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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, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7784
CENTURY TELEPHONE ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Century Park Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (318)388-9500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
Preference Share Purchase Rights 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. [ ]
As of February 28, 1997, the aggregate market value of voting stock held by
non-affiliates (affiliates being for these purposes only directors, executive
officers and holders of more than five percent of the Company's outstanding
voting securities) was $1.8 billion.
As of February 28, 1997, there were 60,019,807 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement prepared in connection with the
1997 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 local exchange telephone services and cellular telephone
communications services. For the year ended December 31, 1996, telephone (local
exchange) operations and mobile communications (cellular) operations provided
60% and 33%, 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, 1996, the Company's local exchange telephone subsidiaries
operated over 503,000 telephone access lines, primarily in rural, suburban and
small urban areas in 14 states, with the largest customer bases located in
Wisconsin, Louisiana, Michigan, Ohio, Arkansas and Texas. According to published
sources, the Company is the sixteenth 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's cellular operations, 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, 1996, the Company, through its cellular operations, owned
approximately 8.0 million pops in 27 MSAs, primarily concentrated in Michigan,
Louisiana, Arkansas, Mississippi and Texas, and 30 RSAs, most of which are in
Michigan, Mississippi, Louisiana and Arkansas. The Company is the majority owner
and operator in 19 of the MSAs and 15 of the RSAs, which collectively represent
6.5 million pops, and has minority interests in the other MSAs and RSAs, which
collectively represent 1.5 million pops. Of the Company's 8.0 million pops,
approximately 70% are attributable to the Company's MSA interests, with the
balance attributable to its RSA interests. According to data derived from
published sources, the Company is the twelfth largest cellular telephone company
in the United States based on the Company's owned pops. At December 31, 1996,
the Company's majority-owned and operated cellular systems had more than 368,000
cellular subscribers. Except for five MSAs and three RSAs, all of the cellular
systems operated by the Company are operated under wireline licenses.
The Company also provides long distance, operator, competitive access and
interactive services in certain local and regional markets, as well as certain
printing and related services.
Recent Acquisitions. In April 1996 Century acquired Ringgold Telephone
Company. In connection with the acquisition, Century acquired approximately
1,700 telephone access lines along with an additional 25% interest in the North
Louisiana Cellular Partnership. The acquisition brought the Company's total
ownership in the North Louisiana Cellular Partnership to 87%.
In December 1996 Century acquired 100% of the Mississippi RSA #7 cellular
system, which has a population of approximately 179,000. Mississippi RSA #7 is
adjacent to the Jackson, Mississippi MSA and Mississippi RSA #6, both of which
are operated by the Company.
In January 1997 Century acquired Pecoco, Inc., a provider of local exchange
telephone service in four counties in Wisconsin. As a result of the acquisition,
Century acquired more than 7,600 telephone access lines and a minority interest
in two cellular partnerships serving Madison and Milwaukee, Wisconsin,
representing approximately 35,000 pops.
The Company is continually evaluating the possibility of acquiring additional
telephone access lines and cellular or other wireless interests in exchange for
cash, securities or both. Although the Company's primary focus will continue to
be on acquiring telephone and wireless 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. As of December 31, 1996, the Company employed approximately 3,400
persons, of which approximately 185 employees located in Ohio are covered by a
three-year collective bargaining agreement between the Company and the
Communications Workers of America. The agreement, which was scheduled to lapse
on March 30, 1997, has been extended until March 30, 1998.
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 sixteenth largest local exchange telephone company in the
United States, based on the more than 503,000 access lines it served at December
31, 1996. Currently, the Company operates over 500 central office and remote
switching centers in its telephone operating areas. All of the Company's access
lines are 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 the Company's access lines as of December 31, 1996:
Number of Percent of
State access lines access lines
- ------------------------------------------------------------------
Wisconsin 105,252 21%
Louisiana 92,677 18
Michigan 88,483 18
Ohio 75,103 15
Arkansas 40,673 8
Texas 38,327 8
Tennessee 23,507 5
Mississippi 16,211 3
Colorado 7,420 1
New Mexico 5,168 1
Indiana 4,827 1
Idaho 4,162 1
Arizona 1,563 0
Iowa 189 0
- ------------------------------------------------------------------
503,562 100%
==================================================================
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,
- -----------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------
(Dollars in thousands)
Access lines 503,562 480,757 454,963 434,691 397,300
% Residential 77% 78 79 80 81
% Business 23% 22 21 20 19
Operating revenues $ 451,538 419,242 391,265 350,330 298,812
Capital expenditures $ 110,147 136,006 152,336 131,180 108,974
- -----------------------------------------------------------------------
Future growth in telephone operations is expected to be derived from (i)
acquiring additional telephone companies, (ii) providing service to new
customers, (iii) increasing network usage and (iv) 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 local exchange telephone subsidiaries derive revenue from
providing (i) local telephone services, (ii) network access services and (iii)
other related services. The following table reflects the percentage of telephone
operating revenues derived from these respective services:
1996 1995 1994
- ---------------------------------------------------------------
Local service 26.9% 26.6 25.6
Network access 61.2 61.7 62.3
Other 11.9 11.7 12.1
- ---------------------------------------------------------------
100.0% 100.0 100.0
===============================================================
Local service revenues are derived from the provision of local exchange
telephone services in the Company's service areas. Internal access line growth
during 1996, 1995 and 1994 was 4.3%, 4.4% and 4.1%, respectively. The Company
believes that access line growth in the future will benefit from population
growth in its service areas, acquisitions and the growth of second lines. The
Company markets local Internet access in 194 communities in eight states, which
the Company believes has led to an increase in orders for second lines.
Network access 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 terminate interstate and intrastate
long distance telephone calls. Most of the Company's interstate network access
revenues are derived through pooling arrangements administered by the National
Exchange Carrier Association ("NECA"). 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 and subsequently
distributes these revenues to such LECs based primarily on cost separation
studies. The charges billed to the long distance carriers and other LEC
customers are based on tariffed access rates filed with the FCC by the NECA on
behalf of the Company and other participating LECs. Interstate revenues as a
percentage of telephone operating revenues amounted to 33.8%, 34.6% and 33.5% in
1996, 1995 and 1994, respectively.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company 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 with other LECs and are determined based on cost
separation studies or special settlement arrangements.
The installation of digital switches and related software has been an
important component of the Company's growth strategy because it allows the
Company to offer enhanced 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 1996 the Company continued to
expand its list of premium services (such as voice mail and Internet access)
offered in certain service areas and aggressively marketed these services.
The Company's telephone subsidiaries are installing fiber optic cable in high
traffic routes in certain areas in which the subsidiaries operate and have
provided alternative routing of telephone service over fiber optic cable
networks in several strategic operating areas. At December 31, 1996, the
Company's telephone subsidiaries had over 2,600 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, (iv) participating in the
publication of local directories and (v) providing Internet access. At the end
of 1996, the Company offered Internet access in telephone markets representing
82% of its telephone customers. Certain large telecommunications companies for
which the Company currently provides billing and collection services continue to
indicate their desire to reduce their billing and collection expenses, which is
expected to result in future reductions of 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") and the Rural Telephone Bank ("RTB").
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
6.04% to 6.42% for the fiscal year ended September 30, 1996), and in some cases
makes loans concurrently with RUS loans. Most of the Company's telephone plant
is pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS and RTB. The Company's telephone subsidiaries which have
borrowed from government agencies generally may not loan or advance any funds to
Century, but may pay dividends if certain financial ratios are met.
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 have traditionally been regulated
extensively by various state regulatory agencies (generally called public
service commissions or public utility commissions) and by the FCC. As discussed
in greater detail below, passage of the Telecommunications Act of 1996 (the
"1996 Act"), coupled with state legislative and regulatory initiatives and
technological changes, has fundamentally altered the telephone industry by
reducing the regulation of LECs and permitting competition in each segment of
the telecommunications industry. Although Century anticipates that these trends
towards reduced regulation and increased competition will continue, it is
difficult to determine the form or degree of future regulation and competition
in the Company's service areas.
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 recent years, Wisconsin, Louisiana, Michigan, Ohio and other state
legislatures and regulatory commissions having jurisdiction over the Company's
telephone subsidiaries have either begun to reduce the regulation of LECs or
have announced their intention to review such regulation, and it is expected
that this trend will continue. This reduced 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. During 1995 the Louisiana Public Service Commission ("LPSC") adopted
a new regulatory plan for independent telephone companies in Louisiana effective
July 1, 1995. For additional information, see "Regulation and Competition" in
Item 7 herein. As stated in Item 7, the Company anticipates that, as a result of
the LPSC's plan, the access revenues of its Louisiana telephone subsidiaries
will be reduced by approximately $3.8 million in 1997 and an additional $1.4 in
1998, and that there is no assurance that revenues of such companies will not be
further reduced in the future as a result of the LPSC plan.
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
interstate 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 Corporation. 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 optional incentive
regulatory plan, but will continue to evaluate its options on a periodic basis.
Either election, if made by the Company, would have to be applicable to all of
the Company's telephone subsidiaries. The authorized interstate access rate of
return for the Company's telephone subsidiaries 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.
In February 1996 the FCC sought public comments on whether it should initiate
a rate of return represcription proceeding for LECs that are subject to rate of
return regulation for interstate access revenues. The Company is unaware of any
significant developments in this proceeding.
In December 1996 the FCC opened a new proceeding to address reforming the
system requiring long distance carriers to pay certain LECs for access to the
LECs' networks. Although the FCC's proceeding primarily affects LECs other than
those (such as the Company's LECs) which are primarily subject to rate of return
regulation, the FCC is expected to review a number of matters under this
proceeding which will have an impact on rate of return companies. The FCC also
plans to initiate a separate proceeding in 1997 to undertake a comprehensive
review of access charges for rate of return incumbent LECs. The FCC has outlined
two possible approaches for restructuring access charges and for deregulating
LEC access services as competition develops in the LEC market, one of which
would allow the marketplace to determine access charges. The other approach
would involve the FCC mandating price levels or pricing methodologies.
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.
In February 1996 the United States Congress enacted the 1996 Act which
provides, among other things, that a federal-state joint board (the "Board")
review the then-existing universal service support mechanisms and recommend
changes to the FCC regulations in order that such regulations will be consistent
with the universal service principles in the 1996 Act. The 1996 Act provides
that all telecommunications carriers providing interstate services contribute to
universal service support mechanisms. The 1996 Act provides that only eligible
telecommunications carriers designated by a state shall be eligible to receive
specific federal universal service
support and that any eligible telecommunications carrier that receives such
support shall only use that support to provide, maintain and upgrade facilities
and services for universal service in the area for which the support is
received. In November 1996 the Board issued its recommendations. Although the
Board has recommended maintaining and funding universal service support
mechanisms, the Board deferred a recommendation on how large the subsidy should
be. The Board also recommended creation of a $2.25 billion fund for providing
discounted services to schools and libraries. The FCC is expected to take final
actions on these recommendations prior to May 8, 1997. Although the Company
anticipates that the 1996 Act may ultimately result in a reduction of its
federal support revenues, management believes it is premature to assess or
estimate the ultimate impact thereof. During 1996 and 1995 the Company's
telephone subsidiaries received $49.3 million and $41.8 million, respectively,
from the federal Universal Service Fund.
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. See "-State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
Most of the Company's LECs concur with the common line and traffic sensitive
tariffs filed by the NECA and participate in the access revenue pools
administered by the NECA for interstate services. All of the 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 access tariffed rates. There is no assurance that these
requests will not result in decreased 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 each sector of the telephone
industry, including, most recently, local service. As a result, the number of
companies offering competitive services has increased.
As indicated above, in February 1996 Congress enacted the 1996 Act, which
obligates LECs to permit competitors to interconnect their facilities to the
LEC's network and to take various other steps that are designed to lower
barriers of entry to competitors. The 1996 Act imposes a general duty to
interconnect with other telecommunications carriers and to forego the
installation or implementation of network features or functions that do not
comply with guidelines and standards established under the 1996 Act. The 1996
Act imposes several duties on a LEC if it receives a specific request from
another entity which seeks to connect with or provide services using the LEC's
network. These include the duties (i) to refrain from prohibiting
resale of its service, (ii) to provide number portability, (iii) to provide
dialing parity, (iv) to afford access to poles, ducts, conduits, and
rights-of-way, and (v) to establish reciprocal compensation arrangements for the
transport and termination of traffic. In addition, each incumbent LEC is
obligated to (i) negotiate interconnection agreements in good faith, (ii)
provide "unbundled" access to all aspects of the LEC's network, (iii) offer
resale of its telecommunications services at wholesale rates and (iv) permit
competitors to collocate its physical plant on the LEC's property, or provide
virtual collocation if physical collocation is not practicable. Under the 1996
Act's rural telephone company exemption, each of the Company's telephone
subsidiaries is exempt from certain interconnection requirements until such time
as the appropriate state regulatory commission receives notice that a bona fide
request has been presented to such company for interconnection, services or
network elements and such commission determines that the request is technically
feasible, not unduly economically burdensome and is consistent with the
universal service provisions contained in the 1996 Act. Facility interconnection
charges are required to be based on cost (to be determined without a
rate-of-return or other rate-based proceeding) and may include a reasonable
profit. The 1996 Act provides that each LEC, to the extent that it provides
wireline services, shall have a statutory duty to provide equal access and
nondiscrimination to interexchange carriers and information service providers.
In August 1996 the FCC issued an order which included rules implementing most of
the interconnection provisions of the 1996 Act. Under the FCC's order, rural
LECs will have the burden of proving the continuing availability of the rural
telephone company exemption. The FCC order is currently subject to judicial
review. Management believes that the 1996 Act will ultimately increase
competition in its telephone service areas, although the form and degree of
competition cannot be ascertained until such time as the FCC (and, in certain
instances, state regulatory commissions) adopts final and nonappealable
implementing regulations.
Of the 14 states in which the Company provides telephone services, most
(including Wisconsin, Louisiana, Ohio and Michigan) have taken legislative or
regulatory steps to introduce competition into the local exchange business.
Largely as a result thereof, several well-established interexchange carriers,
competitive access providers and cable television companies have accelerated
their development of networks and facilities designed to provide local exchange
services, principally in larger cities. 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. A
cable company has requested authorization to provide local exchange service in a
portion of the Company's service area in Ohio, and it is anticipated that
similar action may be taken by others in the Company's service areas. States
can, if they so desire, introduce more competition than is mandated under the
1996 Act.
Competition from competitive access providers and others has increased and is
expected to continue to increase. Competitive access providers, which originally
were formed to provide redundancy services, have provided access services in
urban areas for several years, and more recently have begun to provide
competitive
local exchange services. Although competitive access providers have thus far not
significantly affected the Company, in the future the Company may face
competition from competitive access providers in its operating areas located
near larger urban areas.
In addition to receiving services directly from companies competing with
incumbent LECs, interexchange carriers and other users of toll service are
expected to increasingly seek other means to bypass LECs' switching services and
local distribution facilities. There are several ways which users of toll
service can bypass the Company's switching services. Certain interexchange
carriers provide services which allow users to divert their traffic from LECs'
usage-sensitive services to their flat-rate services. In addition, users or
interexchange carriers may construct, modify or lease facilities to transmit
traffic directly from a user 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. Moreover, users may choose to use
wireless services to bypass LECs' switching services. Although certain of the
Company's telephone subsidiaries have experienced a loss of traffic to such
bypass, the Company believes that the impact of such loss on revenues has not
been significant.
Historically, cellular communications services have complemented traditional
LEC services. However, 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, local-multipoint-distribution services 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."
To the extent that the telephone industry increasingly experiences
competition, 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 substantially
greater assets and resources than the Company, and several are not subject to
the same regulatory constraints as the Company.
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. 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. The Company intends to actively monitor these developments, to observe
the effect of emerging competitive trends in initial competitive
markets and to continue to evaluate new business opportunities that may arise
out of future technological, legislative and regulatory developments.
The Company anticipates that revenue reductions will occur in the future in
its telephone operations, primarily as a result of regulatory changes and
competitive pressures. However, the Company anticipates that such reductions may
be minimized by increases in revenues attributable to increased demand for
enhanced services and new product offerings. While the Company expects its
telephone revenues to continue to grow over the short term, its internal
telephone revenue growth rate may slow during upcoming periods.
MOBILE COMMUNICATIONS OPERATIONS
According to data derived from published sources, the Company is the twelfth
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, 1996, the
Company owned approximately 8.0 million pops, of which 70% were applicable to
MSAs and 30% were RSA pops.
Cellular Industry
The cellular telephone industry has been in existence for less than 15 years
in the United States. Although the industry is relatively new, it has grown
significantly during this period and cellular service is now available in
substantially all areas of the United States. According to the Cellular
Telecommunications Industry Association, in December 1996 there were estimated
to be over 44 million cellular customers across the United States.
Cellular mobile telephone service is capable of high-quality, high-capacity
communications to and from vehicle-mounted and hand-held radio telephones.
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 Telephone
Switching Office ("MTSO"), which in turn is connected to the worldwide telephone
network.
Communications within a cellular system are controlled by the MTSO 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 MTSO 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.
Cellular telephone systems have high subscriber capacity 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 offer certain advantages over analog
technologies, including expanding the capacity of mobile communications systems,
improving voice clarity, permitting the introduction of new services, and making
such systems more private. 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. In recent years several
cellular carriers have installed digital cellular voice transmission facilities
in certain larger markets. During the fourth quarter of 1996, the Company
deployed digital service in four of its MSA markets and plans to deploy digital
service in the majority of its remaining MSAs and certain of its RSAs in 1997.
See "-Regulation and Competition-Developments Affecting Mobile Communications
Competition."
Construction and Maintenance
The construction and maintenance of cellular systems is capital intensive.
