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, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 1-7784 CENTURY TELEPHONE ENTERPRISES, 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, 1998, there were 91,938,325 shares of common stock outstanding.
CENTURY TELEPHONE ENTERPRISES, 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, 1998 and 1997 3 Consolidated Statements of Comprehensive Income-- Three Months and Nine Months Ended September 30, 1998 and 1997 4 Consolidated Balance Sheets--September 30, 1998 and December 31, 1997 5 Consolidated Statements of Stockholders' Equity-- Nine Months Ended September 30, 1998 and 1997 6 Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 1998 and 1997 7 Notes to Consolidated Financial Statements 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-24 Part II. Other Information: Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 25 Signature 26
PART I. FINANCIAL INFORMATION CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, - -------------------------------------------------------------------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------- (Dollars, except per share amounts, and shares expressed in thousands) <S> <C> <C> <C> <C> OPERATING REVENUES Telephone $ 275,397 121,934 800,532 359,454 Wireless 106,662 80,163 305,699 220,472 Other 19,890 16,254 55,816 47,986 - -------------------------------------------------------------------------------- Total operating revenues 401,949 218,351 1,162,047 627,912 - -------------------------------------------------------------------------------- OPERATING EXPENSES Cost of sales and operating expenses 192,155 111,462 559,955 329,254 Depreciation and amortization 81,610 37,074 242,288 108,740 - -------------------------------------------------------------------------------- Total operating expenses 273,765 148,536 802,243 437,994 - -------------------------------------------------------------------------------- OPERATING INCOME 128,184 69,815 359,804 189,918 - -------------------------------------------------------------------------------- OTHER INCOME (EXPENSE) Gain on sale or exchange of assets, net - - 49,859 70,121 Interest expense (41,904) (11,175) (126,785) (33,539) Income from unconsolidated cellular entities 9,162 8,371 25,105 21,750 Minority interest (3,619) (1,817) (10,264) (3,722) Other income and expense 1,159 1,174 2,454 3,467 - -------------------------------------------------------------------------------- Total other income (expense) (35,202) (3,447) (59,631) 58,077 - -------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE 92,982 66,368 300,173 247,995 Income tax expense 38,304 24,935 123,610 90,251 - -------------------------------------------------------------------------------- NET INCOME $ 54,678 41,433 176,563 157,744 ================================================================================ BASIC EARNINGS PER SHARE* $ .60 .46 1.93 1.75 ================================================================================ diluted earnings per share* $ .59 .45 1.90 1.73 ================================================================================ Dividends per common share* $ .065 .0617 .195 .1851 ================================================================================ Average basic shares outstanding* 91,471 90,134 91,238 89,802 ================================================================================ Average diluted shares outstanding* 93,548 91,710 93,272 91,325 ================================================================================ *Reflects March 1998 stock split. See Note 5. See accompanying notes to consolidated financial statements. </TABLE>
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Three months Nine months ended September 30, ended September 30, - -------------------------------------------------------------------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> Net income $ 54,678 41,433 176,563 157,744 - -------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding gains (losses) arising during period, net of tax (631) 37,473 10,310 62,038 Reclassification adjustment for gains included in net income, net of tax - - (20,478) - - -------------------------------------------------------------------------------- Other comprehensive income, net of tax (631) 37,473 (10,168) 62,038 - -------------------------------------------------------------------------------- Comprehensive income $ 54,047 78,906 166,395 219,782 ================================================================================ See accompanying notes to consolidated financial statements. </TABLE>
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> September 30, December 31, 1998 1997 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 3,940 26,017 Accounts receivable, less allowance of $4,824 and $5,954 182,117 227,272 Materials and supplies, at average cost 24,841 21,994 Other 7,442 8,197 - -------------------------------------------------------------------------------- 218,340 283,480 - -------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,245,445 2,258,563 - -------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $119,620 and $84,132 1,741,491 1,767,352 Other 430,894 400,006 - -------------------------------------------------------------------------------- 2,172,385 2,167,358 - -------------------------------------------------------------------------------- $ 4,636,170 4,709,401 ================================================================================ LIABILITIES AND EQUITY - ---------------------- CURRENT LIABILITIES Current maturities of long-term debt $ 45,015 55,244 Accounts payable 77,194 83,378 Accrued expenses and other liabilitiesz Salaries and benefits 46,737 38,225 Taxes 19,746 74,898 Interest 23,416 20,821 Other 24,506 25,229 Advance billings and customer deposits 28,285 24,213 - -------------------------------------------------------------------------------- 264,899 322,008 - -------------------------------------------------------------------------------- LONG-TERM DEBT 2,392,685 2,609,541 - -------------------------------------------------------------------------------- DEFERRED CREDITS AND OTHER LIABILITIES 509,951 477,580 - -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, 175,000,000 shares authorized, 91,924,239 and 91,103,674 shares issued and outstanding 91,924 91,104 Paid-in capital 487,221 469,586 Accumulated other comprehensive income- unrealized holding gain on investments, net of taxes 1,725 11,893 Retained earnings 886,479 728,033 Unearned ESOP shares (6,820) (8,450) Preferred stock-non-redeemable 8,106 8,106 - -------------------------------------------------------------------------------- 1,468,635 1,300,272 - -------------------------------------------------------------------------------- $ 4,636,170 4,709,401 ================================================================================ See accompanying notes to consolidated financial statements. </TABLE>
