TELEPHONE & DATA SYSTEMS INC /DE/
10-Q, 2000-05-15
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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- --------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ----------------
                                    FORM 10-Q

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


 X      QUARTERLY REPORT  PURSUANT TO  SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended                 March 31, 2000
                               -------------------------------------------------
                                                        OR
        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

                                  Not Applicable
            ---------------------------------------------------------
           (Former address of principal executive offices) (Zip Code)

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
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 April 28, 2000
        -----------------------------             ------------------------------
        Common Shares, $.01 par value                    53,557,625 Shares
    Series A Common Shares, $.01 par value                6,958,391 Shares

- --------------------------------------------------------------------------------




<PAGE>




                        TELEPHONE AND DATA SYSTEMS, INC.
                        --------------------------------
                         1ST QUARTER REPORT ON FORM 10-Q
                         -------------------------------

                                      INDEX
                                      -----


                                                                        Page No.
                                                                        --------
Part I.      Financial Information

                Management's Discussion and Analysis of
                   Results of Operations and Financial Condition            2-13

                Consolidated Statements of Income -
                   Three Months Ended March 31, 2000 and 1999                 14

                Consolidated Statements of Cash Flows -
                   Three Months Ended March 31, 2000 and 1999                 15

                Consolidated Balance Sheets -
                   March 31, 2000 and December 31, 1999                    16-17

                Notes to Consolidated Financial Statements                 18-25


Part II.     Other Information                                                26


Signatures                                                                    27




<PAGE>



                          PART I. FINANCIAL INFORMATION
                          -----------------------------
                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                -------------------------------------------------
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
          -------------------------------------------------------------
                             AND FINANCIAL CONDITION
                             -----------------------

Telephone  and Data  Systems,  Inc.  ("TDS" or the  "Company")  is a diversified
telecommunications   company  which  provides  high-quality   telecommunications
services to 3.4 million wireless  telephone and telephone  customer units. TDS's
business  development  strategy  is to expand its  existing  operations  through
internal growth and acquisitions,  and to explore and develop telecommunications
businesses that management  believes  utilize TDS's expertise in  customer-based
telecommunications.  The  Company  conducts  substantially  all of its  wireless
telephone operations through its 81.3%-owned subsidiary,  United States Cellular
Corporation ("U.S.  Cellular") and its wireline telephone operations through its
wholly-owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom").

Merger of Aerial Communications, Inc.

In 1999,  the Board of Directors of TDS approved a plan of merger between Aerial
Communications,  Inc.  ("Aerial"),  its over 80%-owned  personal  communications
services company,  and VoiceStream Wireless  Corporation  ("VoiceStream").  As a
result of the merger,  Aerial shareholders will receive 0.455 VoiceStream common
shares for each share of Aerial stock they own. Aerial public  shareholders will
have a right to elect to receive  $18 in cash in lieu of shares of  VoiceStream.
The parties  anticipate that the merger will be tax-free to Aerial  shareholders
that elect to receive VoiceStream stock.

As a result of the board's  approval  of the plan,  the  consolidated  financial
statements  and  supplemental  data of TDS have been  adjusted  to  reflect  the
results of  operations  and net assets of Aerial as  discontinued  operations in
accordance with generally accepted accounting  principles.  Financial statements
for  prior   periods  have  been   reclassified   to  conform  to  current  year
presentation.

TDS  expected  to  recognize  a net  gain  on the  disposition  of  Aerial  and,
accordingly,  deferred  recognition  of Aerial's net  operating  losses of $69.3
million from September 18, 1999 through March 31, 2000.

The merger closed on May 4, 2000. TDS received  35,570,493 shares of VoiceStream
common  stock,  approximately  14% of  VoiceStream's  common  shares  on a fully
converted basis, valued at $3.9 billion at closing. TDS will recognize a gain of
approximately $2.25 billion on this transaction.

TDS was released from its  guarantees of Aerial's  long-term debt at the closing
of the merger.  In addition,  the net settlement of  intercompany  debt due from
Aerial  amounting  to less than $100  million  was repaid at the  closing of the
merger.



                                        2

<PAGE>



RESULTS OF OPERATIONS
- ---------------------

Three Months Ended 3/31/00 Compared to Three Months Ended 3/31/99
- -----------------------------------------------------------------

Operating  Revenues  increased 11% ($49.3 million) during the first three months
of 2000 primarily as a result of a 17.5% increase in customer units served. U.S.
Cellular's  operating  revenues  increased 10% ($34.1 million) as customer units
served increased by 437,000,  or 19.3%, since March 31, 1999, to 2,707,000.  TDS
Telecom operating  revenues  increased 12% ($15.2 million) as total access lines
increased by 63,900, or 11%, since March 31, 1999 to 662,300.

Operating  Expenses  rose 10% ($36.4  million) in the first three months of 2000
reflecting growth in operations. U.S. Cellular's operating expenses increased 9%
($25.1 million) and TDS Telecom's expenses increased 11% ($11.3 million).

Operating  Income  increased  16% to $92.0  million in the first three months of
2000 from $79.1 million in 1999. U.S. Cellular's  operating income increased 17%
to $61.2  million in the first three  months of 2000 from $52.1  million in 1999
and its operating income margin, as a percentage of service  revenues,  expanded
to 17.7% in 2000 from 16.5% in 1999. TDS Telecom's  operating  income  increased
14% to $30.9  million in the first  three  months of 2000 from $27.0  million in
1999 and its operating margin expanded to 21.4% in 2000 from 20.9% in 1999.

Investment  and Other  Income  (Expense)  totaled $9.3 million in 2000 and $10.5
million in 1999.

Investment Income, net, the Company's share of income in unconsolidated entities
in which the Company has a minority  interest,  and follows the equity method of
accounting  decreased 75% ($5.0  million) in the first three months of 2000. The
decrease was primarily due to decreased  operating results related to the paging
interest  offset somewhat by an increase in the aggregate  operating  results of
minority-owned  cellular  interests.  Investment  income is net of  amortization
relating to these minority interests.

As of  March  31,  2000,  the  carrying  value  of  the  paging  investment  was
approximately  $78 million.  The Company has evaluated the carrying value of the
paging investment and will continue to review the carrying value considering the
operations of the investment and the general conditions of the paging industry.

Minority Share of Income  includes the minority  public  shareholders'  share of
U.S.  Cellular's net income,  the minority  shareholders'  or partners' share of
U.S.  Cellular's  subsidiaries' net income or loss and other minority interests.
The  increase in minority  share of income is  primarily  due to the increase in
U.S. Cellular's net income.



                                        3

<PAGE>


<TABLE>
<CAPTION>

                                                   Three Months Ended March 31,
                                                   ----------------------------
                                                   2000        1999      Change
                                                   ----        ----      ------
                                                      (Dollars in thousands)
<S>                                            <C>         <C>         <C>
Minority Share of Income
  U.S. Cellular
     Minority Public Shareholders'             $ (9,037)   $ (5,297)   $ (3,740)
     Minority Shareholders' or Partners'         (1,015)     (1,483)        468
                                               ---------   ---------   ---------
                                                (10,052)     (6,780)     (3,272)
  Other                                            (193)       (181)        (12)
                                               ---------   ---------   ---------
                                               $(10,245)   $ (6,961)   $ (3,284)
                                               =========   =========   =========

</TABLE>

Gain on Sale of Cellular  and Other  Investments  totaled  $17.9  million in the
first three  months of 2000 and $11.6  million in the first three months of 1999
as the Company sold certain non- strategic minority cellular interests and other
investments.

Interest Expense decreased 11% ($2.7 million) in the first three months of 2000.
The decline in interest  expense is  primarily  due to reduced  short-term  debt
balances.

Income  Tax  Expense  increased  33% ($8.1  million)  in 2000  primarily  due to
increased  pretax  income  as a  result  of  improved  operations.  The  overall
effective tax rate on continuing operations was 45.6% in 2000 and 42.9% in 1999.
The increase in the  effective  tax rate was  primarily due to the tax effect of
the gains.