Although all of the Company's MSA and RSA systems are operational, the Company
has continued to add cell sites to increase coverage, provide additional
capacity, expand areas where hand-held cellular phones may be used and improve
the quality of these systems. In 1996 the Company completed construction of 69
cell sites in markets operated by the Company. At December 31, 1996, the Company
operated 354 cell sites in its majority-owned markets.
During the last few years the Company upgraded certain portions of its
cellular systems to be capable of providing digital service. As mentioned above,
the Company implemented digital service in certain markets during 1996 using the
TDMA digital standard and plans to install digital voice transmission facilities
in other markets in 1997. See "-Regulation and Competition-Developments
Affecting Mobile Communications
Competition." Total capital expenditures related to majority-owned cellular
systems operated by the Company were approximately $84 million in 1996 and are
anticipated to be approximately $67 million in 1997.
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 48%
of the Company's pops in markets operated by the Company are in a single,
contiguous cluster of eight MSAs and seven 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
and two north-south interstate highways. See "-Services, Customers and System
Usage."
Based on its review of publicly available data, the Company believes that it
has the second highest ratio of owned cellular pops to telephone access lines
among the 20 largest telephone companies (based on access lines) in the United
States. At the end of 1996, the Company provided cellular service in markets
covering 38% of its telephone customers. In early 1997 the Company was awarded
12 PCS licenses in connection with the FCC's D and E block auctions of 10MHz PCS
licenses. The licenses, 11 of which are in Michigan, will allow the Company to
provide an additional alternative to the LEC's service in the areas covered by
the PCS licenses. The Company is currently negotiating for additional PCS
ownership.
Marketing
The Company markets its cellular services through several distribution
channels, including independent agents, its direct sales force and retail
outlets owned by the Company and others. The Company's cellular sales force
consists of almost 350 independent agents, which generate a majority of the
Company's new subscribers,
and over 200 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.
The sales and marketing costs of obtaining new subscribers include
advertising and a direct expense applicable to most new subscribers, either in
the form of a commission payment to an agent or a salary/incentive payment to a
direct sales person. In addition, the Company discounts the cost of cellular
telephone equipment, and periodically runs promotions which provide some amount
of initial activation, access or airtime free to new subscribers. The cost of
acquisition per gross subscriber addition ($283 in 1996) remains one of the
largest expenses in conducting the Company's cellular operations.
Since 1994, AT&T Corp. has marketed cellular service under the AT&T brand
name. The Company competes with AT&T in three of the MSAs it operates and
several of its operated RSAs. While AT&T and several of the Company's other
competitors have substantially greater resources than the Company, the Company
intends to continue to modify certain of its price plans and implement certain
other plans and promotions in order to retain current customers and attract
new customers.
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 charges its subscribers for access to its systems, for minutes of
use and for enhanced services, such as voice mail. A subscriber may purchase
certain of these services separately or may purchase rate plans which bundle
these services in different ways and are designed to fit different calling
patterns. While the Company historically has typically charged its customers
separately for custom-calling features, air time in excess of the packaged
amount, and toll calls, recently it has begun to offer plans which include
features such as unlimited toll calls and unlimited weekend calling in certain
calling areas. Custom-calling features provided by the Company include
call-forwarding, call-waiting, three-way calling and no-answer transfer. The
Company offers 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. In the
Company's markets where digital service has been deployed, customers can
subscribe to caller ID and other digital enhancements.
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. The average monthly cellular
service revenue per customer declined to $63 in 1996 from $66 in 1995 and $69 in
1994. It is anticipated that average revenue per customer may continue to
decline (i) as market penetration increases and additional lower usage customers
are activated and (ii) as competitive pressures from current and future wireless
communications providers intensify and place additional 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 markets in the United States; such agreements offer the
Company's customers the opportunity to roam in these markets. 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. In some instances, based on
competitive factors and financial considerations, the Company charges a lower
amount to its customers than the amount actually charged by the servicing
cellular carrier for roaming. The Company anticipates that competitive factors
and industry consolidation may place further pressure on charging premium
roaming rates. For additional information on roaming revenue, see "-Strategy."
Roamer fraud, a cellular industry problem, occurs when cellular telephone
equipment is programmed to conceal the true identity and location of the user.
The Company and the industry have implemented extensive fraud control processes
in an attempt to minimize roamer fraud.
Churn rate (the average percentage of cellular customers that terminate
service each month) is an industry-wide concern. A portion of the churn in the
Company's markets is due to the Company disconnecting service to customers for
nonpayment of bills for cellular service. In addition, the Company faces
substantial competition from the other cellular provider in certain of its
markets. The Company's churn rate was 2.37% in 1996 and 2.42% in 1995. The
Company is attempting to lower the churn rate by increasing its proactive
customer service efforts and through the implementation of additional customer
retention programs.
During recent years, the Company's cellular subsidiaries experienced strong
subscriber growth in the fourth quarter, primarily due to increased holiday
season sales.
The following table summarizes, among other things, certain information about
the Company's customers and market penetration:
Year Ended or At December 31,
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Majority-owned and operated MSA and RSA
systems (Note 1):
Cellular systems operated 34 33 31
Population of systems operated (Note 2) 7,097,568 6,877,598 6,359,699
Customers (Note 3):
At beginning of period 290,075 211,710 116,484
Additions 165,377 139,836 110,636
Net acquisitions/dispositions 4,850 8,699 30,743
Disconnects, net of reconnects 92,069 70,170 46,153
At end of period 368,233 290,075 211,710
Market penetration at end of period (Note 4) 5.19% 4.22 3.33
Churn rate (Note 5) 2.37% 2.42 1.99
Average monthly cellular service revenue
per customer $ 63 66 69
Construction expenditures (in thousands) $ 83,679 41,990 39,937
All operated MSA and RSA systems (Note 6):
Cellular systems operated 38 37 36
Population of systems operated (Note 2) 7,946,442 7,721,569 7,445,571
Customers at end of period (Note 7) 407,400 313,430 227,140
Market penetration at end of period (Note 8) 5.13% 4.06 3.05
Churn rate (Note 5) 2.32% 2.39 2.29
- -------------------------------------------------------------------------------
Notes:
1. Represents the number of systems in which the Company owned at least a
50% interest. The revenues and expenses of these cellular markets, all of which
are operated by the Company, 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 referred to in note 1.
5. Represents the average percentage of customers that disconnect on a
monthly basis.
6. Represents the total number of systems that the Company operated,
including systems in which it does not own a majority interest.
7. Represents the approximate number of revenue-generating cellular
telephones served by the cellular systems referred to in note 6.
8. Computed by dividing the number of customers at the end of the period
by the total population of systems referred to in note 6.
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, 1996:
The Other
1996 Company's cellular
population Ownership pops at operator
(Note 1) percentage December 31,1996 (Note 2)
- --------------------------------------------------------------------------------
Majority-owned and operated MSAs
- --------------------------------
Grand Rapids, MI 739,158 97.00% 716,983 AirTouch
Lansing-E. Lansing, MI 496,879 97.00 481,973 AirTouch
Saginaw-Bay
City-Midland, MI 402,519 91.70 369,110 AirTouch
Kalamazoo, MI 306,098 97.00 296,915 Centennial
Battle Creek, MI 194,414 97.00 188,582 Centennial
Muskegon, MI 188,491 97.00 182,836 AirTouch
Benton Harbor, MI 161,660 97.00 156,810 Masters Cellular
Jackson, MI 154,352 97.00 149,721 Centennial
Shreveport, LA 378,941 87.00 329,679 AT&T
Alexandria, LA 141,580 100.00 141,580 Centennial
Monroe, LA 147,876 87.00 128,652 AT&T
Jackson, MS (Note 4) 418,523 87.33 365,496 MCTA
Biloxi-Gulfport,
MS (Note 4) 232,839 93.12 216,824 Cellular South
Pascagoula, MS (Note 4) 129,580 86.12 111,591 Cellular South
La Crosse, WI 102,239 95.00 97,127 U. S. Cellular
Pine Bluff, AR 83,443 100.00 83,443 SBC
McAllen-Edinburg-
Mission, TX (Note 4) 492,998 68.33 336,877 SBC
Brownsville-Harlingen,
TX (Note 4) 315,875 77.81 245,794 SBC
Texarkana, AR/TX 136,981 89.00 121,913 AT&T
- ---------------------------------------------------------
5,224,446 4,721,906
- ---------------------------------------------------------
Minority-owned MSAs
- -------------------
Flint, MI 506,014 3.20% 16,182 Note 3
Detroit, MI 4,601,330 3.20 147,151 Note 3
Appleton-Oshkosh-
Neenah, WI 478,129 10.83 51,781 Note 3
Little Rock, AR 547,406 36.00 197,066 Note 3
Lafayette, LA 258,524 49.00 126,677 Note 3
Austin, TX 940,500 35.00 329,175 Note 3
Dallas-Ft. Worth, TX 4,398,889 .50 21,994 Note 3
Sherman-Denison, TX 98,246 .50 491 Note 3
- ---------------------------------------------------------
11,829,038 890,517
- ---------------------------------------------------------
Total MSAs 17,053,484 5,612,423
- ---------------------------------------------------------
Operated RSAs
- -------------
Arkansas 2 83,956 82.00% 68,844 SBC
Arkansas 3 103,016 82.00 84,473 SBC
Arkansas 11 67,319 89.00 59,914 AT&T
Arkansas 12 187,673 80.00 150,138 SBC
Louisiana 1 114,736 87.00 99,820 Cellular One
Louisiana 2 115,681 87.00 100,642 AT&T/Centennial
Louisiana 3 (B2) 95,554 87.00 83,132 AT&T/Centennial
Louisiana 4 73,532 100.00 73,532 Centennial
Michigan 3 157,905 38.76 61,208 Unitel
Michigan 4 131,551 100.00 131,551 RFB
Michigan 5 157,820 38.76 61,175 Unitel
Michigan 6 137,778 98.00 135,022 Centennial
Michigan 7 239,804 41.78 100,202 Centennial
Michigan 8 98,358 97.00 95,407 Allegan Cellular
Michigan 9 293,345 43.38 127,253 Centennial
Mississippi 2 (Note 4) 244,570 100.00 244,570 Bell South
Mobility
Mississippi 6 (Note 4) 182,538 100.00 182,538 Cellular South
Mississippi 7 (Note 4) 179,227 100.00 179,227 MCTA
Texas 7 (B6) 57,633 89.00 51,293 AT&T
- --------------------------------------------------------
2,721,996 2,089,941
- --------------------------------------------------------
Non-operated RSAs
- -----------------
Arizona 2 249,229 21.30% 53,077 Note 3
Michigan 10 135,060 26.00 35,116 Note 3
Minnesota 11 206,076 13.01 26,806 Note 3
New Mexico 4W 136,354 35.71 48,698 Note 3
Texas 16 322,312 9.60 30,942 Note 3
Wisconsin 1 109,883 8.44 9,276 Note 3
Wisconsin 2 85,161 12.81 10,909 Note 3
Wisconsin 3 140,259 14.29 20,037 Note 3
Wisconsin 6 114,832 28.57 32,809 Note 3
Wisconsin 8 233,713 4.00 9,349 Note 3
Wisconsin 10 128,962 15.00 19,344 Note 3
- --------------------------------------------------------
1,861,841 296,363
- --------------------------------------------------------
Total RSAs 4,583,837 2,386,304
- --------------------------------------------------------
21,637,321 7,998,727
========================================================
Notes:
1. Based on 1996 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.
Operations
A substantial number of the cellular systems in MSAs operated by the Company
are owned by limited partnerships in which the Company is a general partner
("MSA Partnerships"). Most of these partnerships are governed by partnership
agreements with similar terms, including, among other things, customary
provisions concerning capital contributions, sharing of profits and losses, and
dissolution and termination of the partnership. Most of these partnership
agreements vest complete operational control of the partnership with the general
partner. The general partner typically has the power to manage, supervise and
conduct the affairs of the
partnership, make all decisions appropriate in connection with the business
purposes of the partnership, and incur obligations and execute agreements on
behalf of the partnership. The general partner also may make decisions regarding
the time and amount of cash contributions and distributions, and the nature,
timing and extent of construction, without the consent of the other partners.
The Company owns more than 50% of all of the MSA Partnerships.
A substantial number of the cellular systems in RSAs operated by the Company
are also owned by limited or general partnerships in which the Company is either
the general or managing partner (the "RSA Partnerships"). These partnerships are
governed by partnership agreements with varying terms and provisions. In many of
these partnerships, the noncontrolling partners have the right to vote on major
issues such as the annual budget and system design. In a few of these
partnerships, the Company's management position is for a limited term (similar
to a management contract) and the other partners in the partnership have the
right to change managers, with or without cause. The Company owns less than 50%
of some of the RSA Partnerships.
The partnership agreements for both the MSA Partnerships and RSA Partnerships
generally contain provisions granting all partners a right of first refusal in
the event a partner desires to transfer a partnership interest. This restriction
on transfer can make these partnership interests more difficult to sell to a
third party.
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 1996, 1995 and 1994.
1996 1995 1994
-----------------------------
Cellular access fees and toll revenues 79.7% 79.5 77.7
Cellular roaming 18.6 17.7 16.1
Equipment sales 1.7 2.8 4.3
Paging services (Note) - - 1.9
-----------------------------
100.0% 100.0 100.0
=============================
Note: 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 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.
Initial operating licenses were 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 1997.
In addition to regulation by the FCC, cellular systems are subject to certain
Federal Aviation Administration tower height regulations concerning 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 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. Certain of the Company's competitors have
substantially greater assets and resources than the Company.
Developments Affecting Mobile Communications Competition. Continued and
rapid technological advances in the communications field, coupled with
legislative and regulatory uncertainty, make it difficult 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.
Several recent FCC initiatives have resulted in the allocation of additional
radio spectrum or the issuance of licenses for emerging mobile communications
technologies that have or may become 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. In 1996 and early 1997 the FCC auctioned up to
six PCS licenses per market. Two 30MHz frequency blocks were awarded for each of
the 51 Rand McNally Major Trading Areas ("MTAs"), while one 30MHz and three
10MHz frequency blocks were awarded for each of the 493 Rand McNally Basic
Trading Areas ("BTAs"). The Company did not participate in the FCC's auction of
the MTA licenses. In early 1997 the Company was awarded 12 PCS licenses in
connection with the FCC's D and E block auctions of 10MHz PCS licenses. The
licenses cover areas with a total population of approximately four million; the
Company's investment in the licenses was $4.6 million. The Company expects to
begin the construction of networks in 1997 to be utilized in providing PCS
services under the licenses.
PCS technology permits PCS operators to offer wireless data, image and
multimedia services. The largest PCS providers commenced initial operations in
late 1996, and have announced plans to substantially increase their operations
in 1997. Thus far the Company has experienced PCS competition in only one of its
markets. The extent to which PCS will offer services in the Company's markets
that are complementary or competitive
with cellular services is uncertain, and is expected to be influenced by
continuing developments in PCS and cellular technologies.
In addition to PCS, users and potential users of cellular systems may find
their communication needs satisfied by other current and developing
technologies. Several years ago the FCC 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.
One well-established SMR provider has constructed 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. Paging or
beeper services that feature text message and data display as well as tones may
be adequate for potential subscribers who do not need to communicate with the
caller. Mobile satellite systems, in which transmissions are between mobile
units and satellites, may ultimately be successful in obtaining market share
from cellular systems which communicate directly to land-based stations.
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.
Recently, several large cellular providers have merged with other companies
or formed joint ventures. The resulting entities have substantially greater
assets and resources than the Company. Several of these joint ventures pooled
their resources to purchase PCS licenses and to develop the associated markets.
For more information, see "-Marketing."
Although it is uncertain how PCS, SMR, mobile satellites and other emerging
technologies will ultimately affect the Company, the Company anticipates that it
will face increased competition in some of its markets in the near term.
However, management believes that providing digital services 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.
OTHER OPERATIONS
The Company also provides long distance, operator, competitive access and
interactive services in certain local and regional markets, as well as certain
printing and related services. The results of these operations,
which accounted for 6.4% and .1%, respectively, of the Company's consolidated
revenues and operating income during 1996, are reflected for financial reporting
purposes in the "Other operations" section in operating income.
Long Distance. In 1996 the Company began marketing long distance service in
all of its equal access telephone operating areas. At December 31, 1996, the
Company provided long distance services in certain of its local exchange markets
to more than 110,000 customers, which represented a 137% increase from the
number of customers served as of January 1, 1996. Although the Company owns and
operates long distance switches in La Crosse, Wisconsin and San Marcos, Texas,
it anticipates that most of its future long distance service revenues will be
provided by reselling service purchased from other facilities-based long
distance providers. The Company intends to continue to expand its long distance
business, principally through reselling arrangements.
Competitive access. The Company's competitive access subsidiary has
constructed a 231-mile fiber optic network which allows the Company to offer
certain competitive access services in Fort Worth and Arlington, Texas, along
with a portion of downtown Dallas. The subsidiary, which also has smaller
networks in Austin and San Antonio, Texas, provides enhanced data transmission
services, transport to local area network users, and central office
interconnection, primarily for large business customers. The subsidiary also
provides transport for origination and termination services for long distance
companies. The Company plans for the subsidiary to begin offering competitive
local exchange service in certain of its service areas in 1997. While the
Company plans to continue to pursue the development of its competitive access
business in Texas, it is also considering other alternatives, such as possibly
acquiring other competitive access operations or merging the subsidiary with
another competitive access company. While the Company expects to increasingly
incur operating losses in such business during the next few years, the amount of
such losses will be dependent upon how quickly the subsidiary transitions to a
full-service competitive local exchange carrier.
Other. The Company provides 0+ and 0- operator services for retail and
wholesale markets. The retail market consists primarily of the hospitality and
payphone industries. The wholesale market consists of other independent
telephone companies and interexchange carriers.
