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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1994
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7784
CENTURY TELEPHONE ENTERPRISES, INC.
A Louisiana Corporation I.R.S. Employer Identification
No. 72-0651161
100 Century Park Drive, Monroe, Louisiana 71203
Telephone number (318) 388-9500
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
par value $1.00
Exchange on which registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of February 28, 1995, the aggregate market value of voting stock held
by non-affiliates (affiliates being for these purposes only directors
and executive officers) was approximately $1.8 billion.
As of February 28, 1995, there were 58,204,027 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement prepared in connection with the 1995
annual meeting of shareholders are incorporated in Part III of this
Report.
PART I
Item 1. Business
General. Century Telephone Enterprises, Inc. ("Century") is a regional
diversified telecommunications company that is primarily engaged in
providing traditional telephone services and cellular telephone
communications services. For the year ended December 31, 1994, telephone
operations and mobile communications operations (substantially all of
which are comprised of the Company's cellular telephone operations)
provided 72% and 28%, respectively, of the consolidated revenues of
Century and its subsidiaries (the "Company"). All of the Company's
operations are conducted within the continental United States.
At December 31, 1994 the Company's telephone subsidiaries operated over
454,000 telephone access lines, primarily in rural, suburban and small
urban areas in 14 states, with the largest customer bases located in
Wisconsin, Louisiana, Michigan and Ohio. According to published sources,
the Company is the fifteenth largest local exchange telephone company in
the United States based on the number of access lines served.
Whenever used herein with respect to the Company, the term "pops" means
the population of licensed cellular telephone markets (based on
independent third-party population estimates) multiplied by the Company's
proportionate equity interests in the licensed operators thereof. The
term "MSA" means a Metropolitan Statistical Area for which the Federal
Communications Commission (the "FCC") has granted a cellular operating
license. The term "RSA" means a Rural Service Area for which the FCC has
granted a cellular operating license. The term "wireline license" refers
to the cellular operating license initially reserved by the FCC for
companies providing local telephone service in the licensed market and the
term "non-wireline license" refers to the license initially reserved for
licensees unaffiliated with such local telephone companies.
At December 31, 1994 the Company, through its cellular operations,
owned approximately 7.1 million pops (which includes approximately 300,000
pops the Company either sold during the first quarter of 1995 or which are
subject to sale pursuant to definitive agreements) in 28 MSAs, primarily
concentrated in Michigan, Louisiana, Mississippi and Texas, and 31 RSAs,
most of which are in Michigan, Louisiana and Arkansas. The Company is the
majority owner and operator in 19 of the MSAs and 12 of the RSAs, which
collectively represent 5.5 million pops, and has minority interests in the
other MSAs and RSAs, which collectively represent 1.6 million pops. Of
the Company's 7.1 million pops, approximately 76% are attributable to the
Company's MSA interests, with the balance attributable to its RSA
interests. According to data derived from published sources, at December
31, 1994 the Company was the seventeenth largest cellular telephone
company in the United States based on the Company's owned pops. At
December 31, 1994, the Company's majority-owned and operated cellular
systems had more than 211,000 cellular subscribers. Except for five MSAs,
all of the cellular systems operated by the Company are operated under
wireline licenses.
1
Recent Acquisitions and Dispositions. In February 1994 the Company
acquired Celutel, Inc. ("Celutel"), which currently provides cellular
mobile telephone services to approximately 35,000 customers in three MSA
non-wireline cellular markets in Mississippi and two MSA non-wireline
cellular markets in Texas which have a combined population of 1.5 million.
Celutel's share of these pops is approximately 1.2 million. In March 1994
Century acquired a local exchange telephone company in Michigan which
currently serves approximately 2,600 telephone access lines and which owns
a 13% interest in a cellular partnership which has been operated by the
Company for several years. In November 1994 the Company exchanged its
Minnesota RSA 6 non-wireline cellular system for a 100% interest in the
Pine Bluff, Arkansas MSA wireline cellular system plus $10.5 million cash.
The Pine Bluff MSA has a population of approximately 85,000. In January
1995 Century acquired Tele-Max, Inc. and its affiliates. In connection
with this acquisition, Century acquired approximately 5,300 telephone
access lines in a suburban community north of Dallas, Texas and a one-half
of one percent interest in the Dallas MSA wireline cellular system (which
represents approximately 20,000 pops). In connection with its exercise of
first refusal purchase rights during 1994, the Company increased its
ownership in markets in which it already holds interests by approximately
35,000 pops.
In accordance with its strategy of clustering its telephone and
cellular businesses, Century sold its paging operations in October 1994.
In addition, during late 1994 the Company entered into definitive
agreements to sell its ownership interests in several RSAs located
primarily in western states and two MSAs located in the midwest, which in
the aggregate represent approximately 300,000 pops. Certain of these
transactions were consumated during the first quarter of 1995.
The Company is continually evaluating the possibility of acquiring
additional telephone access lines and cellular interests in exchange for
cash, securities or both. Although the Company's primary focus will
continue to be on acquiring telephone and cellular interests that are
proximate to its properties or that serve a customer base large enough for
the Company to operate efficiently, other communications interests may
also be acquired.
Other. The Company also provides long distance, operator and
interactive services in certain local and regional markets, as well as
certain printing and related services, and has recently entered the
competitive access business. During 1994 the Company's newly-formed
competitive access subsidiary obtained franchises and rights-of-way to
build a fiber optic network which will allow the Company to offer voice,
data and certain video services in Fort Worth and Arlington, Texas, along
with a portion of downtown Dallas. Century expects to begin offering
these services in the second quarter of 1995. The Company's competitive
access subsidiary has also obtained a franchise to provide similar
services in Austin, Texas and is currently attempting to obtain rights-of-
way in this market. The results of all of these other operations are
recorded for financial reporting purposes in "Other income and expense".
2
As of December 31, 1994, the Company employed approximately 3,000
persons, of which approximately 200 employees located in Ohio are covered
by a three-year collective bargaining agreement between the Company and
the Communications Workers of America. The agreement lapses on March 30,
1997.
Century was incorporated under Louisiana law in 1968 to serve as a
holding company for several telephone companies acquired over the previous
15 to 20 years. Century's principal executive offices are located at 100
Century Park Drive, Monroe, Louisiana 71203 and its telephone number is
(318) 388-9500.
TELEPHONE OPERATIONS
The Company is the fifteenth largest local exchange telephone company
in the United States, based on the more than 454,000 access lines it
served at December 31, 1994. Currently, the Company operates over 500
central office and remote switching centers in its telephone operating
areas. Over the past decade, Century has installed digital switching
platforms throughout much of its switching network. At December 31, 1994,
95% of Century's total access lines were digitally switched. Through its
operating telephone subsidiaries, Century provides services to
predominately rural, suburban and small urban markets in 14 states. The
table below sets forth certain information with respect to Century's
access lines as of December 31, 1994:
Number of Percent of Percent
State access lines access lines digital
------------------------------------------------------------------
Wisconsin 98,323 22% 92%
Louisiana 84,785 19 98
Michigan 80,032 18 100
Ohio 70,436 15 100
Arkansas 37,554 8 83
Texas 28,741 6 100
Tennessee 21,343 5 100
Mississippi 13,062 3 100
Colorado 5,763 1 100
New Mexico 4,713 1 74
Indiana 4,610 1 100
Idaho 3,949 1 100
Arizona 1,469 0 0
Iowa 183 0 100
----------------------------------------------------------------
454,963 100% 95%
================================================================
3
As indicated in the following table, Century has experienced growth
in its telephone operations over the past several years, a substantial
portion of which was attributable to acquisitions of other telephone
companies and to the expansion of services:
Year Ended or As of December 31,
-----------------------------------------------------------------------
1994 1993 1992 1991
-----------------------------------------------------------------------
(Dollars in thousands)
Access lines 454,963 434,691 397,300 314,819
% Residential 79% 80 81 81
% Business 21% 20 19 19
Operating revenues $ 389,438 348,485 297,510 235,796
Capital expenditures $ 152,336 131,180 108,974 73,913
Future growth in telephone operations is expected to be derived from
(i) acquiring additional telephone companies, (ii) providing service to
new customers, (iii) upgrading existing customers to higher grades of
service, (iv) increasing network usage and (v) providing additional
services made possible by advances in technology and changes in
regulation. For information on developing competitive trends, see "-
Regulation and Competition."
Services
The Company's telephone subsidiaries derive revenue from providing (i)
local telephone services, (ii) network access and long distance services
and (iii) other related services. The following table reflects the
percentage of telephone operating revenues derived from these respective
services:
1994 1993 1992
-------------------------------------------------------------------------
Local service 25.7% 25.4 26.3
Network access and long distance 62.6 62.3 61.4
Other 11.7 12.3 12.3
-------------------------------------------------------------------------
100.0% 100.0 100.0
=========================================================================
Local service revenues are generated by the provision of local exchange
telephone services in the Company's franchised service areas.
4
Network access and long distance revenues primarily relate to services
provided by the Company to interexchange carriers (long distance carriers)
in connection with the use of the Company's facilities to originate and
complete interstate and intrastate long distance telephone calls.
Substantially all of the Company's interstate network access revenues are
derived through pooling arrangements administered by the National Exchange
Carrier Association ("NECA"). NECA receives access charges billed by the
Company and other participating local exchange carriers ("LECs") to
interstate long distance carriers and other LEC customers for use of the
participating LECs' local exchange networks to complete long distance
calls and subsequently distributes these revenues to such LECs based on
cost separation studies or average schedule settlement agreements. The
charges billed to the long distance carriers and other LEC customers are
based on tariffed access rates filed with the FCC by NECA on behalf of the
Company and other participating LECs. Interstate revenues as a percentage
of telephone operating revenues amounted to 33.7%, 32.1% and 31.4% in
1994, 1993 and 1992, respectively.
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company directly to intrastate long
distance carriers and other LEC customers. Such intrastate network access
charges are based on access tariffs which are subject to state regulatory
commission approval. Additionally, certain of the Company's intrastate
network access revenues, along with intrastate long distance revenues, are
derived through state pooling arrangements and are determined based on
cost separation studies or special settlement arrangements.
The installation of digital switches and related software continues to
be an important component of the Company's growth strategy because it
allows the Company to offer new services (such as call forwarding,
conference calling, caller identification, selective call ringing and call
waiting) and to thereby increase utilization of existing access lines. In
1994 the Company continued to expand its list of premium services offered
in certain service areas and aggressively marketed these services. In
addition, with digital switching the Company has been able to construct
centralized electronic monitoring facilities that allow employees to
detect operating malfunctions in digital switches and, in many cases, to
correct the malfunctions without a site visit by the Company's personnel,
thereby reducing maintenance costs.
The Company is installing fiber optic cable in certain areas in which
it operates and has provided alternative routing of telephone service over
fiber optic cable networks in several of its strategic operating areas.
At December 31, 1994, the Company had approximately 1,360 miles of fiber
optic cable in place.
Other revenues include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for
interexchange carriers, (iii) leasing network facilities and (iv)
participating in the publication of local directories. Certain large
telecommunications companies for which the Company currently provides
billing and
5
collection services have indicated their desire to reduce
their billing and collection expenses, which may lead to reduced future
billing and collection revenues.
For further information on the regulation of the Company's revenues,
see "-Regulation and Competition."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term
financing from the Rural Utilities Service ("RUS") (formerly the Rural
Electrification Administration or REA), the Rural Telephone Bank ("RTB")
and the Federal Financing Bank ("FFB"). The RUS has made long-term loans
to telephone companies since 1949 for the purpose of improving telephone
service in rural areas. The RUS continues to make new loans at interest
rates that range from 5% to 7% based on borrower qualifications and the
cost of money to the United States government. The RTB, established in
1971, makes long-term loans at interest rates based on its average cost of
funds as determined by statutory formula (such rates ranged from 6.05% to
6.35% for the fiscal year ended September 30, 1994), and in some cases
makes loans concurrently with RUS loans. In addition, the RUS guarantees
certain loans made to telephone companies by the FFB or other qualified
lenders. A significant portion of the Company's telephone plant is
pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS, RTB and FFB. The amount of common stock
dividends that may be paid by the Company's telephone subsidiaries is
limited by certain financial requirements set forth in the financing
agreements.
Certain of the Company's telephone subsidiaries have made applications
for additional loans from the RUS and intend to make further applications
as needs arise. There is no assurance that these applications will be
accepted or that the terms or interest rates of any future loan
commitments will remain favorable. Federal budget proposals which could
significantly reduce or eliminate the availability of new loan commitments
under the RUS and RTB programs were considered in recent years and are
expected to continue to be considered. If the Company's telephone
subsidiaries are unable to borrow additional funds through the RUS and RTB
programs and are forced to borrow from conventional lenders at market
rates, the Company's cost of new loans might increase.
For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.
Regulation and Competition
Traditionally, LECs have operated as regulated monopolies.
Consequently, the majority of the Company's telephone operations are
regulated extensively by various state regulatory agencies (generally
called public
6
service commissions or public utility commissions) and by the FCC. As
discussed in greater detail below, various aspects of federal and state
regulation have recently been subject to extensive modification and re-
examination, which has generally relaxed the regulation of LECs. As
further discussed below, several legislative and regulatory initiatives
and technological changes have allowed competition in traditionally
monopolistic segments of the industry. Although Century anticipates that
these trends towards relaxed regulation and increased competition will
continue, the form and degree of future regulation and competition is
unknown.
State Regulation. The local service rates and intrastate access
charges of substantially all of the Company's telephone subsidiaries are
regulated by state regulatory commissions that traditionally have
regulated pricing through "rate of return" regulation that focuses on
authorized levels of earnings by LECs. Most of these commissions also (i)
regulate the purchase and sale of LECs, (ii) prescribe depreciation rates
and certain accounting procedures and (iii) regulate various other
matters, including certain service standards and operating procedures. In
certain states, construction and/or financing plans are also subject to
regulatory approval.
In recent years, Ohio, Michigan, Wisconsin, Louisiana and other state
legislatures and regulatory commissions have either begun to relax the
regulation of LECs or have announced their intention to review such
regulation, and it is expected that this trend will continue. This
relaxed regulatory oversight of certain of the Company's telephone
operations may allow the Company to offer new and competitive services
faster than under the traditional regulatory process. Coincident with
these efforts is the introduction of competition into traditionally
monopolistic segments of the industry. For a discussion of legislative,
regulatory and technological changes that have introduced competition into
the local exchange industry, see "-Developments Affecting Competition."
Substantially all of the state regulatory commissions have statutory
authority, the specific limits of which vary, to initiate and conduct
earnings reviews of the LECs that they regulate. As part of the movement
towards deregulation, several states are moving away from traditional rate
of return regulation towards price cap regulation and incentive regulation
(which are similar to the FCC regulations discussed below), and are
actively encouraging larger LECs to adopt these newer forms of price
regulation. The continuation of this trend may lead to fewer earnings
reviews in the future. Currently, however, most of the Company's LECs
continue to be regulated under rate of return regulation. After
initiating an informal earnings review during 1993 of all independent LECs
in Louisiana, the Louisiana Public Service Commission ("LPSC") recently
docketed a formal earnings review of such carriers. In addition, the
Public Service Commission of Wisconsin ("PSCW") is examining transactions
in which Century and its service subsidiaries provided various services
and materials to the Company's Wisconsin LECs. There is no assurance that
these reviews (or any other future review in these or other states) will
not lead to future revenue reductions or customer refunds. Moreover, in
light of the movement away from traditional rate of return regulation, no
assurance can be given that the Company's LECs will continue to earn the
same rate of return that they achieved in recent years.
7
FCC Regulation. The FCC regulates the interstate services provided by
the Company's telephone subsidiaries primarily by regulating the
interstate access charges that are billed to interexchange carriers and
other LEC customers by the Company for use of its local network in
connection with the origination and termination of interstate telephone
calls. Additionally, the FCC has prescribed certain rules and regulations
for telephone companies, including regulations regarding the use of radio
frequencies; a uniform system of accounts; and rules regarding the
separation of costs between jurisdictions and, ultimately, between
services.
Effective January 1, 1991 the FCC adopted price-cap regulation relating
to interstate access rates for the Regional Bell Operating Companies
("RBOCs") and GTE. An annual opportunity to elect price-cap regulation is
available for other LECs. Under price-cap regulation, limits imposed on a
company's interstate rates will be adjusted periodically to reflect
inflation, productivity improvement and changes in certain non-
controllable costs. In May 1993 the FCC adopted an optional incentive
regulatory plan for LECs not subject to price-cap regulation. A LEC
electing the optional incentive regulatory plan would, among other things,
file tariffs based primarily on historical costs and not be allowed to
participate in the relevant NECA pooling arrangements. The Company has
not elected price-cap regulation or the incentive regulatory plan, but
will continue to evaluate its options on a periodic basis. Consequently,
the Company's telephone subsidiaries' authorized interstate access rate of
return is 11.25%, which is the authorized rate established by the FCC for
LECs not governed by price-cap regulation or the optional incentive
regulatory plan.
High-Cost Support Funds, Revenue Pools and Related Matters. A
significant number of the Company's telephone subsidiaries recover a
portion of their costs under federal and state cost recovery mechanisms
that traditionally have allowed LECs serving small communities and rural
areas to provide access to telecommunications services reasonably
comparable to those available in urban areas and at reasonably comparable
prices.
The FCC and certain state regulatory commissions have recently explored
or implemented initiatives to reduce, or at least review, the funding of
certain of these cost recovery mechanisms. In 1993 the eight-year phase-
in of the FCC's Universal Service Fund ("USF") was completed. In December
1993 the FCC adopted interim provisions which place certain limitations,
including a cap, on the USF growth rate during 1994 and 1995. The Company
anticipates that revenues from the USF under these interim provisions will
continue to increase in the near term, but at a lesser percentage rate
than that associated with recent prior periods. Since adopting these
interim measures, the FCC has instituted proceedings to study the
effectiveness of its high-cost assistance programs. In addition, certain
bills recently considered by Congress (which are further discussed below)
have sought review of federal high-cost assistance programs. Accordingly,
there is no assurance that cost recovery through these programs will
remain at current levels.
8
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. There can be no assurance that these
states will continue to provide for cost recovery at current levels.
As the customer bases of the Company's LECs grow, the revenues
determined under the FCC's cost separation studies may decrease as a
result of such growth. Under a graduated scale used in such studies, LECs
serving between 50,000 and 20,000 customers, between 20,000 and 10,000
customers, and less than 10,000 customers receive increasingly higher
weightings which result in higher interstate access revenues.
Most of the Company's LECs concur with the common line and traffic
sensitive tariffs filed by NECA and participate in the access revenue
pools administered by NECA for interstate services. All of the long
distance and intrastate network access revenues of the Company's LECs are
based on access charges, cost separation studies or special settlement
arrangements. See "-Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. In March 1994 a
major long distance carrier filed a petition with the LPSC requesting that
the LPSC investigate and lower the rates for intrastate access charges
billed to long distance carriers by certain LECs, including the Company's
LECs that operate in Louisiana. There is no assurance that these requests
will not result in decreased intrastate access revenues.
Developments Affecting Competition. The communications industry is
currently undergoing fundamental changes which may have a significant
impact on the future operations and financial performance of
telecommunications companies. Primarily as a result of legislative and
regulatory initiatives and technological changes, competition has been
introduced and encouraged in certain sectors of the telephone industry,
including interstate and intrastate toll, special and switched access
services, pay phones, customer premise equipment and, most recently, local
service. As a result, the number of companies offering competitive
services has increased. As discussed below, far-reaching federal
legislation is currently being considered which could pre-empt current
initiatives of the FCC, state legislatures and state regulatory
commissions to promote competition, all of which are likely to continue if
federal legislation is delayed or defeated.
In 1994 the United States House of Representatives passed two
telecommunications bills that proposed to substantially alter the
regulatory framework of the telecommunications industry by, among other
things, promoting local exchange competition and removing certain barriers
of entry to several lines of telecommunications businesses. No companion
bill passed in the United States Senate. Legislation is expected to be
considered in 1995 that may promote competition and deregulation to a
greater degree than the bills that passed the House in 1994. Draft bills
currently pending before the Senate would, among other things, (i)
obligate LECs, upon request, to negotiate interconnection agreements
permitting competitors to use the LECs' facilities, (ii) authorize a joint
board to study and make recommendations regarding federal universal
service
9
systems, (iii) mandate states to remove all regulations that
prohibit any entity from providing telecommunications services and to
eliminate any rate-of-return regulations relating to common carriers in
markets where the FCC determines that local networks are open and
competitive, (iv) permit common carriers to provide video programming in
their existing markets, and (v) remove, under certain circumstances,
restrictions that prevent the RBOCs from providing long distance and other
services. There is no assurance that any such bills will be enacted, or
that the terms of any legislation ultimately enacted will not differ
materially from those outlined above. While it is currently impossible to
assess the ultimate effect of these and related initiatives, there can be
no assurance that they will not materially affect the Company's
operations.
Certain states have taken legislative and/or regulatory steps to
introduce competition into the local exchange business. Since January 1,
1995, customers in one upstate New York market have been permitted to
choose their local telephone service provider pursuant to a plan approved
in late 1994 by the New York Public Service Commission. Cable companies
are also providing, or preparing to provide, telephone service in a
limited number of other markets under plans approved by state regulators.
In 1994 Wisconsin, a state in which the Company operates, enacted
legislation which, among other things, requires the PSCW to authorize
cable television operators to provide local exchange service in larger
markets, including one of the Company's markets. Although no cable
television operator has requested authorization to provide local exchange
service in the Company's market, the Company anticipates that such a
request will be forthcoming. The Company anticipates that an increasing
number of states will, to some degree, allow local service competition
with LECs. Largely as a result of these trends towards liberalized
regulation, several well-established interexchange carriers and cable
television companies have accelerated their development of networks and
facilities designed to provide local exchange services, principally in
larger cities.
