UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 1-7784 CENTURYTEL, INC. (Exact name of registrant as specified in its charter) Louisiana 72-0651161 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Century Park Drive, Monroe, Louisiana 71203 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (318) 388-9000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of July 31, 1999, there were 139,510,368 shares of common stock outstanding.
CenturyTel, Inc. TABLE OF CONTENTS Page No. -------- Part I. Financial Information: Item 1. Financial Statements Consolidated Statements of Income--Three Months and Six Months Ended June 30, 1999 and 1998 3 Consolidated Statements of Comprehensive Income -- Three Months and Six Months Ended June 30, 1999 and 1998 4 Consolidated Balance Sheets--June 30, 1999 and December 31, 1998 5 Consolidated Statements of Stockholders' Equity-- Six Months Ended June 30, 1999 and 1998 6 Consolidated Statements of Cash Flows-- Six Months Ended June 30, 1999 and 1998 7 Notes to Consolidated Financial Statements 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-24 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 Part II. Other Information: Item 4. Submission of Matters To a Vote of Security Holders 24-25 Item 6. Exhibits and Reports on Form 8-K 25-26 Signature 26
PART I. FINANCIAL INFORMATION CenturyTel, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Six months ended June 30, ended June 30, - ------------------------------------------------------------------------------------------ 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------ (Dollars, except per share amounts, and shares expressed in thousands) <S> <C> <C> <C> <C> OPERATING REVENUES Telephone $ 279,113 265,322 572,074 525,135 Cellular 109,932 104,871 208,403 199,037 Other 27,705 18,185 50,529 35,926 - ------------------------------------------------------------------------------------------ Total operating revenues 416,750 388,378 831,006 760,098 - ------------------------------------------------------------------------------------------ OPERATING EXPENSES Cost of sales and operating expenses 200,113 185,406 393,765 367,800 Depreciation and amortization 86,012 81,484 175,993 160,678 - ------------------------------------------------------------------------------------------ Total operating expenses 286,125 266,890 569,758 528,478 - ------------------------------------------------------------------------------------------ OPERATING INCOME 130,625 121,488 261,248 231,620 - ------------------------------------------------------------------------------------------ OTHER INCOME (EXPENSE) Gain on sale or exchange of assets, net 39,601 25,516 49,959 49,859 Interest expense (37,487) (42,072) (79,728) (84,881) Income from unconsolidated cellular entities 9,267 9,066 16,112 15,943 Minority interest (18,790) (4,002) (22,100) (6,645) Other income and expense 3,434 691 5,614 1,295 - ------------------------------------------------------------------------------------------ Total other income (expense) (3,975) (10,801) (30,143) (24,429) - ------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAX EXPENSE 126,650 110,687 231,105 207,191 Income tax expense 73,188 46,496 116,538 85,306 - ------------------------------------------------------------------------------------------ NET INCOME $ 53,462 64,191 114,567 121,885 ========================================================================================== BASIC EARNINGS PER SHARE* $ .38 .47 .83 .89 ========================================================================================== DILUTED EARNINGS PER SHARE* $ .38 .46 .81 .87 ========================================================================================== DIVIDENDS PER COMMON SHARE* $ .045 .043 .09 .087 ========================================================================================== AVERAGE BASIC SHARES OUTSTANDING * 138,852 136,922 138,455 136,686 ========================================================================================== AVERAGE DILUTED SHARES OUTSTANDING * 141,461 140,028 141,245 139,701 ========================================================================================== * Reflects March 1999 stock split. See Note 4. See accompanying notes to consolidated financial statements. </TABLE>
CenturyTel, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Six months ended June 30, ended June 30, - ------------------------------------------------------------------------------------------ 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> <C> <C> Net income $ 53,462 64,191 114,567 121,885 - ------------------------------------------------------------------------------------------ Other comprehensive income, net of tax: Unrealized holding gains arising during period, net of $1,313, $1,056, $2,430 and $5,891 tax 2,439 1,961 4,512 10,941 Reclassification adjustment for gains included in net income, net of $-, $3,060, $3,625 and $11,027 tax - (5,683) (6,733) (20,478) - ------------------------------------------------------------------------------------------ Other comprehensive income, net of $1,313, $2,004, $1,195, and $5,136 tax 2,439 (3,722) (2,221) (9,537) - ------------------------------------------------------------------------------------------ Comprehensive income $ 55,901 60,469 112,346 112,348 ========================================================================================== See accompanying notes to consolidated financial statements. </TABLE>
CenturyTel, Inc. CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> June 30, December 31, 1999 1998 - ------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 93,893 5,742 Accounts receivable, less allowance of $3,535 and $4,155 194,067 185,398 Materials and supplies, at average cost 20,624 23,709 Other 7,450 11,389 - ------------------------------------------------------------------------------------------ 316,034 226,238 - ------------------------------------------------------------------------------------------ NET PROPERTY, PLANT AND EQUIPMENT 2,181,519 2,351,453 - ------------------------------------------------------------------------------------------ INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $139,657 and $133,135 1,625,044 1,956,701 Other 436,116 401,063 - ------------------------------------------------------------------------------------------ 2,061,160 2,357,764 - ------------------------------------------------------------------------------------------ $ 4,558,713 4,935,455 ========================================================================================== LIABILITIES AND EQUITY - ---------------------- CURRENT LIABILITIES Current maturities of long-term debt $ 53,360 53,010 Accounts payable 113,923 87,627 Accrued expenses and other liabilities Salaries and benefits 43,015 36,900 Taxes 128,143 33,411 Interest 36,095 36,926 Other 23,532 24,249 Advance billings and customer deposits 32,092 32,721 - ------------------------------------------------------------------------------------------ 430,160 304,844 - ------------------------------------------------------------------------------------------ LONG-TERM DEBT 2,017,472 2,558,000 - ------------------------------------------------------------------------------------------ DEFERRED CREDITS AND OTHER LIABILITIES 461,930 541,129 - ------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 350,000,000 shares, issued and outstanding 139,363,490 and 138,082,926 shares 139,363 138,083 Paid-in capital 467,561 451,535 Accumulated other comprehensive income - unrealized holding gain on investments, net of taxes 4,996 7,217 Retained earnings 1,034,505 932,611 Unearned ESOP shares (5,380) (6,070) Preferred stock - non-redeemable 8,106 8,106 - ------------------------------------------------------------------------------------------ 1,649,151 1,531,482 - ------------------------------------------------------------------------------------------ $ 4,558,713 4,935,455 ========================================================================================== See accompanying notes to consolidated financial statements. </TABLE>
