TELEPHONE & DATA SYSTEMS INC /DE/
10-Q, 2000-11-13
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              September 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 October 31, 2000
----------------------------------         -------------------------------------
   Common Shares, $.01 par value                       51,867,068 Shares
Series A Common Shares, $.01 par value                  6,912,099 Shares

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



<PAGE>


                        TELEPHONE AND DATA SYSTEMS, INC.
                        --------------------------------
                         3rd 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            2-15

                Consolidated Statements of Income -
                   Three Months and Nine Months Ended
                   September 30, 2000 and 1999                                16

                Consolidated Statements of Cash Flows -
                   Nine Months Ended September 30, 2000 and 1999              17

                Consolidated Balance Sheets -
                   September 30, 2000 and December 31, 1999                18-19

                Notes to Consolidated Financial Statements                 20-27


Part II.     Other Information                                                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 3.6 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 82.7%-owned subsidiary,  United States Cellular
Corporation ("U.S.  Cellular") and its wireline telephone operations through its
wholly owned subsidiary, TDS Telecommunications Corporation ("TDS Telecom").

Merger of Aerial Communications, Inc.

In  September  of 1999,  the Board of Directors of TDS approved a plan of merger
between Aerial Communications, Inc. ("Aerial"), its then over 80%-owned personal
communications   services   company,   and  VoiceStream   Wireless   Corporation
("VoiceStream").  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  in 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.

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

Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
--------------------------------------------------------------------------------
1999
----
Operating  Revenues  increased 11% ($160.0 million) during the first nine months
of 2000 primarily as a result of a 16% increase in customer  units served.  U.S.
Cellular's  operating  revenues increased 11% ($111.8 million) as customer units
served increased by 437,000, or 18%, since September 30, 1999, to 2,890,000. TDS
Telecom operating  revenues  increased 12% ($48.2

                                       2
<PAGE>

million) as total access lines increased by 69,400 or 11%, since  September 30,
1999 to 696,400.

Operating  Expenses  rose 11%  ($122.4  million)  in 2000  reflecting  growth in
operations. U.S. Cellular's operating expenses increased 10% ($81.3 million) and
TDS Telecom's expenses increased 13% ($41.1 million).

Operating  Income increased 12% to $345.4 million in 2000 from $307.7 million in
1999. U.S.  Cellular's  operating income increased 14% to $250.6 million in 2000
from $220.1 million in 1999 and its operating income margin,  as a percentage of
service  revenues,  improved to 22.3% in 2000 from 21.5% in 1999.  TDS Telecom's
operating  income  increased 8% to $94.7  million in 2000 from $87.6  million in
1999 and its operating  margin declined to 21.0% in 2000 from 21.8% in 1999. The
slight  decrease in TDS Telecom's  operating  margin was primarily the result of
expanding CLEC activities.

Investment  and Other Income  (Expense)  totaled $7.4 million in 2000 and $300.4
million in 1999.

Gain on Cellular and Other Investments  totaled $25.6 million in 2000 and $345.9
million in 1999. The sale of non-strategic cellular interests and the settlement
of a legal matter  resulted in gains of $96.1  million in 2000.  TDS reduced the
carrying value of its paging  investment by $70.5 million in 2000 to reflect the
reduced valuations in the paging industry.  TDS continues to hold a secured note
receivable of $11.0 million with its paging investment.

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 U.S.
Cellular's net income due to a decrease in gains. Gains increased minority share
of income by $8.7 million in 2000 and $30.6 million in 1999.
<TABLE>
<CAPTION>

                                                               Nine Months Ended
                                                                 September 30,
                                                              ------------------
                                                           2000              1999              Change
                                                           ----              ----              ------
                                                            (Dollars in thousands)
<S>                                                   <C>                <C>                <C>
Minority Share of (Income)
  U.S. Cellular
    Minority Public Shareholders'                     $      (35,707)    $     (53,516)     $      17,809
    Minority Shareholders' or Partners'                       (6,801)           (6,156)              (645)
                                                      ---------------    --------------     --------------
                                                             (42,508)          (59,672)            17,164

  Other                                                         (247)             (510)               263
                                                      ---------------    --------------     --------------
                                                      $      (42,755)    $     (60,182)     $      17,427
                                                      ===============    ==============     ==============
</TABLE>

Interest Expense decreased 6% ($4.3 million) in 2000 reflecting  primarily lower
average short-term debt balances.

Income Tax Expense  decreased 42% ($87.7 million) in 2000. The effective  income
tax rate was 46.9% in 2000 and 41.0% in 1999.  The  effective  income  tax rate,
excluding gains, was 43.0% in 2000 and 43.8% in 1999.

Income From Continuing  Operations totaled $139.2 million,  or $2.26 per diluted
share, in 2000,

                                       3
<PAGE>

compared to $302.7  million,  or $4.82 per diluted share,  in 1999.  Income from
continuing operations,  excluding gains and losses, increased to $139.7 million,
or $2.27 per  diluted  share in 2000 from $111.2  million,  or $1.75 per diluted
share in 1999.  A summary  of income  from  continuing  operations  and  diluted
earnings per share from operations and gains (losses) is shown below.
<TABLE>
<CAPTION>

                                                                  Nine Months Ended
                                                                    September 30,
                                                                  -----------------
                                                              2000                    1999
                                                              ----                    ----
                                                       (Dollars in thousands, except per share amounts)
<S>                                                      <C>                     <C>
Income from Continuing Operations
  Operations                                             $       139,708         $       111,186
  Gains (Losses)                                                    (488)                191,489
                                                         ----------------        ----------------
                                                         $       139,220         $       302,675
                                                         ================        ================

Diluted Earnings Per Share from
     Continuing Operations
  Operations                                             $          2.27          $         1.75
  Gains (Losses)                                                    (.01)                   3.07
                                                         ----------------        ----------------
                                                         $          2.26          $         4.82
                                                         ================        ================
</TABLE>

Discontinued  Operations.  The gain on disposal of Aerial totaled $2.15 billion,
or $35.14  per  diluted  share in 2000.  Loss on  operations  of Aerial  totaled
$(84.2) million, or $(1.35) per diluted share in 1999. A loss from operations of
Aerial of  $(37.7)  million  in 2000,  prior to the  merger,  was  deferred  and
recognized as a reduction of the gain on disposal of Aerial.

Extraordinary  Item - loss  on  extinguishment  of  debt,  is  related  to  U.S.
Cellular's  repurchase and certain  conversions of its Liquid Yield Option Notes
(LYONs).  A loss, net of taxes and minority  interest,  of $(26.6)  million,  or
$(0.43) per diluted  share,  reflects the  difference  between the repurchase or
conversion price and the carrying value.

