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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1994
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7784
CENTURY TELEPHONE ENTERPRISES, INC.
A Louisiana Corporation I.R.S. Employer Identification
No. 72-0651161
100 Century Park Drive, Monroe, Louisiana 71203
Telephone number (318) 388-9500
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
par value $1.00
Exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of February 28, 1995, the aggregate market value of voting stock held
by non-affiliates (affiliates being for these purposes only directors
and executive officers) was approximately $1.8 billion.
As of February 28, 1995, there were 58,204,027 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement prepared in connection with the 1995
annual meeting of shareholders are incorporated in Part III of this
Report.
PART I
Item 1. Business
General. Century Telephone Enterprises, Inc. ("Century") is a regional
diversified telecommunications company that is primarily engaged in
providing traditional telephone services and cellular telephone
communications services. For the year ended December 31, 1994, telephone
operations and mobile communications operations (substantially all of
which are comprised of the Company's cellular telephone operations)
provided 72% and 28%, respectively, of the consolidated revenues of
Century and its subsidiaries (the "Company"). All of the Company's
operations are conducted within the continental United States.
At December 31, 1994 the Company's telephone subsidiaries operated over
454,000 telephone access lines, primarily in rural, suburban and small
urban areas in 14 states, with the largest customer bases located in
Wisconsin, Louisiana, Michigan and Ohio. According to published sources,
the Company is the fifteenth largest local exchange telephone company in
the United States based on the number of access lines served.
Whenever used herein with respect to the Company, the term "pops" means
the population of licensed cellular telephone markets (based on
independent third-party population estimates) multiplied by the Company's
proportionate equity interests in the licensed operators thereof. The
term "MSA" means a Metropolitan Statistical Area for which the Federal
Communications Commission (the "FCC") has granted a cellular operating
license. The term "RSA" means a Rural Service Area for which the FCC has
granted a cellular operating license. The term "wireline license" refers
to the cellular operating license initially reserved by the FCC for
companies providing local telephone service in the licensed market and the
term "non-wireline license" refers to the license initially reserved for
licensees unaffiliated with such local telephone companies.
At December 31, 1994 the Company, through its cellular operations,
owned approximately 7.1 million pops (which includes approximately 300,000
pops the Company either sold during the first quarter of 1995 or which are
subject to sale pursuant to definitive agreements) in 28 MSAs, primarily
concentrated in Michigan, Louisiana, Mississippi and Texas, and 31 RSAs,
most of which are in Michigan, Louisiana and Arkansas. The Company is the
majority owner and operator in 19 of the MSAs and 12 of the RSAs, which
collectively represent 5.5 million pops, and has minority interests in the
other MSAs and RSAs, which collectively represent 1.6 million pops. Of
the Company's 7.1 million pops, approximately 76% are attributable to the
Company's MSA interests, with the balance attributable to its RSA
interests. According to data derived from published sources, at December
31, 1994 the Company was the seventeenth largest cellular telephone
company in the United States based on the Company's owned pops. At
December 31, 1994, the Company's majority-owned and operated cellular
systems had more than 211,000 cellular subscribers. Except for five MSAs,
all of the cellular systems operated by the Company are operated under
wireline licenses.
1
Recent Acquisitions and Dispositions. In February 1994 the Company
acquired Celutel, Inc. ("Celutel"), which currently provides cellular
mobile telephone services to approximately 35,000 customers in three MSA
non-wireline cellular markets in Mississippi and two MSA non-wireline
cellular markets in Texas which have a combined population of 1.5 million.
Celutel's share of these pops is approximately 1.2 million. In March 1994
Century acquired a local exchange telephone company in Michigan which
currently serves approximately 2,600 telephone access lines and which owns
a 13% interest in a cellular partnership which has been operated by the
Company for several years. In November 1994 the Company exchanged its
Minnesota RSA 6 non-wireline cellular system for a 100% interest in the
Pine Bluff, Arkansas MSA wireline cellular system plus $10.5 million cash.
The Pine Bluff MSA has a population of approximately 85,000. In January
1995 Century acquired Tele-Max, Inc. and its affiliates. In connection
with this acquisition, Century acquired approximately 5,300 telephone
access lines in a suburban community north of Dallas, Texas and a one-half
of one percent interest in the Dallas MSA wireline cellular system (which
represents approximately 20,000 pops). In connection with its exercise of
first refusal purchase rights during 1994, the Company increased its
ownership in markets in which it already holds interests by approximately
35,000 pops.
In accordance with its strategy of clustering its telephone and
cellular businesses, Century sold its paging operations in October 1994.
In addition, during late 1994 the Company entered into definitive
agreements to sell its ownership interests in several RSAs located
primarily in western states and two MSAs located in the midwest, which in
the aggregate represent approximately 300,000 pops. Certain of these
transactions were consumated during the first quarter of 1995.
The Company is continually evaluating the possibility of acquiring
additional telephone access lines and cellular interests in exchange for
cash, securities or both. Although the Company's primary focus will
continue to be on acquiring telephone and cellular interests that are
proximate to its properties or that serve a customer base large enough for
the Company to operate efficiently, other communications interests may
also be acquired.
Other. The Company also provides long distance, operator and
interactive services in certain local and regional markets, as well as
certain printing and related services, and has recently entered the
competitive access business. During 1994 the Company's newly-formed
competitive access subsidiary obtained franchises and rights-of-way to
build a fiber optic network which will allow the Company to offer voice,
data and certain video services in Fort Worth and Arlington, Texas, along
with a portion of downtown Dallas. Century expects to begin offering
these services in the second quarter of 1995. The Company's competitive
access subsidiary has also obtained a franchise to provide similar
services in Austin, Texas and is currently attempting to obtain rights-of-
way in this market. The results of all of these other operations are
recorded for financial reporting purposes in "Other income and expense".
2
As of December 31, 1994, the Company employed approximately 3,000
persons, of which approximately 200 employees located in Ohio are covered
by a three-year collective bargaining agreement between the Company and
the Communications Workers of America. The agreement lapses on March 30,
1997.
Century was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous
15 to 20 years. Century's principal executive offices are located at 100
Century Park Drive, Monroe, Louisiana 71203 and its telephone number is
(318) 388-9500.
TELEPHONE OPERATIONS
The Company is the fifteenth largest local exchange telephone company
in the United States, based on the more than 454,000 access lines it
served at December 31, 1994. Currently, the Company operates over 500
central office and remote switching centers in its telephone operating
areas. Over the past decade, Century has installed digital switching
platforms throughout much of its switching network. At December 31, 1994,
95% of Century's total access lines were digitally switched. Through its
operating telephone subsidiaries, Century provides services to
predominately rural, suburban and small urban markets in 14 states. The
table below sets forth certain information with respect to Century's
access lines as of December 31, 1994:
Number of Percent of Percent
State access lines access lines digital
------------------------------------------------------------------
Wisconsin 98,323 22% 92%
Louisiana 84,785 19 98
Michigan 80,032 18 100
Ohio 70,436 15 100
Arkansas 37,554 8 83
Texas 28,741 6 100
Tennessee 21,343 5 100
Mississippi 13,062 3 100
Colorado 5,763 1 100
New Mexico 4,713 1 74
Indiana 4,610 1 100
Idaho 3,949 1 100
Arizona 1,469 0 0
Iowa 183 0 100
----------------------------------------------------------------
454,963 100% 95%
================================================================
3
As indicated in the following table, Century has experienced growth
in its telephone operations over the past several years, a substantial
portion of which was attributable to acquisitions of other telephone
companies and to the expansion of services:
Year Ended or As of December 31,
-----------------------------------------------------------------------
1994 1993 1992 1991
-----------------------------------------------------------------------
(Dollars in thousands)
Access lines 454,963 434,691 397,300 314,819
% Residential 79% 80 81 81
% Business 21% 20 19 19
Operating revenues $ 389,438 348,485 297,510 235,796
Capital expenditures $ 152,336 131,180 108,974 73,913
Future growth in telephone operations is expected to be derived from
(i) acquiring additional telephone companies, (ii) providing service to
new customers, (iii) upgrading existing customers to higher grades of
service, (iv) increasing network usage and (v) providing additional
services made possible by advances in technology and changes in
regulation. For information on developing competitive trends, see "-
Regulation and Competition."
Services
The Company's telephone subsidiaries derive revenue from providing (i)
local telephone services, (ii) network access and long distance services
and (iii) other related services. The following table reflects the
percentage of telephone operating revenues derived from these respective
services:
1994 1993 1992
-------------------------------------------------------------------------
Local service 25.7% 25.4 26.3
Network access and long distance 62.6 62.3 61.4
Other 11.7 12.3 12.3
-------------------------------------------------------------------------
100.0% 100.0 100.0
=========================================================================
Local service revenues are generated by the provision of local exchange
telephone services in the Company's franchised service areas.
4
Network access and long distance revenues primarily relate to services
provided by the Company to interexchange carriers (long distance carriers)
in connection with the use of the Company's facilities to originate and
complete interstate and intrastate long distance telephone calls.
