UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-7784
CENTURYTEL, INC.
(Exact name of registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Century Park Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (318) 388-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of July 31, 2000, there were 140,548,972 shares of common stock
outstanding.
<PAGE>
CenturyTel, Inc.
TABLE OF CONTENTS
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income--Three Months and
Six Months Ended June 30, 2000 and 1999 3
Consolidated Statements of Comprehensive Income --
Three Months and Six Months Ended June 30, 2000 and 1999 4
Consolidated Balance Sheets--June 30, 2000 and
December 31, 1999 5
Consolidated Statements of Stockholders' Equity--
Six Months Ended June 30, 2000 and 1999 6
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-24
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Part II. Other Information:
Item 4. Submission of Matters To a Vote of Security Holders 25-26
Item 6. Exhibits and Reports on Form 8-K 26
Signature 26
<PAGE>
PART I. FINANCIAL INFORMATION
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares expressed in thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Telephone $ 276,088 274,897 553,014 563,170
Wireless 111,142 110,032 211,546 208,593
Other 35,926 31,821 71,552 59,243
-----------------------------------------------------------------------------------------------
Total operating revenues 423,156 416,750 836,112 831,006
-----------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating
expenses 212,495 200,113 429,218 393,765
Depreciation and amortization 85,769 86,012 170,580 175,993
-----------------------------------------------------------------------------------------------
Total operating expenses 298,264 286,125 599,798 569,758
----------------------------------------------------------------------------------------------
OPERATING INCOME 124,892 130,625 236,314 261,248
-----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (35,267) (37,487) (71,309) (79,728)
Income from unconsolidated
cellular entities 9,475 9,267 8,016 16,112
Minority interest (2,871) (18,790) (5,163) (22,100)
Gain on sale of assets - 39,601 9,910 49,959
Other income and expense 2,384 3,434 6,613 5,614
-----------------------------------------------------------------------------------------------
Total other income (expense) (26,279) (3,975) (51,933) (30,143)
-----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 98,613 126,650 184,381 231,105
Income tax expense 40,768 73,188 77,252 116,538
-----------------------------------------------------------------------------------------------
NET INCOME $ 57,845 53,462 107,129 114,567
===============================================================================================
BASIC EARNINGS PER SHARE $ .41 .38 .76 .83
===============================================================================================
DILUTED EARNINGS PER SHARE $ .41 .38 .76 .81
===============================================================================================
DIVIDENDS PER COMMON SHARE $ .0475 .045 .095 .09
===============================================================================================
AVERAGE BASIC SHARES
OUTSTANDING 139,995 138,852 139,874 138,455
===============================================================================================
AVERAGE DILUTED SHARES
OUTSTANDING 141,732 141,461 141,729 141,245
===============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 57,845 53,462 107,129 114,567
-----------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses)
arising during period, net of
$1,072, $1,313, ($2,693) and
$2,430 tax 1,990 2,439 (5,003) 4,512
Reclassification adjustment for
gains included in net income,
net of $-, $-, $- and $3,625 tax - - - (6,733)
-----------------------------------------------------------------------------------------------
Other comprehensive income,
net of $1,072, $1,313,
($2,693), and ($1,195) tax 1,990 2,439 (5,003) (2,221)
-----------------------------------------------------------------------------------------------
Comprehensive income $ 59,835 55,901 102,126 112,346
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 49,685 56,640
Accounts receivable, less allowance of
$5,132 and $4,150 207,733 193,057
Materials and supplies, at average cost 24,699 28,769
Other 10,484 7,607
------------------------------------------------------------------------------------------------
Total current assets 292,601 286,073
------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,235,891 2,256,458
------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired, less accumulated
amortization of $184,626 and $165,327 1,621,491 1,644,884
Other 571,884 517,992
------------------------------------------------------------------------------------------------
Total investments and other assets 2,193,375 2,162,876
------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,721,867 4,705,407
================================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 75,022 62,098
Accounts payable 110,186 78,450
Accrued expenses and other liabilities
Salaries and benefits 33,202 34,570
Taxes 29,063 40,999
Interest 37,595 37,232
Other 17,409 22,172
Advance billings and customer deposits 34,235 33,656
------------------------------------------------------------------------------------------------
Total current liabilities 336,712 309,177
------------------------------------------------------------------------------------------------
LONG-TERM DEBT 1,953,844 2,078,311
------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 483,760 469,927
------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000
shares, issued and outstanding 140,539,960 and
139,945,920 shares 140,540 139,946
Paid-in capital 502,971 493,432
Unrealized holding gain on investments, net of taxes 59,359 64,362
Retained earnings 1,240,706 1,146,967
Unearned ESOP shares (4,000) (4,690)
Preferred stock - non-redeemable 7,975 7,975
------------------------------------------------------------------------------------------------
Total stockholders' equity 1,947,551 1,847,992
------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 4,721,867 4,705,407
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six months
<TABLE>
<CAPTION>
ended June 30,
------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
COMMON STOCK
Balance at beginning of period $ 139,946 138,083
Conversion of convertible securities into common stock 254 254
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 340 1,026
------------------------------------------------------------------------------------------------
Balance at end of period 140,540 139,363
------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 493,432 451,535
Conversion of convertible securities into common stock 3,046 3,046
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 5,840 11,475
Amortization of unearned compensation and other 653 1,505
------------------------------------------------------------------------------------------------
Balance at end of period 502,971 467,561
------------------------------------------------------------------------------------------------
UNREALIZED HOLDING GAIN ON INVESTMENTS, NET OF TAXES
Balance at beginning of period 64,362 7,217
Change in unrealized holding gain on investments,
net of reclassification adjustment (5,003) (2,221)
------------------------------------------------------------------------------------------------
Balance at end of period 59,359 4,996
------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 1,146,967 932,611
Net income 107,129 114,567
Cash dividends declared
Common stock-$.095 and $.09 per share, respectively (13,190) (12,469)
Preferred stock (200) (204)
------------------------------------------------------------------------------------------------
Balance at end of period 1,240,706 1,034,505
------------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (4,690) (6,070)
Release of ESOP shares 690 690
------------------------------------------------------------------------------------------------
Balance at end of period (4,000) (5,380)
------------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 7,975 8,106
------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,947,551 1,649,151
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
Six months
ended June 30,
------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 107,129 114,567
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 170,580 175,993
Deferred income taxes 5,471 4,345
Income from unconsolidated cellular entities (8,016) (16,112)
Minority interest 5,163 22,100
Gain on sale of assets (9,910) (49,959)
Changes in current assets and current liabilities:
Accounts receivable (14,699) (16,392)
Accounts payable 31,716 8,927
Accrued taxes (11,927) 30,701
Other current assets and other current
liabilities, net (2,932) 14,118
Increase in other non-current assets (32,485) (23,016)
Change in other non-current liabilities 6,347 (586)
Other, net 11,396 10,073
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 257,833 274,759
------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (139,407) (149,128)
Purchase of minority investment in other entities (33,153) -
Proceeds from sales of assets 15,849 465,784
Distributions from unconsolidated cellular entities 12,413 10,109
Acquisitions, net of cash acquired - (17,614)
Purchase of life insurance investment (3,303) (4,405)
Other, net (1,996) 1,511
------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (149,597) 306,257
------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 3,111 7,954
Payments of long-term debt (110,664) (501,087)
Proceeds from issuance of common stock 5,220 11,947
Cash dividends (13,390) (12,673)
Other, net 532 994
------------------------------------------------------------------------------------------------
Net cash used in financing activities (115,191) (492,865)
------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,955) 88,151
Cash and cash equivalents at beginning of period 56,640 5,742
------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 49,685 93,893
================================================================================================
Supplemental cash flow information:
Income taxes paid $ 85,624 79,497
Interest paid (net of capitalized interest of $1,698
and $1,339) $ 69,248 79,220
------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(1) Basis of Financial Reporting
The consolidated financial statements of CenturyTel, Inc. and its
subsidiaries (the "Company") include the accounts of CenturyTel, Inc.
