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, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 1-7784 CenturyTel, Inc. (Exact name of registrant as specified in its charter) Louisiana 72-0651161 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 CenturyTel Drive, Monroe, Louisiana 71203 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (318) 388-9000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of April 30, 2001, there were 140,995,276 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, 2001 and 2000 3 Consolidated Statements of Comprehensive Income-- Three Months Ended March 31, 2001 and 2000 4 Consolidated Balance Sheets--March 31, 2001 and December 31, 2000 5 Consolidated Statements of Stockholders' Equity-- Three Months Ended March 31, 2001 and 2000 6 Consolidated Statements of Cash Flows-- Three Months Ended March 31, 2001 and 2000 7 Notes to Consolidated Financial Statements 8-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Part II. Other Information: Item 2. Changes in Securities and Use of Proceeds 19 Item 6. Exhibits and Reports on Form 8-K 19 Signature 19
PART I. FINANCIAL INFORMATION CenturyTel, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------------------ (Dollars, except per share amounts, and shares in thousands) OPERATING REVENUES <S> <C> <C> Telephone $ 371,249 276,926 Wireless 104,406 100,404 Other 40,353 35,626 - ------------------------------------------------------------------------------------------- Total operating revenues 516,008 412,956 - ------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses 266,368 216,723 Depreciation and amortization 115,432 84,811 - ------------------------------------------------------------------------------------------- Total operating expenses 381,800 301,534 - ------------------------------------------------------------------------------------------- OPERATING INCOME 134,208 111,422 - -------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense (61,703) (36,042) Income (loss) from unconsolidated cellular entities 5,321 (1,459) Minority interest (2,649) (2,292) Gain on sale of assets - 9,910 Other income and expense 2,923 4,229 - -------------------------------------------------------------------------------------------- Total other income (expense) (56,108) (25,654) - --------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE 78,100 85,768 Income tax expense 31,378 36,484 - ------------------------------------------------------------------------------------------- NET INCOME $ 46,722 49,284 =========================================================================================== BASIC EARNINGS PER SHARE $ .33 .35 =========================================================================================== DILUTED EARNINGS PER SHARE $ .33 .35 =========================================================================================== DIVIDENDS PER COMMON SHARE $ .05 .0475 =========================================================================================== AVERAGE BASIC SHARES OUTSTANDING 140,572 139,737 =========================================================================================== AVERAGE DILUTED SHARES OUTSTANDING 142,482 141,728 =========================================================================================== </TABLE> See accompanying notes to consolidated financial statements.
CenturyTel, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> NET INCOME $ 46,722 49,284 OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized holding loss arising during period, net of ($1,549) and ($3,765) tax (2,877) (6,993) - -------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 43,845 42,291 ================================================================================ </TABLE> See accompanying notes to consolidated financial statements. CenturyTel, Inc. CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> March 31, December 31, 2001 2000 - -------------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS CURRENT ASSETS <S> <C> <C> Cash and cash equivalents $ 15,873 19,039 Accounts receivable, less allowance of $10,904 and $12,857 271,468 307,165 Materials and supplies, at average cost 33,858 38,532 Other 14,120 11,768 - -------------------------------------------------------------------------------------------------- Total current assets 335,319 376,504 - -------------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,954,667 2,959,293 - -------------------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $235,953 and $219,809 2,526,785 2,509,033 Other 571,954 548,460 - -------------------------------------------------------------------------------------------------- Total investments and other assets 3,098,739 3,057,493 - -------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 6,388,725 6,393,290 ================================================================================================== LIABILITIES AND EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 155,574 149,962 Short-term debt 319,347 276,000 Accounts payable 97,227 127,287 Accrued expenses and other liabilities Salaries and benefits 38,682 33,859 Taxes 63,967 40,023 Interest 56,025 52,011 Other 20,744 23,349 Advance billings and customer deposits 41,335 40,879 - -------------------------------------------------------------------------------------------------- Total current liabilities 792,901 743,370 - -------------------------------------------------------------------------------------------------- LONG-TERM