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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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 (IRS 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
Berlin Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Berlin Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 29, 2000, the aggregate market value of voting stock held by
non-affiliates (affiliates being for these purposes only directors, executive
officers and holders of more than five percent of the Company's outstanding
voting securities) was $4.7 billion. As of February 29, 2000, there were
140,216,554 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement prepared in connection with the
2000 annual meeting of shareholders are incorporated in Part III of this Report.
PART I
Item 1. Business
General. CenturyTel, Inc. ("CenturyTel") is a regional diversified
communications company engaged primarily in providing local exchange telephone
services and wireless telephone communications services. For the year ended
December 31, 1999, local exchange telephone operations and wireless operations
provided 68% and 25%, respectively, of the consolidated revenues of CenturyTel
and its subsidiaries (the "Company"). Substantially all of the Company's
telephone and wireless operations are conducted within the continental United
States.
At December 31, 1999, the Company's local exchange telephone subsidiaries
operated over 1.27 million telephone access lines, primarily in rural, suburban
and small urban areas in 20 states, with the largest customer bases located in
Wisconsin, Washington, Michigan, Louisiana, Colorado, Ohio, Oregon and Montana.
According to published sources, the Company is the seventh largest local
exchange telephone company in the United States based on the number of access
lines served. For more information, see "Telephone Operations."
At December 31, 1999, the Company's majority-owned and operated cellular
systems served approximately 707,000 customers in 19 Metropolitan Statistical
Areas ("MSAs") in Michigan, Louisiana, Arkansas, Mississippi, Wisconsin and
Texas, and 23 Rural Service Areas ("RSAs"), most of which are in Michigan,
Louisiana, Arkansas, Mississippi and Wisconsin. The Company's ownership interest
in these operated markets represented approximately 7.6 million pops (the
estimated population of licensed cellular telephone markets multiplied by the
Company's proportionate equity interest in the licensed operators thereof). At
December 31, 1999, the Company also owned minority equity interests in 10 MSAs
and 17 RSAs, representing approximately 1.9 million pops. Of the Company's 9.5
million aggregate pops, approximately 64% are attributable to the Company's MSA
interests, with the balance attributable to its RSA interests. All of the
cellular systems operated by the Company are operated under wireline licenses,
except for three MSAs and five RSAs which are operated under non-wireline
licenses. According to data derived from published sources, the Company is the
ninth largest cellular telephone company in the United States based on the
Company's 9.5 million pops. For more information, see "Wireless Operations."
The Company also provides long distance, security monitoring, cable
television and interactive services in certain local and regional markets, as
well as certain printing and related services. For more information, see "Other
Operations."
Recent acquisitions and dispositions. In November 1999, the Company
acquired the assets of DigiSys, Inc., an Internet service provider in Kalispell,
Montana. DigiSys provides Internet services to more than 8,600 customers in
Montana and operates MontanaWeb, one of the largest online business directories
in the state.
In October 1999, the Company acquired the non-wireline cellular license to
serve Mississippi RSA #5, which covers 160,000 pops. Mississippi RSA #5
encompasses the Vicksburg and Greenville markets as well as portions of
Interstate Highway 20 between Jackson, Mississippi and Monroe, Louisiana.
On December 1, 1998, the Company acquired the assets of certain of
Ameritech's telephone operations and related telephone directories in 19
telephone exchanges covering 21 communities in northern and central Wisconsin
for approximately $221 million cash. The operations acquired by the Company
include the telephone property and equipment that serves nearly 69,000
customers, or approximately 86,000 access lines, as well as nine related
telephone directories.
On December 1, 1997, the Company acquired Pacific Telecom, Inc. ("PTI") in
exchange for $1.503 billion cash. As a result of the PTI acquisition, the
Company acquired (i) over 660,000 telephone access lines in four midwestern
states, seven western states and Alaska, (ii) over 88,000 cellular customers in
ten markets located in two midwestern states and Alaska and (iii) various
wireless, cable television and other communications assets. In May 1998, the
Company sold PTI's undersea cable operations for approximately $61.8 million
cash. In May 1999, the Company sold substantially all of its Alaska operations
that it had acquired from PTI for approximately $300 million after-tax. In
February 2000, the Company sold its interest in Alaska RSA #1 which completed
the Company's divestiture of its Alaska operations.
During late 1997 and early 1998, the Company acquired two security
monitoring businesses that provide services to approximately 6,000 customers in
north central Louisiana, southern Arkansas and northwestern Mississippi.
In December 1997 the Company acquired an additional 76% interest in
Wisconsin RSA #8, which is adjacent to the Company's existing cellular
operations in southwestern Wisconsin.
During 1997 the Company exchanged its 89% interest in its competitive
access subsidiary for approximately 4.3 million shares of publicly traded common
stock. Approximately 3.8 million shares of such stock were sold in November 1997
for $203 million and the remaining shares were converted into approximately 1.0
million shares of MCIWorldCom, Inc. ("WorldCom") in early 1998. In the second
quarter of 1998, the Company sold 750,000 shares of WorldCom common stock for
$35.6 million. In January 1999, the Company sold its remaining shares of
WorldCom stock for $20.1 million.
In January 1997 the Company acquired Pecoco, Inc., a provider of local
exchange telephone service in four counties in Wisconsin. As a result of the
acquisition, the Company acquired (i) more than 7,600 telephone access lines,
(ii) a minority interest in two cellular partnerships serving Madison and
Milwaukee, Wisconsin, representing approximately 35,000 pops and (iii) certain
cable television assets.
In June 1999 the Company sold all of the operations of its Brownsville and
McAllen, Texas, cellular systems to Western Wireless Corporation for
approximately $96 million cash. The Company received a proportionate share of
the sale proceeds of approximately $45 million after-tax.
The Company continually evaluates the possibility of acquiring additional
telecommunications assets in exchange for cash, securities or both, and at any
given time may be engaged in discussions or negotiations regarding additional
acquisitions. The Company generally does not announce its acquisitions until it
has entered into a preliminary or definitive agreement. Over the past few years,
the number and size of communications properties on the market has increased
substantially. Although the Company's primary focus will continue to be on
acquiring telephone and wireless interests that are proximate to its properties
or that serve a customer base large enough for the Company to operate
efficiently, other communications interests may also be acquired and these
acquisitions could have a material impact upon the Company.
Pending acquisitions. In June 1999, the Company signed a definitive asset
purchase agreement to purchase from affiliates of GTE Corporation ("GTE")
telephone access lines (which numbered approximately 225,000 at December 31,
1999) and related local exchange assets in Arkansas for approximately $845.8
million in cash. In July 1999, the Company acquired a 61.5% (56.9% fully
diluted) interest in a newly-organized joint venture company which has entered
into a definitive asset purchase agreement with affiliates of GTE to purchase
telephone access lines (which numbered approximately 121,000 at December 31,
1999) and related local exchange assets in Missouri for approximately $290
million in cash. At closing, the Company has agreed to make approximately a $55
million preferred equity investment in the new entity and it is anticipated that
the Company will loan the new entity approximately $220 million.
In August 1999, the Company acquired an 89% interest in a newly-organized
joint venture company which has entered into a definitive asset purchase
agreement to purchase telephone access lines (which numbered approximately
61,700 as of December 31, 1999) and related local exchange assets in Wisconsin
from a GTE affiliate for approximately $170 million cash. At closing the Company
has agreed to make an equity investment in the newly organized company of
approximately $37.8 million and it is anticipated that the Company will loan the
new entity approximately $130 million. In October 1999, the Company also entered
into a definitive asset purchase agreement to purchase additional telephone
access lines (which numbered approximately 68,200 as of December 31, 1999) and
related local exchange assets in Wisconsin from a GTE affiliate for
approximately $195 million cash.
Other. As of December 31, 1999, the Company had approximately 5,700
employees, approximately 760 of whom were members of seven different bargaining
units represented by the International Brotherhood of Electrical Workers,
Communications Workers of America, or the NTS Employee Committee. Relations with
employees continue to be generally good.
CenturyTel was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous 15 to
20 years. CenturyTel's principal executive offices are located at 100 Century
Park Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.
TELEPHONE OPERATIONS
According to published sources, the Company is the seventh largest local
exchange telephone company in the United States, based on the more than 1.27
million access lines it served at December 31, 1999. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominately rural, suburban and small urban
markets in 20 states. The table below sets forth certain information with
respect to the Company's access lines as of December 31, 1999 and 1998.
December 31, 1999 December 31, 1998
- -----------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
- -----------------------------------------------------------------------------
Wisconsin 358,768 28% 340,895 25%
Washington 183,759 14 175,508 13
Alaska - - 131,858 10
Michigan 112,468 9 108,769 8
Louisiana 100,967 8 97,676 7
Colorado 91,446 7 86,249 7
Ohio 83,287 7 80,400 6
Oregon 78,210 6 75,392 6
Montana 63,867 5 60,657 5
Texas 48,144 4 44,822 3
Arkansas 45,675 4 43,778 3
Minnesota 30,583 2 29,708 2
Tennessee 26,917 2 25,609 2
Mississippi 21,844 2 19,648 2
Idaho 6,040 1 5,881 1
New Mexico 6,354 1 5,770 -
Indiana 5,266 0 5,136 -
Wyoming 4,841 0 4,663 -
Iowa 1,997 0 1,938 -
Arizona 1,936 0 1,780 -
Nevada 498 0 430 -
- -------------------------------------------------------------------------
1,272,867 100% 1,346,567 100%
==========================================================================
As indicated in the following table, the Company has experienced growth in
its telephone operations over the past several years, a substantial portion of
which was attributable to the December 1997 acquisition of PTI and other
telephone properties and to the expansion of services. A portion of the
Company's access line growth was offset by the May 1999 sale of the Company's
Alaska telephone operations.
Year ended or as of December 31,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
(Dollars in thousands)
Access lines 1,272,867 1,346,567 1,203,650 503,562 480,757
% Residential 75% 74 74 77 78
% Business 25% 26 26 23 22
Operating revenues $ 1,142,593 1,091,610 530,597 451,538 419,242
Capital expenditures $ 233,512 233,190 115,854 110,147 136,006
- --------------------------------------------------------------------------------
Future growth in telephone operations is expected to be derived from (i)
acquiring additional telephone properties from GTE and others, (ii) providing
service to new customers, (iii) increasing network usage and (iv) providing
additional services made possible by advances in technology and changes in
regulation. For information on developing competitive trends, see "-Regulation
and Competition."
Services
The Company's local exchange telephone subsidiaries derive revenue from
providing (i) local telephone services, (ii) network access services and (iii)
other related services. The following table reflects the percentage of telephone
operating revenues derived from these respective services:
1999 1998 1997
- -----------------------------------------------------------------
Local service 30.9% 30.4 27.8
Network access 57.2 57.7 60.2
Other 11.9 11.9 12.0
- ------------------------------------------------------------------
100.0% 100.0 100.0
==================================================================
Local service. Local service revenues are derived from the provision of
local exchange telephone services in the Company's service areas. Internal
access line growth during 1999, 1998 and 1997 was 4.8%, 4.7% and 4.4%,
respectively. The Company believes that access line growth in the future should
benefit from population growth in its service areas, acquisitions and increases
in the number of households maintaining more than one access line. The Company
believes its Internet access services (discussed further below) have led to an
increase in orders for additional lines.
The installation of digital switches and related software has been an
important component of the Company's growth strategy because it allows the
Company to offer enhanced services (such as call forwarding, conference calling,
caller identification, selective call ringing and call waiting) and to thereby
increase utilization of existing access lines. In 1999 the Company continued to
expand its list of premium services (such as voice mail and Internet access)
offered in certain service areas and aggressively marketed these services.
Network access. Network access revenues primarily relate to services
provided by the Company to long distance carriers and other customers in
connection with the use of the Company's facilities to originate and terminate
interstate and intrastate long distance telephone calls. Access charges to long
distance carriers and other customers are based on tariffed access rates filed
with the Federal Communications Commission ("FCC") for interstate services and
with the respective state regulatory agency for intrastate services. Certain of
the Company's interstate network access revenues are based on access charges
prescribed by the FCC; the remainder of such revenues are derived under revenue
sharing arrangements with other local exchange carriers ("LECs") administered by
the National Exchange Carrier Association ("NECA").
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on access tariffs, which are subject to state regulatory commission
approval. Additionally, certain of the Company's intrastate network access
revenues, along with intrastate long distance revenues, are derived through
revenue sharing arrangements with other LECs.
The Company is installing fiber optic cable in certain of its high traffic
routes and provides alternative routing of telephone service over fiber optic
cable networks in several strategic operating areas. At December 31, 1999, the
Company's telephone subsidiaries had over 7,310 miles of fiber optic cable in
use.
Other. Other revenues include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for long
distance companies, (iii) participating in the publication of local directories
and (iv) providing Internet access. The Company began offering traditional
Internet access services to its telephone customers in 1995. During 1999, the
Company began offering in select markets digital subscriber line Internet access
services, a high-speed premium-priced data service. At December 31, 1999 the
Company provided Internet access services to approximately 59,700 customers in
355 markets in 13 states. These 355 markets represent 70% of the access lines
served by the Company's LECs.
Certain large communications companies for which the Company currently
provides billing and collection services continue to indicate their desire to
reduce their billing and collection expenses, which has resulted and may
continue to result in future reductions of the Company's billing and collection
revenues.
For further information on the regulation of the Company's revenues, see
"-Regulation and Competition."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") and the Rural Telephone Bank
("RTB"). The RUS has made long-term loans to telephone companies since 1949 for
the purpose of improving telephone service in rural areas. The RUS continues to
make new loans at interest rates that range from 5% to 7% based on borrower
qualifications and the cost of funds to the United States government. The RTB,
established in 1971, makes long-term loans at interest rates based on its
average cost of funds as determined by statutory formula (such rates ranged from
5.89% to 5.98% for the fiscal year ended September 30, 1999), and in some cases
makes loans concurrently with RUS loans. Most of the Company's telephone plant
is pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS and RTB. The Company's telephone subsidiaries which have
borrowed from government agencies generally may not loan or advance any funds to
CenturyTel, but may pay dividends if certain financial covenants are met.
For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.
Regulation and Competition
Traditionally, LECs have operated as regulated monopolies. Consequently,
the majority of the Company's telephone operations have traditionally been
regulated extensively by various state regulatory agencies (generally called
public service commissions or public utility commissions) and by the FCC. As
discussed in greater detail below, passage of the Telecommunications Act of 1996
(the "1996 Act"), coupled with state legislative and regulatory initiatives and
technological changes, has fundamentally altered the telephone industry by
reducing the regulation of LECs and permitting competition in each segment of
the telephone industry. Although CenturyTel anticipates that these trends
towards reduced regulation and increased competition will continue, it is
difficult to determine the form or degree of future regulation and competition
in the Company's service areas.
State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions. Most of such commissions have traditionally regulated
pricing through "rate of return" regulation that focuses on authorized levels of
earnings by LECs. Most of these commissions also (i) regulate the purchase and
sale of LECs, (ii) prescribe depreciation rates and certain accounting
procedures and (iii) regulate various other matters, including certain service
standards and operating procedures.
In recent years, state legislatures and regulatory commissions in most of
the states in which the Company has substantial operations have either begun to
reduce the regulation of LECs or have announced their intention to do so, and it
is expected that this trend will continue. Wisconsin, Louisiana and several
other of these states have passed legislation which permit LECs to opt out of
rate of return regulation in exchange for agreeing to alternative forms of
regulation which typically permit the LEC greater freedom to establish local
service rates in exchange for agreeing not to charge rates in excess of
specified caps. As discussed further below most of the Company's remaining
Wisconsin telephone subsidiaries have agreed to be governed by alternative
regulation plans, and the Company continues to explore its options for similar
treatment in other states. The Company believes that reduced regulatory
oversight of certain of the Company's telephone operations may allow the Company
to offer new and competitive services faster than under the traditional
regulatory process. Coincident with these efforts, legislative, regulatory and
technological changes have introduced competition into the local exchange
industry. See "-Developments Affecting Competition."
Substantially all of the state regulatory commissions have statutory
authority, the specific limits of which vary, to initiate and conduct earnings
reviews of the LECs that they regulate under "rate of return" regulation.
Notwithstanding the movement towards deregulation, most of the Company's LECs
continue to be regulated under rate of return regulation, and remain subject to
earnings reviews.
In 1997 the Louisiana Public Service Commission ("LPSC") adopted a
Consumer Price Protection Plan (the "Louisiana Plan"), effective July 1997,
which impacts all of the Company's LECs operating in Louisiana. The new form of
regulation focuses on price and quality of service. Under the Louisiana Plan,
the Company's Louisiana LECs' local rates were frozen for a period of three
years and access rates were frozen for a period of two years. Although the
Louisiana Plan has no specified term, the LPSC is required to review it by
mid-2000. The Company's Louisiana LECs have the option to propose a new plan at
any time if the LPSC determines that (i) effective competition exists or (ii)
unforeseen events threaten the subsidiary's ability to provide adequate service
or impair its financial health.
The Company's telephone operations in Wisconsin that were acquired in the
December 1997 acquisition of PTI have been regulated under an alternative
regulation plan (the "Wisconsin Plan") since June 1996. In late 1999 and early
2000, substantially all of the Company's remaining Wisconsin telephone
subsidiaries agreed to be subject to alternative regulation plans. Each of these
plans have a five-year term and permit the Company to freely adjust local rates
within specified parameters if certain quality-of-service and
infrastructure-development commitments are met. These plans also include
initiatives designed to promote competition.
The Michigan Public Service Commission regulates the Company's Michigan
telephone subsidiaries pursuant to the parameters established by the Michigan
Telecommunications Act of 1995 ("MTA"). The MTA restructured regulation to focus
on price and quality of service as opposed to traditional rate of return
regulation. The MTA relies more on existing federal and state law regarding
antitrust consumer protection and fair trade to provide safeguards for
competition and consumers.
FCC regulation. The FCC regulates the interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other LECs by the Company
for use of its local network in connection with the origination and termination
of interstate telephone calls. Additionally, the FCC has prescribed certain
rules and regulations for telephone companies, including regulations regarding
the use of radio frequencies; a uniform system of accounts; and rules regarding
the separation of costs between jurisdictions and, ultimately, between
interstate services.
Effective January 1, 1991, the FCC adopted price-cap regulation relating
to interstate access rates for the Regional Bell Operating Companies ("RBOCs")
and GTE Corporation. All other LECs may elect to be subject to price-cap
regulation. Under price-cap regulation, limits imposed on a company's interstate
rates are adjusted periodically to reflect inflation, productivity improvement
and changes in certain non-controllable costs. In May 1993 the FCC adopted an
optional incentive regulatory plan for LECs not subject to price-cap regulation.
A LEC electing the optional incentive regulatory plan would, among other things,
file tariffs based primarily on historical costs and not be allowed to
participate in the relevant NECA pooling arrangements. The Company has not
elected price-cap regulation or the optional incentive regulatory plan, but will
continue to evaluate its options on a periodic basis. Either election, if made
by the Company, would have to be applicable to all of the Company's telephone
subsidiaries. The authorized interstate access rate of return for the Company's
telephone subsidiaries is currently 11.25%, which is the authorized rate
established by the FCC for LECs not governed by price-cap regulation or the
optional incentive regulatory plan.
In September 1998, the FCC initiated a proceeding to represcribe the
authorized rate of return for interstate access services provided by LECs. The
FCC periodically represcribes this rate of return to ensure that the service
rates filed by incumbent LECs subject to rate of return regulation continue to
be just and reasonable. It is uncertain whether or by how much the FCC may lower
the authorized rate of return. For rate of return companies, the FCC is
considering how other unresolved issues such as jurisdictional separations,
access charge reform and universal service must be addressed before
represcribing rate of return.
In an access charge reform order adopted in May 1997, the FCC changed its
system of interstate access charges to make them compatible with the
deregulatory framework established by the 1996 Act. Such changes are primarily
applicable to price-cap companies. The Company's telephone subsidiaries
determine interstate revenues under rate of return regulation and are,
therefore, only minimally impacted by the access charge reform order. In July
1998, the FCC issued a Notice of Proposed Rulemaking to amend the access charge
rules for rate of return companies in a manner similar to that adopted for price
cap companies, subject to reviewing whether differences exist between price cap
companies and rate of return companies that would require different rules in
order to achieve the goal of fostering an efficient, competitive marketplace.
The FCC has not yet issued a final ruling on this matter.
In 1998 the FCC created a federal-state joint board to review
jurisdictional separations procedures through which the costs of regulated
telecommunications services are allocated to the interstate and intrastate
jurisdictions. The board has not yet issued its findings.
High-cost support funds, revenue sharing arrangements and related matters.
A significant number of the Company's telephone subsidiaries recover a portion
of their costs under federal and state cost recovery mechanisms that
traditionally have allowed LECs serving small communities and rural areas to
provide communications services reasonably comparable to those available in
urban areas and at reasonably comparable prices.
The 1996 Act authorized the establishment of new federal and state
universal service funds to provide continued support to eligible
telecommunications carriers. In May 1997 the FCC adopted an order on universal
service, as mandated by the 1996 Act. In the order, the FCC ruled that rural
telephone companies which are designated eligible telecommunications carriers
will continue to receive universal service funding. Each of the Company's LECs
has been so designated by its respective state regulatory agency. As a result,
the Company's LECs will continue to receive payments under the federal support
mechanisms currently in effect until the FCC adopts funding support mechanisms
based on forward-looking economic costs, which it is required to do, but no
earlier than January 2001. Although the Company anticipates that it may
experience a reduction in its federal support revenues at some point in the
future, management believes it is premature to assess or estimate the ultimate
impact thereof. There can be no assurance, however, that such impact will not be
material. During 1999 and 1998 the Company's telephone subsidiaries received
$127.5 million (of which $5.2 million related to the Company's Alaska
operations) and $127.6 million (of which $13.4 million related to the Alaska
based operations), respectively, from the federal Universal Service Fund,
representing 7.6% and 8.1%, respectively, of the Company's consolidated revenues
for 1999 and 1998. In addition, the Company's telephone subsidiaries received
$19.5 million and $1.5 million in 1999 and 1998, respectively, from intrastate
support funds. For additional information, see Item 7 of this report.
As part of its universal service order, the FCC also established new
programs to provide discounted telecommunications services annually to schools,
libraries and rural health care providers. All communications carriers providing
interstate telecommunications services, including the Company's LECs and its
cellular and long distance operations, are required to contribute to these
programs. The Company's LECs recover their funding contributions in their rates
for interstate services. The Company's contribution by its cellular and long
distance operations, which is passed on to its customers, was approximately $3.9
million in 1999 and $3.1 million in 1998.
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "-State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
Substantially all of the Company's LECs concur with the common line
tariffs and certain of the Company's LECs concur with the traffic sensitive
tariffs filed by the NECA; such LECs participate in the access revenue sharing
arrangements administered by the NECA for interstate services. All of the
intrastate network access revenues of the Company's LECs are based on access
charges, cost separation studies or special settlement arrangements. See
"-Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. There is no assurance
that these requests will not result in decreased access revenues.
Developments affecting competition. The communications industry continues
to undergo fundamental changes which are likely to significantly impact the
future operations and financial performance of all communications companies.
Primarily as a result of legislative and regulatory initiatives and
technological changes, competition has been introduced and encouraged in each
sector of the telephone industry, including, most recently, the local exchange
sector. As a result, the number of companies offering competitive services has
increased substantially.
