminutes).  Also, decreases in the prepaycustomer base and the average revenue per prepay customer contributed to adecline in prepay voice revenues. U.S. Cellular expects continued pressure onrevenues from voice services in the foreseeable future due to industrycompetition related to service plan offerings.

 

***Inbound roaming revenues***

 

The decrease in Inbound roaming revenues in2009 was due primarily to a decline in roaming revenues from the combinedentity of Verizon Wireless (“Verizon”) and Alltel Corporation (“Alltel”). In January 2009, Verizon acquiredAlltel. As a result of this transaction, the network footprints of Verizon andAlltel were combined.  This has resultedin a decrease in inbound roaming revenues for U.S. Cellular, since the combinedVerizon and Alltel entity has reduced its usage of U.S. Cellular’s network incertain coverage areas that were used by Verizon and Alltel (as separateentities).  U.S. Cellularanticipates that this trend will increase over the next several quarters andwill more than offset the positive impact of the trends of increasing minutesof use and increasing data usage from U.S. Cellular’s other roaming partners.

 

Additional changes in the network footprintsof other carriers due to additional consolidation or network expansions alsocould have an adverse effect on U.S. Cellular’s inbound roaming revenues.  U.S. Cellular also anticipates that itsroaming revenue per minute of use will decline over time due to therenegotiation of existing contracts.  Theforegoing could have an adverse effect on U.S. Cellular’s business, financialcondition or results of operations.

 

***Other revenues***

 

The growth in Other revenues was due primarily to an increase in USFrevenues, which represent amounts received from the USF for states in whichU.S. Cellular has been designated as an Eligible Telecommunications Carrier (“ETC”).  U.S. Cellular was eligible to receive ETCfunds in sixteen states at June 30, 2009 and eleven states at June 30,2008; the ETC revenue amounts were $68.9 million in 2009 and $61.9 million in2008.

 

The Federal Communications Commission (“FCC”) is consideringsignificant changes to the USF.  U.S.Cellular is not able to predict what changes, if any, will be adopted by theFCC. Such changes could have a material adverse impact on U.S. Cellular’sfinancial condition and results of operations.

 

***Equipment sales revenues***

 

Equipment sales revenues include revenues from sales of handsets andrelated accessories to both new and existing customers, as well as revenuesfrom sales of handsets and accessories to agents. All equipment sales revenuesare recorded net of anticipated rebates.

 

U.S. Cellular strives to offer a competitive line of quality handsetsto both new and existing customers. U.S. Cellular’s customer retention effortsinclude offering new handsets at discounted prices to existing customers as theexpiration date of the customer’s service contract approaches. U.S. Cellularalso continues to sell handsets to agents; this practice enables U.S. Cellularto provide better control over the quality of handsets sold to its customers,establish roaming preferences and earn quantity discounts from handsetmanufacturers which are passed along to agents. U.S. Cellular anticipates thatit will continue to sell handsets to agents in the future.

 

The decrease in 2009 equipment sales revenues was driven primarily by adecline of 6% in average revenue per handset sold as the overall mix ofhandsets purchased by customers shifted to lower priced phones.

 

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**Operating Expenses**

 

***System operations expenses(excluding Depreciation, amortization and accretion)***

 

System operations expenses (excluding Depreciation, amortization, andaccretion) include charges from wireline telecommunications service providersfor U.S. Cellular’s customers’ use of their facilities, costs related to localinterconnection to the wireline network, charges for maintenance of U.S.Cellular’s network, long-distance charges, outbound roaming expenses andpayments to third-party data product and platform developers.

 

Key components of the overall increase in system operations expenseswere as follows:

 

·      Maintenance, utility andcell site expenses increased $5.9 million, or 4%, in 2009, primarilydriven by increases in the number of cell sites within U.S. Cellular’s networkand rent expense per cell site. The number of cell sites totaled 7,043 in 2009and 6,596 in 2008, as U.S. Cellular continued to expand and enhance coverage inits existing markets; and

 

·      Expenses incurred whenU.S. Cellular’s customers used other carriers’ networks while roaming increased$1.9 million, or 2%, in 2009, due primarily to higher roaming minutes ofuse as more customers migrated to national and wide area plans.

 

U.S. Cellular expects total system operations expenses to increase inthe foreseeable future, driven by the following factors:

 

·      Increases in the number ofcell sites and other network facilities within U.S. Cellular’s systems as itcontinues to add capacity and enhance quality;

 

·      Continued expansion of 3Gservices to additional markets; and

 

·      Increases in total voice,text messaging and other data usage, both on U.S. Cellular’s network and byU.S. Cellular’s customers on other carriers’ networks when roaming.

 

***Cost of equipment sold***

 

Cost of equipment sold decreased in 2009 due primarily to a 4% declinein cost per handset sold as the overall mix of handsets purchased by customersshifted to lower priced phones.

 

U.S. Cellular expects loss on equipment, defined as equipment salesrevenues less cost of equipment sold, to continue to be a significant cost andperhaps to increase in the foreseeable future as wireless carriers continue touse handset availability and pricing as a means of competitive differentiation.New handsets with expanded capabilities, particularly smart phones and premiumtouch screen phones, generally have higher purchase costs for carriers which,due to competitive market conditions, generally cannot be recovered throughproportionately higher selling prices to customers.

 

***Selling, general and administrativeexpenses***

 

Selling, general and administrative expenses include salaries,commissions and expenses of field sales and retail personnel and facilities;telesales department salaries and expenses; agent commissions and relatedexpenses; corporate marketing and merchandise management; and advertisingexpenses. Selling, general and administrative expenses also include bad debtsexpense, costs of operating customer care centers and corporate expenses.

 

Key components of the net increase in Selling, general andadministrative expenses in 2009 were as follows:

 

·      Selling and marketing expenses decreased$2.6 million, or 1%, in 2009, primarily due to lower commissions resultingfrom a reduction in customer gross additions; and

 

·      General and administrativeexpenses increased $3.0 million, or 1%, in 2009, due primarily to higher salestaxes, employee related expenses and bad debts expense (reflecting higher baddebts experience as a percent of revenues), partially offset by lower universalservice fund contributions.

 

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U.S. Cellular expects Selling, general and administrative expenses toincrease in the foreseeable future driven primarily by increases in expensesassociated with acquiring, serving and retaining customers, as well as costsrelated to its multi-year initiatives discussed previously.

 

***Depreciation, amortization, andaccretion***

 

TotalDepreciation, amortization and accretion expense decreased $11.5 million, or4%, in 2009. Depreciation decreased $10.5 million, or 4%, in 2009, primarily due to fully depreciating TimeDivision Multiple Access (“TDMA”) and analog network equipment in 2008. U.S. Cellulardiscontinued its TDMA-based service during the six months ended June 30,2009; in connection with such discontinuance, property, plant and equipment inservice and accumulated depreciation of $452.0 million were eliminated from theConsolidated Balance Sheet.

 

See “FinancialResources” and “Liquidity and Capital Resources” for a discussion of U.S.Cellular’s capital expenditures.

 

***Loss on asset disposals, net***

 

These amounts represent charges related to disposals of assets,trade-ins of older assets for replacement assets and other retirements ofassets from service.

 

**Components of Other Income (Expense)**

 
| ** **                                                             | ** ** | ** **                                            | ** ** | ** ** | ** ** | **Increase/**  | ** ** | **Percentage** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
| **Six  Months Ended June 30,**                                    | ** ** | **2009**                                              | ** ** | **2008**   | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| ** **                                                             | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| Operating income                                                       |       | $                                                     | 255,689    |       | $          | 236,868        |       | $              | 18,821     |   | 8 | % |
|                                                                   |       |                                                  |       |       |       |           |       |           |       |
| Equity in earnings from unconsolidated  entities                       |       | 50,121                                                |       | 44,042     |       | 6,079          |       | 14             | %          |
| Interest and dividend income                                           |       | 1,228                                                 |       | 3,334      |       | (2,106         | )          | (63            | )%         |
| Interest expense                                                       |       | (38,409                                               | )          | (40,889    | )          | 2,480          |       | 6              | %          |
| Other, net                                                             |       | 278                                                   |       | 718        |       | (440           | )          | (61            | )%         |
| Total investment and other income (expense)                            |       | 13,218                                                |       | 7,205      |       | 6,013          |       | 83             | %          |
|                                                                   |       |                                                  |       |       |       |           |       |           |       |
| Income before income taxes                                             |       | 268,907                                               |       | 244,073    |       | 24,834         |       | 10             | %          |
| Income tax expense                                                     |       | (88,980                                               | )          | (91,556    | )          | 2,576          |       | 3              | %          |
|                                                                   |       |                                                  |       |       |       |           |       |           |       |
| Net income                                                             |       | 179,927                                               |       | 152,517    |       | 27,410         |       | 18             | %          |
| Less: Net income attributable to  noncontrolling interests, net of tax |       | (11,977                                               | )          | (9,358     | )          | (2,619         | )          | (28            | )%         |
| Net income attributable to U.S. Cellular                               |       | $                                                     | 167,950    |       | $          | 143,159        |       | $              | 24,791     |   | 17 | % |
|                                                                   |       |                                                  |       |       |       |           |       |           |       |
| Basic earnings per share attributable to U.S.  Cellular shareholders   |       | $                                                     | 1.93       |       | $          | 1.63           |       | $              | 0.30       |   | 18 | % |
| Diluted earnings per share attributable to U.S.  Cellular shareholders |       | $                                                     | 1.92       |       | $          | 1.63           |       | $              | 0.29       |   | 18 | % |

 

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***Equity in earningsfrom unconsolidated entities***

 

Equity in earnings of unconsolidated entities represents U.S. Cellular’sshare of net income from the markets in which it has an interest and followsthe equity method of accounting. U.S. Cellular follows the equity method ofaccounting for unconsolidated entities over which it has the ability toexercise significant influence, generally entities in which its ownershipinterest is less than or equal to 50% but equals or exceeds 20% forcorporations and 3% for partnerships and limited liability companies.

