UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
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.
A Louisiana Corporation I.R.S. Employer Identification
No. 72-0651161
100 Century Park Drive, Monroe, Louisiana 71203
Telephone number (318) 388-9500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
As of October 31, 1997, there were 60,616,838 shares of common stock
outstanding.
CENTURY TELEPHONE ENTERPRISES, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income--Three Months and Nine
Months Ended September 30, 1997 and 1996 3
Consolidated Balance Sheets--September 30, 1997 and
December 31, 1996 4
Consolidated Statements of Stockholders' Equity--
Nine Months Ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-20
Part II. Other Information:
Item 2. Changes in Securities 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
PART I. FINANCIAL INFORMATION
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months Nine months
ended September 30 ended September 30
- --------------------------------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------
(Dollars,except per share amounts,
and shares in thousands)
OPERATING REVENUES
Telephone $121,934 113,785 359,454 335,819
Mobile communications 80,163 66,694 220,472 185,286
Other 16,254 12,617 47,986 34,343
- -------------------------------------------------------------------------
Total operating revenues 218,351 193,096 627,912 555,448
- -------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and
operating expenses 111,462 100,783 329,254 286,764
Depreciation and
amortization 37,074 33,297 108,740 96,456
- -------------------------------------------------------------------------
Total operating expenses 148,536 134,080 437,994 383,220
- -------------------------------------------------------------------------
OPERATING INCOME 69,815 59,016 189,918 172,228
- -------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Gain on sales of assets - 815 70,121 815
Interest expense (11,175) (11,023) (33,539) (33,972)
Income from unconsolidated
cellular entities 8,371 8,990 21,750 21,584
Minority interest (1,817) (1,418) (3,722) (5,947)
Other income and expense 1,174 1,544 3,467 2,601
- -------------------------------------------------------------------------
Total other income
(expense) (3,447) (1,092) 58,077 (14,919)
- -------------------------------------------------------------------------
INCOME BEFORE INCOME TAX
EXPENSE 66,368 57,924 247,995 157,309
Income tax expense 24,935 21,574 90,251 58,353
- -------------------------------------------------------------------------
NET INCOME $ 41,433 36,350 157,744 98,956
=========================================================================
Primary earnings per share $ .68 .60 2.61 1.65
=========================================================================
Fully diluted earnings
per share $ .67 .60 2.58 1.64
=========================================================================
Dividends per common share $ .0925 .09 .2775 .27
=========================================================================
Average primary shares
outstanding 60,887 60,111 60,510 59,853
=========================================================================
Average fully diluted shares
outstanding 61,615 60,881 61,198 60,593
=========================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1997 1996
- -------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 11,283 8,402
Accounts receivable
Customers, less allowance
of $4,188 and $3,327 70,383 60,181
Other 29,757 26,263
Materials and supplies, at average cost 9,139 8,222
Other 3,351 6,166
- -------------------------------------------------------------------------
123,913 109,234
- -------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 1,145,557 1,149,012
- -------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired,
less accumulated amortization
of $78,617 and $67,061 545,683 532,410
Other 458,551 237,849
- -------------------------------------------------------------------------
1,004,234 770,259
- -------------------------------------------------------------------------
$ 2,273,704 2,028,505
=========================================================================
LIABILITIES AND EQUITY
- ----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 19,013 19,919
Accounts payable 53,273 60,548
Accrued expenses and other liabilities
Salaries and benefits 19,150 20,224
Taxes 21,118 13,913
Interest 10,157 5,581
Other 12,867 8,837
Advance billings and customer deposits 16,705 15,122
- -------------------------------------------------------------------------
152,283 144,144
- -------------------------------------------------------------------------
LONG-TERM DEBT 565,633 625,930
- -------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 308,173 230,278
- -------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value,
authorized 175,000,000 shares,
issued and outstanding 60,519,391
and 59,858,540 shares 60,519 59,859
Paid-in capital 490,661 474,607
Unrealized holding gain on investments,
net of taxes 62,038 -
Retained earnings 635,491 494,726
Unearned ESOP shares (9,200) (11,080)
Preferred stock - non-redeemable 8,106 10,041
- -------------------------------------------------------------------------
1,247,615 1,028,153
- -------------------------------------------------------------------------
$ 2,273,704 2,028,505
=========================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine months
ended September 30
- -------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 59,859 59,114
Issuance of common stock for acquisitions - 257
Conversion of convertible securities into
common stock 113 -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 423 406
Conversion of preferred stock into
common stock 124 32
- ------------------------------------------------------------------------
Balance at end of period 60,519 59,809
- ------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 474,607 453,584
Issuance of common stock for acquisitions - 8,201
Conversion of convertible securities
into common stock 3,187 -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 10,448 8,436
Amortization of unearned compensation
and other 608 973
Conversion of preferred stock into
common stock 1,811 130
- ------------------------------------------------------------------------
Balance at end of period 490,661 471,324
- ------------------------------------------------------------------------
UNREALIZED HOLDING GAIN ON INVESTMENTS,
NET OF TAXES
Balance at beginning of period - -
Change in unrealized holding gain on
investments, net of taxes 62,038 -
- ------------------------------------------------------------------------
