SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2)).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Section 240.14a-12
CenturyTel, Inc.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
--------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------------
(5) Total fee paid:
--------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
--------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
--------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------------
(3) Filing Party:
--------------------------------------------------------------------------------
(4) Date Filed:
--------------------------------------------------------------------------------
[CENTURYTEL LOGO]
================================================================================
2005 NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
ANNUAL FINANCIAL STATEMENTS
AND REVIEW OF OPERATIONS
================================================================================
THURSDAY, MAY 12, 2005
2:00 P.M. LOCAL TIME
100 CENTURYTEL DRIVE
MONROE, LOUISIANA
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF CENTURYTEL, INC.:
The Annual Meeting of Shareholders of CenturyTel, Inc. will be held at
2:00 p.m., local time, on May 12, 2005 in the Corporate Conference Room of the
Company's principal offices, 100 CenturyTel Drive, Monroe, Louisiana, for the
following purposes:
1. to elect four Class II directors;
2. to ratify the appointment of KPMG LLP as the Company's independent auditor
for 2005;
3. to approve the Company's 2005 Management Incentive Compensation Plan;
4. to approve the Company's 2005 Directors Stock Plan;
5. to approve the Company's 2005 Executive Officer Short-Term Incentive
Program; and
6. to transact such other business as may properly come before the meeting
and any adjournments thereof.
The Board of Directors has fixed the close of business on March 22, 2005
as the record date for the determination of shareholders entitled to notice of
and to vote at the meeting and all adjournments thereof.
By Order of the Board of Directors
/s/Stacey W. Goff
STACEY W. GOFF, Secretary
Dated: April 1, 2005
SHAREHOLDERS ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. EVEN IF YOU
EXPECT TO ATTEND, IT IS IMPORTANT THAT YOU PLEASE SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD PROMPTLY. IF YOU PLAN TO ATTEND AND WISH TO VOTE YOUR SHARES
PERSONALLY, YOU MAY DO SO AT ANY TIME BEFORE YOUR PROXY IS VOTED.
[CENTURYTEL LETTERHEAD]
April 1, 2005
Dear Shareholder:
It is a pleasure to invite you to the Company's 2005 Annual Meeting of
Shareholders on Thursday, May 12, beginning at 2:00 p.m. local time, at the
Company's headquarters in Monroe, Louisiana. I hope you will be able to attend.
As in the past, this booklet includes our formal notice of the meeting,
our proxy statement and our annual financial statements and review of
operations.
Most of you have received with this booklet a proxy card that indicates
the number of votes that you will be entitled to cast at the meeting according
to the records of the Company or your broker or other nominee. Each share of the
Company that you have "beneficially owned" continuously since May 30, 1987
generally entitles you to ten votes; each other share entitles you to one vote.
Shares held through a broker or other nominee are presumed to have one vote per
share. In lieu of receiving a proxy card, participants in the Company's benefit
plans have been furnished with voting instruction cards. The reverse side of
this letter describes the Company's voting provisions in greater detail.
Regardless of how many shares you own or whether you plan to attend the
meeting in person, it is important that your shares be voted at the meeting. At
your earliest convenience, please complete the enclosed proxy card (or voting
instruction cards) and return it or them promptly in the enclosed return
envelope.
Thank you for your interest and continued support.
Sincerely,
/s/ Glen F. Post, III
Glen F. Post, III
Chairman of the Board and
Chief Executive Officer
VOTING PROVISIONS
SHAREHOLDERS
Record Shareholders. In general, shares registered in the name of any
natural person or estate that are represented by certificates dated as of or
prior to May 30, 1987 are presumed to have ten votes per share and all other
shares are presumed to have one vote per share. However, the Company's articles
of incorporation (the relevant provisions of which are reproduced below) set
forth a list of circumstances in which the foregoing presumptions may be
refuted. If you believe that the voting information set forth on your proxy card
is incorrect or a presumption made with respect to your shares should not apply,
please send a letter to the Company briefly describing the reasons for your
belief. Merely marking the proxy card will not be sufficient notification to the
Company that you believe the voting information thereon is incorrect.
Beneficial Shareholders. All shares held through a broker, bank or other
nominee are presumed to have one vote per share. The Company's articles of
incorporation set forth a list of circumstances in which this presumption may be
refuted by the person who has held since May 30, 1987 all of the attributes of
beneficial ownership referred to in Article III(C)(2) reproduced below. If you
believe that some or all of your shares are entitled to ten votes, you may
follow one of two procedures. First, you may write a letter to the Company
describing the reasons for your belief. The letter should contain your name
(unless you prefer to remain anonymous), the name of the brokerage firm, bank or
other nominee holding your shares, your account number with such nominee and the
number of shares you have beneficially owned continuously since May 30, 1987.
Alternatively, you may ask your broker, bank or other nominee to write a letter
to the Company on your behalf stating your account number and indicating the
number of shares that you have beneficially owned continuously since May 30,
1987. In either case, your letter should indicate how you wish to have your
shares voted.
Other. The Company will consider all letters received prior to the date of
the Annual Meeting and, when a return address is provided in the letter, will
advise the party furnishing such letter of its decision, although in many cases
the Company will not have time to inform an owner or nominee of its decision
prior to the time the shares are voted. In limited circumstances, the Company
may require additional information before a determination will be made. If you
have any questions about the Company's voting procedures, please call the
Company at (318) 388-9500.
PARTICIPANTS IN BENEFIT PLANS
Participants in the Company's Employee Stock Ownership Plan, Dollars &
Sense Plan, Union Retirement Savings Plan, Union Group Incentive Plan, or
Security Systems Inc. 401(k) Plan have received voting instruction cards in lieu
of a proxy card. For additional information, please refer to the materials
supplied by the trustee of the plans in which you participate.
* * * *
EXCERPTS FROM THE COMPANY'S ARTICLES OF INCORPORATION
Paragraph C of Article III of the Company's articles of incorporation
provides as follows:
(1) Each share of Common Stock . . . which has been beneficially owned
continuously by the same person since May 30, 1987 will entitle such person to
ten votes with respect to such share on each matter properly submitted to the
shareholders of the Corporation for their vote, consent, waiver, release or
other action . . .
(2) (a) For purposes of this paragraph C, a change in beneficial
ownership of a share of the Corporation's stock will be deemed to have
occurred whenever a change occurs in any person or group of persons who,
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise has or shares (i) voting power, which includes
the power to vote, or to direct the voting of such share; (ii) investment
power, which includes the power to direct the sale or other disposition of
such share; (iii) the right to receive or retain the proceeds of any sale
or other disposition of such share; or (iv) the right to receive
distributions, including cash dividends, in respect to such share.
(b) In the absence of proof to the contrary provided in accordance
with the procedures referred to in subparagraph (4) of this paragraph C, a
change in beneficial ownership will be deemed to have occurred whenever a
share of stock is transferred of record into the name of any other person.
(c) In the case of a share of Common Stock . . . held of record in
the name of a corporation, general partnership, limited partnership,
voting trustee, bank, trust company, broker, nominee or clearing agency,
or in any other name except a natural person, if it has not been
established pursuant to the procedures referred to in subparagraph (4)
that such share was beneficially owned continuously since May 30, 1987 by
the person who possesses all of the attributes of beneficial ownership
referred to in clauses (i) through (iv) of subparagraph (2)(a) of this
paragraph C with respect to such share of Common Stock . . . then such
share of Common Stock . . . will carry with it only one vote regardless of
when record ownership of such share was acquired.
(d) In the case of a share of stock held of record in the name of
any person as trustee, agent, guardian or custodian under the Uniform
Gifts to Minors Act, the Uniform Transfers to Minors Act or any comparable
statute as in effect in any state, a change in beneficial ownership will
be deemed to have occurred whenever there is a change in the beneficiary
of such trust, the principal of such agent, the ward of such guardian or
the minor for whom such custodian is acting.
(3) Notwithstanding anything in this paragraph C to the contrary, no
change in beneficial ownership will be deemed to have occurred solely as a
result of:
(a) any event that occurred prior to May 30, 1987, including
contracts providing for options, rights of first refusal and similar
arrangements, in existence on such date to which any holder of shares of
stock is a party;
(b) any transfer of any interest in shares of stock pursuant to a
bequest or inheritance, by operation of law upon the death of any
individual, or by any other transfer without valuable consideration,
including a gift that is made in good faith and not for the purpose of
circumventing this paragraph C;
(c) any change in the beneficiary of any trust, or any distribution
of a share of stock from trust, by reason of the birth, death, marriage or
divorce of any natural person, the adoption of any natural person prior to
age 18 or the passage of a given period of time or the attainment by any
natural person of a specified age, or the creation or termination of any
guardianship or custodian arrangement; or
(d) any appointment of a successor trustee, agent, guardian or
custodian with respect to a share of stock.
(4) For purposes of this paragraph C, all determinations concerning
changes in beneficial ownership, or the absence of any such change, will be made
by the Corporation. Written procedures designed to facilitate such
determinations will be established by the Corporation and refined from time to
time. Such procedures will provide, among other things, the manner of proof of
facts that will be accepted and the frequency with which such proof may be
required to be renewed. The Corporation and any transfer agent will be entitled
to rely on all information concerning beneficial ownership of a share of stock
coming to their attention from any source and in any manner reasonably deemed by
them to be reliable, but neither the Corporation nor any transfer agent will be
charged with any other knowledge concerning the beneficial ownership of a share
of stock.
(5) Each share of Common Stock acquired by reason of any stock split or
dividend will be deemed to have been beneficially owned by the same person
continuously from the same date as that on which beneficial ownership of the
share of Common Stock, with respect to which such share of Common Stock was
distributed, was acquired.
* * * *
(8) Shares of Common Stock held by the Corporation's employee benefit
plans will be deemed to be beneficially owned by such plans regardless of how
such shares are allocated to or voted by participants, until the shares are
actually distributed to participants.
* * * *
CENTURYTEL, INC.
100 CENTURYTEL DRIVE
MONROE, LOUISIANA 71203
(318) 388-9500
PROXY STATEMENT
April 1, 2005
This proxy statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors (the "Board") of CenturyTel, Inc.
(the "Company") for use at its annual meeting of shareholders to be held at the
time and place set forth in the accompanying notice, and at any adjournments
thereof (the "Meeting"). This proxy statement is first being mailed to
shareholders of the Company on or about April 5, 2005.
As of March 22, 2005, the record date for determining shareholders
entitled to notice of and to vote at the Meeting (the "Record Date"), the
Company had outstanding 132,922,458 shares of common stock (the "Common Shares")
and 319,000 shares of Series L preferred stock that vote together with the
Common Shares as a single class on all matters ("Preferred Shares" and,
collectively with the Common Shares, "Voting Shares"). The Company's Restated
Articles of Incorporation (the "Articles") generally provide that holders of
Common Shares that have been beneficially owned continuously since May 30, 1987
are entitled to cast ten votes per share, subject to compliance with certain
procedures. Article III of the Articles and the voting procedures adopted
thereunder contain several provisions governing the voting power of Common
Shares, including a presumption that each Common Share held by nominees or by
any holder other than a natural person or estate entitles such holder to one
vote, unless the holder furnishes the Company with proof to the contrary.
Applying the presumptions described in Article III and information known to the
Company, the Company's records indicate that 215,405,986 votes are entitled to
be cast at the Meeting, of which 215,086,986 (99.9%) are attributable to the
Common Shares. Unless otherwise indicated, all percentages of voting power set
forth in this proxy statement have been calculated based on such number of
votes.
If you are a participant in the Company's Automatic Dividend Reinvestment
and Stock Purchase Service or the Company's Employee Stock Purchase Plans, the
Company's proxy card covers shares credited to your account under each plan, as
well as any shares directly registered in your name. You should not, however,
use the proxy card to vote any shares held for you in the Company's Employee
Stock Ownership Plan, Dollars & Sense Plan, Union Retirement Savings Plan, Union
Group Incentive Plan, or Security Systems Inc. 401(k) Plan. Instead,
participants in these plans will receive from the plan trustees separate voting
instruction cards covering these shares. Plan participants should complete and
return these voting instruction cards in the manner provided in the instructions
that accompany such cards.
The Company will pay all expenses of soliciting proxies for the Meeting.
Proxies may be solicited personally, by mail, by telephone or by facsimile by
the Company's directors, officers
1
and employees, who will not be additionally compensated therefor. The Company
will also request persons holding Voting Shares in their names for others, such
as brokers, banks and other nominees, to forward proxy materials to their
principals and request authority for the execution of proxies, and the Company
will reimburse them for their expenses incurred in connection therewith. The
Company has retained Innisfree M&A Incorporated, New York, New York, to assist
in the solicitation of proxies, for which it will be paid fees anticipated to be
$7,500 and will be reimbursed for certain out-of-pocket expenses.
ELECTION OF DIRECTORS
(ITEM 1 ON PROXY OR VOTING INSTRUCTION CARD)
The Board of Directors has fixed the number of directors to serve after
the Meeting at 12 members, which are divided under the Articles into three
classes. Members of the respective classes hold office for staggered terms of
three years, with one class elected at each annual shareholders' meeting. Four
Class II directors will be elected at the Meeting. Acting upon the
recommendation of its Nominating and Corporate Governance Committee, the Board
has nominated the four individuals listed below to serve as Class II directors.
Unless authority is withheld, all votes attributable to the shares represented
by each duly executed and delivered proxy will be cast for the election of each
of these below-named nominees. Under the Company's bylaw nominating procedures,
these nominees are the only individuals who may be elected at the Meeting. For
additional information on the Company's nomination process, see "Corporate
Governance - Director Nomination Process." If for any reason any such nominee
should decline or become unable to stand for election as a director, which is
not anticipated, votes will be cast instead for another candidate designated by
the Board, without resoliciting proxies. For information on recent changes in
the size and composition of the Board, see "Corporate Governance - Director
Nomination Process."
The following provides certain information with respect to each nominee
and each other director whose term will continue after the Meeting, including
his or her beneficial ownership of Common Shares determined in accordance with
Rule 13d-3 of the Securities and Exchange Commission ("SEC"). Unless otherwise
indicated, (i) all information is as of the Record Date, (ii) each person has
been engaged in the principal occupation shown for more than the past five
years, (iii) shares beneficially owned are held with sole voting and investment
power and (iv) all references in this proxy statement to "Restricted Stock" mean
unvested shares of restricted stock, the terms of which are further described
herein, and does not refer to any such shares that have vested and are no longer
subject to transfer restrictions. Unless otherwise indicated, none of the
persons named below beneficially owns more than 1% of the outstanding Common
Shares or is entitled to cast more than 1% of the total voting power.
2
CLASS II DIRECTORS (FOR TERM EXPIRING IN 2008):
Photo
VIRGINIA BOULET, age 51; a director since 1995; Special Counsel at Adams and
Reese LLP, a law firm, since March 2002; Partner, Phelps Dunbar, L.L.P., a law
firm, for 10 years prior to such time; President and Chief Operating Officer of
IMDiversity, Inc., an on-line recruiting company, from March 2002 to February
2004; a director of W&T Offshore, Inc.
Committee Memberships: Nominating and Corporate
Governance (Chairperson); Audit
Shares Beneficially Owned: 21,011 (1), (2)
Photo
CALVIN CZESCHIN, age 69; a director since 1975; President and Chief Executive
Officer of Yelcot Telephone Company and Ultimate Auto Group.
Committee Memberships: Executive; Risk Evaluation
Shares Beneficially Owned: 366,869 (1), (3)
Photo
JAMES B. GARDNER, age 70; a director since 1981; Senior Managing Director of the
capital markets division of Samco Capital Markets, a division of Penson
Financial Services, Inc., since November 2001; Managing Director of such
division for over seven years prior to such date; a director of Ennis, Inc.
Committee Memberships: Audit (Chairman); Executive;
Compensation
Shares Beneficially Owned: 19,500 (1)
Photo
GREGORY J. MCCRAY, age 42; has not previously served as a director of the
Company; Chief Executive Officer of Antenova Limited, a British company which
develops and markets wireless components, since January 2003; President of
McCray Consulting, a technology consulting company, from March 2002 to December
2002; Chief Executive Officer of Pipinghot Networks Ltd., a wireless technology
research and development company, from December 2000 to February 2002; Senior
Vice President and General Manager, Customer Operations (for Europe, the Middle
East and Africa), of Lucent Technologies Inc. from 1998 to December 2000.
Shares Beneficially Owned: 0
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THESE NOMINEES.
3
CLASS III DIRECTORS (TERM EXPIRES IN 2006):
Photo
FRED R. NICHOLS, age 58; a director since May 2003; retired in 2000 after
serving as Executive Vice President of Operations of Cox Communications, Inc.
from August 1999 to February 2000; Chairman of the Board, President and Chief
Executive Officer of TCA Cable TV, Inc. from 1997 to August 1999.
Committee Membership: Audit; Compensation
Shares Beneficially Owned: 14,000 (1)
Photo
HARVEY P. PERRY, age 60; a director since 1990; non-executive Vice Chairman of
the Board of Directors of the Company since January 1, 2004; retired from the
Company on December 31, 2003 after serving as Executive Vice President and Chief
Administrative Officer for almost five years, as Secretary for 18 years and as
General Counsel for 20 years; also served as Senior Vice President from 1985 to
1999.
Committee Membership: Executive
Shares Beneficially Owned: 222,499 (1), (4), (5)
Photo
JIM D. REPPOND, age 63; a director since 1986; retired from the Company in 1996
after serving as President-Telephone Group of the Company (or a comparable
predecessor position) for several years.
Committee Memberships: Executive; Compensation
Shares Beneficially Owned: 79,920 (1)
Photo
JOSEPH R. ZIMMEL, age 51; a director since January 2003; retired in 2002 after
serving as a managing director of the investment banking division of The Goldman
Sachs Group, Inc. from 1996 to 2001; a director of Digitas Inc.
Committee Membership: Audit
Shares Beneficially Owned: 18,667 (1)
4
CLASS I DIRECTORS (TERM EXPIRES IN 2007):
Photo
WILLIAM R. BOLES, JR., age 48; a director since 1992; an executive officer,
director and practicing attorney with The Boles Law Firm.
Committee Memberships: Risk Evaluation (Chairman)
Shares Beneficially Owned: 22,004 (1)
Photo
W. BRUCE HANKS, age 50; a director since 1992; private investor since June 2004;
Athletic Director of the University of Louisiana at Monroe from March 2001 to
June 2004; a senior or executive officer of the Company with operational or
strategic development responsibilities for several years prior to such time; an
advisory director of IberiaBank Corporation.
Committee Membership: Risk Evaluation
Shares Beneficially Owned: 86,685 (1), (4)
Photo
C. G. MELVILLE, JR., age 64; a director since 1968; private investor since 1992;
retired executive officer of an equipment distributor.
Committee Memberships: Compensation (Chairman); Nominating and
Corporate Governance
Shares Beneficially Owned: 25,322 (1)
Photo
GLEN F. POST, III, age 52; a director since 1985; Chairman of the Board of the
Company since June 2002 and Chief Executive Officer of the Company since 1993.
Mr. Post also served as Vice Chairman of the Board from 1993 to 2002 and
President from 1990 to 2002.
Committee Membership: Executive (Chairman)
Shares Beneficially Owned: 1,925,869 (4), (6)
5
(1) Includes shares that each outside director has the right to acquire within
60 days of the date of this Proxy Statement pursuant to options granted
under the Company's 2002 directors stock option plan. Under these options,
each outside director has the right to acquire within such period 16,000
shares, other than Messrs. Perry, Nichols and Zimmel, who have the right
to acquire 6,000, 12,000 and 13,667 shares, respectively.
(2) Includes 955 shares held by Ms. Boulet as custodian for the benefit of her
children and 450 shares owned by Ms. Boulet's spouse, as to which she
disclaims beneficial ownership.
(3) Constitutes 0.3% of the outstanding Common Shares and entitles Mr.
Czeschin to cast 1.6% of the total voting power; includes 11,997 shares
owned by Mr. Czeschin's wife, as to which he disclaims beneficial
ownership; also includes 300,000 shares that are pledged pursuant to a
pre-paid forward sale contract that expires January 19, 2006. Mr. Czeschin
holds voting but not investment power as to such pledged shares.
(4) Includes (i) Restricted Stock issued to the below-named directors under
the Company's incentive compensation plans, with respect to which such
individuals have sole voting power but no investment power; (ii) shares
("Option Shares") that such individuals have the right to acquire within
60 days of the Record Date pursuant to options granted under the Company's
incentive compensation plans (other than the Company's 2002 directors
stock option plan referenced in footnote 1 above); and (iii) shares
(collectively, "Plan Shares") allocated to such individual's accounts
under the Company's Employee Stock Ownership Plan ("ESOP") and the
Company's Dollars & Sense Plan ("401(k) Plan"), as follows:
Name Restricted Stock Option Shares Plan Shares
----------------- ---------------- ------------- -----------
Harvey P. Perry - 166,000 -
W. Bruce Hanks - 70,000 -
Glen F. Post, III 107,120 1,643,884 82,075
Participants in the 401(k) Plan who have attained 45 years of age or three
years of service with the Company have investment power with respect to
all shares held in their 401(k) Plan account, and participants in the ESOP
who have attained 55 years of age and 10 years of participation in the
plan have investment power with respect to a portion of the shares held in
their ESOP accounts. Participants in both these plans are entitled to
direct the voting of their plan shares, as described in greater detail
elsewhere herein.
(5) Includes 2,863 shares held as custodian for the benefit of Mr. Perry's
children.
(6) Constitutes 1.4% of the outstanding Common Shares.
CORPORATE GOVERNANCE
GOVERNANCE GUIDELINES
Listed below are excerpts from the Company's corporate governance
guidelines, which the Board reviews at least annually. For information on how to
obtain a complete copy of the Company's corporate governance guidelines, see "-
Access to Information" below.
1. Director Qualifications
- The Board will have a majority of independent directors. The
Nominating and Corporate Governance Committee is responsible for
reviewing with the Board, on an annual basis, the requisite skills
and characteristics of new Board members as well as the composition
of the Board as a whole. This assessment will include members'
independence qualifications, as well as consideration of diversity,
age, character, skills and experience in the context of the needs of
the Board. It is the general sense of the Board that no more than
two management directors should serve on the Board.
6
- The Board expects directors who change the job or responsibility
they held when they were elected to the Board to volunteer to resign
from the Board. It is not the sense of the Board that in every such
instance the director should necessarily leave the Board. There
should, however, be an opportunity for the Board, through the
Nominating and Corporate Governance Committee, to review the
continued appropriateness of Board membership under the
circumstances.
- No director may serve on more than two other unaffiliated public
company boards, unless this prohibition is waived by the Board. No
director may be appointed or nominated to a new term if he or she
would be age 72 or older at the time of the election or appointment.
- The Nominating and Corporate Governance Committee will review each
director's continuation on the Board every three years.
- Directors will be deemed to be "independent" if (i) the Board
affirmatively confirms that neither the director nor any
organization with which the director is affiliated receives any
payments from the Company other than Permissible Directors
Compensation (as defined below) and (ii) none of the disqualifying
events or conditions specified in Rule 303A(2)(b) of the NYSE Listed
Company Manual apply to the director. For purposes hereof,
"Permissible Directors Compensation" means (i) director and
committee fees, (ii) reimbursement for an annual physical,
continuing education, travel and other out-of-pocket expenses in
accordance with the Company's applicable policies and (iii) a
pension or other form of deferred compensation for prior service,
provided such compensation is not contingent in any way on continued
service. The Board may make determinations or interpretations under
this paragraph, provided that they are consistent with the foregoing
standards.
- Once the Board has determined that a director is independent, the
director may not engage in any transaction with the Company, either
directly or indirectly through an immediate family member or related
entity, without such transaction being approved by the Board.
2. Director Responsibilities
- The Chairman will establish the agenda for each Board meeting. Each
Board member is free to suggest the inclusion of items on the
agenda. Each Board member is free to raise at any Board meeting
subjects that are not on the agenda for that meeting. The Board will
review the Company's long-term strategic plans and the principal
issues that the Company will face in the future during at least one
Board meeting each year.
- The non-management directors will meet in executive session at least
quarterly. The director who presides at these meetings will be an
independent director chosen annually by the non-management
directors, and his or her name will be disclosed in the annual proxy
statement.
7
3. Board Committees
- The Board will have at all times an Audit Committee, a Compensation
Committee and a Nominating and Corporate Governance Committee. All
of the members of these committees will be independent directors, as
defined in Section 1 above.
- The Chair of each committee, in consultation with the committee
members, will determine the frequency and length of the committee
meetings consistent with any requirements set forth in the
committee's charter. The Chair of each committee, in consultation
with members of the committee and others specified in the
committee's charter, will develop the committee's agenda.
- The Board and each committee have the power to hire independent
legal, financial or other advisors as they may deem necessary,
without consulting or obtaining the approval of any officer of the
Company in advance.
- Each committee may meet in executive session as often as it deems
appropriate.
4. Director Access to Officers and Employees
- Directors have full and free access to officers and employees of the
Company.
- The Board welcomes regular attendance at each Board meeting of
senior officers of the Company.
5. Director Compensation
- The form and amount of director compensation will be determined by
the Nominating and Corporate Governance Committee in accordance with
the policies and principles set forth in its charter, and such
Committee will conduct an annual review of director compensation.
6. Director Orientation and Continuing Education
- The Nominating and Corporate Governance Committee shall maintain an
Orientation Program for new directors. All new directors must
participate in the Company's Orientation Program, which should be
conducted as soon as practicable after new directors are elected or
appointed.
- The Company will also maintain a Continuing Education Program for
directors, pursuant to which it will endeavor to periodically update
directors on industry, technological and regulatory developments,
and to provide adequate resources to support directors in
understanding the Company's business and matters to be acted upon at
board and committee meetings.
8
7. CEO Evaluation and Management Succession
- The Nominating and Corporate Governance Committee will conduct an
annual review of the CEO's performance. The Nominating and Corporate
Governance Committee will provide a report of its findings to the
Board of Directors (with appropriate recusals of the CEO and other
management directors, as necessary) to enable the Board to ensure
that the CEO is providing the best leadership for the Company in the
long- and short-term.
- The Nominating and Corporate Governance Committee should report
periodically to the Board on succession planning. The entire Board
will consult periodically with the Nominating and Corporate
Governance Committee regarding potential successors to the CEO. The
CEO should at all times make available his or her recommendations
and evaluations of potential successors, along with a review of any
development plans recommended for such individuals.
8. Annual Performance Evaluation
- The Board of Directors will conduct an annual self-evaluation to
determine whether it and its committees are functioning effectively.
The Nominating and Corporate Governance Committee will receive
comments from all directors and report annually to the Board with an
assessment of the Board's performance, which will be discussed with
the full Board. The assessment will focus on the Board's
contribution to the Company and specifically focus on areas in which
the Board or management believes that the Board could improve.
9. Standards of Business Conduct and Ethics
- All of the Company's directors, officers and employees are required
to abide by the Company's long-standing Corporate Compliance
Program, which includes standards of business conduct and ethics.
The Company's program and related procedures cover all areas of
professional conduct, including employment policy, conflicts of
interests, protection of confidential information, as well as strict
adherence to all laws and regulations applicable to the conduct of
the Company's business.
- Any waiver of the Company's policies, principles or guidelines
relating to business conduct or ethics for executive officers or
directors may be made only by the Audit Committee and will be
promptly disclosed as required by law or stock exchange regulation.
INDEPENDENCE
Based on the information made available to it, the Board has affirmatively
determined that (i) Virginia Boulet, James B. Gardner, Fred R. Nichols, Jim D.
Reppond, Joseph R. Zimmel, W. Bruce Hanks and C. G. Melville, Jr. qualify as
independent directors under the standards referred to above under " - Governance
Guidelines" and (ii) Gregory J. McCray, if elected at the Meeting, will also
qualify as an independent director under the Company's guidelines. In
9
making these determinations, the Board, with assistance from the Company's
counsel, evaluated responses to a questionnaire completed by each director
regarding relationships and possible conflicts of interest. In its review of
director independence, the Board considered all commercial, consulting, legal,
accounting, charitable, and familial relationships any director may have with
the Company or its management.
MEETINGS AND CERTAIN COMMITTEES OF THE BOARD
During 2004, the Board held four regular meetings and six special
meetings.
During 2004, the Board's Audit Committee held ten meetings. The Audit
Committee's functions are described further below under "Report of Audit
Committee."
The Board's Compensation Committee held six meetings during 2004. The
Compensation Committee's Incentive Awards Subcommittee held two meeting during
2004. Both the Compensation Committee and the Subcommittee are described further
below under "Executive Compensation and Related Information - Report of
Compensation Committee Regarding Executive Compensation."
The Board's Nominating and Corporate Governance Committee (the "Nominating
Committee") met eight times during 2004. The Nominating Committee is responsible
for, among other things, (i) recommending to the Board nominees to serve as
directors and officers, (ii) monitoring the composition and size of the Board
and its committees, (iii) periodically reassessing the Company's corporate
governance guidelines, (iv) leading the Board in its annual review of the
Board's performance and (v) reviewing annually the Chief Executive Officer's
performance and reporting to the Board on succession planning for senior
executive officers. For information on the Company's director nomination
process, see "- Director Nomination Process" below.
Each of the committees listed above is composed solely of independent
directors under the standards referred to above under "- Governance Guidelines."
The Board has determined that Joseph R. Zimmel and James B. Gardner are audit
committee financial experts, as defined under the federal securities laws.
If you would like additional information on the responsibilities of the
committees listed above, please refer to the committees' respective charters,
which can be obtained in the manner described below under "- Access to
Information."
The Company expects all of its directors to attend the Company's annual
shareholders meetings. Each director attended the 2004 annual shareholders
meeting, except for one director who was recovering from surgery.
DIRECTOR NOMINATION PROCESS
Nominations for the election of directors at annual shareholder meetings
may be made by the Board (upon the receipt of recommendations of the Nominating
Committee) or by any
10
shareholder of record who complies with the Company's bylaws. Under the bylaws,
any shareholder of record interested in making a nomination (referred to below
as "nominating shareholders") generally must deliver written notice to the
Company's secretary not more than 180 days and not less than 90 days in advance
of the first anniversary of the preceding year's annual shareholder's meeting.
For the Meeting this year, the Board has nominated the four nominees listed
above under "Election of Directors" to stand for election as Class II directors,
and no shareholders submitted any nominations. For further information on
deadlines for submitting nominations for the Company's 2006 annual shareholders
meeting, see "Other Matters - Shareholder Nominations and Proposals."
The written notice required to be sent by any nominating shareholder must
include (i) the name, age, business address and residential address of the
nominating shareholder and any other person acting in concert with such
shareholder, (ii) a representation that the nominating shareholder is a record
holder of Voting Shares, and intends to make his nomination in person, (iii) a
description of all agreements among the nominating shareholder, any person
acting in concert with him, each proposed nominee and any other person pursuant
to which the nomination or nominations are to be made and (iv) various
biographical information about each proposed nominee, including principal
occupation, holdings of Voting Shares and other information required to be
disclosed in the Company's proxy statement. The notice must also be accompanied
by the written consent of each proposed nominee to serve as a director if
elected, and an affidavit certifying that the proposed nominee meets the
qualifications for service specified in the bylaws and summarized below. The
Company may require a proposed nominee to furnish other reasonable information
or certifications. Shareholders interested in bringing before a shareholders
meeting any matter other than a director nomination should consult the bylaws
for additional procedures governing such requests. The Company may disregard any
nomination or submission of any other matter that fails to comply with these
bylaw procedures.
The Nominating Committee will consider candidates nominated by
shareholders in accordance with the bylaws. Upon receipt of any such
nominations, the Committee will review the submission for compliance with the
bylaws, including determining if the proposed nominee meets the bylaw
qualifications for service as a director. These provisions disqualify any person
who fails to respond satisfactorily to any inquiry for information to enable the
Company to make certifications required by the Federal Communications Commission
under the Anti-Drug Abuse Act of 1988, or who has been arrested or convicted of
certain specified drug offenses or engaged in actions that could lead to such an
arrest or conviction.
Under the Company's corporate governance guidelines, the Nominating
Committee assesses director candidates based on their independence, diversity,
age, character, skills and experience in the context of the needs of the Board.
Although the guidelines permit the Nominating Committee to adopt additional
selection guidelines or criteria, it has chosen not to do so. Instead, the
Nominating Committee periodically assesses skills and characteristics then
required by the Board based on the Board's configuration and future challenges
at the time of the assessment. The Nominating Committee believes this flexible
approach enables it to respond to changes caused by director retirements and
industry developments. Although the Company does not have a history of receiving
director nominations from shareholders, the Nominating Committee envisions that
it would evaluate any such candidate on the same terms as other proposed
nominees, but would place a substantial premium on retaining incumbent directors
who are familiar with the Company's management, operations, business, industry,
strategies and
11
competitive position, and who have previously demonstrated a
proven ability to provide valuable contributions to the Board and the Company.
The Nominating Committee retained Korn/Ferry International in 2004 to
assist in a nationwide search for one or two directors to replace R. L.
Hargrove, Jr., age 73, and Johnny Hebert, age 76, both of whom are retiring as
Class II directors at the Meeting. Korn/Ferry International assembled
comprehensive lists of qualified replacement directors for review by the
Nominating Committee. Following a series of interviews, the Nominating Committee
recommended Gregory J. McCray as a Class II nominee. In February 2005, the Board
accepted this nomination and reduced the size of the Board from 13 to 12,
effective on the date of the Meeting.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company (referred to as
"outside directors" or "non-management directors") is paid an annual fee of
$50,000 plus $2,000 for attending each regular Board meeting, $2,500 for
attending each special Board meeting and $1,500 for attending each meeting of a
Board committee.
Currently the Vice Chairman of the Board is paid supplemental board fees
at the rate of $100,000 per year. The Vice Chairman's duties include (i)
assisting the Chairman by facilitating communications among the directors and
monitoring the activities of the Board's committees, (ii) serving at the
Chairman's request on the board of any company in which the Company has an
investment, (iii) monitoring the Company's strategies and (iv) performing
certain executive succession functions.
Currently (i) the chair of the Audit Committee is paid supplemental board
fees at the rate of $20,000 per year and (ii) the chair of the Compensation
Committee, the chair of the Nominating Committee and the chair of the Risk
Evaluation Committee are each paid supplemental board fees at the rate of
$10,000 per year.
The Company permits each outside director to defer receipt of all or a
portion of his or her fees. Amounts so deferred earn interest equal to the
six-month Treasury bill rate. Each outside director is also entitled to be
reimbursed (i) for expenses incurred in attending board and committee meetings,
(ii) for expenses incurred in attending director education programs and (iii) up
to $5,000 per year for the cost of an annual physical examination, plus related
travel expenses and the estimated income taxes incurred by the director in
connection with receiving these medical reimbursement payments.
Under the Company's 2002 Directors Stock Option Plan, outside directors
are entitled to receive annual grants of options to purchase up to 6,000 Common
Shares (with the actual number to be determined by the Compensation Committee of
the Board) following each annual meeting of shareholders and upon joining the
Board if other than by election at an annual meeting of shareholders. In 2004,
the Board's Compensation Committee granted each outside director non-qualified
options to purchase 6,000 Common Shares. As discussed further below, the Board
has adopted the Company's 2005 Directors Stock Plan (the "Director Plan"),
subject to approval of the plan by the shareholders at the Meeting. If the
Director Plan is approved at the
12
Meeting, the Company will not make any additional grants under its 2002
Directors Stock Option Plan. The Director Plan will enable the Company to grant
to directors options, restricted stock and other types of equity awards. See
"Proposal to Approve the CenturyTel, Inc. 2005 Directors Stock Plan" for more
information on the Director Plan. In early 2005, the Compensation Committee
authorized each outside director who is duly elected and serving immediately
after the Meeting to receive (i) $100,000 of restricted stock (based on the
average closing price of the Common Shares on each of the 15 trading days
preceding the Meeting), but only if the Director Plan is approved by the
shareholders at the Meeting, or (ii) non-qualified options to purchase 6,000
Common Shares if the Director Plan is not approved at the Meeting.
Prior to June 1, 2002, outside directors participated in the Company's
Outside Directors Retirement Plan. Under such plan, participating outside
directors with fully vested rights are entitled to receive, upon normal
retirement at age 70, $30,000 per year, payable bi-weekly generally, in the form
of a life annuity (subject to certain limited exceptions). Under the plan,
participating outside directors can also receive payments upon early retirement
at age 65, subject to certain benefit reductions. In addition, the plan provides
certain disability and preretirement death benefits. The Company has established
a trust to fund its obligations under the plan, but participants' rights to
these trust assets are no greater than the rights of unsecured creditors. Under
the plan, participating outside directors whose service is terminated in
connection with a change in control of the Company are entitled to receive a
cash payment equal to the present value of their vested plan benefits,
determined in accordance with actuarial assumptions specified in the plan. In
2002, the plan was "frozen" to (i) limit participation to outside directors
serving as of May 31, 2002, (ii) limit benefits to those accrued through May 31,
2002, and (iii) freeze the annual payment for participants with fully vested
rights at $30,000, which equaled the annual retainer plus the fee for attending
one special Board meeting as of May 31, 2002.
The Company's bylaws require it to indemnify its directors and officers to
the fullest extent permitted by law so that they will be free from undue concern
about personal liability in connection with their service to the Company. The
Company has signed agreements with each of those individuals contractually
obligating it to provide these indemnification rights. The Company also provides
its directors with customary directors and officers liability insurance.
PRESIDING DIRECTOR
As indicated above, the non-management directors meet in executive session
at least quarterly. The non-management directors have selected Virginia Boulet
to preside over such meetings during 2005. As explained further on the Company's
website, you may contact Ms. Boulet by writing a letter to the Presiding
Director, c/o Post Office Box 5061, Monroe, Louisiana 71211.
ACCESS TO INFORMATION
The following documents are filed as exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004, and are posted on the
Company's website at www.centurytel.com:
- Corporate governance guidelines
13
- Charters of the Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee
- Corporate compliance program (which includes the Company's code of
ethics)
The Company will furnish printed copies of these materials upon the
request of any shareholder.
RATIFICATION OF THE SELECTION OF THE INDEPENDENT AUDITOR
(ITEM 2 ON PROXY OR VOTING INSTRUCTION CARD)
The Company's 2004 financial statements were audited by KPMG LLP, an
independent registered public accounting firm. The Audit Committee of the Board
has appointed KPMG as independent auditor of the Company for the fiscal year
ending December 31, 2005, and the Board is submitting that appointment to the
Company's shareholders for ratification at the Meeting.
Representatives of KPMG will be present at the Meeting, are expected to be
available to respond to appropriate questions, and will also have an opportunity
to make a statement if they desire to do so. If the shareholders do not ratify
the appointment of KPMG by the affirmative vote of at least a majority of the
voting power present or represented at the Meeting, the Audit Committee will
reconsider the selection of the independent auditor.
For additional information on KPMG, see "Report of the Audit Committee"
below.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
PROPOSAL TO APPROVE THE CENTURYTEL, INC. 2005 MANAGEMENT
INCENTIVE COMPENSATION PLAN
(ITEM 3 ON PROXY OR VOTING INSTRUCTION CARD)
GENERAL
The Board believes that the growth of the Company depends upon the efforts
of its officers, employees, consultants and advisors and that the proposed
CenturyTel, Inc. 2005 Management Incentive Compensation Plan (the "Incentive
Plan") will provide an effective means of attracting and retaining qualified key
personnel while encouraging long-term focus on maximizing shareholder value. The
Incentive Plan has been adopted by the Board of Directors, subject to its
approval by the shareholders at the Meeting. The principal features of the
Incentive Plan are summarized below. This summary is qualified in its entirety,
however, by reference to the Incentive Plan, which is attached to this proxy
statement as Appendix A.
PURPOSE OF THE PROPOSAL
The Board believes that providing officers, employees, consultants and
advisors with a proprietary interest in the growth and performance of the
Company is crucial to stimulating
14
individual performance while at the same time enhancing shareholder value. The
Board intends for the Incentive Plan to supersede the Company's 2002 Management
Incentive Compensation Plan. Currently, only approximately 600,000 Common Shares
remain available for grant under the Company's 2002 Management Incentive
Compensation Plan. The Board believes that adoption of a new superseding plan is
necessary to provide the Company with the continued ability to attract, retain
and motivate key personnel in a manner tied to the interests of shareholders.
TERMS OF THE INCENTIVE PLAN
ADMINISTRATION OF THE INCENTIVE PLAN. If the Incentive Plan is approved at
the Meeting, the Compensation Committee of the Board will administer the plan
and have authority to make awards under the plan, to set the terms of the
awards, to interpret the plan, to establish any rules or regulations relating to
the plan that it determines to be appropriate and to make any other
determination that it believes necessary or advisable for proper administration
of the plan. Subject to the limitations specified in the Incentive Plan, the
Compensation Committee may delegate its authority to the Chief Executive Officer
of the Company and his designees. References to powers of the Compensation
Committee in this section below will be deemed to include references to officers
or managers exercising such powers under delegated authority.
ELIGIBILITY. Officers and employees of the Company (including officers who
are also directors of the Company) and consultants and advisors to the Company
will be eligible to receive awards ("Incentives") under the plan when designated
as plan participants. The Company currently has approximately 50 officers and
approximately 6,780 employees eligible to receive Incentives under the Incentive
Plan, although the Company currently has no plans to grant options to all of its
employees. Over the past several years the Company has granted awards to all of
its officers and its key employees under its predecessor incentive compensation
plans. Incentives under the Incentive Plan may be granted in any one or a
combination of the following forms:
- incentive stock options under Section 422 of the Internal Revenue
Code (the "Code");
- non-qualified stock options;
- restricted stock;
- restricted stock units;
- stock-settled stock appreciation rights; and
- other stock-based awards.
SHARES ISSUABLE THROUGH THE INCENTIVE PLAN. A total of 4,000,000 Common
Shares are authorized to be issued under the Incentive Plan, representing
approximately 3.0% of the outstanding Common Shares. As of December 31, 2004 and
the Record Date, there were options outstanding under the Company's predecessor
incentive compensation plans to acquire approximately 6.7 million and 7.2
million Common Shares, respectively. See " - Equity Compensation Plan
Information." If the Incentive Plan is approved by the shareholders at the
Meeting, no additional Incentives will be granted under the Company's 2002
Management Incentive Compensation Plan. The closing sale price of a Common
Share, as quoted on the New York Stock Exchange on March 31, 2005, was $32.84.
15
LIMITATIONS AND ADJUSTMENTS TO SHARES ISSUABLE THROUGH THE INCENTIVE PLAN.
Incentives relating to no more than 600,000 Common Shares may be granted to a
single participant in any calendar year. In addition, an aggregate of no more
than 2,000,000 Common Shares may be issued as restricted stock, restricted stock
units or other stock-based awards, of which an aggregate of 200,000 Common
Shares may be granted without compliance with the minimum vesting periods
described below.
For purposes of determining the maximum number of Common Shares available
for delivery under the Incentive Plan, Common Shares that are not delivered
because an Incentive is forfeited, canceled or settled in cash will not be
deemed to have been delivered under the Incentive Plan. All 4,000,000 of the
Common Shares that may be issued through the Incentive Plan may be delivered
upon exercise of stock options intended to qualify as incentive stock options
under Section 422 of the Code.
Proportionate adjustments will be made to all of the share limitations
provided in the Incentive Plan, including shares subject to outstanding
Incentives, in the event of any recapitalization, reclassification, stock
dividend, stock split, combination of shares or other change in the Common
Shares, and the terms of any Incentive will be adjusted to the extent
appropriate to provide participants with the same relative rights before and
after the occurrence of any such event. If the Company merges, consolidates,
sells all of its assets or dissolves without causing a change of control of the
Company as described below, then each participant will be entitled to receive
upon exercise or payout of an Incentive granted before the transaction (i) in
lieu of Common Shares previously issuable thereunder, the number and class of
shares of stock to which the participant would have been entitled if the
participant was a shareholder at the time of the transaction or (ii) in lieu of
payments based on Common Stock, payments based on any formula that the
Compensation Committee determines to be equitable.
No Incentives may be granted under the Incentive Plan later than May 1,
2015.
AMENDMENTS TO THE INCENTIVE PLAN. The Board may amend or discontinue the
Incentive Plan at any time. However, the Company's shareholders must approve any
amendment that would:
- materially increase the benefits accruing to participants under the
Incentive Plan;
- increase the number of Common Shares that may be issued under the
Incentive Plan;
- materially expand the classes of persons eligible to participate in
the Incentive Plan;
- materially expand the types of awards available for grant under the
Incentive Plan;
- authorize grants of Incentives after May 1, 2015;
- materially change the method of determining the exercise price of
options or the base price of stock appreciation rights; or
- permit the repricing of an option or stock appreciation right.
Subject to certain exceptions, no amendment or discontinuance of the
Incentive Plan may materially impair any previously granted Incentive without
the consent of the recipient.