 

U.S. Cellular’s investment in the Los Angeles SMSA Limited Partnership(“LA Partnership”) contributed $34.0 million to Equity in earnings ofunconsolidated entities in 2009 and 2008.

 

***Income tax expense***

 

See Note 5 — Income Taxes inthe Notes to Consolidated Financial Statements for a discussion of income taxexpense and the overall effective tax rate on Income before income taxes.

 

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**Three Months Ended June 30, 2009 Compared toThree Months Ended June 30, 2008**

 

**Components of Operating Income**

** **
| **Three  Months Ended June 30,**                                                  | ** ** | **2009**                   | ** ** | **2008**  | ** ** | **Increase/ (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------|------------|--------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Retail service                                                                         |       | $                          | 871,209    |      | $          | 862,392                  |       | $                      | 8,817      |   | 1 | % |
| Inbound roaming                                                                        |       | 62,223                     |       | 84,201    |       | (21,978                  | )          | (26                    | )%         |
| Other                                                                                  |       | 41,323                     |       | 40,759    |       | 564                      |       | 1                      | %          |
| Service revenues                                                                       |       | 974,755                    |       | 987,352   |       | (12,597                  | )          | (1                     | )%         |
| Equipment sales                                                                        |       | 67,795                     |       | 73,240    |       | (5,445                   | )          | (7                     | )%         |
| Total operating  revenues                                                              |       | 1,042,550                  |       | 1,060,592 |       | (18,042                  | )          | (2                     | )%         |
|                                                                                   |       |                       |       |      |       |                     |       |                   |       |
| System operations  (excluding Depreciation, amortization and accretion reported below) |       | 194,806                    |       | 196,652   |       | (1,846                   | )          | (1                     | )%         |
| Cost of equipment  sold                                                                |       | 156,055                    |       | 176,145   |       | (20,090                  | )          | (11                    | )%         |
| Selling, general and  administrative                                                   |       | 410,070                    |       | 418,416   |       | (8,346                   | )          | (2                     | )%         |
| Depreciation,  amortization and accretion                                              |       | 138,614                    |       | 145,258   |       | (6,644                   | )          | (5                     | )%         |
| Loss on asset  disposals, net                                                          |       | 2,086                      |       | 6,219     |       | (4,133                   | )          | (66                    | )%         |
| Total operating  expenses                                                              |       | 901,631                    |       | 942,690   |       | (41,059                  | )          | (4                     | )%         |
| Operating income                                                                       |       | $                          | 140,919    |      | $          | 117,902                  |       | $                      | 23,017     |   | 20 | % |

 

**Operating Revenues**

 

***Retail service revenues***

 

The increase in retail service revenues in 2009 was due to increases inboth the average number of customers and average monthly retail service revenueper customer. The average number of customers increased to 6,199,000 from6,178,000 in 2008. Average monthly retail service revenue per customerincreased 1% to $46.85 in 2009 from $46.53 in 2008, as a significant increasein revenues from data products and services more than offset a decline inrevenues from voice services.

 

Revenues from data products and services totaled $162.0 million in2009 and $123.7 million in 2008, and represented 17% of total service revenuesin 2009 compared to 13% of total service revenues in 2008. Such growth, whichpositively impacted average monthly retail service revenue per customer,reflected customers’ continued and increasing usage of U.S. Cellular’s text,picture, and video messaging services, **easy**edgeSM service and applications,premium mobile Internet services, and smart phone handsets and services.  In 2009, U.S. Cellular introduced unlimitedmessaging plans and unlimited messaging and mobile Internet plans that furtherdrove data usage and revenues.

 

Revenues from voice servicesdeclined year-over-year primarily due to a reduction in average voice revenueper customer.  The reduction in averagevoice revenue per customer reflects industry competition which has resulted inlower pricing overall as well as growth in family plans and service plans withenhanced coverage areas and value (such as free incoming calls and unlimitedminutes).  Also, decreases in the prepaycustomer base and the average revenue per prepay customer contributed to adecline in prepay voice revenues. U.S. Cellular expects continued pressure onrevenues from voice services in the foreseeable future due to industrycompetition related to service plan offerings.

 

***Inbound roaming revenues***

 

The decrease in Inbound roaming revenues in2009 was due primarily to a decline in roaming revenues from the combinedentity of Verizon and Alltel, partially offset by an increase in data roaming.

 

***Equipment sales revenues***

 

The decrease in 2009 equipment sales revenues was driven by a declinein total handsets sold of 5% and a decline in average revenue per handset soldof 2% as the mix of handsets purchased by customers shifted to lower pricedphones.

 

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**Operating Expenses**

 

***System operations expenses(excluding Depreciation, amortization and accretion)***

 

Key components of the overall decrease in system operations expenseswere as follows:

 

·      Network usage expenses on U.S. Cellular’s systems decreased$5.5 million, or 8%, in 2009, due primarily to reduced interconnection costs;and

 

·      Maintenance, utility and cell site expenses increased$3.1 million, or 4%, in 2009, driven primarily by increases in the numberof cell sites within U.S. Cellular’s network and rent expense per cell site.The number of cell sites totaled 7,043 in 2009 and 6,596 in 2008, as U.S.Cellular continued to expand and enhance coverage in its existing markets.

 

***Cost of equipment sold***

 

The decrease in Cost of equipment sold was due to a decline in totalhandsets sold of 5% and a decline in the average cost per handset sold of 8% asthe mix of handsets purchased by customers shifted to lower priced phones.

 

***Selling, general and administrativeexpenses***

 

The decrease in Selling, general and administrative expenses was dueprimarily to a decline in Selling and marketing expenses of $7.7 million, or4%. Key components of the decrease in Selling and marketing expenses were asfollows:

 

·      Advertising expenses decreased $5.1 million, or 8%, in2009, primarily due to a decrease in media purchases; such purchases werehigher in the previous period due to the launch in June 2008 of a newbranding campaign, Believe in Something BetterTM; and

 

·      Other selling and marketing expenses decreased $2.6million, or 2%, in 2009, primarily due to lower commissions resulting from areduction in customer gross additions.

 

***Depreciation, amortization, andaccretion***

 

TotalDepreciation, amortization and accretion expense decreased $6.6 million, or 5%,in 2009. Depreciation decreased primarily due to fully depreciating TDMA andanalog network equipment in 2008, as discussed above.

 

**Components of Other Income(Expense)**

 
| ** **                                                            | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Increase/**  | ** ** | **Percentage** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
| **Three Months Ended June 30,**                                  | ** ** | **2009**                                             | ** ** | **2008**   | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| ** **                                                            | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| Operating income                                                      |       | $                                                    | 140,919    |       | $          | 117,902        |       | $              | 23,017     |   | 20 | % |
|                                                                  |       |                                                 |       |       |       |           |       |           |       |
| Equity in earnings from unconsolidated entities                       |       | 24,794                                               |       | 22,807     |       | 1,987          |       | 9              | %          |
| Interest and dividend income                                          |       | 751                                                  |       | 1,429      |       | (678           | )          | (47            | )%         |
| Interest expense                                                      |       | (19,387                                              | )          | (20,774    | )          | 1,387          |       | 7              | %          |
| Other, net                                                            |       | (2                                                   | )          | 600        |       | (602           | )          | N/M            |       |
| Total investment and other income (expense)                           |       | 6,156                                                |       | 4,062      |       | 2,094          |       | 52             | %          |
|                                                                  |       |                                                 |       |       |       |           |       |           |       |
| Income before income taxes                                            |       | 147,075                                              |       | 121,964    |       | 25,111         |       | 21             | %          |
| Income tax expense                                                    |       | (57,748                                              | )          | (44,016    | )          | (13,732        | )          | (31            | )%         |
|                                                                  |       |                                                 |       |       |       |           |       |           |       |
| Net income                                                            |       | 89,327                                               |       | 77,948     |       | 11,379         |       | 15             | %          |
| Less: Net income attributable to noncontrolling interests, net of tax |       | (5,969                                               | )          | (5,346     | )          | (623           | )          | (12            | )%         |
| Net income attributable to U.S. Cellular                              |       | $                                                    | 83,358     |       | $          | 72,602         |       | $              | 10,756     |   | 15 | % |
|                                                                  |       |                                                 |       |       |       |           |       |           |       |
| Basic earnings per share attributable to U.S. Cellular shareholders   |       | $                                                    | 0.96       |       | $          | 0.83           |       | $              | 0.13       |   | 16 | % |
| Diluted earnings per share attributable to U.S. Cellular shareholders |       | $                                                    | 0.96       |       | $          | 0.83           |       | $              | 0.13       |   | 16 | % |

 

N/M = Notmeaningful

 

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***Equity in earningsfrom unconsolidated entities***

 

U.S. Cellular’s investment in the LAPartnership contributed $17.1 million and $18.2 million to Equity in earningsfrom unconsolidated entities in 2009 and 2008, respectively.

