UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest
event reported):
August 31, 2002
CenturyTel, Inc.
(Exact name of registrant as specified in its charter)
Louisiana 1-7784 72-0651161
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification No.)
incorporation)
100 CenturyTel Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (318) 388-9000
Item 5. OTHER EVENTS AND FD DISCLOSURE.
The information set forth below supplements and updates information
previously reported by CenturyTel, Inc. (the "Company") concerning the
disposition of its wireless operations and its acquisition of telephone
properties during the third quarter of 2002.
Wireless Disposition
On August 1, 2002, the Company completed the sale of substantially all of
its wireless operations to an affiliate of ALLTEL Corporation ("Alltel"). The
Company agreed on March 19, 2002 to sell its wireless operations to Alltel for
$1.65 billion in cash. Due to a cross-ownership restriction that precluded the
sale of one minority-owned market, the Company received approximately $1.593
billion in connection with the transaction (which the Company expects to be
$1.268 billion after-tax). Alltel has agreed to purchase this minority interest
from the Company for approximately $68 million if, among other things, the
Federal Communications Commission waives the cross-ownership restriction prior
to February 1, 2003. No assurance can be given that this sale will occur. See
the Company's Current Report on Form 8-K dated August 1, 2002 and filed August
13, 2002 for additional information concerning this transaction.
The Company used a portion of the proceeds received from the sale of its
wireless operations to finance the $1.177 billion acquisition of access lines in
the state of Missouri from Verizon Communications, Inc. ("Verizon") on August
31, 2002, as discussed further below.
Verizon Acquisitions
On July 1, 2002, an affiliate of the Company purchased from affiliates of
Verizon assets comprising all of Verizon's local exchange telephone operations
in the state of Alabama for approximately $1.020 billion cash. See the Company's
Current Report on Form 8-K dated July 1, 2002 and filed July 15, 2002 for
additional information concerning this transaction.
On August 31, 2002, an affiliate of the Company purchased from affiliates
of Verizon assets comprising all of Verizon's local exchange telephone
operations in the state of Missouri for approximately $1.177 billion cash. The
assets purchased include (i) all telephone access lines (which numbered
approximately 354,000 at the time of purchase) and related property and
equipment comprising Verizon's local exchange operations in 98 exchanges in
predominantly rural markets throughout Missouri, several of which are adjacent
to properties that the Company has owned and operated since 2000, (ii) Verizon's
assets used to provide digital subscriber line ("DSL") and other high speed data
services within the purchased exchanges and (iii) approximately 1,400 route
miles of fiber optic cable within the purchased exchanges. The acquired assets
do not include Verizon's cellular, PCS, long distance, dial-up Internet, or
directory publishing operations, or rights under various Verizon contracts,
including those relating to customer premise equipment. The Company did not
assume any liabilities of Verizon other than (i) those associated with
contracts, facilities and certain other assets transferred in connection with
the purchase and (ii) certain employee-related liabilities, including
liabilities for post-retirement health benefits.
Item 7. Financial Statements and Exhibits
(a) Financial statements of properties acquired
Verizon's Alabama Operations
1. Report of Independent Auditors.
2. Statements of Selected Assets, Selected Liabilities and
Parent Funding as of June 30, 2002 and December 31, 2001.
3. Statements of Income for the six months ended June 30,
2002 and 2001 and the year ended December 31, 2001.
4. Statements of Parent Funding for the six months ended
June 30, 2002 and the year ended December 31, 2001.
5. Statements of Cash Flows for the six months ended June 30,
2002 and 2001 and the year ended December 31, 2001.
6. Notes to Financial Statements.
Verizon's Missouri Operations
7. Report of Independent Auditors.
8. Statements of Selected Assets, Selected Liabilities and
Parent Funding as of June 30, 2002 and December 31, 2001.
9. Statements of Income for the six months ended June 30, 2002
and 2001 and the year ended December 31, 2001.
10. Statements of Parent Funding for the six months ended June
30, 2002 and the year ended December 31, 2001.
11. Statements of Cash Flows for the six months ended June 30,
2002 and 2001 and the year ended December 31, 2001.
12. Notes to Financial Statements.
(b) Unaudited Pro Forma Consolidated Condensed Financial Information
1. Introduction.
2. Pro Forma Consolidated Condensed Statement of Income for the
year ended December 31, 2001.
3. Pro Forma Consolidated Condensed Statement of Income for the
six months ended June 30, 2002.
4. Pro Forma Consolidated Condensed Balance Sheet as of June
30, 2002.
5. Notes to Unaudited Pro Forma Consolidated Condensed Financial
Information.
(c) Exhibits
2.1(a) Stock Purchase Agreement, dated March 19, 2002, between
CenturyTel, Inc. and Alltel Communications, Inc. (incorporated
by reference to Registrant's Current Report on Form 8-K filed
March 22, 2002).
2.1(b) Amendment No. 1 to Stock Purchase Agreement, dated July 31,
2002, between CenturyTel, Inc. and Alltel Communications,
Inc., (incorporated by reference to Registrant's Current
Report on Form 8-K and Form 8-K/A filed August 13, 2002).
2.1(c) Asset Purchase Agreement, dated as of October 22, 2001, between
GTE Midwest Incorporated (d/b/a Verizon Midwest) and CenturyTel
of Missouri, LLC (incorporated by reference to Exhibit 2(a) of
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001.)
2.1(d) Asset Purchase Agreement, dated as of October 22, 2001, between
Verizon South, Inc., Contel of the South, Inc. (d/b/a Verizon
Mid-States) and CenturyTel of Alabama, LLC (incorporated by
reference to Exhibit 2(b) of Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001).
99.1 Press release, dated September 3, 2002, announcing the Company's
purchase of telephone properties in Missouri.
In connection with the preparation of the special purpose financial
statements presented below, Verizon made numerous assumptions and allocations
where specific data was not available pertaining to the acquired assets. Because
of the significant amount of allocations and estimates used to prepare these
special purpose financial statements and because the Company will operate these
assets under a different operating and management structure, they may not
reflect the financial position and results of operations of the acquired
properties after such properties are acquired by the Company.
FINANCIAL STATEMENTS
Verizon's Alabama Operations
For the Six Months ended June 30, 2002 and 2001
and Year ended December 31, 2001
Contents
Report of Independent Auditors
Financial Statements
Statements of Selected Assets, Selected Liabilities
and Parent Funding
Statements of Income
Statements of Parent Funding
Statements of Cash Flows
Notes to Financial Statements
Report of Independent Auditors
The Board of Directors and Shareowners
Verizon South Inc.
and
Contel of the South, Inc.
We have audited the accompanying special-purpose statement of selected assets,
selected liabilities and parent funding of Verizon's Alabama Operations (the
Exchanges), a combination of carved-out components of Verizon South Inc. and
Contel of the South, Inc. (together, the Companies) as of December 31, 2001, and
the related statements of income, parent funding and cash flows for the year
then ended. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As described in Note 2, the accompanying special-purpose financial statements
were prepared for inclusion in CenturyTel, Inc.'s (CenturyTel) Form 8-K for
purposes of complying with the rules and regulations of the Securities and
Exchange Commission as required by Rule 3-05 of Regulation S-X in connection
with an asset purchase agreement between CenturyTel of Alabama L.L.C., a wholly
owned subsidiary of CenturyTel and the Companies. The financial statements
include allocations of certain indirectly attributable amounts on bases
determined by management of the Companies.
In our opinion, the special-purpose financial statements referred to above
present fairly, in all material respects, the selected assets, selected
liabilities and parent funding of Verizon's Alabama Operations as of December
31, 2001, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
April 24, 2002, except for Note 1,
as to which the date is July 1, 2002
Verizon's Alabama Operations
Statements of Selected Assets, Selected Liabilities and Parent Funding
(Dollars in Thousands)
June 30, 2002 December 31, 2001
------------------ -------------------
(Unaudited) (Audited)
Selected Assets
Current assets:
Accounts receivable, net of allowance of
$4,729 and $5,590, respectively $ 34,449 $ 40,574
Materials and supplies 896 876
Prepaid expenses 2,116 5,397
Deferred activation charges - current 4,210 4,385
------------------ -------------------
Total current assets 41,671 51,232
Property, plant and equipment, net 249,841 243,235
Prepaid pension asset 35,014 33,273
Deferred activation charges - noncurrent 8,657 8,428
Other assets - 34
------------------ -------------------
Total selected assets $ 335,183 $ 336,202
================== ===================
Selected Liabilities and Parent Funding
Current liabilities:
Accounts payable $ 4,362 $ 6,533
Advance billings and customer deposits 6,631 7,076
Accrued payroll-related costs 4,713 7,772
Deferred activation revenues - current 4,210 4,385
Other current liabilities 14,069 12,208
------------------ -------------------
Total current liabilities 33,985 37,974
Employee benefit obligations 28,788 28,384
Deferred activation revenues - noncurrent 8,657 8,428
Other liabilities 245 649
------------------ -------------------
Total selected liabilities 71,675 75,435
Parent funding 263,508 260,767
------------------ -------------------
Total selected liabilities and parent funding $ 335,183 $ 336,202
================== ===================
See accompanying notes.
Verizon's Alabama Operations
Statements of Income
(Dollars in Thousands)
Year ended
Six Months ended June 30 December 31
2002 2001 2001
---------------------------------------- ------------------
(Unaudited) (Audited)
Operating Revenues
Local services $ 71,798 $ 70,902 $ 143,612
Network access services 43,576 47,468 90,952
Long-distance services 2,570 3,457 6,623
Other services 7,044 8,335 15,054
--------------------- ------------------ ------------------
Total operating revenues 124,988 130,162 256,241
Operating Expenses
Cost of services 29,461 35,706 70,874
Selling, general and administrative 16,829 18,731 37,816
Depreciation and amortization 18,028 17,976 36,542
--------------------- ------------------ ------------------
Total operating expenses 64,318 72,413 145,232
--------------------- ------------------ ------------------
Operating income 60,670 457,749 111,009
Interest expense, net 5,020 4,446 9,504
Other (income) expense (19) (54) 837
--------------------- ------------------ ------------------
Income before income taxes 55,669 53,357 100,668
Income taxes 21,773 21,149 39,892
--------------------- ------------------ ------------------
Net income $ 33,896 $ 32,208 $ 60,776
===================== ================== ==================
See accompanying notes.
Verizon's Alabama Operations
Statements of Parent Funding
(Dollars in Thousands)
For the Six Months ended June 30, 2002
and the Year ended December 31, 2001
Balance at December 31, 2000 $ 235,211
Net income (audited) 60,776
Net transfers to GTE Corporation (audited) (35,220)
------------
Balance at December 31, 2001 (audited) 260,767
Net income (unaudited) 33,896
Net transfers to GTE Corporation (unaudited) (31,155)
------------
Balance at June 30, 2002 (unaudited) $ 263,508
============
See accompanying notes.
