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 June 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 July 31, 1995, there were 58,373,038 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 Six
Months Ended June 30, 1995 and 1994
Consolidated Balance Sheets--June 30, 1995 and
December 31, 1994
Consolidated Statements of Stockholders' Equity--
Six Months Ended June 30, 1995 and 1994
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1995 and 1994
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Submission of Matters To a Vote of Security Holders
Other Information
Exhibits and Reports on Form 8-K
Signature
Index to Exhibits
PART I. FINANCIAL INFORMATION
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months Six months
ended June 30 ended June 30
---------------- ----------------
1995 1994 1995 1994
------- ------- ------- -------
(Dollars, except per share
amounts, and shares
expressed in thousands)
OPERATING REVENUES
Telephone $101,857 94,969 202,133 186,739
Mobile Communications 47,877 37,911 90,026 67,121
------- ------- ------- -------
Total operating revenues 149,734 132,880 292,159 253,860
------- ------- ------- -------
OPERATING EXPENSES
Cost of sales and
operating expenses 74,252 68,233 143,268 131,894
Depreciation and
amortization 26,670 22,934 52,523 44,367
------- ------- ------- -------
Total operating expenses 100,922 91,167 195,791 176,261
------- ------- ------- -------
OPERATING INCOME 48,812 41,713 96,368 77,599
------- ------- ------- -------
OTHER INCOME (EXPENSE)
Interest expense (10,451) (10,824) (21,847) (19,326)
Income from unconsolidated
cellular entities 3,374 3,411 8,098 5,975
Gain on sales of assets - - 5,909 -
Minority interest (1,895) (857) (3,841) (1,555)
Other income and expense 2,127 795 2,975 1,684
------- ------- ------- -------
Total other income
(expense) (6,845) (7,475) (8,706) (13,222)
------- ------- ------- -------
INCOME BEFORE INCOME TAX
EXPENSE 41,967 34,238 87,662 64,377
Income tax expense 15,800 12,753 34,495 23,691
------- ------- ------- -------
NET INCOME $ 26,167 21,485 53,167 40,686
======= ======= ======= =======
PRIMARY EARNINGS PER SHARE $ .45 .40 .93 .76
======= ======= ======= =======
FULLY DILUTED EARNINGS PER
SHARE $ .45 .39 .92 .74
======= ======= ======= =======
DIVIDENDS PER COMMON SHARE $ .0825 .0800 .1650 .1600
======= ======= ======= =======
AVERAGE PRIMARY SHARES
OUTSTANDING 58,453 53,546 57,318 53,157
======= ======= ======= =======
AVERAGE FULLY DILUTED SHARES
OUTSTANDING 58,659 58,288 58,659 57,859
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1995 1994
------------ ------------
(Dollars in thousands)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 6,150 7,154
Accounts receivable
Customers, less allowance for doubtful
accounts of $2,371 and $2,360 43,502 40,824
Other 22,264 23,180
Materials and supplies, at average cost 5,972 7,090
Other 3,523 2,980
--------- ---------
81,411 81,228
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT 1,004,249 947,131
--------- ---------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired,
less accumulated amortization of
$46,857 and $40,756 444,283 441,436
Other 188,742 173,458
--------- ---------
633,025 614,894
--------- ---------
$1,718,685 1,643,253
========= =========
LIABILITIES AND EQUITY
----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 43,293 12,718
Notes payable to banks 159,500 158,000
Accounts payable 58,300 52,331
Accrued expenses and other liabilities
Salaries and benefits 17,768 17,884
Taxes 15,671 16,530
Interest 5,167 8,243
Other 4,102 9,237
Advance billings and customer deposits 12,430 11,725
--------- ---------
316,231 286,668
--------- ---------
LONG-TERM DEBT 393,994 518,603
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES 195,922 187,746
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
175,000,000 shares, issued and outstanding
58,368,072 and 53,574,361 shares 58,368 53,574
Paid-in capital 431,749 319,235
Retained earnings 335,553 291,999
Unearned ESOP shares (15,400) (16,840)
Preferred stock - non-redeemable 2,268 2,268
--------- ---------
812,538 650,236
--------- ---------
$1,718,685 1,643,253
========= =========
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six months
ended June 30
-------------------
1995 1994
--------- --------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 53,574 51,295
Issuance of common stock for acquisitions - 2,000
Issuance of common stock through conversion
of debentures 4,540 -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 254 89
