UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported):
March 19, 2002
CenturyTel, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 1-7784 72-0651161
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
100 CenturyTel Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (318) 388-9000
* * * * * * * * * * *
Item 5. Other Events
On March 15, 2002, CenturyTel, Inc. (the "Company") filed its Annual
Report on Form 10-K for the year ended December 31, 2001 (the "Form 10-K"). On
March 19, 2002, the Company entered into a definitive agreement (the "Sales
Agreement") to sell its wireless operations to an affiliate of ALLTEL
Corporation ("Alltel") in exchange for $1.65 billion in cash, subject to certain
adjustments and contingencies. As a result of such agreement, the Company's
financial statements must be restated to reflect such wireless operations as
discontinued operations in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144").
In connection with the Company's disposition of its wireless operations to
Alltel on August 1, 2002, the Company intends to file a combined Form 8-K and
Form 8-K/A on or about August 14, 2002, which will include, among other things,
a pro forma statement of income for the year ended December 31, 2001 as if its
wireless operations were sold as of January 1, 2001. Since the Company's Form
10-K was filed prior to the Company's March 19, 2002 announcement of the Sales
Agreement, certain parts of the Form 10-K previously filed must be restated to
reflect the wireless operations as discontinued operations in accordance with
SFAS 144. This Report on Form 8-K updates through March 19, 2002 Items 6, 7 and
8 of the Company's Form 10-K (and Schedule II thereto) that are affected by the
classification of the Company's wireless operations as discontinued operations.
In addition, this Report updates a small number of paragraphs in Items 1 and 2
of the Company's Form 10-K to reference or reflect the Company's execution of
the Sales Agreement on March 19, 2002. All other items of the Form 10-K remain
unchanged.
In addition, certain additional disclosures have been made related to
reflect net income and earnings per share, as adjusted, in accordance with the
requirements of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets".
Finally, the line item "Cost of sales and operating expenses" on the
face of the Consolidated Statements of Income has been changed to read "Cost of
sales and operating expenses (exclusive of depreciation and amortization)" in
response to a comment letter dated July 31, 2002 that the Company received from
the Securities and Exchange Commission.
No attempt has been made to update matters in the Form 10-K except to the
extent expressly provided above. All disclosures in the Form 10-K, including
those reflected in the updated items below, continue to speak only as of March
15, 2002, except to the extent updated through March 19, 2002 to reflect the
Company's execution of the Sales Agreement. For information on developments
since these dates, please refer to the Company's reports filed after such dates
under the Securities Exchange Act of 1934.
PART I
Item 1. Business
General. CenturyTel, Inc. ("CenturyTel") is a regional integrated
communications company engaged primarily in providing local exchange telephone
services and wireless communications services. For the year ended December 31,
2001, local exchange telephone operations provided 90% 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, 2001, the Company's local exchange telephone subsidiaries
operated approximately 1.8 million telephone access lines, primarily in rural,
suburban and small urban areas in 21 states, with the largest customer bases
located in Wisconsin, Arkansas, Washington, Missouri, Michigan, Louisiana and
Colorado. 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."
At December 31, 2001, the Company's majority-owned and operated cellular
systems (i) served approximately 797,000 customers in 19 Metropolitan
Statistical Areas ("MSAs") and 22 Rural Service Areas ("RSAs") in Michigan,
Louisiana, Arkansas, Mississippi, Wisconsin and Texas and (ii) had access to
approximately 7.8 million cellular pops (the estimated population of licensed
cellular telephone markets multiplied by the Company's proportionate equity
interest in the licensed operators thereof). At December 31, 2001, the Company
also owned minority equity interests in 10 MSAs and 22 RSAs, representing
approximately 2.0 million cellular pops. According to data derived from
published sources, the Company is the eighth largest cellular telephone company
in the United States based on the Company's 9.8 million aggregate pops. In
August 2001, the Company announced that it is exploring the separation of its
wireless business from its other operations. On March 19, 2002, the Company
entered into a definitive agreement to sell its wireless operations to an
affiliate of ALLTEL Corporation ("Alltel") in exchange for $1.65 billion in
cash, subject to certain adjustments and contingencies. As a result of such
agreement, the Company's wireless operations have been restated as discontinued
operations in the Company's financial information presented herein. For more
information, see "Wireless Operations."
The Company also provides long distance, Internet access, competitive
local exchange carrier, broadband data, security monitoring, and other
communications and business information services in certain local and regional
markets. For more information, see "Other Operations."
Recent acquisitions and dispositions. On July 31, 2000 and September 29,
2000, affiliates of the Company acquired over 490,000 telephone access lines and
related assets from Verizon Communications, Inc. ("Verizon") in four separate
transactions for approximately $1.5 billion in cash. Under these transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related local exchange assets comprising 106 exchanges
throughout Arkansas for approximately $842 million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra")
purchased approximately 127,000 telephone access lines and related local
exchange assets comprising 107 exchanges throughout Missouri for
approximately $297 million cash. As of December 31, 2001, the Company
owns 75.7% of Spectra, which was organized to acquire and operate these
Missouri properties. At closing, the Company made a preferred equity
investment in Spectra of approximately $55 million (which represented a
57.1% interest) and financed substantially all of the remainder of the
purchase price. In the first quarter of 2001, the Company purchased an
additional 18.6% interest in Spectra for $47.1 million.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related local exchange assets comprising 42
exchanges throughout Wisconsin for approximately $197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related local
exchange assets comprising 35 exchanges throughout Wisconsin for
approximately $172 million in cash. The Company owns 89% of TelUSA,
which was organized to acquire and operate these Wisconsin properties.
At closing, the Company made an equity investment in TelUSA of
approximately $37.8 million and financed substantially all of the
remainder of the purchase price.
In August 2000, the Company acquired the assets of CSW Net, Inc., a
regional Internet service provider that offers dial-up and dedicated Internet
access, and web site and domain hosting to more than 14,000 customers in 28
communities in Arkansas.
In November 1999, the Company acquired the assets of DigiSys, Inc., an
Internet service provider in Kalispell, Montana. DigiSys provides Internet
services to more than 8,600 customers in Montana and operates MontanaWeb, one of
the largest online business directories in the state.
In October 1999, the Company acquired the non-wireline cellular license to
serve Mississippi RSA #5, which covers 160,000 pops. Mississippi RSA #5
encompasses the Vicksburg and Greenville markets as well as portions of
Interstate Highway 20 between Jackson, Mississippi and Monroe, Louisiana.
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 a 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 it Alaska operations.
In the second quarter of 2001, the Company sold to Leap Wireless
International, Inc. 30 PCS (Personal Communications Service) 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.
The Company continually evaluates the possibility of acquiring additional
telecommunications assets in exchange for cash, securities or both, and at any
given time may be engaged in discussions or negotiations regarding additional
acquisitions. The Company generally does not announce its acquisitions until it
has entered into a preliminary or definitive agreement. Over the past few years,
the number and size of communications properties on the market has increased
substantially. Although the Company's primary focus will continue to be on
acquiring interests that are proximate to its properties or that serve a
customer base large enough for the Company to operate efficiently, other
communications interests may also be acquired and these acquisitions could have
a material impact upon the Company.
Pending acquisitions. On October 22, 2001, the Company entered into
definitive agreements to purchase from affiliates of Verizon assets comprising
all of Verizon's local telephone operations in Missouri and Alabama. In
exchange, the Company has agreed to pay approximately $2.159 billion in cash,
subject to certain adjustments described below.
The assets to be purchased will include (i) all telephone access lines
(which numbered approximately 372,000 as of December 31, 2001) and related
property and equipment comprising Verizon's local exchange operations in 98
exchanges in predominantly rural and suburban markets throughout Missouri,
several of which are adjacent to properties currently owned and operated by the
Company, (ii) all telephone access lines (which numbered approximately 304,000
as of December 31, 2001) and related property and equipment comprising Verizon's
local exchange operations in 90 exchanges in predominantly rural markets
throughout Alabama, (iii) Verizon's assets used to provide digital subscriber
line ("DSL") and other high speed data services within the purchased exchanges
in both states and (iv) approximately 2,800 route miles of fiber optic cable
within the purchased exchanges in both states. The acquired assets will not
include Verizon's cellular, PCS, long distance, dial-up Internet, or directory
publishing operations, or rights under various Verizon contracts, including
those relating to customer premise equipment. The Company will not assume any
liabilities of Verizon other than those associated with contracts, employees,
facilities and certain other assets transferred in connection with the
purchases. The purchase price will be adjusted to, among other things, (i)
reimburse Verizon for certain pre-closing costs and (ii) compensate the Company
if Verizon fails to attain certain specified pre-closing capital expenditure
targets. The aggregate effect of these adjustments is not expected to be
material.
The Company's purchase of the Alabama properties has been approved by the
Alabama Public Service Commission. The Company's purchase of the Missouri
properties is subject to the approval of the Missouri Public Service Commission.
Consummation of each transaction is also subject to, among other things, (i) the
approval of the Federal Communications Commission, (ii) compliance with the
notification and waiting period requirements under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, (iii) the receipt of various third party
consents, including releases from Verizon bondholders terminating liens on the
transferred assets, and (iv) various other customary closing conditions. Neither
purchase is conditioned upon the completion of the other purchase. Under each
definitive agreement, the Company has agreed to pay Verizon 10% of the
transaction consideration if the purchase is not consummated under certain
specified conditions, including the Company's incapacity to finance the
transaction.
The properties to be acquired are currently subject to price-cap
regulation for interstate purposes, and the Company has no plans to change this.
Because most of the Company's other telephone properties are subject to
rate-of-return regulation, the Company's plans to retain price-cap regulation
for the acquired properties will require it to seek a waiver of the FCC's "all
or nothing" regulation that generally requires a rate-of-return company
acquiring a price-cap company to convert all of its operations to price-cap
regulation. Although the FCC has granted similar waivers to other carriers over
the past couple of years, no assurances can be provided that the FCC will grant
a waiver to the Company. The Company's failure to obtain this waiver would
adversely impact the financial benefits that the Company anticipates receiving
in connection with its purchases of the Verizon properties.
On February 28, 2002, the Company purchased the fiber network and customer
base of KMC Telecom's operations in Monroe and Shreveport, Louisiana which will
allow the Company to offer broadband services to customers in these markets.
Other. As of December 31, 2001, the Company had approximately 6,900
employees, approximately 1,280 of whom were members of 17 different bargaining
units represented by the International Brotherhood of Electrical Workers, the
Communications Workers of America, or the NTS Employee Committee. Relations with
employees continue to be generally good.
CenturyTel was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous 15 to
20 years. CenturyTel's principal executive offices are located at 100 CenturyTel
Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.
TELEPHONE OPERATIONS
According to published sources, the Company is the eighth largest local
exchange telephone company in the United States, based on the approximately 1.8
million access lines it served at December 31, 2001. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominately rural, suburban and small urban
markets in 21 states. The table below sets forth certain information with
respect to the Company's access lines as of December 31, 2001 and 2000.
December 31, 2001 December 31, 2000
--------------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
--------------------------------------------------------------------------------
Wisconsin 498,331 (1) 28% 498,234 (1) 28%
Arkansas 271,617 15 278,155 15
Washington 189,868 11 189,341 11
Missouri 130,651 (2) 7 129,944 (2) 7
Michigan 114,643 6 114,325 6
Louisiana 104,043 6 103,091 6
Colorado 97,571 6 95,509 5
Ohio 84,636 5 85,308 5
Oregon 78,592 4 79,663 5
Montana 65,974 4 65,966 4
Texas 51,451 3 51,387 3
Minnesota 31,110 2 30,910 2
Tennessee 27,660 2 27,781 2
Mississippi 23,579 1 23,435 1
New Mexico 6,396 - 6,295 -
Idaho 6,119 - 6,197 -
Indiana 5,490 - 5,425 -
Wyoming 5,408 - 5,108 -
Iowa 2,072 - 2,048 -
Arizona 1,937 - 1,920 -
Nevada 495 - 523 -
--------------------------------------------------------------------------------
1,797,643 100% 1,800,565 100%
================================================================================
(1) Approximately 61,990 (as of December 31, 2001) of these lines are owned
and operated by CenturyTel's 89%-owned affiliate.
(2) These lines are owned and operated by CenturyTel's 75.7%-owned affiliate.
As indicated in the following table, the Company has generally experienced
growth in its telephone operations over the past several years, a substantial
portion of which was attributable to the July and September 2000 acquisitions of
telephone properties from Verizon, the December 1997 acquisition of PTI, the
acquisitions of other telephone properties and the expansion of services. A
portion of the Company's access line growth was offset by the May 1999 sale of
the Company's Alaska telephone operations.
Year ended or as of December 31,
-----------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------
(Dollars in thousands)
Access lines 1,797,643 1,800,565 1,272,867 1,346,567 1,203,650
% Residential 76% 76 75 74 74
% Business 24% 24 25 26 26
Operating revenues $ 1,505,733 1,253,969 1,126,112 1,077,343 526,428
Capital expenditures $ 351,010 275,523 233,512 223,190 115,854
-----------------------------------------------------------------------------------------
Future growth in telephone operations is expected to be derived from (i)
acquiring additional telephone properties, (ii) providing service to new
customers, (iii) increasing network usage and (iv) providing additional services
made possible by advances in technology, improvements in the Company's
infrastructure and changes in regulation. For information on developing
competitive trends, see "-Regulation and Competition."
Services
The Company's local exchange telephone subsidiaries derive revenue from
providing (i) local telephone services, (ii) network access services and (iii)
other related services. The following table reflects the percentage of telephone
operating revenues derived from these respective services:
2001 2000 1999
------------------------------------------------------------------------
Local service 32.6% 32.6 31.4
Network access 58.1 58.0 58.1
Other 9.3 9.4 10.5
------------------------------------------------------------------------
100.0% 100.0 100.0
========================================================================
Local service. Local service revenues are derived from the provision of
local exchange telephone services in the Company's service areas. Access lines
declined 0.2% in 2001. Internal access line growth during 2000 and 1999 was 2.8%
and 4.8%, respectively. The decline in internal access line growth during 2001
was substantially due to the slowing growth in the Company's service areas due
to general economic conditions and disconnecting service to customers for
non-payment.
The installation of digital switches, high-speed data circuits and related
software has been an important component of the Company's growth strategy
because it allows the Company to offer enhanced voice services (such as call
forwarding, conference calling, caller identification, selective call ringing
and call waiting) and data services and to thereby increase utilization of
existing access lines. In 2001 the Company continued to expand its list of
premium services (such as voice mail) offered in certain service areas and
aggressively marketed these services.
Network access. Network access revenues primarily relate to services
provided by the Company to long distance carriers, wireless carriers and other
customers in connection with the use of the Company's facilities to originate
and terminate interstate and intrastate long distance telephone calls. Certain
of the Company's interstate network access revenues are based on tariffed access
charges prescribed by the Federal Communications Commission ("FCC"); the
remainder of such revenues are derived under revenue sharing arrangements with
other local exchange carriers ("LECs") administered by the National Exchange
Carrier Association ("NECA"), a quasi-governmental non-profit organization
formed by the FCC in 1983 for such purposes.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on tariffed access charges, which are subject to state regulatory
commission approval. Additionally, certain of the Company's intrastate network
access revenues, along with intrastate and intra-LATA (Local Access and
Transport Areas) long distance revenues, are derived through revenue sharing
arrangements with other LECs.
The Company is installing fiber optic cable in certain of its high traffic
routes and provides alternative routing of telephone service over fiber optic
cable networks in several strategic operating areas. At December 31, 2001, the
Company's telephone subsidiaries had over 10,900 miles of fiber optic cable in
use.
Other. Other revenues include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for long
distance companies and (iii) participating in the publication of local
directories.
Certain large communications companies for which the Company currently
provides billing and collection services continue to indicate their desire to
reduce their billing and collection expenses, which has resulted and may
continue to result in future reductions of the Company's billing and collection
revenues.
For further information on the regulation of the Company's revenues, see
"-Regulation and Competition."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") or the Rural Telephone Bank
("RTB"). The RUS has made long-term loans to telephone companies since 1949 for
the purpose of improving telephone service in rural areas. The RUS continues to
make new loans at interest rates that range from 5% to 7% based on borrower
qualifications and the cost of funds to the United States government. The RTB,
established in 1971, makes long-term loans at interest rates based on its
average cost of funds as determined by statutory formula (which ranged from 5.0%
to 6.0% for the RTB's fiscal year ended September 30, 2001), and in some cases
makes loans concurrently with RUS loans. Much of the Company's telephone plant
is pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS and RTB. The Company's telephone subsidiaries that have
borrowed from government agencies generally may not loan or advance any funds to
CenturyTel, but may pay dividends if certain financial covenants are met.
For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.
Regulation and Competition
Traditionally, LECs have operated as regulated monopolies. Consequently,
most of the Company's telephone operations have traditionally been regulated
extensively by various state regulatory agencies (generally called public
service commissions or public utility commissions) and by the FCC. As discussed
in greater detail below, passage of the Telecommunications Act of 1996 (the
"1996 Act"), coupled with state legislative and regulatory initiatives and
technological changes, has fundamentally altered the telephone industry by
reducing the regulation of LECs and permitting competition in each segment of
the telephone industry. CenturyTel anticipates that these trends towards reduced
regulation and increased competition will continue.
State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions. Most of such commissions have traditionally regulated
pricing through "rate of return" regulation that focuses on authorized levels of
earnings by LECs. Most of these commissions also (i) regulate the purchase and
sale of LECs, (ii) prescribe depreciation rates and certain accounting
procedures and (iii) regulate various other matters, including certain service
standards and operating procedures.
In recent years, state legislatures and regulatory commissions in most of
the states in which the Company has substantial operations 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, Louisiana, 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, most of the Company's
Wisconsin telephone subsidiaries, with the exception of the properties acquired
in mid-2000, have agreed to be governed by alternative regulation plans, and the
Company continues to explore its options for similar treatment in other states.
Other states have imposed new regulatory models that do not rely on "rate of
return" regulation. The Company believes that reduced regulatory oversight of
certain of the Company's telephone operations may allow the Company to offer new
and competitive services faster than under the traditional regulatory process.
For a discussion of legislative, regulatory and technological changes that have
introduced competition into the local exchange industry, see "-Developments
Affecting Competition."
A portion of the Company's telephone operations in Wisconsin have been
regulated under an alternative regulation plan since June 1996. In late 1999 and
early 2000, most of the Company's remaining Wisconsin telephone subsidiaries
agreed to be subject to alternative regulation plans. The Company's Wisconsin
access lines acquired in mid-2000 continue to be regulated under "rate of
return" regulation. Each of these alternative regulation plans has a five-year
term and permits the Company to adjust local rates within specified parameters
if certain quality-of-service and infrastructure-development commitments are
met. These plans also include initiatives designed to promote competition.
Although the Company believes that these plans will be favorable in the future
as additional revenue streams are added and cost efficiencies are obtained,
there can be no assurance that current or future alternative regulation plans
will not reduce revenue growth in the future.
Since 1997 all of the Company's LECs operating in Louisiana have been
regulated under a Consumer Price Protection Plan (the "Louisiana Plan"). This
form of regulation focuses on price and quality of service. Under the Louisiana
Plan, the Company's Louisiana LECs' local rates and access rates have remained
unchanged since 1997, but may currently be increased within certain parameters.
The Company's Louisiana LECs have the option to propose a new plan at any time
if the Louisiana Public Service Commission ("LPSC") determines that (i)
effective competition exists or (ii) unforeseen events threaten the LEC's
ability to provide adequate service or impair its financial health.
The Company's Arkansas LECs, excluding the recently-acquired Verizon
properties, are regulated under an alternative regulation plan adopted in 1997,
which initially froze access rates for three years, after which time such rates
can be adjusted based on an inflation-based factor. Local service rates can be
adjusted without commission approval; however, such rates are subject to
commission review if certain petition criteria are met. In addition, since 1995
the Company's Michigan LECs have been subject to a regulatory structure that
focuses on price and quality of service as opposed to traditional rate of return
regulation, and which relies more on existing federal and state law regarding
antitrust consumer protection and fair trade to provide safeguards for
competition and consumers.
Notwithstanding the movement towards deregulation, LECs operating
approximately 61% of the Company's total access lines continue to be subject to
"rate of return" regulation. These LECs remain subject to the powers of state
regulatory commissions to conduct earnings reviews and adjust service rates,
either of which could lead to revenue reductions.
FCC regulation. The FCC regulates the interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other LECs by the Company
for use of its local network in connection with the origination and termination
of interstate telephone calls. Additionally, the FCC has prescribed certain
rules and regulations for telephone companies, including regulations regarding
the use of radio frequencies; a uniform system of accounts; and rules regarding
the separation of costs between jurisdictions and, ultimately, between
interstate services.
Effective January 1, 1991, the FCC adopted price-cap regulation relating
to interstate access rates for the Regional Bell Operating Companies. All other
LECs may elect to be subject to price-cap regulation. Under price-cap
regulation, limits imposed on a company's interstate rates are adjusted
periodically to reflect inflation, productivity improvement and changes in
certain non-controllable costs. In May 1993 the FCC adopted an optional
incentive regulatory plan for LECs not subject to price-cap regulation. A LEC
electing the optional incentive regulatory plan would, among other things, file
tariffs based primarily on historical costs and not be allowed to participate in
the relevant NECA pooling arrangements. The Company has not elected price-cap
regulation or the optional incentive regulatory plan for its incumbent
operations (but does propose to operate the access lines that it has agreed to
purchase from Verizon under price-cap regulation). Subject to certain
exceptions, if the Company were to elect price-cap regulation or the optional
incentive regulatory plan for its incumbent operations, either election would
have to be applicable to all of the Company's telephone subsidiaries based on
current regulations.
On October 11, 2001, the FCC modified its interstate access charge rules
and universal service support system for rate of return local exchange carriers.
This order, among other things, (i) increases the caps on the subscriber line
charges ("SLC") to the levels paid by most subscribers nationwide; (ii) allows
limited SLC deaveraging, which will enhance the competitiveness of rate of
return carriers by giving them pricing flexibility; (iii) lowers per minute
rates collected for federal access charges; (iv) creates a new explicit
universal service support mechanism that will replace other implicit support
mechanisms in a manner designed to ensure that rate structure changes do not
affect the overall recovery of interstate access costs by rate of return
carriers serving high cost areas and (v) terminates the proceeding on the
represcription of the authorized rate of return for rate of return LECs, which
will remain at 11.25%. The Company expects the order to be implemented on a
revenue neutral basis for interstate purposes. Other proposals submitted to the
FCC by the Multi-Association Group representing rural carriers were rejected or
deferred for additional comment.
The FCC is seeking comment on a Further Notice of Proposed Rulemaking
regarding developing an appropriate federal incentive plan for rate of return
LECs. The Company is actively monitoring this proceeding and will provide
comments to the FCC on major policy issues.
