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 September 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 CenturyTel 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 October 31, 2000, there were 140,647,755 shares of common stock
outstanding.
CenturyTel, Inc.
TABLE OF CONTENTS
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income--Three Months and Nine
Months Ended September 30, 2000 and 1999 3
Consolidated Statements of Comprehensive Income--
Three Months and Nine Months Ended September 30, 2000 and 1999 4
Consolidated Balance Sheets--September 30, 2000 and
December 31, 1999 5
Consolidated Statements of Stockholders' Equity--
Nine Months Ended September 30, 2000 and 1999 6
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-26
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Part II. Other Information:
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27-28
Signature 29
PART I. FINANCIAL INFORMATION
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
----------------------------------------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares expressed in thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Telephone $ 324,608 273,644 877,622 836,814
Wireless 120,232 111,652 331,778 320,245
Other 37,794 33,909 109,346 93,152
----------------------------------------------------------------------------------------------------
Total operating revenues 482,634 419,205 1,318,746 1,250,211
----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses 235,835 204,846 665,053 598,611
Depreciation and amortization 99,740 84,300 270,320 260,293
----------------------------------------------------------------------------------------------------
Total operating expenses 335,575 289,146 935,373 858,904
----------------------------------------------------------------------------------------------------
OPERATING INCOME 147,059 130,059 383,373 391,307
----------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (48,904) (34,997) (120,213) (114,725)
Income from unconsolidated
cellular entities 11,366 10,801 19,382 26,913
Minority interest (2,889) (3,460) (8,052) (25,560)
Gain on sale of assets 10,683 1,201 20,593 51,160
Other income and expense (4,065) 1,108 2,548 6,722
----------------------------------------------------------------------------------------------------
Total other income (expense) (33,809) (25,347) (85,742) (55,490)
----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 113,250 104,712 297,631 335,817
Income tax expense 46,026 40,183 123,278 156,721
----------------------------------------------------------------------------------------------------
NET INCOME $ 67,224 64,529 174,353 179,096
====================================================================================================
BASIC EARNINGS PER SHARE $ .48 .46 1.24 1.29
====================================================================================================
DILUTED EARNINGS PER SHARE $ .47 .46 1.23 1.27
====================================================================================================
DIVIDENDS PER COMMON SHARE $ .0475 .045 .1425 .135
====================================================================================================
AVERAGE BASIC SHARES OUTSTANDING 140,220 139,085 139,989 138,668
====================================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 141,848 141,504 141,769 141,331
====================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 67,224 64,529 174,353 179,096
------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising
during period, net of ($15,102), $1,230,
($17,796) and $3,659 tax (28,047) 2,284 (33,050) 6,796
Reclassification adjustment for gains
included in net income, net of $3,625 tax - - - (6,733)
------------------------------------------------------------------------------------------------------
Other comprehensive income, net of ($15,102),
$1,230, ($17,796), and $34 tax (28,047) 2,284 (33,050) 63
------------------------------------------------------------------------------------------------------
Comprehensive income $ 39,177 66,813 141,303 179,159
======================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
CenturyTel, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 71,645 56,640
Accounts receivable, less allowance of $9,256 and $4,150 258,591 193,057
Materials and supplies, at average cost 30,040 28,769
Other 10,703 7,607
------------------------------------------------------------------------------------------------
370,979 286,073
------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,891,787 2,256,458
------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired, less accumulated
amortization of $201,252 and $165,327 2,523,254 1,644,884
Other 524,862 517,992
------------------------------------------------------------------------------------------------
3,048,116 2,162,876
------------------------------------------------------------------------------------------------
$ 6,310,882 4,705,407
------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 76,204 62,098
Notes payable to banks 273,000 -
Accounts payable 129,851 78,450
Accrued expenses and other liabilities
Salaries and benefits 40,521 34,570
Taxes 56,194 40,999
Interest 24,063 37,232
Other 25,599 22,172
Advance billings and customer deposits 40,353 33,656
------------------------------------------------------------------------------------------------
665,785 309,177
------------------------------------------------------------------------------------------------
LONG-TERM DEBT 3,129,988 2,078,311
------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 531,657 469,927
------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, 350,000,000 shares authorized,
140,641,944 and 139,945,920 shares issued and outstanding 140,642 139,946
Paid-in capital 505,999 493,432
Accumulated other comprehensive income-unrealized
holding gain on investments, net of taxes 31,312 64,362
Retained earnings 1,301,274 1,146,967
Unearned ESOP shares (3,750) (4,690)
Preferred stock - non-redeemable 7,975 7,975
-----------------------------------------------------------------------------------------------
1,983,452 1,847,992
-----------------------------------------------------------------------------------------------
$ 6,310,882 4,705,407
===============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months
ended September 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 254 330
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 442 1,259
-------------------------------------------------------------------------------------------
Balance at end of period 140,642 139,672
-------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 493,432 451,535
Conversion of convertible securities into common stock 3,046 2,918
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 8,346 16,192
Amortization of unearned compensation and other 1,175 938
-------------------------------------------------------------------------------------------
Balance at end of period 505,999 471,583
-------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period 64,362 7,217
Change in unrealized holding gain on investments, net of
reclassification adjustment (33,050) 63
-------------------------------------------------------------------------------------------
Balance at end of period 31,312 7,280
-------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 1,146,967 932,611
Net income 174,353 179,096
Cash dividends declared
Common stock - $.1425 and $.135 per share, respectively (19,747) (18,733)
Preferred stock (299) (304)
-------------------------------------------------------------------------------------------
Balance at end of period 1,301,274 1,092,670
-------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (4,690) (6,070)