Conversion of preferred stock into common stock - 1
------- -------
Balance at end of period 58,368 53,385
------- -------
PAID-IN CAPITAL
Balance at beginning of period 319,235 262,294
Issuance of common stock for acquisitions - 50,311
Issuance of common stock through conversion
of debentures 108,596 -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 3,479 1,593
Amortization of unearned compensation and other 439 384
Conversion of preferred stock into common stock - 26
------- -------
Balance at end of period 431,749 314,608
------- -------
RETAINED EARNINGS
Balance at beginning of period 291,999 208,945
Net income 53,167 40,686
Cash dividends declared
Common stock-$.1650 and $.1600 per share,
respectively (9,552) (8,527)
Preferred stock (61) (39)
------- -------
Balance at end of period 335,553 241,065
------- -------
UNEARNED ESOP SHARES
Balance at beginning of period (16,840) (9,220)
Commitment to ESOP - (10,000)
Release of ESOP shares 1,440 940
------- -------
Balance at end of period (15,400) (18,280)
------- -------
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 - (27)
------- -------
Balance at end of period 2,268 2,302
------- -------
TOTAL STOCKHOLDERS' EQUITY $812,538 593,080
======= =======
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months
ended June 30
-------------------
1995 1994
-------- --------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 53,167 40,686
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 56,907 48,883
Deferred income taxes 2,055 (3,059)
Income from unconsolidated cellular
entities (8,098) (5,975)
Gain on sales of assets (5,909) -
Changes in current assets and current
liabilities:
(Increase) decrease in accounts
receivable (2,905) 2,658
Increase (decrease) in accounts payable 5,837 (10,157)
Increase (decrease) in other accrued
taxes (952) 7,391
Changes in other current assets and other
current liabilities, net (6,393) 5,251
Increase in other noncurrent liabilities 6,099 4,533
Other, net 1,275 277
------- -------
Net cash provided by operating activities 101,083 90,488
------- -------
INVESTING ACTIVITIES
Payments for property, plant and equipment (98,438) (90,426)
Acquisitions, net of cash acquired (6,009) (54,847)
Proceeds from sales of assets 17,922 -
Investments in unconsolidated cellular
entities (7,044) (1,227)
Distributions from unconsolidated cellular
entities 1,386 1,836
Purchase of life insurance investment (6,409) (7,094)
Note receivable - (25,000)
Other, net (156) 855
------- -------
Net cash used in investing activities (98,748) (175,903)
------- -------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 6,498 147,547
Payments of long-term debt (5,310) (46,551)
Notes payable, net 1,500 6,000
Proceeds from issuance of common stock 3,496 1,682
Cash dividends (9,613) (8,566)
Other, net 90 180
------- -------
Net cash provided by (used in)
financing activities (3,339) 100,292
------- -------
Net increase (decrease) in cash and cash
equivalents (1,004) 14,877
Cash and cash equivalents at beginning
of period 7,154 9,777
------- -------
Cash and cash equivalents at end of period $ 6,150 24,654
======= =======
Supplemental cash flow information:
Income taxes paid $ 34,672 17,257
======= =======
Interest paid $ 24,923 17,604
======= =======
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 six
months ended June 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 six-month periods
have been included therein. The results of operations for the first six
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:
June 30, December 31,
1995 1994
---------- ----------
(Dollars in thousands)
Telephone, at original cost $1,147,202 1,076,496
Accumulated depreciation (330,076) (295,255)
--------- ---------
817,126 781,241
--------- ---------
Mobile Communications, at cost 172,676 152,305
Accumulated depreciation (45,233) (38,552)
--------- ---------
127,443 113,753
--------- ---------
Other, at cost 96,368 85,406
Accumulated depreciation (36,688) (33,269)
--------- ---------
59,680 52,137
--------- ---------
$1,004,249 947,131
========= =========
(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.
(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 June
30, 1995 and 1994) were accounted for by the equity method.
Six months
ended June 30
---------------------
1995 1994
-------- --------
(Dollars in thousands)
Results of operations
Revenues $336,812 150,606
Operating income $111,677 38,996
Net income $112,833 37,704
(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).
