Table of Contents

 

 

 

**UNITED STATESSECURITIES 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 March 31, 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                        **

 

**Commission File Number 1-9712**

 

**UNITED STATES CELLULARCORPORATION**

(Exact name 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**

(Addressof principal executive offices)  (ZipCode)

 

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 bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). 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  March 31, 2009** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|
| Common Shares, $1 par value               |       | 53,924,739 Shares                       |       |
| Series A Common Shares, $1 par value |       | 33,005,877 Shares                       |       |

 

 

 

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**United States Cellular Corporation**

** **

**Quarterly Report on Form 10-Q**

**For the Period Ended March 31, 2009**

 

**Index**

 
| ** **    | ** **            | **Page No.**                                                                             |
|---------------|-----------------------|-----------------------------------------------------------------------------------------------|
| Part I.  | Financial Information |                                                                                          |
|          |                  |                                                                                          |
|          | Item 1.               | Financial Statements (Unaudited)                                                              | 3 |
|          |                  |                                                                                          |   |
|          |                  | Consolidated  Statement of Operations Three Months Ended March 31, 2009 and 2008         | 3 |
|          |                  |                                                                                          |   |
|          |                  | Consolidated  Statement of Cash Flows Three Months Ended March 31, 2009 and 2008         | 4 |
|          |                  |                                                                                          |   |
|          |                  | Consolidated Balance Sheet March 31,  2009 and December 31, 2008                    | 5 |
|          |                  |                                                                                          |   |
|          |                  | Consolidated  Statement of Changes in Equity Three Months Ended March 31, 2009 and  2008 | 7 |
|          |                  |                                                                                          |   |
|          |                  | Notes to  Consolidated Financial Statements                                                   | 9 |
|          |                  |                                                                                          |   |
|          | Item 2.               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations   | 19 |
|          |                  |                                                                                          |   |
|          |                  | Overview                                                                                      | 19 |
|          |                  | Results of Operations                                                                         | 22 |
|          |                  | Recent  Accounting Pronouncements                                                             | 28 |
|          |                  | Financial Resources                                                                           | 29 |
|          |                  | Liquidity and  Capital Resources                                                              | 30 |
|          |                  | Application of  Critical Accounting Policies and Estimates                                    | 33 |
|          |                  | Safe Harbor  Cautionary Statement                                                             | 34 |
|          |                  |                                                                                          |   |
|          | Item 3.               | Quantitative and Qualitative Disclosures  About Market Risk                                   | 38 |
|          |                  |                                                                                          |   |
|          | Item 4.               | Controls and Procedures                                                                       | 39 |
|          |                  |                                                                                          |   |
| Part II. | Other Information     |                                                                                          |
|          |                  |                                                                                          |   |
|          | Item 1.               | Legal Proceedings                                                                             | 40 |
|          |                  |                                                                                          |   |
|          | Item 1A.              | Risk Factors                                                                                  | 40 |
|          |                  |                                                                                          |   |
|          | Item 2.               | Unregistered Sales of Equity Securities and  Use of Proceeds                                  | 40 |
|          |                  |                                                                                          |   |
|          | Item 5.               | Other Information                                                                             | 41 |
|          |                  |                                                                                          |   |
|          | Item 6.               | Exhibits                                                                                      | 42 |
|          |                  |
| Signatures    |                  |

 

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Table of Contents

 

**Part I. Financial Information**

**Item 1. Financial Statements**

 

**United States Cellular Corporation**

 

**ConsolidatedStatement of Operations**

**(Unaudited)**

 
| ** **                                                                                                                 | ** ** | **Three Months Ended**                                  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **March 31,**                                                | ** ** |
| ** **                                                                                                                 | ** ** | **2009**                                                          | ** ** | **2008** | ** ** |
| ** **                                                                                                                 | ** ** | **(Dollars and shares in  thousands,  except per share amounts)** | ** ** |
| **Operating  revenues**                                                                                                    |       |                                                              |       |   |   |
| Service                                                                                                                    |       | $                                                                 | 981,874    |   | $ | 962,094 |   |
| Equipment sales                                                                                                            |       | 70,890                                                            |       | 75,762 |   |
| Total operating revenues                                                                                                   |       | 1,052,764                                                         |       | 1,037,856 |   |
|                                                                                                                       |       |                                                              |       |   |   |
| **Operating  expenses**                                                                                                    |       |                                                              |       |   |   |
| System operations (excluding  Depreciation, amortization and accretion reported below)                                     |       | 200,003                                                           |       | 191,016 |   |
| Cost of equipment sold                                                                                                     |       | 185,701                                                           |       | 178,045 |   |
| Selling, general and administrative  (including charges from affiliates of $28.8 million and $28.5 million,  respectively) |       | 412,448                                                           |       | 403,626 |   |
| Depreciation, amortization and  accretion                                                                                  |       | 137,651                                                           |       | 142,530 |   |
| Loss on asset disposals, net                                                                                               |       | 2,191                                                             |       | 3,673 |   |
| Total operating expenses                                                                                                   |       | 937,994                                                           |       | 918,890 |   |
|                                                                                                                       |       |                                                              |       |   |   |
| **Operating  income**                                                                                                      |       | 114,770                                                           |       | 118,966 |   |
|                                                                                                                       |       |                                                              |       |   |   |
| **Investment  and other income (expense)**                                                                                 |       |                                                              |       |   |   |
| Equity in earnings of  unconsolidated entities                                                                             |       | 25,327                                                            |       | 21,235 |   |
| Interest and dividend income                                                                                               |       | 477                                                               |       | 1,905 |   |
| Interest expense                                                                                                           |       | (19,022                                                           | )          | (20,115 | ) |
| Other, net                                                                                                                 |       | 280                                                               |       | 118 |   |
| Total investment and other  income (expense)                                                                               |       | 7,062                                                             |       | 3,143 |   |
|                                                                                                                       |       |                                                              |       |   |   |
| **Income  before income taxes**                                                                                            |       | 121,832                                                           |       | 122,109 |   |
| Income tax expense                                                                                                         |       | 31,232                                                            |       | 47,540 |   |
|                                                                                                                       |       |                                                              |       |   |   |
| **Net  income**                                                                                                            |       | 90,600                                                            |       | 74,569 |   |
| Less: Net income attributable  to noncontrolling interests, net of tax                                                     |       | (6,008                                                            | )          | (4,012 | ) |
| **Net  income attributable to U.S. Cellular**                                                                              |       | $                                                                 | 84,592     |   | $ | 70,557 |   |
|                                                                                                                       |       |                                                              |       |   |   |
| **Basic  weighted average shares outstanding**                                                                             |       | 87,196                                                            |       | 87,571 |   |
| **Basic  earnings per share attributable to U.S. Cellular shareholders**                                                   |       | $                                                                 | 0.97       |   | $ | 0.81 |   |
|                                                                                                                       |       |                                                              |       |   |   |
| **Diluted  weighted average shares outstanding**                                                                           |       | 87,446                                                            |       | 88,064 |   |
| **Diluted  earnings per share attributable to U.S. Cellular shareholders**                                                 |       | $                                                                 | 0.97       |   | $ | 0.80 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**United States Cellular Corporation**

 

**ConsolidatedStatement of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                    | ** ** | **March 31,**                   | ** ** |
| ** **                                                                                    | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Cash  flows from operating activities**                                                     |       |                                 |       |   |   |
| Net income                                                                                    |       | $                                    | 90,600     |   | $ | 74,569 |   |
| Add (deduct) adjustments to  reconcile net income to net cash flows from operating activities |       |                                 |       |   |   |
| Depreciation, amortization and  accretion                                                     |       | 137,651                              |       | 142,530 |   |
| Bad debts expense                                                                             |       | 18,704                               |       | 17,962 |   |
| Stock-based compensation  expense                                                             |       | 2,964                                |       | 1,773 |   |
| Deferred income taxes, net                                                                    |       | 1,673                                |       | 15,926 |   |
| Equity in earnings of  unconsolidated entities                                                |       | (25,327                              | )          | (21,235 | ) |
| Distributions from  unconsolidated entities                                                   |       | 5,908                                |       | 6,933 |   |
| Loss on asset disposals, net                                                                  |       | 2,191                                |       | 3,673 |   |
| Excess tax benefit from stock  awards                                                         |       | (3                                   | )          | (764 | ) |
| Other noncash expense                                                                         |       | 443                                  |       | 443 |   |
| Changes in assets and  liabilities from operations                                            |       |                                 |       |   |   |
| Accounts receivable                                                                           |       | (13,468                              | )          | (8,615 | ) |
| Inventory                                                                                     |       | 7,204                                |       | (13,697 | ) |
| Accounts payable - trade                                                                      |       | (30,754                              | )          | (2,418 | ) |
| Accounts payable - affiliate                                                                  |       | (2,358                               | )          | (117 | ) |
| Customer deposits and deferred  revenues                                                      |       | (1,392                               | )          | 6,515 |   |
| Accrued taxes                                                                                 |       | 39,591                               |       | 32,949 |   |
| Accrued interest                                                                              |       | 9,337                                |       | 9,337 |   |
| Other assets and liabilities                                                                  |       | (57,402                              | )          | (35,967 | ) |
|                                                                                          |       | 185,562                              |       | 229,797 |   |
|                                                                                          |       |                                 |       |   |   |
| **Cash  flows from investing activities**                                                     |       |                                 |       |   |   |
| Additions to property, plant  and equipment                                                   |       | (137,741                             | )          | (111,690 | ) |
| Cash received from  divestitures                                                              |       | —                               |       | 6,838 |   |
| Cash paid for acquisitions and  licenses                                                      |       | (12,127                              | )          | (102,000 | ) |
| Other investing activities                                                                    |       | 240                                  |       | 239 |   |
|                                                                                          |       | (149,628                             | )          | (206,613 | ) |
|                                                                                          |       |                                 |       |   |   |
| **Cash  flows from financing activities**                                                     |       |                                 |       |   |   |
| Common shares reissued for  benefit plans, net of tax payments                                |       | 356                                  |       | (2,526 | ) |
| Common shares repurchased                                                                     |       | (13,291                              | )          | (6,201 | ) |
| Excess tax benefit from stock  awards                                                         |       | 3                                    |       | 764 |   |
| Distributions to  noncontrolling interests                                                    |       | (2,101                               | )          | (3,231 | ) |
| Other financing activities                                                                    |       | (100                                 | )          | (48 | ) |
|                                                                                          |       | (15,133                              | )          | (11,242 | ) |
|                                                                                          |       |                                 |       |   |   |
| **Net  increase in cash and cash equivalents**                                                |       | 20,801                               |       | 11,942 |   |
|                                                                                          |       |                                 |       |   |   |
| **Cash and  cash equivalents**                                                                |       |                                 |       |   |   |
| Beginning of period                                                                           |       | 170,996                              |       | 204,533 |   |
| End of period                                                                                 |       | $                                    | 191,797    |   | $ | 216,475 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**United States Cellular Corporation**

 