DEBT 2,980,442 3,050,292 - -------------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 540,376 567,549 - -------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 350,000,000 shares, issued and outstanding 140,992,706 and 140,667,251 shares 140,993 140,667 Paid-in capital 515,478 509,840 Unrealized holding gain on investments, net of taxes 22,594 25,471 Retained earnings 1,391,216 1,351,626 Unearned ESOP shares (3,250) (3,500) Preferred stock - non-redeemable 7,975 7,975 - -------------------------------------------------------------------------------------------------- Total stockholders' equity 2,075,006 2,032,079 - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 6,388,725 6,393,290 ================================================================================================== See accompanying notes to consolidated financial statements. </TABLE>
CenturyTel, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Three months ended March 31, - ----------------------------------------------------------------------------------------------- 2001 2000 - ----------------------------------------------------------------------------------------------- (Dollars in thousands) COMMON STOCK <S> <C> <C> Balance at beginning of period $ 140,667 139,946 Conversion of convertible securities into common stock 254 254 Issuance of common stock through dividend reinvestment, incentive and benefit plans 72 29 - ----------------------------------------------------------------------------------------------- Balance at end of period 140,993 140,229 - ----------------------------------------------------------------------------------------------- PAID-IN CAPITAL Balance at beginning of period 509,840 493,432 Conversion of convertible securities into common stock 3,046 3,046 Issuance of common stock through dividend reinvestment, incentive and benefit plans 1,170 1,025 Amortization of unearned compensation and other 1,422 1,030 - ----------------------------------------------------------------------------------------------- Balance at end of period 515,478 498,533 - ------------------------------------------------------------------------------------------------ UNREALIZED HOLDING GAIN ON INVESTMENTS, NET OF TAXES Balance at beginning of period 25,471 64,362 Change in unrealized holding gain on investments (2,877) (6,993) - ----------------------------------------------------------------------------------------------- Balance at end of period 22,594 57,369 - ----------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at beginning of period 1,351,626 1,146,967 Net income 46,722 49,284 Cash dividends declared Common stock-$.05 and $.0475 per share, respectively (7,032) (6,642) Preferred stock (100) (100) - ----------------------------------------------------------------------------------------------- Balance at end of period 1,391,216 1,189,509 - ----------------------------------------------------------------------------------------------- UNEARNED ESOP SHARES Balance at beginning of period (3,500) (4,690) Release of ESOP shares 250 440 - ----------------------------------------------------------------------------------------------- Balance at end of period (3,250) (4,250) - ----------------------------------------------------------------------------------------------- PREFERRED STOCK - NON-REDEEMABLE Balance at beginning and end of period 7,975 7,975 - ----------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 2,075,006 1,889,365 =============================================================================================== See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> <CAPTION> CenturyTel, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three months ended March 31, - ------------------------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------------------------ (Dollars in thousands) OPERATING ACTIVITIES <S> <C> <C> Net income $ 46,722 49,284 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 115,432 84,811 Gain on sale of assets - (9,910) Deferred income taxes (8,123) 3,231 (Income) loss from unconsolidated cellular entities (5,321) 1,459 Minority interest 2,649 2,292 Changes in current assets and current liabilities: Accounts receivable 35,697 (15,928) Accounts payable (30,060) 36,414 Other accrued taxes 23,944 30,525 Other current assets and other current liabilities, net 9,010 (8,143) Increase in other noncurrent assets (19,201) (16,222) Increase (decrease) in other noncurrent liabilities (6,757) 4,586 Other, net 19,092 (2,310) - ----------------------------------------------------------------------------------------------- Net cash provided by operating activities 183,084 160,089 - ----------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Payments for property, plant and equipment (120,585) (58,165) Acquisitions, net of cash acquired (47,131) (27,980) Proceeds from sale of assets - 15,849 Purchase of life insurance investment, net (70) (1,627) Other, net 4,215 (827) - ----------------------------------------------------------------------------------------------- Net cash used in investing activities (163,571) (72,750) - ----------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of debt 172,173 1,079 Payments of debt (189,514) (77,007) Proceeds from issuance of common stock 1,242 1,054 Cash dividends (7,132) (6,742) Other, net 552 266 - ----------------------------------------------------------------------------------------------- Net cash used in financing activities (22,679) (81,350) - ----------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (3,166) 5,989 Cash and cash equivalents at beginning of period 19,039 56,640 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 15,873 62,629 =============================================================================================== Supplemental cash flow information: Income taxes paid $ 790 5,146 =============================================================================================== Interest paid (net of capitalized interest of $1,654 and $741) $ 56,035 48,593 =============================================================================================== See accompanying notes to consolidated financial statements. </TABLE>