In 1992 the FCC took a step toward introducing competition in the local
exchange access business by ordering that competitive access providers,
interexchange carriers and others have the right to directly interconnect
facilities to the central offices of certain larger (Tier One) telephone
companies (which do not include the Company's LECs) for the provision of
interstate special transport access services. Although this 1992 order
was overturned by a federal appellate court in mid-1994, the FCC has
requested Tier One LECs to file tariffs for a less intrusive form of co-
location. Effective February 1994, the FCC ordered Tier One LECs to allow
competing carriers to interconnect to their local exchange networks for
the purpose of providing switched access transport services. The intent
of these orders and other related FCC decisions is to allow interstate
access competition with LECs and provide LECs with limited pricing
flexibility to enable LECs to better respond to the resulting competition.
Principally as a result of these and other regulatory actions, competition
from competitive access providers and others has increased and is expected
to continue to increase. Competitive access providers, which originally
were formed in the 1980's to provide redundancy services, now provide
access competition with LECs in most larger urban areas, principally by
targeting large business customers. One competitive access provider has
been granted co-carrier status to provide local telephone service in New
York City, and similar requests are expected to be made in other states.
Although there has
10
been activity by competitive access providers in certain of the
Company's operating areas, such activity has thus far not
significantly affected the Company. The Company expects to increasingly
face competition from competitive access providers in its operating areas
located near larger urban areas and may face similar competition in its
other operating areas.
In addition to receiving services directly from competitive access
providers, interexchange carriers and other users of toll service may seek
other means to bypass LECs' switching services and local distribution
facilities, particularly if services are not strategically priced. There
are several ways which users of toll service may bypass the Company's
switching services. First, users may construct, modify or lease
facilities to transmit their traffic directly to an interexchange carrier.
Cable television companies, in particular, may be able to modify their
networks to partially or completely bypass the Company's local network.
Second, certain interexchange carriers provide services which allow users
to divert their traffic from LECs' usage-sensitive services to their flat-
rate services. Third, users may choose to use mobile communications
services to bypass LECs' switching services. Within the past two years,
each of the three largest interexchange carriers in the United States has
acquired or sought to acquire interests in mobile communications
companies, presumably in part to obtain bypass capabilities. Although
certain of the Company's telephone subsidiaries have experienced a loss of
traffic to such bypass, the impact of such loss on revenues has not been
significant. The Company and the LEC industry are seeking to address
bypass principally by adopting flexible pricing of access services where
appropriate and to the extent permitted by regulatory agencies. No
assurance can be given as to the ultimate outcome of these efforts.
Currently, cellular communications services complement traditional LEC
services. However, as the mobile communications industry matures, the
Company anticipates that existing and emerging mobile communications
technologies will increasingly compete with traditional LEC services.
Technological and regulatory developments in cellular telephone, personal
communications services, digital microwave, coaxial cable, fiber optics and
other wired and wireless technologies are expected to further permit the
development of alternatives to traditional landline services. For further
information on certain of these developments, see "Mobile Communications
Operations - Regulation and Competition."
In connection with the well-publicized convergence of
telecommunications, cable, video, computer and entertainment businesses,
several large companies have announced plans to offer products that would
significantly enhance current communications and data transmission services
and, in some instances, introduce new two-way video, entertainment, data,
consumer and other multimedia services. In particular, several large cable
television companies have announced plans that, if successfully
implemented, could provide significant competition with LECs' traditional
services. Other companies with wireline experience (including electric
utilities) are expected to explore opportunities in this market, along with
wireless companies and other emerging technology companies. Although the
development of new multimedia services is expected to initially have a
greater effect on larger urban areas, no assurance can be given as to how
the offering of these products or
11
services by others will affect the Company. For information on the
effects of these developments on the Company's cellular operations,
see "Mobile Communications Operations - Regulation and Competition."
To the extent that the telephone industry is increasingly opened to
competition by federal or state initiatives, the size and resources of each
respective competitor may increasingly influence its prospects. Many
companies currently providing or planning to provide competitive
telecommunication services have greater assets and resources than the
Company, and several are not subject to the same regulatory constraints as
the Company. Moreover, several of these companies have formed joint
ventures or alliances to better prepare themselves for competition.
The Company anticipates that the traditional operations of LECs will be
increasingly impacted by continued technological developments as well as
legislative and regulatory initiatives affecting the ability of LECs to
provide new services and the capability of cable television companies,
interexchange carriers, competitive access providers and others to provide
competitive LEC services. The Company intends to actively monitor these
developments, to observe the effect of emerging competitive trends in
initial test markets (which are expected to be large urban areas) and to
continue to evaluate new business opportunities that may arise out of
future technological, legislative and regulatory developments. Although
competition relating to services traditionally provided solely by LECs is
expected to initially affect large urban areas to a greater extent than
rural, suburban and small urban areas such as those in which the Company
operates, there is no assurance that these developments will not have an
adverse effect on the Company in the future.
MOBILE COMMUNICATIONS OPERATIONS
According to data derived from published sources, at December 31, 1994
the Company was the seventeenth largest cellular telephone company in the
United States based on the Company's owned pops. The number of pops owned
by a cellular operator does not represent the number of users of cellular
service and is not necessarily indicative of the number of potential
subscribers. Rather, this term is frequently used as a basis for
comparing the size of cellular system operators. At December 31, 1994,
the Company owned approximately 7.1 million pops (which includes
approximately 300,000 pops the Company either sold during the first
quarter of 1995 or which are subject to sale pursuant to definitive
agreements), of which approximately 5.4 million (76%) were applicable to
MSAs and approximately 1.7 million (24%) were RSA pops.
Cellular Industry
The cellular telephone industry has been in existence for just over ten
years in the United States. Although the industry is relatively new, it
has grown significantly during this period. According to the Cellular
Telecommunications Industry Association, in February 1995 there were
estimated to be over 25 million cellular
12
customers across the United States. Cellular service is now available
in substantially all areas of the United States.
Cellular mobile telephone technology was developed in response to
certain limitations of conventional mobile telephone systems. Compared to
such conventional systems, cellular mobile telephone service is capable of
high-quality, high-capacity communications to and from vehicle-mounted and
hand-held radio telephones. While conventional mobile systems limit the
number of people who can utilize the service simultaneously, cellular
systems, if properly designed and equipped, are capable of handling
thousands of calls at any given time and are capable of providing service
to tens of thousands of subscribers in a market.
In a cellular telephone system, the licensed service area is subdivided
into geographic areas, or cells. Each cell has its own transmitter and
receiver that communicates by radio signal with cellular telephones located
within the cell. Each cell is connected by a telephone circuit or
microwave to a Mobile Switching Center ("MSC"), which in turn is connected
to the worldwide telephone network.
Communications within a cellular system are controlled by the MSC
through a transfer process as a cellular telephone user moves from one cell
to another. In this process, when the signal strength of a call declines
to a predetermined level, the MSC determines if the signal strength from an
adjacent cell is greater and, if so, transfers the call to the adjacent
cell. Software which facilitates the transfer between adjacent cells of
different cellular systems using equipment of different manufacturers has
been implemented by the Company in certain markets.
Cellular telephone systems have higher subscriber capacity than
conventional mobile telephone systems because of the substantial frequency
spectrum allocated to these systems by the FCC and because frequencies can
be reused throughout the system. Frequency reuse is possible because the
transmission power of cell site equipment and mobile units is relatively
low. Therefore, signals on the same channel will not interfere with each
other if they are transmitted in cells that are sufficiently far apart.
Reuse multiplies the capacity of channels available to the system operator
and thereby increases the telephone calling capacity.
Until recently, substantially all radio transmissions of cellular
systems were conducted on an analog basis. Technological developments
involving the application of digital radio technology may offer certain
advantages over analog technologies, including expanding the capacity of
mobile communications systems, improving voice clarity, permitting the
introduction of new services, and otherwise making such systems more
efficient, more accessible, more private and eventually less expensive.
Providers of certain services competitive with cellular are currently
incorporating digital technology into their operations, and are expected to
continue to do so in the future. See "-Regulation and Competition-
Developments Affecting Mobile Communications Competition."
13
In recent years certain cellular carriers have begun to install digital
cellular voice transmission facilities in certain larger markets. During
1993 and 1994 the Company upgraded certain portions of its cellular systems
to be capable of providing digital service in the future; the Company
currently plans to implement digital service in certain markets during 1995
using the TDMA digital standard. The Company will continue to monitor the
development and implementation of this technology to determine when it will
become beneficial for the Company to install digital voice transmission
facilities in other markets. See "-Regulation and Competition-Developments
Affecting Mobile Communications Competition."
Strategy
The Company's business development strategy for its cellular telephone
operations is to secure operating control of service areas that are
geographically clustered. Clustered cellular systems aid the Company's
marketing efforts and provide various operating and service advantages.
Approximately 53% of the Company's pops in markets operated by the Company
are in a single, contiguous cluster of eight MSAs and six RSAs in Michigan;
another 21% are in a cluster of five MSAs and seven RSAs in northern and
central Louisiana, southern Arkansas and eastern Texas. See "-The
Company's Cellular Interests."
Another component of the Company's strategy for cellular operations
includes capturing revenues from roaming service. Roaming service revenues
are derived from calls made in one cellular service area by subscribers
from other service areas. Roaming service is made possible by technical
standards requiring that cellular telephones be functionally compatible
with the cellular systems in all United States market areas. The Company
charges premium rates (compared to rates charged to the Company's
customers) for roaming service provided to most non-Company customers. The
Company's Michigan cellular properties include a significant portion of the
interstate highway corridor between Chicago and Detroit; its Louisiana
properties include an east-west interstate highway and a north-south
interstate highway which intersect in its Louisiana cellular service area;
and its Mississippi properties include two east-west interstate highways,
one of which intersects with a north-south interstate highway in Jackson,
Mississippi.
Marketing
The Company coordinates the marketing strategy for each cellular
system which it operates. The Company's cellular sales force consists of
approximately 250 independent agents, which generate a significant majority
of the Company's new subscribers, and approximately 120 sales employees.
Each sales employee and independent agent solicits cellular customers
exclusively for the Company. Company sales employees are compensated by
salary and commission and independent sales agents are paid commissions.
The Company advertises its services through various means, including direct
mail, billboard, magazine, radio, television and newspaper advertisements.
14
During 1994 AT&T completed its acquisition of McCaw, the largest
cellular provider in the United States. Subject to certain regulatory
limitations, it is anticipated that AT&T will market McCaw's service under
the AT&T brand name. During 1994 several other large cellular providers
formed joint ventures to pool their cellular operating and marketing
resources.
Services, Customers and System Usage
There are a number of different types of cellular telephones, all of
which are currently compatible with cellular systems nationwide. The
Company sells a full range of vehicle-mounted, transportable, and hand-held
portable cellular telephones. Features offered in the cellular telephones
sold by the Company include hands-free calling, repeat dialing, horn alert
and others.
The Company's customers are able to choose from a variety of packaged
pricing plans which are designed to fit different calling patterns. The
Company typically charges its customers separately for custom-calling
features, air time in excess of the packaged amount, and toll calls.
Custom-calling features provided by the Company include call-forwarding,
call-waiting, three-way calling and no-answer transfer. The Company offers
a voice message service in many of its markets. This service, which
functions like a sophisticated answering machine, allows customers to
receive messages from callers when they are not available to take calls.
Cellular customers come from a wide range of occupations. They
typically include a large proportion of individuals who work outside of
their office, such as employees in the construction, real estate, wholesale
and retail distribution businesses, and professionals. More customers are
selecting portable and other transportable cellular telephones as these
units become more compact and fully featured, as well as more attractively
priced. It is anticipated that average revenue per customer will continue
to decline as additional non-commercial customers who generate fewer local
minutes of use are added as subscribers and as competitive pressures
intensify and place downward pressure on rates. See "-Regulation and
Competition."
Most cellular systems allow a customer to place or receive a call in a
cellular service area away from the customer's home market area. The
Company has entered into "roaming agreements" with operators of other
cellular systems covering virtually all systems in the United States; such
agreements offer the Company's customers the opportunity to roam in these
systems. These reciprocal agreements automatically pre-register the
customers of the Company's system in the other carriers' systems. Also, a
customer of a participating non-Company system traveling in a market
operated by the Company where this arrangement is in effect is able to
automatically make calls on the Company's system. The charge to a non-
Company customer for this service is typically at premium rates, and is
billed by the Company to the customer's home system, which then bills the
customer. Occasionally, the Company will enter into reciprocal agreements
with other cellular carriers to settle roaming usage at a rate different
from such premium rates. In some instances, based on competitive factors,
the Company may charge a lower amount to its customers than the amount
actually charged by another cellular
15
carrier for roaming. The Company anticipates that competitive factors
and industry consolidation may place downward pressures on charging
premium roaming rates. For additional information on roaming revenue,
see "-Strategy."
The Company is a founding partner and participant in a national alliance
of certain leading wireline cellular operating companies which plans to
design, develop and implement a virtual national cellular network under the
name MobiLink. This cellular alliance intends to offer, among other
things, a customer satisfaction guarantee and certain quality standards.
During 1993 and 1994, the Company's cellular subsidiaries experienced
strong subscriber growth in the fourth quarter, primarily due to increased
holiday season sales. According to the Cellular Telecommunications
Industry Association, industry-wide cellular sales have been seasonally
strong in the fourth calendar quarter for the past several years.
The following table summarizes, among other things, certain information
about the Company's customers and market penetration:
Year Ended or At December 31,
----------------------------------
1994 1993 1992
---- ---- ----
Majority-owned and operated MSA and
RSA systems (Note 1):
Cellular systems operated 31 26 25
Total population of systems
operated (Note 2) 6,359,699 5,015,463 4,813,985
Customers (Note 3):
At beginning of period 116,484 73,084 51,083
Additions 110,636 62,564 32,622
Net acquisitions/dispositions 30,743 - 3,091
Disconnects 46,153 19,164 13,712
At end of period 211,710 116,484 73,084
Market penetration at end of
period (Note 4) 3.33% 2.32% 1.52%
Construction expenditures
(in thousands) $ 39,937 $ 56,070 $ 10,806
All operated MSA and RSA systems
(Note 5):
Cellular systems operated 36 31 31
Total population of systems
operated (Note 2) 7,445,571 6,084,794 5,997,360
Customers at end of period (Note 6) 227,140 124,908 77,106
Market penetration at end of
period (Note 4) 3.05% 2.05% 1.29%
- -------------------------
Notes:
1. Represents the number of systems in which the Company owned at
least a 50% interest and which it operated. The revenues and expenses of
these cellular markets are included in the Company's consolidated operating
revenues and operating expenses.
2. Based on independent third-party population estimates for each
respective year.
3. Represents the approximate number of revenue-generating cellular
telephones served by the cellular systems referred to in note 1.
4. Computed by dividing the number of customers at the end of the
period by the total population of systems operated.
5. Represents the total number of systems that the Company operated,
including systems in which it does not own a majority interest.
6. Represents the approximate number of revenue-generating cellular
telephones served in all systems that the Company operated, including
systems in which it does not own a majority interest.
16
The Company's Cellular Interests
The Company obtained the right to provide cellular service through
(i) the FCC's licensing process described below, under which it received
interests in wireline licenses, and (ii) its acquisition program, under
which it has acquired interests in both wireline and non-wireline
licenses. The table below sets forth certain information with respect to
the interests in cellular systems that the Company owned as of December
31, 1994:
The Other
1994 Company's cellular
population Ownership pops at operator
(Note 1) percentage Dec. 31,1994 (Note 2)
==========================================================================
Majority-owned and operated MSAs
--------------------------------
Grand Rapids, MI 728,032 97.92% 712,889 AirTouch
Lansing, MI 502,701 99.00 497,674 AirTouch
Saginaw, MI 402,884 91.70 369,445 AirTouch
Kalamazoo, MI 299,643 97.92 293,410 Centennial
Battle Creek, MI 192,294 77.94 149,867 Centennial
Muskegon, MI 187,205 97.92 183,311 AirTouch
Benton Harbor, MI 161,613 97.92 158,251 Masters
Cellular
Jackson, MI 152,918 99.00 151,389 Centennial
Shreveport, LA 368,504 62.00 228,472 McCaw/AT&T
Alexandria, LA 150,324 100.00 150,324 Centennial
Monroe, LA 146,068 62.00 90,562 McCaw/AT&T
Jackson, MS (Note 4) 412,535 87.06 359,156 MCTA
Biloxi-Gulfport, MS (Note 4) 217,830 91.23 198,722 Cellular South
Pascagoula, MS (Note 4) 123,071 83.84 103,187 Cellular South
LaCrosse, WI 99,173 95.00 94,214 U. S. Cellular
Pine Bluff, AR 85,251 100.00 85,251 McCaw/AT&T
McAllen-Edinburg-Mission, TX
(Note 4) 431,348 67.28 290,228 SBC
Brownsville-Harlingen, TX
(Note 4) 286,245 77.81 222,738 SBC
Texarkana, AR/TX 137,052 89.00 121,976 McCaw/AT&T
-----------------------------------------------------------
5,084,691 4,461,066
-----------------------------------------------------------
Minority-owned MSAs
-------------------
Flint, MI 504,649 3.04% 15,341 Note 3
Detroit, MI 4,607,060 3.04 140,055 Note 3
Appleton/Oshkosh/Neenah, WI 468,255 10.83 50,712 Note 3
Duluth, MN/WI (Note 5) 243,518 16.33 39,766 Note 3
Owensboro, KY (Note 5) 89,993 5.73 5,157 Note 3
Little Rock, AR 535,862 36.00 192,910 Note 3
Evansville, IN (Note 5) 318,396 5.73 18,244 Note 3
Lafayette, LA 254,249 49.00 124,582 Note 3
Austin, TX 874,277 35.00 305,997 Note 3
-----------------------------------------------------------
7,896,259 892,764
-----------------------------------------------------------
Total MSAs 12,980,950 5,353,830
-----------------------------------------------------------
17
Operated RSAs
-------------
Arizona 3 (Note 5) 147,449 58.70% 86,546 Sprint Cellular
Arkansas 2 79,030 82.00 64,805 McCaw/AT&T
Arkansas 3 103,547 82.00 84,909 McCaw/AT&T
Arkansas 11 67,626 89.00 60,187 McCaw/AT&T
Arkansas 12 188,823 80.00 151,058 McCaw/AT&T
Louisiana 1 112,305 62.00 69,629 McCaw/AT&T
Louisiana 2 112,573 62.00 69,795 Centennial
Louisiana 3 (B2) 92,574 62.00 57,396 Centennial
Louisiana 4 70,825 100.00 70,825 Centennial
Michigan 3 154,657 38.76 59,949 Unitel
Michigan 5 151,220 38.76 58,617 Unitel
Michigan 6 144,382 98.00 141,494 Centennial
Michigan 7 237,052 41.78 99,052 Centennial
Michigan 8 96,650 97.92 94,640 Allegan Cellular
Michigan 9 291,024 43.38 126,246 Centennial
New Mexico 1 (Note 5) 251,919 22.22 55,982 Sprint Cellular
Texas 7 (B6) 59,224 89.00 52,709 McCaw/AT&T
------------------------------------------------------------
2,360,880 1,403,839
------------------------------------------------------------
Non-operated RSAs
-----------------
Arizona 2 (Note 5) 230,120 21.30% 49,007 Note 3
Colorado 6 (Note 5) 68,119 25.00 17,030 Note 3
Colorado 7 ( Note 5) 45,689 20.00 9,138 Note 3
Iowa 13 (Note 5) 66,706 10.00 6,671 Note 3
Michigan 10 133,511 26.00 34,713 Note 3
Minnesota 11 204,128 13.01 26,553 Note 3
New Mexico 3 (Note 5) 78,980 25.00 19,745 Note 3
New Mexico 4W 126,918 35.71 45,328 Note 3
Texas 16 316,704 9.60 30,404 Note 3
Wisconsin 1 106,435 8.44 8,985 Note 3
Wisconsin 2 84,254 12.81 10,793 Note 3
Wisconsin 3 136,443 14.29 19,492 Note 3
Wisconsin 6 115,218 28.57 32,919 Note 3
Wisconsin 10 127,102 15.00 19,065 Note 3
------------------------------------------------------------
1,840,327 329,843
------------------------------------------------------------
Total RSAs 4,201,207 1,733,682
------------------------------------------------------------
17,182,157 7,087,512
============================================================
Notes:
1. Based on 1994 independent third-party population estimates.
2. Information provided to the best of the Company's knowledge.
3. Markets not operated by the Company.
4. Represents a non-wireline interest.
5. Either sold during the first quarter of 1995 or are subject to sale
pursuant to a definitive agreement.
18
The preceding table does not include approximately 20,000 pops which
the Company acquired in January 1995 upon acquisition of a one-half of one
percent interest in the licensed operator of the Dallas, Texas MSA
wireline cellular system.
Revenue
The following table reflects the major revenue categories for the
Company's mobile communications operations as a percentage of mobile
communications operating revenues in 1994, 1993 and 1992.
1994 1993 1992
------------------------------
Cellular access fees, toll revenues
and equipment sales 82.0% 80.5 78.6
Cellular roaming 16.1 14.5 14.3
Paging services (Note 1) 1.9 5.0 7.1
------------------------------
100.0% 100.0 100.0
==============================
Note 1: The Company's paging operations were sold in October 1994.
For further information on these revenue categories, see "-Services,
Customers and System Usage."
Regulation And Competition
As discussed further below, the FCC and various state public utility
commissions regulate, among other things, the licensing, construction,
operation, interconnection arrangements, sale and acquisition of cellular
telephone systems.