Substantially all of the Company's interstate network access revenues are
derived through pooling arrangements administered by the National Exchange
Carrier Association ("NECA"). NECA receives access charges billed by the
Company and other participating local exchange carriers ("LECs") to
interstate long distance carriers and other LEC customers for use of the
participating LECs' local exchange networks to complete long distance
calls and subsequently distributes these revenues to such LECs based on
cost separation studies or average schedule settlement agreements. The
charges billed to the long distance carriers and other LEC customers are
based on tariffed access rates filed with the FCC by NECA on behalf of the
Company and other participating LECs. Interstate revenues as a percentage
of telephone operating revenues amounted to 33.7%, 32.1% and 31.4% in
1994, 1993 and 1992, respectively.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company directly to intrastate long
distance carriers and other LEC customers. Such intrastate network access
charges are based on access tariffs which are subject to state regulatory
commission approval. Additionally, certain of the Company's intrastate
network access revenues, along with intrastate long distance revenues, are
derived through state pooling arrangements and are determined based on
cost separation studies or special settlement arrangements.
The installation of digital switches and related software continues to
be an important component of the Company's growth strategy because it
allows the Company to offer new services (such as call forwarding,
conference calling, caller identification, selective call ringing and call
waiting) and to thereby increase utilization of existing access lines. In
1994 the Company continued to expand its list of premium services offered
in certain service areas and aggressively marketed these services. In
addition, with digital switching the Company has been able to construct
centralized electronic monitoring facilities that allow employees to
detect operating malfunctions in digital switches and, in many cases, to
correct the malfunctions without a site visit by the Company's personnel,
thereby reducing maintenance costs.
The Company is installing fiber optic cable in certain areas in which
it operates and has provided alternative routing of telephone service over
fiber optic cable networks in several of its strategic operating areas.
At December 31, 1994, the Company had approximately 1,360 miles of fiber
optic cable in place.
Other revenues include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for
interexchange carriers, (iii) leasing network facilities and (iv)
participating in the publication of local directories. Certain large
telecommunications companies for which the Company currently provides
billing and
5
collection services have indicated their desire to reduce
their billing and collection expenses, which may lead to reduced future
billing and collection revenues.
For further information on the regulation of the Company's revenues,
see "-Regulation and Competition."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") (formerly the Rural
Electrification Administration or REA), the Rural Telephone Bank ("RTB")
and the Federal Financing Bank ("FFB"). The RUS has made long-term loans
to telephone companies since 1949 for the purpose of improving telephone
service in rural areas. The RUS continues to make new loans at interest
rates that range from 5% to 7% based on borrower qualifications and the
cost of money to the United States government. The RTB, established in
1971, makes long-term loans at interest rates based on its average cost of
funds as determined by statutory formula (such rates ranged from 6.05% to
6.35% for the fiscal year ended September 30, 1994), and in some cases
makes loans concurrently with RUS loans. In addition, the RUS guarantees
certain loans made to telephone companies by the FFB or other qualified
lenders. A significant portion of the Company's telephone plant is
pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS, RTB and FFB. The amount of common stock
dividends that may be paid by the Company's telephone subsidiaries is
limited by certain financial requirements set forth in the financing
agreements.
Certain of the Company's telephone subsidiaries have made applications
for additional loans from the RUS and intend to make further applications
as needs arise. There is no assurance that these applications will be
accepted or that the terms or interest rates of any future loan
commitments will remain favorable. Federal budget proposals which could
significantly reduce or eliminate the availability of new loan commitments
under the RUS and RTB programs were considered in recent years and are
expected to continue to be considered. If the Company's telephone
subsidiaries are unable to borrow additional funds through the RUS and RTB
programs and are forced to borrow from conventional lenders at market
rates, the Company's cost of new loans might increase.
For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.
Regulation and Competition
Traditionally, LECs have operated as regulated monopolies.
Consequently, the majority of the Company's telephone operations are
regulated extensively by various state regulatory agencies (generally
called public
6
service commissions or public utility commissions) and by the FCC. As
discussed in greater detail below, various aspects of federal and state
regulation have recently been subject to extensive modification and re-
examination, which has generally relaxed the regulation of LECs. As
further discussed below, several legislative and regulatory initiatives
and technological changes have allowed competition in traditionally
monopolistic segments of the industry. Although Century anticipates that
these trends towards relaxed regulation and increased competition will
continue, the form and degree of future regulation and competition is
unknown.
State Regulation. The local service rates and intrastate access
charges of substantially all of the Company's telephone subsidiaries are
regulated by state regulatory commissions that traditionally have
regulated pricing through "rate of return" regulation that focuses on
authorized levels of earnings by LECs. Most of these commissions also (i)
regulate the purchase and sale of LECs, (ii) prescribe depreciation rates
and certain accounting procedures and (iii) regulate various other
matters, including certain service standards and operating procedures. In
certain states, construction and/or financing plans are also subject to
regulatory approval.
In recent years, Ohio, Michigan, Wisconsin, Louisiana and other state
legislatures and regulatory commissions have either begun to relax the
regulation of LECs or have announced their intention to review such
regulation, and it is expected that this trend will continue. This
relaxed regulatory oversight of certain of the Company's telephone
operations may allow the Company to offer new and competitive services
faster than under the traditional regulatory process. Coincident with
these efforts is the introduction of competition into traditionally
monopolistic segments of the industry. For a discussion of legislative,
regulatory and technological changes that have introduced competition into
the local exchange industry, see "-Developments Affecting Competition."
Substantially all of the state regulatory commissions have statutory
authority, the specific limits of which vary, to initiate and conduct
earnings reviews of the LECs that they regulate. As part of the movement
towards deregulation, several states are moving away from traditional rate
of return regulation towards price cap regulation and incentive regulation
(which are similar to the FCC regulations discussed below), and are
actively encouraging larger LECs to adopt these newer forms of price
regulation. The continuation of this trend may lead to fewer earnings
reviews in the future. Currently, however, most of the Company's LECs
continue to be regulated under rate of return regulation. After
initiating an informal earnings review during 1993 of all independent LECs
in Louisiana, the Louisiana Public Service Commission ("LPSC") recently
docketed a formal earnings review of such carriers. In addition, the
Public Service Commission of Wisconsin ("PSCW") is examining transactions
in which Century and its service subsidiaries provided various services
and materials to the Company's Wisconsin LECs. There is no assurance that
these reviews (or any other future review in these or other states) will
not lead to future revenue reductions or customer refunds. Moreover, in
light of the movement away from traditional rate of return regulation, no
assurance can be given that the Company's LECs will continue to earn the
same rate of return that they achieved in recent years.
7
FCC Regulation. The FCC regulates the interstate services provided by
the Company's telephone subsidiaries primarily by regulating the
interstate access charges that are billed to interexchange carriers and
other LEC customers by the Company for use of its local network in
connection with the origination and termination of interstate telephone
calls. Additionally, the FCC has prescribed certain rules and regulations
for telephone companies, including regulations regarding the use of radio
frequencies; a uniform system of accounts; and rules regarding the
separation of costs between jurisdictions and, ultimately, between
services.
Effective January 1, 1991 the FCC adopted price-cap regulation relating
to interstate access rates for the Regional Bell Operating Companies
("RBOCs") and GTE. An annual opportunity to elect price-cap regulation is
available for other LECs. Under price-cap regulation, limits imposed on a
company's interstate rates will be adjusted periodically to reflect
inflation, productivity improvement and changes in certain non-
controllable costs. In May 1993 the FCC adopted an optional incentive
regulatory plan for LECs not subject to price-cap regulation. A LEC
electing the optional incentive regulatory plan would, among other things,
file tariffs based primarily on historical costs and not be allowed to
participate in the relevant NECA pooling arrangements. The Company has
not elected price-cap regulation or the incentive regulatory plan, but
will continue to evaluate its options on a periodic basis. Consequently,
the Company's telephone subsidiaries' authorized interstate access rate of
return is 11.25%, which is the authorized rate established by the FCC for
LECs not governed by price-cap regulation or the optional incentive
regulatory plan.
High-Cost Support Funds, Revenue Pools and Related Matters. A
significant number of the Company's telephone subsidiaries recover a
portion of their costs under federal and state cost recovery mechanisms
that traditionally have allowed LECs serving small communities and rural
areas to provide access to telecommunications services reasonably
comparable to those available in urban areas and at reasonably comparable
prices.
The FCC and certain state regulatory commissions have recently explored
or implemented initiatives to reduce, or at least review, the funding of
certain of these cost recovery mechanisms. In 1993 the eight-year phase-
in of the FCC's Universal Service Fund ("USF") was completed. In December
1993 the FCC adopted interim provisions which place certain limitations,
including a cap, on the USF growth rate during 1994 and 1995. The Company
anticipates that revenues from the USF under these interim provisions will
continue to increase in the near term, but at a lesser percentage rate
than that associated with recent prior periods. Since adopting these
interim measures, the FCC has instituted proceedings to study the
effectiveness of its high-cost assistance programs. In addition, certain
bills recently considered by Congress (which are further discussed below)
have sought review of federal high-cost assistance programs. Accordingly,
there is no assurance that cost recovery through these programs will
remain at current levels.
