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, 1999
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, 1999, there were 139,510,368 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, 1999 and 1998 3
Consolidated Statements of Comprehensive Income --
Three Months and Six Months Ended June 30, 1999 and 1998 4
Consolidated Balance Sheets--June 30, 1999 and
December 31, 1998 5
Consolidated Statements of Stockholders' Equity--
Six Months Ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1999 and 1998 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 24
Part II. Other Information:
Item 4. Submission of Matters To a Vote of Security Holders 24-25
Item 6. Exhibits and Reports on Form 8-K 25-26
Signature 26
PART I. FINANCIAL INFORMATION
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months Six months
ended June 30, ended June 30,
- ------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares expressed in thousands)
OPERATING REVENUES
Telephone $ 279,113 265,322 572,074 525,135
Cellular 109,932 104,871 208,403 199,037
Other 27,705 18,185 50,529 35,926
- ------------------------------------------------------------------------------------------
Total operating revenues 416,750 388,378 831,006 760,098
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating
expenses 200,113 185,406 393,765 367,800
Depreciation and amortization 86,012 81,484 175,993 160,678
- ------------------------------------------------------------------------------------------
Total operating expenses 286,125 266,890 569,758 528,478
- ------------------------------------------------------------------------------------------
OPERATING INCOME 130,625 121,488 261,248 231,620
- ------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Gain on sale or exchange of assets, net 39,601 25,516 49,959 49,859
Interest expense (37,487) (42,072) (79,728) (84,881)
Income from unconsolidated
cellular entities 9,267 9,066 16,112 15,943
Minority interest (18,790) (4,002) (22,100) (6,645)
Other income and expense 3,434 691 5,614 1,295
- ------------------------------------------------------------------------------------------
Total other income (expense) (3,975) (10,801) (30,143) (24,429)
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 126,650 110,687 231,105 207,191
Income tax expense 73,188 46,496 116,538 85,306
- ------------------------------------------------------------------------------------------
NET INCOME $ 53,462 64,191 114,567 121,885
==========================================================================================
BASIC EARNINGS PER SHARE* $ .38 .47 .83 .89
==========================================================================================
DILUTED EARNINGS PER SHARE* $ .38 .46 .81 .87
==========================================================================================
DIVIDENDS PER COMMON SHARE* $ .045 .043 .09 .087
==========================================================================================
AVERAGE BASIC SHARES
OUTSTANDING * 138,852 136,922 138,455 136,686
==========================================================================================
AVERAGE DILUTED SHARES
OUTSTANDING * 141,461 140,028 141,245 139,701
==========================================================================================
* Reflects March 1999 stock split. See Note 4.
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,
- ------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
Net income $ 53,462 64,191 114,567 121,885
- ------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gains arising during
period, net of $1,313, $1,056, $2,430
and $5,891 tax 2,439 1,961 4,512 10,941
Reclassification adjustment for gains
included in net income, net of $-,
$3,060, $3,625 and $11,027 tax - (5,683) (6,733) (20,478)
- ------------------------------------------------------------------------------------------
Other comprehensive income,
net of $1,313, $2,004, $1,195,
and $5,136 tax 2,439 (3,722) (2,221) (9,537)
- ------------------------------------------------------------------------------------------
Comprehensive income $ 55,901 60,469 112,346 112,348
==========================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 93,893 5,742
Accounts receivable, less allowance of
$3,535 and $4,155 194,067 185,398
Materials and supplies, at average cost 20,624 23,709
Other 7,450 11,389
- ------------------------------------------------------------------------------------------
316,034 226,238
- ------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,181,519 2,351,453
- ------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired, less accumulated
amortization of $139,657 and $133,135 1,625,044 1,956,701
Other 436,116 401,063
- ------------------------------------------------------------------------------------------
2,061,160 2,357,764
- ------------------------------------------------------------------------------------------
$ 4,558,713 4,935,455
==========================================================================================
LIABILITIES AND EQUITY
- ----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 53,360 53,010
Accounts payable 113,923 87,627
Accrued expenses and other liabilities
Salaries and benefits 43,015 36,900
Taxes 128,143 33,411
Interest 36,095 36,926
Other 23,532 24,249
Advance billings and customer deposits 32,092 32,721
- ------------------------------------------------------------------------------------------
430,160 304,844
- ------------------------------------------------------------------------------------------
LONG-TERM DEBT 2,017,472 2,558,000
- ------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 461,930 541,129
- ------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized 350,000,000
shares, issued and outstanding 139,363,490 and
138,082,926 shares 139,363 138,083
Paid-in capital 467,561 451,535
Accumulated other comprehensive income - unrealized
holding gain on investments, net of taxes 4,996 7,217
Retained earnings 1,034,505 932,611
Unearned ESOP shares (5,380) (6,070)
Preferred stock - non-redeemable 8,106 8,106
- ------------------------------------------------------------------------------------------
1,649,151 1,531,482
- ------------------------------------------------------------------------------------------
$ 4,558,713 4,935,455
==========================================================================================
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six months
ended June 30,
- ------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 138,083 91,104
Issuance of common stock for acquisitions - 28
Conversion of convertible securities into common stock 254 169
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,026 499
- ------------------------------------------------------------------------------------------
Balance at end of period 139,363 91,800
- ------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 451,535 469,586
Issuance of common stock for acquisitions - 1,059
Conversion of convertible securities into common stock 3,046 3,131
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 11,475 8,350
Amortization of unearned compensation and other 1,505 1,281
- ------------------------------------------------------------------------------------------
Balance at end of period 467,561 483,407
- ------------------------------------------------------------------------------------------
Accumulated other comprehensive income
Balance at beginning of period 7,217 11,893
Change in unrealized holding gain on investments,
net of reclassification adjustment (2,221) (9,537)
- ------------------------------------------------------------------------------------------
Balance at end of period 4,996 2,356
- ------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 932,611 728,033
Net income 114,567 121,885
Cash dividends declared
Common stock-$.09 and $.0866 per share, respectively * (12,469) (11,864)
Preferred stock (204) (204)
- ------------------------------------------------------------------------------------------
Balance at end of period 1,034,505 837,850
- ------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (6,070) (8,450)
Release of ESOP shares 690 1,190
- ------------------------------------------------------------------------------------------
Balance at end of period (5,380) (7,260)
- ------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 8,106 8,106
- ------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,649,151 1,416,259
==========================================================================================
* Reflects March 1999 stock split. See Note 4.