Cellular Licensing Process. During the 1980's and early 1990's, the
FCC awarded two licenses to provide cellular service in each market. Each
licensee is required to provide service to a designated portion of the area
or population in its licensed area as a condition to maintaining that
license. Initially, one license was reserved for companies offering local
telephone service in the market (the wireline carrier) and one license was
available for firms unaffiliated with the local telephone company (the non-
wireline carrier). Since mid-1986, the FCC has permitted telephone
companies or their affiliates to acquire control of non-wireline licenses
in markets in which they do not hold interests in the wireline license.
The completion of acquisitions involving the transfer of control of a
cellular system requires prior FCC approval and, in certain cases, receipt
of other federal and state regulatory approvals. Acquisitions of minority
interests generally do not require FCC approval. Whenever FCC approval is
required, any interested party may file a petition to dismiss or deny the
application for approval of the proposed transfer.
19
Initial operating licenses are granted for ten-year periods and are
renewable upon application to the FCC for periods of ten years. Licenses
may be revoked and license renewal applications denied for cause. There
may be competition for licenses upon the expiration of the initial ten-year
terms and there is no assurance that any license will be renewed, although
the FCC has issued a decision that grants a renewal expectancy during the
license renewal period to incumbent licensees that substantially comply
with the terms and conditions of their cellular authorizations and the
FCC's regulations. The licenses for the MSA markets operated by the
Company were initially granted between 1984 and 1987, and licenses for
operated RSAs were initially granted between 1989 and 1991. The Company
intends to file renewal applications for its licenses which will otherwise
expire in 1995.
Five years after initial operating licenses are granted, unserved areas
within markets previously granted to licensees may be applied for by any
qualified party. The FCC has rules that govern the procedures for filing
and granting such applications and has established requirements for
constructing and operating systems in such areas. The Company has not
lost, and does not expect to lose, any significant market areas as a result
of not providing service to such areas. In addition to regulation by the
FCC, cellular systems are subject to certain Federal Aviation
Administration tower height regulations respecting the siting and
construction of cellular transmitter towers and antennas.
Cellular operators are also subject to state and local regulation in
some instances. Although the FCC has pre-empted the states from exercising
jurisdiction in the areas of licensing, technical standards and market
structure, certain states require cellular operators to be certified. In
addition, some state authorities regulate certain aspects of a cellular
operator's business, including certain aspects of pricing, the resale of
long distance service to its customers, the technical arrangements and
charges for interconnection with the landline network, and the transfer of
interests in cellular systems. The LPSC has petitioned the FCC for
continued regulation of cellular operators; the FCC is expected to rule on
the petition in the second quarter of 1995. The siting and construction of
the cellular facilities may also be subject to state or local zoning, land
use and other local regulations.
Competition between cellular providers in each market is conducted
principally on the basis of services and enhancements offered, the
technical quality and coverage of the system, quality and responsiveness of
customer service, and price. Competition may be intense. For a listing of
the Company's competitors in cellular markets operated by the Company, see
"- The Company's Cellular Interests." Under applicable law, the Company is
required to permit the reselling of its services. In certain larger
markets and in certain market segments, competition from resellers may be
significant. There is also substantial competition for agents. Some of
the Company's competitors have greater assets and resources than the
Company.
20
Developments Affecting Mobile Communications Competition. Continued
and rapid technological advances in the communications field, coupled with
legislative and regulatory uncertainty, make it impossible to (i) predict
the extent of future competition to cellular systems, (ii) determine which
emerging technologies pose the most viable alternatives to the Company's
cellular operations, or (iii) list each development that may ultimately
impact the Company's cellular operations. No assurance can be given that
current or future technological advances, or legislative or regulatory
changes, will not impact the Company's cellular operations.
Several recent FCC initiatives have resulted in the allocation of
additional radio spectrum or the issuance of experimental licenses for
emerging mobile communications technologies that will or may be competitive
with the Company's cellular and telephone operations, including personal
communication services ("PCS"). Although there is no universally
recognized definition of PCS, the term is generally used to refer to
wireless services to be provided by licensees operating in the 1850 MHz to
1990 MHz radio frequency band using microcells and high-capacity digital
technology. When offered commercially, PCS technology currently under
development may permit PCS operators to offer wireless data, image and
multimedia services. The extent to which PCS will offer services that are
complementary or competitive with cellular services is uncertain, and is
expected to be influenced by continuing developments in PCS and cellular
technologies and by FCC regulation.
The FCC has adopted rules to auction up to six PCS licenses per market.
Under these rules, two 30 MHz frequency blocks will be awarded for each of
the 51 Rand McNally Major Trading Areas ("MTAs"), while one 30 MHz and
three 10 MHz frequency blocks will be awarded for each of the 493 Rand
McNally Basic Trading Areas ("BTAs"). Subject to certain exceptions, the
Company will be permitted to freely pursue PCS licenses outside its
cellular markets, but will be limited to acquiring only one 10 MHz block in
licensed areas where it controls more than a 20% interest in a cellular
licensee and serves more than 10% of the population within the PCS licensed
area. The Company did not participate in the FCC's auction of the MTA
licenses. If attractive opportunities arise, the Company may participate
in the FCC's auctions of BTA licenses to be held in 1995. PCS service may
be commercially available in certain areas as early as 1996.
In addition to PCS, users and potential users of cellular systems may
find their communication needs satisfied by other current and developing
technologies, several of which may enjoy potential operational and service
advantages through their use of digital technology. The FCC has recently
authorized the licensees of certain specialized mobile radio service
("SMR") systems (which historically have generally been used by taxicabs
and tow truck operators) to configure their systems so as to operate in a
manner similar to cellular systems. The Company believes that SMR systems
are operating in a majority of its cellular markets. Certain well-
established SMR providers have announced their intention to create a
nationwide digital mobile communications system to compete with cellular
systems. Other similar communication services which have the technical
capability to handle mobile telephone calls may provide competition in
certain markets, although these services currently lack the subscriber
capacity of cellular systems. One-way paging or beeper services that
21
feature voice message and data display as well as tones may be adequate for
potential subscribers who do not need to communicate with the caller.
Other two-way mobile services may also be competitive with the Company's
services. For example, the second generation of cordless telephone
technology ("CT-2") will permit the application of this technology to a
public environment. During 1994 the FCC auctioned additional spectrum
suitable for two-way paging and other wireless data services, which is
expected to lead to increased development of these services.
The FCC has taken various actions to authorize mobile satellite systems
in which transmissions from mobile units to satellites would supplement or
replace transmissions to land-based stations. Such satellite-based systems
are being studied and designed, including international systems, and no
assurance can be given that such systems will not ultimately be successful
in supplementing or replacing cellular systems which communicate directly
to land-based stations.
As described further under "Telephone Operations - Regulation and
Competition," in connection with the well-publicized convergence of
telecommunications, cable, video, computer and entertainment businesses,
several large companies have recently announced plans to offer products
that would significantly enhance current communications and data
transmissions services and, in some instances, introduce new services.
Although much of the resulting competition is expected to center on
wireline services, it is anticipated that these developments may also
increase competition in the mobile communications industry. Several
companies are currently developing and marketing small hand-held devices
that provide digital wireless data transmission services that compete with
similar analog services currently being provided by cellular companies.
As discussed further under "Telephone Operations - Regulation and
Competition," recently several bills have been filed in the U.S. Congress
that have the potential to significantly alter the telecommunications
industry, including bills that focus on the mobile communications industry.
Recently, several large cellular providers have merged with other
companies or formed joint ventures. The resulting entities will have
substantially greater assets and resources than the Company. These joint
ventures and others have also pooled their resources to bid on PCS
licenses. For more information, see "-Marketing."
Although it is uncertain how PCS, SMR, CT-2, mobile satellites and other
emerging technologies will ultimately affect the Company, they are not
anticipated to be significant sources of competition in the Company's
markets in the near term. Moreover, management believes that equipping its
current cellular networks with digital enhancements and applying new
microcellular technologies should permit its cellular systems to provide
services comparable with the emerging technologies described above,
although no assurances can be given that this will happen or that future
technological advances or legislative or regulatory changes will not create
additional sources of competition.
22
Certain Considerations Regarding Cellular Telephone Operations
The cellular industry has a relatively limited operating history and
there continues to be uncertainty regarding its future. Among other
factors, there is uncertainty regarding (i) the continued growth in the
number of customers, (ii) the usage and pricing of cellular services,
particularly as market penetration increases and lower-usage customers
subscribe for service, (iii) the number of customers who will terminate
service each month, and (iv) the impact of changes in technology,
regulation and competition, any of which could have a material adverse
effect on the Company. See "- Regulation and Competition."
The market value of cellular interests is frequently determined on the
basis of the number of pops owned by a cellular provider. The population
of a particular cellular market, however, does not necessarily bear a
direct relationship to the number of subscribers or the revenues that may
be realized from the operation of the related cellular system. The future
market value of the Company's cellular interests will depend on, among
other things, the success of its cellular operations.
OTHER
The Company has certain obligations based on federal, state and local
laws relating to the protection of the environment. Costs of compliance
through 1994 have not been material and the Company currently has no reason
to believe that such costs will become material.
For additional information concerning the business and properties of
the Company, see notes 2, 3, 13, 16 and 17 of Notes to Consolidated
Financial Statements set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of (i) telephone lines,
central office equipment, telephone instruments and related equipment, and
land and building related to telephone operations and (ii) switching and
cell site equipment related to cellular telephone operations. As of
December 31, 1994, the Company's gross property, plant and equipment of
approximately $1.3 billion consisted of the following:
Telephone:
Cable and wire.................................... 44.1%
Central office equipment.......................... 23.7
General support................................... 7.0
Information origination/termination equipment..... 1.6
Construction in progress.......................... 5.1
Other............................................. .4
------
81.9
Mobile Communications ................................ 11.6
Other................................................. 6.5
------
100.0%
======
23
"Cable and wire" facilities consist primarily of buried cable and
aerial cable, poles, wire, conduit and drops. "Central office equipment"
consists primarily of switching equipment, circuit equipment and related
facilities. "General support" consists primarily of land, buildings,
tools, furnishings, fixtures, motor vehicles and work equipment.
"Information origination/termination equipment" consists primarily of
premise equipment (private branch exchanges and telephones) for official
company use. "Construction in progress" includes property of the foregoing
categories that has not been placed in service because it is still under
construction. The properties of the Company's telephone subsidiaries are
subject to mortgages securing the funded debt of such companies. The
Company owns substantially all of the central office buildings, local
administrative buildings, warehouses, and storage facilities used in its
telephone operations. The Company leases most of the offices used in its
cellular operations; certain of its transmitter sites are leased while
others are owned by the Company. For further information on the location
and type of the Company's properties, see the descriptions of the Company's
telephone and mobile communications operations in Item 1.
Item 3. Legal Proceedings.
From time to time, the Company is involved in litigation incidental to
its business, including administrative hearings of state public utility
commissions relating primarily to rate making, actions relating to employee
claims, occasional grievance hearings before labor regulatory agencies and
miscellaneous third party tort actions. Currently, there are no material
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning Executive Officers, set forth at Item 10 in
Part III hereof, is incorporated in Part I of this Report by reference.
24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Century's common stock is listed on the New York Stock Exchange and is
traded under the symbol CTL. The following table sets forth the high and
low sale prices, along with the quarterly dividends, for each of the
quarters indicated:
Sale prices
----------- Dividend per
High Low common share
---- --- ------------
1993:
First quarter $ 33-3/8 26 .0775
Second quarter $ 33-1/8 28 .0775
Third quarter $ 31-5/8 27-1/8 .0775
Fourth quarter $ 30-3/8 23-1/4 .0775
1994:
First quarter $ 27-7/8 21-7/8 .08
Second quarter $ 27-5/8 22-5/8 .08
Third quarter $ 30-1/2 25 .08
Fourth quarter $ 32-1/4 27-1/2 .08
Common stock dividends during 1993 and 1994 were paid each quarter.
As of February 28, 1995, there were approximately 7,000 stockholders of
record of Century's common stock.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial
data as of and for each of the years ended in the five-year period ended
December 31, 1994:
Selected Income Statement Data
Year ended December 31,
--------------------------------------------------
1994 1993 1992 1991 1990
--------------------------------------------------
(Dollars, except per share amounts,
and shares expressed in thousands)
Operating revenues
Telephone $ 389,438 348,485 297,510 235,796 215,771
Mobile Communications 150,802 84,712 62,092 46,731 34,594
----------------------------------------------------
Total operating revenues $ 540,240 433,197 359,602 282,527 250,365
====================================================
Operating income (loss)
Telephone $ 137,992 114,902 103,672 80,039 70,654
Mobile Communications 31,443 9,906 5,956 (4,952) (9,553)
----------------------------------------------------
Net operating income $ 169,435 124,808 109,628 75,087 61,101
====================================================
Income before cumulative
effect of changes in
accounting principles $ 100,238 69,004 59,973 37,419 31,098
Cumulative effect of changes
in accounting principles - - (15,668) - -
---------------------------------------------------
Net income $ 100,238 69,004 44,305 37,419 31,098
====================================================
25
Fully diluted earnings per
share before cumulative
effect of changes in
accounting principles $ 1.80 1.32 1.22 .79 .66
Cumulative effect of changes
in accounting principles - - (.31) - -
----------------------------------------------------
Fully diluted earnings
per share $ 1.80 1.32 .91 .79 .66
====================================================
Dividends per common share $ .320 .310 .293 .287 .280
=====================================================
Average fully diluted
shares outstanding 58,135 55,892 48,653 47,432 46,944
=====================================================
Selected Balance Sheet Data
December 31,
1994 1993 1992 1991 1990
-----------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------
Net property, plant and
equipment $ 947,131 827,776 675,878 534,998 490,957
Excess cost of net assets
acquired, net $ 441,436 297,158 217,688 114,258 110,013
Total assets $1,643,253 1,319,390 1,040,487 764,539 706,411
Long-term debt $ 518,603 364,433 346,944 205,453 230,715
Stockholders' equity $ 650,236 513,768 385,449 319,977 280,915
The following table presents certain selected consolidated operating
data as of the end of each of the years in the five-year period ended
December 31, 1994:
Year ended December 31,
----------------------------------------------------
1994 1993 1992 1991 1990
----------------------------------------------------
Telephone access lines 454,963 434,691 397,300 314,819 304,915
Cellular units in service
in majority-owned
markets 211,710 116,484 73,084 51,083 35,815
See Items 1 and 2 in Part I and notes 1, 9, 16 and 20 of Notes to
Consolidated Financial Statements set forth in Item 8 elsewhere herein for
additional information.
26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
OVERVIEW
The 1994 net income of Century Telephone Enterprises, Inc. and
subsidiaries (the "Company") increased 45.3% to $100.2 million from
$69.0 million during 1993. Income before the cumulative effect of changes
in accounting principles during 1992 was $60.0 million.
Fully diluted earnings per share for 1994 increased 36.4% to $1.80 from
$1.32 during 1993. Fully diluted earnings per share in 1992 before the
cumulative effect of changes in accounting principles was $1.22. The
average number of fully diluted shares outstanding increased 4.0% and 5.8%
in 1994 and 1993, respectively, as a result of shares issued in connection
with acquisitions and the Company's dividend reinvestment, incentive and
benefit plans.
The Company is a regional diversified telecommunications company that
is primarily engaged in providing traditional telephone services and
cellular mobile telephone services. The Company's 1994 operating income
was $169.4 million, an increase of $44.6 million (35.8%) over 1993
operating income of $124.8 million. During 1994 the operating income of
the Company's telephone segment and its mobile communications segment
increased $23.1 million (20.1%) and $21.5 million (217.4%), respectively,
compared to 1993. The Company's operating income during 1992 was $109.6
million.
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands,
except per share amounts)
Operating income
Telephone $ 137,992 114,902 103,672
Mobile Communications 31,443 9,906 5,956
--------------------------------------------------------------------------
169,435 124,808 109,628
Interest expense (42,577) (30,149) (27,166)
Income from unconsolidated
cellular entities 15,698 6,626 1,692
Gain on sales of assets 15,877 1,661 3,985
Other income and expense 3,105 3,310 4,433
Income tax expense (61,300) (37,252) (32,599)
--------------------------------------------------------------------------
Income before cumulative effect of
changes in accounting principles 100,238 69,004 59,973
Cumulative effect of changes in
accounting principles - - (15,668)
--------------------------------------------------------------------------
Net income $ 100,238 69,004 44,305
==========================================================================
Fully diluted earnings per share:
Before cumulative effect of changes
in accounting principles $ 1.80 1.32 1.22
Cumulative effect of changes in
accounting principles - - (.31)
--------------------------------------------------------------------------
Fully diluted earnings per share $ 1.80 1.32 .91
==========================================================================
27
The operating income of the telephone segment includes the operations,
subsequent to each respective acquisition, of Century Telephone of Ohio,
Inc. ("Ohio"), acquired in April 1992, and Century Telephone of San
Marcos, Inc. ("San Marcos"), acquired in April 1993. See Note 16 of Notes
to Consolidated Financial Statements for additional information applicable
to these acquisitions.
The Company's mobile communications operations reflect the operations
of the cellular entities in which the Company has a majority interest.
The minority interest owners' share of the income or loss of such entities
is reflected as an expense in "Other income and expense." The operating
income of the mobile communications segment includes (i) the operations of
the Alexandria, Louisiana Metropolitan Statistical Area ("MSA") cellular
system ("Alexandria") subsequent to its acquisition in December 1992, (ii)
the operations of Celutel, Inc. ("Celutel") subsequent to its acquisition
in February 1994, and (iii) the Company's paging operations prior to their
sale in October 1994. See Notes 16 and 17 of Notes to Consolidated
Financial Statements for additional information.
According to data derived from published sources, as of December 31,
1993 the Company had the second highest ratio of owned cellular pops (the
population of licensed cellular telephone markets multiplied by the
Company's proportionate equity interests in the licensed operators
thereof) to telephone access lines among the 20 largest telephone
companies (based on access lines) in the United States. Accordingly, the
Company anticipates that its mobile communications operations will
continue to increasingly influence the Company's overall operations as the
cellular industry matures. Contributions to operating revenues and
operating income by the Company's telephone and mobile communications
operations for each of the three years ended December 31, 1994 were as
follows:
1994 1993 1992
==========================================================================
Operating revenues
Telephone operations 72.1% 80.4 82.7
Mobile Communications operations 27.9% 19.6 17.3
Operating income
Telephone operations 81.4% 92.1 94.6
Mobile Communications operations 18.6% 7.9 5.4
===========================================================================
The Company's share of earnings or loss from the cellular entities in
which it has less than a majority interest is accounted for using the
equity method and is reflected in "Income from unconsolidated cellular
entities." The Company's share of income from such entities increased to
$15.7 million in 1994 from $6.6 million in 1993 and $1.7 million in 1992.
As of January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 106 ("SFAS 106"), "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes."
The cumulative effect of the changes in accounting principles related to
SFAS 106 and SFAS 109 reduced 1992 net income by $14.8 million ($.30 per
fully diluted share) and $913,000 ($.01 per fully diluted share),
respectively.
28
TELEPHONE OPERATIONS
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands)
Operating revenues
Local service $ 100,020 88,704 78,108
Network access and long distance 243,759 217,055 182,711
Other 45,659 42,726 36,691
--------------------------------------------------------------------------
389,438 348,485 297,510
--------------------------------------------------------------------------
Operating expenses
Plant operations 84,117 80,578 66,878
Customer operations 35,746 32,225 26,242
Corporate and other 58,408 55,605 46,791
Depreciation and amortization 73,175 65,175 53,927
--------------------------------------------------------------------------
251,446 233,583 193,838
--------------------------------------------------------------------------
Operating income $ 137,992 114,902 103,672
==========================================================================
The Company's telephone operations are conducted in rural, suburban and
small urban communities in 14 states. Approximately 82% of the Company's
telephone access lines are in Wisconsin, Louisiana, Michigan, Ohio and
Arkansas.
Local Service Revenues
Local service revenues are derived from the provision of local exchange
telephone services in the Company's franchised service areas. The $11.3
million increase in such revenues in 1994 included $4.5 million due to the
increase in the number of customer access lines, $3.8 million from
increased rates for basic services and $1.2 million due to acquisitions.
Acquisitions contributed $7.5 million to the 1993 increase of $10.6
million; $2.7 million of the increase was due to the increase in access
lines. The remaining increases in 1994 and 1993 were primarily due to the
provision of custom calling features. Internal access line growth during
1994, 1993 and 1992 was 4.1%, 3.6% and 3.8%, respectively.
Network Access and Long Distance Revenues
Network access and long distance revenues primarily relate to services
provided to interexchange carriers (long distance carriers) in connection
with the completion of long distance telephone calls. Substantially all
of the Company's interstate network access revenues are received through
pooling arrangements administered by the National Exchange Carrier
Association ("NECA") based on cost separation studies and average schedule
settlement agreements. The NECA receives access charges billed by the
Company and other participating local exchange carriers ("LECs") to
interstate long distance carriers and other LEC customers for their use of
the local exchange network to complete long distance calls. These charges
to the long distance carriers and other LEC customers are based on
tariffed access rates filed with the Federal Communications Commission
("FCC")
29
by the NECA on behalf of the Company and other participating LECs. Long
distance and intrastate network access revenues are based on access rates,
cost separation studies or special settlement arrangements with intrastate
long distance carriers.
