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 March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-7784
CENTURY TELEPHONE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
100 Century Park Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (318) 388-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
As of April 30, 1998, there were 91,552,126 shares of common stock
outstanding.
CENTURY TELEPHONE ENTERPRISES, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income--Three Months
Ended March 31, 1998 and 1997 3
Consolidated Statements of Comprehensive Income--
Three Months Ended March 31, 1998 and 1997 4
Consolidated Balance Sheets--March 31, 1998 and
December 31, 1997 5
Consolidated Statements of Stockholders' Equity--
Three Months Ended March 31, 1998 and 1997 6
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
PART I. FINANCIAL INFORMATION
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months
ended March 31,
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
(Dollars, except per
share amounts, and
shares in thousands)
OPERATING REVENUES
Telephone $ 259,813 117,095
Wireless 94,166 65,839
Other 17,741 16,051
- ----------------------------------------------------------------------------
Total operating revenues 371,720 198,985
- ----------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses 182,394 105,962
Depreciation and amortization 79,194 35,325
- ----------------------------------------------------------------------------
Total operating expenses 261,588 141,287
- ----------------------------------------------------------------------------
OPERATING INCOME 110,132 57,698
- ----------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (42,809) (11,310)
Gain on sale or exchange of assets 24,343 -
Income from unconsolidated cellular entities 6,877 5,580
Minority interest (2,643) (364)
Other income and expense 604 1,234
- ----------------------------------------------------------------------------
Total other income (expense) (13,628) (4,860)
- ----------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 96,504 52,838
Income tax expense 38,810 19,703
- ----------------------------------------------------------------------------
NET INCOME $ 57,694 33,135
============================================================================
BASIC EARNINGS PER SHARE* $ .63 .37
============================================================================
DILUTED EARNINGS PER SHARE* $ .62 .37
============================================================================
DIVIDENDS PER COMMON SHARE* $ .065 .0617
============================================================================
AVERAGE BASIC SHARES OUTSTANDING* 90,961 89,526
============================================================================
AVERAGE DILUTED SHARES OUTSTANDING* 92,917 91,055
============================================================================
* Reflects March 1998 stock split. See Note 5.
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three months
ended March 31,
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
(Dollars in thousands)
Net income $ 57,694 33,135
- ----------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gains arising during period,
net of $4,836 tax 8,980 -
Reclassification adjustment for gains
included in net income, net of $7,967 tax (14,795) -
- ----------------------------------------------------------------------------
Other comprehensive income, net of $3,131 tax (5,815) -
- ----------------------------------------------------------------------------
Comprehensive income $ 51,879 33,135
============================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 15,304 26,017
Accounts receivable, less allowance
of $7,174 and $5,954 182,038 227,272
Materials and supplies, at average cost 21,782 21,994
Other 7,979 8,197
- ---------------------------------------------------------------------------
227,103 283,480
- ---------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,243,775 2,258,563
- ---------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired,
less accumulated amortization
of $95,898 and $84,132 1,759,337 1,767,352
Other 478,013 400,006
- ---------------------------------------------------------------------------
2,237,350 2,167,358
- ---------------------------------------------------------------------------
$ 4,708,228 4,709,401
===========================================================================
LIABILITIES AND EQUITY
- ----------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 33,414 55,244
Accounts payable 72,751 83,378
Accrued expenses and other liabilities
Salaries and benefits 42,734 38,225
Taxes 45,284 74,898
Interest 27,390 20,821
Other 17,779 25,229
Advance billings and customer deposits 26,471 24,213
- ---------------------------------------------------------------------------
265,823 322,008
- ---------------------------------------------------------------------------
LONG-TERM DEBT 2,576,593 2,609,541
- ---------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 510,003 477,580
- ---------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
175,000,000 shares, issued and outstanding
91,547,533 and 91,103,674 shares 91,548 91,104
Paid-in capital 478,373 469,586
Accumulated other comprehensive income -
unrealized holding gain on investments,
net of taxes 6,078 11,893
Retained earnings 779,714 728,033
Unearned ESOP shares (8,010) (8,450)
Preferred stock - non-redeemable 8,106 8,106
- ---------------------------------------------------------------------------
1,355,809 1,300,272
- ---------------------------------------------------------------------------
$ 4,708,228 4,709,401
===========================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three months
ended March 31,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
(Dollars in thousands)
COMMON STOCK
Balance at beginning of period $ 91,104* 59,859
