content_image/27402.jpg
## Management’s Discussion and Analysis of Results of Operations and Financial Condition 

future, and that it will continue to provide rebates to agents who sell handsets to new and current customers. 

In these transactions, equipment sales revenue is recognized upon delivery of the related products to the agents, net of any anticipated agent rebates. In most cases, the agents receive a rebate from U.S. Cellular at the time these agents provide handsets to sign up new customers or retain current customers. 

Handset sales to agents, net of all rebates, increased equipment sales revenues by $52.7 million in 2003 and $20.8 million in 2002. Equipment sales to customers through U.S. Cellular’s non-agent channels increased $7.6 million, or 10%, to $85.5 million in 2003 from $77.9 million in 2002 and increased $9.5 million, or 14%, in 2002 from $68.4 million in 2001. Customers added to U.S. Cellular’s customer base through its marketing distribution channels (“gross customer activations”), the primary driver of equipment sales revenues, increased 9% in 2003 and 14% in 2002. Gross customer activations from non-agent channels increased 5% in 2003 and 8% in 2002. 

The increases in gross customer activations from non-agent channels in both years were driven by an increase in store traffic in U.S. Cellular’s markets and the acquisition of the Chicago market in August 2002, which added to U.S. Cellular’s distribution network. The increases in equipment sales revenues from U.S. Cellular’s non-agent channels in both years were primarily attributable to the increase in handsets sold to customers for retention purposes, as U.S. Cellular continued to focus on retaining customers by offering existing customers handset pricing similar to that offered to new customers, particularly as these customers near the expiration date of their service contracts. This impact was partially offset by lower revenue per handset in both years, reflecting the reduction in sales prices to end users as a result of increased competition. 

## Operating Expenses 

<img src='content_image/27402.jpg'>

Operating expenses increased $547.4 million, or 29%, to $2,463.8 million in 2003 from $1,916.4 million in 2002 and increased $338.8 million, or 21%, in 2002 from $1,577.6 million in 2001. 

System operations expenses (excluding depreciation) increased $83.4 million, or 17%, to $576.2 million in 2003 from $492.8 million in 2002 and increased $71.7 million, or 17%, in 2002 from $421.1 million in 2001. System operations expenses include charges from landline telecommunications service providers for U.S. Cellular’s customers’ use of their facilities, costs related to local interconnection to the landline 

network, charges for maintenance of U.S. Cellular’s network, long-dis- tance charges and outbound roaming expenses. The increases in system operations expenses in both years were due to the following factors: 

• increases of 7% and 34%, respectively, in the number of cell sites within U.S. Cellular’s systems, to 4,184 in 2003 from 3,914 in 2002 and from 2,925 in 2001, as U.S. Cellular continues to expand and enhance coverage in its service areas both through acquisitions and internal growth; and 

• increases in minutes of use both on U.S. Cellular’s systems and by U.S. Cellular’s customers using other systems while roaming. 

The ongoing reductions both in the per-minute cost of usage on U.S. Cellular’s systems and in negotiated roaming rates partially offset the above factors. 

As a result of the above factors, the components of system operations expenses were affected as follows: 

• the cost of minutes used on U.S. Cellular’s systems increased $46.5 million, or 38%, in 2003 and $33.9 million, or 38%, in 2002; 

• maintenance, utility and cell site expenses increased $40.3 million, or 31%, in 2003 and $28.1 million, or 27%, in 2002, as the average number of cell sites in service increased 17% and 30% in 2003 and 2002, respectively; in markets where U.S. Cellular maintains two digital radio equipment technologies, the related costs increased on a per cell site basis as well; and 

• expenses incurred when U.S. Cellular’s customers used other systems when roaming decreased $3.4 million, or 1%, in 2003 and increased $9.6 million, or 4%, in 2002. 

System operations expenses increased in both years due to the August 2002 acquisition of the Chicago market, as a full year of activity in the Chicago market is included in 2003 compared to only the period from August 7 – December 31 in 2002. The increases in expenses in the Chicago market in both periods were partially offset by reductions in expenses in other markets, primarily in the Midwest, when certain customers in surrounding markets used the Chicago system. Prior to acquiring the Chicago market, U.S. Cellular paid roaming charges to third parties when any of its customers roamed in the Chicago market. 

Monthly system operations expenses per customer increased 2% to $11.26 in 2003 and increased 4% to $11.09 in 2002 from $10.67 in 2001. This measurement is calculated by dividing total system opera- tions expenses as reported for each of the annual periods by 12, then dividing that quotient by average customers during each respective 12-month period as defined in footnote 4 to the table of summarized operating data shown on page 22. Management uses this measurement to assess the cost of customer usage and network usage and mainte- nance on a per unit basis. 

In total, management expects system operations expenses to increase over the next few years, driven by the following factors: 

• increases in the number of cell sites within U.S. Cellular’s systems as it continues to add capacity and enhance quality in all markets, and begins development activities in new markets; and 

• increases in minutes of use, both on U.S. Cellular’s systems and by U.S. Cellular’s customers on other systems when roaming. 