As indicated above, in February 1996 Congress enacted the 1996 Act, which
obligates LECs to permit competitors to interconnect their facilities to the
LEC's network and to take various other steps that are designed to promote
competition. The 1996 Act imposes several duties on a LEC if it receives a
specific request from another entity which seeks to connect with or provide
services using the LEC's network. In addition, each incumbent LEC is obligated
to (i) negotiate interconnection agreements in good faith, (ii) provide
"unbundled" access to all aspects of the LEC's network, (iii) offer resale of
its telecommunications services at wholesale rates and (iv) permit competitors
to collocate its physical plant on the LEC's property, or provide virtual
collocation if physical collocation is not practicable. Although the 1996 Act
provides certain exemptions for rural LECs such as those operated by the
Company, the FCC's August 1996 order implementing most of the 1996 Act's
interconnection provisions placed the burden of proving the continuing
availability of these exemptions on rural LECs. States are permitted to adopt
laws or regulations that provide for greater competition than is mandated under
the 1996 Act. Although substantial portions of the FCC's August 1996
interconnection order have survived judicial challenge, the FCC has neither
completed its interconnection rulemaking nor issued rules on universal service
or access reform. Management believes that competition in its telephone service
areas has and will continue to increase as a result of the 1996 Act, although
the form and degree of competition cannot be ascertained until such time as the
FCC (and, in certain instances, state regulatory commissions) adopts final and
nonappealable implementing regulations.
Substantially all of the 20 states in which the Company provides telephone
services have taken legislative or regulatory steps to further introduce
competition into the LEC business. Largely as a result of these steps and the
1996 Act, several competitive access providers originally organized to provide
redundancy or access services have begun, during the past several years, to
provide competitive local exchange services, principally in high population
areas. Moreover, several well-capitalized long distance, cable television,
wireless and electric utility companies, along with several start-up companies,
have also begun to provide competitive local exchange services or announced
their intention to do so, and this trend is expected to continue. Currently the
Company is subject to a limited number of agreements permitting competitors in
Wisconsin to purchase from the Company unbundled network elements or wholesale
services, and the Company is aware of only a few other companies that have
requested authorization to provide local exchange service in the Company's
service areas. Over time, however, the Company anticipates that several more
companies will request authorization to provide competitive services, especially
in its operating areas located near larger urban areas.
In addition to receiving services directly from companies competing with
incumbent LECs, long distance companies and other users of toll service are
expected to increasingly seek other means to bypass LECs' switching services and
local distribution facilities. Certain interexchange carriers provide services
which allow users to divert their traffic from LECs' usage-sensitive services to
their flat-rate services. In addition, users or long distance companies may
construct, modify or lease facilities to transmit traffic directly from a user
to a long distance company. Cable television companies, in particular, may be
able to modify their networks to partially or completely bypass the Company's
local network. Moreover, users may choose to use wireless services to bypass
LECs' switching services. Although certain of the Company's telephone
subsidiaries have experienced a loss of traffic to such bypass, the impact has
thus far not been significant.
Historically, cellular telephone services have complemented traditional
LEC services. However, existing and emerging wireless technologies increasingly
compete with LEC services in Europe and other parts of the world. The Company
anticipates that similar competition may arise in the United States,
particularly if wireless service rates continue to drop. Technological and
regulatory developments in cellular telephone, personal communications services,
digital microwave, coaxial cable, fiber optics, local multipoint distribution
services and other wired and wireless technologies are expected to further
permit the development of alternatives to traditional landline services. For
further information on certain of these developments, see "Wireless Operations -
Regulation and Competition."
To the extent that the telephone industry increasingly experiences
competition, the size and resources of each respective competitor may
increasingly influence its prospects. Many companies currently providing or
planning to provide competitive communication services have substantially
greater financial and marketing resources than the Company, and several are not
subject to the same regulatory constraints as the Company.
The Company anticipates that the traditional operations of LECs will
continue to be impacted by continued technological developments as well as
legislative and regulatory initiatives affecting the ability of LECs to provide
new services and the capability of long distance companies, competitive local
exchange providers, wireless companies, cable television companies and others to
provide competitive LEC services. Competition relating to services traditionally
provided solely by LECs has thus far affected large urban areas to a greater
extent than rural, suburban and small urban areas such as those in which the
Company operates. The Company intends to actively monitor these developments, to
observe the effect of emerging competitive trends in initial competitive markets
and to continue to evaluate new business opportunities that may arise out of
future technological, legislative and regulatory developments.
The Company anticipates that regulatory changes and competitive pressures
may result in future revenue reductions in its telephone operations. However,
the Company anticipates that such reductions may be minimized by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. While the Company expects its telephone revenues to continue
to grow, its internal telephone revenue growth rate may slow during upcoming
periods.
WIRELESS OPERATIONS
At December 31, 1999, the Company's cellular holdings represented
approximately 9.5 million pops, of which 64% were applicable to MSAs and 36%
were RSA pops. According to data derived from published sources, the Company is
the ninth largest cellular telephone company in the United States based on the
Company's 9.5 million pops.
Cellular Industry
The cellular telephone industry has been in existence for over 15 years in
the United States. The industry has grown significantly during this period and
cellular service is now available in substantially all areas of the United
States. According to the Cellular Telecommunications Industry Association, at
September 1999 there were estimated to be over 57.6 million cellular customers
across the United States.
Until recently, substantially all radio transmissions of cellular systems
were conducted on an analog basis. Technological developments involving the
application of digital radio technology offer certain advantages over analog
technologies, including expanding the capacity of mobile communications systems,
improving voice clarity, permitting the introduction of new services, and making
such systems more secure. Providers of certain services competitive with
cellular have incorporated digital technology into their operations. In recent
years most major cellular carriers have installed digital cellular voice
transmission facilities in certain of their systems, principally in larger
markets. Digital service is now available in 100% of the Company's MSA markets
and approximately a third of its RSA markets. Approximately 5% of the Company's
cellular customers currently subscribe to digital services. See "-Regulation and
Competition-Developments Affecting Wireless Competition."
Construction and Maintenance
The construction and maintenance of cellular systems is capital intensive.
Although all of the Company's MSA and RSA systems have been operational for
several years, the Company has continued to add cell sites to increase coverage,
provide additional capacity, and improve the quality of these systems. In 1999
the Company completed construction of 109 cell sites in markets operated by the
Company. At December 31, 1999, the Company operated 711 cell sites in its
majority-owned markets.
Over the past several years the Company has upgraded certain portions of
its wireless systems to be capable of providing digital service under the TDMA
standard. The Company intends to continue installing digital voice transmission
facilities in other markets in 2000. See "-Regulation and
Competition-Developments Affecting Wireless Competition." Capital expenditures
related to majority-owned and operated wireless systems totaled approximately
$58.8 million in 1999. Such capital expenditures for 2000 are anticipated to be
approximately $100 million.
Strategy
The Company's business development strategy for its wireless operations is
to secure operating control of service areas that are geographically clustered.
Clustered systems aid the Company's marketing efforts and provide various
operating and service advantages. Approximately 44% of the Company's customers
are in a single, contiguous cluster of eight MSAs and nine RSAs in Michigan;
another 25% are in a cluster of five MSAs and seven RSAs in northern and central
Louisiana, southern Arkansas and eastern Texas. See "-The Company's Cellular
Interests."
The Company has also traditionally targeted revenues from roaming service.
Roaming service revenues are derived from calls made in one service area by
subscribers from other service areas. In exchange for providing roaming service
to customers of other cellular carriers, the Company has traditionally charged
premium rates to most of these other carriers, who then frequently pass on some
or all of these premium rates to their own customers. The Company's Michigan
cellular properties include a significant portion of the interstate highway
corridor between Chicago and Detroit. Its Louisiana properties include an
east-west interstate highway and a north-south interstate highway which
intersect in its Louisiana cellular service area. Its Mississippi properties
include two east-west interstate highways and two north-south interstate
highways. As indicated elsewhere in Items 1 and 7 of this Report, the Company
has increasingly received pressure from other cellular operators to reduce its
roaming rates. See "-Services, Customers and System Usage."
Marketing
The Company markets its wireless services through several distribution
channels, including its direct sales force, retail outlets owned by the Company
and independent agents. All sales employees and certain independent agents
solicit customers exclusively for the Company. Company sales employees are
compensated by salary and commission and independent sales agents are paid
commissions. The Company advertises its services through various means,
including direct mail, billboard, magazine, radio, television and newspaper
advertisements.
The sales and marketing costs of obtaining new subscribers include
advertising and a direct expense applicable to most new subscribers, either in
the form of a commission payment to an agent or an incentive payment to a direct
sales employee. In addition, the Company discounts the cost of cellular
telephone equipment, and periodically runs promotions which waive certain fees
or provide some amount of free service to new subscribers. The average cost of
acquiring each new customer ($258 in 1999) remains one of the larger expenses in
conducting the Company's wireless operations. In recent years, the Company has
sought to lower this average cost by focusing more on its direct distribution
channels. The Company opened its first retail outlet in 1994, and currently
operates 128 such outlets. During 1999, approximately 72% of new cellular
customers were added through direct distribution channels, up from 37% during
1996.
As indicated further below, most of the Company's cellular markets are
located in rural, suburban or small urban areas, and most of its customers
typically require only local or regional services. The Company lacks the
facilities and national brand name necessary to compete effectively for business
customers requiring nationwide services, and the Company does not actively
target these customers in its marketing campaigns.
Services, Customers and System Usage
There are a number of different types of cellular telephones, all of which
are currently compatible with cellular systems nationwide. The Company sells a
full range of vehicle-mounted, transportable, and hand-held portable cellular
telephones.
The Company charges its subscribers for access to its systems, for minutes
of use and for enhanced services, such as voice mail. A subscriber may purchase
certain of these services separately or may purchase rate plans which bundle
these services in different ways and are designed to fit different customer
requirements. While the Company historically has typically charged its customers
separately for custom-calling features, air time in excess of the packaged
amount, and toll calls, it currently offers plans which include features such as
unlimited toll calls and unlimited weekend calling in certain calling areas.
Custom-calling features provided by the Company include call-forwarding,
call-waiting, three-way calling and no-answer transfer. The Company offers voice
message service in many of its markets. In the Company's markets where digital
service is operational, customers can subscribe to caller ID and other digital
enhancements.
Cellular customers come from a wide range of occupations and typically
include a large proportion of individuals who work outside of their office. In
recent years, the individual consumer market has generated a majority of new
customer additions. A majority of the Company's net unit additions for 1999 were
prepaid customers, who typically use cellular service less than contract
customers. The Company's average monthly cellular service revenue per customer
declined to $53 in 1999 from $57 in 1998 and $61 in 1997. Such average revenue
per customer may further decline (i) as market penetration increases and
additional lower usage customers are activated, (ii) as the Company continues to
receive pressure from other cellular operators to reduce roaming rates and (iii)
as competitive pressures from current and future wireless communications
providers intensify. See "-Regulation and Competition."
The Company has entered into "roaming agreements" nationwide with
operators of other cellular systems that permit each company's respective
customers to place or receive calls outside of their home market area. The
charge to a non-Company customer for this service has traditionally been at
premium rates, and is billed by the Company to the customer's service provider,
which then bills the customer. In most instances, based on competitive factors
and financial considerations, the Company charges an amount to its customers
that is equal to or lower than the amount actually charged by the cellular
carrier providing the roaming service. In the past couple of years, several
large nationwide cellular providers have introduced rate plans that offer
roaming coverage (provided through other carriers) at the same rate as service
within the customer's home market area. To defray the cost of these plans, these
providers have exerted substantial pressure on other cellular providers,
including the Company, to reduce their roaming fees. The Company anticipates
that competitive factors and industry consolidation will continue to place
further pressure on charging premium roaming rates. For additional information
on roaming revenue, see "-Strategy."
Roamer fraud, a cellular industry problem, occurs when cellular telephone
equipment is programmed to conceal the true identity and location of the user.
The Company and the industry have implemented extensive fraud control processes
in an attempt to minimize roamer fraud.
Churn rate (the average percentage of cellular customers that terminate
service each month) is an industry-wide concern. A significant portion of the
churn in the Company's markets is due to the Company disconnecting service to
cellular customers for nonpayment of their bills. In addition, the Company faces
substantial competition from the other wireless providers, including PCS
providers. The Company's average monthly churn rate in its majority-owned and
operated markets was 1.90% in 1999 and 2.23% in 1998. The Company is attempting
to lower its churn rate by increasing its proactive customer service efforts,
offering prepaid service and implementing additional customer retention
programs.
During recent years, the Company's cellular subsidiaries experienced
strong subscriber growth in the fourth quarter, primarily due to holiday season
sales.
The following table summarizes, among other things, certain information
about the Company's customers and market penetration:
Year ended or at December 31,
- --------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
Majority-owned and operated MSA and RSA systems (Note 1):
Cellular systems operated 42 44 44
Cell sites 711 644 558
Population of systems operated (Note 2) 8,267,140 9,026,150 9,008,219
Customers (Note 3):
At beginning of period 624,290 569,983 368,233
Gross units added internally 240,084 214,767 193,623
Net effect of property acquisitions/dispositions (10,563) - 123,600
Disconnects 146,325 160,460 115,473
At end of period 707,486 624,290 569,983
Market penetration at end of period (Note 4) 8.6% 6.9 6.3
Churn rate (Note 5) 1.90% 2.23 2.31
Average monthly service revenue
per customer $ 53 57 61
Construction expenditures (in thousands) $ 58,760 57,326 39,107
All operated MSA and RSA systems (Note 6):
Cellular systems operated 47 51 50
Cell sites 819 758 656
Population of systems operated (Note 2) 9,300,157 10,312,145 10,124,759
Customers at end of period (Note 7) 774,708 689,352 632,446
Market penetration at end of period (Note 8) 8.3% 6.7 6.2
Churn rate (Note 5) 1.90% 2.34 2.33
For additional information, See "- the Company's Cellular Interest."
Notes:
1. Represents the number of systems in which the Company owned at least a 50%
interest.The revenues and expenses of these markets, all of which are oper-
ated by the Company, are included in the Company's consolidated operating
revenues and operating expenses.
2. Based on independent third-party population estimates for each respective
year.
3. Represents the approximate number of revenue-generating cellular telephones
served by the cellular systems referred to in note 1.
4. Computed by dividing the number of customers at the end of the period by
the total population of systems referred to in note 1.
5. Represents the average percentage of customers that are disconnected on a
monthly basis.
6. Represents the total number of systems that the Company operated, including
systems in which it does not own a majority interest.
7. Represents the approximate number of revenue-generating cellular telephones
served by the cellular systems referred to in note 6.
8 Computed by dividing the number of customers at the end of the period by
the total population of systems referred to in note 6.
The Company's Cellular Interests
The Company obtained the right to provide cellular service through (i) the
FCC's licensing process described below, under which it received interests in
wireline licenses, and (ii) its acquisition program, under which it has acquired
interests in both wireline and non-wireline licenses. The table below sets forth
certain information with respect to the interests in cellular systems that the
Company owned as of December 31, 1999:
The Other
1999 Company's cellular
population Ownership pops at operator
(Note 1) percentage 12/31/99 (Note 2)
- --------------------------------------------------------------------------------
Majority-owned and operated MSAs
Pine Bluff, AR 81,087 100.00% 81,087 SBC
Texarkana, AR/TX 136,607 89.00 121,580 AT&T
Alexandria, LA 146,132 100.00 146,132 Centennial
Monroe, LA 147,187 87.00 128,053 AT&T
Shreveport, LA 378,708 87.00 329,476 AT&T
Battle Creek, MI 196,172 97.00 190,287 Centennial
Benton Harbor, MI 159,862 97.00 155,066 Centennial
Grand Rapids, MI 775,514 97.00 752,249 AirTouch
Jackson, MI 156,597 97.00 151,899 Centennial
Kalamazoo, MI 305,639 97.00 296,470 Centennial
Lansing-E. Lansing, MI 511,601 97.00 496,253 AirTouch
Muskegon, MI 192,189 97.00 186,423 AirTouch
Saginaw-Bay City-
Midland, MI 401,279 91.70 367,973 AirTouch
Biloxi-Gulfport, MS (Note 4) 233,535 96.45 225,247 Cellular South
Jackson, MS (Note 4) 432,626 90.22 390,307 MCTA
Pascagoula, MS (Note 4) 132,013 89.22 117,785 Cellular South
Appleton-Oshkosh-
Neenah, WI 502,946 98.85 497,151 U.S. Cellular
Eau Claire, WI 144,180 55.50 80,020 American Cellular
LaCrosse, WI 102,756 95.00 97,618 U. S. Cellular
- -------------------------------------------------------------
5,136,630 4,811,076
- -------------------------------------------------------------
Minority-owned MSAs (Note 3)
Little Rock, AR 560,035 36.00% 201,613
Lafayette, LA 267,665 49.00 131,156
Detroit, MI 4,793,037 3.20 153,281
Flint, MI 508,681 3.20 16,268
Rochester, MN 117,605 2.93 3,446
Austin, TX 1,047,906 35.00 366,767
Dallas-Ft. Worth, TX 4,791,968 0.50 23,960
Sherman-Denison, TX 103,883 0.50 519
Madison, WI 731,747 9.78 71,558
Milwaukee, WI 1,982,586 17.96 356,132
- -------------------------------------------------------------
14,905,113 1,324,700
- -------------------------------------------------------------
Total MSAs 20,041,743 6,135,776
- -------------------------------------------------------------
Operated RSAs
Alaska 1 (Notes 4 and 5) 84,030 100.00% 84,030 Mactel
Arkansas 2 87,446 82.00 71,706 SBC
Arkansas 3 103,223 82.00 84,643 SBC
Arkansas 11 65,978 89.00 58,720 SBC
Arkansas 12 184,509 80.00 147,607 SBC
Louisiana 1 111,793 87.00 97,260 AT&T
Louisiana 2 115,094 87.00 100,132 AT&T
Louisiana 3 B2 95,481 87.00 83,068 Centennial
Louisiana 4 73,521 100.00 73,521 Centennial
Michigan 1 195,725 100.00 195,725 American Cellular
Michigan 2 113,600 100.00 113,600 RFB
Michigan 3 166,110 42.84 71,162 Unitel
Michigan 4 135,736 100.00 135,736 RFB
Michigan 5 161,964 42.84 69,386 Unitel
Michigan 6 142,327 98.00 139,480 Centennial
Michigan 7 246,257 56.07 138,078 Centennial
Michigan 8 102,585 97.00 99,507 Allegan Cellular
Michigan 9 300,375 43.38 130,303 Centennial
Mississippi 2 (Note 4) 251,413 100.00 251,413 Bell South Mobility
Mississippi 5 (Note 4) 159,581 100.00 159,581 Bell South Mobility
Mississippi 6 (Note 4) 183,267 100.00 183,267 Cellular South
Mississippi 7 (Note 4) 180,604 100.00 180,604 MCTA
Texas 7 B6 58,077 89.00 51,689 AT&T
Wisconsin 1 113,547 42.21 47,925 American Cellular
Wisconsin 2 85,261 99.00 84,408 American Cellular
Wisconsin 6 117,433 57.14 67,105 U.S. Cellular
Wisconsin 7 291,021 22.70 66,067 U.S. Cellular
Wisconsin 8 237,569 84.00 199,558 U.S. Cellular
- -------------------------------------------------------------
4,163,527 3,185,281
- -------------------------------------------------------------
Non-operated RSAs (Note 3)
Michigan 10 136,826 26.00 35,575
Minnesota 7 171,191 2.93 5,016
Minnesota 8 66,387 2.93 1,945
Minnesota 9 132,143 2.93 3,872
Minnesota 10 231,484 2.93 6,782
Minnesota 11 206,924 2.93 6,063
Texas 16 338,202 9.60 32,467
Washington 5 61,319 8.47 5,195
Washington 8 137,389 7.36 10,106
Wisconsin 3 141,986 42.86 60,851
Wisconsin 4 121,287 25.00 30,322
Wisconsin 10 129,462 22.50 29,129
- -------------------------------------------------------------
1,874,600 227,323
- -------------------------------------------------------------
Total RSAs 6,038,127 3,412,604
- -------------------------------------------------------------
26,079,870 9,548,380
- -------------------------------------------------------------
Notes:
1. Based on 1999 independent third-party population estimates.
2. Information provided to the best of the Company's knowledge. There is also
at least one PCS competitor in each of the operated MSAs and certain of
the operated RSAs.
3. Markets not operated by the Company.
4. Represents a non-wireline interest.
5. The Company sold its entire interest in this market in February 2000.
Operations
A substantial number of the cellular systems in MSAs operated by the
Company are owned by limited partnerships in which the Company is a general
partner ("MSA Partnerships"). Most of these partnerships are governed by
partnership agreements with similar terms, including, among other things,
customary provisions concerning capital contributions, sharing of profits and
losses, and dissolution and termination of the partnership. Most of these
partnership agreements vest complete operational control of the partnership with
the general partner. The general partner typically has the power to manage,
supervise and conduct the affairs of the partnership, make all decisions
appropriate in connection with the business purposes of the partnership, and
incur obligations and execute agreements on behalf of the partnership. The
general partner also may make decisions regarding the time and amount of cash
contributions and distributions, and the nature, timing and extent of
construction, without the consent of the other partners. The Company owns more
than 50% of all of the MSA Partnerships.
A substantial number of the cellular systems in RSAs operated by the
Company are also owned by limited or general partnerships in which the Company
is either the general or managing partner (the "RSA Partnerships"). These
partnerships are governed by partnership agreements with varying terms and
provisions. In many of these partnerships, the noncontrolling partners have the
right to vote on major issues such as the annual budget and system design. In a
few of these partnerships, the Company's management position is for a limited
term (similar to a management contract) and the other partners in the
partnership have the right to change managers, with or without cause. The
Company owns less than 50% of some of the RSA Partnerships.
The partnership agreements for both the MSA Partnerships and RSA
Partnerships generally contain provisions granting all partners a right of first
refusal in the event a partner desires to transfer a partnership interest. This
restriction on transfer can under certain circumstances make these partnership
interests more difficult to sell to a third party.
PCS Operations
The Company holds licenses to provide personal communication services
("PCS") in 54 Basic Trading Areas in 12 states. The Company's ownership
interests in these trading areas represents approximately 9.9 million pops. In
late 1998, the Company commenced marketing PCS services in a limited number of
its Michigan markets as a fixed wireless alternative to wireline local telephone
services. At December 31, 1999, the Company had approximately 670 PCS customers
located principally in three of its larger PCS Michigan markets.
Revenue
The following table reflects the major revenue categories for the
Company's wireless operations as a percentage of wireless operating revenues in
1999, 1998 and 1997. Virtually all of these revenues were derived from cellular
operations.
1999 1998 1997
- ----------------------------------------------------------------------------
Access fees and toll revenues 72.2% 74.2 78.2
Roaming 25.2 23.6 20.0
Equipment sales 2.6 2.2 1.8
- ----------------------------------------------------------------------------
100.0% 100.0 100.0
============================================================================
For further information on these revenue categories, see "-Services,
Customers and System Usage."
Regulation and Competition
As discussed below, the FCC and various state public utility commissions
regulate, among other things, the licensing, construction, operation,
interconnection arrangements, sale and acquisition of cellular telephone
systems.
