UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7784
CENTURY TELEPHONE ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
Louisiana 72-0651161
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Century Park Drive, Monroe, Louisiana 71203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (318) 388-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 New York Stock Exchange
Berlin Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Berlin Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1998, the aggregate market value of voting stock held by
non-affiliates (affiliates being for these purposes only directors, executive
officers and holders of more than five percent of the Company's outstanding
voting securities) was $3.7 billion. As of February 28, 1998, there were
60,989,911 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement prepared in connection with the
1998 annual meeting of shareholders are incorporated in Part III of this Report.
PART I
Item 1. Business
General. Century Telephone Enterprises, Inc. ("Century") is a regional
diversified communications company engaged primarily in providing local exchange
telephone services and cellular telephone services. For the year ended December
31, 1997, telephone (local exchange) operations and wireless (cellular)
operations provided 59% and 34%, respectively, of the consolidated revenues of
Century and its subsidiaries (the "Company"). All of the Company's telephone and
cellular operations are conducted within the continental United States and
Alaska.
At December 31, 1997, the Company's local exchange telephone subsidiaries
operated over 1.2 million telephone access lines, primarily in rural, suburban
and small urban areas in 21 states, with the largest customer bases located in
Wisconsin, Washington, Alaska, Michigan, Louisiana, Colorado, Ohio, Oregon and
Montana. According to published sources, the Company is the tenth largest local
exchange telephone company in the United States based on the number of access
lines served.
At December 31, 1997, the Company's majority-owned and operated cellular
systems served approximately 570,000 customers in 21 Metropolitan Statistical
Areas ("MSAs"), primarily concentrated in Michigan, Louisiana, Arkansas,
Mississippi, Wisconsin and Texas, and 23 Rural Service Areas ("RSAs"), most of
which are in Michigan, Mississippi, Wisconsin, Louisiana and Arkansas. The
Company's ownership interest in these markets represented approximately 8.1
million pops (the estimated population of licensed cellular telephone markets
multiplied by the Company's proportionate equity interest in the licensed
operators thereof). At December 31, 1997, the Company also owned minority equity
interests in 12 MSAs and 22 RSAs, representing approximately 2.2 million pops.
Of the Company's 10.3 million aggregate pops, approximately 65% are attributable
to the Company's MSA interests, with the balance attributable to its RSA
interests. Except for five MSAs and four RSAs, all of the cellular systems
operated by the Company are operated under wireline licenses. According to data
derived from published sources, the Company is the tenth largest cellular
telephone company in the United States based on the Company's 10.3 million pops.
See "Wireless Operations-Regulation and Competition-Cellular Licensing Process"
for more information on MSAs, RSAs and wireline licenses.
The Company also provides long distance, call center, cable television and
interactive services in certain local and regional markets, as well as certain
printing and related services.
Recent acquisitions and dispositions. On December 1, 1997 the Company
acquired Pacific Telecom, Inc. ("PTI") in exchange for $1.503 billion cash. As a
result of the PTI acquisition, the Company acquired (i) over 660,000 telephone
access lines in four midwestern states, seven western states and Alaska, (ii)
over 88,000 cellular customers in ten markets located in two midwestern states
and Alaska, along with minority equity interests in 12 other cellular markets,
and (iii) various wireless, cable television and other communications assets.
PTI's aggregate cellular equity interests represent 1.9 million pops. The
operations of PTI have been included in the Company's results of operations
beginning December 1, 1997.
During late 1997 and early 1998, the Company acquired two security alarm
businesses that provide services to approximately 5,900 customers in north
central Louisiana, southern Arkansas and northwestern Mississippi.
In December 1997 the Company acquired an additional 76% interest in
Wisconsin RSA 8 which is adjacent to the Company's existing cellular operations
in southwestern Wisconsin.
During 1997 the Company exchanged its 89% interest in its competitive access
subsidiary for approximately 4.3 million shares of publicly traded securities.
Approximately 3.8 million shares of such stock were sold in November 1997 for
$203 million and the remaining shares were converted into approximately 1.0
million shares of WorldCom, Inc. in early 1998.
In January 1997 the Company acquired Pecoco, Inc., a provider of local
exchange telephone service in four counties in Wisconsin. As a result of the
acquisition, the Company acquired (i) more than 7,600 telephone access lines,
(ii) a minority interest in two cellular partnerships serving Madison and
Milwaukee, Wisconsin, representing approximately 35,000 pops and (iii) certain
cable television assets.
For several years prior to 1997, the Company has expanded its operations
through an ongoing program of acquisitions. Substantial acquisitions during the
last five years include (i) the 1993 acquisition of San Marcos Telephone Company
(22,000 telephone access lines and 325,000 pops) and (ii) the 1994 acquisition
of Celutel, Inc. (over 1.1 million pops). The Company continually evaluates the
possibility of acquiring additional telecommunications assets in exchange for
cash, securities or both, and at any given time may be engaged in discussions or
negotiations regarding additional acquisitions. Although the Company's primary
focus will continue to be on acquiring telephone and wireless interests that are
proximate to its properties or that serve a customer base large enough for the
Company to operate efficiently, other communications interests may also be
acquired.
In March 1998 the Company entered into a definitive agreement to acquire
certain local exchange and directory publishing assets from Ameritech for
approximately $225 million. Under such agreement,the Company would acquire,
among other things, 85,000 telephone access lines in northern and central
Wisconsin. The transaction is expected to close in the fourth quarter of 1998
subject to, among other things, regulatory approvals.
Other. As of December 31, 1997, the Company had approximately 5,700
employees, approximately 1,100 of whom were members of eight different
bargaining units represented by the International Brotherhood of Teamsters, the
International Brotherhood of Electrical Workers, Communications Workers of
America, or the NTS Employee Committee. Relations with employees continue to be
generally good.
Century was incorporated under Louisiana law in 1968 to serve as a holding
company for several telephone companies acquired over the previous 15 to 20
years. Century's principal executive offices are located at 100 Century Park
Drive, Monroe, Louisiana 71203 and its telephone number is (318) 388-9000.
TELEPHONE OPERATIONS
According to published sources, the Company is the tenth largest local
exchange telephone company in the United States, based on the more than 1.2
million access lines it served at December 31, 1997. All of the Company's access
lines are digitally switched. Through its operating telephone subsidiaries, the
Company provides services to predominately rural, suburban and small urban
markets in 21 states. The table below sets forth certain information with
respect to the Company's access lines as of December 31, 1997 and 1996, and
illustrates the substantial impact the PTI acquisition had on the Company's
telephone operations:
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------
Number of Percent of Number of Percent of
State access lines access lines access lines access lines
- -------------------------------------------------------------------------
Wisconsin 245,091 20% 105,252 21%
Washington 166,611 14 - -
Alaska 124,869 10 - -
Michigan 104,440 9 88,483 18
Louisiana 94,432 8 92,677 18
Colorado 81,206 7 7,420 1
Ohio 77,987 7 75,103 15
Oregon 71,544 6 - -
Montana 57,390 5 - -
Arkansas 42,193 4 40,673 8
Texas 41,852 4 38,327 8
Minnesota 29,029 2 - -
Tennessee 24,578 2 23,507 5
Mississippi 17,839 2 16,211 3
Idaho 5,746 - 4,162 1
New Mexico 5,559 - 5,168 1
Indiana 4,975 - 4,827 1
Wyoming 4,447 - - -
Iowa 1,801 - 189 -
Arizona 1,624 - 1,563 -
Nevada 437 - - -
- -------------------------------------------------------------------------
1,203,650 100% 503,562 100%
=========================================================================
As indicated in the following table, the Company has experienced growth in
its telephone operations over the past several years, a substantial portion of
which was attributable to the acquisition of PTI and other telephone companies
and to the expansion of services:
Year ended or as of December 31,
- -------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------
(Dollars in thousands)
Access lines 1,203,650 503,562 480,757 454,963 434,691
% Residential 74% 77 78 79 80
% Business 26% 23 22 21 20
Operating revenues $ 530,597 451,538 419,242 391,265 350,330
Capital expenditures $ 115,854 110,147 136,006 152,336 131,180
- -------------------------------------------------------------------------
Future growth in telephone operations is expected to be derived from (i)
acquiring additional telephone companies, (ii) providing service to new
customers, (iii) increasing network usage and (iv) providing additional services
made possible by advances in technology and changes in regulation. For
information on developing competitive trends, see "-Regulation and Competition."
In connection with its acquisition of PTI, the Company has reorganized its
telephone operations into three operating regions, including a new western
region headquartered in Vancouver, Washington. Substantially all of the new
western region is comprised of local exchange companies ("LECs"), located in
seven western states and Alaska, which were acquired in the acquisition of PTI.
As soon as practical, the Company plans to offer long distance, Internet and
certain other services in most of the local exchange markets acquired in the PTI
acquisition.
Services
The Company's local exchange telephone subsidiaries derive revenue from
providing (i) local telephone services, (ii) network access services and (iii)
other related services. The following table reflects the percentage of telephone
operating revenues derived from these respective services:
1997 1996 1995
- -----------------------------------------------------------------
Local service 27.8% 26.9 26.6
Network access 60.2 61.2 61.7
Other 12.0 11.9 11.7
- -----------------------------------------------------------------
100.0% 100.0 100.0
=================================================================
Local service revenues are derived from the provision of local exchange
telephone services in the Company's service areas. Internal access line growth
during 1997, 1996 and 1995 was 4.4%, 4.3% and 4.4%, respectively. The Company
believes that access line growth in the future will benefit from population
growth in its service areas, acquisitions and the increase in the number of
households maintaining more than one access line. The Company markets local
Internet access in 340 communities in 12 states, which the Company believes has
led to an increase in orders for second lines.
Network access revenues primarily relate to services provided by the Company
to long distance carriers and other customers in connection with the use of the
Company's facilities to originate and terminate interstate and intrastate long
distance telephone calls. Access charges to long distance carriers and other
customers are based on tariffed access rates filed with the Federal
Communications Commission ("FCC") for interstate services and with the
respective state regulatory agency for intrastate services. Certain of the
Company's interstate network access revenues are based on access charges filed
directly with the FCC; the remainder of such revenues are derived under revenue
sharing arrangements with other LECs administered by the National Exchange
Carrier Association ("NECA").
Certain of the Company's intrastate network access revenues are derived
through access charges billed by the Company to intrastate long distance
carriers and other LEC customers. Such intrastate network access charges are
based on access tariffs, which are subject to state regulatory commission
approval. Additionally, certain of the Company's intrastate network access
revenues, along with intrastate long distance revenues, are derived through
revenue sharing arrangements with other LECs.
The installation of digital switches and related software has been an
important component of the Company's growth strategy because it allows the
Company to offer enhanced services (such as call forwarding, conference calling,
caller identification, selective call ringing and call waiting) and to thereby
increase utilization of existing access lines. In 1997 the Company continued to
expand its list of premium services (such as voice mail and Internet access)
offered in certain service areas and aggressively marketed these services.
The Company is installing fiber optic cable in certain of its high traffic
routes and provides alternative routing of telephone service over fiber optic
cable networks in several strategic operating areas. At December 31, 1997, the
Company's telephone subsidiaries had over 5,100 miles of fiber optic cable in
use, of which approximately 2,000 miles were acquired in the PTI acquisition.
Other revenues include revenues related to (i) leasing, selling, installing,
maintaining and repairing customer premise telecommunications equipment and
wiring, (ii) providing billing and collection services for long distance
companies, (iii) participating in the publication of local directories and (iv)
providing Internet access. At the end of 1997, the Company offered Internet
access in telephone markets representing 61% of its access lines. Certain large
communications companies for which the Company currently provides billing and
collection services continue to indicate their desire to reduce their billing
and collection expenses, which may result in future reductions of the Company's
billing and collection revenues.
For further information on the regulation of the Company's revenues, see
"-Regulation and Competition."
Federal Financing Programs
Certain of the Company's telephone subsidiaries receive long-term financing
from the Rural Utilities Service ("RUS") and the Rural Telephone Bank ("RTB").
The RUS has made long-term loans to telephone companies since 1949 for the
purpose of improving telephone service in rural areas. The RUS continues to make
new loans at interest rates that range from 5% to 7% based on borrower
qualifications and the cost of funds to the United States government. The RTB,
established in 1971, makes long-term loans at interest rates based on its
average cost of funds as determined by statutory formula (such rates ranged from
5.98% to 6.54% for the fiscal year ended September 30, 1997), and in some cases
makes loans concurrently with RUS loans. Most of the Company's telephone plant
is pledged or mortgaged to secure obligations of the Company's telephone
subsidiaries to the RUS and RTB. The Company's telephone subsidiaries which have
borrowed from government agencies generally may not loan or advance any funds to
Century, but may pay dividends if certain financial covenants are met.
For additional information regarding the Company's financing, see the
Company's consolidated financial statements included in Item 8 herein.
Regulation and Competition
Traditionally, LECs have operated as regulated monopolies. Consequently, the
majority of the Company's telephone operations have traditionally been regulated
extensively by various state regulatory agencies (generally called public
service commissions or public utility commissions) and by the FCC. As discussed
in greater detail below, passage of the Telecommunications Act of 1996 (the
"1996 Act"), coupled with state legislative and regulatory initiatives and
technological changes, has fundamentally altered the telephone industry by
reducing the regulation of LECs and permitting competition in each segment of
the telephone industry. Although Century anticipates that these trends towards
reduced regulation and increased competition will continue, it is difficult to
determine the form or degree of future regulation and competition in the
Company's service areas.
State regulation. The local service rates and intrastate access charges of
substantially all of the Company's telephone subsidiaries are regulated by state
regulatory commissions. Most of such commissions have traditionally regulated
pricing through "rate of return" regulation that focuses on authorized levels of
earnings by LECs. Most of these commissions also (i) regulate the purchase and
sale of LECs, (ii) prescribe depreciation rates and certain accounting
procedures and (iii) regulate various other matters, including certain service
standards and operating procedures.
In recent years, state legislatures and regulatory commissions having
jurisdiction over the Company's telephone subsidiaries in several states in
which the Company has substantial operations have either begun to reduce the
regulation of LECs or have announced their intention to do so, and it is
expected that this trend will continue. This reduced regulatory oversight of
certain of the Company's telephone operations may allow the Company to offer new
and competitive services faster than under the traditional regulatory process.
Coincident with these efforts, legislative, regulatory and technological changes
have introduced competition into the local exchange industry. See "-Developments
Affecting Competition."
Substantially all of the state regulatory commissions have statutory
authority, the specific limits of which vary, to initiate and conduct earnings
reviews of the LECs that they regulate. As part of the movement towards
deregulation, several states are moving away from traditional rate of return
regulation towards price cap regulation and incentive regulation (which are
similar to the FCC regulations discussed below), and are actively encouraging
larger LECs to adopt these newer forms of price regulation. The continuation of
this trend may lead to fewer earnings reviews in the future. Currently, however,
most of the Company's LECs continue to be regulated under rate of return
regulation.
During 1995 the Louisiana Public Service Commission ("LPSC") adopted a new
regulatory plan for independent telephone companies in Louisiana. For additional
information, see "Regulation and Competition" in Item 7 herein. In 1997 the LPSC
adopted a consumer Price Protection Plan (the "Louisiana Plan"), effective July
1997, which impacts all of the Company's telephone subsidiaries operating in
Louisiana. The new form of regulation will focus on price and quality of
service. Under the Louisiana Plan, the Company's Louisiana telephone
subsidiaries' local rates will be frozen for a period of three years and access
rates will be frozen for a period of two years. Although the Louisiana Plan has
no specified term, the LPSC is required to review it by mid-2000. The Company's
Louisiana telephone subsidiaries have the option to propose a new plan at any
time if the LPSC determines that (i) effective competition exists or (ii)
unforeseen events threaten the subsidiary's ability to provide adequate service
or impairs its financial health.
The Company's telephone operations in Wisconsin that were acquired in the
December 1997 acquisition of PTI have been regulated under an alternative
regulation plan (the "Wisconsin Plan") since June 1996. The Wisconsin Plan has a
five-year term and includes a provision that allows the Company's subsidiary
covered by such plan to adjust rates within specified parameters if certain
quality-of-service and infrastructure-development commitments are met. The
Wisconsin Plan also includes initiatives designed to promote competition.
The Michigan Public Service Commission regulates the Company's Michigan
telephone subsidiaries pursuant to the parameters established by the Michigan
Telecommunications Act of 1995 ("MTA"). The MTA focuses on price and quality of
service as opposed to traditional methods of regulation.
FCC regulation. The FCC regulates the interstate services provided by the
Company's telephone subsidiaries primarily by regulating the interstate access
charges that are billed to long distance companies and other LEC customers by
the Company for use of its local network in connection with the origination and
termination of interstate telephone calls. Additionally, the FCC has prescribed
certain rules and regulations for telephone companies, including regulations
regarding the use of radio frequencies; a uniform system of accounts; and rules
regarding the separation of costs between jurisdictions and, ultimately, between
interstate services.
Effective January 1, 1991, the FCC adopted price-cap regulation relating to
interstate access rates for the Regional Bell Operating Companies ("RBOCs") and
GTE Corporation. An annual opportunity to elect price-cap regulation is
available for other LECs. Under price-cap regulation, limits imposed on a
company's interstate rates will be adjusted periodically to reflect inflation,
productivity improvement and changes in certain non-controllable costs. In May
1993 the FCC adopted an optional incentive regulatory plan for LECs not subject
to price-cap regulation. A LEC electing the optional incentive regulatory plan
would, among other things, file tariffs based primarily on historical costs and
not be allowed to participate in the relevant NECA pooling arrangements. The
Company has not elected price-cap regulation or the optional incentive
regulatory plan, but will continue to evaluate its options on a periodic basis.
Either election, if made by the Company, would have to be applicable to all of
the Company's telephone subsidiaries. The authorized interstate access rate of
return for the Company's telephone subsidiaries is 11.25%, which is the
authorized rate established by the FCC for LECs not governed by price-cap
regulation or the optional incentive regulatory plan.
In February 1996 the FCC sought public comments on whether it should
initiate a rate of return represcription proceeding for LECs that are subject to
rate of return regulation for interstate access revenues. The Company is unaware
of any significant developments in this proceeding.
In an access charge reform order adopted in May 1997, the FCC changed its
system of interstate access charges to make them compatible with the
deregulatory framework established by the 1996 Act. Such changes are primarily
applicable to price-cap companies. The Company's telephone subsidiaries
determine interstate revenues under rate of return regulation and are,
therefore, only minimally impacted by the access charge reform order. The FCC
has indicated, however, that a separate access charge reform proceeding would be
initiated for rate of return companies.
In October 1997 the FCC issued a Notice of Proposed Rulemaking which would,
among other things, create a federal-state joint board to review jurisdictional
separations procedures through which the costs of regulated telecommunications
services are allocated to the interstate and intrastate jurisdictions.
High-cost support funds, revenue sharing arrangements and related matters. A
significant number of the Company's telephone subsidiaries recover a portion of
their costs under federal and state cost recovery mechanisms that traditionally
have allowed LECs serving small communities and rural areas to provide
communications services reasonably comparable to those available in urban areas
and at reasonably comparable prices.
The 1996 Act authorized the establishment of new federal and state universal
service funds to provide continued support to eligible telecommunications
carriers. In May 1997 the FCC adopted an order on universal service, as mandated
by the 1996 Act. In the order, the FCC ruled that rural telephone companies
which are designated eligible telecommunications carriers will continue to
receive universal service funding. Each of the Company's LECs has been so
designated by its respective state regulatory agency. As a result, the Company's
LECs will continue to receive payments under the federal support mechanisms
currently in effect until the FCC adopts funding support mechanisms based on
forward-looking economic costs, which it is required to do, but no earlier than
January 2001. Although the Company anticipates that it may experience a
reduction in its federal support revenues at some point in the future,
management believes it is premature to assess or estimate the ultimate impact
thereof. During 1997 and 1996 the Company's telephone subsidiaries received
$65.4 million (of which $4.6 million was applicable to the PTI properties) and
$49.3 million, respectively, from the federal Universal Service Fund.
As part of its universal service order, the FCC also established a new
program to provide up to $2.25 billion of discounted telecommunications services
annually to schools and libraries, commencing January 1998. In addition, the FCC
established a $400 million annual fund to provide discounted telecommunications
services for rural health care providers. All communications carriers providing
interstate telecommunications services, including the Company's LECs and its
cellular and long distance operations, are required to contribute to these
programs. In December 1997 the FCC, while reserving the right to adjust such
amounts if demand increases, modified the amounts to be collected during the
first six months of 1998 to no more than $625 million for schools and libraries
and no more than $50 million for rural health care providers. The FCC has stated
that local exchange telephone companies will recover their funding contributions
in their rates for interstate services. The Company currently estimates that the
contribution by its cellular and long distance operations for 1998 will
approximate $3.5 million.
Some of the Company's telephone subsidiaries operate in states where
traditional cost recovery mechanisms, including rate structures, are under
evaluation or have been modified. See "-State Regulation." There can be no
assurance that these states will continue to provide for cost recovery at
current levels.
Substantially all of the Company's LECs concur with the common line tariffs
and certain of the Company's LECs concur with the traffic sensitive tariffs
filed by the NECA; such LECs participate in the access revenue sharing
arrangements administered by the NECA for interstate services. All of the
intrastate network access revenues of the Company's LECs are based on access
charges, cost separation studies or special settlement arrangements.
See "-Services."
Certain long distance carriers continue to request that certain of the
Company's LECs reduce intrastate access tariffed rates. There is no assurance
that these requests will not result in decreased access revenues.
Developments affecting competition. The communications industry is currently
undergoing fundamental changes which may have a significant impact on the future
operations and financial performance of all communications companies. Primarily
as a result of legislative and regulatory initiatives and technological changes,
competition has been introduced and encouraged in each sector of the telephone
industry, including, most recently, the local exchange sector. As a result, the
number of companies offering competitive services has increased.
As indicated above, in February 1996 Congress enacted the 1996 Act, which
obligates LECs to permit competitors to interconnect their facilities to the
LEC's network and to take various other steps that are designed to promote
competition. The 1996 Act imposes several duties on a LEC if it receives a
specific request from another entity which seeks to connect with or provide
services using the LEC's network. In addition, each incumbent LEC is obligated
to (i) negotiate interconnection agreements in good faith, (ii) provide
"unbundled" access to all aspects of the LEC's network, (iii) offer resale of
its telecommunications services at wholesale rates and (iv) permit competitors
to collocate its physical plant on the LEC's property, or provide virtual
collocation if physical collocation is not practicable. Although the 1996 Act
provides certain exemptions for rural LECs such as those operated by the
Company, the FCC's August 1996 order implementing most of the 1996 Act's
interconnection provisions placed the burden of proving the continuing
availability of these exemptions on rural LECs. In July 1997 the U.S. Court of
Appeals for the Eighth Circuit overturned several provisions of the FCC's August
1996 interconnection order, including the rules placing the burden of proof on
rural LECs to retain their rural exemption. This decision has been appealed to
the United States Supreme Court. States are permitted to adopt laws or
regulations that provide for greater competition than is mandated under the 1996
Act. Management believes that competition in its telephone service areas will
ultimately increase as a result of the 1996 Act, although the form and degree of
competition cannot be ascertained until such time as the FCC (and, in certain
instances, state regulatory commissions) adopts final and nonappealable
implementing regulations.
Substantially all of the 21 states in which the Company provides telephone
services have taken legislative or regulatory steps to further introduce
competition into the LEC business. Largely as a result thereof, several
competitive access providers originally organized to provide redundancy or
access services have begun, during the past few years, to provide competitive
local exchange services, principally in larger urban areas. Moreover, several
well-capitalized long distance, cable television and electric utility companies,
along with several start-up companies, have also begun to provide competitive
local exchange services or announced their intention to do so, and wireless
companies and other emerging technology companies are expected to explore their
opportunities in this market. While the Company is aware of only a few companies
that have requested authorization to provide local exchange service in the
Company's service areas, the Company expects to face additional competition in
the future from competitive providers, especially in its operating areas located
near larger urban areas.
In addition to receiving services directly from companies competing with
incumbent LECs, long distance companies and other users of toll service are
expected to increasingly seek other means to bypass LECs' switching services and
local distribution facilities. Certain interexchange carriers provide services
which allow users to divert their traffic from LECs' usage-sensitive services to
their flat-rate services. In addition, users or long distance companies may
construct, modify or lease facilities to transmit traffic directly from a user
to a long distance company. Cable television companies, in particular, may be
able to modify their networks to partially or completely bypass the Company's
local network. Moreover, users may choose to use wireless services to bypass
LECs' switching services. Although certain of the Company's telephone
subsidiaries have experienced a loss of traffic to such bypass, the Company
believes that the impact of such loss on revenues has not been significant.
Historically, cellular telephone services have complemented traditional LEC
services. However, the Company anticipates that existing and emerging wireless
technologies will increasingly compete with LEC services. Technological and
regulatory developments in cellular telephone, personal communications services,
digital microwave, coaxial cable, fiber optics, local-multipoint-distribution
services and other wired and wireless technologies are expected to further
permit the development of alternatives to traditional landline services. For
further information on certain of these developments, see "Wireless Operations
Regulation and Competition."
To the extent that the telephone industry increasingly experiences
competition, the size and resources of each respective competitor may
increasingly influence its prospects. Many companies currently providing or
planning to provide competitive communication services have substantially
greater financial and marketing resources than the Company, and several are not
subject to the same regulatory constraints as the Company.
The Company anticipates that the traditional operations of LECs will be
increasingly impacted by continued technological developments as well as
legislative and regulatory initiatives affecting the ability of LECs to provide
new services and the capability of cable television companies, long distance
companies, competitive local exchange providers and others to provide
competitive LEC services. Competition relating to services traditionally
provided solely by LECs is expected to initially affect large urban areas to a
greater extent than rural, suburban and small urban areas such as those in which
the Company operates. The Company intends to actively monitor these
developments, to observe the effect of emerging competitive trends in initial
competitive markets and to continue to evaluate new business opportunities that
may arise out of future technological, legislative and regulatory developments.
The Company anticipates that regulatory changes and competitive pressures
may result in future revenue reductions in its telephone operations. However,
the Company anticipates that such reductions may be minimized by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. While the Company expects its telephone revenues to continue
to grow, its internal telephone revenue growth rate may slow during upcoming
periods.
WIRELESS OPERATIONS
At December 31, 1997, the Company's cellular holdings represented
approximately 10.3 million pops, of which 65% were applicable to MSAs and 35%
were RSA pops. According to data derived from published sources, the Company is
the tenth largest cellular telephone company in the United States based on the
Company's 10.3 million pops.