8
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. There can be no assurance that these
states will continue to provide for cost recovery at current levels.
As the customer bases of the Company's LECs grow, the revenues
determined under the FCC's cost separation studies may decrease as a
result of such growth. Under a graduated scale used in such studies, LECs
serving between 50,000 and 20,000 customers, between 20,000 and 10,000
customers, and less than 10,000 customers receive increasingly higher
weightings which result in higher interstate access revenues.
Most of the Company's LECs concur with the common line and traffic
sensitive tariffs filed by NECA and participate in the access revenue
pools administered by NECA for interstate services. All of the long
distance and intrastate network access revenues of the Company's LECs are
based on access charges, cost separation studies or special settlement
arrangements. See "-Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. In March 1994 a
major long distance carrier filed a petition with the LPSC requesting that
the LPSC investigate and lower the rates for intrastate access charges
billed to long distance carriers by certain LECs, including the Company's
LECs that operate in Louisiana. There is no assurance that these requests
will not result in decreased intrastate access revenues.
Developments Affecting Competition. The communications industry is
currently undergoing fundamental changes which may have a significant
impact on the future operations and financial performance of
telecommunications companies. Primarily as a result of legislative and
regulatory initiatives and technological changes, competition has been
introduced and encouraged in certain sectors of the telephone industry,
including interstate and intrastate toll, special and switched access
services, pay phones, customer premise equipment and, most recently, local
service. As a result, the number of companies offering competitive
services has increased. As discussed below, far-reaching federal
legislation is currently being considered which could pre-empt current
initiatives of the FCC, state legislatures and state regulatory
commissions to promote competition, all of which are likely to continue if
federal legislation is delayed or defeated.
In 1994 the United States House of Representatives passed two
telecommunications bills that proposed to substantially alter the
regulatory framework of the telecommunications industry by, among other
things, promoting local exchange competition and removing certain barriers
of entry to several lines of telecommunications businesses. No companion
bill passed in the United States Senate. Legislation is expected to be
considered in 1995 that may promote competition and deregulation to a
greater degree than the bills that passed the House in 1994. Draft bills
currently pending before the Senate would, among other things, (i)
obligate LECs, upon request, to negotiate interconnection agreements
permitting competitors to use the LECs' facilities, (ii) authorize a joint
board to study and make recommendations regarding federal universal
service
9
systems, (iii) mandate states to remove all regulations that
prohibit any entity from providing telecommunications services and to
eliminate any rate-of-return regulations relating to common carriers in
markets where the FCC determines that local networks are open and
competitive, (iv) permit common carriers to provide video programming in
their existing markets, and (v) remove, under certain circumstances,
restrictions that prevent the RBOCs from providing long distance and other
services. There is no assurance that any such bills will be enacted, or
that the terms of any legislation ultimately enacted will not differ
materially from those outlined above. While it is currently impossible to
assess the ultimate effect of these and related initiatives, there can be
no assurance that they will not materially affect the Company's
operations.
Certain states have taken legislative and/or regulatory steps to
introduce competition into the local exchange business. Since January 1,
1995, customers in one upstate New York market have been permitted to
choose their local telephone service provider pursuant to a plan approved
in late 1994 by the New York Public Service Commission. Cable companies
are also providing, or preparing to provide, telephone service in a
limited number of other markets under plans approved by state regulators.
In 1994 Wisconsin, a state in which the Company operates, enacted
legislation which, among other things, requires the PSCW to authorize
cable television operators to provide local exchange service in larger
markets, including one of the Company's markets. Although no cable
television operator has requested authorization to provide local exchange
service in the Company's market, the Company anticipates that such a
request will be forthcoming. The Company anticipates that an increasing
number of states will, to some degree, allow local service competition
with LECs. Largely as a result of these trends towards liberalized
regulation, several well-established interexchange carriers and cable
television companies have accelerated their development of networks and
facilities designed to provide local exchange services, principally in
larger cities.
In 1992 the FCC took a step toward introducing competition in the local
exchange access business by ordering that competitive access providers,
interexchange carriers and others have the right to directly interconnect
facilities to the central offices of certain larger (Tier One) telephone
companies (which do not include the Company's LECs) for the provision of
interstate special transport access services. Although this 1992 order
was overturned by a federal appellate court in mid-1994, the FCC has
requested Tier One LECs to file tariffs for a less intrusive form of co-
location. Effective February 1994, the FCC ordered Tier One LECs to allow
competing carriers to interconnect to their local exchange networks for
the purpose of providing switched access transport services. The intent
of these orders and other related FCC decisions is to allow interstate
access competition with LECs and provide LECs with limited pricing
flexibility to enable LECs to better respond to the resulting competition.
Principally as a result of these and other regulatory actions, competition
from competitive access providers and others has increased and is expected
to continue to increase. Competitive access providers, which originally
were formed in the 1980's to provide redundancy services, now provide
access competition with LECs in most larger urban areas, principally by
targeting large business customers. One competitive access provider has
been granted co-carrier status to provide local telephone service in New
York City, and similar requests are expected to be made in other states.
Although there has
10
been activity by competitive access providers in certain of the
Company's operating areas, such activity has thus far not
significantly affected the Company. The Company expects to increasingly
face competition from competitive access providers in its operating areas
located near larger urban areas and may face similar competition in its
other operating areas.
In addition to receiving services directly from competitive access
providers, interexchange carriers and other users of toll service may seek
other means to bypass LECs' switching services and local distribution
facilities, particularly if services are not strategically priced. There
are several ways which users of toll service may bypass the Company's
switching services. First, users may construct, modify or lease
facilities to transmit their traffic directly to an interexchange carrier.
Cable television companies, in particular, may be able to modify their
networks to partially or completely bypass the Company's local network.
Second, certain interexchange carriers provide services which allow users
to divert their traffic from LECs' usage-sensitive services to their flat-
rate services. Third, users may choose to use mobile communications
services to bypass LECs' switching services. Within the past two years,
each of the three largest interexchange carriers in the United States has
acquired or sought to acquire interests in mobile communications
companies, presumably in part to obtain bypass capabilities. Although
certain of the Company's telephone subsidiaries have experienced a loss of
traffic to such bypass, the impact of such loss on revenues has not been
significant. The Company and the LEC industry are seeking to address
bypass principally by adopting flexible pricing of access services where
appropriate and to the extent permitted by regulatory agencies. No
assurance can be given as to the ultimate outcome of these efforts.
Currently, cellular communications services complement traditional LEC
services. However, as the mobile communications industry matures, the
Company anticipates that existing and emerging mobile communications
technologies will increasingly compete with traditional LEC services.
Technological and regulatory developments in cellular telephone, personal
communications services, digital microwave, coaxial cable, fiber optics and
other wired and wireless technologies are expected to further permit the
development of alternatives to traditional landline services. For further
information on certain of these developments, see "Mobile Communications
Operations - Regulation and Competition."
In connection with the well-publicized convergence of
telecommunications, cable, video, computer and entertainment businesses,
several large companies have announced plans to offer products that would
significantly enhance current communications and data transmission services
and, in some instances, introduce new two-way video, entertainment, data,
consumer and other multimedia services. In particular, several large cable
television companies have announced plans that, if successfully
implemented, could provide significant competition with LECs' traditional
services. Other companies with wireline experience (including electric
utilities) are expected to explore opportunities in this market, along with
wireless companies and other emerging technology companies. Although the
development of new multimedia services is expected to initially have a
greater effect on larger urban areas, no assurance can be given as to how
the offering of these products or
11
services by others will affect the Company. For information on the
effects of these developments on the Company's cellular operations,
see "Mobile Communications Operations - Regulation and Competition."
To the extent that the telephone industry is increasingly opened to
competition by federal or state initiatives, the size and resources of each
respective competitor may increasingly influence its prospects. Many
companies currently providing or planning to provide competitive
telecommunication services have greater assets and resources than the
Company, and several are not subject to the same regulatory constraints as
the Company. Moreover, several of these companies have formed joint
ventures or alliances to better prepare themselves for competition.
The Company anticipates that the traditional operations of LECs will be
increasingly impacted by continued technological developments as well as
legislative and regulatory initiatives affecting the ability of LECs to
provide new services and the capability of cable television companies,
interexchange carriers, competitive access providers and others to provide
competitive LEC services. The Company intends to actively monitor these
developments, to observe the effect of emerging competitive trends in
initial test markets (which are expected to be large urban areas) and to
continue to evaluate new business opportunities that may arise out of
future technological, legislative and regulatory developments. Although
competition relating to services traditionally provided solely by LECs is
expected to initially affect large urban areas to a greater extent than
rural, suburban and small urban areas such as those in which the Company
operates, there is no assurance that these developments will not have an
adverse effect on the Company in the future.