Conversion of convertible securities into
common stock 169 113
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 247 110
Issuance of common stock for acquisition 28 -
- -----------------------------------------------------------------------------
Balance at end of period 91,548 60,082
- -----------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of period 469,586* 474,607
Conversion of convertible securities
into common stock 3,131 3,187
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 4,125 2,106
Issuance of common stock for acquisition 1,059 -
Amortization of unearned compensation and other 472 211
- -----------------------------------------------------------------------------
Balance at end of period 478,373 480,111
- -----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period 11,893 -
Change in unrealized holding gain on
investments, net of reclassification adjustment (5,815) -
- -----------------------------------------------------------------------------
Balance at end of period 6,078 -
- -----------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 728,033 494,726
Net income 57,694 33,135
Cash dividends declared
Common stock-$.065 and $.0617 per
share, respectively* (5,911) (5,523)
Preferred stock (102) (128)
- -----------------------------------------------------------------------------
Balance at end of period 779,714 522,210
- -----------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of period (8,450) (11,080)
Release of ESOP shares 440 690
- -----------------------------------------------------------------------------
Balance at end of period (8,010) (10,390)
- -----------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning and end of period 8,106 10,041
- -----------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $1,355,809 1,062,054
=============================================================================
* Reflects March 1998 stock split. See Note 5.
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months
ended March 31,
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 57,694 33,135
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 79,194 35,325
Gain on sale or exchange of assets (24,343) -
Deferred income taxes 26,599 2,159
Income from unconsolidated cellular entities (6,877) (5,580)
Minority interest 2,643 364
Changes in current assets and current liabilities:
Accounts receivable 45,234 6,674
Accounts payable (10,627) (5,928)
Other accrued taxes (29,614) 12,291
Other current assets and other
current liabilities, net 3,316 7,866
Increase in other noncurrent liabilities 7,660 1,308
Other, net (4,021) 2,111
- -----------------------------------------------------------------------------
Net cash provided by operating activities 146,858 89,725
- -----------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (58,202) (43,977)
Acquisitions, net of cash acquired (5,000) (21,080)
Proceeds from sale of assets 10,177 -
Purchase of life insurance investment (7,180) (4,000)
Other, net 6,446 4,556
- -----------------------------------------------------------------------------
Net cash used in investing activities (53,759) (64,501)
- -----------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 783,000 14,500
Payments of long-term debt (838,582) (31,082)
Payment upon settlement of hedge contracts (40,237) -
Payment of deferred debt issuance costs (6,625) -
Proceeds from issuance of common stock 4,374 2,216
Cash dividends (6,013) (5,651)
Other, net 271 66
- -----------------------------------------------------------------------------
Net cash used in financing activities (103,812) (19,951)
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,713) 5,273
Cash and cash equivalents at beginning of period 26,017 8,402
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,304 13,675
=============================================================================
Supplemental cash flow information:
Income taxes paid $ 47,313 725
=============================================================================
Interest paid $ 36,240 6,597
=============================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(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 consolidated financial statements and footnotes included in this
Form 10-Q should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997. Certain 1997 amounts have been
reclassified to be consistent with the 1998 presentation.
The unaudited financial information for the three months ended March 31,
1998 and 1997 has not been audited by independent certified 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 periods have been included therein. The results
of operations for the first three 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:
March 31, Dec. 31,
1998 1997
- ------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost $ 3,320,571 3,295,860
Accumulated depreciation (1,421,726) (1,375,835)
- ------------------------------------------------------------------------
1,898,845 1,920,025
- ------------------------------------------------------------------------
Wireless, at cost 397,605 380,218
Accumulated depreciation (144,016) (133,357)
- ------------------------------------------------------------------------
253,589 246,861
- ------------------------------------------------------------------------
Corporate and other, at cost 177,776 169,420
Accumulated depreciation (86,435) (77,743)
- ------------------------------------------------------------------------
91,341 91,677
- ------------------------------------------------------------------------
$ 2,243,775 2,258,563
========================================================================
(3) Earnings from Unconsolidated Cellular Entities
The following summarizes the unaudited combined results of operations of
the cellular entities in which the Company's investments (as of March 31, 1998
and 1997) were accounted for by the equity method.
