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, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 1-7784 CENTURY TELEPHONE ENTERPRISES, INC. A Louisiana Corporation I.R.S. Employer Identification No. 72-0651161 100 Century Park Drive, Monroe, Louisiana 71203 Telephone number (318) 388-9500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of October 31, 1996, there were 59,814,450 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, 1996 and 1995 3 Consolidated Balance Sheets--September 30, 1996 and December 31, 1995 4 Consolidated Statements of Stockholders' Equity-- Nine Months Ended September 30, 1996 and 1995 5 Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 1996 and 1995 6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-20 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K 21 Signature 22 Index to Exhibits 23 2
PART I. FINANCIAL INFORMATION CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months Nine months ended September 30 ended September 30 ------------------ ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- (Dollars, except per share amounts, and shares in thousands) OPERATING REVENUES Telephone $113,785 106,468 335,819 309,295 Mobile Communications 66,694 53,204 185,286 143,230 Other 12,617 7,632 34,343 20,373 -------- -------- -------- -------- Total operating revenues 193,096 167,304 555,448 472,898 -------- -------- -------- -------- OPERATING EXPENSES Cost of sales and operating expenses 100,783 81,480 286,764 236,021 Depreciation and amortization 33,297 29,432 96,456 82,842 -------- -------- -------- -------- Total operating expenses 134,080 110,912 383,220 318,863 -------- -------- -------- -------- OPERATING INCOME 59,016 56,392 172,228 154,035 -------- -------- -------- -------- OTHER INCOME (EXPENSE) Interest expense (11,023) (10,924) (33,972) (32,771) Income from unconsolidated cellular entities 8,990 6,602 21,584 14,700 Gain on sales of assets 815 - 815 5,909 Minority interest (1,418) (2,440) (5,947) (6,281) Other income and expense 1,544 1,150 2,601 2,850 -------- -------- -------- -------- Total other income (expense) (1,092) (5,612) (14,919) (15,593) -------- -------- -------- -------- INCOME BEFORE INCOME TAX EXPENSE 57,924 50,780 157,309 138,442 Income tax expense 21,574 18,900 58,353 53,395 -------- -------- -------- -------- NET INCOME $ 36,350 31,880 98,956 85,047 ======== ======== ======== ======== PRIMARY EARNINGS PER SHARE $ .60 .54 1.65 1.47 ======== ======== ======== ======== FULLY DILUTED EARNINGS PER SHARE $ .60 .54 1.64 1.46 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE $ .09 .0825 .27 .2475 ======== ======== ======== ======== AVERAGE PRIMARY SHARES OUTSTANDING 60,111 58,734 59,853 57,790 ======== ======== ======== ======== AVERAGE FULLY DILUTED SHARES OUTSTANDING 60,881 59,193 60,593 58,812 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. 3
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, December 31, 1996 1995 ------------- ------------ (Dollars in thousands) ASSETS - ------ CURRENT ASSETS Cash and cash equivalents $ 15,478 8,540 Accounts receivable Customers, less allowance of $3,866 and $2,768 57,902 50,943 Other 18,212 24,219 Materials and supplies, at average cost 7,108 6,608 Other 5,412 5,019 ---------- ---------- 104,112 95,329 ---------- ---------- NET PROPERTY, PLANT AND EQUIPMENT 1,113,301 1,047,808 ---------- ---------- INVESTMENTS AND OTHER ASSETS Excess cost of net assets acquired, less accumulated amortization of $63,439 and $52,944 509,610 493,655 Other 233,762 225,629 ---------- ---------- 743,372 719,284 ---------- ---------- $1,960,785 1,862,421 ========== ========== LIABILITIES AND EQUITY - ---------------------- CURRENT LIABILITIES Current maturities of long-term debt $ 21,288 15,325 Notes payable - 14,199 Accounts payable 50,037 55,329 Accrued expenses and other liabilities Salaries and benefits 19,260 18,178 Taxes 24,395 12,489 Interest 10,861 6,024 Other 8,660 5,337 Advance billings and customer deposits 14,969 13,043 ---------- ---------- 149,470 139,924 ---------- ---------- LONG-TERM DEBT 589,777 622,904 ---------- ---------- DEFERRED CREDITS AND OTHER LIABILITIES 222,071 211,169 ---------- ---------- STOCKHOLDERS' EQUITY Common stock, $1.00 par value, authorized 175,000,000 shares, issued and outstanding 59,808,933 and 59,113,670 shares 59,809 59,114 Paid-in capital 471,324 453,584 Retained earnings 470,089 387,424 Unearned ESOP shares (11,830) (13,960) Preferred stock - non-redeemable 10,075 2,262 ---------- ---------- 999,467 888,424 ---------- ---------- $1,960,785 1,862,421 ========== ========== See accompanying notes to consolidated financial statements. 4
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) Nine months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars in thousands) COMMON STOCK Balance at beginning of period $ 59,114 53,574 Issuance of common stock for acquisitions 257 577 Conversion of debentures into common stock - 4,540 Issuance of common stock through dividend reinvestment, incentive and benefit plans 406 335 Conversion of preferred stock into common stock 32 - -------- -------- Balance at end of period 59,809 59,026 -------- -------- PAID-IN CAPITAL Balance at beginning of period 453,584 319,235 Issuance of common stock for acquisitions 8,201 15,981 Conversion of debentures into common stock - 108,596 Issuance of common stock through dividend reinvestment, incentive and benefit plans 8,436 4,566 Amortization of unearned compensation and other 973 986 Conversion of preferred stock into common stock 130 - -------- -------- Balance at end of period 471,324 