 

***Income tax expense***

 

See Note 5 — Income Taxes inthe Notes to Consolidated Financial Statements for a discussion of income taxexpense and the overall effective tax rate on Income before income taxes.

 

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**RECENTACCOUNTING PRONOUNCEMENTS**

 

Recentaccounting pronouncements are either not expected to have a significant effecton U.S. Cellular’s financial condition or results of operations or U.S.Cellular is currently analyzing such pronouncements in order to determine theirimpact, if any.

 

See Note 2 — Summary ofSignificant Accounting Policies in the Notes to Consolidated FinancialStatements for information on recent accounting pronouncements.

 

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**FINANCIAL RESOURCES**

 

U.S. Cellular operates a capital- andmarketing-intensive business. U.S. Cellular utilizes cash from its operatingactivities, cash proceeds from divestitures, short-term credit facilities andlong-term debt financing to fund its acquisitions including licenses,construction costs, operating expenses and Common Share repurchases. Cash flowsmay fluctuate from quarter to quarter and year to year due to seasonality, thetiming of acquisitions, capital expenditures and other factors. The table belowand the following discussion in this Financial Resources section summarize U.S.Cellular’s cash flow activities in the six months ended June 30, 2009compared to the six months ended June 30, 2008.

 
| ** **                                            | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                            | ** ** | **(Dollars in thousands)** | ** ** |
| Cash flows from  (used in):                           |       |                       |       |     |       |
| Operating activities                                  |       | $                          | 373,123    |     | $          | 426,832 |   |
| Investing activities                                  |       | (240,072                   | )          | (556,492 | )          |
| Financing activities                                  |       | (28,127                    | )          | 26,282   |       |
| Net increase  (decrease) in cash and cash equivalents |       | $                          | 104,924    |     | $          | (103,378 | ) |

 

**Cash Flows from Operating Activities**

 

Cash flows from operating activities in 2009were $373.1 million, a decrease of $53.7 million from 2008.  Significant changes included the following:

 

·                  Operating income adjusted fornon-cash items, as shown in the table below, increased by $9.7 million, from$573.5 million in 2008 to $583.2 million in 2009.

 
| ** **                                    | ** ** | **2009**                   | ** ** | **2008** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|----------|------------|
| ** **                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Operating income                              |       | $                          | 255,689    |     | $          | 236,868 |   |
| Non-cash items                                |       |                       |       |     |       |
| Depreciation,  amortization and accretion     |       | 276,265                    |       | 287,788  |       |
| Bad debts expense                             |       | 39,028                     |       | 32,426   |       |
| Stock-based  compensation expense             |       | 7,974                      |       | 6,481    |       |
| Loss on asset  disposals, net                 |       | 4,277                      |       | 9,892    |       |
| Operating income  adjusted for non-cash items |       | $                          | 583,233    |     | $          | 573,455 |   |

 

U.S. Cellularbelieves the foregoing table provides useful information to investors regardingU.S. Cellular’s financial condition and results of operations because it showsthe components and impact of cash and non-cash items on cash flows fromoperating activities.

 

·                  A $33.0 million distribution from theLA Partnership was received in 2008.  A$33.0 million distribution for 2009 was approved in June, but not receiveduntil July, resulting in a decline in Distributions from unconsolidated entities.

 

·                  Changes in accounts payable, customerdeposits and deferred revenues required $42.6 million in 2009 and provided$13.4 million in 2008. The resultant $56.0 million increase in cash outflowswas driven primarily by timing differences in payments of accounts payable andlower deposit requirements for new customers in 2009.

 

·                  Income tax payments, net of refunds,in 2009 and 2008 were $15.8 million and $65.0 million, respectively, resultingin a decrease in cash outflows of $49.2 million.

 

·                  In 2009, a $34.0 million deposit waspaid to TDS for U.S. Cellular’s proportionate share of a deposit TDS made tothe Internal Revenue Service to eliminate any potential interest expensesubsequent to the deposit. The deposit was included in Change in other assets andliabilities in the Consolidated Statement of Cash Flows in 2009. See Note 5 —Income Taxes in the Notes to Consolidated Financial Statements for additionalinformation.

 

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**Cash Flows from Investing Activities**

 

U.S. Cellular makes substantial investmentsto construct and upgrade modern high quality wireless communications networksand facilities as a basis for creating long term value for shareholders. Inrecent years, rapid changes in technology and new opportunities have requiredsubstantial investments in potentially revenue-enhancing and cost-reducingupgrades of U.S. Cellular’s networks. Cash flows used for investing activitiesalso represent cash required for the acquisition of wireless properties orlicenses. Proceeds from exchanges and divestiture transactions have providedfunds in recent years which have partially offset the cash requirements forinvesting activities; however, such sources cannot be relied upon to providecontinuing or regular sources of financing.

 

The primary purpose of U.S. Cellular’sconstruction and expansion expenditures is to provide for customer and usagegrowth, to upgrade service and to take advantage of service-enhancing andcost-reducing technological developments in order to maintain competitiveservices.

 

Cash used for property, plant and equipmentand system development expenditures totaled $228.9 million in 2009 and$249.5 million in 2008.  Theseexpenditures were made to construct new cell sites, increase capacity inexisting cell sites and switches, upgrade technology including the overlay of3G technology in certain markets, develop new and enhance existing officesystems, and construct new and remodel existing retail stores.

 

Cash required for acquisitions totaled$12.3 million in 2009 and $312.6 million in 2008.  The cash required for acquisitions in 2008included capital contributions and advances of $300.5 million to KingStreet Wireless L.P. (“King Street Wireless”) and its generalpartner.  King Street Wireless’ generalpartner also made a capital contribution of $0.1 million.  King Street Wireless used these funds inconnection with its participation in FCC Auction 73.

 

**Cash Flows from Financing Activities**

 

There were no short-termborrowings or repayments during 2009. Short-term borrowings and repayments during 2008 were $100.0 million and$50.0 million, respectively.

 

In 2009 and2008, U.S. Cellular repurchased 507,000 and 300,000 Common Shares at anaggregate cost of $19.3 million and $19.1 million, respectively.  U.S. Cellular also received $4.6 million in2008 from an investment banking firm for the final settlement of theaccelerated share repurchases made in 2007. See Note 13 — Common Share Repurchases in the Notes to ConsolidatedFinancial Statements for additional information related to these transactions.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Recent events in the financial servicessector and correlating impacts to other sectors of the economy have resulted inconcerns regarding investment security values, the availability of andconcentration of credit, insurance coverage and a variety of other areas.Although U.S. Cellular’s cash balance, conservative strategies for investingcash on hand and funds available under its new revolving credit agreement havelimited its exposure to these events to date, U.S. Cellular continues tomonitor economic conditions and developments and will make adjustments to itscash investments, borrowing arrangements and insurance coverage as necessaryand feasible.

 

Consumer spending also significantly impactsU.S. Cellular’s operations and performance. Recent economic conditions couldcause consumer spending to deteriorate significantly. Factors that influencelevels of consumer spending include: unemployment rates, increases in fuel andother energy costs, conditions in residential real estate and mortgage markets,labor and health care costs, access to credit, consumer confidence and othermacroeconomic factors. Changes in these and other economic factors could have amaterial adverse effect on demand for U.S. Cellular’s products and services andon U.S. Cellular’s financial condition and results of operations.

 

U.S. Cellular believes that existing cashbalances, expected cash flows from operating activities and funds availableunder its new revolving credit facility provide financial flexibility for U.S.Cellular to meet its normal financing needs (including working capital,construction and development expenditures and share repurchases under itsapproved program) for the foreseeable future. In addition, U.S. Cellular mayhave access to public and private capital markets to help meet its financingneeds.

 

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U.S. Cellular cannot provide assurances thatcircumstances that could have a material adverse affect on its liquidity orcapital resources will not occur. Economic conditions, changes in capitalmarkets or other factors could restrict U.S. Cellular’s liquidity andavailability of financing on terms and prices acceptable to U.S. Cellular,which could require U.S. Cellular to reduce its construction, development,acquisition or share repurchase programs. Such reductions could have a materialadverse effect on U.S. Cellular’s business, financial condition or results ofoperations.

 

**Cash and Cash Equivalents**

 

AtJune 30, 2009, U.S. Cellular had $275.9 million in cash and cashequivalents, which include cash and short-term, highly liquid investments withoriginal maturities of three months or less. The primary objective of U.S.Cellular’s cash and cash equivalents investment activities is to preserve principal.  At June 30, 2009, U.S. Cellular investedsubstantially all of its cash balances in money market funds that investedexclusively in short-term U.S. Treasury securitiesor repurchase agreements backed by U.S.Treasury securities. U.S. Cellular monitors the financial viability ofthe money market funds in which it invests and believes that the credit risk associated with these investments is low.