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 six months ended June
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 June 30, 1995 Compared
to Three Months Ended June 30, 1994
Net income for the second quarter of 1995 was $26.2 million compared
to $21.5 million during the second quarter of 1994, a 21.8% increase. The
increase was principally due to a $7.1 million increase in operating
income which was partially offset by, among other things, a $3.0 million
increase in income tax expense. Fully diluted earnings per share
increased to $.45 for the three months ended June 30, 1995 from $.39
during the three months ended June 30, 1994, a 15.4% increase.
Three months
ended June 30
---------------
1995 1994
------ ------
(Dollars in thousands,
except per share amounts)
Operating income
Telephone $35,025 33,896
Mobile Communications 13,787 7,817
------ ------
48,812 41,713
Interest expense (10,451) (10,824)
Income from unconsolidated cellular entities 3,374 3,411
Minority interest (1,895) (857)
Other income and expense 2,127 795
Income tax expense (15,800) (12,753)
------ ------
Net income $26,167 21,485
====== ======
Fully diluted earnings per share $ .45 .39
====== ======
Contributions to operating revenues and operating income by the
Company's telephone operations and mobile communications operations for
the three months ended June 30, 1995 and 1994 were as follows:
Three months
ended June 30
---------------
1995 1994
------ ------
Operating revenues
Telephone operations 68.0% 71.5
Mobile Communications operations 32.0% 28.5
Operating income
Telephone operations 71.8% 81.3
Mobile Communications operations 28.2% 18.7
Telephone Operations
Three months
ended June 30
---------------
1995 1994
------ ------
(Dollars in thousands)
Operating revenues
Local service $ 27,638 23,967
Network access and
long distance 62,571 60,018
Other 11,648 10,984
------- -------
101,857 94,969
------- -------
Operating expenses
Plant operations 21,039 20,377
Customer operations 9,940 8,356
Corporate and other 15,245 14,584
Depreciation and amortization 20,608 17,756
------- -------
66,832 61,073
------- -------
Operating income $ 35,025 33,896
======= =======
Telephone operating income increased $1.1 million (3.3%) due to an
increase in operating revenues of $6.9 million (7.3%) which more than
offset an increase in operating expenses of $5.8 million (9.4%).
The increase in revenues was primarily due to a $1.3 million increase
in amounts received from the Federal Communications Commission mandated
Universal Service Fund; a $1.9 million contribution to revenues from a
local exchange telephone company acquired during the first quarter of
1995; $1.6 million from increased rates for basic services which was
partially offset by an $839,000 decrease in intrastate high cost
assistance revenues; a $1.1 million increase in revenues as a result of an
increase in the number of customer access lines; and a $919,000 increase
in the partial recovery of increased operating expenses through revenue
pools in which the Company participates with other telephone companies.
During the second quarter of 1995, operating expenses, exclusive of
depreciation and amortization, were $2.9 million (6.7%) higher than during
the second quarter of 1994. Approximately $1.1 million of the increase
was attributable to a one-time reduction in expenses recorded in the
second quarter of 1994 due to a reduction (as a result of the death of a
former executive officer) in the Company's liability for long-term
disability. Of the remaining $1.8 million, approximately $1.1 million was
due to added expenses resulting from the acquisition of a local exchange
telephone company and approximately $700,000 was due to increases in other
general operating expenses.
Depreciation and amortization increased $2.9 million (16.1%) which
included $1.2 million of depreciation due to higher recurring rates
approved in 1994 or anticipated to 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 June 30
---------------
1995 1994
------ ------
(Dollars in thousands)
Operating revenues
Cellular service $46,422 34,954
Equipment and other 1,455 2,957
------ ------
47,877 37,911
------ ------
Operating expenses
Cost of sales and other operating expenses 9,580 8,119
General, administrative and customer
service 9,068 8,503
Sales and marketing 9,380 8,294
Depreciation and amortization 6,062 5,178
------ ------
34,090 30,094
------ ------
Operating income $13,787 7,817
====== ======
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
($1.9 million during the second quarter of 1995 and $857,000 during the
second 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 ($3.4 million during both the three months ended June
30, 1995 and 1994) is reflected in "Income from unconsolidated cellular
entities" on the Company's consolidated statements of income.
Mobile communications operating income increased $6.0 million
(76.4%) to $13.8 million in the second quarter of 1995 from $7.8 million
in the second quarter of 1994. Mobile communications operating revenues
increased $10.0 million (26.3%) which more than offset an increase in
operating expenses of $4.0 million (13.3%).
