UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7784
CENTURYTEL, INC.
(Exact name of Registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 CenturyTel Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (318) 388-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
Berlin Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Berlin Stock Exchange
Corporate Units issued May 2002 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Stock Options
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark if the Registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates (affiliates
being for these purposes only directors, executive officers and holders of more
than five percent of the Company's outstanding voting securities) was $5.0
billion as of June 30, 2003. As of February 27, 2004, there were 142,261,540
shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement to be furnished in connection with
the 2004 annual meeting of shareholders are incorporated by reference in Part
III of this Report.
PART I
Item 1. Business
General. CenturyTel, Inc. ("CenturyTel") is a regional integrated
communications company engaged primarily in providing local exchange telephone
services. For the year ended December 31, 2003, local exchange telephone
operations provided 87% of the consolidated revenues from continuing operations
of CenturyTel and its subsidiaries (the "Company"). All of the Company's
operations are conducted within the continental United States.
At December 31, 2003, the Company's local exchange telephone subsidiaries
operated approximately 2.4 million telephone access lines, primarily in rural,
suburban and small urban areas in 22 states, with over 70% of these lines
located in Wisconsin, Missouri, Alabama, Arkansas and Washington. According to
published sources, the Company is the eighth largest local exchange telephone
company in the United States based on the number of access lines served. For
more information, see "Telephone Operations."
The Company also provides long distance, Internet access, fiber transport,
competitive local exchange carrier, security monitoring, and other
communications and business information services in certain local and regional
markets. For more information, see "Other Operations."
Recent acquisitions. In June 2003, the Company acquired the assets of
Digital Teleport, Inc., a regional communications company providing wholesale
data transport services to other communications carriers over its fiber optic
network located in Missouri, Arkansas, Oklahoma and Kansas, for $39.4 million
cash. In addition, in December 2003, the Company acquired additional fiber
transport assets in Arkansas, Missouri and Illinois from Level 3 Communications,
Inc. for approximately $15.8 million cash. For additional information, see
"Other Operations - Fiber Transport."
On August 31, 2002, the Company purchased assets utilized in serving
approximately 350,000 telephone access lines in the state of Missouri from
Verizon Communications, Inc. ("Verizon") for approximately $1.179 billion cash.
On July 1, 2002, the Company purchased assets utilized in serving approximately
300,000 telephone access lines in the state of Alabama from Verizon for
approximately $1.022 billion cash. The assets purchased in these transactions
included (i) the franchises authorizing the provision of local telephone
service, (ii) related property and equipment comprising Verizon's local exchange
operations in predominantly rural markets throughout Alabama and Missouri and
(iii) Verizon's assets used to provide digital subscriber line ("DSL") and other
high speed data services 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 in these areas.
On February 28, 2002, the Company purchased the fiber network and customer
base of KMC Telecom's operations in Monroe and Shreveport, Louisiana which
allows the Company to offer broadband and competitive local exchange services to
customers in these markets.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired assets utilized to provide local exchange telephone service to over
490,000 telephone access lines 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 assets 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
assets throughout Missouri for approximately $297 million cash. 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. In the fourth quarter of 2003,
the Company purchased an additional 24.3% interest in Spectra for
$32.4 million in cash.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related assets 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 assets
throughout Wisconsin for approximately $172 million in cash. The Company
owns 89% of TelUSA, which was organized to acquire and operate these
Wisconsin properties. At closing, the Company made an equity investment
in TelUSA of approximately $37.8 million and financed substantially all
of the remainder of the purchase price.
In August 2000, the Company acquired the assets of CSW Net, Inc., a
regional Internet service provider that offers dial-up and dedicated Internet
access, and web site and domain hosting to more than 18,000 customers in 28
communities in Arkansas.
The Company continually evaluates the possibility of acquiring additional
communications assets in exchange for cash, securities or both, and at any given
time may be engaged in discussions or negotiations regarding additional
acquisitions. The Company generally does not announce its acquisitions or
dispositions until it has entered into a preliminary or definitive agreement.
Although the Company's primary focus will continue to be on acquiring interests
that are proximate to its properties or that serve a customer base large enough
for the Company to operate efficiently, other communications interests may also
be acquired and these acquisitions could have a material impact upon the
Company.
Recent Dispositions. On August 1, 2002, the Company sold substantially all
of its wireless operations principally to an affiliate of ALLTEL Corporation
("Alltel") for an aggregate of approximately $1.59 billion in cash. In
connection with this transaction, the Company divested its (i) interests in its
majority-owned and operated cellular systems, which at June 30, 2002 served
approximately 783,000 customers and had access to approximately 7.8 million pops
(the estimated population of licensed cellular telephone markets multiplied by
the Company's proportionate equity interest in the licensed operators thereof),
(ii) minority cellular equity interests representing approximately 1.8 million
pops at June 30, 2002, and (iii) licenses to provide PCS covering 1.3 million
pops in Wisconsin and Iowa. As a result, the Company's wireless operations are
reflected as discontinued operations in the Company's accompanying consolidated
financial statements.
In the second quarter of 2001, the Company sold to Leap Wireless
International, Inc. 30 PCS operating licenses for an aggregate of $205 million.
The Company received approximately $118 million of the purchase price in cash at
closing and collected the remainder in installments through the fourth quarter
of 2001.
In June 1999, the Company sold all of the operations of its Brownsville
and McAllen, Texas, cellular systems to Western Wireless Corporation for
approximately $96 million cash. The Company received its proportionate share of
the sale proceeds of approximately $45 million after-tax.
In May 1999, the Company sold substantially all of its Alaska telephone
and wireless operations for approximately $300 million after-tax. In February
2000, the Company sold its interest in Alaska RSA #1, which completed the
Company's divestiture of its Alaska operations.
Where to find additional information. The Company makes available free of
charge on its website (www.centurytel.com) filings made with the Securities and
Exchange Commission ("SEC") on Forms 10-K, 10-Q and 8-K as soon as reasonably
practicable after such filings are made with the SEC.
The Company also makes available free of charge on its website its
Corporate Governance Guidelines, its Corporate Compliance Program and the
charters of its audit, compensation, risk evaluation, and nominating and
corporate governance committees. The Company will furnish printed copies of
these materials upon the request of any shareholder.
Other. As of December 31, 2003, the Company had approximately 6,720
employees, approximately 1,800 of whom were members of 13 different bargaining
units represented by the International Brotherhood of Electrical Workers and the
Communications Workers of America. Relations with employees continue to be
generally good.
CenturyTel was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous 15 to
20 years. CenturyTel's principal executive offices are located at 100 CenturyTel
Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.
TELEPHONE OPERATIONS
According to published sources, the Company is the eighth largest local
exchange telephone company in the United States, based on the approximately 2.4
million access lines it served at December 31, 2003. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominantly rural, suburban and small urban
markets in 22 states. The following table sets forth certain information with
respect to the Company's access lines as of December 31, 2003 and 2002.
December 31, 2003 December 31, 2002
- -----------------------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
- -----------------------------------------------------------------------------------------
Wisconsin (1) 478,134 20% 490,116 21%
Missouri (2) 472,884 20 478,207 20
Alabama 283,501 12 289,015 12
Arkansas 264,787 11 268,220 11
Washington 186,329 8 188,733 8
Michigan 111,104 5 112,713 5
Louisiana 103,726 4 104,408 4
Colorado 95,726 4 96,799 4
Ohio 82,995 3 84,452 4
Oregon 75,530 3 76,751 3
Montana 64,863 3 65,666 3
Texas 46,397 2 48,931 2
Minnesota 30,469 1 30,930 1
Tennessee 27,084 1 27,365 1
Mississippi 24,420 1 24,156 1
New Mexico 6,512 * 6,565 *
Idaho 5,974 * 5,976 *
Wyoming 5,669 * 5,494 *
Indiana 5,401 * 5,468 *
Iowa 2,082 * 2,099 *
Arizona 2,000 * 1,986 *
Nevada 531 * 514 *
- -----------------------------------------------------------------------------------------
2,376,118 100% 2,414,564 100%
=========================================================================================
* Represents less than 1%.
(1) As of December 31, 2003 and 2002, approximately 59,130 and 61,060,
respectively, of these lines were owned and operated by CenturyTel's
89%-owned affiliate.
(2) As of December 31, 2002, approximately 130,740 of these lines were owned
and operated by an affiliate of which CenturyTel owned 75.7%.
As indicated in the following table, the Company has experienced growth in
its telephone operations over the past five years, a substantial portion of
which was attributable to the third quarter 2002 and third quarter 2000
acquisitions of telephone properties from Verizon and the expansion of services.
Year ended or as of December 31,
- ----------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------
(Dollars in thousands)
Access lines 2,376,118 2,414,564 1,797,643 1,800,565 1,272,867
% Residential 76% 76 76 76 75
% Business 24% 24 24 24 25
Operating revenues $ 2,071,980 1,733,592 1,505,733 1,253,969 1,126,112
Capital expenditures $ 317,357 319,536 351,010 275,523 233,512
- ----------------------------------------------------------------------------------------
As discussed further below, the Company's access lines (exclusive of
acquisitions) have declined in recent years, and are expected to continue to
decline. To offset these declines, the Company hopes to expand its telephone
operations by (i) acquiring additional telephone properties, (ii) providing
service to new customers, (iii) increasing network usage, (iv) further
penetrating its existing customer base with existing services and (v) providing
additional services which may be made possible by advances in technology,
improvements in the Company's infrastructure and the bundling of integrated
services. See "-Services" and "-Regulation and Competition."
Services
The Company's local exchange telephone subsidiaries derive revenue from
providing (i) local telephone services, (ii) network access services and (iii)
other related services. The following table reflects the percentage of telephone
operating revenues derived from these respective services:
2003 2002 2001
- ---------------------------------------------------------------------------
Local service 36.4% 34.9 32.6
Network access 54.8 56.1 58.1
Other 8.8 9.0 9.3
- ---------------------------------------------------------------------------
100.0% 100.0 100.0
===========================================================================
Local service. Local service revenues are derived from providing local
exchange telephone services in the Company's service areas, including basic
dial-tone service through the Company's regular switched network and local
private line services. Access lines declined 1.6% in 2003, 1.1% in 2002
(exclusive of the 2002 Verizon acquisitions) and 0.2% in 2001. The Company
believes these declines in the number of access lines were primarily due to
general economic conditions in the Company's markets and the displacement of
traditional wireline telephone services by other competitive service providers,
including the Company's DSL product offering. Even as the economy recovers, the
Company believes that any rebound in access lines will be limited by continued
access line losses caused primarily by the impact of other competitive services.
Based on current conditions, the Company expects access lines to decline between
1 and 2% for 2004.
The use of digital switches, high-speed data circuits and related software
has been an important component of the Company's growth strategy because it
allows the Company to offer enhanced voice services (such as call forwarding,
conference calling, caller identification, selective call ringing and call
waiting) and data services (such as data private line, digital subscriber line,
frame relay and local area/wide area networks) and to thereby increase
utilization of existing access lines. In 2003 the Company continued to expand
the availability of enhanced services offered in certain service areas.
Network access. Network access revenues primarily relate to (i) services
provided by the Company to long distance carriers, wireless carriers and other
carriers and customers in connection with the use of the Company's facilities to
originate and terminate their interstate and intrastate voice and data
transmissions and (ii) the receipt of universal support funds which allows the
Company to recover a portion of its costs under federal and state cost recovery
mechanisms (see - "Regulation and Competition - High-cost support funds" below).
Certain of the Company's interstate network access revenues are based on
tariffed access charges prescribed by the Federal Communications Commission
("FCC"); the remainder of such revenues are derived under revenue sharing
arrangements with other local exchange carriers ("LECs") administered by the
National Exchange Carrier Association ("NECA"), a quasi-governmental non-profit
organization formed by the FCC in 1983 for such purposes.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on tariffed access charges, which are subject to state regulatory
commission approval. Additionally, certain of the Company's intrastate network
access revenues, along with intrastate and intra-LATA (Local Access and
Transport Areas) long distance revenues, are derived through revenue sharing
arrangements with other LECs.
AT&T filed a petition with the FCC in December 2003 seeking forbearance
from enforcing certain provisions of the Telecommunications Act of 1996 that
allows LECs to file access tariffs on a streamlined basis and, if certain
criteria are met, deems those tariffs lawful. Certain of the Company's
telephone subsidiaries file interstate tariffs directly with the FCC using this
streamlined filing approach. As a result of recent court rulings, tariffs that
have been "deemed lawful" in effect nullify an interexchange carrier's ability
to seek refunds should the earnings from the tariffs ultimately result in
earnings above the authorized rate of return prescribed by the FCC. The Company
has not recognized any revenues in excess of the authorized rate of return
applicable to those carriers who historically have requested refunds pending
resolution of the "deemed lawful" tariff issue. The Company will continue to
monitor the status of the AT&T petition with the FCC. Although it is possible
the Company could benefit favorably upon resolution of this issue, there is no
assurance that a favorable outcome will occur.
Other. Other telephone revenues include revenues related to (i) leasing,
selling, installing, maintaining and repairing customer premise
telecommunications equipment and wiring, (ii) providing billing and collection
services for long distance companies and (iii) participating in the publication
of local directories.
Certain large communications companies for which the Company currently
provides billing and collection services continue to indicate their desire to
reduce their billing and collection expenses, which has resulted and may
continue to result in reductions of the Company's billing and collection
revenues. In addition, the Company expects its 2004 directory revenues to
decline from 2003 levels due to reduced revenues associated with the Verizon
properties acquired in 2002.
For further information on regulatory, technological and competitive
changes that could impact the Company's revenues, see "-Regulation and
Competition" and "Special Considerations."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") or the Rural Telephone Bank
("RTB"). The RUS has made long-term loans to telephone companies since 1949 for
the purpose of improving telephone service in rural areas. The RUS continues to
make new loans at interest rates that range from 5% to 7% based on borrower
qualifications and the cost of funds to the United States government. The RTB,
established in 1971, makes long-term loans at interest rates based on its
average cost of funds as determined by statutory formula (which ranged from 5.7%
to 6.1% for the RTB's fiscal year ended September 30, 2003), and in some cases
makes loans concurrently with RUS loans. Approximately 25% of the Company's
telephone plant is pledged to secure obligations of the Company's telephone
subsidiaries to the RUS and RTB. The Company's telephone subsidiaries that are
indebted to government agencies generally may not loan or advance any funds to
CenturyTel, but may pay dividends if certain financial covenants are met.
For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.
Regulation and Competition
Traditionally, LECs operated as regulated monopolies having the exclusive
right and responsibility to provide local telephone services. (These LECs are
sometimes referred to below as "incumbent LECs" or "ILECs"). Consequently, most
of the Company's intrastate telephone operations have traditionally been
regulated extensively by various state regulatory agencies (generally called
public service commissions or public utility commissions) and its interstate
operations have been regulated by the FCC. As discussed in greater detail below,
passage of the Telecommunications Act of 1996 (the "1996 Act"), coupled with
state legislative and regulatory initiatives and technological changes,
fundamentally altered the telephone industry by reducing the regulation of LECs
and attracting a substantial increase in the number of competitors and capital
invested in existing and new services. CenturyTel anticipates that these trends
towards reduced regulation and increased competition will continue.
State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions which typically have the power to grant and revoke
franchises authorizing companies to provide communications services. Most
commissions have traditionally regulated pricing through "rate of return"
regulation that focuses on authorized levels of earnings by LECs. Most of these
commissions also (i) regulate the purchase and sale of LECs, (ii) prescribe
depreciation rates and certain accounting procedures, (iii) oversee
implementation of several federal telecommunications laws and (iv) regulate
various other matters, including certain service standards and operating
procedures.
In recent years, state legislatures and regulatory commissions in most of
the 22 states in which the Company operates have either reduced the regulation
of LECs or have announced their intention to do so, and it is expected that this
trend will continue. Wisconsin, Missouri, Alabama, Arkansas and several other
states have implemented laws or rulings which require or permit LECs to opt out
of "rate of return" regulation in exchange for agreeing to alternative forms of
regulation which typically permit the LEC greater freedom to establish local
service rates in exchange for agreeing not to charge rates in excess of
specified caps. As discussed further below, subsidiaries operating over half of
the Company's access lines in various states have agreed to be governed by
alternative regulation plans, and the Company continues to explore its options
for similar treatment in other states. The Company believes that reduced
regulatory oversight of certain of the Company's telephone operations may allow
the Company to offer new and competitive services faster than under the
traditional regulatory process. For a discussion of legislative, regulatory and
technological changes that have introduced competition into the local exchange
industry, see "-Developments Affecting Competition."
Alternative regulation plans govern some or all of the access lines
operated by the Company in Wisconsin, Missouri, Alabama and Arkansas, which are
the Company's four largest state markets. The following summary describes the
alternative regulation plans applicable to the Company in these states.
o Approximately 70% of the Company's Wisconsin access lines are regulated
under various alternative regulation plans. Each of these alternative regulation
plans has a five-year term and permits the Company to adjust local rates within
specified parameters if it meets certain quality-of-service and
infrastructure-development commitments. These plans also include initiatives
designed to promote competition. The Company's Wisconsin access lines acquired
in mid-2000 continue to be regulated under "rate of return" regulation.
o All of the Company's Missouri LECs are regulated under a price-cap
regulation plan (effective in 2002) whereby basic service rates are adjusted
annually based on an inflation-based factor; non-basic services may be increased
up to 8% annually. The plan also allows LECs to rebalance local basic service
rates up to four times in the first four years of such regulation as a result of
access rate or toll reductions.
o Since 1995, the Company's Alabama telephone properties acquired from
Verizon in 2002 have been subject to an alternative regulation plan. Under this
plan, local rates were frozen initially for five years, after which time such
rates can be raised by an amount equal to consumer price index increases less
1%; non-basic service rates can be increased up to 10% per year.
o In January 2004, the Company's Alabama telephone properties and the
other independent LECs in the state filed comments recommending that the Alabama
Public Service Commission ("Alabama PSC") adopt an alternative regulation plan,
with modifications, proposed by BellSouth. This plan would allow exchanges
identified as competitive exchanges full pricing flexibility for all services.
Exchanges considered less competitive in nature would have the flexibility to
increase basic rates up to 5% a year and increase non-basic rates up to 10% a
year. The Company is currently awaiting a decision by the Alabama PSC concerning
this proposal.
o The Company's Arkansas LECs, excluding the properties acquired from
Verizon in 2000, are regulated under an alternative regulation plan adopted in
1997, which initially froze basic local and access rates for three years, after
which time such rates can be adjusted based on an inflation-based factor. Other
local rates can be adjusted without commission approval; however, such rates
are subject to commission review if certain petition criteria are met.
Notwithstanding the movement toward alternative regulation, LECs operating
approximately 41% of the Company's total access lines continue to be subject to
"rate of return" regulation for intrastate purposes. These LECs remain subject
to the powers of state regulatory commissions to conduct earnings reviews and
adjust service rates, either of which could lead to revenue reductions.
FCC regulation. The FCC regulates interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other communications
companies by the Company for use of its network in connection with the
origination and termination of interstate voice and data transmissions.
Additionally, the FCC has prescribed certain rules and regulations for telephone
companies, including a uniform system of accounts and rules regarding the
separation of costs between jurisdictions and, ultimately, between interstate
services. LECs must obtain FCC approval to use certain radio frequencies, or to
transfer control of any such licenses.
Effective January 1, 1991, the FCC adopted price-cap regulation relating
to interstate access rates for the Regional Bell Operating Companies. All other
LECs may elect to be subject to price-cap regulation. Under price-cap
regulation, limits imposed on a company's interstate rates are adjusted
periodically to reflect inflation, productivity improvement and changes in
certain non-controllable costs. In May 1993 the FCC adopted an optional
incentive regulatory plan for LECs not subject to price-cap regulation. A LEC
electing the optional incentive regulatory plan would, among other things, file
tariffs based primarily on historical costs and not be allowed to participate in
the relevant NECA pooling arrangements. The Company has not elected price-cap
regulation or the optional incentive regulatory plan for its incumbent
operations. However, the properties acquired from Verizon in 2002 are operated
under price-cap regulation. In connection with this acquisition, the Company
obtained a waiver of the FCC's "all or nothing" rule. This waiver is valid until
the FCC reviews the future appropriateness of the "all or nothing" rule. Absent
the waiver, present FCC rules require a carrier that purchases access lines
subject to price-cap regulation to convert all of its properties to price-cap
regulation.
In 2001, the FCC modified its interstate access charge rules and universal
service support system for rate of return LECs. 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
enhanced the competitiveness of rate of return carriers by giving them pricing
flexibility; (iii) lowered per minute rates collected for federal access
charges; (iv) created a new explicit universal service support mechanism that
replaced 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) preserved the
historic 11.25% authorized interstate return rate for rate of return LECs. The
effect of this order on the Company was revenue neutral for interstate purposes,
but did result in a reduction in intrastate revenues in Arkansas and Ohio (where
intrastate access rates must mirror the interstate access rates).
The FCC is currently examining several issues that could have a
substantial impact on the Company's revenues, including a broad inquiry
initiated in 2001 into all currently regulated forms of intercarrier
compensation. As discussed further below, certain providers of competitive
communications services are not required to compensate ILECs for the use of
their networks. The Company relies on access revenues as an important source of
revenues. Depending on the final outcome of the FCC's intercarrier compensation
issue, the Company could suffer a material loss of access revenues.
All forms of federal support available to ILECs are currently available
to any local competitor that qualifies as an "eligible telecommunications
carrier." This support could encourage additional competitors to enter the
Company's high-cost service areas, and, as discussed further below, place
financial pressure on the FCC's support programs.
High-cost support funds, revenue sharing arrangements and related matters.
A significant number of the Company's telephone subsidiaries recover a portion
of their costs under federal and state cost recovery mechanisms that
traditionally have allowed LECs serving small communities and rural areas to
provide communications services on terms and at prices reasonably comparable to
those available in urban areas.