Competition between providers of wireless communications service in each
market is conducted principally on the basis of price, services and enhancements
offered, the technical quality and coverage of the system, and the quality and
responsiveness of customer service. As discussed below, competition has
intensified in recent years in a substantial number of the Company's markets.
Under applicable law, the Company is required to permit the reselling of its
services. In certain larger markets and in certain market segments, competition
from resellers may be significant. There is also substantial competition for
sales agents. Certain of the Company's competitors have substantially greater
assets and resources than the Company.
Cellular licensing process. The term "MSA" means a Metropolitan
Statistical Area for which the FCC has granted a cellular operating license. The
term "RSA" means a Rural Service Area for which the FCC has granted a cellular
operating license. During the 1980's and early 1990's, the FCC awarded two
10-year licenses to provide cellular service in each MSA and RSA market.
Initially, one license was reserved for companies offering local telephone
service in the market (the wireline carrier) and one license was available for
firms unaffiliated with the local telephone company (the non-wireline carrier).
Since mid-1986, the FCC has permitted telephone companies or their affiliates to
acquire control of non-wireline licenses in markets in which they do not hold
interests in the wireline license. The FCC has issued a decision that grants a
renewal expectancy during the license renewal period to incumbent licensees that
substantially comply with the terms and conditions of their cellular
authorizations and the FCC's regulations. The licenses for the MSA markets
operated by the Company were initially granted between 1984 and 1987, and
licenses for operated RSAs were initially granted between 1989 and 1991. Thus
far, the Company has received 10-year extensions of all of its licenses that
have become subject to renewal since their original grant dates.
The completion of an acquisition involving the transfer of control of a
cellular system requires prior FCC approval and, in certain cases, receipt of
other federal and state regulatory approvals. The acquisition of a minority
interest generally does not require FCC approval. Whenever FCC approval is
required, any interested party may file a petition to dismiss or deny the
application for approval of the proposed transfer.
In addition to regulation by the FCC, cellular systems are subject to
certain Federal Aviation Administration tower height regulations concerning the
siting and construction of cellular transmitter towers and antennas.
Cellular operators are also subject to state and local regulation in some
instances. Although the FCC has pre-empted the states from exercising
jurisdiction in the areas of licensing, technical standards and market
structure, certain states require cellular operators to be certified. In
addition, some state authorities regulate certain aspects of a cellular
operator's business, including certain aspects of pricing, the resale of long
distance service to its customers, the technical arrangements and charges for
interconnection with the landline network, and the transfer of interests in
cellular systems. The siting and construction of the cellular facilities may
also be subject to state or local zoning, land use and other local regulations.
Developments affecting wireless competition. Competition in the wireless
communications industry has increased substantially in recent years due to
continued and rapid technological advances in the communications field, coupled
with legislative and regulatory changes.
Several FCC initiatives over the past decade have resulted in the
allocation of additional radio spectrum or the issuance of licenses for emerging
mobile communications technologies that are competitive with the Company's
cellular and telephone operations, including PCS. Although there is no
universally recognized definition of PCS, the term is generally used to refer to
wireless services to be provided by licensees operating in the 1850 MHz to 1990
MHz radio frequency band using microcells and high-capacity digital technology.
In 1996 and early 1997 the FCC auctioned up to six PCS licenses per market. Two
30MHz frequency blocks were awarded for each of the 51 Rand McNally Major
Trading Areas ("MTAs"), while one 30MHz and three 10MHz frequency blocks were
awarded for each of the 493 Rand McNally Basic Trading Areas ("BTAs").
PCS technology permits PCS operators to offer wireless voice, data, image
and multimedia services. The largest PCS providers commenced initial operations
in late 1996 and since then have aggressively expanded their operations. These
providers have initially focused on larger markets, and have generally marketed
PCS as being a competitive service to cellular. Many of these companies have
aggressively competed for customers on the basis of price, which has placed
downward pressure on cellular prices. There is at least one PCS competitor in
each of the Company's operated MSAs and certain of its operated RSAs.
In addition to PCS, current and prospective users of cellular systems may
find their communication needs satisfied by other current and developing
technologies. Several years ago the FCC authorized the licensees of certain
specialized mobile radio service ("SMR") systems (which historically have
generally been used by taxicabs and tow truck operators) to configure their
systems into digital networks that operate in a manner similar to cellular
systems. Such systems are commonly referred to as enhanced specialized mobile
radio service ("ESMR") systems. The Company believes that ESMR systems are
operating in a few of its cellular markets. One well-established ESMR provider
has constructed a nationwide digital mobile communications system to compete
with cellular systems. Other similar communication services that have the
technical capability to handle wireless telephone calls may provide competition
in certain markets, although these services currently lack the subscriber
capacity of cellular systems. Paging or beeper services that feature text
message and data display as well as tones may be adequate for potential
subscribers who do not need to converse directly with the caller. Mobile
satellite systems, in which transmissions are between mobile units and
satellites, may ultimately be successful in obtaining market share from cellular
systems that communicate directly to land-based stations.
In recent years, several large cellular providers have merged with other
companies or formed joint ventures. Several of these joint ventures pooled their
resources to develop extensive PCS systems. Many current or potential
competitors of the Company have substantially greater financial and marketing
resources than the Company.
Although it is uncertain how PCS, SMR, ESMR, mobile satellites and other
emerging technologies will ultimately affect the Company, the Company
anticipates that it will continue to face increased competition in its operating
markets. However, management believes that providing digital services and
applying new microcellular technologies will permit its cellular systems to
provide services comparable with the emerging technologies described above,
although no assurances can be given that this will happen or that future
technological advances or legislative or regulatory changes will not create
additional sources of competition.
OTHER OPERATIONS
The Company provides long distance, security monitoring, competitive local
exchange services, broadband, call center, cable television and interactive
services in certain local and regional markets, as well as certain printing and
related services. The results of these operations, which accounted for 6.7% and
4.3%, respectively, of the Company's consolidated revenues and operating income
during 1999, are reflected for financial reporting purposes in the "Other
operations" section in operating income.
Long distance. In 1996 the Company began marketing long distance service
in all of its equal access telephone operating areas. At December 31, 1999, the
Company provided long distance services to approximately 303,000 customers.
Approximately 74% of the Company's long distance revenues are derived from
service provided to residential customers. Although the Company owns and
operates long distance switches in LaCrosse, Wisconsin and San Marcos, Texas, it
anticipates that most of its future long distance service revenues will be
provided by reselling service purchased from other facilities-based long
distance providers. The Company intends to continue to expand its long distance
business, principally through reselling arrangements.
Security monitoring. The Company offers 24-hour burglary and fire
monitoring services to approximately 6,900 customers in select markets in
Louisiana, Arkansas, Mississippi, Texas and Ohio.
Competitive local exchange services. During the second quarter of 2000,
the Company plans to begin offering competitive local exchange telephone
services, coupled with long distance, wireless, Internet access and other
Company services, to small to medium-sized businesses in Shreveport, Louisiana.
The Company currently plans to target a total of ten initial new markets by year
end 2000, and has budgeted $20 million of capital expenditures for 2000 to
construct competitive local exchange networks. The Company expects to incur an
operating loss in 2000 of approximately $4.0-$6.0 million in connection with
providing these services.
Broadband. In connection with its long-range plans to sell capacity to
other carriers in or near certain of its select markets, the Company expects to
complete construction by mid-year 2000 of a 650- to 700-mile fiber optic ring
connecting several communities in southern and central Michigan. The Company
expects to begin providing initial network services by the third quarter 2000.
Call center. Over the past several years, the Company has provided certain
operator services for retail and wholesale markets. In January 2000, the Company
announced that it would close its call center operations by the second quarter
of 2000.
Other. The Company also provides audiotext services; printing, database
management and direct mail services; and cable television services. The Company
is also in the process of developing deployment plans for 36 Local Multipoint
Distribution System licenses acquired during the past two years, some of which
may be used to assist the Company in providing competitive local exchange
services, as discussed above. From time to time the Company also makes
investments in other domestic or foreign communications companies, the most
significant of which to date is a minority investment in a start-up Internet
service provider in India.
Certain service subsidiaries of the Company provide installation and
maintenance services, materials and supplies, and managerial, technical,
accounting and administrative services to the telephone and wireless operating
subsidiaries. In addition, the Company provides and bills management services to
subsidiaries and in certain instances makes interest-bearing advances to finance
construction of plant, purchases of equipment or acquisitions of other
businesses. These transactions are recorded by the Company's regulated telephone
subsidiaries at their cost to the extent permitted by regulatory authorities.
Intercompany profit on transactions with regulated affiliates is limited to a
reasonable return on investment and has not been eliminated in connection with
consolidating the results of operations of CenturyTel and its subsidiaries. Such
intercompany profit is reflected in operating income in "Other operations".
FORWARD-LOOKING STATEMENTS
This report on Form 10-K and other documents filed by the Company under
the federal securities laws include, and future oral or written statements or
press releases of the Company and its management may include, certain
forward-looking statements, including without limitation statements with respect
to the Company's anticipated future operating and financial performance
(including the impact of pending acquisitions), financial position and
liquidity, growth opportunities and growth rates, business prospects, regulatory
and competitive outlook, investment and expenditure plans, investment results,
financing opportunities and sources (including the impact of financings on the
Company's financial position, financial performance or credit ratings), pricing
plans, strategic alternatives, business strategies, and other similar statements
of expectations or objectives that are highlighted by words such as "expects,"
"anticipates," "intends," "plans," "believes," "projects," "seeks," "estimates,"
"should," and "may," and variations thereof and similar expressions. Such
forward-looking statements are inherently speculative and are based upon several
assumptions concerning future events, many of which are outside of the Company's
control. The Company's forward-looking statements, and the assumptions upon
which such statements are based, are subject to uncertainties that could cause
the Company's actual results to differ materially from such statements. These
uncertainties include but are not limited to those set forth below:
o the effects of ongoing deregulation in the telecommunications industry
as a result of the 1996 Act and other similar federal and state legislation and
federal and state regulations enacted thereunder, including without limitation
(i) greater than anticipated interconnection requests or competition in the
Company's predominately rural local exchange telephone markets resulting
therefrom, (ii) greater than anticipated reductions in revenues received from
the Universal Service Fund or other current or future federal and state support
funds designed to compensate LECs that provide services in high-cost markets,
(iii) the final outcome of regulatory and judicial proceedings with respect to
interconnection agreements and access charge reforms and (iv) future judicial or
regulatory actions taken in response to the 1996 Act.
o the effects of greater than anticipated competition from PCS, SMR, ESMR,
mobile satellites or other wireless companies, including without limitation
competition requiring new pricing or marketing strategies or new product
offerings, and the attendant risk that the Company will not be able to respond
on a timely or profitable basis.
o possible changes in the demand for the Company's products and services,
including without limitation (i) lower than anticipated demand for traditional
or premium telephone services or for additional access lines per household, (ii)
lower than anticipated demand for wireless telephone services, whether caused by
changes in economic conditions, technology, competition, health concerns or
otherwise, (iii) lower than anticipated demand for the Company's digital
subscriber line Internet access services and (iv) reduced demand for the
Company's access or billing and collection services.
o the Company's ability to successfully introduce new offerings on a
timely and cost-effective basis, including without limitation the Company's
ability to (i) expand successfully its long distance and Internet offerings to
new markets (including those to be acquired in connection with future
acquisitions), (ii) offer bundled service packages on terms attractive to its
customers and (iii) successfully initiate competitive local exchange, PCS and
data services in its targeted markets.
o the risks inherent in rapid technological change, including without
limitation (i) the lack of assurance that the Company's ongoing wireless network
improvements will be sufficient to meet or exceed the capabilities and quality
of competing networks, (ii) technological developments that could make the
Company's analog and digital wireless networks uncompetitive or obsolete, such
as the risk that the Time Division Multiple Access digital technology used by
the Company will be uncompetitive with existing or future technologies, and
(iii) the risk that technologies will not be developed by the Company on a
timely or cost-effective basis or perform according to expectations.
o the Company's ability to timely consummate its pending acquisitions and
effectively manage its growth, including without limitation the Company's
ability to (i) integrate newly-acquired operations into the Company's
operations, (ii) attract and retain technological and other key personnel to
work at the Company's Monroe, Louisiana headquarters or regional offices, (iii)
achieve projected economies of scale and cost savings, (iv) meet pro forma cash
flow projections developed by management in valuing newly-acquired businesses,
(v) upgrade its billing and other information systems and (vi) otherwise monitor
its operations, costs, regulatory compliance, and service quality and maintain
other necessary internal controls.
o regulatory limits on the Company's ability to change its prices for
telephone services in response to competitive pressures.
o any difficulties in the Company's ability to expand through attractively
priced acquisitions, whether caused by financing constraints, a decrease in the
pool of attractive target companies, or competition for acquisitions from other
interested buyers.
o higher than anticipated wireless operating costs due to churn or to
fraudulent uses of the Company's networks, or lower than anticipated wireless
revenues due to reduced roaming fees.
o the lack of assurance that the Company can compete effectively against
better-capitalized competitors.
o the future unavailability of SFAS 71 to the Company's telephone
subsidiaries.
o the effects of more general factors, including without limitation:
. changes in general industry and market conditions and growth rates
. changes in interest rates or other general national, regional or
local economic conditions
. changes in legislation, regulation or public policy, including
changes in federal rural financing programs
. unanticipated increases in capital, operating or administrative
costs, or the impact of new business opportunities requiring
significant up-front investments
. the continued availability of financing in amounts, and on terms
and conditions, necessary to support the Company's operations
. changes in the Company's relationships with vendors
. changes in the Company's senior debt ratings
. unfavorable outcomes of regulatory or legal proceedings, including
rate proceedings and environmental proceedings
. losses or unfavorable returns on the Company's investments in other
communications companies
. delays in the construction of the Company's networks
. changes in accounting policies or practices adopted voluntarily or
as required by generally accepted accounting principles.
For additional information, see the description of the Company's business
included above, as well as Item 7 of this report. Due to these uncertainties,
you are cautioned not to place undue reliance upon the Company's forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to update or revise any of its forward-looking statements for any
reason.
OTHER MATTERS
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 1999
have not been material and the Company currently has no reason to believe that
such costs will become material.
For additional information concerning the business and properties of the
Company, see notes 3, 5, 11, 14, 18 and 20 of Notes to Consolidated Financial
Statements set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of (i) telephone lines,
central office equipment, telephone instruments and related equipment, and land
and buildings related to telephone operations, and (ii) switching and cell site
equipment related to cellular telephone operations. As of December 31, 1999 and
1998, the Company's gross property, plant and equipment of approximately $4.2
billion and $4.3 billion, respectively, consisted of the following:
December 31,
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
Telephone operations
Cable and wire 45.4% 47.7
Central office equipment 27.4 27.9
General support 5.9 6.3
Information origination/termination equipment 1.4 1.7
Construction in progress 1.9 1.5
Other .2 .2
- ---------------------------------------------------------------------------
82.2 85.3
- ---------------------------------------------------------------------------
Wireless operations
Cell sites 8.4 7.6
General support 2.3 1.9
Construction in progress .4 .6
Other .1 .1
- ---------------------------------------------------------------------------
11.2 10.2
- ---------------------------------------------------------------------------
Other 6.6 4.5
- ---------------------------------------------------------------------------
100.0% 100.0
===========================================================================
"Cable and wire" facilities consist primarily of buried cable and aerial
cable, poles, wire, conduit and drops. "Central office equipment" consists
primarily of switching equipment, circuit equipment and related facilities.
"General support" consists primarily of land, buildings, tools, furnishings,
fixtures, motor vehicles and work equipment. "Information
origination/termination equipment" consists primarily of premise equipment
(private branch exchanges and telephones) for official company use. "Cell sites"
consist primarily of radio frequency channel equipment, switching equipment and
towers. "Construction in progress" includes property of the foregoing categories
that has not been placed in service because it is still under construction.
Most of the properties of the Company's telephone subsidiaries are subject
to mortgages securing the debt of such companies. The Company owns substantially
all of the central office buildings, local administrative buildings, warehouses,
and storage facilities used in its telephone operations. The Company leases most
of the offices used in its wireless operations; certain of its transmitter sites
are leased while others are owned by the Company. For further information on the
location and type of the Company's properties, see the descriptions of the
Company's telephone and wireless operations in Item 1.
Item 3. Legal Proceedings.
From time to time, the Company is involved in litigation incidental to its
business, including administrative hearings of state public utility commissions
relating primarily to rate making, actions relating to employee claims,
occasional grievance hearings before labor regulatory agencies and miscellaneous
third party tort actions. Currently, there are no material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning Executive Officers, set forth at Item 10 in Part
III hereof, is incorporated in Part I of this Report by reference.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
CenturyTel's common stock is listed on the New York Stock Exchange and is
traded under the symbol CTL. The following table sets forth the high and low
sale prices, along with the quarterly dividends, for each of the quarters
indicated:
Sale prices
---------------------- Dividend per
High Low common share
---- --- ------------
1999:
First quarter $ 49 40-1/16 .0450
Second quarter $ 47-5/8 35-1/8 .0450
Third quarter $ 43-7/8 38-1/4 .0450
Fourth quarter $ 48-3/4 37-9/16 .0450
1998:
First quarter $ 27-3/8 21-9/16 .0433
Second quarter $ 33-5/16 27-1/16 .0433
Third quarter $ 35-1/8 29-15/16 .0433
Fourth quarter $ 45-3/16 30-1/16 .0433
Common stock dividends during 1999 and 1998 were paid each quarter. As of
February 29, 2000, there were approximately 6,000 stockholders of record of
CenturyTel's common stock.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial data
as of and for each of the years ended in the five-year period ended December 31,
1999:
Selected Income Statement Data
Year ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------
(Dollars, except per share amounts, and shares expressed in thousands)
Operating revenues
Telephone $ 1,142,593 1,091,610 530,597 451,538 419,242
Wireless 422,269 407,827 307,742 250,243 197,494
Other 111,807 77,648 63,182 47,896 28,104
------------------------------------------------------------------
Total operating revenues $ 1,676,669 1,577,085 901,521 749,677 644,840
==================================================================
Operating income
Telephone $ 352,357 333,708 173,285 155,183 143,527
Wireless 133,930 129,124 87,772 67,899 56,998
Other 21,782 16,979 6,713 214 2,394
------------------------------------------------------------------
Total operating income $ 508,069 479,811 267,770 223,296 202,919
==================================================================
Gain on sale or exchange
of assets, net (pre-tax) $ 62,808 49,859 169,640 815 6,782
==================================================================
Net income $ 239,769 228,757 255,978 129,077 114,776
==================================================================
Basic earnings per share $ 1.72 1.67 1.89 .96 .89
==================================================================
Diluted earnings per share $ 1.70 1.64 1.87 .95 .87
==================================================================
Dividends per common share $ .18 .173 .164 .16 .147
==================================================================
Average basic shares outstanding 138,848 137,010 134,984 133,400 129,662
==================================================================
Average diluted shares
outstanding 141,432 140,105 137,412 135,980 132,456
==================================================================
Selected Balance Sheet Data
December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(Dollars in thousands)
Net property, plant and
equipment $ 2,256,458 2,351,453 2,258,563 1,149,012 1,047,808
Excess cost of net assets
acquired, net $ 1,644,884 1,956,701 1,767,352 532,410 493,655
Total assets $ 4,705,407 4,935,455 4,709,401 2,028,505 1,862,421
Long-term debt $ 2,078,311 2,558,000 2,609,541 625,930 622,904
Stockholders' equity $ 1,847,992 1,531,482 1,300,272 1,028,153 888,424
------------------------------------------------------------------------
The following table presents certain selected consolidated operating data
as of the end of each of the years in the five-year period ended December 31,
1999:
Year ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------
Telephone access lines 1,272,867 1,346,567 1,203,650 503,562 480,757
Wireless units in service in
majority-owned markets 707,486 624,290 569,983 368,233 290,075
Long distance customers 303,722 226,730 171,962 110,560 46,608
----------------------------------------------------------------
See Items 1 and 2 in Part I and notes 1, 5 and 11 of Notes to Consolidated
Financial Statements set forth in Item 8 elsewhere herein for additional
information.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
OVERVIEW
CenturyTel, Inc. and its subsidiaries (the "Company") is a regional
diversified communications company engaged primarily in providing local exchange
telephone services and wireless communications services. At December 31, 1999,
the Company's local exchange telephone subsidiaries operated over 1.27 million
telephone access lines primarily in rural, suburban and small urban areas in 20
states, and the Company's majority-owned and operated wireless entities had more
than 707,000 subscribers. On December 1, 1998, the Company acquired from
affiliates of Ameritech Corporation ("Ameritech") telephone and directory
operations serving approximately 86,000 access lines in northern and central
Wisconsin for approximately $221 million cash. On December 1, 1997, the Company
significantly expanded its operations by acquiring Pacific Telecom, Inc. ("PTI")
for $1.503 billion cash and assumed PTI's debt of approximately $725 million. As
a result of this acquisition, the Company acquired (i) over 660,000 telephone
access lines, (ii) over 88,000 cellular subscribers and (iii) various wireless,
cable television and other communications assets. The operations of the
Ameritech and PTI properties are included in the Company's results of operations
beginning on the respective dates of acquisition. See Acquisitions and Note 11
of Notes to Consolidated Financial Statements for additional information. During
the three years ended December 31, 1999, the Company has acquired various other
telephone, wireless and other operations, the impact of which has not been
material to the financial position or results of operations of the Company.
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.
The net income of the Company for 1999 was $239.8 million, compared to
$228.8 million during 1998 and $256.0 million during 1997. Diluted earnings per
share for 1999 were $1.70 compared to $1.64 in 1998 and $1.87 in 1997. The
Company's net income (and diluted earnings per share) from recurring operations
for 1999, 1998 and 1997 was $238.3 million ($1.69), $198.2 million ($1.42), and
$149.6 million ($1.09), respectively.
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 352,357 333,708 173,285
Wireless 133,930 129,124 87,772
Other 21,782 16,979 6,713
- --------------------------------------------------------------------------------------
508,069 479,811 267,770
Gain on sale or exchange of assets, net 62,808 49,859 169,640
Interest expense (150,557) (167,552) (56,474)
Income from unconsolidated cellular entities 27,675 32,869 27,794
Minority interest (27,913) (12,797) (5,498)
Other income and expense 9,190 5,268 5,109
Income tax expense (189,503) (158,701) (152,363)
- --------------------------------------------------------------------------------------
Net income $ 239,769 228,757 255,978
======================================================================================
Basic earnings per share $ 1.72 1.67 1.89
======================================================================================
Diluted earnings per share $ 1.70 1.64 1.87
======================================================================================
Average basic shares outstanding 138,848 137,010 134,984
======================================================================================
Average diluted shares outstanding 141,432 140,105 137,412
======================================================================================
Contributions to operating revenues and operating income by the Company's
telephone, wireless and other operations for each of the years in the three-year
period ended December 31, 1999 were as follows:
Year ended December 31, 1999 1998 1997
- -----------------------------------------------------------------
Operating revenues
Telephone operations 68.1% 69.2 58.9
Wireless operations 25.2% 25.9 34.1
Other operations 6.7% 4.9 7.0
Operating income
Telephone operations 69.3% 69.6 64.7
Wireless operations 26.4% 26.9 32.9
Other operations 4.3% 3.5 2.4
- -----------------------------------------------------------------
As a result of the Company's December 1997 acquisition of PTI, the
percentage of the Company's total operating revenues and operating income
contributed by its telephone operations significantly increased during 1998.