High-cost support funds, revenue sharing arrangements and related matters.
A significant number of the Company's telephone subsidiaries recover a portion
of their costs under federal and state cost recovery mechanisms that
traditionally have allowed LECs serving small communities and rural areas to
provide communications services reasonably comparable to those available in
urban areas and at reasonably comparable prices.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that will provide predictable levels of
support to rural local exchange carriers, including substantially all of the
Company's local exchange carriers. The Company estimates (based on current
operations, the current nationwide average cost per loop and other factors) that
such ruling may increase the Company's level of universal service support
receipts by approximately $7 million on an annualized basis compared to previous
levels. During 2001 and 2000 the Company's telephone subsidiaries received
$168.7 million and $146.4 million, respectively (which included $21.6 million
and $8.3 million, respectively, related to the Company's Verizon operations
acquired in 2000) from the federal Universal Service Fund, representing 8.0% and
7.9%, respectively, of the Company's consolidated revenues for 2001 and 2000. In
addition, the Company's telephone subsidiaries received $31.5 million and $30.7
million in 2001 and 2000, respectively, from intrastate support funds.
In 1997, the FCC also established new programs to provide discounted
telecommunications services annually to schools, libraries and rural health care
providers. All communications carriers providing interstate telecommunications
services, including the Company's LECs and its cellular and long distance
operations, are required to contribute to these programs. Prior to May 2001, the
Company's LECs recovered their funding contributions in their rates for
interstate services. Subsequent to May 2001, in accordance with a 2001 FCC
order, such contributions are not recovered through access charges but instead
are charged as an explicit item on customer's bills. The Company's contribution
by its cellular and long distance operations, which is passed on to its
customers, was approximately $5.0 million in 2001 and $3.7 million in 2000.
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "- State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
Substantially all of the Company's LECs 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. Although such changes have not materially affected access
revenues to date, there is no assurance that these requests or initiatives will
not result in decreased access revenues in the future.
Developments affecting competition. The communications industry continues
to undergo fundamental changes which are likely to significantly impact the
future operations and financial performance of all communications companies.
Primarily as a result of legislative and regulatory initiatives and
technological changes, competition has been introduced and encouraged in each
sector of the telephone industry, including, most recently, the local exchange
sector. As a result, the number of companies offering competitive services has
increased substantially.
As indicated above, in February 1996 Congress enacted the 1996 Act, which
obligates primarily the Regional Bell Operating Companies to permit competitors
to interconnect their facilities to the LEC's network and to take various other
steps that are designed to promote competition. The 1996 Act imposes several
duties on a LEC if it receives a specific request from another entity which
seeks to connect with or provide services using the LEC's network. In addition,
each incumbent LEC is obligated to (i) negotiate interconnection agreements in
good faith, (ii) provide "unbundled" access to all aspects of the LEC's network,
(iii) offer resale of its telecommunications services at wholesale rates and
(iv) permit competitors to collocate their physical plant on the LEC's property,
or provide virtual collocation if physical collocation is not practicable.
Under the 1996 Act's rural telephone company exemption, most of the
Company's telephone subsidiaries (except for the access lines most recently
acquired from Ameritech in 1998 and Verizon in 2000) 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. In mid-2000, a federal appellate
court overturned portions of the FCC's 1996 interconnection order that sought to
place the burden of defending this exemption on rural LECs and ruled that
competitors had the burden of proof in removing the rural exemption. States are
permitted to adopt laws or regulations that provide for greater competition than
is mandated under the 1996 Act. Although portions of the FCC's August 1996
interconnection order have survived judicial challenge, the FCC has not
completed its interconnection rulemaking and certain litigation continues in the
area of pricing unbundled network elements. Management believes that competition
in its telephone service areas has increased and will continue to increase as a
result of the 1996 Act and additional FCC interpretations related to
interconnection and the portability of universal service support. While
competition through use of the Company's network is still limited in most of its
markets, the Company will continue to witness competition from a variety of
facilities-based service providers, including wireless and cable companies.
In addition to these changes in federal regulation, all of the 21 states
in which the Company provides telephone services have taken legislative or
regulatory steps to further introduce competition into the LEC business.
As a result of these regulatory developments, incumbent LECs ("ILECs")
increasingly face competition from competitive local exchange carriers
("CLECs"), particularly in high population areas. CLECs provide competing
services through reselling the ILECs' local services, through use of the ILECs'
unbundled network elements or through their own facilities. The number of
companies which have requested authorization to provide local exchange service
in the Company's service areas has increased substantially in recent years,
especially in the Company's Verizon markets acquired in 2000, and it is
anticipated that similar action may be taken by others in the future.
In addition to facing direct competition from CLECs, ILECs increasingly
face competition from alternate communication systems constructed by long
distance carriers, large customers or alternative access vendors. These systems,
which have become more prevalent as a result of the 1996 Act, are capable of
originating or terminating calls without use of the ILECs' networks. Customers
may also use wireless or Internet voice service to bypass ILECs' switching
services. In addition, technological and regulatory developments have increased
the feasibility of competing services offered by cable television companies,
several of whom are pursuing these opportunities. Other potential sources of
competition include noncarrier systems that are capable of bypassing ILECs'
local networks, either partially or completely, through substitution of special
access for switched access or through concentration of telecommunications
traffic on a few of the ILECs' access lines. The Company anticipates that all
these trends will continue and lead to increased competition with the Company's
LECs.
Historically, wireless telephone services have complemented traditional
LEC services. However, existing and emerging wireless technologies increasingly
compete with LEC services. The Company anticipates this trend will continue,
particularly if wireless service rates continue to decline. Technological and
regulatory developments in cellular telephone, personal communications services,
digital microwave, coaxial cable, fiber optics, local multipoint distribution
services and other wired and wireless technologies are expected to further
permit the development of alternatives to traditional landline services. For
further information on certain of these developments, see "Wireless Operations -
Regulation and Competition."
Historically, ILECs earned all or substantially all of the toll revenues
associated with intra-LATA long distance calls. Principally as a result of
recent state regulatory changes, companies offering competing toll services have
emerged in the Company's local exchange markets.
To the extent that the telephone industry increasingly experiences
competition, the size and resources of each respective competitor may
increasingly influence its prospects. Many companies currently providing or
planning to provide competitive communication services have substantially
greater financial and marketing resources than the Company, and several are not
subject to the same regulatory constraints as the Company.
The Company anticipates that the traditional operations of LECs will
continue to be impacted by continued technological developments as well as
legislative and regulatory initiatives affecting the ability of LECs to provide
new services and the capability of long distance companies, CLECs, wireless
companies, cable television companies and others to provide competitive LEC
services. Competition relating to services traditionally provided solely by LECs
has thus far affected large urban areas to a greater extent than rural, suburban
and small urban areas such as those in which the Company operates. The Company
intends to actively monitor these developments, to observe the effect of
emerging competitive trends in initial competitive markets and to continue to
evaluate new business opportunities that may arise out of future technological,
legislative and regulatory developments.
The Company anticipates that regulatory changes and competitive pressures
may result in future revenue reductions in its telephone operations. However,
the Company anticipates that such reductions may be minimized by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. While the Company expects its telephone revenues to continue
to grow, its internal telephone revenue growth rate has slowed in recent years
and may continue to slow during upcoming periods.
WIRELESS OPERATIONS
At December 31, 2001, the Company had access to approximately 9.8 million
cellular pops, of which 65% were applicable to MSAs and 35% were RSA pops.
According to data derived from published sources, the Company is the eighth
largest cellular telephone company in the United States based on the Company's
9.8 million pops.
Cellular Industry
The cellular telephone industry has been in existence for over 17 years in
the United States. The industry has grown significantly during this period and
cellular service is now available in substantially all areas of the United
States. According to the Cellular Telecommunications Industry Association, at
June 30, 2001 there were estimated to be over 118 million wireless customers
across the United States.
Initially, all radio transmissions of cellular systems were conducted on
an analog basis. Technological developments involving the application of digital
radio technology offer certain advantages over analog technologies, including
expanding the capacity of mobile communications systems, improving voice
clarity, permitting the introduction of new services, and making such systems
more secure. Digital service is now available in 100% of the Company's MSA
markets and approximately 65% of its RSA markets. Approximately 33% of the
Company's cellular customers currently subscribe to digital services. As
discussed further below, several large wireless carriers have taken initial
steps to develop "next generation" technologies capable of providing enhanced
digital wireless services. For additional information, see "-Regulation and
Competition-Developments Affecting Wireless Competition."
Construction and Maintenance
The construction and maintenance of cellular systems is capital intensive.
Although the Company's MSA and RSA systems have been operational for many years,
the Company has continued to add cell sites to increase coverage, provide
additional capacity, and improve the quality of these systems. In 2001 the
Company completed construction of 72 cell sites in its majority-owned markets.
At December 31, 2001, the Company operated 739 cell sites in its majority-owned
markets.
Over the past several years the Company has upgraded most of its wireless
systems to be capable of providing digital service under the Time Division
Multiple Access ("TDMA") standard, which is one of the four primary digital
cellular standards currently used worldwide. The Company intends to continue
installing digital voice transmission facilities in other markets in 2002. See
"-Regulation and Competition-Developments Affecting Wireless Competition."
Capital expenditures related to majority-owned and operated wireless systems
totaled approximately $71.2 million in 2001. Such capital expenditures for 2002
are anticipated to be approximately $65 million.
Strategy
The Company's business development strategy for its wireless operations is
to secure operating control of service areas that are geographically clustered.
Clustered systems aid the Company's marketing efforts and provide various
operating and service advantages. Approximately 47% of the Company's customers
are in a single, contiguous cluster of eight MSAs and nine RSAs in Michigan;
another 25% are in a cluster of five MSAs and seven RSAs in northern and central
Louisiana, southern Arkansas and eastern Texas. See "-The Company's Cellular
Interests."
The Company has also traditionally targeted roaming service revenues,
which are derived from calls made in one of the Company's service areas by
customers of other cellular carriers from other service areas. In exchange for
providing roaming service to customers of other carriers, the Company has
traditionally charged premium rates to most of these other carriers, who then
frequently pass on some or all of these premium rates to their own customers.
The Company's Michigan, Louisiana and Mississippi cellular properties provide
service to various interstate highway corridors. As indicated elsewhere in Items
1 and 7 of this Report, the Company has increasingly received pressure from
other cellular operators to reduce substantially its roaming rates. See
"-Services, Customers and System Usage."
Marketing
The Company markets its wireless services through several distribution
channels, including its direct sales force, retail outlets owned by the Company
and independent agents. All sales employees and certain independent agents
solicit customers exclusively for the Company. Company sales employees are
compensated by salary and commission and independent sales agents are paid
commissions. The Company advertises its services through various means,
including direct mail, billboard, magazine, radio, television and newspaper
advertisements.
The sales and marketing costs of obtaining new subscribers include
advertising and a direct expense applicable to most new subscribers, either in
the form of a commission payment to an agent or an incentive payment to a direct
sales employee. In addition, the Company discounts the cost of cellular
telephone equipment sold to its customers, and periodically runs promotions
which waive certain fees or provide some amount of free service to new
subscribers. The average cost of acquiring each new customer ($276 in 2001)
remains one of the larger expenses in conducting the Company's wireless
operations. In recent years, the Company has sought to lower this average cost
by focusing more on its direct distribution channels. The Company opened its
first retail outlet in 1994, and currently operates 130 such outlets. During
2001, approximately 54% of new cellular customers were added through direct
distribution channels, up from 37% during 1996.
Because most of the Company's cellular markets are located in rural,
suburban or small urban areas, the Company believes that many of its customers
typically require only local or regional services. The Company lacks the
facilities and national brand name necessary to compete effectively for business
customers requiring nationwide services, and the Company does not target these
customers in its marketing campaigns. See "- Regulation and Competition."
Services, Customers and System Usage
There are a number of different types of cellular telephones, all of which
are currently compatible with cellular systems nationwide. The Company offers a
full range of vehicle-mounted, transportable, and portable cellular telephones.
The Company typically purchases cellular phones in bulk, and typically resells
them at a loss to meet competition or to stimulate sales by reducing the cost of
becoming a cellular customer.
The Company charges its subscribers for access to its systems, for minutes
of use and for enhanced services, such as voice mail. A subscriber may purchase
certain of these services separately or may purchase rate plans which bundle
these services in different ways and are designed to fit different customer
requirements. While the Company historically has typically charged its customers
separately for custom-calling features, air time in excess of the packaged
amount, and toll calls, it currently offers plans which include features such as
unlimited toll calls and unlimited nights and weekend calling in certain calling
areas. Custom-calling features provided by the Company include call-forwarding,
call-waiting, caller ID, three-way calling and no-answer transfer. The Company
also offers voice message service in certain markets and short text messaging in
markets with digital service.
Cellular customers come from a wide range of occupations and typically
include a large proportion of individuals who work outside of their office. In
recent years, the individual consumer market has generated a majority of new
customer additions. The Company's average monthly revenue (excluding equipment
sales) per customer declined to $46 in 2001 from $49 in 2000 and $53 in 1999.
Such average revenue per customer is expected to further decline (i) as
competitive pressures (including those causing further reductions in service
rates) from current and future wireless communications providers intensify and
(ii) as the Company continues to receive pressure from other cellular operators
to reduce roaming rates. See "-Regulation and Competition."
The Company has entered into "roaming agreements" nationwide with
operators of other cellular systems that permit each company's respective
customers to place or receive calls outside of their home market area. The
charge to a non-Company customer for this service has traditionally been at
premium rates, and is billed by the Company to the customer's service provider,
which then bills the customer. In most instances, based on competitive factors
and financial considerations, the Company charges an amount to its customers
that is equal to or lower than the amount actually charged by the cellular
carrier providing the roaming service. Within the past few years, several large
nationwide cellular providers have introduced rate plans that offer roaming
coverage (provided through other carriers) at the same rate as service within
the customer's home market area. To defray the cost of these plans, these
providers have exerted substantial pressure on other cellular providers,
including the Company, to reduce their roaming fees. The Company anticipates
that competitive factors and industry consolidation will continue to place
further pressure on charging premium roaming rates. For additional information
on roaming revenue, see "-Strategy."
Churn rate (the average percentage of cellular customers that terminate
service each month) is an industry-wide concern. A significant portion of the
churn in the Company's markets is due to the Company disconnecting service to
cellular customers for nonpayment of their bills. In addition, the Company faces
substantial competition from other wireless providers, including PCS providers.
The Company's average monthly churn rate, excluding prepaid customers, in its
majority-owned and operated markets was 2.33% in 2001 and 1.95% in 2000. The
Company is attempting to lower its churn rate by increasing its proactive
customer service efforts and implementing additional customer retention
programs.
Except for 2001, the Company's cellular subsidiaries have traditionally
experienced strong subscriber growth in the fourth quarter, primarily due to
holiday season sales.
The following table summarizes, among other things, certain information
about the Company's customers and market penetration:
Year ended or at December 31,
--------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------------------------------
Majority-owned and operated MSA and RSA systems (Note 1):
Cellular systems operated 41 41 42
Cell sites 739 743 711
Population of systems operated (Note 2) 8,435,303 8,219,411 8,267,140
Customers (Note 3):
At beginning of period 751,200 707,486 624,290
Gross units added internally 316,353 339,247 240,084
Disconnects 270,213 284,880 146,325
Net units added internally 46,140 54,367 93,759
Effect of property dispositions - (10,653) (10,563)
At end of period 797,340 751,200 707,486
Market penetration at end of period (Note 4) 9.5% 9.1 8.6
Churn rate (Note 5) 2.33% 1.95 2.02
Average monthly revenue per customer
(excluding equipment sales) $ 46 49 53
Construction expenditures (in thousands) $ 71,212 58,468 58,760
--------------------------------------------------------------------------------------------------------
For additional information, see "- The Company's Wireless Interests."
Notes:
1. Represents the number of systems in which the Company owned at least a
50% interest. The revenues and expenses of these markets, all of which
are operated by the Company, are included in the Company's consolidated
operating revenues and operating expenses.
2. Based on independent third-party population estimates for each
respective year.
3. Represents the approximate number of revenue-generating cellular
telephones served by the cellular systems referred to in note 1.
4. Computed by dividing the number of customers at the end of the period
by the total population of systems referred to in note 1.
5. Represents the average percentage of customers, excluding prepaid
customers, that were disconnected per month.
The Company's Wireless Interests
Cellular interests. The Company obtained the right to provide cellular
service through (i) the FCC's licensing process described below, under which it
received interests in wireline licenses, and (ii) its acquisition program, under
which it has acquired interests in both wireline and non-wireline licenses. The
table below sets forth certain information with respect to the interests in
cellular systems that the Company owned as of December 31, 2001:
The
2001 Company's
population Ownership pops at
(Note 1) percentage 12/31/01
-------------------------------------------------------------------------
Majority-owned and operated MSAs
Pine Bluff, AR 84,238 100.00% 84,238
Texarkana, AR/TX 144,094 89.00 128,244
Alexandria, LA 146,435 100.00 146,435
Monroe, LA 147,664 87.00 128,468
Shreveport, LA 393,621 87.00 342,450
Battle Creek, MI 195,425 97.00 189,562
Benton Harbor, MI 162,564 97.00 157,687
Grand Rapids, MI 821,985 97.00 797,325
Jackson, MI 159,831 97.00 155,036
Kalamazoo, MI 317,578 97.00 308,051
Lansing-E. Lansing, MI 510,828 97.00 495,503
Muskegon, MI 198,258 97.00 192,310
Saginaw-Bay City-
Midland, MI 403,446 91.70 369,960
Biloxi-Gulfport, MS (Note 4) 249,177 96.45 240,334
Jackson, MS (Note 4) 444,847 90.22 401,333
Pascagoula, MS (Note 4) 132,646 89.20 118,324
Appleton-Oshkosh-
Neenah, WI 525,133 98.85 519,082
Eau Claire, WI 149,160 55.50 82,784
LaCrosse, WI 107,813 95.00 102,422
---------- ----------
5,294,743 4,959,548
---------- ----------
Minority-owned MSAs (Note 2)
Little Rock, AR 589,276 36.00% 212,139
Lafayette, LA 274,869 49.00 134,686
Detroit, MI 4,797,951 3.20 153,438
Flint, MI 508,544 3.20 16,263
Rochester, MN 125,624 2.81 3,530
Austin, TX 1,188,290 35.00 415,902
Dallas-Ft. Worth, TX 5,209,993 0.50 26,050
Sherman-Denison, TX 111,766 0.50 559
Madison, WI 743,317 9.78 72,689
Milwaukee, WI 2,046,433 17.96 367,601
---------- ----------
15,596,063 1,402,857
---------- ----------
Total MSAs 20,890,806 6,362,405
---------- ----------
The
2001 Company's
population Ownership pops at
(Note 1) percentage 12/31/01
-------------------------------------------------------------------------
Operated RSAs
Arkansas 2 92,157 82.00 75,569
Arkansas 3 106,308 82.00 87,173
Arkansas 11 67,763 89.00 60,309
Arkansas 12 189,169 80.00 151,335
Louisiana 1 113,463 87.00 98,713
Louisiana 2 115,297 87.00 100,308
Louisiana 3 B2 97,933 87.00 85,202
Louisiana 4 73,009 100.00 73,009
Michigan 1 203,027 100.00 203,027
Michigan 2 115,455 100.00 115,455
Michigan 3 177,294 48.63 86,217
Michigan 4 142,573 100.00 142,573
Michigan 5 171,415 48.63 83,358
Michigan 6 150,589 98.00 147,577
Michigan 7 258,248 56.07 144,801
Michigan 8 106,803 97.00 103,599
Michigan 9 306,229 43.38 132,842
Mississippi 2 (Note 3) 260,887 100.00 260,887
Mississippi 5 (Note 3) 160,771 100.00 160,771
Mississippi 6 (Note 3) 189,816 100.00 189,816
Mississippi 7 (Note 3) 189,640 100.00 189,640
Texas 7 B6 57,827 89.00 51,466
Wisconsin 1 119,161 42.21 50,295
Wisconsin 2 86,462 99.00 85,597
Wisconsin 6 121,350 57.14 69,343
Wisconsin 7 297,526 22.70 67,544
Wisconsin 8 242,013 84.00 203,291
---------- ----------
4,212,185 3,219,717
---------- ----------
The
2001 Company's
population Ownership pops at
(Note 1) percentage 12/31/01
-------------------------------------------------------------------------
Non-operated RSAs (Note 2)
Iowa 6 158,681 2.81 4,459
Iowa 13 66,055 2.81 1,856
Iowa 14 105,808 2.81 2,973
Iowa 15 84,042 2.81 2,362
Iowa 16 103,444 2.81 2,907
Michigan 10 139,533 26.00 36,279
Minnesota 7 174,808 2.81 4,912
Minnesota 8 67,698 2.81 1,902
Minnesota 9 133,478 2.81 3,751
Minnesota 10 241,116 2.81 6,775
Minnesota 11 213,810 2.81 6,008
Washington 5 65,020 8.47 5,508
Washington 8 139,467 7.36 10,259
Wisconsin 3 144,095 42.86 61,755
Wisconsin 4 125,177 25.00 31,294
Wisconsin 5 98,314 2.81 2,763
Wisconsin 10 131,491 22.50 29,586
------------ ----------
2,192,037 215,349
------------ ----------
Total RSAs 6,404,222 3,435,066
------------ ----------
27,295,028 9,797,471
============ ==========
Notes:
1. Based on 2001 independent third-party population estimates.
2. Markets not operated by the Company.
3. Represents a non-wireline interest. See "Regulation and Competition -
Cellular licensing and regulation."
Competitors. The number of competitors in each of the Company's MSA and
RSA markets range from one to eight. Such competitors include, but are not
limited to, Cingular, AT&T, Verizon, Centennial, Sprint, Nextel, Voicestream
and U. S. Cellular.
Other wireless interests. The Company owned at December 31, 2001 (i)
licenses to provide personal communications services ("PCS") representing
approximately 3.0 million pops and (ii) 36 local multi-point distribution system
("LMDS") licenses representing approximately 12.6 million pops. The Company
intends to use a portion of its LMDS licenses in connection with its new
competitive local exchange business described below under "Other Operations."
The Company is currently evaluating its options with respect to the remainder of
these licenses, some of which will lapse if not used by the Company by certain
specified dates.
Operations
A substantial number of the cellular systems in MSAs operated by the
Company are owned by limited partnerships in which the Company is a general
partner ("MSA Partnerships"). Most of these partnerships are governed by
partnership agreements with similar terms, including, among other things,
customary provisions concerning capital contributions, sharing of profits and
losses, and dissolution and termination of the partnership. Most of these
partnership agreements vest complete operational control of the partnership with
the general partner. The general partner typically has the power to manage,
supervise and conduct the affairs of the partnership, make all decisions
appropriate in connection with the business purposes of the partnership, and
incur obligations and execute agreements on behalf of the partnership. The
general partner also may make decisions regarding the time and amount of cash
contributions and distributions, and the nature, timing and extent of
construction, without the consent of the other partners. The Company owns more
than 50% of all of the MSA Partnerships that it operates.