Network access and long distance revenues increased $26.7 million
(12.3%) in 1994 and $34.3 million (18.8%) in 1993 due to the following
factors:
1994 1993
Increase Increase
(decrease) (decrease)
========================================================================
(Dollars in thousands)
Acquisitions $ 5,734 19,737
Partial recovery of increased operating expenses
through revenue pools in which the Company
participates with other telephone companies
and return on rate base 8,834 7,326
Increased recovery from the FCC mandated
Universal Service Fund ("USF") 8,815 6,161
Increased minutes of use 2,409 3,444
Revision of prior year revenue settlement
agreements 2,537 (770)
Other, net (1,625) (1,554)
-------------------------------------------------------------------------
$ 26,704 34,344
=========================================================================
Other, net in the preceding table reflects reductions of $2.3 million
and $1.0 million in 1994 and 1993, respectively, in certain settlements
received from a large local exchange operating company by the Company's
Louisiana subsidiaries. Also included in other, net in 1994 is a $1.9
million reduction in intrastate high cost assistance revenues as a result
of the phase-out of the Wisconsin state support fund, the loss of which
was offset by an increase in local rates in the same jurisdictions.
Other Revenues
Other revenues include revenues related to (i) leasing, selling,
installing, maintaining and repairing customer premise telecommunications
equipment and wiring, (ii) providing billing and collection services for
interexchange carriers, (iii) leasing network facilities and (iv)
participating in the publication of local directories. The increase in
other revenues during 1994 was primarily due to a $1.2 million increase in
directory advertising revenues and a $1.1 million increase in billing and
collection revenues. The 1993 increase was primarily due to acquisitions.
Certain large telecommuni-cations companies for which the Company
currently provides billing and collection services have indicated their
desire to reduce their billing and collection expenses which may lead to
reduced future billing and collection revenues.
30
Operating Expenses
Plant operations expenses during 1994 and 1993 increased $3.5 million
(4.4%) and $13.7 million (20.5%), respectively. Operating expenses
attributable to acquisitions accounted for $2.3 million of the 1994
increase. A $1.2 million increase in salaries, wages and benefits during
1994 was partially offset by a $531,000 reduction in postemployment
benefit expense. Approximately $7.1 million of the 1993 increase was due
to operating expenses attributable to acquisitions. Increases in
salaries, wages and benefits during 1993 accounted for approximately $2.2
million. The remainder of the 1993 increase was due to increases in other
general operating expenses.
Expenses attributable to acquisitions contributed $2.1 million and
$11.0 million, respectively, to the 1994 increase of $6.3 million (7.2%)
and the 1993 increase of $14.8 million (20.3%) in customer operations,
corporate, and other expenses. Ad valorem taxes increased $1.0 million in
1994 and $601,000 in 1993 due to the increase in plant in service. The
remainder of the increases resulted from increases in other general
operating expenses.
Depreciation and amortization increased $8.0 million (12.3%) and $11.2
million (20.9%) in 1994 and 1993, respectively. Approximately $2.4
million and $5.4 million of the increases in 1994 and 1993, respectively,
were due to acquisitions. Depreciation expense included nonrecurring
additional depreciation charges approved by regulators in certain
jurisdictions which, exclusive of acquisitions, aggregated $3.3 million in
1993 and $2.9 million in 1992. In addition, the Company obtained higher
recurring depreciation rates for certain subsidiaries during the last
three years. Excluding acquisitions, the first-year effects of the higher
rates were approximately $5.6 million in 1994, $1.7 million in 1993 and
$770,000 in 1992. The remaining increases in depreciation and
amortization were due to higher levels of plant in service. The composite
depreciation rate for telephone properties, including the additional
depreciation charges, was 7.1%, 7.1% and 6.6% for 1994, 1993 and 1992,
respectively.
Other
For additional information regarding certain matters that have impacted
or may impact the Company's telephone operations, see Regulation and
Competition below.
31
MOBILE COMMUNICATIONS OPERATIONS
Year ended December 31, 1994 1993 1992
--------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Cellular service $ 141,325 76,583 54,489
Equipment and other 9,477 8,129 7,603
--------------------------------------------------------------------------
150,802 84,712 62,092
--------------------------------------------------------------------------
Operating expenses
Cost of sales and other
operating expenses 31,859 19,681 14,313
General, administrative and
customer service 33,171 23,872 19,685
Sales and marketing 33,074 19,894 13,167
Depreciation and amortization 21,255 11,359 8,971
--------------------------------------------------------------------------
119,359 74,806 56,136
--------------------------------------------------------------------------
Operating income $ 31,443 9,906 5,956
==========================================================================
The Company's mobile communications segment at December 31, 1994
consisted entirely of operations of the cellular entities in which the
Company has a majority interest. The Company's cellular customers are
located primarily in Louisiana, Michigan, Mississippi and Texas. The
Company's share of income from cellular entities in which it has less than
a majority interest (which is not included in the mobile communications
segment) was $15.7 million, $6.6 million and $1.7 million during 1994,
1993 and 1992, respectively, and is reflected in "Income from
unconsolidated cellular entities."
Operating Revenues
Cellular service revenues include monthly service fees for providing
access and airtime to customers, service fees for providing airtime to
users roaming through the Company's service areas and toll revenue.
Cellular service revenues during 1994 increased to $141.3 million from
$76.6 million in 1993 and $54.5 million in 1992.
The 1994 and 1993 increases in cellular service revenues were primarily
attributable to the significant increases in cellular customers resulting
principally from acquisitions, increased demand and expanded areas of
service. Cellular units in service in the Company's majority-owned
markets increased to 211,710 (of which 35,027 were in the Celutel markets)
as of December 31, 1994 from 116,484 as of December 31, 1993 and 73,084 as
of December 31, 1992. Exclusive of acquisitions, access and usage
revenues increased $27.2 million (48.3%) in 1994 and $14.6 million (36.9%)
in 1993 and roaming and toll revenues increased $9.8 million (54.9%) and
$3.0 million (22.3%) in 1994 and 1993, respectively. The remainder of the
1994 revenue increase was due substantially to the Celutel operations,
which increased revenues by $26.3 million, and the remainder of the 1993
increase was due to the Alexandria operations, which increased 1993
revenues by $3.6 million.
32
The average monthly cellular service revenue per customer declined to
$69 in 1994 from $71 in 1993 and $75 in 1992. It has been an industry-
wide trend that early subscribers have normally been the heaviest users
and that a higher percentage of new subscribers tend to be lower usage
customers. The average monthly service revenue per customer may further
decline (i) as market penetration increases and additional lower usage
customers are activated and (ii) as competitive pressures intensify and
place downward pressure on rates. The Company will continue to focus on
customer service and attempt to stimulate cellular usage by promoting the
availability of certain enhanced services and by improving the quality of
its service through the construction of additional cell sites and
enhancements to its system.
Other revenues included $2.9 million and $4.2 million in 1994 and 1993,
respectively, of revenues attributable to the Company's paging operations,
which were sold in October 1994.
Operating Expenses
The $12.2 million increase in 1994 in cost of sales and other operating
expenses included $6.7 million of expenses of Celutel since its
acquisition in February 1994. Expenses incurred in 1993 as a result of
the December 1992 acquisition of Alexandria were $599,000. The remaining
increases in cost of sales and other operating expenses in 1994 and 1993
were primarily due to interconnecting and operating new cell sites which
were built to improve service in several existing markets and to initiate
and develop service in several rural markets. The Company operated 230
cell sites at December 31, 1994 in entities in which it has a majority
interest, compared to 158 at December 31, 1993 and 96 at December 31,
1992. Of the 1994 net increase of 72 cell sites, 29 were added through
acquisitions.
General, administrative and customer service expenses increased $9.3
million (39.0%) in 1994, $7.4 million of which was due to the Celutel
operations. The Alexandria operations contributed $1.2 million of costs
to the 1993 increase of $4.2 million (21.3%). The remaining increases
were primarily related to the increased number of customers.
During 1994 and 1993, sales and marketing expenses increased $13.2
million (66.3%) and $6.7 million (51.1%), respectively, of which $8.2
million in 1994 and $4.2 million in 1993 were due to increases in
commissions paid to agents for selling cellular services to new customers.
The remaining increase in 1994 was due to the Celutel operations. The
remaining increase during 1993 was primarily due to an $812,000 increase
in advertising costs and to $919,000 of costs incurred in the Alexandria
operations.
Depreciation and amortization increased $9.9 million (87.1%) in 1994
and $2.4 million (26.6%) in 1993 due to increases of $4.9 million and $2.4
million, respectively, applicable to higher levels of cellular plant in
service. Approximately $3.8 million of the 1994 increase was due to
amortization of goodwill attributable to the acquisition of Celutel.
33
Other
The Company's paging operations, which contributed 2.5% of mobile
communications revenues from January 1994 through September 1994, were
sold in October 1994.
For additional information regarding certain matters that have impacted
or may impact the Company's mobile communications operations, see
Regulation and Competition below.
INTEREST EXPENSE
Interest expense increased $12.4 million (41.2%) in 1994 and $3.0
million (11.0%) in 1993. The increase during 1994 was primarily the
result of a 34% increase in average debt outstanding, a substantial amount
of which was incurred in connection with the acquisition of Celutel.
Higher interest expense incurred during 1993 due to a 24% increase in
average debt outstanding was substantially offset by the effect of lower
average interest rates.
INCOME FROM UNCONSOLIDATED CELLULAR ENTITIES
Earnings from unconsolidated cellular entities, net of the amortization
of associated goodwill, increased $9.1 million (136.9%) during 1994. An
increase of $2.9 million in the Company's share of income from the
partnership interests acquired in the San Marcos acquisition in April 1993
contributed to the 1994 increase. The remainder of the 1994 increase was
due to the improvement in profitability of other cellular entities in
which the Company owns less than a majority interest. The Company's share
of income from the partnership interests acquired in the San Marcos
acquisition contributed substantially to the $4.9 million (291.6%)
increase in income from unconsolidated cellular entities during 1993.
GAIN ON SALES OF ASSETS
The Company sold the assets comprising a cellular system in a Rural
Service Area ("RSA") 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).
During 1993 the Company sold a minority investment in a telephone
company which resulted in a pre-tax gain of $1.7 million ($1.1 million
after-tax; $.02 per fully diluted share).
34
During 1992 the Company consummated the sales of (i) two telephone
subsidiaries which served approximately 2,000 access lines, (ii) its
minority interests in an MSA cellular partnership and an RSA cellular
partnership, and (iii) its 100% interest in an RSA cellular market. The
sales resulted in an aggregate pre-tax gain of $4.0 million ($2.6 million
after-tax; $.05 per fully diluted share).
OTHER INCOME AND EXPENSE
Other income and expense during 1994 was $3.1 million compared to $3.3
million during 1993 and $4.4 million in 1992. The increased profitability
during 1994 of the Company's majority-owned and operated cellular entities
resulted in a corresponding increase of $2.9 million in the expense
recorded by the Company to reflect the minority interest owners' share of
the profits. Such increase in expense in 1994 was substantially offset by
an increase of $1.8 million in interest income, of which $1.5 million was
interest income earned on a $25.0 million note receivable issued to
Century in May 1994. For additional information, see Liquidity and
Capital Resources - Investing Activities. Other income and expense
decreased $1.1 million (25.3%) in 1993 primarily because of a decrease in
interest income.
Other income and expense includes the results of operations of
subsidiaries of the Company which are not included in telephone or mobile
communications operations, including, but not limited to, the Company's
competitive access subsidiary and the Company's nonregulated long distance
operations, the combined results of which were not significantly different
in 1994, 1993 and 1992.
INCOME TAX EXPENSE
The effective income tax rate was 37.9%, 35.1% and 35.2% in 1994, 1993
and 1992, respectively. The increase in the effective rate in 1994 was
primarily the result of (i) amortization of investment tax credits and the
SFAS 109 regulatory liability remaining relatively stable while income
before taxes increased and (ii) the effect of an increase in the
amortization of goodwill which is not tax deductible. The additional
federal income taxes incurred during 1993 as a result of the 1% increase
in the statutory federal income tax rate in accordance with the provisions
of the Omnibus Budget Reconciliation Act of 1993 (the "Act") was more than
offset by the tax benefit applicable to the deductibility of certain
intangible assets also provided by the Act.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
The Company adopted SFAS 106 as of January 1, 1992. SFAS 106 requires
that the expected cost of providing postretirement health care and life
insurance benefits be accrued during the years an employee renders service
to the Company. The cumulative effect of the change in accounting
principle related to SFAS 106 decreased net income for 1992 by $14.8
million ($.30 per fully diluted share).
35
The Company also adopted SFAS 109 as of January 1, 1992, under which
the accounting for income taxes is based on an asset and liability
approach rather than the deferred method. The cumulative effect of the
change in accounting principle related to SFAS 109 decreased net income
for 1992 by $913,000 ($.01 per fully diluted share).
The Company adopted Statement of Financial Accounting Standards No. 112
("SFAS 112"), "Employers' Accounting for Postemployment Benefits," in the
first quarter of 1994. SFAS 112 addresses the accounting for workers
compensation, disability and other benefits provided after employment but
before retirement by requiring accrual of the expected cost when it is
probable that a benefit obligation has been incurred and the amount can be
reasonably estimated. Liabilities reflected in the consolidated balance
sheet as of December 31, 1993 for postemployment benefits were not
materially different than those required by SFAS 112; therefore, no
cumulative effect of change in accounting principle was recorded upon
adoption of SFAS 112.
INFLATION
The effects of increased costs historically have been mitigated by the
ability to recover certain costs applicable to the Company's regulated
telephone operations through the rate-making process. As operating
expenses in the nonregulated areas increase as a result of inflation, the
Company, to the extent permitted by competition, recovers the costs by
increasing prices for its services and equipment.
While the regulatory process does not consider replacement cost of
physical plant, the Company has historically been able to earn a return on
the increased cost of its net investment when facilities have been
replaced. Possible future regulatory changes may alter the Company's
ability to recover increased costs in its regulated operations. For
additional information regarding the current regulatory environment, see
Regulation and Competition below.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash
provided by operations to provide a substantial portion of its cash needs.
The Company's telephone operations have historically provided a stable
source of cash flow which has helped the Company continue its long-term
program of capital improvements. Cash provided by mobile communications
operations has increased each year since that segment became cash-flow
positive in 1991.
Operating Activities
Net cash provided by operating activities was $199.8 million, $166.8
million and $146.3 million in 1994, 1993 and 1992, respectively. The
Company's accompanying consolidated statements of cash flows identifies
36
major differences between net income and net cash provided by operating
activities for each of these years. For additional information relating
to the telephone operations and mobile communications operations of the
Company, see Results of Operations.
Investing Activities
Net cash used in investing activities was $280.3 million and $248.7
million during 1994 and 1993, respectively. Capital expenditures for 1994
were $152.3 million for telephone operations, $39.9 million for mobile
communications operations and $8.6 million for other operations. Cash
used in connection with the February 1994 acquisition of Celutel
(exclusive of the refinancing of $41.7 million of Celutel's debt) was
$56.0 million. The remainder of the $106.0 million purchase price was
paid through the issuance of 1.9 million shares of Century common stock.
In connection with the corporate restructuring of an unaffiliated local
exchange telephone company which has been viewed from time to time as an
acquisition candidate, Century loaned the telephone company's holding
company $25.0 million in 1994. In 1993, another company had acquired
rights to purchase a controlling interest in the telephone company,
subject to the first refusal rights of the telephone company's principal
stockholder. Century's loan allowed this stockholder to exercise his
first refusal rights and preserved the future availability of the
telephone company as an acquisition candidate for Century. The loan is
collateralized by security interests in the capital stock of the holding
company and the telephone company and by a guaranty from the holding
company's principal stockholder. In connection with the loan, Century
obtained first refusal rights to acquire the stock of the holding company,
the stock of its subsidiaries and/or the assets of its subsidiaries under
various specified circumstances.
Net cash used in investing activities during 1993 was $22.5 million
less than during 1992 primarily because the amount of cash used for
acquisitions during 1993 was $97.9 million less than in the previous year.
Payments for property, plant and equipment during 1993 increased by $64.2
million.
Financing Activities
Net cash provided by financing activities during 1994 and 1993 was
$77.8 million and $81.9 million, respectively. During 1994 the Company
filed a shelf registration statement with the United States Securities and
Exchange Commission registering $400.0 million of senior unsecured debt
securities under which the Company issued $150.0 million of senior notes
in May 1994. See Note 3 of Notes to Consolidated Financial Statements.
The proceeds were used to discharge the Company's indebtedness under a
$90.0 million bridge loan incurred to fund substantially all of the
Company's cash requirements in connection with the acquisition of Celutel
in February 1994 (including the refinancing of $41.7 million of Celutel's
debt) and to reduce the Company's short-term bank indebtedness under
various floating-rate credit facilities. In connection with the
37
offering, in the second quarter of 1994 Moody's upgraded Century's senior
unsecured debt rating to Baa1 and Standard & Poor's affirmed its BBB+
rating.
The $158.0 million of notes payable at December 31, 1994 reflects the
Company's continued utilization of borrowings under its credit facilities
to take advantage of favorable short-term interest rates. The Company
currently intends to continue to monitor market conditions for favorable
opportunities to refinance some or all of these borrowings with long-term
debt.
Cash provided by financing activities in 1993 was $41.0 million less
than in 1992 primarily because net borrowings, including long-term debt
and notes payable, were $38.4 million less than in 1992. The $88.3
million increase in notes payable outstanding in 1993 reflected the
Company's utilization of borrowings under its credit facilities as
discussed above. Proceeds from the issuance of debt during 1992 included
$115.0 million from the issuance of 6% convertible debentures in February
1992 to provide the major portion of the purchase price of Ohio.
Other
Budgeted capital expenditures for 1995 total $112.0 million for
telephone operations, $59.0 million for mobile communications operations
and $12.0 million for other operations. The Company anticipates that
capital expenditures in its telephone operations will continue to include
the installation of fiber optic cable, the replacement of mechanical
switches with digital switches and the upgrading of its plant and
equipment to provide enhanced services. Mobile communications capital
expenditures are expected to continue to focus primarily on constructing
additional cell sites and upgrading the Company's cellular systems to
increase capacity, to enhance the Company's ability to provide digital
service in the future and to begin providing digital service in certain
markets. Budgeted capital expenditures for other operations include
capital construction costs planned to be expended in the Company's
recently-formed competitive access operations.
The Company decided not to participate in the FCC's auction of Major
Trading Area broadband licenses to provide Personal Communications
Services ("PCS"). If attractive opportunities arise, the Company may
participate in the FCC's auctions of Basic Trading Area PCS licenses to be
held in 1995. Pending these auctions, the Company will continue to equip
its current cellular networks with digital enhancements which may, when
applied with new microcellular technologies, permit the Company's cellular
systems to provide services comparable with emerging PCS technologies.
The Company will continue its long-term strategy of pursuing the
acquisition of attractive communications properties in exchange for cash,
securities or both, and may require additional financing in connection
therewith. Approximately 1.2 million shares of Century common stock and
125,000 shares of Century
38
preferred stock remain available for future issuance in connection with
acquisitions under an acquisition shelf registration statement.
As of December 31, 1994, Century's telephone subsidiaries had available
for use $124.0 million of commitments for long-term financing from the
Rural Utilities Service ("RUS") (formerly the Rural Electrification
Administration or REA) and the Company had $65.1 million of undrawn
committed bank lines of credit. In addition, approximately $28.0 million
of uncom-mitted credit facilities were available to Century at December
31, 1994. The Company also has access to debt and equity capital markets,
including its shelf registration statements mentioned above. Applications
for additional long-term financing for Century's telephone subsidiaries
have been filed with the RUS and are in various stages of processing. The
Company has experienced no significant problems in obtaining funds for
capital expenditures or other purposes.
On January 20, 1995 Century called for redemption all $115.0 million of
its outstanding 6% convertible debentures due 2007 at a redemption price
of 104.2% of principal plus accrued interest through February 21, 1995,
the redemption date. All of the debentures were converted into Century
common stock by the debenture holders on or before February 13, 1995 at a
conversion price of $25.33 per share.
Common stockholders' equity as a percentage of total capitalization was
48.4% and 48.5% at December 31, 1994 and 1993, respectively. If all of
the 6% convertible debentures discusssed in the preceding paragraph had
been converted into common stock at December 31, 1994, common
stockholders' equity as a percentage of total capitalization would have
been 57.0%.
REGULATION AND COMPETITION
The majority of the Company's telephone operations are regulated
extensively by various state regulatory agencies and by the FCC.
Primarily as a result of legislative, regulatory and technological
changes, competition has been introduced and encouraged in certain sectors
of the telephone industry. It is expected that upcoming legislation will
address the telecommunications industry and that regulation will decrease
and competition increase in the traditionally monopolistic portions of the
industry. While competition is not new to the Company's cellular
operations, the competitive environment for the cellular industry is also
experiencing change.
Recent Events Affecting the Company
Revenues from the USF increased approximately $9.7 million to $36.3
million during 1994 after increasing $6.2 million during 1993. In 1994
the FCC sought public comment on the effectiveness of high cost assistance
programs provided to LECs, including the USF. In addition, certain bills
recently considered by the United States Congress have sought changes to
Federal high cost assistance programs. Although there is no assurance
39
that the current level of cost recovery from such programs will be
maintained, it is anticipated that mechanisms for high cost assistance
will continue to be provided.
In 1993 the Public Service Commission of Wisconsin ("PSCW") ordered the
Wisconsin state support fund existing at July 1, 1993 to be phased-out.
Certain of the Company's subsidiaries affected by the order have received
approval from the PSCW for increased local rates and other compensation
which offset the loss of the amounts that the Company's subsidiaries had
been receiving from the state support fund. In addition, the PSCW is
conducting an examination of transactions in which Century and its service
subsidiaries provided to the Company's Wisconsin telephone subsidiaries
various services and materials, including supplies and managerial,
technical and accounting services. While this examination may result in
refunds to customers, the Company does not believe that results of
operations will be materially affected.
