TDS 10-Q Quarterly Report June 30, 2014

TELEPHONE & DATA SYSTEMS INC /DE/

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10-Q 1 tds_form10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-14157

TELEPHONE AND DATA SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

Delaware

36-2669023

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

30 North LaSalle Street, Suite 4000, Chicago, Illinois 60602

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (312) 630-1900

Indicate by check mark

Yes

• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



• whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer



Non-accelerated filer



Smaller reporting company



• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at June 30, 2014

Common Shares, $0.01 par value

101,032,392 Shares

Series A Common Shares, $0.01 par value

7,185,356 Shares

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2014

Index
				Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)			1

		Consolidated Statement of Operations			1
			Three and Six Months Ended June 30, 2014 and 201 3

		Consolidated Statement of Comprehensive Income			2
			Three and Six Months Ended June 30, 2014 and 201 3

		Consolidated Statement of Cash Flows			3
			Six Months Ended June 30, 2014 and 201 3

		Consolidated Balance Sheet			4
			June 30, 2014 and December 31, 201 3

		Consolidated Statement of Changes in Equity			6
			Six Months Ended June 30, 2014 and 201 3

		Notes to Consolidated Financial Statements			8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			24

		Overview			24

		Six Months Ended June 30, 2014 and 201 3
			Results of Operations — Consolidated		29
			Results of Operations — U.S. Cellular		31
			Results of Operations — TDS Telecom		36

			Three Months Ended June 30, 2014 and 2013
			Results of Operations — Consolidated		42
			Results of Operations — U.S. Cellular		44
			Results of Operations — TDS Telecom		46

		Recent Accounting Pronouncements			49

		Financial Resources			49

		Liquidity and Capital Resources			51

		Application of Critical Accounting Policies and Estimates			54

		Safe Harbor Cautionary Statement			55

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk			58

	Item 4.	Controls and Procedures			59

Part II.	Other Information

	Item 1.	Legal Proceedings			60

	Item1A.	Risk Factors			60

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			60

	Item 5.	Other Information			62

	Item 6.	Exhibits			63

Signatures

Table of Contents

Part I. Financial Information
Item 1. Financial Statements

Telephone and Data Systems, Inc. Consolidated Statement of Operations (Unaudited)

			Three Months Ended				Six Months Ended
			June 30,				June 30,
(Dollars and shares in thousands, except per share amounts)			2014		2013		2014		2013
Operating revenues
	Service		$	1,072,179	$	1,115,661	$	2,152,421	$	2,314,563
	Equipment and product sales			164,213		112,505		279,933		222,176
		Total operating revenues		1,236,392		1,228,166		2,432,354		2,536,739

Operating expenses
	Cost of services (excluding Depreciation, amortization and accretion reported below)			286,488		275,837		562,446		574,964
	Cost of equipment and products			313,011		239,894		619,658		500,659
	Selling, general and administrative			470,902		470,720		934,571		957,623
	Depreciation, amortization and accretion			204,567		254,203		429,486		496,280
	(Gain) loss on asset disposals, net			7,903		8,319		10,333		13,935
	(Gain) loss on sale of business and other exit costs, net			2,611		(303,034)		(4,289)		(296,103)
	(Gain) loss on license sales and exchanges			-		-		(91,446)		-
		Total operating expenses		1,285,482		945,939		2,460,759		2,247,358

Operating income (loss)				(49,090)		282,227		(28,405)		289,381

Investment and other income (expense)
	Equity in earnings of unconsolidated entities			34,790		35,605		72,117		62,694
	Interest and dividend income			2,751		2,600		5,237		4,178
	Gain (loss) on investments			-		14,518		-		14,518
	Interest expense			(27,898)		(23,749)		(56,605)		(48,247)
	Other, net			50		(197)		210		(351)
		Total investment and other income		9,693		28,777		20,959		32,792

Income (loss) before income taxes				(39,397)		311,004		(7,446)		322,173
	Income tax expense (benefit)			(13,671)		132,607		(2,014)		136,787
Net income (loss)				(25,726)		178,397		(5,432)		185,386
Less: Net income (loss) attributable to noncontrolling interests, net of tax				(3,688)		22,320		(1,648)		27,890
Net income (loss) attributable to TDS shareholders				(22,038)		156,077		(3,784)		157,496
TDS Preferred dividend requirement				(12)		(12)		(25)		(25)
Net income (loss) available to common shareholders			$	(22,050)	$	156,065	$	(3,809)	$	157,471

Basic weighted average shares outstanding				108,719		108,385		108,853		108,320
Basic earnings (loss) per share attributable to TDS shareholders			$	(0.20)	$	1.44	$	(0.04)	$	1.45

Diluted weighted average shares outstanding				108,719		108,913		108,853		108,827
Diluted earnings (loss) per share attributable to TDS shareholders			$	(0.20)	$	1.42	$	(0.04)	$	1.44

Dividends per share to TDS shareholders			$	0.1340	$	0.1275	$	0.2680	$	0.2550

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Telephone and Data Systems, Inc. Consolidated Statement of Comprehensive Income (Unaudited)

				Three Months Ended				Six Months Ended
				June 30,				June 30,
(Dollars in thousands)				2014		2013		2014		2013
Net income (loss)				$	(25,726)	$	178,397	$	(5,432)	$	185,386
Net change in accumulated other comprehensive income (loss)
	Change in net unrealized gain (loss) on equity investments				341		51		341		51
	Change in foreign currency translation adjustment				(17)		-		(21)		15
	Change related to retirement plan
		Amounts included in net periodic benefit cost for the period
			Amortization of prior service cost		(911)		(902)		(1,822)		(1,804)
			Amortization of unrecognized net loss		322		602		644		1,204
					(589)		(300)		(1,178)		(600)
			Change in deferred income taxes		224		114		447		228
		Change related to retirement plan, net of tax			(365)		(186)		(731)		(372)
	Net change in accumulated other comprehensive income (loss)				(41)		(135)		(411)		(306)
Comprehensive income (loss)					(25,767)		178,262		(5,843)		185,080
	Less: Comprehensive income (loss) attributable to noncontrolling interest				(3,688)		22,320		(1,648)		27,890
Comprehensive income (loss) attributable to TDS shareholders				$	(22,079)	$	155,942	$	(4,195)	$	157,190

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Telephone and Data Systems, Inc. Consolidated Statement of Cash Flows (Unaudited)
			Six Months Ended
			June 30,
(Dollars in thousands)			2014		2013
Cash flows from operating activities
	Net income (loss)		$	(5,432)	$	185,386
	Add (deduct) adjustments to reconcile net income to cash flows from operating activities
		Depreciation, amortization and accretion		429,486		496,280
		Bad debts expense		52,098		35,187
		Stock-based compensation expense		15,488		12,902
		Deferred income taxes, net		(33,346)		(21,246)
		Equity in earnings of unconsolidated entities		(72,117)		(62,694)
		Distributions from unconsolidated entities		65,569		47,635
		(Gain) loss on asset disposals, net		10,333		13,935
		(Gain) loss on sale of business and other exit costs, net		(4,289)		(296,103)
		(Gain) loss on investments		-		(14,518)
		(Gain) loss on license sales and exchanges		(91,446)		-
		Noncash interest expense		1,014		997
		Other operating activities		3		505
	Changes in assets and liabilities from operations
		Accounts receivable		40,459		(5,781)
		Inventory		38,674		(8,105)
		Accounts payable		(43,132)		58,204
		Customer deposits and deferred revenues		13,139		7,897
		Accrued taxes		1,049		150,425
		Accrued interest		22		2,172
		Other assets and liabilities		(101,930)		(81,586)
				315,642		521,492

Cash flows from investing activities
	Cash used for additions to property, plant and equipment			(339,907)		(384,281)
	Cash paid for acquisitions and licenses			(18,681)		(14,150)
	Cash received from divestitures			125,905		480,000
	Cash received for investments			10,000		15,000
	Other investing activities			3,720		14,127
				(218,963)		110,696

Cash flows from financing activities
	Repayment of long-term debt			(589)		(605)
	TDS Common Shares reissued for benefit plans, net of tax payments			401		776
	U.S. Cellular Common Shares reissued for benefit plans, net of tax payments			830		(2,206)
	Repurchase of TDS Common Shares			(20,090)		-
	Repurchase of U.S. Cellular Common Shares			(8,298)		(18,425)
	Dividends paid to TDS shareholders			(29,107)		(27,598)
	U.S. Cellular dividends paid to noncontrolling public shareholders			-		(75,235)
	Distributions to noncontrolling interests			(482)		(3,292)
	Other financing activities			5,502		331
				(51,833)		(126,254)

Net increase in cash and cash equivalents				44,846		505,934

Cash and cash equivalents
	Beginning of period			830,014		740,481
	End of period		$	874,860	$	1,246,415

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Telephone and Data Systems, Inc. Consolidated Balance Sheet — Assets (Unaudited)
(Dollars in thousands)			June 30, 2014		December 31, 2013
Current assets
	Cash and cash equivalents		$	874,860	$	830,014
	Short-term investments			40,035		50,104
	Accounts receivable
		Due from customers and agents, less allowances of $37,543 and $63,690, respectively		460,823		551,611
		Other, less allowances of $2,276 and $1,914, respectively		163,438		179,503
	Inventory, net			205,886		244,560
	Net deferred income tax asset			106,077		106,077
	Prepaid expenses			88,860		87,920
	Income taxes receivable			9,197		2,397
	Other current assets			32,274		35,151
				1,981,450		2,087,337

Assets held for sale				5,980		16,027

Investments
	Licenses			1,460,484		1,423,779
	Goodwill			834,352		836,843
	Franchise rights			124,487		123,668
	Other intangible assets, net of accumulated amortization of $122,767 and $112,752, respectively			61,536		71,454
	Investments in unconsolidated entities			308,661		301,772
	Other investments			589		641
				2,790,109		2,758,157
Property, plant and equipment
	In service and under construction			11,220,652		11,239,804
	Less: Accumulated depreciation			7,470,705		7,361,660
				3,749,947		3,878,144

Other assets and deferred charges				180,183		164,482

Total assets			$	8,707,669	$	8,904,147

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Telephone and Data Systems, Inc. Consolidated Balance Sheet — Liabilities and Equity (Unaudited)
(Dollars and shares in thousands)				June 30, 2014		December 31, 2013
Current liabilities
	Current portion of long-term debt			$	890	$	1,646
	Accounts payable				425,051		496,069
	Customer deposits and deferred revenues				302,496		289,445
	Accrued interest				6,671		6,673
	Accrued taxes				73,227		70,518
	Accrued compensation				98,099		115,031
	Other current liabilities				166,270		212,374
					1,072,704		1,191,756

Liabilities held for sale					722		-

Deferred liabilities and credits
	Net deferred income tax liability				828,458		862,975
	Other deferred liabilities and credits				460,862		458,709

Long-term debt					1,718,832		1,720,074

Commitments and contingencies					-		-

Noncontrolling interests with redemption features					911		536

Equity
	TDS shareholders’ equity
		Series A Common and Common Shares
			Authorized 290,000 shares (25,000 Series A Common and 265,000 Common Shares)
			Issued 132,730 shares (7,185 Series A Common and 125,545 Common Shares) and 132,711 shares (7,166 Series A Common and 125,545 Common Shares), respectively
			Outstanding 108,217 shares (7,185 Series A Common and 101,032 Common Shares) and 108,757 shares (7,166 Series A Common and 101,591 Common Shares), respectively
			Par Value ($.01 per share) ($72 Series A Common and $1,255 Common Shares)		1,327		1,327
		Capital in excess of par value			2,312,515		2,308,807
		Treasury shares at cost:
			24,513 and 23,954 Common Shares, respectively		(737,835)		(721,354)
		Accumulated other comprehensive loss			(980)		(569)
		Retained earnings			2,496,735		2,529,626
			Total TDS shareholders' equity		4,071,762		4,117,837

	Preferred shares				824		824
	Noncontrolling interests				552,594		551,436

		Total equity			4,625,180		4,670,097

Total liabilities and equity				$	8,707,669	$	8,904,147

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Telephone and Data Systems, Inc. Consolidated Statement of Changes in Equity (Unaudited)

	TDS Shareholders
(Dollars in thousands)	Series A Common and Common Shares		Capital in Excess of Par Value		Treasury Common Shares		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total TDS Shareholders' Equity		Preferred Shares		Non controlling Interests		Total Equity
December 31, 2013	$	1,327	$	2,308,807	$	(721,354)	$	(569)	$	2,529,626	$	4,117,837	$	824	$	551,436	$	4,670,097
Add (Deduct)
Net income attributable to TDS shareholders		-		-		-		-		(3,784)		(3,784)		-		-		(3,784)
Net income (loss) attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		(2,045)		(2,045)
Net unrealized gain (loss) on equity investments		-		-		-		341		-		341		-		-		341
Change in foreign currency translation adjustment		-		-		-		(21)		-		(21)		-		-		(21)
Change related to retirement plan		-		-		-		(731)		-		(731)		-		-		(731)
TDS Common and Series A Common Share dividends		-		-		-		-		(29,082)		(29,082)		-		-		(29,082)
TDS Preferred dividend requirement		-		-		-		-		(25)		(25)		-		-		(25)
Repurchase of Common Shares		-		-		(21,096)		-		-		(21,096)		-		-		(21,096)
Dividend reinvestment plan		-		1,470		3,468		-		-		4,938		-		-		4,938
Incentive and compensation plans		-		(314)		1,147		-		-		833		-		-		833
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		-		(2,224)		-		-		-		(2,224)		-		3,662		1,438
Stock-based compensation awards		-		5,354		-		-		-		5,354		-		-		5,354
Tax windfall (shortfall) from stock awards		-		(578)		-		-		-		(578)		-		-		(578)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(459)		(459)
June 30, 2014	$	1,327	$	2,312,515	$	(737,835)	$	(980)	$	2,496,735	$	4,071,762	$	824	$	552,594	$	4,625,180

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Telephone and Data Systems, Inc. Consolidated Statement of Changes in Equity (Unaudited)

	TDS Shareholders
(Dollars in thousands)	Series A Common and Common Shares		Capital in Excess of Par Value		Treasury Common Shares		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total TDS Shareholders' Equity		Preferred Shares		Non controlling Interests		Total Equity
December 31, 2012	$	1,327	$	2,304,122	$	(750,099)	$	(8,132)	$	2,464,318	$	4,011,536	$	825	$	643,966	$	4,656,327
Add (Deduct)
Net income attributable to TDS shareholders		-		-		-		-		157,496		157,496		-		-		157,496
Net income attributable to noncontrolling interests classified as equity		-		-		-		-		-		-		-		27,871		27,871
Net unrealized gain (loss) on equity investments		-		-		-		51		-		51		-		-		51
Change in foreign currency translation adjustment		-		-		-		15		-		15		-		-		15
Change related to retirement plan		-		-		-		(372)		-		(372)		-		-		(372)
TDS Common and Series A Common Share dividends		-		-		-		-		(27,573)		(27,573)		-		-		(27,573)
TDS Preferred dividend requirement		-		-		-		-		(25)		(25)		-		-		(25)
U.S. Cellular dividends paid to noncontrolling public shareholders		-		-		-		-		-		-		-		(75,235)		(75,235)
Dividend reinvestment plan		-		448		7,914		-		(4,540)		3,822		-		-		3,822
Incentive and compensation plans		-		533		3,788		-		(3,109)		1,212		-		-		1,212
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans		-		(1,166)		-		-		-		(1,166)		-		(13,457)		(14,623)
Stock-based compensation awards		-		6,124		-		-		-		6,124		-		-		6,124
Tax windfall (shortfall) from stock awards		-		(648)		-		-		-		(648)		-		-		(648)
Distributions to noncontrolling interests		-		-		-		-		-		-		-		(3,292)		(3,292)
Adjust investment in subsidiaries for noncontrolling interest purchases		-		(10,322)		-		-		-		(10,322)		-		5,294		(5,028)
Deconsolidation of partnerships		-		-		-		-		-		-		-		(43,770)		(43,770)
June 30, 2013	$	1,327	$	2,299,091	$	(738,397)	$	(8,438)	$	2,586,567	$	4,140,150	$	825	$	541,377	$	4,682,352

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Telephone and Data Systems, Inc.

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accounting policies of Telephone and Data Systems, Inc. (“TDS”) conform to accounting principles generally accepted in the United States of America (“GAAP”) as set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The consolidated financial statements include the accounts of TDS and subsidiaries in which it has a controlling financial interest, including TDS’ 84%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”) and TDS’ wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”). In addition, the consolidated financial statements include certain entities in which TDS has a variable interest that require consolidation under GAAP. All material intercompany accounts and transactions have been eliminated.

The consolidated financial statements included herein have been prepared by TDS, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, TDS believes that the disclosures included herein are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2013.

TDS’ business segments reflected in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 are U.S. Cellular, TDS Telecom’s Wireline, Cable and Hosted and Managed Services (“HMS”) operations, and the Non-Reportable Segment which includes TDS’ majority-owned printing and distribution company, Suttle-Straus, Inc. (“Suttle-Straus”) and TDS’ wholly-owned wireless telephone subsidiary, Airadigm Communications, Inc. (“Airadigm”). Periods presented for comparative purposes have been re-presented to conform to this segment presentation. All of TDS’ segments operate only in the United States, except for HMS, which includes an insignificant foreign operation. See Note 11 — Business Segment Information for summary financial information on each business segment.

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items, unless otherwise disclosed) necessary for a fair statement of the financial position as of June 30, 2014 and December 31, 2013, and the results of operations and changes in comprehensive income for the three and six months ended June 30, 2014 and 2013 and cash flows and changes in equity for the six months ended June 30, 2014 and 2013. These results are not necessarily indicative of the results to be expected for the full year.

Recently Issued Accounting Pronouncements

On April 10, 2014, the FASB issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 changes the requirements and disclosures for reporting discontinued operations. TDS is required to adopt the provisions of ASU 2014-08 effective January 1, 2015, but early adoption is permitted. TDS adopted the provisions of ASU 2014-08 upon its issuance. The adoption of ASU 2014-08 did not have a significant impact on TDS’ financial position or results of operations.

On May 28, 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers. TDS is required to adopt the provisions of ASU 2014-09 effective January 1, 2017. Early adoption is prohibited. TDS is evaluating what effects the adoption of ASU 2014-09 will have on TDS’ financial position and results of operations.

Equipment Installment Plans

U.S. Cellular offers customers the option to purchase certain devices under installment contracts over a period of up to 24 months. Equipment revenue under these contracts is recognized at the time the device is delivered to the end-user customer for the selling price of the device, net of any deferred imputed interest or guarantee liability, if applicable. For certain installment plans, after a specified period of time, the customer may have the right to upgrade to a new device and have the remaining unpaid installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. U.S. Cellular values this trade-in right as a guarantee liability. The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the customer upgrading to a new device, the customer’s estimated remaining installment contract balance at the time of trade-in

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and the fair value of the device being traded-in at the time of trade-in. As of June 30, 2014, the short-term guarantee liability and imputed interest liability related to equipment installment plans of $15.3 million is recorded in Customer deposits and deferred revenues in the Consolidated Balance Sheet and the long-term imputed interest liability related to equipment installment plans of $0.7 million is recorded in Other deferred liabilities and credits in the Consolidated Balance Sheet. As of June 30, 2014, short-term equipment installment plan receivables of $23.9 million are included in Accounts receivable – customers and agents in the Consolidated Balance Sheet and long-term equipment installment plan receivables of $19.8 million are included in Other assets and deferred charges in the Consolidated Balance Sheet.