449,364 -------- -------- RETAINED EARNINGS Balance at beginning of period 387,424 291,999 Net income 98,956 85,047 Cash dividends declared Common stock-$.27 and $.2475 per share (15,999) (14,385) Preferred stock (292) (92) -------- -------- Balance at end of period 470,089 362,569 -------- -------- UNEARNED ESOP SHARES Balance at beginning of period (13,960) (16,840) Release of ESOP shares 2,130 2,130 -------- -------- Balance at end of period (11,830) (14,710) -------- -------- PREFERRED STOCK - NON-REDEEMABLE Balance at beginning of period 2,262 2,268 Issuance of preferred stock for acquisition 7,975 - Conversion of preferred stock into common stock (162) - -------- -------- Balance at end of period 10,075 2,268 -------- -------- TOTAL STOCKHOLDERS' EQUITY $999,467 858,517 ======== ======== See accompanying notes to consolidated financial statements. 5
CENTURY TELEPHONE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars in thousands) OPERATING ACTIVITIES Net income $ 98,956 85,047 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 96,456 82,842 Deferred income taxes 4,644 4,481 Income from unconsolidated cellular entities (21,584) (14,700) Minority interest 5,947 6,281 Loss on investment in unconsolidated personal communications services entity 1,100 - Gain on sales of assets (815) (5,909) Changes in current assets and current liabilities: Increase in accounts receivable (726) (8,968) Decrease in accounts payable (5,386) (1,231) Increase in other accrued taxes 11,767 8,892 Changes in other current assets and other current liabilities, net 11,984 1,464 Increase in other noncurrent liabilities 3,850 4,702 Other, net 5,275 6,504 ------- -------- Net cash provided by operating activities 211,468 169,405 ------- -------- INVESTING ACTIVITIES Payments for property, plant and equipment (153,892) (143,551) Acquisitions, net of cash acquired (17,022) (21,906) Proceeds from sales of assets - 17,922 Reimbursement of investment in unconsolidated personal communications services entity 18,900 - Investments in unconsolidated cellular entities (744) (7,786) Distributions from unconsolidated cellular entities 9,464 3,048 Purchase of life insurance investment (5,944) (6,417) Note receivable 1,250 416 Other, net (2,347) (1,713) -------- -------- Net cash used in investing activities (150,335) (159,987) -------- -------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt 22,285 31,487 Payments of long-term debt (54,969) (16,576) Notes payable, net (14,199) (12,000) Proceeds from issuance of common stock 8,801 4,901 Cash dividends (16,291) (14,477) Other, net 178 119 -------- -------- Net cash used in financing activities (54,195) (6,546) -------- -------- Net increase in cash and cash equivalents 6,938 2,872 Cash and cash equivalents at beginning of period 8,540 7,154 -------- -------- Cash and cash equivalents at end of period $ 15,478 10,026 ======== ======== Supplemental cash flow information: Income taxes paid $ 42,446 45,884 ======== ======== Interest paid $ 29,135 32,480 ======== ======== See accompanying notes to consolidated financial statements. 6
CENTURY TELEPHONE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (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, 1995. Certain 1995 amounts have been reclassified to be consistent with the 1996 presentation. The unaudited financial information for the three months and nine months ended September 30, 1996 and 1995 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, 1996 1995 ------------- ----------- (Dollars in thousands) Telephone, at original cost $1,273,380 1,207,347 Accumulated depreciation (406,841) (357,633) --------- --------- 866,539 849,714 --------- --------- Mobile Communications, at cost 243,947 191,594 Accumulated depreciation (70,384) (54,927) --------- --------- 173,563 136,667 --------- --------- Corporate and other, at cost 114,650 100,613 Accumulated depreciation (41,451) (39,186) --------- --------- 73,199 61,427 --------- --------- $1,113,301 1,047,808 ========= ========= (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, 1996 and 1995) were accounted for by the equity method. Nine months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars in thousands) Results of operations Revenues $722,424 536,296 Operating income $250,839 187,179 Net income $251,193 188,536 7
CENTURY TELEPHONE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (UNAUDITED) (4) 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 Rural Service Area cellular systems located primarily in western states and three Metropolitan Statistical Area cellular systems located 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). (5) Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," during the first quarter of 1996. SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS 121 also requires that a rate-regulated enterprise recognize an impairment for the amount of costs excluded when a regulator excludes all or part of a cost from the enterprise's rate base. The adoption of SFAS 121 did not materially affect the Company's consolidated financial position or results of operations. