SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Section 240.14a-12
CenturyTel, Inc.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[CENTURYTEL LOGO]
================================================================================
2004 NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
ANNUAL FINANCIAL STATEMENTS
AND REVIEW OF OPERATIONS
================================================================================
THURSDAY, MAY 6, 2004
2:00 P.M. LOCAL TIME
100 CENTURYTEL DRIVE
MONROE, LOUISIANA
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF CENTURYTEL, INC.:
The Annual Meeting of Shareholders of CenturyTel, Inc. will be held at
2:00 p.m., local time, on May 6, 2004 in the Corporate Conference Room of the
Company's principal offices, 100 CenturyTel Drive, Monroe, Louisiana, for the
following purposes:
1. to elect four Class I directors;
2. to ratify the appointment of KPMG LLP as the Company's independent
auditor for 2004; and
3. to transact such other business as may properly come before the meeting
and any adjournments thereof.
The Board of Directors has fixed the close of business on March 8, 2004
as the record date for the determination of shareholders entitled to notice of
and to vote at the meeting and all adjournments thereof.
By Order of the Board of Directors
/s/ Stacey W. Goff
STACEY W. GOFF, Secretary
Dated: March 24, 2004
SHAREHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. EVEN IF YOU
EXPECT TO ATTEND, IT IS IMPORTANT THAT YOU PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD PROMPTLY. IF YOU PLAN TO ATTEND AND WISH TO VOTE YOUR SHARES
PERSONALLY, YOU MAY DO SO AT ANY TIME BEFORE YOUR PROXY IS VOTED.
[CENTURYTEL LETTERHEAD]
March 24, 2004
Dear Shareholder:
It is a pleasure to invite you to the Company's 2004 Annual Meeting of
Shareholders on Thursday, May 6, beginning at 2:00 p.m. local time, at the
Company's headquarters in Monroe, Louisiana. I hope you will be able to attend.
As in the past, this booklet includes our formal notice of the meeting,
our proxy statement and our annual financial statements and review of
operations.
Most of you have received with this booklet a proxy card that indicates
the number of votes that you will be entitled to cast at the meeting according
to the records of the Company or your broker or other nominee. Each share of the
Company that you have "beneficially owned" continuously since May 30, 1987
generally entitles you to ten votes; each other share entitles you to one vote.
Shares held through a broker or other nominee are presumed to have one vote per
share. In lieu of receiving a proxy card, participants in the Company's benefit
plans have been furnished with voting instruction cards. The reverse side of
this letter describes the Company's voting provisions in greater detail.
Regardless of how many shares you own or whether you plan to attend the
meeting in person, it is important that your shares be voted at the meeting. At
your earliest convenience, please complete the enclosed proxy card (or voting
instruction cards) and return it or them promptly in the enclosed return
envelope.
Thank you for your interest and continued support.
Sincerely,
/S/ Glen F. Post,III
Glen F. Post, III
Chairman of the Board and
Chief Executive Officer
VOTING PROVISIONS
SHAREHOLDERS
Record Shareholders. In general, shares registered in the name of any
natural person or estate that are represented by certificates dated as of or
prior to May 30, 1987 are presumed to have ten votes per share and all other
shares are presumed to have one vote per share. However, the Company's articles
of incorporation (the relevant provisions of which are reproduced below) set
forth a list of circumstances in which the foregoing presumptions may be
refuted. If you believe that the voting information set forth on your proxy card
is incorrect or a presumption made with respect to your shares should not apply,
please send a letter to the Company briefly describing the reasons for your
belief. Merely marking the proxy card will not be sufficient notification to the
Company that you believe the voting information thereon is incorrect.
Beneficial Shareholders. All shares held through a broker, bank or
other nominee are presumed to have one vote per share. The Company's articles of
incorporation set forth a list of circumstances in which this presumption may be
refuted by the person who has held since May 30, 1987 all of the attributes of
beneficial ownership referred to in Article III(C)(2) reproduced below. If you
believe that some or all of your shares are entitled to ten votes, you may
follow one of two procedures. First, you may write a letter to the Company
describing the reasons for your belief. The letter should contain your name
(unless you prefer to remain anonymous), the name of the brokerage firm, bank or
other nominee holding your shares, your account number with such nominee and the
number of shares you have beneficially owned continuously since May 30, 1987.
Alternatively, you may ask your broker, bank or other nominee to write a letter
to the Company on your behalf stating your account number and indicating the
number of shares that you have beneficially owned continuously since May 30,
1987. In either case, your letter should indicate how you wish to have your
shares voted.
Other. The Company will consider all letters received prior to the date
of the Annual Meeting and, when a return address is provided in the letter, will
advise the party furnishing such letter of its decision, although in many cases
the Company will not have time to inform an owner or nominee of its decision
prior to the time the shares are voted. In limited circumstances, the Company
may require additional information before a determination will be made. If you
have any questions about the Company's voting procedures, please call the
Company at (318) 388-9500.
PARTICIPANTS IN BENEFIT PLANS
Participants in the Company's Employee Stock Ownership Plan, Dollars &
Sense Plan, Union Retirement Savings Plan, Union Group Incentive Plan, or
Security Systems Inc. 401(k) Plan have received voting instruction cards in lieu
of a proxy card. For additional information, please refer to the materials
supplied by the trustee of the plans in which you participate.
* * * *
EXCERPTS FROM THE COMPANY'S ARTICLES OF INCORPORATION
Paragraph C of Article III of the Company's articles of incorporation
provides as follows:
(1) Each share of Common Stock . . . which has been beneficially
owned continuously by the same person since May 30, 1987 will entitle such
person to ten votes with respect to such share on each matter properly submitted
to the shareholders of the Corporation for their vote, consent, waiver, release
or other action . . .
(2) (a) For purposes of this paragraph C, a change in beneficial
ownership of a share of the Corporation's stock will be deemed to have
occurred whenever a change occurs in any person or group of persons
who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares (i) voting
power, which includes the power to vote, or to direct the voting of
such share; (ii) investment power, which includes the power to direct
the sale or other disposition of such share; (iii) the right to receive
or retain the proceeds of any sale or other disposition of such share;
or (iv) the right to receive distributions, including cash dividends,
in respect to such share.
(b) In the absence of proof to the contrary provided in accordance
with the procedures referred to in subparagraph (4) of this paragraph
C, a change in beneficial ownership will be deemed to have occurred
whenever a share of stock is transferred of record into the name of any
other person.
(c) In the case of a share of Common Stock . . . held of record in
the name of a corporation, general partnership, limited partnership,
voting trustee, bank, trust company, broker, nominee or clearing
agency, or in any other name except a natural person, if it has not
been established pursuant to the procedures referred to in subparagraph
(4) that such share was beneficially owned continuously since May 30,
1987 by the person who possesses all of the attributes of beneficial
ownership referred to in clauses (i) through (iv) of subparagraph
(2)(a) of this paragraph C with respect to such share of Common Stock .
. . then such share of Common Stock . . . will carry with it only one
vote regardless of when record ownership of such share was acquired.
(d) In the case of a share of stock held of record in the name of
any person as trustee, agent, guardian or custodian under the Uniform
Gifts to Minors Act, the Uniform Transfers to Minors Act or any
comparable statute as in effect in any state, a change in beneficial
ownership will be deemed to have occurred whenever there is a change in
the beneficiary of such trust, the principal of such agent, the ward of
such guardian or the minor for whom such custodian is acting.
(3) Notwithstanding anything in this paragraph C to the contrary,
no change in beneficial ownership will be deemed to have occurred solely as a
result of:
(a) any event that occurred prior to May 30, 1987, including
contracts providing for options, rights of first refusal and similar
arrangements, in existence on such date to which any holder of shares
of stock is a party;
(b) any transfer of any interest in shares of stock pursuant to a
bequest or inheritance, by operation of law upon the death of any
individual, or by any other transfer without valuable consideration,
including a gift that is made in good faith and not for the purpose of
circumventing this paragraph C;
(c) any change in the beneficiary of any trust, or any
distribution of a share of stock from trust, by reason of the birth,
death, marriage or divorce of any natural person, the adoption of any
natural person prior to age 18 or the passage of a given period of time
or the attainment by any natural person of a specified age, or the
creation or termination of any guardianship or custodian arrangement;
or
(d) any appointment of a successor trustee, agent, guardian or
custodian with respect to a share of stock.
(4) For purposes of this paragraph C, all determinations
concerning changes in beneficial ownership, or the absence of any such change,
will be made by the Corporation. Written procedures designed to facilitate such
determinations will be established by the Corporation and refined from time to
time. Such procedures will provide, among other things, the manner of proof of
facts that will be accepted and the frequency with which such proof may be
required to be renewed. The Corporation and any transfer agent will be entitled
to rely on all information concerning beneficial ownership of a share of stock
coming to their attention from any source and in any manner reasonably deemed by
them to be reliable, but neither the Corporation nor any transfer agent will be
charged with any other knowledge concerning the beneficial ownership of a share
of stock.
(5) Each share of Common Stock acquired by reason of any stock
split or dividend will be deemed to have been beneficially owned by the same
person continuously from the same date as that on which beneficial ownership of
the share of Common Stock, with respect to which such share of Common Stock was
distributed, was acquired.
* * * *
(8) Shares of Common Stock held by the Corporation's employee
benefit plans will be deemed to be beneficially owned by such plans regardless
of how such shares are allocated to or voted by participants, until the shares
are actually distributed to participants.
* * * *
CENTURYTEL, INC.
100 CENTURYTEL DRIVE
MONROE, LOUISIANA 71203
(318) 388-9500
PROXY STATEMENT
March 24, 2004
This proxy statement is furnished in connection with the solicitation
of proxies on behalf of the Board of Directors (the "Board") of CenturyTel, Inc.
(the "Company") for use at its annual meeting of shareholders to be held at the
time and place set forth in the accompanying notice, and at any adjournments
thereof (the "Meeting"). This proxy statement is first being mailed to
shareholders of the Company on or about March 29, 2004.
As of March 8, 2004, the record date for determining shareholders
entitled to notice of and to vote at the Meeting (the "Record Date"), the
Company had outstanding 141,834,419 shares of common stock (the "Common Shares")
and 319,000 shares of Series L preferred stock that vote together with the
Common Shares as a single class on all matters ("Preferred Shares" and,
collectively with the Common Shares, "Voting Shares"). The Company's Restated
Articles of Incorporation (the "Articles") generally provide that holders of
Common Shares that have been beneficially owned continuously since May 30, 1987
are entitled to cast ten votes per share, subject to compliance with certain
procedures. Article III of the Articles and the voting procedures adopted
thereunder contain several provisions governing the voting power of Common
Shares, including a presumption that each Common Share held by nominees or by
any holder other than a natural person or estate entitles such holder to one
vote, unless the holder furnishes the Company with proof to the contrary.
Applying the presumptions described in Article III, the Company's records
indicate that 221,408,211 votes are entitled to be cast at the Meeting, of which
221,089,211 (99.9%) are attributable to the Common Shares. Unless otherwise
indicated, all percentages of voting power set forth in this proxy statement
have been calculated based on such number of votes.
If you are a participant in the Company's Automatic Dividend
Reinvestment and Stock Purchase Service or the Company's Employee Stock Purchase
Plans, the Company's proxy card covers shares credited to your account under
each plan, as well as shares registered in your name. You should not, however,
use the proxy card to vote any shares held for you in the Company's Employee
Stock Ownership Plan, Dollars & Sense Plan, Union Retirement Savings Plan, Union
Group Incentive Plan, or Security Systems Inc. 401(k) Plan. Instead,
participants in these plans will receive from the plan trustees separate voting
instruction cards covering these shares. These voting instruction cards should
be completed and returned in the manner provided in the instructions that
accompany such cards.
The Company will pay all expenses of soliciting proxies for the
Meeting. Proxies may be solicited personally, by mail, by telephone or by
facsimile by the Company's directors, officers
1
and employees, who will not be additionally compensated therefor. The Company
will also request persons holding Voting Shares in their names for others, such
as brokers, banks and other nominees, to forward proxy materials to their
principals and request authority for the execution of proxies, for which the
Company will reimburse them for expenses incurred in connection therewith. The
Company has retained Innisfree M&A Incorporated, New York, New York, to assist
in the solicitation of proxies, for which it will be paid a fee of $7,500 and
will be reimbursed for certain out-of-pocket expenses.
ELECTION OF DIRECTORS
(ITEM 1 ON PROXY OR VOTING INSTRUCTION CARD)
The Board of Directors has fixed the number of directors at 13 members,
which are divided under the Articles into three classes. Members of the
respective classes hold office for staggered terms of three years, with one
class elected at each annual shareholders' meeting. Four Class I directors will
be elected at the Meeting. Acting upon the recommendation of its Nominating and
Corporate Governance Committee, the Board has nominated the four individuals
listed below to serve as Class I directors. Unless authority is withheld, all
votes attributable to the shares represented by each duly executed and delivered
proxy will be cast for the election of each of these below-named nominees. Under
the Company's bylaw nominating procedures, these nominees are the only
individuals who may be elected at the Meeting. See "Corporate Governance -
Director Nomination Process." If for any reason any such nominee should decline
or become unable to stand for election as a director, which is not anticipated,
votes will be cast instead for another candidate designated by the Board,
without resoliciting proxies.
The following provides certain information with respect to each nominee
and each other director whose term will continue after the Meeting, including
his or her beneficial ownership of Common Shares determined in accordance with
Rule 13d-3 of the Securities and Exchange Commission ("SEC"). Unless otherwise
indicated, (i) all information is as of the Record Date, (ii) each person has
been engaged in the principal occupation shown for more than the past five years
and (iii) shares beneficially owned are held with sole voting and investment
power. Unless otherwise indicated, none of the persons named below beneficially
owns more than 1% of the outstanding Common Shares or is entitled to cast more
than 1% of the total voting power.
2
CLASS I DIRECTORS (FOR TERM EXPIRING IN 2007):
[PHOTO]
WILLIAM R. BOLES, JR., age 47; a director since 1992; an executive
officer, director and practicing attorney with The Boles Law Firm.
Committee Memberships: Risk Evaluation (Chairman)
Shares Beneficially Owned: 15,965 (1)
[PHOTO]
W. BRUCE HANKS, age 49; a director since 1992; Athletic Director of the
University of Louisiana at Monroe between March 2001 and mid-year 2004;
a senior or executive officer of the Company with operational or
strategic development responsibilities for several years prior to such
time.
Committee Membership: Risk Evaluation
Shares Beneficially Owned: 141,341 (1), (2)
[PHOTO]
C. G. MELVILLE, JR., age 63; a director since 1968; private investor
since 1992; retired executive officer of an equipment distributor.
Committee Memberships: Compensation (Chairman); Nominating
and Corporate Governance
Shares Beneficially Owned: 21,471 (1)
[PHOTO]
GLEN F. POST, III, age 51; a director since 1985; Chairman of the Board
since June 2002 and Chief Executive Officer of the Company since 1993.
Mr. Post also served as Vice Chairman of the Board from 1993 to 2002
and President from 1990 to 2002.
Committee Membership: Executive (Chairman)
Shares Beneficially Owned: 1,531,732 (2)
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THESE NOMINEES.
3
CLASS II DIRECTORS (TERM EXPIRES IN 2005):
[PHOTO]
VIRGINIA BOULET, age 50; a director since 1995; President and Chief
Operating Officer of IMDiversity, Inc., an on-line recruiting company,
and Special Counsel at Adams and Reese LLP, a law firm, since March
2002; Partner, Phelps Dunbar, L.L.P., a law firm, for 10 years prior to
such time.
Committee Memberships: Nominating and Corporate
Governance (Chairperson); Audit
Shares Beneficially Owned: 15,328 (1), (3)
[PHOTO]
CALVIN CZESCHIN, age 68; a director since 1975; President and Chief
Executive Officer of Yelcot Telephone Company and Ultimate Auto Group.
Committee Memberships: Executive; Risk Evaluation
Shares Beneficially Owned: 360,869 (1), (4)
[PHOTO]
JAMES B. GARDNER, age 69; a director since 1981; Senior Managing
Director of the capital markets division of Samco Capital Markets, a
division of Penson Financial Services, Inc., since November 2001;
Managing Director of such division for over seven years prior to such
date; a director of Ennis Business Forms, Inc.
Committee Memberships: Audit (Chairman); Executive;
Compensation
Shares Beneficially Owned: 13,500 (1)
[PHOTO]
R. L. HARGROVE, JR., age 72; a director since 1985; retired as an
executive officer of the Company in 1987 after 12 years of service as
an officer.
Committee Memberships: Executive; Audit; Nominating and
Corporate Governance
Shares Beneficially Owned: 73,140 (1)
4
[PHOTO]
JOHNNY HEBERT, age 75; a director since 1968; President of family-owned
electrical contracting businesses.
Committee Memberships: Risk Evaluation
Shares Beneficially Owned: 22,552 (1), (5)
CLASS III DIRECTORS (TERM EXPIRES IN 2006):
[PHOTO]
FRED R. NICHOLS, age 57; a director since May 2003; retired in 2000
after serving as Executive Vice President of Operations of Cox
Communications, Inc. from August 1999 to February 2000; Chairman of the
Board, President and Chief Executive Officer of TCA Cable TV, Inc. from
1997 to August 1999.
Committee Membership: Audit
Shares Beneficially Owned: 8,000 (1)
[PHOTO]
HARVEY P. PERRY, age 59; a director since 1990; non-executive Vice
Chairman of the Board of Directors of the Company since January 1,
2004; retired from the Company on December 31, 2003 after serving as
Executive Vice President and Chief Administrative Officer for almost
five years, as Secretary for 18 years and as General Counsel for 20
years; also served as Senior Vice President from 1985 to 1999.
Committee Membership: Executive
Shares Beneficially Owned: 368,338 (2), (6)
[PHOTO]
JIM D. REPPOND, age 62; a director since 1986; retired from the Company
in 1996 after serving as President-Telephone Group of the Company (or a
comparable predecessor position) for several years.
Committee Memberships: Executive; Compensation
Shares Beneficially Owned: 73,920 (1)
5
[PHOTO]
JOSEPH R. ZIMMEL, age 50; a director since January 2003; retired in
2002 after serving as a managing director of the investment banking
division of The Goldman Sachs Group, Inc. from 1996 to 2001; a director
of Modem Media, Inc.
Committee Membership: Audit
Shares Beneficially Owned: 12,667 (1)
(1) Includes shares that each outside director has the right to acquire
within 60 days of the date of this Proxy Statement pursuant to options
granted under the Company's directors stock option plan. Under these
options, each outside director has the right to acquire within such
period 10,000 shares, other than Messrs. Nichols and Zimmel, who have
the right to acquire 6,000 and 7,667 shares, respectively.
(2) Includes (i) shares of restricted stock issued to the below-named
directors under the Company's incentive compensation plans ("Restricted
Stock"), with respect to which such individuals have sole voting power
but no investment power; (ii) shares ("Option Shares") that such
individuals have the right to acquire within 60 days of the Record Date
pursuant to options granted under the Company's incentive compensation
plans (other than the Company's directors stock option plan referenced
in footnote 1 above); and (iii) shares (collectively, "Plan Shares")
allocated to such individual's accounts under the Company's Employee
Stock Ownership Plan ("ESOP") and the Company's Dollars & Sense Plan
("401(k) Plan"), as follows:
Name Restricted Stock Option Shares Plan Shares
------------------ ---------------- ---------------- -----------
W. Bruce Hanks - 89,616 -
Glen F. Post, III 52,259 1,310,547 79,774
Harvey P. Perry - 318,000 -
Participants in the 401(k) Plan who have attained 45 years of age or
three years of service with the Company have investment power with
respect to all shares held in their 401(k) Plan account, and
participants in the ESOP who have attained 55 years of age and 10 years
of participation in the plan have investment power with respect to a
portion of the shares held in their ESOP accounts. Participants in both
these plans are entitled to direct the voting of their plan shares, as
described in greater detail elsewhere herein.
(3) Includes 1,272 shares held by Ms. Boulet as custodian for the benefit
of her children and 450 shares owned by Ms. Boulet's spouse, as to
which she disclaims beneficial ownership.
(4) Constitutes 0.3% of the outstanding Common Shares and entitles Mr.
Czeschin to cast 1.6% of the total voting power; includes 11,997 shares
owned by Mr. Czeschin's wife, as to which he disclaims beneficial
ownership; also includes 300,000 shares that are pledged pursuant to a
pre-paid forward sale contract that expires January 19, 2006. Mr.
Czeschin holds voting but not investment power as to such pledged
shares.
(5) Includes 1,767 shares owned by Mr. Hebert's wife, as to which he
disclaims beneficial ownership.
(6) Includes 2,837 shares held as custodian for the benefit of Mr. Perry's
children.
CORPORATE GOVERNANCE
GOVERNANCE GUIDELINES
Listed below are excerpts from the Company's corporate governance
guidelines, which the Board reviews at least annually. A complete copy of the
Company's corporate governance guidelines is an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003 and is posted on the
Company's website at www.centurytel.com.
6
1. Director Qualifications
- The Board will have a majority of independent directors. The
Nominating and Corporate Governance Committee is responsible
for reviewing with the Board, on an annual basis, the
requisite skills and characteristics of new Board members as
well as the composition of the Board as a whole. This
assessment will include members' independence qualifications,
as well as consideration of diversity, age, character, skills
and experience in the context of the needs of the Board.
- The Board presently has 13 members. It is the sense of the
Board that a size of 11 to 13 is about right. However, the
Board would be willing to go to a somewhat larger size in
order to accommodate the availability of an outstanding
candidate. It is the general sense of the Board that no more
than two management directors should serve on the Board.
- The Board expects directors who change the job or
responsibility they held when they were elected to the Board
to volunteer to resign from the Board. It is not the sense of
the Board that in every such instance the director should
necessarily leave the Board. There should, however, be an
opportunity for the Board, through the Nominating and
Corporate Governance Committee, to review the continued
appropriateness of Board membership under the circumstances.
- No director may serve on more than two other unaffiliated
public company boards, unless this prohibition is waived by
the Board. No director may be appointed or nominated to a new
term if he or she would be age 72 or older at the time of the
election or appointment.
- The Nominating and Corporate Governance Committee will review
each director's continuation on the Board every three years.
- Directors will be deemed to be "independent" if (i) the Board
affirmatively confirms that neither the director nor any
organization with which the director is affiliated receives
any payments from the Company other than Permissible Directors
Compensation (as defined below) and (ii) none of the
disqualifying events or conditions specified in Rule
303A(2)(b) of the NYSE Listed Company Manual apply to the
director. For purposes hereof, "Permissible Directors
Compensation" means (i) director and committee fees, (ii)
reimbursement for an annual physical, continuing education,
travel and other out-of-pocket expenses in accordance with the
Company's applicable policies and (iii) a pension or other
form of deferred compensation for prior service, provided such
compensation is not contingent in any way on continued
service. The Board may make determinations or interpretations
under this paragraph, provided that they are consistent with
the foregoing standards.
- Once the Board has determined that a director is independent,
the director may not engage in any transaction with the
Company, either directly or indirectly through an immediate
family member or related entity, without such transaction
being approved by the Board.
7
2. Director Responsibilities
- The Chairman will establish the agenda for each Board meeting.
Each Board member is free to suggest the inclusion of items on
the agenda. Each Board member is free to raise at any Board
meeting subjects that are not on the agenda for that meeting.
The Board will review the Company's long-term strategic plans
and the principal issues that the Company will face in the
future during at least one Board meeting each year.
- The non-management directors will meet in executive session at
least quarterly. The director who presides at these meetings
will be an independent director chosen annually by the
non-management directors, and his or her name will be
disclosed in the annual proxy statement.
3. Board Committees
- The Board will have at all times an Audit Committee, a
Compensation Committee and a Nominating and Corporate
Governance Committee. All of the members of these committees
will be independent directors, as defined in Section 1 above.
- The Chair of each committee, in consultation with the
committee members, will determine the frequency and length of
the committee meetings consistent with any requirements set
forth in the committee's charter. The Chair of each committee,
in consultation with members of the committee and others
specified in the committee's charter, will develop the
committee's agenda.
- The Board and each committee have the power to hire
independent legal, financial or other advisors as they may
deem necessary, without consulting or obtaining the approval
of any officer of the Company in advance.
- Each committee may meet in executive session as often as it
deems appropriate.
4. Director Access to Officers and Employees
- Directors have full and free access to officers and employees
of the Company.
- The Board welcomes regular attendance at each Board meeting of
senior officers of the Company.
5. Director Compensation
- The form and amount of director compensation will be
determined by the Nominating and Corporate Governance
Committee in accordance with the policies and principles set
forth in its charter, and such Committee will conduct an
annual review of director compensation.
8
6. Director Orientation and Continuing Education
- The Nominating and Corporate Governance Committee shall
maintain an Orientation Program for new directors. All new
directors must participate in the Company's Orientation
Program, which should be conducted as soon as practicable
after new directors are elected or appointed.
- The Company will also maintain a Continuing Education Program
for directors, pursuant to which it will endeavor to
periodically update directors on industry, technological and
regulatory developments, and to provide adequate resources to
support directors in understanding the Company's business and
matters to be acted upon at board and committee meetings.
7. CEO Evaluation and Management Succession
- The Nominating and Corporate Governance Committee will conduct
an annual review of the CEO's performance. The Nominating and
Corporate Governance Committee will provide a report of its
findings to the Board of Directors (with appropriate recusals
of the CEO and other management directors, as necessary) to
enable the Board to ensure that the CEO is providing the best
leadership for the Company in the long- and short-term.
- The Nominating and Corporate Governance Committee should
report periodically to the Board on succession planning. The
entire Board will consult periodically with the Nominating and
Corporate Governance Committee regarding potential successors
to the CEO. The CEO should at all times make available his or
her recommendations and evaluations of potential successors,
along with a review of any development plans recommended for
such individuals.
8. Annual Performance Evaluation
- The Board of Directors will conduct an annual self-evaluation
to determine whether it and its committees are functioning
effectively. The Nominating and Corporate Governance Committee
will receive comments from all directors and report annually
to the Board with an assessment of the Board's performance,
which will be discussed with the full Board. The assessment
will focus on the Board's contribution to the Company and
specifically focus on areas in which the Board or management
believes that the Board could improve.
9. Standards of Business Conduct and Ethics
- All of the Company's directors, officers and employees are
required to abide by the Company's long-standing Corporate
Compliance Program, which includes standards of business
conduct and ethics. The Company's program and related
procedures cover all areas of professional conduct, including
employment policy, conflicts of interests, protection of
confidential information, as well as strict adherence to all
laws and regulations applicable to the conduct of the
Company's business.
9
- Any waiver of the Company's policies, principles or guidelines
relating to business conduct or ethics for executive officers
or directors may be made only by the Audit Committee and will
be promptly disclosed as required by law or stock exchange
regulation.
