Lumen Technologies, Inc. - Interim / Quarterly Report 2000

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, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 1-7784 CenturyTel, Inc. (Exact name of registrant as specified in its charter) Louisiana 72-0651161 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 CenturyTel Drive, Monroe, Louisiana 71203 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (318) 388-9000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of October 31, 2000, there were 140,647,755 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, 2000 and 1999 3 Consolidated Statements of Comprehensive Income-- Three Months and Nine Months Ended September 30, 2000 and 1999 4 Consolidated Balance Sheets--September 30, 2000 and December 31, 1999 5 Consolidated Statements of Stockholders' Equity-- Nine Months Ended September 30, 2000 and 1999 6 Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 2000 and 1999 7 Notes to Consolidated Financial Statements 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Part II. Other Information: Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 27-28 Signature 29 PART I. FINANCIAL INFORMATION CenturyTel, Inc. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

CenturyTel, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

CenturyTel, Inc. CONSOLIDATED BALANCE SHEETS (UNAUDITED)

CenturyTel, Inc. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)

CenturyTel, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (UNAUDITED) (1) Basis of Financial Reporting The consolidated financial statements of CenturyTel, Inc. and its subsidiaries (the "Company") include the accounts of CenturyTel, Inc. ("CenturyTel") and its majority-owned subsidiaries and partnerships. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission; however, the Company believes the disclosures which are made are adequate to make the information presented not misleading. The consolidated financial statements and footnotes included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain 1999 amounts have been reclassified to be consistent with the Company's 2000 presentation, including the reclassification of the Company's Internet operations from the telephone segment to other operations. The unaudited financial information for the three months and nine months ended September 30, 2000 and 1999 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:

(3) Income from Unconsolidated Cellular Entities The following summarizes the unaudited combined results of operations of the cellular entities in which the Company's investments (as of September 30, 2000 and 1999) were accounted for by the equity method:

(4) Sales of Assets In the first quarter of 2000 the Company recorded a pre-tax gain aggregating $9.9 million ($5.2 million after-tax) due to the sale of its remaining Alaska cellular operations. In the third quarter of 2000 the Company recorded a pre-tax gain aggregating $10.7 million ($6.4 million after-tax) due to the sale of its minority interest in a cellular partnership. In the first quarter of 1999 the Company recorded a pre-tax gain aggregating $10.4 million ($6.7 million after-tax) 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 in exchange for approximately $300 million in after-tax cash. 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. (5) Recently Completed Acquisitions On July 31, 2000 and September 29, 2000, affiliates of the Company acquired over 490,000 telephone access lines and related assets from Verizon Communications, Inc. (successor to GTE Corporation) ("Verizon") in four separate transactions for approximately $1.5 billion in cash. The Company has made preliminary estimates of the fair value and useful lives of Verizon's noncurrent assets and liabilities. Such estimates are subject to change upon completion of the purchase price allocation. Under these transactions: o On July 31, 2000, the Company purchased approximately 231,000 telephone access lines and related local exchange assets comprising 106 exchanges throughout Arkansas for approximately $841 million in cash. o On July 31, 2000, Spectra Communications Group, LLC ("Spectra") purchased approximately 127,000 telephone access lines and related local exchange assets comprising 107 exchanges throughout Missouri for approximately $296 million cash. The Company owns 57.1% of Spectra, which was organized to acquire and operate these Missouri properties. At closing, the Company made a preferred equity investment in Spectra of approximately $55 million and financed substantially all of the remainder of the purchase price. o On September 29, 2000, the Company purchased approximately 70,500 telephone access lines and related local exchange assets comprising 42 exchanges throughout Wisconsin for approximately $194 million in cash. o On September 29, 2000, Telephone USA of Wisconsin, LLC ("TelUSA") purchased approximately 62,900 telephone access lines and related local exchange assets comprising 35 exchanges throughout Wisconsin for approximately $170 million in cash. The Company owns 89% of Telephone USA, which was organized to acquire and own these Wisconsin properties. At closing, the Company made an equity investment in TelUSA of approximately $37.8 million and financed substantially all of the remainder of the purchase price. The purchase prices discussed above reflect various post-closing adjustments made to date. Any remaining adjustments are not expected to be material. To finance these acquisitions on a short-term basis, the Company borrowed $1.157 billion on a floating-rate basis under its new $1.5 billion credit facility with Bank of America, N.A. and Citibank, N.A., as lenders, and Banc of America Securities LLC and Salomon Smith Barney Inc., as arrangers, and borrowed $300 million on a floating-rate basis under its existing credit facility with Bank of America, N.A. On October 19, 2000, the Company issued $500 million of 8.375% Senior Notes, Series H, due 2010, and $400 million of 7.75% Remarketable Senior Notes, Series I, due 2012 (with a remarketing date of October 15, 2002) under its $2.0 billion shelf registration statement filed in May 2000. The net proceeds of approximately $908 million were used to repay a portion of the $1.457 billion of aggregate indebtedness the Company incurred under its credit facilities in connection with the Verizon acquisitions. The following pro forma information represents the consolidated results of operations of the Company as if the Verizon acquisitions had been consummated as of January 1, 2000 and 1999.