Immediately prior to the Company's acquisition of PTI in December 1997, the
Company's ratio of owned cellular pops to telephone access lines was 15:1. As a
result of the Company's acquisition of the PTI properties, the Company's ratio
of owned cellular pops to telephone access lines has decreased to 8:1. Certain
of the Company's cellular markets overlap some of the Company's telephone
service areas.
Cellular Industry
The cellular telephone industry has been in existence for approximately 15
years in the United States. The industry has grown significantly during this
period and cellular service is now available in substantially all areas of the
United States. According to the Cellular Telecommunications Industry
Association, at June 1997 there were estimated to be over 48 million cellular
customers across the United States.
Cellular telephone service is capable of high-quality, high-capacity
communications to and from vehicle-mounted and hand-held telephones. Cellular
systems, if properly designed and equipped, are capable of handling thousands of
calls at any given time and are capable of providing service to tens of
thousands of subscribers in a market.
Until recently, substantially all radio transmissions of cellular systems
were conducted on an analog basis. Technological developments involving the
application of digital radio technology offer certain advantages over analog
technologies, including expanding the capacity of mobile communications systems,
improving voice clarity, permitting the introduction of new services, and making
such systems more private. Providers of certain services competitive with
cellular have incorporated digital technology into their operations. In recent
years most major cellular carriers have installed digital cellular voice
transmission facilities in certain of their systems, principally in larger
markets. Digital service is now operational in ten of the Company's MSA markets
and the Company plans to significantly expand the marketing of such service
during 1998. See "-Regulation and Competition-Developments Affecting Wireless
Competition."
Construction and Maintenance
The construction and maintenance of cellular systems is capital intensive.
Although all of the Company's MSA and RSA systems are operational, the Company
has continued to add cell sites to increase coverage, provide additional
capacity, expand areas where hand-held cellular phones may be used and improve
the quality of these systems. In 1997 the Company completed construction of 49
cell sites in markets operated by the Company and added 155 cell sites through
acquisitions. At December 31, 1997, the Company operated 558 cell sites in its
majority-owned markets.
During the last few years the Company upgraded certain portions of its
cellular systems to be capable of providing digital service. Such service became
operational in certain markets during 1996 and 1997 using the TDMA digital
standard and the Company plans to install digital voice transmission facilities
in other markets in 1998. See "-Regulation and Competition-Developments
Affecting Wireless Competition." Capital expenditures related to majority-owned
and operated cellular systems totaled approximately $39 million in 1997. Due
partially to previously planned projects carried over from 1997 and the PTI
acquisition, such capital expenditures for 1998 are anticipated to be
approximately $90 million.
Strategy
The Company's business development strategy for its cellular telephone
operations is to secure operating control of service areas that are
geographically clustered. Clustered cellular systems aid the Company's marketing
efforts and provide various operating and service advantages. Approximately 43%
of the Company's pops in markets operated by the Company are in a single,
contiguous cluster of eight MSAs and nine RSAs in Michigan; another 17% are in a
cluster of five MSAs and seven RSAs in northern and central Louisiana, southern
Arkansas and eastern Texas. See "-The Company's Cellular Interests."
Another component of the Company's strategy for cellular operations includes
capturing revenues from roaming service. Roaming service revenues are derived
from calls made in one cellular service area by subscribers from other service
areas. Roaming service is made possible by technical standards requiring that
cellular telephones be functionally compatible with the cellular systems in all
United States market areas. The Company charges premium rates (compared to rates
charged to the Company's customers) for roaming service provided to most
non-Company customers. The Company's Michigan cellular properties include a
significant portion of the interstate highway corridor between Chicago and
Detroit. Its Louisiana properties include an east-west interstate highway and a
north-south interstate highway which intersect in its Louisiana cellular service
area. Its Mississippi properties include two east-west interstate highways and
two north-south interstate highways. See "-Services, Customers and System
Usage."
Marketing
The Company markets its cellular services through several distribution
channels, including its direct sales force, retail outlets owned by the Company
and independent agents. At December 31, 1997, the Company's cellular sales force
consisted of approximately 375 sales employees, which generated approximately
one-half of the Company's new subscribers in 1997, and approximately 525
independent agents. Each sales employee and independent agent solicits cellular
customers exclusively for the Company. Company sales employees are compensated
by salary and commission and independent sales agents are paid commissions. The
Company advertises its services through various means, including direct mail,
billboard, magazine, radio, television and newspaper advertisements.
The sales and marketing costs of obtaining new subscribers include
advertising and a direct expense applicable to most new subscribers, either in
the form of a commission payment to an agent or a salary/incentive payment to a
direct sales person. In addition, the Company discounts the cost of cellular
telephone equipment, and periodically runs promotions which provide some amount
of initial activation, access or airtime free to new subscribers. The average
cost of acquiring each new customer ($280 in 1997) remains one of the largest
expenses in conducting the Company's cellular operations.
Services, Customers and System Usage
There are a number of different types of cellular telephones, all of which
are currently compatible with cellular systems nationwide. The Company sells a
full range of vehicle-mounted, transportable, and hand-held portable cellular
telephones.
The Company charges its subscribers for access to its systems, for minutes
of use and for enhanced services, such as voice mail. A subscriber may purchase
certain of these services separately or may purchase rate plans which bundle
these services in different ways and are designed to fit different calling
patterns. While the Company historically has typically charged its customers
separately for custom-calling features, air time in excess of the packaged
amount, and toll calls, it currently offers plans which include features such as
unlimited toll calls and unlimited weekend calling in certain calling areas.
Custom-calling features provided by the Company include call-forwarding,
call-waiting, three-way calling and no-answer transfer. The Company offers voice
message service in many of its markets. In the Company's markets where digital
service is operational, customers can subscribe to caller ID and other digital
enhancements.
Cellular customers come from a wide range of occupations. They typically
include a large proportion of individuals who work outside of their office, such
as employees in the construction, real estate, wholesale and retail distribution
businesses, and professionals. More customers are selecting portable and other
transportable cellular telephones as these units become more compact and fully
featured, as well as more attractively priced. The Company's average monthly
cellular service revenue per customer declined to $61 in 1997 from $63 in 1996
and $66 in 1995. The Company's average service revenue per customer is expected
to decline in 1998 as a result of the PTI acquisition (due to PTI's historically
lower average monthly service revenue per customer). Such average revenue per
customer may further decline (i) as market penetration increases and additional
lower usage customers are activated and (ii) as competitive pressures from
current and future wireless communications providers intensify. See "-Regulation
and Competition."
Most cellular systems allow a customer to place or receive a call in a
cellular service area away from the customer's home market area. The Company has
entered into "roaming agreements" with operators of other cellular systems
covering virtually all markets in the United States; such agreements offer the
Company's customers the opportunity to roam in these markets. Also, a customer
of a participating non-Company system traveling in a market operated by the
Company where this arrangement is in effect is able to automatically make calls
on the Company's system. The charge to a non-Company customer for this service
is typically at premium rates, and is billed by the Company to the customer's
home system, which then bills the customer. In most instances, based on
competitive factors and financial considerations, the Company charges an amount
to its customers that is equal to or lower than the amount actually charged by
the servicing cellular carrier for roaming. The Company anticipates that
competitive factors and industry consolidation may place further pressure on
charging premium roaming rates. For additional information on roaming revenue,
see "-Strategy."
Roamer fraud, a cellular industry problem, occurs when cellular telephone
equipment is programmed to conceal the true identity and location of the user.
The Company and the industry have implemented extensive fraud control processes
in an attempt to minimize roamer fraud.
Churn rate (the average percentage of cellular customers that terminate
service each month) is an industry-wide concern. A significant portion of the
churn in the Company's markets is due to the Company disconnecting service to
cellular customers for nonpayment of their bills. In addition, the Company faces
substantial competition from the other cellular provider in certain of its
markets and has begun to face competition from PCS providers in a few of its
markets. The Company's churn rate was 2.31% in 1997 and 2.37% in 1996. The
Company is attempting to lower its churn rate by increasing its proactive
customer service efforts and through the implementation of additional customer
retention programs.
During recent years, the Company's cellular subsidiaries experienced strong
subscriber growth in the fourth quarter, primarily due to holiday season sales.
The following table summarizes, among other things, certain information
about the Company's customers and market penetration:
Year ended or at December 31,
- ----------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
Majority-owned and operated MSA and RSA systems (Note 1):
Cellular systems operated 44 34 33
Cell sites 558 354 277
Population of systems
operated (Note 2) 9,008,219 7,097,568 6,877,598
Customers (Note 3):
At beginning of period 368,233 290,075 211,710
Additions 193,623 165,377 139,836
Net acquisitions/dispositions 123,600 4,850 8,699
Disconnects, net of reconnects 115,473 92,069 70,170
At end of period 569,983 368,233 290,075
Market penetration at end of
period (Note 4) 6.3% 5.2 4.2
Churn rate (Note 5) 2.31% 2.37 2.42
Average monthly cellular service
revenue per customer $ 61 63 66
Construction expenditures
(in thousands) $ 39,102 83,679 41,990
All operated MSA and RSA systems (Note 6):
Cellular systems operated 50 38 37
Cell sites 656 413 324
Population of systems operated
(Note 2) 10,124,759 7,946,442 7,721,569
Customers at end of period
(Note 7) 632,446 407,400 313,430
Market penetration at end of
period (Note 8 6.2% 5.1 4.1
Churn rate (Note 5) 2.33% 2.32 2.39
- ----------------------------------------------------------------------------
Notes:
1. Represents the number of systems in which the Company owned at least a
50% interest. The revenues and expenses of these cellular markets, all of which
are operated by the Company, are included in the Company's consolidated
operating revenues and operating expenses.
2. Based on independent third-party population estimates for each
respective year.
3. Represents the approximate number of revenue-generating cellular
telephones served by the cellular systems referred to in note 1.
4. Computed by dividing the number of customers at the end of the period
by the total population of systems referred to in note 1.
5. Represents the average percentage of customers that are disconnected
on a monthly basis.
6. Represents the total number of systems that the Company operated,
including systems in which it does not own a majority interest.
7. Represents the approximate number of revenue-generating cellular
telephones served by the cellular systems referred to in note 6.
8. Computed by dividing the number of customers at the end of the period
by the total population of systems referred to in note 6.
The Company's Cellular Interests
The Company obtained the right to provide cellular service through (i) the
FCC's licensing process described below, under which it received interests in
wireline licenses, and (ii) its acquisition program, under which it has acquired
interests in both wireline and non-wireline licenses. The table below sets forth
certain information with respect to the interests in cellular systems that the
Company owned as of December 31, 1997:
The Other
1997 Company's cellular
population Ownership pops at operator
(Note 1) percentage 12/31/97 (Note 2)
- -----------------------------------------------------------------------------
Majority-owned and
operated MSAs
- ------------------
Pine Bluff, AR 82,616 100.00% 82,616 SBC
Texarkana, AR/TX 137,665 89.00 122,522 AT&T
Alexandria, LA 144,523 100.00 144,523 Centennial
Monroe, LA 147,753 87.00 128,545 AT&T
Shreveport, LA 380,333 87.00 330,890 AT&T
Battle Creek, MI 193,965 97.00 188,146 Centennial
Benton Harbor, MI 161,421 97.00 156,578 Centennial
Grand Rapids, MI 758,622 97.00 735,863 AirTouch
Jackson, MI 155,167 97.00 150,512 Centennial
Kalamazoo, MI 305,743 97.00 296,571 Centennial
Lansing-E.Lansing,MI 509,507 97.00 494,222 AirTouch
Muskegon, MI 190,153 97.00 184,448 AirTouch
Saginaw-Bay City-
Midland, MI 403,413 91.70 369,930 AirTouch
Biloxi-Gulfport, MS
(Note 4) 230,242 96.45 222,071 Cellular South
Jackson, MS (Note 4) 424,152 88.31 374,587 MCTA
Pascagoula, MS (Note 4) 129,421 89.05 115,248 Cellular South
Brownsville-
Harlingen, TX (Note 4)321,534 78.74 253,173 SBC
McAllen-Edinburg-
Mission, TX (Note 4) 508,926 69.50 353,691 SBC
Appleton-Oshkosh- C-1 Southern
Neenah, WI 498,367 98.85 492,624 Wisconsin and
Northern Illinois
Eau Claire, WI 143,834 55.50 79,828 Price Cellular
LaCrosse, WI 102,819 95.00 97,678 U. S. Cellular
- --------------------------------------------------------
5,930,176 5,374,266
- --------------------------------------------------------
Minority-owned MSAs (Note 3)
- ----------------------------
Little Rock, AR 552,830 36.00% 199,019
Lafayette, LA 261,276 49.00 128,025
Detroit, MI 4,618,871 3.20 147,711
Flint, MI 509,418 3.20 16,291
Rochester, MN 113,681 2.93 3,331
Austin, TX 987,525 35.00 345,634
Dallas-Ft.Worth,TX 4,548,203 0.50 22,741
Sherman-Denison,TX 101,516 0.50 508
Green Bay/Brown
County, WI 215,185 20.11 43,274
Madison, WI 700,610 9.78 68,513
Milwaukee, WI 1,979,672 17.96 355,608
Wausau, WI 122,436 1.00 1,224
- --------------------------------------------------------
14,711,223 1,331,879
- --------------------------------------------------------
Total MSAs 20,641,399 6,706,145
- --------------------------------------------------------
Operated RSAs
- -------------
Alaska 1 (Note 4) 128,044 100.00% 128,044 Mactel
Alaska 3 74,427 100.00 74,427 Mercury
Arkansas 2 86,426 82.00 70,869 SBC
Arkansas 3 103,692 82.00 85,027 SBC
Arkansas 11 66,783 89.00 59,437 SBC
Arkansas 12 187,065 80.00 149,652 SBC
Louisiana 1 113,313 87.00 98,582 AT&T
Louisiana 2 116,256 87.00 101,143 AT&T
Louisiana 3 B2 95,283 87.00 82,896 Centennial
Louisiana 4 72,909 100.00 72,909 Centennial
Michigan 1 198,058 100.00 198,058 Price Cellular
Michigan 2 112,864 100.00 112,864 RFB
Michigan 3 161,448 42.84 69,165 Unitel
Michigan 4 133,783 100.00 133,783 RFB
Michigan 5 159,061 42.84 68,142 Unitel
Michigan 6 139,515 98.00 136,725 Centennial
Michigan 7 240,993 56.07 135,126 Centennial
Michigan 8 100,094 97.00 97,091 Allegan Cellular
Michigan 9 298,548 43.38 129,510 Centennial
Mississippi 2 (Note 4) 247,820 100.00 247,820 Bell South Mobility
Mississippi 6 (Note 4) 183,383 100.00 183,383 Cellular South
Mississippi 7 (Note 4) 181,267 100.00 181,267 MCTA
Texas 7 B6 57,934 89.00 51,561 AT&T
Wisconsin 1 111,767 42.21 47,174 Price Cellular
Wisconsin 2 85,963 99.00 85,103 Price Cellular
Wisconsin 5 95,526 - - Price Cellular
Wisconsin 6 116,043 57.14 66,310 U.S. Cellular
Wisconsin 7 290,190 22.70 65,878 U.S. Cellular
Wisconsin 8 236,128 82.00 193,625 U.S. Cellular
- --------------------------------------------------------
4,194,583 3,125,571
- --------------------------------------------------------
Non-operated RSAs (Note 3)
- --------------------------
Arizona 2 257,751 21.30% 54,891
Michigan 10 136,216 26.00 35,416
Minnesota 7 171,922 2.93 5,037
Minnesota 8 67,915 2.93 1,990
Minnesota 9 134,921 2.93 3,953
Minnesota 10 230,358 2.93 6,750
Minnesota 11 206,149 2.93 6,040
New Mexico 4W 139,598 35.71 49,856
Oregon 2 74,465 22.00 16,382
Oregon 3 151,017 15.97 24,121
Oregon 6 195,630 37.50 73,361
Texas 16 330,320 9.60 31,711
Washington 5 59,476 8.47 5,039
Washington 8 136,337 7.36 10,028
Wisconsin 3 141,685 42.86 60,722
Wisconsin 4 119,513 30.03 35,887
Wisconsin 10 129,653 22.50 29,172
- --------------------------------------------------------
2,682,926 450,356
- --------------------------------------------------------
Total RSAs 6,877,509 3,575,927
- --------------------------------------------------------
27,518,908 10,282,072
========================================================
Notes:
1. Based on 1997 independent third-party population estimates. 2. Information
provided to the best of the Company's knowledge.
3. Markets not operated by the Company.
4. Represents a non-wireline interest.
Operations
A substantial number of the cellular systems in MSAs operated by the Company
are owned by limited partnerships in which the Company is a general partner
("MSA Partnerships"). Most of these partnerships are governed by partnership
agreements with similar terms, including, among other things, customary
provisions concerning capital contributions, sharing of profits and losses, and
dissolution and termination of the partnership. Most of these partnership
agreements vest complete operational control of the partnership with the general
partner. The general partner typically has the power to manage, supervise and
conduct the affairs of the partnership, make all decisions appropriate in
connection with the business purposes of the partnership, and incur obligations
and execute agreements on behalf of the partnership. The general partner also
may make decisions regarding the time and amount of cash contributions and
distributions, and the nature, timing and extent of construction, without the
consent of the other partners. The Company owns more than 50% of all of the MSA
Partnerships.
A substantial number of the cellular systems in RSAs operated by the Company
are also owned by limited or general partnerships in which the Company is either
the general or managing partner (the "RSA Partnerships"). These partnerships are
governed by partnership agreements with varying terms and provisions. In many of
these partnerships, the noncontrolling partners have the right to vote on major
issues such as the annual budget and system design. In a few of these
partnerships, the Company's management position is for a limited term (similar
to a management contract) and the other partners in the partnership have the
right to change managers, with or without cause. The Company owns less than 50%
of some of the RSA Partnerships.
The partnership agreements for both the MSA Partnerships and RSA
Partnerships generally contain provisions granting all partners a right of first
refusal in the event a partner desires to transfer a partnership interest. This
restriction on transfer can under certain circumstances make these partnership
interests more difficult to sell to a third party.
Revenue
The following table reflects the major revenue categories for the Company's
wireless operations as a percentage of wireless operating revenues in 1997, 1996
and 1995.
1997 1996 1995
- -----------------------------------------------------------------------
Cellular access fees and
toll revenues 78.2% 79.7 79.5
Cellular roaming 20.0 18.6 17.7
Equipment sales 1.8 1.7 2.8
- -----------------------------------------------------------------------
100.0% 100.0 100.0
=======================================================================
For further information on these revenue categories, see "-Services,
Customers and System Usage."
Regulation and Competition
As discussed below, the FCC and various state public utility commissions
regulate, among other things, the licensing, construction, operation,
interconnection arrangements, sale and acquisition of cellular telephone
systems.
Competition between cellular providers in each market is conducted
principally on the basis of services and enhancements offered, the technical
quality and coverage of the system, quality and responsiveness of customer
service, and price. Competition may be intense. For a listing of the other
cellular operator in cellular markets operated by the Company, see "- The
Company's Cellular Interests." Under applicable law, the Company is required to
permit the reselling of its services. In certain larger markets and in certain
market segments, competition from resellers may be significant. There is also
substantial competition for sales agents. Certain of the Company's competitors
have substantially greater assets and resources than the Company.
Cellular licensing process. The term "MSA" means a Metropolitan Statistical
Area for which the FCC has granted a cellular operating license. The term "RSA"
means a Rural Service Area for which the FCC has granted a cellular operating
license. During the 1980's and early 1990's, the FCC awarded two 10-year
licenses to provide cellular service in each market. Initially, one license was
reserved for companies offering local telephone service in the market (the
wireline carrier) and one license was available for firms unaffiliated with the
local telephone company (the non-wireline carrier). Since mid-1986, the FCC has
permitted telephone companies or their affiliates to acquire control of
non-wireline licenses in markets in which they do not hold interests in the
wireline license. The FCC has issued a decision that grants a renewal expectancy
during the license renewal period to incumbent licensees that substantially
comply with the terms and conditions of their cellular authorizations and the
FCC's regulations. The licenses for the MSA markets operated by the Company were
initially granted between 1984 and 1987, and licenses for operated RSAs were
initially granted between 1989 and 1991. Thus far, the Company has received
10-year extensions of all of its licenses that have become subject to renewal
since their original grant dates.
The completion of an acquisition involving the transfer of control of a
cellular system requires prior FCC approval and, in certain cases, receipt of
other federal and state regulatory approvals. The acquisition of a minority
interest generally does not require FCC approval. Whenever FCC approval is
required, any interested party may file a petition to dismiss or deny the
application for approval of the proposed transfer.
In addition to regulation by the FCC, cellular systems are subject to
certain Federal Aviation Administration tower height regulations concerning the
siting and construction of cellular transmitter towers and antennas.
Cellular operators are also subject to state and local regulation in some
instances. Although the FCC has pre-empted the states from exercising
jurisdiction in the areas of licensing, technical standards and market
structure, certain states require cellular operators to be certified. In
addition, some state authorities regulate certain aspects of a cellular
operator's business, including certain aspects of pricing, the resale of long
distance service to its customers, the technical arrangements and charges for
interconnection with the landline network, and the transfer of interests in
cellular systems. The siting and construction of the cellular facilities may
also be subject to state or local zoning, land use and other local regulations.
Developments affecting wireless competition. Competition in the cellular
industry has increased due to continued and rapid technological advances in the
communications field, coupled with legislative and regulatory changes.
Several recent FCC initiatives have resulted in the allocation of additional
radio spectrum or the issuance of licenses for emerging mobile communications
technologies that are competitive with the Company's cellular and telephone
operations, including personal communication services ("PCS"). Although there is
no universally recognized definition of PCS, the term is generally used to refer
to wireless services to be provided by licensees operating in the 1850 MHz to
1990 MHz radio frequency band using microcells and high-capacity digital
technology. In 1996 and early 1997 the FCC auctioned up to six PCS licenses per
market. Two 30MHz frequency blocks were awarded for each of the 51 Rand McNally
Major Trading Areas ("MTAs"), while one 30MHz and three 10MHz frequency blocks
were awarded for each of the 493 Rand McNally Basic Trading Areas ("BTAs").
PCS technology permits PCS operators to offer wireless data, image and
multimedia services. The largest PCS providers commenced initial operations in
late 1996 and increased their operations in 1997. These providers have initially
focused on larger markets, and have generally marketed PCS as being a
competitive service to cellular. Thus far the Company has experienced PCS
competition in only a few of its cellular markets. The extent to which PCS will
offer services in the Company's markets that are complementary or competitive
with cellular services is uncertain, and is expected to be influenced by
continuing developments in PCS and cellular technologies.
In addition to PCS, users and potential users of cellular systems may find
their communication needs satisfied by other current and developing
technologies. Several years ago the FCC authorized the licensees of certain
specialized mobile radio service ("SMR") systems (which historically have
generally been used by taxicabs and tow truck operators) to configure their
systems into digital networks that operate in a manner similar to cellular
systems. Such systems are commonly referred to as enhanced specialized mobile
radio service ("ESMR") systems. The Company believes that ESMR systems are
operating in a few of its cellular markets. One well-established ESMR
provider has constructed a nationwide digital mobile communications system to
compete with cellular systems. Other similar communication services that have
the technical capability to handle wireless telephone calls may provide
competition in certain markets, although these services currently lack the
subscriber capacity of cellular systems. Paging or beeper services that feature
text message and data display as well as tones may be adequate for potential
subscribers who do not need to communicate with the caller. Mobile satellite
systems, in which transmissions are between mobile units and satellites, may
ultimately be successful in obtaining market share from cellular systems that
communicate directly to land-based stations.
Recently, several large cellular providers have merged with other companies
or formed joint ventures. Several of these joint ventures pooled their resources
to purchase PCS licenses and to develop the associated markets. Many current or
potential competitors of the Company have substantially greater financial and
marketing resources than the Company.
Although it is uncertain how PCS, SMR, ESMR, mobile satellites and other
emerging technologies will ultimately affect the Company, the Company
anticipates that it will face increased competition in some of its markets in
the near term. However, management believes that providing digital services and
applying new microcellular technologies should permit its cellular systems to
provide services comparable with the emerging technologies described above,
although no assurances can be given that this will happen or that future
technological advances or legislative or regulatory changes will not create
additional sources of competition.
OTHER OPERATIONS
The Company provides long distance, call center, cable television and
interactive services in certain local and regional markets, as well as certain
printing and related services. The results of these operations, which accounted
for 7.0% and 2.4%, respectively, of the Company's consolidated revenues and
operating income during 1997, are reflected for financial reporting purposes in
the "Other operations" section in operating income.
Long distance. In 1996 the Company began marketing long distance service in
all of its equal access telephone operating areas. At December 31, 1997, the
Company provided long distance services to approximately 172,000 customers.
Although the Company owns and operates long distance switches in LaCrosse,
Wisconsin and San Marcos, Texas, it anticipates that most of its future long
distance service revenues will be provided by reselling service purchased from
other facilities-based long distance providers. The Company intends to continue
to expand its long distance business, principally through reselling
arrangements.
Call center. The Company provides certain operator services for retail and
wholesale markets. The retail market consists primarily of the hospitality and
payphone industries. The wholesale market consists of other independent
telephone companies and interexchange carriers.
PCS. In early 1997 the Company was awarded 12 PCS licenses, 11 of which are
in Michigan, in connection with the FCC's auctions of 10MHz PCS licenses. The
licenses cover areas with a population of approximately 4.0 million. As a result
of the PTI acquisition, the Company acquired PCS licenses that cover areas with
a population of approximately 4.1 million. Such licenses should allow the
Company to provide PCS as a fixed wireless local loop alternative to the LEC's
service in the areas covered by the PCS licenses. Approximately $20 million of
the Company's 1998 capital expenditure budget is for development of certain of
the Company's PCS networks.
Other. The Company, through one or more of its subsidiaries, provides
audiotext services; printing, database management and direct mail services;
cable television services; and security alarm services. The Company also holds
minority equity investments in certain communications companies.
Certain service subsidiaries of the company provide installation and
maintenance services, materials and supplies, and managerial, technical and
accounting services to the telephone and wireless operating subsidiaries. In
addition, Century provides and bills management services to subsidiaries and in
certain instances makes interest-bearing advances to finance construction of
plant and purchases of equipment. These transactions are recorded by the
Company's regulated telephone subsidiaries at their cost to the extent permitted
by regulatory authorities. Intercompany profit on transactions with regulated
affiliates is limited to a reasonable return on investment and has not been
eliminated in connection with consolidating the results of operations of Century
and its subsidiaries. Such intercompany profit is reflected in operating income
in the "Other operations" segment.