Verizon's Alabama Operations
Statements of Cash Flows
(Dollars in Thousands)
Year ended
Six Months ended June 30 December 31
2002 2001 2001
-------------------------------- ----------------
(Unaudited) (Audited)
Operating Activities
Net income $ 33,896 $ 32,208 $ 60,776
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,029 17,976 36,542
Provision for uncollectible accounts 3,655 2,916 5,774
Employee benefit obligations (1,337) (1,139) (2,045)
Changes in current assets and current
liabilities:
Accounts receivable 2,470 (4,535) (11,579)
Other current assets 3,261 1,958 (1,442)
Current liabilities (5,675) (4,978) 4,921
Other, net 1,491 4,158 (992)
-------------------------------- ----------------
Net cash provided by operating activities 55,790 48,564 91,955
Investing Activities
Capital expenditures (24,635) (26,346) (56,735)
-------------------------------- ----------------
Cash used in investing activities (24,635) (26,346) (56,735)
Financing Activities
Net transfers to GTE Corporation (31,155) (22,218) (35,220)
-------------------------------- ----------------
Cash used in financing activities (31,155) (22,218) (35,220)
-------------------------------- ----------------
Net change in cash during the period - - -
Cash at beginning of period - - -
-------------------------------- ----------------
Cash at end of period $ - $ - $ -
================================ ================
See accompanying notes.
Verizon's Alabama Operations
Notes to Financial Statements
1. Description of Business
The selected local telephone exchanges (the Exchanges) included in these
special-purpose financial statements serve approximately 304,000 switched access
lines in the state of Alabama. The Exchanges represent approximately 8% and 65%,
respectively, of the switched access lines in service for Verizon South Inc. and
Contel of the South, Inc. (together, the Companies) and, on a combined basis,
13% of the Companies' total access lines. The Companies are wholly owned
subsidiaries of GTE Corporation (GTE), which is a wholly owned subsidiary of
Verizon Communications Inc. (Verizon).
The Companies provide two basic types of telecommunications services:
Exchange telecommunication service is the transmission of telecommunications
among customers located within a local calling area within a LATA. Examples of
exchange telecommunications services include switched local residential and
business services, local private line voice and data services and Centrex
services. The Companies also provide toll services within a LATA (intraLATA long
distance).
Exchange access service links a customer's premises and the transmission
facilities of other telecommunications carriers, generally interLATA carriers.
Examples of exchange access services include switched access and special access
services.
The communications services provided by the Companies are subject to regulation
by the state regulatory commission of Alabama with respect to intrastate rates
and services and certain other matters. The Federal Communications Commission
(FCC) regulates rates that the Companies charge long-distance carriers and
end-user subscribers for interstate access rates.
On October 22, 2001, the Companies entered into an asset purchase agreement with
CenturyTel of Alabama L.L.C., a wholly owned subsidiary of CenturyTel, Inc.
(CenturyTel), to sell all in-franchise switched access lines in the state of
Alabama to CenturyTel. The transaction closed on July 1, 2002.
2. Basis of Presentation
Historically, financial statements have not been prepared for the Exchanges, as
they have no separate legal status or existence. The accompanying
special-purpose financial statements have been prepared to present the statement
of selected assets, selected liabilities and parent funding and statements of
income and cash flows of the Exchanges for inclusion in CenturyTel's Form 8-K
for purposes of complying with the rules and regulations of the Securities and
Exchange Commission as required by Rule 3-05 of Regulation S-X for the
transaction between CenturyTel and the Companies. The accompanying
special-purpose financial statements have been prepared in accordance with
accounting principles generally accepted in the United States using
exchange-specific information where available (most revenue and property, plant
and equipment (PP&E) related accounts) and allocations where data is not
maintained on an exchange-specific basis within the Companies' books and records
(most operating expenses, assets other than PP&E, and liabilities). Because of
the significant amount of allocations and estimates used to prepare these
financial statements, they may not reflect the financial position or results of
operations of the Exchanges after the sale to CenturyTel.
The unaudited interim financial information presented herein has been prepared
according to accounting principles generally accepted in the United States. In
management's opinion, the information presented herein reflects all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
interim selected assets, selected liabilities and parent funding, and results of
operations and cash flows of Verizon's Alabama Operations. The results for the
interim periods are not necessarily indicative of the results for the full year.
The accompanying special-purpose financial statements include only those assets,
liabilities and related operations of the Exchanges as historically incurred by
the Companies and exclude all other assets, liabilities and operations of the
Companies, specifically, affiliate accounts, cash, debt, accrued interest, and
tax-related balance sheet accounts. These special-purpose financial statements
also include the assets, liabilities and expenses related to employees who
support the Exchanges, some of which are expected to remain employees of the
Companies following the sale of the Exchanges.
Receivables related to end-user billings and operating revenues were identified
by exchange using applicable billing system data. Receivables related to carrier
and other miscellaneous billings were allocated to the Exchanges in proportion
to carrier revenues.
Accounts payable were allocated to the Exchanges based on operating expenses and
capital expenditures. Customer advances and deposits were allocated to the
Exchanges based on total revenue. Accrued payroll costs were allocated to the
Exchanges based on employee head count. Other current liabilities and other
liabilities were allocated to the Exchanges based on access line count.
The Exchanges' operating expenses include both amounts incurred within their
operating territories that relate directly to their exchanges (the Direct
Expenses) and amounts incurred in centralized Verizon service centers that
support multiple Verizon companies (the Indirect Expenses). The Direct Expenses
generally correspond with locally performed functions, which are likely to
transfer to the buyer of the Exchanges. The Indirect Expenses correspond to
substantial back-office support and overhead functions, which are not likely to
transfer to the buyer, but that the buyer will need to replace in some form in
order to operate the Exchanges. The Indirect Expenses have been allocated to the
Companies and further to specific exchanges within the Companies (including the
Exchanges) based on estimates of usage or benefits received from such services.
The level of allocated Indirect Expenses may not be representative of the
buyer's ongoing expenses for these functions. Depreciation and amortization were
calculated by using the related property, plant and equipment data.
Management believes the allocations used to determine selected amounts in the
financial statements are appropriate methods to reasonably reflect the related
income or expense of the Exchanges.
3. Summary of Significant Accounting Policies and Other Disclosures
The notes to the financial statements that follow contain limited disclosure
data where it can be reasonably estimated for the Exchanges.
Revenue Recognition
Service revenues are recognized based on usage of local exchange networks and
facilities and contract fees. The Exchanges recognize product and other service
revenues when services are provided in accordance with contract terms and when
products are delivered and accepted by the customers.
The Companies adopted the provisions of the Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, effective January 1, 2000, as required by the SEC. As a result of
the adoption of SAB No. 101, the Companies defer nonrecurring service activation
revenues and costs and amortize them over the expected term of the customer
relationship. The deferred costs are equal to the activation fee revenue and any
excess cost is expensed immediately. The deferred costs represent direct costs
associated with certain nonrecurring fees, such as service activation and
installation fees.
Maintenance and Repairs
The cost of maintenance and repairs, including the cost of replacing minor items
not constituting substantial betterments, is charged to cost of services as
these costs are incurred.
Materials and Supplies
Included in materials and supplies are new and reusable materials, which are
stated principally at average original cost, except that specific costs are used
in the case of large individual items.
Long-Lived Assets
The Companies assess the impairment of long-lived assets under Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. A determination of impairment, if any, is made based on estimates
of future cash flows. (See Recent Accounting Pronouncements - Impairment or
Disposal of Long-Lived Assets below.)
Plant and Depreciation
Property, plant and equipment are recorded at cost. Depreciation expense is
principally based on the composite group remaining life method and straight-line
composite rates. This method provides for the recognition of the cost of the
remaining net investment in telephone plant, less anticipated net salvage value,
over remaining economic asset lives. This method requires the periodic review
and revision of depreciation rates. The asset lives used are as follows:
Average Lives
----------------
(In Years)
Buildings 30-35
Central office equipment 5-10
Outside communications plant 15-50
Furniture, vehicles and other equipment 3-15
When depreciable telephone plant is replaced or retired in the normal course of
business, the carrying amount of such plant is deducted from the respective
accounts and accumulated depreciation is charged.
Interest associated with the acquisition or construction of plant assets is
capitalized. Capitalized interest is reported as a cost of plant and a reduction
in interest expense. The Companies capitalized $1,756,000 of interest costs for
the year ended December 31, 2001.
Computer Software Costs
The Companies capitalize the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position (SOP) No.
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Subsequent additions, modifications or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Also, interest
associated with the development of internal-use software is capitalized.
Capitalized computer software costs are amortized using the straight-line
method over a period of three to seven years.
Income Taxes
Verizon and its domestic subsidiaries, including the Companies, file a
consolidated federal income tax return. The Companies participate in a
tax-sharing agreement with Verizon and remit tax payments to Verizon based on
their respective tax liability on a separate company basis.
The Exchanges are not taxable entities. The Exchanges' operating results are
included within the Companies for income tax purposes. Although the Exchanges
contribute significant plant-related temporary differences (including investment
tax credits) to the Companies' deferred tax balances, the Companies do not
allocate income tax expense, income tax payables or deferred income taxes to the
Exchanges. Deferred tax assets or liabilities are included in parent funding
within these special-purpose financial statements. The provision for income
taxes included in the accompanying statement of income for the year ended
December 31, 2001 was calculated based on the income before income taxes of the
Exchanges and the Companies' effective tax rates adjusted for permanent
differences not attributable to the Exchanges. The primary difference between
the effective income tax rate and the statutory federal income tax rate is state
income taxes, net of federal tax benefits.
Advertising Costs
The Companies expense advertising costs as they are incurred. The Companies
incurred $6.6 million in advertising costs in 2001. Based on the number of
access lines, the allocated advertising costs for the Exchanges were
approximately $0.9 million for 2001.
Employee Benefit Plans
The Companies participate in the Verizon benefit plans. Under these plans,
pension and postretirement healthcare and life insurance benefits earned during
the year, as well as interest on projected benefit obligations, are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive the benefits.
Comprehensive Income
The Companies had no other comprehensive income components for the year ended
December 31, 2001 or for the six months ended June 30, 2002 and 2001; therefore,
the Companies' and the Exchanges' comprehensive income is the same as net
income.
Derivative Instruments
Effective January 1, 2001, the Companies adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133
requires that all derivatives, including derivatives embedded in other financial
instruments, be measured at fair value and recognized as either assets or
liabilities on the Companies' balance sheets. Changes in the fair values of
derivatives not qualifying as hedges under SFAS No. 133 and any ineffective
portion of hedges are recognized in earnings in the current period. Changes in
the fair values of derivative instruments used effectively as fair value hedges
are recognized in earnings, along with changes in the fair value of the hedged
item. Changes in the fair value of the effective portions of cash flow hedges
are reported in other comprehensive income, and recognized in earnings when the
hedged item is recognized in earnings. The Companies had no derivative
instruments as of December 31, 2001 or June 30, 2002 and 2001.
Recent Accounting Pronouncements
Business Combinations
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, which applies to business combinations occurring
after June 30, 2001. SFAS No. 141 requires that the purchase method of
accounting be used and includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in the combination.