("CenturyTel") and its majority-owned subsidiaries and partnerships. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission; however, the Company believes the disclosures which are
made are adequate to make the information presented not misleading. The
consolidated financial statements and footnotes included in this Form 10-Q
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1999. Certain 1999 amounts have been reclassified to be
consistent with the Company's 2000 presentation, including the reclassification
of the Company's personal communication services operations from other
operations to the wireless segment and the reclassification of the Company's
Internet operations from the telephone segment to other operations.
The unaudited financial information for the three months and six months
ended June 30, 2000 and 1999 has not been audited by independent public
accountants; however, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
results of operations for the three-month and six-month periods have been
included therein. The results of operations for the first six months of the year
are not necessarily indicative of the results of operations which might be
expected for the entire year.
(2) Net Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Telephone, at original cost $ 3,510,277 3,439,469
Accumulated depreciation (1,718,670) (1,605,553)
--------------------------------------------------------------------------------
1,791,607 1,833,916
--------------------------------------------------------------------------------
Wireless, at cost 479,469 472,725
Accumulated depreciation (237,892) (217,056)
--------------------------------------------------------------------------------
241,577 255,669
--------------------------------------------------------------------------------
Other, at cost 328,961 281,713
Accumulated depreciation (126,254) (114,840)
--------------------------------------------------------------------------------
202,707 166,873
--------------------------------------------------------------------------------
$ 2,235,891 2,256,458
================================================================================
</TABLE>
(3) Income from Unconsolidated Cellular Entities
The following summarizes the unaudited combined results of operations of
the cellular entities in which the Company's investments (as of June 30, 2000
and 1999) were accounted for by the equity method.
<PAGE>
<TABLE>
<CAPTION>
Six months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Results of operations
Revenues $ 747,131 642,489
Operating income $ 241,507 195,574
Net income $ 234,853 194,937
--------------------------------------------------------------------------------
</TABLE>
(4) Sales of Assets
In the first quarter of 2000 the Company recorded a pre-tax gain
aggregating $9.9 million ($5.2 million after-tax; $.04 per diluted share) due to
the sale of the assets of its remaining Alaska cellular operations.
In the first quarter of 1999 the Company recorded a pre-tax gain
aggregating $10.4 million ($6.7 million after-tax; $.04 per diluted share) due
to the sale of its remaining common shares of MCIWorldCom, Inc.
In May 1999, the Company sold the stock of substantially all of its
Alaska-based operations in exchange for approximately $300 million in after-tax
cash. No gain or loss was recorded upon the disposition of these properties.
In June 1999, the Company sold the assets of its cellular operations in
Brownsville and McAllen, Texas for approximately $96 million cash. In connection
therewith, the Company recorded a pre-tax gain of approximately $39.6 million,
and an after-tax loss of approximately $7.8 million (($.05) per diluted share.)
(5) Recently Completed and Pending Acquisitions
Pursuant to asset purchase agreements dated June 29, 1999 and July 8,
1999, on July 31, 2000, affiliates of CenturyTel acquired certain assets from
affiliates of Verizon Communications (successor to GTE Corporation) ("Verizon")
in two separate transactions in exchange for an aggregate of approximately $1.1
billion cash. Under these transactions (i) the Company purchased approximately
231,000 telephone access lines and related local exchange assets comprising 106
exchanges throughout Arkansas for approximately $824 million cash and (ii)
Spectra Communications Group, LLC ("Spectra") purchased approximately 127,000
telephone access lines and related local exchange assets comprising 107
exchanges throughout Missouri for approximately $290 million cash. The Company
owns 57.1% of Spectra, which was organized to acquire and operate these Missouri
properties. At closing, the Company made a preferred equity investment in
Spectra of approximately $55 million and financed substantially all of the
remainder of the purchase price. To finance these acquisitions on a short-term
basis, the Company borrowed $1.1 billion under new and existing senior unsecured
credit facilities.
In August 1999, the Company acquired an 89% interest in a newly-organized
joint venture company which has entered into a definitive asset purchase
agreement with a Verizon affiliate to purchase telephone access lines (which
numbered approximately 61,700 as of December 31, 1999) and related local
exchange assets in Wisconsin for approximately $170 million cash, subject to
certain adjustments. The Company has agreed to make an equity investment in the
newly organized company of approximately $37.8 million and it is anticipated
that the Company will loan the new entity approximately $130 million. In October
1999, the Company also entered into a definitive asset purchase agreement to
purchase additional telephone access lines (which numbered approximately 68,200
as of December 31, 1999) and related local exchange assets in Wisconsin from a
Verizon affiliate for approximately $195 million cash, subject to certain
adjustments. The Wisconsin transactions are expected to close September 30,
2000, pending regulatory approvals and certain other closing conditions.
(6) Business Segments
The Company has two separately reportable business segments:telephone and
wireless. The operating income of these segments is reviewed by the Company's
chief operating decision maker to assess performance and make business
decisions. Other operations include but are not limited to the Company's
non-regulated long distance operations, Internet operations, call center
operations and security monitoring operations.