 

**Revolving Credit Facility**

 

Prior to June 30, 2009, U.S.Cellular had a $700 million revolving credit facility available for generalcorporate purposes.  On June 30,2009, U.S. Cellular entered into a new $300 million revolving credit agreementwith certain lenders and other parties. As a result, U.S. Cellular’s $700 million revolving credit agreement,which was due to expire in December 2009, was terminated on June 30,2009 as a condition of entering into the new agreement.  The new revolving credit agreement providesU.S. Cellular with a $300 million senior revolving credit facility for workingcapital, non-hostile acquisitions and other corporate purposes and to refinanceany existing debt of U.S. Cellular. Amounts under the new revolving credit facility may be borrowed, repaidand reborrowed from time to time from and after June 30, 2009 untilmaturity in June 2012.

 

At June 30, 2009, there were no outstandingborrowings and $0.3 million of outstanding letters of credit, leaving $299.7million available for use.  Borrowingsunder the new revolving credit facility bear interest at the London InterBankOffered Rate (“LIBOR”) (or, at U.S. Cellular’s option, an alternate “Base Rate”as defined in the new revolving credit agreement) plus a contractual spreadbased on U.S. Cellular’s credit rating. U.S. Cellular may select borrowing periods of either one, two, three orsix months (or other period of twelve months or less requested by U.S. Cellularif approved by the lenders).  At June 30,2009, the one-month LIBOR was 0.31% and the contractual spread was 300 basispoints.  If U.S. Cellular provides lessthan three business days notice of intent to borrow, interest on borrowings isthe Base Rate plus the contractual spread (the Base Rate was 3.25% at June 30,2009).

 

U.S.Cellular’s interest cost on its new revolving credit facility is subject toincrease if its current credit rating from Standard & Poor’s RatingService, Moody’s Investors Service and/or Fitch Ratings is lowered, and issubject to decrease if the rating is raised. The new credit facility would notcease to be available nor would the maturity date accelerate solely as a resultof a downgrade in U.S. Cellular’s credit rating. However, a downgrade in U.S.Cellular’s credit rating could adversely affect its ability to renew the newcredit facility or obtain access to other credit facilities in the future.

 

U.S. Cellular’s creditratings as of June 30, 2009 and the dates that such ratings were issuedwere as follows:

 
| Moody’s (issued  August 15, 2008)                   | Baa2 | - stable outlook        |
|---------------------------------------------------------------|------|-------------------------|
| Standard &  Poor’s (issued March 13, 2008) | BBB- | - with positive outlook |
| Fitch  Ratings (issued August 16, 2007)                  | BBB+ | -  stable outlook       |

 

The continued availabilityof the new revolving credit facility requires U.S. Cellular to comply withcertain negative and affirmative covenants, maintain certain financial ratiosand make representations regarding certain matters at the time of eachborrowing. U.S. Cellular believes it was in compliance as of June 30, 2009 withall other covenants and requirements set forth in its new revolving creditfacility.

 

The maturity date of any borrowings under U.S. Cellular’s new revolvingcredit facility would accelerate in the event of a change in control.

 

In connection with U.S. Cellular’s newrevolving credit facility, TDS and U.S. Cellular entered into a subordinationagreement dated June 30, 2009 together with the administrative agent forthe lenders under U.S. Cellular’s new revolving credit agreement.  Pursuant to this subordination agreement, (a) anyconsolidated funded indebtedness 

 

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from U.S. Cellular to TDS will beunsecured and (b) any (i) consolidated funded indebtedness (other than“refinancing indebtedness” as defined in the subordination agreement) in excessof $105,000,000, and (ii) refinancing indebtedness in excess of$250,000,000, will be subordinated and made junior in right of payment to theprior payment in full of obligations to the lenders under U.S. Cellular’s newrevolving credit agreement.  The aggregateoutstanding principal amount of consolidated funded indebtedness of U.S.Cellular that was subordinated pursuant to this subordination agreement waszero as of June 30, 2009.

 

**Long-Term Financing**

 

U.S. Cellular’s long-term debt indenture does not contain anyprovisions resulting in acceleration of the maturities of outstanding debt inthe event of a change in U.S. Cellular’s credit rating. However, a downgrade inU.S. Cellular’s credit rating could adversely affect its ability to obtainlong-term debt financing in the future. U.S. Cellular believes it was in compliance as of June 30, 2009with all covenants and other requirements set forth in its long-term debtindenture.  U.S. Cellular has notfailed to make nor does it expect to fail to make any scheduled payment ofprincipal or interest under such indenture.

 

Thelong-term debt principal payments due for the remainder of 2009 and the nextfour years comprise approximately 1% of the total long-term debt obligation at June 30,2009.  Refer to Market Risk — Long-TermDebt in U.S. Cellular’s Form 10-K for the year ended December 31,2008 for additional information regarding required principal payments and theweighted average interest rates related to U.S. Cellular’s long-term debt.

 

U.S. Cellular may from time to time seek toretire or purchase its outstanding debt through cash purchases and/or exchangesfor other securities, in open market purchases, privately negotiatedtransactions, tender offers, exchange offers or otherwise. Such repurchases orexchanges, if any, will depend on prevailing market conditions, liquidityrequirements, contractual restrictions and other factors. The amounts involvedmay be material.

 

**Capital Expenditures**

 

U.S. Cellular’s capital expenditures for 2009 are expected to beapproximately $575 million.  Theseexpenditures are expected to be for the following general purposes:

 

·                  Expand andenhance U.S. Cellular’s coverage in its service areas;

 

·                  Provideadditional capacity to accommodate increased network usage by currentcustomers;

 

·                  Overlay 3Gtechnology in certain markets;

 

·                  Enhance U.S.Cellular’s retail store network;

 

·                  Develop andenhance office systems; and

 

·                  Develop newbilling and other customer management-related systems and platforms.

 

U.S.Cellular plans to finance its capital expenditures program for 2009 using cashon hand, cash flows from operating activities and, if necessary, short-termdebt.

 

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**Suppliers**

 

U.S.Cellular depends upon certain key suppliers to provide it with handsets,equipment, services or content to continue its network build and upgrade and tooperate its business. U.S. Cellular does not have operational or financialcontrol over any of such key suppliers and has limited influence with respectto the manner in which these key suppliers conduct their businesses. If thesekey suppliers experience financial difficulties and are unable to provideequipment, services or content to U.S. Cellular on a timely basis or cease toprovide such equipment, services or content or if such key suppliers otherwisefail to honor their obligations to U.S. Cellular, U.S. Cellular may be unableto maintain and upgrade its network or provide services to its customers in acompetitive manner, or could suffer other disruptions to its business. In thatevent, U.S. Cellular’s business, financial condition or results of operationscould be adversely affected. U.S. Cellular monitors the financial condition ofits key suppliers through its risk management process.

 

In January 2009, NortelNetworks Corporation (“Nortel”), a key supplier of network equipment, businesscommunications systems, and technical support for U.S. Cellular, announced thatit, Nortel Networks Limited and certain of its other Canadian subsidiariesobtained creditor protection under the Companies’ Creditors Arrangement Act inCanada.  Additionally, certain of Nortel’sU.S. subsidiaries, including Nortel Networks Inc. and Nortel Networks CapitalCorporation, have filed voluntary petitions in the United States under Chapter11 (“reorganization”) of the U.S. Bankruptcy Code, and certain of Nortel’sother subsidiaries made similar filings in other jurisdictions.

 

Nortel is operating underthese protections and is pursuing sales of portions of its operations andassets to various parties. In the event that Nortel or the successor acquirersof its assets and operations are not able to continue to provide equipment andservices, U.S. Cellular believes that it will be able to purchase similarnetwork equipment, business communications systems and technical support fromother suppliers and, therefore, U.S. Cellular does not believe Nortel’sreorganization and the sale of Nortel’s assets and operations to other entitieswill have a significant impact on U.S. Cellular’s day-to-day operations.However, the following could adversely impact U.S. Cellular’s future results ofoperations and cash flows:

 

·                  Reduced competition amongtelecommunications equipment suppliers could increase the future costs toacquire such equipment;

 

·                  Replacement and upgrades of Nortelequipment with equipment from other vendors could be more costly;

 

·                  The potential lack of future upgrades orenhancements to Nortel equipment could reduce the useful life of suchequipment, and result in accelerated depreciation charges; and

 

·                  Maintenance of Nortel equipment couldbe more costly.

 

**Acquisitions, Divestitures and Exchanges**

 

U.S. Cellular assesses its existing wireless interests on anongoing basis with a goal of improving the competitiveness of its operations andmaximizing its long-term return on investment. As part of this strategy,U.S. Cellular reviews attractive opportunities to acquire additionalwireless operating markets and wireless spectrum. In addition,U.S. Cellular may seek to divest outright or include in exchanges forother wireless interests those wireless interests that are not strategic to itslong-term success. U.S. Cellular also from time to time may be engaged innegotiations relating to the acquisition, divestiture or exchange of companies,strategic properties or wireless spectrum. In general, U.S. Cellular maynot disclose such transactions until there is a definitive agreement.  See Note 8— Acquisitions, Divestitures andExchanges in the Notes to Consolidated Financial Statements for additionalinformation regarding pending transactions.