Net Income From  Continuing  Operations  totaled $39.4 million,  or $.63 diluted
earnings  per  share,  in the  first  three  months of 2000,  compared  to $33.0
million,  or $.52 diluted earnings per share, in the first three months of 1999.
The  increase in net income from  continuing  operations  and earnings per share
primarily reflects improved operating results. A summary of net income available
to common and diluted  earnings per share from  continuing  operations and gains
from the sale of cellular and other investments is shown below.
<TABLE>
<CAPTION>

                                                             Three Months Ended
                                                                   March 31,
                                                             -------------------
                                                               2000       1999
                                                             -------    -------
                                                        (Dollars in thousands,
                                                       except per share amounts)
<S>                                                        <C>          <C>
Net Income From Continuing Operations
   Operations                                              $ 32,261     $ 26,013
   Gains                                                      7,090        7,021
                                                            -------     --------
                                                           $ 39,351     $ 33,034
                                                            -------     --------
Diluted Earnings Per Share From Continuing Operations
   Operations                                              $    .52     $    .41
   Gains                                                        .11          .11
                                                            -------     --------
                                                           $    .63     $    .52
                                                            =======     ========

</TABLE>

Net Income Available to Common totaled $39.2 million, or $.63 diluted earnings
per share, in the

                                        4

<PAGE>



first three months of 2000,  compared to $10.1 million, or $.16 diluted earnings
per share, in the first three months of 1999. The net income available to common
in 1999 was reduced by the Loss From Discontinued Operations of $22.6 million or
$.36 per diluted  share.  Losses of $25.1  million in the first three  months of
2000 have  been  deferred  and will be offset  against  the  expected  gain upon
closing of the merger.


U.S. CELLULAR OPERATIONS

TDS  provides   wireless   telephone  service  through  United  States  Cellular
Corporation ("U.S.  Cellular"),  an 81.3%-owned subsidiary.  U.S. Cellular owns,
manages and invests in cellular  markets  throughout  the United  States.  Rapid
growth  in the  customer  base  is a  primary  reason  for  the  growth  in U.S.
Cellular's results of operations.  The number of customer units served increased
by 437,000, or 19.3%, since March 31, 1999, to 2,707,000.

<TABLE>
<CAPTION>

                                                            Three Months Ended
                                                                 March 31,
                                                           ---------------------
                                                           2000            1999
                                                          ------          ------
                                                         (Dollars in thousands)
<S>                                                   <C>              <C>
Operating Revenue
   Local retail                                       $ 247,540        $ 213,511
   Inbound roaming                                       73,251           70,964
   Long-distance and other                               25,169           30,719
                                                       --------         --------
     Service Revenue                                    345,960          315,194
   Equipment sales                                       14,127           10,791
                                                       --------         --------
                                                        360,087          325,985
                                                       --------         --------
Operating Expenses
   System operations                                     47,184           58,691
   Marketing and selling                                 69,458           58,305
   Cost of equipment sold                                34,597           25,441
   General and administrative                            81,687           79,519
   Depreciation                                          51,169           41,616
   Amortization                                          14,839           10,299
                                                       --------         --------
                                                        298,934          273,871
                                                       --------         --------

Operating Income                                      $  61,153        $  52,114
                                                       ========         ========
</TABLE>

Operating  revenue  increased  10% ($34.1  million) in the first three months of
2000 primarily related to the increase in customer units. However, total average
monthly  service  revenue per  customer  decreased  $3.70 to $43.48 in the first
three months of 2000 from $47.18 in 1999. The decline in average monthly service
revenue per customer is primarily  related to lower retail  revenue per customer
($.85),  the larger  increase  in the  customer  base than in  roaming  revenues
($1.41) and the  reduction in  long-distance  charges on roaming  minutes of use
($1.44).

Local retail revenue  increased 16% ($34.0 million) in the first three months of
2000 due primarily to the 19.3%  customer  growth.  Average local minutes of use
per retail customer increased 27% to 128 in 2000 from 101 in 1999, while average
local  retail  revenue  per minute  continued  to  decline in 2000.  Competitive
pressures and U.S.  Cellular's  use of pricing and other  incentive  programs in
order to stimulate  overall usage resulted in a lower average revenue per minute
of use. Average monthly

                                        5

<PAGE>



local  retail  revenue  per  customer  declined 3% ($.85) to $31.11 in 2000 from
$31.96 in 1999.

Inbound  roaming  revenue  (charges to customers  of other  systems who use U.S.
Cellular's  cellular  systems when roaming)  increased 3% ($2.3  million) in the
first three months of 2000.  The growth in inbound  roaming  revenue in 2000 was
affected by an increase in roaming  minutes of use and a decrease in revenue per
minute due to the  downward  trend in  negotiated  rates.  Both the  increase in
minutes of use and the decrease in revenue per minute of use were  significantly
affected  by  certain  pricing  programs  offered by other  wireless  companies.
Wireless  customers who sign up for these programs are given price incentives to
roam in other  markets,  including  U.S.  Cellular's  markets,  thus  driving an
increase  in  U.S.   Cellular's  inbound  roaming  minutes  of  use.  Management
anticipates  that the  growth  rate in  inbound  roaming  minutes of use will be
slower  throughout  2000 due to these  pricing  programs  being  present in both
periods of comparison.  Additionally, as new wireless operators begin service in
U.S. Cellular markets, roaming partners could switch their business to these new
operators,  further  slowing the growth in inbound roaming minutes of use. It is
also  anticipated  that average  inbound  roaming revenue per minute of use will
also  continue to decline.  Average  monthly  inbound  roaming  revenue per U.S.
Cellular  customer  decreased 13% ($1.41) to $9.21 in 2000 compared to $10.62 in
1999. The decrease is  attributable  to a larger  increase in the U.S.  Cellular
customer base than in inbound roaming revenue.

Long-distance  and other revenue decreased 18% ($5.6 million) in the first three
months  of 2000.  While  the  volume  of  long-distance  calls  have  increased,
long-distance  revenue  declined due to price  reductions  primarily  related to
long-distance  charges on roaming minutes of use. These  reductions,  similar to
the price  reductions on roaming  airtime  charges,  are a  continuation  of the
industry  trend toward  reduced per minute  prices.  The price  reductions  also
reduced  the  growth  in  the  outbound  roaming  expense  component  of  system
operations  expense by approximately  the same amount,  resulting in no material
effect on U.S.  Cellular's  operating  cash flow or  operating  income.  Average
monthly  long-distance  and other revenue per customer  decreased 31% ($1.44) to
$3.16 in 2000 compared to $4.60 in 1999.

Operating expenses increased 9% ($25.1 million) during the first three months of
2000. The increase is primarily related to costs incurred to expand the customer
base and increased  depreciation and amortization expense,  offset somewhat by a
decrease in system operations expense.

Costs to expand the customer base consist of marketing and selling  expenses and
the cost of equipment sold.  Marketing and selling expenses increased 19% ($11.2
million)  in the  first  three  months  of 2000  while  cost of  equipment  sold
increased 36% ($9.2  million).  These  expenses,  less equipment  sales revenue,
represent the cost to acquire a new customer.  Equipment sales revenue increased
31% ($3.3  million) in the first three months of 2000.  Cost per gross  customer
addition increased to $338 in 2000 from $319 in 1999. Gross customer activations
increased  to 266,000 in 2000 from  229,000 in 1999.  The  increase  in cost per
gross customer  addition was primarily  driven by increased  commissions,  which
resulted from an increase in percentage of gross activations produced by agents,
and an  increase in  equipment  subsidies  primarily  driven by the sale of more
dual-mode phones, which on average generate greater equipment subsidies than the
sale of analog phones.  The increase in sales of dual-mode  phones is related to
the growth in number of U.S.  Cellular's  systems  providing  digital  coverage,
which enables U.S. Cellular to offer its customers more features, better clarity
and increased roaming capabilities.

System operations expenses (costs to provide service) decreased 20%
($11.5 million) and

                                        6

<PAGE>



consumed 13.6% of service revenues in 2000 and 18.6% in 1999.  System operations
expenses include customer usage expenses and maintenance,  utility and cell site
expenses.  The decrease in system  operations  expense was  primarily due to the
$16.1 million decrease in net outbound  roaming expenses  reflecting a reduction
in cost per minute of use related to the lower  roaming  prices in the  industry
discussed  previously.  The  decrease  was  partially  offset  by the  effect of
increases in local and roaming minutes of use.

General and  administrative  expenses  increased 3% ($2.2  million) and consumed
23.6% of service  revenues in 2000 and 25.2% in 1999.  The  overall  increase in
administrative  expenses  reflects the growing  customer base and other expenses
incurred  related  to the  growth in U.S.  Cellular's  business.  U.S.  Cellular
incurred  additional  costs  in 2000  by  providing  dual-mode  phone  units  to
customers  who  migrated  from analog to digital rate plans.  This  increase was
partially offset by decreases in consulting expenses and nonincome taxes.