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. As allowed by SFAS 123, the Company plans to continue to measure compensation cost for employee stock compensation plans using the method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and will provide pro forma disclosures in the Notes to the Consolidated Financial Statements as required by SFAS 123. (6) Shareholders' Rights Plan In August 1996, the Board of Directors declared a dividend of one preference share purchase right for each common share outstanding. Such rights become exercisable if and when a potential acquiror takes certain steps to acquire 15% or more of Century's common stock. Upon the occurrence of such an acquisition, each right held by shareholders other than the acquiror may be exercised to receive that number of shares of common stock or other securities of Century (or, in certain situations, the acquiring company) which at the time of such transaction will have a market value of two times the exercise price of the right. The Shareholders' Rights Plan approved by the Board of Directors in 1986 will expire in November 1996. 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 other information included in the Company's annual report on Form 10-K for the year ended December 31, 1995. The results of operations for the three months and nine months ended September 30, 1996 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, 1996 Compared to Three Months Ended September 30, 1995 Net income for the third quarter of 1996 was $36.4 million compared to $31.9 million during the third quarter of 1995, a 14.0% increase. The increase was principally due to a $2.6 million increase in operating income, a $2.4 increase in income from unconsolidated cellular entities, a $1.0 million decrease in minority interest and an $815,000 pre-tax gain on sales of assets, which were partially offset by a $2.7 million increase in income tax expense. Three months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars, except per share amounts, and shares in thousands) Operating income (loss) Telephone $38,933 36,555 Mobile Communications 20,153 18,517 Other (70) 1,320 ------ ------ 59,016 56,392 Interest expense (11,023) (10,924) Income from unconsolidated cellular entities 8,990 6,602 Gain on sales of assets 815 - Minority interest (1,418) (2,440) Other income and expense 1,544 1,150 Income tax expense (21,574) (18,900) ------- ------ Net income $36,350 31,880 ====== ====== Fully diluted earnings per share $ .60 .54 ====== ====== Average fully diluted shares outstanding 60,881 59,193 ====== ====== Fully diluted earnings per share increased to $.60 for the three months ended September 30, 1996 from $.54 during the three months ended September 30, 1995, an 11.1% increase. The average number of fully diluted shares outstanding increased 2.9%, primarily as a result of shares issued for acquisitions and through the Company's dividend reinvestment, incentive and benefit plans. Contributions to operating revenues and operating income by the Company's telephone, mobile communications, and other operations for the three months ended September 30, 1996 and 1995 were as follows: 9
Three months ended September 30 ------------------ 1996 1995 ---- ---- Operating revenues Telephone operations 58.9% 63.6 Mobile Communications operations 34.5% 31.8 Other operations 6.6% 4.6 Operating income (loss) Telephone operations 66.0% 64.8 Mobile Communications operations 34.1% 32.8 Other operations ( .1)% 2.4 Telephone Operations - -------------------- Three months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars in thousands) Operating revenues Local service $ 31,248 28,455 Network access and long distance 68,433 65,596 Other 14,104 12,417 ------- ------- 113,785 106,468 ------- ------- Operating expenses Plant operations 22,885 21,801 Customer operations 10,936 9,759 Corporate and other 17,252 15,976 Depreciation and amortization 23,779 22,377 ------- ------- 74,852 69,913 ------- ------- Operating income $ 38,933 36,555 ======= ======= Telephone operating income increased $2.4 million (6.5%) due to an increase in operating revenues of $7.3 million (6.9%) which more than offset an increase in operating expenses of $4.9 million (7.1%). The $7.3 million increase in revenues was substantially due to a $1.4 million increase in revenues based on minutes of use; a $1.5 million increase which resulted from an increase in the number of customer access lines; a $2.3 million increase in amounts received from the Federal Communications Commission ("FCC") mandated Universal Service Fund ("USF"); a $1.7 million increase in revenues related to leasing, selling, installing, maintaining and repairing customer premise telecommunications equipment and wiring ("CPE services") and an $840,000 increase in the partial recovery of increased operating expenses through revenue pools in which the Company participates with other telephone companies. These increases were partially offset by a $450,000 reduction in access fees due to the previously-announced reduction in intrastate switched access rates mandated by the Louisiana Public Service Commission ("LPSC") which is being phased in from July 1995 through July 1997. For additional information, see "Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995 -- Telephone Operations." During the third quarter of 1996, plant operations expenses increased $1.1 million (5.0%), of which $574,000 was due to an increase in expenses incurred in the provision of CPE services. 10
