10-Q 1 submfile.txt 2ND QTR 10-Q SUBMISSION FILE UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 1-7784 CenturyTel, Inc. (Exact name of registrant as specified in its charter) Louisiana 72-0651161 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 CenturyTel Drive, Monroe, Louisiana 71203 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (318) 388-9000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of July 31, 2002, there were 141,871,426 shares of common stock outstanding. CenturyTel, Inc. TABLE OF CONTENTS Page No. Part I. Financial Information: Item 1. Financial Statements Consolidated Statements of Income--Three Months and Six Months Ended June 30, 2002 and 2001 3-4 Consolidated Statements of Comprehensive Income-- Three Months and Six Months Ended June 30, 2002 and 2001 5 Consolidated Balance Sheets--June 30, 2002 and December 31, 2001 6 Consolidated Statements of Stockholders' Equity-- Six Months Ended June 30, 2002 and 2001 7 Consolidated Statements of Cash Flows-- Six Months Ended June 30, 2002 and 2001 8 Notes to Consolidated Financial Statements 9-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 Part II. Other Information: Item 1. Legal Proceedings 30 Item 4. Submission of Matters to a Vote of Security Holders 30 Item 6. Exhibits and Reports on Form 8-K 31 Signature 31 PART I. FINANCIAL INFORMATION CenturyTel, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months Six months ended June 30, ended June 30, ------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) OPERATING REVENUES Telephone $ 380,499 367,884 753,230 739,133 Other 58,203 41,366 108,390 81,719 ------------------------------------------------------------------------------------------------------------------- Total operating revenues 438,702 409,250 861,620 820,852 ------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses (exclusive of depreciation and amortization) 230,033 204,472 436,877 407,968 Corporate overhead costs allocable to discontinued operations (See Note 3) 5,134 4,979 9,932 9,958 Depreciation and amortization 94,004 100,590 186,231 199,408 ------------------------------------------------------------------------------------------------------------------- Total operating expenses 329,171 310,041 633,040 617,334 ------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 109,531 99,209 228,580 203,518 ------------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense (54,157) (57,358) (104,805) (119,061) Nonrecurring gains and losses 3,709 (10,500) 3,709 (10,500) Other income and expense 2,485 1,783 217 4,250 ------------------------------------------------------------------------------------------------------------------- Total other income (expense) (47,963) (66,075) (100,879) (125,311) ------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE 61,568 33,134 127,701 78,207 Income tax expense 21,360 12,066 44,636 30,288 ------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 40,208 21,068 83,065 47,919 DISCONTINUED OPERATIONS (See Note 3) Income from discontinued operations, net of $21,574, $79,988, $37,244 and $93,144 tax 38,555 133,173 66,465 153,044 ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 78,763 154,241 149,530 200,963 =================================================================================================================== NET INCOME, AS ADJUSTED FOR GOODWILL AMORTIZATION (See Notes 1 and 4) $ 78,763 168,376 149,530 229,181 ===================================================================================================================
See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Continued)
Three months Six months ended June 30, ended June 30, ------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) BASIC EARNINGS PER SHARE From continuing operations $ .28 .15 .59 .34 From continuing operations, as adjusted* $ .28 .23 .59 .51 From discontinued operations $ .27 .95 .47 1.09 From discontinued operations, as adjusted* $ .27 .96 .47 1.12 Basic earnings per share $ .56 1.10 1.06 1.43 Basic earning per share, as adjusted* $ .56 1.20 1.06 1.63 DILUTED EARNINGS PER SHARE From continuing operations $ .28 .15 .58 .34 From continuing operations, as adjusted* $ .28 .23 .58 .50 From discontinued operations $ .27 .94 .47 1.08 From discontinued operations, as adjusted* $ .27 .95 .47 1.11 Diluted earnings per share $ .55 1.09 1.05 1.41 Diluted earnings per share, as adjusted* $ .55 1.19 1.05 1.61 DIVIDENDS PER COMMON SHARE $ .0525 .05 .105 .10 =================================================================================================================== AVERAGE BASIC SHARES OUTSTANDING 141,243 140,720 141,136 140,656 =================================================================================================================== AVERAGE DILUTED SHARES OUTSTANDING 142,705 142,059 142,679 142,271 ===================================================================================================================
* As adjusted to reflect the after-tax effect of eliminating goodwill amortization in accordance with SFAS 142 (See Notes 1 and 4). See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three months Six months ended June 30, ended June 30, ---------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 -------------------------------------------------------------------------------------------------------------- (Dollars in thousands) NET INCOME $ 78,763 154,241 149,530 200,963 OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized holding gain arising during period, net of $7,109 and $5,560 tax - 13,202 - 10,325 ---------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 78,763 167,443 149,530 211,288 ================================================================================================================ COMPREHENSIVE INCOME, AS ADJUSTED FOR GOODWILL AMORTIZATION (See Notes 1 and 4) $ 78,763 181,578 149,530 239,506 ================================================================================================================
See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 2002 2001 ----------------------------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 302,070 3,496 Accounts receivable, less allowance of $27,162 and $13,908 174,837 205,990 Materials and supplies, at average cost 9,848 10,916 Other 9,063 9,511 ----------------------------------------------------------------------------------------------------------------- Total current assets 495,818 229,913 ----------------------------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,725,096 2,736,142 ----------------------------------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Goodwill 2,115,313 2,087,158 Other 439,555 420,043 ----------------------------------------------------------------------------------------------------------------- Total investments and other assets 2,554,868 2,507,201 ----------------------------------------------------------------------------------------------------------------- ASSETS HELD FOR SALE (See Note 3) 861,526 845,428 ----------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 6,637,308 6,318,684 ================================================================================================================= LIABILITIES AND EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 432,397 955,834 Short-term debt - 53,000 Accounts payable 81,087 61,056 Accrued expenses and other liabilities Salaries and benefits 49,496 46,588 Taxes 37,982 27,937 Interest 52,938 49,191 Other 12,460 15,968 Advance billings and customer deposits 30,194 29,308 ----------------------------------------------------------------------------------------------------------------- Total current liabilities 696,554 1,238,882 ----------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT 2,750,188 2,087,500 ----------------------------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 560,797 506,052 ----------------------------------------------------------------------------------------------------------------- LIABILITIES RELATED TO ASSETS HELD FOR SALE (See Note 3) 171,680 148,870 ----------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 350,000,000 shares, issued and outstanding 141,660,660 and 141,232,806 shares 141,661 141,233 Paid-in capital 509,939 524,668 Retained earnings 1,800,514 1,666,004 Unearned ESOP shares (2,000) (2,500) Preferred stock - non-redeemable 7,975 7,975 ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 2,458,089 2,337,380 ----------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 6,637,308 6,318,684 =================================================================================================================
See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Six months ended June 30, ------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) COMMON STOCK Balance at beginning of period $ 141,233 140,667 Conversion of convertible securities into common stock - 254 Issuance of common stock through dividend reinvestment, incentive and benefit plans 428 99 ------------------------------------------------------------------------------------------------------------------- Balance at end of period 141,661 141,020 ------------------------------------------------------------------------------------------------------------------- PAID-IN CAPITAL Balance at beginning of period 524,668 509,840 Equity unit issuance costs and contract adjustment payments (24,271) - Conversion of convertible securities into common stock - 3,046 Issuance of common stock through dividend reinvestment, incentive and benefit plans 8,149 1,835 Amortization of unearned compensation and other 1,393 1,986 ------------------------------------------------------------------------------------------------------------------- Balance at end of period 509,939 516,707 ------------------------------------------------------------------------------------------------------------------- UNREALIZED HOLDING GAIN ON INVESTMENTS, NET OF TAXES Balance at beginning of period - 25,471 Change in unrealized holding gain on investments, net of tax - 10,325 ------------------------------------------------------------------------------------------------------------------- Balance at end of period - 35,796 ------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at beginning of period 1,666,004 1,351,626 Net income 149,530 200,963 Cash dividends declared Common stock-$.105 and $.10 per share, respectively (14,821) (14,169) Preferred stock (199) (199) ------------------------------------------------------------------------------------------------------------------- Balance at end of period 1,800,514 1,538,221 ------------------------------------------------------------------------------------------------------------------- UNEARNED ESOP SHARES Balance at beginning of period (2,500) (3,500) Release of ESOP shares 500 500 ------------------------------------------------------------------------------------------------------------------- Balance at end of period (2,000) (3,000) ------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK - NON-REDEEMABLE Balance at beginning and end of period 7,975 7,975 ------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 2,458,089 2,236,719 ===================================================================================================================