A substantial number of the cellular systems in RSAs operated by the
Company are also owned by limited or general partnerships in which the Company
is either the general or managing partner (the "RSA Partnerships"). These
partnerships are governed by partnership agreements with varying terms and
provisions. In many of these partnerships, the noncontrolling partners have the
right to vote on major issues such as the annual budget and system design. In a
few of these partnerships, the Company's management position is for a limited
term (similar to a management contract) and the other partners in the
partnership have the right to change managers, with or without cause. The
Company owns less than 50% of some of the RSA Partnerships that it operates.
The partnership agreements for both the MSA Partnerships and RSA
Partnerships generally contain provisions granting all partners a right of first
refusal in the event a partner desires to transfer a partnership interest. This
restriction on transfer can under certain circumstances make these partnership
interests more difficult to sell to a third party.
Revenue
The following table reflects the major revenue categories for the
Company's discontinued wireless operations as a percentage of discontinued
wireless operating revenues in 2001, 2000 and 1999. Virtually all of these
revenues were derived from cellular operations.
2001 2000 1999
-----------------------------------------------------------------------------
Access fees and toll revenues 76.9% 74.2 72.2
Roaming 20.6 22.5 25.2
Equipment sales 2.5 3.3 2.6
-----------------------------------------------------------------------------
100.0% 100.0 100.0
=============================================================================
For further information on these revenue categories, see "-Services,
Customers and System Usage."
Regulation and Competition
As discussed below, the FCC and various state public utility commissions
regulate, among other things, the licensing, construction, operation, safety,
interconnection arrangements, sale and acquisition of cellular telephone
systems.
Competition between providers of wireless communications services in each
market is conducted principally on the basis of price, services and enhancements
offered, the technical quality and coverage of the system, and the quality and
responsiveness of customer service. As discussed below, competition has
intensified in recent years in a substantial number of the Company's markets.
Under applicable law, the Company is required to permit the reselling of its
services. In certain larger markets and in certain market segments, competition
from resellers may be significant. There is also substantial competition for
sales agents. Certain of the Company's competitors have substantially greater
assets and resources than the Company.
Cellular licensing and regulation. The term "MSA" means a Metropolitan
Statistical Area for which the FCC has granted a cellular operating license. The
term "RSA" means a Rural Service Area for which the FCC has granted a cellular
operating license. During the 1980's and early 1990's, the FCC awarded two
10-year licenses to provide cellular service in each MSA and RSA market.
Initially, one license was reserved for companies offering local telephone
service in the market (the wireline carrier) and one license was available for
firms unaffiliated with the local telephone company (the non-wireline carrier).
Since mid-1986, the FCC has permitted telephone companies or their affiliates to
acquire control of non-wireline licenses in markets in which they do not hold
interests in the wireline license. The FCC has issued a decision that grants a
renewal expectancy during the license renewal period to incumbent licensees that
substantially comply with the terms and conditions of their cellular
authorizations and the FCC's regulations. The licenses for the MSA markets
operated by the Company were initially granted between 1984 and 1987, and
licenses for operated RSAs were initially granted between 1989 and 1991. Thus
far, the Company has received 10-year extensions of all of its licenses that
have become subject to renewal since their original grant dates.
The completion of an acquisition involving the transfer of control of a
cellular system requires prior FCC approval and, in certain cases, receipt of
other federal and state regulatory approvals. The acquisition of a minority
interest generally does not require FCC approval. Whenever FCC approval is
required, any interested party may file a petition to dismiss or deny the
application for approval of the proposed transfer.
In recent years, the FCC has also taken steps to (i) require certain
cellular towers and antennas to comply with radio frequency radiation
guidelines, (ii) require cellular carriers to work with public safety or law
enforcement officials to process 911 calls and conduct electronic surveillance,
(iii) enable cellular subscribers to retain, subject to certain limitations,
their existing telephone numbers when they change service providers and (iv)
implement portions of the 1996 Act. These initiatives have increased the cost of
providing cellular services.
In addition to regulation of these and other matters by the FCC, cellular
systems are subject to certain Federal Aviation Administration tower height
regulations concerning the siting and construction of cellular transmitter
towers and antennas.
Cellular operators are also subject to state and local regulation in some
instances. Although the FCC has pre-empted the states from exercising
jurisdiction in the areas of licensing, technical standards and market
structure, certain states require cellular operators to be certified. In
addition, some state authorities regulate certain aspects of a cellular
operator's business, including certain aspects of pricing, the resale of long
distance service to its customers, the technical arrangements and charges for
interconnection with the local wireline network, and the transfer of interests
in cellular systems. The siting and construction of the cellular facilities may
also be subject to state or local zoning, land use and other local regulations,
as well as the increasing possibility of local community opposition to new
towers.
Media and other reports have from time to time suggested that radio
frequency emissions from wireless handsets and base stations can cause various
health problems, and may interefere with electronic medical devices. These
concerns received increased scrutiny following (i) the June 2000 announcement
that the U.S. Food and Drug Administration had agreed to oversee a $1 million
industry-funded long-term study of handset emissions and had recommended that
users of handsets limit the length of their calls pending completion of the
study and (ii) the July 2000 adoption of a policy by the leading industry trade
group requiring handset manufacturers to disclose emission levels. Although some
preliminary research has been undertaken regarding the effects of handset
emissions, no clear conclusion has emerged to date. No assurance can be given
that future research and studies will not demonstrate a link between the radio
frequency emissions of wireless handset and base stations and health problems.
If such a link is demonstrated, the Company cannot provide assurances that
government authorities will not increase regulation of wireless handsets and
base stations or that wireless companies will not be held liable for cost or
damages associated with these concerns. Moreover, these concerns could
materially reduce demand for wireless services, including those offered by the
Company.
The state of New York and several other local communities nationwide have
enacted laws restricting or prohibiting the use of wireless phones while driving
motor vehicles, and it is likely that more state and local jurisdictions will
adopt similar laws. In addition, some studies have indicated that using wireless
phones while driving may impair drivers' attention. Laws prohibiting or
restricting the use of wireless phones while driving could reduce subscriber
usage. Additionally, concerns over the use of wireless phones while driving
could lead to potential litigation against wireless carriers.
Developments affecting wireless competition. Competition in the wireless
communications industry has increased substantially in recent years due to
continued and rapid advances in technology, the emergence of several nationwide
service providers and legislative and regulatory changes.
Several FCC initiatives over the past decade have resulted in the
allocation of additional radio spectrum or the issuance of licenses for emerging
mobile communications technologies that are competitive with the Company's
cellular and telephone operations, including PCS. Although there is no
universally recognized definition of PCS, the term is generally used to refer to
wireless services to be provided by licensees operating in the 1850 MHz to 1990
MHz radio frequency band using microcells and high-capacity digital technology.
In 1996 and early 1997 the FCC auctioned up to six PCS licenses per market. Two
30MHz frequency blocks were awarded for each of the 51 Rand McNally Major
Trading Areas ("MTAs"), while one 30MHz and three 10MHz frequency blocks were
awarded for each of the 493 Rand McNally Basic Trading Areas ("BTAs").
Additional future auctions of radio spectrum will further intensify competition.
PCS technology permits PCS operators to offer wireless voice, data, image
and multimedia services. The largest PCS providers commenced initial operations
in late 1996 and since then have aggressively expanded their operations. These
providers have initially focused on larger markets, and have generally marketed
PCS as being a competitive service to cellular. Many of these companies have
aggressively competed for customers on the basis of price, which has placed
downward pressure on cellular prices. There is at least one PCS competitor in
each of the Company's operated MSAs and some of its operated RSAs.
In addition to PCS, current and prospective users of cellular systems may
find their communication needs satisfied by other current and developing
technologies. Several years ago the FCC authorized the licensees of certain
specialized mobile radio service ("SMR") systems (which historically have
generally been used by taxicabs and tow truck operators) to configure their
systems into digital networks that operate in a manner similar to cellular
systems. Such systems are commonly referred to as enhanced specialized mobile
radio service ("ESMR") systems. FCC regulations allow up to two ESMR carriers
per market. The Company believes that ESMR systems are operating in a few of its
cellular markets. One well-established ESMR provider has constructed a
nationwide digital mobile communications system to compete with cellular
systems. Other similar communication services that have the technical capability
to handle wireless telephone calls may provide competition in certain markets,
although these services currently lack the subscriber capacity of cellular
systems. Paging or beeper services that feature text message and data display as
well as tones may be adequate for potential subscribers who do not need to
converse directly with the caller. Mobile satellite systems, in which
transmissions are between mobile units and satellites, may ultimately be
successful in obtaining market share from cellular systems that communicate
directly to land-based stations. Other future technological advances or
regulatory changes (including additional spectrum auctions) may result in other
alternatives to cellular service, thereby creating additional sources of
competition.
Several large wireless carriers have recently taken one or more of the
following steps that could impact the Company's competitive position:
o First, several large wireless carriers have merged with other companies
or formed marketing alliances or joint ventures in order to enhance
their ability to provide nationwide cellular or PCS service under a
single brand name. Although the Company believes that many of the
customers in its smaller markets require only local or regional
services, the Company believes its wireless operations have been
negatively impacted by these competitors marketing their nationwide
services in the Company's markets.
o Second, several large wireless carriers have taken steps to provide
wireless data, short messaging and other enhanced "next generation"
digital wireless services. In connection therewith, several large
domestic carriers that currently use the TDMA standard have either
announced their intention to abandon the TDMA standard or have begun to
overlay their TDMA systems with additional network elements permitting
packet data transmissions. The Company is evaluating whether the
opportunity to derive additional revenues from these enhanced services
justify the capital costs necessary to provide these services. If the
Company elects to continue to use the TDMA standard or to forego
implementation of "next generation" technology or services, there can be
no assurance that the Company will be able to receive support from
vendors or to compete effectively against companies using different
technologies or offering more services.
Although it is uncertain how competing services and emerging "next
generation" technologies will ultimately affect the Company, the Company
anticipates that it will continue to face increased competition in its wireless
markets.
In August 2001, the Company announced that it was exploring the separation
of its wireless business from its other operations. On March 19, 2002, the
Company entered into a definitive agreement to sell its wireless operations to
an affiliate of Alltel in exchange for $1.65 billion in cash, subject to certain
adjustments and contingencies. As a result of such agreement, the Company's
wireless operations have been restated as discontinued operations in the
Company's financial information presented herein.
OTHER OPERATIONS
The Company provides long distance, Internet access, competitive local
exchange services, broadband data, security monitoring, and other communications
and business information services in certain local and regional markets. The
results of these operations, which accounted for 10.3% and 5.2%, respectively,
of the Company's consolidated revenues and operating income from continuing
operations during 2001, are reflected for financial reporting purposes in the
"Other operations" section.
Long distance. In 1996 the Company began marketing long distance service
in all of its equal access telephone operating areas. At December 31, 2001, the
Company provided long distance services to approximately 465,000 customers.
Approximately 76% of the Company's long distance revenues are derived from
service provided to residential customers. Although the Company owns and
operates switches in LaCrosse, Wisconsin, Shreveport, Louisiana and Grand
Rapids, Michigan which are utilized to provide long distance services, it
anticipates that most of its future long distance service revenues will be
provided by reselling service purchased from other facilities-based long
distance providers. The Company intends to continue to expand its long distance
business, principally through reselling arrangements.
Internet access. The Company began offering traditional Internet access
services to its telephone customers in 1995. In late 1999, the Company began
offering in select markets digital subscriber line ("DSL") Internet access
services, a high-speed premium-priced data service. At December 31, 2001, the
Company provided Internet access services to a total of approximately 144,800
customers, 119,300 of which receive traditional dial-up Internet service in
select markets in 16 states (which markets represent 87% of the access lines
served by the Company's LECs), and 25,500 of which receive DSL services in
markets that cover approximately 61% of the access lines served by the Company's
LECs.
Competitive local exchange services. In late 2000, the Company began
offering competitive local exchange telephone services, coupled with long
distance, wireless, Internet access and other Company services, to small to
medium-sized businesses in Monroe and Shreveport, Louisiana. In late 2001, the
Company began offering similar services in Grand Rapids and Lansing, Michigan.
On February 28, 2002, the Company purchased the fiber network and customer base
of KMC Telecom's operations in Monroe and Shreveport, Louisiana, which will
allow the Company to offer broadband services to customers in these markets.
Broadband data. In connection with its long-range plans to sell capacity
to other carriers in or near certain of its select markets, the Company began
providing service in the second quarter of 2001 to customers over a recently
constructed 700-mile fiber optic ring connecting several communities in southern
and central Michigan.
Security monitoring. The Company offers 24-hour burglary and fire
monitoring services to approximately 7,950 customers in select markets in
Louisiana, Arkansas, Mississippi, Texas and Ohio.
Other. The Company also provides audiotext services; printing, database
management and direct mail services; and cable television services. The Company
is also in the process of developing an integrated billing and customer care
system which will enable the Company to offer customers value packaging and
produce a single bill for multiple services such as local telephone, wireless,
Internet access and long distance. From time to time the Company also makes
investments in other domestic or foreign communications companies.
Certain service subsidiaries of the Company provide installation and
maintenance services, materials and supplies, and managerial, technical,
accounting and administrative services to the telephone and wireless 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 in operating income in "Other operations".
FORWARD-LOOKING STATEMENTS
This report on Form 10-K and other documents filed by the Company under
the federal securities laws include, and future oral or written statements or
press releases of the Company and its management may include, certain
forward-looking statements, including without limitation statements with respect
to the Company's anticipated future operating and financial performance
(including the impact of pending acquisitions), 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 the
Company's financial position, financial performance or credit ratings), pricing
plans, strategic alternatives, business strategies, and other similar statements
of expectations or objectives that are highlighted by words such as "expects,"
"anticipates," "intends," "plans," "believes," "projects," "seeks," "estimates,"
"hopes," "should," and "may," and variations thereof and similar expressions.
Such forward-looking statements are inherently speculative and are based upon
several assumptions concerning future events, many of which are outside of the
Company's control. The Company's forward-looking statements, and the assumptions
upon which such statements are based, are subject to uncertainties that could
cause the Company's actual results to differ materially from such statements.
These uncertainties include but are not limited to those set forth below:
o the Company's ability to timely consummate its pending acquisitions and
effectively manage its growth, including without limitation the Company's
ability to (i) obtain financing and regulatory approvals of its pending
acquisitions on terms acceptable to the Company, (ii) integrate
newly-acquired operations into the Company's operations, (iii) attract and
retain technological, managerial and other key personnel to work at the
Company's Monroe, Louisiana headquarters or regional offices, (iv) achieve
projected economies of scale and cost savings, (v) achieve projected
growth and revenue targets developed by management in valuing
newly-acquired businesses, (vi) upgrade its billing and other information
systems and (vii) otherwise monitor its operations, costs, regulatory
compliance, and service quality and maintain other necessary internal
controls.
o the result of the Company's efforts to separate its wireless operations
from its other operations.
o the risks inherent in rapid technological change, including without
limitation (i) the lack of assurance that the Company's ongoing wireless
network improvements will be sufficient to meet or exceed the capabilities
and quality of competing networks, (ii) technological developments that
could make the Company's analog and digital wireless networks
uncompetitive or obsolete, such as the risk that the TDMA digital
technology used by the Company will be uncompetitive with existing or
future "next generation" technologies, and (iii) the risk that
technologies will not be developed or embraced by the Company on a timely
or cost-effective basis or perform according to expectations.
o the effects of ongoing changes in the regulation of the communications
industry, including without limitation (i) changes as a result of the 1996
Act and other similar federal and state legislation and federal and state
regulations enacted thereunder, (ii) greater than anticipated
interconnection requests or competition in the Company's predominately
rural local exchange telephone markets resulting therefrom, (iii) greater
than anticipated reductions in revenues received from the Universal
Service Fund or other current or future federal and state support funds
designed to compensate LECs that provide services in high-cost markets,
(iv) the final outcome of regulatory and judicial proceedings with
respect to interconnection agreements, (v) future judicial or regulatory
actions taken in response to the 1996 Act and (vi) future legislation or
regulations addressing potential concerns about radio frequency emissions
from wireless handsets and base stations, or the potential hazards of
using wireless phones while driving motor vehicles.
o the effects of greater than anticipated competition, including (i)
competition from competitive local exchange companies or wireless carriers
in the Company's local exchange markets and (ii) the inability of the
Company's wireless operations to compete against larger nationwide
wireless carriers on the basis of price, service coverage area, or product
offerings, or due to other factors, including technological obsolescence
or the lack of marketing or other resources.
o possible changes in the demand for the Company's products and services,
including without limitation (i) lower than anticipated demand for
traditional or premium telephone services or for additional access lines
per household, (ii) lower than anticipated demand for wireless telephone
services, whether caused by changes in economic conditions, technology,
competition, health concerns or otherwise, (iii) lower than anticipated
demand for the Company's DSL Internet access services, CLEC services or
broadband services and (iv) reduced demand for the Company's access or
billing and collection services.
o the Company's ability to successfully introduce new offerings on a timely
and cost-effective basis, including without limitation the Company's
ability to (i) expand successfully its long distance and Internet
offerings to new markets (including those to be acquired in connection
with future acquisitions), (ii) offer bundled service packages on terms
attractive to its customers and (iii) successfully initiate competitive
local exchange and data services in its targeted markets.
o regulatory limits on the Company's ability to change its prices for
telephone services in response to competitive pressures.
o any difficulties in the Company's ability to expand through attractively
priced acquisitions, whether caused by financing constraints, a decrease
in the pool of attractive target companies, or competition for
acquisitions from other interested buyers.
o the possibility of the need to make abrupt and potentially disruptive
changes in the Company's business strategies due to changes in
competition, regulation, technology, product acceptance or other factors.
o higher than anticipated wireless operating costs due to churn or to
fraudulent uses of the Company's networks, or lower than anticipated
wireless revenues due to reduced roaming fees.
o the lack of assurance that the Company can compete effectively against
better-capitalized competitors.
o the future applicability of SFAS 71 to the Company's telephone
subsidiaries.
o the effects of more general factors, including without limitation:
- changes in general industry and market conditions and growth rates
- changes in interest rates or other general national, regional or local
economic conditions
- changes in legislation, regulation or public policy, including changes
in federal rural financing programs
- unanticipated increases in capital, operating or administrative costs,
or the impact of new business opportunities requiring significant
up-front investments
- the continued availability of financing in amounts, and on terms
and conditions, necessary to support the Company's operations
- changes in the Company's relationships with vendors, or the failure
of these vendors to provide competitive products on a timely basis
- changes in the Company's senior debt ratings
- unfavorable outcomes of regulatory or legal proceedings, including rate
proceedings and environmental proceedings
- losses or unfavorable returns on the Company's investments in other
communications companies
- delays in the construction of the Company's networks
- changes in accounting policies or practices adopted voluntarily or as
required by generally accepted accounting principles.
For additional information, see the description of the Company's business
included above, as well as Item 7 of this report. Due to these uncertainties,
you are cautioned not to place undue reliance upon the Company's forward-looking
statements, which speak only as of the date made. The Company undertakes no
obligation to update or revise any of its forward-looking statements for any
reason.
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 2001
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 notes 2, 5, 6, 12, and 18 of Notes to Consolidated Financial
Statements set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties related to continuing operations consist
principally of telephone lines, central office equipment, and land and buildings
related to telephone operations. As of December 31, 2001 and 2000, the Company's
gross property, plant and equipment of approximately $5.7 billion and $5.4
billion, respectively, consisted of the following:
December 31,
----------------------------------------------------------------------------
2001 2000
----------------------------------------------------------------------------
Telephone operations
Cable and wire 52.5% 52.3
Central office 31.9 30.7
General support 5.9 6.1
Information origination/termination 0.7 1.0
Construction in progress 1.1 2.5
Other 0.1 0.1
----------------------------------------------------------------------------
92.2 92.7
----------------------------------------------------------------------------
Other 7.8 7.3
----------------------------------------------------------------------------
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.
Most of the properties 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. For further information
on the location and type of the Company's properties, see the descriptions of
the Company's telephone operations in Item 1.
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, 2001:
Selected Income Statement Data
Year ended December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------
(Dollars, except per share amounts, and shares expressed in thousands)
Operating revenues
Telephone $ 1,505,733 1,253,969 1,126,112 1,077,343 526,428
Other 173,771 148,388 128,288 91,915 67,351
-------------------------------------------------------------------
Total operating revenues $ 1,679,504 1,402,357 1,254,400 1,169,258 593,779
===================================================================
Operating income
Telephone $ 423,420 376,290 351,559 334,604 177,782
Other 22,098 31,258 22,580 16,083 2,216
Corporate overhead costs
allocable to discontinued
operations (20,213) (21,411) (19,416) (14,957) (13,297)
-------------------------------------------------------------------
Total operating income $ 425,305 386,137 354,723 335,730 166,701
===================================================================
Nonrecurring gains and
losses (pre-tax) $ 33,043 - 11,284 28,085 169,640
===================================================================
Income from continuing operations $ 144,146 124,229 135,520 117,128 181,142
===================================================================
Basic earnings per share from
continuing operations $ 1.02 .88 .97 .85 1.34
===================================================================
Basic earnings per share from
continuing operations, as adjusted
for goodwill amortization $ 1.35 1.15 1.20 1.08 1.39
===================================================================
Diluted earnings per share from
continuing operations $ 1.01 .88 .96 .84 1.32
===================================================================
Diluted earnings per share from
continuing operations, as adjusted
for goodwill amortization $ 1.34 1.13 1.18 1.06 1.37
===================================================================
Dividends per common share $ .200 .190 .180 .173 .164
===================================================================
Average basic shares outstanding 140,743 140,069 138,848 137,010 134,984
===================================================================
Average diluted shares
outstanding 142,307 141,864 141,432 140,105 137,412
===================================================================
Selected Balance Sheet Data
December 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------------------------
(Dollars in thousands)
Net property, plant and
equipment $ 2,736,142 2,698,010 2,000,789 2,093,526 2,011,591
Excess cost of net assets
acquired, net $ 2,087,158 2,108,344 1,267,908 1,500,532 1,280,941
Total assets $ 6,318,684 6,393,290 4,705,407 4,935,455 4,709,401
Long-term debt $ 2,087,500 3,050,292 2,075,212 2,551,963 2,600,801
Stockholders' equity $ 2,337,380 2,032,079 1,847,992 1,531,482 1,300,272
---------------------------------------------------------------------
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,
2001:
Year ended December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------
Telephone access lines 1,797,643 1,800,565 1,272,867 1,346,567 1,203,650
Long distance customers 465,872 363,307 303,722 226,730 171,962
--------------------------------------------------------------------
See Items 1 and 2 in Part I, Item 7 in Part II and notes 1, 2 and 6 of
Notes to Consolidated Financial Statements set forth in Item 8 elsewhere herein
for additional information.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Overview
CenturyTel, Inc. and its subsidiaries (the "Company") is a regional
integrated communications company engaged primarily in providing local exchange,
wireless, long distance, Internet access and data services to customers in 21
states.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related local exchange assets
in Arkansas, Missouri and Wisconsin from affiliates of Verizon Communications
Inc. ("Verizon") for an aggregate of approximately $1.5 billion cash. The
operations of these acquired properties are included in the Company's results of
operations beginning on the respective dates of acquisition. See Acquisitions
and Note 2 of Notes to Consolidated Financial Statements for additional
information.
