CENTURY TELEPHONE ENTERPRISES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended December 31, 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 (IRS Employer
incorporation or organization) Identification No.)

100 Century Park Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code - (318) 388-9000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
Berlin Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Berlin Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of February 28, 1999, the aggregate market value of voting stock held by
non-affiliates (affiliates being for these purposes only directors, executive
officers and holders of more than five percent of the Company's outstanding
voting securities) was $3.7 billion. As of February 28, 1999, there were
92,357,172 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's Proxy Statement prepared in connection with the
1999 annual meeting of shareholders are incorporated in Part III of this Report.

PART I

Item 1. Business

General. Century Telephone Enterprises, Inc. ("Century"), which operates
under the tradename of CenturyTel, is a regional diversified communications
company engaged primarily in providing local exchange telephone services and
cellular telephone services. For the year ended December 31, 1998, local
exchange telephone operations and cellular operations provided 69% and 26%,
respectively, of the consolidated revenues of Century and its subsidiaries (the
"Company"). All of the Company's telephone and cellular operations are conducted
within the continental United States and Alaska.

At December 31, 1998, the Company's local exchange telephone subsidiaries
operated over 1.3 million telephone access lines, primarily in rural, suburban
and small urban areas in 21 states, with the largest customer bases located in
Wisconsin, Washington, Alaska, Michigan, Louisiana, Colorado, Ohio, Oregon and
Montana. According to published sources, the Company is the ninth largest local
exchange telephone company in the United States based on the number of access
lines served. For more information, see "Telephone Operations."

At December 31, 1998, the Company's majority-owned and operated cellular
systems served approximately 624,000 customers in 21 Metropolitan Statistical
Areas ("MSAs") in Michigan, Louisiana, Arkansas, Mississippi, Wisconsin and
Texas, and 23 Rural Service Areas ("RSAs"), most of which are in Michigan,
Mississippi, Wisconsin, Louisiana and Arkansas. The Company's ownership interest
in these operated markets represented approximately 8.1 million pops (the
estimated population of licensed cellular telephone markets multiplied by the
Company's proportionate equity interest in the licensed operators thereof). At
December 31, 1998, the Company also owned minority equity interests in 10 MSAs
and 17 RSAs, representing approximately 1.9 million pops. Of the Company's 10.1
million aggregate pops, approximately 67% are attributable to the Company's MSA
interests, with the balance attributable to its RSA interests. All of the
cellular systems operated by the Company are operated under wireline licenses,
except for five MSAs and four RSAs which are operated under non-wireline
licenses. According to data derived from published sources, the Company is the
tenth largest cellular telephone company in the United States based on the
Company's 10.1 million pops. For more information , see "Cellular Operations."

The Company also provides long distance, call center, security monitoring,
cable television and interactive services in certain local and regional markets,
as well as certain printing and related services. For more information, see
"Other Operations."

Recent acquisitions and dispositions. On December 1, 1998, the Company
acquired the assets of certain of Ameritech's telephone operations and related
telephone directories in 19 telephone exchanges covering 21 communities in
northern and central Wisconsin for approximately $221 million cash. The
operations acquired by the Company include the telephone property and equipment
that serves nearly 69,000 customers, or approximately 86,000 access lines, as
well as the nine related telephone directories.

On December 1, 1997, the Company acquired Pacific Telecom, Inc. ("PTI") in
exchange for $1.503 billion cash. As a result of the PTI acquisition, the
Company acquired (i) over 660,000 telephone access lines in four midwestern
states, seven western states and Alaska, (ii) over 88,000 cellular customers in
ten markets located in two midwestern states and Alaska and (iii) various
wireless, cable television and other communications assets. In May 1998, the
Company sold PTI's undersea cable operations for approximately $61.8 million
cash.

During late 1997 and early 1998, the Company acquired two security alarm
businesses that provide services to approximately 6,000 customers in north
central Louisiana, southern Arkansas and northwestern Mississippi.

In December 1997 the Company acquired an additional 76% interest in
Wisconsin RSA 8, which is adjacent to the Company's existing cellular operations
in southwestern Wisconsin.

During 1997 the Company exchanged its 89% interest in its competitive access
subsidiary for approximately 4.3 million shares of publicly traded common stock.
Approximately 3.8 million shares of such stock were sold in November 1997 for
$203 million and the remaining shares were converted into approximately 1.0
million shares of MCIWorldCom, Inc. ("WorldCom") in early 1998. In the second
quarter of 1998, the Company sold 750,000 shares of WorldCom common stock for
$35.6 million. In January 1999, the Company sold its remaining shares of
WorldCom stock for $20.1 million.

In January 1997 the Company acquired Pecoco, Inc., a provider of local
exchange telephone service in four counties in Wisconsin. As a result of the
acquisition, the Company acquired (i) more than 7,600 telephone access lines,
(ii) a minority interest in two cellular partnerships serving Madison and
Milwaukee, Wisconsin, representing approximately 35,000 pops and (iii) certain
cable television assets.

In 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. The Alaska
transaction is anticipated to close in the second quarter of 1999, subject to
regulatory approvals and various closing conditions. The transaction is also
subject to the buyer's receipt of financing pursuant to its existing debt and
equity financing commitments.

In January 1999 the Company signed definitive asset purchase agreements to
sell all of the operations of the Brownsville and McAllen, Texas, cellular
markets to Western Wireless Corporation for $95 million cash, subject to various
adjustments. The Company, which is the majority owner in these markets, will
receive a proportionate share of the sale proceeds of approximately $39 million
after-tax. The transaction is expected to close in the second quarter of 1999,
subject to regulatory approvals, the satisfactory completion of buyer's due
diligence and various other closing conditions.

Over the past several years, the Company has expanded its operations through
an ongoing program of acquisitions. Substantial acquisitions during the last
five years also include the 1994 acquisition of Celutel, Inc. (over 1.1 million
pops). The Company continually evaluates the possibility of acquiring additional
telecommunications assets in exchange for cash, securities or both, and at any
given time may be engaged in discussions or negotiations regarding additional
acquisitions. Over the past few years, the number and size of communications
properties on the market has increased substantially. Recently, two large
communications companies announced their intent to sell up to 1.6 million
primarily rural access lines. Although the Company's primary focus will continue
to be on acquiring telephone and wireless interests that are proximate to its
properties or that serve a customer base large enough for the Company to operate
efficiently, other communications interests may also be acquired.

Other. As of December 31, 1998, the Company had approximately 5,800
employees, approximately 1,000 of whom were members of seven different
bargaining units represented by the International Brotherhood of Electrical
Workers, Communications Workers of America, or the NTS Employee Committee.
Relations with employees continue to be generally good.

In mid-1998, the Company adopted the tradename "CenturyTel" as part of its
branding strategy to operate under a single name. The Company currently markets
its telephone, cellular, long distance, Internet access and most of its other
services under the CenturyTel tradename. Century proposes to formally change its
corporate name to CenturyTel, Inc. at its 1999 annual shareholders meeting
scheduled for May 6, 1999.

Century was incorporated under Louisiana law in 1968 to serve as a holding
company for several telephone companies acquired over the previous 15 to 20
years. Century's principal executive offices are located at 100 Century Park
Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.

TELEPHONE OPERATIONS

According to published sources, the Company is the ninth largest local
exchange telephone company in the United States, based on the more than 1.3
million access lines it served at December 31, 1998. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominately rural, suburban and small urban
markets in 21 states. The table below sets forth certain information with
respect to the Company's access lines as of December 31, 1998 and 1997.

December 31, 1998 December 31, 1997
- -------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
- -------------------------------------------------------------------------

Wisconsin 340,895 25% 245,091 20%
Washington 175,508 13 166,611 14
Alaska 131,858 10 124,869 10
Michigan 108,769 8 104,440 9
Louisiana 97,676 7 94,432 8
Colorado 86,249 7 81,206 7
Ohio 80,400 6 77,987 7
Oregon 75,392 6 71,544 6
Montana 60,657 5 57,390 5
Texas 44,822 3 41,852 4
Arkansas 43,778 3 42,193 4
Minnesota 29,708 2 29,029 2
Tennessee 25,609 2 24,578 2
Mississippi 19,648 2 17,839 2
Idaho 5,881 1 5,746 -
New Mexico 5,770 - 5,559 -
Indiana 5,136 - 4,975 -
Wyoming 4,663 - 4,447 -
Iowa 1,938 - 1,801 -
Arizona 1,780 - 1,624 -
Nevada 430 - 437 -
- ------------------------------------------------------------------------
1,346,567 100% 1,203,650 100%
========================================================================

As indicated in the following table, the Company has experienced growth in
its telephone operations over the past several years, a substantial portion of
which was attributable to the acquisition of PTI and other telephone properties
and to the expansion of services:

Year ended or as of December 31,
- ------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------
(Dollars in thousands)

Access lines 1,346,567 1,203,650 503,562 480,757 454,963
% Residential 74% 74 77 78 79
% Business 26% 26 23 22 21
Operating revenues $1,091,610 530,597 451,538 419,242 391,265
Capital expenditures $ 233,190 115,854 110,147 136,006 152,336
- ------------------------------------------------------------------------

Future growth in telephone operations is expected to be derived from (i)
acquiring additional telephone properties, (ii) providing service to new
customers, (iii) increasing network usage and (iv) providing additional services
made possible by advances in technology and changes in regulation. For
information on developing competitive trends, see "-Regulation and Competition."

Services

The Company's local exchange telephone subsidiaries derive revenue from
providing (i) local telephone services, (ii) network access services and (iii)
other related services. The following table reflects the percentage of telephone
operating revenues derived from these respective services:

1998 1997 1996
- ----------------------------------------------------------------

Local service 30.4% 27.8 26.9
Network access 57.7 60.2 61.2
Other 11.9 12.0 11.9
- ----------------------------------------------------------------
100.0% 100.0 100.0
================================================================

Local service revenues are derived from the provision of local exchange
telephone services in the Company's service areas. Internal access line growth
during 1998, 1997 and 1996 was 4.7%, 4.4% and 4.3%, respectively. The Company
believes that access line growth in the future should benefit from population
growth in its service areas, acquisitions and increases in the number of
households maintaining more than one access line. The Company markets local
Internet access in 396 communities in 12 states, which the Company believes has
led to an increase in orders for second lines.

