UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-7784
CENTURY TELEPHONE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Century Park Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (318) 388-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of October 31, 1998, there were 91,938,325 shares of common stock
outstanding.
CENTURY TELEPHONE ENTERPRISES, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income--Three Months and Nine
Months Ended September 30, 1998 and 1997 3
Consolidated Statements of Comprehensive Income--
Three Months and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Balance Sheets--September 30, 1998 and
December 31, 1997 5
Consolidated Statements of Stockholders' Equity--
Nine Months Ended September 30, 1998 and 1997 6
Consolidated Statements of Cash Flows--
Nine Months Ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-24
Part II. Other Information:
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
PART I. FINANCIAL INFORMATION
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months Nine months
ended September 30, ended September 30,
- --------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares expressed in thousands)
OPERATING REVENUES
Telephone $ 275,397 121,934 800,532 359,454
Wireless 106,662 80,163 305,699 220,472
Other 19,890 16,254 55,816 47,986
- --------------------------------------------------------------------------------
Total operating revenues 401,949 218,351 1,162,047 627,912
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and
operating expenses 192,155 111,462 559,955 329,254
Depreciation and amortization 81,610 37,074 242,288 108,740
- --------------------------------------------------------------------------------
Total operating expenses 273,765 148,536 802,243 437,994
- --------------------------------------------------------------------------------
OPERATING INCOME 128,184 69,815 359,804 189,918
- --------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Gain on sale or exchange of
assets, net - - 49,859 70,121
Interest expense (41,904) (11,175) (126,785) (33,539)
Income from unconsolidated
cellular entities 9,162 8,371 25,105 21,750
Minority interest (3,619) (1,817) (10,264) (3,722)
Other income and expense 1,159 1,174 2,454 3,467
- --------------------------------------------------------------------------------
Total other income (expense) (35,202) (3,447) (59,631) 58,077
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 92,982 66,368 300,173 247,995
Income tax expense 38,304 24,935 123,610 90,251
- --------------------------------------------------------------------------------
NET INCOME $ 54,678 41,433 176,563 157,744
================================================================================
BASIC EARNINGS PER SHARE* $ .60 .46 1.93 1.75
================================================================================
diluted earnings per share* $ .59 .45 1.90 1.73
================================================================================
Dividends per common share* $ .065 .0617 .195 .1851
================================================================================
Average basic shares outstanding* 91,471 90,134 91,238 89,802
================================================================================
Average diluted shares outstanding* 93,548 91,710 93,272 91,325
================================================================================
*Reflects March 1998 stock split. See Note 5.
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months Nine months
ended September 30, ended September 30,
- --------------------------------------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Net income $ 54,678 41,433 176,563 157,744
- --------------------------------------------------------------------------------
Other comprehensive income,
net of tax:
Unrealized holding gains
(losses) arising during
period, net of tax (631) 37,473 10,310 62,038
Reclassification adjustment
for gains included in net
income, net of tax - - (20,478) -
- --------------------------------------------------------------------------------
Other comprehensive income,
net of tax (631) 37,473 (10,168) 62,038
- --------------------------------------------------------------------------------
Comprehensive income $ 54,047 78,906 166,395 219,782
================================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 3,940 26,017
Accounts receivable, less allowance
of $4,824 and $5,954 182,117 227,272
Materials and supplies, at average cost 24,841 21,994
Other 7,442 8,197
- --------------------------------------------------------------------------------
218,340 283,480
- --------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,245,445 2,258,563
- --------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired,
less accumulated amortization of
$119,620 and $84,132 1,741,491 1,767,352
Other 430,894 400,006
- --------------------------------------------------------------------------------
2,172,385 2,167,358
- --------------------------------------------------------------------------------
$ 4,636,170 4,709,401
================================================================================
LIABILITIES AND EQUITY
- ----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 45,015 55,244
Accounts payable 77,194 83,378
Accrued expenses and other liabilitiesz
Salaries and benefits 46,737 38,225
Taxes 19,746 74,898
Interest 23,416 20,821
Other 24,506 25,229
Advance billings and customer deposits 28,285 24,213
- --------------------------------------------------------------------------------
264,899 322,008
- --------------------------------------------------------------------------------
LONG-TERM DEBT 2,392,685 2,609,541
- --------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 509,951 477,580
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, 175,000,000
shares authorized, 91,924,239 and
91,103,674 shares issued and outstanding 91,924 91,104
Paid-in capital 487,221 469,586
Accumulated other comprehensive income-
unrealized holding gain on investments,
net of taxes 1,725 11,893
Retained earnings 886,479 728,033
Unearned ESOP shares (6,820) (8,450)
Preferred stock-non-redeemable 8,106 8,106
- --------------------------------------------------------------------------------
1,468,635 1,300,272
- --------------------------------------------------------------------------------
$ 4,636,170 4,709,401
================================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine months
ended September 30,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 91,104 * 59,859
Issuance of common stock for acquisitions 28 -
Conversion of convertible securities
into common stock 169 237
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 623 423
- --------------------------------------------------------------------------------
Balance at end of period 91,924 60,519
- --------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 469,586 * 474,607
Issuance of common stock for acquisitions 1,059 -
Conversion of convertible securities
into common stock 3,131 4,998
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 11,410 10,448
Amortization of unearned compensation
and other 2,035 608
- --------------------------------------------------------------------------------
Balance at end of period 487,221 490,661
- --------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period 11,893 -
Change in unrealized holding gain on
investments, net of reclassification
adjustment (10,168) 62,038
- --------------------------------------------------------------------------------
Balance at end of period 1,725 62,038
- --------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 728,033 494,726
Net income 176,563 157,744
Cash dividends declared
Common stock - $.195 and $.1851 per
share, respectively* (17,811) (16,622)
Preferred stock (306) (357)
- --------------------------------------------------------------------------------
Balance at end of period 886,479 635,491
- --------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (8,450) (11,080)
Release of ESOP shares 1,630 1,880
- --------------------------------------------------------------------------------
Balance at end of period (6,820) (9,200)
- --------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning of period 8,106 10,041
Conversion of preferred stock into common stock - (1,935)
- --------------------------------------------------------------------------------
Balance at end of period 8,106 8,106
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,468,635 1,247,615
================================================================================
*Reflects March 1998 stock split. See Note 5.