The Company has a subsidiary which provides audiotext services, fax-on-demand
services, and interactive marketing surveys and research. The advertising and
consumer information provided through the audiotext services is supplied by the
businesses that advertise. The Company has another subsidiary that provides
printing, database management and direct mail services which, in conjunction
with the subsidiary that provides marketing surveys and research, can provide a
complete market research package to customers.
Certain service subsidiaries of the company provide installation and
maintenance services, materials and supplies, and managerial, technical and
accounting services to the telephone and mobile communications
operating subsidiaries. In addition, Century provides and bills management
services to subsidiaries and in certain instances makes interest bearing
advances to finance construction of plant and purchases of equipment. These
transactions are recorded by the Company's regulated telephone subsidiaries at
their cost to the extent permitted by regulatory authorities. Intercompany
profit on transactions with regulated affiliates is limited to a reasonable
return on investment and has not been eliminated in connection with
consolidating the results of operations of Century and its subsidiaries. Such
intercompany profit is reflected in operating income in the "Other operations"
segment.
OTHER MATTERS
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 1996
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 3, 5, 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, 1996, the
Company's gross property, plant and equipment of approximately $1.7 billion
consisted of the following:
Telephone
Cable and wire................................... 43.1%
Central office equipment......................... 23.1
General support.................................. 6.1
Information origination/termination equipment.... 1.6
Construction in progress......................... 2.3
Other............................................ .3
-----
76.5
-----
Mobile communications
Cell site........................................ 12.1
General support.................................. 2.8
Construction in progress......................... .9
Other............................................ .2
-----
16.0
-----
Other................................................. 7.5
-----
100.0%
=====
"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. "Cell site" consists
primarily of radio frequency channel equipment, switching equipment and
towers. "Construction in progress" includes property of the foregoing categories
that has not been placed in service because it is still under construction.
Most of the properties of the Company's telephone subsidiaries are subject
to mortgages securing the 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.
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
---- --- ------------
1995:
First quarter $ 33-1/8 29 .0825
Second quarter $ 31-3/4 27-1/2 .0825
Third quarter $ 32-1/8 27 .0825
Fourth quarter $ 32-1/8 27-1/2 .0825
1996:
First quarter $ 35-1/2 31-1/4 .09
Second quarter $ 34-1/4 30-3/8 .09
Third quarter $ 34-1/2 30-1/2 .09
Fourth quarter $ 34-1/2 28-1/2 .09
Common stock dividends during 1995 and 1996 were paid each quarter. As of
February 28, 1997, there were approximately 6,600 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,
1996:
Selected Income Statement Data
Year ended December 31,
------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------
(Dollars, except per share amounts,
and shares expressed in thousands)
Operating revenues
Telephone $ 451,538 419,242 391,265 350,330 298,812
Mobile communications 250,243 197,494 150,802 84,712 62,092
Other 47,896 28,104 22,534 20,633 9,956
-----------------------------------------------
Total operating revenues $ 749,677 644,840 564,601 455,675 370,860
===============================================
Operating income
Telephone $ 155,183 143,527 137,992 114,902 103,672
Mobile communications 67,914 57,009 31,443 9,906 5,956
Other 199 2,383 3,371 3,201 3,324
-----------------------------------------------
Total operating income $ 223,296 202,919 172,806 128,009 112,952
===============================================
Income before cumulative
effect of changes in
accounting principles $ 129,077 114,776 100,238 69,004 59,973
Cumulative effect of
changes in accounting
principles - - - - (15,668)
-----------------------------------------------
Net income $ 129,077 114,776 100,238 69,004 44,305
===============================================
Fully diluted earnings
per share before
cumulative effect of
changes in accounting
principles $ 2.14 1.95 1.80 1.32 1.22
Cumulative effect of
changes in accounting
principles - - - - (.31)
-----------------------------------------------
Fully diluted earnings
per share $ 2.14 1.95 1.80 1.32 .91
===============================================
Dividends per common share $ .36 .33 .32 .31 .293
===============================================
Average fully diluted
shares outstanding 60,660 59,107 58,135 55,892 48,653
===============================================
Selected Balance Sheet Data
December 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------
(Dollars in thousands)
Net property, plant
and equipment $ 1,149,012 1,047,808 947,131 827,776 675,878
Excess cost of net
assets acquired, net $ 532,410 493,655 441,436 297,158 217,688
Total assets $ 2,028,505 1,862,421 1,643,253 1,319,390 1,040,487
Long-term debt $ 625,930 622,904 518,603 364,433 346,944
Stockholders' equity $ 1,028,153 888,424 650,236 513,768 385,449
-----------------------------------------------------
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, 1996:
Year ended December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------
Telephone access lines 503,562 480,757 454,963 434,691 397,300
Cellular units in service
in majority-owned
markets 368,233 290,075 211,710 116,484 73,084
---------------------------------------------------
See Items 1 and 2 in Part I and notes 1, 5 and 13 of Notes to Consolidated
Financial Statements set forth in Item 8 elsewhere herein for additional
information.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
OVERVIEW
Century Telephone Enterprises, Inc. is a regional diversified
telecommunications company that is primarily engaged in providing traditional
telephone services and cellular mobile telephone services. The 1996 net income
of Century Telephone Enterprises, Inc. and its subsidiaries (the "Company")
increased to $129.1 million from $114.8 million during 1995 and $100.2 million
during 1994. Fully diluted earnings per share for 1996 increased to $2.14 from
$1.95 during 1995 and $1.80 during 1994.
The Company's 1996 operating income was $223.3 million, an increase of $20.4
million (10.0%) over 1995 operating income of $202.9 million. During 1996 the
operating income of the Company's telephone and mobile communications segments
increased $11.7 million (8.1%) and $10.9 million (19.1%), respectively, while
the operating income of the Company's other operations decreased $2.2 million
(91.6%). The Company's operating income during 1994 was $172.8 million.
Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 155,183 143,527 137,992
Mobile communications 67,914 57,009 31,443
Other 199 2,383 3,371
- -----------------------------------------------------------------------------
223,296 202,919 172,806
Interest expense (44,662) (43,615) (42,577)
Income from unconsolidated
cellular entities 26,952 20,084 15,698
Gain on sales of assets 815 6,782 15,877
Minority interest (6,675) (8,084) (3,377)
Other income and expense 3,916 4,982 3,111
Income tax expense (74,565) (68,292) (61,300)
- -----------------------------------------------------------------------------
Net income $ 129,077 114,776 100,238
=============================================================================
Fully diluted earnings per share $ 2.14 1.95 1.80
=============================================================================
Average fully diluted shares outstanding 60,660 59,107 58,135
=============================================================================
The Company's mobile communications operations reflect the operations of the
cellular entities in which the Company has a majority ownership interest. For
additional information concerning the minority interest
owners' share of the income of such entities and the Company's share of earnings
from cellular entities in which it has less than a majority interest, see
Cellular Operations and Investments.
Contributions to operating revenues and operating income by the Company's
telephone, mobile communications, and other operations for each of the years in
the three-year period ended December 31, 1996 were as follows:
Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------
Operating revenues
Telephone operations 60.2% 65.0 69.3
Mobile communications operations 33.4% 30.6 26.7
Other operations 6.4% 4.4 4.0
Operating income
Telephone operations 69.5% 70.7 79.9
Mobile communications operations 30.4% 28.1 18.2
Other operations .1% 1.2 1.9
- -----------------------------------------------------------------------
During the three years ended December 31, 1996, the Company has consummated
the acquisitions of various telephone and cellular operations. See Notes 13 and
14 of Notes to Consolidated Financial Statements for additional information.
TELEPHONE OPERATIONS
The Company's telephone operations are conducted in rural, suburban and small
urban communities in 14 states. Approximately 87% of the Company's telephone
access lines are in Wisconsin, Louisiana, Michigan, Ohio, Arkansas and Texas.
The operating revenues, expenses and income of the Company's telephone
operations for 1996, 1995 and 1994 are summarized below.
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 121,728 111,629 100,020
Network access 276,123 258,462 243,759
Other 53,687 49,151 47,486
- ------------------------------------------------------------------------
451,538 419,242 391,265
- ------------------------------------------------------------------------
Operating expenses
Plant operations 90,083 86,789 84,117
Customer operations 43,413 38,768 35,746
Corporate and other 67,066 63,834 60,235
Depreciation and amortization 95,793 86,324 73,175
- ------------------------------------------------------------------------
296,355 275,715 253,273
- ------------------------------------------------------------------------
Operating income $ 155,183 143,527 137,992
========================================================================
Local Service Revenues
Local service revenues are derived from the provision of local exchange
telephone services in the Company's service areas.
The $10.1 million increase in such revenues in 1996 included $6.2 million due
to the increase in the number of customer access lines and $3.0 million due to
the provision of custom calling features. Acquisitions contributed $2.0 million
to the 1995 increase of $11.6 million; $4.5 million of the 1995 increase was due
to the increase in access lines; $3.0 million was due to increased rates for
basic services; and $2.0 million was due to the provision of custom calling
features. Internal access line growth during 1996, 1995 and 1994 was 4.3%, 4.4%
and 4.1%, respectively.
Network Access Revenues
Network access revenues primarily relate to services provided to
interexchange carriers (long distance carriers) in connection with the
completion of long distance telephone calls. Most 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. 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") by the NECA on behalf of the Company and other
participating LECs. Intrastate network access revenues are based on access
rates, cost separation studies or special settlement arrangements with
intrastate long distance carriers.
Network access revenues increased $17.7 million (6.8%) in 1996 and $14.7
million (6.0%) in 1995 due to the following factors:
1996 1995
increase increase
(decrease) (decrease)
- ------------------------------------------------------------------------------
(Dollars in thousands)
Increased recovery from the federal Universal
Service Fund ("USF") $ 7,532 4,394
Increased minutes of use 5,432 1,440
Partial recovery of increased operating expenses
through revenue pools in which the Company
participates with other telephone companies and
return on rate base 4,063 3,039
Acquisitions 726 4,821
Revision of prior year revenue settlement agreements (2,296) (500)
Other, net 2,204 1,509
- ------------------------------------------------------------------------------
$ 17,661 14,703
==============================================================================
Included in other, net in 1996 and 1995 were approximately $2.3 million and
$2.0 million, respectively, of revenue increases associated with a change in the
methodology applied in the network access revenue billing process, a change
which has been completely phased in. Included in other, net in 1996 and 1995
were reductions of $1.7 million and $500,000, respectively, in access fees due
to the previously-announced reduction in intrastate switched access rates
mandated by the Louisiana Public Service Commission ("LPSC") which is being
phased in from July 1995 through July 1997. As such reduction in rates continues
to be phased in, future access revenues will be reduced approximately $3.8
million in 1997 and an additional $1.4 million in 1998. The change in other, net
in 1995 also included a reduction of $1.7 million in intrastate high-cost
assistance revenues as a result of the phase out of the Wisconsin state support
fund; the loss of such revenues 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 ("CPE services"), (ii) providing billing and collection services for
interexchange carriers, (iii) leasing network facilities, (iv) participating in
the publication of local directories and (v) providing Internet access. Revenues
from CPE services contributed $3.2 million to the $4.5 million increase in other
revenues in 1996; $1.4 million was attributable to the provision of Internet
access. Revenues from CPE services and acquisitions contributed $1.9 million and
$606,000, respectively, to the increase in other revenues in 1995. Such
increases in 1996 and 1995 were partially offset by decreases in billing and
collection revenues of $606,000 and $896,000, respectively. Billing and
collection revenues are expected to continue to decrease in 1997.
Operating Expenses
Plant operations expenses during 1996 and 1995 increased $3.3 million (3.8%)
and $2.7 million (3.2%), respectively. Approximately $2.2 million of the 1996
increase was due to an increase in expenses incurred in the provision of
Internet access and $905,000 was due to an increase in salaries and wages.
Operating expenses attributable to acquisitions contributed $1.8 million to the
1995 increase. The remainder of the 1995 increase was due to an increase in
general operating expenses.
Customer operations, corporate, and other expenses increased $7.9 million
(7.7%) in 1996, partially due to a $2.0 million increase in marketing expenses.
Exclusive of marketing expenses, expenses incurred in the provision of CPE
services were up $1.9 million. Operating taxes increased $1.5 million in 1996
due partially to the increase in plant in service. Expenses attributable to
acquisitions contributed $2.7 million to the 1995
increase of $6.6 million (6.9%) in customer operations, corporate, and other
expenses. Ad valorem taxes increased $1.2 million in 1995 and marketing expenses
increased $2.1 million.
Depreciation and amortization increased $9.5 million (11.0%) and $13.1
million (18.0%) in 1996 and 1995, respectively. Depreciation expense included
nonrecurring additional depreciation charges approved by regulators in certain
jurisdictions which aggregated $8.2 million in 1996 and $6.5 million in 1995.
Approximately $1.0 million of the increase in 1995 was due to acquisitions. The
remaining increases in depreciation and amortization in 1996 and 1995 were due
to higher levels of plant in service. The composite depreciation rate for the
Company's regulated telephone properties, including the additional depreciation
charges, was 7.5% for 1996 and 1995 and 7.1% for 1994.
Other
The Company anticipates certain other future revenue reductions in its
telephone operations resulting primarily from regulatory changes and competitive
pressures. However, the Company anticipates that such reductions may be
minimized by increases in revenues attributable to increased demand for enhanced
services and new product offerings. While the Company expects its telephone
revenues to continue to grow over the short term, its internal telephone revenue
growth rate may slow during upcoming periods.
For additional information regarding certain matters that have impacted or
may impact the Company's telephone operations, see Regulation and Competition.
CELLULAR OPERATIONS AND INVESTMENTS
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
(Dollars in thousands)
Operating income - mobile communications segment $ 67,914 57,009 31,443
Minority interest (7,062) (8,084) (3,377)
Income from unconsolidated cellular entities 26,952 20,084 15,698
- -------------------------------------------------------------------------------
$ 87,804 69,009 43,764
===============================================================================
The Company's mobile communications segment reflects 100% of the results of
operations of the cellular entities in which the Company has a majority
ownership interest. The minority interest owners' share of the income of such
entities is reflected in the Company's Consolidated Statements of Income as an
expense in "Minority interest." See Minority Interest for additional
information. The Company's share of earnings from the cellular entities in which
it has less than a majority interest is accounted for using the equity method
and is
reflected in the Company's Consolidated Statements of Income in "Income from
unconsolidated cellular entities." See Income from Unconsolidated Cellular
Entities for additional information.
MOBILE COMMUNICATIONS OPERATIONS
Substantially all of the Company's cellular customers are located in
Michigan, Louisiana, Arkansas, Mississippi and Texas. The operating revenues,
expenses and income of the Company's mobile communications operations for 1996,
1995 and 1994 are summarized below.
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 246,037 191,953 141,325
Equipment sales 4,206 5,541 6,554
Paging - - 2,923
- ------------------------------------------------------------------------------
250,243 197,494 150,802
- ------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 12,771 10,235 8,978
System operations 36,301 25,902 22,881
General, administrative and
customer service 52,891 39,471 33,171
Sales and marketing 46,793 39,450 33,074
Depreciation and amortization 33,573 25,427 21,255
- ------------------------------------------------------------------------------
182,329 140,485 119,359
- ------------------------------------------------------------------------------
Operating income $ 67,914 57,009 31,443
==============================================================================
Based on its review of publicly available data, the Company believes that it
has 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.
Operating Revenues
Cellular service revenues include monthly service fees for providing access
and airtime to customers, service fees for providing airtime to other carriers'
customers roaming through the Company's service areas, and toll revenue.
Cellular service revenues during 1996 increased to $246.0 million from $192.0
million in 1995 and $141.3 million in 1994.
The 1996 and 1995 increases in cellular service revenues were primarily
attributable to the increases in cellular customers resulting principally from
increased demand, acquisitions and expanded areas of service.
Cellular units in service in the Company's majority-owned markets increased to
368,233 as of December 31, 1996 from 290,075 as of December 31, 1995 and 211,710
as of December 31, 1994. Included in the 1996 and 1995 increases were 4,850 and
8,931, respectively, of units added through acquisitions. Exclusive of
acquisitions, access and usage revenues increased $33.9 million (25.6%) in 1996
and $30.8 million (30.3%) in 1995 and roaming and toll revenues increased $11.8
million (24.2%) and $12.9 million (36.0%) in 1996 and 1995, respectively.
Acquisitions contributed $7.8 million and $4.0 million to the increases in
cellular service revenues in 1996 and 1995, respectively.
The average monthly cellular service revenue per customer declined to $63 in
1996 from $66 in 1995 and $69 in 1994. 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 from current and future wireless communications
providers intensify and place additional pressure on rates. The Company is
responding to such competitive pressures by, among other things, modifying
certain of its price plans and implementing certain other plans and promotions,
all of which are likely to result in lower average revenue per customer. The
Company will continue to focus on customer service and attempt to stimulate
cellular usage by promoting the availability of certain enhanced services and by
improving the quality of its service through the construction of additional cell
sites and other enhancements to its system. During the fourth quarter of 1996,
the Company deployed digital service in four of its Metropolitan Statistical
Area ("MSA") markets and plans to deploy digital service in the majority of its
remaining MSAs and certain of its Rural Service Area markets in 1997.
Equipment sales decreased $1.3 million in 1996 and $1.0 million in 1995.
Although the Company sold more phones in 1996 than in 1995, revenues decreased
because the Company has increasingly sold phones below cost, a practice which is
common in the cellular industry.
The Company's paging operations were sold in October 1994.
Operating Expenses
The increases in cost of equipment sold during 1996 and 1995 resulted from
increases in the number of cellular phones sold.
The $10.4 million (40.1%) increase in system operations expenses in 1996
included a $4.0 million increase in the net cost paid to other carriers for
cellular service provided to the Company's customers who roam in the other
carriers' service areas in excess of the amounts the Company bills its customers
and a $1.8 million
increase in expenses associated with cellular fraud. The remainder of the
increase in system operations expenses in 1996 resulted primarily from the
operation of new cell sites.