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> Nine months ended September 30, - -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> COMMON STOCK Balance at beginning of period $ 91,104 * 59,859 Issuance of common stock for acquisitions 28 - Conversion of convertible securities into common stock 169 237 Issuance of common stock through dividend reinvestment, incentive and benefit plans 623 423 - -------------------------------------------------------------------------------- Balance at end of period 91,924 60,519 - -------------------------------------------------------------------------------- PAID-IN CAPITAL Balance at beginning of period 469,586 * 474,607 Issuance of common stock for acquisitions 1,059 - Conversion of convertible securities into common stock 3,131 4,998 Issuance of common stock through dividend reinvestment, incentive and benefit plans 11,410 10,448 Amortization of unearned compensation and other 2,035 608 - -------------------------------------------------------------------------------- Balance at end of period 487,221 490,661 - -------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 11,893 - Change in unrealized holding gain on investments, net of reclassification adjustment (10,168) 62,038 - -------------------------------------------------------------------------------- Balance at end of period 1,725 62,038 - -------------------------------------------------------------------------------- RETAINED EARNINGS Balance at beginning of period 728,033 494,726 Net income 176,563 157,744 Cash dividends declared Common stock - $.195 and $.1851 per share, respectively* (17,811) (16,622) Preferred stock (306) (357) - -------------------------------------------------------------------------------- Balance at end of period 886,479 635,491 - -------------------------------------------------------------------------------- UNEARNED ESOP SHARES Balance at beginning of period (8,450) (11,080) Release of ESOP shares 1,630 1,880 - -------------------------------------------------------------------------------- Balance at end of period (6,820) (9,200) - -------------------------------------------------------------------------------- PREFERRED STOCK - NON-REDEEMABLE Balance at beginning of period 8,106 10,041 Conversion of preferred stock into common stock - (1,935) - -------------------------------------------------------------------------------- Balance at end of period 8,106 8,106 - -------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 1,468,635 1,247,615 ================================================================================ *Reflects March 1998 stock split. See Note 5. See accompanying notes to consolidated financial statements. </TABLE>
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine months ended September 30, - -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- (Dollars in thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $ 176,563 157,744 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 242,288 108,740 Deferred income taxes 30,241 31,667 Income from unconsolidated cellular entities (25,105) (21,750) Minority interest 10,264 3,722 Gain on sales of assets (49,859) (70,121) Changes in current assets and current liabilities: Accounts receivable (15,370) (12,170) Accounts payable (6,184) (6,110) Other accrued taxes (55,152) 8,624 Other current assets and other current liabilities, net 9,364 9,853 Changes in other noncurrent liabilities 3,535 3,259 Other, net (3,408) 4,040 - -------------------------------------------------------------------------------- Net cash provided by operating activities 317,177 217,498 - -------------------------------------------------------------------------------- INVESTING ACTIVITIES Payments for property, plant and equipment (204,627) (123,344) Acquisitions, net of cash acquired (5,028) (30,398) Proceeds from sales of assets 132,307 - Distributions from unconsolidated cellular entities 17,715 9,173 Purchase of life insurance investment, net (2,557) (12,936) Proceeds from note receivable - 22,500 Other, net 2,337 (4,320) - -------------------------------------------------------------------------------- Net cash used in investing activities (59,853) (139,325) - -------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt 772,894 12,151 Payments of long-term debt (999,877) (78,377) Payment upon settlement of hedge contracts (40,237) - Payment of deferred debt issuance costs (6,625) - Proceeds from issuance of common stock 12,110 10,860 Cash dividends (18,117) (16,979) Other, net 451 (2,947) - -------------------------------------------------------------------------------- Net cash used in financing activities (279,401) (75,292) - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (22,077) 2,881 Cash and cash equivalents at beginning of period 26,017 8,402 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 3,940 11,283 ================================================================================ Supplemental cash flow information: Income taxes paid $ 158,365 53,978 Interest paid $ 124,190 28,963 - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. </TABLE>
CENTURY TELEPHONE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) (1) Basis of Financial Reporting The consolidated financial statements of Century Telephone Enterprises, Inc. and its subsidiaries (the "Company") include the accounts of Century Telephone Enterprises, Inc. ("Century") and its majority-owned subsidiaries and partnerships. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission; however, the Company believes the disclosures which are made are adequate to make the information presented not misleading. The financial statements and footnotes included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Certain 1997 amounts have been reclassified to be consistent with the 1998 presentation. The unaudited financial information for the three months and nine months ended September 30, 1998 and 1997 has not been audited by independent public accountants; however, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for the three-month and nine-month periods have been included therein. The results of operations for the first nine months of the year are not necessarily indicative of the results of operations which might be expected for the entire year. (2) Net Property, Plant and Equipment Net property, plant and equipment is composed of the following: September 30, December 31, 1998 1997 - --------------------------------------------------------------------------- (Dollars in thousands) Telephone, at original cost $ 3,414,234 3,295,860 Accumulated depreciation (1,520,474) (1,375,835) - --------------------------------------------------------------------------- 1,893,760 1,920,025 - --------------------------------------------------------------------------- Wireless, at cost 421,412 380,218 Accumulated depreciation (166,949) (133,357) - --------------------------------------------------------------------------- 254,463 246,861 - --------------------------------------------------------------------------- Corporate and other, at cost 191,138 169,420 Accumulated depreciation (93,916) (77,743) - --------------------------------------------------------------------------- 97,222 91,677 - --------------------------------------------------------------------------- $ 2,245,445 2,258,563 =========================================================================== (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, 1998 and 1997) were accounted for by the equity method: Nine months ended September 30, - ---------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------- (Dollars in thousands) Results of operations Revenues $ 937,670 930,860 Operating income $ 334,405 310,236 Net income $ 336,393 277,464 - ---------------------------------------------------------------------------- (4) Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income" and Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About Segments of an Enterprise and Related Information." SFAS 130 established standards for reporting the components of comprehensive income, which is defined to include all changes in equity during a period except those resulting from investments by and distributions to shareholders. SFAS 131 established standards for reporting information about operating segments in annual financial statements and interim financial reports to shareholders. The Company adopted both statements in the first quarter