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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 posi