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 September 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 October 31, 2001, there were 141,102,868 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 Nine Months Ended September 30, 2001 and 2000 3 Consolidated Statements of Comprehensive Income-- Three Months and Nine Months Ended September 30, 2001 and 2000 4 Consolidated Balance Sheets--September 30, 2001 and December 31, 2000 5 Consolidated Statements of Stockholders' Equity-- Nine Months Ended September 30, 2001 and 2000 6 Consolidated Statements of Cash Flows-- Nine Months Ended September 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 11-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 Part II. Other Information: Item 2. Changes in Securities and Use of Proceeds 28 Item 5. Other Information 28-29 Item 6. Exhibits and Reports on Form 8-K 29-30 Signature 30
PART I. FINANCIAL INFORMATION CenturyTel, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, - ----------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares expressed in thousands) <S> <C> <C> <C> <C> OPERATING REVENUES Telephone $ 377,747 324,608 1,116,880 877,622 Wireless 115,404 120,232 329,496 331,778 Other 46,226 37,794 127,945 109,346 - ----------------------------------------------------------------------------------------- Total operating revenues 539,377 482,634 1,574,321 1,318,746 - ----------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses 275,357 235,835 809,260 665,053 Depreciation and amortization 120,209 99,740 351,837 270,320 - ----------------------------------------------------------------------------------------- Total operating expenses 395,566 335,575 1,161,097 935,373 - ----------------------------------------------------------------------------------------- OPERATING INCOME 143,811 147,059 413,224 383,373 - ----------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense (54,438) (48,904) (173,499) (120,213) Income from unconsolidated cellular entities 16,622 11,366 32,648 19,382 Minority interest (2,819) (2,889) (8,731) (8,052) Nonrecurring gains and losses 43,543 10,683 199,971 20,593 Other income and expense 705 (4,065) 8,206 2,548 - ----------------------------------------------------------------------------------------- Total other income (expense) 3,613 (33,809) 58,595 (85,742) - ----------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE 147,424 113,250 471,819 297,631 Income tax expense 55,119 46,026 178,551 123,278 - ----------------------------------------------------------------------------------------- NET INCOME $ 92,305 67,224 293,268 174,353 ========================================================================================= BASIC EARNINGS PER SHARE $ .66 .48 2.08 1.24 ========================================================================================= DILUTED EARNINGS PER SHARE $ .65 .47 2.06 1.23 ========================================================================================= DIVIDENDS PER COMMON SHARE $ .05 .0475 .15 .1425 ========================================================================================= AVERAGE BASIC SHARES OUTSTANDING 140,772 140,220 140,693 139,989 ========================================================================================= AVERAGE DILUTED SHARES OUTSTANDING 142,260 141,848 142,267 141,769 ========================================================================================= </TABLE> See accompanying notes to consolidated financial statements.
CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, - ----------------------------------------------------------------------------------------------- 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> Net income $ 92,305 67,224 293,268 174,353 - ----------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period, net of ($175), ($15,102), $5,385 and ($17,796) tax (326) (28,047) 9,999 (33,050) Reclassification adjustment for gains included in net income, net of ($19,100) tax (35,470) - (35,470) - - ----------------------------------------------------------------------------------------------- Other comprehensive income, net of ($19,275), ($15,102), ($13,715), and ($17,796) tax (35,796) (28,047) (25,471) (33,050) - ----------------------------------------------------------------------------------------------- Comprehensive income $ 56,509 39,177 267,797 141,303 =============================================================================================== </TABLE> See accompanying notes to consolidated financial statements.
CENTURYTEL, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> September 30, December 31, 2001 2000 - -------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS - ------ <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 21,372 19,039 Accounts receivable, less allowance of $14,903 and $12,857 308,277 307,165 Materials and supplies, at average cost 24,344 38,532 Other 9,812 11,768 - -------------------------------------------------------------------------------------------- Total current assets 363,805 376,504 - -------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,985,698 2,959,293 - -------------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $271,566 and $219,809 2,489,276 2,509,033 Other 550,543 548,460 - -------------------------------------------------------------------------------------------- Total investments and other assets 3,039,819 3,057,493 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $ 6,389,322 6,393,290 ============================================================================================ LIABILITIES AND EQUITY - ---------------------- CURRENT LIABILITIES Current maturities of long-term debt $ 275,385 149,962 Short-term debt 39,000 276,000 Accounts payable 96,123 127,287 Accrued expenses and other liabilities Salaries and benefits 46,767 33,859 Taxes 189,013 40,023 Interest 55,945 52,011 Other 20,997 23,349 Advance billings and customer deposits 39,159 40,879 - -------------------------------------------------------------------------------------------- Total current liabilities 762,389 743,370 - -------------------------------------------------------------------------------------------- LONG-TERM DEBT 2,802,301 3,050,292 - -------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 536,201 567,549 - -------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 350,000,000 shares, issued and outstanding 141,089,386 and 140,667,251 shares 141,089 140,667 Paid-in capital 518,731 509,840 Accumulated other comprehensive income-unrealized holding gain on investments, net of taxes - 25,471 Retained earnings 1,623,386 1,351,626 Unearned ESOP shares (2,750) (3,500) Preferred stock - non-redeemable 7,975 7,975 - -------------------------------------------------------------------------------------------- Total stockholders' equity 2,288,431 2,032,079 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 6,389,322 6,393,290 ============================================================================================ </TABLE> See accompanying notes to consolidated financial statements.
CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Nine months ended September 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 168 442 - ------------------------------------------------------------------------------------------ Balance at end of period 141,089 140,642 - ------------------------------------------------------------------------------------------ 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 2,989 6,810 Amortization of unearned compensation and other 2,856 2,711 - ------------------------------------------------------------------------------------------ Balance at end of period 518,731 505,999 - ------------------------------------------------------------------------------------------ UNREALIZED HOLDING GAIN ON INVESTMENTS, NET OF TAXES Balance at beginning of period 25,471 64,362 Change in unrealized holding gain on investments, net of reclassification adjustment (25,471) (33,050) - ------------------------------------------------------------------------------------------ Balance at end of period - 31,312 - ------------------------------------------------------------------------------------------ RETAINED EARNINGS Balance at beginning of period 1,351,626 1,146,967 Net income 293,268 174,353 Cash dividends declared Common stock - $.15 and $.1425 per share, respectively (21,209) (19,747) Preferred stock (299) (299) - ------------------------------------------------------------------------------------------ Balance at end of period 1,623,386 1,301,274 - ------------------------------------------------------------------------------------------ UNEARNED ESOP SHARES Balance at beginning of period (3,500) (4,690) Release of ESOP shares 750 940 - ------------------------------------------------------------------------------------------ Balance at end of period (2,750) (3,750) - ------------------------------------------------------------------------------------------ PREFERRED STOCK - NON-REDEEMABLE Balance at beginning and end of period 7,975 7,975 - ------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $2,288,431 1,983,452 ========================================================================================== </TABLE> See accompanying notes to consolidated financial statements.
CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine months ended September 30, - -------------------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $ 293,268 174,353 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 351,837 270,320 Deferred income taxes 1,151 9,857 Income from unconsolidated cellular entities (32,648) (19,382) Minority interest 8,731 8,052 Nonrecurring gains and losses (199,971) (20,593) Changes in current assets and current liabilities: Accounts receivable 85,390 (33,678) Accounts payable (31,164) 51,217 Accrued taxes 148,990 15,204 Other current assets and other current liabilities, net 27,473 (6,400) Change in other noncurrent assets (55,914) (37,182) Change in other noncurrent liabilities (8,498) 3,197 Other, net 18,206 22,514 - -------------------------------------------------------------------------------------------- Net cash provided by operating activities 606,851 437,479 - -------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Payments for property, plant and equipment (384,255) (282,681) Acquisitions, net of cash acquired (47,131) (1,540,856) Proceeds from sales of assets 172,645 29,495 Distributions from unconsolidated cellular entities 20,188 23,115 Contribution from minority investor - 20,000 Purchase of life insurance investment, net (226) (4,691) Other, net 7,168 2,495 - -------------------------------------------------------------------------------------------- Net cash used in investing activities (231,611) (1,753,123) - -------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of debt 3,896 1,513,646 Payments of debt (359,414) (171,001) Proceeds from issuance of common stock 3,157 7,252 Cash dividends (21,508) (20,046) Other, net 962 798 - -------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (372,907) 1,330,649 - -------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 2,333 15,005 Cash and cash equivalents at beginning of period 19,039 56,640 - -------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 21,372 71,645 ============================================================================================ Supplemental cash flow information and noncash activities: Income taxes paid $ 16,877 107,401 Interest paid (net of capitalized interest of $3,694 and $2,887) $ 165,871 130,495 Note received from sale of assets (See Note 4) $ 86,502 - - -------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 nine months ended September 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 nine-month periods have been included therein. The results of operations for the first nine 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> September 30, December 31, 2001 2000 - ---------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Telephone, at original cost $ 5,220,236 4,999,808 Accumulated depreciation (2,780,181) (2,552,648) - ---------------------------------------------------------------------------- 2,440,055 2,447,160 - ---------------------------------------------------------------------------- Wireless, at cost 552,586 522,684 Accumulated depreciation (293,023) (261,401) - ---------------------------------------------------------------------------- 259,563 261,283 - ---------------------------------------------------------------------------- Other, at cost 443,038 392,024 Accumulated depreciation (156,958) (141,174) - ---------------------------------------------------------------------------- 286,080 250,850 - ---------------------------------------------------------------------------- $ 2,985,698 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 September 30, 2001 and 2000) were accounted for by the equity method:
<TABLE> <CAPTION> Nine months ended September 30, - --------------------------------------------------------------------------- 2001 2000 - --------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Results of operations Revenues $ 1,256,086 1,138,016 Operating income $ 354,983 364,372 Net income $ 355,640 354,772 - --------------------------------------------------------------------------- </TABLE> (4) Nonrecurring Gains and Losses In the third quarter of 2001, the Company recorded a pre-tax gain on the sale of its remaining common shares of Illuminet Holdings, Inc. aggregating $54.6 million ($35.5 million after-tax; $.25 per diluted share). The Company also recorded a pre-tax gain of $4.0 million ($2.6 million after-tax; $.02 per diluted share) on the sale of certain other assets. In the third quarter of 2001, the Company also recorded a pre-tax charge of $15.0 million ($9.7 million after-tax; $.07 per diluted share) due to the write down in the value of certain non-operating investments in which the Company owns a minority interest. 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. During the first nine months of 2000, the Company recorded pre-tax gains aggregating $20.6 million ($11.6 million after-tax; $.08 per diluted share) due to the sales of its remaining Alaska cellular operations and its minority interest in a cellular partnership. (5) Pending Acquisitions In October 2001, the Company signed definitive asset purchase agreements to purchase from affiliates of Verizon Communications Inc. ("Verizon") approximately 675,000 telephone access lines and related local exchange assets in Alabama and Missouri for approximately $2.159 billion in cash, subject to certain adjustments. These acquisitions are expected to close in the second half of 2002, subject to regulatory approvals and certain other closing conditions. (6) 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, fiber network business and security monitoring operations. In August 2001, the Company announced that it is exploring the potential separation of its wireless business from its other operations. <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, - ------------------------------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> Operating revenues Telephone $ 377,747 324,608 1,116,880 877,622 Wireless 115,404 120,232 329,496 331,778 Other operations 46,226 37,794 127,945 109,346 - ------------------------------------------------------------------------------- Total operating revenues $ 539,377 482,634 1,574,321 1,318,746 =============================================================================== Operating income Telephone $ 104,365 99,753 307,728 267,099 Wireless 32,902 39,280 88,839 91,983 Other operations 6,544 8,026 16,657 24,291 - ------------------------------------------------------------------------------- Total operating income $ 143,811 147,059 413,224 383,373 =============================================================================== </TABLE> <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, - ------------------------------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> Operating income $ 143,811 147,059 413,224 383,373 Interest expense (54,438) (48,904) (173,499) (120,213) Income from unconsolidated cellular entities 16,622 11,366 32,648 19,382 Minority interest (2,819) (2,889) (8,731) (8,052) Nonrecurring gains and losses 43,543 10,683 199,971 20,593 Other income and expense 705 (4,065) 8,206 2,548 - ------------------------------------------------------------------------------- Income before income tax expense $ 147,424 113,250 471,819 297,631 =============================================================================== </TABLE> <TABLE> <CAPTION> September 30, December 31, 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Assets Telephone segment $ 4,763,729 4,741,284 Wireless segment 943,058 930,406 Other operations 682,535 721,600 - ------------------------------------------------------------------------------- Total assets $ 6,389,322 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 nine months ended September 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, successfully financing and timely consummating pending acquisitions, 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 interest rates, 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 September 30, 2001 Compared to Three Months Ended September 30, 2000 Net income for the third quarter of 2001 was $92.3 million compared to $67.2 million during the third quarter of 2000. Diluted earnings per share increased to $.65 during the three months ended September 30, 2001 from $.47 during the three months ended September 30, 2000, a 38.3% increase. Net income (and diluted earnings per share) excluding nonrecurring items for the third quarter of 2001 and 2000 was $63.9 million ($.45) and $66.0 million ($.47), respectively. The Company's net pre-tax nonrecurring items in the third quarter of 2001 of $43.7 million ($28.4 million after-tax) primarily relate to the sale of certain non-operating assets, substantially all of which relates to the sale of the Company's remaining interest in Illuminet Holdings, Inc. ("Illuminet"). The Company's net pre-tax nonrecurring items in the third quarter of 2000 of $2.7 million relate to a $10.7 million pre-tax gain on the sale of the Company's minority interest in a cellular partnership which was partially offset by a $7.9 million pre-tax charge (reflected in "Other income and expense") related to the settlement of certain interest rate hedge contracts. <TABLE> <CAPTION> Three months ended September 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> Operating income Telephone $ 104,365 99,753 Wireless 32,902 39,280 Other 6,544 8,026 - ------------------------------------------------------------------------------- 143,811 147,059 Interest expense (54,438) (48,904) Income from unconsolidated cellular entities 16,622 11,366 Minority interest (2,819) (2,889) Nonrecurring gains and losses 43,543 10,683 Other income and expense 705 (4,065) Income tax expense (55,119) (46,026) - ------------------------------------------------------------------------------- Net income $ 92,305 67,224 =============================================================================== Basic earnings per share $ .66 .48 =============================================================================== Diluted earnings per share $ .65 .47 =============================================================================== Average basic shares outstanding 140,772 140,220 =============================================================================== Average diluted shares outstanding 142,260 141,848 =============================================================================== </TABLE> Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the three months ended September 30, 2001 and 2000 were as follows: <TABLE> <CAPTION> Three months ended September 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- <S> <C> <C> Operating revenues Telephone operations 70.0% 67.3 Wireless operations 21.4% 24.9 Other operations 8.6% 7.8 Operating income Telephone operations 72.6% 67.8 Wireless operations 22.9% 26.7 Other operations 4.5% 5.5 - ------------------------------------------------------------------------------- </TABLE> In August 2001, the Company announced that it is exploring the potential separation of its wireless business from its other operations. Telephone Operations <TABLE> <CAPTION> Three months ended September 30, - ----------------------------------------------------------------------------- 2001 2000 - ----------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Local service $ 122,829 106,304 Network access 219,432 187,254 Other 35,486 31,050 - ----------------------------------------------------------------------------- 377,747 324,608 - ----------------------------------------------------------------------------- Operating expenses Plant operations 98,605 76,086 Customer operations 28,148 28,623 Corporate and other 46,293 37,766 Depreciation and amortization 100,336 82,380 - ----------------------------------------------------------------------------- 273,382 224,855 - ----------------------------------------------------------------------------- Operating income $ 104,365 99,753 ============================================================================= </TABLE> The Company conducts its telephone operations in rural, suburban and small urban communities in 21 states. As of September 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 $4.6 million (4.6%) due to an increase in operating revenues of $53.1 million (16.4%) which was substantially offset by an increase in operating expenses of $48.5 million (21.6%). Of the $53.1 million increase in operating revenues, $46.4 million was attributable to the properties acquired from Verizon during the third quarter of 2000. The remaining $6.7 million increase in revenues was partially due to a $1.7 million increase in local service revenues primarily due to an increase in the number of customer access lines in incumbent markets and increased rates in certain jurisdictions; a $1.4 million increase in amounts received from the federal Universal Service Fund; and a $1.6 million increase due to the increased revenues from leasing, selling, installing, maintaining and repairing customer premise telecommunications equipment and wiring ("CPE services"). Annualized internal access line growth during the third quarter of 2001 and 2000 was 0.1% and 4.6%, respectively. The decline in internal access line growth during 2001 is substantially due to the slowing growth in the Company's service areas due to general economic conditions and the replacement of lines with high-speed data circuits. Plant operations expenses increased $22.5 million (29.6%) of which $19.5 million was attributable to the properties acquired from Verizon; $1.3 million was due to an increase in digital subscriber line ("DSL") expenses; and $1.3 million was due to increased information technology expenses. These increases were partially offset by a $2.6 million decrease in engineering expenses. Customer operations expenses decreased $475,000 (1.7%). Decreases in salaries and benefits and marketing expenses were substantially offset by a $2.2 million increase due to the properties acquired from Verizon. Corporate and other expenses increased $8.5 million (22.6%) primarily due to a $10.7 million increase due to the properties acquired from Verizon which was partially offset by a $4.0 million decrease in the provision for doubtful accounts. Depreciation and amortization increased $18.0 million (21.8%), of which $13.3 million was attributable to the properties acquired from Verizon (which included $2.8 million of amortization of goodwill). The remainder of the increase was primarily due to higher levels of plant in service.
