UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 1-7784
CenturyTel, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (I.R.S. 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
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.
[X] Yes [ ] No
As of October 31, 2002, there were 142,607,886 shares of common stock
outstanding.
CenturyTel, Inc.
TABLE OF CONTENTS
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income--Three Months and
Nine Months Ended September 30, 2002 and 2001 3-4
Consolidated Statements of Comprehensive Income--
Three Months and Nine Months Ended September
30, 2002 and 2001 5
Consolidated Balance Sheets--September 30, 2002 and
December 31, 2001 6
Consolidated Statements of Stockholders' Equity--
Nine Months Ended September 30, 2002 and 2001 7
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 2002 and 2001 8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-29
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 30
Item 4. Controls and Procedures 30
Part II. Other Information:
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31-32
Item 6. Exhibits and Reports on Form 8-K 32-33
Signature 33
Certifications 34-35
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months Nine months
ended September 30, ended September 30,
------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES
Telephone $ 460,935 377,747 1,214,165 1,116,880
Other 63,562 46,226 171,952 127,945
-------------------------------------------------------------------------------------------------------------------
Total operating revenues 524,497 423,973 1,386,117 1,244,825
-------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses (exclusive
of depreciation and amortization) 257,924 209,609 694,801 617,577
Corporate overhead costs allocable to
discontinued operations (See Note 4) 1,343 4,918 11,275 14,876
Depreciation and amortization 107,514 103,455 293,745 302,863
-------------------------------------------------------------------------------------------------------------------
Total operating expenses 366,781 317,982 999,821 935,316
-------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 157,716 105,991 386,296 309,509
-------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (60,021) (54,438) (164,826) (173,499)
Nonrecurring gains and losses - 43,543 3,709 33,043
Other income and expense (573) (733) (356) 3,517
-------------------------------------------------------------------------------------------------------------------
Total other income (expense) (60,594) (11,628) (161,473) (136,939)
--------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 97,122 94,363 224,823 172,570
Income tax expense 33,503 34,793 78,139 65,081
-------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 63,619 59,570 146,684 107,489
DISCONTINUED OPERATIONS (See Note 4)
Income from discontinued operations, net of
$248,565, $20,326, $285,809 and $113,470 tax 544,130 32,735 610,595 185,779
-------------------------------------------------------------------------------------------------------------------
NET INCOME $ 607,749 92,305 757,279 293,268
===================================================================================================================
NET INCOME, AS ADJUSTED FOR GOODWILL
AMORTIZATION (See Notes 1 and 5) $ 607,749 106,295 757,279 335,476
===================================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Continued)
Three months Nine months
ended September 30, ended September 30,
-------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
BASIC EARNINGS PER SHARE
From continuing operations $ .45 .42 1.04 .76
From continuing operations, as adjusted* $ .45 .50 1.04 1.01
From discontinued operations $ 3.84 .23 4.32 1.32
From discontinued operations, as adjusted* $ 3.84 .25 4.32 1.37
Basic earnings per share $ 4.29 .65 5.36 2.08
Basic earning per share, as adjusted* $ 4.29 .75 5.36 2.38
DILUTED EARNINGS PER SHARE
From continuing operations $ .45 .42 1.03 .76
From continuing operations, as adjusted* $ .45 .50 1.03 1.00
From discontinued operations $ 3.81 .23 4.28 1.31
From discontinued operations, as adjusted* $ 3.81 .25 4.28 1.36
Diluted earnings per share $ 4.26 .65 5.31 2.06
Diluted earnings per share, as adjusted* $ 4.26 .75 5.31 2.36
DIVIDENDS PER COMMON SHARE $ .0525 .05 .1575 .15
===================================================================================================================
AVERAGE BASIC SHARES OUTSTANDING 141,692 140,772 141,324 140,693
===================================================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 142,770 142,260 142,710 142,267
===================================================================================================================
* As adjusted to reflect the after-tax effect of eliminating goodwill
amortization in accordance with SFAS 142 (See Notes 1 and 5).
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months Nine months
ended September 30, ended September 30,
------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 607,749 92,305 757,279 293,268
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Unrealized holding gains (losses):
Unrealized holding gains (losses) arising during
period, net of ($175) and $5,385 tax - (326) - 9,999
Reclassification adjustment for gains included in
net income, net of ($19,100) tax - (35,470) - (35,470)
Derivative instruments:
Net gains (losses) on derivatives hedging variability
of cash flows, net of ($355) tax (658) - (658) -
------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 607,091 56,509 756,621 267,797
==================================================================================================================
COMPREHENSIVE INCOME,
AS ADJUSTED FOR GOODWILL
AMORTIZATION (See Notes 1 and 5) $ 607,091 70,499 756,621 310,005
==================================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2002 2001
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 294,239 3,496
Accounts receivable, less allowance of $30,888 and $13,908 281,733 205,990
Materials and supplies, at average cost 9,318 10,916
Other 8,872 9,511
------------------------------------------------------------------------------------------------------------------
Total current assets 594,162 229,913
------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,335,224 2,736,142
------------------------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 3,693,948 2,087,158
Other 430,245 420,043
------------------------------------------------------------------------------------------------------------------
Total investments and other assets 4,124,193 2,507,201
------------------------------------------------------------------------------------------------------------------
ASSETS HELD FOR SALE (See Note 4) 11,796 845,428
------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 8,065,375 6,318,684
==================================================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 28,431 955,834
Short-term debt - 53,000
Accounts payable 67,417 61,056
Accrued expenses and other liabilities
Salaries and benefits 68,087 46,588
Taxes 392,562 27,937
Interest 61,880 49,191
Other 39,520 15,968
Advance billings and customer deposits 41,180 29,308
------------------------------------------------------------------------------------------------------------------
Total current liabilities 699,077 1,238,882
------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 3,650,046 2,087,500
------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 652,329 506,052
------------------------------------------------------------------------------------------------------------------
LIABILITIES RELATED TO ASSETS HELD FOR SALE (See Note 4) - 148,870
------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000 shares,
issued and outstanding 142,042,786 and 141,232,806 shares 142,043 141,233
Paid-in capital 515,593 524,668
Accumulated other comprehensive income (loss), net of tax (658) -
Retained earnings 2,400,720 1,666,004
Unearned ESOP shares (1,750) (2,500)
Preferred stock - non-redeemable 7,975 7,975
------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,063,923 2,337,380
------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 8,065,375 6,318,684
==================================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine months
ended September 30,
------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 141,233 140,667
Conversion of convertible securities into common stock - 254
Issuance of common stock through dividend reinvestment,
incentive and benefit plans 810 168
------------------------------------------------------------------------------------------------------------
Balance at end of period 142,043 141,089
------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 524,668 509,840
Equity unit issuance costs and contract adjustment payments (24,377) -
Conversion of convertible securities into common stock - 3,046
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 13,319 2,989
Amortization of unearned compensation and other 1,983 2,856
------------------------------------------------------------------------------------------------------------
Balance at end of period 515,593 518,731
------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Balance at beginning of period - 25,471
Change in other comprehensive income (loss) (net of reclassification
adjustment in 2001), net of tax (658) (25,471)
------------------------------------------------------------------------------------------------------------
Balance at end of period (658) -
------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 1,666,004 1,351,626
Net income 757,279 293,268
Cash dividends declared
Common stock-$.1575 and $.15 per share, respectively (22,264) (21,209)
Preferred stock (299) (299)
------------------------------------------------------------------------------------------------------------
Balance at end of period 2,400,720 1,623,386
------------------------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (2,500) (3,500)
Release of ESOP shares 750 750
------------------------------------------------------------------------------------------------------------
Balance at end of period (1,750) (2,750)
------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 7,975 7,975
------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,063,923 2,288,431
============================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months
ended September 30,
------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 757,279 293,268
Adjustments to reconcile net income to net cash provided by
operating activities from continuing operations:
Income from discontinued operations, net of tax (610,595) (185,779)
Depreciation and amortization 293,745 302,863
Deferred income taxes 43,343 2,309
Nonrecurring gains and losses (3,709) (33,043)
Changes in current assets and current liabilities:
Accounts receivable (22,222) 36,461
Accounts payable 6,361 (19,977)
Other accrued taxes 58,838 69,751
Other current assets and other current liabilities, net 61,745 12,572
Increase in other noncurrent assets (23,562) (55,914)
Increase in other noncurrent liabilities 31,849 5,099
Other, net 43,315 30,738
-------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities from continuing operations 636,387 458,348
-------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Acquisitions, net of cash acquired (2,245,026) (47,131)
Payments for property, plant and equipment (270,774) (331,733)
Proceeds from sale of assets 4,144 64,584
Other, net 5,349 3,150
-------------------------------------------------------------------------------------------------------------
Net cash used in investing activities from continuing operations (2,506,307) (311,130)
--------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of debt 1,168,249 3,896
Payments of debt (604,593) (359,414)
Proceeds from issuance of common stock 14,129 3,157
Cash dividends (22,563) (21,508)
Payment of debt issuance costs (12,899) -
Payment of equity units issuance costs (15,867) -
Other, net 2,572 962
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities from
continuing operations 529,028 (372,907)
------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations (See Note 4) 1,631,635 224,799
------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 290,743 (890)
Cash and cash equivalents at beginning of period 3,496 11,523
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 294,239 10,633
============================================================================================================
Supplemental cash flow information:
Income taxes paid $ 26,183 16,877
============================================================================================================
Interest paid (net of capitalized interest of $1,176 and $3,694) $ 153,781 165,871
============================================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(1) Basis of Financial Reporting
The consolidated financial statements of CenturyTel, Inc. and its
subsidiaries (the "Company") include the accounts of CenturyTel, Inc.
("CenturyTel") and its majority-owned subsidiaries and partnerships. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission; however, in the opinion of management, the disclosures
which are made are adequate to make the information presented not misleading.
