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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7784
CENTURYTEL, INC.
(Exact name of Registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 CenturyTel Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (318) 388-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
___________________ _________________________________________
Common Stock, par value $1.00 New York Stock Exchange
Berlin Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Berlin Stock Exchange
Corporate Units issued May 2002 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark if the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates (affiliates
being for these purposes only directors, executive officers and holders of more
than five percent of the Company's outstanding voting securities) was $4.2
billion as of June 28, 2002. As of February 28, 2003, there were 143,069,486
shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be furnished in connection with
the 2003 annual meeting of shareholders are incorporated by reference in Part
III of this Report.
PART I
Item 1. Business
General. CenturyTel, Inc. ("CenturyTel") is a regional integrated
communications company engaged primarily in providing local exchange telephone
services. For the year ended December 31, 2002, local exchange telephone
operations provided 88% of the consolidated revenues from continuing operations
of CenturyTel and its subsidiaries (the "Company"). All of the Company's
operations are conducted within the continental United States.
At December 31, 2002, the Company's local exchange telephone subsidiaries
operated approximately 2.4 million telephone access lines, primarily in rural,
suburban and small urban areas in 22 states, with the largest customer bases
located in Wisconsin, Missouri, Alabama, Arkansas, Washington, Michigan,
Louisiana, Colorado, Ohio and Oregon. According to published sources, the
Company is the eighth largest local exchange telephone company in the United
States based on the number of access lines served. For more information, see
"Telephone Operations."
On August 1, 2002, the Company sold substantially all of its wireless
operations for an aggregate of approximately $1.59 billion in cash. For
additional information, see "Recent acquisitions and dispositions" below.
The Company also provides long distance, Internet access, competitive
local exchange carrier, fiber network, security monitoring, and other
communications and business information services in certain local and regional
markets. For more information, see "Other Operations."
Recent acquisitions and dispositions. On July 1, 2002, the Company
completed the acquisition of approximately 300,000 telephone access lines in the
state of Alabama from Verizon Communications, Inc. ("Verizon") for approximately
$1.022 billion cash. On August 31, 2002, the Company completed the acquisition
of approximately 350,000 telephone access lines in the state of Missouri from
Verizon for approximately $1.179 billion cash. The assets purchased included (i)
telephone access lines and related property and equipment comprising Verizon's
local exchange operations in predominantly rural markets throughout Alabama and
Missouri, (ii) Verizon's assets used to provide digital subscriber line ("DSL")
and other high speed data services within the purchased exchanges and (iii)
approximately 2,800 route miles of fiber optic cable within the purchased
exchanges. The acquired assets did not include Verizon's cellular, personal
communications services ("PCS"), long distance, dial-up Internet, or directory
publishing operations, or rights under various Verizon contracts, including
those relating to customer premise equipment. The Company did not assume any
liabilities of Verizon other than (i) those associated with contracts,
facilities and certain other assets transferred in connection with the purchase
and (ii) certain employee-related liabilities, including liabilities for
postretirement health benefits.
On February 28, 2002, the Company purchased the fiber network and customer
base of KMC Telecom's operations in Monroe and Shreveport, Louisiana which
allows the Company to offer broadband and competitive local exchange services to
customers in these markets.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related assets from Verizon in
four separate transactions for approximately $1.5 billion in cash. Under these
transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related local exchange assets comprising 106 exchanges
throughout Arkansas for approximately $842 million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra")
purchased approximately 127,000 telephone access lines and related local
exchange assets comprising 107 exchanges throughout Missouri for
approximately $297 million cash. The Company currently owns 75.7% of
Spectra, which was organized to acquire and operate these Missouri
properties. At closing, the Company made a preferred equity investment
in Spectra of approximately $55 million (which represented a 57.1%
interest) and financed substantially all of the remainder of the
purchase price. In the first quarter of 2001, the Company purchased an
additional 18.6% interest in Spectra for $47.1 million.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related local exchange assets comprising 42
exchanges throughout Wisconsin for approximately $197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related local
exchange assets comprising 35 exchanges throughout Wisconsin for
approximately $172 million in cash. The Company owns 89% of TelUSA,
which was organized to acquire and operate these Wisconsin properties.
At closing, the Company made an equity investment in TelUSA of
approximately $37.8 million and financed substantially all of the
remainder of the purchase price.
In August 2000, the Company acquired the assets of CSW Net, Inc., a
regional Internet service provider that offers dial-up and dedicated Internet
access, and web site and domain hosting to more than 18,000 customers in 28
communities in Arkansas.
On August 1, 2002, the Company sold substantially all of its wireless
operations to an affiliate of ALLTEL Corporation ("Alltel") and certain partners
in the Company's markets that exercised "first refusal" purchase rights for an
aggregate of approximately $1.59 billion in cash. In connection with this
transaction, the Company divested its (i) interests in its majority-owned and
operated cellular systems, which at June 30, 2002 served approximately 783,000
customers and had access to approximately 7.8 million pops (the estimated
population of licensed cellular telephone markets multiplied by the Company's
proportionate equity interest in the licensed operators thereof), (ii) minority
cellular equity interests representing approximately 1.8 million pops at June
30, 2002, and (iii) licenses to provide PCS covering 1.3 million pops in
Wisconsin and Iowa. As a result, the Company's wireless operations have been
reflected as discontinued operations in the Company's accompanying consolidated
financial statements.
In the second quarter of 2001, the Company sold to Leap Wireless
International, Inc. 30 PCS operating licenses for an aggregate of $205 million.
The Company received approximately $118 million of the purchase price in cash at
closing and collected the remainder in installments through the fourth quarter
of 2001.
In June 1999, the Company sold all of the operations of its Brownsville
and McAllen, Texas, cellular systems to Western Wireless Corporation for
approximately $96 million cash. The Company received its proportionate share of
the sale proceeds of approximately $45 million after-tax.
In May 1999, the Company sold substantially all of its Alaska telephone
and wireless operations for approximately $300 million after-tax. In February
2000, the Company sold its interest in Alaska RSA #1, which completed the
Company's divestiture of its Alaska operations.
The Company continually evaluates the possibility of acquiring additional
telecommunications assets in exchange for cash, securities or both, and at any
given time may be engaged in discussions or negotiations regarding additional
acquisitions. The Company generally does not announce its acquisitions until it
has entered into a preliminary or definitive agreement. Over the past few years,
the number and size of communications properties on the market has increased
substantially. Although the Company's primary focus will continue to be on
acquiring interests that are proximate to its properties or that serve a
customer base large enough for the Company to operate efficiently, other
communications interests may also be acquired and these acquisitions could have
a material impact upon the Company.
Pending Acquisition and Disposition. In connection with the August 2002
sale of its wireless operations to Alltel, the Company retained a minority
interest in one market, which it agreed to sell to Alltel for approximately $68
million, subject to several closing conditions. Alltel has asserted that some of
these closing conditions have not been satisfied, and the parties are currently
in discussions regarding such conditions. No assurance can be given that this
sale will occur.
On February 13, 2003, a federal bankruptcy court approved the Company's
$38 million bid to acquire the assets of Digital Teleport, Inc., a regional
fiber optics communications company providing wholesale data transport services
to other communications carriers over a currently usable 3,800 route mile
network located in Missouri, Arkansas, Oklahoma and Kansas. The Company intends
to use the acquired assets to sell services to new and existing customers and to
reduce the Company's reliance on third party transport providers. The
transaction is expected to be completed in the second quarter of 2003, subject
to regulatory approvals and other closing conditions.
Where to find additional information. Effective February 28, 2003, the
Company makes available free of charge on its website (www.centurytel.com)
filings made with the Securities and Exchange Commission ("SEC") on Forms 10-K,
10-Q and 8-K as soon as reasonably practicable after such filings are made with
the SEC.
Other. As of December 31, 2002, the Company had approximately 6,960
employees, approximately 1,900 of whom were members of 15 different bargaining
units represented by the International Brotherhood of Electrical Workers, the
Communications Workers of America, or the NTS Employee Committee. Relations with
employees continue to be generally good.
CenturyTel was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous 15 to
20 years. CenturyTel's principal executive offices are located at 100 CenturyTel
Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.
TELEPHONE OPERATIONS
According to published sources, the Company is the eighth largest local
exchange telephone company in the United States, based on the approximately 2.4
million access lines it served at December 31, 2002. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominantly rural, suburban and small urban
markets in 22 states. The table below sets forth certain information with
respect to the Company's access lines as of December 31, 2002 and 2001.
December 31, 2002 December 31, 2001
- ------------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
- ------------------------------------------------------------------------------
Wisconsin (1) 490,116 21% 498,331 28%
Missouri (2) 478,207 20 130,651 7
Alabama 289,015 12 - -
Arkansas 268,220 11 271,617 15
Washington 188,733 8 189,868 11
Michigan 112,713 5 114,643 6
Louisiana 104,408 4 104,043 6
Colorado 96,799 4 97,571 6
Ohio 84,452 4 84,636 5
Oregon 76,751 3 78,592 4
Montana 65,666 3 65,974 4
Texas 48,931 2 51,451 3
Minnesota 30,930 1 31,110 2
Tennessee 27,365 1 27,660 2
Mississippi 24,156 1 23,579 1
New Mexico 6,565 - 6,396 -
Idaho 5,976 - 6,119 -
Wyoming 5,494 - 5,408 -
Indiana 5,468 - 5,490 -
Iowa 2,099 - 2,072 -
Arizona 1,986 - 1,937 -
Nevada 514 - 495 -
- ------------------------------------------------------------------------------
2,414,564 100% 1,797,643 100%
==============================================================================
(1) As of December 31, 2002 and 2001, approximately 61,060 and 61,990,
respectively, of these lines are owned and operated by CenturyTel's
89%-owned affiliate.
(2) As of December 31, 2002 and 2001, approximately 130,740 and 130,651,
respectively, of these lines are owned and operated by CenturyTel's
75.7%-owned affiliate.
As indicated in the following table, the Company has generally experienced
growth in its telephone operations over the past several years, a substantial
portion of which was attributable to the third quarter 2002 acquisitions of
telephone properties from Verizon, the third quarter 2000 acquisitions of
telephone properties from Verizon, the acquisitions of other telephone
properties and the expansion of services. A portion of the Company's access line
growth was offset by the May 1999 sale of the Company's Alaska telephone
operations.
Year ended or as of December 31,
- -------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Access lines 2,414,564 1,797,643 1,800,565 1,272,867 1,346,567
% Residential 76% 76 76 75 74
% Business 24% 24 24 25 26
Operating revenues $ 1,733,592 1,505,733 1,253,969 1,126,112 1,077,343
Capital expenditures $ 319,536 351,010 275,523 233,512 223,190
- -------------------------------------------------------------------------------------------
The Company hopes to expand its telephone operations by (i) acquiring
additional telephone properties, (ii) providing service to new customers, (iii)
increasing network usage and (iv) providing additional services which may be
made possible by advances in technology and improvements in the Company's
infrastructure. For information on developing competitive trends, see
"-Regulation and Competition."
Services
The Company's local exchange telephone subsidiaries derive revenue from
providing (i) local telephone services, (ii) network access services and (iii)
other related services. The following table reflects the percentage of telephone
operating revenues derived from these respective services:
2002 2001 2000
- -------------------------------------------------------------------------
Local service 34.9% 32.6 32.6
Network access 56.1 58.1 58.0
Other 9.0 9.3 9.4
- -------------------------------------------------------------------------
100.0% 100.0 100.0
=========================================================================
Local service. Local service revenues are derived from the provision of
local exchange telephone services in the Company's service areas. Access lines
declined 1.1% in 2002 (exclusive of the 2002 Verizon acquisitions) and declined
0.2% in 2001. Internal access line growth during 2000 was 2.8%. The Company
believes the decline in the number of access lines during 2002 and 2001 is
primarily due to declines in second lines, soft general economic conditions in
the Company's markets and the displacement of traditional wireline telephone
services by other competitive service providers. Even when the economy recovers,
the Company believes that any rebound in access lines will be limited by
continued declines in second lines caused primarily by DSL substitution and the
impact of competitive services. Based on current conditions, the Company
expects to incur a decline in access lines of 1 to 2% for 2003.
The installation of digital switches, high-speed data circuits and related
software has been an important component of the Company's growth strategy
because it allows the Company to offer enhanced voice services (such as call
forwarding, conference calling, caller identification, selective call ringing
and call waiting) and data services (such as data private line, digital
subscriber line, frame relay and local area/wide area networks) and to thereby
increase utilization of existing access lines. In 2002 the Company continued to
expand the availability of enhanced services offered in certain service areas.
Network access. Network access revenues primarily relate to services
provided by the Company to long distance carriers, wireless carriers and other
customers in connection with the use of the Company's facilities to originate
and terminate interstate and intrastate long distance telephone calls. Certain
of the Company's interstate network access revenues are based on tariffed access
charges prescribed by the Federal Communications Commission ("FCC"); the
remainder of such revenues are derived under revenue sharing arrangements with
other local exchange carriers ("LECs") administered by the National Exchange
Carrier Association ("NECA"), a quasi-governmental non-profit organization
formed by the FCC in 1983 for such purposes.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on tariffed access charges, which are subject to state regulatory
commission approval. Additionally, certain of the Company's intrastate network
access revenues, along with intrastate and intra-LATA (Local Access and
Transport Areas) long distance revenues, are derived through revenue sharing
arrangements with other LECs.
In 2002 the Company incurred a reduction in its intrastate revenues
(exclusive of the properties acquired from Verizon in 2002) of approximately
$27.7 million compared to 2001 primarily due to (i) a reduction in intrastate
minutes (partially due to the displacement of minutes by wireless and instant
messaging services) and (ii) decreased access rates in certain states. The
Company believes such trend of decreased intrastate minutes will continue in
2003. Although the magnitude of such decrease cannot be precisely estimated, the
Company believes such decrease will be less than that incurred in 2002.
The Company is continuing to install fiber optic cable in certain high
traffic routes providing diversity, increased bandwidth capability and improved
quality of service for its telephone operations in strategic operating areas. At
December 31, 2002 the Company's telephone subsidiaries had over 15,100 miles of
fiber optic cable in use.
Other. Other telephone revenues include revenues related to (i) leasing,
selling, installing, maintaining and repairing customer premise
telecommunications equipment and wiring, (ii) providing billing and collection
services for long distance companies and (iii) participating in the publication
of local directories.
Certain large communications companies for which the Company currently
provides billing and collection services continue to indicate their desire to
reduce their billing and collection expenses, which has resulted and may
continue to result in future reductions of the Company's billing and collection
revenues.
For further information on the regulation of the Company's revenues, see
"-Regulation and Competition."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") or the Rural Telephone Bank
("RTB"). The RUS has made long-term loans to telephone companies since 1949 for
the purpose of improving telephone service in rural areas. The RUS continues to
make new loans at interest rates that range from 5% to 7% based on borrower
qualifications and the cost of funds to the United States government. The RTB,
established in 1971, makes long-term loans at interest rates based on its
average cost of funds as determined by statutory formula (which ranged from
6.05% to 6.51% for the RTB's fiscal year ended September 30, 2002), and in some
cases makes loans concurrently with RUS loans. Some of the Company's telephone
plant is pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS and RTB. The Company's telephone subsidiaries that have
borrowed from government agencies generally may not loan or advance any funds to
CenturyTel, but may pay dividends if certain financial covenants are met.
For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.
Regulation and Competition
Traditionally, LECs have operated as regulated monopolies. Consequently,
most of the Company's telephone operations have traditionally been regulated
extensively by various state regulatory agencies (generally called public
service commissions or public utility commissions) and by the FCC. As discussed
in greater detail below, passage of the Telecommunications Act of 1996 (the
"1996 Act"), coupled with state legislative and regulatory initiatives and
technological changes, fundamentally altered the telephone industry by reducing
the regulation of LECs and permitting competition in each segment of the
telephone industry. CenturyTel anticipates that these trends towards reduced
regulation and increased competition will continue.
State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions which typically have the power to grant and revoke
franchises authorizing companies to provide communications services. Most of
such commissions have traditionally regulated pricing through "rate of return"
regulation that focuses on authorized levels of earnings by LECs. Most of these
commissions also (i) regulate the purchase and sale of LECs, (ii) prescribe
depreciation rates and certain accounting procedures and (iii) regulate various
other matters, including certain service standards and operating procedures.
In recent years, state legislatures and regulatory commissions in most of
the 22 states in which the Company operates have either reduced the regulation
of LECs or have announced their intention to do so, and it is expected that this
trend will continue. Wisconsin, Missouri, Alabama, Arkansas, Louisiana and
several other states have implemented laws or rulings which require or permit
LECs to opt out of rate of return regulation in exchange for agreeing to
alternative forms of regulation which typically permit the LEC greater freedom
to establish local service rates in exchange for agreeing not to charge rates in
excess of specified caps. As discussed further below, subsidiaries operating
over half of the Company's access lines in various states have agreed to be
governed by alternative regulation plans, and the Company continues to explore
its options for similar treatment in other states. Other states have imposed new
regulatory models that do not rely on "rate of return" regulation. The Company
believes that reduced regulatory oversight of certain of the Company's telephone
operations may allow the Company to offer new and competitive services faster
than under the traditional regulatory process. For a discussion of legislative,
regulatory and technological changes that have introduced competition into the
local exchange industry, see "-Developments Affecting Competition."
A portion of the Company's telephone operations in Wisconsin has been
regulated under an alternative regulation plan since June 1996; such plan was
subsequently modified in early 2000. In late 1999 and early 2000, most of the
Company's remaining Wisconsin telephone subsidiaries agreed to be subject to
alternative regulation plans. Each of these alternative regulation plans has a
five-year term and permits the Company to adjust local rates within specified
parameters if it meets certain quality-of-service and infrastructure-development
commitments. These plans also include initiatives designed to promote
competition. In November 2002, the Company applied to have its Wisconsin access
lines acquired in December 1998 regulated under a similar alternative regulation
plan. The Company's Wisconsin access lines acquired in mid-2000 continue to be
regulated under "rate of return" regulation.
All of the Company's Missouri LECs are regulated under a price-cap
regulation plan (effective in 2002) whereby basic service rates are adjusted
annually based on an inflation-based factor; non-basic services may be increased
up to 8% annually. The plan also allows the LECs to rebalance local basic
service rates up to four times in the first four years of such regulation as a
result of access rate or toll reductions.
Since 1995, the Company's Alabama LEC acquired as part of the acquisitions
from Verizon in 2002 has been subject to an alternative regulation plan. Under
this plan, local rates were frozen initially for five years, after which time
such rates can be increased by an amount equal to the consumer price index less
a 1% efficiency factor; non-basic service rates can be increased 10% per year.
In January 2003, the Company's Alabama LEC and the other independent LECs
in the state filed a Petition for Adoption of Streamlined Regulation Plan with
the Alabama Public Service Commission ("Alabama PSC"). As part of this proposed
plan, basic local service rates could be increased by 3% per year while
non-basic service rates could be increased as much as 7% per year. Access rates
could not be reduced unless the Alabama PSC offsets the revenue loss by some
other means. All rate adjustments proposed in the plan must be approved by the
Alabama PSC before being implemented. The Alabama PSC is expected to issue a
request for comments on the proposed plan in the second quarter of 2003.
The Company's Arkansas LECs, excluding the properties acquired from
Verizon in 2000, are regulated under an alternative regulation plan adopted in
1997, which initially froze access rates for three years, after which time such
rates can be adjusted based on an inflation-based factor. Local service rates
can be adjusted without commission approval; however, such rates are subject to
commission review if certain petition criteria are met. In addition, since 1995
the Company's Michigan LECs have been subject to a regulatory structure that
focuses on price and quality of service as opposed to traditional rate of return
regulation, and which relies more on existing federal and state law regarding
antitrust consumer protection and fair trade to provide safeguards for
competition and consumers.
Since 1997 all of the Company's LECs operating in Louisiana have been
regulated under a Consumer Price Protection Plan (the "Louisiana Plan"). This
form of regulation focuses on price and quality of service. Under the Louisiana
Plan, the Company's Louisiana LECs' local rates and access rates have remained
unchanged since 1997, but may currently be increased within certain parameters.
The Company's Louisiana LECs have the option to propose a new plan at any time
if the Louisiana Public Service Commission determines that (i) effective
competition exists or (ii) unforeseen events threaten the LEC's ability to
provide adequate service or impair its financial health.
Notwithstanding the movement towards alternative regulation, LECs
operating approximately 45% of the Company's total access lines continue to be
subject to "rate of return" regulation for intrastate purposes. These LECs
remain subject to the powers of state regulatory commissions to conduct earnings
reviews and adjust service rates, either of which could lead to revenue
reductions.
FCC regulation. The FCC regulates the interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other LECs by the Company
for use of its local network in connection with the origination and termination
of interstate telephone calls. Additionally, the FCC has prescribed certain
rules and regulations for telephone companies, including regulations regarding
the use of radio frequencies; a uniform system of accounts; and rules regarding
the separation of costs between jurisdictions and, ultimately, between
interstate services.
Effective January 1, 1991, the FCC adopted price-cap regulation relating
to interstate access rates for the Regional Bell Operating Companies. All other
LECs may elect to be subject to price-cap regulation. Under price-cap
regulation, limits imposed on a company's interstate rates are adjusted
periodically to reflect inflation, productivity improvement and changes in
certain non-controllable costs. In May 1993 the FCC adopted an optional
incentive regulatory plan for LECs not subject to price-cap regulation. A LEC
electing the optional incentive regulatory plan would, among other things, file
tariffs based primarily on historical costs and not be allowed to participate in
the relevant NECA pooling arrangements. The Company has not elected price-cap
regulation or the optional incentive regulatory plan for its incumbent
operations; however, the properties acquired from Verizon in 2002 are operated
under price-cap regulation. In connection with this acquisition, the Company
obtained a waiver of the FCC's "all or nothing" rule. This waiver is valid until
the FCC reviews the future appropriateness of the "all or nothing" rule. Absent
the waiver, present rules require a carrier that purchases access lines subject
to price-cap regulation to convert all of its properties to price-cap
regulation.
On October 11, 2001, the FCC modified its interstate access charge rules
and universal service support system for rate of return local exchange carriers.
This order, among other things, (i) increased the caps on the subscriber line
charges ("SLC") to the levels paid by most subscribers nationwide; (ii) allowed
limited SLC deaveraging, which will enhance the competitiveness of rate of
return carriers by giving them pricing flexibility; (iii) lowered per minute
rates collected for federal access charges; (iv) created a new explicit
universal service support mechanism that will replace other implicit support
mechanisms in a manner designed to ensure that rate structure changes do not
affect the overall recovery of interstate access costs by rate of return
carriers serving high cost areas and (v) terminated the FCC's proceeding on the
represcription of the authorized rate of return for rate of return LECs, which
will remain at 11.25%. The effect of this order on the Company was revenue
neutral for interstate purposes; however, intrastate revenues were adversely
affected in Arkansas and Ohio as the intrastate access rates in these states
mirror the interstate access rates.
The FCC is pursuing rulemaking regarding the development of an appropriate
federal incentive plan for rate of return LECs. The Company is actively
monitoring this proceeding and has provided comments to the FCC on this issue.
High-cost support funds, revenue sharing arrangements and related matters.
A significant number of the Company's telephone subsidiaries recover a portion
of their costs under federal and state cost recovery mechanisms that
traditionally have allowed LECs serving small communities and rural areas to
provide communications services reasonably comparable to those available in
urban areas and at reasonably comparable prices.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that will provide predictable levels of
support to rural local exchange carriers, including substantially all of the
Company's local exchange carriers. During 2002 and 2001 the Company's telephone
subsidiaries received $192.4 million (which included $9.9 million related to the
Company's operations acquired from Verizon in 2002) and $168.7 million,
respectively, from the federal Universal Service Fund, representing 9.8% and
8.0%, respectively, of the Company's consolidated revenues from continuing
operations for 2002 and 2001. Increasingly, wireless carriers have sought and
received payments from the Universal Service Fund, which the Company believes is
currently enhancing their ability to compete with wireline services and, in the
long term, could adversely impact the amount of funding available for LECs. In
addition, the Company's telephone subsidiaries received $31.7 million and $31.5
million in 2002 and 2001, respectively, from intrastate support funds.
In 1997, the FCC also established new programs to provide discounted
telecommunications services annually to schools, libraries and rural health care
providers. All communications carriers providing interstate telecommunications
services, including the Company's LECs and long distance operations, are
required to contribute to these programs. Prior to May 2001, the Company's LECs
recovered their funding contributions in their rates for interstate services.
Subsequent to May 2001, in accordance with a 2001 FCC order, such contributions
are not recovered through access charges but instead are charged as an explicit
item on customer's bills. The Company's contribution by its LEC and long
distance operations, both of which is passed on to its customers, was
approximately $10.6 million and $4.4 million, respectively, in 2002, and $6.4
million and $3.2 million, respectively, in 2001.
In late 2002, the FCC requested that the Federal-State Joint Board
("FSJB") on Universal Service review various FCC rules governing high cost
universal service support, including rules regarding eligibility to receive
support payments in markets served by LECs and competitive carriers. On February
7, 2003, the FSJB issued a notice for public comment on whether present rules
fulfill their purpose and whether or not modifications are needed. The Company
has been active in various dockets before the FCC and various state commissions
related to wireless carriers seeking support payments for service in the
Company's service areas.
In January 2003, the Louisiana Public Service Commission directed its
staff to review the feasibility of converting the $42 million Louisiana Local
Optional Service Fund ("LOS Fund") into a state universal service fund. A
recommendation by the Commission staff is expected by the end of 2003.
Currently, the LOS Fund is funded primarily by BellSouth, which proposes to
expand the base of contributors into the LOS Fund. The Company currently
receives approximately $21 million from the LOS Fund each year. There can be no
assurance that this funding will remain at current levels.
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "- State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
Substantially all of the Company's LECs (except for the properties
acquired from Verizon in 2002) concur with the common line tariff and certain of
the Company's LECs concur with the traffic sensitive tariffs filed by the NECA;
such LECs participate in the access revenue sharing arrangements administered by
the NECA for interstate services. All of the intrastate network access revenues
of the Company's LECs are based on access charges, cost separation studies or
special settlement arrangements. See "- Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. Long distance carriers
have also aggressively pursued regulatory or legislative changes that would
reduce access rates. See "Services - Network Access" above for additional
information.
Developments affecting competition. The communications industry continues
to undergo fundamental changes which are likely to significantly impact the
future operations and financial performance of all communications companies.
Primarily as a result of legislative and regulatory initiatives and
technological changes, competition has been introduced and encouraged in each
sector of the telephone industry. As a result, the number of companies offering
competitive services has increased substantially.