Net Income  Available to Common  totaled  $2.26  billion,  or $36.97 per diluted
share, in 2000, compared to $217.5 million, or $3.47 per diluted share, in 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 82.7%-owned subsidiary.  U.S. Cellular owns,
manages and invests in cellular  markets  throughout  the United  States.  Rapid
growth  in the  customer  base  is a  primary  reason  for  the  growth  in U.S.
Cellular's results of operations.  The number of customer units served increased
by 437,000, or 18%, since September 30, 1999, to 2,890,000.
<TABLE>
<CAPTION>

                                            Three Months Ended                      Nine Months Ended
                                              September 30,                           September 30,
                                            ------------------                      -----------------
                                          2000             1999                 2000               1999
                                          ----             ----                 ----               ----
                                                              (Dollars in thousands)

<S>                                     <C>               <C>                  <C>               <C>
Operating Revenue

  Local service                         $ 280,234         $ 241,667            $ 801,512         $ 689,672
  Inbound roaming                          78,124            91,713              226,579           241,790
  Long-distance and other                  38,271            26,760               97,887            92,395
                                       -----------       -----------           ----------        ----------
    Service Revenue                       396,629           360,140            1,125,978         1,023,857

  Equipment Sales                          17,570            13,061               45,965            36,281
                                       -----------       -----------           ----------       -----------
                                          414,199           373,201            1,171,943         1,060,138
                                       -----------       -----------           ----------       -----------
Operating Expenses

  System operations                        54,659            44,807              152,286           165,139
  Marketing and selling                    73,988            66,848              214,174           188,533
  Cost of equipment sold                   34,430            27,915               99,081            81,015
  General and administrative               89,892            80,627              257,931           239,500
  Depreciation                             51,665            47,031              153,052           135,332
  Amortization                             15,037            10,413               44,783            30,493
                                        ----------        ----------           ----------        ----------
                                          319,671           277,641              921,307           840,012
                                        ----------        ----------           ----------        ----------

Operating Income                        $  94,528         $  95,560            $ 250,636         $ 220,126
                                        ==========        ==========           ==========        ==========
</TABLE>

Operating  revenue  increased 11% ($111.8 million) in 2000 primarily  related to
the increase in customer  units.  Average  monthly  service revenue per customer
decreased 7% ($3.53) to $45.53 in 2000 from $49.06 in 1999. The decline reflects
primarily lower retail revenue per customer  ($0.64),  lower roaming revenue per
customer ($2.42) and lower long-distance and other revenue per customer ($0.47).

Local retail revenue increased 16% ($111.8 million) in 2000 due primarily to the
18% customer growth.  Average local minutes of use per retail customer increased
30% to 151 in 2000 from 115 in 1999,  while  average  local  retail  revenue per
minute continued to decline in 2000.  Competitive  pressures and U.S. Cellular's
use of incentive  programs and rate plans to stimulate overall usage resulted in
a lower average revenue per minute of use.  Average monthly local retail revenue
per customer declined 2% ($0.64) to $32.41 in 2000 from $33.04 in 1999.

Inbound  roaming  revenue  (charges to customers  of other  systems who use U.S.
Cellular's  cellular systems when roaming) decreased 6% ($15.2 million) in 2000.
The  decline in inbound  roaming  revenue 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
and in 2001  because  these  pricing  programs  are  present in both  periods of
comparison.  Additionally,  as new  wireless  operators  begin  service  in U.S.
Cellular's  markets,  roaming  partners could switch their business to these new
operators,  further  slowing the growth in inbound roaming minutes of

                                       5
<PAGE>

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 21% ($2.42) to $9.16 in 2000 compared to $11.58 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  increased 6% ($5.5  million) in 2000.  Average
monthly  long-distance  and other revenue per customer  decreased 11% ($0.47) to
$3.96 in 2000  compared to $4.43 in 1999.  The decrease is  attributable  to the
larger increase in the customer base than in long-distance and other revenue.

Operating  expenses  increased  10% ($81.3  million)  in 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 14% ($25.6
million) in 2000 while cost of equipment  sold  increased  22% ($18.1  million).
These expenses,  less equipment  sales revenue,  represent the cost to acquire a
new customer. Equipment sales revenue increased 27% ($9.7 million) in 2000. Cost
per gross customer  addition  decreased to $331 in 2000 from $343 in 1999. Gross
customer  activations  increased  to 807,000 in 2000 from  681,000 in 1999.  The
increase in marketing  and selling  expenses was  primarily  driven by increased
commissions,  which resulted from an increase in gross activations and increased
advertising  costs. 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 September 30,
2000,  42% of U.S.  Cellular's  customers were on digital rate plans compared to
15% as of September 30, 1999.

System  operations  expenses  (costs to  provide  service)  decreased  8% ($12.9
million)  and  consumed  13.5% of  service  revenues  in 2000 and 16.1% 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 $25.5  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.  Maintenance,  utility and cell site expenses  increased
13% ($7.5 million) reflecting the increase in cell sites in service.

General and  administrative  expenses  increased 8% ($18.4 million) and consumed
22.9% of service  revenues in 2000 and 23.4% 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.

Depreciation  expense increased 13% ($17.7 million) in 2000 primarily due to the
12% increase in average fixed assets since  September 30, 1999,  and a reduction
in the useful lives of certain assets  beginning in 2000.  Amortization  expense
increased 47% ($14.3 million) in 2000 primarily  related to U.S.  Cellular's new
billing and information  system.  Beginning October 1, 1999, U.S. Cellular began
amortizing  the  development  costs of the new billing and  information  system.
Annual   amortization   of  these  billing  related  costs  is  expected  to  be
approximately $17 million.

Operating  income  increased 14% ($30.5  million) to $250.6 million in 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 22.3% in
2000 compared to 21.5% in 1999.

                                       6
<PAGE>

Management  expects service revenues to continue to grow during the remainder of
2000 and in 2001; however,  management  anticipates that average monthly revenue
per  customer  will  decrease 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 personal communications services ("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  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 69,400,  or 11%, since September 30, 1999 to
696,400. TDS Telecom's 105 incumbent local exchange ("ILEC") subsidiaries served
598,400 access lines at September 30, 2000, a 5% (27,600 access lines)  increase
over the 570,800 access lines at September 30, 1999.  TDS Telecom's  competitive
local exchange ("CLEC") subsidiaries served 98,000 access lines at September 30,
2000,  an increase of 41,800  access  lines from 56,200  access  lines served at
September 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                 Nine Months Ended
                                                                September 30,                      September 30,
                                                              -----------------                 ----------------
                                                            2000              1999            2000             1999
                                                            ----              ----            ----             ----
                                                                            (Dollars in thousands)
<S>                                                     <C>                <C>              <C>            <C>
Local Telephone Operations

  Operating Revenue
    Local service                                      $     42,447       $     38,623     $   124,660     $   113,212
    Network access and long-distance                         71,545             65,732         212,673         199,905
    Miscellaneous                                            18,681             19,142          53,912          52,206
                                                       -------------      -------------    ------------     -----------
                                                            132,673            123,497         391,245         365,323
                                                       -------------      -------------    ------------     -----------
  Operating Expenses
    Operating expenses                                       66,409             63,198         194,773         183,965
    Depreciation and Amortization                            30,512             29,394          92,478          87,761
                                                       -------------      -------------    ------------    ------------
                                                             96,921             92,592         287,251         271,726
                                                       -------------      -------------    ------------    ------------
      Local Telephone Operating Income                 $     35,752       $     30,905     $   103,994     $    93,597
                                                       -------------      -------------    ------------    ------------
Competitive Local Exchange Operations

  Operating Revenue                                    $     22,246       $     14,423     $    61,382     $    38,741
                                                       -------------      -------------     -----------     -----------
Operating Expenses

  Operating expenses                                         24,279             14,355          64,181          40,474
  Depreciation and Amortization                               2,293              1,536           6,455           4,257
                                                        ------------       ------------     -----------     -----------
                                                             26,572             15,891          70,636          44,731
                                                        ------------       ------------     -----------     -----------
    Competitive Local Exchange
      Operating (Loss)                                  $    (4,326)      $     (1,468)     $   (9,254)     $   (5,990)
                                                        ------------      -------------     -----------     -----------
Intercompany revenues                                          (849)              (482)         (1,728)         (1,354)
Intercompany expenses                                          (849)              (482)         (1,728)         (1,354)
                                                        ------------      -------------     -----------     -----------
  Operating Income                                      $    31,426       $     29,437      $   94,740      $   87,607
                                                        ============      =============     ===========     ===========
</TABLE>

Operating  revenue increased 12% ($48.2 million) in 2000,  reflecting  primarily
customer growth.