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating revenues
Telephone segment $ 276,088 274,897 553,014 563,170
Wireless segment 111,142 110,032 211,546 208,593
Other operations 35,926 31,821 71,552 59,243
-----------------------------------------------------------------------------------------------
Total operating revenues $ 423,156 416,750 836,112 831,006
===============================================================================================
Operating income
Telephone segment $ 82,849 83,994 167,346 178,667
Wireless segment 32,812 41,439 52,703 71,092
Other operations 9,231 5,192 16,265 11,489
-----------------------------------------------------------------------------------------------
Total operating income $ 124,892 130,625 236,314 261,248
===============================================================================================
Operating income $ 124,892 130,625 236,314 261,248
Interest expense (35,267) (37,487) (71,309) (79,728)
Income from unconsolidated
cellular entities 9,475 9,267 8,016 16,112
Minority interest (2,871) (18,790) (5,163) (22,100)
Gain on sale of assets - 39,601 9,910 49,959
Other income and expense 2,384 3,434 6,613 5,614
-----------------------------------------------------------------------------------------------
Income before income tax expense $ 98,613 126,650 184,381 231,105
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Assets
Telephone segment $ 3,198,947 3,246,290
Wireless segment 1,195,295 1,184,129
Other operations 327,625 274,988
--------------------------------------------------------------------------------
Total assets $ 4,721,867 4,705,407
================================================================================
</TABLE>
<PAGE>
CenturyTel, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") included herein should be read in conjunction with MD&A and
the other information included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. The results of operations for the three months
and six months ended June 30, 2000 are not necessarily indicative of the results
of operations which might be expected for the entire year.
CenturyTel, Inc. and its subsidiaries (the "Company") is a regional
diversified communications company that is primarily engaged in providing local
telephone services and wireless telephone communications services. At June 30,
2000, the Company's local exchange telephone subsidiaries operated nearly 1.3
million telephone access lines primarily in rural, suburban and small urban
areas in 20 states, and the Company's majority-owned and operated wireless
entities had more than 749,000 subscribers. On May 14, 1999, the Company sold
substantially all of its Alaska-based operations serving approximately 134,900
telephone access lines and 3,000 cellular subscribers. On June 1, 1999, the
Company sold the assets of its Brownsville and McAllen, Texas cellular
operations serving approximately 7,500 cellular subscribers. In February 2000,
the Company sold the assets of its remaining Alaskan cellular operations serving
approximately 10,600 cellular subscribers. The operations of these disposed
properties are included in the Company's results of operations up to the
respective dates of disposition.
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. Such forward-looking statements are subject to uncertainties
that could cause the Company's actual results to differ materially from such
statements. Such uncertainties include but are not limited to: the effects of
ongoing deregulation in the telecommunications industry; the Company's ability
to timely consummate its pending acquisitions and effectively manage its growth,
including obtaining adequate financing on attractive terms, integrating
newly-acquired properties into the Company's operations, hiring adequate numbers
of qualified staff and successfully upgrading its billing and other information
systems; the risks inherent in rapid technological change; the effects of
greater than anticipated competition in the Company's markets; possible changes
in the demand for the Company's products and services; the Company's ability to
successfully introduce new product or service offerings on a timely and
cost-effective basis; and the effects of more general factors such as changes in
general market or economic conditions or in legislation, regulation or public
policy. These and other uncertainties related to the business are described in
greater detail in Item 1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999. You are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to update any of its forward-looking statements
for any reason.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared
to Three Months Ended June 30, 1999
Net income (excluding after-tax effect of sale of assets) for the second
quarter of 2000 was $57.8 million compared to $61.2 million during the second
quarter of 1999. Diluted earnings per share (excluding after-tax effect of sale
of assets) decreased to $.41 during the three months ended June 30, 2000 from
$.43 during the three months ended June 30, 1999, a 4.7% decrease.
<PAGE>
<TABLE>
<CAPTION>
Three months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
<S> <C> <C>
Operating income
Telephone $ 82,849 83,994
Wireless 32,812 41,439
Other 9,231 5,192
--------------------------------------------------------------------------------
124,892 130,625
Interest expense (35,267) (37,487)
Income from unconsolidated cellular entities 9,475 9,267
Minority interest (2,871) (18,790)
Gain on sale of assets - 39,601
Other income and expense 2,384 3,434
Income tax expense (40,768) (73,188)
--------------------------------------------------------------------------------
Net income $ 57,845 53,462
================================================================================
Basic earnings per share $ .41 .38
================================================================================
Diluted earnings per share $ .41 .38
================================================================================
Average basic shares outstanding 139,995 138,852
================================================================================
Average diluted shares outstanding 141,732 141,461
================================================================================
</TABLE>
Contributions to operating revenues and operating income by the Company's
telephone, wireless, and other operations for the three months ended June 30,
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues
Telephone operations 65.2% 66.0
Wireless operations 26.3% 26.4
Other operations 8.5% 7.6
Operating income
Telephone operations 66.3% 64.3
Wireless operations 26.3% 31.7
Other operations 7.4% 4.0
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Telephone Operations
Three months
ended June 30,
---------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Local service $ 90,527 89,452
Network access 160,933 155,789
Other 24,628 29,656
--------------------------------------------------------------------------------
276,088 274,897
--------------------------------------------------------------------------------
Operating expenses
Plant operations 59,763 60,213
Customer operations 25,509 23,284
Corporate and other 40,336 38,878
Depreciation and amortization 67,631 68,528
--------------------------------------------------------------------------------
193,239 190,903
--------------------------------------------------------------------------------
Operating income $ 82,849 83,994
================================================================================
</TABLE>
Telephone operating income decreased $1.1 million (1.4%) due to an
increase in operating revenues of $1.2 million (.4%), which was more than offset
by an increase in operating expenses of $2.3 million (1.2%).
The $1.2 million increase in operating revenues was partially due to a
$4.4 million increase in local service revenues primarily due to an increase in
the number of customer access lines in incumbent markets; a $7.7 million net
increase due to the partial recovery of increased operating costs through
revenue sharing arrangements with other telephone companies, increased minutes
of use, increased recovery from state support funds and return on rate base; a
$4.0 million increase in amounts received from the federal Universal Service
Fund; and a $1.4 million increase due to the increased provision of custom
calling features. Such increases were substantially offset by a $14.4 million
decrease attributable to the 1999 sale of the Company's Alaska based operations,
which contributed revenues to the Company for a portion of the second quarter of
1999 and a $2.4 million decrease in revenues related to leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring. Annualized internal access line growth during the second
quarter of 2000 and 1999 was 4.3% and 5.1%, respectively.