CenturyTel, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Six months ended June 30, - ------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> COMMON STOCK Balance at beginning of period $ 138,083 91,104 Issuance of common stock for acquisitions - 28 Conversion of convertible securities into common stock 254 169 Issuance of common stock through dividend reinvestment, incentive and benefit plans 1,026 499 - ------------------------------------------------------------------------------------------ Balance at end of period 139,363 91,800 - ------------------------------------------------------------------------------------------ PAID-IN CAPITAL Balance at beginning of period 451,535 469,586 Issuance of common stock for acquisitions - 1,059 Conversion of convertible securities into common stock 3,046 3,131 Issuance of common stock through dividend reinvestment, incentive and benefit plans 11,475 8,350 Amortization of unearned compensation and other 1,505 1,281 - ------------------------------------------------------------------------------------------ Balance at end of period 467,561 483,407 - ------------------------------------------------------------------------------------------ Accumulated other comprehensive income Balance at beginning of period 7,217 11,893 Change in unrealized holding gain on investments, net of reclassification adjustment (2,221) (9,537) - ------------------------------------------------------------------------------------------ Balance at end of period 4,996 2,356 - ------------------------------------------------------------------------------------------ RETAINED EARNINGS Balance at beginning of period 932,611 728,033 Net income 114,567 121,885 Cash dividends declared Common stock-$.09 and $.0866 per share, respectively * (12,469) (11,864) Preferred stock (204) (204) - ------------------------------------------------------------------------------------------ Balance at end of period 1,034,505 837,850 - ------------------------------------------------------------------------------------------ UNEARNED ESOP SHARES Balance at beginning of period (6,070) (8,450) Release of ESOP shares 690 1,190 - ------------------------------------------------------------------------------------------ Balance at end of period (5,380) (7,260) - ------------------------------------------------------------------------------------------ PREFERRED STOCK - NON-REDEEMABLE Balance at beginning and end of period 8,106 8,106 - ------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 1,649,151 1,416,259 ========================================================================================== * Reflects March 1999 stock split. See Note 4. See accompanying notes to consolidated financial statements. </TABLE>
CenturyTel, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six months ended June 30, - ------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $ 114,567 121,885 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 175,993 160,678 Deferred income taxes 4,345 25,537 Income from unconsolidated cellular entities (16,112) (15,943) Minority interest 22,100 6,645 Gain on sales of assets (49,959) (49,859) Changes in current assets and current liabilities: Accounts receivable (16,392) (20,498) Accounts payable 8,927 (6,834) Accrued taxes 30,701 (47,170) Other current assets and other current liabilities, net 14,118 14,240 Increase in other non-current assets (23,016) (5,334) Change in other non-current liabilities (586) 5,551 Other, net 10,073 3,489 - ------------------------------------------------------------------------------------------ Net cash provided by operating activities 274,759 192,387 - ------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Payments for property, plant and equipment (149,128) (122,018) Acquisitions, net of cash acquired - (5,000) Proceeds from sales of assets 465,784 132,307 Distributions from unconsolidated cellular entities 10,109 11,647 Payment into escrow for interest in cellular entity (17,614) - Purchase of life insurance investment (4,405) (5,150) Other, net 1,511 2,386 - ------------------------------------------------------------------------------------------ Net cash provided by investing activities 306,257 14,172 - ------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Proceeds from issuance of long-term debt 7,954 772,852 Payments of long-term debt (501,087) (938,532) Payment upon settlement of hedge contracts - (40,237) Payment of deferred debt issuance costs - (6,625) Proceeds from issuance of common stock 11,947 8,926 Cash dividends (12,673) (12,068) Other, net 994 74 - ------------------------------------------------------------------------------------------ Net cash used in financing activities (492,865) (215,610) - ------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 88,151 (9,051) Cash and cash equivalents at beginning of period 5,742 26,017 - ------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 93,893 16,966 ========================================================================================== Supplemental cash flow information: Income taxes paid $ 79,497 118,364 Interest paid $ 80,559 66,718 - ------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. </TABLE>
CenturyTel, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) (1) Basis of Financial Reporting Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission; however, the Company believes the disclosures which are made are adequate to make the information presented not misleading. The consolidated financial statements and footnotes included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The unaudited financial information for the three months and six months ended June 30, 1999 and 1998 has not been audited by independent public accountants; however, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for the three-month and six-month periods have been included therein. The results of operations for the first six months of the year are not necessarily indicative of the results of operations which might be expected for the entire year. (2) Net Property, Plant and Equipment Net property, plant and equipment is composed of the following: <TABLE> <CAPTION> June 30, December 31, 1999 1998 - ------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> Telephone, at original cost $ 3,311,544 3,660,252 Accumulated depreciation (1,503,094) (1,661,315) - ------------------------------------------------------------------------ 1,808,450 1,998,937 - ------------------------------------------------------------------------ Cellular, at cost 434,285 428,984 Accumulated depreciation (190,036) (178,569) - ------------------------------------------------------------------------ 244,249 250,415 - ------------------------------------------------------------------------ Corporate and other, at cost 233,451 200,422 Accumulated depreciation (104,631) (98,321) - ------------------------------------------------------------------------ 128,820 102,101 - ------------------------------------------------------------------------ $ 2,181,519 2,351,453 ======================================================================== </TABLE> (3) Earnings from Unconsolidated Cellular Entities The following summarizes the unaudited combined results of operations of the cellular entities in which the Company's investments (as of June 30, 1999 and 1998) were accounted for by the equity method. <TABLE> <CAPTION> Six months ended June 30, - -------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Results of operations Revenues $ 642,489 606,793 Operating income $ 195,574 216,062 Net income $ 194,937 216,952 - -------------------------------------------------------------------------- </TABLE> (4) Stock Split On February 23, 1999, the Company's Board of Directors declared a three-for-two common stock split effected as a 50% stock dividend distributed on March 31, 1999. Shares outstanding and per share data for 1998 have been restated to reflect this stock split. (5) Sales of Assets In the first quarter of 1999 the Company recorded a pre-tax gain aggregating $10.4 million ($6.7 million after-tax; $.04 per diluted share) due to the sale of its remaining common shares of MCIWorldCom, Inc. In May 1999, the Company sold the stock of substantially all of its Alaska-based operations to Alaska Communications Systems Holdings, Inc. The Company received approximately $300 million in after-tax cash as a result of the transaction. No gain or loss was recorded upon the disposition of these properties. In June 1999, the Company sold the assets of its cellular operations in Brownsville and McAllen, Texas to Western Wireless Corporation for approximately $96 million cash. In connection therewith, the Company recorded a pre-tax gain of approximately $39.6 million, and an after-tax loss of approximately $7.8 million ($.05 per diluted share.) (6) Pending Acquisitions In June 1999, the Company signed a definitive asset purchase agreement to purchase GTE's telephone access lines (which numbered approximately 213,650 at December 31, 1998) and related local exchange assets in Arkansas for approximately $843.4 million cash, subject to certain adjustments. In July 1999, the Company acquired a 61.5% (56.9% fully-diluted) interest in a newly-organized joint venture company, which has entered into a definitive asset purchase agreement to purchase GTE's telephone access lines (which numbered approximately 116,000 at December 31, 1998) and related local exchange assets in Missouri for approximately $290 million, subject to certain adjustments. At closing, the Company will make a preferred equity investment in the newly organized company of approximately $55 million. These transactions are expected to close in the first quarter of 2000, pending regulatory approvals and certain other closing conditions. (7) Business Segments The Company has two separately reportable business segments: telephone and cellular. The operating income of these segments