Balance at end of period 62,038 -
- ------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 494,726 387,424
Net income 157,744 98,956
Cash dividends declared
Common stock - $.2775 and $.27 per share (16,622) (15,999)
Preferred stock (357) (292)
- ------------------------------------------------------------------------
Balance at end of period 635,491 470,089
- ------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (11,080) (13,960)
Release of ESOP shares 1,880 2,130
- ------------------------------------------------------------------------
Balance at end of period (9,200) (11,830)
- ------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning of period 10,041 2,262
Issuance of preferred stock for acquisition - 7,975
Conversion of preferred stock into
common stock (1,935) (162)
- ------------------------------------------------------------------------
Balance at end of period 8,106 10,075
- ------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $1,247,615 999,467
========================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months
ended September 30
- ---------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 157,744 98,956
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 108,740 96,456
Deferred income taxes 31,667 4,644
Income from unconsolidated cellular entities (21,750) (21,584)
Minority interest 3,722 5,947
Loss on investment in unconsolidated
personal communications services entity - 1,100
Gain on sales of assets (70,121) (815)
Changes in current assets and current
liabilities:
Accounts receivable (12,170) (726)
Accounts payable (6,110) (5,386)
Other accrued taxes 8,624 11,767
Other current assets and other current
liabilities, net 9,853 11,984
Increase in other noncurrent liabilities 3,259 3,850
Other, net 4,040 5,275
- --------------------------------------------------------------------------
Net cash provided by operating activities 217,498 211,468
- --------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (123,344) (153,892)
Acquisitions, net of cash acquired (30,398) (17,022)
Reimbursement of investment in unconsolidated
personal communications services entity - 18,900
Distributions from unconsolidated
cellular entities 9,173 9,464
Purchase of life insurance investment (12,936) (5,944)
Proceeds from note receivable 22,500 1,250
Other, net (4,320) (3,091)
- --------------------------------------------------------------------------
Net cash used in investing activities (139,325) (150,335)
- --------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 12,151 22,285
Payments of long-term debt (78,377) (54,969)
Notes payable, net - (14,199)
Proceeds from issuance of common stock 10,860 8,801
Cash dividends (16,979) (16,291)
Other, net (2,947) 178
- --------------------------------------------------------------------------
Net cash used in financing activities (75,292) (54,195)
- --------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,881 6,938
Cash and cash equivalents at beginning of period 8,402 8,540
- --------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,283 15,478
==========================================================================
Supplemental cash flow information:
Income taxes paid $ 53,978 42,446
Interest paid $ 28,963 29,135
- --------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(UNAUDITED)
(1) Basis of Financial Reporting
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to rules and regulations of the
Securities and Exchange Commission; however, the Company believes the
disclosures which are made are adequate to make the information presented not
misleading. The financial statements and footnotes included in this Form 10-Q
should be read in conjunction with the financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1996. Certain 1996 amounts have been reclassified to be consistent with the
1997 presentation.
The unaudited financial information for the three months and nine months
ended September 30, 1997 and 1996 has not been audited by independent public
accountants; however, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
results of operations for the three-month and nine-month periods have been
included therein. The results of operations for the first nine months of the
year are not necessarily indicative of the results of operations which might be
expected for the entire year.
(2) Net Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
September 30, December 31,
1997 1996
- --------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost $ 1,372,946 1,290,289
Accumulated depreciation (486,257) (417,497)
- ------------------------------------------------------------------------
886,689 872,792
- ------------------------------------------------------------------------
Mobile communications, at cost 304,178 269,389
Accumulated depreciation (99,024) (75,666)
- ------------------------------------------------------------------------
205,154 193,723
- ------------------------------------------------------------------------
Corporate and other, at cost 104,046 126,015
Accumulated depreciation (50,332) (43,518)
- ------------------------------------------------------------------------
53,714 82,497
- ------------------------------------------------------------------------
$ 1,145,557 1,149,012
========================================================================
(3) Earnings from Unconsolidated Cellular Entities
The following summarizes the unaudited combined results of operations of
the cellular entities in which the Company's investments (as of September 30,
1997 and 1996) were accounted for by the equity method.
Nine months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
(Dollars in thousands)
Results of operations
Revenues $ 930,860 722,424
Operating income $ 310,236 250,839
Net income $ 277,464 251,193
- ------------------------------------------------------------------------
(4) Accounting Pronouncement
In March 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS
128 establishes requirements for the computation of basic earnings per share and
diluted earnings per share and is effective for financial statements issued for
periods ending after December 15, 1997. The effect of adoption of SFAS 128 will
not materially impact the calculation of the Company's diluted earnings per
share.
(5) Gain on Sales of Assets
In May 1997 the Company sold its majority-owned competitive access
subsidiary to Brooks Fiber Properties, Inc. ("Brooks") in exchange for 4.3
million shares of Brooks' common stock. The Company recorded a pre-tax gain in
the second quarter of 1997 of approximately $71 million ($46 million after-tax;
$.75 per fully diluted share).