Revenue from local  telephone  operations  increased 7% ($25.9 million) in 2000.
Average  monthly  revenue per access line increased 2% ($1.56) to $74.11 in 2000
from $72.55 in 1999. Local service revenue  increased 10% ($11.4 million) during
2000.  Internal access line growth increased  revenues by $4.5 million while the
sale of custom calling and advanced features increased revenues by $3.5 million.
Rate  increases  added $2.2 million to revenues.  Average  monthly local service
revenue  per access line was $23.61 in 2000 and $22.48 in 1999.  Network  access
and  long-distance  revenue  increased 6% ($12.8 million)  during 2000.  Revenue
generated  from access  minute growth due to increased  network usage  increased
$5.1 million in 2000.  Compensation from state and national revenue pools due to
increased  costs of  providing  network  access  added $2.3 million to revenues.
Average  monthly  network access and  long-distance  revenue per access line was
$40.29 in 2000 and  $39.70 in 1999.  Miscellaneous  revenue  increased  3% ($1.7
million) during 2000. Average monthly  miscellaneous revenue per access line was
$10.21 in 2000 and $10.37 in 1999.

                                       8
<PAGE>

Revenue from competitive local exchange operations increased 58% ($22.6 million)
in 2000 as access  lines served  increased to 98,000 at September  30, 2000 from
56,200 at September 30, 1999.

Operating  expenses  increased 13% ($41.1  million)  during 2000.  Expenses from
local  telephone  operations  increased  by 6%  ($15.5  million)  in 2000.  Cash
operating  expenses  increased by 6% ($10.8 million) in 2000 while  depreciation
and amortization increased 5% ($4.7 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  58% ($25.9  million) in 2000 due  primarily to the costs  incurred to
grow the customer base and provide competitive local exchange services.

Operating income increased 8% ($7.1 million) to $94.7 million in 2000 reflecting
improved local telephone  operations  operating  results.  Operating income from
local  telephone  operations  increased 11% ($10.4  million) to $104.0  million.
Operating loss from competitive  local exchange  operations  increased 54% ($3.3
million) to $(9.3) 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  loss  from
competitive   local  exchange   operations  is  expected  to  increase  somewhat
throughout  2000 due to  costs  associated  with  continued  expansion  into new
markets.

                                       9

<PAGE>


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

Operating  Revenues  increased 11% ($57.6  million)  during the third quarter of
2000 for reasons  generally  the same as the first nine  months.  U.S.  Cellular
revenues  increased 11% ($41.0 million) in 2000. Local retail revenue  increased
16% ($38.6 million) in 2000, while inbound roaming revenue  decreased 15% ($13.6
million).  Average  monthly  service revenue per customer was $46.54 in 2000 and
$49.73 in 1999. TDS Telecom revenues  increased 12% ($16.6 million) in the third
quarter of 2000 due to the growth in ILEC  operations  ($9.2 million) and growth
in CLEC operations ($7.8 million).  Average monthly revenue per ILEC access line
increased to $74.11 in 2000 from $72.58 in 1999.

Operating Expenses rose 15% ($56.7 million) during the third quarter of 2000 for
reasons  generally  the same as the first nine months.  U.S.  Cellular  expenses
increased 15% ($42.0 million).  System  operations  expense  increased 22% ($9.9
million) as a result of increases in minutes of use and the costs of maintaining
9% more cell sites than in 1999. Marketing and selling expenses,  including cost
of  equipment  sold,  increased  14% ($13.7  million).  Cost per gross  customer
addition decreased to $321 in 2000 from $358 in 1999. Gross customer activations
increased  to 283,000 in 2000 from 228,000 in 1999.  General and  Administrative
expense  increased 12% ($9.3 million).  Depreciation  and  amortization  expense
increased 16% ($9.3 million). TDS Telecom expenses increased 14% ($14.6 million)
due to growth in ILEC operations  ($4.3 million) and in CLEC  operations  ($10.7
million) for reasons generally the same as the first nine months.

Operating  Income  increased  1% ($1.0  million) to $126.0  million in the third
quarter of 2000. U.S.  Cellular's  operating  income decreased 1% ($1.0 million)
reflecting   increased   costs   associated  with  customer  growth  and  higher
depreciation and amortization  expense. TDS Telecom's operating income increased
7% ($2.0 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 $48.1 million in 2000 and $200,000 in 1999.
Gain on  Cellular  and Other  Investments  totaled  $57.7  million  in the third
quarter of 2000  compared  to $6.0  million in 1999.  The sale of  non-strategic
cellular  interests and the  settlement  of a legal matter  resulted in gains of
$78.2 million.  TDS reduced the carrying value of its paging investment by $20.5
million in the third  quarter of 2000 to reflect the reduced  valuations  in the
paging industry.  Investment Income, net decreased $4.7 million to $6.9 million.
A $7.8  million  one-time  gain  was  reported  by an  equity-method  investment
increasing investment income in 1999.

Minority Share of (Income)  increased $5.7 million in 2000 primarily  reflecting
the increase in U.S.  Cellular's  net income due to an increase in gains.  Gains
recorded in the third quarter of 2000 increased  minority income by $6.6 million
compared to $800,000 in 1999.
<TABLE>
<CAPTION>

                                                                Three Months Ended
                                                                   September 30,
                                                                   -------------
                                                            2000                 1999               Change
                                                            ----                 ----               ------
                                                                      (Dollars in thousands)
<S>                                                    <C>                   <C>                 <C>
Minority Share of (Income)
  U.S. Cellular
    Minority Shareholders' Share                       $     (17,619)        $    (11,068)       $      (6,551)
    Minority Partners' Share                                  (2,491)              (3,077)                 586
                                                       --------------        -------------       --------------
                                                             (20,110)             (14,145)              (5,965)
  Other                                                            7                 (282)                 289
                                                       --------------        -------------       --------------
                                                       $     (20,103)        $    (14,427)       $      (5,676)
                                                       ==============        =============       ==============

</TABLE>

Interest  Expense  decreased 2% ($471,000) to $24.7 million in the third quarter
of 2000 for reasons

                                       10
<PAGE>

generally the same as the first nine months.

Income Tax Expense  increased to $68.0 million in the third quarter of 2000 from
$40.9  million  in 1999.  The  effective  income tax rate was 47.5% in the third
quarter of 2000 and 43.6% in 1999.  The  effective  income  tax rate,  excluding
gains, was 43.0% in 2000 and 42.4% in 1999.

Income From Continuing  Operations  totaled $75.1 million,  or $1.24 per diluted
share,  in the third  quarter of 2000,  compared to $52.9  million,  or $.84 per
diluted  share,  in 1999.  A summary of income from  continuing  operations  and
diluted earnings per share from operations and gains is shown below.
<TABLE>
<CAPTION>

                                                                  Three Months Ended
                                                                     September 30,
                                                                     -------------
                                                                2000                     1999
                                                                ----                     ----
                                                        (Dollars in thousands, except per share amounts)

<S>                                                         <C>                       <C>
Income from Continuing Operations

  Operations                                                $     52,423              $     51,017
  Gains                                                           22,682                     1,919
                                                            -------------             -------------
                                                            $     75,105              $     52,936
                                                            =============             =============


Diluted Earnings Per Share from
      Continuing Operations

  Operations                                                $        .86              $       .81
  Gains                                                              .38                      .03
                                                            -------------            -------------
                                                            $       1.24              $       .84
                                                            =============            =============
</TABLE>

Discontinued  Operations.  Loss on disposal of Aerial totaled $(2.6) million, or
$(.04)  diluted  earnings per share in the third  quarter of 2000 as a result of
income tax  adjustments  related to the  transaction.  Loss from  operations  of
Aerial totaled  $(27.4)  million,  or $(.44)  diluted  earnings per share in the
third quarter of 1999.