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 2003 and 2002 the Company's telephone
subsidiaries received $199.2 million and $192.4 million, respectively, from the
federal Universal Service High Cost Loop Fund, representing 8.4% and 9.8%,
respectively, of the Company's consolidated revenues from continuing operations
for 2003 and 2002. The Company anticipates its 2004 revenues from the federal
Universal Service High Cost Loop Fund will be lower than 2003 levels due to
increases in the nationwide average cost per loop factor used by the FCC to
allocate funds among all recipients. Wireless and other competitive service
providers continue to seek eligible telecommunications carrier ("ETC") status in
order to be eligible to receive Universal Service Fund support, which is placing
additional financial pressure on the amount of money needed to provide support
to all eligible service providers, including support payments the Company
receives from the High Cost Loop Fund. As a result of the limited growth in the
size of the High Cost Loop Fund and changes in requests for support from the
Universal Service Fund, the Company has no assurance it will continue to
receive payments from the Universal Service Fund commensurate with those
received in the past.
In late 2002, the FCC requested that the Federal-State Joint Board
("FSJB") on Universal Service review various FCC rules governing high cost
universal service support, including rules regarding eligibility to receive
support payments in markets served by LECs and competitive carriers. On February
7, 2003, the FSJB issued a notice for public comment on whether present rules
fulfill their purpose and whether or not modifications are needed. On February
27, 2004, the FSJB sent the FCC a series of recommendations concerning the
process of designating ETCs and suggestions for gaining better control over the
disbursement of high-cost universal service support in markets where one or more
ETCs are present. Specifically, the FSJB recommended that the FCC adopt
permissive federal guidelines designating service and operational criteria for
states to consider using in proceedings to designate ETC's. The FSJB also
recommended that the FCC limit the scope of high-cost support to a single
connection that provides access to the public telephone network. However, the
FSJB did not specify a process for determining which single connection should be
used or how best to address the numerous administrative issues associated with a
single connection. The FSJB declined to recommend that the FCC modify the
methodology used to calculate support in study areas with multiple ETCs, instead
recommending that the FSJB and the FCC consider possible modifications to the
basis of support as part of an overall review of the high-cost support mechanism
for rural and non-rural carriers sometime in 2006. The FCC has taken various
other steps in anticipation of restructuring universal service support
mechanisms, including opening a docket that will change the method of funding
contributions. The FCC is still considering various contribution methodologies
prior to issuing an order. The Congress is also exploring various universal
service issues ranging from targeted universal service legislation to re-writing
the 1996 Act. The Company has been and will continue to be active in monitoring
these developments.
In addition, the Company's telephone subsidiaries received $33.3 million
and $31.7 million in 2003 and 2002, respectively, from intrastate support funds.
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.
Currently, the LOS Fund is funded primarily by BellSouth, which proposes to
expand the base of contributors into the LOS Fund. A recommendation by the
Commission staff is not expected until late 2004. The Company currently receives
approximately $21 million from the LOS Fund each year. There can be no assurance
that this funding will remain at current levels.
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "- State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
The FCC requires all communications carriers providing interstate
telecommunications services, including the Company's LECs and long distance
operations, to contribute to programs to provide discounted telecommunications
services to schools, libraries and rural health care providers. The Company's
contributions by its LEC and long distance operations, both of which the Company
itemizes as separate charges on its customer's bills, was approximately $20.6
million and $6.6 million, respectively, in 2003, and $10.6 million and $4.4
million, respectively, in 2002.
Substantially all of the Company's LECs (except for the properties
acquired from Verizon in 2002) concur with the common line tariff and certain of
the Company's LECs concur with the traffic sensitive tariffs filed by the NECA;
such LECs participate in the access revenue sharing arrangements administered by
the NECA for interstate services. All of the intrastate network access revenues
of the Company's LECs are based on access charges, cost separation studies or
special settlement arrangements. See "- Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. Long distance carriers
have also aggressively pursued regulatory or legislative changes that would
reduce access rates. See "-Services - Network Access" above for additional
information.
Developments affecting competition. The communications industry continues
to undergo fundamental changes which are likely to significantly impact the
future operations and financial performance of all communications companies.
Primarily as a result of regulatory and technological changes, competition has
been introduced and encouraged in each sector of the telephone industry in
recent years. As a result, the Company increasingly faces competition from
providers seeking to use the Company's network and from providers offering
competitive services.
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, imposes several duties on a LEC if it receives
a specific request from another entity which seeks to connect with or provide
services using the LEC's network. In addition, each incumbent LEC is obligated
to (i) negotiate interconnection agreements in good faith, (ii) provide
"unbundled" access to all aspects of the LEC's network, (iii) offer resale of
its telecommunications services at wholesale rates and (iv) permit competitors
to collocate their physical plant on the LEC's property, or provide virtual
collocation if physical collocation is not practicable. During 2003, the FCC
released new rules which outline the obligations of incumbent LECs to lease
elements of their circuit-switched 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. These wholesale rates are based on a forward-looking cost model and other
terms that substantially limit the profitability of these arrangements to
incumbent LECs. This new rule also provides for a significant role of state
regulatory commissions in implementing these new guidelines and establishing
wholesale service rates. On March 2, 2004, a federal district court of appeals
overturned the rules previously adopted by the FCC requiring LECs to provide
competitors with discounted access to the LECs networks. The court also ruled
that the FCC should not have given states the authority previously granted. It
is expected that such decision will be appealed to the Supreme Court. During
2003, the FCC also sought public comments on whether it should make additional
changes to its interconnection regulations, and instituted a comprehensive
review of its methodologies for establishing wholesale rates.
Under the 1996 Act's rural telephone company exemption, approximately 50%
of the Company's telephone access lines are exempt from certain of the 1996
Act's interconnection requirements unless and until the appropriate state
regulatory commission overrides the exemption upon receipt from a competitor of
a bona fide request meeting certain criteria. States are permitted to adopt laws
or regulations that provide for greater competition than is mandated under the
1996 Act. Management believes that competition in its telephone service areas
has increased and will continue to increase as a result of the 1996 Act and the
FCC's interconnection rulings. While competition through use of the Company's
network is still limited in most of its markets, the Company expects to receive
additional interconnection requests in the future from a variety of resellers
and facilities-based service providers.
In addition to these changes in federal regulation, all of the 22 states
in which the Company provides telephone services have taken legislative or
regulatory steps to further introduce competition into the LEC business.
As a result of these regulatory developments, ILECs increasingly face
competition from competitive local exchange carriers ("CLECs"), particularly in
high population areas. CLECs provide competing services through reselling the
ILECs' local services, through use of the ILECs' unbundled network elements or
through their own facilities. The number of companies which have requested
authorization to provide local exchange service in the Company's service areas
has increased substantially in recent years, especially in the Company's Verizon
markets acquired in 2002 and 2000. The Company anticipates that similar action
may be taken by other competitors in the future, especially if all forms of
federal support available to ILECs continue to remain available to these
competitors.
Technological developments have led to the development of new services that
compete with traditional LEC services. Technological improvements have enabled
cable television companies to provide traditional circuit-switched telephone
service over their cable networks, and several national cable companies have
aggressively pursued this opportunity. Recent improvements in the quality of
"Voice-over-Internet Protocol" ("VoIP") service have led several large cable
television and telephone companies, as well as start-up companies, to
substantially increase their offerings of VoIP service to business and
residential customers. VoIP providers route calls over the Internet, without use
of ILEC's circuit switches and, in certain cases, without use of ILEC's networks
to carry their communications traffic. VoIP providers can offer services at
prices substantially below those currently charged for traditional local and
long distance telephone services for several reasons, including lower network
cost structures and the current ability of VoIP providers to use ILECs' networks
without paying access charges. In December 2003, the FCC initiated rulemaking
that is expected to address the effect of VoIP on intercarrier compensation,
universal service and emergency services. There can be no assurance that this
rulemaking will be on terms favorable to ILECs, or that VoIP providers will not
successfully compete for the Company's customers.
Wireless telephone services increasingly constitute a significant source
of competition with LEC services, especially as wireless carriers expand and
improve their network coverage and continue to lower their prices. As a result,
some customers have chosen to completely forego use of traditional wireline
phone service and instead rely solely on wireless service. This trend is
particularly evident among younger customers and in urban areas. The Company
anticipates this trend will continue, particularly if wireless service rates
continue to decline and the quality of wireless service in the Company's markets
improves. Technological and regulatory developments in cellular telephone,
personal communications services, digital microwave, satellite, coaxial cable,
fiber optics, local multipoint distribution services and other wired and
wireless technologies are expected to further permit the development of
alternatives to traditional landline services.
In addition to facing direct competition from those providers described
above, ILECs increasingly face competition from alternate communication systems
constructed by long distance carriers, large customers or alternative access
vendors. These systems, which have become more prevalent as a result of the 1996
Act, are capable of originating or terminating calls without use of the ILECs'
networks or switching services. Other potential sources of competition include
noncarrier systems that are capable of bypassing ILECs' local networks, either
partially or completely, through substitution of special access for switched
access or through concentration of telecommunications traffic on a few of the
ILECs' access lines. The Company anticipates that all these trends will continue
and lead to increased competition with the Company's LECs.
In November 2003, the FCC adopted rules requiring companies to allow their
customers to keep their wireline or wireless phone number when switching to
another service provider (generally referred to as "local number portability").
For several years, customers have been able to retain their numbers when
switching their local service between wireline carriers. The new rules now
require local number portability between wireline and wireless carriers. This
requirement went into effect November 24, 2003 for wireline carriers in the top
100 Metropolitan Statistical Areas ("MSAs"). The new requirement will go into
effect May 24, 2004 for wireline carriers operating in markets smaller than the
top 100 MSAs. The majority of the Company's wireline operations are conducted in
markets below the top 100 MSAs. Local number portability may increase the number
of customers who choose to completely forego the use of traditional wireline
phone service, although the Company believes that it is too early to fully
assess the rule's impact. The costs to comply with the requirements of local
number portability, net of the amount that is recoverable through the
ratemaking process, are not expected to have a material impact on the
Company's results of operations.
Historically, ILECs had little or no competition associated with
intra-LATA long distance calls in their service areas. Principally as a result
of recent state regulatory changes, companies offering competing toll services
have emerged in the Company's local exchange markets.
Significant competitive factors include pricing, packaging of services and
features, quality of service and meeting customer needs such as simplified
billing and timely response to service calls.
As the telephone industry increasingly experiences competition, the size
and resources of each respective competitor may increasingly influence its
prospects. Many companies currently providing or planning to provide competitive
communication services have substantially greater financial and marketing
resources than the Company, and several are not subject to the same regulatory
constraints as the Company.
The Company anticipates that the traditional operations of LECs will
continue to be impacted by continued regulatory and technological developments
affecting the ability of LECs to provide new services and the capability of long
distance companies, CLECs, wireless companies, cable television companies, VoIP
providers and others to provide competitive LEC services. Competition relating
to traditional LEC 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 operates. The Company intends to actively monitor these developments, to
observe the effect of emerging competitive trends in larger markets and to
continue to evaluate new business opportunities that may arise out of future
technological, legislative and regulatory developments.
The Company anticipates that industry changes and competitive pressures
will continue to place downward pressure on its telephone revenues. However, the
Company anticipates that such reductions may be limited by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. The Company expects its telephone revenues to decline in 2004
due to continued access line losses and reduced network access revenues;
however, the Company expects its consolidated revenues to increase in 2004
primarily due to increased revenues from its newly-acquired LightCore operations
and expected increased demand for its long distance, fiber transport, DSL and
other nonregulated product offerings, as discussed further below.
OTHER OPERATIONS
The Company provides long distance, Internet access, competitive local
exchange services, fiber transport, security monitoring, and other
communications and business information services in certain local and regional
markets. The results of these operations, which accounted for 13% of the
Company's consolidated revenues from continuing operations during 2003, are
reflected for financial reporting purposes as "Other operations." Additional
data on the Company's long distance and Internet access services is provided in
the table below.
Year ended or as of December 31,
- --------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------
(Dollars in thousands)
Long distance operations
Operating revenues $ 173,884 146,536 117,363 104,435 83,087
Customers 769,766 648,797 465,872 363,307 303,722
% Residential 90% 90 91 91 91
% Business 10% 10 9 9 9
Internet operations
Operating revenues $ 79,933 58,665 39,057 23,491 16,818
Customers 215,548 179,440 144,817 108,700 68,392
% Dial-Up Service 65% 73 84 95 100
% DSL Service 35% 27 16 5 -
- --------------------------------------------------------------------------------------
Long distance. In 1996 the Company began marketing long distance service
in its equal access telephone operating areas. At December 31, 2003, the Company
provided long distance services to nearly 770,000 customers. The Company owns
and operates switches in LaCrosse, Wisconsin, Shreveport, Louisiana and
Vancouver, Washington, which are utilized to provide long distance services.
The Company anticipates that most of its long distance service revenues will be
provided as part of an integrated bundle with the Company's other service
offerings, including its local exchange telephone service offering.
Internet access. The Company began offering traditional dial-up Internet
access services to its telephone customers in 1995. In late 1999, the Company
began offering digital subscriber line ("DSL") Internet access services, a
high-speed premium-priced data service. As of December 31, 2003, approximately
63% of the Company's access lines were DSL-enabled.
Competitive local exchange services. In late 2000, the Company began
offering competitive local exchange telephone services, coupled with long
distance, Internet access and other Company services, to small to medium-sized
businesses in Monroe and Shreveport, Louisiana. On February 28, 2002, the
Company purchased the fiber network and customer base of KMC Telecom's
operations in Monroe and Shreveport, Louisiana, which allowed the Company to
offer broadband and competitive local exchange services to customers in these
markets.
Fiber transport. During the second quarter of 2001, the Company began
selling capacity to other carriers and businesses over a 700-mile fiber optic
ring that the Company constructed in southern and central Michigan. In June
2003, the Company acquired the assets of Digital Teleport, Inc., a regional
communications company providing wholesale data transport services to other
communications carriers over its fiber optic network located in Missouri,
Arkansas, Oklahoma and Kansas, for $39.4 million cash. The Company has used the
network to sell services to new and existing customers and to reduce the
Company's reliance on third party transport providers. In addition, in December
2003, the Company acquired additional fiber transport assets in Arkansas,
Missouri and Illinois from Level 3 Communications, Inc. for approximately $15.8
million cash to provide services similar to those described above. The Company
operates the assets acquired from both transactions under the name LightCore. As
of December 31, 2003, LightCore's network encompassed more than 6,500 route
miles of lit fiber in the central United States.
Security monitoring. The Company offers 24-hour burglary and fire
monitoring services to approximately 8,600 customers in select markets in
Louisiana, Arkansas, Mississippi, Texas and Ohio.
The Company also provides audiotext services; printing, database
management and direct mail services; and cable television services. From time to
time the Company also makes investments in other domestic or foreign
communications companies, the most significant of which is an interest in a
start-up satellite service company.
Certain service subsidiaries of the Company provide installation and
maintenance services, materials and supplies, and managerial, technical,
accounting and administrative services to the telephone and other operating
subsidiaries. In addition, the Company provides and bills management services to
subsidiaries and in certain instances makes interest-bearing advances to finance
construction of plant, purchases of equipment or acquisitions of other
businesses. These transactions are recorded by the Company's regulated telephone
subsidiaries at their cost to the extent permitted by regulatory authorities.
Intercompany profit on transactions with regulated affiliates is limited to a
reasonable return on investment and has not been eliminated in connection with
consolidating the results of operations of CenturyTel and its subsidiaries. Such
intercompany profit is reflected as a reduction of cost of sales and operating
expenses in "Other operations".
OTHER DEVELOPMENTS
The Company is in the process of developing an integrated billing and
customer care system which will provide the Company with, in addition to
standard billing functionality currently being provided by its legacy system,
custom built hardware and software technology for more efficient and effective
customer care, billing and provisioning systems. The costs to develop such
system have been accounted for in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). The capitalized costs of the system aggregated
$163.5 million (before accumulated amortization) at December 31, 2003. The
Company began amortizing its billing system costs in early 2003 (over a 20-year
period) based on the total number of customers that the Company has migrated to
the new system.
The system remains in the development stage and has required
substantially more time and money to develop than originally anticipated. The
Company currently expects to complete all phases of the new system no later than
mid-2005 at an aggregate capitalized cost in accordance with SOP 98-1 of
approximately $200-215 million (exclusive of previously-disclosed write-offs).
In addition, the Company expects to incur additional costs related to completion
of the project, including (i) approximately $15 million of customer service
related and data conversion costs (the majority of which are expected to be
incurred in 2004) that will be expensed as incurred and (ii) $10 million of
capitalized hardware costs (which will be amortized over a three-year period).
The estimates above do not include any amounts for maintenance or on-going
support of either the old or new system, and are based on assumptions regarding
various future events, several of which are beyond the Company's control. There
is no assurance that the system will be completed in accordance with this
schedule or budget, 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 development costs and further explore its other billing and
customer care system alternatives.
SPECIAL CONSIDERATIONS
Risk Factors
o We face competition, which could adversely affect us.
As a result of various technological, regulatory and other changes, the
telecommunications industry has become increasingly competitive, and we expect
these trends to continue. The number of companies that have requested
authorization to provide traditional local exchange service in our markets has
increased in recent years, and we anticipate that others will take similar
action in the future. Recent technological developments have led several
competitors to substantially increase their service offerings, often at prices
substantially below those charged for traditional phone services. Wireless
telephone services increasingly constitute a significant source of competition
with LEC services, especially as wireless owners expand and improve their
network coverage and continue to lower their prices.
We expect competition to intensify as a result of new competitors and
the development of new technologies, products and services. We cannot predict
which future technologies, products or services will be important to maintain
our competitive position or what funding will be required to develop and provide
these technologies, products or services. Our ability to compete successfully
will depend on how well we market our products and services, and on our ability
to anticipate and respond to various competitive and technological factors
affecting the industry, including a changing regulatory environment that may
affect us differently from our competitors, new services that may be introduced,
changes in consumer preferences, demographic trends, economic conditions and
discount pricing strategies by competitors.
Many of our current and potential competitors have market presence,
engineering, technical and marketing capabilities and financial, personnel and
other resources substantially greater than ours. In addition, some of our
competitors can conduct operations or raise capital at a lower cost than we can,
are subject to less regulation, or have substantially stronger brand names.
Consequently, some competitors may be able to charge lower prices for their
products and services, to develop and expand their communications and network
infrastructures more quickly, to adapt more swiftly to new or emerging
technologies and changes in customer requirements, and to devote greater
resources to the marketing and sale of their products and services than we can.
Competition could adversely impact us in several ways, including (i)
the loss of customers and market share, (ii) the possibility of customers
shifting to less profitable services, (iii) our need to lower prices or increase
marketing expenses to remain competitive and (iv) our inability to diversify by
offering new products or services.
o We could be harmed by rapid changes in technology.
The communications industry is experiencing significant technological
changes, particularly in the areas of VoIP, data transmission and wireless
communications. Some of our competitors may enjoy network advantages that will
enable them to provide services more efficiently or at lower cost. Rapid changes
in technology could result in the development of products or services that
compete with or displace those offered by traditional LECs. If we cannot develop
new products to keep pace with technological advances, or if such products are
not widely embraced by our customers, we could be adversely impacted.
o Our industry is highly regulated, and continues to undergo various
fundamental regulatory changes.
As a diversified full service incumbent local exchange carrier, or
ILEC, we have traditionally been subject to significant regulation from federal,
state and local authorities. This regulation imposes substantial compliance
costs on us and restricts our ability to raise rates, to compete and to respond
rapidly to changing industry conditions. In recent years, the communications
industry has undergone various fundamental regulatory changes that have
generally reduced the regulation of telephone companies and permitted
competition in each segment of the telephone industry. These and subsequent
changes could adversely affect us by reducing the fees that we are permitted to
charge, altering our tariff structures, or otherwise changing the nature of our
operations and competition in our industry. Recent rule changes that permit
customers to retain their wireline or wireless number when switching to another
service provider could increase the number of our customers who choose to
disconnect their wireline service from us. Other pending rulemakings could have
a substantial impact on our operations, including in particular rulemakings on
intercarrier compensation, universal service, interconnection terms and resale
rates. Litigation and different objectives among federal and state regulators
could create uncertainty and delay our ability to respond to new regulations.
Moreover, changes in tax laws, regulations or policies could increase our tax
rate, particularly if state regulators continue to search for additional revenue
sources to address budget shortfalls. We are unable to predict the future
actions of the various regulatory bodies that govern us, but such actions could
materially affect our business.
o We cannot assure you of growth in our core business.
Due to the above-cited changes, the ILEC industry has recently
experienced a decline in access lines and long distance minutes of use. While we
have not suffered as much as a number of other ILECs from recent industry
challenges, the recent decline in access lines and long distance usage, coupled
with the other changes resulting from competitive, technological and regulatory
developments, could materially adversely effect our core business and future
prospects.
We have traditionally sought growth largely through acquisitions of
properties similar to those currently operated by us. However, we cannot assure
you that properties will be available for purchase on terms attractive to us,
particularly if they are burdened by regulations, pricing plans or competitive
pressures that are new or different from those historically applicable to our
incumbent properties. Moreover, we cannot assure you that we will be able to
arrange additional financing on terms acceptable to us.
o Our future results will suffer if we do not effectively manage our growth.
Recently, we have rapidly expanded our operations primarily through
acquisitions and new product and service offerings, and we intend to pursue
similar growth opportunities in the future. Our future success depends, in
part, upon our ability to manage our growth, including our ability to:
o upgrade our billing and other information systems
o retain and attract technological, managerial and other
key personnel
o effectively manage our day to day operations while attempting
to execute our business strategy of expanding our wireline
operations and our emerging businesses
o realize the projected growth and revenue targets developed by
management for our newly acquired and emerging businesses, and
o continue to identify new acquisition or growth opportunities
that we can finance, consummate and operate on attractive terms.
Our rapid growth poses substantial challenges for us to integrate new
operations into our existing business in an efficient and timely manner, to
successfully monitor our operations, costs, regulatory compliance and service
quality, and to maintain other necessary internal controls. We cannot assure you
that these efforts will be successful, or that we will realize our expected
operating efficiencies, cost savings, revenue enhancements, synergies or other
benefits. If we are not able to meet these challenges effectively, our results
of operations may be harmed.
o We cannot assure you that our new billing system will be successful.
We are developing a new integrated billing and customer care system.