Depreciation  expense  increased 23% ($9.6 million) in 2000 primarily due to the
12% increase in average  fixed  assets since March 31, 1999,  and a reduction in
the useful  lives of certain  assets  beginning  in 2000.  Amortization  expense
increased 44% ($4.5  million) in 2000 primarily  related to U.S.  Cellular's new
billing and information  system.  Beginning October 1, 1999, U.S. Cellular began
amortizing  the  development  costs of the new billing and  information  system,
totaling $118 million, over a seven year period.

Operating  income  increased  17% ($9.0  million) to $61.2  million in the first
three months of 2000. The  improvement  was primarily  driven by the substantial
growth in customer units and revenue.  Operating margin, as a percent of service
revenue, improved to 17.7% in 2000 compared to 16.5% in 1999.

Management  expects service revenues to continue to grow during the remainder of
2000; however,  management anticipates that average monthly revenue per customer
will decrease in 2000 as local retail and inbound  roaming revenue per minute of
use  decline  and as U.S.  Cellular  further  penetrates  the  consumer  market.
Management  continues to believe  seasonal trends exist in both service revenue,
which  tend to  increase  more  slowly  in the first and  fourth  quarters,  and
operating  expenses  which  tend  to be  higher  in the  fourth  quarter  due to
increased  marketing  activities and customer growth,  which may cause operating
income to vary from quarter to quarter.  Additionally,  competitors  licensed to
provide  PCS  services  have  initiated  service in  certain of U.S.  Cellular's
markets  over the past four  years.  U.S.  Cellular  expects  PCS  operators  to
continue  deployment of PCS in portions of all of its market clusters throughout
2000 and 2001. U.S. Cellular has increased its advertising since 1997 to promote
its brand and to  distinguish  its service  from other  wireless  communications
providers.  U.S.  Cellular's  management  continues  to monitor  other  wireless
communications   providers'   strategies  to  determine   how  this   additional
competition is affecting U.S.  Cellular's results.  Management  anticipates that
customer  growth  will be  lower in the  future,  primarily  as a result  of the
increase in the number of competitors in U.S. Cellular's markets.



                                        7

<PAGE>



TDS TELECOM OPERATIONS

TDS operates  its wireline  telephone  business  through TDS  Telecommunications
Corporation  ("TDS  Telecom"),  a  wholly-owned  subsidiary.  Total access lines
served by TDS  Telecom  increased  by 63,900,  or 11%,  since  March 31, 1999 to
662,300. TDS Telecom's 104 incumbent local exchange ("ILEC") subsidiaries served
576,100  access lines at March 31, 2000, a 4% increase  over the 554,900  access
lines at March 31, 1999.  TDS  Telecom's  competitive  local  exchange  ("CLEC")
subsidiaries  served  86,200  access lines at March 31, 2000  compared to 43,500
access lines at March 31, 1999. TDS Telecom plans to expand its CLEC  operations
into certain mid-sized cities which are geographically proximate to existing TDS
Telecom markets.

<TABLE>
<CAPTION>

                                                           Three Months Ended
                                                                March 31,
                                                           -------------------
                                                            2000         1999
                                                           ------       ------
                                                          (Dollars in thousands)
<S>                                                      <C>          <C>
Local Telephone Operations
   Operating Revenue
       Local service                                     $  40,111    $  36,389
       Network access and long-distance                     69,256       66,297
       Miscellaneous                                        17,004       15,601
                                                          ---------    ---------
                                                           126,371      118,287
                                                          ---------    ---------
   Operating Expenses
     Operating expenses                                     62,035       59,558
     Depreciation and Amortization                          30,760       29,272
                                                         ---------     ---------
                                                            92,795       88,830
                                                         ---------     ---------

              Local Telephone Operating Income           $  33,576    $  29,457
                                                         ---------    ----------
Competitive Local Exchange Operations
   Operating Revenue                                     $  18,214    $  11,103
                                                         ---------    ---------
Operating Expenses
     Operating expenses                                     18,968       12,321
     Depreciation and Amortization                           1,960        1,285
                                                         ---------    ----------
                                                            20,928       13,606
                                                         ---------    ----------
         Competitive Local Exchange Operating (Loss)        (2,714)      (2,503)
                                                         ----------   ----------
   Intercompany revenues                                      (415)        (425)
   Intercompany expenses                                      (415)        (425)
                                                         ----------   ----------

     Operating Income                                    $  30,862    $  26,954
                                                         =========    ==========
</TABLE>

Operating  revenue  increased  12% ($15.2  million) in the first three months of
2000, reflecting primarily customer growth.

Revenue from local telephone operations increased 7% ($8.1 million) in the first
three  months of 2000.  Average  monthly  revenue per access line  increased  3%
($1.88)  to $73.41 in the first  three  months of 2000 from  $71.53 in the first
three months of 1999. Local service revenue  increased 10% ($3.7 million) during
2000.  Access line growth  increased  revenues by $1.7 million while the sale of
custom-calling and advanced features  increased  revenues by $1.3 million.  Rate
increases added $750,000 to revenues.  Average monthly local service revenue per
access line was $23.30 in 2000

                                        8

<PAGE>



and $22.01 in 1999. Network access and long-distance  revenue increased 4% ($3.0
million)  during  2000.  Revenue  generated  from  access  minute  growth due to
increased network usage increased $1.6 million in 2000.  Compensation from state
and national  revenue pools due to increased  costs of providing  network access
added $1.0 million to revenues. Average monthly network access and long-distance
revenue  per access  line was  $40.23 in 2000 and $40.09 in 1999.  Miscellaneous
revenue increased 9% ($1.4 million) during 2000.  Average monthly  miscellaneous
revenue per access line was $9.88 in 2000 and $9.43 in 1999.

Revenue from competitive local exchange operations  increased 64% ($7.1 million)
in the first three months of 2000 as access lines served  increased to 86,200 at
March 31, 2000 from 43,500 at March 31, 1999.

Operating  expenses  increased 11% ($11.3  million)  during 2000.  Expenses from
local  telephone  operations  increased by 4% ($4.0  million) in the first three
months  of 2000.  Local  telephone  expenses  as a  percent  of local  telephone
revenues  were 73.4% in the first three  months of 2000 and 75.1% in 1999.  Cash
operating expenses increased by 4% ($2.5 million) in 2000 while depreciation and
amortization increased 5% ($1.5 million). Local telephone operating expenses are
expected to increase due to inflation and the  development  and  introduction of
new  revenue-producing  programs.  Competitive local exchange operating expenses
increased 54% ($7.3  million) in the first three months of 2000 due primarily to
the costs  incurred  to grow the  customer  base and provide  competitive  local
exchange services.

Operating  income  increased  14% ($3.9  million) to $30.9  million in the first
three months of 2000 reflecting  improved local telephone  operations  operating
results.  Operating income from local telephone  operations  increased 14% ($4.1
million)  to $33.6  million.  Operating  loss from  competitive  local  exchange
operations increased 8% ($211,000).

Operating income from local telephone  operations should remain fairly stable or
increase slightly with expense increases due to inflation and additional revenue
and  expenses  from new or expanded  product  offerings.  Operating  income from
competitive  local  exchange  operations is expected to decline  somewhat in the
next three quarters due to costs  associated  with continued  expansion into new
markets.


Revenue Recognition

In December 1999,  the SEC issued Staff  Accounting  Bulletin No. 101,  "Revenue
Recognition in Financial  Statements ("SAB 101")." SAB 101 provides  guidance on
the recognition,  presentation and disclosure of revenue in financial satements.
On March 24, 2000, the SEC issued Staff Accounting Bulletin No. 101A "Amendment:
Revenue Recognition in Financial Statements". SAB 101A allows companies to defer
the reporting of a change in accounting principle, as required by SAB 101, until
the second quarter of the current fiscal year. Management is currently analyzing
the impact of this bulletin.
                                        9

<PAGE>



FINANCIAL RESOURCES AND LIQUIDITY

Cash Flows From  Continuing  Operating  Activities.  The  Company is  generating
substantial internal funds from the operations of U.S. Cellular and TDS Telecom.
Cash flows from operating  activities  totaled $144.6 million in the first three
months of 2000 compared to $100.5 million in 1999.

Net income from continuing  operations excluding all noncash items increased 23%
($27.8  million)  to $147.4  million  in the  first  three  months of 2000.  The
increase  primarily  reflects  the  18%  ($29.2  million)  growth  in  aggregate
operating  cash flow  (operating  income plus  depreciation  and  amortization).
Changes in assets and liabilities from operations  required $2.8 million in 2000
and $19.1 million in 1999.

