TELEPHONE & DATA SYSTEMS INC /DE/
10-Q, 2000-08-11
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       June 30, 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 July 31, 2000
     -----------------------------------          ------------------------------
         Common Shares, $.01 par value                    53,026,897 Shares
    Series A Common Shares, $.01 par value                 6,962,783 Shares




<PAGE>

                        TELEPHONE AND DATA SYSTEMS, INC.
                        --------------------------------
                         2nd 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              2-14

             Consolidated Statements of Income -
               Three Months and Six Months Ended
               June 30, 2000 and 1999                                      15

             Consolidated Statements of Cash Flows -
               Six Months Ended June 30, 2000 and 1999                     16

             Consolidated Balance Sheets -
               June 30, 2000 and December 31, 1999                       17-18

             Notes to Consolidated Financial Statements                  19-26


Part II.  Other Information                                              27-28


Signatures                                                                29



<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 3.5 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 82.4%-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.

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")  in
September of 1999.  The merger closed on May 4, 2000. As a result of the merger,
Aerial  shareholders  received 0.455 VoiceStream common shares for each share of
Aerial stock they owned. TDS received  35,570,493  shares of VoiceStream  common
stock  valued  at $3.90  billion  at  closing.  TDS  recognized  a gain of $2.15
billion,  net of tax, 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  amounts due from/to Aerial was repaid to TDS 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.

On July 24, 2000, Deutsche Telecom AG announced a proposed merger of VoiceStream
with Deutsche Telecom.  The proposed merger calls for the exchange of 3.2 shares
of Deutsche  Telecom  and $30 for each share of  VoiceStream  owned,  subject to
adjustment under certain circumstances.  In addition,  VoiceStream  stockholders
may  elect to  receive  all cash or all  stock  for  their  shares,  subject  to
proration.  The merger is subject to regulatory  approvals and other conditions,
including stockholder approval. VoiceStream stockholders holding over 50% of the
voting power of the VoiceStream common stock, including TDS, have agreed to vote
for the merger.

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

Six Months Ended 6/30/00 Compared to Six Months Ended 6/30/99
-------------------------------------------------------------

Operating Revenues increased 11% ($102.4 million) during the first six months of
2000  primarily as a result of a 17%  increase in customer  units  served.  U.S.
Cellular's  operating  revenues  increased 10% ($70.8 million) as customer units
served  increased by 443,000,  or 19%,  since June 30, 1999, to  2,807,000.  TDS
Telecom operating  revenues  increased 12% ($31.6 million) as total access lines
increased by 69,500, or 11%, since June 30, 1999 to 682,200.

                                      2

<PAGE>

Operating  Expenses  rose 9% ($65.7  million)  in the  first six  months of 2000
reflecting growth in operations. U.S. Cellular's operating expenses increased 7%
($39.3 million) and TDS Telecom's expenses increased 13% ($26.4 million).

Operating Income increased 20% to $219.4 million in the first six months of 2000
from $182.7 million in 1999. U.S.  Cellular's  operating income increased 25% to
$156.1  million in the first six months of 2000 from $124.6  million in 1999 and
its operating income margin,  as a percentage of service  revenues,  expanded to
21.4% in 2000 from 18.8% in 1999. TDS Telecom's operating income increased 9% to
$63.3 million in the first six months of 2000 from $58.2 million in 1999 and its
operating  margin  declined  to 21.3% in 2000  from  21.9% in 1999.  The  slight
decrease in TDS Telecom's  operating margin was primarily the result of expanded
CLEC activities.

Investment and Other Income (Expense) totaled $(40.7) million in 2000 and $300.2
million in 1999.

Gain (Loss) on Cellular and Other  Investments  totaled  $(32.1)  million in the
first six months of 2000 and $339.9 million in the first six months of 1999. TDS
reduced the carrying  value of its paging  investment  by $50.0 million to $24.7
million,  plus a secured note  receivable  outstanding of $11.0 million,  in the
second  quarter  of 2000 to  reflect  the  reduced  valuations  that the  paging
industry is experiencing. The Company will continue to review the carrying value
considering  the operations of the investment and the general  conditions of the
paging industry.  The sale of a minority  cellular interest in the first quarter
of 2000 resulted in a gain of $17.9 million.

TDS  recognized  a $327.1  million  gain in the  second  quarter  of 1999 on the
difference   between  its  historical   basis  in  its  investment  in  AirTouch
Communications,  Inc.  ("AirTouch")  common  shares  and the  value of  Vodafone
AirTouch plc  American  Depository  Receipts and cash  received in the merger of
AirTouch and Vodafone  Group plc. The remaining  gains in 1999 resulted when the
Company sold or traded certain  non-strategic  minority  cellular  interests and
other investments.

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  decrease in minority  share of income  primarily  reflects  the decrease in
gains at U.S.  Cellular.  Gains  recorded in 1999  increased  minority  share of
income by $29.9 million.
<TABLE>
<CAPTION>
                                                 Six Months Ended
                                                     June 30,
                                                  ---------------
                                                 2000        1999       Change
                                                 ----        ----       ------
                                                  (Dollars in thousands)
<S>                                             <C>         <C>        <C>
Minority Share of (Income)
  U.S. Cellular
    Minority Public Shareholders'               $(18,088)   $(42,448)  $ 24,360
    Minority Shareholders' or Partners'           (4,310)     (3,079)    (1,231)
                                                ---------   ---------  ---------
                                                 (22,398)    (45,527)    23,129
  Other                                             (254)       (228)       (26)
                                                ---------   ---------  ---------
                                                $(22,652)   $(45,755)  $ 23,103
                                                =========   =========  =========
</TABLE>

Interest  Expense  decreased 7% ($3.8  million) in the first six months of 2000.
The decline in interest  expense is  primarily  due to reduced  short-term  debt
balances.

Income Tax Expense  decreased  68% ($114.9  million)  in 2000  primarily  due to
decline in gains  offset  somewhat by improved  operating  results.  The overall
effective tax rate on continuing

                                        3
<PAGE>

operations was 46.0% in 2000 and 40.4% in 1999.  The overall  effective tax rate
on continuing operations, excluding gains and losses was 43.0% in 2000 and 44.9%
in 1999.

Net Income From Continuing  Operations  totaled $64.1 million,  or $1.03 diluted
earnings per share, in the first six months of 2000, compared to $249.7 million,
or $3.99 diluted  earnings per share, in the first six months of 1999.  Improved
operating  results in 2000 were more than offset by the  reduction  in gains.  A
summary of net income  available  to common and diluted  earnings per share from
continuing  operations and gains  (losses) on cellular and other  investments is
shown below.
<TABLE>
<CAPTION>

                                                        Six Months Ended
                                                             June 30,
                                                     ----------------------
                                                     2000              1999
                                                     ----              ----
                                                     (Dollars in thousands,
                                                    except per share amounts)
<S>                                               <C>                <C>
Net Income from Continuing Operations
  Operations                                      $  87,285          $   60,169
  Gains (Losses)                                    (23,170)            189,570
                                                  ----------         -----------
                                                  $  64,115          $  249,739
                                                  ==========         ===========
Diluted Earnings Per Share from
     Continuing Operations
  Operations                                      $    1.41          $      .94
  Gains (Losses)                                       (.38)               3.05
                                                  ----------         -----------
                                                  $    1.03          $     3.99
                                                  ==========         ===========
</TABLE>

Discontinued  Operations.  The gain on disposal of Aerial totaled $2.15 billion,
or $35.02  diluted  earnings  per share in 2000.  Loss on  operations  of Aerial
totaled $(56.8) million, or $(.91) diluted earnings per share in 1999. A loss on
operations  of Aerial of $(37.7)  million in the first half of 2000 was deferred
and recognized as a reduction in the gain on disposal of Aerial.

Extraordinary Item - loss on extinguishment of debt, net of tax, is related to a
private  purchase  by U.S.  Cellular of $25.8  million  face value of its Liquid
Yield Option Notes (LYONs) for $16.5  million.  A net loss of $6.1  million,  or
$(.10)  per  diluted  earnings  per  share,  was  recorded  to  account  for the
difference between the purchase price and the carrying value.