INDEPENDENCE
The Board has determined that W. Bruce Hanks, C. G. Melville, Jr.,
Virginia Boulet, James B. Gardner, R. L. Hargrove, Jr., Fred R. Nichols, Jim D.
Reppond and Joseph R. Zimmel qualify as independent directors under the
standards referred to above under " - Governance Guidelines."
MEETINGS AND CERTAIN COMMITTEES OF THE BOARD
During 2003, the Board held four regular meetings and six special
meetings.
During 2003, the Board's Audit Committee held ten meetings. The Audit
Committee's functions are described further below under "Report of Audit
Committee."
The Board's Compensation Committee held six meetings during 2003. The
Compensation Committee's Incentive Awards Subcommittee held one meeting during
2003. Both the Compensation Committee and the Subcommittee are described further
below under "Executive Compensation and Related Information - Report of
Compensation Committee Regarding Executive Compensation."
The Board's Nominating and Corporate Governance Committee (the
"Nominating Committee") met nine times during 2003. The Nominating Committee is
responsible for, among other things, (i) recommending to the Board nominees to
serve as directors and officers, (ii) monitoring the composition of the Board
and its committees, (iii) periodically reassessing the Company's corporate
governance guidelines, (iv) leading the Board in its annual review of the
Board's performance and (v) reviewing annually the Chief Executive Officer's
performance and reporting to the Board on succession planning for senior
executive officers. For information on the Company's director nomination
process, see "- Director Nomination Process" below.
Each of the committees listed above is composed solely of independent
directors under the standards referred to above under "- Governance Guidelines."
The Board has determined that R. L. Hargrove, Jr. and James B. Gardner are audit
committee financial experts, as defined under the federal securities laws.
If you would like additional information on the responsibilities of the
committees listed above, please refer to the committees' respective charters,
which are exhibits to the Company's Annual Report on Form 10-K for the year
ended December 31, 2003 and are posted on the Company's website at
www.centurytel.com.
The Company expects all of its directors to attend the Company's annual
shareholders meetings. Each director attended the 2003 annual shareholders
meeting.
10
DIRECTOR NOMINATION PROCESS
Nominations for the election of directors at annual shareholder
meetings may be made by the Board (upon the receipt of recommendations of the
Nominating Committee) or by any shareholder of record who complies with the
Company's bylaws. Under the bylaws, any shareholder of record interested in
making a nomination (referred to below as "nominating shareholders") generally
must deliver written notice to the Company's secretary not more than 180 days
and not less than 90 days in advance of the first anniversary of the preceding
year's annual shareholder's meeting. For the Meeting this year, the Board has
nominated the four nominees listed above under "Election of Directors" to stand
for election as Class I directors, and no shareholders submitted any
nominations. For further information on deadlines for submitting nominations for
the Company's 2005 annual shareholders meeting, see "Other Matters - Shareholder
Nominations and Proposals."
The written notice required to be sent by any nominating shareholder
must include (i) the name, age, business address and residential address of the
nominating shareholder and any other person acting in concert with such
shareholder, (ii) a representation that the nominating shareholder is a record
holder of Voting Shares, and intends to make his nomination in person, (iii) a
description of all agreements among the nominating shareholder, any person
acting in concert with him, each proposed nominee and any other person pursuant
to which the nomination or nominations are to be made and (iv) various
biographical information about each proposed nominee, including principal
occupation, holdings of Voting Shares and other information required to be
disclosed in the Company's proxy statement. The notice must also be accompanied
by the written consent of each proposed nominee to serve as a director if
elected, and an affidavit certifying that the proposed nominee meets the
qualifications for service specified in the bylaws and summarized below. The
Company may require a proposed nominee to furnish other reasonable information
or certifications. Shareholders interested in bringing before a shareholders
meeting any matter other than a director nomination should consult the bylaws
for additional procedures governing such requests. The Company may disregard any
nomination or submission of any other matter that fails to comply with these
bylaw procedures.
The Nominating Committee will consider candidates nominated by
shareholders in accordance with the bylaws. Upon receipt of any such
nominations, the Committee will review the submission for compliance with the
bylaws, including determining if the proposed nominee meets the bylaw
qualifications for service as a director. These provisions disqualify any person
who fails to respond satisfactorily to any inquiry for information to enable the
Company to make any certifications required by the Federal Communications
Commission under the Anti-Drug Abuse Act of 1988, or who has been arrested or
convicted of certain specified drug offenses or engaged in actions that could
lead to such an arrest or conviction.
Under the Company's corporate governance guidelines, the Nominating
Committee assesses director candidates based on their independence, diversity,
age, character, skills and experience in the context of the needs of the Board.
Although the guidelines permit the Nominating Committee to adopt additional
selection guidelines or criteria, it has chosen not to do so. Instead, the
Nominating Committee periodically assesses skills and characteristics then
required by the Board based on the Board's configuration and future challenges
at the time of the assessment. The Nominating Committee believes this flexible
approach enables it to respond to changes caused by director retirements and
industry developments. Although the Company does
11
not have a history of receiving director nominations from shareholders, the
Nominating Committee envisions that it would evaluate any such candidate on the
same terms as other proposed nominees, but would place a substantial premium on
retaining incumbent directors who are familiar with the Company's management,
operations, business, industry, strategies and competitive position, and who
have previously demonstrated a proven ability to provide valuable contributions
to the Board and the Company.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company (referred to as
"outside directors" or "non-management directors") is paid an annual fee of
$30,000 plus $2,000 for attending each regular Board meeting, $2,500 for
attending each special Board meeting and $1,500 for attending each meeting of a
Board committee.
Currently the Vice Chairman of the Board is paid supplemental board
fees at the rate of $100,000 per year. The Vice Chairman's duties include (i)
assisting the Chairman by facilitating communications among the directors and
monitoring the activities of the Board's committees, (ii) serving at the
Chairman's request on the board of any company in which the Company has an
investment, (iii) monitoring the Company's strategies and (iv) performing
certain executive succession functions.
Currently (i) the chair of the Audit Committee is paid supplemental
board fees at the rate of $12,000 per year, (ii) the chair of the Compensation
Committee and the chair of the Nominating Committee are each paid supplemental
board fees at the rate of $8,000 per year, and (iii) the chair of the Risk
Evaluation Committee is paid supplemental board fees at the rate of $6,000 per
year.
The Company permits each outside director to defer receipt of all or a
portion of his or her fees. Amounts so deferred earn interest equal to the
six-month Treasury bill rate. Each outside director is also entitled to be
reimbursed (i) for expenses incurred in attending meetings and (ii) up to $5,000
per year for the cost of an annual physical examination, plus related travel
expenses and the estimated income taxes incurred by the director in connection
with receiving these reimbursement payments.
Under the Company's 2002 Directors Stock Option Plan, outside directors
are entitled to receive annual grants of options to purchase up to 6,000 Common
Shares (with the actual number to be determined by the Compensation Committee of
the Board) following each annual meeting of shareholders and upon joining the
Board if other than by election at an annual meeting of shareholders. In 2003,
the Board's Compensation Committee granted each outside director non-qualified
options to purchase 6,000 Common Shares. In 2004, the Compensation Committee
authorized each outside director to receive subsequent to the Meeting
non-qualified options to purchase an additional 6,000 Common Shares.
Prior to June 1, 2002, outside directors participated in the Company's
Outside Directors Retirement Plan. Under such plan, participating outside
directors with fully vested rights are entitled to receive, upon normal
retirement at age 70, $30,000 per year, payable bi-weekly generally, in the form
of a life annuity (subject to certain limited exceptions). Under the plan,
12
participating outside directors can also receive payments upon early retirement
at age 65, subject to certain benefit reductions. In addition, the plan provides
certain disability and preretirement death benefits. The Company has established
a trust to fund its obligations under the plan, but participants' rights to
these trust assets are no greater than the rights of unsecured creditors. Under
the plan, participating outside directors whose service is terminated in
connection with a change in control of the Company are entitled to receive a
cash payment equal to the present value of their vested plan benefits,
determined in accordance with actuarial assumptions specified in the plan. In
2002, the plan was "frozen" to (i) limit participation to outside directors
serving as of May 31, 2002, (ii) limit benefits to those accrued through May 31,
2002, and (iii) freeze the annual payment for participants with fully vested
rights at $30,000, which equaled the annual retainer plus the fee for attending
one special Board meeting as of May 31, 2002.
The Company's bylaws require it to indemnify its directors and officers
to the fullest extent permitted by law so that they will be free from undue
concern about personal liability in connection with their service to the
Company. The Company has signed agreements with each of those individuals
contractually obligating it to provide these indemnification rights.
PRESIDING DIRECTOR
As indicated above, the non-management directors meet in executive
session at least quarterly. The non-management directors have selected Virginia
Boulet to preside over such meetings during 2004. The Company's website posts
information on the manner in which Ms. Boulet may be contacted by interested
parties.
RATIFICATION OF THE SELECTION OF THE INDEPENDENT AUDITOR
(ITEM 2 ON PROXY OR VOTING INSTRUCTION CARD)
The Company's 2003 financial statements were audited by KPMG LLP. The
Audit Committee of the Board has appointed KPMG as independent auditor of the
Company for the fiscal year ending December 31, 2004, and the Board is
submitting that appointment to the Company's shareholders for ratification at
the Meeting.
Representatives of KPMG will be present at the Meeting, are expected to
be available to respond to appropriate questions, and will also have an
opportunity to make a statement if they desire to do so. If the shareholders do
not ratify the appointment of KPMG by the affirmative vote of at least a
majority of the voting power present or represented at the Meeting, the Audit
Committee will reconsider the selection of the independent auditor.
For additional information on KPMG, see "Report of the Audit Committee"
below.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
13
VOTING SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding ownership of the
Company's Common Shares by (i) each person known to the Company to beneficially
own more than 5% of the outstanding Common Shares, (ii) certain executive
officers who are not listed in the table included under the heading "Election of
Directors" and (iii) all of the Company's directors and executive officers as a
group. Unless otherwise indicated, all information is presented as of the Record
Date in the same manner described under "Election of Directors" and all shares
indicated as beneficially owned are held with sole voting and investment power.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF PERCENT
OWNERSHIP OF OUTSTANDING OF VOTING
BENEFICIAL OWNER COMMON SHARES(1) COMMON SHARES(1) POWER(2)
-------------------------------------------- --------------- --------------- ---------
Principal Shareholders:
Capital Research and Management Company 7,748,330 (3) 5.4% 3.5%
333 South Hope Street
Los Angeles, California 90071
Ariel Capital Management, Inc. 7,292,374 (4) 5.1% 3.3%
200 E. Randolph Drive, Suite 2900
Chicago, Illinois 60601
Regions Morgan Keegan Trust, as Trustee 7,203,532 (5) 5.1% 29.1%
(the "Trustee") of the ESOP
1807 Tower Drive
Monroe, Louisiana 71201
Certain Executive Officers:
R. Stewart Ewing, Jr. 393,035 (6) * *
David D. Cole 376,636 (7) * *
Karen A. Puckett 338,766 (8) * *
All directors and executive officers as of 4,047,760 (9) 2.9% 3.3%
the Record Date as a group (18 persons)
-----------------
* Represents less than 1%.
14
(1) Determined in accordance with Rule 13d-3 of the SEC based upon
information furnished by the persons listed. In addition to Common
Shares, the Company has outstanding Preferred Shares that vote together
with the Common Shares as a single class on all matters. One or more
persons beneficially own more than 5% of the Preferred Shares; however,
the percentage of total voting power held by such persons is
immaterial. For additional information regarding the Preferred Shares,
see page 1 of this proxy statement. For additional information
regarding the investment power held by participants with respect to
their Restricted Stock and Plan Shares, see footnote 2 to the table
included under the heading "Election of Directors."
(2) Based on the Company's records and, with respect to all shares held of
record by the Trustee, based on information the Trustee periodically
provides to the Company to establish that certain of these shares
entitle the Trustee to cast ten votes per share.
(3) Based on share information as of February 10, 2004 contained in a
Schedule 13G/A Report that Capital Research and Management Company has
filed with the SEC. In this report, Capital Research and Management
Company indicated that (i) it is deemed to be the beneficial owner of
these shares as a result of acting as investment advisor to various
registered investment companies, (ii) it holds no voting power with
respect to any of these shares and (iii) it disclaims beneficial
ownership of all of these shares. In this report, Capital Research and
Management Company further indicated that these shares include
2,469,330 Common Shares that it has the right to acquire from the
Company on or before May 15, 2005 pursuant to purchase contracts
included in the Corporate Units of the Company beneficially owned by
Capital Research and Management Company.
(4) Based on information provided by Ariel Capital Management, Inc., on
March 19, 2003, Ariel Capital Management, Inc. beneficially owned
7,292,374 Common Shares, as to which it held sole voting power with
respect to 5,943,124 of such shares and sole dispositive power with
respect to 7,206,019 of such shares.
(5) Substantially all of the voting power attributable to these shares is
directed by the participants of the ESOP, each of whom is deemed,
subject to certain limited exceptions, to tender such instructions as a
"named fiduciary" for all shares (except for PAYSOP shares) under such
plan, which requires the participants to direct their votes in a manner
that they believe to be prudent and in the best interests of the
participants of the ESOP.
(6) Includes 21,939 shares of Restricted Stock, 310,058 Option Shares that
Mr. Ewing has the right to acquire within 60 days of the Record Date,
and 36,347 Plan Shares allocated to his accounts under the ESOP and
401(k) Plan.
(7) Includes (i) 14,729 shares of Restricted Stock, (ii) 312,373 Option
Shares that Mr. Cole has the right to acquire within 60 days of the
Record Date, (iii) 26,410 Plan Shares allocated to his accounts under
the ESOP and 401(k) Plan and (iv) 4,808 Plan Shares held directly by
Mr. Cole's wife as a former employee of the Company in her accounts
under the ESOP and 401(k) Plan, as to which he disclaims beneficial
ownership.
(8) Includes 25,639 shares of Restricted Stock, 310,000 Option Shares that
Ms. Puckett has the right to acquire within 60 days of the Record Date,
685 Plan Shares allocated to her accounts under the ESOP and 401(k)
Plan and 200 shares held as custodian for the benefit of Ms. Puckett's
children.
(9) Includes (i) 141,295 shares of Restricted Stock, (ii) 2,999,804 Option
Shares that such individuals have the right to acquire within 60 days
of the Record Date, (iii) 146,428 Plan Shares allocated to their
respective accounts under the ESOP and 401(k) Plan, (iv) 19,022 shares
held of record by the spouses of certain of these individuals, as to
which beneficial ownership is disclaimed, and (v) 4,589 shares held as
custodian for the benefit of children of such individuals.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following table sets forth certain information regarding the
compensation of (i) the Company's Chief Executive Officer and (ii) each of the
Company's four most highly compensated executive officers other than the Chief
Executive Officer (collectively, the "named officers"). Following this table is
additional information regarding option grants and option exercises during 2003.
For additional information, see " - Report of Compensation Committee Regarding
Executive Compensation."
15
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
----------------------------------------
AWARDS PAYOUTS
----------------------------------------
NO. OF
RESTRICTED SECURITIES LONG-TERM
NAME AND CURRENT STOCK UNDERLYING INCENTIVE ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(1) OPTIONS PLAN PAYOUTS(2) COMPENSATION(3)
----------------------------- ---- ---------- ------------ ---------- ---------- -------------- ---------------
Glen F. Post, III 2003 $ 904,846 $ 1,064,099 $ 0 320,000 $ 143,627 $ 165,783
Chairman of the Board and 2002 787,594 812,797 150,000 320,000 239,804 90,190
Chief Executive Officer 2001 722,194 0 0 320,000 0 96,885
Karen A. Puckett(4) 2003 496,576 535,309 0 150,000 0 92,564
President and Chief 2002 420,600 352,147 100,000 120,000 0 58,309
Operating Officer 2001 389,929 95,259 0 120,000 0 58,951
R. Stewart Ewing, Jr 2003 461,558 407,094 0 81,000 $ 42,992 86,298
Executive Vice President 2002 390,657 274,241 100,000 81,000 72,215 59,651
and Chief Financial 2001 365,981 56,983 0 81,000 0 60,328
Officer
Harvey P. Perry(5) 2003 358,116 315,859 0 81,000 $ 42,992 75,937
Vice Chairman of the Board 2002 344,419 230,072 75,000 81,000 72,215 57,353
2001 333,118 71,487 0 81,000 0 59,248
David D. Cole 2003 345,734 304,938 0 81,000 $ 42,992 74,771
Senior Vice President- 2002 331,111 225,155 75,000 81,000 72,215 55,393
Operations Support 2001 320,212 56,037 0 81,000 0 56,828
-----------------
(1) The chart below sets forth information as of December 31, 2003
regarding the named officers' holdings of Restricted Stock
issued as a special bonus in 2003 for extraordinary efforts
and achievements during 2002. One-third of this Restricted
Stock vested March 15, 2004, one-third will vest on March 15,
2005, and one-third will vest on March 15, 2006. (This chart
reflects neither (i) Restricted Stock issued in February 2004
nor (ii) Restricted Stock outstanding on December 31, 2003
that was issued free of all restrictions in early 2004.)
Aggregate
Shares of Value at
Restricted December 31,
Name Stock 2003
----------- ---------- ------------
Mr. Post 5,459 $ 178,073
Ms. Puckett 3,639 118,705
Mr. Ewing 3,639 118,705
Mr. Perry 2,729 89,020
Mr. Cole 2,729 89,020
Dividends are paid currently with respect to all shares of
Restricted Stock described above. For additional information
regarding the foregoing, see "- Report of Compensation
Committee Regarding Executive Compensation."
(2) Reflects the value of Common Shares released or issued as a
result of performance-based Restricted Stock and performance
shares awarded in 1997 and 1998 becoming vested or earned in
early 2002 and 2003, respectively, based on the appreciation
in the market value of the Common Shares during the preceding
five-year period. See "-Report of Compensation Committee
Regarding Executive Compensation-Prior Grants."
(3) Comprised of the Company's (i) matching contributions to the
401(k) Plan, as supplemented by matching contributions under
the Company's Supplemental Dollars & Sense Plan, (ii)
estimated premium costs of arranging to pay death benefits to
the
16
executive officers' beneficiaries in excess of those provided
generally for other employees under "split-dollar" life
insurance policies discussed further under "-Report of
Compensation Committee Regarding Executive Compensation-Other
Benefits," (iii) contributions pursuant to the ESOP, valued as
of December 31 of each respective year (as supplemented by
contributions under the Company's Supplemental Defined
Contribution Plan), and (iv) payment of cash allowances in
lieu of previously-offered perquisites, in each case for and
on behalf of the named officers as follows:
Cash
Life Allowance
401(k) Plan Insurance ESOP in Lieu of
Name Year Contributions Premiums Contributions Perquisites
----------- ---- ------------- --------- ------------- -----------
Mr. Post 2003 $62,758 $ 0 $68,705 $34,320
2002 27,486 0 31,504 31,200
2001 34,197 2,600 28,888 31,200
Ms. Puckett 2003 30,730 0 33,949 27,885
2002 12,325 0 20,634 25,350
2001 13,449 744 19,408 25,350
Mr. Ewing 2003 28,981 0 29,431 27,885
2002 16,395 0 17,906 25,350
2001 16,785 1,274 16,919 25,350
Mr. Perry 2003 24,525 0 23,527 27,885
2002 15,367 0 16,636 25,350
2001 15,728 1,986 16,184 25,350
Mr. Cole 2003 24,051 0 22,835 27,885
2002 14,557 0 15,486 25,350
2001 15,717 711 15,050 25,350
(4) Ms. Puckett's employment with the Company commenced on July
24, 2000.
(5) Mr. Perry retired as Executive Vice President and Chief
Administrative Officer on December 31, 2003, and has acted as
non-executive Vice-Chairman of the Board since January 1,
2004. For additional information on Mr. Perry, see "Election
of Directors."
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE OF
----------------------------------------------------- OPTIONS AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION OVER TEN-YEAR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE EXPIRATION ---------------------------------
NAME GRANTED (1) IN 2003 PRICE DATE (5%) (10%)
------------------------- ----------- ---------- -------- ---------- --------------- ---------------
Glen F. Post, III........ 320,000 19% $27.48 2/24/13 $ 5,529,600 $ 14,016,000
Karen A. Puckett ........ 150,000 9% 27.48 2/24/13 2,592,000 6,570,000
R. Stewart Ewing, Jr..... 81,000 5% 27.48 2/24/13 1,399,680 3,547,800
Harvey P. Perry.......... 81,000 5% 27.48 2/24/13 1,399,680 3,547,800
David D. Cole............ 81,000 5% 27.48 2/24/13 1,399,680 3,547,800
All Shareholders(2)...... 144,364,168 - 27.76 - $ 2,520,326,224 $ 6,387,001,487
-----------------------
(1) One-third of these options became exercisable on February 24,
2004, one-third will become exercisable on February 24, 2005,
and one-third will become exercisable on February 24, 2006.
17
(2) The amounts shown as potential realizable value for all
shareholders, which are presented for comparison purposes
only, represent the aggregate net gain for all holders of
Common Shares, as of December 31, 2003, assuming a
hypothetical option to acquire 144,364,168 Common Shares (the
number of such shares outstanding as of such date) granted at
$27.76 per share (the weighted average exercise price of all
options granted in 2003) on February 24, 2003 and expiring on
February 24, 2013, if the price of Common Shares appreciates
at the rates shown in the table. There can be no assurance
that the potential realizable values shown in the table will
be achieved. The Company neither makes nor endorses any
prediction as to future stock performance.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
NO. OF
SHARES
ACQUIRED NUMBER OF SECURITIES VALUE OF UNEXERCISED
ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
NAME EXERCISE REALIZED OPTIONS AT DECEMBER 31, 2003 DECEMBER 31, 2003
---------------------- -------- ---------- ------------ ------------- ----------- -------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------ ------------- ----------- -------------
Glen F. Post, III....... 85,027 $1,703,201 1,037,216 639,996 $ 7,898,271 $ 2,134,388
Karen A. Puckett ....... 0 0 220,000 270,000 710,455 954,595
R. Stewart Ewing, Jr.... 51,800 1,045,299 256,060 161,998 1,843,744 540,265
Harvey P. Perry......... 127,257 2,163,656 156,000 162,000 201,965 540,265
David D. Cole........... 0 0 258,375 161,998 1,925,354 540,265
REPORT OF COMPENSATION COMMITTEE REGARDING EXECUTIVE COMPENSATION
GENERAL. The Board's Compensation Committee, either directly or through
its Incentive Awards Subcommittee, monitors and approves the compensation of the
Company's executive officers, administers the Company's incentive compensation
programs, and performs other related tasks. The Committee is composed entirely
of Board members who qualify as independent directors under the Company's
corporate governance guidelines and "non-employee directors" under Rule 16b-3
promulgated under the Securities Exchange Act of 1934. The Subcommittee is
composed entirely of Committee members who also qualify as "outside directors"
under Section 162(m) of the Internal Revenue Code. If you would like additional
information on the responsibilities of the Compensation Committee, please refer
to its charter, which is filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 and is posted on the Company's
website at www.centurytel.com.
Compensation Objectives. During 2003, the Committee applied the
following compensation objectives in connection with its deliberations:
- compensating the Company's executive officers with salaries
higher than those of similarly-situated executives at
comparable companies, if justified by corporate and individual
performance
- providing a substantial portion of the executives'
compensation in the form of incentive compensation based upon
(i) the Company's short and long-term performance and (ii) the
individual, departmental or divisional achievements of the
executives
- encouraging team orientation, and
18
- providing sufficient benefit levels for executives and their
families in the event of disability, illness or retirement.
In addition, to the extent that it is practicable and consistent with
the Company's executive compensation objectives, the Committee seeks to comply
with Section 162(m) of the Internal Revenue Code and any regulations promulgated
thereunder (collectively, "Section 162(m)") in order to preserve the tax
deductibility of performance-based compensation in excess of $1 million per
taxable year to each of the named officers. If compliance with Section 162(m)
conflicts with the Committee's compensation objectives or is contrary to the
best interests of the shareholders, the Committee will pursue its objectives,
regardless of the attendant tax implications.
Overview of 2003 Compensation. As described further below, the
Company's executive compensation for 2003 was comprised of:
- salary
- an annual cash incentive bonus
- long-term incentive compensation in the form of grants of
stock options in 2003 and the payout of incentive awards
granted in 1998, and
- other benefits typically provided to executives of comparable
companies, all as described further below.
For each such component of compensation, the Company's compensation levels were
compared with those of comparable companies.
During the Fall of 2002, the Committee retained an independent
consulting firm to assist the Company in connection with implementing its
officer compensation programs for 2003. The consulting firm compared the
Company's officer compensation to that of a national group of companies. This
group included a number of telecommunications companies (including several of
the peer companies referred to in the Company's stock performance graph
appearing elsewhere herein), but also included other companies that have revenue
levels similar to the Company's.
SALARY. The salary of the Chief Executive Officer and each other
executive officer is based primarily on the officer's level of responsibility
and comparisons to prevailing salary levels for similar officers at comparable
companies. Based upon survey data, recommendations of the Committee's
independent consulting firm and the Company's Chief Executive Officer, and other
considerations, the Committee in February 2003 increased the salary of the Chief
Executive Officer by 8.8% and the salaries of each of the Company's other named
officers by between 4.1% to 11.8%. The Committee believes these 2003 raises were
consistent with its primary objective of ensuring that the executive officers
receive salaries in excess of median salaries of similarly-situated executives
when warranted by corporate and individual performance.
ANNUAL INCENTIVE BONUS PROGRAMS. The Company maintains (i) a
shareholder-approved short-term incentive program for certain of its executive
officers and (ii) an annual incentive bonus program for the Company's other
officers and managers. In
19
connection with both of these bonus programs, the Compensation Committee, either
directly or through its Incentive Awards Subcommittee, annually establishes
target performance levels and the amount of bonus payable if these targets are
met, which typically is defined in terms of a percentage of each officer's
salary. For 2003, the Committee recommended target bonuses ranging from 40% to
60% of each executive officer's salary if the targets were met, with up to
double these amounts if the targets were substantially exceeded and no bonuses
if certain minimum target performance levels were not attained. The target bonus
payable to the Company's Chief Executive Officer for 2003 performance was based
solely upon the Company's overall financial performance measured in terms of
operating income growth and specified levels of return on cash flow measured in
relation to the performance of a group of peer companies, subject to the
"negative discretion" of the Committee to reduce the bonus payment. The bonuses
payable to each other executive officer were based upon the same corporate
performance goals established for the Chief Executive Officer, subject to the
"negative discretion" of the Chief Executive Officer to reduce the bonus payment
based on an assessment of the officer's performance during 2003, including an
assessment of the degree to which such officer attained his or her individual
performance goals for 2003.