MOBILE COMMUNICATIONS OPERATIONS
According to data derived from published sources, at December 31, 1994
the Company was the seventeenth largest cellular telephone company in the
United States based on the Company's owned pops. The number of pops owned
by a cellular operator does not represent the number of users of cellular
service and is not necessarily indicative of the number of potential
subscribers. Rather, this term is frequently used as a basis for
comparing the size of cellular system operators. At December 31, 1994,
the Company owned approximately 7.1 million pops (which includes
approximately 300,000 pops the Company either sold during the first
quarter of 1995 or which are subject to sale pursuant to definitive
agreements), of which approximately 5.4 million (76%) were applicable to
MSAs and approximately 1.7 million (24%) were RSA pops.
Cellular Industry
The cellular telephone industry has been in existence for just over ten
years in the United States. Although the industry is relatively new, it
has grown significantly during this period. According to the Cellular
Telecommunications Industry Association, in February 1995 there were
estimated to be over 25 million cellular
12
customers across the United States. Cellular service is now available
in substantially all areas of the United States.
Cellular mobile telephone technology was developed in response to
certain limitations of conventional mobile telephone systems. Compared to
such conventional systems, cellular mobile telephone service is capable of
high-quality, high-capacity communications to and from vehicle-mounted and
hand-held radio telephones. While conventional mobile systems limit the
number of people who can utilize the service simultaneously, cellular
systems, if properly designed and equipped, are capable of handling
thousands of calls at any given time and are capable of providing service
to tens of thousands of subscribers in a market.
In a cellular telephone system, the licensed service area is subdivided
into geographic areas, or cells. Each cell has its own transmitter and
receiver that communicates by radio signal with cellular telephones located
within the cell. Each cell is connected by a telephone circuit or
microwave to a Mobile Switching Center ("MSC"), which in turn is connected
to the worldwide telephone network.
Communications within a cellular system are controlled by the MSC
through a transfer process as a cellular telephone user moves from one cell
to another. In this process, when the signal strength of a call declines
to a predetermined level, the MSC determines if the signal strength from an
adjacent cell is greater and, if so, transfers the call to the adjacent
cell. Software which facilitates the transfer between adjacent cells of
different cellular systems using equipment of different manufacturers has
been implemented by the Company in certain markets.
Cellular telephone systems have higher subscriber capacity than
conventional mobile telephone systems because of the substantial frequency
spectrum allocated to these systems by the FCC and because frequencies can
be reused throughout the system. Frequency reuse is possible because the
transmission power of cell site equipment and mobile units is relatively
low. Therefore, signals on the same channel will not interfere with each
other if they are transmitted in cells that are sufficiently far apart.
Reuse multiplies the capacity of channels available to the system operator
and thereby increases the telephone calling capacity.
Until recently, substantially all radio transmissions of cellular
systems were conducted on an analog basis. Technological developments
involving the application of digital radio technology may offer certain
advantages over analog technologies, including expanding the capacity of
mobile communications systems, improving voice clarity, permitting the
introduction of new services, and otherwise making such systems more
efficient, more accessible, more private and eventually less expensive.
Providers of certain services competitive with cellular are currently
incorporating digital technology into their operations, and are expected to
continue to do so in the future. See "-Regulation and Competition-
Developments Affecting Mobile Communications Competition."
13
In recent years certain cellular carriers have begun to install digital
cellular voice transmission facilities in certain larger markets. During
1993 and 1994 the Company upgraded certain portions of its cellular systems
to be capable of providing digital service in the future; the Company
currently plans to implement digital service in certain markets during 1995
using the TDMA digital standard. The Company will continue to monitor the
development and implementation of this technology to determine when it will
become beneficial for the Company to install digital voice transmission
facilities in other markets. See "-Regulation and Competition-Developments
Affecting Mobile Communications Competition."
Strategy
The Company's business development strategy for its cellular telephone
operations is to secure operating control of service areas that are
geographically clustered. Clustered cellular systems aid the Company's
marketing efforts and provide various operating and service advantages.
Approximately 53% of the Company's pops in markets operated by the Company
are in a single, contiguous cluster of eight MSAs and six RSAs in Michigan;
another 21% are in a cluster of five MSAs and seven RSAs in northern and
central Louisiana, southern Arkansas and eastern Texas. See "-The
Company's Cellular Interests."
Another component of the Company's strategy for cellular operations
includes capturing revenues from roaming service. Roaming service revenues
are derived from calls made in one cellular service area by subscribers
from other service areas. Roaming service is made possible by technical
standards requiring that cellular telephones be functionally compatible
with the cellular systems in all United States market areas. The Company
charges premium rates (compared to rates charged to the Company's
customers) for roaming service provided to most non-Company customers. The
Company's Michigan cellular properties include a significant portion of the
interstate highway corridor between Chicago and Detroit; its Louisiana
properties include an east-west interstate highway and a north-south
interstate highway which intersect in its Louisiana cellular service area;
and its Mississippi properties include two east-west interstate highways,
one of which intersects with a north-south interstate highway in Jackson,
Mississippi.
Marketing
The Company coordinates the marketing strategy for each cellular
system which it operates. The Company's cellular sales force consists of
approximately 250 independent agents, which generate a significant majority
of the Company's new subscribers, and approximately 120 sales employees.
Each sales employee and independent agent solicits cellular customers
exclusively for the Company. Company sales employees are compensated by
salary and commission and independent sales agents are paid commissions.
The Company advertises its services through various means, including direct
mail, billboard, magazine, radio, television and newspaper advertisements.
14
During 1994 AT&T completed its acquisition of McCaw, the largest
cellular provider in the United States. Subject to certain regulatory
limitations, it is anticipated that AT&T will market McCaw's service under
the AT&T brand name. During 1994 several other large cellular providers
formed joint ventures to pool their cellular operating and marketing
resources.
Services, Customers and System Usage
There are a number of different types of cellular telephones, all of
which are currently compatible with cellular systems nationwide. The
Company sells a full range of vehicle-mounted, transportable, and hand-held
portable cellular telephones. Features offered in the cellular telephones
sold by the Company include hands-free calling, repeat dialing, horn alert
and others.
The Company's customers are able to choose from a variety of packaged
pricing plans which are designed to fit different calling patterns. The
Company typically charges its customers separately for custom-calling
features, air time in excess of the packaged amount, and toll calls.
Custom-calling features provided by the Company include call-forwarding,
call-waiting, three-way calling and no-answer transfer. The Company offers
a voice message service in many of its markets. This service, which
functions like a sophisticated answering machine, allows customers to
receive messages from callers when they are not available to take calls.
Cellular customers come from a wide range of occupations. They
typically include a large proportion of individuals who work outside of
their office, such as employees in the construction, real estate, wholesale
and retail distribution businesses, and professionals. More customers are
selecting portable and other transportable cellular telephones as these
units become more compact and fully featured, as well as more attractively
priced. It is anticipated that average revenue per customer will continue
to decline as additional non-commercial customers who generate fewer local
minutes of use are added as subscribers and as competitive pressures
intensify and place downward pressure on rates. See "-Regulation and
Competition."
Most cellular systems allow a customer to place or receive a call in a
cellular service area away from the customer's home market area. The
Company has entered into "roaming agreements" with operators of other
cellular systems covering virtually all systems in the United States; such
agreements offer the Company's customers the opportunity to roam in these
systems. These reciprocal agreements automatically pre-register the
customers of the Company's system in the other carriers' systems. Also, a
customer of a participating non-Company system traveling in a market
operated by the Company where this arrangement is in effect is able to
automatically make calls on the Company's system. The charge to a non-
Company customer for this service is typically at premium rates, and is
billed by the Company to the customer's home system, which then bills the
customer. Occasionally, the Company will enter into reciprocal agreements
with other cellular carriers to settle roaming usage at a rate different
from such premium rates. In some instances, based on competitive factors,
the Company may charge a lower amount to its customers than the amount
actually charged by another cellular
15
carrier for roaming. The Company anticipates that competitive factors
and industry consolidation may place downward pressures on charging
premium roaming rates. For additional information on roaming revenue,
see "-Strategy."
The Company is a founding partner and participant in a national alliance
of certain leading wireline cellular operating companies which plans to
design, develop and implement a virtual national cellular network under the
name MobiLink. This cellular alliance intends to offer, among other
things, a customer satisfaction guarantee and certain quality standards.
During 1993 and 1994, the Company's cellular subsidiaries experienced
strong subscriber growth in the fourth quarter, primarily due to increased
holiday season sales. According to the Cellular Telecommunications
Industry Association, industry-wide cellular sales have been seasonally
strong in the fourth calendar quarter for the past several years.