As indicated above, in February 1996 Congress enacted the 1996 Act, which
obligates LECs to permit competitors to interconnect their facilities to the
LEC's network and to take various other steps that are designed to promote
competition. The 1996 Act imposes several duties on a LEC if it receives a
specific request from another entity which seeks to connect with or provide
services using the LEC's network. In addition, each incumbent LEC is obligated
to (i) negotiate interconnection agreements in good faith, (ii) provide
"unbundled" access to all aspects of the LEC's network, (iii) offer resale of
its telecommunications services at wholesale rates and (iv) permit competitors
to collocate their physical plant on the LEC's property, or provide virtual
collocation if physical collocation is not practicable. On February 20, 2003,
the FCC revised its rules outlining the obligations of incumbent LECs to lease
elements of their networks on an unbundled basis to competitors. The new
framework eliminates the prior obligation of incumbent LECs to lease their
high-speed data lines to competitors. Incumbent LECs will remain obligated to
offer other telecommunications services to resellers at wholesale rates. This
new rule also provides for a significant role of state regulatory commissions in
implementing these new guidelines and establishing wholesale service rates.
Under the 1996 Act's rural telephone company exemption, approximately 50%
of the Company's telephone access lines are exempt from certain of these
interconnection requirements unless and until the appropriate state regulatory
commission overrides the exemption upon receipt from a competitor of a bona fide
request meeting certain criteria. States are permitted to adopt laws or
regulations that provide for greater competition than is mandated under the 1996
Act. Management believes that competition in its telephone service areas has
increased and will continue to increase as a result of the 1996 Act and
additional FCC interpretations related to interconnection and the portability of
universal service support. While competition through use of the Company's
network is still limited in most of its markets, the Company will continue to
witness competition from a variety of resellers and facilities-based service
providers, including wireless and cable companies.
In addition to these changes in federal regulation, all of the 22 states
in which the Company provides telephone services have taken legislative or
regulatory steps to further introduce competition into the LEC business.
As a result of these regulatory developments, incumbent LECs ("ILECs")
increasingly face competition from competitive local exchange carriers
("CLECs"), particularly in high population areas. CLECs provide competing
services through reselling the ILECs' local services, through use of the ILECs'
unbundled network elements or through their own facilities. The number of
companies which have requested authorization to provide local exchange service
in the Company's service areas has increased substantially in recent years,
especially in the Company's Verizon markets acquired in 2002 and 2000, and it is
anticipated that similar action may be taken by others in the future.
In addition to facing direct competition from CLECs, ILECs increasingly
face competition from alternate communication systems constructed by long
distance carriers, large customers or alternative access vendors. These systems,
which have become more prevalent as a result of the 1996 Act, are capable of
originating or terminating calls without use of the ILECs' networks. Customers
may also use wireless or Internet voice service to bypass ILECs' switching
services. In addition, technological and regulatory developments have increased
the feasibility of competing services offered by cable television companies,
several of whom are pursuing these opportunities. Other potential sources of
competition include noncarrier systems that are capable of bypassing ILECs'
local networks, either partially or completely, through substitution of special
access for switched access or through concentration of telecommunications
traffic on a few of the ILECs' access lines. The Company anticipates that all
these trends will continue and lead to increased competition with the Company's
LECs.
Wireless telephone services increasingly constitute a significant source
of competition with LEC services, especially as wireless carriers expand and
improve their network coverage and continue to lower their prices. As a result,
some customers have chosen to completely forego use of traditional wireline
phone service and instead rely solely on wireless service. This trend is
particularly evident among younger customers, and in urban areas. The Company
anticipates this trend will continue, particularly if wireless service rates
continue to decline and the quality of wireless service in the Company's
markets improves. Technological and regulatory developments in cellular
telephone, personal communications services, digital microwave, coaxial cable,
fiber optics, local multipoint distribution services and other wired and
wireless technologies are expected to further permit the development of
alternatives to traditional landline services.
Historically, ILECs had little or no competition associated with
intra-LATA long distance calls in their service areas. Principally as a result
of recent state regulatory changes, companies offering competing toll services
have emerged in the Company's local exchange markets.
To the extent that the telephone industry increasingly experiences
competition, the size and resources of each respective competitor may
increasingly influence its prospects. Many companies currently providing or
planning to provide competitive communication services have substantially
greater financial and marketing resources than the Company, and several are not
subject to the same regulatory constraints as the Company.
The Company anticipates that the traditional operations of LECs will
continue to be impacted by continued technological developments as well as
legislative and regulatory initiatives affecting the ability of LECs to provide
new services and the capability of long distance companies, CLECs, wireless
companies, cable television companies and others to provide competitive LEC
services. Competition relating to services traditionally provided by LECs has
thus far affected large urban areas to a greater extent than rural, suburban and
small urban areas such as those in which the Company operates. The Company
intends to actively monitor these developments, to observe the effect of
emerging competitive trends in initial competitive markets and to continue to
evaluate new business opportunities that may arise out of future technological,
legislative and regulatory developments.
The Company anticipates that regulatory changes and competitive pressures
will continue to place downward pressure on its telephone revenues. However, the
Company anticipates that such reductions may be minimized by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. The Company expects its internal telephone revenues
(exclusive of the properties acquired from Verizon in 2002) to decline in 2003
primarily due to continued access line loss and reduced intrastate revenues;
however, the Company expects its internal consolidated revenues to increase in
2003 primarily due to expected increased demand for its long distance, DSL and
other product offerings, as discussed further below.
OTHER OPERATIONS
The Company provides long distance, Internet access, competitive local
exchange services, fiber network, security monitoring, and other communications
and business information services in certain local and regional markets. The
results of these operations, which accounted for 12.1% and 7.6%, respectively,
of the Company's operating revenues and operating income during 2002, are
reflected for financial reporting purposes in the "Other operations" section.
Long distance. In 1996 the Company began marketing long distance service
in its equal access telephone operating areas. At December 31, 2002, the Company
provided long distance services to approximately 648,800 customers.
Approximately 75% of the Company's long distance revenues are derived from
service provided to residential customers. Although the Company owns and
operates switches in LaCrosse, Wisconsin; Shreveport, Louisiana and Vancouver,
Washington which are utilized to provide long distance services, it anticipates
that most of its near-term long distance service revenues will be provided by
reselling service purchased from other facilities-based long distance providers.
The Company intends to continue to expand its long distance business,
principally through reselling arrangements.
Internet access. The Company began offering traditional Internet access
services to its telephone customers in 1995. In late 1999, the Company began
offering in select markets digital subscriber line ("DSL") Internet access
services, a high-speed premium-priced data service. At December 31, 2002, the
Company provided Internet access services to a total of approximately 179,400
customers, 131,500 of which receive traditional dial-up Internet service in
select markets in 17 states (which markets represent 85% of the access lines
served by the Company's LECs), and 47,900 of which receive retail DSL services
in markets that cover approximately 59% of the access lines served by the
Company's LECs.
Competitive local exchange services. In late 2000, the Company began
offering competitive local exchange telephone services, coupled with long
distance, Internet access and other Company services, to small to medium-sized
businesses in Monroe and Shreveport, Louisiana. On February 28, 2002, the
Company purchased the fiber network and customer base of KMC Telecom's
operations in Monroe and Shreveport, Louisiana, which allowed the Company to
offer broadband and competitive local exchange services to customers in these
markets. At December 31, 2002, the Company had approximately 141,000 equivalent
access lines in its competitive local exchange carrier business.
Fiber network. In connection with its long-range plans to sell capacity to
other carriers and certain businesses in or near certain of its select markets,
the Company began providing service in the second quarter of 2001 to customers
over a 700-mile fiber optic ring connecting several communities in southern and
central Michigan.
On February 13, 2003, a federal bankruptcy court approved the Company's
$38 million bid to acquire the assets of Digital Teleport, Inc., a regional
fiber optics communication company providing wholesale data transport services
to other communications carriers over a currently usable 3,800 route mile
network located in Missouri, Arkansas, Oklahoma and Kansas. The Company intends
to use the acquired assets to sell services to new and existing customers and to
reduce the Company's reliance on third party transport providers. The
transaction is expected to be completed in the second quarter of 2003, subject
to regulatory approvals and other closing conditions.
Security monitoring. The Company offers 24-hour burglary and fire
monitoring services to approximately 8,600 customers in select markets in
Louisiana, Arkansas, Mississippi, Texas and Ohio.
The Company also provides audiotext services; printing, database
management and direct mail services; and cable television services. From time to
time the Company also makes investments in other domestic or foreign
communications companies.
Certain service subsidiaries of the Company provide installation and
maintenance services, materials and supplies, and managerial, technical,
accounting and administrative services to the telephone and other operating
subsidiaries. In addition, the Company provides and bills management services to
subsidiaries and in certain instances makes interest-bearing advances to finance
construction of plant, purchases of equipment or acquisitions of other
businesses. These transactions are recorded by the Company's regulated telephone
subsidiaries at their cost to the extent permitted by regulatory authorities.
Intercompany profit on transactions with regulated affiliates is limited to a
reasonable return on investment and has not been eliminated in connection with
consolidating the results of operations of CenturyTel and its subsidiaries. Such
intercompany profit is reflected as a reduction of cost of sales and operating
expenses in "Other operations".
OTHER DEVELOPMENTS
The Company is in the process of developing an integrated billing and
customer care system which will provide the Company with, in addition to
standard billing functionality currently being provided by our legacy system,
custom built hardware and software technology for more efficient and effective
customer care, billing and provisioning systems. The costs to develop such
system have been capitalized in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and aggregated $139.5 million at December 31, 2002. A portion of
these billing system costs related to the wireless business ($30.5 million) was
written off as a component of discontinued operations in the third quarter of
2002 as a result of the sale of substantially all of the Company's wireless
operations on August 1, 2002. Excluding this write-off, the Company's aggregate
billing system costs are expected to approximate $180 million upon completion
and are expected to be amortized over a twenty-year period. The Company expects
to begin amortizing the billing system in 2003 as customer groups are migrated
to this new system. In addition, the Company expects to incur duplicative system
costs in 2003 until such time as all customers are migrated to the new system.
Such amortization and duplicative system costs are expected to reduce diluted
earnings per share by $.04 for 2003.
The system remains in the development stage and has required substantially
more time and money to develop than originally anticipated. Although the Company
expects to complete all phases of the system in early 2004, there is no
assurance that this deadline (or the Company's budget) will be met or that the
system will function as anticipated. If the system does not function as
anticipated, the Company may have to write off part or all of its remaining
costs.
SPECIAL CONSIDERATIONS
Risk Factors
We have a substantial amount of indebtedness.
Principally, as a result of our recent acquisitions, we have a
substantial amount of indebtedness. This could hinder our ability to adjust to
changing market and economic conditions, as well as our ability to access the
capital markets to refinance maturing debt in the ordinary course of business.
In connection with executing our business strategies, we are continuously
evaluating the possibility of acquiring additional communications assets, and we
may elect to finance acquisitions by incurring additional indebtedness. If we
incur significant additional indebtedness, our credit ratings could be adversely
affected. As a result, our borrowing costs would likely increase, our access to
capital may be adversely affected and our ability to satisfy our obligations
under our current indebtedness could be adversely affected.
Our operations have undergone material changes, and our actual operating
results will differ from the results indicated in our historical and pro
forma financial statements.
As a result of our recently completed Verizon acquisitions and wireless
divestiture, our mix of operating assets differs materially from those
operations upon which our historical financial statements are based.
Consequently, our historical financial statements may not be reliable as an
indicator of future results. Moreover, the pro forma financial information that
we have filed with the Securities and Exchange Commission, while helpful in
illustrating certain effects of our recently completed transactions and related
financings, does not attempt to predict or suggest future operating results. The
pro forma information was prepared for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if such transactions had been consummated on the dates and in
accordance with the assumptions described in such information, nor is it
necessarily indicative of our future operating results or financial position.
The results of operations for the Verizon assets acquired are reflected in our
consolidated results of operations subsequent to each acquisition.
Our future results will suffer if we do not effectively manage our growth.
Recently, we have rapidly expanded our operations primarily through
acquisitions and new product and service offerings, and we intend to pursue
similar growth opportunities in the future. Our future success depends, in part,
upon our ability to manage our growth, including our ability to:
o upgrade our billing and other information systems
o retain and attract technological, managerial and other key
personnel to work at our Monroe, Louisiana headquarters and
regional offices
o effectively manage our day to day operations while attempting
to execute our business strategy of expanding our wireline
operations and our emerging businesses
o realize the projected growth and revenue targets developed b
management for our newly acquired and emerging businesses, and
o continue to identify new acquisition or growth opportunities
that we can finance, complete and operate on attractive terms.
Our rapid growth poses substantial challenges for us to integrate new
operations into our existing business in an efficient and timely manner, to
successfully monitor our operations, costs, regulatory compliance and service
quality, and to maintain other necessary internal controls. We cannot assure you
that these efforts will be successful, or that we will realize our expected
operating efficiencies, cost savings, revenue enhancements, synergies or other
benefits. If we are not able to meet these challenges effectively, our results
of operations may be harmed.
We cannot assure you that we will acquire additional properties.
We hope to grow primarily through acquisitions of properties similar to
those currently operated by us. However, we cannot assure you that properties
will be available for purchase on terms attractive to us, particularly if they
are burdened by regulations, pricing plans or levels of competitive pressures
that are new or different from those historically applicable to our incumbent
properties. Moreover, we cannot assure you that we will be able to arrange
additional financing on terms acceptable to us.
If we cannot expand through acquisitions, our growth could be limited
primarily to growth associated with providing new or additional services. Our
access lines (exclusive of acquisitions) declined 1.1% in 2002 and 0.2% in 2001,
and we expect to incur a further decline of 1 to 2% for 2003.
We cannot assure you that our new billing system will be successful.
We are developing a new integrated billing and customer care system. The
system remains in the development stage and has required substantially more time
and money to develop than originally anticipated. We expect our aggregate costs
associated with the billing system to total $180 million upon completion of the
system (excluding a write-off that we recorded in the third quarter of 2002).
Although we expect to complete all phases of the system in early 2004, we cannot
assure you that this deadline (or our budget) will be met or that the system
will function as anticipated. If the system does not function as anticipated, we
may have to write off part or all of our remaining costs.
Our industry is highly regulated, and continues to undergo various
fundamental regulatory changes.
As a diversified full service incumbent local exchange carrier, or
ILEC, we have traditionally been subject to significant regulation from federal,
state and local authorities. This regulation restricts our ability to raise our
rates and to compete, and imposes substantial compliance costs on us. In recent
years, the communications industry has undergone various fundamental regulatory
changes that have generally reduced the regulation of telephone companies and
permitted competition in each segment of the telephone industry. These and
subsequent changes could adversely affect us by reducing the fees that we are
permitted to charge, altering our tariff structures, or otherwise changing the
nature of our operations and competition in our industry. We are unable to
predict the future actions of the various regulatory bodies that govern us, but
such actions could materially affect our business.
We face competition, which could adversely affect us.
As a result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive, and we expect
these trends to continue. The number of companies that have requested
authorization to provide local exchange service in our markets has increased in
recent years, and we anticipate that others will take similar action in the
future. As an ILEC, our competitors include competitive local exchange carriers,
or CLECs, and other providers (or potential providers) of communications
services, such as Internet service providers, wireless telephone companies,
satellite companies, alternative access providers, neighboring ILECs, long
distance companies and cable companies that may provide services competitive
with ours or services that we intend to introduce. Wireless telephone services,
in particular, increasingly constitute a significant source of competition with
LEC services, especially as wireless owners expand and improve their network
coverage and continue to lower their prices. We cannot assure you that we will
be able to compete effectively with all of these industry participants.
We expect competition to intensify as a result of new competitors and
the development of new technologies, products and services. We cannot predict
which future technologies, products or services will be important to maintain
our competitive position or what funding will be required to develop and provide
these technologies, products or services. Our ability to compete successfully
will depend on how well we market our products and services, and on our ability
to anticipate and respond to various competitive factors affecting the industry,
including a changing regulatory environment that may affect us differently from
our competitors, new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors.
Many of our current and potential competitors have market presence,
engineering, technical and marketing capabilities and financial, personnel and
other resources substantially greater than ours. In addition, some of our
competitors can raise capital at a lower cost than we can, and have
substantially stronger brand names. Consequently, some competitors may be able
to charge lower prices for their products and services, to develop and expand
their communications and network infrastructures more quickly, to adapt more
swiftly to new or emerging technologies and changes in customer requirements,
and to devote greater resources to the marketing and sale of their products and
services than we can.
While we expect our internal consolidated revenues to grow as the
economy improves, we expect our internal telephone revenues (exclusive of the
properties acquired from Verizon in 2002) to decline in 2003 primarily due to
continued access line loss and reduced intrastate revenues.
We could be harmed by rapid changes in technology.
The communications industry is experiencing significant technological
changes. Rapid changes in technology could result in the development of products
or services that compete with or displace those offered by traditional LECs. If
we cannot develop new products to keep pace with technological advances, or if
such products are not widely embraced by our customers, we could be adversely
impacted.
We are reliant on support funds provided under federal and state laws.
We receive a substantial portion of our revenues from the federal
Universal Service Fund and, to a lesser extent, intrastate support funds. These
governmental programs are reviewed and amended from time to time, and we cannot
assure you that they will not be changed or impacted in a manner adverse to us.
We could be harmed by the recent adverse developments affecting other
communications companies.
Recently, WorldCom, Inc. and several other large communications
companies have declared bankruptcy or suffered financial difficulties, which
caused our provision for uncollectible receivables to increase. Likewise, a
number of our suppliers have recently experienced financial challenges, which
could cause us to experience delays, interruptions or additional expenses
associated with upgrading and expanding our information systems and networks and
offering new products and services. Continued weakness in the communications
industry could have additional future adverse effects on us, including reducing
our ability to collect receivables and to access the capital markets on
favorable terms.
Our agreements and organizational documents and applicable law could
limit another party's ability to acquire us at a premium.
Under our articles of incorporation, each share of common stock that
has been beneficially owned by the same person or entity continually since May
30, 1987 generally entitles the holder to ten votes on all matters duly
submitted to a vote of shareholders. As of March 17, 2003, the holders of our
ten-vote shares held approximately 42% of our total voting power. In
addition, a number of other provisions in our agreements and organizational
documents, including our shareholder rights plan, and various provisions of
applicable law may delay, defer or prevent a future takeover of CenturyTel
unless the takeover is approved by our board of directors. This could deprive
our shareholders of any related takeover premium.
Forward-Looking Statements
This report on Form 10-K and other documents filed by us under the federal
securities laws include, and future oral or written statements or press releases
by us and our management may include, certain forward-looking statements,
including without limitation statements with respect to our anticipated future
operating and financial performance, financial position and liquidity, growth
opportunities and growth rates, business prospects, regulatory and competitive
outlook, investment and expenditure plans, investment results, financing
opportunities and sources (including the impact of financings on our financial
position, financial performance or credit ratings), pricing plans, strategic
alternatives, business strategies, and other similar statements of expectations
or objectives that are highlighted by words such as "expects," "anticipates,"
"intends," "plans," "believes," "projects," "seeks," "estimates," "hopes,"
"should," and "may," and variations thereof and similar expressions. Such
forward-looking statements are inherently speculative and are based upon several
assumptions concerning future events, many of which are outside of our control.
These forward-looking statements, and the assumptions upon which such statements
are based, are subject to uncertainties that could cause our actual results to
differ materially from such statements. These uncertainties include but are not
limited to those set forth below:
o our ability to effectively manage our growth, including without limitation
our ability to (i) integrate newly-acquired operations into our
operations, (ii) attract and retain technological, managerial and other
key personnel to work at our Monroe, Louisiana headquarters or regional
offices, (iii) achieve projected economies of scale and cost savings, (iv)
achieve projected growth and revenue targets developed by management in
valuing newly-acquired businesses, (v) successfully upgrade our billing
and other information systems in a timely and cost-efficient manner and
(vi) otherwise monitor our operations, costs, regulatory compliance, and
service quality and maintain other necessary internal controls.
o the risks inherent in rapid technological change, including without
limitation the risk that technologies will not be developed or embraced by
us on a timely or cost-effective basis or perform according to
expectations.
o the effects of ongoing changes in the regulation of the communications
industry, including without limitation (i) changes as a result of the
1996 Act and other similar federal and state legislation and federal
and state regulations enacted thereunder, (ii) greater than
anticipated interconnection requests or competition in our
predominately rural local exchange telephone markets resulting
therefrom, (iii) greater than anticipated reductions in revenues
received from the federal Universal Service Fund or other current or
future federal and state support funds designed to compensate LECs that
provide services in high-cost markets, (iv) our failure to successfully
transition from "rate of return" regulation to alternative regulation
plans, (v) the final outcome of regulatory and judicial proceedings with
respect to interconnection agreements and (vi) future judicial or
regulatory actions taken in response to the 1996 Act.
o the effects of greater than anticipated competition, including competition
from wireless carriers, competitive local exchange companies or cable
television companies in our local exchange markets.
o possible changes in the demand for, or pricing of, our products and
services, including without limitation (i) reduced demand for
traditional telephone services caused by greater use of wireless or
Internet communications or other factors, (ii) reduced demand for
second lines, (iii) lower than anticipated demand for premium
telephone services, (iv) lower than anticipated demand for our DSL
Internet access services, CLEC services or broadband services and (v)
reduced demand for our access or billing and collection services.
o our ability to successfully introduce new product or service offerings
on a timely and cost-effective basis, including without limitation our
ability to (i) expand successfully our long distance and Internet
offerings to new or acquired markets, (ii) offer bundled service
packages on terms attractive to our customers and (iii) successfully
initiate competitive local exchange and data services in our targeted
markets.
o our ability to collect receivables from financially troubled
communications companies.
o regulatory limits on our ability to change the prices for telephone
services in response to competitive pressures.
o any difficulties in our ability to expand through attractively priced
acquisitions, whether caused by regulatory impediments, financing
constraints, a decrease in the pool of attractive target companies, or
competition for acquisitions from other interested buyers.
o the possibility of the need to make abrupt and potentially disruptive
changes in our business strategies due to changes in competition,
regulation, technology, product acceptance or other factors.
o the lack of assurance that we can compete effectively against better-
capitalized competitors.
o the impact of terrorist attacks on our business.
o other risks referenced from time to time in our filings with the
Securities and Exchange Commission.
o the effects of more general factors, including without limitation:
* changes in general industry and market conditions and growth rates
* changes in interest rates or other general national, regional or local
economic conditions
* changes in legislation, regulation or public policy, including
changes in federal rural financing programs
* unanticipated increases in capital, operating or administrative
costs, or the impact of new business opportunities requiring significant
up-front investments
* the continued availability of financing in amounts, and on terms
and conditions, necessary to support our operations
* changes in our relationships with vendors, or the failure of these
vendors to provide competitive products on a timely basis
* changes in our senior debt ratings
* unfavorable outcomes of regulatory or legal proceedings, including
rate proceedings and environmental proceedings
* losses or unfavorable returns on our investments in other
communications companies
* delays in the construction of our networks
* changes in accounting policies or practices adopted voluntarily or as
required by generally accepted accounting principles.
For additional information, see the description of our business included
above, as well as Item 7 of this report. Due to these uncertainties, you are
cautioned not to place undue reliance upon these forward-looking statements,
which speak only as of the date made. We undertake no obligation to update or
revise any of our forward-looking statements for any reason, whether as a result
of new information, future events or developments, or otherwise.
OTHER MATTERS
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 2002
have not been material and the Company currently has no reason to believe that
such costs will become material.
For additional information concerning the business and properties of the
Company, see Item 7 elsewhere herein, and the Consolidated Financial Statements
and notes 2, 5, 6, 13, and 18 thereto set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of telephone lines, central
office equipment, and land and buildings related to telephone operations. As of
December 31, 2002 and 2001, the Company's gross property, plant and equipment of
approximately $6.9 billion and $5.7 billion, respectively, consisted of the
following:
December 31,
2002 2001
- -------------------------------------------------------------------------------
Telephone operations
Cable and wire 53.0% 52.5
Central office 31.3 31.9
General support 6.9 5.9
Information origination/termination equipment 0.6 0.7
Construction in progress 0.5 1.1
Other 0.1 0.1
- -------------------------------------------------------------------------------
92.4 92.2
- -------------------------------------------------------------------------------
Other operations 7.6 7.8
- -------------------------------------------------------------------------------
100.0% 100.0
===============================================================================
"Cable and wire" facilities consist primarily of buried cable and aerial
cable, poles, wire, conduit and drops. "Central office equipment" consists
primarily of switching equipment, circuit equipment and related facilities.
"General support" consists primarily of land, buildings, tools, furnishings,
fixtures, motor vehicles and work equipment. "Information
origination/termination equipment" consists primarily of premise equipment
(private branch exchanges and telephones) for official company use.
"Construction in progress" includes property of the foregoing categories that
has not been placed in service because it is still under construction.
The properties of certain of the Company's telephone subsidiaries are
subject to mortgages securing the debt of such companies. The Company owns
substantially all of the central office buildings, local administrative
buildings, warehouses, and storage facilities used in its telephone operations.
The Company's property in its Other Operations consist primarily of (i)
corporate general support assets, (ii) the fiber network in Michigan and (iii)
equipment to provide competitive local exchange and Internet access services.
For further information on the location and type of the Company's properties,
see the descriptions of the Company's operations in Item 1.
Item 3. Legal Proceedings.
Following the Company's rejection of an acquisition proposal publicly
disclosed by Alltel Corporation on August 15, 2001, the Company and its
directors were named as defendants in Hannahs v. CenturyTel, Inc., et al., a
case filed August 20, 2001 in the Fourth Judicial District Court, State of
Louisiana, which asserted breach of fiduciary duty and related claims and sought
injunctive relief pertaining to the Company's rejection of the acquisition
proposal, as well as unspecified monetary damages. This case was dismissed
without prejudice on March 24, 2003. Two other similar shareholder suits were
previously either voluntarily dismissed or stayed and administratively closed.
On December 26, 2001, AT&T Corp. and one of its subsidiaries filed a
complaint in the U.S. District Court for the Western District of Washington
(Case No. CV0121512) seeking money damages against CenturyTel of the Northwest,
Inc. The plaintiffs claim, among other things, that CenturyTel of the Northwest,
Inc. has breached its obligations under a 1994 stock purchase agreement to
indemnify the plaintiffs for various environmental costs and damages relating to
properties sold to the plaintiffs under such 1994 agreement. The Company has
investigated this claim and believes it has numerous defenses available. If the
plaintiffs are successful in recovering any sums under this litigation, the
Company believes it is entitled to indemnification under agreements with third
parties.
On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued
by the Arkansas Public Service Commission ("APSC") in connection with the
Company's acquisition of its Arkansas LECs from Verizon in July 2000, and
remanded the case back to the APSC for further hearings. The Court took these
actions in response to challenges to the rates the Company has charged other
LECs for intrastate switched access service. On December 20, 2002, the APSC
approved the access rates established by the Company at the time of acquisition.