U.S. Cellular equipment installment plans do not provide for explicit interest charges. For equipment installment plans with a duration of twelve months or less, U.S. Cellular does not impute interest. For equipment installment plans with a duration of greater than twelve months, U.S. Cellular imputes interest and recognizes such interest income over the duration of the plan as a component of Interest and dividend income.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2014 financial statement presentation. These reclassifications did not affect consolidated net income attributable to TDS shareholders, cash flows, assets, liabilities or equity for the years presented.

In 2014, TDS began presenting separately Equipment and product sales and Cost of equipment and products. As a result of recent HMS acquisitions, these amounts are now more significant to TDS and, accordingly, are shown as separate captions under Operating revenues and Operating expenses, respectively, on the Consolidated Statement of Operations. Amounts in 2013 have been reclassified to conform to the 2014 presentation. The separate presentation of Equipment and product sales and Cost of equipment and products had no other impact on the TDS financial statements.

Amounts Collected from Customers and Remitted to Governmental Authorities

If a tax is assessed upon the customer and TDS merely acts as an agent in collecting the tax on behalf of the imposing governmental authority, then amounts collected from customers and remitted to governmental authorities are recorded on a net basis within a tax liability account in the Consolidated Balance Sheet. If the tax is assessed upon TDS, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $29.1 million and $59.1 million for the three and six months ended June 30, 2014, respectively, and $31.9 million and $67.9 million for the three and six months ended June 30, 2013, respectively.

2. Fair Value Measurements

As of June 30, 2014 and December 31, 2013, TDS did not have any financial or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP. However, TDS has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.

		Level within the Fair Value Hierarchy	June 30, 2014				December 31, 2013
		Level within the Fair Value Hierarchy	Book Value		Fair Value		Book Value		Fair Value
(Dollars in thousands)
Cash and cash equivalents		1	$	874,860	$	874,860	$	830,014	$	830,014
Short-term investments
	U.S. Treasury Notes	1		40,035		40,035		50,104		50,104
Long-term debt
	Retail	1		1,178,250		1,177,723		1,178,250		1,048,010
	Institutional and other	2		537,691		555,775		537,454		512,635

Short-term investments are designated as held-to-maturity investments and recorded at amortized cost in the Consolidated Balance Sheet. Long-term debt excludes capital lease obligations and the current portion of Long-term debt.

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The fair values of Cash and cash equivalents and Short-term investments approximate their book values due to the short-term nature of these financial instruments. The fair value of “Retail” Long-term debt was estimated using market prices for TDS’ 7.0% Senior Notes, 6.875% Senior Notes, 6.625% Senior Notes and 5.875% Senior Notes, and U.S. Cellular's 6.95% Senior Notes. TDS’ institutional debt includes U.S. Cellular’s 6.7% Senior Notes which are traded over the counter. TDS estimated the fair value of its institutional and other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 0.00% to 6.59% at June 30, 2014.

3. Income Taxes

TDS’ overall effective tax rate on Income (loss) before income taxes for the three and six months ended June 30, 2014 was 34.7% and 27.0%, respectively, and for the three and six months ended June 30, 2013 was 42.6% and 42.5%, respectively.

The lower effective tax rate for the six months ended June 30, 2014 resulted from the relatively low amount of Income (loss) before income taxes in this period, which magnified the effective rate impact of discrete tax expense items.

The effective tax rates for the three and six months ended June 30, 2013 reflected incremental deferred tax expense related to the NY1 & NY2 Deconsolidation (as described in Note 7 — Investments in Unconsolidated Entities) and the Divestiture Transaction (as described in Note 5 — Acquisitions, Divestitures and Exchanges) in 2013.

4. Earnings Per Share

Basic earnings (loss) per share attributable to TDS shareholders is computed by dividing Net income (loss) available to common shareholders of TDS by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share attributable to TDS shareholders is computed by dividing Net income (loss) available to common shareholders of TDS by the weighted average number of common shares outstanding during the period adjusted to include the effects of potentially dilutive securities. Potentially dilutive securities primarily include incremental shares issuable upon exercise of outstanding stock options and the vesting of restricted stock units.

The amounts used in computing earnings (loss) per common share and the effects of potentially dilutive securities on the weighted average number of common shares were as follows:

				Three Months Ended				Six Months Ended
				June 30,				June 30,
				2014		2013		2014		2013
(Dollars and shares in thousands, except per share amounts)
Basic earnings (loss) per share attributable to TDS shareholders:
	Net income (loss) available to common shareholders of TDS used in basic earnings (loss) per share			$	(22,050)	$	156,065	$	(3,809)	$	157,471
Adjustments to compute diluted earnings:
	Noncontrolling interest adjustment				-		(1,173)		(5)		(1,209)
	Preferred dividend adjustment				-		12		-		25
	Net income (loss) attributable to common shareholders of TDS used in diluted earnings (loss) per share			$	(22,050)	$	154,904	$	(3,814)	$	156,287

Weighted average number of shares used in basic earnings (loss) per share:
		Common Shares			101,543		101,246		101,682		101,171
		Series A Common Shares			7,176		7,139		7,171		7,149
			Total		108,719		108,385		108,853		108,320

Effects of dilutive securities:
	Stock options				-		110		-		108
	Restricted stock units				-		364		-		345
	Preferred shares				-		54		-		54
Weighted average number of shares used in diluted earnings (loss) per share					108,719		108,913		108,853		108,827

Basic earnings (loss) per share attributable to TDS shareholders				$	(0.20)	$	1.44	$	(0.04)	$	1.45

Diluted earnings (loss) per share attributable to TDS shareholders				$	(0.20)	$	1.42	$	(0.04)	$	1.44

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Certain Common Shares issuable upon the exercise of stock options, vesting of restricted stock units or conversion of preferred shares were not included in average diluted shares outstanding for the calculation of Diluted earnings (loss) per share attributable to TDS shareholders because their effects were antidilutive. The number of such Common Shares excluded, if any, is shown in the table below.

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2014	2013	2014	2013
(Shares in thousands)
Stock options	8,883	7,348	8,777	7,012

Restricted stock units	824	200	737	102

Preferred shares	56	-	56	-

5. Acquisitions, Divestitures and Exchanges

Divestiture Transaction

On November 6, 2012, U.S. Cellular entered into a Purchase and Sale Agreement with subsidiaries of Sprint Corp., fka Sprint Nextel Corporation (“Sprint”). Pursuant to the Purchase and Sale Agreement, on May 16, 2013, U.S. Cellular transferred customers and certain PCS license spectrum to Sprint in U.S. Cellular’s Chicago, central Illinois, St. Louis and certain Indiana/Michigan/Ohio markets (“Divestiture Markets”) in consideration for $480 million in cash. The Purchase and Sale Agreement also contemplated certain other agreements, together with the Purchase and Sale Agreement collectively referred to as the “Divestiture Transaction.”

Pursuant to the Purchase and Sale Agreement, U.S. Cellular and Sprint also entered into certain other agreements, including customer and network transition services agreements, which require U.S. Cellular to provide customer, billing and network services to Sprint for a period of up to 24 months after the May 16, 2013 closing date. Sprint will reimburse U.S. Cellular for providing such services at an amount equal to U.S. Cellular’s estimated costs, including applicable overhead allocations. These services were substantially complete as of March 31, 2014. In addition, these agreements require Sprint to reimburse U.S. Cellular up to $200 million (the “Sprint Cost Reimbursement”) for certain network decommissioning costs, network site lease rent and termination costs, network access termination costs, and employee termination benefits for specified engineering employees. It is estimated that up to $175 million of the Sprint Cost Reimbursement will be recorded in (Gain) loss on sale of business and other exit costs, net and up to $25 million of the Sprint Cost Reimbursement will be recorded in Cost of services in the Consolidated Statement of Operations. For the six months ended June 30, 2014, $34.1 million of the Sprint Cost Reimbursement had been received and recorded in Cash received from divestitures in the Consolidated Statement of Cash Flows.

Financial impacts of the Divestiture Transaction are classified in the Consolidated Statement of Operations within Operating income. The table below describes the amounts TDS has recognized and expects to recognize in the Consolidated Statement of Operations between the date the Purchase and Sale Agreement was signed and the end of the transition services period.

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(Dollars in thousands)			Expected Period of Recognition		Projected Range				Cumulative Amount Recognized as of June 30, 2014		Actual Amount Recognized Six Months Ended June 30, 2014		Actual Amount Recognized Six Months Ended June 30, 2013		Actual Amount Recognized Three Months Ended June 30, 2014		Actual Amount Recognized Three Months Ended June 30, 2013
(Gain) loss on sale of business and other exit costs, net
	Proceeds from Sprint
		Purchase price		2013	$	(480,000)	$	(480,000)	$	(480,000)	$	-	$	(480,000)	$	-	$	(480,000)
		Sprint Cost Reimbursement		2013-2015		(120,000)		(175,000)		(96,835)		(49,194)		(8)		(4,563)		(8)
	Net assets transferred			2013		160,073		160,073		160,073		-		160,073		-		160,073
	Non-cash charges for the write-off and write-down of property under construction and related assets			2012-2015		10,000		15,000		11,013		338		81		(5)		(141)
	Employee related costs including severance, retention and outplacement			2012-2014		13,000		16,000		14,129		(133)		3,103		(71)		53
	Contract termination costs			2012-2015		90,000		120,000		90,417		30,833		16,605		(6,254)		13,705
	Transaction costs			2012-2014		5,000		7,000		6,027		462		3,719		253		2,801
		Total (Gain) loss on sale of business and other exit costs, net			$	(321,927)	$	(336,927)	$	(295,176)	$	(17,694)	$	(296,427)	$	(10,640)	$	(303,517)

Depreciation, amortization and accretion expense
	Incremental depreciation, amortization and accretion, net of salvage values			2012-2014		211,656		211,656		211,656		13,085		88,324		-		50,278
(Increase) decrease in Operating income					$	(110,271)	$	(125,271)	$	(83,520)	$	(4,609)	$	(208,103)	$	(10,640)	$	(253,239)

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Incremental depreciation, amortization and accretion, net of salvage values represents amounts recorded in the specified time periods as a result of a change in estimate for the remaining useful life and salvage value of certain assets and a change in estimate which accelerated the settlement dates of certain asset retirement obligations in conjunction with the Divestiture Transaction. Specifically, for the periods indicated, this is estimated depreciation, amortization and accretion recorded on assets and liabilities of the Divestiture Markets after the execution of the Purchase and Sale Agreement on November 6, 2012 less depreciation, amortization and accretion that would have been recorded on such assets and liabilities in the normal course, absent the Divestiture Transaction.

		As a result of the transaction, TDS recognized the following amounts in the Consolidated Balance Sheet:

					Six Months Ended June 30, 2014
(Dollars in thousands)			Balance December 31, 2013		Costs Incurred		Cash Settlements (1)		Adjustments (2)		Balance June 30, 2014
Accrued compensation
	Employee related costs including severance, retention, outplacement		$	2,053	$	180	$	(908)	$	(313)	$	1,012
Other current liabilities
	Contract termination costs		$	13,992	$	16,691	$	(12,887)	$	2,091	$	19,887
Other deferred liabilities and credits
	Contract termination costs		$	30,849	$	23,773	$	(2,424)	$	(19,898)	$	32,300

(1)		Cash settlement amounts are included in either the Net income or changes in Other assets and liabilities line items as part of Cash flows from operating activities on the Consolidated Statement of Cash Flows.
(2)		Adjustment to liability represents changes to previously accrued amounts.

Airadigm Transaction

On May 23, 2014 (the “Signing Date”), U.S. Cellular entered into a License Purchase and Customer Recommendation Agreement with Airadigm. The Agreement provides that Airadigm will transfer to U.S. Cellular FCC spectrum licenses and certain tower assets in certain markets in Wisconsin, Iowa, Minnesota and Michigan, in consideration for $91.5 million in cash at closing. The transaction also includes a program in which Airadigm would earn a migration fee from U.S. Cellular for each Airadigm customer who becomes a U.S. Cellular customer. Since both parties to this transaction are controlled by TDS, upon closing, U.S. Cellular will record the transferred assets at Airadigm’s net book value. In addition, federal net operating loss carryforwards are expected to become realizable by TDS. Therefore, TDS expects to reduce its valuation allowance by approximately $10 million upon the transaction closing, and recognize income tax benefit for this same amount. The transaction is subject to certain conditions. Subject to the satisfaction or (if permitted) waiver of all conditions, the transaction is expected to close during the third quarter of 2014.

As a result of the Agreement, Airadigm will shut down operation of its consumer wireless business and most of the associated network. Except for certain operations that will be continued, Airadigm’s assets not acquired by U.S. Cellular will be sold or otherwise disposed of, its tower leases, interconnection and other agreements will be terminated and most of its employees will be terminated. The shut-down of Airadigm’s consumer wireless business is expected to be substantially complete in the third quarter of 2014. As a result of the Agreement and the related impacts from the shut-down of Airadigm’s consumer wireless business discussed herein, TDS expects to recognize expenses related to exit and disposal activities within Operating income in its Statement of Operations between Signing Date and the end of the shut-down period as follows:

(Dollars in thousands)			Projected Range				Actual Amount Recognized Three and Six Months Ended June 30, 2014
(Gain) loss on sale of business and other exit costs, net
	Charges for the impairment and decommissioning of various operating assets		$	8,000	$	17,000	$	12,214
	Employee related costs including severance, retention and outplacement			1,000		2,000		500
	Contract termination costs			10,000		15,000		408
	Transaction costs			-		1,000		-
		Total (Gain) loss on sale of business and other exit costs, net	$	19,000	$	35,000	$	13,122

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		As a result of the transaction, TDS recognized the following amounts in the Consolidated Balance Sheet:

					Period Ended June 30, 2014
(Dollars in thousands)			Balance May 23, 2014		Costs Incurred		Cash Settlements (1)		Adjustments (2)		Balance June 30, 2014
Accrued compensation
	Employee related costs including severance, retention and outplacement		$	-	$	500	$	-	$	-	$	500
Other current liabilities
	Contract termination costs		$	-	$	408	$	-	$	-	$	408

(1)		Cash settlement amounts are included in either the Net income or changes in Other assets and liabilities line items as part of Cash flows from operating activities on the Consolidated Statement of Cash Flows.
(2)		Adjustment to liability represents changes to previously accrued amounts.

Other Acquisitions, Divestitures and Exchanges

On May 1, 2014, TDS entered into an agreement to acquire substantially all of the assets of a group of companies operating as BendBroadband, headquartered in Bend, Oregon for $261 million in cash, subject to working capital and other adjustments. BendBroadband is a full-service communications company, offering an extensive range of broadband, fiber connectivity, cable television and telephone services for commercial and residential customers in Central Oregon. The agreement also includes a Tier III data center providing colocation and managed services and a cable advertising and broadcast business. The transaction is subject to governmental regulatory approvals, compliance with the Hart-Scott-Rodino Act and other conditions. Subject to approvals, the transaction is expected to close in the third quarter of 2014.

On March 5, 2014, U.S. Cellular sold the majority of its St. Louis area non-operating market spectrum license for $92.3 million. A gain of $75.8 million was recorded in (Gain) loss on license sales and exchanges in the Consolidated Statement of Operations in the first quarter of 2014.

On February 14, 2014, U.S. Cellular completed an exchange whereby U.S. Cellular received one E block PCS spectrum license covering Milwaukee, WI in exchange for one D block PCS spectrum license covering Milwaukee, WI. The exchange of licenses provided U.S. Cellular with spectrum to meet anticipated future capacity and coverage requirements. No cash, customers, network assets, other assets or liabilities were included in the exchange. As a result of this transaction, TDS recognized a gain of $15.7 million, representing the difference between the $15.9 million fair value of the license surrendered, calculated using a market approach valuation method, and the $0.2 million carrying value of the license surrendered. This gain was recorded in (Gain) loss on license sales and exchanges in the Consolidated Statement of Operations in the first quarter of 2014.

	At June 30, 2014 and December 31, 2013, the following assets and liabilities were classified in the Consolidated Balance Sheet as "Assets held for sale" and "Liabilities held for sale":

		Current Assets		Licenses		Goodwill		Property, Plant and Equipment		Investments		Total Assets Held for Sale		Liabilities Held for Sale (1)
(Dollars in thousands)
June 30, 2014
Divestiture of Wireline Markets (2)		$	534	$	-	$	2,546	$	2,800	$	100	$	5,980	$	722

December 31, 2013
Divestiture of Spectrum Licenses		$	-	$	16,027	$	-	$	-	$	-	$	16,027	$	-

(1)	Liabilities held for sale primarily consisted of Customer deposits and deferred revenues and Other deferred liabilities and credits.

(2)	On May 2, 2014, TDS Telecom entered into agreements with third parties to sell certain Wireline markets.

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6. Intangible Assets

Changes in Licenses for the six months ended June 30, 2014 are presented below. There were no significant changes to Goodwill, Franchise rights or Other intangible assets during the six months ended June 30, 2014.

Licenses

		U.S. Cellular		Wireline		Non-Reportable Segment		Total
(Dollars in thousands)
Balance December 31, 2013		$	1,405,759	$	2,800	$	15,220	$	1,423,779
	Acquisitions		20,986		-		-		20,986
	Exchanges, net		15,719		-		-		15,719
Balance June 30, 2014		$	1,442,464	$	2,800	$	15,220	$	1,460,484

7. Investments in Unconsolidated Entities

Investments in unconsolidated entities consist of amounts invested in wireless and wireline entities in which TDS holds a noncontrolling interest. These investments are accounted for using either the equity or cost method.

	The following table, which is based on information provided in part by third parties, summarizes the combined results of operations of TDS’ equity method investments.

		Three Months Ended June 30,				Six Months Ended June 30,
		2014		2013		2014		2013
(Dollars in thousands)
Revenues		$	1,635,216	$	1,550,200	$	3,259,900	$	3,025,820
Operating expenses			1,209,412		1,100,477		2,343,092		2,139,467
Operating income			425,804		449,723		916,808		886,353
Other income, net			378		713		2,403		1,222
Net income		$	426,182	$	450,436	$	919,211	$	887,575

NY1 & NY2 Deconsolidation

U.S. Cellular holds a 60.00% interest in St. Lawrence Seaway RSA Cellular Partnership (“NY1”) and a 57.14% interest in New York RSA 2 Cellular Partnership (“NY2”) (together with NY1, the “Partnerships”). The remaining interests in the Partnerships are held by Cellco Partnership d/b/a Verizon Wireless (“Verizon Wireless”). Prior to April 3, 2013, because U.S. Cellular owned a greater than 50% interest in each of these Partnerships and based on U.S. Cellular’s rights under the Partnership Agreements, TDS consolidated the financial results of these Partnerships in accordance with GAAP.

