UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7784
CENTURYTEL, INC.
(Exact name of Registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 CenturyTel Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (318) 388-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
Berlin Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Berlin Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 2002, the aggregate market value of voting stock held by
non-affiliates (affiliates being for these purposes only directors, executive
officers and holders of more than five percent of the Company's outstanding
voting securities) was $4.7 billion. As of February 28, 2002, there were
141,299,473 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement prepared in connection with the
2002 annual meeting of shareholders are incorporated in Part III of this Report.
PART I
Item 1. Business
General. CenturyTel, Inc. ("CenturyTel") is a regional integrated
communications company engaged primarily in providing local exchange telephone
services and wireless communications services. For the year ended December 31,
2001, local exchange telephone operations and wireless operations provided 71%
and 21%, respectively, of the consolidated revenues of CenturyTel and its
subsidiaries (the "Company"). All of the Company's operations are conducted
within the continental United States.
At December 31, 2001, the Company's local exchange telephone subsidiaries
operated approximately 1.8 million telephone access lines, primarily in rural,
suburban and small urban areas in 21 states, with the largest customer bases
located in Wisconsin, Arkansas, Washington, Missouri, Michigan, Louisiana and
Colorado. According to published sources, the Company is the eighth largest
local exchange telephone company in the United States based on the number of
access lines served. For more information, see "Telephone Operations."
At December 31, 2001, the Company's majority-owned and operated cellular
systems (i) served approximately 797,000 customers in 19 Metropolitan
Statistical Areas ("MSAs") and 22 Rural Service Areas ("RSAs") in Michigan,
Louisiana, Arkansas, Mississippi, Wisconsin and Texas and (ii) had access to
approximately 7.8 million cellular pops (the estimated population of licensed
cellular telephone markets multiplied by the Company's proportionate equity
interest in the licensed operators thereof). At December 31, 2001, the Company
also owned minority equity interests in 10 MSAs and 22 RSAs, representing
approximately 2.0 million cellular pops. According to data derived from
published sources, the Company is the eighth largest cellular telephone company
in the United States based on the Company's 9.8 million aggregate pops. In
August 2001, the Company announced that it is exploring the separation of its
wireless business from its other operations. For more information, see "Wireless
Operations."
The Company also provides long distance, Internet access, competitive
local exchange carrier, broadband data, security monitoring, and other
communications and business information services in certain local and regional
markets. For more information, see "Other Operations."
Recent acquisitions and dispositions. On July 31, 2000 and September 29,
2000, affiliates of the Company acquired over 490,000 telephone access lines and
related assets from Verizon Communications, Inc. ("Verizon") in four separate
transactions for approximately $1.5 billion in cash. Under these transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related local exchange assets comprising 106 exchanges
throughout Arkansas for approximately $842 million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra")
purchased approximately 127,000 telephone access lines and related local
exchange assets comprising 107 exchanges throughout Missouri for
approximately $297 million cash. As of December 31, 2001, the Company
owns 75.7% of Spectra, which was organized to acquire and operate these
Missouri properties. At closing, the Company made a preferred equity
investment in Spectra of approximately $55 million (which represented a
57.1% interest) and financed substantially all of the remainder of the
purchase price. In the first quarter of 2001, the Company purchased an
additional 18.6% interest in Spectra for $47.1 million.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related local exchange assets comprising 42
exchanges throughout Wisconsin for approximately $197 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related local
exchange assets comprising 35 exchanges throughout Wisconsin for
approximately $172 million in cash. The Company owns 89% of TelUSA,
which was organized to acquire and operate these Wisconsin properties.
At closing, the Company made an equity investment in TelUSA of
approximately $37.8 million and financed substantially all of the
remainder of the purchase price.
In August 2000, the Company acquired the assets of CSW Net, Inc., a
regional Internet service provider that offers dial-up and dedicated Internet
access, and web site and domain hosting to more than 14,000 customers in 28
communities in Arkansas.
In November 1999, the Company acquired the assets of DigiSys, Inc., an
Internet service provider in Kalispell, Montana. DigiSys provides Internet
services to more than 8,600 customers in Montana and operates MontanaWeb, one of
the largest online business directories in the state.
In October 1999, the Company acquired the non-wireline cellular license to
serve Mississippi RSA #5, which covers 160,000 pops. Mississippi RSA #5
encompasses the Vicksburg and Greenville markets as well as portions of
Interstate Highway 20 between Jackson, Mississippi and Monroe, Louisiana.
In June 1999, the Company sold all of the operations of its Brownsville
and McAllen, Texas, cellular systems to Western Wireless Corporation for
approximately $96 million cash. The Company received a proportionate share of
the sale proceeds of approximately $45 million after-tax.
In May 1999, the Company sold substantially all of its Alaska telephone
and wireless operations for approximately $300 million after-tax. In February
2000, the Company sold its interest in Alaska RSA #1 which completed the
Company's divestiture of it Alaska operations.
In the second quarter of 2001, the Company sold to Leap Wireless
International, Inc. 30 PCS (Personal Communications Service) operating licenses
for an aggregate of $205 million. The Company received approximately $118
million of the purchase price in cash at closing and collected the remainder in
installments through the fourth quarter of 2001.
The Company continually evaluates the possibility of acquiring additional
telecommunications assets in exchange for cash, securities or both, and at any
given time may be engaged in discussions or negotiations regarding additional
acquisitions. The Company generally does not announce its acquisitions until it
has entered into a preliminary or definitive agreement. Over the past few years,
the number and size of communications properties on the market has increased
substantially. Although the Company's primary focus will continue to be on
acquiring interests that are proximate to its properties or that serve a
customer base large enough for the Company to operate efficiently, other
communications interests may also be acquired and these acquisitions could have
a material impact upon the Company.
Pending acquisitions. On October 22, 2001, the Company entered into
definitive agreements to purchase from affiliates of Verizon assets comprising
all of Verizon's local telephone operations in Missouri and Alabama. In
exchange, the Company has agreed to pay approximately $2.159 billion in cash,
subject to certain adjustments described below.
The assets to be purchased will include (i) all telephone access lines
(which numbered approximately 372,000 as of December 31, 2001) and related
property and equipment comprising Verizon's local exchange operations in 98
exchanges in predominantly rural and suburban markets throughout Missouri,
several of which are adjacent to properties currently owned and operated by the
Company, (ii) all telephone access lines (which numbered approximately 304,000
as of December 31, 2001) and related property and equipment comprising Verizon's
local exchange operations in 90 exchanges in predominantly rural markets
throughout Alabama, (iii) Verizon's assets used to provide digital subscriber
line ("DSL") and other high speed data services within the purchased exchanges
in both states and (iv) approximately 2,800 route miles of fiber optic cable
within the purchased exchanges in both states. The acquired assets will not
include Verizon's cellular, PCS, long distance, dial-up Internet, or directory
publishing operations, or rights under various Verizon contracts, including
those relating to customer premise equipment. The Company will not assume any
liabilities of Verizon other than those associated with contracts, employees,
facilities and certain other assets transferred in connection with the
purchases. The purchase price will be adjusted to, among other things, (i)
reimburse Verizon for certain pre-closing costs and (ii) compensate the Company
if Verizon fails to attain certain specified pre-closing capital expenditure
targets. The aggregate effect of these adjustments is not expected to be
material.
The Company's purchase of the Alabama properties has been approved by the
Alabama Public Service Commission. The Company's purchase of the Missouri
properties is subject to the approval of the Missouri Public Service Commission.
Consummation of each transaction is also subject to, among other things, (i) the
approval of the Federal Communications Commission, (ii) compliance with the
notification and waiting period requirements under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, (iii) the receipt of various third party
consents, including releases from Verizon bondholders terminating liens on the
transferred assets, and (iv) various other customary closing conditions. Neither
purchase is conditioned upon the completion of the other purchase. Under each
definitive agreement, the Company has agreed to pay Verizon 10% of the
transaction consideration if the purchase is not consummated under certain
specified conditions, including the Company's incapacity to finance the
transaction.
The properties to be acquired are currently subject to price-cap
regulation for interstate purposes, and the Company has no plans to change this.
Because most of the Company's other telephone properties are subject to
rate-of-return regulation, the Company's plans to retain price-cap regulation
for the acquired properties will require it to seek a waiver of the FCC's "all
or nothing" regulation that generally requires a rate-of-return company
acquiring a price-cap company to convert all of its operations to price-cap
regulation. Although the FCC has granted similar waivers to other carriers over
the past couple of years, no assurances can be provided that the FCC will grant
a waiver to the Company. The Company's failure to obtain this waiver would
adversely impact the financial benefits that the Company anticipates receiving
in connection with its purchases of the Verizon properties.
On February 28, 2002, the Company purchased the fiber network and customer
base of KMC Telecom's operations in Monroe and Shreveport, Louisiana which will
allow the Company to offer broadband services to customers in these markets.
Other. As of December 31, 2001, the Company had approximately 6,900
employees, approximately 1,280 of whom were members of 17 different bargaining
units represented by the International Brotherhood of Electrical Workers, the
Communications Workers of America, or the NTS Employee Committee. Relations with
employees continue to be generally good.
CenturyTel was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous 15 to
20 years. CenturyTel's principal executive offices are located at 100 CenturyTel
Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.
TELEPHONE OPERATIONS
According to published sources, the Company is the eighth largest local
exchange telephone company in the United States, based on the approximately 1.8
million access lines it served at December 31, 2001. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominately rural, suburban and small urban
markets in 21 states. The table below sets forth certain information with
respect to the Company's access lines as of December 31, 2001 and 2000.
