UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 1-7784 CENTURYTEL, INC. (Exact name of registrant as specified in its charter) Louisiana 72-0651161 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Century Park Drive, Monroe, Louisiana 71203 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (318) 388-9000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of October 31, 1999, there were 139,679,442 shares of common stock outstanding. CENTURYTEL, INC. TABLE OF CONTENTS Page No. -------- Part I. Financial Information: Item 1. Financial Statements Consolidated Statements of Income--Three Months and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Statements of Comprehensive Income-- Three Months and Nine Months Ended September 30, 1999 and 1998 4 Consolidated Balance Sheets--September 30, 1999 and December 31, 1998 5 Consolidated Statements of Stockholders' Equity-- Nine Months Ended September 30, 1999 and 1998 6 Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 1999 and 1998 7 Notes to Consolidated Financial Statements 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K 27 Signature 28 PART I. FINANCIAL INFORMATION CenturyTel, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, - ------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares expressed in thousands) <S> <C> <C> <C> <C> OPERATING REVENUES Telephone $ 277,352 275,397 849,426 800,532 Wireless 111,652 106,664 320,245 305,704 Other 30,201 19,888 80,540 55,811 - ----------------------------------------------------------------------------------------- Total operating revenues 419,205 401,949 1,250,211 1,162,047 - ----------------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses 204,846 192,155 598,611 559,955 Depreciation and amortization 84,300 81,610 260,293 242,288 - ----------------------------------------------------------------------------------------- Total operating expenses 289,146 273,765 858,904 802,243 - ----------------------------------------------------------------------------------------- OPERATING INCOME 130,059 128,184 391,307 359,804 - ----------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Interest expense (34,997) (41,904) (114,725) (126,785) Income from unconsolidated cellular entities 10,801 9,162 26,913 25,105 Minority interest (3,460) (3,619) (25,560) (10,264) Gain on sale or exchange of assets, net 1,201 - 51,160 49,859 Other income and expense 1,108 1,159 6,722 2,454 - ----------------------------------------------------------------------------------------- Total other income (expense) (25,347) (35,202) (55,490) (59,631) - ------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAX EXPENSE 104,712 92,982 335,817 300,173 Income tax expense 40,183 38,304 156,721 123,610 - ----------------------------------------------------------------------------------------- NET INCOME $ 64,529 54,678 179,096 176,563 ========================================================================================= BASIC EARNINGS PER SHARE* $ .46 .40 1.29 1.29 ========================================================================================= DILUTED EARNINGS PER SHARE* $ .46 .39 1.27 1.26 ========================================================================================= DIVIDENTS PER COMMON SHARE* $ .045 .043 .135 .130 ========================================================================================= AVERAGE BASIC SHARES OUTSTANDING* 139,085 137,207 138,668 136,857 ========================================================================================= AVERAGE DILUTED SHARES OUTSTANDING* 141,504 140,322 141,331 139,908 ========================================================================================= *Reflects March 1999 stock split. See Note 4. See accompanying notes to consolidated financial statements. </TABLE> CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, - ------------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> Net income $ 64,529 54,678 179,096 176,563 - ------------------------------------------------------------------------------------------ Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period, net of $1,230, ($340), $3,659 and $5,552 tax 2,284 (631) 6,796 10,310 Reclassification adjustment for gains included in net income, net of $3,625 and $11,027 tax - - (6,733) (20,478) - ------------------------------------------------------------------------------------------ Other comprehensive income, net of $1,230, ($340), $34, and ($5,475) tax 2,284 (631) 63 (10,168) - ------------------------------------------------------------------------------------------ Comprehensive income $ 66,813 54,047 179,159 166,395 ========================================================================================== See accompanying notes to consolidated financial statements. </TABLE> CENTURYTEL, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> September 30, December 31, 1999 1998 - -------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C><C> <C> ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 37,233 5,742 Accounts receivable, less allowance of $3,539 and $4,155 215,015 185,398 Materials and supplies, at average cost 27,858 23,709 Other 5,206 11,389 - -------------------------------------------------------------------------------------------- 285,312 226,238 - -------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,194,944 2,351,453 - -------------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $151,257 and $133,135 1,629,636 1,956,701 Other 431,264 401,063 - -------------------------------------------------------------------------------------------- 2,060,900 2,357,764 - -------------------------------------------------------------------------------------------- $ 4,541,156 4,935,455 ============================================================================================ LIABILITIES AND EQUITY - ---------------------- CURRENT LIABILITIES Current maturities of long-term debt $ 53,306 53,010 Accounts payable 107,594 87,627 Accrued expenses and other liabilities Salaries and benefits 40,597 36,900 Taxes 36,881 33,411 Interest 23,235 36,926 Other 22,889 24,249 Advance billings and customer deposits 31,938 32,721 - -------------------------------------------------------------------------------------------- 316,440 304,844 - -------------------------------------------------------------------------------------------- LONG-TERM DEBT 2,042,235 2,558,000 - -------------------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 468,241 541,129 - -------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, 350,000,000 shares authorized, 139,672,352 and 138,082,926 shares issued and outstanding 139,672 138,083 Paid-in capital 471,583 451,535 Accumulated other comprehensive income-unrealized holding gain on investments, net of taxes 7,280 7,217 Retained earnings 1,092,670 932,611 Unearned ESOP shares (4,940) (6,070) Preferred stock - non-redeemable 7,975 8,106 - -------------------------------------------------------------------------------------------- 1,714,240 1,531,482 - -------------------------------------------------------------------------------------------- $ 4,541,156 4,935,455 ============================================================================================ See accompanying notes to consolidated financial statements. </TABLE> CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> COMMON STOCK Balance at beginning of period $ 138,083 91,104 Issuance of common stock for acquisitions - 28 Conversion of convertible securities into common stock 330 169 Issuance of common stock through dividend reinvestment, incentive and benefit plans 1,259 623 - ------------------------------------------------------------------------------------------ Balance at end of period 139,672 91,924 - ------------------------------------------------------------------------------------------ PAID-IN CAPITAL Balance at beginning of period 451,535 469,586 Issuance of common stock for acquisitions - 1,059 Conversion of convertible securities into common stock 2,918 3,131 Issuance of common stock through dividend reinvestment, incentive and benefit plans 16,192 11,410 Amortization of unearned compensation and other 938 2,035 - ------------------------------------------------------------------------------------------ Balance at end of period 471,583 487,221 - ------------------------------------------------------------------------------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 7,217 11,893 Change in unrealized holding gain on investments, net of reclassification adjustment 63 (10,168) - ------------------------------------------------------------------------------------------ Balance at end of period 7,280 1,725 - ------------------------------------------------------------------------------------------ RETAINED EARNINGS Balance at beginning of period 932,611 728,033 Net income 179,096 176,563 Cash dividends declared Common stock - $.135 and $.130 per share, respectively* (18,733) (17,811) Preferred stock (304) (306) - ------------------------------------------------------------------------------------------ Balance at end of period 1,092,670 886,479 - ------------------------------------------------------------------------------------------ UNEARNED ESOP SHARES Balance at beginning of period (6,070) (8,450) Release of ESOP shares 1,130 1,630 - ------------------------------------------------------------------------------------------ Balance at end of period (4,940) (6,820) - ------------------------------------------------------------------------------------------- PREFERRED STOCK - NON-REDEEMABLE Balance at beginning of period 8,106 8,106 Conversion of preferred stock into common stock (131) - - ------------------------------------------------------------------------------------------ Balance at end of period 7,975 8,106 - ------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $1,714,240 1,468,635 ========================================================================================== *Reflects March 1999 stock split. See Note 4. See accompanying notes to consolidated financial statements. </TABLE> CENTURYTEL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $ 179,096 176,563 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 260,293 242,288 Deferred income taxes 6,557 19,041 Income from unconsolidated cellular entities (26,913) (25,105) Minority interest 25,560 10,264 Gain on sales of assets (51,160) (49,859) Changes in current assets and current liabilities: Accounts receivable (37,145) (15,370) Accounts payable 17,460 (6,184) Accrued taxes (60,659) (43,952) Other current assets and other current liabilities, net (6,953) 9,364 Changes in other noncurrent assets (26,922) (11,171) Changes in other noncurrent liabilities (5,941) 3,535 Other, net 17,229 7,763 - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 290,502 317,177 - ----------------------------------------------------------------------------------------- INVESTING ACTIVITIES Payments for property, plant and equipment (236,998) (204,627) Acquisitions, net of cash acquired (16,771) (5,028) Proceeds from sales of assets 453,916 132,307 Distributions from unconsolidated cellular entities 16,315 17,715 Purchase of life insurance investment, net (2,545) (2,557) Other, net (2,221) 2,337 - ----------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 211,696 (59,853) - ----------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt 64,551 772,894 Payments of long-term debt (532,535) (999,877) Payment upon settlement of hedge contracts - (40,237) Payment of deferred debt issuance costs - (6,625) Proceeds from issuance of common stock 15,055 12,110 Cash dividends (19,037) (18,117) Other, net 1,259 451 - ----------------------------------------------------------------------------------------- Net cash used in financing activities (470,707) (279,401) - ----------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 31,491 (22,077) Cash and cash equivalents at beginning of period 5,742 26,017 - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 37,233 3,940 ========================================================================================= Supplemental cash flow information: Income taxes paid $ 223,659 158,365 Interest paid $ 128,416 124,190 - ----------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. </TABLE> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) (1) Basis of Financial Reporting Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission; however, the Company believes the disclosures which are made are adequate to make the information presented not misleading. The consolidated financial statements and footnotes included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Certain 1998 amounts have been reclassified to be consistent with the Company's 1999 presentation, including the reclassification of the Company's personal communication services operations from other operations to the wireless segment. The unaudited financial information for the three months and nine months ended September 30, 1999 and 1998 has not been audited by independent public accountants; however, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 1999 and the results of operations for the applicable three-month and nine-month periods have been included therein. The results of operations for the first nine months of the year are not necessarily indicative of the results of operations which might be expected for the entire year. (2) Net Property, Plant and Equipment Net property, plant and equipment is composed of the following: <TABLE> <CAPTION> September 30, December 31, - ------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------- (Dollars in thousands) <S> <C><C> <C> Telephone, at original cost $ 3,366,882 3,660,252 Accumulated depreciation (1,558,418) (1,661,315) - ------------------------------------------------------------------------- 1,808,464 1,998,937 - ------------------------------------------------------------------------- Wireless, at cost 458,197 436,897 Accumulated depreciation (203,469) (178,969) - ------------------------------------------------------------------------- 254,728 257,928 - ------------------------------------------------------------------------- Other operations, at cost 238,418 192,509 Accumulated depreciation (106,666) (97,921) - ------------------------------------------------------------------------- 131,752 94,588 - ------------------------------------------------------------------------- $ 2,194,944 2,351,453 ========================================================================= </TABLE> (3) Earnings from Unconsolidated Cellular Entities The following summarizes the unaudited combined results of operations of the cellular entities in which the Company's investments (as of September 30, 1999 and 1998) were accounted for by the equity method: <TABLE> <CAPTION> Nine months ended September 30, - -------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Results of operations Revenues $ 995,973 937,670 Operating income $ 310,332 334,405 Net income $ 309,141 336,393 - -------------------------------------------------------------------------- </TABLE> (4) Stock Split On February 23, 1999, the Company's Board of Directors declared a three-for-two common stock split effected as a 50% stock dividend distributed on March 31, 1999. Shares outstanding and per share data for 1998 have been restated to reflect this stock split. (5) Sales of Assets In the first quarter of 1999 the Company recorded a pre-tax gain aggregating $10.4 million ($6.7 million after-tax; $.04 per diluted share) due to the sale of its remaining common shares of MCIWorldCom, Inc. In May 1999, the Company sold the stock of substantially all of its Alaska-based operations to Alaska Communications Systems Holdings, Inc. The Company received approximately $300 million in after-tax cash as a result of the transaction. No gain or loss was recorded upon the disposition of these properties. In June 1999, the Company sold the assets of its cellular operations in Brownsville and McAllen, Texas to Western Wireless Corporation for approximately $96 million cash. In connection therewith, the Company recorded a pre-tax gain of approximately $39.6 million, and an after-tax loss of approximately $7.8 million ($.05 per diluted share.) (6) Pending Acquisitions In June 1999, the Company signed a definitive asset purchase agreement with affiliates of GTE Corporation ("GTE") to purchase GTE's telephone access lines (which numbered approximately 214,269 at December 31, 1998) 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 116,000 at December 31, 1998) 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 61,600 as of December 31, 1998) 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 64,800 as of December 31, 1998) and related local exchange assets in Wisconsin from a GTE affiliate for approximately $195 million cash, subject to certain adjustments. All of these GTE transactions are expected to close mid-year 2000, pending regulatory approvals and certain other closing conditions. (7) Business Segments The Company has two separately reportable business segments: telephone and wireless. The operating income of these segments is reviewed by the chief operating decision maker to assess performance and make business decisions. Other operations include, but are not limited to, the Company's non-regulated long distance operations, call center