On April 3, 2013, U.S. Cellular entered into an agreement with Verizon Wireless relating to the Partnerships. The agreement amends the Partnership Agreements in several ways which provide Verizon Wireless with substantive participating rights that allow Verizon Wireless to make decisions that are in the ordinary course of business of the Partnerships and which are significant to directing and executing the activities of the business. Accordingly, as required by GAAP, TDS deconsolidated the Partnerships effective as of April 3, 2013 and thereafter reported them as equity method investments in its consolidated financial statements (“NY1 & NY2 Deconsolidation”). After the NY1 & NY2 Deconsolidation, TDS retained the same ownership percentages in the Partnerships and continues to report the same percentages of income from the Partnerships. Effective April 3, 2013, TDS’ income from the Partnerships is reported in Equity in earnings of unconsolidated entities in the Consolidated Statement of Operations.

8. Variable Interest Entities (VIEs)

TDS consolidates variable interest entities in which it has a controlling financial interest and is the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb VIE losses and the right to receive benefits that are significant to the VIE. TDS reviews these criteria initially at the time it enters into agreements and subsequently when reconsideration events occur.

Consolidated VIEs

As of June 30, 2014, TDS holds a variable interest in and consolidates the following VIEs under GAAP:

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· Aquinas Wireless L.P. (“Aquinas Wireless”); and

· King Street Wireless L.P. (“King Street Wireless”) and King Street Wireless, Inc., the general partner of King Street Wireless.

The power to direct the activities that most significantly impact the economic performance of Aquinas Wireless and King Street Wireless (collectively, the “limited partnerships”) is shared. Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control the limited partnerships and make all decisions to carry on the business of the partnerships; however, the general partner of each partnership needs consent of the limited partner, a TDS subsidiary, to sell or lease certain licenses, to make certain large expenditures, admit other partners or liquidate the limited partnerships. Although the power to direct the activities of the VIEs is shared, TDS has a disproportionate level of exposure to the variability associated with the economic performance of the VIEs, indicating that TDS is the primary beneficiary of the VIEs in accordance with GAAP. Accordingly, these VIEs are consolidated.

The following table presents the classification of the consolidated VIEs’ assets and liabilities in TDS’ Consolidated Balance Sheet.

			June 30, 2014		December 31, 2013
(Dollars in thousands)
Assets
	Cash and cash equivalents		$	2,466	$	2,076
	Other current assets			71		1,184
	Licenses			311,476		310,475
	Property, plant and equipment, net			15,311		18,600
	Other assets and deferred charges			148		511
		Total assets	$	329,472	$	332,846

Liabilities
	Current liabilities		$	29	$	46
	Deferred liabilities and credits			1,689		3,139
		Total liabilities	$	1,718	$	3,185

Other Related Matters

Aquinas Wireless and King Street Wireless were formed to participate in Federal Communications Commission (“FCC”) auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions. As such, these entities have risks similar to those described in the “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2013.

U.S. Cellular currently provides 4G LTE service in conjunction with King Street Wireless.

TDS may agree to make additional capital contributions and/or advances to Aquinas Wireless and King Street Wireless and/or to their general partners to provide additional funding for the development of licenses granted in various auctions. TDS may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or long-term debt. There is no assurance that TDS will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.

There were no capital contributions or advances made to Aquinas Wireless or King Street Wireless or their general partners in the six months ended June 30, 2014 and 2013.

9. Noncontrolling Interests

The following schedule discloses the effects of Net income (loss) attributable to TDS shareholders and changes in TDS’ ownership interest in U.S. Cellular on TDS’ equity:

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			Six Months Ended
			June 30,
			2014		2013
(Dollars in thousands)
Net income (loss) attributable to TDS shareholders			$	(3,784)	$	157,496
	Transfer (to) from the noncontrolling interests
		Change in TDS' Capital in excess of par value from U.S. Cellular's issuance of U.S. Cellular shares		(10,292)		(9,712)
		Change in TDS' Capital in excess of par value from U.S. Cellular's repurchase of U.S. Cellular shares		242		3,470
		Purchase of ownership in subsidiaries from noncontrolling interests		-		(27)
		Net transfers (to) from noncontrolling interests		(10,050)		(6,269)
	Change from net income (loss) attributable to TDS and transfers (to) from noncontrolling interests		$	(13,834)	$	151,227

10. Common Share Repurchases

On August 2, 2013, the Board of Directors of TDS authorized a $250 million stock repurchase program for the purchase of TDS Common Shares from time to time pursuant to open market purchases, block transactions, private purchases or otherwise, depending on market conditions. This authorization does not have an expiration date.

On November 17, 2009, the Board of Directors of U.S. Cellular authorized the repurchase of up to 1,300,000 Common Shares on an annual basis beginning in 2009 and continuing each year thereafter, on a cumulative basis. These purchases will be made pursuant to open market purchases, block purchases, private purchases or otherwise, depending on market conditions. This authorization does not have an expiration date.

Share repurchases made under these authorizations were as follows:

Six Months Ended June 30,		Number of Shares	Average Cost Per Share		Amount
(Dollar amounts and shares in thousands)
2014
	TDS Common Shares	809	$	26.09	$	21,096
	U.S. Cellular Common Shares	212	$	40.49	$	8,598

2013
	TDS Common Shares	-	$	-	$	-
	U.S. Cellular Common Shares	496	$	37.16	$	18,425

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11. Business Segment Information

U.S. Cellular and TDS Telecom are billed for all services they receive from TDS, consisting primarily of information processing, accounting and finance, and general management services. Such billings are based on expenses specifically identified to U.S. Cellular and TDS Telecom and on allocations of common expenses. Management believes the method used to allocate common expenses is reasonable and that all expenses and costs applicable to U.S. Cellular and TDS Telecom are reflected in the accompanying business segment information on a basis that is representative of what they would have been if U.S. Cellular and TDS Telecom operated on a stand-alone basis.

Financial data for TDS’ reportable segments for the three and six month periods ended, or as of June 30, 2014 and 2013, is as follows. See Note 1 — Basis of Presentation for additional information.

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						TDS Telecom

Three Months Ended or as of June 30, 2014			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Non-Reportable Segment		Corporate, Eliminations and Other Reconciling Items		Total
(Dollars in thousands)
Operating revenues
	Service		$	843,473	$	180,297	$	22,484	$	27,575	$	(298)	$	230,058	$	4,505	$	(5,857)	$	1,072,179
	Equipment and product sales			114,300		431		-		40,361		-		40,792		9,121		-		164,213
		Total operating revenues		957,773		180,728		22,484		67,936		(298)		270,850		13,626		(5,857)		1,236,392
Cost of services (excluding Depreciation, amortization and accretion reported below)				187,131		64,305		11,394		21,301		(249)		96,751		4,252		(1,646)		286,488
Cost of equipment and products				271,978		481		-		33,875		-		34,356		6,677		-		313,011
Selling, general and administrative				404,252		47,708		6,285		12,376		(49)		66,320		3,517		(3,187)		470,902
Depreciation, amortization and accretion				148,337		41,827		4,557		6,791		-		53,175		1,492		1,563		204,567
(Gain) loss on asset disposals, net				6,893		514		425		44		-		983		27		-		7,903
(Gain) loss on sale of business and other exit costs, net				(10,511)		-		-		-		-		-		13,122		-		2,611
Operating income (loss)				(50,307)		25,893		(177)		(6,451)		-		19,265		(15,461)		(2,587)		(49,090)
Equity in earnings of unconsolidated entities				33,120		4		-		-		-		4		-		1,666		34,790
Interest and dividend income				1,573		490		1		22		-		513		-		665		2,751
Interest expense				(14,336)		677		30		(439)		-		268		(1,149)		(12,681)		(27,898)
Other, net				100		(95)		-		45		-		(50)		(1)		1		50
Income (loss) before income taxes				(29,850)		26,969		(146)		(6,823)		-		20,000		(16,611)		(12,936)		(39,397)
Add back:
Depreciation, amortization and accretion				148,337		41,827		4,557		6,791		-		53,175		1,492		1,563		204,567
(Gain) loss on sale of business and other exit costs, net				(10,511)		-		-		-		-		-		13,122		-		2,611
Interest expense				14,336		(677)		(30)		439		-		(268)		1,149		12,681		27,898
Adjusted income (loss) before income taxes			$	122,312	$	68,119	$	4,381	$	407	$	-	$	72,907	$	(848)	$	1,308	$	195,679

Investments in unconsolidated entities			$	270,215	$	3,810	$	-	$	-	$	-	$	3,810	$	-	$	34,636	$	308,661
Total assets			$	6,298,967	$	1,408,809	$	287,809	$	335,680	$	-	$	2,032,298	$	46,610	$	329,794	$	8,707,669
Capital expenditures			$	143,927	$	27,370	$	7,181	$	10,628	$	-	$	45,179	$	308	$	1,267	$	190,681

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						TDS Telecom

Three Months Ended or as of June 30, 2013			U.S. Cellular		Wireline		HMS		TDS Telecom Eliminations		TDS Telecom Total		Non-Reportable Segment		Corporate, Eliminations and Other Reconciling Items		Total
(Dollars in thousands)
Operating revenues
	Service		$	910,966	$	181,428	$	23,205	$	(107)	$	204,526	$	4,956	$	(4,787)	$	1,115,661
	Equipment and product sales			84,164		765		18,169		-		18,934		9,407		-		112,505
		Total operating revenues		995,130		182,193		41,374		(107)		223,460		14,363		(4,787)		1,228,166
Cost of services (excluding Depreciation, amortization and accretion reported below)				192,267		65,729		15,071		(107)		80,693		3,225		(348)		275,837
Cost of equipment and products				217,070		1,094		15,114		-		16,208		6,616		-		239,894
Selling, general and administrative				404,127		56,692		9,361		-		66,053		3,711		(3,171)		470,720
Depreciation, amortization and accretion				202,580		43,193		5,563		-		48,756		1,500		1,367		254,203
(Gain) loss on asset disposals, net				9,018		(765)		83		-		(682)		(1)		(16)		8,319
(Gain) loss on sale of business and other exit costs, net				(249,024)		-		-		-		-		-		(54,010)		(303,034)
Operating income (loss)				219,092		16,250		(3,818)		-		12,432		(688)		51,391		282,227
Equity in earnings of unconsolidated entities				35,602		7		-		-		7		-		(4)		35,605
Interest and dividend income				969		546		16		-		562		1		1,068		2,600
Gain (loss) on investments				18,527		-		-		-		-		-		(4,009)		14,518
Interest expense				(10,154)		795		(403)		-		392		(1,001)		(12,986)		(23,749)
Other, net				321		(126)		-		-		(126)		(394)		2		(197)
Income (loss) before income taxes				264,357		17,472		(4,205)		-		13,267		(2,082)		35,462		311,004
Add back:
Depreciation, amortization and accretion				202,580		43,193		5,563		-		48,756		1,500		1,367		254,203
(Gain) loss on sale of business and other exit costs, net				(249,024)		-		-		-		-		-		(54,010)		(303,034)
Gain (loss) on investments				(18,527)		-		-		-		-		-		4,009		(14,518)
Interest expense				10,154		(795)		403		-		(392)		1,001		12,986		23,749
Adjusted income (loss) before income taxes			$	209,540	$	59,870	$	1,761	$	-	$	61,631	$	419	$	(186)	$	271,404

Investments in unconsolidated entities			$	276,363	$	3,809	$	-	$	-	$	3,809	$	-	$	31,874	$	312,046
Total assets			$	6,329,778	$	1,473,173	$	267,062	$	-	$	1,740,235	$	59,293	$	625,459	$	8,754,765
Capital expenditures			$	168,497	$	33,342	$	2,258	$	-	$	35,600	$	232	$	1,715	$	206,044

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					TDS Telecom

Six Months Ended or as of June 30, 2014			U.S. Cellular		Wireline		Cable		HMS		TDS Telecom Eliminations		TDS Telecom Total		Non- Reportable Segment		Corporate, Eliminations and Other Reconciling Items		Total
(Dollars in thousands)
Operating revenues
	Service		$	1,697,086	$	357,230	$	44,987	$	54,951	$	(979)	$	456,189	$	9,018	$	(9,872)	$	2,152,421
	Equipment and product sales			186,498		984		-		76,093		-		77,077		16,358		-		279,933
		Total operating revenues		1,883,584		358,214		44,987		131,044		(979)		533,266		25,376		(9,872)		2,432,354
Cost of services (excluding Depreciation, amortization and accretion expense reported below)				367,738		128,705		22,349		38,247		(894)		188,407		8,502		(2,201)		562,446
Cost of equipment and products				542,452		964		-		64,342		-		65,306		11,900		-		619,658
Selling, general and administrative				799,816		94,228		12,663		27,211		(85)		134,017		7,263		(6,525)		934,571
Depreciation, amortization and accretion				316,090		84,563		8,918		13,469		-		106,950		3,294		3,152		429,486
(Gain) loss on asset disposals, net				8,827		759		490		78		-		1,327		170		9		10,333
(Gain) loss on sale of business and other exit costs, net				(17,411)		-		-		-		-		-		13,122		-		(4,289)
(Gain) loss on license sales and exchanges				(91,446)		-		-		-		-		-		-		-		(91,446)
Operating income (loss)				(42,482)		48,995		567		(12,303)		-		37,259		(18,875)		(4,307)		(28,405)
Equity in earnings of unconsolidated entities				70,195		4		-		-		-		4		-		1,918		72,117
Interest and dividend income				2,457		1,175		2		42		-		1,219		-		1,561		5,237
Interest expense				(29,198)		1,341		35		(860)		-		516		(2,218)		(25,705)		(56,605)
Other, net				186		(149)		-		179		-		30		(6)		-		210
Income (loss) before income taxes				1,158		51,366		604		(12,942)		-		39,028		(21,099)		(26,533)		(7,446)
Add back:
Depreciation, amortization and accretion				316,090		84,563		8,918		13,469		-		106,950		3,294		3,152		429,486
(Gain) loss on sale of business and other exit costs, net				(17,411)		-		-		-		-		-		13,122		-		(4,289)
(Gain) loss on license sales and exchanges				(91,446)		-		-		-		-		-		-		-		(91,446)
Interest expense				29,198		(1,341)		(35)		860		-		(516)		2,218		25,705		56,605
Adjusted income (loss) before income taxes			$	237,589	$	134,588	$	9,487	$	1,387	$	-	$	145,462	$	(2,465)	$	2,324	$	382,910

Investments in unconsolidated entities			$	270,215	$	3,810	$	-	$	-	$	-	$	3,810	$	-	$	34,636	$	308,661
Total assets			$	6,298,967	$	1,408,809	$	287,809	$	335,680	$	-	$	2,032,298	$	46,610	$	329,794	$	8,707,669
Capital expenditures			$	233,508	$	50,268	$	13,400	$	13,379	$	-	$	77,047	$	403	$	2,321	$	313,279

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					TDS Telecom
Six Months Ended or as of June 30, 2013			U.S. Cellular		Wireline		HMS		TDS Telecom Eliminations		TDS Telecom Total		Non- Reportable Segment		Corporate, Eliminations and Other Reconciling Items		Total
(Dollars in thousands)
Operating revenues
	Services		$	1,907,315	$	362,106	$	45,205	$	(185)	$	407,126	$	9,589	$	(9,467)	$	2,314,563
	Equipment and product sales			169,561		1,662		31,733		-		33,395		19,220		-		222,176
		Total operating revenues		2,076,876		363,768		76,938		(185)		440,521		28,809		(9,467)		2,536,739
Cost of services (excluding Depreciation, amortization and accretion expense reported below)				408,566		132,168		28,673		(185)		160,656		6,446		(704)		574,964
Cost of equipment and products				458,761		2,104		26,326		-		28,430		13,468		-		500,659
Selling, general and administrative				824,207		114,072		19,282		-		133,354		7,472		(7,410)		957,623
Depreciation, amortization and accretion				392,425		87,216		11,031		-		98,247		3,009		2,599		496,280
(Gain) loss on asset disposals, net				14,452		(602)		113		-		(489)		-		(28)		13,935
(Gain) loss on sale of business and other exit costs, net				(242,093)		-		-		-		-		-		(54,010)		(296,103)
Operating income (loss)				220,558		28,810		(8,487)		-		20,323		(1,586)		50,086		289,381
Equity in earnings of unconsolidated entities				62,437		14		-		-		14		-		243		62,694
Interest and dividend income				1,872		932		32		-		964		2		1,340		4,178
Gain (loss) on investments				18,527		-		-		-		-		-		(4,009)		14,518
Interest expense				(21,064)		1,626		(808)		-		818		(1,983)		(26,018)		(48,247)
Other, net				106		(178)		(122)		-		(300)		(157)		-		(351)
Income (loss) before income taxes				282,436		31,204		(9,385)		-		21,819		(3,724)		21,642		322,173
Add back:
Depreciation, amortization and accretion				392,425		87,216		11,031		-		98,247		3,009		2,599		496,280
(Gain) loss on sale of business and other exit costs, net				(242,093)		-		-		-		-		-		(54,010)		(296,103)
Gain (loss) on investments				(18,527)		-		-		-		-		-		4,009		(14,518)
Interest expense				21,064		(1,626)		808		-		(818)		1,983		26,018		48,247
Adjusted income before income taxes			$	435,305	$	116,794	$	2,454	$	-	$	119,248	$	1,268	$	258	$	556,079

Investments in unconsolidated entities			$	276,363	$	3,809	$	-	$	-	$	3,809	$	-	$	31,874	$	312,046
Total assets			$	6,329,778	$	1,473,173	$	267,062	$	-	$	1,740,235	$	59,293	$	625,459	$	8,754,765
Capital expenditures			$	286,907	$	61,207	$	4,849	$	-	$	66,056	$	517	$	2,700	$	356,180

Adjusted income before income taxes is a segment measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their performance. Adjusted income before income taxes is defined as Income (loss) before income taxes, adjusted for the items set forth in the reconciliation above. Adjusted income before income taxes excludes these items in order to show operating results on a more comparable basis from period to period. From time to time, TDS may also exclude other items from adjusted income before income taxes if such items help reflect operating results on a more comparable basis. TDS does not intend to imply that any of such items that are excluded are non-recurring, infrequent or unusual; such items may occur in the future. TDS believes Adjusted income before income taxes is a useful measure of TDS’ operating results before significant recurring non-cash charges, discrete gains and losses and financing charges (Interest expense).