During the second quarter of 2000, the Company incurred aggregate
operating expenses of approximately $9.5 million associated with pending Verizon
acquisitions, two of which were closed on July 31, 2000 and the remaining two of
which are expected to be closed September 30, 2000. These expenses consisted of
(i) approximately $3.5 million of variable overhead costs that were
intentionally not eliminated subsequent to the disposition of the Alaska
properties due to the pending Verizon acquisitions and (ii) approximately $6.0
million of expenses associated with readying the Company's systems and staff to
integrate the Verizon operations into the Company's operations immediately upon
closing each transaction. The Company expects that its aggregate third quarter
2000 operating expenses associated with pending Verizon transactions will be
less than the expenses incurred during the first or second quarter.
Plant operations expenses decreased $450,000 (.7%), of which $4.2 million
was attributable to the 1999 sale of the Alaska properties. The remaining $3.8
million increase was primarily due to a $900,000 increase in salaries and
benefits (excluding information technology charges); a $1.1 million increase in
information technology expenses primarily due to increases in contract labor;
and a $1.9 million increase in access expenses primarily due to changes in
revenue settlement methods of certain telephone subsidiaries in a limited number
of states.
During the second quarter of 2000, customer operations expenses increased
$2.2 million (9.6%) primarily due to a $900,000 increase in information
technology expenses primarily due to increases in contract labor and a $1.9
million increase in salaries and benefits. Such increases were partially offset
by a $1.5 million decrease attributable to the 1999 sale of the Alaska
properties.
Corporate and other expenses increased $1.5 million (3.8%) primarily due
to a $7.1 million increase in expenses associated with pending Verizon
acquisitions; a $1.5 million increase in the provision for doubtful accounts;
and a $900,000 increase in expenses related to implementing new accounting
information systems. Such increases were partially offset by a $2.6 million
decrease due to the 1999 sale of the Alaska properties; a $2.2 million decrease
in operating taxes; a $1.6 million decrease in expenses associated with readying
the Company's systems to be year 2000 compliant; and a $1.8 million decrease in
information technology expenses.
Depreciation and amortization decreased $897,000 (1.3%), of which $3.3
million was attributable to the 1999 sale of the Alaska properties. The
remaining $2.4 million increase was primarily due to higher levels of plant in
service.
Wireless Operations and Income From Unconsolidated Cellular Entities
<TABLE>
<CAPTION>
Three months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating income - wireless operations $ 32,812 41,439
Minority interest, exclusive of the
effect of asset sales in 1999 (2,842) (3,864)
Income from unconsolidated cellular entities 9,475 9,267
--------------------------------------------------------------------------------
$ 39,445 46,842
================================================================================
</TABLE>
The Company's wireless operations (discussed below) reflect 100% of the
results of operations of the wireless entities in which the Company has a
majority ownership interest. The minority interest owners' share of the income
of such entities is reflected in the Company's Consolidated Statements of Income
as an expense in "Minority interest." See Minority Interest for additional
information. The Company's share of earnings from the cellular entities in which
it has less than a majority interest is accounted for using the equity method
and is reflected in the Company's Consolidated Statements of Income as "Income
from unconsolidated cellular entities."
Wireless Operations
<TABLE>
<CAPTION>
Three months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Service revenues $ 107,351 107,495
Equipment sales 3,791 2,537
--------------------------------------------------------------------------------
111,142 110,032
--------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 6,356 5,263
System operations 16,380 14,894
General, administrative and customer service 19,421 18,656
Sales and marketing 19,431 13,423
Depreciation and amortization 16,742 16,357
--------------------------------------------------------------------------------
78,330 68,593
--------------------------------------------------------------------------------
Operating income $ 32,812 41,439
================================================================================
</TABLE>
Wireless operating income decreased $8.6 million (20.8%) to $32.8 million
in the second quarter of 2000 from $41.4 million in the second quarter of 1999.
Wireless operating revenues increased $1.1 million (1.0%) while operating
expenses increased $9.7 million (14.2%).
The $144,000 decrease in service revenues was primarily due to (i) a $4.1
million decrease due to the sale of the Company's Texas and Alaska cellular
properties and (ii) a $3.9 million decrease in roaming revenues due to a
reduction in roaming rates (which was partially offset by an increase in roaming
minutes of use), a downward trend that the Company anticipates will continue in
the near future. These decreases were largely offset by a $7.9 million increase
in local service revenues due to a growth in number of customers and increased
minutes of use, (both of which were partially offset by reduced rates).
The following table illustrates the growth in the Company's wireless
customer base in its majority-owned markets:
<TABLE>
<CAPTION>
Three months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Customers at beginning of period 727,507 638,992
Gross units added internally 78,667 45,949
Disconnects 56,774 33,623
Net units added internally 21,893 12,326
Net effect of property dispositions - (10,563)
Customers at end of period 749,400 640,755
Average monthly postpaid churn rate 1.7% 1.8
--------------------------------------------------------------------------------
</TABLE>
The average monthly service revenue per customer declined to $48 during
the second quarter of 2000 from $56 during the second quarter of 1999 due to
price reductions and the continued trend that a higher percentage of new
subscribers tend to be lower usage customers. The average monthly service
revenue per customer may further decline (i) as market penetration increases and
additional lower usage customers are activated; (ii) as the Company continues to
receive pressure from other cellular operators to reduce roaming rates and (iii)
as competitive pressures from current and future wireless communications
providers intensify. The Company is responding to such competitive pressures by,
among other things, modifying certain of its price plans and implementing
certain other plans and promotions, most of which are likely to result in lower
average revenue per customer.
Cost of equipment sold increased $1.1 million (20.8%) substantially due to
an increase in units sold.
System operations expenses increased $1.5 million (10.0%) primarily due to
a $900,000 increase associated with operating a greater number of cell sites and
an $800,000 increase in the net amounts paid to other carriers for cellular
service provided to the Company's customers who roam in the other carriers'
service areas primarily due to an increase in minutes of use.
Sales and marketing expenses increased $6.0 million (44.8%) primarily due
to a $2.2 million increase in sales commissions paid to agents due to an
increase in the number of units sold; a $2.0 million increase in costs incurred
in selling products and services in retail locations primarily due to an
increase in the number of retail locations; and a $1.0 million increase in
advertising expenses.