operations and security monitoring operations. <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, - ----------------------------------------------------------------------------------------- 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> Operating revenues Telephone segment $ 277,352 275,397 849,426 800,532 Wireless segment 111,652 106,664 320,245 305,704 Other operations 30,201 19,888 80,540 55,811 - ----------------------------------------------------------------------------------------- $ 419,205 401,949 1,250,211 1,162,047 ========================================================================================= Operating income Telephone segment $ 81,852 88,210 260,916 245,007 Wireless segment 40,705 36,263 111,797 103,131 Other operations 7,502 3,711 18,594 11,666 - ----------------------------------------------------------------------------------------- $ 130,059 128,184 391,307 359,804 ========================================================================================= Operating income $ 130,059 128,184 391,307 359,804 Interest expense (34,997) (41,904) (114,725) (126,785) Income from unconsolidated cellular entities 10,801 9,162 26,913 25,105 Minority interest (3,460) (3,619) (25,560) (10,264) Gain on sale or exchange of assets, net 1,201 - 51,160 49,859 Other income and expense 1,108 1,159 6,722 2,454 - ----------------------------------------------------------------------------------------- Income before income tax expense $ 104,712 92,982 335,817 300,173 ========================================================================================= </TABLE> <TABLE> <CAPTION> September 30, December 31, 1999 1998 - --------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Total assets Telephone segment $ 3,215,593 3,674,148 Wireless segment 1,175,864 1,114,955 Other operations 149,699 146,352 - --------------------------------------------------------------------------- Total assets $ 4,541,156 4,935,455 =========================================================================== </TABLE> CENTURYTEL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included herein should be read in conjunction with MD&A and the other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of operations for the three months and nine months ended September 30, 1999 are not necessarily indicative of the results of operations which might be expected for the entire year. CenturyTel, Inc. (the "Company"), is a regional diversified communications company that is primarily engaged in providing local telephone services and cellular telephone communications services. At September 30, 1999, the Company's local exchange telephone subsidiaries operated over 1.26 million telephone access lines primarily in rural, suburban and small urban areas in 20 states, and the Company's majority-owned and operated cellular entities had more than 650,000 cellular subscribers. On December 1, 1998, the Company acquired from affiliates of Ameritech Corporation ("Ameritech") telephone operations serving 86,000 access lines in northern and central Wisconsin and the related telephone directories for approximately $221 million cash. The operations of the former Ameritech properties are included in the Company's results of operations beginning December 1, 1998. On May 14, 1999, the Company sold substantially all of its Alaska-based operations serving approximately 134,900 telephone access lines and 3,000 cellular subscribers. On June 1, 1999, the Company sold the assets of its Brownsville and McAllen, Texas cellular operations serving approximately 7,500 cellular subscribers. The operations of these disposed properties are included in the Company's results of operations up to the respective dates of disposition. In addition to historical information, management's discussion and analysis includes certain forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such forward-looking statements are subject to uncertainties that could cause the Company's actual results to differ materially from such statements. Such uncertainties include but are not limited to: the effects of ongoing deregulation in the telecommunications industry; the effects of greater than anticipated competition in the Company's markets; possible changes in the demand for the Company's products and services; the Company's ability to successfully introduce new offerings on a timely and cost-effective basis; the risks inherent in rapid technological change; the Company's ability to 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; the success and expense of the remediation efforts of the Company and its vendors in achieving year 2000 compliance; and the effects of more general factors such as changes in general market or economic conditions or in legislation, regulation or public policy. These and other uncertainties related to the business are described in greater detail in Item 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any of its forward-looking statements for any reason. RESULTS OF OPERATIONS Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Net income for the third quarter of 1999 was $64.5 million compared to $54.7 million during the third quarter of 1998. Diluted earnings per share increased to $.46 during the three months ended September 30, 1999 from $.39 during the three months ended September 30, 1998, a 17.9% increase. <TABLE> <CAPTION> Three months ended September 30, - ---------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C><C> <C> Operating income Telephone $ 81,852 88,210 Wireless 40,705 36,263 Other 7,502 3,711 - ---------------------------------------------------------------------------- 130,059 128,184 Interest expense (34,997) (41,904) Income from unconsolidated cellular entities 10,801 9,162 Minority interest (3,460) (3,619) Gain on sale or exchange of assets, net 1,201 - Other income and expense 1,108 1,159 Income tax expense (40,183) (38,304) - ---------------------------------------------------------------------------- Net income $ 64,529 54,678 ============================================================================ Basic earnings per share $ .46 .40 ============================================================================ Diluted earnings per share $ .46 .39 ============================================================================ Average basic shares outstanding 139,085 137,207 ============================================================================ Average diluted shares outstanding 141,504 140,322 ============================================================================ </TABLE> Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the three months ended September 30, 1999 and 1998 were as follows: <TABLE> <CAPTION> Three months ended September 30, - ------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------- <S> <C> <C> Operating revenues Telephone operations 66.2% 68.5 Wireless operations 26.6% 26.5 Other operations 7.2% 5.0 Operating income Telephone operations 62.9% 68.8 Wireless operations 31.3% 28.3 Other operations 5.8% 2.9 - ------------------------------------------------------------------------- </TABLE> Telephone Operations <TABLE> <CAPTION> Three months ended September 30, - ----------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Local service $ 86,010 84,082 Network access 159,682 159,422 Other 31,660 31,893 - ----------------------------------------------------------------------------- 277,352 275,397 - ----------------------------------------------------------------------------- Operating expenses Plant operations 66,446 62,402 Customer operations 22,073 22,107 Corporate and other 40,584 37,436 Depreciation and amortization 66,397 65,242 - ----------------------------------------------------------------------------- 195,500 187,187 - ----------------------------------------------------------------------------- Operating income $ 81,852 88,210 ============================================================================= </TABLE> Telephone operating income decreased $6.4 million (7.2%) due to an increase in operating expenses of $8.3 million (4.4%) which was partially offset by an increase in operating revenues of $2.0 million (.7%). Of the $2.0 million increase in operating revenues, $11.5 million was attributable to the properties acquired from Ameritech, which was more than offset by a $31.7 million decrease attributable to the sale of the Alaska based operations. The remaining $22.2 million increase in revenues was partially due to a $5.3 million increase in local network service revenues primarily due to an increase in the number of customer access lines; a $4.4 million increase in the partial recovery of increased operating expenses through revenue