10-K 1 file10k.txt FILE 10K 20001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-7784 CENTURYTEL, INC. (Exact name of Registrant as specified in its charter) Louisiana 72-0651161 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 100 CenturyTel Drive, Monroe, Louisiana 71203 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code - (318) 388-9000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $1.00 New York Stock Exchange Berlin Stock Exchange Preference Share Purchase Rights New York Stock Exchange Berlin Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 28, 2002, the aggregate market value of voting stock held by non-affiliates (affiliates being for these purposes only directors, executive officers and holders of more than five percent of the Company's outstanding voting securities) was $4.7 billion. As of February 28, 2002, there were 141,299,473 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement prepared in connection with the 2002 annual meeting of shareholders are incorporated in Part III of this Report. PART I Item 1. Business General. CenturyTel, Inc. ("CenturyTel") is a regional integrated communications company engaged primarily in providing local exchange telephone services and wireless communications services. For the year ended December 31, 2001, local exchange telephone operations and wireless operations provided 71% and 21%, respectively, of the consolidated revenues 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. 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 operated 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 wireless operations as a percentage of 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 is exploring the separation of its wireless business from its other operations and has been in discussions with a number of parties who have expressed interest in these operations. 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 8.2% and 4.0%, respectively, of the Company's consolidated revenues and operating income 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, 121,500 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 23,300 of which receive retail 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 consist principally of (i) telephone lines, central office equipment, and land and buildings related to telephone operations, and (ii) switching and cell site equipment related to cellular telephone operations. As of December 31, 2001 and 2000, the Company's gross property, plant and equipment of approximately $6.3 billion and $5.9 billion, respectively, consisted of the following:
December 31, ------------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------------ Telephone operations Cable and wire 47.7% 47.7 Central office 29.0 28.0 General support 5.4 5.5 Information origination/termination .7 .9 Construction in progress 1.0 2.3 Other .1 .1 ------------------------------------------------------------------------------ 83.9 84.5 ------------------------------------------------------------------------------ Wireless operations Cell site 6.7 6.2 General support 1.7 1.8 Construction in progress .6 .9 ------------------------------------------------------------------------------ 9.0 8.9 ------------------------------------------------------------------------------ Other 7.1 6.6 ------------------------------------------------------------------------------ 100.0% 100.0 ==============================================================================
"Cable and wire" facilities consist primarily of buried cable and aerial cable, poles, wire, conduit and drops. "Central office equipment" consists primarily of switching equipment, circuit equipment and related facilities. "General support" consists primarily of land, buildings, tools, furnishings, fixtures, motor vehicles and work equipment."Information origination/termination equipment" consists primarily of premise equipment (private branch exchanges and telephones) for official company use. "Cell sites" consist primarily of radio frequency channel equipment, switching equipment and towers."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. The Company leases most of the offices used in its wireless operations; certain of its cell sites are leased while most are owned by the Company. For further information on the location and type of the Company's properties, see the descriptions of the Company's telephone and wireless operations in Item 1. Item 3. Legal Proceedings. Following the Company's rejection of an acquisition proposal publicly disclosed by Alltel Corporation ("Alltel") on August 15, 2001, the Company, in CenturyTel, Inc. v. Alltel Corporation, filed August 17, 2001 in the United States District Court for the Western District of Louisiana, brought an action against Alltel, asserting various claims under the federal securities laws and pendent claims under Louisiana law and seeking injunctive and other relief. The Company and its directors have been named defendants in Hannahs v. CenturyTel, Inc., et al., filed August 20, 2001 in the Fourth Judicial District Court, State of Louisiana, which asserts breach of fiduciary duty and related claims and seeks injunctive relief pertaining to the Company's rejection of Alltel's acquisition proposal, as well as unspecified monetary damages. Two other similar shareholder suits have been either voluntarily dismissed or stayed and administratively closed. The Company believes that these shareholder suits are without merit. On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued by the Arkansas Public Utility Commission ("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. From time to time, the Company is involved in other litigation incidental to its business, including administrative hearings of state public utility commissions relating primarily to rate making, actions relating to employee claims, occasional grievance hearings before labor regulatory agencies and miscellaneous third party tort actions. Currently, there are no material legal proceedings of this nature. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Executive Officers of the Registrant Information concerning the Company's Executive Officers, set forth at Item 10 in Part III hereof, is incorporated in Part I of this Report by reference. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. CenturyTel's common stock is listed on the New York Stock Exchange and is traded under the symbol CTL. The following table sets forth the high and low sale prices, along with the quarterly dividends, for each of the quarters indicated:
Sale prices ---------------------- Dividend per High Low common share ---- --- ------------ 2001: First quarter $ 39.88 25.45 .0500 Second quarter $ 30.42 26.90 .0500 Third quarter $ 36.50 28.30 .0500 Fourth quarter $ 35.79 30.25 .0500 2000: First quarter $ 47.31 32.31 .0475 Second quarter $ 40.38 24.44 .0475 Third quarter $ 32.38 25.25 .0475 Fourth quarter $ 38.50 26.81 .0475
Common stock dividends during 2001 and 2000 were paid each quarter. As of February 28, 2002, there were approximately 5,300 stockholders of record of CenturyTel's common stock. Item 6. Selected Financial Data. The following table presents certain selected consolidated financial data 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 Wireless 437,965 443,569 422,269 407,827 307,742 Other 173,771 148,388 128,288 91,915 67,351 ------------------------------------------------------------------ Total operating revenues $ 2,117,469 1,845,926 1,676,669 1,577,085 901,521 ================================================================== Operating income Telephone $ 423,420 376,290 351,559 334,604 177,782 Wireless 112,401 117,865 133,930 129,124 87,772 Other 22,098 31,258 22,580 16,083 2,216 ------------------------------------------------------------------ Total operating income $ 557,919 525,413 508,069 479,811 267,770 ================================================================== Nonrecurring gains and losses (pre-tax) $ 199,971 20,593 62,808 49,859 169,640 ================================================================== Net income $ 343,031 231,474 239,769 228,757 255,978 ================================================================== Basic earnings per share $ 2.43 1.65 1.72 1.67 1.89 ================================================================== Diluted earnings per share $ 2.41 1.63 1.70 1.64 1.87 ================================================================== 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 $ 2,999,563 2,959,293 2,256,458 2,351,453 2,258,563 Excess cost of net assets acquired, net $ 2,471,484 2,509,033 1,644,884 1,956,701 1,767,352 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 2,078,311 2,558,000 2,609,541 Stockholders' equity $ 2,337,380 2,032,079 1,847,992 1,531,482 1,300,272 ------------------------------------------------------------------------
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 Wireless units in service in majority-owned markets 797,340 751,200 707,486 624,290 569,983 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. 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.