On January 29, 2003, AT&T filed with the APSC a petition for rehearing
related to this ruling.
From time to time, the Company is involved in other litigation incidental
to its business, including administrative hearings of state public utility
commissions relating primarily to rate making, actions relating to employee
claims, occasional grievance hearings before labor regulatory agencies and
miscellaneous third party tort actions. Currently, there are no material legal
proceedings of this nature.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning the Company's Executive Officers, set forth at Item
10 in Part III hereof, is incorporated in Part I of this Report by reference.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
CenturyTel's common stock is listed on the New York Stock Exchange and is
traded under the symbol CTL. The following table sets forth the high and low
sales prices, along with the quarterly dividends, for each of the quarters
indicated.
Sales prices
------------ Dividend per
High Low common share
---- --- ------------
2002:
First quarter $ 35.50 28.80 .0525
Second quarter $ 34.45 27.00 .0525
Third quarter $ 30.60 21.13 .0525
Fourth quarter $ 31.65 22.35 .0525
2001:
First quarter $ 39.88 25.45 .0500
Second quarter $ 30.42 26.90 .0500
Third quarter $ 36.50 28.30 .0500
Fourth quarter $ 35.79 30.25 .0500
Common stock dividends during 2002 and 2001 were paid each quarter. As of
February 28, 2003, there were approximately 4,890 stockholders of record of
CenturyTel's common stock.
For information regarding shares of CenturyTel common stock authorized
for issuance under CenturyTel's equity compensation plans, see Item 12.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial data
(from continuing operations) as of and for each of the years ended in the
five-year period ended December 31, 2002:
Selected Income Statement Data
Year ended December 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------
(Dollars, except per share amounts, and shares expressed in thousands)
Operating revenues
Telephone $ 1,733,592 1,505,733 1,253,969 1,126,112 1,077,343
Other 238,404 173,771 148,388 128,288 91,915
------------------------------------------------------------------
Total operating revenues $ 1,971,996 1,679,504 1,402,357 1,254,400 1,169,258
==================================================================
Operating income
Telephone $ 543,113 423,420 376,290 351,559 334,604
Other 43,568 22,098 31,258 22,580 16,083
Corporate overhead costs
allocable to discontinued
operations (11,275) (20,213) (21,411) (19,416) (14,957)
------------------------------------------------------------------
Total operating income $ 575,406 425,305 386,137 354,723 335,730
==================================================================
Nonrecurring gains and
losses (pre-tax) $ 3,709 33,043 - 11,284 28,085
==================================================================
Income from continuing operations $ 189,919 144,146 124,229 135,520 117,128
==================================================================
Basic earnings per share from
continuing operations $ 1.34 1.02 .88 .97 .85
==================================================================
Basic earnings per share from
continuing operations, as adjusted
for goodwill amortization $ 1.34 1.35 1.15 1.20 1.08
==================================================================
Diluted earnings per share from
continuing operations $ 1.33 1.01 .88 .96 .84
==================================================================
Diluted earnings per share from
continuing operations, as adjusted
for goodwill amortization $ 1.33 1.34 1.13 1.18 1.06
==================================================================
Dividends per common share $ .210 .200 .190 .180 .173
==================================================================
Average basic shares outstanding 141,613 140,743 140,069 138,848 137,010
==================================================================
Average diluted shares
outstanding 142,879 142,307 141,864 141,432 140,105
==================================================================
Selected Balance Sheet Data
December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(Dollars in thousands)
Net property, plant and
equipment $ 3,531,645 2,736,142 2,698,010 2,000,789 2,093,526
Goodwill $ 3,427,281 2,087,158 2,108,344 1,267,908 1,500,532
Total assets $ 7,770,408 6,318,684 6,393,290 4,705,407 4,935,455
Long-term debt $ 3,578,132 2,087,500 3,050,292 2,075,212 2,551,963
Stockholders' equity $ 3,088,004 2,337,380 2,032,079 1,847,992 1,531,482
------------------------------------------------------------------------
See Items 7 and 8 for a discussion of the Company's discontinued wireless
operations.
The following table presents certain selected consolidated operating data
as of the end of each of the years in the five-year period ended December 31,
2002:
Year ended December 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------
Telephone access lines 2,414,564 1,797,643 1,800,565 1,272,867 1,346,567
Long distance customers 648,797 465,872 363,307 303,722 226,730
---------------------------------------------------------------------
See Items 1 and 2 in Part I and Items 7 and 8 elsewhere herein for
additional information.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
OVERVIEW
CenturyTel, Inc. and its subsidiaries (the "Company") is a regional
integrated communications company engaged primarily in providing local exchange,
long distance, Internet access and data services to customers in 22 states.
On July 1, 2002, the Company acquired the local exchange telephone
operations of Verizon Communications, Inc. ("Verizon") in the state of Alabama
for approximately $1.022 billion cash. On August 31, 2002, the Company acquired
the local exchange telephone operations of Verizon in the state of Missouri for
approximately $1.179 billion cash. The results of operations for the Verizon
assets acquired are reflected in the Company's consolidated results of
operations subsequent to each respective acquisition. See "Acquisitions" below
and Note 2 of Notes to Consolidated Financial Statements for additional
information.
On August 1, 2002, the Company sold substantially all of its wireless
operations to an affiliate of ALLTEL Corporation ("Alltel") and certain other
purchasers in exchange for an aggregate of approximately $1.59 billion in cash.
As a result, the Company's wireless operations for the years ended December 31,
2002, 2001 and 2000 have been reflected as discontinued operations on the
Company's consolidated statements of income and cash flows. For further
information, see "Discontinued Operations" below.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related local exchange assets
in Arkansas, Missouri and Wisconsin from affiliates of Verizon for an aggregate
of approximately $1.5 billion cash. The operations of these acquired properties
are included in the Company's results of operations beginning on the respective
dates of acquisition. See "Acquisitions" below and Note 2 of Notes to
Consolidated Financial Statements for additional information.
During the three years ended December 31, 2002, the Company has acquired
and sold various other operations, the impact of which has not been material to
the financial position or results of operations of the Company.
The net income of the Company for 2002 was $801.6 million, compared to
$343.0 million during 2001 and $231.5 million during 2000. Diluted earnings per
share for 2002 was $5.61 compared to $2.41 in 2001 and $1.63 in 2000. Income
from continuing operations (and diluted earnings per share from continuing
operations) was $189.9 million ($1.33), $144.1 million ($1.01) and $124.2
million ($.88) for 2002, 2001 and 2000, respectively. In accordance with the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), amortization of goodwill ceased effective
January 1, 2002. Had the results of operations for the years ended December 31,
2001 and 2000 been subject to the provisions of SFAS 142, income from continuing
operations (and diluted earnings per share) would have been $190.5 million
($1.34) for 2001 and $160.8 million ($1.13) for 2000 and net income (and diluted
earnings per share) would have been $399.3 million ($2.81) for 2001 and $278.0
million ($1.96) for 2000.
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 543,113 423,420 376,290
Other 43,568 22,098 31,258
Corporate overhead costs allocable to discontinued
operations (11,275) (20,213) (21,411)
- ----------------------------------------------------------------------------------------------------------
575,406 425,305 386,137
Nonrecurring gains and losses, net 3,709 33,043 -
Interest expense (221,845) (225,523) (183,302)
Other income and expense (63,814) 32 4,936
Income tax expense (103,537) (88,711) (83,542)
- ---------------------------------------------------------------------------------------------------------
Income from continuing operations 189,919 144,146 124,229
Discontinued operations, net of tax 611,705 198,885 107,245
- ---------------------------------------------------------------------------------------------------------
Net income $ 801,624 343,031 231,474
=========================================================================================================
Net income, as adjusted for goodwill amortization $ 801,624 399,297 278,029
=========================================================================================================
Basic earnings per share
From continuing operations $ 1.34 1.02 .88
From continuing operations, as adjusted for
goodwill amortization $ 1.34 1.35 1.15
From discontinued operations $ 4.32 1.41 .77
From discontinued operations, as adjusted for
goodwill amortization $ 4.32 1.48 .84
Basic earnings per share $ 5.66 2.43 1.65
Basic earnings per share, as adjusted for
goodwill amortization $ 5.66 2.83 1.98
Diluted earnings per share
From continuing operations $ 1.33 1.01 .88
From continuing operations, as adjusted for
goodwill amortization $ 1.33 1.34 1.13
From discontinued operations $ 4.28 1.40 .76
From discontinued operations, as adjusted for
goodwill amortization $ 4.28 1.47 .83
Diluted earnings per share $ 5.61 2.41 1.63
Diluted earnings per share, as adjusted for
goodwill amortization $ 5.61 2.81 1.96
Average basic shares outstanding 141,613 140,743 140,069
=========================================================================================================
Average diluted shares outstanding 142,879 142,307 141,864
=========================================================================================================
During the three years ended December 31, 2002, the Company has recorded
certain nonrecurring items. Net income (and diluted earnings per share)
excluding nonrecurring items for 2002, 2001 and 2000 was $325.0 million ($2.27),
$225.7 million ($1.59; $1.98, as adjusted), and $228.8 million ($1.61; $1.94, as
adjusted), respectively. The Company believes this presentation of results of
operations excluding nonrecurring items is useful to investors because it (i)
reflects management's view of recurring operations upon which management bases
financial, operational, compensation and planning decisions and (ii) prevents
investors from misconstruing the significance of financial data impacted by
nonrecurring events. The following reconciliation table shows how the amounts
of various line items reported under generally accepted accounting principles
were impacted by these nonrecurring items.
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, in thousands)
Operating income, as reported $ 575,406 425,305 386,137
Less nonrecurring items:
Reserve for uncollectible receivables,
primarily WorldCom (15,000) - -
Refund of access charges to interexchange carriers (7,645) - -
Other (1,929) (2,000) (504)
- ---------------------------------------------------------------------------------------------------------
Operating income, excluding nonrecurring items $ 599,980 427,305 386,641
=========================================================================================================
Nonrecurring gains and losses, net, as reported $ 3,709 33,043 -
Less nonrecurring items:
Gain on sale of assets 3,709 58,523 -
Write down of non-operating assets - (25,480) -
- ---------------------------------------------------------------------------------------------------------
Nonrecurring gains and losses, net, excluding
nonrecurring items $ - - -
=========================================================================================================
Other income and expense, as reported $ (63,814) 32 4,936
Less nonrecurring items:
Redemption premium on remarketable notes,
net of unamortized premium (59,949) - -
Write-off of nonoperating investment (781) - -
Costs associated with unsolicited takeover proposal (3,000) (6,000) -
Settlement of interest rate hedge contracts - - (7,947)
- ----------------------------------------------------------------------------------------------------------
Other income and expense, excluding nonrecurring items $ (84) 6,032 12,883
=========================================================================================================
Income tax expense, as reported $ (103,537) (88,711) (83,542)
Less: Tax effect of nonrecurring items 29,608 (8,666) 2,957
- ---------------------------------------------------------------------------------------------------------
Income tax expense, excluding nonrecurring items $ (133,145) (80,045) (86,499)
=========================================================================================================
Discontinued operations, net of tax, as reported $ 611,705 198,885 107,245
Less nonrecurring items:
Gain on sale of assets 805,628 185,133 20,593
Write down of wireless portion of billing system (30,491) - -
Write down of non-operating assets (1,702) (18,205) -
Proportionate share of nonrecurring charges
recorded by entities in which the Company
owns a minority interest - (10,054) (5,330)
Company's share of gain on sale of assets - 2,164 -
Minority interest effect of gain on sale of assets - (13) -
Tax effect of nonrecurring items (241,810) (58,032) (7,123)
- ----------------------------------------------------------------------------------------------------------
Income from discontinued operations, net of tax,
excluding nonrecurring items $ 80,080 97,892 99,105
=========================================================================================================
Net income, as reported $ 801,624 343,031 231,474
Less: Effect of nonrecurring items 476,638 117,370 2,646
- ---------------------------------------------------------------------------------------------------------
Net income, excluding nonrecurring items $ 324,986 225,661 228,828
=========================================================================================================
Basic earnings per share, as reported $ 5.66 2.43 1.65
Less: Effect of nonrecurring items 3.37 .83 .02
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share, excluding nonrecurring items $ 2.29 1.60 1.63
=========================================================================================================
Basic earnings per share, excluding nonrecurring items,
as adjusted $ 2.29 2.00 1.96
=========================================================================================================
Diluted earnings per share, as reported $ 5.61 2.41 1.63
Less: Effect of nonrecurring items 3.34 .82 .02
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share, excluding nonrecurring items $ 2.27 1.59 1.61
=========================================================================================================
Diluted earnings per share, excluding nonrecurring items,
as adjusted $ 2.27 1.98 1.94
=========================================================================================================
For additional information concerning the nonrecurring items described in
the above table, see "Telephone Operations", "Nonrecurring Gains and Losses,
Net", "Other Income and Expense", and "Discontinued Operations".
Contributions to operating revenues and operating income by the Company's
telephone and other operations for each of the years in the three-year period
ended December 31, 2002 were as follows:
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------
Operating revenues
Telephone operations 87.9 % 89.7 89.4
Other operations 12.1 % 10.3 10.6
Operating income
Telephone operations 94.4 % 99.6 97.4
Other operations 7.6 % 5.2 8.1
Corporate overhead costs allocable
to discontinued operations (2.0)% (4.8) (5.5)
- ------------------------------------------------------------------------------
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. Such forward-looking statements are subject to uncertainties
that could cause the Company's actual results to differ materially from such
statements. Such uncertainties include but are not limited to: the Company's
ability to effectively manage its growth, including integrating newly-acquired
businesses into the Company's operations, hiring adequate numbers of qualified
staff and successfully upgrading its billing and other information systems; the
risks inherent in rapid technological change; the effects of ongoing changes in
the regulation of the communications industry; the effects of greater than
anticipated competition in the Company's markets; possible changes in the demand
for, or pricing of, the Company's products and services; the Company's ability
to successfully introduce new product or service offerings on a timely and
cost-effective basis; the Company's ability to collect its receivables from
financially troubled communications companies; and the effects of more general
factors such as changes in interest rates, in general market or economic
conditions or in legislation, regulation or public policy. These and other
uncertainties related to the business are described in greater detail in Item 1
included herein. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to update any of its forward-looking statements
for any reason.
TELEPHONE OPERATIONS
The Company conducts its telephone operations in rural, suburban and small
urban communities in 22 states. As of December 31, 2002, approximately 91% of
the Company's 2.4 million access lines were in Wisconsin, Missouri, Alabama,
Arkansas, Washington, Michigan, Louisiana, Colorado, Ohio and Oregon. The
operating revenues, expenses and income of the Company's telephone operations
for 2002, 2001 and 2000 are summarized below.
Year ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 604,580 491,529 408,538
Network access 972,303 874,458 727,797
Other 156,709 139,746 117,634
- -------------------------------------------------------------------------------
1,733,592 1,505,733 1,253,969
- -------------------------------------------------------------------------------
Operating expenses
Plant operations 433,187 380,466 290,062
Customer operations 148,502 117,080 105,950
Corporate and other 211,924 186,483 163,761
Depreciation and amortization 396,866 398,284 317,906
- -------------------------------------------------------------------------------
1,190,479 1,082,313 877,679
- -------------------------------------------------------------------------------
Operating income $ 543,113 423,420 376,290
===============================================================================
Local service revenues. Local service revenues are derived from the
monthly provision of local exchange telephone services in the Company's service
areas. Of the $113.1 million (23.0%) increase in local service revenues in 2002,
$102.8 million was due to the acquisition of the Verizon properties in 2002. The
remaining $10.3 million increase was primarily due to a $7.6 million increase
resulting from the provision of custom calling features to more customers and a
$1.8 million increase due to increased rates in certain jurisdictions. Of the
$83.0 million (20.3%) increase in local service revenues in 2001, $73.7 million
was due to the acquisition of the Verizon properties in 2000. The remaining $9.3
million increase was due to a $6.9 million increase due to increased rates in
certain jurisdictions and an increase in the number of customer access lines in
incumbent markets during most of 2001 and a $3.9 million increase due to the
increased provision of custom calling features. Internal access lines declined
1.1% and 0.2% during 2002 and 2001, respectively. Internal access line growth
during 2000 was 2.8%. The Company believes the decline in the number of access
lines during 2002 and 2001 is primarily due to declines in second lines, soft
general economic conditions in the Company's markets and the displacement of
traditional wireline telephone services by other competitive service providers.
Even when the economy recovers, the Company believes that any rebound in access
lines will be limited by continued declines in second lines caused primarily by
digital subscriber line substitution and the impact of competitive services.
Based on current conditions, the Company expects to incur a decline in access
lines of 1 to 2% for 2003.
Network access revenues. Network access revenues are primarily derived
from charges to long distance companies and other customers for access to the
Company's local exchange carrier ("LEC") networks in connection with the
completion of interstate or intrastate long distance telephone calls. Certain of
the Company's interstate network access revenues are based on tariffed access
charges filed directly with the Federal Communications Commission ("FCC"); the
remainder of such revenues are derived under revenue sharing arrangements with
other LECs administered by the National Exchange Carrier Association. Intrastate
network access revenues are based on tariffed access charges filed with state
regulatory agencies or are derived under revenue sharing arrangements with other
LECs.
Network access revenues increased $97.8 million (11.2%) in 2002 and $146.7
million (20.2%) in 2001 due to the following factors:
2002 2001
increase increase
(decrease) (decrease)
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Acquisitions of Verizon properties in third quarter 2002 $ 98,014 -
Acquisitions of Verizon properties in third quarter 2000 - 139,866
Increased recovery from the federal Universal Service Fund ("USF") 13,832 8,507
One-time refund of access charges to interexchange carriers (7,645) -
Intrastate revenues due to decreased minutes of use and decreased
access rates in certain states (27,740) (3,048)
Partial recovery of increased operating costs through
revenue sharing arrangements with other telephone companies,
increased recovery from state support funds and return on rate base 9,756 16,252
Rate changes in certain jurisdictions 5,600 (916)
Revision of prior year revenue settlement agreements 1,912 (16,876)
Other, net 4,116 2,876
- --------------------------------------------------------------------------------------------------
$ 97,845 146,661
==================================================================================================
In 2002 the Company incurred a reduction in its intrastate revenues
(exclusive of the properties acquired from Verizon in 2002) of approximately
$27.7 million compared to 2001 primarily due to (i) a reduction in intrastate
minutes (partially due to the displacement of minutes by wireless and instant
messaging services) and (ii) decreased access rates in certain states. The
Company believes such trend of decreased intrastate minutes will continue in
2003. Although the magnitude of such decrease cannot be precisely estimated, the
Company believes such decrease will be less than that incurred in 2002.
Other revenues. Other revenues include revenues related to (i) leasing,
selling, installing, maintaining and repairing customer premise
telecommunications equipment and wiring ("CPE services"), (ii) providing billing
and collection services for long distance carriers and (iii) participating in
the publication of local directories. Other revenues increased $17.0 million
(12.1%) in 2002, of which $18.2 million was due to the properties acquired from
Verizon in 2002. Other revenues increased $22.1 million in 2001, primarily due
to a $20.5 million increase attributable to revenues contributed by the
properties acquired from Verizon in 2000. The remainder of the increase in 2001
was due primarily to a $7.0 million increase in revenues from CPE services
(primarily due to an increase in rates) which was partially offset by a $5.0
million decrease in billing and collection revenues.
Operating expenses. Plant operations expenses during 2002 and 2001
increased $52.7 million (13.9%) and $90.4 million (31.2%), respectively. Of the
$52.7 million increase in 2002, $58.4 million was attributable to the properties
acquired from Verizon in 2002 and $13.8 million related to increases in salaries
and benefits. Such increases were partially offset by a $16.4 million decrease
in access expenses primarily as a result of changes in certain optional calling
plans in Arkansas approved in late 2001 and a $3.0 million decrease in repairs
and maintenance expense. Of the $90.4 million increase in 2001, $87.3 million
was attributable to the properties acquired from Verizon in 2000. The remaining
$3.1 million increase was primarily due to a $6.1 million increase in salaries
and benefits, a $2.7 million increase in network operations expenses and a $2.6
million increase in digital subscriber line ("DSL") expenses. Such increases
were substantially offset by a $9.9 million decrease in engineering expenses.
Customer operations, corporate and other expenses increased $56.9 million
(18.7%) in 2002 and $33.9 million (12.6%) in 2001. Of the $56.9 million increase
in 2002, $47.2 million related to the Verizon acquisitions in 2002. The
remaining increase of $9.7 million was due primarily to a $7.7 million increase
in salaries and benefits, a $4.6 million increase in customer service expenses
and a $3.9 million increase in the provision for doubtful accounts. Such
increases were partially offset by a $5.0 million decrease in operating taxes
and a $1.4 million decrease in expenses related to the provision of CPE
services. The Company recorded a provision for uncollectible receivables for
telecommunications carriers, primarily related to the bankruptcy of WorldCom,
Inc., in the amount of $15.0 million during 2002. Such increase was partially
offset by an $11.1 million reduction in the provision for uncollectible
receivables for non-carrier customers. Of the $33.9 million increase in customer
operations, corporate and other expenses in 2001, $42.5 million related to the
Verizon properties acquired in 2000. The remaining $8.6 million decrease in 2001
was primarily due to a $4.3 million decrease in the provision for uncollectible
receivables and a $3.1 million decrease in operating taxes.
Depreciation and amortization decreased $1.4 million (0.4%) in 2002 and
increased $80.4 million (25.3%) in 2001. Of the $1.4 million decrease in 2002,
$58.0 million related to ceasing amortization of goodwill effective January 1,
2002 in accordance with the provisions of SFAS 142. Such decrease was
substantially offset by $38.0 million of depreciation and amortization related
to the properties acquired from Verizon in 2002 and a $21.8 million increase in
depreciation expense due to higher levels of plant in service in incumbent
markets. Of the $80.4 million increase in 2001, $65.2 million was attributable
to the properties acquired from Verizon in 2000 (which included $14.7 million of
amortization of goodwill) and the remainder was primarily due to higher levels
of plant in service in incumbent markets. The composite depreciation rate for
the Company's regulated telephone properties was 6.9% for 2002, 6.8% for 2001
and 7.2% for 2000.
Other. For additional information regarding certain matters that have
impacted or may impact the Company's telephone operations, see "Regulation and
Competition".
OTHER OPERATIONS
Other operations includes the results of continuing operations of
subsidiaries of the Company which are not included in the telephone segment
including, but not limited to, the Company's nonregulated long distance
operations, Internet operations, competitive local exchange carrier ("CLEC")
operations, fiber network business and security monitoring operations. The
operating revenues, expenses and income of the Company's other operations for
2002, 2001 and 2000 are summarized below.
Year ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 146,536 117,363 104,435
Internet 58,665 39,057 23,491
Other 33,203 17,351 20,462
- --------------------------------------------------------------------------------------
238,404 173,771 148,388
- --------------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 180,076 142,919 112,219
Depreciation and amortization 14,760 8,754 4,911
- --------------------------------------------------------------------------------------
194,836 151,673 117,130
- --------------------------------------------------------------------------------------
Operating income $ 43,568 22,098 31,258
======================================================================================
Long distance revenues increased $29.2 million (24.9%) and $12.9 million
(12.4%) in 2002 and 2001, respectively. The $29.2 million increase in 2002 was
primarily attributable to the growth in the number of customers and increased
average minutes of use ($34.8 million), partially offset by a decrease in the
average rate charged by the Company per minute of use ($5.8 million). The $12.9
million increase in 2001 was due primarily to the growth in the number of
customers and increased minutes of use, primarily due to penetration of the
markets acquired from Verizon in 2000. The number of long distance customers as
of December 31, 2002, 2001, and 2000 was approximately 648,790, 465,870, and
363,300, respectively.
Internet revenues increased $19.6 million (50.2%) in 2002 due to growth in
the number of customers, primarily due to the expansion of the Company's DSL
product offering. Internet revenues increased $15.6 million (66.3%) in 2001
primarily due to a $12.6 million increase due to growth in the number of
customers (including growth in the Company's DSL product offering) and a $1.8
million increase due to Internet operations acquired in mid-2000.
Other revenues increased $15.9 million in 2002, of which $15.1 million was
due to increased revenues in the Company's CLEC business, primarily due to an
acquisition of certain CLEC operations in the first quarter of 2002. Other
revenues decreased $3.1 million in 2001 primarily due to the winding down of the
Company's third party call center operations during 2000.
Cost of sales and operating expenses increased $37.2 million (26.0%) in
2002 primarily due to (i) a $23.9 million increase in expenses associated with
the Company's long distance operations (of which $13.4 million was due to
increased payments to other carriers due to higher minutes of use partially
offset by a decrease in the rate per minute of use; $5.3 million related to
increased sales and marketing costs; $2.2 million was due to an increase in the
provision for doubtful accounts; and $2.3 million was due to an increase in
billing and collection costs); (ii) an $11.8 million increase in expenses
associated with the Company's CLEC operations primarily due to the expansion of
the business and operations acquired in the first quarter of 2002; and (iii) a
$12.3 million increase associated with expanding the Company's Internet
operations. Such increases were partially offset by a $7.4 million reduction in
expenses primarily due to the increased intercompany profit with regulated
affiliates (the recognition of which in accordance with regulatory accounting
principles acts to offset operating expenses).
Cost of sales and operating expenses increased $30.7 million (27.4%) in
2001 primarily due to (i) a $23.5 million increase in expenses related to the
provision of Internet access primarily due to the expansion of the Company's DSL
product offering, (ii) an increase of $9.3 million in expenses of the Company's
long distance operations primarily due to an increase in the number of customers
and an increase in marketing expenses, and (iii) an $8.3 million increase due to
the expansion of the Company's CLEC business. Such increases were partially
offset by a $6.5 million reduction in expenses due to the winding down of the
Company's third party call center operations during 2000.
Depreciation and amortization increased $6.0 million in 2002 and $3.8
million in 2001 primarily due to increased depreciation expense in the Company's
CLEC, Internet and fiber network businesses.
The Company incurred combined operating losses in 2002 and 2001 of $16.7
million and $16.5 million, respectively, in its CLEC and fiber network
businesses, and expects to incur a combined operating loss ranging from $13 to
$18 million in 2003 related to these operations.
Certain of the Company's service subsidiaries provide managerial,
operational, technical, accounting and administrative services, along with
materials and supplies, to the Company's telephone subsidiaries. In accordance
with regulatory accounting, intercompany profit on transactions with regulated
affiliates has not been eliminated in connection with consolidating the results
of operations of the Company. When the regulated operations of the Company no
longer qualify for the application of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("SFAS 71"), such intercompany profit will be eliminated in subsequent financial
statements, the primary result of which will be a decrease in operating expenses
applicable to the Company's telephone operations and an increase in operating
expenses applicable to the Company's other operations. The amount of
intercompany profit with regulated affiliates which was not eliminated was
approximately $29.5 million, $22.0 million and $17.1 million in 2002, 2001 and
2000, respectively. For additional information applicable to SFAS 71, see
"Regulation and Competition -- Other Matters."