Wireless Operations and Income From Unconsolidated Cellular Entities <TABLE> <CAPTION> Three months ended September 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income - wireless operations $ 32,902 39,280 Income from unconsolidated cellular entities 16,622 11,366 Minority interest (3,449) (3,657) - ------------------------------------------------------------------------------- $ 46,075 46,989 =============================================================================== </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 September 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Service $ 88,695 86,501 Roaming 24,036 30,361 Equipment sales 2,673 3,370 - ------------------------------------------------------------------------------- 115,404 120,232 - ------------------------------------------------------------------------------- Operating expenses Cost of equipment sold 6,108 7,192 System operations 19,924 19,749 General, administrative and customer service 22,250 18,796 Sales and marketing 17,466 19,081 Depreciation and amortization 16,754 16,134 - ------------------------------------------------------------------------------- 82,502 80,952 - ------------------------------------------------------------------------------- Operating income $ 32,902 39,280 =============================================================================== </TABLE> Wireless operating income decreased $6.4 million (16.2%) in the third quarter of 2001 to $32.9 million from $39.3 million in the third quarter of 2000. Wireless operating revenues decreased $4.8 million (4.0%) while operating expenses increased $1.6 million (1.9%). The $2.2 million 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. Roaming revenues decreased $6.3 million (20.8%) primarily due to a reduction in roaming rates (which was partially offset by an increase in roaming minutes of use), 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 September 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- <S> <C> <C> Customers at beginning of period 779,958 749,400 Gross units added internally 86,057 75,346 Disconnects 71,351 83,563 Net units added (disconnected) 14,706 (8,217) Customers at end of period 794,664 741,183 Average monthly churn rate (excluding prepaid customers) 2.32% 1.93 - ------------------------------------------------------------------------------- </TABLE> The average monthly revenue (excluding equipment sales) per customer declined to $47 during the third quarter of 2001 from $52 during the third 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 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 $1.1 million (15.1%) substantially due to a decrease in average cost per unit which was partially offset by an increase in units sold. System operations expenses increased $175,000 (.9%) in the third quarter of 2001 primarily due to a $1.3 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 and a $1.1 million increase in cell site expenses. Such increases were substantially offset by a $2.0 million decrease in toll costs. General, administrative and customer service expenses increased $3.5 million (18.4%) due primarily to a $1.0 million increase in the provision for doubtful accounts; an $891,000 increase in operating taxes; and a $757,000 increase in customer retention costs. Sales and marketing expenses decreased $1.6 million (8.5%) primarily due to a $1.3 million decrease in advertising expense. Depreciation and amortization increased $620,000 (3.8%) primarily due to increased plant in service.
Other Operations <TABLE> <CAPTION> Three months ended September 30, - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Long distance $ 31,050 27,075 Internet 10,561 6,138 Other 4,615 4,581 - ------------------------------------------------------------------------------- 46,226 37,794 - ------------------------------------------------------------------------------- Operating expenses Cost of sales and operating expenses 36,563 28,542 Depreciation and amortization 3,119 1,226 - ------------------------------------------------------------------------------- 39,682 29,768 - ------------------------------------------------------------------------------- Operating income $ 6,544 8,026 =============================================================================== </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, fiber network business and security monitoring operations. The $4.0 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 September 30, 2001 and 2000 was 438,700 and 347,200, respectively. Internet revenues increased $4.4 million due primarily to growth in the number of customers, principally due to the expansion of the Company's DSL product offering. Cost of sales and operating expenses increased $8.0 million in the third quarter of 2001 compared to the third quarter of 2000 primarily due to (i) a $4.1 million increase in expenses related to the provision of Internet access primarily due to the expansion of the Company's DSL product offering; (ii) a $3.1 million increase in expenses of the Company's long distance operations due primarily to an increase in customers; and (iii) a $2.6 million increase in expenses due to the expansion of the Company's CLEC business. Such increases were partially offset by a $1.4 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. Depreciation and amortization increased $1.9 million primarily due to increased depreciation expense in the Company's Internet and fiber network businesses. 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. Interest Expense Interest expense increased $5.5 million in the third quarter of 2001 compared to the third 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 the amortization of associated goodwill, increased $5.3 million (46.2%) primarily due to the Company's proportionate share ($3.2 million) recorded in the third quarter of 2001 of a favorable depreciation adjustment made by the operator of a cellular entity in which the Company owns a minority interest. The remaining increase was primarily due to increased earnings of cellular entities in which the Company owns a minority interest. Nonrecurring Gains and Losses In the third quarter of 2001, the Company recorded a pre-tax gain on the sale of its remaining common shares of Illuminet aggregating $54.6 million ($35.5 million after-tax; $.25 per diluted share). The Company also recorded a pre-tax gain of $4.0 million ($2.6 million after-tax; $.02 per diluted share) on the sale of certain other assets. In the third quarter of 2001, the Company also recorded a pre-tax charge of $15.0 million ($9.7 million after-tax; $.07 per diluted share) due to the write down in the value of certain non-operating investments in which the Company owns a minority interest. In the third quarter of 2000, the Company recorded a pre-tax gain of $10.7 million ($6.4 million after tax; $.05 per diluted share) due to the sale of its minority interest in a cellular partnership. Other Income and Expense Other income and expense for the third quarter of 2001 was $705,000 income compared to a $4.1 million expense for the third quarter of 2000. Such increase was primarily attributable to a $7.9 million charge in the third quarter 2000 related to the settlement of certain interest rate hedge contracts entered into in connection with financing the Verizon acquisitions. This increase was partially offset by $3.0 million of costs incurred in the third quarter of 2001 associated with responding to an unsolicited takeover proposal. Income Tax Expense Income tax expense increased $9.1 million in the third quarter of 2001 compared to the third quarter of 2000. Exclusive of the effects of income tax expense on nonrecurring items, the effective income tax rate was 38.4% and 40.3% for the three months ended September 30, 2001 and 2000, respectively. Such reduction in the effective rate was primarily due to a reduction in state income tax expense. Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Net income for the first nine months of 2001 was $293.3 million compared to $174.4 million during the first nine months of 2000. Diluted earnings per share increased to $2.06 during the first nine months of 2001 from $1.23 during the first nine months of 2000. Net income (and diluted earnings per share) excluding nonrecurring items for the first nine months of 2001 and 2000 was $165.3 million ($1.16) and $171.7 million ($1.21), respectively. Substantially all of the net nonrecurring pre-tax items in the first nine months of 2001 of $200.3 million relate to the sale of PCS licenses to Leap Wireless International, Inc. ("Leap") and the sale of the Company's remaining common shares of Illuminet; these items were partially offset by the write down of certain non-operating assets which aggregated $25.5 million pre-tax. Substantially all of the nonrecurring items in the first nine months of 2000 of $6.8 million relate to pre-tax gains aggregating $20.6 million related to the sale of the Company's remaining Alaska cellular operations and its minority interest in a cellular partnership. Such gains were partially 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" and a $7.9 million pre-tax charge (reflected in "Other income and expense") related to the settlement of certain interest rate hedge contracts.
<TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> Operating income Telephone $ 307,728 267,099 Wireless 88,839 91,983 Other 16,657 24,291 - ------------------------------------------------------------------------------- 413,224 383,373 Interest expense (173,499) (120,213) Income from unconsolidated cellular entities 32,648 19,382 Minority interest (8,731) (8,052) Nonrecurring gains and losses 199,971 20,593 Other income and expense 8,206 2,548 Income tax expense (178,551) (123,278) - ------------------------------------------------------------------------------- Net income $ 293,268 174,353 =============================================================================== Basic earnings per share $ 2.08 1.24 =============================================================================== Diluted earnings per share $ 2.06 1.23 =============================================================================== Average basic shares outstanding 140,693 139,989 =============================================================================== Average diluted shares outstanding 142,267 141,769 =============================================================================== </TABLE> Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the nine months ended September 30, 2001 and 2000 were as follows: <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ <S> <C> <C> Operating revenues Telephone operations 71.0% 66.5 Wireless operations 20.9% 25.2 Other operations 8.1% 8.3 Operating income Telephone operations 74.5% 69.7 Wireless operations 21.5% 24.0 Other operations 4.0% 6.3 - ------------------------------------------------------------------------------ </TABLE> In August 2001, the Company announced that it is exploring the potential separation of its wireless business from its other operations.
Telephone Operations <TABLE> <CAPTION> Nine months ended September 30, - ----------------------------------------------------------------------------- 2001 2000 - ----------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Local service $ 367,283 284,896 Network access 645,869 510,440 Other 103,728 82,286 - ----------------------------------------------------------------------------- 1,116,880 877,622 - ----------------------------------------------------------------------------- Operating expenses Plant operations 285,980 198,625 Customer operations 86,219 76,893 Corporate and other 140,329 117,634 Depreciation and amortization 296,624 217,371 - ----------------------------------------------------------------------------- 809,152 610,523 - ----------------------------------------------------------------------------- Operating income $ 307,728 267,099 ============================================================================= </TABLE> The Company conducts its telephone operations in rural, suburban and small urban communities in 21 states. As of September 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 $40.6 million (15.2%) due to an increase in operating revenues of $239.3 million (27.3%) which more than offset an increase in operating expenses of $198.6 million (32.5%). Of the $239.3 million increase in operating revenues, $227.4 million was attributable to the properties acquired from Verizon in the third quarter of 2000. The remaining $11.9 million increase in revenues was primarily due to a $5.4 million increase in amounts received from the federal Universal Service Fund; a $5.2 million increase in revenues from CPE services; and a $2.8 million increase in revenues associated with the provision of custom calling features. Annualized internal access line growth during the first nine months of 2001 and 2000 was 0.6% and 3.9%, respectively. The decline in internal access line growth during 2001 is substantially due to the slowing growth in the Company's service areas due to general economic conditions and the replacement of lines with high-speed data circuits. Plant operations expenses increased $87.4 million (44.0%) of which $88.2 million was attributable to the properties acquired from Verizon. Customer operations expenses increased $9.3 million (12.1%) of which $18.2 million was attributable to the properties acquired from Verizon. The remaining $8.9 million decrease was primarily due to a $3.7 million decrease in information technology expenses; a $2.8 million decrease in salaries and benefits; and a $1.6 million decrease in expenses associated with the provision of CPE services. Corporate and other expenses increased $22.7 million (19.3%) of which $26.2 million was due to the properties acquired from Verizon. The remaining $3.5 million decrease was primarily due to $2.4 million decrease in the provision for doubtful accounts. Depreciation and amortization increased $79.3 million (36.5%), of which $67.3 million was attributable to the properties acquired from Verizon (which included $14.6 million of amortization of goodwill) and the remainder of which was primarily due to higher levels of plant in service.
Wireless Operations and Income From Unconsolidated Cellular Entities <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income - wireless operations $ 88,839 91,983 Income from unconsolidated cellular entities 32,648 19,382 Minority interest (9,150) (8,783) - ------------------------------------------------------------------------------- $ 112,337 102,582 =============================================================================== </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> Nine months ended September 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Service $ 253,886 246,890 Roaming 67,047 73,946 Equipment sales 8,563 10,942 - ------------------------------------------------------------------------------- 329,496 331,778 - ------------------------------------------------------------------------------- Operating expenses Cost of equipment sold 17,789 21,728 System operations 54,565 51,782 General, administrative and customer service 64,042 56,423 Sales and marketing 55,287 60,637 Depreciation and amortization 48,974 49,225 - ------------------------------------------------------------------------------- 240,657 239,795 - ------------------------------------------------------------------------------- Operating income $ 88,839 91,983 =============================================================================== </TABLE> Wireless operating income decreased $3.1 million (3.4%) to $88.8 million in the first nine months of 2001 from $92.0 million in the first nine months of 2000. Wireless operating revenues decreased $2.3 million (.7%) while operating expenses increased $862,000 (.4%). The $7.0 million increase in service revenues was primarily due to a growth in the number of customers and increased minutes of use, both of which were partially offset by reduced rates. The $6.9 million decrease in roaming revenue was primarily due to a reduction in roaming rates (which was partially offset by an increase in roaming minutes of use), a downward trend in rates that the Company anticipates will continue in the near feature.
