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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003, for United States Cellular Corporation (U.S. Cellular). The company is an 82.2%-owned subsidiary of Telephone and Data Systems, Inc. (TDS) and operates wireless markets across the United States. As of the reporting date, the company served 4.24 million customers across 149 operational markets. A significant event during the period was the announcement of a definitive agreement on March 10, 2003, to exchange wireless properties with AT&T Wireless (AWE), involving the transfer of 10 markets in Florida and Georgia in exchange for PCS licenses in 13 states and cash.

Key Financial Metrics

Note: Debt figures include notes payable, long-term debt, and variable prepaid forward contracts. The filing does not provide a single consolidated "Total Debt" line item, but the sum of current and long-term debt obligations is approximately $1.34 billion.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 25% ($117.5 million) driven by a 21% increase in the customer base and the inclusion of the Chicago 20MHz acquisition in the current period (which was not consolidated in Q1 2002).
• Operating Loss: The company reported an operating loss of $6.2 million compared to an operating income of $79.7 million in the prior year. This decline was primarily due to a $23.5 million loss on assets held for sale related to the pending AWE transaction and increased operating expenses.
• Expense Increases: Total operating expenses rose 51% ($203.4 million). Key drivers included:
  • System Operations: Up 28% due to a 31% increase in cell sites and higher minutes of use.
  • Marketing and Selling: Up 37% due to increased customer activations and advertising in the Chicago market.
  • General and Administrative: Up 45% due to billing system conversion costs, bad debt expenses, and customer retention costs.
  • Depreciation: Up 45% reflecting higher fixed asset balances from network expansion and the Chicago acquisition.
• Net Income: Net income swung from a profit of $48.5 million to a loss of $14.6 million, heavily impacted by the asset impairment loss and increased interest expense ($15.5 million vs. $9.0 million).

Guidance, Outlook, and Risks

• Outlook: Management expects operating income for the full year 2003 to be lower than in 2002 due to continued integration costs for the Chicago 20MHz acquisition and network build-out expenses. Service revenues are expected to grow, but average revenue per minute is anticipated to decline due to competition.
• Capital Expenditures: Estimated capital spending for 2003 is between $600 million and $630 million. Approximately $141 million was incurred by March 31, 2003. A significant portion is allocated to migrating the network to a single digital platform (CDMA), with a total projected cost of $385 million to $410 million over 2002-2004.
• Pending Transaction: The AWE exchange is expected to close in the third quarter of 2003. The company anticipates an additional income tax charge of approximately $12 million and a current tax liability of $26 million upon completion.
• Liquidity: The company maintains $293 million in unused capacity under its revolving credit facilities ($20 million under the 1997 facility and $273 million under the 2002 facility). Management believes cash flows and credit facilities are sufficient to meet short- and long-term needs.
• Risks: Key risks include increased competition leading to lower revenue per minute, potential impairment of licenses and goodwill, uncertainty in capital markets affecting financing availability, and regulatory changes. The company also faces risks related to the valuation of marketable equity securities (Vodafone ADRs), though downside risk is hedged via forward contracts.

Investor Verification Checklist

• AWE Transaction Status: Verify the regulatory approval status and expected closing date of the asset exchange with AT&T Wireless, as this impacts future asset base and tax liabilities.
• Chicago 20MHz Integration: Monitor the progress of billing system conversion and customer retention costs, which are currently driving higher G&A expenses.
• Capital Expenditure Execution: Track actual capital spending against the $600-$630 million guidance, specifically regarding the CDMA migration costs.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly given the operating loss and increased leverage.
• Market Penetration: Assess the impact of increased competition on market penetration rates (currently 11.53%) and churn rates (1.6% postpay).