Extraordinary  Item - loss  on  extinguishment  of  debt,  is  related  to  U.S.
Cellular's repurchase and certain conversions of its LYONs. A loss, net of taxes
and minority  interest,  of $(20.5)  million,  or $(.34) per diluted share,  was
recorded to reflect the difference  between the  repurchase or conversion  price
and the carrying value.

Net Income Available to Common totaled $51.9 million, or $.86 per diluted share,
in the third  quarter of 2000,  compared to $25.2  million,  or $.40 per diluted
share, in 1999.

                                       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 $597.9 million in the first nine
months of 2000 compared to $356.1 million in 1999.

Income from  continuing  operations  excluding all noncash  items  increased 15%
($62.3 million) to $474.6 million in the first nine months of 2000. The increase
primarily  reflects the 14% ($76.6 million)  growth in aggregate  operating cash
flow (operating income plus depreciation and  amortization).  Changes in working
capital and other assets and  liabilities from operations provided $80.8 million
in 2000 and  required  $56.2 million  in 1999.  Cash  provided by the  change in
working capital and other assets and  liabilities  in 2000 primarily  relates to
an  increase  in  accrued  taxes.  Cash  required  in 1999 primarily reflects an
increase in accounts receivable.
<TABLE>
<CAPTION>

                                                                   Nine Months Ended
                                                                     September 30,
                                                                     -------------
                                                                2000                     1999
                                                                ----                     ----
                                                                    (Dollars in thousands)
<S>                                                        <C>                       <C>

Income from continuing operations                          $      139,220            $     302,675
Noncash items included in Income
  from continuing operations                                      335,402                  109,603
                                                            --------------           --------------


Income from continuing operations
  Excluding all noncash items                                     474,622                  412,278


Proceeds from litigation settlement                                42,457                       --


Changes in working capital and other
  assets and liabilities from operations                           80,827                  (56,158)
                                                            --------------           --------------
                                                            $     597,906            $     356,120
                                                            ==============           ==============
</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
$300.3  million in the first nine months of 2000  compared to $201.0  million in
1999 reflecting primarily capital  expenditures.  Capital expenditures  required
$301.7  million in 2000 and $311.5  million in 1999.  Acquisitions,  net of cash
acquired,  required $75.5 million in 2000 and $29.5 million in 1999. The Company
acquired a telephone  company,  majority  interest in two  cellular  markets and
several  minority  cellular  interests of U.S.  Cellular  majority held markets,
increasing  U.S.  Cellular's  ownership in these markets,  in 2000. The sales of
non-strategic cellular interests and other investments provided $73.0 million in
2000,  and $120.0  million in 1999,  reducing  total  cash  flows  required  for
investing activities in each period.

                                       12
<PAGE>

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  $206.6  million  in  2000  and  $232.8  million  in  1999
representing  the  construction of cell sites, the development of office systems
and the change out of analog radio  equipment for digital radio  equipment.  TDS
Telecom capital  expenditures totaled $95.1 million in 2000 and $78.7 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  $309.6  million in the first nine months of 2000 and $70.4
million in 1999.  During 2000, TDS and U.S.  Cellular have expended  significant
amounts to repurchase  common shares.  TDS paid $281.6 million to repurchase 2.6
million TDS Common Shares pursuant to board of director authorizations.  TDS has
financed these  repurchases  primarily with short-term debt. U.S.  Cellular paid
$206.8 million to repurchase 3.1 million U.S. Cellular Common Shares pursuant to
board of director  authorizations.  U.S. Cellular has financed these repurchases
using  existing cash balances and internal  cash flow.  U.S.  Cellular also paid
$64.8 million in cash, and will pay an additional  $10.9 million in October 2000
to settle purchases from the end of September 2000, to repurchase $113.5 million
face value of LYONs with a carrying  value of $47.2 million.  Additionally, U.S.
Cellular  satisfied the  conversion of $82.8 million face value of LYONs, with a
carrying value of $34.5 million, by issuing 785,000 U.S. Cellular common shares.
Notes Payable  balances  increased by $271.0  million in 2000 and  decreased  by
$43.7 million in 1999. Dividends paid on Common and Preferred Shares,  excluding
dividends reinvested,  totaled $23.0 million in 2000 and $22.0 million in 1999.

Cash  Flows  From  Discontinued  Operations.  Cash  outflows  from  discontinued
operations  totaled  $6.6 million in 2000 and $49.7  million in 1999  reflecting
primarily,  in 1999, amounts borrowed from TDS to fund the operating  activities
of Aerial.

LIQUIDITY

TDS and its  subsidiaries  had cash and  temporary  investments  totaling  $96.2
million at September 30, 2000. TDS also had $587 million of bank lines of credit
for general  corporate  purposes at September 30, 2000.  Unused  amounts of such
lines  totaled  $316  million.  These  line of  credit  agreements  provide  for
borrowings at negotiated rates up to the prime rate. In addition,  U.S. Cellular
had $500  million of bank  lines of credit for  general  corporate  purposes  at
September  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.

TDS  anticipates  that the  aggregate  resources  required for 2000 will include
approximately  $310 million for U.S. Cellular capital additions and $145 million
for TDS Telecom capital  additions.  At September 30, 2000, the remaining amount
of capital  spending  approximated  $103 million for cellular  additions and $50
million for telephone additions. In addition, the Company expects to continue to
repurchase TDS and U.S. Cellular common shares as market conditions  warrant and
to opportunistically  repurchase LYONs. The Company may also, from time to time,
require resources to complete acquisitions.

U.S. Cellular plans to finance its cellular construction program using primarily
internally  generated cash. U.S.  Cellular's  operating cash flow totaled $548.3
million for the twelve months ended  September 30, 2000, up 15% ($73.1  million)
from 1999.

TDS Telecom plans to finance its construction program using primarily internally
generated  cash  supplemented  by long-term  financing  from federal  government
programs.  TDS  Telecom's  operating  cash flow totaled  $251.9  million for the
twelve  months ended  September  30, 2000,  up 8% ($17.8  million) from 1999. In
addition,  TDS Telecom  telephone  subsidiaries had $111.9 million in unadvanced
loan  funds  from  federal   government   programs  to  finance  the   telephone
construction activities as of September 30, 2000.

                                       13
<PAGE>

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.

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

TDS and  U.S.  Cellular  continually  review  attractive  opportunities  for the
acquisition  of  additional  telecommunications  companies as  well as exchanges
of markets that will  complement its established markets.  TDS and U.S. Cellular
also review attractive opportunities  for the acquisition of additional wireless
spectrum. TDS expects to  expend  $52  million in the  fourth  quarter  of  2000
to acquire 49% of Camden Telephone & Telegraph Co. Inc., in St. Mary's  Georgia.
U.S. Cellular expects  to expend $56 million  in  the  first quarter of 2001 for
acquisitions pending as of September 30, 2000.