The following table summarizes, among other things, certain information
about the Company's customers and market penetration:
Year Ended or At December 31,
----------------------------------
1994 1993 1992
---- ---- ----
Majority-owned and operated MSA and
RSA systems (Note 1):
Cellular systems operated 31 26 25
Total population of systems
operated (Note 2) 6,359,699 5,015,463 4,813,985
Customers (Note 3):
At beginning of period 116,484 73,084 51,083
Additions 110,636 62,564 32,622
Net acquisitions/dispositions 30,743 - 3,091
Disconnects 46,153 19,164 13,712
At end of period 211,710 116,484 73,084
Market penetration at end of
period (Note 4) 3.33% 2.32% 1.52%
Construction expenditures
(in thousands) $ 39,937 $ 56,070 $ 10,806
All operated MSA and RSA systems
(Note 5):
Cellular systems operated 36 31 31
Total population of systems
operated (Note 2) 7,445,571 6,084,794 5,997,360
Customers at end of period (Note 6) 227,140 124,908 77,106
Market penetration at end of
period (Note 4) 3.05% 2.05% 1.29%
- -------------------------
Notes:
1. Represents the number of systems in which the Company owned at
least a 50% interest and which it operated. The revenues and expenses of
these cellular markets are included in the Company's consolidated operating
revenues and operating expenses.
2. Based on independent third-party population estimates for each
respective year.
3. Represents the approximate number of revenue-generating cellular
telephones served by the cellular systems referred to in note 1.
4. Computed by dividing the number of customers at the end of the
period by the total population of systems operated.
5. Represents the total number of systems that the Company operated,
including systems in which it does not own a majority interest.
6. Represents the approximate number of revenue-generating cellular
telephones served in all systems that the Company operated, including
systems in which it does not own a majority interest.
16
The Company's Cellular Interests
The Company obtained the right to provide cellular service through
(i) the FCC's licensing process described below, under which it received
interests in wireline licenses, and (ii) its acquisition program, under
which it has acquired interests in both wireline and non-wireline
licenses. The table below sets forth certain information with respect to
the interests in cellular systems that the Company owned as of December
31, 1994:
The Other
1994 Company's cellular
population Ownership pops at operator
(Note 1) percentage Dec. 31,1994 (Note 2)
==========================================================================
Majority-owned and operated MSAs
--------------------------------
Grand Rapids, MI 728,032 97.92% 712,889 AirTouch
Lansing, MI 502,701 99.00 497,674 AirTouch
Saginaw, MI 402,884 91.70 369,445 AirTouch
Kalamazoo, MI 299,643 97.92 293,410 Centennial
Battle Creek, MI 192,294 77.94 149,867 Centennial
Muskegon, MI 187,205 97.92 183,311 AirTouch
Benton Harbor, MI 161,613 97.92 158,251 Masters
Cellular
Jackson, MI 152,918 99.00 151,389 Centennial
Shreveport, LA 368,504 62.00 228,472 McCaw/AT&T
Alexandria, LA 150,324 100.00 150,324 Centennial
Monroe, LA 146,068 62.00 90,562 McCaw/AT&T
Jackson, MS (Note 4) 412,535 87.06 359,156 MCTA
Biloxi-Gulfport, MS (Note 4) 217,830 91.23 198,722 Cellular South
Pascagoula, MS (Note 4) 123,071 83.84 103,187 Cellular South
LaCrosse, WI 99,173 95.00 94,214 U. S. Cellular
Pine Bluff, AR 85,251 100.00 85,251 McCaw/AT&T
McAllen-Edinburg-Mission, TX
(Note 4) 431,348 67.28 290,228 SBC
Brownsville-Harlingen, TX
(Note 4) 286,245 77.81 222,738 SBC
Texarkana, AR/TX 137,052 89.00 121,976 McCaw/AT&T
-----------------------------------------------------------
5,084,691 4,461,066
-----------------------------------------------------------
Minority-owned MSAs
-------------------
Flint, MI 504,649 3.04% 15,341 Note 3
Detroit, MI 4,607,060 3.04 140,055 Note 3
Appleton/Oshkosh/Neenah, WI 468,255 10.83 50,712 Note 3
Duluth, MN/WI (Note 5) 243,518 16.33 39,766 Note 3
Owensboro, KY (Note 5) 89,993 5.73 5,157 Note 3
Little Rock, AR 535,862 36.00 192,910 Note 3
Evansville, IN (Note 5) 318,396 5.73 18,244 Note 3
Lafayette, LA 254,249 49.00 124,582 Note 3
Austin, TX 874,277 35.00 305,997 Note 3
-----------------------------------------------------------
7,896,259 892,764
-----------------------------------------------------------
Total MSAs 12,980,950 5,353,830
-----------------------------------------------------------
17
Operated RSAs
-------------
Arizona 3 (Note 5) 147,449 58.70% 86,546 Sprint Cellular
Arkansas 2 79,030 82.00 64,805 McCaw/AT&T
Arkansas 3 103,547 82.00 84,909 McCaw/AT&T
Arkansas 11 67,626 89.00 60,187 McCaw/AT&T
Arkansas 12 188,823 80.00 151,058 McCaw/AT&T
Louisiana 1 112,305 62.00 69,629 McCaw/AT&T
Louisiana 2 112,573 62.00 69,795 Centennial
Louisiana 3 (B2) 92,574 62.00 57,396 Centennial
Louisiana 4 70,825 100.00 70,825 Centennial
Michigan 3 154,657 38.76 59,949 Unitel
Michigan 5 151,220 38.76 58,617 Unitel
Michigan 6 144,382 98.00 141,494 Centennial
Michigan 7 237,052 41.78 99,052 Centennial
Michigan 8 96,650 97.92 94,640 Allegan Cellular
Michigan 9 291,024 43.38 126,246 Centennial
New Mexico 1 (Note 5) 251,919 22.22 55,982 Sprint Cellular
Texas 7 (B6) 59,224 89.00 52,709 McCaw/AT&T
------------------------------------------------------------
2,360,880 1,403,839
------------------------------------------------------------
Non-operated RSAs
-----------------
Arizona 2 (Note 5) 230,120 21.30% 49,007 Note 3
Colorado 6 (Note 5) 68,119 25.00 17,030 Note 3
Colorado 7 ( Note 5) 45,689 20.00 9,138 Note 3
Iowa 13 (Note 5) 66,706 10.00 6,671 Note 3
Michigan 10 133,511 26.00 34,713 Note 3
Minnesota 11 204,128 13.01 26,553 Note 3
New Mexico 3 (Note 5) 78,980 25.00 19,745 Note 3
New Mexico 4W 126,918 35.71 45,328 Note 3
Texas 16 316,704 9.60 30,404 Note 3
Wisconsin 1 106,435 8.44 8,985 Note 3
Wisconsin 2 84,254 12.81 10,793 Note 3
Wisconsin 3 136,443 14.29 19,492 Note 3
Wisconsin 6 115,218 28.57 32,919 Note 3
Wisconsin 10 127,102 15.00 19,065 Note 3
------------------------------------------------------------
1,840,327 329,843
------------------------------------------------------------
Total RSAs 4,201,207 1,733,682
------------------------------------------------------------
17,182,157 7,087,512
============================================================
Notes:
1. Based on 1994 independent third-party population estimates.
2. Information provided to the best of the Company's knowledge.
3. Markets not operated by the Company.
4. Represents a non-wireline interest.
5. Either sold during the first quarter of 1995 or are subject to sale
pursuant to a definitive agreement.
18
The preceding table does not include approximately 20,000 pops which
the Company acquired in January 1995 upon acquisition of a one-half of one
percent interest in the licensed operator of the Dallas, Texas MSA
wireline cellular system.
Revenue
The following table reflects the major revenue categories for the
Company's mobile communications operations as a percentage of mobile
communications operating revenues in 1994, 1993 and 1992.
1994 1993 1992
------------------------------
Cellular access fees, toll revenues
and equipment sales 82.0% 80.5 78.6
Cellular roaming 16.1 14.5 14.3
Paging services (Note 1) 1.9 5.0 7.1
------------------------------
100.0% 100.0 100.0
==============================
Note 1: The Company's paging operations were sold in October 1994.
For further information on these revenue categories, see "-Services,
Customers and System Usage."
Regulation And Competition
As discussed further below, the FCC and various state public utility
commissions regulate, among other things, the licensing, construction,
operation, interconnection arrangements, sale and acquisition of cellular
telephone systems.
Cellular Licensing Process. During the 1980's and early 1990's, the
FCC awarded two licenses to provide cellular service in each market. Each
licensee is required to provide service to a designated portion of the area
or population in its licensed area as a condition to maintaining that
license. Initially, one license was reserved for companies offering local
telephone service in the market (the wireline carrier) and one license was
available for firms unaffiliated with the local telephone company (the non-
wireline carrier). Since mid-1986, the FCC has permitted telephone
companies or their affiliates to acquire control of non-wireline licenses
in markets in which they do not hold interests in the wireline license.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval and, in certain cases, receipt
of other federal and state regulatory approvals. Acquisitions of minority
interests generally do not require FCC approval. Whenever FCC approval is
required, any interested party may file a petition to dismiss or deny the
application for approval of the proposed transfer.
