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 March 31, 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 April 30, 2000, there were 140,235,231 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
Ended March 31, 2000 and 1999 3
Consolidated Statements of Comprehensive Income--
Three Months Ended March 31, 2000 and 1999 4
Consolidated Balance Sheets--March 31, 2000 and
December 31, 1999 5
Consolidated Statements of Stockholders' Equity--
Three Months Ended March 31, 2000 and 1999 6
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 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 11-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
PART I. FINANCIAL INFORMATION
CENTURYTEL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months
ended March 31,
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
OPERATING REVENUES
Telephone $ 276,926 288,273
Wireless 100,404 98,562
Other 35,626 27,421
- -------------------------------------------------------------------------------
Total operating revenues 412,956 414,256
- -------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses 216,723 193,652
Depreciation and amortization 84,811 89,981
- -------------------------------------------------------------------------------
Total operating expenses 301,534 283,633
- -------------------------------------------------------------------------------
OPERATING INCOME 111,422 130,623
- -------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (36,042) (42,241)
Income (loss) from unconsolidated cellular
entities (1,459) 6,845
Minority interest (2,292) (3,310)
Gain on sale of assets 9,910 10,358
Other income and expense 4,229 2,180
- -------------------------------------------------------------------------------
Total other income (expense) (25,654) (26,168)
- -------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 85,768 104,455
Income tax expense 36,484 43,350
- -------------------------------------------------------------------------------
NET INCOME $ 49,284 61,105
===============================================================================
BASIC EARNINGS PER SHARE $ .35 .44
===============================================================================
DILUTED EARNINGS PER SHARE $ .35 .43
===============================================================================
DIVIDENDS PER COMMON SHARE $ .0475 .045
===============================================================================
AVERAGE BASIC SHARES OUTSTANDING 139,737 138,086
===============================================================================
AVERAGE DILUTED SHARES OUTSTANDING 141,728 141,028
===============================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months
ended March 31,
- -------------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------------
(Dollars in thousands)
NET INCOME $ 49,284 61,105
- -------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gain (loss) arising during period,
net of ($3,765) and $1,116 tax (6,993) 2,073
Reclassification adjustment for gain
included in net income, net of $ - and $3,625 tax - (6,733)
- -------------------------------------------------------------------------------------
Other comprehensive income, net of ($3,765) and ($2,509) tax (6,993) (4,660)
- -------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 42,291 56,445
=====================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2000 1999
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 62,629 56,640
Accounts receivable, less allowance of $4,185 and $4,150 208,962 193,057
Materials and supplies, at average cost 26,404 28,769
Other 8,907 7,607
- -----------------------------------------------------------------------------------------------
Total current assets 306,902 286,073
- -----------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,232,390 2,256,458
- -----------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired, less accumulated
amortization of $174,656 and $165,327 1,632,171 1,644,884
Other 557,721 517,992
- -----------------------------------------------------------------------------------------------
Total investments and other assets 2,189,892 2,162,876
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,729,184 4,705,407
===============================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 62,311 62,098
Accounts payable 114,884 78,450
Accrued expenses and other liabilities
Salaries and benefits 36,360 34,570
Taxes 71,515 40,999
Interest 23,940 37,232
Other 22,794 22,172
Advance billings and customer deposits 34,264 33,656
- -----------------------------------------------------------------------------------------------
Total current liabilities 366,068 309,177
- -----------------------------------------------------------------------------------------------
LONG-TERM DEBT 1,998,430 2,078,311
- -----------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 475,321 469,927
- -----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000 shares,
issued and outstanding 140,229,175 and 139,945,920 shares 140,229 139,946
Paid-in capital 498,533 493,432
Unrealized holding gain on investments, net of taxes 57,369 64,362
Retained earnings 1,189,509 1,146,967
Unearned ESOP shares (4,250) (4,690)
Preferred stock - non-redeemable 7,975 7,975
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 1,889,365 1,847,992
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 4,729,184 4,705,407
===============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three months
ended March 31,
- ------------------------------------------------------------------------------------------
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 29 935
- ------------------------------------------------------------------------------------------
Balance at end of period 140,229 139,272
- ------------------------------------------------------------------------------------------
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 1,663 9,688
Amortization of unearned compensation and other 392 453