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 Wireless 112,401 117,865 133,930 Other 22,098 31,258 22,580 ------------------------------------------------------------------------------------------------- 557,919 525,413 508,069 Nonrecurring gains and losses, net 199,971 20,593 62,808 Interest expense (225,523) (183,302) (150,557) Income from unconsolidated cellular entities 27,460 26,986 27,675 Minority interest (11,812) (10,201) (27,913) Other income and expense 5,041 6,696 9,190 Income tax expense (210,025) (154,711) (189,503) ------------------------------------------------------------------------------------------------- Net income $ 343,031 231,474 239,769 ================================================================================================= Basic earnings per share $ 2.43 1.65 1.72 ================================================================================================= Diluted earnings per share $ 2.41 1.63 1.70 ================================================================================================= 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 $ 557,919 525,413 508,069 Less: Nonrecurring operating expenses (1) (2,000) (504) (2,749) --------------------------------------------------------------------------------------------------------- Operating income, excluding nonrecurring items $ 559,919 525,917 510,818 ========================================================================================================= Nonrecurring gains and losses, net, as reported $ 199,971 20,593 62,808 Less nonrecurring items: Gain on sale of assets 243,656 20,593 62,808 Write down of non-operating assets (43,685) - - --------------------------------------------------------------------------------------------------------- Nonrecurring gains and losses, net, excluding nonrecurring items $ - - - ========================================================================================================= Income from unconsolidated cellular entities, as reported $ 27,460 26,986 27,675 Less nonrecurring items: 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 - - --------------------------------------------------------------------------------------------------------- Income from unconsolidated cellular entities, excluding nonrecurring items $ 35,350 32,316 34,535 ========================================================================================================= Minority interest, as reported $ (11,812) (10,201) (27,913) Less: Minority interest effect of gain on sale of assets (13) - (14,926) --------------------------------------------------------------------------------------------------------- Minority interest, excluding nonrecurring items $ (11,799) (10,201) (12,987) ========================================================================================================= Other income and expense, as reported $ 5,041 6,696 9,190 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 $ 11,041 14,643 9,190 ========================================================================================================= Income tax expense, as reported $ (210,025) (154,711) (189,503) Less: Tax effect of nonrecurring items (66,698) (4,166) (36,821) --------------------------------------------------------------------------------------------------------- Income tax expense, excluding nonrecurring items $ (143,327) (150,545) (152,682) ========================================================================================================= 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", "Income from Unconsolidated Cellular Entities", "Minority Interest", and "Other Income and Expense". Contributions to operating revenues and operating income by the Company's telephone, wireless 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 71.1% 67.9 67.2 Wireless operations 20.7% 24.0 25.2 Other operations 8.2% 8.1 7.6 Operating income Telephone operations 75.9% 71.6 69.2 Wireless operations 20.1% 22.4 26.4 Other operations 4.0% 6.0 4.4 ----------------------------------------------------------------------------
In August 2001, the Company announced that it is exploring the potential separation of its wireless business from its other operations. 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. Wireless Operations and Income from Unconsolidated Cellular Entities
Year ended December 31, 2001 2000 1999 ---------------------------------------------------------------------------------------------- (Dollars in thousands) Operating income - wireless operations $ 112,401 117,865 133,930 Minority interest - wireless operations, exclusive of the effect of asset sales in 1999 (11,510) (11,598) (12,911) Income from unconsolidated cellular entities 27,460 26,986 27,675 ---------------------------------------------------------------------------------------------- $ 128,351 133,253 148,694 ==============================================================================================
The Company's wireless operations (discussed below) reflect 100% of the results of operations of the cellular entities in which the Company has a majority ownership interest. The minority interest owners' share of the income of such entities is reflected in the Company's Consolidated Statements of Income as an expense in "Minority interest." See Minority Interest for additional information. The Company's share of earnings from the cellular entities in which it has less than a majority interest is accounted for using the equity method and is reflected in the Company's Consolidated Statements of Income in "Income from unconsolidated cellular entities." See Income from Unconsolidated Cellular Entities for additional information. Wireless Operations All of the Company's wireless operations are located in Michigan, Louisiana, Wisconsin, Mississippi, Texas and Arkansas. The operating revenues, expenses and income of the Company's wireless operations for 2001, 2000 and 1999 are summarized below.
Year ended December 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------------- (Dollars in thousands) Operating 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 --------------------------------------------------------------------------------------------------------- Operating expenses Cost of equipment sold 23,453 30,064 21,408 System operations 75,628 69,641 56,866 General, administrative and customer service 85,467 78,087 79,569 Sales and marketing 74,670 82,673 61,903 Depreciation and amortization 66,346 65,239 68,593 --------------------------------------------------------------------------------------------------------- 325,564 325,704 288,339 --------------------------------------------------------------------------------------------------------- Operating income $ 112,401 117,865 133,930 =========================================================================================================
Operating 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. Operating 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 increased $7.4 million (9.5%) 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 $1.5 million (1.9%) 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. Other. For additional information regarding certain matters that have impacted or may impact the Company's wireless operations, see Regulation and Competition. Other Operations Other operations includes the results of operations of subsidiaries of the Company which are not included in the telephone or wireless segments 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 $200.0 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. Also during 2001, 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 2000, the Company recorded pre-tax gains 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 aggregating $62.8 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 an $11.6 million pre-tax gain ($7.6 million after tax; $.05 per diluted share) 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 Income from Unconsolidated Cellular Entities, Minority Interest and Other Income and Expense. 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. 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 subsidiaries. Minority interest increased $1.6 million in 2001 compared to 2000 due primarily to increased profitability of certain of the Company's majority-owned and operated entities. Minority interest decreased $17.7 million during 2000 compared to 1999 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 $2.8 million primarily due to the decreased profitability of the Company's majority-owned and operated cellular entities ($1.3 million) and due to the minority partners' share of the loss incurred by certain of the operations acquired from Verizon by CenturyTel's majority-owned affiliates ($1.6 million). OTHER INCOME AND EXPENSE Other income and expense decreased $1.7 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 $2.5 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 $4.1 million increase in interest income. INCOME TAX EXPENSE The Company's effective income tax rate was 38.0%, 40.1% and 44.1% in 2001, 2000 and 1999, respectively. Exclusive of the effect of income tax expense on asset sales, the effective income tax rate was 39.0%, 39.9% and 39.0% in 2001, 2000 and 1999, respectively. 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 required. 