The consolidated financial statements and footnotes included in this Form 10-Q
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's current report on Form 8-K dated March
19, 2002 and filed August 13, 2002. Certain 2001 amounts have been reclassified
to be consistent with the Company's 2002 presentation.
The unaudited financial information for the three months and nine months
ended September 30, 2002 and 2001 has not been audited by independent certified
public accountants; however, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the results of operations for the three-month and nine-month periods have been
included therein. The results of operations for the first nine months of the
year are not necessarily indicative of the results of operations which might be
expected for the entire year.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). Under SFAS 142, effective January 1, 2002, systematic amortization
of goodwill is no longer permitted; instead, SFAS 142 requires goodwill recorded
in a business combination to be reviewed for impairment and to be written down
only in periods in which the recorded amount of goodwill exceeds its fair value.
Impairment of goodwill is tested at least annually by comparing the fair value
of the reporting unit to its carrying value (including goodwill). Estimates of
the fair value of the reporting unit are based on valuation models using
criterion such as multiples of earnings. Each adjustment reflected in the
consolidated statements of income and comprehensive income by use of the term
"as adjusted for goodwill amortization" reflects the effects of SFAS 142, as
more fully described in Note 5.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
also broadens the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the entity in
a disposal transaction. As a result of the Company's agreement in March 2002 to
sell its wireless operations (which was consummated on August 1, 2002) (see Note
4), such operations have been reflected as discontinued operations for the three
months and nine months ended September 30, 2002. Assets and liabilities related
to the Company's wireless operations are reflected as "Held for sale" on the
accompanying consolidated balance sheets. Results of operations for 2001 have
been restated to conform to this presentation.
(2) Net Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
Sept. 30, Dec. 31,
2002 2001
-----------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost $ 6,075,708 5,292,255
Accumulated depreciation (3,053,681) (2,839,268)
-----------------------------------------------------------------------------
3,022,027 2,452,987
-----------------------------------------------------------------------------
Other, at cost 501,516 446,920
Accumulated depreciation (188,319) (163,765)
-----------------------------------------------------------------------------
313,197 283,155
-----------------------------------------------------------------------------
$ 3,335,224 2,736,142
=============================================================================
(3) Acquisitions
On July 1, 2002, the Company completed the acquisition of approximately
300,000 telephone access lines in the state of Alabama from Verizon
Communications, Inc. ("Verizon") for approximately $1.022 billion cash. On
August 31, 2002, the Company completed the acquisition of approximately 354,000
telephone access lines in the state of Missouri from Verizon for approximately
$1.179 billion cash. The assets purchased include (i) all telephone access lines
and related property and equipment comprising Verizon's local exchange
operations in predominantly rural markets throughout Alabama and Missouri, (ii)
Verizon's assets used to provide digital subscriber line ("DSL") and other high
speed data services within the purchased exchanges and (iii) approximately 2,800
route miles of fiber optic cable within the purchased exchanges. The acquired
assets do not include Verizon's cellular, personal communications services
("PCS"), long distance, dial-up Internet, or directory publishing operations, or
rights under various Verizon contracts, including those relating to customer
premise equipment. The Company will not assume any liabilities of Verizon other
than (i) those associated with contracts, facilities and certain other assets
transferred in connection with the purchase and (ii) certain employee-related
liabilities, including liabilities for postretirement health benefits. For
financing arrangements related to these acquisitions, see Note 7.
The results of operations of the acquired properties are included in the
Company's results of operations from and after the respective acquisition dates.
The following table presents the Company's preliminary allocation of its
aggregate purchase price to the assets acquired and liabilities assumed in
connection with the acquisitions.
(In thousands)
------------
Accounts receivable $ 49,716
Property, plant and equipment 640,843
Goodwill 1,579,153
Accrued expenses and other liabilities (1,195)
Advance billings and customer deposits (10,362)
Other deferred credits (56,897)
------------
Aggregate purchase price $ 2,201,258
============
Allocation of the purchase price has not been finalized because the
third party valuation of the fixed assets and identifiable intangibles has not
been completed. The preliminary purchase price allocation above assumes that the
net book value of the property, plant and equipment will approximate its
appraised value. The Company anticipates allocating a portion of the purchase
price to an identifiable intangible (customer base) and will amortize such asset
over its remaining useful life. For the preliminary allocation depicted above,
such amount is included in goodwill. The Company does not anticipate that the
amount allocated to customer base (nor the associated amortization) will be
material to its results of operations. The Company believes the entire amount of
goodwill will be deductible for income tax purposes.
The following pro forma information represents the consolidated results of
continuing operations of the Company for the nine months ended September 30,
2002 and 2001 as if the Verizon acquisitions had been consummated as of January
1, 2002 and 2001, respectively.
Nine months
ended September 30,
2002 2001
-----------------------
(Dollars in thousands)
Operating revenues from continuing operations $ 1,699,540 1,658,920
Income from continuing operations $ 170,443 135,957
Basic earnings per share from
continuing operations, as adjusted $ 1.20 1.21
Diluted earnings per share from
continuing operations, as adjusted $ 1.19 1.20
The pro forma information is based on various assumptions and estimates
(including estimates of the Company's Verizon Missouri operating results for
July and August 2002 based on their operations for the six months ended June 30,
2002), and on the above-mentioned preliminary purchase price allocations. To the
extent that final allocations of the purchase price cause the Company's annual
depreciation and amortization expense to differ from that presented in the pro
forma information, annual earnings per share will be effected by $.01 per share
for every $2.4 million difference in annual depreciation and amortization
expense. The pro forma information (i) reflects the effect of reduced interest
expense after August 1, 2002 as a result of reducing outstanding indebtedness
from utilization of proceeds received from the August 1, 2002 sale of the
Company's wireless operations described in Note 4 and (ii) makes no pro forma
adjustments to reflect any assumed consummation of such sale (or any use of such
sale proceeds) prior to August 1, 2002. The pro forma information is not
necessarily indicative of the operating results that would have occurred if the
Verizon acquisitions had been consummated as of January 1 of each respective
period, nor is it necessarily indicative of future operating results. The pro
forma information does not give effect to any potential revenue enhancements or
cost synergies or other operating efficiencies that could result from the
acquisitions. The actual results of operations of the Verizon properties are
included in the consolidated financial statements only from the respective dates
of acquisition.
(4) Discontinued Operations
On August 1, 2002 (pursuant to a definitive agreement signed March 19,
2002), the Company sold substantially all of its wireless operations to an
affiliate of ALLTEL Corporation ("Alltel") and certain partners in the Company's
markets that exercised "first refusal" purchase rights for an aggregate of
approximately $1.59 billion in cash. In connection with this transaction, the
Company divested its (i) interests in its majority-owned and operated cellular
systems, which at June 30, 2002 served approximately 783,000 customers and had
access to approximately 7.8 million pops, (ii) minority cellular equity
interests representing approximately 1.8 million pops at June 30, 2002, and
(iii) licenses to provide PCS covering 1.3 million pops in Wisconsin and Iowa.
Proceeds from the sale of the wireless operations were used to partially fund
the Company's acquisitions of telephone properties in Alabama and Missouri
during the third quarter of 2002.
As a result, the Company's wireless operations prior to August 1, 2002
have been reflected as discontinued operations in the Company's consolidated
financial statements as of and for the three months and nine months ended
September 30, 2002. Amounts reported for 2001 have been restated to conform to
the 2002 presentation. The depreciation and amortization of long-lived and
intangible assets related to the wireless operations ceased on March 19, 2002,
the date of the definitive agreement to sell such operations.
The following table represents certain summary income statement
information related to the Company's wireless operations reflected as
discontinued operations.
Three months Nine months
ended September 30, ended September 30,
-----------------------------------------------------------------------------------------------------
2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 38,012 115,404 246,705 329,496
-----------------------------------------------------------------------------------------------------
Operating income (loss) (1) $ (15,167) 37,820 71,258 103,715
Income from unconsolidated cellular entities 5,426 16,622 29,622 32,648
Minority interest expense (1,659) (3,449) (8,569) (9,150)
Gain on sale of discontinued operations 803,905 - 803,905 -
Nonrecurring gains and losses - - - 166,928
Other income and (expense) 190 2,068 188 5,108
-----------------------------------------------------------------------------------------------------
Pre-tax income from discontinued operations 792,695 53,061 896,404 299,249
Income tax expense (248,565) (20,326) (285,809) (113,470)
-----------------------------------------------------------------------------------------------------
Income from discontinued operations $ 544,130 32,735 610,595 185,779
=====================================================================================================
(1) Excludes corporate overhead costs allocated to the wireless operations of
$1.3 million, $4.9 million, $11.3 million, and $14.9 million for the three
months ended September 30, 2002 and 2001 and the nine months ended
September 30, 2002 and 2001, respectively, which the Company expects to
continue to incur after the August 1, 2002 disposal of the wireless
business. The three months and nine months ended September 30, 2002
includes a $30.5 million charge associated with a write-off of all
amounts expended to develop the wireless portion of the Company's billing
system currently in development.
The following table represents certain summary cash flow statement
information related to the Company's wireless operations reflected as
discontinued operations.
Nine months
ended September 30,
-------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------
(Dollars in thousands)
Net cash provided by operating activities $ 55,721 145,280
Net cash provided by investing activities (1) 1,575,914 79,519
Net cash used in financing activities - -
-------------------------------------------------------------------------------
Net cash provided by discontinued operations $ 1,631,635 224,799
===============================================================================
(1) Includes cash proceeds of $1.59 billion from the sale of substantially
all of the Company's wireless operations.
The following table represents the net assets of the discontinued wireless
operations as of September 30, 2002 and December 31, 2001, which are classified
as held for sale on the consolidated balance sheets.