of 1998; however, the provisions of SFAS 131 need not be applied to interim periods in the initial year of application. SFAS 131 is not expected to materially impact how the Company currently reports its segment information. In June 1998, the 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. (5) Stock Split On March 31, 1998, the Company effected a three-for-two common stock split by means of a 50% stock dividend. Shares outstanding and per share data for the nine months and three months ended September 30, 1997 have been restated to reflect this stock split. (6) Debt Issuance On January 15, 1998, Century 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 by the Company in connection with its December 1, 1997 acquisition of Pacific Telecom, Inc. ("PTI"). In mid-January 1998, the Company settled numerous interest rate hedge contracts that had been entered into in anticipation of these debt issuances. The amounts paid by the Company upon settlement of the hedge contracts aggregated approximately $40 million, which will be amortized as interest expense over the lives of the underlying debt instruments. The effective weighted average interest rate of the above-mentioned debt (after giving consideration to these payment obligations) is 7.15%. In March 1998 the Company paid approximately $250,000 upon settlement of its remaining interest rate hedge contracts. (7) Sale or Exchange of Assets In connection with the first quarter 1998 acquisition of Brooks Fiber Properties, Inc. ("Brooks") by WorldCom, Inc. ("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; $.16 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; $.06 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; $.13 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. During the second quarter of 1997, the Company sold its competitive access subsidiary to Brooks and recorded a pre-tax gain of $71 million ($46 million after-tax; $.50 per diluted share). (8) Pending Acquisition On March 12, 1998, the Company entered into definitive agreements to purchase from affiliates of Ameritech Corporation ("Ameritech") the assets of certain local telephone and directory operations in parts of northern and central Wisconsin, in exchange for approximately $225 million cash (subject to adjustments). The assets to be purchased include (i) access lines and related property and equipment in 21 predominantly rural communities in Wisconsin which serve approximately 68,000 customers, (ii) Ameritech's directory publishing operations that relate to nine telephone directories serving such customers, and (iii) approximately $4 million in net receivables. Subject to the satisfaction of various closing conditions, this transaction is expected to be completed in the fourth quarter of 1998. (9) Pending Disposition In August 1998, the Company entered into a definitive agreement to sell the stock of the entities conducting the Company's Alaska operations to ALEC Acquisition Corporation for $415 million cash, subject to various adjustments. Proceeds from this transaction will be used to reduce debt and to fund the Company's pending acquisition of telephone access lines from Ameritech described in Note 8. The Alaska transaction is anticipated to close in the first quarter of 1999, subject to regulatory approvals and various closing conditions. CENTURY TELEPHONE ENTERPRISES, 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, 1997. The results of operations for the three months and nine months ended September 30, 1998 are not necessarily indicative of the results of operations which might be expected for the entire year. Century Telephone Enterprises, Inc., which operates under the trade name of CenturyTel, and its subsidiaries (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, 1998, the Company's local exchange telephone subsidiaries operated over 1.2 million telephone access lines primarily in rural, suburban and small urban areas in 21 states, and the Company's majority-owned and operated cellular entities had more than 591,000 cellular subscribers. On December 1, 1997, the Company significantly expanded its operations by acquiring Pacific Telecom, Inc. ("PTI"). As a result of the 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. In addition to historical information, management's discussion and analysis includes certain forward-looking statements regarding events and financial trends that may affect the Company's future operating results and financial position. Such forward-looking statements are subject to uncertainties that could cause the Company's actual results to differ materially from such statements. Such uncertainties include but are not limited to: the effects of ongoing deregulation in the telecommunications industry; the effects of greater than anticipated competition in the Company's markets; possible changes in the demand for the Company's products and services; the Company's ability to successfully introduce new offerings on a timely and cost-effective basis; the risks inherent in rapid technological change; the Company's ability to effectively manage its growth, including integrating the operations of PTI into the Company's operations; the success and expense of the remediation efforts of the Company and its vendors in achieving year 2000 compliance; and the effects of more general factors such as changes in general market or economic conditions or in legislation, regulation or public policy. These and other uncertainties related to the business are described in greater detail in Item 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 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, 1998 Compared to Three Months Ended September 30, 1997 Net income for the third quarter of 1998 was $54.7 million compared to $41.4 million during the third quarter of 1997. Diluted earnings per share increased to $.59 during the three months ended September 30, 1998 from $.45 during the three months ended September 30, 1997, a 31.1% increase. Three months ended September 30, - --------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------- (Dollars, except per share amounts,and shares in thousands) Operating income Telephone $ 88,210 40,114 Wireless 36,693 27,403 Other 3,281 2,298 - --------------------------------------------------------------------------- 128,184 69,815 Interest expense (41,904) (11,175) Income from unconsolidated cellular entities 9,162 8,371 Minority interest (3,619) (1,817) Other income and expense 1,159 1,174 Income tax expense (38,304) (24,935) - --------------------------------------------------------------------------- Net income $ 54,678 41,433 =========================================================================== Diluted earnings per share* $ .59 .45 =========================================================================== Average diluted shares outstanding* 93,548 91,710 =========================================================================== * Reflects March 1998 stock split. See Note 5. Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the three months ended September 30, 1998 and 1997 were as follows: Three months ended September 30, - --------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------- Operating revenues Telephone operations 68.5% 55.8 Wireless operations 26.5% 36.7 Other operations 5.0% 7.5 Operating income Telephone operations 68.8% 57.5 Wireless operations 28.6% 39.2 Other operations 2.6% 3.3 - --------------------------------------------------------------------------- Telephone Operations Three months ended September 30, - --------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Local service $ 84,082 33,443 Network access 159,422 73,385 Other 31,893 15,106 - --------------------------------------------------------------------------- 275,397 121,934 - --------------------------------------------------------------------------- Operating expenses Plant operations 62,402 24,971 Customer operations 22,107 11,931 Corporate and other 37,436 18,679 Depreciation and amortization 65,242 26,239 - --------------------------------------------------------------------------- 187,187 81,820 - --------------------------------------------------------------------------- Operating income $ 88,210 40,114 =========================================================================== Telephone operating income increased $48.1 million (119.9%) due to an increase in operating revenues of $153.5 million (125.9%) which more than offset an increase in operating expenses of $105.4 million (128.8%). Of the $153.5 million increase in operating revenues, $139.8 million was attributable to the properties acquired in the PTI acquisition. The remaining $13.7 million increase in revenues was partially due to a $2.5 million increase in revenues due to increased minutes of use; a $2.5 million increase resulting from favorable prior period revenue settlements; a $3.4 million increase in the partial recovery of increased operating expenses through revenue pools in which the Company participates with other telephone companies; a $1.9 million increase in amounts received from the federal Universal Service Fund; and a $1.6 million increase resulting from internal growth in the number of customer access lines. During the third quarter of 1998, operating expenses, exclusive of depreciation and amortization, increased $66.4 million, of which $61.1 million was attributable to the properties acquired in the PTI acquisition. The remainder of the increase in operating expenses was due to increases in general operating expenses. Depreciation and amortization increased $39.0 million, of which $35.2 million (which includes $6.9 million of amortization of excess cost of net assets acquired) was attributable to the properties acquired in the PTI acquisition. The remainder of the increase was primarily due to higher recurring rates or nonrecurring depreciation charges which have been approved for certain subsidiaries. Wireless Operations and Income From Unconsolidated Cellular Entities Three months ended September 30, - --------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------- (Dollars in thousands) Operating income - wireless operations $ 36,693 27,403 Minority interest (3,619) (2,044) Income from unconsolidated cellular entities 9,162 8,371 - --------------------------------------------------------------------------- $ 42,236 33,730 =========================================================================== 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 Three months ended September 30, - --------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Service revenues $ 104,527 78,839 Equipment sales 2,135 1,324 - --------------------------------------------------------------------------- 106,662 80,163 - --------------------------------------------------------------------------- Operating expenses Cost of equipment sold 3,784 2,987 System operations 15,326 12,549 General, administrative and customer service 21,991 15,090 Sales and marketing 13,312 11,918 Depreciation and amortization 15,556 10,216 - --------------------------------------------------------------------------- 69,969 52,760 - --------------------------------------------------------------------------- Operating income $ 36,693 27,403 =========================================================================== Wireless operating income increased $9.3 million (33.9%) to $36.7 million in the third quarter of 1998 from $27.4 million in the third quarter of 1997. Wireless operating revenues increased $26.5 million (33.1%) while operating expenses increased $17.2 million (32.6%). Of the $25.7 million increase in service revenues, $23.0 million was attributable to acquisitions. Excluding acquisitions, roaming revenues increased $3.0 million in the third quarter of 1998. The average number of cellular units in service in majority-owned markets (exclusive of acquisitions) during the third quarter of 1998 and 1997 was 449,600 and 411,300, respectively. The average monthly cellular service revenue per customer (including acquisitions) declined to $59 during the third quarter of 1998 from $64 during the third quarter of 1997 partially due to the continued trend that a higher percentage of new subscribers tend to be lower usage customers. In addition, the properties acquired in the PTI acquisition historically have had a lower average monthly service revenue per customer than the Company's incumbent properties. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers are activated and (ii) as competitive pressures from current and future wireless communications providers intensify. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, all of which are likely to result in lower average revenue per customer. The Company will continue to focus on customer service and attempt to stimulate cellular usage by promoting the availability of certain enhanced services and by improving the quality of its service through the construction of additional cell sites and other enhancements to its system. System operations expenses increased $2.8 million (22.1%) in the third quarter of 1998 primarily due to $4.8 million of expenses attributable to acquisitions. Such increase was partially offset by a $1.7 million decrease in the amounts paid to other carriers for cellular service provided to the Company's customers who roam in the other carriers' service areas. General, administrative and customer service expenses increased $6.9 million (45.7%), of which $3.4 million was attributable to expenses of entities acquired. The remainder of the increase was primarily due to a $2.4 million increase in the provision for doubtful accounts. The Company's average monthly churn rate (the percentage of cellular customers that terminate service) was 2.3% for the third quarter of 1998 and 2.2% for the third quarter of 1997. Sales and marketing expenses increased $1.4 million (11.7%) in the third quarter of 1998 primarily due to $2.8 million of expenses of entities acquired and a $1.0 million increase in advertising expense. Commissions paid to agents for selling services to new customers decreased $2.8 million primarily as a result of fewer cellular units added during the third quarter of 1998 compared to the third quarter of 1997. The Company will continue to focus on attracting and retaining higher usage customers. Depreciation and amortization increased $5.3 million (52.3%), of which $3.5 million was attributable to acquisitions. The remainder of the increase was due primarily to a higher level of plant in service. Other Operations Three months ended September 30, - ---------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------- (Dollars in thousands) Operating revenues Long distance $ 13,263 9,810 Call center 2,754 3,866 Other 3,873 2,578 - ---------------------------------------------------------------------- 19,890 16,254 - ---------------------------------------------------------------------- Operating expenses Cost of sales and operating expenses 15,797 13,337 Depreciation and amortization 812 619 - ---------------------------------------------------------------------- 16,609 13,956 - ---------------------------------------------------------------------- Operating income $ 3,281 2,298 ====================================================================== 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 nonregulated long distance and call center operations. The $3.5 million increase in long