UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 1, 1997
CENTURY TELEPHONE ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
Louisiana 1-7784 72-0651161
(State or other (Commission file (IRS Employer
jurisdiction of number) Identification No.)
incorporation)
100 Century Park Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (318)388-9500
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On December 1, 1997, Century Telephone Enterprises, Inc. ("Century") acquired
Pacific Telecom, Inc. ("PTI") in exchange for $1.503 billion cash in a two-step
transaction pursuant to a Stock Purchase Agreement dated as of June 11, 1997 by
and among Century and its wholly-owned subsidiary, Century Cellunet, Inc.
("Cellunet"), on the one hand, and PTI and its parent company, PacifiCorp
Holdings, Inc. ("PHI"), on the other hand. In the first step of the transaction,
Cellunet purchased from PTI substantially all of the cellular telephone
operations of PTI in exchange for $240 million, and in the second step Century
purchased from PHI the capital stock of PTI for $1.263 billion. After the first
step but immediately prior to the second, PTI paid a $240 million cash dividend
to PHI.
To finance the acquisition, Century borrowed $1.288 billion under its $1.6
billion senior unsecured credit facility dated August 28, 1997 with NationsBank
of Texas Inc. and a syndicate of other lenders. This debt matures in five years
and carries floating-rate interest based upon the London InterBank Offered Rates
for short-term periods. The current weighted average interest rate of this debt
is 6.155%. Century paid the remainder of the PTI acquisition price with
available cash, most of which consisted of the proceeds of Century's sale of
common stock of Brooks Fiber Properties, Inc. in November 1997.
As a result of the acquisition, Century and Cellunet acquired (i) 660,000
telephone access lines located in four midwestern states, seven western
states and Alaska, (ii) approximately 100,000 cellular subscribers in
markets operated by PTI in two midwestern states and Alaska and (iii)
wireless, cable television and certain other telecommunications assets.
Cellunet intends to integrate the cellular properties purchased from PTI
into its existing cellular operations. Century will operate the remainder
of PTI as a wholly-owned subsidiary, with its headquarters remaining in
Vancouver, Washington. In connection with the acquisition, Century has
reorganized its telephone operations into three operating regions,
including a new western telephone operating region, substantially all of
which will be comprised of PTI's local exchange properties in seven
western states and Alaska. As soon as practical, Century plans to offer
long distance, Internet and certain other services in most of PTI's local
exchange markets on substantially the same terms on which Century recently
began to offer such services to its telephone customers. Other than these
new product offerings and the possible sale of non-strategic assets,
Century plans to continue to operate PTI in the ordinary course of
business.
ITEM 5. OTHER EVENTS.
On December 2, 1997 Moody's Investors Service assigned a Baa1 rating to
Century's $1.6 billion unsecured credit facility and confirmed its Baa1 rating
of Century's senior unsecured debt securities. Moody's and Standard & Poor's
initiated rating reviews of Century's debt shortly after Century announced that
it had reached a definitive agreement to acquire PTI. Standard & Poor's has not
yet completed its review.
On December 11, 1997 Century filed a shelf registration statement with the
Securities and Exchange Commission registering $1.5 billion of senior unsecured
debt securities, preferred stock, common stock and warrants, which may be issued
from time to time as determined by Century's Board of Directors. A copy of
Century's press release announcing the filing of the registration statement is
filed as Exhibit 99.1 hereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Pacific Telecom, Inc.
1. Independent Auditors' Report.
2. Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994.
3. Consolidated Balance Sheets as of December 31, 1996 and 1995.
4. Consolidated Statements of Changes in Shareholder's Equity for the
years ended December 31, 1996, 1995 and 1994.
5. Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
6. Notes to Consolidated Financial Statements as of December 31, 1996.
7. Consolidated Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996.
8. Consolidated Statements of Income for the nine months ended September
30, 1997 and 1996 (unaudited).
9. Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 (unaudited).
10. Condensed Notes to Consolidated Financial Statements as of September
30, 1997 (unaudited).
(b) Pro Forma Consolidated Condensed Financial Information.
1. Introduction.
2. Unaudited Pro Forma Consolidated Condensed Balance Sheet as of
September 30, 1997.
3. Unaudited Pro Forma Consolidated Condensed Statement of Income for the
nine months ended September 30, 1997.
4. Unaudited Pro Forma Consolidated Condensed Statement of Income for the
year ended December 31, 1996.
5. Notes to Unaudited Pro Forma Consolidated Condensed Financial
Information.
(c) Exhibits
2.1 Stock Purchase Agreement, dated as of June 11, 1997, by and among
PacifiCorp Holdings, Inc., Pacific Telecom, Inc., Century Telephone
Enterprises, Inc. and Century Cellunet, Inc. (incorporated by
reference to Exhibit 2.1 to Century's Current Report on Form 8-K
dated June 11, 1997 and filed June 24, 1997).
2.2 Amendment, dated November 5, 1997 to Stock Purchase Agreement by and
among PacifiCorp Holdings, Inc., Pacific Telecom, Inc., Century
Telephone Enterprises, Inc. and Century Cellunet, Inc.
99.1 Press release dated December 11, 1997 relating to Century's filing of
a shelf registration statement.
FINANCIAL STATEMENTS OF PACIFIC TELECOM, INC.
---------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholder of Pacific Telecom, Inc.:
We have audited the accompanying consolidated balance sheets of Pacific Telecom,
Inc. and its subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, such consolidated financial statements represent fairly, in all
material respects, the financial position of Pacific Telecom, Inc. and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
January 27, 1997
PACIFIC TELECOM, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
- -------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------
(In thousands)
OPERATING REVENUES:
Local network service $140,870 120,512 96,944
Network access service 259,110 223,723 168,530
Long distance network service 1,606 150,064 271,977
Private line service - 34,270 58,193
Sales of cable capacity 8,353 3,419 4,567
Cellular 44,043 33,884 23,642
Other 67,148 74,263 72,533
- -------------------------------------------------------------------------
Total operating revenues 521,130 640,135 696,386
- -------------------------------------------------------------------------
OPERATING EXPENSES:
Plant support 91,163 112,350 117,694
Depreciation and amortization (Note 3) 102,292 105,828 100,879
Leased circuits 2,509 20,933 26,618
Access expense (Note 2) - 53,002 92,929
Other operating expense 31,066 37,876 35,116
Cost of cable sales 6,688 2,205 2,977
Customer operations 45,482 58,486 64,204
Administrative support 63,623 68,294 75,616
Taxes other than income taxes 19,575 15,850 15,712
- -------------------------------------------------------------------------
Total operating expenses 362,398 474,824 531,745
- -------------------------------------------------------------------------
OPERATING INCOME 158,732 165,311 164,641
- -------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (40,823) (42,316) (34,754)
Interest income 3,471 2,798 1,716
Gain on sale of subsidiaries and
investments (Notes 5 and 15) 3,705 66,526 2,073
Minority interest (2,398) (1,298) (975)
Other 44 (4,445) (10,536)
- -------------------------------------------------------------------------
Other income (expense) - net (36,001) 21,265 (42,476)
- -------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 122,731 186,576 122,165
INCOME TAXES (NOTE 6) 47,454 47,012 40,766
- -------------------------------------------------------------------------
NET INCOME $ 75,277 139,564 81,399
=========================================================================
The accompanying notes are an integral part of these financial statements.
PACIFIC TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and temporary cash investments $ 9,421 6,331
Accounts receivable 97,705 81,528
Accounts and notes receivable - affiliates (Note 2) 62,345 41,234
Material and supplies (at average cost) 8,676 7,082
Inventory - North Pacific Cable 53,883 60,571
Other 6,428 9,522
- --------------------------------------------------------------------------
Total current assets 238,458 206,268
Investments (Note 9) 131,621 124,555
Plant in service:
Telecommunications (Note 3) 1,631,443 1,570,262
Other 22,444 22,655
Less accumulated depreciation 721,462 678,328
- --------------------------------------------------------------------------
932,425 914,589
Construction work in progress 16,140 13,970
- --------------------------------------------------------------------------
Net plant 948,565 928,559
Intangible assets - net 365,451 378,214
Deferred charges 17,713 16,528
- --------------------------------------------------------------------------
Total assets $1,701,808 1,654,124
==========================================================================
The accompanying notes are an integral part of these financial statements.
PACIFIC TELECOM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------
(In thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Currently maturing long-term debt (Note 11) $ 15,813 5,535
Notes payable (Note 10) 18,000 90,000
Accounts payable 48,138 48,395
Accrued liabilities 52,788 58,736
Dissenters' rights (Note 2) 27,930 27,930
Accrued access and unearned revenue 7,216 8,354
- --------------------------------------------------------------------------
Total current liabilities 169,885 238,950
Long-term debt (Note 11) 527,906 459,502
Deferred income taxes (Note 6) 152,116 126,539
Unamortized investment tax credits 5,203 6,929
Other long-term liabilities 51,607 48,502
Minority interest 17,216 18,288
Shareholder's equity:
Common stock - stated value, 1996 and 1995 - $1.00 (Note 2)
- authorized, 200,000,000 shares
- outstanding, 1996 and 1995 - 100 shares - -
Additional paid-in capital 225,943 225,943
Retained earnings (Note 11) 551,932 529,471
- --------------------------------------------------------------------------
Total shareholder's equity 777,875 755,414
Commitments and contingencies (Notes 4 and 13) - -
- --------------------------------------------------------------------------
Total liabilities and shareholder's equity $1,701,808 1,654,124
==========================================================================
The accompanying notes are an integral part of these financial statements.