Release of ESOP shares 940 1,130
-------------------------------------------------------------------------------------------
Balance at end of period (3,750) (4,940)
-------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning of period 7,975 8,106
Conversion of preferred stock into common stock - (131)
-------------------------------------------------------------------------------------------
Balance at end of period 7,975 7,975
-------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,983,452 1,714,240
===========================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months
ended September 30,
-------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 174,353 179,096
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 270,320 260,293
Deferred income taxes 9,857 6,557
Income from unconsolidated cellular entities (19,382) (26,913)
Minority interest 8,052 25,560
Gain on sale of assets (20,593) (51,160)
Changes in current assets and current liabilities
(exclusive of acquisitions and dispositions):
Accounts receivable (33,678) (37,145)
Accounts payable 51,217 17,460
Accrued taxes 15,204 (60,659)
Other current assets and other current
liabilities, net (6,400) (6,953)
Changes in other noncurrent assets (37,182) (26,922)
Changes in other noncurrent liabilities 3,197 (5,941)
Other, net 22,514 17,229
-------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 437,479 290,502
-------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (282,681) (236,998)
Acquisitions, net of cash acquired (1,540,856) (16,771)
Proceeds from sales of assets 29,495 453,916
Distributions from unconsolidated cellular entities 23,115 16,315
Contribution from minority investor 20,000 -
Purchase of life insurance investment, net (4,691) (2,545)
Other, net 2,495 (2,221)
-------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,753,123) 211,696
-------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,240,646 64,551
Payments of long-term debt (171,001) (532,535)
Notes payable 273,000 -
Proceeds from issuance of common stock 7,252 15,055
Cash dividends (20,046) (19,037)
Other, net 798 1,259
-------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,330,649 (470,707)
-------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 15,005 31,491
Cash and cash equivalents at beginning of period 56,640 5,742
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 71,645 37,233
=======================================================================================================
Supplemental cash flow information:
Income taxes paid $ 107,401 223,659
Interest paid (net of capitalized interest of $2,887 and $1,666) $ 130,495 126,750
-------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 Internet operations from the telephone segment to other
operations.
The unaudited financial information for the three months and nine months
ended September 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 nine-month periods have been
included therein. The results of operations for the first nine 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>
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Telephone, at original cost $ 4,901,664 3,439,469
Accumulated depreciation (2,491,524) (1,605,553)
--------------------------------------------------------------------------------
2,410,140 1,833,916
--------------------------------------------------------------------------------
Wireless, at cost 503,215 472,725
Accumulated depreciation (249,813) (217,056)
--------------------------------------------------------------------------------
253,402 255,669
--------------------------------------------------------------------------------
Other operations, at cost 362,057 281,713
Accumulated depreciation (133,812) (114,840)
--------------------------------------------------------------------------------
228,245 166,873
--------------------------------------------------------------------------------
$ 2,891,787 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 September 30,
2000 and 1999) were accounted for by the equity method:
<TABLE>
<CAPTION>
Nine months
ended September 30,
-----------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Results of operations
Revenues $ 907,235 995,973
Operating income $ 264,495 310,332
Net income $ 252,931 309,141
-----------------------------------------------------------------------
</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) due to the sale of its
remaining Alaska cellular operations.
In the third quarter of 2000 the Company recorded a pre-tax gain
aggregating $10.7 million ($6.4 million after-tax) due to the sale of its
minority interest in a cellular partnership.
In the first quarter of 1999 the Company recorded a pre-tax gain
aggregating $10.4 million ($6.7 million after-tax) 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 to Western Wireless Corporation 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.
(5) Recently Completed Acquisitions
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related assets from Verizon
Communications, Inc. (successor to GTE Corporation) ("Verizon") in four separate
transactions for approximately $1.5 billion in cash. The Company has made
preliminary estimates of the fair value and useful lives of Verizon's noncurrent
assets and liabilities. Such estimates are subject to change upon completion of
the purchase price allocation. Under these transactions:
o On July 31, 2000, the Company purchased approximately 231,000 telephone
access lines and related local exchange assets comprising 106 exchanges
throughout Arkansas for approximately $841 million in cash.
o On July 31, 2000, Spectra Communications Group, LLC ("Spectra") purchased
approximately 127,000 telephone access lines and related local exchange
assets comprising 107 exchanges throughout Missouri for approximately
$296 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.
o On September 29, 2000, the Company purchased approximately 70,500
telephone access lines and related local exchange assets comprising 42
exchanges throughout Wisconsin for approximately $194 million in cash.
o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA")
purchased approximately 62,900 telephone access lines and related local
exchange assets comprising 35 exchanges throughout Wisconsin for
approximately $170 million in cash. The Company owns 89% of Telephone
USA, which was organized to acquire and own these Wisconsin properties.
At closing, the Company made an equity investment in TelUSA of
approximately $37.8 million and financed substantially all of the
remainder of the purchase price.
The purchase prices discussed above reflect various post-closing
adjustments made to date. Any remaining adjustments are not expected to be
material.
To finance these acquisitions on a short-term basis, the Company borrowed
$1.157 billion on a floating-rate basis under its new $1.5 billion credit
facility with Bank of America, N.A. and Citibank, N.A., as lenders, and Banc of
America Securities LLC and Salomon Smith Barney Inc., as arrangers, and borrowed
$300 million on a floating-rate basis under its existing credit facility with
Bank of America, N.A.
On October 19, 2000, the Company issued $500 million of 8.375% Senior
Notes, Series H, due 2010, and $400 million of 7.75% Remarketable Senior Notes,
Series I, due 2012 (with a remarketing date of October 15, 2002) under its $2.0
billion shelf registration statement filed in May 2000. The net proceeds of
approximately $908 million were used to repay a portion of the $1.457 billion of
aggregate indebtedness the Company incurred under its credit facilities in
connection with the Verizon acquisitions.
The following pro forma information represents the consolidated results
of operations of the Company as if the Verizon acquisitions had been consummated
as of January 1, 2000 and 1999.