The following table illustrates the growth in the Company's wireless customer base in its majority owned markets: <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------------- <S> <C> <C> Customers at beginning of period 751,200 707,486 Gross units added internally 241,607 247,014 Disconnects 198,143 202,664 Net units added 43,464 44,350 Net effect of dispositions - (10,653) Customers at end of period 794,664 741,183 Average monthly churn rate (excluding prepaid customers) 2.28% 1.88 - ------------------------------------------------------------------------------- </TABLE> The average monthly revenue (excluding equipment sales) per customer declined to $46 during the first nine months of 2001 from $49 during the first nine months 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 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 $3.9 million (18.1%) due primarily to a decrease in the number of units sold and to a decrease in average price per unit. System operations expenses increased $2.8 million (5.4%) in the first nine months of 2001 primarily due to a $2.0 million increase in cell site expenses and a $3.8 million increase in the amounts paid to other carriers for service provided to the Company's customers who roam in the other carriers' service areas primarily due to an increase in minutes of use. Such increases were partially offset by a $3.3 million decrease in toll costs. General, administrative and customer service expenses increased $7.6 million (13.5%) primarily due to a $3.0 million increase in the provision for doubtful accounts; a $1.8 million increase in customer retention costs; and a $1.0 million increase in operating taxes. Sales and marketing expenses decreased $5.4 million (8.8%) due primarily to a $3.4 million decrease in advertising and sales promotion expenses and a $2.0 million decrease in sales commissions paid to agents.
Other Operations <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------------ 2001 2000 - ------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> Operating revenues Long distance $ 87,164 77,001 Internet 27,678 16,423 Other 13,103 15,922 - ------------------------------------------------------------------------------ 127,945 109,346 - ------------------------------------------------------------------------------ Operating expenses Cost of sales and operating expenses 105,049 81,331 Depreciation and amortization 6,239 3,724 - ------------------------------------------------------------------------------ 111,288 85,055 - ------------------------------------------------------------------------------ Operating income $ 16,657 24,291 ============================================================================== </TABLE> Other operations include the results of operations of subsidiaries 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, fiber network business and security monitoring operations. The $10.2 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 September 30, 2001 and 2000 was 438,700 and 347,200, respectively. Internet revenues increased $11.3 million due primarily to a $8.5 million increase due to growth in the number of customers and a $1.9 million increase due to Internet operations acquired in mid-2000. The $2.8 million decrease in other revenues was primarily due to the planned phase-out of the Company's third-party call center operations during 2000. Cost of sales and operating expenses increased $23.7 million (29.2%) primarily due to a $17.9 million increase in expenses related to the provision of Internet access primarily due to the expansion of the Company's DSL product offering; a $6.8 million increase due to the expansion of the Company's CLEC business; and an increase of $6.5 million in expenses of the Company's long distance operations primarily due to an increase in the number of customers. Such increases were partially offset by a $6.5 million reduction in expenses due to the winding down of the Company's third party call center operations during 2000. Depreciation and amortization increased $2.5 million primarily due to increased depreciation expense in the Company's Internet and fiber network businesses. The Company anticipates 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. Interest Expense Interest expense increased $53.3 million in the first nine months of 2001 compared to the first nine months of 2000 primarily due to an increase in outstanding indebtedness related to the Verizon acquisition.
Income from Unconsolidated Cellular Entities Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $13.3 million (68.4%) in the first nine months of 2001 primarily due to (i) 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, (ii) the Company's proportionate share ($3.2 million) recorded in the third quarter of 2001 of a favorable depreciation adjustment made by the operator of a cellular entity in which the Company owns a minority interest and (iii) 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. In November 2001, the Company became aware of a non-recurring charge that will be recorded in the fourth quarter of 2001 by a cellular entity in which the Company owns a minority interest. The Company's share of such charge will approximate $15 million pre-tax. Minority Interest Minority interest increased $679,000 in the first nine months of 2001 compared to the first nine months of 2000 due primarily to increased profitability of certain of the Company's majority-owned and operated entities. Nonrecurring Gains and Losses During the first nine months 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. Also during the first nine months of 2001, the Company recorded a pre-tax gain on the sale of its remaining shares of Illuminet common stock aggregating $54.6 million ($35.5 million after-tax; $.25 diluted share) and a pre-tax gain of $4.0 million ($2.6 million after-tax; $.02 per diluted share) on the sale of certain other assets. Additionally, during the first nine months of 2001, the Company recorded pre-tax charges of $25.5 million ($16.6 million after-tax; $.12 per diluted share) due to the write down in the value of certain non-operating investments in which the Company owns a minority interest. In the first nine months of 2000, the Company recorded pre-tax gains of approximately $20.6 million ($11.6 million after-tax; $.08 per diluted share) due to the sales of its remaining Alaska cellular operations and the Company's minority interest in a cellular partnership. See Note 4 of Notes to Consolidated Financial Statements for additional information. Other Income and Expense Other income and expense increased $5.7 million in the first nine months of 2001 compared to the first nine months of 2000, primarily due to a $7.9 million charge related to the settlement of certain interest rate hedge contracts entered into in connection with financing the Verizon acquisitions in 2000 which was partially offset by $3.0 million of costs incurred in 2001 associated with responding to an unsolicited takeover proposal. Income Tax Expense Income tax expense increased $55.3 million in the first nine months of 2001 compared to the first nine months of 2000. Exclusive of the effects of income tax expense on nonrecurring items, the effective income tax rate was 39.1% and 41.0% for the nine months ended September 30, 2001 and 2000, respectively. Such reduction in the effective rate was primarily due to a reduction in state income tax expense.