Sept. 30, Dec.31,
2002 2001
------------------------------------------------------------------------------------
(Dollars in thousands)
Current assets $ - 70,360
Net property, plant and equipment - 263,421
Goodwill - 384,326
Other assets (1) 11,796 127,321
------------------------------------------------------------------------------------
Assets held for sale $ 11,796 845,428
====================================================================================
Current liabilities $ - 55,074
Deferred credits and other liabilities - 93,796
------------------------------------------------------------------------------------
Liabilities related to assets held for sale $ - 148,870
====================================================================================
(1) At September 30, 2002, represents the Company's minority interest in a
cellular partnership that the Company has agreed to sell to Alltel upon
the satisfaction of various closing conditions, including approval of
the Federal Communications Commission.
(5) Goodwill and other intangible assets
The following information relates to the Company's goodwill as of
September 30, 2002 and December 31, 2001:
Sept. 30, Dec. 31,
2002 2001
--------------------------------------------------------------------------------
(Dollars in thousands)
Carrying amount of goodwill
Telephone segment $ 3,653,302 2,074,036
Other operations 40,646 13,122
--------------------------------------------------------------------------------
Total goodwill $ 3,693,948 2,087,158
================================================================================
The Company has completed the initial transitional goodwill impairment
test of SFAS 142 as well as the required annual test and has determined its
goodwill is not impaired. The increase in goodwill in the telephone segment
since December 31, 2001 is substantially due to the Verizon acquisitions
consummated in third quarter 2002 (see Note 3).
The following is a reconciliation of reported net income and reported
earnings per share to the amounts that would have been reported for periods
ending prior to December 31, 2001 had the Company been subject to SFAS 142
during 2001.
Three months Nine months
ended September 30, ended September 30,
--------------------------------------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Net income, as reported $ 607,749 92,305 757,279 293,268
Goodwill amortization, net of taxes - 13,990 - 42,208
--------------------------------------------------------------------------------------------
Net income, as adjusted $ 607,749 106,295 757,279 335,476
============================================================================================
Basic earnings per share, as reported $ 4.29 .65 5.36 2.08
Goodwill amortization, net of taxes - .10 - .30
--------------------------------------------------------------------------------------------
Basic earnings per share, as adjusted $ 4.29 .75 5.36 2.38
============================================================================================
Diluted earnings per share, as reported $ 4.26 .65 5.31 2.06
Goodwill amortization, net of taxes - .10 - .30
--------------------------------------------------------------------------------------------
Diluted earnings per share, as adjusted $ 4.26 .75 5.31 2.36
============================================================================================
(6) Business Segments
The Company's only separately reportable business segment is its telephone
operations. The operating income of this segment is reviewed by the Company's
chief operating decision maker to assess performance and make business
decisions. Due to the sale of the Company's wireless operations, such operations
(which were previously reported as a separate segment) are classified as
discontinued operations (see Note 4). Other operations include, but are not
limited to, the Company's non-regulated long distance operations, Internet
operations, competitive local exchange carrier operations and security
monitoring operations.
Three months Nine months
ended September 30, ended September 30,
---------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Telephone $ 460,935 377,747 1,214,165 1,116,880
Other operations 63,562 46,226 171,952 127,945
---------------------------------------------------------------------------------------------------------------
Total operating revenues $ 524,497 423,973 1,386,117 1,244,825
===============================================================================================================
Operating income
Telephone $ 144,619 104,365 366,296 307,728
Other operations 14,440 6,544 31,275 16,657
Corporate overhead costs allocable to
discontinued operations (See Note 4) (1,343) (4,918) (11,275) (14,876)
---------------------------------------------------------------------------------------------------------------
Total operating income $ 157,716 105,991 386,296 309,509
===============================================================================================================
Operating income $ 157,716 105,991 386,296 309,509
Interest expense (60,021) (54,438) (164,826) (173,499)
Nonrecurring gains and losses - 43,543 3,709 33,043
Other income and expense (573) (733) (356) 3,517
---------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income tax expense $ 97,122 94,363 224,823 172,570
===============================================================================================================
Sept. 30, Dec. 31,
2002 2001
-------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Telephone $ 6,911,961 4,754,522
Other operations 1,141,618 718,734
Assets held for sale (See Note 4) 11,796 845,428
-------------------------------------------------------------------------------
Total assets $ 8,065,375 6,318,684
===============================================================================
(7) Financing Arrangements
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of Equity Units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million Equity Units
issued was priced at $25 and consists initially of a beneficial interest in a
CenturyTel senior unsecured note with a principal amount of $25 and a contract
to purchase shares of CenturyTel common stock no later than May 2005. The senior
notes will mature in May 2007. The total distributions on the Equity Units will
be at an initial annual rate of 6.875%, consisting of interest (6.02%) and
contract adjustment payments (0.855%). Each stock purchase contract will
generally require the holder to purchase between .6944 and .8741 of a share of
CenturyTel common stock in May 2005 in exchange for $25, subject to certain
adjustments and exceptions.
The Equity Units are reflected on the balance sheet as long-term debt in
the amount of $500 million. Interest expense is accrued at a rate of 6.02%, the
initial interest rate of the senior notes. The present value of the contract
adjustment payments was recorded as a reduction to paid-in capital and as a
liability upon the issuance of the Equity Units. Subsequent contract adjustment
payments will be allocated between the liability and interest expense based on
the effective interest method over the three-year life of the purchase contract.
The issuance costs were allocated to the debt and equity components of the
Equity Units. The debt issuance costs ($3.3 million) were computed based on
typical costs of a debt transaction and will be amortized to interest expense
over the term of the senior notes. The remainder of the issuance costs ($12.6
million) were treated as a cost of raising equity and recorded as a charge to
paid-in capital.
On July 22, 2002, the Company entered into $800 million of credit
facilities, consisting of a $533 million three-year facility and a $267 million
364-day revolving facility with a one-year term-out option. The agents for these
credit facilities are JP Morgan Chase Bank, Wachovia Bank, Bank of America, Bank
One and SunTrust Bank. These facilities replaced credit facilities that matured
during the third quarter of 2002.
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which, upon the occurrence
of specified events, may be converted into shares of CenturyTel common stock
at a conversion price of $40.455 per share).
Proceeds from the sale of Equity Units, senior notes and convertible
senior debentures, along with the proceeds received from the sale of
substantially all of the Company's wireless operations and utilization of its
$800 million credit facilities, were used to finance the third quarter 2002
acquisitions of telephone properties in Alabama and Missouri from Verizon which
aggregated $2.201 billion and the redemption of $400 million principal amount in
remarketable debt securities (plus an associated $71.1 million premium payment)
in October 2002 (see Note 9). The Company also has an obligation to pay taxes in
December 2002 of approximately $300 million as a result of the sale of
substantially all of its wireless operations.
(8) Derivative Instruments
During the third quarter of 2002, the Company entered into the following
derivative transactions:
(a) A cash flow hedge designed to lock in a fixed interest rate for $100
million of the anticipated $500 million senior notes issued in August
2002. Such hedge was settled in the third quarter of 2002 for a $1.1
million payment by the Company. Such amount will be amortized as
additional interest expense over a ten-year period, which equates to
the term of the debt issuance hedged.
(b) A fair value hedge with respect to the Company's $500 million
aggregate principal amount of 8.375% Series H senior notes, due 2010.
This hedge is a "fixed to variable" interest rate swap that
effectively converts the Company's fixed rate interest payment
obligations under these notes into variable rate obligations which is
reflected as a component of interest expense for the nine months ended
September 30, 2002. The fair value of such hedge at September 30, 2002
was $19.2 million and is reflected on the accompanying balance sheet
as an asset (included in "Other assets") and as an increase in
the underlying debt (included in "Long-term debt").
(c) A cash flow hedge designed to eliminate the variability of interest
payments for $400 million of variable rate debt under its $800 million
credit facilities. Such hedge was deemed to be an effective hedge as
of September 30, 2002 and its value ($1.0 million) is reflected as a
liability (included in Deferred Credits and Other Liabilities) and as
Accumulated Other Comprehensive Income (Loss) (net of tax) on the
accompanying balance sheet.
(9) Subsequent Event
On October 15, 2002, the Company redeemed $400 million principal amount
(which has been classified as long-term debt on the September 30, 2002 balance
sheet) of its Series I Remarketable Senior Notes at par value, plus accrued
interest. In connection with such redemption, the Company also paid a premium of
approximately $71.1 million in accordance with the redemption provisions of the
associated remarketing agreement. Such premium payment (net of $11.1 million of
unamortized net premium primarily associated with the option payment received by
the Company in connection with the original issuance of the remarketable notes)
will be reflected as an expense in the Company's results of operations for the
fourth quarter of 2002 ($39.0 million after-tax; $.27 per share).
(10) Commitments and Contingencies
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.
Item 2.
CenturyTel, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") included herein should be read in conjunction with MD&A and
the other information included in the Company's current report on Form 8-K dated
March 19, 2002 and filed August 13, 2002. The results of operations for the
three months and nine months ended September 30, 2002 are not necessarily
indicative of the results of operations which might be expected for the entire
year.
CenturyTel, Inc. and its subsidiaries (the "Company") is a regional
integrated communications company engaged primarily in providing local exchange,
long distance, Internet access and data services to customers in 22 states. On
July 1, 2002, the Company acquired the assets of all of the local exchange
telephone operations of Verizon Communications, Inc. ("Verizon") in the state of
Alabama for approximately $1.022 billion cash. On August 31, 2002, the Company
acquired the assets of all of the local exchange telephone operations of Verizon
in the state of Missouri for approximately $1.179 billion cash. The results of
operations for the Verizon assets acquired are reflected in the Company's
consolidated results of operations subsequent to each respective acquisition.