The system remains in the development stage and has required substantially more
time and money to develop than originally anticipated. As discussed further
herein, we expect our aggregate capitalized costs associated with the billing
system to total $200-215 million (exclusive of previously-disclosed write-offs)
upon completion of the system. Although we expect to complete all phases of the
system no later than mid-2005, we cannot assure you that this deadline (or our
budget) will be met or that the system will function as anticipated. If the
system does not function as anticipated, we may have to write off part or all of
our development costs.
o We are reliant on support funds provided under federal and state laws.
We receive a substantial portion of our revenues from the federal
Universal Service Fund and, to a lesser extent, intrastate support funds. These
governmental programs are reviewed and amended from time to time, and we cannot
assure you that they will not be changed or impacted in a manner adverse to us.
Unless the FCC can obtain additional funding sources for the Universal Service
Fund, we cannot assure you that we will continue to receive payments from the
Fund commensurate with those received in the past.
o We could be affected by certain changes in labor matters.
At December 31, 2003, approximately 27% of our employees were members
of 13 separate bargaining units represented by two different unions. From time
to time, our labor agreements with these unions lapse, and we typically
negotiate the terms of new agreements. We cannot predict the outcome of these
negotiations. We may be unable to reach new agreements, and union employees may
engage in strikes, work slowdowns or other labor actions, which could materially
disrupt our ability to provide services. In addition, new labor agreements may
impose significant new costs on us, which could impair our financial condition
or results of operations in the future.
o We have a substantial amount of indebtedness.
Principally as a result of our recent acquisitions, we have a
substantial amount of indebtedness. This could hinder our ability to adjust to
changing market and economic conditions, as well as our ability to access the
capital markets to refinance maturing debt in the ordinary course of business.
In connection with executing our business strategies, we are continuously
evaluating the possibility of acquiring additional communications assets, and we
may elect to finance acquisitions by incurring additional indebtedness. If we
incur significant additional indebtedness, our credit ratings could be adversely
affected. As a result, our borrowing costs would likely increase, our access to
capital may be adversely affected and our ability to satisfy our obligations
under our current indebtedness could be adversely affected.
o We cannot assure you that we will obtain sufficient capital to expand.
To respond to the competitive challenges discussed above, we may be
required to raise substantial additional capital to finance acquisitions or new
product or service offerings. Our ability to arrange additional financing will
depend on, among other factors, our financial position and performance, as well
as prevailing market conditions and other factors beyond our control. We cannot
assure you that we will be able to raise additional financing on terms
acceptable to us or at all.
o We could be harmed by the adverse developments affecting other
communications companies.
During the past couple of years, WorldCom, Inc. and several other large
communications companies declared bankruptcy or suffered financial difficulties.
Likewise, a number of our suppliers have recently experienced financial
challenges, which could cause us to experience delays, interruptions or
additional expenses associated with upgrading and expanding our information
systems and networks and offering new products and services. Continued weakness
in the communications industry could have additional future adverse effects on
us, including reducing our ability to collect receivables and to access the
capital markets on favorable terms.
o Our agreements and organizational documents and applicable law could
limit another party's ability to acquire us at a premium.
Under our articles of incorporation, each share of common stock that
has been beneficially owned by the same person or entity continually since May
30, 1987 generally entitles the holder to ten votes on all matters duly
submitted to a vote of shareholders. As of March 8, 2004, the holders of our
ten-vote shares held approximately 40% of our total voting power. In addition,
a number of other provisions in our agreements and organizational documents,
including our shareholder rights plan, and various provisions of applicable law
may delay, defer or prevent a future takeover of CenturyTel unless the takeover
is approved by our board of directors. This could deprive our shareholders of
any related takeover premium.
Forward-Looking Statements
This report on Form 10-K and other documents filed by us under the federal
securities laws include, and future oral or written statements or press releases
by us and our management may include, certain forward-looking statements,
including without limitation statements with respect to our anticipated future
operating and financial performance, financial position and liquidity, growth
opportunities and growth rates, business prospects, regulatory and competitive
outlook, investment and expenditure plans, investment results, financing
opportunities and sources (including the impact of financings on our financial
position, financial performance or credit ratings), pricing plans, strategic
alternatives, business strategies, and other similar statements of expectations
or objectives that are highlighted by words such as "expects," "anticipates,"
"intends," "plans," "believes," "projects," "seeks," "estimates," "hopes,"
"should," and "may," and variations thereof and similar expressions. Such
forward-looking statements are based upon our judgment and assumptions as of the
date of this report concerning future developments and events, many of which are
outside of our control. These forward-looking statements, and the assumptions
upon which such statements are based, are inherently speculative and are subject
to uncertainties that could cause our actual results to differ materially from
such statements. These uncertainties include but are not limited to those set
forth below:
o the extent, timing, success and overall effects of competition from
wireless carriers, VoIP providers, CLECs, cable television companies and
others, including without limitation the risks that these competitors may
offer less expensive or more innovative products and services.
o the risks inherent in rapid technological change, including without
limitation the risk that new technologies will displace our products and
services.
o the effects of ongoing changes in the regulation of the communications
industry, including without limitation (i) increased competition resulting
from the FCC's regulations relating to local number portability,
interconnection and other matters, (ii) the final outcome of various
federal, state and local regulatory initiatives and proceedings that could
impact our competitive position, compliance costs, capital expenditures or
prospects, and (iii) reductions in revenues received from the federal
Universal Service Fund or other current or future federal and state
support programs designed to compensate LECs operating in high-cost
markets.
o our ability to effectively manage our growth, including without limitation
our ability to (i) integrate newly-acquired operations into our
operations, (ii) attract and retain technological, managerial and other
key personnel, (iii) achieve projected growth, revenue and cost savings
targets, (iv) successfully upgrade our billing and other information
systems in a timely and cost-efficient manner and (v) otherwise monitor
our operations, costs, regulatory compliance, and service quality and
maintain other necessary internal controls.
o possible changes in the demand for, or pricing of, our products and
services, including without limitation (i) reduced demand for traditional
telephone services caused by greater use of wireless or Internet
communications or other factors, (ii) reduced demand for second lines and
(iii) reduced demand for our access services.
o our ability to successfully introduce new product or service offerings on
a timely and cost-effective basis, including without limitation our
ability to (i) expand successfully our long distance and Internet
offerings to new or acquired markets and (ii) offer bundled service
packages on terms attractive to our customers.
o our ability to collect receivables from financially troubled
communications companies.
o regulatory limits on our ability to change the prices for telephone
services in response to industry changes.
o impediments to our ability to expand through attractively priced
acquisitions, whether caused by regulatory limits, financing constraints,
a decrease in the pool of attractive target companies, or competition for
acquisitions from other interested buyers.
o the possible need to make abrupt and potentially disruptive changes in our
business strategies due to changes in competition, regulation, technology,
product acceptance or other factors.
o the lack of assurance that we can compete effectively against
better-capitalized competitors.
o the impact of terrorist attacks on our business.
o other risks referenced in this report and from time to time in our other
filings with the Securities and Exchange Commission.
o the effects of more general factors, including without limitation:
-- changes in general industry and market conditions and growth rates
-- changes in labor conditions, including workforce levels and labor
negotiations
-- changes in interest rates or other general national, regional
or local economic conditions
-- changes in legislation, regulation or public policy, including
changes in federal rural financing programs or changes that increase
our tax rate
-- increases in capital, operating, medical or administrative costs, or
the impact of new business opportunities requiring significant up-front
investments
-- the continued availability of financing in amounts, and on terms
and conditions, necessary to support our operations
-- changes in our relationships with vendors, or the failure of these
vendors to provide competitive products on a timely basis
-- changes in our senior debt ratings
-- unfavorable outcomes of regulatory or legal proceedings, including
rate proceedings
-- losses or unfavorable returns on our investments in other
communications companies
-- delays in the construction of our networks
-- changes in accounting policies, assumptions, estimates or practices
adopted voluntarily or as required by generally accepted accounting
principles.
For additional information, see the description of our business included
above, as well as Item 7 of this report. Due to these uncertainties, there can
be no assurance that our anticipated results will occur, that our judgments or
assumptions will prove correct, or that unforeseen developments will not occur.
Accordingly, you are cautioned not to place undue reliance upon these
forward-looking statements, which speak only as of the date made. We undertake
no obligation to update or revise any of our forward-looking statements for any
reason, whether as a result of new information, future events or developments,
or otherwise.
OTHER MATTERS
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 2003
have not been material and the Company currently has no reason to believe that
such costs will become material.
For additional information concerning the business and properties of the
Company, see Item 7 elsewhere herein, and the Consolidated Financial Statements
and notes 2, 5, 6, 13, and 18 thereto set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of telephone lines, central
office equipment, and land and buildings related to telephone operations. As of
December 31, 2003 and 2002, the Company's gross property, plant and equipment of
approximately $7.2 billion and $6.9 billion, respectively, consisted of the
following:
December 31,
2003 2002
- --------------------------------------------------------------------------------
Telephone operations
Cable and wire 52.9% 53.0
Central office 31.1 31.3
General support 6.8 6.9
Information origination/termination equipment 0.6 0.6
Construction in progress 0.3 0.5
Other 0.1 0.1
- --------------------------------------------------------------------------------
91.8 92.4
- --------------------------------------------------------------------------------
Other operations 8.2 7.6
- --------------------------------------------------------------------------------
100.0% 100.0
================================================================================
"Cable and wire" facilities consist primarily of buried cable and aerial
cable, poles, wire, conduit and drops. "Central office equipment" consists
primarily of switching equipment, circuit equipment and related facilities.
"General support" consists primarily of land, buildings, tools, furnishings,
fixtures, motor vehicles and work equipment. "Information
origination/termination equipment" consists primarily of premise equipment
(private branch exchanges and telephones) for official company use.
"Construction in progress" includes property of the foregoing categories that
has not been placed in service because it is still under construction.
The properties of certain of the Company's telephone subsidiaries are
subject to mortgages securing the debt of such companies. The Company owns
substantially all of the central office buildings, local administrative
buildings, warehouses, and storage facilities used in its telephone operations.
The Company's property in its Other Operations consist primarily of (i)
corporate general support assets, (ii) fiber transport assets and (iii)
equipment to provide competitive local exchange and Internet access services.
For further information on the location and type of the Company's
properties, see the descriptions of the Company's operations in Item 1.
Item 3. Legal Proceedings.
In Barbrasue Beattie and James Sovis, on behalf of themselves and all
others similarly situated, v. CenturyTel, Inc., filed on October 29, 2002 in the
United States District Court for the Eastern District of Michigan (Case No.
02-10277), the plaintiffs allege that the Company unjustly and unreasonably
billed customers for inside wire maintenance services, and seek unspecified
money damages and injunctive relief under various legal theories on behalf of a
purported class of over two million customers in the Company's telephone
markets. The Court has not yet ruled on the plaintiffs' certification motion,
and has not yet set a date to resolve this issue. Given the current status of
this case, the Company cannot estimate the potential impact, if any, that this
case will have on its results of operations.
From time to time, the Company is involved in other litigation incidental
to its business, including administrative hearings of state public utility
commissions relating primarily to rate making, actions relating to employee
claims, occasional grievance hearings before labor regulatory agencies and
miscellaneous third party tort actions. Currently, there are no material legal
proceedings of this nature.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning the Company's Executive Officers, set forth at Item
10 in Part III hereof, is incorporated in Part I of this Report by reference.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
CenturyTel's common stock is listed on the New York Stock Exchange and is
traded under the symbol CTL. The following table sets forth the high and low
sales prices, along with the quarterly dividends, for each of the quarters
indicated.
Sales prices Dividend per
-------------------
High Low common share
------ ----- ------------
2003:
First quarter $ 31.79 25.25 .0550
Second quarter $ 35.90 27.33 .0550
Third quarter $ 35.85 32.45 .0550
Fourth quarter $ 36.76 30.09 .0550
2002:
First quarter $ 35.50 28.80 .0525
Second quarter $ 34.45 27.00 .0525
Third quarter $ 30.60 21.13 .0525
Fourth quarter $ 31.65 22.35 .0525
Common stock dividends during 2003 and 2002 were paid each quarter.
As of February 27, 2004, there were approximately 4,530 stockholders of record
of CenturyTel's common stock. As of March 8, 2004, the closing stock price of
CenturyTel common stock was $28.95.
For information regarding shares of CenturyTel common stock authorized for
issuance under CenturyTel's equity compensation plans, see Item 12.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial data
(from continuing operations) as of and for each of the years ended in the
five-year period ended December 31, 2003:
Selected Income Statement Data
Year ended December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------
(Dollars, except per share amounts, and
shares expressed in thousands)
Operating revenues
Telephone $ 2,071,980 1,733,592 1,505,733 1,253,969 1,126,112
Other 308,765 238,404 173,771 148,388 128,288
----------------------------------------------------------------
Total operating revenues $ 2,380,745 1,971,996 1,679,504 1,402,357 1,254,400
================================================================
Operating income
Telephone $ 688,114 543,113 423,420 376,290 351,559
Other 62,282 43,568 22,098 31,258 22,580
Corporate overhead costs
allocable to discontinued
operations - (11,275) (20,213) (21,411) (19,416)
----------------------------------------------------------------
Total operating income $ 750,396 575,406 425,305 386,137 354,723
================================================================
Nonrecurring gains and
losses, net (pre-tax) $ - 3,709 33,043 - 11,284
================================================================
Income from continuing operations $ 344,707 193,533 149,081 127,474 134,038
================================================================
Basic earnings per share from
continuing operations $ 2.40 1.36 1.06 .91 .96
================================================================
Basic earnings per share from
continuing operations, as
adjusted for goodwill
amortization $ 2.40 1.36 1.39 1.17 1.19
================================================================
Diluted earnings per share from
continuing operations $ 2.38 1.35 1.05 .90 .95
================================================================
Diluted earnings per share from
continuing operations, as
adjusted for goodwill
amortization $ 2.38 1.35 1.37 1.16 1.17
================================================================
Dividends per common share $ .22 .21 .20 .19 .18
================================================================
Average basic shares outstanding 143,583 141,613 140,743 140,069 138,848
================================================================
Average diluted shares
outstanding 144,700 142,879 142,307 141,864 141,432
================================================================
Selected Balance Sheet Data
December 31,
------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------------
(Dollars in thousands)
Net property, plant and
equipment $ 3,455,481 3,531,645 2,736,142 2,698,010 2,000,789
Goodwill $ 3,425,001 3,427,281 2,087,158 2,108,344 1,267,908
Total assets $ 7,895,852 7,770,408 6,318,684 6,393,290 4,705,407
Long-term debt $ 3,109,302 3,578,132 2,087,500 3,050,292 2,075,212
Stockholders' equity $ 3,478,516 3,088,004 2,337,380 2,032,079 1,847,992
------------------------------------------------------------------
See Items 7 and 8 for a discussion of the Company's discontinued wireless
operations.
The following table presents certain selected consolidated operating data
as of the end of each of the years in the five-year period ended December 31,
2003:
Year ended December 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------
Telephone access lines 2,376,118 2,414,564 1,797,643 1,800,565 1,272,867
Long distance customers 769,766 648,797 465,872 363,307 303,722
----------------------------------------------------------------
See Items 1 and 2 in Part I and Items 7 and 8 elsewhere herein for
additional information.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Overview
CenturyTel, Inc. ("CenturyTel") and its subsidiaries is a regional
integrated communications company engaged primarily in providing local exchange,
long distance, Internet access and data services to customers in 22 states. For
the year ended December 31, 2003, local exchange telephone operations provided
87% of the consolidated revenues of CenturyTel and its subsidiaries (the
"Company"). The Company's local exchange telephone operations derive revenues
from providing (i) local telephone services, (ii) network access services and
(iii) other related services.
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. During 2003, the Company also acquired fiber transport assets in
five central U.S. states (which the Company operates under the name LightCore)
for $55.2 million cash.
On August 1, 2002, the Company sold substantially all of its wireless
operations principally to an affiliate of ALLTEL Corporation ("Alltel") 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 and 2001
have been reflected as discontinued operations on the Company's consolidated
statements of income and cash flows. For further information, see "Discontinued
Operations" below.
During the three years ended December 31, 2003, 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 2003 was $344.7 million, compared to
$801.6 million during 2002 and $343.0 million during 2001. Diluted earnings per
share for 2003 was $2.38 compared to $5.61 in 2002 and $2.41 in 2001. Income
from continuing operations (and diluted earnings per share from continuing
operations) was $344.7 million ($2.38), $193.5 million ($1.35) and $149.1
million ($1.05) for 2003, 2002 and 2001, 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. If the results of operations for the year ended December 31,
2001 been subject to the provisions of SFAS 142, income from continuing
operations (and diluted earnings per share) would have been $195.4 million
($1.37) and net income (and diluted earnings per share) would have been $399.3
million ($2.81).
Year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 688,114 543,113 423,420
Other 62,282 43,568 22,098
Corporate overhead costs allocable
to discontinued operations - (11,275) (20,213)
- -----------------------------------------------------------------------------------------
750,396 575,406 425,305
Interest expense (226,751) (221,845) (225,523)
Income from unconsolidated cellular entity 6,160 5,582 7,592
Nonrecurring gains and losses, net - 3,709 33,043
Other income and expense 2,154 (63,814) 32
Income tax expense (187,252) (105,505) (91,368)
- -----------------------------------------------------------------------------------------
Income from continuing operations 344,707 193,533 149,081
Discontinued operations, net of tax - 608,091 193,950
- -----------------------------------------------------------------------------------------
Net income $ 344,707 801,624 343,031
=========================================================================================
Net income, as adjusted for goodwill
amortization $ 344,707 801,624 399,297
=========================================================================================
Basic earnings per share
From continuing operations $ 2.40 1.36 1.06
From continuing operations, as
adjusted for goodwill amortization $ 2.40 1.36 1.39
From discontinued operations $ - 4.29 1.38
From discontinued operations, as
adjusted for goodwill amortization $ - 4.29 1.45
Basic earnings per share $ 2.40 5.66 2.43
Basic earnings per share, as
adjusted for goodwill amortization $ 2.40 5.66 2.83
Diluted earnings per share
From continuing operations $ 2.38 1.35 1.05
From continuing operations, as
adjusted for goodwill amortization $ 2.38 1.35 1.37
From discontinued operations $ - 4.26 1.36
From discontinued operations, as
adjusted for goodwill amortization $ - 4.26 1.43
Diluted earnings per share $ 2.38 5.61 2.41
Diluted earnings per share, as
adjusted for goodwill amortization $ 2.38 5.61 2.81
Average basic shares outstanding 143,583 141,613 140,743
=========================================================================================
Average diluted shares outstanding 144,700 142,879 142,307
=========================================================================================
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, 2003 were as follows:
Year ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------
Operating revenues
Telephone operations 87.0% 87.9 89.7
Other operations 13.0% 12.1 10.3
Operating income
Telephone operations 91.7% 94.4 99.6
Other operations 8.3% 7.6 5.2
Corporate overhead costs allocable
to discontinued operations -% (2.0) (4.8)
- --------------------------------------------------------------------------
In addition to historical information, this management's discussion and
analysis includes certain forward-looking statements that are based on current
expectations only, and are subject to a number of risks, uncertainties and
assumptions, many of which are beyond the control of the Company. Actual events
and results may differ materially from those anticipated, estimated or projected
if one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect. Factors that could affect actual results include
but are not limited to: the timing, success and overall effects of competition
from a wide variety of competitive providers; the risks inherent in rapid
technological change; the effects of ongoing changes in the regulation of the
communications industry; 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; possible changes in the demand for, or
pricing of, the Company's products and services; the Company's ability to
successfully introduce new product or service offerings on a timely and
cost-effective basis; the Company's ability to collect its receivables from
financially troubled communications companies; other risks referenced from time
to time in this report or other of the Company's filings with the Securities and
Exchange Commission; and the effects of more general factors such as changes in
interest rates, in tax rates, in accounting policies or practices, in operating,
medical or administrative costs, in general market, labor or economic
conditions, or in legislation, regulation or public policy. These and other
uncertainties related to the business are described in greater detail in Item 1
included herein. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Company undertakes no obligation to update any of its forward-looking statements
for any reason.
Telephone Operations
The Company conducts its telephone operations in rural, suburban and small
urban communities in 22 states. As of December 31, 2003, approximately 70% of
the Company's 2.4 million access lines were in Wisconsin, Missouri, Alabama,
Arkansas and Washington. The operating revenues, expenses and income of the
Company's telephone operations for 2003, 2002 and 2001 are summarized below.
Year ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 754,063 604,580 491,529
Network access 1,135,223 972,303 874,458
Other 182,694 156,709 139,746
- -------------------------------------------------------------------------------
2,071,980 1,733,592 1,505,733
- -------------------------------------------------------------------------------
Operating expenses
Plant operations 505,786 433,187 380,466
Customer operations 167,594 148,502 117,080
Corporate and other 259,635 211,924 186,483
Depreciation and amortization 450,851 396,866 398,284
- -------------------------------------------------------------------------------
1,383,866 1,190,479 1,082,313
- -------------------------------------------------------------------------------
Operating income $ 688,114 543,113 423,420
===============================================================================
Local service revenues. Local service revenues are derived from the
provision of local exchange telephone services in the Company's service areas.
Of the $149.5 million (24.7%) increase in local service revenues in 2003, $130.1
million was due to the properties acquired from Verizon in the third quarter of
2002. Of the remaining $19.4 million increase, $8.4 million was due to the
provision of custom calling features to more customers and $5.9 million was due
to increased rates in certain jurisdictions. Of the $113.1 million (23.0%)
increase in local service revenues in 2002, $102.8 million was due to the
acquisition of the Verizon properties in 2002. The remaining $10.3 million
increase was primarily due to a $7.6 million increase resulting from the
provision of custom calling features to more customers and a $1.8 million
increase due to increased rates in certain jurisdictions. Access lines declined
38,400 (1.6%) during 2003 compared to a decline of 19,600 (1.1%) in 2002
(exclusive of acquisitions). The Company believes the decline in the number of
access lines during 2003 and 2002 is primarily due to general economic
conditions in the Company's markets and the displacement of traditional wireline
telephone services by other competitive services, including the Company's DSL
product offering. Even as the economy recovers, the Company believes that any
rebound in access lines will be limited by continued access line losses caused
primarily by the impact of other competitive services. Based on current
conditions, the Company expects access lines to decline between 1 and 2% for
2004.