CenturyTel, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (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, 2000. Certain 2000 amounts have been reclassified to be consistent with the Company's 2001 presentation. The unaudited financial information for the three months ended March 31, 2001 and 2000 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, 2001 2000 - ------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Telephone, at original cost $ 5,067,201 4,999,808 Accumulated depreciation (2,630,212) (2,552,648) - ------------------------------------------------------------------------- 2,436,989 2,447,160 - ------------------------------------------------------------------------- Wireless, at cost 518,901 522,684 Accumulated depreciation (269,411) (261,401) - ------------------------------------------------------------------------- 249,490 261,283 - ------------------------------------------------------------------------- Other, at cost 415,165 392,024 Accumulated depreciation (146,977) (141,174) - ------------------------------------------------------------------------- 268,188 250,850 - ------------------------------------------------------------------------- $ 2,954,667 2,959,293 ========================================================================= </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, 2001 and 2000) were accounted for by the equity method.
<TABLE> <CAPTION> Three months ended March 31, - -------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------- (Dollars in thousands) Results of operations <S> <C> <C> Revenues $ 374,406 357,434 Operating income $ 114,937 99,861 Net income $ 112,104 99,149 - -------------------------------------------------------------------------- </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. (5) Business Segments The Company has two separately reportable business segments: telephone and wireless. The Company's reportable segments are strategic business units that offer different products and services. 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, competitive local exchange carrier operations and security monitoring operations. <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) Operating revenues <S> <C> <C> Telephone $ 371,249 276,926 Wireless 104,406 100,404 Other operations 40,353 35,626 - ------------------------------------------------------------------------------- Total operating revenues $ 516,008 412,956 =============================================================================== Operating income Telephone $ 103,981 84,497 Wireless 24,920 19,891 Other operations 5,307 7,034 - ------------------------------------------------------------------------------- Total operating income $ 134,208 111,422 =============================================================================== Operating income $ 134,208 111,422 Interest expense (61,703) (36,042) Income (loss) from unconsolidated cellular entities 5,321 (1,459) Minority interest (2,649) (2,292) Gain on sale of assets - 9,910 Other income and expense 2,923 4,229 - ------------------------------------------------------------------------------- Income before income tax expense $ 78,100 85,768 =============================================================================== </TABLE> <TABLE> <CAPTION> March 31, Dec. 31, 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) Assets <S> <C> <C> Telephone $ 4,795,612 4,779,812 Wireless 1,190,578 1,204,186 Other operations 402,535 409,292 - ------------------------------------------------------------------------------- Total assets $ 6,388,725 6,393,290 =============================================================================== </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, 2000. The results of operations for the three months ended March 31, 2001 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 integrated communications company engaged primarily in providing local exchange, wireless, long distance, Internet access and data services to customers in 21 states. On July 31, 2000 and September 29, 2000, affiliates of the Company acquired over 490,000 telephone access lines and related local exchange assets in Arkansas, Missouri and Wisconsin from affiliates of Verizon Communications, Inc. ("Verizon") for an aggregate of approximately $1.5 billion cash. The operations of those acquired properties are included in the Company's results of operations beginning on the respective dates of acquisition. In February 2000, the Company sold the assets of its remaining Alaska cellular operations serving approximately 10,600 cellular subscribers. The operations of this disposed property are included in the Company's results of operations up to the date of disposition. In addition to historical