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months
ended September 30,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 176,563 157,744
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 242,288 108,740
Deferred income taxes 30,241 31,667
Income from unconsolidated cellular entities (25,105) (21,750)
Minority interest 10,264 3,722
Gain on sales of assets (49,859) (70,121)
Changes in current assets and current liabilities:
Accounts receivable (15,370) (12,170)
Accounts payable (6,184) (6,110)
Other accrued taxes (55,152) 8,624
Other current assets and other current
liabilities, net 9,364 9,853
Changes in other noncurrent liabilities 3,535 3,259
Other, net (3,408) 4,040
- --------------------------------------------------------------------------------
Net cash provided by operating activities 317,177 217,498
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (204,627) (123,344)
Acquisitions, net of cash acquired (5,028) (30,398)
Proceeds from sales of assets 132,307 -
Distributions from unconsolidated cellular entities 17,715 9,173
Purchase of life insurance investment, net (2,557) (12,936)
Proceeds from note receivable - 22,500
Other, net 2,337 (4,320)
- --------------------------------------------------------------------------------
Net cash used in investing activities (59,853) (139,325)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 772,894 12,151
Payments of long-term debt (999,877) (78,377)
Payment upon settlement of hedge contracts (40,237) -
Payment of deferred debt issuance costs (6,625) -
Proceeds from issuance of common stock 12,110 10,860
Cash dividends (18,117) (16,979)
Other, net 451 (2,947)
- --------------------------------------------------------------------------------
Net cash used in financing activities (279,401) (75,292)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (22,077) 2,881
Cash and cash equivalents at beginning of period 26,017 8,402
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,940 11,283
================================================================================
Supplemental cash flow information:
Income taxes paid $ 158,365 53,978
Interest paid $ 124,190 28,963
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
(1) Basis of Financial Reporting
The consolidated financial statements of Century Telephone Enterprises,
Inc. and its subsidiaries (the "Company") include the accounts of Century
Telephone Enterprises, Inc. ("Century") and its majority-owned subsidiaries and
partnerships. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission; however, the Company believes the
disclosures which are made are adequate to make the information presented not
misleading. The financial statements and footnotes included in this Form 10-Q
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997. Certain 1997 amounts have been reclassified to be consistent with the
1998 presentation.
The unaudited financial information for the three months and nine months
ended September 30, 1998 and 1997 has not been audited by independent public
accountants; however, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
results of operations for the three-month and nine-month periods have been
included therein. The results of operations for the first nine months of the
year are not necessarily indicative of the results of operations which might be
expected for the entire year.
(2) Net Property, Plant and Equipment
Net property, plant and equipment is composed of the following:
September 30, December 31,
1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost $ 3,414,234 3,295,860
Accumulated depreciation (1,520,474) (1,375,835)
- ---------------------------------------------------------------------------
1,893,760 1,920,025
- ---------------------------------------------------------------------------
Wireless, at cost 421,412 380,218
Accumulated depreciation (166,949) (133,357)
- ---------------------------------------------------------------------------
254,463 246,861
- ---------------------------------------------------------------------------
Corporate and other, at cost 191,138 169,420
Accumulated depreciation (93,916) (77,743)
- ---------------------------------------------------------------------------
97,222 91,677
- ---------------------------------------------------------------------------
$ 2,245,445 2,258,563
===========================================================================
(3) Earnings from Unconsolidated Cellular Entities
The following summarizes the unaudited combined results of operations of
the cellular entities in which the Company's investments (as of September 30,
1998 and 1997) were accounted for by the equity method:
Nine months
ended September 30,
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
(Dollars in thousands)
Results of operations
Revenues $ 937,670 930,860
Operating income $ 334,405 310,236
Net income $ 336,393 277,464
- ----------------------------------------------------------------------------
(4) Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures About Segments of an Enterprise and Related
Information." SFAS 130 established standards for reporting the components of
comprehensive income, which is defined to include all changes in equity during a
period except those resulting from investments by and distributions to
shareholders. SFAS 131 established standards for reporting information about
operating segments in annual financial statements and interim financial reports
to shareholders. The Company adopted both statements in the first quarter of
1998; however, the provisions of SFAS 131 need not be applied to interim periods
in the initial year of application. SFAS 131 is not expected to materially
impact how the Company currently reports its segment information.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 established accounting and reporting standards for
derivative instruments and for hedging activities by requiring that entities
recognize all derivatives as either assets or liabilities at fair value on the
balance sheet. Based on the Company's current use of derivatives, SFAS 133 is
not expected to materially impact the Company's financial position or results of
operations.
(5) Stock Split
On March 31, 1998, the Company effected a three-for-two common stock split
by means of a 50% stock dividend. Shares outstanding and per share data for the
nine months and three months ended September 30, 1997 have been restated to
reflect this stock split.
(6) Debt Issuance
On January 15, 1998, Century issued $100 million of 7-year, 6.15% senior
notes (Series E); $240 million of 10-year, 6.3% senior notes (Series F); and
$425 million of 30-year, 6.875% debentures (Series G) under its shelf
registration statements. The net proceeds of approximately $758 million
(excluding payment obligations of approximately $40 million related to interest
rate hedging effected in connection with the offering) were used to reduce the
bank indebtedness incurred by the Company in connection with its December 1,
1997 acquisition of Pacific Telecom, Inc. ("PTI").
In mid-January 1998, the Company settled numerous interest rate hedge
contracts that had been entered into in anticipation of these debt issuances.
The amounts paid by the Company upon settlement of the hedge contracts
aggregated approximately $40 million, which will be amortized as interest
expense over the lives of the underlying debt instruments. The effective
weighted average interest rate of the above-mentioned debt (after giving
consideration to these payment obligations) is 7.15%. In March 1998 the Company
paid approximately $250,000 upon settlement of its remaining interest rate hedge
contracts.
(7) Sale or Exchange of Assets
In connection with the first quarter 1998 acquisition of Brooks Fiber
Properties, Inc. ("Brooks") by WorldCom, Inc. ("WorldCom") , the Company's
551,000 shares of Brooks' common stock were converted into approximately 1.0
million shares of WorldCom common stock. The Company recorded such conversion at
fair value which resulted in a pre-tax gain of approximately $22.8 million
($14.8 million after-tax; $.16 per diluted share). In the second quarter of
1998, the Company sold 750,000 shares of WorldCom common stock for $35.6 million
cash and recorded a pre-tax gain of $8.7 million ($5.7 million after tax; $.06
per diluted share).