 

**Variable Interest Entities**

 

U.S. Cellular consolidates certainvariable interest entities pursuant to FASB Interpretation No. 46 (revisedDecember 2003), *Consolidation ofVariable Interest Entities*. See Note 6—Variable InterestEntities in the Notes to Consolidated Financial Statements for thedetails of these variable interest entities. U.S. Cellular may elect tomake additional capital contributions and/or advances to these variableinterest entities in future periods in order to fund their operations.

 

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**Common Share Repurchase Program**

 

U.S. Cellular has repurchased and expects to continue torepurchase its Common Shares subject to the repurchase program. For details ofthis program and repurchases made during 2009 and 2008, see Note 13—Common ShareRepurchases in the Notes toConsolidated Financial Statements.

 

**Contractual and Other Obligations**

 

The Contractual and Other Obligations disclosed in Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in U.S. Cellular’s Form 10-K for the year ended December 31,2008 did not include any liabilities related to unrecognized taxbenefits under FASB Interpretation 48, *Accounting for Uncertaintyin Income Taxes — an Interpretation of FASB Statement No. 109*(“FIN48”).  U.S. Cellular is unable to predictthe period of settlement of such FIN 48 liabilities.  Subject to the foregoing, there has been nomaterial change to Contractual and Other Obligations between December 31, 2008 and June 30, 2009.

 

**Off-Balance Sheet Arrangements**

 

U.S. Cellular has no transactions,agreements or other contractual arrangements with unconsolidated entitiesinvolving “off-balance sheet arrangements,” as defined by SEC rules, that haveor are reasonably likely to have a material current or future effect on itsfinancial condition, changes in financial condition, revenues or expenses,results of operations, liquidity, capital expenditures or capital resources.

 

**Accounts Receivable and Allowance forDoubtful Accounts**

 

U.S. Cellular’s accountsreceivable consist primarily of amounts owed by customers pursuant to servicecontracts and for equipment sales, by agents for equipment sales, by otherwireless carriers whose customers have used U.S. Cellular’s wireless systemsfor roaming and by unaffiliated third-party partnerships or corporationspursuant to equity distribution declarations.

 

**U.S. Cellular assesses its accounts receivable for collectabilityon an ongoing basis. The allowance for doubtful accounts is the bestestimate of the amount of probable credit losses related to existing accountsreceivable. The allowance is estimated based on historical experience and otherfactors, such as general economic and consumermarket conditions, which could affect collectability. Accountsreceivable balances are reviewed for collectability on either an aggregate orindividual basis depending on the type of receivable. When it is probable thatan account balance will not be collected, the account balance is chargedagainst the allowance for doubtful accounts. U.S. Cellular’s bad debts expensewas 2.1% and 1.7% of related revenues for the six month periods endedJune 30, 2009 and 2008, respectively.**

 

**Insurance**

 

U.S. Cellular has several commercialproperty and casualty insurance policies with a variety of subsidiary companiesof American International Group, Inc. (“AIG”). These companies operateunder the insurance regulations of various states including New York,Pennsylvania and Delaware. U.S. Cellular has inquired into the ability ofthese AIG companies to meet their obligations in the event of a claim againstthese policies and has received assurance from AIG and U.S. Cellular’sinsurance brokers that the companies remain able to meet these obligations.State insurance regulators and the rating agencies have issued press releasesindicating the same. U.S. Cellular did not have any significant propertyand casualty claims outstanding with these companies as of June 30, 2009.U.S. Cellular continues to monitor the financial condition of otherinsurance providers.

 

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**APPLICATIONOF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

U.S. Cellular preparesits consolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”).  U.S. Cellular’s significant accountingpolicies are discussed in detail in Note 2 — Summary of Significant AccountingPolicies of the Notes to Consolidated Financial Statements and U.S. Cellular’s Applicationof Critical Accounting Policies and Estimates is discussed in detail inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, both included in U.S. Cellular’s Form 10-K for the year ended December 31,2008.

 

Since the adoption ofSFAS No. 142, *Goodwill and OtherIntangible Assets*(“SFAS 142”), U.S. Cellular’s annual impairmentreview of goodwill and indefinite-lived intangible assets has been completed asof April 1 of each year. Effective April 1, 2009, U.S. Cellularadopted a new accounting policy whereby its annual impairment review ofgoodwill and indefinite-lived intangible assets will be performed as of November 1instead of April 1 of each year. As discussed in Note 9 — Licenses andGoodwill, an impairment analysis of goodwill and indefinite-lived intangibleassets was last completed as of December 31, 2008. The change in theannual goodwill and indefinite-lived intangible asset impairment testing datewas made to better align the annual impairment test with the timing of U.S.Cellular’s annual strategic planning process, which allows for a betterestimate of the future cash flows used in discounted cash flow models to testfor impairment. This change in accounting policy does not delay, accelerate oravoid an impairment charge. Accordingly, U.S. Cellular management believes thatthis accounting change is preferable under the circumstances.

 

See Note 3 —Noncontrolling Interests in the Notes to Consolidated Financial Statements forinformation related to U.S. Cellular’s adoption of SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements*—*an amendment of ARB No. 51.*

 

Other than disclosedabove, there were no material changes to U.S. Cellular’s significant accountingpolicies or application of critical accounting policies during the six monthsended June 30, 2009.

 

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***PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995***

***SAFE HARBOR CAUTIONARY STATEMENT***

 

This Form 10-Q,including exhibits, contains statements that are not based on historical factsand represent forward-looking statements, as this term is defined in thePrivate Securities Litigation Reform Act of 1995.  All statements, otherthan statements of historical facts, that address activities, events ordevelopments that U.S. Cellular intends, expects, projects, believes,estimates, plans or anticipates will or may occur in the future areforward-looking statements.  The words “believes,” “anticipates,” “estimates,”“expects,” “plans,” “intends,” “projects” and similar expressions are intendedto identify these forward-looking statements, but are not the exclusive meansof identifying them. Such forward-looking statements involve known and unknownrisks, uncertainties and other factors that may cause actual results, events ordevelopments to be significantly different from any future results, events ordevelopments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include those set forth below, asmore fully discussed under “Risk Factors” in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2008.  However, such factors are notnecessarily all of the important factors that could cause actual results,performance or achievements to differ materially from those expressed in, orimplied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effectson future results, performance or achievements.  U.S. Cellular undertakesno obligation to update publicly any forward-looking statements whether as aresult of new information, future events or otherwise. You should carefullyconsider the Risk Factors in U.S. Cellular’s Form 10-K for the year ended December 31,2008, the following factors and other information contained in, or incorporatedby reference into, this Form 10-Q to understand the material risksrelating to U.S. Cellular’s business.

 

·                  *Intense competition in the marketsin which U.S. Cellular operates could adversely affect U.S. Cellular’s revenuesor increase its costs to compete.*

 

·                  *A failure by U.S. Cellular’sservice offerings to meet customer expectations could limit U.S. Cellular’sability to attract and retain customers and could have an adverse effect onU.S. Cellular’s operations.*

 

·                  *U.S. Cellular’s systeminfrastructure may not be capable of supporting changes in technologies andservices expected by customers, which could result in lost customers andrevenues.*

 

·                  *An inability to obtain or maintainroaming arrangements with other carriers on terms that are acceptable toU.S. Cellular could have an adverse effect on U.S. Cellular’sbusiness, financial condition or results of operations.*

 

·                  *U.S.Cellular currently receives a significant amount of roaming revenues.  As a result of recent acquisitions by othercompanies in the wireless industry, U.S. Cellular’s roaming revenues havedeclined.  U.S. Cellular anticipates thatthis trend will increase over the next several quarters.  Further industry consolidation and continuedbuild outs by existing and new wireless carriers could cause roaming revenuesto decline even more, which would have an adverse effect on U.S. Cellular’sbusiness, financial condition and results of operations.*

 

·                  *A failure by U.S. Cellular toobtain access to adequate radio spectrum could have an adverse effect onU.S. Cellular’s business and operations.*

 

·                  *To the extent conducted by theFCC, U.S. Cellular is likely to participate in FCC auctions of additionalspectrum in the future as an applicant or as a non-controlling partner inanother auction applicant and, during certain periods, will be subject to theFCC’s anti-collusion rules, which could have an adverse effect onU.S. Cellular.*

 

·                  *An inability to attract and/orretain management, technical, sales and other personnel could have an adverseeffect on U.S. Cellular’s business, financial condition or results ofoperations.*

 

·                  *U.S. Cellular’s assets areconcentrated in the U.S. wireless telecommunications industry. As aresult, its results of operations may fluctuate based on factors relatedentirely to conditions in this industry.*

 

·                  *The completion of acquisitions hasled to increased consolidation in the wireless telecommunicationsindustry.  U.S. Cellular’s lower scalerelative to larger wireless carriers has in the past and could in the futureprevent or delay its access to new products including handsets, new technologyand/or new content and applications which could adversely affect U.S. Cellular’sability to attract and retain customers and, as a result, could adverselyaffect its business, financial condition or results of operations.*

 