The Company operated 354 cell sites at December 31, 1996 in entities in which
it had a majority interest, compared to 277 at December 31, 1995 and 230 at
December 31, 1994. In 1996 and 1995, eight cell sites and 24 cell sites,
respectively, were added through acquisitions.
System operations expenses increased $3.0 million (13.2%) in 1995 primarily
due to a $1.5 million increase in the net cost paid to other carriers for
cellular service provided to the Company's customers who roam in the other
carriers' service areas in excess of the amounts the Company bills its customers
and a $1.5 million increase in expenses incurred in the operation of new cell
sites. The $3.0 million increase in 1995 was net of a $1.0 million decrease in
operating expenses due to the sale of the Company's paging operations in 1994.
Most of the $13.4 million (34.0%) increase in general, administrative and
customer service expenses in 1996 was related to increased expenses resulting
from a larger customer base. Customer service and retention costs increased $5.5
million, the provision for doubtful accounts increased $2.2 million, billing
costs were $1.3 million higher and other general office expenses increased $3.9
million. Of the $6.3 million increase in general, administrative and customer
service expenses in 1995, $1.4 million was due to an increase in billing costs,
$1.2 million was due to an increase in the provision for doubtful accounts, $1.1
million was due to an increase in other general office expenses and $620,000
represented increased customer service expenses.
Churn rate (the percentage of cellular customers that terminate service) is
an industry-wide concern. The Company faces substantial competition from the
other cellular provider in certain of its markets. A portion of the churn in the
Company's markets is due to the Company disconnecting service to customers for
nonpayment of bills for cellular service. The Company's average monthly churn
rate was 2.37% in 1996 and 2.42% in 1995.
During 1996 and 1995, sales and marketing expenses increased $7.3 million
(18.6%) and $6.4 million (19.3%), respectively. The 1996 increase included a
$3.7 million increase in advertising and sales promotions expenses, a portion of
which was applicable to the introduction of digital service in certain of the
Company's markets. In addition, a $2.8 million increase in costs was incurred in
selling products and services in retail locations, including Company-owned
stores. Approximately $3.8 million of the 1995 increase was commissions paid to
agents for selling cellular services to new customers. The 1995 increase also
included a $1.8 million increase in advertising and sales promotions expenses.
Costs of operating the Company's retail stores, the first of which was opened in
late 1994, increased $601,000 in 1995.
Depreciation and amortization increased $8.1 million (32.0%) in 1996 and $4.2
million (19.6%) in 1995 due primarily to higher levels of plant in service.
Other
For additional information regarding certain matters that have impacted or
may impact the Company's mobile communications operations, see Regulation and
Competition.
OTHER OPERATIONS
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or mobile communications
segments, including, but not limited to, the Company's competitive access
subsidiary and the Company's nonregulated long distance operations. Of the $19.8
million (70.4%) increase in operating revenues in 1996, $15.9 million was
applicable to the long distance operations; of the $22.0 million (85.4%)
increase in operating expenses, $13.8 million was incurred by the long distance
operations. During 1996 the operating loss of the Company's competitive access
subsidiary ($6.2 million) was $2.6 million greater than in 1995. While the
Company expects such loss to be greater in 1997 than it was in 1996, the amount
of such loss will be dependent upon how quickly the Company's competitive access
subsidiary transitions to a full-service competitive local exchange carrier. The
$988,000 decrease in operating income in 1995 was substantially due to the loss
incurred by the Company's competitive access subsidiary in 1995 ($3.6 million)
being $1.8 million more than in 1994.
Certain of the Company's service subsidiaries provide managerial,
operational, technical and accounting services, along with materials and
supplies, to the Company's telephone subsidiaries. In accordance with regulatory
accounting, intercompany profit on transactions with regulated affiliates has
not been eliminated in connection with consolidating the results of operations
of the Company. When the regulated operations of the Company no longer qualify
for the application of Statement of Financial Accounting Standards No. 71 ("SFAS
71"), "Accounting for the Effects of Certain Types of Regulation," such
intercompany profit will be eliminated in subsequent financial statements, the
primary result of which will be a decrease in operating expenses applicable to
the Company's telephone operations and an increase in operating expenses
applicable to the Company's other operations segment. The amount of intercompany
profit with regulated affiliates which was not eliminated in 1996 was
approximately $7.7 million. For additional information applicable to SFAS 71,
see Regulation and Competition - Other Matters.
INTEREST EXPENSE
Interest expense increased $1.0 million (2.4%) in 1996, primarily due to an
increase in average debt outstanding. In November 1995 the Company issued $150.0
million of senior notes under a shelf registration statement. The effect of
higher average interest rates increased interest expense $4.0 million in 1995.
Such increase was substantially offset by a decrease in interest expense due to
a decrease in average debt outstanding as a result of the conversion in February
1995 of the Company's $115.0 million of 6% convertible debentures into 4.5
million shares of common stock. For additional information, see Liquidity and
Capital Resources - Financing Activities and Note 5 of Notes to Consolidated
Financial Statements.
INCOME FROM UNCONSOLIDATED CELLULAR ENTITIES
Earnings from unconsolidated cellular entities, net of the amortization of
associated goodwill, increased $6.9 million (34.2%) during 1996 and $4.4 million
(27.9%) during 1995 due to the improvement in profitability of the cellular
entities in which the Company owns less than a majority interest. During 1995
the Company recorded a nonrecurring $800,000 reduction in earnings from
unconsolidated cellular entities as a result of a retroactive adjustment
recorded by the operator of a cellular partnership in which the Company owns
less than a majority interest.
GAIN ON SALES OF ASSETS
During 1995 the Company sold its ownership interests in certain non-strategic
cellular entities which resulted in a pre-tax gain of $5.9 million ($2.0 million
after-tax; $.03 per fully diluted share). Sales of other assets during 1995
resulted in a pre-tax gain of $873,000 ($567,000 after-tax; $.01 per fully
diluted share).
The Company sold the assets comprising a cellular system in a Rural Service
Area in Minnesota in 1994 and recognized a pre-tax gain of $14.7 million ($8.5
million after-tax; $.15 per fully diluted share). In addition, the Company sold
its paging operations in 1994 which resulted in a pre-tax gain of $1.2 million
($756,000 after-tax; $.01 per fully diluted share).
MINORITY INTEREST
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings of the Company's majority-owned
and operated cellular entities and majority-owned subsidiaries. While such
entities' profitability increased in 1996, minority interest decreased $1.4
million (17.4%) due to the effect of the Company's acquisition, during the
second quarter of 1996, of an additional 25% interest in a Louisiana cellular
partnership which decreased the minority interest owners' share of such
partnership. The increased profitability during 1995 of the Company's
majority-owned and operated cellular entities resulted in a corresponding
increase of $4.7 million in minority interest.
OTHER INCOME AND EXPENSE
Other income and expense during 1996 was $3.9 million compared to $5.0
million during 1995 and $3.1 million in 1994. During 1995 the Company invested
$20.0 million in a minority equity interest in an entity formed for the purpose
of participating in the FCC auction of one 30MHz Personal Communications
Services ("PCS") license for each Basic Trading Area. In 1996 such entity
withdrew from the auction and, as a result thereof, the Company recovered $18.9
million of its equity investment in such entity and recorded a $1.1 million
loss. During 1995 interest income increased $1.0 million due to interest income
earned on a $25.0 million note receivable issued to Century in 1994. For
additional information, see Liquidity and Capital Resources - Investing
Activities and Note 2 of Notes to Consolidated Financial Statements.
INCOME TAX EXPENSE
The Company's effective income tax rate was 36.6%, 37.3% and 37.9% in 1996,
1995 and 1994, respectively. For additional information, see Note 7 of Notes to
Consolidated Financial Statements.
ACCOUNTING PRONOUNCEMENTS
In 1996 the Company adopted Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 121 established accounting standards
for the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. SFAS 121 requires that a
rate-regulated enterprise recognize an impairment for
the amount of costs excluded when a regulator excludes all or part of a cost
from the enterprise's rate base. The effect of adoption of SFAS 121 did not
affect the Company's consolidated financial position or results of operations.
In 1996 the Company adopted Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123
established financial accounting and reporting standards for stock-based
employee compensation plans. As allowed by SFAS 123, the Company accounts for
employee stock compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." For additional
information, see Note 11 of Notes to Consolidated Financial Statements.
The Company adopted Statement of Financial Accounting Standards No. 112
("SFAS 112"), "Employers' Accounting for Postemployment Benefits," in the first
quarter of 1994. No cumulative effect of change in accounting principle was
required to be recorded upon adoption of SFAS 112.
INFLATION
The effects of increased costs historically have been mitigated by the
ability to recover certain costs applicable to the Company's regulated telephone
operations through the rate-making process. As operating expenses in the
Company's nonregulated lines of business increase as a result of inflation, the
Company, to the extent permitted by competition, recovers the costs by
increasing prices for its services and equipment. While the regulatory process
does not consider replacement cost of physical plant, the Company has
historically been able to earn a return on the increased cost of its net
investment when facilities have been replaced. Possible future regulatory
changes may alter the Company's ability to recover increased costs in its
regulated operations. For additional information regarding the current
regulatory environment, see Regulation and Competition.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided by
operations to provide a substantial portion of its cash needs. The Company's
telephone operations have historically provided a stable source of cash flow
which has helped the Company continue its long-term program of capital
improvements. Cash provided by the Company's mobile communications operations
has continued to increase as the cellular industry has continued to mature.
Operating Activities
Net cash provided by operating activities was $264.7 million, $215.7 million
and $199.8 million in 1996, 1995 and 1994, respectively. The Company's
accompanying consolidated statements of cash flows identify major differences
between net income and net cash provided by operating activities for each of
those years. For additional information relating to the telephone operations,
mobile communications operations, and other operations of the Company, see
Results of Operations.
Investing Activities
Net cash used in investing activities was $241.8 million, $227.8 million and
$280.3 million in 1996, 1995 and 1994, respectively. Capital expenditures for
1996 were $110.1 million for telephone operations, $83.7 million for mobile
communications operations and $29.1 million for corporate and other operations.
Payments for property, plant and equipment during 1995 and 1994 were $196.6
million and $200.8 million, respectively. Cash used for acquisitions was $46.3
million during 1996, compared to $22.1 million in 1995 and $56.0 million in
1994. During 1995 the Company invested $20.0 million in exchange for a minority
equity interest in an entity formed for the purpose of participating in the FCC
auction of Basic Trading Area PCS licenses. During 1996 such entity withdrew
from the auction and, as a result thereof, the Company withdrew its equity
investment in such entity and recouped $18.9 million of its investment.
Investments in unconsolidated cellular entities were $744,000 in 1996, down from
$8.0 million in 1995, while distributions received from such entities were $15.6
million, an increase of $10.7 million. In connection with the corporate
restructuring of an unaffiliated local exchange telephone company which has been
viewed from time to time as an acquisition candidate, Century loaned the
telephone company's holding company $25.0 million in May 1994.
Financing Activities
Net cash used in financing activities was $23.0 million during 1996. Net cash
provided by financing activities was $13.5 million and $77.8 million during 1995
and 1994, respectively. Net payments of debt were $11.6 million during 1996
compared to net borrowings of $27.7 million during 1995. In November 1995 the
Company issued $150.0 million of senior notes under its $400.0 million shelf
registration statement (see next paragraph), under which $300.0 million of
senior notes have been issued, to take advantage of attractive long-term
interest rates. The net proceeds were used to reduce the Company's borrowings
under its credit facilities.
During 1994 the Company filed a shelf registration statement with the United
States Securities and Exchange Commission registering $400.0 million of senior
unsecured debt securities under which the Company issued $150.0 million of
senior notes in May 1994. The proceeds were used to discharge the Company's
indebtedness under a $90.0 million bridge loan incurred to fund substantially
all of the Company's cash requirements in connection with the acquisition of
Celutel, Inc. in February 1994 and to reduce the Company's short-term bank
indebtedness under various floating-rate credit facilities.
In August 1996 Standard & Poor's upgraded Century's senior unsecured debt
rating from BBB+ to A-.
Other
Budgeted capital expenditures for 1997 total $102 million for telephone
operations, $67 million for mobile communications operations and $36 million for
corporate and other operations. The Company anticipates that capital
expenditures in its telephone operations will continue to include the
installation of fiber optic cable and the upgrading of its plant and equipment,
including its digital switches, to provide enhanced services. Mobile
communications capital expenditures are expected to continue to focus on
constructing additional cell sites (which will provide additional capacity and
expanded areas where hand-held cellular phones may be used) and to provide
digital service in additional markets. Budgeted capital expenditures for other
operations for 1997 include $30 million of capital construction costs planned to
be expended in the Company's competitive access operations.
In early 1997 the Company was awarded 12 PCS licenses in connection with the
FCC's D and E block auctions of 10MHz PCS licenses. The licenses cover areas
with a total population of approximately four million; the Company's investment
in the licenses was $4.6 million. The Company expects to begin the construction
of networks in 1997 to be utilized in providing PCS services under the licenses.
The amount of capital expenditures to be incurred in 1997 will not be known
until the Company finalizes its PCS business plan and construction budget.
The Company will continue its long-term strategy of pursuing the acquisition
of attractive communications properties in exchange for cash, securities or
both, and may require additional financing in connection therewith.
Approximately 1.8 million shares of Century common stock and 200,000 shares of
Century preferred stock remain available for future issuance in connection with
acquisitions under an acquisition shelf registration statement.
As of December 31, 1996, Century's telephone subsidiaries had available for
use $138.1 million of commitments for long-term financing from the Rural
Utilities Service and the Company had $98.6 million of undrawn committed bank
lines of credit. In addition, approximately $130.0 million of uncommitted credit
facilities were available to Century at December 31, 1996. The Company also has
access to debt and equity
capital markets, including its shelf registration statements mentioned above.
The Company has experienced no significant problems in obtaining funds for
capital expenditures or other purposes.
Common stockholders' equity as a percentage of total capitalization was 60.8%
and 57.5% at December 31, 1996 and 1995, respectively.
REGULATION AND COMPETITION
The telecommunications industry continues to undergo various fundamental
regulatory, competitive and technological changes that make it difficult to
determine the form or degree of future regulation and competition affecting the
Company's telephone and mobile communications operations.
Events Affecting the Telecommunications Industry
In recent years, the FCC and a number of state legislative and regulatory
bodies have taken steps to foster local exchange competition. Coincident with
this movement toward increased competition has been the relaxation of regulatory
oversight of LECs. These changes have led to the organization and continued
growth of various companies providing services that compete with LECs' services.
Wireless telephone services are also expected to increasingly compete with LECs.
In February 1996 the United States Congress accelerated these trends towards
increased competition and reduced regulation by enacting the Telecommunications
Act of 1996 (the "1996 Act"). The 1996 Act obligates LECs to permit competitors
to interconnect their facilities to the LEC's network and to take various other
steps that are designed to lower barriers of entry to competitors. Under the
1996 Act's rural telephone company exemption, each of the Company's telephone
subsidiaries is exempt from certain interconnection requirements until such time
as the appropriate state regulatory commission receives certain notices and
makes certain determinations. In August 1996 the FCC issued an order which
included rules implementing most of the interconnection provisions of the 1996
Act. Under the FCC's order, rural LECs will have the burden of proving the
continuing availability of the rural telephone company exemption. The FCC order
is currently subject to judicial review. The 1996 Act also provided that all
interstate telecommunications carriers shall contribute to universal service
support mechanisms, and authorized a federal-state joint board (the "Board") to
recommend changes to existing FCC support mechanisms to ensure that they will be
consistent with the universal service principles in the 1996 Act. In November
1996 the Board issued its recommendations. Although the Board has recommended
maintaining and funding universal service support mechanisms, the Board deferred
a recommendation on how large the subsidy should be. The Board also recommended
creation of a $2.25 billion fund for providing discounted services to schools
and libraries. The FCC is expected to take
final actions on these recommendations prior to May 8, 1997. Management believes
that the 1996 Act will ultimately increase competition in the Company's
telephone service areas, although the form and degree of competition cannot be
ascertained with certainty until such time as final and nonappealable
regulations implementing the 1996 Act's interconnection and universal service
provisions are in effect.
In December 1996 the FCC opened a new proceeding to address reforming the
system requiring long distance carriers to pay certain LECs for access to the
LECs' networks. Although the FCC's proceeding primarily affects LECs other than
those (such as the Company's LECs) which are primarily subject to rate of return
regulation, the FCC is expected to review a number of matters under this
proceeding which will have an impact on rate of return companies, and the FCC
plans to initiate a separate proceeding in 1997 to undertake a comprehensive
review of rate of return incumbent LECs. The FCC has outlined two possible
approaches for restructuring access charges and for deregulating LEC access
services as competition develops in the LEC market, one of which would allow the
marketplace to determine access charges. The other approach would involve the
FCC mandating price levels or pricing methodologies.
In recent years, the FCC has allocated a significant amount of additional
frequency spectrum for mobile communications technologies that are competitive
with cellular, including PCS and mobile satellite services. In 1996 several
major PCS companies began providing services competitive with cellular in
selected larger markets. Thus far PCS competition has been experienced in only
one of the Company's markets. The Company expects competition from PCS providers
in certain of its other markets in 1997. The FCC has also authorized certain
specialized mobile radio service licensees to configure their systems so as to
operate in a manner similar to cellular systems.
Competition to provide local exchange and access services 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's telephone operations are
located. The same expectation applies to emerging competitive wireless
technologies. The Company does not believe such competition is likely to
materially affect it in the near term. The Company further believes that it may
benefit from having the opportunity to observe the effects of these developments
in large urban markets. The Company will continue to monitor ongoing changes in
regulation, competition and technology and consider which developments provide
the most favorable opportunities for the Company to pursue.