The increase in cellular service revenues was substantially due to
an increase in the number of cellular units in service. The average
number of cellular units in service in majority-owned markets during the
second quarter of 1995 and 1994 was 232,300 and 169,000, respectively.
The average monthly cellular service revenue per customer declined
to $67 during the second quarter of 1995 from $69 during the second
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 $1.5 million during
the second quarter of 1995 from $3.0 million during the second quarter of
1994, substantially because the second quarter of 1994 included $930,000
of revenues applicable to the Company's paging operations which were sold
in October 1994. Revenues from the sale of cellular phones decreased
$572,000 in the second quarter of 1995 compared to the second quarter of
1994. Although the Company sold more phones in the second quarter of 1995
than in the second quarter of 1994, revenues decreased because of certain
promotions which were based on equipment discounting.
Cost of sales and other operating expenses during the second
quarter of 1995 increased $1.5 million substantially due to an $890,000
increase in cost of sales caused by an increase in the number of units
sold. The remaining increase was primarily due to costs incurred in
connection with providing service to a larger number of customers.
General, administrative and customer service expenses increased
$565,000 primarily due to costs associated with serving a larger
number of customers.
Sales and marketing costs increased $1.1 million partially due to
a $430,000 increase in the costs of sales promotions. The remaining
increase was primarily due to an increase in commissions paid to
agents and employees for selling cellular service to new customers.
Depreciation and amortization increased $884,000 (17.1%) due
primarily to a higher level of plant in service.
Interest Expense
Interest expense decreased $373,000 (3.4%) during the second
quarter of 1995 compared to the second 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 $3.4 million in both the second
quarter of 1995 and the second quarter of 1994. In the second quarter of
1995, the Company recorded a $1.0 million 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. This unfavorable adjustment
was offset by improved profitability, exclusive of the above mentioned
adjustment, in the cellular entities in which the Company owns less than a
majority interest.
Minority Interest
The increased profitability during the second quarter of 1995 of
the Company's majority-owned and operated cellular entities resulted in
a corresponding increase of $1.0 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 second quarter of 1995 was $2.1
million compared to $795,000 during the second quarter of 1994. The
results of operations of subsidiaries of the Company which are not
included in the telephone or mobile communications operations increased
$956,000 in the second quarter of 1995 compared to the second quarter of
1994 primarily as a result of a $600,000 non-recurring charge against
earnings during the second quarter of 1994. Interest income increased
$373,000 in the second quarter of 1995, substantially all of which was due
to interest on a $25.0 million note receivable issued to Century in May
1994.
Income Tax Expense
Income tax expense increased $3.0 million (23.9%) during the
second quarter of 1995 compared to the second quarter of 1994 primarily
due to the increase in income before taxes.
Six Months Ended June 30, 1995 Compared
to Six Months Ended June 30, 1994
Net income for the first six months of 1995 increased $12.5
million (30.7%) to $53.2 million from $40.7 million during the first six
months of 1994. The increase was principally due to an $18.8 million
increase in operating income (of which $14.2 million was applicable to the
Company's mobile communications operations) and a $5.9 million pre-tax
gain on the sale of certain non-strategic cellular entities, which were
partially offset by, among other things, an increase in income tax expense
of $10.8 million. Fully diluted earnings per share increased to $.92 for
the six months ended June 30, 1995 from $.74 during the six months ended
June 30, 1994, a 24.3% increase.
Six months
ended June 30
---------------
1995 1994
------ ------
(Dollars in thousands,
except per share amounts)
Operating income
Telephone $69,370 64,786
Mobile Communications 26,998 12,813
------ ------
96,368 77,599
Interest expense (21,847) (19,326)
Income from unconsolidated cellular entities 8,098 5,975
Gain on sales of assets 5,909 -
Minority interest (3,841) (1,555)
Other income and expense 2,975 1,684
Income tax expense (34,495) (23,691)
------ ------
Net income $53,167 40,686
====== ======
Fully diluted earnings per share $ .92 .74
====== ======
Contributions to operating revenues and operating income by the
Company's telephone operations and mobile communications operations
for the six months ended June 30, 1995 and 1994 were as follows:
Six months
ended June 30
---------------
1995 1994
------ ------
Operating revenues
Telephone operations 69.2% 73.6
Mobile Communications operations 30.8% 26.4
Operating income
Telephone operations 72.0% 83.5
Mobile Communications operations 28.0% 16.5
Telephone Operations
Six months
ended June 30
---------------
1995 1994
------ ------
(Dollars in thousands)
Operating revenues
Local service $ 54,478 47,472
Network access and long distance 124,156 117,925
Other 23,499 21,342
------- -------
202,133 186,739
------- -------
Operating expenses
Plant operations 42,674 41,590
Customer operations 19,090 16,864
Corporate and other 30,120 28,688
Depreciation and amortization 40,879 34,811
------- -------
132,763 121,953
------- -------
Operating income $ 69,370 64,786
======= =======
Telephone operating income increased $4.6 million (7.1%) due
to an increase in operating revenues of $15.4 million (8.2%) which more
than offset an increase in operating expenses of $10.8 million (8.9%).
