SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Section 240.14a-12
CenturyTel, Inc.
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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(CENTURYTEL LOGO)
================================================================================
2003 NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
ANNUAL FINANCIAL STATEMENTS
AND REVIEW OF OPERATIONS
================================================================================
THURSDAY, MAY 8, 2003
2:00 P.M. LOCAL TIME
100 CENTURYTEL DRIVE
MONROE, LOUISIANA
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF CENTURYTEL, INC.:
The Annual Meeting of Shareholders of CenturyTel, Inc. will be held at
2:00 p.m., local time, on May 8, 2003 in the Corporate Conference Room of the
Company's principal offices, 100 CenturyTel Drive, Monroe, Louisiana, for the
following purposes:
1. to elect four Class III directors; and
2. to transact such other business as may properly come before the meeting
and any adjournments thereof.
The Board of Directors has fixed the close of business on March 17,
2003 as the record date for the determination of shareholders entitled to notice
of and to vote at the meeting and all adjournments thereof.
By Order of the Board of Directors
/s/ HARVEY P. PERRY
HARVEY P. PERRY, Secretary
Dated: March 31, 2003
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SHAREHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. EVEN IF YOU
EXPECT TO ATTEND, IT IS IMPORTANT THAT YOU PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD PROMPTLY. IF YOU PLAN TO ATTEND AND WISH TO VOTE YOUR SHARES
PERSONALLY, YOU MAY DO SO AT ANY TIME BEFORE YOUR PROXY IS VOTED.
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(CENTURYTEL LETTERHEAD)
March 31, 2003
Dear Shareholder:
It is a pleasure to invite you to the Company's 2003 Annual Meeting of
Shareholders on Thursday, May 8, beginning at 2:00 p.m. local time, at the
Company's headquarters in Monroe, Louisiana. I hope you will be able to attend.
As in the past, this booklet includes our formal notice of the meeting,
our proxy statement and our annual financial statements and review of
operations.
Most of you have received with this booklet a proxy card that indicates
the number of votes that you will be entitled to cast at the meeting according
to the records of the Company or your broker or other nominee. Each share of the
Company that you have "beneficially owned" continuously since May 30, 1987 will
generally entitle you to ten votes; each other share entitles you to one vote.
Shares held through a broker or other nominee are presumed to have one vote per
share. In lieu of receiving a proxy card, participants in the Company's benefit
plans have been furnished with voting instruction cards. The reverse side of
this letter describes the Company's voting provisions in greater detail.
Regardless of how many shares you own or whether you plan to attend the
meeting in person, it is important that your shares be voted at the meeting. At
your earliest convenience, please complete the enclosed proxy card (or voting
instruction cards) and return it or them promptly in the enclosed return
envelope.
Thank you for your interest and continued support.
Sincerely,
/s/ GLEN F. POST, III
Glen F. Post, III
Chairman of the Board and
Chief Executive Officer
VOTING PROVISIONS
SHAREHOLDERS
Record Shareholders. In general, shares registered in the name of any
natural person or estate that are represented by certificates dated as of or
prior to May 30, 1987 are presumed to have ten votes per share and all other
shares are presumed to have one vote per share. However, the Company's articles
of incorporation (the relevant provisions of which are reproduced below) set
forth a list of circumstances in which the foregoing presumptions may be
refuted. If you believe that the voting information set forth on your proxy card
is incorrect or a presumption made with respect to your shares should not apply,
please send a letter to the Company briefly describing the reasons for your
belief. Merely marking the proxy card will not be sufficient notification to the
Company that you believe the voting information thereon is incorrect.
Beneficial Shareholders. All shares held through a broker, bank or
other nominee are presumed to have one vote per share. The Company's articles of
incorporation set forth a list of circumstances in which this presumption may be
refuted by the person who has held since May 30, 1987 all of the attributes of
beneficial ownership referred to in Article III(C)(2) reproduced below. If you
believe that some or all of your shares are entitled to ten votes, you may
follow one of two procedures. First, you may write a letter to the Company
describing the reasons for your belief. The letter should contain your name
(unless you prefer to remain anonymous), the name of the brokerage firm, bank or
other nominee holding your shares, your account number with such nominee and the
number of shares you have beneficially owned continuously since May 30, 1987.
Alternatively, you may ask your broker, bank or other nominee to write a letter
to the Company on your behalf stating your account number and indicating the
number of shares that you have beneficially owned continuously since May 30,
1987. In either case, your letter should indicate how you wish to have your
shares voted.
Other. The Company will consider all letters received prior to the date
of the Annual Meeting and, when a return address is provided in the letter, will
advise the party furnishing such letter of its decision, although in many cases
the Company will not have time to inform an owner or nominee of its decision
prior to the time the shares are voted. In limited circumstances, the Company
may require additional information before a determination will be made. If you
have any questions about the Company's voting procedures, please call the
Company at (318) 388-9500.
PARTICIPANTS IN BENEFIT PLANS
Participants in the Company's Employee Stock Ownership Plan, Dollars &
Sense Plan, Union Retirement Savings Plan, Union Group Incentive Plan, or
Security Systems Inc. 401(k) Plan have received voting instruction cards in lieu
of a proxy card. For additional information, please refer to the materials
supplied by the trustee of the plans in which you participate.
****
EXCERPTS FROM THE COMPANY'S ARTICLES OF INCORPORATION
Paragraph C of Article III of the Company's articles of incorporation
provides as follows:
(1) Each share of Common Stock . . . which has been beneficially owned
continuously by the same person since May 30, 1987 will entitle such person to
ten votes with respect to such share on each matter properly submitted to the
shareholders of the Corporation for their vote, consent, waiver, release or
other action . . .
(2) (a) For purposes of this paragraph C, a change in beneficial
ownership of a share of the Corporation's stock will be deemed to have
occurred whenever a change occurs in any person or group of persons
who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares (i) voting
power, which includes the power to vote, or to direct the voting of
such share; (ii) investment power, which includes the power to direct
the sale or other disposition of such share; (iii) the right to receive
or retain the proceeds of any sale or other disposition of such share;
or (iv) the right to receive distributions, including cash dividends,
in respect to such share.
(b) In the absence of proof to the contrary provided in
accordance with the procedures referred to in subparagraph (4) of this
paragraph C, a change in beneficial ownership will be deemed to have
occurred whenever a share of stock is transferred of record into the
name of any other person.
(c) In the case of a share of Common Stock . . . held of
record in the name of a corporation, general partnership, limited
partnership, voting trustee, bank, trust company, broker, nominee or
clearing agency, or in any other name except a natural person, if it
has not been established pursuant to the procedures referred to in
subparagraph (4) that such share was beneficially owned continuously
since May 30, 1987 by the person who possesses all of the attributes of
beneficial ownership referred to in clauses (i) through (iv) of
subparagraph (2)(a) of this paragraph C with respect to such share of
Common Stock . . . then such share of Common Stock . . . will carry
with it only one vote regardless of when record ownership of such share
was acquired.
(d) In the case of a share of stock held of record in the name
of any person as trustee, agent, guardian or custodian under the
Uniform Gifts to Minors Act, the Uniform Transfers to Minors Act or any
comparable statute as in effect in any state, a change in beneficial
ownership will be deemed to have occurred whenever there is a change in
the beneficiary of such trust, the principal of such agent, the ward of
such guardian or the minor for whom such custodian is acting.
(3) Notwithstanding anything in this paragraph C to the contrary, no
change in beneficial ownership will be deemed to have occurred solely
as a result of:
(a) any event that occurred prior to May 30, 1987, including
contracts providing for options, rights of first refusal and similar
arrangements, in existence on such date to which any holder of shares
of stock is a party;
(b) any transfer of any interest in shares of stock pursuant
to a bequest or inheritance, by operation of law upon the death of any
individual, or by any other transfer without valuable consideration,
including a gift that is made in good faith and not for the purpose of
circumventing this paragraph C;
(c) any change in the beneficiary of any trust, or any
distribution of a share of stock from trust, by reason of the birth,
death, marriage or divorce of any natural person, the adoption of any
natural person prior to age 18 or the passage of a given period of time
or the attainment by any natural person of a specified age, or the
creation or termination of any guardianship or custodian arrangement;
or
(d) any appointment of a successor trustee, agent, guardian or
custodian with respect to a share of stock.
(4) For purposes of this paragraph C, all determinations concerning
changes in beneficial ownership, or the absence of any such change, will be made
by the Corporation. Written procedures designed to facilitate such
determinations will be established by the Corporation and refined from time to
time. Such procedures will provide, among other things, the manner of proof of
facts that will be accepted and the frequency with which such proof may be
required to be renewed. The Corporation and any transfer agent will be entitled
to rely on all information concerning beneficial ownership of a share of stock
coming to their attention from any source and in any manner reasonably deemed by
them to be reliable, but neither the Corporation nor any transfer agent will be
charged with any other knowledge concerning the beneficial ownership of a share
of stock.
(5) Each share of Common Stock acquired by reason of any stock split or
dividend will be deemed to have been beneficially owned by the same person
continuously from the same date as that on which beneficial ownership of the
share of Common Stock, with respect to which such share of Common Stock was
distributed, was acquired.
****
(8) Shares of Common Stock held by the Corporation's employee benefit
plans will be deemed to be beneficially owned by such plans regardless of how
such shares are allocated to or voted by participants, until the shares are
actually distributed to participants.
****
CENTURYTEL, INC.
100 CENTURYTEL DRIVE
MONROE, LOUISIANA 71203
(318) 388-9500
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PROXY STATEMENT
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March 31, 2003
This proxy statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors (the "Board") of CenturyTel, Inc.
(the "Company") for use at its annual meeting of shareholders to be held at the
time and place set forth in the accompanying notice, and at any adjournments
thereof (the "Meeting"). This proxy statement is first being mailed to
shareholders of the Company on or about April 4, 2003.
As of March 17, 2003, the record date for determining shareholders
entitled to notice of and to vote at the Meeting (the "Record Date"), the
Company had outstanding 143,078,703 shares of common stock (the "Common Shares")
and 319,000 shares of Series L preferred stock that vote together with the
Common Shares as a single class on all matters ("Preferred Shares" and,
collectively with the Common Shares, "Voting Shares"). The Company's Restated
Articles of Incorporation (the "Articles") generally provide that holders of
Common Shares that have been beneficially owned continuously since May 30, 1987
are entitled to cast ten votes per share, subject to compliance with certain
procedures. Article III of the Articles and the voting procedures adopted
thereunder contain several provisions governing the voting power of Common
Shares, including a presumption that each Common Share held by nominees or by
any holder other than a natural person or estate entitles such holder to one
vote, unless the holder furnishes the Company with proof to the contrary.