Recent Events Affecting the Company
Revenues from the USF increased approximately $7.5 million to $49.3 million
during 1996 after increasing $5.4 million during 1995. The 1996 Act contemplates
certain changes to existing universal service support
mechanisms, as described further in Events Affecting the Telecommunications
Industry. Although the Company anticipates that it may experience a reduction in
its federal support revenues at some point in the future, management believes it
is premature to assess or estimate the ultimate impact thereof. There can be no
assurance, however, that such impact will not be material. In February 1996 the
FCC sought public comments on whether it should initiate a rate of return
represcription proceeding for LECs that are subject to rate of return regulation
for interstate access revenues. The Company is unaware of any significant
developments in this proceeding.
During the last few years, Wisconsin, Louisiana, Ohio, Michigan and certain
other states in which the Company operates took legislative and/or regulatory
steps to further introduce competition into the LEC business. While the Company
is aware of only one company (a cable company) which has requested authorization
to provide local exchange service in a portion of one of the Company's service
areas, it is anticipated that similar action may be taken by others in the
future.
During 1995 the LPSC adopted a new regulatory plan for independent telephone
companies in Louisiana. Under this plan, the Company's access revenues were
reduced $1.7 million in 1996 and $500,000 in 1995, and the Company anticipates
that its access revenues will be further reduced by approximately $3.8 million
in 1997 and an additional $1.4 million in 1998. The plan established a target
rate of return of between 10.75% and 12.75%. During 1996 and 1995 certain of the
Company's Louisiana telephone subsidiaries, with the LPSC's approval, recorded
an aggregate of $7.1 million and $6.5 million, respectively, of nonrecurring
additional depreciation charges. The Company anticipates that certain of its
Louisiana telephone subsidiaries may continue to request nonrecurring additional
depreciation charges in the future. The Company's Louisiana telephone
subsidiaries are required to file annual earnings monitoring reports with the
LPSC. Based on the reports filed for 1995, which gave effect to the access
revenue reductions mentioned above and to other known and measurable changes,
the Company's Louisiana telephone subsidiaries were not required to make
adjustments to their rates. There is no assurance, however, that revenues of
such companies will not be further reduced in the future as a result of this
plan.
Certain long distance carriers continue to request that the Company reduce
intrastate access tariffed rates for certain of its telephone subsidiaries.
There is no assurance that these requests will not result in reduced intrastate
access revenues in the future.
Other Matters
The Company's regulated telephone operations are subject to the provisions of
SFAS 71, under which the Company is required to account for the economic effects
of the rate-making process, including the recognition
of depreciation of plant and equipment over lives approved by regulators. The
ongoing applicability of SFAS 71 to the Company's regulated telephone operations
is being monitored due to the changing regulatory, competitive and legislative
environments. When the regulated operations of the Company no longer qualify for
the application of SFAS 71, the net adjustments required will result in a
material, extraordinary, noncash charge against earnings. While the amount of
such charge cannot be precisely estimated at this time, management believes that
the noncash, after-tax, extraordinary charge would be between $100 million and
$130 million. See Note 10 of Notes to Consolidated Financial Statements for
additional information.
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 1996
have not been material and the Company currently has no reason to believe that
such costs will become material.
Item 8. Financial Statements and Supplementary Data
Report of Management
--------------------
The Shareholders
Century Telephone Enterprises, Inc.:
Management has prepared and is responsible for the Company's consolidated
financial statements. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and necessarily
include amounts determined using our best judgments and estimates with
consideration given to materiality.
The Company maintains internal control systems and related policies and
procedures designed to provide reasonable assurance that the accounting records
accurately reflect business transactions and that the transactions are in
accordance with management's authorization. The design, monitoring and revision
of the systems of internal control involve, among other things, our judgment
with respect to the relative cost and expected benefits of specific control
measures. Additionally, the Company maintains an internal auditing function
which independently evaluates the effectiveness of internal controls, policies
and procedures and formally reports on the adequacy and effectiveness thereof.
The Company's consolidated financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, who have expressed
their opinion with respect to the fairness of the consolidated financial
statements. Their audit was conducted in accordance with generally accepted
auditing standards, which includes the consideration of the Company's internal
controls to the extent necessary to form an independent opinion on the
consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed of directors who
are not officers or employees of the Company. The Committee meets periodically
with the independent certified public accountants, internal auditors and
management. The Committee considers the audit scope and discusses internal
control, financial and reporting matters. Both the independent and internal
auditors have free access to the Committee.
/s/ R. Stewart Ewing, Jr.
R. Stewart Ewing, Jr.
Senior Vice President and Chief Financial Officer
Independent Auditors' Report
----------------------------
The Board of Directors
Century Telephone Enterprises, Inc.:
We have audited the consolidated financial statements of Century Telephone
Enterprises, Inc. and subsidiaries as listed in Item 14a(i). In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedules as listed in Item 14a(ii). These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Century
Telephone Enterprises, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Shreveport, Louisiana
January 29, 1997
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Statements of Income
Year ended December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Telephone $ 451,538 419,242 391,265
Mobile communications 250,243 197,494 150,802
Other 47,896 28,104 22,534
- ------------------------------------------------------------------------------
Total operating revenues 749,677 644,840 564,601
- ------------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses 394,360 328,151 296,082
Depreciation and amortization 132,021 113,770 95,713
- ------------------------------------------------------------------------------
Total operating expenses 526,381 441,921 391,795
- ------------------------------------------------------------------------------
OPERATING INCOME 223,296 202,919 172,806
- ------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (44,662) (43,615) (42,577)
Income from unconsolidated cellular
entities 26,952 20,084 15,698
Gain on sales of assets 815 6,782 15,877
Minority interest (6,675) (8,084) (3,377)
Other income and expense 3,916 4,982 3,111
- ------------------------------------------------------------------------------
Total other income (expense) (19,654) (19,851) (11,268)
- ------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 203,642 183,068 161,538
Income tax expense 74,565 68,292 61,300
- ------------------------------------------------------------------------------
NET INCOME $ 129,077 114,776 100,238
==============================================================================
PRIMARY EARNINGS PER SHARE $ 2.15 1.97 1.88
==============================================================================
FULLY DILUTED EARNINGS PER SHARE $ 2.14 1.95 1.80
==============================================================================
DIVIDENDS PER COMMON SHARE $ .36 .33 .32
==============================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Balance Sheets
December 31,
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,402 8,540
Accounts receivable
Customers, less allowance of $3,327 and $2,768 60,181 50,943
Other 26,263 24,219
Materials and supplies, at average cost 8,222 6,608
Other 6,166 5,019
- ------------------------------------------------------------------------------
Total current assets 109,234 95,329
- ------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 1,149,012 1,047,808
- ------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired,
less accumulated amortization of
$67,061 and $52,944 532,410 493,655
Other 237,849 225,629
- ------------------------------------------------------------------------------
Total investments and other assets 770,259 719,284
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 2,028,505 1,862,421
==============================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 19,919 15,325
Notes payable - 14,199
Accounts payable 60,548 55,329
Accrued expenses and other current liabilities
Salaries and benefits 20,224 18,178
Taxes 13,913 12,489
Interest 5,581 6,024
Other 8,837 5,337
Advance billings and customer deposits 15,122 13,043
- ------------------------------------------------------------------------------
Total current liabilities 144,144 139,924
- ------------------------------------------------------------------------------
LONG-TERM DEBT 625,930 622,904
- ------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 230,278 211,169
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
175,000,000 shares, issued and outstanding
59,858,540 and 59,113,670 shares 59,859 59,114
Paid-in capital 474,607 453,584
Retained earnings 494,726 387,424
Unearned ESOP shares (11,080) (13,960)
Preferred stock - non-redeemable 10,041 2,262
- ------------------------------------------------------------------------------
Total stockholders' equity 1,028,153 888,424
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 2,028,505 1,862,421
==============================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 129,077 114,776 100,238
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 132,021 113,770 95,713
Income from unconsolidated cellular
entities (26,952) (20,084) (15,698)
Minority interest 6,675 8,084 3,377
Deferred income taxes 7,935 9,563 7,423
Gain on sales of assets (815) (6,782) (15,877)
Loss on investment in unconsolidated
personal communications services entity 1,100 - -
Changes in current assets and current
liabilities:
Increase in accounts receivable (4,353) (8,949) (1,581)
Increase (decrease) in accounts
payable 5,103 2,656 (2,383)
Increase (decrease) in other
accrued taxes 1,285 (4,134) 8,347
Changes in other current assets and
other current liabilities, net 6,220 (4,413) 6,543
Increase in other noncurrent
liabilities 4,305 5,754 4,092
Other, net 3,051 5,497 9,610
- -------------------------------------------------------------------------------
Net cash provided by operating
activities 264,652 215,738 199,804
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (222,885) (196,592) (200,776)
Acquisitions, net of cash acquired (46,327) (22,130) (55,979)
Investment in unconsolidated personal
communications services entity 18,900 (20,000) -
Investments in unconsolidated cellular
entities (744) (8,013) (5,516)
Distributions from unconsolidated
cellular entities 15,648 4,957 5,969
Proceeds from sales of assets - 19,953 10,475
Purchase of life insurance investment (5,944) (6,418) (7,664)
Note receivable 1,667 833 (25,000)
Other, net (2,106) (396) (1,764)
- -------------------------------------------------------------------------------
Net cash used in investing
activities (241,791) (227,806) (280,255)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 59,649 203,987 155,427
Payments of long-term debt (57,021) (18,377) (59,792)
Notes payable, net (14,199) (158,000) (7,700)
Proceeds from issuance of common stock 10,089 6,522 4,814
Cash dividends (21,775) (19,351) (17,184)
Other, net 258 (1,327) 2,263
- -------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (22,999) 13,454 77,828
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (138) 1,386 (2,623)
Cash and cash equivalents at beginning of year 8,540 7,154 9,777
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,402 8,540 7,154
===============================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Statements of Stockholders' Equity
Year ended December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
(Dollars and shares
in thousands)
COMMON STOCK
Balance at beginning of year $ 59,114 53,574 51,295
Issuance of common stock for acquisitions 257 577 2,000
Conversion of debentures into common stock - 4,540 -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 455 422 277
Conversion of preferred stock into
common stock 33 1 2
- ------------------------------------------------------------------------------
Balance at end of year 59,859 59,114 53,574
- ------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of year 453,584 319,235 262,294
Issuance of common stock for acquisitions 8,201 15,981 50,311
Conversion of debentures into common stock - 108,596 -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 9,676 6,100 4,537
Amortization of unearned compensation
and other 2,983 3,667 2,034
Conversion of preferred stock into
common stock 163 5 59
- ------------------------------------------------------------------------------
Balance at end of year 474,607 453,584 319,235
- ------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 387,424 291,999 208,945
Net income 129,077 114,776 100,238
Cash dividends declared
Common stock - $.36, $.33 and $.32 per share (21,355) (19,228) (17,084)
Preferred stock (420) (123) (100)
- ------------------------------------------------------------------------------
Balance at end of year 494,726 387,424 291,999
- ------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of year (13,960) (16,840) (9,220)
Release of ESOP shares 2,880 2,880 2,380
Commitment to ESOP - - (10,000)
- ------------------------------------------------------------------------------
Balance at end of year (11,080) (13,960) (16,840)
- ------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning of year 2,262 2,268 454
Issuance of preferred stock for
acquisitions 7,975 - 1,875
Conversion of preferred stock into
common stock (196) (6) (61)
- ------------------------------------------------------------------------------
Balance at end of year 10,041 2,262 2,268
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,028,153 888,424 650,236
==============================================================================
COMMON SHARES OUTSTANDING
Balance at beginning of year 59,114 53,574 51,295
Issuance of common stock for acquisitions 257 577 2,000
Conversion of debentures into common stock - 4,540 -
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 455 422 277
Conversion of preferred stock into
common stock 33 1 2
- ------------------------------------------------------------------------------
Balance at end of year 59,859 59,114 53,574
==============================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements of Century
Telephone Enterprises, Inc. and its subsidiaries (the "Company") include the
accounts of Century Telephone Enterprises, Inc. ("Century") and its
majority-owned subsidiaries and partnerships. The Company's regulated telephone
operations are subject to the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
Investments in cellular entities where the Company does not own a majority
interest are accounted for using the equity method of accounting.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue recognition - Revenues are recognized when earned. Certain of the
Company's telephone subsidiaries participate in revenue pools with other
telephone companies for interstate revenue and for certain intrastate revenue.
Such pools are funded by toll revenue and/or access charges within state
jurisdictions and by access charges in the interstate market. Revenues earned
through the various pooling processes are initially recorded based on the
Company's estimates.
Property, plant and equipment - Telephone plant is stated substantially at
original cost of construction. Normal retirements of telephone property are
charged against accumulated depreciation, along with the costs of removal, less
salvage, with no gain or loss recognized. Renewals and betterments of plant and
equipment are capitalized while repairs, as well as renewals of minor items, are
charged to operating expense. Depreciation of telephone properties is provided
on the straight line method, using class or overall group rates acceptable to
the regulatory authorities; such rates range from 1.8% to 25%.
Non-telephone property is stated at cost and, when sold or retired, a gain or
loss is recognized. Depreciation of such property is provided on the straight
line method over estimated service lives ranging from three to 30 years.
Impairment of long-lived assets and excess cost of net assets acquired
(goodwill) - In 1996 the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The carrying value of long-lived assets, including allocated
goodwill, is reviewed for impairment at least annually, or whenever events or
changes in circumstances indicate that such carrying value may not be
recoverable, by assessing the recoverability of such carrying value through
estimated undiscounted future net cash flows expected to be generated by the
assets or the acquired business. The adoption of SFAS 121 did not affect the
Company's consolidated financial position or results of operations. The excess
cost of net assets acquired of substantially all of the Company's acquisitions
accounted for as purchases is being amortized over forty years.
Affiliated transactions - Certain service subsidiaries of Century provide
installation and maintenance services, materials and supplies, and managerial,
technical and accounting services to subsidiaries. In addition, Century provides
and bills management services to subsidiaries and in certain instances makes
interest bearing advances to finance construction of plant and purchases of
equipment. These transactions are recorded by the Company's telephone
subsidiaries at their cost to the extent permitted by regulatory authorities.
Intercompany profit on transactions with regulated affiliates is limited to a
reasonable return on investment and has not been eliminated in connection with
consolidating the results of operations of Century and its subsidiaries.
Intercompany profit on transactions with nonregulated affiliates has been
eliminated.
Income taxes - Century files a consolidated federal income tax return with its
eligible subsidiaries. The Company uses the asset and liability method of
accounting for income taxes under which deferred tax assets and liabilities are
established for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Investment tax credits related to telephone plant have
been deferred and are being amortized as a reduction of federal income tax
expense over the estimated useful lives of the assets giving rise to the
credits.
Earnings per share - Primary earnings per share amounts are determined on the
basis of the weighted average number of common shares and common stock
equivalents outstanding during the year. The weighted average number of shares
used in computing primary earnings per share was 59.9 million in 1996, 58.1
million in 1995 and 53.4 million in 1994.
Fully diluted earnings per share amounts give further effect to convertible
securities which are not common stock equivalents. The weighted average number
of shares used in computing fully diluted earnings per share was 60.7 million,
59.1 million and 58.1 million in 1996, 1995 and 1994, respectively.
Stock compensation - During 1996 the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." As allowed by SFAS 123, the Company accounts for employee stock
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees."
Cash equivalents - The Company considers short-term investments with a maturity
at date of purchase of three months or less to be cash equivalents.
Reclassifications - Certain amounts previously reported for prior years have
been reclassified to conform with the 1996 presentation.
(2) INVESTMENTS AND OTHER ASSETS
Investments and other assets at December 31, 1996 and 1995 were composed of
the following:
December 31, 1996 1995
- -------------------------------------------------------------------------------
(Dollars in thousands)
Excess cost of net assets acquired,
less accumulated amortization $ 532,410 493,655
Investments in unconsolidated cellular entities 99,212 83,552
Cash surrender value of life insurance
contracts, net 61,750 54,697
Note receivable, less current portion 20,833 22,500
Investment in unconsolidated personal
communications services entity - 20,000
Marketable equity securities 8,478 8,478
Other 47,576 36,402
- -------------------------------------------------------------------------------
$ 770,259 719,284
===============================================================================
Goodwill amortization of $12.8 million, $11.4 million and $10.6 million for
1996, 1995 and 1994, respectively, is included in "Depreciation and
amortization."
In 1995 the Company invested $20.0 million in exchange for a minority equity
interest in an entity formed for the purpose of participating in the Federal
Communication Commission's auction of one 30MHz Personal Communications Services
license for each Basic Trading Area. In 1996 such entity withdrew from the
auction and the Company withdrew its equity investment in such entity.
In 1994 Century loaned an unaffiliated telephone holding company $25.0
million. The loan bears interest at prime plus 1.5%; interest is due quarterly.
Quarterly principal payments began in August 1995 and the unpaid balance becomes
due in May 1998. Century received a security interest in the holding company's
capital stock, a guaranty from such company's principal stockholder and first
refusal rights to acquire certain properties under various specified
circumstances.