See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, ------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) OPERATING ACTIVITIES FROM CONTINUING OPERATIONS Net income $ 149,530 200,963 Adjustments to reconcile net income to net cash provided by operating activities from continuing operations: Income from discontinued operations, net of tax (66,465) (153,044) Depreciation and amortization 186,231 199,408 Deferred income taxes 29,259 (20,133) Nonrecurring gains and losses (3,709) 10,500 Changes in current assets and current liabilities: Accounts receivable 34,958 38,281 Accounts payable 7,610 (21,116) Other accrued taxes 10,045 46,211 Other current assets and other current liabilities, net 19,423 (2,390) Increase in other noncurrent assets (14,408) (41,815) Increase (decrease) in other noncurrent liabilities 12,393 (2,333) Other, net 14,256 10,817 ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities from continuing operations 379,123 265,349 ------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES FROM CONTINUING OPERATIONS Payments for property, plant and equipment (179,033) (209,722) Acquisitions, net of cash acquired (43,768) (47,131) Other, net 3,413 (1,812) -------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities from continuing operations (219,388) (258,665) -------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES FROM CONTINUING OPERATIONS Proceeds from issuance of debt 503,249 1,367 Payments of debt (416,498) (142,086) Proceeds from issuance of common stock 8,577 1,934 Cash dividends (15,020) (14,368) Equity units issuance costs (15,867) - Other, net 1,221 1,106 ------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities from continuing operations 65,662 (152,047) ------------------------------------------------------------------------------------------------------------------- Net cash provided by discontinued operations (See Note 3) 73,177 165,506 ------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 298,574 20,143 Cash and cash equivalents at beginning of period 3,496 11,523 ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 302,070 31,666 =================================================================================================================== Supplemental cash flow information: Income taxes paid $ 25,389 13,726 =================================================================================================================== Interest paid (net of capitalized interest of $840 and $2,942) $ 100,260 117,900 ===================================================================================================================
See accompanying notes to consolidated financial statements. CenturyTel, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) (1) Basis of Financial Reporting The consolidated financial statements of CenturyTel, Inc. and its subsidiaries (the "Company") include the accounts of CenturyTel, Inc. ("CenturyTel") and its majority-owned subsidiaries and partnerships. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission; however, in the opinion of management, the disclosures which are made are adequate to make the information presented not misleading. The consolidated financial statements and footnotes included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's current report on Form 8-K dated March 19, 2002 and filed August 13, 2002. Certain 2001 amounts have been reclassified to be consistent with the Company's 2002 presentation. The unaudited financial information for the three months and six months ended June 30, 2002 and 2001 has not been audited by independent certified public accountants; however, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for the three-month and six-month periods have been included therein. The results of operations for the first six months of the year are not necessarily indicative of the results of operations which might be expected for the entire year. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, effective January 1, 2002, systematic amortization of goodwill is no longer permitted; instead, SFAS 142 requires goodwill recorded in a business combination to be reviewed for impairment and to be written down only in periods in which the recorded amount of goodwill exceeds its fair value. Each adjustment reflected in the consolidated statements of income and comprehensive income by use of the term "as adjusted for goodwill amortization" reflects the effects of SFAS 142, as more fully described in Note 4. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. As a result of the Company's agreement in March 2002 to sell its wireless operations (which was consummated on August 1, 2002) (see Note 3), such operations have been reflected as discontinued operations for the three months and six months ended June 30, 2002. Assets and liabilities related to the Company's wireless operations are reflected as "Held for sale" on the accompanying consolidated balance sheets. Results of operations for 2001 have been restated to conform to this presentation. (2) Net Property, Plant and Equipment Net property, plant and equipment is composed of the following:
June 30, Dec. 31, 2002 2001 ---------------------------------------------------------------------------- (Dollars in thousands) Telephone, at original cost $ 5,385,714 5,292,255 Accumulated depreciation (2,971,117) (2,839,268) ---------------------------------------------------------------------------- 2,414,597 2,452,987 ---------------------------------------------------------------------------- Other, at cost 488,999 446,920 Accumulated depreciation (178,500) (163,765) ---------------------------------------------------------------------------- 310,499 283,155 ---------------------------------------------------------------------------- $ 2,725,096 2,736,142 ============================================================================
(3) Discontinued Operations On August 1, 2002 (pursuant to a definitive agreement signed March 19, 2002), the Company sold substantially all of its wireless operations to an affiliate of ALLTEL Corporation ("Alltel") and certain partners in the Company's markets that exercised "first refusal" purchase rights for an aggregate of approximately $1.58 billion in cash (see Note 7 for additional information). As a result, the Company's wireless operations have been reflected as discontinued operations and as assets and liabilities held for sale in the Company's consolidated financial statements as of and for the six months ended June 30, 2002. Amounts reported for 2001 have been restated to conform to the 2002 presentation. The depreciation and amortization of long-lived and intangible assets related to the wireless operations ceased on March 19, 2002, the date of the definitive agreement to sell such operations. The following table represents certain summary income statement information related to the Company's wireless operations reflected as discontinued operations.
Three months Six months ended June 30, ended June 30, --------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 --------------------------------------------------------------------------------------------------------- (Dollars in thousands) Operating revenues $ 106,272 109,686 208,693 214,092 ---------------------------------------------------------------------------------------------------------- Operating income (1) $ 51,409 35,996 86,425 65,895 Income from unconsolidated cellular entities 12,682 10,705 24,196 16,026 Minority interest expense (4,039) (3,064) (6,910) (5,701) Nonrecurring gains and losses - 166,928 - 166,928 Other income and (expense) 77 2,596 (2) 3,040 ---------------------------------------------------------------------------------------------------------- Pre-tax income from discontinued operations 60,129 213,161 103,709 246,188 Income tax expense (21,574) (79,988) (37,244) (93,144) ---------------------------------------------------------------------------------------------------------- Income from discontinued operations $ 38,555 133,173 66,465 153,044 ==========================================================================================================
(1) Excludes corporate overhead costs of $5.1 million, $5.0 million, $9.9 million, and $10.0 million for the three months ended June 30, 2002 and 2001 and the six months ended June 30, 2002 and 2001, respectively, allocated to the wireless operations that the Company expects to continue to incur subsequent to the disposal of the wireless operations. The following table represents certain summary cash flow statement information related to the Company's wireless operations reflected as discontinued operations.
Six months ended June 30, -------------------------------------------------------------------------------------- 2002 2001 -------------------------------------------------------------------------------------- (Dollars in thousands) Net cash provided by operating activities $ 83,078 79,765 Net cash provided by (used in) investing activities (9,901) 85,741 Net cash used in financing activities - - -------------------------------------------------------------------------------------- Net cash provided by discontinued operations $ 73,177 165,506 ======================================================================================
The following table represents the net assets of the discontinued wireless operations as of June 30, 2002 and December 31, 2001, which are classified as held for sale on the consolidated balance sheets.