December 31, 2001 December 31, 2000
- ----------------------------------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
- -----------------------------------------------------------------------------------------------------
Wisconsin 498,331 (1) 28% 498,234 (1) 28%
Arkansas 271,617 15 278,155 15
Washington 189,868 11 189,341 11
Missouri 130,651 (2) 7 129,944 (2) 7
Michigan 114,643 6 114,325 6
Louisiana 104,043 6 103,091 6
Colorado 97,571 6 95,509 5
Ohio 84,636 5 85,308 5
Oregon 78,592 4 79,663 5
Montana 65,974 4 65,966 4
Texas 51,451 3 51,387 3
Minnesota 31,110 2 30,910 2
Tennessee 27,660 2 27,781 2
Mississippi 23,579 1 23,435 1
New Mexico 6,396 - 6,295 -
Idaho 6,119 - 6,197 -
Indiana 5,490 - 5,425 -
Wyoming 5,408 - 5,108 -
Iowa 2,072 - 2,048 -
Arizona 1,937 - 1,920 -
Nevada 495 - 523 -
- ----------------------------------------------------------------------------------------------------
1,797,643 100% 1,800,565 100%
====================================================================================================
(1) Approximately 61,990 (as of December 31, 2001) of these lines are owned and
operated by CenturyTel's 89%-owned affiliate.
(2) These lines are owned and operated by CenturyTel's 75.7%-owned affiliate.
As indicated in the following table, the Company has generally experienced
growth in its telephone operations over the past several years, a substantial
portion of which was attributable to the July and September 2000 acquisitions of
telephone properties from Verizon, the December 1997 acquisition of PTI, the
acquisitions of other telephone properties and the expansion of services. A
portion of the Company's access line growth was offset by the May 1999 sale of
the Company's Alaska telephone operations.
Year ended or as of December 31,
- -----------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
Access lines 1,797,643 1,800,565 1,272,867 1,346,567 1,203,650
% Residential 76% 76 75 74 74
% Business 24% 24 25 26 26
Operating revenues $ 1,505,733 1,253,969 1,126,112 1,077,343 526,428
Capital expenditures $ 351,010 275,523 233,512 223,190 115,854
- -----------------------------------------------------------------------------------------------
Future growth in telephone operations is expected to be derived from (i)
acquiring additional telephone properties, (ii) providing service to new
customers, (iii) increasing network usage and (iv) providing additional services
made possible by advances in technology, improvements in the Company's
infrastructure and changes in regulation. For information on developing
competitive trends, see "-Regulation and Competition."
Services
The Company's local exchange telephone subsidiaries derive revenue from
providing (i) local telephone services, (ii) network access services and (iii)
other related services. The following table reflects the percentage of telephone
operating revenues derived from these respective services:
2001 2000 1999
- -------------------------------------------------------------------------------
Local service 32.6% 32.6 31.4
Network access 58.1 58.0 58.1
Other 9.3 9.4 10.5
- -------------------------------------------------------------------------------
100.0% 100.0 100.0
===============================================================================
Local service. Local service revenues are derived from the provision of
local exchange telephone services in the Company's service areas. Access lines
declined 0.2% in 2001. Internal access line growth during 2000 and 1999 was 2.8%
and 4.8%, respectively. The decline in internal access line growth during 2001
was substantially due to the slowing growth in the Company's service areas due
to general economic conditions and disconnecting service to customers for
non-payment.
The installation of digital switches, high-speed data circuits and related
software has been an important component of the Company's growth strategy
because it allows the Company to offer enhanced voice services (such as call
forwarding, conference calling, caller identification, selective call ringing
and call waiting) and data services and to thereby increase utilization of
existing access lines. In 2001 the Company continued to expand its list of
premium services (such as voice mail) offered in certain service areas and
aggressively marketed these services.
Network access. Network access revenues primarily relate to services
provided by the Company to long distance carriers, wireless carriers and other
customers in connection with the use of the Company's facilities to originate
and terminate interstate and intrastate long distance telephone calls. Certain
of the Company's interstate network access revenues are based on tariffed access
charges prescribed by the Federal Communications Commission ("FCC"); the
remainder of such revenues are derived under revenue sharing arrangements with
other local exchange carriers ("LECs") administered by the National Exchange
Carrier Association ("NECA"), a quasi-governmental non-profit organization
formed by the FCC in 1983 for such purposes.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on tariffed access charges, which are subject to state regulatory
commission approval. Additionally, certain of the Company's intrastate network
access revenues, along with intrastate and intra-LATA (Local Access and
Transport Areas) long distance revenues, are derived through revenue sharing
arrangements with other LECs.
The Company is installing fiber optic cable in certain of its high traffic
routes and provides alternative routing of telephone service over fiber optic
cable networks in several strategic operating areas. At December 31, 2001, the
Company's telephone subsidiaries had over 10,900 miles of fiber optic cable in
use.
Other. Other revenues include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for long
distance companies and (iii) participating in the publication of local
directories.
Certain large communications companies for which the Company currently
provides billing and collection services continue to indicate their desire to
reduce their billing and collection expenses, which has resulted and may
continue to result in future reductions of the Company's billing and collection
revenues.
For further information on the regulation of the Company's revenues, see
"-Regulation and Competition."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") or the Rural Telephone Bank
("RTB"). The RUS has made long-term loans to telephone companies since 1949 for
the purpose of improving telephone service in rural areas. The RUS continues to
make new loans at interest rates that range from 5% to 7% based on borrower
qualifications and the cost of funds to the United States government. The RTB,
established in 1971, makes long-term loans at interest rates based on its
average cost of funds as determined by statutory formula (which ranged from 5.0%
to 6.0% for the RTB's fiscal year ended September 30, 2001), and in some cases
makes loans concurrently with RUS loans. Much of the Company's telephone plant
is pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS and RTB. The Company's telephone subsidiaries that have
borrowed from government agencies generally may not loan or advance any funds to
CenturyTel, but may pay dividends if certain financial covenants are met.
For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.
Regulation and Competition
Traditionally, LECs have operated as regulated monopolies. Consequently,
most of the Company's telephone operations have traditionally been regulated
extensively by various state regulatory agencies (generally called public
service commissions or public utility commissions) and by the FCC. As discussed
in greater detail below, passage of the Telecommunications Act of 1996 (the
"1996 Act"), coupled with state legislative and regulatory initiatives and
technological changes, has fundamentally altered the telephone industry by
reducing the regulation of LECs and permitting competition in each segment of
the telephone industry. CenturyTel anticipates that these trends towards reduced
regulation and increased competition will continue.
State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions. Most of such commissions have traditionally regulated
pricing through "rate of return" regulation that focuses on authorized levels of
earnings by LECs. Most of these commissions also (i) regulate the purchase and
sale of LECs, (ii) prescribe depreciation rates and certain accounting
procedures and (iii) regulate various other matters, including certain service
standards and operating procedures.
In recent years, state legislatures and regulatory commissions in most of
the states in which the Company has substantial operations have either reduced
the regulation of LECs or have announced their intention to do so, and it is
expected that this trend will continue. Wisconsin, Louisiana, Arkansas and
several other states have implemented laws or rulings which require or permit
LECs to opt out of rate of return regulation in exchange for agreeing to
alternative forms of regulation which typically permit the LEC greater freedom
to establish local service rates in exchange for agreeing not to charge rates in
excess of specified caps. As discussed further below, most of the Company's
Wisconsin telephone subsidiaries, with the exception of the properties acquired
in mid-2000, have agreed to be governed by alternative regulation plans, and the
Company continues to explore its options for similar treatment in other states.
Other states have imposed new regulatory models that do not rely on "rate of
return" regulation. The Company believes that reduced regulatory oversight of
certain of the Company's telephone operations may allow the Company to offer new
and competitive services faster than under the traditional regulatory process.
For a discussion of legislative, regulatory and technological changes that have
introduced competition into the local exchange industry, see "-Developments
Affecting Competition."
A portion of the Company's telephone operations in Wisconsin have been
regulated under an alternative regulation plan since June 1996. In late 1999 and
early 2000, most of the Company's remaining Wisconsin telephone subsidiaries
agreed to be subject to alternative regulation plans. The Company's Wisconsin
access lines acquired in mid-2000 continue to be regulated under "rate of
return" regulation. Each of these alternative regulation plans has a five-year
term and permits the Company to adjust local rates within specified parameters
if certain quality-of-service and infrastructure-development commitments are
met. These plans also include initiatives designed to promote competition.
Although the Company believes that these plans will be favorable in the future
as additional revenue streams are added and cost efficiencies are obtained,
there can be no assurance that current or future alternative regulation plans
will not reduce revenue growth in the future.
Since 1997 all of the Company's LECs operating in Louisiana have been
regulated under a Consumer Price Protection Plan (the "Louisiana Plan"). This
form of regulation focuses on price and quality of service. Under the Louisiana
Plan, the Company's Louisiana LECs' local rates and access rates have remained
unchanged since 1997, but may currently be increased within certain parameters.
The Company's Louisiana LECs have the option to propose a new plan at any time
if the Louisiana Public Service Commission ("LPSC") determines that (i)
effective competition exists or (ii) unforeseen events threaten the LEC's
ability to provide adequate service or impair its financial health.
The Company's Arkansas LECs, excluding the recently-acquired Verizon
properties, are regulated under an alternative regulation plan adopted in 1997,
which initially froze access rates for three years, after which time such rates
can be adjusted based on an inflation-based factor. Local service rates can be
adjusted without commission approval; however, such rates are subject to
commission review if certain petition criteria are met. In addition, since 1995
the Company's Michigan LECs have been subject to a regulatory structure that
focuses on price and quality of service as opposed to traditional rate of return
regulation, and which relies more on existing federal and state law regarding
antitrust consumer protection and fair trade to provide safeguards for
competition and consumers.