TYPES OF INCENTIVES. Each of the types of Incentives that may be granted
under the Incentive Plan is described below:
16
Stock Options. The Compensation Committee may grant non-qualified stock
options or incentive stock options to purchase shares of Common Stock. The
Compensation Committee will determine the number and exercise price of the
options, and the time or times that the options become exercisable, provided
that the option exercise price may not be less than the fair market value of a
Common Share on the date of grant, except for an option granted in substitution
of an outstanding award in an acquisition transaction. The term of an option
will also be determined by the Compensation Committee, but may in no event
exceed ten years. The Compensation Committee may accelerate the exercisability
of any stock option at any time. As noted above, the Compensation Committee may
not, without the prior approval of the Company's shareholders, decrease the
exercise price for any outstanding option after the date of grant. In addition,
an outstanding option may not, as of any date that the option has a per share
exercise price that is greater than the then current fair market value of a
Common Share, be surrendered to the Company as consideration for the grant of a
new option with a lower exercise price, another Incentive, a cash payment or
Common Shares, unless approved by the Company's shareholders. Incentive stock
options will be subject to certain additional requirements necessary in order to
qualify as incentive stock options under Section 422 of the Code.
The option exercise price may be paid in cash; by check; in Common Shares,
subject to certain limitations; through a "cashless" exercise arrangement with a
broker approved in advance by the Company; or in any other manner authorized by
the Compensation Committee.
Restricted Stock. Shares of Common Stock may be granted by the
Compensation Committee and made subject to restrictions on sale, pledge or other
transfer by the recipient for a certain period (the restricted period). Except
for shares of restricted stock that vest based on the attainment of performance
goals, the restricted period must be a minimum of three years, with incremental
vesting of portions of the award over the three-year period permitted. If
vesting of the shares is subject to the attainment of specified performance
goals, the restricted period must be at least one year, with incremental vesting
of portions of the award allowed. However, as described above, restricted stock,
restricted stock units or other stock-based awards, with respect to an aggregate
of 200,000 Common Shares, may be granted without compliance with these minimum
vesting periods. All shares of restricted stock will be subject to such
restrictions as the Compensation Committee may provide in an agreement with the
participant, including provisions which may obligate the participant to forfeit
or resell the shares to the Company in the event of termination of employment or
if specified performance goals or targets are not met. Subject to the
restrictions provided in the agreement and the Incentive Plan, a participant
receiving restricted stock shall have all of the rights of a shareholder as to
such shares.
Restricted Stock Units. Restricted stock units may be granted by the
Compensation Committee and made subject to restrictions on sale, pledge or other
transfer by the employee for a certain period (the restricted period). A
restricted stock unit represents the right to receive from the Company on the
scheduled vesting date or other specified payment date one Common Share.
Restricted stock units are subject to the same minimum vesting requirements
described above for restricted stock. All restricted stock units will be subject
to such restrictions as the Compensation Committee may provide in an agreement
with the participant, including provisions which may obligate the participant to
forfeit or resell the units to the Company in the event of termination of
employment or if specified performance goals or targets are not met.
17
Subject to the restrictions provided in the agreement and the Incentive Plan, a
participant receiving restricted stock units shall have no rights of a
shareholder as to such units until such time as Common Shares are issued to the
participant.
Stock-Settled Stock Appreciation Rights. A stock-settled stock
appreciation right is a right to receive, without payment to the Company, a
number of Common Shares determined by dividing the product of the number of
Common Shares as to which the stock appreciation right is exercised and the
amount of the appreciation in such shares by the fair market value of a Common
Share on the date of exercise of the right. The Compensation Committee will
determine the base price used to measure share appreciation and the number and
term of stock appreciation rights, provided that the term of a stock
appreciation right may not exceed ten years. The Compensation Committee may
accelerate the exercisability of any stock appreciation right at any time. The
Incentive Plan restricts decreases in the base price and certain exchanges of
stock appreciation rights on terms similar to the restrictions summarized above
for options.
Other Stock-Based Awards. The Incentive Plan also permits the Compensation
Committee to grant participants awards of Common Shares and other awards that
are denominated in, payable in, valued in whole or in part by reference to, or
are otherwise based on the value of, or the appreciation in value of, Common
Shares (other stock-based awards). The Compensation Committee has discretion to
determine the times at which such awards are to be made, the size of such
awards, the form of payment, and all other conditions of such awards, including
any restrictions, deferral periods or performance requirements. Other
stock-based awards are subject to the same minimum vesting requirements
described above for restricted stock and restricted stock units.
PERFORMANCE-BASED COMPENSATION UNDER SECTION 162(m). Stock options and
stock appreciation rights granted in accordance with the terms of the Incentive
Plan will qualify as performance-based compensation under Section 162(m), which
is described under "Executive Compensation and Related Information -
Compensation Committee's Report on Executive Compensation." Grants of any
restricted stock, restricted stock units or other stock-based awards that the
Company intends to qualify as performance-based compensation under Section
162(m) must be made subject to the achievement of pre-established performance
goals. The pre-established performance goals will be based upon any or a
combination of the following criteria relating to the Company or one or more of
its divisions, subsidiaries or lines of business: return on equity, cash flow,
assets or investment; shareholder return; changes in revenues, operating income,
cash flow, cash provided by operating activities, earnings or earnings per
share; customer growth; customer satisfaction or an economic value added
measure. For any performance period, the performance goals may be measured on an
absolute basis or relative to a group of peer companies selected by the
Compensation Committee, relative to internal goals or industry benchmarks, or
relative to levels attained in prior years. Performance measurements may be
adjusted as specified under the Incentive Plan to exclude the effects of
non-recurring transactions or changes in accounting standards.
The Compensation Committee has authority to use different targets from
time to time with respect to the performance goals provided in the Incentive
Plan. The regulations under Section 162(m) require that the material terms of
the performance goals be reapproved by the shareholders every five years. To
qualify as performance-based compensation, grants of
18
restricted stock, restricted stock units and other stock-based awards will be
required to satisfy the other applicable requirements of Section 162(m).
TERMINATION OF EMPLOYMENT. If an employee participant ceases to be an
employee of the Company for any reason, including death, disability, early
retirement or normal retirement, the employee's outstanding Incentives may be
exercised or shall expire at such time or times as may be determined by the
Compensation Committee and described in the employee's Incentive agreement.
CHANGE OF CONTROL. In the event of a change of control of the Company, as
defined in the Incentive Plan, all Incentives will become fully vested and
exercisable, all restrictions or limitations on any Incentives will lapse and,
unless otherwise provided in the Incentive agreement, all performance criteria
and other conditions relating to the payment of Incentives will generally be
deemed to be achieved.
In addition to the foregoing, upon a change of control the Compensation
Committee will have the authority to take a variety of actions regarding
outstanding Incentives. Within certain time periods and under certain
conditions, the Compensation Committee may (i) require that all outstanding
Incentives remain exercisable only for a limited time, after which time all such
Incentives will terminate, (ii) require the surrender to the Company of some or
all outstanding Incentives in exchange for a stock or cash payment for each
Incentive equal in value to the per-share change of control value, calculated as
described in the Incentive Plan, over the exercise or base price, (iii) make any
equitable adjustments to outstanding Incentives as the Compensation Committee
deems necessary to reflect the corporate change or (iv) provide that an
Incentive shall become an Incentive relating to the number and class of shares
of stock or other securities or property (including cash) to which the
participant would have been entitled in connection with the change of control
transaction if the participant had been a shareholder.
TRANSFERABILITY OF INCENTIVES. The Incentives awarded under the Incentive
Plan may not be transferred except
- by will
- by the laws of descent and distribution
- pursuant to a domestic relations order, or
- in the case of stock options only, if permitted by the Compensation
Committee and if so provided in the stock option agreement, to
immediate family members or to a partnership, limited liability
company or trust for which the sole owners, members or beneficiaries
are the participant or immediate family members.
PAYMENT OF WITHHOLDING TAXES. The Company may withhold from any payments
or stock issuances under the Incentive Plan, or collect as a condition of
payment, any taxes required by law to be withheld. If permitted under the
participant's Incentive agreement, the participant may, but is not required to,
satisfy his or her withholding tax obligation by electing to deliver currently
owned Common Shares or to have the Company withhold, from the shares the
participant would otherwise receive, Common Shares, in each case having a value
equal to the minimum amount required to be withheld. This election must be made
prior to the date on which
19
the amount of tax to be withheld is determined and is subject to the
Compensation Committee's right of disapproval.
PURCHASE OF INCENTIVES. The Compensation Committee may approve the
purchase by the Company of an unexercised or unvested Incentive from the holder
by mutual agreement.
AWARDS TO BE GRANTED
If the shareholders approve the Incentive Plan at the Meeting, grants of
awards to employees, officers, consultants and advisors will be made in the
future by the Compensation Committee as it deems necessary or appropriate. Any
cash received by the Company in connection with the exercise or settlement of
Incentives will be used for general corporate purposes.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences related to the issuance of the
different types of Incentives that may be awarded under the Incentive Plan are
discussed below. Participants who are granted Incentives under the Incentive
Plan should consult their own tax advisors to determine the tax consequences
based on their particular circumstances.
STOCK OPTIONS. Under existing federal income tax provisions, a participant
who is granted a stock option normally will not realize any income, nor will the
Company normally receive any deduction for federal income tax purposes, in the
year the option is granted.
When a non-qualified stock option granted pursuant to the Incentive Plan
is exercised, the participant will realize ordinary income measured by the
difference between the aggregate purchase price of the Common Shares acquired
and the aggregate fair market value of the Common Shares acquired on the
exercise date and, subject to the limitations of Section 162(m) of the Code, the
Company will be entitled to a deduction in the year the option is exercised
equal to the amount the participant is required to treat as ordinary income.
An employee generally will not recognize any income upon the exercise of
any incentive stock option, but the excess of the fair market value of the
shares at the time of exercise over the option price will be an item of tax
preference, which may, depending on particular factors relating to the employee,
subject the employee to the alternative minimum tax imposed by Section 55 of the
Code. The alternative minimum tax is imposed in addition to the federal
individual income tax, and it is intended to ensure that individual taxpayers do
not completely avoid federal income tax by using preference items. An employee
will recognize capital gain or loss in the amount of the difference between the
exercise price and the sale price on the sale or exchange of stock acquired
pursuant to the exercise of an incentive stock option, provided the employee
does not dispose of such stock within two years from the date of grant and one
year from the date of exercise of the incentive stock option (the holding
periods). An employee disposing of such shares before the expiration of the
holding periods will recognize ordinary income generally equal to the difference
between the option price and the fair market value of the stock on the date of
exercise. The remaining gain, if any, will be capital gain. The Company will not
be entitled to a federal income tax deduction in connection with the exercise of
an
20
incentive stock option, except where the employee disposes of the Common
Shares received upon exercise before the expiration of the holding periods.
If the exercise price of a non-qualified option is paid by the surrender
of previously owned shares, the basis and the holding period of the previously
owned shares carry over to the same number of shares received in exchange for
the previously owned shares. The compensation income recognized on exercise of
these options is added to the basis of the shares received. If the exercised
option is an incentive stock option and the shares surrendered were acquired
through the exercise of an incentive stock option and have not been held for the
holding periods, the optionee will recognize income on such exchange, and the
basis of the shares received will be equal to the fair market value of the
shares surrendered. If the applicable holding period has been met on the date of
exercise, there will be no income recognition and the basis and the holding
period of the previously owned shares will carry over to the same number of
shares received in exchange, and the remaining shares will begin a new holding
period and have a zero basis.
RESTRICTED STOCK. Unless the participant who is granted restricted stock
makes an election to accelerate recognition of the income to the date of grant
(as described below), the participant will not recognize income, and the Company
will not be allowed a tax deduction, at the time the restricted stock award is
granted. When the restrictions lapse, the participant will recognize ordinary
income equal to the fair market value of the Common Shares as of that date (less
any amount paid for the Common Shares), and the Company will be allowed a
corresponding federal income tax deduction at that time, subject to any
applicable limitations under Section 162(m) of the Code. If the participant
files an election under Section 83(b) of the Code within 30 days of the date of
grant of restricted stock, the participant will recognize ordinary income as of
the date of the grant equal to the fair market value of the stock as of that
date (less any amount paid for the stock), and the Company will be allowed a
corresponding federal income tax deduction at that time, subject to any
applicable limitations under Section 162(m). Any future appreciation in the
stock will be taxable to the participant at capital gains rates. If the stock is
later forfeited, however, the participant will not be able to recover the tax
previously paid pursuant to a Section 83(b) election.
RESTRICTED STOCK UNITS. A participant will not be deemed to have received
taxable income upon the grant of restricted stock units. The participant will be
deemed to have received taxable ordinary income at such time as shares are
distributed with respect to the restricted stock units in an amount equal to the
fair market value of the shares distributed to the participant. Upon the
distribution of Common Shares to a participant with respect to restricted stock
units, the Company will ordinarily be entitled to a deduction for federal income
tax purposes in an amount equal to the taxable ordinary income of the
participant, subject to any applicable limitations under Section 162(m) of the
Code. The basis of the Common Shares received will equal the amount of taxable
ordinary income recognized by the participant upon receipt of such shares.
STOCK-SETTLED STOCK APPRECIATION RIGHTS. Generally, a participant who is
granted a stock-settled stock appreciation right under the Incentive Plan will
not recognize any taxable income at the time of the grant. The participant will
recognize ordinary income upon exercise equal to the fair market value of the
stock received on the day it is received.
21
In general, there are no federal income tax deductions allowed to the
Company upon the grant or termination of stock-settled stock appreciation
rights. Upon the exercise of the stock-settled stock appreciation right,
however, the Company will be entitled to a deduction for federal income tax
purposes equal to the amount of ordinary income that the participant is required
to recognize as a result of the exercise, provided that the deduction is not
otherwise disallowed under Section 162(m).
OTHER STOCK-BASED AWARDS. Generally, a participant who is granted an other
stock-based award under the Incentive Plan will recognize ordinary income at the
time the Common Shares associated with the award are received in an amount equal
to the excess of the fair market value of the stock received over any amount
paid by the participant in exchange for the stock. If, however, the stock is
non-vested (meaning the employee is required to work for a period of time in
order to have the right to sell the stock) when it is received under the
Incentive Plan and the participant has not elected otherwise under Section 83(b)
of the Code, the participant generally will not recognize income until the stock
becomes vested, at which time the participant will recognize ordinary income
equal to the excess of the fair market value of the stock on the date it becomes
vested over any amount paid by the participant in exchange for the stock.
In the case of other stock-based awards that take the form of the
Company's unfunded and unsecured promise to issue Common Shares at a future
date, the grant of this type of award is not a taxable event to the participant
because it constitutes an unfunded and unsecured promise to issue Common Shares
at a future date. Once this type of award vests and the participant receives the
Common Shares, the tax rules discussed in the previous paragraph will apply to
receipt of such shares. If such an award constitutes non-qualified deferred
compensation under Section 404A of the Code, it will be required to be
structured to comply with Section 404A to avoid the imposition on the
participant of penalties and interest.
If a participant receives the cash equivalent of Common Shares (in lieu of
actually receiving Common Shares), the participant will recognize ordinary
income at the time of the receipt of such cash in the amount of the cash
received.
In the year that the participant recognizes ordinary taxable income in
respect of such award, the Company will be entitled to a deduction for federal
income tax purposes equal to the amount of ordinary income that the participant
is required to recognize, provided that the deduction is not otherwise
disallowed under Section 162(m).
TAX CONSEQUENCES OF A CHANGE OF CONTROL. If, upon a change of control of
the Company, the exercisability, vesting or payout of an Incentive is
accelerated, any excess on the date of the change of control of the fair market
value of the shares or cash issued under accelerated Incentives over the
purchase price of such shares, if any, may be characterized as "parachute
payments" (within the meaning of Section 280G of the Code) if the sum of such
amounts and any other such contingent payments received by the employee exceeds
an amount equal to three times the "base amount" for such employee. The base
amount generally is the average of the annual compensation of such employee for
the five years preceding such change in ownership or control. An "excess
parachute payment," with respect to any employee, is the excess of the parachute
payments to such person, in the aggregate, over and above such person's
22
base amount. If the amounts received by an employee upon a change of control are
characterized as parachute payments, such employee will be subject to a 20%
excise tax on the excess parachute payment and the Company will be denied any
deduction with respect to such excess parachute payment.
The foregoing discussion summarizes the federal income tax consequences of
Incentives that may be granted under the Incentive Plan based on current
provisions of the Code, which are subject to change. This discussion also
assumes that the Incentives will not be deemed deferred compensation under
Section 409A of the Code. This summary does not cover any foreign, state or
local tax consequences of Incentives.
ACCOUNTING
For information on the accounting effects of granting stock-based
compensation, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Appendix E to this proxy
statement.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about Common Shares authorized
for issuance under the Company's existing equity compensation plans as of
December 31, 2004.
(c)
Number of securities
remaining available for
(a) (b) future issuance under
Number of securities to Weighted-average plans (excluding
be issued upon conversion exercise price of securities reflected in
Plan Category of outstanding options outstanding options column (a))
------------------------- ------------------------- ------------------- -----------------------
Equity compensation plans
approved by security
holders 6,713,558(1) $ 28.79 2,694,244(2)
Employee Stock Purchase
Plan approved by
shareholders - - 4,721,138
Equity compensation plans
not approved by security
holders - - -
--------- --------- ---------
Totals 6,713,558(1) $ 28.79 7,415,382
========= ========= =========
(1) For data as of a more recent date, see " - Terms of the Incentive Plan -
Shares Issuable Through the Incentive Plan."
(2) Includes 1,695,124 Common Shares subject to issuance as of December 31,
2004 under the Company's 2002 Management Incentive Compensation Plan (of
which 9,371 were subject to issuance as restricted stock or other
stock-based awards). If the Incentive Plan is approved at the Meeting,
none of the shares
23
subject to issuance under the Company's 2002 Management Incentive
Compensation Plan will be available for future issuance.
VOTE REQUIRED
Approval of the Incentive Plan requires the affirmative vote of the
holders of at least a majority of the total number of votes cast with respect to
such matter, provided that such number of votes cast represents over one-half in
interest of all Voting Shares. See "Other Matters - Quorum and Voting of
Proxies."
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
PROPOSAL TO APPROVE THE CENTURYTEL, INC. 2005 DIRECTORS
STOCK PLAN
(ITEM 4 ON PROXY OR VOTING INSTRUCTION CARD)
GENERAL
The Board believes that the proposed CenturyTel, Inc. 2005 Directors Stock
Plan (the "Director Plan") will provide an effective means of attracting and
retaining experienced and qualified directors, and will encourage the highest
level of director performance by providing directors with a proprietary interest
in the financial success and growth of the Company. The Director Plan has been
adopted by the Board of Directors, subject to its approval by the shareholders
at the Meeting. If the Director Plan is not approved by the shareholders at the
Meeting, the awards proposed to be granted under the Director Plan will not be
granted and the Company's 2002 Directors Stock Option Plan will remain in
effect. The principal features of the Director Plan are summarized below. This
summary is qualified in its entirety, however, by reference to the Director
Plan, which is attached to this proxy statement as Appendix B.
PURPOSE OF THE PROPOSAL
The Board intends for the Director Plan to supersede the Company's 2002
Directors Stock Option Plan, which is a formulaic, non-discretionary plan that
automatically grants non-qualified stock options to outside directors on terms
and a schedule fixed under the plan. The Board believes that the adoption of a
more flexible, discretionary plan superseding the 2002 Directors Stock Option
Plan will be better suited for attracting, retaining and motivating outside
directors under prevailing market conditions.
TERMS OF THE DIRECTOR PLAN
ADMINISTRATION OF THE DIRECTOR PLAN. If the Director Plan is approved at
the Meeting, the Compensation Committee of the Board will administer the plan
and have authority to make awards under the plan, to set the terms of the
awards, to interpret the plan, to establish any rules or regulations relating to
the plan that it determines to be appropriate and to make any other
determination that it believes necessary or advisable for proper administration
of the plan.
24
ELIGIBILITY. Only non-employee directors of the Company are eligible to
participate in and receive awards ("Incentives") under the Director Plan.
Assuming the nominees named in this proxy statement are elected at the Meeting
in the manner described herein, the Company will immediately thereafter have 11
non-employee directors eligible to receive Incentives under the Director Plan.
See " - Awards to be Granted" for information on awards to be granted in May
2005. Unless the Compensation Committee otherwise determines, future grants will
be made on the day following each annual meeting of shareholders. Incentives
under the Director Plan may be granted by the Compensation Committee in any one
or a combination of the following forms:
- non-qualified stock options;
- restricted stock;
- restricted stock units;
- stock-settled stock appreciation rights; and
- other stock-based awards.
SHARES ISSUABLE THROUGH THE DIRECTOR PLAN. A total of 400,000 Common
Shares are authorized to be issued under the Director Plan, representing
approximately 0.3% of the outstanding Common Shares. If the Director Plan is
approved at the Meeting, no additional stock options will be granted under the
Company's predecessor director stock option plan. The closing sale price of a
Common Share, as quoted on the New York Stock Exchange on March 31, 2005, was
$32.84.
LIMITATIONS AND ADJUSTMENTS TO SHARES ISSUABLE THROUGH THE DIRECTOR PLAN.
An aggregate of no more than 200,000 Common Shares may be issued as restricted
stock, restricted stock units or other stock-based awards under the Director
Plan.
For purposes of determining the maximum number of Common Shares available
for delivery under the Director Plan, Common Shares that are not delivered
because an Incentive is forfeited, canceled or settled in cash will not be
deemed to have been delivered under the Director Plan.
Proportionate adjustments will be made to all of the share limitations
provided in the Director Plan, including shares subject to outstanding
Incentives, in the event of any recapitalization, reclassification, stock
dividend, stock split, combination of shares or other change in the Common
Shares, and the terms of any Incentive will be adjusted to the extent
appropriate to provide participants with the same relative rights before and
after the occurrence of any such event. If the Company merges, consolidates,
sells all of its assets or dissolves without causing a change of control of the
Company as described below, then each participant will be entitled to receive
upon exercise or payout of an Incentive granted before the transaction (i) in
lieu of Common Shares previously issuable thereunder, the number and class of
shares of stock to which the participant would have been entitled if the
participant was a shareholder at the time of the transaction or (ii) in lieu of
payments based on Common Stock, payments based on any formula that the
Compensation Committee determines to be equitable.
No Incentives may be granted under the Director Plan later than May 1,
2015.
25
AMENDMENTS TO THE DIRECTOR PLAN. The Board may amend or discontinue the
Director Plan at any time. However, the Company's shareholders must approve any
amendment that would:
- materially increase the benefits accruing to participants under the
Director Plan;
- increase the number of Common Shares that may be issued under the
Director Plan;
- materially expand the classes of persons eligible to participate in
the Director Plan;
- materially expand the types of awards available for grant under the
Director Plan;
- authorize grants of Incentives after May 1, 2015;
- materially change the method of determining the exercise price of
options or the base price of stock appreciation rights; or
- permit repricing of an option or stock appreciation right.
Subject to certain exceptions, no amendment or discontinuance of the
Director Plan may materially impair any previously granted Incentive without the
consent of the recipient.
TYPES OF INCENTIVES. Each of the types of Incentives that may be granted
under the Director Plan is described below:
Stock Options. The Compensation Committee may grant non-qualified stock
options to purchase Common Shares. The Compensation Committee will determine the
number and exercise price of the options, and the time or times that the options
become exercisable, provided that the option exercise price may not be less than
the fair market value of a Common Share on the date of grant, except for an
option granted in substitution of an outstanding award in an acquisition
transaction. The term of an option will also be determined by the Compensation
Committee, but may in no event exceed ten years. The Compensation Committee may
accelerate the exercisability of any stock option at any time. As noted above,
the Compensation Committee may not, without the prior approval of the Company's
shareholders, decrease the exercise price for any outstanding option after the
date of grant. In addition, an outstanding option may not, as of any date that
the option has a per share exercise price that is greater than the then current
fair market value of a Common Share, be surrendered to the Company as
consideration for the grant of a new option with a lower exercise price, another
Incentive, a cash payment or Common Shares, unless approved by the Company's
shareholders.
The option exercise price may be paid in cash; by check; in Common Shares,
subject to certain limitations; through a "cashless" exercise arrangement with a
broker; or in any other manner authorized by the Compensation Committee.
Restricted Stock. Common Shares may be granted by the Compensation
Committee to an eligible director and made subject to restrictions on sale,
pledge or other transfer by the director for a certain period (the restricted
period). All shares of restricted stock will be subject to such restrictions as
the Compensation Committee may provide in an agreement with the participant,
including provisions which may obligate the participant to forfeit or resell the
shares to the Company under circumstances, if any, to be specified by the
Compensation Committee. Subject to the restrictions provided in the agreement
and the Director Plan, a participant receiving restricted stock shall have all
of the rights of a shareholder as to such shares.
26
Restricted Stock Units. Restricted stock units may be granted by the
Compensation Committee to an eligible director and made subject to restrictions
on sale, pledge or other transfer by the director for a certain period (the
restricted period). A restricted stock unit represents the right to receive from
the Company on the scheduled vesting date and other specified payment date one
Common Share. All restricted stock units will be subject to such restrictions as
the Compensation Committee may provide in an agreement with the participant,
including provisions which may obligate the participant to forfeit or resell the
units to the Company under circumstances, if any, to be specified by the
Compensation Committee. Subject to the restrictions provided in the agreement
and the Director Plan, a participant receiving restricted stock units shall have
no rights of a shareholder as to such units until such time as Common Shares are
issued to the participant.
Stock-Settled Stock Appreciation Rights. A stock-settled stock
appreciation right is a right to receive, without payment to the Company, a
number of Common Shares determined by dividing the product of the number of
Common Shares as to which the stock appreciation right is exercised and the
amount of the appreciation in such shares by the fair market value of a Common
Share on the date of exercise of the right. The Compensation Committee will
determine the base price used to measure share appreciation and the number and
term of the stock appreciation rights, provided that the term of a stock
appreciation right may not exceed ten years. The Compensation Committee may
accelerate the exercisability of any stock appreciation right at any time. The
Director Plan restricts decreases in the base price and certain exchanges of
stock appreciation rights on terms similar to the restrictions summarized above
for options.
Other Stock-Based Awards. The Director Plan also permits the Compensation
Committee to grant outside directors awards of Common Shares and other awards
that are denominated in, payable in, valued in whole or in part by reference to,
or are otherwise based on the value of, or the appreciation in value of, Common
Shares (other stock-based awards). The Compensation Committee has discretion to
determine the times at which such awards are to be made, the size of such
awards, the form of payment, and all other conditions of such awards, including
any restrictions, deferral periods or performance requirements.
TERMINATION OF BOARD SERVICE. If an outside director ceases to be a member
of the Board for any reason, including death, disability, early retirement or
normal retirement, the director's outstanding Incentives may be exercised or
shall expire at such time or times as may be determined by the Compensation
Committee and described in the director's Incentive agreement.
CHANGE OF CONTROL. In the event of a change of control of the Company, as
defined in the Director Plan, all Incentives will become fully vested and
exercisable, all restrictions or limitations on any Incentives will lapse and,
unless otherwise provided in the Incentive agreement, all performance criteria
and other conditions relating to the payment of Incentives will generally be
deemed to be achieved.
In addition to the foregoing, upon a change of control the Compensation
Committee will have the authority to take a variety of actions regarding
outstanding Incentives. Within certain time periods or under certain conditions,
the Compensation Committee may (i) require that all outstanding Incentives
remain exercisable only for a limited time, after which time all such Incentives
will terminate, (ii) require the surrender to the Company of some or all
outstanding
27
Incentives in exchange for a stock or cash payment for each Incentive equal in
value to the per-share change of control value, calculated as described in the
Director Plan, over the exercise or base price, (iii) make any equitable
adjustments to outstanding Incentives as the Compensation Committee deems
necessary to reflect the corporate change or (iv) provide that an Incentive
shall become an Incentive relating to the number and class of shares of stock or
other securities or property (including cash) to which the participant would
have been entitled in connection with the change of control transaction if the
participant had been a shareholder.
TRANSFERABILITY OF INCENTIVES. The Incentives awarded under the Director
Plan may not be transferred except
- by will;
- by the laws of descent and distribution;
- pursuant to a domestic relations order; or
- in the case of stock options only, if permitted by the Compensation
Committee and if so provided in the stock option agreement, to
immediate family members or to a partnership, limited liability
company or trust for which the sole owners, members or beneficiaries
are the participant or immediate family members.
PAYMENT OF WITHHOLDING TAXES. The Company may withhold from any payments
or stock issuances under the Director Plan, or collect as a condition of
payment, any taxes required by law to be withheld.
PURCHASE OF INCENTIVES. The Compensation Committee may approve the
purchase by the Company of an unexercised or unvested Incentive from the holder
by mutual agreement.
FEDERAL INCOME TAX CONSEQUENCES
The tax consequences related to the issuance of the different types of
Incentives that may be awarded under the Director Plan are discussed under
"Proposal to Approve the CenturyTel, Inc. 2005 Management Incentive Compensation
Plan - Federal Income Tax Consequences."
AWARDS TO BE GRANTED
If the shareholders approve the Director Plan at the Meeting, the Company
will grant shares of restricted stock under the Director Plan on May 13, 2005 to
the below-named persons in the amounts set forth below.
Value of Shares of
Name Restricted Stock(1)
--------------------- -------------------
William R. Boles, Jr. $ 100,000
Virginia Boulet(2) $ 100,000
Calvin Czeschin(2) $ 100,000
James B. Gardner(2) $ 100,000
W. Bruce Hanks $ 100,000
Gregory J. McCray(2) $ 100,000
28
Value of Shares of
Name Restricted Stock(1)
--------------------- -------------------
C. G. Melville, Jr. $ 100,000
Fred R. Nichols $ 100,000
Harvey P. Perry $ 100,000
Jim D. Reppond $ 100,000
Joseph R. Zimmel $ 100,000
All non-employee
directors as a group $ 1,100,000
--------------------
(1) The number of shares of Restricted Stock to be issued will be based on the
average closing price of the Common Shares on each of the 15 trading days
preceding the Meeting.
(2) The referenced grants of shares of restricted stock is contingent upon the
director's re-election or, in the case of Mr. McCray, election at the
Meeting.
In addition, while the Director Plan is in effect and to the extent that
Common Shares remain available for issuance thereunder, non-employee directors
will continue to receive future grants of Incentives as determined by the
Compensation Committee on the terms described above. Any cash received by the
Company in connection with the exercise or settlement of future Incentives will
be used for general corporate purposes.
If the Director Plan is not approved at the Meeting, each outside director
who is duly elected and serving immediately after the Meeting will receive
non-qualified options to purchase 6,000 Common Shares.
ACCOUNTING
For information on the accounting effects of granting stock-based
compensation, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Appendix E to this proxy
statement.
EQUITY COMPENSATION PLAN INFORMATION
Information about Common Shares authorized for issuance under the
Company's existing equity compensation plans is provided under "Proposal to
Approve the CenturyTel, Inc. 2005 Management Incentive Compensation Plan -
Equity Compensation Plan Information."
VOTE REQUIRED
Approval of the Director Plan requires the affirmative vote of the holders
of at least a majority of the total number of votes cast with respect to such
matter, provided that such number
29
of votes cast represents over one-half in interest of all Voting Shares. See
"Other Matters - Quorum and Voting of Proxies."
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
PROPOSAL TO APPROVE THE CENTURYTEL, INC. 2005 EXECUTIVE
OFFICER SHORT-TERM INCENTIVE PROGRAM
(ITEM 5 ON PROXY OR VOTING INSTRUCTION CARD)
GENERAL
The Company proposes to pay annual incentive bonuses to certain of its
designated executive officers for 2005 and future years pursuant to the
Company's 2005 Executive Officer Short-Term Incentive Program (the "Program").
Subject to shareholder approval of the Program at the Meeting, the Board of
Directors has adopted the Program to update and replace a similar predecessor
bonus plan, which is scheduled to lapse in the near future. The principal
features of the Program are summarized below. This summary is qualified in its
entirety, however, by reference to the full text of the Program, which is
attached to this proxy statement as Appendix C.
PURPOSE OF THE PROPOSAL
Under Section 162(m) of the Code, the Company may not deduct more than $1
million per year for compensation paid or accrued to the Chief Executive Officer
or the four other most highly compensated executive officers of the Company. An
exclusion from the $1 million per officer limitation is available for
compensation that satisfies the shareholder approval and other requirements
provided in Section 162(m) for qualified performance-based compensation. The
purpose of submitting the Program to the shareholders is to qualify the annual
incentive bonus to be paid to each participating executive officer as
performance-based compensation that will be excluded from the $1 million limit
on tax deductible compensation under Section 162(m). If approved at the Meeting,
the Program will supersede the Company's 2001 Executive Officer Short-Term
Incentive Program, a predecessor plan approved by the shareholders in 2001 to
accomplish similar purposes.
TERMS OF THE PROGRAM
ADMINISTRATION OF THE PROGRAM. If approved at the Meeting, the Program
will be administered by the Compensation Committee of the Board of Directors of
the Company, which will have the power to designate participants, establish
performance goals and objectives, adopt appropriate regulations, certify as to
the achievement of performance goals and make all determinations necessary for
the administration of the Program.
ELIGIBILITY. Any executive officer may be designated by the Compensation
Committee as a participant in the Program for any year. The Company currently
has six executive officers eligible to be designated as participants. The
Compensation Committee will designate prior to March 31 of each year the
executive officers of the Company who will participate in the Program that year.
30
INCENTIVE BONUS. Under the Program, each participant will be eligible to
be paid an incentive bonus based on the achievement of pre-established annual
performance goals. The participants and the performance goals for each year must
be established prior to March 31. The performance goals for each year will be
based upon one or more of the following criteria relating to the Company or one
or more of its divisions, subsidiaries or lines of business: return on equity,
cash flow, assets or investment; shareholder return; changes in revenues,
operating income, cash flow, cash provided by operating activities, earnings or
earnings per share; customer growth; customer satisfaction or an economic value
added measure. For any performance period, the performance goals may be measured
on an absolute basis or relative to a group of peer companies selected by the
Compensation Committee, relative to internal goals or industry benchmarks, or
relative to levels attained in prior years. Performance measurements may be
adjusted as specified under the Program to exclude the effect of non-recurring
transactions or changes in accounting standards. For each year that the Program
is in effect, the Committee may change the performance goals permitted under the
Program and targets.
No participant may be paid a bonus under the Program of more than $3.0
million for any year. The Compensation Committee has discretion to decrease but
not increase the amount of the bonus paid to a participant from the amount that
is payable under the terms of the pre-established criteria for the applicable
year. The Compensation Committee may determine to pay bonuses under the plan in
whole or in part in (i) cash or (ii) restricted stock or restricted stock units,
in which case such stock or units will be paid under any of the Company's
stock-based incentive plans that provide for such types of grants. Prior to the
payment of annual bonuses under the Program, the Compensation Committee must
certify that the performance goals and the applicable conditions to the payment
of the bonus have been met.
TERMINATION OF EMPLOYMENT. If a participant's employment is terminated as
the result of retirement on or after attaining age 55 (after completing five
full years of employment), disability, or death more than 90 days into any
calendar year, the participant or his heirs or beneficiary will be entitled to
receive a pro rata portion of the bonus that would otherwise be payable based on
the achievement of the performance goals for that year. If employment is
terminated during a Program year for any other reason, the participant will not
receive an award for that year, unless otherwise provided in the participant's
change of control agreement with the Company.
AMENDMENT TO THE PROGRAM. The Compensation Committee may amend, suspend or
terminate the Program at any time. Any amendment or termination of the Program
shall not, however, affect the right of a participant to receive any earned but
unpaid bonus.
TERM OF THE PROGRAM. The Program applies to each of the five calendar
years during the period beginning January 1, 2005 and ending December 31, 2009,
unless terminated earlier by the Compensation Committee.
BONUSES TO BE PAID. If the Program is not approved at the Meeting, the
annual incentive bonuses proposed to be paid under the Program will not be paid,
but participants will instead continue to participate in the Company's other
bonus plans in order to provide total compensation commensurate with their
responsibilities.
31
SECTION 162(m). Nothing in the Program precludes the Board of Directors or
its committees from making additional payments or special awards in their
discretion outside of the Program that may not qualify as performance-based
compensation under Section 162(m).
PLAN BENEFITS
For information as to the bonuses that would have been paid to the
executive officers under the Program for the last fiscal year if the Program had
been in effect, please see the bonus amounts included in the Summary
Compensation Table under "Executive Compensation and Related Information."
VOTE REQUIRED
Approval of the Program requires the affirmative vote of the holders of at
least a majority of the voting power present or represented by proxy at the
Meeting. See "Other Matters - Quorum and Voting of Proxies."
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL.
VOTING SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding ownership of the
Company's Common Shares by (i) each person known to the Company to beneficially
own more than 5% of the outstanding Common Shares or control more than 5% of the
total voting power, (ii) certain directors and executive officers of the Company
who are not listed in the table included under the heading "Election of
Directors" and (iii) all of the Company's directors and executive officers as a
group. Unless otherwise indicated, all information is presented as of the Record
Date in the same manner described under "Election of Directors" and all shares
indicated as beneficially owned are held with sole voting and investment power.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF PERCENT
OWNERSHIP OF OUTSTANDING OF VOTING
BENEFICIAL OWNER COMMON SHARES(1) COMMON SHARES(1) POWER(2)
------------------------------------------------------- ----------------- ---------------- ----------
Principal Shareholders:
The Trust Company of Sterne, Agee & Leach, 6,523,670(3) 4.9% 29.6%
Inc., as trustee (the "Trustee") of the ESOP
800 Shades Creek Parkway, Suite 100
Birmingham, Alabama 35209
Certain Directors or Executive Officers(4):
R. Stewart Ewing, Jr. 525,790(5) * *
Karen A. Puckett 517,373(6) * *
David D. Cole 463,771(7) * *
32
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF PERCENT
OWNERSHIP OF OUTSTANDING OF VOTING
BENEFICIAL OWNER COMMON SHARES(1) COMMON SHARES(1) POWER(2)
-------------------------------------------------- ----------------- ---------------- ----------
Michael E. Maslowski 327,994(8) * *
R. L. Hargrove, Jr. 78,440(9) * *
Johnny Hebert 28,645(9),(10) * *
All directors and executive officers as of 3.7% 2.7%
the Record Date as a group (18 persons) 4,872,892(11)
--------------
* Represents less than 1%.
(1) Determined in accordance with Rule 13d-3 of the SEC based upon information
furnished by the persons listed. In addition to Common Shares, the Company
has outstanding Preferred Shares that vote together with the Common Shares
as a single class on all matters. One or more persons beneficially own
more than 5% of the Preferred Shares; however, the percentage of total
voting power held by such persons is immaterial. For additional
information regarding the Preferred Shares, see page 1 of this proxy
statement. For additional information regarding the investment power held
by participants with respect to their Restricted Stock and Plan Shares,
see footnote 4 to the table included under the heading "Election of
Directors."
(2) Based on the Company's records and, with respect to all shares held of
record by the Trustee, based on information the Trustee periodically
provides to the Company to establish that certain of these shares entitle
the Trustee to cast ten votes per share.
(3) Substantially all of the voting power attributable to these shares is
directed by the participants of the ESOP, each of whom is deemed, subject
to certain limited exceptions, to tender such instructions as a "named
fiduciary" for all shares (except for PAYSOP shares) under such plan,
which requires the participants to direct their votes in a manner that
they believe to be prudent and in the best interests of the participants
of the ESOP.
(4) Mr. Ewing, Ms. Puckett, Mr. Cole and Mr. Maslowski are executive officers.
Mr. Hargrove and Mr. Hebert are directors who are retiring as Class II
directors at the Meeting.
(5) Includes 37,813 shares of Restricted Stock, 423,119 Option Shares that Mr.
Ewing has the right to acquire within 60 days of the Record Date, and
37,741 Plan Shares allocated to his accounts under the ESOP and 401(k)
Plan.
(6) Includes 45,213 shares of Restricted Stock, 465,003 Option Shares that Ms.
Puckett has the right to acquire within 60 days of the Record Date, 1,433
Plan Shares allocated to her accounts under the ESOP and 401(k) Plan and
200 shares held as custodian for the benefit of Ms. Puckett's children.
(7) Includes (i) 24,910 shares of Restricted Stock, (ii) 401,119 Option Shares
that Mr. Cole has the right to acquire within 60 days of the Record Date,
(iii) 27,847 Plan Shares allocated to his accounts under the ESOP and
401(k) Plan and (iv) 4,893 Plan Shares beneficially held by Mr. Cole's
wife as a former employee of the Company in her accounts under the ESOP
and 401(k) Plan, as to which he disclaims beneficial ownership.
(8) Includes 24,910 shares of Restricted Stock, 298,644 Option Shares that Mr.
Maslowski has the right to acquire within 60 days of the Record Date, and
1,677 Plan Shares allocated to his accounts under the ESOP and 401(K)
Plan.
(9) Includes 16,000 shares that each of Messrs. Hargrove and Hebert have the
right to acquire within 60 days of the date of this Proxy Statement
pursuant to options granted under the Company's 2002 directors stock
option plan.
(10) Includes 1,783 shares held of record by Mr. Hebert's wife, as to which he
disclaims beneficial ownership.
(11) Includes (i) 267,766 shares of Restricted Stock, (ii) 3,745,672 Option
Shares that such individuals have the right to acquire within 60 days of
the Record Date, (iii) 153,068 Plan Shares allocated to their respective
accounts under the ESOP and 401(k) Plan, (iv) 19,123 shares held of record
or beneficially by the spouses of certain of these individuals, as to
which beneficial ownership is disclaimed, and (v) 4,018 shares held as
custodian for the benefit of children of such individuals.
33
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following table sets forth certain information regarding the
compensation of (i) the Company's Chief Executive Officer and (ii) each of the
Company's four most highly compensated executive officers other than the Chief
Executive Officer (collectively, the "named officers"). Following this table is
additional information regarding option grants and option exercises during 2004.
For additional information on the compensation summarized below and other
benefits, see " - Report of Compensation Committee Regarding Executive
Compensation."
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
----------------------------------------
AWARDS PAYOUTS
--------------------------- -----------
ANNUAL NO. OF LONG-TERM
COMPENSATION RESTRICTED SECURITIES INCENTIVE
NAME AND CURRENT --------------------- STOCK UNDERLYING PLAN ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(1) OPTIONS PAYMENTS(2) COMPENSATION(3)
----------------------------- ---- -------- ---------- ----------- ----------- ------------ ---------------
Glen F. Post, III 2004 $961,544 $1,003,851 $ 1,326,312 160,000 $ 145,397 $ 189,238
Chairman of the Board and 2003 904,846 1,064,099 0 320,000 200,466 165,783
Chief Executive Officer 2002 787,594 812,797 150,000 320,000 239,804 90,190
Karen A. Puckett(4) 2004 541,860 518,560 623,480 75,000 0 110,124
President and Chief 2003 496,576 535,309 0 150,000 0 92,564
Operating Officer 2002 420,600 352,147 100,000 120,000 0 58,309
R. Stewart Ewing, Jr. 2004 492,384 385,536 518,622 62,500 43,781 96,601
Executive Vice President 2003 461,558 407,094 0 81,000 60,323 86,298
and Chief Financial 2002 390,657 274,241 100,000 81,000 72,215 59,651
Officer
David D. Cole 2004 359,016 281,109 340,080 40,500 43,781 82,334
Senior Vice President- 2003 345,734 304,938 0 81,000 60,323 74,771
Operations Support 2002 331,111 225,155 75,000 81,000 72,215 55,393
Michael E. Maslowski(5) 2004 307,711 214,166 340,080 40,500 12,554 65,789
Senior Vice President 2003 289,721 227,142 0 81,000 0 54,780
and Chief Information 2002 259,387 156,456 75,000 81,000 0 41,002
Officer
------------
(1) The Restricted Stock shown for 2002 was issued as a special bonus in early
2003 for extraordinary efforts and achievements in 2002. The Restricted
Stock shown for 2004 was issued in early 2004 as a portion of the
officers' long-term incentive compensation awards for 2004. Of the
Restricted Stock shown for 2002, one-third of the shares vested on March
15, 2004, one-third vested on March 15, 2005 and one-third will vest on
March 15, 2006, subject to accelerated vesting in certain events. All of
the Restricted Stock shown for 2004 will vest on March 15, 2009, subject
to accelerated vesting in certain events, including the Company attaining
certain targets relating to its 2004, 2005 or 2006 financial performance.
The chart below sets forth information as of December 31, 2004 regarding
the named officers' holdings of Restricted Stock (excluding for these
purposes (i) Restricted Stock outstanding on December 31, 2004 that vested
in early 2005 and (ii) Restricted Stock issued in February 2005).
34
Aggregate
Shares of Value at
Restricted December 31,
Name Stock 2004
----------- ----------- ------------
Mr. Post 48,620 $ 1,724,551
Ms. Puckett 23,213 823,365
Mr. Ewing 19,513 692,126
Mr. Cole 12,910 457,918
Mr. Maslowski 12,910 457,918
Dividends are paid currently with respect to all shares of Restricted
Stock described above. For additional information regarding the foregoing,
see "- Report of Compensation Committee Regarding Executive Compensation."
(2) Reflects the value of Common Shares released or issued as a result of
performance-based Restricted Stock and performance shares awarded in 1997,
1998 and 1999 becoming vested or earned in early 2002, 2003 and 2004,
respectively, based on the appreciation in the market value of the Common
Shares during the preceding five-year period. See "-Report of Compensation
Committee Regarding Executive Compensation-Prior Grants."