FORWARD-LOOKING STATEMENTS
This report on Form 10-K and other documents filed by the Company under the
federal securities laws include, and future oral or written statements of the
Company and its management may include, certain forward-looking statements,
including without limitation statements with respect to the Company's
anticipated future operating and financial performance (including the impact of
pending acquisitions), financial position and liquidity, growth opportunities
and growth rates, business and competitive outlook, investment and expenditure
plans, pricing plans, strategic alternatives, business strategies, and other
similar statements of expectations or objectives that are highlighted by works
such as "expects," "anticipates," "intends," "plans," "believes," "projects,"
"seeks," "estimates," "should," and "may," and variations thereof and similar
expressions. Such forward-looking statements are subject to uncertainties that
could cause the Company's actual results to differ materially from such
statements. These uncertainties include but are not limited to those set forth
below:
o the effects of ongoing deregulation in the telecommunications industry as
a result of the 1996 Act and other similar federal and state legislation and
federal and state regulations enacted thereunder, including without limitation
(i) greater than anticipated competition in the Company's predominately rural
local exchange telephone markets resulting therefrom, (ii) greater than
anticipated reductions in revenues received from the Universal Service Fund or
other current or future federal and state support funds designed to compensate
LECs that provide services in high-cost markets, (iii) the final outcome of
regulatory and judicial proceedings with respect to interconnection agreements
and access charge reforms and (iv) future state regulatory actions taken in
response to the 1996 Act.
o the effects of greater than anticipated competition from PCS, SMR, ESMR,
satellite or other wireless companies, including without limitation competition
requiring new pricing or marketing strategies or new product offerings, and the
attendant risk that the Company will not be able to respond on a timely or
profitable basis.
o possible changes in the demand for the Company's products and services,
including without limitation (i) lower than anticipated demand for premium
telephone services or for additional access lines per household, (ii) lower than
anticipated demand for wireless telephone services, whether caused by changes in
economic conditions, technology, competition, health concerns or otherwise, and
(iii) reduced demand for the Company's access or billing and collection
services.
o the Company's ability to successfully introduce new offerings on a timely
and cost-effective basis, including without limitation the Company's ability to
(i) expand successfully its long distance and Internet offerings to new markets
(including those acquired in December 1997 in the PTI acquisition or to be
acquired in connection with future acquisitions), (ii) offer bundled service
packages on terms attractive to its customers and (iii) successfully initiate
PCS services in its licensed markets.
o the risks inherent in rapid technological change, including without
limitation (i) the lack of assurance that the Company's ongoing wireless network
improvements will be sufficient to meet or exceed the capabilities and quality
of competing networks, (ii) technological developments that could make the
Company's analog and digital wireless networks uncompetitive or obsolete, such
as the risk that the Time Division Multiple Access technology used by the
Company will be uncompetitive with Code Division Multiple Access or other
digital technologies, and (iii) the risk that technologies will not be developed
by the Company on a timely or cost-effective basis or perform according to
expectations.
o regulatory limits on the Company's ability to change its prices for
telephone services in response to competitive pressures.
o the Company's ability to effectively manage its growth, including without
limitation the Company's ability to (i) integrate the operations of PTI acquired
in December 1997 into the Company's operations, (ii) achieve projected economies
of scale and cost savings, (iii) meet pro forma cash flow projections developed
by management in valuing newly-acquired businesses and (iv) implement necessary
internal controls and retain and attract key personnel.
o any difficulties in the Company's ability to expand through additional
acquisitions, whether caused by financing constraints, a decrease in the pool of
attractive target companies, or competition for acquisitions from other
interested buyers.
o higher than anticipated wireless operating costs due to churn or to
fraudulent uses of the Company's networks.
o the lack of assurance that the Company can compete effectively against
better-capitalized competitors.
o the future unavailability of SFAS 71 to the Company's telephone
subsidiaries.
o the effects of more general factors, including without limitation:
. changes in general industry and market conditions and growth rates
. changes in interest rates or other general national, regional or local
economic conditions
. changes in legislation, regulation or public policy, including changes
in federal rural financing programs
. unanticipated increases in capital, operating or administrative costs,
or the impact of new business opportunities requiring significant up-front
investments
. the continued availability of financing in amounts, and on terms and
conditions, necessary to support the Company's operations
. changes in the Company's relationships with vendors
. changes in the Company's senior debt ratings
. unfavorable outcomes of regulatory or legal proceedings, including
rate proceedings
. changes in accounting policies or practices adopted voluntarily or as
required by generally accepted accounting principles.
For additional information, see the description of the Company's business
included above, as well as Item 7 to this report. Due to these uncertainties,
you are cautioned not to place undue reliance upon the Company's forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to update or revise any of its forward-looking statements for any
reason.
OTHER MATTERS
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 1997
have not been material and the Company currently has no reason to believe that
such costs will become material.
For additional information concerning the business and properties of the
Company, see notes 2, 3, 6, and 18 of Notes to Consolidated Financial Statements
set forth in Item 8 elsewhere herein.
Item 2. Properties.
The Company's properties consist principally of (i) telephone lines, central
office equipment, telephone instruments and related equipment, and land and
buildings related to telephone operations, and (ii) switching and cell site
equipment related to cellular telephone operations. As of December 31, 1997 and
1996, the Company's gross property, plant and equipment of approximately $3.8
billion and $1.7 billion, respectively, consisted of the following:
December 31,
- --------------------------------------------------------------
1997 1996
- --------------------------------------------------------------
Telephone operations
Cable and wire 47.9% 43.1
Central office equipment 27.9 23.1
General support 6.7 6.1
Information origination/termination
equipment 1.7 1.6
Construction in progress 1.4 2.3
Other .2 .3
- --------------------------------------------------------------
85.8 76.5
- --------------------------------------------------------------
Wireless operations
Cell site 7.4 12.1
General support 1.7 2.8
Construction in progress .1 .9
Other .6 .2
- --------------------------------------------------------------
9.8 16.0
- --------------------------------------------------------------
Other 4.4 7.5
- --------------------------------------------------------------
100.0% 100.0
==============================================================
"Cable and wire" facilities consist primarily of buried cable and aerial
cable, poles, wire, conduit and drops. "Central office equipment" consists
primarily of switching equipment, circuit equipment and related facilities.
"General support" consists primarily of land, buildings, tools, furnishings,
fixtures, motor vehicles and work equipment. "Information
origination/termination equipment" consists primarily of premise equipment
(private branch exchanges and telephones) for official company use. "Cell site"
consists primarily of radio frequency channel equipment, switching equipment and
towers. "Construction in progress" includes property of the foregoing categories
that has not been placed in service because it is still under construction.
Most of the properties of the Company's telephone subsidiaries are subject
to mortgages securing the debt of such companies. The Company owns substantially
all of the central office buildings, local administrative buildings, warehouses,
and storage facilities used in its telephone operations. The Company leases most
of the offices used in its cellular operations; certain of its transmitter sites
are leased while others are owned by the Company. For further information on the
location and type of the Company's properties, see the descriptions of the
Company's telephone and wireless operations in Item 1.
Item 3. Legal Proceedings.
From time to time, the Company is involved in litigation incidental to its
business, including administrative hearings of state public utility commissions
relating primarily to rate making, actions relating to employee claims,
occasional grievance hearings before labor regulatory agencies and miscellaneous
third party tort actions. Currently, there are no material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Information concerning Executive Officers, set forth at Item 10 in Part III
hereof, is incorporated in Part I of this Report by reference.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Century's common stock is listed on the New York Stock Exchange and is traded
under the symbol CTL. The following table sets forth the high and low sale
prices, along with the quarterly dividends, for each of the quarters indicated
(adjusted to reflect the March 1998 three-for-two stock split):
Sale prices
---------------- Dividend per
High Low common share
---- --- ------------
1996:
First quarter $ 23-5/8 20-7/8 .06
Second quarter $ 22-7/8 20-1/4 .06
Third quarter $ 23 20-3/8 .06
Fourth quarter $ 23 19 .06
1997:
First quarter $ 22-5/16 19-3/16 .0617
Second quarter $ 22-9/16 19 .0617
Third quarter $ 29-5/16 22-1/16 .0617
Fourth quarter $ 33-5/8 27-5/16 .0617
Common stock dividends during 1996 and 1997 were paid each quarter. As of
February 28, 1998, there were approximately 6,250 stockholders of record of
Century's common stock.
Item 6. Selected Financial Data.
The following table presents certain selected consolidated financial data as
of and for each of the years ended in the five-year period ended December 31,
1997:
Selected Income Statement Data
Year ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------
(Dollars, except per share amounts, and
shares expressed in thousands)
Operating revenues
Telephone $ 530,597 451,538 419,242 391,265 350,330
Wireless 307,742 250,243 197,494 150,802 84,712
Other 63,182 47,896 28,104 22,534 20,633
--------------------------------------------------
Total operating revenues $ 901,521 749,677 644,840 564,601 455,675
==================================================
Operating income
Telephone $ 173,285 155,183 143,527 137,992 114,902
Wireless 88,081 67,914 57,009 31,443 9,906
Other 6,404 199 2,383 3,371 3,201
--------------------------------------------------
Total operating income $ 267,770 223,296 202,919 172,806 128,009
==================================================
Net income $ 255,978 129,077 114,776 100,238 69,004
==================================================
Diluted earnings
per share * $ 2.80 1.43 1.31 1.21 .88
==================================================
Dividends per
common share * $ .247 .24 .22 .213 .207
==================================================
Average diluted shares
outstanding * 91,608 90,653 88,304 86,828 83,369
==================================================
* Adjusted to reflect the March 1998 three-for-two stock split
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." Earnings per
share amounts for prior periods have been restated to conform with SFAS 128.
Selected Balance Sheet Data
December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------
(Dollars in thousands)
Net property, plant
and equipment $ 2,258,563 1,149,012 1,047,808 947,131 827,776
Excess cost of net
assets acquired, net $ 1,767,352 532,410 493,655 441,436 297,158
Total assets $ 4,709,401 2,028,505 1,862,421 1,643,253 1,319,390
Long-term debt $ 2,609,541 625,930 622,904 518,603 364,433
Stockholders' equity $ 1,300,272 1,028,153 888,424 650,236 513,768
-----------------------------------------------------
The following table presents certain selected consolidated operating data as
of the end of each of the years in the five-year period ended December 31, 1997:
Year ended December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------
Telephone access lines 1,203,650 503,562 480,757 454,963 434,691
Cellular units in service
in majority-owned markets 569,983 368,233 290,075 211,710 116,484
---------------------------------------------------
See Items 1 and 2 in Part I and notes 1, 2 and 6 of Notes to Consolidated
Financial Statements set forth in Item 8 elsewhere herein for additional
information.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
OVERVIEW
Century Telephone Enterprises, Inc. is a regional diversified communications
company engaged primarily in providing local exchange telephone services and
cellular telephone services. Century Telephone Enterprises, Inc. and its
subsidiaries (the "Company") significantly expanded its operations by acquiring
Pacific Telecom, Inc. ("PTI") on December 1, 1997 in exchange for $1.503 billion
cash. As a result of the acquisition, the Company acquired (i) over 660,000
telephone access lines, (ii) over 88,000 cellular subscribers and (iii) various
wireless, cable television and other communications assets. The operations of
PTI are included in the Company's results of operations beginning December 1,
1997. See Major Acquisition and Note 2 of Notes to Consolidated Financial
Statements for additional information. During the three years ended December 31,
1997, the Company has acquired various other telephone and cellular operations,
the impact of which has not been material to the financial position and results
of operations of the Company.
In May 1997 the Company sold its majority-owned competitive access
subsidiary to Brooks Fiber Properties, Inc. ("Brooks") in exchange for
approximately 4.3 million shares of Brooks' common stock. In November 1997 the
Company sold approximately 3.8 million shares of such stock. See Gain on Sales
of Assets for additional information.
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Operating income
Telephone $ 173,285 155,183 143,527
Wireless 88,081 67,914 57,009
Other 6,404 199 2,383
- ------------------------------------------------------------------------------
267,770 223,296 202,919
Interest expense (56,474) (44,662) (43,615)
Income from unconsolidated
cellular entities 27,794 26,952 20,084
Gain on sales of assets, net 169,640 815 6,782
Minority interest (5,498) (6,675) (8,084)
Other income and expense 5,109 3,916 4,982
Income tax expense (152,363) (74,565) (68,292)
- ------------------------------------------------------------------------------
Net income $ 255,978 129,077 114,776
==============================================================================
Diluted earnings per share* $ 2.80 1.43 1.31
==============================================================================
Average diluted shares outstanding* 91,608 90,653 88,304
==============================================================================
* Adjusted to reflect stock split. See Note 20 of Notes to Consolidated
Financial Statements.
The net income of the Company for 1997 increased to $256.0 million from
$129.1 million during 1996 and $114.8 million during 1995. Diluted earnings per
share for 1997 increased to $2.80 from $1.43 during 1996 and $1.31 during 1995.
Excluding gain on sales of assets, the Company's net income (and diluted
earnings per share) for 1997, 1996 and 1995 was $149.6 million ($1.64), $128.6
million ($1.42) and $112.2 million ($1.28), respectively.
The Company's 1997 operating income was $267.8 million, an increase of $44.5
million (19.9%) over 1996 operating income of $223.3 million. During 1997 the
operating income of the Company's telephone and wireless segments increased
$18.1 million (11.7%) and $20.2 million (29.7%), respectively, while the
operating income of the Company's other operations increased $6.2 million. The
Company's operating income during 1995 was $202.9 million.
The Company's wireless operations reflect the operations of the cellular
entities in which the Company has a majority ownership interest. For additional
information concerning the minority interest owners' share of the income of such
entities and the Company's share of earnings from cellular entities in which it
has less than a majority interest, see Cellular Operations and Income From
Unconsolidated Cellular Entities.
Contributions to operating revenues and operating income by the Company's
telephone, wireless, and other operations for each of the years in the
three-year period ended December 31, 1997 were as follows:
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Operating revenues
Telephone operations 58.9% 60.2 65.0
Wireless operations 34.1% 33.4 30.6
Other operations 7.0% 6.4 4.4
Operating income
Telephone operations 64.7% 69.5 70.7
Wireless operations 32.9% 30.4 28.1
Other operations 2.4% .1 1.2
- ------------------------------------------------------------------------------
As indicated by the chart above, the percentage of the Company's total
operating revenues and operating income contributed by its wireless operations
has increased over the past few years. Immediately prior to the Company's
acquisition of PTI in December 1997, the Company's ratio of owned cellular pops
(the population of licensed cellular telephone markets multiplied by the
Company's proportionate equity interests in the licensed operators thereof) to
telephone access lines was 15:1. As a result of the Company's acquisition of the
PTI properties, the Company's ratio of owned cellular pops to telephone access
lines has decreased to 8:1.
In addition to historical information, management's discussion and analysis
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 telecommunications 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 product 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 Company's business are described in detail in Item 1. 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. The Company undertakes no
obligation to update any of its forward-looking statements for any reason.
TELEPHONE OPERATIONS
Prior to December 1997 the Company conducted its telephone operations in
rural, suburban and small urban communities in 14 states. Subsequent to the PTI
acquisition on December 1, 1997, the Company provides local exchange telephone
service in similar communities in 21 states. As of December 31, 1997,
approximately 85% of the Company's telephone access lines were in Wisconsin,
Washington, Alaska, Michigan, Louisiana, Colorado, Ohio, Oregon and Montana. The
operating revenues, expenses and income of the Company's telephone operations
for 1997, 1996 and 1995 are summarized below.
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Local service $ 147,589 121,728 111,629
Network access 319,301 276,123 258,462
Other 63,707 53,687 49,151
- -----------------------------------------------------------------------------
530,597 451,538 419,242
- -----------------------------------------------------------------------------
Operating expenses
Plant operations 110,220 90,083 86,789
Customer operations 50,819 43,413 38,768
Corporate and other 80,551 67,066 63,834
Depreciation and amortization 115,722 95,793 86,324
- -----------------------------------------------------------------------------
357,312 296,355 275,715
- -----------------------------------------------------------------------------
Operating income $ 173,285 155,183 143,527
=============================================================================
Local Service Revenues
Local service revenues are derived from the provision of local exchange
telephone services in the Company's service areas. The $25.9 million (21.2%)
increase in such revenues in 1997 included $17.4 million from properties
acquired, of which $15.0 million was from the PTI properties; $5.6 million due
to the increase in the number of customer access lines; and $2.8 million due to
the provision of custom calling features. An increase in access lines
contributed $6.2 million to the 1996 increase of $10.1 million; $3.0 million of
the 1996 increase was due to the provision of custom calling features. Internal
access line growth during 1997, 1996 and 1995 was 4.4%, 4.3% and 4.4%,
respectively.
Network Access Revenues
Network access revenues are primarily derived from charges to long distance
companies and other customers for access to the Company's local exchange carrier
("LEC") networks in connection with the completion of long distance telephone
calls. These access charges are based on tariffed access rates filed with the
Federal Communications Commission ("FCC") for interstate services and with the
respective state regulatory agency for intrastate services. Certain of the
Company's interstate network access revenues are based on access charges filed
directly with the FCC; the remainder of such revenues are derived under revenue
sharing arrangements with other LECs administered by the National Exchange
Carrier Association. Intrastate network access revenues are based on access
charges or are derived under revenue sharing arrangements with other LECs.
Network access revenues increased $43.2 million (15.6%) in 1997 and $17.7
million (6.8%) in 1996 due to the following factors:
1997 1996
increase increase
(decrease) (decrease)
- ------------------------------------------------------------------------------
(Dollars in thousands)
PTI acquisition $ 26,040 -
Increased recovery from the federal
Universal Service Fund ("USF") 11,314 7,532
Increased minutes of use 5,033 5,432
Acquisitions, excluding PTI 3,465 726
Partial recovery of increased operating costs
through revenue sharing arrangements with
other telephone companies and return on rate base 2,454 4,063
Other, net (5,128) (92)
- ------------------------------------------------------------------------------
$ 43,178 17,661
==============================================================================
Included in "Other, net" in 1997 and 1996 were reductions of $3.8 million
and $1.7 million, respectively, in access revenues due to the previously
announced reductions in intrastate switched access rates mandated by the
Louisiana Public Service Commission ("LPSC") which were phased in from July 1995
through July 1997. As a result of the July 1997 rate reduction being in effect
for a full twelve months during 1998, such access revenues for 1998 will be
reduced approximately $1.8 million from 1997 levels. Included in "Other, net" in
1996 was approximately $2.3 million of revenue increases associated with a
change in the methodology applied in the network access revenue billing process.
Other Revenues
Other revenues include revenues related to (i) leasing, selling, installing,
maintaining and repairing customer premise telecommunications equipment and
wiring ("CPE services"), (ii) providing billing and collection services for long
distance carriers, (iii) participating in the publication of local directories
and (iv) providing Internet access. The PTI properties contributed $4.6 million
to the $10.0 million increase in other revenues in 1997. Exclusive of PTI,
revenues from CPE services increased $3.5 million; $2.5 million of the 1997
increase was attributable to the provision of Internet access to a larger number
of customers. Revenues from CPE services and the provision of Internet access
contributed $3.2 million and $1.4 million, respectively, to the $4.5 million
increase in other revenues in 1996. Billing and collection revenues decreased
$1.0 million and $606,000 in 1997 and 1996, respectively.
Operating Expenses
Plant operations expenses during 1997 and 1996 increased $20.1 million
(22.4%) and $3.3 million (3.8%), respectively. Expenses incurred by the PTI
properties in December 1997 were $12.0 million. Exclusive of PTI, expenses
incurred in connection with providing Internet access to a larger number of
customers contributed $3.5 million to the 1997 increase and other acquisitions
accounted for $1.8 million of such increase. Expenses incurred in the provision
of Internet access contributed approximately $2.2 million to the 1996 increase
Customer operations, corporate, and other expenses increased $20.9 million
(18.9%) in 1997, of which $11.2 million was incurred by the PTI properties and,
exclusive of PTI, $1.7 million was due to an increase in marketing expenses.
Exclusive of PTI and marketing expenses, expenses incurred in the provision of
CPE services were up $1.4 million; operating taxes increased $1.6 million in
1997. Marketing expenses contributed $2.0 million to the 1996 increase of $7.9
million (7.7%) in customer operations, corporate, and other expenses. Exclusive
of marketing expenses, expenses incurred in the provision of CPE services
increased $1.9 million in 1996 and operating taxes increased $1.5 million.
Depreciation and amortization increased $19.9 million (20.8%) and $9.5
million (11.0%) in 1997 and 1996, respectively. Approximately $11.4 million of
the 1997 increase was applicable to acquiring and operating PTI, of which $1.5
million represented amortization of goodwill. $1.7 million of the 1997 increase
was applicable to other acquisitions. Exclusive of acquisitions, depreciation
expense included nonrecurring additional depreciation charges approved by
regulators in certain jurisdictions which aggregated $4.4 million in 1997 and
$8.2 million in 1996. In addition, the Company obtained increased depreciation
rates in certain jurisdictions which increased depreciation expense by $4.4
million in 1997. The remaining increases in depreciation and amortization in
1997 and 1996 were due to higher levels of plant in service. The composite
depreciation rate for the Company's regulated telephone properties, including
the additional depreciation charges, was 7.4% for 1997 and 7.5% for 1996 and
1995.
Other
The Company anticipates that regulatory changes and competitive pressures
may result in future revenue reductions in its telephone operations. However,
the Company anticipates that such reductions may be minimized by increases in
revenues attributable to the continued demand for enhanced services and new
product offerings. While the Company expects its telephone revenues to continue
to grow, its internal telephone revenue growth rate may slow during upcoming
periods.
For additional information regarding certain matters that have impacted or
may impact the Company's telephone operations, see Regulation and Competition.
CELLULAR OPERATIONS AND INCOME FROM UNCONSOLIDATED CELLULAR ENTITIES
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars in thousands)
Operating income - wireless operations $ 88,081 67,914 57,009
Minority interest (6,916) (7,062) (8,084)
Income from unconsolidated cellular entities 27,794 26,952 20,084
- ------------------------------------------------------------------------------
$ 108,959 87,804 69,009
==============================================================================
The Company's wireless operations reflect 100% of the results of operations
of the cellular entities in which the Company has a majority ownership interest.
The minority interest owners' share of the income of such entities is reflected
in the Company's Consolidated Statements of Income as an expense in "Minority
interest." See Minority Interest for additional information. The Company's share
of earnings from the cellular entities in which it has less than a majority
interest is accounted for using the equity method and is reflected in the
Company's Consolidated Statements of Income in "Income from unconsolidated
cellular entities." See Income from Unconsolidated Cellular Entities for
additional information.
WIRELESS OPERATIONS
Substantially all of the Company's cellular customers are located in
Michigan, Louisiana, Wisconsin, Mississippi, Texas and Arkansas. The operating
revenues, expenses and income of the Company's wireless operations for 1997,
1996 and 1995 are summarized below.
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Service revenues $ 302,156 246,037 191,953
Equipment sales 5,586 4,206 5,541
- ------------------------------------------------------------------------------
307,742 250,243 197,494
- ------------------------------------------------------------------------------
Operating expenses
Cost of equipment sold 14,576 12,771 10,235
System operations 47,572 36,301 25,902
General, administrative and
customer service 62,258 52,891 39,471
Sales and marketing 54,128 46,793 39,450
Depreciation and amortization 41,127 33,573 25,427
- ------------------------------------------------------------------------------
219,661 182,329 140,485
- ------------------------------------------------------------------------------
Operating income $ 88,081 67,914 57,009
==============================================================================
Operating Revenues
Cellular service revenues include monthly service fees for providing access
and airtime to customers, service fees for providing airtime to other carriers'
customers roaming through the Company's service areas, and toll revenue.
Cellular service revenues during 1997 increased to $302.2 million from $246.0
million in 1996 and $192.0 million in 1995.
The 1997 and 1996 increases in cellular service revenues were primarily
attributable to the increases in cellular customers due to increased demand for
wireless services and acquisitions. Cellular units in service in the Company's
majority-owned markets increased to 569,983 as of December 31, 1997 from 368,233
as of December 31, 1996 and 290,075 as of December 31, 1995. Included in the
1997 and 1996 increases were 123,600 and 4,850, respectively, of units added
through acquisitions, including 88,245 acquired in the PTI acquisition in
December 1997. Exclusive of acquisitions, access and usage revenues increased
$29.6 million (16.9%) in 1997 and $33.9 million (25.6%) in 1996 and roaming and
toll revenues increased $16.6 million (25.1%) and $11.8 million (24.2%) in 1997
and 1996, respectively. Acquisitions contributed $11.8 million and $7.8 million
to the increase in cellular service revenues in 1997 and 1996, respectively.
The average monthly cellular service revenue per customer declined to $61 in
1997 from $63 in 1996 and $66 in 1995. It has been an industry-wide trend that
early subscribers have normally been the heaviest users and that a higher
percentage of new subscribers tend to be lower usage customers. The average
monthly service revenue per customer is expected to decline in 1998 as a result
of the PTI acquisition (due to PTI's historically lower average monthly service
revenue per customer) and may further decline (i) as market penetration
increases and additional lower usage customers are activated and (ii) as
competitive pressures from current and future wireless communications providers
intensify. The Company is responding to such competitive pressures by, among
other things, modifying certain of its price plans and implementing certain
other plans and promotions, all of which are likely to result in lower average
revenue per customer. The Company will continue to focus on customer service and
attempt to stimulate cellular usage by promoting the availability of certain
enhanced services and by improving the quality of its service through the
construction of additional cell sites and other enhancements to its system.
Operating Expenses
The $11.3 million (31.0%) increase in system operations expenses in 1997
included a $4.7 million increase in the amounts paid to other carriers for
cellular service provided to the Company's customers who roam in the other
carriers' service areas (net of the amounts the Company bills its customers
therefor), and a $974,000 increase in expenses associated with cellular fraud.
Expenses incurred by properties acquired were $2.8 million. The remainder of the
increase in system operations expenses in 1997 resulted primarily from the
operation of more cell sites.
The Company operated 558 cell sites at December 31,1997 in entities in which
it had a majority interest, compared to 354 at December 31, 1996 and 277 at
December 31, 1995. In 1997 and 1996, 155 cell sites and eight cell sites,
respectively, were added through acquisitions.