- ------------------------------------------------------------------------------------------
Balance at end of period 498,533 464,722
- ------------------------------------------------------------------------------------------
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 (6,993) (4,660)
- ------------------------------------------------------------------------------------------
Balance at end of period 57,369 2,557
- ------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 1,146,967 932,611
Net income 49,284 61,105
Cash dividends declared
Common stock-$.0475 and $.045 per share, respectively (6,642) (6,220)
Preferred stock (100) (102)
- ------------------------------------------------------------------------------------------
Balance at end of period 1,189,509 987,394
- ------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (4,690) (6,070)
Release of ESOP shares 440 440
- ------------------------------------------------------------------------------------------
Balance at end of period (4,250) (5,630)
- ------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 7,975 8,106
- ------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,889,365 1,596,421
==========================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months
ended March 31,
- ----------------------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 49,284 61,105
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 84,811 89,981
Gain on sale of assets (9,910) (10,358)
Deferred income taxes 3,231 2,516
(Income) loss from unconsolidated cellular entities 1,459 (6,845)
Minority interest 2,292 3,310
Changes in current assets and current liabilities:
Accounts receivable (15,928) (8,316)
Accounts payable 36,414 (3,068)
Other accrued taxes 30,525 42,394
Other current assets and other current liabilities, net (8,143) (10,697)
Increase in other noncurrent assets (16,222) (5,408)
Increase in other noncurrent liabilities 4,586 860
Other, net (2,310) 4,118
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 160,089 159,592
- ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (58,165) (63,001)
Purchase of minority investment in other entities (27,980) -
Proceeds from sale of assets 15,849 20,056
Purchase of life insurance investment, net (1,627) (1,561)
Other, net (827) 5,409
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (72,750) (39,097)
- ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,079 7,779
Payments of long-term debt (77,007) (134,269)
Proceeds from issuance of common stock 1,054 10,434
Cash dividends (6,742) (6,322)
Other, net 266 226
- ----------------------------------------------------------------------------------------------
Net cash used in financing activities (81,350) (122,152)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,989 (1,657)
Cash and cash equivalents at beginning of period 56,640 5,742
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 62,629 4,085
==============================================================================================
Supplemental cash flow information:
Income taxes paid $ 5,146 2,947
==============================================================================================
Interest paid (net of capitalized interest of $741 and $837) $ 48,593 55,474
==============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 ended March 31,
2000 and 1999 has not been audited by independent certified 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 periods have been included therein. The results
of operations for the first three 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:
March 31, Dec. 31,
2000 1999
- -------------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost $ 3,465,611 3,439,469
Accumulated depreciation (1,662,093) (1,605,553)
- -------------------------------------------------------------------------------
1,803,518 1,833,916
- -------------------------------------------------------------------------------
Wireless, at cost 468,630 472,725
Accumulated depreciation (226,057) (217,056)
- -------------------------------------------------------------------------------
242,573 255,669
- -------------------------------------------------------------------------------
Other, at cost 305,367 281,713
Accumulated depreciation (119,068) (114,840)
- -------------------------------------------------------------------------------
186,299 166,873
- -------------------------------------------------------------------------------
$ 2,232,390 2,256,458
===============================================================================
(3) Income (Loss) 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 March 31, 2000
and 1999) were accounted for by the equity method.
Three months
ended March 31,
- --------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------
(Dollars in thousands)
Results of operations
Revenues $ 357,434 328,540
Operating income $ 99,861 108,541
Net income $ 99,149 108,394
- --------------------------------------------------------------------------
(4) Sale 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.
(5) Pending Acquisitions
In June 1999, the Company signed a definitive asset purchase agreement
with affiliates of GTE Corporation ("GTE") to purchase GTE's telephone access
lines (which numbered approximately 225,000 at December 31, 1999) and related
local exchange assets in Arkansas for approximately $845.8 million cash, subject
to certain adjustments.
In July 1999, the Company acquired a 61.5% (56.9% fully-diluted) interest
in a newly-organized joint venture company which has entered into a definitive
asset purchase agreement with affiliates of GTE to purchase telephone access
lines (which numbered approximately 121,000 at December 31, 1999) and related
local exchange assets in Missouri for approximately $290 million cash, subject
to certain adjustments. The Company has agreed to make a preferred equity
investment in the newly organized company of approximately $55 million and it is
anticipated that the Company will loan the new entity approximately $220
million.