information, management's discussion and analysis includes certain forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such forward-looking statements are subject to uncertainties that could cause the Company's actual results to differ materially from such statements. Such uncertainties include but are not limited to: the Company's ability to effectively manage its growth, including integrating newly-acquired businesses into the Company's operations, hiring adequate numbers of qualified staff and successfully upgrading its billing and other information systems; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the telecommunications industry; the effects of greater than anticipated competition in the Company's markets; possible changes in the demand for, or pricing of, the Company's products and services; the Company's ability to successfully introduce new product or service offerings on a timely and cost-effective basis; and the effects of more general factors such as changes in general market or economic conditions or in legislation, regulation or public policy. These and other uncertainties related to the business are described in greater detail in Item 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 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, 2001 Compared to Three Months Ended March 31, 2000 Net income (and diluted earnings per share) was $46.7 million ($.33) and $49.3 million ($.35) for the first quarter of 2001 and 2000, respectively. Net income (excluding after-tax gain on sale of assets and certain non-recurring charges) was $47.9 million for both the first quarter of 2001 and the first quarter of 2000. Diluted earnings per share (excluding after-tax gain on sale of assets and certain non-recurring charges) was $.34 during both quarters. The non-recurring charge in first quarter 2001 of $2.0 million ($.01 per diluted share) was related to ice storm damages in certain of the Company's local telephone operations. Substantially all of the non-recurring charges in first quarter 2000 related to the Company's proportionate share ($5.3 million; $.03 per diluted share) 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, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) Operating income <S> <C> <C> Telephone $ 103,981 84,497 Wireless 24,920 19,891 Other 5,307 7,034 - ------------------------------------------------------------------------------- 134,208 111,422 Interest expense (61,703) (36,042) Income (loss) from unconsolidated cellular entities 5,321 (1,459) Minority interest (2,649) (2,292) Gain on sale of assets - 9,910 Other income and expense 2,923 4,229 Income tax expense (31,378) (36,484) - ------------------------------------------------------------------------------- Net income $ 46,722 49,284 =============================================================================== Basic earnings per share $ .33 .35 =============================================================================== Diluted earnings per share $ .33 .35 =============================================================================== Average basic shares outstanding 140,572 139,737 =============================================================================== Average diluted shares outstanding 142,482 141,728 =============================================================================== </TABLE> Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the three months ended March 31, 2001 and 2000 were as follows: <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ Operating revenues <S> <C> <C> Telephone operations 72.0% 67.1 Wireless operations 20.2% 24.3 Other operations 7.8% 8.6 Operating income Telephone operations 77.5% 75.8 Wireless operations 18.6% 17.9 Other operations 3.9% 6.3 - ------------------------------------------------------------------------------ </TABLE> Telephone Operations <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ Operating revenues <S> <C> <C> Local service $ 121,161 88,065 Network access 213,867 162,253 Other 36,221 26,608 - ------------------------------------------------------------------------------ 371,249 276,926 - ------------------------------------------------------------------------------ Operating expenses Plant operations 93,885 62,776 Customer operations 29,257 22,761 Corporate and other 46,765 39,532 Depreciation and amortization 97,361 67,360 - ------------------------------------------------------------------------------ 267,268 192,429 - ------------------------------------------------------------------------------ Operating income $ 103,981 84,497 ============================================================================== </TABLE> The Company conducts its telephone operations in rural, suburban and small urban communities in 21 states. As of March 31, 2001, approximately 87% of the Company's 1.8 million access lines were in Wisconsin, Arkansas, Washington, Missouri, Michigan, Louisiana, Colorado, Ohio and Oregon. Telephone operating income increased $19.5 million (23.1%) due to an increase in operating revenues of $94.3 million (34.1%) which more than offset an increase in operating expenses of $74.8 million (38.9%). Of the $94.3 million increase in operating revenues, $88.0 million was attributable to the acquisitions of the Verizon properties. The remaining $6.3 million increase in revenues was partially due to a $2.4 million increase in local network service revenues primarily due to an increase in the number of customer access lines in incumbent