Notwithstanding the movement towards deregulation, LECs operating
approximately 61% of the Company's total access lines continue to be subject to
"rate of return" regulation. These LECs remain subject to the powers of state
regulatory commissions to conduct earnings reviews and adjust service rates,
either of which could lead to revenue reductions.
FCC regulation. The FCC regulates the interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other LECs by the Company
for use of its local network in connection with the origination and termination
of interstate telephone calls. Additionally, the FCC has prescribed certain
rules and regulations for telephone companies, including regulations regarding
the use of radio frequencies; a uniform system of accounts; and rules regarding
the separation of costs between jurisdictions and, ultimately, between
interstate services.
Effective January 1, 1991, the FCC adopted price-cap regulation relating
to interstate access rates for the Regional Bell Operating Companies. All other
LECs may elect to be subject to price-cap regulation. Under price-cap
regulation, limits imposed on a company's interstate rates are adjusted
periodically to reflect inflation, productivity improvement and changes in
certain non-controllable costs. In May 1993 the FCC adopted an optional
incentive regulatory plan for LECs not subject to price-cap regulation. A LEC
electing the optional incentive regulatory plan would, among other things, file
tariffs based primarily on historical costs and not be allowed to participate in
the relevant NECA pooling arrangements. The Company has not elected price-cap
regulation or the optional incentive regulatory plan for its incumbent
operations (but does propose to operate the access lines that it has agreed to
purchase from Verizon under price-cap regulation). Subject to certain
exceptions, if the Company were to elect price-cap regulation or the optional
incentive regulatory plan for its incumbent operations, either election would
have to be applicable to all of the Company's telephone subsidiaries based on
current regulations.
On October 11, 2001, the FCC modified its interstate access charge rules
and universal service support system for rate of return local exchange carriers.
This order, among other things, (i) increases the caps on the subscriber line
charges ("SLC") to the levels paid by most subscribers nationwide; (ii) allows
limited SLC deaveraging, which will enhance the competitiveness of rate of
return carriers by giving them pricing flexibility; (iii) lowers per minute
rates collected for federal access charges; (iv) creates a new explicit
universal service support mechanism that will replace other implicit support
mechanisms in a manner designed to ensure that rate structure changes do not
affect the overall recovery of interstate access costs by rate of return
carriers serving high cost areas and (v) terminates the proceeding on the
represcription of the authorized rate of return for rate of return LECs, which
will remain at 11.25%. The Company expects the order to be implemented on a
revenue neutral basis for interstate purposes. Other proposals submitted to the
FCC by the Multi-Association Group representing rural carriers were rejected or
deferred for additional comment.
The FCC is seeking comment on a Further Notice of Proposed Rulemaking
regarding developing an appropriate federal incentive plan for rate of return
LECs. The Company is actively monitoring this proceeding and will provide
comments to the FCC on major policy issues.
High-cost support funds, revenue sharing arrangements and related matters.
A significant number of the Company's telephone subsidiaries recover a portion
of their costs under federal and state cost recovery mechanisms that
traditionally have allowed LECs serving small communities and rural areas to
provide communications services reasonably comparable to those available in
urban areas and at reasonably comparable prices.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that will provide predictable levels of
support to rural local exchange carriers, including substantially all of the
Company's local exchange carriers. The Company estimates (based on current
operations, the current nationwide average cost per loop and other factors) that
such ruling may increase the Company's level of universal service support
receipts by approximately $7 million on an annualized basis compared to previous
levels. During 2001 and 2000 the Company's telephone subsidiaries received
$168.7 million and $146.4 million, respectively (which included $21.6 million
and $8.3 million, respectively, related to the Company's Verizon operations
acquired in 2000) from the federal Universal Service Fund, representing 8.0% and
7.9%, respectively, of the Company's consolidated revenues for 2001 and 2000. In
addition, the Company's telephone subsidiaries received $31.5 million and $30.7
million in 2001 and 2000, respectively, from intrastate support funds.
In 1997, the FCC also established new programs to provide discounted
telecommunications services annually to schools, libraries and rural health care
providers. All communications carriers providing interstate telecommunications
services, including the Company's LECs and its cellular and long distance
operations, are required to contribute to these programs. Prior to May 2001, the
Company's LECs recovered their funding contributions in their rates for
interstate services. Subsequent to May 2001, in accordance with a 2001 FCC
order, such contributions are not recovered through access charges but instead
are charged as an explicit item on customer's bills. The Company's contribution
by its cellular and long distance operations, which is passed on to its
customers, was approximately $5.0 million in 2001 and $3.7 million in 2000.
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "- State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
Substantially all of the Company's LECs concur with the common line tariff
and certain of the Company's LECs concur with the traffic sensitive tariffs
filed by the NECA; such LECs participate in the access revenue sharing
arrangements administered by the NECA for interstate services. All of the
intrastate network access revenues of the Company's LECs are based on access
charges, cost separation studies or special settlement arrangements. See "-
Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. Long distance carriers
have also aggressively pursued regulatory or legislative changes that would
reduce access rates. Although such changes have not materially affected access
revenues to date, there is no assurance that these requests or initiatives will
not result in decreased access revenues in the future.
Developments affecting competition. The communications industry continues
to undergo fundamental changes which are likely to significantly impact the
future operations and financial performance of all communications companies.
Primarily as a result of legislative and regulatory initiatives and
technological changes, competition has been introduced and encouraged in each
sector of the telephone industry, including, most recently, the local exchange
sector. As a result, the number of companies offering competitive services has
increased substantially.
As indicated above, in February 1996 Congress enacted the 1996 Act, which
obligates primarily the Regional Bell Operating Companies to permit competitors
to interconnect their facilities to the LEC's network and to take various other
steps that are designed to promote competition. The 1996 Act imposes several
duties on a LEC if it receives a specific request from another entity which
seeks to connect with or provide services using the LEC's network. In addition,
each incumbent LEC is obligated to (i) negotiate interconnection agreements in
good faith, (ii) provide "unbundled" access to all aspects of the LEC's network,
(iii) offer resale of its telecommunications services at wholesale rates and
(iv) permit competitors to collocate their physical plant on the LEC's property,
or provide virtual collocation if physical collocation is not practicable.
Under the 1996 Act's rural telephone company exemption, most of the
Company's telephone subsidiaries (except for the access lines most recently
acquired from Ameritech in 1998 and Verizon in 2000) are exempt from certain of
these interconnection requirements unless and until the appropriate state
regulatory commission overrides the exemption upon receipt from a competitor of
a bona fide request meeting certain criteria. In mid-2000, a federal appellate
court overturned portions of the FCC's 1996 interconnection order that sought to
place the burden of defending this exemption on rural LECs and ruled that
competitors had the burden of proof in removing the rural exemption. States are
permitted to adopt laws or regulations that provide for greater competition than
is mandated under the 1996 Act. Although portions of the FCC's August 1996
interconnection order have survived judicial challenge, the FCC has not
completed its interconnection rulemaking and certain litigation continues in the
area of pricing unbundled network elements. Management believes that competition
in its telephone service areas has increased and will continue to increase as a
result of the 1996 Act and additional FCC interpretations related to
interconnection and the portability of universal service support. While
competition through use of the Company's network is still limited in most of its
markets, the Company will continue to witness competition from a variety of
facilities-based service providers, including wireless and cable companies.
In addition to these changes in federal regulation, all of the 21 states
in which the Company provides telephone services have taken legislative or
regulatory steps to further introduce competition into the LEC business.
As a result of these regulatory developments, incumbent LECs ("ILECs")
increasingly face competition from competitive local exchange carriers
("CLECs"), particularly in high population areas. CLECs provide competing
services through reselling the ILECs' local services, through use of the ILECs'
unbundled network elements or through their own facilities. The number of
companies which have requested authorization to provide local exchange service
in the Company's service areas has increased substantially in recent years,
especially in the Company's Verizon markets acquired in 2000, and it is
anticipated that similar action may be taken by others in the future.
In addition to facing direct competition from CLECs, ILECs increasingly
face competition from alternate communication systems constructed by long
distance carriers, large customers or alternative access vendors. These systems,
which have become more prevalent as a result of the 1996 Act, are capable of
originating or terminating calls without use of the ILECs' networks. Customers
may also use wireless or Internet voice service to bypass ILECs' switching
services. In addition, technological and regulatory developments have increased
the feasibility of competing services offered by cable television companies,
several of whom are pursuing these opportunities. Other potential sources of
competition include noncarrier systems that are capable of bypassing ILECs'
local networks, either partially or completely, through substitution of special
access for switched access or through concentration of telecommunications
traffic on a few of the ILECs' access lines. The Company anticipates that all
these trends will continue and lead to increased competition with the Company's
LECs.
Historically, wireless telephone services have complemented traditional
LEC services. However, existing and emerging wireless technologies increasingly
compete with LEC services. The Company anticipates this trend will continue,
particularly if wireless service rates continue to decline. Technological and
regulatory developments in cellular telephone, personal communications services,
digital microwave, coaxial cable, fiber optics, local multipoint distribution
services and other wired and wireless technologies are expected to further
permit the development of alternatives to traditional landline services. For
further information on certain of these developments, see "Wireless Operations -
Regulation and Competition."
Historically, ILECs earned all or substantially all of the toll revenues
associated with intra-LATA long distance calls. Principally as a result of
recent state regulatory changes, companies offering competing toll services have
emerged in the Company's local exchange markets.
