Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended****March 31, 2010**

 

**OR**

 

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

 

**For the transition period from                   to                  **

 

**CommissionFile Number 1-9712**

 

**UNITEDSTATES CELLULAR CORPORATION**

**(Exact name of registrant asspecified in its charter)**

 

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

 

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

(Addressof principal executive offices)  (ZipCode)

 

Registrant’s telephonenumber, 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 the preceding12 months (or for such shorter period that the registrant was required to submitand 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

(Do not check if a smaller  reporting company) |   | Smaller reporting company o |

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Class**                                 | ** ** | **Outstanding  at March 31, 2010** |
|-------------------------------------------|------------|-----------------------------------------|
| Common Shares, $1 par value               |       | 53,434,528 Shares                       |
| Series A Common Shares, $1 par value |       | 33,005,877 Shares                       |

 

 

 

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Table ofContents

 

**UnitedStates Cellular Corporation**

 

**QuarterlyReport on Form 10-Q**

**Forthe Quarterly Period Ended March 31, 2010**

 

**Index**

 
| ** **    | ** **            | **Page No.**                                                                            |
|---------------|-----------------------|----------------------------------------------------------------------------------------------|
| Part I.  | Financial Information | 3                                                                                            |
|          |                  |                                                                                         |
|          | Item 1.               | Financial Statements (Unaudited)                                                             | 3 |
|          |                  |                                                                                         |   |
|          |                  | Consolidated  Statement of Operations Three Months Ended March 31, 2010 and 2009        | 3 |
|          |                  |                                                                                         |   |
|          |                  | Consolidated  Statement of Cash Flows Three Months Ended March 31, 2010 and 2009        | 4 |
|          |                  |                                                                                         |   |
|          |                  | Consolidated Balance  Sheet March 31, 2010 and December 31, 2009                   | 5 |
|          |                  |                                                                                         |   |
|          |                  | Consolidated Statement of Changes in Equity Three  Months Ended March 31, 2010 and 2009 | 7 |
|          |                  |                                                                                         |   |
|          |                  | Notes to  Consolidated Financial Statements                                                  | 9 |
|          |                  |                                                                                         |   |
|          | Item 2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations  | 18 |
|          |                  |                                                                                         |   |
|          |                  | Overview                                                                                     | 18 |
|          |                  | Results of Operations                                                                        | 23 |
|          |                  | Recent Accounting  Pronouncements                                                            | 29 |
|          |                  | Financial Resources                                                                          | 29 |
|          |                  | Liquidity and  Capital Resources                                                             | 31 |
|          |                  | Application of  Critical Accounting Policies and Estimates                                   | 34 |
|          |                  | Safe Harbor Cautionary Statement                                                             | 35 |
|          |                  |                                                                                         |   |
|          | Item 3.               | Quantitative  and Qualitative Disclosures About Market Risk                                  | 39 |
|          |                  |                                                                                         |   |
|          | Item 4.               | Controls and  Procedures                                                                     | 40 |
|          |                  |                                                                                         |   |
| Part II. | Other Information     | 41                                                                                           |
|          |                  |                                                                                         |   |
|          | Item 1.               | Legal Proceedings                                                                            | 41 |
|          |                  |                                                                                         |   |
|          | Item 1A.              | Risk Factors                                                                                 | 41 |
|          |                  |                                                                                         |   |
|          | Item 2.               | Unregistered  Sales of Equity Securities and Use of Proceeds                                 | 42 |
|          |                  |                                                                                         |   |
|          | Item 5.               | Other Information                                                                            | 43 |
|          |                  |                                                                                         |   |
|          | Item 6.               | Exhibits                                                                                     | 43 |
|          |                  |
| Signatures    |                  |

 

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Table ofContents

 

**Part I.  Financial Information**

**Item 1.  Financial Statements**

 

**United States Cellular Corporation**

 

**Consolidated Statement of Operations**

**(Unaudited)**

 
| ** **                                                                                                                | ** ** | **Three  Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                                | ** ** | **March 31,**      | ** ** |
| **(Dollars and shares in  thousands, except per share amounts)**                                                          | ** ** | **2010**                | ** ** | **2009** | ** ** |
| ** **                                                                                                                |       |                    |       |   |   |
| **Operating  revenues**                                                                                                   |       |                    |       |   |   |
| Service                                                                                                                   |       | $                       | 965,188    |   | $ | 983,615 |   |
| Equipment sales                                                                                                           |       | 58,849                  |       | 70,890 |   |
| Total operating revenues                                                                                                  |       | 1,024,037               |       | 1,054,505 |   |
|                                                                                                                      |       |                    |       |   |   |
| **Operating  expenses**                                                                                                   |       |                    |       |   |   |
| System operations (excluding Depreciation, amortization and accretion  reported below)                                    |       | 207,077                 |       | 199,883 |   |
| Cost of equipment sold                                                                                                    |       | 161,105                 |       | 185,701 |   |
| Selling, general and administrative (including charges from affiliates  of $27.7 million and $28.8 million, respectively) |       | 428,661                 |       | 408,159 |   |
| Depreciation, amortization and accretion                                                                                  |       | 143,233                 |       | 137,878 |   |
| Loss on asset disposals, net                                                                                              |       | 5,176                   |       | 3,945 |   |
| Total operating expenses                                                                                                  |       | 945,252                 |       | 935,566 |   |
|                                                                                                                      |       |                    |       |   |   |
| **Operating  income**                                                                                                     |       | 78,785                  |       | 118,939 |   |
|                                                                                                                      |       |                    |       |   |   |
| **Investment  and other income (expense)**                                                                                |       |                    |       |   |   |
| Equity in earnings of unconsolidated entities                                                                             |       | 24,694                  |       | 25,327 |   |
| Interest and dividend income                                                                                              |       | 1,021                   |       | 477 |   |
| Interest expense                                                                                                          |       | (16,286                 | )          | (19,287 | ) |
| Other, net                                                                                                                |       | (65                     | )          | 280 |   |
| Total investment and other income (expense)                                                                               |       | 9,364                   |       | 6,797 |   |
|                                                                                                                      |       |                    |       |   |   |
| **Income  before income taxes**                                                                                           |       | 88,149                  |       | 125,736 |   |
| Income tax expense                                                                                                        |       | 34,198                  |       | 35,226 |   |
|                                                                                                                      |       |                    |       |   |   |
| **Net  income**                                                                                                           |       | 53,951                  |       | 90,510 |   |
| Less: Net income attributable to noncontrolling interests, net of tax                                                     |       | (5,719                  | )          | (6,008 | ) |
| **Net  income attributable to U.S. Cellular shareholders**                                                                |       | $                       | 48,232     |   | $ | 84,502 |   |
|                                                                                                                      |       |                    |       |   |   |
| **Basic  weighted average shares outstanding**                                                                            |       | 86,576                  |       | 87,196 |   |
| **Basic  earnings per share attributable to U.S. Cellular shareholders**                                                  |       | $                       | 0.56       |   | $ | 0.97 |   |
|                                                                                                                      |       |                    |       |   |   |
| **Diluted  weighted average shares outstanding**                                                                          |       | 86,978                  |       | 87,446 |   |
| **Diluted  earnings per share attributable to U.S. Cellular shareholders**                                                |       | $                       | 0.55       |   | $ | 0.97 |   |

 

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

 

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**UnitedStates Cellular Corporation**

 

**Consolidated Statement of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                    | ** ** | **March 31,**     | ** ** |
| **(Dollars in thousands)**                                                                    | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                                                                                    |       |                   |       |   |   |
| **Cash  flows from operating activities**                                                     |       |                   |       |   |   |
| Net income                                                                                    |       | $                      | 53,951     |   | $ | 90,510 |   |
| Add (deduct) adjustments to reconcile net income to net cash flows  from operating activities |       |                   |       |   |   |
| Depreciation, amortization and accretion                                                      |       | 143,233                |       | 137,878 |   |
| Bad debts expense                                                                             |       | 19,193                 |       | 18,704 |   |
| Stock-based compensation expense                                                              |       | 3,830                  |       | 2,964 |   |
| Deferred income taxes, net                                                                    |       | (2,419                 | )          | 2,342 |   |
| Equity in earnings of unconsolidated entities                                                 |       | (24,694                | )          | (25,327 | ) |
| Distributions from unconsolidated entities                                                    |       | 7,238                  |       | 5,908 |   |
| Loss on asset disposals, net                                                                  |       | 5,176                  |       | 3,945 |   |
| Other operating activities                                                                    |       | 274                    |       | 440 |   |
| Changes in assets and liabilities from operations                                             |       |                   |       |   |   |
| Accounts receivable                                                                           |       | 1,313                  |       | (18,132 | ) |
| Inventory                                                                                     |       | (722                   | )          | 7,204 |   |
| Accounts payable - trade                                                                      |       | (39,375                | )          | (30,754 | ) |
| Accounts payable - affiliate                                                                  |       | (5,843                 | )          | (2,358 | ) |
| Customer deposits and deferred revenues                                                       |       | 403                    |       | (1,579 | ) |
| Accrued taxes                                                                                 |       | 29,860                 |       | 42,144 |   |
| Accrued interest                                                                              |       | 9,221                  |       | 9,337 |   |
| Other assets and liabilities                                                                  |       | (48,387                | )          | (57,664 | ) |
|                                                                                          |       | 152,252                |       | 185,562 |   |
|                                                                                          |       |                   |       |   |   |
| **Cash  flows from investing activities**                                                     |       |                   |       |   |   |
| Additions to property, plant and equipment                                                    |       | (121,514               | )          | (137,741 | ) |
| Cash paid for acquisitions and licenses                                                       |       | (3,800                 | )          | (12,127 | ) |
| Cash paid for investments                                                                     |       | (25,000                | )          | (278 | ) |
| Other investing activities                                                                    |       | 356                    |       | 518 |   |
|                                                                                          |       | (149,958               | )          | (149,628 | ) |
|                                                                                          |       |                   |       |   |   |
| **Cash  flows from financing activities**                                                     |       |                   |       |   |   |
| Common shares reissued for benefit plans, net of tax payments                                 |       | 486                    |       | 356 |   |
| Common shares repurchased                                                                     |       | (5,186                 | )          | (13,291 | ) |
| Distributions to noncontrolling interests                                                     |       | (2,284                 | )          | (2,101 | ) |
| Other financing activities                                                                    |       | (63                    | )          | (97 | ) |
|                                                                                          |       | (7,047                 | )          | (15,133 | ) |
|                                                                                          |       |                   |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                     |       | (4,753                 | )          | 20,801 |   |
|                                                                                          |       |                   |       |   |   |
| **Cash  and cash equivalents**                                                                |       |                   |       |   |   |
| Beginning of period                                                                           |       | 294,411                |       | 170,996 |   |
| End of period                                                                                 |       | $                      | 289,658    |   | $ | 191,797 |   |

 

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

 

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**UnitedStates Cellular Corporation**

 

**Consolidated Balance Sheet — Assets**

**(Unaudited)**

 
| ** **                                                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                            | ** ** | **2010**           | ** ** | **2009**              | ** ** |
|                                                                                  |       |               |       |                  |       |
| **Current  assets**                                                                   |       |               |       |                  |       |
| Cash and cash equivalents                                                             |       | $                  | 289,658    |                  | $          | 294,411 |   |
| Short-term investments                                                                |       | 25,534             |       | 330                   |       |
| Accounts receivable                                                                   |       |               |       |                  |       |
| Customers, less allowances of $24,749 and $26,260, respectively                       |       | 305,083            |       | 339,825               |       |
| Roaming                                                                               |       | 26,087             |       | 28,450                |       |
| Affiliated                                                                            |       | 3,818              |       | 135                   |       |
| Other, less allowances of $307 and $364, respectively                                 |       | 69,565             |       | 56,647                |       |
| Inventory                                                                             |       | 153,278            |       | 152,556               |       |
| Prepaid income taxes                                                                  |       | —             |       | 717                   |       |
| Prepaid expenses                                                                      |       | 72,829             |       | 63,463                |       |
| Net deferred income tax asset                                                         |       | 21,570             |       | 21,570                |       |
| Other current assets                                                                  |       | 55,250             |       | 51,013                |       |
|                                                                                  |       | 1,022,672          |       | 1,009,117             |       |
| **Investments**                                                                       |       |               |       |                  |       |
| Licenses                                                                              |       | 1,438,800          |       | 1,435,000             |       |
| Goodwill                                                                              |       | 494,737            |       | 494,737               |       |
| Customer lists, net of accumulated amortization of $94,020 and  $92,829, respectively |       | 2,892              |       | 4,083                 |       |
| Investments in unconsolidated entities                                                |       | 178,903            |       | 161,481               |       |
| Notes and interest receivable — long-term                                        |       | 4,179              |       | 4,214                 |       |
|                                                                                  |       | 2,119,511          |       | 2,099,515             |       |
| **Property,  plant and equipment**                                                    |       |               |       |                  |       |
| In service and under construction                                                     |       | 5,975,704          |       | 5,884,307             |       |
| Less: Accumulated depreciation                                                        |       | 3,397,244          |       | 3,282,969             |       |
|                                                                                  |       | 2,578,460          |       | 2,601,338             |       |
|                                                                                  |       |               |       |                  |       |
| **Other  assets and deferred charges**                                                |       | 38,393             |       | 38,776                |       |
|                                                                                  |       |               |       |                  |       |
| **Total  assets**                                                                     |       | $                  | 5,759,036  |                  | $          | 5,748,746 |   |

 

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

 

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**UnitedStates Cellular Corporation**

 