On August 1, 2002 (pursuant to a definitive agreement signed March 19,
2002), the Company sold substantially all of its wireless operations to an
affiliate of ALLTEL Corporation ("Alltel") and certain other purchasers in
exchange for an aggregate of approximately $1.59 billion in cash. As a result,
the Company's wireless operations for the three months and nine months ended
September 30, 2002 and 2001 have been reflected as discontinued operations on
the Company's consolidated statements of income and cash flows. For further
information, see "Discontinued Operations" below.
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. Such forward-looking statements are subject to uncertainties
that could cause the Company's actual results to differ materially from such
statements. Such uncertainties include but are not limited to: the Company's
ability to effectively manage its growth, including integrating newly-acquired
businesses into the Company's operations, hiring adequate numbers of qualified
staff and successfully upgrading its billing and other information systems; the
risks inherent in rapid technological change; the effects of ongoing changes in
the regulation of the communications industry; the effects of greater than
anticipated competition in the Company's markets; possible changes in the demand
for, or pricing of, the Company's products and services; the Company's ability
to successfully introduce new product or service offerings on a timely and
cost-effective basis; the direct and indirect effects on the Company's business
resulting from the financial difficulties of other communications companies,
including the effect on the Company's ability to collect receivables from
financially troubled carriers, and the effects of more general factors such as
changes in overall market or economic conditions, in prevailing interest rates
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 hereof. The Company undertakes no obligation to
update any of its forward-looking statements for any reason.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 Compared
to Three Months Ended September 30, 2001
Net income (and diluted earnings per share) was $607.7 million ($4.26) and
$92.3 million ($.65) for the third quarter of 2002 and 2001, respectively.
Income from continuing operations was $63.6 million for the third quarter of
2002 and $59.6 million for the third quarter of 2001. Diluted earnings per share
from continuing operations was $.45 during the third quarter of 2002 compared to
$.42 during the third quarter of 2001. In accordance with the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), amortization of goodwill ceased effective
January 1, 2002. Had the results of operations for the three months ended
September 30, 2001 been subject to SFAS 142, income from continuing operations
(and diluted earnings per share) would have been $71.0 million ($.50) and net
income (and diluted earnings per share) would have been $106.3 million ($.75).
Exclusive of the effects of nonrecurring items, diluted earnings per share
(as adjusted for goodwill amortization) would have been $.57 and $.55 for the
third quarter of 2002 and 2001, respectively. Net income in the third quarter of
2002 includes a net favorable impact of nonrecurring items ($765.8 million
pre-tax; $3.69 per share) consisting of (i) an $803.9 million pre-tax gain
($3.86 per share) on the sale of assets, substantially all of which relates to
the Company's sale of substantially all of its wireless business (reflected as a
component of discontinued operations), (ii) a $30.5 million pre-tax charge ($.14
per share) attributable to a write-off of the wireless portion of the Company's
billing system currently in development (reflected as a component of
discontinued operations) and (iii) a $7.6 million pre-tax charge ($.03 per
share) related to the Company's refund of access charges collected from
interexchange carriers on certain properties acquired in 1998. Net income in the
third quarter of 2001 includes a net favorable impact of nonrecurring items
($43.7 million pre-tax; $.20 per share) consisting primarily of (i) $58.5
million of pre-tax gains on sales of assets ($.27 per share), substantially all
of which related to the sale of the Company's remaining shares of common stock
of Illuminet Holdings, Inc. ("Illuminet"), (ii) the write-down of certain
non-operating investments ($15.0 million pre-tax; $.07 per share) and (iii)
costs incurred to defend an unsolicited takeover proposal ($3.0 million pre-tax;
$.01 per share).
Three months
ended September 30,
-----------------------------------------------------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 144,619 104,365
Other 14,440 6,544
Corporate overhead costs allocable to discontinued operations (1,343) (4,918)
------------------------------------------------------------------------------------------------------------
157,716 105,991
Interest expense (60,021) (54,438)
Nonrecurring gains and losses - 43,543
Other income and expense (573) (733)
Income tax expense (33,503) (34,793)
------------------------------------------------------------------------------------------------------------
Income from continuing operations 63,619 59,570
Discontinued operations, net of tax 544,130 32,735
------------------------------------------------------------------------------------------------------------
Net income $ 607,749 92,305
============================================================================================================
Net income, as adjusted for goodwill amortization $ 607,749 106,295
============================================================================================================
Basic earnings per share
From continuing operations $ .45 .42
From continuing operations, as adjusted for goodwill amortization $ .45 .50
From discontinued operations $ 3.84 .23
From discontinued operations, as adjusted for goodwill amortization $ 3.84 .25
Basic earnings per share $ 4.29 .65
Basic earnings per share, as adjusted for goodwill amortization $ 4.29 .75
Diluted earnings per share
From continuing operations $ .45 .42
From continuing operations, as adjusted for goodwill amortization $ .45 .50
From discontinued operations $ 3.81 .23
From discontinued operations, as adjusted for goodwill amortization $ 3.81 .25
Diluted earnings per share $ 4.26 .65
Diluted earnings per share, as adjusted for goodwill amortization $ 4.26 .75
Average basic shares outstanding 141,692 140,772
===========================================================================================================
Average diluted shares outstanding 142,770 142,260
===========================================================================================================
Contributions to operating revenues and operating income by the Company's
telephone and other operations for the three months ended September 30, 2002 and
2001 were as follows:
Three months
ended September 30,
---------------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------------------------------------------------
Operating revenues
Telephone operations 87.9% 89.1
Other operations 12.1% 10.9
Operating income
Telephone operations 91.7% 98.4
Other operations 9.2% 6.2
Corporate overhead costs allocable to discontinued operations (.9)% (4.6)
---------------------------------------------------------------------------------------------------------------
Telephone Operations
Three months
ended September 30,
------------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 169,098 122,829
Network access 249,047 219,432
Other 42,790 35,486
------------------------------------------------------------------------------------------------------------------
460,935 377,747
------------------------------------------------------------------------------------------------------------------
Operating expenses
Plant operations 117,997 98,605
Customer operations 41,161 28,148
Corporate and other 52,774 46,293
Depreciation and amortization 104,384 100,336
------------------------------------------------------------------------------------------------------------------
316,316 273,382
------------------------------------------------------------------------------------------------------------------
Operating income $ 144,619 104,365
==================================================================================================================
The Company conducts its telephone operations in rural, suburban and
small urban communities in 22 states. As of September 30, 2002, approximately
84% of the Company's 2.4 million access lines were in Wisconsin, Missouri,
Alabama, Arkansas, Washington, Michigan, Louisiana and Colorado.
Telephone operating income increased $40.3 million (38.6%) due to an
increase in operating revenues of $83.2 million (22.0%), partially offset by an
increase in operating expenses of $42.9 million (15.7%).
Of the $46.3 million (37.7%) increase in local service revenues, $42.9
million was due to the properties acquired from Verizon in the third quarter of
2002. The remaining increase of $3.4 million was primarily due to a $2.2 million
increase in the provision of custom calling features.
Network access revenues increased $29.6 million (13.5%) in the third
quarter of 2002 of which $35.9 million was due to the properties acquired from
Verizon. The remaining $6.3 million decrease was primarily due to a $7.6 million
pre-tax charge relating to the Company's refund of access charges to
interexchange carriers and a $5.0 million decrease in intrastate revenues due to
(i) a reduction in intrastate minutes (partially due to the displacement of
minutes by wireless services) and (ii) decreased access rates in certain states.
Such decreases were partially offset by a $2.3 million increase in the revision
of prior year revenue settlement agreements, a $1.9 million increase in revenues
from the federal Universal Service Fund and a $1.8 million increase in rates in
certain jurisdictions.
Other revenues increased $7.3 million (20.6%) of which $6.7 million was
due to the properties acquired from Verizon.
Exclusive of access lines acquired from Verizon, access lines declined
1.0% during the three months ended September 30, 2002. Access line growth during
the three months ended September 30, 2001 was 0.1%. The Company believes the
decline in the number of access lines during 2002 is primarily due to general
economic conditions in the Company's markets (which the Company believes will
continue until there is an economic recovery) and an increase in the number of
customers receiving telephone services from competitive service providers,
including wireless and cable telephony providers.
During the third quarter of 2002, the Company incurred aggregate
pre-acquisition operating expenses of approximately $2.3 million associated with
the two Verizon acquisitions, one of which was completed on July 1, 2002 and the
other of which was completed on August 31, 2002.
Plant operations expenses increased $19.4 million (19.7%), of which $23.5
million related to the properties acquired from Verizon and $5.3 million related
to increases in salaries and benefits. Of the remaining $9.4 million decrease in
expenses, $3.6 million was due to a decrease in access expense primarily as a
result of previously-disclosed changes in certain optional calling plans in
Arkansas approved in late 2001, $2.6 million was due to reduced network costs
and $1.8 million was due to lower information technology expenses.
During the third quarter of 2002, customer operations expenses increased
$13.0 million (46.2%), of which $6.8 million was due to the acquisitions of the
Verizon properties, $2.4 million was due to increased customer service expenses
and $2.6 million was due to an increase in salaries and benefits.
Corporate and other expenses increased $6.5 million (14.0%), of which
$10.1 million was due to the acquisitions of the Verizon properties. Such
increase was partially offset by a $4.8 million decrease in the provision for
doubtful accounts.
Depreciation and amortization increased $4.0 million (4.0%), of which
$13.4 million was due to the acquisitions of the Verizon properties and $5.7
million was due to higher levels of plant in service. Such increase was
partially offset by a $14.1 million decrease related to ceasing amortization of
goodwill effective January 1, 2002 in accordance with the provisions of SFAS
142.