sharing arrangements in which the Company participates with other telephone companies; a $3.0 million increase related to the Company's sales, leases, installations, maintenance and repair of customer premise telecommunications equipment and wiring ("CPE services"); a $3.7 million increase in revenues due to increased minutes of use; and a $2.6 million increase in amounts received from the federal Universal Service Fund. Plant operations expenses increased $4.0 million (6.5%) of which $3.4 million was attributable to the properties acquired from Ameritech, which was more than offset by a $9.5 million decrease due to the sale of the Alaska properties. The remaining $10.1 million increase was primarily due to a $4.0 million increase in access expenses primarily due to changes in revenue settlement methods of certain telephone subsidiaries in a limited number of states; a $3.1 million increase in salaries and benefits; and a $1.3 million increase in repair and maintenance expenses. Customer operations expenses decreased $34,000 of which $3.3 million was due to the sale of the Alaska properties. Such decrease was substantially offset by a $1.1 million increase in expenses attributable to the properties acquired from Ameritech and a $1.0 million increase in marketing expenses. Corporate and other expenses increased $3.1 million (8.4%) primarily due to a $3.1 million increase in contract labor expenses attributable to readying the Company's systems to be year 2000 compliant; a $1.5 million increase in salaries and benefits; a $1.2 million increase attributable to the properties acquired from Ameritech; a $1.0 million increase in expenses associated with the provision of CPE services; and a $957,000 increase in the provision for doubtful accounts. Such increases were partially offset by a $4.9 million decrease due to the sale of the Alaska properties. Depreciation and amortization increased $1.2 million (1.8%), of which $3.8 million was attributable to the properties acquired from Ameritech, which was more than offset by a $7.1 million decrease due to the sale of the Alaska properties. The remainder of the increase was primarily due to higher levels of plant in service. Wireless Operations and Income From Unconsolidated Cellular Entities <TABLE> <CAPTION> Three months ended September 30, - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income - wireless operations $ 40,705 36,263 Minority interest (3,449) (3,619) Income from unconsolidated cellular entities 10,801 9,162 - -------------------------------------------------------------------------------- $ 48,057 41,806 ================================================================================ </TABLE> 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." The Company's share of earnings from the cellular entities in which it has less than a majority interest is accounted for using the equity method and is reflected in the Company's Consolidated Statements of Income as "Income from unconsolidated cellular entities." See Income from Unconsolidated Cellular Entities for additional information. Wireless Operations <TABLE> <CAPTION> Three months ended September 30, - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Service revenues $ 109,318 104,529 Equipment sales 2,334 2,135 - ------------------------------------------------------------------------------- 111,652 106,664 - ------------------------------------------------------------------------------- Operating expenses Cost of equipment sold 4,200 3,784 System operations 13,864 15,359 General, administrative and customer service 22,128 22,115 Sales and marketing 13,588 13,585 Depreciation and amortization 17,167 15,558 - ------------------------------------------------------------------------------- 70,947 70,401 - ------------------------------------------------------------------------------- Operating income $ 40,705 36,263 =============================================================================== </TABLE> Wireless operating income increased $4.4 million (12.2%) to $40.7 million in the third quarter of 1999 from $36.3 million in the third quarter of 1998. Wireless operating revenues increased $5.0 million (4.7%) while operating expenses increased $546,000 (.8%). The $4.8 million increase in service revenues was primarily due to a $4.9 million increase in local service revenues and a $3.5 million increase in roaming usage, both of which are primarily attributable to a growth in the number of customers and increased minutes of use, partially offset by reduced rates. Such increases were partially offset by a $3.6 million decrease due to the Company's sale of its Texas and Alaska cellular properties. The following table illustrates the growth in the Company's wireless customer base in its majority-owned markets: <TABLE> <CAPTION> Three months ended September 30, - --------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------- <S> <C> <C> Customers at beginning of period 641,440 583,929 Gross units added internally 47,309 48,718 Disconnects 37,850 41,002 Net units added 9,459 7,716 Customers at end of period 650,899 591,645 - --------------------------------------------------------------------------- </TABLE> The average monthly service revenue per customer declined to $57 during the third quarter of 1999 from $59 during the third quarter of 1998 due to pricing rate reductions and the continued trend that a higher percentage of new subscribers tend to be lower usage customers. A majority of the Company's net unit additions for third quarter 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 revenue per contract customer. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers (including prepaid customers) are activated and (ii) as competitive pressures from current and future wireless communications providers intensify. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, 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 by promoting the availability of certain enhanced services and by improving the quality of its service through the construction of additional cell sites and other enhancements to its system. System operations expenses decreased $1.5 million (9.7%) in the third quarter of 1999 primarily due to a $1.2 million decrease in toll expenses; a $943,000 decrease due to the sale of the Alaska and Texas properties; and an $853,000 decrease in the amounts paid to other carriers for service provided to the Company's customers who roam in the other carriers' service areas. Such decreases were partially offset by a $1.4 million increase associated with operating a greater number of cell sites. General, administrative and customer service expenses increased $13,000. A $3.7 million decrease in the provision for doubtful accounts was offset by a $1.0 million increase in contract labor expense attributable to readying the Company's system to be year 2000 compliant and a $2.5 million increase in general office expenses. The Company's average monthly churn rate (the percentage of customers that terminate service) was 1.9% for the third quarter of 1999 and 2.3% for the third quarter of 1998. Depreciation and amortization increased $1.6 million (10.3%) primarily due to an increase in amortization of intangibles. Other Operations <TABLE> <CAPTION> Three months ended September 30, - ------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> Operating revenues Long distance $ 22,602 13,263 Call center 3,352 2,754 Other 4,247 3,871 - ------------------------------------------------------------------------------ 30,201 19,888 - ------------------------------------------------------------------------------ Operating expenses Cost of sales and operating expenses 21,963 15,367 Depreciation and amortization 736 810 - ------------------------------------------------------------------------------ 22,699 16,177 - ------------------------------------------------------------------------------ Operating income $ 7,502 3,711 ============================================================================== </TABLE> Other operations include the results of operations of subsidiaries of the Company which are not included in the telephone or wireless segments, including, but not limited to, the Company's non-regulated long distance and call center operations. The $9.3 million increase in long distance revenues was primarily attributable to the growth in the number of customers. The average number of long distance customers during the third quarter of 1999 and 1998 was 270,700 and 207,900, respectively. Operating expenses increased $6.5 million primarily due to a $5.4 million increase in expenses of the Company's long distance operations primarily due to increased minutes of use due to an increase in the number of customers. 