**Consolidated Balance Sheet — Liabilities andEquity**

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars and shares in thousands)**                                                                                | ** ** | **2010**           | ** ** | **2009**              | ** ** |
|                                                                                                                 |       |               |       |                  |       |
| **Current  liabilities**                                                                                             |       |               |       |                  |       |
| Current portion of long-term debt                                                                                    |       | $                  | 84         |                  | $          | 76 |   |
| Accounts payable                                                                                                     |       |               |       |                  |       |
| Affiliated                                                                                                           |       | 8,889              |       | 14,732                |       |
| Trade                                                                                                                |       | 256,913            |       | 296,288               |       |
| Customer deposits and deferred revenues                                                                              |       | 140,651            |       | 140,248               |       |
| Accrued taxes                                                                                                        |       | 83,876             |       | 52,026                |       |
| Accrued compensation                                                                                                 |       | 38,220             |       | 62,242                |       |
| Other current liabilities                                                                                            |       | 90,602             |       | 92,884                |       |
|                                                                                                                 |       | 619,235            |       | 658,496               |       |
|                                                                                                                 |       |               |       |                  |       |
| **Deferred  liabilities and credits**                                                                                |       |               |       |                  |       |
| Net deferred income tax liability                                                                                    |       | 504,822            |       | 513,151               |       |
| Other deferred liabilities and credits                                                                               |       | 268,795            |       | 262,412               |       |
|                                                                                                                 |       | 773,617            |       | 775,563               |       |
|                                                                                                                 |       |               |       |                  |       |
| **Long-term  debt**                                                                                                  |       | 867,662            |       | 867,522               |       |
|                                                                                                                 |       |               |       |                  |       |
| **Commitments  and contingencies**                                                                                   |       |               |       |                  |       |
|                                                                                                                 |       |               |       |                  |       |
| **Noncontrolling  interests with redemption features**                                                               |       | 752                |       | 727                   |       |
|                                                                                                                 |       |               |       |                  |       |
| **Equity**                                                                                                           |       |               |       |                  |       |
| U.S. Cellular shareholders’ equity                                                                              |       |               |       |                  |       |
| Common Shares, par value $1 per share; authorized 140,000 shares; issued  55,068 shares                              |       | 55,068             |       | 55,068                |       |
| Series A Common Shares, par value $1 per share; authorized 50,000  shares; issued and outstanding 33,006 shares |       | 33,006             |       | 33,006                |       |
| Additional paid-in capital                                                                                           |       | 1,360,712          |       | 1,356,322             |       |
| Treasury shares, at cost, 1,634 and 1,534 Common Shares, respectively                                                |       | (72,194            | )          | (69,616               | )          |
| Retained earnings                                                                                                    |       | 2,066,066          |       | 2,019,957             |       |
| Total U.S. Cellular shareholders’ equity                                                                        |       | 3,442,658          |       | 3,394,737             |       |
|                                                                                                                 |       |               |       |                  |       |
| Noncontrolling interests                                                                                             |       | 55,112             |       | 51,701                |       |
|                                                                                                                 |       |               |       |                  |       |
| Total equity                                                                                                         |       | 3,497,770          |       | 3,446,438             |       |
|                                                                                                                 |       |               |       |                  |       |
| **Total  liabilities and equity**                                                                                    |       | $                  | 5,759,036  |                  | $          | 5,748,746 |   |

 

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

 

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**UnitedStates Cellular Corporation**

 

**Consolidated Statement of Changes in Equity**

**(Unaudited)**

 
| ** **                                                                |       |                                     |       |              |       |           |       |         |       |         |       |                   |       |               |       |             |       |      |   |   |   |   |   |      |   |
|---------------------------------------------------------------------------|------------|------------------------------------------|------------|-------------------|------------|----------------|------------|--------------|------------|--------------|------------|------------------------|------------|--------------------|------------|------------------|------------|-----------|--------|--------|--------|--------|--------|-----------|--------|
| ** **                                                                | ** ** | **U.S. Cellular Shareholders** | ** ** | ** **        | ** ** | ** **     | ** ** |
| ** **                                                                | ** ** | ** **                               | ** ** | ** **        | ** ** | ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | **Total**              | ** ** | ** **         | ** ** | ** **       | ** ** |
| ** **                                                                | ** ** | ** **                               | ** ** | **Series A** | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **   | ** ** | **U.S. Cellular**      | ** ** | ** **         | ** ** | ** **       | ** ** |
| ** **                                                                | ** ** | **Common**                               | ** ** | **Common**        | ** ** | **Paid-In**    | ** ** | **Treasury** | ** ** | **Retained** | ** ** | **Shareholders’** | ** ** | **Noncontrolling** | ** ** | ** **       | ** ** |
| **(Dollars  in thousands)**                                               | ** ** | **Shares**                               | ** ** | **Shares**        | ** ** | **Capital**    | ** ** | **Shares**   | ** ** | **Earnings** | ** ** | **Equity**             | ** ** | **Interests**      | ** ** | **Total Equity** | ** ** |
| **Balance,  December 31, 2009**                                      |       | $                                        | 55,068     |              | $          | 33,006         |       | $            | 1,356,322  |         | $          | (69,616                | )          | $                  | 2,019,957  |             | $          | 3,394,737 |   | $      | 51,701 |   | $      | 3,446,438 |   |
| Add (Deduct)                                                              |       |                                     |       |              |       |           |       |         |       |         |       |                   |       |               |       |             |       |
| Net income  attributable to U.S. Cellular shareholders                    |       | —                                   |       | —            |       | —         |       | —       |       | 48,232       |       | 48,232                 |       | —             |       | 48,232           |       |
| Net income attributable  to noncontrolling interests classified as equity |       | —                                   |       | —            |       | —         |       | —       |       | —       |       | —                 |       | 5,695              |       | 5,695            |       |
| Repurchase of Common  Shares                                              |       | —                                   |       | —            |       | —         |       | (5,186       | )          | —       |       | (5,186                 | )          | —             |       | (5,186           | )          |
| Incentive and  compensation plans                                         |       | —                                   |       | —            |       | 605            |       | 2,608        |       | (2,123       | )          | 1,090                  |       | —             |       | 1,090            |       |
| Stock-based compensation  awards                                          |       | —                                   |       | —            |       | 3,830          |       | —       |       | —       |       | 3,830                  |       | —             |       | 3,830            |       |
| Tax windfall  (shortfall) from stock awards                               |       | —                                   |       | —            |       | (45            | )          | —       |       | —       |       | (45                    | )          | —             |       | (45              | )          |
| Distributions to  noncontrolling interests                                |       | —                                   |       | —            |       | —         |       | —       |       | —       |       | —                 |       | (2,284             | )          | (2,284           | )          |
| **Balance,  March 31, 2010**                                         |       | $                                        | 55,068     |              | $          | 33,006         |       | $            | 1,360,712  |         | $          | (72,194                | )          | $                  | 2,066,066  |             | $          | 3,442,658 |   | $      | 55,112 |   | $      | 3,497,770 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**United States Cellular Corporation**

 

**Consolidated Statement of Changesin Equity**

**(Unaudited)**

 
| ** **                                                                | ** ** | **U.S. Cellular Shareholders** | ** ** | ** **        | ** ** | ** **     | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------|------------|----------------|------------|
| ** **                                                                | ** ** | ** **                     | ** ** | ** **        | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | ** **                     | ** ** | **Series A** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** | **U.S. Cellular** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                | ** ** | **Common**                     | ** ** | **Common**        | ** ** | **Paid-In**    | ** ** | **Treasury** | ** ** | **Retained** | ** ** | **Shareholders’** | ** ** | **Noncontrolling** | ** ** | ** ** | ** ** |
| **(Dollars  in thousands)**                                               | ** ** | **Shares**                     | ** ** | **Shares**        | ** ** | **Capital**    | ** ** | **Shares** | ** ** | **Earnings** | ** ** | **Equity** | ** ** | **Interests** | ** ** | **Total Equity** | ** ** |
| **Balance,  December 31, 2008**                                      |       | $                              | 55,068     |              | $          | 33,006         |       | $ | 1,340,146 |   | $ | (50,258 | ) | $ | 1,827,644 |   | $ | 3,205,606 |   | $ | 48,567 |   | $ | 3,254,173 |   |
| Add (Deduct)                                                              |       |                           |       |              |       |           |       |   |   |   |   |   |   |   |   |   |   |
| Net income  attributable to U.S. Cellular shareholders                    |       | —                         |       | —            |       | —         |       | — |   | 84,502 |   | 84,502 |   | — |   | 84,502 |   |
| Net income  attributable to noncontrolling interests classified as equity |       | —                         |       | —            |       | —         |       | — |   | — |   | — |   | 5,985 |   | 5,985 |   |
| 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 | ) | $ | 1,910,869 |   | $ | 3,280,707 |   | $ | 52,451 |   | $ | 3,333,158 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**United States CellularCorporation**

 

**Notes to Consolidated FinancialStatements**

 

**1.    Basisof Presentation**

 

United States Cellular Corporation (“U.S.Cellular”), a Delaware Corporation, is an 82%-owned subsidiary of Telephone andData Systems, Inc. (“TDS”).

 

Theaccounting policies of U.S. Cellular conform to accounting principles generallyaccepted in the United States of America (“GAAP”) as set forth in the FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).The consolidated financial statements include the accounts of U.S. Cellular,its majority-owned subsidiaries since acquisition, general partnerships inwhich U.S. Cellular has a majority partnership interest and certain entities inwhich U.S. Cellular has a variable interest that require consolidation underGAAP.  All material intercompany accountsand transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the 2010presentation.

 

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.  These consolidated financialstatements should be read in conjunction with the consolidated financialstatements and the notes thereto included in U.S. Cellular’s Annual Report on Form 10-K(“Form 10-K”) for the year ended December 31, 2009.

 

The accompanying unaudited consolidatedfinancial statements contain all adjustments (consisting of only normalrecurring items and adjustments to prior periods as described in Note 2 -Adjustment of Prior Period Amounts) necessary to present fairly the financialposition as of March 31, 2010 and the results of operations, cash flowsand changes in equity for the three months ended March 31, 2010 and2009.  The Consolidated Statement ofComprehensive Income was not included because comprehensive income for thethree months ended March 31, 2010 and 2009 equaled net income. The resultsof operations, cash flows and changes in equity for the three months ended March 31,2010 are not necessarily indicative of the results to be expected for the fullyear.

 

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**2.   Revision of Prior Period Amounts**

 

Inpreparing its financial statements for the three months ended March 31,2010, U.S. Cellular discovered certain errors related to accounting for servicerevenues and sales tax liabilities. These errors resulted in the overstatementof service revenues and understatement of sales tax liabilities for 2009, 2008and 2007. In accordance with *SEC Staff AccountingBulletin Nos. 99 and 108* (“SAB 99 and SAB 108”), U.S. Cellularevaluated these errors and determined that they were immaterial to each of thereporting periods affected and, therefore, amendment of previously filedreports was not required. However, if the adjustments to correct the cumulativeerrors had been recorded in the first quarter 2010, U.S. Cellular believes theimpact would have been significant to the first quarter and would impactcomparisons to prior periods. As permitted by SAB 108, U.S. Cellular revised inthe current filing and plans to revise in the next filings of its quarterly andannual consolidated financial statements previously reported annual andquarterly results for 2009, 2008 and 2007 for these immaterial amounts. Inaddition to recording these adjustments, U.S. Cellular recorded and plans torecord other adjustments to prior-year amounts to correct other immaterialitems, which include adjustments related to rent expense as disclosed in U.S.Cellular’s 2009 Form 10-K.

 

TheConsolidated Balance Sheet at December 31, 2009 was revised to reflect thecumulative effect of these errors which resulted in a decrease to Retainedearnings of $9.6 million.  Also, inaccordance with SAB 108, the Consolidated Statement of Operations and theConsolidated Statement of Cash Flows have been revised as follows:

 

Consolidated Balance Sheet — December 31,2009

 
| **(Dollars in thousands)**                         | ** ** | **As previously  reported** | ** ** | **Adjustment** | ** ** | **Revised** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|----------------|------------|-------------|------------|
| ** **                                         | ** ** | ** **                  | ** ** | ** **     | ** ** | ** **  | ** ** |
| Accounts receivable  - Due from customers          |       | $                           | 336,296    |           | $          | 3,529       |       | $ | 339,825 |   |
| **Total  current assets**                          |       | 1,005,588                   |       | 3,529          |       | 1,009,117   |       |
| **Total  assets**                                  |       | 5,745,217                   |       | 3,529          |       | 5,748,746   |       |
| Customer deposits  and deferred revenues           |       | 143,760                     |       | (3,512         | )          | 140,248     |       |
| Accrued taxes                                      |       | 34,583                      |       | 17,443         |       | 52,026      |       |
| **Total  current liabilities**                     |       | 644,565                     |       | 13,931         |       | 658,496     |       |
| Net deferred income  tax liability                 |       | 513,994                     |       | (843           | )          | 513,151     |       |
| **Total  deferred liabilities and credits**        |       | 776,406                     |       | (843           | )          | 775,563     |       |
| Retained earnings                                  |       | 2,029,516                   |       | (9,559         | )          | 2,019,957   |       |
| **Total  U.S. Cellular shareholders’ equity** |       | 3,404,296                   |       | (9,559         | )          | 3,394,737   |       |
| **Total  equity**                                  |       | 3,455,997                   |       | (9,559         | )          | 3,446,438   |       |
| **Total  liabilities and equity**                  |       | 5,745,217                   |       | 3,529          |       | 5,748,746   |       |
|                                                    |            |                             |            |                |            |             |            |  |  |  |

 

