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, 1995 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) 388-9500 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, 1995, there were 59,031,773 shares of common stock outstanding.
CENTURY TELEPHONE ENTERPRISES, INC. TABLE OF CONTENTS Page No. -------- Part I. Financial Information: Consolidated Statements of Income--Three Months and Nine Months Ended September 30, 1995 and 1994.................. 3 Consolidated Balance Sheets--September 30, 1995 and December 31, 1994......................................... 4 Consolidated Statements of Stockholders' Equity-- Nine Months Ended September 30, 1995 and 1994............. 5 Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 1995 and 1994............. 6 Notes to Consolidated Financial Statements................. 7-8 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 9-19 Part II. Other Information: Exhibits and Reports on Form 8-K........................... 20 Signature....................................................... 21 Index to Exhibits............................................... 22 2
PART I. FINANCIAL INFORMATION CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months Nine months ended September 30 ended September 30 ------------------ ------------------ 1995 1994 1995 1994 ------ ------ ------ ------ (Dollars, except per share amounts, and shares expressed in thousands) OPERATING REVENUES Telephone $105,918 99,487 308,051 286,226 Mobile Communications 53,204 42,028 143,230 109,149 -------- -------- -------- -------- Total operating revenues 159,122 141,515 451,281 395,375 -------- -------- -------- -------- OPERATING EXPENSES Cost of sales and operating expenses 75,220 70,519 218,488 202,413 Depreciation and amortization 28,830 25,215 81,353 69,582 -------- -------- -------- -------- Total operating expenses 104,050 95,734 299,841 271,995 -------- -------- -------- -------- OPERATING INCOME 55,072 45,781 151,440 123,380 -------- -------- -------- -------- OTHER INCOME (EXPENSE) Interest expense (10,924) (11,513) (32,771) (30,839) Income from unconsolidated cellular entities 6,602 4,604 14,700 10,579 Gain on sales of assets - - 5,909 - Minority interest (2,440) (1,461) (6,281) (3,016) Other income and expense 2,470 2,378 5,445 4,062 -------- -------- -------- -------- Total other income (expense) (4,292) (5,992) (12,998) (19,214) -------- -------- -------- -------- INCOME BEFORE INCOME TAX EXPENSE 50,780 39,789 138,442 104,166 Income tax expense 18,900 15,176 53,395 38,867 -------- -------- -------- -------- NET INCOME $ 31,880 24,613 85,047 65,299 ======== ======== ======== ======== PRIMARY EARNINGS PER SHARE $ .54 .46 1.47 1.22 ======== ======== ======== ======== FULLY DILUTED EARNINGS PER SHARE $ .54 .44 1.46 1.18 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE $ .0825 .0800 .2475 .2400 ======== ======== ======== ======== AVERAGE PRIMARY SHARES OUTSTANDING 58,734 53,583 57,790 53,299 ======== ======== ======== ======== AVERAGE FULLY DILUTED SHARES OUTSTANDING 59,193 58,332 58,812 58,016 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. 3
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, December 31, 1995 1994 ------------ ------------ (Dollars in thousands) ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 10,026 7,154 Accounts receivable Customers, less allowance for doubtful accounts of $2,459 and $2,360 48,988 40,824 Other 24,083 23,180 Materials and supplies, at average cost 5,961 7,090 Other 4,939 2,980 ---------- ---------- 93,997 81,228 ---------- ---------- NET PROPERTY, PLANT AND EQUIPMENT 1,025,136 947,131 ---------- ---------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $49,543 and $40,756 498,472 441,436 Other 197,036 173,458 ---------- ---------- 695,508 614,894 ---------- ---------- $1,814,641 1,643,253 ========== ========== LIABILITIES AND EQUITY - ---------------------- CURRENT LIABILITIES Current maturities of long-term debt $ 43,059 12,718 Notes payable 15,199 158,000 Accounts payable 56,606 52,331 Accrued expenses and other liabilities Salaries and benefits 16,476 17,884 Taxes 25,515 16,530 Interest 8,534 8,243 Other 4,678 9,237 Advance billings and customer deposits 12,895 11,725 ---------- ---------- 182,962 286,668 ---------- ---------- LONG-TERM DEBT 570,003 518,603 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES 203,159 187,746 ---------- ---------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 175,000,000 shares, issued and outstanding 59,026,020 and 53,574,361 shares 59,026 53,574 Paid-in capital 449,364 319,235 Retained earnings 362,569 291,999 Unearned ESOP shares (14,710) (16,840) Preferred stock - non-redeemable 2,268 2,268 ---------- ---------- 858,517 650,236 ---------- ---------- $1,814,641 1,643,253 ========== ========== See accompanying notes to consolidated financial statements. 4