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12. Supplemental Cash Flow Disclosures

Under the American Recovery and Reinvestment Act of 2009 (“the Recovery Act”), TDS Telecom was awarded $105.1 million in federal grants and will provide $30.9 million of its own funds to complete 44 projects to provide broadband access in unserved areas. TDS Telecom received $12.0 million and $34.6 million in grants during the six months ended June 30, 2014 and 2013, respectively. TDS Telecom has received cumulative grants of $75.6 million as of June 30, 2014. These funds reduced the carrying amount of the assets to which they relate. TDS Telecom had recorded $15.7 million and $23.6 million in grants receivable at June 30, 2014 and December 31, 2013, respectively. These amounts were included as a component of Accounts receivable, Other, in the Consolidated Balance Sheet.

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Item 2 . Management’s Discussion and Analysis of Financial Condition and Results of Operations

Telephone and Data Systems, Inc. (“TDS”) is a diversified telecommunications company providing high-quality telecommunications services to approximately 4.7 million wireless customers and 1.1 million wireline and cable connections at June 30, 2014. TDS conducts substantially all of its wireless operations through its 84%‑owned subsidiary, United States Cellular Corporation (“U.S. Cellular”). TDS provides wireline services, cable services and Hosted and Managed Services (“HMS”), through its wholly-owned subsidiary, TDS Telecommunications Corporation (“TDS Telecom”).

The following discussion and analysis should be read in conjunction with TDS’ interim consolidated financial statements and notes included in Item 1 above, and with the description of TDS’ business, its audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in TDS’ Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2013.

OVERVIEW

The following is a summary of certain selected information contained in the comprehensive Management’s Discussion and Analysis of Financial Condition and Results of Operations that follows. The overview does not contain all of the information that may be important. You should carefully read the entire Management’s Discussion and Analysis of Financial Condition and Results of Operations and not rely solely on the overview.

The following provides historical and forward-looking information and analysis about TDS’ existing business segments. In addition, TDS’ consolidated operations include corporate operations, corporate investments and the Non-Reportable Segment, which includes TDS’ majority-owned printing and distribution company, Suttle-Straus, Inc. (“Suttle-Straus”) and TDS’ wholly-owned wireless telephone subsidiary, Airadigm Communications, Inc. (“Airadigm”), and may in the future include other possible activities or businesses that are not included within the operating results of U.S. Cellular or TDS Telecom. Accordingly, the combined operating results do not currently represent, and in the future will not represent, the only components of the consolidated operating results of TDS, which will continue to reflect such other operations, investments, segments, activities or businesses.

U.S. Cellular

In its consolidated operating markets, U.S. Cellular serves approximately 4.7 million customers in 23 states. As of June 30, 2014, U.S. Cellular’s average penetration rate in its consolidated operating markets was 14.7%. U.S. Cellular operates on a customer satisfaction strategy, striving to meet or exceed customer needs by providing a comprehensive range of wireless products and services, excellent customer support, and a high-quality network.

Financial and operating highlights in the six months ended June 30, 2014 included the following:

· In March 2014, U.S. Cellular sold the majority of its St. Louis area non-operating market license for $92.3 million. As a result of this sale, a gain of $75.8 million was recorded in (Gain) loss on license sales and exchanges in the Consolidated Statement of Operations.

· In February 2014, U.S. Cellular completed a license exchange in Milwaukee. As a result of this transaction, a gain of $15.7 million was recorded in (Gain) loss on license sales and exchanges in the Consolidated Statement of Operations.

The following operating information is presented for Core Markets. As used here, Core Markets is defined as all consolidated markets in which U.S. Cellular currently conducts business and, therefore, excludes the Divestiture Markets and the NY1 & NY2 Partnerships. Core Markets as defined also includes any other income or expenses due to U.S. Cellular’s direct or indirect ownership interests in other spectrum in the Divestiture Markets which was not included in the Divestiture Transaction and other retained assets from the Divestiture Markets. See Note 5 — Acquisitions, Divestitures and Exchanges and Note 7 — Investments in Unconsolidated Entities in the Notes to Consolidated Financial Statements for additional information.

· Total customers were 4,653,000 at June 30, 2014, including 4,500,000 retail customers (97% of total).

· Retail customer net losses were 110,000 in the first six months of 2014 compared to net losses of 47,000 in 2013. In the postpaid category, there were net losses of 119,000 in 2014, compared to net losses of 86,000 in 2013. Postpaid defections increased due to billing system conversion issues and aggressive promotions by other carriers. Prepaid net additions were 9,000 in 2014 compared to net additions of 39,000 in 2013. The decline resulted from lower net additions in the national retail channel.

· Postpaid customers comprised approximately 92% of U.S. Cellular’s retail customers as of June 30, 2014. The postpaid churn rate was 2.0% in 2014 compared to 1.6% in 2013. Billing system conversion issues and aggressive competitive offerings contributed to the increase in postpaid churn. The prepaid churn rate was 6.7% in 2014 compared to 5.8% in 2013.

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· Billed average revenue per user (“ARPU”) increased to $53.62 in 2014 from $50.97 in 2013 reflecting an increase in postpaid ARPU due to increases in smartphone adoption and corresponding revenues from data products and services. Service revenue ARPU increased to $60.23 in 2014 from $57.52 in 2013 due primarily to an increase in postpaid ARPU, offset by a decrease in inbound roaming revenue.

· Postpaid customers on smartphone service plans increased to 55% as of June 30, 2014 compared to 46% as of June 30, 2013. In addition, smartphones represented 73% of all devices sold in 2014 compared to 64% in 2013.

· Beginning in the second quarter of 2014, U.S. Cellular expanded its offerings for equipment installment plans. For the three months ended June 30, 2014, 15% of total smartphone sales to customers were made under an equipment installment plan.

The following financial information is presented for U.S. Cellular consolidated results:

· Retail service revenues of $1,510.9 million decreased $175.5 million, or 10%, in 2014 due to a decrease of 799,000 in the average number of customers (including approximately 500,000 due to the reductions caused by the Divestiture Transaction and NY1 & NY2 Deconsolidation) partially offset by an increase in billed ARPU.

· Total additions to Property, plant and equipment were $233.5 million, including expenditures to deploy fourth generation Long-term Evolution (“4G LTE”) equipment, construct cell sites, increase capacity in existing cell sites and switches, outfit new and remodel existing retail stores, and enhance billing and other customer management related systems and platforms. Total cell sites in service decreased 20% year-over-year to 6,183 primarily as a result of the NY1 & NY2 Deconsolidation and the deactivation of certain cell sites in the Divestiture Markets.

· Operating income (loss) decreased $263.0 million, to a loss of $42.5 million in 2014. The (Gain) loss on license sales and exchanges and the (Gain) loss on sale of business and other exit costs contributed $108.9 million and $242.1 million to operating income in 2014 and 2013, respectively. Without these items, operating income decreased $129.8 million due to lower service revenues and higher equipment subsidies, which were partially offset by lower system operations, selling, general and administrative, and depreciation, amortization and accretion expense.

U.S. Cellular anticipates that its future results may be affected by the following factors:

· Effects of industry competition on service and equipment pricing;

· U.S. Cellular completed the migration of its customers to a new Billing and Operational Support System (“B/OSS”) in the third quarter of 2013. Intermittent system outages and delayed system response times negatively impacted customer service and sales operations at certain times. System enhancements continue to be implemented to address these issues, and customer service and sales operations response times have improved. However, any future operational problems associated with the new billing system could have adverse effects on U.S. Cellular’s business (in areas such as overall customer satisfaction, customer attrition, uncollectible accounts receivable, gross customer additions, or operating expenses). All of these factors could have a material adverse effect on U.S. Cellular’s results of operations or cash flows;

· Impacts of selling Apple iPhone products;

· Impacts of selling devices under equipment installment plans;

· Relative ability to attract and retain customers in a competitive marketplace in a cost effective manner;

· Expanded distribution of products and services in third-party national retailers;

· Potential increases in prepaid customers, who generally generate lower ARPU and higher churn, as a percentage of U.S. Cellular’s customer base in response to changes in customer preferences and industry dynamics;

· The nature and rate of growth in the wireless industry, requiring U.S. Cellular to grow revenues primarily from selling additional products and services to its existing customers, increasing the number of multi-device users among its existing customers, increasing data products and services and attracting wireless customers switching from other wireless carriers;

· Continued growth in revenues and costs related to data products and services and declines in revenues from voice services;

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· Rapid growth in the demand for new data devices and services which may result in increased cost of equipment sold and other operating expenses and the need for additional investment in network capacity and enhancements;

· Further consolidation among carriers in the wireless industry, which could result in increased competition for customers and/or cause roaming revenues to decline;

· Uncertainty related to various rulemaking proceedings underway at the Federal Communications Commission (“FCC”);

· The ability to negotiate satisfactory 4G LTE data roaming agreements with other wireless operators.

See “Results of Operations—U.S. Cellular.”

TDS Telecom

The Wireline and Cable segments seek to be the preferred telecommunications solutions providers in their chosen markets serving both residential and commercial customers by developing and delivering high-quality products through a superior network that meets or exceeds customers’ needs and to outperform the competition by maintaining superior customer service. TDS Telecom provides broadband, voice, and video services to residential customers through value-added bundling of products. The commercial focus is to provide advanced IP-based voice and data services to small to medium sized businesses. The HMS segment provides colocation, dedicated hosting, hosted application management, cloud computing services and planning, engineering, procurement, installation, sales and management of Information Technology (“IT”) infrastructure hardware solutions.

On October 4, 2013, TDS acquired 100% of the outstanding shares of MSN Communications, Inc. (“MSN”) for $43.6 million in cash. The operations of MSN are included in the HMS segment. On August 1, 2013, TDS Telecom acquired substantially all of the assets of Baja Broadband, LLC (“Baja”) for $264.1 million in cash. The operations of Baja comprise the Cable segment. These acquisitions impact the comparability of TDS Telecom’s operating results.

On May 1, 2014, TDS entered into an agreement to acquire substantially all of the assets of a group of companies operating as BendBroadband, headquartered in Bend, Oregon for $261 million in cash, subject to working capital and other adjustments. BendBroadband is a full-service communications company, offering an extensive range of broadband, fiber connectivity, cable television and telephone services for commercial and residential customers in Central Oregon. The agreement also includes a Tier III data center providing colocation and managed services and a cable advertising and broadcast business. At December 31, 2013, BendBroadband passed approximately 79,000 homes and businesses, with approximately 36,000 video subscribers, 41,000 high-speed broadband subscribers and 22,000 digital voice subscribers. BendBroadband generated annual revenues of $70 million in 2013. The transaction is subject to governmental regulatory approvals, compliance with the Hart-Scott-Rodino Act and other conditions. Subject to approvals, the transaction is expected to close in the third quarter of 2014.

TDS Telecom’s financial results for the six months ended June 30, 2014 included the following:

· Operating revenues increased $92.7 million or 21% to $533.3 million in 2014. The increase was due primarily to $97.3 million from acquisitions of Baja and MSN, partially offset by a $6.0 million decrease in Wireline Wholesale revenues.

· Operating expenses increased $75.8 million or 18% to $496.0 million in 2014 due primarily to $96.9 million from acquisitions, partially offset by a $25.7 million decrease in Wireline expenses.

TDS anticipates that TDS Telecom’s future results will be affected by the following factors:

· Continued increases in competition from wireless and other wireline providers, cable providers, and technologies such as Voice over Internet Protocol (“VoIP”), DOCSIS 3.0 and higher, and fourth-generation (“4G”) mobile technology;

· Continued increases in consumer data usage and demand for high-speed data services;

· Continued declines in Wireline voice connections;

· Continued focus on customer retention programs, including discounting for “triple-play” bundles including voice, broadband and video or satellite video;

· The expansion of Internet Protocol television (“IPTV”) into additional market areas;

· Continued growth in hosted and managed services which may result in the need for additional investment in data centers;

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· Continued focus on cost-reduction initiatives through product and service cost improvements and process efficiencies;

· The Federal government’s disbursement of Broadband Stimulus Funds to bring broadband to rural customers;

· The National Broadband Plan and other rulemaking by the FCC, including uncertainty related to future funding from the Universal Service Fund (“USF”), broadband requirements, intercarrier compensation and changes in access reform;

· Impacts of the Baja and MSN transactions, including, but not limited to, the ability to successfully integrate and operate these businesses and the financial impacts of such transactions;

· Impacts of the BendBroadband transaction, including, but not limited to, the ability to obtain regulatory approval, successfully complete the transaction, integrate and operate the businesses of BendBroadband, and the financial impacts of such transaction, including the effects on TDS’ capital resources and liquidity as a result of the use of $261 million in cash for the purchase price; and

· Potential acquisitions or divestitures by TDS and/or TDS Telecom of wireline, cable, HMS or other businesses.

See “Results of Operations—TDS Telecom.”

Pro Forma Financial Information

Refer to TDS’ Form 8-K filed on August 2, 2013 for pro forma financial information related to the Divestiture Transaction and the NY1 & NY2 Deconsolidation for the three and six months ended June 30, 2013, as if the transactions had occurred at the beginning of the period.

REGULATORY DEVELOPMENTS

FCC Interoperability Order

On October 25, 2013, the FCC adopted a Report and Order and Order of Proposed Modification confirming a voluntary industry agreement on interoperability in the Lower 700 MHz spectrum band. The FCC's Report and Order laid out a roadmap for the voluntary commitments of AT&T and DISH Network Corporation ("DISH") to become fully binding. The FCC implemented the AT&T commitments in an Order adopted in the first quarter of 2014 that modified AT&T’s Lower 700 MHz licenses. Pursuant to these commitments, AT&T will begin incorporating changes in its network and devices that will foster interoperability across all paired spectrum blocks in the Lower 700 MHz Band and support LTE roaming on AT&T networks for carriers with compatible Band 12 devices, consistent with the FCC’s rules on roaming. AT&T will be implementing the foregoing changes in phases starting with network software enhancement taking place possibly through the third quarter of 2015 with the AT&T Band 12 device roll-out to follow. In addition, the FCC has adopted changes in its technical rules for certain unpaired spectrum licensed to AT&T and DISH in the Lower 700 MHz band to enhance prospects for Lower 700 MHz interoperability. AT&T’s network and devices currently interoperate across only two of the three paired blocks in the Lower 700 MHz band. U.S. Cellular’s LTE deployment, carried out in conjunction with its partner, King Street Wireless, utilizes spectrum in all three of these blocks and, consequently, was not interoperable with the AT&T configuration. U.S. Cellular believes that the FCC action will broaden the ecosystem of devices available to U.S. Cellular’s customers over time.

FCC Net Neutrality Proposal

In May 2014, the FCC issued a notice of proposed rulemaking seeking comments on revised net neutrality rules. The revised proposed rules are substantially similar to rules adopted in 2010 that were vacated by a U.S. Court of Appeals in January 2014 (as described in our Form 10-K for the year ended December 31, 2013), except that they include certain changes intended to allow the revised proposed rules to be sustained considering the Court’s decision. In particular, whereas the vacated rules prohibited fixed (i.e., cable and telephone) Internet Service Providers from engaging in “unreasonable discrimination” in transmitting internet traffic, the revised proposed rules would prohibit those carriers from engaging in “commercially unreasonable practices.” The FCC is also considering applying that standard to wireless Internet Service Providers, which were not subject to the former “unreasonable discrimination” standard. All types of Internet Service Providers previously were and would again be prohibited from “blocking” access to lawful Internet services, and remain subject to “transparency” requirements which were not vacated by the Court of Appeals. The FCC also now proposes to “enhance” those transparency requirements to provide for greater disclosure of network management practices. The FCC proceeding is currently pending, and we cannot predict the outcome of the proceeding.

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FCC Spectrum Auction 97

The FCC has scheduled an auction of AWS-3 spectrum licenses, referred to as Auction 97, to begin on November 13, 2014. U.S. Cellular evaluates opportunities to acquire additional spectrum in FCC auctions and may participate as a bidder or member of a bidding group. If U.S. Cellular participates, information relating to this will be disclosed at a later time, subject to FCC rules. In such event, applicable FCC anti-collusion rules will place certain restrictions on public disclosures and business communications with other companies relating to U.S. Cellular’s participation, commencing on the application deadline of September 12, 2014 until the down payment deadline for Auction 97, which will be the later of January 7, 2015 or ten business days after release of the auction closing public notice. These anti-collusion rules, which could last three to four months or more, may restrict the normal conduct of U.S. Cellular’s disclosures and/or business communications by U.S. Cellular relating to the auction. The restrictions could have an adverse effect on U.S. Cellular’s business, financial condition or results of operations.

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Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

RESULTS OF OPERATIONS — CONSOLIDATED
									Percentage
Six Months Ended June 30,			2014		2013		Change		Change
(Dollars in thousands, except per share amounts)
Operating revenues
	U.S. Cellular		$	1,883,584	$	2,076,876	$	(193,292)	(9)	%
	TDS Telecom			533,266		440,521		92,745	21	%
	All other (1)			15,504		19,342		(3,838)	(20)	%
		Total operating revenues		2,432,354		2,536,739		(104,385)	(4)	%
Operating expenses
	U.S. Cellular			1,926,066		1,856,318		69,748	4	%
	TDS Telecom			496,007		420,198		75,809	18	%
	All other (1)(2)			38,686		(29,158)		67,844	>100	%
		Total operating expenses		2,460,759		2,247,358		213,401	9	%
Operating income (loss)
	U.S. Cellular			(42,482)		220,558		(263,040)	>(100)	%
	TDS Telecom			37,259		20,323		16,936	83	%
	All other (1)(2)			(23,182)		48,500		(71,682)	>(100)	%
		Total operating income (loss)		(28,405)		289,381		(317,786)	>(100)	%
Other income and (expenses)
	Equity in earnings of unconsolidated entities			72,117		62,694		9,423	15	%
	Interest and dividend income			5,237		4,178		1,059	25	%
	Gain (loss) on investments			-		14,518		(14,518)	N/M
	Interest expense			(56,605)		(48,247)		(8,358)	17	%
	Other, net			210		(351)		561	>100	%
		Total other income (expenses)		20,959		32,792		(11,833)	(36)	%

Income before income taxes				(7,446)		322,173		(329,619)	>(100)	%
	Income tax expense			(2,014)		136,787		(138,801)	>(100)	%

Net income (loss)				(5,432)		185,386		(190,818)	>(100)	%
	Less: Net income (loss) attributable to noncontrolling interests, net of tax			(1,648)		27,890		(29,538)	>(100)	%
Net income attributable to TDS shareholders				(3,784)		157,496		(161,280)	>(100)	%
	Preferred dividend requirement			(25)		(25)		-	-
Net income available to common shareholders			$	(3,809)	$	157,471	$	(161,280)	>(100)	%

Basic earnings per share attributable to TDS shareholders			$	(0.04)	$	1.45	$	(1.49)	>(100)	%

Diluted earnings per share attributable to TDS shareholders			$	(0.04)	$	1.44	$	(1.48)	>(100)	%

N/M - Percent change not meaningful

(1)	Consists of Non-Reportable Segment, corporate operations and intercompany eliminations between U.S. Cellular, TDS Telecom, the Non-Reportable Segment and corporate operations.