ConsolidatedStatement of Operations — Three Months Ended March 31, 2009

 
| **(Dollars in thousands)**                                                       | ** ** | **As previously  reported** | ** ** | **Adjustment** | ** ** | **Revised** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------|------------|-------------|------------|
|                                                                             |       |                        |       |           |       |        |       |
| Service revenues                                                                 |       | $                           | 981,874    |           | $          | 1,741       |       | $ | 983,615 |   |
| **Total  operating revenues**                                                    |       | 1,052,764                   |       | 1,741          |       | 1,054,505   |       |
| System operations  expenses (excluding Depreciation, amortization and accretion) |       | 200,003                     |       | (120           | )          | 199,883     |       |
| Selling, general and  administrative expenses                                    |       | 412,448                     |       | (4,289         | )          | 408,159     |       |
| Depreciation,  amortization and accretion                                        |       | 137,651                     |       | 227            |       | 137,878     |       |
| Loss on asset  disposals, net                                                    |       | 2,191                       |       | 1,754          |       | 3,945       |       |
| **Total  operating expenses**                                                    |       | 937,994                     |       | (2,428         | )          | 935,566     |       |
| **Operating  income**                                                            |       | 114,770                     |       | 4,169          |       | 118,939     |       |
| Interest expense                                                                 |       | (19,022                     | )          | (265           | )          | (19,287     | )          |
| **Total  investment and other income (expense)**                                 |       | 7,062                       |       | (265           | )          | 6,797       |       |
| **Income  before income taxes**                                                  |       | 121,832                     |       | 3,904          |       | 125,736     |       |
| Income tax expense                                                               |       | 31,232                      |       | 3,994          |       | 35,226      |       |
| **Net  income**                                                                  |       | 90,600                      |       | (90            | )          | 90,510      |       |
| **Net  income attributable to U.S. Cellular shareholders**                       |       | 84,592                      |       | (90            | )          | 84,502      |       |
| **Basic  earnings attributable to U.S. Cellular shareholders**                   |       | 0.97                        |       | —         |       | 0.97        |       |
| **Diluted  earnings attributable to U.S. Cellular shareholders**                 |       | 0.97                        |       | —         |       | 0.97        |       |
|                                                                                  |            |                             |            |                |            |             |            |  |  |  |

 

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ConsolidatedStatement of Cash Flows — Three Months Ended March 31, 2009

 
| **(Dollars in thousands)**                         | ** ** | **As previously  reported** | ** ** | **Adjustment** | ** ** | **Revised** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|----------------|------------|-------------|------------|
|                                               |       |                        |       |           |       |        |       |
| Net income                                         |       | $                           | 90,600     |           | $          | (90         | )          | $ | 90,510 |   |
| Depreciation,  amortization and accretion          |       | 137,651                     |       | 227            |       | 137,878     |       |
| Deferred income  taxes, net                        |       | 1,673                       |       | 669            |       | 2,342       |       |
| Loss on asset  disposals, net                      |       | 2,191                       |       | 1,754          |       | 3,945       |       |
| Change in accounts  receivable                     |       | (13,468                     | )          | (4,664         | )          | (18,132     | )          |
| Change in customer  deposits and deferred revenues |       | (1,392                      | )          | (187           | )          | (1,579      | )          |
| Change in accrued  taxes                           |       | 39,591                      |       | 2,553          |       | 42,144      |       |
| Change in other  assets and liabilities            |       | (57,402                     | )          | (262           | )          | (57,664     | )          |
| **Cash  flows from operating activities**          |       | 185,562                     |       | —         |       | 185,562     |       |
|                                                    |            |                             |            |                |            |             |            |  |  |  |

 

**3.   Summary of Significant Accounting Policies**

 

AmountsCollected from Customers and Remitted to Governmental Authorities

 

Ifa tax is assessed upon the customer and U.S. Cellular merely acts as an agentin collecting the tax on behalf of the governmental authority imposing suchtax, the amounts collected from customers and remitted to governmentalauthorities are recorded net in Accrued taxes in the Consolidated BalanceSheet.  If a tax is assessed upon U.S.Cellular but billed to customers to recover it, the amounts billed to customersare recorded in Service revenues and the amounts remitted to governmentalauthorities are recorded in Selling, general and administrative expenses in theConsolidated Statement of Operations. The amounts recorded in Service revenues that were billed to customersand remitted to governmental authorities totaled $34.1 million and $24.1million for the three months ended March 31, 2010 and 2009, respectively.

 

Implementationof Revised Variable Interest Entity Accounting

 

U.S. Cellularholds interests in certain variable interest entities (“VIEs”) as such term isdefined by GAAP.  Under GAAP, a VIE generally is an entity in which the votingrights held by equity holders are ineffective in determining which party has acontrolling financial interest in the entity because control of an entity maybe achieved through arrangements that do not involve voting equity.  Theprimary beneficiary of a VIE, as defined by GAAP, is required to consolidatethe VIE in its financial statements.  Prior to January 1, 2010, theprimary beneficiary of a VIE was the entity that recognized a majority of a VIE’sexpected gains or losses, as determined based on a quantitative model.  Effective January 1, 2010, newprovisions under GAAP related to accounting for VIEs provide for a morequalitative assessment in determining the primary beneficiary of a VIE.

 

Therevised consolidation guidance related to VIEs effective January 1, 2010did not change U.S. Cellular’s consolidated reporting entities.  See Note10 — Variable Interest Entities (VIEs) for details on consolidated VIEs.

 

Recent Accounting Pronouncements

 

In October 2009, theFASB issued Accounting Standards Update No. 2009-13, *Multiple Deliverable Revenue Arrangements—a consensusof FASB Emerging Issues Task Force* (“ASU 2009-13”).  ASU 2009-13 provides for less restrictiveseparation criteria that must be met for a deliverable to be considered aseparate unit of accounting. Additionally, under this Standard, there is ahierarchy for determining the selling price of a unit of accounting andconsideration must be allocated using a relative-selling price method.  ASU 2009-13 will be effective for U.S.Cellular on January 1, 2011; however, early adoption is permitted.  U.S. Cellular is currently reviewing therequirements of ASU 2009-13 and has not yet determined the impact on itsfinancial position or results of operations.

 

In October 2009, the FASB issued Accounting StandardsUpdate No. 2009-14, *Certain RevenueArrangements that include Software Elements—a consensus of the FASB EmergingIssues Task Force* (“ASU 2009-14”). ASU 2009-14 amends accounting and reporting guidance for revenuearrangements involving both tangible products and software that is “more thanincidental to the tangible product as a whole.” ASU 2009-14 will be effective for U.S. Cellular on January 1, 2011;however, early adoption is permitted. U.S. Cellular does not anticipate that this pronouncement will have asignificant impact on its financial position or results of operations.

 

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In January 2010, the FASB issued AccountingStandards Update No. 2010-06, *ImprovingDisclosures about Fair Value Measurements* (“ASU 2010-06”).  ASU 2010-06 requires new disclosuresregarding transfers in and out of Levels 1 and 2 and activity in Level 3 fairvalue measurements.  It also clarifiesexisting disclosure requirements regarding the level of disaggregation incertain disclosures, inputs, and valuation techniques used in FASB ASC 820, *Fair Value Measurements and Disclosures.*  U.S. Cellular adopted all of the requirementsof this update on January 1, 2010, its effective date, except for the newrequirement regarding activity in Level 3 fair value measurements which has alater effective date under the provisions of ASU 2010-6, and will becomeeffective on January 1, 2011.  Adoption of this pronouncement has not had,and is not expected to have, a significant impact on U.S. Cellular’s fair valuedisclosures.

 

**4.   Fair Value Measurements**

 

Asof March 31, 2010 and December 31, 2009, U.S. Cellular did nothave any financial assets or liabilities that were required, under GAAP, to berecorded at fair value on a recurring basis in its Consolidated Balance Sheet.However, U.S. Cellular has applied the provisions of fair value accountingfor purposes of computing the fair value of financial instruments fordisclosure purposes. The fair value of financial instruments was as follows:

 
| ** **                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| **(Dollars in thousands)** | ** ** | **Book Value**     | ** ** | **Fair Value**        | ** ** | **Book Value** | ** ** | **Fair Value** | ** ** |
| ** **                 | ** ** | ** **         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents |       | $                  | 289,658    |                  | $          | 289,658 |   | $ | 294,411 |   | $ | 294,411 |   |
| Short-term  investments    |       | 25,534             |       | 25,534                |       | 330 |   | 330 |   |
| Long-term debt (1)         |       | 863,316            |       | 851,920               |       | 863,202 |   | 853,937 |   |
|                            |            |                    |            |                       |            |  |  |  |  |  |  |  |  |

 

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(1)   Excludes capital lease obligations

 

Thefair values of Cash and cash equivalents and Short-term investments approximatetheir book values due to the short-term nature of these financial instruments.The fair value of Long-term debt, excluding capital lease obligations, wasestimated using market prices for the 7.5% senior notes and discounted cashflow analysis for the remaining debt.

 

As of March 31, 2010, U.S. Cellular held commercial paper with aface value of $25.0 million guaranteed under the Federal Deposit InsuranceCorporation’s Temporary Liquidity Guarantee Program.  These notes issued by General ElectricCapital Corporation pay interest semi-annually at the coupon rate of 1.8% andmature on March 11, 2011. This investment was purchased at a premium andis carried at amortized cost on the balance sheet ($25.3 million as of March 31,2010).

 

Asof March 31, 2010, U.S. Cellular did not have any nonfinancial assets orliabilities that required the application of fair value accounting for purposesof reporting such amounts in its Consolidated Balance Sheet.

 

**5.   IncomeTaxes**

 

U.S.Cellular is included in a consolidated federal income tax return and in certainstate income tax returns with other members of the TDS consolidated group.  For financial statement purposes, U.S.Cellular and its subsidiaries compute their income tax expense as if theycomprised a separate affiliated group and were not included in the TDSconsolidated group.

 

U.S.Cellular’s overall effective tax rate on Income before income taxes for thethree months ended March 31, 2010 and 2009 was 38.8% and 28.0%,respectively.  The effective tax rate forthe three months ended March 31, 2009 was lower than the rate for thethree months ended March 31, 2010 due primarily to a 2009 state taxbenefit resulting from a state tax law change. This benefit, along with other minor discrete benefits in the quarter,decreased income tax expense for the three months ended March 31, 2009 by$12.1 million; absent these benefits, the effective tax rate for such periodwould have been higher by 9.6 percentage points.

 

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**6.  Earnings Per Share**

 

Basicearnings per share attributable to U.S. Cellular shareholders is computed bydividing Net income attributable to U.S. Cellular shareholders by the weightedaverage number of common shares outstanding during the period. Diluted earningsper share attributable to U.S. Cellular shareholders is computed by dividingNet income attributable to U.S. Cellular shareholders by the weighted averagenumber of common shares adjusted to include the effects of potentially dilutivesecurities. Potentially dilutive securities include incremental shares issuableupon exercise of outstanding stock options and the vesting of restricted stockunits.

 

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** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|
| **(Dollars and shares in thousands,**                                  | ** ** | **March 31,**     | ** ** |
| **except per share amounts)**                                          | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                                                             | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income  attributable to U.S. Cellular shareholders                 |       | $                      | 48,232     |   | $ | 84,502 |   |
|                                                                   |       |                   |       |   |   |
| Weighted average  number of shares used in basic earnings per share    |       | 86,576                 |       | 87,196 |   |
| Effect of dilutive  securities:                                        |       |                   |       |   |   |
| Stock options (1)                                                      |       | 57                     |       | 33 |   |
| Restricted stock  units (2)                                            |       | 345                    |       | 217 |   |
| Weighted average  number of shares used in diluted earnings per share  |       | 86,978                 |       | 87,446 |   |
|                                                                   |       |                   |       |   |   |
| Basic earnings per  share attributable to U.S. Cellular shareholders   |       | $                      | 0.56       |   | $ | 0.97 |   |
|                                                                   |       |                   |       |   |   |
| Diluted earnings per  share attributable to U.S. Cellular shareholders |       | $                      | 0.55       |   | $ | 0.97 |   |

 

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(1)         Stock options exercisableinto 1,401 Common Shares in 2010 and 1,485 Common Shares in 2009 were notincluded in computing Diluted Earnings per Share because their effects wereantidilutive.

(2)         Restricted stock unitsissuable upon vesting into Common Shares that were excluded in computingDiluted Earnings per share because their effects were antidilutive totaled lessthan one thousand in both 2010 and 2009.

 

**7.  Licenses and Goodwill**

 

Changesin U.S. Cellular’s licenses and goodwill for the three months ended March 31,2010 and 2009 are presented below.

 

Licenses

 
| ** **                    | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|--------------------|------------|
| **(Dollars in thousands)**    | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| ** **                    | ** ** | ** **         | ** ** | ** **         | ** ** |
| Balance, beginning  of period |       | $                  | 1,435,000  |               | $          | 1,433,415 |   |
| Acquisitions                  |       | 3,800              |       | 12,250             |       |
| Balance, end of  period       |       | $                  | 1,438,800  |               | $          | 1,445,665 |   |

 

Goodwill

 
| ** **                     | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|--------------------------------|------------|--------------------|------------|--------------------|------------|
| **(Dollars in thousands)**     | ** ** | **2010**           | ** ** | **2009**           | ** ** |
| ** **                     | ** ** | ** **         | ** ** | ** **         | ** ** |
| Balance, beginning  of period  |       | $                  | 494,737    |               | $          | 494,279 |   |
| Accumulated  impairment losses |       | —             |       | —             |       |
|                           |       | 494,737            |       | 494,279            |       |
| Other                          |       | —             |       | 458                |       |
| Balance, end of  period        |       | $                  | 494,737    |               | $          | 494,737 |   |

 

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**8.  ****Investment in Unconsolidated Entities**

 

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

 

Equityin earnings of unconsolidated entities totaled $24.7 million and $25.3 millionin the three months ended March 31, 2010 and 2009, respectively; of thoseamounts, U.S. Cellular’s investment in the Los Angeles SMSA Partnership (“LAPartnership”) contributed $16.9 million in both periods.  U.S. Cellular held a 5.5% ownership interestin the LA Partnership during these periods.

