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 March 31, 2003 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) [X] Yes [ ] No As of April 30, 2003, there were 143,121,157 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 Ended March 31, 2003 and 2002 3 Consolidated Statements of Comprehensive Income-- Three Months Ended March 31, 2003 and 2002 4 Consolidated Balance Sheets--March 31, 2003 and December 31, 2002 5 Consolidated Statements of Cash Flows-- Three Months Ended March 31, 2003 and 2002 6 Consolidated Statements of Stockholders' Equity-- Three Months Ended March 31, 2003 and 2002 7 Notes to Consolidated Financial Statements 8-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-21 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21-22 Item 4. Controls and Procedures 23 Part II. Other Information: Item 1. Legal Proceedings 24 Item 6. Exhibits and Reports on Form 8-K 24 Signature 25 Certifications 26-27
PART I. FINANCIAL INFORMATION Item 1. Financial Statements CenturyTel, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - -------------------------------------------------------------------------------- 2003 2002 - -------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> OPERATING REVENUES Telephone $ 511,378 372,731 Other 69,152 50,187 - ------------------------------------------------------------------------------- Total operating revenues 580,530 422,918 - ------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses (exclusive of depreciation and amortization) 277,759 206,844 Corporate overhead costs allocable to discontinued operations (See Note 4) - 4,798 Depreciation and amortization 117,998 92,227 - ------------------------------------------------------------------------------- Total operating expenses 395,757 303,869 - ------------------------------------------------------------------------------- OPERATING INCOME 184,773 119,049 - ------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense (55,592) (50,648) Income from unconsolidated cellular entity 1,569 400 Other income and expense (932) (2,268) - -------------------------------------------------------------------------------- Total other income (expense) (54,955) (52,516) - -------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE 129,818 66,533 Income tax expense 45,899 23,416 - ------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 83,919 43,117 DISCONTINUED OPERATIONS (See Note 4) Income from discontinued operations, net of $15,530 tax - 27,650 - ------------------------------------------------------------------------------- NET INCOME $ 83,919 70,767 =============================================================================== BASIC EARNINGS PER SHARE From continuing operations $ .59 .30 From discontinued operations $ - .20 Basic earnings per share $ .59 .50 DILUTED EARNINGS PER SHARE From continuing operations $ .58 .30 From discontinued operations $ - .19 Diluted earnings per share $ .58 .50 DIVIDENDS PER COMMON SHARE $ .055 .0525 =============================================================================== AVERAGE BASIC SHARES OUTSTANDING 142,901 141,051 =============================================================================== AVERAGE DILUTED SHARES OUTSTANDING 143,797 142,654 =============================================================================== </TABLE> See accompanying notes to consolidated financial statements.
CenturyTel, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------ 2003 2002 - ------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> NET INCOME $ 83,919 70,767 OTHER COMPREHENSIVE INCOME, NET OF TAX: Minimum pension liability adjustment: Minimum pension liability adjustment, net of ($5,484) tax (10,186) - Derivative instruments: Net losses on derivatives hedging the variability of cash flows, net of ($173) tax (322) - Less: reclassification adjustment for losses included in net income, net of $173 tax 322 - - ------------------------------------------------------------------------------ COMPREHENSIVE INCOME $ 73,733 70,767 ============================================================================== </TABLE> See accompanying notes to consolidated financial statements.
CenturyTel, Inc. CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> March 31, December 31, 2003 2002 - ----------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 18,738 3,661 Accounts receivable, less allowance of $26,874 and $33,962 235,950 272,992 Materials and supplies, at average cost 9,491 10,150 Other 12,223 9,099 - --------------------------------------------------------------------------------------------- Total current assets 276,402 295,902 - --------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 3,464,754 3,531,645 - --------------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Goodwill 3,429,663 3,427,281 Other 529,006 515,580 - --------------------------------------------------------------------------------------------- Total investments and other assets 3,958,669 3,942,861 - --------------------------------------------------------------------------------------------- TOTAL ASSETS $ 7,699,825 7,770,408 ============================================================================================= LIABILITIES AND EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 119,894 70,737 Accounts payable 89,052 64,825 Accrued expenses and other liabilities Salaries and benefits 72,258 63,937 Income taxes 81,743 40,897 Other taxes 40,536 28,183 Interest 43,367 59,045 Other 16,739 18,596 Advance billings and customer deposits 44,797 41,884 - --------------------------------------------------------------------------------------------- Total current liabilities 508,386 388,104 - --------------------------------------------------------------------------------------------- LONG-TERM DEBT 3,291,591 3,578,132 - --------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 741,288 716,168 - --------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 350,000,000 shares, issued and outstanding 143,105,384 and 142,955,839 shares 143,105 142,956 Paid-in capital 542,189 537,804 Accumulated other comprehensive loss, net of tax (46,889) (36,703) Retained earnings 2,513,430 2,437,472 Unearned ESOP shares (1,250) (1,500) Preferred stock - non-redeemable 7,975 7,975 - --------------------------------------------------------------------------------------------- Total stockholders' equity 3,158,560 3,088,004 - --------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 7,699,825 7,770,408 ============================================================================================= </TABLE> See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - --------------------------------------------------------------------------------------------- 2003 2002 - --------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> OPERATING ACTIVITIES FROM CONTINUING OPERATIONS Net income $ 83,919 70,767 Adjustments to reconcile net income to net cash provided by operating activities from continuing operations: Income from discontinued operations, net of tax - (27,650) Depreciation and amortization 117,998 92,227 Income from unconsolidated cellular entity (1,569) (400) Deferred income taxes 9,502 14,606 Changes in current assets and current liabilities: Accounts receivable 36,266 6,526 Accounts payable 24,227 20,482 Accrued income and other taxes 53,199 36,244 Other current assets and other current liabilities, net (8,766) 3,647 Increase in other noncurrent assets (6,751) (5,103) Increase in other noncurrent liabilities 3,739 2,305 Other, net 7,537 4,253 - --------------------------------------------------------------------------------------------- Net cash provided by operating activities from continuing operations 319,301 217,904 - --------------------------------------------------------------------------------------------- INVESTING ACTIVITIES FROM CONTINUING OPERATIONS Payments for property, plant and equipment (59,669) (73,532) Acquisitions, net of cash acquired - (43,768) Distribution from unconsolidated cellular entity 1,103 2,104 Other, net (422) (2,509) - --------------------------------------------------------------------------------------------- Net cash used in investing activities from continuing operations (58,988) (117,705) - --------------------------------------------------------------------------------------------- FINANCING ACTIVITIES FROM CONTINUING OPERATIONS Payments of debt (242,474) (92,722) Proceeds from issuance of common stock 4,031 2,477 Cash dividends (7,961) (7,508) Other, net 1,168 556 - --------------------------------------------------------------------------------------------- Net cash used in financing activities from continuing operations (245,236) (97,197) - --------------------------------------------------------------------------------------------- Net cash provided by discontinued operations (See Note 4) - 45,640 - --------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 15,077 48,642 Cash and cash equivalents at beginning of period 3,661 3,496 - --------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 18,738 52,138 ============================================================================================= Supplemental cash flow information: Income taxes paid $ 147 2,708 ============================================================================================= Interest paid (net of capitalized interest of $35 and $390) $ 71,235 44,131 ============================================================================================= </TABLE> See accompanying notes to consolidated financial statements.