Other Operations
Three months
ended September 30,
---------------------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 39,592 31,050
Internet 14,996 10,561
Other 8,974 4,615
---------------------------------------------------------------------------------------
63,562 46,226
---------------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 45,992 36,563
Depreciation and amortization 3,130 3,119
---------------------------------------------------------------------------------------
49,122 39,682
---------------------------------------------------------------------------------------
Operating income $ 14,440 6,544
=======================================================================================
Other operations include the results of continuing operations of the
Company which are not included in the telephone segment including, but not
limited to, the Company's non-regulated long distance operations, Internet
operations, competitive local exchange carrier operations and security
monitoring operations.
The $8.5 million increase in long distance revenues was primarily
attributable to the growth in the number of customers and increased minutes of
use ($10.5 million), which was partially offset by a decrease in the average
rate charged by the Company per minute of use ($2.0 million). The number of long
distance customers as of September 30, 2002 and 2001 was 584,890 and 438,669,
respectively. Internet revenues increased $4.4 million due to growth in the
number of customers, primarily due to the expansion of the Company's digital
subscriber line ("DSL") product offering. Other revenues increased $4.4 million
primarily due to increased revenues in the Company's competitive local exchange
carrier ("CLEC") business, substantially all of which was due to an acquisition
of certain CLEC operations in the first quarter of 2002.
Cost of sales and operating expenses increased $9.4 million primarily due
to (i) a $6.1 million increase in expenses associated with the Company's long
distance operations (of which $4.5 million was due to increased payments to
other carriers due to higher minutes of use (partially offset by a decrease in
the average rate per minute of use) and $798,000 related to increased sales and
marketing costs); (ii) a $3.5 million increase in expenses associated with the
Company's CLEC operations primarily due to the expansion of the business and
operations acquired in the first quarter of 2002; and (iii) a $3.6 million
increase associated with expanding the Company's Internet operations. Such
increases were partially offset by a $3.1 million reduction in expenses due to
the increased intercompany profit with regulated affiliates (the recognition of
which in accordance with regulatory accounting principles acts to offset
operating expenses).
Interest Expense
Interest expense increased $5.6 million (10.3%) in the third quarter of
2002 compared to the third quarter of 2001 substantially due to an increase in
net indebtedness outstanding as a result of the acquisitions of telephone
properties from Verizon, which were only partially funded from the sale of the
Company's wireless business.
Nonrecurring Gains and Losses
In the third quarter of 2001, the Company recorded a $58.5 million
pre-tax gain ($.27 per share) on the sale of assets, substantially all of which
related to the sale of its remaining shares of common stock of Illuminet. In the
third quarter of 2001, the Company also recorded a pre-tax charge of $15.0
million ($.07 per share) due to the write-down in the value of certain
non-operating investments in which the Company owns a minority interest.
Income Tax Expense
Income tax expense from continuing operations decreased $1.3 million in
the third quarter of 2002 compared to the third quarter of 2001. The effective
income tax rate (from continuing operations) was 34.5% and 36.9% for the three
months ended September 30, 2002 and 2001, respectively. Such decrease in the
effective tax rate is primarily attributable to the effect of ceasing
amortization of goodwill (some of which was nondeductible for tax purposes)
effective January 1, 2002 in accordance with the provisions of SFAS 142.
Discontinued Operations
On August 1, 2002 (pursuant to a definitive agreement signed March 19,
2002), the Company sold substantially all of its wireless operations to Alltel
and certain other purchasers for an aggregate of approximately $1.59 billion in
cash. As a result, the Company's wireless operations for the three months ended
September 30, 2002 (which only reflect results of operations prior to the date
of sale) have been reflected as discontinued operations in the Company's
consolidated financial statements. The results of operations for the three
months ended September 30, 2001 have been restated to conform to the 2002
presentation. The following table summarizes certain information concerning the
Company's wireless operations for the periods presented.
Three months
ended September 30,
--------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 38,012 115,404
Operating expenses, exclusive of corporate overhead costs
of $1.3 million and $4.9 million, respectively $ (53,179) (77,584)
Income from unconsolidated cellular entities $ 5,426 16,622
Minority interest expense $ (1,659) (3,449)
Gain on sale of discontinued operations $ 803,905 -
Other income and (expense) $ 190 2,068
Income tax expense $ (248,565) (20,326)
Income from discontinued operations, net of tax $ 544,130 32,735
Included in operating expenses for the three months ended September 30,
2002 is a $30.5 million charge associated with the write-off of all costs
expended to develop the wireless portion of the Company's billing system
currently in development.
The Company recorded an $803.9 million pre-tax gain on the sale of
substantially all of its wireless business in the third quarter of 2002.
For further information, see Note 4 to the Company's consolidated
financial statements appearing elsewhere in this report.
Nine Months Ended September 30, 2002 Compared
to Nine Months Ended September 30, 2001
Net income (and diluted earnings per share) was $757.3 million ($5.31) and
$293.3 million ($2.06) for the first nine months of 2002 and 2001, respectively.
Income from continuing operations was $146.7 million for the first nine months
of 2002 and $107.5 million for the first nine months of 2001. Diluted earnings
per share from continuing operations was $1.03 during the first nine months of
2002 compared to $.76 during the first nine months of 2001. In accordance with
the provisions of SFAS 142, amortization of goodwill ceased effective January 1,
2002. Had the results of operations for the nine months ended September 30, 2001
been subject to SFAS 142, income from continuing operations (and diluted
earnings per share) would have been $142.2 million ($1.00) and net income (and
diluted earnings per share) would have been $335.5 million ($2.36).
Exclusive of nonrecurring items, diluted earnings per share (as adjusted
for goodwill amortization) would have been $1.68 and $1.46 for the nine months
ended September 30, 2002 and 2001, respectively. Net income for the first nine
months of 2002 includes a net favorable impact ($751.5 million pre-tax; $3.63
per share) of nonrecurring items consisting of (i) a $803.9 million pre-tax gain
($3.86 per share) on the sale of substantially all of its wireless operations
(reflected as a component of discontinued operations), (ii) a $30.5 million
pre-tax charge ($.14 per share) to write down the wireless portion of the
billing system (reflected as a component of discontinued operations), (iii) a
$15.0 million pre-tax charge ($.07 per share) for uncollectible receivables
primarily related to the bankruptcy of WorldCom, Inc., (iv) a $3.0 million
pre-tax charge ($.01 per share) associated with responding to an unsolicited
takeover proposal, (v) a $7.6 million pre-tax charge ($.03 per share) related to
the Company's refund of access charges to interexchange carriers, and (vi) a
$3.7 million pre-tax gain ($.02 per share) on the sale of certain non-strategic
assets. Net income for the first nine months of 2001 includes a net favorable
impact ($200.3 million pre-tax; $.90 per share) of nonrecurring items consisting
primarily of (i) gain on the sale of PCS licenses, reflected as a component of
discontinued operations ($169.1 million pre-tax; $.76 per share), (ii) gain on
the sale of assets ($58.5 million pre-tax; $.27 per share), substantially all of
which relates to the sale of Illuminet stock, (iii) the write-down of certain
non-operating investments ($25.5 million pre-tax; $.12 per share), (iv) a $3.0
million pre-tax charge ($.01 per share) associated with responding to an
unsolicited takeover proposal and (v) costs incurred related to an ice storm
($2.0 million pre-tax; $.01 per share).
Nine months
ended September 30,
------------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 366,296 307,728
Other 31,275 16,657
Corporate overhead costs allocable to discontinued operations (11,275) (14,876)
-------------------------------------------------------------------------------------------------------------------
386,296 309,509
Interest expense (164,826) (173,499)
Nonrecurring gains and losses 3,709 33,043
Other income and expense (356) 3,517
Income tax expense (78,139) (65,081)
-------------------------------------------------------------------------------------------------------------------
Income from continuing operations 146,684 107,489
Discontinued operations, net of tax 610,595 185,779
-------------------------------------------------------------------------------------------------------------------
Net income $ 757,279 293,268
===================================================================================================================
Net income, as adjusted for goodwill amortization $ 757,279 335,476
===================================================================================================================
Basic earnings per share
From continuing operations $ 1.04 .76
From continuing operations, as adjusted for goodwill amortization $ 1.04 1.01
From discontinued operations $ 4.32 1.32
From discontinued operations, as adjusted for goodwill amortization $ 4.32 1.37
Basic earnings per share $ 5.36 2.08
Basic earnings per share, as adjusted for goodwill amortization $ 5.36 2.38
Diluted earnings per share
From continuing operations $ 1.03 .76
From continuing operations, as adjusted for goodwill amortization $ 1.03 1.00
From discontinued operations $ 4.28 1.31
From discontinued operations, as adjusted for goodwill amortization $ 4.28 1.36
Diluted earnings per share $ 5.31 2.06
Diluted earnings per share, as adjusted for goodwill amortization $ 5.31 2.36
Average basic shares outstanding 141,324 140,693
==================================================================================================================
Average diluted shares outstanding 142,710 142,267
==================================================================================================================
Contributions to operating revenues and operating income by the Company's
telephone and other operations for the nine months ended September 30, 2002 and
2001 were as follows:
Nine months
ended September 30,
----------------------------------------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------------------------------------
Operating revenues
Telephone operations 87.6% 89.7
Other operations 12.4% 10.3
Operating income
Telephone operations 94.8% 99.4
Other operations 8.1% 5.4
Corporate overhead costs allocable to discontinued operations (2.9)% (4.8)
----------------------------------------------------------------------------------------------------------------
Telephone Operations
Nine months
ended September 30,
------------------------------------------------------------------------------------------------------------------
2002 2001
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 418,332 367,283
Network access 686,325 645,869
Other 109,508 103,728
------------------------------------------------------------------------------------------------------------------
1,214,165 1,116,880
------------------------------------------------------------------------------------------------------------------
Operating expenses
Plant operations 305,230 285,980
Customer operations 103,484 86,219
Corporate and other 155,269 140,329
Depreciation and amortization 283,886 296,624
------------------------------------------------------------------------------------------------------------------
847,869 809,152
------------------------------------------------------------------------------------------------------------------
Operating income $ 366,296 307,728
==================================================================================================================
The Company conducts its telephone operations in rural, suburban and
small urban communities in 22 states. As of September 30, 2002, approximately
84% of the Company's 2.4 million access lines were in Wisconsin, Missouri,
Alabama, Arkansas, Washington, Michigan, Louisiana and Colorado.