(3) Comprised of the Company's (i) matching contributions to the 401(k) Plan,
as supplemented by matching contributions under the Company's Supplemental
Dollars & Sense Plan, (ii) contributions pursuant to the ESOP, valued as
of December 31 of each respective year (as supplemented by contributions
under the Company's Supplemental Defined Contribution Plan), and (iii)
payment of cash allowances in lieu of previously-offered perquisites, in
each case for and on behalf of the named officers as follows:
Cash
Allowance
401(k) Plan ESOP in Lieu of
Name Year Contributions Contributions Perquisites
--------------- ---- ------------- ------------- -----------
Mr. Post 2004 $73,892 $ 81,026 $ 34,320
2003 62,758 68,705 34,320
2002 27,486 31,504 31,200
Ms. Puckett 2004 39,087 43,087 27,950
2003 30,730 33,949 27,885
2002 12,325 20,634 25,350
Mr. Ewing 2004 32,672 35,979 27,950
2003 28,981 29,431 27,885
2002 16,395 17,906 25,350
Mr. Cole 2004 27,826 26,558 27,950
2003 24,051 22,835 27,885
2002 14,557 15,486 25,350
Mr. Maslowski 2004 21,515 21,394 22,880
2003 14,613 17,847 22,320
2002 8,233 11,969 20,800
(4) Ms. Puckett's employment with the Company commenced on July 24, 2000.
(5) Mr. Maslowski's employment with the Company commenced on March 22, 1999.
35
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE OF
--------------------------------------------------------- OPTIONS AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION OVER TEN-YEAR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE EXPIRATION ----------------------------------
NAME GRANTED (1) IN 2004 PRICE DATE (5%) (10%)
-------------------------- ------------ ----------- -------- ----------- -------------- --------------
Glen F. Post, III......... 160,000 18% $28.34 2/25/14 $ 2,851,200 $ 7,227,200
Karen A. Puckett ......... 75,000 9% 28.34 2/25/14 1,336,500 3,387,750
R. Stewart Ewing, Jr...... 62,500 7% 28.34 2/25/14 1,113,750 2,823,125
David D. Cole............. 40,500 5% 28.34 2/25/14 721,710 1,829,385
Michael E. Maslowski...... 40,500 5% 28.34 2/25/14 721,710 1,829,385
All Shareholders(2)....... 132,373,912 - 28.10 - $2,339,047,025 $5,927,703,779
--------------
(1) One-third of these options became exercisable on February 25, 2004,
one-third became exercisable on February 25, 2005, and one-third will
become exercisable on February 25, 2006.
(2) The amounts shown as potential realizable value for all shareholders,
which are presented for comparison purposes only, represent the aggregate
net gain for all holders of Common Shares, as of December 31, 2004,
assuming a hypothetical option to acquire 132,373,912 Common Shares (the
number of such shares outstanding as of such date) granted at $28.10 per
share (the weighted average exercise price of all options granted in 2004)
on February 25, 2004 and expiring on February 25, 2014, if the price of
Common Shares appreciates at the rates shown in the table. There can be no
assurance that the potential realizable values shown in the table will be
achieved. The Company neither makes nor endorses any prediction as to
future stock performance.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
NO. OF NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT DECEMBER 31, 2004 DECEMBER 31, 2004
ON VALUE ------------------------------ ------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------------- -------- ---------- ------------ -------------- ----------- -------------
Glen F. Post, III......... 100,000 $1,786,754 1,310,550 426,662 $10,531,762 $ 2,729,578
Karen A. Puckett ......... 50,000 326,790 325,000 190,000 1,897,700 1,254,700
R. Stewart Ewing, Jr...... 30,442 467,721 327,450 122,666 2,482,425 795,499
David D. Cole............. 25,000 456,327 327,873 108,000 2,568,441 690,930
Michael E. Maslowski...... 27,001 176,047 217,642 108,000 875,065 690,930
REPORT OF COMPENSATION COMMITTEE REGARDING EXECUTIVE COMPENSATION
GENERAL. The Board's Compensation Committee, either directly or through
its Incentive Awards Subcommittee, monitors and approves the compensation of the
Company's executive officers, administers the Company's incentive compensation
programs, and performs other related tasks. The Committee is composed entirely
of Board members who qualify as independent directors under the Company's
corporate governance guidelines and "non-employee directors" under Rule 16b-3
promulgated under the Securities Exchange Act of 1934. The Subcommittee is
composed entirely of Committee members who also qualify as "outside directors"
under Section 162(m) of the Internal Revenue Code. If you would like additional
information on the responsibilities of the Compensation Committee, please refer
to its charter, which can be obtained in the manner described above under
"Corporate Governance - Access to Information."
36
Compensation Objectives. During 2004, the Committee applied the following
compensation objectives in connection with its deliberations:
- compensating the Company's executive officers with base salaries
that are higher than those of similarly-situated executives at
comparable companies, if justified by corporate and individual
performance
- providing a substantial portion of the executives' compensation in
the form of incentive compensation based principally upon the
Company's short and long-term performance and secondarily upon the
individual performance of the executives
- encouraging team orientation, and
- providing sufficient benefit levels for executives and their
families in the event of disability, illness or retirement.
In addition, to the extent that it is practicable and consistent with the
Company's executive compensation objectives, the Committee seeks to comply with
Section 162(m) of the Internal Revenue Code and any regulations promulgated
thereunder (collectively, "Section 162(m)") in order to preserve the tax
deductibility of performance-based compensation in excess of $1 million per
taxable year to each of the named officers. If compliance with Section 162(m)
conflicts with the Committee's compensation objectives or is contrary to the
best interests of the shareholders, the Committee will pursue its objectives,
regardless of the attendant tax implications.
Overview of 2004 Compensation. As described further below, the Company's
executive compensation for 2004 was comprised of:
- salary
- an annual cash incentive bonus
- long-term incentive compensation in the form of grants of restricted
stock and stock options in 2004 and the payout of incentive awards
granted in 1999, and
- other benefits typically provided to executives of comparable
companies, all as described further below.
For each such component of compensation, the Company's compensation levels were
compared with those of comparable companies.
Over the past decade, the Committee has retained independent consulting
firms every three years to conduct a detailed review of the Company's
compensation philosophy, practices and programs, including the structure of its
annual and long-term incentive compensation programs. During these triennial
reviews, the Committee has typically sought to confirm that its philosophy and
practices are comparable to those of similar companies and to establish the
target amount of long-term incentive compensation to be granted to each of the
Company's executives during the upcoming three-year period. The Committee and
its consultants have typically designed these long-term grants to have a value,
determined under commonly-used valuation methodologies, commensurate with
long-term incentive awards to similarly-situated executives at comparable
companies. During the second and third year of each of these three-year periods,
the Committee consults with its independent consultants to determine if changes
to the Company's three-year program are necessary or appropriate, and to
establish the annual and
37
incentive compensation payable to the Company's executives for the upcoming
year. Following deliberations with its independent consultants, the Committee
approved a three-year officer compensation program in early 2002 covering 2002,
2003 and 2004, and a three-year officer compensation program in early 2005
covering 2005, 2006 and 2007.
During the Fall of 2003, the Committee retained an independent consulting
firm to assist the Company in determining the annual and incentive compensation
of officers for 2004. The consulting firm compared the Company's officer
compensation to that of a national group of companies. This group included a
number of telecommunications companies (including several of the peer companies
referred to in the Company's stock performance graph appearing elsewhere
herein), but also included other companies that have revenue levels similar to
the Company's.
SALARY. The salary of the Chief Executive Officer and each other executive
officer is based primarily on the officer's level of responsibility and
comparisons to prevailing salary levels for similar officers at comparable
companies. Based upon survey data, recommendations of the Committee's
independent consulting firm and the Company's Chief Executive Officer, and other
considerations, the Committee in February 2004 increased the salary of the Chief
Executive Officer by 5.4% and the salaries of each of the Company's other named
officers by between 3.5% to 8.5%. The Committee believes these 2004 raises were
consistent with its primary objective of ensuring that the executive officers
receive salaries in excess of median salaries of similarly-situated executives
when warranted by corporate and individual performance. In early 2005, the
Committee increased the annual salary of the Chief Executive Officer an
additional 2.6%, to $1 million, and the annual salaries of other named officers
an additional 4.0% to 5.7%.
ANNUAL INCENTIVE BONUS PROGRAMS. The Company maintains (i) a
shareholder-approved short-term incentive program for certain of its executive
officers and (ii) an annual incentive bonus program for the Company's other
officers and managers. In connection with both of these bonus programs, the
Compensation Committee, either directly or through its Incentive Awards
Subcommittee, annually establishes target performance levels and the amount of
bonus payable if these targets are met, which typically is defined in terms of a
percentage of each officer's salary. For 2004, the Committee recommended target
bonuses ranging from 40% to 60% of each executive officer's salary if the
targets were met, with up to double these amounts if the targets were
substantially exceeded and no bonuses if certain minimum target performance
levels were not attained. The target bonus payable to the Company's Chief
Executive Officer for 2004 performance was based solely upon the Company's
overall financial performance measured in terms of operating income growth and
specified levels of return on cash flow measured in relation to the performance
of a group of peer companies, subject to the "negative discretion" of the
Committee to reduce the bonus payment. The bonuses payable to each other
executive officer were based upon the same corporate performance goals
established for the Chief Executive Officer, subject to the "negative
discretion" of the Chief Executive Officer to reduce the bonus payment based on
an assessment of the officer's performance during 2004, including an assessment
of the degree to which such officer attained his or her individual performance
goals for 2004.
38
Based on the Company's 2004 performance, the Chief Executive Officer
received a bonus equal to 104.4% of his 2004 salary. Applying the standards
described above, each other named officer received a bonus between approximately
70% and 96% of his or her 2004 salary. The Committee elected to pay these 2004
incentive bonuses in cash.
LONG-TERM EQUITY INCENTIVE PROGRAMS. The Company's current long-term
incentive compensation programs authorize the Incentive Awards Subcommittee to
grant stock options and various other stock-based incentives to key personnel.
Among the Subcommittee's central goals with respect to stock incentive awards is
to strengthen the relationship between compensation and growth in the market
price of the Common Shares and thereby align the executive officers' financial
interests with those of the Company's shareholders and to attract and retain
executive talent.
Incentives granted under these programs become exercisable based upon
criteria established by the Subcommittee. The Subcommittee generally determines
the size of option grants based on the recipient's responsibilities and duties,
and on information furnished by the Subcommittee's consultants regarding equity
incentive practices among comparable companies. Since 2001, the Committee's
general philosophy has been to award annual option grants as opposed to larger,
multi-year grants.
2004 Grants. In early 2004, the Subcommittee awarded equity incentive
grants for the final year of the three-year program developed and approved by
the Committee and its independent advisors in 2002. Based on data compiled by
the Committee's consulting firm, the Subcommittee determined that the target
amount of long-term compensation established during the 2002 triennial review
process continued to be commensurate with the long-term incentive awards to
similarly situated executives at other comparable companies. Unlike 2002 and
2003, however, the Subcommittee elected to pay these long-term incentive grants
half in stock options and half in restricted stock, the terms of which are
further described elsewhere herein.
Prior Grants. During 1997, 1998 and 1999, the Committee awarded to the
Company's officers long-term incentive compensation in the form of (i)
time-vested restricted stock which will generally vest on or about the fifth
anniversary of the grant date and (ii) performance-based restricted stock and
performance shares which will vest or be earned based on appreciation of the
market value of the Company's Common Shares over a five-year period. These
grants vested or were earned in early 2002, 2003 and 2004, respectively.
OTHER BENEFITS. The Company maintains certain broad-based employee benefit
plans in which the executive officers are generally permitted to participate on
terms substantially similar to those relating to all other participants, subject
to certain legal limitations on the compensation on which benefits and
contributions may be based. The Board has determined to have the Company's
matching contribution under the 401(k) Plan invested in Common Shares so as to
further align employees' and shareholders' financial interests. The Company also
maintains the ESOP, which serves to further align employees' and shareholders'
interests.
Prior to the Sarbanes-Oxley Act of 2002, the Company funded supplemental
life insurance benefits to its officers in excess of those generally afforded to
employees. These benefits were provided pursuant to endorsement "split-dollar"
insurance agreements between the
39
Company and its officers. Under each of these agreements, the Company and the
officer's beneficiaries shared the death benefits payable upon the officer's
death under a life insurance policy procured by the Company, with the
beneficiaries receiving pre-retirement death benefits of four times the
officer's annual salary less group life insurance benefits (or post-retirement
death benefits of two times the officer's annual salary less group life
insurance benefits), and the Company receiving all remaining death benefits. In
response to uncertainties as to whether these arrangements with the Company's
executive officers violated the Sarbanes-Oxley Act, in mid-2002 the Company
suspended the payment of further premiums under the "split-dollar" policies
insuring the lives of its executive officers. In November 2003, the Compensation
Committee approved restructured arrangements with the executive officers in
order to alleviate such uncertainties, as well as potential adverse tax
consequences of new tax regulations adopted in 2003. Under these restructured
arrangements with each executive officer, the Company is authorized to (i)
surrender the insurance policy insuring such officer in exchange for cash from
the policy equal to the aggregate premiums the Company had previously paid to
fund such policy, (ii) terminate its prior "split-dollar" insurance agreement
with such officer and transfer ownership of the related policy to such officer,
(iii) forfeit its right to receive death benefits under such related policy and
(iv) adopt a new plan providing substitute supplemental life insurance benefits
for its executive officers. This new plan, among other things, would obligate
the Company to pay premiums on the executive officers' respective insurance
policies sufficient to provide the same death benefits available under the prior
agreements, and entitle the executive officers to purchase additional
post-retirement coverage at their cost and to receive "gross-up" cash payments
in amounts sufficient to compensate them for income and employment taxes
incurred as a result of the Company's premium payments. Upon completion of
necessary estate-planning, the Company expects to implement these restructured
arrangements and re-commence paying premiums in mid-2005.
Under the Company's aircraft usage policy, the Company's chief executive
officer may use the Company's aircraft for personal travel without reimbursing
the Company, and each other executive officer of the Company may use the
Company's aircraft for up to $10,000 per year in personal travel without
reimbursing the Company (calculated in accordance with applicable SEC
guidelines). In all such cases, personal travel is permitted only if aircraft is
available and not needed for superseding business purposes. During 2004, the
following executive officers used the Company's aircraft for personal travel as
follows: Mr. Post, one round-trip at a cost of $12,600, Ms. Puckett, two
round-trips at an aggregate cost of $8,435, and Stacey W. Goff (the Company's
Senior Vice President and General Counsel), one round-trip at a cost of $910.
The Company's officers are entitled to be reimbursed for the cost of an
annual physical examination, plus related travel expenses.
Additionally, the Company makes available to its officers various defined
benefit retirement plans (which are described below under " - Pension Plans"),
various nonqualified supplemental benefit plans, cash allowances in lieu of
previously-offered perquisites, and a disability salary continuation plan.
COMPENSATION OF CHIEF EXECUTIVE OFFICER. The criteria, standards and
methodology used by the Committee and Subcommittee in reviewing and establishing
the Chief Executive Officer's salary, bonus and other compensation are the same
as those used with respect to all
40
other executive officers, as described above. As discussed above under " -
Salary," based on its review of data compiled by the Committee's independent
consulting firm and other information, the Committee raised the annual salary of
the Chief Executive Officer by 5.4% during 2004 to $975,000. The Chief Executive
Officer also received a cash bonus of $1,003,851 for 2004 performance under the
Company's shareholder-approved short-term incentive plan. In addition, during
2004 the Chief Executive Officer was granted options to purchase 160,000 shares
and 46,800 shares of Restricted Stock, as described further herein. As indicated
above, the annual salary of the Chief Executive Officer was increased to $1
million in early 2005.
Submitted by the Compensation Committee of the Board of Directors.
C. G. Melville, Jr. (Chairman) James B. Gardner Fred R. Nichols Jim D. Reppond
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
One of the members of the Compensation Committee, Jim D. Reppond, was an
officer of the Company prior to his retirement in 1996. Mr. Reppond is not a
member of the Committee's Incentive Awards Subcommittee, which administers the
Company's incentive compensation plans and programs and is comprised solely of
Committee members who qualify as "outside directors" under Section 162(m).
PENSION PLANS
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Company maintains a
Supplemental Executive Retirement Plan (the "Supplemental Pension Plan")
pursuant to which certain officers who have completed at least five years of
service are generally entitled to receive a monthly payment upon attaining early
or normal retirement age under the plan. The following table reflects the
approximate annual retirement benefits that a participant with the indicated
years of service and compensation level may expect to receive under the
Supplemental Pension Plan assuming retirement at age 65. Early retirement may be
taken at age 55 by any participant with ten or more years of service, with
reduced benefits.
Years of Service
------------------------------------------------------------------------------
Compensation 5 10 15 20 25
------------- --------- --------- --------- -------- --------
$ 400,000 $ 60,000 $ 120,000 $ 140,000 $160,000 $180,000
500,000 75,000 150,000 175,000 200,000 225,000
600,000 90,000 180,000 210,000 240,000 270,000
700,000 105,000 210,000 245,000 280,000 315,000
800,000 120,000 240,000 280,000 320,000 360,000
900,000 135,000 270,000 315,000 360,000 405,000
1,000,000 150,000 300,000 350,000 400,000 450,000
1,100,000 165,000 330,000 385,000 440,000 495,000
1,200,000 180,000 360,000 420,000 480,000 540,000
41
The above table reflects the annual benefits payable upon normal
retirement under the Supplemental Pension Plan assuming such benefits will be
paid in the form of a monthly lifetime annuity and before reductions relating to
the receipt of Social Security benefits as described below. The actual amount of
an officer's monthly payment under the Supplemental Pension Plan is equal to (i)
3% of the officer's "average monthly compensation" (defined below) times the
officer's years of service during his first ten years with the Company plus (ii)
1% of the officer's "average monthly compensation" times his years of service
after his first ten years with the Company (up to a maximum of 15 additional
years), minus (iii) 4% of his estimated monthly Social Security benefits times
his years of service with the Company (up to a maximum of 25 years). Payments to
retired officers under this formula are increased by 3% per year to reflect cost
of living increases. "Average monthly compensation" means the officer's average
monthly compensation during the 36 consecutive month period within his last ten
years of employment in which he received his highest compensation. Participants
added to the plan after January 1, 2000 receive credit only for service while a
plan participant.
Under the Supplemental Pension Plan, the number of credited years of
service at December 31, 2004 was 25 years for Mr. Post, four years for Ms.
Puckett, 22 years for Mr. Ewing, 22 years for Mr. Cole and six years for Mr.
Maslowski. The compensation upon which benefits are based under such plan is the
aggregate amount of compensation reported for 2004 for each respective officer
under the columns in the Summary Compensation Table appearing above that are
entitled "Salary" and "Bonus."
BROAD-BASED PENSION PLAN. The Company also maintains a qualified defined
benefit plan (the "Qualified Plan") pursuant to which most of the Company's
employees (including officers) who have completed at least five years of service
are generally entitled to receive payments upon attaining early or normal
retirement age under the plan. The Company further maintains a non-qualified
defined benefit plan (the "Non-Qualified Plan") designed to pay supplemental
retirement benefits to officers in amounts equal to the benefits that such
officers would otherwise forego under the Qualified Plan due to federal
limitations on the amount of benefits payable to highly compensated participants
of qualified plans.
The following table reflects the approximate total annual retirement
benefits that a participant with the indicated years of service and annual
compensation level may expect to receive under the Qualified and Non-Qualified
Plans (collectively, the "Broad-Based Pension Plan") assuming retirement at age
65 during 2005. Upon attaining age 55, participants with at least five years of
service may elect to receive reduced early retirement benefits.
42
Years of Service
-----------------------------------------------------------------------------
Compensation 5 10 15 20 25 30
------------ -------- -------- ------- ------- ------- --------
$ 400,000 $ 16,000 $ 33,000 $49,000 $65,000 $81,000 $ 98,000
500,000 21,000 43,000 64,000 85,000 106,000 128,000
600,000 26,000 53,000 79,000 105,000 131,000 158,000
700,000 31,000 63,000 94,000 125,000 156,000 188,000
800,000 36,000 73,000 109,000 145,000 181,000 218,000
900,000 41,000 83,000 124,000 165,000 206,000 248,000
1,000,000 46,000 93,000 139,000 185,000 231,000 278,000
1,100,000 51,000 103,000 154,000 205,000 256,000 308,000
1,200,000 56,000 113,000 169,000 225,000 281,000 338,000
The above table approximates the total annual benefits payable under the
Broad-Based Pension Plan assuming (in addition to the assumptions stated above)
that such benefits will be paid in the form of a monthly lifetime annuity. The
actual amount of a participant's total monthly payment is equal to the sum of
(i) his number of years of service under the plan (up to a maximum of 30 years)
multiplied by 0.5% of his final average pay plus (ii) his number of years of
service under the plan (up to a maximum of 30 years) multiplied by 0.5% of his
final average pay in excess of his compensation subject to Social Security taxes
(as determined under the plan). For these purposes, "final average pay" means
the participant's average monthly compensation during the 60 consecutive month
period within his last ten years of employment in which he received his highest
compensation.
Under the Broad-Based Pension Plan, each named officer other than Ms.
Puckett and Mr. Maslowski began to receive credit for years of service on
January 1, 1999. Ms. Puckett and Mr. Maslowski began receiving credit for years
of service on July 24, 2000 and March 22, 1999, respectively. The compensation
upon which benefits are based under such plan is the aggregate amount reported
for 2004 for each such officer under the columns in the Summary Compensation
Table appearing above that are entitled "Salary" and "Bonus."
CHANGE-IN-CONTROL ARRANGEMENTS
The Company has agreements with each of its executive officers which
entitle any such officer who is terminated without cause or resigns under
certain specified circumstances within three years of any change in control of
the Company to (i) receive a lump sum cash severance payment equal to three
times the sum of such officer's annual salary and bonus, (ii) receive any such
additional cash payments as may be necessary to compensate him or her for any
federal excise taxes imposed upon contingent change in control payments and
(iii) continue to receive certain welfare benefits for three years.
Under the above-referenced agreements, a "change in control" of the
Company would be deemed to occur upon (i) any person (as defined in the
Securities Exchange Act of 1934) becoming the beneficial owner of 30% or more of
the outstanding Common Shares or 30% or more of combined voting power of the
Company's voting securities, (ii) a majority of the Company's directors being
replaced, (iii) consummation of certain mergers, substantial asset
43
sales or similar business combinations, or (iv) approval by the shareholders of
a liquidation or dissolution of the Company.
In the event of a change in control of the Company, the Company's benefit
plans provide, among other things, that all restrictions on outstanding
restricted stock will lapse, all outstanding stock options will become fully
exercisable, phantom stock units credited under the Company's supplemental
defined contribution plan will be converted into cash and held in trust, and
post-retirement health and life insurance benefits will vest with respect to
certain current and former employees. In addition, participants in the
Supplemental Pension Plan who are terminated without cause or resign under
certain specified circumstances within three years of the change in control will
receive a cash payment equal to the present value of their plan benefits (after
providing age and service credits of up to three years), determined in
accordance with actuarial assumptions specified in the plan.
PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Common Shares with the cumulative total return of the S&P 500 Index and the S&P
Integrated Telecommunications Services Index (the "S&P Telecom Index") for the
period from December 31, 1999 to December 31, 2004, in each case assuming (i)
the investment of $100 on January 1, 2000 at closing prices on December 31, 1999
and (ii) reinvestment of dividends.
[GRAPH TO BE INSERTED BY PRINTER]
December 31,
------------------------------------------------------------------
1999 2000 2001 2002 2003 2004
------- ------ ------ ------ ------ ------
CenturyTel, Inc..................... $100.00 $75.91 $70.10 $63.24 $70.70 $77.45
S&P 500 Index....................... 100.00 90.90 80.10 62.41 80.30 89.02
S&P Telecom Index(1)................ 100.00 64.49 58.42 40.67 40.60 46.19
--------------
(1) The S&P Telecom Index consists of ALLTEL Corporation, AT&T Corporation,
BellSouth Corporation, Citizens Communications Company, Qwest
Communications International Inc., SBC Communications Inc., Sprint Corp.,
Verizon Communications Inc., and the Company. The index is publicly
available.
44
CERTAIN TRANSACTIONS
The Company paid fees of $811,704 to The Boles Law Firm for legal services
rendered to the Company in 2004. William R. Boles, Jr., a director of the
Company since 1992, is President and a director and practicing attorney with
such firm, which has provided legal services to the Company since 1968. The
Company also paid $120,000 in 2004 to Capital Strategies, LLC, a lobbying and
consulting firm owned by Mr. Boles' brother-in-law.
During 2004, the Company purchased $1,504,999 of electrical contracting
services from a firm owned by Johnny Hebert, a director of the Company who will
retire at the Meeting.
During 2004, the Company paid $143,489 to a real estate firm owned by the
brother of Harvey P. Perry, a director of the Company. In exchange for such
payments, such firm provided a variety of services with respect to numerous real
estate transactions in several states, including locating and analyzing
properties suitable for purchase or lease and negotiating purchase or lease
terms with the land owners.
During 2004, the Company paid Rhonda Woodard $99,095 in salary and bonus
for serving as Director of Customer Service Centers. Ms. Woodard is the
sister-in-law of David Cole, an executive officer of the Company, and has been
an employee of the Company since 1991.
During 2004, the Company paid Rickey Lowery approximately $81,243 in
salary and bonus for serving as a lead database analyst technician. Mr. Lowery
has been an employee of the Company since 1989 and has been the son-in-law of
Harvey P. Perry, a director of the Company, since 1990.
During 2004, the Company paid Martha Amman $85,707 in salary and bonus for
serving as Manager, Employment and Staffing. Ms. Amman is the sister of Harvey
P. Perry, a director of the Company, and has been an employee of the Company
since 1998.
During 2004, the Company paid H. Parnell Perry, Jr. $67,970 in salary and
bonus for serving as a technician. Mr. Perry is the son of Harvey P. Perry, a
director of the Company, and has been an employee of the Company since 1988.
During 2004, the Company paid Dale Shields $62,713 in salary and bonus for
serving as Manager of Risk and Safety, and allowed his late wife to use the
Company's aircraft on several occasions in connection with medical emergencies.
Mr. Shields is the son-in-law of R. L. Hargrove, Jr., a director of the Company
who will retire at the Meeting. Mr. Shields has been an employee of the Company
since 1983.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Securities Exchange Act of 1934 requires the Company's executive
officers and directors, among others, to file certain beneficial ownership
reports with the SEC. During 2004, all such reports were timely filed.
45
REPORT OF AUDIT COMMITTEE
ACTIVITIES OF COMMITTEE
The Audit Committee of the Board of Directors is currently composed of
five directors, all of whom qualify as independent directors under the Company's
corporate governance guidelines. The Committee operates under a written charter
adopted by the Board, which is attached as Appendix D.
Management is responsible for the Company's internal controls and the
financial reporting process. The Company's independent auditor is responsible
for performing an independent audit of the Company's consolidated financial
statements and the effectiveness of the Company's internal control over
financial reporting, and to issue reports thereon. The Committee's
responsibility is to monitor and oversee these processes.
In this context, the Committee has met and held discussions with the
Company's management, its internal auditors and its independent auditor, KPMG
LLP. Management represented to the Committee that the Company's consolidated
financial statements were prepared in accordance with generally accepted U.S.
accounting principles, and the Committee has reviewed and discussed the
consolidated financial statements with management and KPMG. The Committee
discussed with KPMG matters required to be discussed by Statements on Auditing
Standards No. 61 and 90 (Communication with Audit Committees).
KPMG also provided to the Committee the written disclosures required by
Independence Standards Board Standard No. 1 (Independence Discussions with Audit
Committees). The Committee discussed with KPMG that firm's independence, and
considered the effects that the provision of non-audit services may have on
KPMG's independence.
Based on and in reliance upon the reviews and discussions referred to
above, and subject to the limitations on the role and responsibilities of the
Committee referred to in its charter, the Committee recommended that the Board
of Directors include the audited consolidated financial statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.
OTHER INFORMATION
KPMG has acted as independent certified or registered public auditors for
the Company since 1977, and has been selected by the Audit Committee to serve
again in that capacity for 2005. The following table lists the aggregate fees
and costs billed by KPMG and its affiliates to the Company and its subsidiaries
for the 2003 and 2004 services identified below:
46
Amount Billed
---------------------------------
2003 2004
---------- -----------
Audit Fees (1)................................................ $1,682,000 $ 4,600,000
Audit-Related Fees(2)......................................... 195,000 129,000
Tax Fees(3)................................................... 1,122,000 1,088,000
All Other Fees................................................ 2,000 -
---------- ----------
Total $3,001,000 $5,817,000
---------- ----------
--------------
(1) Includes, for 2003 and 2004, the cost of services rendered in connection
with auditing the Company's annual consolidated financial statements for
each applicable year and, for 2004, the cost of auditing the Company's
internal control over financial reporting and management's assessment of
its review of internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002. Also includes costs of
reviewing the Company's quarterly financial statements, as well as
auditing the financial statements of several of the Company's telephone
subsidiaries, and includes services rendered in connection with reviewing
the Company's registration statements and issuing related comfort letters.
(2) Includes the cost of auditing the Company's benefit plans and general
accounting consulting services.
(3) Includes costs associated with (i) assistance in preparing income tax
returns (which were approximately $420,000 in 2003 and $403,000 in 2004);
(ii) assistance with various tax audits (which were approximately $179,000
in 2003 and $525,000 in 2004); (iii) assistance with the Company's
divestiture of its wireless business in August 2002 (which were
approximately $124,000 in 2003 and $17,000 in 2004); and (iv) general
income tax planning, consultation and compliance (which were approximately
$399,000 in 2003 and $143,000 in 2004).
The Audit Committee maintains written procedures that require it to
annually pre-approve the scope of all auditing services to be performed by the
Company's independent auditor. The Committee's procedures prohibit the
independent auditor from providing any non-audit services unless the service is
permitted under applicable law and is pre-approved by the Audit Committee or its
Chairman. The Chairman is authorized to pre-approve projects expected to cost no
more than $75,000, provided the total cost of all projects pre-approved by the
Chairman during any fiscal quarter does not exceed $125,000. The Audit Committee
has pre-approved the Company's independent auditor to provide up to $40,000 per
quarter of miscellaneous tax services that do not constitute discrete and
separate projects. The Chief Financial Officer is required periodically to
advise the full Committee of the scope and cost of services not pre-approved by
the full Committee. Although applicable regulations waive these pre-approval
requirements in certain limited circumstances, the Audit Committee did not use
these waiver provisions in either 2003 or 2004.
The Audit Committee has considered whether the provision of KPMG's
non-audit services is compatible with maintaining KPMG's independence.
If you would like additional information on the responsibilities of the
Audit Committee, please refer to its charter attached as Appendix D.
Submitted by the Audit Committee of the Board of Directors.
James B. Gardner R. L. Hargrove, Jr.
(Chairman) Fred R. Nichols
Virginia Boulet Joseph R. Zimmel
47
OTHER MATTERS
QUORUM AND VOTING OF PROXIES
The presence, in person or by proxy, of a majority of the total voting
power of the Voting Shares is necessary to constitute a quorum to organize the
Meeting. Shareholders voting or abstaining from voting on any issue will be
counted as present for purposes of constituting a quorum to organize the
Meeting.
If a quorum to organize the Meeting is present, directors will be elected
by plurality vote and, as such, withholding authority to vote in the election of
directors will not affect whether the nominees named herein are elected.
Assuming a quorum to organize the Meeting is present, the following proposals
will require the affirmative vote of holders of the following:
Proposal Required Vote
------------------------------------------- ------------------------------------------
No. 2 - Ratification of the appointment of Majority of the voting power present or
KPMG LLP as the Company's independent represented at the Meeting
auditor for 2005
No. 3 - Approval of the Company's 2005 Majority of the total number of votes cast
Management Incentive Compensation Plan with respect to such matter, provided that
such number of votes cast represents over
one-half in interest of all Voting Shares
No. 4 - Approval of the Company's 2005 Majority of the total number of votes cast
Directors Stock Plan with respect to such matter, provided that
such number of votes cast represents over
one-half in interest of all Voting Shares
No. 5 - Approval of the Company's 2005 Majority of the voting power present or
Executive Officer Short-Term Incentive represented at the Meeting
Program
Shares as to which the proxy holders have been instructed to abstain from voting
(i) will be treated under the Company's bylaws as not being present or
represented for purposes of voting with respect to Proposal No. 2 or No. 5, and
will therefore not affect the outcome of such votes, and (ii) will be treated,
based upon interpretations of the New York Stock Exchange (the "NYSE"), as being
cast for purposes of voting with respect to Proposal No. 3 and No. 4, and will
therefore have the same effect as a negative vote.
Under the rules of the NYSE, brokers who hold shares in street name for
customers may vote in their discretion on matters when they have not received
voting instructions from beneficial owners unless the matter is a non-routine,
"non-discretionary" item. Under the NYSE rules, brokers who do not receive such
instructions will be entitled to vote in their discretion with respect to the
Company's election of directors and Proposal Nos. 2 and 5, but will not be
entitled to vote in their discretion with respect to the other proposals
described herein. If brokers who do
48
not receive voting instructions may not or do not exercise discretionary voting
power (a "broker non-vote") with respect to any matter to be considered at the
Meeting, shares that are not voted will be treated as present for purposes of
constituting a quorum to organize the Meeting but not present or cast with
respect to considering such matter. Because the election of directors must be
approved by plurality vote and each of the other proposals listed above must be
approved by a majority of either the voting power present or represented at the
Meeting or the votes cast with respect to the matter, broker non-votes with
respect to these matters will not affect the outcome of the voting (except that,
with respect to Proposal Nos. 3 and 4, such non-votes will make it more
difficult for the Company to satisfy the NYSE requirement that the number of
votes cast with respect thereto represents over one-half in interest of all
Voting Shares).
Voting Shares represented by all properly executed proxies received in
time for the Meeting will be voted at the Meeting. A proxy may be revoked at any
time before it is exercised by filing with the Secretary of the Company a
written revocation or a duly executed proxy bearing a later date, or by
attending the Meeting and voting in person. Unless revoked, all properly
executed proxies will be voted as specified and, if no specifications are made,
will be voted in favor of the nominees and the other proposals listed above.
Management has not timely received any notice that a shareholder desires
to present any matter for action at the Meeting in accordance with the Company's
bylaws (which are described below), and is otherwise unaware of any matter for
action by shareholders at the Meeting other than the election of directors and
the other proposals listed above. The enclosed proxy and voting instruction
cards, however, will confer discretionary voting authority with respect to any
other matter that may properly come before the Meeting. It is the intention of
the persons named therein to vote in accordance with their best judgment on any
such matter.
SHAREHOLDER NOMINATIONS AND PROPOSALS
In order to be eligible for inclusion in the Company's 2006 proxy
materials pursuant to the federal proxy rules, any shareholder proposal to take
action at such meeting must be received at the Company's principal executive
offices by December 2, 2005, and must comply with applicable federal proxy
rules. In addition, the Company's bylaws require shareholders to furnish timely
written notice of their intent to nominate a director or bring any other matter
before a shareholders' meeting, whether or not they wish to include their
proposal in the Company's proxy materials. In general, notice must be received
by the Secretary of the Company between November 13, 2005 and February 11, 2006
and must contain specified information concerning, among other things, the
matters to be brought before such meeting and concerning the shareholder
proposing such matters. (If the date of the 2006 annual meeting is more than 30
days earlier or later than May 12, 2006, notice must be received by the
Secretary of the Company within 15 days of the earlier of the date on which
notice of such meeting is first mailed to shareholders or public disclosure of
the meeting date is made.) For additional information on these procedures, see
"Corporate Governance - Director Nomination Process."
ANNUAL REPORT AND FINANCIAL INFORMATION
Appendix E includes the Annual Financial Statements and Review of
Operations of the Company in the form in which they were filed with the
Securities and Exchange Commission on
49
March 16, 2005 as part of the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. The Company expects to mail a copy of its summary
annual report for the year ended December 31, 2004 on or about the date that it
mails this Proxy Statement to its shareholders.
During 2004, the Company's chief executive officer certified to the New
York Stock Exchange that he was unaware of any violation by the Company of the
New York Stock Exchange's corporate governance listing standards. In connection
with filing the Company's Form 10-K report for the year ended December 31, 2004,
the Company's chief executive officer and chief financial officer made the
certifications regarding the Company's financial disclosures required under the
Sarbanes-Oxley Act of 2002, and the regulations promulgated thereunder.
You may obtain a copy of the Company's Form 10-K report without charge by
writing to Stacey W. Goff, Secretary, CenturyTel, Inc., 100 CenturyTel Drive,
Monroe, LA 71203, or by visiting the Company's website at www.centurytel.com.
Neither Appendix E nor the Company's summary annual report is to be
regarded as proxy soliciting material.
By Order of the Board of Directors
/s/ Stacey W. Goff
Stacey W. Goff
Secretary
Dated: April 1, 2005
50
APPENDIX A
TO PROXY STATEMENT
CENTURYTEL, INC.
2005 MANAGEMENT INCENTIVE COMPENSATION PLAN
1. PURPOSE. The purpose of the 2005 Management Incentive Compensation Plan
(this "Plan") of CenturyTel, Inc. ("CenturyTel") is to increase shareholder
value and to advance the interests of CenturyTel and its subsidiaries
(collectively, the "Company") by furnishing a variety of equity incentives (the
"Incentives") designed to attract, retain and motivate officers, employees,
consultants and advisors and to strengthen the mutuality of interests between
such persons and CenturyTel's shareholders. Incentives may consist of options to
purchase shares of CenturyTel's common stock, $1.00 par value per share (the
"Common Stock"), stock appreciation rights, shares of restricted stock,
restricted stock units or other stock-based awards the value of which is based
upon the value of the Common Stock, all on terms determined under this Plan. As
used in this Plan, the term "subsidiary" means any corporation, limited
liability company or other entity of which CenturyTel owns (directly or
indirectly) within the meaning of Section 424(f) of the Internal Revenue Code of
1986, as amended (the "Code"), 50% or more of the total combined voting power of
all classes of stock, membership interests or other equity interests issued
thereby.
2. ADMINISTRATION.
2.1 COMPOSITION. This Plan shall be administered by the compensation
committee of the Board of Directors of CenturyTel, or by a subcommittee of
the compensation committee. The committee or subcommittee that administers
this Plan shall hereinafter be referred to as the "Committee." The
Committee shall consist of not fewer than two members of the Board of
Directors, each of whom shall (a) qualify as a "non-employee director"
under Rule 16b-3 under the Securities Exchange Act of 1934 (the "1934
Act"), or any successor rule, and (b) qualify as an "outside director"
under Section 162(m) of the Code and the regulations thereunder
(collectively, "Section 162(m)").
2.2 AUTHORITY. The Committee shall have authority to award
Incentives under this Plan, to interpret this Plan, to establish any rules
or regulations relating to this Plan that it determines to be appropriate,
to enter into agreements with or provide notices to participants as to the
terms of the Incentives (the "Incentive Agreements") and to make any other
determination that it believes necessary or advisable for the proper
administration of this Plan. Its decisions concerning matters relating to
this Plan shall be final, conclusive and binding on the Company and
participants. The Committee may delegate its authority hereunder to the
extent provided in Section 3 hereof. The Committee shall not have
authority to award Incentives under this Plan to directors in their
capacities as such.
3. ELIGIBLE PARTICIPANTS. Employees and officers of the Company (including
officers who also serve as directors of the Company) and consultants and
advisors to the Company shall become eligible to receive Incentives under this
Plan when designated by the Committee. Employees may be designated individually
or by groups or categories, as the Committee deems appropriate. With respect to
participants not subject to Section 16 of the 1934 Act or Section 162(m), (i)
the Committee may delegate to the chief executive officer of
A-1
CenturyTel its authority to designate participants, to determine the type, size
and terms of the Incentives to be received by these participants, to determine
any performance objectives for these participants and to approve or authorize
the form of Incentive Agreement governing such Incentives and (ii) following any
grants of Incentives pursuant to such delegated authority, the chief executive
officer of CenturyTel or any officer designated by him may exercise any powers
of the Committee under this Plan to accelerate vesting or exercise periods, to
terminate restricted periods, to waive compliance with specified provisions or
to otherwise make determinations contemplated hereunder with respect to such
Incentives; provided, however, that in no event may (A) the chief executive
officer grant stock options at an exercise price other than the Fair Market
Value of a share of Common Stock on the later of the date of grant or the date
the participant commences employment with the Company, unless otherwise
determined by the Committee (subject to the limitations in Section 5.1), (B) any
person other than the Committee make any of the determinations set forth in
Section 4.5, 11.11 or Section 11.12 of this Plan, or (C) any person take any
action that the Committee lacks the authority to take hereunder.
4. SHARES SUBJECT TO THIS PLAN. The shares of Common Stock with respect to
which Incentives may be granted under this Plan shall be subject to the
following:
4.1 TYPE OF COMMON STOCK. The shares of Common Stock with respect to
which Incentives may be granted under this Plan may be currently
authorized but unissued shares or shares currently held or subsequently
acquired by the Company as treasury shares, including shares purchased in
the open market or in private transactions.
4.2 MAXIMUM NUMBER OF SHARES. Subject to the other provisions of
this Section 4, the maximum number of shares of Common Stock that may be
delivered to participants and their beneficiaries under this Plan shall be
4,000,000 shares of Common Stock.
4.3 SHARE COUNTING. To the extent any shares of Common Stock covered
by an Incentive are not delivered to a participant or beneficiary because
the Incentive is forfeited or canceled, or the shares of Common Stock are
not delivered because the Incentive is paid or settled in cash, such
shares shall not be deemed to have been delivered for purposes of
determining the maximum number of shares of Common Stock available for
delivery under Section 4.2 or 4.4(c) of this Plan. In the event that
shares of Common Stock are issued as Incentives and thereafter are
forfeited or reacquired by the Company pursuant to rights reserved upon
issuance thereof, such forfeited and reacquired Shares may again be issued
under this Plan. All shares to which a stock appreciation right relates
(not only the net shares) shall be counted against the shares issuable
through the Plan, except as otherwise provided above.
4.4 LIMITATIONS ON NUMBER OF SHARES. Subject to Section 4.5, the
following additional limitations are imposed under this Plan:
(a) The maximum number of shares of Common Stock that may be
issued upon exercise of stock options intended to qualify as
incentive stock options under Section 422 of the Code shall be
4,000,000 shares.
A-2
(b) The maximum number of shares of Common Stock that may be
covered by Incentives granted under this Plan to any one individual
during any one calendar-year period shall be 600,000.
(c) The maximum number of shares of Common Stock that may be
issued as restricted stock, restricted stock units, or Other
Stock-Based Awards (as defined below) shall be 2,000,000 shares.
Such Incentives shall be subject to the minimum vesting periods
provided herein, with respect to restricted stock, restricted stock
units and Other Stock-Based Awards, except that restricted stock,
restricted stock units and Other Stock-Based Awards with respect to
an aggregate of 200,000 shares of Common Stock may be granted
without compliance with the minimum vesting periods provided in
Sections 6.2, 7.2 and 9.2.
(d) If, after shares have been earned under an Incentive, the
delivery is deferred, any additional shares attributable to
dividends paid during the deferral period shall be disregarded for
purposes of the limitations of this Section 4.
4.5 ADJUSTMENT.
(a) In the event of any recapitalization, reclassification,
stock dividend, stock split, combination of shares or other change
in the Common Stock, all limitations on numbers of shares of Common
Stock provided in this Section 4 and the number of shares of Common
Stock subject to outstanding Incentives shall be equitably adjusted
in proportion to the change in outstanding shares of Common Stock.
In addition, in the event of any such change in the Common Stock,
the Committee shall make any other adjustment that it determines to
be equitable, including adjustments to the exercise price of any
option or the base price of any stock appreciation right and any per
share performance objectives of any Incentive in order to provide
participants with the same relative rights before and after such
adjustment.
(b) If the Company merges, consolidates, sells all of its
assets or dissolves and such transaction is not a Change of Control,
as defined in Section 11.12 (each of the foregoing a "Fundamental
Change"), then thereafter upon any exercise or payout of an
Incentive theretofore granted the participant shall be entitled to
receive (i) in lieu of shares of Common Stock previously issuable
thereunder, the number and class of shares of stock and securities
to which the participant would have been entitled pursuant to the
terms of the Fundamental Change if, immediately prior to such
Fundamental Change, the participant had been the holder of record of
the number of shares of Common Stock subject to such Incentive or
(ii) in lieu of payments based upon Common Stock previously payable
thereunder, payments based on any formula that the Committee
determines to be equitable in order to provide participants with
substantially equivalent rights before and after the Fundamental
Change. In the event any such Fundamental Change causes a change in
the outstanding Common Stock, the aggregate number of shares
available under the Plan may be appropriately
A-3
adjusted by the Committee in its sole discretion, whose
determination shall be conclusive.
5. STOCK OPTIONS. The Committee may grant incentive stock options (as such
term is defined in Section 422 of the Code) or non-qualified stock options. Any
option that is designated as a non-qualified stock option shall not be treated
as an incentive stock option. Each stock option granted by the Committee under
this Plan shall be subject to the following terms and conditions:
5.1 PRICE. The exercise price per share shall be determined by the
Committee, subject to adjustment under Section 4.5; provided that in no
event shall the exercise price be less than the Fair Market Value (as
defined below) of a share of Common Stock on the date of grant, except in
the case of a stock option granted in assumption of or in substitution for
an outstanding award of a company acquired by the Company or with which
the Company combines.