In July 1994 the Wisconsin Telecommunications Act of 1993 was signed
into law. Among other things, the act requires the PSCW to authorize
cable television operators to provide local exchange service in larger
markets, including one of the Company's markets. Although no cable
television operator has requested authorization from the PSCW to provide
local exchange service in the Company's market, the Company anticipates
that such a request will be forthcoming. During 1994 certain other states
in which the Company operates took legislative and/or regulatory steps to
further introduce competition into the LEC business.
After initiating an informal earnings review during 1993 of all
independent local exchange carriers in Louisiana, the Louisiana Public
Service Commission ("LPSC") recently docketed a formal earnings review of
such carriers which could possibly lead to a reduction in earnings. As
19% of the Company's telephone access lines are in Louisiana, there is no
assurance that the impact of possible changes resulting from such review
will not have a material effect on future results of operations.
Certain long distance carriers continue to request that the Company
reduce intrastate access tariffed rates for certain of its telephone
subsidiaries. In March 1994 a major long distance carrier filed a
petition with the LPSC requesting that the commission investigate and
lower the rates for intrastate access charges charged to long distance
carriers by certain local exchange telephone companies, including the
Company's Louisiana subsidiaries. There is no assurance that these
requests will not result in reduced intrastate access revenues.
Events Affecting the Telecommunications Industry
The telecommunications industry is currently undergoing various
regulatory, competitive and technological changes that make it impossible
to determine the form or degree of future regulation and competition
affecting the Company's telephone and mobile communications operations.
The FCC and a number of state regulatory commissions have begun to reduce
the regulatory oversight of LECs. Coincident with this movement toward
reduced regulation is the introduction and encouragement of local exchange
40
competition by the FCC, various state regulatory commissions and others.
These changes have accelerated the growth of certain companies providing
competitive access and other services that compete with LECs' services and
led to the announcement by certain interexchange carriers and cable
television companies of their desire to enter the local telephone
business, particularly in larger markets. Wireless telephone services are
also expected to increasingly compete with LECs. The FCC has recently
allocated additional frequency spectrum for mobile communications
technologies that will or may be competitive with cellular, including PCS
(for which the FCC began to auction operating licenses in late 1994) and
mobile satellite services. The FCC has also authorized certain
specialized mobile radio service licensees to configure their systems so
as to operate in a manner similar to cellular systems. Some of these
licensees have announced their intention to create a nationwide mobile
communications system to compete with cellular systems. In addition, in
connection with the well-publicized convergence of telecommunications,
cable, video, computer and other technologies, several large companies
have recently announced plans to offer products that would significantly
enhance current communications and data transmission services and, in some
instances, introduce new two-way video, entertainment, data, consumer and
other multimedia services.
In 1994 the United States House of Representatives passed two
telecommunications bills that proposed to substantially alter the
regulatory framework of the telecommunications industry by, among other
things, promoting local exchange competition and removing certain barriers
of entry to several lines of telecommunications businesses. A companion
bill failed to pass in the United States Senate. Legislation is expected
to be considered in 1995 that, among other things, will promote
competition and deregulation to a greater degree than the bills that
passed the House in 1994.
Competition to provide local exchange and access services is expected
to initially affect large urban areas to a greater extent than rural,
suburban and small urban areas such as those in which the Company's
telephone operations are located. The same expectation applies to
emerging competitive wireless technologies and the development of new
multimedia services. The Company does not believe such competition is
likely to materially affect it in the near term. The Company further
believes that it may benefit from having the opportunity to observe the
effects of these developments in large urban markets. The Company will
continue to monitor the ongoing changes in regulation, competition and
technology and consider which developments provide the most favorable
opportunities for the Company to pursue.
Other Matters
The Company's regulated telephone operations are subject to the
provisions of Statement of Financial Accounting Standards No. 71 ("SFAS
71"), "Accounting for the Effects of Certain Types of Regulation," under
which the Company is required to account for the economic effects of the
rate-making process, including the recognition of depreciation of plant
and equipment over lives approved by regulators. The ongoing
applicability of SFAS 71 to the Company's regulated telephone operations
is being monitored due to the
41
changing regulatory, competitive and legislative environments. Should the
regulated operations of the Company no longer qualify for the application of
SFAS 71 at some future date, the required accounting impact, the amount of
which has not been determined, would result in a material, extraordinary,
noncash charge against earnings. See Note 14 of Notes to Consolidated
Financial Statements for additional information.
The Company has certain obligations based on federal, state and local
laws relating to the protection of the environment. Costs of compliance
through 1994 have not been material and the Company currently has no
reason to believe that such costs will become material.
42
Item 8. Financial Statements and Supplementary Data
Report of Management
--------------------
To the Shareholders of
Century Telephone Enterprises, Inc.:
Management has prepared and is responsible for the Company's
consolidated financial statements. The consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles and necessarily include amounts determined using our best
judgments and estimates with consideration given to materiality.
The Company maintains internal control systems and related policies and
procedures designed to provide reasonable assurance that the accounting
records accurately reflect business transactions and that the transactions
are in accordance with management's authorization. The design, monitoring
and revision of the systems of internal control involve, among other
things, our judgment with respect to the relative cost and expected
benefits of specific control measures. Additionally, the Company
maintains an internal auditing function which independently evaluates the
effectiveness of internal controls, policies and procedures and formally
reports on the adequacy and effectiveness thereof.
The Company's consolidated financial statements have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, who have
expressed their opinion with respect to the fairness of the consolidated
financial statements. Their audit was conducted in accordance with
generally accepted auditing standards, which includes the consideration of
the Company's internal controls to the extent necessary to form an
independent opinion on the consolidated financial statements prepared by
management.
The Audit Committee of the Board of Directors is composed of directors
who are not officers or employees of the Company. The Committee meets
periodically with the independent certified public accountants, internal
auditors and management. The Committee considers the audit scope and
discusses internal control, financial and reporting matters. Both the
independent and internal auditors have free access to the Committee.
/s/ R. Stewart Ewing, Jr.
R. Stewart Ewing, Jr.
Senior Vice President and Chief Financial Officer
43
Independent Auditors' Report
----------------------------
The Board of Directors
Century Telephone Enterprises, Inc.:
We have audited the consolidated financial statements of Century
Telephone Enterprises, Inc. and subsidiaries as listed in Item 14a(i). In
connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as listed in Item
14a(ii). These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Century Telephone Enterprises, Inc. and subsidiaries as of December 31,
1994 and 1993, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
As discussed in notes 1 and 9 to the consolidated financial statements,
the Company adopted Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," and
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," in 1992.
/s/ KPMG Peat Marwick LLP
Shreveport, Louisiana
February 6, 1995
44
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Statements of Income
Year ended December 31,
======================================================================
1994 1993 1992
----------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Telephone $ 389,438 348,485 297,510
Mobile Communications 150,802 84,712 62,092
----------------------------------------------------------------------
Total revenues 540,240 433,197 359,602
----------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and
operating expenses 276,375 231,855 187,076
Depreciation and amortization 94,430 76,534 62,898
----------------------------------------------------------------------
Total expenses 370,805 308,389 249,974
----------------------------------------------------------------------
OPERATING INCOME 169,435 124,808 109,628
----------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (42,577) (30,149) (27,166)
Income from unconsolidated
cellular entities 15,698 6,626 1,692
Gain on sales of assets 15,877 1,661 3,985
Other income and expense 3,105 3,310 4,433
----------------------------------------------------------------------
Total other income (expense) (7,897) (18,552) (17,056)
----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 161,538 106,256 92,572
Income tax expense 61,300 37,252 32,599
----------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES 100,238 69,004 59,973
Cumulative effect of changes
in accounting principles - - (15,668)
----------------------------------------------------------------------
NET INCOME $ 100,238 69,004 44,305
======================================================================
PRIMARY EARNINGS PER SHARE :
Before cumulative effect of
changes in accounting
principles $ 1.88 1.35 1.23
Cumulative effect of changes
in accounting principles - - (.32)
----------------------------------------------------------------------
PRIMARY EARNINGS PER SHARE $ 1.88 1.35 .91
======================================================================
FULLY DILUTED EARNINGS PER SHARE :
Before cumulative effect of
changes in accounting
principles $ 1.80 1.32 1.22
Cumulative effect of changes
in accounting principles - - (.31)
----------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE $ 1.80 1.32 .91
======================================================================
DIVIDENDS PER COMMON SHARE $ .320 .310 .293
======================================================================
See accompanying notes to consolidated financial statements.
45
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Balance Sheets
December 31,
==========================================================================
1994 1993
--------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,154 9,777
Accounts receivable
Customers, less allowance for doubtful
accounts of $2,360 and $1,473 40,824 34,438
Other 23,180 21,771
Materials and supplies, at average cost 7,090 4,418
Other 2,980 2,068
--------------------------------------------------------------------------
Total current assets 81,228 72,472
--------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 947,131 827,776
--------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired,
less accumulated amortization
of $40,756 and $29,253 441,436 297,158
Other 173,458 121,984
--------------------------------------------------------------------------
Total investments and other assets 614,894 419,142
--------------------------------------------------------------------------
TOTAL ASSETS $1,643,253 1,319,390
==========================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 12,718 14,233
Notes payable to banks 158,000 165,700
Accounts payable 52,331 49,506
Accrued expenses and other current liabilities
Salaries and benefits 17,884 15,990
Taxes 16,530 9,327
Interest 8,243 6,476
Other 9,237 5,162
Advance billings and customer deposits 11,725 9,312
--------------------------------------------------------------------------
Total current liabilities 286,668 275,706
--------------------------------------------------------------------------
LONG-TERM DEBT 518,603 364,433
--------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 187,746 165,483
--------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
100,000,000 shares, issued and outstanding
53,574,361 and 51,294,705 shares 53,574 51,295
Paid-in capital 319,235 262,294
Retained earnings 291,999 208,945
Unearned ESOP shares (16,840) (9,220)
Preferred stock - non-redeemable 2,268 454
--------------------------------------------------------------------------
Total stockholders' equity 650,236 513,768
--------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $1,643,253 1,319,390
==========================================================================
See accompanying notes to consolidated financial statements.
46
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
=========================================================================
1994 1993 1992
-------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 100,238 69,004 44,305
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 103,591 85,209 70,367
Cumulative effect of changes in
accounting principles - - 15,668
Income from unconsolidated
cellular entities (15,698) (6,626) (1,692)
Deferred income taxes 7,423 6,781 (1,427)
Gain on sales of assets (15,877) (1,661) (3,985)
Changes in current assets and
current liabilities:
Increase in accounts receivable (1,581) (7,026) (2,307)
Increase (decrease) in accounts
payable (2,383) 11,024 11,694
Increase (decrease) in other
accrued taxes 8,347 (1,476) 3,115
Changes in other current assets and
other current liabilities, net 6,543 2,135 7,434
Increase in other noncurrent liabilities 7,469 8,536 148
Other, net 1,732 854 3,004
-------------------------------------------------------------------------
Net cash provided by
operating activities 199,804 166,754 146,324
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for property, plant and equipment (200,776) (204,229) (140,057)
Acquisitions, net of cash acquired (55,979) (37,116) (134,999)
Note receivable (25,000) - -
Investments in unconsolidated
cellular entities (5,516) (3,605) (2,161)
Distributions from unconsolidated
cellular entities 5,969 1,587 395
Proceeds from sales of assets 10,475 - 5,049
Purchase of life insurance investment (7,664) (7,670) (6,160)
Other, net (1,764) 2,361 6,771
-------------------------------------------------------------------------
Net cash used in investing
activities (280,255) (248,672) (271,162)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 155,427 35,847 142,081
Payments of long-term debt (59,792) (32,564) (25,246)
Notes payable, net (7,700) 88,285 13,115
Proceeds from issuance of common stock 4,814 3,529 8,776
Cash dividends paid (17,184) (15,735) (14,119)
Other, net 2,263 2,562 (1,636)
-------------------------------------------------------------------------
Net cash provided by
financing activities 77,828 81,924 122,971
-------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,623) 6 (1,867)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 9,777 9,771 11,638
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,154 9,777 9,771
=========================================================================
See accompanying notes to consolidated financial statements.
47
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Statements of Stockholders' Equity
Preferred
Total Stock
Common Stock- Unearned Non-
Shares holders' Common Paid-in Retained ESOP redeem-
Outstanding Equity Stock Capital Earnings Shares able
===========================================================================================
(Dollars in thousands)
31,364,872 BALANCES, DECEMBER 31, 1991 $319,977 31,365 175,648 125,490 (12,980) 454
- Net income 44,305 - - 44,305 - -
Issuance of common stock
through dividend
reinvestment, incentive
490,275 and benefit plans 8,777 490 8,287 - - -
Issuance of common stock for
978,115 acquisitions 21,475 978 20,497 - - -
Amortization of unearned
- compensation and other 3,154 - 3,154 - - -
16,063,614 Three-for-two stock split - 16,064 (16,064) - - -
- Release of ESOP shares 1,880 - - - 1,880 -
Common stock dividends -
- $.293 per share (14,087) - - (14,087) - -
- Preferred stock dividends (32) - - (32) - -
-----------------------------------------------------------------------------------------
48,896,876 BALANCES, DECEMBER 31, 1992 385,449 48,897 191,522 155,676 (11,100) 454
- Net income 69,004 - - 69,004 - -
Issuance of common stock
through dividend
reinvestment, incentive
214,954 and benefit plans 3,529 215 3,314 - - -
Issuance of common stock for
2,182,875 acquisitions 68,172 2,183 65,989 - - -
Amortization of unearned
- compensation and other 1,469 - 1,469 - - -
- Release of ESOP shares 1,880 - - - 1,880 -
Common stock dividends -
- $.310 per share (15,703) - - (15,703) - -
- Preferred stock dividends (32) - - (32) - -
-----------------------------------------------------------------------------------------
51,294,705 BALANCES, DECEMBER 31, 1993 513,768 51,295 262,294 208,945 (9,220) 454
- Net income 100,238 - - 100,238 - -
Issuance of common stock
through dividend
reinvestment, incentive
276,657 and benefit plans 4,814 277 4,537 - - -
Issuance of preferred stock
- for acquisition 1,875 - - - - 1,875
Issuance of common stock for
2,000,578 acquisitions 52,311 2,000 50,311 - - -
Conversion of preferred stock
2,421 to common stock - 2 59 - - (61)
Amortization of unearned
- compensation and other 2,034 - 2,034 - - -
- Release of ESOP shares 2,380 - - - 2,380 -
- Commitment to ESOP (10,000) - - - (10,000) -
Common stock dividends -
- $.320 per share (17,084) - - (17,084) - -
- Preferred stock dividends (100) - - (100) - -
-----------------------------------------------------------------------------------------
53,574,361 BALANCES, DECEMBER 31, 1994 $650,236 53,574 319,235 291,999 (16,840) 2,268
=========================================================================================
See accompanying notes to consolidated financial statements.
48
CENTURY TELEPHONE ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 31, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements of
Century Telephone Enterprises, Inc. and subsidiaries (the "Company")
include the accounts of Century Telephone Enterprises, Inc. ("Century")
and its majority-owned subsidiaries and partnerships. The Company's
regulated telephone operations are subject to the provisions of Statement
of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting for the
Effects of Certain Types of Regulation." Investments in cellular entities
where the Company does not own a majority interest are accounted for using
the equity method of accounting.
Revenue recognition - Revenues are recognized when earned. Certain of the
Company's telephone subsidiaries participate in revenue pools with other
telephone companies for interstate revenue and for certain intrastate
revenue. Such pools are funded by toll revenue and/or access charges
within state jurisdictions and by access charges in the interstate market.
Revenues earned through the various pooling processes are initially
recorded based on the Company's estimates.
Property, plant and equipment - Telephone plant is stated substantially at
original cost of construction. Normal retirements of telephone property
are charged against accumulated depreciation, along with the costs of
removal, less salvage, with no gain or loss recognized. Renewals and
betterments of plant and equipment are capitalized while repairs, as well
as renewals of minor items, are charged to operating expense.
Depreciation of telephone properties is provided on the straight line
method, using class or overall composite rates acceptable to the
regulatory authorities.
Non-telephone property is stated at cost and, when sold or retired, a
gain or loss is recognized. Depreciation of such property is provided on
the straight line method over estimated service lives ranging from three
to thirty years.
Excess cost of net assets acquired - The excess cost of net assets
acquired of substantially all of the Company's acquisitions accounted for
as purchases (goodwill) is being amortized over forty years. The carrying
value of goodwill is reviewed for impairment at least annually, or
whenever events or changes in circumstances indicate that such carrying
value may not be recoverable, by assessing the recoverability of such
carrying value through estimated undiscounted future net cash flows.
49
Affiliated transactions - Certain service subsidiaries of Century provide
installation and maintenance services, materials and supplies, and
managerial, technical and accounting services to subsidiaries. In
addition, Century provides and bills management services to subsidiaries
and in certain instances makes interest bearing advances to finance
construction of plant and purchases of equipment. These purchases are
recorded by the Company's telephone subsidiaries at their cost to the
extent permitted by regulatory authorities. Intercompany profit on
transactions with regulated affiliates is limited to a reasonable return
on investment and has not been eliminated. Intercompany profit on
transactions with nonregulated affiliates has been eliminated.
Income taxes - Century files a consolidated federal income tax return with
its eligible subsidiaries. The Company uses the asset and liability
method of accounting for income taxes under which deferred tax assets and
liabilities are established for the future tax consequences attributable
to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Investment tax credits
related to telephone plant have been deferred and are being amortized as a
reduction of federal income tax expense over the estimated useful lives of
the assets giving rise to the credits.
The Company adopted Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting For Income Taxes," as of January 1, 1992 and
reported an unfavorable $913,000 cumulative effect of the change in the
method of accounting for income taxes in the 1992 consolidated statement
of income.
Earnings per share - Primary earnings per share amounts are determined on
the basis of the weighted average number of common shares and common stock
equivalents outstanding during the year. The number of shares used in
computing primary earnings per share was 53.4 million in 1994, 51.2
million in 1993, and 48.5 million in 1992.
Fully diluted earnings per share amounts give further effect to
convertible securities, primarily Century's convertible debentures, which
are not common stock equivalents. For the computation of fully diluted
earnings per share for 1992, the debentures were excluded as their
inclusion would have been anti-dilutive. The number of shares used in
computing fully diluted earnings per share was 58.1 million, 55.9 million
and 48.7 million in 1994, 1993 and 1992, respectively. The number of
shares used in computing fully diluted earnings per share before the
cumulative effect of changes in accounting principles in 1992 was 52.8
million.
Cash equivalents - The Company considers short-term investments with a
maturity at date of purchase of three months or less to be cash
equivalents.
50
Reclassifications - Certain amounts previously reported for prior years
have been reclassified to conform with the 1994 presentation.
(2) PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at December 31, 1994 and 1993 was
composed of the following:
December 31, 1994 1993
==========================================================================
(Dollars in thousands)
Telephone, at original cost
Cable and wire $ 580,012 512,240
Central office 310,684 281,123
General support 91,722 85,303
Information origination/termination 21,478 36,925
Construction in progress 67,244 53,838
Other 5,356 10,020
--------------------------------------------------------------------------
1,076,496 979,449
Accumulated depreciation (295,255) (288,479)
--------------------------------------------------------------------------
781,241 690,970
--------------------------------------------------------------------------
Mobile Communications, at cost
Cell site 104,553 81,528
General support 34,235 22,974
Pagers - 3,166
Construction in progress 12,602 2,192
Other 915 3,392
--------------------------------------------------------------------------
152,305 113,252
Accumulated depreciation (38,552) (27,736)
--------------------------------------------------------------------------
113,753 85,516
--------------------------------------------------------------------------
Other, at cost
General support 81,932 77,011
Other 3,474 726
--------------------------------------------------------------------------
85,406 77,737
Accumulated depreciation (33,269) (26,447)
--------------------------------------------------------------------------
52,137 51,290
--------------------------------------------------------------------------
Net property, plant and equipment $ 947,131 827,776
==========================================================================
Depreciation expense was $92.1 million, $78.0 million and $64.3 million
in 1994, 1993 and 1992, respectively. The composite depreciation rate for
telephone properties was 7.1%, 7.1% and 6.6% for 1994, 1993 and 1992,
respectively.
51
(3) LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1993 was composed of the
following:
December 31, 1994 1993
==========================================================================
(Dollars in thousands)
Century
6.0% convertible debentures, due 2007 $ 115,000 115,000
8.25% senior notes, due 2024 100,000 -
9.4%* senior notes, due through 2004 65,000 69,600
7.75% senior notes, due 2004 50,000 -
7.2%* Employee Stock Ownership
Plan commitment, due in installments
through 2004 16,840 9,220
10.7%* notes, due in installments through 2006 975 1,245
--------------------------------------------------------------------------
Total Century 347,815 195,065
--------------------------------------------------------------------------
Subsidiaries
First mortgage debt
5.8%* notes, payable to agencies of the
United States government and cooperative
lending associations, due in
installments through 2026 166,175 158,998
7.4%* bonds, due in installments through 2002 7,094 11,699
Other debt
9.0%* notes, due in installments through 2020 8,632 8,633
7.8%* capital lease obligations, due in
installments through 1997 1,605 4,271
--------------------------------------------------------------------------
Total subsidiaries 183,506 183,601
--------------------------------------------------------------------------
Total long-term debt 531,321 378,666
Less current maturities 12,718 14,233
--------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 518,603 364,433
==========================================================================
* weighted average interest rate at December 31, 1994
The approximate annual debt maturities (including sinking fund
requirements) for the five years subsequent to December 31, 1994 are as
follows: 1995 - $12.7 million; 1996 - $43.7 million; 1997 - $13.6 million;
1998 - $11.4 million; and 1999 - $11.0 million.