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars, except per share amounts,
in thousands)
<S> <C> <C>
Operating revenues $ 1,527,018 1,504,703
Net income $ 153,215 148,263
Basic earnings per share $ 1.09 1.07
Diluted earnings per share $ 1.08 1.05
</TABLE>
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 of each respective period, nor is it necessarily
indicative of future operating results. The pro forma information does not give
effect to any potential revenue enhancements or cost synergies or other
operating efficiencies that could result from the acquisitions. The actual
results of operations of the Verizon properties are included in the Company's
consolidated financial statements only from the date of acquisition.
(6) Business Segments
The Company has two separately reportable business segments: telephone
and wireless. The operating income of these segments is reviewed by the chief
operating decision maker to assess performance and make business decisions.
Other operations include, but are not limited to, the Company's long distance
operations, Internet operations, call center operations (which ceased operations
in the third quarter of 2000) and security monitoring operations.
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating revenues
Telephone segment $ 324,608 273,644 877,622 836,814
Wireless segment 120,232 111,652 331,778 320,245
Other operations 37,794 33,909 109,346 93,152
------------------------------------------------------------------------------------------------------------
$ 482,634 419,205 1,318,746 1,250,211
============================================================================================================
Operating income
Telephone segment $ 99,753 81,608 267,099 260,275
Wireless segment 39,280 40,705 91,983 111,797
Other operations 8,026 7,746 24,291 19,235
------------------------------------------------------------------------------------------------------------
$ 147,059 130,059 383,373 391,307
============================================================================================================
Operating income $ 147,059 130,059 383,373 391,307
Interest expense (48,904) (34,997) (120,213) (114,725)
Income from unconsolidated cellular entities 11,366 10,801 19,382 26,913
Minority interest (2,889) (3,460) (8,052) (25,560)
Gain on sale of assets 10,683 1,201 20,593 51,160
Other income and expense (4,065) 1,108 2,548 6,722
------------------------------------------------------------------------------------------------------------
Income before income tax expense $ 113,250 104,712 297,631 335,817
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Total assets
Telephone segment $ 4,725,490 3,246,290
Wireless segment 1,205,270 1,184,129
Other operations 380,122 274,988
--------------------------------------------------------------------------------
Total assets $ 6,310,882 4,705,407
================================================================================
</TABLE>
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 nine months ended September 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 September
30, 2000, the Company's local exchange telephone subsidiaries operated over 1.8
million telephone access lines primarily in rural, suburban and small urban
areas in 21 states, and the Company's majority-owned and operated wireless
entities had more than 741,000 subscribers. On July 31, 2000 and September 29,
2000, affiliates of the Company acquired over 490,000 telephone access lines and
related local exchange assets in Arkansas, Missouri and Wisconsin from Verizon
Communications, Inc. ("Verizon") for an aggregate of approximately $1.5 billion
cash. The operations of these acquired properties are included in the Company's
results of operations beginning on the respective dates of acquisition. 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 Company's
ability to effectively manage its growth, including integrating newly-acquired
businesses 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 ongoing changes in
the regulation of the telecommunications industry; the effects of greater than
anticipated competition in the Company's markets; possible changes in the demand
for, or pricing of, 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 September 30, 2000 Compared
to Three Months Ended September 30, 1999
Net income for the third quarter of 2000 was $67.2 million compared to
$64.5 million during the third quarter of 1999. Diluted earnings per share
increased to $.47 during the three months ended September 30, 2000 from $.46
during the three months ended September 30, 1999, a 2.2% increase. Net income
(and diluted earnings per share) excluding the after-tax effect of asset sales
for the third quarter of 2000 and 1999 was $60.8 million ($.43) and $63.8
million ($.45), respectively.
<TABLE>
<CAPTION>
Three months
ended September 30,
------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
<S> <C> <C>
Operating income
Telephone $ 99,753 81,608
Wireless 39,280 40,705
Other 8,026 7,746
------------------------------------------------------------------------------------
147,059 130,059
Interest expense (48,904) (34,997)
Income from unconsolidated cellular entities 11,366 10,801
Minority interest (2,889) (3,460)
Gain on sale of assets 10,683 1,201
Other income and expense (4,065) 1,108
Income tax expense (46,026) (40,183)
------------------------------------------------------------------------------------
Net income $ 67,224 64,529
====================================================================================
Basic earnings per share $ .48 .46
====================================================================================
Diluted earnings per share $ .47 .46
====================================================================================
Average basic shares outstanding 140,220 139,085
====================================================================================
Average diluted shares outstanding 141,848 141,504
====================================================================================
</TABLE>
Contributions to operating revenues and operating income by the Company's
telephone, wireless, and other operations for the three months ended September
30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three months
ended September 30,
------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------
<S> <C> <C>
Operating revenues
Telephone operations 67.3% 65.3
Wireless operations 24.9% 26.6
Other operations 7.8% 8.1
Operating income
Telephone operations 67.8% 62.7
Wireless operations 26.7% 31.3
Other operations 5.5% 6.0
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Telephone Operations
Three months
ended September 30,
------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Local service $ 106,304 86,010
Network access 187,254 159,682
Other 31,050 27,952
------------------------------------------------------------------------------
324,608 273,644
------------------------------------------------------------------------------
Operating expenses
Plant operations 76,086 64,076
Customer operations 28,623 21,398
Corporate and other 37,766 40,548
Depreciation and amortization 82,380 66,014
------------------------------------------------------------------------------
224,855 192,036
------------------------------------------------------------------------------
Operating income $ 99,753 81,608
==============================================================================
</TABLE>
Telephone operating income increased $18.1 million (22.2%) due to an
increase in operating revenues of $51.0 million (18.6%) which was partially
offset by an increase in operating expenses of $32.8 million (17.1%).
Of the $51.0 million increase in operating revenues, $41.0 million was
attributable to the properties acquired from Verizon. The remaining $10.0
million increase in revenues was partially due to a $4.4 million increase in
local network service revenues primarily due to an increase in the number of
customer access lines in incumbent markets; a $4.6 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.
