UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 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 July 31, 2001, there were 141,010,413 shares of common stock outstanding.
CENTURYTEL, INC. TABLE OF CONTENTS Page No. -------- Part I. Financial Information: Item 1. Financial Statements Consolidated Statements of Income--Three Months and Six Months Ended June 30, 2001 and 2000 3 Consolidated Statements of Comprehensive Income -- Three Months and Six Months Ended June 30, 2001 and 2000 4 Consolidated Balance Sheets--June 30, 2001 and December 31, 2000 5 Consolidated Statements of Stockholders' Equity-- Six Months Ended June 30, 2001 and 2000 6 Consolidated Statements of Cash Flows-- Six Months Ended June 30, 2001 and 2000 7 Notes to Consolidated Financial Statements 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Part II. Other Information: Item 2. Changes in Securities and Use of Proceeds 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 6. Exhibits and Reports on Form 8-K 27 Signature 27
PART I. FINANCIAL INFORMATION CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Six months ended June 30, ended June 30, - ----------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares expressed in thousands) <S> <C> <C> <C> <C> OPERATING REVENUES Telephone $ 367,884 276,088 739,133 553,014 Wireless 109,686 111,142 214,092 211,546 Other 41,366 35,926 81,719 71,552 - ----------------------------------------------------------------------------------------------- Total operating revenues 518,936 423,156 1,034,944 836,112 - ----------------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses 267,535 212,495 533,903 429,218 Depreciation and amortization 116,196 85,769 231,628 170,580 - ----------------------------------------------------------------------------------------------- Total operating expenses 383,731 298,264 765,531 599,798 - ----------------------------------------------------------------------------------------------- OPERATING INCOME 135,205 124,892 269,413 236,314 - ----------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense (57,358) (35,267) (119,061) (71,309) Income from unconsolidated cellular entities 10,705 9,475 16,026 8,016 Minority interest (3,263) (2,871) (5,912) (5,163) Nonrecurring gains and losses 156,428 - 156,428 9,910 Other income and expense 4,578 2,384 7,501 6,613 - ----------------------------------------------------------------------------------------------- Total other income (expense) 111,090 (26,279) 54,982 (51,933) - ----------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE 246,295 98,613 324,395 184,381 Income tax expense 92,054 40,768 123,432 77,252 - ----------------------------------------------------------------------------------------------- NET INCOME $ 154,241 57,845 200,963 107,129 =============================================================================================== BASIC EARNINGS PER SHARE $ 1.10 .41 1.43 .76 =============================================================================================== DILUTED EARNINGS PER SHARE $ 1.09 .41 1.41 .76 ================================================================================================ DIVIDENDS PER COMMON SHARE $ .05 .0475 .10 .095 ================================================================================================ AVERAGE BASIC SHARES OUTSTANDING 140,720 139,995 140,656 139,874 ================================================================================================ AVERAGE DILUTED SHARES OUTSTANDING 142,059 141,732 142,271 141,729 ================================================================================================ </TABLE> See accompanying notes to consolidated financial statements.
CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Six months ended June 30, ended June 30, - -------------------------------------------------------------------------------------- 2001 2000 2001 2000 - -------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> Net income $ 154,241 57,845 200,963 107,129 Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period, net of $7,109, $1,072, $5,560 and ($2,693) tax 13,202 1,990 10,325 (5,003) - -------------------------------------------------------------------------------------- Comprehensive income $ 167,443 59,835 211,288 102,126 ====================================================================================== </TABLE> See accompanying notes to consolidated financial statements.
CENTURYTEL, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> June 30, December 31, 2001 2000 - ----------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 39,323 19,039 Accounts receivable, less allowance of $8,768 and $12,857 351,421 307,165 Materials and supplies, at average cost 28,493 38,532 Other 10,657 11,768 - --------------------------------------------------------------------------------------- Total current assets 429,894 376,504 - --------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,965,053 2,959,293 - --------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $252,215 and $219,809 2,511,255 2,509,033 Other 605,703 548,460 - --------------------------------------------------------------------------------------- Total investments and other assets 3,116,958 3,057,493 - --------------------------------------------------------------------------------------- TOTAL ASSETS $ 6,511,905 6,393,290 ======================================================================================= LIABILITIES AND EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 154,962 149,962 Short-term debt 215,025 276,000 Accounts payable 101,804 127,287 Accrued expenses and other liabilities Salaries and benefits 39,113 33,859 Taxes 152,778 40,023 Interest 50,230 52,011 Other 21,707 23,349 Advance billings and customer deposits 40,029 40,879 - --------------------------------------------------------------------------------------- Total current liabilities 775,648 743,370 - --------------------------------------------------------------------------------------- LONG-TERM DEBT 2,961,748 3,050,292 - --------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 537,790 567,549 - --------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 350,000,000 shares, issued and outstanding 141,020,385 and 140,667,251 shares 141,020 140,667 Paid-in capital 516,707 509,840 Unrealized holding gain on investments, net of taxes 35,796 25,471 Retained earnings 1,538,221 1,351,626 Unearned ESOP shares (3,000) (3,500) Preferred stock - non-redeemable 7,975 7,975 - --------------------------------------------------------------------------------------- Total stockholders' equity 2,236,719 2,032,079 - --------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 6,511,905 6,393,290 ======================================================================================= </TABLE> See accompanying notes to consolidated financial statements.
CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Six months ended June 30, - ------------------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> COMMON STOCK 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 99 340 - ------------------------------------------------------------------------------------------ Balance at end of period 141,020 140,540 - ------------------------------------------------------------------------------------------ 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 1,835 4,717 Amortization of unearned compensation and other 1,986 1,776 - ------------------------------------------------------------------------------------------ Balance at end of period 516,707 502,971 - ------------------------------------------------------------------------------------------ UNREALIZED HOLDING GAIN ON INVESTMENTS, NET OF TAXES Balance at beginning of period 25,471 64,362 Change in unrealized holding gain on investments 10,325 (5,003) - ------------------------------------------------------------------------------------------ Balance at end of period 35,796 59,359 - ------------------------------------------------------------------------------------------ RETAINED EARNINGS Balance at beginning of period 1,351,626 1,146,967 Net income 200,963 107,129 Cash dividends declared Common stock-$.10 and $.095 per share, respectively (14,169) (13,191) Preferred stock (199) (199) - ------------------------------------------------------------------------------------------ Balance at end of period 1,538,221 1,240,706 - ------------------------------------------------------------------------------------------ UNEARNED ESOP SHARES Balance at beginning of period (3,500) (4,690) Release of ESOP shares 500 690 - ------------------------------------------------------------------------------------------ Balance at end of period (3,000) (4,000) - ------------------------------------------------------------------------------------------ PREFERRED STOCK - NON-REDEEMABLE Balance at beginning and end of period 7,975 7,975 - ------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 2,236,719 1,947,551 ========================================================================================== </TABLE> See accompanying notes to consolidated financial statements.
CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six months ended June 30, - ------------------------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $ 200,963 107,129 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 231,628 170,580 Deferred income taxes (20,772) 5,471 Income from unconsolidated cellular entities (16,026) (8,016) Minority interest 5,912 5,163 Nonrecurring gains and losses (156,428) (9,910) Changes in current assets and current liabilities: Accounts receivable 42,246 (14,699) Accounts payable (25,483) 31,716 Accrued taxes 112,755 (11,927) Other current assets and other current liabilities, net 10,690 (2,932) Increase in other non-current assets (41,815) (32,485) Change in other non-current liabilities (8,311) 6,347 Other, net 9,896 11,396 - ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 345,255 257,833 - ------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Payments for property, plant and equipment (243,318) (139,407) Purchase of minority investment in other entities - (33,153) Proceeds from sales of assets 108,061 15,849 Distributions from unconsolidated cellular entities 14,513 12,413 Acquisitions, net of cash acquired (47,131) - Purchase of life insurance investment (219) (3,303) Other, net (4,830) (1,996) - ------------------------------------------------------------------------------------------------- Net cash used in investing activities (172,924) (149,597) - ------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of debt 1,367 3,111 Payments of debt (142,086) (110,664) Proceeds from issuance of common stock 1,934 5,057 Cash dividends (14,368) (13,390) Other, net 1,106 695 - ------------------------------------------------------------------------------------------------- Net cash used in financing activities (152,047) (115,191) - ------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 20,284 (6,955) Cash and cash equivalents at beginning of period 19,039 56,640 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 39,323 49,685 ================================================================================================= Supplemental cash flow information and noncash activities: Income taxes paid $ 13,726 85,624 Interest paid (net of capitalized interest of $2,942 and $1,698) $ 117,900 69,248 Note received from sale of assets (see Note 4) $ 86,502 - - ------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
CENTURYTEL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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 and six months ended June 30, 2001 and 2000 has not been audited by independent public accountants; however, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for the three-month and six-month periods have been included therein. The results of operations for the first six months of the year are not necessarily indicative of the results of operations which might be expected for the entire year. (2) Net Property, Plant and Equipment Net property, plant and equipment is composed of the following: <TABLE> <CAPTION> June 30, December 31, 2001 2000 - ------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Telephone, at original cost $ 5,149,185 4,999,808 Accumulated depreciation (2,707,290) (2,552,648) - ------------------------------------------------------------------------ 2,441,895 2,447,160 - ------------------------------------------------------------------------ Wireless, at cost 533,451 522,684 Accumulated depreciation (280,815) (261,401) - ------------------------------------------------------------------------ 252,636 261,283 - ------------------------------------------------------------------------ Other, at cost 425,702 392,024 Accumulated depreciation (155,180) (141,174) - ------------------------------------------------------------------------ 270,522 250,850 - ------------------------------------------------------------------------ $ 2,965,053 2,959,293 ======================================================================== </TABLE> (3) Income from Unconsolidated Cellular Entities The following summarizes the unaudited combined results of operations of the cellular entities in which the Company's investments (as of June 30, 2001 and 2000) were accounted for by the equity method.