To the extent that the telephone industry increasingly experiences
competition, the size and resources of each respective competitor may
increasingly influence its prospects. Many companies currently providing or
planning to provide competitive communication services have substantially
greater financial and marketing resources than the Company, and several are not
subject to the same regulatory constraints as the Company.
The Company anticipates that the traditional operations of LECs will
continue to be impacted by continued technological developments as well as
legislative and regulatory initiatives affecting the ability of LECs to provide
new services and the capability of long distance companies, CLECs, wireless
companies, cable television companies and others to provide competitive LEC
services. Competition relating to services traditionally provided solely by LECs
has thus far affected large urban areas to a greater extent than rural, suburban
and small urban areas such as those in which the Company operates. The Company
intends to actively monitor these developments, to observe the effect of
emerging competitive trends in initial competitive markets and to continue to
evaluate new business opportunities that may arise out of future technological,
legislative and regulatory developments.
The Company anticipates that regulatory changes and competitive pressures
may result in future revenue reductions in its telephone operations. However,
the Company anticipates that such reductions may be minimized by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. While the Company expects its telephone revenues to continue
to grow, its internal telephone revenue growth rate has slowed in recent years
and may continue to slow during upcoming periods.
WIRELESS OPERATIONS
At December 31, 2001, the Company had access to approximately 9.8 million
cellular pops, of which 65% were applicable to MSAs and 35% were RSA pops.
According to data derived from published sources, the Company is the eighth
largest cellular telephone company in the United States based on the Company's
9.8 million pops.
Cellular Industry
The cellular telephone industry has been in existence for over 17 years in
the United States. The industry has grown significantly during this period and
cellular service is now available in substantially all areas of the United
States. According to the Cellular Telecommunications Industry Association, at
June 30, 2001 there were estimated to be over 118 million wireless customers
across the United States.
Initially, all radio transmissions of cellular systems were conducted on
an analog basis. Technological developments involving the application of digital
radio technology offer certain advantages over analog technologies, including
expanding the capacity of mobile communications systems, improving voice
clarity, permitting the introduction of new services, and making such systems
more secure. Digital service is now available in 100% of the Company's MSA
markets and approximately 65% of its RSA markets. Approximately 33% of the
Company's cellular customers currently subscribe to digital services. As
discussed further below, several large wireless carriers have taken initial
steps to develop "next generation" technologies capable of providing enhanced
digital wireless services. For additional information, see "-Regulation and
Competition-Developments Affecting Wireless Competition."
Construction and Maintenance
The construction and maintenance of cellular systems is capital intensive.
Although the Company's MSA and RSA systems have been operational for many years,
the Company has continued to add cell sites to increase coverage, provide
additional capacity, and improve the quality of these systems. In 2001 the
Company completed construction of 72 cell sites in its majority-owned markets.
At December 31, 2001, the Company operated 739 cell sites in its majority-owned
markets.
Over the past several years the Company has upgraded most of its wireless
systems to be capable of providing digital service under the Time Division
Multiple Access ("TDMA") standard, which is one of the four primary digital
cellular standards currently used worldwide. The Company intends to continue
installing digital voice transmission facilities in other markets in 2002. See
"-Regulation and Competition-Developments Affecting Wireless Competition."
Capital expenditures related to majority-owned and operated wireless systems
totaled approximately $71.2 million in 2001. Such capital expenditures for 2002
are anticipated to be approximately $65 million.
Strategy
The Company's business development strategy for its wireless operations is
to secure operating control of service areas that are geographically clustered.
Clustered systems aid the Company's marketing efforts and provide various
operating and service advantages. Approximately 47% of the Company's customers
are in a single, contiguous cluster of eight MSAs and nine RSAs in Michigan;
another 25% are in a cluster of five MSAs and seven RSAs in northern and central
Louisiana, southern Arkansas and eastern Texas. See "-The Company's Cellular
Interests."
The Company has also traditionally targeted roaming service revenues,
which are derived from calls made in one of the Company's service areas by
customers of other cellular carriers from other service areas. In exchange for
providing roaming service to customers of other carriers, the Company has
traditionally charged premium rates to most of these other carriers, who then
frequently pass on some or all of these premium rates to their own customers.
The Company's Michigan, Louisiana and Mississippi cellular properties provide
service to various interstate highway corridors. As indicated elsewhere in Items
1 and 7 of this Report, the Company has increasingly received pressure from
other cellular operators to reduce substantially its roaming rates. See
"-Services, Customers and System Usage."
Marketing
The Company markets its wireless services through several distribution
channels, including its direct sales force, retail outlets owned by the Company
and independent agents. All sales employees and certain independent agents
solicit customers exclusively for the Company. Company sales employees are
compensated by salary and commission and independent sales agents are paid
commissions. The Company advertises its services through various means,
including direct mail, billboard, magazine, radio, television and newspaper
advertisements.
The sales and marketing costs of obtaining new subscribers include
advertising and a direct expense applicable to most new subscribers, either in
the form of a commission payment to an agent or an incentive payment to a direct
sales employee. In addition, the Company discounts the cost of cellular
telephone equipment sold to its customers, and periodically runs promotions
which waive certain fees or provide some amount of free service to new
subscribers. The average cost of acquiring each new customer ($276 in 2001)
remains one of the larger expenses in conducting the Company's wireless
operations. In recent years, the Company has sought to lower this average cost
by focusing more on its direct distribution channels. The Company opened its
first retail outlet in 1994, and currently operates 130 such outlets. During
2001, approximately 54% of new cellular customers were added through direct
distribution channels, up from 37% during 1996.
Because most of the Company's cellular markets are located in rural,
suburban or small urban areas, the Company believes that many of its customers
typically require only local or regional services. The Company lacks the
facilities and national brand name necessary to compete effectively for business
customers requiring nationwide services, and the Company does not target these
customers in its marketing campaigns. See "- Regulation and Competition."
Services, Customers and System Usage
There are a number of different types of cellular telephones, all of which
are currently compatible with cellular systems nationwide. The Company offers a
full range of vehicle-mounted, transportable, and portable cellular telephones.
The Company typically purchases cellular phones in bulk, and typically resells
them at a loss to meet competition or to stimulate sales by reducing the cost of
becoming a cellular customer.
The Company charges its subscribers for access to its systems, for minutes
of use and for enhanced services, such as voice mail. A subscriber may purchase
certain of these services separately or may purchase rate plans which bundle
these services in different ways and are designed to fit different customer
requirements. While the Company historically has typically charged its customers
separately for custom-calling features, air time in excess of the packaged
amount, and toll calls, it currently offers plans which include features such as
unlimited toll calls and unlimited nights and weekend calling in certain calling
areas. Custom-calling features provided by the Company include call-forwarding,
call-waiting, caller ID, three-way calling and no-answer transfer. The Company
also offers voice message service in certain markets and short text messaging in
markets with digital service.
Cellular customers come from a wide range of occupations and typically
include a large proportion of individuals who work outside of their office. In
recent years, the individual consumer market has generated a majority of new
customer additions. The Company's average monthly revenue (excluding equipment
sales) per customer declined to $46 in 2001 from $49 in 2000 and $53 in 1999.
Such average revenue per customer is expected to further decline (i) as
competitive pressures (including those causing further reductions in service
rates) from current and future wireless communications providers intensify and
(ii) as the Company continues to receive pressure from other cellular operators
to reduce roaming rates. See "-Regulation and Competition."
The Company has entered into "roaming agreements" nationwide with
operators of other cellular systems that permit each company's respective
customers to place or receive calls outside of their home market area. The
charge to a non-Company customer for this service has traditionally been at
premium rates, and is billed by the Company to the customer's service provider,
which then bills the customer. In most instances, based on competitive factors
and financial considerations, the Company charges an amount to its customers
that is equal to or lower than the amount actually charged by the cellular
carrier providing the roaming service. Within the past few years, several large
nationwide cellular providers have introduced rate plans that offer roaming
coverage (provided through other carriers) at the same rate as service within
the customer's home market area. To defray the cost of these plans, these
providers have exerted substantial pressure on other cellular providers,
including the Company, to reduce their roaming fees. The Company anticipates
that competitive factors and industry consolidation will continue to place
further pressure on charging premium roaming rates. For additional information
on roaming revenue, see "-Strategy."
Churn rate (the average percentage of cellular customers that terminate
service each month) is an industry-wide concern. A significant portion of the
churn in the Company's markets is due to the Company disconnecting service to
cellular customers for nonpayment of their bills. In addition, the Company faces
substantial competition from other wireless providers, including PCS providers.
The Company's average monthly churn rate, excluding prepaid customers, in its
majority-owned and operated markets was 2.33% in 2001 and 1.95% in 2000. The
Company is attempting to lower its churn rate by increasing its proactive
customer service efforts and implementing additional customer retention
programs.
Except for 2001, the Company's cellular subsidiaries have traditionally
experienced strong subscriber growth in the fourth quarter, primarily due to
holiday season sales.
The following table summarizes, among other things, certain information
about the Company's customers and market penetration:
Year ended or at December 31,
- --------------------------------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Majority-owned and operated MSA and RSA systems (Note 1):
Cellular systems operated 41 41 42
Cell sites 739 743 711
Population of systems operated (Note 2) 8,435,303 8,219,411 8,267,140
Customers (Note 3):
At beginning of period 751,200 707,486 624,290
Gross units added internally 316,353 339,247 240,084
Disconnects 270,213 284,880 146,325
Net units added internally 46,140 54,367 93,759
Effect of property dispositions - (10,653) (10,563)
At end of period 797,340 751,200 707,486
Market penetration at end of period (Note 4) 9.5% 9.1 8.6
Churn rate (Note 5) 2.33% 1.95 2.02
Average monthly revenue per customer
(excluding equipment sales) $ 46 49 53
Construction expenditures (in thousands) $ 71,212 58,468 58,760
- --------------------------------------------------------------------------------------------------------
For additional information, see "- The Company's Wireless Interests."