is reviewed by the chief operating decision maker to assess performance and make business decisions. <TABLE> <CAPTION> Three months Six months ended June 30, ended June 30, - ------------------------------------------------------------------------------ 1999 1998 1999 1998 - ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Operating revenues Telephone segment $ 279,113 265,322 572,074 525,135 Cellular segment 109,932 104,871 208,403 199,037 Other operations 27,705 18,185 50,529 35,926 - ------------------------------------------------------------------------------ $ 416,750 388,378 831,006 760,098 ============================================================================== Operating income Telephone segment $ 83,766 79,954 179,064 156,797 Cellular segment 42,753 37,511 73,136 67,166 Other operations 4,106 4,023 9,048 7,657 - ------------------------------------------------------------------------------ $ 130,625 121,488 261,248 231,620 ============================================================================== Operating income $ 130,625 121,488 261,248 231,620 Gain on sale or exchange of assets, net 39,601 25,516 49,959 49,859 Interest expense (37,487) (42,072) (79,728) (84,881) Income from unconsolidated cellular entities 9,267 9,066 16,112 15,943 Minority interest (18,790) (4,002) (22,100) (6,645) Other income and expense 3,434 691 5,614 1,295 - ------------------------------------------------------------------------------ Income before income tax expense $ 126,650 110,687 231,105 207,191 ============================================================================== </TABLE> <TABLE> <CAPTION> June 30, December 31, 1999 1998 - ----------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Total assets Telephone segment $ 3,137,296 3,674,148 Cellular segment 1,242,961 1,097,789 Other operations 178,456 163,518 - ----------------------------------------------------------------------- Total assets $ 4,558,713 4,935,455 ======================================================================= </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, 1998. The results of operations for the three months and six months ended June 30, 1999 are not necessarily indicative of the results of operations which might be expected for the entire year. CenturyTel, Inc. (the "Company"), is a regional diversified communications company that is primarily engaged in providing local telephone services and cellular telephone communications services. At June 30, 1999, the Company's local exchange telephone subsidiaries operated over 1.2 million telephone access lines primarily in rural, suburban and small urban areas in 20 states, and the Company's majority-owned and operated cellular entities had more than 640,000 cellular subscribers. On December 1, 1998, the Company acquired from affiliates of Ameritech Corporation ("Ameritech") telephone operations serving 86,000 access lines in northern and central Wisconsin and the related telephone directories for approximately $221 million cash. The operations of the former Ameritech properties are included in the Company's results of operations beginning December 1, 1998. On May 14, 1999, the Company sold substantially all of its Alaska-based operations serving approximately 134,900 telephone access lines and 3,000 cellular subscribers. On June 1, 1999, the Company sold the assets of its Brownsville and McAllen, Texas cellular operations serving approximately 7,500 cellular subscribers. The operations of these disposed properties are included in the Company's results of operations up to the respective dates of disposition. In addition to historical information, management's discussion and analysis includes certain forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such forward-looking statements are subject to uncertainties that could cause the Company's actual results to differ materially from such statements. Such uncertainties include but are not limited to: the effects of ongoing deregulation in the telecommunications industry; the effects of greater than anticipated competition in the Company's markets; possible changes in the demand for the Company's products and services; the Company's ability to successfully introduce new offerings on a timely and cost-effective basis; the risks inherent in rapid technological change; the Company's ability to effectively manage its growth, including integrating newly acquired properties into the Company's operations; the success and expense of the remediation efforts of the Company and its vendors in achieving year 2000 compliance; and the effects of more general factors such as changes in general market or economic conditions or in legislation, regulation or public policy. These and other uncertainties related to the business are described in greater detail in Item 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any of its forward-looking statements for any reason. RESULTS OF OPERATIONS Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Net income (and diluted earnings per share) for the second quarter of 1999 and 1998 was $53.5 million ($.38) and $64.2 million ($.46), respectively. Net income (excluding the after-tax effect of asset sales) for the second quarter of 1999 was $61.2 million compared to $49.5 million during the second quarter of 1998. Diluted earnings per share (excluding the after-tax effect of asset sales) increased to $.43 during the three months ended June 30, 1999 from $.35 during the three months ended June 30, 1998, a 22.9% increase. <TABLE> <CAPTION> Three months ended June 30, - --------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------- (Dollars, except per share amounts,and shares in thousands) <S> <C> <C> Operating income Telephone $ 83,766 79,954 Cellular 42,753 37,511 Other 4,106 4,023 - --------------------------------------------------------------------------- 130,625 121,488 Gain on sale or exchange of assets, net 39,601 25,516 Interest expense (37,487) (42,072) Income from unconsolidated cellular entities 9,267 9,066 Minority interest (18,790) (4,002) Other income and expense 3,434 691 Income tax expense (73,188) (46,496) - --------------------------------------------------------------------------- Net income $ 53,462 64,191 =========================================================================== Basic earnings per share $ .38 .47 =========================================================================== Diluted earnings per share $ .38 .46 =========================================================================== Average basic shares outstanding 138,852 136,922 =========================================================================== Average diluted shares outstanding 141,461 140,028 =========================================================================== </TABLE> Contributions to operating revenues and operating income by the Company's telephone, cellular, and other operations for the three months ended June 30, 1999 and 1998 were as follows: <TABLE> <CAPTION> Three months ended June 30, - --------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------- <S> <C> <C> Operating revenues Telephone operations 67.0% 68.3 Cellular operations 26.4% 27.0 Other operations 6.6% 4.7 Operating income Telephone operations 64.1% 65.8 Cellular operations 32.7% 30.9 Other operations 3.2% 3.3 - --------------------------------------------------------------------------- </TABLE> Telephone Operations <TABLE> <CAPTION> Three months ended June 30, - ---------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Local service $ 89,452 81,456 Network access 155,789 151,976 Other 33,872 31,890 - ---------------------------------------------------------------------------- 279,113 265,322 - ---------------------------------------------------------------------------- Operating expenses Plant operations 63,492 57,548 Customer operations 24,001 23,033 Corporate and other 38,916 39,225 Depreciation and amortization 68,938 65,562 - ---------------------------------------------------------------------------- 195,347 185,368 - ---------------------------------------------------------------------------- Operating income $ 83,766 79,954 ============================================================================ </TABLE> Telephone operating income increased $3.8 million (4.8%) due to an increase in operating revenues of $13.8 million (5.2%), which more than offset an increase in operating expenses of $10.0 million (5.4%). Of the $13.8 million increase in operating revenues, $10.9 million was attributable to the properties acquired from Ameritech, which was more than offset by a $14.4 million decrease due to the sale of the Company's Alaska telephone properties on May 14, 1999. The remaining $17.3 million increase in revenues was partially due to a $5.6 million increase in local network service primarily due to an increase in the number of customer access lines; a $2.4 million increase in revenues due to increased minutes of use; a $2.3 million increase in amounts received from the federal Universal