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Business Context and Reporting Period

Company: United States Cellular Corporation (U.S. Cellular)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: U.S. Cellular is a regional wireless operator owning, operating, and investing in wireless markets throughout the United States. It is an 81.3%-owned subsidiary of Telephone and Data Systems, Inc. (TDS). As of September 30, 2005, the company served approximately 5.3 million customers across 242 wireless markets (including pending acquisitions).

Key Financial Metrics (Nine Months Ended Sept 30, 2005)

Note: All 2004 figures presented are "As Restated" to conform to current period presentation and correct prior accounting errors.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 7% ($149.4 million) driven by a 10% increase in the customer base (to 5.3 million) and growth in data product revenues. However, average monthly service revenue per customer declined 2% to $45.10 due to competitive pricing pressures and a higher mix of prepaid/reseller customers.
• Operating Income: Operating income increased 19% ($27.8 million) with margins improving from 7.4% to 8.3% of service revenues. This was achieved despite higher selling, general, and administrative (SG&A) expenses and depreciation costs.
• Restatement Impact: The company restated prior period financials (2004 and 2003) to correct errors in income tax accounting, Universal Service Fund (USF) contributions, customer contract termination fees, and lease accounting. The restatement increased reported Net Income for the nine months ended Sept 30, 2004, by $2.9 million ($0.03 per share).
• Capital Expenditures: Cash used for property, plant, and equipment was $384.8 million, reflecting the addition of 436 cell sites and network capacity upgrades.

Guidance, Outlook, Risks, and Unusual Items

Guidance and Outlook

Management updated full-year 2005 estimates (as of Feb 27, 2006) to include the impact of the ALLTEL property exchange:

• Service Revenues: Approximately $2.8 billion.
• Operating Income: $220 million to $260 million (includes an estimated $40-$45 million pre-tax gain from the ALLTEL exchange).
• Capital Expenditures: Estimated at $580 million to $590 million for the full year.

Unusual Items and Transactions

• ALLTEL Exchange: On Sept 12, 2005, U.S. Cellular agreed to exchange two Idaho markets and $50 million cash for 15 Kansas/Nebraska markets. The transaction closed Dec 19, 2005, with an expected pre-tax gain of $40-$45 million.
• Carroll Wireless: The company contributed $129.9 million to Carroll Wireless, L.P., a designated entity that won 17 licenses in FCC Auction 58. U.S. Cellular consolidates this entity.
• Customer Care Center Closure: The company announced the closure of its Medford, Oregon, Customer Care Center, with exit costs estimated between $2.0 million and $4.0 million.

Risks and Contingencies

• SEC Investigation: On Nov 11, 2005, the SEC announced an investigation into the company's financial restatement. The company intends to cooperate fully.
• Credit Rating Downgrades: Moody's downgraded U.S. Cellular from Baa1 to Baa3 (Nov 2005), increasing borrowing costs on its revolving credit facility. Standard & Poor's placed the rating on Credit Watch Negative (Jan 2006).
• Internal Control Weaknesses: Management concluded disclosure controls were not effective as of Sept 30, 2005, citing insufficient accounting personnel and ineffective controls over income tax accounting.
• Legal Proceedings: The company is involved in litigation regarding rights of first refusal related to the ALLTEL acquisition of Midwest Wireless Holdings.

Investor Verification Checklist

• Restatement Details: Verify the specific adjustments made to income taxes and USF contributions in the restated 2004 and 2005 Q1/Q2 filings.
• SEC Investigation Status: Monitor updates regarding the SEC investigation into the financial restatement and potential penalties or further disclosures.
• Credit Facility Terms: Confirm the current interest rate spread and facility fees on the $700 million revolving credit facility following the Moody's downgrade to Baa3.
• ALLTEL Exchange Closing: Verify the final accounting treatment and actual gain recognized from the ALLTEL property exchange in the Q4 2005 results.
• Internal Control Remediation: Review subsequent filings for progress on remediation of material weaknesses in internal controls over financial reporting.
• Midwest Wireless Litigation: Track the outcome of the lawsuit filed against Midwest Wireless Holdings regarding rights of first refusal.