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 was $665.4 million, $562.5 million and $408.7 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 was $(275.7) million, $(1.914) billion and $69.8 million in 2001, 2000 and 1999, respectively. Cash used for acquisitions was $47.1 million in 2001, $1.541 billion in 2000 (substantially all of which relates to the Verizon acquisitions) and $21.0 million in 1999. Proceeds from the sales of assets were $166.2 million in 2001 compared to $29.5 million in 2000 and $484.5 million in 1999. Capital expenditures for 2001 were $351.0 million for telephone operations, $71.2 million for wireless operations and $84.5 million for other operations. Capital expenditures during 2000 and 1999 were $449.5 million and $390.0 million, respectively. In connection with the sale of PCS licenses to Leap in 2001, the Company received an $86.5 million promissory note, all of which was subsequently collected during 2001. Financing activities. Net cash provided by (used in) financing activities was $(395.4) million in 2001, $1.314 billion in 2000 and $(427.6) 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. 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. Other. Budgeted capital expenditures for 2002 total $315 million for telephone operations, $65 million for 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 to fixed charges and preferred stock dividends 3.40 3.07 3.75 Ratio of earnings, excluding nonrecurring items, to fixed charges and preferred stock dividends 2.57 3.01 3.45 ------------------------------------------------------------------------------
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, in August 2001, the Company announced that it is exploring the potential separation of its wireless business from its other 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 also have 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 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 Wireless 437,965 443,569 422,269 Other 173,771 148,388 128,288 ------------------------------------------------------------------------------------------------------- Total operating revenues 2,117,469 1,845,926 1,676,669 ------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses 1,086,166 932,457 819,784 Depreciation and amortization 473,384 388,056 348,816 ------------------------------------------------------------------------------------------------------- Total operating expenses 1,559,550 1,320,513 1,168,600 ------------------------------------------------------------------------------------------------------- OPERATING INCOME 557,919 525,413 508,069 ------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Nonrecurring gains and losses, net 199,971 20,593 62,808 Interest expense (225,523) (183,302) (150,557) Income from unconsolidated cellular entities 27,460 26,986 27,675 Minority interest (11,812) (10,201) (27,913) Other income and expense 5,041 6,696 9,190 ------------------------------------------------------------------------------------------------------- Total other income (expense) (4,863) (139,228) (78,797) ------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE 553,056 386,185 429,272 Income tax expense 210,025 154,711 189,503 ------------------------------------------------------------------------------------------------------- NET INCOME $ 343,031 231,474 239,769 ======================================================================================================= BASIC EARNINGS PER SHARE $ 2.43 1.65 1.72 ======================================================================================================= DILUTED EARNINGS PER SHARE $ 2.41 1.63 1.70 ======================================================================================================= 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 =======================================================================================================
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 $ 13,362 19,039 Accounts receivable Customers, less allowance of $16,359 and $12,857 147,259 182,454 Other 106,835 124,711 Materials and supplies, at average cost 20,239 38,532 Other 12,578 11,768 --------------------------------------------------------------------------------------------------------- Total current assets 300,273 376,504 --------------------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,999,563 2,959,293 --------------------------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $288,760 and $219,809 2,471,484 2,509,033 Other 547,364 548,460 --------------------------------------------------------------------------------------------------------- Total investments and other assets 3,018,848 3,057,493 --------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 6,318,684 6,393,290 ========================================================================================================= LIABILITIES AND EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 955,834 149,962 Short-term debt 53,000 276,000 Accounts payable 87,439 127,287 Accrued expenses and other current liabilities Salaries and benefits 47,129 33,859 Taxes 42,711 40,023 Interest 49,358 52,011 Other 18,771 23,349 Advance billings and customer deposits 39,714 40,879 --------------------------------------------------------------------------------------------------------- Total current liabilities 1,293,956 743,370 --------------------------------------------------------------------------------------------------------- LONG-TERM DEBT 2,087,500 3,050,292 --------------------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 599,848 567,549 --------------------------------------------------------------------------------------------------------- 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 Net income $ 343,031 231,474 239,769 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 473,384 388,056 348,816 Income from unconsolidated cellular entities (27,460) (26,986) (27,675) Minority interest 11,812 10,201 27,913 Deferred income taxes 56,645 41,820 (17,139) Nonrecurring gains and losses, net (199,971) (20,593) (62,808) Changes in current assets and current liabilities Accounts receivable 53,071 (82,252) (15,181) Accounts payable (39,848) 48,653 (11,469) Accrued taxes 2,688 (967) (59,571) Other current assets and other current liabilities, net 20,916 3,605 (1,354) Increase in noncurrent assets (65,698) (46,026) (30,375) Increase (decrease) in other noncurrent liabilities 6,656 4,087 (5,311) Other, net 30,136 11,394 23,087 ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 665,362 562,466 408,702 ---------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Acquisitions, net of cash acquired (47,131) (1,540,856) (20,972) Payments for property, plant and equipment (506,727) (449,537) (389,980) Proceeds from sale of assets 166,245 29,495 484,467 Collection of note receivable 86,502 - - Distributions from unconsolidated cellular entities 30,856 35,842 22,219 Contribution from minority investor - 20,000 - Purchase of life insurance investment, net (1,086) (5,753) (2,545) Other, net (4,325) (3,267) (23,416) ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (275,666) (1,914,076) 69,773 ---------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES 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 1,490 1,520 ---------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (395,373) 1,314,009 (427,577) ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (5,677) (37,601) 50,898 Cash and cash equivalents at beginning of year 19,039 56,640 5,742 ---------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,362 19,039 56,640 ==========================================================================================================
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. 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 $ 2,054,198 2,015,992 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) INVESTMENTS IN UNCONSOLIDATED CELLULAR ENTITIES The Company's share of earnings from cellular entities in which it does not own a majority interest (which is included in "Income from unconsolidated cellular entities" in the Company's Consolidated Statements of Income) was $28.6 million, $28.1 million and $28.8 million in 2001, 2000 and 1999, respectively, and is net of amortization of goodwill attributable to such investments which totaled $1.1 million for all three periods. Over 71% of the 2001 income from unconsolidated cellular entities was attributable to the following investments.
Ownership interest -------------------------------------------------------------------------------- GTE Mobilnet of Austin Limited Partnership 35% Alltel Cellular Associates of Arkansas Limited Partnership 36% Detroit SMSA Limited Partnership 3% Michigan RSA #9 Limited Partnership 43% Cellular North Michigan Network General Partnership 49% Lafayette MSA Limited Partnership 49% Wisconsin RSA #1 Limited Partnership 42% Wisconsin RSA #7 Limited Partnership 23% --------------------------------------------------------------------------------
Based primarily on data furnished to the Company by third parties, the following summarizes the unaudited combined assets, liabilities and equity, and the unaudited combined results of operations, of the cellular entities in which the Company's investments (as of December 31, 2001 and 2000) were accounted for by the equity method.