distance revenues was primarily attributable to the growth in the number of customers; the $1.1 million decrease in call center revenues was primarily due to the loss of two major customers in the fourth quarter of 1997. The increase in other revenues was primarily attributable to the PTI acquisition and the acquisition of two security alarm businesses subsequent to the third quarter of 1997. Operating expenses increased due to (i) an increase of $3.5 million in expenses of the Company's long distance operations due primarily to an increase in customers and (ii) $1.9 million of operating expenses applicable to acquisitions. Such increases were substantially offset because (i) the amount of intercompany profit with regulated affiliates which, in accordance with regulatory accounting principles, was not eliminated in connection with consolidating the results of operations (which acts to offset operating expenses) increased $1.1 million as a result of the PTI acquisition, and (ii) the third quarter of 1997 included $1.7 million of costs applicable to entities sold during 1997. Interest Expense Interest expense increased $30.7 million in the third quarter of 1998 compared to the third quarter of 1997 primarily due to $21.9 million of interest expense on the borrowings used to finance the PTI acquisition and $7.5 million of interest expense applicable to PTI's debt. Income from Unconsolidated Cellular Entities Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $791,000 (9.4%) primarily due to $2.2 million of earnings from interests in unconsolidated entities acquired in the PTI acquisition. Such increase was partially offset by a $1.0 million decrease in income due to the sale of the Company's minority interests 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 or loss of the Company's majority-owned and operated cellular entities and majority-owned subsidiaries. Minority interest increased $1.8 million primarily due to a $1.0 million increase in expense related to the entities acquired in the PTI acquisition. The remainder of the increase is primarily due to the increased profitability of the Company's majority-owned and operated cellular entities. Income Tax Expense Income tax expense increased $13.4 million in the third quarter of 1998 compared to the third quarter of 1997. The effective income tax rate was 41.2% and 37.6% in the three months ended September 30, 1998 and 1997, respectively. Such increase in the effective income tax rate was primarily due to an increase in non-deductible amortization of excess cost of net assets acquired (goodwill) attributable to the PTI acquisition. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Net income (excluding gain on sale or exchange of assets) for the first nine months of 1998 was $146.0 million compared to $112.2 million during the first nine months of 1997. Diluted earnings per share (excluding gain on sale or exchange of assets) increased to $1.57 during the nine months ended September 30, 1998 from $1.23 during the nine months ended September 30, 1997, a 27.6% increase. Nine months ended September 30, - ---------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------- (Dollars, except per share amounts, and shares in thousands) Operating income Telephone $ 245,007 119,610 Wireless 103,859 65,752 Other 10,938 4,556 - --------------------------------------------------------------------------- 359,804 189,918 Gain on sale or exchange of assets, net 49,859 70,121 Interest expense (126,785) (33,539) Income from unconsolidated cellular entities 25,105 21,750 Minority interest (10,264) (3,722) Other income and expense 2,454 3,467 Income tax expense (123,610) (90,251) - --------------------------------------------------------------------------- Net income $ 176,563 157,744 =========================================================================== Diluted earnings per share* $ 1.90 1.73 =========================================================================== Average diluted shares outstanding* 93,272 91,325 =========================================================================== * Reflects March 1998 stock split. See Note 5. Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the nine months ended September 30, 1998 and 1997 were as follows: Nine months ended September 30, - -------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------- Operating revenues Telephone operations 68.9% 57.2 Wireless operations 26.3% 35.1 Other operations 4.8% 7.7 Operating income Telephone operations 68.1% 63.0 Wireless operations 28.9% 34.6 Other operations 3.0% 2.4 - -------------------------------------------------------------------------- Telephone Operations Nine months ended September 30, - --------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Local service $ 243,664 98,749 Network access 462,576 217,407 Other 94,292 43,298 - --------------------------------------------------------------------------- 800,532 359,454 - --------------------------------------------------------------------------- Operating expenses Plant operations 176,609 73,013 Customer operations 67,956 34,674 Corporate and other 116,444 54,916 Depreciation and amortization 194,516 77,241 - --------------------------------------------------------------------------- 555,525 239,844 - --------------------------------------------------------------------------- Operating income $ 245,007 119,610 =========================================================================== Telephone operating income increased $125.4 million (104.8%) due to an increase in operating revenues of $441.1 million (122.7%) which more than offset an increase in operating expenses of $315.7 million (131.6%). Of the $441.1 million increase in operating revenues, $410.1 million was attributable to the properties acquired in the PTI acquisition. The remaining $31.0 million increase in revenues was partially due to a $6.7 million increase in amounts received from the federal Universal Service Fund; a $6.5 million increase in revenues due to increased minutes of use; a $7.3 million increase resulting from internal growth in the number of customer access lines; and a $6.5 million increase in the partial recovery of increased operating expenses through revenue pools in which the Company participates with other telephone companies. During the first nine months of 1998, operating expenses, exclusive of depreciation and amortization, increased $198.4 million, of which $187.2 million was attributable to the properties acquired in the PTI acquisition. The remainder of the increase in operating expenses was due to increases in general operating expenses. Depreciation and amortization increased $117.3 million, of which $108.7 million (which includes $20.7 million of amortization of excess cost of net assets acquired) was attributable to the properties acquired in the PTI acquisition. The remainder of the increase was due to higher levels of plant in service and higher recurring rates or nonrecurring depreciation charges which have been approved for certain subsidiaries. Wireless Operations and Income From Unconsolidated Cellular Entities Nine months ended September 30, - --------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------- (Dollars in thousands) Operating income - wireless operations $103,859 65,752 Minority interest (10,264) (5,140) Income from unconsolidated cellular entities 25,105 21,750 - --------------------------------------------------------------------------- $118,700 82,362 - --------------------------------------------------------------------------- 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 Nine months ended September 30, - --------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Service