(6) Investments in Marketable Equity Securities
Marketable equity securities owned by the Company, substantially all of
which were received as proceeds from the sale of the Company's competitive
access subsidiary to Brooks in May 1997, are classified as available-for-sale
and are reported at fair value, with unrealized holding gains and losses
reported, net of tax, as a separate component of stockholders' equity. As of
September 30, 1997, gross unrealized holding gains of the Company's marketable
equity securities were $95.4 million.
(7) Pending Acquisition
On June 11, 1997, the Company signed a definitive purchase agreement with
PacifiCorp Holdings, Inc. ("Holdings") to acquire the stock of Holdings'
wholly-owned telecommunications subsidiary, Pacific Telecom, Inc. ("PTI"). PTI
provides local exchange telephone service in four midwestern states, seven
western states and Alaska. PTI also has cellular ownership interests in six
states.
The Company has agreed to pay $1.523 billion cash for the stock of PTI.
It is currently estimated that PTI's debt at closing will approximate $725
million. The Company anticipates financing the acquisition initially with
5-year senior unsecured floating-rate bank debt under a $1.6 billion committed
credit facility with NationsBank and a syndicate of other lenders.
The Company anticipates completing the transaction in the fourth quarter of
1997 subject to the receipt of various regulatory approvals and certain other
closing conditions.
CENTURY TELEPHONE ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") included below should be read in conjunction with MD&A and
other information included in the Company's annual report on Form 10-K for the
year ended December 31, 1996. The results of operations for the three months and
nine months ended September 30, 1997 are not necessarily indicative of the
results of operations which might be expected for the entire year.
Century Telephone Enterprises, Inc. (the "Company") is a regional
diversified telecommunications company that is primarily engaged in providing
local telephone services and cellular telephone communications services. At
September 30, 1997, the Company's local exchange telephone subsidiaries operated
over 530,000 telephone access lines primarily in rural, suburban and small urban
areas in 14 states, and the Company's majority-owned and operated cellular
entities had more than 429,000 cellular subscribers. In June 1997 Century agreed
to purchase Pacific Telecom, Inc. ("PTI") in exchange for $1.523 billion cash.
PTI provides local exchange telephone services to approximately 650,000
telephone access lines and operates cellular entities that serve more than
100,000 subscribers.
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; 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 detail in Item 5 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997. You are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to update any of its forward-looking statements
for any reason.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared
to Three Months Ended September 30, 1996
Net income for the third quarter of 1997 increased $5.1 million (14.0%) to
$41.4 million from $36.4 million during the third quarter of 1996. Fully diluted
earnings per share increased to $.67 during the third quarter of 1997 compared
to $.60 during the third quarter of 1996, an 11.7% increase. The third quarter
of 1996 included an $815,000 pre-tax gain on the sale of certain assets ($.01
per fully diluted share).
Three months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
(Dollars, except per share
amounts, and shares in thousands)
Operating income (loss)
Telephone $ 40,114 38,933
Mobile communications 27,403 20,153
Other 2,298 (70)
- ------------------------------------------------------------------------
69,815 59,016
Interest expense (11,175) (11,023)
Income from unconsolidated cellular entities 8,371 8,990
Gain on sales of assets - 815
Minority interest (1,817) (1,418)
Other income and expense 1,174 1,544
Income taxes (24,935) (21,574)
- ------------------------------------------------------------------------
Net income $ 41,433 36,350
========================================================================
Fully diluted earnings per share $ .67 .60
========================================================================
Average fully diluted shares outstanding 61,615 60,881
========================================================================
Contributions to operating revenues and operating income by the Company's
telephone, mobile communications, and other operations for the three months
ended September 30, 1997 and 1996 were as follows:
Three months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
Operating revenues
Telephone operations 55.8% 58.9
Mobile communications operations 36.7% 34.5
Other operations 7.5% 6.6
Operating income (loss)
Telephone operations 57.5% 66.0
Mobile communications operations 39.2% 34.1
Other operations 3.3% ( .1)
- ------------------------------------------------------------------------
Telephone Operations
Three months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 33,443 31,248
Network access 73,385 68,433
Other 15,106 14,104
- ------------------------------------------------------------------------
121,934 113,785
- ------------------------------------------------------------------------
Operating expenses
Plant operations 24,971 22,885
Customer operations 11,931 10,936
Corporate and other 18,679 17,252
Depreciation and amortization 26,239 23,779
- ------------------------------------------------------------------------
81,820 74,852
- ------------------------------------------------------------------------
Operating income $ 40,114 38,933
========================================================================
Telephone operating income for the third quarter of 1997 increased $1.2
million (3.0%) due to an increase in operating revenues of $8.1 million (7.2%)
which more than offset an increase in operating expenses of $7.0 million (9.3%).