December 31, 2001 2000 --------------------------------------------------------------------------------------- (Dollars in thousands) (unaudited) Assets Current assets $ 243,536 305,366 Property and other noncurrent assets 1,058,410 996,702 --------------------------------------------------------------------------------------- $ 1,301,946 1,302,068 ======================================================================================= Liabilities and equity Current liabilities $ 85,860 153,797 Noncurrent liabilities 235,926 138,642 Equity 980,160 1,009,629 --------------------------------------------------------------------------------------- $ 1,301,946 1,302,068 =======================================================================================
Year ended December 31, 2001 2000 1999 --------------------------------------------------------------------------------------- (Dollars in thousands) (unaudited) Results of operations Revenues $ 1,719,370 1,539,459 1,398,314 Operating income $ 439,687 495,971 427,274 Net income $ 434,495 481,923 416,740 ---------------------------------------------------------------------------------------
(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 $ 2,471,484 2,509,033 Billing system development costs 139,503 73,805 Investments in unconsolidated cellular entities 102,056 117,942 Cash surrender value of life insurance contracts 99,835 96,065 Marketable equity securities - 42,801 Other 205,970 217,847 ----------------------------------------------------------------------------------------------- $ 3,018,848 3,057,493 ===============================================================================================
Amortization of goodwill and other intangibles of $74.9 million, $60.1 million and $52.0 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). (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 ---------------------------------------------------------------------------------------- Wireless, at cost Cell site 420,943 366,855 General support 108,670 105,951 Construction in progress 38,881 49,799 Other 341 79 ---------------------------------------------------------------------------------------- 568,835 522,684 Accumulated depreciation (305,414) (261,401) ---------------------------------------------------------------------------------------- 263,421 261,283 ---------------------------------------------------------------------------------------- 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 $ 2,999,563 2,959,293 ========================================================================================
Depreciation expense was $398.5 million, $328.0 million and $296.8 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 6.50% note - 3,300 7.51%** capital lease obligations, due through 2008 9,004 13,432 ------------------------------------------------------------------------------------------------ Total subsidiaries 557,523 656,916 ------------------------------------------------------------------------------------------------ Total long-term debt 3,043,334 3,200,254 Less current maturities 955,834 149,962 ------------------------------------------------------------------------------------------------ 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 $ 345,772 298,451 Accrued postretirement benefit costs 128,419 118,614 Minority interest 66,747 88,295 Regulatory liability - income taxes 5,657 8,528 Deferred investment tax credits 530 1,053 Other 52,723 52,608 ----------------------------------------------------------------------------------- $ 599,848 567,549 ===================================================================================
(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 $ 31,766 30,834 Regulatory support 12,163 13,504 Net operating loss carryforwards 21,991 8,302 Regulatory liability 2,175 3,191 Long-term debt 6,606 7,765 Other employee benefits 8,452 7,335 Other 10,291 11,055 -------------------------------------------------------------------------------------------- Gross deferred tax assets 93,444 81,986 Less valuation allowance (21,991) (8,302) -------------------------------------------------------------------------------------------- Net deferred tax assets 71,453 73,684 -------------------------------------------------------------------------------------------- Deferred tax liabilities Property, plant and equipment, primarily due to depreciation differences (170,225) (122,459) Excess cost of net assets acquired (234,591) (216,368) Deferred debt costs (2,582) (2,764) Customer base (3,617) (5,742) Marketable equity securities - (13,715) Intercompany profits (3,283) (3,283) Other (2,927) (7,804) -------------------------------------------------------------------------------------------- Gross deferred tax liabilities (417,225) (372,135) -------------------------------------------------------------------------------------------- Net deferred tax liability $ (345,772) (298,451) ============================================================================================
The following is a reconciliation from the statutory federal income tax rate to the Company's effective income tax rate:
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 1.3 2.8 2.5 Amortization of nondeductible excess cost of net assets acquired 2.0 2.9 2.7 Basis difference of assets sold - .3 3.9 Amortization of investment tax credits (.1) (.2) (.4) Amortization of regulatory liability (.3) (.4) (.4) Other, net .1 (.3) .8 ---------------------------------------------------------------------------------------------------------- Effective income tax rate 38.0% 40.1 44.1 ==========================================================================================================
Income tax expense 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 $ 137,138 98,271 184,872 Deferred 61,455 39,651 (11,600) State Current 16,242 14,620 21,770 Deferred (4,810) 2,169 (5,539) ------------------------------------------------------------------------------------------ $ 210,025 154,711 189,503 ==========================================================================================
Income tax expense was allocated as follows:
Year ended December 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------- (Dollars in thousands) Net tax expense in the consolidated statements of income $ 210,025 154,711 189,503 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 --------------------------------------------------------------------------------------------------- $ 195,259 131,068 203,438 ===================================================================================================
(12) SALE OF ASSETS In the second quarter of 2001, 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 the 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 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 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 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 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 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): 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 ================================================================================================== 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 $ 2.43 1.65 1.72 ================================================================================================== Diluted earnings per share $ 2.41 1.63 1.70 ==================================================================================================
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 ---------------------------------------------------------------------------------------------------------- Weighted average Range of remaining contractual Weighted average exercise prices Number of options life outstanding exercise price ---------------------------------------------------------------------------------------------------------- $ 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 ---------------------------------------------------------------------------------------------------------- Range of Number of Weighted average exercise prices options exercisable exercise price ---------------------------------------------------------------------------------------------------------- $ 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 ------------------------------------------------------------------------------- (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 -------------------------------------------------------------------------------
(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 telephone and wireless 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 $ - 607,415 830 Excess cost of net assets acquired 33,183 917,468 20,194 Other investments - 7,145 - Long-term debt - (378) - Deferred credits and other liabilities 13,948 (44,465) - Other assets and liabilities, excluding cash and cash equivalents - 53,671 (52) -------------------------------------------------------------------------------------- Decrease in cash due to acquisitions $ 47,131 1,540,856 20,972 ======================================================================================
CenturyTel has disposed of various telephone and wireless 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 $ (20,653) (4,062) (165,286) Excess cost of net assets acquired, net - (4,071) (296,605) Marketable equity securities (3,614) - (18,363) Other assets and liabilities, excluding cash and cash equivalents 51,593 (769) 58,595 Gain on sale of assets (199,971) (20,593) (62,808) -------------------------------------------------------------------------------------------------- Increase in cash due to dispositions $(172,645) (29,495) (484,467) ==================================================================================================
In connection with the sale of PCS licenses to Leap in the second quarter of 2001, the Company received approximately $86.5 million in the form of a promissory note. Such note was subsequently collected in installments through the fourth quarter of 2001. (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 -------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 31, 2001 ----------------- Financial assets $ 30,248 30,248 (3) Financial liabilities Long-term debt (including current maturities) $ 3,043,334 3,040,242 (2) Other $ 39,714 39,714 (3) -------------------------------------------------------------------------------------------------------- December 31, 2000 ----------------- Financial assets Investments Marketable equity securities $ 42,801 42,801 (1) Other $ 36,514 36,514 (3) Financial liabilities Long-term debt (including current maturities) $ 3,200,254 3,107,899 (2) Other $ 40,879 40,879 (3) --------------------------------------------------------------------------------------------------------
(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 has two reportable segments: telephone and wireless. The Company's reportable segments are strategic business units that offer different products and services. The operating income of these segments is reviewed by the chief operating decision maker to assess performance and make business decisions. 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. In August 2001, the Company announced that it is exploring the potential separation of its wireless business from its other 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. The Company's wireless customers are located in Michigan, Louisiana, Wisconsin, Mississippi, Texas, and Arkansas.
