10-Q 1 0001.txt FORM 10-Q 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. 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 PART I. FINANCIAL INFORMATION CenturyTel, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months Six months ended June 30, ended June 30, ----------------------------------------------------------------------------------------------- 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares expressed in thousands) 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.
CenturyTel, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three months Six months ended June 30, ended June 30, ----------------------------------------------------------------------------------------------- 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------- (Dollars in thousands) 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 ===============================================================================================
See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 2000 1999 ------------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS 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 ================================================================================================
See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) Six months
ended June 30, ------------------------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------------------------ (Dollars in thousands) 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 ================================================================================================
See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) Six months ended June 30, ------------------------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------------------------ (Dollars in thousands) 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 ------------------------------------------------------------------------------------------------
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:
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) 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 ================================================================================
(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.
Six months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) Results of operations Revenues $ 747,131 642,489 Operating income $ 241,507 195,574 Net income $ 234,853 194,937 --------------------------------------------------------------------------------
(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.
Three months Six months ended June 30, ended June 30, ----------------------------------------------------------------------------------------------- 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------- (Dollars in thousands) 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 ===============================================================================================
June 30, December 31, 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) 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 ================================================================================
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.
Three months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) 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 ================================================================================
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:
Three months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------
Telephone Operations Three months ended June 30, --------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) 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 ================================================================================
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
Three months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) 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 ================================================================================
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
Three months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) 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 ================================================================================
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:
Three months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------
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. Other Operations
Three months ended June 30, ----------------------------------------------------------------------------- 2000 1999 ----------------------------------------------------------------------------- (Dollars in thousands) 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 =============================================================================
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. 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."
Six months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars, except per share amounts,and shares in thousands) 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 =================================================================================
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:
Six months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------
Telephone Operations Six months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) 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 ================================================================================
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
Six months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) 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 ================================================================================
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. Wireless Operations
Six months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) 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 ================================================================================
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:
Six months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------
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
Six months ended June 30, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands) 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 ================================================================================
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. 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. 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. 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)