(2)	Due to the Airadigm Transaction, TDS recognized expenses of $13.1 million related to exit and disposal activities in 2014. In 2013, TDS recognized an incremental gain of $53.5 million compared to U.S. Cellular upon closing of the Divestiture Transaction as a result of lower asset basis in the assets disposed. See Note 5 – Acquisitions, Divestitures and Exchanges in the Notes to the Consolidated Financial Statements for additional information related to these transactions.

Operating revenues and expenses

See “Results of Operations — U.S. Cellular” and “Results of Operations — TDS Telecom” below for factors that affected consolidated Operating revenues and expenses.

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Equity in earnings of unconsolidated entities

TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $39.6 million and $40.4 million to Equity in earnings of unconsolidated entities in 2014 and 2013, respectively.

On April 3, 2013, TDS deconsolidated the NY1 & NY2 Partnerships and began reporting them as equity method investments in its consolidated financial statements as of that date. Equity in earnings of the NY1 & NY2 Partnerships was $13.7 million and $8.6 million in 2014 and 2013, respectively. See Note 7 — Investments in Unconsolidated Entities in Notes to Consolidated Financial Statements for additional information.

Gain (loss) on investments

In 2013, in connection with the deconsolidation of the NY1 & NY2 Partnerships, TDS recognized a non-cash pre-tax gain of $14.5 million.

Interest expense

The increase in interest expense was due primarily to a decrease in capitalized interest related to network and systems projects. Interest cost capitalized was $3.8 million and $12.1 million for 2014 and 2013, respectively.

Income tax expense

See Note 3 — Income Taxes in the Notes to Consolidated Financial Statements for a discussion of the overall effective tax rate on Income before income taxes.

Net income (loss) attributable to noncontrolling interests, net of tax

Net income (loss) attributable to noncontrolling interests, net of tax includes the noncontrolling public shareholders’ share of U.S. Cellular’s net income (loss) and the noncontrolling shareholders’ or partners’ share of certain TDS or U.S. Cellular subsidiaries’ net income (loss).

		Six Months Ended
		June 30,
		2014		2013
(Dollars in thousands)
Net income (loss) attributable to noncontrolling interests, net of tax
	U.S. Cellular noncontrolling public shareholders’	$	70	$	23,111
	Noncontrolling shareholders’ or partners’ (1)		(1,718)		4,779
		$	(1,648)	$	27,890

(1)	The decrease from 2013 to 2014 is due primarily to the elimination of the noncontrolling interest as a result of the NY1 & NY2 Deconsolidation on April 3, 2013.

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RESULTS OF OPERATIONS — U.S. CELLULAR

TDS provides wireless telephone service through U.S. Cellular, an 84%-owned subsidiary. U.S. Cellular owns, manages and invests in wireless markets throughout the United States.

Summary Operating Data for U.S. Cellular Consolidated Markets

Following is a table of summarized operating data for U.S. Cellular’s Consolidated Markets. Consolidated Markets herein refers to markets which U.S. Cellular currently consolidates, or previously consolidated in the periods presented, and is not adjusted in prior periods for subsequent divestitures or deconsolidations. Unless otherwise noted, figures reported in Results of Operations are representative of consolidated results.

As of or for Six Months Ended June 30,			2014			2013
Retail Customers
	Postpaid
		Total at end of period		4,148,000			4,412,000
		Gross additions		387,000			356,000
		Net additions (losses)		(119,000)			(194,000)
		ARPU(1)	$	57.18		$	54.80
		Churn rate(2)		2.0	%		1.9	%
		Smartphone penetration(3)		55.3	%		45.5	%
	Prepaid
		Total at end of period		352,000			381,000
		Gross additions		150,000			181,000
		Net additions (losses)		9,000			16,000
		ARPU(1)	$	33.18		$	32.76
		Churn rate(2)		6.7	%		6.6	%
Total customers at end of period				4,653,000			4,968,000
Billed ARPU(1)			$	53.62		$	51.15
Service revenue ARPU(1)			$	60.23		$	57.85
Smartphones sold as a percent of total devices sold				72.8	%		63.7	%
Total Population
	Consolidated markets(4)			54,817,000			84,025,000
	Consolidated operating markets(4)			31,729,000			31,822,000
Market penetration at end of period
	Consolidated markets(5)			8.5	%		5.9	%
	Consolidated operating markets(5)			14.7	%		15.6	%
Capital expenditures (000s)			$	233,508		$	286,907
Total cell sites in service				6,183			7,748
Owned towers				4,457			4,411

Summary Operating Data for U.S. Cellular Core Markets

Following is a table of summarized operating data for U.S. Cellular's Core Markets. For comparability, Core Markets as presented here excludes the results of the Divestiture Markets and NY1 and NY2 Partnerships as of or for the six months ended June 30, 2013.

As of or for Six Months Ended June 30,			2014			2013
Retail Customers
	Postpaid
		Total at end of period		4,148,000			4,412,000
		Gross additions		387,000			341,000
		Net additions (losses)		(119,000)			(86,000)
		ARPU(1)	$	57.18		$	54.34
		Churn rate(2)		2.0	%		1.6	%
		Smartphone penetration(3)		55.3	%		45.5	%
	Prepaid
		Total at end of period		352,000			381,000
		Gross additions		150,000			167,000
		Net additions (losses)		9,000			39,000
		ARPU(1)	$	33.18		$	32.36
		Churn rate(2)		6.7	%		5.8	%
Total customers at end of period				4,653,000			4,968,000
Billed ARPU(1)			$	53.62		$	50.97
Service revenue ARPU(1)			$	60.23		$	57.52
Smartphones sold as a percent of total devices sold				72.8	%		64.0	%
Total Population
	Consolidated markets(4)			54,817,000			84,025,000
	Consolidated operating markets(4)			31,729,000			31,822,000
Market penetration at end of period
	Consolidated markets(5)			8.5	%		5.9	%
	Consolidated operating markets(5)			14.7	%		15.6	%
Capital expenditures (000s)			$	233,508		$	279,073
Total cell sites in service				6,183			6,113
Owned towers				3,892			3,846

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(1) ARPU metrics are calculated by dividing a revenue base by an average number of customers by the number of months in the period. These revenue bases and customer populations are shown below:

a. Postpaid ARPU consists of total postpaid service revenues and postpaid customers.

b. Prepaid ARPU consists of total prepaid service revenues and prepaid customers.

c. Billed ARPU consists of total retail service or “billed” revenues (total postpaid, prepaid and reseller service revenues) and postpaid, prepaid and reseller customers.

d. Service revenue ARPU consists of total retail service revenues, inbound roaming and other service revenues and postpaid, prepaid and reseller customers.

(2) Churn metrics represent the percentage of the postpaid or prepaid customers that disconnect service each month. These metrics represent the average monthly postpaid or prepaid churn rate for each respective period.

(3) Smartphones represent wireless devices which run on an Android, Apple, BlackBerry or Windows Mobile operating system, excluding tablets. Smartphone penetration is calculated by dividing postpaid smartphone customers by total postpaid customers.

(4) The decrease in the population of Consolidated markets is due primarily to the divestiture of the Mississippi Valley non-operating license in October 2013 and the majority of the St. Louis area non-operating market license in March 2014. Total Population is used only to calculate market penetration of consolidated markets and consolidated operating markets, respectively. See footnote (5) below.

(5) Market penetration is calculated by dividing the number of wireless customers at the end of the period by the total population of consolidated markets and consolidated operating markets, respectively, as estimated by Claritas. The increase in penetration is due primarily to a lower denominator as a result of the license divestitures described in footnote (4) above.

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Components of Operating Income

Six Months Ended June 30,		2014		2013		Change		Percentage Change
(Dollars in thousands)
Retail service		$	1,510,918	$	1,686,399	$	(175,481)	(10)	%
Inbound roaming			107,706		130,907		(23,201)	(18)	%
Other			78,462		90,009		(11,547)	(13)	%
	Service revenues		1,697,086		1,907,315		(210,229)	(11)	%
Equipment sales			186,498		169,561		16,937	10	%
	Total operating revenues		1,883,584		2,076,876		(193,292)	(9)	%

System operations (excluding Depreciation, amortization and accretion reported below)			367,738		408,566		(40,828)	(10)	%
Cost of equipment sold			542,452		458,761		83,691	18	%
Selling, general and administrative			799,816		824,207		(24,391)	(3)	%
Depreciation, amortization and accretion			316,090		392,425		(76,335)	(19)	%
(Gain) loss on asset disposals, net			8,827		14,452		(5,625)	(39)	%
(Gain) loss on sale of business and other exit costs, net			(17,411)		(242,093)		224,682	93	%
(Gain) loss on license sales and exchanges			(91,446)		-		(91,446)	N/M
	Total operating expenses		1,926,066		1,856,318		69,748	4	%
	Operating income (loss)	$	(42,482)	$	220,558	$	(263,040)	>(100)	%

N/M - Not meaningful

Operating Revenues

Service revenues

Service revenues consist primarily of: (i) charges for access, airtime, roaming, recovery of regulatory costs and value added services, including data products and services, provided to U.S. Cellular’s retail customers and to end users through third party resellers (“retail service”); (ii) charges to other wireless carriers whose customers use U.S. Cellular’s wireless systems when roaming; and (iii) amounts received from the Federal Universal Service Fund (“USF”).

Retail service revenues

Retail service revenues decreased by $175.5 million, or 10%, in 2014 to $1,510.9 million due to a decrease in U.S. Cellular’s average customer base (including the reductions caused by the Divestiture Transaction and NY1 & NY2 Deconsolidation) partially offset by an increase in billed ARPU.

Billed ARPU increased to $53.62 in 2014 from $51.15 in 2013. This overall increase is due primarily to an increase in postpaid ARPU to $57.18 in 2014 from $54.80 in 2013, reflecting increases in smartphone adoption and corresponding revenues from data products and services.

U.S. Cellular expects continued pressure on retail service revenues in the foreseeable future due to industry competition for customers and related effects on pricing of service plan offerings offset to some degree by continued adoption of smartphones and data usage. In addition, beginning in the second quarter of 2014, U.S. Cellular expanded its offerings of equipment installment plans. To the extent that customers adopt these plans, U.S. Cellular expects an increase in equipment sales revenues. In addition, certain of the equipment installment plans provide the customer with a reduction in the monthly access charge for the device; thus, to the extent that existing customers adopt such plans, U.S. Cellular expects a reduction in retail service revenues and ARPU.

Inbound roaming revenues

Inbound roaming revenues decreased by $23.2 million, or 18%, in 2014 to $107.7 million. The decrease was due primarily to a $17.6 million impact related to the Divestiture Transaction and NY1 & NY2 Deconsolidation. The remaining decrease in the Core Markets was due to a decrease in rates and a decline in voice volume, partially offset by higher data usage.

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Other revenues

Other revenues decreased by $11.5 million, or 13%, in 2014 compared to 2013, due primarily to a $14.2 million decrease in eligible telecommunications carriers (“ETC”) support.

Pursuant to the FCC's Reform Order (“Reform Order”), U.S. Cellular’s current ETC support is being phased down at the rate of 20% per year beginning July 1, 2012. The Phase II Mobility Fund was not operational by July 2014. Therefore, as provided by the Reform Order, the phase down is currently suspended and U.S. Cellular will continue to receive 60% of its baseline support until the Phase II Mobility Fund is operational. At this time, U.S. Cellular cannot predict the net effect of the FCC’s changes to the USF high cost support program in the Reform Order. Accordingly, U.S. Cellular cannot predict whether such changes will have a material adverse effect on U.S. Cellular’s business, financial condition or results of operations.

Equipment sales revenues

Equipment sales revenues include revenues from sales of wireless devices and related accessories to both new and existing customers, as well as revenues from sales of devices and accessories to agents. All Equipment sales revenues are recorded net of rebates.

U.S. Cellular offers a competitive line of quality wireless devices to both new and existing customers. U.S. Cellular's customer acquisition and retention efforts include offering new wireless devices to customers at discounted prices; in addition, customers on currently offered rate plans receive loyalty reward points that may be used to purchase a new wireless device or accelerate the timing of a customer's eligibility for a wireless device upgrade at promotional pricing. U.S. Cellular also continues to sell wireless devices to agents including national retailers; this practice enables U.S. Cellular to provide better control over the quality of wireless devices sold to its customers, establish roaming preferences and earn quantity discounts from wireless device manufacturers which are passed along to agents and other retailers.

Beginning in the second quarter of 2014, U.S. Cellular expanded its offerings of equipment installment plans. To the extent that customers adopt these plans, U.S. Cellular expects an increase in equipment sales revenues. In addition, certain of the equipment installment plans provide the customer with a reduction in the monthly access charge for the device; thus, to the extent that existing customers adopt such plans, U.S. Cellular expects a reduction in retail service revenues and ARPU.

Equipment sales revenues increased $16.9 million , or 10%, in 2014 to $186.5 million. In the Core Markets, equipment sales revenues increased by $24.6 million due primarily to an increase in average revenue per device sold (including the impact of sales under equipment installment plans), partially offset by the sale of fewer devices, primarily in the feature phone category. The increase in equipment sales revenues in the Core Markets was partially offset by the effects of the Divestiture Transaction and the NY1 & NY2 Deconsolidation.

Operating Expenses

System operations expenses (excluding Depreciation, amortization and accretion)

System operations expenses (excluding Depreciation, amortization, and accretion) include charges from telecommunications service providers for U.S. Cellular’s customers’ use of their facilities, costs related to local interconnection to the wireline network, charges for cell site rent and maintenance of U.S. Cellular’s network, long-distance charges, outbound roaming expenses and payments to third‑party data product and platform developers.

System operations expenses decreased $40.8 million, or 10%, to $367.7 million. Key components of the net changes in System operations expense were as follows:

· Customer usage expenses decreased by $24.4 million, or 19%, driven by impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation and decreases in network costs due to lower rates for long distance usage and lower fees for platform and content providers.

· Maintenance, utility and cell site expenses decreased $13.2 million, or 7%, driven primarily by impacts of the Divestiture Transaction and NY1 & NY2 Deconsolidation and lower headcount, partially offset by costs related to 4G LTE support.

· Expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming decreased $3.2 million, or 4%, due primarily to the Divestiture Transaction and NY1 & NY2 Deconsolidation, lower voice usage and lower rates, offset by higher data roaming usage in the Core Markets.

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U.S. Cellular expects system operations expenses to increase in the future to support the continued growth in cell sites and other network facilities as it continues to add capacity, enhance quality and deploy new technologies as well as to support increases in total customer usage, particularly data usage. However, these increases are expected to be offset to some extent by cost savings generated by shifting data traffic to the more efficient 4G LTE network from the 3G network.

Cost of equipment sold

Cost of equipment sold increased by $83.7 million, or 18%, in 2014 to $542.5 million. The increase was driven by a 36% increase in the average cost per device sold, which more than offset the impact of selling fewer devices. Average cost per device sold increased due to general customer preference for higher-priced 4G LTE smartphones. Smartphones sold as a percentage of total devices sold were 73% and 64% in 2014 and 2013, respectively. The total number of devices sold decreased by 11%, partially due to the Divestiture Transaction.

U.S. Cellular's loss on equipment, defined as equipment sales revenues less cost of equipment sold, was $356.0 million and $289.2 million for 2014 and 2013, respectively. U.S. Cellular expects loss on equipment to continue to be a significant cost in the foreseeable future as wireless carriers continue to use device availability and pricing as a means of competitive differentiation. In addition, U.S. Cellular expects increasing sales of data centric wireless devices to result in higher equipment subsidies over time; these devices generally have higher purchase costs which cannot be recovered through proportionately higher selling prices to customers under the standard contract/subsidy model the industry has operated with for many years. However, U.S. Cellular expects the introduction of the equipment installment plans to offset the increases in loss on equipment to some degree.

Selling, general and administrative expenses

Selling, general and administrative expenses include salaries, commissions and expenses of field sales and retail personnel and facilities; telesales department salaries and expenses; agent commissions and related expenses; corporate marketing and merchandise management; and advertising expenses. Selling, general and administrative expenses also include bad debts expense, costs of operating customer care centers and corporate expenses.

Key components of the $24.4 million, or 3%, decrease to $799.8 million were as follows:

· Selling and marketing expense decreased by $7.0 million, or 2%, due primarily to the effects of the Divestiture Transaction and NY1 & NY2 Deconsolidation, offset by increases in advertising and commissions expenses.

· General and administrative expense decreased by $17.4 million, or 4%, due primarily to the Divestiture Transaction and NY1 & NY2 Deconsolidation and lower consulting expenses related to the billing system conversion in the prior year, offset by an increase in bad debts expense.

Depreciation, amortization and accretion

Depreciation, amortization and accretion decreased $76.3 million, or 19%, in 2014 to $316.1 million due primarily to the higher amount of accelerated depreciation, amortization and accretion in the Divestiture Markets that occurred in 2013. The impact of the acceleration was $13.1 million in 2014 compared to $88.3 million in 2013. The accelerated depreciation, amortization and accretion in the Divestiture Markets was completed in the first quarter of 2014.

(Gain) loss on asset disposals, net

(Gain) loss on asset disposals, net was a loss in both 2014 and 2013 due primarily to the write-off and disposals of certain network assets.

(Gain) loss on sale of business and other exit costs, net

The net gain in both 2014 and 2013 resulted from the Divestiture Transaction. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

(Gain) loss on license sales and exchanges

The net gain in 2014 resulted from the sale of the St. Louis area non-operating market license and the license exchange in Milwaukee. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information.

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RESULTS OF OPERATIONS — TDS TELECOM

TDS Telecom provides broadband, video and voice telecommunications services and hosted and managed services in three reportable segments: Wireline, Cable and HMS. TDS Telecom’s Wireline and Cable operations served 1,113,200 customer connections at June 30, 2014. TDS Telecom also provides hosted and managed services (“HMS”) under the OneNeck IT Solutions (“OneNeck”) brand, which provides colocation, dedicated hosting, hosted application management, cloud computing services and planning, engineering, procurement, installation, sales and management of Information Technology (“IT”) infrastructure hardware solutions.

On October 4, 2013, TDS acquired 100% of the outstanding shares of MSN. The operations of MSN are included in the HMS segment since the date of acquisition. On August 1, 2013, TDS Telecom acquired substantially all of the assets of Baja. The operations of Baja are included in the Cable segment since the date of acquisition. These acquisitions impact the comparability of TDS Telecom’s operating results.

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The following table summarizes customer connections for TDS Telecom’s Wireline and Cable operations:

As of or for the six months ended June 30,				2014		2013		Change
Wireline
	Residential connections
		Voice (1)			346,100		364,100		(18,000)
		Broadband (2)			232,700		231,700		1,000
		IPTV (3)			18,200		10,500		7,700
			Wireline residential connections		597,000		606,300		(9,300)

	Total residential revenue per connection (4)			$	40.92	$	40.05	$	0.87

	Commercial connections
		Voice (1)			206,200		229,100		(22,900)
		Broadband (2)			26,000		28,200		(2,200)
		managedIP (5)			133,300		112,000		21,300
			Wireline commercial connections		365,500		369,300		(3,800)

	Total Wireline connections				962,500		975,600		(13,100)

Cable									`
	Cable connections
		Video (6)			69,700
		Broadband (7)			63,200
		Voice (7)			17,800
			Cable connections		150,700

	Total residential revenue per connection (4)			$	57.09

(1)	The individual circuit connecting customers to TDS Telecom’s central office facilities.