**ConsolidatedBalance Sheet — Assets**

 
| ** **                                                                            | ** ** | **March 31,**                   | ** ** | ** **            | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **2009**                             | ** ** | **December 31,** | ** ** |
| ** **                                                                            | ** ** | **(Unaudited)**                      | ** ** | **2008**              | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  assets**                                                                   |       |                                 |       |                  |       |
| Cash and cash equivalents                                                             |       | $                                    | 191,797    |                  | $          | 170,996 |   |
| Accounts receivable                                                                   |       |                                 |       |                  |       |
| Customers, less allowances of  $7,915 and $8,222, respectively                        |       | 325,669                              |       | 330,390               |       |
| Roaming                                                                               |       | 27,772                               |       | 34,841                |       |
| Affiliated                                                                            |       | 644                                  |       | 1,579                 |       |
| Other, less allowances of $159  and $150, respectively                                |       | 60,298                               |       | 52,809                |       |
| Inventory                                                                             |       | 108,051                              |       | 116,564               |       |
| Prepaid income taxes                                                                  |       | —                               |       | 22,515                |       |
| Prepaid expenses                                                                      |       | 57,766                               |       | 51,645                |       |
| Net deferred income tax asset                                                         |       | 19,481                               |       | 19,481                |       |
| Other current assets                                                                  |       | 8,283                                |       | 14,227                |       |
|                                                                                  |       | 799,761                              |       | 815,047               |       |
| **Investments**                                                                       |       |                                 |       |                  |       |
| Licenses                                                                              |       | 1,445,665                            |       | 1,433,415             |       |
| Goodwill                                                                              |       | 494,737                              |       | 494,279               |       |
| Customer lists, net of  accumulated amortization of $89,256 and $87,976, respectively |       | 7,656                                |       | 8,936                 |       |
| Investments in unconsolidated  entities                                               |       | 175,571                              |       | 156,637               |       |
| Notes and interest receivable  — long-term                                       |       | 4,265                                |       | 4,297                 |       |
|                                                                                  |       | 2,127,894                            |       | 2,097,564             |       |
| **Property,  plant and equipment**                                                    |       |                                 |       |                  |       |
| In service and under construction                                                     |       | 5,527,778                            |       | 5,884,383             |       |
| Less: accumulated depreciation                                                        |       | 2,904,973                            |       | 3,264,007             |       |
|                                                                                  |       | 2,622,805                            |       | 2,620,376             |       |
|                                                                                  |       |                                 |       |                  |       |
| **Other  assets and deferred charges**                                                |       | 69,495                               |       | 33,055                |       |
|                                                                                  |       |                                 |       |                  |       |
| **Total  assets**                                                                     |       | $                                    | 5,619,955  |                  | $          | 5,566,042 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**UnitedStates Cellular Corporation**

 

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

 
| ** **                                                                                                                    | ** ** | **March 31,**                   | ** ** | ** **            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                    | ** ** | **2009**                             | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                    | ** ** | **(Unaudited)**                      | ** ** | **2008**              | ** ** |
| ** **                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| **Current  liabilities**                                                                                                      |       |                                 |       |                  |       |
| Current portion of long-term  debt                                                                                            |       | $                                    | 10,086     |                  | $          | 10,258 |   |
| Accounts payable                                                                                                              |       |                                 |       |                  |       |
| Affiliated                                                                                                                    |       | 7,255                                |       | 9,613                 |       |
| Trade                                                                                                                         |       | 218,031                              |       | 248,785               |       |
| Customer deposits and deferred  revenues                                                                                      |       | 149,690                              |       | 151,082               |       |
| Accrued taxes                                                                                                                 |       | 34,729                               |       | 17,643                |       |
| Accrued compensation                                                                                                          |       | 43,202                               |       | 55,969                |       |
| Other current liabilities                                                                                                     |       | 106,858                              |       | 108,533               |       |
|                                                                                                                          |       | 569,851                              |       | 601,883               |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Deferred  liabilities and credits**                                                                                         |       |                                 |       |                  |       |
| Net deferred income tax  liability                                                                                            |       | 481,196                              |       | 478,106               |       |
| Other deferred liabilities and  credits                                                                                       |       | 236,478                              |       | 233,619               |       |
|                                                                                                                          |       | 717,674                              |       | 711,725               |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Long-term  debt**                                                                                                           |       | 997,534                              |       | 996,636               |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Commitments  and contingencies**                                                                                            |       |                                 |       |                  |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Noncontrolling  interests with redemption features**                                                                        |       | 612                                  |       | 589                   |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Equity**                                                                                                                    |       |                                 |       |                  |       |
| U.S. Cellular shareholders’  equity                                                                                      |       |                                 |       |                  |       |
| Common Shares, par value $1  per share; authorized 140,000,000 shares; issued 55,068,219 shares                               |       | 55,068                               |       | 55,068                |       |
| Series A Common Shares,  par value $1 per share; authorized 50,000,000 shares; issued and outstanding  33,005,877 shares |       | 33,006                               |       | 33,006                |       |
| Additional paid-in capital                                                                                                    |       | 1,343,599                            |       | 1,340,146             |       |
| Treasury shares, at cost,  1,143,480 and 794,254 Common Shares, respectively                                                  |       | (61,835                              | )          | (50,258               | )          |
| Retained earnings                                                                                                             |       | 1,911,995                            |       | 1,828,680             |       |
| Total U.S. Cellular  shareholders’ equity                                                                                |       | 3,281,833                            |       | 3,206,642             |       |
|                                                                                                                          |       |                                 |       |                  |       |
| Noncontrolling interests                                                                                                      |       | 52,451                               |       | 48,567                |       |
|                                                                                                                          |       |                                 |       |                  |       |
| Total equity                                                                                                                  |       | 3,334,284                            |       | 3,255,209             |       |
|                                                                                                                          |       |                                 |       |                  |       |
| **Total  liabilities and equity**                                                                                             |       | $                                    | 5,619,955  |                  | $          | 5,566,042 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**UnitedStates Cellular Corporation**

** **

**Consolidated Statement 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 |       | —                                   |       | —                            |       | —                           |       | — |   | 84,592 |   | 84,592 |   | 5,985 |   | 90,577 |   |
| Repurchase of Common Shares                                                                               |       | —                                   |       | —                            |       | —                           |       | (13,291 | ) | — |   | (13,291 | ) | — |   | (13,291 | ) |
| Incentive and compensation plans                                                                          |       | —                                   |       | —                            |       | 499                              |       | 1,714 |   | (1,277 | ) | 936 |   | — |   | 936 |   |
| Stock-based compensation awards                                                                           |       | —                                   |       | —                            |       | 2,964                            |       | — |   | — |   | 2,964 |   | — |   | 2,964 |   |
| Tax windfall (shortfall) from stock awards                                                                |       | —                                   |       | —                            |       | (10                              | )          | — |   | — |   | (10 | ) | — |   | (10 | ) |
| Distributions to noncontrolling interests                                                                 |       | —                                   |       | —                            |       | —                           |       | — |   | — |   | — |   | (2,101 | ) | (2,101 | ) |
| **Balance, March 31, 2009**                                                                          | ** ** | **$**                                    | **55,068** | ** **                        | **$**      | **33,006**                       | ** ** | **$** | **1,343,599** | ** ** | **$** | **(61,835** | **)** | **$** | **1,911,995** | ** ** | **$** | **3,281,833** | ** ** | **$** | **52,451** | ** ** | **$** | **3,334,284** | ** ** |
|                                                                                                           |            |                                          |            |                                   |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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**UnitedStates Cellular Corporation**

 

**Consolidated Statement of Changes in 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 |       | —                                   |       | —                            |       | —                           |       | — |   | — |   | 70,557 |   | 70,557 |   | 5,567 |   | 76,124 |   |
| Net unrealized losses on securities                                                                       |       | —                                   |       | —                            |       | —                           |       | — |   | 33 |   | — |   | 33 |   | — |   | 33 |   |
| Repurchase of Common Shares                                                                               |       | —                                   |       | —                            |       | 4,554                            |       | (10,755 | ) | — |   | — |   | (6,201 | ) | — |   | (6,201 | ) |
| Incentive and compensation plans                                                                          |       | —                                   |       | —                            |       | (5,908                           | )          | 10,219 |   | — |   | (6,030 | ) | (1,719 | ) | — |   | (1,719 | ) |
| Stock-based compensation awards                                                                           |       | —                                   |       | —                            |       | 1,773                            |       | — |   | — |   | — |   | 1,773 |   | — |   | 1,773 |   |
| Tax windfall (shortfall) from stock awards                                                                |       | —                                   |       | —                            |       | 1,027                            |       | — |   | — |   | — |   | 1,027 |   | — |   | 1,027 |   |
| Distributions to noncontrolling interests                                                                 |       | —                                   |       | —                            |       | —                           |       | — |   | — |   | — |   | — |   | (3,231 | ) | (3,231 | ) |
| **Balance, March 31, 2008**                                                                          | ** ** | **$**                                    | **55,068** | ** **                        | **$**      | **33,006**                       | ** ** | **$** | **1,318,231** | ** ** | **$** | **(42,395** | **)** | **$** | **10,167** | ** ** | **$** | **1,887,549** | ** ** | **$** | **3,261,626** | ** ** | **$** | **49,167** | ** ** | **$** | **3,310,793** | ** ** |

 

The accompanying notes are anintegral part 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 (“Form 10-K”).

 

The accompanying unaudited consolidatedfinancial statements contain all adjustments (consisting of only normalrecurring items, unless otherwise disclosed) necessary to present fairly thefinancial position as of March 31, 2009 and December 31, 2008, andthe results of operations, cash flows and changes in equity for the threemonths ended March 31, 2009 and 2008. The results of operations, cash flows and changes in equity for thethree months ended March 31, 2009 are not necessarily indicative of theresults to be expected for the full year.

 

**2.****             ****Summary of 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. If the tax is assessed upon U.S. Cellular, the amounts collected fromcustomers as recovery of the tax are recorded in Service revenues and amountsremitted to governmental authorities are recorded in Selling, general andadministrative expenses in the Consolidated Statement of Operations.  The amounts recorded in Service revenues thatare billed to customers and remitted to governmental authorities totaled $25.9million and $33.2 million for the three months ended March 31, 2009 and2008, 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, going forward, SFAS 141(R) willrequire U.S. Cellular to revise its application of the acquisition method in anumber of significant aspects, such as requiring the expensing of transactioncosts and requiring the acquiror to recognize 100% of the acquiree’s assets andliabilities, rather than a proportional share, for acquisitions of less than100% of a business.  In addition, SFAS141(R) eliminates the step acquisition model and provides that all businesscombinations, whether full, partial, or step acquisitions, will result in allassets and liabilities of an acquired business being recorded at their fairvalues at the acquisition date.

 

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 threemonths ended March 31, 2009.