<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                               March 31,
                                                         -----------------------
                                                         2000            1999
                                                        ------          ------
                                                          (Dollars in thousands)
<S>                                                   <C>             <C>

Net Income from continuing operations                 $  39,351       $  33,034
Noncash items included in Net Income
   from continuing operations                           108,042          86,512
                                                      ---------       ----------
Net Income from continuing operations
   excluding all noncash items                          147,393         119,546
Changes in assets and liabilities
   from operations                                       (2,800)        (19,072)
                                                      ----------      ----------
                                                      $ 144,593       $ 100,474
                                                      =========       ==========
</TABLE>

Cash  Flows  From  Continuing  Investing   Activities.   TDS  makes  substantial
investments  each  year to  acquire,  construct,  operate  and  maintain  modern
high-quality  communications  networks  and  facilities  as a basis for creating
long-term value for shareowners.  Cash flows from investing  activities required
$48.5  million in the first three  months of 2000  compared to $96.4  million in
1999 reflecting primarily capital  expenditures.  Capital expenditures  required
$75.9  million in 2000 and $106.2  million  in 1999.  Acquisitions,  net of cash
acquired,  required $8.1 million in 1999.  The sales of  non-strategic  cellular
interests  and other  investments  provided  $22.5  million  in 2000,  and $14.3
million in 1999, reducing total cash flows required for investing  activities in
each period.

The  primary  purpose  of  TDS's  construction  and  expansion  strategy  is  to
continually expand and improve the quality of its telecommunications networks in
order  to  provide  improved  services  to  customers.   U.S.  Cellular  capital
expenditures   totaled   $59.8  million  in  2000  and  $84.7  million  in  1999
representing  the  construction of cell sites, the development of office systems
and the change out of analog radio  equipment for digital radio  equipment.  TDS
Telecom capital  expenditures totaled $16.1 million in 2000 and $21.6 million in
1999 representing amounts spent on accommodating growth in existing ILEC markets
and expansion of new and existing CLEC markets.

Cash Flows  From  Continuing  Financing  Activities.  Cash flows from  financing
activities  required  $111.9  million  in the  first  three  months  of 2000 and
provided $35.7 million in 1999.  During the first three months of 2000, TDS paid
$59.6  million to  repurchase  TDS Common  Shares and U.S.  Cellular  paid $51.5
million to repurchase U.S.  Cellular Common Shares.  The Company increased Notes
Payable  balances by $7.7 million in 2000 and $40.6  million in 1999.  Dividends
paid on Common and

                                       10

<PAGE>



Preferred Shares,  excluding dividends reinvested,  totaled $7.8 million in 2000
and $7.2 million in 1999.

In February 2000, the TDS Board of Directors  authorized the repurchase of up to
2.0 million TDS Common Shares. As of March 31, 2000, the Company has repurchased
545,000 common shares under this program. In March 2000, the U.S. Cellular Board
of Directors authorized the repurchase of up to 1.4 million U.S. Cellular Common
Shares. A total of 652,300 common shares were repurchased  under this program as
of March 31, 2000.  An  additional  165,000  U.S.  Cellular  Common  Shares were
purchased  in the first  quarter of 2000  pursuant  to a  previously  authorized
program to repurchase a limited amount of shares on a quarterly basis, primarily
for use in employee benefit plans.

Cash  Flows  From  Discontinued  Operations.  Cash  outflows  from  discontinued
operations  totaled  $51.3  million in 2000  compared  to $36.4  million in 1999
reflecting  primarily amounts borrowed from TDS to fund the operating activities
of Aerial.

LIQUIDITY

TDS  anticipates  that the  aggregate  resources  required for 2000 will include
approximately  $330 million for U.S. Cellular capital additions and $140 million
for TDS Telecom capital additions.

TDS and its  subsidiaries  had cash and  temporary  investments  totaling  $47.9
million at March 31, 2000. TDS also had $587 million of bank lines of credit for
general  corporate  purposes  at March 31,  2000.  Unused  amounts of such lines
totaled $579.3 million.  These line of credit agreements  provide for borrowings
at negotiated rates up to the prime rate.

U.S. Cellular plans to finance its cellular construction program using primarily
internally  generated cash. U.S.  Cellular's  operating cash flow totaled $508.9
million for the twelve months ended March 31, 2000, up 25% ($100.5 million) from
1999.  U.S.  Cellular  had $500  million  of bank  lines of credit  for  general
corporate  purposes at March 31,  2000,  all of which was unused.  These line of
credit  agreements  provide for borrowings at the London InterBank  Offered Rate
("LIBOR") plus 26.5 basis points.

TDS Telecom plans to finance its construction program using primarily internally
generated  cash  supplemented  by long-term  financing  from federal  government
programs.  TDS  Telecom's  operating  cash flow totaled  $244.0  million for the
twelve months ended March 31, 2000,  up 14% ($29.5  million) from 1999. At March
31, 2000, TDS Telecom  telephone  subsidiaries  had $112.8 million in unadvanced
loan  funds  from  federal   government   programs  to  finance  the   telephone
construction activities.

Pursuant to current Board authorizations  discussed above, TDS and U.S. Cellular
plan to continue the  repurchase of their common  shares,  as market  conditions
warrant, on the open market or at negotiated prices in private transactions.  In
May 2000, the U.S.  Cellular Board of Directors  authorized the repurchase of an
additional 1.4 million U.S. Cellular Common Shares. The repurchase  programs are
intended to create value for the shareholders.  The repurchases of common shares
will be funded by internal cash flow, supplemented by short-term borrowings.

Management  believes that internal cash flows and funds  available from cash and
cash equivalents, lines of credit, and longer-term financing commitments provide
sufficient financial flexibility. TDS and

                                       11

<PAGE>



its subsidiaries  have access to public and private capital markets to help meet
its long-term  financing needs. TDS and its  subsidiaries  anticipate  accessing
public and private capital markets to issue debt and equity securities only when
and if capital  requirements,  financial  market  conditions  and other  factors
warrant.

U.S.  Cellular's LYONs are convertible,  at the option of their holders,  at any
time prior to maturity, redemption or purchase, into U.S. Cellular Common Shares
at a  conversion  rate of 9.475 U.S.  Cellular  Common  Shares per Liquid  Yield
Option Note ('LYON").  Upon conversion,  U.S. Cellular has the option to deliver
to holders either U.S.  Cellular Common Shares or cash equal to the market value
of the U.S. Cellular Common Shares into which the LYONs are convertible.

Under the terms of the LYONs, on June 15, 2000, U.S.  Cellular will be required,
at the option of each holder of LYONs,  to purchase LYONs for a price of $411.99
for each LYON (the "Put  Value").  Each LYON has a face  value of  $1,000.00  at
maturity.  Pursuant to the  preceding  terms,  on May 15,  2000,  U.S.  Cellular
commenced a tender offer to purchase the LYONs for cash in the amount of $411.99
for each LYON. Pursuant to the terms of the LYONs, U.S. Cellular has elected not
to become obligated to offer to purchase the LYONs at their accreted value as of
June 15, 2005.

Based on current market prices for U.S.  Cellular Common Shares,  the conversion
value of the LYONs is greater than the Put Value.  Accordingly,  U.S. Cellular's
management  believes it is unlikely the holders of LYONs will exercise their put
rights on June 15, 2000. However,  there can be no assurance that the conversion
value of the LYONs will exceed the Put Value on or shortly  prior that date.  If
the conversion  value declines so that it is near or below the Put Value,  it is
possible that some or all holders of LYONs may exercise  their option to require
U.S.  Cellular  to  purchase  the LYONs.  In the event that any holders of LYONs
exercise this option, U.S. Cellular intends to finance such purchases using cash
on hand and,  if  necessary,  borrowing  under its $500  million  bank  lines of
credit.

In addition,  under the terms of the LYONs,  U.S.  Cellular  may, at any time or
after June 15,  2000,  redeem LYONs for cash at a price equal to the issue price
plus accrued  original issue discount  through the date of redemption.  However,
holders  of LYONs must be  notified  of such  redemption  between 30 and 60 days
prior to the date of the  redemption.  During  the  period  between  the date of
notice and the  redemption  date, as at any other time,  any holder of LYONs may
exercise his conversion rights.

