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, 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.
(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, 1996, there were 59,719,447 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, 1996 and 1995 3
Consolidated Balance Sheets--June 30, 1996 and
December 31, 1995 4
Consolidated Statements of Stockholders' Equity--
Six Months Ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows--
Six Months Ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-20
Part II. Other Information:
Submission of Matters To a Vote of Security Holders 21
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 Six months
ended June 30 ended June 30
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Dollars, except per share
amounts, and shares
expressed in thousands)
OPERATING REVENUES
Telephone $111,403 102,264 222,034 202,827
Mobile Communications 63,588 47,877 118,592 90,026
Other 11,547 6,674 21,726 12,741
-------- -------- -------- --------
Total operating revenues 186,538 156,815 362,352 305,594
-------- -------- -------- --------
OPERATING EXPENSES
Cost of sales and
operating expenses 96,421 79,881 185,981 154,541
Depreciation and
amortization 32,420 27,252 63,159 53,410
-------- -------- -------- --------
Total operating expenses 128,841 107,133 249,140 207,951
-------- -------- -------- --------
OPERATING INCOME 57,697 49,682 113,212 97,643
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense (11,353) (10,451) (22,949) (21,847)
Income from unconsolidated
cellular entities 6,960 3,374 12,594 8,098
Gain on sales of assets - - - 5,909
Minority interest (1,973) (1,895) (4,529) (3,841)
Other income and expense 910 1,257 1,057 1,700
-------- -------- -------- --------
Total other income
(expense) (5,456) (7,715) (13,827) (9,981)
-------- -------- -------- --------
INCOME BEFORE INCOME TAX
EXPENSE 52,241 41,967 99,385 87,662
Income tax expense 19,300 15,800 36,779 34,495
-------- -------- -------- --------
NET INCOME $ 32,941 26,167 62,606 53,167
======== ======== ======== ========
PRIMARY EARNINGS PER SHARE $ .55 .45 1.05 .93
======== ======== ======== ========
FULLY DILUTED EARNINGS PER
SHARE $ .55 .45 1.04 .92
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE $ .09 .0825 .18 .165
======== ======== ======== ========
AVERAGE PRIMARY SHARES
OUTSTANDING 59,969 58,453 59,723 57,318
======== ======== ======== ========
AVERAGE FULLY DILUTED SHARES
OUTSTANDING 60,695 58,659 60,449 58,659
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1996 1995
----------- ------------
(Dollars in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 13,892 8,540
Accounts receivable
Customers, less allowance of
$3,404 and $2,768 56,759 50,943
Other 25,222 24,219
Materials and supplies, at average cost 6,364 6,608
Other 5,102 5,019
------------ ------------
107,339 95,329
------------ ------------
NET PROPERTY, PLANT AND EQUIPMENT 1,090,439 1,047,808
------------ ------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired,
less accumulated amortization of
$59,936 and $52,944 512,782 493,655
Other 224,554 225,629
------------ ------------
737,336 719,284
------------ ------------
$ 1,935,114 1,862,421
============ ============
LIABILITIES AND EQUITY
- ----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 17,367 15,325
Notes payable - 14,199
Accounts payable 49,985 55,329
Accrued expenses and other liabilities
Salaries and benefits 19,316 18,178
Taxes 15,172 12,489
Interest 5,568 6,024
Other 7,271 5,337
Advance billings and customer deposits 14,540 13,043
------------ ------------
129,219 139,924
------------ ------------
LONG-TERM DEBT 621,422 622,904
------------ ------------
DEFERRED CREDITS AND OTHER LIABILITIES 218,622 211,169
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
175,000,000 shares, issued and outstanding
59,707,961 and 59,113,670 shares 59,708 59,114
Paid-in capital 469,333 453,584
Retained earnings 439,214 387,424
Unearned ESOP shares (12,520) (13,960)
Preferred stock - non-redeemable 10,116 2,262
------------ ------------
965,851 888,424
------------ ------------
$ 1,935,114 1,862,421
============ ============
See accompanying notes to consolidated financial statements.