 

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Implementationof SFAS No. 160

 

SeeNote 3 — Noncontrolling Interests below for information related to U.S.Cellular’s adoption of SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements*—*anamendment of ARB No. 51.*

 

Recent Accounting Pronouncements

 

InApril 2009, the FASB issued three FASB Staff Positions related to fairvalue measurement and disclosure.  FSPFAS 157-4, *Determining Fair Value when the Volume and Level ofActivity for the Asset or Liability have Significantly Decreased andIdentifying Transactions that are not Orderly*, provides additionalguidance on the factors that should be considered in estimating fair value whenthere has been a significant decrease in market activity for an asset orliability.  The FASB also issued FSP FAS115-2 and FAS 124-2, *Recognition andPresentation of Other-than-Temporary Impairments*, amending theaccounting guidance for other-than-temporary impairments of debt securities andthe disclosure requirements of equity securities and debt securities.  U.S. Cellular does not hold equity securitiesor debt securities within the scope of this FSP at March 31, 2009.  Subsequent to the issuance of this FSP, theSEC issued Staff Accounting Bulletin No. 111, amended SEC Topic 5.M., *Other than Temporary Impairment of Certain Investments in Debt andEquity Securities* (“SAB No. 111”), to amend the scope of SECTopic 5.M. to exclude debt securities that are within the scope of the newlyissued FSP FAS 115-2 and FAS 124-2.  Alsoissued was FSP FAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*. FSP 107-2 and APB 28-1 requires disclosure of fair value for assets andliabilities within the scope of SFAS 107, *Disclosures about FairValue of Financial Instruments* (“SFAS 107”), for interimperiods.  These FSPs and SAB will have nosignificant impact on U.S. Cellular’s financial position or results ofoperations.  U.S. Cellular will adoptthese FSPs effective April 1, 2009.

 

SeeNote 4 — Fair Value Measurements for information related to U.S. Cellular’sadoption of SFAS No. 157, *Fair Value Measurements*.

 

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

 

Implementationof SFAS No. 160

 

EffectiveJanuary 1, 2009, U.S. Cellular adopted the provisions of SFAS No. 160,*Noncontrolling Interests in ConsolidatedFinancial Statements*—*anamendment of ARB No. 51* (“SFAS 160”).

 

Pursuant toSFAS 160, the following provisions were applied retrospectively to all periodspresented in the financial statements:

 
| · | U.S.  Cellular reclassified noncontrolling interests from a separate caption  between liabilities and shareholders’ equity (“mezzanine section”) to a  component of equity, with the exception of noncontrolling interests with  redemption features, which require mezzanine section presentation in  accordance with Emerging Issues Task Force Topic No. D-98, *Classification and Measurement of Redeemable Securities*.  Previously, minority interests generally were reported in the balance sheet in  the mezzanine section. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| · | Consolidated  net income and comprehensive income include amounts attributable to both U.S.  Cellular and the noncontrolling interests. Previously, net income  attributable to the noncontrolling interests was reported as a deduction in  arriving at consolidated net income. This presentation change does not impact  the calculation of basic or diluted earnings per share, which continue to be  calculated based on Net income attributable to U.S. Cellular.                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| · | Shares of  U.S. Cellular held by its subsidiary are reflected as treasury shares in the  consolidated financial statements. Previously, these shares were not  reflected as issued shares and treasury shares in the consolidated financial  statements. As a result, 22,534 Common Shares were added to both Common  Shares issued and Treasury Shares in the Consolidated Balance Sheets as of  March 31, 2009 and December 31, 2008.                                                                                                             |

 

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Pursuant toSFAS 160, the following provisions were applied prospectively effective January 1,2009:

 
| · | SFAS 160  provides that all earnings and losses of a subsidiary should be attributed to  the parent and the noncontrolling interest, even if the losses attributable  to the noncontrolling interest result in a deficit noncontrolling interest  balance. Previously, any losses exceeding the noncontrolling interest’s  investment in the subsidiary were attributed to the parent. This change did  not have a significant impact on U.S. Cellular’s financial statements for the  three months ended March 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · | SFAS 160  also establishes that, once control of a subsidiary is obtained, changes in  ownership interests in that subsidiary that do not result in a loss of  control shall be accounted for as equity transactions. Previously, decreases  in ownership interest in a subsidiary were accounted for as equity  transactions, while increases in ownership interests of a subsidiary were  accounted for as step acquisitions under the provisions of SFAS 141. U.S.  Cellular did not enter into any transactions in the three months ended March  31, 2009 that changed its ownership interest in its consolidated  subsidiaries. During the three months ended March 31, 2008, U.S. Cellular  purchased noncontrolling interests in a consolidated subsidiary. U.S.  Cellular accounted for this transaction as a step acquisition under the  provisions of SFAS 141. The amounts recorded in this transaction are  reflected in the changes in the balances of Licenses, Goodwill and Customer  lists. |

 

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 $122.1 million at March 31,2009.  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 March 31, 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 March 31,2009 was $49.7 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 noncontrollinginterests of $72.4 million was due primarily to the unrecognized appreciationof the noncontrolling interest holders’ share of the underlying net assets inthe consolidated 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 smaller settlementamount.

 

**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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EffectiveJanuary 1, 2008, U.S. Cellular adopted the provisions of SFAS 157 for itsfinancial assets and liabilities.  As of March 31,2009 and December 31, 2008, U.S. Cellular did not have any financialassets or liabilities that required the application of SFAS 157 forpurposes of valuing and reporting such amounts in its Consolidated BalanceSheet. However, U.S. Cellular has applied the provisions of SFAS 157 forpurposes of computing fair value for disclosure purposes. As of March 31,2009, U.S. Cellular’s Long-term debt (excluding capital lease obligations) bookvalue and fair value were $993 million and $704 million, respectively.  As of December 31, 2008, U.S. Cellular’sLong-term debt (excluding capital lease obligations) book value and fair valuewere $993 million and $663 million, respectively. The fair value amountsrelated to U.S. Cellular’s mandatorily redeemable noncontrolling interest arepresented in Note 3 — Noncontrolling Interests.

 

EffectiveJanuary 1, 2009, U.S. Cellular adopted the provisions of SFAS 157 for itsnonfinancial assets and liabilities as permitted by FASB Staff Position (“FSP”)FAS 157-2, *Effective Date of FASB Statement No. 157*.  As of March 31, 2009, U.S. Cellular didnot have any nonfinancial assets or liabilities that required the applicationof SFAS 157 for purposes of valuing and reporting such amounts in itsConsolidated 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 months ended March 31, 2009 and 2008 was 25.6% and 38.9%,respectively.  The effective tax rate forthe three months ended March 31, 2009 was lower than the rate for the threemonths ended March 31, 2008 primarily due to a state tax benefit resulting froma state tax law change.  The benefitassociated with the state tax law change was recognized as a discrete item inthe three months ended March 31, 2009. This benefit, along with other minor discrete benefits in the quarter,decreased income tax expense for the three months ended March 31, 2009 by $14.6million; absent these benefits, the effective tax rate for such period wouldhave been 37.6%.  The state tax lawchange is not expected to provide any incremental benefit in future periods.

 

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 assets anddeferred charges in U.S. Cellular’s Consolidated Balance Sheet at March 31,2009.

 

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

 

From time to time, theFCC conducts auctions through which additional spectrum is made available forthe provision of wireless services.  U.S. Cellular participated inspectrum auctions indirectly through its limited partnership interests inAquinas Wireless, King Street Wireless, Barat Wireless L.P. (“Barat Wireless”)and Carroll Wireless L.P. (“Carroll Wireless”), collectively, the “limitedpartnerships.”  Each entity qualified asa “designated entity” and thereby was eligible for bid credits with respect tolicenses purchased in accordance with the rules defined by the FCC foreach auction. In most cases, the bidding credits resulted in a 25% discountfrom the gross winning bid.  Some licenses were “closed licenses,” forwhich no credit was received, but bidding was restricted to bidders qualifyingas “entrepreneurs,” which are small businesses that have a limited amount of assetsand revenues.

 

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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 March 31,2009, the FCC had not granted licenses to Aquinas Wireless and King StreetWireless for Auctions 78 and 73, respectively.

(2)          Provisionallywon.

 

ConsolidatedVariable Interest Entities

 

As of March 31, 2009, U.S. Cellular consolidates the following variable interest entities (“VIEs”):

 
| · | Aquinas Wireless;                                                                                        |
|--------|----------------------------------------------------------------------------------------------------------|
| · | King Street Wireless  and King Street Wireless, 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. Cellularwas deemed to be the primary beneficiary of these VIEs.  Without financial support fromU.S. Cellular, these VIEs are unable to finance their operations(i.e., participate in FCC auctions and construct wireless networks).  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.

 

Following is a summary ofthe capital contributions and advances made to each entity by U.S. Cellular asof March 31, 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. |   | 300,454 |    |
| Barat Wireless & Barat  Wireless, Inc.             |   | 127,335 |    |
| Carroll Wireless & Carroll  PCS, Inc.              |   | 130,094 |    |
|                                                             |   | $       | 560,015 |   |

 

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Thefollowing table presents the classification of the consolidated VIEs’ assetsand liabilities in U.S. Cellular’s Consolidated Balance Sheet.

 
| ** **                               | ** ** | **March 31,**                   | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2009**                             | ** ** | **2008**              | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                               |       |                                 |       |                  |       |
| Cash                                     |       | $                                    | 312        |                  | $          | 684 |   |
| Other current assets                     |       | 353                                  |       | 63                    |       |
| Licenses                                 |       | 487,962                              |       | 487,962               |       |
| Total assets                             |       | $                                    | 488,627    |                  | $          | 488,709 |   |
|                                     |       |                                 |       |                  |       |
| **Liabilities**                          |       |                                 |       |                  |       |
| Customer deposits and deferred  revenues |       | 75                                   |       | 63                    |       |
| Total liabilities                        |       | $                                    | 75         |                  | $          | 63 |   |

 

OtherRelated Matters

 

U.S.Cellular may agree to make additional capital contributions and/or advances tothe VIEs discussed above and/or to their general partners to provide additionalfunding for the development of licenses granted in the various auctions. U.S. Cellular may finance such amounts with a combination of cash on hand,borrowings under its revolving credit agreement and/or long-term debt. There is no assurance that U.S. Cellular will be able to obtain additionalfinancing on commercially reasonable terms or at all to provide such financialsupport.

 

Thegeneral partner of each of these VIEs has the right to manage and operate thelimited partnerships; however, the general partner needs consent of the limitedpartner, a subsidiary of U.S. Cellular, in certain limited circumstances, suchas to make certain large expenditures, admit other partners, or liquidate thelimited partnerships.

 

SeeNote 11 — Commitments and Contingencies for additional information related tothe participation of Carroll Wireless, Barat Wireless and King Street Wirelessin Auction 58, Auction 66 and Auction 73, respectively.

 

TheseVIEs are in the process of developing long-term business and financingplans.  These entities were formed toparticipate in FCC auctions of wireless spectrum and to fund, establish, andprovide wireless service with respect to any FCC licenses won in theauctions.  As such, these entities haverisks similar to those described in the “Risk Factors” in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2008.

 

**7.****             ****Earnings Per 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  March 31,**                                                    | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                                                                                            | ** ** | **2008** | ** ** |
| ** **                                                             | ** ** | **(Dollars and shares in thousands,  except per share amounts)** | ** ** |
|                                                                   |       |                                                                                                |       |   |   |
| Net income attributable to  U.S. Cellular                              |       | $                                                                                                   | 84,592     |   | $ | 70,557 |   |
|                                                                   |       |                                                                                                |       |   |   |
| Weighted average number of  shares used in basic earnings per share    |       | 87,196                                                                                              |       | 87,571 |   |
| Effect of dilutive securities:                                         |       |                                                                                                |       |   |   |
| Stock options(1)                                                       |       | 33                                                                                                  |       | 273 |   |
| Restricted stock units(2)                                              |       | 217                                                                                                 |       | 220 |   |
| Weighted average number of  shares used in diluted earnings per share  |       | 87,446                                                                                              |       | 88,064 |   |
|                                                                   |       |                                                                                                |       |   |   |
| Basic earnings per share  attributable to U.S. Cellular shareholders   |       | $                                                                                                   | 0.97       |   | $ | 0.81 |   |
|                                                                   |       |                                                                                                |       |   |   |
| Diluted earnings per share  attributable to U.S. Cellular shareholders |       | $                                                                                                   | 0.97       |   | $ | 0.80 |   |

 

----

(1)          Stock optionsexercisable into 1,485,335 Common Shares in 2009 and 331,239 Common Shares in2008 were not included in computing Diluted Earnings per Share because theireffects were antidilutive.