The increase in revenues was substantially due to a $2.3 million increase
in amounts received from the federal Universal Service Fund; a $1.6 million
increase due to acquisitions consummated since the third quarter of 1996; a $1.2
million increase resulting from an increase in the number of access lines
served; a $1.7 million increase in the partial recovery of increased operating
expenses through revenue pools in which the Company participates with other
telephone companies; a $1.4 million increase due to increased minutes of use; a
$542,000 increase due to increased demand for custom calling features; and a
$584,000 increase in Internet access revenues attributable to growth in the
number of customers. These increases were partially offset by a reduction of
$1.1 million in access revenues due to the reduction in intrastate switched
access rates mandated by the Louisiana Public Service Commission; the last
portion of such reduction went into effect in July 1997. See Nine Months Ended
September 30, 1997 Compared to Nine Months Ended September 30, 1996 - Telephone
Operations for additional information.
During the third quarter of 1997, operating expenses, exclusive of
depreciation and amortization, increased $4.5 million (8.8%), substantially due
to an $834,000 increase in sales and marketing expenses; a $793,000 increase in
expenses (exclusive of sales and marketing expenses) related to providing
Internet access services; $672,000 of expenses of companies acquired since the
third quarter of 1996; and a $617,000 increase in operating taxes. The remainder
of the increase was due to increases in general operating expenses.
Depreciation and amortization increased $2.5 million (10.3%) primarily due
to higher levels of plant in service.
Cellular Operations and Investments
Three months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
(Dollars in thousands)
Operating income - mobile
communications segment $ 27,403 20,153
Minority interest - cellular operations (2,044) (1,534)
Income from unconsolidated
cellular entities 8,371 8,990
- ------------------------------------------------------------------------
$ 33,730 27,609
========================================================================
The Company's mobile communications operations (discussed below) reflects
100% of the results of operations of the cellular entities in which the Company
has a majority ownership interest. The minority interest owners' share of the
income of such entities is reflected in the Company's Consolidated Statements of
Income as an expense in "Minority interest." See Minority Interest for
additional information. The Company's share of earnings from the cellular
entities in which it has less than a majority interest is accounted for using
the equity method and is reflected in the Company's Consolidated Statements of
Income as "Income from unconsolidated cellular entities." See Income From
Unconsolidated Cellular Entities for additional information.
Mobile Communications Operations
Three months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 78,839 65,621
Equipment sales 1,324 1,073
- ------------------------------------------------------------------------
80,163 66,694
- ------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 2,987 3,167
System operations 12,549 10,279
General, administrative and customer service 15,090 13,529
Sales and marketing 11,918 10,805
Depreciation and amortization 10,216 8,761
- ------------------------------------------------------------------------
52,760 46,541
- ------------------------------------------------------------------------
Operating income $ 27,403 20,153
========================================================================
Mobile communications operating income increased $7.3 million (36.0%) to
$27.4 million in the third quarter of 1997 from $20.2 million in the third
quarter of 1996. Mobile communications operating revenues increased $13.5
million (20.2%) while operating expenses increased $6.2 million (13.4%).
The increase in cellular service revenues was primarily due to the increase
in the number of cellular customers. The average number of cellular units in
service in the Company's majority-owned markets during the third quarter of 1997
and 1996 was 411,300 and 331,000, respectively. Exclusive of acquisitions,
access and usage revenues increased $7.3 million (16.2%) in the third quarter of
1997 and roaming and toll revenues increased $4.8 million (25.5%). Companies
acquired since the third quarter of 1996 contributed $1.8 million of service
revenues.
The average monthly cellular service revenue per customer declined to $64
during the third quarter of 1997 from $66 during the third quarter of 1996. It
has been an industry-wide trend that early subscribers have normally been the
heaviest users and that a higher percentage of new subscribers tend to be lower
usage customers. The average monthly service revenue per customer may further
decline (i) as market penetration increases and additional lower usage customers
are activated and (ii) as competitive pressures from current and future wireless
communications providers intensify and place additional pressure on rates. The
Company is responding to such competitive pressures by, among other things,
modifying certain of its price plans and implementing certain other plans and
promotions, all of which are likely to result in lower average revenue per
customer. The Company will continue to focus on customer service and attempt to
stimulate cellular usage by promoting the availability of certain enhanced
services and by improving the quality of its service through the construction of
additional cell sites and other enhancements to its system.
System operations expenses increased $2.3 million (22.1%) in the third
quarter of 1997 primarily due to (i) a $1.0 million increase in the net cost
paid to other carriers for cellular service provided to the Company's customers
who roam in the other carriers' service areas in excess of the amounts the
Company bills its customers and (ii) a $431,000 increase in cell site expenses
associated with a higher number of cell sites in service.
General, administrative and customer service expenses increased $1.6
million (11.5%) primarily due to increased expenses resulting from a larger
customer base, such as customer service ($453,000) and billing costs ($623,000).
During the third quarter of 1997, sales and marketing expenses increased
$1.1 million (10.3%) primarily due to a $732,000 increase in costs incurred in
selling products and services in retail locations.
Depreciation and amortization increased $1.5 million (16.6%) due primarily
to a higher level of plant in service.
The Company's average monthly churn rate (the percentage of cellular
customers that terminate service) was 2.24% for the third quarter of 1997 and
2.61% for the third quarter of 1996.