The increase in revenues was primarily due to a $3.5 million
increase in amounts received from the Federal Communications Commission
mandated Universal Service Fund; a $4.1 million contribution to revenues
from two local exchange telephone companies acquired in 1994 and 1995;
$3.2 million from increased rates for basic services which was partially
offset by a $1.6 million decrease in intrastate high cost assistance
revenues; a $1.9 million increase in revenues as a result of an increase
in the number of customer access lines; and a $1.1 million increase in the
partial recovery of increased operating expenses through revenue pools in
which the Company participates with other telephone companies.
During the first six months of 1995, operating expenses, exclusive
of depreciation and amortization, increased $4.7 million (5.4%)
partially due to $2.2 million of expenses incurred as a result of the
acquisition of two local exchange telephone companies. Operating expenses
were $1.1 million higher during the first six months of 1995 as a result
of 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. The remaining increase was primarily due to an increase in
other general operating expenses.
Depreciation and amortization increased $6.1 million (17.4%) which
included $2.8 million of depreciation due to higher recurring rates approved
in 1994 or anticipated to 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
Six months
ended June 30
---------------
1995 1994
------ ------
(Dollars in thousands)
Operating revenues
Cellular service $87,243 62,029
Equipment and other 2,783 5,092
------ ------
90,026 67,121
------ ------
Operating expenses
Cost of sales and other operating expenses 17,112 14,497
General, administrative and customer service 17,848 15,683
Sales and marketing 16,424 14,572
Depreciation and amortization 11,644 9,556
------ ------
63,028 54,308
------ ------
Operating income $26,998 12,813
====== ======
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 ($3.8 million during the first six
months of 1995 and $1.6 million during the first six 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 ($8.1
million and $6.0 million during the six months ended June 30, 1995 and
1994, respectively) is reflected in "Income from unconsolidated cellular
entities" on the Company's consolidated statements of income.
Mobile communications operating income increased $14.2 million
(110.7%) to $27.0 million in the first six months of 1995 from $12.8
million in the first six months of 1994. Mobile communications operating
revenues increased $22.9 million (34.1%) which more than offset an increase
in operating expenses of $8.7 million (16.1%).
The increase in cellular service revenues was substantially due
to (i) an increase in the number of cellular units in service and (ii)
a $5.8 million increase in revenues generated by Celutel. Celutel was
acquired on February 10, 1994; accordingly, the six months ended June 30,
1995 included six months of revenues applicable to Celutel while the six
months ended June 30, 1994 included only revenues recorded subsequent to
the acquisition date. The average number of cellular units in service in
majority-owned markets during the first six months of 1995 and 1994 was
224,500 and 152,800, respectively.
The average monthly cellular service revenue per customer
declined to $65 during the first six months of 1995 from $68 during the
first six 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.
Equipment and other revenues decreased $2.3 million to $2.8 million
during the six months ended June 30, 1995 compared to $5.1 million
during the six months ended June 30, 1994. The six months ended June 30,
1994 included $1.9 million of revenues applicable to the Company's paging
operations which were sold in October 1994. Revenues from the sale of
cellular phones decreased $431,000 during the first six months of 1995
compared to the first six months of 1994. Although the Company sold more
phones in the first six months of 1995 than in the first six months of
1994, revenues decreased because of certain promotions which were based on
equipment discounting.
Cost of sales and other operating expenses during the first six
months of 1995 increased $2.6 million substantially as a result of a $1.4
million increase in cost of sales caused by an increase in the number
of units sold. The remaining increase was primarily due to costs incurred
in connection with providing service to a larger number of customers.
General, administrative and customer service expenses increased
$2.2 million primarily due to the costs associated with serving a larger
number of customers.