Net Income Available to Common totaled $2.21 billion, or $35.95 diluted earnings
per share, in the first six months of 2000, compared to $192.3 million, or $3.08
diluted  earnings  per  share,  in the first  six  months  of 1999.  Net  income
available  to common in 2000  includes  significant  gains from the  disposal of
Aerial.

                                        4
<PAGE>

U.S. CELLULAR OPERATIONS

TDS  provides   wireless   telephone  service  through  United  States  Cellular
Corporation ("U.S.  Cellular"),  an 82.4%-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 443,000, or 19%, since June 30, 1999, to 2,807,000.
<TABLE>
<CAPTION>


                                           Three Months Ended                     Six Months Ended
                                                 June 30,                              June 30,
                                           ------------------                  -----------------------
                                          2000             1999                2000               1999
                                          ----             ----                ----               ----
                                                             (Dollars in thousands)
<S>                                      <C>               <C>                <C>                <C>
Operating Revenue
  Local service                          $273,738          $234,494           $521,278           $448,005
  Inbound roaming                          75,204            79,114            148,455            150,077
  Long-distance and other                  34,447            34,915             59,616             65,635
                                         --------          --------           --------           --------
    Service Revenue                       383,389           348,523            729,349            663,717
  Equipment Sales                          14,268            12,429             28,395             23,220
                                         --------          --------           --------           --------
                                          397,657           360,952            757,744            686,937
                                         --------          --------           --------           --------

Operating Expenses
  System operations                        50,443            61,641             97,627            120,332
  Marketing and selling                    70,728            63,380            140,186            121,685
  Cost of equipment sold                   30,054            27,659             64,651             53,100
  General and administrative               86,352            79,354            168,039            158,873
  Depreciation                             50,218            46,685            101,387             88,301
  Amortization                             14,907             9,781             29,746             20,080
                                         --------          --------           --------           --------
                                          302,702           288,500            601,636            562,371
                                         --------          --------           --------           --------
Operating Income                         $ 94,955          $ 72,452           $156,108           $124,566
                                         ========          ========           ========           ========
</TABLE>

Operating  revenue increased 10% ($70.8 million) in the first six months of 2000
primarily  related to the increase in customer  units.  However,  total  average
monthly service revenue per customer decreased 8% ($3.74) to $44.97 in the first
six  months of 2000 from  $48.71 in 1999.  The  decline  reflects  lower  retail
revenue per customer ($.74),  lower roaming revenue per customer ($1.86) and the
reduction in long-distance charges primarily on roaming minutes of use ($1.14).

Local retail  revenue  increased 16% ($73.3  million) in the first six months of
2000 due primarily to the 19% customer growth.  Average local minutes of use per
retail  customer  increased  27% to 142 in 2000 from 112 in 1999,  while average
local  retail  revenue  per minute  continued  to  decline in 2000.  Competitive
pressures and U.S.  Cellular's  use of pricing and other  incentive  programs in
order to stimulate  overall usage resulted in a lower average revenue per minute
of use. Average monthly local retail revenue per customer  declined 2% ($.74) to
$32.14 in 2000 from $32.88 in 1999.

Inbound  roaming  revenue  (charges to customers  of other  systems who use U.S.
Cellular's  cellular  systems when roaming)  decreased 1% ($1.6  million) in the
first six months of 2000. The decline in inbound  roaming  revenue in 2000 was a
result of an increase in roaming  minutes of use offset by a decrease in roaming
revenue  per minute due to the  downward  trend in  negotiated  rates.  Both the
decrease  in revenue  per minute of use and the  increase in minutes 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  the remainder of 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

                                        5
<PAGE>

roaming  minutes of use. It is also  anticipated  that average  inbound  roaming
revenue  per minute of use will  continue to decline.  Average  monthly  inbound
roaming  revenue per U.S.  Cellular  customer  decreased 17% ($1.86) to $9.15 in
2000 compared to $11.01 in 1999. The decrease is  attributable  to a decrease in
inbound roaming revenue  compared to an increase in the U.S.  Cellular  customer
base.

Long-distance  and other  revenue  decreased 9% ($6.0  million) in the first six
months  of  2000.  While  the  volume  of  long-distance  calls  has  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 24% ($1.14) to
$3.68 in 2000 compared to $4.82 in 1999.

Operating  expenses  increased 7% ($39.3 million) during the first six 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 15% ($18.5
million) in the first six months of 2000 while cost of equipment  sold increased
22% ($11.6 million). These expenses, less equipment sales revenue, represent the
cost to acquire a new  customer.  Equipment  sales  revenue  increased 22% ($5.2
million)  in the first  six  months of 2000.  Cost per gross  customer  addition
increased  to  $337 in  2000  from  $335 in  1999.  Gross  customer  activations
increased to 524,000 in 2000 from 453,000 in 1999. The increase in marketing and
selling expenses was primarily  driven by increased  commissions and advertising
expenses, which resulted from an increase in gross activations.  The increase in
equipment  subsidies was 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. As of June 30, 2000, 35% of U.S. Cellular's customers were
on digital rate plans compared to 11% as of June 30, 1999.

System  operations  expenses  (costs to provide  service)  decreased  19% ($22.7
million)  and  consumed  13.4% of  service  revenues  in 2000 and 18.1% 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 $30.9  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.  The  decrease  was  partially  offset by the effect of
increases in local and roaming minutes of use.

General and  administrative  expenses  increased 6% ($9.2  million) and consumed
23.0% of service  revenues in 2000 and 23.9% 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 15% ($13.1 million) in 2000 primarily due to the
12% increase in average fixed assets since June 30, 1999, and a reduction in the
useful lives of certain assets beginning in 2000. Amortization expense increased
48% ($9.7 million) in 2000 primarily related to

                                        6
<PAGE>

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.  Annual  amortization  of these  billing  related  costs is
expected to be approximately $17 million.

Operating  income  increased 25% ($31.5  million) to $156.1 million in the first
six 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 21.4% in 2000 compared to 18.8% 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 69,500,  or 11%,  since  June 30,  1999 to
682,200. TDS Telecom's 105 incumbent local exchange ("ILEC") subsidiaries served
594,500  access lines at June 30, 2000,  a 5% increase  over the 564,200  access
lines at June 30,  1999.  TDS  Telecom's  competitive  local  exchange  ("CLEC")
subsidiaries  served  87,700  access  lines at June 30, 2000  compared to 48,500
access lines at June 30, 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                 Six Months Ended
                                                                    June 30,                          June 30,
                                                              ----------------------            ---------------------
                                                              2000              1999            2000             1999
                                                              ----              ----            ----             ----

                                                                            (Dollars in thousands)
<S>                                                        <C>                <C>             <C>             <C>
Local Telephone Operations
  Operating Revenue
    Local service                                          $ 42,102           $ 38,200        $ 82,213        $ 74,589
    Network access and long-distance                         71,872             67,876         141,128         134,173
    Miscellaneous                                            18,227             17,463          35,231          33,064
                                                           ---------          ---------       ---------       ---------
                                                            132,201            123,539         258,572         241,826
                                                           ---------          ---------       ---------       ---------
  Operating Expenses
    Operating expenses                                       66,329             61,209         128,364         120,767
    Depreciation and Amortization                            31,206             29,095          61,966          58,367
                                                           ---------          ---------       ---------       ---------
                                                             97,535             90,304         190,330         179,134
                                                           ---------          ---------       ---------       ---------
      Local Telephone Operating Income                     $ 34,666           $ 33,235        $ 68,242        $ 62,692
                                                           ---------          ---------       ---------       ---------
Competitive Local Exchange Operations
  Operating Revenue                                        $ 20,922           $ 13,215        $ 39,136        $ 24,318
                                                           ---------          ---------       ---------       ---------
Operating Expenses
  Operating expenses                                         20,934             13,798          39,902          26,120
  Depreciation and Amortization                               2,202              1,436           4,162           2,720
                                                           ---------          ---------       ---------       ---------
                                                             23,136             15,234          44,064          28,840
                                                           ---------          ---------       ---------       ---------
    Competitive Local Exchange
      Operating (Loss)                                     $ (2,214)          $ (2,019)       $ (4,928)       $ (4,522)
                                                           ---------          ---------       ---------       ---------
Intercompany revenues                                          (464)              (447)           (879)           (872)
Intercompany expenses                                          (464)              (447)           (879)           (872)
                                                           ---------          ---------       ---------       ---------
  Operating Income                                         $ 32,452           $ 31,216        $ 63,314        $ 58,170
                                                           =========          =========       =========       =========
</TABLE>