Customer operations expenses increased $1.2 million (12.1%) in the third quarter of 1996, primarily due to increases of $544,000 in salaries and wages and $309,000 in expenses incurred in the provision of CPE services. A significant portion of the increases in these customer operations expenses related to the Company's increased sales and marketing efforts. Of the $1.3 million (8.0%) increase in corporate and other expenses, $427,000 was attributable to increased operating taxes and $772,000 to the provision of CPE services. Depreciation and amortization increased $1.4 million (6.3%) primarily due to a higher level of plant in service. Cellular Operations and Investments - ----------------------------------- Three months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars in thousands) Operating income - mobile communications segment $20,153 18,517 Minority interest (1,534) (2,440) Income from unconsolidated cellular entities 8,990 6,602 ------ ------ $27,609 22,679 ====== ====== The mobile communications segment reflects 100% of the results of operations of the cellular entities in which the Company has a majority interest. The minority interest owners' share of the income of such entities was $1.5 million during the third quarter of 1996 and $2.4 million during the third quarter of 1995 and is reflected in the Company's Consolidated Statements of Income as an expense in "Minority interest." See Minority Interest for additional information. The Company's share of earnings from the cellular entities in which it has less than a majority interest is accounted for using the equity method and is reflected in the Company's Consolidated Statements of Income in "Income from unconsolidated cellular entities." The Company's share of income from such entities was $9.0 million and $6.6 million during the three months ended September 30, 1996 and 1995, respectively. Mobile Communications Operations - -------------------------------- Three months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars in thousands) Operating revenues Cellular service $65,621 51,858 Equipment sales 1,073 1,346 ------ ------ 66,694 53,204 ------ ------ Operating expenses Cost of equipment sold 3,167 2,083 System operations 10,279 6,831 General, administrative and customer service 13,529 10,072 Sales and marketing 10,805 9,248 Depreciation and amortization 8,761 6,453 ------ ------ 46,541 34,687 ------ ------ Operating income $20,153 18,517 ====== ====== 11
Mobile communications operating income increased $1.6 million (8.8%) to $20.2 million in the third quarter of 1996 from $18.5 million in the third quarter of 1995. Mobile communications operating revenues increased $13.5 million (25.4%) which more than offset an increase in operating expenses of $11.9 million (34.2%). The increase in cellular service revenues was substantially due to the increase in the number of cellular customers. The average number of cellular units in service in majority-owned markets during the third quarter of 1996 and 1995 was 331,000 and 250,000, respectively. Exclusive of acquisitions, access and usage revenues increased $8.4 million in the third quarter of 1996 and roaming and toll revenues increased $2.8 million. Cellular operations acquired subsequent to the second quarter of 1995 contributed $3.4 million of service revenues during the third quarter of 1996 and $1.4 million during the third quarter of 1995. The average monthly cellular service revenue per customer declined to $66 during the third quarter of 1996 from $69 during the third quarter of 1995. It has been an industry-wide trend that early subscribers have normally been the heaviest users and that a higher percentage of new subscribers tend to be lower usage customers. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers are activated and (ii) as competitive pressures intensify and place additional pressure on rates. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, all of which 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 other enhancements to its system, including the planned deployment of digital service with PCS-type features in certain cellular markets during the fourth quarter of 1996. Equipment sales decreased $273,000 (20.3%) in the third quarter of 1996 compared to the third quarter of 1995. Although the Company sold more phones in the third quarter of 1996 than in the third quarter of 1995, revenues decreased because the Company has increasingly sold phones below cost, a practice which is common in the cellular industry. The increase in cost of equipment sold during the third quarter of 1996 resulted from the increase in the number of cellular phones sold. System operations expenses increased $3.4 million (50.5%) in the third quarter of 1996 primarily due to a $2.3 million increase in the net cost paid to other carriers related to the provision of cellular service by such other carriers to the Company's customers who roam in the other carriers' service areas in excess of the amounts the Company bills its customers. The remainder of the increase in system operations expenses resulted primarily from the operation of new cell sites. General, administrative and customer service expenses increased $3.5 million (34.3%) primarily due to increased expenses resulting from a larger customer base, such as customer service and retention expenses (an increase of $1.6 million), the provision for doubtful accounts (an increase of $742,000) and general office expenses (an increase of $866,000). Sales and marketing costs increased $1.6 million (16.8%) substantially due to a $671,000 increase in costs incurred in selling the Company's products and services in retail locations, including Company-owned retail stores. The remaining increase was substantially due to an increase in advertising and sales promotions expenses. Depreciation and amortization increased $2.3 million (35.8%) due primarily to a higher level of plant in service. 12