19
Initial operating licenses are granted for ten-year periods and are
renewable upon application to the FCC for periods of ten years. Licenses
may be revoked and license renewal applications denied for cause. There
may be competition for licenses upon the expiration of the initial ten-year
terms and there is no assurance that any license will be renewed, although
the FCC has issued a decision that grants a renewal expectancy during the
license renewal period to incumbent licensees that substantially comply
with the terms and conditions of their cellular authorizations and the
FCC's regulations. The licenses for the MSA markets operated by the
Company were initially granted between 1984 and 1987, and licenses for
operated RSAs were initially granted between 1989 and 1991. The Company
intends to file renewal applications for its licenses which will otherwise
expire in 1995.
Five years after initial operating licenses are granted, unserved areas
within markets previously granted to licensees may be applied for by any
qualified party. The FCC has rules that govern the procedures for filing
and granting such applications and has established requirements for
constructing and operating systems in such areas. The Company has not
lost, and does not expect to lose, any significant market areas as a result
of not providing service to such areas. In addition to regulation by the
FCC, cellular systems are subject to certain Federal Aviation
Administration tower height regulations respecting the siting and
construction of cellular transmitter towers and antennas.
Cellular operators are also subject to state and local regulation in
some instances. Although the FCC has pre-empted the states from exercising
jurisdiction in the areas of licensing, technical standards and market
structure, certain states require cellular operators to be certified. In
addition, some state authorities regulate certain aspects of a cellular
operator's business, including certain aspects of pricing, the resale of
long distance service to its customers, the technical arrangements and
charges for interconnection with the landline network, and the transfer of
interests in cellular systems. The LPSC has petitioned the FCC for
continued regulation of cellular operators; the FCC is expected to rule on
the petition in the second quarter of 1995. The siting and construction of
the cellular facilities may also be subject to state or local zoning, land
use and other local regulations.
Competition between cellular providers in each market is conducted
principally on the basis of services and enhancements offered, the
technical quality and coverage of the system, quality and responsiveness of
customer service, and price. Competition may be intense. For a listing of
the Company's competitors in cellular markets operated by the Company, see
"- The Company's Cellular Interests." Under applicable law, the Company is
required to permit the reselling of its services. In certain larger
markets and in certain market segments, competition from resellers may be
significant. There is also substantial competition for agents. Some of
the Company's competitors have greater assets and resources than the
Company.
20
Developments Affecting Mobile Communications Competition. Continued
and rapid technological advances in the communications field, coupled with
legislative and regulatory uncertainty, make it impossible to (i) predict
the extent of future competition to cellular systems, (ii) determine which
emerging technologies pose the most viable alternatives to the Company's
cellular operations, or (iii) list each development that may ultimately
impact the Company's cellular operations. No assurance can be given that
current or future technological advances, or legislative or regulatory
changes, will not impact the Company's cellular operations.
Several recent FCC initiatives have resulted in the allocation of
additional radio spectrum or the issuance of experimental licenses for
emerging mobile communications technologies that will or may be competitive
with the Company's cellular and telephone operations, including personal
communication services ("PCS"). Although there is no universally
recognized definition of PCS, the term is generally used to refer to
wireless services to be provided by licensees operating in the 1850 MHz to
1990 MHz radio frequency band using microcells and high-capacity digital
technology. When offered commercially, PCS technology currently under
development may permit PCS operators to offer wireless data, image and
multimedia services. The extent to which PCS will offer services that are
complementary or competitive with cellular services is uncertain, and is
expected to be influenced by continuing developments in PCS and cellular
technologies and by FCC regulation.
The FCC has adopted rules to auction up to six PCS licenses per market.
Under these rules, two 30 MHz frequency blocks will be awarded for each of
the 51 Rand McNally Major Trading Areas ("MTAs"), while one 30 MHz and
three 10 MHz frequency blocks will be awarded for each of the 493 Rand
McNally Basic Trading Areas ("BTAs"). Subject to certain exceptions, the
Company will be permitted to freely pursue PCS licenses outside its
cellular markets, but will be limited to acquiring only one 10 MHz block in
licensed areas where it controls more than a 20% interest in a cellular
licensee and serves more than 10% of the population within the PCS licensed
area. The Company did not participate in the FCC's auction of the MTA
licenses. If attractive opportunities arise, the Company may participate
in the FCC's auctions of BTA licenses to be held in 1995. PCS service may
be commercially available in certain areas as early as 1996.
In addition to PCS, users and potential users of cellular systems may
find their communication needs satisfied by other current and developing
technologies, several of which may enjoy potential operational and service
advantages through their use of digital technology. The FCC has recently
authorized the licensees of certain specialized mobile radio service
("SMR") systems (which historically have generally been used by taxicabs
and tow truck operators) to configure their systems so as to operate in a
manner similar to cellular systems. The Company believes that SMR systems
are operating in a majority of its cellular markets. Certain well-
established SMR providers have announced their intention to create a
nationwide digital mobile communications system to compete with cellular
systems. Other similar communication services which have the technical
capability to handle mobile telephone calls may provide competition in
certain markets, although these services currently lack the subscriber
capacity of cellular systems. One-way paging or beeper services that
21
feature voice message and data display as well as tones may be adequate for
potential subscribers who do not need to communicate with the caller.
Other two-way mobile services may also be competitive with the Company's
services. For example, the second generation of cordless telephone
technology ("CT-2") will permit the application of this technology to a
public environment. During 1994 the FCC auctioned additional spectrum
suitable for two-way paging and other wireless data services, which is
expected to lead to increased development of these services.
The FCC has taken various actions to authorize mobile satellite systems
in which transmissions from mobile units to satellites would supplement or
replace transmissions to land-based stations. Such satellite-based systems
are being studied and designed, including international systems, and no
assurance can be given that such systems will not ultimately be successful
in supplementing or replacing cellular systems which communicate directly
to land-based stations.
As described further under "Telephone Operations - Regulation and
Competition," in connection with the well-publicized convergence of
telecommunications, cable, video, computer and entertainment businesses,
several large companies have recently announced plans to offer products
that would significantly enhance current communications and data
transmissions services and, in some instances, introduce new services.
Although much of the resulting competition is expected to center on
wireline services, it is anticipated that these developments may also
increase competition in the mobile communications industry. Several
companies are currently developing and marketing small hand-held devices
that provide digital wireless data transmission services that compete with
similar analog services currently being provided by cellular companies.
As discussed further under "Telephone Operations - Regulation and
Competition," recently several bills have been filed in the U.S. Congress
that have the potential to significantly alter the telecommunications
industry, including bills that focus on the mobile communications industry.
Recently, several large cellular providers have merged with other
companies or formed joint ventures. The resulting entities will have
substantially greater assets and resources than the Company. These joint
ventures and others have also pooled their resources to bid on PCS
licenses. For more information, see "-Marketing."
Although it is uncertain how PCS, SMR, CT-2, mobile satellites and other
emerging technologies will ultimately affect the Company, they are not
anticipated to be significant sources of competition in the Company's
markets in the near term. Moreover, management believes that equipping its
current cellular networks with digital enhancements and applying new
microcellular technologies should permit its cellular systems to provide
services comparable with the emerging technologies described above,
although no assurances can be given that this will happen or that future
technological advances or legislative or regulatory changes will not create
additional sources of competition.
22
Certain Considerations Regarding Cellular Telephone Operations
The cellular industry has a relatively limited operating history and
there continues to be uncertainty regarding its future. Among other
factors, there is uncertainty regarding (i) the continued growth in the
number of customers, (ii) the usage and pricing of cellular services,
particularly as market penetration increases and lower-usage customers
subscribe for service, (iii) the number of customers who will terminate
service each month, and (iv) the impact of changes in technology,
regulation and competition, any of which could have a material adverse
effect on the Company. See "- Regulation and Competition."
The market value of cellular interests is frequently determined on the
basis of the number of pops owned by a cellular provider. The population
of a particular cellular market, however, does not necessarily bear a
direct relationship to the number of subscribers or the revenues that may
be realized from the operation of the related cellular system. The future
market value of the Company's cellular interests will depend on, among
other things, the success of its cellular operations.
OTHER
The Company has certain obligations based on federal, state and local
laws relating to the protection of the environment. Costs of compliance
through 1994 have not been material and the Company currently has no reason
to believe that such costs will become material.
For additional information concerning the business and properties of
the Company, see notes 2, 3, 13, 16 and 17 of Notes to Consolidated
Financial Statements set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of (i) telephone lines,
central office equipment, telephone instruments and related equipment, and
land and building related to telephone operations and (ii) switching and
cell site equipment related to cellular telephone operations. As of
December 31, 1994, the Company's gross property, plant and equipment of
approximately $1.3 billion consisted of the following:
Telephone:
Cable and wire.................................... 44.1%
Central office equipment.......................... 23.7
General support................................... 7.0
Information origination/termination equipment..... 1.6
Construction in progress.......................... 5.1
Other............................................. .4
------
81.9
Mobile Communications ................................ 11.6
Other................................................. 6.5
------
100.0%
======
23
"Cable and wire" facilities consist primarily of buried cable and
aerial cable, poles, wire, conduit and drops. "Central office equipment"
consists primarily of switching equipment, circuit equipment and related
facilities. "General support" consists primarily of land, buildings,
tools, furnishings, fixtures, motor vehicles and work equipment.