 

(2)          Restricted stockunits issuable upon vesting into 384 Common Shares in 2009 were not included incomputing Diluted Earnings per Share because their effects were antidilutive.  There were no antidilutive restricted stockunits for the comparable period 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 March 31,2009

 

AFederal Communications Commission (“FCC”) auction of spectrum in the PCS andAWS-1 bands, designated by the FCC as Auction 78, closed August 20, 2008.U.S. Cellular participated in Auction 78 indirectly through its interest inAquinas Wireless L.P. (“Aquinas Wireless”). Aquinas Wireless paid$2.1 million to the FCC in 2008 for five licenses for which it was theprovisional winning bidder in the auction.

 

U.S.Cellular also participated in the 2008 FCC auction of spectrum in the 700megahertz band, known as Auction 73, which closed on March 20, 2008. U.S.Cellular participated in Auction 73 indirectly through its interest in KingStreet Wireless L. P. (“King Street Wireless”). King Street Wireless paid$300.5 million to the FCC in 2008 for the 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 ofMarch 31, 2009, the FCC had not granted the licenses to Aquinas Wirelessor King Street Wireless. See Note 6—Variable Interest Entities, forfurther details on Aquinas Wireless and King Street Wireless and the licensesacquired in Auctions 78 and 73.

 

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**9.****              Licenses andGoodwill**

 

Changesin U.S. Cellular’s licenses and goodwill are presented below.

 
| ** **                   | ** ** | **March 31,**                   | ** ** | **March 31,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2009**                             | ** ** | **2008**           | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Licenses                     |       |                                 |       |               |       |
| Balance, beginning of period |       | $                                    | 1,433,415  |               | $          | 1,482,446 |   |
| Acquisitions                 |       | 12,250                               |       | 306,102            |       |
| Balance, end of period       |       | $                                    | 1,445,665  |               | $          | 1,788,548 |   |

 
| ** **                   | ** ** | **March 31,**                   | ** ** | **March 31,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2009**                             | ** ** | **2008**           | ** ** |
| ** **                   | ** ** | **(Dollars in thousands)** | ** ** |
| Goodwill                     |       |                                 |       |               |       |
| Balance, beginning of period |       | $                                    | 494,279    |               | $          | 491,316 |   |
| Acquisitions                 |       | —                               |       | 970                |       |
| Other                        |       | 458                                  |       | —             |       |
| Balance, end of period       |       | $                                    | 494,737    |               | $          | 492,286 |   |

 

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 therequired annual impairment assessment of its licenses and goodwill in thesecond quarter of the year.

 

Asa result of the deterioration in the credit and financial markets and thedecline of the overall economy in the fourth quarter of 2008, U.S. Cellularperformed an interim impairment assessment of licenses and goodwill as of December 31,2008.  The assessment resulted in animpairment loss of $386.7 million on licenses, which was recognized in December 2008,and no impairment of goodwill.  Given that the unfavorable economicconditions experienced in the fourth quarter of 2008 continued through thethree months ended March 31, 2009, and U.S. Cellular’s marketcapitalization declined from December 31, 2008 to March 31, 2009,U.S. Cellular assessed whether an interim impairment assessment was alsorequired at March 31, 2009, and concluded that such an impairmentassessment was not required based on the following:

 

·                  Theestimates and assumptions that U.S. Cellular used in its assessment as of December 31,2008 had not changed significantly from December 31, 2008 to March 31,2009;

 

·                  U.S.Cellular did not experience significant changes in its business during thethree months ended March 31, 2009; and

 

·                  No othersignificant discrete events occurred or circumstances existed that wouldindicate an impairment of the recorded balances of licenses and goodwill as of March 31,2009.

 

**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 $25.3 million and $21.2 millionin the three months ended March 31, 2009 and 2008, respectively; of thoseamounts, U.S. Cellular’s investment in the Los Angeles SMSA Partnership (“LAPartnership”) contributed $16.9 million and $15.8 million in the three monthsended March 31, 2009 and 2008, respectively.  U.S. Cellular held a 5.5% ownership interestin the LA Partnership throughout and at the end of the three months ended March 31,2009 and 2008.

 

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

 
| ** **             | ** ** | **Three Months Ended**     | ** ** |
|------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **March 31,**                   | ** ** |
| ** **             | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **             | ** ** | **(Dollars in thousands)** | ** ** |
|                   |       |                                 |       |   |   |
| Revenues               |       | $                                    | 1,172,000  |   | $ | 1,176,000 |   |
| Operating expenses     |       | 814,000                              |       | 817,000 |   |
| Operating income       |       | 358,000                              |       | 359,000 |   |
| Other income (expense) |       | 8,000                                |       | 6,000 |   |
| Net Income             |       | $                                    | 366,000    |   | $ | 365,000 |   |

 

**11.****      ****Commitments and Contingencies**

 

Indemnifications

 

U.S.Cellular enters into agreements in the normal course of business that providefor indemnification of counterparties. These agreements include certain asset sales and financings with otherparties.  The terms of theindemnification vary by agreement.  Theevents or circumstances that would require U.S. Cellular to perform under theseindemnities are transaction specific; however, these agreements may requireU.S. Cellular to indemnify the counterparty for costs and losses incurred fromany litigation or claims arising from the underlying transaction.  U.S. Cellular is unable to estimate themaximum potential liability for these types of indemnifications as the amountsare dependent on the outcome of future events, the nature and likelihood ofwhich cannot be determined at this time. Historically, U.S. Cellular has not made any significant indemnificationpayments under such agreements.

 

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 66,and Auction 73, respectively, and received a 25% bid credit in the applicableauction price under FCC rules.  The DOJis investigating whether these limited partnerships qualified for the 25% bidcredit in auction price considering their arrangements with TDS andU.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 violated applicablelaw or FCC rules.  At this time,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. expects to make a submission as requested bythe 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.

 

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**12.****       Common Share Repurchases**

 

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 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 three months ended March 31, 2009, U.S. Cellularrepurchased 367,000 Common Shares for $13.3 million, or an average of $36.22per Common Share.  During the threemonths ended March 31, 2008, U.S. Cellular repurchased 150,000 CommonShares for $10.8 million, or an average of $71.70 per Common Share.  In addition, U.S. Cellular also received $4.6million in cash during the three months ended March 31, 2008 as a finalsettlement payment of 2007 Common Share repurchases executed throughaccelerated share repurchase agreements with an investment banking firm.  As of March 31, 2009, U.S. Cellular hadrepurchased the maximum number of Common Shares permitted to be repurchased forthe twelve months then ended under the Limited Authorization.

 

**13.****       Accumulated OtherComprehensive Income**

 

The cumulative balance ofunrealized gains on securities and related income tax effects included inAccumulated other comprehensive income was zero at March 31, 2009 and December 31,2008.  Changes in such cumulative balanceduring the three months ended March 31, 2009 and March 31, 2008 were$0 and $33,000, respectively.

 

Comprehensive income forthe three months ended March 31, 2009 and 2008 was as follows:

 
| ** **                                                               | ** ** | **Three Months Ended**     | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                               | ** ** | **March 31,**                   | ** ** |
| ** **                                                               | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** **                                                               | ** ** | **(Dollars in thousands)** | ** ** |
| **Comprehensive  Income**                                                |       |                                 |       |   |   |
| Net income                                                               |       | $                                    | 90,600     |   | $ | 74,569 |   |
| Net change in accumulated  other comprehensive income                    |       | —                               |       | 33 |   |
| Comprehensive income                                                     |       | 90,600                               |       | 74,602 |   |
| Less: Comprehensive income  attributable to the noncontrolling interests |       | (6,008                               | )          | (4,012 | ) |
| Comprehensive income  attributable to U.S. Cellular                      |       | $                                    | 84,592     |   | $ | 70,590 |   |

 

**14.****       Supplemental Cash FlowDisclosures**

 

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

 
| ** **                                                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                                                                           | ** ** | **(Dollars in thousands)**             | ** ** |
| Common Shares withheld(1)                                                                            |       | 1                                                |       | 145,827 |   |
| Aggregate value of Common  Shares withheld                                                           |       | $                                                | —     |   | $ | 8,626 |   |
|                                                                                                 |       |                                             |       |   |   |
| Cash receipts upon exercise of  stock options                                                        |       | 356                                              |       | 607 |   |
| Cash disbursements for payment  of taxes(2)                                                          |       | —                                           |       | (3,133 | ) |
| Net cash receipts  (disbursements) from exercise of stock options and vesting of other stock  awards |       | $                                                | 356        |   | $ | (2,526 | ) |

 

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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 orvesting.  U.S. Cellular then pays theamount of the required tax withholdings to the taxing authorities in cash.

 

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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 March 31,2009.

 

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’s Discussionand Analysis of Financial Condition and Results of Operations included in itsAnnual Report on Form 10-K (‘Form 10-K’) for the year ended December 31,2008.

 

**OVERVIEW**

 

Thefollowing is a summary of certain selected information contained in the comprehensiveManagement’s Discussion and Analysis of Financial Condition and Results ofOperations that follows. The overview does not contain all of the informationthat may be important. You should carefully read the entire Management’sDiscussion and Analysis of Financial Condition and Results of Operations andnot 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 March 31,2009, 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 13.5%. 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 three months of 2009 included the following:

 

·                  Netretail customer additions were 63,000. Total customers increased from 6,196,000at December 31, 2008 to 6,243,000 at March 31, 2009;

 

·                  Thepostpay churn rate was 1.5%. Postpay customers comprised approximately 95% ofU.S. Cellular’s retail customer base as of March 31, 2009;

 

·                  Servicerevenues of $981.9 million increased $19.8 million (2%) year-over-year, despitea $12.7 million (17%) reduction in inbound roaming revenues; the increase wasdriven by growth in customers and average monthly service revenue per unit.Average monthly service revenue per customer increased 1% year-over-year to$52.54, driven primarily by growth in revenues from data products and services;

 

·                  Cashflows from operating activities were $185.6 million. At March 31, 2009,cash and cash equivalents totaled $191.8 million and there were no outstandingborrowings under the revolving credit facility;

 

·                  Additionsto property, plant and equipment totaled $137.7 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 8%year-over-year to 6,942; and

 

·                  U.S.Cellular launched 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 an Internet/Web platform to enable customers tocomplete a wide range of transactions and, eventually, to manage their accountsonline.

 

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·                  Operatingincome was $114.8 million in 2009, compared to $119.0 million in 2008.