Applying the presumptions described in Article III, the Company's records
indicate that 229,523,104 votes are entitled to be cast at the Meeting, of which
229,204,104 (99.9%) are attributable to the Common Shares. All percentages of
voting power set forth in this proxy statement have been calculated based on
such number of votes.
If you are a participant in the Company's Automatic Dividend
Reinvestment and Stock Purchase Service or the Company's Employee Stock Purchase
Plans, the Company's proxy card covers shares credited to your account under
each plan, as well as shares registered in your name. You should not, however,
use the proxy card to vote any shares held for you in the Company's Employee
Stock Ownership Plan, Dollars & Sense Plan, Union Retirement Savings Plan, Union
Group Incentive Plan, or Security Systems Inc. 401(k) Plan. Instead,
participants in these plans will receive from the plan trustees separate voting
instruction cards covering these shares. These voting instruction cards should
be completed and returned in the manner provided in the instructions that
accompany such cards.
The Company will pay all expenses of soliciting proxies for the
Meeting. Proxies may be solicited personally, by mail, by telephone or by
facsimile by the Company's directors, officers
1
and employees, who will not be additionally compensated therefor. The Company
will also request persons holding Voting Shares in their names for others, such
as brokers, banks and other nominees, to forward proxy materials to their
principals and request authority for the execution of proxies, for which the
Company will reimburse them for expenses incurred in connection therewith. The
Company has retained Innisfree M&A Incorporated, New York, New York, to assist
in the solicitation of proxies, for which it will be paid a fee of $7,500 and
will be reimbursed for certain out-of-pocket expenses.
ELECTION OF DIRECTORS
(ITEM 1 ON PROXY OR VOTING INSTRUCTION CARD)
The Board of Directors has fixed the number of directors at 13 members,
which are divided under the Articles into three classes. Members of the
respective classes hold office for staggered terms of three years, with one
class elected at each annual shareholders' meeting. Four Class III directors
will be elected at the Meeting. Unless authority is withheld, all votes
attributable to the shares represented by each duly executed and delivered proxy
will be cast for the election of each of the four below-named nominees, each of
whom has been recommended for election by the Board's Nominating and Corporate
Governance Committee. Because no shareholder has timely nominated any
individuals to stand for election at the Meeting in accordance with the
Company's advance notification bylaw (which is described generally below under
the heading "Other Matters - Shareholder Nominations and Proposals"), the four
below-named nominees will be the only individuals who may be elected at the
Meeting. If for any reason any such nominee should decline or become unable to
stand for election as a director, which is not anticipated, votes will be cast
instead for another candidate designated by the Board, without resoliciting
proxies.
The following provides certain information with respect to each
proposed nominee and each other director whose term will continue after the
Meeting, including his or her beneficial ownership of Common Shares determined
in accordance with Rule 13d-3 of the Securities and Exchange Commission ("SEC").
Unless otherwise indicated, (i) all information is as of the Record Date, (ii)
each person has been engaged in the principal occupation shown for more than the
past five years and (iii) shares beneficially owned are held with sole voting
and investment power. Unless otherwise indicated, none of the persons named
below beneficially owns more than 1% of the outstanding Common Shares or is
entitled to cast more than 1% of the total voting power. For information on
recent changes in the composition and configuration of the Board, see "- Recent
Developments."
2
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CLASS III DIRECTORS (FOR TERM EXPIRING IN 2006):
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FRED R. NICHOLS, age 56; has not previously
served as a director of the Company; retired in
2000 after serving as Executive Vice President of
(PHOTO) Operations of Cox Communications, Inc. from
August 1999 to February 2000; Chairman of the
Board, President and Chief Executive Officer of
TCA Cable TV, Inc. from 1997 to August 1999.
Shares Beneficially Owned: 2,000
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HARVEY P. PERRY, age 58; a director since 1990;
Executive Vice President and Chief Administrative
Officer of the Company since May 1999; Senior
(PHOTO) Vice President of the Company from 1985 to May
1999; General Counsel and Secretary of the
Company since 1984 and 1986, respectively.
Committee Membership: Executive
Shares Beneficially Owned: 345,826 (1), (2)
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JIM D. REPPOND, age 61; a director since 1986;
retired from the Company in 1996 after serving as
(PHOTO) President-Telephone Group of the Company (or a
comparable predecessor position) for several
years.
Committee Memberships: Executive; Compensation
Shares Beneficially Owned: 67,920 (3)
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JOSEPH R. ZIMMEL, age 49; a director since
January 1, 2003; retired in 2002 after serving as
(PHOTO) a managing director of the investment banking
division of The Goldman Sachs Group, Inc. from
1996 to 2001; a director of Modem Media, Inc.
Committee Memberships: Audit
Shares Beneficially Owned: None
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THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THESE PROPOSED NOMINEES.
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CLASS I DIRECTORS (TERM EXPIRES IN 2004):
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WILLIAM R. BOLES, JR., age 46; a director since
(PHOTO) 1992; an executive officer, director and
practicing attorney with The Boles Law Firm.
Committee Memberships: Risk Evaluation (Chairman)
Shares Beneficially Owned: 9,930 (3)
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W. BRUCE HANKS, age 48; a director since 1992;
Athletic Director of the University of Louisiana
at Monroe since March 2001; a senior or executive
(PHOTO) officer of the Company with operational or
strategic development responsibilities for
several years prior to such time.
Committee Membership: Risk Evaluation
Shares Beneficially Owned: 217,583 (2), (3)
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C. G. MELVILLE, JR., age 62; a director since
(PHOTO) 1968; private investor since 1992; retired
executive officer of an equipment distributor.
Committee Memberships: Compensation (Chairman);
Nominating and Corporate
Governance
Shares Beneficially Owned: 16,621 (3)
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GLEN F. POST, III, age 50; a director since 1985;
Chairman of the Board (since June 2002) and Chief
(PHOTO) Executive Officer of the Company (since 1993).
Mr. Post also served as Vice Chairman of the
Board from 1993 to 2002 and President from 1990
to 2002.
Committee Membership: Executive (Chairman)
Shares Beneficially Owned: 1,255,684 (2)
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4
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CLASS II DIRECTORS (TERM EXPIRES IN 2005):
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VIRGINIA BOULET, age 49; a director since 1995;
President and Chief Operating Officer of
IMDiversity, Inc., an on-line recruiting company,
(PHOTO) and Special Counsel at Adams and Reese LLP, a law
firm, since March 2002; Partner, Phelps Dunbar,
L.L.P., a law firm, for 10 years prior to such
time.
Committee Memberships: Nominating and Corporate
Governance (Chairperson);
Audit
Shares Beneficially Owned: 9,328 (3), (4)
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CALVIN CZESCHIN, age 67; a director since 1975;
(PHOTO) President and Chief Executive Officer of Yelcot
Telephone Company and Ultimate Auto Group.
Committee Memberships: Executive; Risk Evaluation
Shares Beneficially Owned: 354,869 (3), (5)
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JAMES B. GARDNER, age 68; a director since 1981;
Senior Managing Director of the capital markets
division of Service Asset Management Company, a
(PHOTO) financial services firm, since November 2001;
Managing Director of such division for over seven
years prior to such date; a director of Ennis
Business Forms, Inc.
Committee Memberships: Audit (Chairman);
Executive; Compensation
Shares Beneficially Owned: 7,500 (3)
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R. L. HARGROVE, JR., age 71; a director since
(PHOTO) 1985; retired as an executive officer of the
Company in 1987 after 12 years of service as an
officer.
Committee Memberships: Executive; Audit;
Nominating and Corporate
Governance
Shares Beneficially Owned: 67,840 (3)
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5
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JOHNNY HEBERT, age 74; a director since 1968;
(PHOTO) President of family-owned electrical contracting
businesses.
Committee Memberships: Risk Evaluation
Shares Beneficially Owned: 16,482 (3), (6)
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(1) Includes 2,818 shares held as custodian for the benefit of Mr. Perry's
children.
(2) Includes (i) shares of time-vested and performance-based restricted
stock issued to the below-named directors under the Company's incentive
compensation plans ("Restricted Stock"), with respect to which such
individuals have sole voting power but no investment power; (ii) shares
("Option Shares") that such individuals have the right to acquire prior
to May 16, 2003 pursuant to options granted under the Company's
incentive compensation plans; and (iii) shares (collectively, "Plan
Shares") allocated to such individual's accounts under the Company's
Employee Stock Ownership Plan ("ESOP") and the Company's Dollars &
Sense Plan ("401(k) Plan"), as follows:
Name Restricted Stock Option Shares Plan Shares
------------------ ---------------- ------------- -----------
Harvey P. Perry 4,918 256,257 40,316
W. Bruce Hanks -- 175,858 --
Glen F. Post, III 12,728 1,015,575 78,776
Participants in the 401(k) Plan who have attained 45 years of age or
three years of service with the Company have investment power with
respect to all shares held in their 401(k) Plan account, and
participants in the ESOP who have attained 55 years of age and 10 years
of participation in the plan have investment power with respect to a
portion of the shares held in their ESOP accounts. Participants in both
these plans are entitled to direct the voting of their plan shares, as
described in greater detail elsewhere herein.
(3) Includes 4,000 shares that such outside director has the right to
acquire prior to May 16, 2003 pursuant to options granted under the
Company's directors stock option plan.
(4) Includes 1,272 shares held by Ms. Boulet as custodian for the benefit
of her children and 450 shares owned by Ms. Boulet's spouse, as to
which she disclaims beneficial ownership.
(5) Constitutes 0.2% of the outstanding Common Shares and entitles Mr.
Czeschin to cast 1.5% of the total voting power; includes 11,997 shares
owned by Mr. Czeschin's wife, as to which he disclaims beneficial
ownership; also includes 300,000 shares that are pledged pursuant to a
pre-paid forward sale contract that expires January 19, 2006. Mr.
Czeschin holds voting but not investment power as to such pledged
shares.
(6) Includes 1,755 shares owned by Mr. Hebert's wife, as to which he
disclaims beneficial ownership.
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CORPORATE GOVERNANCE
GOVERNANCE GUIDELINES
In response to regulatory developments and other recent events, the
Company revised and substantially expanded its corporate governance guidelines
since last year's proxy statement. Listed below are excerpts from the Company's
current guidelines, which the Board plans to review at least annually. A
complete copy of the Company's corporate governance guidelines is filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended December
31, 2002 and is posted on the Company's website at www.centurytel.com.
