The guidance set forth in Auditing Standard No. 2 ("AS2") of the Public Company Accounting Oversight Board states that the restatement of previously issued financial statements to reflect the correction of a misstatement should be regarded as at least a significant deficiency in, and is a strong indicator of a material weakness in internal control over financial reporting. In connection with the expected filing of the amended 2004 Form 10-K, U.S. Cellular has concluded that a material weakness existed as of Dec. 31, 2004, which precludes U.S. Cellular from concluding that its internal control over financial reporting was effective as of Dec. 31, 2004. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the interim or annual financial statements will not be detected. Therefore, U.S. Cellular's Management Report on Internal Control Over Financial Reporting, which was contained in Item 9A of the Form 10-K as of and for the year ended Dec. 31, 2004 and which stated that U.S. Cellular's internal control over financial reporting was effective as of Dec. 31, 2004, can no longer be relied on and will be restated in connection with the filing of the amended Form 10-K. In such amended Form 10-K, (i) U.S. Cellular management will conclude that as of Dec. 31, 2004 U.S. Cellular did not maintain effective controls over the financial reporting process due to an insufficient number of qualified personnel with the required proficiency to apply the company's accounting policies in accordance with U.S. GAAP and (ii) U.S. Cellular expects that PricewaterhouseCoopers LLP, U.S. Cellular's independent public accounting firm, will reissue its report stating that U.S. Cellular did not maintain effective internal control over financial reporting as of Dec. 31, 2004. Also, as a result of the accounting adjustments described above, U.S. Cellular is evaluating the effectiveness of internal control over financial reporting as of Dec. 31, 2004 and Sept. 30, 2005, including a review of controls in the following areas: (1) Universal Service Fund expense; (2) leases; (3) contract termination fees; (4) income tax accounting; and (5) other adjustments and accruals, including the recognition of income from certain investments accounted for under the equity method of accounting. U.S. Cellular is reviewing the impact of these items as part of an overall assessment. As a result, the company believes it is possible that additional material weaknesses in its internal control over financial reporting may be identified and reported. Since December 31, 2004, the company has made several additions to technical accounting and financial reporting personnel to increase its expertise in these areas. Further actions are in process, 2
including the recruiting of additional personnel, providing additional training for the current accounting staff, incorporating more detailed analytical review processes and other actions. While management believes it has made substantial progress on this remediation, additional efforts will be required to fully remediate the material weakness. Management is continuing to develop and implement its plan to remediate this issue. It is necessary for U.S. Cellular to finalize and complete the restatements before U.S. Cellular can file its Form 10-Q for the quarter ended Sept. 30, 2005 because financial information to be included in such Form 10-Q depends on the results of such restatements of prior periods. Such Form 10-Q is due on Nov. 9, 2005, but can be extended to Nov. 14, 2005. It is not expected that the restatements will be completed by the extended deadline of Nov. 14, 2005. Accordingly, U.S. Cellular expects that its Form 10-Q for the quarter ended Sept. 30, 2005 will not be filed on a timely basis. U.S. Cellular expects to file the restatements and the Form 10-Q as soon as possible, but such filing is not expected to be made until mid-December 2005. The restatements and the late filing of the Form 10-Q for the quarter ended Sept. 30, 2005 will result in technical defaults under the revolving credit agreement between U.S. Cellular and certain lenders and under certain forward contracts between subsidiaries of U.S. Cellular and a counterparty. U.S. Cellular has not failed to make nor does it expect to fail to make any scheduled payment of principal or interest under such revolving credit agreements or forward contracts. U.S. Cellular has communicated with the agents for the lenders and the counterparty to obtain waivers from the lenders and the counterparty under such agreements. U.S. Cellular believes that the lenders and the counterparty will agree to waive any defaults that may occur as a result of the restatements and the late filing of the Form 10-Q. However, such actions cannot be assured. In addition, the late filing of the Form 10-Q results in non-compliance under certain debt indentures. However, this non-compliance will not result in events of default unless and until written notice thereof is delivered by the trustee or sufficient holders of debt and, in any event, such events of default would be cured if U.S. Cellular files its Form 10-Q for the quarter ended Sept. 30, 2005 within 90 days of any such notice. As a result, U.S. Cellular believes that it will be able to file the Form 10-Q in sufficient time to avoid any event of default maturing into a default under any indenture. U.S. Cellular has not failed to make nor does it expect to fail to make any scheduled payment of principal or interest under such indentures. U.S. Cellular has notified the American Stock Exchange of the restatements and the expected delay in its filing of the Form 10-Q for the quarter ended Sept. 30, 2005. U.S. Cellular expects to receive a notice of failure to satisfy listing requirements from the American Stock Exchange following such delay in filing. U.S. Cellular will disclose any such notice and the contents of such notice promptly. In such event, U.S. Cellular expects to restore compliance with such listing requirements when it files the restated financial statements for the periods noted herein and the Form 10-Q for the quarter ended Sept. 30, 2005. A summary of the tentative operating data and unaudited results of certain key components of the statement of operations for the third quarter and nine months of 2005, and for the third quarter and nine months of 2004, reflecting anticipated restatements, are included in the table below. There can be no assurance that final results will not differ materially from these preliminary results. 3
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