On November 1, 2000 the United States Bankruptcy Court for the Western  District
of  Wisconsin   confirmed  a  plan  of  financial  reorganization  for  Airadigm
Communications, Inc., a Wisconsin based wireless services  provider.  Under  the
terms of the plan of reorganization, TDS and RW Acquisition Corp., an  affiliate
of TeleCorp PCS, have committed to provide funding to  meet certain  obligations
of Airadigm.  Airadigm continues to operate as an independent company  providing
wireless services.  Pursuant  to  the  plan  of  reorganization,  under  certain
circumstances  and  subject to  the FCC's  rules and  regulations,  TDS  and  RW
Acquisition Corp. or  their  respective  designees,  may  each  acquire  certain
personal  communications  services  licenses for areas of  Wisconsin and Iowa as
well  as other Airadigm  assets.  TDS's portion of the funding under the plan of
reorganization could possibly aggregate approximately $175 million.

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.

                                      14

<PAGE>


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 $4.73 billion at
September  30,  2000. A  hypothetical  10% decrease in the share prices of these
investments  would result in a $473.2 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,  but are not  limited  to:
  o changes in the overall economy,
  o changes in competition in the markets in which TDS operates,
  o advances in  telecommunications  technology,
  o changes in telecommunications regulatory environment,
  o pending and future litigation,
  o acquisitions/divestitures of properties and or licenses, and
  o changes in customer  growth rates,  penetration  rates,  churn rates,
    roaming rates and the mix of products and services offered in our markets.

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.

                                       15
<PAGE>

<TABLE>
<CAPTION>

                                                  TELEPHONE AND DATA SYSTEMS, INC. AND SUBSIDIARIES
                                                  -------------------------------------------------
                                                          CONSOLIDATED STATEMENTS OF INCOME
                                                          ---------------------------------
                                                                       Unaudited
                                                                       ---------
                                                                    Three Months Ended                  Nine Months Ended
                                                                       September 30,                      September 30,
                                                                      --------------                     -------------
                                                                   2000             1999             2000             1999
                                                                   ----             ----             ----             ----
                                                                       (Dollars in thousands, except per share amounts)
<S>                                                             <C>               <C>            <C>             <C>
OPERATING REVENUES
  U.S. Cellular                                                 $   414,199        $  373,201     $ 1,171,943     $ 1,060,138
  TDS Telecom                                                       154,070           137,438         450,899         402,710
                                                                ------------       -----------    ------------    ------------
                                                                    568,269           510,639       1,622,842       1,462,848
                                                                ------------       -----------    ------------    ------------
OPERATING EXPENSES
  U.S. Cellular                                                     319,671           277,641         921,307         840,012
  TDS Telecom                                                       122,644           108,001         356,159         315,103
                                                                ------------       -----------    ------------    ------------
                                                                    442,315           385,642       1,277,466       1,155,115
                                                                ------------       -----------    ------------    ------------

OPERATING INCOME                                                    125,954           124,997         345,376         307,733
                                                                ------------       -----------    ------------    ------------
INVESTMENT AND OTHER INCOME
  Interest and dividend income                                        2,511               718           9,805           4,065
  Investment income, net of amortization                              6,932            11,585          16,142          18,878
  Gain on cellular and other investments                             57,743             6,046          25,594         345,938
  Other (expense), net                                                1,003            (3,722)         (1,431)         (8,265)
  Minority share of (income)                                        (20,103)          (14,427)        (42,755)        (60,182)
                                                                ------------       -----------    ------------    ------------
                                                                     48,086               200           7,355         300,434
                                                                ------------       -----------    ------------    ------------

INCOME BEFORE INTEREST AND INCOME TAXES                             174,040           125,197         352,731         608,167
Interest expense                                                     24,699            25,170          72,146          76,410
Minority interest in income of subsidiary trust                       6,202             6,202          18,607          18,607
                                                                ------------       -----------    ------------    ------------

INCOME FROM CONTINUING OPERATIONS                                   143,139            93,825         261,978         513,150
  BEFORE INCOME TAXES
Income tax expense                                                   68,034            40,889         122,758         210,475
                                                                ------------       -----------    ------------    ------------

INCOME FROM CONTINUING OPERATIONS                                    75,105            52,936         139,220         302,675
                                                                ------------       -----------    ------------    ------------
Discontinued Operations
  Loss from operations of Aerial, net of tax                            --            (27,394)            --          (84,190)
  Gain on disposal of Aerial, net of tax                             (2,647)               --       2,147,435              --
                                                                ------------       -----------    ------------    ------------
                                                                     (2,647)          (27,394)      2,147,435         (84,190)
                                                                ------------       -----------    ------------    ------------

INCOME BEFORE EXTRAORDINARY ITEM                                     72,458            25,542       2,286,655         218,485
  Extraordinary Item - loss on extinguishment of debt,
    net of tax                                                      (20,460)               --         (26,566)             --
                                                                ------------       -----------    ------------    ------------
NET INCOME                                                       $   51,998        $   25,542     $ 2,260,089      $  218,485

Preferred Dividend Requirement                                         (119)             (316)           (385)         (1,003)
                                                                ------------       -----------    ------------    ------------

NET INCOME AVAILABLE TO COMMON                                   $   51,879        $   25,226     $ 2,259,704      $   217,482
                                                               =============       ===========    ============    =============

BASIC WEIGHTED AVERAGE COMMON SHARES (000s)                          59,537            61,451          60,307          61,376

BASIC EARNINGS PER SHARE (Note 8)
  Income from continuing operations                              $    1.26         $     0.86     $    2.30        $     4.92
  Net income available to common                                 $     .87         $     0.41     $   37.47        $     3.54
                                                                 ==========        ===========    ==========       ===========
DILUTED EARNINGS PER SHARE (Note 8)
  Income from continuing operations                              $    1.24         $     0.84     $    2.26        $     4.82
  Net income available to common                                 $     .86         $     0.40     $   36.97        $     3.47
                                                                 ==========        ===========    ==========       ===========

DIVIDENDS PER SHARE                                              $    .125         $     .115     $    .375        $     .345
                                                                 ==========        ===========    ==========       ===========
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 STATEMENTS OF CASH FLOWS
                                                                    -------------------------------------
                                                                                   Unaudited
                                                                                   ---------

                                                                                    Nine Months Ended
                                                                                      September 30,
                                                                                     -------------
                                                                                 2000                1999
                                                                                 ----                ----
                                                                                 (Dollars in thousands)
  <S>                                                                      <C>                  <C>
  CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
    Income from continuing operations                                      $   139,220          $   302,675
    Add (Deduct) adjustments to reconcile income
      from continuing operations to net cash provided by
      operating activities
        Depreciation and amortization                                           296,768              257,842
        Deferred taxes                                                            4,148              124,411
        Investment income                                                       (25,762)             (28,659)
        Minority share of income                                                 42,755               60,182
        (Gain) on cellular and other investments                                (25,594)            (345,938)
        Noncash interest expense                                                 13,358               13,315
        Other noncash expense                                                    29,729               28,450
        Proceeds from litigation settlement                                      42,457                   --
        Change in accounts receivable                                           (19,528)             (51,010)
        Change in materials and supplies                                         (3,313)              (7,383)
        Change in accounts payable                                                5,282               (3,241)
        Change in accrued interest                                              (12,699)             (13,811)
        Change in accrued taxes                                                  83,656                  914
        Change in other assets and liabilities                                   27,429               18,373
                                                                            ------------         ------------
                                                                                597,906              356,120
                                                                            ------------         ------------

  CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES
    Capital expenditures                                                       (301,749)            (311,493)
    Acquisitions, net of cash acquired                                          (75,527)             (29,527)
    Investments in and advances to investment
      entities and license costs                                                 (3,681)                 724
    Distributions from investments                                               14,625               19,225
    Proceeds from investment sales                                               72,973              120,000
    Increase in notes receivable                                                (13,400)                  --
    Other investing activities                                                    6,504                   51
                                                                            ------------         ------------
                                                                               (300,255)            (201,020)
                                                                            ------------         -------------

  CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
    Long-term debt borrowings                                                     1,752                8,868
    Repayments of long-term debt                                                (11,634)             (17,012)
    Change in notes payable                                                     271,000              (43,724)
    Dividends paid                                                              (22,989)             (21,970)
    Repurchase of common shares                                                (281,641)                  --
    Repurchase of subsidiary common shares                                     (206,782)                  --
    Repurchase and conversion of LYONs                                          (64,891)                  --
    Other financing activities                                                    5,619                3,410
                                                                            ------------        -------------
                                                                               (309,566)             (70,428)
                                                                            ------------        -------------

  CASH FLOWS FROM DISCONTINUED OPERATIONS                                        (6,563)             (49,680)
                                                                            ------------        -------------

  NET INCREASE IN CASH AND CASH EQUIVALENTS                                     (18,478)              34,992
  CASH AND CASH EQUIVALENTS -
    Beginning of period                                                         111,010               45,139
                                                                            ------------        -------------
    End of period                                                           $    92,532         $     80,131
                                                                            ============        =============

         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
                                                              ---------------------------
                                                                           ASSETS
                                                                           ------

                                                                     (Unaudited)
                                                                     September 30,           December 31,
                                                                         2000                   1999
                                                                         ----                   ----
                                                                        (Dollars in thousands)
<S>                                                                   <C>                  <C>
CURRENT ASSETS
  Cash and cash equivalents                                           $     92,532         $     111,010
  Temporary investments                                                      3,681                 4,983
  Accounts receivable from customers and others                            342,944               317,025
  Materials and supplies, at average cost,
    and other current assets                                                86,744                74,990
                                                                      -------------        --------------
                                                                           525,901               508,008
                                                                      -------------        --------------

INVESTMENTS
  Marketable equity securities                                           4,731,812               843,280
  Intangible Assets
    Cellular license acquisitions costs, net                             1,140,775             1,156,175
    Franchise costs and other costs, net                                   196,153               177,677
  Investments in unconsolidated entities                                   245,534               272,601
  Other investments                                                         56,304                28,837
                                                                      -------------        --------------
                                                                         6,370,578             2,478,570
                                                                      -------------        --------------

PROPERTY, PLANT AND EQUIPMENT, NET
  U.S. Cellular                                                          1,227,563             1,206,467
  TDS Telecom                                                              897,433               889,422
                                                                      -------------        --------------
                                                                         2,124,996             2,095,889
                                                                      -------------        --------------

OTHER ASSETS AND DEFERRED CHARGES                                           49,286                56,216
                                                                      -------------        --------------

NET ASSETS OF DISCONTINUED OPERATIONS                                           --               237,145
                                                                      -------------        --------------
    TOTAL ASSETS                                                      $  9,070,761         $   5,375,828
                                                                      =============        ==============

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

                                       18
<PAGE>



<TABLE>
<CAPTION>

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

                                                                               (Unaudited)
                                                                              September 30,         December 31,
                                                                             --------------        ------------
                                                                                 2000                  1999
                                                                                  ----                  ----
                                                                                   (Dollars in thousands)
<S>                                                                     <C>                   <C>
CURRENT LIABILITIES
  Current portion of long-term debt                                     $         15,134      $         14,967
  Notes payable                                                                  271,000                    --
  Accounts payable                                                               243,612               206,937
  Advance billings and customer deposits                                          53,770                43,965
  Accrued interest                                                                11,430                23,492
  Accrued taxes                                                                   54,947                19,773
  Accrued compensation                                                            40,108                35,939
  Other current liabilities                                                       37,329                24,599
                                                                        -----------------     -----------------
                                                                                 727,330               369,672
                                                                        -----------------     -----------------

DEFERRED LIABILITIES AND CREDITS                                               1,994,308               424,515
                                                                        -----------------     -----------------

LONG-TERM DEBT, excluding current portion                                      1,220,142             1,279,877
                                                                        -----------------     -----------------

MINORITY INTEREST in subsidiaries                                                 450,900               509,658
                                                                        -----------------     -----------------

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

PREFERRED SHARES                                                                   7,881                 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                                               1,811,355             1,897,402
  Treasury Shares, at cost
    (3,674,472 shares and 1,237,207 shares, respectively)                       (376,812)             (102,975)
  Accumulated other comprehensive income                                         188,954               179,071
  Retained earnings                                                            2,746,079               508,979
                                                                        -----------------     -----------------
                                                                               4,370,200             2,483,101
                                                                        -----------------     -----------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $      9,070,761      $      5,375,828
                                                                        =================     =================

(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.
</TABLE>

                                       19
<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  September  30,  2000 and
      December 31, 1999,  and the results of  operations  and cash flows for the
      nine months ended  September 30, 2000 and 1999.  The results of operations
      for the nine months ended September 30, 2000 and 1999, are not necessarily
      indicative of the results to be expected for the full year.

2.    Discontinued Operations

      In  September  of 1999,  the Board of  Directors of TDS approved a plan of
      merger  between  Aerial  Communications,  Inc.  ("Aerial"),  its then over
      80%-owned  personal   communications  services  company,  and  VoiceStream
      Wireless Corporation ("VoiceStream"). 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.

                                       20
<PAGE>
<TABLE>

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

<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>
<TABLE>
<CAPTION>

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

                                                             Three Months Ended                   Nine Months Ended
                                                               September 30,                        September 30,
                                                              --------------                        -------------
                                                           2000               1999               2000              1999
                                                           ----               ----               ----              ----
                                                                            (Dollars in thousands)

<S>                                                   <C>                  <C>                <C>               <C>
Revenues                                              $         --         $    48,753        $   94,463        $  154,079
Expenses                                                        --              89,578           164,148           292,085
                                                      -------------        ------------       -----------       -----------
Operating (Loss)                                                --             (40,825)          (69,685)         (138,006)
Minority share of loss                                          --                  --            33,459            10,967
Other income                                                    --              (2,835)          (29,533)               (1)
Interest expense                                                --              (4,813)           (8,605)          (15,210)
                                                      -------------        ------------       -----------       -----------
(Loss) Before Income Taxes                                      --             (48,473)          (74,364)         (142,250)
Income tax benefit                                              --             (21,079)          (36,624)          (58,060)
                                                      -------------        ------------       -----------       -----------
  Net (Loss)                                                    --             (27,394)          (37,740)          (84,190)
Losses deferred after measurement date                          --                  --            37,740                --
                                                      -------------        ------------       -----------       -----------
Net (Loss) From Discontinued
  Operations                                          $        --          $   (27,394)       $       --        $  (84,190)
                                                      =============        ============       ===========       ===========



</TABLE>

                                       21
<PAGE>
<TABLE>
<CAPTION>

Summarized cash flow statement  information relating to discontinued  operations is as follows:

                                                                             Nine Months Ended
                                                                              September 30,
                                                                              -------------

                                                                        2000                   1999
                                                                        ----                   ----
                                                                            (Dollars in thousands)
<S>                                                               <C>                    <C>
Cash flows from operating activities                              $       (55,851)       $       (25,683)
Cash flows from financing activities                                      108,180                  2,464
Cash flows from investing activities                                      (17,325)               (23,845)
                                                                  ----------------       ----------------
Cash provided (used) by discontinued operations                            35,004                (47,064)
(Increase) decrease in cash included in net
  assets of discontinued operations                                       (41,567)                (2,616)
                                                                  ----------------       ----------------
Cash flows from discontinued operations                           $        (6,563)       $       (49,680)
                                                                  ================       ================
</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>