CenturyTel, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - --------------------------------------------------------------------------------------------------- 2003 2002 - --------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> COMMON STOCK Balance at beginning of period $ 142,956 141,233 Issuance of common stock through dividend reinvestment, incentive and benefit plans 149 94 - --------------------------------------------------------------------------------------------------- Balance at end of period 143,105 141,327 - --------------------------------------------------------------------------------------------------- PAID-IN CAPITAL Balance at beginning of period 537,804 524,668 Issuance of common stock through dividend reinvestment, incentive and benefit plans 3,882 2,383 Amortization of unearned compensation and other 503 1,039 - --------------------------------------------------------------------------------------------------- Balance at end of period 542,189 528,090 - --------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX Balance at beginning of period (36,703) - Change in other comprehensive loss, net of tax (10,186) - - --------------------------------------------------------------------------------------------------- Balance at end of period (46,889) - - --------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at beginning of period 2,437,472 1,666,004 Net income 83,919 70,767 Cash dividends declared Common stock - $.055 and $.0525 per share, respectively (7,861) (7,408) Preferred stock (100) (100) - --------------------------------------------------------------------------------------------------- Balance at end of period 2,513,430 1,729,263 - --------------------------------------------------------------------------------------------------- UNEARNED ESOP SHARES Balance at beginning of period (1,500) (2,500) Release of ESOP shares 250 250 - --------------------------------------------------------------------------------------------------- Balance at end of period (1,250) (2,250) - --------------------------------------------------------------------------------------------------- PREFERRED STOCK - NON-REDEEMABLE Balance at beginning and end of period 7,975 7,975 - --------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 3,158,560 2,404,405 =================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. CenturyTel, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 (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. 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 annual report on Form 10-K for the year ended December 31, 2002. Certain 2002 amounts have been reclassified to be consistent with the Company's 2003 presentation. The unaudited financial information for the three months ended March 31, 2003 and 2002 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 periods have been included therein. The results of operations for the first three months of the year are not necessarily indicative of the results of operations which might be expected for the entire year. As a result of the Company's August 1, 2002 sale of substantially all of its wireless operations (see Note 4), such operations have been reflected as discontinued operations for the three months ended March 31, 2002. In its December 31, 2002 consolidated balance sheet, the Company reflected as "assets held for sale" a minority interest in a cellular partnership that it had previously agreed to sell to ALLTEL Corporation upon the satisfaction of various closing conditions. In light of the failure of the parties to agree upon whether the closing conditions were met, the Company determined during the first quarter of 2003 to retain such investment; therefore, for reporting purposes, this investment (and its related earnings) has been reclassified from discontinued operations to continuing operations on the accompanying financial statements as of and for the three months ended March 31, 2003. Prior periods have been restated to reflect this investment (and its related earnings) as part of continuing operations. (2) Net Property, Plant and Equipment Net property, plant and equipment is composed of the following: <TABLE> <CAPTION> March 31, Dec. 31, 2003 2002 - ---------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Telephone, at original cost $ 6,413,936 6,347,900 Accumulated depreciation (3,244,925) (3,136,107) - ---------------------------------------------------------------------------- 3,169,011 3,211,793 - ---------------------------------------------------------------------------- Other, at cost 500,860 521,292 Accumulated depreciation (205,117) (201,440) - ---------------------------------------------------------------------------- 295,743 319,852 - ---------------------------------------------------------------------------- $ 3,464,754 3,531,645 ============================================================================ </TABLE> Approximately $16.5 million of net property, plant and equipment was transferred from other operations to telephone operations during the first quarter of 2003.