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 timely
consummate its pending acquisitions and effectively manage its growth, including
integrating newly acquired properties into the Company's operations, hiring
adequate numbers of qualified staff and successfully upgrading its billing and
other information systems; and the effects of more general factors such as
changes in general market or economic conditions or in legislation, regulation
or public policy. These and other uncertainties related to the business are
described in greater detail in Item 1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1999. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to update any of its
forward-looking statements for any reason.
TELEPHONE OPERATIONS
The Company conducts its telephone operations in rural, suburban and small
urban communities in 20 states. As of December 31, 1999, approximately 84% of
the Company's 1.27 million access lines were in Wisconsin, Washington, Michigan,
Louisiana, Colorado, Ohio, Oregon and Montana. The operating revenues, expenses
and income of the Company's telephone operations for 1999, 1998 and 1997 are
summarized below.
Year ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 353,534 331,736 147,589
Network access 654,003 629,583 319,301
Other 135,056 130,291 63,707
- -----------------------------------------------------------------------------------
1,142,593 1,091,610 530,597
- -----------------------------------------------------------------------------------
Operating expenses
Plant operations 262,864 245,164 110,220
Customer operations 91,077 92,552 50,819
Corporate and other 160,819 157,293 80,551
Depreciation and amortization 275,476 262,893 115,722
- -----------------------------------------------------------------------------------
790,236 757,902 357,312
- -----------------------------------------------------------------------------------
Operating income $ 352,357 333,708 173,285
===================================================================================
Local service revenues
Local service revenues are derived from the provision of local exchange
telephone services in the Company's service areas. Of the $21.8 million (6.6%)
increase in local service revenues in 1999, $21.1 million was due to the
acquisition of the Ameritech properties which was more than offset by a $22.8
million decrease attributable to the sale of the Company's Alaska based
operations. The remaining $23.5 million increase was due to a $15.6 million
increase due to an internal growth in the number of customer access lines and a
$4.1 million increase due to the increased provision of custom calling features.
The $184.1 million (124.8%) increase in such revenues in 1998 included $171.0
million from acquired properties, of which $169.2 million was from the PTI
properties; $10.7 million due to an internal growth in the number of customer
access lines and a $3.0 million increase due to the increased provision of
custom calling features. Internal access line growth during 1999, 1998 and 1997
was 4.8%, 4.7% and 4.4%, respectively.
Network access revenues
Network access revenues are primarily derived from the charges to long
distance companies and other customers for access to the Company's local
exchange carrier ("LEC") networks in connection with the completion of long
distance telephone calls. These access charges are based on tariffed access
rates filed with the Federal Communications Commission ("FCC") for interstate
services and with the respective state regulatory agency for intrastate
services. Certain of the Company's interstate network access revenues are based
on access charges filed directly with the FCC; the remainder of such revenues
are derived under revenue sharing arrangements with other LECs administered by
the National Exchange Carrier Association. Intrastate network access revenues
are based on access charges or are derived under revenue sharing arrangements
with other LECs.
Network access revenues increased $24.4 million (3.9%) in 1999 and $310.3
million (97.2%) in 1998 due to the following factors:
1999 1998
increase increase
(decrease) (decrease)
- --------------------------------------------------------------------------------
(Dollars in thousands)
PTI acquisition $ - 278,471
Increased recovery from the federal Universal
Service Fund ("USF") 8,193 8,329
Acquisitions, excluding PTI 17,645 1,013
Disposition of Alaska properties (39,985) -
Partial recovery of increased operating costs
through revenue sharing arrangements with other
telephone companies, increased minutes of use,
increased recovery from state support funds and
return on rate base 19,524 19,286
Revision of prior year revenue settlement agreements 15,944 618
Other, net 3,099 2,565
- -------------------------------------------------------------------------------
$ 24,420 310,282
===============================================================================
Other revenues
Other revenues include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring ("CPE services"), (ii) providing billing and collection
services for long distance carriers, (iii) participating in the publication of
local directories and (iv) providing Internet access. Of the $4.8 million
increase in other revenues in 1999, $5.0 million was attributable to the
Ameritech properties. Such increase was more than offset by a $12.0 million
decrease due to the sale of the Alaska properties. The remaining increase of
$11.8 million was primarily due to a $5.0 million and $6.4 million increase from
the provision of Internet access and CPE services, respectively. Other revenues
increased $66.6 million in 1998, which included $60.7 million due to
acquisitions. The remainder of the increase in 1998 was due to a $3.9 million
increase from the provision of Internet access and a $3.5 million increase from
the provision of CPE services.
Operating expenses
Plant operations expenses during 1999 and 1998 increased $17.7 million
(7.2%) and $134.9 million (122.4%), respectively. Of the $17.7 million increase
in 1999, $13.2 million was attributable to the properties acquired from
Ameritech, which was more than offset by a $23.7 million decrease due to the
sale of the Alaska properties. The remaining $28.2 million increase was
primarily due to a $7.4 million increase in access expenses primarily due to
changes in revenue settlement methods of certain telephone subsidiaries in a
limited number of states; a $5.6 million increase in repair and maintenance
expenses; a $5.6 million increase in engineering and network expenses and a $2.0
million increase in expenses associated with providing Internet access. Expenses
incurred by the PTI and Ameritech operations in 1998 accounted for $120.4
million of the 1998 increase. The remainder of the increase in 1998 was
primarily due to an increase in salaries and benefits.
Customer operations, corporate and other expenses increased $2.1 million
(.8%) in 1999 and $118.5 million (90.2%) in 1998. The Ameritech properties
contributed $12.5 million of the 1999 increase. Such increase was more than
offset by a $19.8 million decrease due to the sale of the Alaska properties. The
remaining $9.4 million increase in 1999 was primarily due to a $6.5 million
increase in contract labor expenses attributable to readying the Company's
systems to be Year 2000 compliant; a $2.8 million increase in expenses
associated with the provision of CPE services and a $3.0 million increase in the
provision for doubtful accounts. Such increases in 1999 were partially offset by
a $5.9 million decrease in salaries and benefits primarily due to a decrease in
the number of non-operational personnel. Of the $118.5 million increase in 1998,
$110.7 million was applicable to the PTI properties. Exclusive of acquisitions,
the remainder of the 1998 increase was due to a $4.3 million increase in
salaries and benefits and a $2.0 million increase in marketing expenses.
Depreciation and amortization increased $12.6 million (4.8%) and $147.2
million (127.2%) in 1999 and 1998, respectively. Of the 1999 increase, $17.1
million was attributable to the properties acquired from Ameritech, which was
more than offset by a $17.8 million decrease due to the sale of the Alaska
properties. Approximately $136.6 million of the 1998 increase was applicable to
acquiring and operating PTI (of which $27.9 million represented amortization of
goodwill) and $1.3 million was applicable to the former Ameritech properties.
Exclusive of acquisitions, depreciation expense included nonrecurring additional
depreciation charges approved by regulators in certain jurisdictions which
aggregated $10.7 million in 1999 and $6.2 million in 1998. In addition, the
Company obtained increased depreciation rates in certain jurisdictions which
increased depreciation expense by $2.2 million in 1999 and $1.1 million in 1998.
The remainder of the increases in depreciation and amortization in 1999 and 1998
were due to higher levels of plant in service. The composite depreciation rate
for the Company's regulated telephone properties, including the additional
depreciation charges, was 7.0% for 1999, 6.9% for 1998 and 7.4% for 1997.
Other
For additional information regarding certain matters that have impacted or
may impact the Company's telephone operations, see Regulation and Competition.
WIRELESS OPERATIONS AND INCOME FROM UNCONSOLIDATED CELLULAR ENTITIES
Year ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------
(Dollars in thousands)
Operating income - wireless operations $ 133,930 129,124 88,048
Minority interest, exclusive of the
effect of asset sales (12,911) (12,635) (6,916)
Income from unconsolidated cellular entities 27,675 32,869 27,794
- ------------------------------------------------------------------------------------
$ 148,694 149,358 108,926
====================================================================================
The Company's wireless 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 in "Income
from unconsolidated cellular entities." See Income from Unconsolidated Cellular
Entities for additional information.
WIRELESS OPERATIONS
Substantially all of the Company's wireless customers are located in
Michigan, Louisiana, Wisconsin, Mississippi, Texas and Arkansas. The operating
revenues, expenses and income of the Company's wireless operations for 1999,
1998 and 1997 are summarized below.
Year ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 411,492 398,739 302,156
Equipment sales 10,777 9,088 5,586
- ---------------------------------------------------------------------------------------
422,269 407,827 307,742
- ---------------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 21,408 16,992 14,588
System operations 56,866 60,049 47,572
General, administrative and customer service 79,569 81,350 62,536
Sales and marketing 61,903 57,967 54,128
Depreciation and amortization 68,593 62,345 41,146
- ---------------------------------------------------------------------------------------
288,339 278,703 219,970
- ---------------------------------------------------------------------------------------
Operating income $ 133,930 129,124 87,772
=======================================================================================
Operating revenues
Service revenues include monthly service fees for providing access and
airtime to customers, service fees for providing airtime to other carriers'
customers roaming through the Company's service areas and toll revenue.
Of the $12.8 million increase in service revenues in 1999, $11.3 million
was due to an increase in roaming usage primarily attributable to increased
minutes of use which was partially offset by reduced rates. Local service
revenues increased $5.9 million due to a growth in the number of customers and
increased minutes of use, both of which were partially offset by reduced rates.
Such increases were partially offset by a $6.3 million decrease due to the
Company's sale of its Texas and Alaska cellular properties. Of the $96.6 million
increase in service revenues in 1998, $76.1 million was attributable to
acquisitions of properties. The remainder of the 1998 increase in service
revenues was primarily due to a $10.9 million increase in roaming revenues and a
$9.4 million increase in local service revenues.
The following table illustrates the growth in the Company's wireless
customer base in its majority-owned markets:
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------
Customers at beginning of period 624,290 569,983 368,233
Gross units added internally 240,084 214,767 193,623
Disconnects 146,325 160,460 115,473
Net units added internally 93,759 54,307 78,150
Net effect of property acquisitions and dispositions (10,563) - 123,600
Customers at end of period 707,486 624,290 569,983
- -------------------------------------------------------------------------------------------
The average monthly service revenue per customer declined to $53 during
1999 from $57 in 1998 and $61 in 1997 due to price reductions and the continued
trend that a higher percentage of new customers tend to be lower usage
customers. A majority of the Company's net unit additions for 1999 were prepaid
customers. The average monthly service revenue per prepaid customer has been and
is expected to continue to be less than the average monthly service revenues per
contract customer. The average monthly service revenue per customer may further
decline (i) as market penetration increases and additional lower usage customers
are activated; (ii) as the Company continues to receive pressure from other
cellular operators to reduce roaming rates and (iii) as competitive pressures
from current and future wireless communications providers intensify. The Company
is responding to such competitive pressures by, among other things, modifying
certain of its price plans and implementing certain other plans and promotions,
most 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
usage and customer growth 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.
Operating expenses
Cost of equipment sold increased $4.4 million (26.0%) in 1999 and $2.4
million (16.5%) in 1998 primarily due to an increase in the number of phones
sold.
System operations expenses decreased $3.2 million (5.3%) in 1999 primarily
due to a $3.8 million decrease 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 a decrease in roaming rates; a $1.7 million decrease in
toll costs; and a $1.9 million decrease in expenses attributable to operations
sold during 1999. Such decreases were partially offset by a $4.3 million
increase in expenses associated with operating a greater number of cell sites.
The $12.5 million (26.2%) increase in system operations expenses in 1998 was
primarily due to $15.6 million of expenses attributable to acquisitions. Such
increase was partially offset by a $6.1 million decrease 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 a decrease in roaming rates.
The Company operated 711 cell sites at December 31, 1999 in entities in
which it had a majority interest, compared to 644 at December 31, 1998 and 558
at December 31, 1997.
General, administrative and customer service expenses decreased $1.8
million (2.2%), of which $9.0 million was attributable to a decrease in the
provision for doubtful accounts. Such decrease was substantially offset by a
$2.9 million increase in customer service expenses; a $2.1 million increase in
contract labor expenses associated with readying the Company's systems to be
Year 2000 compliant; and a $3.4 million increase in general office expenses. Of
the $18.8 million (30.1%) increase in 1998 expenses, $13.4 million was
attributable to expenses of entities acquired. The remainder of the 1998
increase was primarily due to a $2.1 million increase in the provision for
doubtful accounts and a $1.8 million increase in customer service expenses.
Churn rate (the percentage of cellular customers that terminate service)
is an industry-wide concern. The Company faces substantial competition from
other wireless providers, including those offering Personal Communications
Services ("PCS"). A significant portion of the churn in the Company's cellular
markets is due to the Company disconnecting service to customers for nonpayment.
The Company's average monthly churn rate in its majority-owned and operated
markets was 1.90% in 1999, 2.23% in 1998 and 2.31% in 1997.
Sales and marketing expenses increased $3.9 million (6.8%) in 1999
primarily due to a $4.0 million increase in costs incurred in selling products
and services in retail locations and a $2.0 million increase in advertising
expenses. Such increases were partially offset by a $2.1 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 and a $1.2 million decrease in expenses due to
the Company's sale of its Texas and Alaska properties. Sales and marketing
expenses increased $3.8 million (7.1%) in 1998 primarily due to $9.7 million of
expenses of acquired entities; a $2.9 million increase in costs incurred in
selling products and services in retail locations and a $2.4 million increase in
advertising expenses. Such increases were partially offset by a $10.6 million
reduction in commissions paid to agents for selling services to new customers
primarily as a result of fewer units being added through this distribution
channel during 1998 as compared to 1997.
Depreciation and amortization increased $6.2 million (10.0%) in 1999, of
which $4.0 million was due to an increase in amortization of intangibles and
$2.5 million was attributable to a higher level of plant in service. Of the
$21.2 million (51.5%) increase in 1998, $14.5 million was attributable to
acquisitions. The remainder of the 1998 increase was primarily due to higher
levels of plant in service.
Other
For additional information regarding certain matters that have impacted or
may impact the Company's wireless operations, see Regulation and Competition.
OTHER OPERATIONS
Other operations includes 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, call
center operations and security monitoring business. The operating revenues,
expenses and income of the Company's other operations for 1999, 1998 and 1997
are summarized below.
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 83,087 53,027 36,550
Call center 11,749 9,701 14,285
Other 16,971 14,920 12,347
- --------------------------------------------------------------------------------
111,807 77,648 63,182
- --------------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 85,278 57,353 53,842
Depreciation and amortization 4,747 3,316 2,627
- --------------------------------------------------------------------------------
90,025 60,669 56,469
- --------------------------------------------------------------------------------
Operating income $ 21,782 16,979 6,713
================================================================================
The 1999 and 1998 increases in long distance revenues of $30.1 million and
$16.5 million, respectively, were primarily attributable to the growth in the
number of customers. The number of long distance customers as of December 31,
1999, 1998, and 1997 was 303,700, 226,700, and 172,000, respectively. The $4.6
million decrease in call center revenues in 1998 was primarily due to the loss
of two major customers in the fourth quarter of 1997. The increases in other
revenues in 1998 of $2.6 million was primarily attributable to the acquisition
of cable television properties in the PTI acquisition and the acquisition of two
security monitoring businesses, partially offset by a loss of revenues
applicable to entities sold during 1997.
Operating expenses in 1999 increased $29.4 million (48.4%) primarily due
to (i) an increase of $17.8 million in expenses of the Company's long distance
operations primarily due to the increased minutes of use due to an increase in
the number of long distance customers, (ii) a $6.7 million increase associated
with the Company's call center operations and (iii) a $3.8 million increase in
expenses due to the expansion of the Company's security monitoring and fiber
network businesses. In January 2000, the Company announced that it would close
its third party call center operations by the end of the first quarter 2000.
Included in total operating expenses for 1999 is a $2.7 million charge to write
down the assets of the call center to estimated net realizable value.
Operating expenses in 1998 increased due to (i) an increase of $13.6
million in expenses of the Company's long distance operations due primarily to
an increase in customers and (ii) $6.6 million of operating expenses applicable
to acquisitions. Such increases were substantially offset by decreases in
operating expenses because (i) 1997 included $9.2 million of costs applicable to
entities sold during 1997 and (ii) the amount of intercompany profit with
regulated affiliates (the recognition of which in accordance with regulatory
accounting principles acts to offset operating expenses) increased $5.8 million
as a result of the acquisition of PTI.
The Company anticipates that the growth of operating income for its other
operations will slow in future periods as it incurs increasingly larger expenses
in connection with expanding its security monitoring business and its emerging
fiber network and competitive local exchange carrier businesses.
Certain of the Company's service subsidiaries provide managerial,
operational, technical, accounting and administrative services, along with
materials and supplies, to the Company's telephone subsidiaries. In accordance
with regulatory accounting, intercompany profit on transactions with regulated
affiliates has not been eliminated in connection with consolidating the results
of operations of the Company. When the regulated operations of the Company no
longer qualify for the application of Statement of Financial Accounting
Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of
Regulation," such intercompany profit will be eliminated in subsequent financial
statements, the primary result of which will be a decrease in operating expenses
applicable to the Company's telephone operations and an increase in operating
expenses applicable to the Company's other operations. The amount of
intercompany profit with regulated affiliates which was not eliminated was
approximately $14.0 million, $14.4 million and $8.9 million in 1999, 1998 and
1997, respectively. For additional information applicable to SFAS 71, see
Regulation and Competition - Other Matters and Note 12 of Notes to Consolidated
Financial Statements.
GAIN ON SALE OR EXCHANGE OF ASSETS, NET
In 1999, the Company recorded pre-tax gains aggregating $62.8 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. ("WorldCom"). Approximately $39.6 million of the pre-tax
gains ($7.8 million after-tax loss; $.05 per diluted share) was due to the sale
of the Company's Brownsville and McAllen, Texas cellular properties. The
remainder of the gains in 1999 was primarily due to an $11.6 million pre-tax
gain ($7.6 million after-tax; $.05 per diluted share) due to the sale of the
Company's shares of common stock of Telephone and Data Systems, Inc. See Note 14
of Notes to Consolidated Financial Statements for additional information.
In 1998 the Company recorded net pre-tax gains aggregating $49.9 million
($30.5 million after-tax; $.22 per diluted share) primarily due to the
conversion of its investment in the common stock of Brooks Fiber Properties,
Inc. ("Brooks") into common stock of WorldCom, the subsequent sale of 750,000
shares of WorldCom stock, and the sale of minority interests in two
non-strategic cellular entities.
In the second quarter of 1997, the Company sold its competitive access
subsidiary to Brooks in exchange for approximately 4.3 million shares of Brooks'
common stock and recorded a pre-tax gain of approximately $71 million ($46
million after-tax; $.34 per diluted share). In November 1997 the Company sold
approximately 3.8 million shares of Brooks' stock and recorded a pre-tax gain of
approximately $108 million ($66 million after-tax; $.48 per diluted share).
INTEREST EXPENSE
Interest expense decreased $17.0 million in 1999 primarily due to a
reduction in outstanding indebtedness. Interest expense increased $111.1 million
in 1998 primarily due to $89.7 million of interest expense on the borrowings
used to finance the PTI and Ameritech acquisitions and $23.2 million of interest
expense applicable to debt assumed from PTI.
INCOME FROM UNCONSOLIDATED CELLULAR ENTITIES
Earnings from unconsolidated cellular entities, net of the amortization of
associated goodwill, decreased $5.2 million (15.8%) primarily due to the
Company's proportionate share ($6.9 million) of a non-cash charge that was
recorded by a cellular entity in which the Company owns a minority interest. The
1998 increase of $5.1 million (18.3%) was primarily due to $7.3 million of
earnings of unconsolidated cellular entities acquired in the PTI acquisition.
Such increase was partially offset by a $2.5 million decrease due to the sale of
the Company's minority interest in two non-strategic cellular entities during
the second quarter of 1998.
MINORITY INTEREST
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings of the Company's majority-owned
and operated cellular entities and majority-owned subsidiaries. Minority
interest increased $15.1 million during 1999, substantially all of which relates
to the minority partners' share of the gain on sale of assets of the Brownsville
and McAllen, Texas cellular properties. Of the $7.3 million increase in minority
interest in 1998, $2.0 million was associated with entities acquired in the PTI
acquisition. The remainder of the increase was primarily due to the increased
profitability of the Company's majority-owned and operated cellular entities.
OTHER INCOME AND EXPENSE
Other income and expense increased $3.9 million in 1999, substantially all
of which relates to favorable non-recurring items recorded in 1999.
INCOME TAX EXPENSE
The Company's effective income tax rate was 44.1%, 41.0% and 37.3% in 1999,
1998 and 1997, respectively. Exclusive of the effect of income tax expense on
asset sales, the effective income tax rate was 39.0%, 41.3% and 37.3% in 1999,
1998 and 1997, respectively. Such decrease in the effective rate for 1999 was
primarily due to two factors. First, the Company's 1999 sale of its Texas and
Alaska operations resulted in a decrease in the amount of amortization of excess
cost of net assets acquired (goodwill) that is non-deductible for tax purposes.
Second, the Company recorded a $5.3 million state tax benefit relating to a loss
carryback that will be utilized to recoup taxes paid in a previous year.
The increase in the effective rate in 1998 was primarily due to the
increase in non-deductible amortization of excess cost of net assets acquired
attributable to the PTI acquisition.
ACQUISITIONS
On December 1, 1998, the Company acquired the assets of certain of
Ameritech's telephone and directory operations in 19 telephone exchanges
covering 21 communities in northern and central Wisconsin for approximately $221
million cash. The operations acquired by the Company include the telephone
property and equipment serving approximately 86,000 access lines, as well as the
related nine telephone directories.
On December 1, 1997, the Company acquired PTI in exchange for $1.503
billion cash and assumed PTI's debt of approximately $725 million. To finance
the acquisition, the Company borrowed $1.288 billion under its committed credit
facility and paid the remainder of the purchase price with available cash, most
of which consisted of the proceeds of the sale of Brooks' common stock in
November 1997. See Liquidity and Capital Resources - Financing Activities for
additional information. As a result of the acquisition, the Company acquired (i)
over 660,000 telephone access lines located in four midwestern states, seven
western states and Alaska, (ii) over 88,000 cellular subscribers in two
midwestern states and Alaska and (iii) various wireless, cable television and
other communications assets. For additional information, see Note 11 of Notes to
Consolidated Financial Statements.
ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." 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. Based on the Company's
current use of derivatives, SFAS 133 is not expected to materially impact the
Company's financial position or results of operations. In June 1999, the FASB
deferred the effective date of SFAS 133 to fiscal years beginning after June 15,
2000.
In June 1999, the FASB issued Interpretation No. 43, "Real Estate Sales,
an Interpretation of FASB Statement No. 66." The interpretation is effective for
sales of real estate with property improvements or integral equipment entered
into after June 30, 1999. Under this interpretation, fiber optic cable is
considered integral equipment and, accordingly, title must transfer to a lessee
in order for an Indefeasible Right to Use transaction to be accounted for as a
sales-type lease. The application of the provisions of FASB Interpretation No.
43 does not have an impact on the Company's financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition and deferred
costs in the financial statements. Based on the Company's current revenue
recognition policies, SAB 101 is not expected to materially impact the Company's
financial position or results of operations.