 

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

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **March 31,**     | ** ** |
| **(Dollars in thousands)** | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                       |       |                   |       |   |   |
| Revenues                   |       | $                      | 1,214,000  |   | $ | 1,172,000 |   |
| Operating expenses         |       | 859,000                |       | 814,000 |   |
| Operating income           |       | 355,000                |       | 358,000 |   |
| Other income  (expense)    |       | 7,000                  |       | 8,000 |   |
| Net income                 |       | $                      | 362,000    |   | $ | 366,000 |   |

 

**9.   Commitments andContingencies**

 

Indemnifications

 

U.S. Cellular enters into agreements in the normal course of businessthat provide for indemnification of counterparties.  The terms of the indemnifications vary byagreement.  The events or circumstancesthat would require U.S. Cellular to perform under these indemnities aretransaction specific; however, these agreements may require U.S. Cellular toindemnify the counterparty for costs and losses incurred from litigation orclaims arising from the underlying transaction. U.S. Cellular is unable to estimate the maximum potential liability forthese types of indemnifications as the amounts are dependent on the outcome offuture events, the nature and likelihood of which cannot be determined at thistime.  Historically, U.S. Cellular hasnot made any significant indemnification payments under such agreements.

 

Legal Proceedings

 

U.S. Cellular is involved or may be involved from time to time in legalproceedings before the Federal Communications Commission (“FCC”), otherregulatory authorities, 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.

 

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**10.   Variable Interest Entities (VIEs)**

 

Fromtime to time, the FCC conducts auctions through which additional spectrum ismade available for the provision of wireless services.  U.S. Cellularparticipated in and was awarded spectrum licenses in each of four separatespectrum auctions (FCC Auctions 78, 73, 66, and 58) indirectly through itsinterests in Aquinas Wireless L.P. (“Aquinas Wireless”), King Street WirelessL.P. (“King Street Wireless”), Barat Wireless L.P. (“Barat Wireless”) andCarroll Wireless L.P. (“Carroll Wireless”), collectively, the “limitedpartnerships.”  Each entity qualified asa “designated entity” and thereby was eligible for bidding credits with respectto licenses 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.

 

Consolidated VIEs

 

As of March 31, 2010, U.S. Cellular consolidates the following VIEs under GAAP:

 

·                  Aquinas Wireless;

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

·                  Barat Wireless and Barat Wireless, Inc., thegeneral partner of Barat Wireless; and

·                  Carroll Wireless and Carroll PCS, Inc., thegeneral partner of Carroll Wireless.

 

U.S.Cellular holds a variable interest in the entities listed above due to capitalcontributions and/or advances it provided to these entities.  The power to direct the activities of theVIEs that most significantly impacts their economic performance is shared.  Specifically, the general partner of each ofthese VIEs has the exclusive right to manage, operate and control the limitedpartnerships and make all decisions to carry on the business of thepartnerships; however, the general partner of each partnership needsconsent of the limited partner, a U.S. Cellular subsidiary, to sell or leasecertain licenses, to make certain large expenditures, admit other partners orliquidate the limited partnerships. Although the power to direct the activities of the VIEs is shared, U.S. Cellular has a disproportionatelevel of exposure to the variability associated with economic performance ofthe VIEs, indicating that U.S. Cellular is the primary beneficiary of the VIEsin accordance with GAAP.  Accordingly,these VIEs are consolidated.

 

Followingis a summary of the capital contributions and advances made to each entity byU.S. Cellular as of March 31, 2010 (dollars in thousands).  The amounts shown in the table below excludefunds provided to these entities solely from the shareholder of the generalpartner.

 
| Aquinas Wireless                                                |   | $       | 2,132   |   |
|-----------------------------------------------------------------|--------|---------|---------|--------|
| King Street Wireless & King Street Wireless, Inc. |   | 300,904 |    |
| Barat Wireless & Barat Wireless, Inc.             |   | 127,685 |    |
| Carroll Wireless & Carroll PCS, Inc.              |   | 131,294 |    |
|                                                            |   | $       | 562,015 |   |

 

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The following table presentsthe classification of the consolidated VIEs’ assets and liabilities in U.S.Cellular’s Consolidated Balance Sheet.

 
| ** **                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**    | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                              | ** ** | ** **         | ** ** | ** **            | ** ** |
| **Assets**                              |       |               |       |                  |       |
| Cash                                    |       | $                  | 651        |                  | $          | 679 |   |
| Other current assets                    |       | 204                |       | 393                   |       |
| Licenses                                |       | 487,962            |       | 487,962               |       |
| Other assets                            |       | 1,548              |       | 440                   |       |
| Total assets                            |       | $                  | 490,365    |                  | $          | 489,474 |   |
|                                    |       |               |       |                  |       |
| **Liabilities**                         |       |               |       |                  |       |
| Customer deposits and deferred revenues |       | $                  | —     |                  | $          | 70 |   |
| Total liabilities                       |       | $                  | —     |                  | $          | 70 |   |

 

Other Related Matters

 

U.S. Cellular may agree tomake additional capital contributions and/or advances to the VIEs discussedabove and/or to their general partners to provide additional funding for thedevelopment of licenses granted in the various auctions.  U.S. Cellularmay finance such amounts with a combination of cash on hand, borrowings underits revolving credit agreement and/or long-term debt.  There is noassurance that U.S. Cellular will be able to obtain additional financing oncommercially reasonable terms or at all to provide such financial support.

 

These VIEs are in theprocess of developing long-term business and financing plans.  These entities were formed to participate inFCC auctions of wireless spectrum and to fund, establish, and provide wirelessservice with respect to any FCC licenses won in the auctions.  As such, these entities have risks similar tothe business risks described in the “Risk Factors” in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2009.

 

**11. Common Share Repurchases**

 

On November 17, 2009, the Board of Directors ofU.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on anannual basis beginning in 2009 and continuing each year thereafter, on acumulative basis.  These purchases willbe made pursuant to open market purchases, block purchases, private purchases,or otherwise, depending on market prices and other conditions.  This authorization does not have anexpiration date.

 

Common Share repurchases made under thisauthorization and prior authorizations were as follows:

** **
| ** **                                                    | ** ** | **Three  Months Ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|
| **(Dollars and shares in  thousands, except cost per share)** | ** ** | **2010**                               | ** ** | **2009** | ** ** |
|                                                          |       |                                   |       |   |   |
| Number of shares                                              |       | 128                                    |       | 367 |   |
| Average cost per share                                        |       | $                                      | 40.68      |   | $ | 36.22 |   |
| Total cost                                                    |       | $                                      | 5,186      |   | $ | 13,291 |   |

 

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**12. Noncontrolling Interests**

 

MandatorilyRedeemable Noncontrolling Interests in Finite-Lived Subsidiaries

 

Under GAAP,certain noncontrolling interests in consolidated entities with finite lives maymeet the definition of mandatorily redeemable financial instruments. U.S.Cellular’s consolidated financial statements include certain noncontrollinginterests that meet the definition of mandatorily redeemable financialinstruments.  These mandatorilyredeemable noncontrolling interests represent interests held by third partiesin consolidated partnerships and limited liability companies (“LLCs”), wherethe terms of the underlying partnership or LLC agreement provide for a definedtermination date at which time the assets of the subsidiary are to be sold, theliabilities are to be extinguished and the remaining net proceeds are to bedistributed to the noncontrolling interest holders and U.S. Cellular inaccordance with the respective partnership and LLC agreements.  The termination dates of these mandatorilyredeemable noncontrolling interests range from 2085 to 2094.

 

The settlementvalue of U.S. Cellular’s mandatorily redeemable noncontrolling interests infinite-lived subsidiaries is estimated to be $137.0 million at March 31,2010.  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, 2010, net of estimated liquidationcosts.  This amount excludes redemptionamounts recorded in Noncontrolling interests with redemption features in theConsolidated Balance Sheet.  U.S.Cellular currently has no plans or intentions relating to the liquidation ofany of the related partnerships or LLCs prior to their scheduled terminationdates.  The corresponding carrying valueof the mandatorily redeemable noncontrolling interests in finite-livedconsolidated partnerships and LLCs at March 31, 2010 was $50.4 million,and is included in Noncontrolling interests in the Consolidated Balance Sheet.The excess of the aggregate settlement value over the aggregate carrying valueof these mandatorily redeemable noncontrolling interests is due primarily tothe unrecognized appreciation of the noncontrolling interest holders’ share ofthe underlying net assets in the consolidated partnerships and LLCs.  Neither the noncontrolling interest holders’share, nor U.S. Cellular’s share, of the appreciation of the underlying netassets of these subsidiaries is reflected in the consolidated financialstatements. The estimate of settlement value was based on certain factors andassumptions which are subjective in nature. Changes in those factors and assumptions could result in a materiallylarger or smaller settlement amount.

 

**13.Supplemental Cash Flow Disclosures**

 

Followingare supplemental cash flow disclosures regarding transactions related tostock-based compensation awards:

 
| ** **                                                                          | ** ** | **Three  Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                          | ** ** | **March 31,**      | ** ** |
| **(Dollars and shares in thousands)**                           | ** ** | **2010**                | ** ** | **2009** | ** ** |
| ** **                                                                          | ** ** | ** **              | ** ** | ** ** | ** ** |
| Common Shares withheld (1)                                                          |       | 18                      |       | — |   |
|                                                                                |       |                    |       |   |   |
| Aggregate value of Common Shares withheld                                           |       | $                       | 753        |   | $ | — |   |
|                                                                                |       |                    |       |   |   |
| Cash receipts upon exercise of stock options                                        |       | $                       | 538        |   | $ | 356 |   |
| Cash disbursements for payment of taxes (2)                                         |       | (52                     | )          | — |   |
| Net cash receipts from exercise of stock options and vesting of other  stock awards |       | $                       | 486        |   | $ | 356 |   |

 

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(1)          Such shares were withheld tocover the exercise price of stock options, if applicable, and required taxwithholdings.

(2)          In certain situations, U.S.Cellular withholds shares that are issuable upon the exercise of stock optionsor the vesting of restricted shares to cover, and with a value equivalent to,the exercise price and/or the amount of taxes required to be withheld from the stockaward holder at the time of the exercise or vesting.  U.S. Cellular then pays the amount of therequired tax withholdings to the taxing authorities in cash.

 

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**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 82%-ownedsubsidiary of Telephone and Data Systems, Inc. (“TDS”) as of March 31,2010.

 

Thefollowing discussion and analysis should be read in conjunction with U.S.Cellular’s interim consolidated financial statements and footnotes included inItem 1 above, and with the description of U.S. Cellular’s business, its auditedconsolidated financial statements and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in the U.S. CellularAnnual Report on Form 10-K (“Form 10-K”) for the year ended December 31,2009.

 

**OVERVIEW**

 

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

 

U.S.Cellular provides wireless telecommunications services to approximately6.1 million customers in five geographic market areas in 26 states. As of March 31,2010, U.S. Cellular’s average penetration rate in its consolidated operatingmarkets, calculated by dividing U.S. Cellular’s total customers by the totalpopulation of 46.5 million in such markets, was 13.2%. U.S. Cellularoperates on a customer satisfaction strategy, striving to meet or exceedcustomer needs by providing a comprehensive range of wireless products andservices, excellent customer support, and a high-quality network.U.S. Cellular’s business development strategy is to acquire and operatecontrolling interests in wireless licenses in areas adjacent to or in proximityto its other wireless licenses, thereby building contiguous operating marketareas. U.S. Cellular believes that operating in contiguous market areaswill continue to provide it with certain economies in its capital and operatingcosts.

 

Financialand operating highlights in the first three months of 2010 included thefollowing:

 

·                  Totalcustomers were 6,147,000 at March 31, 2010, including 5,768,000 retailcustomers.

 

·                  Retailcustomer net additions were 24,000 in 2010 compared to 63,000 in 2009,reflecting continuing pressures from weak economic and very competitiveindustry conditions.  Prepaid netadditions increased to 33,000 in 2010 from 3,000 in 2009.

 

·                  Postpaycustomers comprised approximately 95% of U.S. Cellular’s retail customers as ofMarch 31, 2010. The postpay churn rate improved to 1.4% in 2010 comparedto 1.5% in 2009.

 

·                  Servicerevenues of $965.2 million decreased $18.4 million (2%) year-over-year, dueprimarily to decreases in retail service revenues ($10.6 million) and inboundroaming revenues ($8.1 million). Retail service revenues decreased due to adecline in voice revenues which was partially offset by continued growth indata revenues.  Data revenues grew 28%year-over-year to $201.3 million.

 

·                  Cashflows from operating activities were $152.3 million. At March 31, 2010,Cash and cash equivalents totaled $289.7 million and there were no outstandingborrowings under the revolving credit facility.

 

·                  Additionsto property, plant and equipment totaled $121.5 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, develop new billing and other customer managementrelated systems and platforms, and enhance existing office systems. Total cellsites in service increased 5% year-over-year to 7,310.

 

·                  U.S.Cellular’s innovative Battery Swap program and Overage Protection serviceremained popular with its customers in 2010. By March 31, 2010, U.S. Cellular had completed 1.5 million batteryswaps since the program launched in May 2009. Also, U.S. Cellular hadnearly 1.5 million customers sign up for Overage Protection since it launchedin November 2009.