6
1. Director Qualifications
o The Board will have a majority of independent directors. The
Nominating and Corporate Governance Committee is responsible
for reviewing with the Board, on an annual basis, the
requisite skills and characteristics of new Board members as
well as the composition of the Board as a whole.
o The Board presently has 13 members. It is the sense of the
Board that a size of 11 to 13 is about right. However, the
Board would be willing to go to a somewhat larger size in
order to accommodate the availability of an outstanding
candidate. It is the general sense of the Board that no more
than two management directors should serve on the Board.
o The Board expects directors who change the job or
responsibility they held when they were elected to the Board
to volunteer to resign from the Board. It is not the sense of
the Board that in every such instance the director should
necessarily leave the Board. There should, however, be an
opportunity for the Board, through the Nominating and
Corporate Governance Committee, to review the continued
appropriateness of Board membership under the circumstances.
o No director may serve on more than two other unaffiliated
public company boards, unless this prohibition is waived by
the Board. No director may be appointed or nominated to a new
term if he or she would be age 72 or older at the time of the
election or appointment.
o The Nominating and Corporate Governance Committee will review
each director's continuation on the Board every three years.
o The Board has adopted a standard that no director qualifies as
"independent" unless the Board affirmatively confirms that the
director (and any organization with which the director is
affiliated) receives no payments from CenturyTel, Inc. or its
subsidiaries (the "Company") other than director's fees or a
pension or other form of deferred compensation for prior
service (provided such compensation is not contingent in any
way on continued service). In addition, (i) no director who is
a former employee of the Company can be "independent" until
five years after the employment has ended; (ii) no director
who is, or in the past five years has been, affiliated with or
employed by a (present or former) auditor of the Company can
be "independent" until five years after the end of either the
affiliation or the auditing relationship; (iii) no director
can be "independent" if he or she is, or in the past five
years has been, part of an interlocking directorate in which
an executive officer of the Company serves on the compensation
committee of another company that concurrently employs the
director; and (iv) directors with immediate family members (as
defined in the New York Stock Exchange Listed Company Manual)
in the foregoing categories are likewise subject to the
five-year "cooling-off" provision for purposes of determining
"independence." The Board may determine a director to be
independent if a family member is employed by the Company in a
non-executive officer position, and may make other reasonable
determinations or interpretations consistent with the
foregoing standards.
7
o Once the Board has determined that a director is independent,
the director may not engage in any transaction with the
Company, either directly or indirectly through an immediate
family member or related entity, without such transaction
being approved by the Board.
2. Director Responsibilities
o The Chairman will establish the agenda for each Board meeting.
Each Board member is free to suggest the inclusion of items on
the agenda. Each Board member is free to raise at any Board
meeting subjects that are not on the agenda for that meeting.
The Board will review the Company's long-term strategic plans
and the principal issues that the Company will face in the
future during at least one Board meeting each year.
o The non-management directors will meet in executive session at
least quarterly. The director who presides at these meetings
will be an independent director chosen annually by the
non-management directors, and his or her name will be
disclosed in the annual proxy statement.
3. Board Committees
o The Board will have at all times an Audit Committee, a
Compensation Committee and a Nominating and Corporate
Governance Committee. All of the members of these committees
will be independent directors under the criteria established
by the New York Stock Exchange.
o The Chairman of each committee, in consultation with the
committee members, will determine the frequency and length of
the committee meetings consistent with any requirements set
forth in the committee's charter. The Chairman of each
committee, in consultation with members of the committee and
others specified in the committee's charter, will develop the
committee's agenda.
o The Board and each committee have the power to hire
independent legal, financial or other advisors as they may
deem necessary, without consulting or obtaining the approval
of any officer of the Company in advance.
o Each committee may meet in executive session as often as it
deems appropriate.
4. Director Access to Officers and Employees
o Directors have full and free access to officers and employees
of the Company.
o The Board welcomes regular attendance at each Board meeting of
senior officers of the Company.
5. Director Compensation
o The form and amount of director compensation will be
determined by the Nominating and Corporate Governance
Committee in accordance with the
8
policies and principles set forth in its charter, and such
Committee will conduct an annual review of director
compensation.
6. Director Orientation and Continuing Education
o The Nominating and Corporate Governance Committee shall
develop an Orientation Program for new directors. All new
directors must participate in the Company's Orientation
Program, which should be conducted as soon as practicable
after new directors are elected or appointed. The Company will
also endeavor to periodically update directors on industry,
technological and regulatory developments, and to provide
adequate resources to support directors in understanding the
Company's business and matters to be acted upon at board and
committee meetings.
7. CEO Evaluation and Management Succession
o The Nominating and Corporate Governance Committee will conduct
an annual review of the CEO's performance. The Board of
Directors will review the Nominating and Corporate Governance
Committee's report in order to ensure that the CEO is
providing the best leadership for the Company in the long- and
short-term.
o The Nominating and Corporate Governance Committee should
report periodically to the Board on succession planning. The
entire Board will consult periodically with the Nominating and
Corporate Governance Committee regarding potential successors
to the CEO. The CEO should at all times make available his or
her recommendations and evaluations of potential successors,
along with a review of any development plans recommended for
such individuals.
8. Annual Performance Evaluation
o The Board of Directors will conduct an annual self-evaluation
to determine whether it and its committees are functioning
effectively. The Nominating and Corporate Governance Committee
will receive comments from all directors and report annually
to the Board with an assessment of the Board's performance,
which will be discussed with the full Board. The assessment
will focus on the Board's contribution to the Company and
specifically focus on areas in which the Board or management
believes that the Board could improve.
9. Waivers of the Code of Business Conduct and Ethics
o Any waiver of the Company's policies, principles or guidelines
relating to business conduct or ethics for executive officers
or directors may be made only by the Audit Committee and will
be promptly disclosed as required by law or stock exchange
regulation.
9
MEETINGS AND CERTAIN COMMITTEES OF THE BOARD
During 2002 the Board held four regular meetings and eight special
meetings. Each of the incumbent directors who served in 2002 attended at least
75% of the Board meetings held during 2002.
During 2002, the Board's Audit Committee held three meetings, and its
review subcommittee met four times to review the Company's quarterly earnings
prior to their public release. The Audit Committee's functions are described
further below.
The Board's Compensation Committee held six meetings during 2002. The
Compensation Committee's functions are described further below.
In connection with identifying new board members and undertaking an
extensive governance review, the Board's Nominating and Corporate Governance
Committee met 17 times during 2002. The Nominating and Corporate Governance
Committee is responsible for (i) recommending to the Board nominees to serve as
directors and officers, (ii) monitoring the composition of the Board and its
committees, (iii) recommending to the Board a set of corporate governance
guidelines and (iv) leading the Board in its annual review of the Board's
performance. Any shareholder who wishes to make a nomination for the election of
directors in 2004 must do so in compliance with the procedures set forth in the
Company's advance notification bylaw, which is discussed below under the heading
"Other Matters - Shareholder Nominations and Proposals."
Each of the committees listed above is composed solely of independent
directors. The Board has determined that R. L. Hargrove, Jr. and James B.
Gardner are audit committee financial experts, as defined under the federal
securities laws.
If you would like additional information on the responsibilities of the
committees listed above, please refer to the committees' respective charters,
which are filed as exhibits to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002 and are posted on the Company's website at
www.centurytel.com.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company (an "outside
director") is paid an annual fee of $30,000 plus $2,000 for attending each
regular Board meeting, $2,500 for attending each special Board meeting and
$1,500 for attending each meeting of a Board committee. Currently (i) the chair
of the Audit Committee is paid supplemental fees at the rate of $12,000 per
year, (ii) the chair of the Compensation Committee is paid supplemental fees at
the rate of $8,000 per year, and (iii) the chair of the Risk Evaluation
Committee is paid supplemental fees at the rate of $6,000 per year. The chair of
the Nominating and Corporate Governance Committee is currently being paid
supplemental fees at the rate of $12,000 per year through the third quarter of
2003, after which this supplemental fee will be reduced to an annual rate of
$8,000. The Company permits each outside director to defer receipt of all or a
portion of his or her fees. Amounts so deferred earn interest equal to the
six-month Treasury bill rate. Each director is also reimbursed for expenses
incurred in attending meetings.
10
Under the Company's 2002 Directors Stock Option Plan, outside directors
are entitled to receive annual grants of options to purchase up to 6,000 Common
Shares (with the actual number to be determined by the Compensation Committee of
the Board) following each annual meeting of shareholders and upon joining the
Board if other than by election at an annual meeting of shareholders. In 2002,
the Board's Compensation Committee granted each outside director non-qualified
options to purchase 4,000 Common Shares. In 2003, the Compensation Committee
authorized each outside director to receive subsequent to the Meeting
non-qualified options to purchase 6,000 Common Shares.
Prior to June 1, 2002, outside directors participated in the Company's
Outside Directors Retirement Plan. Under such plan, participating outside
directors with fully vested rights are entitled to receive, upon normal
retirement at age 70, $30,000 per year, payable bi-weekly generally, in the form
of a life annuity (subject to certain limited exceptions). Under the plan,
participating outside directors can also receive payments upon early retirement
at age 65, subject to certain benefit reductions. In addition, the plan provides
certain disability and preretirement death benefits. The Company has established
a trust to fund its obligations under the plan, but participants' rights to
these trust assets are no greater than the rights of unsecured creditors. Under
the plan, participating outside directors whose service is terminated in
connection with a change in control of the Company are entitled to receive a
cash payment equal to the present value of their vested plan benefits,
determined in accordance with actuarial assumptions specified in the plan. In
2002, the plan was "frozen" to (i) limit participation to outside directors
serving as of May 31, 2002, (ii) limit benefits to those accrued through May 31,
2002, and (iii) freeze the annual payment for participants with fully vested
rights at $30,000, which equaled the annual retainer plus the fee for attending
one special Board meeting as of May 31, 2002.
Effective December 31, 2002, Jim D. Reppond terminated a ten-year
consulting agreement that the Company entered into with him in connection with
his retirement in 1996. During 2002, Mr. Reppond received consulting fees of
$16,717 under this agreement.
RECENT DEVELOPMENTS
In an effort to replace retiring directors and enhance the independence
of the Board, the Nominating and Corporate Governance Committee retained Spencer
Stuart & Associates in the second half of 2002 to assist in the search for
independent director nominees. In connection with this process, Ernest Butler,
Jr., age 74, who had served as a director since 1971, resigned as a Class II
director, effective December 31, 2002. He was replaced by Calvin Czeschin, who
previously served as a Class III director. Effective January 1, 2003, the Board
appointed Joseph R. Zimmel to fill Mr. Czeschin's vacancy, which resulted in the
Board attaining its goal of being constituted by a majority of independent
directors. The Board has also identified Fred R. Nichols as the nominee to
replace F. Earl Hogan, age 81, who is retiring as a Class III director upon the
election of his successor. As indicated above, the Board has nominated both Mr.