<TABLE> <CAPTION> Six months ended June 30, - --------------------------------------------------------------------------- 2001 2000 - --------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Results of operations Revenues $ 818,355 747,131 Operating income $ 214,305 241,507 Net income $ 220,575 234,853 - --------------------------------------------------------------------------- </TABLE> (4) Nonrecurring Gains and Losses In the second quarter of 2001, the Company completed the sale of 30 PCS (Personal Communication Service) licenses to affiliates of Leap Wireless International, Inc. ("Leap") for an aggregate of $195 million. The Company received approximately $108 million of the purchase price in cash at closing with the remaining $87 million in the form of a promissory note bearing interest at 10% per annum. The Company recorded a pre-tax gain aggregating $185.1 million ($117.7 million after-tax; $.83 per diluted share) as a result of such transaction. In conjunction with the sale of the licenses to Leap, the Company also recorded a pre-tax charge of $18.2 million ($11.6 million after-tax; $.08 per share) due to the write down in the value of certain non-operating assets. Additionally, the Company recorded its proportionate share of a gain from the sale of PCS licenses to Leap ($2.2 million pre-tax; $1.4 million after-tax; $.01 per share), which is reflected in Income from Unconsolidated Cellular Entities, recorded by an entity in which the Company owns a minority interest. In the second quarter of 2001, the Company also recorded a pre-tax charge of $10.5 million ($6.8 million after-tax; $.05 per diluted share) due to the write down in the value of a non-operating investment in which the Company owns a minority interest. 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 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 Six months ended June 30, ended June 30, - ------------------------------------------------------------------------------------------------------------ 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> <C> <C> Operating revenues Telephone $ 367,884 276,088 739,133 553,014 Wireless 109,686 111,142 214,092 211,546 Other operations 41,366 35,926 81,719 71,552 - ------------------------------------------------------------------------------------------------------------ Total operating revenues $ 518,936 423,156 1,034,944 836,112 ============================================================================================================ Operating income Telephone $ 99,382 82,849 203,363 167,346 Wireless 31,017 32,812 55,937 52,703 Other operations 4,806 9,231 10,113 16,265 - ------------------------------------------------------------------------------------------------------------ Total operating income $ 135,205 124,892 269,413 236,314 ============================================================================================================ Operating income $ 135,205 124,892 269,413 236,314 Interest expense (57,358) (35,267) (119,061) (71,309) Income from unconsolidated cellular entities 10,705 9,475 16,026 8,016 Minority interest (3,263) (2,871) (5,912) (5,163) Nonrecurring gains and losses 156,428 - 156,428 9,910 Other income and expense 4,578 2,384 7,501 6,613 - ------------------------------------------------------------------------------------------------------------ Income before income tax expense $ 246,295 98,613 324,395 184,381 ============================================================================================================ </TABLE> <TABLE> <CAPTION> June 30, December 31, 2001 2000 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Assets Telephone segment $ 4,759,417 4,741,284 Wireless segment 972,785 930,406 Other operations 779,703 721,600 - -------------------------------------------------------------------------------- Total assets $ 6,511,905 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 and six months ended June 30, 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 is 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 June 30, 2001 Compared to Three Months Ended June 30, 2000 Net income (and diluted earnings per share) was $154.2 million ($1.09) and $57.8 million ($.41) for the second quarter of 2001 and 2000, respectively. Net income (excluding nonrecurring gains and losses) for the second quarter of 2001 was $53.5 million compared to $57.8 million during the second quarter of 2000. Diluted earnings per share (excluding nonrecurring gains and losses) decreased to $.38 during the three months ended June 30, 2001 from $.41 during the three months ended June 30, 2000, a 7.3% decrease. The net pre-tax nonrecurring gain in the second quarter of 2001 of $158.6 million ($100.7 million after tax) relates to the sale of PCS licenses to Leap Wireless International, Inc. ("Leap"), which was partially offset by the write-down of certain non-operating assets. See "Nonrecurring Gains and Losses" and "Income from Unconsolidated Cellular Entities" for additional information. <TABLE> <CAPTION> Three months ended June 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> Operating income Telephone $ 99,382 82,849 Wireless 31,017 32,812 Other 4,806 9,231 - ------------------------------------------------------------------------------- 135,205 124,892 Interest expense (57,358) (35,267) Income from unconsolidated cellular entities 10,705 9,475 Minority interest (3,263) (2,871) Nonrecurring gains and losses 156,428 - Other income and expense 4,578 2,384 Income tax expense (92,054) (40,768) - ------------------------------------------------------------------------------- Net income $ 154,241 57,845 =============================================================================== Basic earnings per share $ 1.10 .41 =============================================================================== Diluted earnings per share $ 1.09 .41 =============================================================================== Average basic shares outstanding 140,720 139,995 =============================================================================== Average diluted shares outstanding 142,059 141,732 =============================================================================== </TABLE> Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the three months ended June 30, 2001 and 2000 were as follows: <TABLE> <CAPTION> Three months ended June 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- <S> <C> <C> Operating revenues Telephone operations 70.9% 65.2 Wireless operations 21.1% 26.3 Other operations 8.0% 8.5 Operating income Telephone operations 73.5% 66.3 Wireless operations 22.9% 26.3 Other operations 3.6% 7.4 - ------------------------------------------------------------------------------- </TABLE> Telephone Operations <TABLE> <CAPTION> Three months ended June 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Local service $ 123,293 90,527 Network access 212,570 160,933 Other 32,021 24,628 - ------------------------------------------------------------------------------- 367,884 276,088 - ------------------------------------------------------------------------------- Operating expenses Plant operations 93,490 59,763 Customer operations 