 

U.S. Cellular anticipates that future growth inits operating income will be affected by the following factors:

 

·                  Uncertaintyrelated to current economic conditions and their impact on demand for U.S.Cellular’s products and services;

 

·                  Increasingpenetration in the wireless industry;

 

·                  Costsof customer acquisition and retention, such as equipment subsidies andadvertising;

 

·                  Industryconsolidation and the resultant effects on roaming revenues, service andequipment pricing and other effects of competition;

 

·                  Providingservice in recently launched areas or potential new market areas;

 

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

 

·                  Costsof developing and introducing new products and services;

 

·                  Costsof developing and enhancing office and customer support systems;

 

·                  Continuedenhancements to its wireless networks, including expansion of 3G services andpotential deployments of new technology;

 

·                  Increasingcosts of regulatory compliance; and

 

·                  Uncertaintyin future eligible telecommunication carrier (“ETC”) funding.

 

·                  Netincome attributable to U.S. Cellular increased $14.0 million to $84.6 millionin 2009 compared to $70.6 million in 2008, due primarily to lower income taxexpense.  Basic earnings per share was$0.97 in 2009, which was $0.16 higher than in 2008, and Diluted earnings pershare was $0.97, which was $0.17 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, including theimpacts of recent economic events.

 

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**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 net retail customeradditions; service revenues; operating income; depreciation, amortization andaccretion expenses; and capital expenditures are shown below. Such estimatesrepresent U.S. Cellular’s views as of the date of filing of U.S. Cellular’s Form 10-Qfor the three months ended March 31, 2009. Such forward-looking statementsshould not be assumed to be accurate as of any future date. U.S. Cellularundertakes no duty to update such information whether as a result of newinformation, future events or otherwise. There can be no assurance that finalresults will not differ materially from such estimated results.

 
| ** **                                            | ** ** | **2009**                   | ** ** | **2008**                | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **Estimated Results** | ** ** | **Actual Results** | ** ** |
| Net retail customer additions                         |       | 75,000 - 150,000           |       | 149,000                 |       |
| Service revenues                                      |       | $3,900 - $4,000 million    |       | $3,940.3 million        |       |
| Operating income(1)                                   |       | $275 - $350 million        |       | $27.7 million           |       |
| Depreciation, amortization and  accretion expenses(1) |       | Approx. $600 million       |       | $987.0 million          |       |
| Capital expenditures                                  |       | Approx. $575 million       |       | $585.6 million          |       |

 

----

(1)          2008 Actual Results include losses ondisposals of $23.4 million and impairments of assets of $386.7 million. The2009 Estimated Results include only the estimate for Depreciation, amortizationand accretion expenses and losses on disposals of assets, and do not includeany estimate for losses on impairment of assets since these cannot bepredicted.

 

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 anticipates that its customer base will increaseduring 2009 as a result of its continuing focus on customer satisfaction,attractively priced service plans, a broad line of handsets and other products,and improvements in distribution. U.S. Cellular believes growth in its revenueswill result primarily from attracting wireless users switching from otherwireless carriers, selling additional products and services to its existingcustomers, and increasing the number of multi-device users among its existingcustomers, rather than by adding users that are new to wireless service. U.S.Cellular is focusing on opportunities to increase revenues, pursuing costreduction initiatives in various areas and implementing a number of initiativesto enable future growth. The initiatives are intended, among other things, toallow U.S. Cellular to accelerate its introduction of new products andservices, better segment its customers for retention and to sell additionalservices such as data, expand its Internet sales and customer servicecapabilities, and improve its prepay products and services.

 

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**RESULTSOF OPERATIONS**

 

**Three Months Ended March 31,2009 Compared to Three Months Ended March 31, 2008**

 

Following is a table of summarized operatingdata for U.S. Cellular’s consolidated operations.

 
| **As of March 31,(1)**                         | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| Total market population of  consolidated operating markets(2) |       | 46,306,000 |       | 45,262,000 |       |
| Customers(3)                                                  |       | 6,243,000  |       | 6,175,000  |       |
| Market penetration(2)                                         |       | 13.5       | %          | 13.6       | %          |
| Total full-time equivalent  employees                         |       | 8,754      |       | 8,105      |       |
| Cell sites in service                                         |       | 6,942      |       | 6,452      |       |

 
| **For the Three Months Ended March 31,(4)** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net customer additions(5)                                                 |       | 47,000   |       | 73,000   |       |
| Net retail customer  additions(5)                                         |       | 63,000   |       | 85,000   |       |
| Average monthly service  revenue per customer(6)                          |       | $        | 52.54      |     | $          | 52.24 |   |
| Postpay churn rate (7)                                                    |       | 1.5      | %          | 1.4      | %          |
|                                                                           |            |          |            |          |            |  |  |

 

----

(1)          Amounts include results for U.S. Cellular’sconsolidated operating markets as of March 31.

 

(2)          Calculated using 2008 and 2007 Claritas populationestimates for 2009 and 2008, respectively. “Total market population ofconsolidated 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).

 

Thetotal market population and penetration measures for consolidated operatingmarkets apply to markets in which U.S. Cellular provides wireless service tocustomers. For comparison purposes, total market population and penetrationrelated to all consolidated markets in which U.S. Cellular owns an interestwere 83,726,000 and 7.5%, and 82,846,000 and 7.5%, as of March 31, 2009and 2008, respectively.

 

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

 
| ** **                                                                                                                | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                | ** ** | **2009**           | ** ** | **2008** | ** ** |
| Customers on postpay service  plans in which the end user is a customer of U.S. Cellular (“postpay  customers”) |       | 5,480,000          |       | 5,331,000 |   |
| Customers on prepay service  plans in which the end user is a customer of U.S. Cellular (“prepay  customers”)   |       | 290,000            |       | 309,000 |   |
| End user customers acquired  through U.S. Cellular’s agreements with third parties (“reseller customers”)  |       | 473,000            |       | 535,000 |   |
| Total customers                                                                                                           |       | 6,243,000          |       | 6,175,000 |   |

 

(4)          Amounts include results for U.S. Cellular’s consolidated operatingmarkets for the period January 1 through March 31; operating marketsacquired during a particular period are included as of the acquisition date.

 

(5)          “Net customer additions” represents the numberof net customers added to U.S. Cellular’s overall customer base through all ofits marketing distribution channels, excluding any customers transferredthrough acquisitions, divestitures or exchanges. “Net retail customer additions”represents the number of net customers added to U.S. Cellular’s customer basethrough its marketing distribution channels, excluding net reseller customersadded to its reseller customer base and excluding any customers transferred through acquisitions, divestitures orexchanges.

 

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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:

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **March 31,**               | ** ** |
| ** **                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Service revenues per  Consolidated Statements of Operations (000s) |       | $                                | 981,874    |   | $ | 962,094 |   |
| Divided by average customers  during period (000s)*                |       | 6,229                            |       | 6,139 |   |
| Divided by number of months in  each period                        |       | 3                                |       | 3 |   |
| Average monthly service  revenue per customer                      |       | $                                | 52.54      |   | $ | 52.24 |   |

 

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* “Average customers during period” is calculated by adding the numberof total customers, including reseller customers, at the beginning of the firstmonth of the period and at the end of each month in the period and dividing bythe number of months in the period plus one. Acquired and divested customersare included in the calculation on a prorated basis for the amount of time U.S.Cellular included such customers during each period.

 

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

 

**Componentsof Operating Income**

 
| **Three Months Ended March 31,**                                   | ** ** | **2009**                             | ** ** | **2008**  | ** ** | **Increase/  (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------|------------|---------------------------|------------|------------------------|------------|
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Retail service                                                                         |       | $                                    | 874,098    |      | $          | 850,470                   |       | $                      | 23,628     |   | 3 | % |
| Inbound roaming                                                                        |       | 60,057                               |       | 72,755    |       | (12,698                   | )          | (17                    | )%         |
| Other                                                                                  |       | 47,719                               |       | 38,869    |       | 8,850                     |       | 23                     | %          |
| Service revenues                                                                       |       | 981,874                              |       | 962,094   |       | 19,780                    |       | 2                      | %          |
| Equipment sales                                                                        |       | 70,890                               |       | 75,762    |       | (4,872                    | )          | (6                     | )%         |
| Total operating revenues                                                               |       | 1,052,764                            |       | 1,037,856 |       | 14,908                    |       | 1                      | %          |
|                                                                                   |       |                                 |       |      |       |                      |       |                   |       |
| System operations (excluding  Depreciation, amortization and accretion reported below) |       | 200,003                              |       | 191,016   |       | 8,987                     |       | 5                      | %          |
| Cost of equipment sold                                                                 |       | 185,701                              |       | 178,045   |       | 7,656                     |       | 4                      | %          |
| Selling, general and  administrative                                                   |       | 412,448                              |       | 403,626   |       | 8,822                     |       | 2                      | %          |
| Depreciation, amortization and  accretion                                              |       | 137,651                              |       | 142,530   |       | (4,879                    | )          | (3                     | )%         |
| Loss on asset disposals, net                                                           |       | 2,191                                |       | 3,673     |       | (1,482                    | )          | (40                    | )%         |
| Total operating expenses                                                               |       | 937,994                              |       | 918,890   |       | 19,104                    |       | 2                      | %          |
| Operating income                                                                       |       | $                                    | 114,770    |      | $          | 118,966                   |       | $                      | (4,196     | ) | (4 | )% |

 

**OperatingRevenues**

 

***Service revenues***

 

Service revenues consistprimarily of: (i) charges for access, airtime, roaming, recovery ofregulatory costs and value-added services, including data products and servicesand long distance, provided to U.S. Cellular’s retail customers and to endusers through third-party resellers (“retail service”); (ii) charges toother wireless carriers whose customers use U.S. Cellular’s wireless systemswhen roaming, including long-distance roaming (“inbound roaming”); and (iii) amountsreceived from the Federal Universal Service Fund (“USF”).

 

The increase in Service revenues was due tothe growth in the average customer base, which increased 1% to 6.2 million in2009 from 6.1 million in 2008, and higher average monthly service revenue percustomer; average monthly service revenue per customer was $52.54 in 2009 and$52.24 in 2008.

 

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***Retail service revenues***

 

The increase in Retail service revenues in2009 was due primarily to growth in U.S. Cellular’s average customer base andan increase in average monthly retail service revenue per customer.

 

The increase in the average number ofcustomers was driven by the net retail customer additions that U.S. Cellulargenerated from its marketing distribution channels.  Average monthly retail service revenue percustomer increased 1% to $46.78 in 2009 from $46.18 in 2008. The increaseresulted primarily from the growth in revenues from data products and services,which more than offset a slight decline in revenues from voice services.

 

Revenues from data products and servicestotaled $157.0 million in 2009 and $115.7 million in 2008, and represented16% of total service revenues in 2009 compared to 12% of total service revenuesin 2008. Such growth, which positively impacted average monthly retail servicerevenue per customer, reflected customers’ continued and increasing usage ofU.S. Cellular’s text, picture, and video messaging services, **easy**edgeSM service and applications, premium mobileInternet services, and smart phone handsets and services.  During the first quarter of 2009, U.S.Cellular introduced unlimited messaging plans and unlimited messaging andmobile Internet plans to further drive data usage and revenues.  U.S. Cellular expects that the growth inrevenues from data products and services will continue as customers migrate tothe new unlimited plans and as U.S. Cellular’s 3G network expands toapproximately 61% of its cell sites by the end of 2009.