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 voice and data transmissions. 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 $162.9 million (16.8%) in 2003 and $97.8
million (11.2%) in 2002 due to the following factors:
2003 2002
increase increase
(decrease) (decrease)
- ------------------------------------------------------------------------------
(Dollars in thousands)
Acquisitions of Verizon properties in
third quarter 2002 $ 146,941 98,014
Increased recovery from the federal
Universal Service Fund ("USF") 250 13,832
One-time refund of access charges to
interexchange carriers 7,645 (7,645)
Intrastate revenues due to decreased
minutes of use and decreased access
rates in certain states (6,798) (27,740)
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 4,116 9,756
Rate changes in certain jurisdictions 2,472 5,600
Revision of prior year revenue
settlement agreements 9,983 1,912
Other, net (1,689) 4,116
- ------------------------------------------------------------------------------
$ 162,920 97,845
==============================================================================
As indicated in the chart above, in 2003 the Company experienced a
reduction in its intrastate revenues (exclusive of the properties acquired from
Verizon in 2002) of approximately $6.8 million primarily due to (i) a reduction
in intrastate minutes (partially due to the displacement of minutes by wireless
and electronic mail services) and (ii) decreased access rates in certain states.
The corresponding decrease in 2002 compared to 2001 was $27.7 million. The
Company believes intrastate minutes will continue to decline in 2004, although
the magnitude of such decrease cannot be precisely estimated.
The Company anticipates that revenue derived from its revision of prior
year revenue settlement agreements will be lower in 2004 compared to 2003
levels.
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 $26.0 million
(16.6%) during 2003, substantially all of which is due to the properties
acquired from Verizon in the third quarter of 2002. 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.
Operating expenses. Plant operations expenses during 2003 and 2002
increased $72.6 million (16.8%) and $52.7 million (13.9%), respectively. Of the
$72.6 million increase in 2003, $74.8 million was due to the properties acquired
from Verizon in the third quarter of 2002. The remaining $2.2 million decrease
was due to a $5.7 million decrease in information technology expenses and a $5.2
million decrease in repair and maintenance expenses. Such decreases were
partially offset by a $4.8 million increase in access expenses and $4.7 million
increase in salaries and benefits. Of the $52.7 million increase in 2002, $58.4
million was attributable to the properties acquired from Verizon in 2002 and
$13.8 million related to increases in salaries and benefits. Such increases were
partially offset by a $16.4 million decrease in access expenses primarily as a
result of changes in certain optional calling plans in Arkansas approved in late
2001 and a $3.0 million decrease in repairs and maintenance expense.
Customer operations, corporate and other expenses increased $66.8 million
(18.5%) in 2003 and $56.9 million (18.7%) in 2002. Of the $66.8 million increase
in 2003, $65.4 million related to the Verizon acquisitions in 2002. The
remaining increase of $1.4 million was due primarily to (i) a $14.0 million
increase in operating taxes, which included a $7.5 million charge arising out of
various operating tax audits in 2003, and (ii) a $6.7 million increase in
information technology expenses largely attributable to the Company's
development of the new billing system described below under "Development of
Billing System". Such increases were partially offset by (i) a $16.0 million
decrease in the provision for uncollectible receivables (as 2002 was adversely
impacted by the establishment of a $15.0 million reserve for uncollectible
receivables primarily related to the bankruptcy of MCI (formerly WorldCom,
Inc.), whereas 2003 was positively impacted by a $5.0 million reduction in the
provision for uncollectible receivables due to the partial recovery of amounts
previously written off related to the bankruptcy of MCI) and (ii) a $4.6 million
decrease in customer service expenses. 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 uncollectible receivables
(attributable to the above-mentioned establishment of a $15.0 million reserve
for uncollectible receivables primarily related to the bankruptcy of MCI which
was partially offset by an $11.1 million reduction in the provision for
uncollectible receivables for non-carrier customers). 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.
Depreciation and amortization increased $54.0 million (13.6%) in 2003 and
decreased $1.4 million (0.4%) in 2002. Of the $54.0 million increase in 2003,
$50.9 million was due to the properties acquired from Verizon in 2002. The
remaining increase is primarily due to an increase in depreciation expense due
to higher levels of plant in service in incumbent markets. 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. The composite depreciation rate for the Company's
telephone properties was 7.0% for 2003, 6.9% for 2002 and 6.8% for 2001.
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 and fiber transport operations. During 2003, the Company paid $55.2
million cash to acquire fiber transport assets in five central U.S. states
(which the Company operates under the name LightCore). The operating revenues,
expenses and income of the Company's other operations for 2003, 2002 and 2001
are summarized below.
Year ended December 31, 2003 2002 2001
- ------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 173,884 146,536 117,363
Internet 79,933 58,665 39,057
Other 54,948 33,203 17,351
- ------------------------------------------------------------------------------
308,765 238,404 173,771
- ------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating
expenses 226,693 180,076 142,919
Depreciation and amortization 19,790 14,760 8,754
- ------------------------------------------------------------------------------
246,483 194,836 151,673
- ------------------------------------------------------------------------------
Operating income $ 62,282 43,568 22,098
==============================================================================
Long distance revenues increased $27.3 million (18.7%) and $29.2 million
(24.9%) in 2003 and 2002, respectively. The $27.3 million increase in 2003 was
primarily attributable to the growth in the number of customers and increased
minutes of use ($32.6 million), primarily due to penetration of the markets
acquired from Verizon in 2002. Such increase was partially offset by a decrease
in the average rate charged by the Company ($5.3 million). 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 Company anticipates that increased competition will continue to
place downward pressure on rates. The number of long distance customers as of
December 31, 2003, 2002, and 2001 was approximately 769,760, 648,790, and
465,870, respectively.
Internet revenues increased $21.3 million (36.3%) in 2003 and $19.6
million (50.2%) in 2002 due primarily to growth in the number of customers,
principally due to the expansion of the Company's DSL product offering.
Other revenues increased $21.7 million (65.5%) primarily due to (i) $16.7
million of revenues associated with the Company's LightCore operations and (ii)
a $4.3 million increase in revenues in the Company's CLEC business primarily due
to an increased number of customers, including those acquired in connection with
the purchase of certain CLEC operations on February 28, 2002. 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 the above-referenced
CLEC acquisition in early 2002.
Cost of sales and operating expenses increased $46.6 million (25.9%) in
2003 primarily due to (i) a $14.6 million increase in expenses associated with
the Company's long distance operations (of which $7.4 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; $2.8 million was due to an
increase in the provision for doubtful accounts; and $2.4 million was due to an
increase in billing and collection costs); (ii) a $16.4 million increase in
expenses associated with the Company's Internet operations due to an increase in
the number of customers; and (iii) a $10.4 million increase in expenses
associated with the Company's LightCore operations.
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 was 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 due to an increase in customers. 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).
Depreciation and amortization increased $5.0 million in 2003 and $6.0
million in 2002 primarily due to increased depreciation expense in the Company's
CLEC and fiber transport businesses (including LightCore).
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 $28.5 million, $29.5 million and $22.0 million in 2003, 2002 and
2001, respectively. For additional information applicable to SFAS 71, see
"Regulation and Competition -- Other Matters."
INTEREST EXPENSE
Interest expense increased $4.9 million in 2003 primarily due to $7.5
million of interest associated with various operating tax audits. Such increase
was partially offset by reduced interest expense due to a decrease in average
debt outstanding.
Interest expense decreased $3.7 million in 2002 due to a decrease in
average debt outstanding and decreased rates.
INCOME FROM UNCONSOLIDATED CELLULAR ENTITY
Income from unconsolidated cellular entity was $6.2 million in 2003, $5.6
million in 2002 and $7.6 million in 2001. Such income represents the Company's
share of income from its 49% interest in a cellular partnership.
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.
OTHER INCOME AND EXPENSE
Other income and (expense) was $2.2 million in 2003, ($63.8 million) in
2002 and $32,000 in 2001. Included in 2002 was 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.
INCOME TAX EXPENSE
The Company's effective income tax rate (from continuing operations) was
35.2%, 35.3% and 38.0% in 2003, 2002 and 2001, 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. In 2003, the Company reduced the valuation allowance related to net
state operating loss carryforwards as it was more likely than not that future
taxable income will be sufficient to enable the Company to utilize a portion of
the operating loss carryforwards. For additional information, see Note 12 to the
Company's consolidated financial statements appearing elsewhere in this report.
The Company expects its effective income tax rate to increase in 2004 due to an
increase in the effective state income tax rate.
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
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
- ----------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 246,705 437,965
Operating expenses, exclusive of
corporate overhead costs of $11.3
million and $20.2 million (175,447) (305,351)
Income from unconsolidated
cellular entities 25,768 19,868
Minority interest expense (8,569) (11,510)
Gain on sale of discontinued operations 803,905 -
Nonrecurring gains - 166,928
Other income 188 4,707
Income tax expense (284,459) (118,657)
- ---------------------------------------------------------------------------
Income from discontinued operations,
net of tax $ 608,091 193,950
===========================================================================
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.
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.
For further information, see Notes 3 and 13 to the Company's consolidated
financial statements appearing elsewhere in this report.
ACQUISITIONS AND RELATED FINANCING ARRANGEMENTS
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 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 which lapsed during 2003. These facilities replaced
credit facilities that matured during the third quarter of 2002.
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which may be converted into
shares of CenturyTel common stock at a conversion price of $40.455 per share).
The Company used proceeds from the sale of equity units, senior notes and
convertible senior debentures, along with the $1.59 billion cash proceeds
received from the sale of substantially all of the Company's wireless operations
and utilization of its credit facilities, to finance the third quarter 2002
acquisitions of telephone properties in Alabama and Missouri from Verizon which
aggregated $2.201 billion, the redemption of $400 million principal amount in
remarketable debt securities (plus an associated $71.1 million premium payment)
in October 2002, and the Company's fourth quarter 2002 estimated tax payment,
which aggregated $290 million and included the obligation to pay taxes
associated with the sale of substantially all of its wireless operations.
In June and December 2003, the Company purchased certain fiber transport
assets for an aggregate of approximately $55.2 million. In the fourth quarter of
2003, the Company acquired an additional 24.3% interest in a telephone company
in which it owned a majority interest for $32.4 million cash.
ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"),
which 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
obsolete assets, depreciation rates of certain assets established by regulatory
authorities for the Company's telephone operations subject to Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS 71"), have historically included a component for
removal costs in excess of the related estimated salvage value. Notwithstanding
the adoption of SFAS 143, SFAS 71 requires the Company to continue to reflect
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 acquired from Verizon in 2002 and its other operations
(neither of which are subject to SFAS 71), the Company has not accrued a
liability for anticipated removal costs in the past. For these reasons, the
adoption of SFAS 143 did not have a material effect on the Company's financial
statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Financial Instruments
with Characteristics of both Liabilities and Equity" ("SFAS 150"), which
provides standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and for pre-existing instruments as of the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on the Company's financial condition or results of operations.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation" ("SFAS 148"). SFAS 148, effective for fiscal years ending after
December 15, 2002, amends Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") to provide alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Company has elected to account for employee stock-based compensation using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by SFAS
123.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Element Deliverables." This release addresses how to account for arrangements
that may involve the delivery or performance of multiple products, services or
rights to use assets. Under this release, revenue arrangements with multiple
deliverables should be divided into separate units of accounting based on their
relative fair value. The final consensus was applicable to agreements entered
into in periods beginning after June 15, 2003. The adoption of EITF 00-21 did
not have a material impact on the Company's results of operations.
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.
Certain of the Company's telephone subsidiaries file tariffs directly with
the Federal Communications Commission ("FCC") for certain interstate revenues.
Generally, the Company records such revenue at the authorized rate of return
prescribed by the FCC. If amounts are billed in excess of the authorized rate of
return, such excess is subject to refund upon request from other
telecommunications carriers and customers. Amounts not requested for refund by
carriers or customers are recognized as revenues at the end of the settlement
period, which is generally 33 months subsequent to the two-year monitoring
periods. See Note 19 to the Company's consolidated financial statements
appearing elsewhere in this report for additional information.
Allowance for doubtful accounts. In evaluating the collectibility of its
accounts receivable, the Company assesses a number of factors, including a
specific customer's or carrier's ability to meet its financial obligations to
the Company, the length of time the receivable has been past due and historical
collection experience. Based on these assessments, the Company records both
specific and general reserves for uncollectible accounts receivable to reduce
the related accounts receivable to the amount the Company ultimately expects to
collect from customers and carriers. If circumstances change or economic
conditions worsen such that the Company's past collection experience is no
longer relevant, the Company's estimate of the recoverability of its accounts
receivable could be further reduced from the levels reflected in the
accompanying consolidated balance sheet.
Purchase price allocation. For the properties acquired from Verizon in
2002, the Company allocated the aggregate purchase price to the assets acquired
and liabilities assumed based on fair value at the date of acquisition. The fair
value of property, plant and equipment and identifiable intangible assets was
determined by an independent appraisal of such assets. The fair value of the
postretirement benefit obligation was determined through actuarial valuations.
The fair value of current assets and current liabilities was assumed to
approximate the recorded value at acquisition due to their short maturity. The
remaining unallocated acquisition cost was considered goodwill.
Pension and postretirement benefits. The amounts recognized in the
financial statements related to pension and postretirement benefits are
determined on an actuarial basis, which utilizes many assumptions in the
calculation of such amounts. A significant assumption used in determining the
Company's pension and postretirement expense is the expected long-term rate of
return on plan assets. For 2003, the Company lowered its expected long-term rate
of return on plan assets to 8.25%, reflecting the expected moderation of
long-term rates of return in the financial markets. For 2002, such expected
return was assumed to be 10%.
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 6.0% at December 31, 2003 from 6.75% at
December 31, 2002. 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.
Intangible and long-lived assets. Effective January 1, 2002, the Company
was subject to testing 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 Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144").
SFAS 142 requires goodwill recorded in business combinations to be
reviewed for impairment at least annually 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 (before interest, taxes and depreciation and
amortization). 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 required annual test of goodwill
impairment (as of September 30, 2003) under SFAS 142 and determined its goodwill
is not impaired as of such date. 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 year ended December 31, 2001 totaled approximately $69.2
million.
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 over time applicable to its regulated
telephone operations through the rate-making process. Possible future regulatory
changes and the continued movement toward alternative forms of regulation for
intrastate operations may alter the Company's ability to recover increased costs
in its regulated operations. For the properties acquired from Verizon in 2002,
which are regulated under price-cap regulation for interstate purposes, price
changes are limited to the rate of inflation, minus a productivity offset. For
additional information regarding the current regulatory environment, see
"Regulation and Competition." As operating expenses in the Company's
nonregulated lines of business increase as a result of inflation, the Company,
to the extent permitted by competition, attempts to recover the costs by
increasing prices for its services and equipment.
MARKET RISK
The Company is exposed to market risk from changes in interest rates on
its long-term debt obligations. The Company has estimated its market risk using
sensitivity analysis. Market risk is defined as the potential change in the fair
value of a fixed-rate debt obligation due to a hypothetical adverse change in
interest rates. Fair value of 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
financing 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, 2003, the fair value of the Company's long-term debt was
estimated to be $3.4 billion based on the overall weighted average rate of the
Company's long-term debt of 6.4% and an overall weighted maturity of 10 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 long-term debt resulting from a hypothetical increase of 64 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 $143.9 million decrease in the fair value of the Company's
long-term debt. As of December 31, 2003, after giving effect to interest rate
swaps currently in place, approximately 84% of the Company's long-term debt
obligations were fixed rate.
The Company seeks to maintain a favorable mix of fixed and variable rate
debt in an effort to limit interest costs and cash flow volatility resulting
from changes in rates. From time to time, the Company uses derivative
instruments to (i) lock-in or swap its exposure to changing or variable interest
rates for fixed interest rates or (ii) to swap obligations to pay fixed interest
rates for variable interest rates. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes. Management
periodically reviews the Company's exposure to interest rate fluctuations and
implements strategies to manage the exposure.
At December 31, 2003, the Company had outstanding four fair value
interest rate hedges associated with the full $500 million aggregate principal
amount of its Series L senior notes, due 2012, that pay interest at a fixed rate
of 7.875%. These hedges are "fixed to variable" interest rate swaps that
effectively convert the Company's fixed rate interest payment obligations under
these notes into obligations to pay variable rates that range from the six-month
London InterBank Offered Rate ("LIBOR") plus 3.229% to the six-month LIBOR plus
3.67%, with settlement and rate reset dates occurring each six months through
the expiration of the hedges in August 2012. At December 31, 2003, the Company
realized a rate under these hedges of 4.8%. Interest expense was reduced by $7.7
million during 2003 as a result of these hedges. The aggregate fair market value
of these hedges was $11.7 million at December 31, 2003 and is reflected both as
a liability and as a decrease in the Company's underlying long-term debt on the
December 31, 2003 balance sheet. With respect to these hedges, 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 $17.8
million decrease in the fair value of these hedges.
Effective May 8, 2003, the Company terminated a fair value interest rate
hedge associated with $500 million aggregate principal amount of its Series H
senior notes and received $22.3 million cash upon settlement, which represented
the fair value of the hedge at the termination date. Such amount will be
amortized as a reduction of interest expense through 2010, the maturity date of
the Series H notes.
DEVELOPMENT OF BILLING SYSTEM
The Company is in the process of developing an integrated billing and
customer care system which will provide the Company with, in addition to
standard billing functionality currently being provided by its legacy system,
custom built hardware and software technology for more efficient and effective
customer care, billing and provisioning systems. The costs to develop such
system have been accounted for in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). The capitalized costs of the system aggregated
$163.5 million (before accumulated amortization) at December 31, 2003. The
Company began amortizing its billing system costs in early 2003 (over a 20-year
period) based on the total number of customers that the Company has migrated to
the new system.
The system remains in the development stage and has required
substantially more time and money to develop than originally anticipated. The
Company currently expects to complete all phases of the new system no later than
mid-2005 at an aggregate capitalized cost in accordance with SOP 98-1 of
approximately $200-215 million (exclusive of previously-disclosed write-offs).
In addition, the Company expects to incur additional costs related to completion
of the project, including (i) approximately $15 million of customer service
related and data conversion costs (the majority of which are expected to be
incurred in 2004) that will be expensed as incurred and (ii) $10 million of
capitalized hardware costs (which will be amortized over a three-year period).
The estimates above do not include any amounts for maintenance or on-going
support of either the old or new system, and are based on assumptions regarding
various future events, several of which are beyond the Company's control. There
is no assurance that the system will be completed in accordance with this
schedule or budget, 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 development costs and further explore its other billing and
customer care system alternatives.
PENSION AND MEDICAL COSTS
During the past several years, the Company's employee benefit expenses,
including defined benefit pension expenses and pre- and post-retirement medical
expenses, have increased due to rising medical costs, the decline of equity
markets in recent years prior to 2003 and record low interest rates. During
2003, such costs (including the effect of the Verizon acquisitions in 2002)
increased approximately $19.3 million over 2002. As a result of continued
increases in medical costs, the Company discontinued its practice of subsidizing
post-retirement medical benefits for persons hired on or after January 1, 2003.
In addition, the Company announced changes, effective January 1, 2004, that
would decrease its subsidization of benefits provided under its postretirement
medical plan. The amount of the Company's cost savings will be dependent upon
several factors, including the age and years of service of the Company's
retirees. The Company also lowered its expected long-term return on plan assets
for its pension and post-retirement plans to 8.25% for 2003 compared to 10% for
2002. Pension and medical costs are anticipated to increase between $6-8
million in 2004 compared to 2003 levels.
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 $1.068 billion, $793.4 million and $572.9 million in
2003, 2002 and 2001, 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 $464.6 million, $2.623 billion and $417.2 million in
2003, 2002 and 2001, respectively. Cash used for acquisitions was $86.2 million
in 2003 (primarily due to the acquisitions of fiber transport assets and the
acquisition of an additional 24.3% interest in a telephone company in which the
Company owns a majority interest), $2.245 billion in 2002 (substantially all of
which relates to the 2002 Verizon acquisitions) and $47.1 million in 2001.
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 2003 were $317.4 million for
telephone operations and $60.6 million for other operations. Capital
expenditures from continuing operations during 2002 and 2001 were $386.3 million
and $435.5 million, respectively.
Financing activities. Net cash provided by (used in) financing activities
from continuing operations was ($403.8) million in 2003, $506.3 million in 2002
and ($395.4) million in 2001. Net payments of debt were $432.3 million in 2003.
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.
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. The Company did not
renew its $267 million 364-day facility in 2003.
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which may be converted into
shares of CenturyTel common stock at a conversion price of $40.455 per share).
Holders of the convertible senior debentures will have the right to require the
Company to purchase all or a portion of the debentures on August 1, 2006, August
1, 2010 and August 1, 2017 at par plus any accrued and unpaid interest to the
purchase date. For additional information, see Note 6 to the Company's
consolidated financial statements appearing elsewhere in this report.
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion cash.
The Company used proceeds from the sale of equity units, senior notes and
convertible senior debentures, along with the proceeds received from the sale of
the Company's wireless operations and utilization of its $800 million credit
facilities, to finance the third quarter 2002 acquisitions of telephone
properties in Alabama and Missouri from Verizon which aggregated $2.201 billion,
the redemption of $400 million principal amount in remarketable debt securities
(plus an associated $71.1 million premium payment) in October 2002 and the
Company's fourth quarter 2002 estimated tax payment, which aggregated $290
million and included the obligation to pay taxes associated with the sale of
substantially all of its wireless operations.
In second quarter 2001, the Company completed the sale of 30 PCS operating
licenses for an aggregate of $195 million to Leap Wireless International, Inc.
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 2004 total $290 million for
telephone operations and $110 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 following table contains certain information concerning the
Company's material contractual obligations as of December 31, 2003.
Payments due by period
- ---------------------------------------------------------------------------------------------------------
Less than After
Contractual 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 $ 3,181,755 72,453 523,952 (1) 805,397 (2) 1,779,953
- ----------------------------------------------------------------------------------------------------------
(1) 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.
(2) 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.