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 $606.9 million during the first nine months of 2001 compared to $437.5 million during the first nine 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 $231.6 million for the nine months ended September 30, 2001 compared to $1.753 billion for the nine months ended September 30, 2000. Cash used for acquisitions was $1.541 billion in 2000 (substantially all of which relates to the Verizon acquisitions in 2000). Proceeds from the sale of assets were $172.6 million in the first nine months of 2001 compared to $29.5 million in the first nine months of 2000. Payments for property, plant and equipment were $101.6 million more in the first nine months of 2001 than in the comparable period during 2000, principally due to the Verizon acquisitions. Capital expenditures for the nine months ended September 30, 2001 were $248.8 million for telephone, $52.5 million for wireless and $82.9 million for other operations. Revised budgeted capital expenditures for 2001 total $400 million for telephone operations, $70 million for wireless operations and $90 million for other operations. Anticipated capital expenditures for 2002 are currently expected to range from $500-$525 million, exclusive of the impact of pending acquisitions. Net cash used in financing activities was $372.9 million during the first nine months of 2001. Net cash provided by financing activities was $1.331 billion during the first nine months of 2000. Net payments of debt were $355.5 million during the first nine months of 2001 compared to net proceeds of debt of $1.343 billion during the first nine months of 2000 primarily due to borrowings due to the purchase of assets from Verizon. As of September 30, 2001, CenturyTel's telephone subsidiaries had available for use $123.0 million of commitments for long-term financing from the Rural Utilities Service and the Company had $500.1 million of undrawn committed bank lines of credit. In addition, in October 2000 the Company implemented a commercial paper program that authorizes the Company to have outstanding up to $1.5 billion in commercial paper at any one time. At September 30, 2001, the Company had $39.0 million of debt 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 and $48 million in cash in July 2001 under the terms of a promissory note bearing interest at 10% per annum. Subsequent to September 30, 2001, the Company received the remaining $39 million cash owed under the note. In third quarter 2001, the Company sold its remaining shares of its investment in Illuminet common stock for an aggregate of approximately $58.2 million. Proceeds from these sales were used to repay indebtedness. In October 2001, the Company entered into definitive asset purchase agreements to purchase from affiliates of Verizon Communications Inc. telephone access lines (which numbered approximately 675,000 at June 30, 2001) and related local exchange assets in Missouri and Alabama for approximately $2.159 billion in cash, subject to adjustments which are not expected to be material in the aggregate. These transactions are anticipated to close in the second half of 2002, subject to regulatory approvals and certain other closing conditions. The Company's financing plans are not yet complete and will be dependent upon the Company's review of its alternatives and market conditions. For additional information, see Item 5 of Part II of this Report.
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, competition or the demand for regulated services or products or the Company's acquisition of new properties 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 October 31, 2001, the Wisconsin Public Service Commission ("WPSC") approved a permanent rate increase of $8.3 million annually for the local exchange properties that the Company acquired from Ameritech in December 1998. The WPSC ordered the Company to refund a portion ($1.5 million) of the previously approved interim rates. Such refund will have the effect of a one-time reduction in revenue of approximately $300,000 as the Company was not recording 100% of the interim rates as revenue. 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. During this interim period, the Company estimates (based on current operations and considering the increase in the nationwide average cost per loop in July 2001) that such ruling will increase the Company's level of universal service support receipts by approximately $12 million annually compared to previous levels. In August 2001, the Company was awarded an interim access rate increase by the WPSC for the former Verizon properties in Wisconsin in an amount of approximately $7.9 million annually. Such rates are subject to refund pending an order establishing permanent rates. In August 2001, the Arkansas Public Service Commission approved tariff amendments that limit the number of minutes included for a flat rate in certain unlimited optional calling plans in certain of the acquired Verizon markets. Once fully implemented in January 2002, the Company anticipates that these tariff revisions will reduce the level of its operating expenses by approximately $20 million annually.
On October 11, 2001, the FCC modified its interstate access charge rules and universal service support system for rate of return local exchange carriers. This order, among other things, (i) increases the caps on the subscriber line charges ("SLC") to the levels paid by most subscribers nationwide; (ii) allows limited SLC deaveraging, which will enhance the competitiveness of rate of return carriers by giving them pricing flexibility; (iii) lowers per minute rates the Company collects for federal access charges; (iv) creates a new explicit universal service support mechanism that will replace other implicit support mechanisms in a manner designed to ensure that rate structure changes do not affect the overall recovery of interstate access costs by rate of return carriers serving high cost areas and (v) terminates the proceeding on the represcription of the authorized rate of return, which will remain at 11.25%. The Company expects the order to be implemented on a revenue neutral basis. Other proposals submitted to the FCC by the Multi-Association Group representing rural carriers were rejected or deferred for additional comment. 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 September 30, 2001, the Company had outstanding an interest rate swap relating to $212.0 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, the Company does not expect fluctuations in the fair value of the swap to be recorded in its statements of income. 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 no longer permitted. 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 nine months ended September 30, 2001 totaled approximately $56.1 million. The Company is still in the process of determining the impact, if any, of the transitional goodwill impairment rules of SFAS 142. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 replaces Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 144 requires long-lived assets be measured at the lower of selling amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. SFAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is still in the process of determining the impact, if any, of the provisions of SFAS 144.