Other Operations - ---------------- Other operations include the results of operations of subsidiaries of the Company which are not included in the telephone or mobile communications segments, including, but not limited to, the Company's competitive access subsidiary and the Company's nonregulated long distance operations. The operating loss of the Company's competitive access subsidiary was $727,000 greater during the third quarter of 1996 than in the third quarter of 1995. Income from Unconsolidated Cellular Entities - -------------------------------------------- Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $2.4 million (36.2%) during the third quarter of 1996 compared to the third quarter of 1995 due to the improvement in profitability of the cellular entities in which the Company owns less than a majority interest. Minority Interest - ----------------- The expense recorded by the Company to reflect the minority interest owners' share of the profits of the Company's majority-owned and operated cellular entities decreased $1.0 million during the third quarter of 1996 compared to the third quarter of 1995 primarily due to the effect of the Company's acquisition, during the second quarter of 1996, of an additional 25% interest in a cellular partnership (which the Company operates) which decreased the minority interest owners' share of such partnership. Income Tax Expense - ------------------ Income tax expense increased $2.7 million (14.1%) during the third quarter of 1996 compared to the third quarter of 1995 primarily due to the increase in income before taxes. 13
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995 Net income for the first nine months of 1996 increased $13.9 million (16.4%) to $99.0 million from $85.0 million during the first nine months of 1995. The increase was principally due to an $18.2 million increase in operating income and a $6.9 million increase in income from unconsolidated cellular entities. Such increases were partially offset by a $5.0 million increase in income tax expense and a $5.1 million decrease in gain on sales of assets. Nine months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars, except per share amounts, and shares in thousands) Operating income Telephone $115,348 105,925 Mobile Communications 56,105 45,515 Other 775 2,595 ------- ------- 172,228 154,035 Interest expense (33,972) (32,771) Income from unconsolidated cellular entities 21,584 14,700 Gain on sales of assets 815 5,909 Minority interest (5,947) (6,281) Other income and expense 2,601 2,850 Income tax expense (58,353) (53,395) ------- ------- Net income $ 98,956 85,047 ======= ======= Fully diluted earnings per share $ 1.64 1.46 ======= ======= Average fully diluted shares outstanding 60,593 58,812 ======= ======= Fully diluted earnings per share increased to $1.64 for the nine months ended September 30, 1996 from $1.46 during the nine months September 30, 1995, a 12.3% increase. The average number of fully diluted shares outstanding increased 3.0%, primarily as a result of shares issued for acquisitions and through the Company's dividend reinvestment, incentive and benefit plans. Contributions to operating revenues and operating income by the Company's telephone, mobile communications, and other operations for the nine months ended September 30, 1996 and 1995 were as follows: Nine months ended September 30 ------------------ 1996 1995 ---- ---- Operating revenues Telephone operations 60.5% 65.4 Mobile Communications operations 33.3% 30.3 Other operations 6.2% 4.3 Operating income Telephone operations 67.0% 68.8 Mobile Communications operations 32.6% 29.5 Other operations .4% 1.7 14
Telephone Operations - -------------------- Nine months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars in thousands) Operating revenues Local service $ 90,542 82,933 Network access and long distance 205,134 189,752 Other 40,143 36,610 ------- ------- 335,819 309,295 ======= ======= Operating expenses Plant operations 67,582 64,475 Customer operations 31,761 28,849 Corporate and other 50,669 46,790 Depreciation and amortization 70,459 63,256 ------- ------- 220,471 203,370 ------- ------- Operating income $115,348 105,925 ======= ======= Telephone operating income increased $9.4 million (8.9%) due to an increase in operating revenues of $26.5 million (8.6%) which more than offset an increase in operating expenses of $17.1 million (8.4%). The $26.5 million increase in revenues was substantially due to a $6.8 million increase in revenues based on minutes of use, of which approximately $2.6 million was associated with a change, effective during the third quarter of 1995, in the methodology applied in the network access revenue billing process. Also contributing to the $26.5 million increase in revenues was a $4.8 million increase which resulted from an increase in the number of customer access lines; a $5.5 million increase in amounts received from the FCC mandated USF; a $3.7 million increase in the partial recovery of increased operating expenses through revenue pools in which the Company participates with other telephone companies; and a $4.0 million increase in revenues related to CPE services. The increases in revenues were partially offset by a $1.3 million reduction in access fees due to the previously-announced reduction in intrastate switched access rates mandated by the LPSC which is being phased in from July 1995 through July 1997. As such rate reduction in Louisiana continues to be phased in, future access revenues will be reduced up to approximately $2.1 million annually (in addition to the reductions disclosed in the Company's Form 10-K for the year ended December 31, 1995) because of the above-mentioned change in the methodology applied in the network access revenue billing process. The Company anticipates