 

Revenues from voice services declinedyear-over-year due primarily to a reduction in average monthly retail voicerevenues per customer.  The reduction inaverage monthly retail voice revenues per customer was partially attributableto customers moving towards service plans with free incoming minutes and largercoverage areas, and staying within their packaged minutes, thereby limitingoverages.  Also, a decrease in the prepaycustomer base contributed to a decline in prepay voice revenues.

 

***Inbound roaming revenues***

 

The decrease in Inbound roamingrevenues in 2009 was due primarily to a decline in roaming revenues from thecombined entity 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 previously were used by Verizon and Alltel (asseparate entities).  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 thenetwork footprints of other carriers also could have an adverse effect on U.S.Cellular’s inbound roaming revenues.  Forexample, consolidation among other carriers which have network footprints thatcurrently overlap U.S. Cellular’s network could further decrease the amount ofinbound roaming revenues for U.S. Cellular. U.S. Cellular also anticipates that its roaming revenue per minute ofuse will decline over time due to the renegotiation of existing contracts.  The foregoing could have an adverse effect onU.S. Cellular’s business, financial condition or results of operations.

 

***Other revenues***

 

The growth in Other revenues was dueprimarily to an increase in amounts that were received from the USF for statesin which U.S. Cellular has been designated as an Eligible TelecommunicationsCarrier (“ETC”).  U.S. Cellular waseligible to receive ETC funds in sixteen states in 2009 and eleven states inthe first quarter of 2008; the ETC revenue amounts recorded were $37.7 millionin 2009 and $30.5 million in 2008.

 

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

 

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***Equipment sales revenues***

 

Equipment sales revenues include revenuesfrom sales of handsets and related accessories to both new and existingcustomers, as well as revenues from sales of handsets and accessories toagents. All equipment sales revenues are recorded net of anticipated rebates.

 

U.S. Cellular strives to offer a competitiveline of quality handsets to both new and existing customers. U.S. Cellular’scustomer retention efforts include offering new handsets at discounted pricesto existing customers as the expiration date of the customer’s service contractapproaches. U.S. Cellular also continues to sell handsets to agents; thispractice enables U.S. Cellular to provide better control over the quality ofhandsets sold to its customers, establish roaming preferences and earn quantitydiscounts from handset manufacturers which are passed along to agents. U.S.Cellular anticipates that it will continue to sell handsets to agents in thefuture.

 

The decrease in 2009 equipment sales revenueswas driven by a decline of 9% in average revenue per handset sold, primarilyreflecting aggressive handset promotions and discounts, partially offset by anincrease in total handsets sold.  Due tothe current highly competitive conditions related to handset pricing in thewireless industry, U.S. Cellular expects continued pressure on its handsetpricing in the foreseeable future.

 

**OperatingExpenses**

 

***System operations expenses (excluding Depreciation, amortization andaccretion)***

 

System operations expenses (excludingDepreciation, amortization, and accretion) include charges from wirelinetelecommunications service providers for U.S. Cellular’s customers’ use oftheir facilities, costs related to local interconnection to the wirelinenetwork, charges for maintenance of U.S. Cellular’s network, long-distance charges,outbound roaming expenses and payments to third-party data product and platformdevelopers. Key components of the overall increase in system operationsexpenses were as follows:

 

·                  The cost of network usageon U.S. Cellular’s systems increased $4.8 million, or 7%, in 2009, as voice anddata usage on U.S. Cellular’s systems increased driven primarily by continuedmigration to voice plans with a larger number of packaged minutes, textmessaging plans, and other data offerings. In addition, data network anddeveloper costs increased due to the increase in data usage;

 

·                  Maintenance, utility andcell site expenses increased $2.8 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 6,942 in 2009and 6,452 in 2008, as U.S. Cellular continued to grow by expanding andenhancing coverage in its existing markets; and

 

·                  Expenses incurred whenU.S. Cellular’s customers used other carriers’ networks while roaming increased$1.4 million, or 3%, in 2009. The increase is due to an increase inroaming minutes of use driven by customer migration to national and wide areaplans.

 

U.S. Cellular expects total system operationsexpenses to increase in the foreseeable future, driven by the followingfactors:

 

·                  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 voiceminutes of use and data usage, both on U.S. Cellular’s network and by U.S.Cellular’s customers on other carriers’ networks when roaming.

 

These factors are expected to be partiallyoffset by anticipated decreases in the per-minute cost of usage on U.S.Cellular’s and other carriers’ networks.

 

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***Cost of equipment sold***

 

Cost of equipment sold increased in 2009 dueprimarily to a 4% increase in the number of handsets sold.

 

U.S. Cellular expects loss on equipment,defined as equipment sales revenues less cost of equipment sold, to continue tobe a significant cost and perhaps to increase in the foreseeable future aswireless carriers continue to use handset availability and pricing as a meansof competitive differentiation. New handsets with expanded capabilities,particularly smart phones and premium touch screen phones, generally havehigher purchase costs for carriers which, due to competitive market conditions,generally cannot be recovered through proportionately higher selling prices tocustomers.

 

***Selling, general and administrative expenses***

 

Selling, general and administrative expensesinclude salaries, commissions and expenses of field sales and retail personneland facilities; telesales department salaries and expenses; agent commissionsand related expenses; corporate marketing and merchandise management; andadvertising expenses. Selling, general and administrative expenses also includebad debts expense, costs of operating customer care centers and corporateexpenses.

 

Key components of the increase in Selling,general and administrative expenses in 2009 were as follows:

 

·                  Advertising expensesincreased $5.0 million, or 9%, in 2009, due primarily to an increase inmedia purchases; and

 

·                  General and administrativeexpenses increased $3.7 million, or 2%, in 2009, due primarily to higher salestaxes.

 

U.S. Cellular expects Selling, general andadministrative expenses to increase in the foreseeable future driven primarilyby increases in expenses associated with acquiring, serving and retainingcustomers, as well as costs related to its multi-year initiatives discussedpreviously.

 

***Depreciation, amortization, and accretion***

 

Total Depreciation, amortization and accretion expense decreased $4.9million, or 3%, in 2009. Depreciation decreased $4.5 million, or 3%, in 2009, primarily due to fully depreciating TimeDivision Multiple Access (“TDMA”) and analog network equipment in 2008. U.S. Cellular discontinuedits TDMA-based service during the first quarter of 2009; in connection withsuch discontinuance, property, plant and equipment in service and accumulateddepreciation of $452.0 million were eliminated from the Consolidated BalanceSheet.

 

See “Financial Resources” and “Liquidity and Capital Resources” for adiscussion of U.S. Cellular’s capital expenditures.

 

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

 

These amounts represent charges related todisposals of assets, trade-ins of older assets for replacement assets and otherretirements of assets from service.

 

**Componentsof Other Income (Expense)**

 
| ** **                                                             | ** ** | ** **                                                                         | ** ** | ** ** | ** ** | **Increase/**  | ** ** | **Percentage** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|
| **Three Months Ended March 31,**                   | ** ** | **2009**                                                                           | ** ** | **2008**   | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| ** **                                                             | ** ** | **(Dollars in thousands, except per share amounts)** | ** ** |
| Operating  income                                                      |       | $                                                                                  | 114,770    |       | $          | 118,966        |       | $              | (4,196     | ) | (4 | )% |
|                                                                   |       |                                                                               |       |       |       |           |       |           |       |
| Equity  in earnings from unconsolidated entities                       |       | 25,327                                                                             |       | 21,235     |       | 4,092          |       | 19             | %          |
| Interest  and dividend income                                          |       | 477                                                                                |       | 1,905      |       | (1,428         | )          | (75            | )%         |
| Interest  expense                                                      |       | (19,022                                                                            | )          | (20,115    | )          | 1,093          |       | 5              | %          |
| Other,  net                                                            |       | 280                                                                                |       | 118        |       | 162            |       | N/M            |       |
| Total  investment and other income (expense)                           |       | 7,062                                                                              |       | 3,143      |       | 3,919          |       | N/M            |       |
|                                                                   |       |                                                                               |       |       |       |           |       |           |       |
| Income  before income taxes                                            |       | 121,832                                                                            |       | 122,109    |       | (277           | )          | —         |       |
| Income  tax expense                                                    |       | (31,232                                                                            | )          | (47,540    | )          | 16,308         |       | 34             | %          |
|                                                                   |       |                                                                               |       |       |       |           |       |           |       |
| Net  income                                                            |       | 90,600                                                                             |       | 74,569     |       | 16,031         |       | 21             | %          |
| Less:  Net income attributable to noncontrolling interests, net of tax |       | (6,008                                                                             | )          | (4,012     | )          | (1,996         | )          | (50            | )%         |
| Net  income attributable to U.S. Cellular                              |       | $                                                                                  | 84,592     |       | $          | 70,557         |       | $              | 14,035     |   | 20 | % |
|                                                                   |       |                                                                               |       |       |       |           |       |           |       |
| Basic  earnings per share attributable to U.S. Cellular shareholders   |       | $                                                                                  | 0.97       |       | $          | 0.81           |       | $              | 0.16       |   | 20 | % |
| Diluted  earnings per share attributable to U.S. Cellular shareholders |       | $                                                                                  | 0.97       |       | $          | 0.80           |       | $              | 0.17       |   | 21 | % |

 

N/M = Not meaningful

 

***Equity in earnings from unconsolidatedentities***

 

Equity in earnings ofunconsolidated entities represents U.S. Cellular’s share of net income from themarkets in which it has an interest and follows the equity method ofaccounting. U.S. Cellular follows the equity method of accounting forunconsolidated entities over which it has the ability to exercise significantinfluence, generally entities in which its ownership interest is less than orequal to 50% but equals or exceeds 20% for corporations and 3% for partnershipsand limited liability companies.

 

U.S. Cellular’s investment inthe Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed$16.9 million and $15.8 million to Equity in earnings ofunconsolidated entities in 2009 and 2008, respectively.

 

***Income tax expense***

 

See Note 5 —Income Taxes in the Notes to Consolidated Financial Statements for a discussionof income tax expense and the overall effective tax rate on Income beforeincome taxes.

 

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**RECENTACCOUNTING PRONOUNCEMENTS**

 

Recent accounting pronouncements are not expected to have a significanteffect on U.S. Cellular’s financial condition or results of operations.

 

See Note 2 — Summary of Significant Accounting Policies in the Notes toConsolidated Financial Statements for information on recent accountingpronouncements.

 

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**FINANCIALRESOURCES**

 

U.S. Cellular operates acapital- and marketing-intensive business. U.S. Cellular utilizes cash from itsoperating activities, cash proceeds from divestitures, short-term creditfacilities and long-term debt financing to fund its acquisitions includinglicenses, construction costs, operating expenses and Common Share repurchases.Cash flows may fluctuate from quarter to quarter and year to year due toseasonality, the timing of acquisitions, capital expenditures and otherfactors. The table below and the following discussion in this Financial Resourcessection summarize U.S. Cellular’s cash flow activities in the three monthsended March 31, 2009 compared to the three months ended March 31,2008.

 
| ** **                                 | ** ** | **2009**                             | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Cash  flows from (used in):                |       |                                 |       |     |       |
| Operating  activities                      |       | $                                    | 185,562    |     | $          | 229,797 |   |
| Investing  activities                      |       | (149,628                             | )          | (206,613 | )          |
| Financing  activities                      |       | (15,133                              | )          | (11,242  | )          |
| Net  increase in cash and cash equivalents |       | $                                    | 20,801     |     | $          | 11,942 |   |

 

**CashFlows from Operating Activities**

 

Cash flows from operatingactivities in 2009 were $185.6 million, down $44.2 million from 2008;the decrease was due primarily to changes in operating assets andliabilities.  Changes in operating assetsand liabilities required cash of $88.8 million in 2009 and $45.0 millionin 2008, which resulted in a net decrease in cash flows from operatingactivities of $43.8 million from 2008 to 2009. Significant changes included the following:

 

·                  In2009, a $34.0 million deposit paid to TDS for U.S. Cellular’s proportionateshare of a deposit TDS paid to the Internal Revenue Service to eliminate anypotential interest expense subsequent to the deposit.  The deposit was included in Change in otherassets and liabilities.  See Note 5 —Income Taxes in the Notes to Consolidated Financial Statements for additionalinformation.