System operations expenses increased $10.4 million (40.1%) in 1996 primarily
due to a $4.0 million increase in the amounts paid to other carriers for
cellular service provided to the Company's customers who roam in the other
carriers' service areas (net of the amounts the Company bills its customers
therefor), and a $1.8 million increase in expenses associated with cellular
fraud. The remainder of the increase in system operations expenses in 1996
resulted primarily from the operation of new cell sites.
Approximately $3.0 million of the $9.4 million (17.7%) increase in general,
administrative and customer service expenses in 1997 was applicable to
operations acquired. Most of the remainder of the 1997 increase was related to
increased expenses resulting from a larger customer base. Customer service and
retention costs increased $2.4 million and billing costs were $2.4 million
higher. Of the $13.4 million (34.0%) increase in general, administrative and
customer service expenses in 1996, $5.5 million was due to an increase in
customer service and retention costs; $2.2 million was due to an increase in the
provision for doubtful accounts; $1.3 million was due to an increase in billing
costs; and $3.9 million was due to increased general office expenses.
Churn rate (the percentage of cellular customers that terminate service) is
an industry-wide concern. The Company faces substantial competition from the
other cellular provider in certain of its markets and has begun to face
competition from PCS providers in a few of its markets. A significant portion of
the churn in the Company's cellular markets is due to the Company disconnecting
service to customers for nonpayment. The Company's average monthly churn rate
was 2.31% in 1997 and 2.37% in 1996.
During 1997 and 1996, sales and marketing expenses increased $7.3 million
(15.7%) and $7.3 million (18.6%), respectively. The 1997 increase included a
$4.9 million increase in costs incurred in selling products and services in
retail locations, including Company-owned stores. Approximately $2.8 million of
the 1997 increase was applicable to operations acquired. Approximately $3.7
million of the 1996 increase was due to an increase in advertising and sales
promotion expenses. The 1996 increase also included a $2.8 million increase in
costs of operating retail locations.
Depreciation and amortization increased $7.6 million (22.5%) in 1997 and
$8.1 million (32.0%) in 1996 due primarily to higher levels of plant in service.
In 1997 and 1996, $2.1 million and $1.7 million, respectively, of the increase
was applicable to operations acquired.
Other
For additional information regarding certain matters that have impacted or
may impact the Company's wireless operations, see Regulation and Competition.
OTHER OPERATIONS
Other operations include the results of operations of subsidiaries of the
Company which are not included in the telephone or wireless segments including,
but not limited to, the Company's competitive access subsidiary (which was sold
to Brooks in May 1997) and the Company's non-regulated long distance and call
center operations. The operating revenues, expenses and income of the Company's
other operations for 1997, 1996 and 1995 are summarized below.
Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
(Dollars in thousands)
Operating revenues
Long distance $ 36,550 28,894 15,980
Call center 14,285 8,832 6,129
Competitive access 2,499 2,730 634
Other 9,848 7,440 5,361
- ----------------------------------------------------------------------------
63,182 47,896 28,104
- ----------------------------------------------------------------------------
Operating expenses
Cost of sales and
operating expenses 54,132 45,042 23,702
Depreciation and amortization 2,646 2,655 2,019
- ----------------------------------------------------------------------------
56,778 47,697 25,721
- ----------------------------------------------------------------------------
Operating income $ 6,404 199 2,383
============================================================================
Of the $15.3 million (31.9%) increase in operating revenues in 1997, $13.1
million was applicable to the long distance and call center operations. An
increase in operating expenses of $11.7 million incurred by the long distance
and call center operations in 1997 was partially offset by a decrease of $4.1
million in operating expenses incurred by the Company's competitive access
subsidiary. The operating loss of the Company's competitive access subsidiary in
1997 (prior to its sale) was $2.4 million compared to $6.2 million in 1996.
In 1996, $15.6 million of the $19.8 million increase in operating revenues
was due to the long distance and call center operations. Of the $22.0 million
increase in operating expenses in 1996, $13.8 million was incurred by the long
distance and call center operations and $4.7 million was applicable to the
Company's competitive access subsidiary.
Certain of the Company's service subsidiaries provide managerial,
operational, technical and accounting services, along with materials and
supplies, to the Company's telephone subsidiaries. In accor-dance with
regulatory accounting, intercompany profit on transactions with regulated
affiliates has not been eliminated in connection with consolidating the results
of operations of the Company. When the regulated operations of the Company no
longer qualify for the application of Statement of Financial Accounting
Standards No. 71 ("SFAS 71"), "Accounting for the Effects of Certain Types of
Regulation," such intercompany profit will be eliminated in subsequent financial
statements, the primary result of which will be a decrease in operating expenses
applicable to the Company's telephone operations and an increase in operating
expenses applicable to the Company's other operations segment. The amount of
intercompany profit with regulated affiliates which was not eliminated was
approximately $8.9 million, $7.7 million and $8.0 million in 1997, 1996 and
1995, respectively. For additional information applicable to SFAS 71, see
Regulation and Competition - Other Matters.
INTEREST EXPENSE
Interest expense increased $11.8 million (26.4%) in 1997, primarily due to
$7.2 million of interest expense on the borrowings used to fund the PTI
acquisition and $3.5 million of interest expense applicable to PTI's debt.
For additional information, see Liquidity and Capital Resources - Financing
Activities and Note 6 of Notes to Consolidated Financial Statements.
INCOME FROM UNCONSOLIDATED CELLULAR ENTITIES
Earnings from unconsolidated cellular entities, net of the amortization of
associated goodwill, increased $842,000 (3.1%) during 1997 and $6.9 million
(34.2%) during 1996. The improvement in profitability in 1997 of most of the
cellular entities in which the Company owns less than a majority interest was
substantially offset by a $2.4 million decrease in the Company's portion of the
profits of a partnership in which the Company has a significant ownership
interest.
GAIN ON SALES OF ASSETS
During 1997 the Company sold its majority-owned competitive access
subsidiary to Brooks in exchange for approximately 4.3 million shares of Brooks'
common stock. The Company recorded a pre-tax gain in the second quarter of 1997
of approximately $71 million ($46 million after-tax; $.50 per diluted share). In
November 1997, the Company sold approximately 3.8 million shares of Brooks'
stock and recorded a pre-tax gain of approximately $108 million ($66 million
after-tax; $.73 per diluted share).
MINORITY INTEREST
Minority interest is the expense recorded by the Company to reflect the
minority interest owners' share of the earnings of the Company's majority-owned
and operated cellular entities and majority-owned subsidiaries. Decreases in
minority interest of $1.2 million in 1997 and $1.4 million in 1996 were due to
the effect of the Company's acquisition, during the second quarter of 1996, of
an additional 25% interest in a Louisiana cellular partnership which decreased
the minority interest owners' share of such partnership. In addition, minority
interest decreased $756,000 during 1997 as a result of allocating thereto a
portion of the loss of the Company's majority-owned competitive access
subsidiary to the minority shareholders. In 1996, no portion of the loss of such
subsidiary was allocated to minority interest. Such decreases were substantially
offset by increased minority interest expense due to increased profitability of
the Company's majority-owned and operated cellular entities.
OTHER INCOME AND EXPENSE
Other income and expense during 1997 was $5.1 million compared to $3.9
million during 1996 and $5.0 million in 1995. The first quarter of 1996 included
a nonrecurring charge of $1.1 million which related to the Company's withdrawal
of its investment in an entity formed to bid on Personal Communications Services
("PCS") licenses after such entity withdrew from the federal auction in 1996.
INCOME TAX EXPENSE
The Company's effective income tax rate was 37.3%, 36.6% and 37.3% in 1997,
1996 and 1995, respectively. For additional information, see Note 10 of Notes to
Consolidated Financial Statements.
MAJOR ACQUISITION
On December 1, 1997, the Company acquired PTI in exchange for $1.503 billion
cash. To finance the acquisition, the Company borrowed $1.288 billion under its
$1.6 billion senior unsecured credit facility with NationsBank of Texas, N.A.
and a syndicate of other lenders. This debt matures in five years and carries
floating-rate interest based upon London InterBank Offered Rates for short-term
periods. As of December 31, 1997, the weighted average interest rate of this
debt was 6.17%. The Company paid the remainder of the PTI acquisition price with
available cash, most of which consisted of the proceeds of the sale of Brooks'
common stock in November 1997. As indicated below under Liquidity and Capital
Resources - Financing Activities, the Company repaid approximately $758 million
of this acquisition indebtedness with the net proceeds of a public offering of
senior debt securities in January 1998.As a result of the acquisition, the
Company acquired (i) over 660,000 telephone access lines located in four
midwestern states, seven western states and Alaska, (ii) over 88,000 cellular
subscribers in two midwestern states and Alaska and (iii) various wireless,
cable television and other communications assets. For additional information,
see Note 2 of Notes to Consolidated Financial Statements.
ACCOUNTING PRONOUNCEMENTS
In December 1997 the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 established
requirements for the computation of basic earnings per share and diluted
earnings per share. The Company previously reported primary earnings per share
of $1.43 and $1.31 for 1996 and 1995, respectively, and fully diluted earnings
per share of $1.43 and $1.30 for 1996 and 1995, respectively, in accordance with
the provisions of Accounting Principles Board Opinion No. 15, "Earnings per
Share."
INFLATION
The effects of increased costs historically have been mitigated by the
ability to recover certain costs applicable to the Company's regulated telephone
operations through the rate-making process. As operating expenses in the
Company's nonregulated lines of business increase as a result of inflation, the
Company, to the extent permitted by competition, recovers the costs by
increasing prices for its services and equipment. While the rate-making process
does not permit the Company to immediately recover the costs of replacing its
physical plant, the Company has historically been able to recapture these costs
over time. Possible future regulatory changes may alter the Company's ability to
recover increased costs in its regulated operations. For additional information
regarding the current regulatory environment, see Regulation and Competition.
YEAR 2000
The Company believes that it has identified each of its computer systems
that will require modifications to enable it to perform satisfactorily on and
after January 1, 2000. The financial impact of making such modifications to the
Company's systems is not expected to be material to the Company's consolidated
financial position or results of operations. In addition, the Company is
currently corresponding with vendors that provide products and systems to the
Company in order to determine if such products or systems will be required to be
upgraded or replaced. Although management believes the Company has an adequate
program in place to address the year 2000 issue, the costs of upgrades to, or
replacements of, its purchased products or systems has not been determined and
there can be no assurance that the program will ultimately be successful.
LIQUIDITY AND CAPITAL RESOURCES
Excluding cash used for acquisitions, the Company relies on cash provided by
operations to provide a substantial portion of its cash needs. The Company's
operations have historically provided a stable source of cash flow which has
helped the Company continue its long-term program of capital improvements.
Operating Activities
Net cash provided by operating activities was $297.3 million, $264.7 million
and $215.7 million in 1997, 1996 and 1995, respectively. The Company's
accompanying consolidated statements of cash flows identify major differences
between net income and net cash provided by operating activities for each of
those years. For additional information relating to the telephone operations,
wireless operations, and other operations of the Company, see Results of
Operations.
Investing Activities
Net cash used in investing activities was $1.503 billion, $241.8 million and
$227.8 million in 1997, 1996 and 1995, respectively. Cash used for acquisitions
was $1.544 billion during 1997, compared to $46.3 million in 1996 and $22.1
million in 1995. See Results of Operations - Major Acquisition for additional
information. Capital expenditures for 1997 were $115.9 million for telephone
operations, $39.1 million for wireless operations and $26.3 million for
corporate and other operations. Capital expenditures during 1996 and 1995 were
$222.9 million and $196.6 million, respectively. Proceeds from the sale of
Brooks' common stock were $202.7 million in 1997. The $241.8 million of net cash
used in investing activities in 1996 was net of the reimbursement of $18.9
million related to the Company's withdrawal of its equity investment in an
entity formed for the purpose of participating in the FCC auction of 30MHz PCS
licenses.
Financing Activities
Net cash provided by financing activities was $1.223 billion during 1997, of
which $1.288 billion was related to the acquisition of PTI. See Results of
Operations - Major Acquisition for additional information. Net cash used in
financing activities was $23.0 million during 1996 and net cash provided by
financing activities was $13.5 million during 1995. Exclusive of amounts
borrowed to fund the PTI acquisition, net payments of debt were $54.7 million
during 1997 compared to $11.6 million during 1996. In November 1995 the Company
issued $150 million of senior notes under its $400 million shelf registration
statement. The net proceeds were used to reduce the Company's borrowings under
its credit facilities.
In December 1997, after giving consideration to the PTI acquisition,
Standard & Poor's assigned Century's senior unsecured debt a rating of BBB+ and
Moody's reaffirmed its rating of Baa1.
In December 1997 the Company filed a shelf registration statement with the
United States Securities and Exchange Commission registering $1.5 billion of
senior unsecured debt securities, preferred stock, common stock and warrants,
under which the Company issued $665 million of senior debt securities in January
1998 concurrent with the issuance of the remaining $100 million under its $400
million shelf registration statement. The net proceeds of approximately $758
million (excluding payment obligations of approximately $39 million related to
interest rate hedging effected in connection with the offering) were used to
reduce the bank acquisition indebtedness incurred by the Company in connection
with its December 1997 acquisition of PTI. The Company's effective weighted
average cost of funds for its $765 million debt issuance is 7.15%, after giving
consideration to the payment obligations mentioned above.
Other
Budgeted capital expenditures for 1998 total $220 million for telephone
operations, $90 million for wireless operations and $40 million for corporate
and other operations. The Company anticipates that capital expenditures in its
telephone operations will continue to include the installation of fiber optic
cable and the upgrading of its plant and equipment, including its digital
switches, to provide enhanced services. Capital expenditures in the wireless
operations are expected to continue to focus on constructing additional cell
sites (which will provide additional capacity and expanded areas where hand-held
cellular phones may be used) and providing digital service.
In early 1997 the Company was awarded 12 PCS licenses in connection with the
FCC's D and E block auctions of 10MHz PCS licenses. The licenses cover areas
with a population of approximately four million; the Company's investment in the
licenses was $4.6 million. As a result of the PTI acquisition, the Company
acquired PCS licenses that cover areas with a population of approximately 4.1
million. Approximately $20 million of the 1998 capital expenditure budget for
corporate and other operations is for development of the Company's PCS networks.
The Company will continue its long-term strategy of pursuing the acquisition
of attractive communications properties in exchange for cash, securities or
both, and may require additional financing in connection therewith.
Approximately 2.7 million shares of Century common stock and 200,000 shares of
Century preferred stock remain available for future issuance in connection with
acquisitions under an acquisition shelf registration statement.
As of December 31, 1997, the Company's telephone subsidiaries had available
for use $140.9 million of commitments for long-term financing from the Rural
Utilities Service and the Company had $351.1 million of undrawn committed bank
lines of credit. The Company also has access to debt and equity capital markets,
including its shelf registration statements mentioned above.
Common stockholders' equity as a percentage of total capitalization was
32.6% and 60.8% at December 31, 1997 and 1996, respectively. As of November 30,
1997 (immediately prior to the PTI acquisition), common stockholders' equity as
a percentage of total capitalization was 68.5%.
REGULATION AND COMPETITION
The communications industry continues to undergo various fundamental
regulatory, competitive and technological changes that make it difficult to
determine the form or degree of future regulation and competition affecting the
Company's telephone and wireless operations. These changes may have a
significant impact on the future financial performance of all communications
companies.
Events Affecting the Communications Industry
In February 1996 the United States Congress enacted the Telecommunications
Act of 1996 (the "1996 Act"), which obligates LECs to permit competitors to
interconnect their facilities to the LEC's network and to take various other
steps that are designed to promote competition. Although the 1996 Act provides
certain exemptions for rural LECs such as those operated by the Company, the
FCC's August 1996 order implementing most of the 1996 Act's interconnection
provisions placed the burden of proving the continuing availability of these
exemptions on rural LECs. In July 1997 the U.S. Court of Appeals for the Eighth
Circuit overturned several provisions of the FCC's August 1996 interconnection
order, including the rules placing the burden of proof on rural LECs to retain
their rural exemption. This decision has been appealed to the United States
Supreme Court.
Prior to and since the enactment of the 1996 Act, the FCC and a number of
state legislative and regulatory bodies have taken steps to foster local
exchange competition. Coincident with this recent movement toward increased
competition has been the gradual reduction of regulatory oversight of LECs.
These cumulative changes have led to the continued growth of various companies
providing services that compete with LECs' services. Wireless services are also
expected to increasingly compete with LECs.
The 1996 Act authorized the establishment of federal and state universal
service funds to provide support to eligible telecommunications carriers. In May
1997 the FCC adopted an order on universal service, as mandated by the 1996 Act.
In the order, the FCC ruled that rural telephone companies which are designated
eligible telecommunications carriers will continue to receive universal service
funding. Each of the Company's LECs has been so designated by its respective
state regulatory agency. As a result, the Company's LECs will continue to
receive payments under the federal support mechanisms currently in effect until
the FCC adopts funding support mechanisms based on forward-looking economic
costs, which it is required to do, but no earlier than January 2001.
As part of its universal service order, the FCC also established a new
program to provide up to $2.25 billion of discounted telecommunications services
annually to schools and libraries, commencing January 1998. In addition, the FCC
established a $400 million annual fund to provide discounted telecom-munications
services for rural health care providers. All communications carriers providing
interstate telecommunications services, including the Company's LECs and its
cellular and long distance operations, are required to contribute to these
programs. In December 1997 the FCC, while reserving the right to adjust such
amounts if demand increases, modified the amounts to be collected during the
first six months of 1998 to no more than $625 million for schools and libraries
and no more than $50 million for rural health care providers. The FCC has stated
that local exchange telephone companies will recover their funding contributions
in their rates for interstate services. The Company currently estimates that the
contribution by its cellular and long distance operations for 1998 will
approximate $3.5 million.
In an access charge reform order adopted in May 1997, the FCC changed its
system of interstate access charges to make them compatible with the
deregulatory framework established by the 1996 Act. Such changes are primarily
applicable to price-cap companies. The Company's telephone subsidiaries
determine interstate revenues under rate of return regulation and are,
therefore, only minimally impacted by the access charge reform order. The FCC
stated that a separate access charge reform proceeding would be initiated for
rate of return companies.
Numerous petitions for reconsideration or clarification have been filed with
the FCC regarding the universal service and access charge reform orders
discussed above.
In October 1997 the FCC issued a Notice of Proposed Rulemaking which would,
among other things, create a federal-state joint board to review jurisdictional
separations procedures through which the costs of regulated telecommunications
services are allocated to the interstate and intrastate jurisdictions.
In recent years, the FCC has allocated additional frequency spectrum for
wireless technologies that compete or are expected to compete with cellular,
including PCS and mobile satellite services. Recently, several major PCS
companies began providing services competitive with cellular in selected larger
markets, although thus far the Company has experienced competition from PCS
companies in only a few of its markets. The FCC has also authorized certain
specialized mobile radio service licensees to configure their systems so as to
operate in a manner similar to cellular systems.
In February 1996 the FCC sought public comments on whether it should
initiate a rate of return represcription proceeding for LECs that are subject to
rate of return regulation for interstate access revenues. The Company is unaware
of any significant developments in this proceeding.
Competition to provide traditional telephone or wireless services is
expected to initially affect large urban areas to a greater extent than rural,
suburban and small urban areas such as those in which the Company's operations
are located. The Company does not believe such competition is likely to
materially affect it in the near term. The Company further believes that it may
benefit from having the opportunity to observe the effects of these developments
in large urban markets. The Company will continue to monitor ongoing changes in
regulation, competition and technology and consider which developments provide
the most favorable opportunities for the Company to pursue.
Recent Events Affecting the Company
As mentioned above in Events Affecting the Communications Industry, in May
1997 the FCC adopted an order on universal service. During 1997 the Company's
revenues from the USF increased approximately $16.1 million (of which $4.6
million was applicable to the PTI properties) to $65.4 million after increasing
$7.5 million during 1996. Although the Company anticipates that it may
experience a reduction in its federal support revenues at some point in the
future, management believes it is premature to assess or estimate the ultimate
impact thereof. There can be no assurance, however, that such impact will not be
material.
During the last few years, several states in which the Company has
substantial operations took legislative or regulatory steps to further introduce
competition into the LEC business. While the Company is aware of only a few
companies which have requested authorization to provide local exchange service
in the Company's service areas, it is anticipated that similar action may be
taken by others in the future.
In June 1997 the LPSC adopted a Consumer Price Protection Plan (the "Plan"),
effective July 1997, which impacts all of the Company's telephone subsidiaries
operating in Louisiana. The new form of regulation will focus primarily on price
and quality of service. Under the Plan, the Company's Louisiana telephone
subsidiaries' local rates will be frozen for a period of three years and access
rates will be frozen for a period of two years. Although the Plan has no
specified term, the LPSC is required to review it by mid-2000. The Company's
Louisiana telephone subsidiaries have the option to propose a new plan at any
time if the LPSC determines that (i) effective competition exists or (ii)
unforeseen events threaten the subsidiary's ability to provide adequate service
or impair its financial health.
During 1995 the LPSC adopted a regulatory plan for independent telephone
companies in Louisiana. Under this plan, the Company's access revenues were
reduced $3.8 million in 1997 and $1.7 million in 1996, and the Company
anticipates that its access revenues will be further reduced by approximately
$1.8 million in 1998. See Results of Operations Telephone Operations for
additional information.
Certain long distance carriers continue to request that the Company reduce
intrastate access tariffed rates for certain of its telephone subsidiaries.
There is no assurance that these requests will not result in reduced intrastate
access revenues in the future.
Other Matters
The Company's regulated telephone operations are subject to the provisions
of SFAS 71, under which the Company is required to account for the economic
effects of the rate-making process, including the recognition of depreciation of
plant and equipment over lives approved by regulators. The ongoing applicability
of SFAS 71 to the Company's regulated telephone operations is being monitored
due to the changing regulatory, competitive and legislative environments. When
the regulated operations of the Company no longer qualify for the application of
SFAS 71, the net adjustments required will result in a material, extraordinary,
noncash charge against earnings. While the amount of such charge cannot be
precisely estimated at this time, management believes that the noncash,
after-tax, extraordinary charge would be between $250 million and $300 million.
See Note 11 of Notes to Consolidated Financial Statements for additional
information.
The Company has certain obligations based on federal, state and local laws
relating to the protection of the environment. Costs of compliance through 1997
have not been material, and the Company currently has no reason to believe that
such costs will become material.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable for 1997.
Item 8. Financial Statements and Supplementary Data
Report of Management
--------------------
The Shareholders
Century Telephone Enterprises, Inc.:
Management has prepared and is responsible for the Company's consolidated
financial statements. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and necessarily
include amounts determined using our best judgments and estimates with
consideration given to materiality.
The Company maintains internal control systems and related policies and
procedures designed to provide reasonable assurance that the accounting records
accurately reflect business transactions and that the transactions are in
accordance with management's authorization. The design, monitoring and revision
of the systems of internal control involve, among other things, our judgment
with respect to the relative cost and expected benefits of specific control
measures. Additionally, the Company maintains an internal auditing function
which independently evaluates the effectiveness of internal controls, policies
and procedures and formally reports on the adequacy and effectiveness thereof.
The Company's consolidated financial statements have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, who have expressed
their opinion with respect to the fairness of the consolidated financial
statements. Their audit was conducted in accordance with generally accepted
auditing standards, which includes the consideration of the Company's internal
controls to the extent necessary to form an independent opinion on the
consolidated financial statements prepared by management.
The Audit Committee of the Board of Directors is composed of directors who
are not officers or employees of the Company. The Committee meets periodically
with the independent certified public accountants, internal auditors and
management. The Committee considers the audit scope and discusses internal
control, financial and reporting matters. Both the independent and internal
auditors have free access to the Committee.
/s/ R. Stewart Ewing, Jr.
R. Stewart Ewing, Jr.
Senior Vice President and Chief Financial Officer
Independent Auditors' Report
----------------------------
The Board of Directors
Century Telephone Enterprises, Inc.:
We have audited the consolidated financial statements of Century Telephone
Enterprises, Inc. and subsidiaries as listed in Item 14a(i). In connection with
our audits of the consolidated financial statements, we have also audited the
financial statement schedules as listed in Item 14a(ii). These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Century
Telephone Enterprises, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Shreveport, Louisiana
January 28, 1998, except as to the third paragraph of Note 20 which is as of
February 25, 1998.
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Statements of Income
Year ended December 31,
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
(Dollars in thousands, except
per share amounts)
OPERATING REVENUES
Telephone $ 530,597 451,538 419,242
Wireless 307,742 250,243 197,494
Other 63,182 47,896 28,104
- --------------------------------------------------------------------------
Total operating revenues 901,521 749,677 644,840
- --------------------------------------------------------------------------
OPERATING EXPENSES
Cost of sales and
operating expenses 474,256 394,360 328,151
Depreciation and amortization 159,495 132,021 113,770
- --------------------------------------------------------------------------
Total operating expenses 633,751 526,381 441,921
- --------------------------------------------------------------------------
OPERATING INCOME 267,770 223,296 202,919
- --------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Gain on sales of assets, net 169,640 815 6,782
Interest expense (56,474) (44,662) (43,615)
Income from unconsolidated
cellular entities 27,794 26,952 20,084
Minority interest (5,498) (6,675) (8,084)
Other income and expense 5,109 3,916 4,982
- --------------------------------------------------------------------------
Total other income (expense) 140,571 (19,654) (19,851)
- --------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 408,341 203,642 183,068
Income tax expense 152,363 74,565 68,292
- --------------------------------------------------------------------------
NET INCOME $ 255,978 129,077 114,776
==========================================================================
BASIC EARNINGS PER SHARE* $ 2.84 1.45 1.33
==========================================================================
DILUTED EARNINGS PER SHARE* $ 2.80 1.43 1.31
==========================================================================
DIVIDENDS PER COMMON SHARE* $ .247 .24 .22
==========================================================================
*Adjusted to reflect stock split. See Note 20.