Notes:
1. Represents the number of systems in which the Company owned at least a
50% interest. The revenues and expenses of these markets, all of which
are operated by the Company, are included in the Company's consolidated
operating revenues and operating expenses.
2. Based on independent third-party population estimates for each
respective year.
3. Represents the approximate number of revenue-generating cellular
telephones served by the cellular systems referred to in note 1.
4. Computed by dividing the number of customers at the end of the period by
the total population of systems referred to in note 1.
5. Represents the average percentage of customers, excluding prepaid
customers, that were disconnected per month.
The Company's Wireless Interests
Cellular interests. The Company obtained the right to provide cellular
service through (i) the FCC's licensing process described below, under which it
received interests in wireline licenses, and (ii) its acquisition program, under
which it has acquired interests in both wireline and non-wireline licenses. The
table below sets forth certain information with respect to the interests in
cellular systems that the Company owned as of December 31, 2001:
The
2001 Company's
population Ownership pops at
(Note 1) percentage 12/31/01
- -------------------------------------------------------------------------
Majority-owned and operated MSAs
Pine Bluff, AR 84,238 100.00% 84,238
Texarkana, AR/TX 144,094 89.00 128,244
Alexandria, LA 146,435 100.00 146,435
Monroe, LA 147,664 87.00 128,468
Shreveport, LA 393,621 87.00 342,450
Battle Creek, MI 195,425 97.00 189,562
Benton Harbor, MI 162,564 97.00 157,687
Grand Rapids, MI 821,985 97.00 797,325
Jackson, MI 159,831 97.00 155,036
Kalamazoo, MI 317,578 97.00 308,051
Lansing-E. Lansing, MI 510,828 97.00 495,503
Muskegon, MI 198,258 97.00 192,310
Saginaw-Bay City-
Midland, MI 403,446 91.70 369,960
Biloxi-Gulfport, MS (Note 4) 249,177 96.45 240,334
Jackson, MS (Note 4) 444,847 90.22 401,333
Pascagoula, MS (Note 4) 132,646 89.20 118,324
Appleton-Oshkosh-
Neenah, WI 525,133 98.85 519,082
Eau Claire, WI 149,160 55.50 82,784
LaCrosse, WI 107,813 95.00 102,422
---------- ----------
5,294,743 4,959,548
---------- ----------
Minority-owned MSAs (Note 2)
Little Rock, AR 589,276 36.00% 212,139
Lafayette, LA 274,869 49.00 134,686
Detroit, MI 4,797,951 3.20 153,438
Flint, MI 508,544 3.20 16,263
Rochester, MN 125,624 2.81 3,530
Austin, TX 1,188,290 35.00 415,902
Dallas-Ft. Worth, TX 5,209,993 0.50 26,050
Sherman-Denison, TX 111,766 0.50 559
Madison, WI 743,317 9.78 72,689
Milwaukee, WI 2,046,433 17.96 367,601
----------- ----------
15,596,063 1,402,857
----------- ----------
Total MSAs 20,890,806 6,362,405
----------- ----------
The
2001 Company's
population Ownership pops at
(Note 1) percentage 12/31/01
- -------------------------------------------------------------------------
Operated RSAs
Arkansas 2 92,157 82.00 75,569
Arkansas 3 106,308 82.00 87,173
Arkansas 11 67,763 89.00 60,309
Arkansas 12 189,169 80.00 151,335
Louisiana 1 113,463 87.00 98,713
Louisiana 2 115,297 87.00 100,308
Louisiana 3 B2 97,933 87.00 85,202
Louisiana 4 73,009 100.00 73,009
Michigan 1 203,027 100.00 203,027
Michigan 2 115,455 100.00 115,455
Michigan 3 177,294 48.63 86,217
Michigan 4 142,573 100.00 142,573
Michigan 5 171,415 48.63 83,358
Michigan 6 150,589 98.00 147,577
Michigan 7 258,248 56.07 144,801
Michigan 8 106,803 97.00 103,599
Michigan 9 306,229 43.38 132,842
Mississippi 2 (Note 3) 260,887 100.00 260,887
Mississippi 5 (Note 3) 160,771 100.00 160,771
Mississippi 6 (Note 3) 189,816 100.00 189,816
Mississippi 7 (Note 3) 189,640 100.00 189,640
Texas 7 B6 57,827 89.00 51,466
Wisconsin 1 119,161 42.21 50,295
Wisconsin 2 86,462 99.00 85,597
Wisconsin 6 121,350 57.14 69,343
Wisconsin 7 297,526 22.70 67,544
Wisconsin 8 242,013 84.00 203,291
---------- ----------
4,212,185 3,219,717
--------- ---------
The
2001 Company's
population Ownership pops at
(Note 1) percentage 12/31/01
- -------------------------------------------------------------------------
Non-operated RSAs (Note 2)
Iowa 6 158,681 2.81 4,459
Iowa 13 66,055 2.81 1,856
Iowa 14 105,808 2.81 2,973
Iowa 15 84,042 2.81 2,362
Iowa 16 103,444 2.81 2,907
Michigan 10 139,533 26.00 36,279
Minnesota 7 174,808 2.81 4,912
Minnesota 8 67,698 2.81 1,902
Minnesota 9 133,478 2.81 3,751
Minnesota 10 241,116 2.81 6,775
Minnesota 11 213,810 2.81 6,008
Washington 5 65,020 8.47 5,508
Washington 8 139,467 7.36 10,259
Wisconsin 3 144,095 42.86 61,755
Wisconsin 4 125,177 25.00 31,294
Wisconsin 5 98,314 2.81 2,763
Wisconsin 10 131,491 22.50 29,586
------------ ----------
2,192,037 215,349
------------ ----------
Total RSAs 6,404,222 3,435,066
------------ ----------
27,295,028 9,797,471
============ ==========
Notes:
1. Based on 2001 independent third-party population estimates.
2. Markets not operated by the Company.
3. Represents a non-wireline interest. See "Regulation and Competition -
Cellular licensing and regulation."
Competitors. The number of competitors in each of the Company's operated
MSA and RSA markets range from one to eight. Such competitors include, but are
not limited to, Cingular, AT&T, Verizon, Centennial, Sprint, Nextel, Voicestream
and U. S. Cellular.
Other wireless interests. The Company owned at December 31, 2001 (i)
licenses to provide personal communications services ("PCS") representing
approximately 3.0 million pops and (ii) 36 local multi-point distribution system
("LMDS") licenses representing approximately 12.6 million pops. The Company
intends to use a portion of its LMDS licenses in connection with its new
competitive local exchange business described below under "Other Operations."
The Company is currently evaluating its options with respect to the remainder of
these licenses, some of which will lapse if not used by the Company by certain
specified dates.
Operations
A substantial number of the cellular systems in MSAs operated by the
Company are owned by limited partnerships in which the Company is a general
partner ("MSA Partnerships"). Most of these partnerships are governed by
partnership agreements with similar terms, including, among other things,
customary provisions concerning capital contributions, sharing of profits and
losses, and dissolution and termination of the partnership. Most of these
partnership agreements vest complete operational control of the partnership with
the general partner. The general partner typically has the power to manage,
supervise and conduct the affairs of the partnership, make all decisions
appropriate in connection with the business purposes of the partnership, and
incur obligations and execute agreements on behalf of the partnership. The
general partner also may make decisions regarding the time and amount of cash
contributions and distributions, and the nature, timing and extent of
construction, without the consent of the other partners. The Company owns more
than 50% of all of the MSA Partnerships that it operates.
A substantial number of the cellular systems in RSAs operated by the
Company are also owned by limited or general partnerships in which the Company
is either the general or managing partner (the "RSA Partnerships"). These
partnerships are governed by partnership agreements with varying terms and
provisions. In many of these partnerships, the noncontrolling partners have the
right to vote on major issues such as the annual budget and system design. In a
few of these partnerships, the Company's management position is for a limited
term (similar to a management contract) and the other partners in the
partnership have the right to change managers, with or without cause. The
Company owns less than 50% of some of the RSA Partnerships that it operates.
The partnership agreements for both the MSA Partnerships and RSA
Partnerships generally contain provisions granting all partners a right of first
refusal in the event a partner desires to transfer a partnership interest. This
restriction on transfer can under certain circumstances make these partnership
interests more difficult to sell to a third party.
Revenue
The following table reflects the major revenue categories for the
Company's wireless operations as a percentage of wireless operating revenues in
2001, 2000 and 1999. Virtually all of these revenues were derived from cellular
operations.
2001 2000 1999
- -------------------------------------------------------------------------------
Access fees and toll revenues 76.9% 74.2 72.2
Roaming 20.6 22.5 25.2
Equipment sales 2.5 3.3 2.6
- -------------------------------------------------------------------------------
100.0% 100.0 100.0
===============================================================================
For further information on these revenue categories, see "-Services,
Customers and System Usage."
Regulation and Competition
As discussed below, the FCC and various state public utility commissions
regulate, among other things, the licensing, construction, operation, safety,
interconnection arrangements, sale and acquisition of cellular telephone
systems.
Competition between providers of wireless communications services in each
market is conducted principally on the basis of price, services and enhancements
offered, the technical quality and coverage of the system, and the quality and
responsiveness of customer service. As discussed below, competition has
intensified in recent years in a substantial number of the Company's markets.