(3) PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at December 31, 1996 and 1995 was composed
of the following:
December 31, 1996 1995
- ---------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost
Cable and wire $ 726,340 661,429
Central office 389,259 357,359
General support 102,667 99,145
Information origination/termination 27,881 24,394
Construction in progress 38,981 59,859
Other 5,161 5,161
- ---------------------------------------------------------------------------
1,290,289 1,207,347
Accumulated depreciation (417,497) (357,633)
- ---------------------------------------------------------------------------
872,792 849,714
- ---------------------------------------------------------------------------
Mobile communications, at cost
Cell site 203,879 140,462
General support 47,138 33,651
Construction in progress 15,716 16,162
Other 2,656 1,319
- ---------------------------------------------------------------------------
269,389 191,594
Accumulated depreciation (75,666) (54,927)
- ---------------------------------------------------------------------------
193,723 136,667
- ---------------------------------------------------------------------------
Corporate and other, at cost
General support 94,042 86,149
Other 31,973 14,464
- ---------------------------------------------------------------------------
126,015 100,613
Accumulated depreciation (43,518) (39,186)
- ---------------------------------------------------------------------------
82,497 61,427
- ---------------------------------------------------------------------------
Net property, plant and equipment $ 1,149,012 1,047,808
===========================================================================
Depreciation expense was $118.9 million, $102.1 million and $84.8 million in
1996, 1995 and 1994, respectively. The composite depreciation rate for telephone
properties was 7.5% for 1996 and 1995 and 7.1% for 1994.
(4) INVESTMENTS IN UNCONSOLIDATED CELLULAR ENTITIES
The Company's share of earnings from cellular entities in which it does not
own a majority interest was $28.2 million, $21.4 million and $16.9 million in
1996, 1995 and 1994, respectively, and is included, net of $1.3 million, $1.3
million and $1.2 million of amortization of goodwill attributable to such
investments, in "Income from unconsolidated cellular entities."
Over 70% of the 1996 income from unconsolidated cellular entities was
attributable to the following investments.
Ownership interest
- ----------------------------------------------------------------------------
GTE Mobilnet of Austin Limited Partnership 35%
Alltel Cellular Associates of Arkansas Limited Partnership 36%
Lafayette MSA Limited Partnership 49%
Detroit SMSA Limited Partnership 3%
New Mexico 4 - Santa Fe RSA West Limited Partnership 36%
- ----------------------------------------------------------------------------
The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited combined results of operations, of the cellular
entities in which the Company's investments (as of December 31, 1996 and 1995)
were accounted for by the equity method.
December 31, 1996 1995
- --------------------------------------------------------------------------
(Dollars in thousands)
(Unaudited)
Assets
Current assets $ 286,197 204,222
Property and other noncurrent assets 603,204 487,073
- --------------------------------------------------------------------------
$ 889,401 691,295
==========================================================================
Liabilities and equity
Current liabilities $ 108,525 79,085
Noncurrent liabilities 24,564 6,922
Equity 756,312 605,288
- --------------------------------------------------------------------------
$ 889,401 691,295
==========================================================================
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(Dollars in thousands)
(Unaudited)
Results of operations
Revenues $ 985,788 743,779 329,907
Operating income $ 338,554 266,355 93,512
Net income $ 339,040 268,967 92,446
- --------------------------------------------------------------------------
At December 31, 1996, $41.7 million of the Company's consolidated retained
earnings represented undistributed earnings of unconsolidated cellular entities.
(5) LONG-TERM DEBT
December 31, 1996 1995
- ----------------------------------------------------------------------------
(Dollars in thousands)
Century
8.25% senior notes, series B, due 2024 $ 100,000 100,000
7.2% senior notes, series D, due 2025 100,000 100,000
5.7%* notes payable to banks, due 2000 62,500 22,500
7.75% senior notes, series A, due 2004 50,000 50,000
6.55% senior notes, series C, due 2005 50,000 50,000
9.4% senior notes, due through 2003 25,800 60,400
7.1%* Employee Stock Ownership Plan commitment,
due in installments through 2004 11,080 13,960
10.1%* notes, due in installments through 2006 417 674
- ----------------------------------------------------------------------------
Total Century 399,797 397,534
- ----------------------------------------------------------------------------
Subsidiaries
First mortgage debt
5.9%* notes, payable to agencies of the
United States government and cooperative
lending associations, due in installments
through 2025 208,920 202,037
6.1% bonds, due in 1997 1,775 4,760
Other debt
7.4%* notes, due in installments through 2020 18,112 19,164
6.5% note, due in installments through 2001 14,605 13,714
8.2%* capital lease obligations, due in
installments through 1998 2,640 1,020
- ----------------------------------------------------------------------------
Total subsidiaries 246,052 240,695
- ----------------------------------------------------------------------------
Total long-term debt 645,849 638,229
Less current maturities 19,919 15,325
- ----------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 625,930 622,904
============================================================================
* weighted average interest rate at December 31, 1996
The approximate annual debt maturities (including sinking fund requirements)
for the five years subsequent to December 31, 1996 are as follows: 1997 - $19.9
million; 1998 - $17.9 million; 1999 - $16.6 million; 2000 - $80.4 million; and
2001 - $18.2 million.
Short-term borrowings of $62.5 million at December 31, 1996 were classified
as long-term debt on the accompanying balance sheet as the Company had available
an aggregate of $145.0 million in two long-term revolving credit facilities. The
Company intends to refinance such debt using the facilities, both of which are
multi-year agreements which expire in August 2000 and contain a variety of
pricing options including competitive bid options. Relying on the same
facilities, short-term borrowings of $22.5 million, along with $30.0 million of
debt becoming due in 1996, were classified as long-term debt at December 31,
1995.
Certain of the Company's loan agreements contain various restrictions, among
which are limitations regarding issuance of additional debt, payment of cash
dividends, reacquisition of the Company's capital stock
and other matters. At December 31, 1996, all of the consolidated retained
earnings reflected on the balance sheet was available for the declaration of
dividends.
The transfer of funds from certain consolidated subsidiaries to Century is
restricted by various loan agreements. Subsidiaries which have loans from
government agencies and cooperative lending associations, or have issued first
mortgage bonds, generally may not loan or advance any funds to Century, but may
pay dividends if certain financial ratios are met. At December 31, 1996,
restricted net assets of subsidiaries were $280.3 million. Subsidiaries'
retained earnings in excess of amounts restricted by debt covenants totaled
$467.2 million.
Most of the Company's telephone property, plant and equipment is pledged to
secure the long-term debt of subsidiaries.
Century's telephone subsidiaries had approximately $138.1 million in
commitments for long-term financing from the Rural Utilities Service available
at December 31, 1996. Approximately $228.6 million of additional borrowings, of
which $130.0 million were under uncommitted facilities, were available to the
Company through lines of credit with various banks. In addition, Century has
$100.0 million of registered, unissued senior unsecured debt securities under a
shelf registration statement.
During the fourth quarter of 1995, Century issued $50.0 million of 10-year,
6.55% senior notes and $100.0 million of 30-year, 7.2% senior notes under a
shelf registration statement. The proceeds were used to reduce Century's
short-term indebtedness under various credit facilities. Interest payments are
due semi-annually and principal payments are due in 2005 and 2025 upon maturity
of the 10-year and 30-year notes, respectively. The 30-year notes may be
redeemed by Century at any time subject to certain "make-whole" provisions
contained therein.
In January 1995 Century called for redemption its $115.0 million of
outstanding 6% convertible debentures due 2007. All of the debentures were
converted into Century common stock by the debenture holders in February 1995 at
a conversion price of $25.33 per share. If Century had issued common stock
instead of the debentures, primary earnings per share for the years ended
December 31, 1995 and 1994 would have been $1.95 and $1.81, respectively.
In May 1994 Century issued $50.0 million of 10-year, 7.75% senior notes and
$100.0 million of 30-year, 8.25% senior notes under a shelf registration
statement. The proceeds were used to reduce certain of the Company's short-term
bank indebtedness. Interest payments are due semi-annually and principal
payments are due in 2004 and 2024 upon maturity of the 10-year and 30-year
notes, respectively. The 30-year notes may be
redeemed by Century on or after May 1, 2004 subject to a premium schedule which
declines from 103.62% as of May 1, 2004 to 100% as of May 1, 2014.
(6) DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 1996 and 1995 were
composed of the following:
December 31, 1996 1995
- ----------------------------------------------------------------------------
(Dollars in thousands)
Deferred federal and state income taxes $ 111,110 93,118
Accrued postretirement benefit costs 48,515 44,513
Minority interest 32,460 29,354
Regulatory liability - income taxes 22,575 27,027
Deferred investment tax credits 3,882 6,026
Other 11,736 11,131
- ----------------------------------------------------------------------------
$ 230,278 211,169
============================================================================
(7) INCOME TAXES
Income tax expense for the years ended December 31, 1996, 1995 and 1994 was
as follows:
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
(Dollars in thousands)
Federal
Current $ 60,530 53,554 47,969
Deferred 7,390 9,021 5,703
State
Current 6,100 5,175 5,908
Deferred 545 542 1,720
- ----------------------------------------------------------------------------
$ 74,565 68,292 61,300
============================================================================
Income tax expense was allocated as follows:
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
(Dollars in thousands)
Net tax expense in the consolidated
statements of income $ 74,565 68,292 61,300
Stockholders' equity, primarily for
compensation expense for tax purposes in
excess of amounts recognized for
financial reporting purposes (1,866) (2,354) (1,243)
- ----------------------------------------------------------------------------
$ 72,699 65,938 60,057
============================================================================
The following is a reconciliation from the statutory federal income tax rate
to the Company's effective income tax rate:
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------
(Percentage of pre-tax income)
Statutory federal income tax rate 35.0% 35.0 35.0
State income taxes, net of federal
income tax benefit 2.1 2.0 3.0
Amortization of nondeductible excess cost
of net assets acquired 1.8 1.8 2.1
Amortization of investment tax credits (1.1) (1.3) (1.4)
Amortization of regulatory liability (.9) (1.0) (1.2)
Other, net (.3) .8 .4
- ---------------------------------------------------------------------------
Effective income tax rate 36.6% 37.3 37.9
===========================================================================
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 were as follows:
December 31, 1996 1995
- ------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Postretirement benefit costs $ 16,790 15,314
Net operating loss carryforwards of
an acquired subsidiary 8,367 9,234
Regulatory liability 7,901 9,460
Deferred compensation 2,435 2,659
Deferred investment tax credits 1,216 1,918
Other employee benefits 4,393 4,673
Other 2,146 3,227
- ------------------------------------------------------------------------
Gross deferred tax assets 43,248 46,485
Less valuation allowance (8,367) (9,234)
- ------------------------------------------------------------------------
Net deferred tax assets 34,881 37,251
- ------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment, primarily due
to depreciation differences (129,123) (117,095)
Excess cost of net assets acquired (6,112) (4,563)
Intercompany profits (3,338) (3,787)
Other (7,418) (4,924)
- ------------------------------------------------------------------------
Gross deferred tax liabilities (145,991) (130,369)
- ------------------------------------------------------------------------
Net deferred tax liability $ (111,110) (93,118)
========================================================================
As a result of the acquisition of Celutel, Inc. ("Celutel") (see Note 13) the
Company had $23.9 million, $26.4 million and $29.4 million of net operating loss
carryforwards at December 31, 1996, 1995 and 1994, respectively, which related
to various entities acquired. The yearly utilization of such loss carryforwards
is limited to separate entity taxable income; the loss carryforwards are further
limited by certain Internal Revenue Code regulations. During 1996 and 1995, the
Company utilized $2.5 million and $3.0 million, respectively, of such loss
carryforwards; the related tax benefits reduced excess cost of net assets
acquired. Subsequently recognized tax benefits applicable to the net operating
loss carryforwards will reduce excess cost of net assets acquired. The net
operating loss carryforwards expire between 2003 and 2008.
(8) POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company sponsors defined benefit health care plans that provide
postretirement medical, life and dental benefits to substantially all retired
full-time employees.
Net periodic postretirement benefit cost for 1996, 1995 and 1994 included the
following components:
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 2,354 1,769 2,007
Interest cost 4,212 3,972 3,473
Amortization of unrecognized
actuarial losses (gains) 475 (50) 447
Amortization of unrecognized
prior service cost 121 121 121
- --------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 7,162 5,812 6,048
==========================================================================
The following table sets forth the amounts recognized as liabilities for
postretirement benefits in the Company's consolidated balance sheets at December
31, 1996 and 1995.
December 31, 1996 1995
- -------------------------------------------------------------------------
(Dollars in thousands)
Accumulated postretirement benefit obligation
Retirees and retirees' dependents $ 25,105 26,185
Fully eligible active plan participants 10,512 9,972
Other active plan participants 23,540 23,971
- -------------------------------------------------------------------------
Accumulated postretirement benefit obligation 59,157 60,128
Plan assets - -
Unrecognized prior service cost (1,303) (1,424)
Unrecognized net gain (loss) (6,986) (12,881)
- -------------------------------------------------------------------------
Accrued postretirement benefit costs $ 50,868 45,823
=========================================================================
For calculation purposes, a 7% health care cost rate was assumed for 1997;
the rate was assumed to decrease to 6% thereafter. If the assumed health care
cost rate had been increased by one percentage point in each year, the
accumulated postretirement benefit obligation as of December 31, 1996 would have
increased $4.5 million and the net periodic postretirement benefit cost for the
year ended December 31, 1996 would have increased $351,000. The discount rates
used in determining the accumulated postretirement benefit obligation as of
December 31, 1996 and 1995 were 7.75% and 7.25%, respectively.
In the first quarter of 1994 the Company adopted Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), "Employers' Accounting for
Postemployment Benefits." Liabilities for postemployment benefits in the
consolidated balance sheet as of December 31, 1993 were not materially different
than those
required by SFAS 112; therefore, no cumulative effect of change in accounting
principle was recorded upon adoption of SFAS 112.
(9) STOCKHOLDERS' EQUITY
Common stock - At December 31, 1996, unissued shares of Century common stock
were reserved as follows:
December 31, 1996
- ---------------------------------------------------------------------
(In thousands)
Stock option plans 3,707
Acquisitions 2,389
Employee stock purchase plan 506
Conversion of convertible preferred stock 353
Other employee benefit plans 1,244
- ---------------------------------------------------------------------
8,199
=====================================================================
Under Century's Articles of Incorporation each share of common stock
beneficially owned continuously by the same person since May 30, 1987 generally
entitles the holder thereof to ten votes per share. All other shares entitle the
holder to one vote per share. At December 31, 1996, the holders of 7.9 million
shares of common stock were entitled to ten votes per share.
Preferred stock - As of December 31, 1996, Century had 2.0 million shares of
preferred stock, $25 par value per share, authorized. At December 31, 1996 and
1995, there were 401,629 and 90,467 shares, respectively, of outstanding
preferred stock. Holders of outstanding Century preferred stock are entitled to
receive cumulative dividends, receive preferential distributions equal to $25
per share plus unpaid dividends upon Century's liquidation and vote as a single
class with the holders of common stock.
Shareholders' Rights Plan - In 1996 the Board of Directors declared a dividend
of one preference share purchase right for each common share outstanding. Such
rights become exercisable if and when a potential acquiror takes certain steps
to acquire 15% or more of Century's common stock. Upon the occurrence of such an
acquisition, each right held by shareholders other than the acquiror may be
exercised to receive that number of shares of common stock or other securities
of Century (or, in certain situations, the acquiring company) which at the time
of such transaction will have a market value of two times the exercise price of
the right. The Shareholders' Rights Plan approved by the Board of Directors in
1986 expired in November 1996.
(10) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's regulated telephone operations are subject to the provisions of
Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for
the Effects of Certain Types of Regulation." Actions of a regulator can provide
reasonable assurance of the existence of an asset, reduce or eliminate the value
of an asset and impose a liability on a regulated enterprise. Such regulatory
assets and liabilities are required to be recorded and, accordingly, reflected
in the balance sheet of an entity subject to SFAS 71.
The Company's consolidated balance sheet as of December 31, 1996 included
regulatory assets of approximately $7.9 million and regulatory liabilities of
approximately $22.6 million exclusive of (i) property, plant and equipment, (ii)
accumulated depreciation and (iii) deferred income taxes and deferred investment
tax credits associated with regulatory assets and liabilities. The $7.9 million
of regulatory assets included assets established in connection with
postretirement benefits ($1.7 million), income taxes ($2.7 million),
extraordinary retirements ($603,000) and deferred financing costs ($2.9
million). The $22.6 million of regulatory liabilities was established in
connection with the adoption of Statement of Financial Accounting Standards No.
109, "Accounting For Income Taxes." Net deferred income tax assets related to
the regulatory assets and liabilities quantified above were $5.1 million.
Property, plant and equipment of the Company's regulated telephone operations
has been depreciated using generally the straight line method over lives
approved by regulators. Such depreciable lives have generally exceeded the
depreciable lives used by nonregulated entities. In addition, in accordance with
regulatory accounting, retirements of regulated telephone property have been
charged to accumulated depreciation, along with the costs of removal, less
salvage, with no gain or loss recognized. These accounting policies have
resulted in accumulated depreciation being significantly less than if the
Company's telephone operations had not been regulated.
Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated
Enterprises - Accounting for the Discontinuance of Application of FASB Statement
No. 71," specifies the accounting required when an enterprise ceases to meet the
criteria for application of SFAS 71. SFAS 101 requires the elimination of the
effects of any actions of regulators that have been recognized as assets and
liabilities in accordance with SFAS 71 but would not have been recognized as
assets and liabilities by enterprises in general, along with an adjustment of
certain accumulated depreciation accounts to reflect the difference between
recorded depreciation and the amount of depreciation that would have been
recorded had the Company's telephone operations not been subject to rate
regulation. SFAS 101 further provides that the carrying amounts of property,
plant and equipment are to be adjusted only to the extent the assets are
impaired and that impairment shall be judged in the same manner as for
enterprises in general. Deferred tax liabilities and deferred investment tax
credits will
be impacted based on the change in the temporary differences for property, plant
and equipment and accumulated depreciation.
The ongoing applicability of SFAS 71 to the Company's regulated telephone
operations is being monitored due to the changing regulatory, competitive and
legislative environments, and it is possible that changes in regulation,
legislation or competition or in the demand for regulated services or products
could result in the Company's telephone operations no longer being subject to
SFAS 71 in the near future. When the regulated operations of the Company no
longer qualify for the application of SFAS 71, the net adjustments required will
result in a material, noncash charge against earnings which will be reported as
an extraordinary item. While the effect of implementing SFAS 101 cannot be
precisely estimated at this time, management believes that the noncash,
after-tax, extraordinary charge would be between $100 million and $130 million.