In the second quarter of 1998, the Company sold its minority interests in
two non-strategic cellular entities for approximately $31.0 million cash which
resulted in a pre-tax gain of $21.8 million ($12.3 million after-tax; $.13 per
diluted share). Additionally, in the second quarter the Company wrote off its
minority investment in a start-up company.
During the second quarter of 1998, the Company also sold various other
properties that were acquired in the PTI acquisition, including, but not limited
to, the Company's submarine cable operations. The Company utilized the proceeds
from these transactions to reduce its debt associated with the acquisition of
PTI. In accordance with purchase accounting, no gain or loss was recorded upon
the disposition of these assets.
During the second quarter of 1997, the Company sold its competitive access
subsidiary to Brooks and recorded a pre-tax gain of $71 million ($46 million
after-tax; $.50 per diluted share).
(8) Pending Acquisition
On March 12, 1998, the Company entered into definitive agreements to
purchase from affiliates of Ameritech Corporation ("Ameritech") the assets of
certain local telephone and directory operations in parts of northern and
central Wisconsin, in exchange for approximately $225 million cash (subject to
adjustments). The assets to be purchased include (i) access lines and related
property and equipment in 21 predominantly rural communities in Wisconsin which
serve approximately 68,000 customers, (ii) Ameritech's directory publishing
operations that relate to nine telephone directories serving such customers, and
(iii) approximately $4 million in net receivables. Subject to the satisfaction
of various closing conditions, this transaction is expected to be completed in
the fourth quarter of 1998.
(9) Pending Disposition
In August 1998, the Company entered into a definitive agreement to sell
the stock of the entities conducting the Company's Alaska operations to ALEC
Acquisition Corporation for $415 million cash, subject to various adjustments.
Proceeds from this transaction will be used to reduce debt and to fund the
Company's pending acquisition of telephone access lines from Ameritech described
in Note 8. The Alaska transaction is anticipated to close in the first quarter
of 1999, subject to regulatory approvals and various closing conditions.
CENTURY TELEPHONE ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") included herein should be read in conjunction with MD&A and
the other information included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. The results of operations for the three months
and nine months ended September 30, 1998 are not necessarily indicative of the
results of operations which might be expected for the entire year.
Century Telephone Enterprises, Inc., which operates under the trade name of
CenturyTel, and its subsidiaries (the "Company"), is a regional diversified
communications company that is primarily engaged in providing local telephone
services and cellular telephone communications services. At September 30, 1998,
the Company's local exchange telephone subsidiaries operated over 1.2 million
telephone access lines primarily in rural, suburban and small urban areas in 21
states, and the Company's majority-owned and operated cellular entities had more
than 591,000 cellular subscribers. On December 1, 1997, the Company
significantly expanded its operations by acquiring Pacific Telecom, Inc.
("PTI"). As a result of the acquisition, the Company acquired (i) over 660,000
telephone access lines, (ii) over 88,000 cellular subscribers and (iii) various
wireless, cable television and other communications assets.
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. Such forward-looking statements are subject to uncertainties
that could cause the Company's actual results to differ materially from such
statements. Such uncertainties include but are not limited to: the effects of
ongoing deregulation in the telecommunications industry; the effects of greater
than anticipated competition in the Company's markets; possible changes in the
demand for the Company's products and services; the Company's ability to
successfully introduce new offerings on a timely and cost-effective basis; the
risks inherent in rapid technological change; the Company's ability to
effectively manage its growth, including integrating the operations of PTI into
the Company's operations; the success and expense of the remediation efforts of
the Company and its vendors in achieving year 2000 compliance; and the effects
of more general factors such as changes in general market or economic conditions
or in legislation, regulation or public policy. These and other uncertainties
related to the business are described in greater detail in Item 1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
update any of its forward-looking statements for any reason.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared
to Three Months Ended September 30, 1997
Net income for the third quarter of 1998 was $54.7 million compared to
$41.4 million during the third quarter of 1997. Diluted earnings per share
increased to $.59 during the three months ended September 30, 1998 from $.45
during the three months ended September 30, 1997, a 31.1% increase.
Three months
ended September 30,
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
(Dollars, except per
share amounts,and
shares in thousands)
Operating income
Telephone $ 88,210 40,114
Wireless 36,693 27,403
Other 3,281 2,298
- ---------------------------------------------------------------------------
128,184 69,815
Interest expense (41,904) (11,175)
Income from unconsolidated cellular entities 9,162 8,371
Minority interest (3,619) (1,817)
Other income and expense 1,159 1,174
Income tax expense (38,304) (24,935)
- ---------------------------------------------------------------------------
Net income $ 54,678 41,433
===========================================================================
Diluted earnings per share* $ .59 .45
===========================================================================
Average diluted shares outstanding* 93,548 91,710
===========================================================================
* Reflects March 1998 stock split. See Note 5.
Contributions to operating revenues and operating income by the Company's
telephone, wireless, and other operations for the three months ended September
30, 1998 and 1997 were as follows:
Three months
ended September 30,
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
Operating revenues
Telephone operations 68.5% 55.8
Wireless operations 26.5% 36.7
Other operations 5.0% 7.5
Operating income
Telephone operations 68.8% 57.5
Wireless operations 28.6% 39.2
Other operations 2.6% 3.3
- ---------------------------------------------------------------------------
Telephone Operations
Three months
ended September 30,
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 84,082 33,443
Network access 159,422 73,385
Other 31,893 15,106
- ---------------------------------------------------------------------------
275,397 121,934
- ---------------------------------------------------------------------------
Operating expenses
Plant operations 62,402 24,971
Customer operations 22,107 11,931
Corporate and other 37,436 18,679
Depreciation and amortization 65,242 26,239
- ---------------------------------------------------------------------------
187,187 81,820
- ---------------------------------------------------------------------------
Operating income $ 88,210 40,114
===========================================================================
Telephone operating income increased $48.1 million (119.9%) due to an
increase in operating revenues of $153.5 million (125.9%) which more than offset
an increase in operating expenses of $105.4 million (128.8%).
Of the $153.5 million increase in operating revenues, $139.8 million was
attributable to the properties acquired in the PTI acquisition. The remaining
$13.7 million increase in revenues was partially due to a $2.5 million increase
in revenues due to increased minutes of use; a $2.5 million increase resulting
from favorable prior period revenue settlements; a $3.4 million increase in the
partial recovery of increased operating expenses through revenue pools in which
the Company participates with other telephone companies; a $1.9 million increase
in amounts received from the federal Universal Service Fund; and a $1.6 million
increase resulting from internal growth in the number of customer access lines.