June 30, Dec. 31, 2002 2001 ---------------------------------------------------------------------------------------------- (Dollars in thousands) Current assets $ 67,070 70,360 Net property, plant and equipment 271,578 263,421 Goodwill 384,446 384,326 Other assets 138,432 127,321 ---------------------------------------------------------------------------------------------- Assets held for sale $ 861,526 845,428 ============================================================================================== Current liabilities $ 73,944 55,074 Deferred credits and other liabilities 97,736 93,796 ---------------------------------------------------------------------------------------------- Liabilities related to assets held for sale $ 171,680 148,870 ==============================================================================================
(4) Goodwill and other intangible assets The following information relates to the Company's goodwill as of June 30, 2002 and December 31, 2001:
June 30, Dec. 31, 2002 2001 -------------------------------------------------------------------------------- (Dollars in thousands) Carrying amount of goodwill Telephone segment $ 2,075,886 2,074,036 Other operations 39,427 13,122 -------------------------------------------------------------------------------- Total goodwill $ 2,115,313 2,087,158 ================================================================================
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 were based on valuation models using techniques such as multiples of earnings. The Company has completed the initial transitional goodwill impairment test of SFAS 142 and has determined its goodwill is not impaired. Certain customer base assets in the Company's wireless operations (which are reflected as assets held for sale) constitute intangible assets that, prior to March 19, 2002, were subject to amortization in accordance with SFAS 142. The gross carrying amount (and accumulated amortization) of these assets was $22.7 million ($19.6 million) as of June 30, 2002 and $22.7 million ($18.5 million) as of December 31, 2001. Total amortization expense for the first six months of 2002 (which is reflected in discontinued operations) was $1.1 million. Such amortization was ceased upon the classification of such assets as held for sale on March 19, 2002. The following is a reconciliation of reported net income and reported earnings per share to the amounts that would have been reported for periods ending prior to December 31, 2001 had the Company been subject to SFAS 142 during 2001.
Three months Six months ended June 30, ended June 30, ---------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 ---------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) Net income, as reported $ 78,763 154,241 149,530 200,963 Goodwill amortization, net of taxes - 14,135 - 28,218 ---------------------------------------------------------------------------------------------------- Net income, as adjusted $ 78,763 168,376 149,530 229,181 ==================================================================================================== Basic earnings per share, as reported $ .56 1.10 1.06 1.43 Goodwill amortization, net of taxes - .10 - .20 ---------------------------------------------------------------------------------------------------- Basic earnings per share, as adjusted $ .56 1.20 1.06 1.63 ==================================================================================================== Diluted earnings per share, as reported $ .55 1.09 1.05 1.41 Goodwill amortization, net of taxes - .10 - .20 ---------------------------------------------------------------------------------------------------- Diluted earnings per share, as adjusted $ .55 1.19 1.05 1.61 ====================================================================================================
(5) Business Segments The Company's only separately reportable business segment is its telephone operations. The operating income of this segment is reviewed by the Company's chief operating decision maker to assess performance and make business decisions. Due to the sale of the Company's wireless operations, such operations (which were previously reported as a separate segment) are classified as discontinued operations (see Note 3). Other operations include, but are not limited to, the Company's non-regulated long distance operations, Internet operations, competitive local exchange carrier operations and security monitoring operations.
Three months Six months ended June 30, ended June 30, --------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 --------------------------------------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Telephone $ 380,499 367,884 753,230 739,133 Other operations 58,203 41,366 108,390 81,719 --------------------------------------------------------------------------------------------------------- Total operating revenues $ 438,702 409,250 861,620 820,852 ========================================================================================================= Operating income Telephone $ 103,709 99,382 221,677 203,363 Other operations 10,956 4,806 16,835 10,113 Corporate overhead costs allocable to discontinued operations (See Note 3) (5,134) (4,979) (9,932) (9,958) --------------------------------------------------------------------------------------------------------- Total operating income $ 109,531 99,209 228,580 203,518 ========================================================================================================= Operating income $ 109,531 99,209 228,580 203,518 Interest expense (54,157) (57,358) (104,805) (119,061) Nonrecurring gains and losses 3,709 (10,500) 3,709 (10,500) Other income and expense 2,485 1,783 217 4,250 --------------------------------------------------------------------------------------------------------- Income from continuing operations before income tax expense $ 61,568 33,134 127,701 78,207 =========================================================================================================
June 30, Dec. 31, 2002 2001 -------------------------------------------------------------------------------- (Dollars in thousands) Assets Telephone $ 4,677,059 4,754,522 Other operations 1,098,723 718,734 Assets held for sale (See Note 3) 861,526 845,428 -------------------------------------------------------------------------------- Total assets $ 6,637,308 6,318,684 ================================================================================
(6) Financing Arrangements On May 6, 2002, the Company issued and sold in an underwritten public offering $500 million of Equity Units. Net proceeds to the Company from this issuance were approximately $483.4 million. Each of the 20 million Equity Units issued was priced at $25 and consists initially of a beneficial interest in a CenturyTel senior unsecured note with a principal amount of $25 and a contract to purchase shares of CenturyTel common stock no later than May 2005. The senior notes will mature in May 2007. The total distributions on the Equity Units will be at an initial annual rate of 6.875%, consisting of interest (6.02%) and contract adjustment payments (0.855%). Each stock purchase contract will generally require the holder to purchase between .6944 and .8741 of a share of CenturyTel common stock in May 2005 in exchange for $25, subject to certain adjustments and exceptions. The Equity Units are reflected on the balance sheet as long-term debt in the amount of $500 million. Interest expense is accrued at a rate of 6.02%, the initial interest rate of the senior notes. The present value of the contract adjustment payments was recorded as a reduction to paid-in capital and as a liability upon the issuance of the Equity Units. Subsequent contract adjustment payments will be allocated between the liability and interest expense based on the effective interest method over the three-year life of the purchase contract. The issuance costs were allocated to the debt and equity components of the Equity Units. The debt issuance costs ($3.3 million) were computed based on typical costs of a debt transaction and will be amortized to interest expense over the term of the senior notes. The remainder of the issuance costs ($12.6 million) were treated as a cost of raising equity and recorded as a charge to paid-in capital. On July 22, 2002, the Company entered into $800 million of credit facilities, consisting of a $533 million three-year facility and a $267 million 364-day revolving facility with a one-year term out option. The agents for these credit facilities are JP Morgan Chase Bank, Wachovia Bank, Bank of America, Bank One and SunTrust Bank. These facilities are designed to replace maturing credit facilities. As a result of entering into the above $800 million long-term credit facilities (which will be used to refinance a credit facility expiring in late August 2002), $173.4 million of indebtedness that would otherwise have been classified as short-term has been classified as long-term on the Company's accompanying consolidated balance sheet as of June 30, 2002. (7) Subsequent Events 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 $1.0 billion cash. The assets purchased include (i) all telephone access lines (which numbered nearly 300,000) and related property and equipment comprising Verizon's local exchange operations in 90 exchanges in predominantly rural markets throughout Alabama, (ii) Verizon's assets used to provide digital subscriber line ("DSL") and other high speed data services within the purchased exchanges and (iii) approximately 1,400 route miles of fiber optic cable within the purchased exchanges. The acquired assets do not include Verizon's cellular, personal communications services ("PCS"), long distance, dial-up Internet, or directory publishing operations, or rights under various Verizon contracts, including those relating to customer premise equipment. The Company will not assume any liabilities of Verizon other than (i) those associated with contracts, facilities and certain other assets transferred in connection with the purchase and (ii) certain employee-related liabilities, including liabilities for postretirement health benefits. To finance this acquisition on a short-term basis, the Company (i) utilized net proceeds of approximately $483.4 million from the issuance of Equity Units in early May 2002, (ii) borrowed $395 million on a floating rate basis under its $600 million short-term bridge loan facility, (iii) utilized approximately $85 million of available cash on