 

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·                  U.S.Cellular continued its efforts on a number of multi-year initiatives includingthe development of: a Billing and Operational Support System (“BSS/OSS”)including a new point-of-sale system to consolidate billing on one platform; anElectronic Data Warehouse/Customer Relationship Management System to collectand analyze information more efficiently to build and improve customerrelationships; and a new Internet/Web platform to enable customers to completea wide range of transactions and, eventually, to manage their accounts online.

 

·                  Operatingincome decreased $40.2 million, or 34%, to $78.8 million in 2010 from $118.9million in 2009. Factors in the decrease were lower service revenues asdiscussed above, together with higher costs of serving and retaining customersin an increasingly competitive industry and costs of investments in multi-yearinitiatives.

 

·                  Netincome attributable to U.S. Cellular shareholders decreased $36.3 million, or43%, to $48.2 million in 2010 compared to $84.5 million in 2009, due primarilyto lower operating income. Basic earnings per share was $0.56 in 2010, whichwas $0.41 lower than in 2009, and Diluted earnings per share was $0.55, whichwas $0.42 lower than in 2009.

 

U.S.Cellular anticipates that its future results will be affected by the followingfactors:

 

·                  Continueduncertainty related to current economic conditions and their impact on customerpurchasing and payment behaviors;

 

·                  Increasedcompetition in the wireless industry, including potential reductions in pricingfor products and services overall and impacts associated with the expandingpresence of carriers offering low-priced, unlimited prepaid service;

 

·                  Potentialincreases in prepaid or reseller customers as a percentage of U.S. Cellular’scustomer base in response to changes in customer preferences and industrydynamics;

 

·                  Increasingpenetration in the wireless industry, requiring U.S. Cellular to grow revenuesprimarily from selling additional products and services to its existingcustomers, increasing the number of multi-device users among its existingcustomers, increasing data products and services and attracting wirelesscustomers switching from other wireless carriers rather than by addingcustomers that are new to wireless service;

 

·                  Continuedgrowth in revenues from data products and services and lower growth or declinesin revenues from voice services;

 

·                  Theeffect of recent industry consolidation, such as Verizon’s acquisition ofAlltel, and possible further industry consolidation, and the effects on roamingrevenues, service and equipment pricing;

 

·                  Costsof developing and enhancing office and customer support systems, includingcosts and risks associated with the completion and potential benefits of themulti-year initiatives described above;

 

·                  Continuedenhancements to U.S. Cellular’s wireless networks, including expansion of 3Gservices; and

 

·                  Uncertaintyrelated to the National Broadband Plan and other rulemaking by the FederalCommunications Commission (“FCC”), including uncertainty relating to futureeligible telecommunication carrier (“ETC”) funding from the universal servicefund (“USF”), as discussed below.

 

**Cash Flows and Investments**

 

U.S.Cellular believes that cash on hand, expected future cash flows from operatingactivities and sources of external financing provide substantial liquidity andfinancial flexibility and are sufficient to permit U.S. Cellular to finance itscontractual obligations and anticipated capital expenditures for theforeseeable future. U.S. Cellular continues to seek to maintain a strongbalance sheet and an investment grade credit rating.

 

See“Financial Resources” and “Liquidity and Capital Resources” below foradditional information related to cash flows and investments.

 

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**Recent Developments**

 

American Recovery and Reinvestment Act

 

Congress enacted the American Recovery and Reinvestment Act of 2009, orthe Recovery Act, which provides, among other things, for an aggregateappropriation of $7.2 billion to fund grants and loans to provide broadbandinfrastructure, access and equipment to consumers residing in rural, unservedor underserved areas of the United States. U.S. Cellular has not received anygrants of Recovery Act funds. The distribution of Recovery Act funds to othertelecommunications service providers could impact competition in certain ofU.S. Cellular’s service areas.

 

NationalBroadband Plan and Related Matters

 

Inearly 2009, Congress directed the FCC to develop a National Broadband Plan toensure every American has “access to broadband capability.”  In March 2010, the FCC released the **plan**which describes the FCC’s goals in enhancing broadband availability and themethods for achieving those goals over the next decade. The six long-term goalsidentified by the FCC in the plan include:

 

(1)          Atleast 100 million U.S. homes should have affordable access to actual downloadspeeds of at least 100 megabits per second and actual upload speeds of at least50 megabits per second;

(2)          TheUnited States should lead the world in mobile innovation, with the fastest andmost extensive wireless networks of any nation;

(3)          EveryAmerican should have affordable access to robust broadband service, and themeans and skills to subscribe if they so choose;

(4)          Everycommunity should have affordable access to at least 1 gigabit per second (“Gbps”)broadband service to anchor institutions such as schools, hospitals andgovernment buildings;

(5)          Toensure the safety of Americans, every first responder should have access to anationwide public safety wireless network;

(6)          Toensure that America leads in the clean energy economy, every American should beable to use broadband to track and manage their real-time energy consumption.

 

TheNational Broadband Plan identifies four approaches in which the government caninfluence broadband development in the United States.  The following identifies each of theseapproaches and also discusses certain actions taken by the FCC on April 21,2010, consistent with or in furtherance of the National Broadband Plan.

 

(1)  Designpolicies to ensure robust competition and, as a result, maximize consumerwelfare, innovation and investment:

 

Under this approach, among other things, actionwould be taken that would facilitate wireless data roaming.  Consistent with this policy, on April 21,2010, the FCC issued a proposed rulemaking seeking comment on rules thatif adopted, would apply to roaming for mobile data services, such as mobilebroadband service.

 

In addition, consistent with the foregoing, on April 21,2010, the FCC issued an order expanding voice roaming by eliminating the “homeroaming exclusion” that allowed a wireless carrier to deny roaming where therequesting carrier had spectrum in the relevant market.  As a result, the FCC will treat requests forautomatic roaming in home markets under the same framework as other requestsfor automatic roaming.

 

In addition, the National Broadband Planrecommends that new spectrum be identified by the end of 2010 and released forunlicensed use within the next ten years and that revised rules beproposed in the third quarter of 2010 to allow for increased spectrum sharingamong compatible point-to-point microwave services and greater flexibility in deployingwireless backhaul.

 

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(2)  Ensureefficient allocation and management of assets that the government controls orinfluences, such as spectrum, poles and rights-of-way, to encourage networkupgrades and competitive entry:

 

Under this approach, among other things, the FCCwould ensure that assets (e.g., spectrum and poles) are managed efficientlysuch as through rules on right of way, and access to supportinfrastructure of municipalities and competitors.

 

In addition, the National Broadband Planrecommends that the FCC make 500 megahertz of spectrum available for broadbanduse within the next ten years, of which 300 MHz of high-value spectrum between225 MHz and 3.7 gigahertz should be made available for mobile use within fiveyears.

 

Also, the National Broadband Plan recommendsthat Congress consider expanding the FCC’s authority to enable it to conductincentive auctions in which incumbent licensees may relinquish rights inspectrum assignments for the FCC to reclaim and re-license that spectrum foranother purpose which could include mobile uses.

 

(3)  Reform currentuniversal service mechanisms to support deployment of broadband in high-costareas; and ensure that low-income Americans can afford broadband; and, inaddition, support efforts to boost adoption and utilization:

 

Under this approach, among other things, the USFwould be reformed to transfer funding from existing USF mechanisms to a newfund aimed at broadband deployment.  As part of this plan, on April 21,2010, the FCC issued a notice of inquiry and proposed rulemaking with the goalof reforming USF to ultimately transition USF compensation from currentrecipients for the provision of voice services to carriers for the provision ofbroadband in unserved areas.  If such actions are taken, they could reducesupport for wireless recipients of USF funds, which could have a materialadverse effect on U.S. Cellular.

 

The National Broadband Plan also contemplates areform of inter-carrier compensation in conjunction with the changes to theUSF. In the notice of inquiry and proposed rulemaking of April 21, 2010,the FCC indicated that it was seeking comment on the relationship of the USFand existing inter-carrier compensation and ways to reform inter-carriercompensation.  However, the notice ofinquiry and proposed rulemaking of April 21, 2010 does not make anyspecific recommendations concerning inter-carrier compensation and, thus, theissue is likely to be the subject of further rulemaking proceedings by the FCC.

 

(4)  Reform laws,policies, standards and incentives to maximize the benefits of broadband insectors that the government influences significantly, such as public education,health care and government operations:

 

Under this approach, among other things, stateand local governments would be encouraged to invest in broadband and toimplement online service delivery and to use cloud-computing models.

 

TheFCC notes that about one-half of the plan will be addressed by the FCC, whilethe remainder would be addressed by Congress, the Executive Branch and thestate and local government working closely with private and non-profitsectors.  U.S. Cellular cannot predictthe outcome of these deliberations or what effect any final rules, regulationsor laws may have on its ability to compete in the provision of wirelessbroadband service to its customer base. Changes in regulation or the amount ordistribution of funds to U.S. Cellular and other telecommunications serviceproviders could impact competition in certain of U.S. Cellular’s service areas,and could have a material adverse affect on U.S. Cellular’s business, financialcondition or results of operations.

 

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NetNeutrality

 

Asdisclosed in U.S. Cellular’s Annual Report on Form 10-K for the year endedDecember 31, 2009, the FCC initiated a rulemaking proceeding in 2009designed to codify its existing “Net Neutrality” principles and impose newrequirements that could have the effect of restricting the ability of wirelessInternet service providers to manage applications and content that traversetheir networks. These principles, which the FCC initially announced in2005, espoused the right of consumers to access lawful Internet content, to runapplications and use services of their choice. In 2008, the FCC ruled that Comcast had violated these principles bymoderating the amount of bandwidth used by certain peer-to-peer services andordered Comcast to discontinue this practice. Comcast challenged this orderand, on April 6, 2010, the U.S. Court of Appeals for the District ofColumbia Circuit ruled that the FCC had exceeded its authority under theCommunications Act of 1934, as amended, when it sought to regulate Comcast’snetwork management practices for its high-speed Internet access service. In2010, the FCC sought and received comments on its Net Neutrality proposals andconcerning the impact of the Comcast case on those proposals.  It is currently evaluating thosecomments.  Accordingly, the status of theFCC’s network neutrality proceeding is uncertain at this time and, as a result,there may be further proceedings or legislation relating to the FCC’s authorityto regulate the Internet. U.S. Cellular cannot predict the ultimate outcome ofthis matter or the effect it will have on its wireless broadband services.

 

**2010 Estimates**

 

U.S.Cellular’s estimates of full-year 2010 results are shown below. Such estimatesrepresent U.S. Cellular’s views as of the date of filing of U.S. Cellular’sQuarterly Report on Form 10-Q (“Form 10-Q”) for the quarterly periodended March 31, 2010. Such forward-looking statements should not beassumed to be accurate as of any future date. U.S. Cellular undertakes no dutyto update such information whether as a result of new information, futureevents or otherwise. There can be no assurance that final results will notdiffer materially from such estimated results.

 
| ** **                                                                                                | ** ** | **2010  Estimated Results** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| Service revenues                                                                                          |       | $3,975-$4,075 million            |       |
| Adjusted OIBDA (1)                                                                                        |       | $850-$950 million                |       |
| Operating income                                                                                          |       | $250-$350 million                |       |
| Depreciation,  amortization and accretion expenses, and losses on disposals and impairment  of assets (2) |       | Approx. $600 million             |       |
| Capital expenditures                                                                                      |       | Approx. $600 million             |       |

 

----

(1)   Adjusted OIBDA is defined as operating incomeexcluding the effects of: depreciation, amortization and accretion (OIBDA); thenet gain or loss on asset disposals (if any); and the loss on impairment ofintangible assets (if any). This amount may also be commonly referred to bymanagement as operating cash flow. This amount should not be confused with Cashflows from operating activities, which is a component of the Consolidated Statementof Cash Flows.

 

(2)   The 2010 Estimated Results include estimates forDepreciation, amortization and accretion expenses and losses on disposals ofassets, but do not include an estimate for losses on impairment of assets sincethese can not be predicted.

 

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 continue tosignificantly impact actual results. U.S. Cellular expects to continue itsfocus on customer satisfaction by delivering a high quality network,attractively priced service plans, a broad line of handsets and other products,and outstanding customer service in its company-owned and agent retail storesand customer care centers. U.S. Cellular believes that future growth in itsrevenues will result primarily from selling additional products and services,including data products and services, to its existing customers, increasing thenumber of multi-device users among its existing customers and attractingwireless users switching from other wireless carriers, rather than by addingusers that are new to wireless service. U.S. Cellular is focusing onopportunities to increase revenues, pursuing cost reduction initiatives invarious areas and implementing a number of initiatives to enable future growth.The initiatives are intended, among other things, to allow U.S. Cellular toaccelerate its introduction of new products and services, better segment itscustomers for new services and retention, sell additional services such asdata, expand its Internet sales and customer service capabilities, improve itsprepaid products and services and reduce operational expenses over the longterm.

 

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**RESULTS OF OPERATIONS**

 

**Three Months Ended March 31, 2010 Compared toThree Months Ended March 31, 2009**

 

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

 
| **As of March 31, (1)**                                   | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|
| Total market  population of consolidated operating markets (2) |       | 46,546,000 |       | 46,306,000 |       |
| Customers (3)                                                  |       | 6,147,000  |       | 6,243,000  |       |
| Market penetration  (2)                                        |       | 13.2       | %          | 13.5       | %          |
| Total full-time  equivalent employees                          |       | 8,868      |       | 8,754      |       |
| Cell sites in  service                                         |       | 7,310      |       | 6,942      |       |

 
| **For the Three Months Ended March 31, (4)** | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Net retail customer  additions (5)                |       | 24,000   |       | 63,000   |       |
| Net customer  additions (5)                       |       | 6,000    |       | 47,000   |       |
| Average monthly  service revenue per customer (6) |       | $        | 52.42      |     | $          | 52.64 |   |
| Postpay churn rate  (7)                           |       | 1.4      | %          | 1.5      | %          |
|                                                   |            |          |            |          |            |  |  |

 

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(1)   Amounts include results for U.S. Cellular’s consolidated operatingmarkets as of March 31.

