Telephone and Data Systems, Inc. Management’s Discussion and Analysis of Results of Operation and Financial Condition Cash Flows From Continuing Investing Activities primarily represents uses of funds to acquire, construct and upgrade modern high-quality communications networks and facilities as a basis for creating long-term value for shareowners. In recent years, rapid changes in technology and new opportunities have required substantial investments in revenue enhancing and cost reducing upgrades of TDS’s networks. Cash flows used for investing activities primarily represent cash required for capital expenditures, and the acquisition of cellular and telephone properties and wireless spectrum. Proceeds from merger transactions, the sale of non- strategic properties and distributions from unconsolidated entities have provided substantial funds in recent years which have partially offset the cash requirements for investing activities; however, such sources cannot be relied upon to provide continuing or regular sources of financing. The primary purpose of TDS’s construction and expansion expenditures is to provide for significant customer growth, to upgrade service, and to take advantage of service-enhancing and cost-reducing technological developments in order to maintain competitive services. Cash expenditures for capital additions totaled $700.2 million in 2001, $456.0 million in 2000 and $399.6 million in 1999. U.S. Cellular’s capital additions totaled $503.3 million in 2001, $305.4 million in 2000 and $277.4 million in 1999 representing expenditures to build 377 cell sites in 2001, 224 in 2000 and 225 in 1999, to change out analog equipment for digital equipment and to improve business systems, primarily its customer information system. TDS Telecom’s capital additions for its local telephone operations totaled $99.9 million in 2001, $93.4 million in 2000 and $99.2 million in 1999 representing expenditures for switch modernization and outside plant facilities to maintain and enhance the quality of service and offer new revenue opportunities. TDS Telecom’s capital additions also included expenditures of $96.9 million in 2001, $57.2 million in 2000 and $23.0 million in 1999 for switching and other network facilities for its competitive local exchange business. Cash used for acquisitions, excluding cash acquired, totaled $392.8 million in 2001, $200.7 million in 2000 and $31.3 million in 1999. TDS’s acquisitions include primarily the purchase of controlling interests in cellular telephone and telephone properties, minority interests that increased the ownership of majority-owned markets and wireless spectrum. These expenditures added the majority interest in one cellular market, 26 PCS licenses and two telephone companies representing 6.8 million population equivalents, 1,000 customer units and 43,400 access lines in 2001. In 2000, the Company acquired the majority interest in two cellular markets, one telephone company and a minority interest in one telephone company representing 387,000 population equivalents and 10,200 access lines. In 1999, the Company acquired the majority interest in one cellular market and one telephone company representing 245,000 population equivalents, 15,000 customer units and 500 access lines. The 2000 expenditures also include a deposit on certain PCS licenses. The PCS licenses were acquired on U.S. Cellular’s behalf and through joint ventures. The interests acquired through joint ventures are 100% owned by the joint ventures, and the Company is considered to have the controlling financial interest in these joint ventures for financial reporting purposes. TDS received $570.0 million in cash from the merger of Deutsche Telekom and VoiceStream in 2001 and $46.6 million in cash from the merger of AirTouch and Vodafone in 1999. The sale of non-strategic cellular assets, and certain other assets and properties provided $0.5 million in 2001, $73.0 million in 2000 and $73.4 million in 1999. TDS loans and advances, primarily to Airadigm Communications, Inc., totaled $9.8 million in 2001 and $55.1 million in 2000. Distributions from unconsolidated investments provided $16.6 million in 2001, $34.8 million in 2000 and $26.1 million in 1999. The 2000 amount included a special nonrecurring distribution of $11.8 million. 32 Telephone and Data Systems, Inc. Annual Report 2001 Management’s Discussion and Analysis of Results of Operation and Financial Condition Cash Flows from Continuing Financing Activities Liquidity and Capital Resources primarily reflects changes in short-term debt balances, cash used to repurchase common shares, cash used for the repurchase and conversion of LYONs securities and proceeds from the sale of long-term debt and equity securities to refinance short-term debt. The Company has used short-term debt to finance acquisitions, for general corporate purposes and to repurchase common shares. Internally generated funds as well as proceeds from the sale of non-strategic cellular and other investments, from time to time, have been used to reduce short-term debt. In addition, TDS has taken advantage of attractive opportunities to reduce short-term debt with proceeds from the sale of long-term debt securities, including sales of debt securities by subsidiaries. TDS has cash management arrangements with its subsidiaries under which the subsidiaries may from time to time deposit excess cash with TDS for investment.  