On February 3, 2004, the Company announced that its board of directors
approved a stock repurchase program that will allow the Company to repurchase up
to an aggregate of $400 million of either its common stock or convertible equity
units prior to December 31, 2005. The Company commenced purchases under this
plan on February 6, 2004.
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 or dispositions until it has
entered into a preliminary or definitive agreement. 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.
As of December 31, 2003, the Company had available $533.0 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. The Company has a
commercial paper program that authorizes the Company to have outstanding up to
$1.5 billion in commercial paper at any one time; however, borrowings are
limited to the amount available under its credit facility. As of December 31,
2003, 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. At December 31, 2003, the Company held over $203
million of cash and cash equivalents.
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. Any downgrade in the Company's
ratings could adversely impact the Company's ability to issue commercial paper
or use its bank facility.
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:
2003 2002 2001
- --------------------------------------------------------------------------
Debt to total capitalization 47.8% 54.2 57.0
Ratio of earnings from continuing
operations to fixed charges
and preferred stock dividends 3.33 2.33 2.03
- --------------------------------------------------------------------------
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. 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.
During 2003, the FCC released new rules which outline the obligations of
incumbent LECs to lease elements of their circuit-switched 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. These wholesale
rates are based on a forward-looking cost model and other terms that
substantially limit the profitability of these arrangements to incumbent LECs.
This new rule also provides for a significant role of state regulatory
commissions in implementing these new guidelines and establishing wholesale
service rates. On March 2, 2004, a federal district court of appeals overturned
the rules previously adopted by the FCC requiring LECs to provide competitors
with discounted access to the LECs networks. The court also ruled that the FCC
should not have given states the authority previously granted. It is expected
that such decision will be appealed to the Supreme Court. During 2003, the FCC
also sought public comments on whether it should make additional changes to its
interconnection regulations, and instituted a comprehensive review of its
methodologies for establishing wholesale 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, coupled with various technological developments, have
led to the continued growth of various companies providing services that compete
with LECs' services. Wireless services entities also increasingly constitute a
significant source of competition with LECs.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that will provide predictable levels of
support to rural local exchange carriers, including substantially all of the
Company's local exchange carriers. During 2003 and 2002 the Company's telephone
subsidiaries received $199.2 million and $192.4 million, respectively, from the
federal Universal Service High Cost Loop Fund, representing 8.4% and 9.8%,
respectively, of the Company's consolidated revenues from continuing operations
for 2003 and 2002. The Company anticipates its 2004 revenues from the federal
Universal Service High Cost Loop Fund will be lower than 2003 levels due to
increases in the nationwide average cost per loop factor used by the FCC to
allocate funds among all recipients. Wireless and other competitive service
providers continue to seek eligible telecommunications carrier ("ETC") status in
order to be eligible to receive Universal Service Fund support, which is placing
additional financial pressure on the amount of money needed to provide support
to all eligible service providers, including support payments the Company
receives from the High Cost Loop Fund. As a result of the limited growth in the
size of the High Cost Loop Fund and changes in requests for support from the
Universal Service Fund, the Company has no assurance it will continue to
receive payments from the Universal Service Fund commensurate with those
received in the past.
In 2001, the FCC modified its interstate access charge rules and universal
service support system for rate of return LECs. 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
enhanced the competitiveness of rate of return carriers by giving them pricing
flexibility; (iii) lowered per minute rates collected for federal access
charges; (iv) created a new explicit universal service support mechanism that
replaced 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) preserved the
historic 11.25% authorized interstate return rate for rate of return LECs. The
effect of this order on the Company was revenue neutral for interstate purposes
but did result in a reduction in intrastate revenues in Arkansas and Ohio (where
intrastate access rates must mirror the interstate access rates).
Technological developments have led to the development of new services
that compete with traditional LEC services. Technological improvements have
enabled cable television companies to provide traditional circuit-switched
telephone service over their cable networks, and several national cable
companies have aggressively pursued this opportunity. Recent improvements in the
quality of "Voice-over-Internet Protocol" ("VoIP") service have led several
large cable television and telephone companies, as well as start-up companies,
to substantially increase their offerings of VoIP service to business and
residential customers. VoIP providers route calls over the Internet, without use
of ILEC's circuit switches and, in certain cases, without use of ILEC's networks
to carry their communications traffic. VoIP providers can offer services at
prices substantially below those currently charged for traditional local and
long distance telephone services for several reasons, including lower network
cost structures and the current ability of VoIP providers to use ILECs' networks
without paying access charges. In December 2003, the FCC initiated rulemaking
that is expected to address the effect of VoIP on intercarrier compensation,
universal service and emergency services. There can be no assurance that this
rulemaking will be on terms favorable to ILECs, or that VoIP providers will not
successfully compete for the Company's customers.
In November 2003, the FCC adopted rules requiring companies to allow their
customers to keep their wireline or wireless phone number when switching to
another service provider (generally referred to as "local number portability").
For several years, customers have been able to retain their numbers when
switching their local service between wireline carriers. The new rules now
require local number portability between wireline and wireless carriers. This
requirement went into effect November 24, 2003 for wireline carriers in the top
100 Metropolitan Statistical Areas ("MSAs"). The new requirement will go into
effect May 24, 2004 for wireline carriers operating in markets smaller than the
top 100 MSAs. The majority of the Company's wireline operations are conducted in
markets below the top 100 MSAs. Local number portability may increase the number
of customers who chose to completely forego the use of traditional wireline
phone service, although the Company believes that it is too early to fully
assess the rule's impact. The costs to comply with the requirements of local
number portability, net of the amount that is recoverable through the ratemaking
process, are not expected to have a material impact on the Company's results of
operations.
The FCC is currently examining several issues that could have a
substantial impact on the Company's revenues, including a broad inquiry
initiated in 2001 into all currently regulated forms of intercarrier
compensation. As discussed further below, certain providers of competitive
communications services are not required to compensate ILECs for the use of
their networks. The Company relies on access revenues as an important source of
revenues. Depending on the final outcome of the FCC's intercarrier compensation
issue, the Company could suffer a material loss of access revenues.
Recent events affecting the Company. During the last few years, several
states in which the Company has substantial operations took legislative or
regulatory steps to further introduce competition into the LEC business. The
number of companies which have requested authorization to provide local exchange
service in the Company's service areas has increased in recent years, especially
in the markets acquired from Verizon in 2002 and 2000, and it is anticipated
that similar action may be taken by others in the future.
State alternative regulation plans recently adopted by certain of the
Company's LECs have also affected revenue growth recently.
Certain long distance carriers continue to request that the Company reduce
intrastate access tariffed rates for certain of its LECs. In addition, the
Company has recently experienced reductions in intrastate traffic, partially due
to the displacement of minutes by wireless and electronic mail services. In 2003
the Company incurred a reduction in its intrastate revenues (exclusive of the
properties acquired from Verizon in 2002) of approximately $6.8 million compared
to 2002 primarily due to these factors. The corresponding decrease in 2002
compared to 2001 was $27.7 million. The Company believes such trend of decreased
intrastate minutes will continue in 2004, although the magnitude of such
decrease cannot be precisely estimated.
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.
Currently, the LOS Fund is funded primarily by BellSouth, which proposes to
expand the base of contributors into the LOS Fund. A recommendation by the
Commission staff is not expected until late 2004. 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, technological and competitive changes will
result in future revenue reductions. The Company expects its telephone revenues
to decline in 2004 due to continued access line losses and reduced network
access revenues; however, the Company expects its consolidated revenues to
increase in 2004 primarily due to increased revenues from its newly-acquired
LightCore operations and expected increased demand for its long distance, fiber
transport, DSL and other nonregulated 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 recognition of an asset, reduce or eliminate the
value of an asset and impose a liability on a regulated enterprise. Such
regulatory assets are required to be recorded and, accordingly, reflected in the
balance sheet of an entity subject to SFAS 71. The Company is monitoring the
ongoing applicability of SFAS 71 to its regulated telephone operations due to
the changing regulatory, competitive and legislative environments, and it is
possible that changes in regulation, legislation or competition or in the demand
for regulated services or products could result in the Company's telephone
operations no longer being subject to SFAS 71 in the near future.
Statement of Financial Accounting Standards No. 101, "Regulated
Enterprises - Accounting for the Discontinuance of Application of FASB Statement
No. 71" ("SFAS 101"), specifies the accounting required when an enterprise
ceases to meet the criteria for application of SFAS 71. SFAS 101 requires the
elimination of the effects of any actions of regulators that have been
recognized as assets and liabilities in accordance with SFAS 71 but would not
have been recognized as assets and liabilities by nonregulated enterprises. SFAS
101 further provides that the carrying amounts of property, plant and equipment
are to be adjusted only to the extent the assets are impaired and that
impairment shall be judged in the same manner as for nonregulated enterprises.
The Company's consolidated balance sheet as of December 31, 2003 included
regulatory assets of approximately $3.3 million (primarily deferred costs
related to financing costs, regulatory proceedings and income taxes) and
regulatory liabilities of approximately $912,000 (related to income taxes). Net
deferred income tax liabilities related to the regulatory assets and liabilities
quantified above were $1.2 million.
When and if 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 2003
have not been material, and the Company currently has no reason to believe that
such costs will become material.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
For information pertaining to the Company's market risk disclosure, see
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk".
Item 8. Financial Statements and Supplementary Data
Report of Management
The Shareholders
CenturyTel, Inc.:
Management has prepared and is responsible for the Company's consolidated
financial statements. The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and necessarily include amounts determined using our best judgments
and estimates with consideration given to materiality.
The Company maintains internal control systems and related policies and
procedures designed to provide reasonable assurance that the accounting records
accurately reflect business transactions and that the transactions are in
accordance with management's authorization. The design, monitoring and revision
of the systems of internal control involve, among other things, our judgment
with respect to the relative cost and expected benefits of specific control
measures. Additionally, the Company maintains an internal auditing function
which independently evaluates the effectiveness of internal controls, policies
and procedures and formally reports on the adequacy and effectiveness thereof.
The Company's consolidated financial statements have been audited by KPMG
LLP, independent certified public accountants, who have expressed their opinion
with respect to the fairness of the consolidated financial statements. Their
audit was conducted in accordance with auditing standards generally accepted in
the United States of America, which include the consideration of the Company's
internal controls to the extent necessary to form an independent opinion on the
consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed of independent
directors who are not officers or employees of the Company. The Committee meets
periodically with the independent certified public accountants, internal
auditors and management. The Committee considers the independence of the
external auditors and the audit scope and discusses internal control, financial
and reporting matters. Both the independent and internal auditors have free
access to the Committee.
/s/ R. Stewart Ewing, Jr.
- --------------------------
R. Stewart Ewing, Jr.
Executive Vice President and Chief Financial Officer
March 12, 2004
Independent Auditors' Report
The Board of Directors
CenturyTel, Inc.:
We have audited the consolidated financial statements of CenturyTel, Inc.
and subsidiaries as listed in Item 15a(i). In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in Item 15a(ii). These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CenturyTel,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002.
/s/ KPMG LLP
- -----------------
KPMG LLP
Shreveport, Louisiana
January 29, 2004
CENTURYTEL, INC.
Consolidated Statements of Income
Year ended December 31,
- -----------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES
Telephone $ 2,071,980 1,733,592 1,505,733
Other 308,765 238,404 173,771
- -----------------------------------------------------------------------------------------
Total operating revenues 2,380,745 1,971,996 1,679,504
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses
(exclusive of depreciation and
amortization) 1,159,708 973,689 826,948
Corporate overhead costs allocable to
discontinued operations - 11,275 20,213
Depreciation and amortization 470,641 411,626 407,038
- -----------------------------------------------------------------------------------------
Total operating expenses 1,630,349 1,396,590 1,254,199
- -----------------------------------------------------------------------------------------
OPERATING INCOME 750,396 575,406 425,305
- -----------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (226,751) (221,845) (225,523)
Income from unconsolidated
cellular entity 6,160 5,582 7,592
Nonrecurring gains and losses, net - 3,709 33,043
Other income and expense 2,154 (63,814) 32
- -----------------------------------------------------------------------------------------
Total other income (expense) (218,437) (276,368) (184,856)
- -----------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 531,959 299,038 240,449
Income tax expense 187,252 105,505 91,368
- -----------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 344,707 193,533 149,081
DISCONTINUED OPERATIONS
Income from discontinued operations,
net of $284,459, and $118,657 tax - 608,091 193,950
- -----------------------------------------------------------------------------------------
NET INCOME $ 344,707 801,624 343,031
=========================================================================================
NET INCOME, AS ADJUSTED FOR GOODWILL
AMORTIZATION $ 344,707 801,624 399,297
=========================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Income
(Continued)
Year ended December 31,
- --------------------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
BASIC EARNINGS PER SHARE
From continuing operations $ 2.40 1.36 1.06
From continuing operations, as adjusted for
goodwill amortization $ 2.40 1.36 1.39
From discontinued operations $ - 4.29 1.38
From discontinued operations, as adjusted for
goodwill amortization $ - 4.29 1.45
Basic earnings per share $ 2.40 5.66 2.43
Basic earnings per share, as adjusted for
goodwill amortization $ 2.40 5.66 2.83
DILUTED EARNINGS PER SHARE
From continuing operations $ 2.38 1.35 1.05
From continuing operations, as adjusted for
goodwill amortization $ 2.38 1.35 1.37
From discontinued operations $ - 4.26 1.36
From discontinued operations, as adjusted for
goodwill amortization $ - 4.26 1.43
Diluted earnings per share $ 2.38 5.61 2.41
Diluted earnings per share, as adjusted for
goodwill amortization $ 2.38 5.61 2.81
DIVIDENDS PER COMMON SHARE $ .22 .21 .20
============================================================================================
AVERAGE BASIC SHARES OUTSTANDING 143,583 141,613 140,743
============================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 144,700 142,879 142,307
============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Comprehensive Income
Year ended December 31,
- -----------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 344,707 801,624 343,031
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 tax - - 9,999
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 and ($19,312) tax 35,864 (35,864) -
Derivative instruments:
Net losses on derivatives hedging
variability of cash flows, net of
($36) and ($496) tax (67) (921) -
Less: reclassification adjustment
for losses included in net income,
net of $487 and $44 tax 906 82 -
- -----------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 381,410 764,921 317,560
=========================================================================================
COMPREHENSIVE INCOME, AS ADJUSTED
FOR GOODWILL AMORTIZATION $ 381,410 764,921 373,826
=========================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Balance Sheets
December 31,
- -------------------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 203,181 3,661
Accounts receivable
Customers, less allowance of $13,862 and $15,314 163,526 161,319
Interexchange carriers and other, less allowance
of $9,817 and $18,648 72,661 111,673
Materials and supplies, at average cost 9,229 10,150
Other 14,342 9,099
- -------------------------------------------------------------------------------------------
Total current assets 462,939 295,902
- -------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,455,481 3,531,645
- -------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 3,425,001 3,427,281
Other 552,431 515,580
- -------------------------------------------------------------------------------------------
Total investments and other assets 3,977,432 3,942,861
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,895,852 7,770,408
==========================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 72,453 70,737
Accounts payable 113,274 64,825
Accrued expenses and other current liabilities
Salaries and benefits 83,628 63,937
Income taxes 43,082 40,897
Other taxes 35,532 28,183
Interest 64,247 59,045
Other 14,555 18,596
Advance billings and customer deposits 44,612 41,884
- -------------------------------------------------------------------------------------------
Total current liabilities 471,383 388,104
- -------------------------------------------------------------------------------------------
LONG-TERM DEBT 3,109,302 3,578,132
- -------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 836,651 716,168
- -------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000
shares, issued and outstanding 144,364,168 and
142,955,839 shares 144,364 142,956
Paid-in capital 576,515 537,804
Accumulated other comprehensive income (loss),
net of tax - (36,703)
Retained earnings 2,750,162 2,437,472
Unearned ESOP shares (500) (1,500)
Preferred stock - non-redeemable 7,975 7,975
- -------------------------------------------------------------------------------------------
Total stockholders' equity 3,478,516 3,088,004
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 7,895,852 7,770,408
===========================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
- ---------------------------------------------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 344,707 801,624 343,031
Adjustments to reconcile net income to net
cash provided by operating activities from
continuing operations
Income from discontinued operations, net of tax - (608,091) (193,950)
Depreciation and amortization 470,641 411,626 407,038
Deferred income taxes 128,706 71,112 57,944
Income from unconsolidated cellular entity (6,160) (5,582) (7,592)
Nonrecurring gains and losses, net - (3,709) (33,043)
Changes in current assets and current liabilities
Accounts receivable 37,980 (13,481) 34,266
Accounts payable 47,972 3,769 (29,485)
Accrued taxes 57,709 43,046 1,078
Other current assets and other current
liabilities, net 17,323 36,316 9,526
Retirement benefits (14,739) (9,416) (5,059)
Increase in noncurrent assets (23,528) (30,543) (65,698)
Increase (decrease) in other noncurrent liabilities (6,151) 35,489 691
Other, net 13,504 61,274 54,139
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities
from continuing operations 1,067,964 793,434 572,886
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Acquisitions, net of cash acquired (86,243) (2,245,026) (47,131)
Payments for property, plant and equipment (377,939) (386,267) (435,515)
Proceeds from sale of assets - 4,144 58,184
Distributions from unconsolidated cellular entity 1,104 5,438 3,713
Other, net (1,560) (1,378) 3,553
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities
from continuing operations (464,638) (2,623,089) (417,196)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of debt - 2,123,618 3,896
Payments of debt (432,258) (1,592,246) (379,516)
Proceeds from settlement of interest rate hedge contract 22,315 - -
Proceeds from issuance of common stock 33,980 29,125 7,351
Payment of debt issuance costs - (12,999) -
Payment of equity unit issuance costs - (15,867) -
Cash dividends (32,017) (30,156) (28,653)
Other, net 4,174 4,866 1,549
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities
from continuing operations (403,806) 506,341 (395,373)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations - 1,323,479 231,772
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 199,520 165 (7,911)
Cash and cash equivalents at beginning of year 3,661 3,496 11,407
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 203,181 3,661 3,496
=========================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Stockholders' Equity
Year ended December 31,
- -------------------------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------------------------
(Dollars and shares in thousands)
COMMON STOCK
Balance at beginning of year $ 142,956 141,233 140,667
Conversion of convertible securities into
common stock - - 254
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,408 1,723 312
- -------------------------------------------------------------------------------------------------
Balance at end of year 144,364 142,956 141,233
- -------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of year 537,804 524,668 509,840
Equity unit issuance costs and initial
contract adjustment liability - (24,377) -
Conversion of convertible securities into
common stock - - 3,046
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 32,572 27,402 7,039
Amortization of unearned compensation and other 6,139 10,111 4,743
- -------------------------------------------------------------------------------------------------
Balance at end of year 576,515 537,804 524,668
- -------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
(LOSS), NET OF TAX
Balance at beginning of year (36,703) - 25,471
Change in other comprehensive income
(loss) (net of reclassification
adjustment), net of tax 36,703 (36,703) (25,471)
- -------------------------------------------------------------------------------------------------
Balance at end of year - (36,703) -
- -------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 2,437,472 1,666,004 1,351,626
Net income 344,707 801,624 343,031
Cash dividends declared
Common stock - $.22, $.21 and
$.20 per share (31,618) (29,757) (28,254)
Preferred stock (399) (399) (399)
- -------------------------------------------------------------------------------------------------
Balance at end of year 2,750,162 2,437,472 1,666,004
- -------------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of year (1,500) (2,500) (3,500)
Release of ESOP shares 1,000 1,000 1,000
- -------------------------------------------------------------------------------------------------
Balance at end of year (500) (1,500) (2,500)
- -------------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of year 7,975 7,975 7,975
- -------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,478,516 3,088,004 2,337,380
=================================================================================================
COMMON SHARES OUTSTANDING
Balance at beginning of year 142,956 141,233 140,667
Conversion of convertible securities
into common stock - - 254
Issuance of common stock through
dividend reinvestment, incentive
and benefit plans 1,408 1,723 312
- -------------------------------------------------------------------------------------------------
Balance at end of year 144,364 142,956 141,233
=================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
(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.
Regulatory accounting - 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 recognition of an asset, reduce or eliminate the
value of an asset and impose a liability on a regulated enterprise. Such
regulatory assets are required to be recorded and, accordingly, reflected in the
balance sheet of an entity subject to SFAS 71. The Company is monitoring the
ongoing applicability of SFAS 71 to its regulated telephone operations due to
the changing regulatory, competitive and legislative environments, and it is
possible that changes in regulation, legislation or competition or in the demand
for regulated services or products could result in the Company's telephone
operations no longer being subject to SFAS 71 in the near future.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue recognition - Revenues are generally recognized when services are
provided or when products are delivered to customers. Revenue that is billed in
advance includes monthly recurring network access services, special access
services and monthly recurring local line charges. The unearned portion of this
revenue is initially deferred as a component of advanced billings and customer
deposits on the Company's balance sheet and recognized as revenue over the
period that the services are provided. Revenue that is billed in arrears
includes nonrecurring network access services, nonrecurring local services and
long distance services. The earned but unbilled portion of this revenue is
recognized as revenue in the period that the services are provided.
Certain of the Company's telephone subsidiaries participate in revenue
sharing arrangements with other telephone companies for interstate revenue and
for certain intrastate revenue. Such sharing arrangements are funded by toll
revenue and/or access charges within state jurisdictions and by access charges
in the interstate market. Revenues earned through the various sharing
arrangements are initially recorded based on the Company's estimates.
Property, plant and equipment - Telephone plant is stated at original cost.
Normal retirements of telephone plant are charged against accumulated
depreciation, along with the costs of removal, less salvage, with no gain or
loss recognized. Renewals and betterments of plant and equipment are capitalized
while repairs, as well as renewals of minor items, are charged to operating
expense. Depreciation of telephone plant is provided on the straight line method
using class or overall group rates acceptable to regulatory authorities; such
rates range from 1.8% to 25%.
Non-telephone property is stated at cost and, when sold or retired, a
gain or loss is recognized. Depreciation of such property is provided on the
straight line method over estimated service lives ranging from three to 30
years.
Intangible assets - Effective January 1, 2002, in accordance with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), 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 (or in these notes) 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.