(2)	The number of customers provided high-capacity data circuits via various technologies, including DSL and dedicated internet circuit technologies.

(3)	The number of customers provided video services using IP networking technology.

(4)	Total residential revenue divided by the average number of total residential connections.

(5)	The number of telephone handsets, data lines and IP trunks providing communications using IP networking technology.

(6)	Generally, a home or business receiving video programming counts as one video connection. In counting bulk residential or commercial connections, such as an apartment building or a hotel, connections are counted based on the number of units/rooms within the building receiving service.

(7)	Broadband and voice connections reflect billable number of lines into a building for high speed data and voice services, respectively.

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TDS Telecom

Components of Operating Income

									Percentage
Six Months Ended June 30,			2014		2013		Change		Change
(Dollars in thousands)
Operating revenues
	Wireline		$	358,214	$	363,768	$	(5,554)	(2)	%
	Cable			44,987		-		44,987	N/M
	HMS			131,044		76,938		54,106	70	%
	Intra-company elimination			(979)		(185)		(794)	>(100)	%
		TDS Telecom operating revenues		533,266		440,521		92,745	21	%

Operating expenses
	Wireline			309,219		334,958		(25,739)	(8)	%
	Cable			44,420		-		44,420	N/M
	HMS			143,347		85,425		57,922	68	%
	Intra-company elimination			(979)		(185)		(794)	>(100)	%
		TDS Telecom operating expenses		496,007		420,198		75,809	18	%

	TDS Telecom operating income		$	37,259	$	20,323	$	16,936	83	%

N/M - Not meaningful

Wireline Operations

Components of Operating Income
											Percentage
Six Months Ended June 30,						2014		2013		Change	Change
(Dollars in thousands)
Service revenues
	Residential				$	145,865	$	145,915	$	(50)	-
	Commercial					115,452		114,253		1,199	1	%
	Wholesale					95,913		101,938		(6,025)	(6)	%
		Total service revenues				357,230		362,106		(4,876)	(1)	%
Equipment and product sales						984		1,662		(678)	(41)	%
			Total operating revenues			358,214		363,768		(5,554)	(2)	%

Cost of services (excluding Depreciation, amortization and accretion reported below)						128,705		132,168		(3,463)	(3)	%
Cost of equipment and products						964		2,104		(1,140)	(54)	%
Selling, general and administrative						94,228		114,072		(19,844)	(17)	%
Depreciation, amortization and accretion						84,563		87,216		(2,653)	(3)	%
(Gain) loss on asset disposals, net						759		(602)		1,361	>100	%
			Total operating expenses			309,219		334,958		(25,739)	(8)	%
				Total operating income	$	48,995	$	28,810	$	20,185	70	%

Operating Revenues

Residential revenues consist of voice, data and video services to TDS Telecom’s Wireline residential customer base.

Residential revenues were unchanged from the prior year at $145.9 million in 2014. Legacy voice connections declined by 5% decreasing revenues by $4.1 million, while IPTV connections grew 75% increasing revenues $2.7 million. A 2% increase in average revenue per residential connection driven by price increases for broadband services, growth in customers opting for faster broadband speeds and growth in customers selecting higher tier IPTV packages increased revenues $2.1 million.

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Commercial revenues consist of data and voice services and sales and installation of IP-based telecommunication systems to TDS Telecom’s Wireline commercial customer base.

Commercial revenues increased $1.2 million or 1% to $115.5 million in 2014. A 25% growth in average managedIP connections and a 1% increase in average revenue per connection increased commercial revenue, offsetting decreases in revenue from declining legacy voice and data connections.

Wholesale revenues represent compensation from other carriers for utilizing TDS Telecom’s network infrastructure and regulatory recoveries.

Wholesale revenues decreased $6.0 million or 6% to $95.9 million. Revenues received through inter-state and intra-state regulatory recovery mechanisms decreased $3.6 million. Wholesale revenues declined $1.4 million due to a 12% reduction in minutes-of-use.

Operating Expenses

Cost of services (excluding Depreciation, amortization and accretion)

Cost of services decreased $3.5 million or 3% to $128.7 million in 2014. Employee expenses decreased by $2.4 million while reductions in costs of providing long-distance services and fewer promotional giveaways reduced expense by $2.9 million. Charges related to the growth in IPTV increased cost of services $1.9 million.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased $19.8 million or 17% to $94.2 million in 2014 due to cost control efforts. Employee expenses decreased $11.1 million and consulting and IT maintenance charges decreased $2.5 million and $1.7 million, respectively.

Depreciation, amortization and accretion

Depreciation, amortization and accretion expense decreased $2.7 million or 3% to $84.6 million in 2014 due primarily to depreciation being fully recognized on some assets.

Cable Operations

Components of Operating Income

Six Months Ended June 30,				2014
(Dollars in thousands)
Service revenues
	Residential			$	36,475
	Commercial				8,512
		Total operating revenues			44,987

Cost of services (excluding Depreciation, amortization and accretion reported below)					22,349
Selling, general and administrative					12,663
Depreciation, amortization and accretion					8,918
(Gain) loss on asset disposals, net					490
		Total operating expenses			44,420
			Total operating income (loss)	$	567

Operating Revenues

Residential revenues consist of video, broadband and voice services to TDS Telecom’s Cable residential customer base.

At June 30, 2014, residential customer connections were 107,200, generating revenues of $36.5 million in 2014.

Commercial revenues consist of video, broadband and voice services to TDS Telecom’s Cable commercial customer base.

At June 30, 2014, commercial customer connections were 43,500, generating revenues of $8.5 million in 2014.

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Operating Expenses

Cost of services ( excluding Depreciation, amortization and accretion)

Cost of services (excluding Depreciation, amortization and accretion) of $22.3 million were incurred in 2014 primarily for programming costs and expenses related to the delivery and support of services.

Selling, general and administrative expenses

Selling, general and administrative expenses of $12.7 million were incurred primarily for product management, marketing, customer service, and general administration in 2014.

Depreciation, amortization and accretion expense

Depreciation, amortization and accretion expense was $8.9 million. Amortization of the acquired customer list and trade name contributed $2.7 million to the expense in 2014.

HMS Operations

Components of Operating Income (Loss)
									Percentage
Six Months Ended June 30,			2014		2013		Change		Change
(Dollars in thousands)
Service revenues			$	54,951	$	45,205	$	9,746	22	%
Equipment and product sales				76,093		31,733		44,360	>100	%
	Total operating revenues			131,044		76,938		54,106	70	%

Cost of services (excluding Depreciation, amortization and accretion reported below)				38,247		28,673		9,574	33	%
Cost of equipment and products				64,342		26,326		38,016	>100	%
Selling, general and administrative				27,211		19,282		7,929	41	%
Depreciation, amortization and accretion				13,469		11,031		2,438	22	%
(Gain) loss on asset disposals, net				78		113		(35)	(31)	%
	Total operating expenses			143,347		85,425		57,922	68	%
		Total operating income (loss)	$	(12,303)	$	(8,487)	$	(3,816)	(45)	%

Operating Revenues

Service revenues consist primarily of colocation, cloud computing and hosted managed services, application management, and installation and management of IT infrastructure hardware solutions.

Service revenues increased $9.7 million or 22% to $55.0 million in 2014. The acquisition of MSN in October of 2013 contributed $6.8 million of this increase with the remaining increase due primarily to growth in colocation, dedicated hosting, hosted application management and cloud computing services of $2.9 million or 8%.

Equipment and product sales revenues include revenues from sales of IT infrastructure hardware solutions.

Equipment and product sales revenues increased $44.4 million to $76.1 million in 2014 due to the acquisition of MSN.

Operating Expenses

Cost of services (excluding Depreciation, amortization and accretion)

Cost of services increased $9.6 million to $38.2 million in 2014 due primarily to $5.4 million from the acquisition of MSN and increases in employee related expenses, data center maintenance and software costs to support growth in customer services.

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Cost of equipment and products

Cost of equipment and products increased $38.0 million to $64.3 million in 2014 due to the acquisition of MSN.

Selling, general and administrative expense

Selling, general and administrative expense increased $7.9 million to $27.2 million in 2014 due primarily to $7.4 million from the acquisition of MSN.

Depreciation, amortization and accretion expense

Depreciation, amortization and accretion expense increased $2.4 million to $13.5 million due to customer list amortization from the MSN acquisition and depreciation on capital additions.

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Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

RESULTS OF OPERATIONS — CONSOLIDATED

Three Months Ended June 30,			2014		2013		Change		Percentage Change
(Dollars in thousands, except per share amounts)
Operating revenues
	U.S. Cellular		$	957,773	$	995,130	$	(37,357)	(4)	%
	TDS Telecom			270,850		223,460		47,390	21	%
	All other (1)			7,769		9,576		(1,807)	(19)	%
		Total operating revenues		1,236,392		1,228,166		8,226	1	%
Operating expenses
	U.S. Cellular			1,008,080		776,038		232,042	30	%
	TDS Telecom			251,585		211,028		40,557	19	%
	All other (1)(2)			25,817		(41,127)		66,944	>100	%
		Total operating expenses		1,285,482		945,939		339,543	36	%
Operating income (loss)
	U.S. Cellular			(50,307)		219,092		(269,399)	>(100)	%
	TDS Telecom			19,265		12,432		6,833	55	%
	All other (1)(2)			(18,048)		50,703		(68,751)	>(100)	%
		Total operating income (loss)		(49,090)		282,227		(331,317)	>(100)	%
Other income and (expenses)
	Equity in earnings of unconsolidated entities			34,790		35,605		(815)	(2)	%
	Interest and dividend income			2,751		2,600		151	6	%
	Gain (loss) on investments			-		14,518		(14,518)	N/M
	Interest expense			(27,898)		(23,749)		(4,149)	17	%
	Other, net			50		(197)		247	>100	%
		Total investment and other income (expense)		9,693		28,777		(19,084)	(66)	%

Income (loss) before income taxes				(39,397)		311,004		(350,401)	>(100)	%
	Income tax expense (benefit)			(13,671)		132,607		(146,278)	>(100)	%

Net income (loss)				(25,726)		178,397		(204,123)	>(100)	%
	Less: Net income (loss) attributable to noncontrolling interests, net of tax			(3,688)		22,320		(26,008)	>(100)	%
Net income (loss) attributable to TDS shareholders				(22,038)		156,077		(178,115)	>(100)	%
	Preferred dividend requirement			(12)		(12)		-	-
Net income (loss) available to common shareholders			$	(22,050)	$	156,065	$	(178,115)	>(100)	%

Basic earnings (loss) per share attributable to TDS shareholders			$	(0.20)	$	1.44	$	(1.64)	>(100)	%

Diluted earnings (loss) per share attributable to TDS shareholders			$	(0.20)	$	1.42	$	(1.62)	>(100)	%

N/M - Percentage change not meaningful

(1)	Consists of Non-Reportable Segment, corporate operations and intercompany eliminations between U.S. Cellular, TDS Telecom, the Non-Reportable Segment and corporate operations.

(2)	Due to the Airadigm Transaction, TDS recognized expenses of $13.1 million related to exit and disposal activities in 2014. In 2013, TDS recognized an incremental gain of $53.5 million compared to U.S. Cellular upon closing of the Divestiture Transaction as a result of lower asset basis in the assets disposed. See Note 5 – Acquisitions, Divestitures and Exchanges in the Notes to the Consolidated Financial Statements for additional information related to these transactions.

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Operating Revenues and Expenses

See “Results of Operations — U.S. Cellular” and “Results of Operations — TDS Telecom” below for factors that affected consolidated Operating Revenues and Expenses.

Equity in earnings of unconsolidated entities

TDS’ investment in the LA Partnership contributed $18.4 million and $19.8 million to Equity in earnings of unconsolidated entities in 2014 and 2013, respectively.

Gain (loss) on investments

Gain (loss) on investments in 2013 reflects a gain of $14.5 million as a result of TDS’ deconsolidation of NY1 & NY2 in April 2013.

Interest expense

The increase in interest expense was due primarily to a decrease in capitalized interest related to network and systems projects. Interest cost capitalized was $2.0 million and $6.4 million for 2014 and 2013, respectively.

Income tax expense (benefit)

See Note 3 — Income Taxes in the Notes to Consolidated Financial Statements for a discussion overall effective tax rate on Income (loss) before income taxes.

Net income (loss) attributable to noncontrolling interests, net of tax

		Three Months Ended
		June 30,
		2014		2013
(Dollars in thousands)
Net income (loss) attributable to noncontrolling interests, net of tax
	U.S. Cellular noncontrolling public shareholders’	$	(3,014)	$	22,340
	Noncontrolling shareholders’ or partners’		(674)		(20)
		$	(3,688)	$	22,320

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RESULTS OF OPERATIONS — U.S. CELLULAR

Components of Operating Income (Loss)

Three Months Ended June 30,		2014		2013		Change		Percentage Change
(Dollars in thousands)
Retail service		$	746,117	$	802,408	$	(56,291)	(7	)%
Inbound roaming			57,580		65,033		(7,453)	(11	)%
Other			39,776		43,525		(3,749)	(9	)%
	Service revenues		843,473		910,966		(67,493)	(7	)%
Equipment sales			114,300		84,164		30,136	36	%
	Total operating revenues		957,773		995,130		(37,357)	(4	)%

System operations (excluding Depreciation, amortization and accretion reported below)			187,131		192,267		(5,136)	(3	)%
Cost of equipment sold			271,978		217,070		54,908	25	%
Selling, general and administrative			404,252		404,127		125	-
Depreciation, amortization and accretion			148,337		202,580		(54,243)	(27	)%
(Gain) loss on asset disposals, net			6,893		9,018		(2,125)	(24	)%
(Gain) loss on sale of business and other exit costs, net			(10,511)		(249,024)		238,513	96	%
	Total operating expenses		1,008,080		776,038		232,042	30	%
	Operating income (loss)	$	(50,307)	$	219,092	$	(269,399)	>(100	)%

Operating Revenues

Retail service revenues

Retail service revenues decreased $56.3 million, or 7%, to $746.1 million in 2014 due primarily to a decrease in U.S. Cellular’s average customer base (including the reductions caused by the Divestiture Transaction) partially offset by an increase in billed ARPU.

Billed ARPU increased to $53.36 in 2014 compared to $50.60 in 2013. The overall increase is due primarily to an increase in postpaid ARPU to $56.82 in 2014 from $54.18 in 2013, reflecting increases in smartphone adoption and corresponding revenues from data products and services.

Inbound roaming revenues

Inbound roaming revenues decreased by $7.5 million, or 11%, to $57.6 million in 2014 compared to 2013. The decrease was due in part to a $3.4 million impact related to the Divestiture Transaction. The remaining decrease in the Core Markets was due to a decrease in rates and a decline in voice volume, partially offset by higher data usage.

Other revenues

Other revenues decreased by $3.7 million, or 9%, to $39.8 million, due primarily to a $6.4 million decrease in ETC revenues. ETC revenues decreased due to the phase down of USF support as described in Results of Operations – U.S. Cellular for the six months ended June 30, 2014.

Equipment sales revenues

Equipment sales revenues increased by $30.1 million, or 36%, in 2014 to $114.3 million. The increase was due primarily to activity in the Core Markets, which reflected an increase in the average revenue per device sold (including the impact of sales under equipment installment plans), partially offset by the sale of fewer devices, primarily in the feature phone category. The increase in equipment sales revenues in the Core Markets was partially offset by the effects of the Divestiture Transaction.

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Operating Expenses

System operations expenses (excluding Depreciation, amortization and accretion)

Key components of the $5.1 million, or 3%, decrease to $187.1 million were as follows:

· Customer usage expense decreased $6.8 million, or 11%, driven by the impacts of the Divestiture Transaction and lower fees for platform and content providers.

· Maintenance, utility and cell site expenses decreased $1.1 million, or 1%, due primarily to the impacts of the Divestiture Transaction and lower headcount, partially offset by costs related to 4G LTE support.

· Expenses incurred when U.S. Cellular’s customers used other carriers’ networks while roaming increased $2.7 million, or 7%, due primarily to an increase in data usage, partially offset by a decrease in voice usage, lower rates, and the impacts of the Divestiture Transaction.

Cost of equipment sold

Cost of equipment sold increased by $54.9 million, or 25%, to $272.0 million in 2014 due primarily to an increase of 34% in the average cost per device sold due to general customer preference for higher-priced 4G LTE smartphones. The increase in average cost per device sold was partially offset by fewer device sales in the Core Markets and impacts of the Divestiture Transaction.

Selling, general and administrative expenses

Selling, general and administrative expenses were essentially flat year over year. Key components of Selling, general and administrative expenses were as follows:

· Selling and marketing expense increased by $2.5 million, or 1%, due primarily to an increase in commission and personnel expenses, partially offset by the effects of the Divestiture Transaction.

· General and administrative expense decreased by $2.4 million, or 1%, due primarily to the Divestiture Transaction and lower consulting expenses related to the billing system conversion in the prior year, offset by an increase in bad debts expense.

Depreciation, amortization and accretion

Depreciation, amortization and accretion decreased $54.2 million, or 27%, in 2014 to $148.3 million due primarily to the higher amount of accelerated depreciation, amortization and accretion in the Divestiture Markets that occurred in 2013. The impact of the acceleration was $50.3 million in 2013.

(Gain) loss on asset disposals, net

(Gain) loss on asset disposals, net was a loss in both 2014 and 2013 due primarily to the write-off and disposals of certain network assets.