The 6% convertible debentures are convertible into Century common stock
at a conversion price of $25.33 per share and may be redeemed by Century
on or after February 1, 1995 subject to a declining premium schedule. As
discussed in Note 20, Century has called the debentures for redemption at
a redemption price of 104.2% of principal.
52
During the first quarter of 1994, Century filed a shelf registration
statement registering $400.0 million of senior unsecured debt securities
under which, in May 1994, Century issued $50.0 million of 10-year, 7.75%
senior notes and $100.0 million of 30-year, 8.25% senior notes. The
proceeds were used to reduce certain of the Company's short-term bank
indebtedness. Interest payments are due semi-annually and principal
payments are due in 2004 and 2024 upon maturity of the 10-year and 30-year
notes, respectively. The 30-year notes may be redeemed by Century on or
after May 1, 2004 subject to a premium schedule which declines from
103.62% as of May 1, 2004 to 100% as of May 1, 2014.
The Company's loan agreements contain various restrictions, among which
are limitations regarding issuance of additional debt, payment of cash
dividends, reacquisition of the Company's capital stock and other matters.
At December 31, 1994, all of the consolidated retained earnings reflected
on the balance sheet was available for the declaration of dividends.
The transfer of funds from certain consolidated subsidiaries to Century
is restricted by various loan agreements. Subsidiaries which have loans
from government agencies and cooperative lending associations, or have
issued first mortgage bonds, generally may not loan or advance any funds
to Century, but may pay dividends if certain financial ratios are met. At
December 31, 1994, restricted net assets of subsidiaries were $140.1
million. Subsidiaries' retained earnings in excess of amounts restricted
by debt covenants totaled $355.2 million.
Substantially all of the Company's telephone property, plant and
equipment is pledged to secure the long-term debt of subsidiaries.
At December 31, 1994 and 1993, Century had in place certain long-term
credit facilities more fully discussed in Note 5. Borrowings totaling
$96.5 million under such facilities at December 31, 1993 which were
classified as "Long-term debt" in previously issued financial statements
have been reclassified to "Notes payable to banks" due to subjective
acceleration clauses included in the facilities.
Century's telephone subsidiaries had approximately $124.0 million in
commitments for long-term financing from the Rural Utilities Service
available at December 31, 1994. Approximately $93.1 million of additional
borrowings, of which $28.0 million were under uncommitted facilities, were
available to the Company through lines of credit with various banks. In
addition, Century had $250.0 million of senior unsecured debt securities
under the 1994 shelf registration statement which had not been issued.
53
(4) INVESTMENTS AND OTHER ASSETS
Investments and other assets at December 31, 1994 and 1993 were
composed of the following:
December 31, 1994 1993
=========================================================================
(Dollars in thousands)
Excess cost of net assets acquired,
less accumulated amortization $ 441,436 297,158
Investments in unconsolidated cellular entities 59,360 41,983
Cash surrender value of life insurance contracts 47,637 38,642
Note receivable, less current portion 24,167 -
Marketable equity securities 8,478 8,478
Other 33,816 32,881
--------------------------------------------------------------------------
$ 614,894 419,142
==========================================================================
Goodwill amortization of $10.6 million, $6.2 million and $5.0 million
for 1994, 1993 and 1992, respectively, is included in "Depreciation and
amortization."
In 1994 Century loaned an unaffiliated telephone holding company $25.0
million. The loan bears interest at prime plus 1.5%; interest is due
quarterly. Quarterly principal payments are scheduled to begin in August
1995 with the unpaid balance becoming due in May 1998. The loan is
collateralized by security interests in the capital stock of the holding
company and a subsidiary and by a guaranty from such company's principal
stockholder. In connection with the loan, Century obtained first refusal
rights to acquire certain properties under various specified circumstances.
For additional information, see the second paragraph of Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Investing Activities.
(5) REVOLVING CREDIT FACILITIES
At December 31, 1994 and 1993, Century had in place certain long-term
credit facilities, including a $50.0 million line of credit (two-year
revolver which expires in January 1996, convertible to a five-year term
loan) with interest at the rate chosen by the Company based on a number of
interest rate options and a $55.0 million line of credit (multi-year
revolving credit facility which expires in January 1998) with similar
interest rate options. Borrowings under such facilities are included in
"Notes payable to banks" on the accompanying balance sheets. The
facilities can be withdrawn by the lenders only upon an event of default as
defined in the respective agreements. The weighted average interest rate
for notes payable to banks was 6.5% and 3.9% as of December 31, 1994 and
1993, respectively. See Note 3 for additional information.
54
(6) STOCKHOLDERS' EQUITY
Common stock - At December 31, 1994, unissued shares of Century common
stock were reserved as follows:
Number of shares
===================================================================
(In thousands)
Conversion of convertible debentures 4,540
Stock option plans 2,781
Acquisitions 1,178
Employee stock purchase plan 506
Dividend reinvestment plan 291
Conversion of convertible preferred stock 193
Other employee benefit plans 1,262
-------------------------------------------------------------------
10,751
===================================================================
Under Century's Articles of Incorporation each share of common stock
beneficially owned continuously by the same person since May 30, 1987
generally entitles the holder thereof to ten votes per share. All other
shares entitle the holder to one vote per share. At December 31, 1994,
8.9 million shares of common stock were entitled to ten votes per share.
Preferred stock - As of December 31, 1994, Century had 2.0 million shares
of preferred stock, $25 par value per share, authorized. At December 31,
1994 and 1993 there were 90,707 and 18,162, respectively, shares of
outstanding preferred stock. Holders of currently outstanding Century
preferred stock are entitled to (i) receive cumulative dividends, (ii)
receive preferential distributions equal to $25 per share plus unpaid
dividends upon Century's liquidation and (iii) vote as a single class with
the common stock. At December 31, 1994 and 1993, 4,260 shares of Century
preferred stock were redeemable at the option of the Company.
Shareholders' Rights Plan - In 1986 the Board of Directors declared a
dividend of one preferred stock purchase right for each common share
outstanding or that shall become outstanding prior to November 26, 1996.
With certain exceptions, if a person or group acquires beneficial
ownership of 15% or more of Century common shares or commences a tender or
exchange offer which upon consummation would result in ownership of 30% or
more of the common shares, each right held by shareholders, other than
such person or group, may be exercised to buy (i) eight twenty-sevenths of
one one-hundredth of a share of Series AA Junior Participating Preferred
Stock of Century at a price of $85 per one one-hundredth of a share or
(ii) in lieu thereof, subject to certain restrictions, the number of
shares of Century common stock having a market value equal to two times
such purchase price. The rights, which do not have voting rights, expire
on November 27, 1996 and may be redeemed by Century at a price of $.05 per
right at any time before they become exercisable. If, at any time the
rights are exercisable, Century is a party to a merger or other business
combination or certain other transactions occur, each right will entitle
its holder to purchase at the exercise price of the right a number of
shares of common stock of the surviving company having a fair market value
of two times the exercise price of the right.
55
At December 31, 1994, 162,000 shares of Series AA Junior Participating
Preferred Stock were reserved for issuance under the Rights Plan.
(7) DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 1994 and 1993
were composed of the following:
December 31, 1994 1993
==========================================================================
(Dollars in thousands)
Deferred federal and state income taxes $ 73,966 60,122
Accrued postretirement benefit costs 41,126 36,642
Regulatory liability - income taxes 31,278 36,111
Minority interest 22,585 10,504
Deferred investment tax credits 8,175 10,431
Other 10,616 11,673
--------------------------------------------------------------------------
$187,746 165,483
==========================================================================
(8) INCOME TAXES
Income tax expense for the years ended December 31, 1994, 1993 and 1992
was allocated as follows:
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands)
Income before cumulative effect of
changes in accounting principles $ 61,300 37,252 32,599
Cumulative effect of changes in
accounting principles - - (8,272)
--------------------------------------------------------------------------
Net tax expense in the consolidated
statements of income 61,300 37,252 24,327
Stockholders' equity, primarily for compensation
expense for tax purposes in excess of amounts
recognized for financial reporting purposes (1,243) (800) (2,885)
--------------------------------------------------------------------------
$ 60,057 36,452 21,442
==========================================================================
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1993 were as follows:
December 31, 1994 1993
=========================================================================
(Dollars in thousands)
Deferred tax assets:
Postretirement benefit costs $ 12,908 10,809
Net operating loss carryforwards of
an acquired subsidiary 10,283 -
Regulatory liability 10,948 12,011
Deferred compensation 2,676 2,522
Deferred investment tax credits 2,658 3,465
Other employee benefits 4,205 3,842
Other 2,556 630
-------------------------------------------------------------------------
Total gross deferred tax assets 46,234 33,279
Less valuation allowance (10,283) -
-------------------------------------------------------------------------
Net deferred tax assets 35,951 33,279
-------------------------------------------------------------------------
56
Deferred tax liabilities:
Property, plant and equipment, primarily due
to depreciation differences (97,073) (84,159)
Intercompany profits (3,497) (3,236)
Other (9,347) (6,006)
-------------------------------------------------------------------------
Total gross deferred tax liabilities (109,917) (93,401)
-------------------------------------------------------------------------
Net deferred tax liability $(73,966) (60,122)
=========================================================================
As a result of the acquisition of Celutel, Inc. ("Celutel") (see Note
16) the Company has $29.4 million of net operating loss carryforwards at
December 31, 1994 which relate to various entities acquired. The yearly
utilization of such loss carryforwards is limited to separate entity
taxable income; the loss carryforwards are further limited by certain
Internal Revenue Code regulations. Subsequently recognized tax benefits
applicable to the net operating loss carryforwards will reduce excess cost
of net assets acquired. The net operating loss carryforwards expire
between 2002 and 2008.
Income tax expense attributable to income before cumulative effect of
changes in accounting principles was as follows:
Year ended December 31, 1994 1993 1992
=========================================================================
(Dollars in thousands)
Federal
Current $ 47,969 26,409 29,100
Deferred 5,703 6,133 (1,742)
State
Current 5,908 4,062 4,926
Deferred 1,720 648 315
-------------------------------------------------------------------------
$ 61,300 37,252 32,599
=========================================================================
The following is a reconciliation from the statutory federal income tax
rate to the Company's effective income tax rate:
Year ended December 31, 1994 1993 1992
==========================================================================
(Percentage of pre-tax income)
Statutory federal income tax rate 35.0% 35.0 34.0
State income taxes, net of federal
income tax benefit 3.0 2.9 3.7
Amortization of nondeductible excess
cost of net assets acquired 2.1 1.2 2.0
Amortization of investment tax credits (1.4) (2.0) (2.3)
Amortization of regulatory liability (1.2) (1.8) (2.6)
Other, net .4 (.2) .4
--------------------------------------------------------------------------
Effective income tax rate 37.9% 35.1 35.2
==========================================================================
57
(9) POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company sponsors defined benefit health care plans that provide
postretirement medical, life and dental benefits to substantially all
retired full-time employees.
The Company adopted Statement of Financial Accounting Standards No. 106
("SFAS 106"), "Employers' Accounting for Postretirement Benefits Other
Than Pensions," as of January 1, 1992 and elected immediate recognition of
the transition obligation. In accordance with the provisions of SFAS 71
the Company deferred $3.5 million of the $27.4 million transition
obligation as a regulatory asset; such costs are being expensed in
connection with recovery through the rate-making process. The remaining
$23.9 million, net of tax benefits which aggregated $9.2 million, was
reported as the cumulative effect of a change in accounting principle.
Net periodic postretirement benefit cost for 1994, 1993 and 1992
included the following components:
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands)
Service cost $ 2,007 1,640 1,040
Interest cost 3,473 3,008 2,521
Amortization of unrecognized actuarial losses 447 365 -
Amortization of unrecognized prior service cost 121 86 -
--------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 6,048 5,099 3,561
==========================================================================
The following table sets forth the amounts recognized as liabilities
for postretirement benefits in the Company's consolidated balance sheets
at December 31, 1994 and 1993.
December 31, 1994 1993
==========================================================================
(Dollars in thousands)
Accumulated postretirement benefit obligation:
Retirees and retirees' dependents $ 19,079 20,451
Fully eligible active plan participants 8,300 6,753
Other active plan participants 16,430 18,555
--------------------------------------------------------------------------
Accumulated postretirement benefit obligation 43,809 45,759
Plan assets - -
Unrecognized prior service cost (1,546) (1,177)
Unrecognized net gain (loss) 173 (6,630)
--------------------------------------------------------------------------
Accrued postretirement benefit costs $ 42,436 37,952
==========================================================================
For calculation purposes, a 7% health care cost rate was assumed for
1995 through 1997; the rate was assumed to decrease to 6% thereafter. If
the assumed health care cost trend rate had been increased by one
percentage point in each year, the accumulated postretirement benefit
obligation as of December 31, 1994 would have increased $7.5 million and
the net periodic postretirement benefit cost for the year ended December
31, 1994 would have increased $694,000.
58
The discount rates used in determining the accumulated postretirement
benefit obligation as of December 31, 1994 and 1993 were 8.5% and 7%,
respectively.
In the first quarter of 1994 the Company adopted Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), "Employers' Accounting for
Postemployment Benefits." Liabilities for postemployment benefits in the
consolidated balance sheet as of December 31, 1993 were not materially
different than those required by SFAS 112; therefore, no cumulative effect
of change in accounting principle was recorded upon adoption of SFAS 112.
(10) STOCK OPTION AND INCENTIVE PROGRAMS
Century currently has two incentive compensation programs which allow
the Board of Directors, through the Compensation Committee, to grant
incentives to employees in any one or a combination of the following
forms: incentive stock options and non-qualified stock options; stock
awards; restricted stock; performance shares; and cash awards.
Stock option transactions during 1992, 1993 and 1994 were as follows:
Number Average
of options price
========================================================================
Outstanding December 31, 1991 1,988,628 $ 14.31
Exercised (516,398) 8.97
Granted at market price 960,639 27.67
--------------------------------------------------------
Outstanding December 31, 1992 2,432,869 20.72
Exercised (51,120) 9.90
--------------------------------------------------------
Outstanding December 31, 1993 2,381,749 20.96
Exercised (139,282) 11.10
Granted at market price 31,000 26.25
--------------------------------------------------------
Outstanding December 31, 1994 2,273,467 21.63
========================================================
Exercisable December 31, 1993 2,135,265 20.89
========================================================
Exercisable December 31, 1994 2,143,873 21.57
========================================================
All of the options expire ten years after the date of grant. As of
December 31, 1994, Century has reserved 2.8 million shares of common stock
which may be issued under the two incentive compensation programs.
59
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of certain of the Company's financial instruments at December 31,
1994 and 1993.
Carrying Fair
amount value
===========================================================================
(Dollars in thousands)
December 31, 1994
---------------------------------------------------------------------------
Financial assets:
Investments
Note receivable (including current portion) $ 25,000 25,000 (1)
Marketable equity securities $ 8,478 10,127 (2)
Other $ 9,069 9,069 (1)
Financial liabilities:
Long-term debt (including current maturities) $531,321 520,151 (3)
---------------------------------------------------------------------------
December 31, 1993
---------------------------------------------------------------------------
Financial assets:
Investments
Marketable equity securities $ 8,478 11,444 (2)
Other $ 9,039 9,039 (1)
Financial liabilities:
Long-term debt (including current maturities) $378,666 406,612 (3)
===========================================================================
(1) Fair value was estimated by the Company.
(2) Fair value was based on quoted market prices.
(3) Fair value was estimated by discounting the scheduled payment streams
to present value based upon rates currently offered to the Company
for similar debt.
Cash and cash equivalents, accounts receivable, accounts payable and notes
payable to banks - The carrying amount approximates the fair value due to
the short maturity of these instruments.
(12) SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest of $40.8 million, $30.1 million and $24.0
million during 1994, 1993 and 1992, respectively. Income taxes paid were
$41.3 million in 1994, $37.1 million in 1993, and $30.5 million in 1992.
Century has consummated the acquisition of various telephone and
cellular operations, along with certain other assets, during the three
years ended December 31, 1994. In connection with these acquisitions, the
following assets were acquired, liabilities assumed and common and
preferred stock issued:
60
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands)
Property, plant and equipment $ 11,301 33,020 67,514
Excess cost of net assets acquired 152,239 85,251 113,913
Investment in unconsolidated
cellular entities - 7,508 -
Long-term debt (46,478) (18,609) (20,271)
Deferred credits and other liabilities (5,706) (7,648) (9,652)
Other assets and liabilities, excluding cash
and cash equivalents (1,191) 5,766 4,970
Common stock issued (52,311) (68,172) (21,475)
Preferred stock issued (1,875) - -
--------------------------------------------------------------------------
Decrease in cash $ 55,979 37,116 134,999
==========================================================================
Century has consummated the disposition of various telephone and
cellular operations, along with certain other assets, during the three
years ended December 31, 1994. In connection with these dispositions, the
following assets were sold, liabilities eliminated, assets received and
gain recognized:
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands)
Property, plant and equipment $ (2,673) - (3,231)
Excess cost of net assets acquired (3,976) - (4,772)
Long-term debt - - 1,243
Other assets and liabilities, excluding cash
and cash equivalents 993 191 (1,312)
Assets of cellular system 11,058 - -
Marketable equity securities - 1,470 7,008
Gain on sales of assets (15,877) (1,661) (3,985)
--------------------------------------------------------------------------
Increase in cash $ (10,475) - (5,049)
==========================================================================
(13) BUSINESS SEGMENTS
The Company currently operates in two principal segments - traditional
telephone services and mobile communications services. The Company's
telephone operations are conducted in rural, suburban and small urban
communities in 14 states. Approximately 82% of the Company's telephone
access lines are in Wisconsin, Louisiana, Michigan, Ohio and Arkansas.
The Company's cellular customers are located primarily in Louisiana,
Michigan, Mississippi and Texas.
The effect of the change in accounting principle related to accounting
for postretirement benefits reduced 1992 operating income of the telephone
operations and mobile communications operations by $1.7 million and
$250,000, respectively. Other accounts receivable are primarily amounts
due from various long distance carriers, principally AT&T, and several
large local exchange operating companies.
61
Mobile
Telephone Communications Total
==========================================================================
(Dollars in thousands)
Year ended December 31, 1994
--------------------------------------------------------------------------
Operating revenues $ 389,438 150,802 540,240
Depreciation and amortization $ 73,175 21,255 94,430
Operating income $ 137,992 31,443 169,435
Year ended December 31, 1993
--------------------------------------------------------------------------
Operating revenues $ 348,485 84,712 433,197
Depreciation and amortization $ 65,175 11,359 76,534
Operating income $ 114,902 9,906 124,808
Year ended December 31, 1992
--------------------------------------------------------------------------
Operating revenues $ 297,510 62,092 359,602
Depreciation and amortization $ 53,927 8,971 62,898
Operating income $ 103,672 5,956 109,628
==========================================================================
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands)
Operating income $169,435 124,808 109,628
Interest expense (42,577) (30,149) (27,166)
Income from unconsolidated
cellular entities 15,698 6,626 1,692
Gain on sales of assets 15,877 1,661 3,985
Other income and expense 3,105 3,310 4,433
--------------------------------------------------------------------------
Income before income taxes and
cumulative effect of changes
in accounting principles $161,538 106,256 92,572
==========================================================================
Income before income taxes $161,538 106,256 76,904
==========================================================================
Capital expenditures
Telephone $152,336 131,180 108,974
Mobile Communications $ 39,937 56,092 10,904
==========================================================================
Identifiable assets
Telephone $1,053,950 969,388 803,901
Mobile Communications 430,777 224,913 141,522
General corporate 88,305 62,827 54,733
Other 70,221 62,262 40,331
--------------------------------------------------------------------------
Total assets $1,643,253 1,319,390 1,040,487
==========================================================================
(14) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's regulated telephone operations are subject to the
provisions of Statement of Financial Accounting Standards No. 71 ("SFAS
71"), "Accounting for the Effects of Certain Types of Regulation."
Actions of a regulator can provide reasonable assurance of the existence
of an asset, reduce or eliminate the
62
value of an asset and impose a
liability on a regulated enterprise. SFAS 71 requires that, if a conflict
exists between the application of SFAS 71 and another authoritative
pronouncement, SFAS 71 is to be followed because other authoritative
pronouncements do not consider the economic effects of the rate-making
process. Therefore, regulatory assets and liabilities established by the
actions of a regulator are required to be recorded, and, accordingly,
reflected in the balance sheet of an entity subject to SFAS 71.
The Company's consolidated balance sheet as of December 31, 1994
included regulatory assets of approximately $9.2 million and regulatory
liabilities of approximately $31.3 million exclusive of (i) property,
plant and equipment, (ii) accumulated depreciation and (iii) deferred
income taxes and deferred investment tax credits associated with
regulatory assets and liabilities. The $9.2 million of regulatory assets
included assets established in connection with the adoption of SFAS 106
($2.4 million) and SFAS 109 ($3.7 million), extraordinary retirements
($542,000), compensated absences ($607,000) and deferred financing costs
($2.0 million). The $31.3 million of regulatory liabilities was
established in connection with the adoption of SFAS 109. Net deferred
income tax assets related to the regulatory assets and liabilities
quantified above were $12.2 million.
Property, plant and equipment of the Company's regulated telephone
operations has been depreciated using generally the straight line method
over lives approved by regulators. Such depreciable lives have generally
exceeded the depreciable lives used by nonregulated entities. In
addition, in accordance with regulatory accounting, retirements of
regulated telephone property have been charged to accumulated
depreciation, along with the costs of removal, less salvage, with no gain
or loss recognized. These regulatory accounting policies have resulted in
accumulated depreciation being significantly less than if the Company's
telephone operations had not been regulated.