hand and (iv) financed the remainder of the purchase price from the issuance of commercial paper. On August 1, 2002, the Company sold substantially all of its wireless operations to Alltel and certain other purchasers for an aggregate of approximately $1.58 billion 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 are expected to ultimately be used to finance the Company's pending acquisition of telephone access lines in Missouri from Verizon for approximately $1.159 billion (which is expected to close on or about August 31, 2002) and to reduce outstanding indebtedness. (8) Commitments and Contingencies From time to time, the Company is involved in various claims and legal actions relating to the conduct of its business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. CenturyTel, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in the Company's current report on Form 8-K dated March 19, 2002 and filed August 13, 2002. The results of operations for the three months and six months ended June 30, 2002 are not necessarily indicative of the results of operations which might be expected for the entire year. CenturyTel, Inc. and its subsidiaries (the "Company") is a regional integrated communications company engaged primarily in providing local exchange, long distance, Internet access and data services to customers in 21 states. On August 1, 2002 (pursuant to a definitive agreement signed March 19, 2002), the Company sold its wireless operations to an affiliate of ALLTEL Corporation ("Alltel") and certain other purchasers in exchange for an aggregate of approximately $1.58 billion in cash. As a result, the Company's wireless operations for the three months and six months ended June 30, 2002 and 2001 have been reflected as discontinued operations on the Company's consolidated statements of income and cash flows. For further information, see "Discontinued Operations" below. In addition to historical information, management's discussion and analysis includes certain forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such forward-looking statements are subject to uncertainties that could cause the Company's actual results to differ materially from such statements. Such uncertainties include but are not limited to: the Company's ability to effectively manage its growth, including successfully financing and timely consummating its pending Missouri Verizon acquisition, integrating newly-acquired businesses into the Company's operations, hiring adequate numbers of qualified staff and successfully upgrading its billing and other information systems; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the communications industry; the effects of greater than anticipated competition in the Company's markets; possible changes in the demand for, or pricing of, the Company's products and services; the Company's ability to successfully introduce new product or service offerings on a timely and cost-effective basis; the direct and indirect effects on the Company's business resulting from the financial difficulties of other communications companies, including the effect on the Company's ability to collect receivables from financially troubled carriers and its ability to access the capital markets on the same terms as in the past; and the effects of more general factors such as changes in interest rates, in the capital markets, in general market or economic conditions or in legislation, regulation or public policy. These and other uncertainties related to the business are described in greater detail in Item 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any of its forward-looking statements for any reason. RESULTS OF OPERATIONS Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Net income (and diluted earnings per share) was $78.8 million ($.55) and $154.2 million ($1.09) for the second quarter of 2002 and 2001, respectively. Income from continuing operations was $40.2 million for the second quarter of 2002 and $21.1 million for the second quarter of 2001. Diluted earnings per share from continuing operations was $.28 during the second quarter of 2002 compared to $.15 during the second quarter of 2001. In accordance with the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), amortization of goodwill ceased effective January 1, 2002. Had the results of operations for the three months ended June 30, 2001 been subject to SFAS 142, income from continuing operations (and diluted earnings per share) would have been $32.7 million ($.23) and net income (and diluted earnings per share) would have been $168.4 million ($1.19). Exclusive of the effects of nonrecurring items, diluted earnings per share (as adjusted for goodwill amortization) would have been $.60 and $.48 for the second quarter of 2002 and 2001, respectively. Nonrecurring items in the second quarter of 2002 include a net negative impact ($7.3 million; $.05 per share) of nonrecurring items consisting of a $15.0 million pre-tax charge ($.07 per share) for uncollectible receivables primarily related to the bankruptcy of WorldCom, Inc. and a $3.7 million pre-tax gain ($.02 per share) on the sale of certain non-strategic assets. Net income in the second quarter of 2001 includes a net favorable impact of nonrecurring items ($100.7 million; $.71 per share) consisting of a gain on sale of PCS licenses ($.76 per share) and the write-down of certain non-operating investments ($.05 per share).
Three months ended June 30, ------------------------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) Operating income Telephone $ 103,709 99,382 Other 10,956 4,806 Corporate overhead costs allocable to discontinued operations (5,134) (4,979) ------------------------------------------------------------------------------------------------------ 109,531 99,209 Interest expense (54,157) (57,358) Nonrecurring gains and losses 3,709 (10,500) Other income and expense 2,485 1,783 Income tax expense (21,360) (12,066) ------------------------------------------------------------------------------------------------------ Income from continuing operations 40,208 21,068 Discontinued operations, net of tax 38,555 133,173 ------------------------------------------------------------------------------------------------------ Net income $ 78,763 154,241 ====================================================================================================== Net income, as adjusted for goodwill amortization $ 78,763 168,376 ====================================================================================================== Basic earnings per share From continuing operations $ .28 .15 From continuing operations, as adjusted for goodwill amortization $ .28 .23 From discontinued operations $ .27 .95 From discontinued operations, as adjusted for goodwill amortization $ .27 .96 Basic earnings per share $ .56 1.10 Basic earnings per share, as adjusted for goodwill amortization $ .56 1.20 Diluted earnings per share From continuing operations $ .28 .15 From continuing operations, as adjusted for goodwill amortization $ .28 .23 From discontinued operations $ .27 .94 From discontinued operations, as adjusted for goodwill amortization $ .27 .95 Diluted earnings per share $ .55 1.09 Diluted earnings per share, as adjusted for goodwill amortization $ .55 1.19 Average basic shares outstanding 141,243 140,720 ====================================================================================================== Average diluted shares outstanding 142,705 142,059 ======================================================================================================
Contributions to operating revenues and operating income by the Company's telephone and other operations for the three months ended June 30, 2002 and 2001 were as follows:
Three months ended June 30, ---------------------------------------------------------------------------------- 2002 2001 ---------------------------------------------------------------------------------- Operating revenues Telephone operations 86.7% 89.9 Other operations 13.3% 10.1 Operating income Telephone operations 94.7% 100.2 Other operations 10.0% 4.8 Corporate overhead costs allocable to discontinued operations (4.7)% (5.0) ---------------------------------------------------------------------------------
Telephone Operations
Three months ended June 30, ------------------------------------------------------------------------- 2002 2001 ------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Local service $ 125,357 123,293 Network access 220,702 212,570 Other 34,440 32,021 ------------------------------------------------------------------------- 380,499 367,884 ------------------------------------------------------------------------- Operating expenses Plant operations 96,147 93,490 Customer operations 32,385 28,814 Corporate and other 58,099 47,271 Depreciation and amortization 90,159 98,927 ------------------------------------------------------------------------- 276,790 268,502 ------------------------------------------------------------------------- Operating income $ 103,709 99,382 =========================================================================