Depreciation Operating and Operating revenues amortization income ---------------------------------------------------------------------------------------------------------- (Dollars in thousands) Year ended December 31, 2001 Telephone $ 1,505,733 398,284 423,420 Wireless 437,965 66,346 112,401 Other operations 173,771 8,754 22,098 ---------------------------------------------------------------------------------------------------------- Total $ 2,117,469 473,384 557,919 ========================================================================================================== Year ended December 31, 2000 Telephone $ 1,253,969 317,906 376,290 Wireless 443,569 65,239 117,865 Other operations 148,388 4,911 31,258 ---------------------------------------------------------------------------------------------------------- Total $ 1,845,926 388,056 525,413 ========================================================================================================== Year ended December 31, 1999 Telephone $ 1,126,112 273,666 351,559 Wireless 422,269 68,593 133,930 Other operations 128,288 6,557 22,580 ---------------------------------------------------------------------------------------------------------- Total $ 1,676,669 348,816 508,069 ========================================================================================================== Year ended December 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------------- (Dollars in thousands) Operating income $ 557,919 525,413 508,069 Nonrecurring gains and losses, net 199,971 20,593 62,808 Interest expense (225,523) (183,302) (150,557) Income from unconsolidated cellular entities 27,460 26,986 27,675 Minority interest (11,812) (10,201) (27,913) Other income and expense 5,041 6,696 9,190 ---------------------------------------------------------------------------------------------------------- Income before income tax expense $ 553,056 386,185 429,272 ========================================================================================================== Year ended December 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------------- (Dollars in thousands) Capital expenditures Telephone $ 351,010 275,523 233,512 Wireless 71,212 58,468 58,760 Other operations 84,505 115,546 97,708 ---------------------------------------------------------------------------------------------------------- Total $ 506,727 449,537 389,980 ========================================================================================================== December 31, 2001 2000 1999 --------------------------------------------------------------------------------------------------------- (Dollars in thousands) Total assets Telephone $ 4,629,224 4,741,284 3,207,690 Wireless 877,222 930,406 1,023,936 Other operations 812,238 721,600 473,781 ---------------------------------------------------------------------------------------------------------- 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, $65 million for wireless 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. CENTURYTEL, INC. Consolidated Quarterly Income Statement Information (Unaudited)
First Second Third Fourth quarter quarter quarter quarter ---------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 2001 (unaudited) ---------------------------------------------------------------------------------------------------------- Operating revenues $ 516,008 518,936 539,377 543,148 Operating income $ 134,208 135,205 143,811 144,695 Net income $ 46,722 154,241 92,305 49,763 Basic earnings per share $ .33 1.10 .66 .35 Diluted earnings per share $ .33 1.09 .65 .35 2000 ---------------------------------------------------------------------------------------------------------- Operating revenues $ 412,956 423,156 482,634 527,180 Operating income $ 111,422 124,892 147,059 142,040 Net income $ 49,284 57,845 67,224 57,121 Basic earnings per share $ .35 .41 .48 .41 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. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. The name, age and office(s) held by each of the Registrant's executive officers are shown below. Each of the executive officers listed below serves at the pleasure of the Board of Directors, except Mr. Williams who has entered into an employment agreement with the Registrant. The agreement's initial term has lapsed, but the agreement remains in effect from year to year, subject to the right of Mr. Williams or the Company to terminate such agreement.
Name Age Office(s) held with CenturyTel ------------------- ------------- ------------------------------ Clarke M. Williams 80 Chairman of the Board of Directors Glen F. Post, III 49 Vice Chairman of the Board of Directors, President and Chief Executive Officer Karen A. Puckett 41 Executive Vice President and Chief Operating Officer R. Stewart Ewing, Jr. 50 Executive Vice President and Chief Financial Officer Harvey P. Perry 57 Executive Vice President, Chief Administrative Officer, General Counsel and Secretary David D. Cole 44 Senior Vice President - Operations Support Michael Maslowski 54 Senior Vice President and Chief Information Officer
Each of the Registrant's executive officers, except for Ms. Puckett and Mr. Maslowski, has served as an officer of the Registrant and one or more of its subsidiaries in varying capacities for more than the past five years. Mr. Cole has served as Senior Vice President - Operations Support since November 1998 and as President - Wireless Group from October 1996 to October 1998. Mr. Maslowski has served as Senior Vice President and Chief Information Officer since March 1999 and as Senior Information Systems Executive for Lucent Technologies and for a joint venture between Lucent Technologies and Phillips Consumer Communications from 1996 to early 1999. Ms. Puckett has served as Executive Vice President and Chief Operating Officer since July 2000, as Sales and Marketing Senior Officer of BroadStream Communications from July 1999 through July 2000 and as Texas Region President for GTE Wireless from 1996 to mid-1999. Commco Technology LLC (formerly BroadStream Communications) filed for bankruptcy on December 18, 2000 in the United States Bankruptcy Court, District of Connecticut (Bridgeport). Ms. Puckett was an officer and employee of BroadStream Communications from July 1999 through July 2000. The balance of the information required by Item 10 is incorporated by reference to the Registrant's definitive proxy statement relating to its 2002 annual meeting of stockholders (the "Proxy Statement"), which Proxy Statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. Item 11. Executive Compensation. The information required by Item 11 is incorporated by reference to the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Item 12 is incorporated by reference to the Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by Item 13 is incorporated by reference to the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. a. Financial Statements (i) Consolidated Financial Statements: Independent Auditors' Report on Consolidated Financial Statements and Financial Statement Schedules Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 Consolidated Balance Sheets - December 31, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Consolidated Quarterly Income Statement Information (unaudited) (ii) Schedules:* I Condensed Financial Information of Registrant II Valuation and Qualifying Accounts * Those schedules not listed above are omitted as not applicable or not required. b. Reports on Form 8-K. The following items were reported in a Form 8-K filed October 25, 2001: Item 5. Other events - (i) News release announcing the pending acquisition of 675,000 access lines from Verizon and (ii) news release announcing third quarter earnings expectations. The following item was reported in a Form 8-K filed November 2, 2001: Item 5. Other events - News release announcing third quarter results of operations and fourth quarter 2001 earnings expectations. The following item was reported in a Form 8-K filed December 10, 2001: Item 5. Other events - To correct inaccurate press reports about CenturyTel's reference to its guidance at the Lehman Brothers Telecom Conference. c. Exhibits: 3(i) Amended and Restated Articles of Incorporation of Registrant, dated as of May 6, 1999, (incorporated by reference to Exhibit 3(i) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). 