NONRECURRING GAINS AND LOSSES, NET
In 2002, the Company recorded a pre-tax gain of $3.7 million from the sale
of a PCS license.
In 2001, the Company's net favorable nonrecurring pre-tax gains
were $33.0 million. The Company recorded a pre-tax gain on the sale of its
remaining shares of Illuminet Holdings, Inc. ("Illuminet") common stock
aggregating $54.6 million ($35.5 million after-tax; $.25 per diluted share) and
a pre-tax gain of $4.0 million ($2.6 million after-tax; $.02 per diluted share)
on the sale of certain other assets. Additionally in 2001, the Company recorded
pre-tax charges of $25.5 million ($16.6 million after-tax; $.12 per diluted
share) due to the write-down in the value of certain non-operating investments
in which the Company owns a minority interest.
Certain other nonrecurring items for the three-year period ended December
31, 2002 are reflected in other line items of the Company's consolidated
financial statements. See "Results of Operations - Overview".
INTEREST EXPENSE
Interest expense decreased $3.7 million in 2002 compared to 2001 due to a
decrease in average debt outstanding and decreased rates.
Interest expense increased $42.2 million in 2001 compared to 2000
primarily due to an increase in interest expense related to outstanding
indebtedness incurred to acquire the Verizon operations.
OTHER INCOME AND EXPENSE
Other expense was $63.8 million in 2002 compared to other income of
$32,000 in 2001. Such decrease was primarily due to a $59.9 million pre-tax
charge related to the Company's payment of premium in connection with redeeming
its Series I remarketable notes, net of unamortized premium.
Other income decreased $4.9 million in 2001 compared to 2000 primarily due
to $6.0 million of costs incurred in 2001 associated with responding to an
unsolicited takeover proposal; a $1.7 million increase in minority interest
expense due primarily to increased profitability of certain of the Company's
majority-owned affiliates; and to other expense increases. These 2001 expense
increases were partially offset by a favorable comparison to expenses in 2000,
when the Company recorded a $7.9 million charge related to the settlement of
certain interest rate hedge contracts entered into in connection with financing
the 2000 Verizon acquisitions.
INCOME TAX EXPENSE
The Company's effective income tax rate (from continuing operations) was
35.3%, 38.1% and 40.2% in 2002, 2001 and 2000, respectively. The decrease in the
effective tax rate in 2002 compared to 2001 is primarily attributable to the
effect of ceasing amortization of goodwill (some of which was nondeductible for
tax purposes) effective January 1, 2002 in accordance with the provisions of
SFAS 142.
DISCONTINUED OPERATIONS
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion in cash. As a result, the Company's wireless
operations for 2002 have been reflected as discontinued operations in the
Company's consolidated financial statements. The results of operations for 2001
and 2000 have been restated to conform to the 2002 presentation. The following
table summarizes certain information concerning the Company's wireless
operations for the periods presented.
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 246,705 437,965 443,569
Operating expenses, exclusive of corporate
overhead costs of $11.3 million, $20.2
million and $21.4 million (175,447) (305,351) (304,293)
Income from unconsolidated cellular entities 31,350 27,460 26,986
Minority interest expense (8,569) (11,510) (11,598)
Gain on sale of discontinued operations 803,905 - -
Nonrecurring gains - 166,928 20,593
Other income 188 4,707 3,157
Income tax expense (286,427) (121,314) (71,169)
- ------------------------------------------------------------------------------------------------
Income from discontinued operations, net of tax $ 611,705 198,885 107,245
================================================================================================
Included in operating expenses for 2002 is a $30.5 million charge
associated with a write-off of all amounts expended to develop the wireless
portion of the Company's billing system currently in development. Depreciation
and amortization of long-lived assets and amortizable intangibles related to the
Company's wireless operations ceased effective March 19, 2002, the date of the
Company's definitive sales agreement with Alltel. Such cessation of depreciation
and amortization had the effect of reducing depreciation and amortization
expense approximately $20 million in 2002 and thereby contributing approximately
$.08 to the Company's diluted earnings per share for 2002.
The Company recorded an $803.9 million pre-tax gain on the sale of
substantially all of its wireless business in the third quarter of 2002.
Nonrecurring gains for 2001 relate to the sale of 30 PCS licenses to Leap
Wireless International, Inc. Nonrecurring gains for 2000 relate to the sale of
the Company's remaining Alaska cellular operations and its minority interest in
one other market.
For further information, see Notes 3 and 13 to the Company's consolidated
financial statements appearing elsewhere in this report.
ACQUISITIONS AND RELATED FINANCING ARRANGEMENTS
Verizon 2002 Acquisitions. On July 1, 2002, the Company completed the
acquisition of approximately 300,000 telephone access lines in the state of
Alabama from Verizon for approximately $1.022 billion cash. On August 31, 2002,
the Company completed the acquisition of approximately 350,000 telephone access
lines in the state of Missouri from Verizon for approximately $1.179 billion
cash.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consists initially of a beneficial interest in a
CenturyTel senior unsecured note with a principal amount of $25 and a contract
to purchase shares of CenturyTel common stock no later than May 2005. The senior
notes mature in May 2007. Each purchase contract will generally require the
holder to purchase between .6944 and .8741 of a share of CenturyTel common stock
in May 2005 based on the then current stock price of CenturyTel common stock in
exchange for $25, subject to certain adjustments and exceptions. Accordingly,
upon full settlement of the purchase contracts in May 2005, the Company will
receive proceeds of $500 million and will deliver between 13.9 million and 17.5
million common shares in the aggregate. The senior notes are pledged by the
holders to secure their obligations under the purchase contracts. The total
distributions on the equity units will be at an initial annual rate of 6.875%,
consisting of interest (6.02%) and contract adjustment payments (0.855%), each
payable quarterly. On or after mid-February 2005, the senior notes will be
remarketed, at which time the remarketing agent will reset the interest rate on
the senior notes in order to generate sufficient proceeds to secure the holder's
obligation under the purchase contract. In the event of an unsuccessful
remarketing, the Company will exercise its right as a secured party to dispose
of the senior notes and satisfy in full the holder's obligation to purchase
common stock under the purchase contract.
On July 22, 2002, the Company entered into $800 million of credit
facilities, consisting of a $533 million three-year facility and a $267 million
364-day revolving facility with a one-year term-out option. These facilities
replaced credit facilities that matured during the third quarter of 2002.
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which may be converted into
shares of CenturyTel common stock at a conversion price of $40.455 per share).
The Company used proceeds from the sale of equity units, senior notes and
convertible senior debentures, along with the $1.59 billion cash proceeds
received from the sale of substantially all of the Company's wireless operations
and utilization of its credit facilities, to finance the third quarter 2002
acquisitions of telephone properties in Alabama and Missouri from Verizon which
aggregated $2.201 billion, the redemption of $400 million principal amount in
remarketable debt securities (plus an associated $71.1 million premium payment)
in October 2002, and the Company's fourth quarter 2002 estimated tax payment,
which aggregated $290 million and included the obligation to pay taxes
associated with the sale of substantially all of its wireless operations.
Verizon 2000 Acquisitions. On July 31, 2000 and September 29, 2000,
affiliates of the Company acquired over 490,000 telephone access lines and
related assets from Verizon in four separate transactions for approximately $1.5
billion in cash. Under these transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related local exchange assets comprising 106 exchanges
throughout Arkansas for approximately $842 million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra") purchased
approximately 127,000 telephone access lines and related local exchange
assets comprising 107 exchanges throughout Missouri for approximately $297
million cash. The Company currently owns 75.7% of Spectra, which was
organized to acquire and operate these Missouri properties. At closing,
the Company made a preferred equity investment in Spectra of approximately
$55 million (which represented a 57.1% interest) and financed
substantially all of the remainder of the purchase price. In the first
quarter of 2001, the Company purchased an additional 18.6% interest in
Spectra for $47.1 million.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related local exchange assets comprising 42
exchanges throughout Wisconsin for approximately $197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related local
exchange assets comprising 35 exchanges throughout Wisconsin for
approximately $172 million in cash. The Company owns 89% of TelUSA, which
was organized to acquire and own these Wisconsin properties. At closing,
the Company made an equity investment in TelUSA of approximately $37.8
million and financed substantially all of the remainder of the purchase
price.
To finance these acquisitions on a short-term basis, the Company borrowed
$1.157 billion on a floating-rate basis under its $1.5 billion credit facility
with Bank of America, N.A. and Citibank, N.A. and borrowed $300 million on a
floating-rate basis under its 1997 credit facility with Bank of America, N.A.
On October 19, 2000, the Company issued $500 million of 8.375% Senior
Notes, Series H, due 2010, and $400 million of 7.75% Remarketable Senior Notes,
Series I, due 2012 (with a remarketing date of October 15, 2002). The net
proceeds of approximately $908 million (excluding the Company's payments of
approximately $12.3 million associated with related interest rate hedging) were
used to repay a portion of the $1.457 billion of aggregate indebtedness the
Company incurred under its credit facilities in connection with the Verizon
acquisitions.
ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and
SFAS 142. SFAS 141 requires all business combinations consummated after June 30,
2001 to be accounted for under the purchase method of accounting; the pooling of
interests method is no longer permitted. The Company adopted SFAS 141 on July 1,
2001. SFAS 142 requires goodwill recorded in a business combination to be
reviewed for impairment at least annually and to be written down only in periods
in which the recorded amount of goodwill exceeds its fair value. Effective
January 1, 2002, systematic amortization of goodwill is no longer permitted. The
Company adopted SFAS 142 effective January 1, 2002.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
also broadens the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the entity in
a disposal transaction. The Company adopted the provisions of SFAS 144 on
January 1, 2002. The Company's wireless operations have been reflected as
discontinued operations for 2002 in accordance with the provisions of SFAS 144.
Results of operations for 2001 and 2000 have been restated to conform to this
presentation. The adoption of the impairment portion of SFAS 144 did not have a
material effect on the results of operations of the Company.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143, effective beginning January 1, 2003,
addresses financial accounting and reporting for legal obligations associated
with the retirement of tangible long-lived assets and requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred and be capitalized as part of the book value of
the long-lived asset.
Although the Company generally has had no legal obligation to remove
assets, depreciation rates of certain assets established by regulatory
authorities for the Company's telephone operations subject to SFAS 71 have
historically included a component for removal costs in excess of the related
estimated salvage value. SFAS 71 requires the Company to not remove this
accumulated liability for removal costs in excess of salvage value even though
there is no legal obligation to remove the assets. For the Company's telephone
operations not subject to SFAS 71 (the properties acquired from Verizon in 2002)
and its other operations, the Company has not accrued a liability for
anticipated removal costs in the past and will continue to expense the costs of
removal as incurred since there is no legal obligation to remove assets. The
Company does not expect the adoption of SFAS 143 to have a material effect on
its financial statements.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation" ("SFAS 148"). SFAS 148, effective for fiscal years ending after
December 15, 2002, amends Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") to provide alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Company has elected to account for employee stock-based compensation using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by SFAS
123.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. Management continually evaluates its estimates and judgments
including those related to (i) revenue recognition, (ii) allowance for doubtful
accounts, (iii) purchase price allocation, (iv) pension and postretirement
benefits and (v) long-lived assets. Actual results may differ from these
estimates. The Company believes the following critical accounting policies
involve a higher degree of judgment or complexity.
Revenue recognition. Certain of the Company's telephone subsidiaries
participate in revenue sharing arrangements with other telephone companies for
interstate revenue and for certain intrastate revenue. Under such sharing
arrangements, which are typically administered by quasi-governmental agencies,
participating telephone companies contribute toll revenue or access charges
within state jurisdictions and access charges in the interstate market. These
revenues are pooled by the administrative agencies and used to reimburse
exchange carriers for their costs. Typically, participating companies have 24
months to update or correct data previously submitted. As a result, revenues
earned through the various sharing arrangements are initially recorded based on
the Company's estimates. Historically, revisions of previous revenue estimates
have not been material.
Allowance for doubtful accounts. In evaluating the collectibility of its
accounts receivable, the Company assesses a number of factors, including a
specific customer's or carrier's ability to meet its financial obligations to
the Company, the length of time the receivable has been past due and historical
collection experience. Based on these assessments, the Company records both
specific and general reserves for uncollectible accounts receivable to reduce
the related accounts receivable to the amount the Company ultimately expects to
collect from customers and carriers. If circumstances change or economic
conditions worsen such that the Company's past collection experience is no
longer relevant, the Company's estimate of the recoverability of its accounts
receivable could be further reduced from the levels reflected in the
accompanying consolidated balance sheet.
Purchase price allocation. For the properties acquired from Verizon in
2002, the Company allocated the aggregate purchase price to the assets acquired
and liabilities assumed based on fair value at the date of acquisition. The fair
value of property, plant and equipment and identifiable intangible assets was
determined by an independent appraisal of such assets. The fair value of the
postretirement benefit obligation was determined through actuarial valuations.
The fair value of current assets and current liabilities was assumed to
approximate the recorded value at acquisition due to their short maturity. The
remaining unallocated acquisition cost was considered goodwill.
Pension and postretirement benefits. The amounts recognized in the
financial statements related to pension and postretirement benefits are
determined on an actuarial basis, which utilizes many assumptions in the
calculation of such amounts. A significant assumption used in determining the
Company's pension and postretirement expense is the expected long-term rate of
return on plan assets. For 2002, such expected return was assumed to range
between 8-10%, with 10% being used on the plans with the greatest amount of
assets. For the past several years, our actual return on plan assets has been
significantly lower than the 8-10% range. For 2003, the Company lowered its
expected long-term rate of return on plan assets to range from 8-8.25%,
reflecting the expected moderation of long-term rates of return in the financial
markets.
Another assumption used in the determination of the Company's pension and
postretirement benefit plan obligations is the appropriate discount rate, which
is generally based on the yield on high-quality corporate bonds. The Company
lowered its assumed discount rate to 6.75% at December 31, 2002 from 7.00% at
December 31, 2001. Changes in the discount rate do not have a material impact on
the Company's results of operations.
See "Pension and Medical Costs" for additional information.
Long-lived assets. Effective January 1, 2002, the Company was subject to
test for impairment of long-lived assets under two new accounting standards,
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), and SFAS 144.
SFAS 142 requires goodwill recorded in business combinations to be
reviewed for impairment and requires write-downs only in periods in which the
recorded amount of goodwill exceeds the fair value. Under SFAS 142, impairment
of goodwill is tested by comparing the fair value of the reporting unit to its
carrying value (including goodwill). Estimates of the fair value of the
reporting unit are based on valuation models using techniques such as multiples
of earnings. If the fair value of the reporting unit is less than the carrying
value, a second calculation is required in which the implied fair value of
goodwill is compared to its carrying value. If the implied fair value of
goodwill is less than its carrying value, goodwill must be written down to its
implied fair value. The Company completed the initial transitional goodwill
impairment test (as of January 1, 2002) as well as the required annual test (as
of September 30, 2002) of SFAS 142 and has determined its goodwill is not
impaired. Prior to January 1, 2002, substantially all of the Company's goodwill
was amortized over 40 years. The Company's amortization of goodwill for the
years ended December 31, 2001 and 2000 totaled approximately $69.2 million and
$60.1 million, respectively.
Under SFAS 144, the carrying value of long-lived assets other than
goodwill is reviewed for impairment whenever events or circumstances indicate
that such carrying amount cannot be recoverable by assessing the recoverability
of the carrying value through estimated undiscounted net cash flows expected to
be generated by the assets. If the undiscounted net cash flows are less than the
carrying value, an impairment loss would be measured as the excess of the
carrying value of a long-lived asset over its fair value.
For additional information on the Company's critical accounting policies,
see "Accounting Pronouncements" and "Regulation and Competition - Other
Matters", and the footnotes to the Company's consolidated financial statements.
INFLATION
The effects of increased costs historically have been mitigated by the
Company's ability to recover certain costs applicable to its regulated telephone
operations through the rate-making process. While the rate-making process does
not permit the Company to immediately recover the costs of replacing its
physical plant, the Company has historically been able to recapture these costs
over time. Possible future regulatory changes may alter the Company's ability to
recover increased costs in its regulated operations. For the properties acquired
from Verizon in 2002, which are regulated under price-cap regulation for
interstate purposes, price changes are limited to the rate of inflation, minus a
productivity offset. For additional information regarding the current regulatory
environment, see "Regulation and Competition." As operating expenses in the
Company's nonregulated lines of business increase as a result of inflation, the
Company, to the extent permitted by competition, attempts to recover the costs
by increasing prices for its services and equipment.
MARKET RISK
The Company is exposed to market risk from changes in interest rates on
its long-term debt obligations. The Company has estimated its market risk using
sensitivity analysis. Market risk is defined as the potential change in the fair
value of a fixed-rate debt obligation due to a hypothetical adverse change in
interest rates. Fair value on long-term debt obligations is determined based on
a discounted cash flow analysis, using the rates and maturities of these
obligations compared to terms and rates currently available in the long-term
markets. The results of the sensitivity analysis used to estimate market risk
are presented below, although the actual results may differ from these
estimates.
At December 31, 2002, the fair value of the Company's long-term debt was
estimated to be $3.9 billion based on the overall weighted average rate of the
Company's long-term debt of 6.0% and an overall weighted maturity of 11 years
compared to terms and rates currently available in long-term financing markets.
With respect to the Company's fixed-rate long-term debt obligations, market
risk is estimated as the potential decrease in fair value of the Company's fixed
rate long-term debt resulting from a hypothetical increase of 60 basis points in
interest rates (ten percent of the Company's overall weighted average borrowing
rate). Such an increase in interest rates would result in approximately a $149.4
million decrease in fair value of the Company's long-term debt. As of December
31, 2002, after giving effect to interest rate swaps currently in place,
approximately 86% of the Company's long-term debt obligations were fixed rate.
The Company seeks to maintain a favorable mix of fixed and variable rate
debt in an effort to limit interest costs and cash flow volatility resulting
from changes in rates. From time to time, the Company uses derivative
instruments to (i) lock-in or swap its exposure to changing or variable interest
rates for fixed interest rates or (ii) to swap obligations to pay fixed interest
rates for variable interest rates. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes. Management
periodically reviews the Company's exposure to interest rate fluctuations and
implements strategies to manage the exposure.
At December 31, 2002, the Company had outstanding a fair value interest
rate hedge associated with $500 million aggregate principal amount of its Series
H senior notes, due 2010, that pays interest at a fixed rate of 8.375%. This
hedge is a "fixed to variable" interest rate swap that effectively converts the
Company's fixed rate interest payment obligations under these notes into
obligations to pay variable rates equal to the six-month London InterBank
Offered Rate ("LIBOR") plus 3.59% with settlement and rate reset dates occurring
each six months through the expiration of the hedge in October 2010. At December
31, 2002, the Company realized a rate under this hedge of 4.96%. Interest
expense was reduced by $7.8 million in 2002 as a result of this hedge. The fair
market value of this hedge was $22.2 million at December 31, 2002 and is
reflected as an asset and as an adjustment to the underlying debt on the
December 31, 2002 balance sheet. With respect to this hedge, market risk is
estimated as the potential change in the fair value of the hedge resulting from
a hypothetical 10% increase in the forward rates used to determine the fair
value. A hypothetical 10% increase in the forward rates would result in a $14.5
million decrease in the fair value of this hedge.
At December 31, 2002, the Company also had outstanding a cash flow hedge
associated with $400 million of borrowings under its $800 million credit
facilities. Such hedge expires in October 2003. This hedge is designed to swap
the Company's future obligation to pay variable rate interest based on LIBOR
into obligations that lock-in a fixed rate of 2.49%. The fair value of this
hedge was $1.3 million at December 31, 2002 and is reflected as a liability and
Accumulated Other Comprehensive Loss (net of tax) on the December 31, 2002
balance sheet. A hypothetical 10% increase in the forward rates would result in
a $622,000 decrease in the fair value (liability) of this hedge.
DEVELOPMENT OF BILLING SYSTEM
The Company is in the process of developing an integrated billing and
customer care system. The costs to develop such system have been capitalized in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and aggregated $139.5
million at December 31, 2002. A portion of these billing system costs related to
the wireless business ($30.5 million) was written off as a component of
discontinued operations in the third quarter of 2002 as a result of the sale of
substantially all of the Company's wireless operations on August 1, 2002. See
Note 4 to the Company's consolidated financial statements appearing elsewhere in
this report. Excluding this write-off, the Company's aggregate billing system
costs are expected to approximate $180 million upon completion and are expected
to be amortized over a twenty-year period. The Company expects to begin
amortization of the billing system in 2003 as customer groups are migrated to
this new system. In addition, the Company expects to incur duplicative system
costs in 2003 until such time as all customers are migrated to the new system.
Such amortization and duplicative system costs are expected to reduce diluted
earnings per share by $.04 for 2003.
The system remains in the development stage and has required substantially
more time and money to develop than originally anticipated. Although the Company
expects to complete all phases of the system in early 2004, there is no
assurance that this deadline (or the Company's budget) will be met or that the
system will function as anticipated. If the system does not function as
anticipated, the Company may have to write off part or all of its remaining
costs.
PENSION AND MEDICAL COSTS
The decline in equity markets in recent years, coupled with record low
interest rates and rising medical costs, have increased the Company's employee
benefits expenses, including defined benefit pension expenses and pre- and
post-retirement medical expenses. The Company expects these conditions will
result in higher pension and pre- and post-retirement medical expenses in 2003.
Based on the Company's current estimates, such costs are expected to increase
between $15 - 25 million in 2003 compared to 2002 amounts. As a result of
continued increases in medical costs, the Company discontinued its practice of
subsidizing post-retirement medical benefits for persons hired after January 1,
2003.
OTHER
In connection with the acquisitions of telephone properties from Verizon
in 2002, the Company had an independent appraisal performed to determine the
fair value of the property, plant and equipment acquired from Verizon. Such
appraisal was not completed until March 2003; therefore, the Company's December
31, 2002 balances of property, plant and equipment and goodwill, as presented in
the Company's fourth quarter 2002 earnings news release contained in a Current
Report on Form 8-K filed January 31, 2003, differ from those presented elsewhere
herein. As a result of the appraisal, property, plant and equipment was
increased by $202.6 million and goodwill was decreased by a like amount.
Depreciation expense calculated based on the appraised values of property, plant
and equipment is not materially different from that previously presented in the
above-described Form 8-K and therefore has not been changed.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to provide for its cash needs. The Company's operations have
historically provided a stable source of cash flow which has helped the Company
continue its long-term program of capital improvements.
Operating activities. Net cash provided by operating activities from
continuing operations was $795.4 million, $575.5 million and $438.2 million in
2002, 2001 and 2000, respectively. The Company's accompanying consolidated
statements of cash flows identify major differences between net income and net
cash provided by operating activities for each of those years. For additional
information relating to the continuing and discontinued operations of the
Company, see Results of Operations.
Investing activities. Net cash used in investing activities from
continuing operations was $2.629 billion, $420.9 million and $1.914 billion in
2002, 2001 and 2000, respectively. Cash used for acquisitions was $2.245 billion
in 2002 (substantially all of which relates to the 2002 Verizon acquisitions),
$47.1 million in 2001 and $1.536 billion in 2000 (substantially all of which
relates to the 2000 Verizon acquisitions). Proceeds from the sales of assets
were $4.1 million in 2002 (excluding the Company's 2002 wireless divestiture)
and $58.2 million in 2001. Capital expenditures from continuing operations for
2002 were $319.5 million for telephone operations and $66.7 million for other
operations. Capital expenditures from continuing operations during 2001 and 2000
were $435.5 million and $391.1 million, respectively.
Financing activities. Net cash provided by (used in) financing activities
from continuing operations was $506.3 million in 2002, ($395.4) million in 2001
and $1.314 billion in 2000. Proceeds from the issuance of debt, net of debt
payments, were $531.4 million during 2002, compared to net payments of debt of
$375.6 million during 2001. Net proceeds from the issuance of debt was $1.340
billion during 2000 primarily due to an increase in borrowings due to the
purchase of assets from Verizon.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consists initially of a beneficial interest in a
CenturyTel senior unsecured note with a principal amount of $25 and a contract
to purchase shares of CenturyTel common stock no later than May 2005. The senior
notes will mature in May 2007. Each stock purchase contract will generally
require the holder to purchase between .6944 and .8741 of a share of CenturyTel
common stock in May 2005 in exchange for $25, subject to certain adjustments and
exceptions. The total distributions on the equity units will be at an initial
annual rate of 6.875%, consisting of interest (6.02%) and contract adjustment
payments (0.855%). For additional information, see Note 6 to the Company's
consolidated financial statements appearing elsewhere in this report.
On July 22, 2002, the Company entered into $800 million of credit
facilities, consisting of a $533 million three-year facility and a $267 million
364-day revolving facility with a one-year term-out option. These facilities
replaced credit facilities that matured during the third quarter of 2002.
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which may be converted into
shares of CenturyTel common stock at a conversion price of $40.455 per share).
Holders of the convertible senior debentures will have the right to require the
Company to purchase all or a portion of the debentures on August 1, 2006, August
1, 2010 and August 1, 2017 at par plus any accrued and unpaid interest to the
purchase date. For additional information, see Note 6 to the Company's
consolidated financial statements appearing elsewhere in this report.
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion cash.
The Company used proceeds from the sale of equity units, senior notes and
convertible senior debentures, along with the proceeds received from the sale of
the Company's wireless operations and utilization of its $800 million credit
facilities, to finance the third quarter 2002 acquisitions of telephone
properties in Alabama and Missouri from Verizon which aggregated $2.201 billion,
the redemption of $400 million principal amount in remarketable debt securities
(plus an associated $71.1 million premium payment) in October 2002 and the
Company's fourth quarter 2002 estimated tax payment, which aggregated $290
million and included the obligation to pay taxes associated with the sale of
substantially all of its wireless operations.
In second quarter 2001, the Company completed the sale of 30 PCS operating
licenses for an aggregate of $195 million to Leap. The Company received
approximately $108 million of the purchase price in cash at closing and the
remainder was collected in installments through the fourth quarter of 2001. Such
proceeds, and the proceeds from the Company's above-described divestiture of its
wireless operations in 2002, are included as net cash provided by discontinued
operations on the statements of cash flows appearing elsewhere in this report.
In third quarter 2001, the Company sold its remaining shares of its investment
in Illuminet common stock for an aggregate of approximately $58.2 million.
Proceeds from these sales were used to repay indebtedness.
Other. Budgeted capital expenditures for 2003 total $370 million for
telephone operations and $30 million for other operations. The Company
anticipates that capital expenditures in its telephone operations will continue
to include the upgrading of its plant and equipment, including its digital
switches, to provide enhanced services, particularly in its newly acquired
markets, and the installation of fiber optic cable.