Zimmel and Mr. Nichols to be elected at the Meeting to three-year terms.
Effective January 1, 2003, the Board also reconfigured the Audit, Compensation
and Nominating and Corporate Governance committees to be composed solely of
independent directors.
11
PRESIDING DIRECTOR
As indicated above, the non-management directors will meet in executive
session at least quarterly. The non-management directors have selected Virginia
Boulet to preside over such meetings during 2003. In the near future, the
Company expects to post on its website information on the manner in which Ms.
Boulet may be contacted by interested parties.
VOTING SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding ownership of the
Company's Common Shares by (i) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Shares, (ii) certain
directors or executive officers who are not listed in the table included under
the heading "Election of Directors" and (iii) all of the Company's directors and
executive officers as a group. Unless otherwise indicated, all information is
presented as of the Record Date and all shares indicated as beneficially owned
are held with sole voting and investment power.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF PERCENT
OWNERSHIP OF OUTSTANDING OF VOTING
BENEFICIAL OWNER COMMON SHARES(1) COMMON SHARES(1) POWER(2)
---------------- ---------------- ---------------- ---------
Principal Shareholders:
Putnam, LLC (doing business as Putnam Investments)
One Post Office Square
Boston, Massachusetts 02109 8,640,608 (3) 6.0% 3.8%
Regions Morgan Keegan Trust, as Trustee
(the "Trustee") of the ESOP
1807 Tower Drive
Monroe, Louisiana 71201 7,654,560 (4) 5.4% 28.3%
Capital Research and Management Company
333 South Hope Street
Los Angeles, California 90071 7,149,730 (5) 5.0% 3.1%
Others:(6)
Clarke M. Williams 1,757,880 (7) 1.2% *
R. Stewart Ewing, Jr. 349,341 (8) * *
David D. Cole 287,537 (9) * *
Karen A. Puckett 152,178 (10) * *
F. Earl Hogan 41,097 (11) * *
All directors and executive officers as of
the Record Date as a group (17 persons) 3,330,931 (12) 2.3% 1.5%
----------
* Represents less than 1%.
12
(1) Determined in accordance with Rule 13d-3 of the SEC based upon
information furnished by the persons listed. In addition to Common
Shares, the Company has outstanding Preferred Shares that vote together
with the Common Shares as a single class on all matters. One or more
persons beneficially own more than 5% of the Preferred Shares; however,
the percentage of total voting power held by such persons is
immaterial. For additional information regarding the Preferred Shares,
see page 1 of this proxy statement. For additional information
regarding the investment power held by participants with respect to
their Restricted Stock and Plan Shares, see footnote 2 to the table
included under the heading "Election of Directors."
(2) Based on the Company's records and, with respect to all shares held of
record by the Trustee, based on information the Trustee periodically
provides to the Company to establish that certain of these shares
entitle the Trustee to cast ten votes per share.
(3) Based on share information as of February 13, 2003 contained in a
Schedule 13G Report filed jointly with the SEC by Marsh & McLennan
Companies, Inc., its wholly owned subsidiary, Putnam, LLC, doing
business as Putnam Investments, and two of its other subsidiaries which
operate as registered investment advisors. According to this report,
these companies collectively have shared voting power with respect to
1,198,440 of these shares and shared dispositive power with respect to
all 8,640,608 of these shares.
(4) Substantially all of the voting power attributable to these shares is
directed by the participants of the ESOP, each of whom is deemed,
subject to certain limited exceptions, to tender such instructions as a
"named fiduciary" for all shares (except for PAYSOP shares) under such
plan, which requires the participants to direct their votes in a manner
that they believe to be prudent and in the best interests of the
participants of the ESOP.
(5) Based on share information as of February 10, 2003 contained in a
Schedule 13G/A Report that Capital Research and Management Company has
filed with the SEC. In this report, Capital Research and Management
Company indicated that (i) it is deemed to be the beneficial owner of
these shares as a result of acting as investment advisor to various
registered investment companies, (ii) it holds no voting power with
respect to any of these shares and (iii) it disclaims beneficial
ownership of all of these shares.
(6) Mr. Williams was Chairman of the Board at the time of his death on June
5, 2002. Mr. Ewing, Mr. Cole and Ms. Puckett are executive officers.
Mr. Hogan is a director who is retiring as a Class III director upon
the election of his successor at the Meeting.
(7) Represents shares held by Mr. Williams at the time of his death. These
shares have been transferred to his heirs or his estate, which is
administered by his wife.
(8) Includes 5,828 shares of Restricted Stock, 280,858 Option Shares that
Mr. Ewing has the right to acquire prior to May 16, 2003, and 40,576
Plan Shares allocated to his accounts under the ESOP and 401(k) Plan.
(9) Includes 4,918 shares of Restricted Stock, 231,373 Option Shares that
Mr. Cole has the right to acquire prior to May 16, 2003, and 25,714
Plan Shares allocated to his accounts under the ESOP and 401(k) Plan.
(10) Includes 3,639 shares of Restricted Stock, 146,667 Option Shares that
Ms. Puckett has the right to acquire prior to May 16, 2003, and 276
Plan Shares allocated to her accounts under the ESOP and 401(k) Plan.
(11) Includes 4,000 shares that Mr. Hogan has the right to acquire prior to
May 16, 2003 pursuant to options granted under the Company's directors
stock option plan.
(12) Includes (i) 35,388 shares of Restricted Stock, (ii) 2,265,730 Option
Shares that such individuals have the right to acquire prior to May 16,
2003, (iii) 186,943 Plan Shares allocated to their respective accounts
under the ESOP and 401(k) Plan, (iv) 18,981 shares held of record by
the spouses of certain of these individuals, as to which beneficial
ownership is disclaimed, and (v) 4,569 shares held as custodian for the
benefit of children of such individuals. Excludes shares held by the
estate or heirs of Mr. Williams, as described further in note 7 above.
13
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following table sets forth certain information regarding the
compensation of (i) the Company's Chief Executive Officer, (ii) each of the
Company's four most highly compensated executive officers other than the Chief
Executive Officer, and (iii) Clarke M. Williams, who was the Chairman of the
Board of the Company at the time of his death in June 2002 (collectively, the
"named officers"). Following this table is additional information regarding
option grants and option exercises during 2002. For additional information, see
" - Report of Compensation Committee Regarding Executive Compensation."
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
------------------------------------
AWARDS PAYOUTS
----------------------- -----------
ANNUAL NO. OF LONG-TERM
COMPENSATION RESTRICTED SECURITIES INCENTIVE
NAME AND CURRENT ----------------------- STOCK UNDERLYING PLAN ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) AWARDS(2) OPTIONS PAYOUTS(3) COMPENSATION(4)
----------------------------------- ---- --------- --------- ---------- ---------- ----------- ---------------
Glen F. Post, III 2002 $ 787,594 $ 812,797 $ 150,000 320,000 $ 239,804 $ 90,190
Chairman of the Board and 2001 722,194 0 0 320,000 0 96,885
Chief Executive Officer 2000 690,840 207,252 0 320,000 0 107,569
Karen A. Puckett (5) 2002 420,600 352,147 100,000 120,000 0 58,309
President and Chief Operating 2001 389,929 95,259 0 120,000 0 58,951
Officer 2000 158,664 76,833 0 100,000 0 13,105
R. Stewart Ewing, Jr. 2002 390,657 274,241 100,000 81,000 72,215 59,651
Executive Vice President and 2001 365,981 56,983 0 81,000 0 60,328
Chief Financial Officer 2000 329,377 91,995 0 85,000 0 59,458
Clarke M. Williams(6) 2002 361,545 203,169 0 320,000 239,804 190,461(7)
2001 759,409 0 0 320,000 0 145,346
2000 726,527 217,958 0 320,000 0 155,214
Harvey P. Perry 2002 344,419 230,072 75,000 81,000 72,215 57,353
Executive Vice President, Chief 2001 333,118 71,487 0 81,000 0 59,248
Administrative Officer, General 2000 318,652 87,088 0 85,000 0 57,860
Counsel and Secretary
David D. Cole 2002 331,111 225,155 75,000 81,000 72,215 55,393
Senior Vice President- 2001 320,212 56,037 0 81,000 0 56,828
Operations Support 2000 306,297 97,954 0 85,000 0 57,656
----------
(1) The "Bonus" column reflects the annual incentive cash bonuses granted
pursuant to the Company's annual incentive programs. As discussed
further in note 2 below, the "Restricted Stock Awards" column reflects
the dollar value of special bonuses of restricted stock awarded for
extraordinary services during 2002.
(2) As part of the long-term incentive compensation granted to the
Company's officers in 1999, each named officer other than Ms. Puckett
received restricted stock that vests January 1, 2004 (collectively, the
"Time-Vested Restricted Shares") and performance-based restricted
shares (the "Performance-Based Restricted Shares") that will vest based
on the performance of the Company's stock through January 1, 2004 in
relation to that of certain specified peer group companies. The chart
below sets forth additional information as of January 1, 2004
14
regarding the named officers' aggregate holdings of Time-Vested
Restricted Shares and Performance-Based Restricted Shares and the
aggregate value thereof, determined as if all such restricted shares
were fully vested. (This chart does not reflect restricted stock issued
in early 2003 or unearned performance shares with respect to which
Common Shares have not been issued.)
Performance- Aggregate
Time-Vested Based Value at
Restricted Restricted December 31,
Name Shares Shares Total 2002
-------------- ----------- ------------ -------- -------------
Mr. Post 10,663 7,266 17,929 $ 526,754
Ms. Puckett 0 0 0 0
Mr. Ewing 3,167 2,188 5,355 157,330
Mr. Williams 0 0 0 0
Mr. Perry 3,168 2,188 5,356 157,359
Mr. Cole 3,130 2,188 5,318 156,243
In addition to the restricted stock reflected in the chart immediately
above, 20,924 additional shares of restricted stock were issued on
February 24, 2003 to the executive officers as a special bonus to
compensate them for their extraordinary efforts and achievements during
2002. One-third of these restricted shares will vest on March 15, 2004,
one-third on March 15, 2005 and one-third on March 15, 2006.
Dividends are paid currently with respect to all shares of restricted
stock described above. For additional information regarding the
foregoing, see "- Report of Compensation Committee Regarding Executive
Compensation."