Statement of Financial Accounting Standards No. 101 ("SFAS 101"),
"Regulated Enterprises - Accounting for the Discontinuance of Application
of FASB Statement No. 71," specifies the accounting required when an
enterprise ceases to meet the criteria for application of SFAS 71. SFAS
101 requires the elimination of the effects of any actions of regulators
that have been recognized as assets and liabilities in accordance with
SFAS 71 but would not have been recognized as assets and liabilities by
enterprises in general. SFAS 101 further provides that the carrying
amounts of property, plant and equipment are to be adjusted only to the
extent the assets are impaired and that impairment shall be judged in the
same manner as for enterprises in general. The Company has not determined
(i) the amount of additional accumulated depreciation which would have to
be recorded nor (ii) the amount, if any, by which property, plant and
equipment would be impaired if the Company's regulated operations cease to
become subject to SFAS 71. In addition, deferred tax liabilities and
deferred investment tax credits would be impacted based on the change in
the temporary differences for property, plant and equipment and
accumulated depreciation.
63
The ongoing applicability of SFAS 71 to the Company's regulated
telephone operations is being monitored due to the changing regulatory,
competitive and legislative environments. Should the regulated operations
of the Company no longer qualify for the application of SFAS 71 at some
future date, the net adjustments required would result in a material,
extraordinary, noncash charge against earnings. Telephone subsidiaries
accounting and reporting for regulatory purposes would not be affected by
the discontinued application of SFAS 71.
(15) RETIREMENT AND SAVINGS PLANS
Century sponsors an Outside Directors' Retirement Plan and a
Supplemental Executive Retirement Plan to provide directors and officers,
respectively, with supplemental retirement, death and disability benefits.
In addition, the bargaining unit employees of a subsidiary are provided
benefits under a defined benefit pension plan. At December 31, 1994 and
1993, the combined accumulated benefit obligation of the plans,
substantially all of which was vested, aggregated $15.2 million and $16.3
million, respectively. The projected benefit obligation in excess of plan
assets was $2.7 million and $7.4 million as of December 31, 1994 and 1993,
respectively. During 1994 and 1993 Century funded $3.0 million and
$340,000, respectively, of the obligations of the plans. Prepaid pension
cost was $525,000 at December 31, 1994; accrued pension cost was $1.6
million at December 31, 1993. The net periodic pension cost for 1994,
1993 and 1992 was $1.2 million, $1.1 million and $930,000, respectively.
Discount rates used in determining the year end liabilities were 8.5% for
1994 and ranged from 7.0% to 7.25% for 1993.
Century sponsors an Employee Stock Bonus Plan ("ESBP") and an Employee
Stock Ownership Plan ("ESOP"). These plans cover most employees with one
year of service with the Company and are funded by Company contributions
determined annually by the Board of Directors. Century also sponsors a
qualified profit sharing plan pursuant to Section 401(k) of the Internal
Revenue Code (the "401(k) Plan") which is available to substantially all
employees of the Company. The Company's matching contributions to the
401(k) Plan for 1994, 1993 and 1992 were $2.4 million, $2.0 million and
$1.4 million, respectively.
The Company recorded contributions related to the ESBP in the amount of
$2.3 million, $1.8 million and $1.1 million during 1994, 1993 and 1992,
respectively. At December 31, 1994, the ESBP owned 4.4 million shares of
Century common stock.
The Company's contributions to the ESOP approximate the ESOP's debt
service less dividends received by the ESOP applicable to unallocated
shares. The ESOP shares initially were pledged as collateral for its
debt. As the debt is repaid, shares are released from collateral based on
the percentage of principal payment to outstanding debt before applying
the principal payment. As of each year end, such released shares are
allocated to active employees.
64
The ESOP had outstanding debt of $7.3 million at December 31, 1994
which was applicable to shares purchased prior to 1993. Interest incurred
by the ESOP on debt applicable to such shares was $571,000, $895,000 and
$1.1 million in 1994, 1993 and 1992, respectively. The Company
contributed and expensed $1.9 million, $2.6 million and $2.4 million
during 1994, 1993 and 1992, respectively, with respect to such shares.
Dividends on unallocated ESOP shares used for debt service by the ESOP
were $288,000 in 1994, $335,000 in 1993, and $375,000 in 1992. ESOP
shares as of December 31, 1994 and 1993 which were purchased prior to 1993
were as follows:
1994 1993
=======================================================================
Allocated shares 1,164,290 996,331
Unreleased shares 706,998 882,490
-----------------------------------------------------------------------
1,871,288 1,878,821
=======================================================================
The Company accounts for shares purchased subsequent to December 31,
1992 in accordance with Statement of Position 93-6 ("SOP 93-6").
Accordingly, as shares are released from collateral, the Company reports
compensation expense equal to the current market price of the shares and
the shares become outstanding for earnings per share computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as a reduction
of debt. ESOP compensation expense for 1994 applicable to shares
purchased subsequent to 1992 was $605,000. The fair value of unreleased
ESOP shares accounted for under SOP 93-6 was $11.7 million at December 31,
1994. ESOP shares purchased subsequent to 1992 totaled 416,850, of which
20,842 were allocated and 396,008 were unreleased as of December 31, 1994.
(16) MAJOR ACQUISITIONS
In February 1994 the Company acquired Celutel for approximately $106.0
million in a stock and cash transaction accounted for as a purchase.
Approximately $56.0 million of the purchase price was paid in cash, with
the remainder paid through the issuance of approximately 1.9 million
shares of Century common stock. Celutel currently provides cellular
service to approximately 35,000 customers in five non-wireline provider
systems in Metropolitan Statistical Areas ("MSAs") in Mississippi and
Texas.
In April 1993 the Company acquired San Marcos Telephone Company, Inc.
("SMTC") in a stock and cash transaction and acquired SM Telecorp, Inc.,
an affiliate of SMTC, for cash. The total acquisition price for both
companies approximated $100.0 million (based on Century's common stock
price of $31-7/8 on the date of acquisition), the stock portion of which
was represented by approximately 2.2 million shares of Century common
stock. As a result of the acquisitions, which were accounted for as
purchases, the Company acquired approximately 22,500 telephone access
lines in and around San Marcos, Texas, along with a 35% ownership
65
interest in the Austin, Texas, MSA wireline cellular market and a 9.6%
interest in the Texas Rural Service Area ("RSA") #16 wireline cellular
market.
In April 1992 the Company acquired Central Telephone Company of Ohio
("Central") for $120.0 million and changed Central's name to Century
Telephone of Ohio, Inc. ("Ohio"). Ohio is a local exchange telephone
company with approximately 70,400 access lines located in suburbs of
Cleveland, Ohio. In December 1992 the company acquired 100% of the
Alexandria, Louisiana, MSA wireline cellular market for $18.2 million.
The following pro forma information represents the consolidated results
of operations of the Company as if each major acquisition had been
combined with the Company as of January 1 of (i) the year in which the
acquisition was consummated and (ii) the year prior to the acquisition.
Year ended December 31, 1994 1993 1992
==========================================================================
(Dollars in thousands,
except per share amounts)
(unaudited)
Operating revenues $543,768 467,862 395,033
Income before cumulative effect of
changes in accounting principles $ 98,958 62,516 58,324
Net income $ 98,958 62,516 42,656
Fully diluted earnings per share before
cumulative effect of changes in
accounting principles $ 1.77 1.15 1.12
Fully diluted earnings per share $ 1.77 1.15 .85
==========================================================================
The pro forma information is not necessarily indicative of the
operating results that would have occured if each major acquisition had
been consummated as of January 1 of each respective period, nor is it
necessarily indicative of future operating results. The actual results of
operations of an acquired company are included in the Company's
consolidated financial statements only from the date of acquisition.
(17) SALES OF ASSETS
In 1994 the Company sold the assets comprising an RSA cellular system
in Minnesota; the Company received (i) the assets of the Pine Bluff,
Arkansas, MSA wireline cellular system and (ii) $10.5 million cash. The
transaction resulted in a pre-tax gain of $14.7 million ($8.5 million
after-tax). The Company also sold the assets of its paging operations
during 1994 and recognized a gain of $1.2 million ($756,000 after-tax).
66
During 1993 the Company sold a minority investment in a telephone
company which resulted in a pre-tax gain of $1.7 million ($1.1 million
after-tax).
During 1992 the Company sold (i) two telephone subsidiaries which
served approximately 2,000 access lines, (ii) its minority interest in an
MSA cellular partnership and its minority interest in an RSA cellular
partnership, and (iii) its 100% interest in an RSA cellular market. The
sales prices totaled $12.2 million and the transactions resulted in an
aggregate pre-tax gain of $4.0 million ($2.6 million after-tax).
(18) INVESTMENTS IN UNCONSOLIDATED CELLULAR ENTITIES
The Company's share of earnings from cellular entities in which it does
not own a majority interest was $16.9 million, $7.6 million and $2.1
million in 1994, 1993 and 1992, respectively, and is included, net of $1.2
million, $966,000 and $395,000 of amortization of goodwill attributable to
such investments, in "Income from unconsolidated cellular entities." Over
70% of the 1994 income from unconsolidated cellular entities was
attributable to the following investments:
Ownership interest
========================================================================
GTE Mobilnet of Austin Limited Partnership 35%
Alltel Cellular Associates of Arkansas Limited Partnership 36%
Lafayette MSA Limited Partnership 49%
========================================================================
Consolidated retained earnings at December 31, 1994 which represented
undistributed earnings of unconsolidated cellular entities was $15.4
million.
The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited combined results of operations of the cellular
entities in which the Company's investments are accounted for by the
equity method.
December 31, 1994 1993
======================================================================
(Dollars in thousands)
(unaudited)
Assets
Current assets $ 76,191 52,273
Property and other noncurrent assets 277,269 234,512
----------------------------------------------------------------------
$ 353,460 286,785
======================================================================
Liabilities and equity
Current liabilities $ 48,144 47,814
Noncurrent liabilities 11,080 9,627
Equity 294,236 229,344
----------------------------------------------------------------------
$ 353,460 286,785
======================================================================
67
Year ended December 31, 1994 1993 1992
======================================================================
(Dollars in thousands)
(unaudited)
Results of operations
Revenues $ 329,907 236,230 151,978
Operating income $ 93,512 52,742 26,683
Income before cumulative effect of
changes in accounting principles $ 92,446 53,617 29,148
Net income $ 92,446 53,607 25,971
======================================================================
(19) COMMITMENTS AND CONTINGENCIES
Construction expenditures and investments in vehicles, buildings and
other work equipment during 1995 are estimated to be $112.0 million for
telephone operations, $59.0 million for mobile communications operations
and $12.0 million for other operations.
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
(20) SUBSEQUENT EVENT
On January 20, 1995 Century announced that it was calling for
redemption all $115.0 million of its outstanding 6% convertible debentures
due 2007 at a redemption price of 104.2% of principal plus accrued
interest from February 1, 1995 to February 21, 1995, the redemption date.
The debentures may be converted into Century common stock by the debenture
holders on or before February 13, 1995 at a conversion price of $25.33 per
share.
The debentures were issued in February 1992. If Century had issued
common stock instead of the debentures, primary earnings per share for the
years ended December 31, 1994 and 1993 would have been $1.81 and $1.32,
respectively; primary earnings per share before the cumulative effect of
changes in accounting principles in 1992 would have been $1.22.
68
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Quarterly Income Information (unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
========================================================================
(Dollars in thousands, except per share amounts)
1994
------------------------------------------------------------------------
Operating revenues $ 120,980 132,880 141,515 144,865
Operating income $ 35,886 41,713 45,781 46,055
Net income $ 19,201 21,485 24,613 34,939
Fully diluted earnings
per share $ .35 .39 .44 .62
========================================================================
1993
------------------------------------------------------------------------
Operating revenues $ 96,825 107,338 112,765 116,269
Operating income $ 28,267 31,343 33,477 31,721
Net income $ 15,740 16,517 17,596 19,151
Fully diluted earnings
per share $ .31 .32 .33 .36
========================================================================
Fully diluted earnings per share for the fourth quarter of 1994 includes
$.16 per share of gain on the sales of assets; such increase in fully
diluted earnings per share was partially offset by a decrease of $.03 per
share related to cellular commissions incurred (during the fourth quarter
of 1994 as compared to the average of the first three quarters of 1994) as
a result of the significant increase in the number of cellular subscribers
activated during the quarter.
Fully diluted earnings per share for the fourth quarter of 1993
reflects a decrease of $.04 per share related to cellular commissions
incurred (during the fourth quarter of 1993 as compared to the average of
the first three quarters of 1993) as a result of the significant increase
in the number of cellular subscribers activated during the quarter; such
decrease was offset by non-recurring favorable income tax adjustments of
$.04 per share.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
69
PART III
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers
The name, age and office(s) held by each of the Registrant's executive
officers are shown below. Each of the executive officers listed below
serves at the pleasure of the Board of Directors, except Mr. Williams who
has entered into an employment agreement with the Registrant effective
through May 1996 and from year to year thereafter subject to the right of
Mr. Williams or the Company to terminate such agreement.
Name Age Office(s) held with Century
-----------------------------------------------------------------------
Clarke M. Williams 73 Chairman of the Board
of Directors
Glen F. Post, III 42 Vice Chairman of the
Board of Directors, President
and Chief Executive Officer
R. Stewart Ewing, Jr. 43 Senior Vice President and Chief
Financial Officer
W. Bruce Hanks 40 President - Telecommunications
Services
Harvey P. Perry 50 Senior Vice President, General
Counsel and Secretary
Kenneth R. Cole 47 President - Telephone Group
Each of the Registrant's executive officers has served as an officer
of the Registrant and/or one or more of its subsidiaries in varying
capacities for more than the past 5 years. Mr. Cole has served as
President-Telephone Group since January 1995 and as Vice President from
1983 to 1994.
The balance of the information required by Item 10 is incorporated by
reference to the Registrant's definitive proxy statement relating to its
1995 annual meeting of stockholders (the "Proxy Statement"), which Proxy
Statement will be filed pursuant to Regulation 14A within 120 days after
the end of the last fiscal year.
70
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to
the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to
the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to
the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
a. Financial Statements
(i) Consolidated Financial Statements:
Independent Auditors' Report on Consolidated Financial
Statements and Financial Statement Schedule
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1993 and 1992
Consolidated Balance Sheets - December 31, 1994
and 1993
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
71
Consolidated Quarterly Income Information (unaudited)
(ii) Schedules:*
I Condensed Financial Information of Registrant
* Those Schedules not listed above are omitted as not
applicable or not required.
b. Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth
quarter of 1994.
c. Exhibits:
3(i) Restated Articles of Incorporation of Registrant, dated
September 30, 1994 (incorporated by reference to
Exhibit 3(i) to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994).
3(ii) Registrant's Bylaws, as amended through August 23, 1994
(incorporated by reference to Exhibit 3(ii) to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994).
4.1 Loan Agreement, dated January 3, 1990, between Registrant
and National Bank of Detroit, First National Bank of
Commerce and Bank One, Texas, National Association
(incorporated by reference to Exhibit 4.1 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989) and amendment thereto dated
May 15, 1992 (incorporated by reference to Exhibit 4.1
to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992) and the second amendment
thereto dated March 31,1993 (incorporated by reference
to Exhibit 19.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1993).
4.2 Note Purchase Agreement, dated September 1, 1989, between
Registrant, Teachers Insurance and Annuity Association
of America and the Lincoln
72
National Life Insurance
Company (incorporated by reference to Exhibit 4.23 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1989).
4.3 Agreement, dated November 27, 1977, among Registrant, The
Travelers Insurance Company and The Travelers
Indemnity Company, and form of Warrant (incorporated
by reference to Exhibits 4 and 5 to Registrant's
Annual Report on Form 10-K for the year ended December
31, 1977).
4.10 Form of Indenture dated May 1, 1940 among Century
Telephone of Wisconsin, Inc. (formerly La Crosse
Telephone Corporation) and the First National Bank of
Chicago and the Co-Trustee named therein (incorporated
by reference to Exhibit 4.12 to Registration No. 2-
48478).
4.11 Supplemental Indenture No. 12 (incorporated by reference
to Exhibit 5.12 to Registration No. 2-62172) and
Supplemental Indentures 13 and 14 (incorporated by
reference to Exhibit 5.11 to Registration No. 2-
68731), each of which are supplemental indentures to
the Form of Indenture dated May 1, 1940 listed above
as Exhibit 4.10.
4.12 Amended and Restated Rights Agreement dated as of
November 17, 1986 between Century Telephone
Enterprises, Inc. and the Rights Agent named therein
(incorporated by reference to Exhibit 4.1 to
Registrant's Current Report on Form 8-K dated December
20, 1988), the Amendment thereto dated March 26, 1990
(incorporated by reference to Exhibit 4.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1990) and the Second Amendment
thereto dated February 23, 1993 (incorporated by
reference to Exhibit 4.12 to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1992).
4.16 Note Purchase Agreement, dated May 6, 1986, among
Registrant, Teachers Insurance and Annuity Association
of America, Aetna Life Insurance Company, the Aetna
Casualty and Surety Company and Lincoln National
Pension Insurance Company (incorporated by reference
to Exhibit 4.23 to Registration No. 33-5836),
Amendatory Agreement dated November 1, 1986
(incorporated by reference to Exhibit 4.2 to
Registrant's Annual Report on Form 10-K for the year
73
ended December 31, 1986), amendment thereto dated
November 1, 1987 (incorporated by reference to Exhibit
4.2 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1987) and Modification Letter
dated September 1, 1989 (incorporated by reference to
Exhibit 19.6 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1989).
4.22 Form of common stock certificate of the Registrant
(incorporated by reference to Exhibit 4.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
4.23 Indenture, dated February 1, 1992, between Registrant and
Regions Bank (formerly First American Bank and Trust
of Louisiana) (incorporated by reference to Exhibit
4.23 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991).
4.24 Revolving Credit Facility Agreement, dated February 7,
1992 between Registrant and NationsBank of Texas, N.A.
(incorporated by reference to Exhibit 4.24 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991), amendment thereto dated
April 8, 1993 (incorporated by reference to Exhibit
19.2 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993), amendment thereto
dated July 9, 1993 (incorporated by reference to
Exhibit 4.24 to Registrant's Annual Report on Form 10-
K for the year ended December 31, 1993) and amendment
thereto dated August 15, 1994 (incorporated by
reference to Exhibit 4.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1994).
4.26 Resolutions adopted by the Executive Committee of the
Board of Directors on April 29, 1994 designating the
terms and conditions of the Company's 7-3/4% Senior
Notes, Series A, due 2004 and 8-1/4% Senior Notes,
Series B, due 2024 ("Senior Notes") (incorporated by
reference to Exhibit 4.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1994).
4.27 Form of Senior Notes (incorporated by reference to
Exhibit 4.3 of the Company's Registration Statement on
Form S-3, Registration No. 33-52915).
74
4.28 Indenture dated as of March 31, 1994 between the Company
and Regions Bank (formerly First American Bank & Trust
of Louisiana), as Trustee (incorporated by reference
to Exhibit 4.1 of the Company's Registration Statement
on Form S-3, Registration No. 33-52915).
10.1* Employment Agreement, dated May 24, 1993, by and between
Clarke M. Williams and Registrant (incorporated by
reference to Exhibit 19.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1993).
10.2* Form of agreement that the registrant has entered into
with each Executive Officer other than Mr. Williams
(incorporated by reference to Exhibit 10.2 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1990).
10.3* Registrant's Outside Directors' Retirement Plan, dated
November 19, 1984 (incorporated by reference to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1985), amendment thereto dated
February 21, 1989 (incorporated by reference to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988) and amendment thereto dated
May 17, 1991 (incorporated by reference to Exhibit
10.3 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991).
10.4* Registrant's Amended and Restated Supplemental Executive
Retirement Plan, as amended and restated July 1, 1994
and amendment thereto dated February 10, 1995,
included elsewhere herein.
10.5* Registrant's 1983 Restricted Stock Plan, dated February
21, 1984 (incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended December
31, 1985).
10.6* Registrant's Key Employee Incentive Compensation Plan,
dated January 1, 1984 (incorporated by reference to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1985).
75
10.7* The Century Telephone Enterprises, Inc. Dollars & Sense
Plan and Trust, as amended and restated, generally
effective April 1, 1992, included elsewhere herein.
10.8* Century Telephone Enterprises, Inc. Employee Stock
Ownership Plan and Trust, dated March 20, 1987
(incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1986), amendment thereto dated February 29, 1988
(incorporated by reference to Exhibit 10.9 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1987), amendments thereto dated
March 21, 1991 and April 15, 1991 (incorporated by
reference to Exhibit 10.8 to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1991), amendments thereto dated March 31, 1992
(incorporated by reference to Exhibit 10.8 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992) and amendments thereto dated
June 1, 1993 and June 10, 1993 (incorporated by
reference to Exhibit 10.8 to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1993).
10.9* Registrant's 1988 Incentive Compensation Program as
amended and restated August 22, 1989 (incorporated by
reference to Exhibit 19.8 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1989).
10.10* Form of Stock Option Agreement entered into in 1988 by
the Registrant, pursuant to 1988 Incentive
Compensation Program, with certain of its officers
(incorporated by reference to Exhibit 10.10 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988) and amendment thereto
(incorporated by reference to Exhibit 4.6 to
Registrant's Registration No. 33-31314).
10.11* Registrant's 1990 Incentive Compensation Program, dated
March 15, 1990 (incorporated by reference to Exhibit
19.1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990).