The Company continually evaluates the possibility of acquiring additional
telecommunications operations and expects to continue its long-term strategy of
pursuing the acquisition of attractive communications properties in exchange for
cash, securities or both. At any given time, the Company may be engaged in
discussions or negotiations regarding additional acquisitions. The Company
generally does not announce its acquisitions until it has entered into a
preliminary or definitive agreement. Over the past few years, the amount and
size of communications properties available to be purchased by the Company has
increased substantially. The Company may require additional financing in
connection with any such acquisitions, the consummation of which could have a
material impact on the Company's financial condition or operations.
Approximately 4.1 million shares of CenturyTel common stock and 200,000 shares
of CenturyTel preferred stock remain available for future issuance in connection
with acquisitions under CenturyTel's acquisition shelf registration statement.
The following table contains certain information concerning the Company's
material contractual obligations as of December 31, 2002.
Payments due by period
- ------------------------------------------------------------------------------------------
Total contractual Less than After
obligations Total 1 year 1-3 years 4-5 years 5 years
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Long-term debt,
including current
maturities and
capital lease
obligations $ 3,648,869 70,737 702,188 635,619 (1) 2,240,325 (2)
- -------------------------------------------------------------------------------------------
(1) Includes $500 million aggregate principal amount of the Company's senior
notes, Series J, due 2007, which the Company is committed to remarket in 2005.
(2) Includes $165 million aggregate principal amount of the Company's
convertible debentures, Series K, due 2032, which can be put to the Company at
various dates beginning in 2006.
As of December 31, 2002, the Company had available $415.0 million of
undrawn committed bank lines of credit and the Company's telephone subsidiaries
had available for use $123.0 million of commitments for long-term financing from
the Rural Utilities Service and Rural Telephone Bank. In addition, in October
2000 the Company implemented a commercial paper program that authorizes the
Company to have outstanding up to $1.5 billion in commercial paper at any one
time. As of December 31, 2002, the Company had no commercial paper outstanding
under such program. The Company also has access to debt and equity capital
markets, including its shelf registration statements.
Moody's Investors Service ("Moody's") rates CenturyTel's long-term debt
Baa2 (with a stable outlook) and Standard & Poor's ("S&P") rates CenturyTel's
long-term debt BBB+ (with a stable outlook). The Company's commercial paper
program is rated P2 by Moody's and A2 by S&P.
The following table reflects the Company's debt to total capitalization
percentage and ratio of earnings to fixed charges and preferred stock dividends
as of and for the years ended December 31:
2002 2001 2000
- ---------------------------------------------------------------------------
Debt to total capitalization 54.2% 57.0 63.1
Ratio of earnings from continuing
operations to fixed charges
and preferred stock dividends 2.30 2.00 2.07
- ---------------------------------------------------------------------------
REGULATION AND COMPETITION
The communications industry continues to undergo various fundamental
regulatory, legislative, competitive and technological changes. These changes
may have a significant impact on the future financial performance of all
communications companies.
Events affecting the communications industry. In 1996, the United States
Congress enacted the Telecommunications Act of 1996 (the "1996 Act"), which
obligates LECs to permit competitors to interconnect their facilities to the
LEC's network and to take various other steps that are designed to promote
competition. The 1996 Act provides certain exemptions for rural LECs such as
those operated by the Company. Under the 1996 Act's rural telephone company
exemption, approximately 50% of the Company's telephone access lines are
exempt from certain of these interconnection requirements unless and until
the appropriate state regulatory commission overrides the exemption upon
receipt from a competitor of a bona fide request meeting certain criteria.
On February 20, 2003, the FCC revised its rules outlining the obligations
of incumbent LECs to lease elements of their networks on an unbundled basis to
competitors. The new framework eliminates the prior obligation of incumbent LECs
to lease their high-speed data lines to competitors. Incumbent LECs will remain
obligated to offer other telecommunications services to resellers at wholesale
rates. This new rule also provides for a significant role of state regulatory
commissions in implementing these new guidelines and establishing wholesale
service rates.
Prior to and since the enactment of the 1996 Act, the FCC and a number of
state legislative and regulatory bodies have also taken steps to foster local
exchange competition. Coincident with this recent movement toward increased
competition has been the gradual reduction of regulatory oversight of LECs.
These cumulative changes have led to the continued growth of various companies
providing services that compete with LECs' services. Wireless services entities
also increasingly constitute a significant source of competition with LECs.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that will provide predictable levels of
support to rural local exchange carriers, including substantially all of the
Company's local exchange carriers. During 2002 the Company's interstate revenues
from the federal universal service fund totaled approximately $192.4 million
(which includes $9.9 million from the Verizon properties acquired in 2002).
During 2001 and 2000, such revenues totaled $168.7 million and $146.4 million,
respectively. Increasingly, wireless carriers have sought and received payments
from the Universal Service Fund, which the Company believes is currently
enhancing their ability to compete with wireline services and, in the long term,
could adversely impact the amount of funding available for LECs.
On October 11, 2001, the FCC modified its interstate access charge rules
and universal service support system for rate of return local exchange carriers,
which includes the Company's local exchange carriers (excluding the properties
acquired from Verizon in 2002). This order, among other things, (i) increased
the caps on the subscriber line charges ("SLC") to the levels paid by most
subscribers nationwide; (ii) allowed limited SLC deaveraging, which is expected
to enhance the competitiveness of rate of return carriers by giving them pricing
flexibility; (iii) lowered per minute rates collected for federal access
charges, which might increase competition with CenturyTel's long distance
operations to the extent other carriers seek to take advantage of this change;
(iv) created a new explicit universal service support mechanism that will
replace other implicit support mechanisms in a manner designed to ensure that
rate structure changes do not affect the overall recovery of interstate access
costs by rate of return carriers serving high cost areas and (v) terminated the
FCC's proceeding on the represcription of the authorized rate of return for rate
of return LECs, which will remain at 11.25%. The effect of this order on the
Company was revenue neutral for interstate purposes; however, intrastate
revenues were adversely effected in Arkansas and Ohio as the intrastate access
rates in these states mirror the interstate access rates.
Recent events affecting the Company. During the last few years, several
states in which the Company has substantial operations took legislative or
regulatory steps to further introduce competition into the LEC business. The
number of companies which have requested authorization to provide local exchange
service in the Company's service areas has increased in recent years, especially
in the markets acquired from Verizon in 2002 and 2000, and it is anticipated
that similar action may be taken by others in the future.
State alternative regulation plans recently adopted by certain of the
Company's LECs have also affected revenue growth recently.
Certain long distance carriers continue to request that the Company reduce
intrastate access tariffed rates for certain of its LECs. In addition, the
Company has recently experienced reductions in intrastate traffic, partially due
to the displacement of minutes by wireless services. In 2002 the Company
incurred a reduction in its intrastate revenues (exclusive of the properties
acquired from Verizon in 2002) of approximately $27.7 million compared to 2001
primarily due to these factors. The Company believes such trend of decreased
intrastate minutes will continue in 2003. Although the magnitude of such
decrease cannot be precisely estimated, the Company believes such decrease will
be less than that incurred in 2002.
In August 2001, the Company was awarded an interim access rate increase by
the Wisconsin Public Service Commission ("WPSC") for the former Verizon
properties in Wisconsin in an amount of approximately $7.9 million annually. In
October 2002, the Company was awarded a permanent rate increase which will
result in an additional $8 to $10 million annually above the $7.9 million
awarded on an interim basis.
On August 29, 2002, the Wisconsin Court of Appeals upheld a ruling upon
appeal that ordered the Company to refund intrastate access charges collected
from interexchange carriers from December 1998 through December 2000 on the
Wisconsin properties acquired from Ameritech in December 1998. As a result of
this ruling, the Company recorded a one-time charge of $7.6 million ($.03 per
share) related to this refund in the third quarter of 2002. On October 31, 2001,
the WPSC approved a permanent rate increase of $8.3 million annually for these
properties. This increase was partially offset by a one-time reduction in
revenue of approximately $300,000 arising out of the WPSC's order to refund a
portion of the previously approved interim rates.
In August 2001, the Arkansas Public Utility Commission ("APUC") approved
tariff amendments that limited the number of minutes included for a flat rate in
certain optional calling plans in certain of the markets acquired from Verizon
in 2000. These revisions resulted in reductions of the Company's operating
expenses of approximately $17.5 million during 2002 compared to 2001.
On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued
by the Arkansas Public Service Commission ("APSC") in connection with the
Company's acquisition of its Arkansas LECs from Verizon in July 2000, and
remanded the case back to the APSC for further hearings. The Court took these
actions in response to challenges to the rates the Company has charged other
LECs for intrastate switched access service. On December 20, 2002, the APSC
approved the access rates established by the Company at the time of acquisition.
On January 29, 2003, AT&T filed with the APSC a petition for rehearing related
to this ruling.
In January 2003, the Louisiana Public Service Commission directed its
staff to review the feasibility of converting the $42 million Louisiana Local
Optional Service Fund ("LOS Fund") into a state universal service fund. A
recommendation by the Commission staff is expected by the end of 2003.
Currently, the LOS Fund is funded primarily by BellSouth, which proposes to
expand the base of contributors into the LOS Fund. The Company currently
receives approximately $21 million from the LOS Fund each year. There can be no
assurance that this funding will remain at current levels.
Competition to provide traditional telephone services has thus far
affected large urban areas to a greater extent than rural, suburban and small
urban areas such as those in which the Company's telephone operations are
located. Although the Company does not believe that the increased competition it
has thus far experienced is likely to materially affect it in the near term, the
Company anticipates that regulatory changes and competitive pressures may result
in future revenue reductions. The Company expects its internal telephone
revenues (exclusive of the properties acquired from Verizon in 2002) to decline
in 2003 primarily due to continued access line loss and reduced intrastate
revenues; however, the Company expects its internal consolidated revenues to
increase in 2003 primarily due to expected increased demand for its long
distance, DSL and other product offerings.
Other matters. The Company's regulated telephone operations (except for
the properties acquired from Verizon in 2002) are subject to the provisions of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" ("SFAS 71"). Actions by regulators can provide
reasonable assurance of the existence of an asset, reduce or eliminate the value
of an asset and impose a liability on a regulated enterprise. Such regulatory
assets are required to be recorded and, accordingly, reflected in the balance
sheet of an entity subject to SFAS 71. The Company is monitoring the ongoing
applicability of SFAS 71 to its regulated telephone operations due to the
changing regulatory, competitive and legislative environments, and it is
possible that changes in regulation, legislation or competition or in the demand
for regulated services or products could result in the Company's telephone
operations no longer being subject to SFAS 71 in the near future.
Statement of Financial Accounting Standards No. 101, "Regulated
Enterprises - Accounting for the Discontinuance of Application of FASB Statement
No. 71" ("SFAS 101"), specifies the accounting required when an enterprise
ceases to meet the criteria for application of SFAS 71. SFAS 101 requires the
elimination of the effects of any actions of regulators that have been
recognized as assets and liabilities in accordance with SFAS 71 but would not
have been recognized as assets and liabilities by nonregulated enterprises. SFAS
101 further provides that the carrying amounts of property, plant and equipment
are to be adjusted only to the extent the assets are impaired and that
impairment shall be judged in the same manner as for nonregulated enterprises.
The Company's consolidated balance sheet as of December 31, 2002 included
regulatory assets of approximately $3.2 million (primarily related to deferred
financing costs, regulatory proceedings and income taxes) and regulatory
liabilities of approximately $1.7 million (related to income taxes). Net
deferred income tax liabilities related to the regulatory assets and liabilities
quantified above were $1.1 million.
When the Company's regulated operations no longer qualify for the
application of SFAS 71, the Company does not expect to record any impairment
charge related to the carrying value of the property, plant and equipment of its
regulated telephone operations. Additionally, upon the discontinuance of SFAS
71, the Company would be required to revise the lives of its property, plant and
equipment to reflect the estimated useful lives of the assets. The Company does
not expect such revisions in asset lives to have a material impact on the
Company's results of operations. For regulatory purposes, the accounting and
reporting of the Company's telephone subsidiaries will not be affected by the
discontinued application of SFAS 71.
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 2002
have not been material, and the Company currently has no reason to believe that
such costs will become material.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in interest rates on
its long-term debt obligations. The Company has estimated its market risk using
sensitivity analysis. Market risk is defined as the potential change in the fair
value of a fixed-rate debt obligation due to a hypothetical adverse change in
interest rates. Fair value on long-term debt obligations is determined based on
a discounted cash flow analysis, using the rates and maturities of these
obligations compared to terms and rates currently available in the long-term
markets. The results of the sensitivity analysis used to estimate market risk
are presented below, although the actual results may differ from these
estimates.
At December 31, 2002, the fair value of the Company's long-term debt was
estimated to be $3.9 billion based on the overall weighted average rate of the
Company's long-term debt of 6.0% and an overall weighted maturity of 11 years
compared to terms and rates currently available in long-term financing markets.
Market risk is estimated as the potential decrease in fair value of the
Company's fixed rate long-term debt resulting from a hypothetical increase of 60
basis points in interest rates (ten percent of the Company's overall weighted
average borrowing rate). Such an increase in interest rates would result in
approximately a $149.4 million decrease in fair value of the Company's long-term
debt. As of December 31, 2002, after giving effect to interest rate swaps
currently in place, approximately 86% of the Company's long-term debt
obligations were fixed rate.
The Company seeks to maintain a favorable mix of fixed and variable rate
debt in an effort to limit interest costs and cash flow volatility resulting
from changes in rates. From time to time, the Company uses derivative
instruments to (i) lock-in or swap its exposure to changing or variable interest
rates for fixed interest rates or (ii) to swap obligations to pay fixed interest
rates for variable interest rates. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes. Management
periodically reviews the Company's exposure to interest rate fluctuations and
implements strategies to manage the exposure.
At December 31, 2002, the Company had outstanding a fair value interest
rate hedge associated with $500 million aggregate principal amount of its Series
H senior notes, due 2010, that pay interest at a fixed rate of 8.375%. This
hedge is a "fixed to variable" interest rate swap that effectively converts the
Company's fixed rate interest payment obligations under these notes into
obligations to pay variable rates equal to the six-month London InterBank
Offered Rate ("LIBOR") plus 3.59% with settlement and rate reset dates occurring
each six months through the expiration of the hedge in October 2010. At December
31, 2002, the Company realized a rate under this hedge of 4.96%. Interest
expense was reduced by $7.8 million in 2002 as a result of this hedge. The fair
market value of this hedge was $22.2 million at December 31, 2002 and is
reflected as an asset and as an adjustment to the underlying debt on the
December 31, 2002 balance sheet. With respect to this hedge, market risk is
estimated as the potential change in the fair value of the hedge resulting
from a hypothetical 10% increase in the forward rates used to determine the
fair value. A hypothetical 10% increase in the forward rates would result in a
$14.5 million decrease in the fair value of this hedge.
At December 31, 2002, the Company also had outstanding a cash flow hedge
associated with $400 million of borrowings incurred in the fourth quarter of
2002 under its $800 million credit facilities. Such hedge expires in October
2003. This hedge is designed to swap the Company's future obligation to pay
variable rate interest based on LIBOR into obligations that lock-in a fixed rate
of 2.49%. The fair value of this hedge was $1.3 million at December 31, 2002 and
is reflected as a liability and Accumulated Other Comprehensive Loss (net of
tax) on the December 31, 2002 balance sheet. A hypothetical 10% increase in the
forward rates would result in a $622,000 decrease in the fair value (liability)
of this hedge.
Item 8. Financial Statements and Supplementary Data
Report of Management
--------------------
The Shareholders
CenturyTel, Inc.:
Management has prepared and is responsible for the Company's consolidated
financial statements. The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and necessarily include amounts determined using our best judgments
and estimates with consideration given to materiality.
The Company maintains internal control systems and related policies and
procedures designed to provide reasonable assurance that the accounting records
accurately reflect business transactions and that the transactions are in
accordance with management's authorization. The design, monitoring and revision
of the systems of internal control involve, among other things, our judgment
with respect to the relative cost and expected benefits of specific control
measures. Additionally, the Company maintains an internal auditing function
which independently evaluates the effectiveness of internal controls, policies
and procedures and formally reports on the adequacy and effectiveness thereof.
The Company's consolidated financial statements have been audited by KPMG
LLP, independent certified public accountants, who have expressed their opinion
with respect to the fairness of the consolidated financial statements. Their
audit was conducted in accordance with auditing standards generally accepted in
the United States of America, which include the consideration of the Company's
internal controls to the extent necessary to form an independent opinion on the
consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed of independent
directors who are not officers or employees of the Company. The Committee meets
periodically with the independent certified public accountants, internal
auditors and management. The Committee considers the independence of the
external auditors and the audit scope and discusses internal control, financial
and reporting matters. Both the independent and internal auditors have free
access to the Committee.
/s/ R. Stewart Ewing, Jr.
R. Stewart Ewing, Jr.
Executive Vice President and Chief Financial Officer
Independent Auditors' Report
----------------------------
The Board of Directors
CenturyTel, Inc.:
We have audited the consolidated financial statements of CenturyTel, Inc.
and subsidiaries as listed in Item 15a(i). In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in Item 15a(ii). These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CenturyTel,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002.
/s/ KPMG LLP
KPMG LLP
Shreveport, Louisiana
January 29, 2003
CENTURYTEL, INC.
Consolidated Statements of Income
Year ended December 31,
- ---------------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES
Telephone $ 1,733,592 1,505,733 1,253,969
Other 238,404 173,771 148,388
- ---------------------------------------------------------------------------------------------------
Total operating revenues 1,971,996 1,679,504 1,402,357
- ---------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses (exclusive of
depreciation and amortization) 973,689 826,948 671,992
Corporate overhead costs allocable to
discontinued operations 11,275 20,213 21,411
Depreciation and amortization 411,626 407,038 322,817
- ---------------------------------------------------------------------------------------------------
Total operating expenses 1,396,590 1,254,199 1,016,220
- ---------------------------------------------------------------------------------------------------
OPERATING INCOME 575,406 425,305 386,137
- ---------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Nonrecurring gains and losses, net 3,709 33,043 -
Interest expense (221,845) (225,523) (183,302)
Other income and expense (63,814) 32 4,936
- ---------------------------------------------------------------------------------------------------
Total other income (expense) (281,950) (192,448) (178,366)
- ---------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 293,456 232,857 207,771
Income tax expense 103,537 88,711 83,542
- ---------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 189,919 144,146 124,229
DISCONTINUED OPERATIONS
Income from discontinued operations, net of
$286,427, $121,314, and $71,169 tax 611,705 198,885 107,245
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 801,624 343,031 231,474
===================================================================================================
NET INCOME, AS ADJUSTED FOR GOODWILL
AMORTIZATION $ 801,624 399,297 278,029
===================================================================================================
CENTURYTEL, INC.
Consolidated Statements of Income
(Continued)
Year ended December 31,
- -----------------------------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
BASIC EARNINGS PER SHARE
From continuing operations $ 1.34 1.02 .88
From continuing operations, as adjusted for
goodwill amortization $ 1.34 1.35 1.15
From discontinued operations $ 4.32 1.41 .77
From discontinued operations, as adjusted for
goodwill amortization $ 4.32 1.48 .84
Basic earnings per share $ 5.66 2.43 1.65
Basic earnings per share, as adjusted for
goodwill amortization $ 5.66 2.83 1.98
DILUTED EARNINGS PER SHARE
From continuing operations $ 1.33 1.01 .88
From continuing operations, as adjusted for
goodwill amortization $ 1.33 1.34 1.13
From discontinued operations $ 4.28 1.40 .76
From discontinued operations, as adjusted for
goodwill amortization $ 4.28 1.47 .83
Diluted earnings per share $ 5.61 2.41 1.63
Diluted earnings per share, as adjusted for
goodwill amortization $ 5.61 2.81 1.96
DIVIDENDS PER COMMON SHARE $ .21 .20 .19
===============================================================================================
AVERAGE BASIC SHARES OUTSTANDING 141,613 140,743 140,069
===============================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 142,879 142,307 141,864
===============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Comprehensive Income
Year ended December 31,
- ------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 801,624 343,031 231,474
OTHER COMPREHENSIVE INCOME, NET OF TAXES
Unrealized holding gains (losses):
Unrealized holding gains (losses) related
to marketable equity securities arising
during period, net of $5,385 and
($20,941) tax - 9,999 (38,891)
Less: reclassification adjustment for
gains included in net income, net
of ($19,100) tax - (35,470) -
Minimum pension liability adjustment:
Minimum pension liability adjustment,
net of ($19,312) tax (35,864) - -
Derivative instruments:
Net losses on derivatives hedging
variability of cash flows, net
of ($496) tax (921) - -
Less: reclassification adjustment for
losses included in net income,
net of $44 tax 82 - -
- ------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 764,921 317,560 192,583
================================================================================================
COMPREHENSIVE INCOME, AS ADJUSTED
FOR GOODWILL AMORTIZATION $ 764,921 373,826 239,138
================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Balance Sheets
December 31,
2002 2001
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,661 3,496
Accounts receivable
Customers, less allowance of $15,314 and $13,908 161,319 118,376
Interexchange carriers and other, less allowance
of $18,648 in 2002 111,673 87,614
Materials and supplies, at average cost 10,150 10,916
Other 9,099 9,511
- ------------------------------------------------------------------------------------------------
Total current assets 295,902 229,913
- ------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,531,645 2,736,142
- ------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 3,427,281 2,087,158
Other 503,775 420,043
- ------------------------------------------------------------------------------------------------
Total investments and other assets 3,931,056 2,507,201
- ------------------------------------------------------------------------------------------------
ASSETS HELD FOR SALE 11,805 845,428
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,770,408 6,318,684
================================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 70,737 955,834
Short-term debt - 53,000
Accounts payable 64,825 61,056
Accrued expenses and other current liabilities
Salaries and benefits 63,937 46,588
Income taxes 40,897 4,554
Other taxes 28,183 23,383
Interest 59,045 49,191
Other 18,596 15,968
Advance billings and customer deposits 41,884 29,308
- ------------------------------------------------------------------------------------------------
Total current liabilities 388,104 1,238,882
- ------------------------------------------------------------------------------------------------
LONG-TERM DEBT 3,578,132 2,087,500
- ------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 716,168 506,052
- ------------------------------------------------------------------------------------------------
LIABILITIES RELATED TO ASSETS HELD FOR SALE - 148,870
- ------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
350,000,000 shares, issued and outstanding
142,955,839 and 141,232,806 shares 142,956 141,233
Paid-in capital 537,804 524,668
Accumulated other comprehensive income (loss),
net of tax (36,703) -
Retained earnings 2,437,472 1,666,004
Unearned ESOP shares (1,500) (2,500)
Preferred stock - non-redeemable 7,975 7,975
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 3,088,004 2,337,380
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 7,770,408 6,318,684
================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
- ---------------------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 801,624 343,031 231,474
Adjustments to reconcile net income to net
cash provided by operating activities from
continuing operations
Income from discontinued operations, net of tax (611,705) (198,885) (107,245)
Depreciation and amortization 411,626 407,038 322,817
Deferred income taxes 71,112 57,944 31,854
Nonrecurring gains and losses, net (3,709) (33,043) -
Changes in current assets and current liabilities
Accounts receivable (13,481) 34,266 (74,736)
Accounts payable 3,769 (29,485) 36,493
Accrued taxes 43,046 1,078 (309)
Other current assets and other current
liabilities, net 34,939 9,083 11,902
Increase in noncurrent assets (30,543) (65,698) (46,026)
Increase in other noncurrent liabilities 33,719 9,919 10,677
Other, net 55,005 40,295 21,332
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities
from continuing operations 795,402 575,543 438,233
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Acquisitions, net of cash acquired (2,245,026) (47,131) (1,535,683)
Payments for property, plant and equipment (386,267) (435,515) (391,069)
Proceeds from sale of assets 4,144 58,184 -
Contribution from minority investor - - 20,000
Purchase of life insurance investment, net - (1,086) (5,753)
Other, net (1,378) 4,639 (1,089)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities
from continuing operations (2,628,527) (420,909) (1,913,594)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of debt 2,123,618 3,896 2,715,852
Payments of debt (1,592,246) (379,516) (1,375,895)
Payment of deferred hedge contracts - - (4,345)
Proceeds from issuance of common stock 29,125 7,351 7,996
Payment of debt issuance costs (12,999) - (4,274)
Payment of equity unit issuance costs (15,867) - -
Cash dividends (30,156) (28,653) (26,815)
Other, net 4,866 1,549 1,289
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities from continuing operations 506,341 (395,373) 1,313,808
- ---------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations 1,326,949 232,828 116,815
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 165 (7,911) (44,738)
Cash and cash equivalents at beginning of year 3,496 11,407 56,145
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,661 3,496 11,407
=========================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Stockholders' Equity
Year ended December 31,
- ---------------------------------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands)
COMMON STOCK
Balance at beginning of year $ 141,233 140,667 139,946
Conversion of convertible securities into common stock - 254 254
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,723 312 467
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 142,956 141,233 140,667
- ---------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of year 524,668 509,840 493,432
Equity unit issuance costs and initial contract
adjustment liability (24,377) - -
Conversion of convertible securities into common stock - 3,046 3,046
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 27,402 7,039 7,529
Amortization of unearned compensation and other 10,111 4,743 5,833
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 537,804 524,668 509,840
- ---------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX
Balance at beginning of year - 25,471 64,362
Change in other comprehensive income (loss)
(net of reclassification adjustment
in 2001), net of tax (36,703) (25,471) (38,891)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (36,703) - 25,471
- ---------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 1,666,004 1,351,626 1,146,967
Net income 801,624 343,031 231,474
Cash dividends declared
Common stock - $.21, $.20 and $.19 per share (29,757) (28,254) (26,416)
Preferred stock (399) (399) (399)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 2,437,472 1,666,004 1,351,626
- ---------------------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of year (2,500) (3,500) (4,690)
Release of ESOP shares 1,000 1,000 1,190
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (1,500) (2,500) (3,500)
- ---------------------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of year 7,975 7,975 7,975
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,088,004 2,337,380 2,032,079
=========================================================================================================
COMMON SHARES OUTSTANDING
Balance at beginning of year 141,233 140,667 139,946
Conversion of convertible securities into common stock - 254 254
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,723 312 467
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 142,956 141,233 140,667
=========================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Notes to Consolidated Financial Statements
December 31, 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements of
CenturyTel, Inc. and its subsidiaries (the "Company") include the accounts of
CenturyTel, Inc. ("CenturyTel") and its majority-owned subsidiaries and
partnerships. Certain of the Company's regulated telephone operations are
subject to the provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation."
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue recognition - Revenues are generally recognized when services are
provided or when products are delivered to customers. Revenue that is billed in
advance includes monthly recurring network access services, special access
services and monthly recurring local line charges. The unearned portion of this
revenue is initially deferred as a component of advanced billings and customer
deposits on the Company's balance sheet and recognized as revenue over the
period that the services are provided. Revenue that is billed in arrears
includes nonrecurring network access services, nonrecurring local services and
long distance services. The earned but unbilled portion of this revenue is
recognized as revenue in the period that the services are provided.