The pro forma information is not necessarily indicative of the operating results that would have occurred if the Verizon acquisitions had been consummated as of January 1 of each respective period, nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any potential revenue enhancements or cost synergies or other operating efficiencies that could result from the acquisitions. The actual results of operations of the Verizon properties are included in the Company's consolidated financial statements only from the date of acquisition. (6) 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 long distance operations, Internet operations, call center operations (which ceased operations in the third quarter of 2000) and security monitoring operations.

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, 1999. The results of operations for the three months and nine months ended September 30, 2000 are not necessarily indicative of the results of operations which might be expected for the entire year. CenturyTel, Inc. and its subsidiaries (the "Company") is a regional diversified communications company that is primarily engaged in providing local telephone services and wireless telephone communications services. At September 30, 2000, the Company's local exchange telephone subsidiaries operated over 1.8 million telephone access lines primarily in rural, suburban and small urban areas in 21 states, and the Company's majority-owned and operated wireless entities had more than 741,000 subscribers. On July 31, 2000 and September 29, 2000, affiliates of the Company acquired over 490,000 telephone access lines and related local exchange assets in Arkansas, Missouri and Wisconsin from Verizon Communications, Inc. ("Verizon") for an aggregate of approximately $1.5 billion cash. The operations of these acquired properties are included in the Company's results of operations beginning on the respective dates of acquisition. 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. In February 2000, the Company sold the assets of its remaining Alaskan cellular operations serving approximately 10,600 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 Company's ability to effectively manage its growth, including integrating newly-acquired businesses into the Company's operations, hiring adequate numbers of qualified staff and successfully upgrading its billing and other information systems; the risks inherent in rapid technological change; the effects of ongoing changes in the regulation of the telecommunications industry; the effects of greater than anticipated competition in the Company's markets; possible changes in the demand for, or pricing of, the Company's products and services; the Company's ability to successfully introduce new product or service offerings on a timely and cost-effective basis; and the effects of more general factors such as changes in general market or economic conditions or in legislation, regulation or public policy. These and other uncertainties related to the business are described in greater detail in Item 1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any of its forward-looking statements for any reason. RESULTS OF OPERATIONS Three Months Ended September 30, 2000 Compared to Three Months Ended September 30, 1999 Net income for the third quarter of 2000 was $67.2 million compared to $64.5 million during the third quarter of 1999. Diluted earnings per share increased to $.47 during the three months ended September 30, 2000 from $.46 during the three months ended September 30, 1999, a 2.2% increase. Net income (and diluted earnings per share) excluding the after-tax effect of asset sales for the third quarter of 2000 and 1999 was $60.8 million ($.43) and $63.8 million ($.45), respectively.

Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the three months ended September 30, 2000 and 1999 were as follows:

Telephone operating income increased $18.1 million (22.2%) due to an increase in operating revenues of $51.0 million (18.6%) which was partially offset by an increase in operating expenses of $32.8 million (17.1%). Of the $51.0 million increase in operating revenues, $41.0 million was attributable to the properties acquired from Verizon. The remaining $10.0 million increase in revenues was partially due to a $4.4 million increase in local network service revenues primarily due to an increase in the number of customer access lines in incumbent markets; a $4.6 million increase in amounts received from the federal Universal Service Fund; and a $1.4 million increase due to the increased provision of custom calling features. Plant operations expenses increased $12.0 million (18.7%) of which $14.3 million was attributable to the properties acquired from Verizon and $1.2 million was due to an increase in engineering expenses. These increases were partially offset by a $2.4 million decrease in access expenses primarily due to non-recurring retroactive changes in revenue settlement methods recorded in 1999 of certain telephone subsidiaries in a limited number of states. Customer operations expenses increased $7.2 million (33.8%) of which $5.6 million was due to the properties acquired from Verizon. The remaining $1.6 million increase was primarily due to a $1.0 million increase in salaries and benefits and a $1.1 million increase in information technology expenses. Corporate and other expenses decreased $2.8 million (6.9%) primarily due to a $4.0 million decrease in contract labor expenses primarily associated with costs incurred in 1999 attributable to readying the Company's systems to be year 2000 compliant; a $1.3 million decrease in salaries and benefits; a $1.3 million decrease in information technology expenses; and a $2.4 million decrease in operating taxes. Such decreases were partially offset by a $3.0 million increase due to the properties acquired from Verizon and a $4.4 million increase in the provision for doubtful accounts. Depreciation and amortization increased $16.4 million (24.8%) of which $14.3 million was attributable to the properties acquired from Verizon (which included $2.8 million of amortization of goodwill). The remainder of the increase was primarily due to higher levels of plant in service. Wireless Operations and Income From Unconsolidated Cellular Entities

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

Wireless operating income decreased $1.4 million (3.5%) to $39.3 million in the third quarter of 2000 from $40.7 million in the third quarter of 1999. Wireless operating revenues increased $8.6 million (7.7%) while operating expenses increased $10.0 million (14.1%). The $7.5 million increase in service revenues was primarily due to a $9.3 million increase in local service revenues primarily due to a growth in the number of customers and increased minutes of use per customer, both of which were partially offset by reduced rates. Such increase was partially offset by a $1.7 million decrease due to the Company's sale of its remaining Alaska cellular properties. The Company's roaming revenues were approximately the same in third quarter 2000 and third quarter 1999 as revenues generated from increased roaming minutes of use were completely offset by a reduction in roaming rates, a downward trend in rates that the Company anticipates will continue in the near future. The following table illustrates the Company's wireless customer base in its majority-owned markets:

The average monthly service revenue per customer declined to $52 during the third quarter of 2000 from $57 during the third quarter of 1999 primarily due to price reductions and the continued trend that a higher percentage of new subscribers tend to be lower usage customers. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers are activated; (ii) as the Company continues to receive pressure from other cellular operators to reduce roaming rates and (iii) as competitive pressures from current and future wireless communications providers intensify. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, most of which are likely to result in lower average revenue per customer. During the third quarter of 2000, the Company added approximately 21,900 net contract customers while approximately 30,100 net prepaid customers were disconnected. The Company will continue to focus on adding contract customers while decreasing its focus on prepaid plans for future customer growth. Cost of equipment sold increased $3.0 million (71.2%) substantially due to an increase in units sold and an increase in average price per unit. System operations expenses increased $5.9 million (42.4%) in the third quarter of 2000 primarily due to a $2.3 million increase in toll expenses due to nonrecurring favorable adjustments recorded in the third quarter of 1999; a $1.7 million increase in the amounts paid to other carriers for service provided to the Company's customers who roam in the other carriers' service areas and a $1.6 million increase associated with operating a greater number of cell sites. General, administrative and customer service expenses decreased $3.3 million (15.1%) due to a $1.6 million decrease in allocated general office expenses and a $900,000 decrease in certain operating taxes. Sales and marketing expenses increased $5.5 million (40.4%) primarily due to a $2.3 million increase in sales commissions paid to agents due to an increase in the number of units sold and an $862,000 increase in sales promotion expenses. Depreciation and amortization decreased $1.0 million (6.0%) primarily due to nonrecurring adjustments in the third quarter of 1999. Other Operations

Contributions to operating revenues and operating income by the Company's telephone, wireless, and other operations for the nine months ended September 30, 2000 and 1999 were as follows:

Telephone operating income increased $6.8 million (2.6%) due to an increase in operating revenues of $40.8 million (4.9%) which more than offset an increase in operating expenses of $34.0 million (5.9%). Of the $40.8 million increase in operating revenues, $41.0 million was attributable to the properties acquired from Verizon in the third quarter of 2000, which was offset by a $42.9 million decrease due to the sale of the Alaska properties in the second quarter of 1999. The remaining $42.7 million increase in revenues was primarily due to a $13.7 million net increase due to the partial recovery of increased operating costs through revenue sharing arrangements with other telephone companies, increased minutes of use, increased recovery from state support funds and return on rate base; a $13.3 million increase in local network service revenues primarily due to an increase in the number of customer access lines; a $12.7 million increase in amounts received from the federal Universal Service Fund; and a $4.2 million increase in revenues associated with the provision of custom calling features. During the first nine months of 2000, the Company incurred aggregate operating expenses of approximately $19.7 million associated with pending Verizon acquisitions, two of which closed on July 31, 2000 and the remaining two of which closed on September 29, 2000. These expenses consisted of (i) approximately $8.8 million of variable overhead costs that were intentionally not eliminated subsequent to the disposition of the Alaska properties in 1999 and early 2000 due to the pending Verizon acquisitions and (ii) approximately $10.9 million of expenses associated with readying the Company's systems and staff to integrate the Verizon operations into the Company's operations immediately upon closing each transaction. Plant operations expenses increased $10.4 million (5.5%) of which $14.3 million was attributable to the properties acquired from Verizon, which was more than offset by a $15.5 million decrease due to the sale of the Company's Alaska properties. The remaining $11.6 million increase was primarily due to a $5.1 million increase in salaries and benefits; a $1.1 million increase in information technology expenses; a $1.3 million increase in access expenses primarily due to changes in revenue settlement methods of certain telephone subsidiaries in a limited number of states; and a $3.0 million increase in network operations and engineering expenses. Customer operations expenses increased $10.9 million (16.4%) of which $5.6 million was attributable to the properties acquired from Verizon, which was partially offset by a $4.4 million decrease due to the sale of the Alaska properties. The remaining $9.7 million increase was primarily due to a $3.7 million increase in information technology expenses and a $3.4 million increase in salaries and benefits. Corporate and other expenses increased $1.3 million (1.1%) of which $10.0 million was due to the properties acquired from Verizon partially offset by a $5.4 million decrease due to the sale of the Alaska properties. The remaining $3.3 million decrease was primarily due to a $6.4 million decrease in operating taxes and a $4.6 million decrease in contract labor expenses primarily associated with costs incurred in 1999 attributable to readying the Company's systems to be year 2000 compliant. Such decreases were partially offset by a $6.9 million increase in the provision for doubtful accounts. Depreciation and amortization increased $11.4 million, of which $14.3 million was attributable to the properties acquired from Verizon (which included $2.8 million of amortization of goodwill) and $7.5 million was primarily due to higher levels of plant in service. Such increases were partially offset by a $10.6 million reduction resulting from the sale of the Company's Alaska properties. Wireless Operations and Income From Unconsolidated Cellular Entities

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

Wireless operating income decreased $19.8 million (17.7%) to $92.0 million in the first nine months of 2000 from $111.8 million in the first nine months of 1999. Wireless operating revenues increased $11.5 million (3.6%) while operating expenses increased $31.3 million (15.0%). The $8.0 million increase in service revenues was primarily due to a $23.2 million increase in local service revenues primarily due to growth in the number of customers and increased minutes of use per customer, both of which were partially offset by reduced rates. Such increase was partially offset by (i) a $11.4 million decrease due to the sale of the Company's Texas and Alaska cellular properties and (ii) a $3.8 million decrease in roaming revenue due to a reduction in roaming rates (which was partially offset by an increase in roaming minutes of use), a downward trend in rates that the Company anticipates will continue in the near feature. The following table illustrates the growth in the Company's wireless customer base in its majority owned markets:

The average monthly service revenue per customer declined to $49 during the first nine months of 2000 from $54 during the first nine months of 1999 primarily due to price reductions and the continued trend that a higher percentage of new subscribers tend to be lower usage customers. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers are activated; (ii) as the Company continues to receive pressure from other cellular operators to reduce roaming rates and (iii) as competitive pressures from current and future wireless communications providers intensify. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, most of which are likely to result in lower average revenue per customer. During the first nine months of 2000, the Company added approximately 56,300 net contract customers while approximately 11,900 net prepaid customers were disconnected. The Company will continue to focus on adding contract customers while decreasing its focus on prepaid plans for future customer growth. Cost of equipment sold increased $7.9 million (56.9%) primarily due to an increase in the number of units sold and an increase in average price per unit. System operations expenses increased $9.4 million (22.1%) in the first nine months of 2000 primarily due to a $5.0 million increase associated with operating a greater number of cell sites; a $1.3 million increase in the amounts paid to other carriers for service provided to the Company's customers who roam in the other carriers' service areas; and a $2.6 million increase in toll costs. General, administrative and customer service expenses decreased $3.7 million (6.1%), of which $2.4 million was attributable to a decrease in operating taxes and $1.7 million was due to the sale of the Alaska and Texas properties. Sales and marketing expenses increased $19.5 million (47.4%) due primarily to a $6.3 million increase in sales commissions paid to agents due to an increase in the number of units sold; a $7.5 million increase in advertising and sales promotion expenses; and a $3.3 million increase in costs incurred in selling products and services in retail locations primarily due to an increase in the number of retail locations. Depreciation and amortization decreased $1.7 million (3.4%), primarily due to the sale of the Alaska and Texas properties. Other Operations