(3) Reflects the value of Common Shares released or issued as a result of
Performance-Based Restricted Shares and performance shares awarded in
1997 becoming vested or earned in early 2002 based on the appreciation
in the market value of the Common Shares during the five-year period
from 1997 through 2001. See "-Report of Compensation Committee
Regarding Executive Compensation-Prior Grants."
(4) Comprised of the Company's (i) matching contributions to the 401(k)
Plan, as supplemented by matching contributions under the Company's
Supplemental Dollars & Sense Plan, (ii) estimated premium costs of
arranging to pay death benefits to the executive officers'
beneficiaries in excess of those provided generally for other employees
under life insurance policies that the Company procures (and, subject
to certain limited exceptions, controls the cash surrender value
thereof), (iii) contributions pursuant to the ESOP, valued as of
December 31 of each respective year (as supplemented by contributions
under the Company's Supplemental Defined Contribution Plan), and (iv)
payment of cash allowances in lieu of previously-offered perquisites,
in each case for and on behalf of the named officers as follows:
Cash
Life Allowance
401(k) Plan Insurance ESOP in Lieu of
Name Year Contributions Premiums Contributions Perquisites
-------------- ------ ------------- ---------- ------------- -----------
Mr. Post 2002 $ 27,486 $ 0 $ 31,504 $ 31,200
2001 34,197 2,600 28,888 31,200
2000 38,779 1,666 35,924 31,200
Ms. Puckett 2002 12,325 0 20,634 25,350
2001 13,449 744 19,408 25,350
2000 2,380 0 0 10,725
Mr. Ewing 2002 16,395 0 17,906 25,350
2001 16,785 1,274 16,919 25,350
2000 16,487 766 16,855 25,350
Mr. Williams 2002 0 42,554 26,855 14,400
2001 0 83,770 30,376 31,200
2000 0 86,235 37,779 31,200
Mr. Perry 2002 15,367 0 16,636 25,350
2001 15,728 1,986 16,184 25,350
2000 15,106 1,174 16,230 25,350
Mr. Cole 2002 14,557 0 15,486 25,350
2001 15,717 711 15,050 25,350
2000 15,455 681 16,170 25,350
In connection with Mr. Williams' death during 2002, the Company
distributed to his beneficiaries various amounts that had accrued under
the Company's defined contribution plans. See also note 7 below.
(5) Ms. Puckett's employment with the Company commenced on July 24, 2000.
(6) Mr. Williams was Chairman of the Board of the Company at the time of
his death on June 5, 2002.
(7) Includes $106,652 cash paid to the estate of Mr. Williams in exchange
for Mr. Williams' unused accrued vacation benefits.
----------
15
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE OF
------------------------------------------------------- OPTIONS AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION OVER TEN-YEAR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE EXPIRATION -------------------------------------
NAME GRANTED (1) IN 2002 PRICE DATE (5%) (10%)
------------------------------ ------------- ------------ --------- ----------- --------------- ----------------
Glen F. Post, III ............ 320,000 16% $ 32.99 2/25/12 $ 6,640,000 $ 16,825,600
Karen A. Puckett ............. 120,000 6% 32.99 2/25/12 2,490,000 6,309,600
R. Stewart Ewing, Jr ......... 81,000 4% 32.99 2/25/12 1,680,750 4,258,980
Clarke M. Williams ........... 320,000 16% 32.99 2/25/12 6,640,000 16,825,600
Harvey P. Perry .............. 81,000 4% 32.99 2/25/12 1,680,750 4,258,980
David D. Cole ................ 81,000 4% 32.99 2/25/12 1,680,750 4,258,980
All Shareholders(2) .......... 142,955,839 -- 32.62 -- 2,932,024,258 7,432,274,070
----------
(1) One-third of these options became exercisable on February 25, 2003,
one-third will become exercisable on February 25, 2004, and one-third
will become exercisable on February 25, 2005.
(2) The amounts shown as potential realizable value for all shareholders,
which are presented for comparison purposes only, represent the
aggregate net gain for all holders of Common Shares, as of December 31,
2002, assuming a hypothetical option to acquire 142,955,839 Common
Shares (the number of such shares outstanding as of such date) granted
at $32.62 per share (the weighted average price of all options granted
in 2002) on February 25, 2002 and expiring on February 25, 2012, if the
price of Common Shares appreciates at the rates shown in the table.
There can be no assurance that the potential realizable values shown in
the table will be achieved. The Company neither makes nor endorses any
prediction as to future stock performance.
----------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
Set forth below is certain data relating to option exercises during
2002. A substantial number of options exercised by executive officers during
2002 were set to expire by year-end.
NO. OF NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT DECEMBER 31, 2002 DECEMBER 31, 2002
ON VALUE ------------------------------ ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------ ------------ ------------ ----------- ------------- ----------- -------------
Glen F. Post, III ............ 168,750 $ 2,874,262 802,243 639,996 $ 7,032,419 $ 287,998
Karen A. Puckett ............. 0 0 106,669 233,331 66,835 114,415
R. Stewart Ewing, Jr ......... 78,125 1,376,819 225,527 163,331 2,066,510 72,899
Clarke M. Williams(1) ........ 701,614(2) 9,369,490(2) 960,000(3) 0 432,000 0
Harvey P. Perry .............. 34,601 529,675 200,926 163,331 1,703,015 72,899
David D. Cole ................ 33,835 581,736 176,042 163,331 1,414,652 72,899
----------
(1) Mr. Williams was Chairman of the Board of the Company at the time of
his death on June 5, 2002.
(2) Of these amounts, 675,283 of the shares and $8,886,008 of the value
realized relate to the exercise of options by the estate of Mr.
Williams after June 5, 2002.
(3) The options to acquire these securities are currently held by the
estate of Mr. Williams.
----------
REPORT OF COMPENSATION COMMITTEE REGARDING EXECUTIVE COMPENSATION
GENERAL. The Board's Compensation Committee monitors and establishes
the compensation levels of the Company's executive officers, administers the
Company's incentive
16
compensation programs, and performs other related tasks. The Committee is
composed entirely of Board members who qualify as (i) independent directors
under the Company's corporate governance guidelines, (ii) "outside directors"
under Section 162(m) of the Internal Revenue Code and (iii) "non-employee
directors" under Rule 16b-3 promulgated under the Securities Exchange Act of
1934. If you would like additional information on the responsibilities of the
Compensation Committee, please refer to its charter, which is filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended December
31, 2002 and is posted on the Company's website at www.centurytel.com.
Compensation Objectives. During 2002, the Committee applied the
following compensation objectives in connection with its deliberations:
o compensating the Company's executive officers with salaries
commensurate with or higher than those of similarly-situated
executives at comparable companies, based upon corporate and
individual performance
o providing a substantial portion of the executives'
compensation in the form of incentive compensation based upon
(i) the Company's short and long-term performance and (ii) the
individual, departmental or divisional achievements of the
executives
o encouraging team orientation, and
o providing sufficient benefit levels for executives and their
families in the event of disability, illness or retirement.
In addition, to the extent that it is practicable and consistent with
the Company's executive compensation objectives, the Committee seeks to comply
with Section 162(m) of the Internal Revenue Code and any regulations promulgated
thereunder (collectively, "Section 162(m)") in order to preserve the tax
deductibility of performance-based compensation in excess of $1 million per
taxable year to each of the named officers. If compliance with Section 162(m)
conflicts with the Committee's compensation objectives or is contrary to the
best interests of the shareholders, the Committee reserves the right to pursue
its objectives, regardless of the attendant tax implications.
Overview of 2002 Compensation. As described further below, the
Company's executive compensation for 2002 was comprised of:
o salary
o normal annual incentive bonuses and special bonuses for
extraordinary efforts and achievements
o long-term incentive compensation in the form of grants of
stock options in 2002 and the payout of incentive awards
granted in 1997, and
o other benefits typically provided to executives of comparable
companies, all as described further below.
For each such component of compensation, the Company's compensation levels were
compared with those of comparable companies.
17
During the Fall of 2001, the Committee retained an independent
consulting firm to assist the Company in connection with implementing its
officer compensation programs for 2002. The consulting firm compared the
Company's officer compensation to that of a national group of companies. This
group included a number of telecommunications companies (including several of
the peer companies referred to in the Company's stock performance graph
appearing elsewhere herein), but also included other companies that have revenue
levels similar to the Company's.
SALARY. The salary of the Chief Executive Officer and each other
executive officer is based primarily on the officer's level of responsibility
and comparisons to prevailing salary levels for similar officers at comparable
companies. Based upon survey data, recommendations of its independent consulting
firm and other considerations, the Committee in May 2002 increased the salary of
the Chief Executive Officer by 7.8% and the salaries of each of the Company's
other named officers by 2.5%. In connection with promotions of officers
following the death of the Company's Chairman, the Committee in September 2002
increased the salaries of the Company's Chief Executive Officer, its President
and its Chief Financial Officer by 7.3%, 12.2% and 11.3%, respectively. The
Committee believes these 2002 raises were consistent with its objectives of (i)
ensuring that the executive officers receive salaries commensurate with or in
excess of median salaries of similarly-situated executives when warranted by the
performance of the Company or the individual and (ii) applying a team
orientation to executive compensation.
BONUSES. As described further below, the Committee awarded normal
annual incentive bonuses and special bonuses for extraordinary efforts and
achievements during 2002.
Annual Incentive Bonus Programs. The Company maintains (i) a
shareholder-approved short-term incentive program for certain of its executive
officers and (ii) an annual incentive bonus program for the Company's other
officers and managers. In connection with both of these bonus programs, the
Compensation Committee annually establishes target performance levels and the
amount of bonus payable if these targets are met, which typically is defined in
terms of a percentage of each officer's salary. For 2002, the Committee
recommended target bonuses ranging from 40% to 60% of each executive officer's
salary if the targets were met, with up to double these amounts if the targets
were substantially exceeded and no bonuses if certain minimum target performance
levels were not attained. The target bonuses payable to the Company's late
Chairman and its Chief Executive Officer for 2002 performance were based solely
upon the Company's overall financial performance measured in terms of operating
income growth and, to a lesser extent, revenue growth. The bonuses payable to
each other executive officer were based partially upon the Company's overall
financial performance and partially upon the attainment of pre-approved
individual, departmental or divisional goals.
Based on the Company's 2002 performance, the Chief Executive Officer
received a bonus equal to 103.2% of his 2002 salary. Based upon the Company's
performance and the attainment of individual performance objectives, each other
incumbent named officer received a bonus between approximately 66.8% and 83.73%
of his or her 2002 salary. During 2002, the spouse of the Company's late
Chairman was paid a pro rata bonus for service through the date of his death,
based upon the assumption that the Company would attain 100% of the target
performance levels. The Committee elected to pay these 2002 incentive bonuses in
cash.