Service Fund; a $1.7 million increase in revenues resulting from revisions of revenue settlement agreements; and a $1.5 million increase in the partial recovery of increased operating expenses through revenue sharing arrangements in which the Company participates with other telephone companies. Plant operations expenses increased $5.9 million (10.3%), of which $3.1 million was attributable to the properties acquired from Ameritech, offset by a $4.1 decrease due to the sale of the Alaska properties. The remaining $6.9 million increase was primarily due to a $1.6 million increase in repair and maintenance expenses; a $2.1 million increase in network operations expenses; and a $1.3 million increase in expenses associated with the Company's non-regulated operations. During the second quarter of 1999 customer operations expenses increased $968,000 (4.2%) due to a $769,000 increase in salaries and benefits and a $894,000 increase attributable to the properties acquired from Ameritech. Such increases were partially offset by a $1.4 million decrease due to the sale of the Alaska properties. Corporate and other expenses decreased $309,000 (.8%) primarily due to a $2.0 million decrease in salaries and benefits and a $2.2 million decrease due to the sale of the Alaska properties. Such decreases were partially offset by a $2.1 million increase in contract labor expenses associated with readying the Company's systems to be year 2000 compliant and a $1.6 million increase in operating taxes. Depreciation and amortization increased $3.4 million, of which $3.9 million was attributable to the properties acquired from Ameritech and $3.1 million was due to higher levels of plant in service. Such increases were partially offset by a $3.9 million reduction in depreciation and amortization expense related to the Company's Alaska properties. Cellular Operations and Income From Unconsolidated Cellular Entities <TABLE> <CAPTION> Three months ended June 30, - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income - cellular operations $ 42,753 37,511 Minority interest, exclusive of the effect of asset sales (3,864) (4,002) Income from unconsolidated cellular entities 9,267 9,066 - ------------------------------------------------------------------------------ $ 48,156 42,575 ============================================================================== </TABLE> The Company's cellular operations (discussed below) reflect 100% of the results of operations of the cellular entities in which the Company has a majority ownership interest. The minority interest owners' share of the income of such entities is reflected in the Company's Consolidated Statements of Income as an expense in "Minority interest." See Minority Interest for additional information. The Company's share of earnings from the cellular entities in which it has less than a majority interest is accounted for using the equity method and is reflected in the Company's Consolidated Statements of Income as "Income from unconsolidated cellular entities." Cellular Operations <TABLE> <CAPTION> Three months ended June 30, - ------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Service revenues $ 107,405 102,766 Equipment sales 2,527 2,105 - ------------------------------------------------------------------------------- 109,932 104,871 - ------------------------------------------------------------------------------- Operating expenses Cost of equipment sold 5,254 3,702 System operations 14,438 14,633 General, administrative and customer service 18,470 20,063 Sales and marketing 12,922 13,791 Depreciation and amortization 16,095 15,171 - ------------------------------------------------------------------------------- 67,179 67,360 - ------------------------------------------------------------------------------- Operating income $ 42,753 37,511 =============================================================================== </TABLE> Cellular operating income increased $5.2 million (14.0%) to $42.8 million in the second quarter of 1999 from $37.5 million in the second quarter of 1998. Cellular operating revenues increased $5.1 million (4.8%) while operating expenses decreased $181,000 (.3%). The $4.6 million increase in service revenues was primarily due to a $5.7 million increase in roaming usage which was partially offset by a $1.1 million decrease in local service revenues. The following table illustrates the growth in the Company's cellular customer base in its majority-owned markets: <TABLE> <CAPTION> Three months ended June 30, - ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- <S> <C> <C> Customers at beginning of period 638,992 576,397 Gross units added internally 45,949 43,013 Disconnects 33,623 35,481 Net units added 12,326 7,532 Effect of dispositions (10,563) - Customers at end of period 640,755 583,929 - ----------------------------------------------------------------------- </TABLE> The average monthly cellular service revenue per customer declined to $56 during the second quarter of 1999 from $59 during the second quarter of 1998 partially due to the continued trend that a higher percentage of new subscribers tend to be lower usage customers and pricing rate reductions. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers are activated and (ii) as competitive pressures from current and future wireless communications providers intensify. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, all of which are likely to result in lower average revenue per customer. The Company will continue to focus on customer service and attempt to stimulate cellular usage by promoting the availability of certain enhanced services and by improving the quality of its service through the construction of additional cell sites and other enhancements to its system. General, administrative and customer service expenses decreased $1.6 million (7.9%) due to a $2.2 million decrease in the provision for doubtful accounts which was partially offset by a $607,000 increase in general office expenses. The Company's average monthly churn rate (the percentage of cellular customers that terminate service) was 1.72% for the second quarter of 1999 and 1.97% for the second quarter of 1998. Sales and marketing expenses decreased $869,000 (6.3%) primarily due to a $669,000 decrease in advertising and sales promotions expenses and a $497,000 decrease in commissions paid to agents for selling services to new customers primarily as a result of fewer cellular units being added through this distribution channel during 1999 as compared to 1998. Depreciation and amortization increased $924,000 (6.1%) primarily due to an increase in amortization of intangibles. Other Operations <TABLE> <CAPTION> Three months ended June 30, - -------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Long distance $ 19,411 12,338 Call center 3,103 2,349 Other 5,191 3,498 - -------------------------------------------------------------------------- 27,705 18,185 - -------------------------------------------------------------------------- Operating expenses Cost of sales and operating expenses 22,620 13,411 Depreciation and amortization 979 751 - -------------------------------------------------------------------------- 23,599 14,162 - -------------------------------------------------------------------------- Operating income $ 4,106 4,023 ========================================================================== </TABLE> Other operations include the results of operations of subsidiaries of the Company which are not included in the telephone or cellular segments, including, but not limited to, the Company's non-regulated long distance and call center operations. The $7.1 million increase in long distance revenues was primarily attributable to the growth in the number of customers. The number of long distance customers as of June 30, 1999 and 1998 was 259,800 and 204,700, respectively. Operating expenses increased $9.4 million primarily due to (i) a $4.7 million increase in expenses of the Company's long distance operations due primarily to an increase in customers and (ii) a $2.5 million increase in expenses due to expansion of the Company's security, personal communications services and fiber network businesses. Interest Expense Interest expense decreased $4.6 million in the second quarter of 1999 compared to the second quarter of 1998 primarily due to a reduction in outstanding indebtedness. Gain on Sale or Exchange of Assets In the second quarter of 1999, the Company recorded a pre-tax gain of approximately $39.6 million as a result of the sale of the assets of the Brownsville and McAllen, Texas cellular properties. See Note 5 of Notes to Consolidated Financial Statements for additional information and Minority Interest below. In the second quarter of 1998, the Company recorded pre-tax gains aggregating $25.5 million ($14.7 million after-tax; $.11 per diluted share) primarily as a result of the sale of 750,000 shares of MCIWorldCom, Inc. stock and the sale of minority interests in two non-strategic cellular entities.