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 long distance operations, Internet operations, call center operations (which ceased operations in the third quarter of 2000) and security monitoring operations. The $18.0 million increase in long distance revenues was attributable to the growth in the number of customers and increased minutes of use per customer. The number of long distance customers as of September 30, 2000 and 1999 was 347,200 and 285,500, respectively. Internet revenues increased $3.8 million due primarily to a $3.5 million increase due to growth in the number of customers and a $2.0 million increase due to Internet operations acquired in late 1999 and mid-2000. Such increases were partially offset by a $2.3 million decrease due to the May 1999 sale of the Company's Alaska Internet operations. The $5.1 million decrease in call center revenues was due to the planned phase-out of the Company's third-party call center operations during 2000. Cost of sales and operating expenses increased $10.8 million (15.3%) primarily due to an increase of $9.6 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 and a $6.3 million increase in expenses associated with expanding the Company's Internet operations. Such increases were partially offset by a $4.0 million reduction in expenses due to the winding down of the Company's third party call center operations during 2000 and a $2.6 million decrease due to the 1999 sale of the Company's Alaska Internet operations. 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 fiber network and competitive local exchange carrier businesses. Interest Expense Interest expense increased $5.5 million in the first nine months of 2000 compared to the first nine months of 1999. Interest expense incurred in 2000 related to the Verizon acquisitions indebtedness was $13.5 million. Such increase was substantially offset by lower interest expense due to a decrease in outstanding indebtedness prior to the Verizon acquisitions. Income from Unconsolidated Cellular Entities Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, decreased $7.5 million (28.0%) in the first nine months of 2000 primarily due to the Company's proportionate share ($5.3 million) of non-cash charges that were recorded in the first quarter of 2000 by two cellular entities in which the Company owns a minority interest. The remaining decrease was primarily due to decreased earnings of certain cellular entities in which the Company owns a minority interest. 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 decreased $17.5 million during the first nine months of 2000 compared to the same period in 1999 primarily due to the minority partners' share of the gain on sale of assets of the Brownsville and McAllen, Texas cellular properties recorded in the first nine months of 1999. Excluding the effect of this gain, minority interest decreased $2.6 million primarily due to the decreased profitability of the Company's majority-owned and operated cellular entities. Gain on Sale of Assets In the first nine months of 2000, the Company recorded pre-tax gains aggregating $20.6 million. Approximately $9.9 million ($5.2 million after-tax; $.04 per diluted share) was due to the sale of the assets of the Company's remaining Alaska cellular operations and approximately $10.7 million ($6.4 million after-tax; $.05 per diluted share) was due to the sale of the Company's minority interest in a cellular partnership. 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 Companys 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 4 of Notes to Consolidated Financial Statements and Minority Interest. Other Income and Expense Other income and expense decreased $4.2 million in the first nine months of 2000 compared to the first nine months of 1999, primarily due to a $7.9 million charge related to the settlement of certain interest rate hedge contracts entered into in connection with the Verizon acquisitions. Such decrease was partially offset by a $3.7 million increase in interest income. Income Tax Expense Income tax expense decreased $33.4 million in the first nine months of 2000 compared to the first nine months of 1999. Exclusive of the effects of income tax expense on asset sales, the effective income tax rate was 41.2% and 40.1% for the nine months ended September 30, 2000 and 1999, respectively. 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 $437.5 million during the first nine months of 2000 compared to $290.5 million during the first nine months of 1999. 