Network access revenues primarily relate to services provided by the Company
to long distance carriers and other customers in connection with the use of the
Company's facilities to originate and terminate interstate and intrastate long
distance telephone calls. Access charges to long distance carriers and other
customers are based on tariffed access rates filed with the Federal
Communications Commission ("FCC") for interstate services and with the
respective state regulatory agency for intrastate services. Certain of the
Company's interstate network access revenues are based on access charges filed
directly with the FCC; the remainder of such revenues are derived under revenue
sharing arrangements with other LECs administered by the National Exchange
Carrier Association ("NECA").

Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on access tariffs, which are subject to state regulatory commission
approval. Additionally, certain of the Company's intrastate network access
revenues, along with intrastate long distance revenues, are derived through
revenue sharing arrangements with other LECs.

The installation of digital switches and related software has been an
important component of the Company's growth strategy because it allows the
Company to offer enhanced services (such as call forwarding, conference calling,
caller identification, selective call ringing and call waiting) and to thereby
increase utilization of existing access lines. In 1998 the Company continued to
expand its list of premium services (such as voice mail and Internet access)
offered in certain service areas and aggressively marketed these services.

The Company is installing fiber optic cable in certain of its high traffic
routes and provides alternative routing of telephone service over fiber optic
cable networks in several strategic operating areas. At December 31, 1998, the
Company's telephone subsidiaries had over 8,350 miles of fiber optic cable in
use.

Other revenues include revenues related to (i) leasing, selling, installing,
maintaining and repairing customer premise telecommunications equipment and
wiring, (ii) providing billing and collection services for long distance
companies, (iii) participating in the publication of local directories and (iv)
providing Internet access. At the end of 1998, the Company offered Internet
access in telephone markets representing 60% of its access lines. Certain large
communications companies for which the Company currently provides billing and
collection services continue to indicate their desire to reduce their billing
and collection expenses, which may result in future reductions of the Company's
billing and collection revenues.

For further information on the regulation of the Company's revenues,see
"-Regulation and Competition."

Federal Financing Programs

Certain of the Company's telephone subsidiaries receive long-term financing
from the Rural Utilities Service ("RUS") and the Rural Telephone Bank ("RTB").
The RUS has made long-term loans to telephone companies since 1949 for the
purpose of improving telephone service in rural areas. The RUS continues to make
new loans at interest rates that range from 5% to 7% based on borrower
qualifications and the cost of funds to the United States government. The RTB,
established in 1971, makes long-term loans at interest rates based on its
average cost of funds as determined by statutory formula (such rates ranged from
5.71% to 5.96% for the fiscal year ended September 30, 1998), and in some cases
makes loans concurrently with RUS loans. Most of the Company's telephone plant
is pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS and RTB. The Company's telephone subsidiaries which have
borrowed from government agencies generally may not loan or advance any funds to
Century, but may pay dividends if certain financial covenants are met.

For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.

Regulation and Competition

Traditionally, LECs have operated as regulated monopolies. Consequently, the
majority of the Company's telephone operations have traditionally been regulated
extensively by various state regulatory agencies (generally called public
service commissions or public utility commissions) and by the FCC. As discussed
in greater detail below, passage of the Telecommunications Act of 1996 (the
"1996 Act"), coupled with state legislative and regulatory initiatives and
technological changes, has fundamentally altered the telephone industry by
reducing the regulation of LECs and permitting competition in each segment of
the telephone industry. Although Century anticipates that these trends towards
reduced regulation and increased competition will continue, it is difficult to
determine the form or degree of future regulation and competition in the
Company's service areas.

State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions. Most of such commissions have traditionally regulated
pricing through "rate of return" regulation that focuses on authorized levels of
earnings by LECs. Most of these commissions also (i) regulate the purchase and
sale of LECs, (ii) prescribe depreciation rates and certain accounting
procedures and (iii) regulate various other matters, including certain service
standards and operating procedures.

In recent years, state legislatures and regulatory commissions having
jurisdiction over the Company's telephone subsidiaries in most of the states in
which the Company has substantial operations have either begun to reduce the
regulation of LECs or have announced their intention to do so, and it is
expected that this trend will continue. Wisconsin, Louisiana and several other
of these states have passed legislation which permit LECs to opt out of rate of
return regulation in exchange for agreeing to alternative forms of regulation
which typically permit the LEC greater freedom to establish service rates in
exchange for agreeing not to charge rates in excess of specified caps. The
Company continues to explore its options in these states. The Company believes
that reduced regulatory oversight of certain of the Company's telephone
operations may allow the Company to offer new and competitive services faster
than under the traditional regulatory process. Coincident with these efforts,
legislative, regulatory and technological changes have introduced competition
into the local exchange industry. See "-Developments Affecting Competition."

Substantially all of the state regulatory commissions have statutory
authority, the specific limits of which vary, to initiate and conduct earnings
reviews of the LECs that they regulate. As part of the movement towards
deregulation, several states are moving away from traditional rate of return
regulation towards price cap regulation and incentive regulation (which are
similar to the FCC regulations discussed below), and are actively encouraging
larger LECs to adopt these newer forms of price regulation. The continuation of
this trend may lead to fewer earnings reviews in the future. Currently, however,
most of the Company's LECs continue to be regulated under rate of return
regulation.

During 1995 the Louisiana Public Service Commission ("LPSC") adopted a new
regulatory plan for independent telephone companies in Louisiana that
incrementally reduced the Company's access revenues between 1996 and 1998. In
1997 the LPSC adopted a Consumer Price Protection Plan (the "Louisiana Plan"),
effective July 1997, which impacts all of the Company's LECs operating in
Louisiana. The new form of regulation will focus on price and quality of
service. Under the Louisiana Plan, the Company's Louisiana LECs' local rates
were frozen for a period of three years and access rates were frozen for a
period of two years. Although the Louisiana Plan has no specified term, the LPSC
is required to review it by mid-2000. The Company's Louisiana LECs have the
option to propose a new plan at any time if the LPSC determines that (i)
effective competition exists or (ii) unforeseen events threaten the subsidiary's
ability to provide adequate service or impair its financial health.

The Company's telephone operations in Wisconsin that were acquired in the
December 1997 acquisition of PTI have been regulated under an alternative
regulation plan (the "Wisconsin Plan") since June 1996. The Wisconsin Plan has a
five-year term and includes a provision that allows the Company's subsidiary
covered by such plan to freely adjust rates within specified parameters if
certain quality-of-service and infrastructure-development commitments are met.
The Wisconsin Plan also includes initiatives designed to promote competition. In
early 1999, another of the Company's Wisconsin LECs filed a request with the
Wisconsin Public Service Commission to be regulated under an alternative
regulation plan.

The Michigan Public Service Commission regulates the Company's Michigan
telephone subsidiaries pursuant to the parameters established by the Michigan
Telecommunications Act of 1995 ("MTA"). The MTA restructured regulation to focus
on price and quality of service as opposed to traditional rate of return
regulation. The MTA relies more on existing federal and state law regarding
antitrust consumer protection and fair trade to provide safeguards for
competition and consumers.

FCC regulation. The FCC regulates the interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other LEC customers by
the Company for use of its local network in connection with the origination and
termination of interstate telephone calls. Additionally, the FCC has prescribed
certain rules and regulations for telephone companies, including regulations
regarding the use of radio frequencies; a uniform system of accounts; and rules
regarding the separation of costs between jurisdictions and, ultimately, between
interstate services.

Effective January 1, 1991, the FCC adopted price-cap regulation relating to
interstate access rates for the Regional Bell Operating Companies ("RBOCs") and
GTE Corporation. All other LECs may elect to be subject to price-cap regulation.
Under price-cap regulation, limits imposed on a company's interstate rates are
adjusted periodically to reflect inflation, productivity improvement and changes
in certain non-controllable costs. In May 1993 the FCC adopted an optional
incentive regulatory plan for LECs not subject to price-cap regulation. A LEC
electing the optional incentive regulatory plan would, among other things, file
tariffs based primarily on historical costs and not be allowed to participate in
the relevant NECA pooling arrangements. The Company has not elected price-cap
regulation or the optional incentive regulatory plan, but will continue to
evaluate its options on a periodic basis. Either election, if made by the
Company, would have to be applicable to all of the Company's telephone
subsidiaries. The authorized interstate access rate of return for the Company's
telephone subsidiaries is currently 11.25%, which is the authorized rate
established by the FCC for LECs not governed by price-cap regulation or the
optional incentive regulatory plan.

In September 1998, the FCC initiated a proceeding to represcribe the
authorized rate of return for interstate access services provided by LECs. The
FCC periodically represcribes this rate of return to ensure that the service
rates filed by incumbent LECs subject to rate of return regulation continue to
be just and reasonable. It is uncertain whether or by how much the FCC may lower
the authorized rate of return.

In an access charge reform order adopted in May 1997, the FCC changed its
system of interstate access charges to make them compatible with the
deregulatory framework established by the 1996 Act. Such changes are primarily
applicable to price-cap companies. The Company's telephone subsidiaries
determine interstate revenues under rate of return regulation and are,
therefore, only minimally impacted by the access charge reform order. In July
1998, the FCC issued a Notice of Proposed Rulemaking to amend the access charge
rules for rate of return companies in a manner similar to that adopted for price
cap companies, subject to reviewing whether differences exist between price cap
companies and rate of return companies that would require different rules in
order to achieve the goal of fostering an efficient, competitive marketplace.
Comments were filed with the FCC in August 1998; the FCC has not yet issued a
final ruling on this matter.