revenues $ 299,391 216,476 Equipment sales 6,308 3,996 - --------------------------------------------------------------------------- 305,699 220,472 - --------------------------------------------------------------------------- Operating expenses Cost of equipment sold 11,182 10,373 System operations 44,211 33,946 General, administrative and customer service 60,435 43,568 Sales and marketing 40,745 37,345 Depreciation and amortization 45,267 29,488 - --------------------------------------------------------------------------- 201,840 154,720 - --------------------------------------------------------------------------- Operating income $ 103,859 65,752 =========================================================================== Wireless operating income increased $38.1 million (58.0%) to $103.9 million in the first nine months of 1998 from $65.8 million in the first nine months of 1997. Wireless operating revenues increased $85.2 million (38.7%) while operating expenses increased $47.1 million (30.5%). Of the $82.9 million increase in service revenues, $62.7 million was attributable to acquisitions. The remainder of the increase in cellular service revenues was primarily due to the increase in the number of cellular customers in the Company's incumbent markets. The average number of cellular units in service in majority-owned markets (exclusive of acquisitions) during the first nine months of 1998 and 1997 was 448,000 and 391,000, respectively. Excluding acquisitions, local and toll revenues increased $12.1 million in the first nine months of 1998 and roaming revenues increased $8.2 million. The average monthly cellular service revenue per customer (including acquisitions) declined to $57 during the first nine months of 1998 from $62 during the first nine months of 1997 partially due to the continued trend that a higher percentage of new subscribers tend to be lower usage customers. In addition, the properties acquired in the PTI acquisition historically have had a lower average monthly service revenue per customer than the Company's incumbent properties. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers are activated and (ii) as competitive pressures from current and future wireless communications providers intensify. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, all of which are likely to result in lower average revenue per customer. The Company will continue to focus on customer service and attempt to stimulate cellular usage by promoting the availability of certain enhanced services and by improving the quality of its service through the construction of additional cell sites and other enhancements to its system. System operations expenses increased $10.3 million (30.2%) in the first nine months of 1998 primarily due to $12.5 million of expenses attributable to acquisitions. A $4.4 million decrease in the amounts paid to other carriers for cellular service provided to the Company's customers who roam in the other carriers' service areas was substantially offset by a $2.1 million increase in operating expenses due to an increase in the number of cell sites. General, administrative and customer service expenses increased $16.9 million (38.7%), of which $9.9 million was attributable to expenses of entities acquired. The remainder of the increase was primarily due to a $4.3 million increase in the provision for doubtful accounts. The Company's average monthly churn rate (the percentage of cellular customers that terminate service) was 2.3% for the first nine months of 1998 and 1997. Sales and marketing expenses increased $3.4 million in the first nine months of 1998 primarily due to $8.1 million of expenses of entities acquired, a $2.0 million increase in costs incurred in selling products and services in retail locations and a $1.7 million increase in advertising expenses. Such increases were substantially offset by a $7.6 million reduction in commissions paid to agents for selling services to new customers primarily as a result of fewer cellular units added during the first nine months of 1998 compared to the first nine months of 1997. The Company will continue to focus on attracting and retaining higher usage customers. Depreciation and amortization increased $15.8 million (53.5%), of which $10.5 million was attributable to acquisitions. The remainder of the increase was due primarily to a higher level of plant in service. Other Operations Nine months ended September 30, - ------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------- (Dollars in thousands) Operating revenues Long distance $ 36,865 26,556 Call center 7,702 12,077 Competitive access - 2,499 Other 11,249 6,854 - ------------------------------------------------------------------------- 55,816 47,986 - ------------------------------------------------------------------------- Operating expenses Cost of sales and operating expenses 42,373 41,419 Depreciation and amortization 2,505 2,011 - ------------------------------------------------------------------------- 44,878 43,430 - ------------------------------------------------------------------------- Operating income $ 10,938 4,556 ========================================================================= 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 competitive access subsidiary (which was sold to Brooks Fiber Properties, Inc. ("Brooks") in May 1997) and the Company's nonregulated long distance and call center operations. The $10.3 million increase in long distance revenues was attributable to the growth in the number of customers; the $4.4 million decrease in call center revenues was primarily due to the loss of two major customers in the fourth quarter of 1997. The increase in other revenues was primarily attributable to the PTI acquisition and the acquisition of two security alarm businesses subsequent to the third quarter of 1997. Operating expenses increased due to (i) an increase of $10.4 million in expenses of the Company's long distance operations due primarily to an increase in customers and (ii) $5.9 million of operating expenses applicable to acquisitions. Such increases were substantially offset by decreases in operating expenses because (i) the first nine months of 1997 included $9.2 million of costs applicable to entities sold during 1997, (ii) the amount of intercompany profit with regulated affiliates which, in accordance with regulatory accounting principles, was not eliminated in connection with consolidating the results of operations (which acts to offset operating expenses) increased $4.4 million as a result of the acquisition of PTI and (iii) operating expenses of the Company's call center business decreased $1.5 million primarily due to the loss of two major customers in the fourth quarter of 1997. Interest Expense Interest expense increased $93.2 million in the first nine months of 1998 compared to the first nine months of 1997 primarily due to $68.6 million of interest expense on the borrowings used to finance the PTI acquisition and $19.0 million of interest expense applicable to PTI's debt. Gain on Sale or Exchange of Assets, Net In the first nine months of 1998, the Company recorded pre-tax gains aggregating $49.9 million ($30.5 million after-tax; $.33 per diluted share) primarily due to the conversion of its investment in the common stock of Brooks into common stock of WorldCom, Inc. ("WorldCom"), the subsequent sale of 750,000 shares of WorldCom stock, and the sale of minority interests in two non-strategic cellular entities. See Note 7 of Notes to Consolidated Financial Statements for additional information. In the first nine months of 1997, the Company sold its competitive access subsidiary to Brooks and recorded a pre-tax gain of $71 million ($46 