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 September 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 6.6% 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 66 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 $101.0 million decrease in fair value of the Company's long-term debt. As of September 30, 2001, the Company owed $339.0 million of debt on a floating-rate basis. As of September 30, 2001, the Company had outstanding an interest rate swap relating to $212.0 million of its 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 Between July 1 and July 11, 2001, CenturyTel sold at market prices approximately 122 shares of CenturyTel common stock to employees through its Union Group Incentive Plan and approximately six shares of CenturyTel common stock through its Security Systems, Inc. 401(k) Plan. All such shares were privately placed under Section 4(2) of the Securities Act of 1933, as amended. Since July 11, 2001, all sales under both of these plans have been registered under such Act. Item 5. Other Information On October 22, 2001, the Company entered into definitive agreements to purchase from affiliates of Verizon Communications Inc. ("Verizon") assets comprising all of Verizon's local telephone operations in Missouri and Alabama. In exchange, the Company has agreed to pay approximately $2.159 billion in cash, subject to certain adjustments described below. The assets to be purchased will include (i) all telephone access lines (which numbered approximately 369,000 as of June 30, 2001) and related property and equipment comprising Verizon's local exchange operations in 98 exchanges in predominantly rural and suburban markets throughout Missouri, several of which are adjacent to properties currently owned and operated by the Company, (ii) all telephone access lines (which numbered approximately 306,000 as of June 30, 2001) and related property and equipment comprising Verizon's local exchange operations in 90 exchanges in predominantly rural markets throughout Alabama, (iii) Verizon's assets used to provide digital subscriber line (DSL) and other high speed data services within the purchased exchanges in both states and (iv) approximately 2,800 route miles of fiber optic cable within the purchased exchanges in both states. The acquired assets will not include Verizon's cellular, PCS, long distance, dial-up Internet, or directory publishing operations, or rights under various Verizon contracts, including those relating to customer premise equipment. The Company will not assume any liabilities of Verizon other than those associated with contracts, employees, facilities and certain other assets transferred in connection with the purchases. The purchase price will be adjusted to, among other things, (i) reimburse Verizon for certain pre-closing costs and (ii) compensate the Company if Verizon fails to attain certain specified pre-closing capital expenditure targets. The aggregate effect of these adjustments is not expected to be material. The Company's purchase of the Missouri properties is subject to the approval of the Missouri Public Service Commission, and the Company's purchase of the Alabama properties is subject to the approval of the Alabama Public Service Commission. Consummation of each transaction is also subject to, among other things, (i) the approval of the Federal Communications Commission, (ii) compliance with the notification and waiting period requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the receipt of various third party consents, including releases from Verizon bondholders terminating liens on the transferred assets, and (iv) various other customary closing conditions. Neither purchase is conditioned upon the completion of the other purchase. Under each definitive agreement, the Company has agreed to pay Verizon 10% of the transaction consideration if the purchase is not consummated under certain specified conditions, including the Company's incapacity to finance the transaction. The properties to be acquired are currently subject to price-cap regulation for interstate purposes, and the Company has no plans to change this. Because most of the Company's other telephone properties are subject to rate-of-return regulation, the Company's plans to retain price-cap regulation for the acquired properties will require it to seek a waiver of the FCC's "all or nothing" regulation that generally requires a rate-of-return company acquiring a price-cap company to convert all of its operations to price-cap regulation. Although the FCC has granted similar waivers to other carriers over the past couple of years, no assurances can be provided that the FCC will grant a waiver to the Company. The Company's failure to obtain this waiver would adversely impact the financial benefits that the Company anticipates receiving in connection with its purchases of the Verizon properties. Additional information regarding the purchases is set forth in the Company's press release announcing the transactions and the definitive asset purchase agreements entered into on October 22, 2001, all of which are filed as Exhibits to this Report and are incorporated by reference herein. Item 6. Exhibits and Reports on Form 8-K A. Exhibits 2(a) Asset Purchase Agreement, dated as of October 22, 2001, between GTE Midwest Incorporated (d/b/a Verizon Midwest) and CenturyTel of Missouri, LLC 2(b) Asset Purchase Agreement, dated as of October 22, 2001, between Verizon South, Inc., Contel of the South, Inc. (d/b/a Verizon Mid-States) and CenturyTel of Alabama, LLC 10(a) Registrant's Employee Stock Ownership Plan, as amended and restated September 17, 2001. 10(b) Merger Agreement, dated September 18, 2001, between Registrant and Regions Bank of Louisiana, pursuant to which Registrant's Stock Bonus Plan and Paysop was merged into Registrant's Employee Stock Ownership Plan. 11 Computations of Earnings Per Share 99 Press Release dated October 22, 2001, announcing the Company's pending acquisition of approximately 675,000 telephone access lines from affiliates of Verizon Communications Inc. (incorporated by reference from the Company's Current Report on Form 8-K filed on October 25, 2001) B. Reports on Form 8-K (i) The following item was reported on Form 8-K filed July 27, 2001: Item 5. Other events - News release announcing second quarter results of operations. (ii) The following items were reported on Form 8-K filed August 15, 2001: Item 5. Other events - (i) News release issuing statement in response to Alltel unsolicited proposal, dated August 14, 2001 and (ii) News release announcing that CenturyTel is exploring the separation of its wireless operations, dated August 15, 2001. (iii) The following items were reported on Form 8-K filed August 17, 2001: Item 5. Other events - (i) News release announcing that the Arkansas Public Service Commission has approved tariff amendments that limit the number of minutes included for a flat rate in the Company's extended area optional calling plans and (ii) correspondence sent by the Chief Executive Officer of Registrant to Scott T. Ford, President and Chief Operating Officer of ALLTEL Corporation, on August 10, 2001. (iv) The following items were reported on Form 8-K filed August 21, 2001: Item 5. Other events - On August 17, 2001 CenturyTel, Inc. filed a complaint against ALLTEL Corporation seeking injunction relief and damages for violation of federal and state laws. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits - Complaint filed by CenturyTel on August 17, 2001. (v) The following item was reported on Form 8-K filed August 22, 2001: Item 5. Other events - News release announcing that the Public Service Commission of Wisconsin has approved interim access rates for properties acquired from Verizon. (vi) The following item was reported on Form 8-K filed August 28, 2001: Item 5. Other events - News release of Registrant responding to a letter dated August 27, 2001, from Mr. Scott T. Ford, President and Chief Operating Officer of ALLTEL Corporation. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CenturyTel, Inc. Date: November 14, 2001 /s/ Neil A. Sweasy --------------------- Neil A. Sweasy Vice President and Controller (Principal Accounting Officer)