In 1998 the FCC created a federal-state joint board to review jurisdictional
separations procedures through which the costs of regulated telecommunications
services are allocated to the interstate and intrastate jurisdictions.

High-cost support funds, revenue sharing arrangements and related matters. A
significant number of the Company's telephone subsidiaries recover a portion of
their costs under federal and state cost recovery mechanisms that traditionally
have allowed LECs serving small communities and rural areas to provide
communications services reasonably comparable to those available in urban areas
and at reasonably comparable prices.

The 1996 Act authorized the establishment of new federal and state universal
service funds to provide continued support to eligible telecommunications
carriers. In May 1997 the FCC adopted an order on universal service, as mandated
by the 1996 Act. In the order, the FCC ruled that rural telephone companies
which are designated eligible telecommunications carriers will continue to
receive universal service funding. Each of the Company's LECs has been so
designated by its respective state regulatory agency. As a result, the Company's
LECs will continue to receive payments under the federal support mechanisms
currently in effect until the FCC adopts funding support mechanisms based on
forward-looking economic costs, which it is required to do, but no earlier than
January 2001. Although the Company anticipates that it may experience a
reduction in its federal support revenues at some point in the future,
management believes it is premature to assess or estimate the ultimate impact
thereof. There can be no assurance, however, that such impact will not be
material. During 1998 and 1997 the Company's telephone subsidiaries received
$127.6 million and $65.4 million, respectively, from the federal Universal
Service Fund.

As part of its universal service order, the FCC also established a new
program to provide up to $2.25 billion of discounted telecommunications services
annually to schools and libraries, commencing January 1998. In addition, the FCC
established a $400 million annual fund to provide discounted telecommunications
services for rural health care providers. All communications carriers providing
interstate telecommunications services, including the Company's LECs and its
cellular and long distance operations, are required to contribute to these
programs. The FCC has stated that local exchange telephone companies will
recover their funding contributions in their rates for interstate services. The
Company's contribution by its cellular and long distance operations for 1998,
which was passed on to its customers, was approximately $3.1 million.

Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "-State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.

Substantially all of the Company's LECs concur with the common line tariffs
and certain of the Company's LECs concur with the traffic sensitive tariffs
filed by the NECA; such LECs participate in the access revenue sharing
arrangements administered by the NECA for interstate services. All of the
intrastate network access revenues of the Company's LECs are based on access
charges, cost separation studies or special settlement arrangements.
See "-Services."

Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. There is no assurance
that these requests will not result in decreased access revenues.

Developments affecting competition. The communications industry is currently
undergoing fundamental changes which may have a significant impact on the future
operations and financial performance of all communications companies. Primarily
as a result of legislative and regulatory initiatives and technological changes,
competition has been introduced and encouraged in each sector of the telephone
industry, including, most recently, the local exchange sector. As a result, the
number of companies offering competitive services has increased substantially.

As indicated above, in February 1996 Congress enacted the 1996 Act, which
obligates LECs to permit competitors to interconnect their facilities to the
LEC's network and to take various other steps that are designed to promote
competition. The 1996 Act imposes several duties on a LEC if it receives a
specific request from another entity which seeks to connect with or provide
services using the LEC's network. In addition, each incumbent LEC is obligated
to (i) negotiate interconnection agreements in good faith, (ii) provide
"unbundled" access to all aspects of the LEC's network, (iii) offer resale of
its telecommunications services at wholesale rates and (iv) permit competitors
to collocate its physical plant on the LEC's property, or provide virtual
collocation if physical collocation is not practicable. Although the 1996 Act
provides certain exemptions for rural LECs such as those operated by the
Company, the FCC's August 1996 order implementing most of the 1996 Act's
interconnection provisions placed the burden of proving the continuing
availability of these exemptions on rural LECs. States are permitted to adopt
laws or regulations that provide for greater competition than is mandated under
the 1996 Act. Although substantial portions of the FCC's August 1996
interconnection order have survived judicial challenge, the FCC has neither
completed its interconnection rulemaking nor issued rules on universal service
or access reform. Management believes that competition in its telephone service
areas will ultimately increase as a result of the 1996 Act, although the form
and degree of competition cannot be ascertained until such time as the FCC (and,
in certain instances, state regulatory commissions) adopts final and
nonappealable implementing regulations.

Substantially all of the 21 states in which the Company provides telephone
services have taken legislative or regulatory steps to further introduce
competition into the LEC business. Largely as a result of these steps and the
1996 Act, several competitive access providers originally organized to provide
redundancy or access services have begun, during the past several years, to
provide competitive local exchange services, principally in urban areas.
Moreover, several well-capitalized long distance, cable television, wireless and
electric utility companies, along with several start-up companies, have also
begun to provide competitive local exchange services or announced their
intention to do so, and this trend is expected to continue. Currently the
Company is subject to a limited number of agreements permitting competitors in
Wisconsin to purchase from the Company unbundled network elements or wholesale
services, and the Company is aware of only a few other companies that have
requested authorization to provide local exchange service in the Company's
service areas. Over time, however, the Company anticipates that several more
companies will request authorization to provide competitive services, especially
in its operating areas located near larger urban areas.

In addition to receiving services directly from companies competing with
incumbent LECs, long distance companies and other users of toll service are
expected to increasingly seek other means to bypass LECs' switching services and
local distribution facilities. Certain interexchange carriers provide services
which allow users to divert their traffic from LECs' usage-sensitive services to
their flat-rate services. In addition, users or long distance companies may
construct, modify or lease facilities to transmit traffic directly from a user
to a long distance company. Cable television companies, in particular, may be
able to modify their networks to partially or completely bypass the Company's
local network. Moreover, users may choose to use wireless services to bypass
LECs' switching services. Although certain of the Company's telephone
subsidiaries have experienced a loss of traffic to such bypass, the Company
believes that the impact of such loss on revenues has not been significant.

Historically, cellular telephone services have complemented traditional LEC
services. However, the Company anticipates that existing and emerging wireless
technologies will increasingly compete with LEC services. Technological and
regulatory developments in cellular telephone, personal communications services,
digital microwave, coaxial cable, fiber optics, local-multipoint-distribution
services and other wired and wireless technologies are expected to further
permit the development of alternatives to traditional landline services. For
further information on certain of these developments, see "Wireless Operations -
Regulation and Competition."

To the extent that the telephone industry increasingly experiences
competition, the size and resources of each respective competitor may
increasingly influence its prospects. Many companies currently providing or
planning to provide competitive communication services have substantially
greater financial and marketing resources than the Company, and several are not
subject to the same regulatory constraints as the Company.

The Company anticipates that the traditional operations of LECs will be
increasingly impacted by continued technological developments as well as
legislative and regulatory initiatives affecting the ability of LECs to provide
new services and the capability of long distance companies, competitive local
exchange providers, wireless companies, cable television companies and others to
provide competitive LEC services. Competition relating to services traditionally
provided solely by LECs is expected to initially affect large urban areas to a
greater extent than rural, suburban and small urban areas such as those in which
the Company operates. The Company intends to actively monitor these
developments, to observe the effect of emerging competitive trends in initial
competitive markets and to continue to evaluate new business opportunities that
may arise out of future technological, legislative and regulatory developments.

The Company anticipates that regulatory changes and competitive pressures
may result in future revenue reductions in its telephone operations. However,
the Company anticipates that such reductions may be minimized by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. While the Company expects its telephone revenues to continue
to grow, its internal telephone revenue growth rate may slow during upcoming
periods.

CELLULAR OPERATIONS

At December 31, 1998, the Company's cellular holdings represented
approximately 10.1 million pops, of which 67% were applicable to MSAs and 33%
were RSA pops. According to data derived from published sources, the Company is
the tenth largest cellular telephone company in the United States based on the
Company's 10.1 million pops.

Cellular Industry

The cellular telephone industry has been in existence for approximately 15
years in the United States. The industry has grown significantly during this
period and cellular service is now available in substantially all areas of the
United States. According to the Cellular Telecommunications Industry
Association, at September 1998 there were estimated to be over 51 million
cellular customers across the United States.

Until recently, substantially all radio transmissions of cellular systems
were conducted on an analog basis. Technological developments involving the
application of digital radio technology offer certain advantages over analog
technologies, including expanding the capacity of mobile communications systems,
improving voice clarity, permitting the introduction of new services, and making
such systems more secure. Providers of certain services competitive with
cellular have incorporated digital technology into their operations. In recent
years most major cellular carriers have installed digital cellular voice
transmission facilities in certain of their systems, principally in larger
markets. Digital service is now available in 95% of the Company's MSA markets
and the Company plans to expand the marketing of such service during 1999. See
"-Regulation and Competition-Developments Affecting Wireless Competition."

Construction and Maintenance

The construction and maintenance of cellular systems is capital intensive.
Although all of the Company's MSA and RSA systems have been operational for
several years, the Company has continued to add cell sites to increase coverage,
provide additional capacity, and improve the quality of these systems. In 1998
the Company completed construction of 57 cell sites in markets operated by the
Company. At December 31, 1998, the Company operated 615 cell sites in its
majority-owned markets.

During the last few years the Company upgraded certain portions of its
cellular systems to be capable of providing digital service. Such service became
operational in certain markets during 1996 and 1997 using the TDMA digital
standard and the Company continued to install digital voice transmission
facilities in other markets in 1998. See "-Regulation and
Competition-Developments Affecting Wireless Competition." Capital expenditures
related to majority-owned and operated cellular systems totaled approximately
$49.5 million in 1998. Such capital expenditures for 1999 are anticipated to be
approximately $70 million.

Strategy

The Company's business development strategy for its cellular telephone
operations is to secure operating control of service areas that are
geographically clustered. Clustered cellular systems aid the Company's marketing
efforts and provide various operating and service advantages. Approximately 43%
of the Company's pops in markets operated by the Company are in a single,
contiguous cluster of eight MSAs and nine RSAs in Michigan; another 17% are in a
cluster of five MSAs and seven RSAs in northern and central Louisiana, southern
Arkansas and eastern Texas. See "-The Company's Cellular Interests."