PACIFIC TELECOM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common
Stock Additional Unearned Total
--------------- Paid-in Stock Retained Shareholder's
Shares Amount Capital Compensation Earnings Equity
- ------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 39,609 $19,805 $205,985 $(143) $413,064 $638,711
Shares issued for benefits 13 6 293 299
Share purchases (2) (1) (47) (48)
Unearned stock compensation (Note 7) (299) (299)
Net income 81,399 81,399
Cash dividends (52,289) (52,289)
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 39,620 19,810 206,231 (442) 442,174 667,773
Shares issued for benefits 26 13 792 805
Share purchases (30) (15) (882) (897)
Minority buy-out and
reverse merger (Note 2) (39,616) (19,808) 19,808 -
Share retirements (16) (16)
Unearned stock compensation
(Note 7) 10 442 452
Net income 139,564 139,564
Cash dividends (52,267) (52,267)
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 - - 225,943 - 529,471 755,414
Net income 75,277 75,277
Cash dividends (52,816) (52,816)
- ------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 - $ - $225,943 $ - $551,932 $777,875
================================================================================================
</TABLE>
The Company has 152,000 shares of $25 stated value, six percent cumulative
Preferred Stock authorized, but no shares are outstanding.
The accompanying notes are an integral part of these financial statements.
PACIFIC TELECOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- -----------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 75,277 139,564 81,399
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 111,508 114,282 107,784
Deferred income taxes and investment
tax credits, net 22,296 24,515 (62,329)
Gain on sale of subsidiaries
and investments (3,705) (66,526) (2,073)
Gains from unconsolidated
entities, net (6,030) (3,350) (3,135)
Accounts receivable and other
current assets (10,868) (46,165) (8,089)
Inventory - North Pacific Cable 6,689 2,206 2,977
Accounts payable and accrued
liabilities (3,277) (5,430) 22,168
Other 5,147 (6,049) 2,666
- -----------------------------------------------------------------------------
Net cash provided by
operating activities 197,037 153,047 141,368
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (122,387) (121,753) (148,248)
Cost of businesses acquired - (368,348) -
Investments in and advances
to affiliates (5,118) (7,321) (4,726)
Proceeds from Alaska
restructuring (Note 15) - 235,076 105,000
Proceeds from sales of assets 5,821 3,985 17,656
- -----------------------------------------------------------------------------
Net cash used by investing
activities (121,684) (258,361) (30,318)
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in
short-term debt (72,000) 82,023 (3,190)
Change in affiliated notes (26,131) 459 -
Proceeds from issuance of
long-term debt 135,239 153,810 8,006
Purchase of common stock - (897) (48)
Dividends paid (52,816) (52,267) (52,289)
Payments of long-term debt (56,555) (81,366) (58,507)
- -----------------------------------------------------------------------------
Net cash provided (used)
by financing activities (72,263) 101,762 (106,028)
- -----------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS 3,090 (3,552) 5,022
CASH AND TEMPORARY CASH INVESTMENTS
AT BEGINNING OF YEAR 6,331 9,883 4,861
- -----------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS
AT END OF YEAR $ 9,421 6,331 9,883
=============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Interest paid during the year $40,030 40,688 36,692
Income taxes paid during the year 17,911 33,736 102,324
NONCASH INVESTING ACTIVITIES:
Liabilities disposed of in connection
with the sale of subsidiaries - 85,668 53
Common stock issued in connection
with employee benefits - 805 299
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
PACIFIC TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation -- The consolidated financial statements
include the accounts of Pacific Telecom, Inc. (PTI) and its
subsidiaries (Company). The equity method is used to account
for those affiliated companies in which the Company exerts
significant influence through management agreements or ownership
of 20 to 50 percent and for all cellular partnerships in which a
Company subsidiary is a partner. All appropriate intercompany
transactions and balances have been eliminated. The 1995 and
1994 consolidated financial statements reflect certain
reclassifications to conform to the 1996 presentations.
(b) Industry segmentation -- Although regulatory requirements impose
structural separation in its operations, the Company operates
predominately in the telecommunications industry through local exchange
operations providing switched and non-switched voice and data
communication services.
(c) Regulatory authorities -- The accounting policies of the Company
are in conformity with the requirements of the Federal
Communications Commission (FCC) and the regulatory agencies of
the various states in which the Company operates. The Company
prepares its financial statements in accordance with Statement
of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." Accounting under
SFAS 71 is appropriate as long as: rates are established by or
subject to approval by independent, third-party regulators;
rates are designed to recover the specific enterprise's
cost-of-service; and in view of demand for service, it is
reasonable to assume that rates are set at levels that will
recover costs and can be collected from customers.
(d) Telecommunications plant -- Telecommunications plant is stated
at cost. Additions to plant include direct costs and related
indirect charges. Depreciation and amortization are provided
using the straight-line method based on the estimated service
lives of the various classes of depreciable assets. Amounts
charged to operations for depreciation expense reflect methods
prescribed by regulators in the Company's regulated operations
and, given the Company's operating environment, do not
materially differ from estimated useful life determinations used
to calculate depreciation estimates of the Company's
nonregulated operations. These depreciation estimates and
methods are applied consistently in both regulated and public
financial presentations. The composite depreciation rate for
depreciable telecommunications plant was 6.2 percent in 1996,
6.1 percent in 1995 and 6.4 percent in 1994.
(e) Interest during construction -- In accordance with regulatory
requirements, the Company's regulated subsidiaries capitalize debt
costs applicable to their construction projects. Interest capitalized
during 1996 and 1995 was $470,000 and $231,000, respectively.
(f) Asset impairments -- In December 1995, the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS 121 establishes
accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those
assets to be held and used and for long-lived assets and certain
identifiable assets to be disposed of. The Company evaluated
its assets based on this standard and concluded that no assets
qualified as impaired and consequently no adjustments were
required.
(g) Cash and cash equivalents -- The Company considers all investments with
original maturities less than 90 days to be cash equivalents.
(h) Income taxes -- The Company uses the liability method of
accounting for income taxes, which requires that deferred income
taxes be provided for all differences between the financial
statement and tax bases of assets and liabilities. Deferred
income taxes result primarily from differences between the
financial statement and tax bases of depreciable assets and
certain acquired assets, as well as employment related expenses
not currently deductible.
Excess deferred income taxes on regulated assets and liabilities
resulting from the decrease in the statutory rates under the Tax Reform
Act of 1986, net of an increase arising from the Revenue Reconciliation
Act of 1993, are being amortized to income over the composite book life
of the related assets as required by regulatory authorities.
Investment tax credits relating to regulated telephone property, plant
and equipment have been deferred and are being amortized over the
estimated useful lives of the related assets.
(i) Intangible assets -- These costs are primarily for franchises of
local exchange and cellular companies acquired and goodwill
recorded from such acquisitions and are being amortized
generally over 40 years. Accumulated amortization of these
costs at December 31, 1996 and 1995 was $53,359,000 and
$42,703,000, respectively. Intangible assets relating to
nonconsolidated investments are included in "Investments" on the
balance sheet (Note 9).
(j) Inventory -- Inventory on the North Pacific Cable represents the
construction costs for the cable, which are carried at lower of cost or
market and charged to income on an average cost per unit basis as
capacity in the cable is sold.
(k) Software capitalization -- The Company capitalizes initial operating
system software development costs and expenses subsequent additions or
modifications to operating system software. The Company also
capitalizes application software that is purchased at a cost of $10,000
or more and with a useful life in excess of one year.
(l) Accrued access and unearned revenue -- Advance billings creditable to
revenue accounts in future months and advance payments made by
prospective customers prior to establishment of services are recorded
in accrued access and unearned revenue until the service is rendered or
cleared from this account as refunds are made.
(m) Revenue recognition -- The Company's subsidiaries participate in
access revenue pools for certain interstate and intrastate
revenues, which are initially recorded based on estimates.
Certain network access revenues are estimated under cost
separations procedures that base revenues on current operating
costs and investments in facilities to provide such services.
These estimates are subject to subsequent adjustment in future
accounting periods as refined operational information becomes
available.
(n) Use of estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Actual results
could differ from those estimates.
(o) Regulatory assets and liabilities -- In accordance with SFAS 71,
the Company's LEC operations capitalize certain costs
(regulatory assets) in accordance with regulatory authority
whereby those costs will be expensed and recovered in future
periods. At December 31, 1996 and 1995, the Company had
$502,000 and $704,000, respectively, in regulatory assets and
$5,873,000 and $8,900,000, respectively, in regulatory
liabilities on its balance sheet. The regulatory assets were
included in "Deferred charges" and the regulatory liabilities
were included in "Other long-term liabilities." The regulatory
assets arose from the income tax benefits provided to current
ratepayers for pre-1987 tax deductible expenses that were
capitalized on the books of the Company and for which no
deferred taxes were provided. These regulatory assets are being
reduced as the capitalized amounts are depreciated on the books
and those expenses are recovered. The regulatory liabilities
are made up of three items. The first relates to the excess
deferred taxes that resulted from a reduction in the Federal tax
rate from 46 percent to 35 percent. This excess will not be
paid to the Federal government, but rather will reduce future
revenue requirements from customers over the average life of the
assets that generated the difference. The second item in the
regulatory liability is the tax savings resulting from this
reduced revenue requirement created by the amortization of the
excess deferred taxes. The final item is a similar reduction in
revenue requirements due to the tax savings resulting from
amortization of deferred investment tax credits.
NOTE 2. TRANSACTIONS WITH RELATED PARTIES
The Company is a wholly-owned subsidiary of PacifiCorp Holdings, Inc.
(Holdings), which is a wholly-owned subsidiary of PacifiCorp. On September 27,
1995, holders of a majority of the approximately 5.3 million shares of
outstanding common stock held by minority shareholders voted in favor of the
merger of a wholly-owned subsidiary of Holdings into the Company. As a result of
the merger, the common stock held by minority shareholders (other than shares as
to which dissenters' rights were perfected) were converted into the right to
receive $30.00 per share in cash, and the Company became a wholly-owned
subsidiary of Holdings with 100 shares of no par value common stock outstanding.
At December 31, 1996, a liability in the amount of $27,930,000 included amounts
to be paid to dissenters in the merger based on $30.00 per share fair value for
shares and accrued interest at a rate equal to 5.97 percent per annum. The
Company also recorded a receivable from Holdings in the amount of the accrued
liability to dissenters.