"Information origination/termination equipment" consists primarily of
premise equipment (private branch exchanges and telephones) for official
company use. "Construction in progress" includes property of the foregoing
categories that has not been placed in service because it is still under
construction. The properties of the Company's telephone subsidiaries are
subject to mortgages securing the funded debt of such companies. The
Company owns substantially all of the central office buildings, local
administrative buildings, warehouses, and storage facilities used in its
telephone operations. The Company leases most of the offices used in its
cellular operations; certain of its transmitter sites are leased while
others are owned by the Company. For further information on the location
and type of the Company's properties, see the descriptions of the Company's
telephone and mobile communications operations in Item 1.
Item 3. Legal Proceedings.
From time to time, the Company is involved in litigation incidental to
its business, including administrative hearings of state public utility
commissions relating primarily to rate making, actions relating to employee
claims, occasional grievance hearings before labor regulatory agencies and
miscellaneous third party tort actions. Currently, there are no material
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning Executive Officers, set forth at Item 10 in
Part III hereof, is incorporated in Part I of this Report by reference.
24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Century's common stock is listed on the New York Stock Exchange and is
traded under the symbol CTL. The following table sets forth the high and
low sale prices, along with the quarterly dividends, for each of the
quarters indicated:
Sale prices
----------- Dividend per
High Low common share
---- --- ------------
1993:
First quarter $ 33-3/8 26 .0775
Second quarter $ 33-1/8 28 .0775
Third quarter $ 31-5/8 27-1/8 .0775
Fourth quarter $ 30-3/8 23-1/4 .0775
1994:
First quarter $ 27-7/8 21-7/8 .08
Second quarter $ 27-5/8 22-5/8 .08
Third quarter $ 30-1/2 25 .08
Fourth quarter $ 32-1/4 27-1/2 .08
Common stock dividends during 1993 and 1994 were paid each quarter.
As of February 28, 1995, there were approximately 7,000 stockholders of
record of Century's common stock.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial
data as of and for each of the years ended in the five-year period ended
December 31, 1994:
Selected Income Statement Data
Year ended December 31,
--------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------
(Dollars, except per share amounts,
and shares expressed in thousands)
Operating revenues
Telephone $ 389,438 348,485 297,510 235,796 215,771
Mobile Communications 150,802 84,712 62,092 46,731 34,594
----------------------------------------------------
Total operating revenues $ 540,240 433,197 359,602 282,527 250,365
====================================================
Operating income (loss)
Telephone $ 137,992 114,902 103,672 80,039 70,654
Mobile Communications 31,443 9,906 5,956 (4,952) (9,553)
----------------------------------------------------
Net operating income $ 169,435 124,808 109,628 75,087 61,101
====================================================
Income before cumulative
effect of changes in
accounting principles $ 100,238 69,004 59,973 37,419 31,098
Cumulative effect of changes
in accounting principles - - (15,668) - -
---------------------------------------------------
Net income $ 100,238 69,004 44,305 37,419 31,098
====================================================
25
Fully diluted earnings per
share before cumulative
effect of changes in
accounting principles $ 1.80 1.32 1.22 .79 .66
Cumulative effect of changes
in accounting principles - - (.31) - -
----------------------------------------------------
Fully diluted earnings
per share $ 1.80 1.32 .91 .79 .66
====================================================
Dividends per common share $ .320 .310 .293 .287 .280
=====================================================
Average fully diluted
shares outstanding 58,135 55,892 48,653 47,432 46,944
=====================================================
Selected Balance Sheet Data
December 31,
1994 1993 1992 1991 1990
-----------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------
Net property, plant and
equipment $ 947,131 827,776 675,878 534,998 490,957
Excess cost of net assets
acquired, net $ 441,436 297,158 217,688 114,258 110,013
Total assets $1,643,253 1,319,390 1,040,487 764,539 706,411
Long-term debt $ 518,603 364,433 346,944 205,453 230,715
Stockholders' equity $ 650,236 513,768 385,449 319,977 280,915
The following table presents certain selected consolidated operating
data as of the end of each of the years in the five-year period ended
December 31, 1994:
Year ended December 31,
----------------------------------------------------
1994 1993 1992 1991 1990
----------------------------------------------------
Telephone access lines 454,963 434,691 397,300 314,819 304,915
Cellular units in service
in majority-owned
markets 211,710 116,484 73,084 51,083 35,815
See Items 1 and 2 in Part I and notes 1, 9, 16 and 20 of Notes to
Consolidated Financial Statements set forth in Item 8 elsewhere herein for
additional information.
26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
OVERVIEW
The 1994 net income of Century Telephone Enterprises, Inc. and
subsidiaries (the "Company") increased 45.3% to $100.2 million from
$69.0 million during 1993. Income before the cumulative effect of changes
in accounting principles during 1992 was $60.0 million.
Fully diluted earnings per share for 1994 increased 36.4% to $1.80 from
$1.32 during 1993. Fully diluted earnings per share in 1992 before the
cumulative effect of changes in accounting principles was $1.22. The
average number of fully diluted shares outstanding increased 4.0% and 5.8%
in 1994 and 1993, respectively, as a result of shares issued in connection
with acquisitions and the Company's dividend reinvestment, incentive and
benefit plans.
The Company is a regional diversified telecommunications company that
is primarily engaged in providing traditional telephone services and
cellular mobile telephone services. The Company's 1994 operating income
was $169.4 million, an increase of $44.6 million (35.8%) over 1993
operating income of $124.8 million. During 1994 the operating income of
the Company's telephone segment and its mobile communications segment
increased $23.1 million (20.1%) and $21.5 million (217.4%), respectively,
compared to 1993. The Company's operating income during 1992 was $109.6
million.
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands,
except per share amounts)
Operating income
Telephone $ 137,992 114,902 103,672
Mobile Communications 31,443 9,906 5,956
--------------------------------------------------------------------------
169,435 124,808 109,628
Interest expense (42,577) (30,149) (27,166)
Income from unconsolidated
cellular entities 15,698 6,626 1,692
Gain on sales of assets 15,877 1,661 3,985
Other income and expense 3,105 3,310 4,433
Income tax expense (61,300) (37,252) (32,599)
--------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 100,238 69,004 59,973
Cumulative effect of changes in
accounting principles - - (15,668)
--------------------------------------------------------------------------
Net income $ 100,238 69,004 44,305
==========================================================================
Fully diluted earnings per share:
Before cumulative effect of changes
in accounting principles $ 1.80 1.32 1.22
Cumulative effect of changes in
accounting principles - - (.31)
--------------------------------------------------------------------------
Fully diluted earnings per share $ 1.80 1.32 .91
==========================================================================
27
The operating income of the telephone segment includes the operations,
subsequent to each respective acquisition, of Century Telephone of Ohio,
Inc. ("Ohio"), acquired in April 1992, and Century Telephone of San
Marcos, Inc. ("San Marcos"), acquired in April 1993. See Note 16 of Notes
to Consolidated Financial Statements for additional information applicable
to these acquisitions.
The Company's mobile communications operations reflect the operations
of the cellular entities in which the Company has a majority interest.
The minority interest owners' share of the income or loss of such entities
is reflected as an expense in "Other income and expense." The operating
income of the mobile communications segment includes (i) the operations of
the Alexandria, Louisiana Metropolitan Statistical Area ("MSA") cellular
system ("Alexandria") subsequent to its acquisition in December 1992, (ii)
the operations of Celutel, Inc. ("Celutel") subsequent to its acquisition
in February 1994, and (iii) the Company's paging operations prior to their
sale in October 1994. See Notes 16 and 17 of Notes to Consolidated
Financial Statements for additional information.
According to data derived from published sources, as of December 31,
1993 the Company had the second highest ratio of owned cellular pops (the
population of licensed cellular telephone markets multiplied by the
Company's proportionate equity interests in the licensed operators
thereof) to telephone access lines among the 20 largest telephone
companies (based on access lines) in the United States. Accordingly, the
Company anticipates that its mobile communications operations will
continue to increasingly influence the Company's overall operations as the
cellular industry matures. Contributions to operating revenues and
operating income by the Company's telephone and mobile communications
operations for each of the three years ended December 31, 1994 were as
follows:
1994 1993 1992
==========================================================================
Operating revenues
Telephone operations 72.1% 80.4 82.7
Mobile Communications operations 27.9% 19.6 17.3
Operating income
Telephone operations 81.4% 92.1 94.6
Mobile Communications operations 18.6% 7.9 5.4
===========================================================================
The Company's share of earnings or loss from the cellular entities in
which it has less than a majority interest 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 increased to
$15.7 million in 1994 from $6.6 million in 1993 and $1.7 million in 1992.