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months
ended June 30,
- ------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 114,567 121,885
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 175,993 160,678
Deferred income taxes 4,345 25,537
Income from unconsolidated cellular entities (16,112) (15,943)
Minority interest 22,100 6,645
Gain on sales of assets (49,959) (49,859)
Changes in current assets and current liabilities:
Accounts receivable (16,392) (20,498)
Accounts payable 8,927 (6,834)
Accrued taxes 30,701 (47,170)
Other current assets and other current
liabilities, net 14,118 14,240
Increase in other non-current assets (23,016) (5,334)
Change in other non-current liabilities (586) 5,551
Other, net 10,073 3,489
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 274,759 192,387
- ------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (149,128) (122,018)
Acquisitions, net of cash acquired - (5,000)
Proceeds from sales of assets 465,784 132,307
Distributions from unconsolidated cellular entities 10,109 11,647
Payment into escrow for interest in cellular entity (17,614) -
Purchase of life insurance investment (4,405) (5,150)
Other, net 1,511 2,386
- ------------------------------------------------------------------------------------------
Net cash provided by investing activities 306,257 14,172
- ------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 7,954 772,852
Payments of long-term debt (501,087) (938,532)
Payment upon settlement of hedge contracts - (40,237)
Payment of deferred debt issuance costs - (6,625)
Proceeds from issuance of common stock 11,947 8,926
Cash dividends (12,673) (12,068)
Other, net 994 74
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (492,865) (215,610)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 88,151 (9,051)
Cash and cash equivalents at beginning of period 5,742 26,017
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 93,893 16,966
==========================================================================================
Supplemental cash flow information:
Income taxes paid $ 79,497 118,364
Interest paid $ 80,559 66,718
- ------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CenturyTel, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
(1) Basis of Financial Reporting
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, 1998.
The unaudited financial information for the three months and six months
ended June 30, 1999 and 1998 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,
1999 1998
- ------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost $ 3,311,544 3,660,252
Accumulated depreciation (1,503,094) (1,661,315)
- ------------------------------------------------------------------------
1,808,450 1,998,937
- ------------------------------------------------------------------------
Cellular, at cost 434,285 428,984
Accumulated depreciation (190,036) (178,569)
- ------------------------------------------------------------------------
244,249 250,415
- ------------------------------------------------------------------------
Corporate and other, at cost 233,451 200,422
Accumulated depreciation (104,631) (98,321)
- ------------------------------------------------------------------------
128,820 102,101
- ------------------------------------------------------------------------
$ 2,181,519 2,351,453
========================================================================
(3) Earnings 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, 1999
and 1998) were accounted for by the equity method.
Six months
ended June 30,
- --------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------
(Dollars in thousands)
Results of operations
Revenues $ 642,489 606,793
Operating income $ 195,574 216,062
Net income $ 194,937 216,952
- --------------------------------------------------------------------------
(4) Stock Split
On February 23, 1999, the Company's Board of Directors declared a
three-for-two common stock split effected as a 50% stock dividend distributed on
March 31, 1999. Shares outstanding and per share data for 1998 have been
restated to reflect this stock split.
(5) Sales of Assets
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 to Alaska Communications Systems Holdings, Inc. The
Company received approximately $300 million in after-tax cash as a result of the
transaction. No gain or loss was recorded upon the disposition of these
properties.
In June 1999, the Company sold the assets of its cellular operations in
Brownsville and McAllen, Texas to Western Wireless Corporation for approximately
$96 million cash. In connection therewith, the Company recorded a pre-tax gain
of approximately $39.6 million, and an after-tax loss of approximately $7.8
million ($.05 per diluted share.)
(6) Pending Acquisitions
In June 1999, the Company signed a definitive asset purchase agreement to
purchase GTE's telephone access lines (which numbered approximately 213,650 at
December 31, 1998) and related local exchange assets in Arkansas for
approximately $843.4 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 to purchase GTE's telephone access lines (which numbered approximately
116,000 at December 31, 1998) and related local exchange assets in Missouri for
approximately $290 million, subject to certain adjustments. At closing, the
Company will make a preferred equity investment in the newly organized company
of approximately $55 million. These transactions are expected to close in the
first quarter of 2000, pending regulatory approvals and certain other closing
conditions.
(7) Business Segments
The Company has two separately reportable business segments: telephone
and cellular. The operating income of these segments is reviewed by the chief
operating decision maker to assess performance and make business decisions.
Three months Six months
ended June 30, ended June 30,
- ------------------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------
Operating revenues
Telephone segment $ 279,113 265,322 572,074 525,135
Cellular segment 109,932 104,871 208,403 199,037
Other operations 27,705 18,185 50,529 35,926
- ------------------------------------------------------------------------------
$ 416,750 388,378 831,006 760,098
==============================================================================
Operating income
Telephone segment $ 83,766 79,954 179,064 156,797
Cellular segment 42,753 37,511 73,136 67,166
Other operations 4,106 4,023 9,048 7,657
- ------------------------------------------------------------------------------
$ 130,625 121,488 261,248 231,620
==============================================================================
Operating income $ 130,625 121,488 261,248 231,620
Gain on sale or exchange
of assets, net 39,601 25,516 49,959 49,859
Interest expense (37,487) (42,072) (79,728) (84,881)
Income from unconsolidated
cellular entities 9,267 9,066 16,112 15,943
Minority interest (18,790) (4,002) (22,100) (6,645)
Other income and expense 3,434 691 5,614 1,295
- ------------------------------------------------------------------------------
Income before income
tax expense $ 126,650 110,687 231,105 207,191
==============================================================================
June 30, December 31,
1999 1998
- -----------------------------------------------------------------------
(Dollars in thousands)
Total assets
Telephone segment $ 3,137,296 3,674,148
Cellular segment 1,242,961 1,097,789
Other operations 178,456 163,518
- -----------------------------------------------------------------------
Total assets $ 4,558,713 4,935,455
=======================================================================
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, 1998. The results of operations for the three
months and six months ended June 30, 1999 are not necessarily indicative of the
results of operations which might be expected for the entire year.