<PAGE>
Other Operations
<TABLE>
<CAPTION>
Three months
ended June 30,
-----------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Long distance $ 25,099 19,411
Internet 5,272 4,216
Call center 1,102 3,103
Other 4,453 5,091
-----------------------------------------------------------------------------
35,926 31,821
-----------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 25,299 25,502
Depreciation and amortization 1,396 1,127
-----------------------------------------------------------------------------
26,695 26,629
-----------------------------------------------------------------------------
Operating income $ 9,231 5,192
=============================================================================
</TABLE>
Other operations include the results of operations of the Company which
are not included in the telephone or wireless segments, including, but not
limited to, the Company's non-regulated long distance operations, Internet
operations, call center operations and security monitoring operations. The $5.7
million increase in long distance revenues was primarily attributable to the
growth in the number of customers and increased minutes of use per customer. The
number of long distance customers as of June 30, 2000 and 1999 was 326,400 and
259,800, respectively. Internet revenues increased $1.1 million due primarily to
a $1.9 million increase due to growth in the number of customers, which was
partially offset by an $800,000 decrease due to the 1999 sale of the Company's
Alaska Internet operations. The $2.0 million decrease in call center revenues
was due to the planned phase-out of the Company's third party call center
operations during 2000.
Cost of sales and operating expenses decreased $203,000 in second quarter
of 2000 compared to second quarter 1999. Cost of sales and operating expenses
increased $4.3 million in the Company's long distance and Internet operations
due to the increase in the number of customers. Such increase was more than
offset by (i) a $1.2 million decrease in expenses due to the 1999 sale of the
Company's Alaska Internet operations;(ii) a $1.7 million reduction in expenses
due to the winding down of the Company's call center operations and (iii) a $1.9
million favorable non-recurring rate adjustment in the second quarter of 2000 in
the Company's long distance operations.
The Company anticipates that the growth of operating income for its other
operations will slow in future periods as it incurs increasingly larger expenses
in connection with expanding its emerging fiber network and competitive local
exchange carrier businesses.
Interest Expense
Interest expense decreased $2.2 million in the second quarter of 2000
compared to the second quarter of 1999 primarily due to a reduction in
outstanding indebtedness which was partially offset by increased borrowing
rates.
Minority Interest
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings or loss of the Company's
majority-owned and operated cellular entities and majority-owned subsidiaries.
Minority interest decreased $15.9 million during the second quarter of 2000
primarily due to the expense recorded in the second quarter of 1999 related to
the minority partners' share of the gain on sale of assets of the Brownsville
and McAllen, Texas cellular properties. Excluding the effect of this gain,
minority interest decreased $1.0 million due to the decreased profitability of
the Company's majority-owned and operated cellular entities.
<PAGE>
Gain on Sale of Assets
In the second quarter of 1999, the Company recorded a pre-tax gain of
approximately $39.6 million as a result of the sale of the assets of the
Brownsville and McAllen, Texas cellular properties. See Note 4 of Notes to
Consolidated Financial Statements and Minority Interest for additional
information.
Other Income and Expense
Other income and expense decreased $1.1 million in the second quarter of
2000 compared to the second quarter of 1999, substantially all of which relates
to favorable non-recurring items recorded in 1999.
Income Tax Expense
Income tax expense decreased $32.4 million in the second quarter of 2000
compared to the second quarter of 1999 primarily due to the income tax expense
recorded in the second quarter of 1999 associated with the sale of the assets of
the Brownsville and McAllen, Texas cellular properties. Exclusive of the effects
of income tax expense on asset sales, the effective income tax rate was 41.3%
and 40.0% in the three months ended June 30, 2000 and 1999, respectively.
Six Months Ended June 30, 2000 Compared
to Six Months Ended June 30, 1999
Net income (excluding after-tax effect of sale of assets and certain first
quarter 2000 non-recurring charges) for the first six months of 2000 was $105.7
million compared to $115.6 million during the first six months of 1999. Diluted
earnings per share (excluding after-tax effect of sale of assets and certain
first quarter 2000 non-recurring charges) decreased to $.75 during the six
months ended June 30, 2000 from $.82 during the six months ended June 30, 1999,
an 8.5% decrease. Substantially all of the non-recurring charges in the first
six months of 2000 relate to the Company's proportionate share ($5.3 million) of
non-cash charges that were recorded by two cellular entities in which the
Company owns a minority interest and is reflected in "Income from unconsolidated
cellular entities."
<TABLE>
<CAPTION>
Six months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars, except per
share amounts,and
shares in thousands)
<S> <C> <C>
Operating income
Telephone $ 167,346 178,667
Wireless 52,703 71,092
Other 16,265 11,489
---------------------------------------------------------------------------------
236,314 261,248
Interest expense (71,309) (79,728)
Income from unconsolidated cellular entities 8,016 16,112
Minority interest (5,163) (22,100)
Gain on sale of assets 9,910 49,959
Other income and expense 6,613 5,614
Income tax expense (77,252) (116,538)
----------------------------------------------------------------------------------
Net income $ 107,129 114,567
=================================================================================
Basic earnings per share $ .76 .83
=================================================================================
Diluted earnings per share $ .76 .81
=================================================================================
Average basic shares outstanding 139,874 138,455
=================================================================================
Average diluted shares outstanding 141,729 141,245
=================================================================================
</TABLE>
Contributions to operating revenues and operating income by the Company's
telephone, wireless, and other operations for the six months ended June 30, 2000
and 1999 were as follows:
<TABLE>
<CAPTION>
Six months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues
Telephone operations 66.1% 67.8
Wireless operations 25.3% 25.1
Other operations 8.6% 7.1
Operating income
Telephone operations 70.8% 68.4
Wireless operations 22.3% 27.2
Other operations 6.9% 4.4
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Telephone Operations
Six months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Local service $ 178,592 180,109
Network access 323,186 322,944
Other 51,236 60,117
--------------------------------------------------------------------------------
553,014 563,170
--------------------------------------------------------------------------------
Operating expenses
Plant operations 122,539 124,150
Customer operations 48,270 44,641
Corporate and other 79,868 75,757
Depreciation and amortization 134,991 139,955
--------------------------------------------------------------------------------
385,668 384,503
--------------------------------------------------------------------------------
Operating income $ 167,346 178,667
================================================================================
</TABLE>
Telephone operating income decreased $11.3 million (6.3%) due to a
decrease in operating revenues of $10.2 million (1.8%) and an increase in
operating expenses of $1.2 million (.3%).