(a) Notes payable -- The Company has an agreement that permits
temporary cash advances to or from Holdings at short-term
borrowing rates (Note 10). Interest expense on borrowings from
Holdings was $10,000 in 1996. There were no borrowings from
Holdings in 1995 and 1994. Interest income related to cash
advances to Holdings was $1,660,000 in 1996, $577,000 in 1995
and $777,000 in 1994. Interest income for 1996 and 1995 mainly
relates to the note receivable from Holdings for estimated
amounts due dissenters.
(b) Long-term debt -- At December 30, 1996, the Company issued Series C
Medium-term Notes in the amount of $33,499,000 to PacifiCorp
Environmental Remediation Company, a wholly-owned subsidiary of
Holdings. Holding has agreed to pay the Company a fee of $10,000
annually for each year the notes are outstanding. See Note 11 for
additional information relating to these notes.
(c) Accounts and notes receivable - affiliates -- These amounts generally
represent billings to affiliates for services provided by the Company.
The 1996 and 1995 amounts primarily reflect the amount due from
Holdings for estimated amounts due dissenters' and a tax refund
receivable from Holdings. In 1996, the amount also represents cash
advances to Holdings of $26,131,000.
(d) Access expense -- The long lines subsidiary sold during 1995
recognized approximately $10,001,000 for the first seven months
of 1995 and $18,332,000 in 1994 of interstate and intrastate
access expense related to the Company's local exchange companies
in Alaska. Due to the tariffed nature of these charges, the
amounts were recorded as network access service revenues by the
local exchange companies and have not been eliminated in the
consolidated financial statements.
(e) Income taxes -- The Company participates with PacifiCorp in filing
consolidated income tax returns. The Company's income tax provisions
are based on a separate company calculation of income taxes.
(f) Management fees -- The Company pays PacifiCorp a management fee for
administrative services PacifiCorp provides to the Company. Management
fees paid to PacifiCorp were $2,214,000 in 1996, $1,289,000 in 1995 and
$871,000 in 1994.
(g) The Company rents its headquarters building from a 50 percent owned
partnership. Annual rent was $1,661,000 in 1996, 1995 and 1994, 50
percent of which was included in administrative support.
NOTE 3. TELECOMMUNICATIONS PLANT IN SERVICE
The balances by category of Telecommunications Plant in Service at December 31
are (in thousands):
Average
Remaining
Life 1996 1995
- --------------------------------------------------------------------------
Central Office Equipment 13 $ 560,841 520,810
Poles, Cable and Conduit 20 874,308 826,075
Building and Towers 29 85,116 91,331
Other 11 111,178 132,046
- --------------------------------------------------------------------------
Total Telecommunications
Plant in Service $1,631,443 1,570,262
==========================================================================
Depreciation expense was $97,131,000, $101,966,000 and $97,784,000 for 1996,
1995 and 1994, respectively. Depreciation expense declined in 1996 relating to
the sale of Alascom, Inc. (Alascom) in 1995. This was partially offset by
increases related to acquisitions.
NOTE 4. LEASE AND MAINTENANCE ARRANGEMENTS
The Company's operating lease and maintenance agreements relate to the use of
headquarters buildings, data processing and customer premise equipment,
terrestrial communications circuits and cable maintenance and backhaul. These
agreements generally contain provisions or options to renew the agreements at
fair market rental rates. The Company has no material capital lease obligations
at this time. Under these noncancellable operating lease and maintenance
agreements, minimum annual rental commitments are as follows (in thousands):
Year Ending December 31,
- -----------------------------------------------------------------------
1997 $17,442
1998 11,786
1999 5,423
2000 3,158
2001 2,265
2002 and beyond 4,765
- -----------------------------------------------------------------------
Total minimum lease and maintenance payments $44,839
=======================================================================
Rent expense approximated $16,960,000 in 1996, $36,591,000 in 1995 and
$41,688,000 in 1994. These amounts included rent expense for Alascom of
$17,939,000 in 1995 and $28,148,000 in 1994.
NOTE 5. SALE OF SUBSIDIARIES
During 1996, the Company sold several cellular properties. These transactions
resulted in proceeds of $5,286,000 and after-tax gains of $2,269,000.
See Note 15 for information regarding the sale of Alascom to AT&T Corp. (AT&T)
in August 1995.
On April 29, 1994, the Company completed the sale of PTI Harbor Bay, Inc. and
Upsouth Corporation, to IntelCom Group, Inc. for 1,183,147 shares of IntelCom
common stock and $200,000 in cash. On October 17, 1994, the Company sold its
IntelCom stock. Cash proceeds of $15,934,000 and a gain of $1,007,000, net of
tax and selling expenses, were recognized in 1994.
NOTE 6. INCOME TAXES
The Company's effective combined state and federal income tax rate was 38.7
percent in 1996, 25.2 percent in 1995 and 33.4 percent in 1994. The difference
between taxes calculated as if the statutory federal tax rate of 35 percent were
applied to pre-tax income and the recorded tax expense is due to the following:
Year Ended December 31,
- -------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------
(in thousands)
Tax expense at statutory rates $42,955 65,302 42,758
State income taxes 6,639 14,491 1,702
Federal benefit of state income taxes (2,324) (5,072) (596)
Amortization of investment tax credits (1,714) (3,098) (4,355)
Amortization of excess deferred income taxes (595) (451) (1,776)
Amortization of acquisition costs in excess
of equity 2,056 2,018 2,086
Alascom gain (a) - (23,278) -
Other 437 (2,900) 947
- -------------------------------------------------------------------------
Recorded tax expense $47,454 47,012 40,766
=========================================================================
Income tax expense consisted of:
Taxes currently provided $25,158 22,497 103,095
Deferred income taxes (b) 24,010 27,613 (57,974)
Investment tax credits (1,714) (3,098) (4,355)
- -------------------------------------------------------------------------
$47,454 47,012 40,766
=========================================================================
(a) The financial statement gain on the sale of Alascom was recorded
without federal or state income tax expense, because the tax basis
in Alascom was greater than the selling price. The tax basis was
significantly greater than the book basis due to Alascom's required
tax recognition of the $150,000,000 in transition payments due from
AT&T under a 1994 FCC order. The Company has not historically
provided deferred tax liabilities or assets under SFAS 109 for
book/tax differences on investments in subsidiaries. As a result,
the tax benefit of the higher tax basis in Alascom was realized in
1995 with the sale.
(b) During 1994, prepaid taxes of $61,500,000 were reported due to the FCC
ordered transition payments of $150,000,000. Also, in 1995, the Company
had deferred tax increases associated with book/tax differences on the
newly acquired assets from USWC.
The tax effect of significant items comprising the Company's net deferred tax
liability are as follows:
Year Ended December 31,
- -------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------
(in thousands)
Deferred tax liabilities:
Plant in service $124,324 94,602
Cellular acquisition adjustments 43,388 45,224
Deferred tax assets:
Employment related liabilities (13,736) (12,243)
Valuation adjustments 581 (3,902)
Reserve for self insurance (2,848) (3,808)
Other (2,388) 2,661
- -------------------------------------------------------------------------
Net deferred tax liability 149,321 122,534
=========================================================================
Noncurrent tax liabilities 152,116 126,539
Current tax assets (2,795) (4,005)
- -------------------------------------------------------------------------
$149,321 122,534
=========================================================================
NOTE 7. PENSION PLAN
Substantially all employees of the Company, except those who are members of one
local of the International Brotherhood of Electrical Workers (IBEW), are covered
under the Company's pension plan. The Company recognized costs of $1,173,000,
$1,074,000 and $1,065,000 in 1996, 1995 and 1994, respectively, for
contributions to the IBEW pension plans and $1,747,000 and $3,110,000 in 1995
and 1994, respectively, for contributions to the International Brotherhood of
Teamsters. With the sale of Alascom in August 1995, the Company has no further
obligation to pay for pension benefits of employees represented by the
International Brotherhood of Teamsters. The Company's plan provides benefits
based upon an employee's total years of service and the highest five years
compensation during the last 10 years of service. The Company's policy is to
fund annually up to the maximum amount of the unfunded pension liability that
can be deducted for federal income tax purposes.
The Company's unrecognized net asset resulting from the initial application of
SFAS 87 - "Employer Accounting for Pensions", was amortized over a 10-year
period that ended in 1996 for the Company's original plan and is being amortized
over a 20-year period ending in 2006 for the North-West Telecommunications, Inc.
plan that was merged with the Company's plan on January 1, 1993. Net pension
cost and funded status of the pension plan are summarized as follows:
December 31,
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
(in thousands)
Service cost of benefits earned $ 4,163 3,724 4,308
Interest cost on the projected
benefit obligation 10,697 10,765 9,954
Actual loss (gain) on assets (13,638) (32,633) 1,592
Net amortization and deferral (2,118) 18,947 (15,845)
- ------------------------------------------------------------------------------
Total pension (income) expense $ (896) 803 9
==============================================================================
Early retirement program $ 2,520 - -
==============================================================================
Actuarial present value of benefit obligations:
Accumulated benefit obligation $133,123 141,574 112,176
==============================================================================
Portion of accumulated benefit
obligation vested $131,792 140,022 111,041
==============================================================================
Projected benefit obligation $156,406 167,317 131,530
Plan assets at fair value, primarily
listed stocks and bonds 171,428 154,316 129,582
- ------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 15,022 (13,001) (1,948)
Unrecognized net loss (gain) (21,150) 6,749 (4,393)
Unrecognized prior service benefit (1,784) (2,029) (2,291)
Unrecognized net asset remaining from
initial application of SFAS 87 (2,663) (4,536) (6,409)
- ------------------------------------------------------------------------------
Pension liability at December 31 $(10,575) (12,817) (15,041)
==============================================================================
Assumptions used to develop pension plan information were:
Discount rate 7.50% 7.25% 8.50%
Estimated long-term rate of return
on assets 9.00 9.00 9.00
Assumed rate of increase in
compensation levels 4.50 5.00 5.00
- ------------------------------------------------------------------------------
The Company's pension liability at December 31, 1996 and 1995 was included in
"Other long-term liabilities" on the balance sheet.