Telephone operating income increased $58.6 million (19.0%) due to an
increase in operating revenues of $97.3 million (8.7%), which was partially
offset by an increase in operating expenses of $38.7 million (4.8%).
The $51.0 million (13.9%) increase in local service revenues was
primarily due to a $42.9 million increase due to the acquisitions of the Verizon
properties. The remaining increase of $8.1 million was primarily due to a $5.5
million increase in the provision of custom calling features.
Network access revenues increased $40.5 million (6.3%) in the first nine
months of 2002 primarily due to a $35.9 million increase due to the acquisitions
of the Verizon properties, a $9.2 million increase in the partial recovery of
increased operating expenses through revenue sharing arrangements in which the
Company participates with other telephone companies, a $7.9 million increase in
revenues from the federal Universal Service Fund, a $7.3 million increase in
rates in certain jurisdictions and a $3.9 million increase in the revision of
prior year revenue settlement agreements. Such increases were partially offset
by a $17.1 million decrease in intrastate revenues due to (i) a reduction in
intrastate minutes (partially due to the displacement of minutes by wireless
services) and (ii) decreased access rates in certain states; and a $7.6 million
pre-tax charge relating to the Company's refund of access charges to
interexchange carriers.
Other revenues increased $5.8 million (5.6%) in the first nine months of
2002 primarily due to a $6.7 million increase due to the acquisitions of the
Verizon properties.
Exclusive of access lines acquired from Verizon, access lines declined
0.5% during the nine months ended September 30, 2002. Access line growth during
the nine months ended September 30, 2001 was 0.6%. The Company believes the
decline in the number of access lines during 2002 is primarily due to general
economic conditions in the Company's markets (which the Company believes will
continue until there is an economic recovery) and an increase in the number of
customers receiving telephone services from competitive service providers,
including wireless and cable telephony providers.
During the first nine months of 2002, the Company incurred aggregate
pre-acquisition operating expenses of approximately $6.0 million associated with
the two Verizon acquisitions, one of which was completed July 1, 2002 and the
other of which was completed August 31, 2002.
Plant operations expenses increased $19.3 million (6.7%), of which $23.9
million was related to the acquisitions of the Verizon properties and $13.3
million was related to increases in salaries and benefits. Such increases were
partially offset by a $13.8 million decrease in access expenses primarily as a
result of previously-disclosed changes in certain optional calling plans in
Arkansas approved in late 2001 and a $3.1 million decrease in repairs and
maintenance expenses.
During the first nine months of 2002, customer operations expenses
increased $17.3 million (20.0%) primarily due to $7.0 million increase related
to the acquisitions of the Verizon properties, a $5.0 million increase in
salaries and benefits and a $5.0 million increase in customer service expenses.
Corporate and other expenses increased $14.9 million (10.6%) primarily
due to a $10.3 million increase related to the acquisitions of the Verizon
properties, a $3.6 million increase in salaries and benefits, and a $3.8 million
increase in the provision for doubtful accounts. The Company recorded a
provision for uncollectible receivables, primarily related to the bankruptcy of
WorldCom, Inc., in the amount of $15.0 million during the first nine months of
2002. Such increase was partially offset by an $11.2 million reduction in the
provision for uncollectible receivables.
Depreciation and amortization decreased $12.7 million (4.3%), of which
$43.4 million related to ceasing amortization of goodwill effective January 1,
2002 in accordance with the provisions of SFAS 142. Such decrease was partially
offset by a $18.9 million increase in depreciation expense due to higher levels
of plant in service and $13.5 million of depreciation related to the properties
acquired from Verizon.
Other Operations
Nine months
ended September 30,
------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 105,871 87,164
Internet 42,263 27,678
Other 23,818 13,103
------------------------------------------------------------------------------------------
171,952 127,945
------------------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 130,818 105,049
Depreciation and amortization 9,859 6,239
------------------------------------------------------------------------------------------
140,677 111,288
------------------------------------------------------------------------------------------
Operating income $ 31,275 16,657
==========================================================================================
Other operations include the results of continuing operations of the
Company which are not included in the telephone segment including, but not
limited to, the Company's non-regulated long distance operations, Internet
operations, competitive local exchange carrier operations and security
monitoring operations.
The $18.7 million increase in long distance revenues was primarily
attributable to the growth in the number of customers and increased minutes of
use ($22.1 million), partially offset by a decrease in the average rate charged
by the Company per minute of use ($3.4 million). The number of long distance
customers as of September 30, 2002 and 2001 was 584,890 and 438,669,
respectively. Internet revenues increased $14.6 million due to growth in the
number of customers, primarily due to the expansion of the Company's DSL product
offering. Other revenues increased $10.7 million due to increased revenues in
the Company's CLEC business, substantially all of which was due to an
acquisition of certain CLEC operations in the first quarter of 2002.
Cost of sales and operating expenses increased $25.8 million primarily
due to (i) a $17.4 million increase in expenses associated with the Company's
long distance operations (of which $9.4 million was due to increased payments to
other carriers due to higher minutes of use partially offset by a decrease in
the average rate per minute of use; $3.3 million related to increased sales and
marketing costs; $2.3 million was due to an increase in the provision for
doubtful accounts; and $1.6 million was due to an increase in billing and
collection costs); (ii) a $9.7 million increase in expenses associated with the
Company's CLEC operations primarily due to the expansion of the business and
operations acquired in the first quarter of 2002; and (iii) a $9.4 million
increase associated with expanding the Company's Internet operations. Such
increases were partially offset by a $7.0 million reduction in expenses due to
the increased intercompany profit with regulated affiliates (the recognition of
which in accordance with regulatory accounting principles acts to offset
operating expenses).
Depreciation and amortization increased $3.6 million (58.0%) primarily
due to increased depreciation expense in the Company's CLEC and fiber network
businesses.
Interest Expense
Interest expense decreased $8.7 million (5.0%) in the first nine months
of 2002 compared to the first nine months of 2001 due to decreased average debt
outstanding and decreased rates.
Nonrecurring Gains and Losses
In the second quarter of 2002, the Company recorded a pre-tax gain of
$3.7 million from the sale of a PCS license.
In the first nine months of 2001, the Company recorded a pre-tax gain of
$58.5 million from the sale of assets, substantially all of which related to the
sale of its remaining common shares of Illuminet. Such gain was partially offset
by a $25.5 million pre-tax charge due to the write-down in the value of certain
non-operating investments.
Other Income and Expense
Other expense was $356,000 in the first nine months of 2002 compared to
income of $3.5 million during the first nine months of 2001. Such decrease was
primarily due to a $2.5 million reduction in capitalized interest.
Income Tax Expense
Income tax expense from continuing operations increased $13.1 million in
the first nine months of 2002 compared to the first nine months of 2001
primarily due to an increase in income before taxes. The effective income tax
rate (from continuing operations) was 34.8% and 37.7% for the nine months ended
September 30, 2002 and 2001, respectively. Such decrease in the effective tax
rate is primarily attributable to the effect of ceasing amortization of goodwill
(some of which was nondeductible for tax purposes) effective January 1, 2002 in
accordance with the provisions of SFAS 142.
Discontinued Operations
On August 1, 2002 (pursuant to a definitive agreement signed March 19,
2002), the Company sold substantially all of its wireless operations to Alltel
and certain other purchasers for an aggregate of approximately $1.59 billion in
cash. As a result, the Company's wireless operations for the nine months ended
September 30, 2002 (which only reflect results of operations prior to the date
of sale) have been reflected as discontinued operations in the Company's
consolidated financial statements. The results of operations for the nine months
ended September 30, 2001 have been restated to conform to the 2002 presentation.
The following table summarizes certain information concerning the Company's
wireless operations for the periods presented.
Nine months
ended September 30,
----------------------------------------------------------------------------------------------
2002 2001
----------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues $ 246,705 329,496
Operating expenses, exclusive of corporate overhead costs
of $11.3 million and $14.9 million, respectively $ (175,447) (225,781)
Income from unconsolidated cellular entities $ 29,622 32,648
Minority interest expense $ (8,569) (9,150)
Gain on sale of discontinued operations $ 803,905 -
Nonrecurring gains $ - 166,928
Other income and (expense) $ 188 5,108
Income tax expense $ (285,809) (113,470)
Income from discontinued operations, net of tax $ 610,595 185,779
Included in operating expenses for the nine months ended September 30,
2002 is a $30.5 million charge associated with the write-off of all costs
expended to develop the wireless portion of the Company's billing system
currently in development.
The Company recorded an $803.9 million pre-tax gain on the sale of
substantially all of its wireless business in the third quarter of 2002.
Nonrecurring gains and losses for the first nine months of 2001 relate to
the sale of 30 PCS licenses to Leap Wireless, Inc.
For further information, see Note 4 to the Company's consolidated
financial statements appearing elsewhere in this report.
Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and
SFAS 142. SFAS 141 requires all business combinations consummated after June 30,
2001 to be accounted for under the purchase method of accounting; the pooling of
interests method is no longer permitted. Under SFAS 142, effective January 1,
2002, systematic amortization of goodwill is no longer permitted; instead, SFAS
142 requires goodwill recorded in a business combination to be reviewed for
impairment at least annually and to be written down only in periods in which the
recorded amount of goodwill exceeds its fair value. The Company has completed
the initial transitional goodwill impairment test as well as the required annual
test of SFAS 142 and has determined its goodwill is not impaired.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets 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
Company's wireless operations have been reflected as discontinued operations for
the first nine months of 2002 in accordance with the provisions of SFAS 144.