 

(2)   Calculated using 2009 and 2008 Claritas population estimates for 2010and 2009, respectively. “Total market population of consolidated operatingmarkets” is used only for the purposes of calculating market penetration ofconsolidated operating markets, which is calculated by dividing customers bythe total market population (without duplication of population in overlappingmarkets).

 

The total 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 90,468,000 and 6.8%, and 83,726,000 and 7.5%, as of March 31, 2010and 2009, respectively.

 

(3)   U.S. Cellular’s customer base consists of the following types ofcustomers:

 
| ** **                                                                                                                | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                | ** ** | **2010**           | ** ** | **2009** | ** ** |
| Customers on postpay  service plans in which the end user is a customer of U.S. Cellular (“postpay  customers”) |       | 5,473,000          |       | 5,480,000 |   |
| Customers on prepaid  service plans in which the end user is a customer of U.S. Cellular (“prepaid  customers”) |       | 295,000            |       | 290,000 |   |
| Total retail  customers                                                                                                   |       | 5,768,000          |       | 5,770,000 |   |
|                                                                                                                      |       |               |       |   |   |
| End user customers  acquired through U.S. Cellular’s agreements with third parties (“reseller  customers”) |       | 379,000            |       | 473,000 |   |
| Total customers                                                                                                           |       | 6,147,000          |       | 6,243,000 |   |

 

(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 retail customer additions” represents the number of net customersadded to U.S. Cellular’s retail customer base through its marketingdistribution channels; this measure excludes activity related to resellercustomers and customers transferred through acquisitions, divestitures orexchanges.  “Net customer additions”represents the number of net customers added to U.S. Cellular’s overallcustomer base through its marketing distribution channels; this measureincludes activity related to reseller customers but excludes activity relatedto customers transferred through acquisitions, divestitures or exchanges.

 

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(6)   Management uses this measurement to assess the amount of service revenuethat U.S. Cellular generates each month on a per customer basis. Variances inthis measurement are monitored and compared to variances in expenses on a percustomer basis. Average monthly service revenue per customer is calculated asfollows:

 
| ** **                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Service revenues per  Consolidated Statements of Operations (000s) |       | $                                      | 965,188    |   | $ | 983,615 |   |
| Divided by average  customers during period (000s)*                |       | 6,137                                  |       | 6,229 |   |
| Divided by number of  months in each period                        |       | 3                                      |       | 3 |   |
| Average monthly  service revenue per customer                      |       | $                                      | 52.42      |   | $ | 52.64 |   |

 

* “Average customers duringperiod” is calculated by adding the number of total customers, includingreseller customers, at the beginning of the first month of the period and atthe end of each month in the period and dividing by the number of months in theperiod plus one. Acquired and divested customers are included in thecalculation on a prorated basis for the amount of time U.S. Cellular includedsuch customers during each period.

 

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

 

**Components of Operating Income**

** **
| **Three Months Ended  March 31,**                                                 | ** ** | **2010**   | ** ** | **2009**   | ** ** | **Increase/  (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------------------|------------|------------------------|------------|
| **(Dollars in thousands)**                                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                | ** ** | ** **             | ** ** |
| Retail service                                                                         |       | $          | 865,219    |       | $          | 875,839                   |       | $                      | (10,620    | ) | (1 | )% |
| Inbound roaming                                                                        |       | 51,942     |       | 60,057     |       | (8,115                    | )          | (14                    | )%         |
| Other                                                                                  |       | 48,027     |       | 47,719     |       | 308                       |       | 1                      | %          |
| Service revenues                                                                       |       | 965,188    |       | 983,615    |       | (18,427                   | )          | (2                     | )%         |
| Equipment sales                                                                        |       | 58,849     |       | 70,890     |       | (12,041                   | )          | (17                    | )%         |
| Total operating revenues                                                               |       | 1,024,037  |       | 1,054,505  |       | (30,468                   | )          | (3                     | )%         |
|                                                                                   |       |       |       |       |       |                      |       |                   |       |
| System operations (excluding Depreciation, amortization and accretion  reported below) |       | 207,077    |       | 199,883    |       | 7,194                     |       | 4                      | %          |
| Cost of equipment sold                                                                 |       | 161,105    |       | 185,701    |       | (24,596                   | )          | (13                    | )%         |
| Selling, general and administrative                                                    |       | 428,661    |       | 408,159    |       | 20,502                    |       | 5                      | %          |
| Depreciation, amortization and accretion                                               |       | 143,233    |       | 137,878    |       | 5,355                     |       | 4                      | %          |
| Loss on asset disposals, net                                                           |       | 5,176      |       | 3,945      |       | 1,231                     |       | 31                     | %          |
| Total operating expenses                                                               |       | 945,252    |       | 935,566    |       | 9,686                     |       | 1                      | %          |
| Operating income                                                                       |       | $          | 78,785     |       | $          | 118,939                   |       | $                      | (40,154    | ) | (34 | )% |

 

**Operating Revenues**

 

***Service revenues***

 

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

 

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***Retail service revenues***

 

The decrease in Retail service revenues in 2010 was due to a decrease inthe average number of customers; the impact of fewer customers more than offsetthe impact of higher revenue per customer.

 

·      The average number of customers decreased to 6,137,000 in 2010 from6,229,000 in 2009.

 

·      Average monthly retail service revenue per customer increased less than1% to $46.99 in 2010 from $46.87 in 2009. The net increase resulted primarilyfrom growth in revenues from data products and services and revenues related toregulatory cost recovery, which together offset a decline in revenues fromvoice services.

 

Revenues from data products and services totaled $201.3 million in2010 and $157.0 million in 2009, and represented 21% of service revenues in2010 compared to 16% of service revenues in 2009. Such growth, which positivelyimpacted average monthly retail service revenue per customer, reflectedcustomers’ continued and increasing usage of U.S. Cellular’s text, picture, andvideo messaging services, **easy**edgeSM service and applications,premium mobile Internet services, smartphone handsets and services, andmodems.  In March 2010, U.S.Cellular launched new data offerings for its prepaid customers, which includedpicture and video messaging, ringtones, email services, and **easy**edgeSM service and applications.U.S. Cellular expects that the growth in revenues from data products andservices will continue as customers increasingly purchase premium and smartphonedevices along with data plans and applications and utilize U.S. Cellular’s3G network. U.S. Cellular’s 3G network covered over 75% of its customersas of March 31, 2010. U.S. Cellular expects to expand its 3G networkto cover approximately 98% of its customers by the summer of 2010.

 

Revenues related to regulatory cost recovery increased due to anincrease in the USF contribution rate established by the FCC to 14.1% in 2010 from 9.5% in 2009.

 

Revenues from voice servicesdeclined year-over-year primarily due to a reduction in average voice revenueper customer.  The reduction in averagevoice revenue per customer reflects industry competition which has resulted inlower pricing overall as well as growth in family plans and service plans withenhanced coverage areas and value (such as free incoming calls, freemobile-to-mobile and unlimited minutes). Also, decreases in the average prepaid customer base and the averagerevenue per prepaid customer contributed to a decline in prepaid voicerevenues. U.S. Cellular expects continued pressure on revenues from voiceservices in the foreseeable future due to industry competition related toservice plan offerings.

 

***Inbound roaming revenues***

 

The decrease in Inbound roaming revenues in2010 was due primarily to a decline in roaming revenues from the combinedentity of Verizon Wireless (“Verizon”) and Alltel Corporation (“Alltel”). In January 2009,Verizon acquired Alltel. As a result of this transaction, the networkfootprints of Verizon and Alltel were combined. This has resulted in a decreasein inbound roaming revenues for U.S. Cellular, since the combined Verizonand Alltel entity has reduced its usage of U.S. Cellular’s network incertain coverage areas that were used by Verizon and Alltel as separateentities. U.S. Cellular anticipates that inbound roaming revenues for thefull year 2010 will be flat to slightly higher than the prior year due to thepositive impact of increasing minutes of use and increasing data usage fromU.S. Cellular’s roaming partners, partially offset by the negative impactof decreasing rates per minute or kilobyte of use.

 

***Equipment sales revenues***

 

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

 

U.S. Cellular’s customer retention efforts include offering newsmartphones and premium handsets at discounted prices to existing customers asthe expiration date of the customer’s service contract approaches. U.S.Cellular also continues to sell handsets to agents; this practice enables U.S.Cellular to provide better control over the quality of handsets sold to itscustomers, establish roaming preferences and earn quantity discounts fromhandset manufacturers which are passed along to agents. U.S. Cellularanticipates that it will continue to sell handsets to agents in the future.

 

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The decrease in 2010 equipment sales revenues was driven primarily bydeclines of 12% in total handsets sold and 8% in average revenue per handsetsold. Total handsets sold declined due to fewer new sales and renewaltransactions. Average revenue per handset sold declined due to aggressivepromotional pricing across all categories of handsets.

 

**Operating Expenses**

 

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

 

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

 

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

 

·      Maintenance, utility andcell site expenses increased $5.2 million, or 7%, driven primarily by anincrease in the number of cell sites within U.S. Cellular’s network. The numberof cell sites totaled 7,310 at March 31, 2010 and 6,942 at March 31,2009, as U.S. Cellular continued to grow by expanding and enhancing coverage inits existing markets.

 

·      Expenses incurred whenU.S. Cellular’s customers used other carriers’ networks while roaming increased$1.4 million, or 3%, due primarily to higher data usage.

 

U.S. Cellular expects total system operations expenses to increase on ayear-over-year basis 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 totalcustomer usage, driven by text messaging and other data usage, both on U.S. Cellular’snetwork and by U.S. Cellular’s customers on other carriers’ networks whenroaming.

 

***Cost of equipment sold***

 

Cost of equipment sold decreased in 2010 due primarily to a 12% declinein total handsets sold as well as a slight reduction in the average cost perhandset sold. Total handsets sold declined due to fewer new sales and renewaltransactions.

 

***Selling, general and administrativeexpenses***

 

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

 

Key components of the net increase in Selling, general andadministrative expenses in 2010 were as follows:

 

·      Selling and marketingexpenses decreased by $6.2 million, or 3%, due primarily to lower commissionsexpense reflecting fewer new sales and renewal transactions; and loweradvertising expense due to differences in the timing of spending for mediapurchases.

 

·      General and administrative expenses increased $26.7 million, or 13%, dueto higher USF contributions (most of the USF contribution expenses are offsetby revenues for amounts passed through to customers as discussed above); highercosts related to investments in multi-year initiatives as described in theOverview section; costs of the Battery Swap program; and higher employeerelated expenses.

 

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U.S. Cellular expects Selling, general and administrative expenses toincrease on a year-over-year basis 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 andaccretion***

 

Depreciation,amortization and accretion increased due primarily to an increase in the grossproperty, plant and equipment balances from 2009 to 2010.

 

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

 

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

 

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

 

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**Components of Other Income (Expense)**

** **
| **Three Months Ended March 31,**                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Increase/**  | ** ** | **Percentage** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|----------------|------------|
| **(Dollars in thousands, except per share amounts)**                   | ** ** | **2010**   | ** ** | **2009**   | ** ** | **(Decrease)** | ** ** | **Change**     | ** ** |
| Operating income                                                       |       | $          | 78,785     |       | $          | 118,939        |       | $              | (40,154    | ) | (34 | )% |
|                                                                   |       |       |       |       |       |           |       |           |       |
| Equity in earnings of unconsolidated entities                          |       | 24,694     |       | 25,327     |       | (633           | )          | (2             | )%         |
| Interest and dividend income                                           |       | 1,021      |       | 477        |       | 544            |       | >100        | %          |
| Interest expense                                                       |       | (16,286    | )          | (19,287    | )          | 3,001          |       | 16             | %          |
| Other, net                                                             |       | (65        | )          | 280        |       | (345           | )          | >(100       | )%         |
| Total investment and other income (expense)                            |       | 9,364      |       | 6,797      |       | 2,567          |       | 38             | %          |
|                                                                   |       |       |       |       |       |           |       |           |       |
| Income before income taxes                                             |       | 88,149     |       | 125,736    |       | (37,587        | )          | (30            | )%         |
| Income tax expense                                                     |       | (34,198    | )          | (35,226    | )          | 1,028          |       | 3              | %          |
|                                                                   |       |       |       |       |       |           |       |           |       |
| Net income                                                             |       | 53,951     |       | 90,510     |       | (36,559        | )          | (40            | )%         |
| Less: Net income attributable to  noncontrolling interests, net of tax |       | (5,719     | )          | (6,008     | )          | 289            |       | 5              | %          |
| Net income attributable to U.S. Cellular  shareholders                 |       | $          | 48,232     |       | $          | 84,502         |       | $              | (36,270    | ) | (43 | )% |
|                                                                   |       |       |       |       |       |           |       |           |       |
| Basic earnings per share attributable to U.S.  Cellular shareholders   |       | $          | 0.56       |       | $          | 0.97           |       | $              | (0.41      | ) | (42 | )% |
| Diluted earnings per share attributable to U.S.  Cellular shareholders |       | $          | 0.55       |       | $          | 0.97           |       | $              | (0.42      | ) | (43 | )% |

 

***Equity in earningsof unconsolidated entities***

 

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

 

U.S. Cellular’s investment in the Los Angeles SMSA Limited Partnershipcontributed $16.9 million to Equity in earnings of unconsolidated entitiesin each of 2010 and 2009.