Plant operations expenses increased $12.0 million (18.7%) of which $14.3
million was attributable to the properties acquired from Verizon and $1.2
million was due to an increase in engineering expenses. These increases were
partially offset by a $2.4 million decrease in access expenses primarily due to
non-recurring retroactive changes in revenue settlement methods recorded in 1999
of certain telephone subsidiaries in a limited number of states.
Customer operations expenses increased $7.2 million (33.8%) of which $5.6
million was due to the properties acquired from Verizon. The remaining $1.6
million increase was primarily due to a $1.0 million increase in salaries and
benefits and a $1.1 million increase in information technology expenses.
Corporate and other expenses decreased $2.8 million (6.9%) primarily due
to a $4.0 million decrease in contract labor expenses primarily associated with
costs incurred in 1999 attributable to readying the Company's systems to be year
2000 compliant; a $1.3 million decrease in salaries and benefits; a $1.3 million
decrease in information technology expenses; and a $2.4 million decrease in
operating taxes. Such decreases were partially offset by a $3.0 million increase
due to the properties acquired from Verizon and a $4.4 million increase in the
provision for doubtful accounts.
Depreciation and amortization increased $16.4 million (24.8%) of which
$14.3 million was attributable to the properties acquired from Verizon (which
included $2.8 million of amortization of goodwill). The remainder of the
increase was primarily due to higher levels of plant in service.
Wireless Operations and Income From Unconsolidated Cellular Entities
<TABLE>
<CAPTION>
Three months
ended September 30,
------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating income - wireless operations $ 39,280 40,705
Minority interest (3,657) (3,449)
Income from unconsolidated cellular entities 11,366 10,801
------------------------------------------------------------------------------
$ 46,989 48,057
==============================================================================
</TABLE>
The Company's wireless operations (discussed below) reflect 100% of the
results of operations of the cellular 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." 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.
Wireless Operations
<TABLE>
<CAPTION>
Three months
ended September 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Service revenues $ 116,862 109,318
Equipment sales 3,370 2,334
-------------------------------------------------------------------------------
120,232 111,652
-------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 7,192 4,200
System operations 19,749 13,864
General, administrative and customer service 18,796 22,128
Sales and marketing 19,081 13,588
Depreciation and amortization 16,134 17,167
-------------------------------------------------------------------------------
80,952 70,947
-------------------------------------------------------------------------------
Operating income $ 39,280 40,705
===============================================================================
</TABLE>
Wireless operating income decreased $1.4 million (3.5%) to $39.3 million
in the third quarter of 2000 from $40.7 million in the third quarter of 1999.
Wireless operating revenues increased $8.6 million (7.7%) while operating
expenses increased $10.0 million (14.1%).
The $7.5 million increase in service revenues was primarily due to a $9.3
million increase in local service revenues primarily due to a 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 partially offset by a
$1.7 million decrease due to the Company's sale of its remaining Alaska cellular
properties. The Company's roaming revenues were approximately the same in third
quarter 2000 and third quarter 1999 as revenues generated from increased roaming
minutes of use were completely offset by a reduction in roaming rates, a
downward trend in rates that the Company anticipates will continue in the near
future.
The following table illustrates the Company's wireless customer base in
its majority-owned markets:
<TABLE>
<CAPTION>
Three months
ended September 30,
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
Customers at beginning of period 749,400 641,440
Gross units added internally 75,346 60,513
Disconnects 83,563 51,054
Net units added (disconnected) (8,217) 9,459
Customers at end of period 741,183 650,899
Average monthly churn rate
(excluding prepaid customers) 1.93% 2.05
----------------------------------------------------------------------------
</TABLE>
The average monthly service revenue per customer declined to $52 during
the third quarter of 2000 from $57 during the third quarter of 1999 primarily
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.
During the third quarter of 2000, the Company added approximately 21,900
net contract customers while approximately 30,100 net prepaid customers were
disconnected. The Company will continue to focus on adding contract customers
while decreasing its focus on prepaid plans for future customer growth.
Cost of equipment sold increased $3.0 million (71.2%) substantially due
to an increase in units sold and an increase in average price per unit.
System operations expenses increased $5.9 million (42.4%) in the third
quarter of 2000 primarily due to a $2.3 million increase in toll expenses due to
nonrecurring favorable adjustments recorded in the third quarter of 1999; a $1.7
million increase in the amounts paid to other carriers for service provided to
the Company's customers who roam in the other carriers' service areas and a $1.6
million increase associated with operating a greater number of cell sites.
General, administrative and customer service expenses decreased $3.3
million (15.1%) due to a $1.6 million decrease in allocated general office
expenses and a $900,000 decrease in certain operating taxes.
Sales and marketing expenses increased $5.5 million (40.4%) primarily due
to a $2.3 million increase in sales commissions paid to agents due to an
increase in the number of units sold and an $862,000 increase in sales promotion
expenses.
Depreciation and amortization decreased $1.0 million (6.0%) primarily due
to nonrecurring adjustments in the third quarter of 1999.
Other Operations
<TABLE>
<CAPTION>
Three months
ended September 30,
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Long distance $ 27,075 22,602
Internet 6,138 3,708
Call center 567 3,352
Other 4,014 4,247
----------------------------------------------------------------------------
37,794 33,909
----------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 28,542 25,044
Depreciation and amortization 1,226 1,119
----------------------------------------------------------------------------
29,768 26,163
----------------------------------------------------------------------------
Operating income $ 8,026 7,746
============================================================================
</TABLE>
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or wireless segments, including,
but not limited to, the Company's long distance operations, Internet operations,
call center operations (which ceased operations in the third quarter of 2000)
and security monitoring operations. The $4.5 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 September 30, 2000 and 1999 was 347,200 and 285,500, respectively. Internet
revenues increased $2.4 million due primarily to a $1.4 million increase due to
growth in the number of customers and a $863,000 increase due to Internet
operations acquired subsequent to the third quarter of 1999. The $2.8 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 increased $3.5 million due to a $5.3
million increase in expenses of the Company's long distance and Internet
operations primarily due to the increase in the number of customers. Such
increase was partially offset by a $2.8 million reduction in expenses due to the
winding down of the Company's call center 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 businesses.