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) Nine months ended September 30 -------------------- 1995 1994 -------- -------- (Dollars in thousands) COMMON STOCK Balance at beginning of period $ 53,574 51,295 Issuance of common stock for acquisitions 577 2,000 Issuance of common stock through conversion of debentures 4,540 - Issuance of common stock through dividend reinvestment, incentive and benefit plans 335 126 Conversion of preferred stock into common stock - 2 -------- -------- Balance at end of period 59,026 53,423 -------- -------- PAID-IN CAPITAL Balance at beginning of period 319,235 262,294 Issuance of common stock for acquisitions 15,981 50,311 Issuance of common stock through conversion of debentures 108,596 - Issuance of common stock through dividend reinvestment, incentive and benefit plans 4,566 2,451 Amortization of unearned compensation and other 986 588 Conversion of preferred stock into common stock - 52 -------- -------- Balance at end of period 449,364 315,696 -------- -------- RETAINED EARNINGS Balance at beginning of period 291,999 208,945 Net income 85,047 65,299 Cash dividends declared Common stock-$.2475 and $.2400 per share, respectively (14,385) (12,800) Preferred stock (92) (70) -------- -------- Balance at end of period 362,569 261,374 -------- -------- UNEARNED ESOP SHARES Balance at beginning of period (16,840) (9,220) Commitment to ESOP - (10,000) Release of ESOP shares 2,130 1,630 -------- -------- Balance at end of period (14,710) (17,590) -------- -------- PREFERRED STOCK - NON-REDEEMABLE Balance at beginning of period 2,268 454 Issuance of preferred stock for acquisition - 1,875 Conversion of preferred stock into common stock - (54) -------- -------- Balance at end of period 2,268 2,275 -------- -------- TOTAL STOCKHOLDERS' EQUITY $858,517 615,178 ======== ======== See accompanying notes to consolidated financial statements. 5
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended September 30 ------------------ 1995 1994 ------ ------ (Dollars in thousands) OPERATING ACTIVITIES Net income $ 85,047 65,299 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 88,482 76,264 Deferred income taxes 4,481 (5,602) Income from unconsolidated cellular entities (14,700) (10,579) Gain on sales of assets (5,909) - Changes in current assets and current liabilities: Increase in accounts receivable (8,968) (1,070) Increase (decrease) in accounts payable 3,933 (4,504) Increase in other accrued taxes 8,892 18,525 Changes in other current assets and other current liabilities, net (3,700) 6,594 Increase in other noncurrent liabilities 10,983 7,948 Other, net 864 691 -------- -------- Net cash provided by operating activities 169,405 153,566 -------- -------- INVESTING ACTIVITIES Payments for property, plant and equipment (143,551) (147,352) Acquisitions, net of cash acquired (21,906) (54,899) Proceeds from sales of assets 17,922 - Investments in unconsolidated cellular entities (7,786) (1,652) Distributions from unconsolidated cellular entities 3,048 3,950 Purchase of life insurance investment (6,417) (7,664) Note receivable 416 (25,000) Other, net (1,713) (416) -------- -------- Net cash used in investing activities (159,987) (233,033) -------- -------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt 31,487 185,472 Payments of long-term debt (16,576) (90,731) Notes payable, net (12,000) 1,000 Proceeds from issuance of common stock 4,901 2,578 Cash dividends (14,477) (12,870) Other, net 119 1,237 -------- -------- Net cash provided by (used in) financing activities (6,546) 86,686 -------- -------- Net increase in cash and cash equivalents 2,872 7,219 Cash and cash equivalents at beginning of period 7,154 9,777 -------- -------- Cash and cash equivalents at end of period $ 10,026 16,996 ======== ======== Supplemental cash flow information: Income taxes paid $ 45,884 26,686 ======== ======== Interest paid $ 32,480 28,024 ======== ======== See accompanying notes to consolidated financial statements. 6
CENTURY TELEPHONE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 (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, 1994. Certain 1994 amounts have been reclassified to be consistent with the 1995 presentation. The unaudited financial information for the three months and nine months ended September 30, 1995 and 1994 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, 1995 1994 ------------- ------------- (Dollars in thousands) Telephone, at original cost $1,176,568 1,076,496 Accumulated depreciation (343,707) (295,255) ---------- ---------- 832,861 781,241 ---------- ---------- Mobile Communications, at cost 180,298 152,305 Accumulated depreciation (49,946) (38,552) ---------- ---------- 130,352 113,753 ---------- ---------- Other, at cost 100,385 85,406 Accumulated depreciation (38,462) (33,269) ---------- ---------- 61,923 52,137 ---------- ---------- $1,025,136 947,131 ========== ========== (3) Conversion of Debentures In February 1995 all $115.0 million of Century's outstanding 6% convertible debentures due 2007 were converted into Century common stock by the debenture holders at a conversion price of $25.33 per share. 7
CENTURY TELEPHONE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1995 (UNAUDITED) (4) 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, 1995 and 1994) were accounted for by the equity method. Nine months ended September 30 ------------------ 1995 1994 -------- -------- (Dollars in thousands) Results of operations Revenues $536,296 238,388 Operating income $187,179 65,944 Net income $188,536 64,905 (5) Sales of Assets In the first quarter of 1995 the Company sold, for an aggregate of approximately $17.9 million cash, its ownership interests in certain non-strategic cellular RSAs located primarily in western states and two MSAs in the midwest, which represented an aggregate of approximately 253,000 pops. These transactions resulted in a pre-tax gain of $5.9 million ($2.0 million after tax). (6) Long-term Debt Short-term borrowings of $145.0 million at September 30, 1995 have been classified as long-term debt on the accompanying balance sheet as the Company has available $145.0 million in long-term revolving credit facilities amended or entered into subsequent to September 30, 1995. 8