(3) Acquisitions On July 1, 2002, the Company completed the acquisition of approximately 300,000 telephone access lines in the state of Alabama from Verizon Communications, Inc. ("Verizon") for approximately $1.022 billion cash. On August 31, 2002, the Company completed the acquisition of approximately 350,000 telephone access lines in the state of Missouri from Verizon for approximately $1.179 billion cash. The assets purchased included (i) telephone access lines and related property and equipment comprising Verizon's local exchange operations in predominantly rural markets throughout Alabama and Missouri, (ii) Verizon's assets used to provide digital subscriber line ("DSL") and other high speed data services within the purchased exchanges and (iii) approximately 2,800 route miles of fiber optic cable within the purchased exchanges. The acquired assets did 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 did 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. The following pro forma information represents the consolidated results of continuing operations of the Company for the three months ended March 31, 2002 as if the Verizon acquisitions had been consummated as of January 1, 2002. <TABLE> <CAPTION> Three months ended March 31, 2002 -------------------- (Dollars in thousands) (unaudited) <S> <C> Operating revenues from continuing operations $ 555,603 Income from continuing operations $ 55,552 Basic earnings per share from continuing operations $ .39 Diluted earnings per share from continuing operations $ .39 </TABLE> The pro forma information is based on various assumptions and estimates. The pro forma information makes no pro forma adjustments to reflect any assumed consummation of the Company's August 1, 2002 sale of its wireless operations described in Note 4 (or any use of the sale proceeds therefrom). The pro forma information is not necessarily indicative of the operating results that would have occurred if the Verizon acquisitions had been consummated as of January 1, 2002, nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any potential revenue enhancements or cost synergies or other operating efficiencies that could result from the acquisitions. The actual results of operations of the Verizon properties are included in the consolidated financial statements only from the respective dates of acquisition. (4) Discontinued Operations On August 1, 2002, the Company sold substantially all of its wireless operations to an affiliate of ALLTEL Corporation and certain other partners in the Company's markets that exercised "first refusal" purchase rights for an aggregate of approximately $1.59 billion in cash. As a result, such operations for the three months ended March 31, 2002 have been reflected as discontinued operations in the Company's consolidated financial statements. Proceeds from the sale of the wireless operations were used to partially fund the Company's acquisitions of telephone properties in Alabama and Missouri during the third quarter of 2002. The following table represents certain summary income statement information related to the Company's wireless operations reflected as discontinued operations for 2002. <TABLE> <CAPTION> Three months ended March 31, 2002 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> Operating revenues $ 102,421 - -------------------------------------------------------------------------------- Operating income (1) $ 35,016 Income from unconsolidated cellular entities 11,114 Minority interest expense (2,871) Other income and (expense) (79) - -------------------------------------------------------------------------------- Pre-tax income from discontinued operations 43,180 Income tax expense (15,530) - -------------------------------------------------------------------------------- Income from discontinued operations $ 27,650 ================================================================================ </TABLE> (1) Excludes corporate overhead costs of $4.8 million allocated to the wireless operations. The following table represents certain summary cash flow statement information related to the Company's wireless operations reflected as discontinued operations for 2002. <TABLE> <CAPTION> Three months ended March 31, 2002 - ---------------------------------------------------------------------------- (Dollars in thousands) <S> <C> Cash provided by operating activities $ 45,981 Cash used in investing activities (341) - ---------------------------------------------------------------------------- Net cash provided by discontinued operations $ 45,640 ============================================================================ </TABLE> (5) Goodwill and Other Intangible Assets The following information relates to the Company's goodwill as of March 31, 2003 and December 31, 2002: <TABLE> <CAPTION> March 31, Dec. 31, 2003 2002 - ----------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Carrying amount of goodwill Telephone segment $ 3,384,495 3,382,113 Other operations 45,168 45,168 - ----------------------------------------------------------------------------- Total goodwill $ 3,429,663 3,427,281 ============================================================================= </TABLE> The Company also has certain intangible assets that are subject to amortization in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). These intangible assets relate to certain customer base assets acquired in connection with the acquisitions of properties from Verizon in 2002. The gross carrying amount (and accumulated amortization) of these assets was $22.7 million ($1.1 million) as of March 31, 2003 and $22.7 million ($729,000) as of December 31, 2002. Total amortization expense for the first quarter of 2003 was $378,000 and is expected to be $1.5 million annually for each of the next five years. In connection with its acquisitions of properties from Verizon in 2002, the Company allocated $35.3 million of the purchase price as an intangible asset associated with franchise costs. Such asset has an indefinite life and is not subject to amortization currently. (6) Stock-based Compensation The Company accounts for employee stock compensation plans using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Options have been granted to employees at a price either equal to or exceeding the then-current market price. Accordingly, the Company has not recognized compensation cost in connection with issuing stock options. If compensation cost for CenturyTel's options had been determined consistent with SFAS 123, the Company's net income and earnings per share on a pro forma basis for the three months ended March 31, 2003 and 2002 would have been as follows: <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------ 2003 2002 - ------------------------------------------------------------------------------ (Dollars in thousands, except per share amounts) <S> <C> <C> Net income, as reported $ 83,919 70,767 Less: Total stock-based employee compensation expense determined under fair value based method, net of tax $ (3,534) (3,485) - ------------------------------------------------------------------------------- Pro forma net income $ 80,385 67,282 =============================================================================== Basic earnings per share As reported $ .59 .50 Pro forma $ .56 .48 Diluted earnings per share As reported $ .58 .50 Pro forma $ .56 .47 - ------------------------------------------------------------------------------- </TABLE> (7) 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 August 1, 2002 sale of the Company's wireless operations, such operations (which were previously reported as a separate segment) are classified as discontinued operations (see Note 4). Other operations include, but are not limited to, the Company's non-regulated long distance operations, Internet