During the third quarter of 1998, operating expenses, exclusive of
depreciation and amortization, increased $66.4 million, of which $61.1 million
was attributable to the properties acquired in the PTI acquisition. The
remainder of the increase in operating expenses was due to increases in general
operating expenses.
Depreciation and amortization increased $39.0 million, of which $35.2
million (which includes $6.9 million of amortization of excess cost of net
assets acquired) was attributable to the properties acquired in the PTI
acquisition. The remainder of the increase was primarily due to higher recurring
rates or nonrecurring depreciation charges which have been approved for certain
subsidiaries.
Wireless Operations and Income From Unconsolidated Cellular Entities
Three months
ended September 30,
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
Operating income - wireless operations $ 36,693 27,403
Minority interest (3,619) (2,044)
Income from unconsolidated cellular entities 9,162 8,371
- ---------------------------------------------------------------------------
$ 42,236 33,730
===========================================================================
The Company's wireless operations (discussed below) reflect 100% of the
results of operations of the cellular entities in which the Company has a
majority ownership interest. The minority interest owners' share of the income
of such entities is reflected in the Company's Consolidated Statements of Income
as an expense in "Minority interest." See Minority Interest for additional
information. The Company's share of earnings from the cellular entities in which
it has less than a majority interest is accounted for using the equity method
and is reflected in the Company's Consolidated Statements of Income as "Income
from unconsolidated cellular entities." See Income from Unconsolidated Cellular
Entities for additional information.
Wireless Operations
Three months
ended September 30,
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 104,527 78,839
Equipment sales 2,135 1,324
- ---------------------------------------------------------------------------
106,662 80,163
- ---------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 3,784 2,987
System operations 15,326 12,549
General, administrative and customer service 21,991 15,090
Sales and marketing 13,312 11,918
Depreciation and amortization 15,556 10,216
- ---------------------------------------------------------------------------
69,969 52,760
- ---------------------------------------------------------------------------
Operating income $ 36,693 27,403
===========================================================================
Wireless operating income increased $9.3 million (33.9%) to $36.7 million
in the third quarter of 1998 from $27.4 million in the third quarter of 1997.
Wireless operating revenues increased $26.5 million (33.1%) while operating
expenses increased $17.2 million (32.6%).
Of the $25.7 million increase in service revenues, $23.0 million was
attributable to acquisitions. Excluding acquisitions, roaming revenues increased
$3.0 million in the third quarter of 1998. The average number of cellular units
in service in majority-owned markets (exclusive of acquisitions) during the
third quarter of 1998 and 1997 was 449,600 and 411,300, respectively.
The average monthly cellular service revenue per customer (including
acquisitions) declined to $59 during the third quarter of 1998 from $64 during
the third quarter of 1997 partially due to the continued trend that a higher
percentage of new subscribers tend to be lower usage customers. In addition, the
properties acquired in the PTI acquisition historically have had a lower average
monthly service revenue per customer than the Company's incumbent properties.
The average monthly service revenue per customer may further decline (i) as
market penetration increases and additional lower usage customers are activated
and (ii) as competitive pressures from current and future wireless
communications providers intensify. The Company is responding to such
competitive pressures by, among other things, modifying certain of its price
plans and implementing certain other plans and promotions, all of which are
likely to result in lower average revenue per customer. The Company will
continue to focus on customer service and attempt to stimulate cellular usage by
promoting the availability of certain enhanced services and by improving the
quality of its service through the construction of additional cell sites and
other enhancements to its system.
System operations expenses increased $2.8 million (22.1%) in the third
quarter of 1998 primarily due to $4.8 million of expenses attributable to
acquisitions. Such increase was partially offset by a $1.7 million decrease in
the amounts paid to other carriers for cellular service provided to the
Company's customers who roam in the other carriers' service areas.
General, administrative and customer service expenses increased $6.9
million (45.7%), of which $3.4 million was attributable to expenses of entities
acquired. The remainder of the increase was primarily due to a $2.4 million
increase in the provision for doubtful accounts.
The Company's average monthly churn rate (the percentage of cellular
customers that terminate service) was 2.3% for the third quarter of 1998 and
2.2% for the third quarter of 1997.
Sales and marketing expenses increased $1.4 million (11.7%) in the third
quarter of 1998 primarily due to $2.8 million of expenses of entities acquired
and a $1.0 million increase in advertising expense. Commissions paid to agents
for selling services to new customers decreased $2.8 million primarily as a
result of fewer cellular units added during the third quarter of 1998 compared
to the third quarter of 1997. The Company will continue to focus on attracting
and retaining higher usage customers.
Depreciation and amortization increased $5.3 million (52.3%), of which
$3.5 million was attributable to acquisitions. The remainder of the increase was
due primarily to a higher level of plant in service.
Other Operations
Three months
ended September 30,
- ----------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 13,263 9,810
Call center 2,754 3,866
Other 3,873 2,578
- ----------------------------------------------------------------------
19,890 16,254
- ----------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 15,797 13,337
Depreciation and amortization 812 619
- ----------------------------------------------------------------------
16,609 13,956
- ----------------------------------------------------------------------
Operating income $ 3,281 2,298
======================================================================
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or wireless segments, including,
but not limited to, the Company's nonregulated long distance and call center
operations. The $3.5 million increase in long distance revenues was primarily
attributable to the growth in the number of customers; the $1.1 million decrease
in call center revenues was primarily due to the loss of two major customers in
the fourth quarter of 1997. The increase in other revenues was primarily
attributable to the PTI acquisition and the acquisition of two security alarm
businesses subsequent to the third quarter of 1997.
Operating expenses increased due to (i) an increase of $3.5 million in
expenses of the Company's long distance operations due primarily to an increase
in customers and (ii) $1.9 million of operating expenses applicable to
acquisitions. Such increases were substantially offset because (i) the amount of
intercompany profit with regulated affiliates which, in accordance with
regulatory accounting principles, was not eliminated in connection with
consolidating the results of operations (which acts to offset operating
expenses) increased $1.1 million as a result of the PTI acquisition, and (ii)
the third quarter of 1997 included $1.7 million of costs applicable to entities
sold during 1997.
Interest Expense
Interest expense increased $30.7 million in the third quarter of 1998
compared to the third quarter of 1997 primarily due to $21.9 million of interest
expense on the borrowings used to finance the PTI acquisition and $7.5 million
of interest expense applicable to PTI's debt.