3(ii) Registrant's Bylaws, as amended through November 18, 1999 (incorporated by reference to Exhibit 3(ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). 4.1 Note Purchase Agreement, dated September 1, 1989, between Registrant, Teachers Insurance and Annuity Association of America and the Lincoln National Life Insurance Company (incorporated by reference to Exhibit 4.23 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989). 4.2 Rights Agreement, dated as of August 27, 1996, between Registrant and Society National Bank, as Rights Agent, including the form of Rights Certificate (incorporated by reference to Exhibit 1 of Registrant's Current Report on Form 8-K filed August 30, 1996) and Amendment No.1 thereto, dated May 25, 1999 (incorporated by reference to Exhibit 4.2(ii) to Registrant's Report on Form 8-K dated May 25, 1999) and Amendment No. 2 thereto, dated and effective as of June 30, 2000, by and between the Registrant and Computershare Investor Services, LLC, as rights agent (incorporated by reference to Exhibit 4.1 of Registrant's Quarterly report on 10-Q for the quarter ended September 30, 2000). 4.3 Form of common stock certificate of the Registrant (incorporated by reference to Exhibit 4.3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000). 4.4 Instruments relating to the Company's public senior debt (a) Indenture dated as of March 31, 1994 between the Company and Regions Bank (formerly First American Bank & Trust of Louisiana), as Trustee (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-3, Registration No. 33-52915). (b) Resolutions designating the terms and conditions of the Company's 7-3/4% Senior Notes, Series A, due 2004 and 8-1/4% Senior Notes, Series B, due 2024 (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994). (c) Resolutions designating the terms and conditions of the Company's 6.55% Senior Notes, Series C, due 2005 and 7.2% Senior Notes, Series D, due 2025 (incorporated by reference to Exhibit 4.27 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). (d) Resolutions designating the terms and conditions of the Company's 6.15% Senior Notes, Series E, due 2005; 6.30% Senior Notes, Series F, due 2008; and 6.875% Debentures, Series G, due 2028, (incorporated by reference to Exhibit 4.9 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997). (e) Form of Registrant's 8.375% Senior Notes, Series H, Due 2010, issued October 19, 2000 (incorporated by reference to Exhibit 4.2 of Registrant's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000). (f) Form of the Registrant's 7.750% Remarketable Senior Notes, Series I, due 2012, issued October 19, 2000 (the "Remarketable Notes") (incorporated by reference to Exhibit 4.3 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). (g) Remarketing Agreement, dated as of October 19, 2000, between the Registrant and Banc of America Securities LLC, as remarketing agent for the Remarketable Notes (incorporated by reference to Exhibit 4.4 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 4.5 Competitive Advance and Revolving Credit Facility Agreement, dated as of August 28, 1997, among Registrant, the lenders named therein, and NationsBank of Texas, N.A. (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 4.6 Revolving Credit Facility Agreement, dated July 31, 2001, among Registrant, Bank of America, N.A., Citibank, N.A., Banc of America Securities LLC and Salomon Smith Barney, Inc., included elsewhere herein. 4.7 First Supplemental Indenture, dated as of November 2, 1998, to Indenture between CenturyTel of the Northwest, Inc. and The First National Bank of Chicago (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). 10.1 Qualified Employee Benefit Plans (excluding several narrow-based qualified plans that cover union employees or other limited groups of Company employees) (a) Registrant's Employee Stock Ownership Plan and Trust, as amended and restated September 17, 2001 (incorporated by reference to Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). (b) Registrant's Dollars & Sense Plan and Trust, as amended and restated, effective January 1, 1998 and amendment thereto dated December 29, 1998 (incorporated by reference to Exhibit 10.1 (c) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998). (c) Registrant's Amended and Restated Retirement Plan, effective as of January 1, 1999 (incorporated by reference to Exhibit 10.1 (z) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998) and amendment thereto dated April 17, 2000, included elsewhere herein. (d) Merger Agreement, dated September 18, 2001, between Registrant and Regions Bank of Louisiana, pursuant to which Registrant's Stock Bonus Plan and PAYSOP were merged into Registrant's Employee Stock Ownership Plan (incorporated by reference to Exhibit 10(b) of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 10.2 Stock-based Incentive Plans (a) Registrant's 1983 Restricted Stock Plan, dated February 21, 1984, as amended and restated as of November 16, 1995 (incorporated by reference to Exhibit 10.1(e) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995) and amendment thereto dated November 21, 1996, (incorporated by reference to Exhibit 10.1(e) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996), and amendment thereto dated February 25, 1997 (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997), and amendment thereto dated April 25, 2001 (incorporated by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001), and amendment thereto dated April 17, 2000, included elsewhere herein. (b) Registrant's 1988 Incentive Compensation Program as amended and restated August 22, 1989 (incorporated by reference to Exhibit 19.8 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1989) and amendment thereto dated November 21, 1996 (incorporated by reference to Exhibit 10.1(g) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). (c) Registrant's 1990 Incentive Compensation Program, dated March 15, 1990 (incorporated by reference to Exhibit 19.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990) and amendment thereto dated November 21, 1996 (incorporated by reference to Exhibit 10.1(i) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996). (d) Registrant's 1995 Incentive Compensation Plan approved by Registrant's shareholders on May 11, 1995 (incorporated by reference to Exhibit 4.4 to Registration No. 33-60061) and amendment thereto dated November 21, 1996 (incorporated by Reference to Exhibit 10.1 (l) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996), and amendment thereto dated February 25, 1997 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). (i) Form of Stock Option Agreement, pursuant to 1995 Incentive Compensation Plan and dated as of May 22, 1995, entered into by Registrant and its officers (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). (ii) Form of Stock Option Agreement, pursuant to 1995 Incentive Compensation Plan and dated as of June 23, 1995, entered into by Registrant and certain key employees (incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). (iii) Form of Stock Option Agreement, pursuant to 1995 Incentive Compensation Plan and dated as of February 24, 1997, entered into by Registrant and its officers (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). (iv) Form of Stock Option Agreement, pursuant to 1995 Incentive Compensation Plan and dated as of February 21, 2000, entered into by Registrant and its officers (incorporated by reference to Exhibit 10.1 (t) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). (v) Form of Amended and Restated Restricted Stock and Performance Share Agreement dated as of March 16, 1998, relating to equity incentive awards granted in 1997 pursuant to Registrant's 1995 Incentive Compensation Plan (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). (vi) Form of Restricted Stock and Performance Share Agreement, dated as of March 16, 1998, relating to equity incentive awards granted in 1998 pursuant to Registrant's 1995 Incentive Compensation Plan (incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). (vii) Form of Restricted Stock and Performance Share Agreement, dated as of February 22, 1999, relating to equity incentive awards granted in 1999 pursuant to the Registrant's 1995 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1(x) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). (e) Amended and Restated Registrant's 2000 Incentive Compensation Plan, as amended through May 23, 2000 (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). (i) Form of Stock Option Agreement, pursuant to the 2000 Incentive Compensation Plan and dated as of May 21, 2001, entered into by Registrant and its officers, included elsewhere herein. 