CenturyTel, Inc. (the "Company"), is a regional diversified
communications company that is primarily engaged in providing local telephone
services and cellular telephone communications services. At June 30, 1999, 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 cellular entities had more
than 640,000 cellular subscribers. On December 1, 1998, the Company acquired
from affiliates of Ameritech Corporation ("Ameritech") telephone operations
serving 86,000 access lines in northern and central Wisconsin and the related
telephone directories for approximately $221 million cash. The operations of the
former Ameritech properties are included in the Company's results of operations
beginning December 1, 1998. 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. 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
risks inherent in rapid technological change; the Company's ability to
effectively manage its growth, including integrating newly acquired properties
into the Company's operations; the success and expense of the remediation
efforts of the Company and its vendors in achieving year 2000 compliance; 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, 1998. 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, 1999 Compared
to Three Months Ended June 30, 1998
Net income (and diluted earnings per share) for the second quarter of
1999 and 1998 was $53.5 million ($.38) and $64.2 million ($.46), respectively.
Net income (excluding the after-tax effect of asset sales) for the second
quarter of 1999 was $61.2 million compared to $49.5 million during the second
quarter of 1998. Diluted earnings per share (excluding the after-tax effect of
asset sales) increased to $.43 during the three months ended June 30, 1999 from
$.35 during the three months ended June 30, 1998, a 22.9% increase.
Three months
ended June 30,
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
(Dollars, except per
share amounts,and
shares in thousands)
Operating income
Telephone $ 83,766 79,954
Cellular 42,753 37,511
Other 4,106 4,023
- ---------------------------------------------------------------------------
130,625 121,488
Gain on sale or exchange of assets, net 39,601 25,516
Interest expense (37,487) (42,072)
Income from unconsolidated cellular entities 9,267 9,066
Minority interest (18,790) (4,002)
Other income and expense 3,434 691
Income tax expense (73,188) (46,496)
- ---------------------------------------------------------------------------
Net income $ 53,462 64,191
===========================================================================
Basic earnings per share $ .38 .47
===========================================================================
Diluted earnings per share $ .38 .46
===========================================================================
Average basic shares outstanding 138,852 136,922
===========================================================================
Average diluted shares outstanding 141,461 140,028
===========================================================================
Contributions to operating revenues and operating income by the Company's
telephone, cellular, and other operations for the three months ended June 30,
1999 and 1998 were as follows:
Three months
ended June 30,
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
Operating revenues
Telephone operations 67.0% 68.3
Cellular operations 26.4% 27.0
Other operations 6.6% 4.7
Operating income
Telephone operations 64.1% 65.8
Cellular operations 32.7% 30.9
Other operations 3.2% 3.3
- ---------------------------------------------------------------------------
Telephone Operations
Three months
ended June 30,
- ----------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 89,452 81,456
Network access 155,789 151,976
Other 33,872 31,890
- ----------------------------------------------------------------------------
279,113 265,322
- ----------------------------------------------------------------------------
Operating expenses
Plant operations 63,492 57,548
Customer operations 24,001 23,033
Corporate and other 38,916 39,225
Depreciation and amortization 68,938 65,562
- ----------------------------------------------------------------------------
195,347 185,368
- ----------------------------------------------------------------------------
Operating income $ 83,766 79,954
============================================================================
Telephone operating income increased $3.8 million (4.8%) due to an
increase in operating revenues of $13.8 million (5.2%), which more than offset
an increase in operating expenses of $10.0 million (5.4%).
Of the $13.8 million increase in operating revenues, $10.9 million was
attributable to the properties acquired from Ameritech, which was more than
offset by a $14.4 million decrease due to the sale of the Company's Alaska
telephone properties on May 14, 1999. The remaining $17.3 million increase in
revenues was partially due to a $5.6 million increase in local network service
primarily due to an increase in the number of customer access lines; a $2.4
million increase in revenues due to increased minutes of use; a $2.3 million
increase in amounts received from the federal Universal Service Fund; a $1.7
million increase in revenues resulting from revisions of revenue settlement
agreements; and a $1.5 million increase in the partial recovery of increased
operating expenses through revenue sharing arrangements in which the Company
participates with other telephone companies.
Plant operations expenses increased $5.9 million (10.3%), of which $3.1
million was attributable to the properties acquired from Ameritech, offset by a
$4.1 decrease due to the sale of the Alaska properties. The remaining $6.9
million increase was primarily due to a $1.6 million increase in repair and
maintenance expenses; a $2.1 million increase in network operations expenses;
and a $1.3 million increase in expenses associated with the Company's
non-regulated operations.
During the second quarter of 1999 customer operations expenses increased
$968,000 (4.2%) due to a $769,000 increase in salaries and benefits and a
$894,000 increase attributable to the properties acquired from Ameritech. Such
increases were partially offset by a $1.4 million decrease due to the sale of
the Alaska properties.
Corporate and other expenses decreased $309,000 (.8%) primarily due to a
$2.0 million decrease in salaries and benefits and a $2.2 million decrease due
to the sale of the Alaska properties. Such decreases were partially offset by a
$2.1 million increase in contract labor expenses associated with readying the
Company's systems to be year 2000 compliant and a $1.6 million increase in
operating taxes.
Depreciation and amortization increased $3.4 million, of which $3.9
million was attributable to the properties acquired from Ameritech and $3.1
million was due to higher levels of plant in service. Such increases were
partially offset by a $3.9 million reduction in depreciation and amortization
expense related to the Company's Alaska properties.