markets; a $2.4 million increase in amounts received from the federal Universal Service Fund; a $1.5 million increase related to selling, leasing, installing, maintaining and repairing customer premise telecommunications equipment and wiring and a $1.2 million increase due to the increased provision of custom calling features. Such increases were partially offset by a $2.5 million decrease in the Company's partial recovery of operating costs through revenue sharing arrangements with other telephone companies. Annualized internal access line growth for first quarter of 2001 and 2000 was 0.6% and 2.9%, respectively. The decline in internal access line growth during 2001 is substantially due to disconnecting service to customers for non-payment and the replacement of lines with high-speed data circuits. Plant operations expenses increased $31.1 million (49.6%), of which $29.9 million (including $2.0 million related to ice storm damages) was attributable to the acquisitions of the Verizon properties. The remaining $1.2 million increase was primarily due to an $835,000 increase in access expenses. During the first quarter of 2001 customer operations expenses increased $6.5 million (28.5%), substantially all of which was attributable to the Verizon acquisitions. Corporate and other expenses increased $7.2 million (18.3%) primarily due to a $2.3 million increase in expenses associated with the Verizon acquisitions; a $1.8 million increase in the provision for doubtful accounts; and a $1.3 million increase associated with the Company's sales, leases, installations, maintenance and repair of customer premise telecommunications equipment and wiring. Depreciation and amortization increased $30.0 million, of which $26.8 million was attributable to the Verizon properties acquired (of which $5.9 million related to amortization of goodwill). The remaining $3.2 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, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income - wireless operations $ 24,920 19,891 Minority interest (2,637) (2,284) Income (loss) from unconsolidated cellular entities 5,321 (1,459) - ------------------------------------------------------------------------------- $ 27,604 16,148 =============================================================================== </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." See Income (loss) From Unconsolidated Cellular Entities for additional information. Wireless Operations <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) Operating revenues <S> <C> <C> Service $ 80,466 76,261 Roaming 20,634 20,362 Equipment sales 3,306 3,781 - ------------------------------------------------------------------------------- 104,406 100,404 - ------------------------------------------------------------------------------- Operating expenses Cost of equipment sold 5,844 8,180 System operations 17,466 15,653 General, administrative and customer service 20,737 18,206 Sales and marketing 18,825 22,125 Depreciation and amortization 16,614 16,349 - ------------------------------------------------------------------------------- 79,486 80,513 - ------------------------------------------------------------------------------- Operating income $ 24,920 19,891 =============================================================================== </TABLE> Wireless operating income increased $5.0 million (25.3%) to $24.9 million in the first quarter of 2001 from $19.9 million in the first quarter of 2000. Wireless operating revenues increased $4.0 million (4.0%) while operating expenses decreased $1.0 million (1.3%). The $4.2 million increase in service revenues was primarily due to growth in number of customers and increased minutes of use, both of which were partially offset by reduced rates. The Company's roaming revenues were approximately the same in first quarter 2001 and first quarter 2000 as revenues generated from increased minutes of use were completely offset by a reduction in roaming rates, a downward trend in rates that the Company anticipates will continue in the near future. The following table illustrates the growth in the Company's wireless customer base in its majority-owned markets: <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ <S> <C> <C> Customers at beginning of period 751,200 707,486 Gross units added internally 83,509 93,001 Disconnects 65,894 62,327 Net units added internally 17,615 30,674 Effect of property dispositions - (10,653) Customers at end of period 768,815 727,507 - ------------------------------------------------------------------------------ </TABLE> The average monthly revenue per customer declined to $44 during the first quarter of 2001 from $45 during the first quarter of 2000 primarily due to price reductions in service rates charged to the Company's customers, reductions in roaming rates charged to other cellular operators and the continued trend that a higher percentage of new customers tend to be lower usage customers. The average monthly service revenue per customer is expected to 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, some of which may result in lower average revenue per customer. Cost of equipment sold decreased $2.3 million (28.6%) substantially due to a decrease in units sold. System operations expenses increased $1.8 million (11.6%) primarily due to a $1.6 million increase in the net amounts paid to other carriers for cellular service provided to the Company's customers who roam in such other carriers' service