Operating revenue increased 12% ($31.6 million) in the first six months of 2000,
reflecting  primarily customer growth.  Revenue from local telephone  operations
increased 7% ($16.7  million) in the first six months of 2000.  Average  monthly
revenue per access line  increased  2% ($1.53) to $74.06 in the first six months
of 2000  from  $72.53 in the first six  months of 1999.  Local  service  revenue
increased 10% ($7.6 million) during 2000.  Internal access line growth increased
revenues by $3.3 million while the sale of custom calling and advanced  features
increased  revenues  by $2.6  million.  Rate  increases  added  $1.1  million to
revenues.  Average  monthly local service  revenue per access line was $23.55 in
2000 and $22.37 in 1999.  Network access and long-distance  revenue increased 5%
($7.0 million) during 2000.  Revenue  generated from access minute growth due to
increased network usage increased $3.8 million in 2000.  Compensation from state
and national  revenue pools due to increased  costs of providing  network access
added $1.4 million to revenues. Average monthly network access and long-distance
revenue  per access  line was  $40.42 in 2000 and $40.24 in 1999.  Miscellaneous
revenue increased 7% ($2.2 million) during 2000.  Average monthly  miscellaneous
revenue per access line was $10.09 in 2000 and $9.92 in 1999.

                                        8
<PAGE>

Revenue from competitive local exchange operations increased 61% ($14.8 million)
in the first six months of 2000 as access  lines  served  increased to 87,700 at
June 30, 2000 from 48,500 at June 30, 1999.

Operating  expenses  increased 13% ($26.4  million)  during 2000.  Expenses from
local  telephone  operations  increased  by 6% ($11.2  million) in the first six
months  of 2000.  Local  telephone  expenses  as a  percent  of local  telephone
revenues  were  73.6% in the  first six  months of 2000 and 74.1% in 1999.  Cash
operating expenses increased by 6% ($7.6 million) in 2000 while depreciation and
amortization increased 6% ($3.6 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  53% ($15.2  million) in the first six months of 2000 due primarily to
the costs  incurred  to grow the  customer  base and provide  competitive  local
exchange services.

Operating  income  increased 9% ($5.1 million) to $63.3 million in the first six
months of 2000 reflecting improved local telephone operations operating results.
Operating income from local telephone  operations increased 9% ($5.5 million) to
$68.2  million.  Operating  loss  from  competitive  local  exchange  operations
increased 9% ($406,000) to $(4.9) million.

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 throughout
2000 due to costs associated with continued expansion into new markets.

                                        9
<PAGE>

Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999

Operating  Revenues  increased 11% ($53.1  million) during the second quarter of
2000 for  reasons  generally  the same as the first six  months.  U.S.  Cellular
revenues  increased 10% ($36.7 million) in 2000. Local retail revenue  increased
17% ($39.2 million) in the second quarter of 2000, while inbound roaming revenue
decreased 5% ($3.9  million).  Average  monthly service revenue per customer was
$46.37 in the second  quarter of 2000 and $50.18 in 1999.  TDS Telecom  revenues
increased 12% ($16.4 million) in the second quarter of 2000 due to the growth in
ILEC  operations  ($8.7 million) and growth in CLEC  operations  ($7.7 million).
Average  monthly  revenue per ILEC access line increased to $74.88 in the second
quarter of 2000 from $73.52 in 1999.

Operating Expenses rose 7% ($29.3 million) during the second quarter of 2000 for
reasons  generally  the same as the first six  months.  U.S.  Cellular  expenses
increased 5% ($14.2 million).  System  operations  expense  decreased 18% ($11.2
million).  Marketing and selling  expenses,  including  cost of equipment  sold,
increased 11% ($9.7 million). Cost per gross customer addition decreased to $335
in the second  quarter  of 2000 from $351 in 1999.  Gross  customer  activations
increased to 258,000 in the second quarter of 2000 from 224,000 in 1999. General
and  Administrative  expense  increased  9%  ($7.0  million).  Depreciation  and
amortization  expense  increased  15%  ($8.7  million).   TDS  Telecom  expenses
increased 14% ($15.1  million) due to growth in ILEC  operations  ($7.2 million)
and in CLEC  operations  ($7.9  million) for reasons  generally  the same as the
first six months.

Operating  Income  increased 23% ($23.7 million) to $127.4 million in the second
quarter of 2000. U.S. Cellular's  operating income increased 31% ($22.5 million)
reflecting  continued growth in customers and revenues.  TDS Telecom's operating
income  increased 4% ($1.2 million)  reflecting  the improved  results from ILEC
activities  offset somewhat by the anticipated  impact of the development of the
CLEC activities.

Investment and Other Income totaled  $(50.1)  million in 2000 and $289.7 million
in 1999. Gain (Loss) on Cellular and Other  Investments  totaled $(50.0) million
in the second  quarter of 2000 compared to $328.3  million in 1999.  TDS reduced
the carrying  value of its paging  investment by $50.0 million to $24.7 million,
plus a secured  note  receivable  outstanding  of $11.0  million,  in the second
quarter of 2000 to reflect the reduced  valuations  that the paging  industry is
experiencing.  The Company  recorded a $327.1 million gain related to the merger
of AirTouch and Vodafone  Group plc in 1999.  Investment  Income  increased $6.9
million to $7.6 million primarily due to improvements in the aggregate operating
results of minority-owned cellular interests.

Minority Share of (Income) decreased $26.4 million in the second quarter of 2000
primarily due to the decrease in gains at U.S.  Cellular.  Gains recorded in the
second quarter of 1999 increased minority income by $29.9 million.
<TABLE>
<CAPTION>

                                                              Three Months Ended
                                                                   June 30,
                                                            ----------------------
                                                            2000              1999             Change
                                                            ----              ----             ------
                                                                       (Dollars in thousands)
<S>                                                     <C>                <C>               <C>
Minority Share of (Income)
  U.S. Cellular
    Minority Shareholders' Share                        $  (9,052)         $ (37,150)        $  28,098
    Minority Partners' Share                               (3,295)            (1,596)           (1,699)
                                                        ----------         ----------        ----------
                                                          (12,347)           (38,746)           26,399
  Other                                                       (60)               (48)              (12)
                                                        ----------         ----------        ----------
                                                        $ (12,407)         $ (38,794)        $  26,387
                                                        ==========         ==========        ==========
</TABLE>

Interest  Expense  decreased  4% ($1.1  million) to $24.6  million in the second
quarter of 2000 for

                                        10
<PAGE>

reasons generally the same as the first six months.

Income Tax Expense decreased to $21.8 million in the second quarter of 2000 from
$144.8  million in 1999  primarily due to the large gains  recorded in 1999. The
overall  effective  tax rate on  continuing  operations  was 46.8% in the second
quarter of 2000 and 40.1% in 1999. The overall  effective tax rate on continuing
operations, excluding gains was 43.0% in 2000 and 45.8% in 1999.