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, 1994. The results of operations for the three months and/or nine months ended September 30, 1995 are not necessarily indicative of the results of operations which might be expected for the entire year. RESULTS OF OPERATIONS Three Months Ended September 30, 1995 Compared to Three Months Ended September 30, 1994 Net income for the third quarter of 1995 was $31.9 million compared to $24.6 million during the third quarter of 1994, a 29.5% increase. The increase was principally due to a $9.3 million increase in operating income and a $2.0 million increase in income from unconsolidated cellular entities, which were partially offset by a $3.7 million increase in income tax expense and a $979,000 increase in minority interest. Fully diluted earnings per share increased to $.54 for the three months ended September 30, 1995 from $.44 during the three months ended September 30, 1994, a 22.7% increase. Three months ended September 30 ------------------ 1995 1994 -------- -------- (Dollars in thousands, except per share amounts) Operating income Telephone $36,555 33,740 Mobile Communications 18,517 12,041 ------- ------- 55,072 45,781 Interest expense (10,924) (11,513) Income from unconsolidated cellular entities 6,602 4,604 Minority interest (2,440) (1,461) Other income and expense 2,470 2,378 Income tax expense (18,900) (15,176) ------- ------- Net income $31,880 24,613 ======= ======= Fully diluted earnings per share $ .54 .44 ======= ======= Contributions to operating revenues and operating income by the Company's telephone operations and mobile communications operations for the three months ended September 30, 1995 and 1994 were as follows: Three months ended September 30 ------------------ 1995 1994 -------- -------- Operating revenues Telephone operations 66.6% 70.3 Mobile Communications operations 33.4% 29.7 Operating income Telephone operations 66.4% 73.7 Mobile Communications operations 33.6% 26.3 9
Telephone Operations Three months ended September 30 ------------------ 1995 1994 -------- -------- (Dollars in thousands) Operating revenues Local service $28,455 26,192 Network access and long distance 65,596 61,614 Other 11,867 11,681 ------- ------- 105,918 99,487 ------- ------- Operating expenses Plant operations 21,801 22,031 Customer operations 9,759 8,870 Corporate and other 15,426 15,331 Depreciation and amortization 22,377 19,515 ------- ------- 69,363 65,747 ------- ------- Operating income $36,555 33,740 ======= ======= Telephone operating income increased $2.8 million (8.3%) due to an increase in operating revenues of $6.4 million (6.5%) which more than offset an increase in operating expenses of $3.6 million (5.5%). The increase in revenues was primarily due to a $1.4 million contribution to revenues from a local exchange telephone company acquired during the first quarter of 1995; a $1.8 million increase in local service revenues, primarily as a result of an increase in the number of customer access lines; and a $1.5 million increase in revenues based on minutes of use, of which approximately $1.0 million was associated with a change in the method used to calculate factors applied in the network access revenue billing process. During the third quarter of 1995, operating expenses, exclusive of depreciation and amortization, were $754,000 (1.6%) higher than during the third quarter of 1994. The increase was primarily due to $1.0 million of added expenses resulting from the acquisition of a local exchange telephone company and an $800,000 increase in marketing expenses. Such increases were significantly offset by reductions in various operating costs, including certain network and maintenance costs. Depreciation and amortization increased $2.9 million (14.7%) which included $1.2 million of depreciation due to higher recurring rates or nonrecurring depreciation charges which have been approved or are anticipated will be approved in 1995 for certain subsidiaries. The remaining increase in depreciation and amortization was primarily due to higher levels of plant in service. Mobile Communications Operations Three months ended September 30 ------------------ 1995 1994 -------- -------- (Dollars in thousands) Operating revenues Cellular service $51,858 39,611 Equipment and other 1,346 2,417 ------- ------- 53,204 42,028 ------- ------- Operating expenses Cost of sales and other operating expenses 8,914 8,142 General, administrative and customer service 10,072 8,678 Sales and marketing 9,248 7,467 Depreciation and amortization 6,453 5,700 ------- ------- 34,687 29,987 ------- ------- Operating income $18,517 12,041 ======= ======= 10