operations and competitive local exchange carrier operations. <TABLE> <CAPTION> Three months ended March 31, - -------------------------------------------------------------------------------- 2003 2002 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Telephone $ 511,378 372,731 Other operations 69,152 50,187 - -------------------------------------------------------------------------------- Total operating revenues $ 580,530 422,918 ================================================================================ Operating income Telephone $ 172,375 117,968 Other operations 12,398 5,879 Corporate overhead costs allocable to discontinued operations (See Note 4) - (4,798) - -------------------------------------------------------------------------------- Total operating income $ 184,773 119,049 ================================================================================ </TABLE> <TABLE> <CAPTION> Three months ended March 31, - -------------------------------------------------------------------------------- 2003 2002 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income $ 184,773 119,049 Interest expense (55,592) (50,648) Income from unconsolidated cellular entity 1,569 400 Other income and expense (932) (2,268) - -------------------------------------------------------------------------------- Income from continuing operations before income tax expense $ 129,818 66,533 ================================================================================ </TABLE> <TABLE> <CAPTION> March 31, Dec. 31, 2003 2002 - -------------------------------------------------------------------------------- (Dollars in thousands) Assets <S> <C> <C> Telephone $ 6,868,757 6,962,713 Other operations 831,068 807,695 - -------------------------------------------------------------------------------- Total assets $ 7,699,825 7,770,408 ================================================================================ </TABLE> (8) Accounting Pronouncement On January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and be capitalized as part of the book value of the long-lived asset. Although the Company generally has had no legal obligation to remove obsolete assets, depreciation rates of certain assets established by regulatory authorities for the Company's telephone operations subject to Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"), have historically included a component for removal costs in excess of the related estimated salvage value. Notwithstanding the adoption of SFAS 143, SFAS 71 requires the Company to not remove this accumulated liability for removal costs in excess of salvage value even though there is no legal obligation to remove the assets. For the Company's telephone operations acquired from Verizon in 2002 and its other operations (neither of which are subject to SFAS 71), the Company has not accrued a liability for anticipated removal costs in the past. For these reasons, the adoption of SFAS 143 did not have a material effect on the Company's financial statements. (9) Commitments and Contingencies In Barbrasue Beattie and James Sovis, on behalf of themselves and all others similarly situated, v. CenturyTel, Inc., filed on October 29, 2002 in the United States District Court for the Eastern District of Michigan, the plaintiffs allege that the Company unjustly and unreasonably billed customers for inside wire maintenance services, and seek unspecified money damages and injunctive relief under various legal theories on behalf of a purported class of over two million customers in the Company's telephone markets. The Company anticipates that the court will rule on whether to certify the plaintiffs' purported class of customers by the third quarter of 2003. On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued by the Arkansas Public Service Commission ("APSC") in connection with the Company's acquisition of its Arkansas LECs from Verizon in July 2000, and remanded the case back to the APSC for further hearings. The Court took these actions in response to challenges to the rates the Company has charged other carriers for intrastate switched access service. On December 20, 2002, the APSC approved the access rates established by the Company at the time of acquisition. The periods for appealing this ruling have lapsed, and the Company believes the ruling is now final and nonappealable. From time to time, the Company is involved in various other claims and legal actions relating to the conduct of its business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. (10) Subsequent Event Effective May 8, 2003, the Company terminated its fair value interest rate hedge associated with $500 million aggregate principal amount of its Series H senior notes, due 2010. In connection with such termination, the Company received approximately $22.3 million in cash upon settlement, which represented the fair value of the hedge at the termination date. Such amount will be amortized as a reduction of interest expense through 2010, the maturity date of the Series H notes. Effective May 8, 2003, the Company entered into a fair value interest rate hedge associated with $250 million of its $500 million aggregate principal amount of Series L senior notes, due 2012, that pay interest at a fixed rate of 7.875%. This hedge is a "fixed to variable" interest rate swap that effectively converts the Company's fixed rate interest payment obligations under these notes into obligations to pay variable rates equal to the six-month London InterBank Offered Rate ("LIBOR") plus 3.50% with settlement and rate reset dates occurring each six months through the expiration of the hedge in August 2012. Item 2. CenturyTel, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in the Company's annual report on Form 10-K for the year ended December 31, 2002. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results of operations which might be expected for the entire year. CenturyTel, Inc. and its subsidiaries (the "Company") is a regional integrated communications company engaged primarily in providing local exchange, long distance, Internet access and data services to customers in 22 states. On July 1, 2002, the Company acquired the local exchange telephone operations of Verizon Communications, Inc. ("Verizon") in the state of Alabama for approximately $1.022 billion cash. On August 31, 2002, the Company acquired the local exchange telephone operations of Verizon in the state of Missouri for approximately $1.179 billion cash. The results of operations for the Verizon assets acquired are reflected in the Company's consolidated results of operations subsequent to each respective acquisition. On August 1, 2002, the Company sold substantially all of its wireless operations to an affiliate of ALLTEL Corporation ("Alltel") and certain other purchasers in exchange for an aggregate of approximately $1.59 billion in cash. As a result, the Company's wireless operations for the three months ended March 31, 2002 have been reflected as discontinued operations on the Company's consolidated statements of income and cash flows. For further information, see "Discontinued Operations" below. In addition to historical information, management's discussion and analysis includes certain forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such forward-looking statements are subject to uncertainties that could cause the Company's actual results to differ materially from such statements. Such uncertainties include but are not limited to: the Company's ability to effectively manage its growth, including integrating newly-acquired businesses into the Company's operations, hiring adequate numbers of qualified staff and successfully upgrading its billing and other information systems; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the communications industry; the effects of greater than anticipated competition in the Company's markets; possible changes in the demand for, or pricing of, the Company's products and services; the Company's ability to successfully introduce new product or service offerings on a timely and cost-effective basis; the Company's ability to collect its receivables from financially troubled communications companies; and the effects of more general factors such as changes in interest rates, in general market or economic conditions or in legislation, regulation or public policy. These and other uncertainties related to the business are described in greater detail in Item 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002. 