areas. General, administrative and customer service expenses increased $2.5 million (13.9%) primarily due to a $900,000 increase in the provision for doubtful accounts and an $833,000 increase in customer service and retention costs. The Company's average monthly postpaid churn rate (the percentage of contract cellular customers that terminate service) was 2.4% for the first quarter of 2001 and 2.0% for the first quarter of 2000. Sales and marketing expenses decreased $3.3 million (14.9%) primarily due to a $3.1 million decrease in advertising expenses associated with the introduction of new rate plans during the first quarter of 2000 and a $948,000 decrease in commissions paid to agents for selling services to new customers. Other Operations <TABLE> <CAPTION> Three months ended March 31, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) Operating revenues <S> <C> <C> Long distance $ 27,600 24,827 Internet 8,399 5,012 Other 4,354 5,787 - ------------------------------------------------------------------------------ 40,353 35,626 - ------------------------------------------------------------------------------ Operating expenses Cost of sales and operating expenses 33,589 27,490 Depreciation and amortization 1,457 1,102 - ------------------------------------------------------------------------------ 35,046 28,592 - ------------------------------------------------------------------------------ Operating income $ 5,307 7,034 ============================================================================== </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 (which ceased operations in the third quarter of 2000), competitive local exchange carrier operations and security monitoring operations. The $2.8 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, 2001 and 2000 was 392,900 and 319,100, respectively. Internet revenues increased $3.4 million due primarily to a $2.1 million increase due to growth in the number of customers and an $867,000 increase due to Internet operations acquired in mid-2000. The decrease in other revenues is primarily due to the planned phase out of the Company's third party call center operations in the last half of 2000. Operating expenses increased $6.5 million primarily due to (i) a $7.1 million increase in expenses related to the provision of Internet access primarily due to the expansion of the Company's digital subscriber line ("DSL") product offering; and (ii) a $2.5 million increase due to the expansion of the Company's competitive local exchange carrier and fiber network businesses. Such increases were partially offset by a $3.3 million reduction in expenses due to the planned phase out of the Company's third party call center operations in the last half of 2000. The Company anticipates that future operating income for its other operations will continue to decline in relation to prior periods as it incurs increasingly larger expenses in connection with expanding its competitive local exchange carrier and fiber network businesses and its DSL product offering. Interest Expense Interest expense increased $25.7 million (71.2%) in the first quarter of 2001 compared to the first quarter of 2000 substantially due to an increase in interest expense related to the Verizon acquisition indebtedness. Income (Loss) from Unconsolidated Cellular Entities Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $6.8 million. The first quarter of 2000 included the Company's proportionate share ($5.3 million) of non-cash charges that was recorded by two cellular entities in which the Company owns a minority interest. The remaining increase was primarily due to increased earnings of certain cellular entities in which the Company owns a minority interest. Minority Interest Minority interest increased $357,000 in first quarter 2001 compared to first quarter 2000 due to the increased 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 to the sale of the assets of its remaining Alaska cellular operations. Other Income and Expense Other income and expense decreased $1.3 million in first quarter 2001 primarily due to a reduction in interest income. Income Tax Expense Income tax expense decreased $5.1 million in the first quarter of 2001 compared to the first quarter of 2000 primarily due to a decrease in income before taxes. The effective income tax rate was 40.2% and 42.5% in the three months ended March 31, 2001 and 2000, respectively. LIQUIDITY AND CAPITAL RESOURCES Excluding cash used for acquisitions, the Company relies on cash provided by operations to provide for 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 $183.1 million during the first three months of 2001 compared to $160.1 million during the first three months of 2000. 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 $163.6 million and $72.8 million for the three months ended March 31, 2001 and 2000, respectively. Payments for property, plant and equipment were $62.4 million more in the first quarter of 2001 than in the comparable period during 2000. Capital expenditures for the three months ended March 31, 2001 were $72.7 million for telephone, $18.3 million for wireless and $29.6 million for other operations. During the first quarter of 2001, the Company acquired an additional 18.6% interest for $47.1 million cash in Spectra Communication Group, LLC, the entity organized to acquire and operate the former Verizon properties in Missouri. 