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 $1.753 billion for the nine months ended September 30, 2000. Net cash provided by investing activities was $211.7 million for the nine months ended September 30, 1999. Cash used for acquisitions was $1.541 billion in 2000 (substantially all of which relates to the Verizon acquisitions) compared to $16.8 million in 1999. Proceeds from the sale of assets were $29.5 million in the first nine months of 2000 compared to $453.9 million in the first nine months of 1999. Payments for property, plant and equipment were $45.7 million more in the first nine months of 2000 than in the comparable period during 1999. Capital expenditures for the nine months ended September 30, 2000 were $157.8 million for telephone, $38.9 million for wireless and $85.9 million for other operations. Revised budgeted capital expenditures for 2000 total $235 million for telephone operations, $65 million for wireless operations and $125 million for other operations. Anticipated capital expenditures for 2001 are expected to be approximately $525 million. Net cash provided by (used in) financing activities was $1.331 billion during the first nine months of 2000 compared to ($470.7) million during the first nine months of 1999. Net proceeds from the issuance of debt were $1.810 billion more during the first nine months of 2000 compared to the first nine months of 1999 primarily due to an increase in borrowings due to the purchase of assets from Verizon. In addition, payments of debt were higher in 1999 than in 2000 primarily due to the use of proceeds from the sale of assets. On July 31, 2000 and September 29, 2000, affiliates of the Company acquired over 490,000 telephone access lines and related assets from Verizon Communications, Inc. (successor to GTE Corporation) ("Verizon") in four separate transactions for approximately $1.5 billion in cash. See Note 5 of Notes to Consolidated Financial Statements for additional information. To finance these acquisitions on a short-term basis, the Company borrowed $1.157 billion on a floating-rate basis under its new $1.5 billion credit facility with Bank of America, N.A. and Citibank, N.A., as lenders, and Banc of America Securities LLC and Salomon Smith Barney Inc., as arrangers, and borrowed $300 million on a floating-rate basis under its existing credit facility with Bank of America, N.A. On October 19, 2000, the Company issued $500 million of 8.375% Senior Notes, Series H, due 2010, and $400 million of 7.75% Remarketable Senior Notes, Series I, due 2012 (with a remarketing date of October 15, 2002) under its $2.0 billion shelf registration statement filed in May 2000. The net proceeds of approximately $908 million were used to repay a portion of the $1.457 billion of aggregate indebtedness the Company incurred under its credit facilities in connection with the Verizon acquisitions. As of September 30, 2000, CenturyTel's telephone subsidiaries had available for use $129.5 million of commitments for long-term financing from the Rural Utilities Service and the Company had $327.1 million of undrawn committed bank lines of credit. In addition, in late October 2000 the Company implemented a commercial paper program that authorizes the Company to have outstanding up to $1.5 billion in commercial paper at any one time. As described further in Item 5 to this Report, the Company has agreed to sell certain operating licenses for an aggregate of $205 million, which the Company expects to receive in installments during 2001 and 2002 On September 19, 2000, Moody's Investors Service ("Moody's") lowered CenturyTel's long-term debt rating to Baa2 (with a stable outlook) from Baa1 and on September 20, 2000, Standard & Poor's ("S&P") affirmed its rating of CenturyTel's long-term debt of BBB+ (with a negative outlook). The Company's commercial paper program, initiated in late October 2000 is rated P2 by Moody's and A2 by S&P. 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 (exclusive of the recently acquired Verizon properties.) Accounting Pronouncements In June 1998 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB deferred the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. SFAS 133 established accounting and reporting standards for derivative instruments and for hedging activities by requiring that entities recognize all derivatives as either assets or liabilities at fair value on the balance sheet. Based on the Company's current use of derivatives, SFAS 133 is not expected to materially impact the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition and deferred costs in the financial statements. SAB 101 is effective beginning in the fourth quarter of 2000. Based on the Company's current revenue recognition policies, SAB 101 is not expected to materially impact the Company's financial position or results of operations. Regulatory Matters On October 20, 2000, a comprehensive reform plan designed to address access rates, universal service, rate of return and separations was filed with the Federal Communications Commission ("FCC") by a Multi Association Group representing small and mid-sized telephone companies that currently are regulated under traditional rate of return mechanisms. The plan attempts to mirror certain principles of the access charge reform plan implemented by the FCC for price cap companies in mid-1999. The plan, as filed, would create more efficient cost recovery under the FCC's access charge reform system while making universal support more explicit and enforcing the geographic averaging requirements of the Telecommunication Act of 1996. The plan also proposes to remove the current caps on high cost loop support. Under the plan, companies will have a five-year period to transition from their existing forms of rate of return regulation to a new form of incentive regulation. If adopted in its current form, the plan would not have a material effect on the Company's level of operating revenues or results of operations; however, until the plan undergoes the rulemaking procedures of the FCC, it is premature to assess the ultimate impact this proposal will have on the Company. There can be no assurance that the plan, in its final form, will not have a material effect on the Company's results of operations. In connection with authorizing the Company's acquisition from Verizon of telephone properties in Wisconsin, the Wisconsin Public Service Commission indicated its intent to review the possibility of regulating all of the Company's Wisconsin local exchange carriers on an unitary basis, which would reduce the Company's revenues in Wisconsin (unless and to the extent the Company could mitigate these reductions through rate adjustments or other revenue enhancements approved by the Wisconsin Public Service Commission). 