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) <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> 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. </TABLE> CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> 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. </TABLE> CENTURYTEL, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> March 31, December 31, 2000 1999 - ------------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> 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. </TABLE> CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------------------ 2000 1999 - ------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> COMMON STOCK Balance at beginning of period $ 139,946 138,083 Conversion of convertible securities into common stock 254 254 Issuance of common stock through dividend reinvestment, incentive and benefit plans 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. </TABLE> CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - ---------------------------------------------------------------------------------------------- 2000 1999 - ---------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> 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. </TABLE> 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: <TABLE> <CAPTION> March 31, Dec. 31, 2000 1999 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> 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 =============================================================================== </TABLE> (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. <TABLE> <CAPTION> Three months ended March 31, - -------------------------------------------------------------------------- 2000 1999 - -------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Results of operations Revenues $ 357,434 328,540 Operating income $ 99,861 108,541 Net income $ 99,149 108,394 - -------------------------------------------------------------------------- </TABLE> (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. <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> 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 =============================================================================== </TABLE> <TABLE> <CAPTION> March 31, December 31, 2000 1999 - --------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> 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 =========================================================================== </TABLE> CENTURYTEL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in the Company's annual report on Form 10-K for the year ended December 31, 1999. The results of operations for the three months 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." <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> 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 ========================================================================= </TABLE> 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: <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------------- <S> <C> <C> 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 - ------------------------------------------------------------------------------- </TABLE> Telephone Operations <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> 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 =============================================================================== </TABLE> 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 <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> 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 =============================================================================== </TABLE> The Company's wireless operations (discussed below) reflect 100% of the results of operations of the wireless entities in which the Company has a majority ownership interest. The minority interest owners' share of the income of such entities is reflected in the Company's Consolidated Statements of Income as an expense in "Minority interest." See Minority Interest for additional information. The Company's share of earnings from the cellular entities in which it has less than a majority interest is accounted for using the equity method and is reflected in the Company's Consolidated Statements of Income as "Income (loss) from unconsolidated cellular entities." Wireless Operations <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------ 2000 1999 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> 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 - ------------------------------------------------------------------------------- </TABLE> 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: <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2000 1999 - ------------------------------------------------------------------------------- <S> <C> <C> 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 - ------------------------------------------------------------------------------- </TABLE> 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 <TABLE> <CAPTION> Three months ended March 31, - ---------------------------------------------------------------------------- 2000 1999 - ---------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> 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 ============================================================================ </TABLE> Other operations include the results of operations of the Company which are not included in the telephone or wireless segments including, but not limited to, the Company's non-regulated long distance operations, Internet operations, call center operations and security monitoring operations. The $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)