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, fiber network and competitive local exchange businesses. Interest Expense Interest expense decreased $6.9 million in the third quarter of 1999 compared to the third quarter of 1998 primarily due to a reduction in outstanding indebtedness. Income from Unconsolidated Cellular Entities Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $1.6 million (17.9%) due to increased earnings from unconsolidated entities. Income Tax Expense Income tax expense increased $1.9 million in the third quarter of 1999 compared to the third quarter of 1998. The effective income tax rate was 38.4% and 41.2% in the three months ended September 30, 1999 and 1998, respectively. Such decrease in the effective income tax rate was primarily due to two factors. First, the Company's 1999 sale of its Alaska and Texas 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, in the third quarter of 1999 the Company recorded a $2.5 million state tax benefit relating to a loss carryback that will be utilized to recoup taxes paid in a previous year. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Net income (and diluted earnings per share) for the first nine months of 1999 and 1998 was $179.1 million ($1.27) and $176.6 million ($1.26), respectively. Net income (excluding the after-tax effect of asset sales) for the first nine months of 1999 was $179.4 million compared to $146.0 million during the first nine months of 1998. Diluted earnings per share (excluding the after-tax effect of asset sales) increased to $1.27 during the nine months ended September 30, 1999 from $1.05 during the nine months ended September 30, 1998, a 21.0% increase. <TABLE> <CAPTION> Nine months ended September 30, - ---------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) <S> <C> <C> Operating income Telephone $ 260,916 245,007 Wireless 111,797 103,131 Other 18,594 11,666 - ---------------------------------------------------------------------------- 391,307 359,804 Interest expense (114,725) (126,785) Income from unconsolidated cellular entities 26,913 25,105 Minority interest (25,560) (10,264) Gain on sale or exchange of assets, net 51,160 49,859 Other income and expense 6,722 2,454 Income tax expense (156,721) (123,610) - ---------------------------------------------------------------------------- Net income $ 179,096 176,563 ============================================================================ Basic earnings per share $ 1.29 1.29 ============================================================================ Diluted earnings per share $ 1.27 1.26 ============================================================================ Average basic shares outstanding 138,668 136,857 ============================================================================ Average diluted shares outstanding 141,331 139,908 ============================================================================ </TABLE> Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the nine months ended September 30, 1999 and 1998 were as follows: <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------- <S> <C> <C> Operating revenues Telephone operations 67.9% 68.9 Wireless operations 25.6% 26.3 Other operations 6.5% 4.8 Operating income Telephone operations 66.7% 68.1 Wireless operations 28.6% 28.7 Other operations 4.7% 3.2 - ------------------------------------------------------------------------- </TABLE> Telephone Operations <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Local service $ 266,119 243,664 Network access 482,626 462,576 Other 100,681 94,292 - ------------------------------------------------------------------------- 849,426 800,532 - ------------------------------------------------------------------------- Operating expenses Plant operations 196,960 176,609 Customer operations 67,968 67,956 Corporate and other 116,419 116,444 Depreciation and amortization 207,163 194,516 - ------------------------------------------------------------------------- 588,510 555,525 - ------------------------------------------------------------------------- Operating income $ 260,916 245,007 ========================================================================= </TABLE> Telephone operating income increased $15.9 million (6.5%) due to an increase in operating revenues of $48.9 million (6.1%) which more than offset an increase in operating expenses of $33.0 million (5.9%). Of the $48.9 million increase in operating revenues, $35.3 million was attributable to the properties acquired from Ameritech, which was more than offset by a $42.7 million decrease due to the sale of the Alaska properties. The remaining $56.3 million increase in revenues was partially due to a $14.9 million increase in local network service revenues primarily due to an increase in the number of customer access lines; a $7.4 million increase in the partial recovery of increased operating expenses through revenue sharing arrangements in which the Company participates with other telephone companies; a $6.3 million increase in amounts received from the federal Universal Service Fund; a $5.9 million increase in revenues due to increased minutes of use; a $5.1 million increase in revenues associated with the Company's provision of CPE services; a $6.7 million increase in revenues resulting from revisions of revenue settlement agreements; and a $3.9 million increase in revenues from the provision of Internet access. Plant operations expenses increased $20.4 million (11.5%) of which $8.6 million was attributable to the properties acquired from Ameritech, which was more than offset by a $13.1 million decrease due to the sale of the Company's Alaska properties. The remaining $24.9 million increase was partially due to a $6.0 million increase in repair and maintenance expenses; a $4.9 million increase in access expenses primarily due to changes in revenue settlement methods of certain telephone subsidiaries in a limited number of states; a $4.7 million increase in network operations expenses; and a $2.5 million increase in salaries and benefits. Customer operations expenses increased $12,000 of which $3.0 million was attributable to the properties acquired from Ameritech, which was more than offset by a $5.1 million decrease due to the sale of the Alaska properties. The remaining $2.1 million increase was primarily due to a $2.5 million increase in marketing expenses. Corporate and other expenses decreased $25,000 of which $7.6 million was due to the sale of the Alaska properties, partially offset by a $3.5 million increase attributable to the properties acquired from Ameritech. The remaining $4.1 million increase was primarily due to a $6.8 million increase in contract labor expenses associated with readying the Company's systems to be year 2000 compliant which was partially offset by a $2.7 million decrease in salaries and benefits. Depreciation and amortization increased $12.6 million (6.5%), of which $11.6 million was attributable to the properties acquired from Ameritech and $11.4 million was due to higher levels of plant in service and nonrecurring depreciation charges which have been approved for certain subsidiaries. Such increases were partially offset by a $10.5 million reduction in depreciation and amortization expenses resulting from the sale of the Company's Alaska properties. Wireless Operations and Income From Unconsolidated Cellular Entities <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating income - wireless operations $ 111,797 103,131 Minority interest, exclusive of the effect of asset sales (10,611) (10,264) Income from unconsolidated cellular entities 26,913 25,105 - ------------------------------------------------------------------------------- $ 128,099 117,972 =============================================================================== </TABLE> 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 as "Income from unconsolidated cellular entities." See Income from Unconsolidated Cellular Entities for additional information. Wireless Operations <TABLE> <CAPTION> Nine months ended September 30, - ---------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> Operating revenues Service revenues $ 312,873 299,396 Equipment sales 7,372 6,308 - ---------------------------------------------------------------------------- 320,245 305,704 - ---------------------------------------------------------------------------- Operating expenses Cost of equipment sold 13,848 11,211 System operations 42,394 44,285 General, administrative and customer service 60,113 60,785 Sales and marketing 41,130 41,018 Depreciation and amortization 50,963 45,274 - ---------------------------------------------------------------------------- 