TDS received $484.2 million from the sale of $500 million 40-year 7.6% Series A Notes in 2001. The proceeds were used to reduce short-term debt. A total of $65.5 million was paid to retire medium-term notes called at par in 2001. Short-term debt required cash totaling $249.5 million in 2001 and $170.9 million in 1999, and provided $499.0 million in 2000. During 1999, TDS reduced notes payable balances primarily through Aerial’s repayment of intercompany indebtedness as a result of Aerial’s receipt of an equity investment from a strategic investor, and as a result of internally generated cash and improved cash management.  The boards of directors of TDS and U.S. Cellular have authorized the repurchase of common shares of TDS and U.S. Cellular. During 2001, 2000 and 1999, TDS repurchased 325,000 shares, 2,666,000 shares and 664,000 shares, respectively, for an aggregate purchase price of $30.3 million, or an average of $93.47 per share, $287.7 million, or an average of $107.94 per share, and $80.5 million, or an average of $121.18 per share, respectively. Cash required for the repurchase of common shares totaled $39.4 million in 2001, $290.1 million in 2000 and $69.0 million in 1999 reflecting differences in the number of shares acquired and timing differences in the cash disbursements. During 2001 and 2000, U.S. Cellular repurchased 643,000 and 3,524,000 common shares for an aggregate purchase price of $29.9 million, or an average of $46.45 per share and $234.8 million, or an average of $66.64 per share, respectively. Cash required for the repurchase of U.S. Cellular common shares totaled $40.9 million and $223.8 million in 2001 and 2000, respectively. U.S. Cellular’s LYONs securities are convertible, at the option of the 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 notice of 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 such common shares. In addition, U.S. Cellular has opportunistically repurchased LYONs securities in private transactions and in open-market transactions. In 2001, U.S. Cellular paid $32.0 million and issued 644,000 U.S. Cellular common shares to retire LYONs securities with a carrying value of $55.1 million. During 2000, U.S. Cellular retired LYONs securities with a carrying value of $126.2 million for cash totaling $99.4 million and for 1,416,000 U.S. Cellular common shares. Cash Flows from Discontinued Operations represents the net cash used to fund the construction and operating activities of Aerial and cash provided by financing activities of Aerial prior to the merger with VoiceStream. Aerial’s financing activities included investments aggregating $230 million in 1999 in Aerial and one of its subsidiaries by a strategic investor. The cash provided by these investments was, upon receipt, used to reduce intercompany debt incurred to fund the construction and operating activities of Aerial. Management believes that internal cash flow, existing cash and cash equivalents, and funds available from line of credit arrangements provide sufficient financial resources to finance its near-term capital, business development and expansion expenditures. 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. However, the availability of financial resources is dependent on economic events, business developments, technological changes, financial conditions or other factors, some of which may not be in TDS’s control. If at any time financing is not available on terms acceptable to TDS, TDS might be required to reduce its business development and capital expenditure plans, which could have a materially adverse effect on its business and financial condition. TDS does not believe that any circumstances that could materially adversely affect TDS’s liquidity or capital resources are currently reasonably likely to occur, but it cannot provide assurances that such circumstances will not occur or that they will not occur rapidly. Economic downturns, changes in financial markets or other factors could rapidly change the availability of TDS’s liquidity and capital resources. As of December 31, 2001, the resources required for scheduled repayment of long-term debt (including announced prepayments of medium-term notes), trust originated securities, and aggregate minimum commitments under noncancelable long-term operating leases, and with respect to 2002, announced acquisitions, were as follows. Telephone and Data Systems, Inc. Annual Report 2001 33 – 800 – 700 – 600 – 500 – 400 – 300 – 200 – 100 – 0 700 400 456 ILEC Capital Expenditures $ Millions Cellular CLEC