Another component of the Company's strategy for cellular operations includes
capturing revenues from roaming service. Roaming service revenues are derived
from calls made in one cellular service area by subscribers from other service
areas. Roaming service is made possible by technical standards requiring that
cellular telephones be functionally compatible with the cellular systems in all
United States market areas. In exchange for providing roaming service to
customers of other cellular carriers, the Company charges premium rates to most
of these other carriers, who then frequently pass on some or all of these
premium rates to their own customers. The Company's Michigan cellular properties
include a significant portion of the interstate highway corridor between Chicago
and Detroit. Its Louisiana properties include an east-west interstate highway
and a north-south interstate highway which intersect in its Louisiana cellular
service area. Its Mississippi properties include two east-west interstate
highways and two north-south interstate highways. See "-Services, Customers and
System Usage."

Marketing

The Company markets its cellular services through several distribution
channels, including its direct sales force, retail outlets owned by the Company
and independent agents. All sales employees and certain independent agents
solicit cellular customers exclusively for the Company. Company sales employees
are compensated by salary and commission and independent sales agents are paid
commissions. The Company advertises its services through various means,
including direct mail, billboard, magazine, radio, television and newspaper
advertisements.

The sales and marketing costs of obtaining new subscribers include
advertising and a direct expense applicable to most new subscribers, either in
the form of a commission payment to an agent or an incentive payment to a direct
sales employee. In addition, the Company discounts the cost of cellular
telephone equipment, and periodically runs promotions which waive certain fees
or provide some amount of free service to new subscribers. The average cost of
acquiring each new customer ($268 in 1998) remains one of the larger expenses in
conducting the Company's cellular operations. In recent years, the Company has
sought to lower this average cost by focusing more on its direct distribution
channels. The Company opened its first retail outlet in 1994, and currently
operates 59 such outlets. During 1998, approximately 58% of new cellular
customers were added through direct distribution channels, up from 37% during
1996.

Services, Customers and System Usage

There are a number of different types of cellular telephones, all of which
are currently compatible with cellular systems nationwide. The Company sells a
full range of vehicle-mounted, transportable, and hand-held portable cellular
telephones.

The Company charges its subscribers for access to its systems, for minutes
of use and for enhanced services, such as voice mail. A subscriber may purchase
certain of these services separately or may purchase rate plans which bundle
these services in different ways and are designed to fit different calling
patterns. While the Company historically has typically charged its customers
separately for custom-calling features, air time in excess of the packaged
amount, and toll calls, it currently offers plans which include features such as
unlimited toll calls and unlimited weekend calling in certain calling areas.
Custom-calling features provided by the Company include call-forwarding,
call-waiting, three-way calling and no-answer transfer. The Company offers voice
message service in many of its markets. In the Company's markets where digital
service is operational, customers can subscribe to caller ID and other digital
enhancements.

Cellular customers come from a wide range of occupations and typically
include a large proportion of individuals who work outside of their office. In
recent years, the individual consumer market has generated a majority of new
customer additions. The Company's average monthly cellular service revenue per
customer declined to $57 in 1998 from $61 in 1997 and $63 in 1996. Such average
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. See
"-Regulation and Competition."

Most cellular systems allow a customer to place or receive a call in a
cellular service area away from the customer's home market area. The Company has
entered into "roaming agreements" with operators of other cellular systems
covering virtually all markets in the United States; such agreements offer the
Company's customers the opportunity to roam in these markets. Also, a customer
of a participating non-Company system traveling in a market operated by the
Company where this arrangement is in effect is able to automatically make calls
on the Company's system. The charge to a non-Company customer for this service
is typically at premium rates, and is billed by the Company to the customer's
service provider, which then bills the customer. In most instances, based on
competitive factors and financial considerations, the Company charges an amount
to its customers that is equal to or lower than the amount actually charged by
the cellular carrier providing the roaming service. The Company anticipates that
competitive factors and industry consolidation may place further pressure on
charging premium roaming rates. For additional information on roaming revenue,
see "-Strategy."

Roamer fraud, a cellular industry problem, occurs when cellular telephone
equipment is programmed to conceal the true identity and location of the user.
The Company and the industry have implemented extensive fraud control processes
in an attempt to minimize roamer fraud.

Churn rate (the average percentage of cellular customers that terminate
service each month) is an industry-wide concern. A significant portion of the
churn in the Company's markets is due to the Company disconnecting service to
cellular customers for nonpayment of their bills. In addition, the Company faces
substantial competition from the other wireless providers, including PCS
providers. The Company's average monthly churn rate in its majority-owned and
operated markets was 2.23% in 1998 and 2.31% in 1997. The Company is attempting
to lower its churn rate by increasing its proactive customer service efforts and
through the implementation of additional customer retention programs.

During recent years, the Company's cellular subsidiaries experienced strong
subscriber growth in the fourth quarter, primarily due to holiday season sales.

The following table summarizes, among other things, certain information
about the Company's customers and market penetration:

Year ended or at December 31,
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------

Majority-owned and operated MSA and
RSA systems (Note 1):
Cellular systems operated 44 44 34
Cell sites 615 558 354
Population of systems operated(Note 2) 9,026,150 9,008,219 7,097,568
Customers (Note 3):
At beginning of period 569,983 368,233 290,075
Gross units added internally 214,596 193,623 165,377
Net effect of property
acquisitions/dispositions - 123,600 4,850
Disconnects 160,460 115,473 92,069
At end of period 624,119 569,983 368,233
Market penetration at end of
period (Note 4) 6.9% 6.3 5.2
Churn rate (Note 5) 2.23% 2.31 2.37

Average monthly cellular service
revenue per customer $ 57 61 63
Construction expenditures (in thousands) $ 49,538 39,102 83,679
All operated MSA and RSA systems (Note 6):
Cellular systems operated 51 50 38
Cell sites 729 656 413
Population of systems
operated (Note 2) 10,312,145 10,124,759 7,946,442
Customers at end of period (Note 7) 689,181 632,446 407,400
Market penetration at end
of period (Note 8) 6.7% 6.2 5.1
Churn rate (Note 5) 2.34% 2.33 2.32
- -------------------------------------------------------------------------------

Notes:

1. Represents the number of systems in which the Company owned at least a 50%
interest. The revenues and expenses of these cellular markets, all of which
are operated by the Company, are included in the Company's consolidated
operating revenues and operating expenses.
2. Based on independent third-party population estimates for each respective
year.
3. Represents the approximate number of revenue-generating cellular telephones
served by the cellular systems referred to in note 1.
4. Computed by dividing the number of customers at the end of the period by the
total population of systems referred to in note 1.
5. Represents the average percentage of customers that are disconnected on a
monthly basis.
6. Represents the total number of systems that the Company operated, including
systems in which it does not own a majority interest.
7. Represents the approximate number of revenue-generating cellular telephones
served by the cellular systems referred to in note 6.
8 Computed by dividing the number of customers at the end of the period by the
total population of systems referred to in note 6.

The Company's Cellular Interests

The Company obtained the right to provide cellular service through (i) the
FCC's licensing process described below, under which it received interests in
wireline licenses, and (ii) its acquisition program, under which it has acquired
interests in both wireline and non-wireline licenses. The table below sets forth
certain information with respect to the interests in cellular systems that the
Company owned as of December 31, 1998:

The Other
1998 Company's cellular
population Ownership pops at operator
(Note 1) percentage 12/31/98 (Note 2)
- --------------------------------------------------------------------------------

Majority-owned and
operated MSAs
- -------------------
Pine Bluff, AR 81,588 100.00% 81,588 SBC
Texarkana, AR/TX 137,764 89.00 122,610 AT&T
Alexandria, LA 143,311 100.00 143,311 Centennial
Monroe, LA 147,570 87.00 128,386 AT&T
Shreveport, LA 379,370 87.00 330,052 AT&T
Battle Creek, MI 195,400 97.00 189,538 Centennial
Benton Harbor, MI 161,753 97.00 156,900 Centennial
Grand Rapids, MI 770,152 97.00 747,047 AirTouch
Jackson, MI 156,316 97.00 151,627 Centennial
Kalamazoo, MI 308,144 97.00 298,900 Centennial
Lansing-E. Lansing, MI 512,390 97.00 497,018 AirTouch
Muskegon, MI 191,712 97.00 185,961 AirTouch
Saginaw-Bay City-
Midland, MI 404,426 91.70 370,859 AirTouch
Biloxi-Gulfport, MS (Note 4) 232,431 96.45 224,182 Cellular South
Jackson, MS (Note 4) 426,583 89.58 382,130 MCTA
Pascagoula, MS (Note 4) 130,979 89.22 116,862 Cellular South
Brownsville-
Harlingen, TX (Note 4) 329,824 78.74 259,700 SBC
McAllen-Edinburg-
Mission, TX (Note 4) 525,734 69.50 365,372 SBC
Appleton-Oshkosh-
Neenah, WI 500,164 98.85 494,401 U.S. Cellular
Eau Claire, WI 143,664 55.50 79,734 American Cellular
LaCrosse, WI 102,768 95.00 97,630 U. S. Cellular
- -----------------------------------------------------------
5,982,043 5,423,808
- -----------------------------------------------------------

Minority-owned MSAs (Note 3)
- ---------------------------
Little Rock, AR 555,272 36.00% 199,898
Lafayette, LA 262,964 49.00 128,852
Detroit, MI 4,761,992 3.20 152,289
Flint, MI 511,788 3.20 16,367
Rochester, MN 113,844 2.93 3,336
Austin, TX 1,016,912 35.00 355,919
Dallas-Ft. Worth, TX 4,630,120 0.50 23,151
Sherman-Denison, TX 102,618 0.50 513
Madison, WI 702,398 9.78 68,688
Milwaukee, WI 1,972,973 17.96 354,405
- -----------------------------------------------------------
14,630,881 1,303,418
- -----------------------------------------------------------
Total MSAs 20,612,924 6,727,226
- -----------------------------------------------------------