Other Operations
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or mobile communications
segments, including, but not limited to, the Company's nonregulated long
distance and operator services operations. Operating revenues of the long
distance and operator services operations increased $3.3 million during the
third quarter of 1997 while operating expenses of such operations increased $2.9
million.
In May 1997 the Company sold its majority-owned competitive access
subsidiary to Brooks Fiber Properties, Inc. ("Brooks") in exchange for 4.3
million shares of Brooks' publicly-traded common stock. Operating revenues and
expenses in the third quarter of 1996 applicable to the competitive access
subsidiary were $597,000 and $2.3 million, respectively.
Income From Unconsolidated Cellular Partnerships
Earnings from unconsolidated cellular entities, net of the amortization of
associated goodwill, decreased $619,000 (6.9%) in the third quarter of 1997
compared to the third quarter of 1996 due to a $1.7 million decrease in the
Company's share of earnings in two cellular entities in which the Company owns
less than a majority interest. Such decrease was partially offset by increased
profitability of other cellular entities in which the Company owns less than a
majority interest.
Minority Interest
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings or loss of the Company's
majority-owned and operated cellular entities and majority-owned subsidiaries.
Minority interest increased $399,000 (28.1%) due primarily to an increase in the
earnings of the Company's majority-owned and operated cellular entities.
Income Tax Expense
Income tax expense increased $3.4 million in the third quarter of 1997
compared to the third quarter of 1996 primarily due to the increase in income
before taxes. The effective income tax rate was 37.6% and 37.2% for the three
months ended September 1997 and 1996, respectively.
Nine Months Ended September 30, 1997 Compared
to Nine Months Ended September 30, 1996
Net income for the first nine months of 1997, exclusive of gain on sales of
assets, increased $13.7 million (13.9%) to $112.2 million from $98.4 million
during the first nine months of 1996. Excluding gain on sales of assets, fully
diluted earnings per share increased to $1.84 for the nine months ended
September 30, 1997 from $1.63 during the nine months ended September 30, 1996, a
12.9% increase.
Nine months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
Operating income
Telephone $ 119,610 115,348
Mobile communications 65,752 56,105
Other 4,556 775
- ------------------------------------------------------------------------
189,918 172,228
Gain on sales of assets 70,121 815
Interest expense (33,539) (33,972)
Income from unconsolidated cellular entities 21,750 21,584
Minority interest (3,722) (5,947)
Other income and expense 3,467 2,601
Income tax expense (90,251) (58,353)
- ------------------------------------------------------------------------
Net income $ 157,744 98,956
========================================================================
Fully diluted earnings per share $ 2.58 1.64
========================================================================
Average fully diluted shares outstanding 61,198 60,593
========================================================================
Contributions to operating revenues and operating income by the Company's
telephone, mobile communications, and other operations for the nine months ended
September 30, 1997 and 1996 were as follows:
Nine months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
Operating revenues
Telephone operations 57.2% 60.5
Mobile communications operations 35.1% 33.3
Other operations 7.7% 6.2
Operating income
Telephone operations 63.0% 67.0
Mobile communications operations 34.6% 32.6
Other operations 2.4% .4
- ------------------------------------------------------------------------
Telephone Operations
Nine months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 98,749 90,542
Network access 217,407 205,134
Other 43,298 40,143
- ------------------------------------------------------------------------
359,454 335,819
- ------------------------------------------------------------------------
Operating expenses
Plant operations 73,013 67,582
Customer operations 34,674 31,761
Corporate and other 54,916 50,669
Depreciation and amortization 77,241 70,459
- ------------------------------------------------------------------------
239,844 220,471
- ------------------------------------------------------------------------
Operating income $ 119,610 115,348
========================================================================
Telephone operating income for the first nine months of 1997 increased $4.3
million (3.7%) due to an increase in operating revenues of $23.6 million (7.0%)
which more than offset an increase in operating expenses of $19.4 million
(8.8%).
The increase in revenues was primarily due to a $6.8 million increase in
amounts received from the federal Universal Service Fund; a $5.3 million
increase due to acquisitions consummated since the first quarter of 1996; a $4.0
million increase resulting from an increase in the number of access lines
served; a $3.3 million increase in revenues due to an increase in minutes of
use; a $3.5 million increase in the partial recovery of increased operating
expenses through revenue pools in which the Company participates with other
telephone companies; a $2.1 million increase due to the increased demand for
custom calling features; and a $1.8 million increase in Internet access revenues
attributable to growth in the number of customers. Such increases in revenues
were partially offset by a $3.1 million reduction in the Company's access
revenues due to the reduction in intrastate switched access rates mandated by
the Louisiana Public Service Commission ("LPSC"); the last portion of such
reduction went into effect in July 1997. In addition, billing and collection
revenues decreased $1.1 million during the nine months ended September 30, 1997
compared to the nine months ended September 30, 1996.