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·                  *Inability to manage its supplychain or inventory successfully could have an adverse effect on U.S. Cellular’sbusiness, financial condition or results of operations.*

 

·                  *Changes in general economic andbusiness conditions, both nationally and in the markets in whichU.S. Cellular operates, could have an adverse effect on U.S. Cellular’sbusiness, financial condition or results of operations.*

 

·                  *Changes in various businessfactors could have an adverse effect on U.S. Cellular’s business,financial condition or results of operations.*

 

·                  *Advances or changes intelecommunications technology, such as Voice over Internet Protocol (“VoIP”),High-Speed Packet Access, WiMAX or Long-Term Evolution (“LTE”), could rendercertain technologies used by U.S. Cellular obsolete, could reduceU.S. Cellular’s revenues or could increase its costs of doing business.*

 

·                  *Changes in U.S. Cellular’senterprise value, changes in the market supply or demand for wireless licenses,adverse developments in the business or the industry in whichU.S. Cellular is involved and/or other factors could requireU.S. Cellular to recognize impairments in the carrying value of itslicense costs, goodwill, customer lists and/or physical assets.*

 

·                  *Costs, integration problems orother factors associated with acquisitions/divestitures of properties orlicenses and/or expansion of U.S. Cellular’s business could have anadverse effect on U.S. Cellular’s business, financial condition or resultsof operations.*

 

·                  *A significant portion ofU.S. Cellular’s revenues is derived from customers who buy servicesthrough independent agents who market U.S. Cellular’s services on acommission basis. If U.S. Cellular’s relationships with these agents areseriously harmed, its revenues could be adversely affected.*

 

·                  *U.S. Cellular’s investmentsin technologies which are unproven or for which success has not yet beendemonstrated may not produce the benefits that U.S. Cellular expects.*

 

·                  *A failure by U.S. Cellular tocomplete significant network construction and systems implementation activitiesas part of its plans to improve the quality, coverage, capabilities andcapacity of its network and support systems could have an adverse effect on itsoperations.*

 

·                  *Financial difficulties (includingbankruptcy proceedings) of U.S. Cellular’s key suppliers or vendors,termination or impairment of U.S. Cellular’s relationships with suchsuppliers or vendors, or a failure by U.S. Cellular to manage its supply chaineffectively could result in delays or termination of U.S. Cellular’s receiptof required equipment or services, or could result in excess quantities ofrequired equipment or services, any of which could adversely affectU.S. Cellular’s business, financial condition or results of operations.*

 

·                  *U.S. Cellular has significantinvestments in entities that it does not control. Losses in the value of suchinvestments could have an adverse effect on U.S. Cellular’s financialcondition or results of operations.*

 

·                  *A material disruption in U.S.Cellular’s telecommunication networks or information technology, includingbreaches of network or information technology security, could have an adverseeffect on U.S. Cellular’ business, financial condition or results ofoperations.*

 

·                  *Wars, conflicts, hostilitiesand/or terrorist attacks or equipment failures, power outages, naturaldisasters or other events could have an adverse effect on U.S. Cellular’sbusiness, financial condition or results of operations.*

 

·                  *The market price ofU.S. Cellular’s Common Shares is subject to fluctuations due to a varietyof factors.*

 

·                  *Changes in interpretations ofaccounting requirements, changes in industry practice, identification of errorsor changes in management assumptions could require amendments to orrestatements of financial information or disclosures included in this or priorfilings with the SEC.*

 

·                  *Restatements of financialstatements by U.S. Cellular and related matters, including resultingdelays in filing periodic reports with the SEC, could have an adverse effect onU.S. Cellular’s business, financial condition or results of operations.*

 

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·                  *The existence of material weaknessesin the effectiveness of internal control over financial reporting could resultin inaccurate financial statements or other disclosures or failure to preventfraud, which could have an adverse effect on U.S. Cellular’s business,financial condition or results of operations.*

 

·                  *Changes in facts or circumstances,including new or additional information that affects the calculation ofpotential liabilities for contingent obligations under guarantees, indemnitiesor otherwise, could require U.S. Cellular to record charges in excess ofamounts accrued in the financial statements, if any, which could have anadverse effect on U.S. Cellular’s financial condition or results ofoperations.*

 

·                  *Early redemptions or repurchasesof debt, issuances of debt, changes in operating leases, changes in purchaseobligations or other factors or developments could cause the amounts reportedunder Contractual Obligations in U.S. Cellular’s Management’s Discussion andAnalysis of Financial Condition and Results of Operations to be different fromthe amounts actually incurred.*

 

·                  *An increase in the amount ofU.S. Cellular’s debt in the future could subject U.S. Cellular tohigher interest costs and restrictions on its financing, investing andoperating activities and could decrease its net income and cash flows.*

 

·                  *Recent market events andconditions, including disruption in credit and other financial markets and thedeterioration of U.S. and global economic conditions, could, among otherthings, impede U.S. Cellular’s access to or increase the cost of financing itsoperating and investment activities and/or result in reduced revenues and loweroperating income and cash flows, which would have an adverse effect on U.S.Cellular’s financial condition or results of operations.*

 

·                  *Uncertainty of access to capitalfor telecommunications companies, deterioration in the capital markets, otherchanges in market conditions, changes in U.S. Cellular’s credit ratings orother factors could limit or restrict the availability of financing on termsand prices acceptable to U.S. Cellular, which could requireU.S. Cellular to reduce its construction, development or acquisitionprograms.*

 

·                  *Changes in the regulatoryenvironment or a failure by U.S. Cellular to timely or fully comply withany applicable regulatory requirements could adversely affectU.S. Cellular’s financial condition, results of operations or ability todo business.*

 

·                  *Changes in USF funding and/orintercarrier compensation could have a material adverse impact on U.S. Cellular’sfinancial position or results of operations.*

 

·                  *Changes in income tax rates, laws,regulations or rulings, or federal or state tax assessments could have anadverse effect on U.S. Cellular’s financial condition or results ofoperations.*

 

·                  *Settlements, judgments, restraintson its current or future manner of doing business and/or legal costs resultingfrom pending and future litigation could have an adverse effect onU.S. Cellular’s financial condition, results of operations or ability todo business.*

 

·                  *The possible development ofadverse precedent in litigation or conclusions in professional studies to theeffect that radio frequency emissions from handsets, wireless data devicesand/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, financialcondition or results of operations.*

 

·                  *Claims of infringement ofintellectual property and proprietary rights of others, primarily involvingpatent infringement claims, could prevent U.S. Cellular from using necessarytechnology to provide services or subject U.S. Cellular to expensive intellectualproperty litigation or monetary penalties, which could have an adverse effecton U.S. Cellular’s business, financial condition or results of operations.*

 

·                  *There are potential conflicts ofinterests between TDS and U.S. Cellular.*

 

·                  *Certain matters, such as controlby TDS and provisions in the U.S. Cellular Restated Certificate ofIncorporation, may serve to discourage or make more difficult a change incontrol of U.S. Cellular.*

 

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·                  *A failure by U.S. Cellular tosuccessfully execute its business strategy could have an adverse effect on U.S.Cellular’s business, financial condition or results of operations.*

 

·                  *Any of the foregoing events orother events could cause revenues, customer additions, operating income,capital expenditures and/or any other financial or statistical information tovary from U.S. Cellular’s forward-looking estimates by a material amount.*

 

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**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk**

 

**MARKET RISK**

 

**Long-Term Debt**

 

Asof June 30, 2009, U.S. Cellular’s long-term debt was in the form offixed-rate notes with original maturities ranging up to 30 years. Fluctuationsin market interest rates can lead to fluctuations in the fair value of thesefixed-rate notes.

 

SeeNote 4 — Fair Value Measurements in the Notes to Consolidated FinancialStatements for additional information related to the fair market value of U.S.Cellular’s long-term debt as of June 30, 2009.

 

Referto the disclosure under Market Risk — Long-Term Debt in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2008 for additional information regardingrequired principal payments and weighted average interest rates related to U.S.Cellular’s long-term debt.

 

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**Item 4.Controls and Procedures**

 

Evaluationof Disclosure Controls and Procedures

 

U.S. Cellular maintainsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) that are designed to ensure that information required to be disclosed inits reports filed or submitted under the Exchange Act is processed, recorded,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to U.S.Cellular’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regardingrequired disclosure.  In designing and evaluating the disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives.

 

As required by SEC Rule 13a-15(b),U.S. Cellular carried out an evaluation, under the supervision and with theparticipation of management, including its Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of U.S.Cellular’s disclosure controls and procedures as of the end of the periodcovered by this Quarterly Report.  Based on this evaluation, U.S. Cellular’sChief Executive Officer and Chief Financial Officer concluded that U.S.Cellular’s disclosure controls and procedures were effective as of June 30, 2009.

 

Changesin Internal Control Over Financial Reporting

 

Therewere no changes in U.S. Cellular’s internal control over financial reportingduring the quarter ended June 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, U.S. Cellular’s internal control over financial reporting.