Operated RSAs
- -------------
Alaska 1 (Note 4) 85,056 100.00% 85,056 Mactel
Alaska 3 74,712 100.00 74,712 Mercury
Arkansas 2 87,646 82.00 71,870 SBC
Arkansas 3 103,724 82.00 85,054 SBC
Arkansas 11 66,228 89.00 58,943 SBC
Arkansas 12 185,325 80.00 148,260 SBC
Louisiana 1 112,083 87.00 97,512 AT&T
Louisiana 2 115,624 87.00 100,593 AT&T
Louisiana 3 B2 96,231 87.00 83,721 Centennial
Louisiana 4 72,615 100.00 72,615 Centennial
Michigan 1 196,408 100.00 196,408 American Cellular
Michigan 2 113,772 100.00 113,772 RFB
Michigan 3 164,586 42.84 70,509 Unitel
Michigan 4 135,657 100.00 135,657 RFB
Michigan 5 161,584 42.84 69,223 Unitel
Michigan 6 142,356 98.00 139,509 Centennial
Michigan 7 244,148 56.07 136,895 Centennial
Michigan 8 101,746 97.00 98,694 Allegan Cellular
Michigan 9 301,227 43.38 130,672 Centennial
Mississippi 2 (Note 4) 249,231 100.00 249,231 Bell South
Mobility
Mississippi 5 159,176 - -
Mississippi 6 (Note 4) 183,177 100.00 183,177 Cellular South
Mississippi 7 (Note 4) 181,661 100.00 181,661 MCTA
Texas 7 B6 58,013 89.00 51,632 AT&T
Wisconsin 1 112,351 42.21 47,421 American Cellular
Wisconsin 2 86,024 99.00 85,164 American Cellular
Wisconsin 5 95,903 - - American Cellular
Wisconsin 6 116,145 57.14 66,369 U.S. Cellular
Wisconsin 7 291,168 22.70 66,100 U.S. Cellular
Wisconsin 8 236,525 84.00 198,681 U.S. Cellular
- -----------------------------------------------------------
4,330,102 3,099,111
- -----------------------------------------------------------

Non-operated RSAs (Note 3)
- --------------------------
Michigan 10 137,398 26.00 35,723
Minnesota 7 172,206 2.93 5,046
Minnesota 8 67,467 2.93 1,977
Minnesota 9 134,073 2.93 3,928
Minnesota 10 230,077 2.93 6,741
Minnesota 11 205,949 2.93 6,034
Texas 16 334,056 9.60 32,069
Washington 5 60,311 8.47 5,109
Washington 8 137,237 7.36 10,095
Wisconsin 3 142,332 42.86 61,000
Wisconsin 4 119,763 25.00 29,941
Wisconsin 10 129,404 22.50 29,116
- -----------------------------------------------------------
1,870,273 226,779
- -----------------------------------------------------------
Total RSAs 6,200,375 3,325,890
- -----------------------------------------------------------
26,813,299 10,053,116
- -----------------------------------------------------------

Notes:

1. Based on 1998 independent third-party population estimates.
2. Information provided to the best of the Company's knowledge. There is also at
least one PCS competitor in each of the operated MSAs and certain of the
operated RSAs.
3. Markets not operated by the Company.
4. Represents a non-wireline interest.

For information on certain cellular properties that the Company has agreed to
sell, see "-Recent acquisitions and dispositions" above.

Operations

A substantial number of the cellular systems in MSAs operated by the Company
are owned by limited partnerships in which the Company is a general partner
("MSA Partnerships"). Most of these partnerships are governed by partnership
agreements with similar terms, including, among other things, customary
provisions concerning capital contributions, sharing of profits and losses, and
dissolution and termination of the partnership. Most of these partnership
agreements vest complete operational control of the partnership with the general
partner. The general partner typically has the power to manage, supervise and
conduct the affairs of the partnership, make all decisions appropriate in
connection with the business purposes of the partnership, and incur obligations
and execute agreements on behalf of the partnership. The general partner also
may make decisions regarding the time and amount of cash contributions and
distributions, and the nature, timing and extent of construction, without the
consent of the other partners. The Company owns more than 50% of all of the MSA
Partnerships.

A substantial number of the cellular systems in RSAs operated by the Company
are also owned by limited or general partnerships in which the Company is either
the general or managing partner (the "RSA Partnerships"). These partnerships are
governed by partnership agreements with varying terms and provisions. In many of
these partnerships, the noncontrolling partners have the right to vote on major
issues such as the annual budget and system design. In a few of these
partnerships, the Company's management position is for a limited term (similar
to a management contract) and the other partners in the partnership have the
right to change managers, with or without cause. The Company owns less than 50%
of some of the RSA Partnerships.

The partnership agreements for both the MSA Partnerships and RSA
Partnerships generally contain provisions granting all partners a right of first
refusal in the event a partner desires to transfer a partnership interest. This
restriction on transfer can under certain circumstances make these partnership
interests more difficult to sell to a third party.

Revenue

The following table reflects the major revenue categories for the Company's
wireless operations as a percentage of wireless operating revenues in 1998, 1997
and 1996.

1998 1997 1996
- ----------------------------------------------------------------------------

Cellular access fees and toll revenues 74.2% 78.2 79.7
Cellular roaming 23.6 20.0 18.6
Equipment sales 2.2 1.8 1.7
- ----------------------------------------------------------------------------
100.0% 100.0 100.0
============================================================================

For further information on these revenue categories, see
"-Services, Customers and System Usage."

Regulation and Competition

As discussed below, the FCC and various state public utility commissions
regulate, among other things, the licensing, construction, operation,
interconnection arrangements, sale and acquisition of cellular telephone
systems.

Competition between providers of wireless communications service in each
market is conducted principally on the basis of price, services and enhancements
offered, the technical quality and coverage of the system, and the quality and
responsiveness of customer service. As discussed below, competition has
intensified in recent years in a substantial number of the Company's markets.
Under applicable law, the Company is required to permit the reselling of its
services. In certain larger markets and in certain market segments, competition
from resellers may be significant. There is also substantial competition for
sales agents. Certain of the Company's competitors have substantially greater
assets and resources than the Company.

Cellular licensing process. The term "MSA" means a Metropolitan Statistical
Area for which the FCC has granted a cellular operating license. The term "RSA"
means a Rural Service Area for which the FCC has granted a cellular operating
license. During the 1980's and early 1990's, the FCC awarded two 10-year
licenses to provide cellular service in each MSA and RSA market. Initially, one
license was reserved for companies offering local telephone service in the
market (the wireline carrier) and one license was available for firms
unaffiliated with the local telephone company (the non-wireline carrier). Since
mid-1986, the FCC has permitted telephone companies or their affiliates to
acquire control of non-wireline licenses in markets in which they do not hold
interests in the wireline license. The FCC has issued a decision that grants a
renewal expectancy during the license renewal period to incumbent licensees that
substantially comply with the terms and conditions of their cellular
authorizations and the FCC's regulations. The licenses for the MSA markets
operated by the Company were initially granted between 1984 and 1987, and
licenses for operated RSAs were initially granted between 1989 and 1991. Thus
far, the Company has received 10-year extensions of all of its licenses that
have become subject to renewal since their original grant dates.

The completion of an acquisition involving the transfer of control of a
cellular system requires prior FCC approval and, in certain cases, receipt of
other federal and state regulatory approvals. The acquisition of a minority
interest generally does not require FCC approval. Whenever FCC approval is
required, any interested party may file a petition to dismiss or deny the
application for approval of the proposed transfer.

In addition to regulation by the FCC, cellular systems are subject to
certain Federal Aviation Administration tower height regulations concerning the
siting and construction of cellular transmitter towers and antennas.

Cellular operators are also subject to state and local regulation in some
instances. Although the FCC has pre-empted the states from exercising
jurisdiction in the areas of licensing, technical standards and market
structure, certain states require cellular operators to be certified. In
addition, some state authorities regulate certain aspects of a cellular
operator's business, including certain aspects of pricing, the resale of long
distance service to its customers, the technical arrangements and charges for
interconnection with the landline network, and the transfer of interests in
cellular systems. The siting and construction of the cellular facilities may
also be subject to state or local zoning, land use and other local regulations.

Developments affecting wireless competition. Competition in the wireless
communications industry has increased due to continued and rapid technological
advances in the communications field, coupled with legislative and regulatory
changes.

Several recent FCC initiatives over the past several years have resulted in
the allocation of additional radio spectrum or the issuance of licenses for
emerging mobile communications technologies that are competitive with the
Company's cellular and telephone operations, including personal communication
services ("PCS"). Although there is no universally recognized definition of PCS,
the term is generally used to refer to wireless services to be provided by
licensees operating in the 1850 MHz to 1990 MHz radio frequency band using
microcells and high-capacity digital technology. In 1996 and early 1997 the FCC
auctioned up to six PCS licenses per market. Two 30MHz frequency blocks were
awarded for each of the 51 Rand McNally Major Trading Areas ("MTAs"), while one
30MHz and three 10MHz frequency blocks were awarded for each of the 493 Rand
McNally Basic Trading Areas ("BTAs").

PCS technology permits PCS operators to offer wireless voice, data, image
and multimedia services. The largest PCS providers commenced initial operations
in late 1996 and since then have aggressively expanded their operations. These
providers have initially focused on larger markets, and have generally marketed
PCS as being a competitive service to cellular. Many of these companies have
aggressively competed for customers on the basis of price, which has placed
downward pressure on cellular prices. There is at least one PCS competitor in
each of the Company's operated MSAs and certain of its operated RSAs.