208,448 202,573 - ---------------------------------------------------------------------------- Operating income $ 111,797 103,131 ============================================================================ </TABLE> Wireless operating income increased $8.7 million (8.4%) to $111.8 million in the first nine months of 1999 from $103.1 million in the first nine months of 1998. Wireless operating revenues increased $14.5 million (4.8%) while operating expenses increased $5.9 million (2.9%). The $13.5 million increase in service revenues was primarily due to an $11.3 million increase in roaming usage and a $2.2 million increase in local service revenues, both of which are primarily attributable to a growth in the number of customers and increased minutes of use, partially offset by reduced rates. The following table illustrates the growth in the Company's wireless customer base in its majority owned markets: <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------- <S> <C> <C> Customers at beginning of period 624,290 569,983 Gross units added internally 146,754 140,407 Disconnects 109,582 118,745 Net units added 37,172 21,662 Effect of dispositions (10,563) - Customers at end of period 650,899 591,645 - ------------------------------------------------------------------------- </TABLE> The average monthly service revenue per customer declined to $54 during the first nine months of 1999 from $57 during the first nine months of 1998 due to pricing rate reductions and the continued trend that a higher percentage of new subscribers 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 revenue per contract customer. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers (including prepaid customers) are activated and (ii) as competitive pressures from current and future wireless communications providers intensify. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, 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 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. Cost of equipment sold increased $2.6 million (23.5%) primarily due to an increase in the number of phones sold. System operations expenses decreased $1.9 million (4.3%) in the first nine months of 1999 primarily due to a $2.8 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; a $1.4 million decrease in toll costs; and a $1.3 million decrease in expenses attributable to operations sold in 1999. Such decreases were partially offset by a $3.9 million increase in expenses associated with operating a greater number of cell sites. General, administrative and customer service expenses decreased $672,000 (1.1%), of which $8.3 million was attributable to a decrease in the provision for doubtful accounts. Such decrease was substantially offset by a $3.5 million increase in customer service expenses; a $1.9 million increase in contract labor expenses attributable to readying the Company's systems to be year 2000 compliant; and a $3.3 million increase in general office expenses. The Company's average monthly churn rate (the percentage of customers that terminate service) was 1.9% for the first nine months of 1999 and 2.3% for the first nine months of 1998. Depreciation and amortization increased $5.7 million (12.6%), of which $4.0 million was due to an increase in amortization of intangibles and $1.8 million was attributable to a higher level of plant in service. Other Operations <TABLE> <CAPTION> Nine months ended September 30, - ------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------ (Dollars in thousands) <S> <C> <C> Operating revenues Long distance $ 59,043 36,865 Call center 8,899 7,702 Other 12,598 11,244 - ------------------------------------------------------------------------------ 80,540 55,811 - ------------------------------------------------------------------------------ Operating expenses Cost of sales and operating expenses 59,779 41,647 Depreciation and amortization 2,167 2,498 - ------------------------------------------------------------------------------ 61,946 44,145 - ------------------------------------------------------------------------------ Operating income $ 18,594 11,666 ============================================================================== </TABLE> Other operations include the results of operations of subsidiaries of the Company which are not included in the telephone or wireless segments, including, but not limited to, the Company's non-regulated long distance and call center operations. The $22.2 million increase in long distance revenues was attributable to the growth in the number of customers. The average number of long distance customers during the first nine months of 1999 and 1998 was 252,700 and 192,700, respectively. Operating expenses increased $17.8 million (40.3%) primarily due to (i) an increase of $12.2 million in expenses of the Company's long distance operations primarily due to increased minutes of use due to an increase in the number of customers, (ii) a $3.0 million increase associated with the Company's call center operations and (iii) a $2.7 million increase in expenses due to expansion of the Company's security monitoring and fiber network businesses. 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, fiber network and competitive local exchange businesses. Interest Expense Interest expense decreased $12.1 million in the first nine months of 1999 compared to the first nine months of 1998 primarily due to a reduction in outstanding indebtedness. Income from Unconsolidated Cellular Entities Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $1.8 million (7.2%) due to increased earnings from unconsolidated entities. Minority Interest Minority interest is the expense recorded by the Company to reflect the minority interest owners' share of the earnings or loss of the Company's majority-owned and operated cellular entities and majority-owned subsidiaries. Minority interest increased $15.3 million during the first nine months of 1999 compared to the same period in 1998 primarily due to the minority partners' share of the gain on sale of assets of the Brownsville and McAllen, Texas cellular properties. Gain on Sale or Exchange of Assets, Net In the first nine months of 1999, the Company recorded pre-tax gains aggregating $51.2 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. Of the remaining $40.8 million, $39.6 million of the pre-tax gains ($7.8 million loss after-tax; ($.05) per diluted share) was due to the sale of the Company's Brownsville and McAllen, Texas cellular properties. For additional information, see Note 5 of Notes to Consolidated Financial Statements and Minority Interest. In the first nine months of 1998, the Company recorded pre-tax gains aggregating $49.9 million ($30.5 million after-tax; $.21 per diluted share) primarily due to the conversion of its investment in the common stock of Brooks Fiber Networks, Inc. into common stock of WorldCom, Inc., the subsequent sale of 750,000 shares of WorldCom, Inc. common stock, and the sale of minority interests in two non-strategic cellular entities. Other Income and Expense Other income and expense increased $4.3 million in the first nine months of 1999 compared to the first nine months of 1998, substantially all of which relates to favorable non-recurring items recorded in 1999. Income Tax Expense Income tax expense increased $33.1 million in the first nine months of 1999 compared to the first nine months of 1998. Exclusive of the effects of income tax expense on asset sales, the effective income tax rate was 40.1% and 41.7% for the nine months ended September 30, 1999 and 1998, respectively. Such decrease in the effective income tax rate was primarily due to two factors. First, the Company's 1999 sale of its Alaska and Texas 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, in the third quarter of 1999 the Company recorded a $2.5 million state tax benefit relating to a loss carryback that will be utilized to recoup taxes paid in a previous year. LIQUIDITY AND CAPITAL RESOURCES Excluding cash used for acquisitions, the Company relies on cash provided by operations to provide a substantial portion of its cash needs. The Company's operations have historically provided a stable source of cash flow which has helped the Company continue its long-term program of capital improvements. Net cash provided by operating activities was $290.5 million during the first nine months of 1999 compared to $317.2 million during the first nine months of 1998. The Company's accompanying consolidated statements of cash flows identify major differences between net income and net cash provided by operating activities for each of these periods. For additional information relating to the telephone