The mobile communications operating income reflects the operations of the cellular entities in which the Company owns a majority interest. The minority interest owners' share of the income or loss of such entities ($2.4 million during the third quarter of 1995 and $1.5 million during the third quarter of 1994) is reflected as an expense in "Minority interest" on the Company's consolidated statements of income. The Company's share of income or loss from the cellular entities in which it owns less than a majority interest ($6.6 million during the three months ended September 30, 1995 and $4.6 million during the three months ended September 30, 1994) is reflected as "Income from unconsolidated cellular entities" on the Company's consolidated statements of income. Mobile communications operating income increased $6.5 million (53.8%) to $18.5 million in the third quarter of 1995 from $12.0 million in the third quarter of 1994. Mobile communications operating revenues increased $11.2 million (26.6%) which more than offset an increase in operating expenses of $4.7 million (15.7%). The increase in cellular service revenues was substantially due to the increase in the number of cellular units in service. The average number of cellular units in service in majority-owned markets during the third quarter of 1995 and 1994 was 250,000 and 182,000, respectively. Cellular entities acquired during the third quarter of 1995 contributed $1.4 million of service revenues. The average monthly cellular service revenue per customer declined to $69 during the third quarter of 1995 from $73 during the third quarter of 1994. It has been an industry-wide trend that early subscribers have normally been the heaviest users and that a higher percent 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 intensify and continue to place downward 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 may 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 enhancements to its system. Equipment and other revenues decreased to $1.3 million during the third quarter of 1995 from $2.4 million during the third quarter of 1994, substantially because the third quarter of 1994 included $887,000 of revenues applicable to the Company's paging operations which were sold in October 1994. Revenues from the sale of cellular phones decreased $187,000 in the third quarter of 1995 compared to the third quarter of 1994. Although the Company sold more phones in the third quarter of 1995 than in the third quarter of 1994, revenues decreased because the Company has begun to sell phones below cost, a strategy which is common in the cellular industry. Cost of sales and other operating expenses during the third quarter of 1995 increased $772,000 primarily due to costs incurred in connection with providing service to a larger number of customers, including costs related to operating additional cell sites placed in service. General, administrative and customer service expenses increased $1.4 million primarily due to costs associated with serving a larger number of customers. 11
Sales and marketing costs increased $1.8 million primarily due to a $900,000 increase in commissions paid to agents and employees for selling cellular service to new customers and a $400,000 increase in the costs of sales promotions. Depreciation and amortization increased $753,000 (13.2%) due primarily to a higher level of plant in service. Interest Expense Interest expense decreased $589,000 (5.1%) during the third quarter of 1995 compared to the third quarter of 1994. Average debt outstanding decreased primarily due to the conversion of $115.0 million of 6% convertible debentures into common stock in February 1995. The resulting decrease in interest expense was substantially offset by an increase in interest expense caused by higher average interest rates. Income from Unconsolidated Cellular Entities Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, was $6.6 million in the third quarter of 1995 and $4.6 million in the third quarter of 1994. This increase was due to improvement in profitability of the cellular entities in which the Company owns less than a majority interest. Minority Interest The increased profitability during the third quarter of 1995 of the Company's majority-owned and operated cellular entities resulted in a corresponding increase of $979,000 in the expense recorded by the Company to reflect the minority interest owners' share of the profits. Income Tax Expense Income tax expense increased $3.7 million (24.5%) during the third quarter of 1995 compared to the third quarter of 1994 primarily due to the increase in income before taxes. 12
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30, 1994 Net income for the first nine months of 1995 increased $19.7 million (30.2%) to $85.0 million from $65.3 million during the first nine months of 1994. The increase was principally due to a $28.1 million increase in operating income (of which $20.7 million was applicable to the Company's mobile communications operations), a $4.1 million increase in income from unconsolidated cellular entities and a $5.9 million pre-tax gain on the sale of certain non-strategic cellular entities, which were partially offset by increases in income tax expense and minority interest of $14.5 million and $3.3 million, respectively. Fully diluted earnings per share increased to $1.46 for the nine months ended September 30, 1995 from $1.18 during the nine months ended September 30, 1994, a 23.7% increase. Nine months ended September 30 ------------------ 1995 1994 -------- -------- (Dollars in thousands, except per share amounts) Operating income Telephone $105,925 98,526 Mobile Communications 45,515 24,854 -------- -------- 151,440 123,380 Interest expense (32,771) (30,839) Income from unconsolidated cellular entities 14,700 10,579 Gain on sales of assets 5,909 - Minority interest (6,281) (3,016) Other income and expense 5,445 4,062 Income tax expense (53,395) (38,867) -------- -------- Net income $ 85,047 65,299 ======== ======== Fully diluted earnings per share $ 1.46 1.18 ======== ======== Contributions to operating revenues and operating income by the Company's telephone operations and mobile communications operations for the nine months ended September 30, 1995 and 1994 were as follows: Nine months ended September 30 ------------------ 1995 1994 -------- -------- Operating revenues Telephone operations 68.3% 72.4 Mobile Communications operations 31.7% 27.6 Operating income Telephone operations 69.9% 79.9 Mobile Communications operations 30.1% 20.1 13