Of the $10.2 million decrease in operating revenues, $44.2 million was
attributable to the May 1999 sale of the Company's Alaska based operations. The
remaining $34.0 million increase in revenues was partially due to a $15.2
million net increase due to the partial recovery of increased operating costs
through revenue sharing arrangements with other telephone companies, increased
minutes of use, increased recovery from state support funds and return on rate
base; a $10.1 million increase in local service revenues primarily due to an
increase in the number of customer access lines in incumbent markets; an $8.1
million increase in amounts received from the federal Universal Service Fund;
and a $2.8 million increase due to the increased provision of custom calling
features. Annualized internal access line growth during the first six months of
2000 and 1999 was 3.6% and 5.3%, respectively.
During the first six months of 2000, the Company incurred aggregate
operating expenses of approximately $15.5 million associated with pending
Verizon acquisitions, two of which were closed on July 31, 2000 and the
remaining two of which are expected to be closed September 30, 2000. These
expenses consisted of (i) approximately $7.0 million of variable overhead costs
that were intentionally not eliminated subsequent to the disposition of the
Alaska properties due to the pending Verizon acquisitions and (ii) approximately
$8.5 million of expenses associated with readying the Company's systems and
staff to integrate the Verizon operations into the Company's operations
immediately upon closing each transaction. The Company expects that its
aggregate third quarter 2000 operating expenses associated with pending Verizon
transactions will be less than the expenses incurred during the first or second
quarter.
Plant operations expenses decreased $1.6 million (1.3%), of which $13.0
million was attributable to the 1999 sale of the Alaska properties. The
remaining $11.4 million increase was primarily due to a $4.2 million increase in
salaries and benefits (excluding information technology charges); a $2.4 million
increase in network operations expenses; a $1.5 million increase in information
technology expenses primarily due to increases in contract labor; and a $3.2
million increase in access expenses primarily due to changes in revenue
settlement methods of certain telephone subsidiaries in a limited number of
states.
During the first six months of 2000, customer operations expenses
increased $3.6 million (8.1%) primarily due to a $3.0 million increase in
information technology expenses primarily due to increases in contract labor; a
$2.6 million increase in salaries and benefits; and a $1.8 million increase in
marketing and customer service expenses. Such increases were partially offset by
a $4.2 million decrease attributable to the 1999 sale of the Alaska properties.
Corporate and other expenses increased $4.1 million (5.4%) primarily due
to an $11.6 million increase in expenses associated with pending Verizon
acquisitions; a $2.1 million increase in the provision for doubtful accounts and
a $1.9 million increase in expenses related to implementing new accounting
information systems. Such increases were partially offset by a $7.2 million
decrease due to the 1999 sale of the Alaska properties; a $3.9 million decrease
in operating taxes; and a $1.4 million decrease in expenses associated with
readying the Company's systems to be year 2000 compliant.
Depreciation and amortization decreased $5.0 million, of which $10.5
million was attributable to the sale of the Alaska properties. The remaining
$5.5 million increase was primarily due to higher levels of plant in service.
Wireless Operations and Income From Unconsolidated Cellular Entities
<TABLE>
<CAPTION>
Six months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating income - wireless operations $ 52,703 71,092
Minority interest, exclusive of the effect
of asset sales in 1999 (5,126) (7,162)
Income from unconsolidated cellular entities 8,016 16,112
--------------------------------------------------------------------------------
$ 55,593 80,042
================================================================================
</TABLE>
The Company's wireless operations (discussed below) reflect 100% of the
results of operations of the wireless entities in which the Company has a
majority ownership interest. The minority interest owners' share of the income
of such entities is reflected in the Company's Consolidated Statements of Income
as an expense in "Minority interest." See Minority Interest for additional
information. The Company's share of earnings from the cellular entities in which
it has less than a majority interest is accounted for using the equity method
and is reflected in the Company's Consolidated Statements of Income as "Income
from unconsolidated cellular entities." See Income from Unconsolidated Cellular
Entities for additional information.
<PAGE>
Wireless Operations
<TABLE>
<CAPTION>
Six months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Service revenues $ 203,974 203,555
Equipment sales 7,572 5,038
--------------------------------------------------------------------------------
211,546 208,593
--------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 14,536 9,648
System operations 32,033 28,530
General, administrative and customer service 37,627 37,985
Sales and marketing 41,556 27,542
Depreciation and amortization 33,091 33,796
--------------------------------------------------------------------------------
158,843 137,501
--------------------------------------------------------------------------------
Operating income $ 52,703 71,092
================================================================================
</TABLE>
Wireless operating income decreased $18.4 million (25.9%) to $52.7 million
in the first six months of 2000 from $71.1 million in the first six months of
1999. Wireless operating revenues increased $3.0 million (1.4%), while operating
expenses increased $21.3 million (15.5%).
The $419,000 increase in service revenues was primarily due to a $13.9
million increase in local service revenues due to growth in the number of
customers and increased minutes of use per customer, both of which were
partially offset by reduced rates. Such increase was substantially offset by (i)
a $9.7 million decrease due to the sale of the Company's Texas and Alaska
cellular properties and (ii) a $3.8 million decrease in roaming revenue due to a
reduction in roaming rates (which was partially offset by an increase in roaming
minutes of use), a downward trend that the Company anticipates will continue in
the near future.
The following table illustrates the growth in the Company's wireless
customer base in its majority-owned markets:
<TABLE>
<CAPTION>
Six months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Customers at beginning of period 707,486 624,119
Gross units added internally 171,668 98,931
Disconnects 119,101 71,732
Net units added internally 52,567 27,199
Net effect of dispositions (10,653) (10,563)
Customers at end of period 749,400 640,755
Average monthly postpaid churn rate 1.9% 2.0
--------------------------------------------------------------------------------
</TABLE>
The average monthly service revenue per customer declined to $47 during
the first six months of 2000 from $53 during the first six months of 1999 due to
price reductions and the continued trend that a higher percentage of new
subscribers tend to be lower usage customers. The average monthly service
revenue per customer may further decline (i) as market penetration increases and
additional lower usage customers are activated; (ii) as the Company continues to
receive pressure from other cellular operators to reduce roaming rates and (iii)
as competitive pressures from current and future wireless communications
providers intensify. The Company is responding to such competitive pressures by,
among other things, modifying certain of its price plans and implementing
certain other plans and promotions, most of which are likely to result in lower
average revenue per customer.
Cost of equipment sold increased $4.9 million (50.7%) substantially due to
an increase in units sold.
System operations expenses increased $3.5 million (12.3%) in the first six
months of 2000 primarily due to a $4.6 million increase associated with
operating a greater number of cell sites. Such increase was partially offset by
a $1.7 million decrease due to the sale of the Company's Texas and Alaska
cellular properties.