Income from Unconsolidated Cellular Entities
Earnings from unconsolidated cellular entities, net of the amortization of
associated goodwill, increased $791,000 (9.4%) primarily due to $2.2 million of
earnings from interests in unconsolidated entities acquired in the PTI
acquisition. Such increase was partially offset by a $1.0 million decrease in
income due to the sale of the Company's minority interests in two non-strategic
cellular entities during the second quarter of 1998.
Minority Interest
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings or loss of the Company's
majority-owned and operated cellular entities and majority-owned subsidiaries.
Minority interest increased $1.8 million primarily due to a $1.0 million
increase in expense related to the entities acquired in the PTI acquisition. The
remainder of the increase is primarily due to the increased profitability of the
Company's majority-owned and operated cellular entities.
Income Tax Expense
Income tax expense increased $13.4 million in the third quarter of 1998
compared to the third quarter of 1997. The effective income tax rate was 41.2%
and 37.6% in the three months ended September 30, 1998 and 1997, respectively.
Such increase in the effective income tax rate was primarily due to an increase
in non-deductible amortization of excess cost of net assets acquired (goodwill)
attributable to the PTI acquisition.
Nine Months Ended September 30, 1998 Compared
to Nine Months Ended September 30, 1997
Net income (excluding gain on sale or exchange of assets) for the first
nine months of 1998 was $146.0 million compared to $112.2 million during the
first nine months of 1997. Diluted earnings per share (excluding gain on sale or
exchange of assets) increased to $1.57 during the nine months ended September
30, 1998 from $1.23 during the nine months ended September 30, 1997, a 27.6%
increase.
Nine months
ended September 30,
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
Operating income
Telephone $ 245,007 119,610
Wireless 103,859 65,752
Other 10,938 4,556
- ---------------------------------------------------------------------------
359,804 189,918
Gain on sale or exchange of assets, net 49,859 70,121
Interest expense (126,785) (33,539)
Income from unconsolidated cellular entities 25,105 21,750
Minority interest (10,264) (3,722)
Other income and expense 2,454 3,467
Income tax expense (123,610) (90,251)
- ---------------------------------------------------------------------------
Net income $ 176,563 157,744
===========================================================================
Diluted earnings per share* $ 1.90 1.73
===========================================================================
Average diluted shares outstanding* 93,272 91,325
===========================================================================
* Reflects March 1998 stock split. See Note 5.
Contributions to operating revenues and operating income by the Company's
telephone, wireless, and other operations for the nine months ended September
30, 1998 and 1997 were as follows:
Nine months
ended September 30,
- --------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------
Operating revenues
Telephone operations 68.9% 57.2
Wireless operations 26.3% 35.1
Other operations 4.8% 7.7
Operating income
Telephone operations 68.1% 63.0
Wireless operations 28.9% 34.6
Other operations 3.0% 2.4
- --------------------------------------------------------------------------
Telephone Operations
Nine months
ended September 30,
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 243,664 98,749
Network access 462,576 217,407
Other 94,292 43,298
- ---------------------------------------------------------------------------
800,532 359,454
- ---------------------------------------------------------------------------
Operating expenses
Plant operations 176,609 73,013
Customer operations 67,956 34,674
Corporate and other 116,444 54,916
Depreciation and amortization 194,516 77,241
- ---------------------------------------------------------------------------
555,525 239,844
- ---------------------------------------------------------------------------
Operating income $ 245,007 119,610
===========================================================================
Telephone operating income increased $125.4 million (104.8%) due to an
increase in operating revenues of $441.1 million (122.7%) which more than offset
an increase in operating expenses of $315.7 million (131.6%).
Of the $441.1 million increase in operating revenues, $410.1 million was
attributable to the properties acquired in the PTI acquisition. The remaining
$31.0 million increase in revenues was partially due to a $6.7 million increase
in amounts received from the federal Universal Service Fund; a $6.5 million
increase in revenues due to increased minutes of use; a $7.3 million increase
resulting from internal growth in the number of customer access lines; and a
$6.5 million increase in the partial recovery of increased operating expenses
through revenue pools in which the Company participates with other telephone
companies.
During the first nine months of 1998, operating expenses, exclusive of
depreciation and amortization, increased $198.4 million, of which $187.2 million
was attributable to the properties acquired in the PTI acquisition. The
remainder of the increase in operating expenses was due to increases in general
operating expenses.
Depreciation and amortization increased $117.3 million, of which $108.7
million (which includes $20.7 million of amortization of excess cost of net
assets acquired) was attributable to the properties acquired in the PTI
acquisition. The remainder of the increase was due to higher levels of plant in
service and higher recurring rates or nonrecurring depreciation charges which
have been approved for certain subsidiaries.
Wireless Operations and Income From Unconsolidated Cellular Entities
Nine months
ended September 30,
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
Operating income - wireless operations $103,859 65,752
Minority interest (10,264) (5,140)
Income from unconsolidated cellular entities 25,105 21,750
- ---------------------------------------------------------------------------
$118,700 82,362
- ---------------------------------------------------------------------------
The Company's wireless operations (discussed below) reflect 100% of the
results of operations of the cellular entities in which the Company has a
majority ownership interest. The minority interest owners' share of the income
of such entities is reflected in the Company's Consolidated Statements of Income
as an expense in "Minority interest." See Minority Interest for additional
information. The Company's share of earnings from the cellular entities in which
it has less than a majority interest is accounted for using the equity method
and is reflected in the Company's Consolidated Statements of Income as "Income
from unconsolidated cellular entities." See Income from Unconsolidated Cellular
Entities for additional information.
Wireless Operations
Nine months
ended September 30,
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 299,391 216,476
Equipment sales 6,308 3,996
- ---------------------------------------------------------------------------
305,699 220,472
- ---------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 11,182 10,373
System operations 44,211 33,946
General, administrative and customer service 60,435 43,568
Sales and marketing 40,745 37,345
Depreciation and amortization 45,267 29,488
- ---------------------------------------------------------------------------
201,840 154,720
- ---------------------------------------------------------------------------
Operating income $ 103,859 65,752
===========================================================================
Wireless operating income increased $38.1 million (58.0%) to $103.9
million in the first nine months of 1998 from $65.8 million in the first nine
months of 1997. Wireless operating revenues increased $85.2 million (38.7%)
while operating expenses increased $47.1 million (30.5%).