For regulatory purposes, the accounting and reporting of the Company's telephone
subsidiaries will not be affected by the discontinued application of SFAS 71.
(11) STOCK OPTION PROGRAM
Century has an incentive compensation program which allows the Board of
Directors, through a subcommittee to the Compensation Committee, to grant
incentives to employees in any one or a combination of the following forms:
incentive stock options and non-qualified stock options; stock appreciation
rights; restricted stock; and performance shares. As of December 31, 1996,
Century had reserved 3.7 million shares of common stock which may be issued
under the incentive compensation program.
Under the program, options have been granted to employees at a price either
equal to or exceeding the then-current market price and all of the options
expire ten years after the date of grant.
During 1995 the Company granted 634,031 options (the "1995 Options") above
market price. During 1994 the Company granted 31,000 options at market price.
The weighted-average fair value of each of the 1995 Options was estimated as of
the date of grant to be $9.93 using an option-pricing model with the following
assumptions: dividend yield - 1.1%; expected volatility - 25%; risk-free
interest rate - 6.5%; and expected option life - eight years.
Stock option transactions during 1996, 1995 and 1994 were as follows:
Number Average
of options price
- -------------------------------------------------------------------
Outstanding December 31, 1993 2,381,749 $ 20.96
Exercised (139,282) 11.10
Granted 31,000 26.25
- ------------------------------------------------------
Outstanding December 31, 1994 2,273,467 21.63
Exercised (272,300) 10.12
Granted 634,031 36.15
- ------------------------------------------------------
Outstanding December 31, 1995 2,635,198 25.46
Exercised (292,403) 18.72
Forfeited (12,550) 29.27
- ------------------------------------------------------
Outstanding December 31, 1996 2,330,245 27.25
======================================================
Exercisable December 31, 1995 2,604,198 26.32
======================================================
Exercisable December 31, 1996 2,317,745 27.26
======================================================
The following tables summarize certain information about Century's stock
options at December 31, 1996.
Options outstanding
- ---------------------------------------------------------------------------
Weighted average
Range of Number of remaining Weighted average
exercise prices options outstanding contractual life exercise price
- ---------------------------------------------------------------------------
$ 8.85-16.00 103,906 1.8 years $ 10.09
18.75-27.67 1,602,364 5.0 24.87
31.63-39.69 623,975 8.4 36.22
---------
8.85-39.69 2,330,245 6.1 27.25
=========
Options exercisable
- ---------------------------------------------------------------------------
Range of Number of Weighted average
exercise prices options exercisable exercise price
- ---------------------------------------------------------------------------
$ 8.85-16.00 103,906 $ 10.09
18.75-27.67 1,589,864 24.86
31.63-39.69 623,975 36.22
---------
8.85-39.69 2,317,745 27.26
=========
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for its program. Accordingly, no
compensation cost has been recognized for the program. If compensation cost for
Century's program had been determined consistent with SFAS 123 for the 1995
Options, the Company's net income and earnings per share for 1995 would have
been reduced to the pro forma amounts shown in the following table. All of the
1995 Options became fully vested in 1995; under SFAS 123 there would be no
compensation expense after 1995 applicable to the 1995 Options.
Year ended December 31, 1995
- ------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net income
As reported $ 114,776
Pro forma $ 110,813
Fully diluted earnings per share
As reported $ 1.95
Pro forma $ 1.88
- ------------------------------------------------------------------------
(12) RETIREMENT AND SAVINGS PLANS
Century sponsors an Outside Directors' Retirement Plan and a Supplemental
Executive Retirement Plan to provide directors and officers, respectively, with
supplemental retirement, death and disability benefits. In addition, the
bargaining unit employees of a subsidiary are provided benefits under a defined
benefit pension plan. At December 31, 1996 and 1995, the combined accumulated
benefit obligation of the plans, substantially all of which was vested,
aggregated $19.6 million and $18.4 million, respectively. The plans' assets were
$1.7 million in excess of the projected benefit obligations as of December 31,
1996. The projected benefit obligations were $823,000 in excess of the plans'
assets as of December 31, 1995. During 1996 and 1995 Century funded $2.2 million
and $2.9 million, respectively, of the obligations of the plans. Prepaid pension
cost was $4.2 million at December 31, 1996 and $2.5 million at December 31,
1995. The net periodic pension cost in 1996, 1995 and 1994 was $508,000,
$928,000 and $1.2 million, respectively. Discount rates used in determining the
year-end liabilities were 7.75% for 1996 and 7.25% for 1995.
Century sponsors an Employee Stock Bonus Plan ("ESBP") and an Employee Stock
Ownership Plan ("ESOP"). These plans cover most employees with one year of
service with the Company and are funded by Company contributions determined
annually by the Board of Directors.
The Company contributed $1.9 million, $1.6 million and $2.3 million to the
ESBP during 1996, 1995 and 1994, respectively. At December 31, 1996, the ESBP
owned 4.0 million shares of Century common stock.
The Company's contributions to the ESOP approximate the ESOP's debt service
less dividends received by the ESOP applicable to unallocated shares. The ESOP
shares initially were pledged as collateral for its debt. As the debt is repaid,
shares are released from collateral based on the percentage of principal payment
to outstanding debt before applying the principal payment. As of each year end,
such released shares are allocated to active employees.
The ESOP had outstanding debt of $3.6 million at December 31, 1996 which was
applicable to shares purchased prior to 1993. Interest incurred by the ESOP on
debt applicable to such shares was $430,000, $580,000 and $728,000 in 1996, 1995
and 1994, respectively. The Company contributed and expensed $2.1 million, $2.3
million and $1.9 million during 1996, 1995 and 1994, respectively, with respect
to such shares. Dividends on unallocated ESOP shares used for debt service by
the ESOP were $189,000 in 1996, $170,000 in 1995 and $288,000 in 1994. ESOP
shares as of December 31, 1996 and 1995 which were purchased prior to 1993 were
as follows:
December 31, 1996 1995
- ---------------------------------------------------------------------
(In thousands)
Allocated shares 1,445 1,338
Unreleased shares 294 490
- ---------------------------------------------------------------------
1,739 1,828
=====================================================================
The Company accounts for shares purchased subsequent to December 31, 1992 in
accordance with Statement of Position 93-6 ("SOP 93-6"). Accordingly, as shares
are released from collateral, the Company reports compensation expense equal to
the current market price of the shares and the shares become outstanding for
earnings per share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt. ESOP compensation expense applicable to shares
purchased subsequent to 1992 was $1.4 million for 1996, $1.3 million for 1995
and $605,000 for 1994. The fair value of unreleased ESOP shares accounted for
under SOP 93-6 was $9.7 million and $11.2 million at December 31, 1996 and
December 31, 1995, respectively. ESOP shares purchased subsequent to 1992
totaled 416,850, of which 104,200 were allocated and 312,650 were unreleased as
of December 31, 1996.
Century also sponsors a qualified profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code (the "401(k) Plan") which is available to
substantially all employees of the Company. The Company's matching contributions
to the 401(k) Plan were $2.3 million in 1996 and $2.4 million in 1995 and 1994.
(13) MAJOR ACQUISITION
In February 1994 the Company acquired Celutel for approximately $106.0
million in a stock and cash transaction accounted for as a purchase.
Approximately $56.0 million of the purchase price was paid in cash, with the
remainder paid through the issuance of approximately 1.9 million shares of
Century common stock. At acquisition, Celutel provided cellular service to
approximately 29,000 customers in five non-wireline provider systems in MSAs in
Mississippi and Texas.
(14) SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest of $45.1 million, $45.8 million and $40.8 million
during 1996, 1995 and 1994, respectively. Income taxes paid were $64.1 million
in 1996, $62.4 million in 1995 and $41.3 million in 1994.
Century has consummated the acquisition of various telephone and cellular
operations, along with certain other assets, during the three years ended
December 31, 1996. In connection with these acquisitions, the following assets
were acquired, liabilities assumed, and common and preferred stock issued:
Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment $ 4,963 16,949 11,301
Excess cost of net assets acquired 53,220 70,124 152,239
Investments in unconsolidated
cellular entities - 2,804 -
Notes payable - (14,199) -
Long-term debt (3,273) (38,147) (46,478)
Deferred credits and other liabilities (171) (1,880) (5,706)
Other assets and liabilities, excluding
cash and cash equivalents 8,021 3,037 (1,191)
Common stock issued (8,458) (16,558) (52,311)
Preferred stock issued (7,975) - (1,875)
- -----------------------------------------------------------------------
Decrease in cash due to acquisitions $ 46,327 22,130 55,979
=======================================================================
Century has consummated the disposition of various cellular operations, along
with certain other assets, during the three years ended December 31, 1996. In
connection with these dispositions, the following assets were sold, liabilities
eliminated, assets received and gain recognized:
Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment $ 900 (4,399) (2,673)
Excess cost of net assets acquired - (4,494) (3,976)
Other assets and liabilities, excluding
cash and cash equivalents (85) (4,278) 993
Assets of cellular system - - 11,058
Gain on sales of assets (815) (6,782) (15,877)
- -----------------------------------------------------------------------
Increase in cash due to dispositions $ - (19,953) (10,475)
=======================================================================
In February 1995 Century's $115.0 million of outstanding 6% convertible
debentures were converted into Century common stock by the debenture holders at
a conversion price of $25.33 per share.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of certain of the Company's financial instruments at December 31, 1996 and 1995.
Carrying Fair
amount value
- -------------------------------------------------------------------------
(Dollars in thousands)
December 31, 1996
- -----------------
Financial assets
Investments
Note receivable
(including current portion) $ 22,500 22,500 (1)
Marketable equity securities $ 8,478 7,959 (2)
Other $ 16,362 16,362 (1)
Financial liabilities
Long-term debt
(including current maturities) $ 645,849 649,756 (3)
Other $ 15,122 15,122 (1)
- -------------------------------------------------------------------------
December 31, 1995
- -----------------
Financial assets
Investments
Note receivable
(including current portion) $ 24,167 24,167 (1)
Marketable equity securities $ 8,478 8,672 (2)
Other equity investment $ 20,000 20,000 (1)
Other $ 9,912 9,912 (1)
Financial liabilities
Long-term debt
(including current maturities) $ 638,229 638,383 (3)
Other $ 13,043 13,043 (1)
- -------------------------------------------------------------------------
(1) Fair value was estimated by the Company.
(2) Fair value was based on quoted market prices.
(3) Fair value was estimated by discounting the scheduled payment streams to
present value based upon rates currently offered to the Company for
similar debt.
Cash and cash equivalents, accounts receivable, notes payable, accounts payable
and accrued expenses - The carrying amount approximates the fair value due to
the short maturity of these instruments.
(16) SALES OF ASSETS
In the first quarter of 1995 the Company sold, for an aggregate of $17.9
million cash, its ownership interests in certain non-strategic cellular Rural
Service Areas ("RSAs") located primarily in western states and three
Metropolitan Statistical Areas ("MSAs") in the midwest. These transactions
resulted in a pre-tax gain of $5.9 million ($2.0 million after-tax). During the
fourth quarter of 1995, the Company sold certain assets of one of its
subsidiaries for $2.0 million which resulted in a pre-tax gain of $873,000
($567,000 after-tax).
In 1994 the Company sold the assets comprising an RSA cellular system in
Minnesota; the Company received (i) the assets of the Pine Bluff, Arkansas MSA
wireline cellular system and (ii) $10.5 million cash. The transaction resulted
in a pre-tax gain of $14.7 million ($8.5 million after-tax). The Company also
sold the assets of its paging operations during 1994 and recognized a gain of
$1.2 million ($756,000 after-tax).
(17) BUSINESS SEGMENTS
The Company is primarily engaged in providing traditional telephone services
and mobile communications services. The Company's telephone operations are
conducted in rural, suburban and small urban communities in 14 states.
Approximately 87% of the Company's telephone access lines are in Wisconsin,
Louisiana, Michigan, Ohio, Arkansas and Texas. The Company's cellular customers
are located primarily in Michigan, Louisiana, Arkansas, Mississippi and Texas.
Depreciation
Operating and Operating
revenues amortization income
- ----------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 1996
- ----------------------------
Telephone $ 451,538 95,793 155,183
Mobile communications 250,243 33,573 67,914
Other 59,561 2,655 199
Eliminations (11,665) - -
- ----------------------------------------------------------------------
Total $ 749,677 132,021 223,296
======================================================================
Year ended December 31, 1995
- ----------------------------
Telephone $ 419,242 86,324 143,527
Mobile communications 197,494 25,427 57,009
Other 39,580 2,019 2,383
Eliminations (11,476) - -
- ----------------------------------------------------------------------
Total $ 644,840 113,770 202,919
======================================================================
Year ended December 31, 1994
- ----------------------------
Telephone $ 391,265 73,175 137,992
Mobile communications 150,802 21,255 31,443
Other 33,272 1,283 3,371
Eliminations (10,738) - -
- ----------------------------------------------------------------------
Total $ 564,601 95,713 172,806
======================================================================
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------
(Dollars in thousands)
Operating income $ 223,296 202,919 172,806
Interest expense (44,662) (43,615) (42,577)
Income from unconsolidated
cellular entities 26,952 20,084 15,698
Gain on sales of assets 815 6,782 15,877
Minority interest (6,675) (8,084) (3,377)
Other income and expense 3,916 4,982 3,111
- ------------------------------------------------------------------------
Income before income tax expense $ 203,642 183,068 161,538
========================================================================
Capital expenditures
Telephone $ 110,147 136,006 152,336
Mobile communications $ 83,679 41,990 39,937
Corporate and other $ 29,059 18,596 8,503
========================================================================
Identifiable assets
Telephone $ 1,174,317 1,114,827 1,053,950
Mobile communications 644,587 547,260 430,777
General corporate 95,545 109,096 88,305
Other 114,056 91,238 70,221
- ------------------------------------------------------------------------
Total assets $ 2,028,505 1,862,421 1,643,253
========================================================================
Other accounts receivable are primarily amounts due from various long
distance carriers, principally AT&T, and several large local exchange operating
companies.
(18) COMMITMENTS AND CONTINGENCIES
Construction expenditures and investments in vehicles, buildings and other
work equipment during 1997 are estimated to be $102 million for telephone
operations, $67 million for mobile communications operations and $36 million for
corporate and other operations.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Quarterly Income Information
First Second Third Fourth
quarter quarter quarter quarter
- -----------------------------------------------------------------------------
(Dollars in thousands, except
per share amounts)
(Unaudited)
1996
- -----------------------------------------------------------------------------
Operating revenues $ 175,814 186,538 193,096 194,229
Operating income $ 55,515 57,697 59,016 51,068
Net income $ 29,665 32,941 36,350 30,121
Fully diluted earnings per share $ .50 .55 .60 .50
- -----------------------------------------------------------------------------
1995
- -----------------------------------------------------------------------------
Operating revenues $ 148,779 156,815 167,304 171,942
Operating income $ 47,961 49,682 56,392 48,884
Net income $ 27,000 26,167 31,880 29,729
Fully diluted earnings per share $ .47 .45 .54 .50
- -----------------------------------------------------------------------------
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The name, age and office(s) held by each of the Registrant's executive
officers are shown below. Each of the executive officers listed below serves at
the pleasure of the Board of Directors, except Mr. Williams who has entered into
an employment agreement with the Registrant. The agreement's initial term has
lapsed, but the agreement remains in effect from year to year, subject to the
right of Mr. Williams or the Company to terminate such agreement.
Name Age Office(s) held with Century
- ---- --- ---------------------------
Clarke M. Williams 75 Chairman of the Board
of Directors
Glen F. Post, III 44 Vice Chairman of the Board of
Directors, President and Chief
Executive Officer
David D. Cole 39 President - Mobile Communications
Group
Kenneth R. Cole 49 President - Telephone Group
R. Stewart Ewing, Jr. 45 Senior Vice President and Chief
Financial Officer
W. Bruce Hanks 42 Senior Vice President - Corporate
Development and Strategy
Harvey P. Perry 52 Senior Vice President, General
Counsel and Secretary
Each of the Registrant's executive officers has served as an officer of the
Registrant and/or one or more of its subsidiaries in varying capacities for more
than the past five years. Mr. David D. Cole has served as President - Mobile
Communications Group since October 1996 and as Vice President from 1990 to 1996.
Mr. Kenneth R. Cole has served as President - Telephone Group since January 1995
and as Vice President from 1983 to 1994. Mr. Hanks has served as Senior Vice
President - Corporate Development and Strategy since October 1996 and as
President - Telecommunications Services or a comparable position from 1989 to
1996.
The balance of the information required by Item 10 is incorporated by
reference to the Registrant's definitive proxy statement relating to its 1997
annual meeting of stockholders (the "Proxy Statement"), which Proxy Statement
will be filed pursuant to Regulation 14A within 120 days after the end of the
last fiscal year.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a. Financial Statements
(i) Consolidated Financial Statements:
Independent Auditors' Report on Consolidated Financial
Statements and Financial Statement Schedules
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Consolidated Quarterly Income Information (unaudited)
(ii) Schedules:*
I Condensed Financial Information of Registrant
II Valuation and Qualifying Accounts
* Those schedules not listed above are omitted as not
applicable or not required.
b. Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth quarter of
1996.
c. Exhibits:
3(i) Amended and Restated Articles of Incorporation of
Registrant, dated as of December 2, 1996, included
elsewhere herein.
3(ii) Registrant's Bylaws, as amended through November 21, 1996
(incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-4, Registration No.
333-17015).
4.1 Competitive Advance and Revolving Credit Facility
Agreement, dated October 17, 1995, between Registrant and
Bank One of Texas, N.A. (incorporated by reference to
Exhibit 4.2 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995).