Interest Expense
Interest expense increased $13.9 million in the third quarter of 2000
compared to the third quarter of 1999 primarily due to increased debt due to the
Verizon acquisitions. See Note 5 of Notes to Consolidated Financial Statements
for additional information.
Income from Unconsolidated Cellular Entities
Earnings from unconsolidated cellular entities, net of the amortization
of associated goodwill, increased $565,000 (5.2%) due to increased earnings of
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 $571,000 during the third quarter of 2000 compared
to the third quarter of 1999 primarily due to the minority partners' share of
the loss incurred by certain of the operations acquired from Verizon by
CenturyTel's majority-owned affiliates.
Gain on Sale of Assets
During the third quarter of 2000, the Company recorded a pre-tax gain of
approximately $10.7 million ($6.4 million after-tax; $.05 per diluted share) due
to sale of its minority interest in a cellular partnership.
Other Income and Expense
Other income and expense for the third quarter of 2000 was a $4.1 million
expense compared to a $1.1 million income for the third quarter of 1999. Such
decrease was primarily attributable to a $7.9 million charge related to the
settlement of certain interest rate hedge contracts entered into in connection
with the Verizon acquisitions. This decrease was partially offset by a $1.2
million increase in interest income.
Income Tax Expense
Income tax expense increased $5.8 million in the third quarter of 2000
compared to the third quarter of 1999. The effective income tax rate was 40.6%
and 38.4% in the three months ended September 30, 2000 and 1999, respectively.
During the third quarter of 1999, the Company recorded a $2.5 million state tax
benefit relating to a loss carryback that was utilized to recoup taxes paid in a
previous year.
Nine Months Ended September 30, 2000 Compared
to Nine Months Ended September 30, 1999
Net income (and diluted earnings per share) for the first nine months of
2000 and 1999 was $174.4 million ($1.23) and $179.1 million ($1.27),
respectively. Net income (excluding the after-tax effect of asset sales) for the
first nine months of 2000 was $162.7 million compared to $179.4 million during
the first nine months of 1999. Diluted earnings per share (excluding the
after-tax effect of asset sales) decreased to $1.15 during the nine months ended
September 30, 2000 from $1.27 during the nine months ended September 30, 1999, a
9.4% decrease.
<TABLE>
<CAPTION>
Nine months
ended September 30,
-----------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------
(Dollars, except per share
amounts, and shares in thousands)
<S> <C> <C>
Operating income
Telephone $ 267,099 260,275
Wireless 91,983 111,797
Other 24,291 19,235
-----------------------------------------------------------------------------
383,373 391,307
Interest expense (120,213) (114,725)
Income from unconsolidated cellular entities 19,382 26,913
Minority interest (8,052) (25,560)
Gain on sale of assets 20,593 51,160
Other income and expense 2,548 6,722
Income tax expense (123,278) (156,721)
-----------------------------------------------------------------------------
Net income $ 174,353 179,096
=============================================================================
Basic earnings per share $ 1.24 1.29
=============================================================================
Diluted earnings per share $ 1.23 1.27
=============================================================================
Average basic shares outstanding 139,989 138,668
=============================================================================
Average diluted shares outstanding 141,769 141,331
=============================================================================
</TABLE>
Contributions to operating revenues and operating income by the Company's
telephone, wireless, and other operations for the nine months ended September
30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Nine months
ended September 30,
--------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------
<S> <C> <C>
Operating revenues
Telephone operations 66.5% 66.9
Wireless operations 25.2% 25.6
Other operations 8.3% 7.5
Operating income
Telephone operations 69.7% 66.5
Wireless operations 24.0% 28.6
Other operations 6.3% 4.9
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Telephone Operations
Nine months
ended September 30,
---------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Local service $ 284,896 266,119
Network access 510,440 482,626
Other 82,286 88,069
---------------------------------------------------------------------------
877,622 836,814
---------------------------------------------------------------------------
Operating expenses
Plant operations 198,625 188,226
Customer operations 76,893 66,039
Corporate and other 117,634 116,305
Depreciation and amortization 217,371 205,969
---------------------------------------------------------------------------
610,523 576,539
---------------------------------------------------------------------------
Operating income $ 267,099 260,275
===========================================================================
</TABLE>
Telephone operating income increased $6.8 million (2.6%) due to an
increase in operating revenues of $40.8 million (4.9%) which more than offset an
increase in operating expenses of $34.0 million (5.9%).
Of the $40.8 million increase in operating revenues, $41.0 million was
attributable to the properties acquired from Verizon in the third quarter of
2000, which was offset by a $42.9 million decrease due to the sale of the Alaska
properties in the second quarter of 1999. The remaining $42.7 million increase
in revenues was primarily due to a $13.7 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 $13.3 million increase in local
network service revenues primarily due to an increase in the number of customer
access lines; a $12.7 million increase in amounts received from the federal
Universal Service Fund; and a $4.2 million increase in revenues associated with
the provision of custom calling features.
During the first nine months of 2000, the Company incurred aggregate
operating expenses of approximately $19.7 million associated with pending
Verizon acquisitions, two of which closed on July 31, 2000 and the remaining two
of which closed on September 29, 2000. These expenses consisted of (i)
approximately $8.8 million of variable overhead costs that were intentionally
not eliminated subsequent to the disposition of the Alaska properties in 1999
and early 2000 due to the pending Verizon acquisitions and (ii) approximately
$10.9 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.
Plant operations expenses increased $10.4 million (5.5%) of which $14.3
million was attributable to the properties acquired from Verizon, which was more
than offset by a $15.5 million decrease due to the sale of the Company's Alaska
properties. The remaining $11.6 million increase was primarily due to a $5.1
million increase in salaries and benefits; a $1.1 million increase in
information technology expenses; a $1.3 million increase in access expenses
primarily due to changes in revenue settlement methods of certain telephone
subsidiaries in a limited number of states; and a $3.0 million increase in
network operations and engineering expenses.