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 GTE 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
GTE affiliate for approximately $195 million cash, subject to certain
adjustments.
All of these transactions are expected to close mid-year 2000, pending
regulatory approvals, the absence of litigation 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 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
ended March 31,
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Telephone $ 276,926 288,273
Wireless 100,404 98,562
Other operations 35,626 27,421
- -------------------------------------------------------------------------------
Total operating revenues $ 412,956 414,256
===============================================================================
Operating income
Telephone $ 84,497 94,673
Wireless 19,891 29,653
Other operations 7,034 6,297
- -------------------------------------------------------------------------------
Total operating income $ 111,422 130,623
===============================================================================
Operating income $ 111,422 130,623
Interest expense (36,042) (42,241)
Income (loss) from unconsolidated cellular entities (1,459) 6,845
Minority interest (2,292) (3,310)
Gain on sale of assets 9,910 10,358
Other income and expense 4,229 2,180
- -------------------------------------------------------------------------------
Income before income tax expense $ 85,768 104,455
===============================================================================
March 31, December 31,
2000 1999
- ---------------------------------------------------------------------------
(Dollars in thousands)
Assets
Telephone $ 3,223,491 3,246,290
Wireless 1,208,966 1,184,129
Other operations 296,727 274,988
- ---------------------------------------------------------------------------
Total assets $ 4,729,184 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
ended March 31, 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 March 31,
2000, the Company's local exchange telephone subsidiaries operated over 1.2
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 727,000 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 Alaska 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 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 offerings on a timely and cost-effective basis; 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; 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 March 31, 2000 Compared
to Three Months Ended March 31, 1999
Net income (excluding after-tax gain on sale of assets and certain
non-recurring charges) for the first quarter of 2000 was $47.9 million compared
to $54.4 million during the first quarter of 1999. Diluted earnings per share
(excluding after-tax gain on sale of assets and certain non-recurring charges)
decreased to $.34 during the three months ended March 31, 2000 from $.39 during
the three months ended March 31, 1999, a 12.8% decrease. Substantially all of
the non-recurring charges in first quarter 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 (loss) from unconsolidated cellular entities."
Three months
ended March 31,
- -------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 84,497 94,673
Wireless 19,891 29,653
Other 7,034 6,297
- -------------------------------------------------------------------------
111,422 130,623
Interest expense (36,042) (42,241)
Income (loss) from unconsolidated
cellular entities (1,459) 6,845
Minority interest (2,292) (3,310)
Gain on sale of assets 9,910 10,358
Other income and expense 4,229 2,180
Income tax expense (36,484) (43,350)
- -------------------------------------------------------------------------
Net income $ 49,284 61,105
=========================================================================
Basic earnings per share $ .35 .44
=========================================================================
Diluted earnings per share $ .35 .43
=========================================================================
Average basic shares outstanding 139,737 138,086
=========================================================================
Average diluted shares outstanding 141,728 141,028
=========================================================================
Contributions to operating revenues and operating income by the Company's
telephone, wireless, and other operations for the three months ended March 31,
2000 and 1999 were as follows:
Three months
ended March 31,
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
Operating revenues
Telephone operations 67.1% 69.6
Wireless operations 24.3% 23.8
Other operations 8.6% 6.6
Operating income
Telephone operations 75.8% 72.5
Wireless operations 17.9% 22.7
Other operations 6.3% 4.8
- -------------------------------------------------------------------------------
Telephone Operations
Three months
ended March 31,
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 88,065 90,657
Network access 162,253 167,155
Other 26,608 30,461
- -------------------------------------------------------------------------------
276,926 288,273
- -------------------------------------------------------------------------------
Operating expenses
Plant operations 62,776 63,937
Customer operations 22,761 21,357
Corporate and other 39,532 36,879
Depreciation and amortization 67,360 71,427
- -------------------------------------------------------------------------------
192,429 193,600
- -------------------------------------------------------------------------------
Operating income $ 84,497 94,673
===============================================================================
Telephone operating income decreased $10.2 million (10.7%) due to a
decrease in operating revenues of $11.3 million (3.9%) which was partially
offset by a decrease in operating expenses of $1.2 million (.6%).