Based on the Company's 2003 performance, the Chief Executive Officer
received a bonus equal to 118% of his 2003 salary. Applying the standards
described above, each other named officer received a bonus between approximately
88% and 108% of his or her 2003 salary. The Committee elected to pay these 2003
incentive bonuses in cash.
STOCK INCENTIVE PROGRAMS. The Company's current long-term incentive
compensation programs authorize the Incentive Awards Subcommittee to grant stock
options and various other stock-based incentives to key personnel. One of the
Subcommittee's central goals with respect to stock incentive awards is to
strengthen the relationship between compensation and growth in the market price
of the Common Shares and thereby align the executive officers' financial
interests with those of the Company's shareholders.
Incentives granted under these programs become exercisable based upon
criteria established by the Subcommittee. The Subcommittee generally determines
the size of option grants based on the recipient's responsibilities and duties,
and on information furnished by the Subcommittee's consultants regarding stock
option practices among comparable companies. Since 2001, the Committee's general
philosophy has been to award annual option grants as opposed to larger,
multi-year grants.
2003 Grants. During 2003, the Compensation Committee awarded to the
Company's officers stock options on the terms further described elsewhere
herein. The Committee determined the size of its 2003 option grants based on
information furnished by the Committee's independent consulting firm relating to
the long-term incentive compensation practices among other comparable companies.
Based on the consulting firm's recommendations, the Committee granted awards to
each executive officer having a value, determined under the Black-Scholes
valuation methodology, commensurate with long-term incentive awards to
similarly-situated executives at other comparable companies.
20
Prior Grants. During 1997, 1998 and 1999, the Committee awarded to the
Company's officers long-term incentive compensation in the form of (i)
time-vested restricted stock which will generally vest on or about the fifth
anniversary of the grant date and (ii) performance-based restricted stock and
performance shares which will vest or be earned based on appreciation of the
market value of the Company's Common Shares over a five-year period. These
grants vested or were earned in early 2002, 2003 and 2004, respectively.
OTHER BENEFITS. The Company maintains certain broad-based employee
benefit plans in which the executive officers are generally permitted to
participate on terms substantially similar to those relating to all other
participants, subject to certain legal limitations on the compensation on which
benefits and contributions may be based. The Board has determined to have the
Company's matching contribution under the 401(k) Plan invested in Common Shares
so as to further align employees' and shareholders' financial interests. The
Company also maintains the ESOP, which serves to further align employees' and
shareholders' interests.
Prior to the Sarbanes-Oxley Act of 2002, the Company funded
supplemental life insurance benefits to its officers in excess of those
generally afforded to employees. These benefits were provided pursuant to
endorsement "split-dollar" insurance agreements between the Company and its
officers. Under each of these agreements, the Company and the officer's
beneficiaries shared the death benefits payable upon the officer's death under a
life insurance policy procured by the Company, with the beneficiaries receiving
pre-retirement death benefits of four times the officer's annual salary less
group life insurance benefits (or post-retirement death benefits of two times
the officer's annual salary less group life insurance benefits), and the Company
receiving all remaining death benefits. In response to uncertainties as to
whether these arrangements with the Company's executive officers violated the
Sarbanes-Oxley Act, in mid-2002 the Company suspended the payment of further
premiums under the "split-dollar" policies insuring the lives of its executive
officers. In November 2003, the Compensation Committee approved restructured
arrangements with the executive officers in order to alleviate such
uncertainties, as well as potential adverse tax consequences of new tax
regulations adopted in 2003. Under these restructured arrangements with each
executive officer, the Company is authorized to (i) surrender the insurance
policy insuring such officer in exchange for cash from the policy equal to the
aggregate premiums the Company had previously paid to fund such policy, (ii)
terminate its prior "split-dollar" insurance agreement with such officer and
transfer ownership of the related policy to such officer, (iii) forfeit its
right to receive death benefits under such related policy and (iv) adopt a new
plan providing substitute supplemental life insurance benefits for its executive
officers. This new plan, among other things, would obligate the Company to pay
premiums on the executive officers' respective insurance policies sufficient to
provide the same death benefits available under the prior agreements, and
entitle the executive officers to purchase additional post-retirement coverage
at their cost and to receive "gross-up" cash payments in amounts sufficient to
compensate them for income and employment taxes incurred as a result of the
Company's premium payments. The Company expects to implement these restructured
arrangements during the second quarter of 2004.
21
Additionally, the Company makes available to its officers various
defined benefit retirement plans (which are described below under " - Pension
Plans"), various nonqualified supplemental benefit plans, cash allowances in
lieu of previously-offered perquisites, and a disability salary continuation
plan.
COMPENSATION OF CHIEF EXECUTIVE OFFICER. The criteria, standards and
methodology used by the Committee and Subcommittee in reviewing and establishing
the Chief Executive Officer's salary, bonus and other compensation are the same
as those used with respect to all other executive officers, as described above.
As discussed above under " - Salary," based on its review of data compiled by
the Committee's independent consulting firm and other information, the Committee
raised the annual salary of the Chief Executive Officer by 8.8% during 2003 to
$925,000. The Chief Executive Officer also received a cash bonus of $1,064,099
for 2003 performance under the Company's shareholder-approved short-term
incentive plan. In addition, during 2003 the Chief Executive Officer was granted
options to purchase 320,000 shares, as described further herein.
Submitted by the Compensation Committee of the Board of Directors.
C.G. Melville, Jr. (Chairman) James B. Gardner Jim D. Reppond
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
One of the members of the Compensation Committee, Jim D. Reppond, was
an officer of the Company prior to his retirement in 1996. Mr. Reppond is not a
member of the Committee's Incentive Awards Subcommittee, which administers the
Company's incentive compensation plans and programs and is comprised solely of
Committee members who qualify as "outside directors" under Section 162(m).
PENSION PLANS
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Company maintains a
Supplemental Executive Retirement Plan (the "Supplemental Pension Plan")
pursuant to which certain officers who have completed at least five years of
service are generally entitled to receive a monthly payment upon attaining early
or normal retirement age under the plan. The following table reflects the
approximate annual retirement benefits that a participant with the indicated
years of service and compensation level may expect to receive under the
Supplemental Pension Plan assuming retirement at age 65. Early retirement may be
taken at age 55 by any participant with ten or more years of service, with
reduced benefits.
22
Years of Service
---------------------------------------------------------------------------
Compensation 5 10 15 20 25
------------ --------- --------- -------- -------- --------
$ 400,000 $ 60,000 $ 120,000 $140,000 $160,000 $180,000
500,000 75,000 150,000 175,000 200,000 225,000
600,000 90,000 180,000 210,000 240,000 270,000
700,000 105,000 210,000 245,000 280,000 315,000
800,000 120,000 240,000 280,000 320,000 360,000
900,000 135,000 270,000 315,000 360,000 405,000
1,000,000 150,000 300,000 350,000 400,000 450,000
1,100,000 165,000 330,000 385,000 440,000 495,000
1,200,000 180,000 360,000 420,000 480,000 540,000
The above table reflects the annual benefits payable upon normal
retirement under the Supplemental Pension Plan assuming such benefits will be
paid in the form of a monthly lifetime annuity and before reductions relating to
the receipt of Social Security benefits as described below. The actual amount of
an officer's monthly payment under the Supplemental Pension Plan is equal to (i)
3% of the officer's "average monthly compensation" (defined below) times the
officer's years of service during his first ten years with the Company plus (ii)
1% of the officer's "average monthly compensation" times his years of service
after his first ten years with the Company (up to a maximum of 15 additional
years), minus (iii) 4% of his estimated monthly Social Security benefits times
his years of service with the Company (up to a maximum of 25 years). Payments to
retired officers under this formula are increased by 3% per year to reflect cost
of living increases. "Average monthly compensation" means the officer's average
monthly compensation during the 36 consecutive month period within his last ten
years of employment in which he received his highest compensation. Participants
added to the plan after January 1, 2000 receive credit only for service while a
plan participant.
Under the Supplemental Pension Plan, the number of credited years of
service at December 31, 2003 was 25 years for Mr. Post, three years for Ms.
Puckett, 21 years for Mr. Ewing, 19 years for Mr. Perry, and 21 years for Mr.
Cole. The compensation upon which benefits are based under such plan is the
aggregate amount of compensation reported for 2003 for each respective officer
under the columns in the Summary Compensation Table appearing above that are
entitled "Salary" and "Bonus."
BROAD-BASED PENSION PLAN. The Company also maintains a qualified
defined benefit plan (the "Qualified Plan") pursuant to which most of the
Company's employees (including officers) who have completed at least five years
of service are generally entitled to receive payments upon attaining early or
normal retirement age under the plan. The Company further maintains a
non-qualified defined benefit plan (the "Non-Qualified Plan") designed to pay
supplemental retirement benefits to officers in amounts equal to the benefits
that such officers would otherwise forego under the Qualified Plan due to
federal limitations on the amount of benefits payable to highly compensated
participants of qualified plans.
23
The following table reflects the approximate total annual retirement
benefits that a participant with the indicated years of service and annual
compensation level may expect to receive under the Qualified and Non-Qualified
Plans (collectively, the "Broad-Based Pension Plan") assuming retirement at age
65 during 2004. Upon attaining age 55, participants with at least five years of
service may elect to receive reduced early retirement benefits.
Years of Service
------------------------------------------------------------------------------------------
Compensation 5 10 15 20 25 30
------------ --------- --------- -------- -------- -------- ---------
$ 400,000 $ 18,840 $ 37,690 $ 56,530 $ 75,370 $ 94,210 $ 113,060
500,000 23,840 47,690 71,530 95,370 119,210 143,060
600,000 28,840 57,690 86,530 115,370 144,210 173,060
700,000 33,840 67,690 101,530 135,370 169,210 203,060
800,000 38,840 77,690 116,530 155,370 194,210 233,060
900,000 43,840 87,690 131,530 175,370 219,210 263,060
1,000,000 48,840 97,690 146,530 195,370 244,210 293,060
1,100,000 53,840 107,690 161,530 215,370 269,210 323,060
1,200,000 58,840 117,690 176,530 235,370 294,210 353,060
The above table approximates the total annual benefits payable under
the Broad-Based Pension Plan assuming (in addition to the assumptions stated
above) that such benefits will be paid in the form of a monthly lifetime
annuity. The actual amount of a participant's total monthly payment is equal to
the sum of (i) his number of years of service under the plan (up to a maximum of
30 years) multiplied by 0.5% of his final average pay plus (ii) his number of
years of service under the plan (up to a maximum of 30 years) multiplied by 0.5%
of his final average pay in excess of his compensation subject to Social
Security taxes (as determined under the plan). For these purposes, "final
average pay" means the participant's average monthly compensation during the 60
consecutive month period within his last ten years of employment in which he
received his highest compensation.
Under the Broad-Based Pension Plan, each named officer other than Ms.
Puckett began to receive credit for years of service on January 1, 1999. Ms.
Puckett began receiving credit for years of service on July 24, 2000. The
compensation upon which benefits are based under such plan is the aggregate
amount reported for 2003 for each such officer under the columns in the Summary
Compensation Table appearing above that are entitled "Salary" and "Bonus."
CHANGE-IN-CONTROL ARRANGEMENTS
The Company has agreements with each of its executive officers which
entitle any such officer who is terminated without cause or resigns under
certain specified circumstances within three years of any change in control of
the Company to (i) receive a lump sum cash severance payment equal to three
times the sum of such officer's annual salary and bonus, (ii) receive any such
additional cash payments as may be necessary to
24
compensate him or her for any federal excise taxes imposed upon contingent
change in control payments and (iii) continue to receive certain welfare
benefits for three years.
Under the above-referenced agreements, a "change in control" of the
Company would be deemed to occur upon (i) any person (as defined in the
Securities Exchange Act of 1934) becoming the beneficial owner of 30% or more of
the outstanding Common Shares or 30% or more of combined voting power of the
Company's voting securities, (ii) a majority of the Company's directors being
replaced, (iii) consummation of certain mergers, substantial asset sales or
similar business combinations, or (iv) approval by the shareholders of a
liquidation or dissolution of the Company.
In the event of a change in control of the Company, the Company's
benefit plans provide, among other things, that all restrictions on outstanding
restricted stock will lapse, all outstanding stock options will become fully
exercisable, phantom stock units credited under the Company's supplemental
defined contribution plan will be converted into cash and held in trust, and
post-retirement health and life insurance benefits will vest with respect to
certain current and former employees. In addition, participants in the
Supplemental Pension Plan who are terminated without cause or resign under
certain specified circumstances within three years of the change in control will
receive a cash payment equal to the present value of their plan benefits (after
providing age and service credits of up to three years), determined in
accordance with actuarial assumptions specified in the plan.
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Common Shares with the cumulative total return of the S&P 500 Index and the S&P
Integrated Telecommunications Services Index (the "S&P Telecom Index") for the
period from December 31, 1998 to December 31, 2003, in each case assuming (i)
the investment of $100 on January 1, 1999 at closing prices on December 31, 1998
and (ii) reinvestment of dividends. The data was provided by Value Line, Inc.
[PERFORMANCE GRAPH]
25
December 31,
-----------------------------------------------------------------
1998 1999 2000 2001 2002 2003
------- ------- ------- ------ ------ ------
CenturyTel.......................... $100.00 $105.73 $ 80.27 $74.13 $66.86 $74.76
S&P 500 Index....................... 100.00 119.62 107.49 93.47 71.63 90.53
S&P Telecom Index(1)................ 100.00 108.96 75.34 65.16 48.64 48.43
-------------------
(1) The S&P Telecom Index consists of ALLTEL Corporation, AT&T
Corporation, BellSouth Corporation, Citizens Communications
Company, Qwest Communications International Inc., SBC
Communications Inc., Sprint Corp. FON Group, Verizon
Communications Inc., and the Company. The index is publicly
available.
CERTAIN TRANSACTIONS
The Company paid fees of $874,388 to The Boles Law Firm for legal
services rendered to the Company in 2003. William R. Boles, Jr., a director of
the Company since 1992, is President and a director and practicing attorney with
such firm, which has provided legal services to the Company since 1968.
During 2003, the Company purchased $399,599 of electrical contracting
services from a firm owned by Johnny Hebert, a director of the Company.
During 2003, the Company paid approximately $265,000 of interest and
commitment fees to Regions Bank in its capacity as a participating lender under
the Company's credit facility arranged and syndicated by JP Morgan Chase Bank,
Wachovia Bank, N.A. and their affiliates. As disclosed elsewhere herein, an
affiliated trust of Regions Bank, acting in its capacity as trustee of the
Company's ESOP, is the record holder of 5.1% of the Common Shares. The president
of a regional office of Regions Bank is the brother-in-law of William R. Boles,
Jr., a director of the Company. For several decades, Regions Bank or its
predecessors in northeast Louisiana have provided a wide variety of banking and
trust services to the Company.
During 2003, the Company paid $98,448 to a real estate firm owned by
the brother of Harvey P. Perry, a director of the Company. In exchange for such
payments (approximately $12,520 of which was used to compensate subcontractors
and vendors and to recoup other out-of-pocket costs), such firm provided a
variety of services with respect to numerous real estate transactions in several
states, including locating and analyzing properties suitable for purchase or
lease and negotiating purchase or lease terms with the land owners.
During 2003, the Company paid Rhonda Woodard $88,085 in salary and
bonus for serving as Director of Customer Service Centers. Ms. Woodard is the
sister-in-law of David Cole, an executive officer of the Company, and has been
an employee of the Company since 1991.
During 2003, the Company paid Rickey Lowery approximately $78,686 in
salary and bonus for serving as a lead database analyst technician. Mr. Lowery
has been an employee of the Company since 1989 and has been the son-in-law of
Harvey P. Perry, a director of the Company, since 1990.
26
During 2003, the Company paid Martha Amman $82,876 in salary and bonus
for serving as Manager, Employment and Staffing. Ms. Amman is the sister of
Harvey P. Perry, a director of the Company, and has been an employee of the
Company since 1998.
During 2003, the Company paid H. Parnell Perry, Jr. $63,533 in salary
and bonus for serving as a technician. Mr. Perry is the son of Harvey P. Perry,
a director of the Company, and has been an employee of the Company since 1988.
During 2003, the Company paid Dale Shields $61,235 in salary and bonus
for serving as Manager of Risk and Safety, and allowed his wife to use the
Company's aircraft in connection with a medical emergency. Mr. Shields is the
son-in-law of R. L. Hargrove, Jr., a director of the Company, and has been an
employee of the Company since 1983.
As an accommodation to the heirs of the Company's deceased founder,
Clarke M. Williams, in May 2003 the Compensation Committee of the Board approved
the sale of options to purchase 640,000 Common Shares that were originally
granted to Mr. Williams as executive compensation. The options were sold to Bear
Stearns & Co., Inc. by Mr. Williams' surviving spouse and by trusts created for
the benefit of one of her grandchildren and her three daughters, including the
wife of Harvey P. Perry, the Company's Vice Chairman of the Board. Under the
Company's incentive compensation plans, options may not be transferred to
non-family members unless the option holder is deceased and the transfer is
approved by the Compensation Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Securities Exchange Act of 1934 requires the Company's executive
officers and directors, among others, to file certain beneficial ownership
reports with the SEC. During 2003, each executive officer of the Company and its
Controller filed one late Form 4 that reported the grant of stock options on
February 24, 2003 described elsewhere herein. Each such form was filed one day
late due to a clerical oversight. In addition, Harvey P. Perry, the Vice
Chairman of the Board, filed one additional late Form 4 that reported two
transactions by his wife. The delinquent form was filed within two hours of the
5:30 p.m. Eastern time filing deadline based on the good faith belief that the
SEC's extended 10:00 p.m. Eastern time filing deadline was in effect when, in
fact, the extension had been announced but was not yet in effect.
REPORT OF AUDIT COMMITTEE
ACTIVITIES OF COMMITTEE
The Audit Committee of the Board of Directors is currently composed of
five directors, all of whom qualify as independent directors under the Company's
corporate governance guidelines.
Management is responsible for the Company's internal controls and the
financial reporting process. The Company's independent auditor is responsible
for performing an
27
independent audit of the Company's consolidated financial statements in
accordance with generally accepted auditing standards and to issue a report
thereon. The Committee's responsibility is to monitor and oversee these
processes.
In this context, the Committee has met and held discussions with the
Company's management, its internal auditors and its independent auditor, KPMG
LLP. Management represented to the Committee that the Company's consolidated
financial statements were prepared in accordance with generally accepted U.S.
accounting principles, and the Committee has reviewed and discussed the
consolidated financial statements with management and KPMG. The Committee
discussed with KPMG matters required to be discussed by Statements on Auditing
Standards No. 61 and 90 (Communication with Audit Committees).
KPMG also provided to the Committee the written disclosures required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees). The Committee discussed with KPMG that firm's independence, and
considered the effects that the provision of non-audit services may have on
KPMG's independence.
Based on and in reliance upon the reviews and discussions referred to
above, and subject to the limitations on the role and responsibilities of the
Committee referred to in its charter, the Committee recommended that the Board
of Directors include the audited consolidated financial statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.
OTHER INFORMATION
KPMG has acted as independent certified public auditor for the Company
since 1977, and has been selected by the Audit Committee to serve again in that
capacity for 2004. The following table lists the aggregate fees and costs billed
by KPMG and its affiliates to the Company and its subsidiaries for the 2002 and
2003 services identified below:
Amount Billed
--------------------------------
2002 2003
---------- ----------
Audit Fees (1)................................................ $1,641,000 $1,682,000
Audit-Related Fees(2)......................................... 129,000 195,000
Tax Fees(3)................................................... 1,869,000 1,122,000
All Other Fees(4)............................................. 21,000 2,000
---------- ----------
Total $3,660,000 $3,001,000
---------- ----------
------------------
(1) Includes the cost of services rendered in connection with
auditing the Company's annual consolidated financial
statements for each applicable year and reviewing the
Company's quarterly financial statements for such year, as
well as auditing the financial statements of several of the
Company's telephone subsidiaries and various partnerships
included in the Company's discontinued wireless operations;
also includes services rendered in connection with reviewing
the Company's registration statements and issuing comfort
letters.
(2) Includes the cost of (i) auditing the Company's benefit plans;
(ii) close out audits of the financial statements of various
partnerships included in the Company's discontinued wireless
operations; (iii) general accounting consulting services; and
(iv) services rendered in connection with the Company's
implementation of Section 404 of the Sarbanes-Oxley Act of
2002.
28
(3) Includes costs associated with (i) assistance in preparing
income tax returns; (ii) assistance with various tax audits;
(iii) assistance with the Company's divestiture of its
wireless business; and (iv) general income tax planning,
consultation and compliance. Of these aggregate amounts, for
2002 approximately $831,000, and for 2003 approximately
$124,000, is attributable to fees and costs associated with
the Company's divestiture of its wireless business in August
2002.
(4) Substantially all of such amounts for 2002 are related to
assistance provided in connection with an internal audit
department review of the Company's information technology
function.
The Audit Committee maintains written procedures that require it to
annually pre-approve the scope of all auditing services to be performed by the
Company's independent auditor. The Committee's procedures prohibit the
independent auditor from providing any non-audit services unless the service is
permitted under applicable law and is pre-approved by the Audit Committee or its
Chairman. The Chairman is authorized to pre-approve projects expected to cost no
more than $50,000, provided the total cost of all projects pre-approved by the
Chairman during any fiscal quarter does not exceed $100,000. The Audit Committee
has pre-approved the Company's independent auditor to provide up to $40,000 per
quarter of miscellaneous tax services that do not constitute discrete and
separate projects. The Chief Financial Officer is required periodically to
advise the full Committee of the scope and cost of services not pre-approved by
the full Committee. Although applicable regulations waive these pre-approval
requirements in certain limited circumstances, the Audit Committee did not use
these waiver provisions in either 2002 or 2003.
The Audit Committee has considered whether the provision of KPMG's
non-audit services is compatible with maintaining KPMG's independence.
If you would like additional information on the responsibilities of the
Audit Committee, please refer to its charter, which is an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 2003 and is
posted on the Company's website at www.centurytel.com.
Submitted by the Audit Committee of the Board of Directors.
James B. Gardner R. L. Hargrove, Jr.
(Chairman) Fred R. Nichol
Virginia Boulet Joseph R. Zimmel
OTHER MATTERS
QUORUM AND VOTING OF PROXIES
The presence, in person or by proxy, of a majority of the total voting
power of the Voting Shares is necessary to constitute a quorum to organize the
Meeting. Shareholders voting or abstaining from voting on any issue will be
counted as present for purposes of constituting a quorum to organize the
Meeting.
29
If a quorum is present, directors will be elected by plurality vote
and, as such, withholding authority to vote in the election of directors will
not affect whether the nominees named herein are elected. As indicated above,
the affirmative vote of the holders of a majority of the voting power present or
represented at the Meeting will be required to ratify the appointment of the
independent auditor. Shares as to which the proxy holders have been instructed
to abstain from voting will not be treated as present or represented for
purposes of such vote, and will therefore not affect the outcome of the vote.
Under the rules of the New York Stock Exchange, brokers who hold shares
in street name for customers may vote in their discretion on the election of
directors and the ratification of the appointment of the independent auditor
when they have not received voting instructions from beneficial owners. If
brokers who do not receive voting instructions do not exercise such
discretionary voting power (a "broker non-vote"), shares that are not voted will
be treated as present for purposes of constituting a quorum to organize the
Meeting but not present for purposes of voting to elect directors or ratify the
appointment of the independent auditor. Because the election of directors must
be approved by plurality vote and the ratification of the independent auditor
must be approved by a majority of the voting power present or represented at the
Meeting, broker non-votes with respect to these matters will not affect the
outcome of the voting.
Voting Shares represented by all properly executed proxies received in
time for the Meeting will be voted at the Meeting. A proxy may be revoked at any
time before it is exercised by filing with the Secretary of the Company a
written revocation or a duly executed proxy bearing a later date, or by
attending the Meeting and voting in person. Unless revoked, all properly
executed proxies will be voted as specified and, if no specifications are made,
will be voted in favor of the nominees and the ratification of the appointment
of the independent auditor.
Management has not timely received any notice that a shareholder
desires to present any matter for action at the Meeting in accordance with the
Company's bylaws (which are described below), and is otherwise unaware of any
matter for action by shareholders at the Meeting other than the election of
directors and the ratification of the appointment of the independent auditor.
The enclosed proxy and voting instruction cards, however, will confer
discretionary voting authority with respect to any other matter that may
properly come before the Meeting. It is the intention of the persons named
therein to vote in accordance with their best judgment on any such matter.
SHAREHOLDER NOMINATIONS AND PROPOSALS
In order to be eligible for inclusion in the Company's 2005 proxy
materials pursuant to the federal proxy rules, any shareholder proposal to take
action at such meeting must be received at the Company's principal executive
offices by November 24, 2004, and must comply with applicable federal proxy
rules. In addition, the Company's bylaws require shareholders to furnish timely
written notice of their intent to nominate a director or bring any other matter
before a shareholders' meeting, whether or not they wish to include their
proposal in the Company's proxy materials. In general, notice must
30
be received by the Secretary of the Company between November 6, 2004 and
February 5, 2005 and must contain specified information concerning, among other
things, the matters to be brought before such meeting and concerning the
shareholder proposing such matters. (If the date of the 2005 annual meeting is
more than 30 days earlier or later than May 6, 2005, notice must be received by
the Secretary of the Company within 15 days of the earlier of the date on which
notice of such meeting is first mailed to shareholders or public disclosure of
the meeting date is made.) For additional information on these procedures, see
"Corporate Governance - Director Nomination Process."
ANNUAL REPORT AND FINANCIAL INFORMATION
Appendix A includes the Annual Financial Statements and Review of
Operations of the Company in the form in which they were filed with the
Securities and Exchange Commission on March 12, 2004 as part of the Company's
Annual Report on Form 10-K for the year ended December 31, 2003. The Company
expects to mail a copy of its summary annual report for the year ended December
31, 2003 on or about the date that it mails this Proxy Statement to its
shareholders.
You may obtain a copy of the Company's Form 10-K report without charge
by writing to Stacey W. Goff, Secretary, CenturyTel, Inc., 100 CenturyTel Drive,
Monroe, LA 71203, or by visiting the Company's website at www.centurytel.com.
Neither Appendix A nor the Company's summary annual report is to be
regarded as proxy soliciting material.
By Order of the Board of Directors
/s/ Stacey W. Goff
Stacey W. Goff
Secretary
Dated: March 24, 2004
31
'
APPENDIX A
TO PROXY STATEMENT
CENTURYTEL, INC.
ANNUAL FINANCIAL STATEMENTS
AND
REVIEW OF OPERATIONS
A-1
INDEX TO FINANCIAL INFORMATION
DECEMBER 31, 2003
The materials included in this Appendix A are excerpted from Items 7
and 8 of the Company's Annual Report on Form 10-K for the year ended December
31, 2003, which the Company filed with the Securities and Exchange Commission on
March 12, 2004. Reference is made to the Form 10-K for additional information
about the business and operations of the Company.