In addition to PCS, users and potential users of cellular systems may find
their communication needs satisfied by other current and developing
technologies. Several years ago the FCC authorized the licensees of certain
specialized mobile radio service ("SMR") systems (which historically have
generally been used by taxicabs and tow truck operators) to configure their
systems into digital networks that operate in a manner similar to cellular
systems. Such systems are commonly referred to as enhanced specialized mobile
radio service ("ESMR") systems. The Company believes that ESMR systems are
operating in a few of its cellular markets. One well-established ESMR provider
has constructed a nationwide digital mobile communications system to compete
with cellular systems. Other similar communication services that have the
technical capability to handle wireless telephone calls may provide competition
in certain markets, although these services currently lack the subscriber
capacity of cellular systems. Paging or beeper services that feature text
message and data display as well as tones may be adequate for potential
subscribers who do not need to converse directly with the caller. Mobile
satellite systems, in which transmissions are between mobile units and
satellites, may ultimately be successful in obtaining market share from cellular
systems that communicate directly to land-based stations.

In recent years, several large cellular providers have merged with other
companies or formed joint ventures. Several of these joint ventures pooled their
resources to develop extensive PCS systems. Many current or potential
competitors of the Company have substantially greater financial and marketing
resources than the Company.

Although it is uncertain how PCS, SMR, ESMR, mobile satellites and other
emerging technologies will ultimately affect the Company, the Company
anticipates that it will continue to face increased competition in its operating
markets. However, management believes that providing digital services and
applying new microcellular technologies will permit its cellular systems to
provide services comparable with the emerging technologies described above,
although no assurances can be given that this will happen or that future
technological advances or legislative or regulatory changes will not create
additional sources of competition.

OTHER OPERATIONS

The Company provides long distance, call center, security monitoring, cable
television and interactive services in certain local and regional markets, as
well as certain printing and related services. The results of these operations,
which accounted for 4.9% and 3.2%, respectively, of the Company's consolidated
revenues and operating income during 1998, are reflected for financial reporting
purposes in the "Other operations" section in operating income.

Long distance. In 1996 the Company began marketing long distance service in
all of its equal access telephone operating areas. At December 31, 1998, the
Company provided long distance services to approximately 227,000 customers.
Approximately 65% of the Company's long distance revenues are derived from
service provided to residential customers. Although the Company owns and
operates long distance switches in LaCrosse, Wisconsin and San Marcos, Texas, it
anticipates that most of its future long distance service revenues will be
provided by reselling service purchased from other facilities-based long
distance providers. The Company intends to continue to expand its long distance
business, principally through reselling arrangements.

Call center. The Company provides certain operator services for retail and
wholesale markets. The retail market consists primarily of the hospitality and
payphone industries. The wholesale market consists of other independent
telephone companies and interexchange carriers.

PCS. In early 1997 the Company was awarded 12 PCS licenses, 11 of which are
in Michigan, in connection with the FCC's auctions of 10MHz PCS licenses. The
licenses cover areas with a population of approximately 4.0 million. As a result
of the PTI acquisition, the Company acquired PCS licenses that cover areas with
a population of approximately 4.1 million. In 1998, the Company began marketing
PCS service in select Michigan markets as a fixed wireless local loop
alternative to the LEC's service in these markets. Approximately $15 million of
the Company's 1999 capital expenditure budget is for development of the
Company's PCS networks.

Security monitoring. The Company offers 24-hour burglary and fire monitoring
services to approximately 6,000 customers in select markets in Louisiana,
Arkansas, Mississippi, Texas and Ohio. The Company plans to expand the
availability of this service to more of its markets in 1999.

Other. The Company, through one or more of its subsidiaries, provides
audiotext services; printing, database management and direct mail services; and
cable television services. In connection with its long-range plans to sell
capacity to other carriers in or near certain of its select markets, the Company
is currently constructing a $20 million 650-to 700-mile fiber optic ring
connecting several communities in southern and central Michigan. The Company
also holds minority equity investments in certain communications companies, and
is in the process of developing deployment plans for 32 Local Multipoint
Distribution System licenses acquired by the Company in 1998.

Certain service subsidiaries of the company provide installation and
maintenance services, materials and supplies, and managerial, technical and
accounting services to the telephone and wireless operating subsidiaries. In
addition, Century provides and bills management services to subsidiaries and in
certain instances makes interest-bearing advances to finance construction of
plant and purchases of equipment. These transactions are recorded by the
Company's regulated telephone subsidiaries at their cost to the extent permitted
by regulatory authorities. Intercompany profit on transactions with regulated
affiliates is limited to a reasonable return on investment and has not been
eliminated in connection with consolidating the results of operations of Century
and its subsidiaries. Such intercompany profit is reflected in operating income
in the "Other operations" segment.

FORWARD-LOOKING STATEMENTS

This report on Form 10-K and other documents filed by the Company under the
federal securities laws include, and future oral or written statements of the
Company and its management may include, certain forward-looking statements,
including without limitation statements with respect to the Company's
anticipated future operating and financial performance (including the impact of
pending acquisitions), financial position and liquidity, growth opportunities
and growth rates, business prospects, regulatory and competitive outlook,
investment and expenditure plans, financing sources, pricing plans, strategic
alternatives, business strategies, and other similar statements of expectations
or objectives that are highlighted by words such as "expects," "anticipates,"
"intends," "plans," "believes," "projects," "seeks," "estimates," "should," and
"may," and variations thereof and similar expressions. Such forward-looking
statements are inherently speculative and are based upon several assumptions
concerning future events, many of which are outside of the Company's control.
The Company's forward-looking statements, and the assumptions upon which such
statements are based, are subject to uncertainties that could cause the
Company's actual results to differ materially from such statements. These
uncertainties include but are not limited to those set forth below:

o the effects of ongoing deregulation in the telecommunications industry as
a result of the 1996 Act and other similar federal and state legislation and
federal and state regulations enacted thereunder, including without limitation
(i) greater than anticipated interconnection requests or competition in the
Company's predominately rural local exchange telephone markets resulting
therefrom, (ii) greater than anticipated reductions in revenues received from
the Universal Service Fund or other current or future federal and state support
funds designed to compensate LECs that provide services in high-cost markets,
(iii) the final outcome of regulatory and judicial proceedings with respect to
interconnection agreements and access charge reforms and (iv) future regulatory
actions taken in response to the 1996 Act.

o the effects of greater than anticipated competition from PCS, SMR, ESMR,
satellite or other wireless companies, including without limitation competition
requiring new pricing or marketing strategies or new product offerings, and the
attendant risk that the Company will not be able to respond on a timely or
profitable basis.

o possible changes in the demand for the Company's products and services,
including without limitation (i) lower than anticipated demand for traditional
or premium telephone services or for additional access lines per household, (ii)
lower than anticipated demand for wireless telephone services, whether caused by
changes in economic conditions, technology, competition, health concerns or
otherwise, and (iii) reduced demand for the Company's access or billing and
collection services.

o the Company's ability to successfully introduce new offerings on a timely
and cost-effective basis, including without limitation the Company's ability to
(i) expand successfully its long distance and Internet offerings to new markets
(including those acquired in December 1997 in the PTI acquisition or to be
acquired in connection with future acquisitions), (ii) offer bundled service
packages on terms attractive to its customers, (iii) offer digital cellular
service and (iv) successfully initiate PCS and data services in its targeted
markets.

o the risks inherent in rapid technological change, including without
limitation (i) the lack of assurance that the Company's ongoing wireless network
improvements will be sufficient to meet or exceed the capabilities and quality
of competing networks, (ii) technological developments that could make the
Company's analog and digital wireless networks uncompetitive or obsolete, such
as the risk that the Time Division Multiple Access technology used by the
Company will be uncompetitive with Code Division Multiple Access or other
digital technologies, and (iii) the risk that technologies will not be developed
by the Company on a timely or cost-effective basis or perform according to
expectations.

o the Company's ability to effectively manage its growth, including without
limitation the Company's ability to (i) integrate newly-acquired operations into
the Company's operations, (ii) attract and retain technological and other key
personnel to work at the Company's Monroe, Louisiana headquarters or regional
offices, (iii) achieve projected economies of scale and cost savings, (iv) meet
pro forma cash flow projections developed by management in valuing
newly-acquired businesses and (v) implement necessary internal controls.

o the success and expense of the remediation efforts of the Company and its
vendors in achieving year 2000 compliance (as discussed in greater detail in
Item 7 of this report).

o regulatory limits on the Company's ability to change its prices for
telephone services in response to competitive pressures.

o any difficulties in the Company's ability to expand through additional
acquisitions, whether caused by financing constraints, a decrease in the pool of
attractive target companies, or competition for acquisitions from other
interested buyers.

o higher than anticipated wireless operating costs due to churn or to
fraudulent uses of the Company's networks.

o the lack of assurance that the Company can compete effectively against
better-capitalized competitors.

o the future unavailability of SFAS 71 to the Company's telephone
subsidiaries.

o the effects of more general factors, including without limitation:

. changes in general industry and market conditions and growth rates
. changes in interest rates or other general national, regional or local
economic conditions
. changes in legislation, regulation or public policy, including changes
in federal rural financing programs
. unanticipated increases in capital, operating or administrative costs,
or the impact of new business opportunities requiring significant
up-front investments
. the continued availability of financing in amounts, and on terms and
conditions,necessary to support the Company's operations
. changes in the Company's relationships with vendors
. changes in the Company's senior debt ratings
. unfavorable outcomes of regulatory or legal proceedings, including
rate proceedings
. changes in accounting policies or practices adopted voluntarily or as
required by generally accepted accounting principles.

For additional information, see the description of the Company's business
included above, as well as Item 7 of this report. Due to these uncertainties,
you are cautioned not to place undue reliance upon the Company's forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to update or revise any of its forward-looking statements for any
reason.

OTHER MATTERS

The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 1998
have not been material and the Company currently has no reason to believe that
such costs will become material.