The Company conducts its telephone operations in rural, suburban and small urban communities in 21 states. As of June 30, 2002, approximately 87% of the Company's 1.8 million access lines were in Wisconsin, Arkansas, Washington, Missouri, Michigan, Louisiana, Colorado, Ohio and Oregon. Telephone operating income increased $4.3 million (4.4%) due to an increase in operating revenues of $12.6 million (3.4%) partially offset by an increase in operating expenses of $8.3 million (3.1%). Of the $2.1 million (1.7%) increase in local service revenues, $1.7 million was due to the increased provision of custom calling features. Network access revenues increased $8.1 million (3.8%) in the second quarter of 2002 primarily due to a $5.8 million increase in revenues from the federal Universal Service Fund, a $3.0 million increase in the partial recovery of increased operating expenses through revenue sharing arrangements in which the Company participates with other telephone companies, a $2.5 million increase in rates in certain jurisdictions, and a $1.0 million increase due to revisions of prior year revenue settlement agreements. Such increases were partially offset by a $5.9 million decrease in intrastate revenues due to a reduction in intrastate minutes (partially due to the displacement of minutes by wireless services). Other revenues increased $2.4 million (7.6%) due to a $1.2 million increase in directory revenue and a $1.5 million increase due to revisions of prior year revenue settlement agreements. Access lines declined 0.1% during the three months ended June 30, 2002. Access line growth during the three months ended June 30, 2001 was 1.1%. The Company believes the decline in the number of access lines during 2002 is primarily due to general economic conditions in the Company's markets, disconnecting service to customers for non-payment and the displacement of traditional wireline telephone services by other services. During the second quarter of 2002, the Company incurred aggregate operating expenses of approximately $3.1 million associated with two pending Verizon acquisitions, one of which was completed July 1, 2002 and the other of which is expected to be completed on or about August 31, 2002. Plant operations expenses increased $2.7 million (2.8%), of which $4.9 million related to increases in salaries and benefits and $3.4 million related to an increase in network costs. Such increases were partially offset by a $4.7 million decrease in access expense primarily as a result of changes in certain optional calling plans in Arkansas approved in late 2001. During the second quarter of 2002 customer operations expenses increased $3.6 million (12.4%) primarily due to a $2.7 million increase in salaries and benefits. Corporate and other expenses increased $10.8 million (22.9%) primarily due to an $8.1 million increase in the provision for doubtful accounts and a $1.8 million increase in salaries and benefits. The Company recorded a provision for uncollectible receivables, primarily related to the bankruptcy of WorldCom, Inc., in the amount of $15.0 million during the second quarter of 2002. Depreciation and amortization decreased $8.8 million (8.9%), of which $14.7 million related to ceasing amortization of goodwill effective January 1, 2002 in accordance with the provisions of SFAS 142. Such decrease was partially offset by a $6.4 million increase in depreciation expense due to higher levels of plant in service. Other Operations
Three months ended June 30, -------------------------------------------------------------------------------- 2002 2001 -------------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Long distance $ 34,462 28,514 Internet 14,706 8,718 Other 9,035 4,134 -------------------------------------------------------------------------------- 58,203 41,366 -------------------------------------------------------------------------------- Operating expenses Cost of sales and operating expenses 43,402 34,897 Depreciation and amortization 3,845 1,663 -------------------------------------------------------------------------------- 47,247 36,560 -------------------------------------------------------------------------------- Operating income $ 10,956 4,806 ================================================================================
Other operations include the results of continuing operations of the Company which are not included in the telephone segment including, but not limited to, the Company's non-regulated long distance operations, Internet operations, competitive local exchange carrier operations and security monitoring operations. The $5.9 million increase in long distance revenues was primarily attributable to the growth in the number of customers and increased minutes of use. The number of long distance customers as of June 30, 2002 and 2001 was 536,400 and 414,500, respectively. Internet revenues increased $6.0 million due to growth in the number of customers, primarily due to the expansion of the Company's digital subscriber line ("DSL") product offering. Other revenues increased $4.9 million primarily due to increased revenues in the Company's competitive local exchange carrier ("CLEC") business primarily due to an acquisition of certain CLEC operations in the first quarter of 2002. Cost of sales and operating expenses increased $8.5 million primarily due to (i) a $5.7 million increase in expenses associated with the Company's long distance operations (of which $2.9 million was due to increased minutes of use; $1.0 million was due to an increase in the provision for doubtful accounts; and $828,000 related to increased sales and marketing costs); (ii) a $3.4 million increase in expenses associated with the Company's CLEC operations primarily due to the expansion of the business and operations acquired in the first quarter of 2002; and (iii) a $3.3 million increase associated with expanding the Company's Internet operations. Such increases were partially offset by a $2.3 million reduction in expenses due to the increased intercompany profit with regulated affiliates (the recognition of which in accordance with regulatory accounting principles acts to offset operating expenses). Depreciation and amortization increased $2.2 million primarily due to increased depreciation expense in the Company's CLEC (primarily due to the acquisition consummated in the first quarter of 2002) and fiber network businesses. Interest Expense Interest expense decreased $3.2 million (5.6%) in the second quarter of 2002 compared to the second quarter of 2001 substantially due to decreased debt outstanding. Nonrecurring gains and losses In the second quarter of 2002, the Company recorded a pre-tax gain of $3.7 million from the sale of a Personal Communication Services ("PCS") license. In the second quarter of 2001, the Company recorded a $10.5 million pre-tax charge due to the write-down in the value of a non-operating investment. Income Tax Expense Income tax expense from continuing operations increased $9.3 million in the second quarter of 2002 compared to the second quarter of 2001 primarily due to an increase in income before taxes. The effective income tax rate (from continuing operations) was 34.7% and 36.4% for the three months ended June 30, 2002 and 2001, respectively. Such decrease in the effective tax rate is primarily attributable to the effect of ceasing amortization of goodwill (some of which was nondeductible for tax purposes) effective January 1, 2002 in accordance with the provisions of SFAS 142. Discontinued Operations On August 1, 2002 (pursuant to a definitive agreement signed March 19, 2002), the Company sold substantially all of its wireless operations to Alltel and certain other purchasers for an aggregate of approximately $1.58 billion in cash. As a result, the Company's wireless operations for the three months ended June 30, 2002 have been reflected as discontinued operations in the Company's consolidated financial statements. The results of operations for the three months ended June 30, 2001 have been restated to conform to the 2002 presentation. The following table summarizes certain information concerning the Company's wireless operations for the periods presented.
Three months ended June 30, ----------------------------------------------------------------------------------------- 2002 2001 ----------------------------------------------------------------------------------------- (Dollars in thousands) Operating revenues $ 106,272 109,686 Operating expenses, exclusive of corporate overhead costs $ (54,863) (73,690) Income from unconsolidated cellular entities $ 12,682 10,705 Minority interest expense $ (4,039) (3,064) Nonrecurring gains and losses $ - 166,928 Other income and (expense) $ 77 2,596 Income tax expense $ (21,574) (79,988) Income from discontinued operations, net of tax $ 38,555 133,173
Wireless operating revenues decreased $3.4 million (3.1%) primarily due to a $1.7 million decrease in roaming revenues due to a reduction in roaming rates (which was partially offset by an increase in roaming minutes of use), a $941,000 decrease in service revenues associated principally with a reduction in rates, and a $731,000 decrease in equipment sales. Operating expenses, exclusive of corporate overhead costs, decreased $18.8 million (25.5%) primarily due to (i) a decrease in depreciation and amortization expense of $15.6 million primarily due to a $12.9 million decrease resulting from the ceasing of depreciation and amortization of long-lived and intangible assets in connection with the announced sale of the wireless business (effective March 19, 2002) and a $2.7 million decrease resulting from the ceasing of goodwill amortization in accordance with SFAS 142 (effective January 1, 2002); (ii) a $1.8 million decrease in cost of sales due to a decrease in units sold and cost per unit; and (iii) a $1.9 million decrease in sales and marketing expenses. Nonrecurring gains and losses in the second quarter of 2001 relate to the sale of 30 PCS licenses to Leap Wireless, Inc. Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001 Net income (and diluted earnings per share) was $149.5 million ($1.05) and $201.0 million ($1.41) for the first six months of 2002 and 2001, respectively. Income from continuing operations was $83.1 million for the first six months of 2002 and $47.9 million for the first six months of 2001. Diluted earnings per share from continuing operations was $.58 during the first six months of 2002 compared to $.34 during the first six months of 2001. In accordance with the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), amortization of goodwill ceased effective January 1, 2002. Had the results of operations for the six months ended June 30, 2001 been subject to SFAS 142, income from continuing operations (and diluted earnings per share) would have been $71.2 million ($.50) and net income (and diluted earnings per share) would have been $229.2 million ($1.61). Exclusive of nonrecurring items, diluted earnings per share (as adjusted for goodwill amortization) would have been $1.11 and $.91 for the six months ended June 30, 2002 and 2001, respectively. Nonrecurring items for the first six months of 2002 include a net negative impact ($9.3 million; $.06 per share) of nonrecurring items consisting of (i) a $15.0 million pre-tax charge ($.07 per share) for uncollectible receivables primarily related to the bankruptcy of WorldCom, Inc., (ii) a $3.0 million charge ($.01 per share) associated with responding to an unsolicited takeover proposal and (iii) a $3.7 million pre-tax gain ($.02 per share) on the sale of certain non-strategic assets. Net income for the first six months of 2001 includes a net favorable impact ($99.5 million; $.70 per share) of nonrecurring items consisting of (i) gain on sale of PCS licenses ($.76 per share), (ii) the write-down of certain non-operating investments ($.05 per share) and (iii) costs incurred related to an ice storm ($.01 per share).