Certain of the Company's telephone subsidiaries participate in revenue
sharing arrangements with other telephone companies for interstate revenue and
for certain intrastate revenue. Such sharing arrangements are funded by toll
revenue and/or access charges within state jurisdictions and by access charges
in the interstate market. Revenues earned through the various sharing
arrangements are initially recorded based on the Company's estimates.
Property, plant and equipment - Telephone plant is stated at original cost.
Normal retirements of telephone plant are charged against accumulated
depreciation, along with the costs of removal, less salvage, with no gain or
loss recognized. Renewals and betterments of plant and equipment are capitalized
while repairs, as well as renewals of minor items, are charged to operating
expense. Depreciation of telephone plant is provided on the straight line method
using class or overall group rates acceptable to regulatory authorities; such
rates range from 1.8% to 25%.
Non-telephone property is stated at cost and, when sold or retired, a
gain or loss is recognized. Depreciation of such property is provided on the
straight line method over estimated service lives ranging from three to 30
years.
Long-lived assets - In July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). Under SFAS 142, effective January 1, 2002,
systematic amortization of goodwill is no longer permitted; instead, SFAS 142
requires goodwill recorded in a business combination to be reviewed for
impairment and to be written down only in periods in which the recorded amount
of goodwill exceeds its fair value. Impairment of goodwill is tested at least
annually by comparing the fair value of the reporting unit to its carrying value
(including goodwill). Estimates of the fair value of the reporting unit are
based on valuation models using criterion such as multiples of earnings. Each
adjustment reflected in the consolidated statements of income and comprehensive
income by use of the term "as adjusted for goodwill amortization" reflects the
effects of SFAS 142, as more fully described in Note 4. Prior to January 1,
2002, substantially all of the Company's goodwill was amortized over 40 years.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets (exclusive of goodwill) and also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. As a result of the
Company's agreement in March 2002 to sell its wireless operations (which was
consummated on August 1, 2002) (see Note 3), such operations have been reflected
as discontinued operations for the year ended December 31, 2002. Assets and
liabilities related to the Company's wireless operations are reflected as "Held
for sale" on the accompanying consolidated balance sheets. Results of operations
for 2001 and 2000 have been restated to conform to this presentation.
Affiliated transactions - Certain service subsidiaries of CenturyTel provide
installation and maintenance services, materials and supplies, and managerial,
operational, technical, accounting and administrative services to subsidiaries.
In addition, CenturyTel provides and bills management services to subsidiaries
and in certain instances makes interest bearing advances to finance construction
of plant and purchases of equipment. These transactions are recorded by the
Company's telephone subsidiaries at their cost to the extent permitted by
regulatory authorities. Intercompany profit on transactions with regulated
affiliates is limited to a reasonable return on investment and has not been
eliminated in connection with consolidating the results of operations of
CenturyTel and its subsidiaries. Intercompany profit on transactions with
nonregulated affiliates has been eliminated.
Income taxes - CenturyTel files a consolidated federal income tax return with
its eligible subsidiaries. The Company uses the asset and liability method of
accounting for income taxes under which deferred tax assets and liabilities are
established for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Investment tax credits related to telephone plant have
been deferred and are being amortized as a reduction of federal income tax
expense over the estimated useful lives of the assets giving rise to the
credits.
Derivative financial instruments - Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires
all derivative instruments be recognized as either assets or liabilities at fair
value on the balance sheet. The Company uses derivative instruments to (i)
lock-in or swap its exposure to changing or variable interest rates for fixed
interest rates or (ii) swap obligations to pay fixed interest rates for variable
interest rates. The Company has established policies and procedures for risk
assessment and the approval, reporting and monitoring of derivative instrument
activities. The Company does not hold or issue derivative financial instruments
for trading or speculative purposes. Management periodically reviews the
Company's exposure to interest rate fluctuations and implements strategies to
manage the exposure.
Earnings per share - Basic earnings per share amounts are determined on the
basis of the weighted average number of common shares outstanding during the
year. Diluted earnings per share gives effect to all potential dilutive common
shares that were outstanding during the period.
Stock-based compensation - The Company accounts for employee stock compensation
plans using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Options have been granted to employees at a price
either equal to or exceeding the then-current market price. Accordingly, the
Company has not recognized compensation cost in connection with issuing stock
options.
During 2002 the Company granted 1,983,150 options (the "2002 Options") at
market price. The weighted average fair value of each of the 2002 Options was
estimated as of the date of grant to be $11.66 using an option-pricing model
with the following assumptions: dividend yield - .7%; expected volatility - 30%;
risk-free interest rate - 3.4%; and expected option life - seven years.
During 2001 the Company granted 1,971,750 options (the "2001 Options") at
market price. The weighted average fair value of each of the 2001 Options was
estimated as of the date of grant to be $11.16 using an option-pricing model
with the following assumptions: dividend yield - .6%; expected volatility - 30%;
risk-free interest rate - 4.8%; and expected option life - seven years.
During 2000 the Company granted 1,565,750 options (the "2000 Options") at
market price. The weighted average fair value of each of the 2000 Options was
estimated as of the date of grant to be $12.46 using an option-pricing model
with the following assumptions: dividend yield - .5%; expected volatility - 25%;
risk-free interest rate - 5.3%; and expected option life - seven years.
If compensation cost for CenturyTel's options had been determined
consistent with SFAS 123, the Company's net income and earnings per share on a
pro forma basis for 2002, 2001 and 2000 would have been as follows:
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 801,624 343,031 231,474
Less: Total stock-based employee compensation
expense determined under fair value based
method, net of tax $ (15,001) (8,971) (6,310)
--------------------------------------
Pro forma net income $ 786,623 334,060 225,164
======================================
Basic earnings per share
As reported $ 5.66 2.43 1.65
Pro forma $ 5.56 2.37 1.60
Diluted earnings per share
As reported $ 5.61 2.41 1.63
Pro forma $ 5.51 2.35 1.59
- ------------------------------------------------------------------------------------------
Cash equivalents - The Company considers short-term investments with a maturity
at date of purchase of three months or less to be cash equivalents.
Discontinued operations - Pursuant to a definitive agreement signed March 19,
2002, on August 1, 2002, the Company sold substantially all of its wireless
operations to an affiliate of ALLTEL Corporation ("Alltel") and certain partners
in the Company's markets that exercised "first refusal" purchase rights for an
aggregate of approximately $1.59 billion in cash. As a result, the Company's
wireless operations have been reflected as discontinued operations for all
periods presented. See Note 3 for additional information.
Reclassifications - Certain amounts previously reported for prior years have
been reclassified to conform with the 2002 presentation.
(2) ACQUISITIONS
On July 1, 2002, the Company completed the acquisition of approximately
300,000 telephone access lines in the state of Alabama from Verizon
Communications, Inc ("Verizon") for approximately $1.022 billion cash. On August
31, 2002, the Company completed the acquisition of approximately 350,000
telephone access lines in the state of Missouri from Verizon for approximately
$1.179 billion cash. The assets purchased include (i) telephone access lines and
related property and equipment comprising Verizon's local exchange operations in
predominantly rural markets throughout Alabama and Missouri, (ii) Verizon's
assets used to provide digital subscriber line ("DSL") and other high speed data
services within the purchased exchanges and (iii) approximately 2,800 route
miles of fiber optic cable within the purchased exchanges. The acquired assets
did not include Verizon's cellular, personal communications services ("PCS"),
long distance, dial-up Internet, or directory publishing operations, or rights
under various Verizon contracts, including those relating to customer premise
equipment. The Company did not assume any liabilities of Verizon other than (i)
those associated with contracts, facilities and certain other assets transferred
in connection with the purchase and (ii) certain employee-related liabilities,
including liabilities for postretirement health benefits. For financing
arrangements related to these acquisitions, see Note 6.
The results of operations of the acquired properties are included in the
Company's results of operations from and after the respective acquisition dates.
The following table presents the Company's allocation of its aggregate
purchase price to the assets acquired and liabilities assumed in connection with
the acquisitions.
(In thousands)
-------------
Accounts receivable $ 49,716
Materials and supplies 1,458
Property, plant and equipment 855,752
Goodwill 1,304,786
Other assets 58,000
Accrued expenses and other liabilities (1,195)
Advanced billings and customer deposits (10,362)
Deferred credits and other liabilities (56,897)
-------------
Aggregate purchase price $ 2,201,258
=============
The Company believes the entire amount of goodwill will be deductible for
income tax purposes.
The following pro forma information represents the consolidated results
of continuing operations of the Company for the years ended December 31, 2002
and 2001 as if the Verizon acquisitions in 2002 had been consummated as of
January 1, 2002 and 2001, respectively.
2002 2001
----------- ---------
(Dollars in thousands,
except per share amounts)
Operating revenues from continuing operations $ 2,285,866 2,231,631
Income from continuing operations $ 214,638 181,936
Basic earnings per share from
continuing operations, as adjusted $ 1.51 1.62
Diluted earnings per share from
continuing operations, as adjusted $ 1.50 1.60
The pro forma information is based on various assumptions and estimates,
and on the above-mentioned allocations of the aggregate Verizon purchase price
to the Verizon assets acquired. The pro forma information (i) reflects the
effect of reduced interest expense after August 1, 2002 as a result of reducing
outstanding indebtedness from utilization of proceeds received from the August
1, 2002 sale of substantially all of the Company's wireless operations described
in Note 3 and (ii) makes no pro forma adjustments to reflect any assumed
consummation of such sale (or any use of such sale proceeds) prior to August 1,
2002. The pro forma information is not necessarily indicative of the operating
results that would have occurred if the Verizon acquisitions had been
consummated as of January 1 of each respective period, nor is it necessarily
indicative of future operating results. The pro forma information does not give
effect to any potential revenue enhancements or cost synergies or other
operating efficiencies that could result from the acquisitions. The actual
results of operations of the Verizon properties are included in the consolidated
financial statements only from the respective dates of acquisition.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related assets from Verizon in
four separate transactions for approximately $1.5 billion in cash. Under these
transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related local exchange assets comprising 106 exchanges
throughout Arkansas for approximately $842 million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra") purchased
approximately 127,000 telephone access lines and related local exchange assets
comprising 107 exchanges throughout Missouri for approximately $297 million
cash. The Company currently owns 75.7% of Spectra, which was organized to
acquire and operate these Missouri properties. At closing, the Company made a
preferred equity investment in Spectra of approximately $55 million (which
represented a 57.1% interest) and financed substantially all of the remainder of
the purchase price. In the first quarter of 2001, the Company purchased an
additional 18.6% interest in Spectra for $47.1 million.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related local exchange assets comprising 42 exchanges
throughout Wisconsin for approximately $197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related local exchange
assets comprising 35 exchanges throughout Wisconsin for approximately $172
million in cash. The Company owns 89% of TelUSA, which was organized to acquire
and operate these Wisconsin properties. At closing, the Company made an equity
investment in TelUSA of approximately $37.8 million and financed substantially
all of the remainder of the purchase price.
(3) DISCONTINUED OPERATIONS
Pursuant to a definitive agreement signed March 19, 2002, on August 1,
2002, the Company sold substantially all of its wireless operations to Alltel
and certain partners in the Company's markets that exercised "first refusal"
purchase rights for an aggregate of approximately $1.59 billion in cash. In
connection with this transaction, the Company divested its (i) interests in its
majority-owned and operated cellular systems, which at June 30, 2002 served
approximately 783,000 customers and had access to approximately 7.8 million
pops, (ii) minority cellular equity interests representing approximately 1.8
million pops at June 30, 2002, and (iii) licenses to provide PCS covering 1.3
million pops in Wisconsin and Iowa. Proceeds from the sale of the wireless
operations were used to partially fund the Company's acquisitions of telephone
properties in Alabama and Missouri during the third quarter of 2002.
As a result of the sale, the Company's wireless operations have been
reflected as discontinued operations in the Company's consolidated statements of
income and cash flows for the years ended December 31, 2002, 2001 and 2000.
Assets and liabilities related to the Company's wireless operations are
reflected as "Held for sale" on the accompanying consolidated balance sheets.
The depreciation and amortization of long-lived and amortizable intangible
assets related to the wireless operations ceased on March 19, 2002, the date of
the definitive agreement to sell such operations.
The Company had no outstanding indebtedness directly related to its
wireless operations; therefore, no interest expense was allocated to
discontinued operations. The following table represents certain summary income
statement information related to the Company's wireless operations that is
reflected in discontinued operations.
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 246,705 437,965 443,569
- ------------------------------------------------------------------------------------------
Operating income (1) $ 71,258 132,614 139,276
Nonrecurring gains and losses, net - 166,928 20,593
Income from unconsolidated cellular entities 31,350 27,460 26,986
Minority interest expense (8,569) (11,510) (11,598)
Gain on sale of discontinued operations 803,905 - -
Other income 188 4,707 3,157
- ------------------------------------------------------------------------------------------
Pre-tax income from discontinued operations $ 898,132 320,199 178,414
Income tax expense (286,427) (121,314) (71,169)
- ------------------------------------------------------------------------------------------
Income from discontinued operations $ 611,705 198,885 107,245
==========================================================================================
(1) Excludes corporate overhead costs of $11.3 million, $20.2 million and
$21.4 million for 2002, 2001 and 2000, respectively, allocated to the wireless
operations. Included as a reduction in operating income for 2002 is a
$30.5 million charge associated with the write-off of all amounts expended to
develop the wireless portion of the Company's billing system currently in
development.
The following table represents certain summary cash flow statement
information related to the Company's wireless operations reflected as
discontinued operations.
Year ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net cash provided by (used in) operating activities $ (250,684) (1) 87,585 117,096
Net cash provided by (used in) investing activities 1,577,633 (2) 145,243 (482)
Net cash provided by financing activities - - 201
- ------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations $ 1,326,949 232,828 116,815
======================================================================================================
(1) Includes approximately $305 million estimated tax payment related to sale
of wireless operations.
(2) Includes cash proceeds of $1.59 billion from the sale of substantially all
of the Company's wireless operations.
The following table represents the net assets of the discontinued
wireless operations as of December 31, 2002 and December 31, 2001 that are
classified as held for sale on the consolidated balance sheets.
December 31, 2002 2001
- ----------------------------------------------------------------------------
(Dollars in thousands)
Current assets $ - 70,360
Net property, plant and equipment - 263,421
Goodwill - 384,326
Other assets (1) 11,805 127,321
- ----------------------------------------------------------------------------
Assets held for sale $ 11,805 845,428
============================================================================
Current liabilities $ - 55,074
Deferred credits and other liabilities - 93,796
- ----------------------------------------------------------------------------
Liabilities related to assets
held for sale $ - 148,870
============================================================================
(1) At December 31, 2002, represents the Company's minority interest in a
cellular partnership that the Company has agreed to sell to Alltel upon the
satisfaction of various closing conditions. The Company is currently in
discussions regarding whether these closing conditions have been met. No
assurance can be given that this sale will occur.
(4) INVESTMENTS AND OTHER ASSETS
Investments and other assets at December 31, 2002 and 2001 were composed
of the following:
December 31, 2002 2001
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Goodwill $ 3,427,281 2,087,158
Billing system development costs 139,451 139,503
Cash surrender value of life insurance contracts 93,664 99,835
Prepaid pension asset 54,695 42,353
Franchise costs 35,300 -
Customer base, less accumulated amortization of $729 21,971 -
Deferred interest rate hedge contracts 33,635 35,192
Debt issuance costs, net 23,491 12,108
Fair value of interest rate swap 22,163 -
Other 79,405 91,052
- --------------------------------------------------------------------------------
$ 3,931,056 2,507,201
================================================================================
The following information relates to the Company's goodwill as of
December 31, 2002 and 2001:
December 31, 2002 2001
- ------------------------------------------------------------------------------
(Dollars in thousands)
Carrying amount of goodwill
Telephone segment $ 3,382,113 2,074,036
Other operations 45,168 13,122
- ------------------------------------------------------------------------------
Total goodwill $ 3,427,281 2,087,158
==============================================================================
During 2002, the Company completed the initial transitional goodwill
impairment test and the required annual test of SFAS 142 and determined its
goodwill was not impaired in either test. The increase in goodwill in the
telephone segment since December 31, 2001 is primarily due to the Verizon
acquisitions consummated in third quarter 2002 (see Note 2).
The following is a reconciliation of reported net income and reported
earnings per share to the amounts that would have been reported had the Company
been subject to SFAS 142 during 2001 and 2000.
Year ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 801,624 343,031 231,474
Goodwill amortization, net of taxes - 56,266 46,555
- -----------------------------------------------------------------------------
Net income, as adjusted $ 801,624 399,297 278,029
=============================================================================
Basic earnings per share, as reported $ 5.66 2.43 1.65
Goodwill amortization, net of taxes - .40 .33
- -----------------------------------------------------------------------------
Basic earnings per share, as adjusted $ 5.66 2.83 1.98
=============================================================================
Diluted earnings per share, as reported $ 5.61 2.41 1.63
Goodwill amortization, net of taxes - .40 .33
- -----------------------------------------------------------------------------
Diluted earnings per share, as adjusted $ 5.61 2.81 1.96
=============================================================================
Amortization of goodwill and other intangibles from continuing operations
of $729,000, $58.4 million and $43.6 million for 2002, 2001 and 2000,
respectively, is included in "Depreciation and amortization" in the Company's
Consolidated Statements of Income. In accordance with SFAS 142, effective
January 1, 2002, goodwill is no longer subject to amortization but instead is
tested for impairment at least annually.
The Company is in the process of developing an integrated billing and
customer care system. The costs to develop such system have been capitalized in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and aggregated $139.5
million at both December 31, 2002 and 2001. A portion of these billing costs
related to the wireless business ($30.5 million) was written off as a component
of discontinued operations in the third quarter of 2002 as a result of the sale
of substantially all of the Company's wireless operations on August 1, 2002.
Excluding this write-off, the Company's aggregate billing system costs are
expected to approximate $180 million upon completion and are expected to be
amortized over a twenty-year period. The Company expects to begin amortization
of the billing system in 2003 as customer groups are migrated to this new
system.
In connection with the acquisitions of properties from Verizon in 2002,
the Company assigned $35.3 million as an intangible asset associated with
franchise costs (which includes amounts necessary to maintain eligibility to
provide telecommunications services in its licensed service areas). Such asset
has an indefinite life and therefore is not subject to amortization currently.
The Company assigned $22.7 million to a customer base intangible asset in
connection with the acquisitions of Verizon properties in 2002. Such asset is
being amortized over 15 years; amortization expense for 2002 was $729,000 and is
expected to be $1.5 million for each of the next five years.
(5) PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at December 31, 2002 and 2001 was
composed of the following:
December 31, 2002 2001
- -------------------------------------------------------------------------------
(Dollars in thousands)
Telephone
Cable and wire $ 3,643,167 3,009,720
Central office 2,150,217 1,829,945
General support 474,022 340,416
Information origination/termination 44,198 42,038
Construction in progress 32,507 64,560
Other 3,789 5,576
- -------------------------------------------------------------------------------
6,347,900 5,292,255
Accumulated depreciation (3,136,107) (2,839,268)
- -------------------------------------------------------------------------------
3,211,793 2,452,987
- -------------------------------------------------------------------------------
Other, at cost
General support 346,037 309,500
Fiber network 74,305 72,410
Other 100,950 65,010
- -------------------------------------------------------------------------------
521,292 446,920
Accumulated depreciation (201,440) (163,765)
- -------------------------------------------------------------------------------
319,852 283,155
- -------------------------------------------------------------------------------
Net property, plant and equipment $ 3,531,645 2,736,142
===============================================================================
Depreciation expense was $410.9 million, $348.6 million and $279.2
million in 2002, 2001 and 2000, respectively. The composite depreciation rate
for telephone properties was 6.9% for 2002, 6.8% for 2001 and 7.2% for 2000.
(6) LONG-TERM AND SHORT-TERM DEBT
The Company's long-term debt as of December 31, 2002 and 2001 was as
follows:
December 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CenturyTel
2.05%* senior credit facilities, due through 2005 $ 385,000 -
Senior credit facility - 300,000
4.85% note - 199,125
Senior notes and debentures:
7.75% Series A, due 2004 50,000 50,000
8.25% Series B, due 2024 100,000 100,000
6.55% Series C, due 2005 50,000 50,000
7.20% Series D, due 2025 100,000 100,000
6.15% Series E, due 2005 100,000 100,000
6.30% Series F, due 2008 240,000 240,000
6.875% Series G, due 2028 425,000 425,000
8.375% Series H, due 2010 500,000 500,000
7.75% Series I - 400,000
6.02% Series J, due 2007 (remarketable 2005) 500,000 -
4.75% Series K, due 2032 165,000 -
7.875% Series L, due 2012 500,000 -
9.38% notes, due through 2003 2,800 7,975
6.86%** Employee Stock Ownership
Plan commitment, due in installments through 2004 1,500 2,500
Unamortized net (discount) premium (5,084) 11,036
Fair value of derivative instrument related to
Series H senior notes 22,163 -
Other 146 175
- ---------------------------------------------------------------------------------------------------------
Total CenturyTel 3,136,525 2,485,811
- ---------------------------------------------------------------------------------------------------------
Subsidiaries
First mortgage debt
5.92%** notes, payable to agencies of the U. S. government
and cooperative lending associations, due in
installments through 2025 250,325 265,240
7.98% notes, due through 2017 5,500 5,419
Other debt
7.02%** unsecured medium-term notes, due through 2008 244,124 271,135
7.03%** notes, due in installments through 2020 5,361 6,725
6.46%** capital lease obligations, due through 2008 7,034 9,004
- ---------------------------------------------------------------------------------------------------------
Total subsidiaries 512,344 557,523
- ---------------------------------------------------------------------------------------------------------
Total long-term debt 3,648,869 3,043,334
Less current maturities 70,737 955,834
- ---------------------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 3,578,132 2,087,500
=========================================================================================================
* variable interest rate at December 31, 2002
** weighted average interest rate at December 31, 2002
The approximate annual debt maturities for the five years subsequent to
December 31, 2002 are as follows: 2003 - $70.7 million; 2004 - $71.8 million;
2005 - $630.4 million; 2006 - $113.4 million (assuming the Company is not
required to purchase any of its Series K debentures in 2006 pursuant to the
put rights described below); and 2007 - $522.3 million.
Certain of the loan agreements of CenturyTel and its subsidiaries contain
various restrictions, among which are limitations regarding issuance of
additional debt, payment of cash dividends, reacquisition of capital stock and
other matters. In addition, the transfer of funds from certain consolidated
subsidiaries to CenturyTel is restricted by various loan agreements.
Subsidiaries which have loans from government agencies and cooperative lending
associations, or have issued first mortgage bonds, generally may not loan or
advance any funds to CenturyTel, but may pay dividends if certain financial
ratios are met. At December 31, 2002, restricted net assets of subsidiaries were
$264.7 million and subsidiaries' retained earnings in excess of amounts
restricted by debt covenants totaled $1.377 billion. At December 31, 2002, all
of the consolidated retained earnings reflected on the balance sheet was
available under CenturyTel's loan agreements for the declaration of dividends.
Some of the Company's telephone property, plant and equipment is pledged
to secure the long-term debt of subsidiaries.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consists initially of a beneficial interest in a
CenturyTel senior unsecured note (Series J) with a principal amount of $25 and a
contract to purchase shares of CenturyTel common stock no later than May 2005.
The senior notes will mature in May 2007. Each purchase contract will generally
require the holder to purchase between .6944 and .8741 of a share of CenturyTel
common stock in May 2005 based on the then current stock price of CenturyTel
common stock in exchange for $25, subject to certain adjustments and exceptions.
Accordingly, upon full settlement of the purchase contracts in May 2005, the
Company will receive proceeds of $500 million and will deliver between 13.9
million and 17.5 million common shares in the aggregate. The senior notes are
pledged by the holders to secure their obligations under the purchase contracts.
The total distributions on the equity units will be at an initial annual rate of
6.875%, consisting of interest (6.02%) and contract adjustment payments
(0.855%), each payable quarterly. On or after mid-February 2005, the senior
notes will be remarketed, at which time the remarketing agent will reset the
interest rate on the senior notes in order to generate sufficient proceeds to
secure the holder's obligation under the purchase contract. In the event of an
unsuccessful remarketing, the Company will exercise its right as a secured party
to dispose of the senior notes and satisfy in full the holder's obligation to
purchase common stock under the purchase contract.
The senior note portion of the equity units is reflected on the balance
sheet as long-term debt in the amount of $500 million. Interest expense on the
senior notes is accrued at a rate of 6.02%, the initial interest rate. The
present value of the aggregate contract adjustment payments has been recorded as
an $11.6 million reduction to paid-in capital and as an equivalent liability.
The Company will amortize the difference between the aggregate amount of all
payments and the present value thereof as interest expense over the three-year
term of the purchase contracts. Upon making each such payment, the Company will
allocate most of the payment to the reduction of its $11.6 million liability,
and record the remainder as interest expense. The issuance costs of the equity
units have been allocated to the units' debt and equity components. The debt
issuance costs ($3.3 million) were computed based on typical costs of a debt
transaction and will be amortized to interest expense over the term of the
senior notes. The remainder of the issuance costs ($12.6 million) were treated
as a cost of raising equity and recorded as a charge to paid-in capital.
On July 22, 2002, the Company entered into $800 million of credit
facilities, consisting of a $533 million three-year facility and a $267 million
364-day revolving facility with a one-year term-out option. The Company had $385
million outstanding under these facilities at December 31, 2002. These
facilities replaced credit facilities that matured during the third quarter of
2002.
In the third quarter of 2002, the Company issued $500 million of senior
notes, Series L, due 2012 (which bear interest at 7.875%) and $165 million of
convertible senior debentures, Series K, due 2032 (which bear interest at 4.75%
and which may be converted into shares of CenturyTel common stock at a
conversion price of $40.455 per share). Holders of the convertible senior
debentures will have the right to require the Company to purchase all or a
portion of the debentures on August 1, 2006, August 1, 2010 and August 1, 2017.
In each case, the purchase price payable will be equal to 100% of the principal
amount of the debentures to be purchased plus any accrued and unpaid interest to
the purchase date. The Company will pay cash for all debentures so purchased on
August 1, 2006. For any such purchases on or after August 1, 2010, the Company
may choose to pay the purchase price in cash or shares of its common stock, or
any combination thereof (except that the Company will pay any accrued and unpaid
interest in cash).
On October 15, 2002, the Company redeemed $400 million principal amount
of its Series I Remarketable Senior Notes at par value, plus accrued interest.