Sales and marketing expenses increased $1.9 million primarily due
to a $1.1 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 $2.1 million (21.9%)
due primarily to a higher level of plant in service.
Interest Expense
Interest expense increased $2.5 million (13.0%) during the first
six months of 1995 compared to the first six months of 1994 primarily due
to the effect of higher average interest rates which increased interest
expense $3.6 million. Such increase was partially offset by a decrease in
interest expense due to a decrease in average debt outstanding. The
decrease in average debt outstanding was partially 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 $2.1 million (35.5%) during
the first six months of 1995 compared to the first six 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 six 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.
Minority Interest
The increased profitability during the first six months of
1995 of the Company's majority-owned and operated cellular entities
resulted in a corresponding increase of $2.3 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 six months of 1995 was
$3.0 million compared to $1.7 million during the first six months of 1994.
Interest income increased $995,000 in the first six months of 1995,
substantially all of which was due to interest income on a $25.0 million
note receivable issued to Century in May 1994. For additional information
on other income and expense, see Three Months Ended June 30, 1995 Compared
to Three Months Ended June 30, 1994 - Other Income and Expense.
Income Tax Expense
Income tax expense increased $10.8 million (45.6%) during the
first six months of 1995 compared to the first six months of 1994
primarily due to the increase in income before taxes. The effective
income tax rate for the first six 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 $101.1 million
during the first six months of 1995 compared to $90.5 million during the
first six 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 $98.7 million and
$175.9 million for the six months ended June 30, 1995 and 1994,
respectively. Cash used in connection with the Celutel acquisition during
the first six months of 1994 was $54.8 million. Payments for property,
plant and equipment were $8.0 million more in the first six months of 1995
than in the comparable period during 1994. Capital expenditures for the
six months ended June 30, 1995 were $61.2 million for telephone
operations, $26.4 million for mobile communications operations and $11.6
million for other operations. The $98.7 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.
Net cash used in financing activities was $3.3 million
during the first six months of 1995; net cash provided by financing
activities was $100.3 million during the first six months of 1994. Net
borrowings, including notes payable and long-term debt, were $2.7 million
during the first six months of 1995 compared to net borrowings of $107.0
million during the first six months of 1994. During the first six 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 $15.0 million for other operations.
As of June 30, 1995, Century's telephone subsidiaries had
available for use $160.8 million of commitments for long-term financing
from the Rural Utilities Service ("RUS") and the Company had $72.1 million
of undrawn committed bank lines of credit. In addition, approximately
$19.5 million of uncommitted credit facilities were available to Century
at June 30, 1995. The Company also has access to debt and equity capital
markets. Applications for additional long-term financing for Century's
telephone subsidiaries have been filed with the RUS and are in various
stages of processing. 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 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 currently in effect for South Central Bell. 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
have each recently passed separate telecommunications bills that propose
to substantially alter the regulatory framework of the telecommunications
industry by, among other things, promoting deregulation and local exchange
competition. The bills will not become law until their conflicting terms
can be reconciled and consolidated into a single bill by a conference
committee composed of members of the House and Senate, which must be
approved by both chambers and signed or otherwise allowed to take effect
by President Clinton. 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 the proposals and policy changes relating to
certain federal high cost assistance mechanisms, 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.
PART II. OTHER INFORMATION
CENTURY TELEPHONE ENTERPRISES, INC.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders held on May 11, 1995,
the shareholders elected five Class I directors and approved each of the
proposals set forth in the Company's proxy statement dated March 24, 1995.
The following number of votes were cast for or were withheld from the
following nominees:
Class I Nominees For Withheld
------------------------------------------------------------------------------
William R. Boles, Jr. 117,779,152 2,696,924
W. Bruce Hanks 118,909,569 1,566,507
C. G. Melville, Jr. 118,790,197 1,685,879
Glen F. Post, III 118,869,610 1,606,466
Clarke M. Williams 119,343,843 1,132,233
The following number of votes were cast in the manner indicated below
with respect to the following proposals.