(Gain) loss on sale of business and other exit costs, net

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RESULTS OF OPERATIONS — TDS TELECOM

TDS Telecom

Components of Operating Income

Three months ended June 30,			2014		2013		Change		Percentage Change
(Dollars in thousands)
Operating revenues
	Wireline		$	180,728	$	182,193	$	(1,465)	(1)	%
	Cable			22,484		-		22,484	N/M
	HMS			67,936		41,374		26,562	64	%
	Intra-company elimination			(298)		(107)		(191)	>(100)	%
		TDS Telecom operating revenues		270,850		223,460		47,390	21	%

Operating expenses
	Wireline			154,835		165,943		(11,108)	(7)	%
	Cable			22,661		-		22,661	N/M
	HMS			74,387		45,192		29,195	65	%
	Intra-company elimination			(298)		(107)		(191)	>(100)	%
		TDS Telecom operating expenses		251,585		211,028		40,557	19	%

TDS Telecom operating income			$	19,265	$	12,432	$	6,833	55	%

N/M - Not meaningful

Wireline Operations

Components of Operating Income

Three months ended June 30,					2014		2013		Change		Percentage Change
(Dollars in thousands)
Service revenues
	Residential				$	73,360	$	72,911	$	449	1	%
	Commercial					57,472		57,128		344	1	%
	Wholesale					49,465		51,389		(1,924)	(4)	%
		Total service revenues				180,297		181,428		(1,131)	(1)	%
Equipment and product sales						431		765		(334)	(44)	%
			Total operating revenues			180,728		182,193		(1,465)	(1)	%

Cost of services (excluding Depreciation, amortization and accretion reported below)						64,305		65,729		(1,424)	(2)	%
Cost of equipment and products						481		1,094		(613)	(56)	%
Selling, general and administrative						47,708		56,692		(8,984)	(16)	%
Depreciation, amortization and accretion						41,827		43,193		(1,366)	(3)	%
(Gain) loss on asset disposals, net						514		(765)		1,279	>100	%
			Total operating expenses			154,835		165,943		(11,108)	(7)	%
				Total operating income	$	25,893	$	16,250	$	9,643	59	%

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Operating Revenues

Residential revenues

Residential revenues grew 1% in 2014. An increase in revenue resulting from a 2% growth in average revenue per residential connections was partially offset by a decrease in revenue from a 2% reduction in average residential connections.

Commercial revenues

Commercial revenues grew 1% to $57.5 million in 2014 due primarily to growth in managedIP revenues resulting from both a 22% increase in average managedIP connections and a 3% increase in average revenue per connection offsetting a decrease in revenue from a 10% decline in average voice connections.

Wholesale revenues

Wholesale revenues decreased $1.9 million or 4% to $49.5 million. Wholesale revenues declined $0.7 million due to a 13% reduction in minutes-of-use. Revenues received through inter-state and intra-state regulatory mechanisms decreased $0.8 million.

Operating Expenses

Cost of services (excluding Depreciation, amortization and accretion)

Cost of services decreased $1.4 million or 2% to $64.3 million in 2014. Decreases in employee expenses, cost of providing long distance services and promotional giveaways were partially offset by increased costs associated with the provisioning of IPTV.

Selling, general and administrative expenses

Selling, general and administrative expenses decreased $9.0 million or 16% to $47.7 million in 2014 due to cost control efforts which decreased employee related expenses $5.1 million, consulting $1.3 million and IT maintenance charges $0.5 million.

Cable Operations

Components of Operating Income

Three months ended June 30,				2014
(Dollars in thousands)
Service revenues
	Residential			$	18,222
	Commercial				4,262
		Total operating revenues			22,484

Cost of services (excluding Depreciation, amortization and accretion reported below)					11,394
Selling, general and administrative					6,285
Depreciation, amortization and accretion					4,557
(Gain) loss on asset disposals, net					425
		Total operating expenses			22,661
			Total operating income (loss)	$	(177)

Operating Revenues

Residential revenues

At June 30, 2014, residential customer connections were 107,200, generating revenues of $18.2 million in the quarter.

Commercial revenues

At June 30, 2014, commercial customer connections were 43,500, generating revenues of $4.3 million in the quarter.

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Operating Expenses

Cost of services ( excluding Depreciation, amortization and accretion)

Cost of services (excluding Depreciation, amortization and accretion) of $11.4 million were incurred for programming costs and expenses related to the delivery and support of products in 2014.

Selling, general and administrative expenses

Selling, general and administrative expenses of $6.3 million were incurred primarily for product management, marketing, customer service, and general administration in 2014.

Depreciation, amortization and accretion expense

Depreciation, amortization and accretion expense was $4.6 million in 2014. Amortization of customer list and trade name contributed $1.4 million of this expense.

HMS Operations

Components of Operating Income
									Percentage
Three months ended June 30,			2014		2013		Change		Change
(Dollars in thousands)
Service revenues			$	27,575	$	23,205	$	4,370	19	%
Equipment and product sales				40,361		18,169		22,192	>100	%
	Total operating revenues			67,936		41,374		26,562	64	%

Cost of services (excluding Depreciation, amortization and accretion reported below)				21,301		15,071		6,230	41	%
Cost of equipment and products				33,875		15,114		18,761	>100	%
Selling, general and administrative				12,376		9,361		3,015	32	%
Depreciation, amortization and accretion				6,791		5,563		1,228	22	%
(Gain) loss on asset disposals, net				44		83		(39)	(47)	%
	Total operating expenses			74,387		45,192		29,195	65	%
		Total operating income (loss)	$	(6,451)	$	(3,818)	$	(2,633)	(69)	%

Operating Revenues

Service revenues

Service revenues increased $4.4 million or 19% to $27.6 million in 2014. The acquisition of MSN contributed $3.3 million of this increase with the remaining increase due primarily to growth in colocation, dedicated hosting, hosted application management and cloud computing services of $1.3 million or 7%.

Equipment and product sales revenues

Equipment and product sales revenues increased $22.2 million to $40.4 million in 2014 due to the acquisition of MSN.

Operating Expenses

Cost of services (excluding Depreciation, amortization and accretion)

Cost of services increased $6.2 million to $21.3 million in 2014 due to $2.6 million from the acquisition of MSN and increases in employee related expenses, data center maintenance and software costs to support growth in customer services.

Cost of equipment and products

Cost of equipment and products increased $18.8 million to $33.9 million in 2014 due to the acquisition of MSN.

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Selling, general and administrative expense

Selling, general and administrative expense increased $3.0 million to $12.4 million in 2014 due to the acquisition of MSN.

Depreciation, amortization and accretion expense

Depreciation, amortization and accretion expense increased $1.2 million to $6.8 million due to customer list amortization from the MSN acquisition and depreciation on capital additions.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 — Basis of Presentation in the Notes to Consolidated Financial Statements for information on recent accounting pronouncements.

FINANCIAL RESOURCES

TDS operates a capital- and marketing-intensive business. TDS utilizes cash on hand, cash from operating activities, cash proceeds from divestitures and disposition of investments, short-term credit facilities and long-term debt financing to fund its acquisitions (including licenses), construction costs, operating expenses and share repurchases. Cash flows may fluctuate from quarter to quarter and year to year due to seasonality, the timing of acquisitions, capital expenditures and other factors. The table below and the following discussion in this Financial Resources section summarize TDS' cash flow activities for the six months ended June 30, 2014 and 2013.

		2014		2013
(Dollars in thousands)
Cash flows from (used in):
	Operating activities	$	315,642	$	521,492
	Investing activities		(218,963)		110,696
	Financing activities		(51,833)		(126,254)
	Net increase in cash and cash equivalents	$	44,846	$	505,934

Cash Flows from Operating Activities

Cash flows from operating activities were $315.6 million in 2014 and $521.5 million in 2013. This decrease was due primarily to lower earnings excluding gains recognized on sale of business and license sales and exchanges. Also contributing to this decrease were changes in Accounts payable balances driven primarily by payment timing differences related to operating expenses and device purchases. The above decreases in Cash flows from operating activities were partially offset by a decrease in inventory levels and a decrease in Accounts receivable balances in 2014. The decrease in Accounts receivable balances was driven by the high receivables at December 31, 2013 resulting from the conversion to a new U.S. Cellular billing system in the third quarter of 2013, and the subsequent decrease of Accounts receivable balances to more normal levels during 2014. This decrease in Accounts receivable balances during 2014 was partially offset by increases in equipment installment plan receivables at U.S. Cellular.

Cash Flows from Investing Activities

TDS makes substantial investments to acquire wireless licenses and properties and to construct and upgrade telecommunications networks and facilities as a basis for creating long-term value for shareholders. In recent years, rapid changes in technology and new opportunities have required substantial investments in potentially revenue‑enhancing and cost-reducing upgrades to TDS’ networks.

Capital expenditures (i.e., additions to property, plant and equipment and system development expenditures) totaled $313.3 million in 2014 and $356.2 million in 2013. Cash used for additions to property, plant and equipment is reported in the Consolidated Statement of Cash Flows and excludes amounts accrued in Accounts receivable and Accounts payable for capital expenditures at June 30, 2014 and includes amounts received and/or paid in the current period that were accrued at December 31, 2013. Cash used for additions to property, plant and equipment totaled $339.9 million in 2014 and $384.3 million in 2013. See “Capital Expenditures” in Liquidity and Capital Resources below for additional information on capital expenditures.

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Cash payments for acquisitions for the six months ended June 30, 2014 and 2013 were as follows:

Cash Payment for Acquisitions	2014		2013
(Dollars in thousands)
U.S. Cellular licenses	$	17,245	$	14,150
TDS Telecom HMS business		(442)		-
TDS Telecom cable business		1,878		-
Total	$	18,681	$	14,150

Cash amounts paid for the acquisitions may differ from the purchase price due to cash acquired in the transactions and the timing of cash payments related to the respective transactions.

Cash received from divestitures in 2014 and 2013 was as follows.

Cash Received from Divestitures	2014		2013
(Dollars in thousands)
U.S. Cellular licenses	$	91,789	$	-
U.S. Cellular businesses		34,116		480,000
Total	$	125,905	$	480,000

See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to these divestitures.

TDS realized proceeds of $10.0 million and $15.0 million related to the maturities of certain of its investments in U.S. Treasury Notes in 2014 and 2013, respectively.

Cash Flows from Financing Activities

Cash flows from financing activities include proceeds from and repayments of short-term and long-term debt, dividends to shareholders, distributions to noncontrolling interests, cash used to repurchase Common Shares and cash proceeds from reissuance of Common Shares pursuant to stock-based compensation plans.

In 2014, TDS repurchased Common Shares for $20.1 million. TDS did not repurchase any Common Shares in 2013. Payments for repurchases of U.S. Cellular Common Shares required $8.3 million and $18.4 million in 2014 and 2013, respectively. See Note 10 — Common Share Repurchases in the Notes to Consolidated Financial Statements for additional information related to these transactions.

U.S. Cellular did not pay any dividends in 2014. On June 25, 2013, U.S. Cellular paid a special cash dividend of $5.75 per share, for an aggregate amount of $482.3 million, to all holders of U.S. Cellular Common Shares and Series A Common Shares. Of the $482.3 million paid, TDS received $407.1 million while external shareholders received $75.2 million. The cash paid to external shareholders is presented as U.S. Cellular dividends paid to noncontrolling public shareholders on the Consolidated Statement of Cash Flows.

Adjusted Free Cash Flow

The following table presents Adjusted free cash flow. Adjusted free cash flow is defined as Cash flows from operating activities, as adjusted for cash proceeds from the Sprint Cost Reimbursement (which are included in Cash flows from investing activities in the Consolidated Statement of Cash Flows), less Cash used for additions to property, plant and equipment. Adjusted free cash flow is a non-GAAP financial measure which TDS believes may be useful to investors and other users of its financial information in evaluating the amount of cash generated by business operations (including cash proceeds from the Sprint Cost Reimbursement), after Cash used for additions to property, plant and equipment. The prior manner of calculating free cash flow has been adjusted to include the Sprint Cost Reimbursement. The reason for this is that the Sprint decommissioning cash outflows are included in “Cash flows from operating activities,” but the reimbursements from Sprint related to those outflows are not included in this caption.

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Six Months Ended June 30,			2014		2013
(Dollars in thousands)
Cash flows from operating activities		$	315,642	$	521,492
Add: Sprint Cost Reimbursement (1)			34,116		-
Less: Cash used for additions to property, plant and equipment			339,907		384,281
	Adjusted free cash flow	$	9,851	$	137,211

(1)	See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to the Sprint Cost Reimbursement.

See Cash Flows from Operating Activities and Cash Flows from Investing Activities for additional information related to the components of Adjusted free cash flow.

LIQUIDITY AND CAPITAL RESOURCES

TDS believes that existing cash and investment balances, funds available under its revolving credit facilities and expected cash flows from operating and investing activities provide substantial liquidity and financial flexibility for TDS to meet its normal financing needs for the foreseeable future. However, these sources may not be adequate to fund future expenditures, including spectrum license auctions and acquisitions, that the companies could potentially elect to make. It may be necessary to increase the size of the existing revolving credit facilities, to put in place new facilities, or to obtain other forms of financing in order to fund these potential expenditures. To the extent that sufficient funds are not available to TDS or its subsidiaries on terms or at prices acceptable to TDS, it could require TDS to reduce its construction, development and acquisition programs.

TDS cannot provide assurances that circumstances that could have a material adverse effect on its liquidity or capital resources will not occur. Economic conditions, changes in financial markets, TDS financial performance and/or prospects or other factors could restrict TDS’ liquidity and availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its capital expenditure, acquisition or share repurchase programs. Such reductions could have a material adverse effect on TDS’ business, financial condition or results of operations.

The following table summarizes TDS’ and U.S. Cellular’s cash and investments as of June 30, 2014.

(Dollars in thousands)		TDS		U.S. Cellular (1)
Cash and cash equivalents		$	874,860	$	404,058
Short-term investments		$	40,035	$	40,035

(1)	Also included as a component of the TDS column.

Cash and Cash Equivalents

Cash and cash equivalents include cash and short-term, highly liquid investments with original maturities of three months or less. The primary objective of TDS’ Cash and cash equivalents investment activities is to preserve principal. At June 30, 2014, the majority of TDS’ Cash and cash equivalents was held in bank deposit accounts and in money market funds that invest exclusively in U.S. Treasury Notes or in repurchase agreements fully collateralized by such obligations. TDS monitors the financial viability of the money market funds and direct investments in which it invests and believes that the credit risk associated with these investments is low.

Short-term Investments

Short-term investments consist of U.S. Treasury Notes which are designated as held-to-maturity investments and are recorded at amortized cost in the Consolidated Balance Sheet. For these investments, TDS’ objective is to earn a higher rate of return on funds that are not anticipated to be required to meet liquidity needs in the near term, while maintaining a low level of investment risk. See Note 2 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information on Short-term investments.

Revolving Credit Facilities

TDS and U.S. Cellular have revolving credit facilities available for general corporate purposes.

In connection with U.S. Cellular’s revolving credit facility, TDS and U.S. Cellular entered into a subordination agreement dated December 17, 2010 together with the administrative agent for the lenders under U.S. Cellular’s revolving credit facility. At June 30, 2014, no U.S. Cellular debt was subordinated pursuant to this subordination agreement.

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In April 2014, two of the nationally recognized credit rating agencies downgraded the TDS and U.S. Cellular corporate and senior debt credit ratings. In July 2014, one of the nationally recognized credit rating agencies downgraded the TDS and U.S. Cellular corporate and senior debt credit ratings. After these downgrades, two of the nationally recognized credit rating agencies rated TDS and U.S. Cellular at sub-investment grade. One of the nationally recognized credit rating agencies rated TDS and U.S. Cellular at investment grade.

TDS’ and U.S. Cellular’s interest cost on their revolving credit facilities may be subject to increase if their current credit ratings from nationally recognized credit rating agencies are lowered, and may be subject to decrease if the ratings are raised. The April and July 2014 downgrades will increase the commitment fee on the revolving credit facilities by 0.075% per annum. The downgrades also will increase the interest rate on any borrowings by 0.25% per annum. The credit facilities do not cease to be available nor do the maturity dates accelerate solely as a result of a downgrade in TDS’ or U.S. Cellular’s credit rating. However, downgrades in TDS’ or U.S. Cellular’s credit rating could adversely affect their ability to renew the credit facilities or obtain access to other credit facilities in the future.

The following table summarizes the terms of such revolving credit facilities as of June 30, 2014:

(Dollars in millions)		TDS	U.S. Cellular
Maximum borrowing capacity	$	400.0	$	300.0
Letters of credit outstanding	$	0.3	$	17.5
Amount borrowed	$	-	$	-
Amount available for use	$	399.7	$	282.5
Agreement date		December 2010		December 2010
Maturity date		December 2017		December 2017

The continued availability of the revolving credit facilities requires TDS and U.S. Cellular to comply with certain negative and affirmative covenants, maintain certain financial ratios and make representations regarding certain matters at the time of each borrowing. TDS and U.S. Cellular believe that they were in compliance as of June 30, 2014 with all of the financial covenants and requirements set forth in their revolving credit facilities.

As more fully described on TDS’ Form 8-K dated July 24, 2014, to provide for additional financial flexibility, TDS and U.S. Cellular entered into amendments to the revolving credit facilities agreements which increased the Consolidated Leverage Ratio (the ratio of Consolidated Funded Indebtedness to Consolidated Earnings before interest, taxes, depreciation and amortization (“EBITDA”)) that the companies are required to maintain. Beginning July 1, 2014, TDS and U.S. Cellular are required to maintain the Consolidated Leverage Ratio at a level not to exceed 3.75 to 1.00 for the period of the four fiscal quarters most recently ended (this was 3.00 to 1.00 prior to July 1, 2014). The terms of the amendment decrease the maximum permitted Consolidated Leverage Ratio beginning January 1, 2016, with further decreases effective July 1, 2016 and January 1, 2017 (and will return to 3.00 to 1.00 at that time). For the twelve months ended June 30, 2014, the actual Consolidated Leverage Ratio was 2.36 to 1.00. Future changes in TDS’ and U.S. Cellular’s financial condition could negatively impact their ability to meet the financial covenants and requirements in their revolving credit facilities agreements. TDS also has certain other non-material credit facilities from time to time.

Long-Term Financing

There were no material changes to Long-Term Financing as disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in TDS’ Form 10-K for the year ended December 31, 2013.

TDS and its subsidiaries’ long-term debt indentures do not contain any provisions resulting in acceleration of the maturities of outstanding debt in the event of a change in TDS’ credit rating. However, a downgrade in TDS’ credit rating could adversely affect its ability to obtain long-term debt financing in the future. TDS believes that it and its subsidiaries were in compliance as of June 30, 2014 with all financial covenants and other requirements set forth in its long-term debt indentures. TDS and U.S. Cellular have not failed to make nor do they expect to fail to make any scheduled payment of principal or interest under such indentures.

The long-term debt principal payments due for the remainder of 2014 and the next four years represent less than 1% of the total long-term debt obligation at June 30, 2014. Refer to Market Risk — Long-Term Debt in TDS’ Form 10-K for the year ended December 31, 2013 for additional information regarding required principal payments and the weighted average interest rates related to TDS’ Long-term debt.

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Capital Expenditures

U.S. Cellular’s capital expenditures for 2014 are expected to be approximately $640 million. These expenditures are expected to be for the following general purposes:

· Expand and enhance network coverage in its service areas, including providing additional capacity to accommodate increased network usage, principally data usage, by current customers;

· Continue to deploy 4G LTE technology in certain markets;

· Expand and enhance the retail store network; and

· Develop and enhance office systems.

TDS Telecom’s capital expenditures for 2014 are expected to be approximately $200 million. These expenditures are expected to be for the following general purposes:

· Maintain and enhance existing infrastructure at Wireline, HMS and Cable;

· Fiber expansion in Wireline markets to support IPTV and super high speed data;

· Success-based spending to sustain managedIP, IPTV, HMS and Cable growth; and

· Expansion of HMS data center facilities.

