Edgar Filing: TELEPHONE & DATA SYSTEMS INC /DE/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

OR

o	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		(I.R.S. Employer Identification No.)
incorporation or organization)

30 North LaSalle Street, Chicago, Illinois 60602

(Address of principal executive offices) (Zip Code)

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

Indicate by check mark 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. Yes x No o

Indicate by check mark 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). Yes o No o

Indicate by check mark 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 x		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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 March 31, 2010
Common Shares, $.01 par value		49,824,627 Shares
Special Common Shares, $.01 par value		49,255,526 Shares
Series A Common Shares, $.01 par value		6,498,354 Shares

Table of Contents

Telephone and Data Systems, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2010

Index

			Page No.
Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited)	3

		Consolidated Statement of Operations Three Months Ended March 31, 2010 and 2009	3

		Consolidated Statement of Cash Flows Three Months Ended March 31, 2010 and 2009	4

		Consolidated Balance Sheet March 31, 2010 and December 31, 2009	5

		Consolidated Statement of Changes in Equity Three Months Ended March 31, 2010 and 2009	7

		Consolidated Statement of Comprehensive Income Three Months Ended March 31, 2010 and 2009	9

		Notes to Consolidated Financial Statements	10

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

		Overview	22
		Three Months Ended March 31, 2010 and 2009
		Results of Operations - Consolidated	29
		Results of Operations - Wireless	31
		Results of Operations - Wireline	35
		Recent Accounting Pronouncements	39
		Financial Resources	39
		Liquidity and Capital Resources	41
		Application of Critical Accounting Policies and Estimates	44
		Safe Harbor Cautionary Statement	45

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49

	Item 4.	Controls and Procedures	50

Part II.	Other Information		51

	Item 1.	Legal Proceedings	51

	Item 1A.	Risk Factors	51

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

	Item 5.	Other Information	54

	Item 6.	Exhibits	54

Signatures			55

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Part I. Financial Information

Item 1. Financial Statements

Telephone and Data Systems, Inc.

Consolidated Statement of Operations

(Unaudited)

	Three Months Ended
	March 31,
(Dollars and shares in thousands, except per share amounts)	2010			2009

Operating revenues	$	1,222,615		$	1,258,387

Operating expenses
Cost of services and products (excluding Depreciation, amortization and accretion expense reported below)	444,495			467,287
Selling, general and administrative	480,143			463,559
Depreciation, amortization and accretion	189,389			182,993
Loss on asset disposals, net	5,431			4,170
Total operating expenses	1,119,458			1,118,009

Operating income	103,157			140,378

Investment and other income (expense)
Equity in earnings of unconsolidated entities	24,903			25,337
Interest and dividend income	2,441			2,072
Interest expense	(28,720		)	(30,370		)
Other, net	(190		)	499
Total investment and other income (expense)	(1,566		)	(2,462		)

Income before income taxes	101,591			137,916
Income tax expense	38,465			42,106
Net income	63,126			95,810
Less: Net income attributable to noncontrolling interests, net of tax	(14,011		)	(21,350		)
Net income attributable to TDS shareholders	49,115			74,460
Preferred dividend requirement	(12		)	(13		)
Net income available to common shareholders	$	49,103		$	74,447

Basic weighted average shares outstanding	105,938			112,238
Basic earnings per share attributable to TDS shareholders	$	0.46		$	0.66

Diluted weighted average shares outstanding	106,250			112,427
Diluted earnings per share attributable to TDS shareholders	$	0.46		$	0.66

Dividends per share	$	0.1125		$	0.1075

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

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Telephone and Data Systems, Inc.

Consolidated Statement of Cash Flows

(Unaudited)

	Three Months Ended
	March 31,
(Dollars in thousands)	2010			2009

Cash flows from operating activities
Net income	$	63,126		$	95,810
Add (deduct) adjustments to reconcile net income to net cash flows from operating activities
Depreciation, amortization and accretion	189,389			182,993
Bad debts expense	20,245			20,303
Stock-based compensation expense	7,444			5,556
Deferred income taxes, net	(13,874		)	5,603
Equity in earnings of unconsolidated entities	(24,903		)	(25,337		)
Distributions from unconsolidated entities	7,243			6,029
Loss on asset disposals, net	5,431			4,170
Other operating activities	948			52
Changes in assets and liabilities from operations
Accounts receivable	9,648			(10,936		)
Inventory	(947		)	7,720
Accounts payable	(40,676		)	(48,271		)
Customer deposits and deferred revenues	784			(1,010		)
Accrued taxes	35,641			34,893
Accrued interest	9,212			9,358
Other assets and liabilities	(58,051		)	(63,683		)
	210,660			223,250

Cash flows from investing activities
Additions to property, plant and equipment	(146,622		)	(165,236		)
Cash paid for acquisitions and licenses	(21,118		)	(14,582		)
Cash paid for investments	(50,000		)	(26,248		)
Cash received for investments	15,561			—
Other investing activities	439			1,010
	(201,740		)	(205,056		)