certain other future revenue reductions resulting primarily from regulatory changes and competitive pressures. Based on anticipated revenue reductions, the Company expects its internal telephone revenue growth rate to slow during upcoming quarters. During the first nine months of 1996, plant operations expenses increased $3.1 million (4.8%), of which $1.8 million was due to an increase in expenses incurred in the provision of CPE services and $794,000 was due to an increase in salaries and wages. Customer operations expenses increased $2.9 million (10.1%) in the first nine months of 1996, primarily due to increases of $1.5 million in salaries and wages and $730,000 in expenses incurred in the provision of CPE services. A significant portion of the increases in these customer operations expenses related to the Company's increased sales and marketing efforts. Of the $3.9 million (8.3%) increase in corporate and other expenses, $1.6 million was attributable to increased operating taxes and $2.0 million to the provision of CPE services. 15
Depreciation and amortization increased $7.2 million (11.4%) primarily due to a higher level of plant in service. The composite depreciation rate for telephone properties was 7.5% for the nine months ended September 30, 1996 and 7.4% for the nine months ended September 30, 1995. Cellular Operations and Investments - ----------------------------------- Nine months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars in thousands) Operating income - mobile communications segment $56,105 45,515 Minority interest (6,141) (6,281) Income from unconsolidated cellular entities 21,584 14,700 ------ ------ $71,548 53,934 ====== ====== The mobile communications segment reflects 100% of the results of operations of the cellular entities in which the Company has a majority interest. The minority interest owners' share of the income of such entities was $6.1 million during the first nine months of 1996 and $6.3 million during the first nine months of 1995 and is reflected in the Company's Consolidated Statements of Income as an expense in "Minority interest." See Minority Interest for additional information. The Company's share of earnings from the cellular entities in which it has less than a majority interest is accounted for using the equity method and is reflected in the Company's Consolidated Statements of Income in "Income from unconsolidated cellular entities." The Company's share of income from such entities was $21.6 million and $14.7 million during the nine months ended September 30, 1996 and 1995, respectively. See Income from Unconsolidated Cellular Entities for additional information. Mobile Communications Operations - -------------------------------- Nine months ended September 30 ------------------ 1996 1995 ---- ---- (Dollars in thousands) Operating revenues Cellular service $182,218 139,101 Equipment sales 3,068 4,129 ------- ------- 185,286 143,230 ------- ------- Operating expenses Cost of equipment sold 8,889 6,558 System operations 26,632 19,468 General, administrative and customer service 38,626 27,920 Sales and marketing 31,012 25,672 Depreciation and amortization 24,022 18,097 ------- ------- 129,181 97,715 ------- ------ Operating income $ 56,105 45,515 ======= ======= Mobile communications operating income increased $10.6 million (23.3%) to $56.1 million in the first nine months of 1996 from $45.5 million in the first nine months of 1995. Mobile communications operating revenues increased $42.1 million (29.4%) which more than offset an increase in operating expenses of $31.5 million (32.2%). 16
The increase in cellular service revenues was primarily due to the increase in the number of cellular customers. The average number of cellular units in service in majority-owned markets during the first nine months of 1996 and 1995 was 314,700 and 233,000, respectively. Exclusive of acquisitions, access and usage revenues increased $26.0 million in the first nine months of 1996 and roaming and toll revenues increased $9.2 million. Cellular operations acquired subsequent to the second quarter of 1995 contributed $8.3 million of service revenues during the first nine months of 1996 and $1.4 million during the first nine months of 1995. The average monthly cellular service revenue per customer declined to $64 during the first nine months of 1996 from $66 during the first nine months of 1995. It has been an industry-wide trend that early subscribers have normally been the heaviest users and that a higher percentage of new subscribers tend to be lower usage customers. The average monthly service revenue per customer may further decline (i) as market penetration increases and additional lower usage customers are activated and (ii) as competitive pressures intensify and place additional pressure on rates. The Company is responding to such competitive pressures by, among other things, modifying certain of its price plans and implementing certain other plans and promotions, all of which 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 other enhancements to its system, including the planned deployment of digital service with PCS-type features in certain cellular markets during the fourth quarter of 1996. Equipment sales decreased $1.1 million (25.7%) during the nine months ended September 30, 1996 compared to the nine months ended September 30, 1995. Although the Company sold more phones in the first nine months of 1996 than in the first nine months of 1995, revenues decreased because the Company has increasingly sold phones below cost, a practice which is common in the cellular