Minority Interest Minority interest is the expense recorded by the Company to reflect the minority interest owners' share of the earnings or loss of the Company's majority-owned and operated cellular entities and majority-owned subsidiaries. Minority interest increased $14.8 million primarily due to the minority partners' share of the gain on sale of assets of the Brownsville and McAllen, Texas cellular properties. Other Income and Expense Other income and expense increased $2.7 million in the second quarter of 1999 compared to the second quarter of 1998, substantially all of which relates to favorable non-recurring items recorded in the second quarter of 1999. Income Tax Expense Income tax expense increased $26.7 million in the second quarter of 1999 compared to the second quarter of 1998. Exclusive of the effects of income tax expense on asset sales, the effective income tax rate was 40.0% and 41.9% in the three months ended June 30, 1999 and 1998, respectively. Such decrease in the effective income tax rate was primarily due to a decrease in non-deductible amortization of excess cost of net assets acquired (goodwill) attributable to the sale of the Company's Alaska and Texas properties in the second quarter of 1999. Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 Net income (and diluted earnings per share) for the first six months of 1999 and 1998 was $114.6 million ($.81) and $121.9 million ($.87), respectively. Net income (excluding the after-tax effect of asset sales) for the first six months of 1999 was $115.6 million compared to $91.4 million during the first six months of 1998. Diluted earnings per share (excluding the after-tax effect of asset sales) increased to $.82 during the six months ended June 30, 1999 from $.66 during the six months ended June 30, 1998, a 24.2% increase. <TABLE> <CAPTION> Six months ended June 30, - ------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------ (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> Operating income Telephone $ 179,064 156,797 Cellular 73,136 67,166 Other 9,048 7,657 - ------------------------------------------------------------------------------ 261,248 231,620 Gain on sale or exchange of assets, net 49,959 49,859 Interest expense (79,728) (84,881) Income from unconsolidated cellular entities 16,112 15,943 Minority interest (22,100) (6,645) Other income and expense 5,614 1,295 Income tax expense (116,538) (85,306) - ------------------------------------------------------------------------------ Net income $ 114,567 121,885 ============================================================================== Basic earnings per share $ .83 .89 ============================================================================== Diluted earnings per share $ .81 .87 ============================================================================== Average basic shares outstanding 138,455 136,686 ============================================================================== Average diluted shares outstanding 141,245 139,701 ============================================================================== </TABLE>
Contributions to operating revenues and operating income by the Company's telephone, cellular, and other operations for the six months ended June 30, 1999 and 1998 were as follows: <TABLE> <CAPTION> Six months ended June 30, - ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- <S> <C> <C> Operating revenues Telephone operations 68.8% 69.1 Cellular operations 25.1% 26.2 Other operations 6.1% 4.7 Operating income Telephone operations 68.5% 67.7 Cellular operations 28.0% 29.0 Other operations 3.5% 3.3 - ----------------------------------------------------------------------- </TABLE> Telephone Operations <TABLE> <CAPTION> Six months ended June 30, - ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Local service $ 180,109 159,582 Network access 322,944 303,154 Other 69,021 62,399 - ----------------------------------------------------------------------- 572,074 525,135 - ----------------------------------------------------------------------- Operating expenses Plant operations 130,514 114,207 Customer operations 45,895 45,849 Corporate and other 75,835 79,008 Depreciation and amortization 140,766 129,274 - ----------------------------------------------------------------------- 393,010 368,338 - ----------------------------------------------------------------------- Operating income $ 179,064 156,797 ======================================================================= </TABLE> Telephone operating income increased $22.3 million (14.2%) due to an increase in operating revenues of $46.9 million (8.9%), which more than offset an increase in operating expenses of $24.7 million (6.7%). Of the $46.9 million increase in operating revenues, $22.9 million was attributable to the properties acquired from Ameritech, which was partially offset by a $11.7 million decrease due to the sale of the Company's Alaska telephone properties. The remaining $35.7 million increase in revenues was partially due to a $11.1 million increase in local network service primarily due to an increase in access lines; a $4.4 million increase resulting from revisions of revenue settlement agreements; a $4.0 million increase in amounts received from the federal Universal Service Fund; a $3.0 million increase in the partial recovery of increased operating expenses through revenue sharing arrangements in which the Company participates with other telephone companies; a $2.6 million increase in revenues from the provision of Internet access; and a $2.2 million increase in revenues due to increased minutes of use. Plant operations expenses increased $16.3 million (14.3%) of which $5.3 million was attributable to the properties acquired from Ameritech, offset by a $3.1 million decrease due to the sale of the Alaska telephone properties. The remaining $14.1 million increase was primarily due to a $4.0 million increase in repair and maintenance expenses; a $3.6 million increase in network operations expenses; and a $1.9 million increase in expenses associated with the Company's non-regulated operations. Corporate and other expenses decreased $3.2 million (4.0%) due to a $4.1 million decrease in salaries and benefits and a $4.0 million decrease in expenses due to the sale of the Alaska telephone properties. Such decreases were partially offset by a $2.3 million increase in expenses attributable to the Ameritech properties and a $2.4 million increase in contract labor expenses attributable to readying the Company's systems to be year 2000 compliant. Depreciation and amortization increased $11.5 million (8.9%) of which $7.8 million was attributable to the properties acquired from Ameritech and $5.4 million was due to higher levels of plant in service. Such increases were partially offset by a $3.3 million reduction in depreciation and amortization expense related to the Company's Alaska properties. Cellular Operations and Income From Unconsolidated Cellular Entities <TABLE> <CAPTION> Six months ended June 30, - ---------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income - cellular operations $ 73,136 67,166 Minority interest, exclusive of the effect of asset sales (7,162) (6,645) Income from unconsolidated cellular entities 16,112 15,943 - ---------------------------------------------------------------------------- $ 82,086 76,464 ============================================================================ </TABLE> The Company's cellular operations (discussed below) reflect 100% of the results of operations of the cellular entities in which the Company has a majority ownership interest. The minority interest owners' share of the income of such entities is reflected in the Company's Consolidated Statements of Income as an expense in "Minority interest." See Minority Interest for additional information. The Company's share of earnings from the cellular entities in which it has less than a majority interest is accounted for using the equity method and is reflected in the Company's Consolidated Statements of Income as "Income from unconsolidated cellular entities." Cellular Operations <TABLE> <CAPTION> Six months ended June 30, - ------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Service revenues $ 203,381 194,864 Equipment sales 5,022 4,173 - ------------------------------------------------------------------- 208,403 199,037 - ------------------------------------------------------------------- Operating expenses Cost of equipment sold 9,635 7,398 System operations 27,741 28,885 General, administrative and customer service 37,630 38,444 Sales and marketing 26,935 27,433 Depreciation and amortization 33,326 29,711 - ------------------------------------------------------------------- 135,267 131,871 - ------------------------------------------------------------------- Operating income $ 73,136 67,166 =================================================================== </TABLE> Cellular operating income increased $6.0 million (8.9%) to $73.1 million in the first six months of 1999 from $67.2 million in the first six months of 1998. Cellular operating revenues increased $9.4 million (4.7%), while operating expenses increased $3.4 million (2.6%). The $8.5 million increase in service revenues was primarily due to a $9.4 million increase in roaming usage which was partially offset by a $922,000 decrease in local service revenues.