operations, wireless operations, and other operations of the Company, see Results of Operations. Net cash provided by (used in) investing activities was $211.7 million and ($59.9) million for the nine months ended September 30, 1999 and 1998, respectively. Proceeds from the sale of assets were $453.9 million in the first nine months of 1999 compared to $132.3 million in the first nine months of 1998. Payments for property, plant and equipment were $32.4 million more in the first nine months of 1999 than in the comparable period during 1998. Capital expenditures for the nine months ended September 30, 1999 were $145.2 million for telephone, $44.3 million for wireless and $47.5 million for other operations. Net cash used in financing activities was $470.7 million during the first nine months of 1999 compared to $279.4 million during the first nine months of 1998. Net payments of long-term debt were $241.0 million more during the first nine months of 1999 compared to the first nine months of 1998 primarily due to utilization of proceeds received from the sales of assets. During the first nine months of 1998, the Company issued an aggregate of $765 million of senior notes and debentures. The net proceeds of approximately $758 million were used to reduce the bank indebtedness incurred in connection with the acquisition of Pacific Telecom, Inc. In addition, the Company paid approximately $40 million in 1998 to settle numerous interest rate hedge contracts that had been entered into in anticipation of these debt issuances. Revised budgeted capital expenditures for 1999 total $215 million for telephone operations, $70 million for wireless operations and $60 million for corporate and other operations. Anticipated capital expenditures for 2000, excluding properties to be acquired, are expected to be between $400-$425 million. As of September 30, 1999, Century'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 $568.1 million of undrawn committed bank lines of credit. 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 214,269 at December 31, 1998) 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 joint venture company which has entered into a definitive asset purchase agreement with affiliates of GTE to purchase telephone access lines (which numbered approximately 116,000 at December 31, 1998) 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 61,600 as of December 31, 1998) 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 64,800 as of December 31, 1998) 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. As a result of the Company's announcement of these acquisitions, Moody's placed its ratings of the Company's debt under review for possible downgrade and Standard & Poor's placed its ratings of the Company's debt on CreditWatch with negative implications. OTHER MATTERS Accounting for the Effects of Regulation The Company currently accounts for its regulated telephone operations in accordance with the provisions of Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation." While the ongoing applicability of SFAS 71 to the Company's telephone operations is being monitored due to the changing regulatory, competitive and legislative environments, the Company believes that SFAS 71 still applies. However, it is possible that changes in regulation or legislation or anticipated changes in competition or in the demand for regulated services or products could result in the Company's telephone operations not being subject to SFAS 71 in the near future. In that event, implementation of Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the Discontinuance of Application of FASB Statement No. 71," would require the write-off of previously established regulatory assets and liabilities, along with an adjustment of certain accumulated depreciation accounts to reflect the difference between recorded depreciation and the amount of depreciation that would have been recorded had the Company's telephone operations not been subject to rate regulation. Such discontinuance of the application of SFAS 71 would result in a material, noncash charge against earnings which would be reported as an extraordinary item. While the effect of implementing SFAS 101 cannot be precisely estimated at this time, management believes that the noncash, after-tax, extraordinary charge would be between $320 million and $370 million. Regulatory Issues On October 21, 1999, the Federal Communications Commission ("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 support. Because all of the Company's local exchange carriers ("LECs") have been designated as a rural carrier, this order will not directly impact the Company. However, this order may establish the benchmark for the treatment of universal support funding for rural carriers. The Company's LECs will continue to receive payments under the existing federal support mechanism for rural carriers until the FCC adopts funding support mechanisms based on forward-looking costs, which it is required to do, but no earlier than January 2001. Year 2000 Readiness Disclosure The Year 2000 issue concerns the inability of computer systems and certain other equipment to properly recognize and process data that uses two digits rather than four to designate particular years. The Company has implemented a Year 2000 Project Plan ("the Plan") to assess whether its systems that process date sensitive information will perform satisfactorily leading up to and beyond January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000, Year 2000-related problems with critical systems, the failure of which could reasonably be expected to have a material adverse effect on the Company's operations. The Plan was designed to (i) identify critical system elements that require date code remediation, (ii) remediate all such systems, and (iii) selectively test the remediated systems. All phases of the Plan have been materially completed as of early fourth quarter 1999. As discussed further below, the Company believes the Plan has sufficiently identified, remediated and selectively tested critical Company-owned systems. However, because the Company relies upon third parties for the delivery of critical services and because not all Company-owned remediated systems have been or will be tested under the Plan, there can be no assurance that all critical systems will properly function subsequent to December 31, 1999. The Company will continue its Year 2000 monitoring efforts throughout the remainder of 1999. The identification phase of the Plan identified Year 2000 issues in the following critical Company-owned systems: (i) switching and transmission hardware and software used by the Company to route and deliver telephone calls; (ii) network support systems, including customer service systems; and (iii) billing and collection systems used by the Company to invoice and process most of its customer payments. In addition, the Company (i) receives critical services from providers of utilities and other services to facilities that house employees and switching, transmission and other equipment and (ii) is dependent upon outside vendors for, among other things, the provision of critical network components and cellular billing services. The Company is also critically reliant upon the systems of other telecommunication carriers with which the Company's systems interconnect for the routing and delivery of telephone calls. The Company has also identified potential Year 2000-related liability with respect to telephone equipment manufactured by unaffiliated parties that the Company has sold or leased to its customers ("Customer Premises Equipment" or "CPE"). Based on the critical systems issues identified by the Plan, the Company has undertaken the following steps with respect to Company-owned systems, third-party vendors, other telecommunications carriers, and CPE customers: o The Company has remediated all identified Year 2000 deficiencies in Company-owned switching, transmission, billing and collection and other critical systems through the revision or replacement of current system components. Selective testing and verification of remediated Company-owned systems has been completed. Due to the large number of system components requiring remediation, the Company has not and will not test every remediated system, but will rely upon the results of selective testing to determine the effectiveness of remediation efforts. Testing results were not verified by third parties. The Company believes, however, that the remediation and testing undertaken under the Plan has sufficiently addressed Year 2000 deficiencies in Company-owned critical systems. o With respect to critical services provided by utilities and other third parties, the