4.2 Note Purchase Agreement, dated September 1, 1989, between
Registrant, Teachers Insurance and Annuity Association of
America and the Lincoln National Life Insurance Company
(incorporated by reference to Exhibit 4.23 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989).
4.3 Rights Agreement, dated as of August 27, 1996, between
Century Telephone Enterprises, Inc. and Society National
Bank, as Rights Agent, including the form of Rights
Certificate (incorporated by reference to Exhibit 1 of
Registrant's Current Report on Form 8-K filed August 30,
1996).
4.4 Form of common stock certificate of the Registrant
(incorporated by reference to Exhibit 4.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1993).
4.5 Revolving Credit Facility Agreement, dated February 7, 1992
between Registrant and NationsBank of Texas, N.A.
(incorporated by reference to Exhibit 4.24 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1991), amendment thereto dated April 8, 1993 (incorporated
by reference to
Exhibit 19.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993),
amendment thereto dated July 9, 1993 (incorporated by
reference to Exhibit 4.24 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993), amendment
thereto dated August 15, 1994 (incorporated by reference to
Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994) and amendment
thereto dated October 5, 1995 (incorporated by reference to
Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995).
4.6 Indenture dated as of March 31, 1994 between the Company
and Regions Bank of Louisiana (formerly First American Bank
& Trust of Louisiana), as Trustee (incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-3, Registration No. 33-52915).
4.7 Resolutions designating the terms and conditions of the
Company's 7-3/4% Senior Notes, Series A, due 2004 and
8-1/4% Senior Notes, Series B, due 2024 (incorporated by
reference to Exhibit 4.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1994).
4.8 Resolutions designating the terms and conditions of the
Company's 6.55% Senior Notes, Series C, due 2005 and 7.2%
Senior Notes, Series D, due 2025 ("Senior Notes")
(incorporated by reference to Exhibit 4.27 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995).
4.9 Form of Senior Notes (incorporated by reference to Exhibit
4.3 of the Company's Registration Statement on Form S-3,
Registration No. 33-52915).
10.1 Employee Benefit Plans
(a) Registrant's Employee Stock Ownership Plan and Trust,
as amended and restated December 30, 1994 (incorporated
by reference to Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1995), amendment thereto dated January 26, 1996
(incorporated by reference to Exhibit 10.1(a) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995) and amendment thereto dated
July
15, 1996 (incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996).
(b) Registrant's Stock Bonus Plan, PAYSOP and Trust, as
amended and restated December 30, 1994 (incorporated by
reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1995), amendment thereto dated July 11, 1995
(incorporated by reference to Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995), amendment thereto dated
January 26, 1996 (incorporated by reference to Exhibit
10.1(b) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995) and amendment thereto
dated July 15, 1996 (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996).
(c) Registrant's Dollars & Sense Plan and Trust, as amended
and restated, generally effective April 1, 1992
(incorporated by reference to Exhibit 10.7 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994) and amendment thereto dated
July 15, 1996 (incorporated by reference to Exhibit
10.3 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996).
(d) Registrant's Restated Supplemental Executive Retirement
Plan, generally effective as of November 16, 1995
(incorporated by reference to Exhibit 10.1(d) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995) and amendment thereto dated
November 21, 1996, included elsewhere herein.
(e) Registrant's 1983 Restricted Stock Plan, dated February
21, 1984, as amended and restated as of November 16,
1995 (incorporated by reference to Exhibit 10.1(e) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995) and amendment thereto dated
November 21, 1996, included elsewhere herein.
(f) Registrant's Key Employee Incentive Compensation Plan,
dated January 1, 1984, as amended and restated as of
November 16, 1995 (incorporated by
reference to Exhibit 10.1(f) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1995) and amendment thereto dated November 21, 1996,
included elsewhere herein.
(g) Registrant's 1988 Incentive Compensation Program as
amended and restated August 22, 1989 (incorporated by
reference to Exhibit 19.8 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1989) and amendment thereto dated November 21, 1996,
included
elsewhere herein.
(h) Form of Stock Option Agreement entered into in 1988 by
the Registrant, pursuant to 1988 Incentive Compensation
Program, with certain of its officers (incorporated by
reference to Exhibit 10.10 to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1988) and amendment thereto (incorporated by reference
to Exhibit 4.6 to Registrant's Registration No.
33-31314).
(i) Registrant's 1990 Incentive Compensation Program, dated
March 15, 1990 (incorporated by reference to Exhibit
19.1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990) and amendment thereto
dated November 21, 1996, included elsewhere herein.
(j) Form of Stock Option Agreement entered into in 1990 by
the Registrant, pursuant to 1990 Incentive Compensation
Program, with certain of its officers (incorporated by
reference to Exhibit 19.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1990) and amendment thereto dated as of May 22, 1995
(incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
(k) Form of Stock Option Agreement entered into in 1992 by
the Registrant, pursuant to 1990 Incentive Compensation
Program, with certain of its officers and employees
(incorporated by reference to Exhibit 10.17 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992) and amendment thereto dated as
of May 22, 1995 (incorporated by
reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1995).
(l) Registrant's 1995 Incentive Compensation Plan approved
by Registrant's shareholders on May 11, 1995
(incorporated by reference to Exhibit 4.4 to
Registration No. 33-60061) and amendment thereto dated
November 21, 1996, included elsewhere herein.
(m) Form of Stock Option Agreement, pursuant to 1995
Incentive Compensation Plan and dated as of May 22,
1995, entered into by Registrant and its officers
(incorporated by reference to Exhibit 10.5 to
Registrant's Quarterly Report on From 10-Q for the
quarter ended June 30, 1995).
(n) Form of Stock Option Agreement, pursuant to 1995
Incentive Compensation Plan and dated as of June 23,
1995, entered into by Registrant and certain key
employees (incorporated by reference to Exhibit 10.6 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995).
(o) Form of Performance Share Agreement Under the 1990
Incentive Compensation Program, entered into in 1993
with certain of its officers and employees
(incorporated by reference to Exhibit 28.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993) and amendment thereto
dated as of May 22, 1995 (incorporated by reference to
Exhibit 10.3 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
(p) Registrant's Restated Supplemental Defined Contribution
Plan, dated as of November 16, 1995 (incorporated by
reference to Exhibit 10.1(q) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1995), amendment thereto dated July 15, 1996
(incorporated by reference to Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996) and amendment thereto
dated November 21, 1996, included elsewhere herein.
(q) Registrant's Amended and Restated Supplemental Dollars
& Sense Plan, effective as of January 1, 1995
(incorporated by reference to Exhibit 10.22 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994), amendment thereto dated July
18, 1995 (incorporated by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996) and amendment thereto
dated November 21, 1996, included elsewhere herein.
(r) Registrant's Amended and Restated Salary Continuation
(Disability) Plan for Officers, dated November 26, 1991
(incorporated by reference to Exhibit 10.16 of
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991).
(s) Registrant's Restated Outside Directors' Retirement
Plan, dated as of November 16, 1995 (incorporated by
reference to Exhibit 10.1(t) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1995).
(t) Registrant's Restated Deferred Compensation Plan for
Outside Directors, dated as of November 16, 1995
(incorporated by reference to Exhibit 10.1(u) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.2 Employment, Severance and Related Agreements
(a) Employment Agreement, dated May 24, 1993, by and
between Clarke M. Williams and Registrant (incorporated
by reference to Exhibit 19.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1993) and amendment thereto dated as of February 27,
1996 (incorporated by reference to Exhibit 10.2(a) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
(b) Form of Amended and Restated Severance Agreement, by
and between Registrant and each of its executive
officers other than Clarke M. Williams, dated as of
November 16, 1995 (incorporated by reference to Exhibit
10.2(b) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995).
(c) Form of Amended and Restated Severance Agreement, by
and between Registrant and five of its officers who are
not executive officers, dated as of November 16, 1995
(incorporated by reference to Exhibit 10.2(c) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
(d) Agreement, dated December 31, 1994, by and between Jim
D. Reppond and Registrant (incorporated by reference to
Exhibit 10.24 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1994).
(e) Consulting Agreement, dated as of July 2, 1996, by and
between Century Telephone Enterprises, Inc. and Jim D.
Reppond (incorporated by reference to Exhibit 10 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).
10.3 Other Agreement
(a) Loan Agreement and Grant of Rights of First Refusal to
Acquire Assets and/or Capital Stock of MillTenn, Inc.
and its Subsidiaries (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994).
11 Computations of Earnings Per Share, included elsewhere
herein.
21 Subsidiaries of the Registrant, included elsewhere herein.
23 Independent Auditors' Consent, included elsewhere herein.
27 Financial Data Schedule, included elsewhere herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTURY TELEPHONE ENTERPRISES, INC.
Date: March 17, 1997 By: /s/ Clarke M. Williams
-----------------------------
Clarke M. Williams
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Clarke M. Williams Chairman of the Board March 17, 1997
- ------------------------- of Directors
Clarke M. Williams
Vice Chairman of the
/s/ Glen F. Post, III Board of Directors, March 17, 1997
- ------------------------- President, and Chief
Glen F. Post, III Executive Officer
/s/ R. Stewart Ewing, Jr. Senior Vice President March 17, 1997
- ------------------------- and Chief Financial
R. Stewart Ewing, Jr. Officer
/s/ Harvey P. Perry Senior Vice President, March 17, 1997
- ------------------------- General Counsel,
Harvey P. Perry Secretary and Director
/s/ W. Bruce Hanks Senior Vice President - March 17, 1997
- ------------------------- Corporate Development
W. Bruce Hanks and Strategy and Director
/s/ Murray H. Greer Controller (Principal March 17, 1997
- ------------------------- Accounting Officer)
Murray H. Greer
/s/ William R. Boles, Jr. Director March 17, 1997
- -------------------------
William R. Boles, Jr.
/s/ Virginia Boulet Director March 17, 1997
- -------------------------
Virginia Boulet
/s/ Ernest Butler, Jr. Director March 17, 1997
- -------------------------
Ernest Butler, Jr.
- ------------------------- Director
Calvin Czeschin
/s/ James B. Gardner Director March 17, 1997
- -------------------------
James B. Gardner
/s/ R. L. Hargrove, Jr. Director March 17, 1997
- -------------------------
R. L. Hargrove, Jr.
/s/ Johnny Hebert Director March 17, 1997
- -------------------------
Johnny Hebert
/s/ F. Earl Hogan Director March 17, 1997
- -------------------------
F. Earl Hogan
/s/ C. G. Melville, Jr. Director March 17, 1997
- -------------------------
C. G. Melville, Jr.
/s/ Jim D. Reppond Director March 17, 1997
- -------------------------
Jim D. Reppond
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
STATEMENTS OF INCOME
Year ended December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
(Dollars in thousands)
REVENUES $ 6,520 5,608 6,190
- ------------------------------------------------------------------------------
EXPENSES
Operating expenses 6,071 5,165 5,400
Depreciation and amortization 7,286 6,860 6,603
- ------------------------------------------------------------------------------
Total expenses 13,357 12,025 12,003
- ------------------------------------------------------------------------------
OPERATING LOSS (6,837) (6,417) (5,813)
- ------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Loss on investment (1,100) - -
Interest expense (36,709) (37,467) (34,463)
Interest income 28,884 30,930 24,088
- ------------------------------------------------------------------------------
Total other income (expense) (8,925) (6,537) (10,375)
- ------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND
EQUITY IN SUBSIDIARIES' EARNINGS (15,762) (12,954) (16,188)
Income tax benefit 4,467 3,769 3,205
- ------------------------------------------------------------------------------
LOSS BEFORE EQUITY IN
SUBSIDIARIES' EARNINGS (11,295) (9,185) (12,983)
Equity in subsidiaries' earnings 140,372 123,961 113,221
- ------------------------------------------------------------------------------
NET INCOME $ 129,077 114,776 100,238
==============================================================================
See accompanying notes to condensed financial information of registrant.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(continued)
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
BALANCE SHEETS
December 31,
- ---------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,055 1,616
Receivables from subsidiaries 99,506 94,217
Other receivables 12,527 9,888
Prepayments and other 1,711 1,854
- ---------------------------------------------------------------------------
Total current assets 114,799 107,575
- ---------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property and equipment 1,028 983
Accumulated depreciation (651) (583)
- ---------------------------------------------------------------------------
Net property, plant and equipment 377 400
- ---------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Investments in subsidiaries (at equity) 1,348,986 1,166,186
Receivables from subsidiaries 183,333 139,631
Other investments 37,570 50,620
Note receivable 20,833 22,500
Deferred charges 4,916 5,010
- ---------------------------------------------------------------------------
Total investments and other assets 1,595,638 1,383,947
- ---------------------------------------------------------------------------
TOTAL ASSETS $ 1,710,814 1,491,922
===========================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 5,122 5,516
Payables to subsidiaries 202,467 143,793
Accrued interest 3,784 4,424
Other accrued liabilities 7,336 4,377
- ---------------------------------------------------------------------------
Total current liabilities 218,709 158,110
- ---------------------------------------------------------------------------
LONG-TERM DEBT 394,675 392,018
- ---------------------------------------------------------------------------
PAYABLES TO SUBSIDIARIES 47,618 35,684
- ---------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 21,659 17,686
- ---------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value,
authorized 175,000,000 shares,
issued and outstanding 59,858,540
and 59,113,670 shares 59,859 59,114
Paid-in capital 474,607 453,584
Retained earnings 494,726 387,424
Unearned ESOP shares (11,080) (13,960)
Preferred stock - non-redeemable 10,041 2,262
- ---------------------------------------------------------------------------
Total stockholders' equity 1,028,153 888,424
- ---------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 1,710,814 1,491,922
===========================================================================
See accompanying notes to condensed financial information of registrant.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
STATEMENTS OF CASH FLOWS
Year ended December 31,
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 129,077 114,776 100,238
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 7,286 6,860 6,603
Deferred income taxes 2,934 4,241 5,918
Earnings of subsidiaries (140,372) (123,961) (113,221)
Loss on investment in unconsolidated
personal communications services entity 1,100 - -
Changes in current assets and current
liabilities:
(Increase) decrease in other receivables (2,639) (8,947) 7,078
Increase (decrease) in other accrued
liabilities 329 (3,409) 5,063
Changes in other current assets and
other current liabilities, net 3,998 (4,377) 6,014
Other, net 2,197 1,558 766
- -------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 3,910 (13,259) 18,459
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions (46,327) (22,130) (55,979)
Capital contributions to subsidiaries (20,179) (53,050) (47,516)
Dividends received from subsidiaries 473 52,423 3,841
(Increase) decrease in receivables
from subsidiaries (45,945) 71,203 (98,917)
Increase (decrease) in payables to subsidiaries 97,908 (10,271) 70,512
Investment in unconsolidated personal
communications services entity 18,900 (20,000) -
Note receivable 1,667 833 (25,000)
Other, net (4,425) (2,546) (3,292)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 2,072 16,462 (156,351)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 47,500 171,046 147,754
Payments of long-term debt (42,357) (4,901) (4,870)
Notes payable, net - (158,000) 7,500
Proceeds from issuance of common stock 10,089 6,522 4,814
Cash dividends paid (21,775) (19,351) (17,184)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (6,543) (4,684) 138,014
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (561) (1,481) 122
Cash and cash equivalents at beginning of year 1,616 3,097 2,975
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,055 1,616 3,097
===============================================================================
See accompanying notes to condensed financial information of registrant.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(continued)
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(A) LONG-TERM DEBT
The approximate annual debt maturities (including sinking fund
requirements) for the five years subsequent to December 31, 1996 are as follows:
1997 - $ 5.1 million
1998 - $ 4.7 million
1999 - $ 4.3 million
2000 - $ 67.7 million
2001 - $ 5.1 million
(B) GUARANTEES
As of December 31, 1996, Century has guaranteed a promissory note for a
subsidiary of $2.4 million, as well as the applicable interest and premium.
Century has also guaranteed $795,000 in Industrial Development Revenue Bonds
originally issued by a subsidiary; such bonds were assumed by the purchaser of
the subsidiary's assets.
(C) DIVIDENDS FROM SUBSIDIARIES
Dividends paid to Century by consolidated subsidiaries were $472,800, $52.4
million and $3.8 million during 1996, 1995 and 1994, respectively.
(D) INCOME TAXES AND INTEREST PAID
Income taxes paid by Century (including amounts reimbursed from
subsidiaries) were $56.0 million, $56.9 million and $35.0 million during 1996,
1995 and 1994, respectively.
Interest paid by Century was $37.3 million, $40.4 million and $32.0 million
during 1996, 1995 and 1994, respectively.
(E) AFFILIATED TRANSACTIONS
Century provides and bills management services to subsidiaries and in
certain instances makes interest bearing advances to finance construction of
plant and purchases of equipment. Century recorded intercompany interest income
of $26.4 million, $28.2 million and $22.2 million in 1996, 1995 and 1994,
respectively.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CENTURY TELEPHONE ENTERPRISES, INC.
For the years ended December 31, 1996, 1995 and 1994
Additions
Balance at charged to Deductions Balance
beginning costs and from Other at end
Description of period expenses allowance(1) changes(2) of period
- -------------------------------------------------------------------------------
(Dollars in thousands)
Year ended
December 31, 1996
Allowance for
doubtful accounts $ 2,768 10,155 (9,662) 66 3,327
Year ended
December 31, 1995
Allowance for
doubtful accounts $ 2,360 7,200 (6,946) 154 2,768
Year ended
December 31, 1994
Allowance for
doubtful accounts $ 1,473 4,748 (4,139) 278 2,360
(1) Customers' accounts written-off, net of recoveries.
(2) Allowance for doubtful accounts at the date of acquisition of purchased
subsidiaries, net of allowance for doubtful accounts at the date of
disposition of subsidiaries sold.