Of the $82.9 million increase in service revenues, $62.7 million was
attributable to acquisitions. The remainder of the increase in cellular service
revenues was primarily due to the increase in the number of cellular customers
in the Company's incumbent markets. The average number of cellular units in
service in majority-owned markets (exclusive of acquisitions) during the first
nine months of 1998 and 1997 was 448,000 and 391,000, respectively. Excluding
acquisitions, local and toll revenues increased $12.1 million in the first nine
months of 1998 and roaming revenues increased $8.2 million.
The average monthly cellular service revenue per customer (including
acquisitions) declined to $57 during the first nine months of 1998 from $62
during the first nine months of 1997 partially due to the continued trend that a
higher percentage of new subscribers tend to be lower usage customers. In
addition, the properties acquired in the PTI acquisition historically have had a
lower average monthly service revenue per customer than the Company's incumbent
properties. The average monthly service revenue per customer may further decline
(i) as market penetration increases and additional lower usage customers are
activated and (ii) as competitive pressures from current and future wireless
communications providers intensify. The Company is responding to such
competitive pressures by, among other things, modifying certain of its price
plans and implementing certain other plans and promotions, all of which are
likely to result in lower average revenue per customer. The Company will
continue to focus on customer service and attempt to stimulate cellular usage by
promoting the availability of certain enhanced services and by improving the
quality of its service through the construction of additional cell sites and
other enhancements to its system.
System operations expenses increased $10.3 million (30.2%) in the first
nine months of 1998 primarily due to $12.5 million of expenses attributable to
acquisitions. A $4.4 million decrease in the amounts paid to other carriers for
cellular service provided to the Company's customers who roam in the other
carriers' service areas was substantially offset by a $2.1 million increase in
operating expenses due to an increase in the number of cell sites.
General, administrative and customer service expenses increased $16.9
million (38.7%), of which $9.9 million was attributable to expenses of entities
acquired. The remainder of the increase was primarily due to a $4.3 million
increase in the provision for doubtful accounts.
The Company's average monthly churn rate (the percentage of cellular
customers that terminate service) was 2.3% for the first nine months of 1998 and
1997.
Sales and marketing expenses increased $3.4 million in the first nine
months of 1998 primarily due to $8.1 million of expenses of entities acquired, a
$2.0 million increase in costs incurred in selling products and services in
retail locations and a $1.7 million increase in advertising expenses. Such
increases were substantially offset by a $7.6 million reduction in commissions
paid to agents for selling services to new customers primarily as a result of
fewer cellular units added during the first nine months of 1998 compared to the
first nine months of 1997. The Company will continue to focus on attracting and
retaining higher usage customers.
Depreciation and amortization increased $15.8 million (53.5%), of which
$10.5 million was attributable to acquisitions. The remainder of the increase
was due primarily to a higher level of plant in service.
Other Operations
Nine months
ended September 30,
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 36,865 26,556
Call center 7,702 12,077
Competitive access - 2,499
Other 11,249 6,854
- -------------------------------------------------------------------------
55,816 47,986
- -------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 42,373 41,419
Depreciation and amortization 2,505 2,011
- -------------------------------------------------------------------------
44,878 43,430
- -------------------------------------------------------------------------
Operating income $ 10,938 4,556
=========================================================================
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or wireless segments, including,
but not limited to, the Company's competitive access subsidiary (which was sold
to Brooks Fiber Properties, Inc. ("Brooks") in May 1997) and the Company's
nonregulated long distance and call center operations. The $10.3 million
increase in long distance revenues was attributable to the growth in the number
of customers; the $4.4 million decrease in call center revenues was primarily
due to the loss of two major customers in the fourth quarter of 1997. The
increase in other revenues was primarily attributable to the PTI acquisition and
the acquisition of two security alarm businesses subsequent to the third quarter
of 1997.
Operating expenses increased due to (i) an increase of $10.4 million in
expenses of the Company's long distance operations due primarily to an increase
in customers and (ii) $5.9 million of operating expenses applicable to
acquisitions. Such increases were substantially offset by decreases in operating
expenses because (i) the first nine months of 1997 included $9.2 million of
costs applicable to entities sold during 1997, (ii) the amount of intercompany
profit with regulated affiliates which, in accordance with regulatory accounting
principles, was not eliminated in connection with consolidating the results of
operations (which acts to offset operating expenses) increased $4.4 million as a
result of the acquisition of PTI and (iii) operating expenses of the Company's
call center business decreased $1.5 million primarily due to the loss of two
major customers in the fourth quarter of 1997.
Interest Expense
Interest expense increased $93.2 million in the first nine months of 1998
compared to the first nine months of 1997 primarily due to $68.6 million of
interest expense on the borrowings used to finance the PTI acquisition and $19.0
million of interest expense applicable to PTI's debt.
Gain on Sale or Exchange of Assets, Net
In the first nine months of 1998, the Company recorded pre-tax gains
aggregating $49.9 million ($30.5 million after-tax; $.33 per diluted share)
primarily due to the conversion of its investment in the common stock of Brooks
into common stock of WorldCom, Inc. ("WorldCom"), the subsequent sale of 750,000
shares of WorldCom stock, and the sale of minority interests in two
non-strategic cellular entities. See Note 7 of Notes to Consolidated Financial
Statements for additional information.
In the first nine months of 1997, the Company sold its competitive access
subsidiary to Brooks and recorded a pre-tax gain of $71 million ($46 million
after tax; $.50 per diluted share).
Income from Unconsolidated Cellular Entities
Earnings from unconsolidated cellular entities, net of the amortization of
associated goodwill, increased $3.4 million (15.4%) primarily due to $5.0
million of earnings of the cellular entities acquired in the PTI acquisition.
Such increase was partially offset by a $1.8 million decrease due to the sale of
the Company's minority interests in two non-strategic cellular entities during
the second quarter of 1998.
Minority Interest
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings or loss of the Company's
majority-owned and operated cellular entities and majority-owned subsidiaries.
Minority interest increased $6.5 million partially due to a $2.0 million
increase in expense related to the entities acquired in the PTI acquisition. The
remainder of the increase is primarily due to the increased profitability of the
Company's majority-owned and operated cellular entities.