In connection with such redemption, the Company also paid a premium of
approximately $71.1 million in accordance with the redemption provisions of the
associated remarketing agreement. Such premium payment (net of $11.1 million of
unamortized net premium primarily associated with the option payment received by
the Company in 2000 in connection with the original issuance of the remarketable
notes) is reflected as an Other Expense in the Company's results of operations
for year ended December 31, 2002.
At December 31, 2002, the Company had available $415.0 million of undrawn
committed bank lines of credit and the Company's telephone subsidiaries had
available for use $123.0 million of commitments for long-term financing from the
Rural Utilities Service and Rural Telephone Bank.
(7) DERIVATIVE INSTRUMENTS
During 2002, the Company entered into the following derivative
transactions:
(a) A cash flow hedge designed to lock in a fixed interest rate for
$100 million of the $500 million senior notes issued in the third
quarter of 2002. Such hedge was settled in the third quarter of
2002 for a $1.1 million payment by the Company. Such amount will
be amortized as additional interest expense over a ten-year
period, which equates to the term of the debt issuance hedged.
(b) A fair value hedge with respect to the Company's $500 million
aggregate principal amount of 8.375% Series H senior notes, due
2010. This hedge is a "fixed to variable" interest rate swap that
effectively converts the Company's fixed rate interest payment
obligations under these notes into variable rate obligations. As
of December 31, 2002, the Company realized an interest rate of
4.96% related to such hedge. Interest expense was reduced by $7.8
million in 2002 as a result of this hedge. The fair value of such
hedge at December 31, 2002 was $22.2 million and is reflected on
the accompanying balance sheet as both an asset (included in
"Other assets") and as an increase in the underlying debt
(included in "Long-term debt").
(c) A cash flow hedge designed to eliminate the variability of
interest payments for $400 million of variable rate debt under
the Company's $800 million credit facilities. Such hedge expires
in October 2003 and is designed to swap the Company's future
obligation to pay variable rate interest based on LIBOR into
obligations that lock-in a fixed rate of 2.49%. Such hedge was
deemed to be an effective hedge as of December 31, 2002 and its
value on such date ($1.3 million) is reflected as a liability and
Accumulated Other Comprehensive Loss (net of tax) on the
accompanying balance sheet.
(8) DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 2002 and 2001 were
composed of the following:
December 31, 2002 2001
- --------------------------------------------------------------------------------
(Dollars in thousands)
Deferred federal and state income taxes $ 352,161 303,708
Accrued postretirement benefit costs 208,542 139,020
Additional minimum pension liability 56,388 -
Minority interest 26,067 23,248
Other 73,010 40,076
- --------------------------------------------------------------------------------
$ 716,168 506,052
================================================================================
(9) STOCKHOLDERS' EQUITY
Common stock - Unissued shares of CenturyTel common stock were reserved as
follows:
December 31, 2002
- ------------------------------------------------------------------------------
(In thousands)
Incentive compensation programs 13,452
Acquisitions 4,064
Employee stock purchase plan 4,870
Dividend reinvestment plan 484
Conversion of convertible preferred stock 435
Other employee benefit plans 1,655
- ------------------------------------------------------------------------------
24,960
==============================================================================
Under CenturyTel's Articles of Incorporation each share of common stock
beneficially owned continuously by the same person since May 30, 1987 generally
entitles the holder thereof to ten votes per share. All other shares entitle the
holder to one vote per share. At December 31, 2002, the holders of 9.6 million
shares of common stock were entitled to ten votes per share.
Preferred stock - As of December 31, 2002, CenturyTel had 2.0 million shares of
authorized convertible preferred stock, $25 par value per share. At December 31,
2002 and 2001, there were 319,000 shares of outstanding preferred stock. Holders
of outstanding CenturyTel preferred stock are entitled to receive cumulative
dividends, receive preferential distributions equal to $25 per share plus unpaid
dividends upon CenturyTel's liquidation and vote as a single class with the
holders of common stock.
Shareholders' Rights Plan - In 1996 the Board of Directors declared a dividend
of one preference share purchase right for each common share outstanding. Such
rights become exercisable if and when a potential acquiror takes certain steps
to acquire 15% or more of CenturyTel's common stock. Upon the occurrence of such
an acquisition, each right held by shareholders other than the acquiror may be
exercised to receive that number of shares of common stock or other securities
of CenturyTel (or, in certain situations, the acquiring company) which at the
time of such transaction will have a market value of two times the exercise
price of the right.
(10) POSTRETIREMENT BENEFITS
The Company sponsors health care plans that provide postretirement
benefits to all qualified retired employees.
The following is a reconciliation of the beginning and ending balances
for the benefit obligation and the plan assets.
December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 215,872 165,266 156,724
Service cost 6,669 6,373 4,727
Interest cost 15,962 14,512 10,907
Participant contributions 617 548 677
Acquisitions 56,539 - 15,730
Actuarial (gain) loss (29,534) 40,005 (14,773)
Benefits paid (12,363) (10,832) (8,726)
- ---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 253,762 215,872 165,266
=========================================================================================================
Change in plan assets (primarily listed stocks and bonds)
Fair value of plan assets at beginning of year $ 36,555 39,873 41,781
Return on assets (2,896) (1,379) (270)
Employer contributions 6,784 8,345 6,411
Participant contributions 617 548 677
Benefits paid (12,363) (10,832) (8,726)
- ---------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 28,697 36,555 39,873
=========================================================================================================
Net periodic postretirement benefit cost for 2002, 2001 and 2000 included
the following components:
Year ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 6,669 6,373 4,727
Interest cost 15,962 14,512 10,907
Expected return on plan assets (3,656) (3,987) (4,178)
Amortization of unrecognized actuarial loss 1,470 1,337 26
Amortization of unrecognized prior service cost (129) (129) (129)
- ----------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 20,316 18,106 11,353
==============================================================================================
The following table sets forth the amounts recognized as liabilities for
postretirement benefits at December 31, 2002, 2001 and 2000.
December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (253,762) (215,872) (165,266)
Fair value of plan assets 28,697 36,555 39,873
Unamortized prior service cost (918) (1,046) (1,175)
Unrecognized net actuarial (gain) loss 14,573 33,925 (9,621)
- ------------------------------------------------------------------------------------------
Accrued benefit cost $ (211,410) (146,438) (136,189)
==========================================================================================
Assumptions used in accounting for postretirement benefits as of December
31, 2002 and 2001 were:
2002 2001
- ------------------------------------------------------------------------------
Weighted average assumptions
Discount rate 6.75% 7.0
Expected return on plan assets 10.0% 10.0
- ------------------------------------------------------------------------------
For 2003, the Company lowered its expected return on plan assets from
10.0% to 8.25%.
For measurement purposes, the annual rate in the per capita cost of
covered health care benefits was assumed to range between 4.9%-5.7% for 2003,
reaching an ultimate trend of 4.5% in 2015. A one-percentage-point change in
assumed health care cost rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
- --------------------------------------------------------------------------------------
(Dollars in thousands)
Effect on total of service and interest
cost components $ 1,474 (1,405)
Effect on postretirement benefit obligation $ 16,604 (15,584)
- --------------------------------------------------------------------------------------
(11) RETIREMENT AND SAVINGS PLANS
CenturyTel and certain subsidiaries sponsor defined benefit pension plans
for substantially all employees. CenturyTel also sponsors an Outside Directors'
Retirement Plan and a Supplemental Executive Retirement Plan to provide
directors and officers, respectively, with supplemental retirement, death and
disability benefits.
The following is a reconciliation of the beginning and ending balances
for the aggregate benefit obligation and the plan assets for the Company's
retirement and savings plans.
December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 271,490 249,835 205,455
Service cost 10,353 7,760 5,928
Interest cost 20,053 17,829 15,381
Plan amendments - 1,205 3,387
Acquisitions 51,428 - 35,824
Actuarial (gain) loss 9,231 9,065 (3,726)
Benefits paid (16,299) (14,204) (12,414)
- ---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 346,256 271,490 249,835
=========================================================================================================
Change in plan assets (primarily listed stocks and bonds)
Fair value of plan assets at beginning of year $ 283,448 329,459 319,901
Return on plan assets (43,564) (33,184) (14,991)
Employer contributions 14,887 1,377 572
Acquisitions 51,428 - 36,391
Benefits paid (16,299) (14,204) (12,414)
- ---------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 289,900 283,448 329,459
=========================================================================================================
Net periodic pension expense (benefit) for 2002, 2001 and 2000 included
the following components:
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 10,353 7,760 5,928
Interest cost 20,053 17,829 15,381
Expected return on plan assets (29,578) (31,901) (31,586)
Recognized net (gains) losses 1,328 (2,325) (7,107)
Net amortization and deferral 395 301 (602)
- ---------------------------------------------------------------------------------------------------------
Net periodic pension expense (benefit) $ 2,551 (8,336) (17,986)
=========================================================================================================
The following table sets forth the combined plans' funded status and
amounts recognized in the Company's consolidated balance sheet at December 31,
2002, 2001 and 2000.
December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (346,256) (271,490) (249,835)
Fair value of plan assets 289,900 283,448 329,459
Unrecognized transition asset (1,152) (1,404) (1,648)
Unamortized prior service cost 4,370 5,017 4,126
Unrecognized net actuarial (gain) loss 107,833 26,782 (49,336)
- ---------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 54,695 42,353 32,766
=========================================================================================================
As of December 31, 2002, substantially all of the pension plans had
benefit obligations in excess of plan assets.
Amounts recognized on the balance sheet consist of:
December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Prepaid pension cost $ 54,695 42,353 32,766
Additional minimum pension liability (reflected in Deferred
Credits and Other Liabilities) (56,388) - -
Intangible asset (reflected in Other Assets) 1,212 - -
Accumulated Other Comprehensive Loss 55,176 - -
- ---------------------------------------------------------------------------------------------------------
$ 54,695 42,353 32,766
=========================================================================================================
Assumptions used in accounting for the pension plans as of December 2002
and 2001 were:
2002 2001
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.0
Expected long-term rate of return on assets 8.0-10.0% 8.0-10.0
Weighted average rate of compensation increase 4.50% 4.50
- --------------------------------------------------------------------------------
For 2003, the Company lowered its expected long-term rate of return on
assets from 8-10% to 8-8.25%.
CenturyTel sponsors an Employee Stock Ownership Plan ("ESOP") which
covers most employees with one year of service with the Company and is funded by
Company contributions determined annually by the Board of Directors. The
Company's expense related to the ESOP during 2002, 2001 and 2000 was $9.3
million, $7.5 million, and $9.5 million, respectively. At December 31, 2002, the
ESOP owned an aggregate of 7.6 million shares of CenturyTel common stock.
CenturyTel and certain subsidiaries also sponsor qualified profit sharing
plans pursuant to Section 401(k) of the Internal Revenue Code (the "401(k)
Plans") which are available to substantially all employees of the Company. The
Company's matching contributions to the 401(k) Plans were $6.7 million in 2002,
$6.6 million in 2001 and $6.1 million in 2000.
(12) INCOME TAXES
Income tax expense from continuing operations included in the
Consolidated Statements of Income for the years ended December 31, 2002, 2001
and 2000 was as follows:
Year ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
(Dollars in thousands)
Federal
Current $ 21,019 24,032 42,295
Deferred 80,056 62,164 30,932
State
Current 11,406 6,735 9,393
Deferred (8,944) (4,220) 922
- -------------------------------------------------------------------------------
$ 103,537 88,711 83,542
===============================================================================
Income tax expense from continuing operations was allocated as follows:
Year ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------
(Dollars in thousands)
Income tax expense in the consolidated statements of income $ 103,537 88,711 83,542
Stockholders' equity:
Compensation expense for tax purposes
in excess of amounts recognized for
financial reporting purposes (7,471) (1,051) (2,702)
Tax effect of the change in accumulated other
comprehensive income (loss) (19,763) (13,715) (20,941)
- -------------------------------------------------------------------------------------------------
The following is a reconciliation from the statutory federal income tax
rate to the Company's effective income tax rate from continuing operations:
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------
(Percentage of pre-tax income)
Statutory federal income tax rate 35.0% 35.0 35.0
State income taxes, net of federal income tax benefit .5 .7 3.2
Amortization of nondeductible goodwill - 3.4 3.7
Amortization of investment tax credits (.1) (.2) (.3)
Amortization of regulatory liability (.3) (.7) (.8)
Other, net .2 (.1) (.6)
- ---------------------------------------------------------------------------------------------
Effective income tax rate 35.3% 38.1 40.2
=============================================================================================
In accordance with SFAS 142, effective January 1, 2002, goodwill
amortization for financial reporting purposes ceased.
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2002 and 2001 were as follows:
December 31, 2002 2001
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Postretirement benefit costs $ 40,852 31,670
Regulatory support 11,414 12,163
Net state operating loss carryforwards 28,380 19,691
Other employee benefits 28,697 8,255
Other 18,720 21,036
- --------------------------------------------------------------------------------------------
Gross deferred tax assets 128,063 92,815
Less valuation allowance (28,380) (19,691)
- --------------------------------------------------------------------------------------------
Net deferred tax assets 99,683 73,124
- --------------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment, primarily due to
depreciation differences (189,663) (152,506)
Goodwill (256,801) (218,461)
Deferred debt costs (2,400) (2,582)
Intercompany profits (2,980) (3,283)
- --------------------------------------------------------------------------------------------
Gross deferred tax liabilities (451,844) (376,832)
- --------------------------------------------------------------------------------------------
Net deferred tax liability $ (352,161) (303,708)
============================================================================================
As of December 31, 2002 and 2001, the Company had available tax benefits
associated with state operating loss carryforwards of $28.4 million and $19.7
million, respectively, which expire through 2017. Such amounts were reserved in
total through the valuation allowance as it is likely that such operating loss
carryforwards will not be utilized prior to expiration.
(13) NONRECURRING GAINS AND LOSSES, NET
In the second quarter of 2002, the Company recorded a pre-tax gain of
$3.7 million from the sale of a PCS license.
In the second quarter of 2001, the Company recorded a pre-tax gain
(reflected in discontinued operations) of approximately $185.1 million ($117.7
million after-tax; $.83 per diluted share) due to the sale of 30 PCS licenses to
Leap Wireless International, Inc. ("Leap"). In conjunction with the sale of the
licenses to Leap, the Company also recorded a pre-tax charge (reflected in
discontinued operations) of $18.2 million ($11.6 million after-tax; $.08 per
share) due to the write down in the value of certain non-operating assets.
In the third quarter of 2001, the Company recorded a pre-tax gain on the
sale of its remaining common shares of Illuminet Holdings, Inc. aggregating
$54.6 million ($35.5 million after-tax; $.25 per diluted share). The Company
also recorded a pre-tax gain of $4.0 million ($2.6 million after-tax; $.02 per
diluted share) on the sale of certain other assets. Additionally in 2001, the
Company recorded pre-tax charges of $25.5 million ($16.6 million after-tax; $.12
per diluted share) due to the write-down in the value of certain non-operating
investments in which the Company owns a minority interest.
In the first quarter of 2000 the Company recorded a pre-tax gain
(reflected in discontinued operations) aggregating $9.9 million ($5.2 million
after tax) due to the sale of its remaining Alaska cellular operations.
In the third quarter of 2000 the Company recorded a pre-tax gain
(reflected in discontinued operations) aggregating $10.7 million ($6.4 million
after tax) due to the sale of its minority interest in a non-strategic cellular
partnership.
(14) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, and shares in thousands)
Income (Numerator):
Income from continuing operations $ 189,919 144,146 124,229
Discontinued operations, net of tax 611,705 198,885 107,245
- ---------------------------------------------------------------------------------------------------------
Net income 801,624 343,031 231,474
Dividends applicable to preferred stock (399) (399) (399)
- ---------------------------------------------------------------------------------------------------------
Net income applicable to common stock for
computing basic earnings per share 801,225 342,632 231,075
Dividends applicable to preferred stock 399 399 399
Interest on convertible securities, net of taxes - - 132
- ---------------------------------------------------------------------------------------------------------
Net income as adjusted for purposes of computing
diluted earnings per share $ 801,624 343,031 231,606
=========================================================================================================
Net income applicable to common stock for computing basic
earnings per share, as adjusted for goodwill amortization $ 801,225 398,898 277,630
=========================================================================================================
Net income as adjusted for purposes of computing diluted
earnings per share, as adjusted for goodwill amortization $ 801,624 399,297 278,161
=========================================================================================================
Shares (Denominator):
Weighted average number of shares outstanding
during period 141,796 141,021 140,440
Employee Stock Ownership Plan shares not
committed to be released (183) (278) (371)
- ---------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding during
period for computing basic earnings per share 141,613 140,743 140,069
Incremental common shares attributable to
dilutive securities:
Shares issuable under convertible securities 435 435 707
Shares issuable under outstanding stock options 831 1,129 1,088
- ---------------------------------------------------------------------------------------------------------
Number of shares as adjusted for purposes of
computing diluted earnings per share 142,879 142,307 141,864
=========================================================================================================
Basic earnings per share
From continuing operations $ 1.34 1.02 .88
From continuing operations, as adjusted for
goodwill amortization $ 1.34 1.35 1.15
From discontinued operations $ 4.32 1.41 .77
From discontinued operations, as adjusted for
goodwill amortization $ 4.32 1.48 .84
Basic earnings per share $ 5.66 2.43 1.65
Basic earnings per share, as adjusted for
goodwill amortization $ 5.66 2.83 1.98
Diluted earnings per share
From continuing operations $ 1.33 1.01 .88
From continuing operations, as adjusted for
goodwill amortization $ 1.33 1.34 1.13
From discontinued operations $ 4.28 1.40 .76
From discontinued operations, as adjusted for
goodwill amortization $ 4.28 1.47 .83
Diluted earnings per share $ 5.61 2.41 1.63
Diluted earnings per share, as adjusted for
goodwill amortization $ 5.61 2.81 1.96
The weighted average number of options to purchase shares of common stock
that were excluded from the computation of diluted earnings per share because
the exercise price of the option was greater than the average market price of
the common stock was 3,285,000 for 2002, 1,346,000 for 2001 and 969,000 for
2000.
(15) STOCK OPTION PROGRAMS
CenturyTel maintains programs which allow the Board of Directors, through
the Compensation Committee, to grant (i) incentives to certain employees in any
one or a combination of several forms, including incentive and non-qualified
stock options; stock appreciation rights; restricted stock; and performance
shares and (ii) stock options to outside directors. As of December 31, 2002,
CenturyTel had reserved 13.5 million shares of common stock which may be issued
under CenturyTel's current incentive compensation programs.
Under the Company's programs, options have been granted to employees at a
price either equal to or exceeding the then-current market price. All of the
options expire ten years after the date of grant and the vesting period ranges
from immediate to three years.
Stock option transactions during 2002, 2001 and 2000 were as follows:
Number Average
of options price
- -------------------------------------------------------------------------------
Outstanding December 31, 1999 3,485,842 14.92
Exercised (369,308) 12.46
Granted 1,565,750 33.00
Forfeited (1,125) 13.33
- -----------------------------------------------------------------
Outstanding December 31, 2000 4,681,159 21.16
Exercised (149,806) 15.91
Granted 1,971,750 28.14
Forfeited (135,583) 18.42
- -----------------------------------------------------------------
Outstanding December 31, 2001 6,367,520 23.51
Exercised (1,366,560) 13.97
Granted 1,983,150 32.28
Forfeited (88,308) 28.59
- -----------------------------------------------------------------
Outstanding December 31, 2002 6,895,802 27.95
=================================================================
Exercisable December 31, 2002 3,991,753 25.68
=================================================================
Exercisable December 31, 2001 3,342,216 17.81
=================================================================
The following tables summarize certain information about CenturyTel's
stock options at December 31, 2002.
Options outstanding
- -----------------------------------------------------------------------------------------------------
Weighted average
Range of remaining contractual Weighted average
exercise prices Number of options life outstanding exercise price
- -----------------------------------------------------------------------------------------------------
$ 11.67-17.64 1,382,141 2.8 $ 14.93
24.10-26.31 375,728 8.6 25.19
26.62-31.54 1,976,839 8.3 28.18
31.75-38.50 3,116,934 8.6 33.72
39.00-46.19 44,160 6.4 42.29
---------
11.67-46.19 6,895,802 7.6 27.95
=========
Options exercisable
- -----------------------------------------------------------------------------------------------------
Range of Number of Weighted average
exercise prices options exercisable exercise price
- -----------------------------------------------------------------------------------------------------
$ 11.67-17.64 1,382,141 $ 14.93
24.10-26.31 225,345 25.21
26.62-31.54 939,351 28.18
31.75-38.50 1,400,756 34.15
39.00-46.19 44,160 42.29
---------
11.67-46.19 3,991,753 25.68
=========
(16) SUPPLEMENTAL CASH FLOW DISCLOSURES
The amount of interest actually paid by the Company, net of amounts
capitalized of $1.2 million, $3.5 million and $4.5 million during 2002, 2001 and
2000, respectively, was $210.9 million, $224.7 million and $164.0 million during
2002, 2001 and 2000, respectively. Income taxes paid were $325.5 million in
2002, $128.3 million in 2001 and $142.3 million in 2000.
CenturyTel has consummated the acquisitions of various operations, along
with certain other assets, during the three years ended December 31, 2002. In
connection with these acquisitions, the following assets were acquired and
liabilities assumed:
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment, net $ 866,575 - 607,415
Goodwill 1,335,157 33,183 917,468
Other investments - - 1,972
Long-term debt - - (378)
Deferred credits and other liabilities (56,897) 13,948 (44,465)
Other assets and liabilities, excluding
cash and cash equivalents 100,191 - 53,671
- ------------------------------------------------------------------------------------------
Decrease in cash due to acquisitions $ 2,245,026 47,131 1,535,683
==========================================================================================
CenturyTel has disposed of various operations reflected within continuing
operations, along with certain other assets, during the three years ended
December 31, 2002. In connection with these dispositions, the following assets
were sold, liabilities eliminated, assets received and gain recognized:
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment, net $ - (2,447) -
Marketable equity securities - (3,614) -
Other assets and liabilities, excluding cash and
cash equivalents (435) (19,080) -
Gain on sale of assets (3,709) (33,043) -
- ------------------------------------------------------------------------------------------
Increase in cash due to dispositions $ (4,144) (58,184) -
==========================================================================================
For information on the Company's discontinued operations, see Note 3.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of certain of the Company's financial instruments at December 31, 2002
and 2001.
Carrying Fair
Amount value
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 2002
Financial assets
Interest rate swaps $ 22,163 22,163 (2)
Other $ 33,637 33,637 (2)
Financial liabilities
Long-term debt (including current maturities) $ 3,648,869 3,937,535 (1)
Interest rate swaps $ 1,290 1,290 (2)
Other $ 41,884 41,884 (2)
- --------------------------------------------------------------------------------------------
December 31, 2001
Financial assets $ 25,601 25,601 (2)
Financial liabilities
Long-term debt (including current maturities) $ 3,043,334 3,040,242 (1)
Other $ 29,308 29,308 (2)
- --------------------------------------------------------------------------------------------
(1) Fair value was estimated by discounting the scheduled payment streams
to present value based upon rates currently available to the Company for
similar debt.
(2) Fair value was estimated by the Company to approximate carrying value.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates the fair value due to the
short maturity of these instruments and have not been reflected in the above
table.
(18) BUSINESS SEGMENTS
The Company's only separately reportable business segment is its
telephone operations. The operating income of this segment is reviewed by the
chief operating decision maker to assess performance and make business
decisions. Due to the sale of the Company's wireless operations, such operations
(which were previously reported as a separate segment) are classified as
discontinued operations. Other operations include, but are not limited to, the
Company's nonregulated long distance operations, Internet operations,
competitive local exchange carrier operations, fiber network business and
security monitoring operations.
The Company's telephone operations are conducted in rural, suburban and
small urban communities in 22 states. Approximately 91% of the Company's
telephone access lines are in Wisconsin, Missouri, Alabama, Arkansas,
Washington, Michigan, Louisiana, Colorado, Ohio and Oregon.
Depreciation
Operating and Operating
revenues amortization income
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 2002
Telephone $ 1,733,592 396,866 543,113
Other operations 238,404 14,760 43,568
Corporate overhead costs allocable to
discontinued operations - - (11,275)
- ----------------------------------------------------------------------------------------------------------
Total $ 1,971,996 411,626 575,406
==========================================================================================================
Year ended December 31, 2001
Telephone $ 1,505,733 398,284 423,420
Other operations 173,771 8,754 22,098
Corporate overhead costs allocable to
discontinued operations - - (20,213)
- -----------------------------------------------------------------------------------------------------------
Total $ 1,679,504 407,038 425,305
==========================================================================================================
Year ended December 31, 2000
Telephone $ 1,253,969 317,906 376,290
Other operations 148,388 4,911 31,258
Corporate overhead costs allocable to
discontinued operations - - (21,411)
- ----------------------------------------------------------------------------------------------------------
Total $ 1,402,357 322,817 386,137
==========================================================================================================
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating income $ 575,406 425,305 386,137
Nonrecurring gains and losses, net 3,709 33,043 -
Interest expense (221,845) (225,523) (183,302)
Other income and expense (63,814) 32 4,936
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations
before income tax expense $ 293,456 232,857 207,771
==========================================================================================================
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Capital expenditures
Telephone $ 319,536 351,010 275,523
Other operations 66,731 84,505 115,546
- ----------------------------------------------------------------------------------------------------------
Total $ 386,267 435,515 391,069
==========================================================================================================
December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Total assets
Telephone $ 6,962,713 4,754,522 4,769,557
Other operations 795,890 718,734 721,600
Assets held for sale 11,805 845,428 902,133
- ----------------------------------------------------------------------------------------------------------
Total assets $ 7,770,408 6,318,684 6,393,290
==========================================================================================================
Interexchange carriers and other accounts receivable on the balance
sheets are primarily amounts due from various long distance carriers,
principally AT&T, and several large local exchange operating companies.
(19) COMMITMENTS AND CONTINGENCIES
Construction expenditures and investments in vehicles, buildings and
equipment during 2003 are estimated to be $370 million for telephone operations
and $30 million for other operations.
On August 29, 2002, the Wisconsin Court of Appeals upheld a ruling upon
appeal that ordered the Company to refund access charges collected from
interexchange carriers from December 1998 through 2000 on the former properties
acquired from Ameritech. As a result of this ruling, the Company recorded a $7.6
million pre-tax charge related to this refund in the third quarter of 2002.
On December 26, 2001, AT&T Corp. and one of its subsidiaries filed a
complaint in the U.S. District Court for the Western District of Washington
(Case No. CV0121512) seeking money damages against CenturyTel of the Northwest,
Inc. The plaintiffs claim, among other things, that CenturyTel of the Northwest,
Inc. has breached its obligations under a 1994 stock purchase agreement to
indemnify the plaintiffs for various environmental costs and damages relating to
properties sold to the plaintiffs under such 1994 agreement. The Company has
investigated this claim and believes it has numerous defenses available. If the
plaintiffs are successful in recovering any sums under this litigation, the
Company believes it is entitled to indemnification under agreements with third
parties.