industry. The increase in cost of equipment sold during the first nine months of 1996 resulted from the increase in the number of cellular phones sold. System operations expenses increased $7.2 million (36.8%) during the nine months ended September 30, 1996 primarily due to a $4.9 million increase in the net cost paid to other carriers related to (i) the provision of cellular service by such other carriers to the Company's customers who roam in the other carriers' service areas in excess of the amounts the Company bills its customers and (ii) cellular fraud. The remainder of the increase in system operations expenses resulted primarily from the operation of new cell sites. General, administrative and customer service expenses increased $10.7 million (38.3%) primarily due to increased expenses resulting from a larger customer base, such as customer service and retention expenses (an increase of $3.9 million), the provision for doubtful accounts (an increase of $2.5 million) and general office expenses (an increase of $3.0 million). Sales and marketing expenses increased $5.3 million (20.8%) primarily due to a $1.6 million increase in advertising and sales promotions expenses, a $1.4 million increase in commissions paid to agents and employees for selling cellular service to new customers, and a $2.3 million increase in costs incurred in selling products and services in retail locations, including Company-owned retail stores. Depreciation and amortization increased $5.9 million (32.7%) due primarily to a higher level of plant in service. 17
Other Operations - ---------------- Other operations include the results of operations of subsidiaries of the Company which are not included in the telephone or mobile communications segments, including, but not limited to, the Company's competitive access subsidiary and the Company's nonregulated long distance operations. Of the $14.0 million (68.6%) increase in operating revenues during the nine months ended September 30, 1996 compared to the nine months ended September 30, 1995, $11.4 million was applicable to the long distance operations. Of the $15.8 million (88.8%) increase in operating expenses, $10.4 million was incurred by the long distance operations. During the first nine months of 1996, the operating loss of the Company's competitive access subsidiary was $2.0 million greater than during the first nine months of 1995. Interest Expense - ---------------- Interest expense increased $1.2 million (3.7%) during the first nine months of 1996 compared to the first nine months of 1995 primarily due to an increase in average debt outstanding. Income from Unconsolidated Cellular Entities - -------------------------------------------- Earnings from unconsolidated cellular entities, net of the amortization of associated goodwill, increased $6.9 million (46.8%) during the first nine months of 1996 compared to the first nine months of 1995 due primarily to the 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 a nonrecurring $800,000 reduction in earnings from unconsolidated cellular entities as a result of a 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 systems 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 4 of Notes to Consolidated Financial Statements. Minority Interest - ----------------- The increased profitability of the Company's majority-owned and operated cellular entities during the first nine months of 1996 as compared to the first nine months of 1995 resulted in a corresponding increase of $1.8 million in the expense recorded by the Company to reflect the minority interest owners' share of the profits. Such increase in expense was more than offset by the effect of the Company's acquisition, during the second quarter of 1996, of an additional 25% interest in a cellular partnership (which the Company operates) which decreased the minority interest owners' share of such partnership. Other Income and Expense - ------------------------ Other income and expense for the first nine months of 1996 was $2.6 million compared to $2.9 million during the first nine months of 1995. During 1995 the Company invested $20.0 million in exchange for a minority equity interest in an entity formed for the purpose of participating in the FCC auction of one 30MHz Personal Communications Services ("PCS") license for each Basic Trading Area. In April 1996, such entity withdrew from the auction and, as a result thereof, the Company withdrew its equity investment in such entity and recorded a $1.1 million loss during the first quarter of 1996. The $1.1 million was the portion of the Company's investment which, under the terms of its agreement with such entity, it was not entitled to recoup. 18
Income Tax Expense - ------------------ Income tax expense increased $5.0 million (9.3%) during the first nine months of 1996 compared to the first nine months of 1995 primarily due to the increase in income before taxes. The effective income tax rate was 37.1% in the nine months ended September 30, 1996 and 38.6% in the nine months ended September 30, 1995. The effective income tax rate attributable to the gain on sales of assets in the first quarter of 1995 was considerably higher than the Company's consolidated effective income tax rate for the first nine months 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. Net cash provided by operating activities was $211.5 million during the first nine months of 1996 compared to $169.4 million during the first nine months of 1995. The Company's accompanying consolidated statements of cash flows identify major differences between net income and