18
Special Bonuses. In connection with certifying in early 2003 the amount
of the executive officers' 2002 annual incentive bonuses, the Compensation
Committee determined that the normal incentive bonuses would not adequately
compensate the executive officers for their extraordinary efforts and
achievements during 2002. These achievements included (i) successfully and
timely consummating the purchase of Verizon's local exchange telephone
operations in two separate states for an aggregate of over $2.2 billion cash,
(ii) successfully and timely divesting substantially all of the Company's
wireless operations for almost $1.6 billion cash and (iii) attaining strong
financial and market performance relative to both the Company's internal goals
and the Company's peers. To compensate the executive officers for these
extraordinary efforts and achievements and to aid in the retention of the
executive officers, on February 24, 2003 the Committee issued an aggregate of
$575,000 of restricted stock, which vests annually over a three-year period. The
Committee allocated these special bonuses substantially in proportion to each
executive officer's salary. These special bonuses will not qualify as
performance-based compensation under Section 162(m).
STOCK INCENTIVE PROGRAMS. The Company's current long-term incentive
compensation programs authorize the Compensation Committee to grant stock
options and various other stock-based incentives to key personnel. One of the
Committee's central goals with respect to stock incentive awards is to
strengthen the relationship between compensation and growth in the market price
of the Common Shares and thereby align the executive officers' financial
interests with those of the Company's shareholders.
Incentives granted under these programs become exercisable based upon
criteria established by the Compensation Committee. The Committee generally
determines the size of option grants based on the recipient's responsibilities
and duties, and on information furnished by the Committee's consultants
regarding stock option practices among comparable companies. Since 2001, the
Committee's general philosophy has been to award annual option grants as opposed
to larger, multi-year grants.
2002 Grants. During 2002, the Compensation Committee awarded to the
Company's officers stock options on the terms further described elsewhere
herein. The Committee determined the size of its 2002 option grants based on
information furnished by the Committee's independent consulting firm relating to
the long-term incentive compensation practices among other comparable companies.
Based on the consulting firm's recommendations, the Committee granted awards to
each executive officer having a value, determined under the Black-Scholes
valuation methodology, commensurate with long-term incentive awards to
similarly-situated executives at other comparable companies.
Prior Grants. During 1997, 1998 and 1999, the Committee awarded to the
Company's officers long-term incentive compensation in the form of (i)
time-vested restricted stock which will generally vest on or about the fifth
anniversary of the grant date and (ii) performance-based restricted stock and
performance shares which will vest or be earned based on appreciation of the
market value of the Company's Common Shares over a five-year period. The 1997
and 1998 grants vested or were earned in early 2002 and 2003, respectively.
OTHER BENEFITS. The Company maintains certain broad-based employee
benefit plans in which the executive officers are generally permitted to
participate on terms substantially similar to those relating to all other
participants, subject to certain legal limitations on the compensation
19
on which benefits and contributions may be based. The Board has determined to
have the Company's matching contribution under the 401(k) Plan invested in
Common Shares so as to further align employees' and shareholders' financial
interests. The Company also maintains the ESOP, which serves to further align
employees' and shareholders' interests.
Additionally, the Company makes available to its officers a
supplemental life insurance plan, various defined benefit retirement plans
(which are described below under " - Pension Plans"), various nonqualified
supplemental benefit plans, cash allowances in lieu of previously-offered
perquisites, and a disability salary continuation plan.
COMPENSATION OF CHIEF EXECUTIVE OFFICER. The criteria, standards and
methodology used by the Committee in reviewing and establishing the Chief
Executive Officer's salary, bonus and other compensation are the same as those
used with respect to all other executive officers, as described above. As
discussed above under "- Salary," based on its review of data compiled by the
Committee's independent consulting firm and other information, the Committee
raised the annual salary of the Chief Executive Officer by an aggregate of 15.7%
during 2002 to $850,096. The Chief Executive Officer also received a cash bonus
of approximately $812,800 for 2002 performance under the Company's
shareholder-approved short-term incentive plan, and a special bonus of 5,459
restricted shares. In addition, during 2002 the Chief Executive Officer was
granted options to purchase 320,000 shares, as described further herein.
Submitted by the Compensation Committee of the Board of Directors.
C.G. Melville (Chairman) (1) James B. Gardner
F. Earl Hogan (2) Jim Reppond (3)
----------
(1) Chairman of the Committee since January 1, 2003.
(2) Will retire effective upon election of his successor at the Meeting.
(3) Member of the Committee since January 1, 2003.
PENSION PLANS
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Company maintains a
Supplemental Executive Retirement Plan (the "Supplemental Pension Plan")
pursuant to which certain officers who have completed at least five years of
service are generally entitled to receive a monthly payment upon attaining early
or normal retirement age under the plan. The following table reflects the
approximate annual retirement benefits that a participant with the indicated
years of service and compensation level may expect to receive under the
Supplemental Pension Plan assuming retirement at age 65. Early retirement may be
taken at age 55 by any participant with ten or more years of service, with
reduced benefits.
20
Years of Service
----------------------------------------------------------------------------------------
Compensation 5 10 15 20 25
------------ ---------- --------- --------- --------- ---------
$ 400,000 $ 60,000 $ 120,000 $ 140,000 $ 160,000 $ 180,000
500,000 75,000 150,000 175,000 200,000 225,000
600,000 90,000 180,000 210,000 240,000 270,000
700,000 105,000 210,000 245,000 280,000 315,000
800,000 120,000 240,000 280,000 320,000 360,000
900,000 135,000 270,000 315,000 360,000 405,000
1,000,000 150,000 300,000 350,000 400,000 450,000
1,100,000 165,000 330,000 385,000 440,000 495,000
1,200,000 180,000 360,000 420,000 480,000 540,000
The above table reflects the annual benefits payable upon normal
retirement under the Supplemental Pension Plan assuming such benefits will be
paid in the form of a monthly lifetime annuity and before reductions relating to
the receipt of Social Security benefits as described below. The actual amount of
an officer's monthly payment under the Supplemental Pension Plan is equal to (i)
3% of the officer's "average monthly compensation" (defined below) times the
officer's years of service during his first ten years with the Company plus (ii)
1% of the officer's "average monthly compensation" times his years of service
after his first ten years with the Company (up to a maximum of 15 additional
years), minus (iii) 4% of his estimated monthly Social Security benefits times
his years of service with the Company (up to a maximum of 25 years). Payments to
retired officers under this formula are increased by 3% per year to reflect cost
of living increases. "Average monthly compensation" means the officer's average
monthly compensation during the 36-month period within his last ten years of
employment in which he received his highest compensation. Participants added to
the plan after January 1, 2000 receive credit only for service while a plan
participant.
Under the Supplemental Pension Plan, the number of credited years of
service at December 31, 2002 was 25 years for Mr. Post, two years for Ms.
Puckett, 20 years for Mr. Ewing, 18 years for Mr. Perry, and 20 years for Mr.
Cole. The compensation upon which benefits are based under such plan is the
aggregate amount of compensation reported for 2002 for each respective officer
under the columns in the Summary Compensation Table appearing above that are
entitled "Salary" and "Bonus." The benefit payable under the Supplemental
Pension Plan to Mr. Williams' spouse as a result of his death on June 5, 2002 is
an annuity of approximately $397,431 per year to be paid to Mrs. Williams
annually until her death.
BROAD-BASED PENSION PLAN. The Company also maintains a qualified
defined benefit plan (the "Qualified Plan") pursuant to which most of the
Company's employees (including officers) who have completed at least five years
of service are generally entitled to receive payments upon attaining early or
normal retirement age under the plan. The Company further maintains a companion
non-qualified defined benefit plan (the "Non-Qualified Plan") designed to pay
supplemental retirement benefits to officers in amounts equal to the benefits
that such officers would otherwise forego under the Qualified Plan due to
federal limitations on the amount of benefits payable to highly compensated
participants of qualified plans.
The following table reflects the approximate total annual retirement
benefits that a participant with the indicated years of service and annual
compensation level may expect to
21
receive under the Qualified and Non-Qualified Plans (collectively, the
"Broad-Based Pension Plan") assuming retirement at age 65 during 2003. Upon
attaining age 55, participants with at least five years of service may elect to
receive reduced early retirement benefits.
Compensation 5 10 15 20 25 30
------------ -------- -------- --------- ---------- ---------- ---------
$ 400,000 $ 18,900 $ 37,800 $ 56,700 $ 75,600 $ 94,500 $ 113,400
500,000 23,900 47,800 71,700 95,600 119,500 143,400
600,000 28,900 57,800 86,700 115,600 144,500 173,400
700,000 33,900 67,800 101,700 135,600 169,500 203,400
800,000 38,900 77,800 116,700 155,600 194,500 233,400
900,000 43,900 87,800 131,700 175,600 219,500 263,400
1,000,000 48,900 97,800 146,700 195,600 244,500 293,400
1,100,000 53,900 107,800 161,700 215,600 269,500 323,400
1,200,000 58,900 117,800 176,700 235,600 294,500 353,400
The above table approximates the total annual benefits payable under
the Broad-Based Pension Plan assuming (in addition to the assumptions stated
above) that such benefits will be paid in the form of a monthly lifetime
annuity. The actual amount of a participant's total monthly payment is equal to
the sum of (i) his number of years of service under the plan (up to a maximum of
30 years) multiplied by 0.5% of his final average pay plus (ii) his number of
years of service under the plan (up to a maximum of 30 years) multiplied by 0.5%
of his final average pay in excess of his compensation subject to Social
Security taxes (as determined under the plan). For these purposes, "final
average pay" means the participant's average monthly compensation during the
60-month period within his last ten years of employment in which he received his
highest compensation.
Under the Broad-Based Pension Plan, each named officer other than Ms.
Puckett began to receive credit for years of service on January 1, 1999. Ms.
Puckett began receiving credit for years of service on July 24, 2000. The
compensation upon which benefits are based under such plan is the aggregate
amount reported for 2002 for each such officer under the columns in the Summary
Compensation Table appearing above that are entitled "Salary" and "Bonus." The
benefit payable under the Broad-Based Pension Plan to Mr. Williams' spouse is an
annuity of approximately $29,280 per year to be paid to Mrs. Williams annually
until her death.