                                                                  September 30,               December 31,
                                                                  -------------               ------------
                                                                      2000                        1999
                                                                      ----                        ----
                                                                               (Dollars in thousands)
<S>                                                               <C>                        <C>
Available-for-sale Equity Securities
  Aggregate Fair Value                                            $       4,731,812          $       843,280
  Adjusted Basis                                                          4,417,331                  517,870
                                                                  ------------------         ----------------
  Gross Unrealized Holding Gains                                            314,481                  325,410
  Tax Effect                                                                125,000                  130,616
                                                                  ------------------         ----------------
  Unrealized Holding Gains, net of tax                                      189,481                  194,794
  Minority Share of Unrealized Holding Gains                                    527                   15,723
                                                                  ------------------         ----------------
  Net Unrealized Holding Gains                                     $        188,954          $       179,071
                                                                  ==================         ================
</TABLE>

4. Common Stockholders' Equity

      The TDS Board of Directors  authorized the repurchase of up to 2.0 million
      TDS Common Shares in February 2000 and an additional 2.0 million shares in
      August 2000.  As of  September  30, 2000,  TDS has  repurchased  2,564,100
      common shares under this program.

5. Gain on Cellular and Other Investments

      TDS  recognized  gains of $25.6  million in the first nine months of 2000.
      The sale of non-strategic cellular interests and the settlement of a legal
      matter  resulted in gains of $96.1 million.  TDS also reduced the carrying
      value of its paging  investment  by $70.5  million to reflect  the reduced
      valuations in the paging industry.

      TDS recognized  gains of $345.9 million in 1999. The Company  recognized a
      $327.1 million gain 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 reflect the sale of certain  minority  cellular  interests and other
      investments for cash.

                                       22
<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>

                                                                                 Nine Months Ended
                                                                                   September 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                                         (10,930)               313,631
    Income tax effect                                                            5,618               (125,533)
                                                                         --------------         --------------
                                                                                (5,312)               188,098
    Minority share of unrealized gains                                          15,195                (27,822)
                                                                         --------------         --------------

  Net unrealized gains                                                           9,883                160,276
                                                                         --------------         --------------

  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                                                         9,883                 (6,337)
                                                                         --------------         --------------
  Balance, end of period                                                 $     188,954          $      69,272
                                                                         ==============         ==============
</TABLE>

<TABLE>
<CAPTION>

                                                         Three Months Ended                       Nine Months Ended
                                                            September 30,                           September 30,
                                                           --------------                           -------------
                                                         2000                 1999                 2000              1999
                                                         ----                 ----                 ----              ----
                                                                           (Dollars in thousands)

<S>                                               <C>                  <C>                 <C>                 <C>
Comprehensive Income
  Net Income                                      $       51,998       $      25,542       $    2,260,089      $    218,485
  Net change in unrealized gains
     on securities                                       (73,637)             62,625                9,883            (6,337)
                                                 ----------------     ---------------      ---------------     -------------
                                                  $      (21,639)      $      88,167       $    2,269,972      $    212,148
                                                 ================     ===============      ===============     =============
</TABLE>

7.   Extraordinary Item - Loss on Extinguishment of Debt

     U.S. Cellular repurchased Liquid Yield Option Notes (LYONs) with a carrying
     value of $47.2  million for $75.8 million in the first nine months of 2000.
     A loss, net of taxes and minority interest,  of $(20.5) million, or $(0.34)
     per diluted share in the third quarter and $(26.6) million,  or $(0.43) per
     diluted  share in the first nine  months,  was  recorded to account for the
     difference between the purchase price and the carrying value.

                                       23

<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                    Nine Months Ended
Basic Earnings Per Share                                           September 30,                        September 30,
                                                                  --------------                        -------------

                                                               2000              1999              2000              1999
                                                               ----              ----              ----              ----
                                                                    (Dollars in thousands, except per share amounts)

<S>                                                         <C>                 <C>             <C>               <C>
Income from Continuing Operations                           $    75,105         $  52,936       $   139,220       $  302,675
Less:  Preferred Dividends                                         (119)             (316)             (385)          (1,003)
                                                            ------------        ----------      ------------      -----------
Income Available to Common from Continued
  Operations Used in Basic Earnings Per Share                    74,986            52,620           138,835          301,672


Discontinued Operations
  Gain on Disposal of Aerial                                     (2,647)               --         2,147,435               --
  Loss on Operations of Aerial                                       --           (27,394)               --          (84,190)
Extraordinary Item                                              (20,460)               --           (26,566)              --
                                                            ------------        ----------      ------------      -----------


Net Income Available to Common used in
  Basic Earnings Per Share                                 $     51,879         $  25,226       $  2,259,704      $  217,482
                                                           =============        ==========      =============     ===========


Weighted Average Number of Common Shares
  Used in Basic Earnings Per Share                               59,537            61,451            60,307           61,376
                                                          ==============        ==========      ============      ===========


Basic Earnings Per Common Share
  Continuing Operations                                    $       1.26         $    0.86       $      2.30      $     4.92
   Discontinued Operations
    Gain on Disposal of Aerial                                    (0.05)               --             35.61               --
    Loss on Operations of Aerial                                     --             (0.45)               --            (1.38)
  Extraordinary Item                                              (0.34)               --             (0.44)              --
                                                           -------------        ----------      ------------     -------------
                                                           $       0.87         $    0.41       $      37.47     $       3.54
                                                           =============        ==========      =============    =============
</TABLE>

                                       24

<PAGE>


<TABLE>
<CAPTION>

                                                                  Three Months Ended                  Nine Months Ended
Diluted Earnings Per Share:                                          September 30,                      September 30,
                                                                   --------------                       -------------
                                                                2000              1999              2000              1999
                                                                ----              ----              ----              ----
                                                                     (Dollars in thousands, except per share amounts)

<S>                                                         <C>                 <C>              <C>               <C>
Income Available to Common from Continuing
  Operations Used in Basic Earnings Per Share               $     74,986        $   52,620       $   138,835       $  301,672


Reduction in Preferred Dividends if Preferred
  Shares Converted into Common Shares                                109               289               338              916
Minority Income Adjustment                                          (221)             (621)             (857)          (1,954)
                                                            -------------       -----------      ------------      -----------


Income Available to Common from Continuing
  Operations Used in Diluted Earnings Per Share                   74,874            52,288           138,316          300,634


Discontinued Operations
  Gain on Disposal of Aerial                                      (2,647)               --         2,147,435               --
  Loss on Operations of Aerial                                        --           (27,394)               --          (84,190)
Extraordinary Item                                               (20,460)               --           (26,566)              --
                                                            -------------       -----------       -----------       ----------
Net Income (Loss) Available to Common Used
  in Diluted Earnings Per Share                             $     51,767        $   24,894       $ 2,259,185       $  216,444
                                                            ==============      ===========      ============       ==========

Weighted Average Number of Common Shares
  Used in Basic Earnings Per Share                                59,537            61,451            60,307           61,376


Effect of Dilutive Securities
  Common Shares Outstanding if Preferred
    Shares Converted                                                 254               564               263              611
  Stock Options                                                      527               391               519              308
  Common Shares Issuable                                              13                13                13               13
                                                            -------------       -----------      ------------       ----------
Weighted Average Number of Common Shares
  Used in Diluted Earnings Per Share                              60,331            62,419            61,102           62,308
                                                            =============       ===========      ============       ==========


Diluted Earnings Per Common Share
  Continuing Operations                                     $       1.24        $     0.84       $      2.26       $     4.82
Discontinued Operations
    Gain on Disposal of Aerial                                     (0.04)               --             35.14               --
    Loss on Operations of Aerial                                      --             (0.44)               --            (1.35)
Extraordinary Item                                                 (0.34)               --             (0.43)              --
                                                            -------------       -----------      ------------      ------------
                                                            $       0.86        $     0.40       $     36.97       $      3.47
                                                            =============       ===========      ============      ============

      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.
</TABLE>

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 nine
      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.