In December 1996, the Company offered an early retirement program to a group of
corporate employees. The Company recognized an expense of $2,520,000 relating to
this early retirement program.
In August 1995, the Company sold Alascom to AT&T (Note 15), which resulted in a
pre-tax curtailment gain of $3,401,000. This gain was included in "Gain on sale
of subsidiaries and investments."
The Company participates in PacifiCorp's K Plus Employee Stock Ownership and
Savings Plan. Under this plan, eligible employees may elect to contribute a
portion of their pay, within specified limits, to the Plan. The Company makes a
matching contribution of 50 percent of the employee's elective contribution.
Employee elective contributions subject to matching are limited to six percent
of pay. In addition, the Company makes a fixed contribution of two percent of
pay per year. The costs to the Company for these contributions in 1996, 1995 and
1994 were $2,882,000, $2,262,000 and $2,991,000, respectively.
PacifiCorp has a long-term incentive plan for certain executive employees of the
Company. Participants are eligible to receive shares of PacifiCorp's common
stock, plus dividend equivalents in cash based on a determination of
PacifiCorp's Board of Directors. Until September 1995, the Company had its own
separate long-term incentive plan for certain executive employees and awards
were in the Company's stock. Under this previous plan participants received
grants of restricted shares of the Company's common stock based on a
determination of the Company's Board of Directors. The costs to the Company for
these benefit plans amounted to $311,000, $300,000 and $80,000 in 1996, 1995 and
1994, respectively. Awards granted under these plans that are not yet vested are
included as a liability. Upon completion of the merger with a subsidiary of
Holdings (Note 2), all unvested shares of the Company's stock were converted to
PacifiCorp shares on the basis of the merger consideration.
NOTE 8. OTHER POSTRETIREMENT BENEFITS
The Company provides health care and life insurance benefit to eligible retired
employees. Substantially all employees of the Company are covered under the
Company's postretirement health care and life insurance plans. The
postretirement health care and life insurance plans are noncontributory as long
as the Company's cost per retiree remains below $300 per month ($600 per family
per month). Generally, the health care plan pays stated percentages of most
medical expenses, reduced for any deductible and payments made by government
programs.
The Company recognizes the cost of postretirement benefits over the active
service period of its employees. The Company's policy is to fund annually an
amount of the postretirement benefit liability that will systematically reduce
that liability using available funds and allow deductibility for federal income
tax purposes. Due to income tax regulations that restrict the deductibility of
certain contributions for postretirement benefits, the Company has elected to
make non-tax deductible contributions to meet funding requirements imposed by
state regulatory commissions. The Company funded $10,458,000, $13,254,000 and
$2,429,000 in 1996, 1995 and 1994, respectively, through contributions to
restricted trust funds and directly paying postretirement benefit costs to third
parties. The Company anticipates making additional contributions into 401(h),
VEBA and other trusts for 1997 totalling approximately $5,700,000. The Company
recognizes the transition obligation, which represents the previously
unrecognized prior service cost, over a period of 20 years.
The net funded status for the combined plans is shown below (in thousands):
December 31,
- -----------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
Retirees and dependents $41,517 43,415 37,119
Fully eligible active plan participants 12,147 11,677 11,089
Other active plan participants 29,779 26,498 22,198
- ------------------------------------------------------------------------------
APBO 83,443 81,590 70,406
Plan assets at fair value, primarily
listed stocks and bonds (31,131) (21,977) (8,503)
- ------------------------------------------------------------------------------
APBO in excess of plan assets 52,312 59,613 61,903
Unrecognized transition obligation (27,839) (29,579) (34,521)
Unrecognized prior service cost 491 552 675
Unrecognized net loss from
changes in assumptions (2,994) (6,853) (1,666)
- ------------------------------------------------------------------------------
Accrued postretirement benefit cost $21,970 23,733 26,391
==============================================================================
Net periodic postretirement benefit cost included the following components (in
thousands):
1996 1995 1994
- ------------------------------------------------------------------------------
Service cost $2,706 2,030 2,307
Interest cost on accumulated
postretirement benefit obligation 5,971 5,891 5,836
Actual return on plan assets (1,931) (1,902) 180
Amortization of transition
obligation over 20 years 1,740 1,844 1,918
Net amortization and deferral (40) 1,010 (620)
- ------------------------------------------------------------------------------
Expenses 8,446 8,873 9,621
Early retirement program 250 - -
- ------------------------------------------------------------------------------
Net periodic postretirement
benefit cost $8,696 8,873 9,621
==============================================================================
Assumptions used to develop the accumulated postretirement benefit obligation
information were:
1996 1995 1994
- -----------------------------------------------------------------------------
Discount rate 7.50% 7.25% 8.50%
Estimated long-term rate of return on assets 9.00 9.00 9.00
Health care cost trend rate-under 65 11.00 11.00 11.00
Health care cost trend rate-over 65 10.50 10.00 10.00
Ultimate health care cost trend rate 4.50 4.50 5.50
- -----------------------------------------------------------------------------
The assumed health care cost trend rates gradually decrease over nine years. The
health care cost trend rate assumptions have a significant effect on the amounts
reported. Increasing the assumed health care cost trend rate by one percentage
point would increase the postretirement benefit obligation as of December 31,
1996 by $2,238,000, and the annual net periodic postretirement benefit costs by
$272,000.
In December 1996, the Company offered an early retirement program to a group of
corporate employees. The Company recognized an expense of $250,000 relating to
this early retirement program.
In August 1995, the Company sold Alascom to AT&T (Note 15). As a result of this
sale, the Company recognized a one time pre-tax curtailment loss of $1,401,000.
This loss was included in "Gain on sale of subsidiaries and investments."
The Company's long-term portion of the accrued postretirement benefit cost
appears in "Other long-term liabilities" and the current portion of the accrued
postretirement benefit cost appears in "Accrued liabilities" on the balance
sheet at December 31, 1996.
NOTE 9. INVESTMENTS
The investment balances, which included interest bearing advances of $10,037,000
and $5,000,000 at December 31, 1996 and 1995, respectively, are summarized as
follows:
December 31,
- ----------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------
(in thousands)
Equity investments:
Cellular partnerships (a) $111,505 110,223
Other equity investees 2,375 1,500
Cost investments:
Cellular partnerships 657 767
Other 17,084 12,065
- ----------------------------------------------------------------------
$131,621 124,555
======================================================================
(a) Cellular partnerships include goodwill of $23,383,000 in 1996 and
$23,150,000 in 1995, which is net of accumulated amortization of
$4,284,000 and $3,432,000, respectively.
NOTE 10. SHORT-TERM DEBT
Short-term debt consisted of outstanding notes payable under borrowing
arrangements with various banks and other lenders. Information regarding
short-term debt follows:
At December 31, During the Year
- ---------------------------------------------- --------------------------------
Average Average
Interest Maximum Average Interest
Balance Rate Outstanding Outstanding Rate
- --------------------------------------------------------------------------------
(in thousands, except percentages)
1996
----
Notes payable - banks $18,000 5.6% $80,000 $56,521 5.7%
Notes payable - holdings - - 4,869 66 6.1
1995
----
Notes payable - banks $90,000 5.9% $242,166 $118,874 6.2%
Notes payable - other - - 8,845 3,655 8.2
1994
----
Notes payable - banks $12,000 6.8% $20,000 $9,292 5.0%
Notes payable - other 9,713 8.4 11,713 5,164 5.6
- --------------------------------------------------------------------------------
The average interest rate is calculated by dividing the actual short-term
interest expense by the average daily weighted balance short-term debt
outstanding for the year.
NOTE 11. LONG-TERM DEBT
Long-term debt consisted of the following:
December 31,
- --------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------
(in thousands)
2% - 11.8% First mortgage notes payable
under U.S. Government-sponsored loan
programs, maturities through 2028 $133,330 137,173
9.5% First mortgage notes,
maturities through 1999 6,000 6,039
8% - 9.8% Unsecured notes,
maturities through 2007 22,390 23,325
6.6% - 9.4% Unsecured medium-term notes,
maturities through 2008 323,500 223,500
6% Unsecured medium-term notes,
maturities through 2006 (b) 33,499 -
6.1% Commercial paper - 50,000
5.6% Other available banking
arrangements (c) 25,000 25,000
- --------------------------------------------------------------------------
Total 543,719 465,037
Less current maturities 15,813 5,535
- --------------------------------------------------------------------------
Total long-term debt $527,906 459,502
==========================================================================
(a) The weighted average cost of long-term debt outstanding at December 31,
1996 was 7.2 percent. The Company has small amounts of debt which have
higher rates than prevailing interest rates due to prepayment
restrictions.
(b) Variable rate debt based on the Company's commercial paper rate is
convertible to a fixed rate at the option of the holder after December 30,
1998. Once the debt has been converted to fixed rate debt, Holdings will
indemnify the Company for the incremental interest expense incurred for
rates exceeding 6.75 percent.
(c) Based upon management's intent and the Company's ability to support the
debt on a long-term basis through its revolving credit agreement,
$25,000,000 of borrowings under other available banking arrangements at
December 31, 1996, were classified as long-term debt.
The Company has a $300,000,000 revolving credit agreement. Borrowings under the
revolving credit agreement bear interest at rates based on bids from
participating banks, certain prime rates, interbank borrowing rates or
certificate of deposit rates. The revolving credit agreement has been renewed
for a term ending in November 1999. Annual commitment fees on the revolving
credit agreement are currently .125 percent of the total authorized amount.
Funds that could be borrowed under the revolving credit agreement at December
31, 1996 were $300,000,000.