Cellular Operations and Income From Unconsolidated Cellular Entities
Three months
ended June 30,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands)
Operating income - cellular operations $ 42,753 37,511
Minority interest, exclusive of the effect
of asset sales (3,864) (4,002)
Income from unconsolidated cellular entities 9,267 9,066
- ------------------------------------------------------------------------------
$ 48,156 42,575
==============================================================================
The Company's cellular operations (discussed below) reflect 100% of the
results of operations of the cellular entities in which the Company has a
majority ownership interest. The minority interest owners' share of the income
of such entities is reflected in the Company's Consolidated Statements of Income
as an expense in "Minority interest." See Minority Interest for additional
information. The Company's share of earnings from the cellular entities in which
it has less than a majority interest is accounted for using the equity method
and is reflected in the Company's Consolidated Statements of Income as "Income
from unconsolidated cellular entities."
Cellular Operations
Three months
ended June 30,
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 107,405 102,766
Equipment sales 2,527 2,105
- -------------------------------------------------------------------------------
109,932 104,871
- -------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 5,254 3,702
System operations 14,438 14,633
General, administrative and customer service 18,470 20,063
Sales and marketing 12,922 13,791
Depreciation and amortization 16,095 15,171
- -------------------------------------------------------------------------------
67,179 67,360
- -------------------------------------------------------------------------------
Operating income $ 42,753 37,511
===============================================================================
Cellular operating income increased $5.2 million (14.0%) to $42.8 million
in the second quarter of 1999 from $37.5 million in the second quarter of 1998.
Cellular operating revenues increased $5.1 million (4.8%) while operating
expenses decreased $181,000 (.3%).
The $4.6 million increase in service revenues was primarily due to a $5.7
million increase in roaming usage which was partially offset by a $1.1 million
decrease in local service revenues.
The following table illustrates the growth in the Company's cellular
customer base in its majority-owned markets:
Three months
ended June 30,
- -----------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------
Customers at beginning of period 638,992 576,397
Gross units added internally 45,949 43,013
Disconnects 33,623 35,481
Net units added 12,326 7,532
Effect of dispositions (10,563) -
Customers at end of period 640,755 583,929
- -----------------------------------------------------------------------
The average monthly cellular service revenue per customer declined to $56
during the second quarter of 1999 from $59 during the second quarter of 1998
partially due to the continued trend that a higher percentage of new subscribers
tend to be lower usage customers and pricing rate reductions. The average
monthly service revenue per customer may further decline (i) as market
penetration increases and additional lower usage customers are activated and
(ii) 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, all of which are likely to result in lower
average revenue per customer. The Company will continue to focus on customer
service and attempt to stimulate cellular usage by promoting the availability of
certain enhanced services and by improving the quality of its service through
the construction of additional cell sites and other enhancements to its system.
General, administrative and customer service expenses decreased $1.6
million (7.9%) due to a $2.2 million decrease in the provision for doubtful
accounts which was partially offset by a $607,000 increase in general office
expenses.
The Company's average monthly churn rate (the percentage of cellular
customers that terminate service) was 1.72% for the second quarter of 1999 and
1.97% for the second quarter of 1998.
Sales and marketing expenses decreased $869,000 (6.3%) primarily due to a
$669,000 decrease in advertising and sales promotions expenses and a $497,000
decrease in commissions paid to agents for selling services to new customers
primarily as a result of fewer cellular units being added through this
distribution channel during 1999 as compared to 1998.
Depreciation and amortization increased $924,000 (6.1%) primarily due to
an increase in amortization of intangibles.
Other Operations
Three months
ended June 30,
- --------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 19,411 12,338
Call center 3,103 2,349
Other 5,191 3,498
- --------------------------------------------------------------------------
27,705 18,185
- --------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 22,620 13,411
Depreciation and amortization 979 751
- --------------------------------------------------------------------------
23,599 14,162
- --------------------------------------------------------------------------
Operating income $ 4,106 4,023
==========================================================================
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or cellular segments, including,
but not limited to, the Company's non-regulated long distance and call center
operations. The $7.1 million increase in long distance revenues was primarily
attributable to the growth in the number of customers. The number of long
distance customers as of June 30, 1999 and 1998 was 259,800 and 204,700,
respectively.
Operating expenses increased $9.4 million primarily due to (i) a $4.7
million increase in expenses of the Company's long distance operations due
primarily to an increase in customers and (ii) a $2.5 million increase in
expenses due to expansion of the Company's security, personal communications
services and fiber network businesses.
Interest Expense
Interest expense decreased $4.6 million in the second quarter of 1999
compared to the second quarter of 1998 primarily due to a reduction in
outstanding indebtedness.
Gain on Sale or Exchange 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 5 of Notes to
Consolidated Financial Statements for additional information and Minority
Interest below.
In the second quarter of 1998, the Company recorded pre-tax gains
aggregating $25.5 million ($14.7 million after-tax; $.11 per diluted share)
primarily as a result of the sale of 750,000 shares of MCIWorldCom, Inc. stock
and the sale of minority interests in two non-strategic cellular entities.
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 increased $14.8 million primarily due to the minority
partners' share of the gain on sale of assets of the Brownsville and McAllen,
Texas cellular properties.
Other Income and Expense
Other income and expense increased $2.7 million in the second quarter of
1999 compared to the second quarter of 1998, substantially all of which relates
to favorable non-recurring items recorded in the second quarter of 1999.
Income Tax Expense
Income tax expense increased $26.7 million in the second quarter of 1999
compared to the second quarter of 1998. Exclusive of the effects of income tax
expense on asset sales, the effective income tax rate was 40.0% and 41.9% in the
three months ended June 30, 1999 and 1998, respectively. Such decrease in the
effective income tax rate was primarily due to a decrease in non-deductible
amortization of excess cost of net assets acquired (goodwill) attributable to
the sale of the Company's Alaska and Texas properties in the second quarter of
1999.
Six Months Ended June 30, 1999 Compared
to Six Months Ended June 30, 1998
Net income (and diluted earnings per share) for the first six months of
1999 and 1998 was $114.6 million ($.81) and $121.9 million ($.87), respectively.
Net income (excluding the after-tax effect of asset sales) for the first six
months of 1999 was $115.6 million compared to $91.4 million during the first six
months of 1998. Diluted earnings per share (excluding the after-tax effect of
asset sales) increased to $.82 during the six months ended June 30, 1999 from
$.66 during the six months ended June 30, 1998, a 24.2% increase.