Cash flows from financing activities
Repayment of long-term debt	(697		)	(993		)
TDS Common Shares and Special Common Shares reissued for benefit plans, net of tax payments	463			383
U.S. Cellular Common Shares reissued for benefit plans, net of tax payments	486			356
Repurchase of TDS Special Common Shares	(14,810		)	(12,237		)
Repurchase of U.S. Cellular Common Shares	(5,186		)	(13,291		)
Dividends paid	(11,891		)	(12,057		)
Distributions to noncontrolling interests	(2,284		)	(1,458		)
Other financing activities	(527		)	61
	(34,446		)	(39,236		)

Net decrease in cash and cash equivalents	(25,526		)	(21,042		)

Cash and cash equivalents
Beginning of period	670,992			777,309
End of period	$	645,466		$	756,267

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

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Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Assets

(Unaudited)

	March 31,		December 31,
(Dollars in thousands)	2010		2009

Current assets
Cash and cash equivalents	$	645,466	$	670,992
Short-term investments	148,364		113,275
Accounts receivable
Due from customers, less allowances of $28,220 and $30,422, respectively	348,090		384,470
Other, principally connecting companies, less allowances of $6,208 and $7,201, respectively	138,688		130,973
Inventory	157,935		156,987
Net deferred income tax asset	29,948		29,874
Prepaid expenses	101,905		94,336
Other current assets	68,669		66,764
	1,639,065		1,647,671
Investments
Licenses	1,446,825		1,443,025
Goodwill	713,013		707,840
Other intangible assets, net of accumulated amortization of $111,611 and $108,944, respectively	31,823		26,589
Investments in unconsolidated entities	221,112		203,799
Other investments	9,627		9,785
	2,422,400		2,391,038
Property, plant and equipment
In service and under construction	8,860,837		8,760,327
Less: Accumulated depreciation	5,385,182		5,252,482
	3,475,655		3,507,845

Other assets and deferred charges	64,651		65,759

Total assets	$	7,601,771	$	7,612,313

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

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Telephone and Data Systems, Inc.

Consolidated Balance Sheet — Liabilities and Equity

(Unaudited)

	March 31,			December 31,
(Dollars and shares in thousands)	2010			2009

Current liabilities
Current portion of long-term debt	$	2,277		$	2,509
Accounts payable	307,423			347,348
Customer deposits and deferred revenues	166,080			164,451
Accrued interest	21,330			12,227
Accrued taxes	99,432			57,087
Accrued compensation	62,021			93,524
Other current liabilities	99,023			117,081
	757,586			794,227

Deferred liabilities and credits
Net deferred income tax liability	506,453			516,919
Other deferred liabilities and credits	371,698			373,862
	878,151			890,781

Long-term debt	1,492,666			1,492,908

Commitments and contingencies

Noncontrolling interests with redemption features	752			727

Equity
TDS shareholders’ equity
Common Shares, par value $.01 per share; authorized 100,000 shares; issued 57,082 shares	571			571
Special Common Shares, par value $.01 per share; authorized 165,000 shares; issued 63,442 shares	634			634
Series A Common Shares, par value $.01 per share; authorized 25,000 shares; issued and outstanding 6,498 and 6,492 shares, respectively	65			65
Capital in excess of par value	2,095,636			2,088,807
Treasury shares at cost:
Common Shares, 7,258 and 7,277 shares, respectively	(216,249		)	(217,381		)
Special Common Shares, 14,187 and 13,717 shares, respectively	(477,140		)	(464,268		)
Accumulated other comprehensive loss	(2,966		)	(2,710		)
Retained earnings	2,399,321			2,363,759
Total TDS shareholders’ equity	3,799,872			3,769,477

Preferred shares	831			832
Noncontrolling interests	671,913			663,361

Total equity	4,472,616			4,433,670

Total liabilities and equity	$	7,601,771		$	7,612,313

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

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Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

	TDS Shareholders
(Dollars in thousands)	Common Shares		Special Common Shares		Series A Common Shares		Capital in Excess of Par Value			Treasury Common Shares			Treasury Special Common Shares			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total TDS Shareholders’ Equity			Preferred Shares			Non controlling Interests			Total Equity
December 31, 2009	$	571	$	634	$	65	$	2,088,807		$	(217,381	)	$	(464,268	)	$	(2,710	)	$	2,363,759		$	3,769,477		$	832		$	663,361		$	4,433,670
Add (Deduct)
Net income attributable to TDS Shareholders	—		—		—		—			—			—			—			49,115			49,115			—			—			49,115
Net income attributable to noncontrolling interests classified as equity	—		—		—		—			—			—			—			—			—			—			13,986			13,986
Changes related to retirement plan	—		—		—		—			—			—			(256		)	—			(256		)	—			—			(256		)
Common, Special Common and Series A Common Shares dividends	—		—		—		—			—			—			—			(11,879		)	(11,879		)	—			—			(11,879		)
Preferred dividends	—		—		—		—			—			—			—			(12		)	(12		)	—			—			(12		)
Repurchase of shares	—		—		—		—			—			(14,810		)	—			—			(14,810		)	(1		)	—			(14,811		)
Dividend reinvestment plan	—		—		—		—			1,067			196			—			(318		)	945			—			—			945
Incentive and compensation plans	—		—		—		433			65			1,742			—			(1,344		)	896			—			—			896
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans	—		—		—		2,838			—			—			—			—			2,838			—			(3,150		)	(312		)
Stock-based compensation awards (1)	—		—		—		3,614			—			—			—			—			3,614			—			—			3,614
Tax windfall (shortfall) from stock awards (2)	—		—		—		(56		)	—			—			—			—			(56		)	—			—			(56		)
Distributions to noncontrolling interests	—		—		—		—			—			—			—			—			—			—			(2,284		)	(2,284		)
March 31, 2010	$	571	$	634	$	65	$	2,095,636		$	(216,249	)	$	(477,140	)	$	(2,966	)	$	2,399,321		$	3,799,872		$	831		$	671,913		$	4,472,616

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Telephone and Data Systems, Inc.