INFLATION
The effects of increased costs historically have been mitigated by the
ability to recover certain costs applicable to the Company's regulated telephone
operations through the rate-making process. As operating expenses in the
Company's non-regulated lines of business increase as a result of inflation, the
Company, to the extent permitted by competition, recovers the costs by
increasing prices for its services and equipment. While the rate-making process
does not permit the Company to immediately recover the costs of replacing its
physical plant, the Company has historically been able to recapture these costs
over time. Possible future regulatory changes may alter the Company's ability to
recover increased costs in its regulated operations. For additional information
regarding the current regulatory environment, see Regulation and Competition.
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 December
31, 1999, the fair value of the Company's long-term debt was estimated to be
$2.0 billion based on the overall weighted average rate of the Company's
long-term debt of 7.0% and an overall weighted maturity of 12 years compared to
terms and rates currently available in long-term financing markets. Market risk
is estimated as the potential decrease in fair value of the Company's long-term
debt resulting from a hypothetical increase of 70 basis points in interest rates
(ten percent of the Company's overall weighted average borrowing rate). Such an
increase in interest rates would result in approximately a $89.0 million
decrease in fair value of the Company's long-term debt.
In early 1998 the Company utilized interest rate hedge contracts to manage
its interest rate risk related to the issuance of $765.0 million of senior notes
and debentures. In February 2000, the Company entered into an interest rate
hedge contract designed to reduce its interest rate risk with respect to $100
million of the long-term public debt that it expects to incur in connection with
financing its pending acquisitions of local exchange assets in Arkansas,
Missouri and Wisconsin. It is possible that the Company will enter into
additional interest rate hedges for the same purpose over the next several
months. See Liquidity and Capital Resources for additional information.
YEAR 2000 DISCLOSURE
The Year 2000 issue concerned 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 implemented a
Year 2000 Project Plan ("the Plan") to assess whether its systems that process
date sensitive information would perform satisfactorily leading up to and beyond
January 1, 2000. Subsequent to December 31, 1999, the Company has experienced no
Year 2000-related problems with its critical systems nor did it experience any
problems with the delivery of critical services it receives from third parties.
In connection with implementing the Plan, the Company incurred costs of
$35.1 million during 1999 ($24.1 million of which was related to hardware costs
and other capital items) and $4.2 million during 1998 (none of which was related
to hardware costs or other capital items). All costs were expensed as incurred,
except for hardware and other items that were capitalized in accordance with
generally accepted accounting principles.
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.
Operating activities
Net cash provided by operating activities was $408.7 million, $467.8
million and $297.3 million in 1999, 1998 and 1997, respectively. 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
those years. For additional information relating to the telephone operations,
wireless operations and other operations of the Company, see Results of
Operations.
Investing activities
Net cash provided by (used in) investing activities was $69.8 million,
($375.6) million and ($1.503) billion in 1999, 1998 and 1997, respectively.
Proceeds from the sales of assets were $484.5 million in 1999 compared to $132.3
million in 1998 and $202.7 million in 1997. Cash used for acquisitions was $21.0
million, $225.6 million and $1.544 billion in 1999, 1998 and 1997, respectively.
Capital expenditures for 1999 were $233.5 million for telephone operations,
$58.8 million for wireless operations and $97.7 for other operations. Capital
expenditures during 1998 and 1997 were $310.9 million and $181.2 million,
respectively.
Financing activities
Net cash used in financing activities was $427.6 million in 1999 and
$112.4 million in 1998. Net cash provided by financing activities was $1.223
billion during 1997, of which $1.288 billion was related to the acquisition of
PTI. Net payments of long-term debt were $365.5 million more during 1999
compared to 1998 primarily due to the utilization of proceeds from the sales of
assets. In December 1997 the Company filed a shelf registration statement with
the United States Securities and Exchange Commission registering an aggregate of
$1.6 billion of senior unsecured debt securities, preferred stock, common stock
and warrants. In January 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 PTI. In addition, the Company paid approximately $40 million in 1998 to
settle numerous interest rate hedge contracts that had been entered into in
anticipation of these debt issuances.
Other
Budgeted capital expenditures for 2000 total $250 million for telephone
operations, $100 million for wireless operations and $65 million for other
operations. The Company anticipates that capital expenditures in its telephone
operations will continue to include the installation of fiber optic cable and
the upgrading of its plant and equipment, including its digital switches, to
provide enhanced services. Capital expenditures in the wireless operations are
expected to continue to focus on constructing additional cell sites (which will
provide additional capacity and expanded areas where cellular phones may be
used) and providing digital service. Budgeted capital expenditures for other
operations include $15 million for construction of the Company's fiber network
and $20 million for construction of competitive local exchange networks.
In June 1999, the Company signed a definitive asset purchase agreement to
purchase from affiliates of GTE Corporation ("GTE") telephone access lines
(which numbered approximately 225,000 at December 31, 1999) and related local
exchange assets in Arkansas for approximately $845.8 million in cash. In July
1999, the Company acquired a 61.5% (56.9% fully diluted) interest in a
newly-organized joint venture company which has entered into a definitive asset
purchase agreement with affiliates of GTE to purchase telephone access lines
(which numbered approximately 121,000 at December 31, 1999) and related local
exchange assets in Missouri for approximately $290 million in cash. At closing,
the Company has agreed to make approximately a $55 million preferred equity
investment in the new entity and it is anticipated that the Company will loan
the new entity approximately $220 million.
In August 1999, the Company acquired an 89% interest in a newly-organized
joint venture company which has entered into a definitive asset purchase
agreement to purchase telephone access lines (which numbered approximately
61,700 as of December 31, 1999) and related local exchange assets in Wisconsin
from a GTE affiliate for approximately $170 million cash. At closing the Company
has agreed to make an equity investment in the newly organized company of
approximately $37.8 million and it is anticipated that the Company will loan the
new entity approximately $130 million. In October 1999, the Company also entered
into a definitive asset purchase agreement to purchase additional telephone
access lines (which numbered approximately 68,200 as of December 31, 1999) and
related local exchange assets in Wisconsin from a GTE affiliate for
approximately $195 million cash.
The purchase price under each of these GTE agreements is subject to
adjustments which are not expected to be material in the aggregate. These
transactions are anticipated to close by mid-year 2000, subject to regulatory
approvals and certain other closing conditions. Although financing plans are not
yet complete and will be dependent upon the Company's review of its alternatives
and market conditions, the Company currently anticipates selling a mix of
securities that will include debt securities and may include equity or
equity-linked securities. Currently, the Company's senior unsecured debt is
rated Baa1 by Moody's and BBB+ by Standard & Poor's. However, as a result of the
Company's announcement of its GTE acquisitions, Moody's placed its ratings under
review for possible downgrade and Standard & Poor's placed its ratings on
CreditWatch with negative implications.
The Company continually evaluates the possibility of acquiring additional
telecommunications operations and expects to continue its long-term strategy of
pursuing the acquisition of attractive communications properties in exchange for
cash, securities or both. The Company generally does not announce its
acquisitions until it has entered into a preliminary or definitive agreement.
Over the past few years, the amount of communications properties available to be
purchased by the Company has increased substantially. The Company may require
additional financing in connection with any such acquisitions, the consummation
of which could have a material impact on the Company's financial condition or
operations. Approximately 4.6 million shares of CenturyTel common stock and
200,000 shares of CenturyTel preferred stock remain available for future
issuance in connection with acquisitions under an acquisition shelf registration
statement.
As of December 31, 1999, the Company's telephone subsidiaries had
available for use $131.5 million of commitments for long-term financing from the
Rural Utilities Service and the Company had $219.1 million of undrawn committed
bank lines of credit. The Company also has access to debt and equity capital
markets, including its shelf registration statement.
The following table reflects the Company's debt to total capitalization
percentage and ratio of earnings to fixed charges as of and for the years ended
December 31:
1999 1998 1997
- ---------------------------------------------------------------------------
Debt to total capitalization percentage 53.7% 63.0 67.2
Ratio of earnings to fixed charges 2.79 2.25 7.80
Ratio of earnings to fixed charges excluding
gain on sale or exchange of assets 2.47 1.96 4.87
- ---------------------------------------------------------------------------
REGULATION AND COMPETITION
The communications industry continues to undergo various fundamental
regulatory, legislative, competitive and technological changes that make it
difficult to determine the form or degree of future regulation and competition
affecting the Company's telephone and wireless operations. These changes may
have a significant impact on the future financial performance of all
communications companies.
Events affecting the communications industry
In 1996 the United States Congress enacted the Telecommunications Act of
1996 (the "1996 Act"), which obligates LECs to permit competitors to
interconnect their facilities to the LEC's network and to take various other
steps that are designed to promote competition. The 1996 Act provides certain
exemptions for rural LECs such as those operated by the Company. Under the FCC's
August 1996 order implementing most of the 1996 Act's interconnection
provisions, rural LECs have the burden of proving the availability of these
exemptions.
Prior to and since the enactment of the 1996 Act, the FCC and a number of
state legislative and regulatory bodies have taken steps to foster local
exchange competition. Coincident with this recent movement toward increased
competition has been the gradual reduction of regulatory oversight of LECs.
These cumulative changes have led to the continued growth of various companies
providing services that compete with LECs' services. Wireless services entities
are also expected to increasingly compete with LECs.
The 1996 Act authorized the establishment of new federal and state
universal service funds to provide support to eligible telecommunications
carriers. These new funds are intended to replace existing federal support
mechanisms that currently provide approximately 7.6% of the Company's
consolidated revenues. In October 1999 the FCC adopted an order implementing a
new universal service support mechanism for non-rural carriers for high cost and
rural markets. This order will shift non-rural telephone companies to a
forward-looking cost model in determining their future universal service
support. Because all of the Company's LEC's have been designated as rural
telephone companies, this order will not directly impact the Company. However,
this order may establish the benchmark for the treatment of universal service
support funding for rural carriers. The Company's LECs will continue to receive
payments under the existing federal support mechanisms for rural carriers until
the FCC adopts funding support mechanisms based on forward-looking economic
costs, which it is required to do, but no earlier than January 2001.
In September 1998 the FCC initiated a proceeding to represcribe the
authorized rate of return for interstate access services provided by LECs. The
FCC periodically represcribes this rate of return to ensure that the service
rates filed by incumbent LECs subject to rate of return regulation continue to
be just and reasonable. It is uncertain whether or by how much the FCC may lower
the authorized rate of return. For rate of return companies, the FCC is
considering how other unresolved issues such as jurisdictional separations,
access charge reform and universal service must be addressed before
represcribing rate of return.
Competition to provide traditional telephone or wireless services has thus
far affected large urban areas to a greater extent than rural, suburban and
small urban areas such as those in which the Company's operations are located.
The Company does not believe such competition is likely to materially affect it
in the near term. The Company further believes that it may benefit from having
the opportunity to observe the effects of these developments in large urban
markets. The Company will continue to monitor ongoing changes in regulation,
competition and technology and consider which developments provide the most
favorable opportunities for the Company to pursue.
Recent events affecting the Company
During 1999 the Company's revenues from the USF totaled approximately
$127.5 million (of which $5.2 million related to the Company's Alaska based
operations). During 1998, such revenues totaled $127.6 million (of which $13.4
million related to the Alaska based operations.) Although the Company may
experience a reduction in its federal support revenues at some point in the
future, management believes it is premature to assess or estimate the ultimate
impact thereof. There can be no assurance, however, that such impact will not be
material.
During the last few years, several states in which the Company has
substantial operations took legislative or regulatory steps to further introduce
competition into the LEC business. While the Company is aware of only a few
companies which have requested authorization to provide local exchange service
in the Company's service areas, it is anticipated that similar action may be
taken by others in the future.
In mid-1997 the Louisiana Public Service Commission adopted a Consumer
Price Protection Plan which froze the local rates and access rates that can be
charged by the Company's LECs operating in Louisiana. Certain other states have
implemented various forms of alternative regulation plans, the impact of which
has not been material either individually or in the aggregate to the results of
operations of the Company.
Certain long distance carriers continue to request that the Company reduce
intrastate access tariffed rates for certain of its LECs. In addition, the
Company continues to receive pressure from other cellular operators to reduce
roaming rates in the Company's cellular markets. There is no assurance that
these requests will not result in reduced intrastate access revenues and/or
roaming revenues in the future.
The Company anticipates that regulatory changes and competitive pressures
may result in future revenue reductions in its telephone operations. However,
the Company anticipates that such reductions may be minimized by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. While the Company expects its telephone revenues to continue
to grow, its internal telephone revenue growth rate may slow during upcoming
periods.
Other matters
The Company's regulated telephone operations are subject to the provisions
of SFAS 71, under which the Company is required to account for the economic
effects of the rate-making process, including the recognition of depreciation of
plant and equipment over lives approved by regulators. The ongoing applicability
of SFAS 71 to the Company's regulated telephone operations is being monitored
due to the changing regulatory, competitive and legislative environments. When
the regulated operations of the Company no longer qualify for the application of
SFAS 71, the net adjustments required will result in a material, extraordinary,
noncash charge against earnings. While the amount of such charge cannot be
precisely estimated at this time, management believes that the noncash,
after-tax, extraordinary charge would be between $300 million and $350 million.
See Note 12 of Notes to Consolidated Financial Statements for additional
information.
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 1999
have not been material, and the Company currently has no reason to believe that
such costs will become material.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term obligations since the
majority of the Company's long-term obligations are fixed rate. At December 31,
1999, the Company estimates that the fair value of the Company's long-term debt
was $2.0 billion which was determined by comparing the overall weighted average
rate of the Company's long-term debt of 7.0% and an overall weighted maturity of
12 years to terms and rates currently available in long-term financing markets.
Market risk is estimated as the potential decrease in fair value of the
Company's long-term debt resulting from a hypothetical increase of 70 basis
points in interest rates (ten percent of the Company's overall weighted average
borrowing rate). Such an increase in interest rates would result in
approximately a $89.0 million decrease in fair value of the Company's long-term
debt. In late 1997 and early 1998 the Company utilized interest rate hedge
contracts to manage its interest rate risk related to its January 1998 issuance
of $765.0 million of senior notes and debentures. In February 2000, the Company
entered into an interest rate hedge contract designed to reduce its interest
rate risk with respect to $100 million of long-term public debt that it expects
to incur in connection with financing its pending acquisitions of local exchange
assets in Arkansas, Missouri and Wisconsin. It is possible that the Company will
enter into additional interest rate hedges for the same purpose over the next
several months.
Item 8. Financial Statements and Supplementary Data
Report of Management
The Shareholders
CenturyTel, Inc.:
Management has prepared and is responsible for the Company's consolidated
financial statements. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and necessarily
include amounts determined using our best judgments and estimates with
consideration given to materiality.
The Company maintains internal control systems and related policies and
procedures designed to provide reasonable assurance that the accounting records
accurately reflect business transactions and that the transactions are in
accordance with management's authorization. The design, monitoring and revision
of the systems of internal control involve, among other things, our judgment
with respect to the relative cost and expected benefits of specific control
measures. Additionally, the Company maintains an internal auditing function
which independently evaluates the effectiveness of internal controls, policies
and procedures and formally reports on the adequacy and effectiveness thereof.
The Company's consolidated financial statements have been audited by KPMG
LLP, independent certified public accountants, who have expressed their opinion
with respect to the fairness of the consolidated financial statements. Their
audit was conducted in accordance with generally accepted auditing standards,
which includes the consideration of the Company's internal controls to the
extent necessary to form an independent opinion on the consolidated financial
statements prepared by management.
The Audit Committee of the Board of Directors is composed of directors who
are not officers or employees of the Company. The Committee meets periodically
with the independent certified public accountants, internal auditors and
management. The Committee considers the audit scope and discusses internal
control, financial and reporting matters. Both the independent and internal
auditors have free access to the Committee.
/s/ R. Stewart Ewing, Jr.
- --------------------------
R. Stewart Ewing, Jr.
Executive Vice President and Chief Financial Officer
Independent Auditors' Report
The Board of Directors
CenturyTel, Inc.:
We have audited the consolidated financial statements of CenturyTel, Inc.
and subsidiaries as listed in Item 14a(i). In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedules as listed in Item 14a(ii). These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CenturyTel,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
- ----------------
KPMG LLP
Shreveport, Louisiana
January 26, 2000
CENTURYTEL, INC.
Consolidated Statements of Income
Year ended December 31,
- -----------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
OPERATING REVENUES
Telephone $ 1,142,593 1,091,610 530,597
Wireless 422,269 407,827 307,742
Other 111,807 77,648 63,182
- -----------------------------------------------------------------------------------------------
Total operating revenues 1,676,669 1,577,085 901,521
- -----------------------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses 819,784 768,720 474,256
Depreciation and amortization 348,816 328,554 159,495
- -----------------------------------------------------------------------------------------------
Total operating expenses 1,168,600 1,097,274 633,751
- -----------------------------------------------------------------------------------------------
OPERATING INCOME 508,069 479,811 267,770
- -----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Gain on sale or exchange of assets, net 62,808 49,859 169,640
Interest expense (150,557) (167,552) (56,474)
Income from unconsolidated cellular entities 27,675 32,869 27,794
Minority interest (27,913) (12,797) (5,498)
Other income and expense 9,190 5,268 5,109
- -----------------------------------------------------------------------------------------------
Total other income (expense) (78,797) (92,353) 140,571
- -----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 429,272 387,458 408,341
Income tax expense 189,503 158,701 152,363
- -----------------------------------------------------------------------------------------------
NET INCOME $ 239,769 228,757 255,978
===============================================================================================
BASIC EARNINGS PER SHARE $ 1.72 1.67 1.89
===============================================================================================
DILUTED EARNINGS PER SHARE $ 1.70 1.64 1.87
===============================================================================================
DIVIDENDS PER COMMON SHARE $ .180 .173 .164
===============================================================================================
AVERAGE BASIC SHARES OUTSTANDING 138,848 137,010 134,984
===============================================================================================
AVERAGE DILUTED SHARES OUTSTANDING 141,432 140,105 137,412
===============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Comprehensive Income
Year ended December 31,
- -----------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
Net income $ 239,769 228,757 255,978
- -----------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gains arising during
period, net of $38,473, $8,509 and $6,404 tax 71,449 15,802 11,893
Reclassification adjustment for gains included
in net income, net of $7,702 and $11,027 tax (14,304) (20,478) -
- -----------------------------------------------------------------------------------------------
Other comprehensive income, net of $30,771,
($2,518) and $6,404 tax 57,145 (4,676) 11,893
- -----------------------------------------------------------------------------------------------
Comprehensive income $ 296,914 224,081 267,871
===============================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Balance Sheets
December 31,
- --------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 56,640 5,742
Accounts receivable
Customers, less allowance of $4,150 and $4,155 128,338 130,289
Other 64,719 55,109
Materials and supplies, at average cost 28,769 23,709
Other 7,607 11,389
- --------------------------------------------------------------------------------------------------
Total current assets 286,073 226,238
- --------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,256,458 2,351,453
- --------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired, less accumulated
amortization of $165,327 and $133,135 1,644,884 1,956,701
Other 517,992 401,063
- --------------------------------------------------------------------------------------------------
Total investments and other assets 2,162,876 2,357,764
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,705,407 4,935,455
==================================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 62,098 53,010
Accounts payable 78,450 87,627
Accrued expenses and other current liabilities
Salaries and benefits 34,570 36,900
Taxes 40,999 33,411
Interest 37,232 36,926
Other 22,172 24,249
Advance billings and customer deposits 33,656 32,721
- --------------------------------------------------------------------------------------------------
Total current liabilities 309,177 304,844
- --------------------------------------------------------------------------------------------------
LONG-TERM DEBT 2,078,311 2,558,000
- --------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 469,927 541,129
- --------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
350,000,000 shares, issued and outstanding
139,945,920 and 138,082,926 shares 139,946 138,083
Paid-in capital 493,432 451,535
Unrealized holding gain on investments, net of taxes 64,362 7,217
Retained earnings 1,146,967 932,611
Unearned ESOP shares (4,690) (6,070)
Preferred stock - non-redeemable 7,975 8,106
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 1,847,992 1,531,482
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 4,705,407 4,935,455
==================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
- ------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 239,769 228,757 255,978
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 348,816 328,554 159,495
Income from unconsolidated cellular entities (27,675) (32,869) (27,794)
Minority interest 27,913 12,797 5,498
Deferred income taxes (17,139) 16,196 16,230
Gain on sale of assets, net (62,808) (49,859) (169,640)
Changes in current assets and current liabilities
Accounts receivable (15,181) (15,227) 7,649
Accounts payable (11,469) 4,249 (25,440)
Other accrued taxes (59,571) (34,908) 58,205
Other current assets and other current
liabilities, net (1,354) 15,033 7,263
Increase (decrease) in other noncurrent liabilities (5,311) (1,706) 2,173
Other, net (7,288) (3,243) 7,702
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 408,702 467,774 297,319
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (20,972) (225,569) (1,543,814)
Payments for property, plant and equipment (389,980) (310,919) (181,225)
Proceeds from sale of assets 484,467 132,307 202,705
Distributions from unconsolidated cellular entities 22,219 26,515 16,825
Purchase of life insurance investment, net (2,545) (2,786) (12,962)
Proceeds from note receivable - - 22,500
Other, net (23,416) 4,807 (7,156)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 69,773 (375,645) (1,503,127)
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 15,533 957,668 1,312,546
Payments of long-term debt (438,399) (1,015,015) (79,203)
Payment of hedge contracts - (40,237) -
Proceeds from issuance of common stock 19,182 15,033 14,156
Payment of debt issuance costs - (6,625) -
Cash dividends (25,413) (24,179) (22,671)
Other, net 1,520 951 (1,405)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (427,577) (112,404) 1,223,423
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 50,898 (20,275) 17,615
Cash and cash equivalents at beginning of year 5,742 26,017 8,402
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 56,640 5,742 26,017
======================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC.
Consolidated Statements of Stockholders' Equity
Year ended December 31,
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands)
COMMON STOCK
Balance at beginning of year $ 138,083 91,104 59,859
Issuance of common stock for acquisitions - 28 75
Conversion of convertible securities into common stock 330 169 237
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,533 754 565
Three-for-two stock split - 46,028 30,368
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year 139,946 138,083 91,104
- ----------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of year 451,535 469,586 474,607
Issuance of common stock for acquisitions - 1,059 3,241
Conversion of convertible securities into common stock 3,101 3,131 4,998
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 17,649 14,279 13,591
Amortization of unearned compensation and other 21,147 9,508 3,517
Three-for-two stock split - (46,028) (30,368)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year 493,432 451,535 469,586
- ----------------------------------------------------------------------------------------------------------------
UNREALIZED HOLDING GAIN ON INVESTMENTS, NET OF TAXES
Balance at beginning of year 7,217 11,893 -
Change in unrealized holding gain on investments, net of taxes 57,145 (4,676) 11,893
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year 64,362 7,217 11,893
- ----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 932,611 728,033 494,726
Net income 239,769 228,757 255,978
Cash dividends declared
Common stock - $.18, $.173 and $.164 per share (25,010) (23,771) (22,211)
Preferred stock (403) (408) (460)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year 1,146,967 932,611 728,033
- ----------------------------------------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of year (6,070) (8,450) (11,080)
Release of ESOP shares 1,380 2,380 2,630
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year (4,690) (6,070) (8,450)
- ----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning of year 8,106 8,106 10,041
Conversion of preferred stock into common stock (131) - (1,935)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year 7,975 8,106 8,106
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,847,992 1,531,482 1,300,272
================================================================================================================
COMMON SHARES OUTSTANDING
Balance at beginning of year 138,083 91,104 59,859
Issuance of common stock for acquisitions - 28 75
Conversion of convertible securities into common stock 330 169 237
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 1,533 754 565
Three-for-two stock split - 46,028 30,368
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year 139,946 138,083 91,104
================================================================================================================
See accompanying notes to consolidated financial statements.