For additional information concerning the business and properties of the
Company, see notes 2, 4, 6, and 18 of Notes to Consolidated Financial Statements
set forth in Item 8 elsewhere herein.

Item 2. Properties.

The Company's properties consist principally of (i) telephone lines, central
office equipment, telephone instruments and related equipment, and land and
buildings related to telephone operations, and (ii) switching and cell site
equipment related to cellular telephone operations. As of December 31, 1998 and
1997, the Company's gross property, plant and equipment of approximately $4.3
billion and $3.8 billion, respectively, consisted of the following:

December 31,
- --------------------------------------------------------------
1998 1997
- --------------------------------------------------------------

Telephone operations
Cable and wire 47.7% 47.9
Central office equipment 27.9 27.9
General support 6.3 6.7
Information origination/termination
equipment 1.7 1.7
Construction in progress 1.5 1.4
Other .2 .2
- --------------------------------------------------------------
85.3 85.8
- --------------------------------------------------------------

Cellular operations
Cell site 7.4 7.4
General support 1.9 1.7
Construction in progress .6 .6
Other .1 .1
- --------------------------------------------------------------
10.0 9.8
- --------------------------------------------------------------
Other 4.7 4.4
- --------------------------------------------------------------
100.0% 100.0
==============================================================

"Cable and wire" facilities consist primarily of buried cable and aerial
cable, poles, wire, conduit and drops. "Central office equipment" consists
primarily of switching equipment, circuit equipment and related facilities.
"General support" consists primarily of land, buildings, tools, furnishings,
fixtures, motor vehicles and work equipment. "Information
origination/termination equipment" consists primarily of premise equipment
(private branch exchanges and telephones) for official company use. "Cell site"
consists primarily of radio frequency channel equipment, switching equipment and
towers. "Construction in progress" includes property of the foregoing categories
that has not been placed in service because it is still under construction.

Most of the properties of the Company's telephone subsidiaries are subject
to mortgages securing the debt of such companies. The Company owns substantially
all of the central office buildings, local administrative buildings, warehouses,
and storage facilities used in its telephone operations. The Company leases most
of the offices used in its cellular operations; certain of its transmitter sites
are leased while others are owned by the Company. For further information on the
location and type of the Company's properties, see the descriptions of the
Company's telephone and cellular operations in Item 1.

Item 3. Legal Proceedings.

From time to time, the Company is involved in litigation incidental to its
business, including administrative hearings of state public utility commissions
relating primarily to rate making, actions relating to employee claims,
occasional grievance hearings before labor regulatory agencies and miscellaneous
third party tort actions. Currently, there are no material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Executive Officers of the Registrant

Information concerning Executive Officers, set forth at Item 10 in Part III
hereof, is incorporated in Part I of this Report by reference.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Century's common stock is listed on the New York Stock Exchange and is traded
under the symbol CTL. The following table sets forth the high and low sale
prices, along with the quarterly dividends, for each of the quarters indicated
(adjusted to reflect the March 1999 three-for-two stock split):

Sale prices
---------------- Dividend per
High Low common share
---- --- ------------

1998:
First quarter $ 27-3/8 21-9/16 .0433
Second quarter $ 33-5/16 27-1/16 .0433
Third quarter $ 35-1/8 29-15/16 .0433
Fourth quarter $ 45-3/16 30-1/16 .0433

1997:
First quarter $ 14-7/8 12-3/4 .0411
Second quarter $ 15-1/16 12-11/16 .0411
Third quarter $ 19-9/16 14-11/16 .0411
Fourth quarter $ 22-7/16 18-1/4 .0411

Common stock dividends during 1997 and 1998 were paid each quarter. As of
February 28, 1999, there were approximately 6,054 stockholders of record of
Century's common stock.

Item 6. Selected Financial Data.

The following table presents certain selected consolidated financial data as
of and for each of the years ended in the five-year period ended December 31,
1998:

Selected Income Statement Data

Year ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
(Dollars, except per share amounts,and
shares expressed in thousands)

Operating revenues
Telephone $ 1,091,610 530,597 451,538 419,242 391,265
Cellular 407,749 307,742 250,243 197,494 150,802
Other 77,726 63,182 47,896 28,104 22,534
-------------------------------------------------
Total operating revenues $ 1,577,085 901,521 749,677 644,840 564,601
=================================================

Operating income
Telephone $ 333,708 173,285 155,183 143,527 137,992
Cellular 130,580 88,081 67,914 57,009 31,443
Other 15,523 6,404 199 2,383 3,371
-------------------------------------------------
Total operating income $ 479,811 267,770 223,296 202,919 172,806
=================================================

Gain on sale or exchange
of assets (pre-tax) $ 49,859 169,640 815 6,782 15,877
=================================================

Net income $ 228,757 255,978 129,077 114,776 100,238
================================================

Diluted earnings
per share * $ 1.64 1.87 .95 .87 .80
================================================

Dividends per
common share * $ .173 .164 .16 .147 .142
================================================

Average diluted shares
outstanding * 140,105 137,412 135,980 132,456 130,242
================================================
* Adjusted to reflect the March 1999 three-for-two stock split

Selected Balance Sheet Data

December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
(Dollars in thousands)

Net property, plant
and equipment $ 2,351,453 2,258,563 1,149,012 1,047,808 947,131
Excess cost of net
assets acquired, net $ 1,956,701 1,767,352 532,410 493,655 441,436
Total assets $ 4,935,455 4,709,401 2,028,505 1,862,421 1,643,253
Long-term debt $ 2,558,000 2,609,541 625,930 622,904 518,603
Stockholders' equity $ 1,531,482 1,300,272 1,028,153 888,424 650,236
------------------------------------------------------

The following table presents certain selected consolidated operating data as
of the end of each of the years in the five-year period ended December 31, 1998:

December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------

Telephone access lines 1,346,567 1,203,650 503,562 480,757 454,963
Cellular units in service
in majority-owned markets 624,119 569,983 368,233 290,075 211,710
Long distance customers 226,730 171,962 110,560 46,608 27,632
------------------------------------------------------

See Items 1 and 2 in Part I and notes 1, 2 and 6 of Notes to Consolidated
Financial Statements set forth in Item 8 elsewhere herein for additional
information.

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations

RESULTS OF OPERATIONS

OVERVIEW

Century Telephone Enterprises, Inc., which operates under the trade name of
CenturyTel, and its subsidiaries (the "Company"), is a regional diversified
communications company engaged primarily in providing local exchange telephone
services and cellular telephone communications services. At December 31, 1998,
the Company's local exchange telephone subsidiaries operated over 1.3 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 624,000 cellular subscribers. On December 1, 1997, the Company
significantly expanded its operations by acquiring Pacific Telecom, Inc. ("PTI")
for $1.503 billion cash. 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. On
December 1, 1998, the Company acquired from affiliates of Ameritech Corporation
("Ameritech") telephone operations serving 86,000 access lines in northern and
central Wisconsin and the related telephone directories for approximately $221
million cash. The operations of PTI are included in the Company's results of
operations beginning December 1, 1997 and the operations of the former Ameritech
properties are included in the Company's results of operations beginning
December 1, 1998. See Acquisitions and Note 2 of Notes to Consolidated Financial
Statements for additional information. During the three years ended December 31,
1998, the Company has acquired various other telephone and cellular operations,
the impact of which has not been material to the financial position and results
of operations of the Company.

The net income of the Company for 1998 was $228.8 million, compared to $256.0
million during 1997 and $129.1 million during 1996. Diluted earnings per share
for 1998 were $1.64 compared to $1.87 in 1997 and $.95 in 1996. Excluding gain
on sale or exchange of assets, the Company's net income (and diluted earnings
per share) for 1998, 1997 and 1996 was $198.2 million ($1.42), $149.6 million
($1.09) and $128.6 million ($.95), respectively.

Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)

Operating income
Telephone $ 333,708 173,285 155,183
Cellular 130,580 88,081 67,914
Other 15,523 6,404 199
- --------------------------------------------------------------------------------
479,811 267,770 223,296
Gain on sale or exchange of
assets, net 49,859 169,640 815
Interest expense (167,552) (56,474) (44,662)
Income from unconsolidated
cellular entities 32,869 27,794 26,952
Minority interest (12,797) (5,498) (6,675)
Other income and expense 5,268 5,109 3,916
Income tax expense (158,701) (152,363) (74,565)
- --------------------------------------------------------------------------------
Net income $ 228,757 255,978 129,077
================================================================================
Diluted earnings per share* $ 1.64 1.87 .95
================================================================================
Average diluted shares
outstanding* 140,105 137,412 135,980
================================================================================
*Adjusted to reflect stock split in early 1999. See Note 21 of
Notes to Consolidated Financial Statements.

The Company's operating income for 1998 was $479.8 million, an increase of
$212.0 million (79.2%) over 1997 operating income of $267.8 million. During 1998
the operating income of the Company's telephone and wireless segments increased
$160.4 million (92.6%) and $42.5 million (48.2%), respectively, while the
operating income of the Company's other operations increased $9.1 million
(142.4%). The Company's operating income for 1996 was $223.3 million.

Contributions to operating revenues and operating income by the Company's
telephone, wireless and other operations for each of the years in the three-year
period ended December 31, 1998 were as follows:

Year ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------

Operating revenues
Telephone operations 69.2% 58.9 60.2
Wireless operations 25.9% 34.1 33.4
Other operations 4.9% 7.0 6.4
Operating income
Telephone operations 69.6% 64.7 69.5
Wireless operations 27.2% 32.9 30.4
Other operations 3.2% 2.4 .1
- ---------------------------------------------------------------------------

As indicated by the chart above, the percentage of the Company's total
operating revenues and operating income contributed by its telephone operations
significantly increased during 1998 as a result of the Company's acquisition of
PTI on December 1, 1997.