Page
----
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... A-3
Financial Statements and Supplementary Data:
Report of Management............................................. A-36
Independent Auditors' Report..................................... A-37
Consolidated Statements of Income................................ A-38
Consolidated Statements of Comprehensive Income.................. A-40
Consolidated Balance Sheets...................................... A-41
Consolidated Statements of Cash Flows............................ A-42
Consolidated Statements of Stockholders' Equity.................. A-43
Notes to Consolidated Financial Statements....................... A-44
Consolidated Quarterly Income Statement Information.............. A-79
A-2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
CenturyTel, Inc. ("CenturyTel") and its subsidiaries is a regional
integrated communications company engaged primarily in providing local exchange,
long distance, Internet access and data services to customers in 22 states. For
the year ended December 31, 2003, local exchange telephone operations provided
87% of the consolidated revenues of CenturyTel and its subsidiaries (the
"Company"). The Company's local exchange telephone operations derive revenues
from providing (i) local telephone services, (ii) network access services and
(iii) other related services.
On July 1, 2002, the Company acquired the local exchange telephone
operations of Verizon Communications, Inc. ("Verizon") in the state of Alabama
for approximately $1.022 billion cash. On August 31, 2002, the Company acquired
the local exchange telephone operations of Verizon in the state of Missouri for
approximately $1.179 billion cash. The results of operations for the Verizon
assets acquired are reflected in the Company's consolidated results of
operations subsequent to each respective acquisition. See "Acquisitions" below
and Note 2 of Notes to Consolidated Financial Statements for additional
information. During 2003, the Company also acquired fiber transport assets in
five central U.S. states (which the Company operates under the name LightCore)
for $55.2 million cash.
On August 1, 2002, the Company sold substantially all of its wireless
operations principally to an affiliate of ALLTEL Corporation ("Alltel") in
exchange for an aggregate of approximately $1.59 billion in cash. As a result,
the Company's wireless operations for the years ended December 31, 2002 and 2001
have been reflected as discontinued operations on the Company's consolidated
statements of income and cash flows. For further information, see "Discontinued
Operations" below.
During the three years ended December 31, 2003, the Company has
acquired and sold various other operations, the impact of which has not been
material to the financial position or results of operations of the Company.
A-3
The net income of the Company for 2003 was $344.7 million, compared to
$801.6 million during 2002 and $343.0 million during 2001. Diluted earnings per
share for 2003 was $2.38 compared to $5.61 in 2002 and $2.41 in 2001. Income
from continuing operations (and diluted earnings per share from continuing
operations) was $344.7 million ($2.38), $193.5 million ($1.35) and $149.1
million ($1.05) for 2003, 2002 and 2001, respectively. In accordance with the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), amortization of goodwill ceased effective
January 1, 2002. If the results of operations for the year ended December 31,
2001 been subject to the provisions of SFAS 142, income from continuing
operations (and diluted earnings per share) would have been $195.4 million
($1.37) and net income (and diluted earnings per share) would have been $399.3
million ($2.81).
A-4
Year ended December 31, 2003 2002 2001
---------------------- ---------- -------- --------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 688,114 543,113 423,420
Other 62,282 43,568 22,098
Corporate overhead costs allocable to discontinued
operations - (11,275) (20,213)
---------- -------- --------
750,396 575,406 425,305
Interest expense (226,751) (221,845) (225,523)
Income from unconsolidated cellular entity 6,160 5,582 7,592
Nonrecurring gains and losses, net - 3,709 33,043
Other income and expense 2,154 (63,814) 32
Income tax expense (187,252) (105,505) (91,368)
---------- -------- --------
Income from continuing operations 344,707 193,533 149,081
Discontinued operations, net of tax - 608,091 193,950
---------- -------- --------
Net income $ 344,707 801,624 343,031
========== ======= =======
Net income, as adjusted for goodwill amortization $ 344,707 801,624 399,297
========== ======= =======
Basic earnings per share
From continuing operations $ 2.40 1.36 1.06
From continuing operations, as adjusted for
goodwill amortization $ 2.40 1.36 1.39
From discontinued operations $ - 4.29 1.38
From discontinued operations, as adjusted for
goodwill amortization $ - 4.29 1.45
Basic earnings per share $ 2.40 5.66 2.43
Basic earnings per share, as adjusted for
goodwill amortization $ 2.40 5.66 2.83
Diluted earnings per share
From continuing operations $ 2.38 1.35 1.05
From continuing operations, as adjusted for
goodwill amortization $ 2.38 1.35 1.37
From discontinued operations $ - 4.26 1.36
From discontinued operations, as adjusted for
goodwill amortization $ - 4.26 1.43
Diluted earnings per share $ 2.38 5.61 2.41
Diluted earnings per share, as adjusted for
goodwill amortization $ 2.38 5.61 2.81
Average basic shares outstanding 143,583 141,613 140,743
========== ======= =======
Average diluted shares outstanding 144,700 142,879 142,307
========== ======= =======
A-5
Contributions to operating revenues and operating income by the
Company's telephone and other operations for each of the years in the three-year
period ended December 31, 2003 were as follows:
Year ended December 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------
Operating revenues
Telephone operations 87.0% 87.9 89.7
Other operations 13.0% 12.1 10.3
Operating income
Telephone operations 91.7% 94.4 99.6
Other operations 8.3% 7.6 5.2
Corporate overhead costs allocable to discontinued operations -% (2.0) (4.8)
In addition to historical information, this management's discussion and
analysis includes certain forward-looking statements that are based on current
expectations only, and are subject to a number of risks, uncertainties and
assumptions, many of which are beyond the control of the Company. Actual events
and results may differ materially from those anticipated, estimated or projected
if one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect. Factors that could affect actual results include
but are not limited to: the timing, success and overall effects of competition
from a wide variety of competitive providers; the risks inherent in rapid
technological change; the effects of ongoing changes in the regulation of the
communications industry; the Company's ability to effectively manage its growth,
including integrating newly-acquired businesses into the Company's operations,
hiring adequate numbers of qualified staff, and successfully upgrading its
billing and other information systems; possible changes in the demand for, or
pricing of, the Company's products and services; the Company's ability to
successfully introduce new product or service offerings on a timely and
cost-effective basis; the Company's ability to collect its receivables from
financially troubled communications companies; other risks referenced from time
to time in this report or other of the Company's filings with the Securities and
Exchange Commission; and the effects of more general factors such as changes in
interest rates, in tax rates, in accounting policies or practices, in operating,
medical or administrative costs, in general market, labor or economic
conditions, or in legislation, regulation or public policy. These and other
uncertainties related to the business are described in greater detail in Item 1
to the Company's Annual Report on Form 10-K for the year ended December 31,
2003. You are cautioned not to place undue reliance on
A-6
these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to update any of its
forward-looking statements for any reason.
TELEPHONE OPERATIONS
The Company conducts its telephone operations in rural, suburban and
small urban communities in 22 states. As of December 31, 2003, approximately 70%
of the Company's 2.4 million access lines were in Wisconsin, Missouri, Alabama,
Arkansas and Washington. The operating revenues, expenses and income of the
Company's telephone operations for 2003, 2002 and 2001 are summarized below.
Year ended December 31, 2003 2002 2001
----------------------- -------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 754,063 604,580 491,529
Network access 1,135,223 972,303 874,458
Other 182,694 156,709 139,746
-------------------------------------------
2,071,980 1,733,592 1,505,733
-------------------------------------------
Operating expenses
Plant operations 505,786 433,187 380,466
Customer operations 167,594 148,502 117,080
Corporate and other 259,635 211,924 186,483
Depreciation and amortization 450,851 396,866 398,284
-------------------------------------------
1,383,866 1,190,479 1,082,313
-------------------------------------------
Operating income $ 688,114 543,113 423,420
===========================================
Local service revenues. Local service revenues are derived from the
provision of local exchange telephone services in the Company's service areas.
Of the $149.5 million (24.7%) increase in local service revenues in 2003, $130.1
million was due to the properties acquired from Verizon in the third quarter of
2002. Of the remaining $19.4 million increase, $8.4 million was due to the
provision of custom calling features to more customers and $5.9 million was due
to increased rates in certain jurisdictions. Of the $113.1 million (23.0%)
increase in local service revenues in 2002, $102.8 million was due to the
acquisition of the Verizon properties in 2002. The remaining $10.3 million
increase was primarily due to a $7.6 million increase resulting from the
provision of custom calling features to more customers and a $1.8 million
increase due to increased rates in certain jurisdictions. Access lines declined
38,400 (1.6%) during 2003 compared to a decline of 19,600 (1.1%) in 2002
(exclusive of acquisitions). The Company believes
A-7
the decline in the number of access lines during 2003 and 2002 is primarily due
to general economic conditions in the Company's markets and the displacement of
traditional wireline telephone services by other competitive services, including
the Company's DSL product offering. Even as the economy recovers, the Company
believes that any rebound in access lines will be limited by continued access
line losses caused primarily by the impact of other competitive services. Based
on current conditions, the Company expects access lines to decline between 1 and
2% for 2004.
Network access revenues. Network access revenues are primarily derived
from charges to long distance companies and other customers for access to the
Company's local exchange carrier ("LEC") networks in connection with the
completion of interstate or intrastate voice and data transmissions. Certain of
the Company's interstate network access revenues are based on tariffed access
charges filed directly with the Federal Communications Commission ("FCC"); the
remainder of such revenues are derived under revenue sharing arrangements with
other LECs administered by the National Exchange Carrier Association. Intrastate
network access revenues are based on tariffed access charges filed with state
regulatory agencies or are derived under revenue sharing arrangements with other
LECs.
Network access revenues increased $162.9 million (16.8%) in 2003 and
$97.8 million (11.2%) in 2002 due to the following factors:
2003 2002
increase increase
(decrease) (decrease)
-----------------------------
(Dollars in thousands)
Acquisitions of Verizon properties in third quarter 2002 $ 146,941 98,014
Increased recovery from the federal Universal Service Fund ("USF") 250 13,832
One-time refund of access charges to interexchange carriers 7,645 (7,645)
Intrastate revenues due to decreased minutes of use and decreased
access rates in certain states (6,798) (27,740)
Partial recovery of increased operating costs through
revenue sharing arrangements with other telephone companies,
increased recovery from state support funds and return on rate base 4,116 9,756
Rate changes in certain jurisdictions 2,472 5,600
Revision of prior year revenue settlement agreements 9,983 1,912
Other, net (1,689) 4,116
----------------------------
$ 162,920 97,845
============================
As indicated in the chart above, in 2003 the Company experienced a
reduction in its intrastate revenues (exclusive of the properties acquired from
Verizon in 2002) of approximately $6.8 million primarily due to (i) a reduction
in intrastate minutes (partially
A-8
due to the displacement of minutes by wireless and electronic mail services) and
(ii) decreased access rates in certain states. The corresponding decrease in
2002 compared to 2001 was $27.7 million. The Company believes intrastate minutes
will continue to decline in 2004, although the magnitude of such decrease cannot
be precisely estimated.
The Company anticipates that revenue derived from its revision of prior
year revenue settlement agreements will be lower in 2004 compared to 2003
levels.
Other revenues. Other revenues include revenues related to (i) leasing,
selling, installing, maintaining and repairing customer premise
telecommunications equipment and wiring ("CPE services"), (ii) providing billing
and collection services for long distance carriers and (iii) participating in
the publication of local directories. Other revenues increased $26.0 million
(16.6%) during 2003, substantially all of which is due to the properties
acquired from Verizon in the third quarter of 2002. Other revenues increased
$17.0 million (12.1%) in 2002, of which $18.2 million was due to the properties
acquired from Verizon in 2002.
Operating expenses. Plant operations expenses during 2003 and 2002
increased $72.6 million (16.8%) and $52.7 million (13.9%), respectively. Of the
$72.6 million increase in 2003, $74.8 million was due to the properties acquired
from Verizon in the third quarter of 2002. The remaining $2.2 million decrease
was due to a $5.7 million decrease in information technology expenses and a $5.2
million decrease in repair and maintenance expenses. Such decreases were
partially offset by a $4.8 million increase in access expenses and $4.7 million
increase in salaries and benefits. Of the $52.7 million increase in 2002, $58.4
million was attributable to the properties acquired from Verizon in 2002 and
$13.8 million related to increases in salaries and benefits. Such increases were
partially offset by a $16.4 million decrease in access expenses primarily as a
result of changes in certain optional calling plans in Arkansas approved in late
2001 and a $3.0 million decrease in repairs and maintenance expense.
Customer operations, corporate and other expenses increased $66.8
million (18.5%) in 2003 and $56.9 million (18.7%) in 2002. Of the $66.8 million
increase in 2003, $65.4 million related to the Verizon acquisitions in 2002. The
remaining increase of $1.4 million was due primarily to (i) a $14.0 million
increase in operating taxes, which included a $7.5 million charge arising out of
various operating tax audits in 2003, and (ii) a $6.7 million increase in
information technology expenses largely attributable to the Company's
A-9
development of the new billing system described below under "Development of
Billing System". Such increases were partially offset by (i) a $16.0 million
decrease in the provision for uncollectible receivables (as 2002 was adversely
impacted by the establishment of a $15.0 million reserve for uncollectible
receivables primarily related to the bankruptcy of MCI (formerly WorldCom,
Inc.), whereas 2003 was positively impacted by a $5.0 million reduction in the
provision for uncollectible receivables due to the partial recovery of amounts
previously written off related to the bankruptcy of MCI) and (ii) a $4.6 million
decrease in customer service expenses. Of the $56.9 million increase in 2002,
$47.2 million related to the Verizon acquisitions in 2002. The remaining
increase of $9.7 million was due primarily to a $7.7 million increase in
salaries and benefits, a $4.6 million increase in customer service expenses and
a $3.9 million increase in the provision for uncollectible receivables
(attributable to the above-mentioned establishment of a $15.0 million reserve
for uncollectible receivables primarily related to the bankruptcy of MCI which
was partially offset by an $11.1 million reduction in the provision for
uncollectible receivables for non-carrier customers). Such increases were
partially offset by a $5.0 million decrease in operating taxes and a $1.4
million decrease in expenses related to the provision of CPE services.
Depreciation and amortization increased $54.0 million (13.6%) in 2003
and decreased $1.4 million (0.4%) in 2002. Of the $54.0 million increase in
2003, $50.9 million was due to the properties acquired from Verizon in 2002. The
remaining increase is primarily due to an increase in depreciation expense due
to higher levels of plant in service in incumbent markets. Of the $1.4 million
decrease in 2002, $58.0 million related to ceasing amortization of goodwill
effective January 1, 2002 in accordance with the provisions of SFAS 142. Such
decrease was substantially offset by $38.0 million of depreciation and
amortization related to the properties acquired from Verizon in 2002 and a $21.8
million increase in depreciation expense due to higher levels of plant in
service in incumbent markets. The composite depreciation rate for the Company's
telephone properties was 7.0% for 2003, 6.9% for 2002 and 6.8% for 2001.
Other. For additional information regarding certain matters that have
impacted or may impact the Company's telephone operations, see "Regulation and
Competition".
A-10
OTHER OPERATIONS
Other operations includes the results of continuing operations of
subsidiaries of the Company which are not included in the telephone segment
including, but not limited to, the Company's non-regulated long distance
operations, Internet operations, competitive local exchange carrier ("CLEC")
operations and fiber transport operations. During 2003, the Company paid $55.2
million cash to acquire fiber transport assets in five central U.S. states
(which the Company operates under the name LightCore). The operating revenues,
expenses and income of the Company's other operations for 2003, 2002 and 2001
are summarized below.
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 173,884 146,536 117,363
Internet 79,933 58,665 39,057
Other 54,948 33,203 17,351
------------------------------------------
308,765 238,404 173,771
------------------------------------------
Operating expenses
Cost of sales and operating expenses 226,693 180,076 142,919
Depreciation and amortization 19,790 14,760 8,754
------------------------------------------
246,483 194,836 151,673
------------------------------------------
Operating income $ 62,282 43,568 22,098
==========================================
Long distance revenues increased $27.3 million (18.7%) and $29.2
million (24.9%) in 2003 and 2002, respectively. The $27.3 million increase in
2003 was primarily attributable to the growth in the number of customers and
increased minutes of use ($32.6 million), primarily due to penetration of the
markets acquired from Verizon in 2002. Such increase was partially offset by a
decrease in the average rate charged by the Company ($5.3 million). The $29.2
million increase in 2002 was primarily attributable to the growth in the number
of customers and increased average minutes of use ($34.8 million), partially
offset by a decrease in the average rate charged by the Company per minute of
use ($5.8 million). The Company anticipates that increased competition will
continue to place downward pressure on rates. The number of long distance
customers as of December 31, 2003, 2002, and 2001 was approximately 769,760,
648,790, and 465,870, respectively.
A-11
Internet revenues increased $21.3 million (36.3%) in 2003 and $19.6
million (50.2%) in 2002 due primarily to growth in the number of customers,
principally due to the expansion of the Company's DSL product offering.
Other revenues increased $21.7 million (65.5%) primarily due to (i)
$16.7 million of revenues associated with the Company's LightCore operations and
(ii) a $4.3 million increase in revenues in the Company's CLEC business
primarily due to an increased number of customers, including those acquired in
connection with the purchase of certain CLEC operations on February 28, 2002.
Other revenues increased $15.9 million in 2002, of which $15.1 million was due
to increased revenues in the Company's CLEC business, primarily due to the
above-referenced CLEC acquisition in early 2002.
Cost of sales and operating expenses increased $46.6 million (25.9%) in
2003 primarily due to (i) a $14.6 million increase in expenses associated with
the Company's long distance operations (of which $7.4 million was due to
increased payments to other carriers due to higher minutes of use partially
offset by a decrease in the rate per minute of use; $2.8 million was due to an
increase in the provision for doubtful accounts; and $2.4 million was due to an
increase in billing and collection costs); (ii) a $16.4 million increase in
expenses associated with the Company's Internet operations due to an increase in
the number of customers; and (iii) a $10.4 million increase in expenses
associated with the Company's LightCore operations.
Cost of sales and operating expenses increased $37.2 million (26.0%) in
2002 primarily due to (i) a $23.9 million increase in expenses associated with
the Company's long distance operations (of which $13.4 million was due to
increased payments to other carriers due to higher minutes of use partially
offset by a decrease in the rate per minute of use; $5.3 million was related to
increased sales and marketing costs; $2.2 million was due to an increase in the
provision for doubtful accounts; and $2.3 million was due to an increase in
billing and collection costs); (ii) an $11.8 million increase in expenses
associated with the Company's CLEC operations primarily due to the expansion of
the business and operations acquired in the first quarter of 2002; and (iii) a
$12.3 million increase associated with expanding the Company's Internet
operations due to an increase in customers. Such increases were partially offset
by a $7.4 million reduction in expenses primarily due to the increased
intercompany profit with regulated affiliates (the
A-12
recognition of which in accordance with regulatory accounting principles acts to
offset operating expenses).
Depreciation and amortization increased $5.0 million in 2003 and $6.0
million in 2002 primarily due to increased depreciation expense in the Company's
CLEC and fiber transport businesses (including LightCore).
Certain of the Company's service subsidiaries provide managerial,
operational, technical, accounting and administrative services, along with
materials and supplies, to the Company's telephone subsidiaries. In accordance
with regulatory accounting, intercompany profit on transactions with regulated
affiliates has not been eliminated in connection with consolidating the results
of operations of the Company. When the regulated operations of the Company no
longer qualify for the application of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation"
("SFAS 71"), such intercompany profit will be eliminated in subsequent financial
statements, the primary result of which will be a decrease in operating expenses
applicable to the Company's telephone operations and an increase in operating
expenses applicable to the Company's other operations. The amount of
intercompany profit with regulated affiliates which was not eliminated was
approximately $28.5 million, $29.5 million and $22.0 million in 2003, 2002 and
2001, respectively. For additional information applicable to SFAS 71, see
"Regulation and Competition -- Other Matters."
INTEREST EXPENSE
Interest expense increased $4.9 million in 2003 primarily due to $7.5
million of interest associated with various operating tax audits. Such increase
was partially offset by reduced interest expense due to a decrease in average
debt outstanding.
Interest expense decreased $3.7 million in 2002 due to a decrease in
average debt outstanding and decreased rates.
INCOME FROM UNCONSOLIDATED CELLULAR ENTITY
Income from unconsolidated cellular entity was $6.2 million in 2003,
$5.6 million in 2002 and $7.6 million in 2001. Such income represents the
Company's share of income from its 49% interest in a cellular partnership.
A-13
NONRECURRING GAINS AND LOSSES, NET
In 2002, the Company recorded a pre-tax gain of $3.7 million from the
sale of a PCS license.
In 2001, the Company's net favorable nonrecurring pre-tax gains were
$33.0 million. The Company recorded a pre-tax gain on the sale of its remaining
shares of Illuminet Holdings, Inc. ("Illuminet") common stock aggregating $54.6
million ($35.5 million after-tax; $.25 per diluted share) and a pre-tax gain of
$4.0 million ($2.6 million after-tax; $.02 per diluted share) on the sale of
certain other assets. Additionally in 2001, the Company recorded pre-tax charges
of $25.5 million ($16.6 million after-tax; $.12 per diluted share) due to the
write-down in the value of certain non-operating investments in which the
Company owns a minority interest.
OTHER INCOME AND EXPENSE
Other income and (expense) was $2.2 million in 2003, ($63.8 million) in
2002 and $32,000 in 2001. Included in 2002 was a $59.9 million pre-tax charge
related to the Company's payment of premium in connection with redeeming its
Series I remarketable notes, net of unamortized premium.
INCOME TAX EXPENSE
The Company's effective income tax rate (from continuing operations)
was 35.2%, 35.3% and 38.0% in 2003, 2002 and 2001, respectively. The decrease in
the effective tax rate in 2002 compared to 2001 is primarily attributable to the
effect of ceasing amortization of goodwill (some of which was nondeductible for
tax purposes) effective January 1, 2002 in accordance with the provisions of
SFAS 142. In 2003, the Company reduced the valuation allowance related to net
state operating loss carryforwards as it was more likely than not that future
taxable income will be sufficient to enable the Company to utilize a portion of
the operating loss carryforwards. For additional information, see Note 12 to the
Company's consolidated financial statements appearing elsewhere in this report.
The Company expects its effective income tax rate to increase in 2004 due to an
increase in the effective state income tax rate.
A-14
DISCONTINUED OPERATIONS
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion in cash. As a result, the Company's wireless
operations for 2002 have been reflected as discontinued operations in the
Company's consolidated financial statements. The results of operations for 2001
have been restated to conform to the 2002 presentation. The following table
summarizes certain information concerning the Company's wireless operations for
the periods presented.
2002 2001
--------------------------------
Year ended December 31, (Dollars in thousands)
Operating revenues $ 246,705 437,965
Operating expenses, exclusive of corporate overhead costs
of $11.3 million and $20.2 million (175,447) (305,351)
Income from unconsolidated cellular entities 25,768 19,868
Minority interest expense (8,569) (11,510)
Gain on sale of discontinued operations 803,905 -
Nonrecurring gains - 166,928
Other income 188 4,707
Income tax expense (284,459) (118,657)
--------------------------------
Income from discontinued operations, net of tax $ 608,091 193,950
================================
Included in operating expenses for 2002 is a $30.5 million charge
associated with a write-off of all amounts expended to develop the wireless
portion of the Company's billing system currently in development. Depreciation
and amortization of long-lived assets and amortizable intangibles related to the
Company's wireless operations ceased effective March 19, 2002, the date of the
Company's definitive sales agreement with Alltel. Such cessation of depreciation
and amortization had the effect of reducing depreciation and amortization
expense approximately $20 million in 2002.
The Company recorded an $803.9 million pre-tax gain on the sale of
substantially all of its wireless business in the third quarter of 2002.
Nonrecurring gains for 2001 relate to the sale of 30 PCS licenses to
Leap Wireless International, Inc.
For further information, see Notes 3 and 13 to the Company's
consolidated financial statements appearing elsewhere in this report.
A-15
ACQUISITIONS AND RELATED FINANCING ARRANGEMENTS
On July 1, 2002, the Company completed the acquisition of approximately
300,000 telephone access lines in the state of Alabama from Verizon for
approximately $1.022 billion cash. On August 31, 2002, the Company completed the
acquisition of approximately 350,000 telephone access lines in the state of
Missouri from Verizon for approximately $1.179 billion cash.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consists initially of a beneficial interest in a
CenturyTel senior unsecured note with a principal amount of $25 and a contract
to purchase shares of CenturyTel common stock no later than May 2005. The senior
notes mature in May 2007. Each purchase contract will generally require the
holder to purchase between .6944 and .8741 of a share of CenturyTel common stock
in May 2005 based on the then current price of CenturyTel common stock in
exchange for $25, subject to certain adjustments and exceptions. Accordingly,
upon full settlement of the purchase contracts in May 2005, the Company will
receive proceeds of $500 million and will deliver between 13.9 million and 17.5
million common shares in the aggregate. The senior notes are pledged by the
holders to secure their obligations under the purchase contracts. The total
distributions on the equity units will be at an initial annual rate of 6.875%,
consisting of interest (6.02%) and contract adjustment payments (0.855%), each
payable quarterly. On or after mid-February 2005, the senior notes will be
remarketed, at which time the remarketing agent will reset the interest rate on
the senior notes in order to generate sufficient proceeds to secure the holder's
obligation under the purchase contract. In the event of an unsuccessful
remarketing, the Company will exercise its right as a secured party to dispose
of the senior notes and satisfy in full the holder's obligation to purchase
common stock under the purchase contract.
On July 22, 2002, the Company entered into $800 million of credit
facilities, consisting of a $533 million three-year facility and a $267 million
364-day revolving facility which lapsed during 2003. These facilities replaced
credit facilities that matured during the third quarter of 2002.
A-16
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which may be converted into
shares of CenturyTel common stock at a conversion price of $40.455 per share).
The Company used proceeds from the sale of equity units, senior notes
and convertible senior debentures, along with the $1.59 billion cash proceeds
received from the sale of substantially all of the Company's wireless operations
and utilization of its credit facilities, to finance the third quarter 2002
acquisitions of telephone properties in Alabama and Missouri from Verizon which
aggregated $2.201 billion, the redemption of $400 million principal amount in
remarketable debt securities (plus an associated $71.1 million premium payment)
in October 2002, and the Company's fourth quarter 2002 estimated tax payment,
which aggregated $290 million and included the obligation to pay taxes
associated with the sale of substantially all of its wireless operations.
In June and December 2003, the Company purchased certain fiber
transport assets for an aggregate of approximately $55.2 million. In the fourth
quarter of 2003, the Company acquired an additional 24.3% interest in a
telephone company in which it owned a majority interest for $32.4 million cash.
ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
("SFAS 143"), which addresses financial accounting and reporting for legal
obligations associated with the retirement of tangible long-lived assets and
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred and be capitalized as part
of the book value of the long-lived asset.
Although the Company generally has had no legal obligation to remove
obsolete assets, depreciation rates of certain assets established by regulatory
authorities for the Company's telephone operations subject to Statement of
Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS 71"), have historically included a component for
removal costs in excess of the related estimated salvage value. Notwithstanding
the adoption of SFAS 143, SFAS 71 requires the Company to continue to reflect
this accumulated liability for removal costs in excess of
A-17
salvage value even though there is no legal obligation to remove the assets. For
the Company's telephone operations acquired from Verizon in 2002 and its other
operations (neither of which are subject to SFAS 71), the Company has not
accrued a liability for anticipated removal costs in the past. For these
reasons, the adoption of SFAS 143 did not have a material effect on the
Company's financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150, "Accounting for Financial Instruments
with Characteristics of both Liabilities and Equity" ("SFAS 150"), which
provides standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and for pre-existing instruments as of the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on the Company's financial condition or results of operations.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation" ("SFAS 148"). SFAS 148, effective for fiscal years ending after
December 15, 2002, amends Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") to provide alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The Company has elected to account for employee stock-based compensation using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by SFAS
123.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Element Deliverables." This release addresses how to account for arrangements
that may involve the delivery or performance of multiple products, services or
rights to use assets. Under this release, revenue arrangements with multiple
deliverables should be divided into separate units of accounting based on their
relative fair value. The final consensus was
A-18
applicable to agreements entered into in periods beginning after June 15, 2003.
The adoption of EITF 00-21 did not have a material impact on the Company's
results of operations.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. Management continually evaluates its estimates and judgments
including those related to (i) revenue recognition, (ii) allowance for doubtful
accounts, (iii) purchase price allocation, (iv) pension and postretirement
benefits and (v) long-lived assets. Actual results may differ from these
estimates. The Company believes the following critical accounting policies
involve a higher degree of judgment or complexity.
Revenue recognition. Certain of the Company's telephone subsidiaries
participate in revenue sharing arrangements with other telephone companies for
interstate revenue and for certain intrastate revenue. Under such sharing
arrangements, which are typically administered by quasi-governmental agencies,
participating telephone companies contribute toll revenue or access charges
within state jurisdictions and access charges in the interstate market. These
revenues are pooled by the administrative agencies and used to reimburse
exchange carriers for their costs. Typically, participating companies have 24
months to update or correct data previously submitted. As a result, revenues
earned through the various sharing arrangements are initially recorded based on
the Company's estimates. Historically, revisions of previous revenue estimates
have not been material.
Certain of the Company's telephone subsidiaries file tariffs directly
with the Federal Communications Commission ("FCC") for certain interstate
revenues. Generally, the Company records such revenue at the authorized rate of
return prescribed by the FCC. If amounts are billed in excess of the authorized
rate of return, such excess is subject to refund upon request from other
telecommunications carriers and customers. Amounts not requested for refund by
carriers or customers are recognized as revenues at the end of the settlement
period, which is generally 33 months subsequent to the two-year monitoring
A-19
periods. See Note 19 to the Company's consolidated financial statements
appearing elsewhere in this report for additional information.
Allowance for doubtful accounts. In evaluating the collectibility of
its accounts receivable, the Company assesses a number of factors, including a
specific customer's or carrier's ability to meet its financial obligations to
the Company, the length of time the receivable has been past due and historical
collection experience. Based on these assessments, the Company records both
specific and general reserves for uncollectible accounts receivable to reduce
the related accounts receivable to the amount the Company ultimately expects to
collect from customers and carriers. If circumstances change or economic
conditions worsen such that the Company's past collection experience is no
longer relevant, the Company's estimate of the recoverability of its accounts
receivable could be further reduced from the levels reflected in the
accompanying consolidated balance sheet.
Purchase price allocation. For the properties acquired from Verizon in
2002, the Company allocated the aggregate purchase price to the assets acquired
and liabilities assumed based on fair value at the date of acquisition. The fair
value of property, plant and equipment and identifiable intangible assets was
determined by an independent appraisal of such assets. The fair value of the
postretirement benefit obligation was determined through actuarial valuations.
The fair value of current assets and current liabilities was assumed to
approximate the recorded value at acquisition due to their short maturity. The
remaining unallocated acquisition cost was considered goodwill.
Pension and postretirement benefits. The amounts recognized in the
financial statements related to pension and postretirement benefits are
determined on an actuarial basis, which utilizes many assumptions in the
calculation of such amounts. A significant assumption used in determining the
Company's pension and postretirement expense is the expected long-term rate of
return on plan assets. For 2003, the Company lowered its expected long-term rate
of return on plan assets to 8.25%, reflecting the expected moderation of
long-term rates of return in the financial markets. For 2002, such expected
return was assumed to be 10%.
Another assumption used in the determination of the Company's pension
and postretirement benefit plan obligations is the appropriate discount rate,
which is generally based on the yield on high-quality corporate bonds. The
Company lowered its assumed
A-20
discount rate to 6.0% at December 31, 2003 from 6.75% at December 31, 2002.
Changes in the discount rate do not have a material impact on the Company's
results of operations.
See "Pension and Medical Costs" for additional information.
Intangible and long-lived assets. Effective January 1, 2002, the
Company was subject to testing for impairment of long-lived assets under two new
accounting standards, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") and Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144").
SFAS 142 requires goodwill recorded in business combinations to be
reviewed for impairment at least annually and requires write-downs only in
periods in which the recorded amount of goodwill exceeds the fair value. Under
SFAS 142, impairment of goodwill is tested by comparing the fair value of the
reporting unit to its carrying value (including goodwill). Estimates of the fair
value of the reporting unit are based on valuation models using techniques such
as multiples of earnings (before interest, taxes and depreciation and
amortization). If the fair value of the reporting unit is less than the carrying
value, a second calculation is required in which the implied fair value of
goodwill is compared to its carrying value. If the implied fair value of
goodwill is less than its carrying value, goodwill must be written down to its
implied fair value. The Company completed the required annual test of goodwill
impairment (as of September 30, 2003) under SFAS 142 and determined its goodwill
is not impaired as of such date. Prior to January 1, 2002, substantially all of
the Company's goodwill was amortized over 40 years. The Company's amortization
of goodwill for the year ended December 31, 2001 totaled approximately $69.2
million.
Under SFAS 144, the carrying value of long-lived assets other than
goodwill is reviewed for impairment whenever events or circumstances indicate
that such carrying amount cannot be recoverable by assessing the recoverability
of the carrying value through estimated undiscounted net cash flows expected to
be generated by the assets. If the undiscounted net cash flows are less than the
carrying value, an impairment loss would be measured as the excess of the
carrying value of a long-lived asset over its fair value.
A-21
For additional information on the Company's critical accounting
policies, see "Accounting Pronouncements" and "Regulation and Competition -
Other Matters", and the footnotes to the Company's consolidated financial
statements.
INFLATION
The effects of increased costs historically have been mitigated by the
Company's ability to recover certain costs over time applicable to its regulated
telephone operations through the rate-making process. Possible future regulatory
changes and the continued movement toward alternative forms of regulation for
intrastate operations may alter the Company's ability to recover increased costs
in its regulated operations. For the properties acquired from Verizon in 2002,
which are regulated under price-cap regulation for interstate purposes, price
changes are limited to the rate of inflation, minus a productivity offset. For
additional information regarding the current regulatory environment, see
"Regulation and Competition." As operating expenses in the Company's
nonregulated lines of business increase as a result of inflation, the Company,
to the extent permitted by competition, attempts to recover the costs by
increasing prices for its services and equipment.
MARKET RISK
The Company is exposed to market risk from changes in interest rates on
its long-term debt obligations. The Company has estimated its market risk using
sensitivity analysis. Market risk is defined as the potential change in the fair
value of a fixed-rate debt obligation due to a hypothetical adverse change in
interest rates. Fair value of long-term debt obligations is determined based on
a discounted cash flow analysis, using the rates and maturities of these
obligations compared to terms and rates currently available in the long-term
financing markets. The results of the sensitivity analysis used to estimate
market risk are presented below, although the actual results may differ from
these estimates.
At December 31, 2003, the fair value of the Company's long-term debt
was estimated to be $3.4 billion based on the overall weighted average rate of
the Company's long-term debt of 6.4% and an overall weighted maturity of 10
years compared to terms and rates currently available in long-term financing
markets. Market risk is estimated as the potential
A-22
decrease in fair value of the Company's long-term debt resulting from a
hypothetical increase of 64 basis points in interest rates (ten percent of the
Company's overall weighted average borrowing rate). Such an increase in interest
rates would result in approximately a $143.9 million decrease in the fair value
of the Company's long-term debt. As of December 31, 2003, after giving effect to
interest rate swaps currently in place, approximately 84% of the Company's
long-term debt obligations were fixed rate.
The Company seeks to maintain a favorable mix of fixed and variable
rate debt in an effort to limit interest costs and cash flow volatility
resulting from changes in rates. From time to time, the Company uses derivative
instruments to (i) lock-in or swap its exposure to changing or variable interest
rates for fixed interest rates or (ii) to swap obligations to pay fixed interest
rates for variable interest rates. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes. Management
periodically reviews the Company's exposure to interest rate fluctuations and
implements strategies to manage the exposure.
At December 31, 2003, the Company had outstanding four fair value
interest rate hedges associated with the full $500 million aggregate principal
amount of its Series L senior notes, due 2012, that pay interest at a fixed rate
of 7.875%. These hedges are "fixed to variable" interest rate swaps that
effectively convert the Company's fixed rate interest payment obligations under
these notes into obligations to pay variable rates that range from the six-month
London InterBank Offered Rate ("LIBOR") plus 3.229% to the six-month LIBOR plus
3.67%, with settlement and rate reset dates occurring each six months through
the expiration of the hedges in August 2012. At December 31, 2003, the Company
realized a rate under these hedges of 4.8%. Interest expense was reduced by $7.7
million during 2003 as a result of these hedges. The aggregate fair market value
of these hedges was $11.7 million at December 31, 2003 and is reflected both as
a liability and as a decrease in the Company's underlying long-term debt on the
December 31, 2003 balance sheet. With respect to these hedges, market risk is
estimated as the potential change in the fair value of the hedge resulting from
a hypothetical 10% increase in the forward rates used to determine the fair
value. A hypothetical 10% increase in the forward rates would result in a $17.8
million decrease in the fair value of these hedges.
A-23
Effective May 8, 2003, the Company terminated a fair value interest
rate hedge associated with $500 million aggregate principal amount of its Series
H senior notes and received $22.3 million cash upon settlement, which
represented the fair value of the hedge at the termination date. Such amount
will be amortized as a reduction of interest expense through 2010, the maturity
date of the Series H notes.
DEVELOPMENT OF BILLING SYSTEM
The Company is in the process of developing an integrated billing and
customer care system which will provide the Company with, in addition to
standard billing functionality currently being provided by its legacy system,
custom built hardware and software technology for more efficient and effective
customer care, billing and provisioning systems. The costs to develop such
system have been accounted for in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). The capitalized costs of the system aggregated
$163.5 million (before accumulated amortization) at December 31, 2003. The
Company began amortizing its billing system costs in early 2003 (over a 20-year
period) based on the total number of customers that the Company has migrated to
the new system.
The system remains in the development stage and has required
substantially more time and money to develop than originally anticipated. The
Company currently expects to complete all phases of the new system no later than
mid-2005 at an aggregate capitalized cost in accordance with SOP 98-1 of
approximately $200-215 million (exclusive of previously-disclosed write-offs).
In addition, the Company expects to incur additional costs related to completion
of the project, including (i) approximately $15 million of customer service
related and data conversion costs (the majority of which are expected to be
incurred in 2004) that will be expensed as incurred and (ii) $10 million of
capitalized hardware costs (which will be amortized over a three-year period).
The estimates above do not include any amounts for maintenance or on-going
support of either the old or new system, and are based on assumptions regarding
various future events, several of which are beyond the Company's control. There
is no assurance that the system will be completed in accordance with this
schedule or budget, or that the system will function as anticipated. If the
system does not
A-24
function as anticipated, the Company may have to write off part or all of its
development costs and further explore its other billing and customer care system
alternatives.
PENSION AND MEDICAL COSTS
During the past several years, the Company's employee benefit expenses,
including defined benefit pension expenses and pre- and post-retirement medical
expenses, have increased due to rising medical costs, the decline of equity
markets in recent years prior to 2003 and record low interest rates. During
2003, such costs (including the effect of the Verizon acquisitions in 2002)
increased approximately $19.3 million over 2002. As a result of continued
increases in medical costs, the Company discontinued its practice of subsidizing
post-retirement medical benefits for persons hired on or after January 1, 2003.
In addition, the Company announced changes, effective January 1, 2004, that
would decrease its subsidization of benefits provided under its postretirement
medical plan. The amount of the Company's cost savings will be dependent upon
several factors, including the age and years of service of the Company's
retirees. The Company also lowered its expected long-term return on plan assets
for its pension and post-retirement plans to 8.25% for 2003 compared to 10% for
2002. Pension and medical costs are anticipated to increase between $6-8 million
in 2004 compared to 2003 levels.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash
provided by operations to provide for its cash needs. The Company's operations
have historically provided a stable source of cash flow which has helped the
Company continue its long-term program of capital improvements.
Operating activities. Net cash provided by operating activities from
continuing operations was $1.068 billion, $793.4 million and $572.9 million in
2003, 2002 and 2001, respectively. The Company's accompanying consolidated
statements of cash flows identify major differences between net income and net
cash provided by operating activities for each of those years. For additional
information relating to the continuing and discontinued operations of the
Company, see "Results of Operations."
A-25
Investing activities. Net cash used in investing activities from
continuing operations was $464.6 million, $2.623 billion and $417.2 million in
2003, 2002 and 2001, respectively. Cash used for acquisitions was $86.2 million
in 2003 (primarily due to the acquisitions of fiber transport assets and the
acquisition of an additional 24.3% interest in a telephone company in which the
Company owns a majority interest), $2.245 billion in 2002 (substantially all of
which relates to the 2002 Verizon acquisitions) and $47.1 million in 2001.
Proceeds from the sales of assets were $4.1 million in 2002 (excluding the
Company's 2002 wireless divestiture) and $58.2 million in 2001. Capital
expenditures from continuing operations for 2003 were $317.4 million for
telephone operations and $60.6 million for other operations. Capital
expenditures from continuing operations during 2002 and 2001 were $386.3 million
and $435.5 million, respectively.
Financing activities. Net cash provided by (used in) financing
activities from continuing operations was ($403.8) million in 2003, $506.3
million in 2002 and ($395.4) million in 2001. Net payments of debt were $432.3
million in 2003. Proceeds from the issuance of debt, net of debt payments, were
$531.4 million during 2002, compared to net payments of debt of $375.6 million
during 2001.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consists initially of a beneficial interest in a
CenturyTel senior unsecured note with a principal amount of $25 and a contract
to purchase shares of CenturyTel common stock no later than May 2005. The senior
notes will mature in May 2007. Each stock purchase contract will generally
require the holder to purchase between .6944 and .8741 of a share of CenturyTel
common stock in May 2005 in exchange for $25, subject to certain adjustments and
exceptions. The total distributions on the equity units will be at an initial
annual rate of 6.875%, consisting of interest (6.02%) and contract adjustment
payments (0.855%). For additional information, see Note 6 to the Company's
consolidated financial statements appearing elsewhere in this report.
On July 22, 2002, the Company entered into $800 million of credit
facilities, consisting of a $533 million three-year facility and a $267 million
364-day revolving facility with a one-year term-out option. The Company did not
renew its $267 million 364-day facility in 2003.
A-26
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which may be converted into
shares of CenturyTel common stock at a conversion price of $40.455 per share).
Holders of the convertible senior debentures will have the right to require the
Company to purchase all or a portion of the debentures on August 1, 2006, August
1, 2010 and August 1, 2017 at par plus any accrued and unpaid interest to the
purchase date. For additional information, see Note 6 to the Company's
consolidated financial statements appearing elsewhere in this report.
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion cash.
The Company used proceeds from the sale of equity units, senior notes
and convertible senior debentures, along with the proceeds received from the
sale of the Company's wireless operations and utilization of its $800 million
credit facilities, to finance the third quarter 2002 acquisitions of telephone
properties in Alabama and Missouri from Verizon which aggregated $2.201 billion,
the redemption of $400 million principal amount in remarketable debt securities
(plus an associated $71.1 million premium payment) in October 2002 and the
Company's fourth quarter 2002 estimated tax payment, which aggregated $290
million and included the obligation to pay taxes associated with the sale of
substantially all of its wireless operations.
In second quarter 2001, the Company completed the sale of 30 PCS
operating licenses for an aggregate of $195 million to Leap Wireless
International, Inc. The Company received approximately $108 million of the
purchase price in cash at closing and the remainder was collected in
installments through the fourth quarter of 2001. Such proceeds, and the proceeds
from the Company's above-described divestiture of its wireless operations in
2002, are included as net cash provided by discontinued operations on the
statements of cash flows appearing elsewhere in this report. In third quarter
2001, the Company sold its remaining shares of its investment in Illuminet
common stock for an aggregate of approximately $58.2 million. Proceeds from
these sales were used to repay indebtedness.
A-27
Other. Budgeted capital expenditures for 2004 total $290 million for
telephone operations and $110 million for other operations. The Company
anticipates that capital expenditures in its telephone operations will continue
to include the upgrading of its plant and equipment, including its digital
switches, to provide enhanced services, particularly in its newly acquired
markets, and the installation of fiber optic cable.
The following table contains certain information concerning the
Company's material contractual obligations as of December 31, 2003.
Payments due by period
----------------------------------------------------------------------------------------------------------
Contractual Less than After
obligations Total 1 year 1-3 years 4-5 years 5 years
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Long-term debt,
including current
maturities and
capital lease
obligations $ 3,181,755 72,453 523,952 (1) 805,397 (2) 1,779,953
----------------------------------------------------------------------------------------------------------
(1) Includes $165 million aggregate principal amount of the Company's
convertible debentures, Series K, due 2032, which can be put to the Company at
various dates beginning in 2006.
(2) Includes $500 million aggregate principal amount of the Company's senior
notes, Series J, due 2007, which the Company is committed to remarket in 2005.
On February 3, 2004, the Company announced that its board of directors
approved a stock repurchase program that will allow the Company to repurchase up
to an aggregate of $400 million of either its common stock or convertible equity
units prior to December 31, 2005. The Company commenced purchases under this
plan on February 6, 2004.
The Company continually evaluates the possibility of acquiring
additional telecommunications operations and expects to continue its long-term
strategy of pursuing the acquisition of attractive communications properties in
exchange for cash, securities or both. At any given time, the Company may be
engaged in discussions or negotiations regarding additional acquisitions. The
Company generally does not announce its acquisitions or dispositions until it
has entered into a preliminary or definitive agreement. The Company may require
additional financing in connection with any such acquisitions, the consummation
of which could have a material impact on the Company's financial condition or
operations. Approximately 4.1 million shares of CenturyTel common stock and
200,000 shares of CenturyTel preferred stock remain available for future
issuance in connection with acquisitions under CenturyTel's acquisition shelf
registration statement.
A-28
As of December 31, 2003, the Company had available $533.0 million of
undrawn committed bank lines of credit and the Company's telephone subsidiaries
had available for use $123.0 million of commitments for long-term financing from
the Rural Utilities Service and Rural Telephone Bank. The Company has a
commercial paper program that authorizes the Company to have outstanding up to
$1.5 billion in commercial paper at any one time; however, borrowings are
limited to the amount available under its credit facility. As of December 31,
2003, the Company had no commercial paper outstanding under such program. The
Company also has access to debt and equity capital markets, including its shelf
registration statements. At December 31, 2003, the Company held over $203
million of cash and cash equivalents.
Moody's Investors Service ("Moody's") rates CenturyTel's long-term debt
Baa2 (with a stable outlook) and Standard & Poor's ("S&P") rates CenturyTel's
long-term debt BBB+ (with a stable outlook). The Company's commercial paper
program is rated P2 by Moody's and A2 by S&P. Any downgrade in the Company's
ratings could adversely impact the Company's ability to issue commercial paper
or use its bank facility.
The following table reflects the Company's debt to total capitalization
percentage and ratio of earnings to fixed charges and preferred stock dividends
as of and for the years ended December 31:
2003 2002 2001
------------------------------------
Debt to total capitalization 47.8% 54.2 57.0
Ratio of earnings from continuing operations to fixed charges
and preferred stock dividends 3.33 2.33 2.03
REGULATION AND COMPETITION
The communications industry continues to undergo various fundamental
regulatory, legislative, competitive and technological changes. These changes
may have a significant impact on the future financial performance of all
communications companies.
Events affecting the communications industry. In 1996, the United
States Congress enacted the Telecommunications Act of 1996 (the "1996 Act"),
which obligates LECs to permit competitors to interconnect their facilities to
the LEC's network and to take various other steps that are designed to promote
competition. Under the 1996 Act's rural telephone company exemption,
approximately 50% of the Company's telephone access
A-29
lines are exempt from certain of these interconnection requirements unless and
until the appropriate state regulatory commission overrides the exemption upon
receipt from a competitor of a bona fide request meeting certain criteria.
During 2003, the FCC released new rules which outline the obligations
of incumbent LECs to lease elements of their circuit-switched networks on an
unbundled basis to competitors. The new framework eliminates the prior
obligation of incumbent LECs to lease their high-speed data lines to
competitors. Incumbent LECs will remain obligated to offer other
telecommunications services to resellers at wholesale rates. These wholesale
rates are based on a forward-looking cost model and other terms that
substantially limit the profitability of these arrangements to incumbent LECs.
This new rule also provides for a significant role of state regulatory
commissions in implementing these new guidelines and establishing wholesale
service rates. On March 2, 2004, a federal district court of appeals overturned
the rules previously adopted by the FCC requiring LECs to provide competitors
with discounted access to the LECs networks. The court also ruled that the FCC
should not have given states the authority previously granted. It is expected
that such decision will be appealed to the Supreme Court. During 2003, the FCC
also sought public comments on whether it should make additional changes to its
interconnection regulations, and instituted a comprehensive review of its
methodologies for establishing wholesale rates.
Prior to and since the enactment of the 1996 Act, the FCC and a number
of state legislative and regulatory bodies have also taken steps to foster local
exchange competition. Coincident with this recent movement toward increased
competition has been the gradual reduction of regulatory oversight of LECs.
These cumulative changes, coupled with various technological developments, have
led to the continued growth of various companies providing services that compete
with LECs' services. Wireless services entities also increasingly constitute a
significant source of competition with LECs.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that will provide predictable levels of
support to rural local exchange carriers, including substantially all of the
Company's local exchange carriers. During
A-30
2003 and 2002 the Company's telephone subsidiaries received $199.2 million and
$192.4 million, respectively, from the federal Universal Service High Cost Loop
Fund, representing 8.4% and 9.8%, respectively, of the Company's consolidated
revenues from continuing operations for 2003 and 2002. The Company anticipates
its 2004 revenues from the federal Universal Service High Cost Loop Fund will be
lower than 2003 levels due to increases in the nationwide average cost per loop
factor used by the FCC to allocate funds among all recipients. Wireless and
other competitive service providers continue to seek eligible telecommunications
carrier ("ETC") status in order to be eligible to receive Universal Service Fund
support, which is placing additional financial pressure on the amount of money
needed to provide support to all eligible service providers, including support
payments the Company receives from the High Cost Loop Fund. As a result of the
limited growth in the size of the High Cost Loop Fund and changes in requests
for support from the Universal Service Fund, the Company has no assurance it
will continue to receive payments from the Universal Service Fund commensurate
with those received in the past.
In 2001, the FCC modified its interstate access charge rules and
universal service support system for rate of return LECs. This order, among
other things, (i) increased the caps on the subscriber line charges ("SLC") to
the levels paid by most subscribers nationwide; (ii) allowed limited SLC
deaveraging, which enhanced the competitiveness of rate of return carriers by
giving them pricing flexibility; (iii) lowered per minute rates collected for
federal access charges; (iv) created a new explicit universal service support
mechanism that replaced other implicit support mechanisms in a manner designed
to ensure that rate structure changes do not affect the overall recovery of
interstate access costs by rate of return carriers serving high cost areas; and
(v) preserved the historic 11.25% authorized interstate return rate for rate of
return LECs. The effect of this order on the Company was revenue neutral for
interstate purposes but did result in a reduction in intrastate revenues in
Arkansas and Ohio (where intrastate access rates must mirror the interstate
access rates).
Technological developments have led to the development of new services
that compete with traditional LEC services. Technological improvements have
enabled cable television companies to provide traditional circuit-switched
telephone service over their cable networks, and several national cable
companies have aggressively pursued this
A-31
opportunity. Recent improvements in the quality of "Voice-over-Internet
Protocol" ("VoIP") service have led several large cable television and telephone
companies, as well as start-up companies, to substantially increase their
offerings of VoIP service to business and residential customers. VoIP providers
route calls over the Internet, without use of ILEC's circuit switches and, in
certain cases, without use of ILEC's networks to carry their communications
traffic. VoIP providers can offer services at prices substantially below those
currently charged for traditional local and long distance telephone services for
several reasons, including lower network cost structures and the current ability
of VoIP providers to use ILECs' networks without paying access charges. In
December 2003, the FCC initiated rulemaking that is expected to address the
effect of VoIP on intercarrier compensation, universal service and emergency
services. There can be no assurance that this rulemaking will be on terms
favorable to ILECs, or that VoIP providers will not successfully compete for the
Company's customers.
In November 2003, the FCC adopted rules requiring companies to allow
their customers to keep their wireline or wireless phone number when switching
to another service provider (generally referred to as "local number
portability"). For several years, customers have been able to retain their
numbers when switching their local service between wireline carriers. The new
rules now require local number portability between wireline and wireless
carriers. This requirement went into effect November 24, 2003 for wireline
carriers in the top 100 Metropolitan Statistical Areas ("MSAs"). The new
requirement will go into effect May 24, 2004 for wireline carriers operating in
markets smaller than the top 100 MSAs. The majority of the Company's wireline
operations are conducted in markets below the top 100 MSAs. Local number
portability may increase the number of customers who chose to completely forego
the use of traditional wireline phone service, although the Company believes
that it is too early to fully assess the rule's impact. The costs to comply with
the requirements of local number portability, net of the amount that is
recoverable through the ratemaking process, are not expected to have a material
impact on the Company's results of operations.
The FCC is currently examining several issues that could have a
substantial impact on the Company's revenues, including a broad inquiry
initiated in 2001 into all currently regulated forms of intercarrier
compensation. As discussed further below, certain providers of competitive
communications services are not required to compensate ILECs
A-32
for the use of their networks. The Company relies on access revenues as an
important source of revenues. Depending on the final outcome of the FCC's
intercarrier compensation issue, the Company could suffer a material loss of
access revenues.