Three months
ended March 31,
- ---------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
Results of operations
Revenues $ 323,584 277,570
Operating income $ 101,346 85,587
Net income $ 96,449 86,241
- ---------------------------------------------------------------------------
(4) Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures About Segments of an Enterprise and Related Information." SFAS 130
established standards for reporting and display of comprehensive income and its
components. Comprehensive income includes all changes in equity during a period
except those resulting from investments by and distributions to shareholders.
SFAS 131 established standards for reporting information about operating
segments in annual financial statements and in interim financial reports to
shareholders. The Company adopted both statements in the first quarter of 1998;
however, the provisions of SFAS 131 need not be applied to interim periods in
the initial year of application. SFAS 131 is not expected to materially impact
how the Company currently reports its segment information.
(5) Stock Split
On February 25, 1998, the Company's Board of Directors declared a
three-for-two common stock split effected as a 50% stock dividend on March 31,
1998. Shares outstanding and per share data for the three months ended March 31,
1997 have been restated to reflect this stock split.
(6) Debt Issuance
On January 15,1998, Century issued $100 million of 7-year, 6.15% senior
notes (Series E); $240 million of 10-year, 6.3% senior notes (Series F); and
$425 million of 30-year, 6.875% debentures (Series G) under its shelf
registration statements. The net proceeds of approximately $758 million
(excluding payment obligations of approximately $40 million related to interest
rate hedging effected in connection with the offering) were used to reduce the
bank indebtedness incurred by the Company in connection with its December 1,
1997 acquisition of Pacific Telecom, Inc.
In mid-January 1998, the Company settled numerous interest rate hedge
contracts that had been entered into in anticipation of these debt issuances.
The amounts paid by the Company upon settlement of the hedge contracts
aggregated approximately $40 million. Such payment obligations will be amortized
as interest expense over the lives of the underlying debt instruments. The
effective weighted average interest rate of the above-mentioned debt (after
giving consideration to the payment obligations) is 7.15%. In March 1998 the
Company paid approximately $250,000 upon settlement of its remaining interest
rate hedge contracts.
(7) Sale or Exchange of Asset
In the first quarter of 1998, WorldCom, Inc. ("WorldCom") acquired Brooks
Fiber Properties, Inc. ("Brooks"). The Company owned approximately 551,000
shares of Brooks' common stock which, upon WorldCom's acquisition of Brooks,
were converted into approximately 1.1 million shares of WorldCom common stock.
The Company recorded such conversion at fair value which resulted in a pre-tax
gain of approximately $22.8 million ($14.8 million after-tax; $.16 per diluted
share).
(8) Pending Acquisition
On March 12, 1998, the Company entered into definitive agreements to
purchase from affiliates of Ameritech Corporation ("Ameritech") the assets of
certain of Ameritech's local telephone and directory operations in parts of
northern and central Wisconsin, in exchange for approximately $225 million cash
(subject to adjustments). The assets to be purchased include (i) access lines
and related property and equipment in 21 predominantly rural communities in
Wisconsin which serve approximately 68,000 customers, (ii) Ameritech's directory
publishing operations that relate to nine telephone directories serving such
customers, and (iii) approximately $4 million in net receivables. Subject to the
satisfaction of various closing conditions, this transaction is expected to be
completed in the fourth quarter of 1998.
CENTURY TELEPHONE ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") included herein should be read in conjunction with MD&A and
the other information included in the Company's annual report on Form 10-K for
the year ended December 31, 1997. The results of operations for the three months
ended March 31, 1998 are not necessarily indicative of the results of operations
which might be expected for the entire year.
Century Telephone Enterprises, Inc. (the "Company") is a regional
diversified communications company that is primarily engaged in providing local
telephone services and cellular telephone communications services. At March 31,
1998, the Company's local exchange telephone subsidiaries operated over 1.2
million telephone access lines primarily in rural, suburban and small urban
areas in 21 states, and the Company's majority-owned and operated cellular
entities had more than 576,000 cellular subscribers. On December 1, 1997, the
Company significantly expanded its operations by acquiring Pacific Telecom, Inc.