Telephone Operations Nine months ended September 30 ------------------ 1995 1994 -------- -------- (Dollars in thousands) Operating revenues Local service $ 82,933 73,664 Network access and long distance 189,752 179,539 Other 35,366 33,023 -------- ------- 308,051 286,226 -------- ------- Operating expenses Plant operations 64,475 63,621 Customer operations 28,849 25,734 Corporate and other 45,546 44,019 Depreciation and amortization 63,256 54,326 -------- -------- 202,126 187,700 -------- ------- Operating income $105,925 98,526 ======== ======== Telephone operating income increased $7.4 million (7.5%) due to an increase in operating revenues of $21.8 million (7.6%) which more than offset an increase in operating expenses of $14.4 million (7.7%). The increase in revenues was primarily due to a $3.8 million increase in amounts received from the Federal Communications Commission mandated Universal Service Fund; a $5.1 million contribution to revenues from a local exchange telephone company acquired in early 1995; $2.9 million from increased rates for basic services in one jurisdiction which was partially offset by a $1.7 million decrease in intrastate high cost assistance revenues; a $3.4 million increase in revenues as a result of an increase in the number of customer access lines; $2.0 million due to an increase in revenues based on minutes of use, of which approximately $1.0 million was associated with a change in the method used to calculate factors applied in the network access revenue billing process; and a $2.1 million increase in the partial recovery of increased operating expenses through revenue pools in which the Company participates with other telephone companies. Annualized internal access line growth during the first nine months of 1995 was 5.0%. During the first nine months of 1995, operating expenses, exclusive of depreciation and amortization, increased $5.5 million (4.1%) partially due to $3.2 million of added expenses which resulted from the acquisition of a local exchange telephone company; $2.0 million due to increased marketing expenses; and a $1.2 million increase in ad valorem taxes resulting from the increase in telephone plant and equipment. In addition, operating expenses during the first nine months of 1994 included a $1.1 million reduction in expenses recorded in the second quarter of 1994 due to a reduction in the Company's liability for long-term disability. Such increases were partially offset by reductions in various operating costs, including certain maintenance and consulting costs. Depreciation and amortization increased $8.9 million (16.4%) which included $3.6 million of depreciation due to higher recurring rates or nonrecurring depreciation charges which have been approved or are anticipated will be approved in 1995 for certain subsidiaries. The remaining increase in depreciation and amortization was primarily due to higher levels of plant in service. 14
Mobile Communications Operations Nine months ended September 30 ------------------ 1995 1994 -------- -------- (Dollars in thousands) Operating revenues Cellular service $139,101 101,640 Equipment and other 4,129 7,509 -------- -------- 143,230 109,149 -------- -------- Operating expenses Cost of sales and other operating expenses 26,026 22,639 General, administrative and customer service 27,920 24,361 Sales and marketing 25,672 22,039 Depreciation and amortization 18,097 15,256 -------- ------- 97,715 84,295 -------- -------- Operating income $ 45,515 24,854 ======== ======== The mobile communications operating income reflects the operations of the cellular entities in which the Company owns a majority interest and includes the operations of Celutel, Inc. ("Celutel") subsequent to its acquisition in February 1994. The minority interest owners' share of the income or loss of such entities ($6.3 million during the first nine months of 1995 and $3.0 million during the first nine months of 1994) is reflected as an expense in "Minority interest" on the Company's consolidated statements of income. The Company's share of income or loss from the cellular entities in which it owns less than a majority interest ($14.7 million and $10.6 million during the nine months ended September 30, 1995 and 1994, respectively) is reflected as "Income from unconsolidated cellular entities" on the Company's consolidated statements of income. Mobile communications operating income increased $20.7 million (83.1%) to $45.5 million in the first nine months of 1995 from $24.9 million in the first nine months of 1994. Mobile communications operating revenues increased $34.1 million (31.2%) which more than offset an increase in operating expenses