Of the $11.3 million decrease in operating revenues, $29.0 million was
attributable to the sale of the Company's Alaska based operations. The remaining
$17.7 million increase in revenues was partially due to a $5.7 million increase
in local network service revenues primarily due to an increase in the number of
customer access lines in incumbent markets; a $6.2 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 $4.2 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.
Annualized internal access line growth during the first quarter of 2000 and 1999
was 2.8% and 5.5%, respectively.
During the first quarter of 2000, the Company incurred aggregate operating
expenses of approximately $6.0 million associated with the pending GTE
acquisitions. These expenses consisted of (i) approximately $3.5 million of
absorbed variable overhead costs that were intentionally not eliminated
subsequent to the disposition of the Alaska properties due to the pending GTE
acquisitions and (ii) approximately $2.5 million of expenses associated with
readying the Company's systems and staff to integrate the GTE operations into
the Company's operations immediately upon closing each transaction. During the
second quarter of 2000, the Company expects to incur aggregate operating
expenses associated with the pending GTE acquisitions that exceed those incurred
during the first quarter of 2000.
Plant operations expenses decreased $1.2 million (1.8%), of which $8.8
million was attributable to the sale of the Alaska properties. The remaining
$7.6 million increase was primarily due to a $2.2 million increase in salaries
and benefits; a $2.2 million increase in information technology expenses
primarily due to increases in contract labor and a $1.5 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 quarter of 2000 customer operations expenses increased
$1.4 million (6.6%) primarily due to a $1.8 million increase in information
technology expenses primarily due to increases in contract labor and a $1.3
million increase in salaries and benefits. Such increases were partially offset
by a $2.7 million decrease attributable to the sale of the Alaska properties.
Corporate and other expenses increased $2.7 million (7.2%) primarily due
to a $2.0 million increase in expenses associated with the pending GTE
acquisitions; a $1.7 million increase associated with the Company's sales,
leases, installations, maintenance and repair of customer premise
telecommunications equipment and wiring; a $1.3 million increase in salaries and
benefits and a $1.0 million increase in expenses related to implementing new
accounting information systems. Such increases were partially offset by a $2.1
million decrease due to the sale of the Alaska properties and a $1.7 million
decrease in operating taxes.
Depreciation and amortization decreased $4.1 million, of which $7.1
million was attributable to the sale of the Alaska properties. The remaining
$3.0 million increase was primarily due to higher levels of plant in service.
Wireless Operations and Income (Loss) From Unconsolidated Cellular Entities
Three months
ended March 31,
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
(Dollars in thousands)
Operating income - wireless operations $ 19,891 29,653
Minority interest (2,284) (3,329)
Income (loss) from unconsolidated cellular entities (1,459) 6,845
- -------------------------------------------------------------------------------
$ 16,148 33,169
===============================================================================
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
(loss) from unconsolidated cellular entities."
Wireless Operations
Three months
ended March 31,
- ------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 96,623 96,061
Equipment sales 3,781 2,501
- -------------------------------------------------------------------------------
100,404 98,562
- -------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 8,180 4,385
System operations 15,653 13,636
General, administrative and customer service 18,206 19,329
Sales and marketing 22,125 14,120
Depreciation and amortization 16,349 17,439
- -------------------------------------------------------------------------------
80,513 68,909
- -------------------------------------------------------------------------------
Operating income $ 19,891 29,653
- -------------------------------------------------------------------------------
Wireless operating income decreased $9.8 million (32.9%) to $19.9 million
in the first quarter of 2000 from $29.7 million in the first quarter of 1999.
Wireless operating revenues increased $1.8 million (1.9%) while operating
expenses increased $11.6 million (16.8%).
The $562,000 increase in service revenues was primarily due to a $5.3
million increase due to a growth in number of customers and increased minutes of
use, both of which were partially offset by reduced rates. Such increase was
substantially offset by a $5.1 million decrease due to the sale of the Company's
Texas and Alaska cellular properties. The Company's roaming revenues were
approximately the same in first quarter 2000 and first quarter 1999 as revenues
generated from increased minutes of use were completely offset by a reduction in
roaming rates.