5.2 NUMBER. The number of shares of Common Stock subject to the
option shall be determined by the Committee, subject to the limitations
and adjustments provided in Section 4 hereof.
5.3 DURATION AND TIME FOR EXERCISE. Subject to earlier termination
as provided in Sections 11.4 and 11.12, the term of each stock option
shall be determined by the Committee, but may not exceed ten years. Each
stock option shall become exercisable at such time or times during its
term as shall be determined by the Committee. The Committee may accelerate
the exercisability of any stock option at any time.
5.4 CONDITIONS TO EXERCISE. The Committee may, in its discretion,
provide that a stock option cannot be exercised unless one or more
performance goals are achieved, including any of those specified in
Section 10.
5.5 MANNER OF EXERCISE.
(a) A stock option may be exercised, in whole or in part, by
giving written notice to the Company, specifying the number of
shares of Common Stock to be purchased. The exercise notice shall be
accompanied by tender of the full purchase price for such shares,
which may be paid or satisfied by (i) cash; (ii) check; (iii)
delivery of shares of Common Stock, which shares shall be valued for
this purpose at the Fair Market Value on the business day
immediately preceding the date such option is exercised and, unless
otherwise determined by the Committee, shall have been held by the
optionee for at least six months; (iv) delivery of irrevocable
written instructions to a broker approved by the Company (with a
copy to the Company) to immediately sell a portion of the shares
issuable under the option and to deliver promptly to the Company the
amount of sale proceeds (or loan proceeds if the broker lends funds
to the participant for delivery to the Company) to pay the exercise
price; (v) in such other manner as may be authorized from time to
time by the Committee; or (vi) any combination of the
A-4
preceding, equal in value to the full amount of the exercise price;
provided that all such payments shall be made or denominated in
United States dollars.
(b) Notice under the preceding paragraph may be delivered by
telecopy, electronic mail or any similar form of transmission,
provided that the exercise price of such shares is received by the
Company via wire transfer or other means on or before the day such
transmission is received by the Company. The notice shall specify
the manner in which the certificates for such shares are to be
delivered.
(c) An option to purchase shares of Common Stock in accordance
with this Plan shall be deemed to have been exercised immediately
prior to the close of business on the first business date on which
the Company has received both (i) written notice of such exercise
and (ii) payment in full of the exercise price for the number of
shares for which options are being exercised.
(d) In the case of delivery of an uncertified check, no shares
shall be issued until the check has been paid in full.
(e) Prior to the issuance of shares of Common Stock upon the
exercise of a stock option, a participant shall have no rights as a
shareholder.
5.6 REPRICING. Except for adjustments pursuant to Section 4.5 or
actions permitted to be taken by the Committee under Section 11.12(c) in
the event of a Change of Control, unless approved by the shareholders of
the Company, (a) the exercise price for any outstanding option granted
under this Plan may not be decreased after the date of grant and (b) an
outstanding option that has been granted under this Plan may not, as of
any date that such option has an exercise price that is greater than the
then current Fair Market Value of a share of Common Stock, be surrendered
to the Company as consideration for anything of value, including the grant
of a new option with a lower exercise price, another Incentive, a cash
payment or Common Stock.
5.7 INCENTIVE STOCK OPTIONS. Notwithstanding anything in this Plan
to the contrary, the following additional provisions shall apply to the
grant of stock options that are intended to qualify as incentive stock
options.
(a) Any incentive stock option authorized under this Plan
shall contain such other provisions as the Committee shall deem
advisable, but shall in all events be consistent with and contain or
be deemed to contain all provisions required in order to qualify the
options as incentive stock options;
(b) All incentive stock options must be granted within ten
years from the date on which this Plan was adopted by the Board of
Directors;
(c) No incentive stock option shall be granted to any
participant who, at the time such option is granted, would own
(within the meaning of Section 422 of the Code) stock possessing
more than 10% of the total combined voting power
A-5
of all classes of stock of the corporation that employs such
participant or its parent or subsidiary corporation; and
(d) The aggregate Fair Market Value (determined with respect
to each incentive stock option as of the time such incentive stock
option is granted) of the Common Stock with respect to which
incentive stock options are exercisable for the first time by a
participant during any calendar year (under this Plan or any other
plan of the Company) shall not exceed $100,000. To the extent that
such limitation is exceeded, such options shall not be treated, for
federal income tax purposes, as incentive stock options.
6. RESTRICTED STOCK.
6.1 GRANT OF RESTRICTED STOCK. An award of restricted stock may be
subject to the attainment of specified performance goals or targets,
restrictions on transfer, forfeitability provisions and such other terms
and conditions as the Committee may determine, subject to the provisions
of this Plan. To the extent restricted stock is intended to qualify as
"performance-based compensation" under Section 162(m), it must be granted
subject to the attainment of performance goals as described in Section 10
and meet the additional requirements by imposed by Section 162(m).
6.2 RESTRICTED PERIOD. At the time an award of restricted stock is
made, the Committee shall establish a period of time during which the
transfer of the shares of restricted stock shall be restricted (the
"Restricted Period"). Each award of restricted stock may have a different
Restricted Period. Except as provided in Section 4.4(c), a Restricted
Period of at least three years is required, except that if vesting of the
shares is subject to the attainment of specified performance goals, the
Restricted Period may be one year or more. Incremental periodic vesting of
portions of the award during the Restricted Period is permitted. Unless
otherwise provided in the Incentive Agreement, the Committee may in its
discretion declare the Restricted Period terminated upon a participant's
death, disability, retirement or other termination by the Company and
permit the sale or transfer of the restricted stock. The expiration of the
Restricted Period shall also occur as provided under Section 11.12 upon a
Change of Control of the Company.
6.3 ESCROW. The participant receiving restricted stock shall enter
into an Incentive Agreement with the Company setting forth the conditions
of the grant. Certificates representing shares of restricted stock shall
be registered in the name of the participant and deposited with the
Company, together with a stock power endorsed in blank by the participant.
Each such certificate shall bear a legend in substantially the following
form:
The transferability of this certificate and the shares of Common
Stock represented by it is subject to the terms and conditions
(including conditions of forfeiture) contained in the CenturyTel,
Inc. 2005 Management Incentive Compensation Plan (the "Plan") and an
agreement entered into between the registered owner and CenturyTel,
Inc.
A-6
thereunder. Copies of this Plan and the agreement are on file and
available for inspection at the principal office of the Company.
6.4 DIVIDENDS ON RESTRICTED STOCK. Any and all cash and stock
dividends paid with respect to the shares of restricted stock shall be
subject to any restrictions on transfer, forfeitability provisions or
reinvestment requirements as the Committee may, in its discretion,
prescribe in the Incentive Agreement.
6.5 FORFEITURE. In the event of the forfeiture of any shares of
restricted stock under the terms provided in the Incentive Agreement
(including any additional shares of restricted stock that may result from
the reinvestment of cash and stock dividends, if so provided in the
Incentive Agreement), such forfeited shares shall be surrendered and the
certificates cancelled. The participants shall have the same rights and
privileges, and be subject to the same forfeiture provisions, with respect
to any additional shares received pursuant to Section 4.5 due to a
recapitalization, stock split or other change in capitalization described
therein.
6.6 EXPIRATION OF RESTRICTED PERIOD. Upon the expiration or
termination of the Restricted Period and the satisfaction of any other
conditions prescribed by the applicable Incentive Agreement or at such
earlier time as provided for in Section 6.2, the restrictions applicable
to the restricted stock shall lapse and a stock certificate for the number
of shares of restricted stock with respect to which the restrictions have
lapsed shall be delivered, free of all such restrictions and legends other
than those required by law, to the participant or the participant's
estate, as the case may be.
6.7 RIGHTS AS A SHAREHOLDER. Subject to the restrictions imposed
under the terms and conditions of this Plan and subject to any other
restrictions that may be imposed in the Incentive Agreement, each
participant receiving restricted stock shall have all the rights of a
shareholder with respect to shares of Common Stock during any period in
which such shares are subject to forfeiture and restrictions on transfer,
including the right to vote such shares.
7. RESTRICTED STOCK UNITS.
7.1 GRANT OF RESTRICTED STOCK UNITS. A restricted stock unit, or
RSU, represents the right to receive from the Company on the scheduled
vesting date or other specified payment date for such RSU, one share of
Common Stock. An award of restricted stock units may be subject to the
attainment of specified performance goals or targets, forfeitability
provisions and such other terms and conditions as the Committee may
determine, subject to the provisions of this Plan. To the extent an award
of restricted stock units is intended to qualify as "performance-based
compensation" under Section 162(m), it must be granted subject to the
attainment of performance goals as described in Section 10 and meet the
additional requirements imposed by Section 162(m).
7.2 VESTING PERIOD. At the time an award of restricted stock units
is made, the Committee shall establish a period of time during which the
restricted stock units shall vest (the "Vesting Period"). Each award of
restricted stock units may have a
A-7
different Vesting Period. Except as provided in Section 4.4(c), a Vesting
Period of at least three years is required, except that if vesting of the
RSUs is subject to the attainment of specified performance goals, the
Vesting Period may be one year or more. Incremental periodic vesting of
portions of the award during the Vesting Period is permitted. The
acceleration of the expiration of the Vesting Period shall occur as
provided under Section 11.12(b) upon a Change of Control of the Company
and may also occur as provided under Section 11.4 in the event of
termination of employment under the circumstances provided in the
Incentive Agreement.
7.3 DIVIDEND EQUIVALENT ACCOUNTS. Subject to the terms and
conditions of this Plan and the applicable Incentive Agreement, as well as
any procedures established by the Committee, prior to the expiration of
the applicable Vesting Period of an RSU granted to a participant
hereunder, the Company shall establish an account for the participant and
deposit into that account any securities, cash or other property
comprising any dividend or property distribution with respect to the
shares of Common Stock underlying the RSU. The participant shall have no
rights to the amounts or other property in such account until the
applicable RSU vests.
7.4 RIGHTS AS A SHAREHOLDER. Each participant receiving restricted
stock units shall have no rights as a shareholder with respect to such
restricted stock units until such time as shares of Common Stock are
issued to the participant.
8. STOCK-SETTLED STOCK APPRECIATION RIGHTS.
8.1 GRANT OF STOCK-SETTLED STOCK APPRECIATION RIGHTS. A
stock-settled stock appreciation right, or SAR, is a right to receive,
without payment to the Company, a number of shares of Common Stock, the
number of which is determined pursuant to the formula set forth in Section
8.5. Each SAR granted by the Committee under the Plan shall be subject to
the terms and conditions provided in this Section 8:
8.2 NUMBER. Each SAR granted to any participant shall relate to such
number of shares of Common Stock as shall be determined by the Committee,
subject to adjustment as provided in Section 4.5.
8.3 DURATION. The term of each SAR shall be determined by the
Committee, but shall not exceed a maximum term of 10 years. The Committee
may in its discretion accelerate the exercisability of any SAR at any time
in its discretion.
8.4 EXERCISE. A SAR may be exercised, in whole or in part, by giving
written notice to the Company, specifying the number of SARs which the
holder wishes to exercise. The date that the Company receives such written
notice shall be referred to herein as the "Exercise Date." The Company
shall, within 30 days of an Exercise Date, deliver to the exercising
holder certificates for the shares of Common Stock to which the holder is
entitled pursuant to Section 8.5
8.5 PAYMENT. The number of shares of Common Stock which shall be
issuable upon the exercise of a SAR shall be determined by dividing:
A-8
(a) the number of shares of Common Stock as to which the SAR
is exercised, multiplied by the amount of the appreciation in each
such share (for this purpose, the "appreciation" shall be the amount
by which the Fair Market Value of the Common Stock subject to the
SAR on the business day preceding the Exercise Date exceeds the
"Base Price," which is an amount, not less than the Fair Market
Value of a share of Common Stock on the date of grant, which shall
be determined by the Committee at the time of grant, subject to
adjustment under Section 4.5); by
(b) the Fair Market Value of a share of Common Stock on the
Exercise Date.
8.6 NO FRACTIONAL SHARES. No fractional shares of Common Stock shall
be issued upon the exercise of a SAR. In lieu thereof, the holder of a SAR
shall be entitled to purchase the portion necessary to make a whole share
at its Fair Market Value on the Exercise Date.
8.7 REPRICING. Except for adjustments pursuant to Section 4.5 or
actions permitted to be taken by the Committee under Section 11.12(c) in
the event of a Change of Control, unless approved by the shareholders of
the Company, (a) the Base Price for any outstanding SAR granted under this
Plan may not be decreased after the date of grant and (b) an outstanding
SAR that has been granted under this Plan may not, as of any date that
such SAR has a per share Base Price that is greater than the then current
Fair Market Value of a share of Common Stock, be surrendered to the
Company as consideration for anything of value, including the grant of a
new SAR with a lower Base Price, another Incentive, a cash payment or
Common Stock.
9. OTHER STOCK-BASED AWARDS.
9.1 GRANT OF OTHER STOCK-BASED AWARDS. Subject to the limitations
described in Section 9.2 hereof, the Committee may grant to eligible
participants "Other Stock-Based Awards," which shall consist of awards,
other than options, restricted stock, restricted stock units or SARs
provided for in Sections 5 through 8, the value of which is based in whole
or in part on the value of shares of Common Stock. Other Stock-Based
Awards may be awards of shares of Common Stock or may be denominated or
payable in, valued in whole or in part by reference to, or otherwise based
on or related to, shares of, or appreciation in the value of, Common Stock
(including securities convertible or exchangeable into or exercisable for
shares of Common Stock), as deemed by the Committee consistent with the
purposes of this Plan. The Committee shall determine the terms and
conditions of any Other Stock-Based Award (including which rights of a
shareholder, if any, the recipient shall have with respect to Common Stock
associated with any such award) and may provide that such award is payable
in whole or in part in cash. An Other Stock-Based Award may be subject to
the attainment of such specified performance goals or targets as the
Committee may determine, subject to the provisions of this Plan. To the
extent that an Other Stock-Based Award is intended to qualify as
"performance-based compensation" under Section 162(m), it must be granted
subject to
A-9
the attainment of performance goals as described in Section 10 and meet
the additional requirements imposed by Section 162(m).
9.2 VESTING TERMS. Except as otherwise provided in Section 4.4(c),
other Stock-Based Awards granted under this Section 9 shall be subject to
a vesting period of at least three years, except that if vesting of the
award is subject to the attainment of specified performance goals, a
minimum vesting period of one year is allowed. Incremental periodic
vesting of portions of the award over the required vesting period is
permitted.
10. SECTION 162(m) AWARDS. To the extent that shares of restricted stock,
restricted stock units or Other Stock-Based Awards granted under the Plan are
intended to qualify as "performance-based compensation" under Section 162(m),
the vesting, grant or payment of such awards shall be conditioned on the
achievement of one or more performance goals and must satisfy the other
requirements of Section 162(m). The performance goals pursuant to which such
awards shall vest, be granted or be paid out shall be any or a combination of
the following performance measures applied to the Company or one or more of its
divisions, subsidiaries or lines of business: return on equity, cash flow,
assets or investment; shareholder return; changes in revenues, operating income,
cash flow, cash provided by operating activities, earnings or earnings per
share; customer growth; customer satisfaction or an economic value added
measure. The performance goals may be subject to such adjustments as are
specified in advance by the Committee, including adjustments made pursuant to
written guidelines that are approved or confirmed in advance by the Committee.
For any performance period, the performance objectives may be measured on an
absolute basis or relative to a group of peer companies selected by the
Committee, relative to internal goals or industry benchmarks, or relative to
levels attained in prior years.
11. GENERAL.
11.1 DURATION. No Incentives may be granted under the Plan later
than May 1, 2015; provided, however, that Incentives granted prior to such
date shall remain in effect until (i) all such Incentives granted under
this Plan have either been satisfied by the issuance of shares of Common
Stock or the payment of cash or been terminated under the terms of this
Plan or the applicable Incentive Agreement and (ii) all restrictions
imposed on shares of Common Stock in connection with their issuance under
this Plan have lapsed.
11.2 TRANSFERABILITY OF INCENTIVES. (a) No Incentive granted
hereunder may be transferred, pledged, assigned or otherwise encumbered by
the holder thereof except:
(i) by will;
(ii) by the laws of descent and distribution; or
(iii) pursuant to a domestic relations order, as defined in
the Code; or
A-10
(iv) in the case of stock options only, if permitted by the
Committee and so provided in the Incentive Agreement, (A) to
Immediate Family Members (as defined below), (B) to a partnership in
which the participant and/or Immediate Family Members, or entities
in which the participant and/or Immediate Family Members are the
sole owners, members or beneficiaries, as appropriate, are the sole
partners, (C) to a limited liability company in which the
participant and/or Immediate Family Members, or entities in which
the participant and/or Immediate Family Members are the sole owners,
members or beneficiaries, as appropriate, are the sole members, or
(D) to a trust for the sole benefit of the participant and/or
Immediate Family Members. "Immediate Family Members" means the
spouse and natural or adopted children or grandchildren of the
participant and their respective spouses. To the extent that an
incentive stock option is permitted to be transferred during the
lifetime of the participant, it shall be treated thereafter as a
non-qualified stock option.
(b) No such transfer of any Incentive under paragraph (a)
shall be effective to bind the Company unless the Company shall have
been furnished with written notice thereof and a copy of such
evidence as the Committee may deem necessary to establish the
validity of the transfer and the acceptance by the transferee or
transferees of the terms and conditions of this Plan and the
applicable Incentive Agreement.
(c) Any attempted assignment, transfer, pledge, hypothecation
or other disposition of an Incentive, or levy of attachment or
similar process upon the Incentive not specifically permitted
herein, shall be null and void and without effect.
11.3 DIVIDEND EQUIVALENTS. In the sole and complete discretion of
the Committee, an Incentive may provide the holder thereof with dividends
or dividend equivalents, payable in cash, shares, other securities or
other property on a current or deferred basis.
11.4 EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH. In the event that
a participant ceases to be an employee of the Company for any reason,
including death, disability, early retirement or normal retirement, any
outstanding Incentives then held by such participant may be exercised, may
vest or may expire at such times or in such manner as is set forth in the
Incentive Agreement. In its discretion, the Committee may resolve any
questions under this Plan or any Incentive Agreement as to whether and
when there has been a termination of employment and the cause or nature of
such termination.
11.5 ADDITIONAL CONDITIONS. Anything in this Plan to the contrary
notwithstanding:
(a) the Company may, if it shall determine it necessary or
desirable for any reason, at the time of award of any Incentive or
the issuance of any shares of
A-11
Common Stock pursuant to any Incentive, require the recipient of the
Incentive, as a condition to the receipt thereof or to the receipt
of shares of Common Stock issued pursuant thereto, to deliver to the
Company a written representation of present intention to acquire the
Incentive or the shares of Common Stock issued pursuant thereto for
his own account for investment and not for distribution; and
(b) if at any time the Company further determines, in its sole
discretion, that the listing, registration or qualification (or any
updating of any such document) of any Incentive or the shares of
Common Stock issuable pursuant thereto is necessary on any
securities exchange or under any federal or state securities or blue
sky law, or that the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or in
connection with the award of any Incentive, the issuance of shares
of Common Stock pursuant thereto, or the removal of any restrictions
imposed on such shares, such Incentive shall not be awarded or such
shares of Common Stock shall not be issued or such restrictions
shall not be removed, as the case may be, in whole or in part,
unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions
not acceptable to the Company.
11.6 INCENTIVE AGREEMENTS. An Incentive under this Plan shall be
subject to such terms and conditions, not inconsistent with this Plan, as
the Committee may, in its sole discretion, prescribe and set forth in the
Incentive Agreement. Such terms and conditions may provide for the
forfeiture of an Incentive or the gain associated with an Incentive under
certain circumstances to be set forth in the Incentive Agreement,
including if the participant competes with the Company or engages in other
activities that are harmful to the Company. In connection with all grants
of Incentives under this Plan, the Committee shall authorize and approve a
form of Incentive Agreement governing the terms and conditions of such
Incentive that apply to all similarly-situated award recipients, and cause
the Company to prepare an individual agreement with or notice to each
award recipient that reflects the actual number of shares of Common Stock
to which the Incentive of such recipient relates. A copy of such document
shall be provided to each such award recipient, and the Committee may, but
need not, require that such award recipient duly execute and deliver to
the Company a copy of such document as a condition precedent to the
effectiveness of the grant of the Incentive. Such document is referred to
in this Plan as an "Incentive Agreement" regardless of whether a
participant's signature is required.
11.7 WITHHOLDING.
(a) The Company shall have the right to withhold from any
payments or stock issuances under this Plan, or to collect as a
condition of payment, any taxes required by law to be withheld.
(b) If so provided in the applicable Incentive Agreement, a
participant will have the right to satisfy his or her withholding
tax obligation in whole or in part by electing (an "Election") to
deliver currently owned shares of Common Stock or to have the
Company withhold from the shares the participant otherwise
A-12
would receive shares of Common Stock having a value equal to the
minimum amount required to be withheld, with the value of the shares
to be delivered or withheld being based on the Fair Market Value of
the Common Stock on the date that the amount of tax to be withheld
is determined (the "Tax Date"). Each Election must be made prior to
the Tax Date. Notwithstanding anything to the contrary in this Plan
or any Incentive Agreement, the Committee may disapprove of any
Election or suspend or terminate the right to make Elections.
11.8 NO CONTINUED EMPLOYMENT. No participant under this Plan shall
have any right, because of his or her participation, to continue in the
employ of the Company for any period of time or to any right to continue
his or her present or any other rate of compensation.
11.9 DEFERRAL PERMITTED. Payment of cash or distribution of any
shares of Common Stock to which a participant is entitled under any
Incentive shall be made as provided in the Incentive Agreement. Payment
may be deferred at the option of the participant if provided in the
Incentive Agreement.
11.10 AMENDMENT OR DISCONTINUANCE OF THIS PLAN. The Board may amend
or discontinue this Plan at any time; provided, however, that no such
amendment may:
(a) without the approval of the shareholders, (i) increase,
subject to adjustments permitted herein, the maximum number of
shares of Common Stock that may be issued through this Plan, (ii)
materially increase the benefits accruing to participants under this
Plan, (iii) materially expand the classes of persons eligible to
participate in this Plan, (iv) materially expand the types of awards
available for grant under the Plan, (v) amend Section 11.1 to permit
grants of Incentives hereunder later than May 1, 2015, (vi)
materially change the method of determining the Base price of
options or the Base Price of SARs, or (vii) amend Section 5.6 or 8.7
to permit repricing of options or SARs, respectively, or
(b) materially impair, without the consent of the recipient,
an Incentive previously granted, except (i) as otherwise provided in
Section 11.16 and (ii) that the Company retains all rights to take
action under Section 11.12 and to include in Incentive Agreements
provisions authorizing the Committee in its discretion to cancel
unvested or unexercisable Incentives.
11.11 DEFINITION OF FAIR MARKET VALUE. Whenever the "Fair Market
Value" of Common Stock or some other specified security must be determined
for purposes of this Plan, it shall be determined as follows: (i) if the
Common Stock or other security is listed on an established stock exchange
or any automated quotation system that provides sale quotations, the
closing sale price for a share thereof on such exchange or quotation
system on the applicable date or, if shares are not traded on such day, on
the next preceding trading date, (ii) if the Common Stock or other
security is not listed on any exchange or quotation system, but bid and
asked prices are quoted and published, the mean between the quoted bid and
asked prices on the applicable date or, if bid and asked prices are not
available on such day, on the next preceding day on which such prices were
A-13
available; and (iii) if the Common Stock or other security is not
regularly quoted, the fair market value of a share thereof on the
applicable date as established by the Committee in good faith.
11.12 CHANGE OF CONTROL.
(a) Unless otherwise provided in the Incentive Agreement, a
Change of Control shall mean:
(i) the acquisition by any person of beneficial
ownership of 30% or more of the outstanding shares of the
Common Stock or 30% or more of the combined voting power of
CenturyTel's then outstanding securities entitled to vote
generally in the election of directors; provided, however,
that for purposes of this subsection (i), the following
acquisitions shall not constitute a Change of Control:
(A) any acquisition (other than a Business
Combination (as defined below) which constitutes a
Change of Control under Section 11.12(a)(iii) hereof) of
Common Stock directly from the Company,
(B) any acquisition of Common Stock by the
Company,
(C) any acquisition of Common Stock by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled
by the Company, or
(D) any acquisition of Common Stock by any
corporation pursuant to a Business Combination that does
not constitute a Change of Control under Section
11.12(a)(iii) hereof; or
(ii) individuals who, as of January 1, 2005, constituted
the Board of Directors of CenturyTel (the "Incumbent Board")
cease for any reason to constitute at least a majority of the
Board of Directors; provided, however, that any individual
becoming a director subsequent to such date whose election, or
nomination for election by CenturyTel's shareholders, was
approved by a vote of at least two-thirds of the directors
then comprising the Incumbent Board shall be considered a
member of the Incumbent Board, unless such individual's
initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election or
removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
person other than the Incumbent Board; or
(iii) consummation of a reorganization, share exchange,
merger or consolidation (including any such transaction
involving any direct or indirect subsidiary of CenturyTel) or
sale or other disposition of all or
A-14
substantially all of the assets of the Company (a "Business
Combination"); provided, however, that in no such case shall
any such transaction constitute a Change of Control if
immediately following such Business Combination:
(A) the individuals and entities who were the
beneficial owners of CenturyTel's outstanding Common
Stock and CenturyTel's voting securities entitled to
vote generally in the election of directors immediately
prior to such Business Combination have direct or
indirect beneficial ownership, respectively, of more
than 50% of the then outstanding shares of common stock,
and more than 50% of the combined voting power of the
then outstanding voting securities entitled to vote
generally in the election of directors of the surviving
or successor corporation, or, if applicable, the
ultimate parent company thereof (the "Post-Transaction
Corporation"), and
(B) except to the extent that such ownership
existed prior to the Business Combination, no person
(excluding the Post-Transaction Corporation and any
employee benefit plan or related trust of either
CenturyTel, the Post-Transaction Corporation or any
subsidiary of either corporation) beneficially owns,
directly or indirectly, 20% or more of the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or 20% or more
of the combined voting power of the then outstanding
voting securities of such corporation, and
(C) at least a majority of the members of the
board of directors of the Post-Transaction Corporation
were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of
the Board of Directors, providing for such Business
Combination; or
(iv) approval by the shareholders of CenturyTel of a
complete liquidation or dissolution of CenturyTel.
For purposes of this Section 11.12, the term "person" shall mean a
natural person or entity, and shall also mean the group or syndicate
created when two or more persons act as a syndicate or other group
(including a partnership or limited partnership) for the purpose of
acquiring, holding, or disposing of a security, except that "person"
shall not include an underwriter temporarily holding a security
pursuant to an offering of the security.
(b) Upon a Change of Control of the type described in clause
(a)(i) or (a)(ii) of this Section 11.12 or upon the approval by the
Board of Directors of CenturyTel of any Change of Control of the
type described in clause (a)(iii) or (a)(iv) of this Section 11.12,
all outstanding Incentives granted pursuant to this
A-15
Plan shall automatically become fully vested and exercisable, all
restrictions or limitations on any Incentives shall automatically
lapse and, unless otherwise provided in the Incentive Agreement, all
performance criteria and other conditions relating to the payment of
Incentives shall be deemed to be achieved at the target level
without the necessity of action by any person.
(c) No later than 30 days after a Change of Control of the
type described in subsections (a)(i) or (a)(ii) of this Section
11.12 and no later than 30 days after the approval by the Board of a
Change of Control of the type described in subsections (a)(iii) or
(a)(iv) of this Section 11.12, the Committee, acting in its sole
discretion without the consent or approval of any participant (and
notwithstanding any removal or attempted removal of some or all of
the members thereof as directors or Committee members), may act to
effect one or more of the alternatives listed below, which may vary
among individual participants and which may vary among Incentives
held by any individual participant; provided, however, that no such
action may be taken if it would result in the imposition of a
penalty on the participant under Section 409A of the Code as a
result thereof:
(i) require that all outstanding options, SARs or Other
Stock-Based Awards be exercised on or before a specified date
(before or after such Change of Control) fixed by the
Committee, after which specified date all unexercised options,
SARs and Other Stock-Based Awards and all rights of
participants thereunder shall terminate,
(ii) make such equitable adjustments to Incentives then
outstanding as the Committee deems appropriate to reflect such
Change of Control and provide participants with substantially
equivalent rights before and after such Change of Control
(provided, however, that the Committee may determine in its
sole discretion that no adjustment is necessary),
(iii) provide for mandatory conversion or exchange of
some or all of the outstanding options, SARs, restricted stock
units or Other Stock-Based Awards held by some or all
participants as of a date, before or after such Change of
Control, specified by the Committee, in which event such
Incentives shall be deemed automatically cancelled and the
Company shall pay, or cause to be paid, to each such
participant an amount of cash per share equal to the excess,
if any, of the Change of Control Value of the shares subject
to such option, SAR, restricted stock unit or Other
Stock-Based Award, as defined and calculated below, over the
per share exercise price or base price of such Incentive or,
in lieu of such cash payment, the issuance of Common Stock or
securities of an acquiring entity having a Fair Market Value
equal to such excess, or
(iv) provide that thereafter, upon any exercise or
payment of an Incentive that entitles the holder to receive
Common Stock, the holder shall be entitled to purchase or
receive under such Incentive, in lieu of the
A-16
number of shares of Common Stock then covered by such Incentive, the
number and class of shares of stock or other securities or property
(including cash) to which the holder would have been entitled
pursuant to the terms of the agreement providing for the
reorganization, share exchange, merger, consolidation or asset sale,
if, immediately prior to such Change of Control, the holder had been
the record owner of the number of shares of Common Stock then
covered by such Incentive.
(d) For the purposes of conversions or exchanges under paragraph
(iii) of Section 11.12(c), the "Change of Control Value" shall equal the
amount determined by whichever of the following items is applicable:
(i) the per share price to be paid to holders of Common Stock
in any such merger, consolidation or other reorganization,
(ii) the price per share offered to holders of Common Stock in
any tender offer or exchange offer whereby a Change of Control takes
place, or
(iii) in all other events, the fair market value of a share of
Common Stock, as determined by the Committee as of the time
determined by the Committee to be immediately prior to the effective
time of the conversion or exchange.
(e) In the event that the consideration offered to shareholders of
CenturyTel in any transaction described in this Section 11.12 consists of
anything other than cash, the Committee shall determine the fair cash
equivalent of the portion of the consideration offered that is other than
cash.
11.13 REPURCHASE. Upon approval of the Committee, the Company may
repurchase all or a portion of a previously granted Incentive from a participant
by mutual agreement by payment to the participant of cash or Common Stock or a
combination thereof with a value equal to the value of the Incentive determined
in good faith by the Committee; provided, however, that in no event will this
section be construed to grant the Committee the power to take any action in
violation of Section 5.6 or 8.7.
11.14 LIABILITY.
(a) Neither CenturyTel, its affiliates or any of their respective
directors or officers shall be liable to any participant relating to the
participant's failure to (i) realize any anticipated benefit under an
Incentive due to the failure to satisfy any applicable conditions to
vesting, payment or settlement, including the failure to attain
performance goals or to satisfy the conditions specified in Section 11.5
or (ii) realize any anticipated tax benefit or consequence due to changes
in applicable law, the particular circumstances of the participant, or any
other reason.
(b) No member of the Committee (or officer of the Company exercising
delegated authority of the Committee under Section 3 thereof) will be
A-17
liable for any action or determination made in good faith with respect to
this Plan or any Incentive.
11.15 INTERPRETATION.
(a) Unless the context otherwise requires, (i) all references to
Sections are to Sections of this Plan, (ii) the term "including" means
including without limitation, (iii) all references to any particular
Incentive Agreement shall be deemed to include any amendments thereto or
restatements thereof, and (iv) all references to any particular statute
shall be deemed to include any amendment, restatement or re-enactment
thereof or any statute or regulation substituted therefore.
(b) The titles and subtitles used in this Plan or any Incentive
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Plan or the Incentive Agreement.
(c) All pronouns contained in this Plan or any Incentive Agreement,
and any variations thereof, shall be deemed to refer to the masculine,
feminine or neutral, singular or plural, as the identities of the parties
may require.
(d) Whenever any provision of this Plan authorizes the Committee to
take action or make determinations with respect to outstanding Incentives
that have been granted or awarded by the chief executive officer of
CenturyTel under Section 3(i) hereof, each such reference to "Committee"
shall be deemed to include a reference to any officer of the Company that
has delegated administrative authority under Section 3(ii) of this Plan
(subject to the limitations of such section).
11.16 COMPLIANCE WITH SECTION 409A. It is the intent of the Company that
this Plan comply with the requirements of Section 409A of the Code with respect
to any Incentives that constitute non-qualified deferred compensation under
Section 409A and the Company intends to operate the Plan in compliance with
Section 409A and the Department of Treasury's guidance or regulations
promulgated thereunder. If the Committee grants any Incentives or takes any
other action that would, either immediately or upon vesting or payment of the
Incentive, inadvertently result in the imposition of a penalty on a participant
under Section 409A of the Code, then the Company, in its discretion, may, to the
maximum extent permitted by law, unilaterally rescind ab initio, sever, amend or
otherwise modify the grant or action (or any provision of the Incentive) in such
manner necessary for the penalty to be inapplicable or reduced.
* * * * * * * * * *
A-18
CERTIFICATION
The undersigned Secretary of CenturyTel, Inc. hereby certifies that the
foregoing CenturyTel, Inc. 2005 Management Incentive Compensation Plan was (i)
recommended to the Board of Directors of CenturyTel, Inc. (the "Board") by its
Compensation Committee at a meeting of the Compensation Committee duly held on
February 17, 2005, (ii) adopted by the Board at a meeting duly held on February
22, 2005, and (iii) approved by the requisite affirmative vote of the
shareholders of CenturyTel, Inc. at its 2005 Annual Meeting of Shareholders held
on May 12, 2005.
[Signature Block Intentionally Omitted]
A-19
APPENDIX B
TO PROXY STATEMENT
CENTURYTEL, INC.
2005 DIRECTORS STOCK PLAN
1. PURPOSE. The purpose of the CenturyTel, Inc. 2005 Directors Stock Plan
(the "Plan") is to promote the interests of CenturyTel, Inc. ("CenturyTel") and
its shareholders by strengthening CenturyTel's ability to attract, motivate and
retain experienced and qualified directors, and to encourage the highest level
of director performance by providing directors with a variety of equity
incentives (the "Incentives") offering a proprietary interest in the financial
success and growth of CenturyTel and its subsidiaries (collectively with
CenturyTel, the "Company"). Incentives may consist of options to purchase shares
of CenturyTel's common stock, $1.00 par value per share (the "Common Stock"),
stock appreciation rights, shares of restricted stock, restricted stock units or
other stock-based awards the value of which is based upon the value of the
Common Stock, all on terms determined under this Plan. As used in this Plan, the
term "subsidiary" means any corporation, limited liability company or other
entity of which CenturyTel owns (directly or indirectly) within the meaning of
Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"),
50% or more of the total combined voting power of all classes of stock,
membership interests or other equity interests issued thereby.
2. ADMINISTRATION.
2.1 COMPOSITION. This Plan shall be administered by the compensation
committee of the Board of Directors of CenturyTel, or by a subcommittee of
the compensation committee. The committee or subcommittee that administers
this Plan shall hereinafter be referred to as the "Committee." The
Committee shall consist of not fewer than two members of the Board of
Directors, each of whom shall (a) qualify as a "non-employee director"
under Rule 16b-3 under the Securities Exchange Act of 1934 (the "1934
Act"), or any successor rule, and (b) qualify as an "outside director"
under Section 162(m) of the Code and the regulations thereunder
(collectively, "Section 162(m)").
2.2 AUTHORITY. The Committee shall have authority to grant
Incentives under this Plan, to interpret this Plan, to establish any rules
or regulations relating to this Plan that it determines to be appropriate,
to enter into agreements with or provide notices to participants as to the
terms of the Incentives (the "Incentive Agreements") and to make any other
determination that it believes necessary or advisable for the proper
administration of this Plan. Its decisions concerning matters relating to
this Plan shall be final, conclusive and binding on the Company and
participants.
3. ELIGIBLE PARTICIPANTS. Members of the board of directors of the Company
(the "Board") who are not employed by CenturyTel or any of its subsidiaries are
eligible to receive Incentives under this Plan when designated by the Committee.
4. SHARES SUBJECT TO THIS PLAN. The shares of Common Stock with respect to
which Incentives may be granted under this Plan shall be subject to the
following:
4.1 TYPE OF COMMON STOCK. The shares of Common Stock with respect to
which Incentives may be granted under this Plan may be currently
authorized but
B-1
unissued shares or shares currently held or subsequently acquired by the Company
as treasury shares, including shares purchased in the open market or in private
transactions.
4.2 MAXIMUM NUMBER OF SHARES. Subject to the other provisions of this
Section 4, the maximum number of shares of Common Stock that may be delivered to
participants and their beneficiaries under this Plan shall be 400,000 shares of
Common Stock.
4.3 SHARE COUNTING. To the extent any shares of Common Stock covered by an
Incentive are not delivered to a participant or beneficiary because the
Incentive is forfeited or canceled, or the shares of Common Stock are not
delivered because the Incentive is paid or settled in cash, such shares shall
not be deemed to have been delivered for purposes of determining the maximum
number of shares of Common Stock available for delivery under Section 4.2 or
4.4(a) of this Plan. In the event that shares of Common Stock are issued as
Incentives and thereafter are forfeited or reacquired by the Company pursuant to
rights reserved upon issuance thereof, such forfeited and reacquired Shares may
again be issued under this Plan. All shares to which a stock appreciation right
relates (not only the net shares) shall be counted against the shares issuable
through the Plan, except as otherwise provided above.
4.4 LIMITATIONS ON NUMBER OF SHARES. Subject to Section 4.5, the following
additional limitations are imposed under this Plan:
(a) The maximum number of shares of Common Stock that may be issued
as restricted stock, restricted stock units, or Other Stock-Based Awards
(as defined below) shall be 200,000 shares.
(b) If, after shares have been earned under an Incentive, the
delivery is deferred, any additional shares attributable to dividends paid
during the deferral period shall be disregarded for purposes of the
limitations of this Section 4.
4.5 ADJUSTMENT.
(a) In the event of any recapitalization, reclassification, stock
dividend, stock split, combination of shares or other change in the Common
Stock, all limitations on numbers of shares of Common Stock provided in
this Section 4 and the number of shares of Common Stock subject to
outstanding Incentives shall be equitably adjusted in proportion to the
change in outstanding shares of Common Stock. In addition, in the event of
any such change in the Common Stock, the Committee shall make any other
adjustment that it determines to be equitable, including adjustments to
the exercise price of any option or the base price of any stock
appreciation right and any per share performance objectives of any
Incentive in order to provide participants with the same relative rights
before and after such adjustment.
(b) If the Company merges, consolidates, sells all of its assets or
dissolves and such transaction is not a Change of Control, as defined in
Section 11.12 (each of the foregoing a "Fundamental Change"), then
thereafter upon any exercise or payout of an Incentive theretofore granted
the participant shall be
B-2
entitled to receive (i) in lieu of shares of Common Stock previously
issuable thereunder, the number and class of shares of stock and
securities to which the participant would have been entitled
pursuant to the terms of the Fundamental Change if, immediately
prior to such Fundamental Change, the participant had been the
holder of record of the number of shares of Common Stock subject to
such Incentive or (ii) in lieu of payments based upon Common Stock
previously payable thereunder, payments based on any formula that
the Committee determines to be equitable in order to provide
participants with substantially equivalent rights before and after
the Fundamental Change. In the event any such Fundamental Change
causes a change in the outstanding Common Stock, the aggregate
number of shares available under the Plan may be appropriately
adjusted by the Committee in its sole discretion, whose
determination shall be conclusive.
5. ANNUAL GRANTS. Unless the Committee otherwise determines, (i) each
member of the Board eligible to receive Incentives through this Plan shall
receive an annual grant on the business day following CenturyTel's annual
meeting of shareholders, and (ii) each person who becomes a member of the Board
other than through elections at an annual meeting of shareholders and who is
eligible to receive Incentives under this Plan shall receive a grant of
Incentives on the business day following the date such eligible director becomes
a member of the Board. The type or types of Incentives to be granted and the
terms of such awards shall be determined by the Committee in accordance with
this Plan.
6. STOCK OPTIONS. The Committee may grant non-qualified stock options
under the Plan. Each stock option granted by the Committee under this Plan shall
be subject to the following terms and conditions:
6.1 PRICE. The exercise price per share shall be determined by the
Committee, subject to adjustment under Section 4.5; provided that in no
event shall the exercise price be less than the Fair Market Value (as
defined below) of a share of Common Stock on the date of grant, except in
the case of a stock option granted in assumption of or in substitution for
an outstanding award of a company acquired by the Company or with which
the Company combines.
6.2 NUMBER. The number of shares of Common Stock subject to the
option shall be determined by the Committee, subject to the limitations
and adjustments provided in Section 4 hereof.
6.3 DURATION AND TIME FOR EXERCISE. Subject to earlier termination
as provided in Sections 11.4 and 11.12, the term of each stock option
shall be determined by the Committee, but may not exceed ten years. Each
stock option shall become exercisable at such time or times during its
term as shall be determined by the Committee. The Committee may accelerate
the exercisability of any stock option at any time.
6.4 CONDITIONS TO EXERCISE. The Committee may, in its discretion,
provide that a stock option cannot be exercised unless one or more
performance goals are achieved.
B-3
6.5 MANNER OF EXERCISE.
(a) A stock option may be exercised, in whole or in part, by
giving written notice to the Company, specifying the number of
shares of Common Stock to be purchased. The exercise notice shall be
accompanied by tender of the full purchase price for such shares,
which may be paid or satisfied by (i) cash; (ii) check; (iii)
delivery of shares of Common Stock, which shares shall be valued for
this purpose at the Fair Market Value on the business day
immediately preceding the date such option is exercised and, unless
otherwise determined by the Committee, shall have been held by the
optionee for at least six months; (iv) delivery of irrevocable
written instructions to a broker (with a copy to the Company) to
immediately sell a portion of the shares issuable under the option
and to deliver promptly to the Company the amount of sale proceeds
(or loan proceeds if the broker lends funds to the participant for
delivery to the Company) to pay the exercise price; (v) in such
other manner as may be authorized from time to time by the
Committee; or (vi) any combination of the preceding, equal in value
to the full amount of the exercise price; provided that all such
payments shall be made or denominated in United States dollars.
(b) Notice under the preceding paragraph may be delivered by
telecopy, electronic mail or any similar form of transmission
provided that the exercise price of such shares is received by the
Company via wire transfer or other means on or before the day such
transmission is received by the Company. The notice shall specify
the manner in which the certificates for such shares are to be
delivered.
(c) An option to purchase shares of Common Stock in accordance
with this Plan shall be deemed to have been exercised immediately
prior to the close of business on the first business date in which
the Company has received both (i) written notice of such exercise
and (ii) payment in full of the exercise price for the number of
shares for which options are being exercised.
(d) In the case of delivery of an uncertified check, no shares
shall be issued until the check has been paid in full.
(e) Prior to the issuance of shares of Common Stock upon the
exercise of a stock option, a participant shall have no rights as a
shareholder.
6.6 REPRICING. Except for adjustments pursuant to Section 4.5 or
actions permitted to be taken by the Committee under Section 11.12(c) in
the event of a Change of Control, unless approved by the shareholders of
the Company, (a) the exercise price for any outstanding option granted
under this Plan may not be decreased after the date of grant and (b) an
outstanding option that has been granted under this Plan may not, as of
any date that such option has an exercise price that is greater than the
then current Fair Market Value of a share of Common Stock, be surrendered
to the Company as consideration for anything of value, including the grant
of a new option with a lower exercise price, another Incentive, a cash
payment or Common Stock.
B-4
7. RESTRICTED STOCK.
7.1 GRANT OF RESTRICTED STOCK. An award of restricted stock may be
subject to the attainment of specified performance goals or targets,
restrictions on transfer, forfeitability provisions and such other terms
and conditions as the Committee may determine, subject to the provisions
of this Plan.
7.2 RESTRICTED PERIOD. At the time an award of restricted stock is
made, the Committee shall establish a period of time during which the
transfer of the shares of restricted stock shall be restricted (the
"Restricted Period"). Each award of restricted stock may have a different
Restricted Period. Unless otherwise provided in the Incentive Agreement,
the Committee may in its discretion declare the Restricted Period
terminated upon a participant's death, disability, retirement or other
cessation of Board service and permit the sale or transfer of the
restricted stock. The expiration of the Restricted Period shall also occur
as provided under Section 11.12 upon a Change of Control of the Company.
7.3 ESCROW. The participant receiving restricted stock shall enter
into an Incentive Agreement with the Company setting forth the conditions
of the grant. Certificates representing shares of restricted stock shall
be registered in the name of the participant and deposited with the
Company, together with a stock power endorsed in blank by the participant.
Each such certificate shall bear a legend in substantially the following
form:
The transferability of this certificate and the shares of Common
Stock represented by it is subject to the terms and conditions
(including conditions of forfeiture) contained in the CenturyTel,
Inc. 2005 Directors Stock Plan (the "Plan") and an agreement entered
into between the registered owner and CenturyTel, Inc. thereunder.