CENTURYTEL, INC,
Notes to Consolidated Financial Statements
December 31, 1999
(1) Summary of Significant Accounting Policies
Principles of consolidation - 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. The Company's regulated telephone operations are subject to the
provisions of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation." Investments in cellular
entities where the Company does not own a majority interest are accounted for
using the equity method of accounting.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue recognition - Revenues are recognized when earned. Certain of the
Company's telephone subsidiaries participate in revenue sharing arrangements
with other telephone companies for interstate revenue and for certain intrastate
revenue. Such sharing arrangements are funded by toll revenue and/or access
charges within state jurisdictions and by access charges in the interstate
market. Revenues earned through the various sharing arrangements are initially
recorded based on the Company's estimates.
Property, plant and equipment - Telephone plant is stated substantially at
original cost. Normal retirements of telephone plant are charged against
accumulated depreciation, along with the costs of removal, less salvage, with no
gain or loss recognized. Renewals and betterments of plant and equipment are
capitalized while repairs, as well as renewals of minor items, are charged to
operating expense. Depreciation of telephone plant is provided on the straight
line method using class or overall group rates acceptable to regulatory
authorities; such rates range from 1.8% to 25%.
Non-telephone property is stated at cost and, when sold or retired, a gain or
loss is recognized. Depreciation of such property is provided on the straight
line method over estimated service lives ranging from three to 30 years.
Long-lived assets and excess cost of net assets acquired (goodwill) - The
carrying value of long-lived assets, including allocated goodwill, is reviewed
for impairment at least annually, or whenever events or changes in circumstances
indicate that such carrying value may not be recoverable, by assessing the
recoverability of such carrying value through estimated undiscounted future net
cash flows expected to be generated by the assets or the acquired business. The
excess cost of net assets acquired of substantially all of the Company's
acquisitions accounted for as purchases is being amortized over 40 years.
Affiliated transactions - Certain service subsidiaries of CenturyTel provide
installation and maintenance services, materials and supplies, and managerial,
technical, accounting and administrative services to subsidiaries. In addition,
CenturyTel provides and bills management services to subsidiaries and in certain
instances makes interest bearing advances to finance construction of plant and
purchases of equipment. These transactions are recorded by the Company's
telephone subsidiaries at their cost to the extent permitted by regulatory
authorities. Intercompany profit on transactions with regulated affiliates is
limited to a reasonable return on investment and has not been eliminated in
connection with consolidating the results of operations of CenturyTel and its
subsidiaries. Intercompany profit on transactions with nonregulated affiliates
has been eliminated.
Income taxes - CenturyTel files a consolidated federal income tax return with
its eligible subsidiaries. The Company uses the asset and liability method of
accounting for income taxes under which deferred tax assets and liabilities are
established for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Investment tax credits related to telephone plant have
been deferred and are being amortized as a reduction of federal income tax
expense over the estimated useful lives of the assets giving rise to the
credits.
Derivative financial instruments - The Company has entered into interest rate
hedge contracts in anticipation of certain debt issuances to manage interest
rate exposure. Interest rate contracts generally involve the exchange of fixed
and floating rate interest payments without the exchange of the underlying
principal. Net amounts paid or received are reflected as adjustments to interest
expense. The Company had no outstanding interest rate hedge contracts as of
December 31, 1999. The Company does not utilize derivative financial instruments
for trading or other speculative purposes.
Earnings per share - Basic earnings per share amounts are determined on the
basis of the weighted average number of common shares outstanding during the
year. Diluted earnings per share give effect to all potential dilutive common
shares that were outstanding during the period.
Stock compensation - The Company accounts for employee stock compensation plans
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," as allowed by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
Cash equivalents - The Company considers short-term investments with a maturity
at date of purchase of three months or less to be cash equivalents.
Reclassifications - Certain amounts previously reported for prior years have
been reclassified to conform with the 1999 presentation, including the
reclassification of the Company's personal communication services operations
from other operations to the wireless segment.
(2) Investments in Unconsolidated Cellular Entities
The Company's share of earnings from cellular entities in which it does
not own a majority interest was $28.8 million, $34.1 million and $29.4 million
in 1999, 1998 and 1997, respectively, and is included, net of $1.1 million, $1.2
million and $1.6 million of amortization of goodwill attributable to such
investments, in "Income from unconsolidated cellular entities" in the Company's
Consolidated Statements of Income. Over 86% of the 1999 income from
unconsolidated cellular entities was attributable to the following investments.
Ownership interest
- --------------------------------------------------------------------------------
GTE Mobilnet of Austin Limited Partnership 35%
Milwaukee SMSA Limited Partnership 18%
Alltel Cellular Associates of Arkansas Limited Partnership 36%
Detroit SMSA Limited Partnership 3%
Michigan RSA #9 Limited Partnership 43%
Cellular North Michigan Network General Partnership 43%
- --------------------------------------------------------------------------------
The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited combined results of operations, of the cellular
entities in which the Company's investments (as of December 31, 1999 and 1998)
were accounted for by the equity method.
Year ended December 31, 1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands)
(unaudited)
Assets
Current assets $ 289,355 293,339
Property and other noncurrent assets 822,771 759,665
- -------------------------------------------------------------------------------
$ 1,112,126 1,053,004
===============================================================================
Liabilities and equity
Current liabilities $ 130,161 109,787
Noncurrent liabilities 43,423 25,099
Equity 938,542 918,118
- -------------------------------------------------------------------------------
$ 1,112,126 1,053,004
===============================================================================
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
(unaudited)
Results of operations
Revenues $ 1,398,314 1,281,803 1,277,524
Operating income $ 427,274 430,859 419,246
Net income $ 416,740 435,744 395,990
- --------------------------------------------------------------------------------
At December 31, 1999, $65.5 million of the Company's consolidated
retained earnings represented undistributed earnings of unconsolidated cellular
entities.
(3) PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at December 31, 1999 and 1998 was
composed of the following:
December 31, 1999 1998
- ------------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost
Cable and wire $ 1,904,957 2,046,638
Central office 1,149,095 1,197,438
General support 247,605 269,431
Information origination/termination 58,380 73,984
Construction in progress 80,682 66,241
Other 5,213 6,520
- -------------------------------------------------------------------------------
3,445,932 3,660,252
Accumulated depreciation (1,609,626) (1,661,315)
- -------------------------------------------------------------------------------
1,836,306 1,998,937
- -------------------------------------------------------------------------------
Wireless, at cost
Cell site 353,705 324,292
General support 96,774 82,945
Construction in progress 17,303 23,733
Other 4,943 5,927
- -------------------------------------------------------------------------------
472,725 436,897
Accumulated depreciation (217,056) (178,970)
- -------------------------------------------------------------------------------
255,669 257,927
- -------------------------------------------------------------------------------
Other, at cost
General support 242,780 172,446
Other 32,470 20,063
- -------------------------------------------------------------------------------
275,250 192,509
Accumulated depreciation (110,767) (97,920)
- -------------------------------------------------------------------------------
164,483 94,589
- -------------------------------------------------------------------------------
Net property, plant and equipment $ 2,256,458 2,351,453
===============================================================================
Depreciation expense was $296.8 million, $280.5 million and $142.6 million
in 1999, 1998 and 1997, respectively. The composite depreciation rate for
telephone properties was 7.0% for 1999, 6.9% for 1998 and 7.4% for 1997.
(4) INVESTMENTS AND OTHER ASSETS
Investments and other assets at December 31, 1999 and 1998 were composed
of the following:
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
Excess cost of net assets acquired, less accumulated amortization $ 1,644,884 1,956,701
Investments in unconsolidated cellular entities 125,901 118,016
Cash surrender value of life insurance contracts 90,313 84,976
Marketable equity securities 102,633 29,496
Other 199,145 168,575
- -------------------------------------------------------------------------------------------------
$ 2,162,876 2,357,764
=================================================================================================
Goodwill amortization of $52.0 million, $47.8 million and $16.6 million
for 1999, 1998 and 1997, respectively, is included in "Depreciation and
amortization" in the Company's Consolidated Statements of Income.
The Company's investments in marketable equity securities are classified
as available for sale and are reported at fair value with unrealized holding
gains and losses reported, net of taxes, as a separate component of
stockholders' equity. As of December 31, 1999, gross unrealized holding gains of
the Company's marketable equity securities were $99.0 million.
(5) LONG-TERM DEBT
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
CenturyTel
6.79%* Senior Credit Facility, due through 2002 $ 339,813 752,063
6.875% senior debentures, due 2028 425,000 425,000
6.30% senior notes, due 2008 240,000 240,000
6.15% senior notes, due 2005 100,000 100,000
8.25% senior notes, due 2024 100,000 100,000
7.20% senior notes, due 2025 100,000 100,000
6.10%* notes to banks, due 2002 40,000 40,000
7.75% senior notes, due 2004 50,000 50,000
6.55% senior notes, due 2005 50,000 50,000
9.38% senior notes, due through 2003 16,025 18,900
7.00%* Employee Stock Ownership Plan commitment,
due in installments through 2004 4,690 6,070
Other 225 266
- ---------------------------------------------------------------------------------------------------
Total CenturyTel 1,465,753 1,882,299
- ---------------------------------------------------------------------------------------------------
Subsidiaries
First mortgage debt
5.88%* notes, payable to agencies of the U. S. government
and cooperative lending associations, due in installments
through 2025 290,715 341,817
7.98% notes, due through 2002 5,732 5,871
Other debt
7.48%* unsecured medium-term notes, due through 2008 333,657 335,667
8.07%* notes, due in installments through 2020 25,520 29,301
6.50% note, due in installments through 2001 6,399 9,308
5.61%* capital lease obligations, due through 2003 12,633 6,747
- ---------------------------------------------------------------------------------------------------
Total subsidiaries 674,656 728,711
- ---------------------------------------------------------------------------------------------------
Total long-term debt 2,140,409 2,611,010
Less current maturities 62,098 53,010
- ---------------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 2,078,311 2,558,000
===================================================================================================
* weighted average interest rate at December 31, 1999
The approximate annual debt maturities for the five years subsequent to
December 31, 1999 are as follows: 2000 - $62.1 million; 2001 - $146.4 million;
2002 - $353.9 million; 2003 - $66.4 million; and 2004 - $70.5 million.
Short-term borrowings of $40.0 million at December 31, 1999 and 1998 were
classified as long-term debt on the accompanying balance sheets because the
Company had adequate committed borrowing capacity available under long-term
revolving facilities.
Certain of the Company's loan agreements contain various restrictions,
among which are limitations regarding issuance of additional debt, payment of
cash dividends, reacquisition of the Company's capital stock and other matters.
At December 31, 1999, all of the consolidated retained earnings reflected on the
balance sheet was available for the declaration of dividends.
The transfer of funds from certain consolidated subsidiaries to CenturyTel
is restricted by various loan agreements. Subsidiaries which have loans from
government agencies and cooperative lending associations, or have issued first
mortgage bonds, generally may not loan or advance any funds to CenturyTel, but
may pay dividends if certain financial ratios are met. At December 31, 1999,
restricted net assets of subsidiaries were $608.0 million. Subsidiaries'
retained earnings in excess of amounts restricted by debt covenants totaled
$745.8 million.
Most of the Company's telephone property, plant and equipment is pledged
to secure the long-term debt of subsidiaries.
On January 15, 1998, CenturyTel issued $100 million of 7-year, 6.15%
senior notes (Series E); $240 million of 10-year, 6.3% senior notes (Series F);
and $425 million of 30-year, 6.875% debentures (Series G) under its shelf
registration statements. The net proceeds of approximately $758 million
(excluding payment obligations of approximately $40 million related to interest
rate hedging effected in connection with the offering) were used to reduce the
bank indebtedness incurred under the Senior Credit Facility. This facility
carries floating rate interest based upon London InterBank Offered Rates for
short-term periods.
In mid-January 1998, the Company settled numerous interest rate hedge
contracts that had been entered into in anticipation of the above-mentioned debt
issuances. The amounts paid by the Company upon settlement of the hedge
contracts aggregated approximately $40 million, which is being amortized as
interest expense over the lives of the underlying debt instruments. The
effective weighted average interest rate of the debt incurred in January 1998
(after giving consideration to these payment obligations) is 7.15%.
CenturyTel's telephone subsidiaries had approximately $131.5 million in
commitments for long-term financing from the Rural Utilities Service available
at December 31, 1999. Approximately $219.1 million of additional borrowings were
available to the Company through committed lines of credit with various banks.
(6) POSTRETIREMENT BENEFITS
The Company sponsors defined benefit health care plans that provide
postretirement benefits to substantially all retired full-time employees.
The following is a reconciliation for the benefit obligation and the plan
assets.
December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 172,323 152,632 59,157
Service cost 4,850 5,519 2,578
Interest cost 10,089 10,744 5,047
Plan amendments (2,492) - -
Participant contributions 419 298 119
Acquisition - - 80,166
Actuarial (gain) loss (23,855) 9,720 7,789
Benefits paid (4,610) (6,590) (2,224)
- --------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 156,724 172,323 152,632
==================================================================================================
Change in plan assets (primarily listed stocks and bonds)
Fair value of plan assets at beginning of year $ 35,799 34,618 -
Return on assets 2,961 4,080 -
Employer contributions 7,212 3,393 -
Participant contributions 419 298 -
Acquisition - - 34,618
Benefits paid (4,610) (6,590) -
- --------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 41,781 35,799 34,618
==================================================================================================
Net periodic postretirement benefit cost for 1999, 1998 and 1997 included
the following components:
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 4,850 5,519 2,578
Interest cost 10,089 10,744 5,047
Expected return on plan assets (2,961) (3,250) (458)
Amortization of unrecognized actuarial (gains) losses (565) 430 292
Amortization of unrecognized prior service cost (129) 121 121
- -------------------------------------------------------------------------------------------
Net periodic post-retirement benefit cost $ 11,284 13,564 7,580
===========================================================================================
The following table sets forth the amounts recognized as liabilities for
postretirement benefits at December 31, 1999, 1998 and 1997.
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (156,724) (172,323) (152,632)
Fair value of plan assets 41,781 35,799 34,618
Unamortized prior service cost (1,303) 1,060 1,182
Unrecognized net actuarial loss 707 23,972 14,622
- -------------------------------------------------------------------------------
Accrued benefit cost $ (115,539) (111,492) (102,210)
===============================================================================
Assumptions used in accounting for postretirement benefits as of December
31, 1999 and 1998 were:
1999 1998
- --------------------------------------------------------------------------------
Weighted average assumptions
Discount rate 7.25% 6.5-6.75
Expected return on plan assets 10.0% 10.0
- --------------------------------------------------------------------------------
For measurement purposes, a 7.4% annual rate in the per capita cost of
covered health care benefits was assumed for 2000 and beyond. A
one-percentage-point change in assumed health care cost rates would have the
following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
Effect on total of service and interest cost components $ 975 (951)
Effect on postretirement benefit obligation $ 8,517 (7,871)
- --------------------------------------------------------------------------------------------
(7) DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 1999 and 1998 were
composed of the following:
December 31, 1999 1998
- ------------------------------------------------------------------------------
(Dollars in thousands)
Deferred federal and state income taxes $ 269,988 332,151
Accrued postretirement benefit costs 112,876 109,000
Minority interest 43,204 44,970
Regulatory liability - income taxes 12,469 17,380
Deferred investment tax credits 1,724 3,939
Other 29,666 33,689
- ------------------------------------------------------------------------------
$ 469,927 541,129
==============================================================================
(8) STOCKHOLDER'S EQUITY
Common stock - At December 31, 1999, unissued shares of CenturyTel common stock
were reserved as follows:
December 31, 1999
- -----------------------------------------------------------------------------
(In thousands)
Incentive compensation program 6,492
Acquisitions 4,572
Employee stock purchase plan 999
Dividend reinvestment plan 739
Conversion of convertible preferred stock 435
Other employee benefit plans 2,563
- ------------------------------------------------------------------------------
15,800
==============================================================================
Under CenturyTel's Articles of Incorporation each share of common stock
beneficially owned continuously by the same person since May 30, 1987 generally
entitles the holder thereof to ten votes per share. All other shares entitle the
holder to one vote per share. At December 31, 1999, the holders of 11.4 million
shares of common stock were entitled to ten votes per share.
Preferred stock - As of December 31, 1999, CenturyTel had 2.0 million shares of
preferred stock, $25 par value per share, authorized. At December 31, 1999 and
1998, there were 319,000 and 324,238 shares, respectively, of outstanding
preferred stock. Holders of outstanding CenturyTel preferred stock are entitled
to receive cumulative dividends, receive preferential distributions equal to $25
per share plus unpaid dividends upon CenturyTel's liquidation and vote as a
single class with the holders of common stock.
Shareholders' Rights Plan - In 1996 the Board of Directors declared a dividend
of one preference share purchase right for each common share outstanding. Such
rights become exercisable if and when a potential acquiror takes certain steps
to acquire 15% or more of CenturyTel's common stock. Upon the occurrence of such
an acquisition, each right held by shareholders other than the acquiror may be
exercised to receive that number of shares of common stock or other securities
of CenturyTel (or, in certain situations, the acquiring company) which at the
time of such transaction will have a market value of two times the exercise
price of the right.
Stock split - On February 23, 1999, CenturyTel's Board of Directors declared a
three-for-two common stock split effected as a 50% stock dividend in March 1999.
All per share data included in this report for periods prior to March 1999 have
been restated to reflect this stock split. An amount equal to the par value of
the additional common shares issued pursuant to the stock split was reflected as
a transfer from paid-in-capital to common stock on the consolidated financial
statements for 1998.
(9) STOCK OPTION PROGRAM
CenturyTel has an incentive compensation program which allows the Board of
Directors, through a subcommittee to the Compensation Committee, to grant
incentives to employees in any one or a combination of the following forms:
incentive and non-qualified stock options; stock appreciation rights; restricted
stock; and performance shares. As of December 31, 1999, CenturyTel had reserved
6.5 million shares of common stock which may be issued under the incentive
compensation program.
Under the program, options have been granted to employees at a price
either equal to or exceeding the then-current market price. All of the options
expire ten years after the date of grant and the vesting period ranges from
immediate to three years.
During 1999 the Company granted 83,743 options (the "1999 Options") at
market price. The weighted average fair value of each of the 1999 Options was
estimated as of the date of grant to be $15.90 using an option-pricing model
with the following assumptions: dividend yield - .4%; expected volatility - 20%;
risk-free interest rate - 6.6%; and expected option life - seven years.
During 1998 the Company granted 121,667 options (the "1998 Options") at
market price. The weighted average fair value of each of the 1998 Options was
estimated as of the date of grant to be $8.88 using an option-pricing model with
the following assumptions: dividend yield - .5%; expected volatility - 20%;
risk-free interest rate - 4.8%; and expected option life - seven years.
During 1997 the Company granted 1,293,909 options (the "1997 Options") at
market price. The weighted average fair value of each of the 1997 Options was
estimated as of the date of grant to be $5.68 using an option-pricing model with
the following assumptions: dividend yield - .8%; expected volatility - 25%;
risk-free interest rate - 6.5%; and expected option life - eight years.
Stock option transactions during 1999, 1998 and 1997 were as follows:
Number Average
of options price
- --------------------------------------------------------------------------
Outstanding December 31, 1996 5,243,051 $ 12.11
Exercised (889,173) 10.18
Granted 1,293,909 13.51
Forfeited (38,856) 13.39
- ---------------------------------------------------------
Outstanding December 31, 1997 5,608,931 12.73
Exercised (937,985) 11.41
Granted 121,667 26.25
Forfeited (12,000) 13.33
- ---------------------------------------------------------
Outstanding December 31, 1998 4,780,613 13.35
Exercised (1,369,459) 10.90
Granted 83,743 40.88
Forfeited (9,055) 37.07
- ---------------------------------------------------------
Outstanding December 31, 1999 3,485,842 14.92
=========================================================
Exercisable December 31, 1998 4,188,660 13.13
=========================================================
Exercisable December 31, 1999 3,317,004 14.32
=========================================================
The following tables summarize certain information about CenturyTel's
stock options at December 31, 1999.
Options outstanding
- ------------------------------------------------------------------------------------------
Weighted average
Range of remaining contractual Weighted average
exercise prices Number of options life outstanding exercise price
- ------------------------------------------------------------------------------------------
$ 9.63-12.30 1,060,111 2.6 $ 11.88
13.33-17.64 2,248,491 6.2 14.91
23.03-26.05 55,163 8.1 25.85
26.98-31.54 46,264 8.1 29.08
39.00-46.19 75,813 9.4 40.88
---------
9.63-46.19 3,485,842 7.0 14.92
=========
Options exercisable
- ----------------------------------------------------------------------------
Range of Number of Weighted average
exercise prices options exercisable exercise price
- ----------------------------------------------------------------------------
$ 9.63-12.30 1,060,111 $ 11.88
13.33-17.64 2,166,292 14.97
23.03-26.05 51,337 26.06
26.98-31.54 39,264 28.82
---------
9.63-31.54 3,317,004 14.32
=========
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its program.
Accordingly, no compensation cost has been recognized for the program. If
compensation cost for CenturyTel's program had been determined consistent with
SFAS 123, the Company's net income and earnings per share on a pro forma basis
for 1999, 1998 and 1997 would have been as follows:
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income
As reported $ 239,769 228,757 255,978
Pro forma $ 239,033 227,113 252,773
Basic earnings per share
As reported $ 1.72 1.67 1.89
Pro forma $ 1.72 1.66 1.87
Diluted earnings per share
As reported $ 1.70 1.64 1.87
Pro forma $ 1.69 1.62 1.84
- --------------------------------------------------------------------------------
(10) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations:
Year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
(Dollars, except per share
amounts, and shares in thousands)
Income (Numerator):
Net income $ 239,769 228,757 255,978
Dividends applicable to preferred stock (403) (408) (460)
- ------------------------------------------------------------------------------------------------------
Net income applicable to common stock for
computing basic earnings per share 239,366 228,349 255,518
Dividends applicable to preferred stock 403 408 460
Interest on convertible securities, net of taxes 252 372 480
- ------------------------------------------------------------------------------------------------------
Net income as adjusted for purposes of computing
diluted earnings per share $ 240,021 229,129 256,458
======================================================================================================
Shares (Denominator):
Weighted average number of shares
outstanding during period 139,313 137,568 135,637
Employee Stock Ownership Plan shares
not committed to be released (465) (558) (653)
- ------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding
during period for computing basic earnings per share 138,848 137,010 134,984
Incremental common shares attributable to dilutive securities:
Conversion of convertible securities 981 1,274 1,676
Shares issuable under outstanding stock options 1,603 1,821 752
- ------------------------------------------------------------------------------------------------------
Number of shares as adjusted for purposes
of computing diluted earnings per share 141,432 140,105 137,412
======================================================================================================
Basic earnings per share $ 1.72 1.67 1.89
======================================================================================================
Diluted earnings per share $ 1.70 1.64 1.87
======================================================================================================
The weighted average number of options to purchase shares of common stock
that were excluded from the computation of diluted earnings per share because
the exercise price of the option was greater than the average market price of
the common stock was 20,000, 3,000 and 1,099,000 for 1999, 1998 and 1997,
respectively.