Consolidated Statement of Changes in Equity

(Unaudited)

	TDS Shareholders
(Dollars in thousands)	Common Shares		Special Common Shares		Series A Common Shares		Capital in Excess of Par Value			Treasury Common Shares			Treasury Special Common Shares			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total TDS Shareholders’ Equity			Preferred Shares		Non controlling Interests			Total Equity
December 31, 2008	$	571	$	634	$	65	$	2,066,597		$	(163,017	)	$	(350,091	)	$	(13,391	)	$	2,226,031		$	3,767,399		$	852	$	648,924		$	4,417,175
Add (Deduct)
Net income attributable to TDS shareholders	—		—		—		—			—			—			—			74,460			74,460			—		—			74,460
Net income attributable to noncontrolling interests classified as equity	—		—		—		—			—			—			—			—			—			—		21,326			21,326
Changes related to retirement plan	—		—		—		—			—			—			447			—			447			—		—			447
Common, Special Common and Series A Common Shares dividends	—		—		—		—			—			—			—			(12,044		)	(12,044		)	—		—			(12,044		)
Preferred dividends	—		—		—		—			—			—			—			(13		)	(13		)	—		—			(13		)
Repurchase of shares	—		—		—		—			—			(12,075		)	—			—			(12,075		)	—		—			(12,075		)
Dividend reinvestment plan	—		—		—		1			179			239			—			(7		)	412			—		—			412
Incentive and compensation plans	—		—		—		(156		)	—			1,463			—			(567		)	740			—		—			740
Adjust investment in subsidiaries for repurchases, issuances and other compensation plans	—		—		—		2,688			—			—			—			—			2,688			—		(12,089		)	(9,401		)
Stock-based compensation awards (1)	—		—		—		2,592			—			—			—			—			2,592			—		—			2,592
Tax windfall (shortfall) from stock awards (2)	—		—		—		(68		)	—			—			—			—			(68		)	—		—			(68		)
Distributions to noncontrolling interests	—		—		—		—			—			—			—			—			—			—		(1,458		)	(1,458		)
March 31, 2009	$	571	$	634	$	65	$	2,071,654		$	(162,838	)	$	(360,464	)	$	(12,944	)	$	2,287,860		$	3,824,538		$	852	$	656,703		$	4,482,093

(1) Reflects TDS Corporate and TDS Telecom’s current year stock-based compensation awards impact on Capital in excess of par value. U.S. Cellular’s amounts are included in Adjust investment in subsidiaries for repurchases, issuances and other compensation plans.

(2) Reflects tax windfalls/(shortfalls) associated with the exercise of options and the vesting of restricted stock awards of TDS Common Shares and TDS Special Common Shares. U.S. Cellular’s tax windfalls/(shortfalls) associated with the exercise of options and vesting of restricted stock awards of U.S. Cellular are included in Adjust investment in subsidiaries for repurchases, issuances, and other compensation plans.

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

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Telephone and Data Systems, Inc.

Consolidated Statement of Comprehensive Income

(Unaudited)

	Three Months Ended March 31,
(Dollars in thousands)	2010			2009

Net income	$	63,126		$	95,810
Net change in accumulated other comprehensive income
Changes related to retirement plan	(256		)	447
Comprehensive income	62,870			96,257
Less: Comprehensive income attributable to noncontrolling interests	(14,011		)	(21,350		)
Comprehensive income attributable to TDS shareholders	$	48,859		$	74,907

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

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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 its majority-owned subsidiaries, including TDS’ 82%-owned wireless telephone subsidiary, United States Cellular Corporation (“U.S. Cellular”), TDS’ 100%-owned wireline telephone subsidiary, TDS Telecommunications Corporation (“TDS Telecom”) and TDS’ 80%-owned printing and distribution company, Suttle-Straus, Inc. 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. Certain prior year amounts have been reclassified to conform to the 2010 presentation.

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, 2009.

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items and adjustments to prior periods as described in Note 2 - Adjustment of Prior Period Amounts) necessary to present fairly the financial position as of March 31, 2010 and the results of operations, cash flows, changes in equity and changes in comprehensive income for the three months ended March 31, 2010 and 2009. The results of operations, cash flows, changes in equity and changes in comprehensive income for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year.