million after tax; $.50 per diluted share). Income from Unconsolidated Cellular Entities Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $3.4 million (15.4%) primarily due to $5.0 million of earnings of the cellular entities acquired in the PTI acquisition. Such increase was partially offset by a $1.8 million decrease due to the sale of the Company's minority interests 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 or loss of the Company's majority-owned and operated cellular entities and majority-owned subsidiaries. Minority interest increased $6.5 million partially due to a $2.0 million increase in expense related to the entities acquired in the PTI acquisition. The remainder of the increase is primarily due to the increased profitability of the Company's majority-owned and operated cellular entities. Income Tax Expense Income tax expense increased $33.4 million in the first nine months of 1998 compared to the first nine months of 1997 primarily due to an increase in income before taxes. The effective income tax rate was 41.2% and 36.4% for the nine months ended September 30, 1998 and 1997, respectively. Such increase in the effective income tax rate was primarily due to an increase in non-deductible amortization of excess cost of net assets acquired (goodwill) attributable to the PTI acquisition. 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 $317.2 million during the first nine months of 1998 compared to $217.5 million during the first nine months of 1997. The Company's accompanying consolidated statements of cash flows identify major differences between net income and net cash provided by operating activities for each of these periods. For additional information relating to the telephone operations, wireless operations, and other operations of the Company, see Results of Operations. Net cash used in investing activities was $59.9 million and $139.3 million for the nine months ended September 30, 1998 and 1997, respectively. Payments for property, plant and equipment were $81.3 million more in the first nine months of 1998 than in the comparable period during 1997. Capital expenditures for the nine months ended September 30, 1998 were $142.0 million for telephone, $42.8 million for wireless and $24.2 million for other operations. Proceeds from the sales of assets were $132.3 million in the first nine months of 1998. Cash used in connection with acquisitions was $30.4 million in the first nine months of 1997, most of which was applicable to the acquisition of telephone properties in Wisconsin. Net cash used in financing activities was $279.4 million during the first nine months of 1998 compared to $75.3 million during the first nine months of 1997. Net payments of long-term debt were $160.8 million more during the first nine months of 1998 compared to the first nine months of 1997. 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 PTI. In addition, the Company paid approximately $40 million to settle numerous interest rate hedge contracts that had been entered into in anticipation of these debt issuances. Revised budgeted capital expenditures for 1998 total $220 million for telephone operations, $65 million for wireless operations and $42 million for corporate and other operations. As of September 30, 1998, Century's telephone subsidiaries had available for use $140.9 million of commitments for long-term financing from the Rural Utilities Service and the Company had $519.1 million of undrawn committed bank lines of credit. During the first quarter of 1998, the Company entered into definitive agreements to purchase from affiliates of Ameritech the assets of certain local telephone and directory operations in parts of northern and central Wisconsin, in exchange for approximately $225 million cash (subject to adjustments). The Company expects to provide initial financing for this acquisition through its committed credit facilities and ultimately finance this transaction with proceeds from the sale of the Company's Alaska operations. In August 1998, the Company entered into a definitive agreement to sell the stock of its Alaska operations for $415 million cash, subject to various adjustments. In April 1998 the Company acquired 32 Local Multipoint Distribution System licenses in the Federal Communications Commission's A and B band auction for an aggregate of $9.7 million. The licenses acquired cover geographic areas with a combined population of approximately 10.6 million. The Company has not finalized capital expenditure or deployment plans for these systems. 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 $250 million and $300 million. Year 2000 Readiness Disclosure The Year 2000 issue concerns the inability of computer systems and certain other equipment to properly recognize and process data that uses two digits rather than four to designate particular years. The Company has initiated a Year 2000 Project Plan ("the Plan") to assess whether its systems that process date sensitive information will perform satisfactorily leading up to and beyond January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000, any Year 2000-related problem with critical systems, the failure of which could have a material adverse effect on the Company's operations. The Plan includes steps to (i) identify each critical system element that requires date code remediation, (ii) establish a plan to remediate such systems, (iii) implement all required remediations and (iv) selectively test the remediated systems. Thus far, the identification phase has identified Year 2000 issues in the following critical Company-owned systems: (i) switching and transmission hardware and software used by the Company to route and deliver telephone calls; (ii) network support systems, including customer service systems and (iii) billing and collection systems used by the Company to invoice and process most of its customer payments. In addition, the Company (i) receives critical services from providers of utilities and other services to facilities that house employees and switching, transmission and other equipment and (ii) is dependent upon outside vendors for, among other things, the provision of critical network components and cellular billing services. The Company is also critically reliant upon the systems of other telecommunication carriers with which the Company's systems interconnect for the routing and delivery of telephone calls. The Company has also identified potential Year 2000-related liability with respect to telephone equipment manufactured by unaffiliated parties that the Company has sold or leased to its customers ("Customer Premises Equipment" or "CPE"). The identification and planning phases of the Plan are materially complete as they relate to Company-owned systems. As they relate to third party vendors, other telecommunications carriers and CPE customers, the identification and planning phases are on-going and are expected to be materially complete by first quarter 1999. Based on work completed under the Plan to date, the Company currently intends to take the following additional steps under its Plan with respect to Company-owned systems, third-party vendors, other telecommunications carriers, and CPE customers: o The Company generally plans to remediate Company-owned switching, transmission, billing and collection and other critical systems through the revision or replacement of current system components. Necessary changes to Company-owned systems are in process and are expected to be completed by mid-year 1999. The selective testing and verification of such changes are expected to be completed during 1999. Due to the large number of system components requiring remediation, the Company does not intend