28,814 25,509 Corporate and other 47,271 40,336 Depreciation and amortization 98,927 67,631 - ------------------------------------------------------------------------------- 268,502 193,239 - ------------------------------------------------------------------------------- Operating income $ 99,382 82,849 =============================================================================== </TABLE> The Company conducts its telephone operations in rural, suburban and small urban communities in 21 states. As of June 30, 2001, approximately 87% of the Company's 1.8 million access lines were in Wisconsin, Arkansas, Washington, Missouri, Louisiana, Colorado, Ohio and Oregon. Telephone operating income increased $16.5 million (20.0%) due to an increase in operating revenues of $91.8 million (33.2%), which more than offset an increase in operating expenses of $75.3 million (38.9%). Of the $91.8 million increase in operating revenues, $85.4 million was attributable to the acquisitions of the Verizon properties. The remaining $6.4 million increase in revenues was partially due to a $2.1 million increase in local service revenues primarily due to an increase in the number of customer access lines in incumbent markets; a $1.6 million increase in amounts received from the federal Universal Service Fund; and a $2.1 million increase in revenues related to leasing, selling, installing, maintaining and repairing customer premise telecommunications equipment and wiring. Annualized internal access line growth during the second quarter of 2001 and 2000 was 1.1% and 4.3%, respectively. The decline in internal access line growth during 2001 is substantially due to disconnecting service to customers for non-payment; the replacement of lines with high-speed data circuits; and the slowing growth in the Company's service areas due to general economic conditions. Plant operations expenses increased $33.7 million (56.4%), primarily due to a $33.4 million increase attributable to the acquisition of the Verizon properties. During the second quarter of 2001, customer operations expenses increased $3.3 million (13.0%) of which $8.1 million was attributable to the acquisitions of the Verizon properties. The remaining $4.8 million decrease was primarily due to a $1.4 million decrease in information technology expenses and a $1.6 million decrease in salaries and benefits. Corporate and other expenses increased $6.9 million (17.2%) primarily due to an $8.3 million increase in expenses associated with the Verizon acquisitions. Depreciation and amortization increased $31.3 million (46.3%), of which $27.2 million was attributable to the Verizon properties acquired (of which $6.0 million related to amortization of goodwill). The remaining $4.1 million increase was primarily due to higher levels of plant in service.
Wireless Operations and Income From Unconsolidated Cellular Entities <TABLE> <CAPTION> Three months ended June 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income - wireless operations $ 31,017 32,812 Minority interest (3,064) (2,842) Income from unconsolidated cellular entities 10,705 9,475 - ------------------------------------------------------------------------------- $ 38,658 39,445 =============================================================================== </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." The Company's share of earnings from the cellular entities in which it has less than a majority interest is accounted for using the equity method and is reflected in the Company's Consolidated Statements of Income as "Income from unconsolidated cellular entities." See Income from Unconsolidated Cellular Entities for additional information. Wireless Operations <TABLE> <CAPTION> Three months ended June 30, - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Service $ 84,725 84,128 Roaming 22,377 23,223 Equipment sales 2,584 3,791 - -------------------------------------------------------------------------------- 109,686 111,142 - -------------------------------------------------------------------------------- Operating expenses Cost of equipment sold 5,837 6,356 System operations 17,175 16,380 General, administrative and customer service 21,055 19,421 Sales and marketing 18,996 19,431 Depreciation and amortization 15,606 16,742 - -------------------------------------------------------------------------------- 78,669 78,330 - -------------------------------------------------------------------------------- Operating income $ 31,017 32,812 ================================================================================ </TABLE> Wireless operating income decreased $1.8 million (5.5%) to $31.0 million in the second quarter of 2001 from $32.8 million in the second quarter of 2000. Wireless operating revenues decreased $1.5 million (1.3%) while operating expenses increased $339,000 (.4%). The $597,000 increase in service revenues was primarily due to growth in the number of customers and increased minutes of use, both of which were partially offset by reduced rates. The $846,000 decrease in roaming revenues was primarily due to a reduction in roaming rates (which was partially offset by an increase in roaming minutes of use), a downward trend that the Company anticipates will continue in the near future.
The following table illustrates the growth in the Company's wireless customer base in its majority-owned markets: <TABLE> <CAPTION> Three months ended June 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- <S> <C> <C> Customers at beginning of period 768,815 727,507 Gross units added internally 72,041 78,667 Disconnects 60,898 56,774 Net units added internally 11,143 21,893 Customers at end of period 779,958 749,400 - ------------------------------------------------------------------------------- </TABLE> The average monthly revenue per customer declined to $46 during the second quarter of 2001 from $48 during the second 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 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, some of which may result in lower average revenue per customer. System operations expenses increased $795,000 (4.9%) primarily due to a $859,000 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 primarily due to an increase in minutes of use. General, administrative and customer service expenses increased $1.6 million (8.4%) primarily due to a $1.1 million increase in the provision for doubtful accounts and a $500,000 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 2.2% for the second quarter of 2001 and 1.7% for the second quarter of 2000. Sales and marketing expenses decreased $435,000 (2.2%) primarily due to a decrease in commissions paid to agents for selling services to new customers. <TABLE> <CAPTION> Other Operations Three months ended June 30, - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> Operating revenues Long distance $ 28,514 25,099 Internet 8,718 5,272 Other 4,134 5,555 - ------------------------------------------------------------------------------ 41,366 35,926 - ------------------------------------------------------------------------------ Operating expenses Cost of sales and operating expenses 34,897 25,299 Depreciation and