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2. Revision of Prior Period Amounts

In preparing its financial statements for the three months ended March 31, 2010, TDS discovered certain errors related to accounting for operating revenues and sales tax liabilities. These errors resulted in the overstatement of operating revenues and understatement of sales tax liabilities for 2009, 2008 and 2007. In accordance with SEC Staff Accounting Bulletin Nos. 99 and 108 (“SAB 99 and SAB 108”), TDS evaluated these errors and determined that they were immaterial to each of the reporting periods affected and, therefore, amendment of previously filed reports was not required. However, if the adjustments to correct the cumulative errors had been recorded in the first quarter 2010, TDS believes the impact would have been significant to the first quarter and would impact comparisons to prior periods. As permitted by SAB 108, TDS revised in the current filing and plans to revise in the next filings of its quarterly and annual consolidated financial statements previously reported annual and quarterly results for 2009, 2008 and 2007 for these immaterial amounts. In addition to recording these adjustments, TDS recorded and plans to record other adjustments to prior-year amounts to correct other immaterial items, which include adjustments related to rent expense as disclosed in TDS’ 2009 Form 10-K.

The Consolidated Balance Sheet at December 31, 2009 was revised to reflect the cumulative effect of these errors which resulted in a decrease to Retained earnings of $7.8 million. Also, in accordance with SAB 108, the Consolidated Statement of Operations and the Consolidated Statement of Cash Flows have been revised as follows:

Consolidated Balance Sheet — December 31, 2009

(Dollars in thousands)	As previously reported		Adjustment			Revised

Accounts receivable - Due from customers	$	380,941	$	3,529		$	384,470
Total current assets	1,644,142		3,529			1,647,671
Total assets	7,608,784		3,529			7,612,313
Customer deposits and deferred revenues	167,963		(3,512		)	164,451
Accrued taxes	39,644		17,443			57,087
Total current liabilities	780,296		13,931			794,227
Net deferred income tax liability	517,762		(843		)	516,919
Total deferred liabilities and credits	891,624		(843		)	890,781
Retained earnings	2,371,587		(7,828		)	2,363,759
Total TDS shareholders’ equity	3,777,305		(7,828		)	3,769,477
Noncontrolling interests	665,092		(1,731		)	663,361
Total equity	4,443,229		(9,559		)	4,433,670
Total liabilities and equity	7,608,784		3,529			7,612,313

Consolidated Statement of Operations — Three Months Ended March 31, 2009

(Dollars in thousands)	As previously reported			Adjustment			Revised

Operating revenues	$	1,256,646		$	1,741		$	1,258,387
Cost of services and products (excluding Depreciation, amortization and accretion)	467,407			(120		)	467,287
Selling, general and administrative expenses	467,848			(4,289		)	463,559
Depreciation, amortization and accretion	182,766			227			182,993
Loss on asset disposals, net	2,416			1,754			4,170
Total operating expenses	1,120,437			(2,428		)	1,118,009
Operating income	136,209			4,169			140,378
Interest expense	(30,105		)	(265		)	(30,370		)
Total investment and other income (expense)	(2,197		)	(265		)	(2,462		)
Income before income taxes	134,012			3,904			137,916
Income tax expense	40,638			1,468			42,106
Net income	93,374			2,436			95,810
Net income attributable to noncontrolling interests, net of tax	(21,366		)	16			(21,350		)
Net income attributable to TDS shareholders	72,008			2,452			74,460
Net income available to common shareholders	71,995			2,452			74,447
Basic earnings attributable to TDS shareholders	0.64			0.02			0.66
Diluted earnings attributable to TDS shareholders	0.64			0.02			0.66

Consolidated Statement of Cash Flows — Three Months Ended March 31, 2009

(Dollars in thousands)	As previously reported			Adjustment			Revised

Net income	$	93,374		$	2,436		$	95,810
Depreciation, amortization and accretion	182,766			227			182,993
Deferred income taxes, net	4,934			669			5,603
Loss on asset disposals, net	2,416			1,754			4,170
Change in accounts receivable	(6,272		)	(4,664		)	(10,936		)
Change in customer deposits and deferred revenues	(823		)	(187		)	(1,010		)
Change in accrued taxes	34,865			28			34,893
Change in other assets and liabilities	(63,420		)	(263		)	(63,683		)
Cash flows from operating activities	223,250			—			223,250

3. Summary of Significant Accounting Policies

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 governmental authority imposing such tax, the amounts collected from customers and remitted to governmental authorities are recorded net in Accrued taxes in the Consolidated Balance Sheet. If a tax is assessed upon TDS but billed to customers to recover it, the amounts billed to customers are recorded in Operating revenues and the amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded in Operating revenues that were billed to customers and remitted to governmental authorities totaled $38.4 million and $27.4 million for the three months ended March 31, 2010 and 2009, respectively.

Implementation of Revised Variable Interest Entity Accounting

TDS holds interests in certain variable interest entities (“VIEs”) as such term is defined by GAAP. Under GAAP, a VIE generally is an entity in which the voting rights held by equity holders are ineffective in determining which party has a controlling financial interest in the entity because control of an entity may be achieved through arrangements that do not involve voting equity. The primary beneficiary of a VIE, as defined by GAAP, is required to consolidate the VIE in its financial statements. Prior to January 1, 2010, the primary beneficiary of a VIE was the entity that recognized a majority of a VIE’s expected gains or losses, as determined based on a quantitative model. Effective January 1, 2010, new provisions under GAAP related to accounting for VIEs provide for a more qualitative assessment in determining the primary beneficiary of a VIE.