4
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six months
ended June 30
----------------------
1996 1995
-------- --------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 59,114 53,574
Issuance of common stock for acquisitions 257 -
Conversion of debentures into common stock - 4,540
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 306 254
Conversion of preferred stock into common stock 31 -
-------- --------
Balance at end of period 59,708 58,368
-------- --------
PAID-IN CAPITAL
Balance at beginning of period 453,584 319,235
Issuance of common stock for acquisitions 8,201 -
Conversion of debentures into common stock - 108,596
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 6,720 3,479
Amortization of unearned compensation and other 738 439
Conversion of preferred stock into common stock 90 -
-------- --------
Balance at end of period 469,333 431,749
-------- --------
RETAINED EARNINGS
Balance at beginning of period 387,424 291,999
Net income 62,606 53,167
Cash dividends declared
Common stock-$.18 and $.165 per share,
respectively (10,652) (9,552)
Preferred stock (164) (61)
-------- --------
Balance at end of period 439,214 335,553
-------- --------
UNEARNED ESOP SHARES
Balance at beginning of period (13,960) (16,840)
Release of ESOP shares 1,440 1,440
-------- --------
Balance at end of period (12,520) (15,400)
-------- --------
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 (121) -
-------- --------
Balance at end of period 10,116 2,268
-------- --------
TOTAL STOCKHOLDERS' EQUITY $965,851 812,538
======== ========
See accompanying notes to consolidated financial statements.
5
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months
ended June 30
---------------------
1996 1995
-------- --------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 62,606 53,167
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 63,159 53,410
Deferred income taxes 2,893 2,055
Income from unconsolidated cellular entities (12,594) (8,098)
Minority interest 4,529 3,841
Loss on investment in unconsolidated personal
communications services entity 1,100 -
Gain on sales of assets - (5,909)
Changes in current assets and current liabilities:
Increase in accounts receivable (6,593) (2,905)
Increase (decrease) in accounts payable (5,438) 673
Increase (decrease) in other accrued taxes 2,544 (952)
Changes in other current assets and other
current liabilities, net 5,983 (1,229)
Increase in other noncurrent liabilities 3,570 2,258
Other, net 3,841 4,772
-------- --------
Net cash provided by operating activities 125,600 101,083
-------- --------
INVESTING ACTIVITIES
Payments for property, plant and equipment (99,321) (98,438)
Acquisitions, net of cash acquired (17,022) (6,009)
Proceeds from sales of assets - 17,922
Reimbursement of investment in unconsolidated
personal communications services entity 18,900 -
Investments in unconsolidated cellular entities (744) (7,044)
Distributions from unconsolidated cellular entities 5,129 1,386
Purchase of life insurance investment (5,248) (6,409)
Other, net 1,368 (156)
-------- --------
Net cash used in investing activities (96,938) (98,748)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 45,395 6,498
Payments of long-term debt (50,822) (5,310)
Notes payable, net (14,199) 1,500
Proceeds from issuance of common stock 7,011 3,496
Cash dividends (10,816) (9,613)
Other, net 121 90
-------- --------
Net cash used in financing activities (23,310) (3,339)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,352 (1,004)
Cash and cash equivalents at beginning of period 8,540 7,154
-------- --------
Cash and cash equivalents at end of period $ 13,892 6,150
======== ========
Supplemental cash flow information:
Income taxes paid $ 34,851 34,672
======== ========
Interest paid $ 23,405 24,923
======== ========
See accompanying notes to consolidated financial statements.