 

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**Part II.Other Information**

 

**Item 1.  Legal Proceedings**

 

TheUnited States Department of Justice (“DOJ”) has notified U.S. Cellular andits parent, TDS, that each is a named defendant in a civil action brought by aprivate party in the U.S. District Court for the District of Columbiaunder the “qui tam” provisions of the federal False Claims Act.  TDS and U.S. Cellular were advised thatthe complaint seeks return of approximately $165 million of bid creditsfrom certain FCC auctions and requests treble damages.  The complaint remains under seal pending theDOJ’s consideration as to whether to intervene in the proceeding.  The DOJ has not yet made any decision as towhether it will intervene.  However, as aresult of the complaint, the DOJ is investigating TDS’ and U.S. Cellular’sparticipation in certain spectrum auctions conducted by the FCC between 2005and 2008, through Carroll Wireless, L.P., Barat Wireless, L.P., andKing Street Wireless, L.P.  Theselimited partnerships were winning bidders in Auction 58, Auction 66and Auction 73, respectively, and received a 25% bid credit in theapplicable auction price under FCC rules. The DOJ is investigating whether these limited partnerships qualifiedfor the 25% bid credit in auction price considering their arrangements with TDSand U.S. Cellular. TDS and U.S. Cellular are cooperating with the DOJ’sreview.  TDS and U.S. Cellularbelieve that U.S. Cellular’s arrangements with these limited partnershipsand the limited partnerships’ participation in the FCC auctions complied withapplicable law and FCC rules and each of TDS and U.S. Cellularintends to vigorously defend itself against any claim that it violatedapplicable law or FCC rules.  At thistime, U.S. Cellular cannot predict the outcome of this review or anyproceeding.  The FCC sent a letter toKing Street Wireless, L.P. requesting that it submit to the FCC a writtenresponse to the allegations in the complaint. King Street Wireless, L.P. made this submission as requested by the FCC.

 

U.S.Cellular is involved or may be involved from time to time in legal proceedingsbefore the FCC, other regulatory authorities, and/or various state and federalcourts.  If U.S. Cellular believes that aloss arising from such legal proceedings is probable and can be reasonablyestimated, an amount is accrued in the financial statements for the estimatedloss.  If only a range of loss can be determined, the best estimate withinthat range is accrued; if none of the estimates within that range is betterthan another, the low end of the range is accrued.  The assessment of the expected outcomes oflegal proceedings is a highly subjective process that requires judgments aboutfuture events.  The legal proceedings arereviewed at least quarterly to determine the adequacy of accruals and relatedfinancial statement disclosures.  Theultimate outcomes of legal proceedings could differ materially from amountsaccrued in the financial statements.

 

**Item 1A. Risk Factors.**

 

Inaddition to the information set forth in this Form 10-Q, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31,2008, which could materially affect U.S. Cellular’s business, financialcondition or future results. The risks described in this Form 10-Q and theForm 10-K for the year ended December 31, 2008 may not be the onlyrisks that may affect U.S. Cellular. Additional unidentified or unrecognized risks and uncertainties maymaterially adversely affect U.S. Cellular’s business, financial conditionand/or operating results. Subject to the foregoing, U.S. Cellular has notidentified for disclosure any material changes to the risk factors aspreviously disclosed in U.S. Cellular’s Annual Report on Form 10-K for theyear ended December 31, 2008, except that the following risk factor insuch Form 10-K is hereby updated as follows:

 

**Financial difficulties (including bankruptcy proceedings) ofU.S. Cellular’s key suppliers or vendors, termination or impairment ofU.S. Cellular’s relationships with such suppliers or vendors, or a failureby U.S. Cellular to manage its supply chain effectively could result in delaysor termination of U.S. Cellular’s receipt of required equipment orservices, or could result in excess quantities of required equipment orservices, any of which could adversely affect U.S. Cellular’s business,financial condition or results of operations.**

 

U.S. Cellular depends upon certain vendors to provideit with equipment, services or content to continue its network construction andupgrade and to operate its business.  U.S. Cellular does not haveoperational or financial control over such key suppliers and has limitedinfluence with respect to the manner in which these key suppliers conduct theirbusinesses.  As a result of recent economic conditions, many companies,including certain U.S. Cellular suppliers, are facing financial difficultiesand/or bankruptcy.  If these key suppliers experience financialdifficulties or file for bankruptcy, they may be unable to provide equipment,services or content to U.S. Cellular on a timely basis or cease to provide suchequipment, services or content or otherwise fail to honor their obligations toU.S. Cellular.  In such case, U.S. Cellular may be unable to maintain andupgrade its network or provide services to its customers in a competitivemanner, or could suffer other disruptions to its business.  In that event,U.S. Cellular’s business, financial condition or results of operations could beadversely affected.

 

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In January 2009, Nortel Networks Corporation (“Nortel”),a key supplier of network equipment, business communications systems, and technicalsupport for U.S. Cellular, announced that it, Nortel Networks Limited andcertain of its other Canadian subsidiaries obtained creditor protection underthe Companies’ Creditors Arrangement Act in Canada.  Additionally, certain of Nortel’s U.S. subsidiaries,including Nortel Networks Inc. and Nortel Networks Capital Corporation, havefiled voluntary petitions in the United States under Chapter 11 (“reorganization”)of the U.S. Bankruptcy Code, and certain of Nortel’s other subsidiaries madesimilar filings in other jurisdictions.

 

Nortel is operating under these protections and ispursuing sales of portions of its operations and assets to various parties. Inthe event that Nortel or the successor acquirers of its assets and operationsare not able to continue to provide equipment and services, U.S. Cellularbelieves that it will be able to purchase similar network equipment, businesscommunications systems and technical support from other suppliers and,therefore, U.S. Cellular does not believe Nortel’s reorganization and the saleof Nortel’s assets and operations to other entities will have a significantimpact on U.S. Cellular’s day-to-day operations. However, the following couldadversely impact U.S. Cellular’s future results of operations and cash flows:

 

·                  Reduced competition amongtelecommunications equipment suppliers could increase the future costs toacquire such equipment;

 

·                  Replacement and upgrades of Nortelequipment with equipment from other vendors could be more costly;

 

·                  The potential lack of future upgrades orenhancements to Nortel equipment could reduce the useful life of suchequipment, and result in accelerated depreciation charges; and

 

·                  Maintenance of Nortel equipment could bemore costly.

 

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**Item 2. ****Unregistered Sales of Equity Securities and****Use of Proceeds.**

 

Priorto November 18, 2008, the Board of Directors of U.S. Cellular hadauthorized the repurchase of up to 1% of the outstanding U.S. Cellular CommonShares held by non-affiliates in each three-month period, primarily for use inemployee benefit plans (the “Limited Authorization”).  On November 18,2008, the Board of Directors of U.S. Cellular amended the Limited Authorizationto permit the repurchase of up to 5% of the outstanding U.S. Cellular CommonShares held by persons other than TDS affiliates in each twelve-monthperiod.  This authorization does not have an expiration date.

 

Duringthe three months ended June 30, 2009, U.S. Cellular repurchased 140,000Common Shares for $6.0 million, or an average of $43.15 per share pursuantto this authorization.

 

Thefollowing table provides certain information with respect to all purchases madeby or on behalf of U.S. Cellular, and any open market purchases made by any “affiliatedpurchaser” (as defined by the SEC), of U.S. Cellular Common Shares during thequarter covered by this Form 10-Q.

 
| ** **                                                      | ** ** | **(a)**              | ** ** | **(b)**           | ** **  | **(c)**                       | ** ** | **(d)**                       | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|-------------------|-------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                      | ** ** | ** **           | ** ** | ** **        | ** **  | **Total Number of**           | ** ** | **Maximum Number of**         | ** ** |
| ** **                                                      | ** ** | ** **           | ** ** | ** **        | ** **  | **Common Shares**             | ** ** | **Common Shares that**        | ** ** |
| ** **                                                      | ** ** | **Total Number**     | ** ** | **Average Price** | ** **  | **Purchased as Part of** | ** ** | **May Yet Be Purchased** | ** ** |
| ** **                                                      | ** ** | **of Common**        | ** ** | **Paid per**      | ** **  | **Publicly Announced**        | ** ** | **Under the**                 | ** ** |
| **Period**                                                      | ** ** | **Shares Purchased** | ** ** | **Common Share**  | ** **  | **Plans or Programs**         | ** ** | **Plans or Programs**         | ** ** |
| April 1 – 30,  2009                                   |       | —               |       | —            |        | —                        |       | 143,000                       |       |
| May 1 – 31,  2009                                     |       | —               |       | —            |        | —                        |       | 143,000                       |       |
| June 1 – 30,  2009                                    |       | 140,000              |       | $                 |  43.15 |                          | 140,000    |                          | —     |   |
| Total for or as of  end of the quarter ended June 30, 2009 |       | 140,000              |       | $                 |  43.15 |                          | 140,000    |                          | —     |   |

 

Thefollowing is additional information with respect to the Limited Authorization:

 
| i.     |   | The  date the program was announced was May 15, 2000 by Form 10-Q. The  date the amended program was announced was February 26, 2009 by  Form 10-K.                                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                |
| ii.    |   | On  November 18, 2008, the Board of Directors of U.S. Cellular amended the  Limited Authorization to permit the repurchase of up to 5% of the outstanding  U.S. Cellular Common Shares held by persons other than TDS affiliates in each  twelve-month period. |
|   |   |                                                                                                                                                                                                                                                                |
| iii.   |   | There  is no expiration date for the program.                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                |
| iv.    |   | The  Limited Authorization did not expire during the second quarter of 2009.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                |
| v.     |   | U.S. Cellular did not  determine to terminate the foregoing Common Share repurchase program prior to  expiration, or cease making further purchases thereunder, during the second  quarter of 2009.                                                                 |