As of January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes."
The cumulative effect of the changes in accounting principles related to
SFAS 106 and SFAS 109 reduced 1992 net income by $14.8 million ($.30 per
fully diluted share) and $913,000 ($.01 per fully diluted share),
respectively.
28
TELEPHONE OPERATIONS
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands)
Operating revenues
Local service $ 100,020 88,704 78,108
Network access and long distance 243,759 217,055 182,711
Other 45,659 42,726 36,691
--------------------------------------------------------------------------
389,438 348,485 297,510
--------------------------------------------------------------------------
Operating expenses
Plant operations 84,117 80,578 66,878
Customer operations 35,746 32,225 26,242
Corporate and other 58,408 55,605 46,791
Depreciation and amortization 73,175 65,175 53,927
--------------------------------------------------------------------------
251,446 233,583 193,838
--------------------------------------------------------------------------
Operating income $ 137,992 114,902 103,672
==========================================================================
The Company's telephone operations are conducted in rural, suburban and
small urban communities in 14 states. Approximately 82% of the Company's
telephone access lines are in Wisconsin, Louisiana, Michigan, Ohio and
Arkansas.
Local Service Revenues
Local service revenues are derived from the provision of local exchange
telephone services in the Company's franchised service areas. The $11.3
million increase in such revenues in 1994 included $4.5 million due to the
increase in the number of customer access lines, $3.8 million from
increased rates for basic services and $1.2 million due to acquisitions.
Acquisitions contributed $7.5 million to the 1993 increase of $10.6
million; $2.7 million of the increase was due to the increase in access
lines. The remaining increases in 1994 and 1993 were primarily due to the
provision of custom calling features. Internal access line growth during
1994, 1993 and 1992 was 4.1%, 3.6% and 3.8%, respectively.
Network Access and Long Distance Revenues
Network access and long distance revenues primarily relate to services
provided to interexchange carriers (long distance carriers) in connection
with the completion of long distance telephone calls. Substantially all
of the Company's interstate network access revenues are received through
pooling arrangements administered by the National Exchange Carrier
Association ("NECA") based on cost separation studies and average schedule
settlement agreements. The NECA receives access charges billed by the
Company and other participating local exchange carriers ("LECs") to
interstate long distance carriers and other LEC customers for their use of
the local exchange network to complete long distance calls. These charges
to the long distance carriers and other LEC customers are based on
tariffed access rates filed with the Federal Communications Commission
("FCC")
29
by the NECA on behalf of the Company and other participating LECs. Long
distance and intrastate network access revenues are based on access rates,
cost separation studies or special settlement arrangements with intrastate
long distance carriers.
Network access and long distance revenues increased $26.7 million
(12.3%) in 1994 and $34.3 million (18.8%) in 1993 due to the following
factors:
1994 1993
Increase Increase
(decrease) (decrease)
========================================================================
(Dollars in thousands)
Acquisitions $ 5,734 19,737
Partial recovery of increased operating expenses
through revenue pools in which the Company
participates with other telephone companies
and return on rate base 8,834 7,326
Increased recovery from the FCC mandated
Universal Service Fund ("USF") 8,815 6,161
Increased minutes of use 2,409 3,444
Revision of prior year revenue settlement
agreements 2,537 (770)
Other, net (1,625) (1,554)
-------------------------------------------------------------------------
$ 26,704 34,344
=========================================================================
Other, net in the preceding table reflects reductions of $2.3 million
and $1.0 million in 1994 and 1993, respectively, in certain settlements
received from a large local exchange operating company by the Company's
Louisiana subsidiaries. Also included in other, net in 1994 is a $1.9
million reduction in intrastate high cost assistance revenues as a result
of the phase-out of the Wisconsin state support fund, the loss of which
was offset by an increase in local rates in the same jurisdictions.
Other Revenues
Other revenues include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for
interexchange carriers, (iii) leasing network facilities and (iv)
participating in the publication of local directories. The increase in
other revenues during 1994 was primarily due to a $1.2 million increase in
directory advertising revenues and a $1.1 million increase in billing and
collection revenues. The 1993 increase was primarily due to acquisitions.
Certain large telecommuni-cations companies for which the Company
currently provides billing and collection services have indicated their
desire to reduce their billing and collection expenses which may lead to
reduced future billing and collection revenues.
30
Operating Expenses
Plant operations expenses during 1994 and 1993 increased $3.5 million
(4.4%) and $13.7 million (20.5%), respectively. Operating expenses
attributable to acquisitions accounted for $2.3 million of the 1994
increase. A $1.2 million increase in salaries, wages and benefits during
1994 was partially offset by a $531,000 reduction in postemployment
benefit expense. Approximately $7.1 million of the 1993 increase was due
to operating expenses attributable to acquisitions. Increases in
salaries, wages and benefits during 1993 accounted for approximately $2.2
million. The remainder of the 1993 increase was due to increases in other
general operating expenses.
Expenses attributable to acquisitions contributed $2.1 million and
$11.0 million, respectively, to the 1994 increase of $6.3 million (7.2%)
and the 1993 increase of $14.8 million (20.3%) in customer operations,
corporate, and other expenses. Ad valorem taxes increased $1.0 million in
1994 and $601,000 in 1993 due to the increase in plant in service. The
remainder of the increases resulted from increases in other general
operating expenses.
Depreciation and amortization increased $8.0 million (12.3%) and $11.2
million (20.9%) in 1994 and 1993, respectively. Approximately $2.4
million and $5.4 million of the increases in 1994 and 1993, respectively,
were due to acquisitions. Depreciation expense included nonrecurring
additional depreciation charges approved by regulators in certain
jurisdictions which, exclusive of acquisitions, aggregated $3.3 million in
1993 and $2.9 million in 1992. In addition, the Company obtained higher
recurring depreciation rates for certain subsidiaries during the last
three years. Excluding acquisitions, the first-year effects of the higher
rates were approximately $5.6 million in 1994, $1.7 million in 1993 and
$770,000 in 1992. The remaining increases in depreciation and
amortization were due to higher levels of plant in service. The composite
depreciation rate for telephone properties, including the additional
depreciation charges, was 7.1%, 7.1% and 6.6% for 1994, 1993 and 1992,
respectively.
Other
For additional information regarding certain matters that have impacted
or may impact the Company's telephone operations, see Regulation and
Competition below.
31
MOBILE COMMUNICATIONS OPERATIONS
Year ended December 31, 1994 1993 1992
--------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Cellular service $ 141,325 76,583 54,489
Equipment and other 9,477 8,129 7,603
--------------------------------------------------------------------------
150,802 84,712 62,092
--------------------------------------------------------------------------
Operating expenses
Cost of sales and other
operating expenses 31,859 19,681 14,313
General, administrative and
customer service 33,171 23,872 19,685
Sales and marketing 33,074 19,894 13,167
Depreciation and amortization 21,255 11,359 8,971
--------------------------------------------------------------------------
119,359 74,806 56,136
--------------------------------------------------------------------------
Operating income $ 31,443 9,906 5,956
==========================================================================
The Company's mobile communications segment at December 31, 1994
consisted entirely of operations of the cellular entities in which the
Company has a majority interest. The Company's cellular customers are
located primarily in Louisiana, Michigan, Mississippi and Texas. The
Company's share of income from cellular entities in which it has less than
a majority interest (which is not included in the mobile communications
segment) was $15.7 million, $6.6 million and $1.7 million during 1994,
1993 and 1992, respectively, and is reflected in "Income from
unconsolidated cellular entities."
Operating Revenues
Cellular service revenues include monthly service fees for providing
access and airtime to customers, service fees for providing airtime to
users roaming through the Company's service areas and toll revenue.
Cellular service revenues during 1994 increased to $141.3 million from
$76.6 million in 1993 and $54.5 million in 1992.
The 1994 and 1993 increases in cellular service revenues were primarily
attributable to the significant increases in cellular customers resulting
principally from acquisitions, increased demand and expanded areas of
service. Cellular units in service in the Company's majority-owned
markets increased to 211,710 (of which 35,027 were in the Celutel markets)
as of December 31, 1994 from 116,484 as of December 31, 1993 and 73,084 as
of December 31, 1992. Exclusive of acquisitions, access and usage
revenues increased $27.2 million (48.3%) in 1994 and $14.6 million (36.9%)
in 1993 and roaming and toll revenues increased $9.8 million (54.9%) and
$3.0 million (22.3%) in 1994 and 1993, respectively. The remainder of the
1994 revenue increase was due substantially to the Celutel operations,
which increased revenues by $26.3 million, and the remainder of the 1993
increase was due to the Alexandria operations, which increased 1993
revenues by $3.6 million.
32
The average monthly cellular service revenue per customer declined to
$69 in 1994 from $71 in 1993 and $75 in 1992. 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 downward pressure on rates. The Company will continue to focus on
customer service and attempt to stimulate cellular usage by promoting the