6
CENTURY TELEPHONE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six months
ended June 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 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,
1996 1995
---------- -----------
(Dollars in thousands)
Telephone, at original cost $1,252,035 1,207,347
Accumulated depreciation (393,573) (357,633)
---------- ----------
858,462 849,714
---------- ----------
Mobile Communications, at cost 230,838 191,594
Accumulated depreciation (65,218) (54,927)
---------- ----------
165,620 136,667
---------- ----------
Corporate and other, at cost 106,990 100,613
Accumulated depreciation (40,633) (39,186)
---------- ----------
66,357 61,427
---------- ----------
$1,090,439 1,047,808
========== ==========
7
(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 June 30, 1996
and 1995) were accounted for by the equity method.
Six months
ended June 30
--------------------
1996 1995
-------- --------
(Dollars in thousands)
Results of operations
Revenues $459,275 336,812
Operating income $142,288 111,677
Net income $143,132 112,833
(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 effect of
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.
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 six months ended June 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 June 30, 1996 Compared
to Three Months Ended June 30, 1995
Net income for the second quarter of 1996 was $32.9 million compared to
$26.2 million during the second quarter of 1995, a 25.9% increase. Operating
income increased $8.0 million and income from unconsolidated cellular entities
increased $3.6 million. Such increases were partially offset by, among other
things, a $3.5 million increase in income tax expense.
Three months
ended June 30
-----------------------
1996 1995
------- -------
(Dollars, except per
share amounts, and
shares in thousands)
Operating income
Telephone $37,796 35,025
Mobile Communications 19,782 13,787
Other 119 870
------- -------
57,697 49,682
Interest expense (11,353) (10,451)
Income from unconsolidated cellular entities 6,960 3,374
Minority interest (1,973) (1,895)
Other income and expense 910 1,257
Income tax expense (19,300) (15,800)
------- -------
Net income $32,941 26,167
======= =======
Fully diluted earnings per share $ .55 .45
======= =======
Average fully diluted shares outstanding 60,695 58,659
======= =======
Fully diluted earnings per share increased to $.55 for the three months
ended June 30, 1996 from $.45 during the three months ended June 30, 1995, a
22.2% increase. The average number of fully diluted shares outstanding increased
3.5%, primarily as a result of shares issued for acquisitions and through the
Company's dividend reinvestment, incentive and benefit plans.
9
Contributions to operating revenues and operating income by the
Company's telephone, mobile communications, and other operations for the three
months ended June 30, 1996 and 1995 were as follows:
Three months
ended June 30
------------------
1996 1995
------- -------
Operating revenues
Telephone operations 59.7% 65.2
Mobile Communications operations 34.1% 30.5
Other operations 6.2% 4.3
Operating income
Telephone operations 65.5% 70.5
Mobile Communications operations 34.3% 27.8
Other operations .2% 1.7
Telephone Operations
Three months
ended June 30
------------------
1996 1995
------- -------
(Dollars in thousands)
Operating revenues
Local service $30,209 27,638
Network access and long distance 68,338 62,571
Other 12,856 12,055
------- -------
111,403 102,264
------- -------
Operating expenses
Plant operations 22,318 21,039
Customer operations 10,917 9,940
Corporate and other 16,603 15,652
Depreciation and amortization 23,769 20,608
------- -------
73,607 67,239
------- -------
Operating income $37,796 35,025
======= =======
Telephone operating income increased $2.8 million (7.9%) due to an
increase in operating revenues of $9.1 million (8.9%) which more than offset an
increase in operating expenses of $6.4 million (9.5%).
The $9.1 million increase in revenues was substantially due to a $3.4
million increase in revenues based on minutes of use, of which approximately
$1.2 million was associated with a change, effective in the third quarter of
1995, in the methodology applied in the network access revenue billing process.