Six months ended June 30, ------------------------------------------------------------------------------------------------------------ 2002 2001 ------------------------------------------------------------------------------------------------------------ (Dollars, except per share amounts, and shares in thousands) Operating income Telephone $ 221,677 203,363 Other 16,835 10,113 Corporate overhead costs allocable to discontinued operations (9,932) (9,958) ------------------------------------------------------------------------------------------------------------- 228,580 203,518 Interest expense (104,805) (119,061) Nonrecurring gains and losses 3,709 (10,500) Other income and expense 217 4,250 Income tax expense (44,636) (30,288) ------------------------------------------------------------------------------------------------------------- Income from continuing operations 83,065 47,919 Discontinued operations, net of tax 66,465 153,044 ------------------------------------------------------------------------------------------------------------- Net income $ 149,530 200,963 ============================================================================================================= Net income, as adjusted for goodwill amortization $ 149,530 229,181 ============================================================================================================= Basic earnings per share From continuing operations $ .59 .34 From continuing operations, as adjusted for goodwill amortization $ .59 .51 From discontinued operations $ .47 1.09 From discontinued operations, as adjusted for goodwill amortization $ .47 1.12 Basic earnings per share $ 1.06 1.43 Basic earnings per share, as adjusted for goodwill amortization $ 1.06 1.63 Diluted earnings per share From continuing operations $ .58 .34 From continuing operations, as adjusted for goodwill amortization $ .58 .50 From discontinued operations $ .47 1.08 From discontinued operations, as adjusted for goodwill amortization $ .47 1.11 Diluted earnings per share $ 1.05 1.41 Diluted earnings per share, as adjusted for goodwill amortization $ 1.05 1.61 Average basic shares outstanding 141,136 140,656 ============================================================================================================ Average diluted shares outstanding 142,679 142,271 ============================================================================================================
Contributions to operating revenues and operating income by the Company's telephone and other operations for the six months ended June 30, 2002 and 2001 were as follows:
Six months ended June 30, --------------------------------------------------------------------------------------------- 2002 2001 --------------------------------------------------------------------------------------------- Operating revenues Telephone operations 87.4% 90.0 Other operations 12.6% 10.0 Operating income Telephone operations 97.0% 99.9 Other operations 7.4% 5.0 Corporate overhead costs allocable to discontinued operations (4.4)% (4.9) ---------------------------------------------------------------------------------------------
Telephone Operations
Six months ended June 30, -------------------------------------------------------------------------------- 2002 2001 -------------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Local service $ 249,234 244,454 Network access 437,278 426,437 Other 66,718 68,242 -------------------------------------------------------------------------------- 753,230 739,133 -------------------------------------------------------------------------------- Operating expenses Plant operations 187,233 187,375 Customer operations 62,323 58,071 Corporate and other 102,495 94,036 Depreciation and amortization 179,502 196,288 -------------------------------------------------------------------------------- 531,553 535,770 -------------------------------------------------------------------------------- Operating income $ 221,677 203,363 ================================================================================
The Company conducts its telephone operations in rural, suburban and small urban communities in 21 states. As of June 30, 2002, approximately 87% of the Company's 1.8 million access lines were in Wisconsin, Arkansas, Washington, Missouri, Michigan, Louisiana, Colorado, Ohio and Oregon. Telephone operating income increased $18.3 million (9.0%) due to an increase in operating revenues of $14.1 million (1.9%) and a decrease in operating expenses of $4.2 million (.8%). The $4.8 million (2.0%) increase in local service revenues was primarily due to a $3.3 million increase in the provision of custom calling features. Network access revenues increased $10.8 million (2.5%) in the first six months of 2002 primarily due to a $7.3 million increase in the partial recovery of increased operating expenses through revenue sharing arrangements in which the Company participates with other telephone companies, a $5.8 million increase in revenues from the federal Universal Service Fund, and a $5.3 million increase in rates in certain jurisdictions. Such increases were partially offset by a $10.6 million decrease in intrastate revenues due to a reduction in intrastate minutes (partially due to the displacement of minutes by wireless services). Access lines declined 0.3% during the six months ended June 30, 2002. Access line growth during the six months ended June 30, 2001 was .8%. The Company believes the decline in the number of access lines during 2002 is primarily due to general economic conditions in the Company's markets, disconnecting service to customers for non-payment and the displacement of traditional wireline telephone services by other services. During the first six months of 2002, the Company incurred aggregate operating expenses of approximately $3.7 million associated with two pending Verizon acquisitions, one of which was completed July 1, 2002 and the other of which is expected to be completed on or about August 31, 2002. Plant operations expenses decreased $142,000 (.1%), of which $10.1 million related to a decrease in access expenses primarily as a result of changes in certain optional calling plans in Arkansas approved in late 2001 and $3.1 million related to a decrease in repair and maintenance costs. Such decreases were substantially offset by a $8.0 million increase in salaries and benefits and a $4.6 million increase in network costs. During the first six months of 2002 customer operations expenses increased $4.3 million (7.3%) primarily due to a $2.3 million increase in salaries and benefits and $1.3 million increase in customer service expenses. Corporate and other expenses increased $8.5 million (9.0%) primarily due to a $8.6 million increase in the provision for doubtful accounts and a $3.2 million increase in salaries and benefits. The Company recorded a provision for uncollectible receivables, primarily related to the bankruptcy of WorldCom, Inc., in the amount of $15.0 million during the first six months of 2002. Such increases were partially offset by a $1.8 million decrease in expenses related to the provision of CPE services. Depreciation and amortization decreased $16.8 million (8.6%), of which $29.3 million related to ceasing amortization of goodwill effective January 1, 2002 in accordance with the provisions of SFAS 142. Such decrease was partially offset by a $13.3 million increase in depreciation expense due to higher levels of plant in service. Other Operations
Six months ended June 30, ----------------------------------------------------------------------------- 2002 2001 ----------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Long distance $ 66,279 56,114 Internet 27,267 17,117 Other 14,844 8,488 ----------------------------------------------------------------------------- 108,390 81,719 ----------------------------------------------------------------------------- Operating expenses Cost of sales and operating expenses 84,826 68,486 Depreciation and amortization 6,729 3,120 ----------------------------------------------------------------------------- 91,555 71,606 ----------------------------------------------------------------------------- Operating income $ 16,835 10,113 =============================================================================
Other operations include the results of continuing operations of the Company which are not included in the telephone segment including, but not limited to, the Company's non-regulated long distance operations, Internet operations, competitive local exchange carrier operations and security monitoring operations. The $10.2 million increase in long distance revenues was primarily attributable to the growth in the number of customers and increased minutes of use. The number of long distance customers as of June 30, 2002 and 2001 was 536,400 and 414,500, respectively. Internet revenues increased $10.2 million due to growth in the number of customers, primarily due to the expansion of the Company's DSL product offering. Other revenues increased $6.4 million primarily due to increased revenues in the Company's CLEC business primarily due to an acquisition of certain CLEC operations in the first quarter of 2002. Cost of sales and operating expenses increased $16.3 million primarily due to (i) an $11.3 million increase in expenses associated with the Company's long distance operations (of which $4.9 million was due to increased minutes of use; $2.6 million related to increased sales and marketing costs; $2.5 million was due to an increase in the provision for doubtful accounts; and $1.0 million was due to an increase in billing and collection costs); (ii) a $6.2 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 $5.9 million increase associated with expanding the Company's Internet operations. Such increases were partially offset by a $4.0 million reduction in expenses due to the increased intercompany profit with regulated affiliates (the recognition of which in accordance with regulatory accounting principles acts to offset operating expenses). Depreciation and amortization increased $3.6 million (115.7%) primarily due to increased depreciation expense in the Company's fiber network and CLEC businesses. Interest Expense Interest expense decreased $14.3 million (12.0%) in the first six months of 2002 compared to the first six months of 2001 due to decreased debt outstanding and decreased rates. Nonrecurring gains and losses In the second quarter of 2002, the Company recorded a pre-tax gain of $3.7 million from the sale of a PCS license. In the second quarter of 2001, the Company recorded a $10.5 million pre-tax charge due to the write-down in the value of a non-operating investment. Other Income and Expense Other income decreased $4.0 million (94.9%) primarily due to $3.0 million of costs recorded in the first quarter of 2002 associated with responding to an unsolicited takeover proposal and a $2.1 million reduction in capitalized interest. Income Tax Expense Income tax expense from continuing operations increased $14.3 million in the first six months of 2002 compared to the first six months of 2001 primarily due to an increase in income before taxes. The effective income tax rate (from continuing operations) was 35.0% and 38.7% for the six months ended June 30, 2002 and 2001, respectively. Such decrease in the effective tax rate is primarily attributable to the effect of ceasing amortization of goodwill (some of which was nondeductible for tax purposes) effective January 1, 2002 in accordance with the provisions of SFAS 142. Discontinued Operations On August 1, 2002 (pursuant to a definitive agreement signed March 19, 2002), the Company sold substantially all of its wireless operations to Alltel and certain other purchasers for an aggregate of approximately $1.58 billion in cash. As a result, the Company's wireless operations for the six months ended June 30, 2002 have been reflected as discontinued operations in the Company's consolidated financial statements. The results of operations for the six months ended June 30, 2001 have been restated to conform to the 2002 presentation. The following table summarizes certain information concerning the Company's wireless operations for the periods presented.