Goodwill and Other Intangible Assets
Effective January 1, 2002, the Companies adopted SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 no longer permits the amortization of
goodwill and indefinite-lived intangible assets. Instead, these assets must be
reviewed annually (or more frequently under certain conditions) for impairment
in accordance with this statement. This impairment test uses a fair value
approach rather than the undiscounted cash flows approach previously required by
SFAS No. 121. The goodwill impairment test under SFAS No. 142 requires a
two-step approach, which is performed at the reporting unit level, as defined in
SFAS No. 142. Step one identifies potential impairments by comparing the fair
value of the reporting unit to its carrying amount. Step two, which is only
performed if there is a potential impairment, compares the carrying amount of
the reporting unit's goodwill to its implied value, as defined in SFAS No. 142.
If the carrying amount of the reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized for an amount equal to
that excess. Intangible assets that do not have indefinite lives will continue
to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The adoption of SFAS No. 142 did not impact the results of
operations or statement of selected assets, selected liabilities and parent
funding because the Companies had no goodwill or other intangible assets as of
January 1, 2002.
Impairment or Disposal of Long-Lived Assets
Effective January 1, 2002, the Companies adopted SFAS No. 144. This standard
supersedes SFAS No. 121 and the provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, with regard to reporting the effects of a disposal of a segment of
a business. SFAS No. 144 establishes a single accounting model for assets to be
disposed of by sale and addresses several SFAS No. 121 implementation issues.
The adoption of SFAS No. 144 did not have a material effect on the results of
operations or financial position.
Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This standard provides the accounting for the cost of legal
obligations associated with the retirement of long-lived assets. SFAS No. 143
requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
capitalize that amount as a part of the book value of the long-lived asset. That
cost is then depreciated over the remaining life of the underlying long-lived
asset. The Companies are required to adopt SFAS No. 143, effective January 1,
2003. The Companies are currently evaluating the impact this new standard will
have on their future results of operations or financial position.
4. Property, Plant and Equipment
The Companies maintain continuing property records, which identify specific
property, plant and equipment (PP&E) balances, depreciation reserves and annual
capital expenditure amounts for the Exchanges. The PP&E balance in the
accompanying statement is based on these exchange-specific amounts and does not
include any allocations of common assets utilized in providing the centralized
services described in Note 2.
PP&E of the Exchanges is summarized as follows at December 31, 2001 (dollars
in thousands):
Land $ 1,489
Buildings 38,690
Central office equipment 257,317
Outside communications plant 436,675
Furniture, vehicles and other work equipment 12,131
Other 12,183
Construction-in-progress 908
-------------
759,393
Less accumulated depreciation (516,158)
-------------
Property, plant and equipment, net $ 243,235
=============
5. Employee Benefit Plans
The Companies participate in Verizon's benefit plans. Verizon maintains
noncontributory defined benefit pension plans for substantially all employees.
The postretirement healthcare and life insurance plans for the Companies'
retirees and their dependents are both contributory and noncontributory and
include a limit on the Companies' share of cost for recent and future retirees.
The Companies also sponsor defined contribution savings plans to provide
opportunities for eligible employees to save for retirement on a tax-deferred
basis.
The structure of Verizon's benefit plans does not provide for the separate
determination of certain disclosures for the Companies or the Exchanges.
Pension Plans
The Companies participate in noncontributory defined benefit pension plans
sponsored by Verizon covering substantially all employees. The benefits to be
paid under these plans are generally based on years of credited service and
average final earnings. Verizon's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plans' benefit obligation to employees upon their retirement. The Verizon plans
are currently funded at levels in excess of projected benefit obligations. The
assets of the plans consist primarily of corporate equities, government
securities and corporate debt securities.
The Exchanges' net periodic benefit credit was $3.8 million for 2001. The net
periodic benefit credit for the Exchanges was based on an allocation of the
Companies' net periodic benefit credit. The allocations were based on the
relative number of active employees of the Exchanges and retired employees of
the Companies who were previously involved in the operations of the Exchanges to
the Companies' total active and retired employee participants of the plans.
The prepaid pension asset shown on the accompanying financial statements
represents an allocation of the Companies' net prepaid pension cost. The
allocation was based on the relative number of active employees of the Exchanges
and retired employees of the Companies who were previously directly involved in
the operations of the Exchanges to the Companies' total active and retired
employee participants of the plans.
The significant weighted-average assumptions used by Verizon for the pension
measurements were as follows at December 31, 2001:
Discount rate 7.25%
Rate of compensation increase 5.00
Long-term rate of return on plan assets 9.25
Postretirement Benefits Other than Pensions
Substantially all of the Companies' employees are covered under postretirement
healthcare and life insurance benefit plans sponsored by Verizon. The
determination of benefit cost for postretirement health plans is generally based
on comprehensive hospital, medical and surgical benefit plan provisions. The
Companies intend to fund amounts for postretirement benefits as deemed
appropriate.
The Exchanges' postretirement benefit cost was $2.2 million for 2001. The
postretirement cost for the Exchanges was based on an allocation of the
Companies' net postretirement benefit cost. The allocation was based on the
relative number of active employees of the Exchanges and retired employees of
the Companies who were previously involved in the operations of the Exchanges to
the Companies' total active and retired employee participants of the plans.
The employee benefit obligations shown in the accompanying financial statements
represent an allocation of the Companies' actuarially determined postretirement
healthcare and life insurance benefit liabilities. The allocation was based on
the relative number of active employees of the Exchanges and retired employees
of the Companies who were previously involved in the operations of the Exchanges
to the Companies' total active and retired employee participants of the plans.
The weighted-average assumptions used by Verizon in the actuarial computations
for healthcare and life benefits were as follows at December 31, 2001:
Discount rate 7.25%
Long-term rate of return on plan assets 8.00
Medical cost trend rate at end of year 10.00
Ultimate (year 2005) 5.00
Savings Plans and Employee Stock Ownership Plans
Substantially all of the Companies' employees are eligible to participate in
savings plans maintained by Verizon. Verizon maintains a leveraged employee
stock ownership plan (ESOP) for its management employees of the former GTE
subsidiaries. Under this plan, a certain percentage of eligible employee
contributions is matched with shares of Verizon's common stock. Verizon
recognizes leveraged ESOP cost based on the modified shares allocated method for
this leveraged ESOP that held shares before December 31, 1989. The Companies
recognize savings plans costs based on their matching obligation attributed to
their participating management employees. In addition to the ESOP, Verizon also
maintains a savings plan for nonmanagement employees. Matching contributions
attributable to the Exchanges' employees were included as general and
administrative expenses in these special-purpose financial statements. The
Exchanges' total savings plans costs, based on an allocation of the Exchanges'
employees to the Companies' total employees, were approximately $726,000 in
2001.
6. Parent Funding and Interest Expense
For purposes of these statements, all funding requirements have been summarized
as "parent funding" without regard to whether the funding represents debt or
equity. No specific debt instruments can be directly associated with the
Exchanges, nor are separate equity accounts maintained. As such, interest
expense, net of interest income, of the Companies for the year ended December
31, 2001 and the six months ended June 30, 2002 and 2001 was allocated to the
Exchanges and shown in the accompanying statements of income based on the
relative percentage of the Exchanges' parent funding to the total debt and
equity for the Companies.
7. Transactions with Affiliates
Historically, extensive transactions have occurred between the Exchanges and GTE
Communications Systems Corporation (GTE Communications Systems), Verizon
Information Services Inc., Verizon Data Services Inc., Verizon Services
(including Verizon Services Corp., Verizon Services Group, and Verizon Corporate
Services Group Inc.), GTE Funding and various other affiliates. These
transactions have included construction and maintenance services, data
processing and management services, and financing and directories agreements.
The Companies' transactions with affiliates are summarized as follows (the
respective information is not separately available for the Exchanges):
Year ended
December 31, 2001
---------------- -----------------
Contel of the Verizon South
South
----------------------------------
(Dollars in Thousands)
Operating revenues:
Verizon Information Services Inc. $ 10 $ 1,100
Other revenue from affiliates 21,284 66,400
---------------- -----------------
21,294 67,500
Operating expenses:
GTE Communications Systems 11,186 15,100
Verizon Information Services Inc. 143 4,200
Verizon Data Services Inc. 4,538 61,200
Verizon Services 9,501 122,100
Other - 200
---------------- -----------------
25,368 202,800
Other income:
Equity loss from Ventures III - (9,300)
Interest expense (income), net:
Interest expense (income) to GTE, net 3,178 (300)
Plant, property and equipment:
Purchases from GTE Communications Systems 55 44,700
Transfer of advanced data assets from Ventures III - 4,000
---------------- -----------------
55 48,700
GTE Communications Systems (100% owned by Verizon) provides construction and
maintenance equipment, supplies and electronic repair services to the Companies.
Such purchases and services are recorded at the lower of cost, including a
return realized by GTE Communications Systems, or fair market value.
The Companies have an agreement to provide subscriber lists, billing and
collection and other services to Verizon Information Services Inc. (Directories)
(100% owned by Verizon). Directories bills the Exchanges for printing and other
costs associated with regulatory requirements included in the telephone
directories, including the cost of any Extended Area Service sections in the
directories. Directories also bills the Exchanges for any advertising it places
in the telephone directories. The amounts charged to the Companies for these
transactions are based on fair market value.
Verizon Data Services Inc. provides data processing services, software
application development and maintenance, which generally benefit Verizon's
operating telephone subsidiaries, including the Companies. The amounts charged
to the Companies for these affiliated transactions are based on proportional
cost allocation methodologies.
The Companies have contractual arrangements with Verizon Services Inc. for the
provision of various centralized services. These services are divided into two
broad categories. The first category is comprised of network-related services,
which generally benefit only Verizon's operating telephone subsidiaries. These
services include marketing, sales, legal, accounting, finance, data processing,
materials management, procurement, labor relations, and staff support for
various network operations. The second category is comprised of overhead and
support services, which generally benefit all subsidiaries of Verizon. Such
services include corporate governance, corporate finance, external affairs,
legal, media relations, employee communications, corporate advertising, human
resources, and treasury. Cost may be directly assigned to one subsidiary or
allocated to more than one subsidiary based on functional reviews of the work
performed.
The Companies recognized interest expense/income in connection with contractual
arrangements with GTE Funding to provide short-term financing and cash
management services to them.
In 2000, Verizon South Inc. transferred certain advanced data assets to an
affiliated company, Verizon Ventures III Inc. (Ventures III), in exchange for
common stock of Ventures III. This transfer was done to satisfy a condition of
the FCC's approval of the Bell Atlantic-GTE merger, which required the provision
of advanced data services through a separate affiliate. Throughout 2001, Verizon
South Inc. continued to invest in Ventures III through the transfer of
additional assets. As a result of the transfers, Verizon South Inc. has an
ownership interest in Ventures III, which is accounted for under the equity
method of accounting. Verizon South Inc.'s ownership interest in Ventures III
was 1.11% at December 31, 2001.
The accompanying financial statements reflect equity losses associated with the
investment in Ventures III of $837,000 in 2001 and an investment in Ventures
III, included in other assets, of $20,000 at December 31, 2001.
Other operating revenues and expenses include miscellaneous items of income and
expense resulting from transactions with other affiliates of the Companies.
These transactions include the provision of local and network access services,
billing and collection services, rental of facilities and equipment, and sales
and purchases of materials and supplies. The Companies also earn fees from an
affiliate for usage of its directory listings.