As the intrastate switched access rate reduction in Louisiana continues to be
phased in as discussed below, future access revenues will be reduced each
quarter up to approximately one-half of this $1.2 million amount in addition to
the reductions disclosed in the Company's Form 10-K for the year ended December
31, 1995. Also contributing to the $9.1 million increase in revenues was a $1.6
million increase which resulted from the increase in the number of customer
access lines; a $1.6 million increase in amounts received from the Federal
Communications Commission mandated Universal Service Fund; a $1.3 million
increase in the partial recovery of increased operating expenses through revenue
pools in which the Company participates with other telephone companies; and a
$1.0 million increase in revenues related to leasing, selling, installing,
maintaining and repairing customer premise telecommunications equipment and
wiring ("CPE services"). 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 "Six Months Ended June 30, 1996 Compared to Six
Months Ended June 30, 1995 -- Telephone Operations."
10
During the second quarter of 1996, plant operations expenses increased
$1.3 million (6.1%), primarily due to a $526,000 increase in expenses related to
CPE services and a $530,000 increase in salaries and wages.
Customer operations expenses increased $977,000 (9.8%) in the second
quarter of 1996, primarily due to increases of $533,000 in salaries and wages
and $274,000 in expenses related to 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 $951,000 (6.1%) increase in corporate and other expenses,
$566,000 was attributable to increased operating taxes and $539,000 to the
provision of CPE services.
Depreciation and amortization increased $3.2 million (15.3%) primarily
due to higher levels of plant in service.
Mobile Communications Operations
Three months
ended June 30
------------------
1996 1995
------- -------
(Dollars in thousands)
Operating revenues
Cellular service $62,554 46,422
Equipment 1,034 1,455
------- -------
63,588 47,877
------- -------
Operating expenses
Cost of sales 2,865 2,553
Other operating expenses 9,457 7,027
General, administrative and customer
service 12,898 9,068
Sales and marketing 10,728 9,380
Depreciation and amortization 7,858 6,062
------- -------
43,806 34,090
------- -------
Operating income $19,782 13,787
======= =======
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
$2.0 million during the second quarter of 1996 and $1.9 million during the
second 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 (which is not included in the mobile
communications segment) is accounted for using the equity method and is
reflected in "Income from unconsolidated cellular entities." The Company's share
of income from such entities was $7.0 million and $3.4 million during the three
months ended June 30, 1996 and 1995, respectively. See Income from
Unconsolidated Cellular Entities for additional information.
Mobile communications operating income increased $6.0 million (43.5%) to
$19.8 million in the second quarter of 1996 from $13.8 million in the second
quarter of 1995. Mobile communications operating revenues increased $15.7
million (32.8%) which more than offset an increase in operating expenses of $9.7
million (28.5%).
11
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 second quarter of 1996
and 1995 was 316,100 and 232,300, respectively. Exclusive of acquisitions,
access and usage revenues increased $9.4 million in the second quarter of 1996
and roaming and toll revenues increased $4.1 million. Cellular operations
acquired during the last half of 1995 contributed $2.6 million of service
revenues during the second quarter of 1996.
The average monthly cellular service revenue per customer declined to
$66 during the second quarter of 1996 from $67 during the second 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.
Equipment revenues decreased $421,000 in the second quarter of 1996
compared to the second quarter of 1995. Although the Company sold more phones in
the second quarter of 1996 than in the second 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 sales
during the second quarter of 1996 resulted from the increase in the number of
cellular phones sold.
Other operating expenses increased $2.4 million (34.6%) in the second
quarter of 1996 primarily due to a $1.6 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 (such costs are
expected to increase as the Company continues to expand its reduced rate calling
areas) and (ii) cellular fraud. In addition, a $572,000 increase in
interconnection costs resulted primarily from the operation of new cell sites.
General, administrative and customer service expenses increased $3.8
million (42.2%) primarily due to increased expenses resulting from a larger
customer base, such as customer service and retention ($1.2 million), the
provision for doubtful accounts ($968,000) and general office expenses ($1.2
million).
Sales and marketing costs increased $1.3 million (14.4%) primarily due
to a $910,000 increase in costs incurred in selling the Company's products and
services in retail locations, including Company-owned retail stores. The
remaining increase was primarily due to an increase in advertising expense.