("PTI"). As a result of the acquisition, the Company acquired (i) over 660,000
telephone access lines, (ii) over 88,000 cellular subscribers and (iii) various
wireless, cable television and other communications assets.
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position. Such forward-looking statements are subject to uncertainties
that could cause the Company's actual results to differ materially from such
statements. Such uncertainties include but are not limited to: the effects of
ongoing deregulation in the telecommunications industry; the effects of greater
than anticipated competition in the Company's markets; possible changes in the
demand for the Company's products and services; the Company's ability to
successfully introduce new offerings on a timely and cost-effective basis; the
risks inherent in rapid technological change; the Company's ability to
effectively manage its growth, including integrating the newly-acquired
operations of PTI into the Company's operations; and the effects of more general
factors such as changes in general market or economic conditions or in
legislation, regulation or public policy. These and other uncertainties related
to the business are described in greater detail in Item 1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to update
any of its forward-looking statements for any reason.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared
to Three Months Ended March 31, 1997
Net income for the first quarter of 1998 (excluding gain on sale or
exchange of assets) was $41.9 million compared to $33.1 million during the first
quarter of 1997. Diluted earnings per share (excluding gain on sale or exchange
of assets) increased to $.45 during the three months ended March 31, 1998 from
$.37 during the three months ended March 31, 1997, a 21.6% increase.
Three months
ended March 31,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 76,843 40,524
Wireless 29,655 16,537
Other 3,634 637
- ------------------------------------------------------------------------------
110,132 57,698
Interest expense (42,809) (11,310)
Gain on sale or exchange of assets 24,343 -
Income from unconsolidated cellular entities 6,877 5,580
Minority interest (2,643) (364)
Other income and expense 604 1,234
Income tax expense (38,810) (19,703)
- ------------------------------------------------------------------------------
Net income $ 57,694 33,135
==============================================================================
Diluted earnings per share $ .62 .37
==============================================================================
Average diluted shares outstanding 92,917 91,055
==============================================================================
Contributions to operating revenues and operating income by the Company's
telephone, wireless, and other operations for the three months ended March 31,
1998 and 1997 were as follows:
Three months
ended March 31,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Operating revenues
Telephone operations 69.9% 58.8
Wireless operations 25.3% 33.1
Other operations 4.8% 8.1
Operating income
Telephone operations 69.8% 70.2
Wireless operations 26.9% 28.7
Other operations 3.3% 1.1
- ------------------------------------------------------------------------------
Telephone Operations
Three months
ended March 31,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 78,126 32,188
Network access 151,178 71,542
Other 30,509 13,365
- ------------------------------------------------------------------------------
259,813 117,095
- ------------------------------------------------------------------------------
Operating expenses
Plant operations 56,659 23,596
Customer operations 22,816 10,398
Corporate and other 39,783 17,454
Depreciation and amortization 63,712 25,123
- ------------------------------------------------------------------------------
182,970 76,571
- ------------------------------------------------------------------------------
Operating income $ 76,843 40,524
==============================================================================
Telephone operating income increased $36.3 million (89.6%) due to an
increase in operating revenues of $142.7 million (121.9%) which more than offset
an increase in operating expenses of $106.4 million (139.0%).
Of the $142.7 million increase in operating revenues, $134.5 million was
attributable to the properties acquired in the PTI acquisition. The remaining
$8.2 million increase in revenues was partially due to a $3.0 million increase
in amounts received from the federal Universal Service Fund; a $1.9 million
increase in revenues due to increased minutes of use; and a $1.0 million
increase which resulted from the increase in the number of customer access lines
(exclusive of the PTI acquisition).
During the first quarter of 1998, operating expenses, exclusive of
depreciation and amortization, increased $67.8 million, of which $65.2 million
was attributable to the properties acquired in the PTI acquisition. The
remainder of the increase in operating expenses was due to increases in general
operating expenses.
Depreciation and amortization increased $38.6 million, of which $36.7
million (which includes $6.8 million of amortization of excess cost of net
assets acquired) was attributable to the properties acquired in the PTI
acquisition. The remainder of the increase was primarily due to higher levels of
plant in service.