The following table illustrates the growth in the Company's cellular customer base in its majority owned markets: <TABLE> <CAPTION> Six months ended June 30, - ------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------ <S> <C> <C> Customers at beginning of period 624,119 569,983 Gross units added internally 98,931 91,689 Disconnects 71,732 77,743 Net units added 27,199 13,946 Effect of dispositions (10,563) - Customers at end of period 640,755 583,929 - ------------------------------------------------------------------------ </TABLE> The average monthly cellular service revenue per customer declined to $53 during the first six months of 1999 from $56 during the first six months of 1998 partially due to the continued trend that a higher percentage of new subscribers tend to be lower usage customers and pricing rate reductions. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers are activated and (ii) as competitive pressures from current and future wireless communications providers intensify. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, all of which are likely to result in lower average revenue per customer. The Company will continue to focus on customer service and attempt to stimulate cellular usage by promoting the availability of certain enhanced services and by improving the quality of its service through the construction of additional cell sites and other enhancements to its system. System operations expenses decreased $1.1 million (4.0%) in the first six months of 1999 primarily due to a $2.0 million decrease in the net amounts paid to other carriers for cellular service provided to the Company's customers who roam in the other carriers' service areas. Such decrease was partially offset by a $722,000 increase associated with operating a greater number of cell sites. General, administrative and customer service expenses decreased $814,000 (2.1%) due to a $4.7 million decrease in the provision for doubtful accounts which was partially offset by a $3.9 million increase in general office expenses. The Company's average monthly churn rate (the percentage of cellular customers that terminate service) was 1.86% for the first six months of 1999 and 2.22% for the first six months of 1998. Sales and marketing expenses decreased $498,000 (1.8%) due primarily to $2.0 million reduction in commissions paid to agents for selling services to new customers primarily as a result of fewer cellular units being added through this distribution channel during 1999 as compared to 1998. Such decrease was partially offset by a $1.4 million increase in costs incurred in selling products and services in retail locations. Depreciation and amortization increased $3.6 million (12.2%), of which $1.9 million was attributable to a higher level of plant in service and $2.2 million was due to an increase in amortization of intangibles. Other Operations <TABLE> <CAPTION> Six months ended June 30, - ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Long distance $ 36,441 23,602 Call center 5,547 4,948 Other 8,541 7,376 - ----------------------------------------------------------------------- 50,529 35,926 - ----------------------------------------------------------------------- Operating expenses Cost of sales and operating expenses 39,580 26,576 Depreciation and amortization 1,901 1,693 - ----------------------------------------------------------------------- 41,481 28,269 - ----------------------------------------------------------------------- Operating income $ 9,048 7,657 ======================================================================= </TABLE> Other operations include the results of operations of subsidiaries of the Company which are not included in the telephone or cellular segments, including, but not limited to, the Company's non-regulated long distance and call center operations. The $12.8 million increase in long distance revenues was attributable to the growth in the number of customers. Operating expenses increased $13.2 million primarily due to (i) an increase of $6.9 million in expenses of the Company's long distance operations due primarily to an increase in customers and (ii) a $3.7 million increase in expenses due to expansion of the Company's security, personal communication services and fiber network businesses. Interest Expense Interest expense decreased $5.2 million in the first six months of 1999 compared to the first six months of 1998 primarily due to a reduction in outstanding indebtedness. Gain on Sale or Exchange of Assets, Net In the first six months of 1999, the Company recorded pre-tax gains aggregating $50.0 million. Approximately $10.4 million of the pre-tax gains ($6.7 million after-tax; $.04 per diluted share) was due to the sale of the Company's remaining common shares of MCIWorldCom, Inc. The remaining $39.6 million of the pre-tax gains ($7.8 million loss after-tax; ($.05) per diluted share) was due to the sale of the Company's Brownsville and McAllen, Texas cellular properties. See Note 5 of Notes to Consolidated Financial Statements for additional information and Minority Interest below. In the first six months of 1998, the Company recorded pre-tax gains aggregating $49.9 million ($30.5 million after-tax; $.21 per diluted share) primarily due to the conversion of its investment in the common stock of Brooks Fiber Networks, Inc. into common stock of WorldCom, Inc., the subsequent sale of 750,000 shares of WorldCom, Inc. common stock, and the sale of minority interests in two non-strategic cellular entities. Minority Interest Minority interest is the expense recorded by the Company to reflect the minority interest owners' share of the earnings or loss of the Company's majority-owned and operated cellular entities and majority-owned subsidiaries. Minority interest increased $15.5 million primarily due to the minority partners' share of the gain on sale of assets of the Brownsville and McAllen, Texas cellular properties.