Depreciation and amortization increased $1.8 million (29.6%) due
primarily to a higher level of plant in service.
12
Other Operations
Other operations includes 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 $4.9
million (73.0%) increase in operating revenues, $2.9 million was applicable to
the long distance operations. Of the $5.6 million (96.9%) increase in operating
expenses, $2.5 million was incurred by the long distance operations. During the
second quarter of 1996, the operating loss of the Company's competitive access
subsidiary was $924,000 greater than in the second quarter of 1995.
Interest Expense
Interest expense increased $902,000 (8.6%) during the second quarter of
1996 compared to the second quarter of 1995 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 $3.6 million (106.3%) during the second
quarter of 1996 compared to the second quarter of 1995 due primarily to
improvement in profitability of the cellular entities in which the Company owns
less than a majority interest. In addition, the Company had recorded a $1.0
million reduction in earnings from unconsolidated cellular entities in the
second quarter of 1995 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.
Minority Interest
The increased profitability of the Company's majority-owned and operated
cellular entities resulted in a corresponding increase of $934,000 in the
expense recorded by the Company to reflect the minority interest owners' share
of the profits. Such increase in expense was substantially offset by the effect
of the Company acquiring, during the second quarter of 1996, an additional 25%
interest in a cellular partnership which the Company operates and thereby
decreasing the minority interest owners' share of such partnership.
Income Tax Expense
Income tax expense increased $3.5 million (22.2%) during the second
quarter of 1996 compared to the second quarter of 1995 primarily due to the
increase in income before taxes.
13
Six Months Ended June 30, 1996 Compared
to Six Months Ended June 30, 1995
Net income for the first six months of 1996 increased $9.4 million (17.8%)
to $62.6 million from $53.2 million during the first six months of 1995. The
increase was principally due to a $15.6 million increase in operating income.
During the first six months of 1995, the Company had recorded a $5.9 million
pre-tax gain on the sale of certain non-strategic cellular systems.
Six months
ended June 30
---------------------
1996 1995
-------- --------
(Dollars, except per
share amounts, and
shares in thousands)
Operating income
Telephone $ 76,415 69,370
Mobile Communications 35,952 26,998
Other 845 1,275
-------- --------
113,212 97,643
Interest expense (22,949) (21,847)
Income from unconsolidated cellular entities 12,594 8,098
Gain on sales of assets - 5,909
Minority interest (4,529) (3,841)
Other income and expense 1,057 1,700
Income tax expense (36,779) (34,495)
-------- --------
Net income $ 62,606 53,167
======== ========
Fully diluted earnings per share $ 1.04 .92
======== ========
Average fully diluted shares outstanding 60,449 58,659
======== ========
Fully diluted earnings per share increased to $1.04 for the six months
ended June 30, 1996 from $.92 during the six months ended June 30, 1995, a 13.0%
increase. The average number of fully diluted shares outstanding increased 3.1%,
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 six
months ended June 30, 1996 and 1995 were as follows:
Six months
ended June 30
---------------------
1996 1995
-------- --------
Operating revenues
Telephone operations 61.3% 66.4
Mobile Communications operations 32.7% 29.5
Other operations 6.0% 4.1
Operating income
Telephone operations 67.5% 71.0
Mobile Communications operations 31.8% 27.7
Other operations .7% 1.3
14
Telephone Operations
Six months
ended June 30
---------------------
1996 1995
-------- --------
(Dollars in thousands)
Operating revenues
Local service $ 59,294 54,478
Network access and
long distance 136,701 124,156
Other 26,039 24,193
-------- --------
222,034 202,827
-------- --------
Operating expenses
Plant operations 44,697 42,674
Customer operations 20,825 19,090
Corporate and other 33,417 30,814
Depreciation and amortization 46,680 40,879
-------- --------
145,619 133,457
-------- --------
Operating income $ 76,415 69,370
======== ========
Telephone operating income increased $7.0 million (10.2%) due to an
increase in operating revenues of $19.2 million (9.5%) which more than offset an
increase in operating expenses of $12.2 million (9.1%).