Six months
ended June 30,
- ------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
Operating income
Telephone $ 179,064 156,797
Cellular 73,136 67,166
Other 9,048 7,657
- ------------------------------------------------------------------------------
261,248 231,620
Gain on sale or exchange of assets, net 49,959 49,859
Interest expense (79,728) (84,881)
Income from unconsolidated cellular entities 16,112 15,943
Minority interest (22,100) (6,645)
Other income and expense 5,614 1,295
Income tax expense (116,538) (85,306)
- ------------------------------------------------------------------------------
Net income $ 114,567 121,885
==============================================================================
Basic earnings per share $ .83 .89
==============================================================================
Diluted earnings per share $ .81 .87
==============================================================================
Average basic shares outstanding 138,455 136,686
==============================================================================
Average diluted shares outstanding 141,245 139,701
==============================================================================
Contributions to operating revenues and operating income by the Company's
telephone, cellular, and other operations for the six months ended June 30, 1999
and 1998 were as follows:
Six months
ended June 30,
- -----------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------
Operating revenues
Telephone operations 68.8% 69.1
Cellular operations 25.1% 26.2
Other operations 6.1% 4.7
Operating income
Telephone operations 68.5% 67.7
Cellular operations 28.0% 29.0
Other operations 3.5% 3.3
- -----------------------------------------------------------------------
Telephone Operations
Six months
ended June 30,
- -----------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 180,109 159,582
Network access 322,944 303,154
Other 69,021 62,399
- -----------------------------------------------------------------------
572,074 525,135
- -----------------------------------------------------------------------
Operating expenses
Plant operations 130,514 114,207
Customer operations 45,895 45,849
Corporate and other 75,835 79,008
Depreciation and amortization 140,766 129,274
- -----------------------------------------------------------------------
393,010 368,338
- -----------------------------------------------------------------------
Operating income $ 179,064 156,797
=======================================================================
Telephone operating income increased $22.3 million (14.2%) due to an
increase in operating revenues of $46.9 million (8.9%), which more than offset
an increase in operating expenses of $24.7 million (6.7%).
Of the $46.9 million increase in operating revenues, $22.9 million was
attributable to the properties acquired from Ameritech, which was partially
offset by a $11.7 million decrease due to the sale of the Company's Alaska
telephone properties. The remaining $35.7 million increase in revenues was
partially due to a $11.1 million increase in local network service primarily due
to an increase in access lines; a $4.4 million increase resulting from revisions
of revenue settlement agreements; a $4.0 million increase in amounts received
from the federal Universal Service Fund; a $3.0 million increase in the partial
recovery of increased operating expenses through revenue sharing arrangements in
which the Company participates with other telephone companies; a $2.6 million
increase in revenues from the provision of Internet access; and a $2.2 million
increase in revenues due to increased minutes of use.
Plant operations expenses increased $16.3 million (14.3%) of which $5.3
million was attributable to the properties acquired from Ameritech, offset by a
$3.1 million decrease due to the sale of the Alaska telephone properties. The
remaining $14.1 million increase was primarily due to a $4.0 million increase in
repair and maintenance expenses; a $3.6 million increase in network operations
expenses; and a $1.9 million increase in expenses associated with the Company's
non-regulated operations.
Corporate and other expenses decreased $3.2 million (4.0%) due to a $4.1
million decrease in salaries and benefits and a $4.0 million decrease in
expenses due to the sale of the Alaska telephone properties. Such decreases were
partially offset by a $2.3 million increase in expenses attributable to the
Ameritech properties and a $2.4 million increase in contract labor expenses
attributable to readying the Company's systems to be year 2000 compliant.
Depreciation and amortization increased $11.5 million (8.9%) of which
$7.8 million was attributable to the properties acquired from Ameritech and $5.4
million was due to higher levels of plant in service. Such increases were
partially offset by a $3.3 million reduction in depreciation and amortization
expense related to the Company's Alaska properties.
Cellular Operations and Income From Unconsolidated Cellular Entities
Six months
ended June 30,
- ----------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------
(Dollars in thousands)
Operating income - cellular operations $ 73,136 67,166
Minority interest, exclusive of the
effect of asset sales (7,162) (6,645)
Income from unconsolidated cellular entities 16,112 15,943
- ----------------------------------------------------------------------------
$ 82,086 76,464
============================================================================
The Company's cellular operations (discussed below) reflect 100% of the
results of operations of the cellular entities in which the Company has a
majority ownership interest. The minority interest owners' share of the income
of such entities is reflected in the Company's Consolidated Statements of Income
as an expense in "Minority interest." See Minority Interest for additional
information. The Company's share of earnings from the cellular entities in which
it has less than a majority interest is accounted for using the equity method
and is reflected in the Company's Consolidated Statements of Income as "Income
from unconsolidated cellular entities."
Cellular Operations
Six months
ended June 30,
- -------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 203,381 194,864
Equipment sales 5,022 4,173
- -------------------------------------------------------------------
208,403 199,037
- -------------------------------------------------------------------
Operating expenses
Cost of equipment sold 9,635 7,398
System operations 27,741 28,885
General, administrative and
customer service 37,630 38,444
Sales and marketing 26,935 27,433
Depreciation and amortization 33,326 29,711
- -------------------------------------------------------------------
135,267 131,871
- -------------------------------------------------------------------
Operating income $ 73,136 67,166
===================================================================
Cellular operating income increased $6.0 million (8.9%) to $73.1 million
in the first six months of 1999 from $67.2 million in the first six months of
1998. Cellular operating revenues increased $9.4 million (4.7%), while operating
expenses increased $3.4 million (2.6%).
The $8.5 million increase in service revenues was primarily due to a $9.4
million increase in roaming usage which was partially offset by a $922,000
decrease in local service revenues.