Long-lived assets - Effective January 2002, Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), addresses financial accounting and reporting for the
impairment or disposal of long-lived assets (exclusive of goodwill) and also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
and that will be eliminated from the ongoing operations of the entity in a
disposal transaction. As a result of the Company's agreement in March 2002 to
sell its wireless operations (which was consummated on August 1, 2002) (see Note
3), such operations have been reflected as discontinued operations for the years
ended December 31, 2002 and 2001.
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
affiliates not subject to SFAS 71 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 - Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), requires all derivative instruments be recognized as either assets or
liabilities at fair value on the balance sheet. The Company uses derivative
instruments to (i) lock-in or swap its exposure to changing or variable interest
rates for fixed interest rates or (ii) swap obligations to pay fixed interest
rates for variable interest rates. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes. Management
periodically reviews the Company's exposure to interest rate fluctuations and
implements strategies to manage the exposure.
Earnings per share - Basic earnings per share amounts are determined on the
basis of the weighted average number of common shares outstanding during the
year. Diluted earnings per share gives effect to all potential dilutive common
shares that were outstanding during the period.
Stock-based compensation - The Company accounts for 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 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 2003 the Company granted 1,720,317 options (the "2003 Options") at
market price. The weighted average fair value of each of the 2003 Options was
estimated as of the date of grant to be $9.94 using an option-pricing model with
the following assumptions: dividend yield - .7%; expected volatility - 30%;
weighted average risk-free interest rate - 3.4%; and expected option life -
seven years.
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%;
weighted average 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%;
weighted average risk-free interest rate - 4.8%; and expected option life -
seven years.
If compensation cost for CenturyTel's options had been determined
consistent with SFAS 123, the Company's net income and earnings per share on a
pro forma basis for 2003, 2002 and 2001 would have been as follows:
Year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 344,707 801,624 343,031
Less: Total stock-based compensation
expense determined under fair value based
method, net of tax $ (13,183) (15,001) (8,971)
--------------------------------------
Pro forma net income $ 331,524 786,623 334,060
======================================
Basic earnings per share
As reported $ 2.40 5.66 2.43
Pro forma $ 2.31 5.56 2.37
Diluted earnings per share
As reported $ 2.38 5.61 2.41
Pro forma $ 2.29 5.51 2.35
- ---------------------------------------------------------------------------------------
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 - On August 1, 2002, the Company sold substantially all
of its wireless operations to an affiliate of ALLTEL Corporation ("Alltel") and
certain other purchasers 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 2002 and 2001. See Note 3 for additional
information.
Reclassifications - Certain amounts previously reported for prior years have
been reclassified to conform with the 2003 presentation, including the
reclassification of an investment in a cellular partnership from discontinued
operations to continuing operations. Such investment was originally planned to
be sold to Alltel in connection with the Company's disposition of its wireless
operations but was subsequently retained.
(2) AQUISITIONS
On July 1, 2002, the Company purchased approximately 300,000 telephone
access lines in the state of Alabama from Verizon Communications, Inc.
("Verizon") for approximately $1.022 billion cash. On August 31, 2002, the
Company purchased approximately 350,000 telephone access lines in the state of
Missouri from Verizon for approximately $1.179 billion cash. The assets
purchased in these transactions included (i) the franchise authorizing the
provision of local telephone service, (ii) related property and equipment
comprising Verizon's local exchange operations in predominantly rural markets
throughout Alabama and Missouri and (iii) Verizon's assets used to provide
digital subscriber line ("DSL") and other high speed data services within the
purchased exchanges. For financing arrangements related to these acquisitions,
see Note 6.
In June and December 2003, the Company acquired certain fiber transport
assets for an aggregate of $55.2 million cash (of which $3.8 million was paid as
a deposit in 2002). In the fourth quarter of 2003, the Company purchased an
additional 24.3% interest in a telephone company in which it owned a majority
interest for $32.4 million cash.
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 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 $ 218,252 186,871
Basic earnings per share from
continuing operations, as adjusted for
goodwill amortization $ 1.54 1.65
Diluted earnings per share from
continuing operations, as adjusted for
goodwill amortization $ 1.53 1.64
The pro forma information is based on various assumptions and estimates.
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.
(3) 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. In connection with this transaction, the
Company divested its (i) interests in its majority-owned and operated cellular
systems, which at June 30, 2002 served approximately 783,000 customers and had
access to approximately 7.8 million pops, (ii) minority cellular equity
interests representing approximately 1.8 million pops at June 30, 2002, and
(iii) licenses to provide PCS covering 1.3 million pops in Wisconsin and Iowa.
Proceeds from the sale of the wireless operations were used to partially fund
the Company's acquisitions of telephone properties in Alabama and Missouri
during the third quarter of 2002.
As a result of the sale, the Company's wireless operations have been
reflected as discontinued operations in the Company's consolidated statements of
income and cash flows for the years ended December 31, 2002 and 2001. In its
December 31, 2002 consolidated balance sheet, the Company reflected as "assets
held for sale" a minority interest in a cellular partnership that it had
previously agreed to sell to Alltel upon the satisfaction of various closing
conditions. In light of the failure of the parties to agree upon whether the
closing conditions were met, the Company determined during the first quarter of
2003 to retain such investment; therefore, for reporting purposes, this
investment (and its related earnings) has been reclassified from discontinued
operations to continuing operations on the accompanying financial statements for
2003. Prior periods have been restated to reflect this investment (and its
related earnings) as part of continuing operations.
The depreciation and amortization of long-lived and amortizable
intangible assets related to the wireless operations ceased on March 19, 2002,
the date of he 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
- --------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 246,705 437,965
- --------------------------------------------------------------------------------
Operating income (1) $ 71,258 132,614
Nonrecurring gains and losses, net - 166,928
Income from unconsolidated cellular entities 25,768 19,868
Minority interest expense (8,569) (11,510)
Gain on sale of discontinued operations 803,905 -
Other income 188 4,707
- --------------------------------------------------------------------------------
Pre-tax income from discontinued operations $ 892,550 312,607
Income tax expense (284,459) (118,657)
- --------------------------------------------------------------------------------
Income from discontinued operations $ 608,091 193,950
================================================================================
(1) Excludes corporate overhead costs of $11.3 million and $20.2 million for
2002 and 2001, respectively, allocated to the wireless operations. Included as
a reduction in operating income for 2002 is a $30.5 million charge associated
with the write-off of all amounts expended to develop the wireless portion of
the Company's billing system currently in development.
The following table represents certain summary cash flow statement
information related to the Company's wireless operations reflected as
discontinued operations:
Year ended December 31, 2002 2001
- -------------------------------------------------------------------------------------
(Dollars in thousands)
Net cash provided by (used in) operating activities $ (248,716) (1) 90,242
Net cash provided by investing activities 1,572,195 (2) 141,530
Net cash provided by financing activities - -
- -------------------------------------------------------------------------------------
Net cash provided by discontinued operations $ 1,323,479 231,772
=====================================================================================
(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.
(4) INVESTMENTS AND OTHER ASSETS
Investments and other assets at December 31, 2003 and 2002 were composed
of the following:
December 31, 2003 2002
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
Goodwill $ 3,425,001 3,427,281
Billing system development costs, less accumulated
amortization of $508 in 2003 162,980 139,451
Cash surrender value of life insurance contracts 93,960 93,664
Prepaid pension asset 59,055 26,046
Franchise costs 35,300 35,300
Customer base, less accumulated amortization of
$2,242 and $729 20,458 21,971
Deferred interest rate hedge contracts 31,239 33,635
Debt issuance costs, net 19,317 23,491
Fair value of interest rate swap - 22,163
Other 130,122 119,859
- ---------------------------------------------------------------------------------------
$ 3,977,432 3,942,861
=======================================================================================
The following information relates to the Company's goodwill as of
December 31, 2003 and 2002:
December 31, 2003 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Carrying amount of goodwill
Telephone segment $ 3,369,242 3,382,113
Other operations 55,759 45,168
- --------------------------------------------------------------------------------
Total goodwill $ 3,425,001 3,427,281
================================================================================
Amortization of goodwill and other intangibles from continuing operations
of $1.5 million, $729,000 and $58.4 million for 2003, 2002 and 2001,
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. As of September 30, 2003, the Company
completed the required annual test under SFAS 142 and determined its goodwill
was not impaired.
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.
Year ended December 31, 2001
- -------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 343,031
Goodwill amortization, net of taxes 56,266
- -------------------------------------------------------------------------------
Net income, as adjusted $ 399,297
===============================================================================
Basic earnings per share, as reported $ 2.43
Goodwill amortization, net of taxes .40
- -------------------------------------------------------------------------------
Basic earnings per share, as adjusted $ 2.83
===============================================================================
Diluted earnings per share, as reported $ 2.41
Goodwill amortization, net of taxes .40
- -------------------------------------------------------------------------------
Diluted earnings per share, as adjusted $ 2.81
===============================================================================
The Company is in the process of developing an integrated billing and
customer care system. The costs to develop such system have been accounted for
in accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Aggregate capitalized
costs (before accumulated amortization) totaled $163.5 million and $139.5
million at December 31, 2003 and 2002, respectively. A portion of such 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 capitalized billing system
costs are expected to approximate $200-215 million upon completion and will be
amortized over a twenty-year period. The Company began amortizing its billing
system in 2003 based on the total number of customers that the Company has
migrated to the new system.
In connection with the acquisitions of properties from Verizon in 2002,
the Company assigned $35.3 million of the purchase price 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 of the purchase price 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
2003 and 2002 was $1.5 million and $729,000, respectively, and is expected to be
$1.5 million for each of the full years remaining in the amortization period.
(5) PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at December 31, 2003 and 2002 was
composed of the following:
December 31, 2003 2002
- --------------------------------------------------------------------------------
(Dollars in thousands)
Telephone
Cable and wire $ 3,801,079 3,643,167
Central office 2,230,943 2,150,217
General support 490,884 474,022
Information origination/termination 46,142 44,198
Construction in progress 21,289 32,507
Other 6,263 3,789
- --------------------------------------------------------------------------------
6,596,600 6,347,900
Accumulated depreciation (3,498,298) (3,136,107)
- --------------------------------------------------------------------------------
3,098,302 3,211,793
- --------------------------------------------------------------------------------
Other, at cost
General support 320,417 346,037
Fiber transport 141,853 74,305
Other 125,285 100,950
- --------------------------------------------------------------------------------
587,555 521,292
Accumulated depreciation (230,376) (201,440)
- --------------------------------------------------------------------------------
357,179 319,852
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 3,455,481 3,531,645
================================================================================
Depreciation expense was $469.1 million, $410.9 million and $348.6
million in 2003, 2002 and 2001, respectively. The composite depreciation rate
for telephone properties was 7.0% for 2003, 6.9% for 2002 and 6.8% for 2001.
(6) LONG-TERM AND SHORT-TERM DEBT
The Company's long-term debt as of December 31, 2003 and 2002 was as
follows:
December 31, 2003 2002
- -------------------------------------------------------------------------------------------------
(Dollars in thousands)
CenturyTel
Senior credit facilities $ - 385,000
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
6.02% Series J, due 2007 (remarketable 2005) 500,000 500,000
4.75% Series K, due 2032 165,000 165,000
7.875% Series L, due 2012 500,000 500,000
9.38% notes - 2,800
6.86%* Employee Stock Ownership
Plan commitment, due in installments through 2004 500 1,500
Unamortized net discount (4,501) (5,084)
Fair value of derivative instrument related to
Series H senior notes 19,440 22,163
Fair value of derivative instruments related to
Series L senior notes (11,693) -
Other 114 146
- -------------------------------------------------------------------------------------------------
Total CenturyTel 2,733,860 3,136,525
- -------------------------------------------------------------------------------------------------
Subsidiaries
First mortgage debt
5.92%* notes, payable to agencies of the U. S.
government and cooperative lending
associations, due in installments
through 2025 234,743 250,325
7.98% notes, due through 2017 5,211 5,500
Other debt
6.98%* unsecured medium-term notes, due through 2008 199,613 244,124
7.11%* notes, due in installments through 2020 3,739 5,361
6.55%* capital lease obligations, due through 2008 4,589 7,034
- -------------------------------------------------------------------------------------------------
Total subsidiaries 447,895 512,344
- -------------------------------------------------------------------------------------------------
Total long-term debt 3,181,755 3,648,869
Less current maturities 72,453 70,737
- -------------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 3,109,302 3,578,132
=================================================================================================
* weighted average interest rate at December 31, 2003
The approximate annual debt maturities for the five years subsequent to
December 31, 2003 are as follows: 2004 - $72.5 million; 2005 - $246.1 million;
2006 - $277.9 million (including $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); 2007 - $521.7 million; and 2008 -
$283.7 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, 2003, restricted net assets of subsidiaries were
$249.1 million and subsidiaries' retained earnings in excess of amounts
restricted by debt covenants totaled $1.476 billion. At December 31, 2003, all
of the consolidated retained earnings reflected on the balance sheet was
available under CenturyTel's loan agreements for the declaration of dividends.
Approximately 25% of the Company's telephone property, plant and
equipment is pledged to secure the long-term debt of subsidiaries.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consists initially of a beneficial interest in a
CenturyTel senior unsecured note (Series J) with a principal amount of $25 and a
contract to purchase shares of CenturyTel common stock no later than May 2005.
The senior notes will mature in May 2007. Each purchase contract will generally
require the holder to purchase between .6944 and .8741 of a share of CenturyTel
common stock in May 2005 based on the then current stock price of CenturyTel
common stock in exchange for $25, subject to certain adjustments and exceptions.
Accordingly, upon full settlement of the purchase contracts in May 2005, the
Company will receive proceeds of $500 million and will deliver between 13.9
million and 17.5 million common shares in the aggregate. The senior notes are
pledged by the holders to secure their obligations under the purchase contracts.
The total distributions on the equity units will be at an initial annual rate of
6.875%, consisting of interest (6.02%) and contract adjustment payments
(0.855%), each payable quarterly. On or after mid-February 2005, the senior
notes will be remarketed, at which time the remarketing agent will reset the
interest rate on the senior notes in order to generate sufficient proceeds to
secure the holder's obligation under the purchase contract. In the event of an
unsuccessful remarketing, the Company will exercise its right as a secured party
to dispose of the senior notes and satisfy in full the holder's obligation to
purchase common stock under the purchase contract.
The senior note portion of the equity units is reflected on the balance
sheet as long-term debt in the amount of $500 million. Interest expense on the
senior notes is accrued at a rate of 6.02%, the initial interest rate. The
present value of the aggregate contract adjustment payments has been recorded as
an $11.6 million reduction to paid-in capital and as an equivalent liability.
The Company is amortizing 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 364-day
revolving facility was not renewed in 2003. The Company had no outstanding
borrowings under its facility at December 31, 2003.
In the third quarter of 2002, the Company issued $500 million of senior
notes, Series L, due 2012 (which bear interest at 7.875%) and $165 million of
convertible senior debentures, Series K, due 2032 (which bear interest at 4.75%
and which may be converted into shares of CenturyTel common stock at a
conversion price of $40.455 per share). Holders of the convertible senior
debentures will have the right to require the Company to purchase all or a
portion of the debentures on August 1, 2006, August 1, 2010 and August 1, 2017.
In each case, the purchase price payable will be equal to 100% of the principal
amount of the debentures to be purchased plus any accrued and unpaid interest to
the purchase date. The Company will pay cash for all debentures so purchased on
August 1, 2006. For any such purchases on or after August 1, 2010, the Company
may choose to pay the purchase price in cash or shares of its common stock, or
any combination thereof (except that the Company will pay any accrued and unpaid
interest in cash).
On October 15, 2002, the Company redeemed $400 million principal amount
of its Series I Remarketable Senior Notes at par value, plus accrued interest.
In connection with such redemption, the Company also paid a premium of
approximately $71.1 million in accordance with the redemption provisions of the
associated remarketing agreement. Such premium payment (net of $11.1 million of
unamortized net premium primarily associated with the option payment received by
the Company in 2000 in connection with the original issuance of the remarketable
notes) is reflected as an Other Expense in the Company's results of operations
for year ended December 31, 2002.
At December 31, 2003, the Company had available $533.3 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 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 was a "fixed to variable" interest rate swap
that effectively converted the Company's fixed rate interest payment obligations
under these notes into variable rate obligations. The change in the value of
this hedge was reflected as a component of interest expense for the year ended
December 31, 2002. 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"). In May 2003, the Company
terminated this hedge. In connection with such termination, the Company received
approximately $22.3 million in cash upon settlement, which represented the fair
value of the hedge at the termination date. Such amount is being amortized as a
reduction of interest expense through 2010, the maturity date of the Series H
notes.
In May and July 2003, the Company entered into four separate fair value
interest rate hedges associated with the full $500 million principal amount of
its Series L senior notes, due 2012, that pay interest at a fixed rate of
7.875%. These hedges are "fixed to variable" interest rate swaps that
effectively convert the Company's fixed rate interest payment obligations under
these notes into obligations to pay variable rates that range from the six-month
London InterBank Offered Rate ("LIBOR") plus 3.229% to the six-month LIBOR plus
3.67%, with settlement and rate reset dates occurring each six months through
the expiration of the hedges in August 2012. As of December 31, 2003, the
Company realized a weighted average interest rate of 4.8% related to these
hedges. Interest expense was reduced by $7.7 million during 2003 as a result of
these hedges. The aggregate fair value of such hedges at December 31, 2003 was
$11.7 million and is reflected on the accompanying balance sheet as both a
liability (included in "Deferred credits and other liabilities") and as a
decrease to the Company's underlying long-term debt.
During 2002, the Company entered into (i) 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 which was settled in the third quarter of
2002 for a $1.1 million payment by the Company (which is being amortized as
additional interest expense over a ten-year period, which equates to the term of
the debt issuance hedged) and (ii) 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. During the second quarter of 2003,
the Company retired all outstanding indebtedness associated with its $800
million credit facilities; therefore, such cash flow hedge was deemed
ineffective in 2003 and resulted in a $722,000 unfavorable pre-tax charge to the
Company's income.
(8) DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 2003 and 2002 were
composed of the following:
December 31, 2003 2002
- ----------------------------------------------------------------------------------
(Dollars in thousands)
Deferred federal and state income taxes $ 528,551 352,161
Accrued postretirement benefit costs 222,613 208,542
Fair value of interest rate swap 11,693 1,290
Additional minimum pension liability - 56,388
Minority interest 7,218 26,067
Other 66,576 71,720
- ----------------------------------------------------------------------------------
$ 836,651 716,168
==================================================================================
(9) STOCKHOLDERS' EQUITY
Common stock - Unissued shares of CenturyTel common stock were reserved as
follows:
December 31, 2003
- --------------------------------------------------------------------------
(In thousands)
Incentive compensation programs 12,099
Acquisitions 4,064
Employee stock purchase plan 4,822
Dividend reinvestment plan 454
Conversion of convertible preferred stock 435
Other employee benefit plans 3,717
- --------------------------------------------------------------------------
25,591
==========================================================================
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, 2003, the holders of 8.9
million shares of common stock were entitled to ten votes per share.
Preferred stock - As of December 31, 2003, CenturyTel had 2.0 million shares of
authorized convertible preferred stock, $25 par value per share. At December
31,2003 and 2002, there were 319,000 shares of outstanding preferred stock.
Holders of outstanding CenturyTel preferred stock are entitled to receive
cumulative dividends, receive preferential distributions equal to $25 per share
plus unpaid dividends upon CenturyTel's liquidation and vote as a single class
with the holders of common stock.
Shareholders' Rights Plan - In 1996 the Board of Directors declared a dividend
of one preference share purchase right for each common share outstanding. Such
rights become exercisable if and when a potential acquiror takes certain steps
to acquire 15% or more of CenturyTel's common stock. Upon the occurrence of
such an acquisition, each right held by shareholders other than the acquiror
may be exercised to receive that number of shares of common stock or other
securities of CenturyTel (or, in certain situations, the acquiring company)
which at the time of such transaction will have a market value of two times
the exercise price of the right.
(10) POSTRETIREMENT BENEFITS
The Company sponsors health care plans (which use a December
31 measurement date) that provide postretirement benefits to all qualified
retired employees.
On December 8, 2003, President Bush signed into law a bill that expands
Medicare, primarily adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. The Company anticipates that the benefits it pays
after 2006 will be lower as a result of the new Medicare provisions; however,
the Company's retiree medical obligations and reported costs do not reflect the
impact of this legislation. Deferring recognition of the new medicare
provisions' impact is permitted by Financial Accounting Standards Board Staff
Position 106-1 due to unresolved questions about some of the new Medicare
provisions and a lack of authoritative accounting guidance about certain
matters.
In 2003, the Company announced changes, effective January 1, 2004, that
would decrease its subsidization of benefits provided under its postretirement
benefit plan.
The following is a reconciliation of the beginning and ending balances
for the benefit obligation and the plan assets.
December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 253,762 215,872 165,266
Service cost 6,176 6,669 6,373
Interest cost 18,216 15,962 14,512
Participant contributions 1,199 617 548
Acquisitions - 56,539 -
Plan amendments (34,597) - -
Actuarial (gain) loss 79,163 (29,534) 40,005
Benefits paid (12,498) (12,363) (10,832)
- ---------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 311,421 253,762 215,872
=============================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 28,697 36,555 39,873
Return on assets 4,479 (2,896) (1,379)
Employer contributions 8,000 6,784 8,345
Participant contributions 1,199 617 548
Benefits paid (12,498) (12,363) (10,832)
- ---------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 29,877 28,697 36,555
=============================================================================================
Net periodic postretirement benefit cost for 2003, 2002 and 2001
included the following components:
Year ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 6,176 6,669 6,373
Interest cost 18,216 15,962 14,512
Expected return on plan assets (2,870) (3,656) (3,987)
Amortization of unrecognized actuarial loss 2,234 1,470 1,337
Amortization of unrecognized prior service cost (2,447) (129) (129)
- ---------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 21,309 20,316 18,106
=============================================================================================
The following table sets forth the amounts recognized as liabilities for
postretirement benefits at December 31, 2003, 2002 and 2001.