At December 31, 1996, approximately $638,697,000 of "Telecommunications plant in
service" was pledged as collateral under various loan agreements. Certain
agreements also contain provisions restricting the payment of cash dividends. At
December 31, 1996, consolidated retained earnings available for dividends and
other distributions were $242,037,000, all of which were available from the
retained earnings of subsidiaries.
Long-term debt maturing annually within each of the four years subsequent to
1997 is as follows: 1998 -$29,071,000; 1999 - $48,156,000; 2000 - $6,574,000;
2001 - $66,546,000.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are summarized
as follows:
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
(in thousands)
Cash and temporary investments
and net trade accounts (a) $121,333 121,333 80,698 80,698
Investments at cost (Note 9) (b) 17,741 17,741 12,832 13,326
Long-term debt and notes payable
(Notes 10 and 11) (c) 561,719 569,193 555,037 578,024
- --------------------------------------------------------------------------------
(a) The carrying amount approximates fair value because of the short maturity
of these instruments.
(b) The fair values of the other investments are estimated based on quoted
market prices for these or similar investments, or the investment's
ability to return cash to the Company through operations or through the
sale of the investment.
(c) The fair value of the Company's long-term debt is estimated using the
discounted cash flow method based on the quoted market rates and prices
for the same or similar issues of the same remaining maturities. The
discount rate is determined using U.S. Treasury rates plus the average
spread for the Company quoted by several dealers. Prepayment penalties and
other costs of debt retirement are not reflected in these estimates.
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company has signed agreements with US West Communications, Inc. (USWC), GTE
North Incorporated and the City of Fairbanks to purchase certain telephone
assets or operations in Minnesota, Michigan and Fairbanks, Alaska for
approximately $248 million in cash, which includes approximately $20 million for
cash to be acquired in the acquisitions. Completion of these transactions will
be dependent upon appropriate regulatory approvals, expected to be received
during 1997.
Expenditures under the Company's 1997 construction and capital expenditure
program are expected to approximate $137,000,000. There are currently no
long-term construction projects underway.
The Company is a party to various legal claims, actions and complaints. Although
the ultimate resolution of legal proceedings cannot be predicted with certainty,
management believes that disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
NOTE 14. ACQUISITIONS
During 1995, the Company closed transactions in Colorado, Washington and Oregon
to acquire local exchange properties from USWC. On February 15, 1995, the
Company purchased assets in Colorado representing 45 local exchanges serving
approximately 53,000 access lines for $202,070,000. On September 30, 1995, the
Company purchased assets in Washington representing 26 local exchanges serving
approximately 20,000 access lines for $92,794,000. On October 20, 1995, the
Company purchased assets in Oregon representing 23 exchanges serving
approximately 17,000 access lines for $81,500,000. These purchase prices were
based on a multiple of net book value of USWC assets acquired with certain
purchase price adjustments calculated at closing. Funds used for the purchases
were provided from proceeds received in the sale of Alascom (Note 15), issuance
of medium-term notes and short-term borrowings.
NOTE 15. SALE OF ALASCOM, INC.
On August 7, 1995, the Company sold its Alaska long distance communication
subsidiary, Alascom to AT&T. The Company received total cash proceeds of
$365,500,000 paid in three payments and recognized an after-tax gain of
$66,376,000. In July 1994, AT&T paid a $75,000,000 transition payment to Alascom
that PTI retained. In October 1994, AT&T paid a $30,000,000 down payment at the
time of the signing of the sale agreement. The remaining $260,500,000 was paid
at closing. The Company used the proceeds to fund the asset purchases closed in
1995 (Note 14).
Condensed income information for Alascom is as follows:
Seven months Twelve months
ended July 31, ended December 31,
1995 1994
- --------------------------------------------------------------------------
(in thousands)
Operating revenues $193,126 343,506
Operating income 36,914 80,651
- --------------------------------------------------------------------------
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 are as follows:
Three Months Ended Dec. 31 Sept. 30 June 30 March 31
- --------------------------------------------------------------------------
(in thousands)
1996
----
Operating revenues $134,937 $136,609 $126,761 $122,823
Operating income 43,908 41,555 37,914 35,355
Net income 20,781 20,435 18,044 16,017
1995
----
Operating revenues $128,975 $141,326 $190,228 $179,606
Operating income 40,479 39,184 45,493 40,155
Net income 18,175 84,250 20,412 16,727
- --------------------------------------------------------------------------
Decreased revenues and operating income in the first and second quarters of 1996
and decreased net income in the third quarter of 1996 resulted from the sale of
Alascom in 1995 (Note 15).
* * * * *
PACIFIC TELECOM, INC.
Consolidated Balance Sheets
(Unaudited)
ASSETS
------
September 30, December 31,
1997 1996
- -----------------------------------------------------------------------
(In thousands)
Current assets:
Cash and temporary cash investments $ 10,179 9,421
Accounts receivable 105,486 97,705
Accounts and notes receivable -
affiliates (Note 2) 12,650 62,345
Material and supplies (at average cost) 9,842 8,676
Inventory - North Pacific Cable 40,389 53,883
Other 9,318 6,428
- -----------------------------------------------------------------------
Total current assets 187,864 238,458
Investments 120,213 131,621
Plant in service:
Telecommunications 1,791,298 1,631,443
Other 22,646 22,444
Less accumulated depreciation 819,763 721,462
- -----------------------------------------------------------------------
994,181 932,425
Construction work in progress 22,508 16,140
- -----------------------------------------------------------------------
Net plant 1,016,689 948,565
Intangible assets - net 409,498 365,451
Deferred charges 26,557 17,713
- -----------------------------------------------------------------------
Total assets $1,760,821 1,701,808
=======================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current liabilities:
Currently maturing long-term debt $ 39,045 15,813
Notes payable 90,000 18,000
Accounts payable 50,814 48,138
Accrued liabilities 46,443 52,788
Dissenters' rights (Note 2) 15,043 27,930
Accrued access and unearned revenue 5,014 7,216
- -----------------------------------------------------------------------
Total current liabilities 246,359 169,885
Long-term debt 478,842 527,906
Deferred income taxes (Note 4) 157,917 152,116
Unamortized investment tax credits 4,169 5,203
Other long-term liabilities 54,492 51,607
Minority interest 17,157 17,216
Shareholder's equity:
Common stock - -
Additional paid-in capital 225,943 225,943
Retained earnings (Note 3) 575,942 551,932
- -----------------------------------------------------------------------
Total shareholder's equity 801,885 777,875
- -----------------------------------------------------------------------
Total liabilities and
shareholder's equity $1,760,821 1,701,808
=======================================================================
See accompanying notes to consolidated financial statements.
PACIFIC TELECOM, INC.
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Operating revenues:
Local network service $ 39,545 35,530 112,719 101,970
Network access service 69,208 64,244 198,706 190,372
Long distance network service 490 441 1,295 1,203
Sales of cable capacity 12,300 6,030 12,412 8,279
Cellular 15,612 12,990 38,632 32,367
Other 16,854 17,373 52,401 52,001
- -----------------------------------------------------------------------------
Total operating revenues 154,009 136,608 416,165 386,192
- -----------------------------------------------------------------------------
Operating expenses:
Plant support 26,408 24,919 72,792 69,892
Depreciation and amortization 27,209 25,644 80,420 76,532
Other operating expense 8,625 8,543 25,100 24,211
Cost of cable sales 9,030 5,126 9,084 6,652
Customer operations 11,538 11,705 33,187 34,179
Administrative support 14,666 14,350 46,790 45,349
Taxes other than income taxes 5,456 4,766 15,588 14,553
- -----------------------------------------------------------------------------
Total operating expenses 102,932 95,053 282,961 271,368
- -----------------------------------------------------------------------------
Operating income 51,077 41,555 133,204 114,824
- -----------------------------------------------------------------------------
Other income (expense):
Interest expense (10,052) (9,765) (30,240) (30,104)
Interest income 1,079 995 2,569 2,196
Gain on sale of subsidiaries and
investments - - 1,317 3,705
Equity income 2,945 1,992 6,636 4,977
Other (1,171) (1,331) (6,802) (6,405)
- -----------------------------------------------------------------------------
Other expense - net (7,199) (8,109) (26,520) (25,631)
- -----------------------------------------------------------------------------
Income before income taxes 43,878 33,446 106,684 89,193
Income taxes (Note 4) 16,613 13,011 41,797 34,697
- -----------------------------------------------------------------------------
Net income $ 27,265 20,435 64,887 54,496
=============================================================================
See accompanying notes to consolidated financial statements.
PACIFIC TELECOM, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
- ----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
(In thousands)
Cash Flows from Operating Activities:
Net income $ 64,887 54,496
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 86,817 83,930
Deferred income taxes and investment
tax credits, net 6,189 15,386
Gain on sale of subsidiaries and investments (1,317) (3,705)
Gains from unconsolidated entities, net (6,636) (4,996)
Accounts receivable and other current assets (5,474) (26,498)
Inventory - North Pacific Cable 9,084 6,652
Accounts payable and accrued liabilities (12,247) 23,877
Other 7,273 (3,173)
- ----------------------------------------------------------------------------
Net cash provided by operating activities 148,576 145,969
- ----------------------------------------------------------------------------
Cash Flows from Investing Activities:
Construction expenditures (84,902) (79,585)
Cost of businesses acquired (105,410) -
Investments in and advances to affiliates (5,711) (6,495)
Proceeds from sales of assets 11,968 5,715
- ----------------------------------------------------------------------------
Net cash used by investing activities (184,055) (80,365)
- ----------------------------------------------------------------------------
Cash Flows from Financing Activities:
Increase (Decrease) in short-term debt 47,000 (56,000)
Change in affiliated notes 34,435 (3,562)
Proceeds from issuance of long-term debt - 51,740
Dividends paid (40,875) (39,567)
Payments of long-term debt (4,323) (5,119)
- ----------------------------------------------------------------------------
Net cash used by financing activities 36,237 (52,508)
- ----------------------------------------------------------------------------
Increase in Cash and Temporary Cash Investments 758 13,096
Cash and Temporary Cash Investments at
Beginning of Period 9,421 6,331
- ----------------------------------------------------------------------------
Cash and Temporary Cash Investments at
End of Period $ 10,179 19,427
============================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the nine months ended September 30 for:
Interest $ 36,195 35,727
Income Taxes 25,296 12,489
North Pacific Cable inventory reclassisfied
to Telecommunications - Plant in service 4,409 -
Noncash Investing Activities:
Liabilities assumed in connection with the
acquisition of subsidiaries 4,834 -
- ----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Pacific Telecom, Inc.