Net Income From  Continuing  Operations  totaled $24.8 million,  or $.40 diluted
earnings per share,  in the second quarter of 2000,  compared to $216.7 million,
or $3.47 diluted earnings per share, in the second quarter of 1999. The improved
operating results in 2000 were overshadowed by the reduction in gains. A summary
of net income from  continuing  operations  and diluted  earnings per share from
operations and gains (losses) is shown below.
<TABLE>
<CAPTION>

                                                                    Three Months Ended
                                                                         June 30,
                                                                ---------------------------
                                                                2000                   1999
                                                                ----                   ----
                                                             (Dollars in thousands, except per
                                                                      share amounts)
<S>                                                           <C>                    <C>
Net Income from Continuing Operations
  Operations                                                  $   55,024             $  34,156
  Gains (Losses)                                                 (30,260)              182,549
                                                              -----------            ----------
                                                              $   24,764             $ 216,705
                                                              ===========            ==========

Diluted Earnings Per Share from
      Continuing Operations
  Operations                                                  $      .90             $     .54
  Gains (Losses)                                                    (.50)                 2.93
                                                              -----------            ----------
                                                              $      .40             $    3.47
                                                              ===========            ==========
</TABLE>

Discontinued  Operations.  The gain on disposal of Aerial totaled $2.15 billion,
or $35.25  diluted  earnings  per share in the second  quarter of 2000.  Loss on
operations of Aerial totaled  $(34.2)  million,  or $(.55) diluted  earnings per
share in the second  quarter of 1999. A loss on  operations of Aerial of $(12.6)
million in the second quarter of 2000 was deferred and recognized as a reduction
in the gain on disposal of Aerial.

Extraordinary Item - loss on extinguishment of debt, net of tax, is related to a
private  purchase  by U.S.  Cellular of $25.8  million  face value of its Liquid
Yield Option Notes (LYONs) for $16.5  million.  A net loss of $6.1  million,  or
$(.10)  per  diluted  earnings  per  share,  was  recorded  to  account  for the
difference between the purchase price and the carrying value.

Net Income Available to Common totaled $2.17 billion, or $35.55 diluted earnings
per share, in the second quarter of 2000,  compared to $182.2 million,  or $2.92
diluted  earnings per share, in the second quarter of 1999. Net income available
to common in 2000 includes significant gains from the disposal of Aerial.

                                        11
<PAGE>

Revenue Recognition

In December 1999, the  Securities and Exchange  Commission  ("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  statements.  On June 26,  2000,  the SEC issued  Staff
Accounting Bulletin No. 101B "Second Amendment: Revenue Recognition in Financial
Statements".  SAB 101B allows  companies  to defer the  reporting of a change in
accounting  principle,  as required by SAB 101,  until the fourth quarter of the
current  fiscal  year.   Management  continues  to  analyze  this  bulletin  and
anticipates the impact to be immaterial.

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  $367.3 million in the first six
months of 2000 compared to $198.4 million in 1999.

Net income from continuing  operations excluding all noncash items increased 29%
($72.3  million) to $323.4 million in the first six months of 2000. The increase
primarily  reflects the 18% ($64.5 million)  growth in aggregate  operating cash
flow (operating  income plus depreciation and  amortization).  Changes in assets
and  liabilities  from  operations  provided  $43.9 million in 2000 and required
$52.7 million in 1999.  Cash provided by the change in assets and liabilities in
2000  primarily  relates  to an  increase  in accrued  taxes and a  decrease  in
materials and supplies,  and accounts receivable,  offset somewhat by a decrease
in accounts  payable.  Cash required in 1999  primarily  reflects an increase in
accounts receivable and a decrease in accounts payable.
<TABLE>
<CAPTION>

                                                                       Six Months Ended
                                                                            June 30,
                                                                   -------------------------
                                                                   2000                 1999
                                                                   ----                 ----
                                                                    (Dollars in thousands)

<S>                                                             <C>                  <C>
Net Income from continuing operations                           $  64,115            $ 249,739
Noncash items included in Net Income
  from continuing operations                                      259,281                1,349
                                                                ----------           ----------
Net Income from continuing operations
  Excluding all noncash items                                     323,396              251,088
Changes in assets and liabilities
  from operations                                                  43,863              (52,670)
                                                                ----------           ----------
                                                                $ 367,259            $ 198,418
                                                                ==========           ==========
</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
$225.8  million in the first six months of 2000  compared  to $148.6  million in
1999 reflecting primarily capital  expenditures.  Capital expenditures  required
$175.4  million in 2000 and $210.6  million in 1999.  Acquisitions,  net of cash
acquired,  required $73.2 million in 2000 and $8.1 million in 1999. TDS acquired
a telephone  company,  a majority  interest in one  cellular  market and several
minority  cellular  interests  in the  first six  months  of 2000.  The sales of
non-strategic cellular interests and other investments provided $22.5 million in
2000,  and $57.6  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  $129.8  million  in  2000  and  $161.9  million  in

                                        12
<PAGE>

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 $45.6 million in 2000 and
$48.8  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 $192.4 million in the first six months of 2000 and provided
$24.9  million in 1999.  During the first six  months of 2000,  TDS paid  $143.0
million to repurchase TDS Common Shares and U.S. Cellular paid $135.8 million to
repurchase  U.S.  Cellular  Common Shares.  The Company  increased Notes Payable
balances by $122.0 million in 2000 and $42.4 million in 1999.  Dividends paid on
Common and  Preferred  Shares,  excluding  dividends  reinvested,  totaled $15.5
million in 2000 and $14.6 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 June 30, 2000, the Company has repurchased
1,262,700 common shares under this program. The U.S. Cellular Board of Directors
authorized  the repurchase of 1.4 million U.S.  Cellular  Common Shares in March
2000 and an  additional  1.4 million  shares in May 2000.  A total of  1,735,400
common shares were repurchased  under these two programs as of June 30, 2000. An
additional  327,600 U.S.  Cellular Common Shares were purchased in the first six
months 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  $5.0  million  in 2000  compared  to $40.5  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  $60.1
million at June 30, 2000.  TDS also had $587 million of bank lines of credit for
general  corporate  purposes  at June 30,  2000.  Unused  amounts  of such lines
totaled $465 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 $540.1
million for the twelve months ended June 30, 2000, up 24% ($103.3  million) from
1999.  In addition,  U.S.  Cellular had $500 million of bank lines of credit for
general corporate purposes at June 30, 2000, all of which was unused. These line
of credit agreements provide for borrowings at the London InterBank Offered Rate
("LIBOR") plus 19.5 basis points.

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.

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.  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.

TDS Telecom plans to finance its construction program using primarily internally
generated  cash

                                        13
<PAGE>

supplemented  by long-term  financing  from  federal  government  programs.  TDS
Telecom's operating cash flow totaled $248.1 million for the twelve months ended
June 30,  2000,  up 10% ($22.4  million)  from 1999.  In  addition,  TDS Telecom
telephone  subsidiaries had $112.1 million in unadvanced loan funds from federal
government programs to finance the telephone construction  activities as of June
30, 2000.

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 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.

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 owns a portfolio of marketable equity securities.  The market value of these
investments,  principally  VoiceStream  Wireless  Corporation  common shares and
Vodafone AirTouch plc American  Depository Receipts amounted to $4.86 billion at
June 30,  2000.  A  hypothetical  10%  decrease  in the  share  prices  of these
investments  would result in a $486.3 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, churn rates and
roaming 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.