amortization 1,663 1,396 - ------------------------------------------------------------------------------ 36,560 26,695 - ------------------------------------------------------------------------------ Operating income $ 4,806 9,231 ============================================================================== </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 ("CLEC") operations and security monitoring operations. The $3.4 million increase in long distance revenues was primarily attributable to the growth in the number of customers and increased minutes of use, primarily due to penetration of the newly-acquired Verizon markets. The number of long distance customers as of June 30, 2001 and 2000 was 414,400 and 326,400, 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 $828,000 increase due to Internet operations acquired in mid-2000. Of the $1.4 million decrease in other revenues, $1.1 million was due to the planned phase-out of the Company's third party call center operations in the last half of 2000. Cost of sales and operating expenses increased $9.6 million in second quarter of 2001 compared to second quarter 2000 primarily due to (i) a $6.8 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; (ii) a $2.9 million increase in expenses of the Company's long distance operations due primarily to an increase in customers; and (iii) a $2.4 million increase due to the expansion of the Company's CLEC business. Such increases were partially offset by a $1.9 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 CLEC and fiber network businesses and its DSL product offering. Interest Expense Interest expense increased $22.1 million (62.6%) in the second quarter of 2001 compared to the second quarter of 2000 primarily due to an increase in outstanding indebtedness related to the Verizon acquisitions. Income from Unconsolidated Cellular Entities Income from unconsolidated cellular entities, net of amortization of associated goodwill, increased $1.2 million in the second quarter of 2001 primarily due to the Company's proportionate share ($2.2 million) recorded in the second quarter of 2001 of the gain on sale of PCS licenses to Leap by a cellular entity 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. Nonrecurring Gains and Losses In the second quarter of 2001, the Company recorded a pre-tax gain of approximately $185.1 million ($117.7 million after-tax; $.83 per diluted share) due to the sale of 30 PCS licenses to Leap. In conjunction with the sale of licenses to Leap, the Company also recorded a pre-tax charge of $18.2 million ($11.6 million after-tax; $.08 per share) due to the write down in the value of certain non-operating assets. Additionally, in the second quarter of 2001, the Company recorded a pre-tax charge of $10.5 million ($6.8 million after-tax; $.05 per diluted share) due to the write down in the value of a non-operating investment in which the Company owns a minority interest. See Note 4 of Notes to Consolidated Financial Statements for additional information. Other Income and Expense Other income and expense increased $2.2 million in the second quarter of 2001 compared to the second quarter of 2000, due primarily to a $1.8 million increase in interest income, substantially all of which relates to interest earned on a note received in connection with the sale of PCS licenses to Leap.
Income Tax Expense Income tax expense increased $51.3 million in the second quarter of 2001 compared to the second quarter of 2000 primarily due to the income tax expense recorded in the second quarter of 2001 associated with the sale of the PCS licenses to Leap. Exclusive of the effects of income tax expense on asset sales, the effective income tax rate was 39.0% and 41.3% in the three months ended June 30, 2001 and 2000, respectively. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Net income (and diluted earnings per share) was $201.0 million ($1.41) and $107.1 million ($.76) for the first six months of 2001 and 2000, respectively. Net income (excluding nonrecurring gains and losses) for the first six months of 2001 was $101.5 million compared to $105.7 million during the first six months of 2000. Diluted earnings per share (excluding nonrecurring gains and losses) decreased to $.71 during the six months ended June 30, 2001 from $.75 during the six months ended June 30, 2000, a 5.3% decrease. Substantially all of the net nonrecurring pre-tax gain in the first six months of 2001 of $156.6 million relates to the sale of PCS licenses to Leap, which was partially offset by the write down of certain non-operating assets. Substantially all of the nonrecurring items in the first six months of 2000 relate to the $9.9 million pre-tax gain on sale of the Company's remaining Alaska cellular operations offset by the Company's proportionate share ($5.3 million pre-tax; $.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 from Unconsolidated Cellular Entities." <TABLE> <CAPTION> Six months ended June 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> Operating income Telephone $ 203,363 167,346 Wireless 55,937 52,703 Other 10,113 16,265 - ------------------------------------------------------------------------------- 269,413 236,314 Interest expense (119,061) (71,309) Income from unconsolidated cellular entities 16,026 8,016 Minority interest (5,912) (5,163) Nonrecurring gains and losses 156,428 9,910 Other income and expense 7,501 6,613 Income tax expense (123,432) (77,252) - ------------------------------------------------------------------------------- Net income $ 200,963 107,129 =============================================================================== Basic earnings per share $ 1.43 .76 =============================================================================== Diluted earnings per share $ 1.41 .76 =============================================================================== Average basic shares outstanding 140,656 139,874 =============================================================================== Average diluted shares outstanding 142,271 141,729 =============================================================================== </TABLE>
Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the six months ended June 30, 2001 and 2000 were as follows: <TABLE> <CAPTION> Six months ended June 30, - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> Operating revenues Telephone operations 71.4% 66.1 Wireless operations 20.7% 25.3 Other operations 7.9% 8.6 Operating income Telephone operations 75.5% 70.8 Wireless operations 20.8% 22.3 Other operations 3.7% 6.9 - ------------------------------------------------------------------------------- </TABLE> Telephone Operations <TABLE> <CAPTION> Six months ended June 30, - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Local service $ 244,454 178,592 Network access 426,437 323,186 Other 68,242 51,236 - -------------------------------------------------------------------------------- 739,133 553,014 - -------------------------------------------------------------------------------- Operating expenses Plant operations 187,375 122,539 Customer operations 58,071 48,270 Corporate and other 94,036 79,868 Depreciation and amortization 196,288 134,991 - -------------------------------------------------------------------------------- 535,770 385,668 - -------------------------------------------------------------------------------- Operating income $ 203,363 167,346 ================================================================================ </TABLE> The Company conducts its telephone operations in rural, suburban and small urban communities in 21 states. As of June 30, 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 $36.0 million (21.5%) due to an increase in operating revenues of $186.1 million (33.7%) which more than offset an increase in operating expenses of $150.1 million (38.9%). Of the $186.1 million increase in operating revenues, $173.4 million was attributable to the acquisitions of the Verizon properties. The remaining $12.7 million increase in revenues was partially due to a $4.0 million increase in amounts received from the federal Universal Service Fund; a $3.6 million increase in revenues relating to leasing, selling, installing, maintaining and repairing customer premise telecommunications equipment and wiring; a $3.3 million increase in local service revenues primarily due to an increase in the number of customer access lines in incumbent markets; and a $2.0 million increase due to the increased provision of custom calling features. Annualized internal access line growth during the first six months of 2001 and 2000 was .8% and 3.6%, respectively. The decline in internal access line growth during 2001 is substantially due to disconnecting service to customers for non-payment; the replacement of lines with high-speed data circuits; and the slowing growth in the Company's service areas due to general economic conditions. Plant operations expenses increased $64.8 million (52.9%), of which $68.7 million was attributable to the acquisitions of the Verizon properties. The remaining $3.9 million decrease was primarily due to a $3.3 million decrease in network operations expenses. During the first six months of 2001, customer operations expenses increased $9.8 million (20.3%) of which $16.0 million was due to an increase in expenses associated with the Verizon acquisitions. The remaining $6.2 million decrease was due primarily to a $2.5 million decrease in information technology expenses primarily due to decreases in contract labor; a $1.5 million decrease in salaries and benefits; and a $2.0 million decrease in marketing and customer service expenses. Corporate and other expenses increased $14.2 million (17.7%) primarily due to a $15.8 million increase in expenses associated with Verizon acquisitions. Depreciation and amortization increased $61.3 million (45.4%), of which $54.0 million was attributable to the properties acquired from Verizon (of which $11.9 million related to amortization of goodwill). The remaining $7.3 million increase was primarily due to higher levels of plant in service. Wireless Operations and Income From Unconsolidated Cellular Entities <TABLE> <CAPTION> Six months ended June 30, - ----------------------------------------------------------------------------- 2001 2000 - ----------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income - wireless operations $ 55,937 52,703 Minority interest (5,701) (5,126) Income from unconsolidated cellular entities 16,026 8,016 - ----------------------------------------------------------------------------- $ 66,262 55,593 ============================================================================= </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 from unconsolidated cellular entities." See Income from Unconsolidated Cellular Entities for additional information. Wireless Operations <TABLE> <CAPTION> Six months ended June 30, - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Service $ 165,191 160,389 Roaming 43,011 43,585 Equipment sales 5,890 7,572 - -------------------------------------------------------------------------------- 214,092 211,546 - -------------------------------------------------------------------------------- Operating expenses Cost of equipment sold 11,681 14,536 System operations 34,641 32,033 General, administrative and customer service 41,792 37,627 Sales and marketing 37,821 41,556 Depreciation and amortization 32,220 33,091 - -------------------------------------------------------------------------------- 158,155 158,843 - -------------------------------------------------------------------------------- Operating income $ 55,937 52,703 ================================================================================ </TABLE> Wireless operating income increased $3.2 million (6.1%) to $55.9 million in the first six months of 2001 from $52.7 million in the first six months of 2000. Wireless operating revenues increased $2.5 million (1.2%), while operating expenses decreased $688,000 (.4%). The $4.8 million increase in service revenues was primarily due to a growth in the number of customers and increased minutes of use per customer, both of which were partially offset by reduced rates. The $574,000 decrease in roaming revenues was primarily due to a reduction in roaming rates (which was partially offset by an increase in roaming minutes of use), a downward trend that the Company anticipates will continue in the near future. The following table illustrates the growth in the Company's wireless customer base in its majority-owned markets: <TABLE> <CAPTION> Six months ended June 30, - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ <S> <C> <C> Customers at beginning of period 751,200 707,486 Gross units added internally 155,550 171,668 Disconnects 126,792 119,101 Net units added internally 28,758 52,567 Net effect of dispositions - (10,653) Customers at end of period 779,958 749,400 - ------------------------------------------------------------------------------ </TABLE> The average monthly revenue per customer declined to $45 during the first six months of 2001 from $47 during the first six months of 2000 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 subscribers tend to be lower usage customers. The average monthly 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 are likely to result in lower average revenue per customer. Cost of equipment sold decreased $2.9 million (19.6%) substantially due to a decrease in units sold. System operations expenses increased $2.6 million (8.1%) in the first six months of 2001 primarily due to a $2.5 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 primarily due to an increase in minutes of use. General, administrative and customer service expenses increased $4.2 million (11.1%) primarily due to a $2.0 million increase in the provision for doubtful accounts and a $1.0 million 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 2.3% for the first six months of 2001 and 1.9% for the first six months of 2000. Sales and marketing expenses decreased $3.7 million (9.0%) due primarily to a $2.4 million decrease in advertising and sales promotions expenses associated with the introduction of new rate plans during the first six months of 2000 and a $1.6 million decrease in sales commissions paid to agents due to a decrease in the number of units sold.