Other Income and Expense Other income and expense increased $4.3 million in the first six months of 1999 compared to the first six months of 1998, substantially all of which relates to favorable non-recurring items recorded in 1999. Income Tax Expense Income tax expense increased $31.2 million in the first six months of 1999 compared to the first six months of 1998. Exclusive of the effects of income tax expense on asset sales, the effective income tax rate was 41.0% and 41.9% in the six months ended June 30, 1999 and 1998, respectively. Such decrease in the effective income tax rate was primarily due to a decrease in non-deductible amortization of excess cost of net assets acquired (goodwill) attributable to the sale of the Company's Alaska and Texas properties in 1999. LIQUIDITY AND CAPITAL RESOURCES Excluding cash used for acquisitions, the Company relies on cash provided by operations to provide a substantial portion of its cash needs. The Company's operations have historically provided a stable source of cash flow which has helped the Company continue its long-term program of capital improvements. Net cash provided by operating activities was $274.8 million during the first six months of 1999 compared to $192.4 million during the first six months of 1998. The Company's accompanying consolidated statements of cash flows identify major differences between net income and net cash provided by operating activities for each of these periods. For additional information relating to the telephone operations, cellular operations, and other operations of the Company, see Results of Operations. Net cash provided by investing activities was $306.3 million for the six months ended June 30, 1999 compared to $14.2 million for the six months ended June 30, 1998. Proceeds from the sales of assets were $465.8 million in the first six months of 1999 compared to $132.3 million in the first six months of 1998. Payments for property, plant and equipment were $27.1 million more in the first six months of 1999 than in the comparable period during 1998. Capital expenditures for the six months ended June 30, 1999 were $86.6 million for telephone, $29.0 million for cellular and $33.5 million for other operations. Net cash used in financing activities was $492.9 million during the first six months of 1999 compared to $215.6 million during the first six months of 1998. Net payments of long-term debt were $327.5 million more during the first six months of 1999 compared to the first six months of 1998, primarily due to utilization of proceeds received from the sales of assets. During the first six months of 1998, the Company issued an aggregate of $765 million of senior notes and debentures. The net proceeds of approximately $758 million were used to reduce the bank indebtedness incurred in connection with the acquisition of Pacific Telecom, Inc. In addition, the Company paid approximately $40 million to settle numerous interest rate hedge contracts that had been entered into in anticipation of these debt issuances. Budgeted capital expenditures for 1999 total $215 million for telephone operations, $70 million for cellular operations and $60 million for corporate and other operations. As of June 30, 1999, Century's telephone subsidiaries had available for use $135.1 million of commitments for long-term financing from the Rural Utilities Service and the Company had $606.1 million of undrawn committed bank lines of credit. In June 1999, the Company signed a definitive asset purchase agreement to purchase GTE's local exchange assets in Arkansas for approximately $834.4 million in cash. In July 1999, the Company acquired a 61.5% (56.9% fully diluted) interest in a joint venture company which has entered into a definitive asset purchase agreement to purchase GTE's local exchange assets in Missouri for approximately $290 million in cash. At closing, the Company will make approximately a $55 million preferred equity investment in the new entity. The purchase price under both agreements is subject to adjustments which are not expected to be material in the aggregate. Both transactions are anticipated to close in first quarter 2000, subject to regulatory approvals and certain other closing conditions. Financing plans are not yet complete and will be dependent upon the Company's review of its alternatives and market conditions. As a result of the Company's announcement of these transactions, Moody's placed its ratings of the Company's debt under review for possible downgrade and Standard & Poor's placed its ratings of the Company's debt on CreditWatch with negative implications. OTHER MATTERS Accounting for the Effects of Regulation The Company currently accounts for its regulated telephone operations in accordance with the provisions of Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation." While the ongoing applicability of SFAS 71 to the Company's telephone operations is being monitored due to the changing regulatory, competitive and legislative environments, the Company believes that SFAS 71 still applies. However, it is possible that changes in regulation or legislation or anticipated changes in competition or in the demand for regulated services or products could result in the Company's telephone operations not being subject to SFAS 71 in the near future. In that event, implementation of Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the Discontinuance of Application of FASB Statement No. 71," would require the write-off of previously established regulatory assets and liabilities, along with an adjustment of certain accumulated depreciation accounts to reflect the difference between recorded depreciation and the amount of depreciation that would have been recorded had the Company's telephone operations not been subject to rate regulation. Such discontinuance of the application of SFAS 71 would result in a material, noncash charge against earnings which would be reported as an extraordinary item. While the effect of implementing SFAS 101 cannot be precisely estimated at this time, management believes that the noncash, after-tax, extraordinary charge would be between $320 million and $370 million. Year 2000 Readiness Disclosure The Year 2000 issue concerns the inability of computer systems and certain other equipment to properly recognize and process data that uses two digits rather than four to designate particular years. The Company has initiated a Year 2000 Project Plan ("the Plan") to assess whether its systems that process date sensitive information will perform satisfactorily leading up to and beyond January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000, any Year 2000-related problem with critical systems, the failure of which could have a material adverse effect on the Company's operations. The Plan includes steps to (i) identify each critical system element that requires date code remediation, (ii) establish a plan to remediate such systems, (iii) implement all required remediations and (iv) selectively test the remediated systems. Thus far, the identification phase has identified Year 2000 issues in the following critical Company-owned systems: (i) switching and transmission hardware and software used by the Company to route and deliver telephone calls; (ii) network support systems, including customer service systems, and (iii) billing and collection systems used by the Company to invoice and process most of its customer payments. In addition, the Company (i) receives critical services from providers of utilities and other services to facilities that house employees and switching, transmission and other equipment and (ii) is dependent upon outside vendors for, among other things, the provision of critical network components and cellular billing services. The Company is also critically reliant upon the systems of other telecommunication carriers with which the Company's systems interconnect for the routing and delivery of telephone calls. The Company has also identified potential Year 2000-related liability with respect to telephone equipment manufactured by unaffiliated parties that the Company has sold or leased to its customers ("Customer Premises Equipment" or "CPE"). The identification and planning phases of the Plan are materially complete with respect to Company-owned systems, third party vendors and CPE customers, and are substantially complete with respect to other telecommunication carriers. Based on work completed under the Plan to date, the Company currently intends to take the following additional steps under its Plan with respect to Company-owned systems, third-party vendors, other telecommunications carriers, and CPE customers: o The Company generally plans to remediate Company-owned switching, transmission, billing and collection and other critical systems through the revision or replacement of current system components. Necessary changes to critical Company-owned systems are substantially complete and are expected to be finalized by third quarter 1999. The selective testing and verification of such changes are expected to be completed during 1999. Due to the large number of system components requiring remediation, the Company does not intend to test every remediated system but will rely upon the results of selective testing to determine the effectiveness of remediation efforts. o With respect to critical services provided by utilities and other third parties, the Company contacted all such suppliers during 1998. Thus far, a majority of those suppliers who have responded have indicated that their systems and service delivery mechanisms are Year 2000 compliant or can be made so through currently available modifications. The Company plans to continue monitoring all third-party remediation efforts and to make contingency plans for the delivery of such services as necessary. o The Company has received certain assurances from industry trade