The revised consolidation guidance related to VIEs effective January 1, 2010 did not change TDS’ consolidated reporting entities. See Note 11 — Variable Interest Entities (VIEs) for details on consolidated VIEs.

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple Deliverable Revenue Arrangements—a consensus of FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 provides for less restrictive separation criteria that must be met for a deliverable to be considered a separate unit of accounting. Additionally, under this Standard, there is a hierarchy for determining the selling price of a unit of accounting and consideration must be allocated using a relative-selling price method. ASU 2009-13 will be effective for TDS on January 1, 2011; however, early adoption is permitted. TDS is currently reviewing the requirements of ASU 2009-13 and has not yet determined the impact on its financial position or results of operations.

In October 2009, the FASB issued Accounting Standards Update No. 2009-14, Certain Revenue Arrangements that include Software Elements—a consensus of the FASB Emerging Issues Task Force (“ASU 2009-14”). ASU 2009-14 amends accounting and reporting guidance for revenue arrangements involving both tangible products and software that is “more than incidental to the tangible product as a whole.” ASU 2009-14 will be effective for TDS on January 1, 2011; however, early adoption is permitted. TDS does not anticipate that this pronouncement will have a significant impact on its financial position or results of operations.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires new disclosures regarding transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. It also clarifies existing disclosure requirements regarding the level of disaggregation in certain disclosures, inputs, and valuation techniques used in FASB ASC 820, Fair Value Measurements and Disclosures. TDS adopted all of the requirements of this update on January 1, 2010, its effective date, except for the new requirement regarding activity in Level 3 fair value measurements which has a later effective date under the provisions of ASU 2010-6, and will become effective on January 1, 2011. Adoption of this pronouncement has not had, and is not expected to have, a significant impact on TDS’ fair value disclosures.

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4. Fair Value Measurements

As of March 31, 2010 and December 31, 2009, TDS did not have any financial assets or liabilities that were required, under GAAP, to be recorded at fair value on a recurring basis in its Consolidated Balance Sheet. However, TDS has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes. The fair value of financial instruments was as follows:

	March 31,				December 31,
	2010				2009
(Dollars in thousands)	Book Value		Fair Value		Book Value		Fair Value
Cash and cash equivalents	$	645,466	$	645,466	$	670,992	$	670,992
Short-term investments	148,364		148,364		113,275		113,275
Long-term debt (1)	1,487,995		1,468,305		1,488,196		1,461,976

(1) Excludes capital lease obligations

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 Long-term debt, excluding capital lease obligations, was estimated using market prices for TDS’ 7.6% Series A notes and 6.625% senior notes, U.S. Cellular’s 7.5% senior notes, and discounted cash flow analysis for the remaining debt.

As of March 31, 2010, TDS held certificates of deposit totaling $97.7 million. At March 31, 2010, these certificates of deposit had original maturities of between 120 days and one year on the dates TDS acquired these certificates of deposit and earned interest at annual rates between 0.50% and 1.74%.

As of March 31, 2010, TDS also held commercial paper with an aggregate face value of $50.0 million guaranteed under the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program. These investments include notes issued by Goldman Sachs Group, Inc. with a face value of $25.0 million, which pay interest semi-annually at the coupon rate of 1.7% and mature on March 15, 2011; and notes issued by General Electric Capital Corporation with a face value of $25.0 million, which pay interest semi-annually at the coupon rate of 1.8% and mature on March 11, 2011. These investments were purchased at a premium and are carried at amortized cost on the balance sheet ($50.7 million as of March 31, 2010).

As of March 31, 2010, TDS did not have any nonfinancial assets or liabilities that required the application of fair value accounting for purposes of reporting such amounts in its Consolidated Balance Sheet.

5. Income Taxes

TDS’ overall effective tax rate on Income before income taxes for the three months ended March 31, 2010 and 2009 was 37.9% and 30.5%, respectively. The effective tax rate for the three months ended March 31, 2009 was lower than the rate for the three months ended March 31, 2010 due primarily to a 2009 state tax benefit resulting from a state tax law change. This benefit, along with other minor discrete benefits in the quarter, decreased income tax expense for the three months ended March 31, 2009 by $9.9 million; absent these benefits, the effective tax rate for such period would have been higher by 7.2 percentage points.

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6. Earnings Per Share

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

The amounts used in computing earnings per share and the effects of potentially dilutive securities on income and the weighted average number of Common, Special Common and Series A Common Shares are as follows:

	Three Months Ended
	March 31,
(Dollars and shares in thousands, except per share amounts)	2010			2009

Basic earnings per share attributable to TDS shareholders
Net income attributable to TDS	$	49,115		$	74,460
Preferred dividend requirement	(12		)	(13		)
Net income attributable to common shareholders of TDS used in basic earnings per share	$	49,103		$	74,447

Diluted earnings per share attributable to TDS shareholders
Net income attributable to common shareholders of TDS used in basic earnings per share	$	49,103		$	74,447
Noncontrolling income adjustment (1)	(181		)	(195		)
Preferred dividend adjustment (2)	12			12
Net income attributable to common shareholders of TDS used in diluted earnings per share	$	48,934		$	74,264

Weighted average number of shares used in basic earnings per share
Common Shares	49,852			51,693
Special Common Shares	49,594			54,084
Series A Common Shares	6,492			6,461
Total	105,938			112,238
Effects of dilutive securities:
Stock options (3)	110			50
Restricted stock units (4)	158			93
Preferred shares (5)	44			46
Weighted average number of shares used in diluted earnings per share	106,250			112,427

Basic earnings per share attributable to TDS shareholders	$	0.46		$	0.66

Diluted earnings per share attributable to TDS shareholders	$	0.46		$	0.66

(1) The noncontrolling income adjustment reflects the additional noncontrolling share of U.S. Cellular’s income computed as if all of U.S. Cellular’s issuable securities were outstanding.