The  U.S.   Cellular   Board  of  Directors   has   authorized   management   to
opportunistically  repurchase LYONs in private  transactions.  U.S. Cellular may
also purchase a limited amount of Lyons in open-market transactions from time to
time.



                                        12
<PAGE>

MARKET RISK

The  Company is subject to market  rate risks due to  fluctuations  in  interest
rates and equity  markets.  The majority of the Company's debt is in the form of
long-term  fixed-rate  notes,  debentures  and trust  securities  with  original
maturities ranging up to 40 years.  Accordingly,  fluctuations in interest rates
can lead to  fluctuations  in the fair  value of such  instruments.  TDS has not
entered  into  financial  derivatives  to reduce its  exposure to interest  rate
risks.  There have been no material changes to TDS's  outstanding debt and trust
securities instruments since December 31, 1999.

TDS maintains a portfolio of available  for sale  marketable  equity  securities
which resulted primarily from the sale of non-strategic assets. The market value
of  these  investments, principally  Vodafone  AirTouch plc American  Depository
Receipts, Illuminet Holdings, Inc. common shares, and Rural Cellular Corporation
common shares, amounted to $893.8 million at March 31, 2000.  A hypothetical 10%
decrease  in  the  share  prices of  these  investments  would result in a $89.4
million decline in the market value of the investments.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this Quarterly  Report contain  statements  that
are not based on historical fact, including the words "believes," "anticipates,"
"intends,"   "expects,"  and  similar   words.   These   statements   constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown  risks,  uncertainties  and other  factors  that may  cause  the  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 factors include:
*    general economic and business  conditions,  both nationally and in the
     regions in which TDS operates,
*    technology changes,
*    competition,
*    changes in business strategy or development plans,
*    changes in governmental regulation,
*    availability of future financing, and
*    changes in growth in cellular customers, penetration rates and churn rates.

TDS undertakes no obligation to update publicly any  forward-looking  statements
whether as a result of new  information,  future  events or  otherwise.  Readers
should evaluate any statements in light of these important factors.


                                       13

<PAGE>

                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                -------------------------------------------------
                        CONSOLIDATED STATEMENTS OF INCOME
                        ---------------------------------
                                    Unaudited
                                    ---------
<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                                March 31,
                                                           --------------------
                                                            2000           1999
                                                           ------         ------
                                                          (Dollars in thousands,
                                                       except per share amounts)
<S>                                                      <C>          <C>
OPERATING REVENUES
    U.S. Cellular                                        $ 360,087    $ 325,985
    TDS Telecom                                            144,170      128,965
                                                         ---------    ---------
                                                           504,257      454,950
                                                         ---------    ----------
OPERATING EXPENSES
    U.S. Cellular                                          298,934      273,871
    TDS Telecom                                            113,308      102,011
                                                         ---------    ----------
                                                           412,242      375,882
                                                         ---------    ----------
OPERATING INCOME                                            92,015       79,068
                                                         ---------    ----------
INVESTMENT AND OTHER INCOME
    Interest and dividend income                             2,470        1,702
    Investment income, net of amortization                   1,659        6,643
    Gain on sale of cellular and other investments          17,851       11,551
    Other (expense), net                                    (2,411)      (2,389)
    Minority share of (income)                             (10,245)      (6,961)
                                                         ----------   ----------
                                                             9,324       10,546
                                                         ----------   ----------
INCOME BEFORE INTEREST AND INCOME TAXES                    101,339       89,614
Interest expense                                            22,829       25,563
Minority interest in income of subsidiary trust              6,203        6,203
                                                         ----------   ----------
INCOME FROM CONTINUING OPERATIONS
    BEFORE INCOME TAXES                                     72,307       57,848
Income tax expense                                          32,956       24,814
                                                         ----------   ----------

NET INCOME FROM CONTINUING OPERATIONS                       39,351       33,034
                                                         ----------   ----------

Discontinued Operations                                       --        (43,149)
Tax effect of discontinued operations                         --         20,515
                                                         ----------   ----------
DISCONTINUED OPERATIONS - NET OF TAX                          --        (22,634)
                                                         ----------   ----------
NET INCOME                                                  39,351       10,400
Preferred Dividend Requirement                                (134)        (350)
                                                         ----------   ----------

NET INCOME AVAILABLE TO COMMON                           $  39,217    $  10,050
                                                         =========    ==========
WEIGHTED AVERAGE COMMON
    SHARES (000s)                                           61,078       61,279

BASIC EARNINGS PER SHARE
    Continuing operations                                $    0.64    $    0.53
    Discontinued Operations                                   --          (0.37)
                                                         ----------   ----------
                                                         $    0.64    $    0.16
                                                         =========    ==========
DILUTED EARNINGS PER SHARE
    Continuing Operations                                $    0.63    $    0.52
    Discontinued Operations                                   --          (0.36)
                                                         ----------   ----------
                                                         $    0.63    $    0.16
                                                         =========    ==========
DIVIDENDS PER SHARE                                      $     .12    $    .115
                                                         =========    ==========
</TABLE>
[FN]
              The accompanying notes to financial statements are an
                       integral part of these statements.
</FN>
                                       14

<PAGE>




                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                -------------------------------------------------
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
                                    Unaudited
                                    ---------
<TABLE>
<CAPTION>

                                                             Three Months Ended
                                                                  March 31,
                                                              ------------------
                                                              2000        1999
                                                             ------      ------
                                                          (Dollars in thousands)
<S>                                                        <C>         <C>

CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
    Net income from continuing operations                  $ 39,351    $ 33,034
    Add (Deduct) adjustments to reconcile net income
        from continuing operations to net cash provided
        by operating activities
           Depreciation and amortization                     98,729      82,471
           Deferred taxes                                     8,588       7,896
           Investment income                                 (4,958)     (9,867)
           Minority share of income                          10,245       6,961
           Gain on sale of cellular and other investments   (17,851)    (11,551)
           Noncash interest expense                           4,581       4,401
           Other noncash expense                              8,708       6,201
           Change in accounts receivable                     44,680      13,554
           Change in materials and supplies                     418       4,848
           Change in accounts payable                       (25,636)    (20,673)
           Change in accrued interest                       (13,347)    (13,148)
           Change in accrued taxes                              433       2,438
           Change in other assets and liabilities            (9,348)     (6,091)
                                                          ---------    ---------
                                                            144,593     100,474
                                                          ---------    ---------

CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES
    Capital expenditures                                   (75,908)    (106,243)
    Acquisitions, net of cash acquired                          --       (8,131)
    Investments in and advances to investment
        entities and license costs                            (730)       1,633
    Distributions from investments                           5,827        6,100
    Proceeds from investment sales                          22,500       14,295
    Other investing activities                                (194)      (4,011)
                                                          ---------    ---------
                                                           (48,505)     (96,357)
                                                          ---------    ---------

CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
    Long-term debt borrowings                                  837        1,756
    Repayments of long-term debt                            (3,773)      (3,846)
    Change in notes payable                                  7,700       40,637
    Dividends paid                                          (7,835)      (7,183)
    Repurchase of Common Shares                            (59,571)          --
    Purchase of subsidiary common stock                    (51,522)          --
    Other financing activities                               2,223        4,385
                                                          ---------    ---------
                                                          (111,941)      35,749
                                                          ---------    ---------
CASH FLOWS FROM DISCONTINUED OPERATIONS                    (51,319)     (36,399)
                                                          ---------    ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS -                                (67,172)       3,467
    Beginning of period                                    111,010       45,139
                                                         ----------    ---------
    End of period                                        $  43,838     $ 48,606
                                                        ==========     =========
</TABLE>

[FN]
         The accompanying notes to financial statements are an integral
                           part of these statements.
</FN>

                                       15

<PAGE>

<TABLE>
<CAPTION>


                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                -------------------------------------------------
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                                     ASSETS
                                     ------
                                                       (Unaudited)
                                                        March 31,   December 31,
                                                            2000         1999
                                                         ----------   ----------
                                                          (Dollars in thousands)
<S>                                                      <C>          <C>
CURRENT ASSETS
    Cash and cash equivalents                           $    43,838  $   111,010
    Temporary investments                                     4,045        4,983
    Accounts receivable from customers and others           274,136      317,025
    Materials and supplies, at average cost,
        and other current assets                             76,751       74,990
                                                         ----------   ----------
                                                            398,770      508,008
                                                         ----------   ----------
INVESTMENTS
    Intangible Assets
        Cellular license acquisition costs, net           1,150,004    1,156,175
        Franchise costs and other costs, net                176,365      177,677
    Investments in unconsolidated entities                  262,045      272,601
    Marketable equity securities                            893,844      843,280
    Other investments                                        28,799       28,837
                                                         ----------   ----------
                                                          2,511,057    2,478,570
                                                         ----------   ----------