Under applicable law, the Company is required to permit the reselling of its
services. In certain larger markets and in certain market segments, competition
from resellers may be significant. There is also substantial competition for
sales agents. Certain of the Company's competitors have substantially greater
assets and resources than the Company.
Cellular licensing and regulation. The term "MSA" means a Metropolitan
Statistical Area for which the FCC has granted a cellular operating license. The
term "RSA" means a Rural Service Area for which the FCC has granted a cellular
operating license. During the 1980's and early 1990's, the FCC awarded two
10-year licenses to provide cellular service in each MSA and RSA market.
Initially, one license was reserved for companies offering local telephone
service in the market (the wireline carrier) and one license was available for
firms unaffiliated with the local telephone company (the non-wireline carrier).
Since mid-1986, the FCC has permitted telephone companies or their affiliates to
acquire control of non-wireline licenses in markets in which they do not hold
interests in the wireline license. The FCC has issued a decision that grants a
renewal expectancy during the license renewal period to incumbent licensees that
substantially comply with the terms and conditions of their cellular
authorizations and the FCC's regulations. The licenses for the MSA markets
operated by the Company were initially granted between 1984 and 1987, and
licenses for operated RSAs were initially granted between 1989 and 1991. Thus
far, the Company has received 10-year extensions of all of its licenses that
have become subject to renewal since their original grant dates.
The completion of an acquisition involving the transfer of control of a
cellular system requires prior FCC approval and, in certain cases, receipt of
other federal and state regulatory approvals. The acquisition of a minority
interest generally does not require FCC approval. Whenever FCC approval is
required, any interested party may file a petition to dismiss or deny the
application for approval of the proposed transfer.
In recent years, the FCC has also taken steps to (i) require certain
cellular towers and antennas to comply with radio frequency radiation
guidelines, (ii) require cellular carriers to work with public safety or law
enforcement officials to process 911 calls and conduct electronic surveillance,
(iii) enable cellular subscribers to retain, subject to certain limitations,
their existing telephone numbers when they change service providers and (iv)
implement portions of the 1996 Act. These initiatives have increased the cost of
providing cellular services.
In addition to regulation of these and other matters by the FCC, cellular
systems are subject to certain Federal Aviation Administration tower height
regulations concerning the siting and construction of cellular transmitter
towers and antennas.
Cellular operators are also subject to state and local regulation in some
instances. Although the FCC has pre-empted the states from exercising
jurisdiction in the areas of licensing, technical standards and market
structure, certain states require cellular operators to be certified. In
addition, some state authorities regulate certain aspects of a cellular
operator's business, including certain aspects of pricing, the resale of long
distance service to its customers, the technical arrangements and charges for
interconnection with the local wireline network, and the transfer of interests
in cellular systems. The siting and construction of the cellular facilities may
also be subject to state or local zoning, land use and other local regulations,
as well as the increasing possibility of local community opposition to new
towers.
Media and other reports have from time to time suggested that radio
frequency emissions from wireless handsets and base stations can cause various
health problems, and may interefere with electronic medical devices. These
concerns received increased scrutiny following (i) the June 2000 announcement
that the U.S. Food and Drug Administration had agreed to oversee a $1 million
industry-funded long-term study of handset emissions and had recommended that
users of handsets limit the length of their calls pending completion of the
study and (ii) the July 2000 adoption of a policy by the leading industry trade
group requiring handset manufacturers to disclose emission levels. Although some
preliminary research has been undertaken regarding the effects of handset
emissions, no clear conclusion has emerged to date. No assurance can be given
that future research and studies will not demonstrate a link between the radio
frequency emissions of wireless handset and base stations and health problems.
If such a link is demonstrated, the Company cannot provide assurances that
government authorities will not increase regulation of wireless handsets and
base stations or that wireless companies will not be held liable for cost or
damages associated with these concerns. Moreover, these concerns could
materially reduce demand for wireless services, including those offered by the
Company.
The state of New York and several other local communities nationwide have
enacted laws restricting or prohibiting the use of wireless phones while driving
motor vehicles, and it is likely that more state and local jurisdictions will
adopt similar laws. In addition, some studies have indicated that using wireless
phones while driving may impair drivers' attention. Laws prohibiting or
restricting the use of wireless phones while driving could reduce subscriber
usage. Additionally, concerns over the use of wireless phones while driving
could lead to potential litigation against wireless carriers.
Developments affecting wireless competition. Competition in the wireless
communications industry has increased substantially in recent years due to
continued and rapid advances in technology, the emergence of several nationwide
service providers and legislative and regulatory changes.
Several FCC initiatives over the past decade have resulted in the
allocation of additional radio spectrum or the issuance of licenses for emerging
mobile communications technologies that are competitive with the Company's
cellular and telephone operations, including PCS. Although there is no
universally recognized definition of PCS, the term is generally used to refer to
wireless services to be provided by licensees operating in the 1850 MHz to 1990
MHz radio frequency band using microcells and high-capacity digital technology.
In 1996 and early 1997 the FCC auctioned up to six PCS licenses per market. Two
30MHz frequency blocks were awarded for each of the 51 Rand McNally Major
Trading Areas ("MTAs"), while one 30MHz and three 10MHz frequency blocks were
awarded for each of the 493 Rand McNally Basic Trading Areas ("BTAs").
Additional future auctions of radio spectrum will further intensify competition.
PCS technology permits PCS operators to offer wireless voice, data, image
and multimedia services. The largest PCS providers commenced initial operations
in late 1996 and since then have aggressively expanded their operations. These
providers have initially focused on larger markets, and have generally marketed
PCS as being a competitive service to cellular. Many of these companies have
aggressively competed for customers on the basis of price, which has placed
downward pressure on cellular prices. There is at least one PCS competitor in
each of the Company's operated MSAs and some of its operated RSAs.
In addition to PCS, current and prospective users of cellular systems may
find their communication needs satisfied by other current and developing
technologies. Several years ago the FCC authorized the licensees of certain
specialized mobile radio service ("SMR") systems (which historically have
generally been used by taxicabs and tow truck operators) to configure their
systems into digital networks that operate in a manner similar to cellular
systems. Such systems are commonly referred to as enhanced specialized mobile
radio service ("ESMR") systems. FCC regulations allow up to two ESMR carriers
per market. The Company believes that ESMR systems are operating in a few of its
cellular markets. One well-established ESMR provider has constructed a
nationwide digital mobile communications system to compete with cellular
systems. Other similar communication services that have the technical capability
to handle wireless telephone calls may provide competition in certain markets,
although these services currently lack the subscriber capacity of cellular
systems. Paging or beeper services that feature text message and data display as
well as tones may be adequate for potential subscribers who do not need to
converse directly with the caller. Mobile satellite systems, in which
transmissions are between mobile units and satellites, may ultimately be
successful in obtaining market share from cellular systems that communicate
directly to land-based stations. Other future technological advances or
regulatory changes (including additional spectrum auctions) may result in other
alternatives to cellular service, thereby creating additional sources of
competition.
Several large wireless carriers have recently taken one or more of the
following steps that could impact the Company's competitive position:
o First, several large wireless carriers have merged with other companies
or formed marketing alliances or joint ventures in order to enhance
their ability to provide nationwide cellular or PCS service under a
single brand name. Although the Company believes that many of the
customers in its smaller markets require only local or regional
services, the Company believes its wireless operations have been
negatively impacted by these competitors marketing their nationwide
services in the Company's markets.
o Second, several large wireless carriers have taken steps to provide
wireless data, short messaging and other enhanced "next
generation" digital wireless services. In connection therewith,
several large domestic carriers that currently use the TDMA
standard have either announced their intention to abandon the TDMA
standard or have begun to overlay their TDMA systems with
additional network elements permitting packet data transmissions.
The Company is evaluating whether the opportunity to derive
additional revenues from these enhanced services justify the capital
costs necessary to provide these services. If the Company elects to
continue to use the TDMA standard or to forego implementation of
"next generation" technology or services, there can be no assurance
that the Company will be able to receive support from vendors or to
compete effectively against companies using different technologies
or offering more services.
Although it is uncertain how competing services and emerging "next
generation" technologies will ultimately affect the Company, the Company
anticipates that it will continue to face increased competition in its wireless
markets.
In August 2001, the Company announced that it is exploring the separation
of its wireless business from its other operations and has been in discussions
with a number of parties who have expressed interest in these operations.
OTHER OPERATIONS
The Company provides long distance, Internet access, competitive local
exchange services, broadband data, security monitoring, and other communications
and business information services in certain local and regional markets. The
results of these operations, which accounted for 8.2% and 4.0%, respectively, of
the Company's consolidated revenues and operating income during 2001, are
reflected for financial reporting purposes in the "Other operations" section.
Long distance. In 1996 the Company began marketing long distance service
in all of its equal access telephone operating areas. At December 31, 2001, the
Company provided long distance services to approximately 465,000 customers.
Approximately 76% of the Company's long distance revenues are derived from
service provided to residential customers. Although the Company owns and
operates switches in LaCrosse, Wisconsin, Shreveport, Louisiana and Grand
Rapids, Michigan which are utilized to provide long distance services, it
anticipates that most of its future long distance service revenues will be
provided by reselling service purchased from other facilities-based long
distance providers. The Company intends to continue to expand its long distance
business, principally through reselling arrangements.
Internet access. The Company began offering traditional Internet access
services to its telephone customers in 1995. In late 1999, the Company began
offering in select markets digital subscriber line ("DSL") Internet access
services, a high-speed premium-priced data service. At December 31, 2001, the
Company provided Internet access services to a total of approximately 144,800
customers, 121,500 of which receive traditional dial-up Internet service in
select markets in 16 states (which markets represent 87% of the access lines
served by the Company's LECs), and 23,300 of which receive retail DSL services
in markets that cover approximately 61% of the access lines served by the
Company's LECs.