 

***Interest expense***

 

Interest expense decreased year-over-year due to the redemption of U.S.Cellular’s $130.0 million, 8.75% senior notes in December 2009.

 

***Income tax expense***

 

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

 

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**RECENT ACCOUNTING PRONOUNCEMENTS**

 

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

 

See Note 3 — Summary ofSignificant Accounting Policies in the Notes to Consolidated FinancialStatements for information on recent accounting pronouncements.

 

**FINANCIAL RESOURCES**

 

U.S. Cellular operates a capital- andmarketing-intensive business. U.S. Cellular utilizes cash from its operatingactivities, cash proceeds from divestitures, short-term credit facilities andlong-term debt financing to fund its acquisitions (including licenses),construction costs, operating expenses and Common Share repurchases. Cash flowsmay fluctuate from quarter to quarter and year to year due to seasonality, thetiming of acquisitions, capital expenditures and other factors. The table belowand the following discussion in this Financial Resources section summarize U.S.Cellular’s cash flow activities in the three months ended March 31, 2010compared to the three months ended March 31, 2009.

 
| **(Dollars  in thousands)**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from  (used in):                           |       |     |       |     |       |
| Operating activities                                  |       | $        | 152,252    |     | $          | 185,562 |   |
| Investing activities                                  |       | (149,958 | )          | (149,628 | )          |
| Financing activities                                  |       | (7,047   | )          | (15,133  | )          |
| Net increase  (decrease) in cash and cash equivalents |       | $        | (4,753     | )        | $          | 20,801 |   |

 

**Cash Flows from Operating Activities**

 

The following table presents Adjusted OIBDAand Adjusted OIBDA margin and is included for purposes of analyzing changes incash flows from operating activities. U.S. Cellular believes these measuresprovide useful information to investors regarding U.S. Cellular’s financialcondition and results of operations because they highlight certain key cash andnon-cash items and their impacts on cash flows from operating activities:

 
| **(Dollars in thousands)**                | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Operating income                          |       | $        | 78,785     |     | $          | 118,939 |   |
| Non-cash items                            |       |     |       |     |       |
| Depreciation,  amortization and accretion |       | 143,233  |       | 137,878  |       |
| Loss on asset  disposals, net             |       | 5,176    |       | 3,945    |       |
| Adjusted OIBDA  (1) (2)              |       | $        | 227,194    |     | $          | 260,762 |   |
|                                      |       |     |       |     |       |
| Adjusted OIBDA  margin (3)                |       | 23.5     | %          | 26.5     | %          |

 

----

(1)          Adjusted OIBDA is defined as operating income excluding the effects of:depreciation, amortization and accretion (OIBDA); the net gain or loss on assetdisposals (if any); and the loss on impairment of intangible assets (if any).This amount may also be commonly referred to by management as operating cashflow. This amount should not be confused with Cash flows from operatingactivities, which is a component of the Consolidated Statement of Cash Flows.

 

(2)          Adjusted OIBDA excludes thenet gain or loss on asset disposals and loss on impairment of intangibleassets, if any, in order to show operating results on a more comparable basisfrom period to period.  U.S. Cellulardoes not intend to imply that any of such amounts that are excluded arenon-recurring, infrequent or unusual and, accordingly, they may be incurred inthe future.

 

(3)          Adjusted OIBDA margin is defined as Adjusted OIBDA divided by Servicerevenue. Equipment revenues are excluded from the denominator of thecalculation since equipment is generally sold at a net negative margin, and theequipment subsidy is effectively a cost for purposes of assessing businessresults.  U.S. Cellular believes that this calculation method isconsistent with the method used by certain investors to assess U.S. Cellular’sbusiness results.  Adjusted OIBDA marginmay also be commonly referred to by management as operating cash flow margin.

 

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Cash flows from operating activities in 2010were $152.3 million, a decrease of $33.3 million from 2009.  Significant changes included the following:

 

·                  AdjustedOIBDA, as shown in the table above, decreased by $33.6 million primarily due toa decrease in operating income.  Seediscussion in the “Results of Operations” for factors that affected operatingincome.

 

·                  Changesin working capital accounts, excluding accrued taxes, resulted in net cashoutflows of $83.4 million and $93.9 million in 2010 and 2009, respectively,causing a year-over-year increase in cash flows of $10.5 million.  The 2009 period included a $34.0 milliondeposit related to a pending income tax audit which was paid to TDS for U.S.Cellular’s proportionate share of a deposit TDS made to the Internal RevenueService (“IRS”) to eliminate any potential interest expense due to the IRSrelated to a pending income tax audit subsequent to the date of the deposit.The deposit was recorded in Change in other assets and liabilities in theConsolidated Statement of Cash Flows in 2009.

 

·                  Incometax payments, net of refunds, were $15.8 million in 2010 and income tax refundswere $3.5 million in 2009, resulting in a decrease in cash flows of$19.3 million.  This decreaseprimarily relates to tax payments made in 2010 related to the 2009 tax year.

 

**Cash Flows from Investing Activities**

 

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

 

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

 

Cash used for property, plant and equipmentand system development expenditures totaled $121.5 million in 2010 and$137.7 million in 2009.  Theseexpenditures were made to construct new cell sites, increase capacity inexisting cell sites and switches, upgrade technology including the overlay of3G technology in certain markets, develop new and enhance existing officesystems, and construct new and remodel existing retail stores.

 

Thefollowing table presents Free cash flow. U.S. Cellular believes that Free cash flow as reported by U.S. Cellularis useful to investors and other users of its financial information inevaluating the amount of cash generated by business operations, after capitalexpenditures.

 
| **(Dollars in thousands)**           | ** ** | **2010** | ** ** | **2009** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Cash flows from operating activities |       | $        | 152,252    |     | $          | 185,562 |   |
| Capital expenditures                 |       | (121,514 | )          | (137,741 | )          |
| Free cash flow (1)                   |       | $        | 30,738     |     | $          | 47,821 |   |

 

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(1)          Free cash flow is defined as Cash flows from operating activities lessCapital expenditures. Free cash flow is a non-GAAP financial measure.

 

See Cash flows from Operating Activities andCash flows from Investing Activities for details on the changes to thecomponents of Free cash flow.

 

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Cash payments for acquisitions in 2010 and2009 were as follows:

 
| **(Dollars in thousands)** | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| U.S. Cellular  licenses    |       | 3,800    |       | 11,850   |       |
| Other                      |       | —   |       | 277      |       |
| Total                      |       | $        | 3,800      |     | $          | 12,127 |   |
|                            |            |          |            |          |            |  |  |

 

In 2010, U.S.Cellular invested in commercial paper with a face value of $25.0 millionguaranteed under the Federal Deposit Insurance Corporation’s TemporaryLiquidity Guarantee Program.  The notespay interest semi-annually and mature in March 2011.

 

**Cash Flows from Financing Activities**

 

In 2010 and2009, U.S. Cellular repurchased Common Shares at an aggregate cost of $5.2 millionand $13.3 million,respectively.  See Note 11 — Common ShareRepurchases in the Notes to Consolidated Financial Statements for additional informationrelated to these transactions.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

U.S. Cellular believes that existing cashbalances, expected cash flows from operating activities and funds availableunder its revolving credit facility provide substantial liquidity and financialflexibility for U.S. Cellular to meet its normal financing needs (includingworking capital, construction and development expenditures, and sharerepurchases under its approved program) for the foreseeable future. Inaddition, U.S. Cellular may have access to public and private capital marketsto help meet its financing needs.

 

Consumer spending significantly impactsU.S. Cellular’s operations and performance. Factors that influence levelsof consumer spending include: unemployment rates, increases in fuel and otherenergy costs, conditions in residential real estate and mortgage markets, laborand health care costs, access to credit, consumer confidence and othermacroeconomic factors. Changes in these and other economic factors could have amaterial adverse effect on demand for U.S. Cellular’s products andservices and on U.S. Cellular’s financial condition and results ofoperations.

 

U.S. Cellular cannot provide assurances thatcircumstances that could have a material adverse affect on its liquidity orcapital resources will not occur. Economic conditions, changes in financialmarkets 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 resultsof operations.

 

**Cash and Cash Equivalents**

 

AtMarch 31, 2010, U.S. Cellular had $289.7 million in cash and cashequivalents, which include cash and short-term, highly liquid investments withoriginal maturities of three months or less. The primary objective of U.S.Cellular’s cash and cash equivalents investment activities is to preserveprincipal.  At March 31, 2010, U.S.Cellular invested a significant portion of its cash balances in money marketfunds that invested exclusively in short-term U.S. Treasury securitiesor repurchase agreements backed by U.S.Treasury securities. U.S. Cellular monitors the financial viability ofthe money market funds in which it invests and believes that the credit risk associated with these investments is low.

 

**Short-term Investments**

 

As of March 31, 2010, U.S. Cellular held commercial paper with aface value of $25.0 million guaranteed under the Federal Deposit InsuranceCorporation’s Temporary Liquidity Guarantee Program.  These notes issued by General ElectricCapital Corporation pay interest semi-annually at the coupon rate of 1.8% andmature on March 11, 2011. This investment was purchased at a premium andis carried at amortized cost on the balance sheet ($25.3 million as of March 31,2010).

 

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**Revolving Credit Facility**

 

U.S. Cellular has a $300 million revolving credit facility availablefor general corporate purposes.  At March 31,2010, there were no outstanding borrowings and $0.2 million of outstandingletters of credit, leaving $299.8 million available for use.  In connection with U.S. Cellular’s revolvingcredit facility, TDS and U.S. Cellular entered into a subordination agreementdated June 30, 2009 together with the administrative agent for the lendersunder U.S. Cellular’s revolving credit facility.  At March 31, 2010, no U.S. Cellular debtwas subordinated pursuant to this subordination agreement.

 

U.S.Cellular’s interest cost on its revolving credit facility is subject toincrease if its current credit rating from Standard & Poor’s RatingService, Moody’s Investors Service and/or Fitch Ratings is lowered, and issubject to decrease if the rating is raised. The credit facility would not cease to be available nor would thematurity date accelerate solely as a result of a downgrade in U.S. Cellular’scredit rating.  However, a downgrade inU.S. Cellular’s credit rating could adversely affect its ability to renew thecredit facility or obtain access to other credit facilities in the future.

 

U.S.Cellular’s credit ratings as of March 31, 2010 and the dates that suchratings were issued/re-affirmed were as follows:

 

| Moody’s (re-affirmed September 21, 2009)           |   | Baa2 | -  stable outlook  |
|--------------------------------------------------------------|--------|------|--------------------|
| Standard & Poor’s (issued March 5,  2010) |   | BBB- | -  stable outlook  |
| Fitch Ratings (issued August 20, 2009)                  |   | BBB+ | - negative outlook |

 

The continued availability of the revolvingcredit facility requires U.S. Cellular to comply with certain negative andaffirmative covenants, maintain certain financial ratios and makerepresentations regarding certain matters at the time of each borrowing. Thecovenants also prescribe certain terms associated with intercompany loans fromTDS or TDS subsidiaries to U.S. Cellular or U.S. Cellularsubsidiaries.  U.S. Cellular believes it was incompliance as of March 31, 2010 with all of the covenants and requirementsset forth in its revolving credit facility. There were no intercompany loans atMarch 31, 2010 or 2009.

 

**Long-Term Financing**

 

U.S. Cellular’s long-term debt indenture does not contain anyprovisions resulting in acceleration of the maturities of outstanding debt inthe event of a change in U.S. Cellular’s credit rating. However, a downgrade inU.S. Cellular’s credit rating could adversely affect its ability to obtainlong-term debt financing in the future. U.S. Cellular believes it was in compliance as of March 31, 2010with all covenants and other requirements set forth in its long-term debtindenture.  U.S. Cellular has notfailed to make nor does it expect to fail to make any scheduled payment ofprincipal or interest under such indenture.

 

Thelong-term debt principal payments due for the remainder of 2010 and the nextfour years represent less than 1% of the total long-term debt obligation at March 31,2010.  Refer to Market Risk — Long-TermDebt in U.S. Cellular’s Form 10-K for the year ended December 31,2009 for additional information regarding required principal payments and theweighted average interest rates related to U.S. Cellular’s long-term debt.

 

U.S. Cellular, at its discretion, may fromtime to time seek to retire or purchase its outstanding debt through cashpurchases and/or exchanges for other securities, in open market purchases,privately negotiated transactions, tender offers, exchange offers or otherwise.Such repurchases or exchanges, if any, will depend on prevailing marketconditions, liquidity requirements, contractual restrictions and other factors.The amounts involved may be material.

 

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**Capital Expenditures**

 

U.S.Cellular’s capital expenditures for 2010 are expected to be approximately $600million. These expenditures are expected to be for the following generalpurposes:

 

·                  Expandand enhance U.S. Cellular’s coverage in its service areas;

 

·                  Provideadditional capacity to accommodate increased network usage by currentcustomers;

 

·                  Overlay3G technology in certain markets;

 

·                  EnhanceU.S. Cellular’s retail store network;

 

·                  Developand enhance office systems; and

 

·                  Developnew billing and other customer management related systems and platforms.

 

U.S.Cellular plans to finance its capital expenditures program for 2010 using cashflows from operating activities, existing cash balances and, if necessary,short-term debt.

 

**Acquisitions, Divestitures and Exchanges**

 

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

 

**Variable Interest Entities**

 

U.S. Cellular consolidates certain entities because they are “variableinterest entities” under accounting principles generally accepted in the UnitedStates of America (“GAAP”). See Note 10—Variable Interest Entities (VIEs)in the Notes to Consolidated Financial Statements for the details of thesevariable interest entities. U.S. Cellular may elect to makeadditional capital contributions and/or advances to these variable interestentities in future periods in order to fund their operations.