Copies of this Plan and the agreement are on file and available for
inspection at the principal office of the Company.
7.4 DIVIDENDS ON RESTRICTED STOCK. Any and all cash and stock
dividends paid with respect to the shares of restricted stock shall be
subject to any restrictions on transfer, forfeitability provisions or
reinvestment requirements as the Committee may, in its discretion,
prescribe in the Incentive Agreement.
7.5 FORFEITURE. In the event of the forfeiture of any shares of
restricted stock under the terms provided in the Incentive Agreement
(including any additional shares of restricted stock that may result from
the reinvestment of cash and stock dividends, if so provided in the
Incentive Agreement), such forfeited shares shall be surrendered and the
certificates cancelled. The participants shall have the same rights and
privileges, and be subject to the same forfeiture provisions, with respect
to any additional shares received pursuant to Section 4.5 due to a
recapitalization, stock split or other change in capitalization described
therein.
7.6 EXPIRATION OF RESTRICTED PERIOD. Upon the expiration or
termination of the Restricted Period and the satisfaction of any other
conditions prescribed by the applicable Incentive Agreement or at such
earlier time as provided for in Section 7.2, the
B-5
restrictions applicable to the restricted stock shall lapse and a stock
certificate for the number of shares of restricted stock with respect to
which the restrictions have lapsed shall be delivered, free of all such
restrictions and legends other than those required by law, to the
participant or the participant's estate, as the case may be.
7.7 RIGHTS AS A SHAREHOLDER. Subject to the restrictions imposed
under the terms and conditions of this Plan and subject to any other
restrictions that may be imposed in the Incentive Agreement, each
participant receiving restricted stock shall have all the rights of a
shareholder with respect to shares of Common Stock during any period in
which such shares are subject to forfeiture and restrictions on transfer,
including the right to vote such shares.
8. RESTRICTED STOCK UNITS.
8.1 GRANT OF RESTRICTED STOCK UNITS. A restricted stock unit, or
RSU, represents the right to receive from the Company on the scheduled
vesting date or other specified payment date for such RSU, one share of
Common Stock. An award of restricted stock units may be subject to the
attainment of specified performance goals or targets, forfeitability
provisions and such other terms and conditions as the Committee may
determine, subject to the provisions of this Plan.
8.2 VESTING PERIOD. At the time an award of restricted stock units
is made, the Committee shall establish a period of time during which the
restricted stock units shall vest (the "Vesting Period"). Each award of
restricted stock units may have a different Vesting Period. Unless
otherwise provided in the Incentive Agreement, the acceleration of the
expiration of the Vesting Period shall occur as provided under Section
11.12(b) upon a Change of Control of the Company and may also occur as
provided under Section 11.4 in the event of termination of service as a
director under certain circumstances.
8.3 DIVIDEND EQUIVALENT ACCOUNTS. Subject to the terms and
conditions of this Plan and the applicable Incentive Agreement, as well as
any procedures established by the Committee, prior to the expiration of
the applicable Vesting Period of an RSU granted to a participant
hereunder, the Company shall establish an account for the participant and
deposit into that account any securities, cash or other property
comprising any dividend or property distribution with respect to the
shares of Common Stock underlying the RSU. The participant shall have no
rights to the amounts or other property in such account until the
applicable RSU vests.
8.4 RIGHTS AS A SHAREHOLDER. Each participant receiving restricted
stock units shall have no rights as a shareholder with respect to such
restricted stock units until such time as shares of Common Stock are
issued to the participant.
9. STOCK-SETTLED STOCK APPRECIATION RIGHTS.
9.1 GRANT OF STOCK-SETTLED STOCK APPRECIATION RIGHTS. A
stock-settled stock appreciation right, or SAR, is a right to receive,
without payment to the Company, a number of shares of Common Stock, the
number of which is determined pursuant to the
B-6
formula set forth in Section 9.5. Each SAR granted by the Committee under
the Plan shall be subject to the terms and conditions provided in this
Section 9.
9.2 NUMBER. Each SAR granted to any participant shall relate to such
number of shares of Common Stock as shall be determined by the Committee,
subject to adjustment as provided in Section 4.5.
9.3 DURATION AND TIME FOR EXERCISE. The term of each SAR shall be
determined by the Committee, but shall not exceed a maximum term of 10
years. Each SAR shall become exercisable at such time or times during its
term as shall be determined by the Committee. The Committee may in its
discretion accelerate the exercisability of any SAR at any time in its
discretion.
9.4 EXERCISE. A SAR may be exercised, in whole or in part, by giving
written notice to the Company, specifying the number of SARs which the
holder wishes to exercise. The date that the Company receives such written
notice shall be referred to herein as the "Exercise Date." The Company
shall, within 30 days of an Exercise Date, deliver to the exercising
holder certificates for the shares of Common Stock to which the holder is
entitled pursuant to Section 9.5
9.5 PAYMENT. The number of shares of Common Stock which shall be
issuable upon the exercise of a SAR shall be determined by dividing:
(i) the number of shares of Common Stock as to which the SAR
is exercised, multiplied by the amount of the appreciation in each
such share (for this purpose, the "appreciation" shall be the amount
by which the Fair Market Value of the Common Stock subject to the
SAR on the business day preceding the Exercise Date exceeds the
"Base Price," which is an amount, not less than the Fair Market
Value of a share of Common Stock on the date of grant, which shall
be determined by the Committee at the time of grant, subject to
adjustment under Section 4.5); by
(ii) the Fair Market Value of a share of Common Stock on the
Exercise Date.
9.6 NO FRACTIONAL SHARES. No fractional shares of Common Stock shall
be issued upon the exercise of a SAR. In lieu thereof, the holder of a SAR
shall be entitled to purchase the portion necessary to make a whole share
at its Fair Market Value on the Exercise Date.
9.7 REPRICING. Except for adjustments pursuant to Section 4.5 or
actions permitted to be taken by the Committee under Section 11.12(c) in
the event of a Change of Control, unless approved by the shareholders of
the Company, (a) the Base Price for any outstanding SAR granted under this
Plan may not be decreased after the date of grant and (b) an outstanding
SAR that has been granted under this Plan may not, as of any date that
such SAR has a per share Base Price that is greater than the then current
Fair Market Value of a share of Common Stock, be surrendered to the
Company as consideration for anything of value, including the grant of a
new SAR with a lower Base Price, another Incentive, a cash payment or
Common Stock.
B-7
10. OTHER STOCK-BASED AWARDS. The Committee may grant to eligible
participants "Other Stock-Based Awards," which shall consist of awards, other
than options, restricted stock, restricted stock units or SARs provided for in
Sections 6 through 9, the value of which is based in whole or in part on the
value of shares of Common Stock. Other Stock-Based Awards may be awards of
shares of Common Stock or may be denominated or payable in, valued in whole or
in part by reference to, or otherwise based on or related to, shares of, or
appreciation in the value of, Common Stock (including securities convertible or
exchangeable into or exercisable for shares of Common Stock), as deemed by the
Committee consistent with the purposes of this Plan. The Committee shall
determine the terms and conditions of any Other Stock-Based Award (including
which rights of a shareholder, if any, the recipient shall have with respect to
Common Stock associated with any such award) and may provide that such award is
payable in whole or in part in cash. An Other Stock-Based Award may be subject
to the attainment of such specified performance goals or targets as the
Committee may determine, subject to the provisions of this Plan.
11. GENERAL.
11.1 DURATION. No Incentives may be granted under the Plan later
than May 1, 2015; provided, however, that Incentives granted prior to such
date shall remain in effect until (i) all such Incentives granted under
this Plan have either been satisfied by the issuance of shares of Common
Stock or the payment of cash or been terminated under the terms of this
Plan or the applicable Incentive Agreement and (ii) all restrictions
imposed on shares of Common Stock in connection with their issuance under
this Plan have lapsed.
11.2 TRANSFERABILITY OF INCENTIVES.
(a) No Incentive granted hereunder may be transferred,
pledged, assigned or otherwise encumbered by the holder thereof
except:
(i) by will;
(ii) by the laws of descent and distribution; or
(iii) pursuant to a domestic relations order, as defined in
the Code; or
(iv) in the case of stock options only, if permitted by the
Committee and so provided in the Incentive Agreement, (A) to
Immediate Family Members (as defined below), (B) to a partnership in
which the participant and/or Immediate Family Members, or entities
in which the participant and/or Immediate Family Members are the
sole owners, members or beneficiaries, as appropriate, are the sole
partners, (C) to a limited liability company in which the
participant and/or Immediate Family Members, or entities in which
the participant and/or Immediate Family Members are the sole owners,
members or beneficiaries, as appropriate, are the sole members, or
(D) to a trust for the sole benefit of the participant and/or
Immediate Family Members. "Immediate Family
B-8
Members" means the spouse and natural or adopted children or
grandchildren of the participant and their respective spouses.
(b) No such transfer of any Incentive under paragraph (a)
shall be effective to bind the Company unless the Company shall have
been furnished with written notice thereof and a copy of such
evidence as the Committee may deem necessary to establish the
validity of the transfer and the acceptance by the transferee or
transferees of the terms and conditions of this Plan and the
applicable Incentive Agreement.
(c) Any attempted assignment, transfer, pledge, hypothecation
or other disposition of an Incentive, or levy of attachment or
similar process upon the Incentive not specifically permitted
herein, shall be null and void and without effect.
11.3 DIVIDEND EQUIVALENTS. In the sole and complete discretion of
the Committee, an Incentive may provide the holder thereof with dividends
or dividend equivalents, payable in cash, shares, other securities or
other property on a current or deferred basis.
11.4 EFFECT OF TERMINATION OF BOARD SERVICE. In the event that a
participant ceases to be a member of the Board eligible to participate in
the Plan for any reason, including death, disability, early retirement or
normal retirement, any outstanding Incentives then held by such
participant may be exercised, may vest or may expire at such times or in
such manner as is set forth in the applicable Incentive Agreement;
provided, however, that if the participant ceases to serve on the Board
because such participant is ineligible to stand for re-election under
CenturyTel's directors retirement policy, any Incentives then exercisable
by such participant shall, unless otherwise provided in the applicable
Incentive Agreement, continue to remain outstanding and exercisable for
the remaining term of such Incentives. In its discretion, the Committee
may resolve any questions under this Plan or any Incentive Agreement as to
whether and when there has been a termination of Board service and the
cause or nature of such termination.
11.5 ADDITIONAL CONDITIONS. Anything in this Plan to the contrary
notwithstanding:
(a) the Company may, if it shall determine it necessary or
desirable for any reason, at the time of award of any Incentive or
the issuance of any shares of Common Stock pursuant to any
Incentive, require the recipient of the Incentive, as a condition to
the receipt thereof or to the receipt of shares of Common Stock
issued pursuant thereto, to deliver to the Company a written
representation of present intention to acquire the Incentive or the
shares of Common Stock issued pursuant thereto for his own account
for investment and not for distribution; and
(b) if at any time the Company further determines, in its sole
discretion, that the listing, registration or qualification (or any
updating of any such document) of any Incentive or the shares of
Common Stock issuable pursuant thereto is necessary on any
securities exchange or under any federal or
B-9
state securities or blue sky law, or that the consent or approval of
any governmental regulatory body is necessary or desirable as a
condition of, or in connection with the award of any Incentive, the
issuance of shares of Common Stock pursuant thereto, or the removal
of any restrictions imposed on such shares, such Incentive shall not
be awarded or such shares of Common Stock shall not be issued or
such restrictions shall not be removed, as the case may be, in whole
or in part, unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any
conditions not acceptable to the Company.
11.6 INCENTIVE AGREEMENTS. An Incentive under this Plan shall be
subject to such terms and conditions, not inconsistent with this Plan, as
the Committee may, in its sole discretion, prescribe and set forth in the
Incentive Agreement. Such terms and conditions may provide for the
forfeiture of an Incentive or the gain associated with an Incentive under
certain circumstances to be set forth in the Incentive Agreement. In
connection with a grant of Incentives hereunder, the Committee shall
authorize and approve a form of Incentive Agreement governing the terms
and conditions of such Incentives, and cause the Company to prepare an
individual agreement or notice to each eligible director that represents
the actual number of shares of Common Stock to which the Incentive
relates. A copy of such document shall be provided to each such director,
and the Committee may, but need not, require that such director duly
execute and deliver to the Company a copy of such document as a condition
precedent to the effectiveness of the grant of the Incentive. Such
document is referred to in this Plan as an "Incentive Agreement"
regardless of whether a participant's signature is required.
11.7 WITHHOLDING. The Company shall have the right to withhold from
any payments or stock issuances under this Plan, or to collect as a
condition of payment, any taxes required by law to be withheld.
11.8 NO CONFERMENT OF RIGHTS. Nothing in this Plan or in any
agreement or instrument executed pursuant to this Plan will confer upon
any participant any right to continue to serve as a director or affect the
right of the Company to terminate the services of any director.
11.9 DEFERRAL PERMITTED. Payment of cash or distribution of any
shares of Common Stock to which a participant is entitled under any
Incentive shall be made as provided in the Incentive Agreement. Payment
may be deferred at the option of the participant if provided in the
Incentive Agreement.
11.10 AMENDMENT OR DISCONTINUANCE OF THIS PLAN. The Board may amend
or discontinue this Plan at any time; provided, however, that no such
amendment may:
(a) without the approval of the shareholders, (i) increase,
subject to adjustments permitted herein, the maximum number of
shares of Common Stock that may be issued through this Plan, (ii)
materially increase the benefits accruing to participants under this
Plan, (iii) materially expand the classes of persons eligible to
participate in this Plan, (iv) materially expand the types of awards
available for grant under the Plan, (v) amend Section 11.1 to permit
grants of Incentives later than May 1, 2015, (vi) materially change
the method of determining the exercise price of options or the Base
Price of SARs, or (vii)
B-10
amend Section 6.6 or Section 9.7 to permit repricing of options or
SARs, respectively, or
(b) materially impair, without the consent of the recipient,
an Incentive previously granted, except (i) as otherwise provided in
Section 11.16 and (ii) that the Company retains all rights to take
action under Section 11.12 and to include in Incentive Agreements
provisions authorizing the Committee in its discretion to cancel
unvested or unexercisable Incentives.
11.11 DEFINITION OF FAIR MARKET VALUE. Whenever the "Fair Market
Value" of Common Stock or some other specified security must be determined
for purposes of this Plan, it shall be determined as follows: (i) if the
Common Stock or other security is listed on an established stock exchange
or any automated quotation system that provides sale quotations, the
closing sale price for a share thereof on such exchange or quotation
system on the applicable date or, if shares are not traded on such day, on
the next preceding trading date, (ii) if the Common Stock or other
security is not listed on any exchange or quotation system, but bid and
asked prices are quoted and published, the mean between the quoted bid and
asked prices on the applicable date or, if bid and asked prices are not
available on such day, on the next preceding day on which such prices were
available; and (iii) if the Common Stock or other security is not
regularly quoted, the fair market value of a share thereof on the
applicable date as established by the Committee in good faith.
11.12 CHANGE OF CONTROL.
(a) Unless otherwise provided in the Incentive Agreement, a
Change of Control shall mean:
(i) the acquisition by any person of beneficial
ownership of 30% or more of the outstanding shares of the
Common Stock or 30% or more of the combined voting power of
CenturyTel's then outstanding securities entitled to vote
generally in the election of directors; provided, however,
that for purposes of this subsection (i), the following
acquisitions shall not constitute a Change of Control:
(A) any acquisition (other than a Business
Combination (as defined below) which constitutes a
Change of Control under Section 11.12(a)(iii) hereof) of
Common Stock directly from the Company,
(B) any acquisition of Common Stock by the
Company,
(C) any acquisition of Common Stock by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled
by the Company, or
(D) any acquisition of Common Stock by any
corporation pursuant to a Business Combination that does
not
B-11
constitute a Change of Control under Section
11.12(a)(iii) hereof; or
(ii) individuals who, as of January 1, 2005, constituted
the Board of Directors of CenturyTel (the "Incumbent Board")
cease for any reason to constitute at least a majority of the
Board of Directors; provided, however, that any individual
becoming a director subsequent to such date whose election, or
nomination for election by CenturyTel's shareholders, was
approved by a vote of at least two-thirds of the directors
then comprising the Incumbent Board shall be considered a
member of the Incumbent Board, unless such individual's
initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election or
removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
person other than the Incumbent Board; or
(iii) consummation of a reorganization, share exchange,
merger or consolidation (including any such transaction
involving any direct or indirect subsidiary of CenturyTel) or
sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"); provided,
however, that in no such case shall any such transaction
constitute a Change of Control if immediately following such
Business Combination:
(A) the individuals and entities who were the
beneficial owners of CenturyTel's outstanding Common
Stock and CenturyTel's voting securities entitled to
vote generally in the election of directors immediately
prior to such Business Combination have direct or
indirect beneficial ownership, respectively, of more
than 50% of the then outstanding shares of common stock,
and more than 50% of the combined voting power of the
then outstanding voting securities entitled to vote
generally in the election of directors of the surviving
or successor corporation, or, if applicable, the
ultimate parent company thereof (the "Post-Transaction
Corporation"), and
(B) except to the extent that such ownership
existed prior to the Business Combination, no person
(excluding the Post-Transaction Corporation and any
employee benefit plan or related trust of either
CenturyTel, the Post-Transaction Corporation or any
subsidiary of either corporation) beneficially owns,
directly or indirectly, 20% or more of the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or 20% or more
of the combined voting power of the then outstanding
voting securities of such corporation, and
(C) at least a majority of the members of the
board of directors of the Post-Transaction Corporation
were members of the Incumbent Board at the time of the
execution of the initial
B-12
agreement, or of the action of the Board of Directors,
providing for such Business Combination; or
(iv) approval by the shareholders of CenturyTel of a
complete liquidation or dissolution of CenturyTel.
For purposes of this Section 11.12, the term "person" shall mean a
natural person or entity, and shall also mean the group or syndicate
created when two or more persons act as a syndicate or other group
(including a partnership or limited partnership) for the purpose of
acquiring, holding, or disposing of a security, except that "person"
shall not include an underwriter temporarily holding a security
pursuant to an offering of the security.
(b) Upon a Change of Control of the type described in clause
(a)(i) or (a)(ii) of this Section 11.12 or upon the approval by the
Board of Directors of CenturyTel of any Change of Control of the
type described in clause (a)(iii) or (a)(iv) of this Section 11.12,
all outstanding Incentives granted pursuant to this Plan shall
automatically become fully vested and exercisable, all restrictions
or limitations on any Incentives shall automatically lapse and,
unless otherwise provided in the Incentive Agreement, all
performance criteria and other conditions relating to the payment of
Incentives shall be deemed to be achieved at the target level
without the necessity of action by any person.
(c) No later than 30 days after a Change of Control of the
type described in subsections (a)(i) or (a)(ii) of this Section
11.12 and no later than 30 days after the approval by the Board of a
Change of Control of the type described in subsections (a)(iii) or
(a)(iv) of this Section 11.12, the Committee, acting in its sole
discretion without the consent or approval of any participant (and
notwithstanding any removal or attempted removal of some or all of
the members thereof as directors or Committee members), may act to
effect one or more of the alternatives listed below, which may vary
among individual participants and which may vary among Incentives
held by any individual participant; provided, however, that no such
action may be taken if it would result in the imposition of a
penalty on the participant under Section 409A of the Code as a
result thereof:
(i) require that all outstanding options, SARs or Other
Stock-Based Awards be exercised on or before a specified date
(before or after such Change of Control) fixed by the
Committee, after which specified date all unexercised options,
SARs and Other Stock-Based Awards and all rights of
participants thereunder shall terminate,
(ii) make such equitable adjustments to Incentives then
outstanding as the Committee deems appropriate to reflect such
Change of Control and provide participants with substantially
equivalent rights before and after such Change of Control
(provided, however, that the Committee may determine in its
sole discretion that no adjustment is necessary),
B-13
(iii) provide for mandatory conversion or exchange of
some or all of the outstanding options, SARs, restricted stock
units or Other Stock-Based Awards held by some or all
participants as of a date, before or after such Change of
Control, specified by the Committee, in which event such
Incentives shall be deemed automatically cancelled and the
Company shall pay, or cause to be paid, to each such
participant an amount of cash per share equal to the excess,
if any, of the Change of Control Value of the shares subject
to such option, SAR, restricted stock unit or Other
Stock-Based Award, as defined and calculated below, over the
per share exercise price or base price of such Incentive or,
in lieu of such cash payment, the issuance of Common Stock or
securities of an acquiring entity having a Fair Market Value
equal to such excess, or
(iv) provide that thereafter, upon any exercise or
payment of an Incentive that entitles the holder to receive
Common Stock, the holder shall be entitled to purchase or
receive under such Incentive, in lieu of the number of shares
of Common Stock then covered by such Incentive, the number and
class of shares of stock or other securities or property
(including cash) to which the holder would have been entitled
pursuant to the terms of the agreement providing for the
reorganization, share exchange, merger, consolidation or asset
sale, if, immediately prior to such Change of Control, the
holder had been the record owner of the number of shares of
Common Stock then covered by such Incentive.
(d) For the purposes of conversions or exchanges under
paragraph (iii) of Section 11.12(c), the "Change of Control Value"
shall equal the amount determined by whichever of the following
items is applicable:
(i) the per share price to be paid to holders of Common
Stock in any such merger, consolidation or other
reorganization,
(ii) the price per share offered to holders of Common
Stock in any tender offer or exchange offer whereby a Change
of Control takes place, or
(iii) in all other events, the fair market value of a
share of Common Stock, as determined by the Committee as of
the time determined by the Committee to be immediately prior
to the effective time of the conversion or exchange.
(e) In the event that the consideration offered to
shareholders of CenturyTel in any transaction described in this
Section 11.12 consists of anything other than cash, the Committee
shall determine the fair cash equivalent of the portion of the
consideration offered that is other than cash.
11.13 REPURCHASE. Upon approval of the Committee, the Company may
repurchase all or a portion of a previously granted Incentive from a
participant by mutual agreement by payment to the participant of cash or
Common Stock or a combination thereof with a value equal to the value of
the Incentive as determined in good faith by the
B-14
Committee; provided, however, that in no event will this section be
construed to grant the Committee the power to take any action in violation
of Section 6.6 or 9.7.
11.14 LIABILITY.
(a) Neither CenturyTel, its affiliates or any of their
respective directors or officers shall be liable to any participant
relating to the participant's failure to (i) realize any anticipated
benefit under an Incentive due to the failure to satisfy any
applicable conditions to vesting, payment or settlement, including
the failure to attain performance goals or to satisfy the conditions
specified in Section 11.5 or (ii) realize any anticipated tax
benefit or consequence due to changes in applicable law, the
particular circumstances of the participant, or any other reason.
(b) No member of the Committee will be liable for any action
or determination made in good faith by the Committee with respect to
this Plan or any Incentive.
11.15 INTERPRETATION.
(a) Unless the context otherwise requires, (i) all references
to Sections are to Sections of this Plan, (ii) the term "including"
means including without limitation, (iii) all references to any
particular Incentive Agreement shall be deemed to include any
amendments thereto or restatements thereof, and (iv) all references
to any particular statute shall be deemed to include any amendment,
restatement or re-enactment thereof or any statute or regulation
substituted therefore.
(b) The titles and subtitles used in this Plan or any
Incentive Agreement are used for convenience only and are not to be
considered in construing or interpreting this Plan or the Incentive
Agreement.
(c) All pronouns contained in this Plan or any Incentive
Agreement, and any variations thereof, shall be deemed to refer to
the masculine, feminine or neutral, singular or plural, as the
identities of the parties may require.
11.16 COMPLIANCE WITH SECTION 409A. It is the intent of the Company
that this Plan comply with the requirements of Section 409A of the Code
with respect to any Incentives that constitute non-qualified deferred
compensation under Section 409A and the Company intends to operate the
Plan in compliance with Section 409A and the Department of Treasury's
guidance or regulations promulgated thereunder. If the Committee grants
any Incentives or takes any other action that would, either immediately or
upon vesting or payment of the Incentive, inadvertently result in the
imposition of a penalty on a participant under Section 409A of the Code,
then the Company, in its discretion, may, to the maximum extent permitted
by law, unilaterally rescind ab initio, sever, amend or otherwise modify
the grant or action (or any provision of the Incentive) in such manner
necessary for the penalty to be inapplicable or reduced.
* * * * * * * * * * *
B-15
CERTIFICATION
The undersigned Secretary of CenturyTel, Inc. hereby certifies that the
foregoing CenturyTel, Inc. 2005 Directors Stock Plan was (i) recommended to the
Board of Directors of CenturyTel, Inc. (the "Board") by its Compensation
Committee at a meeting of the Compensation Committee duly held on February 17,
2005, (ii) adopted by the Board at a meeting duly held on February 25, 2005, and
(iii) approved by the affirmative requisite vote of the shareholders of
CenturyTel, Inc. at its 2005 Annual Meeting of Shareholders held on May 12,
2005.
[Signature Block Intentionally Omitted]
B-16
APPENDIX C
TO PROXY STATEMENT
CENTURYTEL, INC.
2005 EXECUTIVE OFFICER SHORT-TERM INCENTIVE PROGRAM
1. Purpose. The purpose of the CenturyTel, Inc. 2005 Executive Officer
Short-Term Incentive Program (the "Program") is to advance the interests
of CenturyTel, Inc. (the "Company") by providing an annual incentive bonus
to be paid to certain designated executive officers of the Company based
on the achievement of pre-established quantitative performance goals.
2. Shareholder Approval. The payment of any bonus hereunder is subject to the
approval of the Program, including the material terms of performance goals
used in the Program, by the shareholders of the Company at the 2005 Annual
Shareholders Meeting.
3. Administration. The Program shall be administered by the Compensation
Committee of the Board of Directors of the Company or, if all of the
members of the Compensation Committee do not qualify as "outside
directors" under Section 162(m) of the Internal Revenue Code ("Section
162(m)"), by a subcommittee of the Compensation Committee, all of the
members of which qualify as "outside directors." The authority of the
committee or subcommittee that administers the Program (the "Committee")
shall include, in particular, authority to:
(a) designate participants for a particular year;
(b) establish performance goals and objectives for a particular year;
(c) establish regulations for the administration of the Program and make
all determinations deemed necessary for the administration of the
Program; and
(d) certify as to whether performance goals have been met.
Notwithstanding the foregoing, all annual incentive bonuses payable under
the Program shall be ratified by the Board of Directors of the Company.
4. Eligibility. The Committee shall designate prior to March 31 of each year
the executive officers of the Company who shall participate in the Program
that year. If no designation is made for any particular year, all
individuals designated as executive officers of the Company in the
Company's by-laws shall be deemed participants in the Program that year.
Executive officers who do not participate in the Program will participate
in the Company's Key Employee Incentive Compensation Plan, as it may be
amended or restated from time to time, or a successor plan (the "Key
Employee Plan").
5. Incentive Bonus. Each participant shall be eligible to be paid an annual
bonus in an amount not to exceed $3.0 million. Before March 31 of each
year for which a bonus is to be payable hereunder (a "Program Year"), the
Committee shall establish the performance goals for that year and the
objective criteria pursuant to which the bonus for that year is
C-1
to be payable. The Committee has the discretion to decrease, but not
increase, the amount of the bonus from the amount that is payable under
the terms of the pre-established criteria for the applicable year. The
performance goals each year shall apply to performance of the Company or
one or more of its divisions, subsidiaries or lines of business and shall
be based upon one or more of the following performance goals: return on
equity, cash flow, assets or investment; shareholder return; changes in
revenues, operating income, cash flow, cash provided by operating
activities, earnings or earnings per share; customer growth; customer
satisfaction or an economic value added measure. For any Program Year,
performance goals may be measured on an absolute basis or relative to a
group of peer companies selected by the Committee, relative to internal
goals or industry benchmarks, or relative to levels attained in prior
years. The Committee may change the performance goals each year to any of
those listed above and may also change the targets applicable to the
performance goals from year to year.
6. Payment of Incentive Bonus. As soon as practicable after the Company has
publicly announced its earnings for the year for which the incentive bonus
will be paid, the Committee shall evaluate the Company's performance to
determine the amount of the incentive bonus that has been earned. In
performing such evaluation, the Committee shall make all adjustments
necessary to exclude the effect of any non-recurring transaction described
in the Committee's Guidelines for Administering Annual Incentive Bonus
Programs, as in effect for the applicable Program Year. The Committee
shall also make adjustments necessary to exclude the effect of any change
in accounting standards required by any regulatory agency or
self-regulatory organization, including the Financial Accounting Standards
Board. The Committee shall certify, either in writing or by the adoption
of written resolutions, prior to the payment of any incentive bonus under
the Program, that the performance goals applicable to the bonus payment
were met. The incentive bonus may be paid in whole or part in the form of
cash, restricted stock or restricted stock units of the Company in the
discretion of the Committee. Shares of restricted stock issued in payment
hereunder may be paid under any of the Company's stock-based incentive
plans that provide for grants of restricted stock or restricted stock
units. The incentive bonus will be paid by the March 15 following the end
of the year for which it was earned, unless deferred under a separate
benefit plan of the Company.
7. Termination of Employment. (a) Except as otherwise provided in paragraphs
(b), (c) or (d) of this Section 7, in order to be eligible to receive a
bonus under the Program, a participant must be an employee of the Company
at the time bonus payments become payable in the ordinary course to all
participants in accordance with the terms and conditions of the Program
and the procedures of the Committee, unless this requirement is waived by
the Committee under such special circumstances as may be determined by the
Committee.
(b) (i) A participant who is not employed by the Company at the time
bonus payments become payable under the Program for a Program
Year may nevertheless be entitled to a full or partial bonus
if such participant is a "Qualifying Participant" for such
Program Year.
C-2
(ii) A "Qualifying Participant" is a participant whose employment
is terminated due to:
(A) retirement on or after age 55 after completing five full
years of employment with the Company. Years of
employment with the Company will be determined by
accumulating such participant's full months of
employment with the Company, in the aggregate and
without regard to whether such employment was
continuous, and dividing such amount by 12;
(B) death; or
(C) disability.
(c) (i) A Qualifying Participant whose employment is terminated with
the Company following the completion of a Program Year, but
before bonus payments become payable under the Program with
respect to such Program Year, shall be entitled to receive a
bonus based on the same terms and conditions (including the
same payment schedule) previously authorized under the Program
and by the Committee, as applicable to active participants for
such Program Year.
(ii) Any Qualifying Participant whose employment with the Company
is terminated at any time after the 90th day of a Program Year
shall be entitled to a pro rata cash bonus for such Program
Year based on the same terms and conditions (including the
same payment schedule) previously authorized under the Program
and by the Committee, as applicable for Program participants
for such Program Year, the amount of which shall equal the
product of the cash bonus that would have been payable to the
Qualifying Participant for the full Program Year multiplied by
a fraction, the numerator of which equals the number of
calendar days of the Program Year that elapsed through the
Qualifying Participant's last date of employment with the
Company and the denominator of which is 365.
(iii) Any bonus payable to a Qualifying Participant under this
Section 7 shall be payable to such participant at the time
bonuses are payable to active participants with respect to
such Program Year.
(d) Nothing in this Section 7 shall reduce or limit the right of a
participant to receive cash payments under his or her Change of
Control Agreement with the Company following a Change of Control (as
defined in such agreements).
(e) Any bonus payment to a participant, or the conditions thereof,
deviating from the terms and conditions of paragraphs (a), (b) or
(c) must be approved by the Committee and will only be considered
for approval if such deviation would not,
C-3
in the opinion of counsel to the Company, limit the Company's
federal income tax reduction for such bonus payment under Section
162(m).
8. Forfeiture of Benefits. In the event a participant is discharged by the
Company for cause, including, without limitation, fraud, embezzlement,
theft, commission of a felony, proven dishonesty or other unethical
behavior, or disclosure of trade secrets of the Company, then the amount
of any benefit provided under this Program to which the participant would
otherwise be entitled shall be forfeited. The decision of the Committee as
to the cause of a former participant's discharge shall be final.
9. Employee Rights Under the Program. Nothing in this Program shall be
construed to:
(a) grant any officer of the Company any claim or right to be
granted an award under this Program;
(b) limit in any way the right of the Company to terminate a
participant's employment with the Company at any time; or
(c) be evidence of any agreement or understanding, express or
implied, that the Company will employ a participant in any
particular position or at any particular rate of remuneration.
10. Assignments and Transfers. A participant may not assign, encumber or
transfer his or her rights and interests under the Program.
11. Amendment and Termination. The Committee may amend, suspend or terminate
the Program at any time in its sole and absolute discretion. Any amendment
or termination of the Program shall not, however, affect the right of a
participant to receive any earned but unpaid incentive bonus.
12. Withholding of Taxes. The Company shall deduct from the amount of any
incentive bonus paid hereunder any federal or state taxes required to be
withheld.
13. Term of Program. The Program applies to each of the five calendar years
during the period beginning January 1, 2005 and ending December 31, 2009,
unless terminated earlier by the Committee.
14. Performance-Based Compensation under Section 162(m) of the Internal
Revenue Code. The Company intends that any incentive bonus paid to an
executive officer under the Program will qualify as "performance-based"
compensation under Section 162(m). Nothing in this Program precludes the
Company from making additional payments or special awards to a participant
outside of the Program that may or may not qualify as "performance-based"
compensation under Section 162(m), provided that such payment or award
does not affect the qualification of any bonus paid or payable under the
Program as "performance-based" compensation.
* * * * * * *
C-4
CERTIFICATION
The undersigned Secretary of CenturyTel, Inc. hereby certifies that the
foregoing CenturyTel, Inc. 2005 Executive Officer Short-Term Incentive Program
was (i) recommended to the Board of Directors of CenturyTel, Inc. (the "Board")
by its Compensation Committee at a meeting of the Compensation Committee duly
held on February 17, 2005, (ii) adopted by the Board at a meeting duly held on
February 22, 2005, and (iii) approved by the requisite affirmative vote of the
shareholders of CenturyTel, Inc. at its 2005 Annual Meeting of Shareholders held
on May 12, 2005.
[Signature Block Intentionally Omitted]
C-5
APPENDIX D
TO PROXY STATEMENT
CENTURYTEL, INC.
CHARTER OF AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
(as amended through November 18, 2004)
I. SCOPE OF RESPONSIBILITY
A. General
Subject to the limitations noted in Section VI, the primary function of
the Audit Committee is to assist the Board of Directors (the "Board") in
fulfilling its oversight responsibilities by (1) overseeing the Company's system
of financial reporting, auditing, controls and legal compliance, (2) monitoring
the operation of such system and the integrity of the Company's financial
statements, (3) monitoring the qualifications and independence of the outside
auditors, and the performance of the outside and internal auditors, and (4)
reporting to the Board periodically concerning activities of the Audit
Committee.
B. Relationship to Other Groups
The management of the Company is responsible primarily for developing the
Company's accounting practices, preparing the Company's financial statements,
maintaining internal controls, maintaining disclosure controls and procedures,
and preparing the Company's disclosure documents in compliance with applicable
law. The internal auditors are responsible primarily for objectively assessing
the Company's internal controls. The outside auditors are responsible primarily
for auditing and attesting to the Company's financial statements and
management's assessment of internal controls. Subject to the limitations noted
in Section VI, the Audit Committee, as the delegate of the Board, is responsible
for overseeing this process and discharging such other functions as are assigned
by law, the Company's organizational documents, or the Board. The functions of
the Audit Committee are not intended to duplicate, certify or guaranty the
activities of management or the internal or outside auditors.
The Audit Committee will strive to maintain an open and free avenue of
communication among management, the outside auditors, the internal auditors, and
the Board. The outside and internal auditors will report directly to the Audit
Committee. The Audit Committee will report regularly to the Board.
II. COMPOSITION
The Audit Committee will be comprised of three or more directors, each of
whom will be appointed and replaced by the Board in accordance with the
Company's bylaws. Each member of the Audit Committee will meet the standards of
independence or other qualifications required from time to time by the New York
Stock Exchange, Section 10A(m)(3) of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules and regulations of the Securities and Exchange
Commission (the "SEC"), and at least one member will in the judgment of the
Board have accounting or related financial management expertise in accordance
with New York Stock
D-1
Exchange listing standards. The Audit Committee's chairperson shall be
designated by the Board. The Audit Committee may form and delegate authority to
subcommittees consisting of one or more members when appropriate, including the
authority to grant preapprovals of audit and permitted non-audit services by the
outside auditors, subject to any limitations or reporting requirements
established by law or the Company's procedures.
III. MEETINGS
The Audit Committee will meet at least four times annually, or more
frequently if the Committee determines it to be necessary. To foster open
communications, the Audit Committee may invite to its meetings other directors
or representatives of management, the outside auditors, the internal auditors,
counsel or other persons whose pertinent advice or counsel is sought by the
Committee, and the participation of such guests shall be governed by any
guidelines or procedures that may be adopted from time to time by management,
the Committee or the Board. The agenda for meetings will be prepared in
consultation among the Committee chairperson (with input from Committee
members), management, the outside auditors, the internal auditors and counsel.
The Audit Committee will maintain written minutes of all its meetings and
provide a copy of all such minutes to every member of the Board.
IV. POWERS
The Audit Committee shall have the sole authority to appoint or replace
the outside auditors, provided that the Audit Committee may submit its
appointment to the Company's shareholders for ratification on terms and
conditions acceptable to it. The Audit Committee shall be directly responsible
for the compensation and oversight of the work of the outside auditors
(including resolution of disagreements between management and the outside
auditors regarding financial reporting) for the purpose of preparing or issuing
an audit report or related work. The Audit Committee shall also have the sole
authority to (a) appoint or replace the head of internal auditing, (b) appoint
or replace any firm engaged to provide internal auditing services and (c) grant
waivers to directors or executive officers from the code of ethics and business
conduct contained in the Company's corporate compliance procedures.
The Audit Committee shall have the authority, to the extent it deems
necessary or appropriate, to retain independent legal, accounting or other
advisors. The Company shall provide appropriate funding, as determined by the
Audit Committee, for payment of (a) compensation to the outside auditor or any
other advisors employed by the Audit Committee and (b) ordinary administrative
expenses of the Audit Committee that are necessary or appropriate in carrying
out its duties.
The Audit Committee shall have the power to (a) obtain and review any
information that the Audit Committee deems necessary to perform its oversight
functions and (b) conduct or authorize investigations into any matters within
the Audit Committee's scope of responsibilities.
The Audit Committee shall have the power to issue any reports or perform
any other duties required by (a) the Company's articles of incorporation or
bylaws, (b) applicable law or (c) rules or regulations of the SEC, the New York
Stock Exchange, or any other self-regulatory organization having jurisdiction
over the affairs of the Audit Committee. The Audit Committee
D-2
may adopt any policies or procedures required under any such articles, bylaws,
laws, rules or regulations, or that it, in its discretion, may determine to be
advisable in connection with its oversight functions.
The Audit Committee shall have the power to consider and act upon any
other matters concerning the financial affairs of the Company as the Audit
Committee, in its discretion, may determine to be advisable in connection with
its oversight functions.
V. PERIODIC OVERSIGHT TASKS
The Audit Committee, to the extent it deems necessary or appropriate or to
the extent required by applicable laws or regulations, will perform the
oversight tasks delineated in the Audit Committee Checklist. The checklist will
be updated annually to reflect changes, if any, in regulatory requirements,
authoritative guidance, or customary oversight practices. The most recently
updated checklist will be considered to be an addendum to this charter.
VI. LIMITATIONS
THE COMMITTEE'S FAILURE TO INVESTIGATE ANY MATTER, TO RESOLVE ANY DISPUTE
OR TO TAKE ANY OTHER ACTIONS OR EXERCISE ANY OF ITS POWERS IN CONNECTION WITH
THE GOOD FAITH EXERCISE OF ITS OVERSIGHT FUNCTIONS SHALL IN NO WAY BE CONSTRUED
AS A BREACH OF ITS DUTIES OR RESPONSIBILITIES TO THE COMPANY, ITS DIRECTORS OR
ITS SHAREHOLDERS.
THE AUDIT COMMITTEE IS NOT RESPONSIBLE FOR PREPARING THE COMPANY'S
FINANCIAL STATEMENTS, PLANNING OR CONDUCTING THE AUDIT OF SUCH FINANCIAL
STATEMENTS, DETERMINING THAT SUCH FINANCIAL STATEMENTS ARE COMPLETE AND ACCURATE
OR PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING STANDARDS, OR
ASSURING COMPLIANCE WITH APPLICABLE LAWS OR THE COMPANY'S POLICIES, PROCEDURES
AND CONTROLS, ALL OF WHICH ARE THE RESPONSIBILITY OF MANAGEMENT OR THE OUTSIDE
AUDITORS. THE AUDIT COMMITTEE'S OVERSIGHT FUNCTIONS INVOLVE SUBSTANTIALLY LESSER
RESPONSIBILITIES THAN THOSE ASSOCIATED WITH THE AUDIT PERFORMED BY THE OUTSIDE
AUDITORS. IN CONNECTION WITH THE AUDIT COMMITTEE'S OVERSIGHT FUNCTIONS, THE
COMMITTEE MAY RELY ON (i) MANAGEMENT'S REPRESENTATIONS THAT THE FINANCIAL
STATEMENTS HAVE BEEN PREPARED WITH INTEGRITY AND OBJECTIVITY AND IN CONFORMITY
WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES AND (ii) THE
REPRESENTATIONS OF THE INTERNAL OR OUTSIDE AUDITORS.
IN CARRYING OUT ITS OVERSIGHT FUNCTIONS, THE AUDIT COMMITTEE BELIEVES ITS
POLICIES AND PROCEDURES SHOULD REMAIN FLEXIBLE IN ORDER TO BEST REACT TO A
CHANGING ENVIRONMENT.
* * * * * * * * * *
------------------
- Originally adopted and approved by the Audit Committee and Board on
November 18, 1999.
- Amended by the Board on February 28, 2001, February 26, 2002, February 25,
2003, February 25, 2004 and November 18, 2004, in each case following
prior approval thereof by the Audit Committee.
D-3
ADDENDUM
AUDIT COMMITTEE CHECKLIST
First Second Third Fourth As
Quarter Quarter Quarter Quarter Needed
------- ------- ------- ------- ------
Annual Audit Planning
1. appoint or replace the outside auditors and approve the X
compensation and other terms of the outside auditors' annual
engagement
2. pre-approve all auditing services X X
3. review significant relationships between the outside auditors X X
and the Company, including those described in written statements of
the outside auditors furnished under ISB Standard No. 1 and employment
relationships proscribed under Rule 2-01(c)(2) of Regulation S-X(1)
4. discuss the scope and comprehensiveness of the audit plan, X X
including changes from prior years and the coordination of the efforts
of the outside and internal auditors
Review of Financial Information
5. meet to review and discuss with management and the outside X X X X
auditors the Company's quarterly financial statements and MD&A
disclosures prior to their public release
6. discuss with management the Company's financial information X X X X
and earnings guidance provided to analysts and rating agencies
7. review with management and the outside auditors the Company's X X X X
financial information, including (a) any report, opinion or review
rendered on the financial statements by management or the outside
auditors (including under SAS No. 61 or 71), (b) any analysis prepared
by management or the outside auditors setting forth significant
financial
------------------
(1) The Audit Committee may request verification that no employee of the Company
in a financial reporting oversight role is a former partner, principal,
shareholder or professional employee of the outside auditors, and may review any
additional records or certifications necessary to verify the outside auditors'
independence under Regulation S-X.