(11) ACQUISITIONS
On December 1, 1997, CenturyTel acquired Pacific Telecom, Inc. ("PTI") in
exchange for $1.503 billion cash and assumed PTI's debt of approximately $725
million. To finance the acquisition, which was accounted for as a purchase,
CenturyTel borrowed $1.288 billion under its $1.6 billion senior unsecured
credit facility (the "Senior Credit Facility") dated August 28, 1997. CenturyTel
paid the remainder of the PTI acquisition price with available cash.
As a result of the acquisition, the Company acquired (i) telephone access
lines located in four midwestern states, seven western states and Alaska, (ii)
cellular subscribers in two midwestern states and Alaska and (iii) various
wireless, cable television and other communications assets.
The following pro forma information represents the consolidated results of
operations of the Company as if the PTI acquisition had been consummated as of
January 1, 1997.
Year ended December 31, 1997
- ---------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
(unaudited)
Operating revenues $ 1,392,268
Net income 256,992
Diluted earnings per share 1.87
- ---------------------------------------------------------------------------
The pro forma information is not necessarily indicative of the operating
results that would have occurred if the PTI acquisition had been consummated as
of January 1, 1997, nor is it necessarily indicative of future operating
results. The actual results of operations of PTI have been included in the
Company's consolidated financial statements only from the date of acquisition.
On December 1, 1998, the Company acquired the assets of certain local
telephone and directory operations in parts of northern and central Wisconsin
from affiliates of Ameritech Corporation ("Ameritech"), in exchange for
approximately $221 million cash. The assets included (i) access lines and
related property and equipment in 21 predominantly rural communities in
Wisconsin and (ii) Ameritech's directory publishing operations that relate to
nine telephone directories.
(12) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's regulated telephone operations are subject to the provisions
of Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting
for the Effects of Certain Types of Regulation." Actions of a regulator can
provide reasonable assurance of the existence of an asset, reduce or eliminate
the value of an asset and impose a liability on a regulated enterprise. Such
regulatory assets and liabilities are required to be recorded and, accordingly,
reflected in the balance sheet of an entity subject to SFAS 71.
The Company's consolidated balance sheet as of December 31, 1999 included
regulatory assets of approximately $570.9 million and regulatory liabilities of
approximately $7.8 million. The $570.9 million of regulatory assets included
amounts related to accumulated depreciation ($565.9 million), assets established
in connection with postretirement benefits ($690,000), income taxes ($1.5
million) and deferred financing costs ($2.8 million). The $7.8 million of
regulatory liabilities was established in connection with the adoption of
Statement of Financial Accounting Standards No. 109, "Accounting For Income
Taxes." Net deferred income tax liabilities related to the regulatory assets and
liabilities quantified above were $229.4 million.
Property, plant and equipment of the Company's regulated telephone
operations has been depreciated using generally the straight line method over
lives approved by regulators. Such depreciable lives have generally exceeded the
depreciable lives used by nonregulated entities. In addition, in accordance with
regulatory accounting, retirements of regulated telephone property have been
charged to accumulated depreciation, along with the costs of removal, less
salvage, with no gain or loss recognized. These accounting policies have
resulted in accumulated depreciation being significantly less than if the
Company's telephone operations had not been regulated.
Statement of Financial Accounting Standards No. 101 ("SFAS 101"),
"Regulated Enterprises - Accounting for the Discontinuance of Application of
FASB Statement No. 71," specifies the accounting required when an enterprise
ceases to meet the criteria for application of SFAS 71. SFAS 101 requires the
elimination of the effects of any actions of regulators that have been
recognized as assets and liabilities in accordance with SFAS 71 but would not
have been recognized as assets and liabilities by enterprises in general, 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. SFAS 101 further provides that the carrying amounts of
property, plant and equipment are to be adjusted only to the extent the assets
are impaired and that impairment shall be judged in the same manner as for
enterprises in general. Deferred tax liabilities and deferred investment tax
credits will be impacted based on the change in the temporary differences for
property, plant and equipment and accumulated depreciation.
The ongoing applicability of SFAS 71 to the Company's regulated telephone
operations is being monitored due to the changing regulatory, competitive and
legislative environments, and it is possible that changes in regulation,
legislation or competition or in the demand for regulated services or products
could result in the Company's telephone operations no longer being subject to
SFAS 71 in the near future. When the regulated operations of the Company no
longer qualify for the application of SFAS 71, the net adjustments required will
result in a material, noncash charge against earnings which will be reported as
an extraordinary item. While the effect of implementing SFAS 101 cannot be
precisely estimated at this time, management believes that the noncash,
after-tax, extraordinary charge would be between $300 million and $350 million.
For regulatory purposes, the accounting and reporting of the Company's telephone
subsidiaries will not be affected by the discontinued application of SFAS 71.
(13) INCOME TAXES
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 were as follows:
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Postretirement benefit costs $ 36,851 38,023
Regulatory support 13,504 15,509
Net operating loss carry forwards of an acquired subsidiary 1,689 6,716
Regulatory liability 4,907 6,230
Long-term debt 2,805 3,382
Other employee benefits 8,367 8,812
Other 10,466 9,609
- -------------------------------------------------------------------------------------------------
Gross deferred tax assets 78,589 88,281
Less valuation allowance (1,689) (6,716)
- -------------------------------------------------------------------------------------------------
Net deferred tax assets 76,900 81,565
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment, primarily due to
depreciation differences (247,571) (280,859)
Excess cost of net assets acquired (39,070) (16,006)
Basis difference in assets to be sold - (66,998)
Deferred debt costs (3,128) (13,309)
Customer base (9,993) (11,381)
Marketable equity securities (34,656) (8,928)
Intercompany profits (3,259) (3,128)
Other (9,211) (13,107)
- -------------------------------------------------------------------------------------------------
Gross deferred tax liabilities (346,888) (413,716)
- -------------------------------------------------------------------------------------------------
Net deferred tax liability $ (269,988) (332,151)
=================================================================================================
The following is a reconciliation from the statutory federal income tax
rate to the Company's effective income tax rate:
Year ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
(Percentage of pre-tax income)
Statutory federal income tax rate 35.0% 35.0 35.0
State income taxes, net of federal income tax benefit 2.5 3.9 2.3
Basis difference of assets sold 3.9 .2 -
Amortization of nondeductible excess cost of net assets acquired 2.7 3.3 1.1
Amortization of investment tax credits (.4) (.6) (.4)
Amortization of regulatory liability (.4) (.6) (.5)
Other, net .8 (.2) (.2)
- ----------------------------------------------------------------------------------------------------
Effective income tax rate 44.1% 41.0 37.3
====================================================================================================
Income tax expense included in the Consolidated Statements of Income for
the years ended December 31, 1999, 1998 and 1997 was as follows:
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Federal
Current $ 184,872 117,490 122,861
Deferred (11,600) 18,048 14,768
State
Current 21,770 25,015 13,272
Deferred (5,539) (1,852) 1,462
- --------------------------------------------------------------------------------
$ 189,503 158,701 152,363
================================================================================
Income tax expense was allocated as follows:
Year ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Net tax expense in the consolidated statements of income $ 189,503 158,701 152,363
Stockholders' equity, primarily for compensation expense
for tax purposes in excess of amounts recognized for
financial reporting purposes and the tax effect of unrealized
holding gain on investments 13,935 (9,097) 3,850
- -----------------------------------------------------------------------------------------------------
$ 203,438 149,604 156,213
=====================================================================================================
(14) SALE OR EXCHANGE 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. ("WorldCom").
In May 1999, the Company sold substantially all of its Alaska-based
operations that were acquired in the PTI acquisition. The Company received
approximately $300 million in after-tax cash as a result of the transaction. In
accordance with purchase accounting, 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 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.)
In the fourth quarter of 1999 the Company recorded a pre-tax gain
aggregating $11.6 million ($7.6 million after-tax; $.05 per diluted share) due
to the sale of its Telephone and Data Systems, Inc. common stock.
In connection with the first quarter 1998 acquisition of Brooks Fiber
Properties, Inc. ("Brooks") by WorldCom, the Company's 551,000 shares of Brooks'
common stock were converted into approximately 1.0 million shares of WorldCom
common stock. The Company recorded such conversion at fair value which resulted
in a pre-tax gain of approximately $22.8 million ($14.8 million after-tax; $.11
per diluted share). In the second quarter of 1998, the Company sold 750,000
shares of WorldCom common stock for $35.6 million cash and recorded a pre-tax
gain of $8.7 million ($5.7 million after tax; $.04 per diluted share).
In the second quarter of 1998, the Company sold its minority interests in
two non-strategic cellular entities for approximately $31.0 million cash which
resulted in a pre-tax gain of $21.8 million ($12.3 million after-tax; $.09 per
diluted share). Additionally, in the second quarter the Company wrote off its
minority investment in a start-up company.
During the second quarter of 1998, the Company also sold various other
properties that were acquired in the PTI acquisition, including, but not limited
to, the Company's submarine cable operations. The Company utilized the proceeds
from these transactions to reduce its debt associated with the acquisition of
PTI. In accordance with purchase accounting, no gain or loss was recorded upon
the disposition of these assets.
In May 1997 the Company sold its majority-owned competitive access
subsidiary to Brooks in exchange for approximately 4.3 million shares of Brooks'
common stock. The Company recorded a pre-tax gain of approximately $71 million
($46 million after-tax; $.34 per diluted share). In November 1997 the Company
sold approximately 3.8 million shares of Brooks' common stock for $202.7 million
cash and recorded a pre-tax gain of approximately $108 million ($66 million
after-tax; $.48 per diluted share).
(15) RETIREMENT AND SAVINGS PLANS
CenturyTel sponsors a defined benefit pension plan for substantially all
employees. In addition, the bargaining unit employees of a subsidiary are
provided benefits under a separate defined benefit pension plan. CenturyTel also
sponsors an Outside Directors' Retire-ment Plan and a Supplemental Executive
Retirement Plan to provide directors and officers, respectively, with
supplemental retirement, death and disability benefits.
The following is a reconciliation of the beginning and ending balances for
the benefit obligation and the plan assets for the retirement and savings plans.
December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 217,747 200,554 20,473
Service cost 5,226 5,361 793
Interest cost 13,817 13,225 2,508
Plan amendments - 227 -
Acquisition - - 175,165
Actuarial (gain) loss (19,844) 8,683 2,548
Benefits paid (11,491) (10,303) (933)
- ------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 205,455 217,747 200,554
======================================================================================================
Change in plan assets (primarily listed stocks and bonds)
Fair value of plan assets at beginning of year $ 278,678 237,618 22,158
Return on plan assets 52,183 50,720 4,237
Employer contributions 531 643 807
Acquisition - - 211,349
Benefits paid (11,491) (10,303) (933)
- ------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 319,901 278,678 237,618
======================================================================================================
Net periodic pension cost for 1999, 1998 and 1997 included the following
components:
December 31, 1999 1998 997
- ------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 5,226 5,361 793
Interest cost 13,817 13,225 2,508
Expected return on plan assets (26,824) (22,925) (5,715)
Recognized net gains (3,176) (2,688) -
Net amortization and deferral (235) (300) 2,459
- ------------------------------------------------------------------------------
Net periodic pension (benefit) cost $ (11,192) (7,327) 45
==============================================================================
The following table sets forth the combined plans' funded status and
amounts recognized in the Company's consolidated balance sheet at December 31,
1999, 1998 and 1997.
December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Benefit obligation $ (205,455) (217,747) (200,554)
Fair value of plan assets 319,901 278,678 237,618
Unrecognized transition asset (1,892) (2,136) (1,550)
Unamortized prior service cost 1,031 1,053 -
Unrecognized net actuarial gain (100,052) (57,981) (37,731)
- -------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 13,533 1,867 (2,217)
===============================================================================
Assumptions used in accounting for the pension plans as of December 1999
and 1998 were:
1999 1998
- ---------------------------------------------------------------------------
Discount rates 7.25% 6.5-6.75
Expected long-term rate of return on assets 8.0-10.0% 8.0-10.0
- ---------------------------------------------------------------------------
CenturyTel sponsors an Employee Stock Bonus Plan ("ESBP") and an Employee
Stock Ownership Plan ("ESOP"). These plans cover most employees with one year of
service with the Company and are funded by Company contributions determined
annually by the Board of Directors.
The Company contributed $5.2 million, $3.7 million and $2.8 million to the
ESBP during 1999, 1998 and 1997, respectively. At December 31, 1999, the ESBP
owned 5.2 million shares of CenturyTel common stock.
The Company's contributions to the ESOP approximate the ESOP's debt
service less dividends received by the ESOP applicable to unallocated shares.
The ESOP shares initially were pledged as collateral for its debt. As the debt
is repaid, shares are released from collateral based on the percentage of
principal payment to outstanding debt before applying the principal payment. As
of each year end, such released shares are allocated to active employees.
The ESOP had outstanding debt of $190,000 at December 31, 1999 which was
applicable to shares purchased prior to 1993. Interest incurred by the ESOP on
such debt was $49,000, $148,000 and $274,000 in 1999, 1998, and 1997,
respectively. The Company contributed and expensed $405,000, $1.5 million and
$1.8 million during 1999, 1998 and 1997, respectively, with respect to such
shares. Dividends on unallocated ESOP shares used for debt service by the ESOP
were $24,000 in 1999, $69,000 in 1998 and $126,000 in 1997. The number of ESOP
shares as of December 31, 1999 and 1998 which were purchased prior to 1993 were
as follows:
December 31, 1999 1998
- ------------------------------------------------------------------------------
(In thousands)
Allocated shares 2,921 3,153
Unreleased shares 26 77
- ------------------------------------------------------------------------------
2,947 3,230
==============================================================================
The Company accounts for shares purchased subsequent to December 31, 1992
in accordance with Statement of Position 93-6 ("SOP 93-6"). Accordingly, as
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt. ESOP compensation
expense applicable to shares purchased subsequent to 1992 was $4.0 million for
1999, $2.9 million for 1998 and $1.5 million for 1997. The fair value of
unreleased ESOP shares accounted for under SOP 93-6 was $20.0 million, $23.2
million and $13.5 million at December 31, 1999, 1998 and 1997, respectively.
ESOP shares purchased subsequent to 1992 totaled 937,913, of which 515,851 were
allocated and 422,062 were unreleased as of December 31, 1999.
CenturyTel also sponsors a qualified profit sharing plan pursuant to
Section 401(k) of the Internal Revenue Code (the "401(k) Plan") which is
available to substantially all employees of the Company. The Company's matching
contributions to the 401(k) Plan were $6.1 million in 1999, $8.5 million in 1998
and $2.8 million in 1997.
(16) SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest of $150.3 million, $151.4 million and $48.8
million during 1999, 1998 and 1997, respectively. Income taxes paid were $270.9
million in 1999, $185.9 million in 1998 and $79.3 million in 1997.
CenturyTel has consummated the acquisitions of various telephone and
cellular operations, along with certain other assets, during the three years
ended December 31, 1999. In connection with these acquisitions, the following
assets were acquired, liabilities assumed, and common and preferred stock
issued:
Year ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment $ 830 75,043 1,106,558
Excess cost of net assets acquired 20,194 145,880 1,204,284
Other investments - 5,028 119,356
Notes payable - - (199,824)
Long-term debt - - (527,937)
Deferred credits and other liabilities - - (246,196)
Other assets and liabilities, excluding cash
and cash equivalents (52) (382) 90,889
Common stock issued - - (3,316)
- ---------------------------------------------------------------------------------------
Decrease in cash due to acquisitions $ 20,972 225,569 1,543,814
- ---------------------------------------------------------------------------------------
During 1999 the Company sold substantially all of its Alaska-based
operations; the remaining shares of its WorldCom stock; the assets of its
cellular operations in Brownsville and McAllen, Texas; and its Telephone and
Data Systems, Inc. stock. See Note 14 for additional information.
During 1998 the Company sold various properties acquired in the PTI
acquisition; a portion of its WorldCom stock; and certain cellular operations.
See Note 14 for additional information.
In May 1997 the Company sold its majority-owned competitive access
subsidiary in exchange for approximately 4.3 million shares of publicly-traded
common stock. In November 1997 approximately 85% of such stock was sold. In
addition, the Company has consummated the disposition of various cellular
operations, along with certain other assets, during the three years ended
December 31, 1999.
In connection with these dispositions, the following assets were sold,
liabilities eliminated, assets received and gain recognized:
Year ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment $ (165,286) - (38,481)
Excess cost of net assets acquired (296,605) - (597)
Marketable equity securities (18,363) (21,923) 13,795
Other assets and liabilities, excluding cash and
cash equivalents 58,595 (60,525) (7,782)
Gain on sale of assets (62,808) (49,859) (169,640)
- -------------------------------------------------------------------------------------------
Increase in cash due to dispositions $ (484,467) (132,307) (202,705)
===========================================================================================
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of certain of the Company's financial instruments at December 31, 1999
and 1998.
Carrying Fair
amount value
- -----------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 1999
Financial assets
Investments
Marketable equity securities $ 102,633 102,633 (1)
Other $ 23,773 23,773 (3)
Financial liabilities
Long-term debt (including current maturities) $ 2,140,409 2,092,744 (2)
Other $ 33,656 33,656 (3)
- -----------------------------------------------------------------------------------
December 31, 1998
Financial assets
Investments
Marketable equity securities $ 29,496 29,496 (1)
Other $ 29,813 29,813 (3)
Financial liabilities
Long-term debt (including current maturities) $ 2,611,010 2,708,680 (2)
Other $ 32,721 32,721 (3)
===================================================================================
(1) Fair value was based on quoted market prices.
(2) Fair value was estimated by discounting the scheduled payment streams
to present value based upon rates currently offered to the Company
for similar debt.
(3) Fair value was estimated by the Company to approximate carrying value.
Cash and cash equivalents, accounts receivable, notes payable, accounts payable
and accrued expenses - The carrying amount approximates the fair value due to
the short maturity of these instruments.
(18) BUSINESS SEGMENTS
The Company has two reportable 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.
The Company's telephone operations are conducted in rural, suburban and
small urban communities in 20 states. Approximately 84% of the Company's
telephone access lines are in Wisconsin, Washington, Michigan, Louisiana,
Colorado, Ohio, Oregon and Montana. The Company's wireless customers are located
in Michigan, Louisiana, Wisconsin, Mississippi, Texas, Arkansas and Alaska.
Depreciation
Operating and Operating
revenues amortization income
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 1999
Telephone $ 1,142,593 275,476 352,357
Wireless 422,269 68,593 133,930
Other operations 111,807 4,747 21,782
- ---------------------------------------------------------------------------------------------------
Total $ 1,676,669 348,816 508,069
===================================================================================================
Year ended December 31, 1998
Telephone $ 1,091,610 262,893 333,708
Wireless 407,827 62,345 129,124
Other operations 77,648 3,316 16,979
- ---------------------------------------------------------------------------------------------------
Total $ 1,577,085 328,554 479,811
===================================================================================================
Year ended December 31, 1997
Telephone $ 530,597 115,722 173,285
Wireless 307,742 41,146 87,772
Other operations 63,182 2,627 6,713
- ---------------------------------------------------------------------------------------------------
Total $ 901,521 159,495 267,770
===================================================================================================
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating income $ 508,069 479,811 267,770
Gain on sale or exchange of assets, net 62,808 49,859 169,640
Interest expense (150,557) (167,552) (56,474)
Income from unconsolidated cellular entities 27,675 32,869 27,794
Minority interest (27,913) (12,797) (5,498)
Other income and expense 9,190 5,268 5,109
- ---------------------------------------------------------------------------------------------------
Income before income tax expense $ 429,272 387,458 408,341
===================================================================================================
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Capital expenditures
Telephone $ 233,512 233,190 115,854
Wireless 58,760 57,326 39,107
Other operations 97,708 20,403 26,264
- ---------------------------------------------------------------------------------------------------
Total $ 389,980 310,919 181,225
===================================================================================================
Identifiable assets
Telephone $ 3,248,680 3,674,148 3,379,376
Wireless 1,184,129 1,114,955 996,089
Other operations 272,598 146,352 333,936
- ---------------------------------------------------------------------------------------------------
Total assets $ 4,705,407 4,935,455 4,709,401
===================================================================================================
Other accounts receivable are primarily amounts due from various long
distance carriers, principally AT&T, and several large local exchange operating
companies.
(19) COMMITMENTS AND CONTINGENCIES
Construction expenditures and investments in vehicles, buildings and other
work equipment during 2000 are estimated to be $250 million for telephone
operations, $100 million for wireless operations and $65 million for other
operations.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
(20) PENDING ACQUISITIONS
In June 1999, the Company signed a definitive asset purchase agreement
with affiliates of GTE Corporation ("GTE") to purchase GTE's telephone access
lines (which numbered approximately 225,000 at December 31, 1999) and related
local exchange assets in Arkansas for approximately $845.8 million, subject to
certain adjustments.
In July 1999, the Company acquired a 61.5% (56.9% fully-diluted) interest
in a newly-organized joint venture company which has entered into a definitive
asset purchase agreement with affiliates of GTE to purchase telephone access
lines (which numbered approximately 121,000 at December 31, 1999) and related
local exchange assets in Missouri for approximately $290 million, subject to
certain adjustments. The Company has agreed to make a preferred equity
investment in the newly organized company of approximately $55 million and to
finance substantially all of the remainder of the purchase price.
In August 1999, the Company acquired an 89% interest in a newly-organized
joint venture company which has entered into a definitive asset purchase
agreement with a GTE affiliate to purchase telephone access lines (which
numbered approximately 61,700 as of December 31, 1999) and related local
exchange assets in Wisconsin for approximately $170 million cash, subject to
certain adjustments. The Company has agreed to make an equity investment in the
newly organized company of approximately $37.8 million and currently expects to
finance substantially all of the remainder of the purchase price. In October
1999, the Company also entered into a definitive asset purchase agreement to
purchase additional telephone access lines (which numbered approximately 68,200
as of December 31, 1999) and related local exchange assets in Wisconsin from a
GTE affiliate for approximately $195 million cash, subject to certain
adjustments.
All of these transactions are expected to close mid-year 2000, pending
regulatory approvals and certain other closing conditions.
(21) SUBSEQUENT EVENT
In February 2000, the Company entered into an interest rate hedge contract
designed to reduce its interest rate risk with respect to $100 million of the
long-term debt that it expects to incur in connection with financing its pending
GTE acquisitions.
CENTURYTEL, INC.
Consolidated Quarterly Income Information
(Unaudited)
First Second Third Fourth
quarter quarter quarter quarter
- -----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
1999 (unaudited)
- -----------------------------------------------------------------------------------------------
Operating revenues $ 414,256 416,750 419,205 426,458
Operating income $ 130,623 130,625 130,059 116,762
Net income $ 61,105 53,462 64,529 60,673
Basic earnings per share $ .44 .38 .46 .43
Diluted earnings per share $ .43 .38 .46 .43
1998
- ----------------------------------------------------------------------------------------------
Operating revenues $ 371,720 388,378 401,949 415,038
Operating income $ 110,132 121,488 128,184 120,007
Net income $ 57,694 64,191 54,678 52,194
Basic earnings per share $ .42 .47 .40 .38
Diluted earnings per share $ .41 .46 .39 .37
- -----------------------------------------------------------------------------------------------
Diluted earnings per share for the first, second, third and fourth quarter
of 1999 included $.04, ($.05), $.01 and $.05 per share, respectively, of net
gain (loss) on sale or exchange of assets. See Note 14 for additional
information.