December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (311,421) (253,762) (215,872)
Fair value of plan assets 29,877 28,697 36,555
Unamortized prior service cost (33,068) (918) (1,046)
Unrecognized net actuarial loss 89,893 14,573 33,925
- ---------------------------------------------------------------------------------------------
Accrued benefit cost $ (224,719) (211,410) (146,438)
=============================================================================================
Assumptions used in accounting for postretirement benefits as of
December 31, 2003 and 2002 were:
2003 2002
- ---------------------------------------------------------------------------------------------
Determination of benefit obligation
Discount rate 6.0% 6.75
Healthcare trend rates (Medical/Prescription Drug)
Following year 11.0%/16.0% 4.9/5.7
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) 5.0%/5.0% 4.5/4.5
Year that the rate reaches the ultimate trend rate 2010/2015 2015/2015
Determination of benefit cost
Discount rate 6.75% 7.00
Expected return on plan assets 8.25% 10.0
- ---------------------------------------------------------------------------------------------
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. The intent of this strategy is to
minimize plan expenses by outperforming plan liabilities over the long term.
Risk tolerance is established through careful consideration of plan
liabilities, plan funded status and corporate financial condition. Investment
risk is measured and monitored on an ongoing basis through annual liability
measurements, periodic asset studies and periodic portfolio reviews.
The Company's postretirement benefit plan weighted-average asset
allocations at December 31, 2003 and 2002 by asset category are as follows:
2003 2002
- ------------------------------------------------------------------------------
Equity securities 80.5% 56.2
Debt securities 16.4 36.6
Other 3.1 7.2
- ------------------------------------------------------------------------------
Total 100.0% 100.0
==============================================================================
In determining the expected return on plan assets, historical markets
are studied and long-term relationships between equities and fixed income are
preserved consistent with the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. Peer data and
historical returns are also reviewed to check for reasonableness.
Assumed health care cost trends have a significant effect on the amounts
reported for postretirement benefit plans. 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 $ 1,588 (1,514)
Effect on postretirement benefit
obligation $ 20,377 (19,126)
- ------------------------------------------------------------------------------------
The Company expects to contribute approximately $13 million to its
postretirement benefit plan in 2004.
(11) RETIREMENT AND SAVINGS PLANS
CenturyTel and certain subsidiaries sponsor defined benefit pension
plans for substantially all employees. CenturyTel also sponsors an Outside
Directors' Retirement Plan and a Supplemental Executive Retirement Plan to
provide directors and officers, respectively, with supplemental retirement,
death and disability benefits. The Company uses a December 31 measurement date
for its plans.
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, 2003 2002 2001
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 346,256 271,490 249,835
Service cost 12,840 10,353 7,760
Interest cost 23,617 20,053 17,829
Plan amendments - - 1,205
Acquisitions - 51,428 -
Settlements (9,962) - -
Actuarial (gain) loss 46,221 9,231 9,065
Benefits paid (28,139) (16,299) (14,204)
- -------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 390,833 346,256 271,490
===========================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 266,420 270,902 315,727
Return on plan assets 52,783 (42,998) (31,998)
Employer contributions 50,437 3,387 1,377
Acquisitions 6,807 51,428 -
Benefits paid (28,139) (16,299) (14,204)
- -------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 348,308 266,420 270,902
===========================================================================================
At December 31, 2003, the Company's underfunded pension plans (meaning
those with benefit obligations in excess of plan assets) had aggregate benefit
obligations of $138.4 million and aggregate plan assets of $84.4 million. As
of December 31, 2002, all of the pension plans had benefit obligations in
excess of plan assets.
Net periodic pension expense (benefit) for 2003, 2002 and 2001 included
the following components:
Year ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 12,840 10,353 7,760
Interest cost 23,617 20,053 17,829
Expected return on plan assets (22,065) (28,575) (30,803)
Settlements 2,233 - -
Recognized net (gains) losses 7,214 1,248 (2,399)
Net amortization and deferral 397 395 301
- -------------------------------------------------------------------------------------------
Net periodic pension expense (benefit) $ 24,236 3,474 (7,312)
===========================================================================================
The following table sets forth the combined plans' funded status and
amounts recognized in the Company's consolidated balance sheet at December 31,
2003, 2002 and 2001.
December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (390,833) (346,256) (271,490)
Fair value of plan assets 348,308 266,420 270,902
Unrecognized transition asset (900) (1,152) (1,404)
Unamortized prior service cost 3,721 4,370 5,017
Unrecognized net actuarial (gain) loss 98,759 102,664 23,121
- -------------------------------------------------------------------------------------------
Prepaid pension cost $ 59,055 26,046 26,146
===========================================================================================
The Company's accumulated benefit obligation as of December 31, 2003 and
2002 was $329.0 million and $284.8 million, respectively.
Amounts recognized on the balance sheet consist of:
December 31, 2003 2002 2001
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Prepaid pension cost $ 59,055 26,046 26,146
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 -
- ------------------------------------------------------------------------------------------
$ 59,055 26,046 26,146
==========================================================================================
Assumptions used in accounting for the pension plans as of December 2003
and 2002 were:
2003 2002
- ------------------------------------------------------------------------------------------
Determination of benefit obligation
Discount rate 6.0% 6.75
Weighted average rate of compensation increase 4.0% 4.50
Determination of benefit cost
Discount rate 6.75% 7.0
Weighted average rate of compensation increase 4.50% 4.50
Expected long-term rate of return on assets 8.25% 10.0
- ------------------------------------------------------------------------------------------
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. The intent of this strategy is to
minimize plan expenses by outperforming plan liabilities over the long term.
Risk tolerance is established through careful consideration of plan
liabilities, plan funded status and corporate financial condition. Investment
risk is measured and monitored on an ongoing basis through annual liability
measurements, periodic asset studies and periodic portfolio reviews.
The Company's pension plans weighted-average asset allocations at
December 31, 2003 and 2002 by asset category are as follows:
2003 2002
- -------------------------------------------------------------------------
Equity securities 54.0% 66.5
Debt securities 11.0 5.7
Cash and cash equivalents 32.3 24.4
Other 2.7 3.4
- -------------------------------------------------------------------------
Total 100.0% 100.0
=========================================================================
In determining the expected return on plan assets, historical markets are
studied and long-term relationships between equities and fixed income are
preserved consistent with the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. Peer data and
historical returns are also reviewed to check for reasonableness.
The amount of the 2004 contribution will be determined based on a number
of factors, including the results of the 2004 actuarial valuation report. At
this time, the amount of the 2004 contribution is not known.
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 2003, 2002 and 2001 was $8.9
million, $9.3 million, and $7.5 million, respectively. At December 31, 2003,
the ESOP owned an aggregate of 7.2 million shares of CenturyTel common stock.
CenturyTel and certain subsidiaries also sponsor qualified profit
sharing plans pursuant to Section 401(k) of the Internal Revenue Code (the
"401(k) Plans") which are available to substantially all employees of the
Company. The Company's matching contributions to the 401(k) Plans were $8.2
million in 2003, $6.7 million in 2002 and $6.6 million in 2001.
(12) INCOME TAX
Income tax expense from continuing operations included in the
Consolidated Statements of Income for the years ended December 31, 2003, 2002
and 2001 was as follows:
Year ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------
(Dollars in thousands)
Federal
Current $ 58,659 22,987 26,689
Deferred 118,600 80,056 62,164
State
Current (113) 11,406 6,735
Deferred 10,106 (8,944) (4,220)
- --------------------------------------------------------------------------------------
$ 187,252 105,505 91,368
======================================================================================
Income tax expense for 2003 was reduced by $21.6 million primarily as a
result of reducing the valuation allowance related to net state operating loss
carryforwards as it is more likely than not that future taxable income will be
sufficient to enable the Company to utilize this portion of the operating loss
carryforwards.
Income tax expense from continuing operations was allocated as follows:
Year ended December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Income tax expense in the consolidated
statements of income $ 187,252 105,505 91,368
Stockholders' equity:
Compensation expense for tax purposes
in excess of amounts recognized for
financial reporting purposes (4,385) (7,471) (1,051)
Tax effect of the change in accumulated
other comprehensive income (loss) 19,763 (19,763) (13,715)
- -----------------------------------------------------------------------------------------
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, 2003 2002 2001
- ------------------------------------------------------------------------------------------
(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 1.2 .5 .7
Amortization of nondeductible goodwill - - 3.4
Amortization of investment tax credits - (.1) (.2)
Amortization of regulatory liability (.1) (.3) (.7)
Other, net (.9) .2 (.2)
- ------------------------------------------------------------------------------------------
Effective income tax rate 35.2% 35.3 38.0
==========================================================================================
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, 2003 and 2002 were as follows:
December 31, 2003 2002
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Postretirement benefit costs $ 59,215 40,852
Regulatory support 12,464 11,414
Net state operating loss carryforwards 41,358 28,380
Other employee benefits 10,160 28,697
Other 24,819 18,720
- ---------------------------------------------------------------------------------------
Gross deferred tax assets 148,016 128,063
Less valuation allowance (19,735) (28,380)
- ---------------------------------------------------------------------------------------
Net deferred tax assets 128,281 99,683
- ---------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment, primarily
due to depreciation differences (291,482) (189,663)
Goodwill (350,812) (256,801)
Deferred debt costs (2,470) (2,400)
Intercompany profits (3,485) (2,980)
Other (8,583) -
- ---------------------------------------------------------------------------------------
Gross deferred tax liabilities (656,832) (451,844)
- ---------------------------------------------------------------------------------------
Net deferred tax liability $ (528,551) (352,161)
=======================================================================================
As of December 31, 2003, the Company had available tax benefits
associated with net state operating loss carryforwards, which expire through
2023, of $41.4 million. In assessing whether the Company can realize the
benefits of its net state operating loss carryforwards, the Company considers
whether it is more likely than not that some portion or all of the carry-
forwards will not be realized. The ultimate realization of the benefits of the
carryforwards is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. The Company
considers its scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. As a
result of such assessment, $19.7 million was reserved through the valuation
allowance as of December 31, 2003 as it is likely that this amount of net
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 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.
(14) EARNING PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
Year ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, and shares in thousands)
Income (Numerator):
Income from continuing operations $ 344,707 193,533 149,081
Discontinued operations, net of tax - 608,091 193,950
- --------------------------------------------------------------------------------------------
Net income 344,707 801,624 343,031
Dividends applicable to preferred stock (399) (399) (399)
- --------------------------------------------------------------------------------------------
Net income applicable to common stock for
computing basic earnings per share 344,308 801,225 342,632
Dividends applicable to preferred stock 399 399 399
- --------------------------------------------------------------------------------------------
Net income as adjusted for purposes of computing
diluted earnings per share $ 344,707 801,624 343,031
============================================================================================
Net income applicable to common stock for
computing basic earnings per share, as
adjusted for goodwill amortization $ 344,308 801,225 398,898
============================================================================================
Net income as adjusted for purposes of computing
diluted earnings per share, as adjusted for
goodwill amortization $ 344,707 801,624 399,297
============================================================================================
Shares (Denominator):
Weighted average number of shares outstanding
during period 143,673 141,796 141,021
Employee Stock Ownership Plan shares not
committed to be released (90) (183) (278)
- --------------------------------------------------------------------------------------------
Weighted average number of shares outstanding during
period for computing basic earnings per share 143,583 141,613 140,743
Incremental common shares attributable to
dilutive securities:
Shares issuable under convertible securities 435 435 435
Shares issuable under outstanding stock options 682 831 1,129
- --------------------------------------------------------------------------------------------
Number of shares as adjusted for purposes of
computing diluted earnings per share 144,700 142,879 142,307
============================================================================================
Basic earnings per share
From continuing operations $ 2.40 1.36 1.06
From continuing operations, as adjusted for
goodwill amortization $ 2.40 1.36 1.39
From discontinued operations $ - 4.29 1.38
From discontinued operations, as adjusted for
goodwill amortization $ - 4.29 1.45
Basic earnings per share $ 2.40 5.66 2.43
Basic earnings per share, as adjusted for
goodwill amortization $ 2.40 5.66 2.83
Diluted earnings per share
From continuing operations $ 2.38 1.35 1.05
From continuing operations, as adjusted for
goodwill amortization $ 2.38 1.35 1.37
From discontinued operations $ - 4.26 1.36
From discontinued operations, as adjusted for
goodwill amortization $ - 4.26 1.43
Diluted earnings per share $ 2.38 5.61 2.41
Diluted earnings per share, as adjusted for
goodwill amortization $ 2.38 5.61 2.81
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 2.6 million for 2003, 3.3 million for 2002 and
1.3 million for 2001.
(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, 2003,
CenturyTel had reserved 12.1 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 and
directors 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 2003, 2002 and 2001 were as follows:
Number Average
of options price
- --------------------------------------------------------------------------------
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
Exercised (1,059,414) 22.30
Granted 1,720,317 27.36
Forfeited (822,133) 33.34
- -----------------------------------------------------------------
Outstanding December 31, 2003 6,734,572 28.14
=================================================================
Exercisable December 31, 2003 3,807,355 27.21
=================================================================
Exercisable December 31, 2002 3,991,753 25.68
=================================================================
The following tables summarize certain information about CenturyTel's
stock options at December 31, 2003.
Options outstanding
- -------------------------------------------------------------------------------------------
Weighted average
Range of remaining contractual Weighted average
exercise prices Number of options life outstanding exercise price
- -------------------------------------------------------------------------------------------
$ 11.67-17.64 931,324 1.9 $ 14.90
24.10-26.31 230,308 7.6 25.20
26.62-31.56 3,061,468 7.9 27.73
31.75-38.50 2,469,563 8.4 33.66
39.00-46.19 41,909 5.3 42.47
---------
11.67-46.19 6,734,572 7.5 28.14
=========
Options exercisable
- --------------------------------------------------------------------------------------------
Range of Number of Weighted average
exercise prices options exercisable exercise price
- --------------------------------------------------------------------------------------------
$ 11.67-17.64 931,324 $ 14.90
24.10-26.31 178,753 25.14
26.62-31.56 1,179,303 28.15
31.75-38.50 1,476,066 34.04
39.00-46.19 41,909 42.47
---------
11.67-46.19 3,807,355 27.21
=========
(16) SUPPLEMENTAL CASH FLOW DISCLOSURES
The amount of interest actually paid by the Company, net of amounts
capitalized of $488,000, $1.2 million and $3.5 million during 2003, 2002 and
2001, respectively, was $221.1 million, $210.9 million and $224.7 million during
2003, 2002 and 2001, respectively. Income taxes paid were $91.6 million in 2003,
$325.5 million in 2002 and $128.3 million in 2001. Income tax refunds totaled
$85.7 million in 2003, $2.7 million in 2002 and $5.0 million in 2001.
The Company has consummated the acquisitions of various operations, along
with certain other assets, during the three years ended December 31, 2003. In
connection with these acquisitions, the following assets were acquired and
liabilities assumed:
Year ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment, net $ 46,390 866,575 -
Goodwill 21,743 1,335,157 33,183
Deferred credits and other liabilities 21,754 (56,897) 13,948
Other assets and liabilities, excluding
cash and cash equivalents (3,644) 100,191 -
- --------------------------------------------------------------------------------
Decrease in cash due to acquisitions $ 86,243 2,245,026 47,131
================================================================================
The Company has disposed of various operations reflected within
continuing operations, along with certain other assets, during the three years
ended December 31, 2003. In connection with these dispositions, the following
assets were sold, liabilities eliminated, assets received and gain recognized:
Year ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------
(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, 2003
and 2002.
Carrying Fair
Amount value
- -------------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 2003
- -----------------
Financial assets
Other $ 54,605 54,605 (2)
Financial liabilities
Long-term debt (including current maturities) $ 3,181,755 3,440,279 (1)
Interest rate swaps $ 11,693 11,693 (2)
Other $ 44,612 44,612 (2)
- -------------------------------------------------------------------------------------
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)
- -------------------------------------------------------------------------------------
(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 transport business and
security monitoring operations.
The Company's telephone operations are conducted in rural, suburban and
small urban communities in 22 states. Approximately 70% of the Company's
telephone access lines are in Wisconsin, Missouri, Alabama, Arkansas and
Washington.
Depreciation
Operating and Operating
revenues amortization income
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 2003
Telephone $ 2,071,980 450,851 688,114
Other operations 308,765 19,790 62,282
- -------------------------------------------------------------------------------------------
Total $ 2,380,745 470,641 750,396
===========================================================================================
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, 2003 2002 2001
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating income $ 750,396 575,406 425,305
Interest expense (226,751) (221,845) (225,523)
Income from unconsolidated cellular entity 6,160 5,582 7,592
Nonrecurring gains and losses, net - 3,709 33,043
Other income and expense 2,154 (63,814) 32
- -------------------------------------------------------------------------------------------
Income from continuing operations
before income tax expense $ 531,959 299,038 240,449
===========================================================================================
Year ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Capital expenditures
Telephone $ 317,357 319,536 351,010
Other operations 60,582 66,731 84,505
- -------------------------------------------------------------------------------------------
Total $ 377,939 386,267 435,515
===========================================================================================
December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Total assets
Telephone $ 6,747,036 6,962,713 4,754,522
Other operations 1,148,816 807,695 730,395
Assets held for sale - - 833,767
- -------------------------------------------------------------------------------------------
Total assets $ 7,895,852 7,770,408 6,318,684
===========================================================================================
Interexchange carriers and other accounts receivable on the balance
sheets are primarily amounts due from various long distance carriers,
principally AT&T, and several large local exchange operating companies.
(19) COMMITMENTS AND CONTINGENCIES
Construction expenditures and investments in vehicles, buildings and
equipment during 2004 are estimated to be $290 million for telephone operations
and $110 million for other operations.
In Barbrasue Beattie and James Sovis, on behalf of themselves and all
others similarly situated, v. CenturyTel, Inc., filed on October 29, 2002 in the
United States District Court for the Eastern District of Michigan (Case No.
02-10277), the plaintiffs allege that the Company unjustly and unreasonably
billed customers for inside wire maintenance services, and seek unspecified
money damages and injunctive relief under various legal theories on behalf of a
purported class of over two million customers in the Company's telephone
markets. The Court has not yet ruled on the plaintiffs' certification motion,
and has not yet set a date to resolve this issue. Given the current status of
this case, the Company cannot estimate the potential impact, if any, that this
case will have on its results of operations.
AT&T filed a petition with the FCC in December 2003 seeking forbearance
from enforcing certain provisions of the Telecommunications Act of 1996 that
allows LECs to file access tariffs on a streamlined basis and, if certain
criteria are met, deems those tariffs lawful. Certain of the Company's
telephone subsidiaries file interstate tariffs directly with the FCC using this
streamlined filing approach. As a result of recent court rulings, tariffs that
have been "deemed lawful" in effect nullify an interexchange carrier's ability
to seek refunds should the earnings from the tariffs ultimately result in
earnings above the authorized rate of return prescribed by the FCC. The Company
has not recognized any revenues in excess of the authorized rate of return
applicable to those carriers who historically have requested refunds pending
resolution of the "deemed lawful" tariff issue. The Company will continue to
monitor the status of the AT&T petition with the FCC. Although it is possible
the Company could benefit favorably upon resolution of this issue, there is no
assurance that a favorable outcome will occur.
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.
(20) SUBSEQUENT EVENT
On February 3, 2004, the Company announced that its board of directors
approved a stock repurchase program that will allow the Company to repurchase up
to an aggregate of $400 million of either its common stock or convertible equity
units prior to December 31, 2005. The Company commenced purchases under this
plan on February 6, 2004.
* * * * * * * * *
CENTURYTEL, INC.
Consolidated Quarterly Income Statement Information
(Unaudited)
First Second Third Fourth
quarter quarter quarter quarter
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
2003 (unaudited)
- ---------------------------------------------------------------------------------------------------------
Operating revenues $ 580,530 590,148 603,752 606,315
Operating income $ 184,773 188,381 190,781 186,461
Net income $ 83,919 87,367 90,979 82,442
Basic earnings per share $ .59 .61 .63 .57
Diluted earnings per share $ .58 .60 .63 .57
2002
- ------------------------------------------------------------------------------------------------
Operating revenues $ 422,918 438,702 524,497 585,879
Operating income $ 119,049 109,531 157,716 189,110
Income from continuing operations $ 43,117 41,482 64,589 44,345
Net income $ 70,767 78,763 607,749 44,345
Basic earnings per share from
continuing operations $ .30 .29 .46 .31
Basic earnings per share $ .50 .56 4.29 .31
Diluted earnings per share from
continuing operations $ .30 .29 .45 .31
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 $ 27,708 22,533 60,994 37,846
Net income $ 46,722 154,241 92,305 49,763
Basic earnings per share from
continuing operations $ .20 .16 .43 .27
Basic earnings per share from
continuing operations, as adjusted $ .28 .24 .51 .35
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 .16 .43 .27
Diluted earnings per share from
continuing operations, as adjusted $ .28 .24 .51 .35
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 fourth quarter of 2003 included a $.06
per share charge related to operating taxes, net of related revenue effect, and
interest associated with various operating tax audits.
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.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None.
Item 9A. Controls and Procedures
The Company maintains disclosure controls and procedures designed to
provide reasonable assurances that information required to be disclosed by the
Company in the reports it files under the Securities Exchange Act of 1934 is
timely recorded, processed, summarized and reported as required. The Company's
Chief Executive Officer, Glen F. Post, III, and the Company's Chief Financial
Officer, R. Stewart Ewing, Jr., have evaluated the Company's disclosure controls
and procedures as of December 31, 2003. Based on the evaluation, Messrs. Post
and Ewing concluded that the Company's disclosure controls and procedures have
been effective in providing reasonable assurance that they have been timely
alerted of material information required to be filed in this annual report.
Since the date of Messrs. Post's and Ewing's most recent evaluation, there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls. The design of any system
of controls is based in part upon certain assumptions about the likelihood of
future events and contingencies, and there can be no assurance that any design
will succeed in achieving its stated goals.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The name, age and office(s) held by each of the Registrant's executive
officers are shown below. Each of the executive officers listed below serves at
the pleasure of the Board of Directors.
Name Age Office(s) held with CenturyTel
- ---- --- ------------------------------
Glen F. Post, III 51 Chairman of the Board of Directors
and Chief Executive Officer
Karen A. Puckett 43 President and Chief Operating Officer
R. Stewart Ewing, Jr. 52 Executive Vice President and
Chief Financial Officer
David D. Cole 46 Senior Vice President -
Operations Support
Stacey W. Goff 38 Senior Vice President, General Counsel
and Corporate Secretary
Michael Maslowski 56 Senior Vice President and
Chief Information Officer
Each of the Registrant's executive officers, except for Ms. Puckett and
Mr. Goff, has served as an officer of the Registrant and one or more of its
subsidiaries in varying capacities for more than the past five years.