                                        14
<PAGE>
<TABLE>
<CAPTION>

                                                                    TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                                                                    -------------------------------------------------
                                                                            CONSOLIDATED STATEMENTS OF INCOME
                                                                            ---------------------------------
                                                                                          Unaudited
                                                                                          ---------

                                                                     Three Months Ended                 Six Months Ended
                                                                          June 30,                           June 30,
                                                                    ---------------------             --------------------
                                                                    2000              1999            2000            1999
                                                                    ----              ----            ----            ----
                                                                      (Dollars in thousands, except per share amounts)
<S>                                                              <C>                <C>            <C>             <C>
OPERATING REVENUES
  U.S. Cellular                                                  $  397,657         $ 360,952      $  757,744      $  686,937
  TDS Telecom                                                       152,659           136,307         296,829         265,272
                                                                 -----------        ----------     -----------     -----------
                                                                    550,316           497,259       1,054,573         952,209
                                                                 -----------        ----------     -----------     -----------
OPERATING EXPENSES
  U.S. Cellular                                                     302,702           288,500         601,636         562,371
  TDS Telecom                                                       120,207           105,091         233,515         207,102
                                                                 -----------        ----------     -----------     -----------
                                                                    422,909           393,591         835,151         769,473
                                                                 -----------        ----------     -----------     -----------

OPERATING INCOME                                                    127,407           103,668         219,422         182,736
                                                                 -----------        ----------     -----------     -----------
INVESTMENT AND OTHER INCOME
  Interest and dividend income                                        4,824             1,645           7,294           3,347
  Investment income, net of amortization                              7,551               650           9,210           7,293
  Gain (Loss) on cellular and other investments                     (50,000)          328,341         (32,149)        339,892
  Other (expense), net                                                  (23)           (2,154)         (2,434)         (4,543)
  Minority share of (income)                                        (12,407)          (38,794)        (22,652)        (45,755)
                                                                 -----------        ----------     -----------     -----------
                                                                    (50,055)          289,688         (40,731)        300,234
                                                                 -----------        ----------     -----------     -----------

INCOME BEFORE INTEREST AND INCOME TAXES                              77,352           393,356         178,691         482,970
Interest expense                                                     24,618            25,677          47,447          51,240
Minority interest in income of subsidiary trust                       6,202             6,202          12,405          12,405
                                                                 -----------        ----------     -----------     -----------

INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES                                                46,532           361,477         118,839         419,325
Income tax expense                                                   21,768           144,772          54,724         169,586
                                                                 -----------        ----------     -----------     -----------

NET INCOME FROM CONTINUING OPERATIONS                                24,764           216,705          64,115         249,739
                                                                 -----------        ----------     -----------     -----------
Discontinued Operations
  Loss from operations of Aerial, net of tax                             --           (34,162)             --         (56,796)
  Gain on disposal of Aerial, net of tax                          2,150,082                --       2,150,082              --
                                                                 -----------        ----------     -----------     -----------
                                                                  2,150,082           (34,162)      2,150,082         (56,796)
                                                                 -----------        ----------     -----------     -----------

NET INCOME BEFORE EXTRAORDINARY ITEM                              2,174,846           182,543       2,214,197         192,943
  Extraordinary Item - loss on extinguishment of debt,
    net of tax                                                       (6,106)               --          (6,106)             --
                                                                 -----------        ----------     -----------     -----------

NET INCOME                                                       $2,168,740          $182,543      $2,208,091      $  192,943
                                                                 -----------        ----------     -----------     -----------

Preferred Dividend Requirement                                         (131)             (337)           (266)           (687)
                                                                 -----------        ----------     -----------     -----------

NET INCOME AVAILABLE TO COMMON                                   $2,168,609         $ 182,206      $2,207,825      $  192,256
                                                                 -----------        ----------     -----------     -----------

BASIC WEIGHTED AVERAGE COMMON SHARES (000s)                          60,306            61,399          60,692          61,339

BASIC EARNINGS PER SHARE (Note 8)
  Net income from continuing operations                          $     0.41         $    3.52      $     1.05      $     4.06
  Net income available to common                                 $    35.96         $    2.97      $    36.38      $     3.13
                                                                 ===========        ==========     ===========     ===========
DILUTED EARNINGS PER SHARE (Note 8)
  Net income from continuing operations                          $     0.40         $    3.47      $     1.03      $     3.99
  Net income available to common                                 $    35.55         $    2.92      $    35.95      $     3.08
                                                                 ===========        ==========     ===========     ===========
DIVIDENDS PER SHARE                                              $     .125         $     .115     $      .25      $      .23
                                                                 ===========        ==========     ===========     ===========

                       The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
                                        15
<PAGE>
<TABLE>
<CAPTION>

                                         TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                                         -------------------------------------------------
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                -------------------------------------
                                                            Unaudited
                                                            ---------
                                                                                     Six Months Ended
                                                                                         June 30,
                                                                                 ------------------------
                                                                                 2000                1999
                                                                                 ----                ----
                                                                                 (Dollars in thousands)
  <S>                                                                        <C>                  <C>
  CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
    Net income from continuing operations                                    $   64,115           $  249,739
    Add (Deduct) adjustments to reconcile net income from
      continuing operations to net cash provided
      by operating activities
        Depreciation and amortization                                           197,261              169,468
        Deferred taxes                                                           (4,199)             115,495
        Investment income                                                       (15,797)             (13,966)
        Minority share of income                                                 22,652               45,755
        (Gain) Loss on cellular and other investments                            32,149             (339,892)
        Noncash interest expense                                                  9,083                8,829
        Other noncash expense                                                    18,132               15,660
        Change in accounts receivable                                             6,343              (27,988)
        Change in materials and supplies                                         10,840               (5,812)
        Change in accounts payable                                              (15,208)             (27,375)
        Change in accrued taxes                                                  28,244                5,685
        Change in other assets and liabilities                                   13,644                2,820
                                                                             -----------          -----------
                                                                                367,259              198,418
                                                                             -----------          -----------

  CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES
    Capital expenditures                                                       (175,391)            (210,607)
    Acquisitions, net of cash acquired                                          (73,184)              (8,131)
    Investments in and advances to investment
      entities and license costs                                                   (959)                 413
    Distributions from investments                                               10,516               13,437
    Proceeds from investment sales                                               22,500               57,614
    Other investing activities                                                   (9,271)              (1,316)
                                                                             -----------          -----------
                                                                               (225,789)            (148,590)
                                                                             -----------          -----------

  CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
    Long-term debt borrowings                                                     1,657                2,469
    Repayments of long-term debt                                                (24,390)              (8,316)
    Change in notes payable                                                     121,991               42,351
    Dividends paid                                                              (15,464)             (14,585)
    Repurchase of common shares                                                (143,000)                  --
    Purchase of subsidiary common stock                                        (135,793)                  --
    Other financing activities                                                    2,599                2,937
                                                                             -----------          -----------
                                                                               (192,400)              24,856
                                                                             -----------          -----------

  CASH FLOWS FROM DISCONTINUED OPERATIONS                                        (4,953)             (40,464)
                                                                             -----------          -----------

  NET INCREASE IN CASH AND CASH EQUIVALENTS                                     (55,883)              34,220
  CASH AND CASH EQUIVALENTS -
    Beginning of period                                                         111,010               45,139
                                                                             -----------          -----------
    End of period                                                            $   55,127           $   79,359
                                                                             ===========          ===========



                     The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
                                        16
<PAGE>
<TABLE>
<CAPTION>

                                        TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                                        -------------------------------------------------
                                                CONSOLIDATED BALANCE SHEETS
                                                ---------------------------
                                                        ASSETS
                                                        ------

                                                                       (Unaudited)
                                                                     June 30, 2000        December 31, 1999
                                                                     -------------        -----------------
                                                                         (Dollars in thousands)
<S>                                                                   <C>                   <C>
CURRENT ASSETS
  Cash and cash equivalents                                           $    55,127           $   111,010
  Temporary investments                                                     4,969                 4,983
  Accounts receivable from customers and others                           324,099               317,025
  Materials and supplies, at average cost,
    and other current assets                                               68,772                74,990
                                                                      ------------          ------------
                                                                          452,967               508,008
                                                                      ------------          ------------

INVESTMENTS

  Marketable equity securities                                          4,863,011               843,280
  Intangible Assets
    Cellular license acquisitions costs, net                            1,145,502             1,156,175
    Franchise costs and other costs, net                                  197,700               177,677
  Investments in unconsolidated entities                                  285,035               272,601
  Other investments                                                        27,255                28,837
                                                                      ------------          ------------
                                                                        6,518,503             2,478,570
                                                                      ------------          ------------