From time to time, the Company is involved in various other claims and
legal actions relating to the conduct of its business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
CENTURYTEL, INC.
Consolidated Quarterly Income Statement Information
(Unaudited)
First Second Third Fourth
quarter quarter quarter quarter
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
2002 (unaudited)
- ---------------------------------------------------------------------------------------------------------
Operating revenues $ 422,918 438,702 524,497 585,879
Operating income $ 119,049 109,531 157,716 189,110
Income from continuing operations $ 42,857 40,208 63,619 43,235
Net income $ 70,767 78,763 607,749 44,345
Basic earnings per share from continuing operations $ .30 .28 .45 .30
Basic earnings per share $ .50 .56 4.29 .31
Diluted earnings per share from continuing operations $ .30 .28 .45 .30
Diluted earnings per share $ .50 .55 4.26 .31
2001
- ---------------------------------------------------------------------------------------------------------
Operating revenues $ 411,602 409,250 423,973 434,679
Operating income $ 104,309 99,209 105,991 115,796
Income from continuing operations $ 26,851 21,069 59,570 36,657
Net income $ 46,722 154,241 92,305 49,763
Basic earnings per share from continuing operations $ .19 .15 .42 .26
Basic earnings per share from continuing operations,
as adjusted $ .27 .23 .50 .34
Basic earnings per share $ .33 1.10 .65 .35
Basic earnings per share, as adjusted $ .43 1.20 .75 .45
Diluted earnings per share from continuing operations $ .19 .15 .42 .26
Diluted earnings per share from continuing operations,
as adjusted $ .27 .23 .50 .34
Diluted earnings per share $ .33 1.09 .65 .35
Diluted earnings per share, as adjusted $ .43 1.19 .75 .45
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share for the third quarter of 2002 included $3.72
per share related to the gain on the sale of substantially all of the Company's
wireless operations, net of amounts written off for costs expended related to
the wireless portion of the new billing system currently in development. Diluted
earnings per share for the fourth quarter of 2002 was negatively impacted by
$.27 per share related to the redemption premium on the Company Series I
remarketable notes that were redeemed in October 2002. On July 1 and August 31,
2002, the Company acquired nearly 650,000 telephone access lines and related
assets from Verizon. See Note 2 for additional information.
Diluted earnings per share for the second and third quarters of 2001
included $.75 and $.27 per share, respectively, of net gains on sales of assets.
See Note 13 for additional information.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The name, age and office(s) held by each of the Registrant's executive
officers are shown below. Each of the executive officers listed below serves at
the pleasure of the Board of Directors.
Name Age Office(s) held with CenturyTel
- ---- --- ------------------------------
Glen F. Post, III 50 Chairman of the Board of Directors
and Chief Executive Officer
Karen A. Puckett 42 President and Chief Operating Officer
R. Stewart Ewing, Jr. 51 Executive Vice President and
Chief Financial Officer
Harvey P. Perry 58 Executive Vice President,
Chief Administrative Officer,
General Counsel and Secretary
David D. Cole 45 Senior Vice President -
Operations Support
Michael Maslowski 55 Senior Vice President and
Chief Information Officer
Each of the Registrant's executive officers, except for Ms. Puckett and
Mr. Maslowski, has served as an officer of the Registrant and one or more of its
subsidiaries in varying capacities for more than the past five years. Mr.
Maslowski has served as Senior Vice President and Chief Information Officer
since March 1999 and as Senior Information Systems Executive for Lucent
Technologies and for a joint venture between Lucent Technologies and Phillips
Consumer Communications from 1996 to early 1999.
Ms. Puckett has served as President and Chief Operating Officer since
August 2002, as Executive Vice President and Chief Operating Officer from July
2000 through August 2002, as Sales and Marketing Senior Officer of BroadStream
Communications from July 1999 through July 2000 and as Texas Region President
for GTE Wireless from 1996 to mid-1999. Commco Technology LLC (formerly
BroadStream Communications) filed for bankruptcy on December 18, 2000 in the
United States Bankruptcy Court, District of Connecticut (Bridgeport). Ms.
Puckett was an officer and employee of BroadStream Communications from July 1999
through July 2000.
Mr. Post has served as Chairman of the Board since June 2002, and
previously served as Vice Chairman of the Board from 1993 to 2002 and President
from 1990 to 2002. In May 1999, Messrs. Ewing and Perry were promoted from
Senior Vice President to Executive Vice President, and Mr. Perry was named Chief
Administrative Officer. Mr. Cole has served as Senior Vice President -
Operations Support since November 1998 and served as President - Wireless Group
from October 1996 to October 1998.
The balance of the information required by Item 10 is incorporated by
reference to the Registrant's definitive proxy statement relating to its 2003
annual meeting of stockholders (the "Proxy Statement"), which Proxy Statement
will be filed pursuant to Regulation 14A within the first 120 days of 2003.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table provides information as of December 31, 2002,
concerning shares of CenturyTel common stock authorized for issuance under
CenturyTel's existing equity compensation plans.
(c)
Number of securities
remaining available for
(a) (b) future issuance under
Number of securities to Weighted-average plans (excluding
be issued upon conversion exercise price of securities reflected in
Plan category of outstanding options outstanding options column (a))
- ------------------ ------------------------- ------------------- -----------------------
Equity compensation
plans approved by
security holders 6,895,802 $ 27.95 4,744,400
Employee Stock Purchase
Plan approved by shareholders - - 4,869,559
Equity compensation
plans not approved by
security holders - - 685,743
- ------------------------------------------------------------------------------------------------
Totals 6,895,802 $ 27.95 10,299,702
================================================================================================
The balance of the information required by Item 12 is incorporated by
reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to the
Proxy Statement.
Item 14. Controls and Procedures
The Company's Chief Executive Officer, Glen F. Post, III, and the
Company's Chief Financial Officer, R. Stewart Ewing, Jr., have evaluated the
Company's disclosure controls and procedures within 90 days of the filing of
this annual report. Based on the evaluation, Messrs. Post and Ewing have
concluded that the Company's disclosure controls and procedures are effective in
providing reasonable assurance that they are timely alerted of all material
information required to be filed in this annual report. Since the date of
Messrs. Post's and Ewing's most recent evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls. The design of any system of controls
is based in part upon certain assumptions about the likelihood of future events
and contingencies, and there can be no assurance that any design will succeed in
achieving its stated goals.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a. Financial Statements
(i) Consolidated Financial Statements:
Independent Auditors' Report on Consolidated Financial
Statements and Financial Statement Schedule
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income for
the years ended December 31, 2002, 2001 and 2000
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Consolidated Quarterly Income Statement Information
(unaudited)
(ii) Schedules:*
II Valuation and Qualifying Accounts
* Those schedules not listed above are
omitted as not applicable or not required.
b. Reports on Form 8-K.
The following items were reported in a Form 8-K filed October
8, 2002:
Item 5. Other events and Regulation FD Disclosure - Updated
information concerning Registrant's disposition of its
wireless operations and acquisitions of telephone properties
from Verizon.
Item 7. Financial Statements and Exhibits - Historical
financial statements of Verizon properties acquired and pro
forma financial information.
The following item was reported in a Form 8-K filed October
25, 2002:
Item 5. Other events and Regulation FD Disclosure - News
release announcing third quarter results of operations and
fourth quarter 2002 earnings expectations.
c. Exhibits:
3.1 Amended and Restated Articles of Incorporation of
Registrant, dated as of May 6, 1999,
(incorporated by reference to Exhibit 3(i) to
Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999).
3.2 Registrant's Bylaws, as amended through February 25, 2003,
included elsewhere herein.
3.3 Governance Guidelines and Charters, all included
elsewhere herein.
(a) Corporate Governance Guidelines
(b) Charter of the Audit Committee of the
Board of Directors
(c) Charter of the Compensation Committee of
the Board of Directors
(d) Charter of the Nominating and Corporate
Governance Committee of the Board of Directors
(e) Charter of the Risk Evaluation Committee of the
Board of Directors
4.1 Note Purchase Agreement, dated September 1, 1989,
between Registrant, Teachers Insurance and
Annuity Association of America and the Lincoln
National Life Insurance Company (incorporated by
reference to Exhibit 4.23 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1989).
4.2 Rights Agreement, dated as of August 27, 1996,
between Registrant and Society National Bank, as
Rights Agent, including the form of Rights
Certificate (incorporated by reference to Exhibit
1 of Registrant's Current Report on Form 8-K
filed August 30, 1996) and Amendment No.1
thereto, dated May 25, 1999 (incorporated by
reference to Exhibit 4.2(ii) to Registrant's
Report on Form 8-K dated May 25, 1999) and
Amendment No. 2 thereto, dated and effective as
of June 30, 2000, by and between the Registrant
and Computershare Investor Services, LLC, as
rights agent (incorporated by reference to
Exhibit 4.1 of Registrant's Quarterly report on
10-Q for the quarter ended September 30, 2000).
4.3 Form of common stock certificate of the Registrant
(incorporated by reference to Exhibit 4.3 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000).
4.4 Instruments relating to the Company's public
senior debt
(a) Indenture dated as of March 31, 1994
between the Company and Regions Bank
(formerly First American Bank & Trust of
Louisiana), as Trustee (incorporated by
reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3,
Registration No. 33-52915).
(b) Resolutions designating the terms and conditions
of the Company's 7-3/4% Senior Notes, Series A,
due 2004 and 8-1/4% Senior Notes, Series B,
due 2024 (incorporated by reference to Exhibit
4.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994).
(c) Resolutions designating the terms and
conditions of the Company's 6.55% Senior
Notes, Series C, due 2005 and 7.2% Senior
Notes, Series D, due 2025 (incorporated by
reference to Exhibit 4.27 to Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1995).
(d) Resolutions designating the terms and
conditions of the Company's 6.15% Senior
Notes, Series E, due 2005; 6.30% Senior
Notes, Series F, due 2008; and 6.875%
Debentures, Series G, due 2028,
(incorporated by reference to Exhibit 4.9
to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
(e) Form of Registrant's 8.375% Senior Notes,
Series H, Due 2010, issued October 19, 2000
(incorporated by reference to Exhibit 4.2
of Registrant's Quarterly Report on Form
10-Q for the Quarter ended September 30,
2000).
(f) For information on Registrant's Series J
notes and related First Supplemental
Indenture, see Item 4.8 below.
(g) Second Supplemental Indenture dated as of
August 20, 2002 between CenturyTel and
Regions Bank (successor-in-interest to
First American Bank & Trust of Louisiana
and Regions Bank of Louisiana), as Trustee,
designating and outlining the terms and
conditions of CenturyTel's 4.75%
Convertible Senior Debentures, Series K,
due 2032 (incorporated by reference to
Exhibit 4.3 of CenturyTel's registration
statement on Form S-4, File No.
333-100480).
(h) Form of 4.75% Convertible Debentures, Series
K, due 2032 (included in Exhibit 4.4(g)).
(i) Board resolutions designating the terms and
conditions of CenturyTel's 7.875% Senior
Notes, Series L, due 2012 (incorporated by
reference to exhibit 4.2 of CenturyTel's
registration statement on Form S-3, File
No. 333-100481).
(i) Form of 7.875% Senior Notes, Series L, due 2012
(included in Exhibit 4.4(i)).
(k) Registration Rights Agreement dated as of
August 26, 2002 by and among CenturyTel,
and Banc of America Securities LLC, J.P.
Morgan Securities Inc. and Wachovia
Securities, Inc. (incorporated by reference
to Exhibit 4.5 of CenturyTel's registration
statement on Form S-4, File No.
333-100480).
(l) Exchange and Registration Rights Agreement
dated as of August 26, 2002 by and among
CenturyTel and Banc of America Securities
LLC, J.P. Morgan Securities Inc. and
Wachovia Securities, Inc., as
representatives of the initial purchasers
named therein (incorporated by reference to
Exhibit 4.4 of CenturyTel's registration
statement on Form S-3, File No.
333-100481).
4.5 $533 Million Three-Year Revolving Credit
Facility, dated July 22, 2002, between
CenturyTel, Inc. and the lenders named therein
(incorporated by reference to Exhibit 10.1 of
Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 2002).
4.6 $267 Million 364-Day Revolving Credit Facility,
dated July 22, 2002, between CenturyTel, Inc. and
the lenders named therein (incorporated by
reference to Exhibit 10.2 of Registrant's
Quarterly Report on Form 10-Q for the period
ended June 30, 2002).
4.7 First Supplemental Indenture, dated as of
November 2, 1998, to Indenture between CenturyTel
of the Northwest, Inc. and The First National
Bank of Chicago (incorporated by reference to
Exhibit 10.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1998).
4.8 Agreements relating to equity units issued by
CenturyTel in May 2002:
(a) Purchase Contract Agreement, dated as of May
1, 2002, between CenturyTel and Wachovia
Bank, National Association, as Purchase
Contract Agent (incorporated by reference to
Exhibit 4.13 to CenturyTel's Registration
Statement on Form S-3, File No. 333-84276).
(b) Pledge Agreement, dated as of May 1, 2002,
by and among CenturyTel, JPMorgan Chase
Bank, as Collateral Agent, Custodial Agent,
and Securities Intermediary, and Wachovia
Bank, National Association, as Purchase
Contract Agent (incorporated by reference to
Exhibit 4.15 to CenturyTel's Registration
Statement on Form S-3, File No. 333-84276).
(c) First Supplemental Indenture, dated as of
May 1, 2002, between CenturyTel and Regions
Bank, as Trustee, to the Indenture, dated as
of March 31, 1994, between CenturyTel and
Regions Bank, as Trustee, relating to
CenturyTel's Senior Notes, Series J, due
2007 issued in connection with the equity
units (incorporated by reference to Exhibit
4.2(b) to CenturyTel's Registration
Statement on Form S-3, File No. 333-84276).
10.1 Qualified Employee Benefit Plans (excluding
several narrow-based qualified plans that cover
union employees or other limited groups of
Company employees)
(a) Registrant's Employee Stock Ownership Plan
and Trust, as amended and restated February
28, 2002 and amendment thereto dated
December 31, 2002, both included elsewhere
herein.
(b) Registrant's Dollars & Sense Plan and
Trust, as amended and restated, effective
September 1, 2000 and amendment thereto
dated December 31, 2002, both included
elsewhere herein.
(c) Registrant's Amended and Restated
Retirement Plan, effective as of February
28, 2002, and amendment thereto dated
December 31, 2002, both included elsewhere
herein.
(d) Merger Agreement, dated September 18, 2001,
between Registrant and Regions Bank of
Louisiana, pursuant to which Registrant's
Stock Bonus Plan and PAYSOP were merged
into Registrant's Employee Stock Ownership
Plan (incorporated by reference to Exhibit
10(b) of Registrant's Quarterly Report on
Form 10-Q for the quarter ended September
30, 2001).
10.2 Stock-based Incentive Plans
(a) Registrant's 1983 Restricted Stock Plan,
dated February 21, 1984, as amended and
restated as of November 16, 1995 (incorporated
by reference to Exhibit 10.1(e) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995) and amendment
thereto dated November 21, 1996,
(incorporated by reference to Exhibit
10.1(e) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1996), and amendment thereto dated February
25, 1997 (incorporated by reference to Exhibit
10.3 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31,
1997), and amendment thereto dated April 25,
2001 (incorporated by reference to Exhibit 10.1
of Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001), and
amendment thereto dated April 17, 2000
(incorporated by reference to Exhibit 10.2(a)
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001).
(b) Registrant's 1988 Incentive Compensation
Program, as amended and restated August 22,
1989 (incorporated by reference to Exhibit
19.8 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September
30, 1989) and amendment thereto dated
November 21, 1996 (incorporated by
reference to Exhibit 10.1(g) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996).
(c) Registrant's 1995 Incentive Compensation
Plan approved by Registrant's shareholders
on May 11, 1995 (incorporated by reference
to Exhibit 4.4 to Registration No. 33-60061) and
amendment thereto dated November 21, 1996
(incorporated by Reference to Exhibit 10.1 (l)
to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996), and
amendment thereto dated February 25, 1997
(incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997).
(i) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of May 22, 1995, entered
into by Registrant and its officers
(incorporated by reference to Exhibit 10.5
to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995).
(ii) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of June 23, 1995,
entered into by Registrant and certain key
employees (incorporated by reference to
Exhibit 10.6 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1995).
(iii) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of February 24, 1997,
entered into by Registrant and its
officers (incorporated by reference to
Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1997).
(iv) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of February 21, 2000,
entered into by Registrant and its
officers incorporated by reference to
Exhibit 10.1 (t) to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1999).
(v) Form of Restricted Stock and
Performance Share Agreement, dated as of
March 16, 1998, relating to equity
incentive awards granted in 1998 pursuant
to Registrant's 1995 Incentive
Compensation Plan (incorporated by
reference to Exhibit 10.3 to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
(vi) Form of Restricted Stock and
Performance Share Agreement, dated as of
February 22, 1999, relating to equity
incentive awards granted in 1999 pursuant
to the Registrant's 1995 Incentive
Compensation Plan (incorporated by
reference to Exhibit 10.1(x) to
Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999).
(d) Amended and Restated Registrant's 2000
Incentive Compensation Plan, as amended
through May 23, 2000 (incorporated by
reference to Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000).
(i) Form of Stock Option Agreement,
pursuant to the 2000 Incentive
Compensation Plan and dated as of
May 21, 2001, entered into by
Registrant and its officers
(incorporated by reference to
Exhibit 10.2(e) to Registrant's
Annual Report on Form 10-K for the
year ended December 31, 2001).
(ii) Form of Stock Option Agreement,
pursuant to the 2000 Incentive
Compensation Plan and dated as of
February 25, 2002, entered into by
Registrant and its officers,
included elsewhere herein.
(e) CenturyTel's 2002 Directors Stock
Option Plan (incorporated by
reference to Exhibit 10.1 of
Registrant's Quarterly Report on
Form 10-Q for the period ended
September 30, 2002).
(i) Form of Stock Option Agreement,
pursuant to the 2002 Directors
Stock Option Plan, entered into by
CenturyTel in connection with
options granted to the outside
directors as of May 10, 2002
(incorporated by reference to
Exhibit 10.2 of Registrant's
Quarterly Report on Form 10-Q for
the period ended September 30,
2002).
(f) CenturyTel's 2002 Management Incentive
Compensation Plan (incorporated by
reference to Exhibit 10.3 of Registrant's
Quarterly Report on Form 10-Q for the
period ended September 30, 2002).
(i) Form of Stock Option Agreement,
pursuant to the 2002 Management
Incentive Compensation Plan,
entered into between CenturyTel and
certain of its officers and key
employees at various dates since
May 9, 2002 (incorporated by
reference to Exhibit 10.4 of
Registrant's Quarterly Report on
Form 10-Q for the period ended
September 30, 2002).
(ii) Form of Stock Option Agreement,
pursuant to the 2002 Management
Incentive Compensation Plan and
dated as of February 24, 2003,
entered into by Registrant and its
officers, included elsewhere
herein.
10.3 Other Non-Qualified Employee Benefit Plans
(a) Registrant's Key Employee Incentive Compensation
Plan, dated January 1, 1984, as amended and
restated as of November 16, 1995 (incorporated by
reference to Exhibit 10.1(f) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995) and amendment thereto dated
November 21, 1996 (incorporated by reference to
Exhibit 10.1 (f) to Registrant's Annual Report
on Form 10-K for the year ended December 31,
1996), amendment thereto dated February 25,
1997 (incorporated by reference to Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997), amendment
thereto dated April 25, 2001 (incorporated by
reference to Exhibit 10.2 of Registrant's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001) and amendment thereto dated
April 17, 2000 (incorporated by reference to
Exhibit 10.3(a) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001).
(b) Registrant's Restated Supplemental
Executive Retirement Plan, dated April 3,
2000 (incorporated by reference to Exhibit
10.1(d) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31,
2000.)
(c) Registrant's Restated Supplemental Defined
Contribution Plan, restated as of July 17,
2001, (incorporated by reference to Exhibit
10.1 of Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30,
2001.)
(d) Registrant's Amended and Restated
Supplemental Dollars & Sense Plan,
effective as of January 1, 1999
(incorporated by reference to Exhibit 10.1
(q) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1998).
(e) Registrant's Supplemental Defined Benefit
Plan, effective as of January 1, 1999
(incorporated by reference to Exhibit 10.1
(y) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1998),
and amendment thereto dated February 28,
2002 (incorporated by reference to Exhibit
10.3(e) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
2001).
(f) Registrant's Amended and Restated Salary
Continuation (Disability) Plan for
Officers, dated November 26, 1991
(incorporated by reference to Exhibit 10.16
of Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991).
(g) Registrant's Restated Outside Directors'
Retirement Plan, dated as of November 16,
1995 (incorporated by reference to Exhibit
10.1(t) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1995) and amendment thereto dated April 17,
2000 (incorporated by reference to Exhibit
10.3(g) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
2001) and amendment thereto dated December
31, 2002, included elsewhere herein.
(h) Registrant's Restated Deferred Compensation
Plan for Outside Directors, dated as of
November 16, 1995 (incorporated by
reference to Exhibit 10.1(u) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995) and
amendment thereto dated April 17, 2000
(incorporated by reference to Exhibit
10.3(h) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
2001).
(i) Registrant's Chairman/Chief Executive
Officer Short-Term Incentive Program
(incorporated by reference to Exhibit 10.6
to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
(j) Registrant's 2001 Employee Stock Purchase Plan
(incorporated by reference to Registrant's 2001 Proxy
Statement).
10.4 Employment, Severance and Related Agreements
(a) Employment Agreement, originally dated May
24, 1993, as amended and restated through
February 22, 2000, by and between
Registrant and its former Chairman Clarke
M. Williams (incorporated by reference to
Exhibit 10.1(a) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 2000).
(b) Change of Control Agreement, dated February
22, 2000 by and between Glen F. Post, III
and Registrant (incorporated by reference
to Exhibit 10.1(b) to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
(c) Form of Change of Control Agreement, dated
February 22, 2000, by and between
Registrant and David D. Cole, R. Stewart
Ewing, Michael E. Maslowski and Harvey P.
Perry (incorporated by reference exhibit
10.1(c) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 2000).
(d) Form of Change of Control Agreement dated
July 24, 2000, by and between the
Registrant and Karen A. Puckett
(incorporated by reference to Exhibit
10.1(c) of Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31,
2000).
10.5 Other Agreements
(a) Asset Purchase Agreement, dated as of
October 22, 2001, between GTE Midwest
Incorporated (d/b/a Verizon Midwest) and
CenturyTel of Missouri, LLC (incorporated
by reference to Exhibit 2(a) of
Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001).
(b) Asset Purchase Agreement, dated as of
October 22, 2001, between Verizon South,
Inc., Contel of the South, Inc. (d/b/a
Verizon Mid-States) and CenturyTel of
Alabama, LLC (incorporated by reference to
Exhibit 2(b) of Registrant's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 2001).
(c) Stock Purchase Agreement, dated March 19,
2002, between Registrant and Alltel
Communications, Inc. (incorporated by
reference to Registrant's Current Report on
Form 8-K filed March 22, 2002), as amended
by Amendment No. 1 to Stock Purchase
Agreement, dated July 31, 2002
(incorporated by reference to Registrant's
Current Report on Form 8-K and Form 8-K/A
filed August 13, 2002).
21 Subsidiaries of the Registrant, included elsewhere herein.
23 Independent Auditors' Consent, included elsewhere herein.
99 Registrant's Chief Executive Officer and Chief Financial
Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, included elsewhere herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CenturyTel, Inc.,
Date: March 27, 2003 By: /s/ Glen F. Post, III
-------------------------
Glen F. Post, III
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Executive Vice President and
/s/ R. Stewart Ewing, Jr. Chief Financial Officer
- --------------------------
R. Stewart Ewing, Jr. March 27, 2003
Executive Vice President, Corporate
Secretary, General Counsel,
/s/ Harvey P. Perry Chief Administrative Officer
- -------------------------- and Director
Harvey P. Perry March 27, 2003
/s/ Neil A. Sweasy Vice President and Controller
- --------------------------
Neil A. Sweasy March 27, 2003
/s/ William R. Boles, Jr. Director
- --------------------------
William R. Boles, Jr. March 27, 2003
/s/ Virginia Boulet Director
- --------------------------
Virginia Boulet March 27, 2003
/s/ Calvin Czeschin Director
- --------------------------
Calvin Czeschin March 27, 2003
/s/ James B. Gardner Director
- --------------------------
James B. Gardner March 27, 2003
/s/ W. Bruce Hanks Director
- --------------------------
W. Bruce Hanks March 27, 2003
/s/ R. L. Hargrove, Jr. Director
- --------------------------
R. L. Hargrove, Jr. March 27, 2003
/s/ Johnny Hebert Director
- --------------------------
Johnny Hebert March 27, 2003
/s/ F. Earl Hogan Director
- --------------------------
F. Earl Hogan March 27, 2003
/s/ C. G. Melville, Jr. Director
- --------------------------
C. G. Melville, Jr. March 27, 2003
/s/ Jim D. Reppond Director
- --------------------------
Jim D. Reppond March 27, 2003
/s/ Joseph R. Zimmel Director
- --------------------------
Joseph R. Zimmel March 27, 2003
CERTIFICATIONS
I, Glen F. Post, III, certify that:
1. I have reviewed this annual report on Form 10-K of CenturyTel, Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 27, 2003
/s/ Glen F. Post, III
----------------------------------
Glen F. Post, III
Chairman of the Board of Directors
and Chief Executive Officer
I, R. Stewart Ewing, Jr. certify that:
1. I have reviewed this annual report on Form 10-K of CenturyTel, Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 27, 2003
/s/ R. Stewart Ewing, Jr.
------------------------------
R. Stewart Ewing, Jr.
Executive Vice President and
Chief Financial Officer
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CENTURYTEL, INC.
For the years ended December 31, 2002, 2001 and 2000
Additions
Balance at charged to Deductions Balance
beginning costs and from Other at end
Description of period expenses allowance (1) changes of period
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 2002
Allowance for doubtful accounts $ 13,908 34,045 (17,134) 3,143 (2) 33,962
Valuation allowance for
deferred tax assets $ 19,691 8,689 - - 28,380
Year ended December 31, 2001
Allowance for doubtful accounts $ 9,968 22,533 (18,593) - 13,908
Valuation allowance for
deferred tax assets $ 6,211 13,480 - - 19,691
Year ended December 31, 2000
Allowance for doubtful accounts $ 2,594 15,977 (12,485) 3,882 (2) 9,968
Valuation allowance for
deferred tax assets $ - 6,211 - - 6,211
(1) Customers' accounts written-off, net of recoveries.
(2) Allowance for doubtful accounts at the date of acquisition of purchased
subsidiaries, net of allowance for doubtful accounts at the date of
disposition of subsidiaries sold.