Diluted earnings per share for both the first quarter and second quarter
of 1998 included $.11 of net gain on sale or exchange of assets.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The name, age and office(s) held by each of the Registrant's executive
officers are shown below. Each of the executive officers listed below serves at
the pleasure of the Board of Directors, except Mr. Williams who has entered into
an employment agreement with the Registrant. The agreement's initial term has
lapsed, but the agreement remains in effect from year to year, subject to the
right of Mr. Williams or the Company to terminate such agreement.
Name Age Office(s) held with CenturyTel
- ---- --- ------------------------------
Clarke M. Williams 78 Chairman of the Board of Directors
Glen F. Post, III 47 Vice Chairman of the Board of Directors,
President and Chief Executive Officer
R. Stewart Ewing, Jr. 48 Executive Vice President and
Chief Financial Officer
Harvey P. Perry 55 Executive Vice President and
Chief Administrative Officer
David D. Cole 42 Senior Vice President - Operational Support
Michael Maslowski 52 Senior Vice President and
Chief Information Officer
Each of the Registrant's executive officers, except for Mr. Maslowski, has
served as an officer of the Registrant and one or more of its subsidiaries in
varying capacities for more than the past five years. Mr. Cole has served as
Senior Vice President - Operational Support since November 1998, as President -
Wireless Group from October 1996 to October 1998 and as Vice President from 1990
to 1996. Mr. Maslowski has served as Senior Vice President and Chief Information
Officer since March 1999.
The balance of the information required by Item 10 is incorporated by
reference to the Registrant's definitive proxy statement relating to its 2000
annual meeting of stockholders (the "Proxy Statement"), which Proxy Statement
will be filed pursuant to Regulation 14A within 120 days after the end of the
last fiscal year.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
a. Financial Statements
(i) Consolidated Financial Statements:
Independent Auditors' Report on Consolidated
Financial Statements and Financial Statement
Schedules
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for
the years ended December 31, 1999, 1998 and 1997
Consolidated Balance Sheets - December 31, 1999
and 1998
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Consolidated Quarterly Income Information (unaudited)
(ii) Schedules:*
I Condensed Financial Information of Registrant
II Valuation and Qualifying Accounts
* Those schedules not listed above are omitted
as not applicable or not required.
b. Reports on Form 8-K.
(i) The following items were reported in a Form 8-K filed
November 2, 1999.
Item 5. News release announcing third quarter result of
operations.
c. Exhibits:
3(i) Amended and Restated Articles of Incorporation of
Registrant, dated as of May 6, 1999,
(incorporated by reference to Exhibit 3(i) to
Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999).
3(ii) Registrant's Bylaws, as amended through November
18, 1999, included elsewhere herein.
4.1 Note Purchase Agreement, dated September 1, 1989,
between Registrant, Teachers Insurance and
Annuity Association of America and the Lincoln
National Life Insurance Company (incorporated by
reference to Exhibit 4.23 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1989).
4.2 Rights Agreement, dated as of August 27, 1996,
between Registrant and Society National Bank, as
Rights Agent, including the form of Rights
Certificate (incorporated by reference to Exhibit
1 of Registrant's Current Report on Form 8-K
filed August 30, 1996) and amendment No.1
thereto, dated May 25, 1999 (incorporated by
reference to Exhibit 4.2(ii) to Registrant's
Report on Form 8-K dated May 25, 1999).
4.3 Form of common stock certificate of the Regis-
trant (incorporated by reference to Exhibit 4.1
to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993).
4.4 Indenture dated as of March 31, 1994 between the
Company and Regions Bank (formerly First
American Bank & Trust of Louisiana), as Trustee
(incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-3,
Registration No. 33-52915).
4.5 Resolutions designating the terms and conditions
of the Company's 7-3/4% Senior Notes, Series A,
due 2004 and 8-1/4% Senior Notes, Series B, due
2024 (incorporated by reference to Exhibit 4.1 to
Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994).
4.6 Resolutions designating the terms and conditions
of the Company's 6.55% Senior Notes, Series C,
due 2005 and 7.2% Senior Notes, Series D, due
2025 (incorporated by reference to Exhibit 4.27
to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995).
4.7 Form of Senior Notes described in 4.5 and 4.6
above (incorporated by reference to Exhibit 4.3
of the Company's Registration Statement on Form
S-3, Registration No. 33-52915).
4.8 Competitive Advance and Revolving Credit Facility
Agreement, dated as of August 28, 1997, among
Registrant, the lenders named therein, and
NationsBank of Texas, N.A. (incorporated by
reference to Exhibit 4.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997).
4.9 Resolutions designating the terms and conditions
of the Company's 6.15% Senior Notes, Series E,
due 2005; 6.30% Senior Notes, Series F, due 2008;
and 6.875% Debentures, Series G, due 2028,
(incorporated by reference to Exhibit 4.9 to
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997).
4.10 Form of Board Resolution to be used in
designating and authorizing the terms and
conditions of any series of Senior Debt
Securities issuable under the Company's shelf
registration statement (incorporated by reference
to Exhibit 4.3 of the Company's Registration
Statement on Form S-3, Registration No.
333-42013).
4.11 Form of Senior Debt Securities described in 4.9
above (incorporated by reference to Exhibit 4.4
of the Company's Registration Statement on Form
S-3, Registration No. 333-42013).
4.12 First Supplemental Indenture, dated as of
November 2, 1998, to Indenture between CenturyTel
of the Northwest, Inc. and The First National
Bank of Chicago (incorporated by reference to
Exhibit 10.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30,
1998).
10.1 Employee Benefit Plans
(a) Registrant's Employee Stock Ownership Plan
and Trust, as amended and restated December
30, 1994 (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1995), amendment thereto dated
January 26, 1996 (incorporated by reference
to Exhibit 10.1(a) to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1995) and amendment thereto
dated July 15, 1996 (incorporated by
reference to Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996), and amendment
thereto dated December 31, 1996 (incorp-
orated by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997), and
amendment thereto dated March 18, 1997
(incorporated by reference to Exhibit 10.6
to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997),
and amendments thereto dated January 1,
1997 (incorporated by reference to Exhibit
10.3 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30,
1997), and amendment thereto dated December
29, 1998 (incorporated by reference to
Exhibit 10.1 (a) to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1998).
(b) Registrant's Stock Bonus Plan, PAYSOP and
Trust, as amended and restated December 30,
1994 (incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31,
1995), amendment thereto dated July 11,
1995 (incorporated by reference to Exhibit
10.4 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30,
1995), amendment thereto dated January 26,
1996 (incorporated by reference to Exhibit
10.1(b) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1995) and amendment thereto dated July 15,
1996 (incorporated by reference to Exhibit
10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30,
1996), and amendment thereto dated December
31, 1996 (incorporated by reference to
Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1997), and amendments thereto
dated January 1, 1997 (incorporated by
reference to Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997), and amendment
thereto dated December 29, 1998 (incorpor-
ated by reference to Exhibit 10.1 (b) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998).
(c) Registrant's Dollars & Sense Plan and
Trust, as amended and restated, effective
January 1, 1998 and amendment thereto dated
December 29, 1998 (incorporated by
reference to Exhibit 10.1 (c) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998).
(d) Registrant's Restated Supplemental
Executive Retirement Plan, generally
effective as of November 16, 1995
(incorporated by reference to Exhibit
10.1(d) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1995) and amendment thereto dated November
21, 1996 (incorporated by reference to
Exhibit 10.1(d) to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1996).
(e) Registrant's 1983 Restricted Stock Plan,
dated February 21, 1984, as amended and
restated as of November 16, 1995
(incorporated by reference to Exhibit
10.1(e) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1995) and amendment thereto dated November
21, 1996, (incorporated by reference to
Exhibit 10.1(e) to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1996), and amendment thereto
dated February 25, 1997 (incorporated by
reference to Exhibit 10.3 to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
(f) Registrant's Key Employee Incentive
Compensation Plan, dated January 1, 1984,
as amended and restated as of November 16,
1995 (incorporated by reference to Exhibit
10.1(f) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1995) and amendment thereto dated November
21, 1996 (incorporated by reference to
Exhibit 10.1 (f) to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1996), and amendment thereto
dated February 25, 1997 (incorporated by
reference to Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
(g) Registrant's 1988 Incentive Compensation
Program as amended and restated August 22,
1989 (incorporated by reference to Exhibit
19.8 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September
30, 1989) and amendment thereto dated
November 21, 1996 (incorporated by
reference to Exhibit 10.1(g) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996).
(h) Form of Stock Option Agreement entered into
in 1988 by the Registrant, pursuant to 1988
Incentive Compensation Program, with
certain of its officers (incorporated by
reference to Exhibit 10.10 to Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1988) and amendment
thereto (incorporated by reference to
Exhibit 4.6 to Registrant's Registration
No. 33-31314).
(i) Registrant's 1990 Incentive Compensation
Program, dated March 15, 1990 (incorporated
by reference to Exhibit 19.1 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1990) and
amendment thereto dated November 21, 1996
(incorporated by reference to Exhibit
10.1(i) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1996).
(j) Form of Stock Option Agreement entered into
in 1990 by the Registrant, pursuant to 1990
Incentive Compensation Program, with
certain of its officers (incorporated by
reference to Exhibit 19.3 to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1990) and amendment
thereto dated as of May 22, 1995
(incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30,
1995).
(k) Form of Stock Option Agreement entered into
in 1992 by the Registrant, pursuant to 1990
Incentive Compensation Program, with
certain of its officers and employees
(incorporated by reference to Exhibit 10.17
to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992) and
amendment thereto dated as of May 22, 1995
(incorporated by reference to Exhibit 10.2
to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30,
1995).
(l) Registrant's 1995 Incentive Compensation
Plan approved by Registrant's shareholders
on May 11, 1995 (incorporated by reference
to Exhibit 4.4 to Registration No.
33-60061) and amendment thereto dated
November 21, 1996 (incorporated by
Reference to Exhibit 10.1 (l) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996), and
amendment thereto dated February 25, 1997
(incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997).
(m) Form of Stock Option Agreement, pursuant to
1995 Incentive Compensation Plan and dated
as of May 22, 1995, entered into by
Registrant and its officers (incorporated
by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995).
(n) Form of Stock Option Agreement, pursuant to
1995 Incentive Compensation Plan and dated
as of June 23, 1995, entered into by
Registrant and certain key employees
(incorporated by reference to Exhibit 10.6
to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995).
(o) Registrant's Restated Supplemental Defined
Contribution Plan, dated as of November 16,
1995 (incorporated by reference to Exhibit
10.1(q) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1995), amendment thereto dated July 15,
1996 (incorporated by reference to Exhibit
10.4 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30,
1996) and amendment thereto dated November
21, 1996 (incorporated by reference to
Exhibit 10.1 (p) to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1996).
(p) Registrant's Amended and Restated Supple-
mental Dollars & Sense Plan, effective
as of January 1, 1999 (incorporated by ref-
erence to Exhibit 10.1(q) to Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1998).
(q) Registrant's Amended and Restated Salary
Continuation (Disability)Plan for Officers,
dated November 26, 1991 (incorporated by
reference to Exhibit 10.16 of Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1991).
(r) Registrant's Restated Outside Directors'
Retirement Plan, dated as of November 16,
1995 (incorporated by reference to Exhibit
10.1(t) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1995).
(s) Registrant's Restated Deferred Compensation
Plan for Outside Directors, dated as of
November 16, 1995 (incorporated by
reference to Exhibit 10.1(u) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995).
(t) Form of Stock Option Agreement, pursuant to
1995 Incentive Compensation Plan and dated
as of February 21, 2000, entered into by
Registrant and its officers, included
elsewhere herein.
(u) Registrant's Chairman/Chief Executive
Officer Short-Term Incentive Program
(incorporated by reference to Exhibit 10.6
to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
(v) Form of Amended and Restated Restricted
Stock and Performance Share Agreement dated
as of March 16, 1998, relating to equity
incentive awards granted in 1997 pursuant
to Registrant's 1995 Incentive Compensation
Plan (incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31,
1998).
(w) Form of Restricted Stock and Performance
Share Agreement dated as of March 16, 1998,
relating to equity incentive awards granted
in 1998 pursuant to Registrant's 1995
Incentive Compensation Plan (incorporated
by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).
(x) Form of Restricted Stock and Performance
Share Agreement, dated as of February 22,
1999, relating to equity incentive awards
granted in 1999 pursuant to the
Registrant's 1995 Incentive Compensation
Plan, included elsewhere herein.
(y) Registrant's Supplemental Defined Benefit
Plan, effective as of January 1, 1999
(incorporated by reference to Exhibit 10.1
(y) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1998).
(z) Registrant's Amended and Restated
Retirement Plan, effective as of January 1,
1999 (incorporated by reference to Exhibit
10.1 (z) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1998).
10.2 Employment, Severance and Related Agreements
(a) Employment Agreement, dated May 24, 1993,
by and between Clarke M. Williams and
Registrant (incorporated by reference to
Exhibit 19.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1993) and amendment thereto dated
as of February 27, 1996 (incorporated by
reference to Exhibit 10.2(a) to
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995).
(b) Form of Amended and Restated Severance
Agreement, by and between Registrant and
each of its executive officers other than
Clarke M. Williams, dated as of November
16, 1995 (incorporated by reference to
Exhibit 10.2(b) to Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1995).
(c) Form of Amended and Restated Severance
Agreement, by and between Registrant and
three of its officers who are not executive
officers, dated as of November 16, 1995
(incorporated by reference to Exhibit
10.2(c) to Registrant's Annual Report on
Form 10-K for the year ended December 31,
1995).
(d) Agreement, dated December 31, 1994, by and
between Jim D. Reppond and Registrant
(incorporated by reference to Exhibit 10.24
to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).
(e) Consulting Agreement, dated as of July 2,
1996, by and between Registrant and Jim D.
Reppond (incorporated by reference to
Exhibit 10 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended
September 30, 1996).
10.3 Other Agreements
(a) Asset Purchase Agreement between Registrant
and affiliates of GTE, dated June 29, 1999
(incorporated by reference to Exhibit 99 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999).
21 Subsidiaries of the Registrant, included
elsewhere herein.
23 Independent Auditors' Consent, included
elsewhere herein.
27 Financial Data Schedule, included elsewhere
herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 15, 2000 By: /s/ Clarke M. Williams
----------------------
Clarke M. Williams
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Clarke M. Williams
- ---------------------------- Chairman of the Board
Clarke M. Williams of Directors March 15, 2000
Vice Chairman of the
/s/ Glen F. Post, III Board of Directors,
- ---------------------------- President, and Chief
Glen F. Post, III Executive Officer March 15, 2000
/s/ R. Stewart Ewing, Jr. Executive Vice President and
- ---------------------------- Chief Financial Officer
R. Stewart Ewing, Jr (Principal Accounting Officer) March 15, 2000
/s/ Harvey P. Perry Executive Vice President,
- ---------------------------- Chief Administrative Officer
Harvey P. Perry and Director March 15, 2000
/s/ W. Bruce Hanks
- ---------------------------- Vice President Strategic Issues
W. Bruce Hanks and Director March 15, 2000
/s/ William R. Boles, Jr.
- ----------------------------
William R. Boles, Jr. Director March 15, 2000
/s/ Virginia Boulet
- ----------------------------
Virginia Boulet Director March 15, 2000
- ----------------------------
Ernest Butler, Jr. Director March 15, 2000
/s/ Calvin Czeschin
- ----------------------------
Calvin Czeschin Director March 15, 2000
/s/ James B. Gardner
- ----------------------------
James B. Gardner Director March 15, 2000
/s/ R. L. Hargrove, Jr.
- ----------------------------
R. L. Hargrove, Jr. Director March 15, 2000
/s/ Johnny Hebert
- ----------------------------
Johnny Hebert Director March 15, 2000
/s/ F. Earl Hogan
- ----------------------------
F. Earl Hogan Director March 15, 2000
/s/ C. G. Melville, Jr.
- ----------------------------
C. G. Melville, Jr. Director March 15, 2000
/s/ Jim D. Reppond
- ----------------------------
Jim D. Reppond Director March 15, 2000
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTURYTEL, INC.
(Parent Company)
STATEMENTS OF INCOME
Year ended December 31,
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
(Dollars in thousands)
REVENUES $ 15,542 16,055 9,666
- -------------------------------------------------------------------------------
EXPENSES
Operating expenses 12,754 15,788 9,088
Depreciation and amortization 7,153 31,842 9,401
- -------------------------------------------------------------------------------
Total expenses 19,907 47,630 18,489
- -------------------------------------------------------------------------------
OPERATING LOSS (4,365) (31,575) (8,823)
- -------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Gain on sales of assets 1,931 28,085 172,537
Interest expense (117,760) (131,309) (49,738)
Interest income 48,078 40,005 28,697
- -------------------------------------------------------------------------------
Total other income (expense) (67,751) (63,219) 151,496
- -------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY IN SUBSIDIARIES' EARNINGS (72,116) (94,794) 142,673
Income tax benefit (expense) 33,179 21,857 (55,591)
- -------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN
SUBSIDIARIES' EARNINGS (38,937) (72,937) 87,082
Equity in subsidiaries' earnings 278,706 301,694 168,896
- -------------------------------------------------------------------------------
NET INCOME $ 239,769 228,757 255,978
===============================================================================
See accompanying notes to condensed financial information of registrant.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(continued)
CENTURYTEL, INC.
(Parent Company)
BALANCE SHEETS
December 31,
- -------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,400 6,540
Receivables from subsidiaries 337,600 142,912
Other receivables 513 23,906
Prepayments and other 225 259
- -------------------------------------------------------------------------------------
Total current assets 350,738 173,617
- -------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property and equipment 1,004 1,162
Accumulated depreciation (683) (676)
- -------------------------------------------------------------------------------------
Net property, plant and equipment 321 486
- -------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Investments in subsidiaries (at equity) 3,422,022 3,170,861
Receivables from subsidiaries 343,169 514,366
Other investments 43,028 42,418
Deferred charges 54,776 58,073
- -------------------------------------------------------------------------------------
Total investments and other assets 3,862,995 3,785,718
- -------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,214,054 3,959,821
=====================================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 37,427 30,046
Payables to subsidiaries 837,645 365,517
Accrued interest 26,956 27,711
Other accrued liabilities 10,035 23,475
- -------------------------------------------------------------------------------------
Total current liabilities 912,063 446,749
- -------------------------------------------------------------------------------------
LONG-TERM DEBT 1,428,326 1,852,253
- -------------------------------------------------------------------------------------
PAYABLES TO SUBSIDIARIES 4,348 32,406
- -------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 21,325 96,931
- -------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
350,000,000 shares, issued and outstanding
139,945,920 and 138,082,926 shares 139,946 138,083
Paid-in capital 493,432 451,535
Unrealized holding gain on investments,
net of taxes 64,362 7,217
Retained earnings 1,146,967 932,611
Unearned ESOP shares (4,690) (6,070)
Preferred stock - non-redeemable 7,975 8,106
- -------------------------------------------------------------------------------------
Total stockholders' equity 1,847,992 1,531,482
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 4,214,054 3,959,821
=====================================================================================
See accompanying notes to condensed financial information of registrant.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
CENTURYTEL, INC.
(Parent Company)
STATEMENTS OF CASH FLOWS
Year ended December 31,
- --------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 239,769 228,757 255,978
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,153 31,842 9,401
Deferred income taxes (10,357) 12,902 8,068
Earnings of subsidiaries (278,706) (301,694) (168,896)
Gain on sale of assets (1,931) (28,085) (172,537)
Changes in current assets and current liabilities:
Other receivables 23,393 (23,114) 11,615
Other accrued liabilities (83,749) (40,535) 35,754
Other current assets and liabilities, net (435) 37,754 8,412
Other, net 6,060 9,724 958
- --------------------------------------------------------------------------------------------------------
Net cash used in operating activities (98,803) (72,449) (11,247)
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions - (225,569) (1,283,291)
Capital contributions to subsidiaries - - (16,634)
Dividends received from subsidiaries 162,149 116,906 117,499
Receivables from subsidiaries (22,607) 303,221 (235,772)
Payables to subsidiaries 380,505 (90,319) 9,738
Proceeds from sales of assets 3,444 40,778 202,705
Note receivable - - 22,500
Other, net 2,569 (28,046) (14,959)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 526,060 116,971 (1,198,214)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt - 950,000 1,297,435
Payments of long-term debt (415,166) (960,274) (52,214)
Payment of hedge contracts - (40,237) -
Proceeds from issuance of common stock 19,182 15,033 14,156
Payment of debt issuance costs - (6,625) -
Cash dividends paid (25,413) (24,179) (22,671)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (421,397) (66,282) 1,236,706
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,860 (21,760) 27,245
Cash and cash equivalents at beginning of year 6,540 28,300 1,055
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,400 6,540 28,300
========================================================================================================
See accompanying notes to condensed financial information of registrant.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(continued)
CENTURYTEL, INC.
(Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(A) LONG-TERM DEBT
The approximate annual debt maturities for the five years subsequent to
December 31, 1999 are as follows:
2000 - $ 37.4 million
2001 - $ 56.6 million
2002 - $ 302.3 million
2003 - $ 3.8 million
2004 - $ 50.5 million
(B) GUARANTEES
As of December 31, 1999, CenturyTel has guaranteed debt of subsidiaries
totaling $325.8 million.
(C) DIVIDENDS FROM SUBSIDIARIES
Dividends paid to CenturyTel by consolidated subsidiaries were $162.1
million, $116.9 million and $117.5 million during 1999, 1998 and 1997,
respectively.
(D) INCOME TAXES AND INTEREST PAID
Income taxes paid by CenturyTel (including amounts reimbursed from
subsidiaries) were $217.0 million, $162.0 million and $71.8 million during 1999,
1998, and 1997 respectively.
Interest paid by CenturyTel was $118.5 million, $114.7 million and $42.4
million during 1999, 1998 and 1997, respectively.
(E) AFFILIATED TRANSACTIONS
CenturyTel provides and bills management services to subsidiaries and in
certain instances makes interest bearing advances to finance construction of
plant and purchases of equipment. CenturyTel recorded intercompany interest
income of $47.8 million, $39.7 million and $26.6 million in 1999, 1998 and 1997,
respectively.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CENTURYTEL, INC.
For the years ended December 31, 1999, 1998 and 1997
Additions
Balance at charged to Deductions Balance
beginning costs and from Other at end
Description of period expenses allowance(1) changes(2) of period
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 1999
Allowance for doubtful accounts $ 4,155 7,680 (7,494) (191) 4,150
Year ended December 31, 1998
Allowance for doubtful accounts $ 5,954 13,951 (15,775) 25 4,155
Year ended December 31, 1997
Allowance for doubtful accounts $ 3,327 11,838 (9,975) 764 5,954
(1) Customers' accounts written-off, net of recoveries.
(2) Allowance for doubtful accounts at the date of acquisition of purchased
subsidiaries, net of allowance for doubtful accounts at the date of
disposition of subsidiaries sold.