The following table illustrates the growth in the Company's cellular
customer base in its majority owned markets:
Six months
ended June 30,
- ------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------
Customers at beginning of period 624,119 569,983
Gross units added internally 98,931 91,689
Disconnects 71,732 77,743
Net units added 27,199 13,946
Effect of dispositions (10,563) -
Customers at end of period 640,755 583,929
- ------------------------------------------------------------------------
The average monthly cellular service revenue per customer declined to $53
during the first six months of 1999 from $56 during the first six months of 1998
partially due to the continued trend that a higher percentage of new subscribers
tend to be lower usage customers and pricing rate reductions. The average
monthly service revenue per customer may further decline (i) as market
penetration increases and additional lower usage customers are activated and
(ii) 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, all of which are likely to result in lower
average revenue per customer. The Company will continue to focus on customer
service and attempt to stimulate cellular usage by promoting the availability of
certain enhanced services and by improving the quality of its service through
the construction of additional cell sites and other enhancements to its system.
System operations expenses decreased $1.1 million (4.0%) in the first six
months of 1999 primarily due to a $2.0 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. Such decrease was partially offset by
a $722,000 increase associated with operating a greater number of cell sites.
General, administrative and customer service expenses decreased $814,000
(2.1%) due to a $4.7 million decrease in the provision for doubtful accounts
which was partially offset by a $3.9 million increase in general office
expenses.
The Company's average monthly churn rate (the percentage of cellular
customers that terminate service) was 1.86% for the first six months of 1999 and
2.22% for the first six months of 1998.
Sales and marketing expenses decreased $498,000 (1.8%) due primarily to
$2.0 million reduction in commissions paid to agents for selling services to new
customers primarily as a result of fewer cellular units being added through this
distribution channel during 1999 as compared to 1998. Such decrease was
partially offset by a $1.4 million increase in costs incurred in selling
products and services in retail locations.
Depreciation and amortization increased $3.6 million (12.2%), of which
$1.9 million was attributable to a higher level of plant in service and $2.2
million was due to an increase in amortization of intangibles.
Other Operations
Six months
ended June 30,
- -----------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 36,441 23,602
Call center 5,547 4,948
Other 8,541 7,376
- -----------------------------------------------------------------------
50,529 35,926
- -----------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 39,580 26,576
Depreciation and amortization 1,901 1,693
- -----------------------------------------------------------------------
41,481 28,269
- -----------------------------------------------------------------------
Operating income $ 9,048 7,657
=======================================================================
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or cellular segments, including,
but not limited to, the Company's non-regulated long distance and call center
operations. The $12.8 million increase in long distance revenues was
attributable to the growth in the number of customers.
Operating expenses increased $13.2 million primarily due to (i) an
increase of $6.9 million in expenses of the Company's long distance operations
due primarily to an increase in customers and (ii) a $3.7 million increase in
expenses due to expansion of the Company's security, personal communication
services and fiber network businesses.
Interest Expense
Interest expense decreased $5.2 million in the first six months of 1999
compared to the first six months of 1998 primarily due to a reduction in
outstanding indebtedness.
Gain on Sale or Exchange of Assets, Net
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 5 of Notes to Consolidated Financial Statements
for additional information and Minority Interest below.
In the first six months of 1998, the Company recorded pre-tax gains
aggregating $49.9 million ($30.5 million after-tax; $.21 per diluted share)
primarily due to the conversion of its investment in the common stock of Brooks
Fiber Networks, Inc. into common stock of WorldCom, Inc., the subsequent sale of
750,000 shares of WorldCom, Inc. common stock, and the sale of minority
interests in two non-strategic cellular entities.
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 increased $15.5 million primarily due to the minority
partners' share of the gain on sale of assets of the Brownsville and McAllen,
Texas cellular properties.
Other Income and Expense
Other income and expense increased $4.3 million in the first six months
of 1999 compared to the first six months of 1998, substantially all of which
relates to favorable non-recurring items recorded in 1999.
Income Tax Expense
Income tax expense increased $31.2 million in the first six months of
1999 compared to the first six months of 1998. Exclusive of the effects of
income tax expense on asset sales, the effective income tax rate was 41.0% and
41.9% in the six months ended June 30, 1999 and 1998, respectively. Such
decrease in the effective income tax rate was primarily due to a decrease in
non-deductible amortization of excess cost of net assets acquired (goodwill)
attributable to the sale of the Company's Alaska and Texas properties in 1999.
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 $274.8 million during the
first six months of 1999 compared to $192.4 million during the first six months
of 1998. 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, cellular operations, and other operations of the Company,
see Results of Operations.
Net cash provided by investing activities was $306.3 million for the six
months ended June 30, 1999 compared to $14.2 million for the six months ended
June 30, 1998. Proceeds from the sales of assets were $465.8 million in the
first six months of 1999 compared to $132.3 million in the first six months of
1998. Payments for property, plant and equipment were $27.1 million more in the
first six months of 1999 than in the comparable period during 1998. Capital
expenditures for the six months ended June 30, 1999 were $86.6 million for
telephone, $29.0 million for cellular and $33.5 million for other operations.
Net cash used in financing activities was $492.9 million during the first
six months of 1999 compared to $215.6 million during the first six months of
1998. Net payments of long-term debt were $327.5 million more during the first
six months of 1999 compared to the first six months of 1998, primarily due to
utilization of proceeds received from the sales of assets. During the first six
months of 1998, the Company issued an aggregate of $765 million of senior notes
and debentures. The net proceeds of approximately $758 million were used to
reduce the bank indebtedness incurred in connection with the acquisition of
Pacific Telecom, Inc. In addition, the Company paid approximately $40 million to
settle numerous interest rate hedge contracts that had been entered into in
anticipation of these debt issuances.
Budgeted capital expenditures for 1999 total $215 million for telephone
operations, $70 million for cellular operations and $60 million for corporate
and other operations.
As of June 30, 1999, Century's telephone subsidiaries had available for
use $135.1 million of commitments for long-term financing from the Rural
Utilities Service and the Company had $606.1 million of undrawn committed bank
lines of credit.