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Balance Sheets
December 31,
- ------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 26,017 8,402
Accounts receivable
Customers, less allowance of $5,954
and $3,327 143,613 60,181
Other 83,659 26,263
Materials and supplies, at average cost 21,994 8,222
Other 8,197 6,166
- ------------------------------------------------------------------------------
Total current assets 283,480 109,234
- ------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 2,258,563 1,149,012
- ------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Excess cost of net assets acquired, less
accumulated amortization of $84,132
and $67,061 1,767,352 532,410
Other 400,006 237,849
- ------------------------------------------------------------------------------
Total investments and other assets 2,167,358 770,259
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 4,709,401 2,028,505
==============================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 55,244 19,919
Accounts payable 83,378 60,548
Accrued expenses and other
current liabilities
Salaries and benefits 38,225 20,224
Taxes 74,898 13,913
Interest 20,821 5,581
Other 25,229 8,837
Advance billings and customer deposits 24,213 15,122
- ------------------------------------------------------------------------------
Total current liabilities 322,008 144,144
- ------------------------------------------------------------------------------
LONG-TERM DEBT 2,609,541 625,930
- ------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 477,580 230,278
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
175,000,000 shares, issued and outstanding
91,103,674* and 59,858,540 shares 91,104 59,859
Paid-in capital 469,586 474,607
Unrealized holding gain on investments,
net of taxes 11,893 -
Retained earnings 728,033 494,726
Unearned ESOP shares (8,450) (11,080)
Preferred stock - non-redeemable 8,106 10,041
- ------------------------------------------------------------------------------
Total stockholders' equity 1,300,272 1,028,153
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 4,709,401 2,028,505
==============================================================================
*Adjusted to reflect stock split. See Note 20.
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Statements of Cash Flows
Year ended December 31,
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 255,978 129,077 114,776
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 159,495 132,021 113,770
Income from unconsolidated
cellular entities (27,794) (26,952) (20,084)
Minority interest 5,498 6,675 8,084
Deferred income taxes 16,230 7,935 9,563
Gain on sales of assets (169,640) (815) (6,782)
Changes in current assets and
current liabilities:
Accounts receivable 7,649 (4,353) (8,949)
Accounts payable (25,440) 5,103 2,656
Other accrued taxes 58,205 1,285 (4,134)
Other current assets and other
current liabilities, net 7,263 6,220 (4,413)
Increase in other noncurrent
liabilities 2,173 4,305 5,754
Other, net 7,702 4,151 5,497
- ------------------------------------------------------------------------------
Net cash provided by operating
activities 297,319 264,652 215,738
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (1,543,814) (46,327) (22,130)
Payments for property, plant
and equipment (181,225) (222,885) (196,592)
Investment in unconsolidated personal
communications services entity - 18,900 (20,000)
Investments in unconsolidated
cellular entities (810) (744) (8,013)
Distributions from unconsolidated
cellular entities 16,825 15,648 4,957
Proceeds from sales of assets 202,705 - 19,953
Purchase of life insurance investment (12,962) (5,944) (6,418)
Note receivable 22,500 1,667 833
Other, net (6,346) (2,106) (396)
- ------------------------------------------------------------------------------
Net cash used in investing
activities (1,503,127) (241,791) (227,806)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of
long-term debt 1,312,546 59,649 203,987
Payments of long-term debt (79,203) (57,021) (18,377)
Notes payable, net - (14,199) (158,000)
Proceeds from issuance of common stock 14,156 10,089 6,522
Cash dividends (22,671) (21,775) (19,351)
Other, net (1,405) 258 (1,327)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 1,223,423 (22,999) 13,454
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 17,615 (138) 1,386
Cash and cash equivalents at
beginning of year 8,402 8,540 7,154
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26,017 8,402 8,540
==============================================================================
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Statements of Stockholders' Equity
Year ended December 31,
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars and shares in thousands)
COMMON STOCK
Balance at beginning of year $ 59,859 59,114 53,574
Issuance of common stock for acquisitions 75 257 577
Conversion of convertible securities into
common stock 237 33 4,541
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 565 455 422
Three-for-two stock split 30,368 - -
- ------------------------------------------------------------------------------
Balance at end of year 91,104 59,859 59,114
- ------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance at beginning of year 474,607 453,584 319,235
Issuance of common stock for acquisitions 3,241 8,201 15,981
Conversion of convertible securities
into common stock 4,998 163 108,601
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 13,591 9,676 6,100
Amortization of unearned compensation
and other 3,517 2,983 3,667
Three-for-two stock split (30,368) - -
- ------------------------------------------------------------------------------
Balance at end of year 469,586 474,607 453,584
- ------------------------------------------------------------------------------
UNREALIZED HOLDING GAIN ON
INVESTMENTS, NET OF TAXES
Balance at beginning of year - - -
Change in unrealized holding gain on
investments, net of taxes 11,893 - -
- ------------------------------------------------------------------------------
Balance at end of year 11,893 - -
- ------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 494,726 387,424 291,999
Net income 255,978 129,077 114,776
Cash dividends declared
Common stock - $.247, $.24
and $.22 per share* (22,211) (21,355) (19,228)
Preferred stock (460) (420) (123)
- ------------------------------------------------------------------------------
Balance at end of year 728,033 494,726 387,424
- ------------------------------------------------------------------------------
UNEARNED ESOP SHARES
Balance at beginning of year (11,080) (13,960) (16,840)
Release of ESOP shares 2,630 2,880 2,880
- ------------------------------------------------------------------------------
Balance at end of year (8,450) (11,080) (13,960)
- ------------------------------------------------------------------------------
PREFERRED STOCK - NON-REDEEMABLE
Balance at beginning of year 10,041 2,262 2,268
Issuance of preferred stock
for acquisitions - 7,975 -
Conversion of preferred stock
into common stock (1,935) (196) (6)
- ------------------------------------------------------------------------------
Balance at end of year 8,106 10,041 2,262
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 1,300,272 1,028,153 888,424
==============================================================================
COMMON SHARES OUTSTANDING
Balance at beginning of year 59,859 59,114 53,574
Issuance of common stock for
acquisitions 75 257 577
Conversion of convertible securities
into common stock 237 33 4,541
Issuance of common stock through dividend
reinvestment, incentive and benefit plans 565 455 422
Three-for-two stock split 30,368 - -
- ------------------------------------------------------------------------------
Balance at end of year 91,104 59,859 59,114
==============================================================================
*Adjusted to reflect stock split. See Note 20.
See accompanying notes to consolidated financial statements.
CENTURY TELEPHONE ENTERPRISES, INC.
Notes to Consolidated Financial Statements
December 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements of Century
Telephone Enterprises, Inc. and its subsidiaries (the "Company") include the
accounts of Century Telephone Enterprises, Inc. ("Century") and its
majority-owned subsidiaries and partnerships. The Company's regulated telephone
operations are subject to the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
Investments in cellular entities where the Company does not own a majority
interest are accounted for using the equity method of accounting.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue recognition - Revenues are recognized when earned. Certain of the
Company's telephone subsidiaries participate in revenue sharing arrangements
with other telephone companies for interstate revenue and for certain intrastate
revenue. Such sharing arrangements are funded by toll revenue and/or access
charges within state jurisdictions and by access charges in the interstate
market. Revenues earned through the various sharing arrangements are initially
recorded based on the Company's estimates.
Property, plant and equipment - Telephone plant is stated substantially at
original cost of construction. Normal retirements of telephone property are
charged against accumulated depreciation, along with the costs of removal, less
salvage, with no gain or loss recognized. Renewals and betterments of plant and
equipment are capitalized while repairs, as well as renewals of minor items, are
charged to operating expense. Depreciation of telephone properties is provided
on the straight line method, using class or overall group rates acceptable to
the regulatory authorities; such rates range from 1.8% to 25%.
Non-telephone property is stated at cost and, when sold or retired, a gain or
loss is recognized. Depreciation of such property is provided on the straight
line method over estimated service lives ranging from three to 30 years.
Impairment of long-lived assets and excess cost of net assets acquired
(goodwill) - In 1996 the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The carrying value of long-lived assets, including allocated
goodwill, is reviewed for impairment at least annually, or whenever events or
changes in circumstances indicate that such carrying value may not be
recoverable, by assessing the recoverability of such carrying value through
estimated undiscounted future net cash flows expected to be generated by the
assets or the acquired business. The adoption of SFAS 121 did not affect the
Company's consolidated financial position or results of operations. The excess
cost of net assets acquired of substantially all of the Company's acquisitions
accounted for as purchases is being amortized over forty years.
Affiliated transactions - Certain service subsidiaries of Century provide
installation and maintenance services, materials and supplies, and managerial,
technical and accounting services to subsidiaries. In addition, Century provides
and bills management services to subsidiaries and in certain instances makes
interest bearing advances to finance construction of plant and purchases of
equipment. These transactions are recorded by the Company's telephone
subsidiaries at their cost to the extent permitted by regulatory authorities.
Intercompany profit on transactions with regulated affiliates is limited to a
reasonable return on investment and has not been eliminated in connection with
consolidating the results of operations of Century and its subsidiaries.
Intercompany profit on transactions with nonregulated affiliates has been
eliminated.
Income taxes - Century files a consolidated federal income tax return with its
eligible subsidiaries. The Company uses the asset and liability method of
accounting for income taxes under which deferred tax assets and liabilities are
established for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax bases. Investment tax credits related to telephone plant have
been deferred and are being amortized as a reduction of federal income tax
expense over the estimated useful lives of the assets giving rise to the
credits.
Derivative financial instruments - Beginning in late 1997, the Company entered
into certain interest rate hedge contracts in anticipation of a public debt
issuance, utilizing such hedge contracts to manage interest rate exposure. The
hedge contracts are treated as off-balance sheet financial instruments. Gains
and losses related to hedges of anticipated transactions are deferred and
amortized as interest expense over the life of the underlying debt issuance. The
Company does not utilize derivative financial instruments for trading or other
speculative purposes.
Earnings per share - During 1997 the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128
established requirements for the computation of basic earnings per share and
diluted earnings per share and was effective for financial statements issued for
periods ending after December 15, 1997. Earnings per share amounts for prior
periods have been restated to conform with SFAS 128.
Stock compensation - During 1996 the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." As allowed by SFAS 123, the Company accounts for employee stock
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees."
Cash equivalents - The Company considers short-term investments with a maturity
at date of purchase of three months or less to be cash equivalents.
Reclassifications - Certain amounts previously reported for prior years have
been reclassified to conform with the 1997 presentation.
(2) MAJOR ACQUISITION
On December 1, 1997, Century acquired Pacific Telecom, Inc. ("PTI") in
exchange for $1.503 billion cash. To finance the acquisition, which was
accounted for as a purchase, Century borrowed $1.288 billion under its $1.6
billion senior unsecured credit facility dated August 28, 1997 with NationsBank
of Texas, N.A. and a syndicate of other lenders. This debt matures in five years
and carries floating-rate interest based upon London InterBank Offered Rates for
short-term periods. The weighted average interest rate of this debt as of
December 31, 1997 was 6.17%. Century paid the remainder of the PTI acquisition
price with available cash.
As a result of the acquisition, the Company acquired (i) telephone access
lines located in four midwestern states, seven western states and Alaska, (ii)
cellular subscribers in two midwestern states and Alaska and (iii) various
wireless, cable television and other communications assets.
The purchase price will be allocated to the assets and liabilities of PTI
based on their estimated fair value. As of December 31, 1997, a preliminary
allocation of the purchase price was made. Such allocation will be refined and
finalized, primarily as it relates to noncurrent assets and liabilities, during
1998.
The following pro forma information represents the consolidated results of
operations of the Company as if the PTI acquisition had been consummated as of
January 1, 1997 and 1996.
Year ended December 31, 1997 1996
- -----------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
(unaudited)
Operating revenues $ 1,392,268 1,245,036
Net income 256,992 120,632
Diluted earnings per share 2.81 1.34
- -----------------------------------------------------------------------------
The pro forma information is not necessarily indicative of the operating
results that would have occurred if the PTI acquisition had been consummated as
of January 1 of each respective period, nor is it necessarily indicative of
future operating results. The actual results of operations of PTI are included
in the Company's consolidated financial statements only from the date of
acquisition.
(3) PROPERTY, PLANT AND EQUIPMENT
Net property, plant and equipment at December 31, 1997 and 1996 was composed
of the following:
December 31, 1997 1996
- -----------------------------------------------------------------------------
(Dollars in thousands)
Telephone, at original cost
Cable and wire $ 1,843,002 726,340
Central office 1,070,477 389,259
General support 256,203 102,667
Information origination/termination 65,304 27,881
Construction in progress 53,382 38,981
Other 7,492 5,161
- -----------------------------------------------------------------------------
3,295,860 1,290,289
Accumulated depreciation (1,375,835) (417,497)
- -----------------------------------------------------------------------------
1,920,025 872,792
- -----------------------------------------------------------------------------
Wireless, at cost
Cell site 284,599 203,879
General support 66,400 47,138
Construction in progress 5,555 15,716
Other 23,664 2,656
- -----------------------------------------------------------------------------
380,218 269,389
Accumulated depreciation (133,357) (75,666)
- -----------------------------------------------------------------------------
246,861 193,723
- -----------------------------------------------------------------------------
Corporate and other, at cost
General support 148,883 94,042
Other 20,537 31,973
- -----------------------------------------------------------------------------
169,420 126,015
Accumulated depreciation (77,743) (43,518)
- -----------------------------------------------------------------------------
91,677 82,497
- -----------------------------------------------------------------------------
Net property, plant and equipment $ 2,258,563 1,149,012
=============================================================================
Depreciation expense was $142.6 million, $118.9 million and $102.1 million
in 1997, 1996 and 1995, respectively. The composite depreciation rate for
telephone properties was 7.4% for 1997 and 7.5% for 1996 and 1995.
(4) INVESTMENTS AND OTHER ASSETS
Investments and other assets at December 31, 1997 and 1996 were composed of
the following:
December 31, 1997 1996
- ------------------------------------------------------------------------------
(Dollars in thousands)
Excess cost of net assets acquired, less
accumulated amortization $ 1,767,352 532,410
Investments in unconsolidated cellular entities 189,363 99,212
Cash surrender value of life insurance
contracts, net 78,658 61,750
Marketable equity securities 40,570 8,478
Other 91,415 68,409
- ------------------------------------------------------------------------------
$ 2,167,358 770,259
==============================================================================
As a result of the purchase of PTI, the Company recorded approximately $1.2
billion of excess cost of net assets acquired.
Goodwill amortization of $16.6 million, $12.8 million and $11.4 million for
1997, 1996 and 1995, respectively, is included in "Depreciation and
amortization" in the Company's Consolidated Statements of Income.
The Company's investments in marketable equity securities are classified as
available for sale and are reported at fair value with unrealized holding gains
and losses reported, net of taxes, as a separate component of stockholders'
equity. As of December 31, 1997, gross unrealized holding gains of the Company's
marketable equity securities were $18.3 million.
(5) INVESTMENTS IN UNCONSOLIDATED CELLULAR ENTITIES
The Company's share of earnings from cellular entities in which it does not
own a majority interest was $29.4 million, $28.2 million and $21.4 million in
1997, 1996 and 1995, respectively, and is included, net of $1.6 million, $1.3
million and $1.3 million of amortization of goodwill attributable to such
investments, in "Income from unconsolidated cellular entities" in the Company's
Consolidated Statements of Income. Over 70% of the 1997 income from
unconsolidated cellular entities was attributable to the following investments.
Ownership
interest
- -----------------------------------------------------------------------------
Alltel Cellular Associates of Arkansas Limited Partnership 36%
Lafayette MSA Limited Partnership 49%
GTE Mobilnet of Austin Limited Partnership 35%
Detroit SMSA Limited Partnership 3%
Michigan RSA #9 Limited Partnership 43%
New Mexico 4 - Santa Fe RSA West Limited Partnership 36%
- -----------------------------------------------------------------------------
The following summarizes the unaudited combined assets, liabilities and
equity, and the unaudited combined results of operations, of the cellular
entities in which the Company's investments (as of December 31, 1997 and 1996)
were accounted for by the equity method.
December 31, 1997 1996
- -----------------------------------------------------------------------------
(Dollars in thousands)
(unaudited)
Assets
Current assets $ 322,863 286,197
Property and other noncurrent assets 767,123 603,204
- -----------------------------------------------------------------------------
$ 1,089,986 889,401
=============================================================================
Liabilities and equity
Current liabilities $ 157,492 108,525
Noncurrent liabilities 25,413 24,564
Equity 907,081 756,312
- -----------------------------------------------------------------------------
$ 1,089,986 889,401
=============================================================================
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
(Dollars in thousands)
(unaudited)
Results of operations
Revenues $ 1,277,524 985,788 743,779
Operating income $ 419,246 338,554 266,355
Net income $ 395,990 339,040 268,967
- -----------------------------------------------------------------------------
At December 31, 1997, $52.6 million of the Company's consolidated retained
earnings represented undistributed earnings of unconsolidated cellular entities.
(6) LONG-TERM DEBT
December 31, 1997 1996
- -----------------------------------------------------------------------------
(Dollars in thousands)
Century
6.17%* Senior Credit Facility, due 2002 $ 1,535,000 -
8.25% senior notes, series B, due 2024 100,000 100,000
7.2% senior notes, series D, due 2025 100,000 100,000
7.0%* notes payable to banks, due 2000 30,000 62,500
7.75% senior notes, series A, due 2004 50,000 50,000
6.55% senior notes, series C, due 2005 50,000 50,000
9.4% senior notes, due through 2003 21,200 25,800
6.9%* Employee Stock Ownership Plan
commitment, due in installments through 2004 8,450 11,080
9.9%* notes, due in installments through 2006 304 417
- -----------------------------------------------------------------------------
Total Century 1,894,954 399,797
- -----------------------------------------------------------------------------
Subsidiaries
First mortgage debt
6.0%* notes, payable to agencies of the United States government and
cooperative lending associations, due in installments
through 2027 348,971 208,920
7.9% notes, due through 2002 5,969 -
6.1% bonds - 1,775
Other debt
7.5%* unsecured medium-term notes,
due through 2008 360,678 -
7.4%* notes, due in installments
through 2020 40,805 18,112
6.5% note, due in installments through 2001 12,040 14,605
8.2%* capital lease obligations,due in 1998 1,368 2,640
- -----------------------------------------------------------------------------
Total subsidiaries 769,831 246,052
- -----------------------------------------------------------------------------
Total long-term debt 2,664,785 645,849
Less current maturities 55,244 19,919
- -----------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 2,609,541 625,930
=============================================================================
* weighted average interest rate at December 31, 1997
The approximate annual debt maturities for the five years subsequent to
December 31, 1997 are as follows: 1998 - $55.2 million; 1999 - $44.8 million;
2000 - $52.9 million; 2001 - $72.4 million; and 2002 - $702.5 million.
Short-term borrowings of $30.0 million at December 31, 1997 were classified
as long-term debt on the accompanying balance sheet as the Company had available
an aggregate of $351.0 million under long-term revolving facilities.
Certain of the Company's loan agreements contain various restrictions, among
which are limitations regarding issuance of additional debt, payment of cash
dividends, reacquisition of the Company's capital stock and other matters. At
December 31, 1997, all of the consolidated retained earnings reflected on the
balance sheet was available for the declaration of dividends.
The transfer of funds from certain consolidated subsidiaries to Century is
restricted by various loan agreements. Subsidiaries which have loans from
government agencies and cooperative lending associations, or have issued first
mortgage bonds, generally may not loan or advance any funds to Century, but may
pay dividends if certain financial ratios are met. At December 31, 1997,
restricted net assets of subsidiaries were $344.2 million. Subsidiaries'
retained earnings in excess of amounts restricted by debt covenants totaled
$684.2 million.
Most of the Company's telephone property, plant and equipment is pledged to
secure the long-term debt of subsidiaries.
In August 1997 Century entered into a $1.6 billion senior unsecured
revolving credit facility (the "Senior Credit Facility") with NationsBank of
Texas, N.A. and a syndicate of other lenders. Such Senior Credit Facility was
initially utilized to finance a substantial portion of the purchase price of
PTI. See Note 2 for additional information. At December 31, 1997, the Senior
Credit Facility had an outstanding balance of $1.535 billion. This debt matures
in five years and carries floating-rate interest based upon London InterBank
Offered Rates for short-term periods.
In December 1997 the Company filed a shelf registration statement with the
United States Securities and Exchange Commission registering $1.5 billion of
senior unsecured debt securities, preferred stock, common stock and warrants,
under which the Company issued $665.0 million of senior debt securities in
January 1998. The Company concurrently issued the remaining $100.0 million of
senior debt securities under its prior shelf registration statement. See Note 20
for additional information.
Century's telephone subsidiaries had approximately $140.9 million in
commitments for long-term financing from the Rural Utilities Service available
at December 31, 1997. Approximately $351.1 million of additional borrowings were
available to the Company through committed lines of credit with various banks.
(7) DEFERRED CREDITS AND OTHER LIABILITIES
Deferred credits and other liabilities at December 31, 1997 and 1996 were
composed of the following:
December 31, 1997 1996
- -----------------------------------------------------------------------------
(Dollars in thousands)
Deferred federal and state income taxes $ 272,290 111,110
Accrued postretirement benefit costs 99,429 48,515
Minority interest 47,695 32,460
Regulatory liability - income taxes 22,856 22,575
Deferred investment tax credits 6,355 3,882
Other 28,955 11,736
- -----------------------------------------------------------------------------
$ 477,580 230,278
=============================================================================
(8) POSTRETIREMENT BENEFITS
The Company sponsors defined benefit health care plans that provide
postretirement medical, life and dental benefits to substantially all retired
full-time employees.
Net periodic postretirement benefit cost for 1997, 1996 and 1995 included
the following components:
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 2,578 2,354 1,769
Interest cost 5,047 4,212 3,972
Actual return on plan assets (458) - -
Amortization of unrecognized actuarial
losses (gains) 292 475 (50)
Amortization of unrecognized prior
service cost 121 121 121
- ------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 7,580 7,162 5,812
==============================================================================
The following table sets forth the amounts recognized as liabilities for
postretirement benefits in the Company's consolidated balance sheets at December
31, 1997 and 1996.
December 31, 1997 1996
- ------------------------------------------------------------------------------
(Dollars in thousands)
Accumulated postretirement benefit obligation
Retirees and retirees' dependents $ 74,148 25,105
Fully eligible active plan participants 22,045 10,512
Other active plan participants 56,439 23,540
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 152,632 59,157
Plan assets, primarily listed stocks and bonds (34,618) -
Unrecognized prior service cost (1,182) (1,303)
Unrecognized net loss (14,622) (6,986)
- ------------------------------------------------------------------------------
Accrued postretirement benefit costs $ 102,210 50,868
==============================================================================
For calculation purposes, the ultimate health care cost rate was assumed to
range from 4.5% to 6%. If the assumed health care cost rate had been increased
by one percentage point in each year, the accumulated postretirement benefit
obligation as of December 31, 1997 would have increased $9.0 million and the net
periodic postretirement benefit cost for the year ended December 31, 1997 would
have increased $483,000. The postretirement benefit plan assumed in connection
with the PTI acquisition had plan assets of $34.6 million as of December 31,
1997.
The discount rates used in determining the accumulated postretirement
benefit obligation as of December 31, 1997 and 1996 were 7.0% and 7.75%,
respectively.
(9) STOCKHOLDERS' EQUITY
Common stock - At December 31, 1997, unissued shares of Century common stock
were reserved as follows:
December 31, 1997
- -----------------------------------------------------------------------------
(In thousands)
Incentive compensation program 4,951
Acquisitions 3,414
Employee stock purchase plan 759
Conversion of convertible preferred stock 341
Other employee benefit plans 1,929
- -----------------------------------------------------------------------------
11,394
=============================================================================
Under Century's Articles of Incorporation each share of common stock
beneficially owned continuously by the same person since May 30, 1987 generally
entitles the holder thereof to ten votes per share. All other shares entitle the
holder to one vote per share. At December 31, 1997, the holders of 11.6 million
shares of common stock were entitled to ten votes per share. See Note 20 for
additional information concerning a stock split in early 1998.
Preferred stock - As of December 31, 1997, Century had 2.0 million shares of
preferred stock, $25 par value per share, authorized. At December 31, 1997 and
1996, there were 324,238 and 401,629 shares, respectively, of outstanding
preferred stock. Holders of outstanding Century preferred stock are entitled to
receive cumulative dividends, receive preferential distributions equal to $25
per share plus unpaid dividends upon Century's liquidation and vote as a single
class with the holders of common stock.
Shareholders' Rights Plan - In 1996 the Board of Directors declared a dividend
of one preference share purchase right for each common share outstanding. Such
rights become exercisable if and when a potential acquiror takes certain steps
to acquire 15% or more of Century's common stock. Upon the occurrence of such an
acquisition, each right held by shareholders other than the acquiror may be
exercised to receive that number of shares of common stock or other securities
of Century (or, in certain situations, the acquiring company) which at the time
of such transaction will have a market value of two times the exercise price of
the right.
(10) INCOME TAXES
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 were as follows:
December 31, 1997 1996
- ------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets
Postretirement benefit costs $ 35,826 16,790
Regulatory support 15,681 -
Net operating loss carryforwards of an
acquired subsidiary 8,013 8,367
Regulatory liability 8,000 7,901
Long-term debt 3,957 -
Deferred compensation 2,994 2,435
Other employee benefits 5,287 4,393
Other 8,788 3,362
- ------------------------------------------------------------------------------
Gross deferred tax assets 88,546 43,248
Less valuation allowance (8,013) (8,367)
- ------------------------------------------------------------------------------
Net deferred tax assets 80,533 34,881
- ------------------------------------------------------------------------------
Deferred tax liabilities
Property, plant and equipment, primarily
due to depreciation differences (303,500) (129,123)
Excess cost of net assets acquired (7,177) (6,112)
Assets to be sold (3,382) -
Marketable equity securities (11,840) (2,167)
Intercompany profits (3,112) (3,338)
Other (23,812) (5,251)
- ------------------------------------------------------------------------------
Gross deferred tax liabilities (352,823) (145,991)
- ------------------------------------------------------------------------------
Net deferred tax liability $ (272,290) (111,110)
==============================================================================
Income tax expense for the years ended December 31, 1997, 1996 and 1995 was
as follows:
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars in thousands)
Federal
Current $ 122,861 60,530 53,554
Deferred 14,768 7,390 9,021
State
Current 13,272 6,100 5,175
Deferred 1,462 545 542
- ------------------------------------------------------------------------------
$ 152,363 74,565 68,292
==============================================================================
Income tax expense was allocated as follows:
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars in thousands)
Net tax expense in the consolidated
statements of income $ 152,363 74,565 68,292
Stockholders' equity, primarily for
compensation expense for tax purposes
in excess of amounts recognized for
financial reporting purposes (2,554) (1,866) (2,354)
- ------------------------------------------------------------------------------
$ 149,809 72,699 65,938
==============================================================================
The following is a reconciliation from the statutory federal income tax rate
to the Company's effective income tax rate:
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
(Percentage of pre-tax income)
Statutory federal income tax rate 35.0% 35.0 35.0
State income taxes, net of federal income
tax benefit 2.3 .1 2.0
Amortization of nondeductible excess cost of
net assets acquired 1.1 1.8 1.8
Amortization of investment tax credits (.4) (1.1) (1.3)
Amortization of regulatory liability (.5) (.9) (1.0)
Other, net (.2) (.3) .8
- -----------------------------------------------------------------------------
Effective income tax rate 37.3% 36.6 37.3
=============================================================================
(11) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's regulated telephone operations are subject to the provisions
of Statement of Financial Accounting Standards No. 71 ("SFAS 71"), "Accounting
for the Effects of Certain Types of Regulation." Actions of a regulator can
provide reasonable assurance of the existence of an asset, reduce or eliminate
the value of an asset and impose a liability on a regulated enterprise. Such
regulatory assets and liabilities are required to be recorded and, accordingly,
reflected in the balance sheet of an entity subject to SFAS 71.
