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Business Context and Reporting Period

Company: United States Cellular Corporation (USM), an 81.9%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).

Reporting Period: Second quarter and six months ended June 30, 2001.

Operations: The Company operates in 142 consolidated cellular markets serving 3.29 million customers (12.83% market penetration) and holds minority interests in 28 additional markets. It is actively acquiring Personal Communication Service (PCS) licenses to expand its footprint.

Key Financial Metrics (Six Months Ended June 30, 2001)

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 11% ($87.9 million) driven by a 17% increase in the customer base. However, average monthly revenue per customer declined 7% to $46.00 due to lower rates and increased competition.
• Expense Increases: Operating expenses rose 13% ($90.4 million). System operations expenses increased 20% due to a 12% increase in cell sites and higher usage minutes. General and administrative expenses surged 28% ($47.8 million) to support customer growth and retention.
• Profitability: Operating income decreased slightly by 2% ($2.5 million) as expense growth outpaced revenue growth. Operating margins compressed from 19.4% to 17.2%.
• Investment Income: Investment and other income dropped 41% to $27.9 million, primarily due to the absence of gains on cellular investments recorded in the prior year ($17.9 million gain in 2000).
• Extraordinary Items: Both periods included extraordinary losses on the extinguishment of debt (Liquid Yield Option Notes). The 2001 loss was $5.2 million; the 2000 loss was $6.1 million.

Guidance, Outlook, and Risks

• Outlook: Management expects service revenues to continue growing but anticipates a slowdown in customer growth and a continued decline in average revenue per customer due to increased competition and market penetration.
• Capital Requirements: The 2001 capital expenditure budget is $425 million to $450 million. $252 million was spent in the first six months, with $173 million to $198 million expected for the remainder of the year.
• Acquisitions: The Company has agreements to acquire PCS licenses in 23 markets for $122.4 million. It also holds an 85% economic interest in Black Crow Wireless L.P., which won 17 PCS licenses in an FCC auction, though some licenses are subject to legal challenges.
• Liquidity: The Company relies on operating cash flow and a $500 million Revolving Credit Facility ($404 million available) to fund operations and acquisitions.
• Risks: Key risks include intensifying competition from PCS operators, declining roaming rates, regulatory changes, and the outcome of litigation regarding FCC license cancellations affecting Black Crow Wireless.
• Accounting Changes: New FASB standards (No. 141 and 142) issued in July 2001 will eliminate goodwill amortization for future acquisitions and require annual impairment testing for existing goodwill, effective January 1, 2002.

Investor Verification Checklist

• Verify the status of the FCC license litigation involving Black Crow Wireless L.P., as a reversal could significantly reduce the Company's financial commitment and asset base.
• Monitor the trend in average monthly revenue per customer and churn rates as competition increases in the Company's markets.
• Review the Company's ability to fund the remaining $173 million to $198 million in capital expenditures and PCS acquisitions using current cash flow and credit facilities.
• Assess the impact of the new FASB standards on future earnings, specifically the cessation of goodwill amortization.
• Confirm the timeline for the completion of pending PCS license acquisitions and the associated cash outflows.