The affiliated receivables and payables associated with these transactions have
been included in parent funding.
8. Regulatory Matters
The state regulatory commission in Alabama regulates the Companies' intrastate
business. The Companies are also subject to regulation by the Federal
Communications Commission for their interstate business operations. The
Companies' Alabama price cap plan started in January 1996. The plan does not
have an expiration date but is reviewed every five years. There are three
service categories: basic, nonbasic and interconnection. Basic services are
capped for five years from the September 1995 order date. At the end of the cap,
prices can be increased by GDP-PI less a 1% productivity factor less any service
penalties (up to 0.75% maximum penalty). Nonbasic services can be increased
beginning January 1997 and prices can be increased a maximum of 10% in the
aggregate for a given year. Individual prices can be changed more than 10% as
long as the aggregate change is 10% or less. The Companies' intrastate access
charges are capped at a composite rate of $0.064 per minute. Tariff filings for
incumbent local exchange carriers are presumptively valid. Earnings are not
regulated.
9. Commitments and Contingencies
The Companies have noncancelable operating leases covering certain buildings,
office space and equipment. The Companies' rental expense was $33,523,000 in
2001. Minimum rental commitments under these noncancelable leases are
approximately $4.3 million, $3.9 million, $3.7 million, $3.4 million, and $3.0
million for the years 2002 through 2006, respectively, and $9.6 million
thereafter. Based on the number of access lines, the allocated rent expense of
the Exchanges was approximately $4.4 million for 2001.
Various legal actions and regulatory proceedings are pending to which the
Companies are a party and there are claims which, if asserted, may lead to other
legal actions. Management does not believe the ultimate resolution of pending
regulatory and legal matters in future periods will have a material effect on
the financial position of the Companies or the Exchanges.
10. Segment Reporting
The Exchanges do not have separate reportable segments of their own. The
Exchanges are part of the Companies, which have one reportable segment - the
provision of domestic wire line telecommunications services. Specifically, the
Companies provide local telephone services including voice and data transport,
enhanced and custom calling features, network access, directory assistance and
private lines. In addition, the Companies provide customer premises equipment
distribution, billing and collection, and pay telephone services.
11. Financial Instruments
Financial instruments that subject the Companies to concentrations of credit
risk consist primarily of short-term investments and trade receivables.
Concentrations of credit risk with respect to trade receivables other than those
from AT&T Corp. (AT&T) are limited due to the large number of customers. The
Companies' revenues generated from services provided to AT&T (primarily network
access and billing and collection) were 6.9% of total revenues for 2001.
While the Companies may be exposed to credit losses due to the nonperformance of
their counterparties, the Companies consider this risk remote and do not expect
the settlement of these transactions to have a material effect on their results
of operations or financial position.
FINANCIAL STATEMENTS
Verizon's Missouri Operations
For the Six Months ended June 30, 2002 and 2001
and Year ended December 31, 2001
Contents
Report of Independent Auditors
Financial Statements
Statements of Selected Assets, Selected Liabilities
and Parent Funding
Statements of Income
Statements of Parent Funding
Statements of Cash Flows
Notes to Financial Statements
Report of Independent Auditors
The Board of Directors and Shareowner
GTE Midwest Incorporated
We have audited the accompanying special-purpose statement of selected assets,
selected liabilities and parent funding of Verizon's Missouri Operations (the
Exchanges), a carved-out component of GTE Midwest Incorporated (the Company), as
of December 31, 2001, and the related statements of income, parent funding and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As described in Note 2, the accompanying special-purpose financial statements
were prepared for inclusion in CenturyTel, Inc.'s (CenturyTel) Form 8-K for
purposes of complying with the rules and regulations of the Securities and
Exchange Commission as required by Rule 3-05 of Regulation S-X in connection
with an asset purchase agreement between CenturyTel of Missouri L.L.C., a wholly
owned subsidiary of CenturyTel and the Company. The statements include
allocations of certain indirectly attributable amounts on bases determined by
management of the Company.
In our opinion, the special-purpose financial statements referred to above
present fairly, in all material respects, the selected assets, selected
liabilities and parent funding of Verizon's Missouri Operations as of December
31, 2001, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
April 24, 2002, except for Note 1,
as to which the date is August 31, 2002
Verizon's Missouri Operations
Statements of Selected Assets, Selected Liabilities and Parent Funding
(Dollars in Thousands)
June 30, 2002 December 31, 2001
------------------ -------------------
(Unaudited) (Audited)
Selected Assets
Current assets:
Accounts receivable, net of allowance of
$5,047 and $4,710, respectively $ 44,430 $ 48,267
Materials and supplies 711 577
Prepaid expenses 2,680 6,500
Deferred activation charges - current 3,624 3,820
------------------ -------------------
Total current assets 51,445 59,164
Property, plant and equipment, net 389,845 390,409
Prepaid pension asset 85,807 80,794
Deferred activation charges - noncurrent 7,060 7,238
------------------ -------------------
Total selected assets $ 534,157 $ 537,605
================== ===================
Selected Liabilities and Parent Funding
Current liabilities:
Accounts payable $ 18 $ 895
Advance billings and customer deposits 5,781 5,323
Accrued payroll-related costs 9,375 15,306
Deferred activation revenues - current 3,624 3,820
Other current liabilities 13,530 9,276
------------------ -------------------
Total current liabilities 32,328 34,620
Employee benefit obligations 27,751 28,201
Deferred activation revenues - noncurrent 7,061 7,238
Other liabilities 278 849
------------------ -------------------
Total selected liabilities 67,418 70,908
Parent funding 466,739 466,697
------------------ -------------------
Total selected liabilities and parent funding $ 534,157 $ 537,605
================== ===================
See accompanying notes.
Verizon's Missouri Operations
Statements of Income
(Dollars in Thousands)
Year ended
Six Months ended June 30 December 31
2002 2001 2001
------------------------------ -------------------
(Unaudited) (Audited)
Operating Revenues
Local services $ 55,715 $ 53,551 $ 106,072
Network access services 67,063 80,098 149,463
Long-distance services 7,807 8,541 17,926
Other services 10,741 11,059 22,425
------------------------------ -------------------
Total operating revenues 141,326 153,249 295,886
Operating Expenses
Cost of services 39,675 33,445 85,609
Selling, general and administrative 20,826 20,165 38,809
Depreciation and amortization 24,231 23,149 44,956
------------------------------ -------------------
Total operating expenses 84,732 76,759 169,374
------------------------------ -------------------
Operating income 56,594 76,490 126,512
Interest expense, net 3,380 8,074 11,884
Other (income) expense (18) (107) 1,645
------------------------------ -------------------
Income before income taxes 53,232 68,523 112,983
Income taxes 20,547 26,559 47,420
-------------- --------------- -------------------
Net income $ 32,685 $ 41,964 $ 65,563
============================== ===================
See accompanying notes.
Verizon's Missouri Operations
Statements of Parent Funding
(Dollars in Thousands)
For the Six Months ended June 30, 2002
and the Year ended December 31, 2001
Balance at December 31, 2000 $ 440,818
Net income (audited) 65,563
Net transfers to GTE Corporation (audited) (39,684)
-------------
Balance at December 31, 2001 (audited) 466,697
Net income (unaudited) 32,685
Net transfers to GTE Corporation (unaudited) (32,643)
=============
Balance at March 31, 2002 (unaudited) $ 466,739
=============
See accompanying notes.
Verizon's Missouri Operations
Statements of Cash Flows
(Dollars in Thousands)
Year ended
Six Months ended June 30 December 31
2002 2001 2001
--------------------------------- -----------------
(Unaudited) (Audited)
Operating Activities
Net income $ 32,685 $ 41,964 $ 65,563
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 24,231 23,149 44,956
Provision for uncollectible accounts 2,447 1,627 1,627
Employee benefit obligations (5,463) (2,671) (7,440)
Changes in current assets and current
liabilities:
Accounts receivable 1,390 745 (6,633)
Other current assets 3,686 9,095 5,815
Current liabilities (6,350) (1,206) (7,277)
Other, net 3,684 (5,554) (3,464)
--------------------------------- -----------------
Cash provided by operating activities 56,310 67,149 93,147
Investing Activities
Capital expenditures (23,667) (25,495) (53,463)
--------------------------------- -----------------
Cash used in investing activities (23,667) (25,495) (53,463)
Financing Activities
Net transfers to GTE Corporation (32,643) (41,654) (39,684)
--------------------------------- -----------------
Cash used in financing activities (32,643) (41,654) (39,684)
--------------------------------- -----------------
Net change in cash during the period - - -
Cash at beginning of period - - -
--------------------------------- -----------------
Cash at end of period $ - $ - $ -
================================= =================
See accompanying notes.
Verizon's Missouri Operations
Notes to Financial Statements
1. Description of Business
The selected local telephone exchanges (the Exchanges) included in these
special-purpose financial statements serve approximately 371,000 switched access
lines in the state of Missouri. The exchanges represent substantially all of the
switched access lines in service for GTE Midwest Incorporated (Company or GTE
Midwest). The Company is a wholly owned subsidiary of GTE Corporation (GTE),
which is a wholly owned subsidiary of Verizon Communications Inc. (Verizon).
The Company provides two basic types of telecommunications services:
Exchange telecommunication service is the transmission of telecommunications
among customers located within a local calling area within a LATA. Examples of
exchange telecommunications services include switched local residential and
business services, local private line voice and data services, and Centrex
services. The Company also provides toll services within a LATA (intraLATA long
distance).
Exchange access service links a customer's premises and the transmission
facilities of other telecommunications carriers, generally interLATA carriers.
Examples of exchange access services include switched access and special access
services.
The communications services provided by the Company are subject to regulation by
the Missouri Public Service Commission with respect to intrastate rates and
services and certain other matters. The Federal Communications Commission (FCC)
regulates rates that the Company charges long-distance carriers and end-user
subscribers for interstate access rates.
On October 22, 2001, the Company entered into an asset purchase agreement with
CenturyTel of Missouri L.L.C., a wholly owned subsidiary of CenturyTel, Inc.
(CenturyTel), to sell all in-franchise switched access lines in the state of
Missouri to CenturyTel. The transaction closed on August 31, 2002.
2. Basis of Presentation
Historically, financial statements have not been prepared for the Exchanges, as
they have no separate legal status or existence. The accompanying
special-purpose financial statements have been prepared to present the statement
of selected assets, selected liabilities and parent funding and statements of
income and cash flows of the Exchanges for inclusion in CenturyTel's Form 8-K
for purposes of complying with the rules and regulations of the Securities and
Exchange Commission as required by Rule 3-05 of Regulation S-X for the
transaction between CenturyTel and the Company. The accompanying special-purpose
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States using exchange-specific information
where available (most revenue and property, plant and equipment (PP&E) related
accounts) and allocations where data is not maintained on an exchange-specific
basis within the Company's books and records (most operating expenses, assets
other than PP&E, and liabilities). Because of the significant amount of
allocations and estimates used to prepare these financial statements, they may
not reflect the financial position or results of operations of the Exchanges
after the sale to CenturyTel.