D-4
First Second Third Fourth As
Quarter Quarter Quarter Quarter Needed
------- ------- ------- ------- ------
reporting issues and judgments made in connection with the preparation
of the financial statements and (c) the effect of regulatory and
accounting initiatives
8. review and discuss reports from the outside auditors on: X X
(a) the Company's critical accounting policies
(b) all alternative treatments of financial information
within GAAP that have been discussed with management, ramifications of the use
of such alternative treatments, and the treatment preferred by the outside
auditors
(c) other material written communications between the
outside auditors and management, such as any management letter or schedule of
unadjusted differences
9. review and discuss reports from the outside auditors on: X X X X X
(a) conditions or matters, if any, that must be reported
under generally accepted auditing standards (including SAS No. 61),
including:
(i) difficulties or disputes with management or the
internal auditors encountered during the audit
(ii) the outside auditors' views regarding the
Company's financial disclosures, the quality of the Company's
accounting principles as applied, the underlying estimates and other
significant judgments made by management in preparing the financial
statements, and the compatibility of the Company's principles and
judgments with prevailing practices and standards
(b) matters, if any, that must be reported under the
federal securities laws (including Section 10A of the Exchange Act)
D-5
First Second Third Fourth As
Quarter Quarter Quarter Quarter Needed
------- ------- ------- ------- ------
(c) communications, if any, with the national office of
the outside auditors pertaining to the Company's financial affairs
10. review with management and the outside auditors major issues X X X X
regarding accounting principles and financial statement presentations,
if any, including (a) significant changes in the Company's selection
or application of accounting principles, (b) major issues as to the
adequacy of the Company's internal controls, its disclosure controls
and procedures, or its financial reporting processes, and (c) special
audit steps adopted in light of material control deficiencies
11. discuss with management and the outside auditors the effect X X X X
of regulatory and accounting initiatives as well as off-balance sheet
structures on the Company's financial statements
12. discuss the Company's major financial risk exposures and the X X
steps management has taken to monitor and control such exposures
13. review the accounting implications of significant new X X X X X
transactions, if any
Conduct of Meetings
14. in connection with each periodic report of the Company,
review:
(a) management's required disclosure, if any, to the Audit X
Committee under Section 302 of the Sarbanes-Oxley Act regarding significant
deficiencies in internal controls over financial reporting or
reportable fraud
(b) the contents of the certifications of the Company's X X X X
CEO and CFO included in such report
15. receive reports, if any, regarding (a) non-audit services X X X X X
that the Chairman (or any subcommittee) pre-cleared the outside
auditor to
D-6
First Second Third Fourth As
Quarter Quarter Quarter Quarter Needed
------- ------- ------- ------- ------
perform since the last meeting, (b) letters received by the Chairman X
under the Company's accounting complaint procedures and (c) any other
"whistle blower" reports alleging material violations within the
purview of the Audit Committee's functions
16. review the extent to which the Company has implemented X
changes in practices or controls that were previously recommended to
or approved by the Audit Committee
17. receive reports regarding significant changes to GAAP or X
regulations impacting the Audit Committee
18. meet in executive session with the outside auditors, X X X X X
internal auditors and management, as necessary
Annual Reports
19. recommend to the Board whether the audited financial X
statements should be included in the Company's 10-K report
20. approve the annual proxy statement report of the Audit X
Committee required by the rules of the SEC
21. review and approve the disclosures in each 10-K report X
regarding management's internal control report
Oversight of the Company's Outside Auditors
22. pre-clear the engagement of the outside auditors to conduct X
any non-audit services not pre-cleared by the Chairman (or a
subcommittee)
23. obtain and review a report from the outside auditors X
regarding (a) the outside auditor's internal quality-control
procedures, (b) any material issues raised by the most recent internal
quality-control review, or peer review, of the firm, or by any inquiry
or investigation by governmental or
D-7
First Second Third Fourth As
Quarter Quarter Quarter Quarter Needed
------- ------- ------- ------- ------
professional authorities within the preceding five years respecting
any audit engagement, (c) any steps taken to deal with any such
issues, and (d) assurances that the outside auditing firm is
registered in good standing with the Public Company Accounting
Oversight Board
24. review and evaluate the lead audit partner and ensure his X
rotation as required by law
25. monitor the effectiveness of the Company's hiring policies X
for employees or former employees of the outside auditors (maintained
under Section 10A(l) of the Exchange Act and NYSE Rule 303A(7))
Oversight of the Company's Internal Auditors
26. review the performance of the head of the internal audit X
department, and replace if necessary
27. meet, if possible, with the entire internal auditing staff X
28. review significant reports to management prepared by the X X X X X
internal auditing department and management's responses
29. discuss with the outside auditors and management the X
internal audit department's plans, responsibilities, preliminary
budget, independence and staffing for the upcoming year (including the
use of third party firms) and any recommended changes thereto
Compliance Oversight Responsibilities
30. monitor the effectiveness of the Company's procedures for X
receiving, retaining, and handling confidential, anonymous complaints
regarding accounting, controls or auditing matters (maintained under
SEC Rule 10A-3)
D-8
First Second Third Fourth As
Quarter Quarter Quarter Quarter Needed
------- ------- ------- ------- ------
31. discuss any correspondence with regulators or governmental X
agencies and any published reports which raise material issues
regarding the Company's financial statements or accounting policies
32. review the adequacy of the Company's disclosure controls and X
procedures
33. review reports on "related party" transactions X
34. solicit, as necessary, germane reports or information from X
other committees with related oversights functions
35. review periodically the procedures established by the X
Company to monitor its compliance with debt covenants
36. consult periodically with counsel concerning the Audit X
Committee's responsibilities or legal matters that may have a material
impact on the Company's financial statements, controls, or corporate
compliance procedures
Self Assessment
37. review annually the Audit Committee's self-review criteria X
38. conduct self-review; verify that all Committee members X
remain eligible to serve
Charter
39. review this checklist and the related Audit Committee X
charter annually, and consider, adopt and submit to the Board any
proposed changes
40. include a copy of the Audit Committee charter as an appendix X
to the proxy statement at least once every three years
D-9
First Second Third Fourth As
Quarter Quarter Quarter Quarter Needed
------- ------- ------- ------- ------
41. periodically review the charter of the internal audit X
department, and consider and adopt necessary changes
* * * * * * * * * *
Last Revised: November 18, 2004.
D-10
APPENDIX E
TO PROXY STATEMENT
CENTURYTEL, INC.
ANNUAL FINANCIAL STATEMENTS
AND
REVIEW OF OPERATIONS
E-1
INDEX TO FINANCIAL INFORMATION
DECEMBER 31, 2004
The materials included in this Appendix E are excerpted from Items 7 and 8
of the Company's Annual Report on Form 10-K for the year ended December 31,
2004, which the Company filed with the Securities and Exchange Commission on
March 16, 2005. Please see the Form 10-K for additional information about the
business and operations of the Company.
Page
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... E-3
Financial Statements and Supplementary Data:
Report of Management................................................... E-32
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements.................................... E-34
Report of Independent Registered Public Accounting Firm on
Management's Assessment of, and the Effective Operation of,
Internal Controls over Financial Reporting........................... E-36
Consolidated Statements of Income...................................... E-38
Consolidated Statements of Comprehensive Income........................ E-39
Consolidated Balance Sheets............................................ E-40
Consolidated Statements of Cash Flows.................................. E-41
Consolidated Statements of Stockholders' Equity........................ E-42
Notes to Consolidated Financial Statements............................. E-43
Consolidated Quarterly Income Statement Information.................... E-73
E-2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
CenturyTel, Inc. ("CenturyTel") and its subsidiaries (the "Company") is an
integrated communications company engaged primarily in providing local exchange,
long distance, Internet access and broadband services to customers in 22 states.
The Company currently derives its revenues from providing (i) local exchange
telephone services, (ii) network access services, (iii) long distance services,
(iv) data services, which includes both dial-up and digital subscriber line
("DSL") Internet services, as well as special access and private line services,
(v) fiber transport, competitive local exchange and security monitoring services
and (vi) other related services.
The Company strives to maintain its customer relationships by, among other
things, bundling its service offerings to provide its customers with a complete
offering of integrated communications services. Effective in the first quarter
of 2004, as a result of the Company's increased focus on integrated bundle
offerings and the varied discount structures associated with such offerings, the
Company determined that its results of operations would be more appropriately
reported as a single reportable segment under the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Therefore, the results of operations for
2004 reflect the presentation of a single reportable segment. Results of
operations for 2003 and 2002 have been conformed to the Company's 2004
presentation of a single reportable segment. In connection with the change in
segment reporting, the Company has, among other things, (i) eliminated certain
revenues arising out of previously-reported intersegment transactions (which
reduced operating expenses by a like amount and therefore had no impact on
operating income), (ii) reclassified certain revenues to conform to the new
revenue components and (iii) reclassified depreciation expense related to
certain service subsidiaries of the Company from operating expenses of its
regulated operations to depreciation expense.
On July 1, 2002, the Company acquired the local exchange telephone
operations of Verizon Communications, Inc. ("Verizon") in the state of Alabama
for approximately $1.022
E-3
billion cash. On August 31, 2002, the Company acquired the local exchange
telephone operations of Verizon in the state of Missouri for approximately
$1.179 billion cash. The results of operations for the Verizon assets acquired
are reflected in the Company's consolidated results of operations subsequent to
each respective acquisition. See "Acquisitions" below and Note 2 of Notes to
Consolidated Financial Statements for additional information. During 2003, the
Company also acquired fiber transport assets in five central U.S. states (which
the Company operates under the name LightCore) for $55.2 million cash.
On August 1, 2002, the Company sold substantially all of its wireless
operations principally to an affiliate of ALLTEL Corporation ("Alltel") in
exchange for an aggregate of approximately $1.59 billion in cash. As a result,
the Company's wireless operations for the year ended December 31, 2002 has been
reflected as discontinued operations on the Company's consolidated statements of
income and cash flows. For further information, see "Discontinued Operations"
below.
During the three years ended December 31, 2004, the Company has acquired
and sold various other operations, the impact of which has not been material to
the financial position or results of operations of the Company.
The net income of the Company for 2004 was $337.2 million, compared to
$344.7 million during 2003 and $801.6 million during 2002. Diluted earnings per
share for 2004 was $2.41 compared to $2.35 in 2003 and $5.56 in 2002. Income
from continuing operations (and diluted earnings per share from continuing
operations) was $337.2 million ($2.41), $344.7 million ($2.35) and $193.5
million ($1.35) for 2004, 2003 and 2002, respectively. The diluted earnings per
share calculation reflects the application of Emerging Issues Task Force No.
04-8 to all periods presented. See Note 13 for additional information.
E-4
Year ended December 31, 2004 2003 2002
------------------------------------------ ---------- -------- --------
(Dollars, except per share amounts,
and shares in thousands)
Operating income $ 753,953 750,396 575,406
Interest expense (211,051) (226,751) (221,845)
Income from unconsolidated cellular entity 7,067 6,160 5,582
Nonrecurring gains and losses, net - - 3,709
Other income (expense) (2,597) 2,154 (63,814)
Income tax expense (210,128) (187,252) (105,505)
---------- -------- --------
Income from continuing operations 337,244 344,707 193,533
Discontinued operations, net of tax - - 608,091
---------- -------- --------
Net income $ 337,244 344,707 801,624
========== ======== ========
Basic earnings per share
From continuing operations $ 2.45 2.40 1.36
From discontinued operations $ - - 4.29
Basic earnings per share $ 2.45 2.40 5.66
Diluted earnings per share
From continuing operations $ 2.41 2.35 1.35
From discontinued operations $ - - 4.21
Diluted earnings per share $ 2.41 2.35 5.56
Average basic shares outstanding 137,215 143,583 141,613
========== ======== ========
Average diluted shares outstanding 142,144 148,779 144,408
========== ======== ========
Operating income increased $3.6 million in 2004 as a $39.8 million
increase in operating revenues was substantially offset by a $36.2 million
increase in operating expenses. Operating income increased $175.0 million in
2003 as a $395.6 million increase in operating revenues was partially offset by
a $220.6 million increase in operating expenses.
In addition to historical information, this management's discussion and
analysis includes certain forward-looking statements that are based on current
expectations only, and are subject to a number of risks, uncertainties and
assumptions, many of which are beyond the control of the Company. Actual events
and results may differ materially from those anticipated, estimated or projected
if one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect. Factors that could affect actual results include
but are not limited to: the timing, success and overall effects of competition
from a wide variety of competitive providers; the risks inherent in rapid
technological change; the effects of ongoing changes in the regulation of the
communications industry; the Company's ability to effectively manage its growth,
including integrating newly-acquired businesses into the Company's operations
and hiring adequate numbers of qualified staff; possible changes in the demand
for, or pricing of, the Company's products and services; the Company's ability
to successfully introduce new product
E-5
or service offerings on a timely and cost-effective basis; the Company's ability
to successfully take steps to mitigate the dilutive effect of the $500 million
of equity units currently scheduled to settle in May 2005; other risks
referenced from time to time in the Company's Annual Report on Form 10-K for the
year ended December 31, 2004 or other of the Company's filings with the
Securities and Exchange Commission; and the effects of more general factors such
as changes in interest rates, in tax rates, in accounting policies or practices,
in operating, medical or administrative costs, in general market, labor or
economic conditions, or in legislation, regulation or public policy. These and
other uncertainties related to the business are described in greater detail in
Item 1 to the Company's Annual Report on Form 10-K for the year ended December
31, 2004. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of March 16, 2005, the date of filing of the
Company's Annual Report on Form 10-K for the year ended December 31, 2004. The
Company undertakes no obligation to update any of its forward-looking statements
for any reason.
OPERATING REVENUES
Year ended December 31, 2004 2003 2002
------------------------ ----------- --------- ---------
(Dollars in thousands)
Local service $ 716,028 712,565 570,871
Network access 966,011 1,001,462 884,982
Long distance 186,997 173,884 146,536
Data 275,777 244,998 179,695
Fiber transport and CLEC 74,409 43,041 21,666
Other 188,150 191,660 168,246
----------- --------- ---------
Operating revenues $ 2,407,372 2,367,610 1,971,996
=========== ========= =========
Local service revenues. Local service revenues are derived from the
provision of local exchange telephone services in the Company's service areas.
Of the $3.5 million (.5%) increase in local service revenues in 2004, $12.6
million was due to the provision of custom calling features to more customers,
which was partially offset by an $8.4 million decrease due to the decline in
access lines. Of the $141.7 million (24.8%) increase in local service revenues
in 2003, $121.2 million was due to the properties acquired from Verizon in the
third quarter of 2002. Of the remaining $20.5 million increase, $8.4 million was
due to the provision of custom calling features to more customers and $5.9
million was due to increased rates in certain jurisdictions. Access lines
declined 62,500 (2.6%) during 2004 compared to a decline of 38,400 (1.6%) in
2003. The Company believes the decline in the number of access lines during 2004
and 2003 is
E-6
primarily due to the displacement of traditional wireline telephone services by
other competitive services, including the Company's DSL product offering. Based
on current conditions, the Company expects access lines to decline between 2.5
and 3.5% for 2005.
Network access revenues. Network access revenues primarily relate to (i)
services provided by the Company to long distance carriers, wireless carriers
and other carriers and customers in connection with the use of the Company's
facilities to originate and terminate their interstate and intrastate voice and
data transmissions and (ii) the receipt of universal support funds which allows
the Company to recover a portion of its costs under federal and state cost
recovery mechanisms. Certain of the Company's interstate network access revenues
are based on tariffed access charges filed directly with the Federal
Communications Commission ("FCC"); the remainder of such revenues are derived
under revenue sharing arrangements with other local exchange carriers ("LECs")
administered by the National Exchange Carrier Association. Intrastate network
access revenues are based on tariffed access charges filed with state regulatory
agencies or are derived under revenue sharing arrangements with other LECs.
Network access revenues decreased $35.5 million (3.5%) in 2004 and
increased $116.5 million (13.2%) in 2003 due to the following factors:
2004 2003
increase increase
(decrease) (decrease)
---------- ----------
(Dollars in thousands)
Acquisitions of Verizon properties in third quarter 2002 $ - 107,319
Recovery from the federal Universal Service
High Cost Loop support program (11,311) 250
One-time refund of access charges to interexchange
carriers in 2002 - 7,645
Intrastate revenues due to decreased minutes of use and decreased
access rates in certain states (25,916) (6,798)
Partial recovery of increased operating costs through
revenue sharing arrangements with other telephone companies,
interstate access revenues, increased recovery from state support
funds and return on rate base 3,980 3,513
Rate changes in certain jurisdictions 5,052 2,472
Revision of prior year revenue settlement agreements (3,690) 7,368
Other, net (3,566) (5,289)
---------- ----------
$ (35,451) 116,480
========== ==========
As indicated in the chart above, in 2004 the Company experienced a
reduction in its intrastate revenues of approximately $25.9 million primarily
due to (i) a reduction in intrastate minutes (partially due to the displacement
of minutes by wireless, electronic mail and other
E-7
optional calling services) and (ii) decreased access rates in certain states.
The corresponding decrease in 2003 compared to 2002 was $6.8 million. The
Company believes intrastate minutes will continue to decline in 2005, although
the magnitude of such decrease cannot be precisely estimated.
The Company anticipates its 2005 revenues from the federal Universal
Service High Cost Loop support program will be approximately $10-15 million
lower than 2004 levels due to increases in the nationwide average cost per loop
factor used to allocate funds among all recipients.
Long distance revenues. The Company's long distance revenues relate to the
provision of retail long distance services to its customers. Long distance
revenues increased $13.1 million (7.5%) and $27.3 million (18.7%) in 2004 and
2003, respectively. The $13.1 million increase in 2004 was primarily
attributable to a 14.9% increase in the average number of long distance lines
served and a 15.3% increase in minutes of use (aggregating $21.7 million),
partially offset by a decrease in the average rate charged by the Company ($9.2
million). The $27.3 million increase in 2003 was primarily attributable to the
28.3% increase in the average number of long distance lines served and increased
minutes of use ($32.6 million), primarily due to penetration of the markets
acquired from Verizon in 2002. Such increase was partially offset by a decrease
in the average rate charged by the Company ($5.3 million). The Company
anticipates that increased competition and its current level of customer
penetration will continue to place downward pressure on rates and slow the
growth rate of the number of long distance lines served.
Data revenues. Data revenues include revenues primarily related to the
provision of Internet access services (both dial-up and DSL services) and the
provision of data transmission services over special circuits and private lines.
Data revenues increased $30.8 million (12.6%) in 2004 and $65.3 million (36.3%)
in 2003. The $30.8 million increase in 2004 was primarily due to a $20.3 million
increase in Internet revenues due primarily to growth in the number of
customers, principally due to expansion of the Company's DSL product offering,
and an $11.3 million increase in special access revenues due to an increase in
the number of special circuits provided and an increase in the partial recovery
of increased operating expenses through revenue sharing arrangements with other
telephone companies. The $65.3 million increase in 2003 was primarily due to (i)
a $38.4 million increase due to the acquisition of the Verizon properties in
2002 and (ii) a $21.3 million increase in Internet revenues due primarily to
growth in the number
E-8
of customers in the Company's incumbent markets, principally due to expansion of
the Company's DSL product offering.
Fiber transport and CLEC. Fiber transport and CLEC revenues include
revenues from the Company's fiber transport, competitive local exchange carrier
("CLEC") and security monitoring businesses. Fiber transport and CLEC revenues
increased $31.4 million (72.9%) in 2004 substantially all of which is
attributable to the Company's acquisitions of fiber transport assets (which are
operated under the name LightCore) in June and December 2003. Fiber transport
and CLEC revenues increased $21.4 million (98.7%) in 2003 primarily due to (i)
$16.7 million of revenues associated with the acquisition of the Company's
LightCore operations and (ii) a $4.3 million increase in revenues in the
Company's CLEC business primarily due to an increased number of customers,
including those acquired in connection with the purchase of certain CLEC
operations on February 28, 2002.
Other revenues. Other revenues include revenues related to (i) leasing,
selling, installing and maintaining customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for long
distance carriers and (iii) participating in the publication of local
directories. Other revenues decreased $3.5 million (1.8%) during 2004 primarily
due to a $3.4 million decrease in directory revenues due to the expiration of
the Company's rights to share in the revenues of yellow page directories
published in certain markets acquired from Verizon in 2002. Other revenues
increased $23.4 million (13.9%) in 2003, substantially all of which is due to
the properties acquired from Verizon in 2002.
OPERATING EXPENSES
Year ended December 31, 2004 2003 2002
------------------------------------------------------------- ----------- --------- ---------
(Dollars in thousands)
Cost of services and products (exclusive of depreciation
and amortization) $ 755,413 739,210 635,164
Selling, general and administrative 397,102 374,352 301,681
Corporate overhead costs allocated to discontinued operations - - 9,548
Depreciation and amortization 500,904 503,652 450,197
----------- --------- ---------
Operating expenses $ 1,653,419 1,617,214 1,396,590
=========== ========= =========
Cost of services and products. Cost of services and products increased
$16.2 million (2.2%) in 2004 primarily due to (i) a $14.6 million increase in
expenses associated with operating the Company's fiber transport assets acquired
in June and December 2003; (ii) an $8.5
E-9
million increase in expenses associated with the Company's Internet operations
due to an increase in the number of customers; (iii) a $7.8 million increase in
customer service and retention related expenses; and (iv) a $6.0 million
increase in plant operations expenses. Such increases were partially offset by a
$13.8 million decrease in access expenses (which included a one-time credit of
$3.1 million recorded in 2004) and a $9.2 million decrease in the cost of
providing retail long distance service primarily due to a decrease in the
average cost per minute of use and a decrease in circuit costs.
Cost of services and products increased $104.0 million (16.4%) in 2003
primarily due to (i) a $77.0 million increase due to the properties acquired
from Verizon in the third quarter of 2002, (ii) an $11.1 million increase in
expenses associated with the Company's Internet operations due to an increase in
the number of customers, (iii) a $7.4 million increase in expenses associated
with the Company's long distance operations (primarily attributable to higher
minutes of use partially offset by a decrease in the rate per minute of use),
(iv) a $6.3 million increase in expenses associated with operating the Company's
LightCore assets acquired in 2003, and (v) a $4.8 million increase in access
expenses.
Selling, general and administrative. Selling, general and administrative
expenses increased $22.8 million (6.1%) in 2004 due to (i) a $9.0 million
increase in marketing expenses; (ii) a $6.4 million increase in expenses
attributable to the Company's Sarbanes-Oxley internal controls compliance
effort; (iii) a nonrecurring $5.0 million reduction in bad debt expense recorded
in the first quarter of 2003 due to the partial recovery of amounts previously
written off related to the bankruptcy of MCI (formerly WorldCom); and (iv) a
$4.3 million increase in expenses associated with operating the Company's
LightCore assets acquired in 2003. Such increases were partially offset by a
$6.6 million decrease in bad debt expense (exclusive of the MCI recovery
mentioned above).
Selling, general and administrative expenses increased $72.7 million
(24.1%) in 2003 due to (i) a $50.3 million increase related to the Verizon
acquisitions in 2002, (ii) a $14.0 million increase in operating taxes, which
included a $7.5 million charge arising out of various operating tax audits in
2003, (iii) a $6.7 million increase in information technology expenses largely
attributable to the Company's development of the new billing system described
below under "Development of Billing System", (iv) a $4.9 million increase
associated with expanding the Company's Internet operations due to an increase
in customers and (v) a $4.4 million increase in
E-10
expenses associated with the Company's long distance operations (of which $2.4
million was due to an increase in billing and collection costs). Such increases
were partially offset by an $11.4 million decrease in the provision for
uncollectible receivables (as 2002 was adversely impacted by the establishment
of a $15.0 million reserve for uncollectible receivables primarily related to
the bankruptcy of MCI (formerly WorldCom, Inc.), whereas 2003 was positively
impacted by a $5.0 million reduction in the provision for uncollectible
receivables due to the partial recovery of amounts previously written off
related to the bankruptcy of MCI).
Depreciation and amortization. Depreciation and amortization decreased
$2.7 million (.5%) in 2004 and increased $53.5 million (11.9%) in 2003. The year
2004 included a reduction in depreciation expense of $13.2 million to adjust the
balances of certain over-depreciated property, plant and equipment accounts. In
order to reduce the risk of similar event, in early 2005 the Company implemented
automated controls to replace previous manual controls to ensure that
depreciation ceases once an asset group is fully depreciated (after
consideration of salvage and removal costs). Depreciation expense for 2004 was
also reduced by $8.4 million due to certain assets becoming fully depreciated.
Such decreases were partially offset by a $16.7 million increase due to higher
levels of plant in service, a $3.1 million adjustment in 2004 related to
depreciation of fixed assets related to the Company's new billing system, and a
$3.0 million increase in depreciation due to the assets acquired in connection
with the Company's LightCore operations. Of the $53.5 million increase in 2003,
$50.9 million was due to the properties acquired from Verizon in 2002. The
remaining increase is primarily due to increased depreciation expense in the
Company's CLEC and fiber transport businesses (including LightCore) and higher
levels of plant in service.
Other. For additional information regarding certain matters that have
impacted or may impact the Company's operations, see "Regulation and
Competition".
INTEREST EXPENSE
Interest expense decreased $15.7 million (6.9%) in 2004 compared to 2003
partially due to $7.5 million of nonrecurring interest expense in 2003
associated with various operating tax audits. The remainder of the decrease was
primarily due to a decrease in average debt outstanding.
E-11
Interest expense increased $4.9 million in 2003 primarily due to $7.5
million of interest associated with various operating tax audits. Such increase
was partially offset by reduced interest expense due to a decrease in average
debt outstanding.
INCOME FROM UNCONSOLIDATED CELLULAR ENTITY
Income from unconsolidated cellular entity was $7.1 million in 2004, $6.2
million in 2003 and $5.6 million in 2002. Such income represents the Company's
share of income from its 49% interest in a cellular partnership.
NONRECURRING GAINS AND LOSSES, NET
In 2002, the Company recorded a pre-tax gain of $3.7 million from the sale
of a Personal Communications Services license.
OTHER INCOME (EXPENSE)
Other income (expense) was ($2.6 million) in 2004, $2.2 million in 2003
and ($63.8 million) in 2002. Included in 2004 was a $3.6 million prepayment
expense paid in connection with the redemption of $100 million aggregate
principal amount of the Company's Series B senior notes in May 2004 and a $2.5
million charge related to the impairment of a nonoperating investment, which
amounts were partially offset by a $2.3 million increase in interest income due
to higher cash balances. Included in 2002 was a $59.9 million pre-tax charge
related to the Company's payment of premium in connection with redeeming its
Series I remarketable notes, net of unamortized premium.
INCOME TAX EXPENSE
The Company's effective income tax rate (from continuing operations) was
38.4%, 35.2% and 35.3% in 2004, 2003 and 2002, respectively. Income tax expense
for 2003 was reduced by $21.6 million primarily as a result of reducing the
valuation allowance related to net state operating loss carryforwards as it was
more likely than not that future taxable income will be sufficient to enable the
Company to utilize this portion of the operating loss carryforwards. For
additional information, see Note 12 to the Company's consolidated financial
statements appearing elsewhere herein.
E-12
DISCONTINUED OPERATIONS
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion in cash. As a result, the Company's wireless
operations for 2002 have been reflected as discontinued operations in the
Company's consolidated financial statements. The following table summarizes
certain information concerning the Company's wireless operations for the year
ended December 31, 2002.
Year ended December 31, 2002
--------------------------------------------------------- ----------------------
(Dollars in thousands)
Operating revenues $ 246,705
Operating expenses, exclusive of corporate overhead costs
of $9.5 million (175,447)
Income from unconsolidated cellular entities 25,768
Minority interest expense (8,569)
Gain on sale of discontinued operations 803,905
Other income 188
Income tax expense (284,459)
----------------------
Income from discontinued operations, net of tax $ 608,091
======================
Included above in operating expenses for 2002 is a $30.5 million charge
associated with a write-off of all amounts expended to develop the wireless
portion of the Company's new billing system discussed below under "Development
of Billing System". Depreciation and amortization of long-lived assets and
amortizable intangibles related to the Company's wireless operations ceased
effective March 19, 2002, the date of the Company's definitive sales agreement
with Alltel. Such cessation of depreciation and amortization had the effect of
reducing depreciation and amortization expense of the Company's wireless
operations approximately $20 million in 2002.
The Company recorded an $803.9 million pre-tax gain on the sale of
substantially all of its wireless business in the third quarter of 2002.
For further information, see Note 3 to the Company's consolidated
financial statements appearing elsewhere herein.
ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of 2004, the Company adopted Emerging Issues Task
Force No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings Per Share" ("EITF 04-8"). EITF 04-8 requires securities issuable under
contingently convertible instruments be
E-13
included in the diluted earnings per share calculation. The Company's $165
million Series K senior notes are convertible into common stock under various
contingent circumstances, including the common stock attaining a specified
trading price in excess of the notes' fixed conversion price. Beginning in the
fourth quarter of 2004, the Company's diluted earnings per share and diluted
shares outstanding reflect the application of EITF 04-8. Prior periods have been
restated to reflect this change in accounting.
The Company has elected to account for employee stock-based compensation
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123(R)"). SFAS 123(R) establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services, focusing primarily on accounting for transactions in which an
entity obtains employee services in exchange for the issuance of stock options.
SFAS 123(R) requires the Company to measure the cost of the employee services
received in exchange for an award of equity instruments based upon the fair
value of the award on the grant date. Such cost will be recognized as an expense
over the period during which the employee is required to provide service in
exchange for the award. SFAS 123(R) is effective for all awards granted after
its effective date of July 1, 2005. In accordance with SFAS 123(R), compensation
cost is also recognized over the applicable remaining vesting period for any
awards that are not fully vested as of the effective date. The Company expects
the adoption of SFAS 123(R) to decrease diluted earnings per share by
approximately $.03 in 2005.
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"),
which addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred and be capitalized as part of the book
value of the long-lived asset.
Although the Company generally has had no legal obligation to remove
obsolete assets, depreciation rates of certain assets established by regulatory
authorities for the Company's
E-14
telephone operations subject to Statement of Financial Accounting Standards No.
71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"),
have historically included a component for removal costs in excess of the
related estimated salvage value. Notwithstanding the adoption of SFAS 143, SFAS
71 requires the Company to continue to reflect this accumulated liability for
removal costs in excess of salvage value even though there is no legal
obligation to remove the assets. Therefore, the Company did not adopt the
provisions of SFAS 143 for its telephone operations subject to SFAS 71. For the
Company's telephone operations acquired from Verizon in 2002 (which are not
subject to SFAS 71) and its other non-regulated operations, the Company has not
accrued a liability for anticipated removal costs in the past. For these
reasons, the adoption of SFAS 143 did not have a material effect on the
Company's financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Financial Instruments
with Characteristics of both Liabilities and Equity" ("SFAS 150"), which
provides standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003
and for pre-existing instruments as of the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on the Company's financial condition or results of operations.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses. Management continually evaluates its estimates and judgments
including those related to (i) revenue recognition, (ii) allowance for doubtful
accounts, (iii) pension and postretirement benefits and (iv) long-lived assets.
Actual results may differ from these estimates. The Company believes that
certain critical accounting policies involve a higher degree of judgment or
complexity, including those described below.
Revenue recognition. Certain of the Company's interstate network access
and data revenues are based on tariffed access charges filed directly with the
FCC; the remainder of such
E-15
revenues is derived from revenue sharing arrangements with other LECs
administered by the National Exchange Carrier Association. In the second quarter
of 2004, the Company revised certain estimates for recognizing interstate
revenues. Previously, the Company initially recognized interstate revenues at a
rate of return lower than the authorized rate of return prescribed by the FCC to
allow for potential decreases in demand or other factor changes which could
decrease the achieved rate of return over the respective monitoring periods. As
the monitoring periods progressed, the Company recorded additional revenues
ratably up to the achieved rate of return. In the second quarter of 2004, the
Company began generally recognizing such interstate network access revenues at
the authorized rate of return, unless the actual achieved rate of return was
lower than authorized.
The Telecommunications Act of 1996 allows local exchange carriers to file
access tariffs on a streamlined basis and, if certain criteria are met, deems
those tariffs lawful. Tariffs that have been "deemed lawful" in effect nullify
an interexchange carrier's ability to seek refunds should the earnings from the
tariffs ultimately result in earnings above the authorized rate of return
prescribed by the FCC. Certain of the Company's telephone subsidiaries file
interstate tariffs directly with the FCC using this streamlined filing approach.
As of December 31, 2004, the amount of the Company's earnings in excess of the
authorized rate of return reflected as a liability on the balance sheet for the
combined 2001/2002 and 2003/2004 monitoring periods aggregated approximately $63
million. The settlement period related to (i) the 2001/2002 monitoring period
lapses on September 30, 2005 and (ii) the 2003/2004 monitoring period lapses on
September 30, 2007. The Company will continue to monitor the legal status of any
pending or future proceedings that could impact its entitlement to these funds,
and may recognize as revenue some or all of the over-earnings at the end of the
settlement period or as the legal status becomes more certain.
Allowance for doubtful accounts. In evaluating the collectibility of its
accounts receivable, the Company assesses a number of factors, including a
specific customer's or carrier's ability to meet its financial obligations to
the Company, the length of time the receivable has been past due and historical
collection experience. Based on these assessments, the Company records both
specific and general reserves for uncollectible accounts receivable to reduce
the related accounts receivable to the amount the Company ultimately expects to
collect from customers and carriers. If circumstances change or economic
conditions worsen such that the Company's past collection
E-16
experience is no longer relevant, the Company's estimate of the recoverability
of its accounts receivable could be further reduced from the levels reflected in
the Company's accompanying consolidated balance sheet.
Pension and postretirement benefits. The amounts recognized in the
Company's financial statements related to pension and postretirement benefits
are determined on an actuarial basis, which utilizes many assumptions in the
calculation of such amounts. A significant assumption used in determining the
Company's pension and postretirement expense is the expected long-term rate of
return on plan assets. For 2003, the Company lowered its expected long-term rate
of return on plan assets to 8.25%, reflecting the expected moderation of
long-term rates of return in the financial markets, and used the same rate in
2004.
Another assumption used in the determination of the Company's pension and
postretirement benefit plan obligations is the appropriate discount rate, which
is generally based on the yield on high-quality corporate bonds. The Company
lowered its assumed discount rate to 5.75% at December 31, 2004 from 6.0% at
December 31, 2003. Changes in the discount rate are not generally expected to
have a material impact on the Company's results of operations.
Intangible and long-lived assets. The Company is subject to testing for
impairment of long-lived assets under two accounting standards, Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), and Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 142 requires goodwill recorded in business combinations to be
reviewed for impairment at least annually and requires write-downs only in
periods in which the recorded amount of goodwill exceeds the fair value. Under
SFAS 142, impairment of goodwill is tested by comparing the fair value of the
reporting unit to its carrying value (including goodwill). Estimates of the fair
value of the reporting unit are based on valuation models using techniques such
as multiples of earnings (before interest, taxes and depreciation and
amortization). If the fair value of the reporting unit is less than the carrying
value, a second calculation is required in which the implied fair value of
goodwill is compared to its carrying value. If the implied fair value of
goodwill is less than its carrying value, goodwill must be written down to its
implied fair value. The Company completed the required annual test of goodwill
impairment (as of
E-17
September 30, 2004) under SFAS 142 and determined its goodwill is not impaired
as of such date.
Under SFAS 144, the carrying value of long-lived assets other than
goodwill is reviewed for impairment whenever events or circumstances indicate
that such carrying amount cannot be recoverable by assessing the recoverability
of the carrying value through estimated undiscounted net cash flows expected to
be generated by the assets. If the undiscounted net cash flows are less than the
carrying value, an impairment loss would be measured as the excess of the
carrying value of a long-lived asset over its fair value.
For additional information on the Company's critical accounting policies,
see "Accounting Pronouncements" and "Regulation and Competition - Other
Matters", and the footnotes to the Company's consolidated financial statements.
INFLATION
The effects of increased costs historically have been mitigated by the
Company's ability to recover certain costs over time applicable to its regulated
telephone operations through the rate-making process. However, LECs operating
over 60% of the Company's total access lines are now governed by alternative
regulation plans, some of which restrict or delay the Company's ability to
recover increased costs. Additional future regulatory changes may further alter
the Company's ability to recover increased costs in its regulated operations.
For the properties acquired from Verizon in 2002, which are regulated under
price-cap regulation for interstate purposes, price changes are limited to the
rate of inflation, minus a productivity offset. For additional information
regarding the current regulatory environment, see "Regulation and Competition."
As operating expenses in the Company's nonregulated lines of business increase
as a result of inflation, the Company, to the extent permitted by competition,
attempts to recover the costs by increasing prices for its services and
equipment.
MARKET RISK
The Company is exposed to market risk from changes in interest rates on
its long-term debt obligations. The Company has estimated its market risk using
sensitivity analysis. Market risk is defined as the potential change in the fair
value of a fixed-rate debt obligation due to a hypothetical adverse change in
interest rates. Fair value of long-term debt obligations is
E-18
determined based on a discounted cash flow analysis, using the rates and
maturities of these obligations compared to terms and rates currently available
in the long-term financing markets. The results of the sensitivity analysis used
to estimate market risk are presented below, although the actual results may
differ from these estimates.
At December 31, 2004, the fair value of the Company's long-term debt was
estimated to be $3.1 billion based on the overall weighted average rate of the
Company's long-term debt of 6.5% and an overall weighted maturity of 10 years
compared to terms and rates available on such date in long-term financing
markets. Market risk is estimated as the potential decrease in fair value of the
Company's long-term debt resulting from a hypothetical increase of 65 basis
points in interest rates (ten percent of the Company's overall weighted average
borrowing rate). Such an increase in interest rates would result in
approximately a $119.9 million decrease in the fair value of the Company's
long-term debt. As of December 31, 2004, after giving effect to interest rate
swaps currently in place, approximately 83% of the Company's long-term debt
obligations were fixed rate.
The Company seeks to maintain a favorable mix of fixed and variable rate
debt in an effort to limit interest costs and cash flow volatility resulting
from changes in rates. From time to time, the Company uses derivative
instruments to (i) lock-in or swap its exposure to changing or variable interest
rates for fixed interest rates or (ii) to swap obligations to pay fixed interest
rates for variable interest rates. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative instrument activities. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes. Management
periodically reviews the Company's exposure to interest rate fluctuations and
implements strategies to manage the exposure.
At December 31, 2004, the Company had outstanding four fair value interest
rate hedges associated with the full $500 million aggregate principal amount of
its Series L senior notes, due 2012, that pay interest at a fixed rate of
7.875%. These hedges are "fixed to variable" interest rate swaps that
effectively convert the Company's fixed rate interest payment obligations under
these notes into obligations to pay variable rates that range from the six-month
London InterBank Offered Rate ("LIBOR") plus 3.229% to the six-month LIBOR plus
3.67%, with settlement and rate reset dates occurring each six months through
the expiration of the hedges in August 2012. At December 31, 2004, the Company
realized a rate under these hedges of 6.4%.
E-19
Interest expense was reduced by $10.3 million during 2004 as a result of these
hedges. The aggregate fair market value of these hedges was $5.7 million at
December 31, 2004 and is reflected both as a liability and as a decrease in the
Company's underlying long-term debt on the December 31, 2004 balance sheet. With
respect to these hedges, market risk is estimated as the potential change in the
fair value of the hedge resulting from a hypothetical 10% increase in the
forward rates used to determine the fair value. A hypothetical 10% increase in
the forward rates would result in a $15.5 million decrease in the fair value of
these hedges.
As of December 31, 2004, the Company also had outstanding cash flow hedges
that effectively locked in the interest rate on a majority of certain
anticipated debt transactions that ultimately were completed in February 2005.
The Company locked in the interest rate of (i) $100 million of 2.25 year debt
(remarketed in February 2005) at 3.9% and (ii) $225 million of 10-year debt
(issued in February 2005) at 5.5%. Such cash flow hedges had a fair value of
$571,000 as of December 31, 2004 and are reflected as a component of Accumulated
Other Comprehensive Loss on the consolidated balance sheet. In January 2005, the
Company also entered into a separate cash flow hedge which effectively locked in
the interest rate for an additional $75 million of 10-year debt (issued in
February 2005) at 5.4%. In February 2005, upon settlement of such hedges, the
Company (i) received $366,000 related to the 2.25 year debt remarketing which
will be amortized as a reduction of interest expense over the remaining term of
the debt and (ii) paid $7.7 million related to the 10-year debt issuance which
will be amortized as an increase in interest expense over the 10-year term of
the debt.
Effective May 8, 2003, the Company terminated a fair value interest rate
hedge associated with $500 million aggregate principal amount of its Series H
senior notes and received $22.3 million cash upon settlement, which represented
the fair value of the hedge at the termination date. Such amount is being
amortized as a reduction of interest expense through 2010, the maturity date of
the Series H notes.
DEVELOPMENT OF BILLING SYSTEM
The Company recently implemented a new integrated billing and customer
care system. The costs to develop such system have been accounted for in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The capitalized costs
of the system aggregated $207 million (before accumulated
E-20
amortization) at December 31, 2004 and are being amortized over a 20-year
period. Virtually all of the Company's customers were converted to the new
system in late 2004. In early 2005, the Company implemented software upgrades
and other changes to enhance the productivity and efficiency of the system, the
cost of which was not material. During the development phase of the new billing
system, the Company capitalized payroll related costs of employees dedicated to
the project. The Company began expensing these costs in late 2004, but does not
expect the impact thereof to have a material adverse effect on its results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to provide for its cash needs. The Company's operations have
historically provided a stable source of cash flow which has helped the Company
continue its long-term program of capital improvements.
Operating activities. Net cash provided by operating activities from
continuing operations was $955.8 million, $1.068 billion and $793.4 million in
2004, 2003 and 2002, respectively. The Company's accompanying consolidated
statements of cash flows identify major differences between net income and net
cash provided by operating activities for each of those years. For additional
information relating to the continuing and discontinued operations of the
Company, see "Results of Operations."
Investing activities. Net cash used in investing activities from
continuing operations was $413.3 million, $464.6 million and $2.623 billion in
2004, 2003 and 2002, respectively. Cash used for acquisitions was $86.2 million
in 2003 (primarily due to the acquisitions of fiber transport assets and the
acquisition of an additional 24.3% interest in a telephone company in which the
Company owns a majority interest) and $2.245 billion in 2002 (substantially all
of which relates to the 2002 Verizon acquisitions). Proceeds from the sales of
assets were $4.1 million in 2002 (excluding the Company's 2002 wireless
divestiture). Capital expenditures from continuing operations during 2004, 2003
and 2002 were $385.3 million, $377.9 million and $386.3 million, respectively.
In the third quarter of 2004, the Company entered into a three-year agreement
with EchoStar Communications Corporation ("EchoStar") to provide co-branded
satellite television services to the Company's customers. As part of the
transaction, the Company paid $25.0 million to EchoStar (see Note 4 for
additional information).
E-21
Financing activities. Net cash provided by (used in) financing activities
from continuing operations was ($578.5) million in 2004, ($403.8) million in
2003 and $506.3 million in 2002. Payments of debt were $179.4 million in 2004
and $432.3 million in 2003. Proceeds from the issuance of debt, net of debt
payments, were $531.4 million during 2002. The Company repurchased 13.4 million
shares of common stock for $401.0 million in 2004 to complete its stock
repurchase program approved in February 2004.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consisted initially of a beneficial interest in a
CenturyTel senior unsecured note with a principal amount of $25 and a contract
to purchase shares of CenturyTel common stock no later than May 2005. As
discussed below, the senior notes were remarketed in February 2005. Each stock
purchase contract will generally require the holder to purchase between .6944
and .8741 of a share of CenturyTel common stock in May 2005 in exchange for $25,
subject to certain adjustments and exceptions. The total distributions on the
equity units were initially set at an initial annual rate of 6.875%, consisting
of interest (6.02%) and contract adjustment payments (0.855%).
In the third quarter of 2002, the Company issued $500 million of senior
notes due 2012 (which bear interest at 7.875%) and $165 million of convertible
senior debentures (which bear interest at 4.75% and which may be converted under
certain specified circumstances into shares of CenturyTel common stock at a
conversion price of $40.455 per share). Holders of the convertible senior
debentures will have the right to require the Company to purchase all or a
portion of the debentures on August 1, 2006, August 1, 2010 and August 1, 2017
at par plus any accrued and unpaid interest to the purchase date. For additional
information, see Note 6 to the Company's consolidated financial statements
appearing elsewhere herein.
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion cash.
The Company used proceeds from the sale of the above-described equity
units, senior notes and convertible senior debentures, along with the proceeds
received from the sale of the Company's wireless operations and utilization of
its $800 million credit facilities, to finance the third quarter 2002
acquisitions of telephone properties in Alabama and Missouri from Verizon which
aggregated $2.201 billion, the redemption of $400 million principal amount in
E-22
remarketable debt securities (plus an associated $71.1 million premium payment)
in October 2002 and the Company's fourth quarter 2002 estimated tax payment,
which aggregated $290 million and included the obligation to pay taxes
associated with the sale of substantially all of its wireless operations.
Other. Budgeted capital expenditures for 2005 total $400 million. The
Company anticipates that capital expenditures in its telephone operations will
continue to include the upgrading of its plant and equipment, including its
digital switches, to provide enhanced services, particularly in its newly
acquired markets, and the installation of fiber optic cable.
On February 2, 2005, the Company signed a definitive purchase agreement to
acquire metro fiber assets in 16 markets from KMC Telecom Holdings, Inc. ("KMC")
for $65 million cash, subject to purchase price adjustments.
The following table contains certain information concerning the Company's
material contractual obligations as of December 31, 2004, except for the KMC
purchase price obligation which is as of February 2, 2005.
Payments due by period
-------------------------------------------------------------
Contractual Less than After
obligations Total 1 year 1-3 years 4-5 years 5 years
-------------------- ----------- --------- --------- --------- ---------
(Dollars in thousands)
Long-term debt,
including current
maturities and
capital lease
obligations (1) $ 3,011,636 249,617 806,511(2) 306,557 1,648,951
Interest on long-
term debt
obligations $ 1,935,814 185,807 347,029 304,936 1,098,042
KMC purchase price
obligation $ 65,000 65,000 - - -
(1) For additional information on the terms of th Company's outstanding debt
instruments, see footnote 6 to the consolidated financial statements included
herewith.
(2) Includes $165 million aggregate principal amount of the Company's
convertible debentures, Series K, due 2032, which can be put to the Company at
various dates beginning in 2006 and $500 million aggregate principal amount of
the Company's senior notes, Series J, due 2007. In February 2005, the Company
purchased and retired approximately $400 million aggregate principal amount of
its Series J notes in connection with a remarketing of the Series J notes.
In February 2005, the Company remarketed approximately $460 million
aggregate principal amount of its $500 million of outstanding Series J senior
notes due 2007 at a rate of 4.628%. In connection with the remarketing, the
Company purchased and retired approximately
E-23
$400 million aggregate principal amount of the notes, resulting in approximately
$100 million aggregate principal amount of such notes remaining outstanding.