Wireless Operations and Income From Unconsolidated Cellular Entities
Three months
ended March 31,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
(Dollars in thousands)
Operating income - wireless operations $ 29,655 16,537
Minority interest (2,643) (1,320)
Income from unconsolidated cellular entities 6,877 5,580
- ------------------------------------------------------------------------------
$ 33,889 20,797
==============================================================================
The Company's wireless operations (discussed below) reflect 100% of the
results of operations of the cellular entities in which the Company has a
majority ownership interest. The minority interest owners' share of the income
of such entities is reflected in the Company's Consolidated Statements of Income
as an expense in "Minority interest." See Minority Interest for additional
information. The Company's share of earnings from the cellular entities in which
it has less than a majority interest is accounted for using the equity method
and is reflected in the Company's Consolidated Statements of Income as "Income
from unconsolidated cellular entities." See Income from Unconsolidated Cellular
Entities for additional information.
Wireless Operations
Three months
ended March 31,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 92,098 64,584
Equipment sales 2,068 1,255
- ------------------------------------------------------------------------------
94,166 65,839
- ------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 3,696 3,930
System operations 14,252 10,326
General, administrative and customer service 18,381 14,215
Sales and marketing 13,642 11,570
Depreciation and amortization 14,540 9,261
- ------------------------------------------------------------------------------
64,511 49,302
- ------------------------------------------------------------------------------
Operating income $ 29,655 16,537
==============================================================================
Wireless operating income increased $13.1 million (79.3%) to $29.7 million
in the first quarter of 1998 from $16.5 million in the first quarter of 1997.
Wireless operating revenues increased $28.3 million (43.0%) while operating
expenses increased $15.2 million (30.8%).
Of the $27.5 million increase in service revenues, $17.7 million was
attributable to acquisitions consummated since the first quarter of 1997,
including $13.2 million attributable to PTI. The remainder of 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 (exclusive of acquisitions) during the first quarter of
1998 and 1997 was 448,800 and 372,500, respectively. Excluding acquisitions,
access and usage revenues increased $4.7 million (9.9%) in the first quarter of
1998 and roaming and toll revenues increased $4.1 million (25.2%).
The average monthly cellular service revenue per customer (including
acquisitions) declined to $54 during the first quarter of 1998 from $58 during
the first quarter of 1997 partially due to the continued trend that a higher
percentage of new subscribers tend to be lower usage customers. In addition, the
properties acquired in the PTI acquisition historically have had a lower average
monthly service revenue per customer than the Company's incumbent properties.
The average monthly service revenue per customer may further decline (i) as
market penetration increases and additional lower usage customers are activated
and (ii) as competitive pressures from current and future wireless
communications providers intensify. The Company is responding to such
competitive pressures by, among other things, modifying certain of its price
plans and implementing certain other plans and promotions, all of which are
likely to result in lower average revenue per customer. The Company will
continue to focus on customer service and attempt to stimulate cellular usage by
promoting the availability of certain enhanced services and by improving the
quality of its service through the construction of additional cell sites and
other enhancements to its system.
System operations expenses increased $3.9 million (38.0%) in the first
quarter of 1998 primarily due to $4.1 million of expenses attributable to
entities acquired. Such increase was partially offset by a $1.1 million decrease
in the amounts paid to other carriers for cellular service provided to the
Company's customers who roam in the other carriers' service areas.
General, administrative and customer service expenses increased $4.2
million (29.3%), of which $3.8 million was attributable to expenses of entities
acquired. The remainder of the increase was due to increases in general office
expenses.
The Company's average monthly churn rate (the percentage of cellular
customers that terminate service) was 2.46% for the first quarter of 1998 and
2.51% for the first quarter of 1997.
Entities acquired subsequent to the first quarter of 1997 incurred $2.6
million of sales and marketing expenses in the first quarter of 1998. A $573,000
increase in advertising and sales promotion expenses and a $605,000 increase in
costs incurred in selling products and services in retail locations were more
than offset by a $1.6 million reduction in commissions paid to agents for
selling services to new customers.
Depreciation and amortization increased $5.3 million (57.0%), of which
$3.4 million was attributable to acquisitions. The remainder of the increase was
due primarily to a higher level of plant in service.