The unaudited interim financial information presented herein has been prepared
according to accounting principles generally accepted in the United States. In
management's opinion, the information presented herein reflects all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
interim selected assets, selected liabilities and parent funding, and results of
operations and cash flows of Verizon's Missouri Operations. The results for the
interim periods are not necessarily indicative of the results for the full year.
The accompanying special-purpose financial statements include only those assets,
liabilities and related operations of the Exchanges as historically incurred by
the Company and exclude all other assets, liabilities and operations of GTE
Midwest and Verizon and its other subsidiaries, specifically cash, debt, accrued
interest, and tax-related balance sheet accounts. These special-purpose
financial statements also include assets, liabilities and expenses related to
employees who support the Exchanges, some of whom are expected to remain
employees of the Company following the sale of the Exchanges.
Accounts receivable and operating revenues are based on the applicable billing
system information. Other current assets and the current liabilities of the
Exchanges reflect the respective balances of the Company, excluding amounts owed
from/to affiliates.
The Exchanges' operating expenses include both amounts incurred within their
operating territories that relate directly to their exchanges (the Direct
Expenses) and amounts incurred in centralized Verizon service centers that
support multiple Verizon companies (the Indirect Expenses). The Direct Expenses
generally correspond with locally performed functions, which are likely to
transfer to the buyer of the Exchanges. The Indirect Expenses correspond to
substantial back-office support and overhead functions, which are not likely to
transfer to the buyer, but that the buyer will need to replace in some form in
order to operate the Exchanges. The Indirect Expenses have been allocated to GTE
Midwest and further to specific exchanges within GTE Midwest (including the
Exchanges) based on estimates of usage or benefits received from such services.
The level of allocated Indirect Expenses may not be representative of the
buyer's ongoing expenses for these functions. Depreciation and amortization were
calculated using the related property, plant and equipment data.
Management believes the allocations used to determine selected amounts in the
financial statements are appropriate methods to reasonably reflect the related
income or expense of the Exchanges.
3. Summary of Significant Accounting Policies and Other Disclosures
The notes to the financial statements that follow contain limited disclosure
data where it can be reasonably estimated for the Exchanges.
Revenue Recognition
Service revenues are recognized based on usage of local exchange networks and
facilities and contract fees. The Exchanges recognize product and other service
revenues when services are provided in accordance with contract terms and when
products are delivered and accepted by the customers.
The Company adopted the provisions of the Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, effective January 1, 2000, as required by the SEC. As a result of
the adoption of SAB No. 101, the Company defers nonrecurring service activation
revenues and costs and amortize them over the expected term of the customer
relationship. The deferred costs are equal to the activation fee revenue and
any excess cost is expensed immediately. The deferred costs represent direct
costs associated with certain nonrecurring fees, such as service activation
and installation fees.
Maintenance and Repairs
The cost of maintenance and repairs, including the cost of replacing minor items
not constituting substantial betterments, is charged to cost of services as
these costs are incurred.
Materials and Supplies
Included in materials and supplies are new and reusable materials, which are
stated principally at average original cost, except that specific costs are used
in the case of large individual items.
Long-Lived Assets
The Company assesses the impairment of long-lived assets under Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. A determination of impairment, if any, is made based on estimates
of future cash flows. (See Recent Accounting Pronouncements - Impairment or
Disposal of Long-Lived Assets below.)
Plant and Depreciation
Property, plant and equipment are recorded at cost. Depreciation expense is
principally based on the composite group remaining life method and straight-line
composite rates. This method provides for the recognition of the cost of the
remaining net investment in telephone plant, less anticipated net salvage value,
over remaining economic asset lives. This method requires the periodic review
and revision of depreciation rates. The asset lives used are as follows:
Average Lives
-------------
(In Years)
Buildings 30-35
Central office equipment 5-10
Outside communications plant 15-50
Furniture, vehicles and other equipment 3-15
When depreciable telephone plant is replaced or retired in the normal course of
business, the carrying amount of such plant is deducted from the respective
accounts and accumulated depreciation is charged.
Interest associated with the acquisition or construction of plant assets is
capitalized. Capitalized interest is reported as a cost of plant and a reduction
in interest expense. During 2001, the Company capitalized $206,000 of interest
costs.
Computer Software Costs
The Company capitalizes the cost of internal-use software which has a useful
life in excess of one year in accordance with Statement of Position (SOP) No.
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Subsequent additions, modifications or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Also, interest
associated with the development of internal-use software is capitalized.
Capitalized computer software costs are amortized using the straight-line method
over a period of three to seven years.
Income Taxes
Verizon and its domestic subsidiaries, including the Company, file a
consolidated federal income tax return. The Company participates in a
tax-sharing agreement with Verizon and remits tax payments to Verizon based on
its respective tax liability on a separate company basis.
The Exchanges are not taxable entities. The Exchanges' operating results are
included within the Company for income tax purposes. Although the Exchanges
contribute significant plant-related temporary differences (including investment
tax credits) to the Company's deferred tax balances, the Company does not
allocate income tax expense, income tax payables or deferred income taxes to the
Exchanges. Deferred tax assets and liabilities are included in parent funding
within these special-purpose financial statements. The provision for income
taxes included in the accompanying statement of income for the year ended
December 31, 2001 was calculated based on the income before income taxes of the
Exchanges and the Company's 2001 effective tax rate adjusted for permanent
differences not attributable to the Exchanges. The primary difference between
the effective income tax rate and the statutory federal income tax rate is state
income taxes, net of federal tax benefits.
Advertising Costs
The Company expenses advertising costs as they are incurred. In 2001, the
Company incurred $1,303,000 in advertising costs.
Employee Benefit Plans
The Company participates in the Verizon benefit plans. Under these plans,
pension and postretirement healthcare and life insurance benefits earned during
the year, as well as interest on projected benefit obligations, are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive the benefits.
Comprehensive Income
The Company had no other comprehensive income components for the year ended
December 31, 2001 or the six months ended June 30, 2002 and 2001; therefore, the
Company's and the Exchange's comprehensive income is the same as net income.
Derivative Instruments
Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133
requires that all derivatives, including derivatives embedded in other financial
instruments, be measured at fair value and recognized as either assets or
liabilities on the Company's balance sheet. Changes in the fair values of
derivatives not qualifying as hedges under SFAS No. 133 and any ineffective
portion of hedges are recognized in earnings in the current period. Changes in
the fair values of derivative instruments used effectively as fair value hedges
are recognized in earnings, along with changes in the fair value of the hedged
item. Changes in the fair value of the effective portions of cash flow hedges
are reported in other comprehensive income, and recognized in earnings when the
hedged item is recognized in earnings. The Company had no derivative instruments
as of December 31, 2001 or June 30, 2002 and 2001.
Recent Accounting Pronouncements
Business Combinations
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, which applies to business combinations occurring
after June 30, 2001. SFAS No. 141 requires that the purchase method of
accounting be used and includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in the combination.
Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 no longer permits the amortization of goodwill
and indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121. The goodwill impairment test under SFAS No. 142 requires a two-step
approach, which is performed at the reporting unit level, as defined in SFAS No.
142. Step one identifies potential impairments by comparing the fair value of
the reporting unit to its carrying amount. Step two, which is only performed if
there is a potential impairment, compares the carrying amount of the reporting
unit's goodwill to its implied value, as defined in SFAS No. 142. If the
carrying amount of the reporting unit's goodwill exceeds the implied fair value
of that goodwill, an impairment loss is recognized for an amount equal to that
excess. Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
The adoption of SFAS No. 142 did not impact the results of operations or
statement of selected assets, selected liabilities and parent funding because
the Company had no goodwill or other intangible assets as of January 1, 2002.
Impairment or Disposal of Long-Lived Assets
Effective January 1, 2002, the Company adopted SFAS No. 144. This standard
supersedes SFAS No. 121 and the provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, with regard to reporting the effects of a disposal of a segment of
a business. SFAS No. 144 establishes a single accounting model for assets to be
disposed of by sale and addresses several SFAS No. 121 implementation issues.
The adoption of SFAS No. 144 did not have a material effect on the results of
operations or financial position.
Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This standard provides the accounting for the cost of legal
obligations associated with the retirement of long-lived assets. SFAS No. 143
requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
capitalize that amount as a part of the book value of the long-lived asset. That
cost is then depreciated over the remaining life of the underlying long-lived
asset. The Company is required to adopt SFAS No. 143 effective January 1, 2003.
The Company is currently evaluating the impact this new standard will have on
its future results of operations or financial position.
4. Property, Plant and Equipment
The Company maintains continuing property records, which identify specific
property, plant and equipment (PP&E) balances, depreciation reserves and annual
capital expenditure amounts for the Exchanges. The PP&E balance in the
accompanying statement is based on these exchange-specific amounts and does not
include any allocations of common assets utilized in providing the centralized
services described in Note 2.
PP&E of the Exchanges is summarized as follows at December 31, 2001 (dollars in
thousands):
Land $ 3,280
Buildings 69,247
Central office equipment 336,084
Outside communications plant 524,915
Furniture, vehicles and other work equipment 25,624
Other 33,898
Construction-in-progress 475
--------------------------------------------------------------------
993,523
====================================================================
Less accumulated depreciation (603,114)
--------------------------------------------------------------------
Property, plant and equipment, net $ 390,409
====================================================================
5. Employee Benefit Plans
The Company participates in Verizon's benefit plans. Verizon maintains
noncontributory defined benefit pension plans for substantially all employees.
The postretirement healthcare and life insurance plans for the Company's
retirees and their dependents are both contributory and noncontributory and
include a limit on the Company's share of cost for recent and future retirees.
The Company also sponsors defined contribution savings plans to provide
opportunities for eligible employees to save for retirement on a tax-deferred
basis.
The structure of Verizon's benefit plans does not provide for the separate
determination of certain disclosures for the Company or the Exchanges.
Pension Plans
The Company participates in noncontributory defined benefit pension plans
sponsored by Verizon covering substantially all employees. The benefits to be
paid under these plans are generally based on years of credited service and
average final earnings. Verizon's funding policy, subject to the minimum funding
requirements of employee benefit and tax laws, is to contribute such amounts as
are determined on an actuarial basis to accumulate funds sufficient to meet the
plans' benefit obligation to employees upon their retirement. The Verizon plans
are currently funded at levels in excess of projected benefit obligations. The
assets of the plans consist primarily of corporate equities, government
securities and corporate debt securities.
The Exchanges' net periodic benefit credit was $11.1 million for 2001.
The prepaid pension asset shown on the accompanying financial statements
represents the net prepaid pension cost of active employees of the Exchanges and
retired employees of the Company who were previously directly involved in the
operations of the Exchanges to the Company's total active and retired employee
participants of the plans.
The significant weighted-average assumptions used by Verizon to determine the
pension credit and asset were as follows at December 31, 2001:
Discount rate 7.25%
Rate of compensation increase 5.00
Long-term rate of return on plan assets 9.25
Postretirement Benefits Other Than Pensions
Substantially all of the Company's employees are covered under postretirement
healthcare and life insurance benefit plans sponsored by Verizon. The
determination of benefit cost for postretirement health plans is generally based
on comprehensive hospital, medical and surgical benefit plan provisions. The
Company intends to fund amounts for postretirement benefits as deemed
appropriate.