Condensed Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
1. The consolidated financial statements include all normal adjustments which,
in the opinion of management, are necessary to present fairly the
consolidated financial position at September 30, 1997, and the consolidated
results of operations for the three and nine months ended September 30, 1997
and 1996 and cash flows for the nine months ended September 30, 1997 and
1996. These consolidated financial statements should be read in conjunction
with the financial statements and related notes included in the latest annual
report filed on Form 10-K of Pacific Telecom, Inc. (Company). The
consolidated results of operations presented herein are not necessarily
indicative of the results to be expected for the year. The 1996 consolidated
financial statements reflect certain reclassifications to conform to the
current year presentation. These reclassifications have no effect on
previously stated net income.
2. The Company is a wholly-owned subsidiary of PacifiCorp Holdings, Inc.
(Holdings), which is a wholly-owned subsidiary of PacifiCorp. See "Part II,
Item 5 - Other Information" in the Company's Form 10-Q for the quarter ended
June 30, 1997, for information regarding the pending sale of all Pacific
Telecom, Inc. outstanding common stock to Century Telephone Enterprises, Inc.
The current liability for dissenters' rights decreased from the year end
balance due to payments made to dissenting shareholders. See Note 2 to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, for information related to
the affiliated note for amounts to be paid dissenters relating to the
minority buy-out. See "Part II, Item 1 - Legal Proceedings" in the Company's
Form 10-Q for the quarter ended June 30, 1997, for information relating to a
lawsuit involving dissenters and the Company.
3. Certain loan agreements contain provisions restricting the payment of cash
dividends. Retained earnings of approximately $238.0 million were available
for dividends and other distributions at September 30, 1997.
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1997, calculated in accordance with Item 503 of Regulation S-K
under the Securities Exchange Act of 1934, was 4.1 to 1.
4. The Company's effective combined state and federal income tax rates were 39.2
percent and 38.9 percent for the nine months ended September 30, 1997 and
1996, respectively.
The difference between taxes calculated at the statutory federal tax rates
and the effective combined rates for 1997 and 1996 is reconciled as follows:
1997 1996
- ---------------------------------------------------------------------
Federal statutory rate 35.0% 35.0%
State income taxes, net of federal benefit 3.4 3.6
Amortization of investment tax credits (1.0) (1.4)
Amortization of excess deferred income taxes (.4) (.5)
Amortization of excess cost 1.6 1.8
Other .6 .4
- ---------------------------------------------------------------------
Effective tax rate 39.2% 38.9%
=====================================================================
The components of income tax expense are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
- -----------------------------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Federal income taxes $14,155 12,104 36,065 29,702
State income taxes 2,458 907 5,732 4,995
- -----------------------------------------------------------------------------
$16,613 13,011 41,797 34,697
=============================================================================
Income taxes currently payable $17,677 951 35,556 19,312
Deferred income taxes (711) 12,492 7,300 16,680
Amortization of deferred
investment tax credits (353) (432) (1,059) (1,295)
- -----------------------------------------------------------------------------
$16,613 13,011 41,797 34,697
=============================================================================
5. On September 30, 1997, the Company acquired local exchange assets in
Minnesota representing 32 exchanges serving approximately 27,000 access lines
from US WEST Communications, Inc. for approximately $103 million in cash.
"Net Plant" increased $58.1 million and "Intangibles" increased $44.9 million
as a result of the acquisition. Cash from operations of $98 million and an
escrow account of $5 million included in "Investments" provided the cash to
fund the acquisition.
6. On October 6, 1997, the Company acquired local exchange assets in Fairbanks,
Alaska representing a single exchange serving approximately 34,000 access
lines from the City of Fairbanks for approximately $84 million in cash.
Additionally, $8 million were placed into escrow pending Federal
Communications Commission approvals for cellular license transfer. Borrowings
under other available banking arrangements and an escrow account provided
most of the cash to fund the acquisition.
7. On October 31, 1997, the Company acquired local exchange assets in Michigan
representing eight exchanges serving approximately 12,000 access lines from
GTE North Incorporated for approximately $34 million in cash. Borrowings
under other available banking arrangements and an escrow account provided
most of the cash to fund the acquisition.
* * * * * *
CENTURY TELEPHONE ENTERPRISES, INC.
Unaudited Pro Forma Consolidated Condensed Financial Information
Introduction
On December 1, 1997, Century Telephone Enterprises, Inc. ("Century") acquired
Pacific Telecom, Inc. ("PTI") in exchange for $1.503 billion cash in a two-step
transaction. In the first step of the transaction, a wholly-owned subsidiary of
Century purchased substantially all of the cellular telephone operations of PTI
(collectively "PT Cellular") in exchange for $240 million, and in the second
step Century purchased 100% of the capital stock of PTI from PacifiCorp
Holdings, Inc. ("PHI") for $1.263 billion. After the first step but immediately
prior to the second, PTI paid a $240 million cash dividend to PHI. PTI and PT
Cellular provide (i) local exchange telephone service to approximately 660,000
telephone access lines in four midwestern states, seven western states and
Alaska and (ii) cellular telephone service to approximately 100,000 subscribers
in three states.
To finance the acquisition, Century borrowed $1.288 billion under its $1.6
billion senior unsecured credit facility dated August 28, 1997 with NationsBank
of Texas, Inc. and a syndicate of other lenders. In November 1997, in an
unrelated transaction effected in anticipation of the PTI acquisition, Century
sold 3.8 million shares of common stock of Brooks Fiber Properties, Inc.
("Brooks") for $202.7 million, which resulted in a pre-tax gain of approximately
$108.1 million ($66.2 million, net of tax). Such proceeds were used to finance a
portion of the purchase price of PTI. Accordingly, the pro forma impact of the
sale of Brooks stock has been included in the unaudited pro forma consolidated
condensed balance sheet, based on the assumption that the sale took place on
September 30, 1997. No pro forma adjustments related to the sale of the Brooks
stock have been made to the unaudited pro forma consolidated condensed income
statements because the investment in Brooks stock had no impact on such
statements for the periods presented. The gain on sale of the Brooks stock
will be reflected in Century's fourth quarter 1997 results of operations.
The following unaudited pro forma consolidated condensed balance sheet as of
September 30, 1997 and the unaudited pro forma consolidated condensed statements
of income for the year ended December 31, 1996 and the nine months ended
September 30, 1997 are based on the historical results of operations and
financial condition of Century and its subsidiaries (the "Company") and PTI and
its subsidiaries, and reflect the effects of the transactions described above.
Pro forma adjustments, and the assumptions on which they are based, are
described in the accompanying notes to the unaudited pro forma consolidated
condensed financial information.
The pro forma financial information related to the PTI acquisition has been
prepared using the purchase method of accounting and is based on the assumptions
that the purchase of PTI took place as of September 30, 1997 for purposes of the
pro forma balance sheet and as of January 1, 1996 for purposes of the pro forma
statements of income.
The pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if such transactions had been consummated on the dates and in
accordance with the assumptions described above, nor is it necessarily
indicative of future operating results or financial position.
In accordance with the purchase method of accounting, the actual consolidated
financial statements of the Company will reflect the PTI transaction only from
and after December 1, 1997.
The pro forma financial information should be read in conjunction with the
historical consolidated financial statements and notes thereto of Century and
PTI.
CENTURY TELEPHONE ENTERPRISES, INC.
Pro Forma Consolidated Condensed Balance Sheet
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro forma
-----------------------------------------
Adjustments
Adjustments relating to
As reported relating sale of
------------------------- to PTI Brooks
Century PTI acquisition stock Consolidated
--------------------------------------------------------------------
(Dollars in thousands)
(Note C) (Note A)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $11,283 10,179 (215,000) 202,700 9,162
Accounts receivable 100,140 118,136 (34,400) 183,876
Materials and supplies, at cost 9,139 9,842 18,981
Other 3,351 49,707 53,058
--------------------------------------------------------------------
123,913 187,864 (249,400) 202,700 265,077
--------------------------------------------------------------------
NET PROPERTY, PLANT AND
EQUIPMENT 1,145,557 1,016,689 (48,300) 2,113,946
--------------------------------------------------------------------
INVESTMENTS AND OTHER
ASSETS
Excess cost of net assets acquired 545,683 409,498 831,531 1,786,712
Other 458,551 146,770 (75,484) (176,686) 353,151
--------------------------------------------------------------------
1,004,234 556,268 756,047 (176,686) 2,139,863
--------------------------------------------------------------------
$2,273,704 1,760,821 458,347 26,014 4,518,886
====================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $19,013 39,045 58,058
Notes payable - 90,000 90,000
Accounts payable 53,273 50,814 104,087
Accrued expenses and other liabilities 63,292 61,486 (64,300) 64,300 124,778
Advance billing and customer deposits 16,705 5,014 21,719
--------------------------------------------------------------------
152,283 246,359 (64,300) 64,300 398,642
--------------------------------------------------------------------
LONG-TERM DEBT 565,633 478,842 1,318,832 2,363,307
--------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 308,173 233,735 5,700 (51,151) 496,457
--------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 60,519 - 60,519
Paid-in capital 490,661 225,943 (225,943) 490,661
Unrealized holding gain on investments, net
of taxes 62,038 - (53,349) 8,689
Retained earnings 635,491 575,942 (575,942) 66,214 701,705
Unearned ESOP shares (9,200) - (9,200)
Preferred stock - non-redeemable 8,106 - 8,106
--------------------------------------------------------------------
1,247,615 801,885 (801,885) 12,865 1,260,480
--------------------------------------------------------------------
$2,273,704 1,760,821 458,347 26,014 4,518,886
====================================================================
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
information.