The $19.2 million increase in revenues was substantially due to a $6.3
million increase in revenues based on minutes of use, of which approximately
$2.4 million was associated with a change, effective in the third quarter of
1995, in the methodology applied in the network access revenue billing process.
As the intrastate switched access rate reduction in Louisiana continues to be
phased in as discussed below, future access revenues will be reduced during each
six-month period up to approximately one-half of this $2.4 million amount in
addition to the reductions disclosed in the Company's Form 10-K for the year
ended December 31, 1995. Also contributing to the $19.2 million increase in
revenues was a $3.2 million increase which resulted from the increase in the
number of customer access lines; a $3.2 million increase in amounts received
from the Federal Communications Commission mandated Universal Service Fund; a
$3.0 million increase in the partial recovery of increased operating expenses
through revenue pools in which the Company participates with other telephone
companies; and a $2.3 million increase in revenues related to CPE services.
These increases in revenues were partially offset by a $900,000
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. The Company anticipates certain other future revenue
reductions resulting primarily from regulatory changes and competitive
pressures. Based on all of these anticipated revenue reductions, the Company
expects its internal telephone revenue growth rate to slow during the upcoming
quarters.
During the first six months of 1996, plant operations expenses increased
$2.0 million (4.7%) primarily due to a $1.2 million increase in expenses related
to CPE services and a $487,000 increase in salaries and wages.
Customer operations expenses increased $1.7 million (9.1%) in the first
six months of 1996, primarily due to increases of $945,000 in salaries and wages
and $422,000 in expenses related to CPE services. A significant portion of the
increases in these customer operations expenses related to the Company's
increased sales and marketing efforts.
15
Of the $2.6 million (8.4%) increase in corporate and other expenses,
$1.2 million was attributable to increased operating taxes and $1.2 million to
the provision of CPE services.
Depreciation and amortization increased $5.8 million (14.2%) primarily
due to higher levels of plant in service.
Mobile Communications Operations
Six months
ended June 30
---------------------
1996 1995
-------- --------
(Dollars in thousands)
Operating revenues
Cellular service $116,597 87,243
Equipment 1,995 2,783
-------- --------
118,592 90,026
-------- --------
Operating expenses
Cost of sales 5,722 4,475
Other operating expenses 16,353 12,637
General, administrative and customer service 25,097 17,848
Sales and marketing 20,207 16,424
Depreciation and amortization 15,261 11,644
-------- --------
82,640 63,028
-------- --------
Operating income $ 35,952 26,998
======== ========
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
$4.5 million during the first six months of 1996 and $3.8 million during the
first six 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 (which is not included in the mobile
communications segment) is accounted for using the equity method and is
reflected in "Income from unconsolidated cellular entities." The Company's share
of income from such entities was $12.6 million and $8.1 million during the six
months ended June 30, 1996 and 1995, respectively. See Income from
Unconsolidated Cellular Entities for additional information.
Mobile communications operating income increased $9.0 million (33.2%) to
$36.0 million in the first six months of 1996 from $27.0 million in the first
six months of 1995. Mobile communications operating revenues increased $28.6
million (31.7%) which more than offset an increase in operating expenses of
$19.6 million (31.1%).
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 six months of 1996
and 1995 was 306,900 and 224,500, respectively. Exclusive of acquisitions,
access and usage revenues increased $17.6 million in the first six months of
1996 and roaming and toll revenues increased $6.4 million. Cellular operations
acquired during the last half of 1995 contributed $5.0 million of service
revenues during the first six months of 1996.
The average monthly cellular service revenue per customer declined to $63
during the first six months of 1996 from $65 during the first six 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
16
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.