Ms. Puckett has served as President and Chief Operating Officer of the
Company since August 2002, as Executive Vice President and Chief Operating
Officer of the Company from July 2000 through August 2002, as Sales and
Marketing Senior Officer of BroadStream Communications from July 1999 through
July 2000 and as Texas Region President for GTE Wireless from 1996 to mid-1999.
Commco Technology LLC (formerly BroadStream Communications) filed for bankruptcy
on December 18, 2000 in the United States Bankruptcy Court, District of
Connecticut (Bridgeport). Ms. Puckett was an officer of BroadStream
Communications from July 1999 through July 2000.
Mr. Post has served as Chairman of the Board since June 2002, and
previously served as Vice Chairman of the Board from 1993 to 2002 and President
from 1990 to 2002. In May 1999, Mr. Ewing was promoted from Senior Vice
President to Executive Vice President. In August 2003, Mr. Goff was promoted to
Senior Vice President, General Counsel and Secretary. He previously served as
Vice President and Assistant General Counsel from 2000 to July 2003 and as
Director-Corporate Legal from 1998 to 2000.
The balance of the information required by Item 10 is incorporated by
reference to the Registrant's definitive proxy statement relating to its 2004
annual meeting of stockholders (the "Proxy Statement"), which Proxy Statement
will be filed pursuant to Regulation 14A within the first 120 days of 2004.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table provides information as of December 31, 2003,
concerning shares of CenturyTel common stock authorized for issuance under
CenturyTel's existing equity compensation plans.
(c)
Number of securities
remaining available for
(a) (b) future issuance under
Number of securities to Weighted-average plans (excluding
be issued upon conversion exercise price of securities reflected in
Plan category of outstanding options outstanding options column (a))
- ----------------- ---------------------------- ------------------- ------------------------
Equity compensation
plans approved by
security holders 6,734,572 $28.14 3,712,002
Employee Stock Purchase
Plan approved by
shareholders - - 4,822,491
Equity compensation
plans not approved by
security holders - - -
- ----------------------------------------------------------------------------------------------------------
Totals 6,734,572 $28.14 8,534,493
==========================================================================================================
The balance of the information required by Item 12 is incorporated by
reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to the
Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated by reference to
the Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a. Financial Statements
(i) Consolidated Financial Statements:
Independent Auditors' Report on Consolidated Financial
Statements and Financial Statement Schedule
Consolidated Statements of Income for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Comprehensive Income for
the years ended December 31, 2003, 2002 and 2001
Consolidated Balance Sheets - December 31, 2003
and 2002
Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
Consolidated Quarterly Income Statement
Information (unaudited)
(ii) Schedules:*
II Valuation and Qualifying Accounts
* Those schedules not listed above are
omitted as not applicable or not required.
b. Reports on Form 8-K.
The following items were reported in a Form 8-K filed October
30, 2003: Item 12. Results of Operations and Financial
Condition - News release announcing third quarter 2003
operating results.
c. Exhibits:
3.1 Amended and Restated Articles of Incorporation of
Registrant, dated as of May 6, 1999,
(incorporated by reference to Exhibit 3(i) to
Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999).
3.2 Registrant's Bylaws, as amended through August
26, 2003 (incorporated by reference to Exhibit
3.1 of Registrant's Current Report on Form 8-K
dated August 26, 2003 and filed on December 2, 2003).
3.3 Governance Guidelines and Charters, as amended through
February 25, 2004, all included elsewhere herein.
(a) Corporate Governance Guidelines
(b) Charter of the Audit Committee of the
Board of Directors
(c) Charter of the Compensation Committee of
the Board of Directors
(d) Charter of the Nominating and Corporate
Governance Committee of the Board of
Directors
(e) Charter of the Risk Evaluation Committee of the
Board of Directors
4.1 Note Purchase Agreement, dated September 1, 1989,
between Registrant, Teachers Insurance and
Annuity Association of America and the Lincoln
National Life Insurance Company (incorporated by
reference to Exhibit 4.23 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1989).
4.2 Rights Agreement, dated as of August 27, 1996, between
Registrant and Society National Bank, as Rights Agent,
including the form of Rights Certificate (incorporated by
reference to Exhibit 1 of Registrant's Current Report on
Form 8-K filed August 30, 1996) and Amendment No.1 thereto,
dated May 25, 1999 (incorporated by reference to Exhibit
4.2(ii) to Registrant's Report on Form 8-K dated May 25,
1999) and Amendment No. 2 thereto, dated and effective as
of June 30, 2000, by and between the Registrant and
Computershare Investor Services, LLC, as rights agent
(incorporated by reference to Exhibit 4.1 of Registrant's
Quarterly report on 10-Q for the quarter ended September
30, 2000).
4.3 Form of common stock certificate of the Registrant
(incorporated by reference to Exhibit 4.3 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000).
4.4 Instruments relating to the Company's public senior debt
(a) Indenture dated as of March 31, 1994
between the Company and Regions Bank
(formerly First American Bank & Trust of
Louisiana), as Trustee (incorporated by
reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3,
Registration No. 33-52915).
(b) Resolutions designating the terms and
conditions of the Company's 7-3/4% Senior
Notes, Series A, due 2004 and 8-1/4% Senior
Notes, Series B, due 2024 (incorporated by
reference to Exhibit 4.1 to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994).
(c) Resolutions designating the terms and
conditions of the Company's 6.55% Senior
Notes, Series C, due 2005 and 7.2% Senior
Notes, Series D, due 2025 (incorporated by
reference to Exhibit 4.27 to Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1995).
(d) Resolutions designating the terms and
conditions of the Company's 6.15% Senior
Notes, Series E, due 2005; 6.30% Senior
Notes, Series F, due 2008; and 6.875%
Debentures, Series G, due 2028,
(incorporated by reference to Exhibit 4.9
to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997).
(e) Form of Registrant's 8.375% Senior Notes,
Series H, Due 2010, issued October 19, 2000
(incorporated by reference to Exhibit 4.2
of Registrant's Quarterly Report on Form
10-Q for the Quarter ended September 30,
2000).
(f) For information on Registrant's Series J
notes and related First Supplemental
Indenture, see Item 4.7 below.
(g) Second Supplemental Indenture dated as of August
20, 2002 between CenturyTel and Regions Bank
(successor-in-interest to First American Bank &
Trust of Louisiana and Regions Bank of Louisiana),
as Trustee, designating and outlining the terms and
conditions of CenturyTel's 4.75% Convertible Senior
Debentures, Series K, due 2032 (incorporated by
reference to Exhibit 4.3 of CenturyTel's registration
statement on Form S-4, File No. 333-100480).
(h) Form of 4.75% Convertible Debentures, Series K,
due 2032 (included in Exhibit 4.4(g)).
(i) Board resolutions designating the terms and
conditions of CenturyTel's 7.875% Senior Notes,
Series L, due 2012 (incorporated by reference to
exhibit 4.2 of CenturyTel's registration statement
on Form S-3, File No. 333-100481).
(j) Form of 7.875% Senior Notes, Series L, due 2012
(included in Exhibit 4.4(i)).
(k) Registration Rights Agreement dated as of
August 26, 2002 by and among CenturyTel,
and Banc of America Securities LLC, J.P.
Morgan Securities Inc. and Wachovia
Securities, Inc. (incorporated by reference
to Exhibit 4.5 of CenturyTel's registration
statement on Form S-4, File No.
333-100480).
(l) Exchange and Registration Rights Agreement
dated as of August 26, 2002 by and among
CenturyTel and Banc of America Securities
LLC, J.P. Morgan Securities Inc. and
Wachovia Securities, Inc., as
representatives of the initial purchasers
named therein (incorporated by reference to
Exhibit 4.4 of CenturyTel's registration
statement on Form S-3, File No.
333-100481).
4.5 $533 Million Three-Year Revolving Credit Facility, dated
July 22, 2002, between CenturyTel, Inc. and the lenders
named therein (incorporated by reference to Exhibit 10.1
of Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2002).
4.6 First Supplemental Indenture, dated as of
November 2, 1998, to Indenture between CenturyTel
of the Northwest, Inc. and The First National
Bank of Chicago (incorporated by reference to
Exhibit 10.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1998).
4.7 Agreements relating to equity units issued by
CenturyTel in May 2002:
(a) Purchase Contract Agreement, dated as of May
1, 2002, between CenturyTel and Wachovia
Bank, National Association, as Purchase
Contract Agent (incorporated by reference to
Exhibit 4.13 to CenturyTel's Registration
Statement on Form S-3, File No. 333-84276).
(b) Pledge Agreement, dated as of May 1, 2002,
by and among CenturyTel, JPMorgan Chase
Bank, as Collateral Agent, Custodial Agent,
and Securities Intermediary, and Wachovia
Bank, National Association, as Purchase
Contract Agent (incorporated by reference to
Exhibit 4.15 to CenturyTel's Registration
Statement on Form S-3, File No. 333-84276).
(c) First Supplemental Indenture, dated as of
May 1, 2002, between CenturyTel and Regions
Bank, as Trustee, to the Indenture, dated as
of March 31, 1994, between CenturyTel and
Regions Bank, as Trustee, relating to
CenturyTel's Senior Notes, Series J, due
2007 issued in connection with the equity
units (incorporated by reference to Exhibit
4.2(b) to CenturyTel's Registration
Statement on Form S-3, File No. 333-84276).
10.1 Qualified Employee Benefit Plans (excluding several
narrow-based qualified plans that cover union
employees or other limited groups of Company employees)
(a) Registrant's Employee Stock Ownership Plan
and Trust, as amended and restated February
28, 2002 and amendment thereto dated
December 31, 2002 (incorporated by
reference to Exhibit 10.1(a) of
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002).
(b) Registrant's Dollars & Sense Plan and
Trust, as amended and restated, effective
September 1, 2000 and amendment thereto
dated December 31, 2002 (incorporated by
reference to Exhibit 10.1(b) of
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002).
(c) Registrant's Amended and Restated
Retirement Plan, effective as of February
28, 2002, and amendment thereto dated
December 31, 2002 (incorporated by
reference to Exhibit 10.1(c) of
Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002).
(d) Merger Agreement, dated September 18, 2001,
between Registrant and Regions Bank of
Louisiana, pursuant to which Registrant's
Stock Bonus Plan and PAYSOP were merged
into Registrant's Employee Stock Ownership
Plan (incorporated by reference to Exhibit
10(b) of Registrant's Quarterly Report on
Form 10-Q for the quarter ended September
30, 2001).
10.2 Stock-based Incentive Plans
(a) Registrant's 1983 Restricted Stock Plan, dated
February 21, 1984, as amended and restated as of
November 16, 1995 (incorporated by reference to
Exhibit 10.1(e) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995)
and amendment thereto dated November 21,
1996, (incorporated by reference to Exhibit 10.1
(e) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996), and amendment
thereto dated February 25, 1997 (incorporated by
reference to Exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997), and amendment thereto dated April 25,
2001 (incorporated by reference to Exhibit 10.1 of
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001), and amendment thereto
dated April 17, 2000 (incorporated by reference to
Exhibit 10.2(a) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001).
(b) Registrant's 1988 Incentive Compensation Program,
as amended and restated August 22, 1989 (incorporated
by reference to Exhibit 19.8 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1989) and amendment thereto dated November 21,
1996 (incorporated by reference to Exhibit
10.1(g) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996).
(c) Registrant's 1995 Incentive Compensation Plan approved
by Registrant's shareholders on May 11, 1995
(incorporated by reference to Exhibit 4.4 to
Registration No. 33-60061) and amendment thereto dated
November 21, 1996 (incorporated by Reference to
Exhibit 10.1 (l) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996), and
amendment thereto dated February 25, 1997
(incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997) and amendment thereto
dated May 29, 2003 (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2003).
(i) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of May 22, 1995, entered
into by Registrant and its officers
(incorporated by reference to Exhibit 10.5
to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995).
(ii) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of June 23, 1995, entered
into by Registrant and certain key
employees (incorporated by reference to
Exhibit 10.6 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1995).
(iii)Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of February 24, 1997,
entered into by Registrant and its officers
(incorporated by reference to Exhibit 10.4
to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
(iv) Form of Stock Option Agreement,
pursuant to 1995 Incentive Compensation
Plan and dated as of February 21, 2000,
entered into by Registrant and its officers
(incorporated by reference to Exhibit 10.1
(t) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1999).
(v) Form of Restricted Stock and
Performance Share Agreement, dated as of
February 22, 1999, relating to equity
incentive awards granted in 1999 pursuant
to the Registrant's 1995 Incentive
Compensation Plan that were vested or
earned wholly or in part in early 2004
(incorporated by reference to Exhibit
10.1(x) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1999).
(d) Amended and Restated Registrant's
2000 Incentive Compensation Plan,
as amended through May 23, 2000
(incorporated by reference to
Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000)
and amendment thereto dated May 29,
2003 (incorporated by reference to
Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003).
(i) Form of Stock Option Agreement,
pursuant to the 2000 Incentive
Compensation Plan and dated as of
May 21, 2001, entered into by
Registrant and its officers
(incorporated by reference to
Exhibit 10.2(e) to Registrant's
Annual Report on Form 10-K for the
year ended December 31, 2001).
(ii) Form of Stock Option Agreement,
pursuant to the 2000 Incentive
Compensation Plan and dated as of
February 25, 2002, entered into by
Registrant and its officers
(incorporated by reference to
Exhibit 10.2(d)(ii) of Registrant's
Annual Report on Form 10-K for the
year ended December 31, 2002).
(e) Amended and Restated CenturyTel,
Inc. 2002 Directors Stock Option
Plan, dated as of February 25,
2004, included elsewhere herein.
(i) Form of Stock Option Agreement,
pursuant to the foregoing plan,
entered into by CenturyTel in
connection with options granted to
the outside directors as of May 10,
2002 (incorporated by reference to
Exhibit 10.2 of Registrant's
Quarterly Report on Form 10-Q for
the period ended September 30,
2002).
(ii) Form of Stock Option Agreement,
pursuant to the foregoing plan,
entered into by CenturyTel in
connection with options granted to
the outside directors as of May 9,
2003, included elsewhere herein.
(f) Amended and Restated CenturyTel, Inc. 2002
Management Incentive Compensation Plan,
dated as of February 25, 2004, included
elsewhere herein.
(i) Form of Stock Option Agreement,
pursuant to the foregoing plan,
entered into between CenturyTel and
certain of its officers and key
employees at various dates since
May 9, 2002 (incorporated by
reference to Exhibit 10.4 of
Registrant's Quarterly Report on
Form 10-Q for the period ended
September 30, 2002).
(ii) Form of Stock Option Agreement,
pursuant to the foregoing plan and
dated as of February 24, 2003,
entered into by Registrant and its
officers (incorporated by reference
to Exhibit 10.2(f)(ii) of
Registrant's Annual Report on Form
10-K for the year ended December
31, 2002).
(iii)Form of Stock Option Agreement,
pursuant to the foregoing plan and
dated as of February 25, 2004,
entered into by Registrant and its
officers, included elsewhere
herein.
(iv) Form of Restricted Stock Agreement,
pursuant to the foregoing plan and
dated as of February 24, 2003,
entered into by Registrant and its
executive officers (incorporated by
reference to Exhibit 10.1 of
Registrant's Quarterly Report on
Form 10-Q for the period ended
March 31, 2003).
10.3 Other Non-Qualified Employee Benefit Plans
(a) Registrant's Key Employee Incentive Compensation
Plan, dated January 1, 1984, as amended and restated
as of November 16, 1995 (incorporated by reference
to Exhibit 10.1(f) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995)
and amendment thereto dated November 21, 1996
(incorporated by reference to Exhibit 10.1 (f) to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996), amendment thereto
dated February 25, 1997 (incorporated by
reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997), amendment thereto dated April 25, 2001
(incorporated by reference to Exhibit 10.2 of
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001) and amendment thereto
dated April 17, 2000 (incorporated by reference to
Exhibit 10.3(a) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 2001).
(b) Registrant's Restated Supplemental
Executive Retirement Plan, dated April 3,
2000 (incorporated by reference to Exhibit
10.1(d) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31,
2000).
(c) Registrant's Restated Supplemental Defined
Contribution Plan, restated as of July 17,
2001, (incorporated by reference to Exhibit
10.1 of Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30,
2001).
(d) Registrant's Amended and Restated
Supplemental Dollars & Sense Plan,
effective as of January 1, 1999
(incorporated by reference to Exhibit 10.1
(q) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1998).
(e) Registrant's Supplemental Defined Benefit
Plan, effective as of January 1, 1999
(incorporated by reference to Exhibit 10.1
(y) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1998),
and amendment thereto dated February 28,
2002 (incorporated by reference to Exhibit
10.3(e) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
2001).
(f) Registrant's Amended and Restated Salary
Continuation (Disability) Plan for
Officers, dated November 26, 1991
(incorporated by reference to Exhibit 10.16
of Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991).
(g) Registrant's Restated Outside Directors' Retirement
Plan, dated as of November 16, 1995 (incorporated
by reference to Exhibit 10.1(t) to Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1995) and amendment thereto dated April
17, 2000 (incorporated by reference to Exhibit 10.3(g)
to Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001) and amendment thereto
dated December 31, 2002 (incorporated by reference
to Exhibit 10.3(g) of Registrant's Annual Report on
Form 10-K for the year ended December 31, 2002).
(h) Registrant's Restated Deferred Compensation
Plan for Outside Directors, dated as of
November 16, 1995 (incorporated by
reference to Exhibit 10.1(u) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995) and
amendment thereto dated April 17, 2000
(incorporated by reference to Exhibit
10.3(h) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
2001).
(i) Registrant's Chairman/Chief Executive
Officer Short-Term Incentive Program
(incorporated by reference to Exhibit 10.6
to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
(j) Registrant's 2001 Employee Stock Purchase
Plan (incorporated by reference to
Registrant's 2001 Proxy Statement).
10.4 Employment, Severance and Related Agreements
(a) Change of Control Agreement, dated
February 22, 2000 by and between Glen F.
Post, III and Registrant (incorporated by
reference to Exhibit 10.1(b) to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
(b) Form of Change of Control Agreement, dated
February 22, 2000, by and between Registrant
and David D. Cole, R. Stewart Ewing and
Michael E. Maslowski (incorporated by
reference exhibit 10.1(c) to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000).(a)
(c) Form of Change of Control Agreement dated
July 24, 2000, by and between the Registrant
and Karen A. Puckett (incorporated by
reference to Exhibit 10.1(c) of Registrant's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
(d) Form of Change of Control Agreement dated
August 26, 2003 by and between Registrant
and Stacey W. Goff (incorporated by
reference to Exhibit 10.1(c) of
Registrant's Quarterly Report on Form 10-Q
for the period ended March 31, 2000).
14 Registrant's Corporate Compliance Program, included
elsewhere herein.
21 Subsidiaries of the Registrant, included elsewhere herein.
23 Independent Auditors' Consent, included elsewhere herein.
31.1 Registrant's Chief Executive Officer certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, included elsewhere herein.
31.2 Registrant's Chief Financial Officer certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, included elsewhere herein.
32 Registrant's Chief Executive Officer and Chief Financial
Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, included elsewhere herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CenturyTel, Inc.,
Date: March 12, 2004 By: /s/ Glen F. Post, III
----------------------------
Glen F. Post, III
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Chairman of the Board and
/s/ Glen F. Post, III Chief Executive Officer
- ----------------------------
Glen F. Post, III March 12, 2004
Executive Vice President and
/s/ R. Stewart Ewing, Jr. Chief Financial Officer
- ----------------------------
R. Stewart Ewing, Jr. March 12, 2004
/s/ Neil A. Sweasy Vice President and Controller
- ----------------------------
Neil A. Sweasy March 12, 2004
/s/ William R. Boles, Jr. Director
- ----------------------------
William R. Boles, Jr. March 12, 2004
/s/ Virginia Boulet Director
- ----------------------------
Virginia Boulet March 12, 2004
Director
- ----------------------------
Calvin Czeschin
/s/ James B. Gardner Director
- ----------------------------
James B. Gardner March 12, 2004
/s/ W. Bruce Hanks Director
- ----------------------------
W. Bruce Hanks March 12, 2004
/s/ R. L. Hargrove, Jr. Director
- ----------------------------
R. L. Hargrove, Jr. March 12, 2004
/s/ Johnny Hebert Director
- ----------------------------
Johnny Hebert March 12, 2004
/s/ C. G. Melville, Jr. Director
- ----------------------------
C. G. Melville, Jr. March 12, 2004
/s/ Fred Nichols Director
- ----------------------------
Fred Nichols March 12, 2004
/s/ Harvey P. Perry Director
- ----------------------------
Harvey P. Perry March 12, 2004
Director
- ----------------------------
Jim D. Reppond
/s/ Joseph R. Zimmel Director
- ----------------------------
Joseph R. Zimmel March 12, 2004
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CENTURYTEL, INC.
For the years ended December 31, 2003, 2002 and 2001
Additions
Balance at charged to Deductions Balance
beginning costs and from Other at end
Description of period expenses allowance changes of period
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 2003
Allowance for doubtful accounts $ 33,962 31,910 (42,193) (1) - 23,679
Valuation allowance for
deferred tax assets $ 28,380 12,978 (21,623) (2) 19,735
Year ended December 31, 2002
Allowance for doubtful accounts $ 13,908 34,045 (17,134) (1) 3,143 (3) 33,962
Valuation allowance for
deferred tax assets $ 19,691 8,689 - - 28,380
Year ended December 31, 2001
Allowance for doubtful accounts $ 9,968 22,533 (18,593) (1) - 13,908
Valuation allowance for
deferred tax assets $ 6,211 13,480 - - 19,691
(1) Customers' accounts written-off, net of recoveries.
(2) Change in the valuation allowance allocated to income tax expense.
(3) Allowance for doubtful accounts at the date of acquisition of purchased
subsidiaries, net of allowance for doubtful accounts at the date of
disposition of subsidiaries sold.