Broker
For Against Abstain Non-Votes
---------------------------------------------
Proposal to amend
the Company's articles
of incorporation to:
(1) increase the number
of authorized shares
of common stock to
175 million shares; 110,843,212 8,502,201 1,130,663 -
(2) clarify and expand the
protections currently
afforded under the
Company's "fair price"
article by:
(A) clarifying the
definition of
Related Person; 107,118,232 7,456,329 1,478,281 4,423,234
and
(B) clarifying the
definition of
Business
Combinations; 110,159,192 4,421,773 1,471,877 4,423,234
and
(3) clarify, simplify and
update the articles by:
(A) adding a new article
regarding directors'
qualifications; 116,779,360 2,611,072 1,085,644 -
(B) clarifying the
Board's authority to
limit management's
liability; 113,649,701 5,393,768 1,432,607 -
(C) deleting a provision
mandating the use
of stock
certificates; 108,227,037 5,804,946 2,020,859 4,423,234
(D) adding a clarifying
definition of total
voting power; 112,869,159 1,581,276 1,602,407 4,423,234
and
(E) adding a clarifying
definition of capital
stock. 111,822,774 2,793,981 1,436,087 4,423,234
Proposal to approve the
Company's 1995 Incentive
Compensation Plan 103,198,683 14,542,436 2,734,957 -
Item 5. Other Information
On May 23, 1995, the Board of Directors amended the Company's bylaws to
conform them to the amendments to the Company's articles of incorporation
described in Item 4 above and to effect various other changes. Among these
changes was the addition of a bylaw requiring shareholders of record who
wish to nominate directors or submit other matters for consideration at
shareholders' meetings to provide timely advance written notice to the
Company (the "Advance Notice Bylaw"). Subject to certain exceptions, to be
timely the notice must be received by the Company not less than 70 days nor
more than 210 days prior to the anniversary date of the previous year's
annual meeting.
The notice to the Company from a shareholder intending to nominate a
person for election as a director or to propose other matters at a
shareholders' meeting must contain certain information, including the name,
age and address of the shareholder proposing such action and any persons
acting in concert with such shareholder and a representation by such
shareholder that such shareholder is a holder of record of the Company's
capital stock and intends to appear at the meeting in person to make the
nomination or propose the specified matter. In the case of nominations for
directors, the notice must also include (i) the name, age, address and
principal occupation of each nominee, (ii) a description of all
arrangements between the nominating shareholder and each nominee, (iii)
other information required to be included in a proxy statement pursuant to
the proxy rules of the Securities and Exchange Commission, and (iv) the
consent of each nominee to serve as director of the Company if elected and
an affidavit that such nominee meets all applicable qualifications to serve
as a director. In the case of other proposed business, the shareholder's
notice must set forth a description of the business, the reasons for
conducting such business at the meeting and any material interest of the
shareholder therein. The chairman of the meeting will have the power to
disregard any nomination or other matter that fails to comply with these
procedures.
With respect to proposals by shareholders to propose matters other than
the nomination of directors, the Advance Notice Bylaw permits the Company
to disregard proposals that (i) are substantially duplicative of a prior-
received proposal to be voted upon at the upcoming meeting, (ii) deal with
substantially the same subject matter as a prior proposal that was voted
upon within the preceding five years and which failed to receive
affirmative votes in excess of certain specified levels, or (iii) in the
judgment of the Board of Directors are not proper subjects for action by
shareholders under Louisiana law.
Nothing in the Advance Notice Bylaw will affect the rights of
shareholders under the proxy rules of the Securities and Exchange
Commission to request that their proposals be included in the Company's
proxy statement or to solicit their own proxies. Shareholders who desire
to pursue these rights at future shareholders' meetings will be required to
comply with both the Advance Notice Bylaw and the federal proxy rules.
Under the terms of the Advance Notice Bylaw, shareholders of record who
wish to nominate directors or submit other matters for consideration at the
Company's 1996 annual meeting of shareholders must submit their notice to
Harvey P. Perry, Secretary of the Company. To be timely, this notice must
be received by the Company between October 13, 1995 and March 4, 1996
(assuming, as expected, that the 1996 annual meeting of shareholders will
be held not more than 30 days earlier or later than May 11, 1996). In
order to be considered for inclusion in the Company's 1996 proxy materials
relating to this meeting pursuant to the federal proxy rules, shareholder
proposals must be received by the Company on or before November 25, 1995.