Other Operations
Three months
ended March 31,
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $11,264 7,846
Call center 2,599 3,768
Competitive access - 2,499
Other 3,878 1,938
- -------------------------------------------------------------------------
17,741 16,051
- -------------------------------------------------------------------------
Operating expenses
Cost of sales and operating expenses 13,165 14,473
Depreciation and amortization 942 941
- -------------------------------------------------------------------------
14,107 15,414
- -------------------------------------------------------------------------
Operating income $ 3,634 637
=========================================================================
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or wireless segments, including,
but not limited to, the Company's competitive access subsidiary (which was sold
to Brooks Fiber Properties, Inc. in May 1997) and the Company's nonregulated
long distance and call center operations. The $3.4 million increase in long
distance revenues was attributable to the growth in the number of customers; the
$1.2 million decrease in call center revenues was primarily due to the loss of
two major customers. The increase in other revenues was primarily attributable
to the PTI acquisition and the acquisition of two security alarm businesses
subsequent to the first quarter of 1997.
Operating expenses decreased because (i) the first quarter of 1997
included $4.9 million of costs applicable to the Company's competitive access
subsidiary and (ii) the amount of intercompany profit with regulated affiliates
increased $2.2 million as a result of the acquisition of PTI. Such decreases
were substantially offset by increases in operating expenses due to (i) an
increase of $4.7 million in expenses of the Company's long distance operations
due primarily to an increase in customers and (ii) $1.9 million of operating
expenses applicable to acquisitions.
Interest Expense
Interest expense increased $31.5 million in the first quarter of 1998
compared to the first quarter of 1997 primarily due to $24.2 million of interest
expense on the borrowings used to finance the PTI acquisition and $7.7 million
of interest expense applicable to PTI's debt.
Gain on Sale or Exchange of Assets
In the first quarter of 1998, the Company recorded a pre-tax gain of
approximately $22.8 million ($14.8 million after-tax; $.16 per diluted share)
upon the conversion of its investment in the common stock of Brooks Fiber
Properties, Inc. into common stock of WorldCom, Inc. See Note 7 of Notes to
Consolidated Financial Statements for additional information.
Income from Unconsolidated Cellular Entities
Earnings from unconsolidated cellular entities, net of the amortization of
associated goodwill, increased $1.3 million (23.2%) primarily due to the
improvement in profitability of the cellular entities in which the Company owns
less than a majority interest.
Minority Interest
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings or loss of the Company's
majority-owned and operated cellular entities and majority-owned subsidiaries.
Minority interest increased $1.3 million due to the increased profitability of
the Company's majority-owned and operated cellular entities. In addition,
$756,000 of the change in minority interest in the first quarter of 1998 was
attributable to the allocation of the minority interest owner's portion of the
loss of the Company's competitive access subsidiary (which was sold in May 1997)
during the first quarter of 1997.
Income Tax Expense
Income tax expense increased $19.1 million in the first quarter of 1998
compared to the first quarter of 1997 primarily due to an increase in income
before taxes. The effective income tax rate was 40.2% and 37.3% in the three
months ended March 31, 1998 and 1997, respectively. Such increase in the
effective income tax rate was primarily due to an increase in non-deductible
amortization of excess cost of net assets acquired (goodwill) attributable to
the PTI acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided
by operations to provide a substantial portion of its cash needs. The Company's
operations have historically provided a stable source of cash flow which has
helped the Company continue its long-term program of capital improvements.
Net cash provided by operating activities was $146.9 million during the
first three months of 1998 compared to $89.7 million during the first three
months of 1997. The Company's accompanying consolidated statements of cash flows
identify major differences between net income and net cash provided by operating
activities for each of these periods. For additional information relating to the
telephone operations, wireless operations, and other operations of the Company,
see Results of Operations.
Net cash used in investing activities was $53.8 million and $64.5 million
for the three months ended March 31, 1998 and 1997, respectively. Payments for
property, plant and equipment were $14.2 million more in the first quarter of
1998 than in the comparable period during 1997. Capital expenditures for the
three months ended March 31, 1998 were $35.3 million for telephone, $18.1
million for wireless and $4.8 million for other operations. Cash used in
connection with acquisitions was $21.1 million in the first three months of
1997, substantially all of which was applicable to the acquisition of telephone
properties in Wisconsin.