<TABLE> <CAPTION> Other Operations Six months ended June 30, - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Long distance $ 56,114 49,926 Internet 17,117 10,285 Other 8,488 11,341 - -------------------------------------------------------------------------------- 81,719 71,552 - -------------------------------------------------------------------------------- Operating expenses Cost of sales and operating expenses 68,486 52,789 Depreciation and amortization 3,120 2,498 - -------------------------------------------------------------------------------- 71,606 55,287 - -------------------------------------------------------------------------------- Operating income $ 10,113 16,265 ================================================================================ </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 ("CLEC") operations and security monitoring operations. The $6.2 million increase in long distance revenues was attributable to the growth in the number of customers and increased minutes of use, primarily due to penetration of the newly-acquired Verizon markets. The number of long distance customers as of June 30, 2001 and June 30, 2000 was 414,400 and 326,400, respectively. Internet revenues increased $6.8 million due primarily to a $5.1 million increase due to growth in number of customers and a $1.7 million increase due to Internet operations acquired in mid-2000. Of the $2.9 million decrease in other revenues, $3.1 was due to the planned phase-out of the Company's third party call center operations in the last half of 2000. Cost of sales and operating expenses increased $15.7 million in the first six months of 2001 compared to the first six months of 2000 primarily due to (i) a $13.8 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; (ii) a $3.4 million increase in expenses of the Company's long distance operations due primarily to an increase in customers; and (iii) a $4.1 million increase due to the expansion of the Company's CLEC businesses. Such increases were partially offset by a $5.2 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 decline in relation to prior periods as it incurs increasingly larger expenses in connection with expanding its CLEC and fiber network businesses and its DSL product offering. Interest Expense Interest expense increased $47.8 million in the first six months of 2001 compared to the first six months of 2000 primarily due to an increase in outstanding indebtedness related to the Verizon acquisitions. Income from Unconsolidated Cellular Entities Income from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $8.0 million in the first six months of 2001 primarily due to the Company's proportionate share ($2.2 million) recorded in the second quarter of 2001 of the gain on sale of PCS licenses to Leap by a cellular entity in which the Company owns a minority interest and the Company's proportionate share ($5.3 million) of non-cash charges that were recorded in the first quarter of 2000 by two cellular entities in which the Company owns a minority interest. The remaining increase was primarily due to increased earnings of certain cellular entities in which the Company owns a minority interest. Minority Interest Minority interest increased $749,000 in the first six months of 2001 compared to the first six months of 2000 due primarily to the increased profitability of the Company's majority-owned and operated cellular entities. Nonrecurring Gains and Losses In the second quarter of 2001, the Company recorded a pre-tax gain of approximately $185.1 million ($117.7 million after-tax; $.83 per diluted share) due to the sale of 30 PCS licenses to Leap. In conjunction with the sale of licenses to Leap, the Company also recorded a pre-tax charge of $18.2 million ($11.6 million after-tax; $.08 per share) due to the write down in the value of non-operating assets. Additionally, in the second quarter of 2001, the Company recorded a pre-tax charge of $10.5 million ($6.8 million after-tax; $.05 per diluted share) due to the write down in the value of a non-operating investment in which the Company owns a minority interest. In the first six months of 2000, the Company recorded a pre-tax gain of approximately $9.9 million ($5.2 million after-tax; $.04 per diluted share) due to the sale of its remaining Alaska cellular operations. See Note 4 of Notes to Consolidated Financial Statements for additional information. Income Tax Expense Income tax expense increased $46.2 million in the first six months of 2001 compared to the first six months of 2000 primarily due to the income tax expense recorded in the first six months of 2001 associated with the sale of the PCS licenses to Leap. Exclusive of the effects of income tax expense on asset sales, the effective income tax rate was 39.5% and 41.6% in the six months ended June 30, 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 $345.3 million during the first six months of 2001 compared to $257.8 million during the first six 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 $172.9 million and $149.6 million for the six months ended June 30, 2001 and 2000, respectively. Proceeds from the sales of assets were $108.1 million in the first six months of 2001 compared to $15.8 million in the first six months of 2000. During the first quarter of 2001, the Company acquired an additional 18.6% interest for $47.1 million cash in Spectra Communications Group, LLC, the entity organized to acquire and operate the former Verizon properties in Missouri. During the first six months of 2000, the Company invested $33.2 million in various other communication entities. Payments for property, plant and equipment were $103.9 million more in the first six months of 2001 than in the comparable period during 2000 primarily due to capital expenditures in the newly-acquired Verizon markets. Capital expenditures for the six months ended June 30, 2001 were $161.8 million for telephone operations, $33.6 million for wireless operations and $47.9 million for other operations. Net cash used in financing activities was $152.0 million during the first six months of 2001 compared to $115.2 million during the first six months of 2000. Net payments of debt were $33.2 million more during the first six months of 2001 compared to the first six months of 2000, primarily due to the increased availability of excess cash received from the sales of assets during 2001. Budgeted capital expenditures for 2001 total $400 million for telephone operations, $70 million for wireless operations and $80 million for other operations. As of June 30, 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 $477.1 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 June 30, 2001, the Company had $215.0 million outstanding under such program. In second quarter 2001, the Company completed the sale of 30 PCS (Personal Communications Service) operating licenses for an aggregate of $195 million to Leap. The Company received approximately $108 million of the purchase price in cash at closing. The remaining $87 million is receivable in the form of a promissory note bearing interest at 10% per annum, of which $48.0 million was received in early July 2001 with the balance due in installments through 2002 upon maturity of the note. Cash received from these sales was used to repay indebtedness. In July 2001, the Company sold 950,000 shares of its investment in Illuminet Holdings, Inc. common stock for an aggregate of approximately $28.1 million; such proceeds 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. Pending the determination of final rates, which is expected in fourth quarter 2001, the Company is recording most but not all of these increases. 