On May 14, 1999, the Company sold substantially all of its Alaska-based
operations serving approximately 134,900 telephone access lines and 3,000
cellular subscribers. On June 1, 1999, the Company sold the assets of its
Brownsville and McAllen, Texas cellular operations serving approximately 7,500
cellular subscribers. In February 2000, the Company sold the assets of its
remaining Alaska cellular operations serving approximately 10,600 cellular
subscribers. The operations of these disposed properties are included in the
Company's results of operations up to the respective dates of disposition.
On March 19, 2002, the Company entered into a definitive agreement to sell
the stock of its wireless operations to an affiliate of ALLTEL Corporation
("Alltel") in exchange for $1.65 billion in cash, subject to certain adjustments
and contingencies. As a result of such agreement, the Company's wireless
operations for the years ended 2001, 2000 and 1999 have been restated 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, 2001, 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 2001 was $343.0 million, compared to
$231.5 million during 2000 and $239.8 million during 1999. Diluted earnings per
share for 2001 were $2.41 compared to $1.63 in 2000 and $1.70 in 1999. Income
from continuing operations (and diluted earnings per share from continuing
operations) was $144.1 million ($1.01), $124.2 million ($.88) and $135.5 million
($.96) for 2001, 2000 and 1999, respectively.
Year ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 423,420 376,290 351,559
Other 22,098 31,258 22,580
Corporate overhead costs allocable
to discontinued operations (20,213) (21,411) (19,416)
-----------------------------------------------------------------------------------------------
425,305 386,137 354,723
Nonrecurring gains and losses, net 33,043 - 11,284
Interest expense (225,523) (183,302) (150,557)
Minority interest (302) 1,397 (76)
Other income and expense 334 3,539 8,706
Income tax expense (88,711) (83,542) (88,560)
-----------------------------------------------------------------------------------------------
Income from continuing operations 144,146 124,229 135,520
Discontinued operations, net of tax 198,885 107,245 104,249
-----------------------------------------------------------------------------------------------
Net income $ 343,031 231,474 239,769
===============================================================================================
Net income, as adjusted for goodwill amortization $ 399,297 278,029 281,583
===============================================================================================
Basic earnings per share
From continuing operations $ 1.02 .88 .97
From continuing operations, as adjusted for
goodwill amortization $ 1.35 1.15 1.20
From discontinued operations $ 1.41 .77 .75
From discontinued operations, as adjusted for
goodwill amortization $ 1.48 .84 .83
Basic earnings per share $ 2.43 1.65 1.72
Basic earnings per share, as adjusted for
goodwill amortization $ 2.83 1.98 2.03
Diluted earnings per share
From continuing operations $ 1.01 .88 .96
From continuing operations, as adjusted for
goodwill amortization $ 1.34 1.13 1.18
From discontinued operations $ 1.40 .76 .74
From discontinued operations, as adjusted for
goodwill amortization $ 1.47 .83 .81
Diluted earnings per share $ 2.41 1.63 1.70
Diluted earnings per share, as adjusted for
goodwill amortization $ 2.81 1.96 1.99
Average basic shares outstanding 140,743 140,069 138,848
===============================================================================================
Average diluted shares outstanding 142,307 141,864 141,432
===============================================================================================
During the three years ended December 31, 2001, the Company has recorded
certain nonrecurring items. Net income (and diluted earnings per share)
excluding nonrecurring items for 2001, 2000 and 1999 was $225.7 million ($1.59),
$228.8 million ($1.61), and $238.3 million ($1.69), respectively. The following
reconciliation table shows how the amounts of various line items reported under
generally accepted accounting principles were impacted by these nonrecurring
items.
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, in thousands)
Operating income, as reported $ 425,305 386,137 354,723
Less: Nonrecurring operating expenses (1) (2,000) (504) (2,749)
-------------------------------------------------------------------------------------------------
Operating income, excluding nonrecurring items $ 427,305 386,641 357,472
=================================================================================================
Nonrecurring gains and losses, net, as reported $ 33,043 - 11,284
Less nonrecurring items:
Gain on sale of assets 58,523 - 11,284
Write down of non-operating assets (25,480) - -
-------------------------------------------------------------------------------------------------
Nonrecurring gains and losses, net, excluding
nonrecurring items $ - - -
=================================================================================================
Other income and expense, as reported $ 334 3,539 8,706
Less nonrecurring items:
Costs associated with unsolicited takeover proposal (6,000) - -
Settlement of interest rate hedge contracts - (7,947) -
-------------------------------------------------------------------------------------------------
Other income and expense, excluding nonrecurring items $ 6,334 11,486 8,706
=================================================================================================
Income tax expense, as reported $ (88,711) (83,542) (88,560)
Less: Tax effect of nonrecurring items (8,666) 2,957 (2,964)
-------------------------------------------------------------------------------------------------
Income tax expense, excluding nonrecurring items $ (80,045) (86,499) (85,596)
=================================================================================================
Discontinued operations, net of tax, as reported $ 198,885 107,245 104,249
Less nonrecurring items:
Gain on sale of assets 185,133 20,593 51,524
Write down of non-operating assets (18,205) - -
Proportionate share of nonrecurring charges
recorded by entities in which the Company
owns a minority interest (10,054) (5,330) (6,860)
Company's share of gain on sale of assets 2,164 - -
Minority interest effect of gain on sale of assets (13) - (14,926)
Tax effect of nonrecurring items (58,032) (7,123) (33,857)
-------------------------------------------------------------------------------------------------
Income from discontinued operations, net of tax,
excluding nonrecurring items $ 97,892 99,105 108,368
=================================================================================================
Net income, as reported $ 343,031 231,474 239,769
Less: Effect of nonrecurring items 117,370 2,646 1,452
-------------------------------------------------------------------------------------------------
Net income, excluding nonrecurring items $ 225,661 228,828 238,317
=================================================================================================
Basic earnings per share, as reported $ 2.43 1.65 1.72
Less: Effect of nonrecurring items .83 .02 .01
-------------------------------------------------------------------------------------------------
Basic earnings per share, excluding nonrecurring items $ 1.60 1.63 1.71
=================================================================================================
Diluted earnings per share, as reported $ 2.41 1.63 1.70
Less: Effect of nonrecurring items .82 .02 .01
-------------------------------------------------------------------------------------------------
Diluted earnings per share, excluding nonrecurring items $ 1.59 1.61 1.69
=================================================================================================
(1) Nonrecurring operating expenses for 2001 relate to expenses incurred as
the result of an ice storm.
For additional information concerning the nonrecurring items described in
the above table, see "Nonrecurring Gains and Losses, Net", "Other Income and
Expense", and "Discontinued Operations".
Contributions to operating revenues and operating income by the Company's
telephone and other operations for each of the years in the three-year period
ended December 31, 2001 were as follows:
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------
Operating revenues
Telephone operations 89.7 % 89.4 89.8
Other operations 10.3 % 10.6 10.2
Operating income
Telephone operations 99.6 % 97.4 99.1
Other operations 5.2 % 8.1 6.4
Corporate overhead costs allocable
to discontinued operations (4.8)% (5.5) (5.5)
-------------------------------------------------------------------------
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. Such forward-looking statements are subject to uncertainties
that could cause the Company's actual results to differ materially from such
statements. Such uncertainties include but are not limited to: the Company's
ability to effectively manage its growth, including integrating newly-acquired
businesses into the Company's operations, successfully financing and timely
consummating pending acquisitions, hiring adequate numbers of qualified staff
and successfully upgrading its billing and other information systems; the
results of the Company's effort to separate its wireless operations; the risks
inherent in rapid technological change; the effects of ongoing changes in the
regulation of the telecommunications industry; the effects of greater than
anticipated competition in the Company's markets; possible changes in the demand
for, or pricing of, the Company's products and services; the Company's ability
to successfully introduce new product or service offerings on a timely and
cost-effective basis; and the effects of more general factors such as changes in
interest rates, in general market or economic conditions or in legislation,
regulation or public policy. These and other uncertainties related to the
business are described in greater detail in Item 1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. 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 21 states. As of December 31, 2001, approximately 87% of
the Company's 1.8 million access lines were in Wisconsin, Arkansas, Washington,
Missouri, Michigan, Louisiana, Colorado, Ohio, and Oregon. The operating
revenues, expenses and income of the Company's telephone operations for 2001,
2000 and 1999 are summarized below.
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 491,529 408,538 353,534
Network access 874,458 727,797 654,003
Other 139,746 117,634 118,575
-------------------------------------------------------------------------------
1,505,733 1,253,969 1,126,112
-------------------------------------------------------------------------------
Operating expenses
Plant operations 380,466 290,062 251,704
Customer operations 117,080 105,950 88,552
Corporate and other 186,483 163,761 160,631
Depreciation and amortization 398,284 317,906 273,666
-------------------------------------------------------------------------------
1,082,313 877,679 774,553
-------------------------------------------------------------------------------
Operating income $ 423,420 376,290 351,559
===============================================================================
Local service revenues. Local service revenues are derived from the
monthly provision of local exchange telephone services in the Company's service
areas. Of the $83.0 million (20.3%) increase in local service revenues in 2001,
$73.7 million was due to the acquisition of the Verizon properties in 2000. The
remaining $9.3 million increase was due to a $6.9 million increase due to
increased rates in certain jurisdictions and an increase in the average number
of customer access lines in incumbent markets and a $3.9 million increase due to
the increased provision of custom calling features. Of the $55.0 million (15.6%)
increase in local service revenues in 2000, $46.5 million was due to the
acquisition of the Verizon properties, which was partially offset by a $14.4
million decrease attributable to the sale of the Company's Alaska-based
operations in the second quarter of 1999. The remaining $22.9 million increase
was due to a $16.4 million increase in the average number of customer access
lines in incumbent markets and a $5.4 million increase due to the increased
provision of custom calling features. Access lines declined 0.2% during 2001.
Internal access line growth during 2000 and 1999 was 2.8% and 4.8%,
respectively. The decline in internal access line growth during 2001 is
substantially due to the slowing growth in the Company's service areas due to
general economic conditions and disconnecting customers for nonpayment.
Network access revenues. Network access revenues are primarily derived
from charges to long distance companies and other customers for access to the
Company's local exchange carrier ("LEC") networks in connection with the
completion of interstate or intrastate long distance telephone calls. Certain of
the Company's interstate network access revenues are based on tariffed access
charges filed directly with the Federal Communications Commission ("FCC"); the
remainder of such revenues are derived under revenue sharing arrangements with
other LECs administered by the National Exchange Carrier Association. Intrastate
network access revenues are based on tariffed access charges filed with state
regulatory agencies or are derived under revenue sharing arrangements with other
LECs.
Network access revenues increased $146.7 million (20.2%) in 2001 and
$73.8 million (11.3%) in 2000 due to the following factors:
2001 2000
increase increase
(decrease) (decrease)
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Acquisitions of Verizon properties in third quarter 2000 $ 139,866 75,938
Increased recovery from the federal Universal Service Fund ("USF") 8,507 15,753
Disposition of Alaska properties - (23,348)
Partial recovery of increased operating costs through
revenue sharing arrangements with other telephone companies,
increased minutes of use, increased recovery from state
support funds and return on rate base 13,204 3,637
Revision of prior year revenue settlement agreements (16,876) 4,228
Other, net 1,960 (2,414)
------------------------------------------------------------------------------------------------
$ 146,661 73,794
================================================================================================
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 $22.1 million in
2001, primarily due to a $20.5 million increase attributable to revenues
contributed by the Verizon properties. The remainder of the increase in 2001 was
due primarily to a $7.0 million increase in revenues from CPE services
(primarily due to an increase in rates) which was partially offset by a $5.0
million decrease in billing and collection revenues. Other revenues decreased
$941,000 in 2000, primarily due to a $6.3 million decrease due to the sale of
the Alaska properties and a $5.4 million decrease from the provision of CPE
services, which benefited in 1999 from sales to customers readying their
equipment for the Year 2000. Such decreases were substantially offset by a $10.8
million increase attributable to revenues contributed by the Verizon properties.
Operating expenses. Plant operations expenses during 2001 and 2000
increased $90.4 million (31.2%) and $38.4 million (15.2%), respectively. Of the
$90.4 million increase in 2001, $87.3 million was attributable to the properties
acquired from Verizon. The remaining $3.1 million increase was primarily due to
a $6.1 million increase in salaries and benefits, a $2.7 million increase in
network operations expenses and a $2.6 million increase in digital subscriber
line ("DSL") expenses. Such increases were substantially offset by a $9.9
million decrease in engineering expenses. Of the $38.4 million increase in 2000,
$44.8 million was attributable to the properties acquired from Verizon, which
was partially offset by a $13.0 million decrease due to the sale of the Alaska
properties. The remaining $6.6 million increase was primarily due to a $4.7
million increase in salaries and benefits and a $2.4 million increase in network
operations and engineering expenses.
Customer operations, corporate and other expenses increased $33.9 million
(12.6%) in 2001 and $20.5 million (8.2%) in 2000. Of the $33.9 million increase
in 2001, $42.5 million related to the Verizon properties. The remaining $8.6
million decrease in 2001 was primarily due to a $4.3 million decrease in the
provision for doubtful accounts and a $3.1 million decrease in operating taxes.
Of the $20.5 million increase in 2000, $34.0 million related to the Verizon
properties, which was partially offset by an $11.4 million decrease due to the
sale of the Alaska properties in 1999. The remaining $2.1 million decrease in
2000 was primarily due to a $5.6 million decrease in contract labor expenses
primarily associated with nonrecurring costs incurred in 1999 attributable to
readying the Company's system to be Year 2000 compliant and an $8.2 million
decrease in operating taxes. Such decreases were partially offset by a $7.7
million increase in the provision for doubtful accounts and a $2.4 million
increase in information technology expenses.
Depreciation and amortization increased $80.4 million (25.3%) and $44.2
million (16.2%) in 2001 and 2000, respectively. Of the $80.4 million increase in
2001, $65.2 million was attributable to the properties acquired from Verizon
(which included $14.7 million of amortization of goodwill) and the remainder was
primarily due to higher levels of plant in service. Of the $44.2 million
increase in 2000, $44.6 million was attributable to the properties acquired from
Verizon (which included $8.5 million of amortization of goodwill) and $11.8
million was primarily due to higher levels of plant in service. Such increases
were partially offset by a $10.6 million reduction resulting from the sale of
the Company's Alaska properties. Exclusive of acquisitions, depreciation expense
included nonrecurring additional depreciation charges approved by regulators in
certain jurisdictions which aggregated $4.1 million in 2000. The composite
depreciation rate for the Company's regulated telephone properties, including
the additional depreciation charges, was 6.8% for 2001, 7.2% for 2000 and 7.0%
for 1999.
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, call center operations (which ceased operations
in the third quarter of 2000), competitive local exchange carrier ("CLEC")
operations, fiber network business and security monitoring operations. The
operating revenues, expenses and income of the Company's other operations for
2001, 2000 and 1999 are summarized below.
Year ended December 31, 2001 2000 1999
---------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 117,363 104,435 83,087
Internet 39,057 23,491 16,818
Other 17,351 20,462 28,383
---------------------------------------------------------------------------------------
173,771 148,388 128,288
---------------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 142,919 112,219 99,151
Depreciation and amortization 8,754 4,911 6,557
---------------------------------------------------------------------------------------
151,673 117,130 105,708
---------------------------------------------------------------------------------------
Operating income $ 22,098 31,258 22,580
=======================================================================================
Long distance revenues increased $12.9 million (12.4%) and $21.3 million
(25.7%) in 2001 and 2000, respectively, due primarily to the growth in the
number of customers and increased minutes of use, primarily due to penetration
of the Verizon markets acquired in 2000. The number of long distance customers
as of December 31, 2001, 2000, and 1999 was 465,870, 363,300, and 303,700,
respectively. Internet revenues increased $15.6 million (66.3%) in 2001
primarily due to a $12.6 million increase due to growth in the number of
customers (including growth in the Company's DSL product offering) and a $1.8
million increase due to Internet operations acquired in mid-2000. Internet
revenues increased $6.7 million (39.7%) in 2000 primarily due to a $6.9 million
increase due to growth in the number of customers and a $1.4 million increase
due to Internet operations acquired in late 1999 and mid-2000. Such increases
were partially offset by a $2.3 million decrease due to the sale of the
Company's Alaska Internet operations in mid-1999. Other revenues declined $3.1
million and $7.9 million in 2001 and 2000, respectively, primarily due to the
planned phase-out of the Company's third party call center operations during
2000.
Cost of sales and operating expenses increased $30.7 million (27.4%) in
2001 primarily due to (i) a $23.5 million increase in expenses related to the
provision of Internet access primarily due to the expansion of the Company's DSL
product offering, (ii) an increase of $9.3 million in expenses of the Company's
long distance operations primarily due to an increase in the number of customers
and an increase in marketing expenses, and (iii) an $8.3 million increase due to
the expansion of the Company's CLEC business. Such increases were partially
offset by a $6.5 million reduction in expenses due to the winding down of the
Company's third party call center operations during 2000.
Cost of sales and operating expenses during 2000 increased $13.1 million
(13.2%) primarily due to an increase of $12.3 million in expenses of the
Company's long distance operations primarily due to increased minutes of use due
to an increase in the number of customers which was partially offset by reduced
rates; a $9.8 million increase in expenses associated with expanding the
Company's Internet operations and a $3.4 million increase in expenses primarily
due to start-up costs of the Company's CLEC business. Such increases were
partially offset by a $9.0 million reduction in expenses due to winding down the
Company's third party call center operations during 2000 and a $2.4 million
decrease due to the 1999 sale of the Company's Alaska Internet operations.
Depreciation and amortization increased $3.8 million in 2001 primarily due
to increased depreciation expense in the Company's Internet and fiber network
businesses. Depreciation and amortization decreased $1.6 million in 2000
primarily due to the write down of assets of the call center operations to
estimated net realizable value in 1999.
The Company incurred combined operating losses in 2001 of $16.5 million in
its CLEC and fiber network businesses and expects to incur a combined operating
loss ranging from $15 to $20 million in 2002 related to these operations.
Certain of the Company's service subsidiaries provide managerial,
operational, technical, accounting and administrative services, along with
materials and supplies, to the Company's telephone subsidiaries. In accordance
with regulatory accounting, intercompany profit on transactions with regulated
affiliates has not been eliminated in connection with consolidating the results
of operations of the Company. When the regulated operations of the Company no
longer qualify for the application of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("SFAS 71"), such intercompany profit will be eliminated in subsequent financial
statements, the primary result of which will be a decrease in operating expenses
applicable to the Company's telephone operations and an increase in operating
expenses applicable to the Company's other operations. The amount of
intercompany profit with regulated affiliates which was not eliminated was
approximately $22.0 million, $17.1 million and $14.0 million in 2001, 2000 and
1999, respectively. For additional information applicable to SFAS 71, see
Regulation and Competition -- Other Matters and Note 14 of Notes to Consolidated
Financial Statements.
NONRECURRING GAINS AND LOSSES, NET
In 2001, the Company's aggregate favorable nonrecurring gains and losses
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.
In 1999, the Company recorded pre-tax gains aggregating $11.3 million, of
which $10.1 million ($6.7 million after-tax, $.05 per diluted share) was due to
the sale of the Company's shares of common stock of Telephone and Data Systems,
Inc.
Certain other nonrecurring items for the three year period ended December
31, 2001 are reflected in other line items of the Company's consolidated
financial statements. See Other Income and Expense and Discontinued Operations.
INTEREST EXPENSE
Interest expense increased $42.2 million in 2001 compared to 2000
primarily due to an increase in interest expense related to outstanding
indebtedness incurred to acquire the Verizon operations.
Interest expense increased $32.7 million in 2000 primarily due to $41.5
million in interest expense related to the Verizon acquisition indebtedness and
a $6.8 million increase caused by higher interest rates. Such increases were
partially offset by interest expense reductions primarily due to a decrease in
outstanding indebtedness exclusive of debt associated with the Verizon
acquisitions.
MINORITY INTEREST
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings from continuing operations of
the Company's majority-owned subsidiaries. Minority interest increased $1.7
million in 2001 compared to 2000 due primarily to increased profitability of
certain of the Company's majority-owned affiliates.
Minority interest decreased $1.5 million during 2000 compared to 1999
primarily due to the minority partners' share of the loss incurred by certain of
the operations acquired from Verizon by CenturyTel's majority-owned affiliates.
OTHER INCOME AND EXPENSE
Other income and expense decreased $3.2 million in 2001 compared to 2000
primarily due to $6.0 million of costs incurred in 2001 associated with
responding to an unsolicited takeover proposal and to other expense increases.
These 2001 expense increases were partially offset by a favorable comparison to
expenses in 2000, when the Company recorded a $7.9 million charge related to the
settlement of certain interest rate hedge contracts entered into in connection
with financing the Verizon acquisitions.
Other income and expense decreased $5.2 million in 2000 compared to 1999
primarily due to the $7.9 million charge related to the settlement of certain
interest rate hedge contracts entered into in connection with financing the
Verizon acquisitions. Such decrease was partially offset by a $1.1 million
increase in interest income.
INCOME TAX EXPENSE
The Company's effective income tax rate (from continuing operations) was
38.1%, 40.2% and 39.5% in 2001, 2000 and 1999, respectively.
DISCONTINUED OPERATIONS
On March 19, 2002, the Company entered into a definitive agreement to sell
the stock of its wireless business to an affiliate of Alltel in exchange for
$1.65 billion in cash, subject to certain adjustments. Subject to various
closing conditions, this transaction is expected to close in the third quarter
of 2002. As a result of such agreement, the Company's wireless operations are
reflected as discontinued operations in the Company's consolidated financial
statements.
All of the Company's wireless operations are located in Michigan,
Louisiana, Wisconsin, Mississippi, Texas and Arkansas. The following table
summarizes certain information concerning the Company's wireless operations for
the periods presented.