Customer operations expenses increased $10.9 million (16.4%) of which
$5.6 million was attributable to the properties acquired from Verizon, which was
partially offset by a $4.4 million decrease due to the sale of the Alaska
properties. The remaining $9.7 million increase was primarily due to a $3.7
million increase in information technology expenses and a $3.4 million increase
in salaries and benefits.
Corporate and other expenses increased $1.3 million (1.1%) of which $10.0
million was due to the properties acquired from Verizon partially offset by a
$5.4 million decrease due to the sale of the Alaska properties. The remaining
$3.3 million decrease was primarily due to a $6.4 million decrease in operating
taxes and a $4.6 million decrease in contract labor expenses primarily
associated with costs incurred in 1999 attributable to readying the Company's
systems to be year 2000 compliant. Such decreases were partially offset by a
$6.9 million increase in the provision for doubtful accounts.
Depreciation and amortization increased $11.4 million, of which $14.3
million was attributable to the properties acquired from Verizon (which included
$2.8 million of amortization of goodwill) and $7.5 million was primarily due to
higher levels of plant in service. Such increases were partially offset by a
$10.6 million reduction resulting from the sale of the Company's Alaska
properties.
Wireless Operations and Income From Unconsolidated Cellular Entities
<TABLE>
<CAPTION>
Nine months
ended September 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating income - wireless operations $ 91,983 111,797
Minority interest, exclusive of the effect of
asset sales in 1999 (8,783) (10,611)
Income from unconsolidated cellular entities 19,382 26,913
--------------------------------------------------------------------------------
$ 102,582 128,099
================================================================================
</TABLE>
The Company's wireless operations (discussed below) reflect 100% of the
results of operations of the cellular 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.
Wireless Operations
<TABLE>
<CAPTION>
Nine months
ended September 30,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Service revenues $ 320,836 312,873
Equipment sales 10,942 7,372
--------------------------------------------------------------------------------
331,778 320,245
--------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 21,728 13,848
System operations 51,782 42,394
General, administrative and customer service 56,423 60,113
Sales and marketing 60,637 41,130
Depreciation and amortization 49,225 50,963
--------------------------------------------------------------------------------
239,795 208,448
--------------------------------------------------------------------------------
Operating income $ 91,983 111,797
================================================================================
</TABLE>
Wireless operating income decreased $19.8 million (17.7%) to $92.0
million in the first nine months of 2000 from $111.8 million in the first nine
months of 1999. Wireless operating revenues increased $11.5 million (3.6%) while
operating expenses increased $31.3 million (15.0%).
The $8.0 million increase in service revenues was primarily due to a
$23.2 million increase in local service revenues primarily 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 partially offset by
(i) a $11.4 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 in rates that the Company anticipates will
continue in the near feature.
The following table illustrates the growth in the Company's wireless
customer base in its majority owned markets:
<TABLE>
<CAPTION>
Nine months
ended September 30,
----------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
Customers at beginning of period 707,486 624,290
Gross units added internally 247,014 174,466
Disconnects 202,664 137,294
Net units added 44,350 37,172
Effect of dispositions (10,653) (10,563)
Customers at end of period 741,183 650,899
Average monthly churn rate
(excluding prepaid customers) 1.88% 1.99
----------------------------------------------------------------------------
</TABLE>
The average monthly service revenue per customer declined to $49 during
the first nine months of 2000 from $54 during the first nine months of 1999
primarily 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.
During the first nine months of 2000, the Company added approximately
56,300 net contract customers while approximately 11,900 net prepaid customers
were disconnected. The Company will continue to focus on adding contract
customers while decreasing its focus on prepaid plans for future customer
growth.
Cost of equipment sold increased $7.9 million (56.9%) primarily due to an
increase in the number of units sold and an increase in average price per unit.
System operations expenses increased $9.4 million (22.1%) in the first
nine months of 2000 primarily due to a $5.0 million increase associated with
operating a greater number of cell sites; a $1.3 million increase in the amounts
paid to other carriers for service provided to the Company's customers who roam
in the other carriers' service areas; and a $2.6 million increase in toll costs.
General, administrative and customer service expenses decreased $3.7
million (6.1%), of which $2.4 million was attributable to a decrease in
operating taxes and $1.7 million was due to the sale of the Alaska and Texas
properties.
Sales and marketing expenses increased $19.5 million (47.4%) due
primarily to a $6.3 million increase in sales commissions paid to agents due to
an increase in the number of units sold; a $7.5 million increase in advertising
and sales promotion expenses; and a $3.3 million increase in costs incurred in
selling products and services in retail locations primarily due to an increase
in the number of retail locations.
Depreciation and amortization decreased $1.7 million (3.4%), primarily
due to the sale of the Alaska and Texas properties.
Other Operations
<TABLE>
<CAPTION>
Nine months
ended September 30,
-------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Operating revenues
Long distance $ 77,001 59,043
Internet 16,423 12,612
Call center 3,759 8,899
Other 12,163 12,598
-------------------------------------------------------------------------------
109,346 93,152
-------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 81,331 70,556
Depreciation and amortization 3,724 3,361
--------------------------------------------------------------------------------
85,055 73,917
-------------------------------------------------------------------------------
Operating income $ 24,291 19,235
===============================================================================
</TABLE>
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or wireless segments, including,
but not limited to, the Company's long distance operations, Internet operations,
call center operations (which ceased operations in the third quarter of 2000)
and security monitoring operations. The $18.0 million increase in long distance
revenues was attributable to the growth in the number of customers and increased
minutes of use per customer. The number of long distance customers as of
September 30, 2000 and 1999 was 347,200 and 285,500, respectively. Internet
revenues increased $3.8 million due primarily to a $3.5 million increase due to
growth in the number of customers and a $2.0 million increase due to Internet
operations acquired in late 1999 and mid-2000. Such increases were partially
offset by a $2.3 million decrease due to the May 1999 sale of the Company's
Alaska Internet operations. The $5.1 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 increased $10.8 million (15.3%)
primarily due to an increase of $9.6 million in expenses of the Company's long
distance operations primarily due to increased minutes of use due to an increase
in the number of customers and a $6.3 million increase in expenses associated
with expanding the Company's Internet operations. Such increases were partially
offset by a $4.0 million reduction in expenses due to the winding down of the
Company's third party call center operations during 2000 and 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 fiber network and competitive local exchange
carrier businesses.