Sales and marketing expenses increased $14.0 million (50.9%) due primarily
to a $6.5 million increase in advertising and sales promotions expenses
associated with the introduction of new rate plans during the first six months
of 2000; a $4.1 million increase in sales commissions paid to agents due to an
increase in the number of units sold; and a $2.6 million increase in costs
incurred in selling products and services in retail locations primarily due to
an increase in the number of retail locations.
Other Operations
<TABLE>
<CAPTION>
Six months
ended June 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Long distance $ 49,926 36,441
Internet 10,285 8,904
Call center 3,192 5,547
Other 8,149 8,351
--------------------------------------------------------------------------------
71,552 59,243
--------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 52,789 45,512
Depreciation and amortization 2,498 2,242
--------------------------------------------------------------------------------
55,287 47,754
--------------------------------------------------------------------------------
Operating income $ 16,265 11,489
================================================================================
</TABLE>
Other operations include the results of operations of the Company which
are not included in the telephone or wireless segments, including, but not
limited to, the Company's non-regulated long distance operations, Internet
operations, call center operations and security monitoring operations. The $13.5
million increase in long distance revenues was attributable to the growth in the
number of customers and increased minutes of use per customer. Internet revenues
increased $1.4 million due primarily to a $3.7 million increase due to growth in
number of customers, which was partially offset by a $2.3 million decrease due
to the sale of the Company's Alaska Internet operations. The $2.4 million
decrease in call center revenues was due to the planned phase-out of the
Company's third party call center operations during 2000.
Operating expenses increased $7.5 million primarily due to an increase of
$7.4 million in expenses of the Company's long distance operations due primarily
to an increase in customers and a $3.2 million increase in expenses related to
the provision of Internet access. Such increases were partially offset by a $2.6
million decrease due to the 1999 sale of the Company's Alaska Internet
operations.
The Company anticipates that the growth of operating income for its other
operations will slow in future periods as it incurs increasingly larger expenses
in connection with expanding its emerging fiber network and competitive local
exchange carrier businesses.
Interest Expense
Interest expense decreased $8.4 million in the first six months of 2000
compared to the first six months of 1999 primarily due to a reduction in
outstanding indebtedness which was partially offset by increased borrowing
rates.
<PAGE>
Income from Unconsolidated Cellular Entities
Earnings from unconsolidated cellular entities, net of the amortization of
associated goodwill, decreased $8.1 million in the first six months of 2000
primarily due to the Company's proportionate share ($5.3 million) of non-cash
charges that were recorded in the first quarter of 2000 by two cellular entities
in which the Company owns a minority interest. The remaining decrease was
primarily due to decreased earnings of certain cellular entities in which the
Company owns a minority interest.
Minority Interest
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings or loss of the Company's
majority-owned and operated cellular entities and majority-owned subsidiaries.
Minority interest decreased $16.9 million primarily due to the expense recorded
in 1999 related to the minority partners' share of the gain on sale of assets of
the Brownsville and McAllen, Texas cellular properties recorded in the first six
months of 1999. Excluding the effect of this gain, minority interest decreased
$2.0 million due to the decreased profitability of the Company's majority-owned
and operated cellular entities.
Gain on Sale of Assets
In the first six months of 2000, the Company recorded a pre-tax gain of
approximately $9.9 million ($5.2 million after-tax; $.04 per diluted share) due
to the sale of its remaining Alaska cellular operations.
In the first six months of 1999, the Company recorded pre-tax gains
aggregating $50.0 million. Approximately $10.4 million of the pre-tax gains
($6.7 million after-tax; $.04 per diluted share) was due to the sale of the
Company's remaining common shares of MCIWorldCom, Inc. The remaining $39.6
million of the pre-tax gains ($7.8 million loss after-tax; ($.05) per diluted
share) was due to the sale of the Company's Brownsville and McAllen, Texas
cellular properties. See Note 4 of Notes to Consolidated Financial Statements
for additional information and Minority Interest.
Income Tax Expense
Income tax expense decreased $39.3 million in the first six months of 2000
compared to the first six months of 1999 primarily due to the income tax expense
recorded in the first six months of 1999 associated with the sale of the assets
of the Brownsville and McAllen, Texas cellular properties. Exclusive of the
effects of income tax expense on asset sales, the effective income tax rate was
41.6% and 41.0% in the six months ended June 30, 2000 and 1999, respectively.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to provide a substantial portion of 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.
Net cash provided by operating activities was $257.8 million during the
first six months of 2000 compared to $274.8 million during the first six months
of 1999. The Company's accompanying consolidated statements of cash flows
identify major differences between net income and net cash provided by operating
activities for each of these periods. For additional information relating to the
telephone operations, wireless operations, and other operations of the Company,
see Results of Operations.
Net cash used in investing activities was $149.6 million for the six months
ended June 30, 2000. Net cash provided by investing activities was $306.3
million for the six months ended June 30, 1999. Proceeds from the sales of
assets were $15.8 million in the first six months of 2000 compared to $465.8
million in the first six months of 1999. Payments for property, plant and
equipment were $9.7 million less in the first six months of 2000 than in the
comparable period during 1999. Capital expenditures for the six months ended
June 30, 2000 were $75.4 million for telephone operations, $14.7 million for
wireless operations and $49.3 million for other operations.
Net cash used in financing activities was $115.2 million during the first
six months of 2000 compared to $492.9 million during the first six months of
1999. Net payments of long-term debt were $385.6 million less during the first
six months of 2000 compared to the first six months of 1999, primarily due to
utilization of proceeds received from the sales of assets during 1999.
Budgeted capital expenditures for 2000 total $250 million for telephone
operations, $100 million for wireless operations and $95 million for other
operations.
On July 31, 2000, affiliates of CenturyTel acquired certain assets from
affiliates of Verizon in two separate transactions in exchange for an aggregate
of approximately $1.1 billion cash. Under these transactions (i) the Company
purchased approximately 231,000 telephone access lines and related local
exchange assets comprising 106 exchanges throughout Arkansas for approximately
$824 million cash and (ii) Spectra Communications Group, LLC ("Spectra")
purchased approximately 127,000 telephone access lines and related local
exchange assets comprising 107 exchanges throughout Missouri for approximately
$290 million cash. The Company owns 57.1% of Spectra, which was organized to
acquire and operate these Missouri properties. At closing, the Company made a
preferred equity investment in Spectra of approximately $55 million and financed
substantially all of the remainder of the purchase price.