In June 1997 the LPSC adopted a Consumer Price Protection Plan (the
"Plan"), effective July 1997, for Century's telephone subsidiaries operating in
Louisiana. The new form of regulation will focus primarily on price and quality
of service. Under the Plan, Century's Louisiana telephone subsidiaries' local
rates will be frozen for a period of three years and access rates will be frozen
for a period of two years. Although the Plan has no specified term, the LPSC is
required to review it by mid-2000. Century's Louisiana telephone subsidiaries
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.
During the first nine months of 1997, operating expenses, exclusive of
depreciation and amortization, increased $12.6 million (8.4%) primarily due to
$2.3 million of expenses of companies acquired; a $2.3 million increase in
expenses (exclusive of sales and marketing expenses) related to providing
Internet access services; a $2.0 million increase in sales and marketing
expenses; a $1.2 million increase in advalorem taxes; and a $723,000 increase in
the provision for doubtful accounts. The remainder of the increase was due to
increases in general operating expenses.
Depreciation and amortization increased $6.8 million (9.6%) primarily due
to higher levels of plant in service ($4.5 million) and acquisitions ($1.3
million).
Cellular Operations and Investments
Nine months
ended September 30
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
(Dollars in thousands)
Operating income - mobile
communications segment $ 65,752 56,105
Minority interest - cellular operations (5,140) (6,141)
Income from unconsolidated
cellular entities 21,750 21,584
- ------------------------------------------------------------------------
$ 82,362 71,548
========================================================================
The Company's mobile communications operations (discussed below) reflects
100% of the results of operations of the cellular entities in which the Company
has a majority ownership interest. The minority interest owners' share of the
income of such entities is reflected in the Company's Consolidated Statements of
Income as an expense in "Minority interest." See Minority Interest for
additional information. The Company's share of earnings from the cellular
entities in which it has less than a majority interest is accounted for using
the equity method and is reflected in the Company's Consolidated Statements of
Income as "Income from unconsolidated cellular entities."
Mobile Communications Operations
Nine months
ended September 30
1997 1996
- ------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 216,476 182,218
Equipment sales 3,996 3,068
- ------------------------------------------------------------------------
220,472 185,286
- ------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 10,373 8,889
System operations 33,946 26,632
General, administrative and
customer service 43,568 38,626
Sales and marketing 37,345 31,012
Depreciation and amortization 29,488 24,022
- ------------------------------------------------------------------------
154,720 129,181
- ------------------------------------------------------------------------
Operating income $ 65,752 56,105
========================================================================
Mobile communications operating income increased $9.6 million (17.2%) to
$65.8 million in the first nine months of 1997 from $56.1 million in the first
nine months of 1996. Mobile communications operating revenues increased $35.2
million (19.0%) which more than offset an increase in operating expenses of
$25.5 million (19.8%).
The increase in cellular service revenues was primarily due to the increase
in the number of cellular customers. The average number of cellular units in
service in the Company's majority-owned markets during the first nine months of
1997 and 1996 was 391,000 and 314,700, respectively. Exclusive of acquisitions,
access and usage revenues increased $22.1 million (17.1%) in the first nine
months of 1997 and roaming and toll revenues increased $10.6 million (21.4%).
Companies acquired since the third quarter of 1996 contributed $3.3 million of
service revenues.
The average monthly cellular service revenue per customer declined to $62
during the first nine months of 1997 from $64 during the first nine months of
1996. It has been an industry-wide trend that early subscribers have normally
been the heaviest users and that a higher percentage of new subscribers tend to
be lower usage customers. The average monthly service revenue per customer may
further decline (i) as market penetration increases and additional lower usage
customers are activated and (ii) as competitive pressures from current and
future wireless communications providers intensify and place additional pressure
on rates. The Company is responding to such competitive pressures by, among
other things, modifying certain of its price plans and implementing certain
other plans and promotions, all of which are likely to result in lower average
revenue per customer. The Company will continue to focus on customer service and
attempt to stimulate cellular usage by promoting the availability of certain
enhanced services and by improving the quality of its service through the
construction of additional cell sites and other enhancements to its system.
System operations expenses increased $7.3 million (27.5%) during the nine
months ended September 30, 1997 primarily due to (i) a $3.5 million increase in
the net cost paid to other carriers for cellular service provided to the
Company's customers who roam in the other carriers' service areas in excess of
the amounts the Company bills its customers and (ii) a $1.5 million increase in
cell site expenses associated with a higher number of cell sites in service.
General, administrative and customer service expenses increased $4.9
million (12.8%) primarily due to increased expenses resulting from a larger
customer base, such as customer service and retention costs ($2.6 million) and
billing costs ($1.7 million).
Sales and marketing expenses increased $6.3 million (20.4%) primarily due
to a $2.9 million increase in costs incurred in selling products and services in
retail locations and a $2.1 million increase in advertising expense.
Depreciation and amortization increased $5.5 million (22.8%) due primarily
to a higher level of plant in service.
The Company's average monthly churn rate (the percentage of cellular
customers that terminate service) was 2.30% for the first nine months of 1997
and 2.34% for the first nine months of 1996.