PROPERTY, PLANT AND EQUIPMENT, NET
  U.S. Cellular                                                         1,221,535             1,206,467
  TDS Telecom                                                             879,755               889,422
                                                                      ------------          ------------
                                                                        2,101,290             2,095,889
                                                                      ------------          ------------

OTHER ASSETS AND DEFERRED CHARGES                                          50,545                56,216
                                                                      ------------          ------------

NET ASSETS OF DISCONTINUED OPERATIONS                                          --               237,145
                                                                      ------------          ------------
    TOTAL ASSETS                                                      $ 9,123,305           $ 5,375,828
                                                                      ============          ============



              The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
                                        17
<PAGE>
<TABLE>
<CAPTION>

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

                                                                            (Unaudited)
                                                                           June 30, 2000        December 31, 1999
                                                                           -------------        -----------------
                                                                                 (Dollars in thousands)
<S>                                                                         <C>                   <C>
CURRENT LIABILITIES
  Current portion of long-term debt                                         $     15,128          $     14,967
  Notes payable                                                                  121,991                    --
  Accounts payable                                                               182,681               206,937
  Advance billings and customer deposits                                          48,859                43,965
  Accrued interest                                                                23,788                23,492
  Accrued taxes                                                                   31,500                19,773
  Accrued compensation                                                            35,211                35,939
  Other current liabilities                                                       34,603                24,599
                                                                            -------------         -------------
                                                                                 493,761               369,672
                                                                            -------------         -------------

DEFERRED LIABILITIES AND CREDITS                                               2,006,184               424,515
                                                                            -------------         -------------

LONG-TERM DEBT, excluding current portion                                      1,286,413             1,279,877
                                                                            -------------         -------------

MINORITY INTERST in subsidiaries                                                 457,484               509,658
                                                                            -------------         -------------

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

PREFERRED SHARES                                                                   8,210                 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                                               1,838,050             1,897,402
  Treasury Shares, at cost
    (2,422,180 shares and 1,237,207 shares, respectively)                       (231,618)             (102,975)
  Accumulated other comprehensive income                                         262,591               179,071
  Retained earnings                                                            2,701,606               508,979
                                                                            -------------         -------------
                                                                               4,571,253             2,483,101
                                                                            -------------         -------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $  9,123,305          $  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>
                                        18
<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 June 30, 2000 and December 31,
      1999,  and the  results  of  operations  and cash flows for the six months
      ended June 30, 2000 and 1999. The results of operations for the six months
      ended  June 30,  2000 and  1999,  are not  necessarily  indicative  of the
      results to be expected for the full year.

2.    Discontinued Operations

      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") in September of 1999. The merger closed on May 4, 2000. As
      a result of the merger,  Aerial  shareholders  received 0.455  VoiceStream
      common  shares for each share of Aerial  stock they  owned.  TDS  received
      35,570,493  shares of VoiceStream  common stock valued at $3.90 billion at
      closing.  TDS recognized a gain of  approximately  $2.15  billion,  net of
      $1.51 billion in taxes, on this transaction.  TDS had a basis in Aerial of
      $236.1 million,  including deferred losses of $81.9 million from September
      17, 1999 to May 4, 2000.  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 amounts due from/to Aerial was repaid to TDS 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.

      On July 24,  2000,  Deutsche  Telecom AG  announced  a proposed  merger of
      VoiceStream  with  Deutsche  Telecom.  The  proposed  merger calls for the
      exchange  of 3.2  shares of  Deutsche  Telecom  and $30 for each  share of
      VoiceStream owned, subject to adjustment under certain  circumstances.  In
      addition,  VoiceStream  stockholders  may elect to receive all cash or all
      stock for their  shares,  subject to  proration.  The merger is subject to
      regulatory approvals and other conditions, including stockholder approval.
      VoiceStream  stockholders  holding  over  50% of the  voting  power of the
      VoiceStream  common  stock,  including  TDS,  have  agreed to vote for the
      merger.

                                        19
<PAGE>

Net assets of discontinued operations as of December 31, 1999, are as follows:
<TABLE>

<S>                                                                 <C>
Current Assets
  Cash and temporary investments                                    $     5,261
  Accounts receivable                                                    32,223
  Inventory                                                               8,336
  Other current assets                                                    5,565
Investments
  Broadband PCS license costs, net                                      303,913
  Other Investments                                                       3,263
Property, plant and equipment                                           619,913
Other assets and deferred charges                                           204
Current portion vendor credit agreement                                (103,765)
Accounts payable                                                        (35,230)
Accrued taxes                                                            (7,419)
Accrued compensation                                                     (9,732)
Other accrued expenses                                                   (4,676)
Deferred income tax liability                                          (147,696)
Long-term debt                                                         (250,846)
Minority interest in subsidiaries                                      (226,348)
Losses deferred after measurement date                                   44,179
                                                                    ------------
                                                                    $   237,145
                                                                    ============

</TABLE>
Summarized  income statement  information  relating to discontinued  operations,
excluding  any  corporate  charges  and  intercompany  interest  expense,  is as
follows:

<TABLE>
<CAPTION>
                                                              Three Months Ended                     Six Months Ended
                                                                   June 30,                              June 30,
                                                            -----------------------               ----------------------
                                                            2000               1999               2000              1999
                                                            ----               ----               ----              ----
                                                                           (Dollars in thousands)
<S>                                                     <C>                 <C>               <C>               <C>
Revenues                                                $    26,934         $    54,785       $    94,463       $   105,326
Expenses                                                     42,676             102,132           164,148           202,507
                                                        ------------        ------------      ------------      ------------
Operating (Loss)                                            (15,742)            (47,347)          (69,685)          (97,181)
Minority share of loss                                       21,804                 865            33,459            10,967
Other income                                                (34,788)              1,243           (29,533)            2,834
Interest expense                                             (2,275)             (5,389)           (8,605)          (10,397)
                                                        ------------        ------------      ------------      ------------
(Loss) Before Income Taxes                                  (31,001)            (50,628)          (74,364)          (93,777)
Income tax benefit                                           18,373              16,466            36,624            36,981
                                                        ------------        ------------      ------------      ------------
  Net (Loss)                                                (12,628)            (34,162)          (37,740)          (56,796)
Losses deferred after measurement date                       12,628                  --            37,740                --
                                                        ------------        ------------      ------------      ------------
Net (Loss) From Discontinued
  Operations                                            $       --          $   (34,162)      $        --       $   (56,796)
                                                        ============        ============      ============      ============

</TABLE>
                                        20
<PAGE>

Summarized cash flow statement  information relating to discontinued  operations
is as follows:
<TABLE>
<CAPTION>

                                                                             Six Months Ended
                                                                                 June 30,
                                                                          ----------------------
                                                                          2000              1999
                                                                          ----              ----
                                                                             (Dollars in thousands)
<S>                                                                   <C>                <C>
Cash flows from operating activities                                  $   (54,241)       $  (29,110)
Cash flows from financing activities                                      108,180             1,605
Cash flows from investing activities                                      (17,325)          (13,457)
                                                                      ------------       -----------
Cash provided (used) by discontinued operations                            36,614           (40,962)
(Increase) decrease in cash included in net
  assets of discontinued operations                                       (41,567)              498
                                                                      ------------       -----------
Cash flows from discontinued operations                               $    (4,953)       $  (40,464)
                                                                      ============       ===========
</TABLE>

3.    Marketable Equity Securities

      Marketable equity securities  include the Company's  investments in equity
      securities,  primarily VoiceStream common shares and Vodafone AirTouch plc
      American   Depository   Receipts.   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>
                                                                   June 30,               December 31,
                                                                   --------               ------------
                                                                     2000                     1999
                                                                     ----                     ----
                                                                       (Dollars in thousands)
Available-for-sale Equity Securities

<S>                                                                  <C>                   <C>
Aggregate Fair Value                                                 $ 4,863,011           $  843,280
  Adjusted Basis                                                       4,417,331              517,870
                                                                     -----------           ----------
  Gross Unrealized Holding Gains                                         445,680              325,410
  Tax Effect                                                             177,312              130,616
                                                                     -----------           ----------
  Unrealized Holding Gains, net of tax                                   268,368              194,794
  Minority Share of Unrealized Holding Gains                               5,777               15,723
                                                                     -----------           ----------
  Net Unrealized Holding Gains                                       $   262,591           $  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  June  30,  2000,  TDS has
      repurchased 1,262,700 common shares under this program.