PROPERTY, PLANT AND EQUIPMENT, NET
    U.S. Cellular                                         1,206,017    1,206,467
    TDS Telecom                                             873,317      889,422
                                                         ----------   ----------
                                                          2,079,334    2,095,889
                                                         ----------   ----------
OTHER ASSETS AND DEFERRED CHARGES                            54,000       56,216
                                                         ----------   ----------
NET ASSETS OF DISCONTINUED OPERATIONS                       288,292      237,145
                                                         ----------   ----------
    TOTAL ASSETS                                        $ 5,331,453  $ 5,375,828
                                                         ==========   ==========


</TABLE>
[FN]
         The accompanying notes to financial statements are an integral
                           part of these statements.
</FN>

                                       16

<PAGE>


<TABLE>
<CAPTION>

                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                -------------------------------------------------
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

                                                       (Unaudited)
                                                         March 31,  December 31,
                                                            2000        1999
                                                         ---------     ---------
                                                          (Dollars in thousands)
<S>                                                      <C>          <C>
CURRENT LIABILITIES
    Current portion of long-term debt                    $  14,953    $  14,967
    Notes payable                                            7,700          --
    Accounts payable                                       177,735      206,937
    Advance billings and customer deposits                  47,705       43,965
    Accrued interest                                        10,145       23,492
    Accrued taxes                                           20,148       19,773
    Accrued compensation                                    29,574       35,939
    Other current liabilities                               25,563       24,599
                                                        -----------   ----------
                                                           333,523      369,672
                                                        -----------   ----------

DEFERRED LIABILITIES AND CREDITS                           450,979      424,515
                                                        -----------   ----------

LONG-TERM DEBT, excluding current portion                1,277,774    1,279,877
                                                        -----------   ----------

MINORITY INTEREST in subsidiaries                          499,295      509,658
                                                        -----------   ----------

COMPANY-OBLIGATED MANDATORILY REDEEMABLE
    PREFERRED SECURITIES of Subsidiary Trusts
    Holding Solely Company Subordinated Debentures (a)     300,000      300,000
                                                        -----------   ----------

PREFERRED SHARES                                            8,806         9,005
                                                        -----------   ----------
COMMON STOCKHOLDERS' EQUITY
    Common Shares, par value $.01 per share                   554           554
    Series A Common Shares, par value $.01 per share           70            70
    Capital in excess of par value                      1,874,786     1,897,402
    Treasury Shares, at cost (1,725,889 and 1,237,207
      shares, respectively)                              (158,789)     (102,975)
    Accumulated other comprehensive income                203,960       179,071
    Retained earnings                                     540,495       508,979
                                                      ------------  ------------
                                                        2,461,076     2,483,101
                                                      ------------  ------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY        $ 5,331,453   $ 5,375,828
                                                      ===========   ============
</TABLE>

[FN]

(a) The sole asset of TDS Capital I is $154.6 million  principal  amount of 8.5%
subordinated  debentures  due 2037 from TDS. The sole asset of TDS Capital II is
$154.6 million principal amount of 8.04%  subordinated  debentures due 2038 from
TDS.

         The accompanying notes to financial statements are an integral
                           part of these statements.
</FN>

                                       17

<PAGE>



                TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Basis of Presentation

      The consolidated  financial  statements included herein have been prepared
      by the Company,  without audit,  pursuant to the rules and  regulations of
      the Securities and Exchange  Commission.  Certain information and footnote
      disclosures   normally  included  in  financial   statements  prepared  in
      accordance  with  generally  accepted  accounting   principles  have  been
      condensed or omitted pursuant to such rules and regulations,  although the
      Company believes that the disclosures are adequate to make the information
      presented  not  misleading.   It  is  suggested  that  these  consolidated
      financial   statements  be  read  in  conjunction  with  the  consolidated
      financial  statements  and the notes  thereto  included  in the  Company's
      latest annual report on Form 10-K.

      The accompanying  unaudited  consolidated financial statements contain all
      adjustments  (consisting  of only normal  recurring  items)  necessary  to
      present  fairly the  financial  position as of March 31, 2000 and December
      31,  1999,  and the  results  of  operations  and cash flows for the three
      months ended March 31, 2000 and 1999.  The results of  operations  for the
      three months ended March 31, 2000 and 1999, are not necessarily indicative
      of the results to be expected for the full year.

2.    Discontinued Operations

      In 1999,  the Board of Directors of TDS approved a plan of merger  between
      Aerial  Communications,  Inc.  ("Aerial"),  its  over  80%-owned  personal
      communications  services  company,  and VoiceStream  Wireless  Corporation
      ("VoiceStream").  As a result  of the  merger,  Aerial  shareholders  will
      receive  0.455  VoiceStream  common  shares for each share of Aerial stock
      they own. Aerial public shareholders will have a right to elect to receive
      $18 in cash in lieu of shares of VoiceStream.  The parties anticipate that
      the merger will be tax-free to Aerial  shareholders  that elect to receive
      VoiceStream  stock. The merger  agreement  provides for TDS to be released
      from its guarantees of Aerial's long-term debt and vendor financing at the
      closing of the merger.

      As a  result  of the  board's  approval  of  the  plan,  the  consolidated
      financial  statements of TDS and  supplemental  data have been adjusted to
      reflect  the results of  operations  and net assets of the  subsidiary  as
      discontinued  operations in accordance with generally accepted  accounting
      principles.  Financial statements for prior periods have been reclassified
      to conform to current year presentation.

      TDS  expected to  recognize a net gain on the  disposition  of Aerial and,
      accordingly,  has deferred recognition of Aerial's net operating losses of
      $25.1  million  in the  first  quarter  of 2000  and  $69.3  million  from
      September  18, 1999 through  March 31,  2000. See Footnote 10 - Subsequent
      Event.









                                       18

<PAGE>








Net assets of discontinued operations are as follows:
<TABLE>
<CAPTION>
                                             March 31, 2000    December 31, 1999
                                             --------------   -----------------
                                                   (Dollars in thousands)
<S>                                            <C>             <C>
Current Assets
   Cash and temporary investments              $  20,835       $   5,261
   Accounts receivable                            37,159          32,223
   Inventory                                       9,798           8,336
   Other current assets                            5,946           5,565
Investments
   Broadband PCS license costs, net              301,952         303,913
   Other Investments                               6,717           3,263
Property, plant and equipment                    620,232         619,913
Other assets and deferred charges                    197             204
Current portion vendor credit agreement         (121,273)       (103,765)
Accounts payable                                 (31,518)        (35,230)
Accrued taxes                                     (7,325)         (7,419)
Accrued compensation                              (6,552)         (9,732)
Other accrued expenses                            (4,971)         (4,676)
Deferred income tax liability                   (146,284)       (147,696)
Long-term debt                                  (255,664)       (250,846)
Minority interest in subsidiaries               (210,248)       (226,348)
Losses deferred after measurement date            69,291          44,179
                                              ----------      ----------
                                               $ 288,292       $ 237,145
                                              ==========      ==========
</TABLE>


                                       19

<PAGE>





Summarized  income statement  information  relating to discontinued  operations,
excluding  any  corporate  charges  and  intercompany  interest  expense,  is as
follows:
<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                               March 31,
                                                         ----------------------
                                                          2000           1999
                                                         -----          ------
                                                         (Dollars in thousands)
<S>                                                   <C>             <C>
Revenues                                              $  67,529       $  50,541
Expenses                                                121,472         100,375
                                                      ---------       ----------
Operating (Loss)                                        (53,943)        (49,834)
Minority share of loss                                   11,655          10,102
Other income                                              5,255           1,591
Interest expense                                         (6,330)         (5,008)
                                                      ----------      ----------
(Loss) Before Income Taxes                              (43,363)        (43,149)
Income tax benefit                                       18,251          20,515
                                                      ----------      ----------
     Net (Loss)                                       $ (25,112)      $ (22,634)
Losses deferred after measurement date                   25,112            --
                                                      ----------      ----------
Net (Loss) From Discontinued Operations               $    --         $ (22,634)
                                                      ==========      ==========
</TABLE>




Summarized cash flow statement  information relating to discontinued  operations
is as follows:
<TABLE>
<CAPTION>
                                                           Three Months Ended
                                                               March 31,
                                                         -----------------------
                                                           2000          1999
                                                          ------        ------
                                                         (Dollars in thousands)
<S>                                                     <C>           <C>
Cash flows from operating activities                    $ (18,173)    $ (31,327)
Cash flows from financing activities                       (4,444)          739
Cash flows from investing activities                      (13,128)       (5,924)
                                                         ---------     ---------
Cash provided (used) by discontinued operations           (35,745)      (36,512)
(Increase) decrease in cash included in Net
      assets of discontinued operations                   (15,574)          113
                                                         ---------     ---------
Cash flows from discontinued operations                 $ (51,319)    $ (36,399)
                                                         =========     =========
</TABLE>




                                       20

<PAGE>




3.    Marketable Equity Securities

      Marketable equity securities  include the Company's  investments in equity
      securities,  primarily Vodafone AirTouch plc American  Depository Receipts
      ("VOD ADRs"),  Illuminet  Holdings,  Inc. common shares and Rural Cellular
      Corporation   common   shares.   These   securities   are   classified  as
      available-for-sale and stated at fair market value.