Interest Expense
Interest expense increased $5.5 million in the first nine months of 2000
compared to the first nine months of 1999. Interest expense incurred in 2000
related to the Verizon acquisitions indebtedness was $13.5 million. Such
increase was substantially offset by lower interest expense due to a decrease in
outstanding indebtedness prior to the Verizon acquisitions.
Income from Unconsolidated Cellular Entities
Earnings from unconsolidated cellular entities, net of the amortization
of associated goodwill, decreased $7.5 million (28.0%) in the first nine 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 $17.5 million during the first nine months of 2000
compared to the same period in 1999 primarily due to the minority partners'
share of the gain on sale of assets of the Brownsville and McAllen, Texas
cellular properties recorded in the first nine months of 1999. Excluding the
effect of this gain, minority interest decreased $2.6 million primarily due to
the decreased profitability of the Company's majority-owned and operated
cellular entities.
Gain on Sale of Assets
In the first nine months of 2000, the Company recorded pre-tax gains
aggregating $20.6 million. Approximately $9.9 million ($5.2 million after-tax;
$.04 per diluted share) was due to the sale of the assets of the Company's
remaining Alaska cellular operations and approximately $10.7 million ($6.4
million after-tax; $.05 per diluted share) was due to the sale of the Company's
minority interest in a cellular partnership.
In the first nine months of 1999, the Company recorded pre-tax gains
aggregating $51.2 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
Companys remaining common shares of MCIWorldCom, Inc. Of the remaining $40.8
million, $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. For additional information, see Note 4 of Notes to
Consolidated Financial Statements and Minority Interest.
Other Income and Expense
Other income and expense decreased $4.2 million in the first nine months
of 2000 compared to the first nine months of 1999, primarily due to a $7.9
million charge related to the settlement of certain interest rate hedge
contracts entered into in connection with the Verizon acquisitions. Such
decrease was partially offset by a $3.7 million increase in interest income.
Income Tax Expense
Income tax expense decreased $33.4 million in the first nine months of
2000 compared to the first nine months of 1999. Exclusive of the effects of
income tax expense on asset sales, the effective income tax rate was 41.2% and
40.1% for the nine months ended September 30, 2000 and 1999, respectively.
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 $437.5 million during the
first nine months of 2000 compared to $290.5 million during the first nine
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 $1.753 billion for the nine
months ended September 30, 2000. Net cash provided by investing activities was
$211.7 million for the nine months ended September 30, 1999. Cash used for
acquisitions was $1.541 billion in 2000 (substantially all of which relates to
the Verizon acquisitions) compared to $16.8 million in 1999. Proceeds from the
sale of assets were $29.5 million in the first nine months of 2000 compared to
$453.9 million in the first nine months of 1999. Payments for property, plant
and equipment were $45.7 million more in the first nine months of 2000 than in
the comparable period during 1999. Capital expenditures for the nine months
ended September 30, 2000 were $157.8 million for telephone, $38.9 million for
wireless and $85.9 million for other operations.
Revised budgeted capital expenditures for 2000 total $235 million for
telephone operations, $65 million for wireless operations and $125 million for
other operations. Anticipated capital expenditures for 2001 are expected to be
approximately $525 million.
Net cash provided by (used in) financing activities was $1.331 billion
during the first nine months of 2000 compared to ($470.7) million during the
first nine months of 1999. Net proceeds from the issuance of debt were $1.810
billion more during the first nine months of 2000 compared to the first nine
months of 1999 primarily due to an increase in borrowings due to the purchase of
assets from Verizon. In addition, payments of debt were higher in 1999 than in
2000 primarily due to the use of proceeds from the sale of assets.
On July 31, 2000 and September 29, 2000, affiliates of the Company
acquired over 490,000 telephone access lines and related assets from Verizon
Communications, Inc. (successor to GTE Corporation) ("Verizon") in four separate
transactions for approximately $1.5 billion in cash. See Note 5 of Notes to
Consolidated Financial Statements for additional information. To finance these
acquisitions on a short-term basis, the Company borrowed $1.157 billion on a
floating-rate basis under its new $1.5 billion credit facility with Bank of
America, N.A. and Citibank, N.A., as lenders, and Banc of America Securities LLC
and Salomon Smith Barney Inc., as arrangers, and borrowed $300 million on a
floating-rate basis under its existing credit facility with Bank of America,
N.A.
On October 19, 2000, the Company issued $500 million of 8.375% Senior
Notes, Series H, due 2010, and $400 million of 7.75% Remarketable Senior Notes,
Series I, due 2012 (with a remarketing date of October 15, 2002) under its $2.0
billion shelf registration statement filed in May 2000. The net proceeds of
approximately $908 million were used to repay a portion of the $1.457 billion of
aggregate indebtedness the Company incurred under its credit facilities in
connection with the Verizon acquisitions.
As of September 30, 2000, CenturyTel's telephone subsidiaries had
available for use $129.5 million of commitments for long-term financing from the
Rural Utilities Service and the Company had $327.1 million of undrawn committed
bank lines of credit. In addition, in late October 2000 the Company implemented
a commercial paper program that authorizes the Company to have outstanding up to
$1.5 billion in commercial paper at any one time.