At its May 23, 1995 meeting, the Board of Directors also adopted a
bylaw to opt-out of the Louisiana Control Share Statute. This statute,
which was enacted in 1987, generally disenfranchises any person who
acquires or proposes to acquire more than 20% of Century's voting power
unless Century's shareholders re-enfranchise his shares at a shareholder
meeting called for this purpose. Given the protections against unfavorable
takeovers afforded under the Company's rights agreement, articles of
incorporation and bylaws, the Board of Directors believes the potential
protections of the Louisiana Control Share Statute are no longer necessary.
Moreover, unlike the Company's rights agreement and other similar
provisions, which are intended to encourage any person desiring to acquire
a controlling interest in the Company to do so through a transaction
negotiated with the Board, the Louisiana Control Share Statute may give
such person a right to convene promptly a shareholder meeting. The
convening of such a meeting may frustrate the ability of the Board to
control the timing and scope of the proposed transaction, which may reduce
the Board's ability, among other things, to represent the interests of all
the Company's shareholders, to consider the impact of the proposed
transaction on the Company's long-term plans and to negotiate the best
possible terms for the shareholders. For these reasons, the Board of
Directors determined that it is in the best interests of the Company and
its shareholders to opt-out of the Louisiana Control Share Statute.
Although not currently anticipated, the Board could, if warranted by a
change in circumstances, opt back into the statute by rescinding its May 23
bylaw, subject to any required regulatory approvals.
The full text of the Company's bylaws, as amended through May 23, 1995,
has been filed as Exhibit 4.2 to Century's Form S-8 which was filed with
the Securities and Exchange Commission on June 7, 1995.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
3(i) Amended and Restated Articles of Incorporation of
Registrant (incorporated by reference to Exhibit 4.1 to
Registration No. 33-60061).
3(ii) Bylaws of Registrant as amended through May 23, 1995
(incorporated by reference to Exhibit 4.2 to Registration
No. 33-60061).
10.1 Form of Severance Agreement, as amended and restated as
of May 23, 1995, by and between Registrant and each of
its executive officers other than Clarke M. Williams.
10.2 Form of Severance Agreement dated May 23, 1995, by and
between Registrant and seven of its officers who are not
executive officers.
10.3 Deferred Compensation Plan for Outside Directors.
10.4 Amendment to the Century Telephone Enterprises, Inc.
Stock Bonus Plan, PAYSOP and Trust.
10.5 Form of Stock Option Agreement, pursuant to 1995
Incentive Compensation Plan and dated as of May 22, 1995,
entered into by Registrant and its officers.
10.6 Form of Stock Option Agreement, pursuant to 1995
Incentive Compensation Plan and dated as of June 23,
1995, entered into by Registrant and certain key
employees.
10.7 Registrant's 1995 Incentive Compensation Plan
(incorporated by reference to Exhibit 4.4 to Registration
No. 33-60061).
11 Computations of Earnings Per Share.
27 Financial Data Schedule.
B. Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended June 30, 1995.
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: August 7, 1995 /s/ Murray H. Greer
---------------
Murray H. Greer
Controller
(Principal Accounting Officer)
CENTURY TELEPHONE ENTERPRISES, INC.
INDEX TO EXHIBITS
Exhibit
Number
-------
3(i) Amended and Restated Articles of Incorporation of Registrant
(incorporated by reference to Exhibit 4.1 to Registration No. 33-
60061).
3(ii) Bylaws of Registrant as amended through May 23, 1995 (incorporated
by reference to Exhibit 4.2 to Registration No. 33-60061).
10.1 Form of Severance Agreement, as amended and restated as of May 23,
1995, by and between Registrant and each of its executive officers
other than Clarke M. Williams, included herein.
10.2 Form of Severance Agreement dated May 23, 1995, by and between
Registrant and seven of its officers who are not executive
officers, included herein.
10.3 Deferred Compensation Plan for Outside Directors, included herein.
10.4 Amendment to the Century Telephone Enterprises, Inc. Stock Bonus
Plan, PAYSOP and Trust, included herein.
10.5 Form of Stock Option Agreement, pursuant to 1995 Incentive
Compensation Plan and dated as of May 22, 1995, entered into by
Registrant and its officers, included herein.
10.6 Form of Stock Option Agreement, pursuant to 1995 Incentive
Compensation Plan and dated as of June 23, 1995, entered into by
Registrant and certain key employees, included herein.
10.7 Registrant's 1995 Incentive Compensation Plan (incorporated by
reference to Exhibit 4.4 to Registration No. 33-60061).
11 Computations of Earnings Per Share, included herein.
27 Financial Data Schedule, included herein.