Results of operations for 2001 have been restated to conform to this
presentation. The adoption of the impairment portion of SFAS 144 is not expected
to have a material effect on the results of operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to fund its operating and capital expenditures. 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.
Net cash provided by operating activities from continuing operations was
$636.4 million during the first nine months of 2002 compared to $458.3 million
during the first nine months of 2001. The Company's accompanying consolidated
statements of cash flows identify major differences between net income and net
cash provided by operating activities from continuing operations for each of
these periods. For additional information relating to the continuing operations
of the Company, see Results of Operations.
Net cash used in investing activities from continuing operations was
$2.506 billion and $311.1 million for the nine months ended September 30, 2002
and 2001, respectively. During the third quarter of 2002, the Company acquired
the assets of Verizon's Alabama and Missouri local exchange telephone operations
for $2.201 billion cash. During the first quarter of 2002, the Company acquired
the assets of certain CLEC operations for $43.8 million cash. During the first
quarter of 2001, the Company paid $47.1 million cash to acquire an additional
18.6% interest in Spectra Communication Group, LLC, the Company's majority-owned
subsidiary organized in 2000 to acquire and operate former Verizon properties in
Missouri. Payments for property, plant and equipment were $61.0 million less in
the first nine months of 2002 than in the comparable period during 2001. Capital
expenditures from continuing operations for the nine months ended September 30,
2002 were $221.3 million for telephone operations and $49.4 million for other
operations. During the third quarter of 2001, the Company received cash proceeds
of $64.6 million, primarily from the sale of its remaining Illuminet common
stock.
Budgeted capital expenditures from continuing operations for 2002 total
$315 million for telephone operations and $65 million for other operations.
Net cash provided by (used in) financing activities from continuing
operations was $529.0 million during the first nine months of 2002 compared to
($372.9) million during the first nine months of 2001. Proceeds from the
issuance of debt, net of debt payments, were $563.7 million during the first
nine months of 2002, compared to net payments of debt of $355.5 million during
the first nine months of 2001. For additional information, see the Company's
accompanying consolidated statements of cash flows.
Net cash provided by discontinued operations was $1.632 billion during
the nine months ended September 30, 2002 compared to $224.8 million during the
nine months ended September 30, 2001. For additional information, see Note 4 to
the Company's consolidated financial statements.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of Equity Units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million Equity Units
issued was priced at $25 and consists initially of a beneficial interest in a
CenturyTel senior unsecured note with a principal amount of $25 and a contract
to purchase shares of CenturyTel common stock no later than May 2005. The senior
notes will mature in May 2007. The total distributions on the Equity Units will
be at an initial annual rate of 6.875%, consisting of interest (6.02%) and
contract adjustment payments (0.855%). Each stock purchase contract will
generally require the holder to purchase between .6944 and .8741 of a share of
CenturyTel common stock in May 2005 in exchange for $25, subject to certain
adjustments and exceptions.
On July 22, 2002, the Company entered into $800 million of credit
facilities, consisting of a $533 million three-year facility and a $267 million
364-day revolving facility with a one-year term-out option. The agents for these
credit facilities are JP Morgan Chase Bank, Wachovia Bank, Bank of America, Bank
One and SunTrust Bank. These facilities replaced credit facilities that matured
during the third quarter of 2002.
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which may be converted into
shares of CenturyTel common stock at a conversion price of $40.455 per share).
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion cash.
Proceeds from the sale of Equity Units, senior notes and convertible
senior debentures, along with the proceeds received from the sale of the
Company's wireless operations and utilization of its $800 million credit
facilities, were used to finance the third quarter 2002 acquisitions of
telephone properties in Alabama and Missouri from Verizon which aggregated
$2.201 billion and the redemption of $400 million principal amount in
remarketable debt securities (plus an associated $71.1 million premium payment)
in October 2002. The Company also has an obligation to pay taxes in December
2002 estimated at approximately $300 million as a result of the sale of
substantially all of its wireless operations.
The following table contains certain information concerning the Company's
material obligations as of October 31, 2002.
Payments due by period
--------------------------------------------------------------------------------------------------------
Less than After
Total obligations Total 1 year 1-3 years 4-5 years 5 years
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Long-term debt,
including current
maturities $3,459,037 28,473 1,009,207 183,097 2,238,260
Estimated income
tax payments as a
result of the sale
of wireless operations $ 300,000 300,000 - - -
--------------------------------------------------------------------------------------------------------
As of October 31, 2002, CenturyTel had $605 million of undrawn committed
bank lines of credit and CenturyTel's subsidiaries had available $123.0 million
of commitments for long-term financing from the Rural Utilities Service and the
Rural Telephone Bank for use in making capital improvements to the Company's
telephone plant and equipment. CenturyTel also has a commercial paper program
that authorizes it to have outstanding up to $1.5 billion in commercial paper at
any one time. At October 31, 2002, CenturyTel had no commercial paper
outstanding under such program.
Following CenturyTel's issuance of Equity Units in May 2002, Moody's
Investors Service affirmed its rating of CenturyTel's long-term debt of Baa2
(with a stable outlook) and Standard & Poor's improved its rating of
CenturyTel's long-term debt to BBB+ (with a stable outlook) from BBB+ (with a
negative outlook). Such ratings were reaffirmed in connection with the Company's
issuance of $665 million aggregate principal amount of senior debt in the third
quarter of 2002.
OTHER MATTERS
Accounting for the Effects of Regulation
The Company currently accounts for its regulated telephone operations
(except for the properties acquired from Verizon in the third quarter of 2002)
in accordance with the provisions of Statement of Financial Accounting Standards
No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation."
While the ongoing applicability of SFAS 71 to the Company's telephone operations
accounted for under SFAS 71 is being monitored due to the changing regulatory,
competitive and legislative environments, the Company believes that SFAS 71
still applies to these operations. However, it is possible that changes in
regulation or legislation or anticipated changes in competition or in the demand
for regulated services or products could result in these telephone operations
not being subject to SFAS 71 in the near future. In that event, implementation
of Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated
Enterprises - Accounting for the Discontinuance of Application of FASB Statement
No. 71," would require the write-off of previously established regulatory assets
and liabilities, 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. Such discontinuance of the
application of SFAS 71 may result in a material, noncash charge against earnings
which would be reported as an extraordinary item.
All of the Company's telephone properties (except for the properties
acquired from Verizon in the third quarter of 2002) are regulated for
interstate services by the Federal Communications Commission ("FCC") under "rate
of return" regulation which focuses on authorized levels of earnings by local
exchange carriers. The properties acquired from Verizon in the third quarter of
2002 are regulated under "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. For additional information, see the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
Development of Billing System
The Company is in the process of developing an integrated billing and
customer care system. The costs to develop such system have been capitalized in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and aggregated $132.6
million at September 30, 2002. A portion of these billing system costs related
to the wireless business ($30.5 million) was written off as a component of
discontinued operations in the third quarter of 2002 as a result of the sale of
substantially all of the Company's wireless operations on August 1, 2002. See
Note 4 to the Company's consolidated financial statements appearing elsewhere in
this report. The Company's remaining billing system costs are expected to
aggregate approximately $175 million upon completion and are expected to be
amortized over a twenty-year period. The Company expects to begin
amortization of the billing system in 2003 as properties are migrated to this
new system.
The system remains in the development stage and has required substantially
more time and money to develop than originally anticipated. Although the Company
expects to complete the system in early 2004, there is no assurance that this
deadline (or the Company's budget) will be met or that the system will function
as anticipated.
Other
The decline in equity markets in recent years coupled with record low
interest rates and rising medical costs have increased the level of employee
benefits expenses, including defined benefit pension expense and pre- and
post-retirement medical expenses. The Company expects these declines in the
equity markets and rising medical costs will result in higher pension expense
and pre- and post-retirement medical expenses in 2003. Based on the Company's
current estimates, such costs are expected to increase between $15-25 million
in 2003 over 2002 levels on an annual basis.
Item 3.
CenturyTel, Inc.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Market Risk
At September 30, 2002, the fair value of the Company's long-term debt was
estimated to be $3.7 billion based on the overall weighted average rate of the
Company's long-term debt of 6.6% and an overall weighted maturity of 10 years
compared to terms and rates currently available in long-term financing markets.
Market risk is estimated as the potential decrease in fair value of the
Company's long-term debt resulting from a hypothetical increase of 66 basis
points in interest rates (ten percent of the Company's overall weighted average
borrowing rate). Such an increase in interest rates would result in
approximately a $142.3 million decrease in fair value of the Company's long-term
debt. As of September 30, 2002, approximately 86% of the Company's long-term
debt obligations were fixed rate (after giving effect to the hedging
transactions described below).
The Company uses derivative instruments to (i) swap its current or
anticipated exposure to changing or variable interest rates for fixed interest
rates or (ii) to swap obligations to pay fixed interest rates for variable
interest rates. The Company has established policies and procedures for risk
assessment and the approval, reporting and monitoring of derivative instrument
activities. The Company does not hold or issue derivative financial instruments
for trading or speculative purposes. Management periodically reviews the
Company's exposure to interest rate fluctuations and implements strategies to
manage the exposure.
At September 30, 2002, the Company had outstanding a fair value interest
rate hedge associated with $500 million aggregate principal amount of its Series
H senior notes, due 2010, that pay interest at a fixed rate of 8.375%. This
hedge is a "fixed to variable" interest rate swap that effectively converts the
Company's fixed rate interest payment obligations under these notes into
obligations to pay variable rates equal to the six-month London InterBank
Offered Rate ("LIBOR") plus 3.59%, with settlement and rate reset dates occuring
each six months through the expiration of the hedge in October 2010. At
September 30, 2002, the Company realized a rate under this hedge of 5.31%. The
fair market value of this hedge was $19.2 million at September 30, 2002 and is
reflected as an asset and as an adjustment to the underlying debt on the
September 30, 2002 balance sheet. Market risk is estimated as the potential
change in the fair value of the hedge resulting from a hypothetical 10% change
in the forward rates used to determine the fair value. A hypothetical 10%
increase in the forward rates would result in a $14.9 million decrease in the
fair value of the hedge.