to test every remediated system but will rely upon the results of selective testing to determine the effectiveness of remediation efforts. o With respect to critical services provided by utilities and other third parties, the Company is in the process of contacting all such suppliers and plans to have contacted all such suppliers before the end of 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 Year 2000 compliance status of other telecommunications carriers with which the Company's switching systems interconnect is not yet known. The Company is making inquiries with these carriers to determine their compliance status and expects to obtain the results of compliance tests during first quarter 1999, although there can be no assurance that carriers will supply this information. o Finally, the Company is in the process of obtaining Year 2000 compliance information from CPE manufacturers and plans to provide this information to the Company's business customers in early 1999. The Company plans to work with CPE manufacturers to encourage the development of remedies for Year 2000 problems in such equipment and to continue working with its customers to identify Year 2000 problems in Customer Premises Equipment. However, there can be no assurance that CPE manufacturers or customers will cooperate with the Company's efforts to address these problems. While the Company currently believes that it will be able to remediate and selectively test Company-owned systems in time to minimize any detrimental effect on its operations, there can be no assurance that such steps will be successful. Failure by the Company to timely and effectively remediate its systems, or the failure of critical vendors and suppliers and other telecommunications carriers to remediate affected systems, could have a material adverse impact on the Company's business, financial condition, results of operations and prospects. Because the impact of Year 2000 issues on the Company is materially dependent on the mitigation efforts of parties outside the Company's control, the Company cannot assess with certainty the magnitude of any such potential adverse impact. However, based upon risk assessment work conducted thus far, the Company believes that the most reasonably likely worst case scenario of the failure by the Company, its suppliers or other telecommunications carriers with which the Company interconnects to resolve Year 2000 issues would be an inability by the Company (i) to provide telecommunications services to the Company's customers, (ii) to route and deliver telephone calls originating from or terminating with other telecommunications carriers, (iii) to timely and accurately process service requests and (iv) to timely and accurately bill its customers. In addition to lost earnings, these failures could also result in loss of customers due to service interruptions and billing errors, substantial claims by customers and CPE purchasers and increased expenses associated with Year 2000 litigation, stabilization of operations and executing mitigation and contingency plans. Contingency planning to maintain and restore service in the event of natural disasters, power failures and systems-related problems is a routine part of the Company's operations. The Company believes that such contingency plans will assist the Company in responding to the failure by outside service providers to successfully address Year 2000 issues. In addition, the Company is currently identifying and considering various Year 2000-specific contingency plans, including identification of alternate vendors and service providers and manual alternatives to system operations. These Year 2000-specific contingency plans are expected to be materially completed during the first quarter of 1999, but their review and development will continue into 1999. Although the total costs to implement the Plan cannot be precisely estimated, the Company incurred costs of $2.5 million during the first nine months of 1998 (none of which was related to hardware costs) and anticipates spending an aggregate of approximately $33.8 million during the remainder of 1998 and 1999 (which includes $20.9 million of hardware costs.) These costs will be expensed as incurred, unless new systems are purchased that should be capitalized in accordance with generally accepted accounting principles. Some of the costs represent ongoing investment in systems upgrades, the timing of which is being accelerated in order to facilitate Year 2000 compliance. In some instances, such upgrades will position the Company to provide more and better-quality services to its customers than they currently receive. The Company expects to fund these costs with cash provided by operations. Cost estimates and statements of the Company's plans discussed above are forward-looking statements that are derived using numerous assumptions of future events, many of which are outside the Company's control, including the availability and future cost of trained personnel and various other resources, third party modification plans, the absence of systems requiring remediation that have not yet been discovered, and other factors. Regulatory Issues In September 1998, the Federal Communications Commission ("FCC") initiated a proceeding to represcribe the authorized rate of return for interstate access services provided by local exchange carriers ("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. Responses to the FCC regarding the represcription proceeding are due December 3, 1998. It is uncertain whether or by how much the FCC may lower the authorized rate of return. PART II. OTHER INFORMATION CENTURY TELEPHONE ENTERPRISES, INC. Item 5. Other Information - ------ ----------------- Recently the Company discovered that the trustee of its 401(k) plan has inadvertently over the past several years sold shares of the Company's common stock to plan participants in amounts that substantially exceed the number of shares registered for sale under the Company's 1992 registration statement for such plan filed under the Securities Act of 1933, as amended. The Company is currently evaluating the number of unregistered shares sold, what remedial steps, if any, that it may take, and whether any of the Company's other plans have made any similar unregistered sales. Item 6. Exhibits and Reports on Form 8-K - ------ -------------------------------- A. Exhibits -------- 3(ii) Registrant's Bylaws, as amended through October 7, 1998. 10.1 Purchase Agreement by and among ALEC Acquisition Corporation, CenturyTel of the Northwest, Inc. and CenturyTel Wireless, Inc., dated August 14, 1998. Pursuant to the regulations of the Securities and Exchange Commission, all schedules and exhibits to the foregoing agreement have been intentionally omitted from this report. The foregoing agreement contains a complete listing of all schedules and exhibits. The registrant agrees to furnish supplementary a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request. 10.2 First Supplemental Indenture, dated as of November 2, 1998, to Indenture between CenturyTel of the Northwest, Inc. and The First National Bank of Chicago. 11 Computations of Earnings Per Share. 27.1 Financial Data Schedule as of and for the nine months ended September 30, 1998. 27.2 Restated Financial Data Schedule as of and for the nine months ended September 30, 1997. B. Reports on Form 8-K ------------------- There were no reports on Form 8-K filed during the quarter ended September 30, 1998. 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. CENTURY TELEPHONE ENTERPRISES, INC. Date: November 12, 1998 /s/ R. Stewart Ewing -------------------------------- R. Stewart Ewing Senior Vice President and Chief Financial Officer