CENTURY TELEPHONE ENTERPRISES, INC.
Pro Forma Consolidated Condensed Statement of Income
For the Nine Months Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Pro forma
----------------------------------
Adjustments
As reported relating
----------------------------- to PTI
Century PTI acquisition Consolidated
---------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
(Note D)
OPERATING REVENUES
Telephone $359,454 347,505 706,959
Mobile communications 220,472 38,632 259,104
Other 47,986 30,028 (26,421) 51,593
---------------------------------------------------------------
627,912 416,165 (26,421) 1,017,656
---------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses 329,254 202,541 (20,010) 511,785
Depreciation and amortization 108,740 80,420 14,313 203,473
---------------------------------------------------------------
437,994 282,961 (5,697) 715,258
---------------------------------------------------------------
OPERATING INCOME 189,918 133,204 (20,724) 302,398
---------------------------------------------------------------
OTHER INCOME (EXPENSE)
Gain on sales of assets 70,121 1,317 71,438
Interest expense (33,539) (30,240) (70,712) (134,491)
Income from unconsolidated cellular
entities 21,750 6,636 28,386
Minority interest (3,722) (2,764) 957 (5,529)
Other income and expense 3,467 (1,469) (564) 1,434
---------------------------------------------------------------
58,077 (26,520) (70,319) (38,762)
---------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 247,995 106,684 (91,043) 263,636
Income tax expense 90,251 41,797 (27,060) 104,988
---------------------------------------------------------------
NET INCOME $157,744 64,887 (63,983) 158,648
===============================================================
Primary earnings per share $2.61 2.62
===============================================================
Fully diluted earnings per share $2.58 2.60
===============================================================
Average primary shares outstanding 60,510 60,510
===============================================================
Average fully diluted shares outstanding 61,198 61,198
===============================================================
</TABLE>
See accompanying notes to unaudited pro forma consolidated condensed financial
information.
CENTURY TELEPHONE ENTERPRISES, INC.
Pro Forma Consolidated Condensed Statement of Income
For the Year Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Pro forma
---------------------------------
Adjustments
As reported relating
----------------------------- to PTI
Century PTI acquisition Consolidated
--------------------------------------------------------------
(Dollars in thousands)
(Note E)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Telephone $451,538 447,873 899,411
Mobile communications 250,243 44,043 294,286
Other 47,896 29,214 (25,771) 51,339
--------------------------------------------------------------
749,677 521,130 (25,771) 1,245,036
--------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and operating expenses 394,360 260,106 (20,659) 633,807
Depreciation and amortization 132,021 102,292 19,171 253,484
--------------------------------------------------------------
526,381 362,398 (1,488) 887,291
--------------------------------------------------------------
OPERATING INCOME 223,296 158,732 (24,283) 357,745
--------------------------------------------------------------
OTHER INCOME (EXPENSE)
Gain on sales of assets 815 3,705 4,520
Interest expense (44,662) (40,353) (94,254) (179,269)
Income from unconsolidated cellular
entities 26,952 5,147 32,099
Minority interest (6,675) (2,398) 848 (8,225)
Other income and expense 3,916 (2,102) (878) 936
--------------------------------------------------------------
(19,654) (36,001) (94,284) (149,939)
--------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 203,642 122,731 (118,567) 207,806
Income tax expense 74,565 47,454 (34,845) 87,174
--------------------------------------------------------------
NET INCOME $129,077 75,277 (83,722) 120,632
==============================================================
Primary earnings per share $2.15 2.01
==============================================================
Fully diluted earnings per share $2.14 2.00
==============================================================
Average primary shares outstanding 59,924 59,924
==============================================================
Average fully diluted shares outstanding 60,660 60,660
==============================================================
</TABLE>
See accompanying notes to unaudited proforma consolidated condensed financial
information.
Notes to Unaudited Pro Forma Consolidated Condensed
Financial Information
(A) Sale of Brooks Stock. In November 1997, in an unrelated transaction
---------------------
effected in anticipation of the PTI acquisition, Century sold 3.8 million
shares of Brooks common stock for $202.7 million, which resulted in a
pre-tax gain of approximately $108.1 million ($66.2 million, net of tax).
Such proceeds were used to finance a portion of the purchase price of PTI.
Accordingly, the pro forma impact of the sale of Brooks stock has been
included in the unaudited pro forma consolidated condensed balance sheet,
based on the assumption that the sale took place on September 30, 1997.
The pro forma adjustment reflects the reduction of the Company's
investment in Brooks stock ($176.7 million); reduction of the associated
unrealized holding gain on investments, net of tax ($53.3 million); and
reversal of related deferred taxes of $51.2 million. The $64.3 million
increase in accrued expenses and other liabilities represents current
income taxes payable as a result of the sale. No pro forma adjustments
related to the sale of the Brooks stock have been made to the unaudited
pro forma consolidated condensed income statements because the investment
in Brooks stock had no impact on such statements for the periods
presented. The gain on sale of the Brooks stock will be reflected in
Century's fourth quarter 1997 results of operations.
(B) Purchase of PTI and PT Cellular.
--------------------------------
1. Costs of acquisition. The $1.503 billion of cash expended for 100% of
the common stock of PTI and PT Cellular was composed of the following:
Purchase of common stock of PTI $1,263,000,000
Purchase of common stock of PT Cellular 240,000,000
-------------
$1,503,000,000
==============
A pro forma adjustment has been reflected in the unaudited pro forma
consolidated condensed balance sheet for $15.3 million of estimated
costs related to the acquisition expected to be incurred by Century.
Such adjustment includes the fee of Century's financial advisor and
estimated involuntary termination benefits payable to PTI employees to
be terminated, along with other costs.
2. Operations. The pro forma adjustments do not consider (i) the effect
of possible long-term expense reductions that may occur in connection
with combining PTI's operations with the Company's operations or (ii)
integration costs required to be expensed as incurred.
3. Other transactions. The pro forma adjustments do not reflect the
effects of the Company's and PTI's acquisitions and dispositions of
certain properties during 1996 and 1997, the aggregate effect of which
is not material for pro forma purposes.
(C) September 30, 1997 Balance Sheet Pro Forma Adjustments. The pro forma
------------------------------------------------------
adjustments applicable to the acquisition of PTI and PT Cellular with
respect to the unaudited pro forma consolidated condensed balance sheet as
of September 30, 1997, as set forth below, reflect a preliminary purchase
price allocation. The preliminary estimates of the fair value of certain
assets and liabilities (specifically noncurrent assets and liabilities)
may change as fair value information is obtained and the purchase price
allocation is refined. Century funded $1.288 billion of the $1.503 billion
purchase price with 5-year senior unsecured floating-rate bank debt under
a $1.6 billion committed credit facility with NationsBank and a syndicate
of other lenders. Century is currently evaluating its long-term financing
alternatives and, although no assurances to this effect may be given, it
currently anticipates selling senior debt securities in early 1998.
The pro forma financial information has been prepared assuming
that Century will obtain long-term financing at an assumed interest rate
of 7.2%.
<TABLE>
<CAPTION>
Accrued
expenses Deferred
Property Excess cost and other Long- credits &
Accounts plant & of net assets Other liabil- term other Paid-in Retained
Cash receivable equipment acquired assets ities debt liabilities capital earnings
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) Purchase PTI and
PT Cellular:
Borrow funds 1,288,000 1,288,000
Deliver consideration (1,503,000) 1,186,097
(2) Eliminate PTI equity
and excess cost (409,498) (75,484) (225,943) (575,942)
(3) Adjustments:
Non-strategic assets
to be sold 56,300 (48,300) (8,000)
Apply cash to long-
term debt (56,300) (56,300)
Long-term debt 7,500 7,500
Conform accounting
methods:
Postretirement
benefits 30,000 30,000
Regulatory support (34,400) 34,400
Deferred taxes on
adjustments (24,300) (24,300)
(4) Reflect estimated costs
of acquisition:
Borrow funds 15,332 15,332
Pay costs (15,332) 15,332
(5) Borrow funds for
payment of income
taxes 64,300 64,300
Pay income taxes (64,300) (64,300)
- -----------------------------------------------------------------------------------------------------------------------------------
(215,000) (34,400) (48,300) 831,531 (75,484) (64,300) 1,318,832 5,700 (225,943) (575,942)
===================================================================================================================================
</TABLE>
(1) Reflects borrowings of $1.288 billion and delivery of $1.503 billion of
consideration. The remaining $215 million was financed from available cash,
most of which consisted of the proceeds of Century's sale of common stock
of Brooks.
(2) Reflects the elimination of PTI equity and excess cost of net assets
acquired.
(3) Reflects the effect on excess cost of net assets acquired of purchase
accounting adjustments, as follows:
Allocation of purchase price to operating unit the
Company intends to sell to reduce acquisition
indebtedness ($8 million)
Adjust long-term debt to fair value $7.5 million
Conform accounting for postretirement benefits to
Century's accounting method $30 million
Conform accounting for regulatory support to
Century's accounting method $34.4 million
Deferred income taxes on purchase accounting
adjustments ($24.3 million)
(4) Reflects estimated costs of acquisition, including the fee of Century's
financial advisor and estimated involuntary termination benefits payable to
PTI employees to be terminated, along with other costs.
(5) Reflects borrowings of $64.3 million and payment of income taxes on sale of
Brooks stock. Funds were temporarily used to fund portion of purchase price
of PTI.