Recent events affecting the Company. During the last few years, several
states in which the Company has substantial operations took legislative or
regulatory steps to further introduce competition into the LEC business. The
number of companies which have requested authorization to provide local exchange
service in the Company's service areas has increased in recent years, especially
in the markets acquired from Verizon in 2002 and 2000, and it is anticipated
that similar action may be taken by others in the future.
State alternative regulation plans recently adopted by certain of the
Company's LECs have also affected revenue growth recently.
Certain long distance carriers continue to request that the Company
reduce intrastate access tariffed rates for certain of its LECs. In addition,
the Company has recently experienced reductions in intrastate traffic, partially
due to the displacement of minutes by wireless and electronic mail services. In
2003 the Company incurred a reduction in its intrastate revenues (exclusive of
the properties acquired from Verizon in 2002) of approximately $6.8 million
compared to 2002 primarily due to these factors. The corresponding decrease in
2002 compared to 2001 was $27.7 million. The Company believes such trend of
decreased intrastate minutes will continue in 2004, although the magnitude of
such decrease cannot be precisely estimated.
In January 2003, the Louisiana Public Service Commission directed its
staff to review the feasibility of converting the $42 million Louisiana Local
Optional Service Fund ("LOS Fund") into a state universal service fund.
Currently, the LOS Fund is funded primarily by BellSouth, which proposes to
expand the base of contributors into the LOS Fund. A recommendation by the
Commission staff is not expected until late 2004. The Company currently receives
approximately $21 million from the LOS Fund each year. There can be no assurance
that this funding will remain at current levels.
Competition to provide traditional telephone services has thus far
affected large urban areas to a greater extent than rural, suburban and small
urban areas such as those in which the Company's telephone operations are
located. Although the Company does not believe that the increased competition it
has thus far experienced is likely to materially
A-33
affect it in the near term, the Company anticipates that regulatory,
technological and competitive changes will result in future revenue reductions.
The Company expects its telephone revenues to decline in 2004 due to continued
access line losses and reduced network access revenues; however, the Company
expects its consolidated revenues to increase in 2004 primarily due to increased
revenues from its newly-acquired LightCore operations and expected increased
demand for its long distance, fiber transport, DSL and other nonregulated
product offerings.
Other matters. The Company's regulated telephone operations (except for
the properties acquired from Verizon in 2002) are subject to the provisions of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" ("SFAS 71"). Actions by regulators can provide
reasonable assurance of the recognition of an asset, reduce or eliminate the
value of an asset and impose a liability on a regulated enterprise. Such
regulatory assets are required to be recorded and, accordingly, reflected in the
balance sheet of an entity subject to SFAS 71. The Company is monitoring the
ongoing applicability of SFAS 71 to its regulated telephone operations due to
the changing regulatory, competitive and legislative environments, and it is
possible that changes in regulation, legislation or competition or in the demand
for regulated services or products could result in the Company's telephone
operations no longer being subject to SFAS 71 in the near future.
Statement of Financial Accounting Standards No. 101, "Regulated
Enterprises - Accounting for the Discontinuance of Application of FASB Statement
No. 71" ("SFAS 101"), specifies the accounting required when an enterprise
ceases to meet the criteria for application of SFAS 71. SFAS 101 requires the
elimination of the effects of any actions of regulators that have been
recognized as assets and liabilities in accordance with SFAS 71 but would not
have been recognized as assets and liabilities by nonregulated enterprises. SFAS
101 further provides that the carrying amounts of property, plant and equipment
are to be adjusted only to the extent the assets are impaired and that
impairment shall be judged in the same manner as for nonregulated enterprises.
The Company's consolidated balance sheet as of December 31, 2003
included regulatory assets of approximately $3.3 million (primarily deferred
costs related to financing costs, regulatory proceedings and income taxes) and
regulatory liabilities of
A-34
approximately $912,000 (related to income taxes). Net deferred income tax
liabilities related to the regulatory assets and liabilities quantified above
were $1.2 million.
When and if the Company's regulated operations no longer qualify for
the application of SFAS 71, the Company does not expect to record any impairment
charge related to the carrying value of the property, plant and equipment of its
regulated telephone operations. Additionally, upon the discontinuance of SFAS
71, the Company would be required to revise the lives of its property, plant and
equipment to reflect the estimated useful lives of the assets. The Company does
not expect such revisions in asset lives to have a material impact on the
Company's results of operations. For regulatory purposes, the accounting and
reporting of the Company's telephone subsidiaries will not be affected by the
discontinued application of SFAS 71.
The Company has certain obligations based on federal, state and local
laws relating to the protection of the environment. Costs of compliance through
2003 have not been material, and the Company currently has no reason to believe
that such costs will become material.
A-35
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The Shareholders
CenturyTel, Inc.:
Management has prepared and is responsible for the Company's
consolidated financial statements. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America and necessarily include amounts determined using our
best judgments and estimates with consideration given to materiality.
The Company maintains internal control systems and related policies and
procedures designed to provide reasonable assurance that the accounting records
accurately reflect business transactions and that the transactions are in
accordance with management's authorization. The design, monitoring and revision
of the systems of internal control involve, among other things, our judgment
with respect to the relative cost and expected benefits of specific control
measures. Additionally, the Company maintains an internal auditing function
which independently evaluates the effectiveness of internal controls, policies
and procedures and formally reports on the adequacy and effectiveness thereof.
The Company's consolidated financial statements have been audited by
KPMG LLP, independent certified public accountants, who have expressed their
opinion with respect to the fairness of the consolidated financial statements.
Their audit was conducted in accordance with auditing standards generally
accepted in the United States of America, which include the consideration of the
Company's internal controls to the extent necessary to form an independent
opinion on the consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed of
independent directors who are not officers or employees of the Company. The
Committee meets periodically with the independent certified public accountants,
internal auditors and management. The Committee considers the independence of
the external auditors and the audit scope and discusses internal control,
financial and reporting matters. Both the independent and internal auditors have
free access to the Committee.
/s/ R. Stewart Ewing, Jr.
-----------------------------------------------------
R. Stewart Ewing, Jr.
Executive Vice President and Chief Financial Officer
A-36
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CenturyTel, Inc.:
We have audited the accompanying consolidated balance sheets of
CenturyTel, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, comprehensive income, cash flows and
stockholders' equity for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CenturyTel,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002.
/s/ KPMG LLP
KPMG LLP
Shreveport, Louisiana
January 29, 2004
A-37
CENTURYTEL, INC.
Consolidated Statements of Income
Year ended December 31,
--------------------------------------------
2003 2002 2001
--------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES
Telephone $ 2,071,980 1,733,592 1,505,733
Other 308,765 238,404 173,771
--------------------------------------------
Total operating revenues 2,380,745 1,971,996 1,679,504
--------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses (exclusive of
depreciation and amortization) 1,159,708 973,689 826,948
Corporate overhead costs allocable to
discontinued operations - 11,275 20,213
Depreciation and amortization 470,641 411,626 407,038
--------------------------------------------
Total operating expenses 1,630,349 1,396,590 1,254,199
--------------------------------------------
OPERATING INCOME 750,396 575,406 425,305
--------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (226,751) (221,845) (225,523)
Income from unconsolidated cellular entity 6,160 5,582 7,592
Nonrecurring gains and losses, net - 3,709 33,043
Other income and expense 2,154 (63,814) 32
--------------------------------------------
Total other income (expense) (218,437) (276,368) (184,856)
--------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 531,959 299,038 240,449
Income tax expense 187,252 105,505 91,368
--------------------------------------------
INCOME FROM CONTINUING OPERATIONS 344,707 193,533 149,081
DISCONTINUED OPERATIONS
Income from discontinued operations, net of
$284,459, and $118,657 tax - 608,091 193,950
--------------------------------------------
NET INCOME $ 344,707 801,624 343,031
============================================
NET INCOME, AS ADJUSTED FOR GOODWILL
AMORTIZATION $ 344,707 801,624 399,297
============================================
See accompanying notes to consolidated financial statements.
A-38
CENTURYTEL, INC.
Consolidated Statements of Income
(Continued)
Year ended December 31,
--------------------------------------------
2003 2002 2001
--------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
BASIC EARNINGS PER SHARE
From continuing operations $ 2.40 1.36 1.06
From continuing operations, as adjusted for
goodwill amortization $ 2.40 1.36 1.39
From discontinued operations $ - 4.29 1.38
From discontinued operations, as adjusted for
goodwill amortization $ - 4.29 1.45
Basic earnings per share $ 2.40 5.66 2.43
Basic earnings per share, as adjusted for
goodwill amortization $ 2.40 5.66 2.83
DILUTED EARNINGS PER SHARE
From continuing operations $ 2.38 1.35 1.05
From continuing operations, as adjusted for
goodwill amortization $ 2.38 1.35 1.37
From discontinued operations $ - 4.26 1.36
From discontinued operations, as adjusted for
goodwill amortization $ - 4.26 1.43
Diluted earnings per share $ 2.38 5.61 2.41
Diluted earnings per share, as adjusted for
goodwill amortization $ 2.38 5.61 2.81
DIVIDENDS PER COMMON SHARE $ .22 .21 .20
============================================
AVERAGE BASIC SHARES OUTSTANDING 143,583 141,613 140,743
============================================
AVERAGE DILUTED SHARES OUTSTANDING 144,700 142,879 142,307
============================================
See accompanying notes to consolidated financial statements.
A-39
CENTURYTEL, INC.
Consolidated Statements of Comprehensive Income
Year ended December 31,
------------------------------------------
2003 2002 2001
------------------------------------------
(Dollars in thousands)
NET INCOME $ 344,707 801,624 343,031
OTHER COMPREHENSIVE INCOME, NET OF TAXES
Unrealized holding gains (losses):
Unrealized holding gains (losses) related to marketable
equity securities arising during period,
net of $5,385 tax - - 9,999
Less: reclassification adjustment for gains included
in net income, net of ($19,100) tax - - (35,470)
Minimum pension liability adjustment:
Minimum pension liability adjustment, net of
$19,312 and ($19,312) tax 35,864 (35,864) -
Derivative instruments:
Net losses on derivatives hedging variability of
cash flows, net of ($36) and ($496) tax (67) (921) -
Less: reclassification adjustment for losses included
in net income, net of $487 and $44 tax 906 82 -
------------------------------------------
COMPREHENSIVE INCOME $ 381,410 764,921 317,560
==========================================
COMPREHENSIVE INCOME, AS ADJUSTED
FOR GOODWILL AMORTIZATION $ 381,410 764,921 373,826
==========================================
See accompanying notes to consolidated financial statements.
A-40
CENTURYTEL, INC.
Consolidated Balance Sheets
December 31,
---------------------------------------
2003 2002
---------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 203,181 3,661
Accounts receivable
Customers, less allowance of $13,862 and $15,314 163,526 161,319
Interexchange carriers and other, less allowance
of $9,817 and $18,648 72,661 111,673
Materials and supplies, at average cost 9,229 10,150
Other 14,342 9,099
---------------------------------------
Total current assets 462,939 295,902
---------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,455,481 3,531,645
---------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 3,425,001 3,427,281
Other 552,431 515,580
---------------------------------------
Total investments and other assets 3,977,432 3,942,861
---------------------------------------
TOTAL ASSETS $ 7,895,852 7,770,408
=======================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 72,453 70,737
Accounts payable 113,274 64,825
Accrued expenses and other current liabilities
Salaries and benefits 83,628 63,937
Income taxes 43,082 40,897
Other taxes 35,532 28,183
Interest 64,247 59,045
Other 14,555 18,596
Advance billings and customer deposits 44,612 41,884
---------------------------------------
Total current liabilities 471,383 388,104
---------------------------------------
LONG-TERM DEBT 3,109,302 3,578,132
---------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 836,651 716,168
---------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000 shares,
issued and outstanding 144,364,168 and 142,955,839 shares 144,364 142,956
Paid-in capital 576,515 537,804
Accumulated other comprehensive income (loss), net of tax - (36,703)
Retained earnings 2,750,162 2,437,472
Unearned ESOP shares (500) (1,500)
Preferred stock - non-redeemable 7,975 7,975
---------------------------------------
Total stockholders' equity 3,478,516 3,088,004
---------------------------------------
TOTAL LIABILITIES AND EQUITY $ 7,895,852 7,770,408
=======================================
See accompanying notes to consolidated financial statements.
A-41
CENTURYTEL, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- --------
(Dollars in thousands)
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 344,707 801,624 343,031
Adjustments to reconcile net income to net
cash provided by operating activities from
continuing operations
Income from discontinued operations, net of tax - (608,091) (193,950)
Depreciation and amortization 470,641 411,626 407,038
Deferred income taxes 128,706 71,112 57,944
Income from unconsolidated cellular entity (6,160) (5,582) (7,592)
Nonrecurring gains and losses, net - (3,709) (33,043)
Changes in current assets and current liabilities
Accounts receivable 37,980 (13,481) 34,266
Accounts payable 47,972 3,769 (29,485)
Accrued taxes 57,709 43,046 1,078
Other current assets and other current
liabilities, net 17,323 36,316 9,526
Retirement benefits (14,739) (9,416) (5,059)
Increase in noncurrent assets (23,528) (30,543) (65,698)
Increase (decrease) in other noncurrent liabilities (6,151) 35,489 691
Other, net 13,504 61,274 54,139
---------- ---------- --------
Net cash provided by operating activities
from continuing operations 1,067,964 793,434 572,886
---------- ---------- --------
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Acquisitions, net of cash acquired (86,243) (2,245,026) (47,131)
Payments for property, plant and equipment (377,939) (386,267) (435,515)
Proceeds from sale of assets - 4,144 58,184
Distributions from unconsolidated cellular entity 1,104 5,438 3,713
Other, net (1,560) (1,378) 3,553
---------- ---------- --------
Net cash used in investing activities
from continuing operations (464,638) (2,623,089) (417,196)
---------- ---------- --------
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of debt - 2,123,618 3,896
Payments of debt (432,258) (1,592,246) (379,516)
Proceeds from settlement of interest rate hedge contract 22,315 - -
Proceeds from issuance of common stock 33,980 29,125 7,351
Payment of debt issuance costs - (12,999) -
Payment of equity unit issuance costs - (15,867) -
Cash dividends (32,017) (30,156) (28,653)
Other, net 4,174 4,866 1,549
---------- ---------- --------
Net cash provided by (used in) financing activities
from continuing operations (403,806) 506,341 (395,373)
---------- ---------- --------
Net cash provided by discontinued operations - 1,323,479 231,772
---------- ---------- --------
Net increase (decrease) in cash and cash equivalents 199,520 165 (7,911)
Cash and cash equivalents at beginning of year 3,661 3,496 11,407
---------- ---------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 203,181 3,661 3,496
========== ========== ========
See accompanying notes to consolidated financial statements.
A-42
CENTURYTEL, INC.
Consolidated Statements of Stockholders' Equity
Year ended December 31,
------------------------------------
2003 2002 2001
---------- --------- ---------
(Dollars and shares in thousands)
COMMON STOCK
Balance at beginning of year $ 142,956 141,233 140,667
Conversion of convertible securities into common stock - - 254
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,408 1,723 312
---------- --------- ---------
Balance at end of year 144,364 142,956 141,233
---------- --------- ---------
PAID-IN CAPITAL
Balance at beginning of year 537,804 524,668 509,840
Equity unit issuance costs and initial contract adjustment liability - (24,377) -
Conversion of convertible securities into common stock - - 3,046
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 32,572 27,402 7,039
Amortization of unearned compensation and other 6,139 10,111 4,743
---------- --------- ---------
Balance at end of year 576,515 537,804 524,668
---------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX
Balance at beginning of year (36,703) - 25,471
Change in other comprehensive income (loss) (net of reclassification
adjustment), net of tax 36,703 (36,703) (25,471)
---------- --------- ---------
Balance at end of year - (36,703) -
---------- --------- ---------
RETAINED EARNINGS
Balance at beginning of year 2,437,472 1,666,004 1,351,626
Net income 344,707 801,624 343,031
Cash dividends declared
Common stock - $.22, $.21 and $.20 per share (31,618) (29,757) (28,254)
Preferred stock (399) (399) (399)
---------- --------- ---------
Balance at end of year 2,750,162 2,437,472 1,666,004
---------- --------- ---------
UNEARNED ESOP SHARES
Balance at beginning of year (1,500) (2,500) (3,500)
Release of ESOP shares 1,000 1,000 1,000
---------- --------- ---------
Balance at end of year (500) (1,500) (2,500)
---------- --------- ---------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of year 7,975 7,975 7,975
---------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY $3,478,516 3,088,004 2,337,380
========== ========= =========
COMMON SHARES OUTSTANDING
Balance at beginning of year 142,956 141,233 140,667
Conversion of convertible securities into common stock - - 254
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,408 1,723 312
---------- --------- ---------
Balance at end of year 144,364 142,956 141,233
========== ========= =========
See accompanying notes to consolidated financial statements.
A-43
CENTURYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements of
CenturyTel, Inc. and its subsidiaries (the "Company") include the accounts of
CenturyTel, Inc. ("CenturyTel") and its majority-owned subsidiaries.
Regulatory accounting - The Company's regulated telephone operations
(except for the properties acquired from Verizon in 2002) are subject to the
provisions of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" ("SFAS 71"). Actions by
regulators can provide reasonable assurance of the recognition of an asset,
reduce or eliminate the value of an asset and impose a liability on a regulated
enterprise. Such regulatory assets are required to be recorded and, accordingly,
reflected in the balance sheet of an entity subject to SFAS 71. The Company is
monitoring the ongoing applicability of SFAS 71 to its regulated telephone
operations due to the changing regulatory, competitive and legislative
environments, and it is possible that changes in regulation, legislation or
competition or in the demand for regulated services or products could result in
the Company's telephone operations no longer being subject to SFAS 71 in the
near future.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue recognition - Revenues are generally recognized when services
are provided or when products are delivered to customers. Revenue that is billed
in advance includes monthly recurring network access services, special access
services and monthly recurring local line charges. The unearned portion of this
revenue is initially deferred as a component of advanced billings and customer
deposits on the Company's balance sheet
A-44
and recognized as revenue over the period that the services are provided.
Revenue that is billed in arrears includes nonrecurring network access services,
nonrecurring local services and long distance services. The earned but unbilled
portion of this revenue is recognized as revenue in the period that the services
are provided.
Certain of the Company's telephone subsidiaries participate in revenue
sharing arrangements with other telephone companies for interstate revenue and
for certain intrastate revenue. Such sharing arrangements are funded by toll
revenue and/or access charges within state jurisdictions and by access charges
in the interstate market. Revenues earned through the various sharing
arrangements are initially recorded based on the Company's estimates.
Property, plant and equipment - Telephone plant is stated at original
cost. Normal retirements of telephone plant are charged against accumulated
depreciation, along with the costs of removal, less salvage, with no gain or
loss recognized. Renewals and betterments of plant and equipment are capitalized
while repairs, as well as renewals of minor items, are charged to operating
expense. Depreciation of telephone plant is provided on the straight line method
using class or overall group rates acceptable to regulatory authorities; such
rates range from 1.8% to 25%.
Non-telephone property is stated at cost and, when sold or retired, a
gain or loss is recognized. Depreciation of such property is provided on the
straight line method over estimated service lives ranging from three to 30
years.
Intangible assets - Effective January 1, 2002, in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), systematic amortization of goodwill is no
longer permitted; instead, SFAS 142 requires goodwill recorded in a business
combination to be reviewed for impairment and to be written down only in periods
in which the recorded amount of goodwill exceeds its fair value. Impairment of
goodwill is tested at least annually by comparing the fair value of the
reporting unit to its carrying value (including goodwill). Estimates of the fair
value of the reporting unit are based on valuation models using criterion such
as multiples of earnings. Each adjustment reflected in the consolidated
statements of income and comprehensive income (or in these notes) by use of the
term "as adjusted for goodwill amortization" reflects the effects of SFAS 142,
as more fully described in Note 4. Prior
A-45
to January 1, 2002, substantially all of the Company's goodwill was amortized
over 40 years.
Long-lived assets - Effective January 2002, Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), addresses financial accounting and reporting
for the impairment or disposal of long-lived assets (exclusive of goodwill) and
also broadens the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the entity in
a disposal transaction. As a result of the Company's agreement in March 2002 to
sell its wireless operations (which was consummated on August 1, 2002) (see Note
3), such operations have been reflected as discontinued operations for the years
ended December 31, 2002 and 2001.
Affiliated transactions - Certain service subsidiaries of CenturyTel
provide installation and maintenance services, materials and supplies, and
managerial, operational, technical, accounting and administrative services to
subsidiaries. In addition, CenturyTel provides and bills management services to
subsidiaries and in certain instances makes interest bearing advances to finance
construction of plant and purchases of equipment. These transactions are
recorded by the Company's telephone subsidiaries at their cost to the extent
permitted by regulatory authorities. Intercompany profit on transactions with
regulated affiliates is limited to a reasonable return on investment and has not
been eliminated in connection with consolidating the results of operations of
CenturyTel and its subsidiaries. Intercompany profit on transactions with
affiliates not subject to SFAS 71 has been eliminated.
Income taxes - CenturyTel files a consolidated federal income tax
return with its eligible subsidiaries. The Company uses the asset and liability
method of accounting for income taxes under which deferred tax assets and
liabilities are established for the future tax consequences attributable to
differences between the financial statement carrying amounts of assets and
liabilities and their respective tax bases. Investment tax credits related to
telephone plant have been deferred and are being amortized as a reduction of
federal income tax expense over the estimated useful lives of the assets giving
rise to the credits.
A-46
Derivative financial instruments - Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), requires all derivative instruments be recognized as
either assets or liabilities at fair value on the balance sheet. The Company
uses derivative instruments to (i) lock-in or swap its exposure to changing or
variable interest rates for fixed interest rates or (ii) swap obligations to pay
fixed interest rates for variable interest rates. The Company has established
policies and procedures for risk assessment and the approval, reporting and
monitoring of derivative instrument activities. The Company does not hold or
issue derivative financial instruments for trading or speculative purposes.
Management periodically reviews the Company's exposure to interest rate
fluctuations and implements strategies to manage the exposure.
Earnings per share - Basic earnings per share amounts are determined on
the basis of the weighted average number of common shares outstanding during the
year. Diluted earnings per share gives effect to all potential dilutive common
shares that were outstanding during the period.
Stock-based compensation - The Company accounts for stock compensation
plans using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Options have been granted at a price either equal to
or exceeding the then-current market price. Accordingly, the Company has not
recognized compensation cost in connection with issuing stock options.
During 2003 the Company granted 1,720,317 options (the "2003 Options")
at market price. The weighted average fair value of each of the 2003 Options was
estimated as of the date of grant to be $9.94 using an option-pricing model with
the following assumptions: dividend yield - .7%; expected volatility - 30%;
weighted average risk-free interest rate - 3.4%; and expected option life -
seven years.
During 2002 the Company granted 1,983,150 options (the "2002 Options")
at market price. The weighted average fair value of each of the 2002 Options was
estimated as of the date of grant to be $11.66 using an option-pricing model
with the following
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assumptions: dividend yield - .7%; expected volatility - 30%; weighted average
risk-free interest rate - 3.4%; and expected option life - seven years.
During 2001 the Company granted 1,971,750 options (the "2001 Options")
at market price. The weighted average fair value of each of the 2001 Options was
estimated as of the date of grant to be $11.16 using an option-pricing model
with the following assumptions: dividend yield - .6%; expected volatility - 30%;
weighted average risk-free interest rate - 4.8%; and expected option life -
seven years.
If compensation cost for CenturyTel's options had been determined
consistent with SFAS 123, the Company's net income and earnings per share on a
pro forma basis for 2003, 2002 and 2001 would have been as follows:
Year ended December 31, 2003 2002 2001
---------------------------------------------- --------- -------- -------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 344,707 801,624 343,031
Less: Total stock-based compensation
expense determined under fair value based
method, net of tax $ (13,183) (15,001) (8,971)
--------- -------- -------
Pro forma net income $ 331,524 786,623 334,060
========= ======== =======
Basic earnings per share
As reported $ 2.40 5.66 2.43
Pro forma $ 2.31 5.56 2.37
Diluted earnings per share
As reported $ 2.38 5.61 2.41
Pro forma $ 2.29 5.51 2.35
Cash equivalents - The Company considers short-term investments with a
maturity at date of purchase of three months or less to be cash equivalents.
Discontinued operations - On August 1, 2002, the Company sold
substantially all of its wireless operations to an affiliate of ALLTEL
Corporation ("Alltel") and certain other purchasers for an aggregate of
approximately $1.59 billion in cash. As a result, the Company's wireless
operations have been reflected as discontinued operations for 2002 and 2001. See
Note 3 for additional information.
Reclassifications - Certain amounts previously reported for prior years
have been reclassified to conform with the 2003 presentation, including the
reclassification of an investment in a cellular partnership from discontinued
operations to continuing
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operations. Such investment was originally planned to
be sold to Alltel in connection with the Company's disposition of its wireless
operations but was subsequently retained.
(2) ACQUISITIONS
On July 1, 2002, the Company purchased approximately 300,000 telephone
access lines in the state of Alabama from Verizon Communications, Inc.
("Verizon") for approximately $1.022 billion cash. On August 31, 2002, the
Company purchased approximately 350,000 telephone access lines in the state of
Missouri from Verizon for approximately $1.179 billion cash. The assets
purchased in these transactions included (i) the franchise authorizing the
provision of local telephone service, (ii) related property and equipment
comprising Verizon's local exchange operations in predominantly rural markets
throughout Alabama and Missouri and (iii) Verizon's assets used to provide
digital subscriber line ("DSL") and other high speed data services within the
purchased exchanges. For financing arrangements related to these acquisitions,
see Note 6.
In June and December 2003, the Company acquired certain fiber transport
assets for an aggregate of $55.2 million cash (of which $3.8 million was paid as
a deposit in 2002). In the fourth quarter of 2003, the Company purchased an
additional 24.3% interest in a telephone company in which it owned a majority
interest for $32.4 million cash.
The results of operations of the acquired properties are included in
the Company's results of operations from and after the respective acquisition
dates.
The following pro forma information represents the consolidated results
of continuing operations of the Company for the years ended December 31, 2002
and 2001 as if the Verizon acquisitions in 2002 had been consummated as of
January 1, 2002 and 2001, respectively.