Equipment revenues decreased $788,000 during the six months ended June 30,
1996 compared to the six months ended June 30, 1995. Although the Company sold
more phones in the first six months of 1996 than in the first six 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 sales during the first six months of 1996 resulted from the increase in the
number of cellular phones sold.
Other operating expenses increased $3.7 million (29.4%) during the six
months ended June 30, 1996 primarily due to a $2.6 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 (such
costs are expected to increase as the Company continues to expand its reduced
rate calling areas) and (ii) cellular fraud. In addition, a $1.1 million
increase in interconnection costs resulted primarily from the operation of new
cell sites.
General, administrative and customer service expenses increased $7.2
million (40.6%) primarily due to increased expenses resulting from a larger
customer base, such as customer service and retention ($2.3 million), the
provision for doubtful accounts ($1.8 million) and general office expenses ($2.1
million).
Sales and marketing expenses increased $3.8 million (23.0%) primarily due
to a $1.1 million increase in advertising and sales promotions expenses, a $1.1
million increase in commissions paid to agents and employees for selling
cellular service to new customers, and a $1.6 million increase in costs incurred
in selling products and services in retail locations, including Company-owned
retail stores.
Depreciation and amortization increased $3.6 million (31.1%) due primarily
to a higher level of plant in service.
Other Operations
Other operations includes 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 $9.0
million (70.5%) increase in operating revenues during the six months ended June
30, 1996 compared to the six months ended June 30, 1995, $6.1 million was
applicable to the long distance operations. Of the $9.4 million (82.1%) increase
in operating expenses, $4.7 million was incurred by the long distance
operations. During the first six months of 1996, the operating loss of the
Company's competitive access subsidiary was $1.2 million greater than during the
first six months of 1995.
17
Interest Expense
Interest expense increased $1.1 million (5.0%) during the first six months
of 1996 compared to the first six 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 $4.5 million (55.5%) during the first six months
of 1996 compared to the first six months of 1995 due primarily 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 had 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 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 resulted in a corresponding increase of $1.5 million in the
expense recorded by the Company to reflect the minority interest owners' share
of the profits. Such increase in expense was partially offset by the effect of
the Company acquiring, during the second quarter of 1996, an additional 25%
interest in a cellular partnership which the Company operates and thereby
decreasing the minority interest owners' share of such partnership.
Other Income and Expense
Other income and expense for the first six months of 1996 was $1.1 million
compared to $1.7 million during the first six 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 Federal Communications
Commission ("FCC") auction of one 30MHz Personal Communications Services ("PCS")
license for each Basic Trading Area. In April 1996, such entity withdrew from
participating in 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.
Income Tax Expense
Income tax expense increased $2.3 million (6.6%) during the first six
months of 1996 compared to the first six months of 1995 primarily due to the
increase in income before taxes. 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 six
months of 1995.
18
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 $125.6 million during the
first six months of 1996 compared to $101.1 million during the first six 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 $96.9 million and $98.7 million
for the six months ended June 30, 1996 and 1995, respectively. Capital
expenditures for the six months ended June 30, 1996 were $49.5 million for
telephone operations, $41.4 million for mobile communications operations and
$8.4 million for other operations. The $96.9 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
$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 systems.
Net cash used in financing activities was $23.3 million during the first
six months of 1996 compared to $3.3 million during the first six months of 1995.
Net payments of debt, including notes payable and long-term debt, were $22.3
million more during the first six months of 1996.
Budgeted capital expenditures for 1996 total $102 million for telephone
operations, $61 million for mobile communications operations and $26 million for
other operations.
The Company intends to participate in the upcoming FCC auction of 10MHz
PCS licenses.
In August 1996 Standard & Poor's upgraded Century's senior unsecured debt
rating from BBB+ to A-.
As of June 30, 1996, Century's telephone subsidiaries had available for
use $146.8 million of commitments for long-term financing from the Rural
Utilities Service ("RUS") and the Company had $111.6 million of undrawn
committed bank lines of credit. In addition, approximately $125.0 million of
uncommitted credit facilities were available to Century at June 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.