 

**Common Share Repurchase Program**

 

U.S. Cellular has repurchased and expects to continue torepurchase its Common Shares subject to its repurchase program. For additionalinformation related to the current repurchase authorization and repurchasesmade during 2010 and 2009, see Note 11—Common Share Repurchases in the Notes to Consolidated FinancialStatements and Item 2, Unregistered Sales of Equity Securities and Use ofProceeds.

 

**Contractual and Other Obligations**

 

There was no material change between December 31, 2009 and March 31,2010 to the Contractual and Other Obligations disclosed in Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in U.S. Cellular’s Form 10-K for the year ended December 31,2009.

 

**Off-Balance Sheet Arrangements**

 

U.S. Cellular had no transactions,agreements or other contractual arrangements with unconsolidated entitiesinvolving “off-balance sheet arrangements,” as defined by Securities andExchange Commission (“SEC”) rules, that had or are reasonably likely to have amaterial current or future effect on its financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

 

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**APPLICATIONOF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

U.S. Cellular preparesits consolidated financial statements in accordance with GAAP.  U.S. Cellular’s significant accountingpolicies are discussed in detail in Note 3 — Summary of Significant AccountingPolicies in the Notes to Consolidated Financial Statements and U.S. Cellular’sApplication of Critical Accounting Policies and Estimates is discussed indetail in Management’s Discussion and Analysis of Financial Condition andResults of Operations, included in U.S. Cellular’s Form 10-K for the yearended December 31, 2009.  Changes tosignificant accounting policies are discussed in Note 3 — Summary ofSignificant Accounting Policies in the Notes to Consolidated FinancialStatements.  There were no material changesto U.S. Cellular’s application of critical accounting policies and estimatesduring the three months ended March 31, 2010.

 

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#### ***PRIVATE SECURITIES LITIGATIONREFORM ACT OF 1995***

#### ***SAFE HARBOR CAUTIONARYSTATEMENT***

 

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, 2009.  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 31,2009, 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 tosuccessfully execute its business strategy or allocate resources or capitalcould have an adverse effect on U.S. Cellular’s business, financial conditionor results of operations.*

 

·                  *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 asignificant amount of roaming revenues. As a result of consolidation of companies in the wireless industry, U.S.Cellular roaming revenues have declined significantly from amounts earned incertain prior years.  Further industryconsolidation and continued build outs by existing and new wireless carrierscould cause roaming revenues to decline even more, which would have an adverseeffect on U.S. Cellular’s business, financial condition and results ofoperations.*

 

·                  *A failure by U.S. Cellular to obtain access to adequateradio spectrum to meet current or anticipated future needs and/or to accuratelypredict future needs for radio spectrum could have an adverse effect on U.S.Cellular’s business and operations.*

 

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

 

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

 

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

 

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·                  *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 byother companies has led to increased consolidation in the wirelesstelecommunications industry.  U.S.Cellular’s lower scale relative to larger wireless carriers has in the past andcould in the future prevent or delay its access to new products includinghandsets, new technology and/or new content and applications which couldadversely affect U.S. Cellular’s ability to attract and retain customers and,as a result, could adversely affect its business, financial condition orresults of operations.*

 

·                  *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.*

 

·                  *U.S. Cellular could incur higherthan anticipated intercarrier compensation costs.*

 

·                  *U.S. Cellular is subject tonumerous surcharges and fees from federal, state and local governments, and theapplicability and the amount of these fees are subject to great uncertainty.*

 

·                  *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 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 may not produce the benefits thatU.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 such investments couldhave an adverse effect on U.S. Cellular’s financial condition or resultsof operations.*

 

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·                  *A failure by U.S. Cellular tomaintain flexible and capable telecommunication networks or informationtechnology, or a material disruption thereof, including breaches of network orinformation technology security, could have an adverse effect on U.S. Cellular’sbusiness, financial condition or results of operations.*

 

·                  *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.*

 

·                  *Identification of errors infinancial information or disclosures 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.*

 

·                  *The existence of materialweaknesses in the effectiveness of internal control over financial reportingcould result in inaccurate financial statements or other disclosures or failureto prevent fraud, which could have an adverse effect on U.S. Cellular’sbusiness, 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, indemnities,claims, litigation or otherwise, could require U.S. Cellular to recordcharges in excess of amounts accrued in the financial statements, if any, whichcould have an adverse effect on U.S. Cellular’s financial condition orresults of operations.*

 

·                  *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 could subject U.S. Cellular to higher interestcosts and restrictions on its financing, investing and operating activities andcould decrease its net income and cash flows.*

 

·                  *Disruption in credit or otherfinancial markets, a deterioration of U.S. or global economic conditions orother events, could, among other things, impede U.S. Cellular’s access to orincrease the cost of financing its operating and investment activities and/orresult in reduced revenues and lower operating income and cash flows, whichwould have an adverse effect on U.S. Cellular’s financial condition or resultsof 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.*

 

·                  *U.S. Cellular’s credit facilityand the indenture governing its senior notes include restrictive covenants thatlimit its operating flexibility and U.S. Cellular may be unable to service itsdebt or to refinance its indebtedness before maturity.*

 

·                  *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 ortumors, or may interfere with various electronic medical devices such aspacemakers, could have an adverse effect on U.S. Cellular’s business,financial condition or results of operations.*

 

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·                  *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 expensiveintellectual property litigation or monetary penalties, which could have anadverse effect on 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.*

 

·                  *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 andQualitative Disclosures About Market Risk**

 

**MARKET RISK**

 

**Long-term Debt**

 

Asof March 31, 2010, 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 significant fluctuations in the fairvalues of these fixed-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, 2010.

 

Referto the disclosure under Market Risk — Long-Term Debt in U.S. Cellular’s Form 10-Kfor the year ended December 31, 2009 for additional information regardingrequired principal payments and the weighted average interest rates related toU.S. Cellular’s long-term debt.  Therehave been no material changes to such information since December 31, 2009.

 

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**Item 4. Controls and Procedures**

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Asrequired by SEC Rule 13a-15(b), U.S. Cellular carried out an evaluation,under the supervision and with the participation of management, including itsChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of U.S. Cellular’s disclosure controls and proceduresas of the end of the period covered by this Quarterly Report.  Based onthis evaluation, U.S. Cellular’s Chief Executive Officer and Chief FinancialOfficer concluded that U.S. Cellular’s disclosure controls and procedures wereeffective as of March 31,2010, at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in U.S. Cellular’s internalcontrol over financial reporting during the quarter ended March 31, 2010 that havematerially affected, or are reasonably likely to materially affect, U.S.Cellular’s internal control over financial reporting.

 

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**Part II. Other Information**

 

**Item 1.  Legal Proceedings**

 

U.S. Cellular is involved or may be involved from time to time inlegal proceedings before the FCC, other regulatory authorities, and/or variousstate 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. If only arange 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. The assessment of the expected outcomes oflegal proceedings is a highly subjective process that requires judgments aboutfuture events. The legal proceedings are reviewed at least quarterly todetermine the adequacy of accruals and related financial statement disclosures.The ultimate outcomes of legal proceedings could differ materially from amountsaccrued in the financial statements.

 

**Item 1A.  Risk Factors.**

 

Inaddition to the information set forth in this Form 10-Q, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors”in U.S. Cellular’s Annual Report on Form 10-K for the year ended December 31,2009, 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, 2009 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 condition and/oroperating results. In addition, you are referred to the above Management’sDiscussion and Analysis of Financial Condition and Results of Operations,particularly the section captioned “Overview — Recent Development,” fordisclosures related to the FCC’s National Broadband Plan and other developmentsthat have occurred since U.S. Cellular filed its Form 10-K for the yearended December 31, 2009. 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, 2009.

 

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

 

On November 17,2009, the Board of Directors of U.S. Cellular authorized the repurchase of upto 1,300,000 Common Shares during the remainder of 2009 and additionalrepurchases of up to 1,300,000 Common Shares on an annual basis in each yearthereafter, on a cumulative basis.  Thesepurchases will be made pursuant to open market purchases, block purchases,private purchases, or otherwise, depending on market prices and other conditions. This authorization does not have an expiration date.

 

Duringthe three months ended March 31, 2010, U.S. Cellular repurchased 127,500Common Shares for $5.2 million, or an average of $40.68 per share pursuant tothis authorization.

 

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

 
| ** **                                                           | ** ** | **(a)**              | ** ** | **(b)**           | ** ** | **(c)**                       | ** ** | **(d)**                       | ** ** |
|----------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | ** **           | ** ** | ** **        | ** ** | **Total Number of**           | ** ** | **Maximum Number of**         | ** ** |
| ** **                                                           | ** ** | ** **           | ** ** | ** **        | ** ** | **Common Shares**             | ** ** | **Common Shares That**        | ** ** |
| ** **                                                           | ** ** | **Total Number**     | ** ** | **Average Price** | ** ** | **Purchased as Part of** | ** ** | **May Yet Be Purchased** | ** ** |
| ** **                                                           | ** ** | **of Common**        | ** ** | **Paid Per**      | ** ** | **Publicly Announced**        | ** ** | **Under the**                 | ** ** |
| **Period**                                                           | ** ** | **Shares Purchased** | ** ** | **Common Share**  | ** ** | **Plans or Programs**         | ** ** | **Plans or Programs**         | ** ** |
| January 1 – 31,  2010                                      |       | —               |       | $                 | —     |                          | —     |                          | 2,509,800  |   |
| February 1 –  28, 2010                                     |       | —               |       | —            |       | —                        |       | 2,509,800                     |       |
| March 1 – 31,  2010                                        |       | 127,500              |       | 40.68             |       | 127,500                       |       | 2,382,300                     |       |
| Total for or as of  the end of the quarter ended March 31, 2010 |       | 127,500              |       | $                 | 40.68      |                          | 127,500    |                          | 2,382,300  |   |

 

Thefollowing is additional information with respect to the foregoingauthorization:

 

i.                  Thedate the program was announced was November 20, 2009 by Form 8-K

 

ii.               Theamount approved was up to 1,300,000 U.S. Cellular Common shares on an annualbasis in 2009 and continuing each year thereafter on a cumulative basis.

 

iii.            Thereis no expiration date for the program.

 

iv.           Theauthorization did not expire during the first quarter of 2010.

 

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 2010.

 

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**Item 5. Other Information.**

 

1.               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 2010. U.S. Cellular had no borrowings outstandingunder its revolving credit facility as of March 31, 2010.

 

Adescription of U.S. Cellular’s revolving credit facility is included under Item1.01 in U.S. Cellular’s Current Report on Form 8-K dated June 30, 2009 and isincorporated by reference herein.

 

2.               Thefollowing information is being provided to update prior disclosures madepursuant to the requirements of Form 8-K, Item 5.02(e) — Departure ofDirectors or Certain Officers; Election of Directors; Appointment of CertainOfficers; Compensatory Arrangements of Certain Officers:

 

OnJanuary 30, 2010, U.S. Cellular entered into an amendment of anEmployment, Consulting and General Release Agreement dated November 3,2009 with U.S. Cellular’s former Executive Vice President and Chief OperatingOfficer, Jay M. Ellison.  A copy of such agreement was filed by U.S.Cellular on a Current Report on Form 8-K dated November 3, 2009.Pursuant to the amendment, Mr. Ellison agreed to perform certainadditional consulting services not contemplated by the foregoing agreement atthe rate of $250 per hour.  A copy of theamendment is attached to this Form 10-Q and is incorporated by referenceherein.

 

**Item 6. Exhibits**

 

Exhibit 10— Amendment dated January 30, 2010 to Employment, Consulting and GeneralRelease Agreement dated November 3, 2009 between U.S. Cellular and Jay M.Ellison.

 

Exhibit 11— Statement regarding computation of per share earnings is included herein asNote 6 — Earnings Per Share in the Notes to Consolidated Financial Statements.

 

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

 

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

 

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

 

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

 

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

 

The foregoing exhibits include only the exhibits thatrelate specifically to this Form 10-Q or that supplement the exhibitsidentified in U.S. Cellular’s Form 10-K for the year ended December 31,2009.  Reference is made to U.S. Cellular’sForm 10-K for the year ended December 31, 2009 for a complete list ofexhibits, which are incorporated herein except to the extent supplemented orsuperseded above.

 

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SIGNATURES

 

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

 

 
|                     | UNITED STATES CELLULAR CORPORATION                 |   |
|--------------------------|----------------------------------------------------|--------|
|                     | (Registrant)                                       |
|                     |                                               |
| Date: May 10,  2010 | /s/ John E. Rooney                                 |
|                     | John E. Rooney                                     |
|                     | President and Chief Executive Officer              |
|                     | (Principal Executive Officer)                      |
|                     |                                               |
|                     |                                               |
| Date: May 10,  2010 | /s/ Steven T. Campbell                             |
|                     | Steven T. Campbell                                 |
|                     | Executive Vice President-Finance,                  |
|                     | Chief Financial Officer and Treasurer              |
|                     | (Principal Financial Officer)                      |
|                     |                                               |
|                     |                                               |
| Date: May 10,  2010 | /s/ Kenneth R. Meyers                              |
|                     | Kenneth R. Meyers                                  |
|                     | Chief Accounting Officer                           |
|                     | (Principal Accounting Officer)                     |
|                     |                                               |
| Date: May 10,  2010 | /s/ Ljubica A. Petrich                             |
|                     | Ljubica A. Petrich 

Vice President and Controller |
|                          |                                                    |        |  |

 

Signaturepage for the U.S. Cellular 2010 First Quarter Form 10-Q

 

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