Competitive local exchange services. In late 2000, the Company began
offering competitive local exchange telephone services, coupled with long
distance, wireless, Internet access and other Company services, to small to
medium-sized businesses in Monroe and Shreveport, Louisiana. In late 2001, the
Company began offering similar services in Grand Rapids and Lansing, Michigan.
On February 28, 2002, the Company purchased the fiber network and customer base
of KMC Telecom's operations in Monroe and Shreveport, Louisiana, which will
allow the Company to offer broadband services to customers in these markets.
Broadband data. In connection with its long-range plans to sell capacity
to other carriers in or near certain of its select markets, the Company began
providing service in the second quarter of 2001 to customers over a recently
constructed 700-mile fiber optic ring connecting several communities in southern
and central Michigan.
Security monitoring. The Company offers 24-hour burglary and fire
monitoring services to approximately 7,950 customers in select markets in
Louisiana, Arkansas, Mississippi, Texas and Ohio.
Other. The Company also provides audiotext services; printing, database
management and direct mail services; and cable television services. The Company
is also in the process of developing an integrated billing and customer care
system which will enable the Company to offer customers value packaging and
produce a single bill for multiple services such as local telephone, wireless,
Internet access and long distance. From time to time the Company also makes
investments in other domestic or foreign communications companies.
Certain service subsidiaries of the Company provide installation and
maintenance services, materials and supplies, and managerial, technical,
accounting and administrative services to the telephone and wireless operating
subsidiaries. In addition, the Company provides and bills management services to
subsidiaries and in certain instances makes interest-bearing advances to finance
construction of plant, purchases of equipment or acquisitions of other
businesses. These transactions are recorded by the Company's regulated telephone
subsidiaries at their cost to the extent permitted by regulatory authorities.
Intercompany profit on transactions with regulated affiliates is limited to a
reasonable return on investment and has not been eliminated in connection with
consolidating the results of operations of CenturyTel and its subsidiaries. Such
intercompany profit is reflected in operating income in "Other operations".
FORWARD-LOOKING STATEMENTS
This report on Form 10-K and other documents filed by the Company under
the federal securities laws include, and future oral or written statements or
press releases of the Company and its management may include, certain
forward-looking statements, including without limitation statements with respect
to the Company's anticipated future operating and financial performance
(including the impact of pending acquisitions), financial position and
liquidity, growth opportunities and growth rates, business prospects, regulatory
and competitive outlook, investment and expenditure plans, investment results,
financing opportunities and sources (including the impact of financings on the
Company's financial position, financial performance or credit ratings), pricing
plans, strategic alternatives, business strategies, and other similar statements
of expectations or objectives that are highlighted by words such as "expects,"
"anticipates," "intends," "plans," "believes," "projects," "seeks," "estimates,"
"hopes," "should," and "may," and variations thereof and similar expressions.
Such forward-looking statements are inherently speculative and are based upon
several assumptions concerning future events, many of which are outside of the
Company's control. The Company's forward-looking statements, and the assumptions
upon which such statements are based, are subject to uncertainties that could
cause the Company's actual results to differ materially from such statements.
These uncertainties include but are not limited to those set forth below:
o the Company's ability to timely consummate its pending acquisitions and
effectively manage its growth, including without limitation the Company's
ability to (i) obtain financing and regulatory approvals of its pending
acquisitions on terms acceptable to the Company, (ii) integrate
newly-acquired operations into the Company's operations, (iii) attract and
retain technological, managerial and other key personnel to work at the
Company's Monroe, Louisiana headquarters or regional offices, (iv) achieve
projected economies of scale and cost savings, (v) achieve projected
growth and revenue targets developed by management in valuing
newly-acquired businesses, (vi) upgrade its billing and other information
systems and (vii) otherwise monitor its operations, costs, regulatory
compliance, and service quality and maintain other necessary internal
controls.
o the result of the Company's efforts to separate its wireless operations
from its other operations.
o the risks inherent in rapid technological change, including without
limitation (i) the lack of assurance that the Company's ongoing wireless
network improvements will be sufficient to meet or exceed the capabilities
and quality of competing networks, (ii) technological developments that
could make the Company's analog and digital wireless networks
uncompetitive or obsolete, such as the risk that the TDMA digital
technology used by the Company will be uncompetitive with existing or
future "next generation" technologies, and (iii) the risk that
technologies will not be developed or embraced by the Company on a timely
or cost-effective basis or perform according to expectations.
o the effects of ongoing changes in the regulation of the communications
industry, including without limitation (i) changes as a result of the
1996 Act and other similar federal and state legislation and federal
and state regulations enacted thereunder, (ii) greater than anticipated
interconnection requests or competition in the Company's predominately
rural local exchange telephone markets resulting therefrom, (iii) greater
than anticipated reductions in revenues received from the Universal
Service Fund or other current or future federal and state support funds
designed to compensate LECs that provide services in high-cost
markets, (iv) the final outcome of regulatory and judicial proceedings
with respect to interconnection agreements, (v) future judicial or
regulatory actions taken in response to the 1996 Act and (vi) future
legislation or regulations addressing potential concerns about radio
frequency emissions from wireless handsets and base stations, or the
potential hazards of using wireless phones while driving motor vehicles.
o the effects of greater than anticipated competition, including (i)
competition from competitive local exchange companies or wireless carriers
in the Company's local exchange markets and (ii) the inability of the
Company's wireless operations to compete against larger nationwide
wireless carriers on the basis of price, service coverage area, or product
offerings, or due to other factors, including technological obsolescence
or the lack of marketing or other resources.
o possible changes in the demand for the Company's products and services,
including without limitation (i) lower than anticipated demand for
traditional or premium telephone services or for additional access lines
per household, (ii) lower than anticipated demand for wireless telephone
services, whether caused by changes in economic conditions, technology,
competition, health concerns or otherwise, (iii) lower than anticipated
demand for the Company's DSL Internet access services, CLEC services or
broadband services and (iv) reduced demand for the Company's access or
billing and collection services.
o the Company's ability to successfully introduce new offerings on a timely
and cost-effective basis, including without limitation the Company's
ability to (i) expand successfully its long distance and Internet
offerings to new markets (including those to be acquired in connection
with future acquisitions), (ii) offer bundled service packages on terms
attractive to its customers and (iii) successfully initiate competitive
local exchange and data services in its targeted markets.
o regulatory limits on the Company's ability to change its prices for
telephone services in response to competitive pressures.
o any difficulties in the Company's ability to expand through attractively
priced acquisitions, whether caused by financing constraints, a decrease
in the pool of attractive target companies, or competition for
acquisitions from other interested buyers.
o the possibility of the need to make abrupt and potentially disruptive
changes in the Company's business strategies due to changes in
competition, regulation, technology, product acceptance or other factors.
o higher than anticipated wireless operating costs due to churn or to
fraudulent uses of the Company's networks, or lower than anticipated
wireless revenues due to reduced roaming fees.
o the lack of assurance that the Company can compete effectively against
better-capitalized competitors.
o the future applicability of SFAS 71 to the Company's telephone
subsidiaries.
o the effects of more general factors, including without limitation:
+ changes in general industry and market conditions and growth rates
+ changes in interest rates or other general national, regional or local
economic conditions
+ changes in legislation, regulation or public policy, including changes
in federal rural financing programs
+ unanticipated increases in capital, operating or administrative costs,
or the impact of new business opportunities requiring significant
up-front investments
+ the continued availability of financing in amounts, and on terms and
conditions, necessary to support the Company's operations
+ changes in the Company's relationships with vendors, or the failure
of these vendors to provide competitive products on a timely basis
+ changes in the Company's senior debt ratings
+ unfavorable outcomes of regulatory or legal proceedings, including rate
proceedings and environmental proceedings
+ losses or unfavorable returns on the Company's investments in other
communications companies
+ delays in the construction of the Company's networks
+ changes in accounting policies or practices adopted voluntarily or as
required by generally accepted accounting principles.
For additional information, see the description of the Company's business
included above, as well as Item 7 of this report. Due to these uncertainties,
you are cautioned not to place undue reliance upon the Company's forward-looking
statements, which speak only as of the date made. The Company undertakes no
obligation to update or revise any of its forward-looking statements for any
reason.
OTHER MATTERS
The Company has certain obligations based on federal, state and
local laws relating to the protection of the environment. Costs of compliance
through 2001 have not been material and the Company currently has no reason to
believe that such costs will become material.
For additional information concerning the business and properties of the
Company, see notes 2, 5, 6, 12, and 18 of Notes to Consolidated Financial
Statements set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of (i) telephone lines,
central office equipment, and land and buildings related to telephone
operations, and (ii) switching and cell site equipment related to cellular
telephone operations. As of December 31, 2001 and 2000, the Company's gross
property, plant and equipment of approximately $6.3 billion and $5.9 billion,
respectively, consisted of the following:
December 31,
- ------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------
Telephone operations
Cable and wire 47.7% 47.7
Central office 29.0 28.0
General support 5.4 5.5
Information origination/termination .7 .9
Construction in progress 1.0 2.3
Other .1 .1
- ------------------------------------------------------------------------------
83.9 84.5
- ------------------------------------------------------------------------------
Wireless operations
Cell site 6.7 6.2
General support 1.7 1.8
Construction in progress .6 .9
- ------------------------------------------------------------------------------
9.0 8.9
- ------------------------------------------------------------------------------
Other 7.1 6.6
- ------------------------------------------------------------------------------
100.0% 100.0
==============================================================================
"Cable and wire" facilities consist primarily of buried cable and aerial
cable, poles, wire, conduit and drops. "Central office equipment" consists
primarily of switching equipment, circuit equipment and related facilities.