EMPLOYMENT CONTRACT WITH CLARKE M. WILLIAMS AND CHANGE-IN-CONTROL ARRANGEMENTS
At the time of his death in June 2002, Clarke M. Williams had a year to
year employment agreement with the Company providing for, among other things, a
minimum annual salary of $436,800, participation in all of the Company's
employee benefit plans and use of the Company's aircraft. The employment
agreement did not provide for any death benefits (although substantial benefits
were paid to Mr. Williams' beneficiaries under the Company's benefit plans and
life insurance policies). If Mr. Williams had been terminated without cause or
resigned under certain specified circumstances, including following any change
in control of the Company, he would have been entitled to receive certain
severance benefits, including (i) a lump sum cash payment equal to three times
the sum of his annual salary and bonus, (ii) any such
22
additional cash payments as may be necessary to compensate him for any federal
excise taxes imposed upon contingent change in control payments, (iii) continued
participation in the Company's welfare benefit plans for three years and (iv)
continued use of the Company's aircraft for one year on terms comparable to
those previously in effect.
The Company also has agreements with each of its executive officers
which entitle any such officer who is terminated without cause or resigns under
certain specified circumstances within three years of any change in control of
the Company to (i) receive a lump sum cash severance payment equal to three
times the sum of such officer's annual salary and bonus, (ii) receive any such
additional cash payments as may be necessary to compensate him or her for any
federal excise taxes imposed upon contingent change in control payments and
(iii) continue to receive certain welfare benefits for three years.
Under the above-referenced agreements, a "change in control" of the
Company would be deemed to occur upon (i) any person (as defined in the
Securities Exchange Act of 1934) becoming the beneficial owner of 30% or more of
the outstanding Common Shares or 30% or more of combined voting power of the
Company's voting securities, (ii) a majority of the Company's directors being
replaced, (iii) consummation of certain mergers, substantial asset sales or
similar business combinations, or (iv) approval by the shareholders of a
liquidation or dissolution of the Company.
In the event of a change in control of the Company, the Company's
benefit plans provide, among other things, that all restrictions on outstanding
time-vested and performance-based restricted stock will lapse, all outstanding
stock options will become fully exercisable, all performance shares will be
earned, phantom stock units credited under the Company's supplemental defined
contribution plan will be converted into cash and held in trust, and
post-retirement health and life insurance benefits will vest with respect to
certain current and former employees. In addition, participants in the
Supplemental Pension Plan who are terminated without cause or resign under
certain specified circumstances within three years of the change in control will
receive a cash payment equal to the present value of their plan benefits (after
providing age and service credits of up to three years), determined in
accordance with actuarial assumptions specified in the plan.
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Common Shares with the cumulative total return of the S&P 500 Index and the S&P
Integrated Telecommunications Services Index (the "S&P Telecom Index") for the
period from December 31, 1997 to December 31, 2002, in each case assuming (i)
the investment of $100 on January 1, 1998 at closing prices on December 31, 1997
and (ii) reinvestment of dividends. The data was provided by Value Line, Inc.
23
(PERFORMANCE GRAPH)
December 31,
------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
-------- -------- -------- -------- -------- --------
CenturyTel ........................ $ 100.00 $ 204.41 $ 216.12 $ 157.91 $ 145.82 $ 131.53
S&P 500 Index ..................... 100.00 126.71 151.56 136.20 118.43 90.76
S&P Telecom Index(1) .............. 100.00 149.77 163.82 103.92 90.84 62.30
----------
(1) The S&P Telecom Index consists of ALLTEL Corporation, AT&T Corporation,
BellSouth Corporation, Citizens Communications Company, Qwest
Communications International Inc., SBC Communications Inc., Sprint
Corp. FON Group, Verizon Communications Inc., and the Company. The
index is publicly available.
CERTAIN TRANSACTIONS
The Company paid fees of approximately $1,039,480 to The Boles Law Firm
for legal services rendered to the Company in 2002. William R. Boles, Jr., a
director of the Company since 1992, is President and a director and practicing
attorney with such firm, which has provided legal services to the Company since
1968.
During 2002, the Company paid approximately $665,832 to a real estate
firm owned by the brother of Harvey P. Perry, a director and executive officer
of the Company. In exchange for such payments (approximately $75,000 of which
was used to compensate subcontractors and vendors and to recoup other
out-of-pocket costs), such firm provided a variety of services with respect to
numerous real estate transactions in several states, including locating and
analyzing properties suitable for purchase or lease and negotiating purchase or
lease terms with the land owners.
During 2002, the Company purchased approximately $758,913 of electrical
contracting services from a firm owned by Johnny Hebert, a director of the
Company.
During 2002, the Company paid Rickey Lowery approximately $77,726 in
salary and bonus for serving as a lead database analyst technician. Mr. Lowery
has been an employee of the Company since 1989 and has been the son-in-law of
Harvey P. Perry, a director and executive officer of the Company, since 1990.
During 2002, the Company paid Martha Amman approximately $74,731 in
salary and bonus for serving as Manager, Employment and Staffing. Ms. Amman is
the sister of Harvey P. Perry, a director and executive officer of the Company,
and has been an employee of the Company since 1998.
24
During 2002, the Company paid H. Parnell Perry, Jr. approximately
$65,562 in salary and bonus for serving as a technician. Mr. Perry is the son of
Harvey P. Perry, a director and executive officer of the Company, and has been
an employee of the Company since 1988.
During 2002, the Company paid Paul Hargrove approximately $62,898 in
salary and bonus for serving as a manager in the Corporate Tax Department. Mr.
Hargrove is the son of R.L. Hargrove, Jr., a director of the Company, and was
employed by the Company between 1983 and December 31, 2002.
During 2002, the Company paid Rhonda Woodard approximately $74,110 in
salary and bonus for serving as Director of Customer Service Centers. Ms.
Woodard is the sister-in-law of David Cole, an executive officer of the Company,
and has been an employee of the Company since 1991.
In connection with the Company's negotiations to obtain a controlling
interest in SkyComm Technologies Corporation ("SkyComm"), in November 2002 the
Company made a $375,000 bridge loan to an affiliate of SkyComm, which in turn
used a portion of the loan proceeds to repay a $200,000 interest-bearing loan
made to it in October 2002 by Ernest Butler, Jr., then a director of the
Company. Upon the Company's funding of the initial installment of its investment
in SkyComm on December 31, 2002, SkyComm's affiliate paid I. E. Butler
Securities Inc. ("Butler Securities") $160,000, plus reimbursement of
out-of-pocket expenses, for investment banking services rendered in connection
with assisting SkyComm to raise capital. If SkyComm receives additional future
funding from the Company or other investors identified by Butler Securities,
Butler Securities will be entitled to additional payments. Mr. Butler, together
with his spouse and children, owns 100% of Butler Securities, and is also the
Chairman and President thereof. Mr. Butler, age 74, resigned from the Board
effective December 31, 2002. See "Corporate Governance-Recent Developments."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Securities Exchange Act of 1934 requires the Company's executive
officers and directors, among others, to file certain beneficial ownership
reports with the SEC. During 2002, Harvey P. Perry, a director and executive
officer of the Company, and C. G. Melville, Jr., a director of the Company, each
inadvertently filed one report late.
REPORT OF AUDIT COMMITTEE
ACTIVITIES OF COMMITTEE
The Audit Committee of the Board of Directors is currently composed of
five directors, all of whom the Board believes are independent under the rules
of the New York Stock Exchange.
Management is responsible for the Company's internal controls and the
financial reporting process. The Company's independent accountants are
responsible for performing an independent audit of the Company's consolidated
financial statements in accordance with generally accepted auditing standards
and to issue a report thereon. The Committee's responsibility is to monitor and
oversee these processes.
25
In this context, the Committee has met and held discussions with the
Company's management, its internal auditors and its independent accountants,
KPMG LLP. Management represented to the Committee that the Company's
consolidated financial statements were prepared in accordance with generally
accepted U.S. accounting principles, and the Committee has reviewed and
discussed the consolidated financial statements with management and KPMG. The
Committee discussed with KPMG matters required to be discussed by Statement on
Auditing Standards No. 61 (Communication with Audit Committees).
KPMG also provided to the Committee the written disclosures required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees). The Committee discussed with KPMG that firm's independence, and
considered the effects that the provision of non-audit services may have on
KPMG's independence.
Based on and in reliance upon the reviews and discussions referred to
above, and subject to the limitations on the role and responsibilities of the
Committee referred to in its charter, the Committee recommended that the Board
of Directors include the audited consolidated financial statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
OTHER INFORMATION
KPMG has acted as independent certified public accountants for the
Company since 1977, and has been selected by the Board to serve again in that
capacity for 2003. The following table lists the aggregate fees and costs billed
by KPMG and its affiliates to the Company and its subsidiaries for the 2001 and
2002 services identified below:
Amount Billed
---------------------------------------
2001 2002
----------- -----------
Audit Fees (1).......................................................... $ 1,363,000 $ 1,641,000
Audit-Related Fees...................................................... 137,000 129,000
Tax Fees................................................................ 1,069,000 (2) 1,869,000 (3)
All Other Fees.......................................................... 1,827,000 (4) 21,000
----------- -----------
Total $ 4,396,000 $ 3,660,000
----------- -----------
----------
(1) Relates to services rendered in connection with auditing the Company's
annual consolidated financial statements for each applicable year and
reviewing the Company's quarterly financial statements for such year,
as well as auditing the financial statements of several of the
Company's telephone subsidiaries, cellular partnerships and benefit
plans; also includes services rendered in connection with reviewing the
Company's registration statements and issuing comfort letters.
(2) Of this aggregate amount, approximately $255,000 is attributable to
fees and costs associated with tax research and planning associated
with proposed transactions and the balance is attributable to assisting
management implement an income tax system, and general income tax
planning and compliance.
(3) Of this aggregate amount, approximately $831,000 is attributable to
fees and costs associated with the Company's divestiture of its
wireless business and the balance is attributable to assisting
management implement an income tax system; tax research and planning
associated with proposed transactions; and general income tax planning
and compliance.
(4) Of this aggregate amount, $1,231,000 is attributable to fees and costs
paid for services provided prior to February 7, 2001 by the consulting
group of KPMG LLP in connection with the development and implementation
of the Company's new billing system. This consulting group was spun off
from KPMG LLP on February 7, 2001.
26
The Audit Committee has considered whether the provision of KPMG's
non-audit services is compatible with maintaining KPMG's independence.
If you would like additional information on the responsibilities of the
Audit Committee, please refer to its charter, which is filed as an exhibit to
the Company's Annual Report on Form 10-K for the year ended December 31, 2002
and is posted on the Company's website at www.centurytel.com.
Submitted by the Audit Committee of the Board of Directors.
James B. Gardner R. L. Hargrove, Jr.