Proceeds to purchase such notes came from the February 2005 issuance of $350
million 5% senior notes, Series M, due 2015 and cash on hand. The Company
expects to incur a pre-tax charge of approximately $6 million in the first
quarter of 2005 related to purchasing and retiring approximately $400 million of
the Series J notes. For additional information, see Note 6 to the Company's
consolidated financial statements appearing elsewhere herein.
In early 2005, the Company filed preliminary consent solicitation
materials with the Securities and Exchange Commission describing plans to
solicit consents to amend the purchase contracts forming a part of the Company's
equity units to grant the Company the flexibility to settle such purchase
contracts in cash rather than in common stock (as described above). The Company
is obligated to pay a consent fee to each consenting holder, the amount of which
(should all holders consent) would aggregate $1.75 million. If under the consent
solicitation the Company settled all of the purchase contracts in cash and the
current stock price of the Company's common stock at the settlement date exceeds
$36, the Company would be obligated to pay to the holders of the purchase
contracts $13.9 million for every $1 that the stock price is in excess of $36.
The Company cannot provide assurance that its consent solicitation will be
initiated or be successful.
In early February 2005, the Company's board of directors approved a stock
repurchase program that will allow the Company to repurchase up to an aggregate
of $200 million of either its common stock or convertible equity units prior to
December 31, 2005. The Company commenced purchases under this plan in early
March 2005.
The Company continually evaluates the possibility of acquiring additional
communications operations and expects to continue its long-term strategy of
pursuing the acquisition of attractive communications properties in exchange for
cash, securities or both. At any given time, the Company may be engaged in
discussions or negotiations regarding additional acquisitions. The Company
generally does not announce its acquisitions or dispositions until it has
entered into a preliminary or definitive agreement. The Company may require
additional financing in connection with any such acquisitions, the consummation
of which could have a material impact on the Company's financial condition or
operations. Approximately 4.1 million shares of CenturyTel common stock and
200,000 shares of CenturyTel preferred stock remain available
E-24
for future issuance in connection with acquisitions under CenturyTel's
acquisition shelf registration statement.
As of December 31, 2004, the Company had available $533.0 million of
undrawn committed bank lines of credit and the Company's telephone subsidiaries
had available for use $123.0 million of commitments for long-term financing from
the Rural Utilities Service and Rural Telephone Bank. The Company has a
commercial paper program that authorizes the Company to have outstanding up to
$1.5 billion in commercial paper at any one time; however, borrowings are
effectively limited to the amount available under its credit facility. As of
December 31, 2004, the Company had no commercial paper outstanding under such
program. The Company also has access to debt and equity capital markets,
including its shelf registration statements. At December 31, 2004, the Company
held over $167 million of cash and cash equivalents.
In March 2005, the Company secured a new five-year, $750 million revolving
credit facility to replace its existing $533 million credit facility which
expires in July 2005. Up to $150 million of the facility can be used for letters
of credit, which reduces the amount available for other extensions of credit.
The credit facility contains financial covenants that require the Company to
meet a consolidated leverage ratio (as defined in the facility) not exceeding 4
to 1 and a minimum interest coverage ratio (as defined in the facility) of at
least 1.5 to 1. The interest rate on revolving loans under the facility is based
on the Company's choice of several prevailing commercial lending rates plus an
additional margin that varies depending on the Company's credit ratings and
aggregate borrowings under the facility. The Company must pay a quarterly
commitment fee on the unutilized portion of the facility, the amount of which
varies based on the Company's credit ratings.
Moody's Investors Service ("Moody's") rates CenturyTel's long-term debt
Baa2 (with a stable outlook) and Standard & Poor's ("S&P") rates CenturyTel's
long-term debt BBB+ (with a stable outlook). Such ratings were affirmed in early
2005 in connection with the Series J remarketing and the Series M note issuance
mentioned above. The Company's commercial paper program is rated P2 by Moody's
and A2 by S&P. Any downgrade in the Company's credit ratings will increase its
borrowing costs and commitment fees under its $750 million revolving credit
facility. Downgrades could also restrict the Company's access to the capital
markets, accelerate the conversion rights of holders of the Company's
outstanding convertible
E-25
securities, increase the Company's borrowing costs under new or replacement debt
financings, or otherwise adversely affect the terms of future borrowings by,
among other things, increasing the amount of the Company's debt covenants and
decreasing the Company's financial or operating flexibility.
The following table reflects the Company's debt to total capitalization
percentage and ratio of earnings to fixed charges and preferred stock dividends
as of and for the years ended December 31:
2004 2003 2002
---- ---- ----
Debt to total capitalization 46.9% 47.8 54.2
Ratio of earnings from continuing operations to fixed charges
and preferred stock dividends 3.57 3.33 2.33
---- ---- ----
REGULATION AND COMPETITION
The communications industry continues to undergo various fundamental
regulatory, legislative, competitive and technological changes. These changes
may have a significant impact on the future financial performance of all
communications companies.
Events affecting the communications industry. In 1996, the United States
Congress enacted the Telecommunications Act of 1996 (the "1996 Act"), which
obligates LECs to permit competitors to interconnect their facilities to the
LEC's network and to take various other steps that are designed to promote
competition. Under the 1996 Act's rural telephone company exemption,
approximately 50% of the Company's telephone access lines are exempt from
certain of these interconnection requirements unless and until the appropriate
state regulatory commission overrides the exemption upon receipt from a
competitor of a bona fide request meeting certain criteria.
During 2003, the FCC released new rules outlining the obligations of
incumbent LECs to lease to competitors elements of their circuit-switched
networks on an unbundled basis at prices that substantially limited the
profitability of these arrangements to incumbent LECs. On March 2, 2004, a
federal appellate court vacated significant portions of these rules, including
the standards used to determine which unbundled network elements must be made
available to competitors. In response to this court decision, on February 4,
2005, the FCC released rules (effective March 11, 2005) that require incumbent
LECs to lease a network element only in those situations where competing
carriers genuinely would be impaired without access to such network element, and
where the unbundling would not interfere with the development of
facilities-based
E-26
competition. These rules are further designed to remove unbundling obligations
over time as competing carriers deploy their own networks and local exchange
competition increases.
Prior to and since the enactment of the 1996 Act, the FCC and a number of
state legislative and regulatory bodies have also taken steps to foster local
exchange competition. Coincident with this recent movement toward increased
competition has been the reduction of regulatory oversight of LECs. These
cumulative changes, coupled with various technological developments, have led to
the continued growth of various companies providing services that compete with
LECs' services. Wireless services entities also increasingly constitute a
significant source of competition with LECs.
As mandated by the 1996 Act, in May 2001 the FCC modified its existing
universal service support mechanism for rural telephone companies. The FCC
adopted an interim mechanism for a five-year period, effective July 1, 2001,
based on embedded, or historical, costs that will provide predictable levels of
support to rural local exchange carriers, including substantially all of the
Company's local exchange carriers. Based on recent FCC filings, the Company
anticipates its 2005 revenues from the USF High Cost Loop support program will
be approximately $10-15 million lower than 2004 levels due to increases in the
nationwide average cost per loop factor used by the FCC to allocate funds among
all recipients. Wireless and other competitive service providers continue to
seek eligible telecommunications carrier ("ETC") status in order to be eligible
to receive USF support, which, coupled with changes in usage of
telecommunications services, have placed stresses on the USF's funding
mechanism. These developments have placed additional financial pressure on the
amount of money that is necessary and available to provide support to all
eligible service providers, including support payments the Company receives from
the High Cost Loop support program. As a result of the continued increases in
the nationwide average cost per loop factor (caused by limited growth in the
size of the High Cost Loop support program and changes in requests for support
from the USF), the Company believes the aggregate level of payments it receives
from the USF will continue to decline in the near term under the FCC's current
rules.
On August 16, 2004, the Federal State Joint Board on Universal Service
released a notice requesting comments on the FCC's current rules for the
provision of high-cost support for rural companies, including comments on
whether eligibility requirements should be amended in a manner that would
adversely affect larger rural LECs such as the Company. The FCC has taken
E-27
various other steps in anticipation of restructuring universal service support
mechanisms, including opening a docket that will change the method of funding
contributions. The FCC is expected to act before its current rules are scheduled
to expire on June 30, 2006. Congress is also exploring various universal service
issues ranging from targeted universal service legislation to re-writing the
1996 Act. The Company has been and will continue to be active in monitoring
these developments.
Technological developments have led to the development of new services
that compete with traditional LEC services. Technological improvements have
enabled cable television companies to provide traditional circuit-switched
telephone service over their cable networks, and several national cable
companies have aggressively pursued this opportunity. Recent improvements in the
quality of "Voice-over-Internet Protocol" ("VoIP") service have led several
large cable television and telephone companies, as well as start-up companies,
to substantially increase their offerings of VoIP service to business and
residential customers. VoIP providers route calls over the Internet, without use
of ILEC's circuit switches and, in certain cases, without use of ILEC's networks
to carry their communications traffic. VoIP providers use existing broadband
networks to deliver flat-rate, all distance calling plans that may be priced
below those currently charged for traditional local and long distance telephone
services for several reasons, including lower network cost structures and the
current ability of VoIP providers to use ILECs' networks without paying access
charges. However, the service must be purchased in addition to the cost of the
broadband connection. In December 2003, the FCC initiated rulemaking that is
expected to address the effect of VoIP on intercarrier compensation, universal
service and emergency services. On March 10, 2004, the FCC released a notice of
proposed rulemaking seeking comment on the appropriate regulatory treatment of
VoIP service and related issues. Although the FCC's rulemaking regarding
VoIP-enabled services remains pending, the FCC has adopted orders establishing
broad guidelines for the regulation of such services, including an April 2004
order in which the FCC ruled that the IP-telephony service of AT&T, which
converts voice calls to IP format for routing over the public switched telephone
network, is a regulated telecommunications service subject to interstate access
charges. In addition, in November 2004, the FCC ruled that Internet-based
services provided by Vonage Holdings Corporation should be subject to federal
rather than state jurisdiction. Several state commissions have filed appeals of
this decision to various federal appellate courts. Also pending at the FCC is a
petition filed by
E-28
Level 3 Communications, Inc. asking the FCC to forbear from imposing interstate
or intrastate access charges on Internet-based calls that originate or terminate
on the public switched telephone network. There can be no assurance that future
rulemaking will be on terms favorable to ILECs, or that VoIP providers will not
successfully compete for the Company's customers.
In 2003, the FCC opened a broad intercarrier compensation proceeding with
the ultimate goal of creating a uniform mechanism to be used by the entire
telecommunications industry for payments between carriers originating,
terminating, carrying or delivering telecommunications traffic. The FCC has
received intercarrier compensation proposals from several industry groups, and
on February 10, 2005 solicited comments on all proposals previously submitted to
it. The Company is involved in this proceeding and will continue to monitor the
implications of these plans to its operations.
Recent events affecting the Company. During the last few years, several
states in which the Company has substantial operations took legislative or
regulatory steps to further introduce competition into the LEC business. The
number of companies which have requested authorization to provide local exchange
service in the Company's service areas has increased in recent years, especially
in the markets acquired from Verizon in 2002 and 2000, and it is anticipated
that similar action may be taken by others in the future.
State alternative regulation plans recently adopted by certain of the
Company's LECs have also affected revenue growth recently.
Certain long distance carriers continue to request that the Company reduce
intrastate access tariffed rates for certain of its LECs. In addition, the
Company has recently experienced reductions in intrastate traffic, partially due
to the displacement of minutes by wireless and electronic mail services. In 2004
the Company incurred a reduction in its intrastate revenues of approximately
$25.9 million compared to 2003 primarily due to these factors. The corresponding
decrease in 2003 compared to 2002 was $6.8 million. The Company believes such
trend of decreased intrastate minutes will continue in 2005, although the
magnitude of such decrease cannot be precisely estimated.
In January 2003, the Louisiana Public Service Commission staff began
reviewing the feasibility of converting the $42 million Louisiana Local Optional
Service Fund ("LOS Fund") into a state universal service fund. Currently, the
LOS Fund is funded primarily by BellSouth, which proposes to expand the base of
contributors into the LOS Fund. The Company currently
E-29
receives approximately $21 million from the LOS Fund each year. Although the
Commission staff has recommended to transfer the fund's $42 million to a state
universal service fund, there can be no assurance that the Commission will adopt
this recommendation or that funding will remain at current levels.
Competition to provide traditional LEC services has thus far affected
large urban areas to a greater extent than rural, suburban and small urban areas
such as those in which the Company's telephone operations are located. While the
Company expects its operating revenues in 2005 to continue to experience
downward pressure due to continued access line losses and reduced network access
revenues, the Company expects its consolidated revenues to increase in 2005
primarily due to increased demand for its long distance, fiber transport, DSL
and other nonregulated product offerings (including its new video and wireless
initiatives).
Other matters. The Company's regulated telephone operations (except for
the properties acquired from Verizon in 2002) are subject to the provisions of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation" ("SFAS 71"). Actions by regulators can provide
reasonable assurance of the recognition of an asset, reduce or eliminate the
value of an asset and impose a liability on a regulated enterprise. Such
regulatory assets and liabilities are required to be recorded and, accordingly,
reflected in the balance sheet of an entity subject to SFAS 71. The Company is
monitoring the ongoing applicability of SFAS 71 to its regulated telephone
operations due to the changing regulatory, competitive and legislative
environments, and it is possible that changes in regulation, legislation or
competition or in the demand for regulated services or products could result in
the Company's telephone operations no longer being subject to SFAS 71 in the
near future.
Statement of Financial Accounting Standards No. 101, "Regulated
Enterprises - Accounting for the Discontinuance of Application of FASB Statement
No. 71" ("SFAS 101"), specifies the accounting required when an enterprise
ceases to meet the criteria for application of SFAS 71. SFAS 101 requires the
elimination of the effects of any actions of regulators that have been
recognized as assets and liabilities in accordance with SFAS 71 but would not
have been recognized as assets and liabilities by nonregulated enterprises.
Depreciation rates of certain assets established by regulatory authorities for
the Company's telephone operations subject to SFAS 71 have historically included
a component for removal costs in excess of the related estimated salvage value.
Notwithstanding the adoption of SFAS 143, SFAS 71 requires the
E-30
Company to continue to reflect this accumulated liability for removal costs in
excess of salvage value even though there is no legal obligation to remove the
assets. Therefore, the Company did not adopt the provisions of SFAS 143 for its
telephone operations subject to SFAS 71. SFAS 101 further provides that the
carrying amounts of property, plant and equipment are to be adjusted only to the
extent the assets are impaired and that impairment shall be judged in the same
manner as for nonregulated enterprises.
The Company's consolidated balance sheet as of December 31, 2004 included
regulatory assets of approximately $3.0 million (primarily deferred costs
related to financing costs and regulatory proceedings) and regulatory
liabilities of approximately $200.3 million related to estimated removal costs
embedded in accumulated depreciation (as described above). Net deferred income
tax assets related to the regulatory assets and liabilities quantified above
were $75.2 million.
When and if the Company's regulated operations no longer qualify for the
application of SFAS 71, the Company does not expect to record any impairment
charge related to the carrying value of the property, plant and equipment of its
regulated telephone operations. Additionally, upon the discontinuance of SFAS
71, the Company would be required to revise the lives of its property, plant and
equipment to reflect the estimated useful lives of the assets. The Company does
not expect such revisions in asset lives will have a material impact on the
Company's results of operations. For regulatory purposes, the accounting and
reporting of the Company's telephone subsidiaries will not be affected by the
discontinued application of SFAS 71.
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 2004
have not been material, and the Company currently has no reason to believe that
such costs will become material.
E-31
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The Shareholders
CenturyTel, Inc.:
Management has prepared and is responsible for the integrity and
objectivity of the Company's consolidated financial statements. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and necessarily include
amounts determined using our best judgments and estimates.
The Company's consolidated financial statements have been audited by KPMG
LLP, an independent registered public accounting firm, who have expressed their
opinion with respect to the fairness of the consolidated financial statements.
Their audit was conducted in accordance with standards of the Public Company
Accounting Oversight Board (United States).
Management is responsible for establishing and maintaining adequate
internal controls over financial reporting, a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Under the supervision and with the
participation of management, including our principal executive officer and
principal financial officer, the Company conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our
evaluation under the framework of COSO, management concluded that the Company's
internal control over financial reporting was effective as of December 31, 2004.
Management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by KPMG LLP, as
stated in their report which is included herein.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Audit Committee of the Board of Directors is composed of independent
directors who are not officers or employees of the Company. The Committee meets
periodically with the external auditors, internal auditors and management. The
Committee considers the
E-32
independence of the external auditors and the audit scope and discusses internal
control, financial and reporting matters. Both the external and internal
auditors have free access to the Committee.
/s/ R. Stewart Ewing, Jr.
R. Stewart Ewing, Jr.
Executive Vice President and Chief Financial Officer
March 16, 2005
E-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CenturyTel, Inc.:
We have audited the accompanying consolidated balance sheets of
CenturyTel, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, comprehensive income, cash flows and
stockholders' equity for each of the years in the three-year period ended
December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CenturyTel,
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
The Company changed its method of accounting for goodwill and other
intangible assets in 2002.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 14, 2005 expressed an unqualified opinion on
E-34
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
Shreveport, Louisiana
March 14, 2005
E-35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
CenturyTel, Inc.:
We have audited management's assessment, included in the accompanying
Report of Management, that CenturyTel, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
E-36
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that CenturyTel, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion,
CenturyTel, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control--Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of CenturyTel, Inc. and subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of income, comprehensive income, cash
flows and stockholders' equity for each of the years in the three-year period
ended December 31, 2004, and our report dated March 14, 2005 expressed an
unqualified opinion on those consolidated financial statements. Such report
refers to a change in the method of accounting for goodwill and other intangible
assets in 2002.
/s/ KPMG LLP
Shreveport, Louisiana
March 14, 2005
E-37
CENTURYTEL, INC.
Consolidated Statements of Income
Year ended December 31,
--------------------------------------
2004 2003 2002
------------ --------- ---------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES $ 2,407,372 2,367,610 1,971,996
------------ --------- ---------
OPERATING EXPENSES
Cost of services and products (exclusive of
depreciation and amortization) 755,413 739,210 635,164
Selling, general and administrative 397,102 374,352 301,681
Corporate overhead costs allocable to
discontinued operations - - 9,548
Depreciation and amortization 500,904 503,652 450,197
------------ --------- ---------
Total operating expenses 1,653,419 1,617,214 1,396,590
------------ --------- ---------
OPERATING INCOME 753,953 750,396 575,406
------------ --------- ---------
OTHER INCOME (EXPENSE)
Interest expense (211,051) (226,751) (221,845)
Income from unconsolidated cellular entity 7,067 6,160 5,582
Nonrecurring gains and losses, net - - 3,709
Other income (expense) (2,597) 2,154 (63,814)
------------ --------- ---------
Total other income (expense) (206,581) (218,437) (276,368)
------------ --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE 547,372 531,959 299,038
Income tax expense 210,128 187,252 105,505
------------ --------- ---------
INCOME FROM CONTINUING OPERATIONS 337,244 344,707 193,533
DISCONTINUED OPERATIONS
Income from discontinued operations, net of
$284,459 tax - - 608,091
------------ --------- ---------
NET INCOME $ 337,244 344,707 801,624
============ ========= =========
Basic earnings per share
From continuing operations $ 2.45 2.40 1.36
From discontinued operations $ - - 4.29
Basic earnings per share $ 2.45 2.40 5.66
Diluted earnings per share
From continuing operations $ 2.41 2.35 1.35
From discontinued operations $ - - 4.21
Diluted earnings per share $ 2.41 2.35 5.56
DIVIDENDS PER COMMON SHARE $ .23 .22 .21
============ ========= =========
AVERAGE BASIC SHARES OUTSTANDING 137,215 143,583 141,613
============ ========= =========
AVERAGE DILUTED SHARES OUTSTANDING 142,144 148,779 144,408
============ ========= =========
See accompanying notes to consolidated financial statements.
E-38
CENTURYTEL, INC.
Consolidated Statements of Comprehensive Income
Year ended December 31,
--------------------------------
2004 2003 2002
---------- ------- -------
(Dollars in thousands)
NET INCOME $ 337,244 344,707 801,624
OTHER COMPREHENSIVE INCOME, NET OF TAXES
Minimum pension liability adjustment:
Minimum pension liability adjustment, net of ($5,916)
$19,312 and ($19,312) tax (9,491) 35,864 (35,864)
Unrealized holding gains:
Unrealized holding gains related to marketable
securities arising during the period, net of $940 tax 1,508 - -
Derivative instruments:
Net losses on derivatives hedging variability of
cash flows, net of ($219), ($36) and ($496) tax (351) (67) (921)
Less: reclassification adjustment for losses included
in net income, net of $487 and $44 tax - 906 82
---------- ------- -------
COMPREHENSIVE INCOME $ 328,910 381,410 764,921
========== ======= =======
See accompanying notes to consolidated financial statements.
E-39
CENTURYTEL, INC.
Consolidated Balance Sheets
December 31,
2004 2003
----------- ---------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 167,215 203,181
Accounts receivable
Customers, less allowance of $12,766 and $13,862 161,827 163,526
Interexchange carriers and other, less allowance
of $8,421 and $9,817 70,753 72,661
Materials and supplies, at average cost 5,361 9,229
Other 14,691 14,342
----------- ---------
Total current assets 419,847 462,939
----------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 3,341,401 3,455,481
----------- ---------
GOODWILL AND OTHER ASSETS
Goodwill 3,433,864 3,425,001
Other 601,841 552,431
----------- ---------
Total investments and other assets 4,035,705 3,977,432
----------- ---------
TOTAL ASSETS $ 7,796,953 7,895,852
=========== =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 249,617 72,453
Accounts payable 141,618 124,320
Accrued expenses and other current liabilities
Salaries and benefits 60,858 55,497
Income taxes 54,648 43,082
Other taxes 47,763 35,532
Interest 67,379 64,247
Other 18,875 31,640
Advance billings and customer deposits 50,860 44,612
----------- ---------
Total current liabilities 691,618 471,383
----------- ---------
LONG-TERM DEBT 2,762,019 3,109,302
----------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES 933,551 836,651
----------- ---------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000 shares,
issued and outstanding 132,373,912 and 144,364,168 shares 132,374 144,364
Paid-in capital 222,205 576,515
Accumulated other comprehensive loss, net of tax (8,334) -
Retained earnings 3,055,545 2,750,162
Unearned ESOP shares - (500)
Preferred stock - non-redeemable 7,975 7,975
----------- ---------
Total stockholders' equity 3,409,765 3,478,516
----------- ---------
TOTAL LIABILITIES AND EQUITY $ 7,796,953 7,895,852
=========== =========
See accompanying notes to consolidated financial statements.
E-40
CENTURYTEL, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
-------------------------------------
2004 2003 2002
----------- --------- ----------
(Dollars in thousands)
OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
Net income $ 337,244 344,707 801,624
Adjustments to reconcile net income to net
cash provided by operating activities from
continuing operations
Income from discontinued operations, net of tax - - (608,091)
Depreciation and amortization 500,904 503,652 450,197
Deferred income taxes 74,374 128,706 71,112
Income from unconsolidated cellular entity (7,067) (6,160) (5,582)
Nonrecurring gains and losses, net - - (3,709)
Changes in current assets and current liabilities
Accounts receivable 2,937 37,980 (13,481)
Accounts payable 15,514 47,972 3,769
Accrued taxes 27,040 57,709 43,046
Other current assets and other current
liabilities, net 12,831 17,323 36,316
Retirement benefits 26,954 (14,739) (9,416)
Increase in noncurrent assets (31,714) (23,528) (30,543)
Increase (decrease) in other noncurrent liabilities (6,220) (6,151) 35,489
Other, net 3,034 (19,507) 22,703
----------- --------- ----------
Net cash provided by operating activities
from continuing operations 955,831 1,067,964 793,434
----------- --------- ----------
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Acquisitions, net of cash acquired (2,000) (86,243) (2,245,026)
Payments for property, plant and equipment (385,316) (377,939) (386,267)
Investment in debt security (25,000) - -
Proceeds from sale of assets - - 4,144
Distributions from unconsolidated cellular entity 8,219 1,104 5,438
Other, net (9,214) (1,560) (1,378)
----------- --------- ----------
Net cash used in investing activities
from continuing operations (413,311) (464,638) (2,623,089)
----------- --------- ----------
FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
Proceeds from issuance of debt - - 2,123,618
Payments of debt (179,393) (432,258) (1,592,246)
Repurchase of common stock (401,013) - -
Proceeds from settlement of interest rate hedge contract - 22,315 -
Proceeds from issuance of common stock 29,485 33,980 29,125
Payment of debt issuance costs - - (12,999)
Payment of equity unit issuance costs - - (15,867)
Cash dividends (31,861) (32,017) (30,156)
Other, net 4,296 4,174 4,866
----------- --------- ----------
Net cash provided by (used in) financing activities
from continuing operations (578,486) (403,806) 506,341
----------- --------- ----------
Net cash provided by discontinued operations - - 1,323,479
----------- --------- ----------
Net increase (decrease) in cash and cash equivalents (35,966) 199,520 165
Cash and cash equivalents at beginning of year 203,181 3,661 3,496
----------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 167,215 203,181 3,661
=========== ========= ==========
See accompanying notes to consolidated financial statements.
E-41
CENTURYTEL, INC.
Consolidated Statements of Stockholders' Equity
Year ended December 31,
------------------------------------
2004 2003 2002
---------- --------- ---------
(Dollars, except per share amounts,
and shares in thousands)
COMMON STOCK
Balance at beginning of year $ 144,364 142,956 141,233
Repurchase of common stock (13,396) - -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,406 1,408 1,723
---------- --------- ---------
Balance at end of year 132,374 144,364 142,956
---------- --------- ---------
PAID-IN CAPITAL
Balance at beginning of year 576,515 537,804 524,668
Repurchase of common stock (387,617) - -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 28,079 32,572 27,402
Equity unit issuance costs and initial contract adjustment liability - - (24,377)
Amortization of unearned compensation and other 5,228 6,139 10,111
---------- --------- ---------
Balance at end of year 222,205 576,515 537,804
---------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE LOSS,
NET OF TAX
Balance at beginning of year - (36,703) -
Change in other comprehensive income (loss) (net of reclassification
adjustment), net of tax (8,334) 36,703 (36,703)
---------- --------- ---------
Balance at end of year (8,334) - (36,703)
---------- --------- ---------
RETAINED EARNINGS
Balance at beginning of year 2,750,162 2,437,472 1,666,004
Net income 337,244 344,707 801,624
Cash dividends declared
Common stock - $.23, $.22 and $.21 per share (31,462) (31,618) (29,757)
Preferred stock (399) (399) (399)
---------- --------- ---------
Balance at end of year 3,055,545 2,750,162 2,437,472
---------- --------- ---------
UNEARNED ESOP SHARES
Balance at beginning of year (500) (1,500) (2,500)
Release of ESOP shares 500 1,000 1,000
---------- --------- ---------
Balance at end of year - (500) (1,500)
---------- --------- ---------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of year 7,975 7,975 7,975
---------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY $3,409,765 3,478,516 3,088,004
========== ========= =========
COMMON SHARES OUTSTANDING
Balance at beginning of year 144,364 142,956 141,233
Repurchase of common stock (13,396) - -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,406 1,408 1,723
---------- --------- ---------
Balance at end of year 132,374 144,364 142,956
========== ========= =========
See accompanying notes to consolidated financial statements.
E-42
CENTURYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements of
CenturyTel, Inc. and its subsidiaries (the "Company") include the accounts of
CenturyTel, Inc. ("CenturyTel") and its majority-owned subsidiaries.
Regulatory accounting - The Company's regulated telephone operations
(except for the properties acquired from Verizon in 2002) are subject to the
provisions of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" ("SFAS 71"). Actions by
regulators can provide reasonable assurance of the recognition of an asset,
reduce or eliminate the value of an asset and impose a liability on a regulated
enterprise. Such regulatory assets and liabilities are required to be recorded
and, accordingly, reflected in the balance sheet of an entity subject to SFAS
71. The Company is monitoring the ongoing applicability of SFAS 71 to its
regulated telephone operations due to the changing regulatory, competitive and
legislative environments, and it is possible that changes in regulation,
legislation or competition or in the demand for regulated services or products
could result in the Company's telephone operations no longer being subject to
SFAS 71 in the near future. The Company's consolidated balance sheet as of
December 31, 2004 included regulatory assets of approximately $3.0 million
(primarily deferred costs related to financing costs and regulatory proceedings)
and regulatory liabilities of approximately $200.3 million related to estimated
removal costs embedded in accumulated depreciation (as required to be recorded
by regulators). Net deferred income tax assets related to the regulatory assets
and liabilities quantified above were $75.2 million.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
E-43
Revenue recognition - Revenues are generally recognized when services are
provided or when products are delivered to customers. Revenue that is billed in
advance includes monthly recurring network access services, special access
services and monthly recurring local line charges. The unearned portion of this
revenue is initially deferred as a component of advanced billings and customer
deposits on the Company's balance sheet and recognized as revenue over the
period that the services are provided. Revenue that is billed in arrears
includes nonrecurring network access services, nonrecurring local services and
long distance services. The earned but unbilled portion of this revenue is
recognized as revenue in the period that the services are provided.
Certain of the Company's telephone subsidiaries participate in revenue
sharing arrangements with other telephone companies for interstate revenue and
for certain intrastate revenue. Such sharing arrangements are funded by toll
revenue and/or access charges within state jurisdictions and by access charges
in the interstate market. Revenues earned through the various sharing
arrangements are initially recorded based on the Company's estimates.
Property, plant and equipment - Telephone plant is stated at original
cost. Normal retirements of telephone plant are charged against accumulated
depreciation, along with the costs of removal, less salvage, with no gain or
loss recognized. Renewals and betterments of plant and equipment are capitalized
while repairs, as well as renewals of minor items, are charged to operating
expense. Depreciation of telephone plant is provided on the straight line method
using class or overall group rates acceptable to regulatory authorities; such
average rates range from 2.8% to 23%.
Non-telephone property is stated at cost and, when sold or retired, a gain
or loss is recognized. Depreciation of such property is provided on the straight
line method over estimated service lives ranging from two to 35 years.
Intangible assets - Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), requires goodwill recorded
in a business combination to be reviewed for impairment and to be written down
only in periods in which the recorded amount of goodwill exceeds its fair value.
Impairment of goodwill is tested at least annually by comparing the fair value
of the reporting unit to its carrying value (including goodwill). Estimates of
the fair value of the reporting unit are based on valuation models using
criterion such as multiples of earnings.
E-44
Long-lived assets - Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets (exclusive of goodwill) and also broadens the reporting of
discontinued operations to include all components of an entity with operations
that can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal transaction.
As a result of the Company's agreement in March 2002 to sell its wireless
operations (which was consummated on August 1, 2002) (see Note 3), such
operations have been reflected as discontinued operations for the year ended
December 31, 2002.
Affiliated transactions - Certain service subsidiaries of CenturyTel
provide installation and maintenance services, materials and supplies, and
managerial, operational, technical, accounting and administrative services to
subsidiaries. In addition, CenturyTel provides and bills management services to
subsidiaries and in certain instances makes interest bearing advances to finance
construction of plant and purchases of equipment. These transactions are
recorded by the Company's telephone subsidiaries at their cost to the extent
permitted by regulatory authorities. Intercompany profit on transactions with
regulated affiliates is limited to a reasonable return on investment and has not
been eliminated in connection with consolidating the results of operations of
CenturyTel and its subsidiaries. Intercompany profit on transactions with
affiliates not subject to SFAS 71 has been eliminated.
Income taxes - CenturyTel files a consolidated federal income tax return
with its eligible subsidiaries. The Company uses the asset and liability method
of accounting for income taxes under which deferred tax assets and liabilities
are established for the future tax consequences attributable to differences
between the financial statement carrying amounts of assets and liabilities and
their respective tax bases.
Derivative financial instruments - The Company accounts for derivative
instruments and hedging activities in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended. SFAS 133, as amended, requires that all
derivative instruments, such as interest rate swaps, be recognized in the
financial statements and measured at fair value regardless of the purpose or
intent of holding them. On the date a derivative contract is entered into, the
Company designates the derivative as either a fair value or cash flow hedge. A
hedge of the fair value of a recognized
E-45
asset or liability or of an unrecognized firm commitment is a fair value hedge.
A hedge of a forecasted transaction or the variability of cash flows to be
received or paid related to a recognized asset or liability is a cash flow
hedge. The Company also formally assesses, both at the hedge's inception and on
an ongoing basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting changes in fair values or cash flows of
hedged items. If the Company determines that a derivative is not highly
effective as a hedge or that it has ceased to be a highly effective hedge, the
Company would discontinue hedge accounting prospectively. The Company does not
hold or issue derivative financial instruments for trading or speculative
purposes. Management periodically reviews the Company's exposure to interest
rate fluctuations and implements strategies to manage the exposure.
Earnings per share - Basic earnings per share amounts are determined on
the basis of the weighted average number of common shares outstanding during the
year. Diluted earnings per share gives effect to all potential dilutive common
shares that were outstanding during the period. In the fourth quarter of 2004,
the Company adopted the requirements of Emerging Issues Task Force No. 04-8,
"The Effect of Contingently Convertible Instruments on Diluted Earnings Per
Share," in calculating its diluted earnings per share. See Note 13 for
additional information.
Stock-based compensation - The Company currently accounts for stock
compensation plans using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as allowed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Options have been
granted at a price either equal to or exceeding the then-current market price.
Accordingly, the Company has not to date recognized compensation cost in
connection with issuing stock options.
During 2004 the Company granted 952,975 options (the "2004 Options") at
market price. The weighted average fair value of each of the 2004 Options was
estimated as of the date of grant to be $10.25 using an option-pricing model
with the following assumptions: dividend yield - .7%; expected volatility - 30%;
weighted average risk-free interest rate - 3.6%; and expected option life -
seven years.
During 2003 the Company granted 1,720,317 options (the "2003 Options") at
market price. The weighted average fair value of each of the 2003 Options was
estimated as of the date of grant to be $9.94 using an option-pricing model with
the following assumptions: dividend yield -
E-46
.7%; expected volatility - 30%; weighted average risk-free interest rate - 3.4%;
and expected option life - seven years.
During 2002 the Company granted 1,983,150 options (the "2002 Options") at
market price. The weighted average fair value of each of the 2002 Options was
estimated as of the date of grant to be $11.66 using an option-pricing model
with the following assumptions: dividend yield - .7%; expected volatility - 30%;
weighted average risk-free interest rate - 3.4%; and expected option life -
seven years.
If compensation cost for CenturyTel's options had been determined
consistent with SFAS 123, the Company's net income and earnings per share on a
pro forma basis for 2004, 2003 and 2002 would have been as follows:
Year ended December 31, 2004 2003 2002
---------------------------------------------- --------- ------- -------
(Dollars in thousands,
except per share amounts)
Net income, as reported $ 337,244 344,707 801,624
Less: Total stock-based compensation
expense determined under fair value based
method, net of tax $ (9,767) (13,183) (15,001)
--------- ------- -------
Pro forma net income $ 327,477 331,524 786,623
========= ======= =======
Basic earnings per share
As reported $ 2.45 2.40 5.66
Pro forma $ 2.38 2.31 5.55
Diluted earnings per share
As reported $ 2.41 2.35 5.56
Pro forma $ 2.34 2.26 5.46
Beginning in the third quarter of 2005, the Company will adopt the
provisions of Statement of Financial Accounting Standards No. 123 (Revised
2004), "Share-Based Payments" ("SFAS 123(R)"). SFAS 123(R) requires the Company
to measure the cost of the employee services received in exchange for an award
of equity instruments based upon the fair value of the award on the grant date.
Such cost will be recognized as an expense over the period during which the
employee is required to provide service in exchange for the award. In accordance
with SFAS 123(R), compensation cost is also recognized over the applicable
remaining vesting period for any awards that are not fully vested as of the
effective date.
Cash equivalents - The Company considers short-term investments with a
maturity at date of purchase of three months or less to be cash equivalents.
Discontinued operations - On August 1, 2002, the Company sold
substantially all of its wireless operations to an affiliate of ALLTEL
Corporation ("Alltel") and certain other
E-47
purchasers for an aggregate of approximately $1.59 billion in cash. As a result,
the Company's wireless operations have been reflected as discontinued operations
for 2002. See Note 3 for additional information.
Reclassifications - Certain amounts previously reported for prior years
have been reclassified to conform with the 2004 presentation, including the
presentation of the Company's segment reporting. See Note 17 for additional
information.
(2) ACQUISITIONS
On July 1, 2002, the Company purchased approximately 300,000 telephone
access lines in the state of Alabama from Verizon Communications, Inc.
("Verizon") for approximately $1.022 billion cash. On August 31, 2002, the
Company purchased approximately 350,000 telephone access lines in the state of
Missouri from Verizon for approximately $1.179 billion cash. The assets
purchased in these transactions included (i) franchises authorizing the
provision of local telephone service, (ii) related property and equipment
comprising Verizon's local exchange operations in predominantly rural markets
throughout Alabama and Missouri and (iii) Verizon's assets used to provide
digital subscriber line ("DSL") and other high speed data services within the
purchased exchanges. For financing arrangements related to these acquisitions,
see Note 6.
In June and December 2003, the Company acquired certain fiber transport
assets for an aggregate of $55.2 million cash (of which $3.8 million was paid as
a deposit in 2002). In the fourth quarter of 2003, the Company purchased an
additional 24.3% interest in a telephone company in which it owned a majority
interest for $32.4 million cash.
The results of operations of the acquired properties are included in the
Company's results of operations from and after the respective acquisition dates.
The following pro forma information represents the consolidated results of
continuing operations of the Company for the year ended December 31, 2002 as if
the Verizon acquisitions in 2002 had been consummated as of January 1, 2002.
2002
-------------------------
(Dollars in thousands,
except per share amounts)
Operating revenues from continuing operations $ 2,285,866
Income from continuing operations $ 218,252
Basic earnings per share from
continuing operations $ 1.54
Diluted earnings per share from
continuing operations $ 1.52
E-48
The pro forma information is based on various assumptions and estimates.
The pro forma information (i) reflects the effect of reduced interest expense
after August 1, 2002 as a result of reducing outstanding indebtedness from
utilization of proceeds received from the August 1, 2002 sale of substantially
all of the Company's wireless operations described in Note 3 and (ii) makes no
pro forma adjustments to reflect any assumed consummation of such sale (or any
use of such sale proceeds) prior to August 1, 2002. The pro forma information is
not necessarily indicative of the operating results that would have occurred if
the Verizon acquisitions had been consummated as of January 1, 2002, nor is it
necessarily indicative of future operating results. The pro forma information
does not give effect to any actual or potential revenue enhancements or cost
synergies or other operating efficiencies resulting from the acquisitions.
(3) DISCONTINUED OPERATIONS
On August 1, 2002, the Company sold substantially all of its wireless
operations to Alltel and certain other purchasers for an aggregate of
approximately $1.59 billion in cash. In connection with this transaction, the
Company divested its (i) interests in its majority-owned and operated cellular
systems, which at June 30, 2002 served approximately 783,000 customers and had
access to approximately 7.8 million pops, (ii) minority cellular equity
interests representing approximately 1.8 million pops at June 30, 2002, and
(iii) licenses to provide PCS covering 1.3 million pops in Wisconsin and Iowa.
Proceeds from the sale of the wireless operations were used to partially fund
the Company's acquisitions of telephone properties in Alabama and Missouri
during the third quarter of 2002.
As a result of the sale, the Company's wireless operations have been
reflected as discontinued operations in the Company's consolidated statements of
income and cash flows for the year ended December 31, 2002.
The depreciation and amortization of long-lived and amortizable intangible
assets related to the wireless operations ceased on March 19, 2002, the date of
the definitive agreement to sell such operations.
The Company had no outstanding indebtedness directly related to its
wireless operations; therefore, no interest expense was allocated to
discontinued operations. The following table represents certain summary income
statement information related to the Company's wireless operations that is
reflected in discontinued operations.
E-49
Year ended December 31, 2002
-------------------------------------------- ----------------------
(Dollars in thousands)
Operating revenues $ 246,705
---------
Operating income (1) $ 71,258
Income from unconsolidated cellular entities 25,768
Minority interest expense (8,569)
Gain on sale of discontinued operations 803,905
Other income 188
---------
Pre-tax income from discontinued operations $ 892,550
Income tax expense (284,459)
---------
Income from discontinued operations $ 608,091
=========
(1) Excludes corporate overhead costs of $9.5 million allocated to the wireless
operations. Included as a reduction in operating income is a $30.5 million
charge associated with the write-off of all amounts expended to develop the
wireless portion of the Company's new billing system.
The following table represents certain summary cash flow statement
information related to the Company's wireless operations reflected as
discontinued operations:
Year ended December 31, 2002
-------------------------------------------- ----------------------
(Dollars in thousands)
Net cash used in operating activities $ (248,716)(1)
Net cash provided by investing activities 1,572,195(2)
Net cash provided by financing activities -
-----------
Net cash provided by discontinued operations $ 1,323,479
===========
(1) Includes approximately $305 million estimated tax payment related to sale of
wireless operations.
(2) Includes cash proceeds of $1.59 billion from the sale of substantially all
of the Company's wireless operations.
(4) GOODWILL AND OTHER ASSETS
Goodwill and other assets at December 31, 2004 and 2003 were composed of
the following:
December 31, 2004 2003
----------------------------------------------------------------- ---------- ---------
(Dollars in thousands)
Goodwill $3,433,864 3,425,001
Billing system development costs, less accumulated amortization
of $4,652 and $508 202,349 162,980
Cash surrender value of life insurance contracts 93,792 93,960
Prepaid pension asset 46,800 59,055
Franchise costs 35,300 35,300
Marketable securities 30,092 27,653
Deferred interest rate hedge contracts 28,435 31,239
Investment in debt security 21,013 -
Customer base, less accumulated amortization of $3,756 and $2,242 18,944 20,458
Other 125,116 121,786
---------- ---------
$4,035,705 3,977,432
========== =========
E-50
As of September 30, 2004, the Company completed the required annual
impairment test under SFAS 142 and determined its goodwill was not impaired.
The Company recently implemented a new integrated billing and customer
care system. The costs to develop such system have been accounted for in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Aggregate capitalized
costs (before accumulated amortization) totaled $207.0 million and $163.5
million at December 31, 2004 and 2003, respectively. Such system is being
amortized over a twenty-year period.
In the third quarter of 2004, the Company entered into a three-year
agreement with EchoStar Communications Corporation ("EchoStar") to provide
co-branded satellite television services to the Company's customers. As part of
the transaction, the Company invested $25 million in an EchoStar convertible
subordinated debt security, which had a fair value at date of issuance of
approximately $20.8 million and matures in 2011. The remaining $4.2 million paid
was established as an intangible asset attributable to the Company's contractual
rights to provide video service and is being amortized over a three-year period.
In connection with the acquisitions of properties from Verizon in 2002,
the Company assigned $35.3 million of the purchase price as an intangible asset
associated with franchise costs (which includes amounts necessary to maintain
eligibility to provide telecommunications services in its licensed service
areas). Such asset has an indefinite life and therefore is not subject to
amortization currently.
The Company assigned $22.7 million of the purchase price to a customer
base intangible asset in connection with the acquisitions of Verizon properties
in 2002. Such asset is being amortized over 15 years. In addition, as mentioned
above, an intangible asset was established related to the contractual rights to
provide video service. Total amortization expense for these identifiable
intangible assets for 2004, 2003 and 2002 was $2.0 million, $1.5 million and
$729,000, respectively, and is expected to be $2.9 million for each of the
subsequent two years, $2.4 million in 2007 and $1.5 million annually thereafter
through 2009.
E-51
(5) PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at December 31, 2004 and 2003 was
composed of the following:
December 31, 2004 2003
----------------------------------- ------------- ----------
(Dollars in thousands)
Cable and wire $ 3,948,784 3,817,646
Central office 2,385,406 2,285,528
General support 785,025 811,301
Fiber transport and CLEC 150,098 127,080
Information origination/termination 56,428 49,643
Construction in progress 66,485 58,018
Other 38,791 34,939
------------- ----------
7,431,017 7,184,155
Accumulated depreciation (4,089,616) (3,728,674)
------------- ----------
Net property, plant and equipment $ 3,341,401 3,455,481
============= ==========
Depreciation expense was $498.9 million, $502.1 million and $449.5 million
in 2004, 2003 and 2002, respectively. The year 2004 included a reduction in
depreciation expense of $13.2 million to adjust the balances of certain
over-depreciated property, plant and equipment accounts.