"General support" consists primarily of land, buildings, tools, furnishings,
fixtures, motor vehicles and work equipment."Information origination/termination
equipment" consists primarily of premise equipment (private branch exchanges
and telephones) for official company use. "Cell sites" consist primarily of
radio frequency channel equipment, switching equipment and towers."Construction
in progress" includes property of the foregoing categories that has not been
placed in service because it is still under construction.
Most of the properties of the Company's telephone subsidiaries are subject
to mortgages securing the debt of such companies. The Company owns substantially
all of the central office buildings, local administrative buildings, warehouses,
and storage facilities used in its telephone operations. The Company leases most
of the offices used in its wireless operations; certain of its cell sites are
leased while most are owned by the Company. For further information on the
location and type of the Company's properties, see the descriptions of the
Company's telephone and wireless operations in Item 1.
Item 3. Legal Proceedings.
Following the Company's rejection of an acquisition proposal publicly
disclosed by Alltel Corporation ("Alltel") on August 15, 2001, the Company, in
CenturyTel, Inc. v. Alltel Corporation, filed August 17, 2001 in the United
States District Court for the Western District of Louisiana, brought an action
against Alltel, asserting various claims under the federal securities laws and
pendent claims under Louisiana law and seeking injunctive and other relief. The
Company and its directors have been named defendants in Hannahs v. CenturyTel,
Inc., et al., filed August 20, 2001 in the Fourth Judicial District Court, State
of Louisiana, which asserts breach of fiduciary duty and related claims and
seeks injunctive relief pertaining to the Company's rejection of Alltel's
acquisition proposal, as well as unspecified monetary damages. Two other similar
shareholder suits have been either voluntarily dismissed or stayed and
administratively closed. The Company believes that these shareholder suits are
without merit.
On March 13, 2002, the Arkansas Court of Appeals vacated two orders issued
by the Arkansas Public Utility Commission ("APUC") in connection with the
Company's acquisition of its Arkansas' LECs from Verizon in July 2000, and
remanded the case back to the APUC for further hearings. The Court took these
actions in response to challenges to the rates the Company has charged other
LECs for intrastate switched access service. The Company intends to move for a
rehearing of the Court's decision, and is currently evaluating the legal and
financial implications of the Court's decision.
From time to time, the Company is involved in other litigation incidental
to its business, including administrative hearings of state public utility
commissions relating primarily to rate making, actions relating to employee
claims, occasional grievance hearings before labor regulatory agencies and
miscellaneous third party tort actions. Currently, there are no material legal
proceedings of this nature.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning the Company's Executive Officers, set forth at Item
10 in Part III hereof, is incorporated in Part I of this Report by reference.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
CenturyTel's common stock is listed on the New York Stock Exchange and is
traded under the symbol CTL. The following table sets forth the high and low
sale prices, along with the quarterly dividends, for each of the quarters
indicated:
Sale prices
---------------------- Dividend per
High Low common share
---- --- ------------
2001:
First quarter $ 39.88 25.45 .0500
Second quarter $ 30.42 26.90 .0500
Third quarter $ 36.50 28.30 .0500
Fourth quarter $ 35.79 30.25 .0500
2000:
First quarter $ 47.31 32.31 .0475
Second quarter $ 40.38 24.44 .0475
Third quarter $ 32.38 25.25 .0475
Fourth quarter $ 38.50 26.81 .0475
Common stock dividends during 2001 and 2000 were paid each quarter. As of
February 28, 2002, there were approximately 5,300 stockholders of record of
CenturyTel's common stock.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial data
as of and for each of the years ended in the five-year period ended December 31,
2001:
Selected Income Statement Data
Year ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------
(Dollars, except per share amounts, and shares expressed in thousands)
Operating revenues
Telephone $ 1,505,733 1,253,969 1,126,112 1,077,343 526,428
Wireless 437,965 443,569 422,269 407,827 307,742
Other 173,771 148,388 128,288 91,915 67,351
------------------------------------------------------------------
Total operating revenues $ 2,117,469 1,845,926 1,676,669 1,577,085 901,521
==================================================================
Operating income
Telephone $ 423,420 376,290 351,559 334,604 177,782
Wireless 112,401 117,865 133,930 129,124 87,772
Other 22,098 31,258 22,580 16,083 2,216
------------------------------------------------------------------
Total operating income $ 557,919 525,413 508,069 479,811 267,770
==================================================================
Nonrecurring gains and
losses (pre-tax) $ 199,971 20,593 62,808 49,859 169,640
==================================================================
Net income $ 343,031 231,474 239,769 228,757 255,978
==================================================================
Basic earnings per share $ 2.43 1.65 1.72 1.67 1.89
==================================================================
Diluted earnings per share $ 2.41 1.63 1.70 1.64 1.87
==================================================================
Dividends per common share $ .200 .190 .180 .173 .164
==================================================================
Average basic shares outstanding 140,743 140,069 138,848 137,010 134,984
==================================================================
Average diluted shares
outstanding 142,307 141,864 141,432 140,105 137,412
==================================================================
Selected Balance Sheet Data
December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------------
(Dollars in thousands)
Net property, plant and
equipment $ 2,999,563 2,959,293 2,256,458 2,351,453 2,258,563
Excess cost of net assets
acquired, net $ 2,471,484 2,509,033 1,644,884 1,956,701 1,767,352
Total assets $ 6,318,684 6,393,290 4,705,407 4,935,455 4,709,401
Long-term debt $ 2,087,500 3,050,292 2,078,311 2,558,000 2,609,541
Stockholders' equity $ 2,337,380 2,032,079 1,847,992 1,531,482 1,300,272
------------------------------------------------------------------------
The following table presents certain selected consolidated operating data
as of the end of each of the years in the five-year period ended December 31,
2001:
Year ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------------
Telephone access lines 1,797,643 1,800,565 1,272,867 1,346,567 1,203,650
Wireless units in service in
majority-owned markets 797,340 751,200 707,486 624,290 569,983
Long distance customers 465,872 363,307 303,722 226,730 171,962
-----------------------------------------------------------------------
See Items 1 and 2 in Part I, Item 7 in Part II and notes 1, 2 and 6 of
Notes to Consolidated Financial Statements set forth in Item 8 elsewhere herein
for additional information.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Overview
CenturyTel, Inc. and its subsidiaries (the "Company") is a regional
integrated communications company engaged primarily in providing local exchange,
wireless, long distance, Internet access and data services to customers in 21
states.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related local exchange assets
in Arkansas, Missouri and Wisconsin from affiliates of Verizon Communications
Inc. ("Verizon") for an aggregate of approximately $1.5 billion cash. The
operations of these acquired properties are included in the Company's results of
operations beginning on the respective dates of acquisition. See Acquisitions
and Note 2 of Notes to Consolidated Financial Statements for additional
information.
On May 14, 1999, the Company sold substantially all of its Alaska-based
operations serving approximately 134,900 telephone access lines and 3,000
cellular subscribers. On June 1, 1999, the Company sold the assets of its
Brownsville and McAllen, Texas cellular operations serving approximately 7,500
cellular subscribers. In February 2000, the Company sold the assets of its
remaining Alaska cellular operations serving approximately 10,600 cellular
subscribers. The operations of these disposed properties are included in the
Company's results of operations up to the respective dates of disposition.
During the three years ended December 31, 2001, the Company has acquired
and sold various other operations, the impact of which has not been material to
the financial position or results of operations of the Company.
The net income of the Company for 2001 was $343.0 million, compared to
$231.5 million during 2000 and $239.8 million during 1999. Diluted earnings per
share for 2001 were $2.41 compared to $1.63 in 2000 and $1.70 in 1999.
Year ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 423,420 376,290 351,559
Wireless 112,401 117,865 133,930
Other 22,098 31,258 22,580
- -------------------------------------------------------------------------------------------------
557,919 525,413 508,069
Nonrecurring gains and losses, net 199,971 20,593 62,808
Interest expense (225,523) (183,302) (150,557)
Income from unconsolidated cellular entities 27,460 26,986 27,675
Minority interest (11,812) (10,201) (27,913)
Other income and expense 5,041 6,696 9,190
Income tax expense (210,025) (154,711) (189,503)
- -------------------------------------------------------------------------------------------------
Net income $ 343,031 231,474 239,769
=================================================================================================
Basic earnings per share $ 2.43 1.65 1.72
=================================================================================================
Diluted earnings per share $ 2.41 1.63 1.70
=================================================================================================
Average basic shares outstanding 140,743 140,069 138,848
=================================================================================================
Average diluted shares outstanding 142,307 141,864 141,432
=================================================================================================
During the three years ended December 31, 2001, the Company has recorded
certain nonrecurring items. Net income (and diluted earnings per share)
excluding nonrecurring items for 2001, 2000 and 1999 was $225.7 million ($1.59),
$228.8 million ($1.61), and $238.3 million ($1.69), respectively. The following
reconciliation table shows how the amounts of various line items reported under
generally accepted accounting principles were impacted by these nonrecurring
items.
Year ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, in thousands)
Operating income, as reported $ 557,919 525,413 508,069
Less: Nonrecurring operating expenses (1) (2,000) (504) (2,749)
- ---------------------------------------------------------------------------------------------------------
Operating income, excluding nonrecurring items $ 559,919 525,917 510,818
=========================================================================================================
Nonrecurring gains and losses, net, as reported $ 199,971 20,593 62,808
Less nonrecurri