Year ended December 31, 2001 2000 1999
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
Revenues
Service $ 336,850 328,956 305,006
Roaming 90,192 99,791 106,486
Equipment sales 10,923 14,822 10,777
----------------------------------------------------------------------------------------------
437,965 443,569 422,269
----------------------------------------------------------------------------------------------
Expenses
Cost of equipment sold 23,453 30,064 21,408
System operations 75,628 69,641 56,866
General, administrative and customer service,
exclusive of corporate overhead costs 65,254 56,676 60,153
Sales and marketing 74,670 82,673 61,903
Depreciation and amortization 66,346 65,239 68,593
----------------------------------------------------------------------------------------------
305,351 304,293 268,923
----------------------------------------------------------------------------------------------
132,614 139,276 153,346
Nonrecurring gains and losses, net 166,928 20,593 51,524
Income from unconsolidated cellular entities 27,460 26,986 27,675
Minority interest (11,510) (11,598) (27,837)
Other income and (expense) 4,707 3,157 484
Income tax expense (121,314) (71,169) (100,943)
----------------------------------------------------------------------------------------------
Income from discontinued operations, net of tax $ 198,885 107,245 104,249
==============================================================================================
Revenues. Service revenues include monthly service fees for providing
access and airtime to customers and toll revenue. Roaming revenues include
service fees for providing airtime to other carriers' customers roaming through
the Company's service areas.
The $7.9 million increase in service revenues in 2001 was due primarily to
an increase in the number of customers and increased minutes of use per
customer, both of which were partially offset by reduced rates. The $9.6 million
decrease in roaming revenues in 2001 was due to a reduction in roaming rates
(which was partially offset by an increase in roaming minutes of use), a
downward trend in rates that the Company anticipates will continue in the near
future. Of the $24.0 million increase in service revenues in 2000, $31.6 million
was due to growth in the number of customers and increased minutes of use per
customer, both of which were partially offset by reduced rates. Such increase
was partially offset by an $8.0 million decrease due to the sale of the Texas
and Alaska cellular properties. Of the $6.7 million decrease in roaming revenues
in 2000, $3.2 million was due to a reduction in roaming rates (which was
partially offset by an increase in roaming minutes of use). The remainder of the
decrease in roaming revenues in 2000 was due to the sale of the Texas and Alaska
cellular properties in mid-1999.
The following table illustrates the growth in the Company's wireless
customer base in its majority-owned markets:
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------
Customers at beginning of period 751,200 707,486 624,290
Gross units added internally 316,353 339,247 240,084
Disconnects 270,213 284,880 146,325
Net units added internally 46,140 54,367 93,759
Effect of property dispositions - (10,653) (10,563)
Customers at end of period 797,340 751,200 707,486
Average monthly churn rate
(excluding prepaid customers) 2.33% 1.95% 2.02%
-------------------------------------------------------------------------------
The average monthly revenue (excluding equipment sales) per customer
declined to $46 during 2001 from $49 in 2000 and $53 in 1999 primarily due to
reductions in service rates charged to the Company's customers and reductions in
roaming rates charged to other cellular operators. The average monthly revenue
per customer is expected to further decline (i) as competitive pressures
(including those causing further reductions in service rates) from current and
future wireless communications providers intensify and (ii) as the Company
continues to receive pressure from other cellular operators to reduce roaming
rates. The Company is responding to such competitive pressures by, among other
things, modifying certain of its price plans and implementing certain other
plans and promotions, some of which are likely to result in lower average
revenue per customer.
During 2001 the Company added approximately 47,700 net contract customers
while the prepaid customer base declined by 1,560 customers. The Company will
continue to focus on adding contract customers while decreasing its focus on
prepaid plans for future customer growth. At December 31, 2001, over 90% of the
Company's wireless customers were contract customers.
Expenses. Cost of equipment sold decreased $6.6 million (22.0%) in 2001
primarily due to a decrease in the number of phones sold and a decrease in the
average cost per unit. Cost of equipment sold increased $8.7 million (40.4%) in
2000 primarily due to an increase in the number of phones sold and an increase
in average cost per unit primarily due to a higher percentage of digital phones
sold.
System operations expenses increased $6.0 million (8.6%) in 2001 primarily
due to a $6.5 million increase in network costs and cell site expenses
associated with operating a greater number of cell sites and a $3.3 million
increase in the net amounts paid to other carriers for service provided to the
Company's customers who roam in the other carriers' service areas. Such
increases were partially offset by a $2.2 million decrease in toll costs. System
operations expenses increased $12.8 million (22.5%) in 2000 primarily due to a
$5.9 million increase associated with operating a greater number of cell sites
and a $4.5 million increase in the net amounts paid to other carriers for
service provided to the Company's customers who roam in the other carriers'
service areas.
Exclusive of cell sites in its PCS markets, the Company operated 739 cell
sites at December 31, 2001 in entities in which it had a majority interest,
compared to 667 at December 31, 2000 and 639 at December 31, 1999.
General, administrative and customer service expenses (exclusive of
corporate overhead costs) increased $8.6 million (15.1%) in 2001, of which $3.7
million was due to an increase in customer service and retention costs and $2.0
million was attributable to an increase in the provision for doubtful accounts.
General, administrative and customer service expenses decreased $3.5 million
(5.8%) in 2000, of which $3.3 million was attributable to a decrease in
operating taxes and $1.5 million was due to the sale of the Alaska and Texas
properties. Such decreases were partially offset by a $2.2 million increase in
the provision for doubtful accounts.
Sales and marketing expenses decreased $8.0 million (9.7%) in 2001 due
primarily to a $2.8 million decrease in advertising and sales promotion
expenses; a $2.1 million decrease in sales commissions paid to agents due to a
decrease in the number of units sold; and a $1.1 million decrease in costs
associated with operating a fewer number of retail locations. Sales and
marketing expenses increased $20.8 million (33.6%) in 2000 due primarily to an
$8.6 million increase in advertising and sales promotion expenses; a $5.2
million increase in sales commissions paid to agents due to an increase in the
number of units sold; and a $4.2 million increase in costs incurred in selling
products and services in retail locations primarily due to an increase in the
number of retail locations.
Depreciation and amortization increased $1.1 million in 2001 primarily due
to a higher level of plant in service. Depreciation and amortization decreased
$3.4 million (4.9%) in 2000, primarily due to the sale of the Alaska and Texas
properties.
Nonrecurring gains and losses, net. In 2001, the Company's aggregate
favorable nonrecurring gains and losses from discontinued operations were $166.9
million. The Company recorded a pre-tax gain of approximately $185.1 million
($117.7 million after-tax; $.83 per diluted share) due to the sale of 30 PCS
licenses to Leap Wireless International, Inc. ("Leap"). In conjunction with the
sale of licenses to Leap, the Company also recorded a pre-tax charge of $18.2
million ($11.6 million after-tax; $.08 per share) due to the write-down in the
value of certain non-operating assets.
In 2000, the Company recorded pre-tax gains from discontinued operations
aggregating $20.6 million. Approximately $9.9 million ($5.2 million after tax;
$.04 per diluted share) was due to the sale of the assets of the Company's
remaining Alaska cellular operations and approximately $10.7 million ($6.4
million after tax; $.05 per diluted share) was due to the sale of the Company's
minority interest in a non-strategic cellular partnership.
In 1999, the Company recorded pre-tax gains from discontinued operations
aggregating $51.5 million. Approximately $39.6 million of the pre-tax gains
($7.8 million after-tax loss; $.05 per diluted share) was due to the sale of the
Company's Brownsville and McAllen, Texas cellular properties. Approximately
$10.4 million of the pre-tax gains ($6.7 million after tax; $.04 per diluted
share) was due to the sale of the Company's remaining common shares of
MCIWorldCom, Inc. The remainder of the gains in 1999 was primarily due to a $1.6
million pre-tax gain ($1.0 million after tax; $.01 per diluted share) due to the
sale of the Company's shares of common stock of Telephone and Data Systems, Inc.
Income from unconsolidated cellular entities. Earnings from unconsolidated
cellular entities, net of the amortization of associated goodwill, increased
$474,000 (1.8%) in 2001 and decreased $689,000 (2.5%) in 2000. The $474,000
increase in 2001 was primarily due to (i) the Company's proportionate share
($5.3 million) of non-cash charges recorded in the first quarter of 2000 by two
cellular entities in which the Company owns a minority interest, (ii) a $2.2
million favorable adjustment related to the gain on the sale of PCS licenses to
Leap by a cellular entity in which the Company owns a minority interest, and
(iii) a $3.1 million increase due to increased earnings of certain cellular
entities in which the Company owns a minority interest. Such increases were
offset by a $10.1 million unfavorable non-cash, nonrecurring charge that was
recorded in 2001 by a cellular entity in which the Company owns a minority
interest.
The $689,000 decrease in 2000 was primarily due to (i) the Company's
proportionate share ($5.3 million) of non-cash, nonrecurring charges that were
recorded in 2000 by cellular entities in which the Company owns a minority
interest and (ii) a $2.3 million decrease due to decreased earnings of certain
cellular entities in which the Company owns a minority interest. Such decreases
were offset by a $6.9 million non-cash charge recorded in 1999 by cellular
entities in which the Company owns a minority interest.
Minority interest. Minority interest is the expense recorded by the
Company to reflect the minority interest owners' share of the earnings of the
Company's majority-owned cellular entities. Minority interest decreased $88,000
in 2001 compared to 2000 and $16.2 million during 2000 compared to 1999. The
decrease in 2000 was primarily due to the minority partners' share of the gain
on sale of assets of the Brownsville and McAllen, Texas cellular properties
recorded in 1999. Excluding the effect of this gain, minority interest decreased
$1.3 million primarily due to the decreased profitability of the Company's
majority-owned and operated cellular entities.
Income tax expense. Income tax expense from discontinued operations
increased $50.1 million in 2001 compared to 2000 primarily due to increased
pre-tax income from discontinued operations due to the gain on sale of PCS
licenses to Leap.
Income tax expense from discontinued operations decreased $29.8 million in
2000 compared to 1999 primarily due to decreased pre-tax income from
discontinued operations primarily due to gains on the sale of certain properties
in 1999.
Other. For additional information regarding certain matters that have
impacted or may impact the Company's wireless operations,
see Regulation and Competition.
Acquisitions
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related assets from Verizon in
four separate transactions for approximately $1.5 billion in cash. Under these
transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related local exchange assets comprising 106 exchanges
throughout Arkansas for approximately $842 million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra") purchased
approximately 127,000 telephone access lines and related local exchange
assets comprising 107 exchanges throughout Missouri for approximately $297
million cash. As of December 31, 2001, the Company owns 75.7% of Spectra,
which was organized to acquire and operate these Missouri properties. At
closing, the Company made a preferred equity investment in Spectra of
approximately $55 million (which represented a 57.1% interest) and
financed substantially all of the remainder of the purchase price. In the
first quarter of 2001, the Company purchased an additional 18.6% interest
in Spectra for $47.1 million.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related local exchange assets comprising 42
exchanges throughout Wisconsin for approximately $197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related local
exchange assets comprising 35 exchanges throughout Wisconsin for
approximately $172 million in cash. The Company owns 89% of TelUSA, which
was organized to acquire and own these Wisconsin properties. At closing,
the Company made an equity investment in TelUSA of approximately $37.8
million and financed substantially all of the remainder of the purchase
price.
To finance these acquisitions on a short-term basis, the Company borrowed
$1.157 billion on a floating-rate basis under its $1.5 billion credit facility
with Bank of America, N.A. and Citibank, N.A. and borrowed $300 million on a
floating-rate basis under its 1997 credit facility with Bank of America, N.A.
On October 19, 2000, the Company issued $500 million of 8.375% Senior
Notes, Series H, due 2010, and $400 million of 7.75% Remarketable Senior Notes,
Series I, due 2012 (with a remarketing date of October 15, 2002) under its $2.0
billion shelf registration statement filed in May 2000. The net proceeds of
approximately $908 million (excluding the Company's payments of approximately
$12.3 million associated with related interest rate hedging) were used to repay
a portion of the $1.457 billion of aggregate indebtedness the Company incurred
under its credit facilities in connection with the Verizon acquisitions.
In October 2001, the Company entered into definitive agreements to
purchase from affiliates of Verizon assets comprising all of Verizon's
operations in Missouri and Alabama for $2.159 billion cash. For additional
information related to these acquisitions, see Liquidity and Capital Resources -
Financing Activities.
CRITICAL ACCOUNTING POLICIES
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
as a percentage of consolidated revenues have not been material.
Accounting for the Effects of Regulation. The Company's regulated
telephone operations are subject to the provisions of SFAS 71. Property, plant
and equipment of the Company's regulated telephone operations has been
depreciated using the straight line method over lives approved by regulators;
such lives have generally exceeded the depreciable lives used by nonregulated
entities. In addition, in accordance with SFAS 71, retirements of regulated
telephone property have been charged to accumulated depreciation, along with the
costs of removal, less salvage, with no gain or loss recognized. These policies
have resulted in accumulated depreciation being significantly less than if the
Company's telephone operations had not been regulated.
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 non-regulated enterprises,
along with an adjustment of certain accumulated depreciation accounts to reflect
the difference between recorded depreciation and the amount of depreciation that
would have been recorded had the Company's telephone operations not been subject
to rate regulation. 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
non-regulated enterprises. Deferred tax liabilities and deferred investment tax
credits will be impacted based on the change in the temporary differences for
property, plant and equipment and accumulated depreciation.
The Company is monitoring the ongoing applicability of SFAS 71 to its
regulated telephone operations by, among other things, assessing the extent of
its interstate and intrastate operations that are subject to various forms of
alternative regulation instead of traditional rate of return regulation. 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. When the
regulated operations of the Company no longer qualify for the application of
SFAS 71, the net adjustments required may result in a material, noncash charge
against earnings which would be reported as an extraordinary item. 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 properties to be acquired from Verizon in 2002 are not expected to be
accounted for under the provisions of SFAS 71.
Long-lived assets. Through December 31, 2001, in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of," ("SFAS 121") the
carrying value of long-lived assets, including property, plant and equipment and
allocated goodwill, was reviewed for impairment at least annually, or whenever
events or changes in circumstances indicated that such carrying value was not
recoverable, by assessing the recoverability of such carrying value through
estimated undiscounted future net cash flows expected to be generated by the
assets or the acquired business. Effective January 1, 2002, the Company will be
required to test for impairment 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 and requires write-downs only in periods in which the
recorded amount of goodwill exceeds the fair value. Under SFAS 142, impairment
of goodwill will be 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 will be based on valuation models using techniques such as
multiples of earnings. If the fair value of the reporting unit is less than the
carrying value, a second calculation is required in which the implied fair value
of goodwill is compared to its carrying value. If the implied fair value of
goodwill is less than its carrying value, goodwill must be written down to its
implied fair value. The Company is in the process of determining the impact, if
any, of the transitional goodwill impairment rules of SFAS 142.
Under SFAS 144, the carrying value of long-lived assets other than
goodwill is reviewed for impairment 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.
Accounting Pronouncements
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 established accounting and reporting
standards for derivative instruments and for hedging activities by requiring
that entities recognize all derivatives as either assets or liabilities at fair
value on the balance sheet. The Company had no derivative instruments
outstanding at January 1, 2001 and thus no transition adjustment was recorded
upon adoption of SFAS 133.
As of December 31, 2001, the Company had outstanding an interest rate swap
relating to $199.1 million of floating rate debt designed to eliminate the
variability of cash flows in the payment of interest related to such debt. Under
SFAS 133, the Company does not expect fluctuations in the fair value of the swap
to be recorded in its statements of income. In addition, the Company has from
time to time entered into interest rate hedge contracts in anticipation of
certain debt issuances to manage interest rate exposure. The Company does not
utilize derivative financial instruments for trading or other speculative
purposes.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and
SFAS 142. SFAS 141 requires all business combinations consummated after June 30,
2001 to be accounted for under the purchase method of accounting; the pooling of
interests method is no longer permitted. SFAS 142 requires goodwill recorded in
a business combination to be reviewed for impairment and would be written down
only in periods in which the recorded amount of goodwill exceeds its fair value.
Effective January 1, 2002, systematic amortization of goodwill is no longer
permitted. The Company's amortization of goodwill for the year ended December
31, 2001 totaled approximately $69.2 million. The application of the
transitional goodwill impairment rules of SFAS 142 is not expected to have a
material effect on the results of operations of the Company.
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
which replaces SFAS 121, and supersedes the accounting and reporting provisions
related to discontinued operations under Accounting Principles Board Opinion No.
30. SFAS 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The provisions of
SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 is not expected to
have a material effect on the results of operations of the Company.
Inflation
The effects of increased costs historically have been mitigated by the
Company's ability to recover certain costs applicable to its regulated telephone
operations through the rate-making process. While the rate-making process does
not permit the Company to immediately recover the costs of replacing its
physical plant, the Company has historically been able to recapture these costs
over time. Possible future regulatory changes may alter the Company's ability to
recover increased costs in its regulated operations. For additional information
regarding the current regulatory environment, see Regulation and Competition. As
operating expenses in the Company's non-regulated lines of business increase as
a result of inflation, the Company, to the extent permitted by competition,
recovers the costs by increasing prices for its services and equipment.
Market Risk
Approximately 90% of the Company's long-term debt obligations are fixed
rate. At December 31, 2001, the fair value of the Company's long-term debt was
estimated to be $3.0 billion based on the overall weighted average rate of the
Company's long-term debt of 6.7% and an overall weighted maturity of 10 years
compared to terms and rates currently available in long-term financing markets.
For purposes hereof, market risk is estimated as the potential decrease in fair
value of the Company's long-term debt resulting from a hypothetical increase of
67 basis points in interest rates (which represents ten percent of the Company's
overall weighted average borrowing rate). Such an increase in interest rates
would result in approximately a $96.4 million decrease in fair value of the
Company's long-term debt. As of December 31, 2001, the Company owed $353.0
million of debt on a floating-rate basis.
As of December 31, 2001, the Company had outstanding an interest rate swap
relating to $191.1 million of its floating rate debt designed to eliminate the
variability of cash flows in the payment of interest related to such debt. Under
this swap, which expires in August 2002, the Company realizes a fixed effective
rate of 4.845% and receives or makes settlement payments based upon the 3-month
London InterBank Offered Rate, with settlement and rate reset dates at
three-month intervals through the expiration date.
OTHER
The Company is in the process of developing an integrated billing and
customer care system. The costs to develop such system have been capitalized in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and aggregated $139.5
million at December 31, 2001. Such costs are expected to aggregate approximately
$200 million upon completion (which is expected to occur in early 2003) and are
expected to be amortized over a twenty-year period.
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 $575.5 million, $438.2 million and $308.7 million in
2001, 2000 and 1999, 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 telephone operations, wireless operations and other
operations of the Company, see Results of Operations.
Investing activities. Net cash provided by (used in) investing activities
from continuing operations was $(420.9) million, $(1.914) billion and $33.1
million in 2001, 2000 and 1999, respectively. Cash used for acquisitions was
$47.1 million in 2001, $1.536 billion in 2000 (substantially all of which
relates to the Verizon acquisitions) and $4.2 million in 1999. Proceeds from the
sales of assets were $58.2 million in 2001 and $378.2 million in 1999. Capital
expenditures for 2001 were $351.0 million for telephone operations and $84.5
million for other operations. Capital expenditures during 2000 and 1999 were
$391.1 million and $331.2 million, respectively.
Financing activities. Net cash provided by (used in) financing activities
from continuing operations was $(395.4) million in 2001, $1.314 billion in 2000
and $(428.0) million in 1999. Net payments of debt in 2001 were $375.6 million,
which reflects utilization of cash received from asset sales. Net proceeds from
the issuance of debt was $1.340 billion during 2000 primarily due to an increase
in borrowings due to the purchase of assets from Verizon. Net payments of debt
were $422.9 million in 1999.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related assets from Verizon in
four separate transactions for approximately $1.5 billion in cash. See
Acquisitions and Note 2 of Notes to Consolidated Financial Statements for
additional information. To finance these acquisitions on a short-term basis, the
Company borrowed $1.157 billion on a floating-rate basis under its $1.5 billion
credit facility with Bank of America, N.A. and Citibank, N.A., and borrowed $300
million on a floating-rate basis under its 1997 credit facility with Bank of
America, N.A.
On October 19, 2000, the Company issued $500 million of 8.375% Senior
Notes, Series H, due 2010, and $400 million of 7.75% Remarketable Senior Notes,
Series I, due 2012 (with a remarketing date of October 15, 2002) under its $2.0
billion shelf registration statement filed in May 2000. The net proceeds of
approximately $908 million (excluding the Company's payments of approximately
$12.3 million associated with related interest rate hedging) were used to repay
a portion of the $1.457 billion of aggregate indebtedness the Company incurred
under its credit facilities in connection with the Verizon acquisitions.
In second quarter 2001, the Company completed the sale of 30 PCS (Personal
Communications Service) operating licenses for an aggregate of $195 million to
Leap. The Company received approximately $108 million of the purchase price in
cash at closing and the remainder was collected in installments through the
fourth quarter of 2001 under the terms of a promissory note. Such proceeds are
included as discontinued operations on the statement of cash flows. 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.
On October 22, 2001, the Company entered into definitive agreements to
purchase from affiliates of Verizon assets comprising all of Verizon's local
telephone operations in Missouri and Alabama. In exchange, the Company has
agreed to pay approximately $2.159 billion in cash, subject to certain
adjustments which are not expected to be material. Under each definitive
agreement, the Company has agreed to pay Verizon 10% of the transaction
consideration if the purchase is not consummated under certain specified
conditions, including the Company's incapacity to finance the transaction. The
acquisitions are subject to the receipt of various state and federal regulatory
approvals and other closing conditions. The Company's financing plans are not
yet complete and will be dependent upon the Company's review of its alternatives
and market conditions.
The properties to be acquired are currently subject to price-cap
regulation for interstate purposes, and the Company has no plans to change this.
Because most of the Company's other telephone properties are subject to
rate-of-return regulation, the Company's plans to retain price-cap regulation
for the acquired properties will require it to seek a waiver of the FCC's "all
or nothing" regulation that generally requires a rate-of-return company
acquiring a price-cap company to convert all of its operations to price-cap
regulation. Although the FCC has granted similar waivers to other carriers over
the past couple of years, no assurances can be provided that the FCC will grant
a waiver to the Company. The Company's failure to obtain this waiver would
adversely impact the financial benefits that the Company anticipates receiving
in connection with its purchases of the Verizon properties.
For additional information on these pending Verizon acquisitions, see Item
1 of the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
On March 19, 2002, the Company entered into a definitive agreement to sell
the stock of its wireless operations to Alltel for $1.65 billion in cash,
subject to certain adjustments which are not anticipated to be material. The
Company's after-tax proceeds from the sale are anticipated to be approximately
$1.3 billion.