(Chairman) (1) F. Earl Hogan (3)
Virginia Boulet C. G. Melville, Jr. (4)
Calvin Czeschin (2) Joseph R. Zimmel (5)
----------
(1) Chairman of the Committee since January 1, 2003.
(2) Chairman and member of the Committee through December 31, 2002.
(3) Will retire effective upon election of his successor at the Meeting.
(4) Member of the Committee through December 31, 2002.
(5) Member of the Committee since January 1, 2003.
OTHER MATTERS
QUORUM AND VOTING OF PROXIES
The presence, in person or by proxy, of a majority of the total voting
power of the Voting Shares is necessary to constitute a quorum to organize the
Meeting. Shareholders voting or abstaining from voting on any issue will be
counted as present for purposes of constituting a quorum to organize the
Meeting.
If a quorum is present, directors will be elected by plurality vote
and, as such, withholding authority to vote in the election of directors will
not affect whether the proposed nominees named herein are elected.
Under the rules of the New York Stock Exchange, brokers who hold shares
in street name for customers may vote in their discretion on the election of
directors when they have not received voting instructions from beneficial
owners. If brokers who do not receive voting instructions do not exercise such
discretionary voting power (a "broker non-vote"), shares that are not voted will
be treated as present for purposes of constituting a quorum to organize the
Meeting but not present for purposes of voting to elect directors. Because the
election of directors must be approved by plurality vote, broker non-votes with
respect to the election of directors will not affect the outcome of the voting.
27
Voting Shares represented by all properly executed proxies received in
time for the Meeting will be voted at the Meeting. A proxy may be revoked at any
time before it is exercised by filing with the Secretary of the Company a
written revocation or a duly executed proxy bearing a later date, or by
attending the Meeting and voting in person. Unless revoked, all properly
executed proxies will be voted as specified and, if no specifications are made,
will be voted in favor of the proposed nominees.
Management has not timely received any notice that a shareholder
desires to present any matter for action at the Meeting in accordance with the
Company's advance notification bylaw (which is described below), and is
otherwise unaware of any matter for action by shareholders at the Meeting other
than the election of directors. The enclosed proxy and voting instruction cards,
however, will confer discretionary voting authority with respect to any other
matter that may properly come before the Meeting. It is the intention of the
persons named therein to vote in accordance with their best judgment on any such
matter.
A representative of KPMG LLP, the Company's independent certified
public accountants, is expected to attend the Meeting and be available to
respond to appropriate questions.
SHAREHOLDER NOMINATIONS AND PROPOSALS
In order to be eligible for inclusion in the Company's 2004 proxy
materials pursuant to the federal proxy rules, any shareholder proposal to take
action at such meeting must be received at the Company's principal executive
offices by December 2, 2003, and must comply with applicable federal proxy
rules. In addition, the Company's advance notification bylaw requires
shareholders to furnish timely written notice of their intent to nominate a
director or bring any other matter before a shareholders' meeting, whether or
not they wish to include their proposal in the Company's proxy materials. In
general, notice must be received by the Secretary of the Company between
November 10, 2003 and February 8, 2004 and must contain specified information
concerning, among other things, the matters to be brought before such meeting
and concerning the shareholder proposing such matters. (If the date of the 2004
annual meeting is more than 30 days earlier or later than May 8, 2004, notice
must be received by the Secretary of the Company within 15 days of the earlier
of the date on which notice of such meeting is first mailed to shareholders or
public disclosure of the meeting date is made.) The Company will be permitted to
disregard any nomination or submission of any other matter that fails to comply
with these bylaw procedures.
ANNUAL REPORT AND FINANCIAL INFORMATION
Appendix A includes the Annual Financial Statements and Review of
Operations of the Company in the form in which they were filed with the
Securities and Exchange Commission on March 27, 2003 as part of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. The Company
expects to mail a copy of its summary annual report for the year ended December
31, 2002 on or about the date that it mails this Proxy Statement to its
shareholders.
28
You may obtain a copy of the Company's Form 10-K without charge by
writing to Harvey P. Perry, Secretary, CenturyTel, Inc., 100 CenturyTel Drive,
Monroe, LA 71203, or by visiting the Company's website at www.centurytel.com.
Neither Appendix A nor the Company's summary annual report is to be
regarded as proxy soliciting material.
By Order of the Board of Directors
/s/ HARVEY P. PERRY
Harvey P. Perry
Secretary
Dated: March 31, 2003
29
APPENDIX A
TO PROXY STATEMENT
CENTURYTEL, INC.
ANNUAL FINANCIAL STATEMENTS
AND
REVIEW OF OPERATIONS
A-1
INDEX TO FINANCIAL INFORMATION
DECEMBER 31, 2002
The materials included in this Appendix A are excerpted from Items 7,
7A and 8 of the Company's Annual Report on Form 10-K for the year ended December
31, 2002, which the Company filed with the Securities and Exchange Commission on
March 27, 2003. Reference is made to the Form 10-K for additional information
about the business and operations of the Company.
Page
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................................... A-3
Quantitative and Qualitative Disclosure About Market Risks.................................................. A-37
Financial Statements and Supplementary Data:
Report of Management............................................................................. A-39
Independent Auditors' Report..................................................................... A-40
Consolidated Statements of Income................................................................ A-41
Consolidated Statements of Comprehensive Income.................................................. A-43
Consolidated Balance Sheets...................................................................... A-44
Consolidated Statements of Cash Flows............................................................ A-45
Consolidated Statements of Stockholders' Equity.................................................. A-46
Notes to Consolidated Financial Statements....................................................... A-47
Consolidated Quarterly Income Statement Information.............................................. A-79
A-2
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.
A-3
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.
A-4
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
A-5
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.
A-6
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
=========== =========== ===========
A-7
Year ended December 31, 2002 2001 2000
-------- -------- --------
(Dollars, except per share
amounts, in thousands)
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
A-8
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 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. 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
A-9
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:
A-10
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
A-11
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
A-12
$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 non-regulated 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.
A-13
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.
A-14
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.
A-15
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.
A-16
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.
A-17
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
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(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
A-19
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
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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
A-21
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
A-22
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.
A-23
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
A-24
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. With respect to the Company's fixed-rate debt obligations,
market risk is defined as the potential change in the fair value of the
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
A-25
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.
A-26
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.
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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
A-28
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.
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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
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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:
A-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.
A-32
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
A-33
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.
A-34
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
A-35
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.
A-36
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. With respect to the Company's fixed-rate debt obligations,
market risk is defined as the potential change in the fair value of the
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.
A-37
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.
A-38
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
A-39
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CenturyTel, Inc.:
We have audited the accompanying consolidated balance sheets of
CenturyTel, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, comprehensive income, cash flows and
stockholders' equity for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements 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.
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
A-40
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
=============== =============== ===============
See accompanying notes to consolidated financial statements.
A-41
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.
A-42
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.
A-43
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.
A-44
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.
A-45
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.
A-46
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.
A-47
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
A-48
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
A-49
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.
A-50
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,
A-51
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.
A-52
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:
A-53
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
A-54
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.
A-55
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
============= =============
A-56
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
A-57
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
============= =============
A-58
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
A-59
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
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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
A-61
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.
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(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
=========== ===========
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(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.
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(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
============= ============= =============
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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.
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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.
A-67
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
A-68
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
========== ========== ==========
A-69
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.
A-70
("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:
A-71
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
A-72
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.
A-73
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:
A-74
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.
A-75
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 non-regulated 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.
A-76
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.
A-77
(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.
A-78
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.
********
A-79
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ADD 6 C 1234567890 J N T
(BARCODE) (BARCODE)
[ ] Mark this box with an X
if you have made changes
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--------------------------------------------------------------------------------
ANNUAL MEETING PROXY CARD
--------------------------------------------------------------------------------
A. TO ELECT FOUR CLASS III DIRECTORS
1. The Board of Directors recommends a vote FOR the listed nominees.
FOR WITHHOLD
01 - Harvey P. Perry [ ] [ ]
02 - Jim D. Reppond [ ] [ ]
03 - Fred R. Nichols [ ] [ ]
04 - Joseph R. Zimmel [ ] [ ]
--------------------------------------------------------------------------------
KEY FOR EXPLANATION OF VOTING RIGHTS
TVS - TOTAL VOTING SECURITIES, INCLUDING DIVIDEND REINVESTMENT
AND/OR EMPLOYEE STOCK PURCHASE PLAN(S)
1VT - ONE-VOTE TOTAL
10VT - TEN-VOTE TOTAL
VOTE - TOTAL VOTES TO WHICH YOU ARE ENTITLED
NOTE: TO DETERMINE THE TOTAL NUMBER OF 10-VOTE
SHARES, DIVIDE THE 10VT AMOUNT BY TEN (10).
--------------------------------------------------------------------------------
B. ISSUES
2. In their discretion to vote upon such other business as may properly come
before the Meeting.
C. AUTHORIZED SIGNATURES - SIGN HERE - THIS SECTION MUST BE COMPLETED FOR YOUR
INSTRUCTIONS TO BE EXECUTED.
Please sign exactly as name appears on the certificate or certificates
representing shares to be voted by this proxy. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons.
Signature 1 - Please keep Signature 2 - Please keep Date (mm/dd/yyyy)
signature within the box signature within the box
------------------------- ------------------------- ----------------------------
/ /
------------------------- ------------------------- ----------------------------
1UPX HHH PPPP 001761 +
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PROXY - CENTURYTEL, INC.
--------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Glen F. Post, III or Harvey P.
Perry, or either of them, proxies for the undersigned, with full power of
substitution, to represent the undersigned and to cast the number of votes
attributable to all of the shares of common stock and voting preferred stock
(collectively, the "Voting Shares") of CenturyTel, Inc. (the "Company") that the
undersigned is entitled to vote at the annual meeting of shareholders of the
Company to be held on May 8, 2003, and at any and all adjournments thereof (the
"Meeting").
The Board of Directors recommends that you vote FOR the nominees and the
proposals listed on the reverse side hereof. In addition to serving as a Proxy,
this card will also serve as instructions to Computershare Investor Services,
LLC(the "Agent") to cast in the manner designated on the reverse side hereof the
number of votes allocable to the undersigned, if any, that are attributable to
shares of the Company's common stock held as of March 17, 2003 in the name of
the Agent and credited to any plan account of the undersigned in accordance with
the Company's dividend reinvestment plan or employee stock purchase plans. Upon
timely receipt of this Proxy, properly executed, all of the votes attributable
to your Voting Shares, including any held in the name of the Agent, will be
voted as specified. If this Proxy is properly executed but no specific
directions are given, all of your votes will be voted for the nominees and the
proposals.
(Please See Reverse Side)