LUMN

Business Context and Reporting Period

Company: CenturyTel, Inc. (Note: The filing identifies the registrant as CenturyTel, Inc., not Lumen Technologies, Inc., which is a later name change).

Reporting Period: Fiscal year ended December 31, 2002.

Business Overview: CenturyTel is a regional integrated communications company primarily providing local exchange telephone services in 22 states, with approximately 2.4 million access lines. The company also offers long distance, Internet access, competitive local exchange, fiber network, and security monitoring services.

Major Transactions:

• Acquisitions: Acquired approximately 650,000 telephone access lines from Verizon in Alabama and Missouri for a total of $2.201 billion in cash during the third quarter of 2002.
• Divestiture: Sold substantially all wireless operations to an affiliate of Alltel Corporation for approximately $1.59 billion in cash on August 1, 2002. These operations are reported as discontinued.

Key Financial Metrics

Note: Net Income for 2002 includes a significant gain from discontinued operations ($611.7 million) related to the sale of wireless assets.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 17.4% to $1.972 billion, driven primarily by the inclusion of Verizon acquisitions in Alabama and Missouri. Telephone operating revenues grew 15.1% to $1.734 billion.
• Profitability: Net income more than doubled to $801.6 million, largely due to the $803.9 million pre-tax gain on the sale of wireless operations. Income from continuing operations increased 31.8% to $189.9 million.
• Debt Levels: Long-term debt increased significantly to $3.58 billion (from $2.09 billion in 2001) to finance the Verizon acquisitions, partially offset by proceeds from the wireless sale and new debt issuances.
• Access Lines: Total access lines grew to 2.41 million (from 1.80 million in 2001). However, internal access lines (excluding acquisitions) declined 1.1% in 2002 due to competition and second-line losses.
• Accounting Changes: The company ceased amortization of goodwill effective January 1, 2002, in accordance with SFAS 142.

Guidance, Outlook, and Risks

Management Outlook:

• 2003 Revenue: Management expects internal telephone revenues (excluding 2002 acquisitions) to decline in 2003 due to continued access line loss and reduced intrastate revenues. However, total consolidated revenues are expected to increase due to demand for long distance, DSL, and other product offerings.
• Access Lines: A decline of 1% to 2% in access lines is expected for 2003.
• Capital Expenditures: Budgeted for 2003 is $370 million for telephone operations and $30 million for other operations.
• Billing System: The new integrated billing system is expected to be completed in early 2004. Amortization and duplicative costs are expected to reduce diluted EPS by $0.04 in 2003.

Key Risks and Contingencies:

• Regulatory Changes: The company faces downward pressure on revenues due to regulatory changes (e.g., FCC access charge rules) and increased competition from wireless and cable providers.
• Debt Servicing: Substantial indebtedness could hinder the ability to adjust to market conditions or access capital markets.
• Technology & Competition: Rapid technological changes and competition from wireless services threaten traditional wireline services.
• System Implementation: Risks associated with the development and implementation of the new billing system, including potential cost overruns or write-offs.
• Legal Proceedings: Ongoing litigation regarding access rates in Arkansas and Wisconsin, and a pending sale of a minority wireless interest to Alltel subject to closing conditions.

Investor Verification Checklist

• Wireless Sale Proceeds: Verify the utilization of the $1.59 billion cash proceeds from the wireless divestiture, specifically regarding debt reduction and funding of the Verizon acquisitions.
• Goodwill Impairment: Review the annual goodwill impairment testing results under SFAS 142, given the significant increase in goodwill to $3.43 billion.
• Access Line Trends: Monitor the rate of internal access line loss (excluding acquisitions) to validate the 1-2% decline forecast for 2003.
• Billing System Costs: Track the total capitalized costs of the new billing system (projected at $180 million) and the timing of amortization impacts on earnings.
• Regulatory Rate Cases: Monitor outcomes of rate proceedings in key states (Arkansas, Wisconsin, Alabama) that could impact intrastate access revenues.
• Debt Covenants: Review compliance with debt covenants, particularly given the high leverage ratio (Debt to Total Capitalization of 54.2% in 2002).