Other. Budgeted capital expenditures for 2002 total $315 million for
telephone operations, $65 million for discontinued wireless operations and $45
million for other operations. The Company anticipates that capital expenditures
in its telephone operations will continue to include the installation of fiber
optic cable and the upgrading of its plant and equipment, including its digital
switches, to provide enhanced services, particularly in its newly acquired
markets. Capital expenditures in the wireless operations are expected to
continue to focus on constructing additional cell sites (which will provide
additional capacity and expanded areas where cellular phones may be used) and
providing digital service.
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. The Company generally does not announce its
acquisitions until it has entered into a preliminary or definitive agreement.
Over the past few years, the amount and size of communications properties
available to be purchased by the Company has increased substantially. The
Company may require additional financing in connection with any such
acquisitions, the consummation of which could have a material impact on the
Company's financial condition or operations. Approximately 4.6 million shares of
CenturyTel common stock and 200,000 shares of CenturyTel preferred stock remain
available for future issuance in connection with acquisitions under CenturyTel's
acquisition shelf registration statement.
The following table contains certain information concerning the Company's
material contractual obligations as of December 31, 2001.
Payments due by period
------------------------------------------------------------------------------------------------
Total contractual Less than After
obligations Total 1 year 1-3 years 4-5 years 5 years
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Long-term debt,
including current
maturities $3,043,334 955,834 141,546 360,399 1,585,555
Verizon purchase
price obligation $2,159,000 2,159,000 - - -
------------------------------------------------------------------------------------------------
As of December 31, 2001, the Company has an aggregate of $499.1 million of
debt outstanding under a credit facility and a note that expires or becomes due
in August 2002 and has an additional $400 million in bonds that must be
mandatorily redeemed by the Company in October 2002 if the remarketing dealer
for these bonds does not purchase and remarket the bonds in accordance with a
remarketing agreement. The Company intends to refinance such debt on a long-term
basis.
As of December 31, 2001, the Company had available $470.1 million of
undrawn committed bank lines of credit and the Company's telephone subsidiaries
had available for use $123.0 million of commitments for long-term financing from
the Rural Utilities Service and Rural Telephone Bank. In addition, in October
2000 the Company implemented a commercial paper program that authorizes the
Company to have outstanding up to $1.5 billion in commercial paper at any one
time. As of December 31, 2001, the Company had outstanding $23.0 million under
such program. The Company also has access to debt and equity capital markets,
including its shelf registration statements.
Moody's Investors Service ("Moody's") rates CenturyTel's long-term debt
rating Baa2 (with a stable outlook) and Standard & Poor's ("S&P") rates
CenturyTel's long-term debt BBB+ (with a negative outlook). The Company's
commercial paper program is rated P2 by Moody's and A2 by S&P.
The following table reflects the Company's debt to total capitalization
percentage and ratio of earnings to fixed charges and preferred stock dividends
as of and for the years ended December 31:
2001 2000 1999
-----------------------------------------------------------------------------------------
Debt to total capitalization 57.0% 63.1 53.7
Ratio of earnings from continuing operations
to fixed charges and preferred stock dividends 2.00 2.07 2.45
Ratio of earnings from continuing operations, excluding
nonrecurring items, to fixed charges and preferred
stock dividends 1.89 2.12 2.39
-----------------------------------------------------------------------------------------
Regulation and Competition
The communications industry continues to undergo various fundamental
regulatory, legislative, competitive and technological changes. These changes
may have a significant impact on the future financial performance of all
communications companies.
Events affecting the communications industry. In 1996, the United States
Congress enacted the Telecommunications Act of 1996 (the "1996 Act"), which
obligates LECs to permit competitors to interconnect their facilities to the
LEC's network and to take various other steps that are designed to promote
competition. The 1996 Act provides certain exemptions for rural LECs such as
those operated by the Company. Under the FCC's August 1996 order implementing
most of the 1996 Act's interconnection provisions, rural LECs have the burden of
proving the availability of these exemptions.
Prior to and since the enactment of the 1996 Act, the FCC and a number of
state legislative and regulatory bodies have also taken steps to foster local
exchange competition. Coincident with this recent movement toward increased
competition has been the gradual reduction of regulatory oversight of LECs.
These cumulative changes have led to the continued growth of various companies
providing services that compete with LECs' services. Wireless services entities
are also expected to increasingly compete 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. The Company estimates (based on current
operations, the current nationwide average cost per loop and other factors) that
such ruling will increase the Company's level of universal service support
receipts by approximately $7 million on an annualized basis compared to previous
levels. During 2001 the Company's revenues from the federal universal service
fund totaled approximately $168.7 million (which includes $21.6 million from the
Verizon properties acquired in 2000). During 2000, such revenues totaled $146.4
million (which includes $8.3 million from the Verizon properties.)
On October 11, 2001, the FCC modified its interstate access charge
rules and universal service support system for rate of return local exchange
carriers, which includes all of the Company's local exchange carriers. This
order, among other things, (i) increases the caps on the subscriber line charges
("SLC") to the levels paid by most subscribers nationwide; (ii) allows limited
SLC deaveraging, which is expected to enhance the competitiveness of rate of
return carriers by giving them pricing flexibility; (iii) lowers per minute
rates collected for federal access charges, which might increase competition
with CenturyTel's long distance operations to the extent other carriers seek to
take advantage of this change; (iv) creates a new explicit universal service
support mechanism that will replace other implicit support mechanisms in a
manner designed to ensure that rate structure changes do not affect the overall
recovery of interstate access costs by rate of return carriers serving high cost
areas and (v) terminates the FCC's proceeding on the represcription of the
authorized rate of return for rate of return LECs, which will remain at 11.25%.
The Company expects the order to be implemented on a revenue neutral basis for
interstate purposes, although there can be no assurance to this effect. Other
proposals submitted to the FCC by the Multi-Association Group representing rural
carriers were rejected or deferred for additional comment.
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 newly-acquired Verizon markets, 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. Although the Company
believes that these plans may be favorable in the future as additional revenue
streams are added and cost efficiencies are obtained, there can be no assurance
that current or future alternative regulation plans will not reduce future
revenue growth.
Certain long distance carriers continue to request that the Company reduce
intrastate access tariffed rates for certain of its LECs. There is no assurance
that these requests will not result in reduced intrastate access revenues in the
future. In addition, the Company continues to receive pressure from other
cellular operators to reduce roaming rates in the Company's cellular markets. In
response, the Company anticipates that it will continue to enter into agreements
that will reduce its roaming rates from current levels. The Company further
anticipates that the adverse impact of reduced roaming rates may be partially
offset by increased roaming traffic.
In August 2001, the Company was awarded an interim access rate increase by
the WPSC for the former Verizon properties in Wisconsin in an amount of
approximately $7.9 million annually. Such rates are subject to refund pending an
order establishing permanent rates.
On October 31, 2001, the WPSC approved a permanent rate increase of $8.3
million annually for the local exchange properties that the Company acquired
from Ameritech in December 1998. The WPSC ordered the Company to refund a
portion ($1.5 million) of the previously approved interim rates. Such refund had
the effect of a one-time reduction in revenue of approximately $300,000 as the
Company was not recognizing 100% of the interim rates as revenue. Separately,
the WPSC ordered the Company to refund $14.7 million related to access charges
collected from interexchange carriers on the former Ameritech properties from
December 1998 through 2000. Such ruling was upheld upon appeal in Wisconsin
State Court. The Company is currently appealing this ruling to the State of
Wisconsin Court of Appeals. If this appeal is unsuccessful, the Company will
have to record a one-time charge of $.03 per share.
In August 2001, the Arkansas Public Utility Commission ("APUC") approved
tariff amendments that limit the number of minutes included for a flat rate in
certain optional calling plans in certain of the acquired Verizon markets. Once
fully implemented in January 2002, the Company anticipates that these tariff
revisions will reduce the level of its operating expenses by approximately $20
million annually.
On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued
by the APUC in connection with the Company's acquisition of its Arkansas' LECs
from Verizon in July 2000, and remanded the case back to the APUC for further
hearings. The Court took these actions in response to challenges to the rates
the Company has charged other LECs for intrastate switched access service. The
Company intends to move for a rehearing of the Court's decision, and is
currently evaluating the legal and financial implications of the Court's
decision.
Competition to provide traditional telephone services has thus far
affected large urban areas to a greater extent than rural, suburban and small
urban areas such as those in which the Company's telephone operations are
located. Although the Company does not believe that the increased competition it
has thus far experienced is likely to materially affect it in the near term, the
Company anticipates that regulatory changes and competitive pressures may result
in future revenue reductions. While the Company expects its telephone revenues
to continue to grow, its internal telephone revenue growth rate has started to
slow in recent years and may continue to slow during upcoming periods.
The Company's wireless operations are subject to increased competition
from large wireless carriers offering nationwide calling plans. The Company does
not offer a nationwide calling plan at this time and may be hindered in its
ability to compete for customers seeking these plans. Additionally, several
wireless carriers have taken initial steps to abandon the TDMA standard used by
the Company and to provide enhanced "next generation" wireless services
utilizing different technologies. If the Company elects to continue to use the
TDMA standard or to forego implementation of enhanced wireless services, there
can be no assurance that the Company will be able to receive support from
vendors or to compete effectively against competitors using different
technologies or offering more services. For these and other reasons, the Company
began exploring the potential separation of its wireless operations from its
other operations and in March 2002, the Company entered into a definitive
agreement with Alltel to sell its wireless operations.
Other matters. The Company's regulated telephone operations are subject to
the provisions of SFAS 71, under which the Company is required to account for
the economic effects of the rate-making process, including the recognition of
depreciation of plant and equipment over lives approved by regulators. The
ongoing applicability of SFAS 71 to the Company's regulated telephone operations
is being monitored due to the changing regulatory, competitive and legislative
environments. When the regulated operations of the Company no longer qualify for
the application of SFAS 71, the net adjustments required may result in a
material, extraordinary, noncash charge against earnings. The properties to be
acquired from Verizon in 2002 are not expected to be accounted for under the
provisions of SFAS 71. See Note 14 of Notes to Consolidated Financial Statements
for additional information.
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 2001
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
Approximately 90% of the Company's long-term debt obligations are fixed
rate. At December 31, 2001, the fair value of the Company's long-term debt was
estimated to be $3.0 billion based on the overall weighted average rate of the
Company's long-term debt of 6.7% and an overall weighted maturity of 10 years
compared to terms and rates currently available in long-term financing markets.
For purposes hereof, market risk is estimated as the potential decrease in fair
value of the Company's long-term debt resulting from a hypothetical increase of
67 basis points in interest rates (which represents ten percent of the Company's
overall weighted average borrowing rate). Such an increase in interest rates
would result in approximately a $96.4 million decrease in fair value of the
Company's long-term debt. As of December 31, 2001, the Company owed $353.0
million of debt on a floating-rate basis.
As of December 31, 2001, the Company had outstanding an interest rate swap
relating to $191.1 million of its floating rate debt designed to eliminate the
variability of cash flows in the payment of interest related to such debt. Under
this swap, which expires in August 2002, the Company realizes a fixed effective
rate of 4.845% and receives or makes settlement payments based upon the
three-month London InterBank Offered Rate, with settlement and rate reset dates
at three-month intervals through the expiration date.
Item 8. Financial Statements and Supplementary Data
Report of Management
The Shareholders
CenturyTel, Inc.:
Management has prepared and is responsible for the Company's consolidated
financial statements. The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and necessarily include amounts determined using our best judgments
and estimates with consideration given to materiality.
The Company maintains internal control systems and related policies and
procedures designed to provide reasonable assurance that the accounting records
accurately reflect business transactions and that the transactions are in
accordance with management's authorization. The design, monitoring and revision
of the systems of internal control involve, among other things, our judgment
with respect to the relative cost and expected benefits of specific control
measures. Additionally, the Company maintains an internal auditing function
which independently evaluates the effectiveness of internal controls, policies
and procedures and formally reports on the adequacy and effectiveness thereof.
The Company's consolidated financial statements have been audited by KPMG
LLP, independent certified public accountants, who have expressed their opinion
with respect to the fairness of the consolidated financial statements. Their
audit was conducted in accordance with auditing standards generally accepted in
the United States of America, which include the consideration of the Company's
internal controls to the extent necessary to form an independent opinion on the
consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed of independent
directors who are not officers or employees of the Company. The Committee meets
periodically with the independent certified public accountants, internal
auditors and management. The Committee considers the independence of the
external auditors and the audit scope and discusses internal control, financial
and reporting matters. Both the independent and internal auditors have free
access to the Committee.
/s/ R. Stewart Ewing, Jr.
--------------------------
R. Stewart Ewing, Jr.
Executive Vice President
and Chief Financial Officer
Independent Auditors' Report
The Board of Directors
CenturyTel, Inc.:
We have audited the consolidated financial statements of CenturyTel, Inc.
and subsidiaries as listed in Item 14a(i). In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedules as listed in Item 14a(ii). These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
Shreveport, Louisiana
January 30, 2002, except for the presentation of discontinued
operations, which is as of March 19, 2002
CENTURYTEL, INC.
Consolidated Statements of Income
Year ended December 31,
-----------------------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES
Telephone $ 1,505,733 1,253,969 1,126,112
Other 173,771 148,388 128,288
-----------------------------------------------------------------------------------------------
Total operating revenues 1,679,504 1,402,357 1,254,400
-----------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses
(exclusive of depreciation and
amortization) 826,948 671,992 600,038
Corporate overhead costs allocable to
discontinued operations 20,213 21,411 19,416
Depreciation and amortization 407,038 322,817 280,223
-----------------------------------------------------------------------------------------------
Total operating expenses 1,254,199 1,016,220 899,677
-----------------------------------------------------------------------------------------------
OPERATING INCOME 425,305 386,137 354,723
-----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Nonrecurring gains and losses, net 33,043 - 11,284
Interest expense (225,523) (183,302) (150,557)
Minority interest (302) 1,397 (76)
Other income and expense 334 3,539 8,706
-----------------------------------------------------------------------------------------------
Total other income (expense) (192,448) (178,366) (130,643)
-----------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 232,857 207,771 224,080
Income tax expense 88,711 83,542 88,560
-----------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 144,146 124,229 135,520
DISCONTINUED OPERATIONS
Income from discontinued operations, net of
$121,314, $71,169, and $100,943 tax 198,885 107,245 104,249
-----------------------------------------------------------------------------------------------
NET INCOME $ 343,031 231,474 239,769
===============================================================================================
NET INCOME, AS ADJUSTED FOR GOODWILL AMORTIZATION $ 399,297 278,029 281,583
===============================================================================================
BASIC EARNINGS PER SHARE
From continuing operations $ 1.02 .88 .97
From continuing operations, as adjusted for
goodwill amortization $ 1.35 1.15 1.20
From discontinued operations $ 1.41 .77 .75
From discontinued operations, as adjusted for
goodwill amortization $ 1.48 .84 .83
Basic earnings per share $ 2.43 1.65 1.72
Basic earnings per share, as adjusted for
goodwill amortization $ 2.83 1.98 2.03
DILUTED EARNINGS PER SHARE
From continuing operations $ 1.01 .88 .96
From continuing operations, as adjusted for
goodwill amortization $ 1.34 1.13 1.18
From discontinued operations $ 1.40 .76 .74
From discontinued operations, as adjusted for
goodwill amortization $ 1.47 .83 .81
Diluted earnings per share $ 2.41 1.63 1.70
Diluted earnings per share, as adjusted for
goodwill amortization $ 2.81 1.96 1.99
DIVIDENDS PER COMMON SHARE $ .20 .19 .18
===============================================================================================
AVERAGE BASIC SHARES OUTSTANDING 140,743 140,069 138,848
===============================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 142,307 141,864 141,432
===============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Comprehensive Income
Year ended December 31,
-------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 343,031 231,474 239,769
-------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME, NET OF TAXES
Unrealized holding gains (losses) arising during period,
net of $5,385, ($20,941) and $38,473 taxes 9,999 (38,891) 71,449
Less: reclassification adjustment for gains included
in net income, net of $19,100 and $7,702 taxes (35,470) - (14,304)
-------------------------------------------------------------------------------------------------------
Other comprehensive income, net of ($13,715),
($20,941) and $30,771 taxes (25,471) (38,891) 57,145
-------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 317,560 192,583 296,914
=======================================================================================================
COMPREHENSIVE INCOME, AS ADJUSTED
FOR GOODWILL AMORTIZATION $ 373,826 239,138 338,728
=======================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Balance Sheets
December 31,
-----------------------------------------------------------------------------------------------
2001 2000
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,496 11,407
Accounts receivable
Customers, less allowance of $13,908 and $9,968 118,376 146,803
Other 87,614 93,453
Materials and supplies, at average cost 10,916 14,880
Other 9,511 8,602
-----------------------------------------------------------------------------------------------
Total current assets 229,913 275,145
-----------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,736,142 2,698,010
-----------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired, less accumulated
amortization of $205,851 and $150,767 2,087,158 2,108,344
Other 420,043 409,658
-----------------------------------------------------------------------------------------------
Total investments and other assets 2,507,201 2,518,002
-----------------------------------------------------------------------------------------------
ASSETS HELD FOR SALE 845,428 902,133
-----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,318,684 6,393,290
===============================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 955,834 146,662
Short-term debt 53,000 276,000
Accounts payable 61,056 90,541
Accrued expenses and other current liabilities
Salaries and benefits 46,588 33,380
Taxes 27,937 26,859
Interest 49,191 51,867
Other 15,968 22,125
Advance billings and customer deposits 29,308 27,655
-----------------------------------------------------------------------------------------------
Total current liabilities 1,238,882 675,089
-----------------------------------------------------------------------------------------------
LONG-TERM DEBT 2,087,500 3,050,292
-----------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 506,052 483,498
-----------------------------------------------------------------------------------------------
LIABILITIES RELATED TO ASSETS HELD FOR SALE 148,870 152,332
-----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
350,000,000 shares, issued and outstanding
141,232,806 and 140,667,251 shares 141,233 140,667
Paid-in capital 524,668 509,840
Unrealized holding gain on investments, net of taxes - 25,471
Retained earnings 1,666,004 1,351,626
Unearned ESOP shares (2,500) (3,500)
Preferred stock - non-redeemable 7,975 7,975
-----------------------------------------------------------------------------------------------
Total stockholders' equity 2,337,380 2,032,079
-----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 6,318,684 6,393,290
===============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
----------------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 343,031 231,474 239,769
Adjustments to reconcile net income to net
cash provided by operating activities from
continuing operations
Income from discontinued operations, net of tax (198,885) (107,245) (104,249)
Depreciation and amortization 407,038 322,817 280,223
Deferred income taxes 57,944 31,854 (10,126)
Nonrecurring gains and losses, net (33,043) - (11,284)
Changes in current assets and current liabilities
Accounts receivable 34,266 (74,736) (10,494)
Accounts payable (29,485) 36,493 (16,017)
Accrued taxes 1,078 (309) (59,197)
Other current assets and other current
liabilities, net 9,083 11,902 2,448
Increase in noncurrent assets (65,698) (46,026) (30,375)
Increase (decrease) in other noncurrent liabilities 9,919 10,677 (2,137)
Other, net 40,295 21,332 30,128
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities
from continuing operations 575,543 438,233 308,689
----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Acquisitions, net of cash acquired (47,131) (1,535,683) (4,201)
Payments for property, plant and equipment (435,515) (391,069) (331,220)
Proceeds from sale of assets 58,184 - 378,207
Contribution from minority investor - 20,000 -
Purchase of life insurance investment, net (1,086) (5,753) (2,545)
Other, net 4,639 (1,089) (7,134)
----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities
from continuing operations (420,909) (1,913,594) 33,107
----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of debt 3,896 2,715,852 15,533
Payments of debt (379,516) (1,375,895) (438,399)
Payment of deferred hedge contracts - (4,345) -
Proceeds from issuance of common stock 7,351 7,996 19,182
Payment of debt issuance costs - (4,274) -
Cash dividends (28,653) (26,815) (25,413)
Other, net 1,549 1,289 1,129
----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities
from continuing operations (395,373) 1,313,808 (427,968)
----------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations 232,828 116,815 136,575
----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7,911) (44,738) 50,403
Cash and cash equivalents at beginning of year 11,407 56,145 5,742
----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,496 11,407 56,145
==========================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Stockholders' Equity
Year ended December 31,
----------------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands)
COMMON STOCK
Balance at beginning of year $ 140,667 139,946 138,083
Conversion of convertible securities into common stock 254 254 330
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 312 467 1,533
----------------------------------------------------------------------------------------------------------
Balance at end of year 141,233 140,667 139,946
----------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of year 509,840 493,432 451,535
Conversion of convertible securities into common stock 3,046 3,046 3,101
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 7,039 7,529 17,649
Amortization of unearned compensation and other 4,743 5,833 21,147
----------------------------------------------------------------------------------------------------------
Balance at end of year 524,668 509,840 493,432
----------------------------------------------------------------------------------------------------------
UNREALIZED HOLDING GAIN ON INVESTMENTS, NET OF TAXES
Balance at beginning of year 25,471 64,362 7,217
Change in unrealized holding gain on investments, net of taxes (25,471) (38,891) 57,145
----------------------------------------------------------------------------------------------------------
Balance at end of year - 25,471 64,362
----------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 1,351,626 1,146,967 932,611
Net income 343,031 231,474 239,769
Cash dividends declared
Common stock - $.20, $.19 and $.18 per share (28,254) (26,416) (25,010)
Preferred stock (399) (399) (403)
----------------------------------------------------------------------------------------------------------
Balance at end of year 1,666,004 1,351,626 1,146,967
----------------------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of year (3,500) (4,690) (6,070)
Release of ESOP shares 1,000 1,190 1,380
----------------------------------------------------------------------------------------------------------
Balance at end of year (2,500) (3,500) (4,690)
----------------------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning of year 7,975 7,975 8,106
Conversion of preferred stock into common stock - - (131)
----------------------------------------------------------------------------------------------------------
Balance at end of year 7,975 7,975 7,975
----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 2,337,380 2,032,079 1,847,992
==========================================================================================================
COMMON SHARES OUTSTANDING
Balance at beginning of year 140,667 139,946 138,083
Conversion of convertible securities into common stock 254 254 330
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 312 467 1,533
----------------------------------------------------------------------------------------------------------
Balance at end of year 141,233 140,667 139,946
==========================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
(1) Summary of Significant Accounting Policies
Principles of consolidation - The consolidated financial statements of
CenturyTel, Inc. and its subsidiaries (the "Company") include the accounts of
CenturyTel, Inc. ("CenturyTel") and its majority-owned subsidiaries and
partnerships. The Company's regulated telephone operations are subject to the
provisions of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation." Investments in cellular
entities where the Company does not own a majority interest are accounted for
using the equity method of accounting.