10.12* Form of Stock Option Agreement entered into in 1990 by
the Registrant, pursuant to 1990 Incentive
Compensation Program, with certain of its officers
76
(incorporated by reference to Exhibit 19.3 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1990).
10.13* Form of Stock Option Agreement entered into in 1992 by
the Registrant, pursuant to 1990 Incentive
Compensation Program, with certain of its officers and
employees (incorporated by reference to Exhibit 10.17
to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.15 Agreement and Plan of Merger dated as of September 24,
1992, as amended by Amendment No. 1 thereto, by and
among Registrant, San Marcos Telephone Company,
Incorporated, SM Telecorp, Inc., SMTC Acquisition
Corp. and SMT Acquisition Corp. (incorporated by
reference to Exhibit 2 of Registrant's Registration on
Form S-4 dated February 3, 1993, Registration No. 33-
57838).
10.16* Registrant's Amended and Restated Salary Continuation
(Disability) Plan for Officers, dated November 26,
1991 (incorporated by reference to Exhibit 10.16 of
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991).
10.18* Form of Performance Share Agreement Under the 1990
Incentive Compensation Program, entered into in 1993
with certain of its officers and employees
(incorporated by reference to Exhibit 28.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993).
10.19* Form of Restricted Stock Agreement and Performance Share
Agreement Under the 1988 Incentive Compensation
Program, entered into in 1993 with certain of its
officers and employees (incorporated by reference to
Exhibit 28.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1993).
10.20 Agreement and Plan of Merger dated October 8, 1993, as
amended by Amendment No. 1 thereto dated January 5,
1994 by and among Registrant, Celutel Acquisition
Corp., Celutel, Inc. and the Principal Stockholders of
Celutel, Inc. (incorporated by reference to Appendix I
of Registrant's Prospectus forming a part of its
Registration Statement No. 33-50791 filed January 12,
1994 pursuant to Rule 424(b)(5)).
77
10.21* Registrant's Amended and Restated Supplemental Defined
Contribution Plan, dated as of January 1, 1994,
included elsewhere herein.
10.22* Registrant's Amended and Restated Supplemental Dollars &
Sense Plan, effective as of January 1, 1995, included
elsewhere herein.
10.23 Loan Agreement and Grant of Rights of First Refusal to
Acquire Assets and/or Capital Stock of MillTenn, Inc.
and its Subsidiaries (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994).
10.24* Agreement, dated December 31, 1994, by and between Jim D.
Reppond and Registrant, included elsewhere herein.
10.25* The Century Telephone Enterprises, Inc. Stock Bonus Plan,
PAYSOP and Trust, as amended and restated September
10, 1987 and amendment thereto dated February 29, 1988
(incorporated by reference to Exhibit 4.21 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1987), amendments thereto dated
March 21, 1991 and April 15, 1991, (incorporated by
reference to Exhibit 4.21 to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1991), amendment thereto dated March 31, 1992
(incorporated by reference to Exhibit 4.21 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992) and amendments thereto dated
June 1, 1993 and June 10, 1993 (incorporated by
reference to Exhibit 4.21 to Regis-trant's Annual
Report on Form 10-K for the year ended December 31,
1993).
11 Computations of Earnings Per Share, included elsewhere
herein.
21 Subsidiaries of the Registrant, included elsewhere herein.
23 Independent Auditors' Consent, included elsewhere herein.
27 Financial Data Schedule, included elsewhere herein.
* Management contract or compensatory plan or arrangement.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CENTURY TELEPHONE ENTERPRISES, INC.
Date: March 17, 1995 By: /s/ Clarke M. Williams
Clarke M. Williams
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the date indicated.
/s/ Clarke M. Williams Chairman of the Board
Clarke M. Williams of Directors March 17, 1995
Vice Chairman of the
Board of Directors,
/s/ Glen F. Post, III President, and Chief
Glen F. Post, III Executive Officer March 17, 1995
Senior Vice President
/s/ R. Stewart Ewing, Jr. and Chief Financial
R. Stewart Ewing, Jr. Officer March 17, 1995
Senior Vice President,
/s/ Harvey P. Perry Secretary, General
Harvey P. Perry Counsel and Director March 17, 1995
/s/ W. Bruce Hanks President - Telecommunications
W. Bruce Hanks Services and Director March 17, 1995
/s/ Murray H. Greer Controller (Principal
Murray H. Greer Accounting Officer) March 17, 1995
/s/ William R. Boles, Jr. Director
William R. Boles, Jr. March 17, 1995
79
/s/ Virginia Boulet Director
Virginia Boulet March 17, 1995
/s/ Ernest Butler, Jr. Director
Ernest Butler, Jr. March 17, 1995
/s/ Calvin Czeschin Director
Calvin Czeschin March 17, 1995
/s/ James B. Gardner Director
James B. Gardner March 17, 1995
/s/ R. L. Hargrove, Jr. Director
R. L. Hargrove, Jr. March 17, 1995
/s/ Johnny Hebert Director
Johnny Hebert March 17, 1995
/s/ F. Earl Hogan Director
F. Earl Hogan March 17, 1995
/s/ C. G. Melville, Jr. Director
C. G. Melville, Jr. March 17, 1995
/s/ Jim D. Reppond Director
Jim D. Reppond March 17, 1995
80
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
STATEMENTS OF INCOME
Year ended December 31,
=========================================================================
1994 1993 1992
-------------------------------------------------------------------------
(Dollars in thousands)
REVENUES $ 6,190 5,860 6,562
-------------------------------------------------------------------------
EXPENSES
Operating expenses 5,400 6,014 6,281
Depreciation and amortization 6,603 5,877 4,086
-------------------------------------------------------------------------
Total expenses 12,003 11,891 10,367
-------------------------------------------------------------------------
OPERATING LOSS (5,813) (6,031) (3,805)
-------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (34,463) (20,678) (18,630)
Interest income 24,088 10,696 10,080
-------------------------------------------------------------------------
Total other income (expense) (10,375) (9,982) (8,550)
-------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES, CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES AND
EQUITY IN SUBSIDIARIES' EARNINGS (16,188) (16,013) (12,355)
Income tax benefit 3,205 5,037 2,173
-------------------------------------------------------------------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES AND EQUITY
IN SUBSIDIARIES' EARNINGS (12,983) (10,976) (10,182)
Cumulative effect of changes in
accounting principles - - 1,292
-------------------------------------------------------------------------
LOSS BEFORE EQUITY IN
SUBSIDIARIES' EARNINGS (12,983) (10,976) (8,890)
Equity in subsidiaries' earnings 113,221 79,980 53,195
-------------------------------------------------------------------------
NET INCOME $ 100,238 69,004 44,305
=========================================================================
81
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(continued)
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
BALANCE SHEETS
December 31,
===========================================================================
1994 1993
---------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,097 2,975
Receivables from subsidiaries 126,821 53,638
Other receivables 941 7,330
Prepayments and other 844 857
---------------------------------------------------------------------------
Total current assets 131,703 64,800
---------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property and equipment 932 1,192
Accumulated depreciation (524) (772)
---------------------------------------------------------------------------
Net property, plant and equipment 408 420
---------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Investments in subsidiaries (at equity) 1,032,991 771,062
Receivables from subsidiaries 155,156 130,568
Note receivable 24,167 -
Deferred charges and other 33,518 28,728
---------------------------------------------------------------------------
Total investments and other assets 1,245,832 930,358
---------------------------------------------------------------------------
TOTAL ASSETS $1,377,943 995,578
===========================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 5,481 4,450
Notes payable to banks 158,000 150,500
Payables to subsidiaries 155,551 93,540
Accrued interest 7,345 5,431
Other accrued liabilities 11,420 3,656
---------------------------------------------------------------------------
Total current liabilities 337,797 257,577
---------------------------------------------------------------------------
LONG-TERM DEBT 342,334 190,615
---------------------------------------------------------------------------
PAYABLES TO SUBSIDIARIES 34,197 25,696
---------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 13,379 7,922
---------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
100,000,000 shares, issued and outstanding
53,574,361 and 51,294,705 shares 53,574 51,295
Paid-in capital 319,235 262,294
Retained earnings 291,999 208,945
Unearned ESOP shares (16,840) (9,220)
Preferred stock - non-redeemable 2,268 454
---------------------------------------------------------------------------
Total stockholders' equity 650,236 513,768
---------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $1,377,943 995,578
===========================================================================
82
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
STATEMENTS OF CASH FLOWS
Year ended December 31,
===========================================================================
1994 1993 1992
---------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 100,238 69,004 44,305
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,603 5,877 4,086
Deferred income taxes 5,918 (451) 2,886
Earnings of subsidiaries (113,221) (79,980) (53,195)
Cumulative effect of changes in
accounting principles - - (1,292)
Gain on sale of subsidiary - - (641)
Changes in current assets and
current liabilities:
(Increase) decrease in other
receivables 7,078 (6,692) (500)
Increase in other accrued liabilities 5,063 1,203 1,075
Change in other current assets and
other current liabilities, net 6,014 102 3,806
Other, net 766 1,934 635
---------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 18,459 (9,003) 1,165
---------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions (55,979) (33,209) (135,131)
Capital contributions to subsidiaries (47,516) (16,819) (14,881)
Dividends received from subsidiaries 3,841 908 12,030
Increase in receivables from subsidiaries (98,917) (13,024) (6,020)
Increase in payables to subsidiaries 70,512 23,848 20,471
Note receivable (25,000) - -
Purchase of Industrial Development
Revenue bonds - (19,000) -
Other, net (3,292) (2,893) 9,932
---------------------------------------------------------------------------
Net cash used in investing activities (156,351) (60,189) (113,599)
---------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 147,754 - 112,987
Payments of long-term debt (4,870) (6,697) (10,118)
Notes payable, net 7,500 88,500 14,700
Proceeds from issuance of common stock 4,814 3,529 8,776
Cash dividends paid (17,184) (15,735) (14,119)
---------------------------------------------------------------------------
Net cash provided by financing
activities 138,014 69,597 112,226
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 122 405 (208)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,975 2,570 2,778
---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,097 2,975 2,570
===========================================================================
83
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(continued)
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(A) LONG-TERM DEBT
The approximate annual debt maturities (including sinking fund
requirements) for the five years subsequent to December 31, 1994 are as
follows:
1995- $5.5 million
1996- $35.5 million
1997- $5.0 million
1998- $4.7 million
1999- $4.3 million
(B) GUARANTEES
As of December 31, 1994, Century has guaranteed a promissory note for
a subsidiary of $2.7 million, as well as the applicable interest and
premium. Century has also guaranteed $1.1 million in Industrial
Development Revenue Bonds originally issued by a subsidiary; such bonds
were assumed by the purchaser of the subsidiary's assets.
(C) DIVIDENDS FROM SUBSIDIARIES
Dividends paid to Century by consolidated subsidiaries were $3.8
million, $908,000, and $12.0 million during 1994, 1993 and 1992,
respectively.
(D) INCOME TAXES AND INTEREST PAID
Income taxes paid by Century (including amounts reimbursed from
subsidiaries) were $35.0 million, $31.5 million and $26.5 million during
1994, 1993 and 1992, respectively.
Interest paid by Century was $32.0 million, $20.9 million and $15.7
million during 1994, 1993 and 1992, respectively.
(E) CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
Century adopted Statement of Financial Accounting Standards No. 106,
"Employer's Accounting for Postretirement Benefits Other Than Pensions"
and Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," as of January 1, 1992.
(F) AFFILIATED TRANSACTIONS
Century provides and bills management services to subsidiaries and in
certain instances makes interest bearing advances to finance construction
of plant and purchases of equipment. Century recorded intercompany
interest income of $22.2 million, $10.6 million and $9.4 million in 1994,
1993 and 1992, respectively.
84
CENTURY TELEPHONE ENTERPRISES, INC.
INDEX TO EXHIBITS
December 31, 1994
Exhibit
Number
-------
3(i) Restated Articles of Incorporation of Registrant, dated September 30,
1994 (incorporated by reference to Exhibit 3(i) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1994).
3(ii) Registrant's Bylaws, as amended through August 23, 1994 (incorporated
by reference to Exhibit 3(ii) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994).
4.1 Loan Agreement, dated January 3, 1990, between Registrant and
National Bank of Detroit, First National Bank of Commerce and Bank
One, Texas, National Association (incorporated by reference to
Exhibit 4.1 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989) and amendment thereto dated May 15, 1992
(incorporated by reference to Exhibit 4.1 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992) and the
second amendment thereto dated March 31,1993 (incorporated by
reference to Exhibit 19.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1993).
4.2 Note Purchase Agreement, dated September 1, 1989, between Registrant,
Teachers Insurance and Annuity Association of America and the
Lincoln National Life Insurance Company (incorporated by reference
to Exhibit 4.23 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1989).
4.3 Agreement, dated November 27, 1977, among Registrant, The Travelers
Insurance Company and The Travelers Indemnity Company, and form of
Warrant (incorporated by reference to Exhibits 4 and 5 to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1977).
4.10 Form of Indenture dated May 1, 1940 among Century Telephone of
Wisconsin, Inc. (formerly La Crosse Telephone Corporation) and the
First National Bank of Chicago and the Co-Trustee named therein
(incorporated by reference to Exhibit 4.12 to Registration No. 2-
48478).
4.11 Supplemental Indenture No. 12 (incorporated by reference to Exhibit
5.12 to Registration No. 2-62172) and Supplemental Indentures 13
and 14 (incorporated by reference to Exhibit 5.11 to Registration
No. 2-68731), each of which are supplemental indentures to the Form
of Indenture dated May 1, 1940 listed above as Exhibit 4.10.
4.12 Amended and Restated Rights Agreement dated as of November 17, 1986
between Century Telephone Enterprises, Inc. and the Rights Agent
named therein (incorporated by reference to Exhibit 4.1 to
Registrant's Current Report on Form 8-K dated December 20, 1988),
the Amendment thereto dated March 26, 1990 (incorporated by
reference to Exhibit 4.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1990) and the Second Amendment
thereto dated February 23, 1993 (incorporated by reference to
Exhibit 4.12 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992).
4.16 Note Purchase Agreement, dated May 6, 1986, among Registrant,
Teachers Insurance and Annuity Association of America, Aetna Life
Insurance Company, the Aetna Casualty and Surety Company and
Lincoln National Pension Insurance Company (incorporated by
reference to Exhibit 4.23 to Registration No. 33-5836), Amendatory
Agreement dated November 1, 1986 (incorporated by reference to
Exhibit 4.2 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1986), amendment thereto dated November 1, 1987
(incorporated by reference to Exhibit 4.2 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1987) and
Modification Letter dated September 1, 1989 (incorporated by
reference to Exhibit 19.6 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1989).
4.22 Form of common stock certificate of the Registrant (incorporated by
reference to Exhibit 4.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993).
4.23 Indenture, dated February 1, 1992, between Registrant and Regions
Bank (formerly First American Bank and Trust of Louisiana)
(incorporated by reference to Exhibit 4.23 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1991).
4.24 Revolving Credit Facility Agreement, dated February 7, 1992 between
Registrant and NationsBank of Texas, N.A. (incorporated by
reference to Exhibit 4.24 to Registrant's Annual Report on Form 10-
K for the year ended December 31, 1991), amendment thereto dated
April 8, 1993 (incorporated by reference to Exhibit 19.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993), amendment thereto dated July 9, 1993 (incorporated
by reference to Exhibit 4.24 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993) and amendment thereto
dated August 15, 1994 (incorporated by reference to Exhibit 4.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
4.26 Resolutions adopted by the Executive Committee of the Board of
Directors on April 29, 1994 designating the terms and conditions of
the Company's 7-3/4% Senior Notes, Series A, due 2004 and 8-1/4%
Senior Notes, Series B, due 2024 ("Senior Notes") (incorporated by
reference to Exhibit 4.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994).
4.27 Form of Senior Notes (incorporated by reference to Exhibit 4.3 of the
Company's Registration Statement on Form S-3, Registration No. 33-
52915).
4.28 Indenture dated as of March 31, 1994 between the Company and Regions
Bank (formerly First American Bank & Trust of Louisiana), as
Trustee (incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3, Registration No. 33-52915).
10.1 Employment Agreement, dated May 24, 1993, by and between Clarke M.
Williams and Registrant (incorporated by reference to Exhibit 19.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993).
10.2 Form of agreement that the registrant has entered into with each
Executive Officer other than Mr. Williams (incorporated by
reference to Exhibit 10.2 to Registrant's Annual Report on Form 10-
K for the year ended December 31, 1990).
10.3 Registrant's Outside Directors' Retirement Plan, dated November 19,
1984 (incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1985), amendment thereto
dated February 21, 1989 (incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988)
and amendment thereto dated May 17, 1991 (incorporated by reference
to Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991).
10.4 Registrant's Amended and Restated Supplemental Executive Retirement
Plan, as amended and restated July 1, 1994 and amendment thereto
dated February 10, 1995, included herein.
10.5 Registrant's 1983 Restricted Stock Plan, dated February 21, 1984
(incorporated by reference to Registrant's Annual Report on Form
10-K for the year ended December 31, 1985).
10.6 Registrant's Key Employee Incentive Compensation Plan, dated January
1, 1984 (incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1985).
10.7 The Century Telephone Enterprises, Inc. Dollars & Sense Plan and
Trust, as amended and restated, generally effective April 1, 1992,
included herein.
10.8 Century Telephone Enterprises, Inc. Employee Stock Ownership Plan and
Trust, dated March 20, 1987 (incorporated by reference to
Registrant's Annual Report on Form 10-K for the year ended December
31, 1986), amendment thereto dated February 29, 1988 (incorporated
by reference to Exhibit 10.9 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1987), amendments thereto
dated March 21, 1991 and April 15, 1991 (incorporated by reference
to Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991), amendments thereto dated March 31,
1992 (incorporated by reference to Exhibit 10.8 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992)
and amendments thereto dated June 1, 1993 and June 10, 1993
(incorporated by reference to Exhibit 10.8 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993).
10.9 Registrant's 1988 Incentive Compensation Program as amended and
restated August 22, 1989 (incorporated by reference to Exhibit 19.8
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989).
10.10 Form of Stock Option Agreement entered into in 1988 by the
Registrant, pursuant to 1988 Incentive Compensation Program, with
certain of its officers (incorporated by reference to Exhibit 10.10
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988) and amendment thereto (incorporated by reference
to Exhibit 4.6 to Registrant's Registration No. 33-31314).
10.11 Registrant's 1990 Incentive Compensation Program, dated March 15,
1990 (incorporated by reference to Exhibit 19.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1990).
10.12 Form of Stock Option Agreement entered into in 1990 by the
Registrant, pursuant to 1990 Incentive Compensation Program, with
certain of its officers (incorporated by reference to Exhibit 19.3
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1990).
10.13 Form of Stock Option Agreement entered into in 1992 by the
Registrant, pursuant to 1990 Incentive Compensation Program, with
certain of its officers and employees (incorporated by reference to
Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992).
10.15 Agreement and Plan of Merger dated as of September 24, 1992, as
amended by Amendment No. 1 thereto, by and among Registrant, San
Marcos Telephone Company, Incorporated, SM Telecorp, Inc., SMTC
Acquisition Corp. and SMT Acquisition Corp. (incorporated by
reference to Exhibit 2 of Registrant's Registration on Form S-4
dated February 3, 1993, Registration No. 33-57838).
10.16 Registrant's Amended and Restated Salary Continuation (Disability)
Plan for Officers, dated November 26, 1991 (incorporated by
reference to Exhibit 10.16 of Registrant's Annual Report on Form
10-K for the year ended December 31, 1991).
10.18 Form of Performance Share Agreement Under the 1990 Incentive
Compensation Program, entered into in 1993 with certain of its
officers and employees (incorporated by reference to Exhibit 28.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993).
10.19 Form of Restricted Stock Agreement and Performance Share Agreement
Under the 1988 Incentive Compensation Program, entered into in 1993
with certain of its officers and employees (incorporated by
reference to Exhibit 28.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1993).
10.20 Agreement and Plan of Merger dated October 8, 1993, as amended by
Amendment No. 1 thereto dated January 5, 1994 by and among
Registrant, Celutel Acquisition Corp., Celutel, Inc. and the
Principal Stockholders of Celutel, Inc. (incorporated by reference
to Appendix I of Registrant's Prospectus forming a part of its
Registration Statement No. 33-50791 filed January 12, 1994 pursuant
to Rule 424(b)(5)).
10.21 Registrant's Amended and Restated Supplemental Defined Contribution
Plan, dated as of January 1, 1994, included herein.
10.22 Registrant's Amended and Restated Supplemental Dollars & Sense Plan,
effective as of January 1, 1995, included herein.
10.23 Loan Agreement and Grant of Rights of First Refusal to Acquire Assets
and/or Capital Stock of MillTenn, Inc. and its Subsidiaries
(incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1994).
10.24 Agreement, dated December 31, 1994, by and between Jim D. Reppond and
Registrant, included herein.
10.25 The Century Telephone Enterprises, Inc. Stock Bonus Plan, PAYSOP and
Trust, as amended and restated September 10, 1987 and amendment
thereto dated February 29, 1988 (incorporated by reference to
Exhibit 4.21 to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1987), amendments thereto dated March 21,
1991 and April 15, 1991, (incorporated by reference to Exhibit 4.21
to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991), amendment thereto dated March 31, 1992
(incorporated by reference to Exhibit 4.21 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992) and
amendments thereto dated June 1, 1993 and June 10, 1993
(incorporated by reference to Exhibit 4.21 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993).
11 Computations of Earnings Per Share, included herein.
21 Subsidiaries of the Registrant, included herein.
23 Independent Auditors' Consent, included herein.
27 Financial Data Schedule, included herein.