To finance these acquisitions on a short-term basis, the Company borrowed
$800 million on a floating-rate basis under a $1.5 billion Revolving Credit
Facility Agreement dated July 31, 2000 with Bank of America, N.A., Citibank,
N.A., Banc of America Securities LLC and Salomon Smith Barney, Inc., and
borrowed $300 million on a floating-rate basis under its existing senior
unsecured credit facility with Bank of America, N.A. Depending upon market
conditions and other factors, the Company expects to ultimately finance these
transactions, along with two other pending acquisitions of local exchange assets
in Wisconsin, by either issuing commercial paper, long-term debt, equity or
equity-linked securities, by selling or monetizing non-core assets or by some
combination thereof.
Following completion of these transactions on July 31, 2000, the Company
had $705 million of undrawn committed bank lines of credit and CenturyTel's
telephone subsidiaries had available for use $129.5 million of commitments for
long-term financing from the Rural Utilities Service.
In August 1999, the Company acquired an 89% interest in a newly-organized
joint venture company which has entered into a definitive asset purchase
agreement to purchase telephone access lines (which numbered approximately
61,700 as of December 31, 1999) and related local exchange assets in Wisconsin
from a Verizon affiliate for approximately $170 million cash, subject to certain
adjustments. At closing the Company has agreed to make an equity investment in
the newly organized company of approximately $37.8 million and it is anticipated
that the Company will loan the new entity approximately $130 million. In October
1999, the Company also entered into a definitive asset purchase agreement to
purchase additional telephone access lines (which numbered approximately 68,200
as of December 31, 1999) and related local exchange assets in Wisconsin from a
Verizon affiliate for approximately $195 million cash, subject to certain
adjustments. The Wisconsin transactions are expected to close September 30,
2000, pending regulatory approvals and certain other closing conditions.
Currently, the Company's senior unsecured debt is rated Baa1 by Moody's and
BBB+ by Standard & Poor's. However, as a result of the Company's announcement of
its Verizon acquisitions, in July 1999 Moody's placed its ratings under review
for possible downgrade and Standard & Poor's placed its ratings on CreditWatch
with negative implications. There can be no assurance that the Company will
maintain its investment grade ratings.
OTHER MATTERS
Accounting for the Effects of Regulation
The Company currently accounts for its regulated telephone operations in
accordance with the provisions of Statement of Financial Accounting Standards
No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation."
While the ongoing applicability of SFAS 71 to the Company's telephone operations
is being monitored due to the changing regulatory, competitive and legislative
environments, the Company believes that SFAS 71 still applies. However, it is
possible that changes in regulation or legislation or anticipated changes in
competition or in the demand for regulated services or products could result in
the Company's telephone operations not being subject to SFAS 71 in the near
future. In that event, implementation of Statement of Financial Accounting
Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the
Discontinuance of Application of FASB Statement No. 71," would require the
write-off of previously established regulatory assets and liabilities, along
with an adjustment of certain accumulated depreciation accounts to reflect the
difference between recorded depreciation and the amount of depreciation that
would have been recorded had the Company's telephone operations not been subject
to rate regulation. Such discontinuance of the application of SFAS 71 would
result in a material, noncash charge against earnings which would be reported as
an extraordinary item. While the effect of implementing SFAS 101 cannot be
precisely estimated at this time, management believes that the noncash,
after-tax, extraordinary charge would be between $300 million and $350 million.
<PAGE>
CENTURYTEL, INC.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt obligations since the
majority of the Company's long-term debt obligations are fixed rate. At June 30,
2000, the fair value of the Company's long-term debt was estimated to be $2.0
billion based on the overall weighted average rate of the Company's long-term
debt of 7.1% and an overall weighted maturity of 12 years compared to terms and
rates currently available in long-term financing markets. For purposes hereof,
market risk is estimated as the potential decrease in fair value of the
Company's long-term debt resulting from a hypothetical increase of 71 basis
points in interest rates (which represents ten percent of the Company's overall
weighted average borrowing rate). Such an increase in interest rates would
result in approximately an $83.7 million decrease in fair value of the Company's
long-term debt.
In the first quarter of 2000, the Company entered into interest rate hedge
contracts designed to reduce its interest rate risk with respect to $500 million
of long-term public debt that it ultimately expects to incur in connection with
providing long-term financing for its Verizon acquisitions. See "Liquidity and
Capital Resources" above. It is possible that the Company will enter into
additional interest rate hedges for the same purpose over the next several
months.
PART II. OTHER INFORMATION
CENTURYTEL, INC.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
At the Company's annual meeting of shareholders on May 11, 2000, the
shareholders elected four Class III directors to serve until the 2003 annual
meeting of shareholders and until their successors are duly elected and
qualified and approved the proposals set forth in the Company's proxy statement
dated March 20, 2000.
The following number of votes were cast for or were withheld from the
following nominees:
Class III Nominees For Withheld
--------------------- ------------- ------------
Calvin Czeschin 221,344,846 8,143,254
F. Earl Hogan 220,971,252 8,516,848
Harvey P. Perry 220,895,813 8,592,287
Jim D. Reppond 221,332,298 8,155,802
The Class I and Class II directors whose terms continued after the
meeting are:
Class I Class II
--------------------- ---------------
William R. Boles, Jr. Virginia Boulet
W. Bruce Hanks Ernest Butler, Jr.
C. G. Melville, Jr. James B. Gardner
Glen F. Post, III R. L. Hargrove, Jr.
Clarke M. Williams Johnny Hebert
The following number of votes were cast in the manner indicated below
with respect to the proposal to approve the Company's 2000 Incentive
Compensation Plan:
For Against Abstain Broker No-Votes
-------------- ------------ -------------- ---------------
206,822,756 20,631,548 2,033,796 -0-
Item 6. Exhibits and Reports on Form 8-K
------- --------------------------------
A. Exhibits
--------
10.1 Form of Change of Control Agreement, dated July 24,
2000, by and between the Registrant and Karen A.
Puckett (incorporated by reference to Exhibit 10.1(c)
of Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 2000).
10.2 Amended and Restated Registrant's 2000 Incentive
Compensation Plan, as amended through May 23, 2000.
11 Computations of Earnings Per Share.
27.1 Financial Data Schedule as of and for the six months
ended June 30, 2000.
B. Reports on Form 8-K
-------------------
(i) The following item was reported in the Form 8-K filed
April 28, 2000:
Item 5. Other events - News release announcing first
quarter results of operations.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CenturyTel, Inc.
Date: August 11, 2000 /s/ Neil A. Sweasy
-----------------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)