      Information  regarding  the  Company's  marketable  equity  securities  is
      summarized below.
<TABLE>
<CAPTION>

                                               March 31, 2000  December 31, 1999
                                               --------------   ----------------
                                                      (Dollars in thousands)
<S>                                               <C>             <C>
Available-for-sale Equity Securities
    Aggregate Fair Value                               $ 893,844       $ 843,280
    Adjusted Basis                                       517,870         517,870
                                                      ----------       ---------
    Gross Unrealized Holding Gains                       375,974         325,410
    Tax Effect                                           150,450         130,616
                                                      ----------      ----------
    Unrealized Holding Gains, net of tax                 225,524         194,794
    Minority Share of Unrealized Holding Gains            21,564          15,723
                                                      ----------      ----------
    Net Unrealized Holding Gains                       $ 203,960       $ 179,071
                                                      ==========      ==========

</TABLE>


4.    Common Stockholders' Equity

      In February 2000, the TDS Board of Directors  authorized the repurchase of
      up to 2.0  million  TDS  Common  Shares.  As of March  31,  2000,  TDS has
      repurchased 545,000 common shares under this program.

5.    Gains from Sale of Cellular and Other Investments

      Gains from the sale of cellular interests and other investments  primarily
      reflect gains recorded on the sale of a minority cellular interest in 2000
      and a minority cellular interest and certain other investments in 1999.



                                       21

<PAGE>




6.    Other Comprehensive Income

      The  Company's  Comprehensive  Income  includes Net Income and  Unrealized
      Gains  from   Marketable   Equity   Securities   that  are  classified  as
      "available-for-sale".   The  following  table   summarizes  the  Company's
      Comprehensive Income.
<TABLE>
<CAPTION>

                                                             Three Months Ended
                                                                  March 31,
                                                            --------------------
                                                          2000             1999
                                                         ------           ------
                                                         (Dollars in thousands)
<S>                                                    <C>            <C>
Accumulated Other Comprehensive Income

      Balance, beginning of period                     $ 179,071      $  75,609

         Unrealized gains on securities                   50,564        129,727
         Income tax effect                               (19,834)       (52,092)
                                                       ----------     ----------
                                                          30,730         77,635
         Minority share of unrealized gains               (5,841)       (11,809)
                                                       ----------     ----------
      Net unrealized gains                                24,889         65,826
                                                       ----------     ----------
      Balance, end of period                           $ 203,960      $ 141,435
                                                       ==========     ==========
</TABLE>
<TABLE>
<CAPTION>



                                                           Three Months Ended
                                                                March 31,
                                                          ----------------------
                                                           2000           1999
                                                           ----           ----
                                                         (Dollars in thousands)
<S>                                                      <C>            <C>
Comprehensive Income
     Net Income                                          $ 39,351       $ 10,400
     Net unrealized gains (losses)
        on securities                                      24,889         65,826
                                                          -------       --------
                                                          $64,240       $ 76,226
                                                          =======       ========
</TABLE>













                                       22

<PAGE>






7.   Earnings Per Share

     The amounts used in  computing  Earnings per Common Share and the effect on
     income and the weighted average number of Common and Series A Common Shares
     of dilutive potential common stock are as follows:
<TABLE>
<CAPTION>

                                                           Three Months Ended
                                                               March 31,
                                                           --------------------
                                                           2000            1999
                                                           ----            ----
                                                          (Dollars in thousands)
<S>                                                       <C>          <C>
Net Income from Continuing Operations                     $ 39,351     $ 33,034
Less:  Preferred Dividends                                    (134)        (350)
                                                          ---------    ---------
Net Income from Continuing Operations
     used in Basic Earnings per Share                       39,217       32,684
Loss on Discontinued Operations                               --        (22,634)
                                                          ---------    ---------
Net Income Available to Common used
     in Basic Earnings per Share                          $ 39,217     $ 10,050
                                                          ========     =========
Net Income from Continuing Operations
     used in Basic Earnings per Share                     $ 39,217     $ 32,684
Reduction in preferred dividends if Preferred
     Shares converted in Common Shares                          78          110
Minority income adjustment                                    (206)        (477)
                                                          ---------    ---------
Net Income from Continuing Operations
     used in Diluted Earnings per Share                   $ 39,089     $ 32,317
Loss on Discontinued Operations                               --        (22,634)
                                                          --------     ---------
Net Income Available to Common used
     in Diluted Earnings per share                        $ 39,089     $  9,683
                                                          ========     =========

Weighted Average Number of Common Shares
     used in Basic Earnings per Share                       61,078       61,279
Effect of Dilutive Securities:
     Common Shares outstanding if Preferred
        Shares converted                                       216          323
     Stock options and stock appreciation rights               530          193
     Common Shares issuable                                     13           13
                                                          --------     ---------
Weighted Average Number of Common Shares
     used in Diluted Earnings per Share                     61,837       61,808
                                                          ========     =========
</TABLE>
[FN]
The minority income  adjustment  reflects the additional  minority share of U.S.
Cellular's income computed as if all of U.S. Cellular's issuable securities were
outstanding.
</FN>



                                       23

<PAGE>




8.    Supplemental Cash Flow Information

      Cash and cash equivalents include cash and those short-term, highly liquid
      investments  with  original  maturities  of three  months  or less.  Those
      investments  with original  maturities of more than three months to twelve
      months are classified as temporary investments.  Temporary investments are
      stated at cost, which approximates market. Those investments with original
      maturities of more than 12 months are  classified  with other  investments
      and are stated at amortized cost.

      TDS acquired certain cellular  licenses in 1999. In conjunction with these
      acquisitions,  the following assets were acquired and liabilities  assumed
      and Common Shares issued.
<TABLE>
<CAPTION>

                                                          Three Months Ended
                                                               March 31,
                                                          -------------------
                                                                 1999
                                                                 ----
                                                        (Dollars in thousands,
                                                       except per share amounts)
<S>                                                            <C>

Cellular licenses                                              $ 5,464
Decrease in minority interest                                    2,667
                                                                ------
Decrease in cash due to acquisitions                           $ 8,131
                                                                ======
</TABLE>


The following table summarizes interest and income taxes paid, and other noncash
transactions.
<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                                 March 31,
                                                            --------------------
                                                            2000           1999
                                                            ----           ----
                                                          (Dollars in thousands)
<S>                                                       <C>           <C>
Interest Paid
   Continuing Operations                                  $ 31,418      $ 34,135
   Discontinued Operations                                   1,448           533
Income Taxes Paid (net of income tax refund
   received of $15,000 in 2000)                             (6,233)        6,515
Common Shares issued by TDS for
   conversion of TDS Preferred Stock                      $   --        $  1,874


</TABLE>

                                       24

<PAGE>




9.    Business Segment Information

      Financial data for the Company's  business  segments for each of the three
      month periods ended or at March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>

Three Months Ended                                                                   Discontinued
or at March 31, 2000                U.S. Cellular     TDS Telecom     All Other (1)  Operations         Total
- --------------------                -------------     -----------     ------------   ----------         -----
 (Dollars in thousands)
<S>                                 <C>               <C>              <C>          <C>             <C>
Operating revenues                  $    360,087      $     144,170    $        --  $         --    $    504,257
Operating cash flow                      127,161             63,582             --            --         190,743
Depreciation and
    amortization expense                  66,008             32,720             --            --          98,782
Operating income                          61,153             30,862             --            --          92,015
Total Assets                           3,325,817          1,441,235        276,109       288,292       5,331,453
Capital expenditures                $     59,831      $      16,077    $        --   $        --    $     75,908