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 and earned when evidence
of an arrangement exists, service has been rendered, the selling price is
determinable and collectibility is reasonably assured. 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 substantially at
original cost. Normal retirements of telephone plant are charged against
accumulated depreciation, along with the costs of removal, less salvage, with no
gain or loss recognized. Renewals and betterments of plant and equipment are
capitalized while repairs, as well as renewals of minor items, are charged to
operating expense. Depreciation of telephone plant is provided on the straight
line method using class or overall group rates acceptable to regulatory
authorities; such rates range from 1.8% to 25%.
Non-telephone property is stated at cost and, when sold or retired, a gain or
loss is recognized. Depreciation of such property is provided on the straight
line method over estimated service lives ranging from three to 30 years.
Long-lived assets - Through December 31, 2001, in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of" ("SFAS 121"), the
carrying value of long-lived assets, including property, plant and equipment and
allocated goodwill, was reviewed for impairment at least annually, or whenever
events or changes in circumstances indicated that such carrying value was not
recoverable, by assessing the recoverability of such carrying value through
estimated undiscounted future net cash flows expected to be generated by the
assets or the acquired business. Through December 31, 2001, substantially all of
the Company's goodwill was being amortized over 40 years. In accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), effective January 1, 2002, goodwill will no
longer be subject to amortization but instead will be tested for impairment at
least annually. Effective January 1, 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, excluding goodwill. SFAS 144
retains the fundamental recognition and measurement provisions of SFAS 121.
Affiliated transactions - Certain service subsidiaries of CenturyTel provide
installation and maintenance services, materials and supplies, and managerial,
operational, technical, accounting and administrative services to subsidiaries.
In addition, CenturyTel provides and bills management services to subsidiaries
and in certain instances makes interest bearing advances to finance construction
of plant and purchases of equipment. These transactions are recorded by the
Company's telephone subsidiaries at their cost to the extent permitted by
regulatory authorities. Intercompany profit on transactions with regulated
affiliates is limited to a reasonable return on investment and has not been
eliminated in connection with consolidating the results of operations of
CenturyTel and its subsidiaries. Intercompany profit on transactions with
nonregulated affiliates has been eliminated.
Income taxes - CenturyTel files a consolidated federal income tax return with
its eligible subsidiaries. The Company uses the asset and liability method of
accounting for income taxes under which deferred tax assets and liabilities are
established for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Investment tax credits related to telephone plant have
been deferred and are being amortized as a reduction of federal income tax
expense over the estimated useful lives of the assets giving rise to the
credits.
Derivative financial instruments - Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires
all derivative instruments be recognized as either assets or liabilities at fair
value on the balance sheet. The Company had no derivative instruments
outstanding at January 1, 2001 and thus no transition adjustment was recorded
upon adoption of SFAS 133. As of December 31, 2001, the Company had outstanding
an interest rate swap relating to $191.1 million of its floating rate debt
designed to eliminate the variability of cash flows in the payment of interest
related to such debt. The swap expires in August 2002. The Company realizes a
fixed effective rate of 4.845% and receives or makes settlement payments based
upon the three-month London InterBank Offered Rate, with settlement and rate
reset dates at three-month intervals through the expiration date. The Company
does not utilize derivative financial instruments for trading or other
speculative purposes.
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 compensation - The Company accounts for employee stock compensation plans
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
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 March 19, 2002, the Company entered into a
definitive agreement to sell its wireless operations to an affiliate of ALLTEL
Corporation ("Alltel") in exchange for $1.65 billion cash, subject to certain
adjustments and contingencies. As a result of such agreement, the Company's
wireless operations have been restated as discontinued operations for all
periods presented. See Note 3 for additional information.
Reclassifications - Certain amounts previously reported for prior years have
been reclassified to conform with the 2001 presentation.
(2) Acquisitions
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related assets from Verizon
Communications, Inc. ("Verizon") in four separate transactions for approximately
$1.5 billion in cash. Under these transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone access
lines and related local exchange assets comprising 106 exchanges throughout
Arkansas for approximately $842 million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra") purchased
approximately 127,000 telephone access lines and related local exchange assets
comprising 107 exchanges throughout Missouri for approximately $297 million
cash. As of December 31, 2001, the Company owns 75.7% of Spectra, which was
organized to acquire and operate these Missouri properties. At closing, the
Company made a preferred equity investment in Spectra of approximately $55
million (which represented a 57.1% interest) and financed substantially all of
the remainder of the purchase price. In the first quarter of 2001, the Company
purchased an additional 18.6% interest in Spectra for $47.1 million.
o On September 29, 2000, the Company purchased approximately 70,500 telephone
access lines and related local exchange assets comprising 42 exchanges
throughout Wisconsin for approximately $197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA") purchased
approximately 62,900 telephone access lines and related local exchange assets
comprising 35 exchanges throughout Wisconsin for approximately $172 million in
cash. The Company owns 89% of TelUSA, which was organized to acquire and operate
these Wisconsin properties. At closing, the Company made an equity investment in
TelUSA of approximately $37.8 million and financed substantially all of the
remainder of the purchase price.
To finance these acquisitions on a short-term basis, the Company borrowed
$1.157 billion on a floating-rate basis under its $1.5 billion credit facility
with Bank of America, N.A. and Citibank, N.A., and borrowed $300 million on a
floating-rate basis under its 1997 credit facility with Bank of America, N.A.
On October 19, 2000, the Company issued $500 million of 8.375% Senior
Notes, Series H, due 2010, and $400 million of 7.75% Remarketable Senior Notes,
Series I, due 2012 (with a remarketing date of October 15, 2002). The net
proceeds of approximately $908 million (excluding the Company's payments of
approximately $12.3 million associated with related interest rate hedging) were
used to repay a portion of the $1.457 billion of aggregate indebtedness the
Company incurred under its credit facilities in connection with the Verizon
acquisitions.
The following pro forma information represents the consolidated results
of operations of the Company as if the above-described Verizon acquisitions had
been consummated as of January 1, 2000 and 1999.
Year ended December 31, 2000 1999
--------------------------------------------------------------------------
(Dollars, except per share
amounts, in thousands)
(unaudited)
Operating revenues $ 1,610,629 1,593,723
Net income $ 210,336 198,659
Basic earnings per share $ 1.50 1.43
Diluted earnings per share $ 1.48 1.41
--------------------------------------------------------------------------
The pro forma information above 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 subsequent or future operating results. The pro forma information
does not give effect to any potential revenue enhancements or cost synergies or
other operating efficiencies that have resulted or could result from the
acquisitions. The actual results of operations of the Verizon properties are
included in the Company's consolidated financial statements only from the date
of acquisition.
(3) DISCONTINUED OPERATIONS
On March 19, 2002, the Company signed a definitive agreement to sell all
of its wireless operations to Alltel for $1.65 billion in cash. In connection
with this transaction, the Company has agreed to divest its (i) interests in its
majority-owned and operated cellular systems, which at December 31, 2001 served
approximately 797,000 customers and had access to approximately 7.8 million
pops, (ii) minority cellular equity interests representing approximately 2.0
million pops at December 31, 2001, and (iii) licenses to provide personal
communications services covering 1.3 million pops in Wisconsin and Iowa. Such
transaction is expected to close in the last half of 2002. As a result, the
Company's wireless operations have been restated as discontinued operations in
the Company's consolidated statements of income and cash flows for the years
ended December 31, 2001, 2000, and 1999. Assets and liabilities related to the
Company's wireless operations are reflected as "Held for sale" on the
accompanying consolidated balance sheets.
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, 2001 2000 1999
------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 437,965 443,569 422,269
------------------------------------------------------------------------------------------
Operating income (1) $ 132,614 139,276 153,346
Nonrecurring gains and losses, net 166,928 20,593 51,524
Income from unconsolidated cellular entities 27,460 26,986 27,675
Minority interest expense (11,510) (11,598) (27,837)
Other income and (expense) 4,707 3,157 484
------------------------------------------------------------------------------------------
Pre tax income from discontinued operations $ 320,199 178,414 205,192
Income tax expense (121,314) (71,169) (100,943)
------------------------------------------------------------------------------------------
Income from discontinued operations $ 198,885 107,245 104,249
==========================================================================================
(1) Excludes corporate overhead costs of $20.2 million, $21.4 million and
$19.4 million for 2001, 2000 and 1999, respectively, allocated to the
wireless operations that the Company expects to continue to incur
subsequent to the disposal of the wireless operations.
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, 2001 2000 1999
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net cash provided by operating activities $ 87,585 117,096 99,518
Net cash provided by (used in) investing activities 145,243 (482) 36,666
Net cash provided by financing activities - 201 391
---------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations $ 232,828 116,815 136,575
=========================================================================================================
The following table represents the net assets of the discontinued
wireless operations as of December 31, 2001 and December 31, 2000 that are
classified as held for sale on the consolidated balance sheets.
December 31, 2001 2000
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Current assets $ 70,360 101,359
Net property, plant and equipment 263,421 261,283
Excess cost of net assets acquired, less accumulated amortization 384,326 400,689
Other assets 127,321 138,802
---------------------------------------------------------------------------------------------------------
Assets held for sale $ 845,428 902,133
=========================================================================================================
Current liabilities $ 55,074 68,281
Deferred credits and other liabilities 93,796 84,051
---------------------------------------------------------------------------------------------------------
Liabilities related to assets held for sale $ 148,870 152,332
=========================================================================================================
(4) Investments and Other Assets
Investments and other assets at December 31, 2001 and 2000 were composed
of the following:
December 31, 2001 2000
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Excess cost of net assets acquired, less accumulated amortization $ 2,087,158 2,108,344
Billing system development costs 139,503 73,805
Cash surrender value of life insurance contracts 99,835 96,065
Marketable equity securities - 42,801
Other 180,705 196,987
---------------------------------------------------------------------------------------------------------
$ 2,507,201 2,518,002
=========================================================================================================
Amortization of goodwill and other intangibles of $58.4 million, $43.6
million and $35.0 million for 2001, 2000 and 1999, 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 will no
longer be subject to amortization but instead will be tested for impairment at
least annually.
The Company is in the process of developing an integrated billing and
customer care system. The costs to develop such system have been capitalized in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and aggregated $139.5
million and $73.8 million at December 31, 2001 and 2000, respectively. Such
costs are expected to be amortized over a twenty-year period once the system is
fully operational (which is expected to occur in early 2003).
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, 2000 and 1999.
Year ended December 31, 2001 2000 1999
---------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 343,031 231,474 239,769
Goodwill amortization, net of taxes 56,266 46,555 41,814
---------------------------------------------------------------------------------------
Net income, as adjusted $ 399,297 278,029 281,583
=======================================================================================
Basic earnings per share, as reported $ 2.43 1.65 1.72
Goodwill amortization, net of taxes .40 .33 .31
---------------------------------------------------------------------------------------
Basic earnings per share, as adjusted $ 2.83 1.98 2.03
=======================================================================================
Diluted earnings per share, as reported $ 2.41 1.63 1.70
Goodwill amortization, net of taxes .40 .33 .29
---------------------------------------------------------------------------------------
Diluted earnings per share, as adjusted $ 2.81 1.96 1.99
=======================================================================================
(5) Property, Plant and Equipment
Net property, plant and equipment at December 31, 2001 and 2000 was
composed of the following:
December 31, 2001 2000
--------------------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost
Cable and wire $ 3,009,720 2,817,797
Central office 1,829,945 1,656,898
General support 340,416 327,766
Information origination/termination 42,038 53,344
Construction in progress 64,560 136,755
Other 5,576 7,248
--------------------------------------------------------------------------------------
5,292,255 4,999,808
Accumulated depreciation (2,839,268) (2,552,648)
--------------------------------------------------------------------------------------
2,452,987 2,447,160
--------------------------------------------------------------------------------------
Other, at cost
General support 309,500 272,286
Fiber network 72,410 60,649
Other 65,010 59,089
--------------------------------------------------------------------------------------
446,920 392,024
Accumulated depreciation (163,765) (141,174)
--------------------------------------------------------------------------------------
283,155 250,850
--------------------------------------------------------------------------------------
Net property, plant and equipment $ 2,736,142 2,698,010
======================================================================================
Depreciation expense was $348.6 million, $279.2 million and $245.2
million in 2001, 2000 and 1999, respectively. The composite depreciation rate
for telephone properties was 6.8% for 2001, 7.2% for 2000 and 7.0% for 1999.
(6) Long-term and Short-term Debt
The Company's long-term debt as of December 31, 2001 and 2000 was as
follows:
December 31, 2001 2000
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CenturyTel
2.21%* senior credit facility, due through 2002 $ 300,000 300,000
4.85% note, due through 2002 199,125 250,625
Senior notes and debentures:
7.75% Series A, due 2004 50,000 50,000
8.25% Series B, due 2024 100,000 100,000
6.55% Series C, due 2005 50,000 50,000
7.20% Series D, due 2025 100,000 100,000
6.15% Series E, due 2005 100,000 100,000
6.30% Series F, due 2008 240,000 240,000
6.875% Series G, due 2028 425,000 425,000
8.375% Series H, due 2010 500,000 500,000
7.75% Series I, remarketable 2002 400,000 400,000
9.38% notes, due through 2003 7,975 12,000
6.86%** Employee Stock Ownership
Plan commitment, due in installments through 2004 2,500 3,500
Net unamortized premium and discounts 11,036 12,012
Other 175 201
---------------------------------------------------------------------------------------------------------
Total CenturyTel 2,485,811 2,543,338
---------------------------------------------------------------------------------------------------------
Subsidiaries
First mortgage debt
5.91%** notes, payable to agencies of the U. S. government
and cooperative lending associations, due in
installments through 2025 265,240 278,079
7.98% notes, due through 2002 5,419 5,582
Other debt
7.03%** unsecured medium-term notes, due through 2008 271,135 333,158
6.88%** notes, due in installments through 2020 6,725 23,365
7.51%** capital lease obligations, due through 2008 9,004 13,432
---------------------------------------------------------------------------------------------------------
Total subsidiaries 557,523 653,616
---------------------------------------------------------------------------------------------------------
Total long-term debt 3,043,334 3,196,954
Less current maturities 955,834 146,662
---------------------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 2,087,500 3,050,292
=========================================================================================================
*variable interest rate at December 31, 2001
** weighted average interest rate at December 31, 2001
The approximate annual debt maturities for the five years subsequent to
December 31, 2001 are as follows: 2002 - $955.8 million (assuming the Company's
Series I notes are redeemed by the Company in 2002); 2003 - $69.5 million; 2004
- $72.0 million; 2005 - $246.0 million; and 2006 - $114.4 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, 2001, restricted net assets of subsidiaries were
$588.4 million and subsidiaries' retained earnings in excess of amounts
restricted by debt covenants totaled $1.8 billion. At December 31, 2001, all of
the consolidated retained earnings reflected on the balance sheet was available
under CenturyTel's loan agreements for the declaration of dividends.
Most of the Company's telephone property, plant and equipment is pledged
to secure the long-term debt of subsidiaries.
During 2000, the Company borrowed $1.157 billion on a floating-rate basis
under its 364-day, $1.5 billion credit facility with Bank of America, N.A. and
Citibank, N.A., and borrowed $300 million on a floating-rate basis under its
1997 $300 million credit facility with Bank of America, N.A. The proceeds were
utilized to finance a substantial portion of the Verizon acquisition on a
short-term basis. See Note 2 for additional information.
On October 19, 2000, the Company issued $500 million of 8.375% Senior
Notes, Series H, due 2010, and $400 million of 7.75% Remarketable Senior Notes,
Series I, due 2012 (with a remarketing date of October 15, 2002) under its $2.0
billion shelf registration statement filed in May 2000. The Series I notes will
bear interest at the rate of 7.75% per year through October 15, 2002 (which is
the first remarketing date), and then at a fixed or floating rate. On the
remarketing date, the Series I notes will be purchased and remarketed by the
Company's remarketing dealer or mandatorily redeemed by the Company. The net
proceeds from the sale of the Series H and I notes of approximately $908 million
(including the payment made to the Company for the remarketing option granted to
the remarketing dealer, but excluding the Company's payments associated with
related interest rate hedging) were used to repay a portion of the $1.457
billion of aggregate indebtedness the Company incurred under its credit
facilities in connection with the Verizon acquisition.
Subsequent to the issuance of permanent financing, the committed amount
under the Company's 364-day, $1.5 billion credit facility was reduced to $500
million in accordance with its terms. The Company also has outstanding
indebtedness under other short-term revolving credit facilities and through its
commercial paper program. The total amount outstanding under these short-term
facilities aggregated $53.0 million at December 31, 2001 and $276.0 million at
December 31, 2000. The weighted average interest rate of the Company's
short-term debt was 2.6% and 7.3% at December 31, 2001 and 2000, respectively.
As of December 31, 2001, the Company had outstanding an interest rate
swap relating to $191.1 million of its floating rate debt designed to eliminate
the variability of cash flows in the payment of interest related to such debt.
Under this swap, which expires in August 2002, the Company realizes a fixed
effective rate of 4.845% and receives or makes settlement payments based upon
the 3-month London InterBank Offered Rate, with settlement and rate reset dates
at three-month intervals through the expiration date.
At December 31, 2001, the Company had available $470.1 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) Deferred Credits and Other Liabilities
Deferred credits and other liabilities at December 31, 2001 and 2000 were
composed of the following:
December 31, 2001 2000
--------------------------------------------------------------------------------
(Dollars in thousands)
Deferred federal and state income taxes $ 303,708 250,776
Accrued postretirement benefit costs 120,820 111,015
Minority interest 23,248 42,656
Regulatory liability - income taxes 5,657 8,528
Deferred investment tax credits 530 1,053
Other 52,089 69,470
--------------------------------------------------------------------------------
$ 506,052 483,498
================================================================================
(8) Stockholders' Equity
Common stock - Unissued shares of CenturyTel common stock were reserved as
follows:
December 31, 2001
-----------------------------------------------------------------------
(In thousands)
Incentive compensation programs 8,388
Acquisitions 4,572
Employee stock purchase plan 4,956
Dividend reinvestment plan 557
Conversion of convertible preferred stock 435
Other employee benefit plans 2,218
-----------------------------------------------------------------------
21,126
=======================================================================
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, 2001, the holders of 10.1 million
shares of common stock were entitled to ten votes per share.
Preferred stock - As of December 31, 2001, CenturyTel had 2.0 million shares of
authorized convertible preferred stock, $25 par value per share. At December 31,
2001 and 2000, 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.
(9) Postretirement Benefits
The Company sponsors health care plans that provide postretirement
benefits to all qualified retired employees.
The following is a reconciliation of the beginning and ending balances
for the benefit obligation and the plan assets.
December 31, 2001 2000 1999
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 165,266 156,724 172,323
Service cost 6,373 4,727 4,850
Interest cost 14,512 10,907 10,089
Plan amendments - - (2,492)
Participant contributions 548 677 419
Actuarial (gain) loss 40,005 957 (23,855)
Benefits paid (10,832) (8,726) (4,610)
------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 215,872 165,266 156,724
================================================================================================
Change in plan assets (primarily listed stocks and bonds)
Fair value of plan assets at beginning of year $ 39,873 41,781 35,799
Return on assets (1,379) (270) 2,961
Employer contributions 8,345 6,411 7,212
Participant contributions 548 677 419
Benefits paid (10,832) (8,726) (4,610)
------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 36,555 39,873 41,781
================================================================================================
Net periodic postretirement benefit cost for 2001, 2000 and 1999 included
the following components:
Year ended December 31, 2001 2000 1999
----------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 6,373 4,727 4,850
Interest cost 14,512 10,907 10,089
Expected return on plan assets (3,987) (4,178) (3,580)
Amortization of unrecognized actuarial loss 1,337 26 54
Amortization of unrecognized prior service cost (129) (129) (129)
----------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 18,106 11,353 11,284
==============================================================================================
The following table sets forth the amounts recognized as liabilities for
postretirement benefits at December 31, 2001, 2000 and 1999.
December 31, 2001 2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (215,872) (165,266) (156,724)
Fair value of plan assets 36,555 39,873 41,781
Unamortized prior service cost (1,046) (1,175) (1,303)
Unrecognized net actuarial loss 49,655 6,109 707
-------------------------------------------------------------------------------
Accrued benefit cost $ (130,708) (120,459) (115,539)
===============================================================================
Assumptions used in accounting for postretirement benefits as of December
31, 2001 and 2000 were:
2001 2000
-----------------------------------------------------------------------------
Weighted average assumptions
Discount rate 7.0% 7.25
Expected return on plan assets 10.0% 10.0
-----------------------------------------------------------------------------
For measurement purposes, a 6.5% annual rate in the per capita cost of
covered health care benefits was assumed for 2002 and beyond. 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 $ 1,455 (1,459)
Effect on postretirement benefit obligation $ 11,117 (10,393)
--------------------------------------------------------------------------------
(10) Retirement and Savings Plans
CenturyTel and certain subsidiaries sponsor defined benefit pension plans
for substantially all employees. CenturyTel also sponsors an Outside Directors'
Retirement Plan and a Supplemental Executive Retirement Plan to provide
directors and officers, respectively, with supplemental retirement, death and
disability benefits.
The following is a reconciliation of the beginning and ending balances
for the aggregate benefit obligation and the plan assets for the Company's
retirement and savings plans.
December 31, 2001 2000 1999
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 249,835 205,455 217,747
Service cost 7,760 5,928 5,226
Interest cost 17,829 15,381 13,817
Plan amendments 1,205 3,387 -
Acquisition - 35,824 -
Actuarial (gain) loss 9,065 (3,726) (19,844)
Benefits paid (14,204) (12,414) (11,491)
---------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 271,490 249,835 205,455
===================================================================================================
Change in plan assets (primarily listed stocks and bonds)
Fair value of plan assets at beginning of year $ 329,459 319,901 278,678
Return on plan assets (33,184) (14,991) 52,183
Employer contributions 1,377 572 531
Acquisition - 36,391 -
Benefits paid (14,204) (12,414) (11,491)
---------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 283,448 329,459 319,901
===================================================================================================
Net periodic pension benefit for 2001, 2000 and 1999 included the
following components:
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 7,760 5,928 5,226
Interest cost 17,829 15,381 13,817
Expected return on plan assets (31,901) (31,586) (26,824)
Recognized net gains (2,325) (7,107) (3,176)
Net amortization and deferral 301 (602) (235)
-------------------------------------------------------------------------------
Net periodic pension benefit $ (8,336) (17,986) (11,192)
===============================================================================
The following table sets forth the combined plans' funded status and
amounts recognized in the Company's consolidated balance sheet at December 31,
2001, 2000 and 1999.