of $13.4 million (15.9%). The increase in cellular service revenues was substantially due to the increase in the number of cellular units in service. The average number of cellular units in service in majority-owned markets during the first nine months of 1995 and 1994 was 233,000 and 162,000, respectively. The average monthly cellular service revenue per customer declined to $66 during the first nine months of 1995 from $70 during the first nine months of 1994. It has been an industry-wide trend that early subscribers have normally been the heaviest users and that a higher percent 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 intensify and continue to place downward 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 may 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 enhancements to its system. 15
Equipment and other revenues decreased $3.4 million to $4.1 million during the nine months ended September 30, 1995 compared to $7.5 million during the nine months ended September 30, 1994. The nine months ended September 30, 1994 included $2.8 million of revenues applicable to the Company's paging operations which were sold in October 1994. Revenues from the sale of cellular phones decreased $615,000 during the first nine months of 1995 compared to the first nine months of 1994. Although the Company sold more phones in the first nine months of 1995 than in the first nine months of 1994, revenues decreased because the Company has begun to sell phones below cost, a strategy which is common in the cellular industry. Cost of sales and other operating expenses during the first nine months of 1995 increased $3.4 million substantially as a result of a $1.2 million increase in cost of sales caused by an increase in the number of phones sold. The remaining increase was primarily due to costs incurred in connection with providing service to a larger number of customers, including costs related to operating additional cell sites placed in service. General, administrative and customer service expenses increased $3.6 million primarily due to the costs associated with serving a larger number of customers. Sales and marketing expenses increased $3.6 million primarily due to a $2.2 million increase in commissions paid to agents and employees for selling cellular service to new customers. The remainder of the increase was primarily due to costs of sales promotions. Depreciation and amortization increased $2.8 million (18.6%) due primarily to a higher level of plant in service. Interest Expense Interest expense increased $1.9 million (6.3%) during the first nine months of 1995 compared to the first nine months of 1994 primarily due to the effect of higher average interest rates which increased interest expense $5.0 million. Such increase was substantially offset by a decrease in interest expense due to a decrease in average debt outstanding. The decrease in average debt outstanding was principally due to the conversion of $115.0 million of 6% convertible debentures into common stock in February 1995. Income from Unconsolidated Cellular Entities Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $4.1 million (39.0%) during the first nine months of 1995 compared to the first nine months of 1994 due to improvement in profitability of the cellular entities in which the Company owns less than a majority interest. During the first nine months of 1995, the Company recorded an $800,000 reduction in earnings from unconsolidated cellular entities as a result of a multi-year retroactive adjustment recorded by the operator of a cellular partnership in which the Company owns less than a majority interest. Gain on Sales of Assets During the first quarter of 1995, the Company sold its ownership interests in certain non-strategic cellular entities which resulted in a pre-tax gain of $5.9 million ($2.0 million after-tax; $.03 per fully diluted share). For additional information, see Note 5 of Notes to Consolidated Financial Statements. 16
Minority Interest The increased profitability during the first nine months of 1995 of the Company's majority-owned and operated cellular entities resulted in a corresponding increase of $3.3 million in the expense recorded by the Company to reflect the minority interest owners' share of the profits. Other Income and Expense Other income and expense for the first nine months of 1995 was $5.4 million compared to $4.1 million during the first nine months of 1994. Interest income increased $995,000 in the first nine months of 1995 due to interest income on a $25.0 million note receivable issued to Century in May 1994. Income Tax Expense Income tax expense increased $14.5 million (37.4%) during the first nine months of 1995 compared to the first nine months of 1994 primarily due to the 32.9% increase in income before taxes. The effective income tax rate for the first nine months of 1995 increased primarily because of the income tax expense attributable to the gain on sales of assets during the first quarter of 1995. 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 mobile communications operations has increased each year since that segment became cash-flow positive in 1991. Net cash provided by operating activities was $169.4 million during the first nine months of 1995 compared to $153.6 million during the first nine months of 1994. 