10.3 Other Non-Qualified Employee Benefit Plans (a) Registrant's Key Employee Incentive Compensation Plan, dated January 1, 1984, as amended and restated as of November 16, 1995 (incorporated by reference to Exhibit 10.1(f) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995) and amendment thereto dated November 21, 1996 (incorporated by reference to Exhibit 10.1 (f) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996), amendment thereto dated February 25, 1997 (incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997), amendment thereto dated April 25, 2001 (incorporated by reference to Exhibit 10.2 of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001) and amendment thereto dated April 17, 2000, included elsewhere herein. (b) Registrant's Restated Supplemental Executive Retirement Plan, dated April 3, 2000 (incorporated by reference to Exhibit 10.1(d) to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). (c) Registrant's Restated Supplemental Defined Contribution Plan, restated as of July 17, 2001, (incorporated by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). (d) Registrant's Amended and Restated Supplemental Dollars & Sense Plan, effective as of January 1, 1999 (incorporated by reference to Exhibit 10.1 (q) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998). (e) Registrant's Supplemental Defined Benefit Plan, effective as of January 1, 1999 (incorporated by reference to Exhibit 10.1 (y) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998), and amendment thereto dated February 28, 2002, included elsewhere herein. (f) Registrant's Amended and Restated Salary Continuation (Disability) Plan for Officers, dated November 26, 1991 (incorporated by reference to Exhibit 10.16 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). (g) Registrant's Restated Outside Directors' Retirement Plan, dated as of November 16, 1995 (incorporated by reference to Exhibit 10.1(t) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995) and amendment thereto dated April 17, 2000, included elsewhere herein. (h) Registrant's Restated Deferred Compensation Plan for Outside Directors, dated as of November 16, 1995 (incorporated by reference to Exhibit 10.1(u) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995) and amendment thereto dated April 17, 2000, included elsewhere herein. (i) Registrant's Chairman/Chief Executive Officer Short-Term Incentive Program (incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). (j) Registrant's 2001 Employee Stock Purchase Plan (incorporated by reference to Registrant's 2001 Proxy Statement). 10.4 Employment, Severance and Related Agreements (a) Employment Agreement, originally dated May 24, 1993, as amended and restated through February 22, 2000, by and between Clarke M. Williams and Registrant (incorporated by reference to Exhibit 10.1(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). (b) Agreement, dated December 31, 1994, by and between Jim D. Reppond and Registrant (incorporated by reference to Exhibit 10.24 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). (c) Consulting Agreement, dated as of July 2, 1996, by and between Registrant and Jim D. Reppond (incorporated by reference to Exhibit 10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). (d) Change of Control Agreement, dated February 22, 2000 by and between Glen F. Post, III and Registrant (incorporated by reference to Exhibit 10.1(b) to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). (e) Form of Change of Control Agreement, dated February 22, 2000, by and between Registrant and David D. Cole, R. Stewart Ewing, Michael E. Maslowski and Harvey P. Perry (incorporated by reference exhibit 10.1(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). (f) Form of Change of Control Agreement dated July 24, 2000, by and between the Registrant and Karen A. Puckett (incorporated by reference to Exhibit 10.1(c) of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). 10.5 Other Agreements (a) Asset Purchase Agreement, dated as of October 22, 2001, between GTE Midwest Incorporated (d/b/a Verizon Midwest) and CenturyTel of Missouri, LLC (incorporated by reference to Exhibit 2(a) of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). (b) Asset Purchase Agreement, dated as of October 22, 2001, between Verizon South, Inc., Contel of the South, Inc. (d/b/a Verizon Mid-States) and CenturyTel of Alabama, LLC (incorporated by reference to Exhibit 2(b) of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 21 Subsidiaries of the Registrant, included elsewhere herein. 23 Independent Auditors' Consent, included elsewhere herein. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CenturyTel, Inc., Date: March 14, 2002 By: /s/ Clarke M. Williams -------------------- ---------------------- Clarke M. Williams Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ Clarke M. Williams ---------------------------- Chairman of the Board Clarke M. Williams of Directors March 14, 2002 Vice Chairman of the /s/ Glen F. Post, III Board of Directors, ---------------------------- President, and Chief Glen F. Post, III Executive Officer March 14, 2002 /s/ R. Stewart Ewing, Jr. ---------------------------- Executive Vice President and R. Stewart Ewing, Jr. Chief Financial Officer March 14, 2002 /s/ Harvey P. Perry Executive Vice President, ---------------------------- Chief Administrative Officer Harvey P. Perry and Director March 14, 2002 /s/ Neil A. Sweasy ---------------------------- Vice President and Controller Neil A. Sweasy (Principal Accounting Officer) March 14, 2002 /s/ William R. Boles, Jr. ---------------------------- William R. Boles, Jr. Director March 14, 2002 /s/ Virginia Boulet ---------------------------- Virginia Boulet Director March 14, 2002 /s/ Ernest Butler, Jr. --------------------------- Ernest Butler, Jr. Director March 14, 2002 /s/ Calvin Czeschin --------------------------- Calvin Czeschin Director March 14, 2002 /s/ James B. Gardner --------------------------- James B. Gardner Director March 14, 2002 /s/ W. Bruce Hanks --------------------------- W. Bruce Hanks Director March 14, 2002 /s/ R. L. Hargrove, Jr. --------------------------- R. L. Hargrove, Jr. Director March 14, 2002 /s/ Johnny Hebert --------------------------- Johnny Hebert Director March 14, 2002 /s/ F. Earl Hogan --------------------------- F. Earl Hogan Director March 14, 2002 /s/ C. G. Melville, Jr. --------------------------- C. G. Melville, Jr. Director March 14, 2002 /s/ Jim D. Reppond --------------------------- Jim D. Reppond Director March 14, 2002 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CENTURYTEL, INC. (Parent Company) STATEMENTS OF INCOME