As described further in Item 5 to this Report, the Company has agreed to
sell certain operating licenses for an aggregate of $205 million, which the
Company expects to receive in installments during 2001 and 2002
On September 19, 2000, Moody's Investors Service ("Moody's") lowered
CenturyTel's long-term debt rating to Baa2 (with a stable outlook) from Baa1 and
on September 20, 2000, Standard & Poor's ("S&P") affirmed its rating of
CenturyTel's long-term debt of BBB+ (with a negative outlook). The Company's
commercial paper program, initiated in late October 2000 is rated P2 by Moody's
and A2 by S&P.
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 $320 million and $370 million
(exclusive of the recently acquired Verizon properties.)
Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." In June 1999, the FASB
deferred the effective date of SFAS 133 to fiscal years beginning after June 15,
2000. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities by requiring that entities recognize all
derivatives as either assets or liabilities at fair value on the balance sheet.
Based on the Company's current use of derivatives, SFAS 133 is not expected to
materially impact the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition and deferred
costs in the financial statements. SAB 101 is effective beginning in the fourth
quarter of 2000. Based on the Company's current revenue recognition policies,
SAB 101 is not expected to materially impact the Company's financial position or
results of operations.
Regulatory Matters
On October 20, 2000, a comprehensive reform plan designed to address
access rates, universal service, rate of return and separations was filed with
the Federal Communications Commission ("FCC") by a Multi Association Group
representing small and mid-sized telephone companies that currently are
regulated under traditional rate of return mechanisms. The plan attempts to
mirror certain principles of the access charge reform plan implemented by the
FCC for price cap companies in mid-1999. The plan, as filed, would create more
efficient cost recovery under the FCC's access charge reform system while making
universal support more explicit and enforcing the geographic averaging
requirements of the Telecommunication Act of 1996. The plan also proposes to
remove the current caps on high cost loop support. Under the plan, companies
will have a five-year period to transition from their existing forms of rate of
return regulation to a new form of incentive regulation. If adopted in its
current form, the plan would not have a material effect on the Company's level
of operating revenues or results of operations; however, until the plan
undergoes the rulemaking procedures of the FCC, it is premature to assess the
ultimate impact this proposal will have on the Company. There can be no
assurance that the plan, in its final form, will not have a material effect on
the Company's results of operations.
In connection with authorizing the Company's acquisition from Verizon of
telephone properties in Wisconsin, the Wisconsin Public Service Commission
indicated its intent to review the possibility of regulating all of the
Company's Wisconsin local exchange carriers on an unitary basis, which would
reduce the Company's revenues in Wisconsin (unless and to the extent the Company
could mitigate these reductions through rate adjustments or other revenue
enhancements approved by the Wisconsin Public Service Commission).
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
September 30, 2000, the fair value of the Company's long-term debt was estimated
to be $3.2 billion based on the overall weighted average rate of the Company's
long-term debt of 7.3% 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 73 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 a $128.9 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 expected to incur in
connection with providing long-term financing for its Verizon acquisitions. The
Company recorded a $7.9 million charge in the third quarter of 2000 related to
the settlement of certain of these hedge contracts.
PART II. OTHER INFORMATION
CenturyTel, Inc.
Item 5. Other Information
On November 3, 2000, the Company entered into a definitive agreement
with Leap Wireless International, Inc. to sell 30 PCS (Personal
Communication Service) operating licenses for an aggregate of $205
million. The licenses cover markets with an aggregate population of
approximately seven million in five states. The transaction is
expected to close in the first quarter of 2001, subject to (i)
approval of the Federal Communications Commission, (ii) receipt of
certain partnership approvals and (iii) certain other closing
conditions.
Approximately $119 million of the purchase price will be delivered at
closing.The remaining $86 million will be in the form of a promissory
note bearing 10% interest per annum.$74 million of the note is payable
within nine months after the issuance of the note with the remainder
payable in 2002 upon maturity of the note. These receipts will be used
to pay down indebtedness incurred in connection with the Company's
recent acquisitions of properties from Verizon Communications, Inc.
The Company's aggregate net proceeds (after taxes and payments to
minority investors) are estimated to be approximately $125 million.
The Company will record a pre-tax gain of approximately $190 million
in the period in which the transaction closes.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
4.1 Amendment No. 2, dated and effective as of June 30, 2000, to
the Rights Agreement by and between the Registrant and
Computershare Investor Services, LLC, as rights agent
4.2 Form of the Registrant's 8.375% Senior Notes, Series H, Due
2010, issued October 19, 2000
4.3 Form of the Registrant's 7.750% Remarketable Senior Notes,
Series I, due 2012, issued October 19, 2000 (the
"Remarketable Notes")
4.4 Remarketing Agreement, dated as of October 19, 2000, between
the Registrant and Banc of America Securities LLC, as
remarketing agent for the Remarketable Notes
11 Computations of Earnings Per Share.
27 Financial Data Schedule as of and for the nine months ended
September 30, 2000.
B. Reports on Form 8-K
(i) The following item was reported in the Form 8-K filed August
1, 2000.
Item 5. Other Events - News release announcing second
quarter 2000 results of operations.
(ii) The following item was reported in the Form 8-K filed August
15, 2000.
Item 2. Acquisition or Disposition of Assets - Acquisition
of certain assets from Verizon Communications, Inc. in
Arkansas and Missouri.
(iii) The following items were reported in the Form 8-K filed
October 5, 2000.
Item 2. Acquisition or Disposition of Assets - Consummation
by the Company of the final two of its four acquisitions of
assets from Verizon Communications, Inc.
Item 5. Other Events - (i) Company announcement concerning
third quarter 2000 expected operating results and (ii) update
of CenturyTel's debt ratings.
Item 7. Financial Statements and Exhibits - (i) Financial
statements of properties acquired from Verizon Communications
Inc. and (ii) Unaudited pro forma consolidated condensed
financial information related to the Verizon acquisitions.
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: November 14, 2000 /s/ Neil A. Sweasy
-------------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)