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 and mobile communications operations of the Company, see Results of Operations. Net cash used in investing activities was $160.0 million and $233.0 million for the nine months ended September 30, 1995 and 1994, respectively. Cash used in connection with the acquisitions of certain cellular entities was $21.9 million during the first nine months of 1995; cash used in connection with the acquisition of Celutel during the first nine months of 1994 was $54.9 million. Payments for property, plant and equipment were $3.8 million less in the first nine months of 1995 than in the comparable period during 1994. Capital expenditures for the nine months ended September 30, 1995 were $98.0 million for telephone operations, $30.0 million for mobile communications operations and $16.3 million for other operations. The $160.0 million of net cash used in investing activities in 1995 was net of $17.9 million of proceeds from the sale of certain cellular entities. In connection with the corporate restructuring of a local exchange telephone company that has been viewed from time to time as an acquisition candidate, Century loaned the telephone company's then-newly-formed parent company $25.0 million in May 1994. 17
Net cash used in financing activities was $6.5 million during the first nine months of 1995; net cash provided by financing activities was $86.7 million during the first nine months of 1995. Net borrowings, including notes payable and long-term debt, were $2.9 million during the first nine months of 1995 compared to $95.7 million during the first nine months of 1994. During the first nine months of 1994, the Company filed a shelf registration statement registering $400.0 million of senior unsecured debt securities under which the Company issued $150.0 million of senior notes on May 6, 1994. The proceeds were used to discharge the Company's indebtedness under a $90.0 million bridge loan incurred to fund substantially all of the Company's cash requirements in connection with the acquisition of Celutel in February 1994, and to reduce the Company's short-term bank indebtedness under various credit facilities. Revised budgeted capital expenditures for 1995 total $120.0 million for telephone operations, $63.0 million for mobile communications operations and $18.0 million for other operations. As of September 30, 1995, Century's telephone subsidiaries had available for use $136.1 million of commitments for long-term financing from the Rural Utilities Service ("RUS") and the Company had $77.1 million of undrawn committed bank lines of credit. In October 1995, the Company increased its committed bank lines of credit by an additional $40.0 million. In addition, approximately $38.0 million of uncommitted credit facilities were available to Century at September 30, 1995. The Company also has access to debt and equity capital markets. The Company has experienced no significant problems in obtaining funds through the issuance of debt or equity for capital expenditures or other purposes. ACCOUNTING PRONOUNCEMENT In March 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" ("SFAS 121"), effective for fiscal years beginning after December 15, 1995. SFAS 121 establishes guidance for recognizing and measuring impairment losses and requires that the carrying amount of an impaired asset be reduced to fair value when events or circumstances indicate that the carrying value may not be recoverable. Recoverability would generally be determined by estimating future cash flows resulting from use and eventual disposition of the asset. The effect on the Company's financial statements of the adoption of SFAS 121 has not yet been determined. OTHER During the third quarter of 1995, the Public Service Commission of Wisconsin completed its examination of transactions in which Century and its service subsidiaries provided various services and materials to the Company's Wisconsin telephone subsidiaries. The impact of the examination was not material to the results of operations of the Company. During 1995 regulatory proceedings promoting competition have been initiated by a number of state regulatory commissions, including those in Louisiana, Ohio, Texas and Tennessee, furthering the expectation that regulation will continue to decrease and competition increase in the traditionally monopolistic portion of the telecommunications industry. 18
During the second quarter of 1995, the Louisiana Public Service Commission ("LPSC") culminated its two-year investigation into the earnings of independent telephone companies in Louisiana by adopting a new regulatory plan for such companies effective July 1, 1995. The plan provides that independent telephone companies in Louisiana will be regulated on an incentive-type rate of return basis in a manner yet to be determined. Under this plan, the Company will be required to reduce its intrastate switched access rates over a two-year period beginning July 1, 1995 to match the rates in effect for BellSouth. The Company anticipates that this directive will reduce its access revenues by approximately $500,000 in 1995 and up to $4.2 million annually upon completion of the two year phase-in. The plan also establishes a target rate of return of between 10.75% and 12.75% after giving effect to the access rate reductions described above. Beginning July 1, 1996, companies earning in excess of 12.75% will be required to lower their prospective rate of return