(2) The preferred dividend adjustment reflects the dividend reduction related to preferred securities that were dilutive, and therefore treated as if converted for shares.

(3) Stock options exercisable into 662 Common Shares and 4,372 Special Common Shares for the three months ended March 31, 2010, and 855 Common Shares and 3,450 Special Common Shares for the three months ended March 31, 2009, were not included in computing Diluted Earnings per Share because their effects were antidilutive.

(4) Restricted stock units issuable upon vesting into Special Common Shares that were excluded in computing Diluted Earnings per Share because their effects were antidilutive totaled less than one thousand in both 2010 and 2009.

(5) For the class of preferred shares that is convertible for Common Shares, there were no antidilutive preferred shares for the three-month periods ended March 31, 2010 and 2009.

7. Acquisitions, Divestitures and Exchanges

TDS assesses its existing wireless and wireline 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, telecommunications companies and wireless spectrum and related service businesses. In addition, TDS may seek to divest outright or include in exchanges for other interests those wireless and wireline interests that are not strategic to its long-term success.

On March 19, 2010, TDS acquired 100% of the outstanding shares of VISI Incorporated (“VISI”) for $18.0 million in cash, including preliminary working capital adjustments. VISI is a managed services company which provides colocation, dedicated hosting, Internet and virtual computing services to small and medium-sized companies. VISI is included in the TDS Telecom ILEC business segment for reporting purposes.

TDS’ acquisitions during the first quarter of 2010 and 2009 and the allocation of the purchase price for these acquisitions were as follows:

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			Allocation of Purchase Price
(Dollars in thousands)	Purchase price (1)		Goodwill (2)		Licenses		Intangible assets subject to amortization		Net tangible assets (liabilities)

2010
U.S. Cellular licenses	$	3,800	$	—	$	3,800	$	—	$	—
TDS Telecom ILEC business	18,027		5,173		—		7,900		4,954
Total	$	21,827	$	5,173	$	3,800	$	7,900	$	4,954

2009
U.S. Cellular licenses	$	12,250	$	—	$	12,250	$	—	$	—
TDS Telecom
ILEC business	289		289		—		—		—
ILEC other	14		14		—		—		—
Total	$	12,553	$	303	$	12,250	$	—	$	—

(1) Cash amounts paid for 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.

(2) None of the goodwill was amortizable for income tax purposes.

8. Licenses and Goodwill

Changes in TDS’ licenses and goodwill for the three months ended March 31, 2010 and 2009 are presented below.

Licenses

	U.S.
(Dollars in thousands)	Cellular (1)		TDS Telecom		Total

Balance December 31, 2009	$	1,440,225	$	2,800	$	1,443,025
Acquisitions	3,800		—		3,800
Balance March 31, 2010	$	1,444,025	$	2,800	$	1,446,825

Balance December 31, 2008	$	1,438,640	$	2,800	$	1,441,440
Acquisitions	12,250		—		12,250
Balance March 31, 2009	$	1,450,890	$	2,800	$	1,453,690

Goodwill

	U.S.			TDS			Non- reportable
(Dollars in thousands)	Cellular (1)			Telecom (2)			segment (3)		Total

Balance December 31, 2009	$	617,222		$	450,156		$	3,802	$	1,071,180
Accumulated impairment losses	(333,900		)	(29,440		)	—		(363,340		)
	283,322			420,716			3,802		707,840
Acquisitions	—			5,173			—		5,173
Balance March 31, 2010	$	283,322		$	425,889		$	3,802	$	713,013

Balance December 31, 2008	$	616,764		$	449,853		$	3,802	$	1,070,419
Accumulated impairment losses	(333,900		)	(29,440		)	—		(363,340		)
	282,864			420,413			3,802		707,079
Acquisitions	—			303			—		303
Other	458			—			—		458
Balance March 31, 2009	$	283,322		$	420,716		$	3,802	$	707,840

(1) Prior to January 1, 2009, TDS accounted for U.S. Cellular’s share repurchases as step acquisitions, allocating a portion of the share repurchase value to TDS licenses and goodwill, as required by GAAP in effect at that time. Consequently, U.S. Cellular’s licenses, goodwill and accumulated impairment loss reported on a stand-alone basis do not match the TDS consolidated licenses, goodwill and accumulated impairment losses related to U.S. Cellular.

(2) The entire goodwill balance of $29.4 million at the TDS Telecom CLEC business segment was impaired in 2004. The remaining goodwill balance at TDS Telecom is attributed to the ILEC business segment.