Six months ended June 30, ----------------------------------------------------------------------------------------- 2002 2001 ----------------------------------------------------------------------------------------- (Dollars in thousands) Operating revenues $ 208,693 214,092 Operating expenses, exclusive of corporate overhead costs $ (122,268) (148,197) Income from unconsolidated cellular entities $ 24,196 16,026 Minority interest expense $ (6,910) (5,701) Nonrecurring gains and losses $ - 166,928 Other income and (expense) $ (2) 3,040 Income tax expense $ (37,244) (93,144) Income from discontinued operations, net of tax $ 66,465 153,044
Wireless operating revenues decreased $5.4 million (2.5%) primarily due to a $3.1 million decrease in roaming revenues due to a reduction in roaming rates (which was partially offset by an increase in roaming minutes of use) and a $1.8 million decrease in equipment sales. Operating expenses, exclusive of corporate overhead costs, decreased $25.9 million (17.5%) primarily due to (i) a decrease in depreciation and amortization expense of $19.3 million primarily due to a $15.0 million decrease resulting from the ceasing of depreciation and amortization of long-lived and intangible assets in connection with the announced sale of the wireless business (effective March 19, 2002) and a $4.3 million decrease resulting from the ceasing of goodwill amortization in accordance with SFAS 142 (effective January 1, 2002); (ii) a $3.3 million decrease in cost of sales due to a decrease in units sold; and (iii) a $1.0 million decrease in sales and marketing expenses. Income from unconsolidated cellular entities increased $8.2 million primarily due to increased earnings of certain cellular entities in which the Company owns a minority interest. Nonrecurring gains and losses for the first six months of 2001 relate to the sale of 30 PCS licenses to Leap Wireless, Inc. Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and SFAS 142. SFAS 141 requires all business combinations consummated after June 30, 2001 to be accounted for under the purchase method of accounting; the pooling of interests method is no longer permitted. Under SFAS 142, effective January 1, 2002, systematic amortization of goodwill is no longer permitted; instead, SFAS 142 requires goodwill recorded in a business combination to be reviewed for impairment and to be written down only in periods in which the recorded amount of goodwill exceeds its fair value. The Company has completed the initial transitional goodwill impairment test of SFAS 142 and has determined its goodwill is not impaired. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company's wireless operations have been reflected as discontinued operations for the first six months of 2002 in accordance with the provisions of SFAS 144. The adoption of the impairment portion of SFAS 144 is not expected to have a material effect on the results of operations of the Company. LIQUIDITY AND CAPITAL RESOURCES Excluding cash used for acquisitions, the Company relies on cash provided by operations to fund its operating and capital expenditures. The Company's operations have historically provided a stable source of cash flow which has helped the Company continue its long-term program of capital improvements. Net cash provided by operating activities from continuing operations was $379.1 million during the first six months of 2002 compared to $265.3 million during the first six months of 2001. The Company's accompanying consolidated statements of cash flows identify major differences between net income and net cash provided by operating activities from continuing operations for each of these periods. For additional information relating to the continuing operations of the Company, see Results of Operations. Net cash used in investing activities from continuing operations was $219.4 million and $258.7 million for the six months ended June 30, 2002 and 2001, respectively. Payments for property, plant and equipment were $30.7 million less in the first six months of 2002 than in the comparable period during 2001. Capital expenditures from continuing operations for the six months ended June 30, 2002 were $145.8 million for telephone operations and $33.2 million for other operations. During the first quarter of 2002, the Company acquired the assets of certain CLEC operations for $43.8 million cash. During the first quarter of 2001, the Company paid $47.1 million cash to acquire an additional 18.6% interest in Spectra Communication Group, LLC, the entity organized in 2000 to acquire and operate former Verizon properties in Missouri. Budgeted capital expenditures from continuing operations for 2002 total $315 million for telephone operations and $45 million for other operations. Net cash provided by (used in) financing activities from continuing operations was $65.7 million during the first six months of 2002 compared to ($152.0) million during the first six months of 2001. Proceeds from the issuance of debt, net of debt payments, were $86.8 million during the first six months of 2002, compared to net payments of debt of $140.7 million during the first six months of 2001. For additional information, see the Company's accompanying consolidated statements of cash flows. On May 6, 2002, the Company issued and sold in an underwritten public offering $500 million of Equity Units. Net proceeds to the Company from this issuance were approximately $483.4 million. Each of the 20 million Equity Units issued was priced at $25 and consists initially of a beneficial interest in a CenturyTel senior unsecured note with a principal amount of $25 and a contract to purchase shares of CenturyTel common stock no later than May 2005. The senior notes will mature in May 2007. The total distributions on the Equity Units will be at an initial annual rate of 6.875%, consisting of interest (6.02%) and contract adjustment payments (0.855%). Each stock purchase contract will generally require the holder to purchase between .6944 and .8741 of a share of CenturyTel common stock in May 2005 in exchange for $25, subject to certain adjustments and exceptions. On May 31, 2002, the Company entered into a $600 million short-term bridge loan facility with Goldman Sachs Credit Partners L.P. and other lenders. Approximately $395 million of borrowings under such credit facility, along with $483.4 million of net proceeds from the above-mentioned issuance of Equity Units, approximately $85 million of available cash and $37 million of commercial paper, was used to fund the $1.0 billion cash purchase of local exchange telephone assets in Alabama from Verizon on July 1, 2002. On August 1, 2002, all indebtedness under this $600 million bridge loan facility was repaid, and this facility was terminated. On July 22, 2002, the Company entered into $800 million of credit facilites, consisting of a $533 million three-year facility and a $267 million 364-day revolving facility with a one-year term out option. The agents for these credit facilities are JP Morgan Chase Bank, Wachovia Bank, Bank of America, Bank One and SunTrust Bank. These facilities are designed to replace maturing credit facilities. On August 1, 2002, the Company sold substanially all of its wireless operations to Alltel and certain other purchasers for an aggregate of approximately $1.58 billion cash. Such proceeds are expected to be used to finance the pending acquisition of telephone access lines in Missouri from Verizon for approximately $1.159 billion (which is expected to close on or about August 31, 2002) and to reduce outstanding indebtedness. Over the next several months, the Company has several material commitments, including commitments to (i) pay Verizon approximately $1.159 billion (subject to adjustments) in exchange for telephone assets in Missouri and (ii) pay taxes estimated at $325 million owed in December 2002 in connection with the Company's sale of its wireless operations. The Company also has $400 million principal amount in remarketable debt securities which, depending on market conditions, will either be remarketed by the Company's remarketing dealer or redeemed by the Company in October 2002. The following table contains certain information concerning the Company's material obligations as of August 1, 2002.