data regarding the Year 2000 readiness of major telecommunications companies with which the Company's switching systems interconnect. In June 1999, the Company made specific inquiries with these and other telecommunication carriers to determine their compliance status, and expects to obtain information in response thereto during third quarter 1999, although there can be no assurance that carriers will supply this information. o Finally, the Company has obtained Year 2000 compliance information from CPE manufacturers and has provided and will continue to provide this information to the Company's business customers throughout 1999. The Company plans to work with CPE manufacturers to encourage the development of remedies for Year 2000 problems in such equipment and to continue working with its customers to identify Year 2000 problems in CPE. However, there can be no assurance that CPE manufacturers or customers will cooperate with the Company's efforts to address these problems. While the Company currently believes that it will be able to remediate and selectively test Company-owned systems in time to minimize any detrimental effect on its operations, there can be no assurance that such steps will be successful. Failure by the Company to timely and effectively remediate its systems, or the failure of critical vendors and suppliers and other telecommunications carriers to remediate affected systems, could have a material adverse impact on the Company's business, financial condition, results of operations and prospects. Because the impact of Year 2000 issues on the Company is materially dependent on the mitigation efforts of parties outside the Company's control, the Company cannot assess with certainty the magnitude of any such potential adverse impact. However, based upon risk assessment work conducted thus far, the Company believes that the most reasonably likely worst case scenario of the failure by the Company, its suppliers or other telecommunications carriers with which the Company interconnects to resolve Year 2000 issues would be an inability by the Company (i) to provide telecommunications services to the Company's customers, (ii) to route and deliver telephone calls originating from or terminating with other telecommunications carriers, (iii) to timely and accurately process service requests and (iv) to timely and accurately bill its customers. In addition to lost earnings, these failures could also result in loss of customers due to service interruptions and billing errors, substantial claims by customers and increased expenses associated with stabilizing operations and executing mitigation plans. Contingency planning to maintain and restore service in the event of natural disasters, power failures and systems-related problems is a routine part of the Company's operations. The Company believes that such contingency plans will assist the Company in responding to the failure by outside service providers to successfully address Year 2000 issues. In addition, the Company is currently identifying and considering various Year 2000-specific contingency plans, including identification of alternate vendors and service providers and manual alternatives to system operations. These Year 2000-specific contingency plans are expected to be materially completed in third quarter 1999, but their review and development will continue throughout 1999. Although the total costs to implement the Plan cannot be precisely estimated, the Company incurred costs of $4.2 million during 1998 (none of which was related to hardware costs and other capital items) and $13.6 million during the first six months of 1999 ($10.9 million of which was related to hardware costs and other capital items) and anticipates spending an aggregate of approximately $17.8 million during the remainder of 1999 (which includes $10.1 million of hardware costs and other capital items.) All costs will be expensed as incurred, except for hardware and other items that should be capitalized in accordance with generally accepted accounting principles. Some of the costs represent ongoing investment in systems upgrades, the timing of which is being accelerated in order to facilitate Year 2000 compliance. In some instances, such upgrades will position the Company to provide more and better-quality services to its customers than they currently receive. The Company expects to fund these costs with cash provided by operations. Cost estimates and statements of the Company's plans and expectations discussed above are forward-looking statements that are derived using numerous assumptions of future events, many of which are outside the Company's control, including the availability and future cost of trained personnel and various other resources, third party modification plans, the absence of systems requiring remediation that have not yet been discovered, and other factors. CENTURYTEL, INC. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The Company is not exposed to material future earnings or cash flow exposures from changes in interest rates on long-term debt obligations since the majority of the Company's long-term debt obligations are fixed rate. At June 30, 1999, the fair value of the Company's long-term debt was estimated to be $2.2 billion based on the overall weighted average rate of the Company's long-term debt of 6.8% and an overall weighted maturity of 13 years compared to terms and rates currently available in long-term financing markets. For purposes hereof, market risk is estimated as the potential decrease in fair value of the Company's long-term debt resulting from a hypothetical increase of 68 basis points in interest rates (which represents ten percent of the Company's overall weighted average borrowing rate). Such an increase in interest rates would result in approximately a $104.6 million decrease in fair value of the Company's long-term debt. The Company is currently not evaluating the future use of any derivative financial instruments; however, it is possible that such instruments may be utilized in connection with financing its acquisitions of local exchange assets in Arkansas and Missouri. PART II. OTHER INFORMATION CENTURYTEL, INC. Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders on May 6, 1999, the shareholders elected five Class II directors to serve until the 2002 annual meeting of shareholders and until their successors are duly elected and qualified and approved the proposals set forth in the Company's proxy statement dated March 16, 1999. The following number of votes were cast for or were withheld from the following nominees: Class II Nominees For Withheld ----------------- --- -------- Virginia Boulet 146,421,022 3,553,720 Ernest Butler, Jr. 145,694,683 4,280,059 James B. Gardner 147,149,530 2,825,212 R. L. Hargrove, Jr. 146,658,342 3,316,400 Johnny Hebert 145,225,126 4,749,616 The Class I and Class III directors whose terms continued after the meeting are: Class I Class III ------- --------- William R. Boles, Jr. Calvin Czeschin W. Bruce Hanks F. Earl Hogan C. G. Melville, Jr. Harvey P. Perry Glen F. Post, III. Jim D. Reppond Clarke M. Williams The following number of votes were cast in the manner indicated below with respect to the following proposals: 1. Proposal to increase the number of authorized shares of common stock from 175 million to 350 million. For Against Abstain Broker No-Votes ----------- --------- ------- --------------- 146,065,346 3,519,491 389,905 0 2. Proposal to change the Company's name to CenturyTel, Inc. For Against Abstain Broker No-Votes ----------- --------- ------- --------------- 147,704,657 1,966,025 304,060 0 Item 6. Exhibits and Reports on Form 8-K A. Exhibits -------- 3(i) Amended and Restated Articles of Incorporation of Registrant, dated as of May 6, 1999. 4.1 Amendment No.1 to Rights Agreement, dated May 25, 1999, incorporated by reference to Exhibit 4.2(ii) to Registrant's Report on Form 8-K dated May 25, 1999. 11 Computations of Earnings Per Share. 27.1 Financial Data Schedule as of and for the six months ended June 30, 1999. 99 Asset Purchase Agreement between Registrant and affiliates of GTE, dated June 29, 1999. Pursuant to the regulations of the Securities and Exchange Commission, all schedules and exhibits to the foregoing agreement have been intentionally omitted from this report. The foregoing agreement contains a complete listing of all schedules and exhibits. The registrant agrees to furnish supplementary a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request. B. Reports on Form 8-K ------------------- (i) The following item was reported in the Form 8-K filed April 30, 1999: Item 5. Other events - News release announcing first quarter results of operations. (ii) The following items were reported in the Form 8-K filed May 28, 1999: Item 5. Other Events - (i) adjusted terms of CenturyTel's Rights Agreement to reflect the three-for-two stock split in the form of a 50% stock dividend and (ii) an amendment to CenturyTel's Rights Agreement which increased the purchase price per 1/225 of a Preference Share from $48.88 to $135.00. (iii) The following item was reported in the Form 8-K filed July 9, 1999: Item 5. Other Events - News release announcing execution of a definitive agreement to purchase from an affiliate of GTE Corporation assets comprising substantially all of GTE's local telephone operations in Arkansas. (iv) The following item was reported in the Form 8-K filed July 9,1999: Item 5. Other Events - News release announcing execution of a definitive agreement to enter into a strategic partnership with various co-investors to purchase telephone access lines in Missouri from an affiliate of GTE Corporation. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CenturyTel, Inc. Date: August 16, 1999 /s/ Neil A. Sweasy ---------------------------- Neil A. Sweasy Vice President and Controller (Principal Accounting Officer)