(3) “Non-reportable segment” consists of goodwill related to Suttle-Straus.

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9. 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.

Equity in earnings of unconsolidated entities totaled $24.9 million and $25.3 million in the three months ended March 31, 2010 and 2009, respectively; of those amounts, TDS’ investment in the Los Angeles SMSA Limited Partnership (“LA Partnership”) contributed $16.9 million in both periods. TDS held a 5.5% ownership interest in the LA Partnership during these periods.

The following table summarizes the combined results of operations of TDS’ equity method investments:

	Three Months Ended March 31,
(Dollars in thousands)	2010		2009
Revenues	$	1,219,000	$	1,177,000
Operating expenses	863,000		818,000
Operating income	356,000		359,000
Other income	6,000		8,000
Net income	$	362,000	$	367,000

10. Commitments and Contingencies

Indemnifications

TDS enters into agreements in the normal course of business that provide for indemnification of counterparties. The terms of the indemnifications vary by agreement. The events or circumstances that would require TDS to perform under these indemnities are transaction specific; however, these agreements may require TDS to indemnify the counterparty for costs and losses incurred from litigation or claims arising from the underlying transaction. TDS is unable to estimate the maximum potential liability for these types of indemnifications as the amounts are dependent on the outcome of future events, the nature and likelihood of which cannot be determined at this time. Historically, TDS has not made any significant indemnification payments under such agreements.

Legal Proceedings

TDS is involved or may be involved from time to time in legal proceedings before the Federal Communications Commission (“FCC”), other regulatory authorities, and/or various state and federal courts. If TDS believes that a loss arising from such legal proceedings is probable and can be reasonably estimated, an amount is accrued in the financial statements for the estimated loss. If only a range of loss can be determined, the best estimate within that range is accrued; if none of the estimates within that range is better than another, the low end of the range is accrued. The assessment of the expected outcomes of legal proceedings is a highly subjective process that requires judgments about future events. The legal proceedings are reviewed at least quarterly to determine the adequacy of accruals and related financial statement disclosures. The ultimate outcomes of legal proceedings could differ materially from amounts accrued in the financial statements.

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11. Variable Interest Entities (VIEs)

From time to time, the FCC conducts auctions through which additional spectrum is made available for the provision of wireless services. U.S. Cellular, TDS’ subsidiary, participated in and was awarded spectrum licenses in each of four separate spectrum auctions (FCC Auctions 78, 73, 66, and 58) indirectly through its interests in Aquinas Wireless L.P. (“Aquinas Wireless”), King Street Wireless L.P. (“King Street Wireless”), Barat Wireless L.P. (“Barat Wireless”) and Carroll Wireless L.P. (“Carroll Wireless”), collectively, the “limited partnerships.” Each entity qualified as a “designated entity” and thereby was eligible for bidding credits with respect to licenses purchased in accordance with the rules defined by the FCC for each auction. In most cases, the bidding credits resulted in a 25% discount from the gross winning bid.

Consolidated VIEs

As of March 31, 2010, TDS consolidates the following VIEs under GAAP:

· Aquinas Wireless;

· King Street Wireless and King Street Wireless, Inc., the general partner of King Street Wireless;

· Barat Wireless and Barat Wireless, Inc., the general partner of Barat Wireless; and

· Carroll Wireless and Carroll PCS, Inc., the general partner of Carroll Wireless.

TDS holds a variable interest in the entities listed above due to capital contributions and/or advances it provided to these entities. The power to direct the activities of the VIEs that most significantly impacts their economic performance is shared. Specifically, the general partner of each 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 economic performance of the VIEs, indicating that TDS is the primary beneficiary of the VIEs in accordance with GAAP. Accordingly, these VIEs are consolidated.

Following is a summary of the capital contributions and advances made to each entity by TDS as of March 31, 2010 (dollars in thousands). The amounts shown in the table below exclude funds provided to these entities solely from the shareholder of the general partner.

Aquinas Wireless	$	2,132
King Street Wireless & King Street Wireless, Inc.	300,904
Barat Wireless & Barat Wireless, Inc.	127,685
Carroll Wireless & Carroll PCS, Inc.	131,294
	$	562,015

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

	March 31,		December 31,
(Dollars in thousands)	2010		2009

Assets
Cash	$	651	$	679
Other current assets	204		393
Licenses	487,962		487,962
Other assets	1,548		440
Total assets	$	490,365	$	489,474

Liabilities
Customer deposits and deferred revenues	$	—	$	70
Total liabilities	$	—	$	70

Other Related Matters

TDS may agree to make additional capital contributions and/or advances to the VIEs discussed above and/or to their general partners to provide additional funding for the development of licenses granted in the 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.

These VIEs are in the process of developing long-term business and financing plans. These entities were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to

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any FCC licenses won in the auctions. As such, these entities have risks similar to the business risks described in the “Risk Factors” in TDS’ Form 10-K for the year ended December 31, 2009.

12. TDS and U.S. Cellular Share Repurchases

On November 19, 2009, the Board of Directors of TDS authorized a $250 million stock repurchase program for both TDS Common and Special Common Shares from time to time pursuant to open market purchases, block transactions, private purchases or otherwise, depending on market conditions. This authorization will expire on November 19, 2012.