                                       25
<PAGE>
<TABLE>
<CAPTION>

                                                                              Nine Months Ended
                                                                               September 30,
                                                                               -------------
                                                                          2000                 1999
                                                                          ----                 ----
                                                                            (Dollars in thousands)
     <S>                                                             <C>                 <C>
     Property, plant and equipment                                   $    10,497         $       4,248
     Cellular licenses                                                    18,761                19,879
     Notes receivable - other                                            (10,000)                   --
     Equity method investment in cellular interests                       67,034                  (748)
     Franchise costs                                                      22,744                 1,034
     Long-term debt                                                      (19,108)                 (987)
     Deferred credits                                                       (700)                 (254)
     Other assets and liabilities,
       Excluding cash and cash equivalents                               (12,589)                2,673
     Decrease in Minority interest                                        (1,112)                3,682
                                                                     ------------       ---------------
     Decrease in cash due to acquisitions                            $    75,527        $       29,527
                                                                     ============       ===============

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

                                                                             Nine Months Ended
                                                                               September 30,
                                                                               -------------
                                                                        2000                 1999
                                                                        ----                 ----
                                                                            (Dollars in thousands)

     <S>                                                                <C>                   <C>
     Interest Paid
       Continuing Operations                                            $   70,961            $  76,423
       Discontinued Operations                                               2,112                2,252
     Income Taxes Paid (net of income tax refund
       received of $15,000 in 2000)                                         22,545               18,697
     Common Shares issued by TDS for
       conversion of TDS Preferred Stock                                       418                3,800
     Subsidiary common shares issued for
       conversion of long-term debt                                     $   34,466            $      --

</TABLE>


                                       26
<PAGE>


10.   Business Segment Information

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

Three Months Ended                                                                          Discontinued
or at September 30, 2000              U.S. Cellular      TDS Telecom      All Other (1)      Operations         Total
------------------------              -------------      -----------      -------------      ----------         -----
      (Dollars in thousands)
<S>                                      <C>                 <C>           <C>                <C>             <C>
Operating revenues                       $  414,199          $  154,070    $        --        $         --    $    568,269
Operating cash flow                         161,230              64,231             --                  --         225,461
Depreciation and
  Amortization expense                       66,702              32,805             --                  --          99,507
Operating income                             94,528              31,426             --                  --         125,954
Marketable Equity Securities                410,140             124,271      4,197,401                  --       4,731,812
Total Assets                              3,328,526           1,443,471      4,298,764                  --       9,070,761
Capital Expenditures                     $   76,835          $   49,523     $       --        $         --     $   126,358

Three Months Ended                                                                          Discontinued
or at September 30, 1999              U.S. Cellular      TDS Telecom      All Other (1)      Operations         Total
------------------------              -------------      -----------      -------------      ----------         -----
      (Dollars in thousands)
Operating revenues                       $  373,201          $  137,438      $      --        $       --        $ 510,639
Operating cash flow                         153,004              60,367             --                --          213,371
Depreciation and
  Amortization expense                       57,444              30,930             --                --           88,374
Operating income                             95,560              29,437             --                --          124,997
Marketable Equity Securities                504,182             144,955             --                --          649,137
Total Assets                              3,326,157           1,405,883        165,346           458,772        5,356,158
Capital Expenditures                     $   70,962          $   29,924      $      --        $       --        $ 100,886

Nine Months Ended                                                                           Discontinued
or at September 30, 2000              U.S. Cellular      TDS Telecom      All Other (1)      Operations         Total
------------------------              -------------      -----------      -------------      ----------         -----
      (Dollars in thousands)
Operating revenues                       $1,171,943          $  450,899      $      --         $      --        $ 1,622,842
Operating cash flow                         448,471             193,673             --                --            642,144
Depreciation and
  Amortization expense                      197,835              98,933             --                --            296,768
Operating income                            250,636              94,740             --                --            345,376
Marketable Equity Securities                410,140             124,271      4,197,401                --          4,731,812
Total Assets                              3,328,526           1,443,471      4,298,764                --          9,070,761
Capital Expenditures                      $ 206,633          $   95,116      $      --         $      --        $   301,749

Nine Months Ended                                                                           Discontinued
or at September 30, 1999              U.S. Cellular      TDS Telecom      All Other (1)      Operations         Total
------------------------              -------------      -----------      -------------      ----------         -----
      (Dollars in thousands)
Operating revenues                       $1,060,138          $  402,710      $      --         $      --        $ 1,462,848
Operating cash flow                         385,951             179,625             --                --            565,576
Depreciation and
  Amortization expense                      165,825              92,018             --                --            257,843
Operating income                            220,126              87,607             --                --            307,733
Marketable Equity Securities                504,182             144,955             --                --            649,137
Total Assets                              3,326,157           1,405,883        165,346           458,772          5,356,158
Capital Expenditures                     $  232,814          $   78,679       $     --         $     --         $   311,493


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

                                       27
<PAGE>



                           PART II. OTHER INFORMATION

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

On April 11, 2000,  two  affiliates of U.S.  Cellular,  along with two unrelated
wireless  carriers,  filed a  declaratory  judgment  action in the United States
District  Court for the  Northern  District of Iowa  against  the Iowa  Attorney
General.  This  action  was  in  response  to  the  Attorney  General's  ongoing
investigation of certain wireless industry practices  involving wireless service
agreements and related matters. The suit by U.S. Cellular and the other wireless
carriers  seeks to have certain  state laws  declared  inapplicable  to wireless
service  agreements and such practices.  In response,  the Iowa Attorney General
filed  suit in the Iowa  State  District  Court  for Polk  County  against  U.S.
Cellular,  alleging  violations  of  various  state  consumer  credit  and other
consumer  protection  laws. The Attorney General is seeking  injunctive  relief,
barring the  enforcement  of  contracts  in excess of four  months,  and related
relief.  The Attorney  General is also seeking  unspecified  reimbursements  for
customers,  statutory  fines  ($40,000  for  certain  violations  and $5,000 for
others,  per violation) as well as fees and costs.  This case was removed to the
U.S.  District  Court for the Southern  District of Iowa.  On August 7, 2000 the
U.S.  District  Court in the Southern  District  granted the Attorney  General's
motion  to  remand  the case to state  court.  On  September  15,  2000 the U.S.
District Court in the Northern District dismissed U.S.  Cellular's  Complaint in
its  entirety.  U.S.  Cellular  vigorously  denies the  allegations  of the Iowa
Attorney  General  in the case  now  remanded  to state  court  and  intends  to
vigorously  contest this case. U.S. Cellular also intends to appeal the grant of
the motion to dismiss the Northern District case.

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  September  30,
             2000: None


                                       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   November 13, 2000                        /s/ Sandra L. Helton
     ------------------------------             --------------------------------
                                                Sandra L. Helton,
                                                Executive Vice President-Finance
                                                (Chief Financial Officer)



Date   November 13, 2000                        /s/ D. Michael Jack
     ------------------------------             --------------------------------
                                                D. Michael Jack,
                                                Vice President and Controller
                                                (Principal Accounting Officer)





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





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