In addition to historical information, management's discussion and analysis
includes certain forward-looking statements regarding events and financial
trends that may affect the Company's future operating results and financial
position. Such forward-looking statements are subject to uncertainties that
could cause the Company's actual results to differ materially from such
statements. Such uncertainties include but are not limited to: the effects of
ongoing deregulation in the telecommunications industry; the effects of greater
than anticipated competition in the Company's markets; possible changes in the
demand for the Company's products and services; the Company's ability to
successfully introduce new offerings on a timely and cost-effective basis; the
risks inherent in rapid technological change; the Company's ability to
effectively manage its growth, including integrating newly-acquired properties
into the Company's operations; the success and expense of the remediation
efforts of the Company and its vendors in achieving year 2000 compliance; and
the effects of more general factors such as changes in general market or
economic conditions or in legislation, regulation or public policy. These and
other uncertainties related to the business are described in greater detail in
Item 1 to the Company's Annual Report on Form 10-K for the year ended December
31, 1998. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to update any of its forward-looking statements for any reason.

TELEPHONE OPERATIONS

The Company conducts its telephone operations in rural, suburban and small
urban communities in 21 states. As of December 31, 1998, approximately 86% of
the Company's 1.3 million telephone access lines were in Wisconsin, Washington,
Alaska, Michigan, Louisiana, Colorado, Ohio, Oregon and Montana. In August 1998
the Company entered into a definitive agreement to sell all of its operations in
Alaska. This transaction is expected to close in the second quarter of 1999. As
of December 31, 1998, the Company had approximately 132,000 access lines in
Alaska. The operating revenues, expenses and income of the Company's telephone
operations for 1998, 1997 and 1996 are summarized below.

Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------
(Dollars in thousands)

Operating revenues
Local service $ 331,736 147,589 121,728
Network access 629,583 319,301 276,123
Other 130,291 63,707 53,687
- --------------------------------------------------------------------
1,091,610 530,597 451,538
- --------------------------------------------------------------------

Operating expenses
Plant operations 245,164 110,220 90,083
Customer operations 92,552 50,819 43,413
Corporate and other 157,293 80,551 67,066
Depreciation and amortization 262,893 115,722 95,793
- --------------------------------------------------------------------
757,902 357,312 296,355
- --------------------------------------------------------------------
Operating income $ 333,708 173,285 155,183
====================================================================

Local service revenues

Local service revenues are derived from the provision of local exchange
telephone services in the Company's service areas. The $184.1 million (124.8%)
increase in such revenues in 1998 included $171.0 million from acquired
properties, of which $169.2 million was from the PTI properties; $10.7 million
due to the internal increase in the number of customer access lines; and $3.0
million due to the increased provision of custom calling features. The $25.9
million increase in revenues in 1997 included $17.4 million from acquired
properties, of which $15.0 million was from the PTI properties; $5.6 million due
to the internal increase in the number of customer access lines; and $2.8
million due to the increased provision of custom calling features. Internal
access line growth during 1998, 1997 and 1996 was 4.7%, 4.4% and 4.3%,
respectively.

Network access revenues

Network access revenues are primarily derived from charges to long distance
companies and other customers for access to the Company's local exchange carrier
("LEC") networks in connection with the completion of long distance telephone
calls. These access charges are based on tariffed access rates filed with the
Federal Communications Commission ("FCC") for interstate services and with the
respective state regulatory agency for intrastate services. Certain of the
Company's interstate network access revenues are based on access charges filed
directly with the FCC; the remainder of such revenues are derived under revenue
sharing arrangements with other LECs administered by the National Exchange
Carrier Association. Intrastate network access revenues are based on access
charges or are derived under revenue sharing arrangements with other LECs.

Network access revenues increased $310.3 million (97.2%) in 1998 and $43.2
million in 1997 due to the following factors:

1998 1997
increase increase
(decrease) (decrease)
- --------------------------------------------------------------------------------
(Dollars in thousands)

PTI acquisition $ 278,471 26,040
Increased recovery from the federal
Universal Service Fund ("USF") 8,329 11,314
Increased minutes of use 8,846 5,033
Acquisitions, excluding PTI 1,013 3,465
Partial recovery of increased operating
costs through revenue sharing arrangements
with other telephone companies and return
on rate base 10,440 2,454
Other, net 3,183 (5,128)
- --------------------------------------------------------------------------------
$ 310,282 43,178
================================================================================

Included in "Other, net" for 1998 and 1997 were decreases of $1.8 million and
$3.8 million, respectively, in access revenues due to the reductions in
intrastate switched access rates mandated by the Louisiana Public Service
Commission ("LPSC") which were phased in from July 1995 through July 1997.

Other revenues

Other revenues include revenues related to (i) leasing, selling, installing,
maintaining and repairing customer premise telecommunications equipment and
wiring ("CPE services"), (ii) providing billing and collection services for long
distance carriers, (iii) participating in the publication of local directories
and (iv) providing Internet access. Acquisitions contributed $60.7 million
(which includes $60.3 million related to PTI) to the $66.6 million increase in
other revenues in 1998. Exclusive of acquisitions, revenues from the provision
of Internet access and CPE services increased $3.9 million and $3.5 million,
respectively, in 1998. Other revenues increased $10.0 million in 1997, of which
$4.6 million was attributable to the PTI acquisition. Revenues from CPE services
and the provision of Internet access contributed $3.5 million and $2.5 million,
respectively, of the remainder of the increase in other revenues in 1997.

Operating expenses

Plant operations expenses during 1998 and 1997 increased $134.9 million
(122.4%) and $20.1 million (22.4%), respectively. Expenses incurred by the PTI
and former Ameritech operations in 1998 accounted for $120.4 million of the 1998
increase. The remainder of the increase in 1998 was primarily due to an increase
in salaries and benefits. Expenses incurred by the PTI operations in 1997
accounted for $12.0 million of the 1997 increase. Exclusive of PTI, expenses
incurred in connection with providing Internet access to a larger number of
customers contributed $3.5 million to the 1997 increase and other acquisitions
accounted for $1.8 million of such increase.

Customer operations, corporate and other expenses increased $118.5 million
(90.2%) in 1998, of which $110.7 million was applicable to the PTI properties.
Exclusive of acquisitions, the remainder of the 1998 increase was due to a $4.3
million increase in salaries and benefits and a $2.0 million increase in
marketing expenses. Of the $20.9 million increase in these expenses in 1997,
$13.4 million was incurred by acquired properties (of which $11.2 million was
incurred by PTI). Exclusive of acquisitions, $1.7 million of the remaining
increase in 1997 expenses was due to an increase in marketing expenses, $1.6
million was due to higher operating taxes and $1.4 million was due to expenses
incurred in the increased provision of CPE services.

Depreciation and amortization increased $147.2 million (127.2%) and $19.9
million (20.8%) in 1998 and 1997, respectively. Approximately $136.6 million of
the 1998 increase was applicable to acquiring and operating PTI (of which $27.9
million represented amortization of goodwill) and $1.3 million was applicable to
the former Ameritech properties. Approx-imately $11.4 million of the 1997
increase was applicable to acquiring and operating PTI (of which $1.5 million
represented amortization of goodwill). Exclusive of acquisitions, depreciation
expense included nonrecurring additional depreciation charges approved by
regulators in certain jurisdictions which aggregated $6.2 million in 1998 and
$4.4 million in 1997. In addition, the Company obtained increased depreciation
rates in certain jurisdictions which increased depreciation expense by $1.1
million in 1998 and $4.4 million in 1997. The remaining increases in
depreciation and amortization in 1998 and 1997 were due to higher levels of
plant in service. The composite depreciation rate for the Company's regulated
telephone properties, including the additional depreciation charges, was 6.9%
for 1998, 7.4% for 1997 and 7.5% for 1996. The properties acquired in the PTI
acquisition historically have had a lower composite depreciation rate than the
Company's incumbent properties.

Other

For additional information regarding certain matters that have impacted or
may impact the Company's telephone operations, see Regulation and Competition.

Cellular Operations and Income From Unconsolidated Cellular Entities

Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
(Dollars in thousands)

Operating income - cellular operations $ 130,580 88,081 67,914
Minority interest (12,635) (6,916) (7,062)
Income from unconsolidated cellular entities 32,869 27,794 26,952
- ------------------------------------------------------------------------------
$ 150,814 108,959 87,804
==============================================================================

The Company's cellular operations reflect 100% of the results of operations
of the cellular entities in which the Company has a majority ownership interest.
The minority interest owners' share of the income of such entities is reflected
in the Company's Consolidated Statements of Income as an expense in "Minority
interest." See Minority Interest for additional information. The Company's share
of earnings from the cellular entities in which it has less than a majority
interest is accounted for using the equity method and is reflected in the
Company's Consolidated Statements of Income in "Income from unconsolidated
cellular entities." See Income from Unconsolidated Cellular Entities for
additional information.

Cellular Operations

All of the Company's cellular customers are located in Michigan, Louisiana,
Wisconsin, Mississippi, Texas, Alaska and Arkansas. The operating revenues,
expenses and income of the Company's cellular operations for 1998, 1997 and 1996
are summarized below.

Year ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------
(Dollars in thousands)

Operating revenues
Service revenues $ 398,661 302,156 246,037
Equipment sales 9,088 5,586 4,206
- ---------------------------------------------------------------------
407,749 307,742 250,243
- ---------------------------------------------------------------------

Operating expenses
Cost of equipment sold 16,954 14,576 12,771
System operations 59,920 47,572 36,301
General, administrative
and customer service 80,827 62,258 52,891
Sales and marketing 57,466 54,128 46,793
Depreciation and amortization 62,002 41,127 33,573
- ---------------------------------------------------------------------
277,169 219,661 182,329
- ---------------------------------------------------------------------
Operating income $ 130,580 88,081 67,914
=====================================================================

Operating revenues

Service revenues include monthly service fees for providing access and
airtime to customers, service fees for providing airtime to other carriers'
customers roaming through the Company's service