The Company's consolidated balance sheet as of December 31, 1997 included
regulatory assets of approximately $7.0 million and regulatory liabilities of
approximately $22.9 million exclusive of (i) property, plant and equipment, (ii)
accumulated depreciation and (iii) deferred income taxes and deferred investment
tax credits associated with regulatory assets and liabilities. The $7.0 million
of regulatory assets included assets established in connection with
postretirement benefits ($1.4 million), income taxes ($2.6 million) and deferred
financing costs ($2.8 million). The $22.9 million of regulatory liabilities was
established in connection with the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting For Income Taxes." Net deferred income tax assets
related to the regulatory assets and liabilities quantified above were $5.5
million.
Property, plant and equipment of the Company's regulated telephone
operations has been depreciated using generally the straight line method over
lives approved by regulators. Such depreciable lives have generally exceeded the
depreciable lives used by nonregulated entities. In addition, in accordance with
regulatory accounting, retirements of regulated telephone property have been
charged to accumulated depreciation, along with the costs of removal, less
salvage, with no gain or loss recognized. These accounting policies have
resulted in accumulated depreciation being significantly less than if the
Company's telephone operations had not been regulated.
Statement of Financial Accounting Standards No. 101 ("SFAS 101"), "Regulated
Enterprises - Accounting for the Discontinuance of Application of FASB Statement
No. 71," specifies the accounting required when an enterprise ceases to meet the
criteria for application of SFAS 71. SFAS 101 requires the elimination of the
effects of any actions of regulators that have been recognized as assets and
liabilities in accordance with SFAS 71 but would not have been recognized as
assets and liabilities by enterprises in general, along with an adjustment of
certain accumulated depreciation accounts to reflect the difference between
recorded depreciation and the amount of depreciation that would have been
recorded had the Company's telephone operations not been subject to rate
regulation. SFAS 101 further provides that the carrying amounts of property,
plant and equipment are to be adjusted only to the extent the assets are
impaired and that impairment shall be judged in the same manner as for
enterprises in general. Deferred tax liabilities and deferred investment tax
credits will be impacted based on the change in the temporary differences for
property, plant and equipment and accumulated depreciation.
The ongoing applicability of SFAS 71 to the Company's regulated telephone
operations is being monitored due to the changing regulatory, competitive and
legislative environments, and it is possible that changes in regulation,
legislation or competition or in the demand for regulated services or products
could result in the Company's telephone operations no longer being subject to
SFAS 71 in the near future. When the regulated operations of the Company no
longer qualify for the application of SFAS 71, the net adjustments required will
result in a material, noncash charge against earnings which will be reported as
an extraordinary item. While the effect of implementing SFAS 101 cannot be
precisely estimated at this time, management believes that the noncash,
after-tax, extraordinary charge would be between $250 million and $300 million.
For regulatory purposes, the accounting and reporting of the Company's telephone
subsidiaries will not be affected by the discontinued application of SFAS 71.
(12) EARNINGS PER SHARE
Basic earnings per share amounts are determined on the basis of the weighted
average number of common shares outstanding during the year. Diluted earnings
per share give effect to all potential dilutive common shares that were
outstanding during the period. See Note 20 for additional information concerning
a stock split in early 1998.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
(Dollars, except per share amounts,
and shares in thousands)
Income (Numerator):
Net income $ 255,978 129,077 114,776
Dividends applicable to preferred stock (460) (420) (123)
- ----------------------------------------------------------------------------
Net income applicable to common stock for
computing basic earnings per share 255,518 128,657 114,653
- ----------------------------------------------------------------------------
Dividends applicable to preferred stock 460 420 123
Interest on convertible securities,
net of taxes 480 579 714
Net income as adjusted for purposes of
computing diluted earnings per share $ 256,458 129,656 115,490
============================================================================
Shares (Denominator)*:
Weighted average number of shares
outstanding during period 90,425 89,432 87,000
Employee Stock Ownership Plan shares
not committed to be released (435) (498) (559)
- ----------------------------------------------------------------------------
Weighted average number of shares
outstanding during period for computing
basic earnings per share 89,990 88,934 86,441
Incremental common shares attributable
to dilutive securities:
Conversion of preferred stock 441 459 309
Conversion of convertible securities 676 846 1,134
Shares issuable under stock option plan 501 414 420
- ----------------------------------------------------------------------------
Number of shares as adjusted for purposes
of computing diluted earnings per share 91,608 90,653 88,304
============================================================================
Basic earnings per share* $ 2.84 1.45 1.33
============================================================================
Diluted earnings per share* $ 2.80 1.43 1.31
============================================================================
*Adjusted to reflect stock split.
The weighted average number of options to purchase shares of common stock
that were excluded from the computation of diluted earnings per share because
the exercise price of the option was greater than the average market price of
the common stock was 732,000, 944,000, and 616,000 for 1997, 1996 and 1995,
respectively.
(13) STOCK OPTION PROGRAM
Century has an incentive compensation program which allows the Board of
Directors, through a subcommittee to the Compensation Committee, to grant
incentives to employees in any one or a combination of the following forms:
incentive and non-qualified stock options; stock appreciation rights; restricted
stock; and performance shares. As of December 31, 1997, Century had reserved 5.0
million shares of common stock which may be issued under the incentive
compensation program.
Under the program, options have been granted to employees at a price either
equal to or exceeding the then-current market price and all of the options
expire ten years after the date of grant.
During 1997 the Company granted 862,606 options (the "1997 Options") at
market price. The weighted average fair value of each of the 1997 Options was
estimated as of the date of grant to be $8.52 using an option-pricing model with
the following assumptions: dividend yield - .8%; expected volatility - 25%;
risk-free interest rate - 6.5%; and expected option life - eight years.
During 1995 the Company granted 951,047 options (the "1995 Options") above
market price. The weighted-average fair value of each of the 1995 Options was
estimated as of the date of grant to be $6.62 using an option-pricing model with
the following assumptions: dividend yield - 1.1%; expected volatility - 25%;
risk-free interest rate - 6.5%; and expected option life - eight years.
Stock option transactions during 1997, 1996 and 1995 were as follows:
Number Average
of options price
- ------------------------------------------------------------------------------
Outstanding December 31, 1994 3,410,200 $ 14.42
Exercised (408,450) 6.75
Granted 951,047 24.10
- ----------------------------------------------------------------
Outstanding December 31, 1995 3,952,797 16.97
Exercised (438,604) 12.48
Forfeited (18,826) 19.51
- ----------------------------------------------------------------
Outstanding December 31, 1996 3,495,367 18.17
Exercised (592,782) 15.27
Granted 862,606 20.26
Forfeited (25,904) 20.09
- ----------------------------------------------------------------
Outstanding December 31, 1997 3,739,287 19.09
================================================================
Exercisable December 31, 1996 3,476,617 18.17
================================================================
Exercisable December 31, 1997 3,141,688 18.88
================================================================
The following tables summarize certain information about Century's stock
options at December 31, 1997.
Options outstanding
- -------------------------------------------------------------------------------
Weighted average
Range of remaining contractual Weighted average
exercise prices Number of options life outstanding exercise price
- -------------------------------------------------------------------------------
$ 5.90-10.67 27,681 .8 years $ 10.56
12.50-18.45 2,004,660 4.0 16.45
20.00-26.46 1,706,946 8.1 23.62
---------
5.90-26.46 3,739,287 6.3 19.09
=========
Options exercisable
- -------------------------------------------------------------------------------
Range of Number of Weighted average
exercise prices options exercisable exercise price
- -------------------------------------------------------------------------------
$ 5.90-10.67 27,681 $10.56
12.50-18.45 2,004,660 16.45
20.25-26.46 1,109,347 24.25
---------
5.90-26.46 3,141,688 18.88
=========
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for its program. Accordingly, no
compensation cost has been recognized for the program. If compensation cost for
Century's program had been determined consistent with SFAS 123 for the 1997
Options and the 1995 Options, the Company's net income and earnings per share on
a pro forma basis for 1997, 1996 and 1995 would have been as follows:
Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
(Dollars in thousands,except
per share amounts)
Net income
As reported $ 255,978 129,077 114,776
Pro forma $ 252,773 129,077 110,813
Diluted earnings per share
As reported $ 2.80 1.43 1.31
Pro forma $ 2.76 1.43 1.26
- -----------------------------------------------------------------------------
(14) SALES OF ASSETS
In May 1997 the Company sold its majority-owned competitive access
subsidiary to Brooks Fiber Properties, Inc. ("Brooks") in exchange for
approximately 4.3 million shares of Brooks' common stock. The Company recorded a
pre-tax gain of approximately $71 million ($46 million after-tax; $.50 per
diluted share). In November 1997 the Company sold approximately 3.8 million
shares of Brooks' common stock for $202.7 million cash and recorded a pre-tax
gain of approximately $108 million ($66 million after-tax; $.73 per diluted
share).
In the first quarter of 1995 the Company sold, for an aggregate of $17.9
million cash, its ownership interests in certain cellular Rural Service Areas
located primarily in western states and three Metropolitan Statistical Areas in
the midwest. These transactions resulted in a pre-tax gain of $5.9 million ($2.0
million after-tax; $.02 per diluted share).
(15) RETIREMENT AND SAVINGS PLANS
Century sponsors an Outside Directors' Retirement Plan and a Supplemental
Executive Retirement Plan to provide directors and officers, respectively, with
supplemental retirement, death and disability benefits. In addition, the
bargaining unit employees of a subsidiary are provided benefits under a defined
benefit pension plan and substantially all of the employees of PTI are covered
under a separate defined benefit pension plan.
The following table sets forth the combined plans' funded status and amounts
recognized in the Company's consolidated balance sheet at December 31, 1997 and
1996.
December 31, 1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $ (165,103) (19,550)
=============================================================================
Accumulated benefit obligation $ (174,860) (19,588)
=============================================================================
Projected benefit obligation $ (200,554) (20,473)
Plan assets at fair value, primarily
listed stocks and bonds 237,618 22,158
- -----------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 37,064 1,685
Unrecognized net loss (gain) (37,731) 1
Unrecognized net (asset) obligation being
recognized over 4-20 years (1,550) 2,519
- -----------------------------------------------------------------------------
(Accrued) prepaid pension cost $ (2,217) 4,205
=============================================================================
Net periodic pension cost for 1997, 1996 and 1995 included the following
components:
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
(In thousands)
Service cost $ 793 466 339
Interest cost 2,508 1,382 1,324
Actual return on plan assets (5,715) (2,273) (3,200)
Net amortization and deferral 2,459 933 2,465
- -----------------------------------------------------------------------------
Net periodic pension cost $ 45 508 928
=============================================================================
Assumptions used in accounting for the pension plans as of December 1997 and
1996 were:
1997 1996
- -----------------------------------------------------------------------------
Discount rates 7.0% 7.75
Expected long-term rate of return on assets 8.0-10.0% 8.0
- -----------------------------------------------------------------------------
Century sponsors an Employee Stock Bonus Plan ("ESBP") and an Employee Stock
Ownership Plan ("ESOP"). These plans cover most employees with one year of
service with the Company and are funded by Company contributions determined
annually by the Board of Directors.
The Company contributed $2.8 million, $1.9 million and $1.6 million to the
ESBP during 1997, 1996 and 1995, respectively. At December 31, 1997, the ESBP
owned 5.1 million shares of Century common stock.
The Company's contributions to the ESOP approximate the ESOP's debt service
less dividends received by the ESOP applicable to unallocated shares. The ESOP
shares initially were pledged as collateral for its debt. As the debt is repaid,
shares are released from collateral based on the percentage of principal payment
to outstanding debt before applying the principal payment. As of each year end,
such released shares are allocated to active employees.
The ESOP had outstanding debt of $2.0 million at December 31, 1997 which was
applicable to shares purchased prior to 1993. Interest incurred by the ESOP on
debt applicable to such shares was $274,000, $430,000 and $580,000 in 1997,
1996, and 1995, respectively. The Company contributed and expensed $1.8 million,
$2.1 million and $2.3 million during 1997, 1996 and 1995, respectively, with
respect to such shares. Dividends on unallocated ESOP shares used for debt
service by the ESOP were $126,000 in 1997, $189,000 in 1996 and $170,000 in
1995. ESOP shares as of December 31, 1997 and 1996 which were purchased prior to
1993 were as follows:
December 31, 1997 1996
- -----------------------------------------------------------------------------
(In thousands)
Allocated shares 2,198 2,168
Unreleased shares 213 441
- -----------------------------------------------------------------------------
2,411 2,609
=============================================================================
The Company accounts for shares purchased subsequent to December 31, 1992 in
accordance with Statement of Position 93-6 ("SOP 93-6"). Accordingly, as shares
are released from collateral, the Company reports compensation expense equal to
the current market price of the shares and the shares become outstanding for
earnings per share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt. ESOP compensation expense applicable to shares
purchased subsequent to 1992 was $1.5 million for 1997, $1.4 million for 1996
and $1.3 million for 1995. The fair value of unreleased ESOP shares accounted
for under SOP 93-6 was $13.5 million and $9.7 million at December 31, 1997 and
December 31, 1996, respectively. ESOP shares purchased subsequent to 1992
totaled 625,275, of which 218,845 were allocated and 406,430 were unreleased as
of December 31, 1997.
Century also sponsors a qualified profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code (the "401(k) Plan") which is available to
substantially all employees of the Company. The Company's matching contributions
to the 401(k) Plan were $2.8 million in 1997, $2.3 million in 1996 and $2.4
million in 1995.
(16) SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest of $48.8 million, $45.1 million and $45.8 million
during 1997, 1996 and 1995, respectively. Income taxes paid were $79.3 million
in 1997, $64.1 million in 1996 and $62.4 million in 1995.
In addition to the acquisition of PTI, Century has consummated the
acquisitions of various telephone and cellular operations, along with certain
other assets, during the three years ended December 31, 1997. In connection with
these acquisitions, the following assets were acquired, liabilities assumed, and
common and preferred stock issued:
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment $ 1,106,558 4,963 16,949
Excess cost of net assets acquired 1,204,284 53,220 70,124
Other investments 119,356 - 2,804
Notes payable (199,824) - (14,199)
Long-term debt (527,937) (3,273) (38,147)
Deferred credits and other liabilities (246,196) (171) (1,880)
Other assets and liabilities,excluding
cash and cash equivalents 90,889 8,021 3,037
Common stock issued (3,316) (8,458) (16,558)
Preferred stock issued - (7,975) -
- ------------------------------------------------------------------------------
Decrease in cash due to acquisitions $ 1,543,814 46,327 22,130
==============================================================================
In May 1997 the Company sold its majority-owned competitive access
subsidiary in exchange for approximately 4.3 million shares of publicly-traded
common stock. In November 1997 approximately 85% of such stock was sold. See
Note 14 for additional information. In addition, Century has consummated the
disposition of various cellular operations, along with certain other assets,
during the three years ended December 31, 1997. In connection with these
dispositions, the following assets were sold, liabilities eliminated, assets
received and gain recognized:
Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
(Dollars in thousands)
Property, plant and equipment $ (38,481) 900 (4,399)
Excess cost of net assets acquired (597) - (4,494)
Marketable equity securities 13,795 - -
Other assets and liabilities, excluding cash
and cash equivalents (7,782) (85) (4,278)
Gain on sales of assets (169,640) (815) (6,782)
- -----------------------------------------------------------------------------
Increase in cash due to dispositions $ (202,705) - (19,953)
=============================================================================
In February 1995 Century's $115.0 million of outstanding 6% convertible
debentures were converted into Century common stock by the debenture holders at
a conversion price of $16.89 per share.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of certain of the Company's financial instruments at December 31, 1997 and 1996.
Carrying Fair
amount value
- -------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 1997
- -----------------
Financial assets
Investments
Marketable equity securities $ 40,570 40,570 (2)
Other $ 22,455 24,036 (1)
Financial liabilities
Long-term debt (including current maturities) $ 2,664,785 2,677,348 (3)
Other $ 24,213 24,213 (1)
Off-balance sheet financial instruments
Interest rate hedge contracts $ - (16,061) (4)
- -------------------------------------------------------------------------------
December 31, 1996
- -----------------
Financial assets
Investments
Note receivable (including current portion) $ 22,500 22,500 (1)
Marketable equity securities $ 8,478 7,959 (2)
Other $ 16,362 16,362 (1)
Financial liabilities
Long-term debt (including current maturities) $ 645,849 649,756 (3)
Other $ 15,122 15,122 (1)
- -------------------------------------------------------------------------------
(1) Fair value was estimated by the Company. (2) Fair value was based on quoted
market prices.
(3) Fair value was estimated by discounting the scheduled payment streams to
present value based upon rates currently offered to the Company for similar
debt.
(4) Fair value represents the estimated amounts the Company would have to pay
to settle these contracts.
Cash and cash equivalents, accounts receivable, notes payable, accounts payable
and accrued expenses - The carrying amount approximates the fair value due to
the short maturity of these instruments.
From October 1997 through December 1997, the Company entered into nine
interest rate hedge contracts for an aggregate notional amount of $800 million
in anticipation of a public debt issuance. In early January 1998, the Company
entered into two additional hedge contracts for notional amounts of $100 million
each. On January 15, 1998, the Company issued a total of $765 million of senior
notes and debentures under its shelf registration statements. See Note 20 for
additional information.
(18) BUSINESS SEGMENTS
The Company is engaged primarily in providing local exchange telephone
services and cellular telephone services.
The Company's telephone operations are conducted in rural, suburban and
small urban communities in 21 states. Approximately 85% of the Company's
telephone access lines are in Wisconsin, Washington, Alaska, Michigan,
Louisiana, Colorado, Ohio, Oregon and Montana.
The Company's wireless operations reflect the operations of the cellular
entities in which the Company has a majority ownership interest. The Company's
cellular customers are located primarily in Michigan, Louisiana, Wisconsin,
Mississippi, Texas and Arkansas.
Depreciation
Operating and Operating
revenues amortization income
- --------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 1997
- ----------------------------
Telephone $ 530,597 115,722 173,285
Wireless 307,742 41,127 88,081
Other 75,817 2,646 6,404
Eliminations (12,635) - -
- -------------------------------------------------------------------------------
Total $ 901,521 159,495 267,770
===============================================================================
Year ended December 31, 1996
- ----------------------------
Telephone $ 451,538 95,793 155,183
Wireless 250,243 33,573 67,914
Other 59,561 2,655 199
Eliminations (11,665) - -
- -------------------------------------------------------------------------------
Total $ 749,677 132,021 223,296
===============================================================================
Year ended December 31, 1995
- ----------------------------
Telephone $ 419,242 86,324 143,527
Wireless 197,494 25,427 57,009
Other 39,580 2,019 2,383
Eliminations (11,476) - -
- -------------------------------------------------------------------------------
Total $ 644,840 113,770 202,919
===============================================================================
Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
(Dollars in thousands)
Operating income $ 267,770 223,296 202,919
Gain on sales of assets, net 169,640 815 6,782
Interest expense (56,474) (44,662) (43,615)
Income from unconsolidated
cellular entities 27,794 26,952 20,084
Minority interest (5,498) (6,675) (8,084)
Other income and expense 5,109 3,916 4,982
- ------------------------------------------------------------------------------
Income before income tax expense $ 408,341 203,642 183,068
==============================================================================
Capital expenditures
Telephone $ 115,854 110,147 136,006
Wireless 39,102 83,679 41,990
Corporate and other 26,269 29,059 18,596
- ------------------------------------------------------------------------------
Total $ 181,225 222,885 196,592
==============================================================================
Identifiable assets
Telephone $ 3,379,376 1,174,317 1,114,827
Wireless 989,729 644,587 547,260
General corporate 181,413 95,545 109,096
Other 158,883 114,056 91,238
- ------------------------------------------------------------------------------
Total assets $ 4,709,401 2,028,505 1,862,421
==============================================================================
Other accounts receivable are primarily amounts due from various long
distance carriers, principally AT&T,and several large local exchange operating
companies.
(19) COMMITMENTS AND CONTINGENCIES
Construction expenditures and investments in vehicles, buildings and other
work equipment during 1998 are estimated to be $220 million for telephone
operations, $90 million for wireless operations and $40 million for corporate
and other operations.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
(20) SUBSEQUENT EVENTS
Debt issuance - On January 15, 1998, Century issued $100 million of 7-year,
6.15% senior notes (Series E); $240 million of 10-year, 6.3% senior notes
(Series F); and $425 million of 30-year, 6.875% debentures (Series G) under its
shelf registration statements. The net proceeds of approximately $758 million
(excluding payment obligations of approximately $39 million related to interest
rate hedging effected in connection with the offering) were used to reduce the
Senior Credit Facility indebtedness incurred by the Company in connection with
the acquisition of PTI. In addition, the Senior Credit Facility's committed
amount was reduced from $1.6 billion to $880 million in accordance with its
terms.
In mid-January 1998, the Company settled numerous hedge contracts that had
been entered into in anticipation of the debt issuances. The amounts paid by the
Company upon settlement of the hedge contracts aggregated $39 million. Such
payment obligations will be amortized as interest expense over the life of the
underlying debt instruments. The effective weighted average interest rate of the
above-mentioned debt (after giving consideration to the payment obligations) is
7.15%.
Stock split - On February 25, 1998, Century's Board of Directors declared a
three-for-two common stock split effected as a 50% stock dividend in March 1998.
All per share data included in this report has been restated to reflect this
stock split. An amount equal to the par value of the additional common shares
issued pursuant to the stock split has been reflected as a transfer from
paid-in-capital to common stock on the consolidated financial statements for
1997.
CENTURY TELEPHONE ENTERPRISES, INC.
Consolidated Quarterly Income Information
First Second Third Fourth
quarter quarter quarter quarter
- -------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
1997 (unaudited)
- -------------------------------------------------------------------------------
Operating revenues $ 198,985 210,576 218,351 273,609
Operating income $ 57,698 62,405 69,815 77,852
Net income $ 33,135 83,176 41,433 98,234
Diluted earnings per share* $ .37 .91 .45 1.06
- -------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------
Operating revenues $ 175,814 186,538 193,096 194,229
Operating income $ 55,515 57,697 59,016 51,068
Net income $ 29,665 32,941 36,350 30,121
Diluted earnings per share* $ .33 .36 .40 .33
- --------------------------------------------------------------------------------
* Adjusted to reflect stock split. See Note 20 of Notes to Consolidated
Financial Statements.
Diluted earnings per share for the second quarter and fourth quarter of 1997
included $.50 and $.66 per share, respectively, of gain on sales of assets. The
fourth quarter of 1997 includes one month of results of operations of Pacific
Telecom, Inc.
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." Earnings per
share amounts for prior periods have been restated to conform with SFAS 128. The
Company previously reported fully diluted earnings per share in accordance with
the provisions of Accounting Principles Board Opinion No. 15, "Earnings per
Share," as follows:
First Second Third Fourth
quarter quarter quarter quarter
- ------------------------------------------------------------------------------
(unaudited)
1997* $ .37 .91 .45 N/A
1996* .33 .36 .40 .33
- ------------------------------------------------------------------------------
* Adjusted to reflect stock split. See Note 20 of Notes to Consolidated
Financial Statements.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The name, age and office(s) held by each of the Registrant's executive
officers are shown below. Each of the executive officers listed below serves at
the pleasure of the Board of Directors, except Mr. Williams who has entered into
an employment agreement with the Registrant. The agreement's initial term has
lapsed, but the agreement remains in effect from year to year, subject to the
right of Mr. Williams or the Company to terminate such agreement.
Name Age Office(s) held with Century
- ---- --- ---------------------------
Clarke M. Williams 76 Chairman of the Board
of Directors
Glen F. Post, III 45 Vice Chairman of the Board of
Directors, President and Chief
Executive Officer
David D. Cole 40 President - Wireless Group
Kenneth R. Cole 50 President - Telephone Group
R. Stewart Ewing, Jr. 46 Senior Vice President and Chief
Financial Officer
W. Bruce Hanks 43 Senior Vice President - Corporate
Development and Strategy
Harvey P. Perry 53 Senior Vice President, General
Counsel and Secretary
Each of the Registrant's executive officers has served as an officer of the
Registrant and/or one or more of its subsidiaries in varying capacities for more
than the past five years. Mr. David D. Cole has served as President - Wireless
Group since October 1996 and as Vice President from 1990 to 1996. Mr. Kenneth R.
Cole has served as President - Telephone Group since January 1995 and as Vice
President from 1983 to 1994. Mr. Hanks has served as Senior Vice President
Corporate Development and Strategy since October 1996 and as President
Telecommunications Services or a comparable position from 1989 to 1996.
The balance of the information required by Item 10 is incorporated by
reference to the Registrant's definitive proxy statement relating to its 1998
annual meeting of stockholders (the "Proxy Statement"), which Proxy Statement
will be filed pursuant to Regulation 14A within 120 days after the end of the
last fiscal year.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated by reference to the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to the
Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated by reference to the Proxy
Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a. Financial Statements
(i) Consolidated Financial Statements:
Independent Auditors' Report on Consolidated Financial
Statements and Financial Statement Schedules
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Consolidated Quarterly Income Information (unaudited)
(ii) Schedules:*
I Condensed Financial Information of Registrant
II Valuation and Qualifying Accounts
* Those schedules not listed above are omitted as not
applicable or not required.
b. Reports on Form 8-K.
(i) The following item was reported in a Form 8-K filed December
1, 1997.