2002 2001
---------- ---------
(Dollars in thousands,
except per share amounts)
Operating revenues from continuing operations $2,285,866 2,231,631
Income from continuing operations $ 218,252 186,871
Basic earnings per share from
continuing operations, as adjusted for goodwill
amortization $ 1.54 1.65
Diluted earnings per share from
continuing operations, as adjusted for goodwill
amortization $ 1.53 1.64
A-49
The pro forma information is based on various assumptions and
estimates. The pro forma information (i) reflects the effect of reduced interest
expense after August 1, 2002 as a result of reducing outstanding indebtedness
from utilization of proceeds received from the August 1, 2002 sale of
substantially all of the Company's wireless operations described in Note 3 and
(ii) makes no pro forma adjustments to reflect any assumed consummation of such
sale (or any use of such sale proceeds) prior to August 1, 2002. The pro forma
information is not necessarily indicative of the operating results that would
have occurred if the Verizon acquisitions had been consummated as of January 1
of each respective period, nor is it necessarily indicative of future operating
results. The pro forma information does not give effect to any potential revenue
enhancements or cost synergies or other operating efficiencies that could result
from the acquisitions.
(3) DISCONTINUED OPERATIONS
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion in cash. In connection with this transaction, the
Company divested its (i) interests in its majority-owned and operated cellular
systems, which at June 30, 2002 served approximately 783,000 customers and had
access to approximately 7.8 million pops, (ii) minority cellular equity
interests representing approximately 1.8 million pops at June 30, 2002, and
(iii) licenses to provide PCS covering 1.3 million pops in Wisconsin and Iowa.
Proceeds from the sale of the wireless operations were used to partially fund
the Company's acquisitions of telephone properties in Alabama and Missouri
during the third quarter of 2002.
As a result of the sale, the Company's wireless operations have been
reflected as discontinued operations in the Company's consolidated statements of
income and cash flows for the years ended December 31, 2002 and 2001. In its
December 31, 2002 consolidated balance sheet, the Company reflected as "assets
held for sale" a minority interest in a cellular partnership that it had
previously agreed to sell to Alltel upon the satisfaction of various closing
conditions. In light of the failure of the parties to agree upon whether the
closing conditions were met, the Company determined during the first quarter of
2003 to retain such investment; therefore, for reporting purposes, this
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investment (and its related earnings) has been reclassified from discontinued
operations to continuing operations on the accompanying financial statements for
2003. Prior periods have been restated to reflect this investment (and its
related earnings) as part of continuing operations.
The depreciation and amortization of long-lived and amortizable
intangible assets related to the wireless operations ceased on March 19, 2002,
the date of the definitive agreement to sell such operations.
The Company had no outstanding indebtedness directly related to its
wireless operations; therefore, no interest expense was allocated to
discontinued operations. The following table represents certain summary income
statement information related to the Company's wireless operations that is
reflected in discontinued operations.
Year ended December 31, 2002 2001
---------------------------------------------- --------- ---------
(Dollars in thousands)
Operating revenues $ 246,705 437,965
--------- ---------
Operating income (1) $ 71,258 132,614
Nonrecurring gains and losses, net - 166,928
Income from unconsolidated cellular entities 25,768 19,868
Minority interest expense (8,569) (11,510)
Gain on sale of discontinued operations 803,905 -
Other income 188 4,707
--------- ---------
Pre-tax income from discontinued operations $ 892,550 312,607
Income tax expense (284,459) (118,657)
--------- ---------
Income from discontinued operations $ 608,091 193,950
========= =========
(1) Excludes corporate overhead costs of $11.3 million and $20.2 million for
2002 and 2001, respectively, allocated to the wireless operations. Included as a
reduction in operating income for 2002 is a $30.5 million charge associated with
the write-off of all amounts expended to develop the wireless portion of the
Company's billing system currently in development.
The following table represents certain summary cash flow statement
information related to the Company's wireless operations reflected as
discontinued operations:
Year ended December 31, 2002 2001
---------------------------------------------------- --------------- -------
(Dollars in thousands)
Net cash provided by (used in) operating activities $ (248,716) (1) 90,242
Net cash provided by investing activities 1,572,195 (2) 141,530
Net cash provided by financing activities - -
----------- -------
Net cash provided by discontinued operations $ 1,323,479 231,772
=========== =======
(1) Includes approximately $305 million estimated tax payment related to sale of
wireless operations.
(2) Includes cash proceeds of $1.59 billion from the sale of substantially all
of the Company's wireless operations.
A-51
(4) INVESTMENTS AND OTHER ASSETS
Investments and other assets at December 31, 2003 and 2002 were
composed of the following:
December 31, 2003 2002
--------------------------------------------------------------- ----------- ---------
(Dollars in thousands)
Goodwill $ 3,425,001 3,427,281
Billing system development costs, less accumulated amortization
of $508 in 2003 162,980 139,451
Cash surrender value of life insurance contracts 93,960 93,664
Prepaid pension asset 59,055 26,046
Franchise costs 35,300 35,300
Customer base, less accumulated amortization of $2,242 and $729 20,458 21,971
Deferred interest rate hedge contracts 31,239 33,635
Debt issuance costs, net 19,317 23,491
Fair value of interest rate swap - 22,163
Other 130,122 119,859
----------- ---------
$ 3,977,432 3,942,861
=========== =========
The following information relates to the Company's goodwill as of
December 31, 2003 and 2002:
December 31, 2003 2002
--------------------------------------------------------------- ----------- ---------
(Dollars in thousands)
Carrying amount of goodwill
Telephone segment $ 3,369,242 3,382,113
Other operations 55,759 45,168
----------- ---------
Total goodwill $ 3,425,001 3,427,281
=========== =========
Amortization of goodwill and other intangibles from continuing
operations of $1.5 million, $729,000 and $58.4 million for 2003, 2002 and 2001,
respectively, is included in "Depreciation and amortization" in the Company's
Consolidated Statements of Income. In accordance with SFAS 142, effective
January 1, 2002, goodwill is no longer subject to amortization but instead is
tested for impairment at least annually. As of September 30, 2003, the Company
completed the required annual test under SFAS 142 and determined its goodwill
was not impaired.
The following is a reconciliation of reported net income and reported
earnings per share to the amounts that would have been reported had the Company
been subject to SFAS 142 during 2001.
A-52
Year ended December 31, 2001
---------------------------------------- ------------------------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 343,031
Goodwill amortization, net of taxes 56,266
-----------
Net income, as adjusted $ 399,297
===========
Basic earnings per share, as reported $ 2.43
Goodwill amortization, net of taxes .40
-----------
Basic earnings per share, as adjusted $ 2.83
===========
Diluted earnings per share, as reported $ 2.41
Goodwill amortization, net of taxes .40
-----------
Diluted earnings per share, as adjusted $ 2.81
===========
The Company is in the process of developing an integrated billing and
customer care system. The costs to develop such system have been accounted for
in accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Aggregate capitalized
costs (before accumulated amortization) totaled $163.5 million and $139.5
million at December 31, 2003 and 2002, respectively. A portion of such costs
related to the wireless business ($30.5 million) was written off as a component
of discontinued operations in the third quarter of 2002 as a result of the sale
of substantially all of the Company's wireless operations on August 1, 2002.
Excluding this write-off, the Company's aggregate capitalized billing system
costs are expected to approximate $200-215 million upon completion and will be
amortized over a twenty-year period. The Company began amortizing its billing
system in 2003 based on the total number of customers that the Company has
migrated to the new system.
In connection with the acquisitions of properties from Verizon in 2002,
the Company assigned $35.3 million of the purchase price as an intangible asset
associated with franchise costs (which includes amounts necessary to maintain
eligibility to provide telecommunications services in its licensed service
areas). Such asset has an indefinite life and therefore is not subject to
amortization currently.
A-53
The Company assigned $22.7 million of the purchase price to a customer
base intangible asset in connection with the acquisitions of Verizon properties
in 2002. Such asset is being amortized over 15 years; amortization expense for
2003 and 2002 was $1.5 million and $729,000, respectively, and is expected to be
$1.5 million for each of the full years remaining in the amortization period.
(5) PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at December 31, 2003 and 2002 was
composed of the following:
December 31, 2003 2002
---------------------------------------- ------------- ----------
(Dollars in thousands)
Telephone
Cable and wire $ 3,801,079 3,643,167
Central office 2,230,943 2,150,217
General support 490,884 474,022
Information origination/termination 46,142 44,198
Construction in progress 21,289 32,507
Other 6,263 3,789
------------- ----------
6,596,600 6,347,900
Accumulated depreciation (3,498,298) (3,136,107)
------------- ----------
3,098,302 3,211,793
------------- ----------
Other, at cost
General support 320,417 346,037
Fiber transport 141,853 74,305
Other 125,285 100,950
------------- ----------
587,555 521,292
Accumulated depreciation (230,376) (201,440)
------------- ----------
357,179 319,852
------------- ----------
Net property, plant and equipment $ 3,455,481 3,531,645
============= ==========
Depreciation expense was $469.1 million, $410.9 million and $348.6
million in 2003, 2002 and 2001, respectively. The composite depreciation rate
for telephone properties was 7.0% for 2003, 6.9% for 2002 and 6.8% for 2001.
A-54
(6) LONG-TERM AND SHORT-TERM DEBT
The Company's long-term debt as of December 31, 2003 and 2002 was as
follows:
December 31, 2003 2002
------------------------------------------------------------------- ----------- ---------
(Dollars in thousands)
CenturyTel
Senior credit facilities $ - 385,000
Senior notes and debentures:
7.75% Series A, due 2004 50,000 50,000
8.25% Series B, due 2024 100,000 100,000
6.55% Series C, due 2005 50,000 50,000
7.20% Series D, due 2025 100,000 100,000
6.15% Series E, due 2005 100,000 100,000
6.30% Series F, due 2008 240,000 240,000
6.875% Series G, due 2028 425,000 425,000
8.375% Series H, due 2010 500,000 500,000
6.02% Series J, due 2007 (remarketable 2005) 500,000 500,000
4.75% Series K, due 2032 165,000 165,000
7.875% Series L, due 2012 500,000 500,000
9.38% notes - 2,800
6.86%* Employee Stock Ownership
Plan commitment, due in installments through 2004 500 1,500
Unamortized net discount (4,501) (5,084)
Fair value of derivative instrument related to
Series H senior notes 19,440 22,163
Fair value of derivative instruments related to
Series L senior notes (11,693) -
Other 114 146
----------- ---------
Total CenturyTel 2,733,860 3,136,525
----------- ---------
Subsidiaries
First mortgage debt
5.92%* notes, payable to agencies of the U. S. government
and cooperative lending associations, due in
installments through 2025 234,743 250,325
7.98% notes, due through 2017 5,211 5,500
Other debt
6.98%* unsecured medium-term notes, due through 2008 199,613 244,124
7.11%* notes, due in installments through 2020 3,739 5,361
6.55%* capital lease obligations, due through 2008 4,589 7,034
----------- ---------
Total subsidiaries 447,895 512,344
----------- ---------
Total long-term debt 3,181,755 3,648,869
Less current maturities 72,453 70,737
----------- ---------
Long-term debt, excluding current maturities $ 3,109,302 3,578,132
=========== =========
* weighted average interest rate at December 31, 2003
The approximate annual debt maturities for the five years subsequent to
December 31, 2003 are as follows: 2004 - $72.5 million; 2005 - $246.1 million;
2006 - $277.9 million (including $165 million aggregate principal amount of the
Company's convertible
A-55
debentures, Series K, due 2032, which can be put to the Company at various dates
beginning in 2006); 2007 - $521.7 million; and 2008 - $283.7 million.
Certain of the loan agreements of CenturyTel and its subsidiaries
contain various restrictions, among which are limitations regarding issuance of
additional debt, payment of cash dividends, reacquisition of capital stock and
other matters. In addition, the transfer of funds from certain consolidated
subsidiaries to CenturyTel is restricted by various loan agreements.
Subsidiaries which have loans from government agencies and cooperative lending
associations, or have issued first mortgage bonds, generally may not loan or
advance any funds to CenturyTel, but may pay dividends if certain financial
ratios are met. At December 31, 2003, restricted net assets of subsidiaries were
$249.1 million and subsidiaries' retained earnings in excess of amounts
restricted by debt covenants totaled $1.476 billion. At December 31, 2003, all
of the consolidated retained earnings reflected on the balance sheet was
available under CenturyTel's loan agreements for the declaration of dividends.
Approximately 25% of the Company's telephone property, plant and
equipment is pledged to secure the long-term debt of subsidiaries.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consists initially of a beneficial interest in a
CenturyTel senior unsecured note (Series J) with a principal amount of $25 and a
contract to purchase shares of CenturyTel common stock no later than May 2005.
The senior notes will mature in May 2007. Each purchase contract will generally
require the holder to purchase between .6944 and .8741 of a share of CenturyTel
common stock in May 2005 based on the then current stock price of CenturyTel
common stock in exchange for $25, subject to certain adjustments and exceptions.
Accordingly, upon full settlement of the purchase contracts in May 2005, the
Company will receive proceeds of $500 million and will deliver between 13.9
million and 17.5 million common shares in the aggregate. The senior notes are
pledged by the holders to secure their obligations under the purchase contracts.
The total distributions on the equity units will be at an initial annual rate of
6.875%, consisting of interest (6.02%) and contract adjustment payments
(0.855%), each payable quarterly. On
A-56
or after mid-February 2005, the senior notes will be remarketed, at which time
the remarketing agent will reset the interest rate on the senior notes in order
to generate sufficient proceeds to secure the holder's obligation under the
purchase contract. In the event of an unsuccessful remarketing, the Company will
exercise its right as a secured party to dispose of the senior notes and satisfy
in full the holder's obligation to purchase common stock under the purchase
contract.
The senior note portion of the equity units is reflected on the balance
sheet as long-term debt in the amount of $500 million. Interest expense on the
senior notes is accrued at a rate of 6.02%, the initial interest rate. The
present value of the aggregate contract adjustment payments has been recorded as
an $11.6 million reduction to paid-in capital and as an equivalent liability.
The Company is amortizing the difference between the aggregate amount of all
payments and the present value thereof as interest expense over the three-year
term of the purchase contracts. Upon making each such payment, the Company will
allocate most of the payment to the reduction of its $11.6 million liability,
and record the remainder as interest expense. The issuance costs of the equity
units have been allocated to the units' debt and equity components. The debt
issuance costs ($3.3 million) were computed based on typical costs of a debt
transaction and will be amortized to interest expense over the term of the
senior notes. The remainder of the issuance costs ($12.6 million) were treated
as a cost of raising equity and recorded as a charge to paid-in capital.
On July 22, 2002, the Company entered into $800 million of credit
facilities, consisting of a $533 million three-year facility and a $267 million
364-day revolving facility with a one-year term-out option. The 364-day
revolving facility was not renewed in 2003. The Company had no outstanding
borrowings under its facility at December 31, 2003.
In the third quarter of 2002, the Company issued $500 million of senior
notes, Series L, due 2012 (which bear interest at 7.875%) and $165 million of
convertible senior debentures, Series K, due 2032 (which bear interest at 4.75%
and which may be converted into shares of CenturyTel common stock at a
conversion price of $40.455 per share). Holders of the convertible senior
debentures will have the right to require the Company to purchase all or a
portion of the debentures on August 1, 2006, August 1
A-57
2010 and August 1, 2017. In each case, the purchase price payable will be equal
to 100% of the principal amount of the debentures to be purchased plus any
accrued and unpaid interest to the purchase date. The Company will pay cash for
all debentures so purchased on August 1, 2006. For any such purchases on or
after August 1, 2010, the Company may choose to pay the purchase price in cash
or shares of its common stock, or any combination thereof (except that the
Company will pay any accrued and unpaid interest in cash).
On October 15, 2002, the Company redeemed $400 million principal amount
of its Series I Remarketable Senior Notes at par value, plus accrued interest.
In connection with such redemption, the Company also paid a premium of
approximately $71.1 million in accordance with the redemption provisions of the
associated remarketing agreement. Such premium payment (net of $11.1 million of
unamortized net premium primarily associated with the option payment received by
the Company in 2000 in connection with the original issuance of the remarketable
notes) is reflected as an Other Expense in the Company's results of operations
for year ended December 31, 2002.
At December 31, 2003, the Company had available $533.3 million of
undrawn committed bank lines of credit and the Company's telephone subsidiaries
had available for use $123.0 million of commitments for long-term financing from
the Rural Utilities Service and Rural Telephone Bank.
(7) DERIVATIVE INSTRUMENTS
During 2002, the Company entered into a fair value hedge with respect
to the Company's $500 million aggregate principal amount of 8.375% Series H
senior notes, due 2010. This hedge was a "fixed to variable" interest rate swap
that effectively converted the Company's fixed rate interest payment obligations
under these notes into variable rate obligations. The change in the value of
this hedge was reflected as a component of interest expense for the year ended
December 31, 2002. As of December 31, 2002, the Company realized an interest
rate of 4.96% related to such hedge. Interest expense was reduced by $7.8
million in 2002 as a result of this hedge. The fair value of such hedge at
December 31, 2002 was $22.2 million and is reflected on the accompanying balance
sheet as both an asset (included in "Other assets") and as an
A-58
increase in the underlying debt (included in "Long-term debt"). In May 2003, the
Company terminated this hedge. In connection with such termination, the Company
received approximately $22.3 million in cash upon settlement, which represented
the fair value of the hedge at the termination date. Such amount is being
amortized as a reduction of interest expense through 2010, the maturity date of
the Series H notes.
In May and July 2003, the Company entered into four separate fair value
interest rate hedges associated with the full $500 million principal amount of
its Series L senior notes, due 2012, that pay interest at a fixed rate of
7.875%. These hedges are "fixed to variable" interest rate swaps that
effectively convert the Company's fixed rate interest payment obligations under
these notes into obligations to pay variable rates that range from the six-month
London InterBank Offered Rate ("LIBOR") plus 3.229% to the six-month LIBOR plus
3.67%, with settlement and rate reset dates occurring each six months through
the expiration of the hedges in August 2012. As of December 31, 2003, the
Company realized a weighted average interest rate of 4.8% related to these
hedges. Interest expense was reduced by $7.7 million during 2003 as a result of
these hedges. The aggregate fair value of such hedges at December 31, 2003 was
$11.7 million and is reflected on the accompanying balance sheet as both a
liability (included in "Deferred credits and other liabilities") and as a
decrease to the Company's underlying long-term debt.
During 2002, the Company entered into (i) a cash flow hedge designed to
lock in a fixed interest rate for $100 million of the $500 million senior notes
issued in the third quarter of 2002 which was settled in the third quarter of
2002 for a $1.1 million payment by the Company (which is being amortized as
additional interest expense over a ten-year period, which equates to the term of
the debt issuance hedged) and (ii) a cash flow hedge designed to eliminate the
variability of interest payments for $400 million of variable rate debt under
the Company's $800 million credit facilities. During the second quarter of 2003,
the Company retired all outstanding indebtedness associated with its $800
million credit facilities; therefore, such cash flow hedge was deemed
ineffective in 2003 and resulted in a $722,000 unfavorable pre-tax charge to the
Company's income.
A-59
(8) DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 2003 and 2002
were composed of the following:
December 31, 2003 2002
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred federal and state income taxes $ 528,551 352,161
Accrued postretirement benefit costs 222,613 208,542
Fair value of interest rate swap 11,693 1,290
Additional minimum pension liability - 56,388
Minority interest 7,218 26,067
Other 66,576 71,720
---------------------------------------------------------------------------------------------------------
$ 836,651 716,168
=========================================================================================================
(9) STOCKHOLDERS' EQUITY
Common stock - Unissued shares of CenturyTel common stock were reserved as
follows:
December 31, 2003
---------------------------------------------------------------------------------------------------------
(In thousands)
Incentive compensation programs 12,099
Acquisitions 4,064
Employee stock purchase plan 4,822
Dividend reinvestment plan 454
Conversion of convertible preferred stock 435
Other employee benefit plans 3,717
-----------------------------------------------------------------------------------------------------
25,591
=====================================================================================================
Under CenturyTel's Articles of Incorporation each share of common stock
beneficially owned continuously by the same person since May 30, 1987 generally
entitles the holder thereof to ten votes per share. All other shares entitle the
holder to one vote per share. At December 31, 2003, the holders of 8.9 million
shares of common stock were entitled to ten votes per share.
Preferred stock - As of December 31, 2003, CenturyTel had 2.0 million shares of
authorized convertible preferred stock, $25 par value per share. At December 31,
2003 and 2002, there were 319,000 shares of outstanding preferred stock. Holders
of outstanding CenturyTel preferred stock are entitled to receive cumulative
dividends, receive preferential distributions equal to $25 per share plus unpaid
dividends upon CenturyTel's liquidation and vote as a single class with the
holders of common stock.
A-60
Shareholders' Rights Plan - In 1996 the Board of Directors declared a dividend
of one preference share purchase right for each common share outstanding. Such
rights become exercisable if and when a potential acquiror takes certain steps
to acquire 15% or more of CenturyTel's common stock. Upon the occurrence of such
an acquisition, each right held by shareholders other than the acquiror may be
exercised to receive that number of shares of common stock or other securities
of CenturyTel (or, in certain situations, the acquiring company) which at the
time of such transaction will have a market value of two times the exercise
price of the right.
(10) POSTRETIREMENT BENEFITS
The Company sponsors health care plans (which use a December 31
measurement date) that provide postretirement benefits to all qualified retired
employees.
On December 8, 2003, President Bush signed into law a bill that expands
Medicare, primarily adding a prescription drug benefit for Medicare-eligible
retirees starting in 2006. The Company anticipates that the benefits it pays
after 2006 will be lower as a result of the new Medicare provisions; however,
the Company's retiree medical obligations and reported costs do not reflect the
impact of this legislation. Deferring recognition of the new medicare
provisions' impact is permitted by Financial Accounting Standards Board Staff
Position 106-1 due to unresolved questions about some of the new Medicare
provisions and a lack of authoritative accounting guidance about certain
matters.
In 2003, the Company announced changes, effective January 1, 2004, that
would decrease its subsidization of benefits provided under its postretirement
benefit plan.
A-61
The following is a reconciliation of the beginning and ending balances
for the benefit obligation and the plan assets.
December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 253,762 215,872 165,266
Service cost 6,176 6,669 6,373
Interest cost 18,216 15,962 14,512
Participant contributions 1,199 617 548
Acquisitions - 56,539 -
Plan amendments (34,597) - -
Actuarial (gain) loss 79,163 (29,534) 40,005
Benefits paid (12,498) (12,363) (10,832)
---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 311,421 253,762 215,872
=========================================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 28,697 36,555 39,873
Return on assets 4,479 (2,896) (1,379)
Employer contributions 8,000 6,784 8,345
Participant contributions 1,199 617 548
Benefits paid (12,498) (12,363) (10,832)
---------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 29,877 28,697 36,555
=========================================================================================================
Net periodic postretirement benefit cost for 2003, 2002 and 2001
included the following components:
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 6,176 6,669 6,373
Interest cost 18,216 15,962 14,512
Expected return on plan assets (2,870) (3,656) (3,987)
Amortization of unrecognized actuarial loss 2,234 1,470 1,337
Amortization of unrecognized prior service cost (2,447) (129) (129)
---------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 21,309 20,316 18,106
=========================================================================================================
The following table sets forth the amounts recognized as liabilities
for postretirement benefits at December 31, 2003, 2002 and 2001.
December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (311,421) (253,762) (215,872)
Fair value of plan assets 29,877 28,697 36,555
Unamortized prior service cost (33,068) (918) (1,046)
Unrecognized net actuarial loss 89,893 14,573 33,925
---------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (224,719) (211,410) (146,438)
=========================================================================================================
A-62
Assumptions used in accounting for postretirement benefits as of
December 31, 2003 and 2002 were:
2003 2002
-------------------------------------------------------------------------------------------------------
Determination of benefit obligation
Discount rate 6.0% 6.75
Healthcare trend rates (Medical/Prescription Drug)
Following year 11.0%/16.0% 4.9/5.7
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate) 5.0%/5.0% 4.5/4.5
Year that the rate reaches the ultimate trend rate 2010/2015 2015/2015
Determination of benefit cost
Discount rate 6.75% 7.00
Expected return on plan assets 8.25% 10.0
---------------------------------------------------------------------------------------------------------
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. The intent of this strategy is to
minimize plan expenses by outperforming plan liabilities over the long term.
Risk tolerance is established through careful consideration of plan liabilities,
plan funded status and corporate financial condition. Investment risk is
measured and monitored on an ongoing basis through annual liability
measurements, periodic asset studies and periodic portfolio reviews.
The Company's postretirement benefit plan weighted-average asset
allocations at December 31, 2003 and 2002 by asset category are as follows:
2003 2002
--------------------------------------------------------------------------------------------------------
Equity securities 80.5% 56.2
Debt securities 16.4 36.6
Other 3.1 7.2
--------------------------------------------------------------------------------------------------------
Total 100.0% 100.0
========================================================================================================
In determining the expected return on plan assets, historical markets
are studied and long-term relationships between equities and fixed income are
preserved consistent with the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. Peer data and
historical returns are also reviewed to check for reasonableness.
A-63
Assumed health care cost trends have a significant effect on the
amounts reported for postretirement benefit plans. A one-percentage-point change
in assumed health care cost rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Effect on total of service and interest cost components $ 1,588 (1,514)
Effect on postretirement benefit obligation $ 20,377 19,126)
--------------------------------------------------------------------------------------------------------
The Company expects to contribute approximately $13 million to its
postretirement benefit plan in 2004.
(11) RETIREMENT AND SAVINGS PLANS
CenturyTel and certain subsidiaries sponsor defined benefit pension
plans for substantially all employees. CenturyTel also sponsors an Outside
Directors' Retirement Plan and a Supplemental Executive Retirement Plan to
provide directors and officers, respectively, with supplemental retirement,
death and disability benefits. The Company uses a December 31 measurement date
for its plans.
The following is a reconciliation of the beginning and ending balances
for the aggregate benefit obligation and the plan assets for the Company's
retirement and savings plans.
December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 346,256 271,490 249,835
Service cost 12,840 10,353 7,760
Interest cost 23,617 20,053 17,829
Plan amendments - - 1,205
Acquisitions - 51,428 -
Settlements (9,962) - -
Actuarial (gain) loss 46,221 9,231 9,065
Benefits paid (28,139) (16,299) (14,204)
---------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 390,833 346,256 271,490
=========================================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $ 266,420 270,902 315,727
Return on plan assets 52,783 (42,998) (31,998)
Employer contributions 50,437 3,387 1,377
Acquisitions 6,807 51,428 -
Benefits paid (28,139) (16,299) (14,204)
---------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 348,308 266,420 270,902
=========================================================================================================
A-64
At December 31, 2003, the Company's underfunded pension plans (meaning
those with benefit obligations in excess of plan assets) had aggregate benefit
obligations of $138.4 million and aggregate plan assets of $84.4 million. As of
December 31, 2002, all of the pension plans had benefit obligations in excess of
plan assets.