Income Tax Expense
Income tax expense increased $33.4 million in the first nine months of
1998 compared to the first nine months of 1997 primarily due to an increase in
income before taxes. The effective income tax rate was 41.2% and 36.4% for the
nine months ended September 30, 1998 and 1997, respectively. Such increase in
the effective income tax rate was primarily due to an increase in non-deductible
amortization of excess cost of net assets acquired (goodwill) attributable to
the PTI acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to provide a substantial portion of its cash needs. The Company's
operations have historically provided a stable source of cash flow which has
helped the Company continue its long-term program of capital improvements.
Net cash provided by operating activities was $317.2 million during the
first nine months of 1998 compared to $217.5 million during the first nine
months of 1997. The Company's accompanying consolidated statements of cash flows
identify major differences between net income and net cash provided by operating
activities for each of these periods. For additional information relating to the
telephone operations, wireless operations, and other operations of the Company,
see Results of Operations.
Net cash used in investing activities was $59.9 million and $139.3 million
for the nine months ended September 30, 1998 and 1997, respectively. Payments
for property, plant and equipment were $81.3 million more in the first nine
months of 1998 than in the comparable period during 1997. Capital expenditures
for the nine months ended September 30, 1998 were $142.0 million for telephone,
$42.8 million for wireless and $24.2 million for other operations. Proceeds from
the sales of assets were $132.3 million in the first nine months of 1998. Cash
used in connection with acquisitions was $30.4 million in the first nine months
of 1997, most of which was applicable to the acquisition of telephone properties
in Wisconsin.
Net cash used in financing activities was $279.4 million during the first
nine months of 1998 compared to $75.3 million during the first nine months of
1997. Net payments of long-term debt were $160.8 million more during the first
nine months of 1998 compared to the first nine months of 1997. During the first
nine months of 1998, the Company issued an aggregate of $765 million of senior
notes and debentures. The net proceeds of approximately $758 million were used
to reduce the bank indebtedness incurred in connection with the acquisition of
PTI. In addition, the Company paid approximately $40 million to settle numerous
interest rate hedge contracts that had been entered into in anticipation of
these debt issuances.
Revised budgeted capital expenditures for 1998 total $220 million for
telephone operations, $65 million for wireless operations and $42 million for
corporate and other operations.
As of September 30, 1998, Century's telephone subsidiaries had available
for use $140.9 million of commitments for long-term financing from the Rural
Utilities Service and the Company had $519.1 million of undrawn committed bank
lines of credit.
During the first quarter of 1998, the Company entered into definitive
agreements to purchase from affiliates of Ameritech the assets of certain local
telephone and directory operations in parts of northern and central Wisconsin,
in exchange for approximately $225 million cash (subject to adjustments). The
Company expects to provide initial financing for this acquisition through its
committed credit facilities and ultimately finance this transaction with
proceeds from the sale of the Company's Alaska operations. In August 1998, the
Company entered into a definitive agreement to sell the stock of its Alaska
operations for $415 million cash, subject to various adjustments.
In April 1998 the Company acquired 32 Local Multipoint Distribution System
licenses in the Federal Communications Commission's A and B band auction for an
aggregate of $9.7 million. The licenses acquired cover geographic areas with a
combined population of approximately 10.6 million. The Company has not finalized
capital expenditure or deployment plans for these systems.
OTHER MATTERS
Accounting for the Effects of Regulation
The Company currently accounts for its regulated telephone operations in
accordance with the provisions of Statement of Financial Accounting Standards
No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation."
While the ongoing applicability of SFAS 71 to the Company's telephone operations
is being monitored due to the changing regulatory, competitive and legislative
environments, the Company believes that SFAS 71 still applies. However, it is
possible that changes in regulation or legislation or anticipated changes in
competition or in the demand for regulated services or products could result in
the Company's telephone operations not being subject to SFAS 71 in the near
future. In that event, implementation of Statement of Financial Accounting
Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the
Discontinuance of Application of FASB Statement No. 71," would require the
write-off of previously established regulatory assets and liabilities, along
with an adjustment of certain accumulated depreciation accounts to reflect the
difference between recorded depreciation and the amount of depreciation that
would have been recorded had the Company's telephone operations not been subject
to rate regulation. Such discontinuance of the application of SFAS 71 would
result in a material, noncash charge against earnings which would be reported as
an extraordinary item. While the effect of implementing SFAS 101 cannot be
precisely estimated at this time, management believes that the noncash,
after-tax, extraordinary charge would be between $250 million and $300 million.
Year 2000 Readiness Disclosure
The Year 2000 issue concerns the inability of computer systems and certain
other equipment to properly recognize and process data that uses two digits
rather than four to designate particular years. The Company has initiated a Year
2000 Project Plan ("the Plan") to assess whether its systems that process date
sensitive information will perform satisfactorily leading up to and beyond
January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000,
any Year 2000-related problem with critical systems, the failure of which could
have a material adverse effect on the Company's operations. The Plan includes
steps to (i) identify each critical system element that requires date code
remediation, (ii) establish a plan to remediate such systems, (iii) implement
all required remediations and (iv) selectively test the remediated systems.
Thus far, the identification phase has identified Year 2000 issues in the
following critical Company-owned systems: (i) switching and transmission
hardware and software used by the Company to route and deliver telephone calls;
(ii) network support systems, including customer service systems and (iii)
billing and collection systems used by the Company to invoice and process most
of its customer payments. In addition, the Company (i) receives critical
services from providers of utilities and other services to facilities that house
employees and switching, transmission and other equipment and (ii) is dependent
upon outside vendors for, among other things, the provision of critical network
components and cellular billing services. The Company is also critically reliant
upon the systems of other telecommunication carriers with which the Company's
systems interconnect for the routing and delivery of telephone calls. The
Company has also identified potential Year 2000-related liability with respect
to telephone equipment manufactured by unaffiliated parties that the Company has
sold or leased to its customers ("Customer Premises Equipment" or "CPE"). The
identification and planning phases of the Plan are materially complete as they
relate to Company-owned systems. As they relate to third party vendors, other
telecommunications carriers and CPE customers, the identification and planning
phases are on-going and are expected to be materially complete by first quarter
1999.