Item 5. Other Events - News release announcing completion
of the acquisition of Pacific Telecom, Inc.
(ii) The following items were reported in a Form 8-K filed
December 11, 1997.
Item 2. Acquisition or Disposition of Assets - Acquisition of
Pacific Telecom, Inc.
Item 5. Other Events
(a) Rating assigned to Century's $1.6 billion
unsecured credit facility by Moody's Investors Service
and confirmation of rating of Century's senior
unsecured debt securities.
(b) Filing of a shelf registration statement on
December 11, 1997 with the Securities and Exchange
Commission.
Item 7. Financial Statements and Exhibits
(a) Financial statements of Pacific Telecom, Inc.
(b) Pro Forma consolidated condensed financial
information.
(c) Exhibits
(i) 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)
(ii) 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.
(iii) Press release dated December 11, 1997
relating to Century's filing of a shelf
registration statement.
c. Exhibits:
3(i) Amended and Restated Articles of Incorporation of
Registrant, dated as of December 2, 1996, (incorporated by
reference to Exhibit 3(i) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996).
3(ii) Registrant's Bylaws, as amended through November 21, 1996
(incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form S-4, Registration No.
333-17015).
4.1 Note Purchase Agreement, dated September 1, 1989, between
Registrant, Teachers Insurance and Annuity Association of
America and the Lincoln National Life Insurance Company
(incorporated by reference to Exhibit 4.23 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1989).
4.2 Rights Agreement, dated as of August 27, 1996, between
Century Telephone Enterprises, Inc. and Society National
Bank, as Rights Agent, including the form of Rights
Certificate (incorporated by reference to Exhibit 1 of
Registrant's Current Report on Form 8-K filed August 30,
1996).
4.3 Form of common stock certificate of the Registrant
(incorporated by reference to Exhibit 4.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1993).
4.4 Indenture dated as of March 31, 1994 between the Company
and Regions Bank of Louisiana (formerly First American Bank
& Trust of Louisiana), as Trustee (incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-3, Registration No. 33-52915).
4.5 Resolutions designating the terms and conditions of the
Company's 7-3/4% Senior Notes, Series A, due 2004 and
8-1/4% Senior Notes, Series B, due 2024 (incorporated by
reference to Exhibit 4.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1994).
4.6 Resolutions designating the terms and conditions of the
Company's 6.55% Senior Notes, Series C, due 2005 and 7.2%
Senior Notes, Series D, due 2025 ("Senior Notes")
(incorporated by reference to Exhibit 4.27 to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995).
4.7 Form of Senior Notes (incorporated by reference to Exhibit
4.3 of the Company's Registration Statement on Form S-3,
Registration No. 33-52915).
4.8 Competitive Advance and Revolving Credit Facility
Agreement, dated as of August 28, 1997, among Registrant,
the lenders named therein, and NationsBank of Texas, N.A.
(incorporated by reference to Exhibit 4.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
4.9 Resolutions designating the terms and conditions of the
Company's 6.15% Senior Notes, Series E, due 2005; 6.30%
Senior Notes, Series F, due 2008; and 6.875% Debentures,
Series G, due 2028, included elsewhere herein.
4.10 Form of Board Resolution to be used in designating and
authorizing the terms and conditions of any series of
Senior Debt Securities (incorporated by reference to
Exhibit 4.3 of the Company's Registration Statement on Form
S-3, Registration No. 333-42013).
4.11 Form of Senior Debt Security (incorporated by reference to
Exhibit 4.4 of the Company's Registration Statement on Form
S-3, Registration No. 333-42013).
10.1 Employee Benefit Plans
(a) Registrant's Employee Stock Ownership Plan and Trust,
as amended and restated December 30, 1994 (incorporated
by reference to Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1995), amendment thereto dated January 26, 1996
(incorporated by reference to Exhibit 10.1(a) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995) and amendment thereto dated
July 15, 1996 (incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996), and amendment thereto
dated December 31, 1996 (incorporated by reference to
Exhibit 10.5 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997), and
amendment thereto dated March 18, 1997 (incorporated by
reference to Exhibit 10.6 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997), and amendments thereto dated January 1, 1997
(incorporated by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
(b) Registrant's Stock Bonus Plan, PAYSOP and Trust, as
amended and restated December 30, 1994 (incorporated by
reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1995), amendment thereto dated July 11, 1995
(incorporated by reference to Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995), amendment thereto dated
January 26, 1996 (incorporated by reference to Exhibit
10.1(b) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995) and amendment thereto
dated July 15, 1996 (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996), and
amendment thereto dated December 31, 1996 (incorporated
by reference to Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997), and amendments thereto dated January 1, 1997
(incorporated by reference to Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
(c) Registrant's Dollars & Sense Plan and Trust, as amended
and restated, generally effective April 1, 1992
(incorporated by reference to Exhibit 10.7 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994) and amendment thereto dated
July 15, 1996 (incorporated by reference to Exhibit
10.3 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996), and amendment thereto
dated June 26, 1997 (incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997), and
amendment thereto dated June 26, 1997 (incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997).
(d) Registrant's Restated Supplemental Executive Retirement
Plan, generally effective as of November 16, 1995
(incorporated by reference to Exhibit 10.1(d) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995) and amendment thereto dated
November 21, 1996 (incorporated by reference to Exhibit
10.1(d) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996).
(e) Registrant's 1983 Restricted Stock Plan, dated February
21, 1984, as amended and restated as of November 16,
1995 (incorporated by reference to Exhibit 10.1(e) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995) and amendment thereto dated
November 21, 1996, (incorporated by reference to
Exhibit 10.1(e) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996), and
amendment thereto dated February 25, 1997 (incorporated
by reference to Exhibit 10.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997).
(f) Registrant's Key Employee Incentive Compensation Plan,
dated January 1, 1984, as amended and restated as of
November 16, 1995 (incorporated by reference to Exhibit
10.1(f) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995) and amendment thereto
dated November 21, 1996 (incorporated by reference to
Exhibit 10.1 (f) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996), and
amendment thereto dated February 25, 1997 (incorporated
by reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997).
(g) Registrant's 1988 Incentive Compensation Program as
amended and restated August 22, 1989 (incorporated by
reference to Exhibit 19.8 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1989) and amendment thereto dated November 21, 1996
(incorporated by reference to Exhibit 10.1(g) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996).
(h) Form of Stock Option Agreement entered into in 1988 by
the Registrant, pursuant to 1988 Incentive Compensation
Program, with certain of its officers (incorporated by
reference to Exhibit 10.10 to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1988) and amendment thereto (incorporated by reference
to Exhibit 4.6 to Registrant's Registration No.
33-31314).
(i) Registrant's 1990 Incentive Compensation Program, dated
March 15, 1990 (incorporated by reference to Exhibit
19.1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990) and amendment thereto
dated November 21, 1996 (incorporated by reference to
Exhibit 10.1(i) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
(j) Form of Stock Option Agreement entered into in 1990 by
the Registrant, pursuant to 1990 Incentive Compensation
Program, with certain of its officers (incorporated by
reference to Exhibit 19.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1990) and amendment thereto dated as of May 22, 1995
(incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995).
(k) Form of Stock Option Agreement entered into in 1992 by
the Registrant, pursuant to 1990 Incentive Compensation
Program, with certain of its officers and employees
(incorporated by reference to Exhibit 10.17 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992) and amendment thereto dated as
of May 22, 1995 (incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995).
(l) Registrant's 1995 Incentive Compensation Plan approved
by Registrant's shareholders on May 11, 1995
(incorporated by reference to Exhibit 4.4 to
Registration No. 33-60061) and amendment thereto dated
November 21, 1996 (incorporated by Reference to Exhibit
10.1 (l) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996), and amendment
thereto dated February 25, 1997 (incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997).
(m) Form of Stock Option Agreement, pursuant to 1995
Incentive Compensation Plan and dated as of May 22,
1995, entered into by Registrant and its officers
(incorporated by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995).
(n) Form of Stock Option Agreement, pursuant to 1995
Incentive Compensation Plan and dated as of June 23,
1995, entered into by Registrant and certain key
employees (incorporated by reference to Exhibit 10.6 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995).
(o) Form of Performance Share Agreement Under the 1990
Incentive Compensation Program, entered into in 1993
with certain of its officers and employees
(incorporated by reference to Exhibit 28.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993) and amendment thereto
dated as of May 22, 1995 (incorporated by reference to
Exhibit 10.3 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
(p) Registrant's Restated Supplemental Defined Contribution
Plan, dated as of November 16, 1995 (incorporated by
reference to Exhibit 10.1(q) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1995), amendment thereto dated July 15, 1996
(incorporated by reference to Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996) and amendment thereto
dated November 21, 1996 (incorporated by reference to
Exhibit 10.1 (p) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
(q) Registrant's Amended and Restated Supplemental Dollars
& Sense Plan, effective as of January 1, 1995
(incorporated by reference to Exhibit 10.22 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994), amendment thereto dated July
18, 1995 (incorporated by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996) and amendment thereto
dated November 21, 1996 (incorporated by reference to
Exhibit 10.1(q) of Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
(r) Registrant's Amended and Restated Salary Continuation
(Disability) Plan for Officers, dated November 26, 1991
(incorporated by reference to Exhibit 10.16 of
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991).
(s) Registrant's Restated Outside Directors' Retirement
Plan, dated as of November 16, 1995 (incorporated by
reference to Exhibit 10.1(t) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1995).
(t) Registrant's Restated Deferred Compensation Plan for
Outside Directors, dated as of November 16, 1995
(incorporated by reference to Exhibit 10.1(u) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
(u) Form of Stock Option Agreement, pursuant to 1995
Incentive Compensation Plan and dated as of February
24, 1997 (incorporated by reference to Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
(v) Form of Restricted Stock and Performance Share
Agreement, pursuant to Registrant's 1995 Incentive
Compensation Program and dated as of February 24, 1997
(incorporated by reference to Exhibit 10.5 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
(w) Registrant's Chairman/Chief Executive Officer
Short-Term Incentive Program (incorporated by reference
to Exhibit 10.6 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997).
10.2 Employment, Severance and Related Agreements
(a) Employment Agreement, dated May 24, 1993, by and
between Clarke M. Williams and Registrant (incorporated
by reference to Exhibit 19.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1993) and amendment thereto dated as of February 27,
1996 (incorporated by reference to Exhibit 10.2(a) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
(b) Form of Amended and Restated Severance Agreement, by
and between Registrant and each of its executive
officers other than Clarke M. Williams, dated as of
November 16, 1995 (incorporated by reference to Exhibit
10.2(b) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995).
(c) Form of Amended and Restated Severance Agreement, by
and between Registrant and four of its officers who are
not executive officers, dated as of November 16, 1995
(incorporated by reference to Exhibit 10.2(c) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
(d) Agreement, dated December 31, 1994, by and between Jim
D. Reppond and Registrant (incorporated by reference to
Exhibit 10.24 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1994).
(e) Consulting Agreement, dated as of July 2, 1996, by and
between Century Telephone Enterprises, Inc. and Jim D.
Reppond (incorporated by reference to Exhibit 10 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).
10.3 Other Agreement
(a) 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 Registrant's Current Report on Form 8-K filed
June 24, 1997) and amendment thereto, dated November 5,
1997 (incorporated by reference to Exhibit 2.2 to
Registrant's Current Report on Form 8-K dated December
1, 1997 and filed December 11, 1997).
21 Subsidiaries of the Registrant, included elsewhere herein.
23 Independent Auditors' Consent, included elsewhere herein.
27 Financial Data Schedule, included elsewhere herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CENTURY TELEPHONE ENTERPRISES, INC.
Date: March 16, 1998 By: /s/ Clarke M. Williams
-----------------------------
Clarke M. Williams
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Clarke M. Williams
________________________ Chairman of the Board
Clarke M. Williams of Directors March 16, 1998
Vice Chairman of the
/s/ Glen F. Post, III Board of Directors,
________________________ President, and Chief
Glen F. Post, III Executive Officer March 16, 1998
/s/ R. Stewart Ewing, Jr. Senior Vice President
________________________ and Chief Financial
R. Stewart Ewing, Jr. Officer March 16, 1998
/s/ Harvey P. Perry Senior Vice President,
________________________ General Counsel,
Harvey P. Perry Secretary and Director March 16, 1998
/s/ W. Bruce Hanks Senior Vice President -
_______________________ Corporate Development
W. Bruce Hanks and Strategy and Director March 16, 1998
/s/ Murray H. Greer
________________________ Controller (Principal
Murray H. Greer Accounting Officer) March 16, 1998
/s/ William R. Boles, Jr.
- -------------------------
William R. Boles, Jr. Director March 16, 1998
/s/ Virginia Boulet
- ------------------------
Virginia Boulet Director March 16, 1998
/s/ Ernest Butler, Jr.
- ------------------------
Ernest Butler, Jr. Director March 16, 1998
/s/ Calvin Czeschin
- ------------------------
Calvin Czeschin Director March 16, 1998
/s/ James B. Gardner
- ------------------------
James B. Gardner Director March 16, 1998
/s/ R. L. Hargrove, Jr.
- ------------------------
R. L. Hargrove, Jr. Director March 16, 1998
/s/ Johnny Hebert
- ------------------------
Johnny Hebert Director March 16, 1998
/s/ F. Earl Hogan
- ------------------------
F. Earl Hogan Director March 16, 1998
/s/ C. G. Melville, Jr.
- ------------------------
C. G. Melville, Jr. Director March 16, 1998
/s/ Jim D. Reppond
- ------------------------
Jim D. Reppond Director March 16, 1998
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
- ----------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
REVENUES $ 9,666 6,520 5,608
- ----------------------------------------------------------------------------
EXPENSES
Operating expenses 9,088 6,071 5,165
Depreciation and amortization 9,401 7,286 6,860
- ----------------------------------------------------------------------------
Total expenses 18,489 13,357 12,025
- ----------------------------------------------------------------------------
OPERATING LOSS (8,823) (6,837) (6,417)
- ----------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Gain on sales of assets 172,537 - -
Loss on investment - (1,100) -
Interest expense (49,738) (36,709) (37,467)
Interest income 28,697 28,884 30,930
- ----------------------------------------------------------------------------
Total other income (expense) 151,496 (8,925) (6,537)
- ----------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EQUITY IN SUBSIDIARIES' EARNINGS 142,673 (15,762) (12,954)
Income tax benefit (expense) (55,591) 4,467 3,769
- ----------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN
SUBSIDIARIES' EARNINGS 87,082 (11,295) (9,185)
Equity in subsidiaries' earnings 168,896 140,372 123,961
- ----------------------------------------------------------------------------
NET INCOME $ 255,978 129,077 114,776
============================================================================
See accompanying notes to condensed financial information of registrant.
</TABLE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(continued)
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 28,300 1,055
Receivables from subsidiaries 76,931 99,506
Other receivables 792 12,527
Prepayments and other 28 1,711
- ----------------------------------------------------------------------------
Total current assets 106,051 114,799
- ----------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Property and equipment 1,236 1,028
Accumulated depreciation (744) (651)
- ----------------------------------------------------------------------------
Net property, plant and equipment 492 377
- ----------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Investments in subsidiaries (at equity) 2,706,066 1,348,986
Receivables from subsidiaries 655,398 183,333
Other investments 75,546 37,570
Note receivable - 20,833
Deferred charges 5,878 4,916
- ----------------------------------------------------------------------------
Total investments and other assets 3,442,888 1,595,638
- ----------------------------------------------------------------------------
TOTAL ASSETS $ 3,549,431 1,710,814
============================================================================
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 11,486 5,122
Payables to subsidiaries 218,993 202,467
Accrued interest 11,088 3,784
Other accrued liabilities 41,628 7,336
- ----------------------------------------------------------------------------
Total current liabilities 283,195 218,709
- ----------------------------------------------------------------------------
LONG-TERM DEBT 1,883,467 394,675
- ----------------------------------------------------------------------------
PAYABLES TO SUBSIDIARIES 46,371 47,618
- ----------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES 36,126 21,659
- ----------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
175,000,000 shares, issued and outstanding
91,103,674* and 59,858,540 shares 91,104 59,859
Paid-in capital 469,586 474,607
Unrealized holding gain on investments,
net of taxes 11,893 -
Retained earnings 728,033 494,726
Unearned ESOP shares (8,450) (11,080)
Preferred stock - non-redeemable 8,106 10,041
- ---------------------------------------------------------------------------
Total stockholders' equity 1,300,272 1,028,153
- ---------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 3,549,431 1,710,814
===========================================================================
* Adjusted to reflect stock split
See accompanying notes to condensed financial information of registrant.
</TABLE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Continued)
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 255,978 129,077 114,776
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 9,401 7,286 6,860
Deferred income taxes 8,068 2,934 4,241
Earnings of subsidiaries (168,896) (140,372) (123,961)
Gain on sales of assets (172,537) - -
Changes in current assets and current
liabilities:
Other receivables 11,615 (2,639) (8,947)
Other accrued liabilities 35,754 329 (3,409)
Other current assets and
liabilities, net 8,412 3,998 (4,377)
Other, net 958 3,297 1,558
- ------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (11,247) 3,910 (13,259)
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisitions (1,283,291) (46,327) (22,130)
Capital contributions to subsidiaries (16,634) (20,179) (53,050)
Dividends received from subsidiaries 117,499 473 52,423
Receivables from subsidiaries (235,772) (45,945) 71,203
Payables to subsidiaries 9,738 97,908 (10,271)
Proceeds from sales of assets 202,705 - -
Investment in unconsolidated personal
communications services entity - 18,900 (20,000)
Note receivable 22,500 1,667 833
Other, net (14,959) (4,425) (2,546)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (1,198,214) 2,072 16,462
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,297,435 47,500 171,046
Payments of long-term debt (52,214) (42,357) (4,901)
Notes payable, net - - (158,000)
Proceeds from issuance of common stock 14,156 10,089 6,522
Cash dividends paid (22,671) (21,775) (19,351)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 1,236,706 (6,543) (4,684)
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 27,245 (561) (1,481)
Cash and cash equivalents at beginning
of year 1,055 1,616 3,097
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,300 1,055 1,616
==============================================================================
See accompanying notes to condensed financial information of registrant.
</TABLE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(continued)
CENTURY TELEPHONE ENTERPRISES, INC.
(Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(A) LONG-TERM DEBT
The approximate annual debt maturities for the five years subsequent to
December 31, 1997 are as follows:
1998 - $ 11.5 million
1999 - $ 31.4 million
2000 - $ 39.1 million
2001 - $ 59.2 million
2002 - $ 691.0 million
(B) GUARANTEES
As of December 31, 1997, Century has guaranteed a promissory note for a
subsidiary of $2.2 million, as well as the applicable interest and premium.
Century has also guaranteed $675,000 in Industrial Development Revenue Bonds
originally issued by a subsidiary; such bonds were assumed by the purchaser of
the subsidiary's assets.
(C) DIVIDENDS FROM SUBSIDIARIES
Dividends paid to Century by consolidated subsidiaries were $117.5 million,
$472,800 and $52.4 million during 1997, 1996 and 1995, respectively.
(D) INCOME TAXES AND INTEREST PAID
Income taxes paid by Century (including amounts reimbursed from
subsidiaries) were $71.8 million, $56.0 million and $56.9 million during 1997,
1996 and 1995, respectively.
Interest paid by Century was $42.4 million, $37.3 million and $40.4 million
during 1997, 1996 and 1995, respectively.
(E) AFFILIATED TRANSACTIONS
Century provides and bills management services to subsidiaries and in
certain instances makes interest bearing advances to finance construction of
plant and purchases of equipment. Century recorded intercompany interest income
of $26.6 million, $26.4 million and $28.2 million in 1997, 1996 and 1995,
respectively.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CENTURY TELEPHONE ENTERPRISES, INC.
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additions
Balance at charged to Deductions Balance
beginning costs and from Other at end
Description of period expenses allowance(1) changes(2) of period
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for
doubtful accounts $ 3,327 11,838 (9,975) 764 5,954
Year ended December 31, 1996
Allowance for
doubtful accounts $ 2,768 10,155 (9,662) 66 3,327
Year ended December 31, 1995
Allowance for
doubtful accounts $ 2,360 7,200 (6,946) 154 2,768
(1) Customers' accounts written-off, net of recoveries.
(2) Allowance for doubtful accounts at the date of acquisition of purchased
subsidiaries, net of allowance for doubtful accounts at the date of
disposition of subsidiaries sold.
</TABLE>
Exhibit 4.9
RESOLUTIONS ADOPTED BY THE SPECIAL
PRICING COMMITTEE OF THE BOARD OF DIRECTORS OF
CENTURY TELEPHONE ENTERPRISES, INC.
January 12, 1998
WHEREAS, the Board of Directors of Century Telephone Enterprises, Inc.
(the "Company") has previously authorized (i) the appropriate officers of the
Company to take various actions necessary to permit the Company to register,
issue and sell various securities of the Company, including senior debt
securities, with an aggregate initial offering price not to exceed
$1,600,000,000 and (ii) the Special Pricing Committee of the Board of the
Directors to establish the specific terms and conditions of any one or more
series of the Company's senior debt securities to be issued and sold from time
to time; and
WHEREAS, the Special Pricing Committee, acting pursuant to such
authorization, deems it desirable and in the best interest of the Company and
its shareholders to authorize the issuance of $765,000,000 aggregate principal
amount of senior debt securities of the Company;
I. AUTHORIZATION OF TERMS OF OFFERED SECURITIES
NOW, THEREFORE, BE IT RESOLVED THAT:
(1) The Company shall create and issue $765,000,000 aggregate principal
amount of its senior debt securities, consisting of (i) $100,000,000 aggregate
principal amount of senior notes designated as the "Century Telephone
Enterprises, Inc. 6.15% Senior Notes, Series E, Due 2005" (the "Series E
Notes"), (ii) $240,000,000 aggregate principal amount of senior notes designated
as the "Century Telephone Enterprises, Inc. 6.30% Senior Notes, Series F, Due
2008" (the "Series F Notes") and (iii) $425,000,000 aggregate principal amount
of debentures designated as the "Century Telephone Enterprises Inc. 6.875%
Debentures, Series G, Due 2028" (the "Series G Debentures" and, together with
the Series E Notes and Series F Notes, the "Offered Securities"), in each case
to be sold at the prices described below and in accordance with the Indenture
dated as of March 31, 1994 ("Indenture"), between the Company and Regions Bank
(successor to Regions Bank of Louisiana and First American Bank & Trust of
Louisiana), as Trustee ("Trustee"), all on the terms and conditions set forth
below:
(a) The Series E Notes will mature on January 15, 2005, the Series F Notes
will mature on January 15, 2008 and the Series G Debentures will mature on
January 15, 2028.
(b) The Offered Securities shall bear interest from January 15, 1998 until
the principal thereof becomes due and payable at the rate of (i) 6.150%
per annum with respect to the Series E Notes, (ii) 6.300% per annum with
respect to the Series F Notes and (iii) 6.875% per annum with respect to
the Series G Debentures, payable in each case semi-annually on January 15
and July 15 of each year commencing July 15, 1998, and any overdue
principal and (to the extent that the payment of such interest is
enforceable under applicable law) any overdue installment of interest
thereon shall bear interest at the same rate per annum; the principal of
and the interest on the Offered Securities shall be payable in any coin or
currency of the United States of America which at the time of payment is
legal tender for the payment of public and private debts, at the office or
agency of the Company maintained in accordance with the Indenture. The
regular record date with respect to any interest
-1-
payment date for the Offered Securities shall be January 1 or July 1, as
the case may be, immediately preceding such interest payment date, whether
or not such date is a business day.
(c) Each of the Series E Notes, Series F Notes and Series G Debentures
will be redeemable, as a whole or in part, at the option of the Company at
any time, at a redemption price equal to the greater of (i) 100% of the
principal amount of such series to be redeemed and (ii) the sum of the
present values of the Remaining Scheduled Payments (as hereinafter
defined) thereon discounted to the redemption date on a semi-annual basis
(assuming a 360-day year consisting of twelve 30-day months) at the
Treasury Rate (as hereinafter defined) plus 15 basis points for the Series
E Notes and 20 basis points for the Series F Notes and the Series G
Debentures, together in all cases with accrued interest (if any) on the
principal amount being redeemed to the redemption date.
"Treasury Rate" means, with respect to any redemption date, the rate
per annum equal to the semi-annual equivalent yield to maturity (computed
as of the second business day immediately preceding such redemption date)
of the Comparable Treasury Issue, assuming a price for the Comparable
Treasury Issue (expressed as a percentage of its principal amount) equal
to the Comparable Treasury Price for such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker that would be utilized, at
the time of selection and in accordance with customary financial practice,
in pricing new issues of corporate debt securities of comparable maturity
to the remaining term of such Series E Notes, Series F Notes or Series G
Debentures. "Independent Investment Banker" means one of the Reference
Treasury Dealers appointed by the Trustee after consultation with the
Company.
"Comparable Treasury Price" means, with respect to any redemption
date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal
amount) on the third business day preceding such redemption date, as set
forth in the daily statistical release (or any successor release)
published by the Federal Reserve Bank of New York and designated
"Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if
such release (or any successor release) is not published or does not
contain such prices on such business day, (A) the average of the Reference
Treasury Dealer Quotations for such redemption date, after excluding the
highest and lowest such Reference Treasury Dealer Quotations, or (B) if
the Trustee obtains fewer than four such Reference Treasury Dealer
Quotations, the average of all such Quotations. "Reference Treasury Dealer
Quotations" means, with respect to each Reference Treasury Dealer and any
redemption date, the average, as determined by the Trustee, of the bid and
asked prices for the Comparable Treasury Issue (expressed in each case as
a percentage of its principal amount) quoted in writing to the Trustee by
such Reference Treasury Dealer at 3:30 p.m. New York time on the third
business day preceding such redemption date.
"Reference Treasury Dealer" means each of Salomon Brothers Inc,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
NationsBanc Montgomery Securities LLC, J.P. Morgan Securities Inc., Credit
Suisse First Boston Corporation and Goldman, Sachs & Co., and their
respective successors; provided, however, that if any of the foregoing
shall cease to be a primary U.S. Government securities dealer in New York
City (a "Primary Treasury Dealer"), the Company shall substitute therefor
another Primary Treasury Dealer.
"Remaining Scheduled Payments" means the remaining scheduled payments
of the principal of the Series E Notes, Series F Notes or Series G
Debentures to be redeemed and interest thereon
-2-
that would be due after the related redemption date but for such
redemption; provided, however, that if such redemption date is not an
interest payment date with respect to such Series E Notes, Series F Notes
or Series G Debentures, the amount of the next succeeding scheduled
interest payment thereon will be reduced by the amount of interest accrued
thereon (if any) to such redemption date.