5.    Gain (Loss) on Cellular and Other Investments

      TDS reduced the carrying  value of its paging  investment by $50.0 million
      to $24.7  million,  plus a secured note  receivable  outstanding  of $11.0
      million,  in the second quarter of 2000 to reflect the reduced  valuations
      that the paging industry is experiencing.  The sale of a minority cellular
      interest in the first quarter of 2000 resulted in a gain of $17.9 million.

      The Company recognized a $327.1 million gain in the second quarter of 1999
      on the  difference  between  its  historical  basis in its  investment  in
      AirTouch Communications,  Inc. ("AirTouch") common shares and the value of
      Vodafone  AirTouch plc American  Depository  Receipts and cash received in
      the merger of AirTouch and Vodafone Group plc. The remaining gains in 1999
      reflect  the  sale  of  certain  minority  cellular  interests  and  other
      investments for cash.

                                        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>
                                                                                   Six Months Ended
                                                                                        June 30,
                                                                               ---------------------------
                                                                               2000                   1999
                                                                               ----                   ----
                                                                                (Dollars in thousands)
<S>                                                                         <C>                    <C>
Accumulated Other Comprehensive Income

  Balance, beginning of period                                              $  179,071             $   75,609
                                                                            -----------            -----------
  Add:
    Net unrealized gains on securities                                         120,269                190,984
    Income tax effect                                                          (46,695)               (76,187)
                                                                            -----------            -----------
                                                                                73,574                114,797
    Minority share of unrealized gains                                           9,946                (17,146)
                                                                            -----------            -----------

  Net unrealized gains                                                          83,520                 97,651
                                                                            -----------            -----------

  Deduct:
    Recognized gains on securities                                                 --                 327,113
    Income tax expense                                                             --                (130,845)
                                                                            -----------            -----------
                                                                                   --                 196,268
    Minority share of recognized gain                                              --                 (29,655)
                                                                            -----------            -----------

    Net recognized gains included in Net Income                                    --                 166,613
                                                                            -----------            -----------

  Net change in unrealized gains included in
    Comprehensive Income                                                        83,520                (68,962)
                                                                            -----------
                                                                                                   -----------
  Balance, end of period                                                    $  262,591             $    6,647
                                                                            ===========            ===========

</TABLE>

<TABLE>
<CAPTION>

                                                           Three Months Ended               Six Months Ended
                                                               June 30,                         June 30,
                                                         ---------------------             ------------------
                                                         2000             1999             2000          1999
                                                         ----             ----             ----          ----
                                                                           (Dollars in thousands)
<S>                                                   <C>              <C>             <C>            <C>
Comprehensive Income
  Net Income                                          $2,168,740       $ 182,543       $2,208,091     $ 192,943
  Net change in unrealized gains
     on securities                                        58,631        (134,788)          83,520       (68,962)
                                                      -----------      ----------      -----------    ----------
                                                      $2,227,371       $  47,755       $2,291,611     $ 123,981
                                                      ===========      ==========      ===========    ==========
</TABLE>

7.   Extraordinary Item - Loss on Extinguishment of Debt

     U.S. Cellular purchased $25.8 million face value of its Liquid Yield Option
     Notes  (LYONs) for $16.5  million in a private  transaction.  A net loss of
     $6.1  million,  or $(.10) per diluted  earnings per share,  was recorded to
     account for the  difference  between the  purchase  price and the  carrying
     value.

                                        22
<PAGE>

8.   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               Six Months Ended
                                                                         June 30,                       June 30,
                                                                 ----------------------           --------------------
                                                                 2000              1999           2000            1999
                                                                 ----              ----           ----            ----
                                                                    (Dollars in thousands, except per share amounts)
<S>                                                          <C>               <C>            <C>             <C>
Net Income from Continuing Operations                        $   24,764        $  216,705     $   64,115      $  249,739
Less:  Preferred Dividends                                         (131)             (337)          (266)           (687)
                                                             -----------       -----------    -----------     -----------
Net Income Available to Common from Continued
  Operations Used in Basic Earnings Per Share                    24,633           216,368         63,849         249,052

Discontinued Operations
  Gain on Disposal of Aerial                                  2,150,082                --      2,150,082              --
  Loss on Operations of Aerial                                       --           (34,162)            --         (56,796)
Extraordinary Item                                               (6,106)               --         (6,106)             --
                                                             -----------       -----------    -----------     -----------
Net Income Available to Common used in
  Basic Earnings Per Share                                   $2,168,609        $  182,206     $2,207,825      $  192,256
                                                             ===========       ===========    ===========     ===========

Weighted Average Number of Common Shares
  Used in Basic Earnings Per Share                               60,306            61,399         60,692          61,339
                                                             ===========       ===========    ===========     ===========

Basic Earnings Per Common Share
  Continuing Operations                                      $     0.41        $     3.52     $     1.05      $     4.06
  Discontinued Operations
    Gain on Disposal of Aerial                                    35.65                --          35.43             --
    Loss on Operations of Aerial                                     --             (0.55)            --           (0.93)
  Extraordinary Item                                              (0.10)               --          (0.10)             --
                                                             -----------       -----------    -----------     -----------
                                                             $    35.96        $     2.97     $    36.38      $     3.13
                                                             ===========       ===========    ===========     ===========
</TABLE>
                                        23


<PAGE>
<TABLE>
<CAPTION>

                                                                   Three Months Ended                  Six Months Ended
                                                                        June 30,                           June 30,
                                                                 ----------------------              ---------------------
                                                                 2000              1999              2000             1999
                                                                 ----              ----              ----             ----
                                                                    (Dollars in thousands, except per share amounts)
<S>                                                          <C>               <C>               <C>              <C>
Net Income Available to Common from Continuing
  Operations Used in Basic Earnings Per Share                $   24,633        $  216,368        $   63,849       $  249,052

Reduction in Preferred Dividends if Preferred
  Shares Converted into Common Shares                                63               307               130              627
Minority Income Adjustment                                         (229)             (541)             (460)          (1,137)
                                                             -----------       -----------       -----------      -----------
Net Income Available to Common from Continuing
  Operations Used in Diluted Earnings Per Share                  24,467           216,134            63,519          248,542

Discontinued Operations
  Gain on Disposal of Aerial                                  2,150,082                --         2,150,082               --
  Loss on Operations of Aerial                                       --           (34,162)               --          (56,796)
Extraordinary Item                                               (6,106)               --            (6,106)              --
                                                             -----------       -----------       -----------      -----------
Net Income (Loss) Available to Common Used
  in Diluted Earnings Per Share                              $2,168,443        $  181,972        $2,207,495       $  191,746
                                                             ===========       ===========       ===========      ===========
Weighted Average Number of Common Shares
  Used in Basic Earnings Per Share                               60,306            61,399            60,692           61,339

Effect of Dilutive Securities
  Common Shares Outstanding if Preferred
    Shares Converted                                                182               614               189              635
  Stock Options                                                     501               339               516              266
  Common Shares Issuable                                             13                13                13               13
                                                             -----------       -----------       -----------      -----------
Weighted Average Number of Common Shares
  Used in Diluted Earnings Per Share                             61,002            62,365            61,410           62,253
                                                             ===========       ===========       ===========      ===========

Diluted Earnings Per Common Share
  Continuing Operations                                      $     0.40        $     3.47        $     1.03       $     3.99
  Discontinued Operations
    Gain on Disposal of Aerial                                    35.25                --             35.02               --
    Loss on Operations of Aerial                                     --             (0.55)               --            (0.91)
  Extraordinary Item                                              (0.10)               --             (0.10)              --
                                                             -----------       -----------       -----------      -----------
                                                             $    35.55        $     2.92        $    35.95       $     3.08
                                                             ===========       ===========       ===========      ===========
</TABLE>

      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.