Based on work completed under the Plan to date, the Company currently
intends to take the following additional steps under its Plan with respect to
Company-owned systems, third-party vendors, other telecommunications carriers,
and CPE customers:
o The Company generally plans to remediate Company-owned switching,
transmission, billing and collection and other critical systems
through the revision or replacement of current system
components. Necessary changes to Company-owned systems are in
process and are expected to be completed by mid-year 1999. The
selective testing and verification of such changes are expected
to be completed during 1999. Due to the large number of system
components requiring remediation, the Company does not intend to
test every remediated system but will rely upon the results of
selective testing to determine the effectiveness of remediation
efforts.
o With respect to critical services provided by utilities and other
third parties, the Company is in the process of contacting all
such suppliers and plans to have contacted all such suppliers
before the end of 1998. Thus far, a majority of those suppliers
contacted have responded that their systems and service delivery
mechanisms are Year 2000 compliant or can be made so through
currently available modifications. The Company plans to continue
monitoring all third-party remediation efforts and to make
contingency plans for the delivery of such services as necessary.
o The Year 2000 compliance status of other telecommunications carriers
with which the Company's switching systems interconnect is not yet
known. The Company is making inquiries with these carriers to
determine their compliance status and expects to obtain the results
of compliance tests during first quarter 1999, although there can be
no assurance that carriers will supply this information.
o Finally, the Company is in the process of obtaining Year 2000
compliance information from CPE manufacturers and plans to
provide this information to the Company's business customers in
early 1999. The Company plans to work with CPE manufacturers to
encourage the development of remedies for Year 2000 problems in
such equipment and to continue working with its customers to
identify Year 2000 problems in Customer Premises Equipment.
However, there can be no assurance that CPE manufacturers or
customers will cooperate with the Company's efforts to address
these problems.
While the Company currently believes that it will be able to remediate and
selectively test Company-owned systems in time to minimize any detrimental
effect on its operations, there can be no assurance that such steps will be
successful. Failure by the Company to timely and effectively remediate its
systems, or the failure of critical vendors and suppliers and other
telecommunications carriers to remediate affected systems, could have a material
adverse impact on the Company's business, financial condition, results of
operations and prospects. Because the impact of Year 2000 issues on the Company
is materially dependent on the mitigation efforts of parties outside the
Company's control, the Company cannot assess with certainty the magnitude of any
such potential adverse impact. However, based upon risk assessment work
conducted thus far, the Company believes that the most reasonably likely worst
case scenario of the failure by the Company, its suppliers or other
telecommunications carriers with which the Company interconnects to resolve Year
2000 issues would be an inability by the Company (i) to provide
telecommunications services to the Company's customers, (ii) to route and
deliver telephone calls originating from or terminating with other
telecommunications carriers, (iii) to timely and accurately process service
requests and (iv) to timely and accurately bill its customers. In addition to
lost earnings, these failures could also result in loss of customers due to
service interruptions and billing errors, substantial claims by customers and
CPE purchasers and increased expenses associated with Year 2000 litigation,
stabilization of operations and executing mitigation and contingency plans.
Contingency planning to maintain and restore service in the event of
natural disasters, power failures and systems-related problems is a routine part
of the Company's operations. The Company believes that such contingency plans
will assist the Company in responding to the failure by outside service
providers to successfully address Year 2000 issues. In addition, the Company is
currently identifying and considering various Year 2000-specific contingency
plans, including identification of alternate vendors and service providers and
manual alternatives to system operations. These Year 2000-specific contingency
plans are expected to be materially completed during the first quarter of
1999, but their review and development will continue into 1999.
Although the total costs to implement the Plan cannot be precisely
estimated, the Company incurred costs of $2.5 million during the first nine
months of 1998 (none of which was related to hardware costs) and anticipates
spending an aggregate of approximately $33.8 million during the remainder of
1998 and 1999 (which includes $20.9 million of hardware costs.) These costs will
be expensed as incurred, unless new systems are purchased that should be
capitalized in accordance with generally accepted accounting principles. Some of
the costs represent ongoing investment in systems upgrades, the timing of which
is being accelerated in order to facilitate Year 2000 compliance. In some
instances, such upgrades will position the Company to provide more and
better-quality services to its customers than they currently receive. The
Company expects to fund these costs with cash provided by operations. Cost
estimates and statements of the Company's plans discussed above are
forward-looking statements that are derived using numerous assumptions of future
events, many of which are outside the Company's control, including the
availability and future cost of trained personnel and various other resources,
third party modification plans, the absence of systems requiring remediation
that have not yet been discovered, and other factors.
Regulatory Issues
In September 1998, the Federal Communications Commission ("FCC") initiated
a proceeding to represcribe the authorized rate of return for interstate access
services provided by local exchange carriers ("LECs"). The FCC periodically
represcribes this rate of return to ensure that the service rates filed by
incumbent LECs subject to rate of return regulation continue to be just and
reasonable. Responses to the FCC regarding the represcription proceeding are due
December 3, 1998. It is uncertain whether or by how much the FCC may lower the
authorized rate of return.
PART II. OTHER INFORMATION
CENTURY TELEPHONE ENTERPRISES, INC.
Item 5. Other Information
- ------ -----------------
Recently the Company discovered that the trustee of its 401(k) plan has
inadvertently over the past several years sold shares of the Company's common
stock to plan participants in amounts that substantially exceed the number of
shares registered for sale under the Company's 1992 registration statement for
such plan filed under the Securities Act of 1933, as amended. The Company is
currently evaluating the number of unregistered shares sold, what remedial
steps, if any, that it may take, and whether any of the Company's other plans
have made any similar unregistered sales.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
A. Exhibits
--------
3(ii) Registrant's Bylaws, as amended through October 7, 1998.
10.1 Purchase Agreement by and among ALEC Acquisition Corporation,
CenturyTel of the Northwest, Inc. and CenturyTel Wireless,
Inc., dated August 14, 1998.
Pursuant to the regulations of the Securities and Exchange
Commission, all schedules and exhibits to the foregoing
agreement have been intentionally omitted from this report.
The foregoing agreement contains a complete listing of all
schedules and exhibits. The registrant agrees to furnish
supplementary a copy of any omitted schedule or exhibit to the
Securities and Exchange Commission upon request.
10.2 First Supplemental Indenture, dated as of November 2, 1998, to
Indenture between CenturyTel of the Northwest, Inc. and The
First National Bank of Chicago.
11 Computations of Earnings Per Share.
27.1 Financial Data Schedule as of and for the nine months ended
September 30, 1998.
27.2 Restated Financial Data Schedule as of and for the nine months
ended September 30, 1997.
B. Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the quarter ended
September 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTURY TELEPHONE ENTERPRISES, INC.
Date: November 12, 1998 /s/ R. Stewart Ewing
--------------------------------
R. Stewart Ewing
Senior Vice President and
Chief Financial Officer