In June 1999, the Company signed a definitive asset purchase agreement to
purchase GTE's local exchange assets in Arkansas for approximately $834.4
million in cash. In July 1999, the Company acquired a 61.5% (56.9% fully
diluted) interest in a joint venture company which has entered into a definitive
asset purchase agreement to purchase GTE's local exchange assets in Missouri for
approximately $290 million in cash. At closing, the Company will make
approximately a $55 million preferred equity investment in the new entity. The
purchase price under both agreements is subject to adjustments which are not
expected to be material in the aggregate. Both transactions are anticipated to
close in first quarter 2000, subject to regulatory approvals and certain other
closing conditions. Financing plans are not yet complete and will be dependent
upon the Company's review of its alternatives and market conditions. As a result
of the Company's announcement of these transactions, Moody's placed its ratings
of the Company's debt under review for possible downgrade and Standard & Poor's
placed its ratings of the Company's debt on CreditWatch with negative
implications.
OTHER MATTERS
Accounting for the Effects of Regulation
The Company currently accounts for its regulated telephone operations in
accordance with the provisions of Statement of Financial Accounting Standards
No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation."
While the ongoing applicability of SFAS 71 to the Company's telephone operations
is being monitored due to the changing regulatory, competitive and legislative
environments, the Company believes that SFAS 71 still applies. However, it is
possible that changes in regulation or legislation or anticipated changes in
competition or in the demand for regulated services or products could result in
the Company's telephone operations not being subject to SFAS 71 in the near
future. In that event, implementation of Statement of Financial Accounting
Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the
Discontinuance of Application of FASB Statement No. 71," would require the
write-off of previously established regulatory assets and liabilities, along
with an adjustment of certain accumulated depreciation accounts to reflect the
difference between recorded depreciation and the amount of depreciation that
would have been recorded had the Company's telephone operations not been subject
to rate regulation. Such discontinuance of the application of SFAS 71 would
result in a material, noncash charge against earnings which would be reported as
an extraordinary item. While the effect of implementing SFAS 101 cannot be
precisely estimated at this time, management believes that the noncash,
after-tax, extraordinary charge would be between $320 million and $370 million.
Year 2000 Readiness Disclosure
The Year 2000 issue concerns the inability of computer systems and certain
other equipment to properly recognize and process data that uses two digits
rather than four to designate particular years. The Company has initiated a Year
2000 Project Plan ("the Plan") to assess whether its systems that process date
sensitive information will perform satisfactorily leading up to and beyond
January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000,
any Year 2000-related problem with critical systems, the failure of which could
have a material adverse effect on the Company's operations. The Plan includes
steps to (i) identify each critical system element that requires date code
remediation, (ii) establish a plan to remediate such systems, (iii) implement
all required remediations and (iv) selectively test the remediated systems.
Thus far, the identification phase has identified Year 2000 issues in the
following critical Company-owned systems: (i) switching and transmission
hardware and software used by the Company to route and deliver telephone calls;
(ii) network support systems, including customer service systems, and (iii)
billing and collection systems used by the Company to invoice and process most
of its customer payments. In addition, the Company (i) receives critical
services from providers of utilities and other services to facilities that house
employees and switching, transmission and other equipment and (ii) is dependent
upon outside vendors for, among other things, the provision of critical network
components and cellular billing services. The Company is also critically reliant
upon the systems of other telecommunication carriers with which the Company's
systems interconnect for the routing and delivery of telephone calls. The
Company has also identified potential Year 2000-related liability with respect
to telephone equipment manufactured by unaffiliated parties that the Company has
sold or leased to its customers ("Customer Premises Equipment" or "CPE"). The
identification and planning phases of the Plan are materially complete with
respect to Company-owned systems, third party vendors and CPE customers, and are
substantially complete with respect to other telecommunication carriers.
Based on work completed under the Plan to date, the Company currently
intends to take the following additional steps under its Plan with respect to
Company-owned systems, third-party vendors, other telecommunications carriers,
and CPE customers:
o The Company generally plans to remediate Company-owned switching,
transmission, billing and collection and other critical systems through the
revision or replacement of current system components. Necessary changes to
critical Company-owned systems are substantially complete and are expected
to be finalized by third quarter 1999. The selective testing and
verification of such changes are expected to be completed during 1999. Due
to the large number of system components requiring remediation, the Company
does not intend to test every remediated system but will rely upon the
results of selective testing to determine the effectiveness of remediation
efforts.
o With respect to critical services provided by utilities and other third
parties, the Company contacted all such suppliers during 1998. Thus far, a
majority of those suppliers who have responded have indicated that their
systems and service delivery mechanisms are Year 2000 compliant or can be
made so through currently available modifications. The Company plans to
continue monitoring all third-party remediation efforts and to make
contingency plans for the delivery of such services as necessary.
o The Company has received certain assurances from industry trade data
regarding the Year 2000 readiness of major telecommunications companies with
which the Company's switching systems interconnect. In June 1999, the
Company made specific inquiries with these and other telecommunication
carriers to determine their compliance status, and expects to obtain
information in response thereto during third quarter 1999, although there
can be no assurance that carriers will supply this information.
o Finally, the Company has obtained Year 2000 compliance information from CPE
manufacturers and has provided and will continue to provide this information
to the Company's business customers throughout 1999. The Company plans to
work with CPE manufacturers to encourage the development of remedies for
Year 2000 problems in such equipment and to continue working with its
customers to identify Year 2000 problems in CPE. However, there can be no
assurance that CPE manufacturers or customers will cooperate with the
Company's efforts to address these problems.
While the Company currently believes that it will be able to remediate and
selectively test Company-owned systems in time to minimize any detrimental
effect on its operations, there can be no assurance that such steps will be
successful. Failure by the Company to timely and effectively remediate its
systems, or the failure of critical vendors and suppliers and other
telecommunications carriers to remediate affected systems, could have a material
adverse impact on the Company's business, financial condition, results of
operations and prospects. Because the impact of Year 2000 issues on the Company
is materially dependent on the mitigation efforts of parties outside the
Company's control, the Company cannot assess with certainty the magnitude of any
such potential adverse impact. However, based upon risk assessment work
conducted thus far, the Company believes that the most reasonably likely worst
case scenario of the failure by the Company, its suppliers or other
telecommunications carriers with which the Company interconnects to resolve Year
2000 issues would be an inability by the Company (i) to provide
telecommunications services to the Company's customers, (ii) to route and
deliver telephone calls originating from or terminating with other
telecommunications carriers, (iii) to timely and accurately process service
requests and (iv) to timely and accurately bill its customers. In addition to
lost earnings, these failures could also result in loss of customers due to
service interruptions and billing errors, substantial claims by customers and
increased expenses associated with stabilizing operations and executing
mitigation plans.