 

·                  Changesin accounts payable, customer deposits and deferred revenues required $34.5million in 2009 and provided $4.0 million in 2008.  The resultant $38.5 million increase in cashoutflows was driven primarily by timing differences in payments of accountspayable and lower deposit requirements for new customers in 2009.

 

·                  Changesin inventory provided $7.2 million in 2009 and required $13.7 millionin 2008, resulting in a $20.9 million increase in cash inflows. The changes ineach period reflect fluctuations in the number and mix of handset units onhand, which is affected by factors such as overall sales and renewals, the natureand timing of promotions, and introduction of new handsets and accessories.

 

·                  Incometax payments decreased by $5.5 million. Income tax payments in 2009 and 2008 were $1.1 million and$6.6 million, respectively.

 

**CashFlows from Investing Activities**

 

U.S. Cellular makes substantialinvestments to construct and upgrade modern high quality wirelesscommunications networks and facilities as a basis for creating long term valuefor shareholders. In recent years, rapid changes in technology and newopportunities have required substantial investments in potentiallyrevenue-enhancing and cost-reducing upgrades of U.S. Cellular’s networks. Cashflows used for investing activities also represent cash required for theacquisition of wireless properties or licenses. Proceeds from exchanges anddivestiture transactions have provided funds in recent years which havepartially offset the cash requirements for investing activities; however, suchsources cannot be relied upon to provide continuing or regular sources offinancing.

 

The primary purpose of U.S.Cellular’s construction and expansion expenditures is to provide for customerand usage growth, to upgrade service and to take advantage of service-enhancingand cost-reducing technological developments in order to maintain competitiveservices.

 

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Cash used for property, plantand equipment and system development expenditures totaled $137.7 millionin 2009 and $111.7 million in 2008. These expenditures were made to construct new cell sites, increasecapacity in existing cell sites and switches, upgrade technology including theoverlay of 3G technology in certain markets, develop new and enhance existingoffice systems, and construct new and remodel existing retail stores.

 

Cash required for acquisitionstotaled $12.1 million in 2009 and $102.0 million in 2008.  The cash required for acquisitions in 2008included capital contributions and advances of $97.0 million to King StreetWireless and its general partner.  KingStreet Wireless’ general partner also made a capital contribution of $0.1million.  King Street Wireless used thesefunds in connection with its participation in FCC Auction 73.

 

**CashFlows from Financing Activities**

 

The re-issuance of treasury shares inconnection with employee benefits plans, net of tax payments made byU.S. Cellular on behalf of stock award holders, provided $0.4 million in 2009and required $2.5 millionin 2008. In certain situations, U.S. Cellular withholds shares that are issuableupon the exercise of stock options or the vesting of restricted shares tocover, and with a value equivalent to, the exercise price and/or the amount oftaxes required to be withheld from the stock award holder at the time of theexercise or vesting. U.S. Cellular then pays the amount of the required taxwithholdings to the taxing authorities in cash.

 

In 2009 and 2008, U.S. Cellular repurchased367,000 and 150,000 Common Shares at an aggregate cost of $13.3 millionand $10.8 million,respectively.  U.S. Cellular alsoreceived $4.6 million in 2008 from an investment banking firm for the finalsettlement of the accelerated share repurchases made in 2007.  See Note 12 — Common Share Repurchases in theNotes to Consolidated Financial Statements for additional information relatedto these transactions.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Recent events in the financialservices sector and correlating impacts to other sectors of the economy haveresulted in concerns regarding investment security values, the availability ofand concentration 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 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 significantlyimpacts U.S. Cellular’s operations and performance. Recent economic conditionscould cause consumer spending to deteriorate significantly. Factors thatinfluence levels of consumer spending include: unemployment rates, increases infuel and other energy costs, conditions in residential real estate and mortgagemarkets, labor and health care costs, access to credit, consumer confidence andother macroeconomic factors. Changes in these and other economic factors couldhave a material adverse effect on demand for U.S. Cellular’s products andservices and on U.S. Cellular’s financial condition and results of operations.

 

U.S. Cellular believes thatexisting cash balances and cash flows from operating activities providefinancial flexibility for U.S. Cellular to meet its normal financing needs(including working capital, construction and development expenditures and sharerepurchases under its approved program) for the foreseeable future. Asdiscussed further below, U.S. Cellular also has funds available under arevolving credit facility which will provide additional flexibility through thedate of its expiration in December 2009. In addition, U.S. Cellular mayhave access to public and private capital markets to help meet its financingneeds.

 

U.S. Cellular cannot provideassurances that circumstances that could have a material adverse affect on itsliquidity or capital resources will not occur. Economic conditions, changes incapital markets 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.

 

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**Cash andCash Equivalents**

 

At March 31, 2009, U.S. Cellular had$191.8 million in cash and cash equivalents, which include cash and short-term,highly liquid investments with original maturities of three months or less. Theprimary objective of U.S. Cellular’s cash and cash equivalents investment activitiesis to preserve principal.  At March 31,2009, U.S. Cellular invested substantially all of its cash balances in moneymarket funds that invested exclusively in short-term U.S. Treasury securitiesor repurchase agreements backedby U.S. Treasury securities. U.S. Cellular monitors the financialviability of the money market funds in which it invests and believes that the credit risk associated withthese investments is low.

 

**RevolvingCredit Facility**

 

U.S.Cellular has a $700.0 million revolving credit facility available for generalcorporate purposes.  At March 31,2009, there were no outstanding borrowings and $0.3 million of outstandingletters of credit, leaving $699.7 million available for use.  Borrowings under the revolving creditfacility bear interest at the LIBOR plus a contractual spread based on U.S.Cellular’s credit rating.  U.S. Cellularmay select borrowing periods of either seven days or one, two, three or sixmonths.  At March 31, 2009, theone-month LIBOR was 0.50% and the contractual spread was 60 basis points.  If U.S. Cellular provides less than two daysnotice of intent to borrow, interest on borrowings is the prime rate less 50basis points (the prime rate was 3.25% at March 31, 2009).

 

U.S. Cellular’s interest cost on its revolvingcredit facility is subject to increase if its current credit rating fromStandard & Poor’s Rating Service and/or Moody’s Investors Service islowered, and is subject to decrease if the rating is raised. The creditfacility would not cease to be available or accelerate solely as a result of adowngrade in U.S. Cellular’s credit rating. However, a downgrade in U.S.Cellular’s credit rating could adversely affect its ability to renew theexisting credit facility or obtain access to new credit facilities in thefuture.

 

U.S. Cellular’s credit ratings as of March 31,2009 and the dates that such ratings were issued, were 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 availability ofthe revolving credit facility requires U.S. Cellular to comply with certainnegative and affirmative covenants, maintain certain financial ratios and makerepresentations regarding certain matters at the time of each borrowing.  The covenants also prescribe certain termsassociated with intercompany loans from TDS or TDS subsidiaries to U.S.Cellular or U.S. Cellular subsidiaries. U.S. Cellular believes it was in complianceas of March 31, 2009 with all covenants and other requirements set forthin its revolving credit facility. There were no intercompany loans at March 31,2009 or December 31, 2008.

 

The maturity date of anyborrowings under U.S. Cellular’s revolving credit facility would accelerate inthe event of a change in control.

 

The revolving credit facilityexpires in December 2009. U.S. Cellular plans to renew its revolvingcredit facility and is maintaining an active dialogue with its existing lendersin advance of the December 2009 expiration date of the current facility.Due to current unfavorable credit market conditions, U.S. Cellular believesthat it is unlikely to be able to obtain similar terms as exist in the currentfacility. In particular, U.S. Cellular believes that the amount of the facilitycould be significantly reduced, the terms of the facility could be shortened,and the pricing on the facility could be increased. If U.S. Cellular is unableto renew its revolving credit facility or to obtain a new revolving creditfacility from alternative sources on acceptable terms or at current fundinglevels for any reason, including reduced availability of credit or theconsolidation of lending institutions as a result of recent market events, U.S.Cellular’s future liquidity, capital resources, business, financial conditionand/or results of operations could be adversely affected.

 

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**Long-TermFinancing**

 

U.S. Cellular’s long-term debt indenture doesnot contain any provisions resulting in acceleration of the maturities ofoutstanding debt in the event of a change in U.S. Cellular’s credit rating.However, a downgrade in U.S. Cellular’s credit rating could adversely affectits ability to obtain long-term debt financing in the future.  U.S. Cellular believes it was in complianceas of March 31, 2009 with all covenants and other requirements set forthin its long-term debt indenture. U.S. Cellular has not failed to make nor does it expect to fail to makeany scheduled payment of principal or interest under such indenture.

 

The long-term debt principal payments due forthe remainder of 2009 and the next four years comprise approximately 1% of thetotal long-term debt obligation at March 31, 2009.  Refer to Market Risk — Long-Term Debt in U.S.Cellular’s Form 10-K for the year ended December 31, 2008 foradditional information regarding required principal payments and the weightedaverage interest rates related to U.S. Cellular’s long-term debt.

 

U.S. Cellular may from time totime seek to retire or purchase its outstanding debt through cash purchasesand/or exchanges for other securities, in open market purchases, privatelynegotiated transactions, tender offers, exchange offers or otherwise. Suchrepurchases or exchanges, if any, will depend on prevailing market conditions,liquidity requirements, contractual restrictions and other factors. The amountsinvolved may be material.

 

**CapitalExpenditures**

 

U.S. Cellular’s capital expenditures for 2009are expected to be approximately $575 million. These expenditures are expected to be for the following generalpurposes:

 

·                  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 new billingand other customer management-relatedsystems and platforms.

 

U.S. Cellular plans to finance its capitalexpenditures program for 2009 using cash on hand, cash flows from operatingactivities and, if necessary, short-term debt.

 

**Acquisitions,Divestitures and Exchanges**

 

U.S. Cellular assesses itsexisting wireless interests on an ongoing basis with a goal of improving thecompetitiveness of its operations and maximizing its long-term return oninvestment. As part of this strategy, U.S. Cellular reviews attractiveopportunities to acquire additional wireless operating markets and wirelessspectrum. In addition, U.S. Cellular may seek to divest outright orinclude in exchanges for other wireless interests those wireless interests thatare not strategic to its long-term success. U.S. Cellular from time totime may be engaged in negotiations relating to the acquisition, divestiture orexchange of companies, strategic properties or wireless spectrum. In general,U.S. Cellular may not disclose such transactions until there is adefinitive agreement.