The Exchange's postretirement benefit cost was $4.1 million for 2001. The
postretirement cost for the Exchanges was based on an allocation of the
Company's net postretirement cost. The allocation was based on the relative
number of active employees of the Exchanges and retired employees of the Company
who were previously involved in the operations of the Exchanges to the Company's
total active and retired employee participants of the plans.
The employee benefit obligations shown in the accompanying financial statements
represents an allocation of the Company's actuarially determined postretirement
healthcare and life insurance benefit liabilities. The allocation was based on
the relative number of active employees of the Exchanges and retired employees
of the Company who were previously involved in the operations of the Exchanges
to the Company's total active and retired employee participants of the plans.
The weighted-average assumptions used by Verizon in the actuarial computations
for healthcare and life benefits were as follows at December 31, 2001:
Discount rate 7.25%
Long-term rate of return on plan assets 8.00
Medical cost trend rate at end of year 10.00
Ultimate (year 2005) 5.00
Savings Plans and Employee Stock Ownership Plans
Substantially all of the Company's employees are eligible to participate in
savings plans maintained by Verizon. Verizon maintains a leveraged employee
stock ownership plan (ESOP) for its management employees of the former GTE
Companies. Under this plan, a certain percentage of eligible employee
contributions is matched with shares of Verizon's common stock. Verizon
recognizes leveraged ESOP cost based on the modified shares allocated method for
this leveraged ESOP that held shares before December 31, 1989. The Company
recognizes savings plans costs based on its matching obligation attributed to
its participating management employees. In addition to the ESOP, Verizon also
maintains a savings plan for nonmanagement employees. The Company's total
savings plans costs were $1.4 million in 2001.
6. Parent Funding and Interest Expense
For purposes of these statements, all funding requirements have been summarized
as "parent funding" without regard to whether the funding represents debt or
equity. No specific debt instruments can be directly associated with the
Exchanges, nor are separate equity accounts maintained. All net interest expense
of the Company for the year ended December 31, 2001 and the six months ended
June 30, 2002 and 2001 was allocated to the Exchanges and shown in the
accompanying statements of income.
7. Transactions with Affiliates
Historically, extensive transactions have occurred between the Company and GTE
Communications Systems Corporation (GTE Communications Systems), Verizon
Information Services Inc., Verizon Data Services Inc., Verizon Services
(including Verizon Services Corp., Verizon Services Group, and Verizon Corporate
Services Group Inc.), GTE Funding Incorporated (GTE Funding) and other
affiliates.
Transactions with affiliates included in the accompanying financial statements
are summarized as follows:
Year ended December 31,
2001
------------------------------
(Dollars in Thousands)
Operating revenues:
Verizon Information Services Inc. $ 73
Other revenue from affiliates 21,190
-----------------------------
21,263
Operating expenses:
GTE Communications Systems 3,651
Verizon Information Services Inc. 764
Verizon Data Services Inc. 13,139
Verizon Services 26,091
-----------------------------
43,645
Other expense:
Equity loss from Ventures III (1,645)
Interest expense, net:
Interest expense to GTE, net 18,884
Plant, property and equipment:
Purchases from GTE Communications Systems 8,083
The Company has an agreement to provide subscriber lists, billing and collection
and other services to Verizon Information Services Inc. (Directories) (100%
owned by Verizon) at fair market value. Directories bills the Company for
printing and other costs associated with regulatory requirements included in the
telephone directories, including the cost of any Extended Area Service sections
in the directories. Directories also bills the Company for any advertising it
places in the telephone directories. The amounts charged to the Company for
these transactions are based on fair market value.
GTE Communications Systems (100% owned by Verizon) provides construction and
maintenance equipment, supplies and electronic repair services to the Company.
Such purchases and services are recorded at the lower of cost, including a
return realized by GTE Communications Systems, or fair market value.
Verizon Data Services Inc. provides data processing services, software
application development and maintenance, which generally benefit Verizon's
operating telephone subsidiaries, including the Exchanges. The amounts charged
to the Company for these affiliated transactions are based on proportional cost
allocation methodologies.
The Company has contractual arrangements with Verizon Services for the provision
of various centralized services. These services are divided into two broad
categories. The first category is comprised of network-related services, which
generally benefit only Verizon's operating telephone subsidiaries. These
services include marketing, sales, legal, accounting, finance, data processing,
materials management, procurement, labor relations, and staff support for
various network operations. The second category is comprised of overhead and
support services, which generally benefit all subsidiaries of Verizon. Such
services include corporate governance, corporate finance, external affairs,
legal, media relations, employee communications, corporate advertising, human
resources, and treasury. Cost may be directly assigned to one subsidiary or
allocated to more than one subsidiary based on functional reviews of the work
performed.
The Company recognized net interest expense in connection with contractual
arrangements with GTE Funding affiliates to provide short-term financing and
cash management services to it.
In 2000, the Company transferred certain advanced data assets to an affiliated
company, Verizon Ventures III Inc. (Ventures III), in exchange for common stock
of Ventures III. This transfer was done to satisfy a condition of the FCC's
approval of the Bell Atlantic-GTE merger, which required the provision of
advanced data services through a separate affiliate. Throughout 2001, the
Company continued to invest in Ventures III through the transfer of additional
assets. As a result of the transfers, the Company has an ownership interest in
Ventures III, which is accounted for under the equity method of accounting. The
Company recorded equity losses associated with its investment in Ventures III of
$1,645,000 in 2001. Its investment in Ventures III was $0 at December 31, 2001.
The Company's ownership interest in Ventures III was 0.21% at December 31, 2001.
Other operating revenues include miscellaneous items of income resulting from
transactions with other affiliates of the Company. These transactions include
the provision of local and network access services, billing and collection
services, rental of facilities and equipment, and sales and purchases of
materials and supplies. The Company also earns fees from an affiliate for usage
of its directory listings.
The affiliated receivables and payables associated with these transactions have
been included in parent funding.
8. Regulatory Matters
The Missouri Public Service Commission regulates the Company's intrastate
business. The Company is also subject to regulation by the Federal
Communications Commission for its interstate business operations.
The Company's Missouri statutory price cap plan started in February 1999. Under
the plan, the Company can rebalance rates in the first four years of the plan by
increasing local rates by $1.50 and reducing switched access by an equivalent
amount. Toll rates must be reduced by 10% in the first year. Nonbasic service
rates may increase 8% annually. Earnings are not regulated.
9. Commitments and Contingencies
The Company has noncancelable operating leases covering certain buildings,
office space and equipment. The Company's rental expense was $12,339,000 in
2001. Minimum rental commitments under these noncancelable leases are
approximately $410,000, $364,000, $356,000, $111,000 and $5,000 for the years
2002 through 2006, respectively, and $52,000 thereafter.
Various legal actions and regulatory proceedings are pending to which the
Company is a party and there are claims which, if asserted, may lead to other
legal actions. Management does not expect that the ultimate resolution of
pending regulatory and legal matters in future periods will have a material
effect on the financial position of the Company or the Exchanges, but could have
a material effect on the results of operations.
10. Segment Reporting
The Exchanges do not have separate reportable segments of their own. The
Exchanges are part of the Company, which has one reportable segment - the
provision of domestic wireline telecommunications services. Specifically, the
Company provides local telephone services including voice and data transport,
enhanced and custom calling features, network access, directory assistance and
private lines. In addition, the Company provides customer premises equipment
distribution, billing and collection, and pay telephone services.
11. Financial Instruments
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of short-term investments and trade receivables.
Concentrations of credit risk with respect to trade receivables other than those
from AT&T Corp. (AT&T) are limited due to the large number of customers. The
Company's revenues generated from services provided to AT&T (primarily network
access and billing and collection) were 10.6% of total operating revenues for
2001.
While the Company may be exposed to credit losses due to the nonperformance of
its counterparties, the Company considers this risk remote and does not expect
the settlement of these transactions to have a material effect on its results of
operations or financial position.
CenturyTel, Inc.
Unaudited Pro Forma Consolidated Condensed Financial Information
Introduction
Background
On July 1, 2002, an affiliate of CenturyTel, Inc. (the "Company") acquired
approximately 300,000 telephone access lines and related property and equipment
comprising Verizon's local exchange operations in 90 exchanges in predominantly
rural markets throughout Alabama for approximately $1.020 billion cash. On
August 31, 2002, an affiliate of the Company acquired approximately 354,000
telephone access lines and related property and equipment comprising Verizon's
local exchange operations in 98 exchanges in predominantly rural markets
throughout Missouri for approximately $1.177 billion cash. The acquired assets
include Verizon's assets used to provide digital subscriber line ("DSL") and
other high speed data services within the purchased exchanges in both states and
an aggregate of approximately 2,800 route miles of fiber optic cable within the
purchased exchanges in both states. In addition to the continued provision of
traditional local exchange telephone services, the Company intends to provide
long distance, Internet access (including DSL access service), and other
communications services in certain of the acquired service areas. For a
discussion of the Company's financing of these acquisitions, see "- Pro Forma
Information" below.
On August 1, 2002, the Company sold substantially all of its wireless
operations to an affiliate of ALLTEL Corporation ("Alltel") for approximately
$1.593 billion in cash. In connection with this transaction, the Company
divested its (i) interests in its majority-owned and operated cellular systems,
which at June 30, 2002 served approximately 783,000 customers and had access to
approximately 7.8 million pops (as defined in the Company's most recent 10-K
Report), (ii) minority cellular equity interests representing approximately 1.8
million pops at June 30, 2002, and (iii) licenses to provide personal
communications services covering 1.3 million pops in Wisconsin and Iowa.
The results of operations of the properties acquired will be included in
the Company's consolidated financial statements from and after their respective
dates of acquisition. The results of operations of the properties sold will be
included in the Company's consolidated financial statements as discontinued
operations through August 1, 2002.
Pro Forma Information
The following unaudited pro forma consolidated condensed balance sheet as
of June 30, 2002 and the unaudited pro forma consolidated condensed statements
of income for the year ended December 31, 2001 and the six months ended June 30,
2002 are based on the historical consolidated results of operations and
financial condition of CenturyTel, Inc. and its subsidiaries, and reflect the
Company's wireless operations as discontinued operations. No interest expense
was allocated to discontinued operations and corporate overhead costs previously
absorbed by the wireless operations are reflected as an expense within
continuing operations.
In addition, the unaudited pro forma consolidated condensed balance sheet
as of June 30, 2002 and the unaudited pro forma consolidated condensed
statements of income for the year ended December 31, 2001 and six months ended
June 30, 2002 also reflect (i) the effects of acquiring the Verizon properties
for an aggregate of $2.197 billion cash, (ii) the effects of divesting the
Company's wireless operations for cash proceeds that approximated $1.593 billion
pre-tax (which are anticipated to be approximately $1.268 billion after-tax) and
(iii) steps the Company has taken through the date of this Current Report on
Form 8-K to finance the Verizon acquisitions, as described further below.