Contingency planning to maintain and restore service in the event of
natural disasters, power failures and systems-related problems is a routine part
of the Company's operations. The Company believes that such contingency plans
will assist the Company in responding to the failure by outside service
providers to successfully address Year 2000 issues. In addition, the Company is
currently identifying and considering various Year 2000-specific contingency
plans, including identification of alternate vendors and service providers and
manual alternatives to system operations. These Year 2000-specific contingency
plans are expected to be materially completed in third quarter 1999, but their
review and development will continue throughout 1999.
Although the total costs to implement the Plan cannot be precisely
estimated, the Company incurred costs of $4.2 million during 1998 (none of which
was related to hardware costs and other capital items) and $13.6 million during
the first six months of 1999 ($10.9 million of which was related to hardware
costs and other capital items) and anticipates spending an aggregate of
approximately $17.8 million during the remainder of 1999 (which includes $10.1
million of hardware costs and other capital items.) All costs will be expensed
as incurred, except for hardware and other items that should be capitalized in
accordance with generally accepted accounting principles. Some of the costs
represent ongoing investment in systems upgrades, the timing of which is being
accelerated in order to facilitate Year 2000 compliance. In some instances, such
upgrades will position the Company to provide more and better-quality services
to its customers than they currently receive. The Company expects to fund these
costs with cash provided by operations. Cost estimates and statements of the
Company's plans and expectations discussed above are forward-looking statements
that are derived using numerous assumptions of future events, many of which are
outside the Company's control, including the availability and future cost of
trained personnel and various other resources, third party modification plans,
the absence of systems requiring remediation that have not yet been discovered,
and other factors.
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,
1999, the fair value of the Company's long-term debt was estimated to be $2.2
billion based on the overall weighted average rate of the Company's long-term
debt of 6.8% and an overall weighted maturity of 13 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 68 basis
points in interest rates (which represents ten percent of the Company's overall
weighted average borrowing rate). Such an increase in interest rates would
result in approximately a $104.6 million decrease in fair value of the Company's
long-term debt. The Company is currently not evaluating the future use of any
derivative financial instruments; however, it is possible that such
instruments may be utilized in connection with financing its acquisitions
of local exchange assets in Arkansas and Missouri.
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 6, 1999, the
shareholders elected five Class II directors to serve until the 2002 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 16, 1999.
The following number of votes were cast for or were withheld from the
following nominees:
Class II Nominees For Withheld
----------------- --- --------
Virginia Boulet 146,421,022 3,553,720
Ernest Butler, Jr. 145,694,683 4,280,059
James B. Gardner 147,149,530 2,825,212
R. L. Hargrove, Jr. 146,658,342 3,316,400
Johnny Hebert 145,225,126 4,749,616
The Class I and Class III directors whose terms continued after the
meeting are:
Class I Class III
------- ---------
William R. Boles, Jr. Calvin Czeschin
W. Bruce Hanks F. Earl Hogan
C. G. Melville, Jr. Harvey P. Perry
Glen F. Post, III. Jim D. Reppond
Clarke M. Williams
The following number of votes were cast in the manner indicated below
with respect to the following proposals:
1. Proposal to increase the number of authorized shares of common
stock from 175 million to 350 million.
For Against Abstain Broker No-Votes
----------- --------- ------- ---------------
146,065,346 3,519,491 389,905 0
2. Proposal to change the Company's name to CenturyTel, Inc.
For Against Abstain Broker No-Votes
----------- --------- ------- ---------------
147,704,657 1,966,025 304,060 0
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
--------
3(i) Amended and Restated Articles of Incorporation of Registrant,
dated as of May 6, 1999.
4.1 Amendment No.1 to Rights Agreement, dated May 25, 1999,
incorporated by reference to Exhibit 4.2(ii) to Registrant's
Report on Form 8-K dated May 25, 1999.
11 Computations of Earnings Per Share.
27.1 Financial Data Schedule as of and for the six months ended
June 30, 1999.
99 Asset Purchase Agreement between Registrant and affiliates of
GTE, dated June 29, 1999.
Pursuant to the regulations of the Securities and Exchange
Commission, all schedules and exhibits to the foregoing
agreement have been intentionally omitted from this report.
The foregoing agreement contains a complete listing of all
schedules and exhibits. The registrant agrees to furnish
supplementary a copy of any omitted schedule or exhibit to
the Securities and Exchange Commission upon request.
B. Reports on Form 8-K
-------------------
(i) The following item was reported in the Form 8-K filed April
30, 1999:
Item 5. Other events - News release announcing first
quarter results of operations.
(ii) The following items were reported in the Form 8-K filed
May 28, 1999:
Item 5. Other Events - (i) adjusted terms of CenturyTel's
Rights Agreement to reflect the three-for-two stock split
in the form of a 50% stock dividend and (ii) an amendment
to CenturyTel's Rights Agreement which increased the
purchase price per 1/225 of a Preference Share from $48.88
to $135.00.
(iii) The following item was reported in the Form 8-K filed
July 9, 1999:
Item 5. Other Events - News release announcing execution
of a definitive agreement to purchase from an affiliate of
GTE Corporation assets comprising substantially all of
GTE's local telephone operations in Arkansas.
(iv) The following item was reported in the Form 8-K filed
July 9,1999:
Item 5. Other Events - News release announcing execution of
a definitive agreement to enter into a strategic partnership
with various co-investors to purchase telephone access lines
in Missouri from an affiliate of GTE Corporation.
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 16, 1999 /s/ Neil A. Sweasy
----------------------------
Neil A. Sweasy
Vice President and Controller
(Principal Accounting Officer)