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, 2000, the fair value of the Company's long-term debt was estimated to be $3.2 billion based on the overall weighted average rate of the Company's long-term debt of 7.3% and an overall weighted maturity of 12 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 73 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 $128.9 million decrease in fair value of the Company's long-term debt. In the first quarter of 2000, the Company entered into interest rate hedge contracts designed to reduce its interest rate risk with respect to $500 million of long-term public debt that it ultimately expected to incur in connection with providing long-term financing for its Verizon acquisitions. The Company recorded a $7.9 million charge in the third quarter of 2000 related to the settlement of certain of these hedge contracts. PART II. OTHER INFORMATION CenturyTel, Inc. Item 5. Other Information On November 3, 2000, the Company entered into a definitive agreement with Leap Wireless International, Inc. to sell 30 PCS (Personal Communication Service) operating licenses for an aggregate of $205 million. The licenses cover markets with an aggregate population of approximately seven million in five states. The transaction is expected to close in the first quarter of 2001, subject to (i) approval of the Federal Communications Commission, (ii) receipt of certain partnership approvals and (iii) certain other closing conditions. Approximately $119 million of the purchase price will be delivered at closing.The remaining $86 million will be in the form of a promissory note bearing 10% interest per annum.$74 million of the note is payable within nine months after the issuance of the note with the remainder payable in 2002 upon maturity of the note. These receipts will be used to pay down indebtedness incurred in connection with the Company's recent acquisitions of properties from Verizon Communications, Inc. The Company's aggregate net proceeds (after taxes and payments to minority investors) are estimated to be approximately $125 million. The Company will record a pre-tax gain of approximately $190 million in the period in which the transaction closes. Item 6. Exhibits and Reports on Form 8-K A. Exhibits 4.1 Amendment No. 2, dated and effective as of June 30, 2000, to the Rights Agreement by and between the Registrant and Computershare Investor Services, LLC, as rights agent 4.2 Form of the Registrant's 8.375% Senior Notes, Series H, Due 2010, issued October 19, 2000 4.3 Form of the Registrant's 7.750% Remarketable Senior Notes, Series I, due 2012, issued October 19, 2000 (the "Remarketable Notes") 4.4 Remarketing Agreement, dated as of October 19, 2000, between the Registrant and Banc of America Securities LLC, as remarketing agent for the Remarketable Notes 11 Computations of Earnings Per Share. 27 Financial Data Schedule as of and for the nine months ended September 30, 2000. B. Reports on Form 8-K (i) The following item was reported in the Form 8-K filed August 1, 2000. Item 5. Other Events - News release announcing second quarter 2000 results of operations. (ii) The following item was reported in the Form 8-K filed August 15, 2000. Item 2. Acquisition or Disposition of Assets - Acquisition of certain assets from Verizon Communications, Inc. in Arkansas and Missouri. (iii) The following items were reported in the Form 8-K filed October 5, 2000. Item 2. Acquisition or Disposition of Assets - Consummation by the Company of the final two of its four acquisitions of assets from Verizon Communications, Inc. Item 5. Other Events - (i) Company announcement concerning third quarter 2000 expected operating results and (ii) update of CenturyTel's debt ratings. Item 7. Financial Statements and Exhibits - (i) Financial statements of properties acquired from Verizon Communications Inc. and (ii) Unaudited pro forma consolidated condensed financial information related to the Verizon acquisitions. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CenturyTel, Inc. Date: November 14, 2000 /s/ Neil A. Sweasy ------------------------- Neil A. Sweasy Vice President and Controller (Principal Accounting Officer)

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Lumen Technologies, Inc. Interim / Quarterly Report 2000

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Lumen Technologies, Inc. — Interim / Quarterly Report 2000

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Lumen Technologies, Inc. Interim / Quarterly Report 2000