The pro forma financial information reflects that the Company financed the
aggregate purchase price for the Verizon assets of $2.197 billion with (i)
$1.268 billion of after-tax proceeds from the August 1, 2002 sale of its
wireless business and (ii) $929 million of net indebtedness incurred, consisting
of (a) all of the $494 million of net proceeds from the sale of senior notes due
2012 (which bear interest at 7.875%) in August 2002, (b) all of the $161 million
of net proceeds from the third quarter 2002 sale of convertible senior
debentures due 2032 (which bear interest at 4.75% and which may be converted
into shares of CenturyTel common stock at a conversion price of $40.455 per
share), and (c) $274 million of a total of $483.4 million of net proceeds from
the sale of equity units (which was reflected entirely as long-term debt upon
issuance) in May 2002 (the remaining portion of which was utilized to repay
outstanding indebtedness). Because this $274 million of net proceeds was held as
cash as of June 30, 2002, the pro forma adjustments to the June 30, 2002 balance
sheet described in note (C) below reflect a $274 million reduction in cash, as
opposed to an increase in long-term debt.
In accordance with Statement of Financial Accounting Standards No. 142,
"Accounting for Goodwill and Other Intangible Assets", effective January 1,
2002, goodwill is no longer subject to amortization; therefore, the accompanying
2001 pro forma statement of income does not reflect amortization of the
estimated goodwill associated with the acquisition of the Verizon properties.
Pro forma adjustments, and the assumptions on which they are based, are
described in the accompanying notes to the unaudited pro forma consolidated
condensed financial information. For purposes of the pro forma information,
adjustments for estimated transaction costs have been excluded.
The pro forma financial information related to the Verizon acquisitions
has been prepared using the purchase method of accounting and is based on the
assumptions that the purchase of all of the Verizon properties took place as of
June 30, 2002 for purposes of the pro forma balance sheet and as of January 1,
2001 for purposes of the pro forma statements of income. In accordance with the
purchase method of accounting, the actual consolidated financial statements of
the Company will reflect the Verizon acquisitions only from and after their
respective dates of acquisition. The Company has not finalized the allocation of
the purchase price related to the Verizon acquisitions. See note (C) for
additional information.
The pro forma financial information related to the sale of the wireless
operations has been prepared based on the assumptions that the sale of those
operations took place as of June 30, 2002 for purposes of the pro forma balance
sheet and as of January 1, 2001 for purposes of the pro forma statements of
income. The actual consolidated financial statements of the Company will reflect
the operations of the wireless properties (as discontinued operations) until
August 1, 2002.
The unaudited pro forma consolidated condensed financial data included
below does not give effect to any potential revenue enhancements, cost
reductions, or other operating efficiencies that could result from the Verizon
acquisitions, including, but not limited to (i) offering long distance, Internet
access and other communications services to an increased number of customers in
the acquired markets or (ii) cost savings that may be associated with operating
and administering the acquired properties with the Company's existing personnel
and operating assets.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if such transactions had been consummated on the dates
and in accordance with the assumptions described herein, nor is it necessarily
indicative of future operating results or financial position. The historical
Verizon financial information reflects the operating and management structure of
Verizon and is not necessarily indicative of the results of operations that may
be obtained with respect to the acquired properties under the Company's
operating and management structure.
You are urged to read the financial information below, along with the
Company's publicly available historical consolidated financial statements and
accompanying notes and the special purpose financial statements of the Verizon
operations acquired appearing elsewhere in this Current Report on Form 8-K.
CENTURYTEL, INC.
Pro Forma Consolidated Condensed Statement of Income
Year ended December 31, 2001
(Unaudited)
Pro forma Pro forma
CenturyTel Verizon adjustments consolidated
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Telephone $ 1,505,733 552,127 - 2,057,860
Other 173,771 - - 173,771
-----------------------------------------------------------------------------------------------------------
Total operating revenues 1,679,504 552,127 - 2,231,631
-----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses
(exclusive of depreciation and amortization) 826,948 233,108 14,900 1,074,956
Corporate overhead costs allocable to
discontinued operations 20,213 - - 20,213
Depreciation and amortization 407,038 81,498 - 488,536
-----------------------------------------------------------------------------------------------------------
Total operating expenses 1,254,199 314,606 14,900 1,583,705
-----------------------------------------------------------------------------------------------------------
OPERATING INCOME 425,305 237,521 (14,900) 647,926
-----------------------------------------------------------------------------------------------------------
OTHER INCOME AND EXPENSE
Nonrecurring gains and losses, net 33,043 - - 33,043
Interest expense (225,523) (21,388) (43,642) (290,553)
Other income and expense 32 (2,482) - (2,450)
-----------------------------------------------------------------------------------------------------------
Total other income (expense) (192,448) (23,870) (43,642) (259,960)
-----------------------------------------------------------------------------------------------------------
Income from continuing operations
before income tax expense 232,857 213,651 (58,542) 387,966
Income tax expense 88,711 87,312 (23,417) 152,606
-----------------------------------------------------------------------------------------------------------
Income from continuing operations 144,146 126,339 (35,125) 235,360
Discontinued operations, net of tax 198,885 - (198,885) -
-----------------------------------------------------------------------------------------------------------
Net income $ 343,031 126,339 (234,010) 235,360
===========================================================================================================
BASIC EARNINGS PER SHARE
From continuing operations $ 1.02 1.67
From continuing operations, as adjusted
for goodwill amortization $ 1.35 2.00
From discontinued operations $ 1.41 -
From discontinued operations, as adjusted
for goodwill amortization $ 1.48 -
Basic earnings per share $ 2.43 (1) 1.67
Basic earnings per share, as adjusted
for goodwill amortization $ 2.83 2.00
DILUTED EARNINGS PER SHARE
From continuing operations $ 1.01 1.64
From continuing operations, as adjusted
for goodwill amortization $ 1.34 1.96
From discontinued operations $ 1.40 -
From discontinued operations, as adjusted
for goodwill amortization $ 1.47 -
Diluted earnings per share $ 2.41 (1) 1.64
Diluted earnings per share, as adjusted
for goodwill amortization $ 2.81 1.96
AVERAGE BASIC SHARES
OUTSTANDING 140,743 140,743
===========================================================================================================
AVERAGE DILUTED SHARES
OUTSTANDING 142,307 146,386
===========================================================================================================
(1) CenturyTel's basic earnings per share and diluted earnings per share
for the year ended December 31, 2001 were $1.72 and $1.70, after
eliminating the effect of nonrecurring net gains associated with our
wireless operations.
See accompanying notes to unaudited pro forma consolidated condensed financial
information.
CENTURYTEL, INC.
Pro Forma Consolidated Condensed Statement of Income
Six months ended June 30, 2002
(Unaudited)
Pro forma Pro forma
CenturyTel Verizon adjustments consolidated
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
OPERATING REVENUES
Telephone $ 753,230 266,314 - 1,019,544
Other 108,390 - - 108,390
----------------------------------------------------------------------------------------------------------
Total operating revenues 861,620 266,314 - 1,127,934
-----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses
(exclusive of depreciation and amortization) 436,877 106,791 6,756 550,424
Corporate overhead costs allocable to
discontinued operations 9,932 - - 9,932
Depreciation and amortization 186,231 42,259 - 228,490
-----------------------------------------------------------------------------------------------------------
Total operating expenses 633,040 149,050 6,756 788,846
-----------------------------------------------------------------------------------------------------------
OPERATING INCOME 228,580 117,264 (6,756) 339,088
-----------------------------------------------------------------------------------------------------------
OTHER INCOME AND EXPENSE
Interest expense (104,805) (8,400) (21,549) (134,754)
Nonrecurring gains and losses 3,709 - - 3,709
Other income and expense 217 37 - 254
-----------------------------------------------------------------------------------------------------------
Total other income (expense) (100,879) (8,363) (21,549) (130,791)
-----------------------------------------------------------------------------------------------------------
Income from continuing operations
before income tax expense 127,701 108,901 (28,305) 208,297
Income tax expense 44,636 42,320 (11,322) 75,634
-----------------------------------------------------------------------------------------------------------
Income from continuing operations 83,065 66,581 (16,983) 132,663
Discontinued operations, net of tax 66,465 - (66,465) -
-----------------------------------------------------------------------------------------------------------
Net income $ 149,530 66,581 (83,448) 132,663
===========================================================================================================
BASIC EARNINGS PER SHARE
From continuing operations $ .59 .94
From discontinued operations $ .47 -
-----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.06 .94
===========================================================================================================
DILUTED EARNINGS PER SHARE
From continuing operations $ .58 .92
From discontinued operations $ .47 -
-----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.05 .92
===========================================================================================================
AVERAGE BASIC SHARES
OUTSTANDING 141,136 141,136
===========================================================================================================
AVERAGE DILUTED SHARES
OUTSTANDING 142,679 146,758
===========================================================================================================
See accompanying notes to unaudited pro forma consolidated condensed financial
information.
CENTURYTEL, INC.
Pro Forma Consolidated Condensed Balance Sheet
June 30, 2002
(Unaudited)
Pro forma Pro forma
CenturyTel Verizon adjustments consolidated
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 302,070 - (274,000) 28,070
Accounts receivable 174,837 78,879 - 253,716
Materials and supplies 9,848 1,607 - 11,455
Other 9,063 12,630 - 21,693
----------------------------------------------------------------------------------------------
Total current assets 495,818 93,116 (274,000) 314,934
---------------------------------------------------------------------------------------------- ------------
NET PROPERTY, PLANT
AND EQUIPMENT 2,725,096 639,686 - 3,364,782
-----------------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill 2,115,313 - 1,533,673 3,648,986
Other 439,555 136,538 (120,821) 455,272
----------------------------------------------------------------------------------------------
Total investments and other assets 2,554,868 136,538 1,412,852 4,104,258
-----------------------------------------------------------------------------------------------------------
ASSETS HELD FOR SALE 861,526 - (861,526) -
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,637,308 869,340 277,326 7,783,974
===========================================================================================================
LIABILITIES AND EQUITY
----------------------
CURRENT LIABILITIES
Short-term debt and current
maturities of long-term debt $ 432,397 - - 432,397
Accounts payable 81,087 4,380 (4,380) 81,087
Accrued expenses and other liabilities 152,876 49,521 (49,521) 152,876
Advance billing and customer deposits 30,194 12,412 - 42,606
-----------------------------------------------------------------------------------------------------------
Total current liabilities 696,554 66,313 (53,901) 708,966
-----------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 2,750,188 - 655,000 3,405,188
-----------------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND
OTHER LIABILITIES 560,797 72,780 - 633,577
-----------------------------------------------------------------------------------------------------------
LIABILITIES RELATED TO ASSETS
HELD FOR SALE 171,680 - (171,680) -
-----------------------------------------------------------------------------------------------------------
PARENT FUNDING - 730,247 (730,247) -
-----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 141,661 - - 141,661
Paid-in capital 509,939 - - 509,939
Retained earnings 1,800,514 - 578,154 2,378,668
Unearned ESOP shares (2,000) - - (2,000)
Preferred stock - non-redeemable 7,975 - - 7,975
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,458,089 - 578,154 3,036,243
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 6,637,308 869,340 277,326 7,783,974
===========================================================================================================
See accompanying notes to unaudited pro forma consolidated condensed financial
information.
Notes to Unaudited Pro Forma Consolidated Condensed Financial Information
(A) Purchase of Verizon assets.
Costs of acquisition. The total cash purchase price of the Verizon assets
was $2.197 billion.