TDS plans to finance its capital expenditures program for 2014 using primarily Cash flows from operating activities and, as necessary, existing cash balances and short-term investments.

Acquisitions, Divestitures and Exchanges

TDS assesses its business interests on an ongoing basis with a goal of improving the competitiveness of its operations and maximizing its long-term return on investment. As part of this strategy, TDS reviews attractive opportunities to acquire additional wireless operating markets and wireless spectrum; and telecommunications, cable, HMS or other possible businesses. In addition, TDS may seek to divest outright or include in exchanges for other interests those interests that are not strategic to its long-term success. As a result, TDS may be engaged from time to time in negotiations relating to the acquisition, divestiture or exchange of companies, properties, wireless spectrum and other possible businesses. In general, TDS may not disclose such transactions until there is a definitive agreement. See Note 5 — Acquisitions, Divestitures and Exchanges in the Notes to Consolidated Financial Statements for additional information related to significant transactions.

Variable Interest Entities

TDS consolidates certain entities because they are “variable interest entities” under accounting principles generally accepted in the United States of America (“GAAP”). See Note 8 — Variable Interest Entities (VIEs) in the Notes to Consolidated Financial Statements for additional information related to these variable interest entities. TDS may elect to make additional capital contributions and/or advances to these variable interest entities in future periods in order to fund their operations.

Common Share Repurchase Programs

In the past year, TDS and U.S. Cellular have repurchased and expect to continue to repurchase their Common Shares, in each case subject to any available repurchase program. For additional information related to the current TDS and U.S. Cellular repurchase authorizations and repurchases made during 2014 and 2013, see Note 10 — Common Share Repurchases in the Notes to Consolidated Financial Statements and Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Contractual and Other Obligations

There were no material changes outside the ordinary course of business between December 31, 2013 and June 30, 2014 to the Contractual and Other Obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in TDS’ Form 10-K for the year ended December 31, 2013.

Off-Balance Sheet Arrangements

TDS had no transactions, agreements or other contractual arrangements with unconsolidated entities involving “off-balance sheet arrangements,” as defined by SEC rules, that had or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

TDS prepares its consolidated financial statements in accordance with GAAP. TDS’ significant accounting policies are discussed in detail in Note 1 — Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Notes to Consolidated Financial Statements and TDS’ Application of Critical Accounting Policies and Estimates is discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in TDS’ Form 10-K for the year ended December 31, 2013. There were no material changes to TDS’ application of critical accounting policies and estimates during the six months ended June 30, 2014.

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PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

SAFE HARBOR CAUTIONARY STATEMENT

This Form 10-Q, including exhibits, contains statements that are not based on historical facts and represent forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, that address activities, events or developments that TDS intends, expects, projects, believes, estimates, plans or anticipates will or may occur in the future are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “expects,” “plans,” “intends,” “projects” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include those set forth below, as more fully described under “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2013. However, such factors are not necessarily all of the important factors that could cause actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this document. Other unknown or unpredictable factors also could have material adverse effects on future results, performance or achievements. TDS undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. You should carefully consider the Risk Factors in TDS’ Form 10-K for the year ended December 31, 2013, the following factors and other information contained in, or incorporated by reference into, this Form 10-Q to understand the material risks relating to TDS’ business.

· Intense competition in the markets in which TDS operates could adversely affect TDS’ revenues or increase its costs to compete.

· A failure by TDS to successfully execute its business strategy (including planned acquisitions, divestitures and exchanges) or allocate resources or capital could have an adverse effect on TDS’ business, financial condition or results of operations.

· A failure by TDS’ service offerings to meet customer expectations, including any continuing issues relating to the conversion to the new Billing and Operational Support System ("B/OSS") in the third quarter of 2013, could limit TDS’ ability to attract and retain customers and could have an adverse effect on TDS’ business, financial condition or results of operations.

· TDS offers customers the option to purchase certain devices under installment contracts, which could result in higher churn and higher bad debts expense.

· TDS’ system infrastructure may not be capable of supporting changes in technologies and services expected by customers, which could result in a loss of existing customers and revenues and impair TDS' ability to add new customers and revenues.

· Changes in roaming practices or other factors could cause TDS’ roaming revenues to decline from current levels and/or impact TDS’ ability to service its customers in geographic areas where TDS does not have its own network, which would have an adverse effect on TDS’ business, financial condition or results of operations.

· A failure by TDS to obtain access to adequate radio spectrum to meet current or anticipated future needs and/or to accurately predict future needs for radio spectrum could have an adverse effect on TDS’ business, financial condition or results of operations.

· To the extent conducted by the Federal Communications Commission (“FCC”), TDS is likely to participate in FCC auctions of additional spectrum in the future as an applicant or as a noncontrolling partner in another auction applicant and, during certain periods, will be subject to the FCC’s anti-collusion rules, which could have an adverse effect on TDS.

· Changes in the regulatory environment or a failure by TDS to timely or fully comply with any applicable regulatory requirements could adversely affect TDS’ business, financial condition or results of operations.

· Changes in Universal Service Fund (“USF”) funding and/or intercarrier compensation could have an adverse impact on TDS’ business, financial condition or results of operations.

· An inability to attract and/or retain highly competent management, technical, sales and other personnel could have an adverse effect on TDS’ business, financial condition or results of operations.

· TDS’ assets are concentrated primarily in the U.S. telecommunications industry. As a result, its results of operations may fluctuate based on factors related primarily to conditions in this industry.

· TDS’ lower scale relative to larger competitors could adversely affect its business, financial condition or results of operations.

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· Changes in various business factors could have an adverse effect on TDS’ business, financial condition or results of operations.

· Advances or changes in technology could render certain technologies used by TDS obsolete, could put TDS at a competitive disadvantage, could reduce TDS’ revenues or could increase its costs of doing business.

· Complexities associated with deploying new technologies present substantial risk.

· TDS is subject to numerous surcharges and fees from federal, state and local governments, and the applicability and the amount of these fees are subject to great uncertainty.

· Performance under device purchase agreements could have a material adverse impact on TDS' business, financial condition or results of operations.

· Changes in TDS’ enterprise value, changes in the market supply or demand for wireless licenses, wireline or cable markets or IT service providers, adverse developments in the businesses or the industries in which TDS is involved and/or other factors could require TDS to recognize impairments in the carrying value of its licenses, goodwill, franchise rights and/or physical assets.

· Costs, integration problems or other factors associated with acquisitions, divestitures or exchanges of properties or licenses and/or expansion of TDS’ businesses could have an adverse effect on TDS’ business, financial condition or results of operations.

· A significant portion of TDS’ wireless revenues is derived from customers who buy services through independent agents and third-party national retailers who market TDS’ services on a commission basis. If TDS’ relationships with these agents or third-party national retailers are seriously harmed, its business, financial condition or results of operations could be adversely affected.

· TDS’ investments in unproven technologies may not produce the benefits that TDS expects.

· A failure by TDS to complete significant network construction and systems implementation activities as part of its plans to improve the quality, coverage, capabilities and capacity of its networks and support systems could have an adverse effect on its operations.

· Financial difficulties (including bankruptcy proceedings) or other operational difficulties of TDS’ key suppliers, termination or impairment of TDS’ relationships with such suppliers, or a failure by TDS to manage its supply chain effectively could result in delays or termination of TDS’ receipt of required equipment or services, or could result in excess quantities of required equipment or services, any of which could adversely affect TDS’ business, financial condition or results of operations.

· TDS has significant investments in entities that it does not control. Losses in the value of such investments could have an adverse effect on TDS’ financial condition or results of operations.

· A failure by TDS to maintain flexible and capable telecommunication networks or information technology, or a material disruption thereof, including breaches of network or information technology security, could have an adverse effect on TDS’ business, financial condition or results of operations.

· Wars, conflicts, hostilities and/or terrorist attacks or equipment failures, power outages, natural disasters or other events could have an adverse effect on TDS’ business, financial condition or results of operations.

· The market price of TDS’ Common Shares is subject to fluctuations due to a variety of factors.

· Identification of errors in financial information or disclosures could require amendments to or restatements of financial information or disclosures included in this or prior filings with the Securities and Exchange Commission (“SEC”). Such amendments or restatements and related matters, including resulting delays in filing periodic reports with the SEC, could have an adverse effect on TDS’ business, financial condition or results of operations.

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· The existence of material weaknesses in the effectiveness of internal control over financial reporting could result in inaccurate financial statements or other disclosures or failure to prevent fraud, which could have an adverse effect on TDS’ business, financial condition or results of operations.

· Changes in facts or circumstances, including new or additional information that affects the calculation of potential liabilities for contingent obligations under guarantees, indemnities, claims, litigation or otherwise, could require TDS to record charges in excess of amounts accrued in the financial statements, which could have an adverse effect on TDS’ business, financial condition or results of operations.

· Disruption in credit or other financial markets, a deterioration of U.S. or global economic conditions or other events could, among other things, impede TDS’ access to or increase the cost of financing its operating and investment activities and/or result in reduced revenues and lower operating income and cash flows, which would have an adverse effect on TDS’ business, financial condition or results of operations.

· Uncertainty of TDS’ ability to access capital, deterioration in the capital markets, other changes in market conditions, changes in TDS’ credit ratings or other factors could limit or restrict the availability of financing on terms and prices acceptable to TDS, which could require TDS to reduce its construction, development or acquisition programs.

· Settlements, judgments, restraints on its current or future manner of doing business and/or legal costs resulting from pending and future litigation could have an adverse effect on TDS’ business, financial condition or results of operations.

· The possible development of adverse precedent in litigation or conclusions in professional studies to the effect that radio frequency emissions from wireless devices and/or cell sites cause harmful health consequences, including cancer or tumors, or may interfere with various electronic medical devices such as pacemakers, could have an adverse effect on TDS’ wireless business, financial condition or results of operations.

· Claims of infringement of intellectual property and proprietary rights of others, primarily involving patent infringement claims, could prevent TDS from using necessary technology to provide products or services or subject TDS to expensive intellectual property litigation or monetary penalties, which could have an adverse effect on TDS’ business, financial condition or results of operations.

· Certain matters, such as control by the TDS Voting Trust and provisions in the TDS Restated Certificate of Incorporation, may serve to discourage or make more difficult a change in control of TDS.

· Any of the foregoing events or other events could cause revenues, earnings, capital expenditures and/or any other financial or statistical information to vary from TDS’ forward-looking estimates by a material amount.

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Item 3 . Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

Refer to the disclosure under Market Risk in TDS’ Form 10-K for the year ended December 31, 2013 for additional information, including information regarding required principal payments and the weighted average interest rates related to TDS’ Long-term debt. There have been no material changes to such information since December 31, 2013.

See Note 2 — Fair Value Measurements in the Notes to Consolidated Financial Statements for additional information related to the fair value of TDS’ Long-term debt as of June 30, 2014.

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Item 4 . Controls and Procedures

Evaluation of Disclosure Controls and Procedures

TDS maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and that such information is accumulated and communicated to TDS’ management, including its principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by SEC Rule 13a-15(b), TDS carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of TDS’ disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, TDS’ principal executive officer and principal financial officer concluded that TDS' disclosure controls and procedures were effective as of June 30, 2014, at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

Internal controls over financial reporting are updated as necessary to accommodate modifications to our business processes and accounting procedures. There have been no changes in TDS’ internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect TDS’ internal control over financial reporting.

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Part II . Other Information

Item 1. Legal Proceedings.

Refer to the disclosure under Legal Proceedings in TDS’ Form 10-K for the year ended December 31, 2013. There have been no material changes to such information since December 31, 2013.

Item 1A. Risk Factors.

In addition to the information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in TDS’ Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect TDS’ business, financial condition or future results. The risks described in this Form 10-Q and the Form 10-K for the year ended December 31, 2013, may not be the only risks that could affect TDS. Additional unidentified or unrecognized risks and uncertainties could materially adversely affect TDS’ business, financial condition and/or operating results. Subject to the foregoing, TDS has not identified for disclosure any material changes to the risk factors as previously disclosed in TDS’ Annual Report on Form 10-K for the year ended December 31, 2013, except as follows:

TDS offers customers the option to purchase certain devices under installment contracts, which could result in higher churn and higher bad debts expense.

Beginning in the second quarter of 2014, U.S. Cellular expanded its offerings of equipment installment plans. Such plans offer customers the option to purchase certain devices under installment contracts over a period of up to 24 months. U.S. Cellular expects that sales of devices under these plans, when compared to sales of devices made under the traditional subsidy model, will reduce retail service revenue and ARPU but increase equipment revenue. Compared to equipment sales made under the traditional subsidy model, these equipment installment plans involve different considerations regarding marketing, sales, customer retention and renewal, device replacement, customer churn, cash flows, accounting and other business considerations, including business risks. U.S. Cellular does not have significant experience in these new plans or a sufficient history to determine how these plans will affect U.S. Cellular’s business, financial position or results of operations. In particular, customers on such plans can discontinue their service at any time without penalty, other than the obligation of any residual commitment they may have for unpaid service or for amounts due under the installment contract for the device. U.S. Cellular could experience reduced revenues and increased marketing costs to acquire new customers if it experiences an increase in churn, which could reduce its margins and operational and financial performance. In addition, customers who purchase their devices through equipment installment plans have the option to pay for their devices in installments over a period of up to 24 months. As a result, these plans subject U.S. Cellular to increased risks relating to consumer credit, which could result in an increase in bad debts expense. These plans may be particularly sensitive to changes in general economic conditions and declines in the credit quality of customers. There is no assurance that such plans will not have an adverse effect on TDS’ business, financial position or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On August 2, 2013, the Board of Directors of TDS authorized a $250 million stock repurchase program for TDS Common Shares. Depending on market conditions, such shares may be repurchased in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended ("Exchange Act"), pursuant to Rule 10b5-1 under the Exchange Act, or pursuant to accelerated share repurchase arrangements, prepaid share repurchases, private transactions or as otherwise authorized. This authorization does not have an expiration date.

The following table provides certain information with respect to all purchases made by or on behalf of TDS, and any open market purchases made by any “affiliated purchaser” (as defined by the SEC) of TDS, of TDS Common Shares during the quarter covered by this Form 10-Q.

Period		Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 – 30, 2014		132,529	$	26.49	132,529	$	232,953,656
May 1 – 31, 2014		247,575		27.08	247,575		226,250,171
June 1 – 30, 2014		270,524		26.02	270,524		219,211,717
	Total for or as of the end of the quarter ended June 30, 2014	650,628	$	26.52	650,628	$	219,211,717

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The following is additional information with respect to the Common Share authorization:

i. The date the program was announced was August 2, 2013 by Form 8-K.

ii. The amount approved was up to $250 million in aggregate purchase price of TDS Common Shares.

iii. The program does not have an expiration date.

iv. The authorization did not expire during the second quarter of 2014.

v. TDS did not determine to terminate the foregoing Common Share repurchase program, or cease making further purchases thereunder, during the second quarter of 2014.

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Item 5. Other Information.

The following information is being provided to update prior disclosures made pursuant to the requirements of Form 8-K, Item 2.03 — Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.

Neither TDS nor U.S. Cellular borrowed or repaid any amounts under their revolving credit facilities in the second quarter of 2014 and had no borrowings outstanding under their revolving credit facilities as of June 30, 2014.

A description of TDS’ revolving credit facility is included under Item 1.01 in TDS’ Current Report on Form 8-K dated December 17, 2010, as such description is amended by Item 1.01 in TDS’ Current Report on Form 8-K dated July 24, 2014, and is incorporated by reference herein.

A description of U.S. Cellular’s revolving credit facility is included under Item 1.01 in U.S. Cellular’s Current Report on Form 8-K dated December 17, 2010, as such description is amended by Item 1.01 in U.S. Cellular’s Current Report on Form 8-K dated July 24, 2014, and is incorporated by reference herein.

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Item 6. Exhibits.

Exhibit 4.1 — Third Amendment dated July 24, 2014 to TDS Revolving Credit Agreement dated December 17, 2010, is hereby incorporated by reference to TDS’ Current Report on Form 8-K dated July 24, 2014.

Exhibit 4.2 — Third Amendment dated July 24, 2014 to U.S. Cellular Revolving Credit Agreement dated December 17, 2010, is hereby incorporated by reference to U.S. Cellular’s Current Report on Form 8-K dated July 24, 2014.

Exhibit 10.1 — Form of U.S. Cellular Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Kenneth R. Meyers, is hereby incorporated by reference to Exhibit 10.1 to U.S. Cellular’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

Exhibit 10.2 — Form of U.S. Cellular’s Long-Term Incentive Plan Stock Option Award Agreement for Kenneth R. Meyers, is hereby incorporated by reference to Exhibit 10.2 to U.S. Cellular’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

Exhibit 10.3 — Amendment Number One to TDS’ 2011 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit A to the TDS Notice of Annual Meeting of Shareholders and Proxy Statement dated April 18, 2014.

Exhibit 11 — Statement regarding computation of per share earnings is included herein as Note 4 — Earnings Per Share in the Notes to Consolidated Financial Statements.

Exhibit 12 — Statement regarding computation of ratio of earnings to fixed charges.

Exhibit 31.1 — Principal executive officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.

Exhibit 31.2 — Principal financial officer certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.

Exhibit 32.1 — Principal executive officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

Exhibit 32.2 — Principal financial officer certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

Exhibit 101.INS — XBRL Instance Document

Exhibit 101.SCH — XBRL Taxonomy Extension Schema Document

Exhibit 101.PRE — XBRL Taxonomy Presentation Linkbase Document

Exhibit 101.CAL — XBRL Taxonomy Calculation Linkbase Document

Exhibit 101.LAB — XBRL Taxonomy Label Linkbase Document

Exhibit 101.DEF — XBRL Taxonomy Extension Definition Linkbase Document

The foregoing exhibits include only the exhibits that relate specifically to this Form 10-Q or that supplement the exhibits identified in TDS’ Form 10-K for the year ended December 31, 2013. Reference is made to TDS’ Form 10-K for the year ended December 31, 2013 for a complete list of exhibits, which are incorporated herein except to the extent supplemented or superseded above.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		TELEPHONE AND DATA SYSTEMS, INC.
		(Registrant)

Date:	August 1, 2014		/s/ LeRoy T. Carlson, Jr.
			LeRoy T. Carlson, Jr., President and Chief Executive Officer (principal executive officer)

Date:	August 1, 2014		/s/ Douglas D. Shuma
			Douglas D. Shuma, Senior Vice President and Controller (principal financial officer and principal accounting officer)

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Part I. Financial Informationprint Item 1. Financial Statementsprint Item 2 . Management S Discussion and Analysis Of Financial Condition and Results Of Operationsprint Item 3 . Quantitative and Qualitative Disclosures About Market Riskprint Item 4 . Controls and Proceduresprint Part II . Other Informationprint Item 1. Legal Proceedingsprint Item 1A. Risk Factorsprint Item 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 5. Other Informationprint Item 6. Exhibitsprint

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TDS 10-Q Quarter ended June 30, 2014