Year ended December 31, --------------------------------------------------------------------------------------------------- 2001 2000 1999 --------------------------------------------------------------------------------------------------- (Dollars in thousands) REVENUES $ 14,962 13,007 15,542 --------------------------------------------------------------------------------------------------- EXPENSES Operating expenses 12,712 11,604 12,057 Depreciation and amortization 10,530 7,470 7,153 --------------------------------------------------------------------------------------------------- Total expenses 23,242 19,074 19,210 --------------------------------------------------------------------------------------------------- OPERATING LOSS (8,280) (6,067) (3,668) --------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Nonrecurring gains and losses, net (25,480) - 1,931 Interest expense (253,018) (214,140) (117,760) Interest income 120,136 84,307 48,078 Other expense (6,149) (7,741) (697) --------------------------------------------------------------------------------------------------- Total other income (expense) (164,511) (137,574) (68,448) --------------------------------------------------------------------------------------------------- LOSS BEFORE INCOME TAXES AND EQUITY IN SUBSIDIARIES' EARNINGS (172,791) (143,641) (72,116) Income tax benefit 66,324 52,259 33,179 --------------------------------------------------------------------------------------------------- LOSS BEFORE EQUITY IN SUBSIDIARIES' EARNINGS (106,467) (91,382) (38,937) Equity in subsidiaries' earnings 449,498 322,856 278,706 --------------------------------------------------------------------------------------------------- NET INCOME $ 343,031 231,474 239,769 ===================================================================================================
See accompanying notes to condensed financial information of registrant. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CENTURYTEL, INC. (Parent Company) BALANCE SHEETS
December 31, ------------------------------------------------------------------------------------------------------ 2001 2000 ------------------------------------------------------------------------------------------------------ (Dollars in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 24,269 4,600 Receivables from subsidiaries 1,249,664 641,794 Other receivables 655 35,890 Prepayments and other 397 527 ------------------------------------------------------------------------------------------------------ Total current assets 1,274,985 682,811 ------------------------------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT Property and equipment 675 1,005 Accumulated depreciation (459) (742) ------------------------------------------------------------------------------------------------------ Net property, plant and equipment 216 263 ------------------------------------------------------------------------------------------------------ INVESTMENTS AND OTHER ASSETS Investments in subsidiaries (at equity) 5,041,830 4,825,386 Receivables from subsidiaries 230,780 224,753 Other investments 43,216 50,322 Deferred charges 59,683 85,253 ------------------------------------------------------------------------------------------------------ Total investments and other assets 5,375,509 5,185,714 ------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 6,650,710 5,868,788 ====================================================================================================== LIABILITIES AND EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 906,305 57,527 Short-term debt 53,000 276,000 Payables to subsidiaries 1,210,181 886,249 Accrued interest 41,535 41,786 Other accrued liabilities 92,798 66,073 ------------------------------------------------------------------------------------------------------ Total current liabilities 2,303,819 1,327,635 ------------------------------------------------------------------------------------------------------ LONG-TERM DEBT 1,579,506 2,485,811 ------------------------------------------------------------------------------------------------------ PAYABLES TO SUBSIDIARIES 404,037 - ------------------------------------------------------------------------------------------------------ DEFERRED CREDITS AND OTHER LIABILITIES 25,968 23,263 ------------------------------------------------------------------------------------------------------ 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 $ 6,650,710 5,868,788 ======================================================================================================
See accompanying notes to condensed financial information of registrant. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CENTURYTEL, INC. (Parent Company) STATEMENTS OF CASH FLOWS
Year ended December 31, ------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) OPERATING ACTIVITIES Net income $ 343,031 231,474 239,769 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 10,530 7,470 7,153 Deferred income taxes (18,905) (6,999) (10,357) Equity in subsidiaries' earnings (449,498) (322,856) (278,706) Nonrecurring gains and losses, net 25,480 - (1,931) Changes in current assets and current liabilities: Other receivables 35,235 (35,377) 23,393 Other accrued liabilities 26,725 56,037 (83,749) Other current assets and liabilities, net (122) 14,528 (435) Other, net 26,355 14,770 6,060 ------------------------------------------------------------------------------------------------------------------ Net cash used in operating activities (1,169) (40,953) (98,803) ------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Acquisitions - (22,952) - Capital contributions to subsidiaries - (1,302,568) - Dividends received from subsidiaries 266,783 174,637 162,149 Receivables from subsidiaries (610,597) (180,878) (22,607) Payables to subsidiaries 658,048 44,256 380,505 Proceeds from sales of assets - - 3,444 Other, net 8,289 (6,680) 2,569 ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 322,523 (1,294,185) 526,060 ------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Proceeds from issuance of debt - 2,654,375 - Payments of debt (279,527) (1,299,599) (415,166) Payment of 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 paid (28,653) (26,815) (25,413) Other, net (856) - - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (301,685) 1,327,338 (421,397) ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 19,669 (7,800) 5,860 Cash and cash equivalents at beginning of year 4,600 12,400 6,540 ------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,269 4,600 12,400 ==================================================================================================================
See accompanying notes to condensed financial information of registrant. SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CENTURYTEL, INC. (Parent Company) NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (A) LONG-TERM DEBT The approximate annual debt maturities for the five years subsequent to December 31, 2001 are as follows: 2002 - $ 906.3 million 2003 - $ 4.8 million 2004 - $ 51.5 million 2005 - $ 151.0 million 2006 - $ 1.0 million (B) GUARANTEES As of December 31, 2001, CenturyTel has guaranteed debt of subsidiaries totaling $266.8 million. (C) DIVIDENDS FROM SUBSIDIARIES Dividends paid to CenturyTel by consolidated subsidiaries were $266.8 million, $174.6 million and $162.1 million during 2001, 2000 and 1999, respectively. (D) INCOME TAXES AND INTEREST PAID Income taxes paid by CenturyTel (including amounts reimbursed from subsidiaries) were $120.4 million, $131.8 million and $220.1 million during 2001, 2000 and 1999, respectively. Interest paid by CenturyTel was $253.3 million, $199.3 million and $118.5 million during 2001, 2000 and 1999, respectively. (E) AFFILIATED TRANSACTIONS 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. CenturyTel recorded intercompany interest income of $119.7 million, $83.0 million and $47.8 million in 2001, 2000 and 1999, respectively. CenturyTel recorded intercompany interest expense of $66.6 million, $74.5 million and $13.4 million in 2001, 2000 and 1999, respectively. 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 $ 12,857 26,322 (22,820) - 16,359 Valuation allowance for deferred tax assets $ 8,302 13,689 - - 21,991 Year ended December 31, 2000 Allowance for doubtful accounts $ 4,150 17,904 (13,036) 3,839 (2) 12,857 Valuation allowance for deferred tax assets $ 2,593 6,211 - (502) (3) 8,302 Year ended December 31, 1999 Allowance for doubtful accounts $ 4,155 7,680 (7,494) (191) (2) 4,150 Valuation allowance for deferred tax assets $ 6,716 - - (4,123) (3) 2,593
(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. (3) Adjust excess cost of net assets acquired upon utilization of net operating loss carryforwards of acquired subsidiary.