Three Months Ended                                                                    Discontinued
or at March 31, 1999                U.S. Cellular     TDS Telecom      All Other (1)  Operations         Total
- --------------------                -------------     -----------      -------------  ----------         -----
 (Dollars in thousands)

Operating revenues                  $    325,985      $     128,965    $        --    $        --    $    454,950
Operating cash flow                      104,029             57,511             --             --         161,540
Depreciation and
    amortization expense                  51,915             30,557             --             --          82,472
Operating income                          52,114             26,954             --             --          79,068
Total Assets                           3,129,795          1,386,966        165,359        459,568       5,141,688
Capital expenditures                $     84,688      $      21,555    $        --    $        --    $    106,243
</TABLE>

[FN]
(1)  Consists  of the TDS  Corporate  operations  and all other  businesses  not
included in the U.S. Cellular or TDS Telecom segments.
</FN>

10.      Subsequent Event

    The merger  between  Aerial  and  VoiceStream  closed on May 4,  2000.  TDS
    received  35,570,493 shares of VoiceStream common stock,  approximately 14%
    of VoiceStream's  common shares on a fully converted basis,  valued at $3.9
    billion  at  closing.  TDS will  recognize  a gain of  approximately  $2.25
    billion on this transaction.

    TDS was  released  from its  guarantees  of Aerial's  long-term  debt at the
    closing of the merger. In addition,  the net settlement of intercompany debt
    due from  Aerial  amounting  to less than  $100  million  was  repaid at the
    closing of the merger.



                                       25

<PAGE>




                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.
- ---------------------------

On April 11, 2000,  two  affiliates of U.S.  Cellular,  along with two unrelated
wireless  carriers,  filed a  declaratory  judgment  action in the United States
District  Court for the  Northern  District of Iowa  against  the Iowa  Attorney
General.  This  action  was  in  response  to  the  Attorney  General's  ongoing
investigation of certain wireless industry practices  involving wireless service
agreements and related matters. The suit by U.S. Cellular and the other wireless
carriers  seeks to have certain  state laws  declared  inapplicable  to wireless
service  agreements and such practices.  In response,  the Iowa Attorney General
filed  suit in the Iowa  State  District  Court  for Polk  County  against  U.S.
Cellular,  alleging  violations  of  various  state  consumer  credit  and other
consumer  protection  laws. The Attorney General is seeking  injunctive  relief,
barring the  enforcement  of  contracts  in excess of four  months,  and related
relief.  The Attorney  General is also seeking  unspecified  reimbursements  for
customers,  statutory  fines  ($40,000  for  certain  violations  and $5,000 for
others,  per  violation)  as well as fees and  costs.  This case has since  been
removed to the U. S.  District  Court for the  Southern  District of Iowa.  U.S.
Cellular  vigorously  denies the  allegations  of the Iowa Attorney  General and
intends to vigorously contest this case.

Item 6.  Exhibits and Reports on Form 8-K.
- ------------------------------------------

    (a) Exhibit 11 -  Computation  of  earnings  per common  share is  included
        herein as footnote 7 to the financial statements.

    (b) Exhibit 12 - Statement regarding computation of ratios.

    (c) Exhibit 27 - Financial  Data  Schedule  for the three months ended March
        31, 2000.

    (d) Reports on Form 8-K filed during the quarter ended March 31, 2000.

        The Company filed a Current  Report on Form 8-K, dated February 24, 2000
        for the purpose of filing two news  releases by the  Company.  The first
        news release,  dated February 24, 2000,  announced that  Shareholders of
        VoiceStream  Wireless  Corporation,  Omnipoint  Corporation,  and Aerial
        Communications,   Inc.   overwhelmingly   approved  the  merger  between
        VoiceStream and Omnipoint,  and VoiceStream and Aerial.  The second news
        release,  dated February 25, 2000,  announced the  authorization  by the
        Board of  Directors  to  repurchase  up to  2,000,000  Common  Shares or
        approximately 3.7% of the Company's public float. The Current Report was
        filed on February 28, 2000.







                                       26

<PAGE>




                                   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   May 15, 2000                        /s/ Sandra L. Helton
- -------------------------------------      -------------------------------------
                                           Sandra L. Helton,
                                           Executive Vice President-Finance
                                           (Chief Financial Officer)



Date   May 15, 2000                        /s/ D. Michael Jack
- ------------------------------------       -------------------------------------
                                           D. Michael Jack,
                                           Vice President and Controller
                                           (Principal Accounting Officer)










Signature page to TDS First Quarter 2000 Form 10Q.

                                       27

<PAGE>




                                                                      Exhibit 12

                        TELEPHONE AND DATA SYSTEMS, INC.
                       RATIOS OF EARNINGS TO FIXED CHARGES
                    For the Three Months ended March 31, 2000
                             (Dollars In Thousands)

<TABLE>
<CAPTION>



EARNINGS:
  <S>                                                                 <C>
  Income from Continuing Operations before
    income taxes                                                      $  72,307
     Add (Deduct):
         Minority Share of Losses                                           (96)
         Earnings on Equity Method                                       (1,658)
         Distributions from Minority Subsidiaries                         5,827
         Minority interest in majority-owned subsidiaries
           that have fixed charges                                        9,244
                                                                      ----------
                                                                         85,624
     Add fixed charges:
         Consolidated interest expense                                   29,032
         Interest Portion (1/3) of Consolidated Rent Expense              3,819
                                                                      ----------
                                                                      $ 118,475
                                                                      ==========
  FIXED CHARGES:
  Consolidated interest expense                                       $  29,032
  Interest Portion (1/3) of Consolidated Rent Expense                     3,819
                                                                      ----------
                                                                      $  32,851
                                                                      ==========
RATIO OF EARNINGS TO FIXED CHARGES                                         3.61
                                                                      ==========
  Tax-Effected Redeemable Preferred Dividends                         $      21
  Fixed Charges                                                          32,851
                                                                      ----------
         Fixed Charges and Redeemable Preferred Dividends             $  32,872
RATIO OF EARNINGS TO FIXED CHARGES                                    ==========
  AND REDEEMABLE PREFERRED DIVIDENDS                                       3.60
                                                                      ==========
  Tax-Effected Preferred Dividends                                    $     226
  Fixed Charges                                                          32,851
                                                                      ----------
         Fixed Charges and Preferred Dividends                        $  33,077
                                                                      ==========
RATIO OF EARNINGS TO FIXED CHARGES
  AND PREFERRED DIVIDENDS                                                  3.58
                                                                      ==========

</TABLE>




<PAGE>


<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
          THIS SCHEDULE  CONTAINS SUMMARY FINANCIAL  INFORMATION  EXTRACTED FROM
          THE CONSOLIDATED  FINANCIAL  STATEMENTS OF TELEPHONE AND DATA SYSTEMS,
          INC. AS OF MARCH 31, 2000, AND FOR THE THREE MONTHS THEN ENDED, AND IS
          QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<MULTIPLIER>                                   1,000


<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                              DEC-31-1999
<PERIOD-START>                                  JAN-1-2000
<PERIOD-END>                                   MAR-31-2000
<CASH>                                              43,838
<SECURITIES>                                       893,844
<RECEIVABLES>                                      284,841
<ALLOWANCES>                                        10,705
<INVENTORY>                                         40,160
<CURRENT-ASSETS>                                   398,770
<PP&E>                                           3,435,022
<DEPRECIATION>                                   1,355,688
<TOTAL-ASSETS>                                   5,331,453
<CURRENT-LIABILITIES>                              333,523
<BONDS>                                          1,277,774
                                    0
                                          8,806
<COMMON>                                               624
<OTHER-SE>                                       2,460,452
<TOTAL-LIABILITY-AND-EQUITY>                     5,331,453
<SALES>                                                  0
<TOTAL-REVENUES>                                   504,257
<CGS>                                                    0
<TOTAL-COSTS>                                      412,242
<OTHER-EXPENSES>                                    (9,324)
<LOSS-PROVISION>                                         0
<INTEREST-EXPENSE>                                  29,032
<INCOME-PRETAX>                                     72,307
<INCOME-TAX>                                        32,956
<INCOME-CONTINUING>                                 39,351
<DISCONTINUED>                                           0
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                        39,351
<EPS-BASIC>                                           0.64
<EPS-DILUTED>                                         0.63



</TABLE>



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