The following table illustrates the growth in the Company's wireless
customer base in its majority-owned markets:
Three months
ended March 31,
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
Customers at beginning of period 707,486 624,290
Gross units added internally 93,001 58,299
Disconnects 62,327 43,353
Net units added internally 30,674 14,946
Net effect of property dispositions (10,653) -
Customers at end of period 727,507 639,236
- -------------------------------------------------------------------------------
The average monthly service revenue per customer declined to $45 during
the first quarter of 2000 from $51 during the first quarter of 1999 due to price
reductions and the continued trend that a higher percentage of new customers
tend to be lower usage customers. A majority of the Company's net unit additions
for first quarter 2000 were prepaid customers. The average monthly service
revenue per prepaid customer has been and is expected to continue to be less
than the average monthly service revenue per contract customer. 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 or all of which
are likely to result in lower average revenue per customer.
Cost of equipment sold increased $3.8 million (86.5%) substantially due to
an increase in units sold.
System operations expenses increased $2.0 million (14.8%) primarily due to
a $2.3 million increase associated with operating a greater number of cell sites
and a $438,000 increase in toll costs. Such increases were partially offset by a
$1.1 million decrease 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 a decrease in rates.
General, administrative and customer service expenses decreased $1.1
million (5.8%) due to a $753,000 decrease in operating taxes and a $798,000
decrease due to the sale of the Texas and Alaska properties. Such decreases were
partially offset by a $438,000 increase in the provision for doubtful accounts.
The Company's average monthly postpaid churn rate (the percentage of
contract cellular customers that terminate service) was 2.0% for both the first
quarter of 2000 and the first quarter of 1999.
Sales and marketing expenses increased $8.0 million (56.7%) primarily due
to a $4.5 million increase in advertising and sales promotions expenses
associated with the introduction of new rate plans during the first quarter of
2000; a $1.8 million increase in costs incurred in selling products and services
in retail locations primarily due to the increase in the number of retail
locations; and a $1.8 million increase in commissions paid to agents for selling
services to new customers.
Depreciation and amortization decreased $1.1 million (6.3%), primarily due
to the sale of the Texas and Alaska properties.
Other Operations
Three months
ended March 31,
- ----------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 24,827 17,030
Internet 5,012 4,688
Call center 2,090 2,444
Other 3,697 3,259
- ----------------------------------------------------------------------------
35,626 27,421
- ----------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 27,490 20,009
Depreciation and amortization 1,102 1,115
- ----------------------------------------------------------------------------
28,592 21,124
- ----------------------------------------------------------------------------
Operating income $ 7,034 6,297
============================================================================
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 $7.8
million increase in long distance revenues was primarily attributable to the
growth in the number of customers and increased minutes of use. The number of
long distance customers as of March 31, 2000 and 1999 was 319,100 and 241,900,
respectively. Internet revenues increased $324,000 due primarily to a $1.8
million increase due to growth in the number of customers which was
substantially offset by a $1.5 million decrease due to the sale of the Company's
Alaska Internet operations.
Operating expenses increased $7.5 million primarily due to (i) an increase
of $6.3 million in expenses of the Company's long distance operations due
primarily to the expenses associated with an increase in customers and minutes
of use; (ii) a $1.3 million increase in expenses related to the provision of
Internet access; and (iii) a $627,000 increase due to the expansion of the
Company's security monitoring, competitive local exchange carrier and fiber
network businesses.
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 security monitoring business and its
emerging fiber network and competitive local exchange carrier businesses.
Interest Expense
Interest expense decreased $6.2 million in the first quarter of 2000
compared to the first quarter of 1999 primarily due to a reduction in
outstanding debt.
Income (Loss) from Unconsolidated Cellular Entities
Earnings from unconsolidated cellular entities, net of the amortization of
associated goodwill, decreased $8.3 million primarily due 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. 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 $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 first quarter of 2000, the Company recorded a pre-tax gain of
approximately $9.9 million ($5.2 million after-tax; $.04 per diluted share due)
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 of
approximately $10.4 million ($6.7 million after-tax; $.04 per diluted share) due
to the sale of its remaining common shares of MCIWorldCom, Inc.