Payments due by period ---------------------------------------------------------------------------------------------------------- Less than After Total obligations Total 1 year 1-3 years 4-5 years 5 years ---------------------------------------------------------------------------------------------------------- (Dollars in thousands) Long-term debt, including current maturities $3,007,089 432,326 (1) 740,818 260,472 1,573,473 Verizon purchase price obligation $1,159,000 1,159,000 - - - Estimated income tax payment as a result of the sale of wireless operations $325,000 325,000 - - - ----------------------------------------------------------------------------------------------------------
(1) Includes $400 million principal amount due under the Company's remarketable debt securities described above. As of the close of business on August 1, 2002, (i) CenturyTel had $800 million of undrawn committed bank lines of credit and (ii) CenturyTel's subsidiaries had available $123.0 million of commitments for long-term financing from the Rural Utilities Service and the Rural Telephone Bank for use in making capital improvements to the Company's telephone plant and equipment. As of the close of business on August 1, 2002, the Company had $710 million of excess cash after receiving the proceeds from the sale of its wireless operations ($1.58 billion) less amounts utilized to repay indebtedness ($870 million). CenturyTel also has a commercial paper program that authorizes it to have outstanding up to $1.5 billion in commercial paper at any one time. At August 1, 2002, CenturyTel had no commercial paper outstanding under such program. CenturyTel believes that its $800 million of existing credit facilities, together with available cash, will be sufficient to fund its pending Missouri Verizon acquisition, and may be sufficient to fund its December 2002 tax payment. If these sources do not fully fund the December 2002 tax payment or if CenturyTel is required to redeem its remarketable debt securities in October 2002, CenturyTel will be required to seek additional financing. Based on conversations with its lenders and financial advisors, the Company believes that sufficient financing should be available. However, given the recent decrease in financing available for communications companies generally, there can be no assurance that sufficient financing will be available on attractive terms. Following CenturyTel's issuance of Equity Units in May 2002, Moody's Investors Service affirmed its rating of CenturyTel's long-term debt of Baa2 (with a stable outlook) and Standard & Poor's improved its rating of CenturyTel's long-term debt to BBB+ (with a stable outlook) from BBB+ (with a negative outlook). OTHER MATTERS Accounting for the Effects of Regulation The Company currently accounts for its regulated telephone operations in accordance with the provisions of Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation." While the ongoing applicability of SFAS 71 to the Company's telephone operations is being monitored due to the changing regulatory, competitive and legislative environments, the Company believes that SFAS 71 still applies. However, it is possible that changes in regulation or legislation or anticipated changes in competition or in the demand for regulated services or products could result in the Company's telephone operations not being subject to SFAS 71 in the near future. In that event, implementation of Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the Discontinuance of Application of FASB Statement No. 71," would require the write-off of previously established regulatory assets and liabilities, along with an adjustment of certain accumulated depreciation accounts to reflect the difference between recorded depreciation and the amount of depreciation that would have been recorded had the Company's telephone operations not been subject to rate regulation. Such discontinuance of the application of SFAS 71 may result in a material, noncash charge against earnings which would be reported as an extraordinary item. The properties to be acquired from Verizon in 2002 will not be accounted for under the provisions of SFAS 71. Other The Company is in the process of developing an integrated billing and customer care system. The costs to develop such system have been capitalized in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and aggregated $153.9 million at June 30, 2002. Such costs are expected to aggregate approximately $200 million upon completion and are expected to be amortized over a twenty-year period. A portion of these billing system costs that relate to the wireless business (currently estimated to be between $30 and $50 million) will be written off in the third quarter of 2002 as a result of the sale of the Company's wireless operations on August 1, 2002. The system remains in the development stage, and has required substantially more time and money to develop than originally anticipated. Although the Company expects to complete the system in early 2004, there is no assurance that this deadline will be met or that the system will function as anticipated. CenturyTel, Inc. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk At June 30, 2002, the fair value of the Company's long-term debt was estimated to be $3.2 billion based on the overall weighted average rate of the Company's long-term debt of 6.9% and an overall weighted maturity of 10 years compared to terms and rates currently available in long-term financing markets. Market risk is estimated as the potential decrease in fair value of the Company's long-term debt resulting from a hypothetical increase of 69 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 $107.4 million decrease in fair value of the Company's long-term debt. As of June 30, 2002, all of the Company's long-term debt obligations were fixed rate. At the end of the second quarter of 2002, the Company had outstanding an interest rate swap relating to $173.4 million of short-term floating rate debt designed to eliminate the variability of cash flows in the payment of interest related to such debt. Under this swap, which expires in August 2002, the Company realizes a fixed effective rate of 4.845% and receives or makes settlement payments based upon the 3-month London InterBank Offered Rate, with settlement and rate reset dates at three-month intervals through the expiration date. PART II. OTHER INFORMATION CenturyTel, Inc. Item 1: Legal Proceedings On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued by the Arkansas Public Utility Commission ("APUC") in connection with the Company's acquisition of its Arkansas LECs from Verizon in July 2000, and remanded the case back to the APUC for further hearings. The Court took these actions in response to challenges to the rates the Company has charged other LECs for intrastate switched access service. On May 13, 2002, the APUC reaffirmed its prior orders and the Company's intrastate switched access rates on an interim basis subject to further rehearing and appeal proceedings. Further rulings by the APUC are expected in the third quarter of 2002. For information on other legal proceedings, see the Company's Annual Report on Form 10-K for the year ended December 31, 2001 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. Item 4: Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders on May 9, 2002, the shareholders elected five Class II directors to serve until the 2005 annual meeting of shareholders and until their successors are duly elected and qualified, and approved the proposals set forth in the Company's proxy statement dated March 27, 2002. The following number of votes were cast for or were withheld from the following nominees: Class II Nominees For Withheld ----------------- ----------- ---------- Virginia Boulet 203,436,038 8,532,546 Ernest Butler, Jr. 200,567,132 11,401,452 James B. Gardner 202,533,891 9,434,693 R.L. Hargrove, Jr. 200,111,648 11,856,936 Johnny Hebert 199,525,520 12,443,064 The Class I and Class III directors whose terms continued after the meeting are: Class I Class III ----------- ------------- William R. Boles, Jr. Calvin Czeschin W. Bruce Hanks F. Earl Hogan C.G. Melville, Jr. Harvey P. Perry Glen F. Post, III Jim D. Reppond Clarke M. Williams (deceased June 5, 2002) The following number of votes were cast in the manner indicated below with respect to the proposal to approve the Company's 2002 Directors Stock Option Plan: For Against Abstain Broker No-Votes ------------ ---------- --------- --------------- 185,536,576 24,522,484 1,909,524 -0- The following number of votes were cast in the manner indicated below with respect to the proposal to approve the Company's 2002 Management Incentive Compensation Plan: For Against Abstain Broker No-Votes ------------ ---------- --------- --------------- 185,405,099 24,649,137 1,914,348 -0- Item 6: Exhibits and Reports on Form 8-K A. Exhibits 10.1 $533 Million Three-Year Revolving Credit Facility, dated July 22, 2002, between CenturyTel, Inc. and lenders named therein. 10.2 $267 Million 364-Day Revolving Credit Facility, dated July 22, 2002, between CenturyTel, Inc. and lenders named therein. 11 Computations of Earnings Per Share. B. Reports on Form 8-K The following item was reported in the Form 8-K filed April 25, 2002: Item 5. Other Events and Regulation FD Disclosure - News release announcing first quarter 2002 operating results. The following item was reported in the Form 8-K filed April 29, 2002: Item 5. Other Events and Regulation FD Disclosure - Unaudited pro forma consolidated condensed financial information. The following item was reported in the Form 8-K filed May 3, 2002: Item 5. Other Events and Regulation FD Disclosure - News release announcing $500 million Equity Units offering. The following item was reported in the Form 8-K filed June 28, 2002: Item 5. Other Events and Regulation FD Disclosure - Five executive officers or directors entered into 10b5-1 sales plan with Morgan Stanley DW Inc. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CenturyTel, Inc. Date: August 14, 2002 /s/ Neil A. Sweasy -------------------------- Neil A. Sweasy Vice President and Controller (Principal Accounting Officer)