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 March 31, 2003 Compared to Three Months Ended March 31, 2002 Net income (and diluted earnings per share) was $83.9 million ($.58) and $70.8 million ($.50) for the first quarter of 2003 and 2002, respectively. Income from continuing operations was $83.9 million for the first quarter of 2003 and $43.1 million for the first quarter of 2002. Diluted earnings per share from continuing operations was $.58 during the first quarter of 2003 compared to $.30 during the first quarter of 2002. <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2003 2002 - ------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> Operating income Telephone $ 172,375 117,968 Other 12,398 5,879 Corporate overhead costs allocable to discontinued operations - (4,798) - -------------------------------------------------------------------------------- 184,773 119,049 Interest expense (55,592) (50,648) Income from unconsolidated cellular entity 1,569 400 Other income and expense (932) (2,268) Income tax expense (45,899) (23,416) - -------------------------------------------------------------------------------- Income from continuing operations 83,919 43,117 Discontinued operations, net of tax - 27,650 - -------------------------------------------------------------------------------- Net income $ 83,919 70,767 ================================================================================ Basic earnings per share From continuing operations $ .59 .30 From discontinued operations $ - .20 Basic earnings per share $ .59 .50 Diluted earnings per share From continuing operations $ .58 .30 From discontinued operations $ - .19 Diluted earnings per share $ .58 .50 Average basic shares outstanding 142,901 141,051 ================================================================================ Average diluted shares outstanding 143,797 142,654 ================================================================================ </TABLE>
Contributions to operating revenues and operating income by the Company's telephone and other operations for the three months ended March 31, 2003 and 2002 were as follows: <TABLE> <CAPTION> Three months ended March 31, - --------------------------------------------------------------------------- 2003 2002 - --------------------------------------------------------------------------- <S> <C> <C> Operating revenues Telephone operations 88.1% 88.1 Other operations 11.9% 11.9 Operating income Telephone operations 93.3% 99.1 Other operations 6.7% 4.9 Corporate overhead costs allocable to discontinued operations -% (4.0) - --------------------------------------------------------------------------- </TABLE> Telephone Operations The Company conducts its telephone operations in rural, suburban and small urban communities in 22 states. As of March 31, 2003, approximately 91% of the Company's 2.4 million access lines were in Wisconsin, Missouri, Alabama, Arkansas, Washington, Michigan, Louisiana, Colorado, Ohio and Oregon. The operating revenues, expenses and income of the Company's telephone operations for the three months ended March 31, 2003 and 2002 are summarized below. <TABLE> <CAPTION> Three months ended March 31, - ---------------------------------------------------------------------------------------- 2003 2002 - ---------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Local service $ 187,384 123,877 Network access 277,981 216,576 Other 46,013 32,278 - ---------------------------------------------------------------------------------------- 511,378 372,731 - ---------------------------------------------------------------------------------------- Operating expenses Plant operations 122,538 91,086 Customer operations 40,724 29,938 Corporate and other 62,454 44,396 Depreciation and amortization 113,287 89,343 - ---------------------------------------------------------------------------------------- 339,003 254,763 - ---------------------------------------------------------------------------------------- Operating income $ 172,375 117,968 ======================================================================================== </TABLE> Telephone operating income increased $54.4 million (46.1%) due to an increase in operating revenues of $138.6 million (37.2%) which was partially offset by an increase in operating expenses of $84.2 million (33.1%). Of the $63.5 million increase in local service revenues, $58.4 million was due to the properties acquired from Verizon in the third quarter of 2002. Of the remaining $5.1 million increase, $2.0 million was due to increased provision of custom calling features and $2.0 million was due to increased rates in certain jurisdictions. Network access revenues increased $61.4 million in the first quarter of 2003, of which $59.5 million was due to the properties acquired from Verizon in the third quarter of 2002. The remaining $1.9 million increase is primarily due to a $5.5 million increase in revenues from the federal Universal Service Fund and a $1.5 million increase in the partial recovery of higher operating expenses through revenue sharing arrangements in which the Company participates with other telephone companies. Such increases were substantially offset by a $5.4 million decrease in intrastate revenues due to (i) a reduction in intrastate minutes (partially due to the displacement of minutes by wireless and instant messaging services) and (ii) decreased access rates in certain states. Other revenues increased $13.7 million during the first quarter of 2003 primarily due to $11.8 million of revenues from the properties acquired from Verizon in the third quarter of 2002. Access lines declined 0.3% during the three months ended March 31, 2003 compared to a decline of 0.1% during the three months ended March 31, 2002. The Company believes the decline in the number of access lines during 2003 and 2002 is primarily due to declines in second lines, soft general economic conditions in the Company's markets and the displacement of traditional wireline telephone services by other competitive services. Based on current conditions, the Company expects to incur a decline in access lines of 1 to 2% on an annualized basis for 2003. Plant operations expenses increased $31.5 million (34.5%), of which $32.4 million was due to the properties acquired from Verizon in the third quarter of 2002 and $2.2 million was due to increased salaries and benefits. Such increases were partially offset by a $2.3 million decrease in information technology expenses and a $1.4 million decrease in access expenses primarily as a result of changes in certain optional calling plans in Arkansas. During the first quarter of 2003 customer operations expenses increased $10.8 million (36.0%), of which $10.0 million was due to the properties acquired from Verizon in the third quarter of 2002. Corporate and other expenses increased $18.1 million (40.7%) primarily due to a $20.0 million increase associated with the properties acquired from Verizon in the third quarter of 2002, a $2.0 million increase in information technology expenses and a $1.0 million increase in operating taxes. Such increases were partially offset by a $5.4 million decrease in the provision for uncollectible receivables primarily due to the partial recovery of amounts previously written off related to the bankruptcy of MCI (formerly WorldCom, Inc). Depreciation and amortization increased $23.9 million (26.8%), of which $21.7 million was due to the properties acquired from Verizon in the third quarter of 2002. The remaining increase is primarily due to an increase in depreciation expense due to higher levels of plant in service. Other Operations 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 and competitive local exchange carrier ("CLEC") operations. The operating revenues, expenses and income of the Company's other operations for the three months ended March 31, 2003 and 2002 are summarized below. <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------ 2003 2002 - ------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> Operating revenues Long distance $ 42,560 31,817 Internet 18,026 12,561 Other 8,566 5,809 - ------------------------------------------------------------------------------ 69,152 50,187 - ------------------------------------------------------------------------------ Operating expenses Cost of sales and operating expenses 52,043 41,424 Depreciation and amortization 4,711 2,884 - ------------------------------------------------------------------------------ 56,754 44,308 - ------------------------------------------------------------------------------ Operating income $ 12,398 5,879 ============================================================================== </TABLE> The $10.7 million increase in long distance revenues was primarily attributable to the growth in the number of customers and increased minutes of use, primarily due to penetration of the markets acquired from Verizon in 2002. The number of long distance customers as of March 31, 2003 and 2002 was 689,500 and 515,400, respectively. Internet revenues increased $5.5 million due primarily to growth in the number of customers, principally due to the expansion of the Company's DSL product offering. Other revenues increased $2.8 million primarily due to increased revenues in the Company's CLEC business primarily due to an increased number of customers, including an acquisition of certain CLEC operations on February 28, 2002. Cost of sales and operating expenses increased $10.6 million primarily due to (i) a $6.8 million increase in expenses associated with the Company's long distance operations (of which $4.9 million was due to increased minutes of use and $1.0 million was due to an increase in marketing expenses); (ii) a $3.3 million increase in expenses associated with the Company's Internet operations due to an increase in the number of customers, (iii) a $1.6 million increase in expenses associated with the Company's CLEC operations primarily due to the expansion of the business and costs associated with an acquisition consummated in the first quarter of 2002. Such increases were partially offset by a $1.0 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 $1.8 million (63.3%) primarily due to increased depreciation expense in the Company's Internet and CLEC businesses. Interest Expense Interest expense increased $4.9 million (9.8%) in the first quarter of 2003 compared to the first quarter of 2002 due to increased average debt outstanding, primarily as a result of indebtedness incurred to acquire certain properties from Verizon in the third quarter of 2002. Income From Unconsolidated Cellular Entity Income from unconsolidated cellular entity increased $1.2 million in the first quarter of 2003 due to improved profitability of the cellular partnership in which the Company owns a 49% minority interest. Other Income and Expense Other income and expense was a $932,000 expense for the first quarter of 2003 compared to a $2.3 million expense for the first quarter of 2002. Such decrease was primarily due to $3.0 million of costs recorded in the first quarter of 2002 associated with responding to an unsolicited takeover proposal which was partially offset by a $965,000 increase in minority interest expense. Income Tax Expense The effective income tax rate from continuing operations was 35.4% and 35.2% for the three months ended March 31, 2003 and 2002, respectively. Discontinued Operations On August 1, 2002, the Company sold substantially all of its wireless operations to an affiliate of Alltel in exchange for $1.59 billion in cash. As a result, such operations for the three months ended March 31, 2002 have been reflected as discontinued operations in the Company's consolidated financial statements. The following table summarizes certain information concerning the Company's wireless operations for 2002. <TABLE> <CAPTION> Three months ended March 31, 2002 - -------------------------------------------------------------------------------- (Dollars in thousands) - -------------------------------------------------------------------------------- <S> <C> Operating revenues $ 102,421 Operating expenses, exclusive of corporate overhead costs $ 67,405 Income from unconsolidated cellular entities $ 11,114 Minority interest expense $ (2,871) Other income and (expense) (79) Income tax expense $ (15,530) Income from discontinued operations, net of tax $ 27,650 </TABLE> Accounting Pronouncement On January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and be capitalized as part of the book value of the long-lived asset. Although the Company generally has had no legal obligation to remove obsolete assets, depreciation rates of certain assets established by regulatory authorities for the Company's telephone operations subject to Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"), have historically included a component for removal costs in excess of the related estimated salvage value. Notwithstanding the adoption of SFAS 143, SFAS 71 requires the Company to not remove this accumulated liability for removal costs in excess of salvage value even though there is no legal obligation to remove the assets. For the Company's telephone operations acquired from Verizon in 2002 and its other operations (neither of which are subject to SFAS 71), the Company has not accrued a liability for anticipated removal costs in the past. For these reasons, the adoption of SFAS 143 did not have a material effect on the Company's financial statements. 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 $319.3 million during the first three months of 2003 compared to $217.9 million during the first three months of 2002. The Company's accompanying consolidated statements of cash flows identify major differences between net income and net cash provided by operating activities for each of 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 $59.0 million and $117.7 million for the three months ended March 31, 2003 and 2002, respectively. Payments for property, plant and equipment were $13.9 million less in the first quarter of 2003 than in the comparable period during 2002. Capital expenditures for the three months ended March 31, 2003 were $53.5 million for telephone operations and $6.2 million for other operations. During the first quarter of 2002, the Company acquired the assets of certain CLEC operations for $43.8 million cash. Net cash used in financing activities from continuing operations was $245.2 million during the first three months of 2003 compared to $97.2 million during the first three months of 2002. Net payments of debt were $149.8 million more during the first quarter of 2003 compared to the first quarter of 2002 primarily due to $43.8 million of cash used for acquisitions in the first quarter of 2002, increased cash flow from operating activities and lower capital expenditures. Budgeted capital expenditures for 2003 total $370 million for telephone operations and $30 million for other operations.