Notice of any redemption will be mailed at least 30 days but no more
than 60 days before the redemption date to each holder of the Series E
Notes, Series F Notes or Series G Debentures to be redeemed.
Unless the Company defaults in payment of the redemption price, on and
after the applicable redemption date interest will cease to accrue on the
Series E Notes, Series F Notes or Series G Debentures, as applicable, or
portions thereof called for redemption.
(d) There will be no mandatory sinking fund payments for any series of the
Offered Securities.
(e) Each series of the Offered Securities will be issued in the form of
fully registered global securities ("Global Securities") which will be
deposited with, or on behalf of, The Depositary Trust Company, New York,
New York ("DTC"), and registered in the name of DTC's nominee. The Offered
Securities may only be transferred, in whole and not in part, to another
nominee of DTC or to a successor of DTC or its nominee, unless the Offered
Securities are subsequently issued in definitive form in the limited
circumstances described below. So long as a nominee of DTC is a registered
owner of the Offered Securities, such nominee will be considered the sole
owner or holder of the Offered Securities for all purposes under the
Indenture. Except as provided below, owners of beneficial interests will
not be entitled to have Offered Securities registered in their names, will
not receive or be entitled to receive physical delivery of Offered
Securities in definitive form and will not be considered the owners or
holders thereof under the Indenture. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, the Company will issue Offered
Securities in definitive form in exchange for the Global Securities. In
addition, the Company may at any time determine not to have the Offered
Securities represented by Global Securities and, in such event, will issue
Offered Securities in definitive form in exchange for the Global
Securities. In either instance, an owner of a beneficial interest in the
Global Securities will be entitled to have Offered Securities equal in
principal amount to such beneficial interest registered in its name and
will be entitled to physical delivery of such Offered Securities in
definitive form. Offered Securities so issued in definitive form will be
issued in denominations of $1,000 and integral multiples thereof and will
be issued in registered form only, without coupons.
(f) The Series E Notes, Series F Notes and Series G Debentures and the
Trustee's Certificate of Authentication to be endorsed thereon are to be
substantially in the following form:
(FORM OF FACE OF SECURITY)
This Security is a Registered Global Security and is registered in the
name of The Depository Trust Company, a New York corporation ("DTC"), or a
nominee thereof. This Security may not be exchanged in whole or in part
for a Security in definitive registered form, and no transfer of this
Security in whole or in part may be registered in the name of any Person
other than DTC or its nominee, except in the limited circumstances
described elsewhere herein.
Unless this Security is presented by an authorized representative of DTC
to the Company (as defined below) or its agent for registration of
transfer, exchange, or payment, and any certificate issued is
-3-
registered in the name of Cede & Co. or in such other name as is requested
by an authorized representative of DTC (and any payment is made to Cede &
Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the
registered owner hereof, Cede & Co., has an interest herein.
No._____________ $_____________
CUSIP NO.________________
Century Telephone Enterprises, Inc.
6.15% Senior Notes, Series E, Due 2005
OR
Century Telephone Enterprises, Inc.
6.30% Senior Notes, Series F, Due 2008
OR
Century Telephone Enterprises, Inc.
6.875% Debentures, Series G, Due 2028
Century Telephone Enterprises, Inc., a corporation duly organized and
existing under the laws of the State of Louisiana (herein referred to as
the "Company"), for value received, hereby promises to pay to
_____________, or registered assigns, the principal sum of _____________
Dollars on _____________ and to pay interest on such principal sum from
the most recent interest payment date to which interest has been paid or
duly provided for, or, if no interest has been paid or duly provided for,
from January 15, 1998, semi-annually on January 15 and July 15 in each
year, commencing July 15, 1998, at the rate of ____% per annum until the
principal hereof shall have become due and payable, and on any overdue
principal and (to the extent that payment of such interest is enforceable
under applicable law) on any overdue installment of interest at the same
rate per annum. The interest installment so payable, and punctually paid
or duly provided for, on any interest payment date will, as provided in
the Indenture hereinafter referred to, be paid to the person in whose name
this Security (or one or more Predecessor Securities, as defined in such
Indenture) is registered at the close of business on the regular record
date for such interest installment, which shall be January 1 or July 1, as
the case may be (whether or not a Business Day), immediately preceding
such interest payment date. Any such interest installment not so
punctually paid or duly provided for shall forthwith cease to be payable
to the registered holder on such regular record date, and may be paid to
the person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on a special record
date to be fixed by the Trustee for the payment of such defaulted
interest, notice of which shall be given to the registered holders of this
series of Security not more than 15 days and not less than 10 days prior
to such special record date, or may be paid at any time in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which this Security may be listed, and upon such notice as may
be required by such exchange, all as more fully provided in the Indenture
hereinafter referred to. The principal of and the interest on this
Security shall be payable in any coin or currency of the United States of
America which at the time of payment is legal tender for payment of public
and private debt, at the office or agency of the Company maintained for
that purpose in the City of Monroe and State of Louisiana, or the Borough
of Manhattan, the City and State of New York.
-4-
This Security shall not be entitled to any benefit under the Indenture
hereinafter referred to, or be valid or become obligatory for any purpose,
until the Certificate of Authentication hereon shall have been signed by
or on behalf of the Trustee.
The provisions of this Security are continued on the following pages
hereof and such continued provisions shall for all purposes have the same
effect as though fully set forth at this place.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed.
Dated_____________________________
CENTURY TELEPHONE ENTERPRISES, INC.
By________________________________
[President/Vice President]
Attest:
By________________________________
[Secretary/Assistant Secretary]
(FORM OF CERTIFICATE OF AUTHENTICATION)
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the above-designated series therein
referred to in the within-mentioned Indenture.
Regions Bank
as Trustee, Authenticating Agent and
Security Registrar
By _________________________
Authorized Officer
(FORM OF ADDITIONAL TERMS OF SECURITY)
This Security is one of a duly authorized series of Security of the
Company (herein sometimes referred to as the "Securities"), all issued or
to be issued in one or more series under and pursuant to an Indenture
dated as of March 31, 1994 duly executed and delivered between the Company
and Regions Bank (successor-in-interest to Regions Bank of Louisiana and
First American
-5-
Bank & Trust of Louisiana), a corporation organized and existing under the
laws of the State of Alabama, as Trustee (herein referred to as the
"Trustee") (such Indenture hereinafter referred to as the "Indenture"), to
which Indenture reference is hereby made for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Trustee, the Company and the holders of the Securities. By the terms of
the Indenture, the Securities are issuable in series which may vary as to
amount, date of maturity, rate of interest and in other respects as in the
Indenture provided. This Security (herein called the "Security") is one of
the series designated on the face hereof (herein called the "Series")
limited in aggregate principal amount to $___,000,000.
In case an Event of Default, as defined in the Indenture, with respect
to the Series shall have occurred and be continuing, the principal of all
of the Securities of the Series may be declared, and upon such declaration
shall become, due and payable, in the manner, with the effect and subject
to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Securities of each series affected at
the time Outstanding, as defined in the Indenture, to execute supplemental
indentures for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Indenture or of any
supplemental indenture or of modifying in any manner the rights of the
holders of the Securities; provided, however, that no such supplemental
indenture shall (i) extend the fixed maturity of any Securities or any
series, or reduce the principal amount thereof, or reduce the rate or
extend the time of payment of interest thereon, or reduce any premium
payable upon the redemption thereof, without the consent of the holder of
each Security so affected or (ii) reduce the aforesaid percentage of
Securities, the holders of which are required to consent to any such
supplemental indenture, without the consent of the holders of each
Security then Outstanding and affected thereby. The Indenture also
contains provisions permitting the holders of a majority in aggregate
principal amount of the Securities of any series at the time Outstanding,
on behalf of the holders of Securities of such series, to waive any past
default in the performance of any of the covenants contained in the
Indenture, or established pursuant to the Indenture with respect to such
series, and its consequences, except a default in the payment of the
principal of, or premium, if any, or interest on any of the Securities of
such series. Any such consent or waiver by the registered holder of this
Security (unless revoked as provided in the Indenture) shall be conclusive
and binding upon such holder and upon all future holders and owners of
this Security and of any Security issued in exchange hereof or in place
hereof (whether by registration of transfer or otherwise), irrespective of
whether or not any notation of such consent or waiver is made upon this
Security.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of and interest
on this Security at the times and place and at the rate and in the
currency herein prescribed.
The Securities of this Series are subject to redemption, as a whole or
in part, at any time, at the option of the Company, upon not less than 30
nor more than 60 days notice by mail, at a redemption price equal to the
greater of (i) 100% of the principal amount of the Securities to be
redeemed and (ii) the sum of the present values of the Remaining Scheduled
Payments (as hereinafter defined) thereon discounted to the redemption
date on a semi-annual basis (assuming a 360-day year consisting of twelve
30-day months) at the Treasury Rate (as hereinafter defined) plus
-6-
[ ] basis points, together with accrued interest (if any) on the principal
amount being redeemed to the redemption date.
"Treasury Rate" means, with respect to any redemption date, the rate
per annum equal to the semi-annual equivalent yield to maturity (computed
as of the second Business Day immediately preceding such redemption date)
of the Comparable Treasury Issue, assuming a price for the Comparable
Treasury Issue (expressed as a percentage of its principal amount) equal
to the Comparable Treasury Price for such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker that would be utilized, at
the time of selection and in accordance with customary financial practice,
in pricing new issues of corporate debt securities of comparable maturity
to the remaining term of this Security. "Independent Investment Banker"
means one of the Reference Treasury Dealers appointed by the Trustee after
consultation with the Company.
"Comparable Treasury Price" means, with respect to any redemption
date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal
amount) on the third Business Day preceding such redemption date, as set
forth in the daily statistical release (or any successor release)
published by the Federal Reserve Bank of New York and designated
"Composite 3:30 p.m. Quotations for U.S. Government Securities" or (ii) if
such release (or any successor release) is not published or does not
contain such prices on such Business Day, (A) the average of the Reference
Treasury Dealer Quotations for such redemption date, after excluding the
highest and lowest such Reference Treasury Dealer Quotations, or (B) if
the Trustee obtains fewer than four such Reference Treasury Dealer
Quotations, the average of all such Quotations. "Reference Treasury Dealer
Quotations" means, with respect to each Reference Treasury Dealer and any
redemption date, the average, as determined by the Trustee, of the bid and
asked prices for the Comparable Treasury Issue (expressed in each case as
a percentage of its principal amount) quoted in writing to the Trustee by
such Reference Treasury Dealer at 3:30 p.m. New York time on the third
Business Day preceding such redemption date.
"Reference Treasury Dealer" means each of Salomon Brothers Inc,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.,
NationsBanc Montgomery Securities LLC, J.P. Morgan Securities Inc., Credit
Suisse First Boston Corporation and Goldman, Sachs & Co., and their
respective successors; provided, however, that if any of the foregoing
shall cease to be a primary U.S. Government securities dealer in New York
City (a "Primary Treasury Dealer"), the Company shall substitute therefor
another Primary Treasury Dealer.
"Remaining Scheduled Payments" means the remaining scheduled payments
of the principal of this Security to be redeemed and interest thereon that
would be due after the related redemption date but for such redemption;
provided, however, that if such redemption date is not an interest payment
date with respect to this Security, the amount of the next succeeding
scheduled interest payment thereon will be reduced by the amount of
interest accrued thereon (if any) to such redemption date.
Notice of any redemption will be mailed at least 30 days but no more
than 60 days before the redemption date to each holder of Securities to be
redeemed.
-7-
Unless the Company defaults in payment of the redemption price, on and
after the applicable redemption date interest will cease to accrue on this
Security, or portions thereof called for redemption.
No recourse shall be had for the payment of the principal of or the
interest on this Security, or for any claim based hereon, or otherwise in
respect hereof, or based on or in respect of the Indenture, against any
incorporator, stockholder, affiliate, officer or director, past, present
or future, as such, of the Company or of any predecessor or successor
corporation, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise, all
such liability being, by the acceptance hereof and as part of the
consideration for the issuance hereof, expressly waived and released.
Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Indenture.
The Indenture and this Security shall be governed by and construed in
accordance with the laws of the State of Louisiana.
(2) The office of Regions Bank located at 1500 North 18th Street, Monroe,
Louisiana, is hereby designated and created as the agency of the Company in the
City of Monroe and State of Louisiana at which (i) both the principal and the
interest on the Offered Securities are payable on the terms and conditions
specified in the Indenture and notices, presentations and demands to or upon the
Company in respect of the Offered Securities may be given or made, and (ii) the
Offered Securities may be surrendered for transfer or exchange and transferred
or exchanged in accordance with the terms of the Indenture;
(3) The principal office of Regions Bank in Montgomery, Alabama is hereby
designated and created as Security Registrar of the Company at which (i) the
Company shall register the Offered Securities, (ii) the Offered Securities may
be surrendered for transfer or exchange and transferred or exchanged in
accordance with the terms or the Indenture, and (iii) books for the registration
and transfer of the Offered Securities shall be kept; and
(4) The Offered Securities hereby authorized by these resolutions shall be
in substantially the form and shall have the characteristics provided in the
Indenture, and the form of the Offered Securities set forth in these resolutions
is hereby approved and adopted.
II. AUTHORIZATION OF SALE OF OFFERED SECURITIES
RESOLVED THAT:
(1) The President or any Vice President of the Company is hereby
authorized to execute and deliver on behalf of the Company an Underwriting
Agreement (the "Underwriting Agreement") in substantially the form of the
Underwriting Agreement presented to the members of this Committee, reflecting
the terms of the sale of the Offered Securities to the Underwriters named in
such agreement, along with the accompanying Price Determination Agreement that
confirms that the sale price of the Series E Notes (after deducting an
underwriting discount of 0.625%) shall be 99.223% of the principal amount
thereof, the sale price of the Series F Notes (after deducting an underwriting
discount of 0.650%) shall be 99.203% of the principal amount thereof; and the
sale price of the Series G Debentures (after deducting an underwriting discount
of 0.875%) shall be 99.074% of the principal amount thereof;
-8-
(2) The President or any Vice President and the Secretary or any Assistant
Secretary of the Company are hereby authorized and directed to deliver to the
Trustee a certified record of these resolutions setting forth the terms of the
Offered Securities as required by Section 2.01 of the Indenture;
(3) The President or any Vice President of the Company is hereby
authorized to execute certificates in such forms as they deem necessary
representing $100,000,000 aggregate principal amount of Series E Notes,
$240,000,000 aggregate principal amount of Series F Notes and $425,000,000
aggregate principal amount of Series G Debentures on behalf of the Company under
its corporate seal or a facsimile attested by the Secretary or any Assistant
Secretary, and the signature of the President, or any Vice President, may be in
the form of a facsimile signature of the present or any future President or Vice
President and the signature of the Secretary or any Assistant Secretary in
attestation of the corporate seal may be in the form of a facsimile signature of
the present or any future Secretary or Assistant Secretary, and should any
officer who signs, or whose facsimile signature appears upon, any of the Offered
Securities cease to be such an officer prior to their issuance, the Series E
Notes, Series F Notes and Series G Debentures so signed or bearing such
facsimile signature shall still be valid, and without prejudice to the use of
the facsimile signature of any other officer as hereinabove authorized, the
facsimile signature of Glen F. Post, III, President, and the facsimile signature
of Harvey P. Perry, Secretary, are hereby expressly approved and adopted;
(4) The officers of the Company are hereby authorized to cause the Offered
Securities to be delivered to the Trustee for authentication and delivery by it
in accordance with the provisions of the Indenture, and the Trustee is hereby
authorized and requested to authenticate the Offered Securities upon compliance
by the Company with the provisions of the Indenture and to deliver the same to
or upon the written order of the President or any Vice President of the Company,
and the President or any Vice President is hereby authorized to apply to the
Trustee for the authentication and delivery of the Offered Securities;
(5) The President or any Vice President and the Treasurer or any Assistant
Treasurer of the Company are hereby authorized and empowered to endorse, in the
name and on behalf of the Company, any and all checks received in connection
with the sales of the Offered Securities for application as described in the
offering materials prepared and filed, or to be prepared and filed, in
connection with the offering of the Offered Securities, or for deposit to the
account of the Company in any bank, and that any such endorsement be sufficient
to bind the Company;
(6) The officers of the Company are hereby authorized to issue and sell
the aggregate principal amounts of the Offered Securities at the price and upon
the terms and conditions set forth in the Underwriting Agreement (including the
accompanying Price Determination Agreement) covering the sale of the Offered
Securities;
(7) The dissemination and filing with the Securities and Exchange
Commission of a preliminary prospectus supplement (to the prospectus dated
December 29, 1997 forming a part of Registration Statement No. 33-52915 and
Registration Statement No. 333-42013) in the form presented to the members of
this Committee is hereby ratified, and the officers of the Company are hereby
authorized to prepare, disseminate and file with the Securities and Exchange
Commission any additional prospectus supplements that may be necessary or
appropriate;
(8) The officers of the Company are authorized to execute and deliver all
such instruments and documents, to incur on behalf of the Company all such
expenses and obligations, to make all such payments, and to do all such other
acts and things as they may consider necessary or desirable in connection with
the accomplishment of the intent and purposes of the foregoing resolutions,
including without limitation
-9-
obtaining all necessary and appropriate CUSIP numbers and debt ratings,
retaining all necessary printing companies, depositary companies, engraving
companies and other agents or advisers, executing and delivering all closing
instruments that are contemplated by the Indenture or Underwriting Agreement or
that are otherwise customary and appropriate, and issuing any necessary and
appropriate press releases; and
(9) All actions heretofore taken by the officers of the Company that would
have been authorized hereunder if taken after the adoption of these resolutions
are hereby ratified and confirmed in all respects as the acts of the Company.
* * * * *
-10-
EXHIBIT 21
CENTURY TELEPHONE ENTERPRISES, INC.
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1997
State of
Subsidiary incorporation
- --------------------------------------------------------------------------------
Alaska RSA #3 Alaska
Brownsville Cellular Telephone Co., Inc. * Delaware
Cascade Autovon Company Washington
Celutel of Biloxi, Inc. * Delaware
Celutel, Inc. Delaware
Century Area Long Lines (CALL), Inc. Wisconsin
Century Business Communications, Inc. Louisiana
Century Cellunet of Alexandria, Inc. Louisiana
Century Cellunet of La Crosse, Inc. Louisiana
Century Cellunet of Michigan RSA #4, Inc. Louisiana
Century Cellunet of Michigan RSAs, Inc. Louisiana
Century Cellunet of Mississippi RSA #2, Inc. Mississippi
Century Cellunet of Mississippi RSA #6, Inc. Mississippi
Century Cellunet of Mississippi RSA #7, Inc. Mississippi
Century Cellunet of North Arkansas, Inc. Louisiana
Century Cellunet of North Louisiana, Inc. Louisiana
Century Cellunet of Pine Bluff, Inc. Arkansas
Century Cellunet of Saginaw, Inc. Louisiana
Century Cellunet of Shreveport, Inc. Louisiana
Century Cellunet of South Arkansas, Inc. Louisiana
Century Cellunet of Southern Michigan, Inc. Delaware
Century Cellunet of Texarkana, Inc. Louisiana
Century Cellunet of Wisconsin RSA #8 Louisiana
Century Cellunet, Inc. Louisiana
Century Interactive Fax, Inc. Louisiana
Century Investments, Inc. Louisiana
Century Paging, Inc. Louisiana
Century Service Group, Inc. Louisiana
Century Supply Group, Inc. Louisiana
Century Telecommunications, Inc. Texas
Century Telelink, Inc. Louisiana
Century Telephone Midwest, Inc. Michigan
Century Telephone of Adamsville, Inc. Tennessee
Century Telephone of Arkansas, Inc. Arkansas
Century Telephone of Central Indiana, Inc. Indiana
Century Telephone of Central Louisiana, Inc. Louisiana
Century Telephone of Chatham, Inc. Louisiana
Century Telephone of Chester, Inc. Iowa
Century Telephone of Claiborne, Inc. Tennessee
Century Telephone of Colorado, Inc. Colorado
Century Telephone of East Louisiana, Inc. Louisiana
Century Telephone of Evangeline, Inc. Louisiana
Century Telephone of Forestville, Inc. Wisconsin
Century Telephone of Idaho, Inc. Delaware
Century Telephone of Lake Dallas, Inc. Texas
Century Telephone of Larsen-Readfield, Inc. Wisconsin
Century Telephone of Michigan, Inc. Michigan
Century Telephone of Monroe County, Inc. Wisconsin
Century Telephone of Mountain Home, Inc. Arkansas
Century Telephone of North Louisiana, Inc. Louisiana
Century Telephone of North Mississippi, Inc. Mississippi
Century Telephone of Northern Michigan, Inc. Michigan
Century Telephone of Northern Wisconsin, Inc. Wisconsin
Century Telephone of Northwest Louisiana, Inc. Louisiana
Century Telephone of Northwest Wisconsin, Inc. Wisconsin
Century Telephone of Odon, Inc. Indiana
Century Telephone of Ohio, Inc. Ohio
Century Telephone of Ooltewah-Collegedale, Inc. Tennessee
Century Telephone of Port Aransas, Inc. Texas
Century Telephone of Redfield, Inc. Arkansas
Century Telephone of Ringgold, Inc. Louisiana
Century Telephone of San Marcos, Inc. Texas
Century Telephone of South Arkansas, Inc. Arkansas
Century Telephone of Southeast Louisiana, Inc. Louisiana
Century Telephone of Southwest Louisiana, Inc. Louisiana
Century Telephone of Southwest, Inc. New Mexico
Century Telephone of Wisconsin, Inc. Wisconsin
Chequamegon RSA, Inc. Colorado
Cowiche Telephone Company Washington
Eagle Telecommunications, Inc./Colorado Colorado
Eau Claire Cellular, Inc. Colorado
Gem State Utilities Corporation Idaho
Inter Island Telephone Company, Inc. Washington
Interactive Communications, Inc. Louisiana
Jackson Cellular Telephone Co., Inc. * Delaware
Kendall Telephone, Inc. Wisconsin
Northland Telephone Company Minnesota
North-West Cellular of Eau Claire, Inc. Wisconsin
North-West Cellular of RSA #1, Inc. Wisconsin
North-West Cellular of RSA #2, Inc. Wisconsin
North-West Cellular of RSA #6, Inc. Wisconsin
North-West Cellular of Wisconsin, Inc. Wisconsin
North-West Telephone Company Wisconsin
Northwestern Telephone Systems, Inc. Oregon
Pacific Telecom Cable, Inc. Delaware
Pacific Telecom Cellular of Alaska RSA #1, Inc. Alaska
Pacific Telecom Cellular of Alaska, Inc. Alaska
Pacific Telecom Cellular of Michigan, Inc. Michigan
Pacific Telecom Cellular of Michigan RSA #1, Inc. Michigan
Pacific Telecom Cellular of Michigan RSA #2, Inc. Michigan
Pacific Telecom Cellular of Oregon, Inc. Oregon
Pacific Telecom Cellular of Washington, Inc. Washington
Pacific Telecom Cellular of Wisconsin, Inc. Wisconsin
Pacific Telecom Cellular, Inc. Wisconsin
Pacific Telecom, Inc. Washington
Pascagoula Cellular Telephone Company, Inc. * Delaware
Postville Telephone Company Iowa
PTI Communications of Alaska, Inc. Alaska
PTI Communications of Michigan, Inc. Michigan
PTI Entertainment, Inc. Washington
Remote Access Cellular Telecommunications, Inc. Texas
Tele-Max, Inc. Texas
Telephone Utilities of Alaska, Inc. Alaska
Telephone Utilities of Eastern Oregon, Inc. Oregon
Telephone Utilities of Oregon, Inc. Oregon
Telephone Utilities of the Northland, Inc. Alaska
Telephone Utilities of Washington, Inc. Washington
Telephone Utilities of Wyoming, Inc. Wyoming
The McAllen Cellular Telephone Co., Inc. * Nevada
Thorp Cellular, Inc. Wisconsin
Universal Telephone, Inc. Wisconsin
WORLDVOX Corporation Oregon
* Conduct business in the name of Century Cellunet
Certain of the Company's smaller subsidiaries have been intentionally
omitted from this exhibit pursuant to rules and regulations of the Securities
and Exchange Commission.
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
Century Telephone Enterprises, Inc.:
We consent to incorporation by reference in the Registration Statements (No.
333-27165 and No. 333-42013) on Form S-3, the Registration Statements (No.
33-5836, No. 33-17113, No. 33-46562, No. 33-48554 and No. 33-60061) on Form S-8,
the Registration Statements (No. 33-31314 and No. 33-46473) on combined Form S-8
and Form S-3, and the Registration Statements (No. 33-48956 and No. 333-17015)
on Form S-4 of Century Telephone Enterprises, Inc. of our report dated January
28, 1998,except as to the third paragraph of Note 20 which is as of February 25,
1998, relating to the consolidated balance sheets of Century Telephone
Enterprises, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
and related financial statement schedules for each of the years in the
three-year period ended December 31, 1997, which report appears in the December
31, 1997 annual report on Form 10-K of Century Telephone Enterprises, Inc.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Shreveport, Louisiana
March 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED CONSOLIDATED BALANCE SHEET OF CENTURY TELEPHONE ENTERPRISES, INC.
AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND THE RELATED AUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTH PERIOD THEN ENDED AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000018926
<NAME> CENTURY TELEPHONE ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 26,017
<SECURITIES> 0
<RECEIVABLES> 149,567
<ALLOWANCES> 5,954
<INVENTORY> 21,994
<CURRENT-ASSETS> 283,480
<PP&E> 3,845,498
<DEPRECIATION> 1,586,935
<TOTAL-ASSETS> 4,709,401
<CURRENT-LIABILITIES> 322,008
<BONDS> 2,609,541
0
8,106
<COMMON> 91,104
<OTHER-SE> 1,201,062
<TOTAL-LIABILITY-AND-EQUITY> 4,709,401
<SALES> 0
<TOTAL-REVENUES> 901,521
<CGS> 0
<TOTAL-COSTS> 633,751
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,474
<INCOME-PRETAX> 408,341
<INCOME-TAX> 152,363
<INCOME-CONTINUING> 255,978
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<EXTRAORDINARY> 0
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<NET-INCOME> 255,978
<EPS-PRIMARY> 2.84
<EPS-DILUTED> 2.80
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