19
OTHER MATTERS
The Company currently accounts for its regulated telephone operations in
accordance with the provisions of Statement of Financial Accounting Standards
No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation."
While the ongoing applicability of SFAS 71 to the Company's telephone operations
is being monitored due to the changing regulatory, competitive and legislative
environments, the Company believes that SFAS 71 still applies to such
operations. However, it is possible that changes in regulation or legislation or
anticipated changes in competition or in the demand for regulated services or
products could result in the Company's telephone operations not being subject to
SFAS 71 in the near future. In that event, implementation of Statement of
Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated Enterprises -
Accounting for the Discontinuance of Application of FASB Statement No. 71,"
would require the write-off of previously established regulatory assets and
liabilities, along with an adjustment of certain accumulated depreciation
accounts to reflect the difference between recorded depreciation and the amount
of depreciation that would have been recorded had the Company's telephone
operations not been subject to rate regulation. Such discontinuance of the
application of SFAS 71 would result in a material, noncash charge against
earnings which would be reported as an extraordinary item. While the effect of
implementing SFAS 101 cannot be precisely estimated at this time, management
believes that the noncash, after-tax, extraordinary charge would be between $100
million and $150 million.
20
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 9, 1996,
the shareholders elected five Class II directors to serve for a term of three
years.
The following number of votes were cast for or were withheld from the
following nominees:
Class II Nominees For Withheld
------------------- ----------- ---------
Virginia Boulet 117,519,853 2,568,472
Ernest Butler, Jr. 116,306,737 3,781,588
James B. Gardner 117,101,241 2,987,084
R. L. Hargrove, Jr. 117,531,403 2,556,922
Johnny Hebert 114,809,428 5,278,897
The Class I and Class III directors whose terms continued after the meeting are:
Class I Class III
--------------------- ---------------
William R. Boles, Jr. Calvin Czeschin
W. Bruce Hanks F. Earl Hogan
C. G. Melville, Jr. Harvey P. Perry
Glen F. Post, III Jim D. Reppond
Clarke M. Williams
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
A. Exhibits
--------
10.1 Amendment, dated July 15, 1996, to Registrant's Stock
Bonus Plan, PAYSOP and Trust.
10.2 Amendment, dated July 15, 1996, to Registrant's Employee
Stock Ownership Plan and Trust.
10.3 Amendment, dated July 15, 1996, to Registrant's Dollars
and Sense Plan and Trust.
10.4 Amendment, dated July 15, 1996, to Registrant's
Supplemental Defined Contribution Plan, 1995 Amendment
and Restatement.
10.5 Amendment, dated July 18, 1996, to Registrant's
Supplemental Dollars and Sense Plan, 1995 Amendment and
Restatement.
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, 1996.
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: August 9, 1996 /s/ Murray H. Greer
-------------------
Murray H. Greer
Controller
(Principal Accounting Officer)
22
CENTURY TELEPHONE ENTERPRISES, INC.
INDEX TO EXHIBITS
Exhibit
Number
- -------
10.1 Amendment, dated July 15, 1996, to Registrant's Stock Bonus Plan,
PAYSOP and Trust, included herein.
10.2 Amendment, dated July 15, 1996, to Registrant's Employee Stock
Ownership Plan and Trust, included herein.
10.3 Amendment, dated July 15, 1996, to Registrant's Dollars and Sense
Plan and Trust, included herein.
10.4 Amendment, dated July 15, 1996, to Registrant's Supplemental
Defined Contribution Plan, 1995 Amendment and Restatement,
included herein.
10.5 Amendment, dated July 18, 1996, to Registrant's Supplemental
Dollars and Sense Plan, 1995 Amendment and Restatement, included
herein.
11 Computations of Earnings Per Share, included herein.
27 Financial Data Schedule, included herein.
23