The following table contains certain information concerning the Company's material contractual obligations as of March 31, 2003. <TABLE> <CAPTION> Payments due by period - ------------------------------------------------------------------------------------------------ Total contractual Less than After obligations Total 1 year 1-3 years 4-5 years 5 years - ------------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> <C> <C> <C> Long-term debt, including current maturities and capital lease obligations $3,411,485 119,894 415,954 874,387 (1) 2,001,250 (2) - ------------------------------------------------------------------------------------------------ </TABLE> (1) Includes $500 million aggregate principal amount of the Company's senior notes, Series J, due 2007, which the Company is committed to remarket in 2005. (2) Includes $165 million aggregate principal amount of the Company's convertible debentures, Series K, due 2032, which can be put to the Company at various dates beginning in 2006. As of March 31, 2003, the Company had $650.0 million of undrawn committed bank lines of credit and the Company telephone subsidiaries had available for use $123.0 million of commitments for long-term financing from the Rural Utilities Service and the Rural Telephone Bank. The Company has a commercial paper program that authorizes it to have outstanding up to $1.5 billion in commercial paper at any one time. At March 31, 2003, the Company had no commercial paper outstanding under such program. OTHER MATTERS Accounting for the Effects of Regulation The Company currently accounts for its regulated telephone operations (except for the properties acquired from Verizon in 2002) in accordance with the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). While the ongoing applicability of SFAS 71 to the Company's regulated telephone operations is being monitored due to the changing regulatory, competitive and legislative environments, 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. SFAS 101 further provides that the carrying amounts of property, plant and equipment are to be adjusted only to the extent the assets are impaired and that impairment shall be judged in the same manner as for nonregulated enterprises. When the Company's regulated operations no longer qualify for the application of SFAS 71, the Company does not expect to record an impairment charge related to the carrying value of the property, plant and equipment of its regulated telephone operations. Additionally, upon the discontinuance of SFAS 71, the Company would be required to revise the lives of its property, plant and equipment to reflect the estimated useful lives of the assets. The Company does not expect such revisions in asset lives, or the elimination of other regulatory assets and liabilities, to have a material impact on the Company's results of operations. Development of Billing System The Company is in the process of developing an integrated billing and customer care system. The costs to develop such system have been capitalized in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and aggregated $146.2 million (before accumulated amortization) at March 31, 2003. The Company's aggregate billing system costs are expected to approximate $180 million upon completion (excluding previously disclosed write-offs) and are expected to be amortized over a twenty-year period. The Company began amortization of the billing system in 2003 based on the total amount of customers that have been migrated to the new system. The Company expects to incur duplicative system costs in 2003 until such time as all customers are migrated to the new system. Such amortization and duplicative system costs are expected to increase operating expenses by approximately $8-12 million for 2003. 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 all phases of the system in early 2004, there is no assurance that this deadline (or the Company's budget) will be met or that the system will function as anticipated. If the system does not function as anticipated, the Company may have to write-off part or all of its remaining costs. Pension and Medical Costs The decline in equity markets in recent years, coupled with record low interest rates and rising medical costs, have increased the Company's employee benefits expenses, including defined benefit pension expenses and pre- and post-retirement medical expenses. The Company expects these conditions will result in higher pension and pre- and post-retirement medical expenses in 2003. Based on the Company's current estimates, such costs are expected to increase between $15 - 25 million annually in 2003 compared to 2002 amounts. As a result of continued increases in medical costs, the Company discontinued its practice of subsidizing post-retirement medical benefits for persons hired after January 1, 2003. The Company also lowered its expected long-term return on plan assets for its pension and post-retirement plans to range between 8 and 8.25% for 2003 compared to 8 to 10% for 2002. Minority Interest in Cellular Partnership In its balance sheet as of December 31, 2002 the Company reflected its minority interest in a cellular partnership as "assets held for sale" in light of a July 2002 agreement to sell such interest for $68 million cash, subject to several closing conditions. In light of the failure of the parties to this agreement to agree upon whether the closing conditions had been met, the Company determined to retain this investment. See Note 1 to the Company's consolidated financial statements appearing elsewhere in this report. Item 3. CenturyTel, Inc. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The Company is exposed to market risk from changes in interest rates on its long-term debt obligations. The Company has estimated its market risk using sensitivity analysis. Market risk is defined as the potential change in the fair value of a fixed-rate debt obligation due to a hypothetical adverse change in interest rates. Fair value on long-term debt obligations is determined based on a discounted cash flow analysis, using the rates and maturities of these obligations compared to terms and rates currently available in the long-term financing markets. The results of the sensitivity analysis used to estimate market risk are presented below, although the actual results may differ from these estimates. At March 31, 2003, the fair value of the Company's long-term debt was estimated to be $3.7 billion based on the overall weighted average rate of the Company's long-term debt of 6.2% and an overall weighted maturity of 11 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 62 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 $149.9 million decrease in fair value of the Company's long-term debt. As of March 31, 2003, after giving effect to interest rate swaps currently in place, approximately 85% of the Company's long-term debt obligations were fixed rate. The Company seeks to maintain a favorable mix of fixed and variable rate debt in an effort to limit interest costs and cash flow volatility resulting from changes in rates. From time to time, the Company uses derivative instruments to (i) lock-in or swap its exposure to changing or variable interest rates for fixed interest rates or (ii) to swap obligations to pay fixed interest rates for variable interest rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative instrument activities. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. Management periodically reviews the Company's exposure to interest rate fluctuations and implements strategies to manage the exposure. At March 31, 2003, the Company had outstanding a fair value interest rate hedge associated with $500 million aggregate principal amount of its Series H senior notes, due 2010, that pay interest at a fixed rate of 8.375%. This hedge is a "fixed to variable" interest rate swap that effectively converts the Company's fixed rate interest payment obligations under these notes into obligations to pay variable rates equal to the six-month London InterBank Offered Rate ("LIBOR") plus 3.59% with settlement and rate reset dates occurring each six months through the expiration of the hedge in October 2010. At March 31, 2003, the Company realized a rate under this hedge of 4.79%. Interest expense was reduced by $4.3 million in the first quarter of 2003 as a result of this hedge. The fair market value of this hedge was $27.5 million at March 31, 2003 and is reflected as an asset and as an adjustment to the underlying debt on the March 31, 2003 balance sheet. Effective May 8, 2003, the Company terminated this hedge and received $22.3 million cash upon settlement, which represented the fair value of the hedge at the termination date. Such amount will be amortized as a reduction of interest expense through 2010, the maturity date of the Series H notes. In addition, the Company entered into a fair value interest rate hedge associated with $250 million of its $500 million aggregate principal amount of Series L senior notes, due 2012, that pay interest at a fixed rate of 7.875%. This hedge is a "fixed to variable" interest rate swap that effectively converts the Company's fixed rate interest payment obligations under these notes into obligations to pay variable rates equal to the six-month LIBOR plus 3.50% with settlement and rate reset dates occurring each six months through the expiration of the hedge in August 2012. At March 31, 2003, the Company also had outstanding a cash flow hedge associated with $400 million of borrowings incurred in the fourth quarter of 2002 under its $800 million credit facilities. Such hedge expires in October 2003. This hedge is designed to swap the Company's future obligation to pay variable rate interest based on LIBOR into obligations that lock-in a fixed rate of 2.49%. The fair value of this hedge was $1.6 million at March 31, 2003 and is reflected as a liability on the March 31, 2003 balance sheet. A portion of this cash flow hedge was deemed ineffective in the first quarter of 2003 and resulted in a $350,000 unfavorable pre-tax charge to the Company's consolidated results of operations. The remaining $1.3 million of liability is reflected in Accumulated Other Comprehensive Loss (net of tax) on the March 31, 2003 balance sheet. A hypothetical 10% increase in the forward rates would reduce this $1.6 million liability by $590,000.
Item 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer, Glen F. Post, III, and the Company's Chief Financial Officer, R. Stewart Ewing, Jr., have evaluated the Company's disclosure controls and procedures within 90 days of the filing of this quarterly report. Based on the evaluation, Messrs. Post and Ewing have concluded that the Company's disclosure controls and procedures are effective in providing reasonable assurance that they are timely alerted of all material information required to be filed in this quarterly report. Since the date of Messrs. Post's and Ewing's most recent evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events and contingencies, and there can be no assurance that any design will succeed in achieving its stated goals.
PART II. OTHER INFORMATION CenturyTel, Inc. Item 1. Legal Proceedings ----------------- In Barbrasue Beattie and James Sovis, on behalf of themselves and all others similarly situated, v. CenturyTel, Inc., filed on October 29, 2002 in the United States District Court for the Eastern District of Michigan, the plaintiffs allege that the Company unjustly and unreasonably billed customers for inside wire maintenance services, and seek unspecified money damages and injunctive relief under various legal theories on behalf of a purported class of over two million customers in the Company's telephone markets. The Company anticipates that the court will rule on whether to certify the plaintiffs' purported class of customers by the third quarter of 2003. On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued by the Arkansas Public Service Commission ("APSC") in connection with the Company's acquisition of its Arkansas LECs from Verizon in July 2000, and remanded the case back to the APSC for further hearings. The Court took these actions in response to challenges to the rates the Company has charged other carriers for intrastate switched access service. On December 20, 2002, the APSC approved the access rates established by the Company at the time of acquisition. The periods for appealing this ruling have lapsed, and the Company believes the ruling is now final and nonappealable. From time to time, the Company is involved in other litigation incidental to its business, including administrative hearings of state public utility commissions relating primarily to rate making and competition related issues, actions relating to employee claims, occasional grievance hearings before labor regulatory agencies and miscellaneous third party tort actions. Currently, there are no material legal proceedings of this nature. Item 6: Exhibits and Reports on Form 8-K -------------------------------- A. Exhibits -------- 10.1 Form of Restricted Stock Agreement, dated as of February 24, 2003, between the Company and each of its executive officers, pursuant to the 2002 Management Incentive Compensation Plan. 11 Computations of Earnings Per Share. 99 Registrant's Chief Executive Officer and Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. B. Reports on Form 8-K ------------------- The following item was reported in the Form 8-K filed January 13, 2003: Items 5 & 7. Other Events and Regulation FD Disclosure and Financial Statements and Exhibits - Updated Unaudited Pro Forma Consolidated Condensed Financial Information for the year ended December 31, 2001 and the nine months ended September 30, 2002 related to the Verizon properties acquired in the third quarter of 2002 and the wireless operations sold in August 2002. The following item was reported in the Form 8-K filed January 31, 2003: Item 5. Other Events - News release announcing fourth quarter 2002 operating results. 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: May 14, 2003 /s/ Neil A. Sweasy -------------------------- Neil A. Sweasy Vice President and Controller (Principal Accounting Officer)
CERTIFICATIONS I, Glen F. Post, III, Chairman of the Board and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CenturyTel, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee or registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Glen F. Post, III -------------------------- Glen F. Post, III Chairman of the Board and Chief Executive Officer * * * * * * * * * * * * I, R. Stewart Ewing, Jr., Executive Vice President and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CenturyTel, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee or registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ R. Stewart Ewing, Jr. ---------------------------- R. Stewart Ewing, Jr. Executive Vice President and Chief Financial Officer