 

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**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

 

At the Annual Meeting of Shareholders of U.S.Cellular held on May 19, 2009, the following number of votes was cast withrespect to the matters indicated, resulting in the outcomes indicated:

 

1.               Electionof Directors:

 

a.               Forthe election of one Class I Director of the Company by the holders ofCommon Shares:

 
| **Nominee**                | ** ** | **For**    | ** ** | **Withhold** | ** ** | **Broker  Non-vote** | ** ** | **Outcome** | ** ** |
|----------------------------|------------|------------|------------|--------------|------------|----------------------|------------|-------------|------------|
| Harry J. Harczak, Jr. |       | 52,317,807 |       | 667,805      |       | —               |       | Elected     |       |

 

b.              Forthe election of three Class I Directors of the Company by the holder of Series ACommon Shares:

 
| **Nominee**           | ** ** | **For**     | ** ** | **Withhold** | ** ** | **Broker  Non-vote** | ** ** | **Outcome** | ** ** |
|-----------------------|------------|-------------|------------|--------------|------------|----------------------|------------|-------------|------------|
| LeRoy T. Carlson      |       | 330,058,770 |       | —       |       | —               |       | Elected     |       |
|                  |       |        |       |         |       |                 |       |        |       |
| Gregory P. Josefowicz |       | 330,058,770 |       | —       |       | —               |       | Elected     |       |
|                  |       |        |       |         |       |                 |       |        |       |
| John E. Rooney        |       | 330,058,770 |       | —       |       | —               |       | Elected     |       |

 

c.               Forthe election of one Class II Director of the Company by the holder of Series ACommon Shares:

 
| **Nominee**    | ** ** | **For**     | ** ** | **Withhold** | ** ** | **Broker  Non-vote** | ** ** | **Outcome** | ** ** |
|----------------|------------|-------------|------------|--------------|------------|----------------------|------------|-------------|------------|
| James Barr III |       | 330,058,770 |       | —       |       | —               |       | Elected     |       |

 

Thenames of the remaining Directors who did not stand for election at the AnnualMeeting and whose terms of office as Directors continued after such meeting areLeRoy T. Carlson, Jr., Kenneth R. Meyers, Walter C.D. Carlson, J. SamuelCrowley, Ronald E. Daly and Paul-Henri Denuit.

 

2.               Approvalof an amended Non-Employee Director Compensation Plan:

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** | **Outcome** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|-------------|------------|
| 380,957,533 |       | 908,029     |       | 6,597       |       | 1,172,223            |       | Approved    |       |

 

3.               Approvalof an amended 2005 Long-Term Incentive Plan:

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** | **Outcome** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|-------------|------------|
| 380,289,642 |       | 1,556,696   |       | 25,821      |       | 1,172,223            |       | Approved    |       |

 

4.               Proposalto Ratify the Selection of PricewaterhouseCoopers LLP as Independent PublicAccountants for 2009:

 
| **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-vote** | ** ** | **Outcome** | ** ** |
|-------------|------------|-------------|------------|-------------|------------|----------------------|------------|-------------|------------|
| 383,015,031 |       | 24,623      |       | 4,728       |       | —               |       | Approved    |       |

 

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**Item 5. Other Information.**

 

a.               The followinginformation is being provided to update prior disclosures made pursuant to therequirements of Form 8-K, Item 2.03 — Creation of a Direct Financial Obligationor an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.

 

U.S. Cellular did not borrowor repay any amounts under its revolving credit facility in the second quarterof 2009. U.S. Cellular had no borrowings outstanding under its Revolving CreditAgreement as of June 30, 2009.  U.S.Cellular entered into a new revolving credit facility on June 30, 2009 andterminated its prior revolving credit facility at the same time.

 

Adescription of U.S. Cellular’s new revolving credit facility is included underItem 1.01 in U.S. Cellular’s Current Report on Form 8-K dated June 30,2009 and is incorporated by reference herein. A description of the termination of the prior U.S. Cellular revolvingcredit facility is set forth in Item 1.02 of such Form 8-K and isincorporated by reference herein.

 

b.              The followinginformation is being provided to update prior disclosures made pursuant to therequirements of Form 8-K, Item 5.02 — Departure of Directors or CertainOfficers; Election of Directors; Appointment of Certain Officers; CompensatoryArrangements for Certain Officers.

 

OnMay 19, 2009, shareholders of U.S. Cellular approved the U.S. CellularCompensation Plan for Non-Employee Directors. A description of this plan is set forth in U.S. Cellular’s Notice ofAnnual Meeting and Proxy Statement as filed with the SEC on April 15, 2009and is incorporated by reference herein.

 

OnMay 19, 2009, shareholders of U.S. Cellular approved the U.S. Cellular2005 Long Term Incentive Plan, as amended. A description of this plan is set forth in U.S. Cellular’s Notice ofAnnual Meeting and Proxy Statement as filed with the SEC on April 15, 2009and is incorporated by reference herein.

 

OnJune 26, 2009, the U.S. Cellular 2009 Executive Officer Annual IncentivePlan Effective January 1, 2009 was approved by U.S. Cellular’s Chairman,who does not participate in such incentive plan.  A description of this plan is set forth inU.S. Cellular’s Current Report on Form 8-K dated June 26, 2009 and isincorporated by reference herein.

 

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**Item 6. Exhibits**

 

Exhibit 4.1— $300,000,000 Credit Agreement dated June 30, 2009 among U.S. Cellularand the lenders and other parties identified therein is hereby incorporated byreference from Exhibit 4.1 to U.S. Cellular’s Current Report on Form 8-Kdated June 30, 2009.

 

Exhibit 10.1— U.S. Cellular Compensation Plan for Non-Employee Directors, as amended March 17,2009, is hereby incorporated by reference to Exhibit B to U.S. Cellular’sNotice of Annual Meeting of Shareholders and Proxy Statement dated April 15,2009.

 

Exhibit 10.2— U.S. Cellular 2005 Long-Term Incentive Plan, as amended, is herebyincorporated by reference to Exhibit C to U.S. Cellular’s Notice of AnnualMeeting of Shareholders and Proxy Statement dated April 15, 2009.

 

Exhibit 10.3— U.S. Cellular 2009 Executive Officer Annual Incentive Plan Effective January 1,2009 is hereby incorporated by reference from Exhibit 10.1 to U.S.Cellular’s Current Report on Form 8-K dated June 26, 2009.

 

Exhibit 11— Statement regarding computation of per share earnings is included herein asNote 7 — Earnings Per Share in the Notes to Consolidated Financial Statements.

 

Exhibit 12— Statement regarding computation of ratio of earnings to fixed charges.

 

Exhibit 18— Preferability letter from Independent Registered Public Accounting Firm.

 

Exhibit 31.1— Chief Executive Officer certification pursuant to Rule 13a-14 of theSecurities Exchange Act of 1934.

 

Exhibit 31.2— Chief Financial Officer certification pursuant to Rule 13a-14 of theSecurities Exchange Act of 1934.

 

Exhibit 32.1— Chief Executive Officer certification pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code.

 

Exhibit 32.2— Chief Financial Officer certification pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code.

 

The foregoing exhibits include only the exhibits thatrelate specifically to this Form 10-Q or that supplement the exhibitsidentified in U.S. Cellular’s Form 10-K for the year ended December 31,2008.  Reference is made to U.S. Cellular’sForm 10-K for the year ended December 31, 2008 for a complete list ofexhibits, which are incorporated herein except to the extent supplemented orsuperseded above.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

UNITED STATES CELLULARCORPORATION

(Registrant)

 

 
| Date:   August 6,  2009 |   | /s/  John E. Rooney                    |
|---------------------------------------------|--------|----------------------------------------|
|                                        |   | John  E. Rooney                        |
|                                        |   | President  and Chief Executive Officer |
|                                        |   | (Principal  Executive Officer)         |
|                                        |   |                                   |
| Date:   August 6,  2009 |   | /s/  Steven T. Campbell                |
|                                        |   | Steven  T. Campbell                    |
|                                        |   | Executive  Vice President-Finance,     |
|                                        |   | Chief  Financial Officer and Treasurer |
|                                        |   | (Principal  Financial Officer)         |
|                                        |   |                                   |
| Date:   August 6,  2009 |   | /s/  Kenneth R. Meyers                 |
|                                        |   | Kenneth  R. Meyers                     |
|                                        |   | Chief  Accounting Officer              |
|                                        |   | (Principal  Accounting Officer)        |
|                                        |   |                                   |
| Date:   August 6,  2009 |   | /s/  Ljubica A. Petrich                |
|                                        |   | Ljubica  A. Petrich                    |
|                                        |   | Vice  President and Controller         |

 

 

Signaturepage for the U.S. Cellular 2009 Second Quarter Form 10-Q

 

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