Income Tax Expense
Income tax expense decreased $6.9 million in the first quarter of 2000
compared to the first quarter of 1999 primarily due to a decrease in income
before taxes. The effective income tax rate was 42.5% and 41.5% in the three
months ended March 31, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions and strategic investments, the
Company relies on cash provided by operations to provide substantially all 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 $160.1 million during the
first three months of 2000 compared to $159.6 million during the first three
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 $72.8 million and $39.1 million
for the three months ended March 31, 2000 and 1999, respectively. Payments for
property, plant and equipment were $4.8 million less in the first quarter of
2000 than in the comparable period during 1999. Capital expenditures for the
three months ended March 31, 2000 were $29.3 million for telephone, $3.7 million
for wireless and $25.2 million for other operations. During the first quarter of
2000, the Company invested $28.0 million in various other communications
entities. Proceeds from the sale of assets were $15.8 million and $20.1 million
for the three months ended March 31, 2000 and 1999, respectively.
Net cash used in financing activities was $81.4 million during the first
three months of 2000 compared to $122.2 million during the first three months of
1999. Net payments of long-term debt were $50.6 million less during the first
quarter of 2000 compared to the first quarter of 1999.
Revised budgeted capital expenditures for 2000 total $250 million for
telephone operations, $100 million for wireless operations and $95 million for
other operations.
As of March 31, 2000, CenturyTel's subsidiaries had available for use
$129.5 million of commitments for long-term financing from the Rural Utilities
Service and the Company had $282.0 million of undrawn committed bank lines of
credit.
In June 1999, the Company signed a definitive asset purchase agreement to
purchase from affiliates of GTE Corporation ("GTE") telephone access lines
(which numbered approximately 225,000 at December 31, 1999) and related local
exchange assets in Arkansas for approximately $845.8 million in cash. In July
1999, the Company acquired a 61.5% (56.9% fully diluted) interest in a
newly-organized joint venture company which has entered into a definitive asset
purchase agreement with affiliates of GTE to purchase telephone access lines
(which numbered approximately 121,000 at December 31, 1999) and related local
exchange assets in Missouri for approximately $290 million in cash. At closing,
the Company has agreed to make approximately a $55 million preferred equity
investment in the new entity and it is anticipated that the Company will loan
the new entity approximately $220 million.
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 GTE affiliate for approximately $170 million cash. 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 GTE affiliate for
approximately $195 million cash.
The purchase price under each of these GTE agreements is subject to
adjustments which are not expected to be material in the aggregate. These
transactions are anticipated to close mid-year 2000, subject to regulatory
approvals and certain other closing conditions. Although financing plans are not
yet complete and will be dependent upon the Company's review of its alternatives
and market conditions, the Company currently anticipates financing the
transactions with short-term bank debt, which would be subsequently repaid with
the proceeds from the possible sale of non-strategic assets and the sale of debt
or equity securities in one or more private or public offerings. 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 GTE
acquisitions, 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 March
31, 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 7.0% and an overall weighted maturity of 12 years compared to
terms and rates currently available in long-term financing markets. Market risk
is estimated as the potential decrease in fair value of the Company's long-term
debt resulting from a hypothetical increase of 70 basis points in interest rates
(ten percent of the Company's overall weighted average borrowing rate). Such an
increase in interest rates would result in approximately a $88.5 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 the long-term public debt that it expects to incur in connection with
financing its pending GTE acquisitions. 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 6: Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
--------
10.1 Employment and Severance Agreements and Arrangements.
(a) Employment Agreement dated May 24, 1993, as amended and
restated through February 22, 2000, by and between Clarke
M. Williams and Registrant.
(b) Change of Control Agreement, dated February 22, 2000, by
and between Glen F. Post, III and Registrant.
(c) Form of Change of Control Agreement, dated February 22,
2000, by and between Registrant and David D.Cole, R.
Stewart Ewing, Michael E. Maslowski and Harvey P. Perry.
(d) Restated Supplemental Executive Retirement Plan, dated
April 3, 2000.
11 Computations of Earnings Per Share.
27 Financial Data Schedule as of and for the three months ended
March 31, 2000.
B. Reports on Form 8-K
-------------------
(i) The following item was reported in the Form 8-K filed March
7, 2000:
Item 5. Other Events - News release announcing fourth quarter
1999 results of operations.
(ii) The following item was reported in the Form 8-K filed April
28, 2000:
Item 5. Other Events - News release announcing first quarter
2000 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: May 12, 2000 /s/ Neil A. Sweasy
------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)