At September 30, 2002, the Company also had outstanding a cash flow hedge
associated with $400 million of anticipated borrowings expected to be incurred
in the fourth quarter of 2002 under its $800 million credit facilities. Such
hedge expires in October 2003. This hedge is designed to swap the Company's
future obligation to pay variable rate interest based on LIBOR into obligations
that lock-in a fixed rate of 1.865%. The fair value of this hedge was $1.0
million at September 30, 2002 and is reflected as a liability and as
Accumulated Other Comprehensive Income (Loss) (net of tax) on the September 30,
2002 balance sheet. A hypothetical 10% increase in the forward rates would
result in a $645,000 decrease in the fair value of this hedge.
Item 4.
CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, Glen F. Post, III, and the
Company's Chief Financial Officer, R. Stewart Ewing, Jr., have evaluated the
Company's disclosure controls and procedures within 90 days of the filing of
this quarterly report. Based on the evaluation, Messrs. Post and Ewing have
concluded that the Company's disclosure controls and procedures are effective in
providing reasonable assurance that they are timely alerted of all material
information required to be filed in this quarterly report. Since the date of
Messrs. Post's and Ewing's most recent evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls.
PART II. OTHER INFORMATION
CenturyTel, Inc.
Item 1: Legal Proceedings
On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued
by the Arkansas Public Service Commission ("APSC") in connection with the
Company's acquisition of its Arkansas LECs from Verizon in July 2000, and
remanded the case back to the APSC for further hearings. The Court took these
actions in response to challenges to the rates the Company has charged other
LECs for intrastate switched access service. On May 13, 2002, the APSC
reaffirmed its prior orders and the Company's intrastate switched access rates
on an interim basis subject to further rehearing and appeal proceedings. Further
ruling by the APSC is expected in the fourth quarter of 2002.
On August 29, 2002, the Wisconsin Court of Appeals upheld a ruling upon
appeal that ordered the Company to refund access charges collected from
interexchange carriers from December 1998 through 2000 on the former properties
acquired from Ameritech. As a result of this ruling, the Company recorded a
one-time charge of $.03 per share related to this refund in the third quarter of
2002.
For information on other legal proceedings, see the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 and its Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.
Item 2: Changes in Securities and Use of Proceeds
In the quarter ended September 30, 2002, the Company completed a private
offering of an aggregate of $165 million principal amount of its 4.75%
Convertible Senior Debentures, Series K, due 2032, to qualified institutional
buyers pursuant to Section 4(2) of the Securities Act of 1933, as amended, and
Rule 144A promulgated thereunder. Banc of America Securities LLC, J.P. Morgan
Securities Inc., and Wachovia Securities, Inc. acted as the initial purchasers
of the debentures. On August 26, 2002, the Company sold $150 million principal
amount of the debentures to the initial purchasers and, on September 10, 2002,
the Company sold an additional $15 million principal amount of the debentures to
the initial purchasers upon exercise of their over-allotment option. The
debentures were issued under an Indenture, dated as of March 31, 1994, between
the Company and Regions Bank, as trustee, and a supplemental indenture, dated as
of August 20, 2002 (together, the "indenture"). The Company sold the debentures
at par value and realized proceeds, net of purchasers' discounts and expenses,
of approximately $160.4 million.
Holders may convert each $1,000 principal amount of their debentures into
24.7188 shares of common stock of the Company (subject to adjustments described
in the indenture) under any of the following circumstances:
o at any time at the option of the holder if the average sales price (as
defined in the indenture) of the Company's common stock for the last 20
trading days in the preceding calendar quarter is greater than or equal
to 120% of the conversion price;
o if the credit rating assigned to the debentures is reduced to Ba2 or
lower by Moody's Investor's Service Inc. or BB+ or lower by Standard
and Poor's Ratings Group;
o if the Company calls the debentures for redemption; or
o upon the occurrence of certain corporate transactions specified in
the indenture.
Interest on the debentures is payable semiannually on February 1
and August 1 of each year, beginning February 1, 2003. The Company will also pay
contingent interest under certain circumstances described in the indenture. The
Company may redeem the debentures for cash beginning on August 5, 2006. Holders
may require the Company to purchase all or a portion of their debentures on
August 1, 2006, August 1, 2010, and August 1, 2017, or upon a change of control
of the Company (as defined in the indenture).
On October 10, 2002, the Company filed a registration statement on
Form S-3, which has not yet become effective, to register the debentures and the
underlying shares of the Company's common stock into which such debentures are
convertible. For additional information regarding the Company's sale of the
debentures and the use of the net proceeds therefrom, see Note 7 to the
Company's consolidated financial statements appearing in Item 1 of Part I of
this Quarterly Report, and Management's Discussion and Analysis of Financial
Condition and Results of Operations appearing in Item 2 of Part I of this
Quarterly Report.
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
--------
4.1 Second Supplemental Indenture dated as of August 20, 2002
between CenturyTel and Regions Bank (successor-in-interest
to First American Bank & Trust of Louisiana and Regions Bank
of Louisiana), as Trustee, designating and outlining the
terms and conditions of CenturyTel's 4.75% Convertible
Senior Debentures, Series K, due 2032 (incorporated by
reference to Exhibit 4.3 of CenturyTel's registration
statement on Form S-4, File No. 333-100480).
4.2 Form of 4.75% Convertible Senior Debentures, Series K, due
2032 (included in Exhibit 4.1).
4.3 Board resolutions designating the terms and conditions of
CenturyTel's 7.875% Senior Notes, Series L, due 2012
(incorporated by reference to Exhibit 4.2 of CenturyTel's
registration statement on Form S-3, File No. 333-100481).
4.4 Form of 7.875% Senior Notes, Series L, due 2012 (included
in Exhibit 4.3).
4.5 Registration Rights Agreement dated as of August 26, 2002
by and among CenturyTel, and Banc of America Securities
LLC, J.P. Morgan Securities Inc. and Wachovia Securities,
Inc., (incorporated by reference to Exhibit 4.5 of
CenturyTel's registration statement on Form S-4, File No.
333-100480).
4.6 Exchange and Registration Rights Agreement dated as of
August 26, 2002 by and among CenturyTel and Banc of America
Securities LLC, J.P. Morgan Securities Inc. and Wachovia
Securities, Inc., as representatives of the initial
purchasers named therein (incorporated by reference to
Exhibit 4.4 of CenturyTel's registration statement on Form
S-3, File No. 333-100481).
10.1 CenturyTel's 2002 Directors Stock Option Plan,
included herein.
10.2 Form of Stock Option Agreement, pursuant to the 2002
Directors Stock Option Plan, entered into by CenturyTel in
connection with options granted to the outside directors as
of May 10, 2002, included herein.
10.3 CenturyTel's 2002 Management Incentive Compensation Plan,
included herein.
10.4 Form of Stock Option Agreement, pursuant to the 2002
Management Incentive Compensation Plan, entered into between
CenturyTel and certain of its officers and key employees at
various dates since May 9, 2002, included herein.
11 Computations of Earnings Per Share, included herein.
B. Reports on Form 8-K
-------------------
The following items were reported in the Form 8-K filed July 15,
2002:
Item 2. Acquisition or Disposition of Assets -
Consummation of the acquisition of telephone
properties in Alabama from Verizon.
Item 7. Financial Statements and Exhibits - Such
information required was provided in a subsequent
Form 8-K filed on August 13, 2002.
The following item was reported in the Form 8-K filed July 19,
2002:
Item 9. Regulation FD Disclosure - Information related to a
report issued by a private research firm.
The following item was reported in the Form 8-K filed July 26,
2002:
Item 5. Other Events and Regulation FD Disclosure - News release
announcing second quarter 2002 operating results.
The following item was reported in the Form 8-K filed August 13,
2002:
Item 5. Other Events and Regulation FD Disclosure -
Restated portions of 2001 Form 10-K to reflect the
Company's wireless operations as discontinued
operations.
The following items were reported in the Form 8-K filed August 13,
2002:
Item 2. Acquisition or Disposition of Assets -
Consummation of the sale of the Company's wireless
operations to Alltel
Item 7. Financial Statements and Exhibits - Historical
financial statements of Verizon properties acquired
or to be acquired and pro forma financial information.
The following items were reported in the Form 8-K filed August 14,
2002:
Items 7 & 9. Financial Statements and Exhibits and
Regulation FD Disclosure- Statements of Oath and
Certification of Financial Statements by Registrant's
Chief Executive Officer and Chief Financial Officer.
The following item was reported in the Form 8-K filed August 22,
2002:
Item 5. Other Events and Regulation FD Disclosure -
Information concerning Registrant's upcoming
commitments and commencement of private placements of
an aggregate of $650 million of debt securities.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CenturyTel, Inc.
Date: November 14, 2002 /s/ Neil A. Sweasy
--------------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)
CERTIFICATIONS
I, Glen F. Post, III, Chairman of the Board and Chief Executive Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of CenturyTel, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods present in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee or registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Glen F. Post, III
--------------------------
Glen F. Post, III
Chairman of the Board and
Chief Executive Officer
CERTIFICATIONS
I, R. Stewart Ewing, Jr., Executive Vice President and Chief Financial
Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CenturyTel, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods present in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee or registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ R. Stewart Ewing, Jr.
--------------------------
R. Stewart Ewing, Jr.
Executive Vice President and
Chief Financial Officer