Other Operations
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or mobile communications
segments, including, but not limited to, the Company's competitive access
subsidiary (which was sold to Brooks in May 1997) and the Company's nonregulated
long distance and operator services operations. Of the $13.6 million (39.7%)
increase in operating revenues during the nine months ended September 30, 1997
compared to the nine months ended September 30, 1996, $12.0 million was
applicable to the long distance and operator services operations. Of the $9.9
million (29.4%) increase in operating expenses, $9.7 million was incurred by the
long distance and operator services operations. The operating loss of the
Company's competitive access subsidiary in 1997 was $2.4 million compared to
$4.2 million during the first nine months of 1996.
Gain on Sales of Assets
Gain on sales of assets included a pre-tax gain of $71 million ($46 million
after-tax: $.75 per fully diluted share) as a result of the sale of the
Company's competitive access subsidiary to Brooks in May 1997. For additional
information, see Note 5 of Notes to Consolidated Financial Statements.
Minority Interest
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings or loss of the Company's
majority-owned and operated cellular entities and majority-owned subsidiaries.
Minority interest decreased $2.2 million (37.4%), of which $2.1 million was due
to the effect of the Company's acquisition, during the second quarter of 1996,
of an additional 25% interest in a Louisiana cellular partnership which
decreased the minority interest owners' share of such partnership. In addition,
minority interest decreased $756,000 during 1997 as a result of allocating
thereto a portion of the loss of the Company's majority-owned competitive access
subsidiary to the minority shareholders. In the first nine months of 1996, no
portion of the loss of such subsidiary was allocated to minority interest. Such
decreases were partially offset by increased minority interest expense due to
increased profitability of the Company's majority-owned and operated cellular
entities.
Other Income and Expense
Other income and expense for the first nine months of 1997 was $3.5 million
compared to $2.6 million during the first nine months of 1996. The first quarter
of 1996 included a non-recurring charge of $1.1 million which related to the
Company's withdrawal of its investment in an entity formed to bid on Personal
Communications Services ("PCS") licenses after such entity withdrew from the
federal auction in 1996.
Income Tax Expense
Income tax expense increased $31.9 million (54.7%) in the first nine months
of 1997 compared to the first nine months of 1996 substantially due to the
second quarter 1997 gain on sales of assets. The effective income tax rate was
36.4% and 37.1% for the nine months ended September 30, 1997 and 1996,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to provide a substantial portion of its cash needs. The Company's
telephone operations have historically provided a stable source of cash flow
which has helped the Company continue its long-term program of capital
improvements. Cash provided by the Company's mobile communications operations
has continued to increase as the cellular industry has matured.
Net cash provided by operating activities was $217.5 million during the
first nine months of 1997 compared to $211.5 million during the first nine
months of 1996. The Company's accompanying consolidated statements of cash flows
identify major differences between net income and net cash provided by operating
activities for each of these periods. For additional information relating to the
telephone operations, mobile communications operations, and other operations of
the Company, see Results of Operations.
Net cash used in investing activities was $139.3 million and $150.3 million
for the nine months ended September 30, 1997 and 1996, respectively. Payments
for property, plant and equipment were $30.5 million less in the first nine
months of 1997 than in the comparable period during 1996. Capital expenditures
for the nine months ended September 30, 1997 were $77.3 million for telephone,
$30.4 million for mobile communications and $15.6 million for other operations.
Cash used in connection with acquisitions was $13.4 million more in the first
nine months of 1997 compared to the first nine months of 1996. A note receivable
with an outstanding balance of $22.5 million was collected during the nine
months ended September 30, 1997. The $150.3 million of net cash used in
investing activities in 1996 was net of the reimbursement of $18.9 million
related to the Company's withdrawal of its equity investment in an entity formed
for the purpose of participating in the FCC auction of 30MHz PCS licenses.
Net cash used in financing activities was $75.3 million during the first
nine months of 1997 compared to $54.2 million during the first nine months of
1996. Net payments, including notes payable and long-term debt, were $19.3
million more during the first nine months of 1997.
Budgeted capital expenditures for 1997 total $102 million for telephone
operations. Revised budgeted capital expenditures for 1997 total $60 million for
mobile communications operations and $25 million for corporate and other
operations.
As of September 30, 1997, Century's telephone subsidiaries had available
for use $126.7 million of commitments for long-term financing from the Rural
Utilities Service and the Company had $1.615 billion of undrawn committed bank
lines of credit. In addition, approximately $95.0 million of uncommitted credit
facilities were available to Century at September 30, 1997. The Company has
experienced no significant problems in obtaining funds through the issuance of
debt or equity for capital expenditures or other purposes.