December 31, 2001 2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (271,490) (249,835) (205,455)
Fair value of plan assets 283,448 329,459 319,901
Unrecognized transition asset (1,404) (1,648) (1,892)
Unamortized prior service cost 5,017 4,126 1,031
Unrecognized net actuarial (gain) loss 26,782 (49,336) (100,052)
-------------------------------------------------------------------------------
Prepaid benefit cost $ 42,353 32,766 13,533
===============================================================================
Assumptions used in accounting for the pension plans as of December 2001
and 2000 were:
2001 2000
-----------------------------------------------------------------------------
Discount rates 7.0% 7.25
Expected long-term rate of return on assets 8.0-10.0% 8.0-10.0
-----------------------------------------------------------------------------
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 2001, 2000 and 1999 was $7.5
million, $9.5 million, and $9.6 million, respectively. At December 31, 2001, the
ESOP owned an aggregate of 8.2 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 $6.6 million in 2001,
$6.1 million in 2000 and $6.1 million in 1999.
(11) Income Taxes
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2001 and 2000 were as follows:
December 31, 2001 2000
-------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Postretirement benefit costs $ 31,670 30,738
Regulatory support 12,163 13,504
Net operating loss carryforwards 19,691 6,211
Regulatory liability 2,175 3,191
Long-term debt 6,606 7,765
Other employee benefits 8,255 7,090
Other 12,255 12,544
------------------------------------------------------------------------------
Gross deferred tax assets 92,815 81,043
Less valuation allowance (19,691) (6,211)
------------------------------------------------------------------------------
Net deferred tax assets 73,124 74,832
------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment, primarily due to
depreciation differences (152,506) (104,320)
Excess cost of net assets acquired (218,461) (201,132)
Deferred debt costs (2,582) (2,764)
Marketable equity securities - (13,715)
Intercompany profits (3,283) (3,283)
Other - (394)
------------------------------------------------------------------------------
Gross deferred tax liabilities (376,832) (325,608)
------------------------------------------------------------------------------
Net deferred tax liability $ (303,708) (250,776)
==============================================================================
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, 2001 2000 1999
----------------------------------------------------------------------------------------------------
(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 .7 3.2 2.4
Amortization of nondeductible excess cost of net assets acquired 3.4 3.7 3.7
Amortization of investment tax credits (.2) (.3) (.7)
Amortization of regulatory liability (.7) (.8) (.8)
Other, net (.1) (.6) (.1)
----------------------------------------------------------------------------------------------------
Effective income tax rate 38.1% 40.2 39.5
====================================================================================================
Income tax expense from continuing operations included in the
Consolidated Statements of Income for the years ended December 31, 2001, 2000
and 1999 was as follows:
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
Federal
Current $ 24,032 42,295 85,128
Deferred 62,164 30,932 (4,982)
State
Current 6,735 9,393 13,558
Deferred (4,220) 922 (5,144)
-------------------------------------------------------------------------------
$ 88,711 83,542 88,560
===============================================================================
Income tax expense from continuing operations was allocated as follows:
Year ended December 31, 2001 2000 1999
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net tax expense in the consolidated statements of income $ 88,711 83,542 88,560
Stockholders' equity
Compensation expense for tax purposes
in excess of amounts recognized for
financial reporting purposes (1,051) (2,702) (16,836)
Tax effect of the change in unrealized holding
gain on investments (13,715) (20,941) 30,771
------------------------------------------------------------------------------------------------
$ 73,945 59,899 102,495
================================================================================================
(12) Sale of Assets
In the second quarter of 2001, the Company recorded a pre-tax gain
(reflected in discontinued operations) of approximately $185.1 million ($117.7
million after-tax; $.83 per diluted share) due to the sale of 30 PCS licenses to
Leap Wireless International, Inc. ("Leap"). In conjunction with the sale of the
licenses to Leap, the Company also recorded a pre-tax charge (reflected in
discontinued operations) of $18.2 million ($11.6 million after-tax; $.08 per
share) due to the write down in the value of certain non-operating assets.
In the third quarter of 2001, the Company recorded a pre-tax gain on the
sale of its remaining common shares of Illuminet Holdings, Inc. aggregating
$54.6 million ($35.5 million after-tax; $.25 per diluted share). The Company
also recorded a pre-tax gain of $4.0 million ($2.6 million after-tax; $.02 per
diluted share) on the sale of certain other assets.
In the first quarter of 2000 the Company recorded a pre-tax gain
(reflected in discontinued operations) aggregating $9.9 million ($5.2 million
after tax) due to the sale of its remaining Alaska cellular operations.
In the third quarter of 2000 the Company recorded a pre-tax gain
(reflected in discontinued operations) aggregating $10.7 million ($6.4 million
after tax) due to the sale of its minority interest in a non-strategic cellular
partnership.
In the first quarter of 1999 the Company recorded a pre-tax gain
(reflected in discontinued operations) aggregating $10.4 million ($6.7 million
after tax) due to the sale of its remaining common shares of MCIWorldCom, Inc.
In May 1999, the Company sold substantially all of its Alaska-based
operations that were acquired in the acquisition of Pacific Telecom, Inc. on
December 1, 1997. The Company received approximately $300 million in after-tax
cash as a result of the transaction. In accordance with purchase accounting, no
gain or loss was recorded upon the disposition of these properties.
In June 1999, the Company sold the assets of its cellular operations in
Brownsville and McAllen, Texas for approximately $96 million cash. In connection
therewith, the Company recorded a pre-tax gain (reflected in discontinued
operations) of approximately $39.6 million, and an after-tax loss of
approximately $7.8 million.
In the fourth quarter of 1999 the Company recorded a pre-tax gain
aggregating $11.6 million ($7.6 million after tax) due to the sale of its
Telephone and Data Systems, Inc. common stock.
(13) Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, and shares in thousands)
Income (Numerator):
Income from continuing operations $ 144,146 124,229 135,520
Discontinued operations, net of tax 198,885 107,245 104,249
-------------------------------------------------------------------------------------------------------
Net income 343,031 231,474 239,769
Dividends applicable to preferred stock (399) (399) (403)
-------------------------------------------------------------------------------------------------------
Net income applicable to common stock for
computing basic earnings per share 342,632 231,075 239,366
Dividends applicable to preferred stock 399 399 403
Interest on convertible securities, net of taxes - 132 252
-------------------------------------------------------------------------------------------------------
Net income as adjusted for purposes of computing
diluted earnings per share $ 343,031 231,606 240,021
=======================================================================================================
Net income applicable to common stock for computing basic
earnings per share, as adjusted for goodwill amortization $ 398,898 277,630 281,180
=======================================================================================================
Net income as adjusted for purposes of computing diluted
earnings per share, as adjusted for goodwill amortization $ 399,297 278,161 281,835
=======================================================================================================
Shares (Denominator):
Weighted average number of shares outstanding
during period 141,021 140,440 139,313
Employee Stock Ownership Plan shares not
committed to be released (278) (371) (465)
-------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding during
period for computing basic earnings per share 140,743 140,069 138,848
Incremental common shares attributable to
dilutive securities:
Conversion of convertible securities 435 707 981
Shares issuable under outstanding stock options 1,129 1,088 1,603
-------------------------------------------------------------------------------------------------------
Number of shares as adjusted for purposes of
computing diluted earnings per share 142,307 141,864 141,432
=======================================================================================================
Basic earnings per share
From continuing operations $ 1.02 .88 .97
From continuing operations, as adjusted for
goodwill amortization $ 1.35 1.15 1.20
From discontinued operations $ 1.41 .77 .75
From discontinued operations, as adjusted for
goodwill amortization $ 1.48 .84 .83
Basic earnings per share $ 2.43 1.65 1.72
Basic earnings per share, as adjusted for
goodwill amortization $ 2.83 1.98 2.03
Diluted earnings per share
From continuing operations $ 1.01 .88 .96
From continuing operations, as adjusted for
goodwill amortization $ 1.34 1.13 1.18
From discontinued operations $ 1.40 .76 .74
From discontinued operations, as adjusted for
goodwill amortization $ 1.47 .83 .81
Basic earnings per share $ 2.41 1.63 1.70
Basic earnings per share, as adjusted for
goodwill amortization $ 2.81 1.96 1.99
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 1,346,000 for 2001, 969,000 for 2000 and 20,000 for 1999.
(14) Accounting for the Effects of Regulation
The Company's regulated telephone operations are subject to the
provisions of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" ("SFAS 71"). Actions of
regulators can provide reasonable assurance of the existence of an asset, reduce
or eliminate the value of an asset and impose a liability on a regulated
enterprise. Such regulatory assets and liabilities are required to be recorded
and, accordingly, reflected in the balance sheet of an entity subject to SFAS
71.
The Company's consolidated balance sheet as of December 31, 2001 included
regulatory assets of approximately $769.8 million and regulatory liabilities of
approximately $2.9 million. The $769.8 million of regulatory assets included
amounts related to accumulated depreciation ($766.3 million), income taxes
($235,000), deferred costs associated with regulatory proceedings ($356,000) and
deferred financing costs ($2.9 million). The $2.9 million of regulatory
liabilities was established in connection with the adoption of Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes." Net
deferred income tax liabilities related to the regulatory assets and liabilities
quantified above were $300.2 million.
Property, plant and equipment of the Company's regulated telephone
operations has been depreciated using the straight line method over lives
approved by regulators. Such depreciable lives have generally exceeded the
depreciable lives used by nonregulated entities. In addition, in accordance with
regulatory accounting, retirements of regulated telephone property have been
charged to accumulated depreciation, along with the costs of removal, less
salvage, with no gain or loss recognized. These accounting policies have
resulted in accumulated depreciation being significantly less than if the
Company's telephone operations had not been regulated.
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 non-regulated enterprises,
along with an adjustment of certain accumulated depreciation accounts to reflect
the difference between recorded depreciation and the amount of depreciation that
would have been recorded had the Company's telephone operations not been subject
to rate regulation. 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
non-regulated enterprises. Deferred tax liabilities and deferred investment tax
credits will be impacted based on the change in the temporary differences for
property, plant and equipment and accumulated depreciation.
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. When the regulated operations of the Company no
longer qualify for the application of SFAS 71, the net adjustments required may
result in a material, noncash charge against earnings which would be reported as
an extraordinary item. 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 properties to be acquired from Verizon in 2002 are not expected to be
accounted for under the provisions of SFAS 71.
(15) Stock Option Program
CenturyTel has a 2000 incentive compensation program which allows the
Board of Directors, through the Compensation Committee, to grant 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. As of December 31, 2001, CenturyTel had reserved
8.4 million shares of common stock which may be issued under CenturyTel's
current incentive compensation program.
Under the Company's programs, options have been granted to employees at a
price either equal to or exceeding the then-current market price. All of the
options expire ten years after the date of grant and the vesting period ranges
from immediate to three years.
During 2001 the Company granted 1,971,750 options (the "2001 Options") at
market price. The weighted average fair value of each of the 2001 Options was
estimated as of the date of grant to be $11.16 using an option-pricing model
with the following assumptions: dividend yield - .6%; expected volatility - 30%;
risk-free interest rate - 4.8%; and expected option life - seven years.
During 2000 the Company granted 1,565,750 options (the "2000 Options") at
market price. The weighted average fair value of each of the 2000 Options was
estimated as of the date of grant to be $12.46 using an option-pricing model
with the following assumptions: dividend yield - .5%; expected volatility - 25%;
risk-free interest rate - 5.3%; and expected option life - seven years.
During 1999 the Company granted 83,743 options (the "1999 Options") at
market price. The weighted average fair value of each of the 1999 Options was
estimated as of the date of grant to be $15.90 using an option-pricing model
with the following assumptions: dividend yield - .4%; expected volatility - 20%;
risk-free interest rate - 6.6%; and expected option life - seven years.
Stock option transactions during 2001, 2000 and 1999 were as follows:
Number Average
of options price
------------------------------------------------------------------------------
Outstanding December 31, 1998 4,780,613 $ 13.35
Exercised (1,369,459) 10.90
Granted 83,743 40.88
Forfeited (9,055) 37.07
---------------------------------------------------------------
Outstanding December 31, 1999 3,485,842 14.92
Exercised (369,308) 12.46
Granted 1,565,750 33.00
Forfeited (1,125) 13.33
---------------------------------------------------------------
Outstanding December 31, 2000 4,681,159 21.16
Exercised (149,806) 15.91
Granted 1,971,750 28.14
Forfeited (135,583) 18.42
---------------------------------------------------------------
Outstanding December 31, 2001 6,367,520 23.51
===============================================================
Exercisable December 31, 2000 3,113,496 15.21
===============================================================
Exercisable December 31, 2001 3,342,216 17.81
===============================================================
The following tables summarize certain information about CenturyTel's
stock options at December 31, 2001.
Options outstanding
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Weighted average
Range of remaining contractual Weighted average
exercise prices Number of options life outstanding exercise price
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$ 11.67-12.30 760,966 1.7 $ 12.29
13.33-17.64 1,934,420 4.2 14.95
24.50-26.31 381,650 7.8 25.29
26.98-31.54 1,932,136 8.6 28.15
31.75-38.50 1,313,517 9.3 34.62
39.00-46.19 44,831 7.4 42.51
---------
11.67-46.19 6,367,520 7.8 23.51
=========
Options exercisable
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Range of Number of Weighted average
exercise prices options exercisable exercise price
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$ 11.67-12.30 760,966 $ 12.29
13.33-17.64 1,934,420 14.95
24.50-26.31 120,824 25.21
26.98-31.54 62,953 28.84
31.75-38.50 418,222 34.62
39.00-46.19 44,831 42.51
----------
11.67-46.19 3,342,216 17.81
=========
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its program.
Accordingly, the Company has not recognized compensation cost in connection with
issuing stock options. If compensation cost for CenturyTel's options had been
determined consistent with Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation", the Company's net income and earnings
per share on a pro forma basis for 2001, 2000 and 1999 would have been as
follows:
Year ended December 31, 2001 2000 1999
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(Dollars in thousands,
except per share amounts)
Net income
As reported $ 343,031 231,474 239,769
Pro forma $ 334,060 225,164 239,033
Basic earnings per share
As reported $ 2.43 1.65 1.72
Pro forma $ 2.37 1.60 1.72
Diluted earnings per share
As reported $ 2.41 1.63 1.70
Pro forma $ 2.35 1.59 1.69
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(16) Supplemental Cash Flow Disclosures
The Company paid interest, net of amounts capitalized of $3.5 million,
$4.5 million and $2.0 million during 2001, 2000 and 1999, respectively, of
$224.7 million, $164.0 million and $148.3 million during 2001, 2000 and 1999,
respectively. Income taxes paid were $128.3 million in 2001, $142.3 million in
2000 and $270.9 million in 1999.
CenturyTel has consummated the acquisitions of various operations, along
with certain other assets, during the three years ended December 31, 2001. In
connection with these acquisitions, the following assets were acquired and
liabilities assumed:
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment, net $ - 607,415 252
Excess cost of net assets acquired 33,183 917,468 4,024
Other investments - 1,972 -
Long-term debt - (378) -
Deferred credits and other liabilities 13,948 (44,465) -
Other assets and liabilities, excluding
cash and cash equivalents - 53,671 (75)
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Decrease in cash due to acquisitions $ 47,131 1,535,683 4,201
===============================================================================
CenturyTel has disposed of various operations, along with certain other
assets, during the three years ended December 31, 2001. In connection with these
dispositions, the following assets were sold, liabilities eliminated, assets
received and gain recognized:
Year ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment, net $ (2,447) - (155,139)
Excess cost of net assets acquired, net - - (252,924)
Marketable equity securities (3,614) - (7,514)
Other assets and liabilities, excluding cash and
cash equivalents (19,080) - 48,654
Gain on sale of assets (33,043) - (11,284)
--------------------------------------------------------------------------------------
Increase in cash due to dispositions $ (58,184) - (378,207)
======================================================================================
(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, 2001
and 2000.
Carrying Fair
Amount value
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(Dollars in thousands)
December 31, 2001
-----------------
Financial assets $ 25,601 25,601 (3)
Financial liabilities
Long-term debt (including current maturities) $ 3,043,334 3,040,242 (2)
Other $ 29,308 29,308 (3)
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December 31, 2000
-----------------
Financial assets
Investments
Marketable equity securities $ 42,801 42,801 (1)
Other $ 27,434 27,434 (3)
Financial liabilities
Long-term debt (including current maturities) $ 3,196,954 3,104,583 (2)
Other $ 27,655 27,655 (3)
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(1) Fair value was based on quoted market prices.
(2) Fair value was estimated by discounting the scheduled payment streams to
present value based upon rates currently offered to the Company for
similar debt.
(3) Fair value was estimated by the Company to approximate carrying value.
The carrying amount of cash and cash equivalents, accounts receivable,
short-term debt, accounts payable and accrued expenses approximates the fair
value due to the short maturity of these instruments.
(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 pending sale of the Company's wireless operations to
Alltel, such operations (which were previously reported as a separate segment)
are classified as discontinued operations. Other operations include, but are not
limited to, the Company's non-regulated long distance operations, Internet
operations, competitive local exchange carrier operations, fiber network
business and security monitoring operations.
The Company's telephone operations are conducted in rural, suburban and
small urban communities in 21 states. Approximately 87% of the Company's
telephone access lines are in Wisconsin, Arkansas, Washington, Missouri,
Michigan, Louisiana, Colorado, Ohio and Oregon.
Depreciation
Operating and Operating
revenues amortization income
------------------------------------------------------------------------------------------
(Dollars in thousands)
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)
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Total $ 1,679,504 407,038 425,305
========================================================================================
Year ended December 31, 2000
Telephone $ 1,253,969 317,906 376,290
Other operations 148,388 4,911 31,258
Corporate overhead costs allocable to
discontinued operations - - (21,411)
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Total $ 1,402,357 322,817 386,137
========================================================================================
Year ended December 31, 1999
Telephone $ 1,126,112 273,666 351,559
Other operations 128,288 6,557 22,580
Corporate overhead costs allocable to
discontinued operations - - (19,416)
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Total $ 1,254,400 280,223 354,723
========================================================================================
Year ended December 31, 2001 2000 1999
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(Dollars in thousands)
Operating income $ 425,305 386,137 354,723
Nonrecurring gains and losses, net 33,043 - 11,284
Interest expense (225,523) (183,302) (150,557)
Minority interest (302) 1,397 (76)
Other income and expense 334 3,539 8,706
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Income from continuing operations
before income tax expense $ 232,857 207,771 224,080
==========================================================================================
Year ended December 31, 2001 2000 1999
------------------------------------------------------------------------------------
(Dollars in thousands)
Capital expenditures
Telephone $ 351,010 275,523 233,512
Other operations 84,505 115,546 97,708
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Total $ 435,515 391,069 331,220
====================================================================================
December 31, 2001 2000 1999
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(Dollars in thousands)
Total assets
Telephone $ 4,754,522 4,769,557 3,375,163
Other operations 718,734 721,600 473,781
Assets held for sale 845,428 902,133 856,463
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Total assets $ 6,318,684 6,393,290 4,705,407
====================================================================================
Other accounts receivable 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 2002 are estimated to be $315 million for telephone operations
and $45 million for other operations.
From time to time, the Company is involved in various 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) PENDING ACQUISITIONS
In October 2001, the Company entered into definitive asset purchase
agreements to purchase from affiliates of Verizon telephone access lines (which
numbered approximately 676,000 at December 31, 2001) and related local exchange
assets in Missouri and Alabama for approximately $2.159 billion in cash, subject
to adjustments which are not expected to be material in the aggregate. Under
each definitive agreement, the Company has agreed to pay Verizon 10% of the
transaction consideration if the purchase is not consummated under specified
conditions, including the Company's incapacity to finance the transaction. These
transactions are anticipated to close in the second half of 2002, subject to
regulatory approvals and certain other closing conditions. The Company's
financing plans are not yet complete and will be dependent upon the Company's
review of its alternatives and market conditions.
(21) SUBSEQUENT EVENT
On March 19, 2002, the Company entered into a definitive agreement to
sell its wireless operations to an affiliate of Alltel for $1.65 billion cash,
subject to certain adjustments and contingencies. As a result of such agreement,
the Company's wireless operations for 2001, 2000 and 1999 have been restated as
discontinued operations in the Company's financial statements.
CENTURYTEL, INC.
Consolidated Quarterly Income Statement Information
(Unaudited)
First Second Third Fourth
quarter quarter quarter quarter
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(Dollars in thousands, except per share amounts)
2001 (unaudited)
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Operating revenues $ 411,602 409,250 423,973 434,679
Operating income $ 104,309 99,209 105,991 115,796
Income from continuing operations $ 26,851 21,069 59,570 36,657
Net income $ 46,722 154,241 92,305 49,763
Basic earnings per share from continuing operations $ .19 .15 .42 .26
Basic earnings per share $ .33 1.10 .66 .35
Diluted earnings per share from continuing operations $ .19 .15 .42 .26
Diluted earnings per share $ .33 1.09 .65 .35
2000
---------------------------------------------------------------------------------------------------------
Operating revenues $ 312,552 312,014 362,402 415,389
Operating income $ 86,074 86,894 103,448 109,721
Income from continuing operations $ 30,869 31,423 28,877 33,060
Net income $ 49,284 57,845 67,224 57,121
Basic earnings per share from continuing operations $ .22 .22 .21 .23
Basic earnings per share $ .35 .41 .48 .41
Diluted earnings per share from continuing operations $ .22 .22 .20 .23
Diluted earnings per share $ .35 .41 .47 .40
---------------------------------------------------------------------------------------------------------
Diluted earnings per share for the second and third quarters of 2001
included $.75 and $.27 per share, respectively, of net gains on sales of assets.
See Note 12 for additional information.
Diluted earnings per share for the first and third quarters of 2000
included $.04 and $.05 per share, respectively, of gain on sale of assets. See
Note 12 for additional information. On July 31, 2000 and September 29, 2000,
affiliates of the Company acquired over 490,000 telephone access lines and
related assets from Verizon. See Note 2 for additional information.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CENTURYTEL, INC.
For the years ended December 31, 2001, 2000 and 1999
Additions
Balance at charged to Deductions Balance
beginning costs and from Other at end
Description of period expenses allowance (1) changes of period
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 2001
Allowance for doubtful accounts $ 9,968 22,533 (18,593) - 13,908
Valuation allowance for
deferred tax assets $ 6,211 13,480 - - 19,691
Year ended December 31, 2000
Allowance for doubtful accounts $ 2,594 15,977 (12,485) 3,882 (2) 9,968
Valuation allowance for
deferred tax assets $ - 6,211 - - 6,211
Year ended December 31, 1999
Allowance for doubtful accounts $ 2,219 6,906 (6,400) (131) (2) 2,594
Valuation allowance for
deferred tax assets $ - - - - -
(1) Customers' accounts written-off, net of recoveries.
(2) Allowance for doubtful accounts at the date of acquisition of purchased
subsidiaries, net of allowance for doubtful accounts at the date of
disposition of subsidiaries sold.
SIGNATURE
Pursuant to the requirements 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.
Dated: August 13, 2002 By: /s/ Neil A. Sweasy
----------------------
Neil A. Sweasy
Vice President and Controller