56 Telephone and Data Systems, Inc. Annual Report 2001 Telephone and Data Systems, Inc. 57 Telephone and Data Systems, Inc. Annual Report 2001 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Tax-Deferred Savings Plan Accumulated Other Comprehensive Income (Loss) Dividend Reinvestment Plans TDS had reserved 62,000 Common Shares for issuance under the TDS Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. Participating employees have the option of investing their contributions in TDS Common Shares, U.S. Cellular Common Shares or seven nonaffiliated funds. The cumulative balance of unrealized gains (losses) on securities and related income tax effects included in Accumulated other comprehensive income (loss) are as follows. TDS had reserved 427,000 Common Shares for issuance under the Automatic Dividend Reinvestment and Stock Purchase Plan and 134,000 Series A Common Shares for issuance under the Series A Common Share Automatic Dividend Reinvestment Plan. These plans enable holders of TDS’s Common Shares and Preferred Shares to reinvest cash dividends in Common Shares and holders of Series A Common Shares to reinvest cash dividends in Series A Common Shares. The purchase price of the shares is 95% of the market value, based on the average of the daily high and low sales prices for TDS’s Common Shares on the American Stock Exchange for the ten trading days preceding the date on which the purchase is made. TDS had reserved 167,000 Common Shares for sale to the employees of TDS and its subsidiaries. TDS had reserved 2,512,000 Common Shares for options granted and to be granted to key employees. TDS has established certain plans that provide for the grant of stock options to officers and employees. The options are exercisable over a specified period not in excess of ten years. The options expire from 2002 to 2010 or 30 days after the date of the employee’s termination of employment, if earlier. No compensation costs have been recognized for the stock option and employee stock purchase plans. Had compensation cost for all plans been determined consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and earnings per share from continuing operations would have been reduced to the following pro forma amounts. The following table summarizes Common and Series A Common Shares issued, including reissued Treasury Shares, for the employee stock ownership plans and dividend reinvestment plans described below. 20 Dividend Reinvestment, Incentive and Compensation Plans Employee Stock Purchase Plan Stock-based Compensation Plans Year Ended December 31, 2001 2000 1999 (Dollars in thousands) Balance, beginning of year $ (178,344) $ 179,071 $ 75,609 Add (Deduct): Unrealized gains (losses) on securities (856,244) (620,834) 504,055 Income tax effect (343,869) (244,829) 201,801 (512,375) (376,005) 302,254 Equity method unrealized gains 397 — — Minority share of  unrealized (gains) losses 11,161 18,590 (32,179) Net unrealized gains (losses) (500,817) (357,415) 270,075 Deduct (Add): Recognized gains on sales  of securities (548,793) — 327,113 Income tax expense (benefit) (221,752) — 130,845 (327,041) — 196,268 Minority share of  recognized (gains) — — (29,655) Net recognized gains (losses) included in Net Income (327,041) — 166,613 Net change in unrealized  gains (losses) included in  Comprehensive Income (173,776) (357,415) 103,462 Balance, end of year $ (352,120) $(178,344) $ 179,071 Year Ended December 31, 2001 2000 1999 Common Shares Tax-deferred savings plan 18,000 14,000 25,000 Dividend reinvestment plan 6,000 5,000 8,000 Employee stock purchase plan 18,000 20,000 5,000 Stock-based  compensation plans 136,000 142,000 158,000 178,000 181,000 196,000 Series A Common Shares Dividend reinvestment plan 9,000 7,000 9,000  Year Ended December 31, 2001 2000 1999 (Dollars in thousands, except per share amounts) Income (loss) from Continuing  Operations As Reported $(168,248) $ 145,527 $ 291,326 Pro Forma (173,677) 138,024 287,674 Basic Earnings per Share from Continuing Operations As Reported (2.87) 2.42 4.72 Pro Forma (2.97) 2.29 4.66 Diluted Earnings per Share from Continuing Operations As Reported (2.87) 2.39 4.65 Pro Forma $ (2.97) $ 2.26 $ 4.60 Common Share Repurchase Program Common Stock 19 Common Stockholders’ Equity The Board of Directors of TDS from time to time has authorized the repurchase of TDS Common Shares. The Company may use repurchased shares to fund acquisitions and for other corporate purposes.  The Company repurchased 325,000 Common Shares in 2001 for $30.3 million, 2,666,000 Common Shares in 2000 for $287.7 million and 664,000 Common Shares in 1999 for $80.5 million. The Company reissued 173,000 Common Shares in 2001, 187,000 in 2000 and 188,000 in 1999 for acquisitions and incentive and compensation plans.  The holders of Common Shares are entitled to one vote per share. The holders of Series A Common Shares are entitled to ten votes per share. Series A Common Shares are convertible, on a share-for-share basis, into Common Shares. TDS has reserved 6,778,000 Common Shares at December 31, 2001, for possible issuance upon such conversion.  The carrying value and estimated fair value of the Com- pany’s Preferred Shares was $7.4 million and $5.4 million, respectively, at December 31, 2001, and $7.8 million and $5.3 million, respectively, at December 31, 2000. The fair value of the Company’s Preferred Shares was estimated using discounted cash flow analysis. The following is a schedule of Preferred Shares activity. The holders of outstanding Preferred Shares are entitled to one vote per share. The Company had 74,423 Preferred Shares authorized, issued and outstanding at December 31, 2001, of which 69,287 Shares were redeemable at the option of TDS and 5,136 Shares were redeemable at the option of the holder, at $100 per share plus accrued and unpaid dividends. The average dividend rate was $6.01 per share. At December 31, 2001, 68,840 Preferred Shares were convertible into 238,492 TDS Common Shares. 18 Preferred Shares Year Ended December 31, 2001 2000 1999 (Dollars in thousands) Balance, beginning of year $ 7,827 $ 9,005 $ 25,985 Less: Conversion of preferred (250) (472) (16,465) Redemption of preferred (135) (706) (515) Balance, end of year $ 7,442 $ 7,827 $ 9,005 The carrying value and estimated fair value of the preferred securities was $300.0 million and $299.2 million, respectively, at December 31, 2001, and $300.0 million and $279.0 million, respectively, at December 31, 2000. The fair value of the preferred securities was determined using the market prices of the preferred securities at December 31, 2001 and 2000. The following table summarizes the number of Common and Series A Common Shares outstanding. Series A  Common Common Treasury Shares Shares Shares (Shares in thousands) Balance December 31, 1998 54,988 6,950 (761) Repurchase Common Shares — — (664) Dividend reinvestment, incentive and  compensation plans 8 9 188 Other 7 — — Conversion of  Preferred Shares 409 — — Balance December 31, 1999 55,412 6,959 (1,237) Repurchase Common Shares — — (2,666) Conversion of Series A Common Shares 86 (86) — Dividend reinvestment,  incentive and  compensation plans 6 7 175 Other — — 12 Conversion of  Preferred Shares 20 — — Balance December 31, 2000 55,524 6,880 (3,716) Repurchase Common Shares — — (325) Conversion of Series A Common Shares 111 (111) — Dividend reinvestment,  incentive and  compensation plans 6 9 172 Other 5 — 1 Conversion of Preferred  Shares 13 — — Balance December 31, 2001 55,659 6,778 (3,868)