(D) September 30, 1997 Income Statement Pro Forma Adjustments. Set forth below
---------------------------------------------------------
are the pro forma adjustments applicable to the acquisition of PTI and PT
Cellular with respect to the unaudited pro forma consolidated condensed
statement of income for the nine-month period ended September 30, 1997:
<TABLE>
<CAPTION>
Cost of
sales and Depreciation
Other operating and Interest Minority Other income Income
revenues expenses amortization expense interest and expense taxes
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amortization of excess
cost of net assets
acquired (assuming a
40-year amortization
period) 24,141
Reverse PTI amortization
of excess cost of net
assets acquired (9,094)
Conform accounting for
postretirement benefits
to Century's accounting
method (1,300)
Interest on net
borrowings of $1.3
billion at an assumed
rate of 7.2% (71,217)
Amortization of
premium on long-
term debt 405
Tax benefit relating
to pro forma adjustments
(assuming a 35%
tax rate) (24,329)
Non-strategic assets
to be sold to reduce
acquisition indebtedness (26,421) (18,710) (734) 100 957 (564) (2,731)
- --------------------------------------------------------------------------------------------------------------------
(26,421) (20,010) 14,313 (70,712) 957 (564) (27,060)
====================================================================================================================
</TABLE>
A .125% change in the assumed interest rate would have changed net income by
approximately $804,000.
(E) December 31, 1996 Income Statement Pro Forma Adjustments. Set forth below
---------------------------------------------------------
are the pro forma adjustments applicable to the acquisition of PTI and PT
Cellular with respect to the unaudited pro forma consolidated condensed
statement of income for the year ended December 31, 1996:
<TABLE>
<CAPTION>
Cost of
sales and Depreciation
Other operating and Interest Minority Other income Income
revenues expenses amortization expense interest and expense taxes
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amortization of excess
cost of net assets
acquired (assuming a
40-year amortization
period) 32,188
Reverse PTI amortization
of excess cost of net
assets acquired (12,125)
Conform accounting for
postretirement benefits
to Century's accounting
method (1,700)
Interest on net
borrowings of $1.3
billion at an assumed
rate of 7.2% (94,956)
Amortization of
premium on long-
term debt 540
Tax benefit relating
to pro forma adjustments
(assuming a 35%
tax rate) (32,451)
Non-strategic assets to
be sold to reduce
acquisition indebtedness (25,771) (18,959) (892) 162 848 (878) (2,394)
- --------------------------------------------------------------------------------------------------------------------
(25,771) (20,659) 19,171 (94,254) 848 (878) (34,845)
====================================================================================================================
</TABLE>
A .125% change in the assumed interest rate would have changed net income by
approximately $1.1 million.
(F) Reclassifactions. Certain reclassifications have been made to the
historical financial information to conform to the presentation of the pro
forma information.
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS REPORT ON FORM 8-K INCLUDES CERTAIN
FORWARD-LOOKING STATEMENTS REGARDING EVENTS AND FINANCIAL TRENDS THAT MAY AFFECT
THE COMPANY'S FUTURE OPERATING RESULTS AND FINANCIAL POSITION. SUCH FORWARD-
LOOKING STATEMENTS ARE SUBJECT TO UNCERTAINTIES THAT COULD CAUSE THE COMPANY'S
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH STATEMENTS. SUCH UNCERTAINTIES
INCLUDE BUT ARE NOT LIMITED TO: THE EFFECTS OF ONGOING DEREGULATION IN THE
TELECOMMUNICATIONSS INDUSTRY; THE POTENTIAL EFFECTS OF GREATER THAN ANTICIPATED
COMPETITION IN THE COMPANY'S MARKETS; POSSIBLE CHANGES IN THE DEMAND FOR THE
COMPANY'S PRODUCTS AND SERVICES; THE COMPANY'S ABILITY TO SUCCESSFULLY INTRODUCE
NEW OFFERINGS ON A TIMELY AND COST EFFECTIVE BASIS; THE RISKS INHERENT IN RAPID
TECHNOLOGICAL CHANGE; THE COMPANY'S ABILITY TO EFFECTIVELY MANAGE ITS GROWTH,
INCLUDING INTEGRATING THE NEWLY-ACQUIRED OPERATIONS OF PTI INTO THE COMPANY'S
OPERATIONS; AND THE EFFECTS OF MORE GENERAL FACTORS SUCH AS CHANGES IN GENERAL
MARKET OR ECONOMIC CONDITIONS OR IN LEGISLATION, REGULATION OR PUBLIC POLICY.
THESE AND OTHER UNCERTAINTIES RELATED TO THE BUSINESS ARE DESCRIBED IN DETAIL
IN CENTURY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997.
YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY WERE MADE.
CENTURY UNDERTAKES NO OBLIGATION TO UPDATE ANY OF ITS FORWARD-LOOKING
STATEMENTS FOR ANY REASON.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CENTURY TELEPHONE ENTERPRISES, INC.
/S/ Murray H. Greer
---------------------
Dated: December 11, 1997 Murray H. Greer
Controller
(Principal Accounting Officer)
Exhibit 2.2
November 5, 1997
Century Telephone Enterprises, Inc.
P.O. Box 4065
Monroe, LA 71211-4065
Attention: Mr. R. Stewart Ewing, Jr.
Senior Vice President and Chief Financial Officer
Re: Definitive Stock Purchase Agreement
Ladies and Gentlemen:
We refer you to the Stock Purchase Agreement (the "Definitive Agreement")
executed on June 11, 1997 by and among PacifiCorp Holdings, Inc. ("PHI"),
Century Telephone Enterprises, Inc. ("Century"), Pacific Telecom, Inc. ("PTI")
and Century Cellunet, Inc., pursuant to which PHI has agreed to sell to Century
all of the capital stock of PTI. Section 7.1 of the Definitive Agreement
contemplates that all Taxes on the income of PTI and its Subsidiaries through
the end of the Closing Date, with certain exceptions, shall be paid to PHI by
PTI at the Closing. Section 7.2 contemplates that PHI will include or cause to
be included the income of PTI and its Subsidiaries, with certain exceptions, on
the consolidated federal and consolidated unitary or combined state and local
income tax returns of PHI and its Affiliated Group for all periods through the
Closing Date and will pay all such Taxes.
The parties have realized that it will be impractical to compute the amount
of Taxes PTI and its Subsidiaries should pay up to PHI at the Closing.
Accordingly, they wish to amend Section 7.1 to take this fact into account.
The parties hereby agree to the following amendments:
1. Amend the last sentence of Section 7.1 to read:
"An estimate of all Taxes on the income of PTI and its Subsidiaries
through the end of the Closing Date (excluding (i) any deferred
income triggered into income by Reg. Sec. 1.1502-13 and 1.1502-14
and Taxes on any excess loss accounts taken into income under Reg.
Sec. 1.1502-19 and (ii) income Taxes on gain from the sale of the
Cellular Stock pursuant to Sec. 2.3) shall be paid to PHI by PTI at the
Closing."
2. Add the following at the end of Section 7.1:
"No later than December 31, 1988, PHI will pay to Century or Century will
pay to PHI, as the case may be, the difference between the estimated
amount of Taxes PTI paid to PHI in accordance with the preceding sentence
at the Closing and the actual amount of 1997 federal consolidated unitary
or combined state and local income Taxes on the income of PTI and its
Subsidiaries (again excluding (i) any tax on deferred income triggered in
the income by Reg. Sec. 1.1502-13 and 1.1502-14 and Taxes on any excess
loss accounts taken into income under Reg. Sec. 1.1502-19 and (ii) income
Taxes on gain from the sale of the Cellular Stock pursuant to Section 2.3.
If the foregoing is acceptable to you, please execute both of the duplicate
originals of this letter agreement, retain one for your records, and return the
other to the undersigned for our records.
PACIFICORP HOLDINGS, INC.
By: /s/ W.E. Peressinni
Title: Treasurer
Agreed to and accepted as of the date hereof:
CENTURY TELEPHONE ENTERPRISES, INC.
By: /s/ W. Bruce Hanks
Title: Senior Vice President Corporate
Development and Strategy
Exhibit 99.1
FOR IMMEDIATE RELEASE FOR MORE INFORMATION CONTACT:
December 11, 1997 Jeffrey S. Glover (318) 388-9648
[email protected]
CENTURY FILES $1.5 BILLION UNIVERSAL SHELF REGISTRATION STATEMENT
Monroe, LA. . . . Century Telephone Enterprises, Inc.(NYSE Symbol:CTL)announced
that it filed today a shelf registration statement with the Securities and
Exchange Commission registering $1.5 billion of senior unsecured debt
securities, preferred stock, common stock and warrants, which may be issued
from time to time as determined by the Board of Directors.
The aggregate principal amount, net proceeds, offering price and other
specific terms of securities which may be issued under the registration
statement will be determined at the time of sale and described in a supplement
to the prospectus forming a part of the registration statement. Unless otherwise
indicated in any such supplement, the net proceeds from any such sale of
securities will be used for refinancing outstanding indebtedness and for other
general corporate purposes, including the financing of acquisitions or capital
expenditures. Century may sell such securities (i) through underwriters or
dealers, (ii) directly to one or more purchasers or (iii) through agents.
Century currently anticipates that it may sell senior debt securities in early
1998 to refinance a substantial portion of the bank indebtedness incurred in
connection with its acquisition of Pacific Telecom, Inc., in early December
1997.
Century Telephone Enterprises, Inc. provides a range of communications
services including local exchange, wireless, long distance and Internet access
to more than two million customers in 21 states. The company, headquartered in
Monroe, Louisiana, is publicly traded on the New York Stock Exchange under the
symbol CTL. Century is the 10th largest local exchange telephone company, based
on access lines, and the 10th largest cellular company, based on population
equivalents owned, in the United States.
Visit Century's corporate website at www.centurytel.com.
*****
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective, nor may sales be effected in the
absence of a prospectus supplement setting forth the terms and conditions of any
specific series of securities offered. This press release shall not constitute
an offer to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any jurisdiction in which such offer, solicitation
or sale would be unlawful prior to registration or qualification under the
securities laws of any such jurisdiction.
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