In June 1997 the Company signed a definitive purchase agreement to acquire
PTI in exchange for $1.523 billion cash. The Company anticipates financing the
acquisition initially with 5-year senior unsecured floating-rate bank debt under
a $1.6 billion committed credit facility agreement dated August 28, 1997 with
NationsBank and a syndicate of other lenders. In June 1997 both Standard &
Poor's and Moody's placed the Company's debt ratings (A- and Baa1, respectively)
under review; neither rating agency has completed its review process in order to
assign ratings that consider the PTI acquisition. Assuming a Standard & Poor's
rating of BBB or BBB+ or a Moody's rating of Baa2 or Baa1, the Company will be
able to borrow funds at 35 or 27.5 basis points, respectively, over the London
InterBank Offered Rate for periods ranging up to six months. The Company's
common stockholders' equity as a percentage of total capitalization was 67.6% at
September 30, 1997. Assuming the PTI acquisition had been consummated as of
September 30, 1997, common stockholders' equity as a percentage of total
capitalization would have been approximately 30%.
OTHER MATTERS
The Company currently accounts for its regulated telephone operations in
accordance with the provisions of Statement of Financial Accounting Standards
No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation."
While the ongoing applicability of SFAS 71 to the Company's telephone operations
is being monitored due to changing regulatory, competitive and legislative
environments, the Company believes that SFAS 71 still applies. However, it is
possible that changes in regulation or legislation or anticipated changes in
competition or in the demand for regulated services or products could result in
the Company's telephone operations not being subject to SFAS 71 in the near
future. In that event, implementation of Statement of Financial Accounting
Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the
Discontinuance of Application of FASB Statement No. 71," would require the
write-off of previously established regulatory assets and liabilities, along
with an adjustment of certain accumulated depreciation accounts to reflect the
difference between recorded depreciation and the amount of depreciation that
would have been recorded had the Company's telephone operations not been subject
to rate regulation. Such discontinuance of the application of SFAS 71 would
result in a material, noncash charge against earnings which would be reported as
an extraordinary item. While the effect of implementing SFAS 101 cannot be
precisely estimated at this time, management believes that, without giving
consideration to the PTI acquisition, the noncash, after-tax, extraordinary
charge would be between $100 million and $130 million.
In May 1997 the Federal Communications Commission ("FCC") adopted orders on
universal service and access charges, as mandated by the Telecommunications Act
of 1996 (the "1996 Act"). In the universal service order, the FCC ruled that
rural telephone companies, which are defined to include each of Century's local
exchange carriers ("LEC"), will continue to receive payments under the support
mechanisms currently in effect and that the funding of these mechanisms will not
be frozen. This status quo will continue under the order until January 2001, at
which time rural telephone companies will begin to receive payments under new,
yet to be developed support mechanisms which will be based on forward-looking
economic costs.
As part of the 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 telecommunications 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 stated that local telephone companies will recover their
funding contributions in their rates for interstate services. Assuming the
programs are fully funded, the Company estimates that the contribution by its
cellular and long distance operations for 1998 will increase approximately $4.8
million.
In the access charge reform order, 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 only applicable to price-cap
companies. Century's telephone subsidiaries determine interstate revenues under
rate of return regulation and are, therefore, only minimally impacted by the
access charge reform order. The FCC stated that a separate access charge reform
proceeding would be initiated for rate of return companies.
Numerous petitions for reconsideration or clarification have been filed
with the FCC regarding these two orders.
In July 1997 the United States Court of Appeals for the Eighth Circuit
overturned several provisions of the local competition regulations in the
interconnection order promulgated by the FCC under the 1996 Act, including rules
regarding the pricing of interconnection services and rules placing the burden
of proof on rural LECs to retain their rural exemption. The FCC is expected to
appeal the decision to the United States Supreme Court.
In October 1997 the FCC issued a Notice of Proposed Rulemaking which
provides, among other things, that a federal-state joint board review
jurisdictional separations procedures through which the costs of regulated
telecommunications services are allocated to the interstate and intrastate
jurisdictions. Comments on the notice of proposed rulemaking are due in December
1997 with replies due in January 1998.
PART II. OTHER INFORMATION
CENTURY TELEPHONE ENTERPRISES, INC.
Item 2. Changes in Securities
- ------- ---------------------
In October 1997, in exchange for 100% of the capital stock of a
security alarm business, the Company issued 74,929 shares of unregistered
Century common stock to Vernon and Dorothy Henson, the sole owners of such
business. The Company believes such issuance is exempt from the
registration requirements of the Securities Act of 1933 pursuant to Section
4(2) thereof.
Item 5. Other Information
- ------- -----------------
On November 7, 1997, in exchange for aggregate net sales proceeds of
approximately $202.7 million, Century sold 3,784,450 of the 4,336,226 shares of
common stock of Brooks issued to Century in May 1997 in connection with the
business combination of Brooks and Century's majority-owned subsidiary,
Metro Access Networks, Inc.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
A. Exhibits
--------
4.1 Competitive Advance and Revolving Credit Facility Agreement,
dated as of August 28, 1997, among Registrant,
the lenders named therein, and NationsBank of Texas, N.A.
10.1 Amendment, dated June 26, 1997 to Registrant's Dollars and
Sense Plan and Trust
11 Computations of Earnings per Share
27 Financial Data Schedule
B. Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTURY TELEPHONE ENTERPRISES, INC.
Date: November 10, 1997 /s/ Murray H. Greer
-------------------
Murray H. Greer
Controller
(Principal Accounting Officer)