Operations. As explained further above, the pro forma adjustments do not
consider the effect of possible revenue enhancements, cost reductions or
other operating efficiencies that may occur in connection with combining
the operations of the acquired properties with the Company's operations.
(B) Sale of Wireless Operations.
Presentation of wireless operations. The wireless operations have been
reflected as discontinued operations on the Company's statements of income
and the assets and liabilities of the wireless operations have been
reflected as held for sale on the Company's balance sheet.
Proceeds from disposition. The after-tax proceeds from the sale of the
wireless operations has been assumed to be $1.268 billion.
(C) June 30, 2002 Balance Sheet Pro Forma Adjustments.
The pro forma adjustments applicable to the acquisition of the Verizon
properties with respect to the unaudited pro forma consolidated condensed
balance sheet as of June 30, 2002, as set forth below, reflect preliminary
allocations of the aggregate purchase price to the acquired properties.
Such preliminary allocations include the assumption that the fair value of
property, plant and equipment will approximate the carrying value on the
date of acquisition. The preliminary estimates of the fair value of the
noncurrent assets and liabilities are subject to change upon completion of
our valuation analysis.
The Company anticipates assigning a portion of the purchase price to
identifiable intangible assets (including customer base) in accordance
with Statement of Financial Accounting Standards No. 141 and amortizing
such asset over its useful life. However, the Company is still in the
relatively early stages of the valuation process. Thus, an estimate to
allocate a portion of the purchase price to identifiable intangibles, the
amortization of which will reduce net income, has not been included in the
accompanying pro forma information. The Company believes the impact of the
amortization of such identifiable intangible assets will not be material
to its results of operations.
To the extent that final allocations of the purchase price cause our
annual depreciation and amortization expense to differ from that presented
in the accompanying pro forma information, annual earnings per share will
be effected by $.01 per share for every $2.4 million difference in annual
depreciation and amortization expense. Thus, for example, if the Company
ultimately allocates an additional $95.7 million of the aggregate purchase
price to property, plant and equipment (representing a 15% increase in the
amount that was preliminarily allocated to such assets), the annual
depreciation and amortization expense would increase by approximately $9.6
million (assuming a composite depreciation rate of 10%) and the annual
earnings per share would decrease by approximately $.04 per share from the
amounts presented in the pro forma information.
As explained further above under "Introduction - Pro Forma Information,"
the pro forma financial information has been prepared (based on the June
30, 2002 Consolidated Balance Sheet) assuming that the aggregate purchase
price of $2.197 billion was financed on a long-term basis with (i) $1.268
billion of after-tax proceeds from the August 1, 2002 sale of the
Company's wireless business and (ii) $929 million of net indebtedness
incurred, consisting of (a) all of the $494 million of net proceeds from
the sale of senior notes in August 2002, (b) all of the $161 million of
net proceeds from the sale of convertible senior debentures in third
quarter 2002, and (c) $274 million of a total of $483.4 million of net
proceeds from the sale of equity units in May 2002 (the remaining portion
of which was utilized to repay outstanding indebtedness). Because this
$274 million of net proceeds was held as cash as of June 30, 2002, the
pro forma adjustments appearing in the table below reflect a $274 million
reduction in cash, as opposed to an increase in long-term debt. There is
no adjustment to reduce long-term debt as a result of the discontinued
operations because the Company has no outstanding indebtedness directly
related to its wireless operations.
June 30, 2002 Balance Sheet Pro Forma Adjustments
(Assets) Accrued
Cash Investments liabilities expenses Long-
and cash and other held Accounts and other term Parent Retained
equivalents Goodwill assets for sale payable liabilities debt funding earnings
---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
(1) (a) $ 1,923,000 1,923,000
(b) (2,197,000) 2,197,000
(2) (730,247) (730,247)
(3) 120,821 (120,821)
(4) (53,901) (4,380) (49,521)
(5) (a) 1,593,000 (861,526) 903,154
171,680
(b) (325,000) (325,000)
(c) (1,268,000) (1,268,000)
--------------------------------------------------------------------------------------------------------------------------
$ (274,000) 1,533,673 (120,821) (689,846) (4,380) (49,521) 655,000 (730,247) 578,154
==========================================================================================================================
(1) Reflects (a) $1.923 billion of net proceeds raised in the third quarter
of 2002 from the sale of assets and debt securities in the manner
discussed herein and (b) delivery of $2.197 billion to purchase the
assets from Verizon.
(2) Reflects the elimination of Verizon's parent debt and equity funding.
(3) Reflects the elimination of Verizon's excess pension assets. Verizon will
retain these assets, together with all income generated by such assets.
Verizon's historical financial statements reflect such assets and income.
(4) Reflects the elimination of Verizon's accounts payable and accrued
expenses and other liabilities. These liabilities will be retained by
Verizon.
(5) Reflects (a) gross proceeds received from the sale of the Company's
wireless operations of $1.593 billion, elimination of assets and
liabilities held for sale and pre-tax gain from the sale of wireless
interests, (b) taxes paid related to the gain on sale of wireless
operations of $325 million and (c) a $1.268 billion reduction in the
amount of debt that would otherwise be incurred absent the divestiture.
(D) December 31, 2001 Income Statement Pro Forma Adjustments.
Set forth below are the pro forma adjustments applicable to the
acquisition of the Verizon assets and to the divestiture of the wireless
operations with respect to the unaudited pro forma consolidated condensed
statement of income for the year ended December 31, 2001. These
adjustments have been prepared assuming the weighted average interest
rate of the $929 million net indebtedness incurred ($2.197 billion cash
purchase price of the Verizon assets less after-tax proceeds from the
sale of the wireless operations of $1.268 billion) was 7.0%. This assumed
7.0% rate is based on the actual interest rates accruing on the debt
securities issued by the Company in the second and third quarter of 2002,
adjusted for the rates on borrowings under revolving credit facilities
utilized for interim financing of the Verizon acquisitions.
December 31, 2001 Income Statement Pro Forma Adjustments
Cost of Sales Discontinued
and Operating Interest Income operations,
Expenses expense tax expense net of tax
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest on net borrowings of $929 million at
an assumed rate of 7.0% (1) $ 65,030
Eliminate Verizon interest expense on parent
funding (2) (21,388)
Eliminate pension credit related to excess
pension assets which will remain with Verizon (3) 14,900
Tax benefit relating to pro forma adjustments
(assuming a 40% tax rate) (23,417)
Eliminate discontinued operations
of wireless business (198,885)
-----------------------------------------------------------------------------------------------------------
$ 14,900 43,642 (23,417) (198,885)
===========================================================================================================
(1) See footnote (C). Use of an assumed rate .125% higher or lower than
7.0% on net borrowings would have changed net income by approximately
$697,000.
(2) See footnote (C), adjustment number (2).
(3) See footnote (C), adjustment number (3).
(E) June 30, 2002 Income Statement Pro Forma Adjustments.
Set forth below are the pro forma adjustments applicable to the
acquisition of the Verizon assets and to the divestiture of the wireless
operations with respect to the unaudited pro forma consolidated condensed
statement of income for the six months ended June 30, 2002. These
adjustments have been prepared assuming the weighted average interest
rate of the $929 million net indebtedness incurred ($2.197 billion cash
purchase price of the Verizon assets less after-tax proceeds from the
sale of the wireless operations of $1.268 billion) was 7.0%. For further
information on this assumed 7.0% rate, see footnote (D).
June 30, 2002 Income Statement Pro Forma Adjustments
Cost of Sales Discontinued
and Operating Interest Income operations,
Expenses expense tax expense net of tax
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest on net borrowings of $912 million at
an assumed rate of 7.0% (1) $ 32,515
Interest expense incurred for the six months
ended June 30, 2002 related to May 2002 debt
issuance (2) (2,566)
Eliminate Verizon interest expense on parent
funding (3) (8,400)
Eliminate pension credit related to excess
pension assets which will remain with Verizon (4) 6,756
Tax benefit relating to pro forma adjustments
(assuming a 40% tax rate) (11,322)
Eliminate discontinued operations
of wireless business (66,465)
-----------------------------------------------------------------------------------------------------------
$ 6,756 21,549 (11,322) (66,465)
===========================================================================================================
(1) See footnote (C). Use of an assumed rate .125% higher or lower than 7.0%
on net borrowings would have changed net income by approximately $348,000.
(2) Because the $32.5 million interest expense adjustment in the chart above
reflects interest incurred on the Company's debt securities issued in May
2002, this entry is necessary to avoid double-counting the interest
payable on such securities. The $2.6 million adjustment amount represents
the actual net interest expense incurred for the six months ended June
30, 2002 related to the issuance of $500 million equity units in May
2002, net of a reduction in interest expense as a result of repaying part
of the Company's revolving credit facility indebtedness using proceeds
from the equity unit issuance.
(3) See footnote (C), adjustment number (2).
(4) See footnote (C), adjustment number (3).
(F) Convertible Debentures
In connection with the long-term financing of the Verizon acquisitions,
the Company issued $165 million of 4.75% convertible senior debentures
in the third quarter of 2002. The debentures are convertible into the
Company's common stock at a conversion price of $40.455 per share upon
the occurrence of certain events. The calculation of pro forma diluted
earnings per share assumes the conversion of the convertible
debentures. Average diluted shares outstanding have been increased by
4.079 million shares on the accompanying pro forma statements of
income to reflect the assumed conversion of the debentures. Interest
expense (net of tax) related to the debentures has been added back
to net income in the amounts of $4,703,000 and $2,351,000 for the year
ended December 31, 2001 and the six months ended June 30, 2002,
respectively, in calculating diluted earnings per share.
(G) Reclassifications.
Certain reclassifications have been made to the historical financial
information to conform to the presentation of the condensed pro forma
information.
(H) Verizon Historical Results.
All amounts reflected above under the headings "Verizon" are based on
special purpose financial statements of the Verizon acquired operations
appearing elsewhere in this report. In connection with the preparation
of these special purpose financial statements, Verizon made numerous
assumptions and allocations where specific data was not available
pertaining to the acquired assets. Because of the significant amount of
allocations and estimates used to prepare these special purpose
financial statements and because the Company will operate these assets
under a different operating and management structure, they may not
reflect the financial position and results of operations of the
acquired properties after such properties are acquired by the Company.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Current Report on Form 8-K
includes certain forward-looking statements and estimates that are based on
current expectations only, and are subject to a number of risks, uncertainties
and assumptions, many of which are beyond the control of the Company. Actual
events and results may differ materially from those anticipated, estimated or
projected if one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect. Factors that could affect actual results
include but are not limited to: the Company's ability to effectively integrate
new businesses into its operations; possible changes in the demand for, or
pricing of, the Company's products and services; the Company's ability to
successfully introduce new offerings on a timely and cost-effective basis; and
the effects of more general factors such as changes in overall market or
economic conditions, in prevailing interest rates or in legislation, regulation
or public policy. These and other uncertainties related to the business are
described in greater detail in Item 1 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update any of its
forward-looking statements for any reason.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CenturyTel, Inc.
Dated: October 8, 2002 By: /s/ Neil A. Sweasy
----------------------
Neil A. Sweasy
Vice President and Controller