Net periodic pension expense (benefit) for 2003, 2002 and 2001 included
the following components:
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 12,840 10,353 7,760
Interest cost 23,617 20,053 17,829
Expected return on plan assets (22,065) (28,575) (30,803)
Settlements 2,233 - -
Recognized net (gains) losses 7,214 1,248 (2,399)
Net amortization and deferral 397 395 301
---------------------------------------------------------------------------------------------------------
Net periodic pension expense (benefit) $ 24,236 3,474 (7,312)
=========================================================================================================
The following table sets forth the combined plans' funded status and
amounts recognized in the Company's consolidated balance sheet at December 31,
2003, 2002 and 2001.
December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (390,833) (346,256) (271,490)
Fair value of plan assets 348,308 266,420 270,902
Unrecognized transition asset (900) (1,152) (1,404)
Unamortized prior service cost 3,721 4,370 5,017
Unrecognized net actuarial (gain) loss 98,759 102,664 23,121
---------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 59,055 26,046 26,146
=========================================================================================================
The Company's accumulated benefit obligation as of December 31, 2003
and 2002 was $329.0 million and $284.8 million, respectively.
Amounts recognized on the balance sheet consist of:
December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Prepaid pension cost $ 59,055 26,046 26,146
Additional minimum pension liability (reflected in Deferred
Credits and Other Liabilities) - (56,388) -
Intangible asset (reflected in Other Assets) - 1,212 -
Accumulated Other Comprehensive Loss - 55,176 -
---------------------------------------------------------------------------------------------------------
$ 59,055 26,046 26,146
=========================================================================================================
A-65
Assumptions used in accounting for the pension plans as of December 2003 and
2002 were:
2003 2002
-------------------------------------------------------------------------------------------------------
Determination of benefit obligation
Discount rate 6.0% 6.75
Weighted average rate of compensation increase 4.0% 4.50
Determination of benefit cost
Discount rate 6.75% 7.0
Weighted average rate of compensation increase 4.50% 4.50
Expected long-term rate of return on assets 8.25% 10.0
--------------------------------------------------------------------------------------------------------
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. The intent of this strategy is to
minimize plan expenses by outperforming plan liabilities over the long term.
Risk tolerance is established through careful consideration of plan liabilities,
plan funded status and corporate financial condition. Investment risk is
measured and monitored on an ongoing basis through annual liability
measurements, periodic asset studies and periodic portfolio reviews.
The Company's pension plans weighted-average asset allocations at
December 31, 2003 and 2002 by asset category are as follows:
2003 2002
-------------------------------------------------------------------------------------
Equity securities 54.0% 66.5
Debt securities 11.0 5.7
Cash and cash equivalents 32.3 24.4
Other 2.7 3.4
-------------------------------------------------------------------------------------
Total 100.0% 100.0
=====================================================================================
In determining the expected return on plan assets, historical markets
are studied and long-term relationships between equities and fixed income are
preserved consistent with the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. Peer data and
historical returns are also reviewed to check for reasonableness.
A-66
The amount of the 2004 contribution will be determined based on a
number of factors, including the results of the 2004 actuarial valuation report.
At this time, the amount of the 2004 contribution is not known.
CenturyTel sponsors an Employee Stock Ownership Plan ("ESOP") which
covers most employees with one year of service with the Company and is funded by
Company contributions determined annually by the Board of Directors. The
Company's expense related to the ESOP during 2003, 2002 and 2001 was $8.9
million, $9.3 million, and $7.5 million, respectively. At December 31, 2003, the
ESOP owned an aggregate of 7.2 million shares of CenturyTel common stock.
CenturyTel and certain subsidiaries also sponsor qualified profit
sharing plans pursuant to Section 401(k) of the Internal Revenue Code (the
"401(k) Plans") which are available to substantially all employees of the
Company. The Company's matching contributions to the 401(k) Plans were $8.2
million in 2003, $6.7 million in 2002 and $6.6 million in 2001.
(12) INCOME TAXES
Income tax expense from continuing operations included in the
Consolidated Statements of Income for the years ended December 31, 2003, 2002
and 2001 was as follows:
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Federal
Current $ 58,659 22,987 26,689
Deferred 118,600 80,056 62,164
State
Current (113) 11,406 6,735
Deferred 10,106 (8,944) (4,220)
---------------------------------------------------------------------------------------------------------
$ 187,252 105,505 91,368
=========================================================================================================
Income tax expense for 2003 was reduced by $21.6 million primarily as a
result of reducing the valuation allowance related to net state operating loss
carryforwards as it is more likely than not that future taxable income will be
sufficient to enable the Company to utilize this portion of the operating loss
carryforwards.
A-67
Income tax expense from continuing operations was allocated as follows:
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Income tax expense in the consolidated statements of income $ 187,252 105,505 91,368
Stockholders' equity:
Compensation expense for tax purposes
in excess of amounts recognized for
financial reporting purposes (4,385) (7,471) (1,051)
Tax effect of the change in accumulated other
comprehensive income (loss) 19,763 (19,763) (13,715)
---------------------------------------------------------------------------------------------------------
The following is a reconciliation from the statutory federal income tax
rate to the Company's effective income tax rate from continuing operations:
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Percentage of pre-tax income)
Statutory federal income tax rate 35.0% 35.0 35.0
State income taxes, net of federal income tax benefit 1.2 .5 .7
Amortization of nondeductible goodwill - - 3.4
Amortization of investment tax credits - (.1) (.2)
Amortization of regulatory liability (.1) (.3) (.7)
Other, net (.9) .2 (.2)
----------------------------------------------------------------------------------------------------------
Effective income tax rate 35.2% 35.3 38.0
==========================================================================================================
In accordance with SFAS 142, effective January 1, 2002, goodwill
amortization for financial reporting purposes ceased.
A-68
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2003 and 2002 were as follows:
December 31, 2003 2002
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Postretirement benefit costs $ 59,215 40,852
Regulatory support 12,464 11,414
Net state operating loss carryforwards 41,358 28,380
Other employee benefits 10,160 28,697
Other 24,819 18,720
---------------------------------------------------------------------------------------------------------
Gross deferred tax assets 148,016 128,063
Less valuation allowance (19,735) (28,380)
---------------------------------------------------------------------------------------------------------
Net deferred tax assets 128,281 99,683
---------------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment, primarily due to
depreciation differences (291,482) (189,663)
Goodwill (350,812) (256,801)
Deferred debt costs (2,470) (2,400)
Intercompany profits (3,485) (2,980)
Other (8,583) -
---------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities (656,832) (451,844)
---------------------------------------------------------------------------------------------------------
Net deferred tax liability $ (528,551) (352,161)
=========================================================================================================
As of December 31, 2003, the Company had available tax benefits
associated with net state operating loss carryforwards, which expire through
2023, of $41.4 million. In assessing whether the Company can realize the
benefits of its net state operating loss carryforwards, the Company considers
whether it is more likely than not that some portion or all of the carryforwards
will not be realized. The ultimate realization of the benefits of the
carryforwards is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. The Company
considers its scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. As a
result of such assessment, $19.7 million was reserved through the valuation
allowance as of December 31, 2003 as it is likely that this amount of net
operating loss carryforwards will not be utilized prior to expiration.
(13) NONRECURRING GAINS AND LOSSES, NET
In the second quarter of 2002, the Company recorded a pre-tax gain of
$3.7 million from the sale of a PCS license.
A-69
In the third quarter of 2001, the Company recorded a pre-tax gain on
the sale of its remaining common shares of Illuminet Holdings, Inc. aggregating
$54.6 million ($35.5 million after-tax; $.25 per diluted share). The Company
also recorded a pre-tax gain of $4.0 million ($2.6 million after-tax; $.02 per
diluted share) on the sale of certain other assets. Additionally in 2001, the
Company recorded pre-tax charges of $25.5 million ($16.6 million after-tax; $.12
per diluted share) due to the write-down in the value of certain non-operating
investments in which the Company owns a minority interest.
(14) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
A-70
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, and shares in thousands)
Income (Numerator):
Income from continuing operations $ 344,707 193,533 149,081
Discontinued operations, net of tax - 608,091 193,950
---------------------------------------------------------------------------------------------------------
Net income 344,707 801,624 343,031
Dividends applicable to preferred stock (399) (399) (399)
---------------------------------------------------------------------------------------------------------
Net income applicable to common stock for
computing basic earnings per share 344,308 801,225 342,632
Dividends applicable to preferred stock 399 399 399
---------------------------------------------------------------------------------------------------------
Net income as adjusted for purposes of computing
diluted earnings per share $ 344,707 801,624 343,031
=========================================================================================================
Net income applicable to common stock for computing basic
earnings per share, as adjusted for goodwill amortization $ 344,308 801,225 398,898
=========================================================================================================
Net income as adjusted for purposes of computing diluted
earnings per share, as adjusted for goodwill amortization $ 344,707 801,624 399,297
=========================================================================================================
Shares (Denominator):
Weighted average number of shares outstanding
during period 143,673 141,796 141,021
Employee Stock Ownership Plan shares not committed to be
released (90) (183) (278)
---------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding during
period for computing basic earnings per share 143,583 141,613 140,743
Incremental common shares attributable to
dilutive securities:
Shares issuable under convertible securities 435 435 435
Shares issuable under outstanding stock options 682 831 1,129
---------------------------------------------------------------------------------------------------------
Number of shares as adjusted for purposes of
computing diluted earnings per share 144,700 142,879 142,307
=========================================================================================================
Basic earnings per share
From continuing operations $ 2.40 1.36 1.06
From continuing operations, as adjusted for
goodwill amortization $ 2.40 1.36 1.39
From discontinued operations $ - 4.29 1.38
From discontinued operations, as adjusted for
goodwill amortization $ - 4.29 1.45
Basic earnings per share $ 2.40 5.66 2.43
Basic earnings per share, as adjusted for
goodwill amortization $ 2.40 5.66 2.83
Diluted earnings per share
From continuing operations $ 2.38 1.35 1.05
From continuing operations, as adjusted for
goodwill amortization $ 2.38 1.35 1.37
From discontinued operations $ - 4.26 1.36
From discontinued operations, as adjusted for
goodwill amortization $ - 4.26 1.43
Diluted earnings per share $ 2.38 5.61 2.41
Diluted earnings per share, as adjusted for
goodwill amortization $ 2.38 5.61 2.81
A-71
The weighted average number of options to purchase shares of common
stock that were excluded from the computation of diluted earnings per share
because the exercise price of the option was greater than the average market
price of the common stock was 2.6 million for 2003, 3.3 million for 2002 and 1.3
million for 2001.
(15) STOCK OPTION PROGRAMS
CenturyTel maintains programs which allow the Board of Directors,
through the Compensation Committee, to grant (i) incentives to certain employees
in any one or a combination of several forms, including incentive and
non-qualified stock options; stock appreciation rights; restricted stock; and
performance shares and (ii) stock options to outside directors. As of December
31, 2003, CenturyTel had reserved 12.1 million shares of common stock which may
be issued under CenturyTel's current incentive compensation programs.
Under the Company's programs, options have been granted to employees
and directors at a price either equal to or exceeding the then-current market
price. All of the options expire ten years after the date of grant and the
vesting period ranges from immediate to three years.
Stock option transactions during 2003, 2002 and 2001 were as follows:
Number Average
of options price
---------------------------------------------------------------------------------------------------------
Outstanding December 31, 2000 4,681,159 $ 21.16
Exercised (149,806) 15.91
Granted 1,971,750 28.14
Forfeited (135,583) 18.42
---------------------------------------------------------------------------------------
Outstanding December 31, 2001 6,367,520 23.51
Exercised (1,366,560) 13.97
Granted 1,983,150 32.28
Forfeited (88,308) 28.59
---------------------------------------------------------------------------------------
Outstanding December 31, 2002 6,895,802 27.95
Exercised (1,059,414) 22.30
Granted 1,720,317 27.36
Forfeited (822,133) 33.34
---------------------------------------------------------------------------------------
Outstanding December 31, 2003 6,734,572 28.14
=======================================================================================
Exercisable December 31, 2003 3,807,355 27.21
=======================================================================================
Exercisable December 31, 2002 3,991,753 25.68
=======================================================================================
A-72
The following tables summarize certain information about CenturyTel's
stock options at December 31, 2003.
Options outstanding
----------------------------------------------------------------------------------------------------------
Weighted average
Range of remaining contractual Weighted average
exercise prices Number of options life outstanding exercise price
----------------------------------------------------------------------------------------------------------
$ 11.67-17.64 931,324 1.9 $ 14.90
24.10-26.31 230,308 7.6 25.20
26.62-31.56 3,061,468 7.9 27.73
31.75-38.50 2,469,563 8.4 33.66
39.00-46.19 41,909 5.3 42.47
---------
11.67-46.19 6,734,572 7.5 28.14
=========
Options exercisable
----------------------------------------------------------------------------------------------------------
Range of Number of Weighted average
exercise prices options exercisable exercise price
----------------------------------------------------------------------------------------------------------
$ 11.67-17.64 931,324 $ 14.90
24.10-26.31 178,753 25.14
26.62-31.56 1,179,303 28.15
31.75-38.50 1,476,066 34.04
39.00-46.19 41,909 42.47
----------
11.67-46.19 3,807,355 27.21
=========
(16) SUPPLEMENTAL CASH FLOW DISCLOSURES
The amount of interest actually paid by the Company, net of amounts
capitalized of $488,000, $1.2 million and $3.5 million during 2003, 2002 and
2001, respectively, was $221.1 million, $210.9 million and $224.7 million during
2003, 2002 and 2001, respectively. Income taxes paid were $91.6 million in 2003,
$325.5 million in 2002 and $128.3 million in 2001. Income tax refunds totaled
$85.7 million in 2003, $2.7 million in 2002 and $5.0 million in 2001.
The Company has consummated the acquisitions of various operations,
along with certain other assets, during the three years ended December 31, 2003.
In connection with these acquisitions, the following assets were acquired and
liabilities assumed:
A-73
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment, net $ 46,390 866,575 -
Goodwill 21,743 1,335,157 33,183
Deferred credits and other liabilities 21,754 (56,897) 13,948
Other assets and liabilities, excluding
cash and cash equivalents (3,644) 100,191 -
---------------------------------------------------------------------------------------------------------
Decrease in cash due to acquisitions $ 86,243 2,245,026 47,131
=========================================================================================================
The Company has disposed of various operations reflected within
continuing operations, along with certain other assets, during the three years
ended December 31, 2003. In connection with these dispositions, the following
assets were sold, liabilities eliminated, assets received and gain recognized:
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment, net $ - - (2,447)
Marketable equity securities - - (3,614)
Other assets and liabilities, excluding cash and
cash equivalents - (435) (19,080)
Gain on sale of assets - (3,709) (33,043)
----------------------------------------------------------------------------------------------------------
Increase in cash due to dispositions $ - (4,144) (58,184)
==========================================================================================================
For information on the Company's discontinued operations, see Note 3.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of certain of the Company's financial instruments at December 31, 2003
and 2002.
A-74
Carrying Fair
Amount value
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 2003
Financial assets
Other $ 54,605 54,605 (2)
Financial liabilities
Long-term debt (including current maturities) $ 3,181,755 3,440,279 (1)
Interest rate swaps $ 11,693 11,693 (2)
Other $ 44,612 44,612 (2)
--------------------------------------------------------------------------------------------------------
December 31, 2002
Financial assets
Interest rate swaps $ 22,163 22,163 (2)
Other $ 33,637 33,637 (2)
Financial liabilities
Long-term debt (including current maturities) $ 3,648,869 3,937,535 (1)
Interest rate swaps 1,290 1,290 (2)
Other $ 41,884 41,884 (2)
--------------------------------------------------------------------------------------------------------
(1) Fair value was estimated by discounting the scheduled payment streams
to present value based upon rates currently available to the Company
for similar debt.
(2) Fair value was estimated by the Company to approximate carrying value.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates the fair value due to the
short maturity of these instruments and have not been reflected in the above
table.
(18) BUSINESS SEGMENTS
The Company's only separately reportable business segment is its
telephone operations. The operating income of this segment is reviewed by the
chief operating decision maker to assess performance and make business
decisions. Due to the sale of the Company's wireless operations, such operations
(which were previously reported as a separate segment) are classified as
discontinued operations. Other operations include, but are not limited to, the
Company's non-regulated long distance operations, Internet operations,
competitive local exchange carrier operations, fiber transport business and
security monitoring operations.
The Company's telephone operations are conducted in rural, suburban and
small urban communities in 22 states. Approximately 70% of the Company's
telephone access lines are in Wisconsin, Missouri, Alabama, Arkansas and
Washington.
A-75
Depreciation
Operating and Operating
revenues amortization income
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 2003
Telephone $ 2,071,980 450,851 688,114
Other operations 308,765 19,790 62,282
----------------------------------------------------------------------------------------------------------
Total $ 2,380,745 470,641 750,396
==========================================================================================================
Year ended December 31, 2002
Telephone $ 1,733,592 396,866 543,113
Other operations 238,404 14,760 43,568
Corporate overhead costs allocable to
discontinued operations - - (11,275)
-----------------------------------------------------------------------------------------------------------
Total $ 1,971,996 411,626 575,406
==========================================================================================================
Year ended December 31, 2001
Telephone $ 1,505,733 398,284 423,420
Other operations 173,771 8,754 22,098
Corporate overhead costs allocable to
discontinued operations - - (20,213)
----------------------------------------------------------------------------------------------------------
Total $ 1,679,504 407,038 425,305
==========================================================================================================
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating income $ 750,396 575,406 425,305
Interest expense (226,751) (221,845) (225,523)
Income from unconsolidated cellular entity 6,160 5,582 7,592
Nonrecurring gains and losses, net - 3,709 33,043
Other income and expense 2,154 (63,814) 32
----------------------------------------------------------------------------------------------------------
Income from continuing operations
before income tax expense $ 531,959 299,038 240,449
==========================================================================================================
Year ended December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Capital expenditures
Telephone $ 317,357 319,536 351,010
Other operations 60,582 66,731 84,505
----------------------------------------------------------------------------------------------------------
Total $ 377,939 386,267 435,515
==========================================================================================================
December 31, 2003 2002 2001
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Total assets
Telephone $ 6,747,036 6,962,713 4,754,522
Other operations 1,148,816 807,695 730,395
Assets held for sale - - 833,767
----------------------------------------------------------------------------------------------------------
Total assets $ 7,895,852 7,770,408 6,318,684
==========================================================================================================
A-76
Interexchange carriers and other accounts receivable on the balance
sheets are primarily amounts due from various long distance carriers,
principally AT&T, and several large local exchange operating companies.
(19) COMMITMENTS AND CONTINGENCIES
Construction expenditures and investments in vehicles, buildings and
equipment during 2004 are estimated to be $290 million for telephone operations
and $110 million for other operations.
In Barbrasue Beattie and James Sovis, on behalf of themselves and all
others similarly situated, v. CenturyTel, Inc., filed on October 29, 2002 in the
United States District Court for the Eastern District of Michigan (Case No.
02-10277), the plaintiffs allege that the Company unjustly and unreasonably
billed customers for inside wire maintenance services, and seek unspecified
money damages and injunctive relief under various legal theories on behalf of a
purported class of over two million customers in the Company's telephone
markets. The Court has not yet ruled on the plaintiffs' certification motion,
and has not yet set a date to resolve this issue. Given the current status of
this case, the Company cannot estimate the potential impact, if any, that this
case will have on its results of operations.
AT&T filed a petition with the FCC in December 2003 seeking forbearance
from enforcing certain provisions of the Telecommunications Act of 1996 that
allows LECs to file access tariffs on a streamlined basis and, if certain
criteria are met, deems those tariffs lawful. Certain of the Company's telephone
subsidiaries file interstate tariffs directly with the FCC using this
streamlined filing approach. As a result of recent court rulings, tariffs that
have been "deemed lawful" in effect nullify an interexchange carrier's ability
to seek refunds should the earnings from the tariffs ultimately result in
earnings above the authorized rate of return prescribed by the FCC. The Company
has not recognized any revenues in excess of the authorized rate of return
applicable to those carriers who historically have requested refunds pending
resolution of the "deemed lawful" tariff issue. The Company will continue to
monitor the status of the AT&T petition with the FCC. Although it is possible
the Company could benefit favorably upon resolution of this issue, there is no
assurance that a favorable outcome will occur.
A-77
From time to time, the Company is involved in various other claims and
legal actions relating to the conduct of its business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
(20) SUBSEQUENT EVENT
On February 3, 2004, the Company announced that its board of directors
approved a stock repurchase program that will allow the Company to repurchase up
to an aggregate of $400 million of either its common stock or convertible equity
units prior to December 31, 2005. The Company commenced purchases under this
plan on February 6, 2004.
* * * * * * * * *
A-78
CENTURYTEL, INC.
Consolidated Quarterly Income Statement Information
(Unaudited)
First Second Third Fourth
quarter quarter quarter quarter
----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
2003 (unaudited)
----------------------------------------------------------------------------------------------------------
Operating revenues $ 580,530 590,148 603,752 606,315
Operating income $ 184,773 188,381 190,781 186,461
Net income $ 83,919 87,367 90,979 82,442
Basic earnings per share $ .59 .61 .63 .57
Diluted earnings per share $ .58 .60 .63 .57
2002
----------------------------------------------------------------------------------------------------------
Operating revenues $ 422,918 438,702 524,497 585,879
Operating income $ 119,049 109,531 157,716 189,110
Income from continuing operations $ 43,117 41,482 64,589 44,345
Net income $ 70,767 78,763 607,749 44,345
Basic earnings per share from continuing operations $ .30 .29 .46 .31
Basic earnings per share $ .50 .56 4.29 .31
Diluted earnings per share from continuing operations $ .30 .29 .45 .31
Diluted earnings per share $ .50 .55 4.26 .31
2001
---------------------------------------------------------------------------------------------------------
Operating revenues $ 411,602 409,250 423,973 434,679
Operating income $ 104,309 99,209 105,991 115,796
Income from continuing operations $ 27,708 22,533 60,994 37,846
Net income $ 46,722 154,241 92,305 49,763
Basic earnings per share from continuing operations $ .20 .16 .43 .27
Basic earnings per share from continuing operations,
as adjusted $ .28 .24 .51 .35
Basic earnings per share $ .33 1.10 .65 .35
Basic earnings per share, as adjusted $ .43 1.20 .75 .45
Diluted earnings per share from continuing operations $ .19 .16 .43 .27
Diluted earnings per share from continuing operations,
as adjusted $ .28 .24 .51 .35
Diluted earnings per share $ .33 1.09 .65 .35
Diluted earnings per share, as adjusted $ .43 1.19 .75 .45
---------------------------------------------------------------------------------------------------------
Diluted earnings per share for the fourth quarter of 2003 included a
$.06 per share charge related to operating taxes, net of related revenue effect,
and interest associated with various operating tax audits.
Diluted earnings per share for the third quarter of 2002 included $3.72
per share related to the gain on the sale of substantially all of the Company's
wireless operations, net of amounts written off for costs expended related to
the wireless portion of the new billing system currently in development. Diluted
earnings per share for the fourth quarter
A-79
of 2002 was negatively impacted by $.27 per share related to the redemption
premium on the Company Series I remarketable notes that were redeemed in October
2002. On July 1 and August 31, 2002, the Company acquired nearly 650,000
telephone access lines and related assets from Verizon. See Note 2 for
additional information.
* * * * * *
A-80
(CENTURYTEL LOGO)
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MR A SAMPLE 000000000.000 ext
DESIGNATION (IF ANY) 000000000.000 ext
ADD 1 000000000.000 ext
ADD 2 000000000.000 ext
ADD 3
ADD 4 HOLDER ACCOUNT NUMBER
ADD 5
ADD 6 C 1234567890 J N T
(BARCODE) (BARCODE)
[ ] Mark this box with an
X if you have made
changes to your name
or address details
above.
--------------------------------------------------------------------------------
ANNUAL MEETING PROXY CARD
--------------------------------------------------------------------------------
A. TO ELECT FOUR CLASS I DIRECTORS
1. The Board of Directors recommends a vote FOR the listed nominees.
FOR WITHHOLD
01 - William R. Boles, Jr. [ ] [ ]
02 - W. Bruce Hanks [ ] [ ]
03 - C.G. Melville, Jr. [ ] [ ]
04 - Glen F. Post, III [ ] [ ]
--------------------------------------------------------------------------------
KEY FOR EXPLANATION OF VOTING RIGHTS
TVS - TOTAL VOTING SECURITIES, INCLUDING DIVIDEND REINVESTMENT
AND/OR EMPLOYEE STOCK PURCHASE PLAN(S)
1VT - ONE-VOTE TOTAL
10VT - TEN-VOTE TOTAL
VOTE - TOTAL VOTES TO WHICH YOU ARE ENTITLED
NOTE: TO DETERMINE THE TOTAL NUMBER OF 10-VOTE
SHARES, DIVIDE THE 10VT AMOUNT BY TEN (10).
--------------------------------------------------------------------------------
B. ISSUES
FOR AGAINST ABSTAIN
2. To ratify the selection of KPMG LLP as [ ] [ ] [ ]
the Company's independent auditor for
2004.
3. In their discretion to vote upon such [ ] [ ] [ ]
other business as may properly come
before the Meeting.
C. AUTHORIZED SIGNATURES - SIGN HERE - THIS SECTION MUST BE COMPLETED FOR YOUR
INSTRUCTIONS TO BE EXECUTED.
Please sign exactly as name appears on the certificate or certificates
representing shares to be voted by this proxy. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons.
Signature 1 - Please keep Signature 2 - Please keep Date (mm/dd/yyyy)
signature within the box signature within the box
------------------------- ------------------------- ----------------------------
/ /
------------------------- ------------------------- ----------------------------
1 UPX HHH PPPP 003005
================================================================================
PROXY - CENTURYTEL, INC.
================================================================================
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Glen F. Post, III or Stacey W.
Goff, or either of them, proxies for the undersigned, with full power of
substitution, to represent the undersigned and to cast the number of votes
attributable to all of the shares of common stock and voting preferred stock
(collectively, the "Voting Shares") of CenturyTel, Inc. (the "Company") that the
undersigned is entitled to vote at the annual meeting of shareholders of the
Company to be held on May 6, 2004, and at any and all adjournments thereof (the
"Meeting").
The Board of Directors recommends that you vote FOR the nominees and the
proposal listed on the reverse side hereof. In addition to serving as a Proxy,
this card will also serve as instructions to Computershare Investor Services,
LLC (the "Agent") to cast in the manner designated on the reverse side hereof
the number of votes allocable to the undersigned, if any, that are attributable
to shares of the Company's common stock held as of March 8, 2004 in the name of
the Agent and credited to any plan account of the undersigned in accordance with
the Company's dividend reinvestment plan or employee stock purchase plans. Upon
timely receipt of this Proxy, properly executed, all of the votes attributable
to your Voting Shares, including any held in the name of the Agent, will be
voted as specified. If this Proxy is properly executed but no specific
directions are given, all of your votes will be voted for the nominees and the
proposal.
(Please See Reverse Side)