(6) LONG-TERM DEBT
The Company's long-term debt as of December 31, 2004 and 2003 was as
follows:
December 31, 2004 2003
------------------------------------------- ---------- ---------
(Dollars in thousands)
CenturyTel
Senior notes and debentures:
7.75% Series A $ - 50,000
8.25% Series B - 100,000
6.55% Series C, due 2005 50,000 50,000
7.20% Series D, due 2025 100,000 100,000
6.15% Series E, due 2005 100,000 100,000
6.30% Series F, due 2008 240,000 240,000
6.875% Series G, due 2028 425,000 425,000
8.375% Series H, due 2010 500,000 500,000
6.02% Series J, due 2007* 500,000 500,000
4.75% Series K, due 2032 165,000 165,000
7.875% Series L, due 2012 500,000 500,000
Employee Stock Ownership
Plan commitment - 500
Unamortized net discount (3,919) (4,501)
Net fair value of derivative instruments
related to Series H and L senior notes 10,865 7,747
Other 79 114
---------- ---------
Total CenturyTel 2,587,025 2,733,860
---------- ---------
E-52
Subsidiaries
First mortgage debt
5.92%** notes, payable to agencies of the U. S.
government and cooperative lending associations,
due in installments through 2028 210,403 234,743
7.98% notes, due through 2016 4,964 5,211
Other debt
6.98%** unsecured medium-term notes, due through 2008 197,999 199,613
8.76%** notes, due in installments through 2028 6,187 3,739
5.35%** capital lease obligations, due through 2008 5,058 4,589
------------- ---------
Total subsidiaries 424,611 447,895
------------- ---------
Total long-term debt 3,011,636 3,181,755
Less current maturities 249,617 72,453
------------- ---------
Long-term debt, excluding current maturities $ 2,762,019 3,109,302
============= =========
* In February 2005, the Company purchased and retired approximately $400
million of the Series J notes; the interest rate on the remaining $100
million was reset to 4.628%.
** Weighted average interest rate at December 31, 2004
The approximate annual debt maturities for the five years subsequent to
December 31, 2004 are as follows (after giving consideration to the Company
purchasing and retiring approximately $400 million of its Series J notes in
February 2005): 2005 - $249.6 million; 2006 - $281.3 million (including $165
million aggregate principal amount of the Company's convertible debentures,
Series K, due 2032, which can be put to the Company at various dates beginning
in 2006); 2007 - $125.2 million; 2008 - $285.9 million; and 2009 - $20.6
million.
Certain of the loan agreements of CenturyTel and its subsidiaries contain
various restrictions, among which are limitations regarding issuance of
additional debt, payment of cash dividends, reacquisition of capital stock and
other matters. In addition, the transfer of funds from certain consolidated
subsidiaries to CenturyTel is restricted by various loan agreements.
Subsidiaries which have loans from government agencies and cooperative lending
associations, or have issued first mortgage bonds, generally may not loan or
advance any funds to CenturyTel, but may pay dividends if certain financial
ratios are met. At December 31, 2004, restricted net assets of subsidiaries were
$227.6 million and subsidiaries' retained earnings in excess of amounts
restricted by debt covenants totaled $1.4 billion. At December 31, 2004, all of
the consolidated retained earnings reflected on the balance sheet was available
under CenturyTel's loan agreements for the declaration of dividends.
The senior notes and debentures of CenturyTel referred to above were
issued under an indenture dated March 31, 1994. This debenture does not contain
any financial covenants, but does include restrictions that limit the Company's
ability to (i) incur, issue or create liens upon its property and (ii)
consolidate with or merge into, or transfer or lease all or substantially all of
E-53
its assets to, any other party. The indenture does not contain any provisions
that are tied to the credit ratings of the Company, or that restrict the
issuance of new securities in the event of a material adverse change in the
Company.
Approximately 21% of the Company's property, plant and equipment is
pledged to secure the long-term debt of subsidiaries.
In May 2004, the Company prepaid all $100 million aggregate principal
amount of its 8.25%, Series B notes, due 2024. The Company incurred a $4.6
million pre-tax expense (a $3.6 million prepayment premium and a $1.0 million
write-off of unamortized deferred debt costs) in the second quarter of 2004
associated with this prepayment.
On May 6, 2002, the Company issued and sold in an underwritten public
offering $500 million of equity units. Net proceeds to the Company from this
issuance were approximately $483.4 million. Each of the 20 million equity units
issued was priced at $25 and consisted initially of a beneficial interest in a
CenturyTel senior unsecured note (Series J) with a principal amount of $25 and a
contract to purchase shares of CenturyTel common stock no later than May 2005.
As discussed below, the senior notes were remarketed in February 2005. Each
purchase contract will generally require the holder to purchase between .6944
and .8741 of a share of CenturyTel common stock in May 2005 based on the then
current stock price of CenturyTel common stock in exchange for $25, subject to
certain adjustments and exceptions. Accordingly, upon full settlement of the
purchase contracts in May 2005, the Company will receive proceeds of $500
million and will deliver between 13.9 million and 17.5 million common shares in
the aggregate. The senior notes were initially pledged by the holders to secure
their obligations under the purchase contracts. The total distributions on the
equity units were initially set at an initial annual rate of 6.875%, consisting
of interest (6.02%) and contract adjustment payments (0.855%), each payable
quarterly.
The senior note portion of the equity units is reflected on the December
31, 2004 balance sheet as long-term debt in the amount of $500 million. Interest
expense on the senior notes has accrued at a rate of 6.02%, the initial interest
rate through February 14, 2005. The present value of the aggregate contract
adjustment payments has been recorded as an $11.6 million reduction to paid-in
capital and as an equivalent liability. The Company is amortizing the difference
between the aggregate amount of all payments and the present value thereof as
interest expense over the three-year term of the purchase contracts. Upon making
each such payment, the
E-54
Company will allocate most of the payment to the reduction of its $11.6 million
liability, and record the remainder as interest expense. The issuance costs of
the equity units have been allocated to the units' debt and equity components.
The debt issuance costs ($3.3 million) were computed based on typical costs of a
debt transaction and will be amortized to interest expense over the term of the
senior notes. The remainder of the issuance costs ($12.6 million) were treated
as a cost of raising equity and recorded as a charge to paid-in capital.
In mid-February 2005, substantially all of the senior notes were
remarketed, at which time the interest rate on the senior notes was reset in
order to generate sufficient proceeds to secure the holder's obligation under
the related purchase contracts. In connection with the remarketing, the Company
purchased and retired approximately $400 million of the Series J notes. As of
February 15, 2005, only approximately $100 million aggregate principal amount of
the Series J notes remained outstanding. The Company financed this purchase with
the net proceeds from its offering of $350 million of senior notes, Series M,
due 2015, and cash on hand.
As of December 31, 2004, the Company had available a $533 million
three-year revolving credit facility, which was scheduled to expire in July
2005. The Company had no outstanding borrowings under its facility at December
31, 2004. In March 2005, the Company secured a five-year $750 million revolving
credit facility to replace the above-mentioned facility. At December 31, 2004,
the Company's telephone subsidiaries had available for use $123.0 million of
commitments for long-term financing from the Rural Utilities Service and Rural
Telephone Bank.
In the third quarter of 2002, the Company issued $165 million of
convertible senior debentures, Series K, due 2032 (which bear interest at 4.75%
and which may be converted under certain specified circumstances into shares of
CenturyTel common stock at a conversion price of $40.455 per share). Holders of
the convertible senior debentures will have the right to require the Company to
purchase all or a portion of the debentures on August 1, 2006, August 1, 2010
and August 1, 2017. In each case, the purchase price payable will be equal to
100% of the principal amount of the debentures to be purchased plus any accrued
and unpaid interest to the purchase date. The Company will pay cash for all
debentures so purchased on August 1, 2006. For any such purchases on or after
August 1, 2010, the Company may choose to pay the purchase price in cash or
shares of its common stock, or any combination thereof (except that the Company
will pay any accrued and unpaid interest in cash).
E-55
On October 15, 2002, the Company redeemed $400 million principal amount of
its Series I Remarketable Senior Notes at par value, plus accrued interest. In
connection with such redemption, the Company also paid a premium of
approximately $71.1 million in accordance with the redemption provisions of the
associated remarketing agreement. Such premium payment (net of $11.1 million of
unamortized net premium primarily associated with the option payment received by
the Company in 2000 in connection with the original issuance of the remarketable
notes) is reflected as an Other Expense in the Company's results of operations
for the year ended December 31, 2002.
(7) DERIVATIVE INSTRUMENTS
In May and July 2003, the Company entered into four separate fair value
interest rate hedges associated with the full $500 million principal amount of
its Series L senior notes, due 2012, that pay interest at a fixed rate of
7.875%. These hedges are "fixed to variable" interest rate swaps that
effectively convert the Company's fixed rate interest payment obligations under
these notes into obligations to pay variable rates that range from the six-month
London InterBank Offered Rate ("LIBOR") plus 3.229% to the six-month LIBOR plus
3.67%, with settlement and rate reset dates occurring each six months through
the expiration of the hedges in August 2012. As of December 31, 2004, the
Company realized a weighted average interest rate of 6.4% related to these
hedges. Interest expense was reduced by $10.3 million during 2004 as a result of
these hedges. The aggregate fair value of such hedges at December 31, 2004 was
$5.7 million and is reflected on the accompanying balance sheet as both a
liability (included in "Deferred credits and other liabilities") and as a
decrease to the Company's underlying long-term debt.
As of December 31, 2004, the Company also had outstanding cash flow hedges
that effectively locked in the interest rate on the majority of certain
anticipated debt transactions that ultimately were completed in February 2005.
The Company locked in the interest rate on (i) $100 million of 2.25 year debt
(remarketed in February 2005) at 3.9% and (ii) $225 million of 10-year debt
(issued in February 2005) at 5.5%. Such cash flow hedges had a fair value of
$571,000 as of December 31, 2004 and is reflected as a component of Accumulated
Other Comprehensive Loss on the consolidated balance sheet. In January 2005, the
Company also entered into a separate cash flow hedge which effectively locked in
the interest rate for an
E-56
additional $75 million of 10-year debt (issued in February 2005) at 5.4%. In
February 2005, upon settlement of such hedges, the Company (i) received $366,000
related to the 2.25 year debt remarketing which will be amortized as a reduction
of interest expense over the remaining term of the debt and (ii) paid $7.7
million related to the 10-year debt issuance which will be amortized as an
increase in interest expense over the 10-year term of the debt.
During 2002, the Company entered into (i) a cash flow hedge designed to
lock in a fixed interest rate for $100 million of the $500 million senior notes
issued in the third quarter of 2002 which was settled in the third quarter of
2002 for a $1.1 million payment by the Company (which is being amortized as
additional interest expense over a ten-year period, which equates to the term of
the debt issuance hedged) and (ii) a cash flow hedge designed to eliminate the
variability of interest payments for $400 million of variable rate debt under
the Company's $800 million credit facilities. During the second quarter of 2003,
the Company retired all outstanding indebtedness associated with its $800
million credit facilities; therefore, such cash flow hedge was deemed
ineffective in 2003 and resulted in a $722,000 unfavorable pre-tax charge to the
Company's income.
During 2002, the Company entered into a fair value hedge with respect to
the Company's $500 million aggregate principal amount of 8.375% Series H senior
notes, due 2010. In May 2003, the Company terminated this hedge. In connection
with such termination, the Company received approximately $22.3 million in cash
upon settlement, which represented the fair value of the hedge at the
termination date. Such amount is being amortized as a reduction of interest
expense through 2010, the maturity date of the Series H notes.
(8) DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 2004 and 2003 were
composed of the following:
December 31, 2004 2003
-------------------------------------- ---------- -------
(Dollars in thousands)
Deferred federal and state income taxes $ 601,757 528,551
Accrued postretirement benefit costs 232,546 222,613
Additional minimum pension liability 18,450 -
Minority interest 7,508 7,218
Fair value of interest rate swap 6,283 11,693
Other 67,007 66,576
---------- -------
$ 933,551 836,651
========== =======
E-57
(9) STOCKHOLDERS' EQUITY
Common stock - Unissued shares of CenturyTel common stock were reserved as
follows:
December 31, 2004
----------------------------------------- --------------
(In thousands)
Incentive compensation programs 9,717
Acquisitions 4,064
Employee stock purchase plan 4,721
Dividend reinvestment plan 422
Conversion of convertible preferred stock 435
Other employee benefit plans 3,393
------
22,752
======
During 2004, the Company repurchased approximately 13.4 million shares of
common stock to complete its $400 million stock repurchase program approved by
the Company's board of directors in early 2004. In February 2005, the Company's
board of directors approved a stock repurchase program that will allow the
Company to repurchase up to an aggregate of $200 million of either its common
stock or convertible equity units prior to December 31, 2005.
Under CenturyTel's Articles of Incorporation each share of common stock
beneficially owned continuously by the same person since May 30, 1987 generally
entitles the holder thereof to ten votes per share. All other shares entitle the
holder to one vote per share. At December 31, 2004, the holders of 8.1 million
shares of common stock were entitled to ten votes per share.
Preferred stock - As of December 31, 2004, CenturyTel had 2.0 million
shares of authorized convertible preferred stock, $25 par value per share. At
December 31, 2004 and 2003, there were 319,000 shares of outstanding preferred
stock. Holders of outstanding CenturyTel preferred stock are entitled to receive
cumulative dividends, receive preferential distributions equal to $25 per share
plus unpaid dividends upon CenturyTel's liquidation and vote as a single class
with the holders of common stock.
Shareholders' Rights Plan - In 1996 the Board of Directors declared a
dividend of one preference share purchase right for each common share
outstanding. Such rights become exercisable if and when a potential acquiror
takes certain steps to acquire 15% or more of CenturyTel's common stock. Upon
the occurrence of such an acquisition, each right held by shareholders other
than the acquiror may be exercised to receive that number of shares of common
stock or other securities of CenturyTel (or, in certain situations, the
acquiring company) which at the time of such transaction will have a market
value of two times the exercise price of the right.
E-58
(10) POSTRETIREMENT BENEFITS
The Company sponsors health care plans (which use a December 31
measurement date) that provide postretirement benefits to all qualified retired
employees.
In May 2004, the Financial Accounting Standards Board issued Financial
Statement Position FAS 106-2, which provides accounting guidance to sponsors of
postretirement health care plans that are impacted by the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act"). The Company
believes that certain drug benefits offered under its postretirement health care
plans will qualify for subsidy under Medicare Part D. In the third quarter of
2004, the Company estimated that the effect of the Act on the Company would not
be material. The Company first reflected the effects of the Act as of the
December 31, 2004 measurement date. As of this date, the Company estimated that
the reduction in its accumulated benefit obligation attributable to prior
service cost was approximately $7 million and has reflected such amount as an
actuarial gain.
In 2003, the Company announced changes, effective January 1, 2004, that
would decrease its subsidization of benefits provided under its postretirement
benefit plan.
The following is a reconciliation of the beginning and ending balances for
the benefit obligation and the plan assets.
December 31, 2004 2003 2002
--------------------------------------------------- -------- ------- --------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $311,421 253,762 215,872
Service cost 6,404 6,176 6,669
Interest cost 17,585 18,216 15,962
Participant contributions 1,362 1,199 617
Acquisitions - - 56,539
Plan amendments 2,529 (34,597) -
Actuarial (gain) loss (18,185) 79,163 (29,534)
Benefits paid (15,396) (12,498) (12,363)
-------- ------- -------
Benefit obligation at end of year $305,720 311,421 253,762
======== ======= =======
Change in plan assets
Fair value of plan assets at beginning of year $ 29,877 28,697 36,555
Return on assets 2,377 4,479 (2,896)
Employer contributions 11,350 8,000 6,784
Participant contributions 1,362 1,199 617
Benefits paid (15,396) (12,498) (12,363)
-------- ------- -------
Fair value of plan assets at end of year $ 29,570 29,877 28,697
======== ======= =======
E-59
Net periodic postretirement benefit cost for 2004, 2003 and 2002 included
the following components:
Year ended December 31, 2004 2003 2002
----------------------------------------------- ---------- ------ ------
(Dollars in thousands)
Service cost $ 6,404 6,176 6,669
Interest cost 17,585 18,216 15,962
Expected return on plan assets (2,465) (2,367) (3,656)
Amortization of unrecognized actuarial loss 3,611 1,731 1,470
Amortization of unrecognized prior service cost (3,648) (2,447) (129)
---------- ------ ------
Net periodic postretirement benefit cost $ 21,487 21,309 20,316
========== ====== ======
The following table sets forth the amounts recognized as liabilities for
postretirement benefits at December 31, 2004, 2003 and 2002.
December 31, 2004 2003 2002
------------------------------- --------- -------- --------
(Dollars in thousands)
Benefit obligation $(305,720) (311,421) (253,762)
Fair value of plan assets 29,570 29,877 28,697
Unamortized prior service cost (26,891) (33,068) (918)
Unrecognized net actuarial loss 68,185 89,893 14,573
--------- -------- --------
Accrued benefit cost $(234,856) (224,719) (211,410)
========= ======== ========
Assumptions used in accounting for postretirement benefits as of December
31, 2004 and 2003 were:
2004 2003
----------- ---------
Determination of benefit obligation
Discount rate 5.75% 6.0
Healthcare cost increase trend rates (Medical/Prescription Drug)
Following year 10.0%/15.0% 11.0/16.0
Rate to which the cost trend rate is assumed to decline (the
ultimate cost trend rate) 5.0%/5.0% 5.0/5.0
Year that the rate reaches the ultimate cost trend rate 2010/2015 2010/2015
Determination of benefit cost
Discount rate 6.0% 6.75
Expected return on plan assets 8.25% 8.25
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. The intent of this strategy is to
minimize plan expenses by outperforming plan liabilities over the long term.
Risk tolerance is established through careful consideration of plan liabilities,
plan funded status and corporate financial condition. Investment risk is
measured and monitored on an ongoing basis through annual liability
measurements, periodic asset studies and periodic portfolio reviews.
E-60
The Company's postretirement benefit plan weighted-average asset
allocations at December 31, 2004 and 2003 by asset category are as follows:
2004 2003
------ -----
Equity securities 63.0% 80.5
Debt securities 34.1 16.4
Other 2.9 3.1
----- -----
Total 100.0% 100.0
===== =====
In determining the expected return on plan assets, historical markets are
studied and long-term relationships between equities and fixed income are
preserved consistent with the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. Peer data and
historical returns are also reviewed to check for reasonableness.
Assumed health care cost trends have a significant effect on the amounts
reported for postretirement benefit plans. A one-percentage-point change in
assumed health care cost rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
(Dollars in thousands)
Effect on total of service and interest cost components $ 1,562 (1,489)
Effect on postretirement benefit obligation $ 20,004 (18,775)
The Company expects to contribute approximately $15 million to its
postretirement benefit plan in 2005.
The Company's estimated future projected benefit payments under its
postretirement benefit plan are as follows:
Before Medicare Medicare Net of
Year Subsidy Subsidy Medicare Subsidy
--------- --------------- -------- ----------------
(Dollars in thousands)
2005 $ 15,200 - 15,200
2006 $ 16,900 (800) 16,100
2007 $ 17,900 (800) 17,100
2008 $ 18,700 (900) 17,800
2009 $ 19,600 (1,000) 18,600
2010-2014 $ 99,400 (5,500) 93,900
E-61
(11) RETIREMENT AND SAVINGS PLANS
CenturyTel and certain subsidiaries sponsor defined benefit pension plans
for substantially all employees. CenturyTel also sponsors an Outside Directors'
Retirement Plan and a Supplemental Executive Retirement Plan to provide
directors and officers, respectively, with supplemental retirement, death and
disability benefits. The Company uses a December 31 measurement date for its
plans.
The following is a reconciliation of the beginning and ending balances for
the aggregate benefit obligation and the plan assets for the Company's
retirement and savings plans.
December 31, 2004 2003 2002
---------------------------------------------------- ------------- -------- --------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 390,833 346,256 271,490
Service cost 14,175 12,840 10,353
Interest cost 23,156 23,617 20,053
Plan amendments 428 - -
Acquisitions - - 51,428
Settlements - (9,962) -
Actuarial loss 16,304 46,221 9,231
Benefits paid (26,266) (28,139) (16,299)
------------ ------- -------
Benefit obligation at end of year $ 418,630 390,833 346,256
============ ======= =======
Change in plan assets
Fair value of plan assets at beginning of year $ 348,308 266,420 270,902
Return on plan assets 35,892 52,783 (42,998)
Employer contributions 6,047 50,437 3,387
Acquisitions - 6,807 51,428
Benefits paid (26,266) (28,139) (16,299)
------------ ------- -------
Fair value of plan assets at end of year $ 363,981 348,308 266,420
============ ======= =======
At December 31, 2004 and 2003, the Company's underfunded pension plans
(meaning those with benefit obligations in excess of plan assets) had aggregate
benefit obligations of $172.0 million and $138.4 million, respectively, and
aggregate plan assets of $109.0 million and $84.4 million, respectively.
Net periodic pension expense for 2004, 2003 and 2002 included the
following components:
Year ended December 31, 2004 2003 2002
------------------------------ ---------- -------- --------
(Dollars in thousands)
Service cost $ 14,175 12,840 10,353
Interest cost 23,156 23,617 20,053
Expected return on plan assets (28,195) (22,065) (28,575)
Settlements 1,093 2,233 -
Recognized net losses 5,525 7,214 1,248
Net amortization and deferral 279 397 395
--------- ------- -------
Net periodic pension expense $ 16,033 24,236 3,474
========= ======= =======
E-62
The following table sets forth the combined plans' funded status and
amounts recognized in the Company's consolidated balance sheet at December 31,
2004, 2003 and 2002.
December 31, 2004 2003 2002
------------------------------- ----------- --------- ---------
(Dollars in thousands)
Benefit obligation $ (418,630) (390,833) (346,256)
Fair value of plan assets 363,981 348,308 266,420
Unrecognized transition asset (648) (900) (1,152)
Unamortized prior service cost 3,618 3,721 4,370
Unrecognized net actuarial loss 98,479 98,759 102,664
---------- -------- --------
Prepaid pension cost $ 46,800 59,055 26,046
========== ======== ========
The Company's accumulated benefit obligation as of December 31, 2004 and
2003 was $353.1 million and $329.0 million, respectively.
Amounts recognized on the balance sheet consist of:
December 31, 2004 2003 2002
----------------------------------------------------------- ---------- ------ -------
(Dollars in thousands)
Prepaid pension cost (reflected in Other Assets) $ 46,800 59,055 26,046
Additional minimum pension liability (reflected in Deferred
Credits and Other Liabilities) (18,450) - (56,388)
Intangible asset (reflected in Other Assets) 3,043 - 1,212
Accumulated Other Comprehensive Loss 15,407 - 55,176
---------- ------ -------
$ 46,800 59,055 26,046
========== ====== =======
Assumptions used in accounting for the pension plans as of December 2004
and 2003 were:
2004 2003
---- ----
Determination of benefit obligation
Discount rate 5.75 6.0
Weighted average rate of compensation increase 4.0% 4.0
Determination of benefit cost
Discount rate 6.0% 6.75
Weighted average rate of compensation increase 4.0% 4.50
Expected long-term rate of return on assets 8.25 8.25
The Company employs a total return investment approach whereby a mix of
equities and fixed income investments are used to maximize the long-term return
of plan assets for a prudent level of risk. The intent of this strategy is to
minimize plan expenses by outperforming plan liabilities over the long term.
Risk tolerance is established through careful consideration of plan liabilities,
plan funded status and corporate financial condition. Investment risk is
measured and monitored on an ongoing basis through annual liability
measurements, periodic asset studies and periodic portfolio reviews.
E-63
The Company's pension plans weighted-average asset allocations at December
31, 2004 and 2003 by asset category are as follows:
2004 2003
------ -----
Equity securities 71.7% 54.0
Debt securities 25.5 11.0
Cash and cash equivalents - 32.3
Other 2.8 2.7
----- -----
Total 100.0% 100.0
===== =====
In determining the expected return on plan assets, historical markets are
studied and long-term relationships between equities and fixed income are
preserved consistent with the widely-accepted capital market principle that
assets with higher volatility and risk generate a greater return over the long
term. Current market factors such as inflation and interest rates are evaluated
before long-term capital market assumptions are determined. Peer data and
historical returns are also reviewed to check for reasonableness.
The amount of the 2005 contribution will be determined based on a number
of factors, including the results of the 2005 actuarial valuation report. At
this time, the amount of the 2005 contribution is not known.
The Company's estimated future projected benefit payments under its
defined benefit pension plans are as follows: 2005 - $20.7 million; 2006 - $22.1
million; 2007 - $23.4 million; 2008 - $26.2 million; 2009 - $28.4 million; and
2010-2014 - $176.8 million.
CenturyTel sponsors an Employee Stock Ownership Plan ("ESOP") which covers
most employees with one year of service with the Company and is funded by
Company contributions determined annually by the Board of Directors. The
Company's expense related to the ESOP during 2004, 2003 and 2002 was $8.1
million, $8.9 million, and $9.3 million, respectively. At December 31, 2004, the
ESOP owned an aggregate of 6.8 million shares of CenturyTel common stock.
CenturyTel and certain subsidiaries also sponsor qualified profit sharing
plans pursuant to Section 401(k) of the Internal Revenue Code (the "401(k)
Plans") which are available to substantially all employees of the Company. The
Company's matching contributions to the 401(k) Plans were $9.1 million in 2004,
$8.2 million in 2003 and $6.7 million in 2002.
E-64
(12) INCOME TAXES
Income tax expense from continuing operations included in the Consolidated
Statements of Income for the years ended December 31, 2004, 2003 and 2002 was as
follows:
Year ended December 31, 2004 2003 2002
----------------------- --------- ------- -------
(Dollars in thousands)
Federal
Current $ 121,374 58,659 22,987
Deferred 59,973 118,600 80,056
State
Current 14,380 (113) 11,406
Deferred 14,401 10,106 (8,944)
--------- ------- -------
$ 210,128 187,252 105,505
========= ======= =======
Income tax expense for 2003 was reduced by $21.6 million primarily as a
result of reducing the valuation allowance related to net state operating loss
carryforwards as it was more likely than not that future taxable income will be
sufficient to enable the Company to utilize this portion of the operating loss
carryforwards.
Income tax expense from continuing operations was allocated as follows:
Year ended December 31, 2004 2003 2002
----------------------------------------------------------- ---------- ------- -------
(Dollars in thousands)
Income tax expense in the consolidated statements of income $ 210,128 187,252 105,505
Stockholders' equity:
Compensation expense for tax purposes in excess of
amounts recognized for financial reporting purposes (3,244) (4,385) (7,471)
Tax effect of the change in accumulated other
comprehensive income (loss) (5,195) 19,763 (19,763)
The following is a reconciliation from the statutory federal income tax
rate to the Company's effective income tax rate from continuing operations:
Year ended December 31, 2004 2003 2002
----------------------------------------------------- ----- ---- -----
(Percentage of pre-tax income)
Statutory federal income tax rate 35.0% 35.0 35.0
State income taxes, net of federal income tax benefit 3.4 1.2 .5
Amortization of investment tax credits - - (.1)
Amortization of regulatory liability - (.1) (.3)
Other, net - (.9) .2
---- ---- ----
Effective income tax rate 38.4% 35.2 35.3
==== ==== ====
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2004 and 2003 were as follows:
E-65
December 31, 2004 2003
---------------------------------------------------- ------------ --------
(Dollars in thousands)
Deferred tax assets
Postretirement benefit costs $ 72,353 59,215
Regulatory support 12,509 12,464
Net state operating loss carryforwards 48,735 41,358
Other employee benefits 19,096 10,160
Other 31,593 24,819
------------ --------
Gross deferred tax assets 184,286 148,016
Less valuation allowance (27,112) (19,735)
------------ --------
Net deferred tax assets 157,174 128,281
------------ --------
Deferred tax liabilities
Property, plant and equipment, primarily due to
depreciation differences (340,175) (291,482)
Goodwill (394,832) (350,812)
Deferred debt costs (2,275) (2,470)
Intercompany profits (3,301) (3,485)
Other (18,348) (8,583)
------------ --------
Gross deferred tax liabilities (758,931) (656,832)
------------ --------
Net deferred tax liability $ (601,757) (528,551)
============ ========
The Company establishes valuation allowances when necessary to reduce the
deferred tax assets to amounts expected to be realized. As of December 31, 2004,
the Company had available tax benefits associated with net state operating loss
carryforwards, which expire through 2024, of $48.7 million. The ultimate
realization of the benefits of the carryforwards is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. The Company considers its scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. As a result of such assessment, $27.1
million was reserved through the valuation allowance as of December 31, 2004 as
it is likely that this amount of net operating loss carryforwards will not be
utilized prior to expiration.
(13) EARNINGS PER SHARE
In the fourth quarter of 2004, the Company adopted Emerging Issues Task
Force No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings Per Share" ("EITF 04-8"). EITF 04-8 requires contingently convertible
instruments be included in the diluted earnings per share calculation. The
Company's $165 million Series K senior notes (issued in the third quarter of
2002) are convertible into common stock under various contingent circumstances,
including the common stock attaining a specified trading price in excess of the
notes' fixed conversion price. Beginning in the fourth quarter of 2004, the
Company's diluted earnings per
E-66
share and diluted shares outstanding reflect the application of EITF 04-8. Prior
periods have been restated to reflect this change in accounting.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
Year ended December 31, 2004 2003 2002
---------------------------------------------------- ------------ ------- -------
(Dollars, except per share
amounts, and shares in thousands)
Income (Numerator):
Income from continuing operations $ 337,244 344,707 193,533
Discontinued operations, net of tax - - 608,091
------------ ------- -------
Net income 337,244 344,707 801,624
Dividends applicable to preferred stock (399) (399) (399)
------------ ------- -------
Net income applicable to common stock for computing
basic earnings per share 336,845 344,308 801,225
Interest on convertible debentures, net of tax 4,829 5,079 1,845
Dividends applicable to preferred stock 399 399 399
------------ ------- -------
Net income as adjusted for purposes of computing
diluted earnings per share $ 342,073 349,786 803,469
============ ======= =======
Shares (Denominator):
Weighted average number of shares outstanding
during period 137,225 143,673 141,796
Employee Stock Ownership Plan shares not committed
to be released (10) (90) (183)
------------ ------- -------
Weighted average number of shares outstanding during
period for computing basic earnings per share 137,215 143,583 141,613
Incremental common shares attributable to
dilutive securities:
Shares issuable under convertible securities 4,514 4,514 1,964
Shares issuable under outstanding stock options 415 682 831
------------ ------- -------
Number of shares as adjusted for purposes of
computing diluted earnings per share 142,144 148,779 144,408
============ ======= =======
Basic earnings per share
From continuing operations $ 2.45 2.40 1.36
From discontinued operations $ - - 4.29
Basic earnings per share $ 2.45 2.40 5.66
Diluted earnings per share
From continuing operations $ 2.41 2.35 1.35
From discontinued operations $ - - 4.21
Diluted earnings per share $ 2.41 2.35 5.56
The weighted average number of options to purchase shares of common stock
that were excluded from the computation of diluted earnings per share because
the exercise price of the option was greater than the average market price of
the common stock was 2.4 million for 2004, 2.6 million for 2003 and 3.3 million
for 2002.
E-67
(14) STOCK OPTION PROGRAMS
CenturyTel currently maintains programs which allow the Board of
Directors, through the Compensation Committee, to grant (i) incentives to
certain employees in any one or a combination of several forms, including
incentive and non-qualified stock options; stock appreciation rights; restricted
stock; and performance shares and (ii) stock options to outside directors. As of
December 31, 2004, CenturyTel had reserved 9.7 million shares of common stock
which may be issued under CenturyTel's current incentive compensation programs.
Under the Company's programs, options have been granted to employees and
directors at a price either equal to or exceeding the then-current market price.
All of the options expire ten years after the date of grant and the vesting
period ranges from immediate to three years.
Stock option transactions during 2004, 2003 and 2002 were as follows:
Number Average
of options price
---------- ---------
Outstanding December 31, 2001 6,367,520 $ 23.51
Exercised (1,366,560) 13.97
Granted 1,983,150 32.28
Forfeited (88,308) 28.59
----------
Outstanding December 31, 2002 6,895,802 27.95
Exercised (1,059,414) 22.30
Granted 1,720,317 27.36
Forfeited (822,133) 33.34
----------
Outstanding December 31, 2003 6,734,572 28.14
Exercised (827,486) 22.96
Granted 952,975 28.22
Forfeited (146,503) 27.90
Outstanding December 31, 2004 6,713,558 28.79
==========
Exercisable December 31, 2004 4,686,177 28.71
==========
Exercisable December 31, 2003 3,807,355 27.21
==========
E-68
The following tables summarize certain information about CenturyTel's
stock options at December 31, 2004.
Options outstanding
--------------------------------------------------------------------------------
Weighted average
Range of remaining contractual Weighted average
exercise prices Number of options life outstanding exercise price
--------------- ----------------- --------------------- ----------------
$ 13.33-17.64 605,300 1.7 $14.51
24.36-29.88 3,563,019 7.3 27.68
30.00-39.00 2,523,274 6.1 33.64
45.54-46.19 21,965 4.2 45.62
---------
13.33-46.19 6,713,558 6.3 28.79
=========
Options exercisable
---------------------------------------------------------
Range of Number of Weighted average
exercise prices options exercisable exercise price
--------------- ------------------- ------------------
$ 13.33-17.64 605,300 $14.51
24.36-29.88 2,055,911 27.75
30.00-39.00 2,003,001 33.80
45.54-46.19 21,965 45.62
---------
13.33-46.19 4,686,177 28.71
=========
(15) SUPPLEMENTAL CASH FLOW DISCLOSURES
The amount of interest actually paid by the Company, net of amounts
capitalized of $762,000, $488,000 and $1.2 million during 2004, 2003 and 2002,
respectively, was $207.2 million, $221.1 million and $210.9 million during 2004,
2003 and 2002, respectively. Income taxes paid were $129.9 million in 2004,
$91.6 million in 2003 and $325.5 million in 2002. Income tax refunds totaled
$8.9 million in 2004, $85.7 million in 2003 and $2.7 million in 2002.
The Company has consummated the acquisitions of various operations, along
with certain other assets, during the three years ended December 31, 2004. In
connection with these acquisitions, the following assets were acquired and
liabilities assumed:
Year ended December 31, 2004 2003 2002
--------------------------------------- ---------- ------ ---------
(Dollars in thousands)
Property, plant and equipment, net $ - 46,390 866,575
Goodwill 5,274 21,743 1,335,157
Deferred credits and other liabilities (3,381) 21,754 (56,897)
Other assets and liabilities, excluding
cash and cash equivalents 107 (3,644) 100,191
---------- ------ ---------
Decrease in cash due to acquisitions $ 2,000 86,243 2,245,026
========== ====== =========
E-69
The Company has disposed of various operations reflected within continuing
operations, along with certain other assets, during the three years ended
December 31, 2004. In connection with these dispositions, the following assets
were sold, liabilities eliminated, assets received and gain recognized:
Year ended December 31, 2004 2003 2002
------------------------------------------------ --------- ---- ------
(Dollars in thousands)
Other assets and liabilities, excluding cash and
cash equivalents $ - - (435)
Gain on sale of assets - - (3,709)
--------- ---- ------
Increase in cash due to dispositions $ - - (4,144)
========= ==== ======
For information on the Company's discontinued operations, see Note 3.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of certain of the Company's financial instruments at December 31, 2004
and 2003.
Carrying Fair
Amount value
------------- -------------
(Dollars in thousands)
December 31, 2004
Financial assets
Other $ 96,808 96,808 (2)
Financial liabilities
Long-term debt (including current maturities) $ 3,011,636 3,132,041 (1)
Interest rate swaps $ 6,283 6,283 (2)
Other $ 50,860 50,860 (2)
------------- ---------
December 31, 2003
Financial assets
Other $ 82,258 82,258 (2)
Financial liabilities
Long-term debt (including current maturities) $ 3,181,755 3,440,279 (1)
Interest rate swaps $ 11,693 11,693 (2)
Other $ 44,612 44,612 (2)
------------- ---------
(1) Fair value was estimated by discounting the scheduled payment streams to
present value based upon rates currently available to the Company for
similar debt.
(2) Fair value was estimated by the Company to approximate carrying value.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates the fair value due to the
short maturity of these instruments and have not been reflected in the above
table.
E-70
(17) BUSINESS SEGMENTS
The Company is an integrated communications company engaged primarily in
providing an array of communications services to its customers, including local
exchange, long distance, Internet access and broadband services. The Company
strives to maintain its customer relationships by, among other things, bundling
its service offerings to provide its customers with a complete offering of
integrated communications services. Effective in the first quarter of 2004, as a
result of the Company's increased focus on integrated bundle offerings and the
varied discount structures associated with such offerings, the Company
determined that its results of operations would be more appropriately reported
as a single reportable segment under the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." Therefore, the results of operations for 2004 reflect the
presentation of a single reportable segment. Results of operations for 2003 and
2002 have been conformed to the Company's 2004 presentation of a single
reportable segment.
The Company's operating revenues for its products and services include the
following components:
Year ended December 31, 2004 2003 2002
------------------------ ----------- --------- ---------
(Dollars in thousands)
Local service $ 716,028 712,565 570,871
Network access 966,011 1,001,462 884,982
Long distance 186,997 173,884 146,536
Data 275,777 244,998 179,695
Fiber transport and CLEC 74,409 43,041 21,666
Other 188,150 191,660 168,246
----------- --------- ---------
Total operating revenues $ 2,407,372 2,367,610 1,971,996
=========== ========= =========
For a description of each of the sources of revenues, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Operating Revenues."
Interexchange carriers and other accounts receivable on the balance sheets
are primarily amounts due from various long distance carriers, principally AT&T,
and several large local exchange operating companies.
(18) COMMITMENTS AND CONTINGENCIES
Construction expenditures and investments in vehicles, buildings and
equipment during 2005 are estimated to be $400 million.
E-71
In Barbrasue Beattie and James Sovis, on behalf of themselves and all
others similarly situated, v. CenturyTel, Inc., filed on October 29, 2002 in the
United States District Court for the Eastern District of Michigan (Case No.
02-10277), the plaintiffs allege that the Company unjustly and unreasonably
billed customers for inside wire maintenance services, and seek unspecified
money damages and injunctive relief under various legal theories on behalf of a
purported class of over two million customers in the Company's telephone
markets. The Court has not yet ruled on the plaintiffs' certification motion,
and has not yet set a date to resolve this issue. Given the current status of
this case, the Company cannot estimate the potential impact, if any, that this
case will have on its results of operations.
The Telecommunications Act of 1996 allows local exchange carriers to file
access tariffs on a streamlined basis and, if certain criteria are met, deems
those tariffs lawful. Tariffs that have been "deemed lawful" in effect nullify
an interexchange carrier's ability to seek refunds should the earnings from the
tariffs ultimately result in earnings above the authorized rate of return
prescribed by the FCC. Certain of the Company's telephone subsidiaries file
interstate tariffs directly with the FCC using this streamlined filing approach.
As of December 31, 2004, the amount of the Company's earnings in excess of the
authorized rate of return reflected as a liability on the balance sheet for the
combined 2001/2002 and 2003/2004 monitoring periods aggregated approximately $63
million. The settlement period related to (i) the 2001/2002 monitoring period
lapses on September 30, 2005 and (ii) the 2003/2004 monitoring period lapses on
September 30, 2007. The Company will continue to monitor the legal status of any
pending or future proceedings that could impact its entitlement to these funds,
and may recognize as revenue some or all of the over-earnings at the end of the
settlement period or as the legal status becomes more certain.
From time to time, the Company is involved in other proceedings incidental
to its business, including administrative hearings of state public utility
commissions relating primarily to rate making, actions relating to employee
claims, occasional grievance hearings before labor regulatory agencies and
miscellaneous third party tort actions. The outcome of these other proceedings
is not predictable. However, the Company does not believe that the ultimate
resolution of these other proceedings, after considering available insurance
coverage, will have a material adverse effect on its financial position, results
of operations or cash flows.
**********
E-72
CENTURYTEL, INC.
Consolidated Quarterly Income Statement Information
(Unaudited)
First Second Third Fourth
quarter quarter quarter quarter
----------- ------- ------- -------
(Dollars in thousands, except per share amounts)
(unaudited)
2004
Operating revenues $ 593,704 603,555 603,879 606,234
Operating income $ 183,557 189,911 190,869 189,616
Net income $ 83,279 83,284 86,192 84,489
Basic earnings per share $ .58 .60 .64 .63
Diluted earnings per share $ .57 .59 .63 .62
2003
Operating revenues $ 578,014 586,729 600,264 602,603
Operating income $ 184,773 188,381 190,781 186,461
Net income $ 83,919 87,367 90,979 82,442
Basic earnings per share $ .59 .61 .63 .57
Diluted earnings per share $ .58 .60 .62 .56
2002
Operating revenues $ 422,918 438,702 524,497 585,879
Operating income $ 119,049 109,531 157,716 189,110
Income from continuing operations $ 43,117 41,482 64,589 44,345
Net income $ 70,767 78,763 607,749 44,345
Basic earnings per share from continuing operations $ .30 .29 .46 .31
Basic earnings per share $ .50 .56 4.29 .31
Diluted earnings per share from continuing operations $ .30 .29 .45 .31
Diluted earnings per share $ .50 .55 4.20 .31
Diluted earnings per share for all periods has been restated to reflect
the application of EITF 04-8. See Note 13 for additional information.
Diluted earnings per share for the fourth quarter of 2003 included a $.06
per share charge related to operating taxes, net of related revenue effect, and
interest associated with various operating tax audits.
Diluted earnings per share for the third quarter of 2002 included $3.67
per share related to the gain on the sale of substantially all of the Company's
wireless operations, net of amounts written off for costs expended related to
the wireless portion of the new billing system currently in development. Diluted
earnings per share for the fourth quarter of 2002 was negatively impacted by
$.26 per share related to the redemption premium on the Company Series I
remarketable notes that were redeemed in October 2002.
On July 1 and August 31, 2002, the Company acquired nearly 650,000
telephone access lines and related assets from Verizon. See Note 2 for
additional information.
**********
E-73
(CENTURYTEL LOGO)
[ ] Mark this box with an X if you have made
changes to your name or address details above.
================================================================================
ANNUAL MEETING PROXY CARD
================================================================================
A TO ELECT FOUR CLASS II DIRECTORS
1. The Board of Directors recommends a vote FOR the listed nominees.
------------------------------------------
For Withhold KEY FOR EXPLANATION OF VOTING RIGHTS
--- --------
01 - Virginia Boulet [ ] [ ]
02 - Calvin Czeschin [ ] [ ]
03 - James B. Gardner [ ] [ ]
04 - Gregory J. McCray [ ] [ ] ------------------------------------------
B ISSUES
For Against Abstain
2. To ratify the selection of KPMG LLP as the [ ] [ ] [ ]
Company's independent auditor for 2005.
For Against Abstain
3. Approval of the 2005 Management Incentive [ ] [ ] [ ]
Compensation Plan.
For Against Abstain
4. Approval of the 2005 Directors Stock Plan. [ ] [ ] [ ]
For Against Abstain
5. Approval of the 2005 Executive Officer [ ] [ ] [ ]
Short-Term Incentive Program.
6. In their discretion to vote upon such
other business as may properly come before
the Meeting.
C AUTHORIZED SIGNATURES - SIGN HERE - THIS SECTION MUST BE COMPLETED FOR YOUR
INSTRUCTIONS TO BE EXECUTED.
Please sign exactly as name appears on the certificate or certificates
representing shares to be voted by this proxy. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons.
Signature 1 - Please keep signature within the box Signature 2 - Please keep signature within the box Date(mm/dd/yyyy)
-------------------------------------------------- -------------------------------------------------- --------------------
================================================================================
PROXY - CENTURYTEL, INC.
================================================================================
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Glen F. Post, III or Stacey W.
Goff, or either of them, proxies for the undersigned, with full power of
substitution, to represent the undersigned and to cast the number of votes
attributable to all of the shares of common stock and voting preferred stock
(collectively, the "Voting Shares") of CenturyTel, Inc. (the "Company") that the
undersigned is entitled to vote at the annual meeting of shareholders of the
Company to be held on May 12, 2005, and at any and all adjournments thereof (the
"Meeting").
The Board of Directors recommends that you vote FOR the nominees and the
proposals listed on the reverse side hereof. In addition to serving as a Proxy,
this card will also serve as instructions to Computershare Investor Services,
LLC (the "Agent") to cast in the manner designated on the reverse side hereof
the number of votes allocable to the undersigned, if any, that are attributable
to shares of the Company's common stock held as of March 22, 2005 in the name of
the Agent and credited to any plan account of the undersigned in accordance with
the Company's dividend reinvestment plan or employee stock purchase plans. Upon
timely receipt of this Proxy, properly executed, all of the votes attributable
to your Voting Shares, including any held in the name of the Agent, will be
voted as specified. If this Proxy is properly executed but no specific
directions are given, all of your votes will be voted for the nominees and the
proposal.
(Please See Reverse Side)
INTERNET AND TELEPHONE VOTING INSTRUCTIONS
YOU CAN VOTE BY TELEPHONE OR INTERNET! AVAILABLE 24 HOURS A DAY 7 DAYS A WEEK!
Instead of mailing your proxy, you may choose one of the two voting methods
outlined below to vote your proxy.
TO VOTE USING THE TELEPHONE (WITHIN U.S. AND CANADA) TO VOTE USING THE INTERNET
o Call toll free 1-XXX-XXX-XXXX in the United States or Canada any time on o Go to the following web site:
a touch tone telephone. There is NO CHARGE to you for the call. WWW.COMPUTERSHARE.COM/US/PROXY
o Follow the simple instructions provided by the recorded message. o Enter the information requested on your computer
screen and follow the simple instructions.
IF YOU VOTE BY TELEPHONE OR THE INTERNET, PLEASE DO NOT MAIL BACK THIS
PROXY CARD. Proxies submitted by telephone or the Internet must be received by
1:00 a.m., Central Time, on XXXXX XX, 200X. THANK YOU FOR VOTING