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 prices and other conditions. This authorization does not have an expiration date.

Share repurchases made under these authorizations and prior authorizations were as follows:

Three Months Ended March 31, (Dollars and shares in thousands, except cost per share)	Number of Shares	Average Cost Per Share		Amount (1)

2010
U.S. Cellular Common Shares	128	$	40.68	$	5,186
TDS Common Shares	—	—		—
TDS Special Common Shares	511	28.99		14,810
2009
U.S. Cellular Common Shares	367	$	36.22	$	13,291
TDS Common Shares	—	—		—
TDS Special Common Shares	504	23.96		12,075

(1) Amounts reported on the Consolidated Statement of Cash Flows may differ from these amounts due to repurchases and subsequent cash settlements occurring in different periods.

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13. Noncontrolling Interests

The following schedule discloses the effects of net income attributable to TDS shareholders and changes in TDS’ ownership interest in U.S. Cellular on TDS’ equity for the three months ended March 31, 2010 and 2009:

	Three Months Ended March 31,
(Dollars in thousands)	2010			2009

Net income attributable to TDS shareholders	$	49,115		$	74,460
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	(634		)	(355		)
Change in TDS’ Capital in excess of par value from U.S. Cellular’s repurchase of U.S. Cellular shares	(120		)	171
Net transfers (to) from noncontrolling interests	(754		)	(184		)
Change from net income attributable to TDS and transfers (to) from noncontrolling interests	$	48,361		$	74,276

Mandatorily Redeemable Noncontrolling Interests in Finite-Lived Subsidiaries

Under GAAP, certain noncontrolling interests in consolidated entities with finite lives may meet the definition of mandatorily redeemable financial instruments. TDS’ consolidated financial statements include certain noncontrolling interests that meet the definition of mandatorily redeemable financial instruments. These mandatorily redeemable noncontrolling interests represent interests held by third parties in consolidated partnerships and limited liability companies (“LLCs”), where the terms of the underlying partnership or LLC agreement provide for a defined termination date at which time the assets of the subsidiary are to be sold, the liabilities are to be extinguished and the remaining net proceeds are to be distributed to the noncontrolling interest holders and TDS in accordance with the respective partnership and LLC agreements. The termination dates of these mandatorily redeemable noncontrolling interests range from 2085 to 2094.

The settlement value of TDS’ mandatorily redeemable noncontrolling interests in finite-lived subsidiaries is estimated to be $121.5 million at March 31, 2010. This amount represents the estimate of cash that would be due and payable to settle these noncontrolling interests assuming an orderly liquidation of the finite-lived consolidated partnerships and LLCs on March 31, 2010, net of estimated liquidation costs. This amount excludes redemption amounts recorded in Noncontrolling interests with redemption features in the Consolidated Balance Sheet. TDS currently has no plans or intentions relating to the liquidation of any of the related partnerships or LLCs prior to their scheduled termination dates. The corresponding carrying value of the mandatorily redeemable noncontrolling interests in finite-lived consolidated partnerships and LLCs at March 31, 2010 is $45.0 million, and is included in Noncontrolling interests in the Consolidated Balance Sheet. The excess of the aggregate settlement value over the aggregate carrying value of these mandatorily redeemable noncontrolling interests is due primarily to the unrecognized appreciation of the noncontrolling interest holders’ share of the underlying net assets in the consolidated partnerships and LLCs. Neither the noncontrolling interest holders’ share, nor TDS’ share, of the appreciation of the underlying net assets of these subsidiaries is reflected in the consolidated financial statements. The estimate of settlement value was based on certain factors and assumptions which are subjective in nature. Changes in those factors and assumptions could result in a materially larger or smaller settlement amount.

14. Accumulated Other Comprehensive Income (Loss)

The changes in the cumulative balance of Accumulated other comprehensive income (loss) were as follows:

	Three Months Ended March 31,
(Dollars in thousands)	2010			2009

Equity Method Investments
Balance, beginning of period	$	306		$	608
Net change in equity method investments	—			—
Balance, end of period	$	306		$	608

Retirement Plans
Balance, beginning of period	$	(3,016	)	$	(13,999	)
Add (deduct):
Amounts included in net periodic benefit cost for the period
Amortization of prior service cost	(953		)	(200		)
Amortization of unrecognized net loss	539			452
	(414		)	252
Deferred income taxes	158			195
Net change in retirement plans	(256		)	447
Balance, end of period	$	(3,272	)	$	(13,552	)

Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period	$	(2,710	)	$	(13,391	)
Add (deduct):
Net change in equity method investments	—			—
Net change in retirement plans	(256		)	447
Balance, end of period	$	(2,966	)	$	(12,944	)

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15. Business Segment Information

Financial data for TDS’ business segments for the three-month periods ended, or as of March 31, 2010 and 2009, is as follows. TDS Telecom’s incumbent local exchange carriers are designated as “ILEC” in the table and its competitive local exchange carrier is designated as “CLEC.”

Three Months Ended or as of

TDS Telecom

Non-

Other

March 31, 2010

U.S.

ILEC/CLEC

TDS Telecom

Reportable

Reconciling