net cash provided by operating activities for each of these periods. For additional information relating to the telephone operations, mobile communications operations, and other operations of the Company, see Results of Operations. Net cash used in investing activities was $150.3 million and $160.0 million for the nine months ended September 30, 1996 and 1995, respectively. Capital expenditures for the nine months ended September 30, 1996 were $80.0 million for telephone operations, $56.8 million for mobile communications operations and $17.2 million for other operations. The $150.3 million of net cash used in investing activities in 1996 was net of the reimbursement of $18.9 million related to the Company's withdrawal of its equity investment in an entity formed for the purpose of participating in the FCC auction of 30MHz PCS licenses. 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 systems. Investments in unconsolidated cellular entities were $7.0 million less during the nine months ended September 30, 1996 compared to the nine months ended September 30, 1995 while distributions received from unconsolidated cellular entities were $6.4 million more during 1996 compared to 1995. Net cash used in financing activities was $54.2 million during the first nine months of 1996 compared to $6.5 million during the first nine months of 1995. Net payments of debt, including notes payable and long-term debt, were $49.8 million more during the first nine months of 1996. Budgeted capital expenditures for 1996 total $102 million for telephone operations and $26 million for other operations. Revised budgeted capital expenditures for 1996 total $80 million for mobile communications operations. In August 1996 Standard & Poor's upgraded Century's senior unsecured debt rating from BBB+ to A-. 19
As of September 30, 1996, Century's telephone subsidiaries had available for use $139.9 million of commitments for long-term financing from the Rural Utilities Service and the Company had $139.1 million of undrawn committed bank lines of credit. In addition, approximately $130.0 million of uncommitted credit facilities were available to Century at September 30, 1996. The Company has experienced no significant problems in obtaining funds through the issuance of debt or equity for capital expenditures or other purposes. OTHER MATTERS The Company currently accounts for its regulated telephone operations in accordance with the provisions of Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation." The ongoing applicability of SFAS 71 to the Company's telephone operations is being monitored due to the changing regulatory, competitive and legislative environments, and 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 $100 million and $150 million. In August 1996 the FCC issued an order (the "Order") which included the rules implementing most of the interconnection provisions of the Telecommunications Act of 1996 (the "1996 Act"). Under the 1996 Act's rural telephone company exemption, all of the Company's telephone subsidiaries are exempt from certain interconnection requirements until such time as the state regulatory commission with jurisdiction over any such company receives notice of a bona fide request for interconnection, services or network elements and such commission determines that the request is technically feasible, not unduly economically burdensome and is consistent with the universal service provisions contained in the 1996 Act. Under the Order, where an appropriate bona fide request is received by the state regulatory commission, the burden of proving that the exemption should continue is the responsibility of the rural local exchange company. Certain provisions of the Order are currently "stayed" pending judicial review. 20
PART II. OTHER INFORMATION CENTURY TELEPHONE ENTERPRISES, INC. Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- A. Exhibits -------- 3(i) Amended and Restated Articles of Incorporation of Registrant, dated as of August 27, 1996. 3(ii) Registrant's Bylaws, as amended through October 7, 1996. 4 Rights Agreement, dated as of August 27, 1996, between Century Telephone Enterprises, Inc. and Society National Bank, as Rights Agent (incorporated by reference to Exhibit 1 of Registrant's Current Report on Form 8-K filed August 30, 1996). 10 Consulting Agreement, dated as of July 2, 1996, by and between Century Telephone Enterprises, Inc. and Jim D. Reppond. 11 Computations of Earnings per Share 27 Financial Data Schedule B. Reports on Form 8-K ------------------- The following item was reported in a Form 8-K filed August 30, 1996: Item 5. Other Events - Adoption of Shareholders' Rights Plan 21
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 7, 1996 /s/ Murray H. Greer ------------------------- Murray H. Greer Controller (Principal Accounting Officer) 22
CENTURY TELEPHONE ENTERPRISES, INC. INDEX TO EXHIBITS Exhibit Number - ------ 3(i) Amended and Restated Articles of Incorporation of Registrant, dated as of August 27, 1996, included herein. 3(ii) Registrant's Bylaws, as amended through October 7, 1996, included herein. 4 Rights Agreement, dated as of August 27, 1996, between Century Telephone Enterprises, Inc. and Society National Bank, as Rights Agent (incorporated by reference to Exhibit 1 of Registrant's Current Report on Form 8-K filed August 30, 1996). 10 Consulting Agreement, dated as of July 2, 1996, by and between Century Telephone Enterprises, Inc. and Jim D. Reppond, included herein. 11 Computations of Earnings Per Share, included herein. 27 Financial Data Schedule, included herein. 23