 

**VariableInterest Entities**

 

U.S. Cellular consolidatescertain variable interest entities pursuant to FASB Interpretation No. 46(revised December 2003), *Consolidationof Variable 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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**CommonShare Repurchase Program**

 

U.S. Cellular hasrepurchased and expects to continue to repurchase its Common Shares subject tothe repurchase program. For details of this program and repurchases made during2009 and 2008, see Note 12—Common ShareRepurchases in the Notes toConsolidated Financial Statements.

 

**Contractualand Other Obligations**

 

The Contractual and OtherObligations disclosed in Management’s Discussion and Analysis of FinancialCondition and Results of Operations included in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2008 did not include anyliabilities related to unrecognized tax benefits under FASB Interpretation 48, *Accounting for Uncertainty in Income Taxes — an Interpretation of FASBStatement No. 109*(“FIN 48”). U.S. Cellular is unable to predict the period of settlement of such FIN48 liabilities.  Subject to theforegoing, there has been no material change to Contractual and OtherObligations between December 31, 2008 and March 31, 2009.

 

**Off-BalanceSheet Arrangements**

 

U.S. Cellular has notransactions, agreements or other contractual arrangements with unconsolidatedentities involving “off-balance sheet arrangements,” as defined by SEC rules,that have or are reasonably likely to have a material current or future effecton its financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capital resources.

 

**AccountsReceivable and Allowance for Doubtful 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 wirelesssystems for roaming and by unaffiliated third-party partnerships orcorporations pursuant to equity distribution declarations.

 

The allowance for doubtfulaccounts is the best estimate of the amount of probable credit losses relatedto existing accounts receivable. The allowance is estimated based on historicalexperience and other factors that could affect collectability. Accountsreceivable balances are reviewed on either an aggregate or individual basis forcollectability depending on the type of receivable. When it is probable that anaccount balance will not be collected, the account balance is charged againstthe allowance for doubtful accounts. U.S. Cellular’s experience related tocredit losses did not appear to have been affected to any significant degree byrecent economic conditions and events as of March 31, 2009.

 

**Insurance**

 

U.S. Cellular has severalcommercial property and casualty insurance policies with a variety ofsubsidiary companies of American International Group, Inc. (“AIG”). Thesecompanies operate under the insurance regulations of various states, includingNew York, Pennsylvania and Delaware. U.S. Cellular has inquired into theability of these AIG companies to meet their obligations in the event of aclaim against these policies and has received assurance from AIG andU.S. Cellular’s insurance brokers that the companies remain able to meetthese obligations. State insurance regulators and the rating agencies haveissued press releases indicating the same. U.S. Cellular did not have anysignificant property and casualty claims outstanding with these companies as ofMarch 31, 2009. U.S. Cellular continues to monitor the financialcondition of other insurance providers.

** **

**APPLICATIONOF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

U.S. Cellular prepares its consolidated financial statements inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”).  U.S. Cellular’ssignificant accounting policies are discussed in detail in Note 2 — Summary ofSignificant Accounting Policies of the Notes to Consolidated FinancialStatements and U.S. Cellular’s Application of Critical Accounting Policies andEstimates is discussed in detail in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, both included in U.S. Cellular’sForm 10-K for the year ended December 31, 2008. There were nomaterial changes to U.S. Cellular’s significant accounting policies orapplication of critical accounting policies during the three months ended March 31,2009.  See Note 3 — NoncontrollingInterests in the Notes to Consolidated Financial Statements for informationrelated to U.S. Cellular’s adoption of SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements*—*anamendment of ARB No. 51.*

 

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***PRIVATE SECURITIES LITIGATION REFORM ACTOF 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 roamingrevenues.  As a result of recent acquisitionsby other companies in the wireless industry, U.S. Cellular’s roaming revenueshave declined.  U.S. Cellular anticipatesthat this 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 additional spectrumin the future as an applicant or as a non-controlling partner in anotherauction applicant and, during certain periods, will be subject to the FCC’santi-collusion rules, which could have an adverse effect on U.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’sreceipt of required equipment or services, or could result in excess quantitiesof required 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**

 

**MARKETRISK**

 

**Long-TermDebt**

 

Asof March 31, 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 March 31, 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 maintains disclosure controlsand procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that aredesigned to ensure that information required to be disclosed in its reportsfiled or submitted under the Exchange Act is processed, recorded, summarizedand 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 March 31, 2009.

 

Changesin Internal Control Over Financial Reporting

 

There were nochanges in U.S. Cellular’s internal control over financial reporting during thequarter ended March 31,2009, 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**

 

The United States Department of Justice (“DOJ”)has notified U.S. Cellular and its parent, TDS, that each is a nameddefendant in a civil action brought by a private party in theU.S. District Court for the District of Columbia under the “qui tam”provisions of the federal False Claims Act. 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. Thecomplaint remains under seal pending the DOJ’s consideration as to whether tointervene in the proceeding. The DOJ has not yet made any decision as towhether it will intervene. However, as a result of the complaint, the DOJ isinvestigating TDS’ and U.S. Cellular’s participation in certain spectrumauctions conducted by the FCC between 2005 and 2008, through CarrollWireless, L.P., Barat Wireless, L.P., and King StreetWireless, L.P. These limited partnerships were winning bidders inAuction 58, Auction 66, and Auction 73, respectively, andreceived a 25% bid credit in the applicable auction price under FCC rules. TheDOJ is investigating whether these limited partnerships qualified for the 25%bid credit in auction price considering their arrangements with TDS and U.S. Cellular.TDS and U.S. Cellular are cooperating with the DOJ’s review. TDS andU.S. Cellular believe that U.S. Cellular’s arrangements with theselimited partnerships and the limited partnerships’ participation in the FCCauctions complied with applicable law and FCC rules and each of TDS andU.S. Cellular intends to vigorously defend itself against any claim thatit violated applicable law or FCC rules. At this time, U.S. Cellularcannot predict the outcome of this review or any proceeding.  The FCC sent a letter to King StreetWireless, L.P. requesting that it submit to the FCC a written response to theallegations in the complaint.  KingStreet Wireless, L.P. expects to make a submission as requested by the FCC.

 

U.S. Cellular is involved or may be involvedfrom time to time in legal proceedings before the FCC, other regulatoryauthorities, and/or various state and federal courts.  If U.S. Cellular believes that a loss arisingfrom such legal proceedings is probable and can be reasonably estimated, anamount is accrued in the financial statements for the estimated loss.  Ifonly a range of loss can be determined, the best estimate within that range isaccrued; if none of the estimates within that range is better than another, thelow end of the range is accrued.  Theassessment of the expected outcomes of legal proceedings is a highly subjectiveprocess that requires judgments about future events.  The legal proceedings are reviewed at leastquarterly to determine the adequacy of accruals and related financial statementdisclosures.  The ultimate outcomes oflegal proceedings could differ materially from amounts accrued in the financialstatements.

 

**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.

 

**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 March 31, 2009, U.S. Cellular repurchased 367,000Common Shares for $13.3 million, or an average of $36.22 per sharepursuant to this authorization.

 

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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.

 
| ** **                                                       | ** ** | ** **                | ** ** | ** **             | ** ** | **(c)**                                 | ** ** | **(d)**                                 | ** ** |
|------------------------------------------------------------------|------------|---------------------------|------------|------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                       | ** ** | ** **                | ** ** | ** **             | ** ** | **Total Number of**           | ** ** | **Maximum Number of**         | ** ** |
| ** **                                                       | ** ** | **(a)**                   | ** ** | **(b)**                | ** ** | **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**         | ** ** |
| January 1 – 31, 2009                                   |       | —                    |       | —                 |       | —                                  |       | 375,000                                 |       |
| February 1 – 28, 2009                                  |       | 150,000                   |       | $                      | 42.66      |                                    | 150,000    |                                    | 217,000    |   |
| March 1 – 31, 2009                                     |       | 217,000                   |       | 31.76                  |       | 217,000                                 |       | —                                  |       |
| Total for or as of end of the quarter  ended March 31, 2009 |       | 367,000                   |       | $                      | 36.22      |                                    | 367,000    |                                    | —     |   |

 

Thefollowing is additional information with respect to the Limited Authorization:

 

i.                  Thedate the program was announced was May 15, 2000 by Form 10-Q.  The date the amended program was announcedwas February 26, 2009 by Form 10-K.

 

ii.               OnNovember 18, 2008, the Board of Directors of U.S. Cellular amended theLimited Authorization to permit the repurchase of up to 5% of the outstandingU.S. Cellular Common Shares held by persons other than TDS affiliates in eachtwelve-month period.

 

iii.            Thereis no expiration date for the program.

 

iv.           TheLimited Authorization did not expire during the first quarter of 2009.

 

v.              U.S.Cellular did not determine to terminate the foregoing Common Share repurchaseprogram prior to expiration, or cease making further purchases thereunder,during the first quarter of 2009.

 

**Item 5. Other Information.**

 

Thefollowing information is being provided to update prior disclosures madepursuant to the requirements of Form 8-K, Item 2.03 — Creation of a DirectFinancial Obligation or an Obligation Under an Off-Balance Sheet Arrangement ofa Registrant.

 

U.S.Cellular did not borrow or repay any amounts under its revolving creditfacility in the first quarter of 2009. U.S. Cellular had no borrowingsoutstanding under its Revolving Credit Agreement as of March 31, 2009.

 

Theforegoing description is qualified by reference to the description of theRevolving Credit Facility under Item 1.01 in U.S. Cellular’s Current Report on Form 8-Kdated December 9, 2004, and a copy of the Revolving Credit Facility, whichis included as Exhibit 4.1 of U.S. Cellular’s Current Report on such Form 8-Kdated December 9, 2004 and is incorporated by reference herein.

 

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**Item 6. Exhibits**

 

Exhibit 10.1 — U.S. Cellular CompensationPlan for Non-Employee Directors, as amended March 17, 2009, is herebyincorporated by reference to Exhibit B to U.S. Cellular’s Notice of AnnualMeeting of Shareholders and Proxy Statement dated April 15, 2009.

 

Exhibit 10.2 — U.S. Cellular 2005 Long-TermIncentive Plan, as amended, is hereby incorporated by reference to Exhibit Cto U.S. Cellular’s Notice of Annual Meeting of Shareholders and Proxy Statementdated April 15, 2009.

 

Exhibit 11 — Statement regardingcomputation of per share earnings is included herein as Note 7 — Earnings PerShare in the Notes to Consolidated Financial Statements.

 

Exhibit 12 — Statement regardingcomputation of ratio of earnings to fixed charges.

 

Exhibit 31.1 — Chief Executive Officercertification pursuant to Rule 13a-14 of the Securities Exchange Act of1934.

 

Exhibit 31.2 — Chief Financial Officercertification pursuant to Rule 13a-14 of the Securities Exchange Act of1934.

 

Exhibit 32.1 — Chief Executive Officercertification pursuant to Section 1350 of Chapter 63 of Title 18 of theUnited States Code.

 

Exhibit 32.2 — Chief Financial Officer certificationpursuant to Section 1350 of Chapter 63 of Title 18 of the United StatesCode.

 

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

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

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

 

Signature page for the U.S. Cellular 2009 First QuarterForm 10-Q

 

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