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 for the three months ended March 31, 2000. Net cash used in financing activities was $22.7 million during the first three months of 2001 compared to $81.4 million during the first three months of 2000. Net payments of debt were $58.6 million less during the first quarter of 2001 compared to the first quarter of 2000. Budgeted capital expenditures for 2001 total $400 million for telephone operations, $70 million for wireless operations and $80 million for other operations. As of March 31, 2001, CenturyTel's subsidiaries had available for use $123.0 million of commitments for long-term financing from the Rural Utilities Service and the Rural Telephone Bank and the Company had $211.1 million of undrawn committed bank lines of credit. The Company has a commercial paper program that authorizes it to have outstanding up to $1.5 billion in commercial paper at any one time. At March 31, 2001, the Company had $30.3 million outstanding under such program. In April 2001, the Company completed the sale of 29 PCS (Personal Communications Service) operating licenses for an aggregate of $175 million to Leap Wireless International, Inc. ("Leap"). The Company received approximately $89 million of the purchase price in cash at closing. The remaining $86 million is payable in the form of a promissory note bearing interest at 10% per annum. $74 million will be payable within nine months after issuance of the note with the remainder payable in 2002 upon maturity of the note. One additional license was sold to Leap for approximately $30 million in cash in early May 2001. Cash received from these sales will be used to pay down indebtedness. 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 $400 million and $450 million. Regulatory Issues On April 19, 2001, the Wisconsin Public Service Commission ("WPSC") approved an interim rate increase of $8.8 million annually for the local exchange properties that the Company acquired from Ameritech in December 1998. Final rates will be determined in a rate case the Company has filed with the WPSC. Separately, the WPSC ordered the Company to refund $14.7 million related to access charges collected from interexchange carriers on the former Ameritech properties from December 1998 through 2000. The Company is challenging the refund order in Wisconsin State Court. If the appeal is unsuccessful, the Company will have to record a one-time charge of $.03 per share. Accounting Pronouncement Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established accounting and reporting standards for derivative instruments and for hedging activities by requiring that entities recognize all derivatives as either assets or liabilities at fair value on the balance sheet. The Company had no derivative instruments outstanding at January 1, 2001, and thus no transition adjustment was recorded upon adoption of SFAS 133. As of March 31, 2001, the Company had outstanding an interest rate swap relating to $237.8 million of floating rate debt designed to eliminate the variability of cash flows in the payment of interest related to such debt. Since the terms of the swap match the terms of the floating rate debt, such swap is expected to have no ineffectiveness. In addition, the Company has from time to time entered into interest rate hedge contracts in anticipation of certain debt issuances to manage interest rate exposure. The Company does not utilize derivative financial instruments for trading or other speculative purposes. CenturyTel, Inc. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The majority of the Company's long-term debt obligations are fixed rate. At March 31, 2001, the fair value of the Company's long-term debt was estimated to be $3.1 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 $107.5 million decrease in fair value of the Company's long-term debt. As of March 31, 2001, the Company owed $857.1 million of debt on a floating-rate basis. At the end of the first quarter of 2001, the Company entered into an interest rate swap relating to $237.8 million of floating rate debt designed to eliminate the variability of cash flows in the payment of interest related to such debt. The swap expires in August 2002. The Company will initially realize a fixed effective rate of 4.845% and will receive or make settlement payments based upon the 3-month London InterBank Offered Rate, with settlement and rate reset dates at three month intervals through the expiration date.
PART II. OTHER INFORMATION CenturyTel, Inc. Item 2: Changes in Securities and Use of Proceeds At various times during the first quarter of 2001, CenturyTel sold at market prices approximately 400 shares of CenturyTel common stock to participants in its Union Group Incentive Plan. All such shares were privately placed under Section 4(2) of the Securities Act of 1933, as amended. Item 6: Exhibits and Reports on Form 8-K A. Exhibits 10.1 Amendment to the Registrant's 1983 Restricted Stock Plan, dated April 25, 2001. 10.2 Amendment to the Registrant's Key Employee Incentive Compensation Plan, dated April 25, 2001. 11 Computations of Earnings Per Share. B. Reports on Form 8-K The following items were reported in the Form 8-K filed February 7, 2001: Item 5. Other Events (i) News release announcing fourth quarter 2000 operating results and (ii) News release announcing growth initiatives and financial guidance for 2001. 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 15, 2001 /s/ Neil A. Sweasy ---------------------------- Neil A. Sweasy Vice President and Controller (Principal Accounting Officer)