to 12.25%, either by further reducing access rates (subject to certain limits) or taking such other actions as may be directed by the LPSC. Although the impact of this directive on the Company cannot be readily determined until the LPSC provides additional guidance on the operation and methodology of the plan, the Company anticipates that the impact of these changes will adversely affect its results of operations and there is no assurance that the effect will not be material. The Company anticipates that certain of its Louisiana telephone subsidiaries may take action to reduce earnings levels as a result of this plan. The United States Senate and the House of Representatives each passed separate telecommunications bills during 1995 that propose to substantially alter the regulatory framework of the telecommunications industry by, among other things, promoting deregulation and local exchange competition. The Conference Committee composed of members of both bodies is currently attempting to reconcile the conflicting terms of these bills. Assuming these measures become law in substantially their current form, the Company does not believe the resulting competition is likely to materially affect it in the near term, although there can be no assurance to this effect or to the effect that these bills will not be substantially altered by the conference committee. In July 1995 the Federal Communications Commission ("FCC") issued a Notice of Proposed Rulemaking and Notice of Inquiry, in which it is seeking comments on proposals and policy changes relating to certain federal high cost assistance mechanisms that provide substantial revenues to the Company, including the Universal Service Fund. The FCC's stated goals are to ensure that universal service can be maintained, but still hold the total level of assistance to a reasonable level and, where possible, reduce barriers to competitive entry and to promote efficient investment in and operation of local service networks. Although the Company anticipates that these initiatives may result in a reduction of its federal support revenues, management believes it is premature to assess or estimate the ultimate impact thereof. There can be no assurance, however, that such impact will not be material. 19
PART II. OTHER INFORMATION CENTURY TELEPHONE ENTERPRISES, INC. Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- A. Exhibits 4.1 Fourth Amendment to Competitive Advance and Revolving Credit Facility Agreement, dated October 5, 1995, between Registrant and NationsBank of Texas, N.A. 4.2 Competitive Advance and Revolving Credit Facility Agreement, dated October 17, 1995, between Registrant and Bank One of Texas, N.A. 10.1 Amendment No. 1, dated as of May 22, 1995, to Form of Stock Option Agreement entered into in 1990 by the Registrant, pursuant to 1990 Incentive Compensation Program, with certain of its officers. 10.2 Amendment No. 1, dated as of May 22, 1995, to Form of Stock Option Agreement entered into in 1992 by the Registrant, pursuant to 1990 Incentive Compensation Program, with certain of its officers. 10.3 Amendment No. 1, dated as of May 22, 1995, to Form of Performance Share Agreement under the 1990 Incentive Compensation Program entered into in 1993 with certain of its officers. 10.4 Amendment No. 1, dated as of May 22, 1995, to Form of Restricted Stock Agreement and Performance Share Agreement under the 1988 Incentive Compensation Program entered into in 1993 with certain of its officers. 11 Computations of Earnings Per Share. 12 Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule. B. Reports on Form 8-K ------------------- The following item was reported in the Form 8-K dated July 31, 1995: Item 5. Other Events - News release reporting results of operations for the quarter ended June 30, 1995. 20
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 9, 1995 /s/ Murray H. Greer ------------------- Murray H. Greer Controller (Principal Accounting Officer) 21
CENTURY TELEPHONE ENTERPRISES, INC. INDEX TO EXHIBITS Exhibit Number - ------- 4.1 Fourth Amendment to Competitive Advance and Revolving Credit Facility Agreement, dated October 5, 1995, between Registrant and NationsBank of Texas, N.A., included herein. 4.2 Competitive Advance and Revolving Credit Facility Agreement, dated October 17, 1995, between Registrant and Bank One of Texas, N.A., included herein. 10.1 Amendment No. 1, dated as of May 22, 1995, to Form of Stock Option Agreement entered into in 1990 by the Registrant, pursuant to 1990 Incentive Compensation Program, with certain of its officers, included herein. 10.2 Amendment No. 1, dated as of May 22, 1995, to Form of Stock Option Agreement entered into in 1992 by the Registrant, pursuant to 1990 Incentive Compensation Program, with certain of its officers, included herein. 10.3 Amendment No. 1, dated as of May 22, 1995, to Form of Performance Share Agreement under the 1990 Incentive Compensation Program entered into in 1993 with certain of its officers, included herein. 10.4 Amendment No. 1, dated as of May 22, 1995, to Form of Restricted Stock Agreement and Performance Share Agreement under the 1988 Incentive Compensation Program entered into in 1993 with certain of its officers, included herein. 11 Computations of Earnings Per Share, included herein. 12 Ratio of Earnings to Fixed Charges, included herein. 27 Financial Data Schedule, included herein. 22