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. In May 2001, the Federal Communications Commission ("FCC") modified its existing universal service support mechanism for rural telephone companies. The FCC adopted an interim mechanism for a five-year period, effective July 1, 2001, based on embedded, or historical, costs that will provide predictable levels of support to rural local exchange carriers, including substantially all of the Company's local exchange carriers. Based on the Company's current operations, such ruling is expected to increase the Company's level of universal service support receipts by approximately $12 million annually compared to current levels. In June 2001, the Company filed with the WPSC an interim request to raise access rates for the former Verizon properties in Wisconsin in an amount that would increase the Company's revenues approximately $8.0 million per year. The Company expects an order on such request by late August 2001. In July 2001, the Company filed tariff revisions with the Arkansas Public Service Commission ("APSC") designed to effectively cap the usage on certain unlimited optional calling plans. The effect of the tariff revisions would serve to reduce the level of operating expenses currently incurred by the Company. A decision by the APSC regarding such tariff revisions is expected in late August 2001. Accounting Pronouncements 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 June 30, 2001, the Company had outstanding an interest rate swap relating to $224.9 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. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations to be accounted for under the purchase method of accounting; the pooling of interest method is prohibited. SFAS 141 is effective for business combinations consummated after June 30, 2001. SFAS 142 requires goodwill recorded in a business combination to be reviewed for impairment and would be written down only in periods in which the recorded amount of goodwill exceeds its fair value. Systematic amortization of goodwill will cease effective January 1, 2002. The Company's amortization of goodwill for the six months ended June 30, 2001 totaled approximately $37.7 million. The Company is still in the process of determining the impact, if any, of the transitional goodwill impairment rules of SFAS 142.
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 June 30, 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 6.9% and an overall weighted maturity of 10 years compared to terms and rates currently available in long-term financing markets. For purposes hereof, market risk is estimated as the potential decrease in fair value of the Company's long-term debt resulting from a hypothetical increase of 69 basis points in interest rates (which represents ten percent of the Company's overall weighted average borrowing rate). Such an increase in interest rates would result in approximately a $105.6 million decrease in fair value of the Company's long-term debt. As of June 30, 2001, the Company owed $739.9 million of debt on a floating-rate basis. As of June 30, 2001, the Company had outstanding an interest rate swap relating to $224.9 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 realizes a fixed effective rate of 4.845% and receives or makes 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 second quarter of 2001, CenturyTel sold at market prices approximately 902 shares of CenturyTel common stock to employees through its Union Group Incentive Plan and approximately 36 shares of CenturyTel common stock through its Security Systems, Inc. 401(k) Plan (the "Plans"). All such shares were privately placed under Section 4(2) of the Securities Act of 1933, as amended. Registration statements on Form S-8 were filed on July 12, 2001 to register future sales through the Plans. Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders on May 10, 2001, the shareholders elected five Class I directors to serve until the 2004 annual meeting of shareholders and until their successors are duly elected and qualified and approved the proposals set forth in the Company's proxy statement dated March 26, 2001. The following number of votes were cast for or were withheld from the following nominees: Class I Nominees For Withheld -------------------- --------------- ---------------- William R. Boles, Jr. 192,078,422 6,823,676 W. Bruce Hanks 193,760,465 5,141,633 C. G. Melville, Jr. 193,699,777 5,202,321 Glen F. Post, III 194,382,988 4,519,110 Clarke M. Williams 193,839,608 5,062,490 The Class II and Class III directors whose terms continued after the meeting are: Class II Class III ------------------------ --------------- Virginia Boulet Calvin Czeschin Ernest Butler, Jr. F. Earl Hogan James B. Gardner Harvey P. Perry R. L. Hargrove, Jr. Jim D. Reppond Johnny Hebert The following number of votes were cast in the manner indicated below with respect to the proposal to approve the Company's Executive Officer Short-term Incentive Program: For Against Abstain Broker No-Votes -------------- ------------ -------------- --------------- 181,290,257 16,816,747 795,094 -0- The following number of votes were cast in the manner indicated below with respect to the proposal to approve the Company's 2001 Employee Stock Purchase Plan: For Against Abstain Broker No-Votes -------------- ------------ -------------- --------------- 190,439,725 7,760,822 701,551 -0- Item 6. Exhibits and Reports on Form 8-K A. Exhibits 10.1 Registrant's Restated Supplemental Defined Contribution Plan, dated July 17, 2001. 11 Computations of Earnings Per Share. B. Reports on Form 8-K (i) The following item was reported in the Form 8-K filed May 11, 2001: Item 5. Other events - News release announcing first quarter results of operations. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CenturyTel, Inc. Date: August 10, 2001 /s/ Neil A. Sweasy ---------------------------- Neil A. Sweasy Vice President and Controller (Principal Accounting Officer)