9.    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 and interests during the first six
      months of 2000 and 1999 and a telephone  company in 2000.  In  conjunction
      with  these   acquisitions,   the  following   assets  were  acquired  and
      liabilities assumed and Common Shares issued.

                                        24
<PAGE>

<TABLE>
<CAPTION>
                                                                            Six Months Ended
                                                                                June 30,
                                                                          ---------------------
                                                                          2000             1999
                                                                          ----             ----
                                                                        (Dollars in thousands)
     <S>                                                             <C>               <C>
     Property, plant and equipment                                   $    10,497       $       --
     Cellular licenses                                                     4,740            5,464
     Notes receivable - other                                            (10,000)              --
     Equity method investment in cellular interests                       65,727               --
     Franchise costs                                                      22,744               --
     Long-term debt                                                      (19,108)              --
     Deferred credits                                                       (700)              --
     Other assets and liabilities,
       excluding cash and cash equivalents                                   952               --
     Decrease in Minority interest                                        (1,668)           2,667
     Common Shares issued                                                     --               --
                                                                     ------------       ----------
     Decrease in cash due to acquisitions                            $    73,184        $   8,131
                                                                     ============       ==========
</TABLE>

The following table summarizes interest and income taxes paid, and other noncash
transactions.
<TABLE>
<CAPTION>

                                                                                 Six Months Ended
                                                                                     June 30,
                                                                             ------------------------
                                                                             2000                1999
                                                                             ----                ----
                                                                             (Dollars in thousands)
     <S>                                                                  <C>                 <C>
     Interest Paid
       Continuing Operations                                              $ 37,793            $  42,081
       Discontinued Operations                                               2,112                1,320
     Income Taxes Paid (net of income tax refund
       received of $15,000 in 2000)                                         18,071                7,353
     Common shares issued by TDS for
       conversion of TDS Preferred Stock                                  $    418            $   2,811


</TABLE>

                                        25
<PAGE>

10.   Business Segment Information

      Financial data for the Company's  business  segments for each of the three
      and six month periods ended or at June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>

Three Months Ended                                                                          Discontinued
or at June 30, 2000                   U.S. Cellular      TDS Telecom      All Other (1)      Operations         Total
-------------------                   -------------      -----------      -------------      ----------         -----
      (Dollars in thousands)
<S>                                     <C>              <C>              <C>               <C>             <C>
Operating revenues                      $   397,657      $  152,659       $      --         $       --      $  550,316
Operating cash flow                         160,080          65,860              --                 --         225,940
Depreciation and
  amortization expense                       65,125          33,408              --                 --          98,533
Operating income                             94,955          32,452              --                 --         127,407
Marketable Equity Securities                459,764         140,014        4,263,233                --       4,863,011
Total Assets                              3,279,294       1,453,808        4,390,203                --       9,123,305
Capital Expenditures                    $    69,968      $   29,515       $      --         $       --      $   99,483

Three Months Ended                                                                          Discontinued
or at June 30, 1999                   U.S. Cellular      TDS Telecom      All Other (1)      Operations         Total
-------------------                   -------------      -----------      -------------      ----------         -----
      (Dollars in thousands)
Operating revenues                      $   360,952      $  136,307       $      --         $       --      $  497,259
Operating cash flow                         128,918          61,747              --                 --         190,665
Depreciation and
  amortization expense                       56,466          30,531              --                 --          86,997
Operating income                             72,452          31,216              --                 --         103,668
Marketable Equity Securities                411,085         113,499              --                 --         524,584
Total Assets                              3,219,523       1,385,411          175,702            526,587      5,307,223
Capital Expenditures                    $    77,164      $   27,200       $      --         $       --      $  104,364

Six Months Ended                                                                            Discontinued
or at June 30, 2000                   U.S. Cellular      TDS Telecom      All Other (1)      Operations         Total
-------------------                   -------------      -----------      -------------      ----------         -----
      (Dollars in thousands)
Operating revenues                      $   757,744      $  296,829       $      --         $       --      $1,054,573
Operating cash flow                         287,241         129,442              --                 --         416,683
Depreciation and
  amortization expense                      131,133          66,128              --                 --         197,261
Operating income                            156,108          63,314              --                 --         219,422
Marketable Equity Securities                459,764         140,014        4,263,233                --       4,863,011
Total Assets                              3,279,294       1,453,808        4,390,203                --       9,123,305
Capital Expenditures                    $   129,799      $   45,592       $      --         $       --      $  175,391

Six Months Ended                                                                            Discontinued
or at June 30, 1999                   U.S. Cellular      TDS Telecom      All Other (1)      Operations         Total
-------------------                   -------------      -----------      -------------      ----------         -----
      (Dollars in thousands)
Operating revenues                      $   686,937      $  265,272       $      --         $       --      $  952,209
Operating cash flow                         232,947         119,258              --                 --         352,205
Depreciation and
  amortization expense                      108,381          61,088              --                 --         169,469
Operating income                            124,566          58,170              --                 --         182,736
Marketable Equity Securities                411,085         113,499              --                 --         524,584
Total Assets                              3,219,523       1,385,411          175,702            526,587      5,307,223
Capital Expenditures                    $   161,852      $   48,755       $      --         $       --      $  210,607

</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>

                                        26
<PAGE>

                           PART II. OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security-Holders.
-------------------------------------------------------------

At the  Annual  Meeting  of  Shareholders  of TDS,  held on May  19,  2000,  the
following number of votes were cast for the matters indicated:

1. a.    For the  election  of three  Class I  Directors  of the  Company by the
         Series A Holders:

                                                                       Broker
           Nominee        For                 Withhold                Non-vote
           -----         ---                 --------                --------
James Barr III          67,920,127                 987                    -0-
Sandra L. Helton        67,921,087                 27                     -0-
George W. Off           67,921,087                 27                     -0-

   b.    For the  election  of one Class I Director of the Company by the Common
         Holders:

                                                                       Broker
           Nominee        For                 Withhold                Non-vote
           -------        ---                 --------                --------
Martin L. Solomon      47,842,311               628,877                  -0-

2. Proposal to Ratify the Selection of Arthur Andersen LLP as Independent Public
   Accountants for 2000:
                                                                        Broker
             For        Withhold                Abstain                Non-vote
             ---        --------                -------                --------
         116,311,142      30,427                 50,733                   -0-

3. Shareholder Proposal:
                                                                        Broker
             For        Withhold                Abstain                Non-vote
             ---        --------                -------                --------
         15,910,870   87,111,979              3,037,801              10,331,652





                                        27

<PAGE>

Item 6.  Exhibits and Reports on Form 8-K.
-----------------------------------------
      (a)    Exhibit 11 -  Computation  of earnings per common share is included
             herein as footnote 8 to the financial statements.

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

      (c)    Exhibit 27 - Financial Data Schedule

      (d)    Reports on Form 8-K filed during the quarter ended June 30, 2000:

The  Company  filed a Current  Report on Form 8-K,  dated May 4,  2000,  for the
purpose of filing a news release and proforma balance.  The news release,  dated
May 4, 2000,  announced the  completion of the  Aerial/VoiceStream  merger.  The
proforma  balance sheet was included to show the effect of the exchange of TDS's
interest in Aerial for  35,570,493  common  shares of  VoiceStream.  The Current
Report was filed on May 19, 2000.

                                        28
<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   August 11, 2000                           /s/ Sandra L. Helton
     -------------------------------            -------------------------
                                                Sandra L. Helton,
                                                Executive Vice President-Finance
                                                (Chief Financial Officer)



Date   August 11, 2000                           /s/ D. Michael Jack
     -------------------------------            ------------------------
                                                D. Michael Jack,
                                                Vice President and Controller
                                                (Principal Accounting Officer)

















Signature page for the TDS 2000 Second Quarter Form 10-Q





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