Net cash used in financing activities was $103.8 million during the first
three months of 1998 compared to $20.0 million during the first three months of
1997. Net payments of long-term debt were $39.0 million more during the first
quarter of 1998 compared to the first quarter of 1997. During the first quarter
of 1998, the Company issued an aggregate of $765 million of senior notes and
debentures. The net proceeds of approximately $758 million were used to reduce
the bank indebtedness incurred in connection with the acquisition of PTI. In
addition, the Company paid approximately $40 million to settle numerous interest
rate hedge contracts that had been entered into in anticipation of these debt
issuances.
Budgeted capital expenditures for 1998 total $220 million for telephone
operations, $90 million for wireless operations and $40 million for corporate
and other operations.
As of March 31, 1998, Century's telephone subsidiaries had available for
use $140.9 million of commitments for long-term financing from the Rural
Utilities Service and the Company had $423.1 million of undrawn committed bank
lines of credit.
During the first quarter of 1998, the Company entered into definitive
agreements to purchase from affiliates of Ameritech Corporation ("Ameritech")
the assets of certain of Ameritech's local telephone and directory operations in
parts of northern and central Wisconsin, in exchange for approximately $225
million cash (subject to adjustments). The Company expects to provide initial
financing through its committed credit facilities.
In April 1998 the Company acquired 32 Local Multipoint Distribution System
licenses in the Federal Communications Commission's A and B band auction for an
aggregate of $9.7 million. The licenses acquired cover geographic areas with a
combined population of approximately 10.6 million. The Company has not finalized
capital expenditure or deployment plans for these systems.
OTHER MATTERS
The Company currently accounts for its regulated telephone operations in
accordance with the provisions of Statement of Financial Accounting Standards
No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of Regulation."
While the ongoing applicability of SFAS 71 to the Company's telephone operations
is being monitored due to the changing regulatory, competitive and legislative
environments, the Company believes that SFAS 71 still applies. However, it is
possible that changes in regulation or legislation or anticipated changes in
competition or in the demand for regulated services or products could result in
the Company's telephone operations not being subject to SFAS 71 in the near
future. In that event, implementation of Statement of Financial Accounting
Standards No. 101 ("SFAS 101"), "Regulated Enterprises - Accounting for the
Discontinuance of Application of FASB Statement No. 71," would require the
write-off of previously established regulatory assets and liabilities, along
with an adjustment of certain accumulated depreciation accounts to reflect the
difference between recorded depreciation and the amount of depreciation that
would have been recorded had the Company's telephone operations not been subject
to rate regulation. Such discontinuance of the application of SFAS 71 would
result in a material, noncash charge against earnings which would be reported as
an extraordinary item. While the effect of implementing SFAS 101 cannot be
precisely estimated at this time, management believes that the noncash,
after-tax, extraordinary charge would be between $250 million and $300 million.
PART II. OTHER INFORMATION
CENTURY TELEPHONE ENTERPRISES, INC.
Item 6. Exhibits and Reports on Form 8-K
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A. Exhibits
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10.1 Form of Stock Option Agreement, pursuant to 1995 Incentive
Compensation Plan, dated as of February 24, 1998.
10.2 Amended and Restated Restricted Stock and Performance Share
Agreement, pursuant to 1995 Incentive Compensation Plan,
dated as of February 24, 1998.
10.3 Form of Restricted Stock and Performance Share Agreement,
pursuant to 1995 Incentive Compensation Plan, dated as of
February 24, 1998.
11 Computations of Earnings Per Share.
27.1 Financial Data Schedule as of and for the three months ended
March 31, 1998.
27.2 Amended Financial Data Schedule as of and for the year ended
December 31, 1997.
27.3 Restated Financial Data Schedule as of and for the year ended
December 31, 1996.
27.4 Restated Financial Data Schedule as of and for the year ended
December 31, 1995.
B. Reports on Form 8-K
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The following items were reported in the Form 8-K dated March 12,
1998 and filed March 31, 1998:
Item 5. Other Events - (i) execution of definitive agreements
pursuant to which Century plans to purchase certain assets from
affiliates of Ameritech Corporation and (ii) adjusted terms of
Century's Rights Agreement to reflect the three-for-two stock
split in the form of a 50% stock dividend.
SIGNATURE
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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: May 13, 1998 /s/ Murray H. Greer
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Murray H. Greer
Controller
(Principal Accounting Officer)