Company contacted all such suppliers during 1998. Thus far, a majority of those suppliers contacted have responded that their systems and service delivery mechanisms are Year 2000 compliant or can be made so through currently available modifications. The Company plans to continue monitoring all third-party remediation efforts and to make contingency plans for the delivery of such services as necessary. o The Company has received certain assurances from industry trade data and governmental reports regarding the year 2000 readiness of major telecommunications companies with which the Company's switching systems interconnect. During 1999, the Company made specific inquiries with these and other telecommunication carriers to determine their compliance status. These carriers have informed the Company that they believe they will be Year 2000 ready by year's-end, although there can be no assurance to this effect. o Finally, the Company has obtained Year 2000 compliance information from CPE manufacturers and has provided and will continue to provide this information to the Company's CPE customers through year-end 1999. The Company continues to work with its customers to identify Year 2000 problems in CPE. However, there can be no assurance that these efforts will be successful in preventing or reducing Year 2000-related claims. While the Company currently believes that it has remediated and selectively tested Company-owned critical systems sufficiently to minimize any detrimental effect on its operations as a result of Year 2000 problems, there can be no assurance to this effect. Failure by the Company to effectively remediate its systems, or the failure of critical vendors and suppliers and other telecommunications carriers to remediate affected systems, could have a material adverse impact on the Company's business, financial condition, results of operations and prospects. Because the impact of Year 2000 issues on the Company is materially dependent on the mitigation efforts of parties outside the Company's control, the Company cannot assess with certainty the magnitude of any such potential adverse impact. However, the Company believes that the most reasonably likely worst case scenario of the failure by the Company, its suppliers or other telecommunications carriers with which the Company interconnects to resolve Year 2000 issues would be an inability by the Company (i) to provide telecommunications services to the Company's customers, (ii) to route and deliver telephone calls originating from or terminating with other telecommunications carriers, (iii) to timely and accurately process service requests and (iv) to timely and accurately bill its customers. In addition to lost earnings, these failures could also result in loss of customers due to service interruptions and billing errors, substantial claims by customers and increased expenses associated with stabilizing operations and executing mitigation plans. Contingency planning to maintain and restore service in the event of natural disasters, power failures and systems-related problems is a routine part of the Company's operations. The Company believes that such contingency plans will assist the Company in responding to the failure by outside service providers to successfully address Year 2000 issues. In addition, in connection with implementation of the Plan the Company has identified alternate vendors and service providers and manual alternatives to system operations. These Year 2000-specific contingency plans are materially complete, but their review and development will continue throughout 1999. In connection with implementing the Plan, the Company incurred costs of $4.2 million during 1998 (none of which was related to hardware costs or other capital items) and $23.8 million during the first nine months of 1999 ($16.6 million of which was related to hardware costs and other capital items). The Company has approximately $6.9 million remaining in its Plan budget (of which $4.5 million relates to hardware costs) which will be used to fund any additional Year 2000 projects identified during the remainder of 1999. Some portion of the remaining Plan budget may be used to pay for hardware costs and other capital items incurred under the Plan, but the Company believes that substantially all such costs have been identified and incurred. All costs will be expensed as incurred, except for hardware and other items that should be capitalized in accordance with generally accepted accounting principles. Some of the costs represent ongoing investment in systems upgrades, the timing of which has been accelerated in order to facilitate Year 2000 compliance. In some instances, such upgrades will position the Company to provide more and better-quality services to its customers than they currently receive. The Company expects to fund these costs with cash provided by operations. Cost estimates and statements of the Company's plans and expectations discussed above are forward-looking statements that are derived using numerous assumptions of future events, many of which are outside the Company's control, including the availability and future cost of trained personnel and various other resources. Given the complexity of these issues and possible unidentified risks, actual results may vary materially from those anticipated and discussed above. Specific factors that might cause such differences include the failure of the Company's selective testing or other initiatives to identify and remediate all Year 2000-related problems, the success of Year 2000 remedial efforts of third parties, and similar uncertainties. CENTURYTEL, INC. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The Company is not exposed to material future earnings or cash flow exposures from changes in interest rates on long-term debt obligations since the majority of the Company's long-term debt obligations are fixed rate. At September 30, 1999, the fair value of the Company's long-term debt was estimated to be $2.2 billion based on the overall weighted average rate of the Company's long-term debt of 6.9% and an overall weighted maturity of 13 years compared to terms and rates currently available in long-term financing markets. For purposes hereof, market risk is estimated as the potential decrease in fair value of the Company's long-term debt resulting from a hypothetical increase of 69 basis points in interest rates (which represents ten percent of the Company's overall weighted average borrowing rate). Such an increase in interest rates would result in approximately a $108.0 million decrease in fair value of the Company's long-term debt. The Company is currently evaluating utilization of certain derivative financial instruments as it has used such instruments in the past in connection with its long-term financings and it is possible that such instruments may be utilized again in connection with financing its acquisitions of local exchange assets in Arkansas, Missouri and Wisconsin. PART II. OTHER INFORMATION CENTURYTEL, INC. Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- A. Exhibits -------- 3(ii) Registrant's Bylaws, as amended through August 24, 1999. 11 Computations of Earnings Per Share. 27.1 Financial Data Schedule as of and for the nine months ended September 30, 1999. B. Reports on Form 8-K -------------------- (i) The following item was reported in the Form 8-K filed July 9, 1999: Item 5. Other Events - News release announcing execution of a definitive agreement to enter into a strategic partnership with various co-investors to purchase telephone access lines in Missouri from an affiliate of GTE Corporation. (ii) The following item was reported in the Form 8-K filed July 9, 1999: Item 5. Other Events - News release announcing execution of a definitive agreement to purchase from as affiliate of GTE Corporation assets comprising substantially all of GTE's local telephone operations in Arkansas. (iii) The following item was reported in the Form 8-K filed July 29, 1999: Item 5. Other Events - News release announcing second quarter results of operations. (iv) The following item was reported in the Form 8-K filed August 25, 1999: Item 5. Other Events - New release announcing (i) execution of a definitive agreement to enter into a joint venture with various co-investors to purchase telephone access lines in Wisconsin from an affiliate of GTE and (ii) execution of a preliminary letter of intent to purchase additional telephone access lines in Wisconsin from GTE. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CenturyTel, Inc. Date: November 12, 1999 /s/ Neil A. Sweasy -------------------------- Neil A. Sweasy Vice President and Controller (Principal Accounting Officer)